Friday, February 27, 2009

February 27 2009: On Going Concerns

D.D. Collins DC Pork 1925
O Street Market in Washington DC

Ilargi: I’m confident that on Friday afternoon, but of course, you're all sharp as tack, so I’ll throw some numbers around.

General Motors' independent auditor Deloitte is going to issue a going concern notice on the company. This simply means Deloitte doesn't think GM can survive. The auditor gets to see, if not all, certainly most of the books, so that's quite a bold statement when it comes to what is perhaps the number 1 symbol of American industry, and perhaps of America as a nation. In that regard, I do love the irony of the fact that the auditor has a French name. And of course that Detroit is a French word too. Freedom fries, here's to you!

Some of the specifics that Deloitte based its assessment on:
  • General Motors 2008 loss: $30.9 billion.
  • GM burned through $5 billion in the fourth quarter.
  • Quarterly revenue plunged by more than a third to $30.8 billion.
  • GM asked for up to $30 billion of U.S. government aid
  • GM pension plans were underfunded by $12.4 billion at the end of 2008.
  • Combined losses in 2007-2008: $69.6 billion
  • Combined losses in past 4 years: $82 billion Job cuts: 92,000.
  • Losses per day(!) in past 4 years: $56 million.
  • Auto operations burned $19.2 billion in 2008,
  • Auto operations expected to burn $14 billion in 2009 (NB: company’s own estimate)
  • Cash reserves end 2008: $14 billion.
  • Minimum operating cash needed annually: $11 billion to $14 billion
  • GM US sales fell 22.7% in 2008.
  • 2008 revenue dropped to $149 billion, down from $180 billion in 2007
  • Received from Treasury so far: $13.4 billion
  • Asking for additional $16.6 billion

Add to this today's Ford prediction for a lowered estimate of 9 million new vehicles sold in the US in 2009, down from 10-11 million. U.S. retail sales fell about 40 percent in February from a year earlier. The annualized rate of sales was about 15.4 million units in February 2008.

How about Citigroup as a going concern? Citi stock is down over 40% today, to about $1.40 per share. And that's after the Treasury announced it will swap $45 billion "worth" of preferred for common stock “worth" perhaps $3 billion, given a $7.6 billion market cap. Just buying all the common stock would seem a lot cheaper. So who will seal Citi's fate, who will issue the going concern notice?

A big part of the answer may be found in something FDIC director Sheila Bair said yesterday. Bair was quoted as saying [the FDIC] ".....may not have the resources to take over a major financial institution." You likely understand by now that that would not surprise me, I’ve expressed my doubts. But the question then becomes: If the FDIC cannot handle the failure of even one single big bank, what exactly is its deposit insurance worth? What will happen if two or three or more big banks fail in a short period of time? Will you still have access to your money? Yes, the FDIC is covered by a government guarantee. But there are trillions of dollars of deposits in just a handful of banks in the US. Which part of the government is going to cough that up? The FDIC, last time I looked, had less than $15 billion in funds left. And then watch this, just 3 banks:

Moreover, even if the government could in theory cover the deposits, the FDIC has nowhere near an adequate number of specialists left on its payroll to process all the filework involved in an institution the size of Citi. It would take them till the 22nd century. Which means Washington will likely keep on dumping your money into the big banks. But the roller coaster doesn't stop there. The government doesn't have the power to decide whether a company is a going concern or not. That is decided by the markets. And these speak loud and clear. The New York Stock Exchange today announced it will suspend its rule of delisting companies whose share price falls below $1. How timely!

Next in line, wherever down the line it may be: Is the US government a going concern, and if so, for how much longer? I'd say watch the bond markets for that one. A record amount in US sovereign bonds is about to be issued, and the market is not exactly getting richer. And there will be a point where the shrinking part strangles the growth of the increasing part. I mean, with what will China buy $2 trillion in US debt? With the $2 trillion in USD denominated reserves it already has? Makes little sense to me.. With new money? We're not buying their trinkets anymore, so what new money? Are we looking at the same movie here? I'd say I think the theater lights are coming on, and they want us out of here.

PS: Did you all send me a birthday present donation today?

Citigroup: World’s Worst Investment to Get Even Worse
Losers double down. That’s the classic trading rule which the USA is about to violate in an enormous way. According to trading maven Dennis Gartman, one should "never, ever, ever, under any circumstance, add to a losing position." And yet that is what we are about to do. To review: Former Treasury Secretary Hank Paulson made a terrible investment on behalf of the taxpayers by purchasing a 7.8% stake in Citigroup (C) for an initial $25 billion dollars. He further put the US on the hook by guaranteeing against 90% of future losses on $301 billion in assets. Subsequently, we (the taxpayers) injected another $20 billion dollars.

At the time, Citigroup had a market cap of about ~$50 billion dollars. Today, its worth ~$13 billion. So for about 100% of the market value of Citi, plus insurance guarantees worth of as much as 500% of its value (~$275 billion), we got less than 1/10 of a company that in total was worth 1/5 of our investment. Pretty good deal, eh? That $45 billion dollar stake now has a market value of just over a billion. And, its about to get even worse. Rather than do what is the FDIC-mandated-by-law thing, we will instead convert the nearly worthless common into preferred shares. The taxpayers stake will rise to near 40% of Citigroup.
NYT:"Under the terms of the deal, the Treasury Department has agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock. It will convert its stake to the extent that Citigroup can persuade private investors, including several big foreign government investment funds, to do so alongside the government, two people close to the deal said."
What does this do for us? Well, the higher investment stake creates an enormous incentive for John Q. Public to continue to pour money into Citi, regardless of valuation. The inept banking giant then has access to infinite amount of capital, courtesy of you, the 1040 filers. Its just another example of why these insolvent banks should be nationalized, or for you squeemish free marketers, FDIC mandated, pre-packaged Chapter 11, government funded reorganization. If Obama continues to listen to the god-awful advice of Larry Summers and Tim Geithner, he will doom his presidency, and finsh marginally ahead of George W. Bush on the list of worst presidents. This is not change we can believe in . . .

U.S. to Take Big Citi Stake and Overhaul the Board
Struggling banking giant Citigroup Inc., moving aggressively to shore up its equity base, announced a stock swap Friday that if successful will leave the government owning more than a third of the company and wipe out nearly three-quarters of existing shareholders' stake. The move is an acknowledgment that more than $50 billion in government capital and a backstop on more than $300 billion in troubled Citigroup assets haven't been enough to stop the bank's slide. It also represents a deepening of the government's role in trying to prop up the U.S. banking sector. Under the deal, Citigroup said it will offer to convert nearly $27.5 billion in preferred stock sold to private investors and the public and up to $25 billion in preferred stock bought by the government into common stock.

The exchange, if fully executed, would leave the U.S. government with 36% of the bank's shares. Existing shareholders' stake would be cut to 26%. Shareholders will have to approve much of the common stock issuance. Additionally, the government is demanding that the company overhaul its board of directors. Citigroup's board will soon include a majority of new independent directors, the company said Friday. Chief Executive Vikram Pandit is expected to keep his job under the agreement. The bank's stock plunged on the news. The terms are onerous for both sides. While common shareholders will see their stakes severely diminished, preferred shareholders are being asked to swap their holdings for riskier common stock, whose holders are the first to get wiped out in times of trouble. Neither has much choice, however.

To motivate investors to sign up, Citigroup is suspending its payment of dividends on preferred stock. And to spur common shareholders to vote for the deal, Citigroup will issue securities to preferred shareholders that agree to the swap that let them buy common stock for a penny a share if shareholders don't approve the deal. The swap won't involve any additional investment in Citigroup by either the government or the private shareholders, but will boost the bank's so-called tangible common equity ratio, which is closely watched by analysts. It will also relieve the bank of the need to pay billions of dollars in annual preferred stock dividends. "This securities exchange has one goal -- to increase our tangible common equity," Chief Executive Vikram Pandit said.

Separately, Citigroup announced it will record $10 billion in write-downs for the fourth quarter, boosting the year's net loss to $27.7 billion. Citi is also suspending dividend payments on common shares, which had already been slashed to 1 cent a share per quarter. The conversion rate for swapping the preferred stock to common shares is $3.25, a 32% premium to Thursday's closing price. The Treasury will only convert its preferred stock into common shares if other preferred-stock holders -- namely sovereign wealth funds that plowed billions into Citigroup in early attempts to bolster capital levels -- also do so. Holders including the Government of Singapore Investment Corp. and longtime shareholder and Saudi Prince Alwaleed Bin Talal are among those of have said they will participate in the exchange.

Treasury said it will match private investors' conversions dollar-for-dollar. "Treasury will receive the most favorable terms and price offered to any other preferred holder through this exchange," the department added in the statement. If the maximum conversion levels are hit, that would boost Citi's TCE from the fourth quarter's $29.7 billion to as much as $81 billion. The agreement marks the third time since October that Washington has come to Citigroup's rescue. Since then, the government has pressured Citigroup to partially break itself up by selling big chunks of its businesses and to overhaul its board. But U.S. ownership has also created a murky situation in which it's unclear who's in charge, leaving Citigroup executives often groping for guidance.

Citigroup will still have to endure the so-called "stress test," which examines banks ability to withstand various chilling economic scenarios, and could be required to raise additional capital. The company will reconstitute its board to include a majority of new independent directors. It said of the 15 current directors, three will not stand for reelection and two will reach retirement age, and it will announce new directors soon. Citigroup Chairman Richard Parsons has been scrambling to lure new directors. That has proven an uphill battle, with two candidates Citigroup approached rebuffing the overtures, according to people familiar with the matter.

In Latest Citi Rescue, Government Spooks Investors With New Shift
The government's new blueprint for bailing out crippled banks has investors thinking twice about sinking money into a sector once known for its steady returns and value. For weeks, investors expected the government to simply take a larger stake in Citigroup Inc. and dilute common shareholders. But, the decision to stop paying dividends on most of the bank's preferred shares caught many by surprise. Suddenly, bank preferred shares have lost their aura of safety. Investors complain that the latest rescue of Citigroup represents yet another shift in the government's strategy. "We all thought we had the game plan from the government just a couple days ago," said Anton Schutz, manager of the Burnham Financial Services Fund. "As portfolio managers, we can't do our job because they keep changing the rules."

Over the past year, the government has taken an ad-hoc approach to dealing with teetering financial firms. Bear Stearns was folded into JPMorgan Chase & Co. with government assistance; Lehman Brothers was allowed to simply fail; and American International Group Inc. is now struggling to repay the $150 billion in government loans. Shares of financial companies plunged after the Treasury Department announced it is willing to convert up to $25 billion of its preferred holdings in Citgroup into riskier common stock. That conversion is contingent upon other preferred stock investors also converting. Citigroup said it will offer to convert nearly $27.5 billion in preferred stock sold to private investors and the public; in total, existing shareholders' stake could be cut to 26% of the company's stock.

Preferred shareholders like pension funds, sovereign wealth funds, and even big individual investors like former Citi Chairman Sanford Weill, do have a choice. Should investors choose not to convert their preferred shares to common stock, they are left to hope and pray that Citi will someday return to paying preferred dividends. (One type of preferred shares, so-called trust preferreds, will continue to pay dividends, and various classes of TruPs were trading between 20% and 66% higher in recent Friday trading, according to FactSet Research.) Analysts say few investors are expected to hold on to their preferred shares. And, that has caused shareholders - both common and higher classes - to become much more wary about the banks that they have holdings in.

"The cost of doing this with one bank is that it makes shareholders at other banks nervous," said Campbell Harvey, professor of finance at Duke University's Fuqua School of Business. The Treasury Department's latest bid to quell fears about Citigroup had a punishing effect on its stock, which fell to an 18-year low. Wall Street was also worried about the chances other banks might be subject to similar federal intervention. Shares of Bank of America Corp. fell 15.8% to $4.48 in midday trading. Analysts have said the bank, which has received massive federal aid, might be another weak link in the ailing financial system. Wells Fargo & Co. fell 6.9% to $13.40 and Fifth Third Bancorp dropped 7.4% to $2.12. Meanwhile, banks seen as not needing government intervention - like JPMorgan, Goldman Sachs Group Inc. and Morgan Stanley - were down less sharply. "We know that the banking system is going to be smaller and simpler, we know that the regulatory environment is going to be harsher," said Jack Ablin, chief investment officer at Harris Private Bank. "Based on the cards being dealt right now, I'm not sure there's a hand to be had investing in banks."

Ilargi: One month ago, the government said Q4 GDP sank 3.8%. Today, it says the number is 6.2%. They were off by 60%!. Looks to me like the entire government is turning into nothing but a guessing game. Confidence boost, anyone?

GDP Shrank 6.2% in 4th Quarter
The U.S. recession deepened a lot more in late 2008 than first reported, according to government data showing a big revision down because businesses cut supplies to adjust for shriveling demand. Gross domestic product decreased at a seasonally adjusted 6.2% annual rate October through December, the Commerce Department said Friday in a new, revised estimate of fourth-quarter GDP. The 6.2% decline meant the worst quarterly showing for GDP since a 6.4% decrease in first-quarter 1982 GDP. In its original estimate, issued a month ago, the government had reported fourth-quarter 2008 GDP fell 3.8%. The sharply lower revision to a decline of 6.2% reflected adjustments downward of inventory investment, exports and consumer spending.

The report showed businesses inventories shrank $19.9 billion in the fourth quarter, instead of rising by $6.2 billion as Commerce originally estimated. Third-quarter inventories fell by $29.6 billion in the third quarter. Falling prices -- oil is a good example -- likely contributed to the fourth-quarter drop in inventories. But companies also likely liquidated stocks of goods to adjust for retreating demand amid the recession, which began in December 2007. The inventory revision in Friday's report was good and bad. Bad, because the $19.9 billion drop meant inventories added a mere 0.16 of a percentage point to GDP in the fourth quarter, instead of adding 1.32 percentage points as reported originally. But the drop also suggests there is less of an inventory overhang, a bit of good news. Still, inventory-to-sales ratios have gone up, an unwelcome sign.

Excess inventory will have to be worked off, and that signals production cuts, which, in turn, could mean layoffs and further impair the economy. Experts see a large drawdown of stockpiles during the first half of 2009 and expect a big drop in GDP during the current, first quarter. The National Association of Business Economics sees a 5.0% contraction in first-quarter GDP and a 1.7% drop in the second quarter. The latest survey of the group's forecasters was released Monday; 47 of them were polled Jan. 29 to Feb. 12. They see a modest upturn in the second half of 2009, a sub-par increase of 1.6%. For 2010, growth is projected at 3.1%.

A research firm, Macroeconomic Advisers, thinks GDP will fall 5.5% January through March. It lowered its forecast on Thursday from a decline of 5.1% after reviewing bad data about the manufacturing sector that showed orders for expensive, durable factory goods tumbled in January much more than Wall Street had expected. GDP is a measure of all goods and services produced in the economy. GDP fell 0.5% in the third quarter of 2008. The 6.2% decrease in the fourth quarter surprised Wall Street. Economists surveyed by Dow Jones Newswires forecast the revision would show a smaller, 5.4% decrease. Gauges measuring prices within the GDP data generally fell, as the economy slumps badly.

Trade took a bite out of the economy in the fourth quarter, the data revisions revealed. U.S. imports fell 16.0% instead of 15.7% as originally reported. Exports were revised down, dropping 23.6% instead of falling 19.7%. Trade reduced GDP by 0.46 of a percentage point in the fourth quarter. Originally, trade was seen adding 0.09 of a percentage point to GDP. Businesses decreased spending more than previously thought. Outlays fell by 21.1% October through December, lower than the originally estimated 19.1% decrease. Business spending fell 1.7% in the third quarter. Fourth-quarter investment in structures decreased 5.9%. Equipment and software plunged 28.8%.

Fourth-quarter spending by consumers tumbled 4.3%, down from a previously reported 3.5% decrease and below the third quarter's 3.8% decline. Consumer spending accounts for about 70% of economic activity. It cut 3.01 percentage points out of GDP in the fourth quarter, instead of the tamer reduction of 2.47 percentage points initially thought. Purchases of durable goods plunged 22.1% in October through December, a bit up from the previously reported 22.4% decrease but below a decline of 14.8% in the third quarter. Durable goods are expensive items designed to last at least three years, like cars, which aren't selling well because the U.S. has lost 3.6 million jobs since the recession began and people are afraid of making large purchases. Fourth-quarter non-durables spending tumbled by 9.2%. Services spending went 1.4% higher.

The sick housing sector undercut GDP sharply. Residential fixed investment decreased by 22.2% in the fourth quarter, a smaller drop than the originally estimated 23.6% but bigger than a third-quarter spending drop of 16.0%. The sector became overbuilt in a boom that turned bust in a big way. Receding demand pushed up supplies of unsold homes, forcing down prices and undercutting sales further. Many home builders have thrown in the towel. Home construction in January was 56.2% below the pace a year earlier. Real final sales of domestic product, which is GDP less the change in private inventories, decreased by 6.4% in the fourth quarter, a revision down from an originally estimated 5.1% decrease. Third-quarter sales fell by 1.3%.

Federal government spending investment increased by 6.7% in the fourth quarter, a bigger climb than the originally estimated 5.8% increase. Third-quarter spending rose by 13.8%. State and local government outlays fell 1.4% in the fourth quarter. Revisions to inflation gauges within the report were mixed. The government's price index for personal consumption expenditures decreased 5.0%, smaller than the previously estimated 5.5% drop. The index rose in the third quarter by 5.0%. The PCE price gauge excluding food and energy increased 0.8%, a bit above the previously estimated 0.6% increase but below the third quarter's 2.4% increase. The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 4.1%, falling less than the previously estimated 4.6% decrease. The index climbed by 4.5% in the third quarter. The chain-weighted GDP increased 0.5%. Originally, the index was seen dipping 0.1%. It rose 3.9% in the third quarter.

FDIC paints bleak banking picture
Banks insured by the FDIC posted a collective loss of $26.2 billion in the fourth quarter of 2008, the agency said Thursday, as the percentage of charged off loans tied a quarterly record of 1.91%. The grim results compared to a $575 million profit during the fourth quarter of 2007. "Rising loan-loss provisions, losses from trading activities and goodwill write-downs all contributed to the quarterly net loss as banks continue to repair their balance sheets in order to return to profitability in future periods," the FDIC said in a press release.

Sheila Bair, the agency's chief, said in a press conference that there will be no quick fix to the banking crisis and that troubled loans will keep rising. She said the number of "problem" banks identified by the FDIC rose to 252 in the fourth quarter, compared to 171 banks at the end of the previous quarter. The FDIC said more than two-thirds of all insured banks earned money in the quarter, but large losses at big banks swamped those results. In a sign that investors were heading for the safety of cash deposits during this economic crisis, total deposits increased by $307.9 billion, or 3.5%, the largest percentage increase in a decade.

And, the agency reported, at year-end, nearly 98% of all insured institutions, representing almost 99% of industry assets, met or exceeded the highest regulatory capital standards. "Public confidence in the banking system and deposit insurance is demonstrated by the increase in domestic deposits during the fourth quarter," FDIC Chairman Sheila Bair said. "Clearly, people see an FDIC-insured account as a safe haven for their money in difficult times." Loan-loss provisions totaled $69.3 billion in the fourth quarter, a 115.7% increase from the same quarter in 2007.

Additionally, banks wrote down $15.8 billion in expenses for write-downs of goodwill and reported $9.2 billion in trading losses and $8.1 billion in realized losses on securities and other assets. The 25 bank failures in 2008 also depleted the agency's deposit insurance fund by $15.7 billion during the fourth quarter to $18.89 billion. The decline in the fund was mainly due to $17.6 billion of money that it used to cover actual and anticipated insured institution failures. For the full year, the fund's balance fell by $33.5 billion, or 64%, as the FDIC covered $40.2 billion of real or anticipated bank-failure losses.

Bair said the fund's reserve ratio, a measure of the funds it has compared to the costs it might face to cover bank failures, fell to its lowest level since 1993 during the fourth quarter. "The December figure is the lowest reserve ratio for a combined bank and thrift insurance fund since June 30, 1993, when the reserve ratio was 0.28%," the agency said in a press release. That could pose problems for the FDIC should it be called on to cover the failure of any very large institution, Bair said.

She said there are limits to what the FDIC can do, and that it may not have the resources to take over a major financial institution.Twelve insured firms failed during the fourth quarter, and they cost the FDIC $4.5 billion. For all of 2008, 25 insured institutions with assets of $372 billion failed, the largest number of failures since 1993 when 41 institutions with combined assets of $3.8 billion failed.

Bank failures put pressure on FDIC
The list of "problem" banks grew by almost 50 per cent in the fourth quarter, the Federal Deposit Insurance Corporation said on Thursday, stoking fears that further bank failures could put the agency’s deposit insurance fund under severe pressure. Sheila Bair, FDIC chairman, suggested more failures were likely in spite of government support for the banking industry. She warned that, given the pace of industry deterioration, proposed increases to the premiums banks pay for receiving deposit insurance may fall short of the insurance fund’s needs. "The outlook for bank failures has increased since we initially proposed making these changes last fall," said Ms Bair.

The FDIC’s board will meet Friday to approve an increase in premiums, with new risk-based rates that will take effect during the second quarter. Ms Bair declined to say whether the FDIC is planning to levy a one-time assessment on banks to help boost the deposit insurance fund. The number of problem banks – those deemed at risk of failure – grew from 171 to 252 in the fourth quarter, the largest number since mid-1995, according to the FDIC’s quarterly report. Total assets of problem institutions increased to $159bn from $115.6bn. The deposit insurance fund was almost halved in the fourth quarter as a dozen bank failures and provision for expected failures depleted the safety net for bank deposits. The insurance fund declined by $16bn in the fourth quarter to $19bn, and a further $22bn has been set aside for expected failures in 2009. The FDIC insures up to $250,000 per depositor in each bank, a temporary increase on the previous level of $100,000 that will expire at the end of 2009.

The agency is required by law to make sure its insurance fund has at least $1.15 for every $100 of insured deposits, a calculation that does not currently include the additional temporarily insured deposits. The fund slumped to 40 cents for every $100 of insured deposits at the end of 2008, a ratio that would be much lower if the temporary $250,000 insurance level were made permanent. Bank deposits also continue to grow, as people burnt by the financial crisis seek a safe haven for their savings. Total deposits insured by the FDIC rose by 3.5 per cent in the fourth quarter, the largest percentage increase in a decade. US banks and savings institutions recorded a loss of $26.2bn for the fourth quarter, the first time since 1990 the industry has failed to turn a profit. Losses at four major banks accounted for half of the losses, but nearly a third of the industry reported a fourth-quarter net loss, the FDIC said.

