Wednesday, February 4, 2009

February 4 2009: Buy America! Everything must go!

Russell Lee This Land is Your Land June 1939
Migrant workers camp near Prague, Lincoln County, Oklahoma

Ilargi: I'll gladly and humbly cede the opening space today to 86-year old philosopher Sheldon Wolin, in a recent interview with Chris Hedges. They take us a step beyond the main media topic of the day, and that I think is a good thing, since it's been the menu du hour for many days already. Yes, that would be the bad bank plan, which gets more insane by the day. Yves Smith writes a good critique, see below, of what in its latest incarnation has become a triage effort. I no longer find it easy to believe that the administration is looking for the best possible plan. I think we should perhaps consider the possibility that they're trying to identify the worst possibly plan, all against a background of rapidly deteriorating circumstances which so far remain partly hidden from view by media hubris and hollow belief systems. There are changes coming alright that we can believe in, just not the ones you think.

It’s Not Going to Be OK
by Chris Hedges

The daily bleeding of thousands of jobs will soon turn our economic crisis into a political crisis. The street protests, strikes and riots that have rattled France, Turkey, Greece, Ukraine, Russia, Latvia, Lithuania, Bulgaria and Iceland will descend on us. It is only a matter of time. And not much time. When things start to go sour, when Barack Obama is exposed as a mortal waving a sword at a tidal wave, the United States could plunge into a long period of precarious social instability. At no period in American history has our democracy been in such peril or has the possibility of totalitarianism been as real. Our way of life is over. Our profligate consumption is finished.

Our children will never have the standard of living we had. And poverty and despair will sweep across the landscape like a plague. This is the bleak future. There is nothing President Obama can do to stop it. It has been decades in the making. It cannot be undone with a trillion or two trillion dollars in bailout money. Our empire is dying. Our economy has collapsed. How will we cope with our decline? Will we cling to the absurd dreams of a superpower and a glorious tomorrow or will we responsibly face our stark new limitations? Will we heed those who are sober and rational, those who speak of a new simplicity and humility, or will we follow the demagogues and charlatans who rise up out of the slime in moments of crisis to offer fantastic visions? Will we radically transform our system to one that protects the ordinary citizen and fosters the common good, that defies the corporate state, or will we employ the brutality and technology of our internal security and surveillance apparatus to crush all dissent? We won’t have to wait long to find out.

There are a few isolated individuals who saw it coming. The political philosophers Sheldon S. Wolin, John Ralston Saul and Andrew Bacevich, as well as writers such as Noam Chomsky, Chalmers Johnson, David Korten and Naomi Klein, along with activists such as Bill McKibben and Ralph Nader, rang the alarm bells. They were largely ignored or ridiculed. Our corporate media and corporate universities proved, when we needed them most, intellectually and morally useless. Wolin, who taught political philosophy at the University of California in Berkeley and at Princeton, in his book "Democracy Incorporated" uses the phrase inverted totalitarianism to describe our system of power. Inverted totalitarianism, unlike classical totalitarianism, does not revolve around a demagogue or charismatic leader.

It finds its expression in the anonymity of the corporate state. It purports to cherish democracy, patriotism and the Constitution while cynically manipulating internal levers to subvert and thwart democratic institutions. Political candidates are elected in popular votes by citizens, but they must raise staggering amounts of corporate funds to compete. They are beholden to armies of corporate lobbyists in Washington or state capitals who write the legislation. A corporate media controls nearly everything we read, watch or hear and imposes a bland uniformity of opinion or diverts us with trivia and celebrity gossip. In classical totalitarian regimes, such as Nazi fascism or Soviet communism, economics was subordinate to politics. "Under inverted totalitarianism the reverse is true," Wolin writes. "Economics dominates politics—and with that domination comes different forms of ruthlessness."

I reached Wolin, 86, by phone at his home about 25 miles north of San Francisco. He was a bombardier in the South Pacific during World War II and went to Harvard after the war to get his doctorate. Wolin has written classics such as "Politics and Vision" and "Tocqueville Between Two Worlds." His newest book is one of the most important and prescient critiques to date of the American political system. He is also the author of a series of remarkable essays on Augustine of Hippo, Richard Hooker, David Hume, Martin Luther, John Calvin, Max Weber, Friedrich Nietzsche, Karl Marx and John Dewey. His voice, however, has faded from public awareness because, as he told me, "it is harder and harder for people like me to get a public hearing." He said that publications, such as The New York Review of Books, which often published his work a couple of decades ago, lost interest in his critiques of American capitalism, his warnings about the subversion of democratic institutions and the emergence of the corporate state.

He does not hold out much hope for Obama. "The basic systems are going to stay in place; they are too powerful to be challenged," Wolin told me when I asked him about the new Obama administration. "This is shown by the financial bailout. It does not bother with the structure at all. I don’t think Obama can take on the kind of military establishment we have developed. This is not to say that I do not admire him. He is probably the most intelligent president we have had in decades. I think he is well meaning, but he inherits a system of constraints that make it very difficult to take on these major power configurations. I do not think he has the appetite for it in any ideological sense. The corporate structure is not going to be challenged. There has not been a word from him that would suggest an attempt to rethink the American imperium." Wolin argues that a failure to dismantle our vast and overextended imperial projects, coupled with the economic collapse, is likely to result in inverted totalitarianism. He said that without "radical and drastic remedies" the response to mounting discontent and social unrest will probably lead to greater state control and repression. There will be, he warned, a huge "expansion of government power."

"Our political culture has remained unhelpful in fostering a democratic consciousness," he said. "The political system and its operatives will not be constrained by popular discontent or uprisings." Wolin writes that in inverted totalitarianism consumer goods and a comfortable standard of living, along with a vast entertainment industry that provides spectacles and diversions, keep the citizenry politically passive. I asked if the economic collapse and the steady decline in our standard of living might not, in fact, trigger classical totalitarianism. Could widespread frustration and poverty lead the working and middle classes to place their faith in demagogues, especially those from the Christian right? "I think that’s perfectly possible," he answered. "That was the experience of the 1930s. There wasn’t just FDR. There was Huey Long and Father Coughlin. There were even more extreme movements including the Klan. The extent to which those forces can be fed by the downturn and bleakness is a very real danger. It could become classical totalitarianism."

He said the widespread political passivity is dangerous. It is often exploited by demagogues who pose as saviors and offer dreams of glory and salvation. He warned that "the apoliticalness, even anti-politicalness, will be very powerful elements in taking us towards a radically dictatorial direction. It testifies to how thin the commitment to democracy is in the present circumstances. Democracy is not ascendant. It is not dominant. It is beleaguered. The extent to which young people have been drawn away from public concerns and given this extraordinary range of diversions makes it very likely they could then rally to a demagogue." Wolin lamented that the corporate state has successfully blocked any real debate about alternative forms of power. Corporations determine who gets heard and who does not, he said. And those who critique corporate power are given no place in the national dialogue.

"In the 1930s there were all kinds of alternative understandings, from socialism to more extensive governmental involvement," he said. "There was a range of different approaches. But what I am struck by now is the narrow range within which palliatives are being modeled. We are supposed to work with the financial system. So the people who helped create this system are put in charge of the solution. There has to be some major effort to think outside the box." "The puzzle to me is the lack of social unrest," Wolin said when I asked why we have not yet seen rioting or protests. He said he worried that popular protests will be dismissed and ignored by the corporate media. This, he said, is what happened when tens of thousands protested the war in Iraq. This will permit the state to ruthlessly suppress local protests, as happened during the Democratic and Republic conventions. Anti-war protests in the 1960s gained momentum from their ability to spread across the country, he noted. This, he said, may not happen this time. "The ways they can isolate protests and prevent it from [becoming] a contagion are formidable," he said.

"My greatest fear is that the Obama administration will achieve relatively little in terms of structural change," he added. "They may at best keep the system going. But there is a growing pessimism. Every day we hear how much longer the recession will continue. They are already talking about beyond next year. The economic difficulties are more profound than we had guessed and because of globalization more difficult to deal with. I wish the political establishment, the parties and leadership, would become more aware of the depths of the problem. They can’t keep throwing money at this. They have to begin structural changes that involve a very different approach from a market economy. I don’t think this will happen." "I keep asking why and how and when this country became so conservative," he went on. "This country once prided itself on its experimentation and flexibility. It has become rigid. It is probably the most conservative of all the advanced countries."

The American left, he said, has crumbled. It sold out to a bankrupt Democratic Party, abandoned the working class and has no ability to organize. Unions are a spent force. The universities are mills for corporate employees. The press churns out info-entertainment or fatuous pundits. The left, he said, no longer has the capacity to be a counterweight to the corporate state. He said that if an extreme right gains momentum there will probably be very little organized resistance. "The left is amorphous," he said. "I despair over the left. Left parties may be small in number in Europe but they are a coherent organization that keeps going. Here, except for Nader’s efforts, we don’t have that. We have a few voices here, a magazine there, and that’s about it. It goes nowhere."

Ilargi: I have the impression that Yves Smith at Naked Capitalism is fast getting angrier and more frustrated. If that leads to high quality pieces such as the one below, I'm all for it.

The Bad Bank Assets Proposal: Even Worse Than You Imagined
Dear God, let's just kiss the US economy goodbye. It may take a few years before the loyalists and permabulls throw in the towel, but the handwriting is on the wall.

The Obama Administration, if the Washington Post's latest report is accurate, is about to embark on a hugely expensive "save the banking industry at all costs" experiment that:
1. Has nothing substantive in common with any of the "deemed as successful" financial crisis programs

2. Has key elements that studies of financial crises have recommended against

3. Consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.

The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was. We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company. Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting).

Why is this a bad idea? Let's turn to a study by the IMF of 124 banking crises. Their conclusion:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

In case you had any doubts, propping up dud asset values is a form of forbearance. Japan had a different way of going about it, but the philosophy was similar, and the last 15 year illustrates how well that worked. What we have from Team Obama is a bigger abortion of a :"throw money at bad bank assets" plan that I feared in my worst nightmare. And (when we get to the Post preview), they have the temerity to invoke triage to make what they are doing sound surgical and limited. Those who remember the origin know that triage means focusing on the middle third of the wounded on the battlefield : leaving the goners to die, leaving those wounded but stable to fend for themselves for the moment (they were in good enough shape to wait to be transported or hold on to be treated later). The middle third, those in immediate danger but who might nevertheless be salvaged, got top priority.

The concept of "triage" recognizes that resources are limited, tough decision need to be made, and some are beyond any hope. But in Team Obama Newspeak, triage means everyone can be saved because resources are presumed to be unlimited:
The basic problem confronting the government is that banks hold large quantities of assets that they value on their books for much more than investors are willing to pay...

Yves here. The spin is so thick I have to interject after one sentence. Note how the problem is that the investors don't want to pay enough, not that the assets are in most cases fetid? Back to the article:
Since the early days of the financial crisis, officials have struggled to unwind that knot. If the government buys the assets at prices that banks consider fair, the Treasury would take a huge loss when it ultimately sells the assets for much less. If, instead, the government insists on paying market prices, the banks may not survive their losses.

Yves here. See how saving the banks in their current form is presumed to be necessary? This is the phony policy constraint that is leading to all the distortions. The savings and loan crisis' Resolution Trust Corporation is touted as a good "bad bank" model (it's far from the only one). But guess what? It got those bad assets from banks that died. That little detail seems to be neglected in modern accounts. Back to the article:
Instead of taking a single approach, the Obama administration plans to divide assets and other loans into three categories, each with its own solution, according to sources familiar with the discussions, speaking on condition of anonymity because the details are not finalized. The government would buy and hold on to those assets whose falling prices are putting banks under the most pressure. Officials want to limit these purchases because of the vast expense.

The centerpiece of the plan would be a guarantee to limit losses on a second group of troubled assets that can be kept by the banks because they have more stable prices. And it would allow banks to retain and profit from their healthiest assets.

Beyond these initiatives, the government also is likely to inject more capital into troubled institutions.

Yves again. This sounds completely arbitrary, despite the pretense of faux science. Do they want to buy the assets most underwater? The assets most at risk of further price declines? The assets with that are the hardest to value (like lower rated CDO tranches?). It may simply be that the Post reporter doesn't appreciate the issues at work, but I wonder if the extreme vagueness reflects instead failure to come to grips with the real objectives (which means Wall Street will be able to manipulate them) or that they don't want the public to know what is going on (per the persistent stonewalling of efforts to find out what securities the Fed has bought and taken as collateral).

As John Paulson pointed out, a lot of poor quality paper is trading. The idea that it is illiquid is a myth. The problem is not a lack of price discovery, as the discussion above pretends, it's a lack of investor willingness or ability to take losses. And readers have said if a particular piece of paper doesn't fetch a bid, that's because its real value is not materially above zero. But per above, that's the sort of dreck that Team Obama would buy.

And what, pray tell, is the point of the guarantee? The loss exposure on a guarantee (versus a purchase) at the same nominal price is the same, although the initial cash outlay is considerably different. Ah, but if the paper is guaranteed, then your friendly bank welfare recipient can bring the junk to the Fed and get nice cash back.

So we the taxpayers are going to eat a ton of bank losses that should instead be borne first by stockholders and bondholders This program should be labeled the Pimco bailout plan, since the giant bond fund holds a lot of bank debt. That show what a fiction Obama's populism is. It's mere posturing and empty phrases. Look at where the dough goes, and it is going first and foremost to the big money end of town.

Now I do no labor under the delusion that there are cheap or easy ways out of our financial sinkhole. People are suffering, and we are only partway through the process of contraction and writeoffs. I heard of a suicide today, a jewelry dealer who was $400,000 in debt (also owed a lot of money but unable to collect) who threw himself off 10 West 47th Street (from someone else in the building, this is no urban legend). A tragedy, and a visible one, and there is plenty of less acute but no less real trauma afoot.

But Team Obama is taking the cowardly approach of distributing the costs among the most disenfranchised group in the process, namely the taxpayer, when there far more obvious and logical groups to take the hits. Shareholders and bondholders bought securities KNOWING there was the possibility of loss. A lot of big financial institutions have been on the ropes for over a year. A security holding is not a marriage. When conditions change, prudent investors reassess and adjust course accordingly. If anyone is long a lot of dodgy bank paper now, they have only themselves to blame. Any why are rank and file bankers still exempt from pay cuts when the workers in another failing US industry, autos, expected to take big hits?

This is the most roundabout and probably the most costly way to not solve this problem. Another warning from the IMF paper:
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.

The most amazing bit is the government acts as if it has no leverage. Look how Paulson sent teams in to inspect the accounts of Fannie and Freddie and put them into conservatorship. The reason it is obvious that this program is a crock is that it has ben cooked up in the complete and utter absence of any serious due diligence on the toxic holdings of the big banks. As we discuss in a separate post, the one punitive element, executive comp restrictions, are mere window-dressing. Welcome to change you can believe in.

Bank Rescue Would Entail Triage for Troubled Assets
The Obama administration's emerging rescue plan for the banking system would amount to financial triage, with the Treasury Department playing the delicate role of deciding which of the trillions of dollars in troubled assets plaguing the economy to buy, guarantee or leave in the hands of banks, sources said. The high-stakes approach would dramatically increase the investment of taxpayer money in the financial industry, and the potential losses. The plan, which Treasury Secretary Timothy F. Geithner is set to announce Monday, is being crafted under tremendous political pressure from people who say the government is risking too much as well as from those who say it is not doing enough to end the crisis.

Facing public anger over the rescue of firms many people blame for causing a recession, the Obama administration is focused on producing a plan that is not just effective but also politically palatable, sources said. Today, the administration is planning to announce tougher restrictions on compensation at companies that need massive government assistance to survive, including a $500,000 cap on executive pay. That move may not appease critics, because, sources said, most firms that get federal aid would not face severe pay conditions. The basic problem confronting the government is that banks hold large quantities of assets that they value on their books for much more than investors are willing to pay. Banks cannot sell these assets without recording massive losses. But holding the assets is tying up vast amounts of money, choking the financial system.

Since the early days of the financial crisis, officials have struggled to unwind that knot. If the government buys the assets at prices that banks consider fair, the Treasury would take a huge loss when it ultimately sells the assets for much less. If, instead, the government insists on paying market prices, the banks may not survive their losses. Instead of taking a single approach, the Obama administration plans to divide assets and other loans into three categories, each with its own solution, according to sources familiar with the discussions, speaking on condition of anonymity because the details are not finalized. The government would buy and hold on to those assets whose falling prices are putting banks under the most pressure. Officials want to limit these purchases because of the vast expense.

The centerpiece of the plan would be a guarantee to limit losses on a second group of troubled assets that can be kept by the banks because they have more stable prices. And it would allow banks to retain and profit from their healthiest assets. Beyond these initiatives, the government also is likely to inject more capital into troubled institutions. The triage approach is a response to accounting rules. When banks buy assets such as loans, they must specify for accounting purposes whether they plan to hold the asset until it is repaid in full or whether they might sell the asset earlier. If the price of similar assets begins to fall, banks may be required to record a loss in value. Those rules apply much more strictly to assets that a bank has said it may sell.

As a result, the recorded value of such "available for sale" assets has declined much more sharply in comparison with assets "held to maturity." Two identical loans, one placed in each category, would now carry different values for accounting purposes. The government plans to focus on buying assets "available for sale" -- those assets whose values banks have already written down substantially, sources said. Such assets are causing immediate problems for banks because they must set aside substantial amounts of capital to compensate for the losses recorded on their books. Assets "held to maturity" would remain with the companies, but the government would guarantee to limit any losses. Allowing institutions to hold those assets rather than selling them to the government would avoid a moment of reckoning because the banks will also be able to avoid acknowledging on their books the sharp declines in market prices. Government officials argue the approach is better for banks and taxpayers because the price of many assets will eventually recover after the financial crisis passes, so there is no value in forcing the banks to record losses.

But many financial experts say that market prices deserve more respect. They argue that many assets are unlikely to recover much of their value and that the government would simply be postponing the day when banks must record losses. Joshua Rosner, a financial analyst at Graham Fisher, said in a recent research note that it makes no sense to accept the prices banks have assigned to assets as more accurate than the prices assigned by investors in the marketplace. "I would argue that it is a thinly veiled attempt to prevent losses from being recognized and which will result in larger levels of ultimate losses," he wrote. Investors have been unimpressed by the government's first forays into asset guarantees.

In November, the government agreed to limit Citigroup's losses on a portfolio of $301 billion of troubled assets. Last month, the government issued a similar guarantee to Bank of America covering $118 billion in troubled assets. In both cases, the companies agreed to absorb an initial increment of losses -- about $30 billion for Citigroup and $10 billion for Bank of America -- with the government absorbing 90 percent of any subsequent losses. Even after the guarantees, however, both companies' stock prices continue to trade near historic lows. Financial analysts say that investors remain uncertain about the extent of the companies' financial problems because the government has not disclosed which assets it guaranteed, or at what prices. "It's a lack of confidence because of a lack of capital," Paul Miller, a banking analyst at Friedman, Billings and Ramsey said. "Until you get that capital in, you're going to be going from crisis to crisis to crisis."

To address public anger over the bailout, White House officials are set to detail today the restrictions that would be imposed on financial firms receiving what the government deems to be "exceptional" assistance. A minority of recipients would fall into this category. Such companies would be required to cap their executives' pay at $500,000, a source said. Any compensation above that limit could come only in the form of restricted stock that cannot be sold until the government has been repaid. Dividend payments would be restricted to a penny. These institutions would also be banned from using federal aid to buy other firms. But companies receiving less than "exceptional assistance" are unlikely to face such severe conditions, largely because administration officials are concerned they would not participate in any of the government programs that are intended to promote bank lending.

Sen. Charles E. Schumer (D-N.Y.) said the dual standards make sense. But he understands the anger of ordinary Americans against the program. "The average person is furious about this because they could say, 'I go to my job and don't mess up and yet I'm losing my health benefits and being put on furlough. Yet these guys did something wrong, why aren't they being asked to sacrifice?'" he said. "Right now every financial institution, particularly those that are getting assistance, has to be sensitive that it's a new world."

Bad Banks, Insurance Wraps and Other Fanciful Notions
"Though your brother's bound and gagged And they've chained him to a chair
Won't you please come to Chicago Just to sing

In a land that's known as freedom How can such a thing be fair
Won't you please come to Chicago For the help we can bring

We can change the world - Re-arrange the world It's dying to get better"

"Chicago"Graham Nash, 1970

Those last lines of the excerpt from the classic song "Chicago" by Graham Nash, performed almost 40 years ago by CSNY, described a period of militancy and optimism in America, a perspective that seems the polar opposite from the gloom and resignation we see today. Revolutions come when expectations are rising, not falling. But as we said during our comments at the latest AEI/PRMIA event in Washington last week, "Bust Bankruptcy and Bailouts,"  the US economy and banking system are in far better shape than those in Europe and Asia. We can fix this mess if we have the courage to act - really act.  But don't mistake the talk of "decisive action" coming from Washington as anything of the kind. A desperate rear-guard action is being fought by the Fed and OCC, an effort to defend what remains of the large money center banks and domestically-owned primary dealers. Call this the Geithner Plan, which we described last week:  ("The Big Banks vs. America: A Roundtable with David Kotok and Josh Rosner.")

As with the muddled thinking on asset valuations we heard last year from Fed Chairman Ben Bernanke, this new plan supposes that there is a "happy medium," some compromise that awaits taxpayers in the US (and the UK too) in terms of buying bad assets from already insolvent banks without requiring the purifying step of insolvency and restructuring. Indeed everyone from our usually sagacious friends at BreakingViews to the Financial Times to US Economic lider maximo, Larry Summers, seem to be coming under the nonsensical notion that there is some alternative to restructuring for the large money center banks in the US and Europe. The editors of the FT in particular seem to forget that their continued existence as a business comes from a healthy, private financial market, not the politically-conflicted statist paradise envisioned by Geithner, Bernanke and their masters at Goldman Sachs .

We are encouraged that a growing number of Republicans in the Senate seem to have figured out that the only way to protect the US taxpayer from further rape at the hands of the profligate souls who inhabit the senior appointed posts at the Fed and Treasury is to first mark the assets of the largest banks to market, a process that must necessarily wipe out the equity of these institutions. Like we said last week, the bondholders are the true owners of Citigroup, Bank of America, et al. One key indicator that the children's hour continues at the Treasury and Fed is the talk of issuing more equity warrants to "protect the taxpayer" as part of a bold plan being considered by the Obama Administration. Geithner is said to be the chief proponent of this idiocy, but we have heard even good friends in the analyst and Buy Side worlds prattle on about how we can draw the line at the equity of the parent companies of the money centers and then commence a credible recap.

In that regard, we hear that Geithner met with C Chairman Dick Parsons on Friday to discuss the Geithner Plan, continuing the conflicted flow of communication between Treasury and C that was legacy of Secretary Hank Paulson.  When is the Congress going to remind Geithner et al that political appointees are not supposed to be communicating directly with the regulated banks?  This is a task which, by law and practice, is assigned to the professional, civil service staff officers at the OCC and Fed. Just what are Geithner and Parsons talking about, we wonder?

Further to our interview last week, Josh Rosner of Graham Fisher & Co. tells The IRA that Geithner is trying to sell the Obama Administration on the idea of a "bad bank" for only trading, "available for sale" assets, while yet another pointless insurance "wrap" would be proposed for "held-to-maturity" assets. Unfortunately, much of the toxic waste currently burdening US bank balance sheets is now hidden in the banking book, having migrated from the trading book over the past few months. Seen in this light, the Geithner plan represents merely another delaying tactic that will increase the cost of the C resolution to the taxpayer, which incidentally is a violation of federal law.

