Saturday, February 7, 2009

February 7 2009: The Unbearable Lightness

Detroit Publishing Co The Unbearable Lightness 1905.
Palm Beach, Florida

Ilargi: In the February 2 '09 edition of the Daily Telegraph, ex-World Bank chief economist Joseph Stiglitz was interviewed:
Professor Stiglitz, the former chair of the White House Council of Economic Advisers, told The Daily Telegraph that Britain should let the banks default on their vast foreign operations and start afresh with a new set of healthy banks.

"The UK has been hit hard because the banks took on enormously large liabilities in foreign currencies. Should the British taxpayers have to lower their standard of living for 20 years to pay off mistakes that benefited a small elite?" he said. "There is an argument for letting the banks go bust. It may cause turmoil but it will be a cheaper way to deal with this in the end. The British Parliament never offered a blanket guarantee for all liabilities and derivative positions of these banks," he said.

Mr Stiglitz said the Government should underwrite all deposits to protect the UK's domestic credit system and safeguard money markets that lubricate lending. It should use the skeletons of the old banks to build a healthier structure.

"The new banks will be more credible once they no longer have these liabilities on their back." Mr Stiglitz said the City of London would survive the shock of such a default because it would uphold the principle of free market responsibility. "Counter-parties entered into voluntary agreements with the banks and they must accept the consequences," he said. Such a drastic course of action would be fraught with difficulties and risks, however. It would leave healthy banks in an untenable position since they would have to compete for funds in the markets with state-run entities.

Yesterday, 4 days later, German news service Deutsche Welle talked to Stiglitz:
Q: Economists Nouriel Roubini and Nassim Taleb, who predicted the global economic downturn, have called for a nationalization of banks in order to stop the financial meltdown. Do you agree?

A: The fact of the matter is, the banks are in very bad shape. The U.S. government has poured in hundreds of billions of dollars to very little effect. It is very clear that the banks have failed. American citizens have become majority owners in a very large number of the major banks. But they have no control. Any system where there is a separation of ownership and control is a recipe for disaster. Nationalization is the only answer. These banks are effectively bankrupt.

The immediate and obvious question for me is: what makes the UK so different from the US? Or does Stiglitz mean to say that nationalization is the same thing as letting a bank default? That would be a strange statement. Nationalization clearly is not the only option in the US. Washington can at any moment demand the return of all bail out funds, take its hands off the banks, and let them fail, as Stiglitz advises London to do.

Citigroup recently estimated the total "value" of troubled U.S. bank assets at $5.7 trillion. While that is a ridiculously low estimate (total derivatives positions of just the big 3 banks are north of $170 trillion), it’s sufficient to make you realize that nationalization, which would in effect mean that the taxpayer inherits the losses, is a very expensive proposal. Robert Reich thinks Obama may be planning it anyway, and suspects that the size of upcoming next bank bail-out is the reason behind the speed with which the stimulus plan is shoved through Capitol Hill.

If true, it could potentially turn the calamity that has been Washington's handling of the financial crisis thus far into an unmitigated disaster for Americans. It's by no means impossible that the final pricetag will be in the order of $100 trillion. Of course there are still voices who will claim that derivatives are a zero-sum game, but we won't now that until we see the paper, will we? And that is what needs to happen, certainly in case nationalization is seriously considered. Still, what are the chances it will be done properly and openly? It would mean a 180 degree change in policy, which to date has focused on hiding the assets at any cost. Tim Geithner's recent comments during his confirmation hearing made it clear he wants to keep all options open to steer clear of marking the paper to market.

What it all shows, once more -as if we needed confirmation- is that Wall Street's influence in the White House is far too large, which is very unhealthy for the man in the street. There is but one option that makes sense for US citizens , and it's not hard to see that. We now have the insane situation that shareholders and bondholders in failed institutions can reap in profits. That is not just utterly nuts, I'm not so sure it's even legal. Yes, there will be unbelievably grandiose losses if we let the banks fail. But those losses will come no matter what. The only thing the current policy, and potential nationalization achieves is the losses are transferred from those who should incur them, the share- and bondholders, to you and your families.

All the money spent so far, which is narrowing in on the $10 trillion mark, has been a complete waste from the point of view of Joe and Jane Blow. We should demand it all back, and make Obama vow not to throw one additional penny in the losers pit. None of this is in the interest of the people who voted him into office. The banks as they exist in their present form are not just useless for America, they are its main enemy. All the talk of how the banks make the economy function, and the end of the world that would come on the heels of Wall Street bankruptcies, is nonsense. What's more, the bankruptcies are inevitable to begin with. The US as a going concern doesn't have enough money to cover the toxic losses that lie fermenting in hiding. Nationalization of lost wagers risks bankrupting the entire American economy. It's perverse, that's what it is. It's crystal clear that these institutions are beyond broke. They are broken. The only objective behind the bank bail-outs is to take more money out of your children's pockets. In the next generation of thesauruses, if you look up corporate fascism, you’ll find the US economic and political system.

But now I still don't know why Stiglitz proposes different solutions for identical problems.

Ilargi: Oh, wait, I wanted you to see this quote from the Obama economic team's main finance guru, Larry Summers. Incidentally, Paul Volcker recently accused Summers of slowing down the attempts to form the economic advisory board the president presented yesterday. A mere two and a half weeks into his presidency, Obama is confronted with ugly power games. This quote comes from the 1994 book FAITH AND CREDIT: The World Bank's Secular Empire, by Susan George and Fabrizio Sabelli. At the time he said it, Summers was Treasury Deputy Secretary under Clinton. Robert Rubin was Secretary. Feel free to read it twice and let it sink in:
Lawrence H. Summers: The laws of economics are like the laws of engineering. There's only one set of laws and they work everywhere. One of the things I've learned in my time at the World Bank is that whenever anybody says "But economics works differently here", they're about to say something dumb. [ p. 106 ]

There are no...limits to the carrying capacity of the earth that are likely to bind any time in the foreseeable future. There isn't a risk of an apocalypse due to global warming or anything else. The idea that we should put limits on growth because of some natural limit, is a profound error and one that, were it ever to prove influential, would have staggering social costs. [ p. 109]

Ilargi: Yes, that is the same man who today presides over Obama's economic plans. Are we getting the picture by now? Larry Summers is a walking talking lump of brain damage. Who, it just so happens, decides over your children's future welfare. Go read that quote again and tell me how you feel.

Nationalized Banks Are "Only Answer," Economist Stiglitz Says
DW-WORLD: Many experts fear that while things are bad now, we haven't seen the worst of the crisis yet. Do you share the belief that we are facing a long decline that could rival the great depression?
Joseph Stiglitz: We live in a very different world than during the Great Depression. Then, we had a manufacturing economy. Now we have a service-sector economy. Many people in the United States are already working part time because they can't get full-time jobs. People are talking more about the 'comprehensive' measures of unemployment, and these show unemployment at very high levels, around 15 percent. So it clearly is a serious downturn. Another big difference between now and the Great Depression is then we didn't have a safety net. Now we have unemployment insurance.

Economists Nouriel Roubini and Nassim Taleb, who predicted the global economic downturn, have called for a nationalization of banks in order to stop the financial meltdown. Do you agree?
The fact of the matter is, the banks are in very bad shape. The U.S. government has poured in hundreds of billions of dollars to very little effect. It is very clear that the banks have failed. American citizens have become majority owners in a very large number of the major banks. But they have no control. Any system where there is a separation of ownership and control is a recipe for disaster. Nationalization is the only answer. These banks are effectively bankrupt.

The Institute of International Finance estimates that the private flow of capital to developing countries will shrink by about two-thirds. Are we facing a situation where we could see a total collapse of many developing countries?
I think many governments of emerging nations actually have a much better central banking system than the United States. They realized the risks of excessive leverage, excessive dependance on real estate lending and so they took much more prudent actions. Many developing countries also built up large reserves and are in a better position to meet this crisis than they were a decade ago. But some will face very difficult times, potentially defaults. Some of these countries are suffering from having paid too much attention to what has gone on in the United States.

Should steps be taken to help these developing countries?
Very definitely. I think it is absolutely imperative not just for the interest of these countries, not just from a humanitarian perspective, but from the perspective of global stability. It is not possible to have a strong global economy when there are large pockets of economic turmoil. The World Bank has called for advanced industrial countries as they are bailing out their own industries and provide subsidies, to set aside some amounts for the developing countries, who can't compete on this uneven playing field.

US President Obama blasted banks for paying out billions in bonuses to executives while still on brink of collapse. Do yo agree with him that their behavior is "shameful" and "irresponsible"?
Yes, it is shameful and irresponsible. But it is not a surprise ... for years the executives of American firms have defended their outrageous compensation, saying it's important as an incentive scheme. How in the world can you give bonuses of billions of dollars when your firm has had record losses of billions of dollars? Unless you're rewarding people for failure you shouldn't be getting bonuses, you should be getting penalties.