Federal Home Loan Banks Hit by Losses
The Federal Home Loan Banks of San Francisco, Pittsburgh, Boston and Chicago reported heavy losses caused by write-downs in the value of mortgage securities. Investments in such securities are straining the finances of several of the 12 regional home-loan banks, an important source of funds for thousands of large and small banks across the country. Federal Home Loan Bank of Chicago said it expects to report a loss of $119 million for the full year 2008 when it files results next month. That compares with net income of $98 million in 2007. Federal Home Loan Bank of Boston reported a loss of $73.2 million, compared with net income of $198.2 million a year earlier.

Federal Home Loan Bank of San Francisco posted a fourth-quarter loss of $103 million, compared with net income of $231 million a year earlier. Not all of the home-loan banks are being hit by big write-downs. Those in New York, Des Moines, Iowa, and Topeka, Kan., all reported net income for 2008. Created by Congress in 1932, the home-loan banks are cooperatives owned by more than 8,000 commercial banks, thrifts, credit unions and insurers, known as members. The home-loan banks make loans, called advances, to their members. The Pittsburgh bank said it recognized "other-than-temporary impairments" of $266 million in the value of so-called private-label mortgage securities, ones that aren't guaranteed by any government-backed entity.

The bank said those charges, driven by accounting rules, exceed its current expectation that it eventually will suffer $94.4 million of actual losses on the securities. Kristina Williams, the Pittsburgh bank's chief financial officer, said it remains in compliance with its regulatory capital requirements. The Chicago bank said it is writing down mortgage securities by $292 million. The Boston bank recorded $339.1 million of write-downs but said it meets all capital requirements. The San Francisco bank's write-down totaled $590 million. It also said it was in compliance with capital requirements.

Big banks damaging 'mainstream'
Salvatore Marranca is outraged. The Southern Tier banker says his little Cattaraugus County Bank and thousands of other small U.S. banks are being punished for what a few big institutions did. "Mainstream banks, which is what the 5,000 banks like us call ourselves, continue to be pummeled for the sins of Wall Street," Marranca said. "It’s very frustrating when we have to pay for the bad things other people are doing. We didn’t cause today’s problems and are willing to be part of a solution, but don’t penalize us in the process," he said.

As the U.S. government tries to reverse the current economic free-fall, hoped-for solutions are being enacted that Marranca says will cost all institutions, not just the giants such as Citigroup, Bank of America and the others that are accused of taking unnecessary risks, bypassing or breaking the rules and contributing to the deepening and darkening recession. At a Washington, D.C., meeting today, banks expect to learn more about the price they will have to pay. It will come in the form of a special assessment on top of higher insurance premiums that the Federal Deposit Insurance Corp. will impose.

This year, Cattaraugus County Bank already has budgeted $100,000 more for insurance premiums than the $40,000 to $50,000 it paid in 2008, Marranca said. But on top of that, the FDIC is expected to impose a one-time special assessment that could cost the bank as much as $26,000 in the second quarter. The special charge and higher premiums are meant to bolster federal reserves and cover losses from accelerating bank failures. In a worst case scenario, the Deposit Insurance Fund could be nearly exhausted by yearend, some industry experts say.

Though the higher mandated costs are not expected to affect Cattaraugus County Bank’s lending ability, Marranca said "they will mean less money to make capital improvements and for growth, less money to spend on either higher deposit returns or lower loan rates - less money to flow into capital. "It’s a tremendously significant increase for us," said Marranca, who served as an FDIC bank examiner for 14 years before becoming president of Cattaraugus County Bank in 1982.

Calm waters don't last long after Bernanke
Just hours after Federal Reserve Chairman Ben Bernanke managed to calm the waters surrounding nationalization of big banks, the white caps are reappearing. Following behind Bernanke, economists and financial analysts appeared before Congress on Thursday expressing alarm that the bank bailout could be more expensive than the Fed or the Obama administration is admitting and might not even work as drawn up. Bernanke told Congress earlier this week that fixing the financial sector was the first step to a recovery. He reassured them that the Obama administration's new plan would work given time. See full story. But analysts were generally not buying what he was selling.

"With time, we're going to see....the costs to the banks just escalate. It is going to be one of those episodes where you tell the American people that you have it under control and it is going to become unstuck," said Desmond Lachman, an analyst with the American Enterprise Institute. Adam Posen, an expert at the Peterson Institute for International Economics, called the new Obama plan "a series of half measures" that is "too clever by half." Most analysts agreed that it was too soon to talk about nationalization. But many said they were not against it, should it come to that. "They are putting us all at risk," Posen said. Comparing a troubled bank to a toxic waste site, Posen said that the best approach has always been for the government to take over the site and clean it up. However, the plan outlined by Treasury Secretary Timothy Geithner was like giving investors a mortgage on the toxic site and asking them to live there while it gets cleaned up. Posen and James Mason, an economics professor at Louisiana State University, said that insolvent banks must be closed very quickly. The government must quickly decide "who should live and who should die," Posen said. They questioned why the Geithner plan would give banks six months to raise capital if they fail the stress test.

James Galbraith, an economics professor at the University of Texas, called the Obama administration's bank plan "a costly exercise in futility." "There is no reason to believe that the 'flow of lending' will be restored, or that banks which long ago abandoned prudent and ordinary lending practices would now somehow return to them, chastened by events," Galbraith said. The plan simply transfers taxpayer wealth to those who hold toxic assets. "It would thus preserve the wealth of bank insiders and financial investors, while failing to prevent the collapse of wealth for almost everyone else. I cannot believe the American public will tolerate this for very long," Galbraith said. Another complicating factor is that European banks are facing enormous losses from lending to Eastern Europe. Posen said that the sand is slipping quickly through the hourglass. If the banking system is not restored to health by the time the economic stimulus package wears off in 18 months, "we are going to be in more miserable shape," Posen said. "We are not proceeding with the level of urgency needed," he told the Joint Economic Committee of Congress.

White House Budget Plan Leaves Little Room for Error, Economists Warn
Economists and conservatives say President Obama's massive $3.55 trillion budget leaves little room for error, and it will be very hard for him to meet his tandem goals of cutting the deficit and sheltering middle-class families from tax increases.  Obama, who released details of his budget for fiscal 2010 on Thursday, said he foresees halving the deficit by 2013. But his budget calls for a $634 billion "reserve fund" to cover the costs of universal health care coverage over 10 years, as well as $200 billion for the wars in Iraq and Afghanistan through next fall and another contingency fund for the sickly financial sector on top of the $787 billion stimulus bill that he signed last week.

With all these expenditures, many are saying they doubt Obama can reach his deficit goal while keeping his pledge to raise taxes only on couples making more than $250,000 a year.  "He's going to have to start moving down the scale and raising taxes on people making $150,000, people making $100,000 and even people making $75,000," said economist Adam Lerrick, a scholar at the conservative American Enterprise Institute. "You have to increase taxes. It's very simple. You have to pay for this somehow."  Part of the concern stems from optimistic White House projections about the rate of economic recovery. The budget overview assumes the economy will grow at a rate faster than other forecasters, including the Congressional Budget Office and the Blue Chip index (the consensus of leading private economic analysts). 

"I'm struck in their budget projections by how much of ... making all this work depends on the speed and magnitude of the economic recovery," said William Gale, director of the Economic Studies Program at the Brookings Institution and co-director of the Tax Policy Center. "The results depend on a relatively quick recovery."  In other words, the Obama forecast doesn't allow for many rainy days.  The White House projects 3.2 percent economic growth in 2010, compared with 1.5 percent from the CBO and 2.1 percent from the Blue Chip.  The White House also projects the economy will shrink by 1.2 percent in 2009, compared with 2.2 percent from the CBO and 1.9 percent from the Blue Chip.  The White House and CBO project similar growth in 2011, but the Blue Chip projects a point less.  Higher growth projections allow the White House to assume higher revenue from taxation. Deviations from that can throw off the administration's spending plans. 

Gale said another complicating factor is simply political, and that Obama runs the risk of drawing accusations of "class warfare" from lawmakers with his budget plan -- something that could lead to revisions in his tax policies and other areas. Plus lawmakers will likely balk at attempts to cut spending in certain programs down the road.  "I think the political constraints are just as real as the economic constraints," Gale said. "The dam could break in lots of places."  Though the deficit is projected to stay above $1 trillion next year, White House budget director Peter Orszag said the administration has already found $2 trillion in long-term savings -- $1 trillion in revenue boosts and $1 trillion in spending cuts.  The budget outline calls over 10 years for $637 billion in higher taxes on the estimated 5 percent of taxpayers with annual adjusted income of $250,000 or more. It also seeks $770 billion in tax cuts or tax refunds for taxpayers who earn less than that. 

Orszag said the administration will exact savings on several fronts, by closing corporate tax loopholes, winding down the Iraq war and cutting programs throughout the federal government.  "We are on an unsustainable fiscal course," he said. "Change is necessary."  The long-term budget plan would pay for its health care allocation in part by raising taxes on couples making more than $250,000 and by reducing government subsidies to Medicare Advantage, the private-sector insurance component of Medicare.  Among other tax increases, the plan would also up capital gains tax rates to 20 percent, from 15 percent, for the wealthy -- this would generate $118 billion, according to projections.  "The president believes that we have a plan that will lead to long-term economic growth, sustained long-term economic growth," White House press secretary Robert Gibbs said Thursday. "That's what this budget blueprint does, that's what he campaigned on, instituting fairness -- more fairness in our system. I think that's what he's done." 

Rob Shapiro, former undersecretary of commerce for economic affairs, told FOX News that the president's efforts to wind down the war in Iraq and make cuts in other programs will fill in the gaps. Plus he said the stimulus bill should ensure the administration gets the growth it projects.  "You have substantial spending right now in order to try to boost the economy," he said. "That's temporary spending. If it work, it will raise growth and incomes and consequently incomes two and three years out."  But many Republican leaders were doubtful. Though President Obama said the government was going to have to make some "hard choices" to cut spending, Republican leaders said Thursday that his fiscal 2010 budget represented anything but.  House Minority Leader John Boehner said the plan will "hit everyone," despite claims that the brunt of the impact is contained to the rich.  "The era of big government is back and Democrats are asking you to pay for it," he said. Obama is aiming for a $530 billion deficit in 2013. But Gale said Obama would leave a deficit more like $850 billion if he enacts his key campaign promises without other big changes to the budget. 

One budget analyst said that the risk of trillion dollar deficits over a couple years is not great as long as the economy is recovering.  "There is little to no risk in lending your money to the U.S. government," Josh Gordon, policy director of the debt hawk Concord Coalition, told "We have over 300 million Americans who have shown their ability to work hard and pay taxes and as long as you have that large a pool of people working hard and paying taxes ... and the government is not printing too much money, you have a pretty safe investment." Gale said Obama's goals are at least mathematically possible, provided unemployment drops significantly and a number of other factors line up in his favor. "They can do their political agenda. They can do their deficit-reduction stuff. The question is whether they can do both at the same time," he said.  He said if unemployment stays at 8 percent, "You can toss the other estimates out the window." 

Obama’s Deficit Plans May Use -Too- Optimistic Forecasts
President Barack Obama’s promise to slash a record deficit may rely on economic-growth projections for the coming years that are too optimistic.
The $3.55 trillion budget proposal for 2010 the president unveiled yesterday projects 3.2 percent economic growth next year, thanks to a $787 billion fiscal-stimulus measure he signed into law earlier this month that is aimed at creating jobs and consumer demand. That is twice the 1.5 percent growth projected by the Congressional Budget Office before the stimulus bill was enacted and higher than the 2.1 percent consensus growth estimate by analysts in the Blue Chip Economic Indicators survey. Even those projections may be too optimistic: Federal Reserve Chairman Ben S. Bernanke said this week the U.S. is suffering a "severe" contraction, and a government report today showed the economy shrank at a 6.2 percent annual rate in the fourth quarter, more than forecast.

"One glaring, central risk to the budget’s projections is the economic outlook," said Joseph Minarik, a senior vice president at the Committee for Economic Development, a Washington-based public policy institution. The budget assumes "the economy is going to turn around more rapidly," said Minarik, a former associate director at the Office of Management and Budget under President Bill Clinton. Obama’s blueprint pledged to trim a $1.75 trillion deficit projected for the current fiscal year ending Sept. 30 to $1.17 trillion next year. The budget assumes economic growth will be sustained even after 2011, when Obama plans to ask Congress to enact tax increases that would cost top-earners, Wall Street executives and multinational corporations almost $1 trillion in higher taxes.

"We are economists and not soothsayers, and all forecasts are subject to a substantial margin of error," Christina Romer, head of the White House Council of Economic Advisers, said at a press conference yesterday in Washington. In a downturn as severe as this recession, "usual patterns surely provide less guidance than in more ordinary times," she said. The plan would reverse eight years of policies under President George W. Bush that reduced taxes on the wealthy. It would do so by reinstating top tax rates and other measures that were put in place to reduce deficits during Clinton’s administration, when economic growth averaged 4 percent a year. The difference is Obama inherits an economy at far greater risk because of unemployment and a credit crunch than the one Clinton was given when he took office in 1993, experts said.

Figures yesterday showed orders for durable goods fell 5.2 percent in January, twice as much as forecast, and the number of Americans filing initial applications for jobless benefits soared to 667,000 last week. Deutsche Bank AG chief U.S. economist Joseph LaVorgna said it’s "conceivable" the economy will shrink as much as 10 percent in the first quarter. Gross domestic product data for the quarter from October through December released today by the Commerce Department in Washington showed the biggest contraction since 1982. Consumer spending, which comprises about 70 percent of the economy, declined at the fastest pace in almost three decades. Still, Obama is counting on the economy roaring back to produce higher tax revenue to help pay for projects such as an additional $750 billion in new aid for the financial industry and an overhaul of the health-care system he estimates will cost $635 billion. He also wants to increase defense spending to send additional troops to Afghanistan.

After $338 billion in tax collections this year, White House economists predict an additional $195 billion will come into the Treasury in 2010, and forecast $332 billion more revenue in 2011. "You can’t spur economic growth on your left hand in this economic environment while on your right hand you’re raising taxes," said Tim Speiss, a partner in charge of the personal wealth group at Eisner LLP, a New York-based accounting and advisory firm. The budget also assumes the government will reap almost $646 billion over 10 years, beginning in 2012, from the so-called cap- and-trade system of government-issued permits to pollute; and $175 billion over 10 years by forcing insurance companies to compete for Medicare insurance business under the Medicare Advantage insurance program. At the same time, the budget contains savings from a reduction in farm subsidies; forcing the wealthy to pay higher premiums for Medicare prescription drugs; reducing Defense Department procurement programs, and anticipated decreases in the costs of the wars in Afghanistan and Iraq, down about $10 billion to $130 billion in 2010.

Obama, 47, wants to end the $4 billion in annual federal subsidies for student-loan providers such as Sallie Mae and Citigroup Inc., leaving the government as the sole provider of federally backed college lending. The government currently offers direct loans through colleges, as well as guarantees for loans made by private lenders such as New York-based Citigroup and Reston, Virginia-based Sallie Mae, officially SLM Corp. The bulk of the additional revenue would come from the approximately 2.6 million Americans who currently pay in the top two income tax brackets, which take effect at $164,550 of taxable income for single taxpayers and $200,300 of taxable income for married couples who file joint returns. Obama’s proposal would cap the value of deductions for items such as charitable donations, mortgage interest and investment expenses at 28 percent for people in the top brackets, or 30 percent less than they would otherwise receive.

And it would force executives at private-equity firms, venture-capital firms, some hedge funds and other partnerships that receive a 20 percent so-called carried interest in the firm’s profit to pay rates as high as 39.6 percent, up from the capital-gains rate of 15 percent they currently owe. The budget also proposes $353.5 billion in higher taxes on corporations over the next decade, the bulk of which would come from changing rules that allow U.S.-based multinational corporations such as General Electric Co. to defer U.S. tax on profits they earn overseas. The budget also targets a widely used accounting method known as "last-in, first-out" for a tax increase and would repeal several benefits for oil and gas companies.

Obama’s budget would keep in place Bush’s tax cuts that benefit lower- and middle-income earners, and it preserves at least one policy that benefits the more affluent: a preferential tax rate on corporate dividends. Before Bush, dividends were taxed as ordinary income, at rates as high as 39.6 percent in the 1990s. Obama would increase the tax rate on most capital gains to 20 percent, the level set by Clinton in 1997. At the same time, Obama’s budget would make permanent the tax reductions for low- and middle-income earners that were included on a temporary basis in his stimulus package. That includes a payroll tax credit worth up to $800 per family and increases take-home pay by an estimated $67 a month. Other policies would extend tax subsidies for the working poor, such as a more generous child tax credit for larger families.

NYSE suspends $1 listing rule until June 30
The New York Stock Exchange will suspend share price and market capitalization rules for its listed companies until June 30 to deal with the deepening market sell-off, parent company NYSE Euronext said on Thursday. For the first time, the Big Board will suspend its requirement that companies keep their shares above $1 or face delisting. The market operator said it will also extend a temporary lowering of its market capitalization standard, which it introduced last month to stem a growing tide of delistings. The changes are effective immediately, but still subject to approval by the U.S. Securities and Exchange Commission. Reuters reported on Feb. 24 that the NYSE was in talks with regulators on the $1 rule.

"The overall market downturn has only deepened ... causing an even larger number of stocks to fall below our requirements," Scott Cutler, the company's head of listings, said in a statement. "We are taking proactive measures to ensure that the stocks of NYSE-listed companies can remain listed in the current difficult market conditions, enabling them to be available to the investing public during this period." The required market cap is temporarily $15 million, down from the usual $25 million. Previously, companies whose shares fell below $1 for 30 days, on average, received a letter warning they faced delisting after a six-month grace period. The NYSE said the shares of more than 50 companies that had fallen below $1 would immediately benefit from the rule change. It said nearly 500 companies had fallen below $5. The exchange has delisted nine companies so far this year for falling below one of several listing requirements. It delisted 54 last year.

Moody's predicts default rate will exceed peaks hit in Great Depression
A bigger proportion of non-investment grade companies will go bust in the US and overseas in the coming years than during the Great Depression, according to Moody's, one of the world's foremost experts on credit. In what will be seen by many as die-cast confirmation that the world economy is plummeting towards an economic and corporate implosion of unprecedented proportions, Moody's said it anticipated a tidal wave of defaults was approaching. It said that in the coming months more than 15pc of speculative-grade bonds and loans - all but the most highly-rated - would default on their debts.

This peak is even higher than the peak reached in 1933, when bank after bank throughout America was collapsing, taking hoards of other companies with them. Back then, the default rate peaked at 15.4pc; moreover these companies were former investment grade issuers regarded as more reliable credit prospects than their contemporary counterparts. Kenneth Emery, senior vice president at Moody's said: "The three main drivers of the forecasting model are forecasts for the high-yield bond spread and the unemployment rate, along with the current level of issuer ratings. In the fourth quarter, the high yield bond spread reached unprecedented levels; and we've got an unemployment forecast approaching 9pc this year and issuer ratings at record low levels.

"We certainly think that this credit cycle will be worse than the last two in the early 1990s and 2000s. In fact, in 2009 we expect to see the largest number of defaults since the advent of high yield bond market in the early 1980s. And the default rate for non-investment grade bonds may reach levels even higher than those registered during the Great Depression. "There are risks here because we are in unchartered territory, but the model forecast is that roughly 15pc of our speculative-grade issuers globally will default in 2009. In Europe the forecast default rate is even higher at close to 19pc."

The report traced the health of the bond market all the way back to the 1920s, and finds that the threat of companies defaulting is more stark now than at any point in that stretch of time. It predicted that company defaults will triple this year to about 300, after 101 defaulted last year on more than $280bn of debt. If the economy deteriorates by even more than expected, the default rate could conceivably mount to around 20pc, Moody's added - meaning around one in five of all non-investment grade issuers default, something which has never happened before. The companies most at risk of default are consumer transport groups, which largely constitute airlines, media companies and car manufacturers.In Europe, the sectors most at risk of defaulting include those providing durable and non-durable consumer goods and business services.

Fannie taps $15.2 billion lifeline after $59 billion in losses
Hammered by the ailing housing market, mortgage finance giant Fannie Mae said Thursday it would tap its lifeline from the Treasury Department after reporting $58.7 billion in losses for 2008. The company, a crucial source of funding for mortgage lenders, said it would draw down $15.2 billion of its $200 billion federal line of credit. In return, the government will receive preferred shares. And it gave a dour view of the housing market -- saying it expects peak-to-trough price declines to be in the 33% to 46% range, up from the 27% to 32% range it gave in the previous quarter. For 2009, it predicts home values will drop 12 to 18%. For the fourth quarter, Fannie Mae reported $25.2 billion in losses, or $4.47 per share. The results mark the sixth straight quarter of losses, though slightly narrower than it reported in the third quarter. A year ago, Fannie Mae reported $3.6 billion in losses.

The company, which was taken over by the government in September along with Freddie Mac, attributed the losses to soaring defaults. Its provision for credit losses plus foreclosed property expense came to $12 billion for the quarter, up 30% from the previous quarter. Its charge-offs, or loans written off as uncollectable, rose 219% to $7 billion in 2008. The value of non-performing loans were $119.2 billion at year-end, compared with $63.6 billion on Sept. 30 and $27.2 billion at the end of 2007. Fannie Mae had said it would need up to $16 billion to cover its fourth quarter losses. Freddie Mac, which has accessed nearly $14 billion and has said it may need up to $35 billion more, should report its results in coming weeks. The companies need the funding because their liabilities exceed their assets, giving them a negative net worth.

The companies' net worth is declining in part because its mortgage guaranty becomes a costlier obligation as the housing market worsens. Also, its funding costs have run higher as investors demanded higher rates because of the agencies' perceived riskiness. The results come a week after President Obama unveiled his foreclosure prevention plan, which relies heavily on Fannie and Freddie. The companies will allow borrowers whose mortgages they own or back to refinance even if they have little or no equity. And they will contribute more than $20 billion toward subsidizing interest rates to lower the monthly payments for borrowers on the verge of or already in default. Fannie Mae, which unveiled with Freddie Mac their own streamlined loan modification program in November, said it conducted 33,249 loan modifications, 7,875 repayment plans and 11,682 preforeclosure sales in 2008.