No, just as we believe that the losses at Fannie/Freddie must eventually involve a haircut for non-collateralized debt holders, the situation at the larger money centers such as C and BAC demands the treatment described by Eugene Fama at University of Chicago. While the customers and counterparties of the subsidiary banks of these groups will not be affected, we cannot see how the creditors of the parent holding companies will avoid a haircut - at least so long as Fair-Value Accounting is the law of the land.  Just remember Washington Mutual.

Let's look at C through fair-value eyes using the year-end 2008 data released last month. If you look at the average earning assets of $1.635 trillion, only $650 billion are bank deposits, with the remaining liabilities needed to support these assets funded from market sources.  If you take a relatively conservative loss rate assumption of 30% of assets, including charge-offs and additional M2M losses, we possibly are talking about total losses at C in excess of $500 billion or a multiple of tangible equity capital, meaning that the only way to mark-to-market C's assets is to accept that the equity is gone and begin by imposing a haircut on C's creditors. Thus when you hear people in Washington talk about buying bad assets from already insolvent banks, the illogic of their position should be apparent to all. Let's walk through the two basic alternatives under a "bad bank" approach.

Scenario A:   The Treasury buys the "bad" assets at inflated prices, say par value, taking the assets from the bank without incurring a loss. The unrealized loss is passed to the taxpayer, who now owns this asset at well-above market value. Unless you believe that the market value of these assets will recover at some time in the future, the prospect is for a subsidy by taxpayers to the bond holders of the large bank. The solvency issues of the large bank may or may not be resolved, but in consideration for taking the bad assets, the taxpayer is clearly now the owner.

Scenario B:   The Treasury first forces the banks to write down the value of their assets in a one-time "Come to Jesus" M2M exercise, a global celebration of Fair-Value Accounting, if you will. The equity and the junior sub debt of C would be completely wiped out, with senior bondholders and new investors comprising the new owners. The large bank will then be solvent and could continue to sell assets and restructure its business to repay the taxpayer for previous support and meet a new business model.

The "Bad Bank" approach in Scenario A represents further delay and temporizing, a strategy that ensures that the US economy remains mired in crisis and recession for years to come. Scenario B represents a painful but ultimately quick remedy, the path whereby we can jump start the US private sector and get on with the process of rebuilding the global financial system. All that is required is courage and leadership, two qualities that still seem to be lacking in Washington.  

‘Failed’ Wall Street Means Biggest Rules Rewrite Since 1930s
Camden Fine’s nightmare is a Bank of America or Citibank branch on every corner. "Do we really want to create more cycloptic monsters stomping around the country ruining people’s lives?" asks Fine, president of the Independent Community Bankers of America. He says he fears new U.S. financial regulation might include a merger of agencies favoring big banks over his 5,000 members. Robert Greifeld, on the other hand, sees his Nasdaq OMX Group benefiting if a restructuring of Wall Street’s rules steers more business to the exchange’s clearinghouse for interest-rate swaps. That would also reduce profits for private derivative traders, said Greifeld, the group’s chief executive officer.

In coming months, President Barack Obama and Congress will pick winners and losers in tackling the biggest overhaul in financial regulation since Franklin D. Roosevelt and Congress created the Federal Deposit Insurance Corp. and the Securities and Exchange Commission in the 1930s. It’s part of the price the industry must pay after a $700 billion bank bailout. "The present system has been broken; it’s failed the test of the marketplace," former Federal Reserve Chairman PaulVolcker said Jan. 15 in New York in calling for strengthening regulation. Volcker, an Obama adviser, is scheduled to testify today at a Senate hearing on the subject. Obama will discuss re-regulation at the White House later this week with congressional leaders, according to spokesman Robert Gibbs. Lobbyists, CEOs, traders and hedge fund operators already are jockeying to influence proposed legislation that includes controls on unregulated hedge funds; new rules for executive pay; and restricting credit-default swaps to those who own the underlying debt.

Former Treasury Secretary Henry Paulson is among those who suggest merging the SEC with the Commodities Futures Trading Commission. Other proposals include combining five current U.S. bank regulators, creating a new federal overseer for the insurance industry, and setting up an umbrella regulator for all financial transactions. "This is a major moment," said Robert Engle, a professor at New York University’s Stern School of Business and the winner of the 2003 Nobel Prize in economics. "We’re looking at a situation like we’ve never seen. Only at this point can you get the attention of people to give up something that they think is their special right." The proposed changes would reverse three decades of deregulation. They are driven by the meltdown that has cost global financial companies more than $1 trillion and outraged taxpayers who lost retirement funds.

"Shameful" was Obama’s description of $18.4 billion in bonuses Wall Street paid itself last year. He promised to restrict executive pay for companies accepting bailout funds. Obama told Senate Democrats last month that financial re- regulation is the "third leg of the stool" in rebuilding the economy, along with shoring up banks and an $819 billion stimulus plan to produce millions of jobs. In the last year the U.S. has rescued, taken over or helped to sell Bear Stearns Cos., Merrill Lynch & Co., American International Group Inc., IndyMac Bancorp Inc., Fannie Mae, Freddie Mac and Citigroup Inc. The collapse of Lehman Brothers Holdings Inc. in September triggered a panic in U.S. credit markets that forced Fed Chairman Ben S. Bernanke and Paulson to ask Congress for $700 billion to stabilize the system. The turmoil rocked an industry that in 2007 accounted for 33 percent of U.S. corporate profits and 8.25 million jobs. Earnings fell to 26 percent of the total last year while more than 227,000 financial professionals have lost their jobs since the February 2007 peak.

"Regulatory reform is essential in getting the economy back to health," said House Financial Services Committee Chairman Barney Frank, 68, a Massachusetts Democrat who will draft the main legislation, in an interview. "Investors are afraid to invest. One of the elements we have to have is a sense of confidence on the part of investors that it’s OK to go back in the water and that means reform." At the same time, more aggressive oversight may be all that’s really needed, William Seidman, a former FDIC chairman, said in an interview. "I’m not convinced this has to be done," Seidman said. "The regulators just didn’t do their jobs. The laws are all on the books."

Financial executives say they are resigned to change. "Hopefully we end up with good regulation instead of very bad regulation that’s done out of haste and anger," said JPMorgan Chase & Co. CEO Jamie Dimon, on a conference call with reporters and analysts on Jan. 15. The regulatory structure Roosevelt put in place in the 1930s in response to the Great Depression remains largely intact. Until now, it has mostly succeeded in shielding investors from abuses and protecting bank customers’ deposits. The FDIC, which insures deposits in the U.S., was created in 1933 following thousands of bank failures that cost consumers their savings. It was set up to restore public confidence and prevent bank runs. Since then, the FDIC says, no customer has lost any money up to the deposit insurance limit, which was temporarily raised from $100,000 to $250,000 per account last year.

The SEC was established in 1934, requiring publicly owned companies to register and to report annually on their financial condition. The agency failed to detect Bernard Madoff’s alleged $50 billion Ponzi scheme and didn’t notice faulty risk modeling and excessive leverage that last year led to the collapse of Bear Stearns Cos. With the entire regulatory system under attack, trade groups representing banks, mortgage brokers, and dealers in credit default swaps are maneuvering to get proposals in front of Frank, Volcker, Treasury Secretary Timothy Geithner and Lawrence Summers, Obama’s top White House economic aide. The Managed Funds Association in Washington, which represents hedge funds, last week hired two new in-house lobbyists from Merrill Lynch and Credit Suisse Group AG, according to its Web site. The Financial Services Roundtable in Washington, a group of 100 financial firms including General Electric Co., Visa Inc., and Wells Fargo & Co., on Jan. 30 announced its "Six Principles" for change, including merging bank regulators.

Bank of New York Mellon Chairman Robert Kelly is leading a Financial Services Forum task force to come up with recommendations that the group of 17 financial services CEO’s can agree upon, said forum president Robert Nichols. While the Obama economic team hasn’t laid out its re- regulation proposals yet, Bernanke, Frank and Volcker have made some of the core elements clear. "Financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk-taking," Bernanke said Jan. 13. Frank said his "No. 1 priority" is to create a systemic- risk regulator, perhaps the Fed, to supervise the activities of any financial firm, be it a bank, hedge fund or insurance company, that poses a danger to the system. Such firms "will be subject to a particularly strong oversight," Volcker said last month as he released an 18-part regulatory overhaul plan sponsored by the Group of Thirty, an organization of former central bankers and finance ministers.

Volcker recommended limits on the trading that firms such as Goldman Sachs Group Inc. can do with their own capital and urged oversight of and capital requirements for hedge funds and private-equity companies deemed "too big to fail." Volcker said he’ll present the plan to Obama, calling it "a reasonable indication of the direction in which we might go." Increased scrutiny would ensure that executive-compensation plans don’t promote excess risk-taking, according to Volcker and Bernanke. That means a Fed bank examiner who earns at most $198,000 a year could object to compensation packages such as the one that awarded Lehman Brothers Chairman Richard Fuld $34.4 million for 2007, nine months before his firm collapsed.

One focus of change is bringing government oversight to unregulated areas such as the $1.5 trillion hedge-fund industry. Senators Carl Levin, a Michigan Democrat, and Charles Grassley, an Iowa Republican, introduced legislation Jan. 29 to require that hedge funds file an annual disclosure form with the SEC, comply with the agency’s record-keeping standards and cooperate with its investigations. Geithner and Mary Schapiro, Obama’s new SEC chairman, during their confirmation hearings endorsed requiring hedge funds to register with regulators. Volcker recommended that funds large enough to be "systemically significant" should have to meet capital, liquidity and risk management standards.

Lawmakers also are proposing oversight of unregulated over- the-counter derivatives, or financial instruments that are derived from stocks, bonds, loans, currencies or commodities. Bad bets on privately traded credit-default swaps, which are based on bonds and loans and are used to speculate on an issuer’s ability to repay debt, led to the failure and government takeover of insurer AIG in September. Representative Collin Peterson, a Minnesota Democrat who is chairman of the House Agriculture Committee, is already circulating a bill that would temporarily ban credit-default swap trading unless investors own the underlying bonds, which they do in about 20 percent of existing trades, according to Eric Dinallo, superintendent of the New York Department of Insurance. The measure would also force trades to be processed by a clearinghouse.

Peterson’s bill "would effectively eliminate" the credit- default swaps business in the U.S., said Robert Pickel, chief executive officer of the International Swaps and Derivatives Association, a trade group for the industry. "Mandating clearing of all OTC derivatives is unwarranted." The proposed legislation would benefit new clearinghouses competing for credit-default swap trades. It would also cut into the profits of traders such as Goldman Sachs and Morgan Stanley, which as much as 40 percent of their profits from OTC derivatives trading, according to CreditSights Inc., a New York research company. "You put these instruments on the exchange, spreads collapse quite dramatically," Greifeld said after a speech at the National Press Club in Washington last month. Other proposals include creating a new U.S. overseer for the insurance industry, now under state regulation, or bringing all financial oversight under a single regulator, such as the United Kingdom’s Financial Services Authority.

Financial services companies don’t agree on what would be the best outcome. Fine says community bankers in his organization are concerned a single regulator would pay too much attention to the largest lenders and adopt policies that encourage consolidation, making it harder for small competitors to survive. "We’ll fight like hell against that," Fine said. Obama has said he’ll have his regulatory plan out by April 2, when the Group of 20 industrialized and emerging market countries meets in London. Charles Dallara, president of the Institute of International Finance in Washington, which represents almost 400 global firms, including Barclays Plc and Societe Generale SA, said his group is urging regulators worldwide to coordinate their efforts, so that banks don’t find conflicting rules -- and added costs -- in each country.

Dallara’s group, led by Deutsche Bank AG CEO Josef Ackermann, is proposing the creation of a Global Financial Regulatory Coordinating Council, which would supervise the largest international financial institutions. Lawmakers should wait until the crisis is over before rewriting standards, according to Wayne Abernathy, executive vice president of the American Bankers Association in Washington. "When you start changing the rules, investors go to the sidelines," he said. Lawmakers should wait, Abernathy said, because "it’s hard to work on a plan to reorganize a fire department when you’ve got lots of fires going on."

We Can Do Better Than a 'Bad Bank'
by George Soros

The Obama administration should come out of the gate with a comprehensive economic program that has two pillars in addition to a fiscal stimulus package. One would prevent housing prices from overshooting on the downside by making mortgages cheaper and more available and reducing foreclosures to a minimum; the other would enable banks to resume lending by adequately recapitalizing them. It would take several months to implement the program and a further period before it impacts the economy. But in the meantime, people could see that there is a way out, and that would help mitigate the severity of the downturn.

Adequate recapitalization of the banking system now faces two seemingly insuperable obstacles. One is that former Treasury Secretary Henry Paulson has poisoned the well by the arbitrary and ill-considered way he implemented the $700 billion Troubled Asset Relief Program (TARP). As a result, the Obama administration feels it cannot ask Congress for more money at this time. The other is that the hole in the banks' balance sheets has become much bigger since TARP was introduced. The assets of the banks -- real estate, securities, and consumer and commercial loans -- have continued to deteriorate, and the market value of bank stocks has continued to decline.

It is estimated that an additional $1.5 trillion would be required to adequately recapitalize the banks. Since their total market capitalization has fallen to about $1 trillion, this raises the specter of nationalization, which remains politically and even culturally unpalatable. Consequently, the Obama administration plans to use up to $100 billion from the second tranche of TARP funds to establish an aggregator bank, or "bad bank," that would acquire toxic assets from the banks' balance sheets. By obtaining 10-to-1 leverage from the balance sheet of the Fed, the bad bank could have $1 trillion at its disposal. That is not sufficient to cleanse the balance sheets of the banks and restart lending, but it would bring some welcome relief.

The bad bank could serve as a useful interim measure, except that it will make it more difficult to obtain the necessary funding for a proper recapitalization in the future. It will also encounter all kinds of difficulties in valuing toxic securities, and it will serve as a covert subsidy to the banks by bidding up the price of their toxic assets. This will generate tremendous political resistance to any further expenditure to bail out the banks. For these reasons it would be a mistake to take the "bad bank" route, especially when there is a way to adequately recapitalize the banks with currently available resources. The trick is not to remove the toxic assets from the banks' balance sheets but instead put them into a "side pocket," as hedge funds are doing with their illiquid assets. The appropriate amount of capital -- equity and unsecured debentures -- would be sequestered in the side pocket.

This would cleanse bank balance sheets and transform them into good banks but leave them undercapitalized. The same $1 trillion that is now destined to fund the bad bank could then be used to infuse capital into the good banks. Although the amount needed to recapitalize the banks would be more than $1 trillion, it would be possible to mobilize a significant portion of the required total amount from the private sector. In the current environment, a good bank would enjoy exceptionally good margins. Margins would narrow as a result of competition, but by then the banking system would be revitalized and nationalization avoided. The scheme I am proposing would minimize valuation problems and avoid providing a hidden subsidy to the banks. Exactly for that reason it is likely to encounter strong resistance from vested interests.

Losses would first accrue to holders of shares and debentures; only if losses exceed a bank's capital would the FDIC be liable for the deficiency, as it is already. Shareholders would be severely diluted, but they would be given tradable rights to subscribe to the good bank, and if there is a positive residue in the side pocket it would also revert to the good bank, giving shareholders the benefit of any subsequent appreciation. The fact that debenture holders may lose money will make it more difficult to sell bank debentures in the future. But that is as it should be: Banks should not be as highly leveraged as they have been recently.

In addition to restarting bank lending, my scheme would resolve the moral-hazard issue for years to come. The banking industry is accustomed to turning to the state in a crisis and effectively demanding a bailout on the grounds that financial capital has to be protected to ensure the proper functioning of the economy. Given the aversion to state ownership of banks, this form of blackmail has always worked, and indeed helped create the financial crisis we're in today. The Obama administration ought to resist this blackmail and adopt the scheme outlined here.

U.S. Debt Default, Dollar Collapse Altogether Likely
The prospect of the United States defaulting on its debt is not just likely. It's inevitable, and imminent. The regulatory black holes into which sanity and reason disappear on a daily basis are soon to collapse under the mass of their sheer size. The circle jerk going on among G7 governments has to end – the steady advance of gold, even in the face of a managed price, exposes the real value of the U.S. dollar, as opposed to its apparent value expressed in the dollar index. Is 2009 the year that the United States formally defaults? And with that, will the dollar collapse be rolled back ten for one or more?

There are a lot of reasons to support that theory. To Wall Street economists, such an event is heresy and therefore unthinkable. Yet Wall Street is the very La-la-land that bred the idea of a perpetually indebted nation in the first place. Number one among the indicators favoring this scenario is what is happening in the U.S. Treasuries auction market. Last Thursday, an $30 billion auction in five-year notes failed to stir the interest of traditional primary dealers. The auction itself was saved by an anonymous “indirect” bid. Buyers are discouraged by the prospect of what is expected to amount to $2 trillion total issuance for the full year of 2009. The further out the maturities on notes, the more bearish the sentiment towards them. The only way to entice buyers is through the increase in yields.

But with yields at 1.82 per cent, five-year notes were met with a demand for 1.98 times the amount offered - the lowest bid-to-cover ratio since September. A sell-off in treasuries began in earnest upon the conclusion of that auction. The U.S. Federal Reserve suggested last week that it was going to step up its treasury-buying activity, and the mainstream media interprets this as a form of market support. What it actually is evidence of growing anxiety and desperation on the part of the Fed as the realization dawns that demand for treasuries is progressively evaporating. The increased demand for gold as an investment witnessed throughout the last two weeks that has pushed gold to a 4 month high is further evidence that investors across the board are gravitating more towards gold and away from U.S. debt.

So what is the catalyzing event that will precipitate outright capitulation? I think the spin-controlled version of events will make the collapse of the derivatives market the red herring that facilitates the aw-shucks-we-have-no-choice shoe-gazing moment possible, and that’s exactly the parachute the government needs to retain a veneer of credibility - at least in its own delusional mirror. The announcement that the CFTC was about to become the target of a regulatory overhaul supports this theory. Consistent with his unfortunate proclivity to hiring foxes to guard chickens, Barack Obama’s choice for CFTC commissioner Gary Gensler was the undersecretary of the U.S. Treasury when the Commodity Futures Modernization Act of 2000 was passed, and is one of its architects. This was the piece of legislation that was put forth to appease the opposition to “dark market” trading in certain OTC derivatives first noisily derided by CFTC commissioner Brooksley Born in 1998.

Ignoring Born’s admonishments with this act, it exempted credit default swaps (CDO’s) from regulation, resulting in the somewhere between 58 and 300 trillion dollars in value presently under threat if the positions were to be unwound. Because of their unregulated status, counterparties in the largest transactions can simply “roll forward” contracts, instead of the losing party in the transaction covering their loss with a transfer of money. It is this massive “nominal” value that could be the Achilles heel of what’s left of the U.S. banking system, and by extension, the U.S. dollar. I don’t arrive at this conclusion because I like making catastrophic outlandish predictions. Its merely the result of following certain logical paths to their most likely outcome based on what has happened in the past.

In discussions on this topic with editors of top tier financial publications, such speculation is dismissed out of hand, and the argument to refute the likelihood of such outcomes is never brought forward. Gold exchange traded funds (ETFs) are now the largest holders of physical gold, and as a proxy for investors who don’t want to be encumbered with taking delivery of the physical, provide a simple way to participate in the gold market. United States citizens should bear in mind, however, that should the banking system be brought down completely by the collapse of the futures market, proxies for gold such as ETF’s and bullion funds could theoretically be targeted by a government desperate for possession of value.

The risk from security in holding physical bullion is matched by the risk of confiscation by government in these volatile times. Don’t forget, the government confiscated and outlawed private ownership of gold in 1933 in support of an ill-conceived gold standard, which to some extent, was that era’s spin to halt the flight of gold (and real value) from U.S. soil. Don’t think for a minute such drastic events are outside the realm of possibility. If somebody had told you in 1998 that a bunch of angry crazy pseudo-Muslims were going to fly jetliners into the World Trade Center, what would you have said?

Asset Guarantees Gain Momentum in U.S. Bank Talks
The Obama administration, aiming to overhaul the $700 billion financial-rescue program, is refocusing on an effort to guarantee illiquid assets against losses without taking them off banks’ balance sheets. Treasury Secretary Timothy Geithner is skeptical of setting up a so-called bad bank to hold the toxic securities, an option that still may form part of the final package, people familiar with the matter said. Senator Charles Schumer yesterday said debt guarantees are becoming "a favorite choice" of options because a bad bank would be too costly. The debate comes as some former officials warn against measures that stop short of stripping banks of the illiquid investments tied to mortgages and related securities. Government protection for $400 billion of Citigroup Inc. and Bank of America Corp. assets hasn’t sparked investor confidence in the firms’ viability.

"The tough decisions need to be made," Frederic Mishkin, a former Federal Reserve governor and research collaborator with Fed Chairman Ben S. Bernanke, said in a Bloomberg Television interview. "You have to make sure that when all is said and done, you actually have financial firms that are either healthy and the ones that are not healthy can’t stay in business." Mishkin, a Columbia University professor, and former International Monetary Fund chief economist Simon Johnson both yesterday advocated government interventions that would split banks into "good" and "bad" units. The "good" parts should later be sold off to private investors, they said. The administration has said it will likely announce a comprehensive plan for revising the Troubled Asset Relief Program early next week and that nothing has been settled. It is likely to use a multi-pronged approach that includes the asset wraps, some type of an aggregator bank and a mortgage foreclosure relief strategy.

With the deliberations likely to extend into the third week of Obama’s term, it is clear that settling on a program is more difficult than expected. "The financial package, whatever they’re going to do, has to be the centerpiece" of the administration’s response to the economic crisis, said Kenneth Rogoff, a Harvard University professor who serves with Geithner and White House economics director Lawrence Summers on the Group of Thirty counselors on financial matters. "I’ve been a little disappointed that we haven’t seen it already" he said in a Jan. 30 Bloomberg Television interview from Davos, Switzerland.  Schumer, a New York Democrat who is on the Senate Banking Committee, said there are two problems with the bad bank, also known as an aggregator bank, solution. It would probably be "very expensive," costing as much as $4 trillion. "Second, it’s very hard to value those assets," and the prices could be set "so low that every other bank would go bankrupt."

While debt backstops were used to help Citigroup and Bank of America, their share prices have fallen further. Citigroup is down 8.2 percent since Nov. 23, when the Treasury announced plans to protect the bank from losses on a $306 billion pile of troubled U.S. home loans, commercial mortgages, subprime debt and corporate loans. Bank of America has lost 36.3 percent since the Jan. 16 government agreement to guarantee a $118 billion asset pool. To be effective, any loss-insurance program must be large enough to encourage private investors to come back in and recapitalize banks, said Eric Hovde, president of Hovde Capital Advisors LLC, which manages $1 billion in financial-services stocks.  The government has to tell banks "we will do this wrap, but you have to go out and raise a bunch of money," Hovde said. Still, having banks manage the assets is a better option than the aggregator bank because "you don’t get into this whole issue of how you price the assets," Hovde said. "The government doesn’t have the infrastructure to manage them." As part of its overhaul of the TARP, the administration also will tighten rules on executive compensation for some recipients of taxpayer funds.

President Barack Obama reiterated in a CNN interview his concern that Wall Street executives are "still getting huge bonuses despite that fact that they’re getting taxpayer money." He said he’ll unveil today new limits on executive compensation. "You’ve got a banking system that is close to a meltdown, and we’ve got to figure out how to intelligently get credit flowing again" to small businesses and consumers, Obama also told CNN’s Anderson Cooper yesterday. The administration plans to impose a cap of $500,000 on the compensation of senior executives for firms getting "exceptional" public financing, according to an administration official. The new rules, which will apply to future bailouts and won’t be made retroactive, also force greater transparency on use of corporate jets, office renovations and holiday parties as well as golden parachutes offered when executives leave companies.