In her speech at the World Economic Forum, German  Chancellor Merkel warned the U.S. of protectionism and criticized subsidies for American auto companies. Is she correct? Do you see a danger that the U.S. will resort to protectionist measures?
Yes, very clearly. We have always been aware that protectionism takes two forms: Tariffs and subsidies. Subsidies distort the playing field just like tariffs do. Subsidies are even more unfair and even more distorting, because while developed countries can give subsidies, poor countries can't afford to do so. Rich countries are distorting the level playing field by giving huge subsidies, not necessarily in the intention of protection, but with the consequence of protection.

Merkel recently called for an international financial oversight body, and concensus on the issue is growing. How realistic do you think it is that governments and companies would give up sovereignty to an international entity?
Merkel's idea is a very important one, which I have long supported. You need to have coordination of global economic policy that goes beyond the IMF, which has failed, and the World Bank. You cannot say that we have open borders without global regulation. It is inconceiveable as we go forward that we would allow financial products that are risky, manufactured in countries with inadequate regulation, to come without regulation into the United States and vice versa. International companies that are committed to gobalization should be at the forefront of calling for international regulation.

Fix the system, not the cause
There are some who believe that it wasn't an apple that tempted Adam and Eve, it was actually a banana. Whatever fruit it was that cast them out of the garden doesn't matter, though; the system failed. We are facing failed systems today in economics, politics and taxes, yet we aren't trying to fix them. We are simply rearranging temptations. We'll never stomp out lying, or cheating. We'll never stomp out avarice. Try as President Obama might, a salary cap on chief executives' pay isn't going to send much of a message to people who work in the finance industry, an industry built around making money. You and I both know some crafty accountant is right now figuring a way around those caps. When it comes to taxes, the system there, too, is flawed. When some of the most savvy and educated people in the country can't get their taxes straight, you know it's time to fix what the IRS acronym should really stand for: Internal Revenue System. Pork-barrel politics need the same treatment. The barrel needs to be emptied and crushed. Those political days should be long gone.

In short, the Obama administration has misstepped. It's focusing on the causes of failures rather than the system of failures. Back up the truck, Barack, and start again. It's appalling that "a little," maybe 1%, maybe 5% -- or maybe even 50% -- of the current fiscal stimulus package is admittedly wasteful spending by the administration and politicians on Capitol Hill. That's like saying, "I only cheated a little." We operate on a rules-based accounting system in the United States. The rest of the world pretty much operates on an "intent-based" system. Hence, our rules are, well, meant to be broken. The term loophole wouldn't exist if we moved to an intent-based system -- and simplified it. There is no reason on earth that a tax filing should come to 24,000 pages, as General Electric Co.'s has. Similarly, an intent-based system should be part of Wall Street's way of doing business. Transparency is something to avoid in finance. Darkness produces profit; when both sides of a trade know what the other holds, transparently, there go margins.

The hundreds of trillions of dollars in derivative instruments that Wall Street can only account for in "nominal value" terms -- because who knows what the real value is -- needs to be called in and accounted for. To be sure, none of these things will be easy to do. But none of these things are even being addressed. Throwing more than a trillion dollars at a system that is broken is not going to fix the problems before us today. If the $350 billion we threw at the problem just a few months ago didn't fix things, and we didn't learn a lesson from that, well then fool us once again. And we should be ashamed. The great infrastructure spending we heard about accounts for less than one-fifth of the new stimulus bill. Many of the most important issues, such as spending on water infrastructure, have been slashed. Meanwhile, more than one-third of the bill includes new tax cuts: the rationale that caused much of the mess we are in today. We need a new operating system, not version 3.0. Otherwise, I'm afraid to say the system will just crash again. And that would be a sin given all the goodwill in the world right now. Furthermore, it's just bananas.

IMF Says Advanced Economies Already in Depression
Advanced economies are already in a depression and the financial crisis may deepen unless the banking system is fixed, International Monetary Fund Managing Director Dominique Strauss-Kahn said. "The worst cannot be ruled out," Strauss-Kahn said in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. "There’s a lot of downside risk." Ten days ago, the IMF cut its world-growth estimate for this year to 0.5 percent, the weakest pace since World War II. Stimulus packages alone won’t succeed in dragging the global economy out of recession unless confidence is restored in the banking system, Strauss-Kahn said today. "All this will work if, and only if, the different countries are likely to do what they have to do in terms of restructuring the banking sector," he said. "And today it’s not done."

The U.S. economy has lost 3.57 million jobs since a recession started in December 2007, its biggest employment slump of any economic contraction in the postwar period as companies from Macy’s Inc. to Caterpillar Inc. cut costs. The U.K. economy will shrink this year by the most since 1946, the IMF forecasts. "There is hope that the fiscal and monetary stimulus measures being implemented around the world can help turn things around," said David Cohen, Singapore-based director of Asian economic forecasting at Action Economics. "But there is still the risk it can be short-circuited by further financial turmoil." The U.S. Senate is due to vote early next week on an economic stimulus package totaling at least $780 billion that President Barack Obama said is needed to prevent the economy from sinking into a deeper recession. Asian nations from China to Singapore and India have pledged more than $685 billion on their own spending programs.

The Obama administration is considering subjecting banks to a new test to determine whether they require fresh capital injections as part of a rescue plan to be unveiled by Treasury Secretary Timothy Geithner next week, people familiar with the matter said. Governments should be ready for "full-fledged" intervention, acting quickly to sell or wind-up insolvent lenders, Strauss-Kahn said. While the European Central Bank, which left interest rates unchanged this week, may have more room to cut borrowing costs, such a policy may not be as important as restructuring the region’s banks, he said. "We’re probably not very far from the point where the question of interest rates is not the most important question," Strauss-Kahn said. "Providing direct liquidity to the market, restructuring the banking sector, may have more influence on demand than interest rates."

In Asia, "there’s still room for bigger stimulus packages," the IMF official said. Malaysia, for example, may introduce a second stimulus package larger than November’s 7 billion-ringgit ($1.9 billion) plan, he said. Developing Asia will probably expand 5.5 percent this year, the slowest pace since 1998, the IMF said in last month’s update of its World Economic Outlook report. The region may expand 6.9 percent next year, the fund forecasts. Asian nations will need a recovery in the global economy before the region can exit a slowdown, the IMF said this month. Strauss-Kahn said today the fund’s forecast for a recovery to start in 2010 is "very uncertain."

Demand for IMF loans is rising in nations suffering from weaker export sales, banking industry turmoil and deteriorating investor confidence. The organization has so far agreed to lend $47.9 billion to countries affected by the crisis, including Belarus, Hungary, Iceland, Latvia, Pakistan, Ukraine and Serbia. Strauss-Kahn said he agreed with Poland that the eastern European nation isn’t in need of assistance from the fund now, but may require financial aid in the future. The fund may collaborate with some countries to restore confidence, without necessarily providing immediate loans, the official said. "Some need for precautionary arrangements may appear," he said, without naming specific countries.

Critics of the fund say it’s failed to keep up with the pace of change as the worldwide recession deepens. The IMF and similar institutions are "incapable" of coping with the global financial crisis, because their resources can’t keep up with demand, former World Bank President Paul Wolfowitz said on Feb. 4. Russian Prime Minister Vladimir Putin has criticized the World Bank, IMF and World Trade Organization as anachronistic organizations that give no voice to emerging economies. The IMF and the World Bank were set up at the 1944 Bretton Woods conference. The IMF was designed to prevent crises in the international monetary system and to provide financing to distressed countries.

Fed's Yellen sees dynamics similar to Depression
The United States is not facing a downturn as deep as the Great Depression, but many of the current dynamics are similar, driving the need for "urgent, aggressive action" to stop a deepening recession, a top Federal Reserve policy-maker said on Friday. The dynamics of the financial markets as well as the global nature of the current downturn both have similarities to the depression of the 1930s, Janet Yellen, president of the San Francisco Federal Reserve Bank, told reporters after a speech to the 128th Assembly for Bank Directors meeting on the Kohala Coast of Hawaii.

"The economy is in the midst of a downward spiral, and that calls for strong policy responses," Yellen said. "Government policies to restore confidence, create jobs by boosting the demand for goods and services, and improve the functioning of our financial system represent our main hope of avoiding a very severe economic contraction." Yellen is a voting member of the policy-setting Federal Open Market Committee in 2009. Yellen, speaking on the same day the government announced the biggest job losses in 34 years, said now is not the time to dither or debate endlessly on the shape of fiscal stimulus. "It is critical that decisions on these matters be made on a timely basis," she said.