Acknowledging the need to strengthen Fannie Mae and Freddie Mac at a time when the companies are under pressure from rising defaults, Obama doubled their federal lifeline, which was originally $100 billion each. He also is allowing each to hold up to $900 billion in loans in their portfolios, an increase of $50 billion. The companies provide critical financing for mortgage lenders by purchasing their loans. They dominate the home loan market now that private investors have been spooked by the mortgage meltdown. Their long-term future, however, remains in doubt. Set up by the government, they were private companies whose debt carried an implicit federal guarantee. But as the mortgage crisis deepened, the Treasury Department in September put them into conservatorship, a form of reorganization similar to bankruptcy.

Japan’s Factory Output Plunges Record 10%, Exports Down 45.7%
Japanese manufacturers slashed production by an unprecedented 10 percent last month, an indication that companies will fire more workers as the economy heads for its worst recession since 1945. The drop in output exceeded December’s record decline of 9.8 percent, the Trade Ministry said today in Tokyo. The figure matched the median estimate of economists surveyed. Gross domestic product shrank at an annual 12.7 percent pace last quarter and a record collapses in exports and production in January suggest the economy won’t do any better in the first three months of the year. The slump has put thousands out of work and parliamentary gridlock has prevented Prime Minister Taro Aso’s government from passing stimulus measures needed to spur domestic spending and protect jobs.

"The magnitude of the decline in final demand is much, much bigger than in the past and the inventory adjustment has been very, very harsh," said Hiroshi Shiraishi, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. Japan’s economic contraction last quarter was the worst since the 1974 oil shock, and analysts predict the slump will drag into next fiscal year. Growth may shrink a record 4 percent in the year starting April 1, according to economists surveyed by Bloomberg last week. Federal Reserve Chairman Ben S. Bernanke said this week the U.S. economy, Japan’s biggest overseas market, may not emerge from recession until next year. Confidence among American consumers plunged to a record low in February and a Bloomberg survey of economists suggests that spending will contract during the first half of the year.

Japan has become more dependent on exports for growth in the past decade, making it vulnerable to the global recession. Manufacturers shipped 21 percent of their goods abroad in 2008, up from 16 percent a decade earlier, according to the central bank. Exports plunged 45.7 percent last month following a 35 percent crash the previous month, the government said this week. Advantest Corp., Japan’s biggest maker of memory-chip testers, said this week it will fire 1,200 workers by March because it expects to lose money this year. Advantest, Nissan Motor Co. and Pioneer Corp. have announced more than 30,000 jobs this month.

Still, companies have been coping with the slowdown by paring production faster than demand has fallen. That’s helped automakers including Toyota Motor Corp. and Nissan pare inventories so they can they turn factory lines back on in coming months. Toyota’s global output fell 43 percent in January, when overall U.S. car sales dropped 37 percent. "Given how radical the production cutbacks have been, we could hit bottom soon," said Kiichi Murashima, chief economist at Nikko Citigroup Ltd. in Tokyo. Nippon Steel Corp. said this week output should pick up next quarter because customers have used up their stockpiles. Nissan, Japan’s third-largest automaker, said yesterday it will raise domestic production next month while Toyota plans to increase manufacturing in May as it unveils new models.

Even so, higher output won’t signal an economic recovery, analysts say. "You’re going to a short-term pickup but activity will still be very depressed," said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. "On a quarter-on- quarter basis production might be positive, but it will be positive at a low level." Bank of Japan Governor Masaaki Shirakawa said last week that the economy will remain in a "severe" state next quarter and companies will struggle to obtain financing as investors shun risk. The bank, which lowered the key overnight lending rate to 0.1 percent in December, last week said it will buy corporate bonds for the first time to ease the credit squeeze. The government has been unable to pass a 10 trillion yen spending package that could help encourage domestic spending in the absence of export demand. Aso, whose popularity has dwindled to around 10 percent, is struggling to get approval from the opposition-controlled upper house to pass aid measures for companies and households.

Subprime-Mortgage Defaults to Surge
Moody’s Investors Service announced Thursday that it’s raising its loss expectations for US subprime residential mortgage-backed securities issued between 2005 and 2007, as it believes, without intervention, nearly all already-delinquent loans will eventually default. The company has therefore placed 7,942 tranches of subprime RMBS with an original balance of $680 billion, on review for possible downgrade. Moody’s attributes the higher loss expectations to "the continued deterioration in home prices, rising loss severities on liquidated loans, persistent elevated default rates, and progressively diminishing prepayment rates throughout the sector."

The updated projections, according to the Moody’s report, will reflect current home price projections and The Homeowner Affordability and Stability Plan announced February 18th. Loss expectations for newly originated loans will increase 10 percent, while loss expectations on other loans could rise 25 percent, said Nicolas Weill, Moody’s team managing director and chief credit officer, according to a Reuters report. Currently, 42 percent of outstanding 2006-vintage subprime loans are at least 60 days delinquent, in foreclosure, or held for sale, Moody’s said, supporting its notion that one-third of borrowers — which represents 19 percent of today’s outstanding loans — could be in default mode by year-end.  "Despite anticipating modest recovery in the housing environment in the next few years,

Moody’s expects subprime borrowers will find limited refinancing opportunities due to negative equity and lack of available credit," the report said. Loss severities have also worsened in the last few months, rising to 63 percent, according to the report. Moody’s anticipates loss severities to rise to around 70 percent, based on an expected further decline in home values. And, despite the anticipated recovery in the housing market, "subprime severities are likely to remain elevated over time," Moody’s said. "Right now we’re experiencing unusual market conditions," said Richard Cantor, team managing director at Moody’s, during a two-hour conference call on its subprime downgrades. "The number of subprime mortgage securities downgraded has ‘no precedent,’ while the dollar value of these downgrades is less significant."

S&P may cut $140 bln of prime jumbo mortgage deals
Standard & Poor's said on Thursday it may downgrade 3,279 prime tranches of jumbo residential mortgage-backed deals with a market value of around $140 billion, after increasing its loss expectations for deals issued in 2006 and 2007. "Our revised loss projections reflect an increase in our loss severity assumption to 40 percent from 30 percent for prime jumbo transactions issued in 2006 and 2007," S&P said in a statement. "This change is based on our belief that the influence of continued foreclosures, distressed sales, an increase in carrying costs for properties in inventory, costs associated with foreclosures, and more declines in home sales will depress prices further and lead loss severities higher than we had previously assumed," S&P said. The tranches under review are from 209 transactions, which originally had a par value of around $172 billion, S&P said. Around 4.42 percent of jumbo loans in the pool were severely delinquent in January, meaning they were more than 90-days due, in foreclosure or real estate owned, S&P said. Severe delinquencies have increased by 45.60 percent in the past three months, it added.

AIG considers break-up in bid to stay afloat
AIG and the US authorities are in advanced discussions over a radical restructuring that would split the stricken insurer into at least three government-controlled divisions in an attempt to keep it afloat, according to people close to the situation. The restructuring, described by one insider as a "controlled break-up", could lead to the end of AIG's 90-year history as a stand-alone global insurance conglomerate. It also could provide a template for carving up other troubled financial groups - such as Citigroup - should they be brought under government control, the people involved say.

AIG, built into a global insurance powerhouse by decades of deal-making by its former chief executive Hank Greenberg, yesterday said it was working with the Federal Reserve "to evaluate potential new alternatives for addressing AIG's financial challenges". The Fed declined to comment Under the plan, the government would swap its current 80 per cent holding in the insurer for large stakes in three units - AIG's Asian operations, its international life insurance business and the US personal lines business. A fourth unit, comprised of AIG's other businesses and troubled assets, could also be formed.

In return, the authorities would relax the terms, or even cancel a large portion, of a $60bn five-year loan to AIG and convert $40bn-worth of preferred stock into shares, in an effort to ease the company's burden. If the plan goes ahead, AIG would remain as a holding company for now. But people involved in the talks say that company could disappear if the government decides to recoup taxpayers' investments in the insurer by selling or listing the three divisions separately. The final shape of the new rescue attempt - the third government bail-out of AIG in five months - could still change as talks between company executives, US Treasury, the Fed and credit rating agencies continue.

However, people close to the situation said AIG was on track to announce the overhaul on Monday, when it is expected to report a $60bn loss with its fourth quarter results. The board is due to meet on Sunday. Insiders said the new rescue plan was precipitated by AIG's deepening financial woes - which were caused by a sharp rise in unrealised losses in its investment portfolio - and its difficulties in selling large assets to repay the current loan. One of AIG's most prized assets, American International Assurance, its Asian business that was once valued at $20bn, attracted lukewarm interest. Potential bidders have been deterred by turbulent conditions in insurance and credit markets.

The sale of AIG's US personal lines business, which had been close to being acquired by Zurich Financial, has also run into trouble as funding markets remain under pressure, according to people familiar with the process. The two divisions are likely to split off. The third unit to be carved out, American Life Insurance Company, is a global life insurance company with operations in more than 50 countries and a large presence in Japan. It remains unclear whether the US life insurance business and Foreign General, AIG's international property and casualty insurer, will be included in one of the three divisions or sold separately. International Lease Finance Corporation, AIG's large aircraft leasing business, is likely to be given a government credit line and put up for sale.

Time to expose those CDOs
by Gillian Tett

Just how much should a debt vehicle backed by subprime mortgage bonds be worth these days? Two years ago, most banks and insurance companies assumed the answer was close to 100 per cent of face value – or more. Since then, however, that "price" has clearly collapsed, triggering tens of billions of dollars worth of writedowns, particularly in relation to a product known as collateralised debt obligations of asset-backed securities (CDO of ABS.) But as the zeroes relating to writedowns multiply, a peculiar – and bitter – irony continues to hang over these numbers.

Notwithstanding the fact that bankers used to promote CDOs as a tool to create more "complete" capital markets, very few of those instruments ever traded in a real market sense before the crisis – and fewer still have changed hands since then. Thus, the "prices falls" that have blasted such terrible holes in the balance sheets of the banks have not been based on any real market numbers, but on models extrapolated from other measures such as the ABX, an index of mortgage derivatives. What has blown up the capital markets is thus a set of theoretical swings in prices that were always pretty abstract.

This takes the concept of virtual banking onto a whole new, terrible level. But now, at long last, one shard of reality has just emerged to piece this gloom. In recent weeks, bankers at places such as JPMorgan Chase and Wachovia have been quietly sifting data trying to ascertain what has happened to those swathes of troubled CDO of ABS. The conclusions are stunning. From late 2005 to the middle of 2007, around $450bn of CDO of ABS were issued, of which about one third were created from risky mortgage-backed bonds (known as mezzanine CDO of ABS) and much of the rest from safer tranches (high grade CDO of ABS.)

Out of that pile, around $305bn of the CDOs are now in a formal state of default, with the CDOs underwritten by Merrill Lynch accounting for the biggest pile of defaulted assets, followed by UBS and Citi. The real shocker, though, is what has happened after those defaults. JPMorgan estimates that $102bn of CDOs has already been liquidated. The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent.

I dare say this might be an extreme case. The subprime loans extended in 2006 and 2007 have suffered particularly high default rates and the CDOs that have already been liquidated are presumably the very worst of the pack. Even so, I would hazard a guess that this is easily the worst outcome for any assets that have ever carried a "triple A" stamp. No wonder so many investors are now so utterly cynical about anything that bankers or rating agencies might say these days. After all, when the ABX started taking a dramatically bearish tone 18 months ago, many banks claimed that it was ridiculous that they were writing their mortgage assets down to prices extrapolated from the ABX, since it was popularly claimed that the ABX overstated likely future loss. Even the Bank of England appeared to share that view.

But with the ABX now suggesting that triple A subprime mortgage assets are worth around 40 cents on the dollar (depending on the precise vintage), the message from that might almost be too optimistic in relation to some CDOs. So where does that leave the banks? In reality we will not know whether that horrific 95 per cent loss is unusual until the rest of the CDO of ABS are liquidated too. But for my part, I suspect that the saga strengthens the case for financiers now biting the bullet – and conducting some open auctions of this stuff, to get a bit of market price discovery.

Hitherto, most bankers – and policy makers – have vehemently resisted that idea since they feared that public sales would produce painfully low prices. That is a valid fear. After all, there are very few investors in the system right now with any appetite or capacity to take risk. But in a world where investors already feel utterly terrified by the inability to determine values – and the recovery rate on triple A assets has tumbled to just 5 per cent – conducting an open fire sale might now be the least bad of some terrible options.

After all, if an open auction ends up pricing mortgage-linked CDOs near zero, at least the capital hit to the banks and insurance companies will be clear; and if it is higher than zero, it might even cheer investors up. Either way, until investors get some sense of what something might – or might not – be worth, it will be painfully hard to rebuild trust in capital markets and banks alike. Those American officials who are implementing flashy new "stress tests" of banks would do well to take note.

The Two Documents Everyone Should Read to Better Understand the Crisis
by William K. Black

As a white-collar criminologist and former financial regulator much of my research studies what causes financial markets to become profoundly dysfunctional. The FBI has been warning of an "epidemic" of mortgage fraud since September 2004. It also reports that lenders initiated 80% of these frauds. When the person that controls a seemingly legitimate business or government agency uses it as a "weapon" to defraud we categorize it as a "control fraud" ("The Organization as 'Weapon' in White Collar Crime." Wheeler & Rothman 1982; The Best Way to Rob a Bank is to Own One. Black 2005). Financial control frauds' "weapon of choice" is accounting.

Control frauds cause greater financial losses than all other forms of property crime -- combined. Control fraud epidemics can arise when financial deregulation and desupervision and perverse compensation systems create a "criminogenic environment" (Big Money Crime. Calavita, Pontell & Tillman 1997.) The FBI correctly identified the epidemic of mortgage control fraud at such an early point that the financial crisis could have been averted had the Bush administration acted with even minimal competence. To understand the crisis we have to focus on how the mortgage fraud epidemic produced widespread accounting fraud.

Don't ask; don't tell: book profits, "earn" bonuses and closet your losses The first document everyone should read is by S&P, the largest of the rating agencies. The context of the document is that a professional credit rater has told his superiors that he needs to examine the mortgage loan files to evaluate the risk of a complex financial derivative whose risk and market value depend on the credit quality of the nonprime mortgages "underlying" the derivative. A senior manager sends a blistering reply with this forceful punctuation:
Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don't have it and can't provide it. [W]e MUST produce a credit estimate. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.

Fraud is the principal credit risk of nonprime mortgage lending. It is impossible to detect fraud without reviewing a sample of the loan files. Paper loan files are bulky, so they are photographed and the images are stored on computer tapes. Unfortunately, "most investors" (the large commercial and investment banks that purchased nonprime loans and pooled them to create financial derivatives) did not review the loan files before purchasing nonprime loans and did not even require the lender to provide loan tapes. The rating agencies never reviewed samples of loan files before giving AAA ratings to nonprime mortgage financial derivatives. The "AAA" rating is supposed to indicate that there is virtually no credit risk -- the risk is equivalent to U.S. government bonds, which finance refers to as "risk-free."

We know that the rating agencies attained their lucrative profits because they gave AAA ratings to nonprime financial derivatives exposed to staggering default risk. A graph of their profits in this era rises like a stairway to heaven. We also know that turning a blind eye to the mortgage fraud epidemic was the only way the rating agencies could hope to attain those profits. If they had reviewed even small samples of nonprime loans they would have had only two choices: (1) rating them as toxic waste, which would have made it impossible to sell the nonprime financial derivatives or (2) documenting that they were committing, and aiding and abetting, accounting control fraud.

Worse, the S&P document demonstrates that the investment and commercial banks that purchased nonprime loans, pooled them to create financial derivatives, and sold them to others engaged in the same willful blindness. They did not review samples of loan files because doing so would have exposed the toxic nature of the assets they were buying and selling. The entire business was premised on a massive lie -- that fraudulent, toxic nonprime mortgage loans were virtually risk-free. The lie was so blatant that the banks even pooled loans that were known in the trade as "liar's loans" and obtained AAA ratings despite FBI warnings that mortgage fraud was "epidemic."

The supposedly most financially sophisticated entities in the world -- in the core of their expertise, evaluating credit risk -- did not undertake the most basic and essential step to evaluate the most dangerous credit risk. They did not review the loan files. In the short and intermediate-term this optimized their accounting fraud but it was also certain to destroy the corporation if it purchased or retained significant nonprime paper. Stress this: stress tests are useless against the nonprime problems What commentators have missed is that the big banks often do not have the vital nonprime loan files now. That means that neither they nor the Treasury know their asset quality. It also means that Geithner's "stress tests" can't "test" assets when they don't have the essential information to "stress." No files means the vital data are unavailable, which means no meaningful stress tests are possible of the nonprime assets that are causing the greatest losses.

The results were disconcerting A rating agency (Fitch) first reviewed a small sample of nonprime loan files after the secondary market in nonprime loan paper collapsed and nonprime lending virtually ceased. The second document everyone should read is Fitch's report on what they found.
Fitch's analysts conducted an independent analysis of these files with the benefit of the full origination and servicing files. The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file. [F]raud was not only present, but, in most cases, could have been identified with adequate underwriting, quality control and fraud prevention tools prior to the loan funding. Fitch believes that this targeted sampling of files was sufficient to determine that inadequate underwriting controls and, therefore, fraud is a factor in the defaults and losses on recent vintage pools.
Fitch also explained why these forms of mortgage fraud cause severe losses.
For example, for an origination program that relies on owner occupancy to offset other risk factors, a borrower fraudulently stating its intent to occupy will dramatically alter the probability of the loan defaulting. When this scenario happens with a borrower who purchased the property as a short-term investment, based on the anticipation that the value would increase, the layering of risk is greatly multiplied. If the same borrower also misrepresented his income, and cannot afford to pay the loan unless he successfully sells the property, the loan will almost certainly default and result in a loss, as there is no type of loss mitigation, including modification, which can rectify these issues.
The widespread claim that nonprime loan originators that sold their loans caused the crisis because they "had no skin in the game" ignores the fundamental causes. The ultra sophisticated buyers knew the originators had no skin in the game. Neoclassical economics and finance predicts that because they know that the nonprime originators have perverse incentives to sell them toxic loans they will take particular care in their due diligence to detect and block any such sales. They assuredly would never buy assets that the trade openly labeled as fraudulent, after receiving FBI warnings of a fraud epidemic, without the taking exceptional due diligence precautions. The rating agencies' concerns for their reputations would make them even more cautious. Real markets, however, became perverse -- "due diligence" and "private market discipline" became oxymoronic. These two documents are enough to begin to understand:
  • the FBI accurately described mortgage fraud as "epidemic"
  • nonprime lenders are overwhelmingly responsible for the epidemic
  • the fraud was so endemic that it would have been easy to spot if anyone looked
  • the lenders, the banks that created nonprime derivatives, the rating agencies, and the buyers all operated on a "don't ask; don't tell" policy
  • willful blindness was essential to originate, sell, pool and resell the loans
  • willful blindness was the pretext for not posting loss reserves
  • both forms of blindness made high (fictional) profits certain when the bubble was expanding rapidly and massive (real) losses certain when it collapsed
  • the worse the nonprime loan quality the higher the fees and interest rates, and the faster the growth in nonprime lending and pooling the greater the immediate fictional profits and (eventual) real losses
  • the greater the destruction of wealth, the greater the (fictional) profits, bonuses, and stock appreciation
  • many of the big banks are deeply insolvent due to severe credit losses
  • those big banks and Treasury don't know how insolvent they are because they didn't even have the loan files
  • a "stress test" can't remedy the banks' problem -- they do not have the loan files

Deloitte may hit GM with going concern notice, automaker says
General Motors to burn through $14 billion in 2009. Available cash at end of '08? $14 bllion

General Motors posted a loss of nearly $31 billion on Thursday for 2008 and said auditor Deloitte was likely to cast doubt on its viability as the automaker seeks an expanded federal bailout to stay afloat. GM burned through $5 billion in the fourth quarter and ended the year reliant on the first $4 billion in loans from the U.S. Treasury. Quarterly revenue plunged by more than a third to $30.8 billion. The automaker, which asked for up to $30 billion of U.S. government aid, also warned that its pension plans were underfunded by about $12.4 billion as of the end of 2008. GM’s loss for 2008 was the deepest among Detroit-based automakers as industry-wide auto sales dropped to 16-year lows. Ford lost $14.6 billion. Chrysler, controlled by private equity firm Cerberus Capital Management, lost $8 billion.

The grim results came as GM Chief Executive Rick Wagoner and other executives met with members of the autos task force headed by U.S. Treasury Secretary Timothy Geithner and White House economic adviser Larry Summers. "They are in fact-gathering mode right now, and so we are here in order to respond to their questions," GM CFO Ray Young told reporters on a conference call from Washington ahead of the meeting on GM’s aid request. GM said it could receive a "going concern" notice from independent auditor Deloitte when it files its annual report for 2008 with U.S. securities regulators by the middle of March. GM, which took $6 billion in charges to shut down North American plants as sales tumbled, posted a loss of $30.9 billion for 2008. That was the second-largest loss for the 100-year-old automaker behind the $38.7 billion loss for 2007.

Over the past four years, GM has lost $82 billion and cut 92,000 jobs. The combined loss is equivalent to about $56 million a day since the start of 2005. GM’s auto operations burned $19 billion in 2008 and the company expects to burn through another $14 billion this year as it cuts output to run down inventories of unsold cars. GM ended the year with $14 billion in cash, including the first $4 billion in taxpayer-backed loans. S&P equity analyst Efraim Levy said GM’s cash burn forecast for this year could prove too low because of the drop in sales and pressure on the supply base. "It reinforces for us the notion that GM will need multibillion government assistance to continue as a going concern," Levy said in a note for clients.

The automaker has received $9.4 billion from the U.S. government this quarter and has said it needs additional funding as soon as next month to avoid bankruptcy. GM’s fourth-quarter net loss widened to $9.6 billion from $722 million a year earlier. Dennis Virag, president of Automotive Consulting Group, said GM had a chance to restructure under federal oversight if the recession does not deepen beyond its forecast. "If the economy does not further erode and if we do see a pickup in the second half of the year, GM could foreseeably correct the situation with government funding," he said. Analysts say the key to valuing GM’s shares and debt is the progress the company is making in restructuring talks with creditors, including the United Auto Workers union.