With Geithner in his second week on the job, some Republicans in Congress are looking to the new Treasury secretary to provide some clarity about the next steps. "The seemingly ad hoc implementation of TARP has led many to wonder if uncertainty is being added to markets at precisely the time when they are desperately seeking a sense of direction," House Republicans including Minority Leader John Boehner said in a letter yesterday to Geithner.

Obama Plans Strict Executive-Pay Caps
President Barack Obama plans to unveil a series of new pay curbs Wednesday, including strict limits on executive salaries, the latest salvo from Washington aimed at reining in financial firms receiving federal assistance. Among the new restrictions being considered is a $500,000 cap on salaries for executives at companies that receive a substantial amount of government aid, according to a person familiar with the matter. Executives would be able to get additional compensation in the form of restricted stock or other compensation that is tied to the long-term health of the company. The Obama administration also plans to ban chief executives of such firms from receiving severance payments. And it is expected to require that firms receiving taxpayer money give shareholders more say in how top executives are compensated, according to people familiar with the administration's plans.

The potential changes amount to one of the most aggressive efforts to limit executive pay, a movement that has been growing in strength in recent years but hadn't made much headway until the financial collapse. The administration's tighter restrictions won't apply to any of the existing financial-rescue programs, including Treasury's $250 billion effort to inject capital into banks. But as the administration prepares to launch the second phase of the financial bailout, it is promising to impose stricter rules for some firms that get taxpayer money, although the exact criteria for which firms would qualify couldn't be learned. "There are mechanisms in place to make sure that institutions that are taking taxpayer money are not using that money for excessive executive compensation," Mr. Obama said Tuesday in an interview on CNN.

Final details of the program were still being worked out Tuesday night amid significant differences between various administration officials over how far to go. Mr. Obama is trying to lay the groundwork for a more aggressive banking bailout with politicians and the public who have grown infuriated that government aid hasn't been used more to kickstart lending. Last week, Mr. Obama called it "shameful" that Wall Street firms awarded $20 billion worth of bonuses as taxpayers were bailing them out, the latest escalation of Washington's rhetoric against what lawmakers call excessive pay. Sen. Claire McCaskill (D., Mo.) had previously proposed capping executive pay for firms receiving bailout money at $400,000 -- the amount Mr. Obama earns. Congress recently agreed to give the Obama administration the second half of the $700 billion after assurances that companies would be subject to a raft of tougher conditions.

Placing curbs on executive pay is proving tricky, however, and the administration has been wrestling with how to fashion terms that are tough but don't discourage companies from participating in the aid programs. The Obama administration is considering relieving banks of the bad bets they made by buying and insuring troubled loans and other assets, a move intended to revive the financial sector and restart credit markets. The government also wants to help healthy banks so that they will continue to lend money to consumers, businesses and each other. Some within the Obama administration fear that curbing executive pay will discourage those companies from participating, delaying the financial-sector's recovery. Another faction in the administration believes that banks need to accept fairly punitive terms in exchange for getting government money. Some banks have already turned down government cash because they worried about the increasing number of new conditions under consideration.

Geithner: Speed Is Key to Recovery
If there is one thing U.S. Treasury Secretary Timothy Geithner learned from watching Japan sink into a decade-long economic quagmire, it's this: Don't dither. Mr. Geithner is keeping Tokyo's mistakes very much in mind as he and the rest of President Barack Obama's economic team address the deep U.S. recession and persistent credit crunch. Recalling how Japanese authorities prolonged their nation's slump by hemming and hawing over public spending, interest rates and bank rescues, Mr. Geithner is leading the charge for an overwhelming response to the U.S. crisis, including a nearly $890 billion stimulus package, fresh help for homeowners and a renewed effort to help financial institutions get rid of their bad investments.

Today's crisis in the U.S. "is dramatically worse today because, collectively, policymakers were a little slow to escalate both on the fiscal side and on the financial side," Mr. Geithner said in a recent interview. He recalled 2008 debates about whether inflation or the credit crisis were bigger risks, whether policymakers should be "trying to teach people a lesson or save the country. ...That made fear and panic worse than it should have been." With its new plan, the administration is "going to do our best" to apply the Japanese lesson, Mr. Geithner said. Still, he noted, pain is inevitable. "Japan had a huge bubble beforehand," he said. "And it was going to be a wrenching, protracted adjustment process no matter what."

Mr. Geithner is expected early next week to lay out the framework of the administration's approach for addressing the crisis -- likely to range from a revamped bank bailout to a foreclosure-prevention plan to a redo of the financial regulatory system. Coupled with the stimulus package being hammered out with Congress, the Obama administration is set to commit trillions of taxpayer dollars to jumpstarting the economy. Mr. Geithner was a junior Treasury bureaucrat on Dec. 29, 1989, when Japan's Nikkei Average stock index, boosted by skyrocketing real-estate prices, hit its all-time high of 38,915.87 and began a plunge from which it has yet to recover. (It closed at 7825.51 Tuesday). A few months later, Mr. Geithner arrived in Tokyo and took up a position as assistant financial attaché in the U.S. Embassy.

It wasn't immediately evident that Japan's economy, which had inspired fear and awe in the U.S. during the 1980s, was entering a long decline. During Mr. Geithner's two years in Tokyo, and after he returned to a series of senior jobs in Washington, he and other Treasury officials became convinced Japan was experiencing a trifecta of economic woes its leaders were reluctant to address. The country's economy was stalled. Its banks and securities firms were overloaded with bad loans. And the yen was so strong that it was diluting the nation's export-led growth strategy. But Japanese authorities feared that cutting interest rates would spur inflation. And out of fear of deficits, they followed big spending packages with tax increases, blunting any resulting stimulus effect. "Monetary policy was very slow to respond," Mr. Geithner said. "Fiscal policy was very tentative and then did a lot of zigzagging."

Likewise, Japanese officials hesitated to acknowledge the obvious -- that Japanese banks were a house of cards -- and to take unpopular steps to put the institutions on more solid footing. It wasn't until relatively late in the decade, when banks began failing, that Japanese authorities injected public capital into the system and set up a Resolution and Collection Corp. to dispose of bad loans. Much like Japan's doldrums, the U.S. crisis was sparked by a collapse of real-estate prices. The ensuing delinquencies and foreclosures weakened or even destroyed banks and investment firms that had bought heavily into mortgage-backed securities. Despite hundreds of billions of dollars in liquidity injections by the Federal Reserve, and a $700 billion federal rescue package, many financial institutions are still loath to lend, leaving companies and individuals unable to secure credit and the economy in a profound recession. "There's a huge temptation to see the light at the end of the tunnel before it's really there," Mr. Geithner said, "and therefore to kind of shift back to restraint before you have recovery fully established."

The return of Britain's local authority mortgages in sight
The Government has paved the way for the return of local authority mortgage lending by cutting the minimum interest rate that councils can charge homeowners. Council leaders said last night that the Department for Communities and Local Government had given them a green light to intervene in the UK’s stricken mortgage market after the "national standard rate" was cut from 5.07 per cent to 3.93 per cent yesterday. It is now on a par with the most competitive rates in the mortgage market. This time last year local authorities wishing to offer home loans were forced to charge 6.89 per cent.

In the two decades up to the early 1980s councils were a major source of mortgage finance for residents who commonly borrowed 100 per cent of the value of their property over 25-year terms. In 1980 there were 600,000 borrowers with local authority mortgages, around 16 per cent of the market. The introduction of 1985 Housing Act meant councils could only lend at a national standard rate, or the local average borrowing rate, designed at the time to be prohibitively expensive. Chris Leslie, of the New Local Government Network, a left-wing think tank, said: "Historically councils were a major force in the mortgage market but Margaret Thatcher believed it was a job for the private sector. It is clear that there has been a thawing of the idea in the Government that the housing market needs mortgage liquidity from any source willing to offer it."

A number of local authorities, including Birmingham, Liverpool, Portsmouth and the London boroughs of Lambeth and Hackney, have expressed an interest in mortgage lending. Councils are expected to work with financial institutions to establish good lending practices. Authorities could borrow cash from the Government to fund new mortgage lending or raise extra capital from wholesale markets, although it is understood that the Treasury is resisting any scheme that further inflates the public debt. Local authorities are keen to support homeowners who cannot get on the house ladder but deny that they that would be willing to fill the gap in sub-prime lending to riskier borrowers.

Steve Reed, Leader of Lambeth Council, said: "There are individuals out there with good incomes and stable jobs who cannot get a mortgage and that is who we would be interesting helping. The interest rate was always a stumbling block preventing councils offering competitive mortgages to first-time buyers but now it is a real possibility." Mortgage lending by banks and building societies plunged by 47 per cent last month to reach a record low, according to the Council of Mortgage Lenders, the industry trade body which represents 99 per cent of mortgage lenders in the UK. Gross mortgage lending fell to £12.6 billion, down 11 per cent from £14.2 billion in November and 47 per cent from December 2007 when banks and building societies agreed £23.8 billion in loans for mortgage borrowers.

The Government has indicated that it is looking at a range of alternatives sources of mortgage finance while banks and building societies struggle to boost the number of deals available to homeowners. Last month, Gordon Brown announced plans to give Northern Rock more time to repay its Government loan .This should result in less homeowners being forced to remortgage to rival banks and raises the possibility of an increase in new mortgage lending. The Government is also considering expanding the role of the Post Office to create a "people's bank" to provide mortgages, as well as current accounts and personal loans. Bernard Clarke, of the CML said: "I’m not sure that local authorities would have the capacity to fill the funding gap which exists in the mortgage market. It is difficult for local authorities to run fully fledged mortgage businesses and their efforts could be better directed at the problem of rising repossessions and homelessness."

Unemployment rises in 98% of cities
In a sign that job loss is felt in every corner of the nation, unemployment rates rose in 98% of metropolitan areas across the country in December, according to a recent government report. The Labor Department reported that the unemployment rates in 363 of 369 metropolitan areas rose in December 2008, compared to the same month in the prior year. In November, 364 of 369 areas reported higher unemployment rates. According to the report, 168 areas reported jobless rates of at least 7%, compared to just 33 a year ago, and 40 areas reported rates that were higher than 10%. Just 22 metropolitan regions had unemployment rates that were under 4%, down from 112 last year.

El Centro, Calif., continued to hold the highest rate of unemployment at 22.6%. Morgantown, W.Va., had a rate of just 2.7%, the lowest in the country. A total of 95 regions registered unemployment rates that were at least 3 percentage points higher than a year ago. Not one region had a jobless rate decrease of more than 0.2 percentage point during that period. Though the rise in unemployment rates depicts the rampant job loss facing the country, the Labor Department does not adjust the rates in its metropolitan unemployment report for typical seasonal changes in employment. Furthermore, smaller cities are usually dependent on a fewer number employers, so layoffs can exacerbate those areas' unemployment rates.

Of the 49 metropolitan areas with a population of at least 1 million, Detroit had the largest unemployment rate, at 10.6%, followed by San Bernadino, Calif., with 10.1%. Oklahoma City had the lowest unemployment rate of large metropolitan regions, at 4.6%, followed by Washington at 4.7%. The report comes on the same day as two independent reports showed job cut announcements and payroll reductions continued to rise in January. The Labor Department is expected to report Friday that the economy lost another 500,000 jobs, according to a consensus estimate of economists surveyed by The national unemployment rate is expected to rise to 7.5% from its current level of 7.2%, the highest rate since January 1993.

Planned layoffs in January hit 7-year high
Planned layoffs at U.S. firms in January reached their highest monthly level in seven years, according to a report released on Wednesday, as the more than year-old U.S. recession took an increasingly heavy toll on employment. The impact of an economic slump that is likely to be the most protracted since the 1930s Great Depression is broadening across a wide range of industries, outplacement company Challenger, Gray & Christmas said in its monthly report on U.S. job cuts. Job cuts announced in January totaled 241,749, up 45 percent from December's 166,348. Layoffs were up from 74,986 in the year-ago period. Record downsizing in the retail sector, with 53,968 layoffs planned, was the biggest area for job cuts and contributed to the overall rise in January's total, Challenger said.

"The variety of industries represented among the top five job-cutting sectors in January is further evidence of how far the impact of this recession has spread," said John A. Challenger, chief executive officer of Challenger, Gray & Christmas, in a statement. "Industries that at first appeared to be immune to downturns, such as computer and pharmaceutical, are now rapidly shedding workers," he added. The financial sector, however, had its lowest one-month total since 2005, with 1,458 job cuts announced in January, down from 39,604 in December. The Challenger data comes ahead of the government's closely watched non-farm payrolls report on Friday, which is expected to show 525,000 jobs were lost in January, according to the median of forecasts in a Reuters poll.

ADP Says U.S. Companies Reduced Payrolls by 522,000
Companies in the U.S. cut an estimated 522,000 jobs in January as the economy weakened at the start of the year, a private report based on payroll data showed today. The drop in the ADP Employer Services gauge was less than economists forecast and followed a revised cut of 659,000 for the prior month. Employers are slashing workers as clogged credit markets and slumps from housing to manufacturing threaten to extend the longest recession in a quarter of a century. Persistent job losses will probably further curb consumer spending, which represents about 70 percent of the economy. "We’re in for several more months of bleeding on the jobs front," Joel Prakken, chairman of Macroeconomic Advisers LLC in St. Louis, said on a conference call with reporters.

ADP revised its methodology late last year to help limit differences between its calculations and the government’s payroll numbers. Last month, the new methodology overestimated the drop in December private payrolls by 162,000 after underestimating the count by about an average 116,000 a month in the first 10 months of 2008 before the revision. The Labor Department may report in two days that the economy lost 535,000 jobs in January and the unemployment rate jumped to a 16-year high of 7.5 percent, according to median forecasts in a Bloomberg News survey. The U.S. lost almost 2.6 million jobs in 2008, the most since 1945. The ADP report was also forecast to show a decline of 535,000 jobs, according to the median estimate of 23 economists in a Bloomberg News survey. Projections ranged from decreases of 487,000 to 720,000.

Stock index futures rose following the report and Treasury securities were little changed. The Standard & Poor’s 500 futures contract was up 0.6 percent at 8:57 a.m. in New York. The yield on the benchmark 10-year note was 2.88 percent, the same as yesterday’s close. ADP includes only private employment and does not take into account hiring by government agencies. Macroeconomic Advisers produces the report jointly with ADP. Job cuts announced by U.S. employers more than tripled in January from a year earlier, led by planned cutbacks at retailers following the worst holiday-shopping season in four decades, the Chicago-based placement firm Challenger, Gray & Christmas Inc. said today. Firing announcements rose 222 percent last month from January 2008, to 241,749. It was the largest total since January 2002, when job cuts reached a record of 248,475, Challenger said.

Today’s report showed a reduction of 243,000 workers in goods-producing industries including manufacturers and construction companies. Service providers cut 279,000 workers. Employment in construction dropped by 83,000. Companies employing more than 499 workers shrank their workforces by 92,000 jobs. Medium-sized businesses, with 50 to 499 employees, cut 255,000 jobs and small companies decreased payrolls by 175,000.

Businesses continue to announce firings. Rockwell Collins Inc., an aircraft-parts producer, yesterday said it will eliminate 600 positions in coming weeks, and PNC Financial Services Group Inc. said it plans to cut 5,800 jobs by 2011. The economy will probably "remain in a severe recession with unemployment well in excess of 8 percent" through 2009, PNC Chief Financial Officer Richard Johnson said on a conference call. The ADP report is based on data from 400,000 businesses with about 24 million workers on payrolls. ADP began keeping records in January 2001 and started publishing its numbers in 2006.

The new jobless
Out in Storm Lake, Iowa (pop. 10,076), pigs outnumber humans by about 18 to one. For 36 years Norlin Gutz raised 50,000 piglets annually on a farm first settled in the 19th century by his great-grandfather. Gutz was one of the few remaining independent pig farmers in an increasingly corporate industry. But on Jan. 11, Gutz loaded his last 1,500 pigs onto a truck. Norlin Gutz is bankrupt. "What caused it is the feed costs," he explains, "and what started that was the unleashing of the ethanol industry. If there had been some type of a gradual phasing in, maybe we could have adjusted. But it was bam! It's just been devastating for the industries that use the corn." While the price of corn has dropped over the past few months, in 2007-2008 the cost per bushel rose from $2 to $7. At the same time, a glut of pigs led to lower prices per head. Gutz says that at the bottom of the market, he got $10 for a ten-pound baby pig that cost him $30 to raise.

In March 2008 the bank Gutz had done business with for almost seven years asked him and his wife, Becky, to come in for a conversation. "We were nervous," Gutz recalls. "We knew we had trouble paying bills. We just prayed that we would accept whatever happened." The loan officer confirmed their worst fears - that there would be no more financing - and Gutz began the process of liquidation. He slowly let go his dozen employees, sold his farm equipment, and fattened his baby pigs to a 260-pound marketable weight, selling them for whatever he could get. He became a statistic, one of the 900 pork farms that the USDA estimates have disappeared since 2006. He also started suffering from severe headaches. "The doctor asked me if I was angry. I was surprised. I said, 'I may be disappointed in myself, but I'm not angry.'" Eventually the headaches stopped. But the second-guessing has not. "I was trying to find a niche by using an older facility at low cost," Gutz says. "But it wasn't a very efficient facility. The bank doesn't even want it."

On Dec. 2, Gutz declared bankruptcy; 18 months ago he had a net worth of $1.3 million. To make ends meet, the farmer has been taking care of pigs for other people. In November, Becky hit the books so that she could renew the nurse's license she hasn't used in 30 years while raising five children and helping out on the farm. Successfully recertified, she accepted a job in a nursing home in January. "Once you've had your heart tore out," says Gutz of his wife, "it's hard to get enthused and go back into it. She's looking forward to something new." Whether he will also try something new remains to be seen. "I grew up in this business," says Gutz, who was once recognized by the state as a Master Pork Producer. "I don't have anything else I can do. You feel like you've let your wife down, your family, your parents, you know? And you feel like other people are talking about you. It's embarrassing. This was my whole world."

NEC's Losses Widen, 20,000 Workers to be Cut
NEC is the latest company to announce company-wide layoffs as the electronics sector continues to get pounded Electronics giant NEC is the latest Japanese company to suffer from the global economic slump, and will cut as many as 20,000 workers worldwide, the company announced late last week.The job cuts will be split evenly among full-time employees and part-time workers, NEC officials said. NEC currently has 150,000 global employees.

NEC expects the entire job cut process to be completed by March 2010, and the 20,000 includes several thousand workers from a previously planned job cut. The company announced its October-December losses increased from $1.46 billion yen last year to $5.2 billion yen in 2008. Overall losses for nine months leading into January totaled $129 billion yen. Japan's economy seemingly fell off a cliff during Q4 last year, with Fujitsu, Hitachi and other Japanese tech companies also struggling.

Automakers Toyota and Honda were forced to lower their financial forecasts at a time when consumers across the world are watching their spending much more closely. In addition, the Nikkei stock average is expected to fall because the Japanese, U.S. and European economies continue to struggle with no end in sight. Panasonic, Sharp, and other Japanese companies are expected to struggle over the next quarters, if not longer, financial analysts warned over the weekend. Japan ministry officials said industry output dropped 9.6 percent in Dec. 2008, and the trend is expected to continue in the next three months.

Panasonic to Cut 15,000 Jobs
Panasonic on Wednesday said it was shedding 15,000 jobs, the second significant layoff in Japan’s electronics industry in less than a week, and the latest example of how Japanese companies, exporters in particular, are scrambling to cut costs as demand evaporates. Panasonic, along with Mitsubishi Motors and Mazda, also joined the rapidly lengthening list of companies to sharply revise their full-year outlooks Wednesday, with Panasonic now projecting a net loss of 380 billion yen or $4.2 billion for the year ending March 31, rather than the 30 billion yen profit it forecast on Nov. 27. Mitsubishi expects a net loss of 60 billion yen and Mazda 13 billion.

The speed of the demand downturn in recent months has taken manufacturers and economists by surprise, and forced many companies to sharply lower profit warnings made only months or even weeks ago. As concerns mounts that no tangible improvement will come until late in 2009 at the earliest, companies have intensified their cost cuts: large-scale layoffs like the ones announced by Panasonic on Wednesday and by the computer maker NEC last Friday are likely to become increasingly common. NEC is shedding 20,000 jobs. Hitachi, Toshiba and Sony have all also recently announced thousands of job cuts.

"Business conditions have worsened particularly since last October," Panasonic said in a statement, "due mainly to the rapid appreciation of the yen, sluggish consumer spending worldwide and ever-intensified price competition." During October-December, as the impact of the credit crunch triggered by the collapse of Lehman Brothers in September began to bite, Panasonic had a net loss of 63.1 billion yen in contrast to a profit of 115.2 billion yen in the period a year earlier. Panasonic said it was shutting 13 manufacturing sites in Japan and 14 abroad by the end of March. It also plans to lay off about 15,000 workers, or 5 percent of its work force, by March 2010. Half of the cuts will be made in Japan.

Manufacturers of "discretionary" items — purchases that shoppers can put off or scrap altogether when times get tough — have been especially hard hit as much of the developed world lurched into recession last year. Such goods include cars, which are piling up unsold as demand plummeted faster than manufacturers’ ability to cut back production. And consumer electronics like the plasma TVs and household appliances that Panasonic is best known for.

Manufacturers in Japan have suffered the additional burden of the yen’s appreciation against the dollar over the past year. This has made their products more expensive for consumers in the key U.S. market. In addition, Japan has a number of electronics makers — Sony, Panasonic, Sanyo and the camera makers Canon and Nikon among them — making for intense competition. The current crisis may intensify pressure for some of these to merge. Panasonic’s plans to swallow the much smaller Sanyo are awaiting regulatory approval.

Japan slams Buy American plan
Taro Aso, Japan’s prime minister, has condemned the proposed Buy American provision in Washington’s forthcoming US economic stimulus bill as a violation of established norms of international trade. Mr Aso’s remarks in the Japanese Diet highlight concerns among US trading partners about the requirement for US companies to use domestic steel and manufacturing products in projects funded by the stimulus bill. The European Union has warned of possible trade litigation against the US if Washington presses ahead with the Buy American provision.

Critics of the bill have been heartened by comments from Barack Obama, US president, who said it should not send a "protectionist message". Worries that the global financial crisis and economic slowdown will prompt a widespread raising of barriers to trade are particularly acute in Japan, which is highly reliant on its potent export sector for economic growth. Takeo Kawamura, Japan’s chief cabinet secretary, yesterday also highlighted concern about the Buy American provision, saying protectionism could cause the world economy to "atrophy".

"There must be concern for the global economy if each country goes in that direction," Mr Kawamura told reporters. The European Commission has said it will examine any US legislation to determine whether it violates the Government Procurement Agreement, a World Trade Organisation treaty signed by the US, EU and Japan. Signatories must open government contracts to foreign companies. Japanese exports slumped a record 35 per cent year-on-year in December, leaving the export powerhouse nursing a trade deficit of Y321bn. Japan’s steel sector is also suffering acute pain from the global slowdown, with exports falling 24 per cent year-on-year in December – their worst fall in more than 18 years.

Hypocrisy hangs over EU's growing clamour about protectionism
A stench of hypocrisy seeped this week from Davos via Brussels to Paris. It combined with a toxic halitosis of xenophobic clamourings – "we can't work alongside these Eyeties" on the picket line at the Lindsey oil refinery in Lincolnshire – to make the atmosphere of Europe unbreathable. The EU is up in arms about protectionism, notably in the US but also in India and elsewhere around the globe. The "Buy American" clause inserted into Obama's draft $900bn (£626bn) stimulus package, protecting US steelmakers and component-makers, has aroused indignation, and a stinking letter (diplomatically couched) from the ambassador in Washington to the White House and Congress.