The U.S. jobless rate hit 7.6 percent in January, the Labor Department said on Friday. Yellen said most economists see the rate peaking in the 8 percent or 9 percent range, still short of the peak of the 1981-82 recession and far below the 20 percent plus rate of the Great Depression. The U.S. Senate on Friday evening reached a deal on a $780 million stimulus package to stem the recession. The Senate is expected to vote on the measure soon, and if it passes then lawmakers would have to resolve differences between the Senate bill and an $819 billion version passed by the House of Representatives last week.

Yellen said consumer spending had been stopped in its tracks as American households have hunkered down and acted to boost their savings in response to spiraling unemployment and a "staggering" $10 trillion loss of household wealth. Yellen said that "unfortunately, there is no end in sight" to the housing woes that triggered the current recession, with inventories of unsold homes remaining high and private mortgage credit still scarce. Meanwhile, a yawning output gap in the U.S. economy suggests "inflation will remain, for some time, below levels that are consistent with price stability."

Still, Yellen said outright deflation, while possible, was less of a worry to her than rising "real" interest rates now that nominal rates are already as low as they can go, inflation is falling, and the economy is still contracting. The U.S. inflation rate, both headline and the core rate excluding volatile food and energy costs, is likely to fall below 1 percent in 2009, she said. "The committee does not regard it as desirable to allow inflation to fall to very low levels," she said, referring to the policy-setting FOMC. Yellen said the FOMC's recent comments that it intends to keep short-term interest rates low for a considerable period are one way it can bolster the economy now that it has reached the "zero bound" on the fed funds rate.

Yellen said past banking crises have shown the importance of removing bad assets from banks' balance sheets, and looked for a proposal on that score from the Obama administration soon, as a prerequisite to restoring stability to the financial system and, ultimately, the economy. Treasury Secretary Timothy Geithner is due on Monday to outline a "comprehensive plan" to stabilize the financial system in a speech set for noon Eastern time (1700 GMT). "As long as hard-to-value, troubled assets clog their balance sheets, banks find it difficult to attract private capital and to focus on new lending," Yellen said.

She urged bank directors to act in ways that would help restore economic growth. "My hope is that, while avoiding imprudent practices that would put your institution at risk, you will also resist extreme risk averse, since it would undermine efforts to get the economy going," she said. As the Fed continues to cross "traditional boundaries" in providing liquidity to various corners of the credit markets, Yellen said she was "absolutely open" to the idea of the central bank buying long-term Treasuries if it would help the overall functioning of the credit market. Meanwhile, Yellen told reporters the Fed needed to fight back against the notion that its liquidity efforts would inevitably lead to higher inflation and higher interest rates, terming the notion "ludicrous."

Treasury Plans More Expansive Approach to Financial Rescue
Treasury Secretary Timothy Geithner's revamp of the $700 billion financial-sector bailout is likely to rely on a broad range of tools, from injecting additional capital into banks and helping homeowners avoid foreclosure to expanding the roles of the Federal Reserve, Fannie Mae, Freddie Mac and the Federal Deposit Insurance Corp., according to people familiar with the matter. The final plan isn't likely to include the creation of a government bank to directly buy bad assets from banks, as was once envisioned. That plan foundered because of its cost and complexity. Instead, the goal will likely be to expand a Fed program to reboot credit markets, among other ways to relieve banks of their bad bets.

The bailout plan has evolved in recent weeks as policy makers debated the merits of various approaches. The Obama administration has taken longer than some expected to finalize a plan as it sought to craft what it has called a "comprehensive" approach to replace the ad hoc initiatives of the previous administration. Mr. Geithner is scheduled to give a speech midday Monday on the bailout overhaul. It isn't known if he will announce all the elements at the same time. Government officials are expected to continue working on the plan through the weekend, and its composition could change. The Treasury secretary is expected to sell the program as a framework to address the financial crisis by attacking its root causes: defaulting loans and rotten assets clogging the books of financial institutions.

The government has already committed $350 billion of the $700 billion financial-sector bailout fund approved by Congress last fall. Many economists -- and some lawmakers -- expect the administration to eventually ask Congress for more money. To improve the bailout's poor public image, the administration is considering renaming the $700 billion Troubled Asset Relief Program and making it independent of the Treasury. It is also going to announce new terms and conditions for companies that receive or have already taken government aid -- in addition to the new executive-compensation limits announced this week -- including a demand that they report how the money is being spent.

The rescue is shaping up to include a second round of capital injections with tougher terms. The government is looking to get money into banks by buying preferred shares that convert into common equity within seven years; that avoids diluting current shareholders' stakes while helping banks better withstand losses. The Treasury may also allow banks that already received capital injections to convert the Treasury's preferred shares to common stock over time. The Treasury is considering expanding the Fed's Term Asset-Backed Securities Loan Facility to include assets beyond the student, credit-card and auto loans it was set up to absorb. The program was set up to spur the consumer-loan market by providing financing for investors to purchase securities backed by consumer loans. Another idea being considered is government insurance to limit banks' losses on certain assets.

The Obama administration is considering giving the FDIC the power to help dismantle large, troubled financial firms beyond the depository institutions over which it currently has authority. Such a move could require legislation. Top government officials, including Mr. Geithner, his predecessor Henry Paulson and Federal Reserve Chairman Ben Bernanke have said there needs to be a government entity empowered to wind down failed financial institutions that aren't banks. Regulators pointed to problems that occurred when Lehman Brothers Holdings Inc. and American International Group Inc. ran into trouble, in part because no federal body had the authority to step in and steer the firms toward an orderly demise.

The FDIC could also guarantee a wider range of debt that banks issue to fund loans, according to people familiar with the matter. The guarantees could help free up credit to companies and consumers. Currently, the FDIC temporarily backs certain debt with a three-year maturity. Government fficials could move to guarantee debt with maturities up to 10 years. For homeowners, the administration is expected to announce a plan that could include the creation of national standards for loan modifications to be adopted by mortgage giants Fannie Mae and Freddie Mac. The plan could include a mechanism to determine the value of homes facing foreclosure -- something that has proven hard to do -- which could speed negotiations with troubled borrowers.

A related move would see the government using taxpayer dollars to give mortgage companies an incentive to modify loans. One idea would help reduce interest rates by having the government match mortgage companies' interest-rate reductions to a certain amount. Mr. Geithner is also expected to express support for legislation that would allow judges to modify the terms of mortgages in bankruptcy court. With the financial crisis unabated, expectations are high for what Mr. Geithner will say. His speech will be a crucial test for the former Federal Reserve Bank of New York president, who is seeking to avoid the route taken by Mr. Paulson. The prior Treasury secretary's stuttering approach to the financial rescue helped taint its reputation. "People have the expectation that something fairly bold and creative is going to be presented," said Brian Bethune, chief financial economist with Global Insight. Indeed, stock markets rallied in part this week on the belief that Washington, buoyed by worsening economic news, will find some way to fix the financial ills.

U.S. decides on how to save banks
After weeks of internal debate, the Obama administration has settled on a plan to inject billions of dollars in fresh capital into banks and entice investors to purchase their most troubled assets.The new financial industry rescue plan, to be outlined in broad terms on Monday in a speech by Treasury Secretary Timothy Geithner, will not require banks to increase their lending. That is despite criticism that institutions that already received money from the Troubled Asset Relief Program, or TARP, either hoarded it or used the funds to acquire other banks.

The incentives to investors could be in the form of commitments to absorb some of the losses from any assets they purchase, should their values continue to decline. The goal is to relieve the banks of their worst assets so that private investors might then provide more capital. Officials hope that that part of the plan is not labeled a "bad bank" administered by the government, although they expect that some might call it that. No matter what it is called, the government would assume some of the risk of declining assets at the heart of the economic crisis. But by relying on a combination of private investors and government guarantees, the administration hopes to reduce its exposure to losses and avoid the problem of having to place a value on assets that the institutions have been unable to sell.

A central element of the plan would be a major expansion of a lending facility begun in November by the Federal Reserve Bank of New York when it was headed by Geithner. The program, which was initially financed by $200 billion in Fed money and $20 billion in seed capital from the $700 billion bailout fund, lent money to investors to buy securities backed by student, auto and credit card loans, as well as loans guaranteed by the Small Business Administration. Obama administration officials say they have rejected nationalizing institutions by taking large ownership stakes. They also will not immediately seek additional money from Congress beyond the $350 billion left in the TARP fund.

With reports of lavish executive pay, extravagant corporate retreats and expensive office renovations at some of the institutions receiving assistance, political support for the program has sharply eroded in recent weeks. And as the White House has put forward a stimulus package of about $800 billion, there is recognition that Congress will very likely balk now at another request for bailout money. But lawmakers said they expected the administration to seek more money for the rescue program later this year.

The banking plan will involve a close review of financial institutions, possibly including a so-called stress test to measure whether they have enough resources to weather a continued economic decline. It will also enable the government, when it provides a new round of investment, to convert the warrants for preferred stock it has already received from many institutions into common stock. The move, which essentially would swap debt for equity, would help relieve the balance sheets of those institutions, although it would also hurt other existing shareholders by diluting their common stock.