Existing shareholder equity could be sharply diluted as bondholders and the union are offered shares in a recapitalized company in an attempt to reduce GM’s cash drain from debt. GM, like its smaller rival Chrysler, faces pressure to wrap up concession talks with the UAW on how to cut funding promised to a healthcare trust under the terms of the federal bailout. GM has offered the UAW up to $10.2 billion in new equity in order to give up a cash claim on half of the $20.4 billion it is owed for the trust fund. Ford reached a deal this week to restructure its own retiree healthcare debt to the union on similar terms. But GM’s parallel negotiations with its bondholders have been more difficult. GM bondholders have been asked to take a payout equal to just $9 billion of the $27 billion that they are collectively owed.

Representatives of the debt holders have said GM’s plan does not go far enough to reduce debt and have asked for steps to safeguard their remaining investment in the company. CFO Young said GM could not comment on its negotiations with bondholders ahead of an end-March deadline to launch the debt exchange. "We are getting to a more sensitive stage in terms of the whole bond exchange process here," he said. December with $14 billion in cash and liquidity including the first $4 billion in loans received from the U.S. Treasury. GM’s fourth-quarter net loss widened to $9.6 billion from $722 million. Excluding one-time items, GM’s quarterly loss was $9.65 cents per share. Analysts surveyed by Reuters Estimates had forecast a loss per share of $7.40 on that adjusted basis.

Revenue for the quarter fell to $30.8 billion from $46.8 billion. GM CFI Ray Young said the deep loss for the quarter reflected how a slump in auto sales that began in the U.S. market had become a global crisis by year end. "When we talk about contagion, what we saw was that the credit crisis was starting to spread," Young told reporters on a conference call. Analysts have said the key to valuing GM’s shares and debt is the progress the company is making in crucial restructuring talks with creditors and the autos task force assembled by U.S. President Barack Obama to slash debt and secure new funding. The release of the company’s results come on the same day that GM boss Rick Wagoner was scheduled to meet with members of the task force headed by U.S. Treasury Secretary Timothy Geithner and White House economic adviser Larry Summers. GM has asked for a total of up to $30 billion in total aid from the U.S. government to survive a plunge in sales in the global auto market.

As GM losses deepen, bankruptcy fears grow
GM Chairman Rick Wagoner pressed Thursday to convince Washington to provide more aid as the company revealed a massive loss coupled with a warning that its auditors are likely to question the automaker's viability. It was a further sign that the century-old automaker is teetering on bankruptcy, a scenario that General Motors Corp. is desperately trying to avoid. Now Washington will have to decide whether it makes sense to loan more money to GM after the company reported an annual loss of $30.9 billion. Company executives met with the Obama administration's auto task force for about six hours, outlining the need for as much as $16.6 billion that it has been seeking -- in addition to the $13.4 billion already given.

Several industry analysts said Thursday's loss, while larger than predicted, was not a complete shock and only underscored the need for more federal assistance. "The last thing that Washington needs is more proof that GM is doing poorly," said Aaron Bragman, an industry analyst with IHS Global Insight. "What Washington is looking for is proof that GM is on the right path toward recovery. It's really difficult to show that you're on that path when the path keeps getting swept away by the floods of recession." The automaker faces tough political currents, though. "It's not going to play well, and it won't play well in particular ... with the Republicans," said Sheldon Stone, a restructuring expert from Birmingham-based Amherst Partners. "I don't think Congress in general is going to have the stomach to continue to fund what looks like a black hole. I think they cannot avoid bankruptcy."

While things look bleak, several analysts see hope in recent statements by President Barack Obama pledging to help the industry and in recent meetings between industry leaders and the president's auto task force. "What is happening is the awareness of how strategic this industry is and how significant it is if there were a major failure," said David Cole, chairman for the Center for Automotive Research. GM, however, said that its auditors were likely to formally question in the company's annual report whether it is a "going concern" -- in other words, whether it is able to continue its operations. The warning could indicate that GM might be forced to file for bankruptcy, a move it has long resisted. "Going-concern opinions tend to trigger defaults that allow a whole lot of bad things to happen if people are inclined to do that," said Kimberly Rodriguez, a restructuring specialist from Grant Thornton. "The key here is the reaction from the stakeholders."

GM's 2008 loss is second only to 2007's loss of $38.7 billion, which was largely because of a noncash, tax issue. Excluding onetime charges, GM's loss last year would have been $16.8 billion. This year's loss, however, was largely attributed to plummeting sales, a consequence of a global recession, which has consumers clamping down on spending, as well as a credit crisis, which has left many consumers who would like to buy a vehicle unable to get a loan. Sales of GM vehicles in the United States, the automaker's largest market, dropped 22.7% last year. In all, the automaker's revenue for 2008 dropped to $149 billion, down from $180 billion in 2007. GM said it ended 2008 with $14 billion in cash on hand, notable because the automaker has said its needs a minimum of $11 billion to $14 billion in cash to operate. On an adjusted basis, GM burned through $19.2 billion in operating cash last year, including $5.2 billion in the final three months. That's compared with $2.4 billion in 2007.

GM Chief Financial Officer Ray Young said the company expects cash burn to drop to $14 billion in 2009. "We're not pleased with a negative $14-billion cash flow burn. That's still a very, very sizable amount. But at the same time, we recognize that the industry conditions in '09 are going to remain fairly challenging," Young said. "We're not forecasting any heroic recovery." Efraim Levy, an analyst with Standard & Poor's Equity Research, wrote in a note Thursday that GM could "very well" end up spending more than the $14 billion in operating cash this year. "This quarter, in our view, just fills in the gap missing in the recently filed viability plan," Levy said. "It reinforces for us the notion that GM will need multibillion-dollar government assistance to continue as a going concern." It is seeking as much as $16.6 billion more from the U.S. government and billions more from foreign governments for the automaker's non-U.S. operations.

Meanwhile, GM continues to negotiate with bondholders and the UAW in an effort to reduce its debt as required by the terms of the government loans. Without the threat of bankruptcy, however, some analysts have suggested that GM is at a disadvantage in its negotiations to reduce its debt with bondholders. "Taking the bankruptcy option off the table diminishes the bargaining power of the companies and the government with the stakeholders," analyst Brian Johnson of Barclays Capital said in a note earlier this month. Additional government support is a tough sale, said James Cashman, a professor at the University of Alabama with years of experience in the auto industry. GM's loss, Cashman said, would "force the debate ... for bankruptcy."

Joseph Phillippi, a longtime industry analyst, agreed that the sum of 2008's loss could make GM's efforts to get assistance even more difficult. "You've got so many hawks. ... It's only going to give them more ammunition," against more government aid, he said. GM, meanwhile, has argued against bankruptcy, saying such a move would cause damage to its sales and image. Cole, chairman of the Center for Automotive Research, said no one was expecting GM to have good news Thursday. "The big deal here is that you can't cost ... your way out of this problem. It's totally a revenue problem," Cole said. "As long as the market stays in the tank at the level it is, the industry is right on the edge of a cliff." However, GM's loss was greater than expected. A survey of analysts by Bloomberg had predicted a loss of $26.83 per share, excluding onetime items. However, GM's loss per share was $29, excluding onetime charges.

Key points from the GM year-end report

• GM burned through $19.2 billion in operating cash last year, on an adjusted basis, including $5.2 billion in the final three months.
• Worldwide automotive operations, which had once helped buoy GM, plummeted by more than $3 billion during the fourth quarter, compared with the same period a year ago.
• GM now has $14 billion in cash, marketable securities and other assets, which is near the minimum GM says it needs to sustain operations.
• GM warns that its upcoming annual report is to contain an opinion from the company's auditors about whether GM remains a "going concern," or has enough resources to continue its operations.
• GM's pension obligations for U.S. hourly and salaried workers are underfunded by an estimated $12.4 billion.

Opel to split from General Motors
German car-maker Opel is considering splitting from its struggling American parent company, General Motors. The head of GM Europe, Carl-Peter Forster, said he could imagine Opel becoming at least partly independent as a business unit. However, he added that it was important for Opel to remain a part of GM's European network of subsidiaries. The statements come a day after thousands of auto workers demonstrated at factories of GM subsidiaries in Europe, hoping to save their jobs. Opel reportedly needs at least 3.3 billion euros to survive. Chancellor Angela Merkel's coalition government has asked the company to come up with a viable business plan in return for state aid. GM's Swedish subsidiary, Saab, has already file for bankruptcy. General Motors has said it will cut thousands of jobs at its subsidiaries in Britain, Germany, Spain and Sweden as part of a restructuring program.

Ford sees Feb U.S. auto sales near 9 million annual rate
Ford Motor Co expects U.S. auto industry sales to drop to about a 9 million unit range on an annualized basis in February as retail demand slipped, the automaker's chief sales analyst said on Friday. U.S. retail sales for the industry likely fell about 40 percent in February from a year earlier under a decline in U.S. consumer confidence, Ford's George Pipas told reporters, adding that Ford's retail results could be slightly worse than that. "The environment continues to be very challenging," he said. Overall, the annualized rate of retail sales, which had remained relatively stable from October through January, appears to have taken "a step down in February," Pipas said, adding that sales to fleets remain difficult to predict.

In January, U.S. auto sales fell 37 percent overall from a year earlier. The annualized rate, a key measure for economists, fell to about 9.57 million vehicles, the lowest monthly rate since 1982. Automakers will also face tough year-over-year comparisons in February. The U.S. annualized rate of sales was about 15.4 million units in February 2008, roughly the peak for the year. Pipas said the U.S. annualized rate of retail sales was in the mid 8 million unit range in January for the industry and will likely be below 8 million in February. Pipas said that while Ford still expects U.S. auto industry sales to begin to recover in the second half of the year, it is not building that assumption into its production plans.

Ford expects to build more vehicles in the second quarter in North America than the 375,000 vehicles it plans to assemble in the first quarter of this year, but that will be down overall from its second-quarter production in 2008, he said. The automaker does not plan to increase production appreciably until it sees a rebound in sales, he said. U.S. government stimulus programs should benefit auto industry sales, but more in the latter half of the year than in the near term, Pipas said.

On Thursday, Ford cut the lower end of its 2009 U.S. auto industry sales forecast to 10.5 million vehicles, but affirmed that it had sufficient liquidity to complete its turnaround plan without seeking government emergency support even if sales fell much steeper than that.
Ford expects the U.S. auto industry sales rate to be closer to the roughly 10.3 million annualized rate from the fourth quarter of last year than to the levels seen in January and expected in February, he said.

Who Will Pay For Obama's Plans?
The White House's $3.6 trillion budget, outlined Thursday, provides a broad plan for government spending during the next decade and a road map for slashing the deficit from $1.75 trillion to $533 billion by 2013. But its true value may be in what it says about how Americans will be taxed during that same period. Specifics of the Obama administration's budget plan won't be unveiled until April--standard procedure for a first-year president. But many of the broad strokes are campaign promises finally put to paper, causing worry from some quarters of the business community. "There's a significant business tax increase suggested in this budget," says Clint Stretch, a tax expert at Deloitte Tax LLP in Washington.

Among them is the closure of tax "loopholes" for the oil and natural gas industries, raising revenue by $32 billion over the next decade. In part, the money would come from reinstating an excise tax on oil and gas from the Gulf of Mexico. It would take away a tax deduction that treats oil and gas as manufactured goods. And it would repeal provisions that allow some drilling costs to be counted as expenses instead of an investment. The industry, obviously, is not happy. "New taxes could mean fewer American jobs and less revenue at a time when we desperately need both," says Jack Gerard, president of the American Petroleum Institute. Less revenue? Higher taxes would discourage oil and natural gas investment domestically, sending it overseas, he argues.

Another major concern is a very vague line item that calls for better implementation of international tax enforcement, reform of tax deferral for income earned and kept overseas, and "other tax reform policies." It's expected to raise revenues by $210 billion during the next 10 years. Business groups don't like what they see. "We've all been invited to the dinner, but some of us turn out to be the main course," says Martin Regalia, chief economist for the U.S. Chamber of Commerce. Of course, not all proposals affecting business are tax hikes. As he proposed on the campaign trail, Obama's budget calls for an elimination of capital gains taxes on small businesses, which would begin to take effect in 2014. A permanent expansion of the "research and experimentation" tax credit would take effect in 2010, costing $74.5 million over a 10-year period.

Also assumed is an expansion of a tax provision that allows businesses to carry back current losses to prior years when they were profitable. That means they can get big refunds from the Treasury now from the taxes they paid in their profitable years. The details aren't spelled out, but PriceWaterhouseCoopers tax expert Lindy Paull says the figures indicate that the "carryback" period will be five years for all businesses. On the individual side, single taxpayers who earn more than $200,000 (or more than $250,000 for couples) will be responsible for offsetting much of the spending increases, including the creation of a $634 billion fund to overhaul the country's health care system. In the name of deficit reduction, the budget allows the Bush-era tax cuts for the better off to expire at the end of 2010. That means the top ordinary income tax rate, now 35%, would return to the 39.6% rate that was in effect when President Bush took office. In addition, the long-term capital gains rate would go back up to 20%, from its current 15%.

The budget would restore two provisions that the Bush cuts were slowly, if temporarily, phasing out: One denies personal exemptions to high-income folks, and the other applies a haircut to the deductions they can claim. On top of that haircut, Obama's budget would further limit the value of itemized deductions for the better off to help pay for their health care aims. Any deductions claimed would be applied only against a 28% tax rate, even though they might be paying taxes at a 35% rate or, in 2011 or later, a 39.6% rate. In addition, so-called "carried interest" earned by hedge fund managers and private equity partners would be taxed as ordinary income, not capital gains.

It's not all bad news. For the better off, dividends would be taxed at a 20% rate, not 39.6%. Those making $200,000 or less would not be affected by tax increases. Obama also seeks to make permanent his $800 per family "making work pay" tax cut, part of the recent stimulus bill, which the administration says will go to 95% of working Americans. The overarching question in all of this is whether Obama will be able to sell his message to Congress. Democrats have the upper hand on Capitol Hill, and tax policy generally falls along party lines. But budget appropriations are a drawn-out process subject to much politicization. And changes to the tax code require separate legislation entirely. Republicans, as expected, will fight it. "Increasing taxes during a recession would be disastrous for the economy," says House Minority Leader John Boehner.

The White House says that's not what it's doing. "That's just factually wrong," argues White House budget director Peter Orszag. He says taxes won't increase until 2011, when the administration projects the economy to be growing again. "So it's not raising taxes during a recession." That's assuming the economy does recover by 2011. Earlier this week, Federal Reserve Chairman Ben Bernanke said recovery could happen in 2010, but only under a best-case scenario. In its budget, the White House assumes that the economic upswing begins in 2009. "We're a little less pessimistic than some forecasts," says Christina Romer, chair of the White House Council of Economic Advisers. She's expecting 3.2% economic growth in 2010, higher than most forecasts, and unemployment below 8% by then--lower than what many forecasters say. A tall order? Romer doesn't see it that way. "I reject the premise that we're noticeably rosier," she says.

Bank Nationalization: Who Would Bear the Pain?
The question of whether big, weak banks such as Citigroup and Bank of America should be nationalized is dividing the nation right up to the highest realms of finance. On Feb. 18 the Financial Times quoted former Federal Reserve Chairman Alan Greenspan as saying that temporary nationalization of some banks "may be necessary." Six days later his successor, Ben Bernanke, told Congress that nationalization "just isn't necessary." At that bank stocks zoomed 13%. The truth is, nationalization is not a painless cure for unhealthy banks. It could get both expensive and messy. But it may nevertheless be the right solution for one or more of the biggest, most vulnerable institutions.

The reason is simple: The U.S. economy continues to spiral downward despite nearly two years' worth of half-measures aimed at propping up the status quo. Extreme actions are needed to fix the financial system. It could turn out that such steps can be taken only via nationalization. That would give the federal government power to negotiate—and, if necessary, force—a workable solution for all of the important players. The key to understanding the nationalization debate is to focus on who will bear the pain of bank restructuring: Will it be mostly taxpayers and common shareholders, as it has been so far? Or will the pain be shared by preferred shareholders and even some classes of creditors, ranging from foreign bondholders to other banks to the counterparties of exotic derivative contracts?

Other nationalization issues generate heat but are distractions. You can safely ignore the controversy over whether the government will spend a lot of money to support nationalized banks; taxpayers are already spending billions, with or without nationalization. Likewise, while the risk that the government could interfere in lending decisions is valid, it's avoidable, especially if the bank is quickly reprivatized. Besides, regulators and Congress are already micromanaging their wards. Just ask Citigroup CEO Vikram S. Pandit or Bank of America CEO Kenneth D. Lewis. Japan's experience during its low-growth "lost decade" of the 1990s, when it propped up zombie banks rather than decisively fixing them, is a cautionary tale for the U.S. A big reason Tokyo resisted drastic, costly measures was an ongoing backlash from resentful Japanese taxpayers.

The twin lessons from Japan, then, are to act swiftly and to earn the public's support by convincing taxpayers that they're not being forced to shoulder an unfair share of the burden. So how should the burdens be shifted in the U.S., if at all? Well, creditors of weak banks have been largely spared to date. The political question—and let's face it, nationalization is a political issue as much as an economic one—is whether that favored treatment can or should continue. Big bondholders are getting nervous that the tide of opinion is turning against them. Kathleen C. Gaffney, who is co-manager of the Loomis Sayles Bond Fund, says it's fair enough for stockholders to lose in a bank rescue because "stockholders know the risk." In contrast, she argues, "bondholders expect to at least get a return of their principal."

Likewise, Joshua S. Siegel, managing principal of New York-based StoneCastle Partners, a private equity firm that invests in banks, says forcing bank creditors to take a haircut "would be rewriting the laws of commerce. The capital markets would collapse, because who would ever again buy debt in any company that's regulated?" What nationalization-hating bondholders hope for is the same thing that Bernanke and Treasury Secretary Timothy Geithner are counting on: That the big banks can be cured with a smallish, temporary injection of public capital, coupled with the new Treasury initiative to get weak assets off their balance sheets. In the ideal scenario, the taxpayers come out ahead in the long run when banks' net worth recovers and the government's stake becomes highly valuable. (On Feb. 25, Treasury said that by the end of April it will finish stress tests to determine whether the 19 biggest banks need more capital.)

Yet there are equally strong voices arguing that taxpayers are being played for suckers and that creditors should absorb some of the bailout cost, now. The airwaves are alive with taxpayers complaining about having to bail out unnamed "fat cat" investors. Some finance experts share their view. "The bond and equity holders should lose first before the taxpayers do. They made the choice to invest without adequate due diligence," says Donn Vickrey, co-founder of Gradient Analytics, a research firm in Scottsdale, Ariz. What taxpayers and their advocates most fear is that the banks will suck up as much taxpayer money as the voracious American International Group, the world's largest insurer. The government acquired 79.9% of New York-based AIG last year and has given it $150 billion to keep it from defaulting, with more injections likely.

An intriguing question with AIG is whether all of its contracts are equally sacrosanct. It would clearly be dangerous for AIG to default on credit default swaps that are helping prop up European banks. But there may be other swaps that AIG has entered into with speculators betting against the value of corporate debt. If so, and if the government has honored those contracts, then taxpayers are indirectly paying speculators who get richer the more the economy deteriorates. We can't tell because the identity of AIG's swaps counterparties has not been revealed. A further question is whether ailing banks have similar obligations. Of course, even if the government wants to make creditors pay a price, it's not clear how it could do so. It's easy enough when the Federal Deposit Insurance Corp. takes over a deposit-taking bank: If the assets are worth less than the liabilities, the FDIC is authorized to force unsecured creditors to share the loss.

But the FDIC has no such authority over bank holding companies—the umbrella organizations that control sister subsidiaries such as Bank of America's Merrill Lynch. Technically, the only way to impose a loss on creditors would be to push the bank holding company into bankruptcy court. But no one wants to go through another bankruptcy like that of Lehman Brothers last fall, which helped cause the global financial system to seize up. Nevertheless, many analysts say that if push comes to shove, the government will somehow find a way to make creditors absorb some pain. R. Christopher Whalen of Institutional Risk Analytics says he thinks Citigroup is the only banking company so weak it will have to be nationalized. If it is, he predicts, bondholders will take at least a 70% loss, if they are not wiped out entirely. They won't suffer it lightly, either, Whalen predicts: "Bondholders are probably the best-organized investor class that there is. You're talking about little old ladies, pension funds, and foreign governments."

What nationalization-hating bondholders hope for is the same thing that Bernanke and Treasury Secretary Timothy Geithner are counting on: That the big banks can be cured with a smallish, temporary injection of public capital, coupled with the new Treasury initiative to get weak assets off their balance sheets. In the ideal scenario, the taxpayers come out ahead in the long run when banks' net worth recovers and the government's stake becomes highly valuable. (On Feb. 25, Treasury said that by the end of April it will finish stress tests to determine whether the 19 biggest banks need more capital.) Yet there are equally strong voices arguing that taxpayers are being played for suckers and that creditors should absorb some of the bailout cost, now.

The airwaves are alive with taxpayers complaining about having to bail out unnamed "fat cat" investors. Some finance experts share their view. "The bond and equity holders should lose first before the taxpayers do. They made the choice to invest without adequate due diligence," says Donn Vickrey, co-founder of Gradient Analytics, a research firm in Scottsdale, Ariz. What taxpayers and their advocates most fear is that the banks will suck up as much taxpayer money as the voracious American International Group (AIG), the world's largest insurer. The government acquired 79.9% of New York-based AIG last year and has given it $150 billion to keep it from defaulting, with more injections likely.

An intriguing question with AIG is whether all of its contracts are equally sacrosanct. It would clearly be dangerous for AIG to default on credit default swaps that are helping prop up European banks. But there may be other swaps that AIG has entered into with speculators betting against the value of corporate debt. If so, and if the government has honored those contracts, then taxpayers are indirectly paying speculators who get richer the more the economy deteriorates. We can't tell because the identity of AIG's swaps counterparties has not been revealed. A further question is whether ailing banks have similar obligations.