But Europe is scarcely home to virtuous virgins in matters free trade and protectionist. Leave to one side the BNP-inspired, or encouraged, racism among trade unionists now despising the "European social model" – their greatest protection – in a reprise of the ugly mood fanned by Enoch Powell four decades ago. In the last few weeks France, to name but one country, has adopted a series of nationalist measures to try to get out of the financial crisis and economic recession. These not only besmirch that social model but, prima facie, breach the entire canon of EC (European Community) law. And this from a country whose trade minister, Anne-Marie Idrac, denounced the Obama/Senate package in Davos as "clearly protectionist and a distortion of competition" and "a very bad sign" counter to the spirit and letter of G20 statements (co-drafted by the Élysée).

The second recapitalisation scheme for the French banks, which will report relatively healthy full-year results for 2008 in the coming days, enjoins them to lend more – to French companies, primarily, even though 45% of the CAC 40 companies are in the hands of foreign investors. These same firms have two-thirds of their business and workforce outside l'Hexagone. Then there's the scheme to inject €5bn (£4.48bn) into the banks for lending to cash-strapped airlines to ensure that they continue to buy Airbus jets made in France but also in Germany, Britain and Spain. Airbus is a quintessentially pan-European company, though Sarko's France sees it and owner EADS as predominantly French and would like to make them more so.

Non-French carriers should benefit from this scheme but, elsewhere, the clear aim is to favour national companies. The two leading car firms, Renault, partly in state hands, and Peugeot Citroën, have already been handed more than €1bn to boost lending by their finance/leasing arms. They will also enjoy the bulk of €6bn of loan guarantees/capital now on offer from François Fillon, the prime minister, and Sarko. But the conditions attached have already raised anti-protectionist eyebrows here in Brussels – those of the stern Neelie Kroes, competition commissioner, above all. The terms of the bail-out clearly enjoin the carmakers to save French jobs and factories at the expense of other Europeans (no "de-localisation").

Fillon has said he won't accept a three-month delay while Neelie considers the scheme, which has not even been notified yet. He says: "This is an emergency." It may well be – but EU rules, however more flexible they may have become since the crisis began in real earnest in mid-September last year, demand non-discrimination. "Protectionism against your neighbours in Europe is a whole different ball-game to protectionism against the Americans," one source said. "If there's a round of beggar-thy-neighbour policies and a war of subsidies, everybody will be worse off, including the French." Are you listening in the Hôtel Matignon?

That palace's main resident, Fillon, took 20 of his ministers to Lyon this week to set out the details of a €10bn programme of 1,000 investments to reboot the economy. Of this, €4bn is earmarked for state-owned firms, with €2.5bn alone going to EDF, the power group that has used its near-sovereign debt rating to buy up British Energy for £12.5bn and other non-French companies. It is owned 80% by the state and the extra capital is designed to maintain its (aging) nuclear power plants, promote renewable energy and upgrade its distribution networks. This came just a few days after Sarko awarded the contract for building France's second European Pressurised Reactor (EPR) – or "Europe's Problem Reactor", according to the Greens' consultant on energy and nuclear power, Mycle Schneider – to EDF. After no public consultation or parliamentary approval.

EDF will be working hand in glove with Areva, the state-owned nuclear plant manufacturer – as it is at Flamanville in Normandy, the site of the country's first EPR. At the same time, the two state firms have just signed a €5bn contract for uranium enrichment to be supplied for EDF from Areva's future centrifugation plant at Tricastin in southern France (scene of an alarming spill from a nuclear power plant last year). And it so happens that Areva, which last week reported a 10.4% jump in 2008 revenues to €13.2bn and a 21% increase in its order book to €48.2bn, has been forced by Sarko to jettison its German partner, Siemens, from its nuclear joint venture. It is building a much-delayed EPR in Finland that is up to €4bn behind schedule.

Siemens has persuaded Russia's premier Putin to enter talks with federal agency Rosatom about co-operation in nuclear energy instead. But Sarko has moved closer to his dream of forging an all-French European and global champion by merging Areva with engineering group Alstom. This is not the place to rehearse the growing debate over the sustainability of the nuclear option as a secure source of Europe's low-carbon energy in future. Nor to point out that a study for Greenpeace indicates that the EPR produces waste seven times more hazardous than that from the existing fleet of reactors. It's simply to underline that Sarko's centre-right government, which issued clarion calls for co-ordinated global responses to the toxic banking crisis and recession when it chaired the EU last year, is instituting a huge state-centred recovery plan that is nakedly nationalistic and protectionist.

It may even be a better option than the faltering response of flexible, open-markets Britain. France is not alone, either, in adopting the national option – but to lead the charge against protectionist America, China and the rest is la pure hypocrisie. "Hypocrite lecteur, mon semblable, mon frère!" (Hypocrite reader, my double, my brother!" – Baudelaire.)

Fitch cuts Russia’s credit rating
Russia’s credit rating was downgraded on Wednesday after Fitch, the ratings agency, took fright over its haemorrhaging currency reserves and sharp drop in oil prices. The long-term credit rating was lowered a notch to triple-B, two rungs above "junk" grade, following a similar move from Standard & Poor’s in December. It would prove very costly for Russia should it lose its investment grade rating. Russia is the only G8 nation to have suffered a downgrade since the start of the financial crisis. "The downgrade reflects the negative impact on Russia from the fall in commodity prices and the dislocation to global capital markets that has left Russian banks and companies struggling to refinance external debt, and the difficulties Russia faces in managing the necessary macro-economic policy adjustments," said Edward Parker, head of emerging Europe at Fitch.

Russia’s foreign exchange reserves have fallen by $210bn since July as the central bank has been forced to defend the rouble, as investors have become increasingly concerned about the faltering economy. Traders said the Russian central bank was defending the currency on Wednesday to keep it within its new trading band against its euro/dollar basket, which the bank set two weeks ago. The rouble has depreciated 27 per cent since the end of August, when worries first emerged over Russia after its invasion of Georgia and the oil price began to fall from its peaks close to $150 a barrel. The downgrade pushed the euro down to session lows against the dollar below $1.29 as the markets sought the US currency and the yen as safe-havens amid the fresh uncertainty over Russia’s outlook. It leaves Russia’s central bank in a difficult position as it faces pressure to raise interest rates to shore up its currency, while at the same time it needs to loosen monetary policy to revive is sharply slowing economy, which is facing its first recession since the 1998 financial crisis.

"We think interest rates may ultimately have to rise by another 250bp if the authorities are to defend the current rouble band," Neil Shearing at Capital Economics said. Fitch said: "Monetary and exchange rate policy remains a challenge for the central bank in terms of whether to continue using foreign exchange to support the rouble, which would weaken the sovereign balance sheet, tighten domestic liquidity, which would adversely affect the banks, or revise its exchange rate policy, which would adversely affect its credibility." However, the agency said the country’s ratings remain supported by the sovereign’s strong and liquid balance sheet. General government debt was less than 10 per cent of gross domestic product at the end of 2008, compared with the triple-B median of 28 per cent. Despite the substantial decline since last summer, Russia’s foreign exchange reserves are still the third highest in the world and the country is a net external creditor.

Citigroup Leads Tumble in Hybrid Bonds as Bank-Nationalization Bets Surge
Bond investors’ bets on bank nationalizations are hindering already reduced lending by the world’s biggest financial institutions. The market for securities with characteristics of both debt and equity that Citigroup Inc., Bank of America Corp. and other financial companies used to bolster their capital is in freefall on concern governments will stop banks that took public cash from paying interest. The hybrids, which typically count as regulatory capital to cushion against losses, fell 11 percent last month in the U.S., more than they did in all of 2008, according to Merrill Lynch & Co. index data. Citigroup and Bank of America bonds lost as much as 34 percent of their value.

"The danger is the government’s going to take over everything and not pay anything," said Gregory Habeeb, who manages $7.5 billion in fixed-income securities at Calvert Asset Management Co. in Bethesda, Maryland. "It could happen." The U.S.’s $700 billion Troubled Asset Relief Program, 350 billion pounds ($499 billion) of U.K. debt guarantees and asset purchases and financial-industry bailouts around the world are weighing on banks’ capital securities, making it more difficult for them to resume lending. Investors are selling their holdings of hybrid securities, including Tier 1 bonds, banks’ lowest- ranked debt.

Treasury spokeswoman Jenni Engebretsen referred to comments that Secretary Timothy Geithner made on Jan. 28. "We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system," he told reporters before a meeting with officials charged with providing TARP oversight. Government’s Goals "Government’s objectives for its support for the banking sector are financial stability, protecting taxpayers and protecting customers," said a U.K. Treasury spokesman, who declined to comment further and wouldn’t be identified, citing department policy.

Only $694 million of preferred securities were sold in the U.S. since September, when the government closed the market by seizing Fannie Mae and Freddie Mac. That compares with about $44 billion in the first three quarters of last year, according to data compiled by Bloomberg. Insurance companies, hedge funds and other investors bought more than $73 billion of hybrids in 2008, taking advantage of yields that were generous for issuers they considered too big to fail, according to Bloomberg and Societe Generale SA data. The bonds were offered at yields of as much as two percentage points more than senior unsecured debt. Less than a year ago, analysts at Merrill Lynch and Lehman Brothers Holdings Inc. predicted that banks and other financial institutions would sell more than $125 billion of the debt to replenish capital after writedowns and losses that now exceed $1 trillion, according to Bloomberg data.

"If they still have difficulty accessing this market it’s not a good sign for the credit markets in general," said John Lonski, chief economist at Moody’s Capital Markets Group in New York. "It’s difficult to conceive of capital markets having returned to normal without the ability of banks to issue." Hybrid notes, whose interest can in some cases be deferred without penalty at the borrower’s discretion, have plunged around the world since the U.S. took control of Fannie and Freddie, the largest mortgage-finance companies. Citigroup’s $1.4 billion of 6.95 percent preferred shares lost 34 percent in January, the worst performing securities in the Merrill Lynch preferred and hybrid index. Charlotte, North Carolina-based Bank of America’s $4 billion of 8.125 percent perpetual hybrid bonds have tumbled to 48 cents on the dollar from 73 cents at year-end, according to Bloomberg data. The securities were issued in April at 100 cents on the dollar. Bank of America posted its first loss since 1991 in the fourth quarter.

The U.S. Treasury agreed in January to provide $20 billion in additional capital and $118 billion in asset guarantees to Bank of America to help absorb losses at Merrill Lynch. New York- based Merrill agreed to be purchased by Bank of America as Lehman Brothers filed for bankruptcy. Scott Silvestri, a spokesman for Bank of America, declined to comment. Danielle Romero-Apsilos, a spokeswoman for Citigroup in New York, declined to comment. London-based Lloyds Banking Group Plc’s 6.35 percent notes callable in 2013 are quoted at 42 cents on the euro, less than Hannover, Germany-based travel company TUI AG’s hybrid 8.625 percent bonds, which are at 50 cents, according to Bloomberg data. TUI’s debt is graded CCC+ by Standard & Poor’s, 11 steps lower than Lloyds’s bonds. Hybrid notes still haven’t fallen as much as bank shares this year, with the MSCI World Financials Index of stocks declining 20 percent, according to data compiled by Bloomberg.

U.S. financial losses may reach $3.6 trillion, suggesting the banking system is "effectively insolvent," New York University Professor Nouriel Roubini, who in January 2007 predicted the economy was headed for a "hard landing," told a conference in Dubai on Jan. 20. President Barack Obama will have to use as much as $1 trillion of public funds to bolster the capitalization of the industry, he estimates. Government capital injections are failing to restore investor confidence in subordinated bank securities, which support the capital on banks’ balance sheets so they can lend. The average price for issues in Merrill Lynch’s preferred stock and hybrid securities index decreased 8 cents on the dollar last month to 64 cents.

"Subordinated bank debt is really, really suffering," said Phil Roantree, a portfolio manager who helps oversee $14 billion at New Star Asset Management in London. "Something is seriously wrong. Regulators need to restore confidence." S&P slashed the ratings on $5.49 billion of collateralized debt obligations that hold hybrid bonds last month because of the risk banks will defer payments. The New York-based ratings firm also cut rankings on hybrids issued by Commerzbank AG, Dexia SA, Dresdner Bank AG, Eurohypo AG and Northern Rock Plc to below investment grade after they received government bailouts. Moody’s Investors Service is reviewing its hybrid rating methodology and is talking with regulators and market participants about how to incorporate nationalization concern into its assessments, said Barbara Havlicek, senior vice president and chairwoman of the rating company’s new-instruments committee.

Aflac Inc., the largest seller of supplemental insurance, lost about half of its market value this year as S&P cut its rating one level to A-, citing investments in subordinated bank debt, including hybrids. The Columbus, Georgia-based insurer yesterday reported $262 million of losses from its investments and said today the maximum writedown on its riskiest hybrid securities is about $400 million. Allstate Corp., the biggest publicly traded U.S. home and auto insurer, was downgraded by Moody’s last week to A3 from A2 because of "significant investment losses." The Northbrook, Illinois-based insurer owns more than $1 billion of hybrids, Judith Greffin, the head of Allstate Investments LLC, said on a conference call last week. "How can anybody have any confidence in that market?" said Marilyn Cohen, president of Envision Capital Management Inc. in Los Angeles, which oversees $175 million in fixed-income assets. "Especially now that we have had a de facto nationalization of some of the banks. All the government has to do is say ‘You can’t do it anymore.’ It’s been perilous."

Hybrid bonds pay a relatively high yield for investors still willing to bet against nationalization, said Calvert’s Habeeb, describing the notes as "very cheap." "They’re not all going to stop paying, and maybe none of them do," Habeeb said. "I’m not saying" nationalization that wipes out the securities "can’t happen, but now you’re getting compensated for the risk," he said. Habeeb declined to say whether he’s been buying the debt. When former U.S. Treasury Secretary Henry Paulson took control on Sept. 7 of Washington-based Fannie and McLean, Virginia-based Freddie, he scrapped dividends on their preferred stock and put $200 billion of new securities owned by the government ahead in the capital structure of the companies. Deutsche Bank AG, Germany’s biggest bank, roiled the hybrid bond market when it declined in December to exercise an option to redeem 1 billion euros ($1.3 billion) of 3.875 percent securities due 2014. The U.K. government’s attempt to bail out Royal Bank of Scotland Group Plc last month by switching its holdings in the bank to ordinary shares from preference shares backfired when S&P on Jan. 19 cut the lender’s hybrid debt by three steps, to BB, below investment grade.

"The bank capital market is totally closed to them now, they can’t raise money," said Roantree. "While the government owned RBS’s preference shares, bond investors assumed they would always get a coupon because their securities ranked equally with the government. They removed that certainty." The Edinburgh-based bank’s 1.3 billion euros of 7.092 percent undated subordinated Tier 1 notes slumped 21.9 cents to 9 cents on the euro on Jan. 20. Envision’s Cohen said she "unfortunately" bought preferreds issued by banks, many of which she’s sold since September. She still owns securities sold by JPMorgan Chase & Co. which she said should be "fine," and some issued by Bank of America, which are "questionable," she said. "Those hybrids and preferreds are going to be the dinosaurs of the market," Cohen said. "They’re not coming back for a long time. Everybody got bruised and battered."

U.S. Auto Sales Hit 27-Year Low
With the exception of Subaru, Hyundai, and Kia, sales plummeted in January. Could the stimulus plan stabilize the market by yearend? It's not just Detroit that's in trouble. The water's also falling on the floor in Stuttgart, Munich, Toyota City, and other automotive manufacturing centers around the world. That's because for the first month of 2009 Americans bought cars at an annualized rate of 9.57 million, the worst level for January—typically a weak month—since 1963 and the worst monthly selling rate since 1982. Industry laggards General Motors (GM) and Chrysler led the losing with sales that fell 48% and 55%, respectively. Ford's (F) sales plunged 40%, while several Asian automakers reported big drops as well.

Record low consumer confidence, stingy lenders, and a deep decline in demand among fleet buyers such as rental car companies have kept auto sales in the tank. While carmakers say some banks are starting to loosen their lending standards, it hasn't been enough to jump-start car sales stalled since last fall by the collapse of credit and stock markets. "Our business is based on credit more than any other industry," says Mike DiGiovanni, executive director of global market analysis at GM. Automakers are bracing for poor sales, but they're hoping that banks are starting to make more loans. GMAC Financial Services, for example, got $6 billion in new cash from the Treasury Dept. in December and was granted status as a bank holding company. That gives the lender access to more funds so it can make more car loans.

GM is just beginning to see the benefits, said Mark LaNeve, vice-president for sales and marketing at GM North America. LaNeve said GMAC financed 5,000 new-car sales in January. That's not much, but the lender wrote even fewer new loans in December. Dealers said that late in January, GMAC turned on the lending again. In the last week of the month, "we saw GMAC doing loans that we haven't seen for a while," said Jim Hardick, a part owner of Moritz Chevrolet in Fort Worth. The U.S. Senate may have given the industry another shot in the arm on Feb. 3 when it passed a measure in the economic stimulus bill that would make auto loan interest and sales tax deductible on federal income taxes. The measure has a good chance of being in the final bill to be signed by President Obama. GM and Chrysler, hardest hit by the lack of available credit, usually combine for between 30% and 35% of U.S. auto sales, so their sales declines are widely felt.

Toyota's (TM) sales dropped 32% for the month, and Honda's (HMC) fell 28%. Subaru bucked the trend of declines for a second straight month, posting an 8% sales increase, while Korean automakers Hyundai and Kia posted increases of 14% and 3.5%, respectively. Sales incentives, and not just discounts, are on the rise as dealers and companies try to reduce stocks of unsold cars. Hyundai has boosted incentives from $887 a vehicle a year ago to $2,611 last month. But it also has been running an offer that allows buyers of new vehicles who lose their jobs to turn the keys back in to Hyundai with no damage to credit scores. "Hyundai's program was very smart, because it dealt with the core of the issue [of consumer confidence and risk of taking on a new car payment]," said Jesse Toprak, executive director of industry analysis for auto buying research site Toprak said he expects other automakers to get creative in their offers. estimated the average automaker incentive at $2,714 per vehicle sold in January, down 5.2% from December but up 12.5% from January 2008. For the most part, luxury auto sales were off as much as the industry as a whole, a sign that wealthier consumers are feeling the pinch as much as middle-class car buyers. Mercedes-Benz (DAI) was down 43% in January, while Volvo was down 64%, Audi was down 26%, Porsche (PSHG_p.DE) was off 36% and Lexus was down 28%. BMW (BMWG.DE) did better than most, reporting just a 16% sales decline. But BMW's MINI, which has been almost recession-proof, was off more than 15%.

A sharp cutback in business travel is hurting rental car firms, traditionally one of the industry's regular customers. Ford's top analyst, George Pipas, said he expects industrywide fleet sales to be down 65% for the month. GM sold only 13,000 vehicles to fleet customers, and only 1,000 of those cars went to rental agencies. Last year, GM sold in excess of 10,000 Chevy Malibus alone in a single month to fleet customers. Part of the reason Detroit's sales declines are worse than those of Toyota and other Asian manufacturers is because U.S. companies typically do more fleet business than Asian companies. GM's market share was down to 19.5% in January, compared with 24% a year ago.

Automakers are struggling to plan for this year's sales. Ford, for example, is forecasting a range of between 11.5 million and 12.5 million sales industry-wide for the year. GM says it is planning its government-supervised turnaround under the assumption the industry will sell 10.5 million new vehicles in the U.S. this year. On Feb. 3, Chrysler said it is envisioning sales of just 10 million. A swing of 2.5 million between the low end and high end of forecasts is a huge wild card, especially for Ford, which is hoping to keep its financial head above water so it can avoid tapping government loans like GM and Chrysler are doing.

Ford remains perhaps the most bullish on a second-half recovery for the industry. Emily Kolinski Morris, Ford's top economist, says she expects the first half of the year to be dismal. But she sees hope in January numbers. "We are seeing stabilization of retail sales for the last two months," she said. Factors such as the government stimulus plan and the loosening of credit, said Kolinski Morris, should push sales higher in the later part of the year. Others are less sanguine. Chrysler Vice-Chairman James Press said the current downturn and low level of sales should be expected to continue. "I'm assuming this is normal," Press said. "We need to recalibrate and rethink all of our assumptions," such as what levels of pent-up demand really are, he added. "There's not a lot of reason to think there will be any growth this year."

US service sector contraction slows in January
The U.S. service sector shrank in January, but less severely than expected, according to a report released on Wednesday. The Institute for Supply Management said its non-manufacturing index came in at 42.9 in January compared with 40.1 in December. The level of 50 separates expansion from contraction. The index dates back to July 1997. Economists had expected a reading of 39.0, according to the median of 75 forecasts in a Reuters poll, which ranged from 37.0 to 44.0. The service sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.

U.S. to auction $67 billion in quarterly refunding
The Treasury Department will auction a record $67 billion in notes and bonds next week and plans several major changes to its auction schedule as the government struggles to come up with the funds to finance a deficit expected to top $1.6 trillion this fiscal year. In line with what the bond market expected, the Treasury said Wednesday it will auction off $32 billion in 3-year notes, $21 billion in 10-year notes and $14 billion in 30-year bonds to refund $36.3 billion in maturing securities and raise approximately $30.7 billion. Financing may prove more challenging in the months ahead. In addition to the economic-stimulus package moving through Congress, the Treasury is likely to have to finance more funds to rescue the banking sector and to help homeowners avoid foreclosure.

The government said it will also resume issuing seven-year notes monthly after a 16-year absence. Moreover, it will auction a new 30-year bond each quarter. There will be a regular reopening of the bond in the month following the initial offering, effectively amounting to eight auctions per year, up from four last year. A second reopening on the 30-year bond is under consideration as well. The department will make an announcement at the next quarterly refunding in May. For the first quarter of 2009, the Treasury anticipates borrowing $493 billion from the markets -- below the record $569 billion borrowed in the fourth quarter of 2008 -- as the bill to finance the bank-rescue plan begins to mount. Primary dealers expect the budget deficit this fiscal year to soar to a record $1.6 trillion. But no estimate fully accounts for all of the possible funding needs from the Obama administration's fiscal stimulus plan, the implementation of TARP and the possible creation of a bad bank to help deal with toxic assets.

The bond market trade group told Treasury officials in a letter that it was worried that potential funding needs under the bank rescue plan were already considerable. Guarantees made on select assets for some of the largest banks could require Treasury to raise hundreds of billions of dollars in the event that these assets continue to deteriorate. Banks could also default on FDIC-insured paper, and any future guarantees would only increase the potential cost, the group said. Minutes from the Treasury Department's meetings with those companies designated as primary dealers, held just ahead of the refunding announcement, show the bind that the government is in. In light of the weak economy, tax receipts have been declining at the very time that the government is spending more. Corporate taxes were 46% lower in the October-through-December quarter compared to the final three months of 2007.

But the government, sensing a possible collapse of the banking system, moved quickly to provide $320 billion to the sector. The quick need for cash has caused the Treasury to issue more short-term bills. However, the department wants to gradually extend the average maturity and duration of its debt. Karthik Ramanathan, the Treasury's acting assistant secretary for financial markets, said the gross issuance of Treasurys may reach $6.5 trillion this fiscal year. At the meeting with the primary dealers, members discussed reintroducing a 4-year note, a 20-year bond, and "a super-long (50 year) maturity issue." The idea of going beyond 30-year security hasn't received much attention on Wall Street. The Federal Reserve defines primary dealers as banks and securities broker-dealers. They deal in U.S. government securities, corporate securities and mortgage-backed securities.