Lawmakers said they were told that Geithner would not spell out the details of much of the program next week, including how the government would use more than $50 billion from that program to help homeowners facing foreclosure. For weeks, administration officials have been exploring several alternatives for reducing the wave of foreclosures. One proposal involves Fannie Mae and Freddie Mac, the mortgage finance companies now under government control, to help further stabilize the housing markets by providing guarantees on low-rate mortgages.

Another proposal, said to be favored by Lawrence Summers, the senior White House economic official, would provide incentives to entice investors in pools of mortgages - and the companies that service mortgages - to refinance troubled home loans. An announcement on that part of the plan is expected to be made by President Barack Obama, lawmakers said, possibly as early as next week. Although critics have blamed the administration of George W. Bush for mismanaging the TARP fund by not pressing the banks receiving assistance to increase their lending, the new round of capital injections is not expected to come with government demands that the institutions provide more loans. But the new administration was expected to take other steps to encourage institutions to increase their lending, as well as to explain how much their lending had increased or decreased each quarter

Geithner’s Bank Rescue May Emphasize Guarantees Over 'Bad Bank'
U.S. Treasury Secretary Timothy Geithner’s strategy to aid the nation’s banks will likely emphasize guarantees of toxic assets over proposals to create a so-called aggregator bank that would remove them from balance sheets, according to people familiar with the plan. The government guarantees, which might be modeled on those already given to Citigroup Inc. and Bank of America Corp., may be coupled with the purchase of preferred shares in the banks that would be later convertible into common stock, some of the people said. The aggregator bank or ‘bad bank,’ has lost favor, in part because of the potential costs involved, they added.

"Our agenda is to begin to shape the architecture of a financial recovery plan that’ll help get credit flowing again," Geithner said before a meeting yesterday with Federal Reserve Chairman Ben S. Bernanke and other members of the President’s Working Group on Financial Markets. Geithner will announce the plan on Feb. 9. The Obama administration has its work cut out for it. U.S. banks have already racked up $745 billion in credit losses and have warned of more to come. Shares of Bank of America, the country’s largest bank, touched a 24-year low yesterday amid concern it would be taken over by the government. The stock recovered to end the day 3 percent higher at $4.84. The risk is that the administration’s measures will fall short of what some experts say is required to restore confidence in the financial system and get credit flowing again. Nouriel Roubini, a professor at New York University, has predicted that U.S. losses may ultimately reach $3.6 trillion.

Another advocate of dramatic action is Harvard University economist Jeremy Stein, tapped to join the White House’s National Economic Council under director Lawrence Summers. Stein, in a September op-ed piece in the New York Times, advocated that the government act as a "deep-pocketed private investor that sees a bargain buying opportunity -- Warren Buffett on steroids" to snap up the toxic assets. He’s also called for the government to conduct tough audits of the banks and to force those who are found insolvent to close or merge. Such a dramatic strategy isn’t likely this time, the people said. The administration, smarting over the fight in Congress over its $800 billion plus economic stimulus plan, is wary about asking lawmakers for more money now for the banks, according to some of the people.

That’s one reason why the administration looks to be backing away from setting up a giant aggregator bank to buy up the assets and at most may settle on a smaller version of that, they added. Less than $350 billion is left to be allocated in the $700 billion bailout fund lawmakers approved last October. The administration has already pledged to use $50 billion to $100 billion of the remainder to stem a surge in home foreclosures. The discussions on the financial rescue are fluid and will probably continue at least through tomorrow, the people said. Banks are also pressing for the plan to include a temporary easing of mark-to-market rules that require them to reduce the value of assets they hold. The firms maintain that at least some of the assets are not that impaired, arguing that investors are being too pessimistic about their ultimate value.

Senate Banking Committee Chairman Christopher Dodd said on Feb. 3 that such a change might be needed, although he made clear yesterday that he isn’t convinced. "I haven’t embraced it yet," the Connecticut lawmaker told reporters, adding that he intended to discuss the idea with Geithner. Geithner told reporters yesterday that the financial rescue package would be designed to "reinforce the recovery and reinvestment plan now working its way through Congress." The House has already passed an $819 billion version of the plan, while the Senate is still working on its own amidst opposition among Republicans and some fiscally conservative Democrats to the high price tag.

President Barack Obama told reporters flying with him on Air Force One that it was "important to make sure that the recovery package is of sufficient size to do what’s needed to create jobs. We lost half a million jobs each month for two consecutive quarters and things could continue to decline." A Labor Department report today may show that employers cut 540,000 positions in January, with the unemployment rate rising to a 16-year high of 7.5 percent, according to the median estimates of economists surveyed by Bloomberg News."The turn for the economy is nowhere in sight," said Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities Inc. in New York.

Treasury's Geithner To Unveil Financial Plan Monday
Treasury Secretary Timothy Geithner, as expected, will announce on Monday a "comprehensive plan" to stabilize the financial system. In a noon news conference, Geithner will lay out a "strategy to strengthen our economy by getting credit flowing again to families and businesses," the Treasury said. The plan will include an aid package for the banking industry, according to a well-informed source. first reported Thursday that the plan was essentially complete and would be announced Monday. According to the source, the banking component will be "smaller" than originally expected, include some "bad bank" component but be centered around government guarantees and insurance of troubled assets—what's called a "ring fence" concept.

"Everybody seems to like that," said the source. "There's a lot of internal conflict about whether this [the bad bank] makes sense ... they realize they have to do something with the bad bank." Other sources told CNBC that the "bad bank" would be able to buy up to $500 billion in troubled assets from financial institutions. Every bank would be subject to a uniform "stress test" to see if the bank needs additional capital, these sources said. At this point, the Obama administration appears to have settled on the most controversial aspect of the bad bank: pricing the toxic debt.

The government will buy toxic assets below the banks' "carrying value," which is basically market value, but not at fire-sale levels, the source said, representing something of a compromise. Such a pricing approach will likely placate both taxpayer and Congressional concerns about the government overpaying for the assets. But, the source noted, it could "trigger an accounting problem for the banks," presumably because the institutions will have to report a loss on the transactions. The Obama administration is now working on ideas to address that, which might entail a temporary suspension of certain accounting rules. It is unclear what that might be, said the source.

In making the announcement Friday, the Treausry also said Geithner would outline "new measures and conditions to strengthen accountability, oversight and transparency in how taxpayer dollars are spent." The Treasury statement provided no further details. The government is also known to be working on a group of measures to aid small business and consumers, including programs to support the housing market—from interest-rate subsidies to home foreclosure relief. Those subjects, as well as new rules on transparency for firms receiving government aid, have been discussed in the last week, according to a source. CNBC reported Friday that sources say a foreclosure component will be included in Monday's announcement.

The current plan is expected to be smaller that previously expected in that it will be paid for out of the remaining money in the original TARP plan, which is about $350 billion. Some of that money, however, will remain earmarked for home foreclosure relief. The size of the problem is far bigger than that. Experts estimate there are some $1.5-$2 trillion in such bad assets, either of the non-performing or illiquid variety. The ring fence concept has already been used with Citigroup and Bank of America. It involves government guarantees and insurance provisions for groups of bad assets, but they remain on the balance sheet of the institution. The bad bank concept literally removes them. Both approaches are meant to spur new lending by banks.

Thus far, the bulk of the government's aid under the TARP program has been through a capital-for-equity swap. The so-called capital injection method was adopted at the urging of Congress late last September and then wound up replacing Paulson's original, primary tool of a government auction to buy the troubled assets. The capital injection program, however, is not expected to be a major part of the new aid package, according to the source. It will also be tweaked, apparently, so that the government receives convertible preferred stock, instead of the current preferred stock. The former include an option to be converted, usually any time after a predetermined date, into a amount of common stock, which is how some would now like to see the government take its equity stake.

Regardless of the merits of one measure or another, there's growing consensus in both government and banking that a one-size-fits-all approach is inappropriate. JPMorgan Chase CEO Jamie Dimon, for one, has made that point recently. Rep. Brad Sherman (D.-Calif.), who voted against the original TARP and favors the capital injection model, now expects any forthcoming plan to include such asset purchases, as well as the ring fence concept and the purchase of toxic assets. "It's consistent with their view of trying new things," says Sherman, a senior member of the House Financial Services Committee.

One of his concerns about the ring fence approach is to what extent the administration might use a multiplier method in backing troubled assets, rather than a virtual dollar-for-dollar approach. "And the question is will the Fed participate," asks Sherman. If so, he says, it would clearly give the government more money to work with. The latest developments come as Congressional support for the bad bank concept and additional financial support for the banking sector are fading. Sen. Charles Schumer (D-NY), a senior member of the Senate Banking Committee, Tuesday joined the bad-bank skeptics, telling CNBC the approach would be "hugely expensive," adding that he prefers government guarantees of such assets.