Of course, even if the government wants to make creditors pay a price, it's not clear how it could do so. It's easy enough when the Federal Deposit Insurance Corp. takes over a deposit-taking bank: If the assets are worth less than the liabilities, the FDIC is authorized to force unsecured creditors to share the loss. But the FDIC has no such authority over bank holding companies—the umbrella organizations that control sister subsidiaries such as Bank of America's Merrill Lynch. Technically, the only way to impose a loss on creditors would be to push the bank holding company into bankruptcy court. But no one wants to go through another bankruptcy like that of Lehman Brothers last fall, which helped cause the global financial system to seize up.

Nevertheless, many analysts say that if push comes to shove, the government will somehow find a way to make creditors absorb some pain. R. Christopher Whalen of Institutional Risk Analytics says he thinks Citigroup is the only banking company so weak it will have to be nationalized. If it is, he predicts, bondholders will take at least a 70% loss, if they are not wiped out entirely. They won't suffer it lightly, either, Whalen predicts: "Bondholders are probably the best-organized investor class that there is. You're talking about little old ladies, pension funds, and foreign governments."

JPMorgan warns of more consumer woe
JPMorgan Chasehas issued a downbeat diagnosis of the financial health of the US consumer, warning its mortgage business would suffer quarterly losses of up to $2.3bn in 2009 while defaults on credit cards could almost double this year. But JPMorgan executives told the bank's annual outlook meeting yesterday they would keep a tight rein on costs, increase prices whenever possible and try to gain market share from struggling rivals to continue to outperform the sector. Shares in JPMorgan reacted positively to the announcement and closed 6.1 per cent higher at $23.05 amid a broad sector rally.

Charlie Scharf, head of JPMorgan's retail bank, said losses on its $154bn worth of home equity loans would rise in 2009 and could reach up to $1.4bn a quarter as owners of depreciating homes struggle to repay second mortgages. In the last three months of 2008, JPMorgan's losses on home equity loans were $770m. "Never in our wildest dream would have we expected numbers like these," he said. "We clearly believe that home equity losses will continue to grow for some portion of time." Jamie Dimon, JPMorgan's chief executive, told the meeting his biggest mistake since the beginning of the crisis was not to stop originating home loans from third-party brokers. Broker-originated loans have suffered sharply higher losses than the ones extended by JPMorgan's own advisors.

However, Mr Dimon said JPMorgan, which has navigated the turmoil better than most rivals, would pass the "stress test" launched by the US government to gauge banks' financial strength and added it would not need the emergency capital injection promised by the authorities to weaker institutions. Mr Scharf told analysts the continued deterioration in the economy would also increase losses on both prime and subprime mortgages to up to $950m a quarter. He added that costs savings from last year's $1.9bn acquisition of the stricken lender Washington Mutual would reach $2bn - $500m more than expected - and would be achieved by the end of 2009, ahead of schedule. A large part of the savings would come from cutting 12,000 of WaMu's 42,000 employees.

JPMorgan's investment bank will reduce its 28,000-strong workforce by up to 2,000 people this year, with most of the cuts likely to come in technology and infrastructure. Gordon Smith, head of JPMorgan's credit card business, said the unit could suffer losses of up to 9 per cent if the unemployment rate continues to climb. Mr Smith said that net charge-offs, the percentage of loans that cannot be recovered, would rise from 4.92 per cent at the end of last year to about 7 per cent in the first three months of 2009 but could jump further if jobless numbers rise.

East European banks get $31 billion support
Eastern Europe's struggling banks will receive euro24.5 billion ($31.1 billion) worth of emergency help from leading international financial institutions to shore up their battered finances, the European Bank of Reconstruction and Development said Friday. The bank said that it was joining with the World Bank and the European Investment Bank (EIB) to support the region's banking sector to fund lending to businesses hit by the global economic crisis. The EBRD, set up in the early 1990s to help countries in the region make the transition from communist rule, will be providing up to euro6 billion for the financial sector in 2009-10, while the EIB will commit euro11 billion and the World Bank the remaining euro7.5 billion. "We are acting because we have a special responsibility for the region and because it makes economic sense," said EBRD President Thomas Mirow.

The previously fast-growing East European economies have been hit particularly hard by the downturn in the world economy as their cheap lines of credit dried up and many export markets shrank. Many have seen their currencies slide and their debt ratings downgraded, threatening further financial turmoil in the future. Over the last week or two, fears over the future of the region have escalated, stoking concerns that troubles there would hurt the already stressed banking system in Western Europe through local subsidiaries. The International Monetary Fund has already made rescue loans to Hungary, Latvia and Ukraine. European officials are meeting Sunday in Brussels to discuss the issue.

World Bank President Robert Zoellick urged European officials to join in supporting Eastern Europe so that progress since the collapse of communism is not threatened by economic woes. "This is a time for Europe to come together to ensure that the achievements of the last 20 years are not lost because of an economic crisis that is rapidly turning into a human crisis," said World Bank President Robert Zoellick. The Hungarian, Polish and Czech currencies strengthened Friday morning on the news of the aid package. The Polish zloty was up to 4.66 to the euro from 4.71 the previous day; the Hungarian forint rose to 296.5 to the euro from 301, while the Czech koruna grew to 27.9 to the euro from 28.4. The forint's strengthening also came on the heels of the Hungarian finance minister saying Budapest will set a date for euro adoption within the next few weeks.

Earlier this week, credit ratings agency Standard & Poor's said rapid growth in the region is "shuddering to a halt" and "all the ingredients for a crisis are in place" because of rising government debt and a heavy reliance on foreign lending, often foreign currency loans for real estate purchases. It also cut Latvia's debt rating to junk status as it forecast another 10 percent decline in the Baltic country's gross domestic product this year -- by most measures, that would be a depression and not just a recession. While the economies of the region have seen their heady growth rates come to a standstill, fears have grown about the exposure of many Western banks to Eastern Europe.

Credit ratings agency Moody's also said recently that faltering economic conditions in Eastern Europe will continue to hit local subsidiaries of major Western banks, which could spill over to their corporate parents, primarily in Austria, Italy, France, Belgium, Germany and Sweden. It said Austria's banking system is potentially the most exposed as Eastern Europe accounts for around half of the country's bank claims. Italian claims in the region, primarily to Poland and Croatia, account for 27 percent of the total, while Scandinavian banks are heavily involved in the Baltic states' banking systems, Moody's added. The rating agency also indicated that the West European exposure in Eastern Europe is concentrated on very few banking groups, with Austria's Raiffeisen and Erste Bank, France's Societe Generale, Italy's UniCredit and Belgium's KBC the most present in the region.

How the Crisis Is Hitting Europe
Its economy harbored far more risk than most people realized, and businesses are more in hock than their US counterparts. Now Europe's fate may depend on events outside its borders. As Prime Minister of the German state of North Rhine-Westphalia, Jürgen Rüttgers wanted to save one of his industrial state's biggest employers. So what did he do? He hopped a plane to Detroit, of course. On Feb. 18, Rüttgers met with General Motors Chief Executive Rick Wagoner in an effort to persuade him not to shutter a factory in the city of Bochum, where 5,000 workers make sedans and minivans carrying GM's Opel badge. Rüttgers returned with little more than a weak assurance that GM has no plans to close any Opel factories -- yet. Rüttgers' pilgrimage to the Motor City says a lot about the way the global downturn has unfolded in Europe.

In the U.S., the trouble started with subprime mortgages -- a problem that barely exists in Europe. But that hasn't kept the region from falling hard and fast, exposing just how tightly Europe's fate is linked to events in the U.S. and the rest of the world. Not so long ago, Europeans thought they had dodged the worst of the financial meltdown. Now the region is suffering its first recession since the introduction of the euro a decade ago. In Spain and Ireland, corporate bankruptcies have doubled since 2007, and they're up 11 percent on the Continent as a whole. Across the European Union, unemployment hit 7.4 percent in December, vs. 6.8 percent a year earlier. And output in the euro zone countries could fall by 2 percent this year, the International Monetary Fund predicts a bigger decline than the 1.6 percent contraction in the U.S. "No one, including us, expected the crisis to be so severe," says Siemens CEO Peter Löscher.

The Continent's banks may not have written subprime mortgages, but it turns out they financed something worse: subprime countries. The former communist East is sinking into recession as Western banks choke off the easy credit that fueled Asian-style growth. Now, some pundits say, the former Soviet bloc countries are headed for a crisis on the scale of Asia's in 1997 and 1998. And how about subprime companies? European corporations are deeply in hock, with $801 billion in corporate debt maturing this year-nearly one-third more than in the U.S. Some, such as Munich-based chipmaker Qimonda and Swedish automaker Saab, say they are insolvent. A glut of debt-fueled private equity is proving to be a curse for others.

Dutch petrochemical group LyondellBasell Industries sought bankruptcy protection for its U.S. operations on Feb. 9, just 14 months after buying Houston-based Lyondell Chemical in a $19 billion debt-financed deal. Just as in the U.S., the collapse of Lehman Brothers last August helped send Europe into a nosedive. Stock markets tumbled, credit markets seized up, and business confidence plummeted. But the crisis also demonstrates that the European Union's economic problems are almost as diverse as its 27 members, ranging from slumping exports in Germany and Eastern Europe to anemic consumer spending in France to property bubbles in Britain, Ireland, and Spain. "It's the first downturn that affects the whole world with such violence," says Léo Apotheker, co-CEO of German software maker SAP.

Meanwhile, there's no single government to fashion a coherent rescue plan. Only the European Central Bank has broad powers over the region's economy, and it has fewer policy tools than the U.S. Federal Reserve. Before the introduction of the euro a decade ago, a country such as Spain could have let its currency fall to make its cars, wine, olive oil, and other goods more attractive to foreigners. That's not an option anymore. Instead, as Europe's highfliers are laid low, companies must cut wages to regain competitiveness. "People aren't aware that monetary union requires new ways to adjust to a recession," says Fernando Ballabriga, an economics professor at the ESADE business school in Barcelona. Europe's woes are a big worry for the rest of the global business community. The European Union is by far America's largest trading partner and a key destination for Asian exports.

And the Continent remains a crucial market for General Electric, Procter & Gamble, Toyota Motor, Sony, and thousands of other multinationals-many of them now facing hard times there. Honda Motor has closed its plant in the British city of Swindon for four months; Ford Motor says it will eliminate 850 jobs at factories across Britain by May; and aluminum maker Alcoa is laying off hundreds of European workers and selling operations in Germany, Hungary, and Italy. That's not the way it was supposed to be. Europe's economy was built for stability more than speed, and policymakers scoffed at the reckless Americans and their greedy bankers. Slower growth was a price Europeans were willing to pay for job protection and a generous safety net. "The German social market economy is a good model" for balancing free markets and social protections, German Chancellor Angela Merkel told the World Economic Forum in Davos, Switzerland, on Jan. 30.

By some measures, she's right. Europe has averted bank failures on the scale of Lehman Brothers. While some British banks are deeply troubled, institutions such as Spain's Banco Santander and BBVA and Germany's Deutsche Bank are in better shape and have so far managed to avoid a government bailout. In most countries, unemployment has risen gradually, while consumer spending has proved resilient. But it's not hard to find evidence of economic trouble. At a Renault plant in Sandouville, in France's Normandy region, about 150 workers staged a wildcat strike to protest plans to close assembly lines for several weeks this winter. Along Barcelona's fashionable Passeig de Gracia, the restaurants may be busy, but a Volkswagen showroom displaying the sporty new Scirocco is empty -- no surprise considering that Spanish auto sales plunged 40 percent in January from a year earlier.

And above street level, windows are festooned with signs advertising offices for rent and apartments for sale. As a global financial hub, London has been particularly hard hit by the crisis. On Bromley High Street, a popular shopping area 10 miles south of the city center, tony home furnishings retailer Habitat has shut down, Gem's pawn shop sits in space recently occupied by a real estate agency, and Poundland -- the British equivalent of a dollar store -- has expanded. Area residents are scaling back their expectations, too. Tucked behind Bromley's train station is a red brick office building that's home to the local JobCentre Plus, a government agency for the unemployed. Inside, the job seekers include Bharat Mistry, a 46-year-old IT manager laid off by Morgan Stanley in London. He says he's interviewing for jobs at half what he was making. "And even for those," Mistry sighs, "there's stiff competition."

Companies with substantial business in the U.S. have seen the crisis coming. Stephen Featherstone, managing director at London-based Llewelyn Davies Yeang, one of Britain's biggest architectural firms, has cut staff about 10 percent in the past year after cancellation of a major project in New York. "The design team was assembled and then the developer suddenly pulled the plug," Featherstone says. Across Europe, weaker companies are going under. Waterford Wedgwood, the Anglo-Irish maker of crystal and china, filed for bankruptcy on Jan. 5. Germany's Märklin, the storied maker of model trains, on Feb. 4 asked a German court for protection from creditors. So anchored is Märklin in German culture that news of its insolvency seems to have shaken the country almost as much as if it were Daimler or Siemens, providing confirmation that these are extraordinary times.

"Now the ravenous financial crisis wants to rob us of the memories of our youth," Germany's Der Spiegel magazine fretted. Even healthy companies are preparing for the worst. Carl-Henric Svanberg, CEO of Swedish telecommunications equipment maker Ericsson, says sales have held up because carriers in emerging markets are still buying. All the same, "it's unrealistic to believe we won't be affected somehow," Svanberg said on Feb. 17 at the Mobile World Congress in Barcelona, where customers jostled for a view of the equipment on display at Ericsson's pavilion. But the din was deceptive: The show, the mobile industry's largest, drew 15 percent fewer visitors this year. Such warning signs have prompted Ericsson to eliminate 5,000 jobs as part of a plan to trim costs by $1.2 billion this year.

Europe's auto sector may be facing the toughest times it has ever seen, and it's taking plenty of towns and cities down with it. Rüsselsheim, Germany, site of Opel's largest factory, wasn't exactly vibrant even before the crisis. The city of 60,000 on the banks of the Main River, 20 miles west of Frankfurt, has seen job cuts for years. In a kebab restaurant near a factory entrance, one laid-off worker is nursing a 9 a.m. beer. Down the street, the Eis Café San Marco is trying to woo customers by offering half-price on drinks and snacks. "We just have to pray Opel won't close," says Giuseppe Basile, the café's Italian-born manager. Europe's economy is wired differently from America's. In the US, credit-card-happy consumers have long driven growth. In much of Europe, particularly Germany and the eastern countries, exports are the locomotive, making the region vulnerable to downturns elsewhere.

Three-quarters of the cars made in Germany are exported, and many of the parts used in BMWs and Volkswagens come from Slovakia, Poland, and elsewhere in the East. The eastern countries, in turn, depend heavily on Western European consumers. Swarzedz, a century-old furniture maker based in a town of the same name in central Poland, in January said it was going out of business after slumping home sales farther west undercut demand for its bedroom sets, dining tables, and other furniture. The liquidation of the century-old company is painful for the town of 30,000, home to five churches and a museum that boasts Europe's largest collection of beehives. "Workers are frustrated, and they have a right to be," says Lukasz Stelmaszyk, Swarzedz's 34-year-old CEO.

Pain is deepest in Europe's poorest countries. Their huge growth was fueled by lending to companies and consumers by the likes of Italy's UniCredit Group, Germany's Commerzbank, and Belgium's KBC Group. As a result, some nations have run up massive current-account deficits. In Bulgaria, the shortfall equals more than 20 percent of gross domestic product. Adding to the risk: During the boom, banks issued low-rate mortgages and other loans in euros and Swiss francs. When the Hungarian forint, Romanian leu, and other weaker scrips began plunging last summer, the cost of repaying those loans skyrocketed. More than half of the private debt in Hungary, Romania, and Bulgaria is in foreign currency, according to Morgan Stanley. Today, customers in Eastern European countries owe foreign banks the equivalent of one-third of their combined GDP, according to the Bank for International Settlements.

The debt problem has been compounded by slumping exports and consumer spending. In Romania, the second-poorest EU member after neighboring Bulgaria, steelmaker Arcelor Mittal imposed a two-month shutdown, idling 1,200 workers at its plant in Hunedoara, a city nestled in the Transylvanian mountains where iron has been forged since Roman times. Dacia Group, a unit of France's Renault that produces the low-cost Logan sedan in Pitesti, 75 miles west of Bucharest, slashed production and cut investment by $130 million. Europe's political leaders and central bankers face unique constraints as they try to jump-start growth. Stimulus plans, such as a German initiative to give a $3,200 rebate to people who trade in old cars for new ones, have a limited effect that doesn't stretch far beyond the border. A country such as Romania really needs Chinese factories to start buying German machinery again-which could boost demand for Romanian steel. But all the stimulus programs in the euro zone don't amount to even 1 percent of GDP, and they're focused on infrastructure, offering little relief to industries such as tourism, which employs millions of Europeans.

"There are a lot less tourists, even those who are well off," says Catherine Castanier, manager of La Coupe d'Or, a café nestled among the luxury boutiques on Paris' swank rue Saint-Honoré. National governments, meanwhile, face tough choices in shoring up their banks. After the fall of communism, Vienna financial houses such as Erste Group and Raiffeisen International grabbed state-owned institutions in Eastern Europe, and today Austria's banks hold assets in the region equal to at least two-thirds of their home country's total economic output. In backing its banks, Vienna is effectively propping up their subsidiaries in the former Warsaw Pact countries. Europe lacks institutions with a clear mandate to tackle such issues regionally. For instance, the ECB would have a hard time boosting lending via purchases of commercial paper and asset-backed securities, as the U.S. Fed has done, argues Mewael F. Tesfaselassie, an economist at Germany's Kiel Institute for the World Economy. Washington stands behind the Fed, but it's not clear who would pick up the tab if the ECB faced huge capital losses. The ECB has already broadened the securities it accepts as collateral for short-term loans, but that provides less relief to credit markets than outright purchase.

Economic tensions are beginning to spill into the streets. In January, Greek farmers demanding government aid blockaded border crossings with their tractors, holding up international truck traffic for more than a week. And on Jan. 13, 10,000 protesters gathered on Doma Square in the gothic Old Town of Riga, Latvia, demanding bolder government action to ease the pain of the financial crisis. The protest turned violent, and demonstrators battled with police, looted stores, and broke windows of several bank branches in the shadow of the Finance Ministry. "There's a huge amount of stress and tension," says Filip Klavins, a Latvian-American lawyer working in Riga. As the situation deteriorates, some pundits even say a weaker member of the euro zone -- perhaps Greece or Ireland -- could pull out of the union rather than face the pain of lower wages and higher unemployment. But few mainstream economists really believe the monetary union will come apart.

On the contrary, non-euro members such as Iceland and Denmark may try to join to protect themselves from sharp declines in their currencies. "Imagine what it would have been like with George Soros betting against the deutsche mark, lira, and franc," says Michael Burda, a professor of economics at Humboldt University in Berlin. "It's a blessing the euro and the ECB are there." Still, the crisis is forcing European leaders to rethink how they manage their economies. The European Union probably needs a single securities and bank regulator rather than the tangle of national bodies it currently has. There's talk of establishing a Europe-wide deposit insurance fund to prevent nervous Hungarians or Lithuanians from withdrawing their money from local banks and sending it to Germany. The European Commission could issue its own bonds backed by all members to help the likes of Spain, where borrowing costs have soared after a downgrade of the country's debt.

The Continent has some competitive advantages over the U.S. and could still emerge from the crisis more quickly. Thanks to decades of investment in nuclear, solar, and wind power as well as a history of energy conservation, Europe is less vulnerable to oil shocks than the U.S. Consumer debt is relatively low in most countries, helping to offset other risks to the banking system. And conservative lending practices mean that, outside of Britain and Ireland, European banks could recover their ability to lend more quickly than devastated U.S. institutions. Deutsche Bank Chief Executive Josef Ackermann argues that, by refusing state aid, he will have more freedom to operate internationally than weakened rivals subject to government intervention. "We can determine our own fate," Ackermann told reporters on Feb. 5. Like the destiny of its companies, Europe's fate may depend on events outside its own borders. Germany and Eastern Europe won't recover until there is a revival in orders for cars and machinery from Russia, the Middle East, the U.S., and China. Britain and Ireland, with their huge banking sectors, must await a stabilization in worldwide financial markets. Just as the crisis began elsewhere, it may have to end elsewhere before Europe returns to health.

Financial crisis sparks unrest in Europe
Thousands of Opel workers from around Germany took part in a mass rally on Thursday demanding parent General Motors scrap plans for plant closures in Europe. The global financial and economic crisis has sparked many protests in parts of Europe. Here are some details:

* BOSNIA -- Workers of Bosnia's only alumina producer Birac protested on Feb. 9 in Banja Luka, demanding salary payments and government support to offset falling metal prices.

* BRITAIN -- British workers held a series of protests at power plants, demonstrating against the employment of foreign contractors to work on critical energy sites.
-- The protests follow a week-long dispute at the Total-owned Lindsey oil refinery in Lincolnshire, which resulted in Total agreeing to hire more British workers on the project. Workers voted to end the unofficial strike on Feb. 5.

* BULGARIA -- Police officers, banned by law from striking, have held three "silent" protests since December to demand a 50 percent pay hike and better working conditions. Bulgaria, the poorest EU nation, has been hit by protests demanding the government take measures to shore up the economy.
-- Farmers blocked the only Danube bridge link with Romania and rallied across Bulgaria on Feb. 4 demanding the government set a minimum protective price for milk and stop imports of cheap substitutes.

* FRANCE -- President Nicolas Sarkozy faced criticism from both unions and bosses on Feb. 19 over new measures to tackle the economic crisis. Sarkozy offered an additional 2.65 billion euros ($3.4 billion) of social spending in an effort to quell labour unrest over a previous stimulus package that targeted investment rather than consumers. France's eight union federations called for a day of action on March 19.
-- Up to 2.5 million protesters took to the streets of France on Jan. 29 in a day of strikes and rallies to denounce the economic crisis but the strike failed to paralyse the country and support from private sector workers was limited.
-- A union representative was killed last week and several policemen wounded by protesters on the French Caribbean island in violence over the cost of living. Guadeloupe, a region of France and part of the EU, has been brought to a standstill in February by a general strike over high prices for food.

* GERMANY -- Thousands of Opel workers from around Germany took part in a mass rally at the company's headquarters, demanding on Thursday that parent General Motors scrap plans for plant closures in Europe. Vice Chancellor Frank-Walter Steinmeier at the rally, added, "This is about more than just Opel. It's about the future of the car industry in Germany."