FDIC seeks power to charge 'systemic risk' fees
The Federal Deposit Insurance Corp asked U.S. lawmakers on Tuesday for permission to impose special fees on "a range of entities" if they pose a high risk to the stability of the financial sector. John Bovenzi, chief operating officer of the FDIC, told Congress that the authority to impose "systemic risk special assessments" would be consistent with the agency's current powers to charge the banking industry to cover losses. Bovenzi said it would impose the assessment on banks that take insured deposits, those banks' holding companies, or both, as the FDIC sees fit.

The FDIC is an independent agency created by Congress that maintains the stability and public confidence in the U.S. financial system by insuring deposits, examining and supervising financial institutions and managing failed banks. The statutory change would also allow the FDIC to shift the timing of when it charges the banking industry to recover losses in a way that does not excessively burden banks during tough times, Bovenzi said. In his prepared testimony to the House Financial Services Committee, Bovenzi also asked Congress to give the FDIC additional support to handle future bank failures. He asked that Congress more than triple its existing line of credit with Treasury to $100 billion from $30 billion.

"The FDIC believes it would be appropriate to adjust the statutory line of credit proportionately to ensure that the public has no confusion or doubt about the government's commitment to insured depositors," Bovenzi said. The FDIC also asked that the line of credit be adjusted further in "exigent circumstances." The move comes as the FDIC's deposit insurance fund has been shrunk by a significant uptick in bank failures over the past year. The insurance fund's value dropped 24 percent in the 2008 third quarter to $34.6 billion. The FDIC said in December it expects the fund to drop to about $29 billion in the first quarter of this year.

Bovenzi also addressed a bill being prepared by Rep. Barney Frank, chairman of the committee, that would make permanent Congress' October decision to increase deposit insurance temporarily to $250,000 per customer account. He said if Congress goes forward with permanently increasing the level of deposit insurance, the FDIC should also be able to charge banks increased fees against the increased coverage. Bovenzi said more needs to be done to stabilize banks' liquidity, as many bank failures in late 2008 occurred because of a lack of access to cash, not their capital levels. "While the assets of these institutions were quickly deteriorating, their liquidity positions were deteriorating at a faster rate," Bovenzi said.

"Stabilizing liquidity could potentially avoid unnecessary costs to the Deposit Insurance Fund (DIF) by eliminating the need to close, or prematurely close, otherwise viable institutions." A total of 25 U.S. banks were seized by bank regulators in 2008, up from only three in 2007. So far this year, six banks have failed as the financial system grapples with mortgage securities and other distressed investments weighing down their balance sheets. Bovenzi said banks have been able to improve their access to funding through the FDIC's temporary liquidity guarantee program. That voluntary program was established in October and provides a government guarantee to certain senior unsecured debt and to banks' transaction deposit accounts.

The programs were established to boost confidence in the U.S. banking industry and reduce the risk of bank runs. As of Jan. 28, outstanding debt covered by the FDIC guarantee program totaled about $221 billion, Bovenzi said. "Indications to date suggest the program has improved access to funding and lowered banks' borrowing costs," he said. But Bovenzi said a lack of liquidity in the financial services sector remains "a major obstacle to efforts to return the economy to a condition where it can support normal economic activity and future economic growth." And he said recent data has led the FDIC to upwardly revise its bank failure cost estimate over the 2008 to 2013 period. The agency had previously forecast a cost of $40 billion. Bovenzi did not say how much that estimate has gone up.

After Uproar, Wells Fargo Calls Off Trip to Las Vegas
Wells Fargo & Co. hastily canceled plans to host a Las Vegas employee conference after lawmakers in Washington learned about the trip and heaped criticism on the bank. The San Francisco bank said it decided to cancel the four-day event "in light of the current environment." Government money wasn't to be used for the meeting, the company said. Wells Fargo is the latest financial institution to move to quell controversy over how lenders are using government bailout money. Citigroup Inc., recipient of $45 billion in bailout aid last fall, had to cancel an order for an expensive new luxury jet under pressure from officials at the U.S. Treasury.

Several banks, most notably Bank of America Corp., canceled plans to send executives to the World Economic Forum in Davos, Switzerland, because of any appearance of excessive spending. American International Group Inc. took heat in 2008 for spending $440,000 on executive spas shortly after receiving $85 billion in federal aid. Wells Fargo, which received $25 billion last year from the U.S. Treasury, had been planning to host its top mortgage officers this month at the Wynn Las Vegas and the Encore Las Vegas, two high-priced hotel and casinos. The Associated Press disclosed plans for the event Tuesday.

Initially, a spokesman for Wells Fargo said in a statement, the bank wasn't going to back away from holding the conference. Just hours later, as television networks and bloggers pummeled the bank, Wells Fargo began backpedaling. First, a spokesman asked journalists to "disregard" the earlier statement. Then the bank put out a new release about the cancellation of the event, which it said was not a "junket" but a "meeting and recognition event for the hard-working team members who made homeownership achievable and sustainable for borrowers across the nation." Bank of America also said Tuesday that it has canceled all employee-incentive trips.

Among the largest U.S. banks, Wells Fargo was one of the better performers in 2008, picking up Charlotte, N.C.-based Wachovia Corp. after regulators threatened to seize the institution. But it still lost $2.55 billion in the fourth quarter, its first loss since 2001. Analysts have argued that Wells will need to raise even more capital to account for Wachovia's loan portfolio, but Wells said last week that it doesn't intend to seek any more government aid.

Banks Promise Loans But Hoard Cash
Bankers have done the equivalent of stuffing the mattress in the last few months, despite being prodded by the government to lend the hundreds of billions in cash being pumped into the banking system by the Federal Reserve and other regulators.They've been hoarding cash at the Federal Reserve, some $793 billion of excess reserves as of the end of January, which is more than double the amount of money doled out or pledged to financial companies through the Treasury Department's $700 billion Troubled Asset Relief Program. The data support the anecdotal evidence that lawmakers on Capitol Hill have railed against: Banks are hoarding the bailout money, even as they promise to make more loans.

It highlights one of the biggest problems facing the financial system right now: balancing the political need to loan out taxpayer funds and ignite the stalled economy with demands to shore up their balance sheets and insure survival during the riskiest lending environment in a generation. "They are nervous," says Mark Zandi of Moody's Banks have to stash away a minimal level of reserves, but they can keep extra reserves. Last year at this time, excess reserves totaled $1.7 billion, according to Fed data. Back then, excess reserves were considered uneconomical, since banks could make more profits off lending the money to fellow banks overnight or to clients. But that all changed in October, when the Fed started paying interest.

Excess reserves went from $2 billion in August to $267 billion in October. As of the middle of January, they had mushroomed to $843 billion. Preliminary numbers for the end of January have them at $793 billion, currently accruing interest at 0.25%, the Fed's benchmark short-term rate. Fed Chairman Ben Bernanke acknowledged the challenges with mounting excess reserves during a recent speech in London. "In practice, the federal funds rate has fallen somewhat below the interest rate on reserves in recent months, reflecting the very high volume of excess reserves, the inexperience of banks with the new regime and other factors," he said.

Other Fed data show that while the amounts of loans and leases by commercial banks are up from December 2007, they have basically flat-lined in the last few months. In September, loans and leases totaled $7 trillion, and in January, they totaled $7 trillion. According to the latest Fed loan officer survey, demand for commercial and industrial loans dropped 60%, and banks reduced lines of credit available. The stability of bank asset levels masks what is going on in the credit markets. Banks are trying to unload troubled assets, for starters, while at the same time, they are being forced to hold loans on their balance sheets they normally would have sold off as packaged securities, and they have had to pick up the slack in the commercial paper market when borrowers were frozen out. So banks are lending, but not necessarily because they want to.

One measure of the real drop in lending is found in the syndicated loan market, where large corporate loans are sliced up and sold to investors. Either because of a lack of investor demand or a lack of borrower demand (or both), syndicated loan volume dropped 41% from $679 billion in the third quarter last year to $399 billion in the fourth quarter. It is down 59% since the fourth quarter of 2007. JPMorgan Chase and Bank of America each have said they made $100 billion or more in new loans in the fourth quarter. Citigroup said on Tuesday it made $75 billion of new loans in the period, including participating as the lead underwriter in $22 billion worth of syndicated loans for clients like Alcoa and Verizon Wireless.

But Citi, in its first report on its use of $45 billion in TARP funds, said it's not planning on using the funds to lend directly to corporations, merely that the funds help support its efforts. Instead, Citi earmarked $36.5 billion of the funds to extend credit to individuals and businesses, offer student loans and credit cards, and to buy mortgage and commercial loan-backed securities in the secondary market. Slightly more than half of the funds will be used to make these secondary market purchases, $10 billion specifically to buy debt issued by Fannie Mae and Freddie Mac. "We are helping to expand the flow of credit to people by providing liquidity to lenders who need to replenish funds so they can continue to originate mortgage loans," Citi explained.

But citing a Fed statistic that consumer borrowing dropped $7.9 billion in November, the biggest drop in 65 years, Citi cautioned against big expectations for a lending glut. "Banks and other lenders have tightened access to credit and are conserving capital in order to absorb the losses that occur when borrowers default," the company said in its TARP update. "Citi will not and cannot take excessive risk with the capital the American public and other investors have entrusted to the company."

Mortgage Refinancing Change Faces Hurdles, FHFA Says
Homeowners with Fannie Mae and Freddie Mac mortgages bigger than their property’s worth must wait for the companies and their regulator to assess the possible "unintended consequences" of allowing them to refinance into lower payments and related "hurdles," Federal Housing Finance Agency Director James Lockhart said. While FHFA and the two largest mortgage-finance companies are considering permitting so-called underwater borrowers whose loans Fannie Mae and Freddie Mac already own or guarantee to refinance, the companies haven’t yet submitted formal proposals seeking the right, Lockhart said. The change could harm mortgage-bond owners and also affect mortgage insurers, he said.

"One of the things we’ve seen a lot is unintended consequences, so I think we want to go through that to make sure there isn’t an unintended consequence here," Lockhart said in a Feb. 2 interview. It’s surprising the rule revision hasn’t happened already, because it would reduce the companies’ default costs and boost the U.S. economy by allowing more consumers to benefit from mortgage rates near record lows, said Ajay Rajadhyaksha, the head of fixed-income strategy in New York at Barclays Capital. Almost one in six U.S. homeowners with mortgages owe more than their homes are worth, said in a report yesterday. "It’s not logical," Rajadhyaksha said in a Feb. 2 interview.

Treasury provides $1.15 billion to 42 banks
The Treasury Department on Tuesday detailed 42 local banks that recently received a combined $1.15 billion in government bailout funds. The funds, given to institutions in 25 states, were distributed through capital investments under the Troubled Asset Relief Program, or TARP. TARP is the $700 billion bank rescue enacted last October that was intended to increase lending. Treasury received $350 billion of the funds immediately and said it has now invested $195.3 billion in 359 institutions in 45 states and Puerto Rico. The Obama administration said it is intent on fixing the banks. What it will do with the next $350 billion in TARP funds and what its actions will do to the ailing financial system remain to be seen. Newly installed Treasury Secretary Timothy Geithner has said officials are looking at a "range of options" to shore up confidence in big banks. He said Wednesday the administration expects to make its proposals public "relatively soon."

The local banks that received the most money from the $1.15 billion include Flagstar Bancorp of Michigan at $266 million, PrivateBancorp of Illinois at $243 million for and W.T.B. Financial Corp. of Washington and Anchor BanCorp of Wisconsin, each of which got $110 million. Other payouts ranged from $3.67 million for AMB Financial Corp. of Indiana to $39 million for the Peoples Bancorp in Ohio. Farmers and Merchants Bank, whose customers are mostly farms and rural businesses, became the first Nebraska bank to receive Treasury investments through the program. Anchor BanCorp and Legacy Bancorp became the first Wisconsin banks to receive TARP investment funds.

Stimulus Brings Out City Wish Lists: Neon for Vegas, Harleys for Shreveport
Las Vegas, which by some accounts already glitters, wants $2 million for neon signs. Boynton Beach, Fla., is looking for $4.5 million for an "eco park" featuring butterfly gardens and gopher tortoises. And Chula Vista, Calif., would like $500,000 to create a place for dogs to run off the leash. These are among 18,750 projects listed in "Ready to Go," the U.S. Conference of Mayors' wish list for funding from the stimulus bill moving through Congress. The group asked cities and towns to suggest "shovel ready" projects for the report, which it gave to Congress and the Obama administration. Although the bulk of proposals are roads, sewers and similar projects, some wouldn't require a shovel at all. The mayors group sees a potential 1.6 million new jobs from the projects, though a few of them wouldn't create any.

Some localities are using a kitchen-sink strategy. "Our approach has been to list everything, because we don't know what the final guidelines will be or what the final dollar amount will be," says Greg MacLean, public-works director in Lincoln, Neb. Among entries on Lincoln's list is a $3 million environmentally friendly clubhouse for a municipal golf course. "From a public-perception standpoint, I see how it could be an issue," Mr. MacLean says. But, he says, construction would create 54 jobs. The debate about what is appropriate stimulative spending, now raging in Washington, echoes differences over the Works Progress Administration during the Depression. It built 651,000 miles of roads and 24,300 miles of sewer lines, but was sometimes lambasted because it also paid for murals and battlefield monuments. "That's when the word 'boondoggle' first came into use" in its modern sense, says William Creech, of the U.S. National Archives and Records Administration.

The mayors' $149 billion project list is just one of many circulating in Washington and state capitals. Massachusetts -- which, like other states, will have a say in distributing the money -- has 4,000 project submissions from 51 towns competing for stimulus money. The San Diego Association of Governments came up with 1,043 possible projects in its region. With their needs acute, some localities are abandoning boosterism, promoting their community as being more run-down than the next town. In central Maine, Pittsfield Mayor Tim Nichols says the roof on a town-owned theater is rickety, potholes are a "pain in the hiney," and underground pipes are so decrepit "you got sewers backing up in cellars and in lawns." Pittsfield would like about $6 million from Washington. In Randolph, Vt., Town Manager Gary Champy says federal money to fix "old and pockmarked" roads in his town would lift the mood of residents, because "they'd feel like the government was working for them." He adds: "This money isn't going to banks."

Shreveport, La., has $2.3 billion in projects ready to go. Mayor Cedric Glover's priority is repairing roads, but he's also asking $6 million for three aquatic centers with water slides, which he says would improve quality of life and create construction jobs. And he would like the U.S. to buy Shreveport eight new Harley-Davidson motorcycles for its cops. This item would produce little local hiring, he acknowledges, but "Harley-Davidson is a great American company. Orders coming from municipalities like ours to a company like that certainly would be stimulative." The Conference of Mayors report has about a dozen golf-course-related projects. A lot of cities want to use funds to upgrade parks, such as Chula Vista, with its plans for a dog park that would include shading and fountains. San Bernadino, Calif., wants $1.1 million for park improvements, including a skateboard ramp and two "splash-park installations." City officials in the communities say these aren't their top priorities, but defend the projects as worthwhile.

Austin, Texas, could use $886,000 to build a 36-hole "disc golf" course, for frisbee tossing. It would be "environmentally and financially sustainable." John Hrncir, government-relations officer, says the project list "was put together on very short notice," and "we are not going to submit anything that is questionable when we seek actual funding." Heather Boushey, a senior economist with Center for American Progress, a liberal think tank in Washington, D.C., says parks and golf courses shouldn't be deemed frivolous if they create jobs and are seen as long-term investments by their cities. She says the flood of proposals underscores a need for transparency in stimulus spending, which officials have promised. The stimulus bill the House approved last week provides an array of tax cuts and a heavy dose of spending for new roads and bridges, public safety, expanded jobless benefits, food aid, wider broadband service and renovations for schools and public housing. Congress has said funds will be distributed to local governments through existing federal programs, either directly or through the states. Though the House approved an $819 billion bill, the final cost will depend on the Senate's vote and on compromises the House and Senate make.

The House bill envisions a board and inspectors general to review the overall spending. It says governors, mayors or others who make funding decisions will have to post details of each project, such as its purpose and cost, on a special Web site, and certify that it's a good use of taxpayer money. Las Vegas, in seeking stimulus money for neon, says there's a shortage of glitz off its beaten path. "When people think of Las Vegas, they think of the Strip, of Caesar's Palace," says city spokesman Jace Radke, but he says this project would help revitalize a blighted neighborhood. As for the eco-park envisioned by Boynton Beach, its parks superintendent, Jody Rivers, says the $4.5 million project would generate jobs, teach residents about environmentally friendly living and highlight nature, such as the "unique gopher tortoises on the site."

Dave Hansen, deputy city manager in Virginia Beach, Va., says localities are seeking funding for "some stuff that's just a Santa Claus wish list." He compiled $1 billion worth of local projects for inclusion in the mayors' report. He calls that a "Holy Grail" list that town officials have now ranked by priority. A former colonel in the Army Corps of Engineers, Mr. Hansen says the town's top priorities are replacing a 50-year-old bridge ($90 million) and building a pumping station to alleviate flooding ($20 million). Lower on Virginia Beach's list are items like "urban tree canopy protection" for the city ($3.75 million). Also, $1.8 million to build municipal tennis courts. "Is it a bona fide need? Absolutely," Mr. Hansen says. "Do you want to compare it to replacing a 52-year-old school? Well, probably not."

Canadian Auto Sales Fall 25% on Declines for GM, Ford, Chrysler
Canadian auto sales, after hitting their second highest annual level in 2008, fell 25 percent in January as the weakening Canadian dollar pushed up prices. Sales slid a combined 35 percent for General Motors Corp., Ford Motor Co. and Chrysler LLC, while Toyota Motor Corp.’s slid 2.7 percent, according to DesRosiers Automotive Consultants. Canadians bought 76,850 cars, minivans, sport-utility vehicles and pickup trucks last month, down from 102,831 a year earlier.

The January decline reflects a rise in auto prices that started in September as the Canadian dollar fell against its U.S. counterpart, said auto analyst Dennis DesRosiers in Richmond Hill, Ontario. Last year, the stronger Canadian currency helped limit the drop in the nation’s auto sales to 1.1 percent, while the U.S. total tumbled 18 percent. "We’ve finally caught up with the global automotive recession," DesRosiers said. "Sales are in the toilet."

Ford sales fell 14 percent. Because that was less than the drop for the industry, the automaker gained market share for the third consecutive month. Ford said it benefited from demand for its Escape SUV. GM sales plunged 47 percent and Chrysler’s were down 34 percent. Toyota posted a 0.3 percent increase for its namesake brand, helped by small models such as Corolla car and Matrix wagon. Toyota’s Lexus luxury brand reported a 35 percent drop. Honda Motor Co. said sales for its main brand fell 39 percent. Nissan Motor Co. reported selling 15 percent fewer vehicles for its namesake division.

Luxury brands other than Lexus also posted declines, including 26 percent for Honda’s Acura, 27 percent for Nissan’s Infiniti and 20 percent for Bayerische Motoren Werke AG. Analysts and automakers expect Canadian auto sales to fall 10 percent to 20 percent this year, as the recession widens and prices keep rising. More than 80 percent of the cars sold in Canada are imports, making price especially sensitive to currency swings. "Today’s auto market is tougher than a 10-cent steak," Chrysler of Canada President Reid Bigland said in a statement.

Canada's Budget 2009 and the Bay St. bailout
Why did the Liberals support the Conservative budget when the analysis is clear: the Finance Minister ignored the vulnerable, punished women, did not provide a serious stimulus to a flagging economy and tied up infrastructure spending in so much red tape that no shovels will be sighted this year? The reason the Liberals did not oppose it, and would not have opposed it -- regardless of the prospects of taking power in coalition with the NDP -- is that Budget 2009 contains a huge spending programme directed to Bay St., and Liberals do not want to be the party that opposes Bay St.

Though you may not have read about it, the federal government is borrowing up to $200 billion to provide cash to mortgage lenders, cash to crown corporations that lend to business, cash to life insurers, and cash to shore up the reserves of our chartered banks. Called the Extraordinary Financing Framework, or EFF, you have to go back to the Canadian postwar loan to Britain to find a financial operation anything like (though a lot bigger than) the 2009 Bay St. bailout. In 1945-6 we were lending to an overseas customer, so that it could buy our products. This time the government is providing cash to the financial sector, so its shareholders can stay afloat.

In the U.S., Joe Stiglitz (Nobel Memorial Prize in economics) calls this lending -- cash for trash -- because a government buys mortgage debt no one else wants to buy. Of the EFF money, mortgage purchases amount to $125 billion -- a lot of cash. Another, inelegant, way to think of it is as the government covering the asses of the bankers who made bad loans, and the shareholders who stand to lose their investments. From Davos on the weekend, where he was attending the World Economic Forum, the networking opportunity for the world financial elite, where respectability is now in short supply, Finance Minister Flaherty re-affirmed that he would do whatever was needed to protect the Canadian banking system. The $200 billion the government is borrowing to back up his words is almost what taxes will bring the government this coming fiscal year.

Central Bank Governor Mark Carney, speaking in Davos as well, complained that despite a G7 pledge on October 10, 2008 -- that no large financial institution would be allowed to fail -- rather than lend to each other, the major banks were accumulating cash for reserves. What is going on is the clearest, most recent, example of common capitalist practice: when things go wrong, citizens pay the costs; when they go right, owners pocket the profits. This (socializing of risk, and privatization of gain) is also known as socialism for the rich.

Capitalism is for the graduate student who cannot get a scholarship without entering "business-related studies" (Budget 2009, pp. 106-7) or the over 60 per cent of the unemployed who pay for unemployment insurance, but do not get it when they are thrown out of work. Under EFF, the Canadian public is on the hook for anything bank management have done wrong, or will do wrong. Who gets protected? The owners and executives of the banks get protected. They can loot their institutions, paying themselves millions in salaries and bonuses, and when things go wrong, as they now have, turn to the public for the bailout, and get it, thanks to the Conservatives, and their Liberal allies.

Finance Minister Flaherty is borrowing all this money so that he does not have to do the sensible thing, have the government take over ownership of the Canadian banking system, in order to protect depositors, not shareholders, and ensure that loans flow to deserving borrowers, not into the pockets of overpaid executives. A much cheaper, much smarter alternative to EFF would have the Department of Finance see to that the banking system is run as a public utility, providing reliable services at cost. Instead of representing shareholders, bank boards would represent the communities they serve, and include employees, depositors and borrowers.

Bankers want to build up their capital because they know loan defaults are coming. The government borrowing under EFF gives banks the money they need to make good on losses from bad loans. Instead of bailing out Bay St. the government could take over ownership of the banks at less cost, and use the sizable amount left of the $200 billion to stimulate the economy, so that people could make a living, and businesses not go belly up in the first place. At the end of the day, both the banks and the economy would be in better shape using the public utility model of banking. The message of Budget 2009 is that the Liberal party is not about to turn its back on the Toronto branch of the financial capitalists recognized once upon a time as the "masters of the universe," and now better seen as the masters of using public credit for protection of private shareholders.

A third of Britons rely on credit card for daily items such as groceries
Almost a third of Britons rely on their credit card for daily items such as groceries, according to Post Office research. The survey indicated that 2.6 million people intend to spend more on their credit cards than last year, with the average spend in January of £318. It found that 45 per cent are not planning to pay off their credit card bills in full each month. London credit card users are the most reliant on credit for day-to-day purchases, including groceries (39 per cent) while those in Scotland and Northern Ireland are the least reliant (22 per cent).