In a news conference Wednesday afternoon, House Speaker Nancy Pelosi (D.-Calif.) said she was "not so sure" that another bailout request from the Obama administration is inevitable, reversing an a previously-held assumption. Congressional Democrats, led by House Financial Services Committee Chairman Barney Frank (D.-Mass.) have shared with the new administration their anger and disappointment over former Treasury Secretary Henry Paulson’s administration of the TARP program, which was seen as too generous to and too lenient on Wall Street firms. They've also made it clear that they want significant government funding to aid consumer borrowers, small business and the housing industry, as well as tighter rules on executive pay for firms participating in the TARP. President Obama unveiled those rules Wednesday.

The source said the Obama administration is keenly aware of the political dynamic and is thus proceeding at a cautious pace. Some in Congress agree. "I think they've talked to the political leadership," says Rep Sherman. "Everything they're doing with the second $350 billion [of the TARP] is with an eye to asking for a third $350 billion and we'll be lucky if it is only $350 billion." The timing of the announcement on Monday is significant. Starting Tuesday, Geithner will brief the respective houses of Congress on a variety of new measures meant to ease the credit crunch.

U.S. bank plan to offer asset support, mortgage help
The Obama administration's eagerly-awaited bank rescue plan will offer to insure some distressed assets held by banks, authorize the government to purchase others, and spend up to $100 billion to buy and modify troubled homeowner mortgages, a source with knowledge of the plan told Reuters on Friday. U.S. Treasury Secretary Timothy Geithner will detail how the administration plans to use the funds remaining in the government's $700 billion financial bailout program in a speech scheduled for 12.30 p.m. on Monday. The so-called Troubled Asset Relief Program (TARP) was created in October to help steady the U.S. financial system, which has been rocked by a plunge in housing prices, steep bank writedowns and an unraveling economy. Much of the first $350 billion in TARP was used by the Bush administration to inject capital into banks and Detroit automakers in exchange for preferred shares and warrants.

The focus of the next phase of TARP spending has been hotly debated within the Obama administration and by lawmakers. "One size doesn't fit all," the source said. "The goal here is to speed the resources so that they do the most good for the economy." The largest portion of the remaining money will be earmarked to offer federal insurance to banks so they can clearly separate, or "ring fence", bad assets that have lost much of their value in recent months, the source said. The program will be similar to insurance already offered to Citigroup and Bank of America, the source said. TARP is providing insurance on $301 billion of Citi's troubled assets and $118 billion at Bank of America, subject to certain deductibles. About $50 billion to $100 billion of remaining TARP money will be used to buy distressed mortgages from banks and modify their terms to help homeowners prevent foreclosure, as the administration had promised, the source said.

Other sources familiar with the administration's thinking said an expanded role for mortgage finance companies Fannie Mae and Freddie Mac was being considered in regard to this portion of the plan. The remaining TARP money will be used to expand a Federal Reserve lending program which can act as a kind of "bad bank" to mop up toxic assets, the source said. The Treasury had already pledged $20 billion from the first half of the TARP spending for the program, the Term Asset-Backed Loan Facility (TALF). Under the current TALF program, the Fed vowed to pump up to $200 billion into credit markets with loans that are collateralized by automobile, student, credit card and small business loans, to free up credit. Any losses would be covered by the TARP funding. More TARP funds would allow the Fed to expand the program to cover a wider range of assets.

CNBC reported on Friday that the "bad bank" would buy up to $500 billion in troubled assets. However, a source told Reuters that Treasury will buy the assets at a discount, not at the assets' "carrying value" that the banks have on their balance sheets. "It's been scaled back considerably," the source said, referring to the bad bank concept. The change came after two influential Democrats, Sen. Charles Schumer of New York and U.S. House Speaker Nancy Pelosi, said taxpayer funds should focus on insurance guarantees rather than a bad bank approach. A government watchdog, special inspector general Neil Barofsky, said on Thursday that the government should be cautious in expanding TALF to mortgage-backed securities that have sunk in value on banks' balance sheets. Anti-fraud measures are crucial before expanding the program, he said in a report to Congress.

The Obama administration's bank rescue blueprint also reflects plans by Rep. Barney Frank, chairman of the House Financial Services Committee, to seek legislation that would let the Federal Deposit Insurance Corp more than triple its credit line to $100 billion. Such an increase would give the bank regulator more financial power to handle U.S. bank failures. The FDIC's deposit insurance fund shrank to $34.6 billion in the 2008 third quarter because of a surge in bank failures. The administration's plan remained fluid on Friday, and was undergoing final tweaks, said Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat. "I think there is a debate within the White House itself about this ... so I'm not sure, they've settled themselves," Dodd told reporters. "Different institutions, different circumstances require a different response."

Fed's consumer plan to start later in February
A new program to try to get credit flowing for small business and consumers is on track to start later this month, the Federal Reserve said Friday. In a statement, the Fed didn't specify a date, but disclosed more details of the terms and conditions of the loans. There's a lot riding on the initiative, known as the term-asset-backed securities loan facility, or TALF, which is seen as a new model for the Fed's efforts to reopen clogged credit channels. The asset-backed securities market for consumer loans has come "to a near standstill," the Fed said. In particular, the Fed will set up a special-purpose vehicle to purchase and manage the assets and the Treasury will invest in the program to protect the Fed from losses.

Under the plan, the Fed will lend up to $200 billion to owners of certain AAA-rated asset-backed-securities backed by auto loans, credit-card loans, student loans and small business loans. The New York Fed will announce monthly loan subscriptions and settlement dates. Borrowers will be able to choose either fixed or floating interest rates on the TALF loans. The fixed interest rate will be 100 basis points over the 3-month Libor swap rate, while the floating interest rate will be 100 basis points over 1-month Libor. The central bank also published preliminary collateral haircuts for the securities, depending on the expected life of the loans. In a speech in Hawaii, San Francisco Fed president Janet Yellen called the TALF a "promising program." "This approach has the potential to be expanded substantially, with higher lending volumes and additional asset classes, such as commercial mortgage-backed securities," Yellen said.

Three U.S. Banks Shut by Regulators as Financial Crisis Deepens
Three banks, two in California and one in Georgia, were seized by regulators, bringing this year’s tally of closings to nine as a recession and record foreclosures extend the biggest financial crisis in more than 70 years. County Bank of Merced, California, with deposits of $1.3 billion and assets of $1.7 billion, was shut yesterday by the state’s Department of Financial Institutions, according to an e-mailed statement from the Federal Deposit Insurance Corp. Westamerica Bancorporation, holding company for Westamerica Bank, acquired all the assets and deposits.

The Georgia Department of Banking and Finance closed McDonough-based FirstBank Financial Services Inc., which had $337 million in assets and $279 million in deposits as of Dec. 31, the FDIC said in a statement. The California Department of Financial Institutions shut Culver City-based Alliance Bank, with assets of $1.14 billion and $951 million in deposits. The FDIC was named receiver of the institutions, which will resume business as branches of the acquiring banks. Regulators seized six banks in January, the largest monthly toll since 1993, including Salt Lake City-based MagnetBank, which the FDIC closed Jan. 30 after being unable to find a buyer. The FDIC shuttered 25 banks last year, matching the total for 2001 through 2007.

The FDIC, other U.S. bank regulators and Congress are taking steps to help banks avoid losses as the administration of President Barack Obama readies a stimulus package that may include guarantees for toxic assets, according to people familiar with the plan. Legislation that would more than double deposit insurance coverage and offer safeguards for banks is being considered by Congress. The House Financial Services Committee unanimously approved a measure that would raise coverage to $250,000 per depositor per bank, from $100,000. Congress also may extend the FDIC’s line of credit with the Treasury to $100 billion from $30 billion to replenish the deposit fund. The FDIC said bank failures through 2013 may cost the fund more than the $40 billion estimated in October.

"We do expect there to be more stress on banks, which could result in an increase in commercial bank failures," said Comptroller of the Currency John Dugan in a Feb. 2 interview. A deepening recession that adds stress may lead to "significantly more losses," said Dugan, regulator of national banks. The FDIC on Dec. 16 doubled premiums it charges banks to replenish its reserves, which totaled $34.6 billion as of the third quarter. The Washington-based agency oversees 8,384 institutions with $13.6 trillion in assets. The latest bank failures will cost the FDIC’s deposit insurance fund a combined $452 million. The fund is supported by fees on insured banks.

Westamerica, based in San Rafael, California, acquired 39 County Bank branches. The branches with Saturday hours will open as Westamerica offices today, and the rest will open Monday as usual. Westamerica shares have declined less than 1 percent in the past 12 months, to $48.52, as the 24-company KBW Bank Index has plummeted by almost two-thirds. Regions Financial Corp. will buy about $17 million of FirstBank’s assets and assume all of the deposits, the FDIC said. FirstBank’s four branches will open as offices of Regions, a Birmingham, Alabama-based bank. Regions’ acquisition is its second in five months, following the purchase of Alpharetta, Georgia-based Integrity Bank’s assets in August.