* GREECE -- Greek farmers protesting low product prices ended a two week blockade of a border crossing with Bulgaria on Feb. 7 when their demands for compensation were met. Greece had endured days of travel chaos with thousands of angry farmers setting roadblocks across the country, but most have ended after the government pledged 500 million euros ($640 million) in subsidies on products such as olive oil and wheat. -- High youth unemployment was a main driver for rioting in Greece in December, initially sparked by the police shooting of a youth in an Athens neighbourhood. The protests forced a government reshuffle.

* ICELAND -- Prime Minister Geir Haarde resigned on Jan. 26 after protests. The first leader in the world to fall as a direct result of the financial crisis, he was replaced by Johanna Sigurdardottir, who heads a new centre-left coalition.

* IRELAND -- Nearly 100,000 people marched through Dublin on Feb. 21 to protest at government cutbacks in the face of a deepening recession and bailouts for the banks.

* LATVIA -- A new Latvian prime minister was appointed on Thursday after the four-party ruling coalition collapsed on Feb. 20 and the president called for talks to forge a new government to tackle a deepening economic crisis. The government was the second to succumb to the financial crisis.
-- Latvia's agriculture minister had already gone on Feb. 3 amid protests by farmers over falling incomes. A 10,000-strong protest on Jan. 13 descended into a riot. Government steps to cut wages, as part of an austerity plan to win international aid, have angered people.

* LITHUANIA -- Police fired teargas lon Jan. 16 to disperse demonstrators who pelted parliament with stones in protest at cuts in social spending. Police said 80 people were detained and 20 injured. Prime Minister Andrius Kubilius said the violence would not stop an austerity plan.

* MONTENEGRO -- In Podgorica, aluminium workers demanded on Feb. 9 to be paid their salaries and an immediate restart of suspended production at the Kombinat Aluminijuma Podgorica (KAP), a Russian-owned plant.

* RUSSIA -- Hundreds of angry communists rallied in Moscow on Feb. 23 in protest at the Kremlin's handling of the crisis that has rocked the Russian economy, the latest in a series of demonstrations held across Russia as the economic crisis bites.
-- The opposition rallied about 350 people in central Moscow two days earlier to demand early presidential elections.
-- On Jan. 31, thousands of opposition supporters rallied in Moscow and the port of Vladivostok over hardships caused by the financial crisis. The next day hundreds of Moscow demonstrators called for Russia's leaders to resign.

* UKRAINE - Hundreds of Ukrainians protested at separate demonstrations on Feb. 23, with some urging President Viktor Yushchenko to quit while others demanded their money back from banks hit by the financial crisis.

'We're Not Paying For Your Crisis!'
Anger rises in Germany as the economy falls. Trade unions and globalization-critical protesters are planning demonstrations in Berlin and Frankfurt under the banner: "We're not paying for your crisis." Alexis Passadakis, 31, an activist from the group Attac, tells SPIEGEL what's wrong with the system.

SPIEGEL: What do you mean with your battle cry, "We're not paying for your crisis"? Don't you want to pay taxes anymore?
Passadakis: We believe that the cost of the economic crisis should be footed by those who profited most from globalization.

SPIEGEL: As a leading exporter, Germany too has profited.
Passadakis: No, the majority of people have not earned much from the boom -- instead they have had to deal with restraint in their wage agreements. The rich, on the other hand, have seen strong increases in their wealth. So it is only fair that they should pay extra duties.

SPIEGEL: You want to fleece the Aldi brothers and the Klatten and Otto families (Germany's richest people) among others?
Passadakis: Yes, they in particular should be ordered to come to the check out. We are calling for the rich to pay out between 5 and 20 percent of their wealth.

SPIEGEL: And by doing so, they should provide enough money to finance the economic stimulus packages?
Passadakis: The German government has now pledged €480 billion ($613 billion) in guarantees and cash injections for banks. In the year 2002 alone, private assets in Germany increased by almost €800 billion. There is lots to draw on. We just can't keep going on as we have been until now.

SPIEGEL: Why not?
Passadakis: The European Commission estimates in a secret paper that the banks are still sitting on toxic assets worth several trillions of euros. To guarantee such sums would be beyond the means of any public fund. Instead, it would be better to let the banks go bankrupt in a controlled fashion, then put them under public control and then recapitalize them. Then the billions of taxes would be used in a sensible way.

SPIEGEL: Do you think many people will participate in your protest?
Passadakis: The crisis is still very abstract for many people. But still our membership numbers are rising fast. After the protests in France we are holding demos in Germany on March 28, shortly before the global finance summit in London.

Brown told us not to question banks on risky practices, says City watchdog
Gordon Brown helped fuel Britain's banking crisis by pressuring City watchdogs into 'light-touch regulation', MPs were told today. In damning evidence to the Treasury select committee, Financial Services Authority chairman Lord Turner said there was clear 'political' pressure not to question the business models of banks such as Northern Rock, HBOS and Bradford and Bingley. The phrase 'light-touch regulation' was one often used by Mr Brown when chancellor and his then City minister Ed Balls. Lord Turner also admitted that his predecessors at the FSA had failed to spot the wider systemic risks of complicated financial instruments and the housing and lending boom.

Lord Turner pledged the City watchdog would unveil a 'revolution' next month in the way it monitors banks, their bonuses and business models. He added that the FSA was focused on specific processes within banks rather than their overall lending policies. Lord Turner told the committee that he had recently gone through the FSA's detailed reports on HBOS. 'We had a philosophy of how to do regulation which was founded on organisational structures, processes, systems, whether reporting lines were correct. 'It fairly overtly said that it was not the function of a regulator to cast questions over the overall business strategy of an institution, You may find that surprising. I find that surprising.'

Lord Turner was accused by MPs of deflecting criticism from the FSA itself and committee chairman John McFall said his remarks had raised serious questions about the FSA's independence. Lord Turner stressed that economists and finance ministers had got it wrong in failing to spot the dangers in the lending boom. But he added that if the FSA had tried to step in it risked being accused by politicians of trying to 'prevent the democratisation of home ownership'. In spite of the disastrous state to which the banking system has been consigned, the FSA also announced today that it would be paying out  £21 million in bonuses to staff. Chief executive Hector Sants told the committee that each employee would get between £7,000 and £8,000. Earlier, Chancellor Alistair Darling urged banks to stop haggling and sign up to the latest £500 billion bail-out plan. The Treasury is offering to underwrite toxic assets amounting to about £250 billion each at RBS and Lloyds and in return, they are expected to give a pledge to increase lending to families and businesses by an extra £40 billion

UK house prices fall to lowest level on record, sales plunge 67%
Home owners saw the value of their properties fall for the seventeenth month in a row as the growth in annual house prices shrunk to a record low, according to Land Registry figures. The Land Registry said house prices dropped by a record 15.1 per cent in January compared with a year ago. It is the largest drop since the Land Registry began its records in January 1995. The average property now costs £153,753, having dropped 0.8 per cent during last month. While all regions across the country are now feeling the effects of the housing slump, the figures indicated that house prices in London and Wales have been particularly badly hit, dropping 14.1 per cent and 19.7 per cent respectively.

Further evidence of the slowdown in the housing market is highlighted by the drop-off in sales. These fell by 67 per cent in England and Wales during the year to November from 33,404 from 100,730. In London, only 3,504 house sales were completed in November 2008 compared with 12,719 in November 2007, representing a fall of 72 per cent. The actual drop in house prices could be worse as the Land Registry figures are based only on those properties which have actually been sold and so lag other indices based on mortgage approvals by about three months. Economists said sales would remain low due to the lack of affordable mortgages and rising unemployment amid the credit crisis. Howard Archer, of economists Global Insight, said: "We are sceptical that sales will pick up substantially anytime soon."

UK taxpayers facing £50-£100 billion bill for RBS toxic assets
The taxpayer could be facing losses of as much as £50bn after Royal Bank of Scotland dumped £325bn of riskier assets with the Government under its Asset Protection Scheme. RBS's lead is widely predicted to be followed today by Lloyds Banking Group, which may use the scheme for another £250bn. Bankers said Barclays is likely to join in, potentially lifting the country's exposure to the bad lending practices of the three British banks to £700bn – half the size of the country's £1.4 trillion economic output. The Treasury did not comment on how much the taxpayer could lose, but one banker close to the situation said: "It all depends on the quality of the assets, but you might say the taxpayer is on the hook for £50bn."

However, Willem Buiter, Professor of European Political Economy at the LSE and a former member of the Monetary Policy Committee, warned that the loss insurance scheme could end up costing the Government £100bn. He told the Jeff Randall Live show on Sky News that there were cheaper and more effective ways of solving the bank’s problems without leaving taxpayers exposed. Under the terms of the scheme, RBS will bear the first 6pc, or £19.5bn, loss on the assets, which have already been written down to £302bn. After that, any loss will be shared between the taxpayer and the bank, with the state taking 90pc of the hit. In return, RBS is paying a fee of 2pc, £6.5bn, in special "B" shares that will carry an effective interest rate of 7pc, but only once the bank returns to profit.

The market had expected the first loss element to be 10pc and the fee at least 3pc. Credit Suisse said "the terms weren't quite as generous as they first appeared" as, including future tax credits and £4.6bn of deferred tax assets RBS has agreed to forgo, the "effective fee increases from 2pc to about 5pc". While Lloyds and Barclays will be examining the terms closely, the Government said the scheme was not "one-size-fits-all". "It is important to understand the terms we agreed with RBS do not create an industry standard," City minister Lord Myners said. Lloyds, which will confirm losses of around £7.5bn today, said "discussions are ongoing". The Treasury has thrown the scheme open to deposit takers with more than £25bn in assets, including subsidiaries of foreign banks. They have until March 31 to apply. In return for the insurance, RBS has pledged to increase lending and to adopt the Financial Services Authority's guidelines on pay and bonuses. The FSA is recommending bonuses be paid two thirds in shares. Cash elements should also be deferred and subject to clawback, the FSA added.

Nearly 4 million British home owners are already in negative equity
Nearly four million home owners are already in negative equity, according to a leading research firm GfK. The calculation is the most gloomy yet, and shows how the property crash has caused serious financial problems for an increasing number of people. Previous estimates suggested that, at most, two million home owners were suffering from the predicament. Some economists have raised eyebrows about how "alarming" GfK's figures are, but the research company insisted its report was robust. GfK estimates that about 3.8 million people are now paying more on their mortgage than their house is worth – about twice the number of people hit by the phenomenon at the worst point of the 1990s house price crash. Its calculation is derived from 60,000 interviews with home owners, asking when they bought their property, at what price, and with what mortgage.

The company also asked whether the home loan was a repayment deal, or an interest-only mortgage. Combining this information with data from the Halifax house price index, which shows pries have fallen 18 per cent from their peak, it has calculated that about 3.8 million people are paying their mortgage company more than their house is worth. This equates to one in three of every one of the 11.7 million households that has a mortgage. Andy Thwaites, GfK financial director of Insight, said: "The shift to negative equity has the potential to be a mammoth welfare disaster for the nation, particularly when so much of the population has recently relied on the capital appreciation in their home to supplement their lifestyle, consolidate debts and fund retirement. The reality is that if there are further job cuts, the problem will become significantly worse."

The report came on the same day that Nationwide, Britain's biggest building society, said the fall in property prices was continuing apace, with average prices falling a further 1.8 per cent in January, taking them back to the level they were in April 2004. These figures dashed hopes that the fall in house prices had bottomed out. Negative equity is when a home owner ends up owning more on their mortgage than their house is worth, a situation that can cause serious problems – and ultimately repossession – if someone can no longer pay their mortgage or if they are forced to move home. Mark Sands, debt expert at the consultancy KPMG, said: "These figures really are astonishing. But what is worrying is when house price falls are combined with mortgage problems, someone losing their job and then also unsecured debt problems. "That's when many home owners just give up and hand back the keys to their homes to the mortgage company as they did in the 1990s." Simon Rubinsohn, the chief economist at the Royal Institution of Chartered Surveyors, said the GfK calculation seemed "rather extreme" and that it was unlikely that as many as one in three mortgage holders was already in negative equity. He added: "Negative equity is never nice for any home owner. But for the vast majority of people it will not affect them, unless they need to move or sell their home."

Debating Opel's Fate
German carmaker Opel, a beleaguered subsidiary of threatened US automobile giant General Motors, is expected to present its own restructuring plan on Friday. As the doomsday clock ticks, German editorialists continue to mull the company's fate. Thousands of workers at General Motors German subsidiary, Opel, gathered for a massive protest at the company's headquarters in Rüsselsheim near Frankfurt on Thursday. Employees are worried that Opel will be shut down as part of its American parent company's restructuring. They carried banners with slogans like "Free Opel" and "Europe without Opel/Saab/Vauxhall would be like a car without a motor." Their immediate concern are plans by GM to close down several Opel plans. German Vice Chancellor and Foreign Minister Frank-Walter Steinmeier also spoke at the rally, where he said he would do all he could to help save Opel. "This is a fight for jobs and I'm fighting without any reservation for you," Steinmeier told workers. Noting that the company has built cars in Germany since 1899, he added: "Opel is a part of German history. We've got to defend that history. ... This is about more than Opel. It's about the future of the car industry in Germany. The car sector isn't just an ordinary industry here. It's the backbone of our economy."

Given that Steinmeier is running as the center-left Social Democratic Party's candidate for chancellor against incumbent Angela Merkel of the conservative Christian Democrats -- a party that shares power with the SPD in the current coalition government -- the foreign minister's visit was not uncontroversial. Conservatives claim the visit was nothing more than a stump speech for his campaign, and an editorial in one of Germany's leading papers suggests he has taken a significant political risk given that he has no plan to rescue the ailing carmaker. Accompanying the protests on Thursday were media reports that the Germany-based Opel dividsion would now need €5.6 billion in bridge loans in order to secure its future. Opel's German management is expected to unveil a restructuring plan to its board on Friday that will likely result in thousands of jobs being cut and the closing of at least one plant. The plan is key to securing aid from the government Berlin. Editorialists on Friday continue to debate Opel's future, as they have throughout the week -- should the state intervene or should the company be allowed to collapse and the jobs of its nearly 30,000 German workers slashed?

The center-right Frankfurter Allgemeine Zeitung writes:
"Adam Opel built sewing machines before he became an automobile producer and the company he founded has been a part of General Motors since 1929. Somehow, though, people here have created the belief that Opel is part of the origins of the German automobile industry. People across Germany are looking to Rüsselsheim, where Opel is threatened with collapse and its thousands of workers could lose their jobs, with great compassion. But that shouldn't deflect attention from reality. Unions and politicians are calling for a European business model that would make it possible for Opel to operate in the future as an independent company. People have been ruminating on how that might happen since Christmas. The reality, though, is that Opel is far too interwoven with its mother company. German rear axels are used in cars built in America, small Japanese cars carry the Opel brand and Opel-designed cars built by GM Korean subsidiary Daewoo are sold under the Chevrolet brand. Without any recognizable resistance from its managers in Europe, GM has made one bad decision after another. … Opel, for example, was forced to turn over its patents to a GM shell corporation and must pay a licensing fee for each car it produces. As bitter as this may be for the company's workers: Opel builds cars that are technically good, but it has too many factories and a parent company that wants taxpayers to bail it out. This cannot be permitted to happen. According to Chancellor Angela Merkel, Germany has an interest in helping companies that 'have good prospects for the future and have solid business structures … to get through the crisis.' When there are doubts, though, the facts are helpful: In GM's European business, of which Opel comprises the greatest share, the company last year lost $2.9 billion. The company looks set to record even greater losses in the future."

The center-left Süddeutsche Zeitung writes:
"The more serious the economic problems, the more concrete the expectations are that politicians will take action. That's why Steinmeier took a real risk by visiting Opel, since he didn't bring anything with him except himself. With all due respect, that's not much in the view of an Opel worker who fears losing his job. Steinmeier criticized management at General Motors and he expressed his support for the workers while pushing for a European solution to the GM crisis. But that would also serve the purpose of taking some of the responsibility away from the state. Still, the public perception is that the government is ultimately responsible. And it's an image Berlin has perpetuated in recent weeks, because any government that systematically rescues banks is going to have difficulty explaining why it can't bail out Opel....Steinmeier hasn't profited in any way with his visit to Opel at Rüsselsheim. Instead he has left with greater liability."

The conservative Die Welt takes the latest developments at Opel as an opportunity to riff on Germany's labor unions:
"It's paradoxical. In the midst of a crisis, the unions are out trumpeting their horns. At the Opel plant in Rüsselsheim on Thursday, members of the IG Metall metalworkers union very confidently expressed their power with the support of the vice chancellor. And this weekend, the Ver.di service union is going to start its next collective bargaining talks for civil servant pay in Germany's state governments. The union is calling for a lavish salary increase of 8 percent. In past economic downturns, exactly the opposite happened. Since the dawn of the age of globalization in the 1990s, each successive crisis has pushed unions into the defensive. Companies threatened to move their operations to countries with lower labor costs and unions were often brought to their knees. But this crisis has been totally different. There's been a paradigm shift in both politics and society. Capitalism is now viewed suspiciously by most. And the issues that only a few years ago were only espoused by the left-wing fringe of the Social Democratic Party are now en vogue even with the conservative Christian Democrats. Minimum wages, economic stimulus packages and even expropriation are now being discussed as if they were never taboo."

Are Germans giving up on the euro?
Ex-Bundesbank chief Karl Otto Pohl has just said that Ireland and Greece are in danger of defaulting on their sovereign debts and/or may be forced out of the Euro, for those who may not be aware of his Sky interview by my colleague Jeff Randall. "I think there are countries considering the possibility. It would be very expensive," he said. "The exchange rate would go down, 50 or 60% and then interest rates would go sky high because the markets would lose all confidence." Professor Pohl said Germany's political class is afraid their country will ultimately have to pay for the EMU mess. His view is that the burden should be shifted to the IMF (ie. the US, Canada, Japan, Britain). Thanks a lot Karl Otto. You broke it, you fix it. This is more or less what ex-foreign minister Joschka Fischer has been saying in London over the last two days, although his main point is that Russia is now the equivalent of Germany in the 1930s: an embittered nation with a revanchist and dysfunctional leadership class. Mr Fischer now thinks monetary union is beyond saving. A massive rescue will be needed. It will not be forthcoming. German-French relations are the worst since the war, he said. The European insitutions have lost virtually all authority in this crisis. The half-century Project is collapsing. .. or words to that effect, from what I hear.

As regards Prof's Pohl's comments, they are revealing. Why should the currencies fall 60pc unless they are massively overvalued? If they are massively overvalued by anything like this amount - or even half - how can they possibly rectify this within the eurozone? Is Germany going to inflate at 10pc to let them claw back competitiveness? Of course not. This is pure madness. Prof Pohl shrinks from the implications of his own logic, as almost everybody does in Euroland when they near the high-voltage line. EMU is inherently unworkable. It was launched before there had been real convergence of productivity growth rates, wage bargaining systems, legal practices, mortgage markets, etc, and without the fiscal transfers and debt union that makes monetary union work (badly, but on balance positively) in, say, the US, Canada, and Britain. The destructive effect has now brought the EU project to this unhappy pass, where even Joschka Fischer is giving up on it. I remember hearing Joschka give a speech in Strasbourg eight years ago in which he said the euro was a powerful federalizing force - "quantum leap" - that would lead ineluctably to full political union. Here is the piece I wrote. He seems to have changed his mind. On the same theme, three notes have hit my desk on the risk of EMU break-up/default -- one from France, one from Benelux, and one from a Swede in the City.

1) Laurence Chieze-Devivier from AXA Investment Managers -- in "Leaving the Euro?" -- says that the rocketing debt costs of Ireland, Greece, Spain, and Italy are taking on a life of their own. (Italy has just revised is public debt forecast from 2010 from 101pc to 111pc. That is a frightening jump. While the CDS default swaps on Irish debt is are at 376 basis pouints. Austria is at 240. This is getting serious). It is far for clear whether all these countries will accept the sort of drastic retrenchment required to stay in EMU. "By leaving the euro, internal adjustments would become less `painful'. An independent currency would re-establish economic competitiveness quickly, not achieved by a sharp drop in employment or wage cuts". Mr Cheize-Devivier makes a point often missed. Countries in trouble may not have a choice. "In our view a FORCED EXIT could be provoked by investors' distrust." The AXA view is that the crisis will ultimately lead to the creation of a new EU machinery -- in effect, an EU economic government -- ensuring the survival of EMU. (This, of course, is what many Brit, Danish, Swedish, and Gallic eurosceptics always suspected, which is why wanted their countries to stay out. Romano Prodi candidly said once that the euro would lead to a crisis one day that would let the EU do things it cannot do now).

2) Carsten Brzeski for ING in Brussels said the eurozone laggards were more likely to default than pay the punishing costs of leaving EMU. "It is difficult to believe that Portugal, Italy, Ireland, Greece, and Spain, would be better off outside the eurozone. While a government could possibly get away with a redenomination of its debt, the private sector would still have to service its foreign debt. We believe any attempts to leave monetary union would lead to the mother of all crises, and total isolation in any future European integration". Mr Brzeski said the bigger danger is that countries will face a buyers' strike for their debt as a flood of bond issues across the world saturates the markets. "A further worsening of the crisis could lead to (partial) sovereign defaults in one or several countries." Others would launch come to the rescue. The "No-Bail" clause in the Maastricht Treaty would be ignored. The EU would instead use the "exceptional occurences beyond its control" clause (Article 100.2) to do whatever it wanted. There would be a price. "The country in question could be partly warded and have to fuilfil strict controls". Quite. This is another long-held fear of eurosceptics: that EMU would lead to vassal states.

3) Gabriel Stein from Lombard Street Research in "A Road-map for EMU break-up" says the euro has shielded weaker member from a currency crisis in this global recession, but only the cost of letting imbalances get further out of hand. Currency crises are often good. If you don't get tremors, you get an earthquake. Mr Stein says a country like Italy that has lost some 40pc in labour competitveness could in theory do what Germany has done for the last 13 years after the D-Mark was locked into the euro system at an overvalued rate. It could screw down wages but that was during a period of global growth. No Greek or Italian government is likely to opt for mass unemployment, or stay in power if it does so. (Actually, I would go further. I doubt whether Italy can possibly do this. Germany was able to pull it off because the Club Med states were all inflating merrily. Italy would have to deflate against a low-inflation Germany. If Italy deflated with a public debt of 111pc of GDP, it would face a debt compound trap. In my view, Italy is already past the point of no return.)