The recession means many borrowers are increasingly relying on debt for basic day-to-day living costs. However, while card holders are planning to spend less on each purchase they are using their cards more frequently for general living costs this year. Az Alibhai, head of lending at the Post Office, said: "In the current climate, many people have little choice but to rely on their credit cards to fund more expensive purchases. "However, what is worrying, is the trend for people to continue to rely on their cards for basic day-to-day purchases, which could be expensive if you only pay off the minimum amount on your credit card each month and have a high rate of interest."

UK research insitute says interest rate cuts 'irrelevant' as it urges quantitative easing push
The National Institute of Economic and Social Research (NIESR) said an interest rate cut on Thursday would provide no real benefit for the UK economy and the Bank of England should instead get on with buying up corporate debt. The influential think tank urged action on quantiative easing as it forecast that the UK will contract at its sharpest rate in 60 years in 2009. NIESR expected gross domestic product (GDP) to shrink by 2.7pc this year, although the drop could be tempered to 2.5pc by the knock-on effect from Barack Obama’s proposed fiscal boost. NIESR said a reduction in the Bank Rate would not sort out the problem of high corporate bond yields which was now at the heart of the recession as companies struggle to access credit.

Economists are expecting the Bank’s Monetary Policy Committee to slash rates by half a percentage point to a new all-time low of 1pc when its two-day meeting concludes on Thursday - a move described as "irrelevant" by Ray Barrell, a senior research fellow at NIESR. NIESR director Martin Weale added: "If you can see that this is what the problem is, why try and fix something else? If you can see a problem you should address it." He said that the recently announced Asset Purchase Facility, which will allow the Bank to buy £50bn of private sector assets funded by Treasury Bills was a good start, but said the Bank should begin the process of quantitative easing should start "sooner rather than later." "If the Bank of England is a buyer the corporate bond market will be more liquid. My sense is that this policy will be much more effective than a half point or a full point cut," he said.

The Bank is expected to cut the Bank Rate by half a percentage point to a new all-time low of 1pc but the National Institute of Economic and Social Research said that it would do nothing to address the key issue of liquidity in the corporate bond market. The comments were made before the publication of NIESR’s latest economic growth forecasts on Wednesday. It predicts that by 2013-14 Government borrowing will be £110bn, more than twice the £54bn estimated by the Chancellor at the Pre-Budget Report in November. NIESR estimates the Government would have to increase taxes or cut spending by a total of £60bn a year to achieve Alistair Darling’s target. It forecasts national debt will reach £1.2 trillion by 2013-14, or 73.6pc of gross domestic product. Over the course of the recession it expects a peak to trough fall in GDP of 3.6pc. World trade will fall 4pc this year as a result of the global recession, NIESR says, the first annual decline since 1982 and the sharpest drop since 1975.

UK and Iceland stage fight for UK high street
Creditors of Baugur are trying to wrest control of some of the Icelandic group's biggest assets by putting much of the company that controls some of Britain best-known high street shops into administration in the UK instead of Iceland. Landsbanki, the Icelandic bank, has appointed PricewaterhouseCoopers (PwC), the accountancy firm, to take control of BG Holdings, which owns stakes in or controls Hamleys, House of Fraser, Iceland Foods and Arum Group, which houses Goldsmiths and Watches of Switzerland. This morning, Baugur announced it was on the brink of collapse, putting the future of many well-known high street names in doubt. Baugur owns or has stakes in a long list of UK retailers, which also include Debenhams, as well as French Connection, Whistles and All Saints, the clothing stores.

Baugur was forced to seek protection from going bust from the District Court in Reykjavik after talks with Landsbanki collapsed over restructuring £1 billion worth of debt. Baugur said today it has asked Icelandic courts for a three week stay of execution "to protect the group’s assets as well as the interests of all creditors". However, last night, Tony Lomas and Zelf Hussain, partners at PwC, filed an emergency petition with the High Court in London and the court will issue its ruling within the next five days. Landsbanki will also continue to fight against Baugur’s application for a moratorium through the Icelandic Courts. A spokesman for Landsbanki, said today: "Our discussions with Baugur Group did not produce any acceptable proposals, so we have taken steps to protect these valuable assets."

House of Fraser today moved to calm investors and its customers over the future of its business. It said: "During these difficult times, it is important to clarify the independence of House of Fraser and to emphasise that Baugur is a minority shareholder and has no impact on the strength of the business, or its day to day operations." Don McCarthy, chairman of House of Fraser said: "This is sad news, however we can only continue to emphasise that the difficulties that Baugur faces do not affect House of Fraser’s trading or banking position. It is business as usual." The news comes days after Baugur, whose companies employ about 50,000 people worldwide, said that it was shutting its Reykjavik office and laying off staff at its glitzy offices on London’s Bond Street.

Baugur has been talking both to Iceland’s government and its bankers for more than two months on a possible restructuring. Sir Philip Green, the billionaire owner of Arcadia, which owns Bhs, Top Shop, Dorothy Perkins and Burtons, flew to Iceland in October in an attempt to buy some £1 billion worth of Baugur debts owned by Icelandic banks. Hawkpoint Partners, the corporate advisors to Mosaic Fashions — the retailer which is part-owned by Baugur and owns names such as Warehouse, Coast and Karen Millen — has already received approaches from would-be buyers for various of its assets with Principles, the fashion chain, thought to be attracting most interest. Drapersonline, the fashion industry website, claimed this week that Sir Philip was one of those interested in acquiring Principles, which was owned by Arcadia before he bought the business, but suggested that he would require a cash fee to take it on.

Alchemy, the private equity firm, led by Jon Moulton, was also linked back in October with a possible takeover of Mosaic. Mr Moulton is said to be a close friend of Mosaic’s chief executive, Derek Lovelock. This morning Mosaic said it wanted to "make it clear that the news of Baugur filing for a moratorium, will in no way affect the future strength of the group or the operations of the business." It added: "Baugur is a minority shareholder in Mosaic Fashions hf. Mosaic Fashions is the operating company. Mosaic, the operating company, is funded by Kaupthing Bank, with whom discussions on long term funding are progressing satisfactorily." The private equity firms Texas Pacific Group — which once owned Debenhams — Blackstone and Permira are also thought to have previously been interested in various parts of Baugur.

One business owned by Mosaic which looks reasonably secure for now is Whistles, the women's fashion chain, which is run by Jane Shepherdson, who previously ran Top Shop for Sir Philip. It has just secured additional finance from its shareholders. Baugur, which roughly means "ring of strength" in ancient Icelandic, was formed in 1998 from the merger of two supermarkets, Hagkaup and Bonus, the latter of which was founded by Jon Asgeir Johannesson — the buccaneering tycoon who, as chief executive for most of the last decade, has been most closely associated with Baugur’s breakneck expansion.

British press face grilling over banking crisis
An influential group of British lawmakers will quiz leading financial journalists Wednesday about whether they held any responsibility in the banking crisis for the way they reported events. The Treasury Select Committee will be taking evidence from key figures in the news media, including Robert Peston, the British Broadcasting Corp.'s business editor, who broke several stories in the autumn when the financial crisis was most acute -- including the news that Lloyds TSB was to take over troubled HBOS, which caused a sharp rise in the HBOS share price.

The year before, Peston broke the news that Northern Rock had agreed an emergency loan from the Bank of England to keep it afloat as the money markets dried up. The following morning, customers lined up outside Northern Rock branches around Britain, prompting suggestions by a few fellow journalists and some Northern Rock shareholders that he was partly responsible for the first run on a British bank for around 150 years. In a recent edition of the BBC's current affairs program Panorama, Peston said he was shocked by the run on Northern Rock, which eventually led to its full-scale nationalization.

On the same program, Simon Jenkins, a columnist at The Guardian newspaper, said financial journalists should be more aware of how their coverage can affect sentiment. Jenkins was due to testify before the committee as well. The committee has said it would consider whether financial journalists should exercise greater restraint during times of market turbulence and whether any kind of reporting restrictions should be applied during such periods. In addition, it said it would investigate whether enough journalists have sufficient expertise in financial issues and examine the role of the financial media in alerting the authorities to issues of public concern.

Other journalists set to join the discussion are Financial Times editor Lionel Barber and Alex Brummer, the financial editor of the Daily Mail, which ran a profile of Peston in October headlined: "Does this man have too much power?" Jeff Randall, the BBC's former business editor and a presenter now on Sky News, will also appear before the lawmakers. The hearing is part of the committee's wider investigation into the banking crisis. Last week, leading hedge fund managers were hauled in front of the committee. Next week, some of the leading executives in the banking industry, including Fred Goodwin, the former chief executive of Royal Bank of Scotland Group PLC, will be grilled by the committee.

Private equity 'next bubble to burst', unions warn
The private equity industry poses a "looming disaster" to the economy as firms struggle to refinance billions of dollars of loans taken out during a buyout boom earlier in the decade, a transatlantic coalition of unions warned today. Britain's Unite union joined forces with the US Services Employees International union (SEIU) to kick off a campaign for greater transparency and tighter regulation over the finances of powerful, low-profile private equity firms. The unions warned of "crippling defaults around the world" as more than $500bn (£346bn) of private equity debt needs to be renegotiated by 2010. They cited a prediction by Alchemy Partners' boss Jon Moulton that up to 30% of mid-market buyouts could end in default.

"The next bubble to burst will be private equity," said Jack Dromey, deputy general secretary of Unite. "There's no question but that we have a looming disaster in our economy." In a surge of deals between 2005 and 2008, scores of household names were swallowed by private equity including Hilton Hotels, Boots the Chemist, the carmaker Chrysler and Harrah's casinos. Unite and the SEIU say that nearly 10 million people in Britain and the US now work for firms under private equity ownership. They want full disclosure by private equity firms of their debt situation including loan repayments, debt-to-equity ratios, the identity of lending banks and the structure of covenants. "Buyout firms have been part of the problem, not part of the solution," said Andy Stern, the SEIU's president, who called on the industry to "come forward and be part of a dialogue" over concerns for the future.

Unions are hoping that the Obama administration will take a tougher line on private equity than the Bush regime by abolishing preferential tax treatment used by the industry and by introducing requirements for greater transparency. But the Private Equity Council, which speaks on behalf of buyout firms, roundly dismissed the unions' comments and said it was "patently absurd" to suggest that the industry was partly to blame for the present financial crisis. "Private equity partnerships invest in bricks, mortar and people, not complex financial instruments," said the council's president, Douglas Lowenstein. "Private equity partnerships are one of the few sources of capital that can help get the economy back on track. This seems to be the right time to encourage private equity investment, not slow it down."

Leading firms concede that they face several years of meagre opportunities as the credit crunch takes its toll, with their focus likely to be on managing existing portfolios rather than new deals. Speaking at the industry's annual gathering in Berlin, Henry Kravis, cofounder of US private equity firm KKR, said he planned to focus on extracting profit from companies it already owned as the US and Europe fell deeper into recession. "Nothing, I mean nothing, is more important than effectively managing our portfolio companies right now," he told hundreds of private equity executives at the Super Return International conference. "It means efficiently managing balance sheets, preserving capital and seeking new opportunities." Kravis was one of the few "titans" of the private equity world to venture to Berlin, compared to the celebratory jamboree in Frankfurt two years ago, which provoked mass protests by unions and politicians who accused the industry of asset stripping, cutting wages and financial engineering to extract profits.

These days, private equity firms struggle to finance acquisitions after banks cut off the debt financing that fuelled a two-year buyout boom. Investors have also become wary and in many cases have withdrawn the promise of funds to private equity buyout vehicles. The recession and last year's stockmarket losses have forced firms to write down a considerable proportion of the value of some of the $1.5tn of investments they made between 2006 and 2007. Echoing the comments of industry rivals, Kravis said: "We have to accept the fact that deals will be smaller. The financing for large transactions simply is not available in the current environment. That's a fact." Investments with "defensive outlooks, superior management teams and a proven method of value creation" have contributed to the long-term strength of KKR's portfolio, Kravis said. He pointed to Alliance Boots as an example of the long term investments that can survive in a downturn. He said the chemist chain, which KKR bought for £11.1bn in 2007, had "historically held up well during periods of economic weakness".

Euro Falls on Bets Eastern Europe’s Slump Will Weigh on Growth
The euro declined against the yen and dollar on speculation the slump in Eastern Europe will cause the regional economic slowdown to deepen.
Kazakhstan devalued the tenge by 18 percent today, and Russia’s ruble approached an 11-year low versus the dollar after Fitch cut the nation’s debt rating. The euro fell toward an eight-week low against the dollar after a report showed retail sales declined more than economists forecast. "Eastern European currencies are melting down," said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. "The cold wind from the east is also knocking down the euro. Emerging markets are still a sell." The euro fell 1.2 percent to 115.25 yen at 11:41 a.m. in New York, from 116.63 yesterday. The 16-nation currency dropped 1.5 percent to $1.2850 from $1.3040, touching $1.2706 on Feb. 2, the lowest level since Dec. 5. The dollar rose 0.2 percent to 89.63 yen from 89.44.

The dollar erased earlier losses against the yen after a report showed U.S. service industries contracted in January at a slower pace than economists forecast.
The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 42.9 from 40.1 in December. Readings below 50 signal contraction. The median forecast of 65 economists surveyed by Bloomberg News was for a decrease to 39. Norway’s krone gained 1.4 percent to 8.866 per euro after Norges Bank lowered the nation’s target lending rate by a half- percentage point to 2.5 percent. Governor Svein Gjedrem said in a statement that borrowing costs have been cut "considerably."

Kazakhstan followed Russia, Ukraine and Belarus in devaluing its currency, abandoning intervention to preserve reserves as local banks and companies struggled to refinance debt. Kazakhstan’s tenge weakened to 149.67 per dollar from 123.48 yesterday after the central bank said in a statement that the currency will trade at about 150. The ruble fell as much as 1 percent to 36.3278 per dollar, near the lowest since the currency was redenominated in 1998, after Fitch cut Russia’s debit rating for the first time in more than a decade as falling oil prices contributed to dwindling foreign currency reserves and record capital flight. Fitch reduced the rating to BBB, the second-lowest investment grade, and maintained a negative outlook.

Poland’s zloty slumped as much as 1.4 percent to 4.6995 per euro, the weakest level since June 2004, on concern the economic slowdown is worsening and speculation the central bank won’t step into the market to support the currency. Economy Minister Waldemar Pawlak told public radio that trying to halt the zloty’s slide would be a mistake. "Eastern Europe is going to be ugly," said Adnan Akant, head of foreign exchange in New York at Fischer Francis Trees & Watts, which oversees $29 billion in assets. "I would say sell the euro versus the yen. That trade has more room to go." The euro also dropped 2.3 percent to 2.9336 against the Brazilian real and 1.9 percent to 12.8368 versus South Africa’s rand. The European Union’s statistics office in Luxembourg said retail sales fell 1.6 percent in December from a year earlier. The median forecast of 13 economists surveyed by Bloomberg News was for a decrease of 1.4 percent.

"In the euro zone, we still have this drip-feed of bad economic news," said David Watt, a senior currency strategist in Toronto at RBC Capital Markets. "That’s weighing on the euro and keeping risk sentiment on the back burner." The ECB will keep its main refinancing rate at 2 percent at a policy meeting tomorrow, according to the median forecast of 53 economists surveyed by Bloomberg. ECB President Jean-Claude Trichet reiterated last week that the next "important" meeting for policy makers will be in March. The yen and dollar gained versus the euro on concern the U.S. fiscal stimulus plan will meet Senate resistance and widening credit losses will erode earnings, increasing the haven demand for the Japanese and U.S. currencies.

In the first Senate vote yesterday on amending President Barack Obama’s $885 billion plan, Democrats fell two votes short of the 60 needed to proceed on a proposal to add $25 billion in spending on highways, mass-transit programs and water projects. The vote was 58-39 in favor of clearing the procedural hurdle.
The euro’s decline against the dollar may be petering out after dropping to an eight-week low, according to ABN Amro Holding NV and Citigroup Inc.
The dollar’s gain over the past few weeks "appears to have lost momentum," Greg Gibbs, director of foreign-exchange strategy at ABN Amro Australia Ltd. in Sydney, wrote in a note to clients. Citigroup analysts led by New York-based Todd Elmer said yesterday the euro is "close to a bottom."

Zapatero Running Short of Cash to Satisfy Catalans, Basques as Spain Sinks
The government that Spanish Prime Minister Jose Luis Rodriguez Zapatero put together with cash is coming unglued. The Socialist’s parliamentary alliances are breaking down as the worst recession in half a century makes handouts to regional allies unaffordable. The Catalans have already bolted his coalition; the Basques are threatening to do the same. "The government depends on nationalist votes, but it is getting increasingly difficult to retain them," said Ken Dubin, a professor of political science at Carlos III University in Madrid. "I’m not sure the finances will enable him to hold this baby together."

Spain’s deteriorating condition means Zapatero can’t make good on promises fueled by a housing boom that delivered a record budget surplus in 2007 and helped him win re-election last year. Now, eight votes short of a majority in the 350-seat parliament, he’s facing legislative paralysis or even the demise of his government. Zapatero, 48, isn’t the only European leader struggling as the recession deepens. U.K. Prime Minister Gordon Brown slipped as much as 15 points behind the Conservative opposition, polls showed. Iceland’s ruling coalition collapsed last month. Belgium’s government fell in December. "All leaders are being blamed for the current crisis," said Dragana Ignjatovic, an analyst at IHS Global Insight in London. "Zapatero’s lucky that he had an election last year before the extent of the crisis became clear."

Zapatero’s dwindling options are underscored by a budget deficit his government projects will reach 5.8 percent of gross domestic product this year, almost twice the European Union’s limit. The 2007 surplus was a record 2.2 percent of GDP, a swing of almost 90 billion euros ($116 billion). Finance Minister Pedro Solbes, embroiled in talks with regions that want to increase their share of the budget, said Jan. 18 he can’t spare more cash after pledging 240 billion euros in stimulus measures to counter the recession. The next day, Standard & Poor’s cut the AAA credit rating Spain had for four years to AA+. Yesterday, Spain offered investors the highest spread in more than a decade to sell 7 billion euros of bonds.

The Basques delivered five of their six votes for the budget in return for a promised 2 billion-euro port at Pasajes, near the border with France. Spain’s biggest construction company, Actividades de Construccion y Servicios SA, may bid for the project, a party spokeswoman said. The regional government also won authority to award one license for the next generation of mobile broadband services, allowing it to support local provider Euskaltel SA’s battle against Telefonica SA and Vodafone Plc. The Basques have indicated that they expect further rewards for continued support. "We have our hands free to do whatever we want," Josu Erkoreka, the group’s leader in the Madrid chamber, said in an interview. "We could vote tomorrow against any government legislation."

Spain’s leaders don’t usually craft formal coalitions to achieve a governing majority. Instead, a prime minister who needs votes secures different alliances that may change throughout his term. Zapatero’s handicap was highlighted last year when Catalan Nationalists dropped their support. They voted against the 2009 budget in December, saying the premier failed to deliver extra funding for their region agreed upon in 2006. Zapatero may trim a 3.8 billion-euro funding increase the Catalans expected by around 2 billion euros, according to Guillem Lopez, a professor of public finance at Barcelona’s Pompeu Fabra University and a member of the board of the Spanish central bank.

"Zapatero is in a very difficult, and very bleak, situation," Josep Sanchez I Llibre, deputy leader of the Catalan Nationalists in the Madrid parliament, said in an interview. "Unless he changes his attitude radically he’ll have many factions against him." The Catalan Nationalists’ 10 lawmakers won’t return to the alliance unless Zapatero makes good on their 2006 deal, Sanchez I Llibre said. Zapatero captured the leadership of his party in 2000 thanks to support from Catalan delegates and won a surprise election victory in 2004 three days after Islamic terrorists killed 191 people in bomb attacks on Madrid commuter trains.

Zapatero may still be able to hang on. Lawmakers proposing a no-confidence motion have to put up an alternative candidate, rather than just vote against the incumbent. That would probably be Mariano Rajoy, head of the People’s Party, the country’s second largest. Since the nationalists are unlikely to back Rajoy, a paralyzed administration, unable to push through legislation, is more likely, Dubin says. Still, a direct challenge can’t be ruled out, said Alfredo Pastor, who resigned as deputy finance minister in 1995 as the deficit reached 6.9 percent, the most since at least 1980. "People are going to blame the government" and "there’s not much they can do," says Pastor, now an economics professor at Iese business school in Barcelona. "Zapatero is in for a rough ride."

Corporate bond issues surge to boom levels
Global corporate debt issuance recovered to levels more in keeping with boom times in January, with buyers found for around $246bn (£173bn) of company bonds. This is the highest volume in 18 months barring a blip in April and May last year, according to data from Thomson Reuters. The findings vindicate small business minister, Baroness Vadera, who was pilloried when she said recently that she was seeing "green shoots" of recovery in the corporate bond markets. Bond markets virtually closed following Lehman Brothers' collapse last September but co-ordinated state bail-outs have since reassured debt investors, with the number of global issues recovering from 133 in October to 315 last month. The UK also enjoyed its best January in at least three years, with £15.7bn placed across 15 issues. Jim Reid, credit strategist at Deutsche Bank, said: "Is the market improving in terms of financing for companies? Yes, it's getting better."

Baroness Vadera was lambasted by the Tories for remarking last month that she could see "a few green shoots but it's a little bit too early to say exactly how they'd grow", on the same day that 7,000 jobs were lost. Bond issuance is vital if companies are to fund future investment and is particularly critical now that the banks are making less credit available. One of the biggest issuers in January was French energy giant EDF, which raised money to help pay down debt taken to buy British Energy. It first raised €4bn (£3.6bn) and then issued a further $5bn (£3.5bn). The company said that there had been exceptional demand, with its order book exceeding 300 orders. On Tuesday, San Miguel Brewery – part of South East Asia's biggest food and drinks group – revealed plans to raise as much as $815m through a bond offer to fund its acquisition of domestic beer brands and real estate. "People are furious with the performance of the equities market and are asking why they shouldn't buy BSkyB bonds paying 10pc interest instead," Barry Donlon, a bond syndicate banker at UBS, said.

The recovery in corporate bond markets also reflects the transfer of risk from the private sector to the state. Credit spreads, the difference between the yields on corporate bonds and Government debt, have narrowed in the past two months – indicating the market recovery and suggesting investors view it as repackaged Government debt. Mr Reid said: "In a recession you would expect people to be buying gilts as part of a flight to quality. But, since the Government bailed out the banks, the market believes risk is being socialised. Credit spreads are narrowing because corporates are being seen as a cheap way of accessing Government bonds." However, the price of issuing bonds has soared dramatically. Thomson Reuters data shows that BBB-rated debt is now yielding 19.6pc compared with around 7pc before the credit crisis struck. "Corporate bond issuance is up, albeit at a price not like before," Mr Reid said. Analysts said the higher price of doing deals reflects an encouraging acceptance that by companies "risk has been repriced".

Medicare 'Rip-Off' Hits Elderly as Obama Maps Changes
Just as President Barack Obama prepares to overhaul the U.S. medical system, providers of U.S.- backed health plans for the elderly are jacking up prices. Humana Inc., Health Net Inc. and other providers increased 2009 premiums by 13 percent on average, or more than five times as much as last year, for people who use the Advantage version of Medicare, according to Avalere Health, a consulting company in Washington. The elderly say higher costs for the Advantage plans, which add features such as drug coverage to Medicare, are reducing money for groceries and utilities.