"It is our responsibility to work with and support the FDIC in finding solutions for depositors in these challenging times," said Regions Chief Executive Officer Dowd Ritter. "We also felt it was important to be a safe harbor for all customers by assuming both insured and uninsured deposits." California Bank and Trust of San Diego, owned by Salt Lake City-based Zions Bancorporation, acquired Alliance’s deposits and bought $1.12 billion of its assets at a discount. Alliance Bank’s five branches will open next week as offices of California Bank, the FDIC said. Zions, which operates in 10 Western states, also acquired the deposits of Henderson, Nevada-based Silver State Bank in September.

The FDIC classified 171 banks as "problem" in the third quarter, a 46 percent jump from the second quarter, and said industry earnings fell 94 percent to $1.73 billion from the previous year. The agency doesn’t identify problem banks by name. The Obama administration is considering a range of options to unclog bank balance sheets, and may emphasize the guarantee of toxic assets over proposals to create a government-run bank. Treasury Secretary Timothy Geithner will unveil a plan as part of the financial-recovery package on Feb. 9, a Treasury official said yesterday.

The FDIC and the Office of the Comptroller of the Currency have taken steps to stem failures, such as allowing private- equity firms and other bidders to buy assets and deposits of lenders running out of cash. IndyMac Bank, the fourth-largest U.S. lender to fail last year, was sold to a private-equity investor for $1.3 billion on Jan. 2. The sale was led by Steven Mnuchin of Dune Capital Management LP. Washington Mutual Inc., the biggest savings and loan, was seized on Sept. 25 and its assets were sold to JPMorgan Chase & Co. after customers drained $16.7 billion in deposits in less than two weeks. Wachovia Corp. was near failure before being bought by Wells Fargo & Co. for $12.7 billion.

Treasury hires bankruptcy firms to advise on auto plans
The U.S. Treasury has hired two law firms with extensive experience in bankruptcy to advise it on the restructuring of General Motors Corp. and Chrysler LLC. The move highlights that bankruptcy remains a real possibility for both automakers despite $17.4 billion in government loans and an all-out push to write cost-cutting plans by a Feb. 17 deadline. Cadwalader, Wickersham & Taft LLP in New York and Sonnenschein Nath & Rosenthal LLP in Chicago were both hired by the Treasury to advise on the automotive rescues, spokespeople for the two firms said today.

GM and Chrysler have both maintained that a bankruptcy would likely mean the dissolution of both companies, because a bankrupt automaker would be hard pressed to generate the cash needed to pay suppliers, build cars and finance dealers. Yet experts and industry officials worry that Chrysler may not have the resources to survive a U.S. market of less than 10 million vehicles a year, while GM could be forced to bankruptcy court in order to win deep concessions from bondholders.

Ford Motor Co. has said it’s not seeking government aid, but would be forced to do so should GM or Chrysler declare bankruptcy, fearing the collapse of key suppliers. The trade group for auto suppliers has asked Treasury to consider aid to its companies, raising the possibility that steep production cuts from January could set off a wave of bankruptcies in March. Under the $13.4-billion loan to GM and $4 billion deal for Chrysler, the Treasury can demand immediate repayment and push the companies into court should it determine they are not making enough progress toward revamping their business.

Delphi Value May Be Too Low to Pay Bankruptcy Lenders
Delphi Corp., the biggest supplier to General Motors Corp., said its value has fallen so much that the company may not be able to cover debts accrued since filing for bankruptcy in 2005, including a $4.35 billion loan. The "extremely low volume production environment in the global automotive industry" has cut the projected value of the reorganized company, Delphi said. To conserve cash, Delphi asked U.S. Bankruptcy Judge Robert Drain to let it end health care benefits for retirees who were salaried workers, saying the move would save about $70 million a year and eliminate as much as $1.1 billion of liabilities from its balance sheet.

"In these circumstances, the debtors’ reasonable business judgment no longer permits them to maintain discretionary benefit programs," Delphi said in a filing with the U.S. Bankruptcy Court in Manhattan dated Feb. 4. Lindsey Williams, a Delphi spokesman, declined to comment beyond the court filing. A hearing on the request to end the retiree benefits is scheduled for Feb. 24. Delphi, based in Troy, Michigan, won approval in January 2007 of a Chapter 11 turnaround plan that valued the company at about $12.8 billion. That value was later reduced to $7.2 billion. Delphi couldn’t implement the plan in April because investors led by Appaloosa Management LP backed out of an agreement to provide as much as $2.55 billion, saying the company failed to meet conditions.

"The outlook for the global automotive industry took a dramatic turn for the worse, with volumes, both domestic and global, plummeting to the lowest levels in recent history," during the fourth quarter, the company said in court papers. GM, Delphi’s former parent company, has agreed to make an accelerated payment of $50 million to help the parts supplier survive while it seeks exit financing. Detroit-based GM also agreed to advance an additional $50 million by Feb. 27 or increase a later payment to $350 million from $300 million, Delphi has said.

U.S. auto-parts suppliers may seek as much as $25.5 billion in government aid to prevent an industry collapse. The Motor & Equipment Manufacturers Association trade group said this week the Treasury Department should widen its commitment to prop up the auto industry. GM and Chrysler LLC received $17.4 billion in government loans to avert bankruptcy and face a Feb. 17 deadline to prove they’re viable. Treasury hired New York-based Cadwalader, Wickersham & Taft LLP to evaluate restructuring scenarios for GM and Chrysler, including a possible bankruptcy funded by the government, two people involved in the work said.

Plant closures, more job cuts at GM feared
General Motors Corp. must close plants and announce deeper job cuts as part of the cost-cutting plans it and Chrysler LLC are to submit to the U.S. Treasury in 10 days, industry experts say, but continued deterioration in the economy could still drive the automakers into bankruptcy. The possibility of a U.S. automaker going bankrupt has led the Obama administration to hire two law firms and an investment bank with extensive backgrounds in corporate restructuring to advise it on strategies for dealing with GM, Chrysler and the rest of the industry. The advisers also would help protect the government's $17.4 billion in loans to the two companies.

"The decision has been made that they can just as well deal with their autoworkers and wages and benefits outside of bankruptcy," said John Jerome, a bankruptcy attorney and partner at Saul Ewing LLP. "It may come to a point where that not's possible." GM and Chrysler maintain that a bankruptcy would likely mean the dissolution of both companies and thousands of lost jobs because a bankrupt automaker would be hard pressed to generate the cash needed to pay suppliers, build cars and finance dealers. The decline of the U.S. auto industry has already led to 200,000 job cuts in the past year, according to federal jobs data released Friday. But with U.S. auto sales not expected to top 10 million vehicles this year, experts and industry officials worry that Chrysler may not have the resources to survive, while GM could be forced to bankruptcy court in order to win deep concessions from bondholders.

With the deadline for the cost-cutting plan approaching, GM has not settled on the scale of any plant closures, but the slack U.S. sales pace and decision to shed the Hummer, Saturn and Saab brands while shrinking Pontiac has left it with expensive unused plant capacity. The automaker has also said it would continue to reduce its workforce over the next few years, and has offered buyouts to thousands of UAW members. "In the long run, I don't think they're going to need as much capacity as they do right now," said Haig Stoddard, auto analyst at IHS Global Insight. "Even after they get through this quarter and take some more hard hits on their revenue, I think it will lead to more announcements of plant cuts to reduce costs."

Stoddard predicts that GM, Chrysler and Ford Motor Co. -- which has not received loans but has requested a credit line for possible use -- would need to each close two assembly plants, including one pickup or SUV factory. Stoddard said GM's Pontiac truck plant, where the automaker builds the Chevrolet Silverado, is at most risk, along with its Orion Assembly, where the Pontiac G6 midsize car is built. For Chrysler, the automaker's St. Louis pickup plant is most likely to be at risk, along with crossover and midsize sedan plants in Belvidere, Ill., and Sterling Heights. At most risk at Ford are Wayne Assembly, as Ford Focus production is shifted to nearby Michigan Truck assembly plant, and the Ford Escape plant in Kansas City, Mo. Spokespeople for GM and Chrysler said they closely monitor the market, but would not say if their plans include plant closures.

While the Obama administration has yet to appoint a so-called car czar to oversee the industry, it does have officials at the White House and the Treasury Department in contact with automakers and parts suppliers on a regular basis. To aid its efforts, the Treasury has hired two law firms with extensive backgrounds in bankruptcy. Cadwalader, Wickersham & Taft LLP in New York and Sonnenschein Nath & Rosenthal LLP in Chicago were hired to advise on the automotive rescues, spokespeople for the two firms said Friday. The administration also has hired investment bank Rothschild Inc. for advice.