Mr Stein's piece is a study of break-down mechanics. What would actually happen? The country's parliament could pass a law redenominating debt into the new Lira, Drachma, or whatever. But there would be a pre-emptive run on bank deposits long before then. "Anyone not desirous of losing money would presumably see the writing on the wall and transfer any funds beyond the reach of the state. In other words, close down that account with Monte dei Paschi di Siena and open a new one with Commerzbank in Germany". Such a wholesale shift would lead to a collapse in the money supply, perhaps equal to the 38pc contraction in M3 from October 1929 to April 1933 in the US -- but concentrated in a much shorter period. "Banks would be forced to call in outstanding loans, bring about a collapse in the country's business." That is something I never thought of before. Italy is really damned if it does, and really damned if it doesn't. Lasciate Ogni Speranza, Voi Che Entrate EMU.

Iceland picks little-known Norwegian to run central bank
Iceland picked a little-known Norwegian economist on Friday to be caretaker head of its central bank, as the island tries to recover from the collapse of its banking system and currency. The government named Svein Harald Oygard interim Governor of Sedlabanki, Iceland's central bank, and the bank's hitherto chief economist Arnor Sighvatsson as his deputy. The former Norwegian assistant finance minister and more recently McKinsey consultant replaces political veteran David Oddsson, who many Icelanders blame for failing to do more to prevent Iceland's economic meltdown last year.

Oygard is seen as a technocrat who could help restore central bank credibility after a politicized feud between Oddsson -- a former conservative prime minister -- and Iceland's center-left government. "Our main priority is to strengthen the Icelandic currency and the monetary system," Oygard, the first ever foreign governor of Iceland's central bank, told a news conference. "We will also support bank restructuring efforts that will provide (a) better framework for business," said Oygard, who also worked for Norway's central bank. He declined to say when capital controls, intended to support the island's fragile currency, would end.

Iceland's economy imploded as the global credit crunch left its banks unable to service the billions of dollars of debts they built up during years of overseas growth. The Atlantic island nation stayed afloat with $10 billion in aid from the International Monetary Fund and other lenders but after mounting public protests, the conservative government resigned last month and elections have been called for April 25. The protests were in part directed at Oddsson, Iceland's longest serving prime minister from 1991 to 2004, who helped create the highly leveraged economic model that came crashing down when global liquidity dried up last October.

"There has been some criticism surrounding Oddsson's credibility given his political past, so in that sense hiring someone who doesn't have any obvious political agenda or history in Iceland seems quite reasonable," Frosti Olafsson, deputy head of Iceland's Chamber of Commerce, told Reuters. Oygard was appointed after parliament passed a bill on Thursday reforming the central bank and effectively ousting Oddsson after he defied government calls for a resignation. Oygard is expected to stay on for several months, while Iceland sets up a Monetary Policy Committee and looks for a full-time replacement. The current interim coalition, which took power earlier this month, had made reforming the central bank a priority.

"I am convinced that this legislation will prove to be a major factor in re-establishing confidence in the bank and the Icelandic financial system as a whole," Prime Minister Johanna Sigurdardottir told Reuters. "Furthermore, the legislation provides for a much needed degree of professionalism in the selection of governors and the creation of the Monetary Policy Committee to handle strategic decision making is also a significant step." Oygard said his new role was "one of the greatest challenges" for an economist and the forecasts are daunting, with Iceland's gross domestic product expected to shrink by 10 percent this year. "Even though Iceland is now a symbol of the financial crisis, my hope is that through our joint efforts, it will also be a symbol of a country able to regain momentum and establish new growth."

Separately, Iceland's government said on Friday a swap of foreign assets held by the country's pension funds for local currency bonds held by foreign investors is one option it is mulling for stabilizing its financial system. Iceland has said foreign investors hold local currency debt worth some 400 billion Iceland crowns, or 25 percent of GDP. These funds are frozen in Iceland since the country's financial meltdown last year, when Reykjavik suspended capital flows to protect the Icelandic crown from further losses.

Danish economy in nosedive
Private consumption has stopped up, shaving 2 percent off GDP in the fourth quarter. Danish GDP fell two percent in the fourth quarter of 2008 according to the latest statistics from Statistics Denmark, in particular as a result of a drop in private consumption. Imports and exports also fell, dragging GDP for all of 2008 down by 1.3 percent. Denmark is not the only loser. According to the new statistics the overall GDP for the European Union fell by 1.5 percent while GDP in the United States fell by one percent. Car sales are generally a good indicator of whether people are hanging on to their money; In the fourth quarter of 2008 car sales dropped no less than 23.8 percent. Other goods dropped 1.1 percent. The new figures come the day after new unemployment figures showed an increase for the fourth month in a row. January jobless figures showed an increase of 5,000 with unemployment now at 2.3 percent.

US ethanol sector faces grim prospects-USDA
Hard times have hit the once-robust U.S. ethanol sector amid the economic recession, with as much as 15 percent of production capacity likely standing idle, USDA chief economist Joseph Glauber said on Thursday. It was a sobering assessment of the fledging industry that was once bursting with optimism and financial gains as the country issued mandates on using the renewable fuel to reduce dependence on crude oil. "The U.S. ethanol industry remains under significant financial pressure as the result of current economic conditions ...," Glauber told the annual USDA Agricultural Outlook Forum in Arlington, Virginia. He said slowing gasoline consumption and lower prices have reduced incentives for blending ethanol in recent months. Crude oil futures have tumbled from a record high above $147 a barrel last summer to around $45 on Thursday as the surge in prices triggered the backlash of reduced consumption.

The Energy Information Administration, the U.S. government's top energy forecasting agency, earlier this month cut its estimate for world oil demand in 2009 by 400,000 barrels per day, citing the slower global economy. The EIA predicted that world oil demand this year would fall by 1.17 million bpd from 2008 to 84.70 million. That would be down from peak demand of 85.9 million bpd in 2007. The state of the ethanol industry has been underscored by the second largest producer VeraSun Energy Corp filing for bankruptcy protection in October due to high corn prices and a lack of financing. VeraSun has since reached an agreement to sell five production facilities to top U.S. refiner Valero Energy Corp) for $280 million. Glauber said excess ethanol production capacity was weighing on ethanol producers' returns as more plant capacity becomes available. He said the Renewable Fuels Association has put existing ethanol production capacity at 12.4 billion gallons, including current plants not operating, with another 2.1 billion under construction or expansion.

"Current indications suggest that 2.0 billion gallons or more of plant capacity has been idled," he said. Glauber said that as much as 15 percent of ethanol production capacity will be idle during the 2009/10 marketing year, based on the estimate of corn used to produce ethanol. However, he said, rising mandates for ethanol use are expected to support corn demand and prices in the 2009/10 marketing year that begins Sept. 1. He said mandated ethanol use rises from 10.5 billion gallons in 2009 to 12 billion in 2010. On a crop-year basis, that translates into about 11.5 billion gallons of ethanol demand in 2009/10, he said, adding that that would mean a 14-percent hike in corn used to produce the biofuel. At a projected 4.1 billion bushels, ethanol use will account for 33 percent of expected corn use in 2009/10, up from a forecast of 30 percent the current marketing year.

Yale’s Tobin Guides Obama From Grave as Friedman Is Eclipsed
So long, Milton Friedman. Hello, James Tobin. After a three-decade run, the free-market philosophies of Friedman that shaped U.S. policy are being eclipsed by the pro- government ideas of Tobin, the late Yale economist and Nobel laureate who brought John Maynard Keynes into the modern era. Tobin’s stamp is on the $787 billion stimulus signed by President Barack Obama, former students and colleagues say. His philosophies are influencing Austan Goolsbee, a former Tobin student advising Obama, and Ben S. Bernanke, head of the Federal Reserve. Unlike Friedman, Tobin provides guidance for today’s problems, said Paul Krugman, a Princeton University economist. "Hard-line doctrines don’t seem very appropriate at this troubled moment," said Krugman, a New York Times columnist who also worked with Tobin at Yale from 1977 to 1979. "Tobin was never a guru in the way Milton Friedman was; he never had legions of Samurai ready to spring to the defense of his theories, but that’s part of why he is so relevant right now."

The decision by Bernanke last September to invoke the Fed’s emergency powers and put mortgages and other assets on the central bank’s balance sheet "is pure Tobin," Krugman said. Bernanke cited Tobin’s 1969 essay on monetary theory in a 2004 paper discussing options available to the Federal Reserve for stimulating the economy when interest rates approach zero. Tobin’s experience of the depression as a teenager in the 1930s gave him a lifelong loathing of unemployment. "As a young professor I did a paper where I analyzed the optimal unemployment rate," said Joseph Stiglitz, a professor at Columbia University in New York, who knew Tobin at Yale. "Tobin went livid over the idea. To him the optimal unemployment rate was zero." Like Keynes, Tobin was an advocate for the role of government in maintaining full employment, said James Galbraith, an economist at the University of Texas in Austin. The current economic and financial crisis has validated that philosophy, said Galbraith, a former Tobin student and the son of the late John Kenneth Galbraith, who was a friend of Tobin.

"It’s clear that the position that the federal government has a responsibility for the level of employment, for the economy, has prevailed," Galbraith said. "The position that the Fed can walk away from the level of employment has completely collapsed. That was the absolutely dominant position coming out of the University of Chicago." In contrast to the Friedman-influenced proponents of tax cuts, deregulation and tight control of the money supply, followers of Tobin are more receptive to government intervention in the economy, including stimulus spending. "I do not believe that over the next two years, we can make major deficit reduction or balancing the budget a goal," Goolsbee, nominated by Obama to the Council of Economic Advisers, said at a Senate hearing on Jan. 15. "I think that would run the risk of repeating one of the mistakes of Herbert Hoover that led us into Depression." Goolsbee was Tobin’s research assistant at Yale.

Tobin was born in 1918 in Champaign, Illinois, the son of a former reporter who was a publicist for the University of Illinois football team. His high school years during the depression motivated him to study economics at Harvard University in Cambridge, Massachusetts, Tobin said in an essay written for the Nobel committee. "The miserable failures of capitalist economies in the Great Depression were root causes of worldwide social and political disasters," he wrote. Economics "offered the hope, as it still does, that improved understanding could better the lot of mankind." Tobin, who died in 2002, won the 1981 Nobel Memorial Prize in Economic Sciences for his analysis of the effect of financial markets on inflation and employment. His followers have been honored as well. Krugman won the 2008 prize, for work on international trade and economic geography. Stiglitz shared the 2001 award, which cited analyses of markets in which some participants have much better information than others.

Tobin helped pioneer the study of financial markets and their importance to economic performance, said William Brainard, a Yale colleague and friend. "He believed financial markets could serve a valuable service in diversifying risk and moving capital in efficient ways," Brainard said. "But he was not someone who believed the market always got it right and that private incentives were always aligned with the public good."  Keynes, who died in 1946, was the British economist whose ideas helped shape U.S. policies for more than four decades, beginning in President Franklin D. Roosevelt’s New Deal. Not all economists accept that Tobin’s theory of government intervention has replaced the Friedman model. John Cochrane, a finance professor at the Booth School of Business at the University of Chicago, said that while Tobin made contributions to investing theory, the idea that spending can spur the economy was discredited decades ago. "It’s not part of what anybody has taught graduate students since the 1960s," Cochrane said. "They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false."

To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the simulative effect, Cochrane said. It also will do nothing to unlock frozen credit, he said. Tobin proposed taxing financial transactions to slow the flow of money to and from markets. Tobin worried that too much efficiency would create instability in the markets as transaction costs fell, said Stiglitz. While there was a flurry of interest in what became known as the "Tobin Tax" during the Asian financial crisis of the late 1990s, the idea never received political support. Tobin’s understanding of the role of financial markets in the economy was rooted in his study of the decisions made by investors, and he was the intellectual force behind many of the tools they use today, Stiglitz said. He devised the Q Ratio, a formula that divides total market capitalization by the cost of replacing assets. Q of greater than one suggests a fast-growing company with incentive to make new capital investments; a Q lower than one suggests a company that might be ripe for takeover because buying its shares would cost less than replacing its assets.

"He’s the father of modern asset pricing," Stiglitz said. After Harvard, where he studied under the late Joseph Schumpeter, he spent four years in the U.S. Navy, serving on a destroyer that supported the invasion of North Africa. While training to be an officer, he served with Herman Wouk, who later wrote "The Caine Mutiny." Tobin was Wouk’s model for a character called Tobit, a "mandarin-like midshipman" who had "a domed forehead, measured quiet speech and a mind like a sponge." Tobin began teaching at Yale, in New Haven, Connecticut, in 1950, leaving in 1961 and 1962 to serve on the U.S. Council of Economic Advisors under President John F. Kennedy. At Yale, he put his stamp on generations of economists who studied or taught there. Those include Goolsbee, Krugman, Stiglitz, and Galbraith. Others influenced by Tobin at Yale include Robert Shiller, a Yale economist and creator of the Case/Shiller home price index; Nouriel Roubini, the New York University economist who predicted the financial collapse; Janet Yellen, president of the Federal Reserve Bank of San Francisco; and David Swensen, Yale’s investment manager. Tobin’s influence on today’s policy makers is still not as powerful as former students would like to see. Richard Levin, the president of Yale, said Tobin would have wanted the stimulus package to create more jobs and contain fewer tax cuts. "Tobin’s insights are what’s needed right now," Levin said. "I wish policy makers would listen more carefully to Tobin."


Anonymous said...

You can add to a losing position if your trading 1 minute charts. In fact you could add to most losing short positions since way back when, certainly after October last year, and have done just fine but that would be bad discipline.

It has gotten to the point where I was looking last night at the last days of the Reich, Hitler's bunker and the rest,in order to find something to assure myself things aren't so bad, or could be a lot worse. On the scale of man folly we are still pikers compared to that.

The Pigmen and the bubbleonians in the end don't want fascism even if all their machinations over the last 3 or 5 decades pointed us in that direction. They just didn't think through to the end what their corporate free market ideology really meant.

Anonymous said...

Yesterday, Stoneleigh brought up a belief about Victorians that I believe is apocryphal:

There's a reason why fathers in Victorian times who could afford it used to get all their daughters' teeth pulled out and replaced with wooden ones as a 21st birthday present.

I think I've found the source:

My generation is probably the first to keep their own teeth. In Australia and elsewhere, people used to have them yanked out at 20, and I have heard stories in the country of fathers actually providing a set of false teeth for their daughters as a dowry. So we're in another world and teeth really do matter.

From Stella Miles Franklin: A Biography

A story heard in the country in Australia is a far cry from a generalization about what "fathers in Victorian times" used to do to their daughters.


Anonymous said...


Another hit! I seem to remember you writing a prediction of N.A. car sales for 2009 around the 9 million mark.

Question: Is the collapse of Citi, B of A and MS Chase going to be the
straw that breaks the camels back?

When they close, and the FDIC cannot cover the deposits, will this be the time that the street riots start?


Anonymous said...

Happy birthday! seems a little trite, but hope you manage to take a bit of time off terminal to smell the roses.
Pinged you a few bucks to help...
all the best :) cs

thethirdcoast said...


Don't forget the irony that Chevrolet's namesake was a Swiss of French descent.

That always made me chuckle when the "WOOOOOO USA #1" crowd would defend Chevy and GM to the ends of the Earth.

goritsas said...

John Hemingway said...

actually the "sexing up" comment was made in the Downing Street memo. Go read it and see for yourself.


‘The Downing Street "Memo" is actually the minutes of a meeting, transcribed during a gathering of many of the British Prime Minister's senior ministers on July 23, 2002. Published by The Sunday Times on May 1, 2005 this document was the first hard evidence from within the UK or US governments that exposed the truth about how the Iraq war began.’

Just so you can see the timeline. Gilligan made the sexing up accusation long before the memo was ever published. Nearly two years before, in fact. Just about a year after the memo was taken. See (if you’re actually able to read any form of English, including, sadly, American).

So, long before the memo can to light, the Blair government had been accused of “sexing up.” Like I said before, if you can’t even get your facts correct, how the hell can you read minds?

But hey, you're right, the USA invaded Iraq for "freedom", not for oil;-)

I’ve never made any claim as to why the Bush administration decided to put troops into Iraq. I simply claimed you have no means that would enable you to divine the motivations of the players themselves, unless you’re a mind reader, of course.

I have to say that I admire your loyalty to the ancienne regime of the Bushmen.

I have never publicly declared my loyalty, or otherwise, to G. W. Bush, or any other president, head of state, or prime minister, for that matter. Once again you’re using your mind reading skills. Is this a gift? Or has it come to you through dedicated training and practice?

Anonymous said...


Prescient post. And happy birthday. Nice to see us fishes in the same pond. Do you swim upstream or down? (I can probably guess that one... :-) )

I sent out an email to my little invesment group a couple of months ago. In it I predicted the shotgun wedding of Ford and GM at the behest if the US gov. Ford will reject the budding suitor. GM will be hot to trot. In the end the gov-as-priest will make sure these two unite in (un)holy matrimony.

The result will be a 1/2 nationalized union with the task of producing US made cars for the new millenium. I.e. high mileage hybrids with all the backing funny money can buy. Look to battery startups like A123 Systems as rising stars in this shotgun wedding.

I see four car companies surviving the 9.0 richter scale shakeout. One in Europe, one in North America, and two in Asia. All the of the dewy eyed wall-flowers will wilt on the vine. Say your goodbyes to Volvo, Saab, Opel, and the rest. They are the also-rans, the wannabees, the unfulfilled dawn of days gone by.

And don't get me started on trucking companies. That's the desert incarnate. Buffet, flawed as his year may be, had the sweet spot in his sights. The iron rail will rule domestic goods in the years to come. We won't be back to waterways and canals but we will ship goods via trains.

They're cheap, they're consistent, and they are cost effective. The latter is the mantra of a new age. No coal or diesel over time but electric lines will cross the continents and spread the news. Electric trains are the future of goods transport. And electric cars the shippers of men.

Anonymous said...

Do you think the coming failures of Citi, BofA, AIG et al will cause turmoil which will spread and cause the downfall of other international banks that have avoided much comment yet; e.g. HSBC?

Anonymous said...

IIRC I read recently about HSBC America's exposure to CDS being 3-4x that of Citi - I don't know how that would play out but I think HSBC have their nobs in the blender just like all the others, though they may be keeping schtum for now...

Anonymous said...

Not sending donation but sending my best wishes for you in your birthday!!

Stoneleigh said...


A story heard in the country in Australia is a far cry from a generalization about what "fathers in Victorian times" used to do to their daughters.

That is not where I came across the information. If memory serves (as it was a long time ago), it was a BBC documentary I saw when I lived in England.

Something similar was also a common practice among people heading west during the opening of western Canada. For that you'd have to watch Canada: A People's History (one of the early episodes on David Thompson and the mapping of the west).

Modern dentistry is an extremely complex field requiring sophisticated machinery, the production of fancy material, drugs and reliable electricity. The likelihood of it surviving, except for the extremely wealthy, is very low indeed.

Anonymous said...

"Add to this today's Ford prediction for a lowered estimate of 9 million new vehicles sold in the US in 2009, down from 10-11 million."

Will those 9 million be at high end, low end or 'assemble it at home yourself' prices?

Anonymous said...

@ aitrader -

I am in 100% agreement with your comments re the railroads.

They made possible the expansion of this country, and once electrified, will give us a sustainable method of transporting goods and people after the models of cars and trucks on highways, JIT inventory, and airplanes as everyman's transportation pass away.


Anonymous said...


Question: Is the collapse of Citi, B of A and MS Chase going to be the
straw that breaks the camels back?

JP Morgan can't fail, it has a special dispensation for National Security. (Only partially tongue-in-cheek statement.)

redcatbiker said...

Dmitry Orlov says it’s boondoggles chasing boondoggles. The late, great Marvin Harris simply labeled it “intensification.”

Either way, the point is that overclasses do one thing and one thing only — pursue the tactics and strategies that carried them to the top of the societies to which they dictate the terms of life.

Alas, as both Orlov and Harris argue, this reliance on doing the same-old-same-old only gets stronger after class decrepitude arrives and the underlying conditions for further exploitation (and further life for the proles) begin to erode themselves. Just when they most need fresh ideas, established overclasses instead only redouble the old ones....

Anonymous said...

The 'black swan' event that nobody is considering is the "new used" goods market. ("New used" goods are technically used goods that are in fact new eg 2009 vehicles with 2-3k miles, etc. Type in '2009' under "cars & trucks - owner" in any Craigslist region to see a firsthand example.)

That is, there was so much overproduction of goods, including autos & homes, over the last 7-8 years, that we have at least 3-5 years worth of excess inventory masquerading as "new used" goods.

Let me be more clear: neither sovereign (foreign) wealth funds nor domestic savers will have sufficient funds to invest in Treasuries if consumption switches from "new" production to "new used" goods. IOW, given excess inventory levels, demand for consumption can be completely satisfied by "new used" goods.

How does this work? Taxes are generated either from sales at the point of retail, or from profits/payroll generated from new production throughout the value chain. In addition, 'excess' profits & payroll can in turn be invested as savings in Treasuries, covering both the tax receipts and deficit financing needs of the state.

Take away new production and substitute it for "new used" goods in a private transaction marketplace like C/L, and you've applied a triple strike:
1. cash sales don't required credit financing (kills bank lending);
2. reduced sales taxes (to the extent private purchasers even conform with the law and report individual use taxes); and
3. diminished production/employment in which to generate profit/payroll taxes & savings directed towards Treasury financing.

The 'black swan' event no one sees coming is the realization of that old '90s buzz word, disintermediation. Well, the central governments of the world are about to get disintermediated by Internet based private-party transaction servers. (Settlement/payment/barter takes place completely off-line in the privacy of buyer-seller.)

When the world wakes up and realizes that neither the Chinese nor domestic savers will be able to make up the shortfall in demand for Treasuries (as well as driving down tax receipts), there's gonna be a mad rush for the door as everyone realizes that Ben is going to have to FIRE (pun intended) up the printing presses and decimate the value of $USD holdings.

Anonymous said...

hey, happy 29th birthday !!!

Anonymous said...

Happy Birthday :D

The smartest bloke on the planet is 29??!! Amazing! I thought he'd be in his mid 40's or 50's atleast.

bluebird said...

Happy Birthday!
I sent you an early birthday donation :)

Anonymous said...

To: Ilargi

Happy Birthday!!!