Obama has vowed to control spending in the $2.6 trillion U.S. health-care system while extending coverage to more people, and, during his campaign, criticized the costs of Advantage plans to taxpayers. The premium increases, charged directly to the elderly rather than the government, are further evidence that insurers’ need for profits is ballooning patients’ expenses and reducing the efficiency of care, said Arnold Relman, former editor of the New England Journal of Medicine. "Medicare Advantage is a rip-off," said Relman, 85, who is also a professor emeritus at Harvard Medical School in Boston, in a telephone interview on Jan. 23. "I cannot see that they do anything better than public insurance does, and they do a lot of things worse."

Medicare will spend 14 percent more this year, on average, for Advantage enrollees than for beneficiaries with basic coverage, according to a staff report in December by the Medicare Payment Advisory Commission, an independent agency that advises Congress. Obama considers the government payments "excessive," said Jen Psaki, a spokeswoman now on the White House staff, in a Jan. 5 e-mail. During his campaign Obama promised to cut subsidies to Advantage by as much as $15 billion a year, or about 15 percent from last year’s total of $100 billion. In addition, insurers collected about $5 billion in Advantage premiums from consumers last year, said Thomas Scully, the former top administrator of the U.S. Centers for Medicare & Medicaid Services, with headquarters in Baltimore.

Scully, who helped design the Advantage program, said that he doesn’t consider the premiums excessive and that Advantage is less expensive than alternatives. Scully is a lawyer for the New York private equity firm Welsh, Carson, Anderson & Stowe, and for the Atlanta law firm Alston & Bird. "I don’t think you’re going to see a mass exodus from Medicare Advantage," Scully said in a Jan. 9 interview.

Medicare is the U.S. health plan for the disabled and those over 65. Basic Medicare, with a monthly fee of $96, lets patients use any U.S. doctor or hospital. Beneficiaries can also buy separate private policies to cover prescription drugs and expenses exempted from standard benefits. Advantage, which covers 10.5 million people, bundles those options. "There are almost 11 million people who have chosen to participate in Medicare Advantage because they feel they’re good plans," said Richard Barasch, chief executive officer of Universal American Corp., an insurer in Rye Brook, New York, in a telephone interview. "Medicare Advantage is a great value to them." The Advantage premiums paid by Blair Law and his wife, Mary, soared to $50 a month this year, up from zero under the policy’s initial terms.

"These guys have you by the short hairs," said Blair Law, 77, a retired construction-company executive now living in Fort Myers, Florida, in a telephone interview. "They know you’re disinclined to shift to another plan, so they keep ratcheting the cost up." In 2007, the Laws joined an Advantage plan provided by Universal Health Care Corp. of St. Petersburg, Florida. Initially, the plan charged no monthly premium, and the insurer rebated the couple’s basic-Medicare premiums, according to the Laws. The rebate ended last year, and this year the company began charging the couple an additional $50 a month. Pinched for funds, Law said he doesn’t eat as much beef as before, uses less air conditioning, and will cut back travels to see relatives across the country. "That’s a real hardship," Law said.

Universal Health Care Chief Executive Officer Akshay Desai didn’t respond to a request for comment. Many Advantage policies had no monthly payments first, according to analysts. The absence of premiums was a "come-on" to spur enrollment for many insurers and was "unsustainable," said Uwe Reinhardt, a professor of political economy at Princeton University in New Jersey. Advantage plans serve about 23 percent of Medicare enrollees, up from about 12 percent in 2003, according to Medicare officials. "The insurers’ dream was that maybe 80 percent of the elderly would enroll in Medicare Advantage and then traditional Medicare would just die, and these private health plans could do what they want," Reinhardt, whose specialty is health-care issues, said in a telephone interview on Jan. 23.

Investors, favorable toward price increases yet wary of the threat of cuts in U.S. subsidies, aren’t sure if there is money to be made in stocks of Advantage providers, said Carl McDonald, an analyst with Oppenheimer & Co. in New York. Most of the companies, in any case, also have other profit centers, and their fate isn’t tied wholly to Advantage. On average, the almost 200 companies selling Advantage policies raised prices 13 percent this year for enrollees, to $41.40 a month, according to Avalere Health. In 2008, premiums rose 2.5 percent, Avalere found. Humana, based in Louisville, Kentucky, more than doubled average premiums for its Advantage clients, to $30 from $14, the largest percentage jump identified in the Avalere analysis conducted for Bloomberg News. Universal American had the second- largest rise among publicly traded companies, moving up average monthly premiums 44 percent to $39. Health Net, of Woodland Hills, California, increased the monthly fee 24 percent to $51.

In calculating the averages, Avalere compared premiums for plans offered in both 2008 and 2009 and weighted each company’s average increase by membership. Health Net, Humana and other insurers also are requiring elderly plan members to pay more for ambulance rides and hospital stays or raise the amount people must spend before 100 percent coverage kicks in, according to Medicare data. Humana, with 1.44 million Advantage members on Dec. 31, said yesterday it expects to add no more than 75,000 people to the plans this year, after gaining 293,000 last year. Health Net said yesterday its Advantage enrollment may fall as much as 2 percent this year, from 295,000 at the end of last year. Not all companies are raising premiums. UnitedHealth Group Inc. dropped what it said were unprofitable Advantage plans for the chronically ill and increased out-of-pocket costs in other Advantage plans. The company, based in Minnetonka, Minnesota, is the largest Advantage provider, with 1.6 million members.

UnitedHealth is counting on competitors’ premium increases to drive the elderly to its policies, said Simon Stevens, former head of the insurer’s Medicare plans, in an e-mail. The company added at least 97,000 customers for policies that began on Jan. 1, according to U.S. government figures. Meanwhile, Martha Baker, 74, said her Health Net plan increased her share of costs for ambulance care and other services this year. Her premium also went up, to $38 a month from zero. "What’s disheartening is, I’m a person who has never taken from the system," said Baker, who retired after directing the women’s ministry at a Tucson, Arizona, church. "I’ve always paid into it, and now it seems to be failing me."

California Credit Rating Lowest in U.S.
Standard & Poor's Corp. cut California's credit rating Monday to the lowest level among all 50 states because of a budget impasse between Gov. Arnold Schwarzenegger and state lawmakers. Mr. Schwarzenegger and state legislators have been deadlocked for three months over ways to close a budget deficit expected to reach $42 billion by mid-2010. The downgrade reflects the rating agency's view of "the lack of political progress around the budget negotiations that we believe is serving to exacerbate the state's current and projected cash position," said Gabriel Petek, an S&P analyst, adding that "the state's cash position is rapidly eroding."

Because of the stalemate, California's controller on Monday began delaying more than $3 billion in tax refunds, welfare checks and other payments to prevent a cash shortfall. And starting Friday, most state offices will furlough tens of thousands of employees for two days a month. "The governor understands we need to solve this deficit as quickly as possible and is meeting with legislative leaders to do so," said Aaron McLear, the governor's spokesman. Mr. Schwarzenegger continued to negotiate Tuesday with lawmakers behind closed doors. People familiar with the budget talks said state leaders may have a budget deal by the end of the week. The parties have already broken a self-imposed deadline of Feb. 1.

S&P downgraded California's $46 billion of general obligation bonds to single-A from single-A-plus, the rating agency's fifth-lowest of 10 investment grades. A spokesman for state Treasurer Bill Lockyer blasted the rating cut, saying it was unnecessary because California has never defaulted on its general-obligation bonds payment "and never will," adding that "Standard and Poor's is punishing investors and taxpayers of California." Ratings company Moody's Corp. still has the Golden State tied with Louisiana, but it threatened two weeks ago to cut California's rating if budget solutions aren't adopted soon.

Poll points finger at Greenspan
The people have spoken – and have named the guilty man. So step forward Alan Greenspan, the former chairman of the US Federal Reserve, and take your bow as the chap most people blame for this fine financial mess we are in. Nearly a third of people (31.9%) who responded to a poll have pointed the finger at the man once dubbed "The Oracle" and at one time so revered by financial markets that a single utterance might prompt – to borrow a Greenspan phrase – an outbreak of "irrational exuberance".

The committed free marketeer and staunch defender of derivatives is not alone in carrying the can in the eyes of those who responded – George W Bush and Gordon Brown have a lot to answer for too, as do the American public, who took on mortgages that they could never, ever afford to repay. They collected 16.7%, 14% and 11% of the vote respectively. The only other real villain of the piece, as assessed by the 8,500 people who cast their vote, was Icelandic premier, Geir Haarde, whose fellow countrymen seemed to concur and have now removed him from office. But that may be only be part of the story. Many of the readers who commented on the article in which I attempted to identify 25 people to blame for the global meltdown, reckon I got it all wrong. Badly wrong. It was, I am told, "shoddy reporting".

For a start where were Thatcher, Bush Snr and Reagan, they asked? Well, those readers have a point, but the Thatcher/Reagan era seems so long ago, and there were so many other names to choose from, especially when you are limiting the list to just 25. Just as many readers wanted Blair in the line-up. They too, have a point. Then again, more than one respondent dismissed the lot of them as "minor players, every one", pointing their fingers instead at Milton Friedman, the grandaddy of monetarism. Unfortunately I missed him out as well.

I also (stupidly, according to some respondents) blanked Russian-American novelist and screenwriter Ayn Rand (1905-1982) too, and her philosophy of objectivism – small government, laissez-faire capitalism. There were plenty of other suggestions for inclusion in the list of shame: the bankers who signed the Basle Accord (Basle 1), Von Hayek, Foxtons estate agency founder Jon Hunt, the Chicago school of Economics, the National Association of Realtors in the US, Hillary Clinton, "the shape-shifting alien reptiles from the lower fourth dimension" (something to do with David Icke), Peter Mandelson, the Rothschild banking dynasty, the Bilderberg group and "the entire government from the 1980s to the present day". I might have needed a little more space for that lot.

For others, I was ignoring the obvious. "Don't forget all the financial journalists", said a comment from Reith. "Didn't notice them saying the sky was about to fall in". Reith should maybe read the back columns of the Guardian's economics editor Larry Elliott a little more often. The Reasoner needs to read a little more widely too. "How come no one every mentions the debt rating agencies to blame?", they enquire. Read on, Reasoner. Especially the words relating to Kathleen Corbet, former CEO, Standard & Poor's. There are some Americans that are clearly a little touchy about their part in this downturn. Nothingbettertodo, who was probably shouting as he composed his reply, says: "Excuse me. Why just the American public? Are we the ONLY greedy, irresponsible pigs on the planet? Last I heard, the British, Irish, French, and citizens of pretty much every country did just as we did – spend too much, buy houses we couldn't afford, and so on ... If this is really the way you folks over there see it, then I hope that the recovery passes you by, because clearly you don't need it."

AlieninDC had not dissimilar thoughts: "I guess it was hoping for too much that the blatant anti-Americanism would have stopped with the inauguration. You blame the US public, who, I agree are responsible, but what about the UK public, who while watching property porn shows unlike anything broadcast in the US, taking out liar loans, and mortgage equity withdrawing to finance consumption, have driven up house prices to income multiples far in excess of those seen in the US market?" So much venom – if only Nothingbettertodo and AlieninDC had read to the end of the paragraph, to the bit where I wrote: "The British public got just as carried away. We are the credit junkies of Europe and many of our problems could easily have been avoided if we had been more sensible and just said no."

Back in the actual poll, however, other familiar scapegoats are dismissed as mere bit part players. Who really thinks that Sir Fred Goodwin, now cast as the prince of darkness in British banking, had a big role in creating the current economic turmoil? He may have done some hugely expensive deals, he may have sanctioned some dodgy-looking loans running into billions, he may have brought a once world-class bank to its knees and now be under pressure to hand back his knighthood. But only 119 respondents to our poll reckon Goodwin was really bad.

What about Dick Fuld, the Lehman Bros bank boss, who piled investors' money into property and raked in some $300m for the Fuld family coffers before presiding over the precipitous collapse of his bank? Surely he must share the blame for this global crisis? Er, no. In fact a rather measly 102 people blamed the man once affectionately known as The Gorilla. As for Adam Applegarth, the cricket-loving chap behind Northern Rock? Just 34 respondents, presumably angry Rock investors or former employees, wanted to pin the tail on that particular donkey.

Madoff Tipster Markopolos Cites 'Ineptitude' in SEC's Inquiry
Harry Markopolos, a former money manager who sought to convince regulators for nine years that Bernard Madoff was a fraud, said the U.S. Securities and Exchange Commission suffers from "investigative ineptitude." Markopolos, in testimony prepared for Congress today, said he contacted the SEC in 2000 after examining Madoff’s investment strategy and determining in four hours that returns exceeding 10 percent weren’t possible. Markopolos, in almost a decade of communication, said only one SEC staff member understood Madoff’s scheme and "the threat it posed to the public."

"My experiences with other SEC officials proved to be a systemic disappointment and lead me to conclude that the SEC securities lawyers, if only through their investigative ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed," Markopolos said in 65 pages of written testimony. U.S. lawmakers, who began investigating Madoff’s case last month, are hearing from Markopolos for the first time as they try to determine how regulators missed his alleged $50 billion Ponzi scheme, the biggest in history. The proceeding may shape the SEC’s fate as Congress debates whether to bolster the regulator or turn its responsibilities over to another agency.

Markopolos, 52, will testify to the House Financial Services Committee’s capital markets panel along with SEC directors Linda Thomsen, enforcement; Andrew Donohue, investment management; Erik Sirri, trading and markets; Lori Richards, compliance and inspections; and Acting General Counsel Andy Vollmer. SEC Inspector General David Kotz told lawmakers Jan. 5 that he was investigating whether Madoff’s clout and relationships with regulators helped the money manager avoid detection. Madoff sat on an SEC advisory committee and was chairman of the Nasdaq Stock Market.

Markopolos, in his written remarks, said that resume made him fear for his life as he and a team of advisers scrutinized the manager’s Bernard L. Madoff Investment Securities LLC. His testimony included 310 pages of e-mails and financial documents. "Our analysis lead us to conclude that Mr. Madoff’s fund and the secret walls around it posed great danger to those questioning and investigating them," he said. "He was one of the most powerful men on Wall Street and in a position to easily end our careers or worse."

Markopolos described repeated meetings with SEC investigators in Boston and New York, saying they appeared to lack the financial expertise needed to understand his warnings or brushed them off. He later tried to alert the media, without success, he said. "BM’s math never made sense, his performance charts were clearly deceiving, and his return stream never resembled any known financial instrument or strategy," he said, referring to Madoff by initials. "To believe in BM was to believe in the impossible."

Markopolos in 2005 shared his concerns with Meaghan Cheung, a branch chief in the SEC’s New York office. Markopolos said he gave Cheung with a 21-page report alleging that Madoff was paying off old investors with money from fresh recruits. "Ms. Cheung never expressed even the slightest interest in asking me questions," Markopolos said. "She never initiated a call to me. I was the one always calling her. She was unresponsive and mostly uncommunicative when I did call." SEC spokesman John Nester declined to comment. Cheung approved an internal memo in November 2007 to close an SEC investigation of Madoff without bringing any claim. She later left the agency.

No active telephone number was listed for her in two Internet directories. On Jan. 7, she told the New York Post she had worked hard to pursue fraud at the agency for 10 years. "Everyone in the New York office behaved ethically and responsibly and did as thorough an investigation as we could do," she told the newspaper. After more interactions with SEC officials, Markopolos said by last year he had "truly given up on the BM investigation." Federal prosecutors arrested Madoff Dec. 11 after he allegedly confessed to his sons that his investment-advisory business was "one big lie."

SEC Chairman Mary Schapiro, sworn in Jan. 27, should assess the staff and determine what skills it lacks, Markopolos said. "My bet is that Ms. Schapiro will find that she has too many attorneys and too few professionals with any sort of financial background," he said. The regulator will only attract employees who understand balance sheets, income statements, derivatives and complex trading strategies if it adopts the "industry’s compensation guidelines," Markopolos said.

Schapiro should set up a central office to respond to all whistleblower complaints, which are handled by the agency’s regional bureaus on an "ad hoc basis," he said. Markopolos also said the new chairman should consider relocating the SEC to a city in the U.S. Northeast from Washington. "Washington is a political center not a financial center," he said. "If the SEC wants to attract the top talent, relocating its headquarters to somewhere between Rye, New York, and New Haven, Connecticut, is where this agency will best attract the foxes with industry experience it so desperately needs."

Chinese see funny side of financial crisis
Millions of migrant workers may be out of a job and China's once booming economy may be locked in a downward spiral as the global economic crisis bites, but for a particular Chinese brand of humor it's been a boon. Many of the jokes have been circulating online, or via text message in a country whose population is obsessed with their mobile phones. A bank worker calls a colleague, goes one joke on the bulletin board.

"Hey, how's it been going?"

"Not so bad."

"Oh, sorry, I've definitely called the wrong number."

Others adopt a similar tone, but riffing off Communist propaganda slogans. "In the face of the financial crisis, I have bravely stood up and am marching forward! That's because ... I can't pay back my loans and the bank has repossessed my car."

Internet use has exploded in recent years, but the government keeps a close tab on what appears, removing offensive comments or detaining those who criticize too much on certain sensitive topics, such as human rights. This hasn't stopped people taking to the Internet to laugh about the crisis, or crack witticisms. Other Chinese have been messing around with word games, albeit not to everyone's taste, the tonal Chinese language being a gift to jokers and wits alike because a single pronunciation can have several wildly different meanings. A posting on popular Chinese website cautions people about sending text message greetings for the Lunar New Year, which was marked last week, lest their meanings be misinterpreted. The website has published a list of greetings not to send.

"Wealth surging in" is out, as it has the same pronunciation as "Lay-offs surging in." Likewise, the website cautions people not to wish friends or family "May you have everything you wish for," fearing it could be interpreted as "Pay cut by 40 percent." The issue has struck an especially raw nerve in China, where superstitions attached to the new year period are strong. "The atmosphere in the office is very tense, and texts which in past years may have meant good luck are now being seen as a stroke of bad luck," the website paraphrased one worker as saying. Another joke circulated by text message pokes fun at the fake money which is becoming a worry as incomes start to falter amid what the government calls the "financial tsunami."

"Two people produce fake 15 yuan notes," it starts, already unlikely in itself as there is no such thing as a 15 yuan bill in China. "They decide to go to a remote mountain area to spend it and buy a candied melon slice for 1 yuan. They burst into tears when they get two 7 yuan notes in change," it ends, the joke being there is also no such thing as a 7 yuan note.


Anonymous said...

How will we cope? What a profound question for the very interesting times in which we live. Yes, I believe that family ,community and humility will be just 3 of many needed characteristics to survive what's ahead. Good thing Spring is coming. The wild flowers in Texas should be pretty for at least a little while. John

Anonymous said...

The Chris Hedges commentary at the lede, while interesting, contributes very little in providing any guidance -- it is a manifesto for despondency.

People can prepare individually. At some point collective action in North America will become more common, as it is becoming in Europe.

Just yesterday a UAW local at Magna International plant (an ex-Chrysler auto parts plant which makes transfer cases for SUVs and puck-ups) rejected a give-back contract by a 3 to 1 margin demanded by Magna. They told Magna there is a limit to give-backs.

Ilargi said...

"The Chris Hedges commentary at the lede, while interesting, contributes very little in providing any guidance -- it is a manifesto for despondency."

It provides understanding, which is the number one requirement for any sort of preparation.

Greyzone said...

Then those UAW workers are about to become unemployed. Jeffrey Brown over at TOD used to advise people to prepare as if their income were cut in half and their expenses doubled. In other words, prepare as though you were only going to have 25% of the purchasing power you had at the peak of the boom.

Nearly everyone is overextended. Nearly everyone is living beyond their means. Almost no one today can cut back to 25% of their current income and survive as they currently do.

Deflation doesn't give a damn if you are a robber baron or a union worker. It doesn't give a damn whether you eat or starve. Deflation is relentless and will not stop until the market as a whole finally rediscovers the correct prices for everything. And foolish attempts to prop up prices will do nothing except prolong the pain.

Now if you'll excuse me, I have seedlings to get started.

Unknown said...


The first article explains the second article -quite- well - nice positioning there. Also, I notice that Yves' complaints in the second article basically follow on what you said yesterday to the effect that the BushObama administration is taking so long to implement a bank-saving plan because they are damned either way.

Ilargi said...

Linda (from yesterday)

Your metaphor is certainly interesting and well put, and there's nothing wrong with it. but I don't think it's either/or. Banks and other financials have undoubtedly bought slips of paper, not just sold them. Maybe the government owns the track, and hands over your cash to the gamblers today in order to keep the illusion alive that there is still a race on. We can think of many different versions. I simply used the simplest one, and that worked for me.


I know this is a little late, but I have a question on your introduction from the other day using betting slips. It took me a little while to figure out my question. In your analogy of betting slips, you write about the banks as if they are the betting slip holder.

But, isn't the problem really that they are the track owners who underestimated the risk of highly unlikely outcomes of multiple races in a short period of time? Isn't what we're talking about the equivalent of every race track having long shots win every race on the same day (or maybe consistently for a week)? Thus, it's true that races have been run and you can't change the outcome. But, if every track in the country simultaneously becomes insolvent because they cannot make the payouts on the winning bets, isn't that a different situation?

Aren't we really seeing the government permit the tracks to borrow money to open for business and permit the tracks try to better rig their subsequent races to insure that they produce the "right" results so that they can recover the losses stemming from previous day? Thus, they're not trying to keep the race running, but rather to keep the total losses hidden in order to allow the tracks a longer time window to recover from the previous losses by using subsequent race winnings and without regard to the knowledge that good faith betting ticket purchasers are being lured into losing money because the illusion of fairness has been maintained?

Linda S."

Anonymous said...

Excellent wise and incisive words from philosopher Sheldon Wolin. Yes, whatever political left the US ever had has crumbled. Sadly, I've watched it fade away since the 1970s. Corporatism and religious fundamentalism took over.

Anonymous said...

That article about corporate bonds hitting record levels was certainly interesting - the green shoots of recovery or companies willing to pay more yields to survive??

Anonymous said...

So what do we do short of violence? Since it's all about money, how about:

1: Stop buying crap you don't need,
2: Stop putting money into the stock market,
3: Use credit unions instead of banks.

Will this help? The reduction in "consumer" spending sure seems to scare a lot of people. Personally I think it's good. Any economy based on buying junk and throwing it away needs to die.

Greyzone said...

Antares, sadly your prescription, though right in the long term, means that in the short term even more people who are currently employed making crap will become unemployed. Any sufficiently large body of hungry, unemployed desperate people becomes a danger, both to those around them and to the government that created them.

Some level of violence is going to be inevitable. Your best bet is to be where the violence is not. Part of that will be simple luck but an even larger part will be the outcome of your personal choices.

Anonymous said...

I had safety training today, all day. Confine Spaces Entry training and I think I run in a strange parallelism with this Bad Bank Rescue thing. Or maybe is in my mind.

There are trained people in this kind of work but there still accidents, usually because something that had never happened before happens. One of the interesting stats was that 60% of the fatalities are rescuers. This is an annual calculation and sometimes is even higher. Our instructor told us that in one of his prior sessions translator was having trouble translating the word emotion, so after a while they used the word love. Love is a bad counselor to logical decisions. One of those true illustration stories was that two people who did not know how to swim jumped in the water to save someone and drowned. Nevertheless I think given the noble intentions even in front of known danger deep down we believe Hollywood will intervene with fairy power. In his interview yesterday Obama said that 5 or 9 years from now people will refer to him as the president who saved America.

Today that I know how risky is to be a rescuer "boondoggles to rescue" I thought.

There are changes coming alright that we can believe in, just not the ones you think.

Anonymous said...


By far, today has been your most powerful and sobering TAE. The endgame is here, we're all pawns and it's a forced mate for the other guy.

Don't know what else to say...

Sad times...


Ilargi said...