The Obama administration declined Friday to discuss any details of how it will approach the Feb. 17 plans. "We look forward to the autos' presentation of their plans," said White House spokesman Robert Gibbs. The plans are to include outlines for cuts in debt, supplier costs and labor, namely setting a target for UAW members to match the pay and benefits of workers at foreign-owned plants in the United States. Yet the agreements with the Bush administration gave the industry and the UAW some room to offer alternatives. It would be up to the czar to rule on whether those alternatives go far enough. Steven Rattner, a New York financier, remains the leading candidate, but his appointment has lingered on a to-do list for some time.

The UAW has opposed some of the loan terms, contending it took major sacrifices under its 2007 contract. "The fundamental premise is all the stakeholders have to be at the table. We think having a car czar team in place would be very helpful," said Alan Reuther, the UAW's legislative director. "We sort of feel we're the only ones who've stepped forward, and we want to see other stakeholders to be part of the process." Ford has said it's not seeking government aid but would be forced to do so should GM or Chrysler declare bankruptcy, fearing the collapse of key suppliers.

Ford to continue in trimming its suppliers
Times are especially tough for automotive suppliers, but Ford Motor Co. said Friday it is sticking to tough love for some suppliers as it works toward its goal of reducing the number of parts-making companies. In 2008, Ford cut the number of production suppliers eligible for work with the company by 419 companies to 1,600. Tony Brown, group vice president of global purchasing, said Ford's goal is to get to 750 suppliers. Automotive suppliers are coping with dramatically lower revenue caused by a slump in sales that has forced automakers to slash production. That situation is forcing Ford to help suppliers financially and operationally more than before, Brown said.

Still, tough times do not guarantee assistance. "We will in some instances work with them, and if we determine that it is not beneficial ... then we may, in fact, move the work somewhere else," Brown said in a conference call with reporters. While Ford's financial situation is better than that of General Motors Corp. and Chrysler LLC, which are receiving a combined $17.4 billion in government loans, Ford cash reserves declined by $5.5 billion during the fourth quarter to $24 billion. Brown said Friday that Ford is just as capable now as it was a year ago to assist troubled suppliers -- even though Ford decided in January to access $10.1 billion in lines of credit so it could bolster its own cash reserves.

"We remain concerned about a potential bankruptcy by one or more of Ford's key suppliers," credit rating agency Standard & Poor's said in a report on Jan. 29. "Such an event could require Ford to use some of its liquidity." Brown said Ford intends to accelerate the development of its Aligned Business Framework. Created in 2005, ABF is a group of preferred suppliers that Ford works with closely. As of August, 65 members were part of ABF.

China's official figures obscure sharp decline
Plunging exports. Factory closures. More than 20 million people thrown out of work. Official data showing that China's economy is cooling but still growing strongly obscure what economists say is a sharp recent decline that has inflicted obvious pain. What is happening matters far beyond China. Whether the third-largest economy is stalling or still growing could affect how quickly the world recovers. A stagnant China would mean less demand for industrial materials and consumer goods from the United States and others.

The difference lies in the way growth is measured. Beijing uses a method that compares growth in one quarter with a full year earlier and says its economy expanded by a healthy 6.8 percent in the final quarter of 2008. But experts say that compared to the previous three months — the system used by most other major countries — China's growth fell to as low as 1 percent or possibly zero. "The recent weakness is much worse than the long-term trend," said JP Morgan economist Frank F.X. Gong. Merrill Lynch economist Ting Lu said fourth-quarter growth from the previous three months was "close to zero." The lower quarter-on-quarter growth figure would be in line with other indicators that show exports and manufacturing falling and weakness in investment and consumer spending.

The pain is evident on factory floors and in empty restaurants and shops. Sales at the Laiwu Sheng Yuan Building Materials Co. have plunged 50 percent from a year earlier, said general manager Wang Jian. He said construction companies are in such bad shape he is reluctant to fill orders. "I'm afraid they won't be able to pay," said Wang, whose company in the eastern city of Laiwu has 100 employees. "Builders already owe me more than 200 million yuan ($29 million), and I don't know when I'm going to get it back."

Other Asian economies such as Japan and South Korea are contracting, which would make Chinese growth of even 1 percent encouraging. Beijing says there are signs its 4 trillion yuan ($586 billion) stimulus launched in November is taking effect. A key indicator of manufacturing improved in January, suggesting the slump might be reaching its bottom. But the purchasing managers index of the China Federation of Logistics and Purchasing said manufacturing still contracted. "Despite the sunny headline figure, we believe it signals not a recovery, but rather continued weakness," Standard Chartered economist Stephen Green said in a report. "Less bad news is not the same as good news."

Other countries such as the United States and Japan report gross domestic product growth by comparing each quarter with the previous quarter. That requires more number-crunching to adjust for seasonal differences but quickly reveals changes in performance. The gap in measurement is well known to private sector economists, who try to estimate China's quarter-on-quarter growth based on skimpy government data. Fourth-quarter growth compared with the previous three months fell to 1 percent at an annual pace, down from 4 percent the previous quarter, according to Green. "We sharply decelerated in November and December," he said. "There are no clear signals we have accelerated."

JP Morgan gave an estimate of 1.5 percent quarter-on-quarter annualized growth. But its figures also highlight a sharp decline: That rate is just one-tenth of the 15 percent quarter-on-quarter growth the bank says China achieved in early 2007. Exporters and China's trade-driven southeast coast have been hit hardest but weakness has spread to other regions and industries such as real estate and auto sales. At Kamboat Chinese Cuisine, a Shanghai restaurant, business was so lackluster for last month's Lunar New Year, usually a busy period, that some waiters were told to start vacation before the holiday, said executive chef Chen Zhenjiang. He said that was despite cutting prices so low they wiped out the restaurant's profit. "Nothing is more important than saving money, even in the festival season," Chen said.

The Cabinet's National Statistics Bureau is struggling to keep up with China's rapid economic evolution. It repeatedly revises past growth estimates as new data come in. It was only in 2005 that booming service industries such as restaurants were counted in economic output. That forced NBS to revise a decade's worth of growth figures. But only annual numbers were revised, not those for each quarter, making it harder for analysts to make historical comparisons. "China's statistics system is really in a mess," said Merrill's Lu. "It's extremely difficult and close to impossible to calculate the quarter-on-quarter growth rate in China." The bureau says it wants to create a reporting system like those of other countries. "We are doing research right now on setting up this system," its boss, Commissioner Ma Jiantang, said last month, though he gave no timetable.

Is China Immune to Crisis?
by Kenneth Rogoff

Addressing the annual World Economic Forum in Davos, Switzerland, Chinese Premier Wen Jiabao explained his government's plans to counter the global economic meltdown with public spending and loans. He all but guaranteed that China's annual growth would remain above 8 percent in 2009. Wen's words were like warm milk to the recession-numbed audience of global political and business leaders. But does the Chinese government really have the tools needed to keep its economy so resilient? Perhaps, but it is far from obvious.

America's deepening recession is slamming China's export sector, just as it has everywhere else in Asia. The immediate problem is a credit crunch not so much in China as in the United States and Europe, where many small and medium-size importers cannot get the trade credits they need to buy inventory from abroad. As a result, some once-booming Chinese coastal areas now look like ghost towns, as tens of thousands of laid-off workers have packed their bags and returned to the countryside. Similarly, in Beijing's Korean section, perhaps half of the 200,000-300,000 inhabitants, mainly workers (and their families) who are paid by Korean companies that produce goods in China for export, reportedly have gone home.

With roughly $2 trillion in foreign-exchange reserves, the Chinese do have deep pockets to fund massive increases in government spending, and to help backstop bank loans. Many leading Chinese researchers are convinced that that the government will do whatever it takes to keep growth above 8 percent. But there is a catch. Even if successful in the short run, the huge shift toward government spending will almost certainly lead to significantly slower growth rates a few years down the road. Simply put, it is far from clear that marginal infrastructure projects are worth building, given that China is already investing more than 45 percent of its income, much of it in infrastructure.

True, some of China's fiscal stimulus effectively consists of loans to the private sector via the highly controlled banking sector. But is there any reason to believe that new loans will go to worthy projects rather than to politically connected borrowers? In fact, China's success so far has come from maintaining a balance between government and private sector expansion. Sharply raising the government's already outsized profile in the economy will upset this delicate balance leading to slower growth in the future. It would be preferable for China to find a way to substitute Chinese for U.S. private consumption demand, but the system seems unable to move quickly in this direction.

If government investment has to be the main vehicle, then it would be far better to build desperately needed schools and hospitals than ``bridges to nowhere," as Japan famously did when it went down a similar path in the 1990s. Unfortunately, China's local officials need to excel in the country's ``growth tournament" to get promoted. Schools and hospitals simply do not generate the kind of fast tax revenue and GDP growth needed to outperform political rivals. Even prior to the onset of the global recession, there were strong reasons to doubt the sustainability of China's growth paradigm. The environmental degradation is obvious even to casual observers. And economists have started to calculate that if China were to continue its prodigious growth rate, it would soon occupy far too large a share of the global economy to maintain its recent export trajectory.