From: An older fish still swimming against the current.:)

Thank you kindly for your work.

John Hemingway said...


Buon Compleanno:-) 29, wow that's young!

Ilargi said...


Their derivatives risk, as per Mike Larson at Money and Markets, is 721% of capital, while Citi is "only" 279%. Hard to oversee, but definitely not 100% safe,

See: A savior to rise from these streets

Anonymous said...

Mike & Stoneleigh:

Re: Teeth

I usually just lurk, but I though some info might help your discussion. We have an extremely conservative group of Amish here. Very, very strict. They won't pay for dental care aside from the occasional family that buys toothpaste. The girls usually have their teeth pulled between 16 and 18 yrs old.
Most boys tend to get a slightly better diet than the girls, and they usually keep their teeth, but they will loose them slowly over the rest of their lives.
Basically the families feel that dentures are cheaper and easier than toothaches and the resulting work loss.
I can see that becoming more commonplace over the next few years.

perry said...

Rail in the US is ALREADY electrified! - the most efficient way possible.

Diesel/electric locomotives burn diesel fuel in 6,000 HP diesel engines on board the locomotives that turn electrical turbines to drive electric traction-motors on the wheels on the undercarriages. That's why they are properly called "diesel/electric locomotives".

OH, I'll bet you mean stringing wire from say Chicago to LA, or Long Beach to KC??


THAT kind of electrified long haul rail in the US is a joke; get over it; look at a map.

Who's going to pay for making all that wire, and poles, and who's going to string 100,000 miles of wire to reach every little hamlet in rural Iowa, the Dakotas, Utah, Oregon and Nevada?

And where do you propose to GET the electricity that is supposed to be fed through all those wires to run all those trains?

Never going to happen.

And electric cars is a BIGGER joke!

NOTHING is "sustainable". Get it?

Just another techno-optimist's wet dream.


Starcade said...

When are people going to get it that the United States of America is not going to survive this -- and at least a third of its present population will be wiped from the Earth?

(Not speaking specifically to here...)

I mean, as I said yesterday: The only question, now, is when all order is lost. Any such guarantee of deposits must eventually mean printing literally trillions of dollars (which immediately render the currency worthless), and it ends with hyperinflation, a forced Jubilee, the end of our currency, the end of our government, and the end of social order.

What you are seeing now is simply trying to retain it as long as possible.

Starcade said...

Ontario 1752: The collapse of MS, BAC, and C (C pretty much died today -- 1.7 B shares traded, down 39%) would be the straw to break it. The thing is, the nationalization of them will be sufficient.

I've always said that the riots start when the checks stop -- that isn't limited to the welfare state.

(Oh, BTW, official California unemployment just went past 10% last month.)

aitrader: There will be no US auto companies left by the end of this -- unless they are a direct part of the US government. There aren't enough people who will be able to buy.

Anon 1822: If the big 3 banks collapse, the currency becomes worthless. I mean, think a second: Once the banks collapse, there won't be any stability left, because of a number of factors (not the least of which, the fractional reserve system)...

centiare: Excess production came from excess population. Unfortunately, that's where we are: We have an unsustainable amount of population (not just for the planet, but definitely the USA).

Anonymous said...


I sold my car a few years ago in anticipation of the deluge of used-car sales. I look at every street and see dozens of cars laying idle - we didn't need to make so many! I did not fully anticipate the massive overproduction and collapse of industry and retail, however. It makes perfect sense it will destroy the tax base of governments. They must find alternate sources to survive, but I believe their days are numbered in any case. Thanks for articulating it so well.


Anonymous said...

Maybe GM et al. should go into the scrap metal business...

. said...


I find the detailed studies of Alan Drake backed by the modeling of the Millennium Institute to be far more credible than your assessment. Electric rail over the STRACNET is a choice we have to make. One way leads to a 1940 standard of living, the other will look more like 1490.

perry said...

We're headed to 1490 regardless - studies or no studies, electric trains or no trains.


Starcade said...

Understand, Perry, what a 1490 standard of living means with respect to population:

Perhaps my estimate of a billion wiped out worldwide might be _low_...

Anonymous said...

Telegraph/London goes bonkers "Banning the cane started slide in pupil discipline, parents believe": they want to promote, le vice anglais! So much for their credibility: In several graphic articles about the Carnival in Brazil, below each photo they drip their poison -to poison their own people, the Brazilians couldn't care less. There's a beautiful woman, strutting her stuff, loads of happy dancing singing people, and the captions: Embraer the airplane maker fired 1000 workers. The credit crunch makes it difficult to get money. Every photo, a drop of venom, because they can't allow their people -and the people across the Atlantic- to see happy, boisterous, hopeful people.
¡A tonga na mironga do kabuleté!
And if you don't understand that look in my website, it is explained.

Anonymous said...

Happy bday!

Author of the Creature from Jekyll Island in second hour of Puplova today.


FSN broadcast page

Remember. Just the 2nd hour, don't catch a gold bug listning to the rest. ;)

Anonymous said...

Gas and oil just jumped. Probably on the news that the UAE is cutting shipments to Asia.

All is not bullish however -

From an OPEC perspective things are not a bullish as the data this week indicate. The number of days that stocks can replace consumption remains high at 52.5 and up 3.8 days from last year. With the low imports import coverage is 96.7 days and 8.4 days higher than last year. OPEC needs stocks down below 50 days coverage before is can expect significantly higher prices.

My guess is we will continue to see US oil stocks drop toward 50 days of coverage. I would expect Hilary to show up in Saudi Arabia for conversations similar to the ones she just finished in China. The US is going to need trillions from sovereign wealth funds in order to stay afloat. An oil price rise toward $70 bbl will be the quid quo pro IMO.

Anonymous said...

@ Ilargi
Happy birthday:))

fish from Warsaw

xtropy27 said...

What Allen Drake and the Millennium Institute envision is very alluring. Who Knows ? < > Maybe it could work ? Thanks 'Iowa Boy'. Happy Birthday Illargi !

xtropy27 said...

What Allen Drake and the Millennium Institute envision is very alluring. Who Knows ? < > Maybe it could work ? Thanks 'Iowa Boy'. Happy Birthday Illargi !

Coco said...

Feliz cumpeaños!

As a USian expat in Spain, I´d like to thank you for your insights, grim as they might be.

I am trying to prepare as best I can. I´ve liquidated my IRA in the US and am waiting for its transfer to an account here. The question is what to do with our savings. Spanish banks? Spanish Govt. bonds? German bonds? The Euro bonds I´m now reading about? Gold, for example Goldmoney in Switzerland? I´m uncomfortable trying to buy and hold physical, since I don´t feel as though I have the expertise not to be taken - and then where do you sell it when the time comes?

Our plan is to buy a small doomstead in northwestern Spain, temperate climate, plentiful water, but also a rightwing stronghold. Prices are less than other parts of Spain, but bound to come down further in the next few years - but can we afford to wait?

The vast majority of people we know, co-workers, relatives, friends are making 1000 € a month or less. What on earth will they do when wages fall even further?

Thanks again for your hard work. DH believes me that the SHTF moment is coming, but prefers to not worry too much until it happens. I hyperventilate.

Anonymous said...


The 'black swan' event no one sees coming is the realization of that old '90s buzz word, disintermediation. Well, the central governments of the world are about to get disintermediated by Internet based private-party transaction servers. (Settlement/payment/barter takes place completely off-line in the privacy of buyer-seller.)

Third party payment intermediaries like Paypal and Google were notified in 2008 that they had 18 months to integrate their reporting systems with the US IRS and state tax apparati. The IRS has had direct direct access to bank and credit card transactions for nearly 15 years. Auction sites like Ebay are already reporting IIRC.

European auction sites report directly to the governments here. And the EU laws to combat "money laundering" went into effect 12 months ago throughout the EU. Any cash deposits above 50 Euros require the depositors name and ID number, which is logged.

<Ron Paul Rant> Once you have an income tax you have to track everyone of your citizens. Technology makes it possible. All modern states are police states to a degree. If you think you are free, think again.</Ron Paul Rant>

Anonymous said...

...and I nearly forgot to add the governments' webspider project.

You are being tracked and watched online. Everything is logged. And I mean everything. Every email you send. Every website you visit. Storage is very cheap these days. If Google can do it with a warehouse of generic PC's then you have an idea what the governments do. Times Google by 100.

I'm not paranoid, they are watching us (aitrader starts playing spooky organ music) oooowahahahaaa :-)

Anonymous said...

Armando Gascón:

In several graphic articles about the Carnival in Brazil, below each photo they drip their poison -to poison their own people, the Brazilians couldn't care less.

I looked at the pictures, they were wonderful. I cannot get the spiteful stuff that you seem to be referring to though and I am in the UK.

I think that you are missing out on the philosophy of the Daily Telegraph newspaper. When there is a Labour government, they just pour out the venom and no good news gets through. When there is a Conservative government, the sun suddenly starts shining and nothing untoward seems to happen worldwide.

It is just the way they are hardwired by their ownership structure. They are owned by Sir David and Sir Frederick Barclay - a couple of amazing twins who tried to turn Guernsey into a fiefdom.

Check out Barclay twins

Anonymous said...


Indeed, I read an article recently which described "acres" of supercomputers under the Mojave desert..

Anonymous said...


We have an extremely conservative group of Amish here. Very, very strict. They won't pay for dental care aside from the occasional family that buys toothpaste. The girls usually have their teeth pulled between 16 and 18 yrs old.


Still, this is anecdotal and hardly supports generalizations that dentistry is going to disappear anytime soon.


Anonymous said...

ref re echelon


Anonymous said...

Ilargi asks, which part of the government can provide backup to the FDIC in case of seizure of C and other large banks:

1) Not necessarily even needed. Read the chart a different way. When Sleepy Hollow Bank of Smalltown, Somewhere is seized, nearly all its liabilities are deposits, so almost the entire hole in its balance sheet is covered by the FDIC. But the great thing about money center banks is around half of their liabilities are other suckers like bondholders. The holes in their balance sheets would need to be very large, topping 40 to 60%, before the FDIC needs to cover. On seizing C, the FDIC tells depositors not to worry, the retail operation continues as normal; ATMs still work, etc. Then they patiently pair off good assets with retail infrastructure and deposits and sell chunks to smaller banks or float chunks as independent regional banks via IPOs.

2) There is of course the possibility of a bank run -- that people don't believe the FDIC assurances and panic and demand to withdraw their money from C. Then the Fed just prints the money with its digital printing press. They tell chicken-little depositors, fine, we will wire the money to any other bank you want, no problem. They can quietly tell all the other banks: any money you receive from this program will be immediately netted against your borrowings from the Fed (i.e. you won't really get any money; just a reduction of your outstanding.) So the money is printed only for a couple of nano-seconds. What they can't recover that way just goes onto the Fed balance sheet (where it will have plenty of company.) The Fed will acquire a claim on C assets in return for paying off its depositors (not much different from the river of loans it currently makes to banks that aren't being seized); and the Fed can get repaid when whatever good assets there are can be sold.

Someone needs to take the loss, and that someone will (should) be holders of the bonds, derivative trade counter-parties, and preferred holders if it gets that far, and finally the FDIC if these banks really are worth less than half of their "assets". Bair means to say the FDIC does not have the staff to supervise the unwinding of all those derivative positions, CDOs, loans and other flotsam; so C's counter-parties will need to wait 10 or 20 years to find out what they get. So it goes when you do business with a stone-stupid big dead bank. As the Sierra Club would say, have some hard TP.

Of course, it won't happen that way, but not because the FDIC lacks money.

Stoneleigh said...


Still, this is anecdotal and hardly supports generalizations that dentistry is going to disappear anytime soon.

Many people have already been priced out of access to dental care, and that situation will apply to the vast majority within a couple of years. Here in Canada there is no public system for dental care. Since we came here, our family has had to shell out about $10,000 in dental bills as we have no dental insurance.

As medical and dental insurance will collapse at the same time as incomes do, who will be able to afford a root canal or other complicated procedures? How many dentists will still be in business if hardly anyone can afford their services, and if they in turn can't afford the materials and equipment and have no money to pay staff?

Of course the rich will still be able to afford modern dental care, but the rest of us will be back to much more barbarous methods. Those without teeth, and who already have good dentures, may end up being the lucky ones (says she remembering what a root infection feels like).

It's difficult to imagine from our modern perspective just what the loss of access to medical care really means. A pay-as-you-go system will not be pleasant, and will involve hard choices at every turn.

For instance, I remember a BBC programme on surgery in Russia after the collapse. It was still available, for a substantial fee, but parents would have to pay a large supplement if they wanted their child having tonsils removed to be given anesthetic, as opposed to a sedative. They had footage of children being operated on that was almost impossible for a parent to watch. For the child's parents, they had the choice of putting their child through a horrible experience or leaving them with the health impacts of chronically infected tonsils.

We generally have no idea how spoiled we are in developed countries compared to what most of humanity already copes with. Stockpiling at least some painkillers would be a good idea.

Anonymous said...

Here here Mugabe.

This is all so simple. You don't save the bank. You save the depositors money, to a large degree.

In all the millions of words about the banking crisis and the trillions spent and promised this most fundamental thing is never even mentioned. They are trying to save the banks of course to save the depositors money. The thing is saving the banks is an indirect way to save the depositors. To say the least it's stupid. That's being kind. Saving C is insane.

I can't say printing money is a good thing. I will say printing money that is used in the real economy as a medium of exchange, not used in the financial economy to support asset prices is a far far better thing.

Without writing a book money has two functions. As a medium of exchange and as a store and measure of wealth. The latter has gotten waaaaaaaaaaay too important. We are potentially going to starve or kill billions of people so that 'wealth' is maintained?

Yes we are!

Anonymous said...


People have been mentioning the "irony" apparently inflicted on the U.S. by all things French or of French origin, e.g. Deloitte, Detroit, Chevrolet.

I am surprised by that as it suggests an inherent and indelible antagonism between the two countries, or at least the perception of such on the part of U.S. citizens.

To my knowledge, history does not bear that opinion out and I would bet that a sizable majority of the French, though occasionally annoyed or surprised, feel no real antagonism.

The last eight years were difficult and the attitude of people like Mrs. Rice was galling, but life goes on and most people know that.


scandia said...

Redcapbiker, thanks for the site, theconsumertrap. I loved the Green marketing cartoon.

bluebird said...

Stoneleigh says "Stockpiling at least some painkillers would be a good idea."

What other items might not be readily available? Perhaps anything made from petroleum, such as plastic trash bags?

Anonymous said...

"A pay-as-you-go system will not be pleasant, and will involve hard choices at every turn."

Hi Stoneleigh, there is another side to that coin:) I was chatting with my GP several years ago regarding our Canadian, more or less, socialized medicine and said that the doctors complaining about it could do worse in the coming years and be collecting their payment in chicken eggs and root vegetables. Incidentally I have been seeing a new Doc since then.

Anonymous said...

Don't panic, Stoneleigh is way over the top in her dark vision of health care and dentistry in the future.

I live in a developing country where medical and dental care can be had in more or less the American form with imported, English-speaking MDs, pay as you go, for about one-third the American price. A 2/3 drop in price is whopping deflation, and it's OK. People have teeth here.

For locals in the local system, the price of medical care is 1-2% of the American price. My daughter was born here. My wife (a local, with government connected job) got the entire $65 cost of her c-section covered by her insurance. (Not a typo; $65.) We were required to put down a $250 deposit for a five day hospital stay, in advance. Mother and baby are doing fine.

American healthcare is so expensive because it's gold-plated, wasteful, and infused with greedy people providing the services. Not because healthcare is inherently expensive. A public hospital in the country where I live is like a bus station with doctors, but they get the job done.

Yes, the system depends on medicines and equipment, all of which can be obtained in China or Europe (which are both desperate to export anything) so even if the USA goes Mad-Max, we will be OK.

Anonymous said...

Bill Gross, the $747 billion bond man, declares the death of equities

But then, what else would a “Bond King” say?

Anonymous said...

* Is current situation malice or stupidity? ; High IQ doesn't preclude ignorance; self-delusion and forms of idiocy; Maybe orchestrated plan gone awry; The folly of the quants
* Gaia doomed; Europe deseritified by 2040
* Iraq war motivation: oil or something else; Topic is a divider, not a uniter
* Rumor of bank runs on Citi - so far unsubstantiated except for on TAE reader who withdrew all funds and hid them in his pants
* Healthcare broken; Headed toward pay as you go; Best hospitals will be empty; Stockpile pain killers and bed pans now
* Modern dentistry may disappear; Too dependent on high tech; Say hello to wooden teeth embedded in lead at age 21; Some claim this is cheaper and less painful anyway; Dentistry will still will be a good profession and in high demand;
* Elegant metaphor: "... the bureaucracy seeks to sustain its core by cutting off limbs."
* FDIC funding at lowest level since 1993; Can it handle failure of large bank?
* Who will buy US Treasuries in 2009?
* Mark Twain quotes; He extols the longevity and influence of Jews
* US Auto sales predicted to be 9 million in 2009; Ilargi right again
* Ilargi celebrates 29th birthday; Many happy returns of the day
* Chevrolet is French for "Goat with Milk"; Shotgun wedding of Ford and GM predicted; Who would have guessed they were in bed together?
* Rail extolled; Will it be electrified?
* Selling "New used" goods will undermine government cash flow; US might attempt to tap private sales in Google and PayPal; Ron Paul says this leads to police state
* Return to 1490 predicted
* Big brother is reading this; His digs are in the Mojave desert

Anonymous said...

Stoneleigh, thanks for that thoughtful response.

All I can say is, would that it were not true.


Stoneleigh said...


American healthcare is so expensive because it's gold-plated, wasteful, and infused with greedy people providing the services. Not because healthcare is inherently expensive. A public hospital in the country where I live is like a bus station with doctors, but they get the job done.

Yes, the system depends on medicines and equipment, all of which can be obtained in China or Europe (which are both desperate to export anything) so even if the USA goes Mad-Max, we will be OK.

People in developing countries may well be better off, as their healthcare systems never became bloated in the first place. The problem with developed countries is that when the existing system seizes up for want of money (remembering that money is the lubricant in the economic engine), there isn't an alternative system waiting in the wings to take over at low cost. Eventually such a thing will develop, but it'll take time.

I wouldn't count on trade to get hold of necessary equipment though, however desperate some may be to export things. Global trade is in the early stages of collapse.

People don't need to have bad teeth, but a modern diet generally leads to that in the absence of dental care. It's interesting to look at the dental evidence from settlements such as those of the vikings in York. Earlier inhabitants (ie from hundreds of years ago) had fine teeth, but once sugar was introduced, their descendant's teeth deteriorated rapidly.

As sugar was once (and may be again) a rare commodity, many dental problems could be avoided (although there will certainly be many other things to worry about). The Domincan Republic was once the world's most valuable overseas possession on account of its sugar production. A shortage of both money an energy could well see sugar assume a high value again.

Greenpa said...

"Is current situation malice or stupidity? ; High IQ doesn't preclude ignorance; self-delusion and forms of idiocy; Maybe orchestrated plan gone awry; The folly of the quants"

Actually, "all of the above" may be a good choice, too.

I think the current rif on "Nonsequiter" has it nailed... the quant knew...

Anonymous said...

For Bluebird, here is list of the 100 things which will disappear first: items_disappearfirst.htm

bluebird said...

side pocket - Thanks for the list. I realize those items disappear fast in an emergency, but usually are re-stocked in stores after the emergency has passed. (i.e. generators)

But my question is what things will disappear from lack of global trade, or lack of petroleum, that we may never see them again.

Plastic bottles? plastic bags? anything made from petroleum?

Wouldn't new shoes disappear? new underwear? anything imported from China?

As we should be stockpiling painkillers, perhaps we need to think what other items may never be in the stores again?

Stoneleigh said...


Water filters would be at the top of my list of important things that may not be available later. Lehman's Non-Electric Catalogue has a lot of things that can be obtained now with only the internet and a credit card. Many of them are made in the US, so they may be available later, but possibly only if you live in Ohio.

Anonymous said...

Dear Stoneleigh,
My son and I have just tried the first P90x, and have decided that perhaps p89 (hold the x) might be more our cup of tea. It's OK - a bit cheesy and frenetic for us!

We managed half an hour..then we went out with my chainsaw and filled the car with beech pieces, some up to 30kg in weight. I collected enough to last us about a month.

I'm not sure about exercise videos - indoor gratuitous expenditure of calories seems a little unecesary these days when there's so much manual work to be done..might be just me though... Splitting those logs when I got back was even harder than the exercises!

How long have you been following this program, and are you, to coin a phrase, now as fit as a robber's dog? [an expression we have in the UK] :)

cs [finally sorted out our solar thermal/wood burning combo, yay]

Anonymous said...

Mugabe vv dental care :
I know ppl traveling back to Ukraine for their dental care (consider $1500 minimum plane ticket) and its still economical, and yes all the same equipment, meds, etc...
So not immediately not everywhere but as people lose the ability to pay and as(if) third party payer system breaks down - then the prices become waaaay more reasonable.


el gallinazo said...

Anyone going to Machu Pichu, I can offer the name of a terrific dentist in Cuzco, Dr. Cepada. Three years ago I got two top front incisor caps, six fillings, and did some epoxy fill-ins to balance my jaw, cleaning. Perfect work, - looks great - no problem in three years. $390 total. However, he speaks absolutely no English, so be prepared to communicate in Spanish or sign language :-)

Anonymous said...

Here in Scandinavia dental care is not covered either. It's only a ferry trip to Estonia where you can get the same high quality care as we have here for 1/3 the price. (Soon to be 1/4, then 1/5...).


I considered myself a "doomer" until I started posting here.

1490? I see dystopia in the future, not the renaissance. Yes 2/3 of the population will melt away over the next five decades. Food will rise back to its former level of 50% of our monthly expenses. But no dental care? You think we'll we melt back to Olduvai?

I don't see it.

Times will be tough. Food will be expensive. Folks will adapt. Teeth will be drilled, pulled, crowned, and filled. They did it in 1890. They'll be doing in in 2090.

Will global trade disappear? There was global trade back in the days it took half a year for the a single leg of the journey. It existed in 490, 1490, and it will still be here in 2090. Just not the way we do it today.

I'm starting to feel like an optimist here. Fancy that...!

Anonymous said...

An aside...I noticed that the FDIC is currently hiring. Look on the Office of Personnel Management's website, and you will see them.