"That article about corporate bonds hitting record levels was certainly interesting - the green shoots of recovery or companies willing to pay more yields to survive??"

Desperate attempts to get operating cash. The US government is trying to sell record amounts in bonds as well. However, as Seeking Alpha reports in "U.S. Debt Default, Dollar Collapse Altogether Likely":

"...five-year notes were met with a demand for 1.98 times the amount offered - the lowest bid-to-cover ratio since September. A sell-off in treasuries began in earnest upon the conclusion of that auction. The U.S. Federal Reserve suggested last week that it was going to step up its treasury-buying activity, and the mainstream media interprets this as a form of market support. What it actually is evidence of growing anxiety and desperation on the part of the Fed as the realization dawns that demand for treasuries is progressively evaporating. "

This is a train at full speed overdrive heading for a wall. Lending is as dry as the Gobi, so bonds are the one option left for companies to get some cash. At the same time, municipalities, counties, states and the feds do the same. There may be a move away from stocks and into bonds, but there is not nearly enough demand to settle every party's needs.

Before summer we will see implosions, bankrupt towns and counties. Much of what is actually revenue, as opposed to the borrowed money from bank loans and bond sales, comes from property-and sales taxes. But consumption levels are down, as are home values.

I started warning about this over a year ago. there is another source of pain for both corporations and lower level governments: they have funds invested in very bad assets. We'll see really crazy cuts in services, crazy both in specific cuts and in the amount of them. People will be clamoring for better roads while water treatment, sewage systems, daycare, health care, education, libraries and many other basic needs come under increasing pressure.

Erin Winthrope said...

This blog has on many occasions recommended short term US Treasuries Bills as a relatively safe investment. In light of the article that Ilargi just highlighted ("U.S. Debt Default, Dollar Collapse Altogether Likely"), are short term T-Bills still recommended?

Anonymous said...

Hello Ilargi,

Thank you for your explanation regarding the commercial bonds.

"Lending is as dry as the Gobi", that was a really witty comment, I particularly enjoyed that metaphor.

If US bond's do fail, than wouldn't that mean a simultaneous dislocation in all OECD countries and elsewhere?

Also Karl Denninger wrote an interesting ticker where he suggests the FED intentionally drained liquidity from the market in October, hence collapsing stocks and making investors rush into the safety of bonds.

If this is the case, we can expect a great big crash to 200 on the S&P as suggested by Karl and than a rush to bonds. Securing for the Government additional funding and more power.

The US govt does need 850 billion plus 4 trillion?? for it's bad banks.

What a surreal situation this is. Of all the bad ideas regarding saving banks, the savior Obama picks the worst one. (From the IMF study of 124 banking crisis)

Anonymous said...

A Russian colleague tells me that his friends in Russia and Ukraine are scrambling to get out of the Ruble and Grivna and into dollars. His comments lead me to believe that the dollar is still considered valuable in many places around the world. My guess is they don't realize what is going on in the US. The dollar may be headed for collapse but it is not there yet.

Anonymous said...


Tough times yet I don't think it is match. Sorry to sound melodramatic, but I am not conceding. I am thankful to find a site like this, learn and pass it on to as many hungry minds as possible. At times I may regret it, but I feel privilaged to live in a time when we may (emphasis on may) shed the final system of slavery in the world.


Anonymous said...

I apologize in advance for this post.

One more thing on the PO vs FC debate and the seeming split between this blogs authors and the people at the Oildrum.

I am as obsessed with the financial/economic crisis and it's political ramifications on both a societal and personal level as the next guy or gal here. I have been immersed in it for 7 years. The timing and shape of how the crisis would unfold I soon learned were impossible to predict with accuracy. Now however the crisis is here.

In general outline the things I envisioned have happened. Specifically the crash in the value of financial and real estate assets and a severe recession.I had no idea the Treasury would be nearly bankrupted in 18 months. So I am vindicated right?

In a sense yes but I don't let it go to my head. Can I see a collapse of epic proportion, easily equaling the Great Depression? Yes I can but I will not ever say with absolute certainty that it will happen. I'll assign it a probability. Today 70%. Some other day the number may be different because to tell the truth I pulled that number out of my ass.

What does that have to do with PO and the Oildrum? It has to do with way the mind works and how it can get lost in itself. In the way that signature crackpots and conspiracy theorists do. Certain PO enthusiasts now attribute most everything that happens in the world through the PO lens. Despite the obvious truth that PO has become irrelevant for probably several years in the future means not a thing to them.

I don't want to end up in the same boat. For all the countless interlocking 'facts' about the economic, political and cultural landscape we can see there are outlines of things which suggest we may be closer to an economic bottom than we think. If we are 'saved' and end up in a political or cultural landscape even less attractive to me than before is a serious but secondary issue when predicting about some Mad Max, end of the world as we know it future.

At heart the PO an FC nightmare scenarios exist in a similar place. A place that puts us , the seers, in the center of history. Seeing the 'truth'. Be wary of that.

In other words I am holding myself to an intellectual discipline which springs from a rejection of determinism. The future is not determined. It has many possible paths. I happen to believe most all turn down but I keep a spot in my head that says, you might be wrong.

Nothing of value will accrue to the benefit of the accurate doomsayer. The doomsayer will be rejected to the very end and to me the ego satisfaction is a thin gruel. I'll prepare in the meager ways available to me. Caution my family and friends to do likewise. Live one day at a time.

Not that anyone should care. Just saying.

el gallinazo said...

de nada

for the rest of yous

It's easy to win a (class) war if one side (the pissants as opposed to the pissers) doesn't realize there is a war going on until it's too late.

Greenpa said...

Storm Lake, Iowa, is in my backyard, almost.

It's a sad and grim story, and perfectly illustrative of the fallacy of "economies of scale".

That entire concept is horrifically destructive, it turns out; and is deeply embedded in our current economic models and concepts of "progress".

This farmer didn't raise pigs; he raised piglets. Specializing in one piece of the industry.

The problem with that model is simple- it works slick, when it works- but when something goes wrong, it collapses faster and bigger. And, just like with banks, it's rigged so the guys down the ladder take the hits- and the processor at the top escapes.

In the old model of raising pigs; rather than selling 50,000 piglets a year, a farmer would - grow his own feed, and maybe 200 pigs. No one would be so foolish as to just grow corn- you could have a crop failure. You also grow oats, barley, alfalfa; all of which can also be fed to pigs.

And if you do lose 200 pigs- it probably doesn't mean bankruptcy; just a bad year.

I'd love to see, in 200 years, if we've learned any of that.

Anonymous said...

The American left, he said, has crumbled. It sold out to a bankrupt Democratic Party, abandoned the working class and has no ability to organize. Unions are a spent force. The universities are mills for corporate employees. The press churns out info-entertainment or fatuous pundits. The left, he said, no longer has the capacity to be a counterweight to the corporate state. He said that if an extreme right gains momentum there will probably be very little organized resistance. "The left is amorphous," he said. "I despair over the left. Left parties may be small in number in Europe but they are a coherent organization that keeps going. Here, except for Nader’s efforts, we don’t have that. We have a few voices here, a magazine there, and that’s about it. It goes nowhere."

The left resurged at the turn of the last century due to hardships. Apparently that's what it takes here. In fact, we got the New Deal etc due to 'saving capitalism from itself'.

It will happen again so.

My personal journey is not unique: I thought I was a conservative active in GOP, then I got pissed at the hypocrites and switched parties thinking the Democrats were different. After ten years of betrayal there, I realized the marginalized dissidents are the fact-based ones.
I found Chomsky and other educators via independent Pacifica radio stations. Over the years I got the real picture.

I am the new left. We are a growing demographic, waiting for the moment that others all discover that they have been betrayed by their GOP and DNC "leaders".

Won't be long now....

Unknown said...

Thanks for the post from It has proved difficult for me to find Canadian blogs that address the financial situation in that country.

Anonymous said...

Great stuff here. Very nice.

Anonymous said...

Anon - "I am the new left."

Care to elaborate?

Wyote said...

In the FWIW department:

the "IMF Study: Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance." fits exactly into the Contact Us (500 character) comment box.

All the Best, Wyote

Anonymous said...

I just discovered that when I click on the header, The Automatic Earth or the side bar header that I get a different page presentation.
rapier said...
I'll prepare in the meager ways available to me. Caution my family and friends to do likewise. Live one day at a time.

I've just heard on "CNN Anderson 360" a paraphrasing of the same sentiment/advise to the viewers

. said...

We raised feeder pigs some times when I was a kid and other times we fed clear to slaughter. The corn prices drove those decisions.

The fellow in Storm Lake was making a business of the babies, or farrowing. This is a good game for the smaller players - one man can handle them no matter what size they are, closer attention means more live births and more survivors to the forty pound mark. My brother runs a farrowing operation for a very large player and it's a constant battle - babies are far more fragile than the forty to two hundred forty pound set.

The stimulus stuff is heartbreaking - we need to do what makes sense in the face of peak oil right now ... and they're going on as if things will go 'back to normal'.

Dmitry Orlov's Reinventing Collapse is looking a little more right with each passing day ... and it scares the crap out of me. The age of the boondoggle has arrived ...

Anonymous said...

I like your evaluation old bird.It seems as if no one will admit we are being screwed by those in power

I think I have figured out why Harry Reid is acting the was he is in the senate.Reid has been "Friends"with those on the other side,and will not let politics get in the way of the friendships with those on the other side.Which means we are screwed,once again.He will not go "knockdown drag out"with the obstructionist rethugs in the senate.

I do not know at this point whether to keep my head down or try and expand my bee thing past the 120-150 target I am shooting for this year.500-1000 is the size most small commercial guys.With the way things are going this may be the largest size practical in the "low energy"future we seem to be headed into....

I have reviewed the responses to my rant a couple of days ago...

The anoni"mouse"835...Insider again insisting "I just don't understand".I have been a info junkie since the creation of the net.I know who caused this mess,...and who got paid off..The info is not hard to find.And I would like to remind him that many of those poor welfare types are part of the .5 million vets of our current games in the "sandbox"They have learned a lot of tricks about urban warfare...and will kill in a heartbeat.5 or 6 tours,and the "good"part of a person is burned out by war.I have a brother who was LEO He retired from the force,and told me some stories about why it is becoming so damn dangerous to be a lawman now...VETS.
That is also why many cities are hiring ex-mil for police.Notice the deathrate for citizen encounters with police have went up?Its because so very many of the cops are ex-mil...and the .mil way to solve a problem is to kill the problem...

Scadia,were your dreams reality...I think Obama is still "getting his sea legs"Problem is the ship is sinking,and the hurricane is just starting...

I am telling everyone I know now to garden/plant everything that will the ton...It will be needed.



Anonymous said...

An American joke:

Q. Why does Treasury only have 10 minutes for morning tea ??

A. If they had any longer, they would need to re-train all the economists.


Anonymous said...

Good lord! Recovery? House prices rose 1.9% in January in the UK.

Embattled British homeowners were offered a glimmer of hope today as the latest monthly house price survey from the Halifax showed that average prices rose by 1.9 per cent last month.

The UK's biggest mortgage lender, owned by the part-nationalised Lloyds Banking Group, said that the rise last month offset December's fall of 1.6 per cent.

The average house costs £163,966, the Halifax said.

But the Halifax, whose survey is among the most carefully watched barometers of market confidence, cautioned against paying too much attention to any single month.

Prices have still fallen by 5.1 per cent over the past three months and have slumped by 17.2 per cent over the previous 12 months.

Martin Ellis, the Halifax's housing economist, said: "There are some very early signs that market activity may be stabilising, albeit at quite a low level.

"Nonetheless, continuing pressures on incomes, rising unemployment and the negative impact of the dislocation of the financial markets on the availability of mortgage finance are expected to mean that 2009 will be a difficult year for the housing market."

Today's survey from the Halifax comes on the day that the Bank of England is expected to cut interest rates for the third month in a row in a desperate effort to revitalise the economy.

The Bank is expected to cut the cost of borrowing by 0.5 per cent to 1 per cent, their lowest level ever.

Earlier this week, however, the Building Societies Assocation urged the Bank to keep rates on hold, arguing that borrowing costs were now low enough.

The Federation of Small Businesses gave the Bank the same message today, saying that it was bank's willingness to lend that was now the real issue.

The Halifax's survey comes after two economic indicators this week offered further indications that the nation's economic woes could be close to bottoming out.

The Chartered Institute of Purchasing and Supply (CIPS)/Markit survey showed that activity in the services sector slumped again in January, but at a slower pace than analysts had expected.

A second CIPS survey of construction also showed that output is declining across the industry, but again at a slower rate than previously.

Stoneleigh said...

Ed Gorey,

This blog has on many occasions recommended short term US Treasuries Bills as a relatively safe investment. In light of the article that Ilargi just highlighted ("U.S. Debt Default, Dollar Collapse Altogether Likely"), are short term T-Bills still recommended?

IMO it's not time to panic about the dollar, or the fate of short term T-bills. I think the dollar rally still has quite some way to go, near-term pullbacks notwithstanding. The dollar has been rallying for nearly a year, and it wouldn't surprise me at all if it continued to do so for at least another year. A flight to safety is a powerful force.

I wouldn't buy long bonds, as I've said before, but you should be fine with short term ones for a long time to come. Of course there's no such thing as a no-risk scenario in the world we are rapidly moving into, but the risks associated with short term T-bills are far lower than for almost anything else. I'm a fan of cash under one's own control, but for larger amounts that simply may not be practical.

I do think a US debt default is inevitable, but I don't think we're anywhere near that point now. I do expect every dollar pullback or bond yield rise to bring out another bout of angst though.

IMO we are very close to a sharp fall in equities - quite possibly another cascade event - that will spark some very alarming headlines. We should see a fear-driven spike low, perhaps by the end of this quarter. This should be the set up for a substantial rally lasting at least as long as the recent rally-that-didn't-look-like-one, if not longer. It would mean some optimistic talk this summer, and congratulations to Obama and his team for saving the world.

Those expectations would be rapidly dashed though as this autumn won't be pleasant IMO. I think that's when we'll see a panic develop that really spreads from Wall Street to Main Street. Last year I said that 2009 would be the year that Wall Street eats Main Street for breakfast and I stand by that.

Anonymous said...

@Stoneleigh: "IMO we are very close to a sharp fall in equities - quite possibly another cascade event - that will spark some very alarming headlines. We should see a fear-driven spike low, perhaps by the end of this quarter. This should be the set up for a substantial rally lasting at least as long as the recent rally-that-didn't-look-like-one, if not longer. It would mean some optimistic talk this summer, and congratulations to Obama and his team for saving the world."

Bob Hoye, the market historian who has been quite accurate in calling the market trend so far, seems to hold his view of rally from now to some time in April and a bigger fall follows from there.


Anonymous said...

for those who have not read
Fisher's 1933 paper
, here are the two excerpts about the 9 factors and 10 steps that seems to be in the replay:

24. Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links: (1) Debt liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be (4) A still greater fall in the net worths of business, precipitating bankruptcies and (5) A like fall in profits, which in a "capitalisitc," that is, a private-profit society, leads the concerns which are running at a loss to make (6) A reduction in output, in trade and in employment of labor, These losses, bankruptcies, and unemployment, lead to (7) Pessimism and loss of confidence, which in turn lead to (8) Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way.

27. In actual chronology, the order of the nine events is somewhat different from the above "logical" order, and there are reactions and repeated effects. ...

I. (7) Mild Gloom and Shock to Confidence
(8) Slightly Reduced Velocity of Circulation
(1) Debt Liquidation

II. (9) Money Interest on Safe Loans Falls
(9) But Money Interest on Unsafe Loans Rises

III. (2) Distress Selling
(7) More Gloom
(3) Fall in Security Prices
(1) More Liquidation
(3) Fall in Commodity Prices

IV. (9) Real interest Rises; Real Debts Increase
(7) More Pessimism and Distrust
(1) More Liquidation
(2) More Distress Selling
(8) More Reduction in Velocity

V. (2) More Distress Selling
(2) Contraction of Deposit Currency
(3) Further Dollar Enlargement

VI. (4) Reduction in Net Worth
(4) Increase in Bankruptcies
(7) More Pessimism and Distrust
(8) More Slowing in Velocity
(1) More Liquidation

VII. (5) Decrease in Profits
(5) Increase in Loses
(7) Increase in Pessimism
(8) Slower Velocity
(1) More Liquidation
(6) Reduction in Volume of Stock Trading

VIII. (6) Decrease in Construction
(6) Reduction in Output
(6) Reduction in Trade
(7) More Pessimism

IX. (8) Hoarding

X. (8) Runs on Banks
(8) Banks Curtailing Loans for Self-Protection
(8) Banks Selling Investments
(8) Bank Failures
(7) Distrust Grows
(8) More Hoarding
(1) More Liquidation
(2) More Distress Selling
(3) Further Dollar Enlargement


Anonymous said...

Stoneleigh --

There is often talk of US debt default. But it appears that there are various interpretations of what it means. I was wondering if you mean default through inflation or complete and total default?

Anonymous said...

Rogers Says Russia May Break Up, Mulls Bet Against Ruble


Anonymous said...


Thanks for the Chris Hedges commentary. I think he expressed ideas I was grappling with, but had no idea how to articulate. Hedges' concept of inverted totalitarianism is the reason why I have such an extreme reaction to Mish (and Denninger), not his analysis, but his politics and because Mish's politics are so intertwined with his analysis I sometime have to force myself to read his stuff.

One thing he insists on that I find wholly disturbing is his pushing for bankrupt states and municipalities to privatize prisons. I really do believe that the formula of a wholly privatized prison system along side a privatized legal system (like the current arbitration system for credit card disputes that are oftentimes made mandatory by those little insertion cards included in your bill and are designed to ensure consumers always have to uphold their end of the contract) unleashed in the crucible and chaos of this economic crisis would be a true triumph of the inverted totalitarian corporatists.

I'm not even sure that such a system would require a charismatic figurehead leader, but rather would operate most successfully in an anonymous cell structure similar to what "terrorist" organizations use. This is worse than feudalism because the system is anonymous, faceless, and rootless leaving everyone confused and in poverty but with no obvious target at which to direct their anger.

I think Mish assumes that the true danger to "American freedom" comes from the left in the form of "socialism." But, I think the largest danger has been from an unholy alliance of the Christian coalition, Libertarians, and Reganites and the toxic interplay of ideology, theology, propaganda, and fear mongering that has endured for 30 years. I just don't think he's capable of understanding how Libertarian thinking has been "gamed" to make sure that believers stay true to the cause without realizing they are being used to lay the trap.

Linda S.

westexas said...

Re: The Relevance of Peak Oil

It's interesting to go back and look at crude demand and prices in the Thirties. As best that I can tell, worldwide oil demand fell only one year, in 1930, and rose thereafter. After Texas succeeded in controlling the output from the East Texas Field, oil prices rose from 1931 to 1937 (apparently BP puts the constant dollar rate of increase at +11%/year from 1931 to 1937). Here is a link to an Oil Drum discussion of crude oil in the Thirties:

And apparently there were three million more cars on the road in 1937 in the US than in 1929. Today, hundreds of millions worldwide of people want to drive a car for the first time.

Our middle case is that the top five net oil exports--Saudi Arabia; Russia; Norway; Iran & the UAE-- have already shipped about 20% of their post-2005 net oil exports and by 2018 they will have shipped about 80% of their post-2005 cumulative net oil exports.

Our three closest sources of imported oil--Canada; Venezuela and Mexico--went from a combined net export rate of 5.0 mbpd in 2004 (EIA) to an estimated rate of 3.9 mbpd in 2008. At this rate, they would collectively approach zero in about 14 years.

IMO, the big difference between the Great Depression and the Greater Depression is that we are facing an accelerating rate of decline in world net oil exports. Regarding demand, I suspect that 2009 is to our present circumstances as 1930 was to the Thirties.

BTW, as Greyzone noted, my long time advice has been to "Cut thy spending and get thee to the non-discretionary side of the economy." You can find my essay by doing a Google Search for: ELP Plan.

Finally, to give credit where credit is due, the AE folks were more accurate about oil prices that I was. While I am never surprised by price volatility, I am surprised at how sharply they have fallen, but in my opinion, the long term accelerating decline in net oil exports is soon going to outpace the decline in demand--especially if we use the Great Depression as a model.

Stoneleigh said...


I was wondering if you mean default through inflation or complete and total default?

There won't be any inflation for a long time to come. It isn't possible to expand the supply of money and credit relative to available goods and services when we are experiencing the largest deleveraging (ie destruction of credit) in history.

A default would be preceeded by a severe dislocation in the bond market, sending interest rates into the double digits in nominal terms (and higher in real terms adjusted for deflation). This will precipitate a much larger wave of credit destruction than we have seen so far and will therefore be highly deflationary.

Eventually the US will not be able to meet its obligations on its bonds at the high rates it will have to pay to attract buyers, but we are not at that point now. For now we are looking at a pull back in bond prices, and concomitant rise in yields, but IMO the flight to safety has further to go once that counter-trend move is over. That means interest rates staying low for now, in nominal terms at least.

Stoneleigh said...

Westexas, my opinion, the long term accelerating decline in net oil exports is soon going to outpace the decline in demand--especially if we use the Great Depression as a model.

My take on this , called Energy, Finance and Hegemonic Power is in the primers list on the right hand side of the TAE main page. I agree with you that oil will bottom early in this depression.

Demand collapse will continue, at least where normal economic activity is concerned, but the beginning of supply collapse is not far off IMO. Military demand will pick up sharply down the line, as we start to see an intensified resource grab. This is a recipe for substantial price increases in the not too distant future, and with purchasing power falling off a cliff that means a great deal of hardship for ordinary people.

scandia said...

Quelle surprise! Just read that the gov't overpaid for the " assets" they bought under TARP. Looks to me like the boyz made off with approx. 75B you think the low confidence levels might have anything to do with the depth of corruption, the unholy alliance, of Wall St. and the State.
Here in Canada 2 Parties( Cons & Libs ) hold the largest number of seats in the House( sorry don't know the numbers)these seats are now occupied by MPs who have taken a vow of silence, have vowed to only speak the message issued to them by " the leader". All of them were elected to represent their constituency on The Hill. All of them have switched allegiance from the the community to " the leader". Why bother electing messenger boys and girls. " The Leader" can just send me an e-mail!And, now that the public have been informed that that is how the game is now played, we wouldn't want to ask our MP and embarassing questions that we know he is not permitted to answer. Sigh, most discouraging...I've been snookered, check- mated or whatever. Definitely, as Snuffy says, screwed.

weatherman said...

The mind plays tricks,
daily headline (side
column) reads
............ "Buy
America! ..Everything
must go!",

but I saw


must go!

weatherman said...


Don't just despair, become a political activist.

Promote electoral reform, and MPs being accountable to the electorate, not to their party leader. Others out there feel the same as you.

Apathy amongst the population has brought us to this point, but until some kind of grass roots movement pushes for free votes in Parliament without fear of retribution...

Wait a minute, wasn't this a key plank in the Reform Party platform? Where are all those Reformers now? Oh yes, they are in the Government.

Anonymous said...

ilargi said

"We'll see really crazy cuts in services,"

You missed internet services! -Telus down all morning in Victoria and the things I play with in themarket did jump ups and I wasn't there - phooey!

scandia said...

Weatherman, I hear you and I have been intensely active in the great fight for more than 4 years. I am suffering burnout. I need to step back this year and restore my spirit. Well not totally step back or I wouldn't be at TAE on a daily basis. I've had some things to learn, for one learning to be as tough as a woodpecker's lips.Not knowing " how the world works" has made my efforts all for naught.
As Tommy Douglas is quoted as saying, " I'll just lie me down and bleed awhile..."