So a shift to greater domestic consumption was inevitable anyway. The global recession has simply brought that problem forward a few years. Interestingly, the U.S. faces a number of similar challenges. For years, the U.S. achieved fast growth by deferring attention to a variety of issues, ranging from the environment to infrastructure to health care. Even absent the financial crisis, addressing the shortcomings in these areas would likely have slowed down U.S. growth. This is not to say that the U.S. and China are the same. One of the great challenges ahead is to find a way to bring these two countries' savings into line, given the vast trade imbalances that many believe planted the seeds of financial crisis.

I was reminded of the challenge recently when a Chinese researcher explained that men in China today feel compelled to save in order to find a bride. The same week, a former student of mine who lost his lucrative financial-sector job explained that he had no savings because it was so expensive to date in New York! These social differences have little to do with the yuan-dollar exchange rate, although that matters, too. One way or the other, the financial crisis is likely to slow medium-term Chinese growth significantly. But will its leaders succeed in stabilizing the situation in the near term? I hope so, but I would be more convinced by a plan tilted more toward domestic private consumption, health, and education than to one based on the same growth strategy of the past 30 years.

GE's Credit Rating 'Unsustainable' - JPMorgan
General Electric Co.'s troubled industrial and financial businesses are leading to a credit-rating cut, which will likely force the conglomerate to reduce its dividend, JPMorgan said Friday. But until the Fairfield, Conn., company lowers its dividend, it will be near impossible for it to restructure with a possible spin-off of GE Capital, according to analyst Stephen Tusa said in a note to investors. "These events are necessary catalysts of change for a culture that was built to manage earnings in a way that is clearly unsustainable over the long term," Tusa wrote. "The bottom line is that, with deteriorating fundamentals - clearly at [GE Capital] and with industrial following - staying the course is a hurdle to capitulation." Adding, "Former [Chief Executive Jack] Welch built a culture of earnings management that was unsustainable."

Tusa's analysis follow General Electric's bruising fourth-quarter results posted two weeks ago, showing a 44% drop in its net earnings on declines in its financial and consumer-product businesses. That trend is expected to continue through 2009, and the company said it would bulk up its cash reserve to weather the challenge. .
GE is a member of the Dow 30 and is considered a bellwether for the economy. After falling earlier, GE shares on Friday posted a 3.5% gain to $11.23. Since mid-September, the stock is off nearly 60% and is trading at a 13-year low. Some analysts have said a slash to its annual dividend has already been priced in. JPMorgan maintained its neutral rating for GE stock, but lowered its price target to $9 from $13, predicting double-digit earnings decline through 2010 with a profit trough that year of 70 cents a share. Analysts polled by FactSet Research are looking for 2010 earnings of $1.30 a share, on average.

GE isn't the only member of the Dow Jones Industrial Average where investors are nervous over the dividend. Pharmaceutical giant Pfizer Corp., Caterpillar Inc., American Express Co., and Alcoa Inc., are all under the microscope. Citigroup Inc, Bank of America and General Motors Corp.have already reduced their dividends.
Elsewhere, GE Chairman and Chief Executive Jeff Immelt has been included in President Barack Obama's new Economic Recovery Advisory Board, headed by former Federal Reserve Chairman Paul Volcker. The board also includes Caterpillar Inc. CEO James Owens.

Job Losses in U.S. Spreading to Workers With College Degrees
In this recession, not even an education can shield you from losing your job. The unemployment rate among workers with college degrees rose to 3.8 percent, the highest level since records began in 1992, the Labor Department reported today. The rate for workers with some college or an associate’s degree also climbed to a record, at 6.2 percent. "This particular recession is hitting workers with more levels of schooling harder than past recessions have hit them," said Heidi Shierholz, an economist at the Economic Policy Institute, a Washington research group typically aligned with the labor movement. "It’s just a deeper recession, it’s more widespread, its tentacles are reaching everywhere."

According to EPI data, the level of unemployment among people with college educations is the highest since January 1983. With banks merging and manufacturers like Caterpillar Inc. eliminating management positions, the ranks of college-educated unemployed may continue to grow, economists said. "This is a deeper recession and it has really accelerated over the last several months," said Christine Owens, executive director of the National Employment Law Project. "There will be income losses throughout the economy." Consumer spending, which accounts for about 70 percent of the economy, dropped 3.5 percent in the fourth quarter, following a 3.8 percent fall in the previous three-month period. It was the first time decreases exceeded 3 percent back-to-back since records began in 1947.

The U.S. lost 598,000 jobs in January and the total unemployment rate soared to 7.6 percent, the highest since 1992, from 7.2 percent in December, the Labor Department said today. According to today’s report, 45.2 million workers, or 30 percent of the civilian labor force, have at least a bachelor’s degree. That was the biggest share of civilian workers. President Barack Obama today said rising U.S. unemployment shows the urgent need for government action on the economy and any delay of his stimulus plan in Congress would be "inexcusable and irresponsible." He also announced the formation of a panel of advisers, led by Paul Volcker, a former chairman of the Federal Reserve.

Insurers' Finances Clouded by Bookkeeping Changes
Allstate, the big insurer, last week declared that despite unprecedented trouble in the markets, it remains financially strong. But tucked deep inside a company report is evidence that Allstate changed its bookkeeping last year in ways that improve its financial appearance. One accounting change added $347 million. Another delivered a year-end boost of $365 million. Allstate's actions illustrate a broader risk to investors, policyholders and people looking for insurance. Insurers have been asking regulators to let them operate with thinner financial cushions or to pad those cushions with assets they could not otherwise count. For anyone trying to assess the companies' financial strength, the changes can cloud the picture. That could make it harder for people to make sound decisions when buying policies or annuities to protect their families.

For regulators, the insurance companies' requests can pose a dilemma. At a time of financial peril, is it better to loosen financial standards for insurers and hope they pull through the crisis still able to keep their promises to policyholders? Or would it be more prudent to hold insurers to existing standards, even if that forces them to take costly and painful steps to shore up their financial stability? Using accounting changes to make companies look stronger can actually make them weaker. Increasing companies' reported capital could enable them to pay out more money in the form of dividends, leaving them with less money in hand to deal with unexpected problems and make good on their policies.

Late last year, a life insurance lobbying group sought emergency industry-wide relief from an array of standards governing the reserves and capital that insurers must maintain. A national committee of state regulators last week rebuffed that request. Nonetheless, companies have been pursuing special dispensations from individual states, and some are finding a sympathetic ear. Allstate's home regulator in Illinois approved one of the company's accounting changes during the fourth quarter of last year, retroactive to Sept. 30, Allstate reported. The company made the other change anticipating that the National Association of Insurance Commissioners would later endorse the approach, Allstate spokeswoman Maryellen Thielen said. Instead, the NAIC executive committee rejected the proposal on Jan. 29, leaving the question for individual states to resolve, Thielen said in an e-mail.

In a Jan. 29 conference call with investment analysts, Allstate executives said they already had regulators' blessing. "They look at it favorably because it's indicative of the strength of the company," Allstate Controller Samuel Pilch said when an analyst asked about the approximately $700 million of capital the company generated through accounting changes. "I think, as Sam said, regulators are involved in it and aware of it and approve it," Allstate Chairman and chief executive Thomas J. Wilson added, according to a transcript of the call. Industry representatives and some regulators argue that existing financial standards are too conservative and that they needlessly constrain companies. Insurers are regulated at the state rather than the federal level, and the NAIC, which has only limited power to influence state regulations, helps coordinate standards among the states. The NAIC tries to prevent a "race to the bottom" in which insurers move to states with weaker regulations, New York Insurance Superintendent Eric Dinallo said last year in testimony to Congress.

Now, it's every state for itself. The result could be that some companies have to measure and report their financial strength differently from state to state, regulators said. Changing the accounting rules for particular companies or companies based in particular states could make it harder to compare insurers or to track changes in their financial condition. The day after the NAIC executive committee voted not to endorse industry-wide relief, Iowa Insurance Commissioner Susan E. Voss announced that she would allow Iowa-based insurers to count more so-called deferred tax assets in their reported capital for last year, much as the insurance lobby had requested. The tax benefits could someday help the companies reduce their tax bills -- or they could eventually expire with no value to the insurers. Unlike cash or other liquid investments, they do not increase a company's ability to pay claims in the meantime. "Let's face it," Voss said. "This is an unusual time."

Inclusion of the added tax benefits "can be a tool for appropriate financial reporting, or it can be a weapon to mislead investors," said Donald Thomas, an accounting analyst with Gradient Analytics. "It all gets back down to the character of the people making the judgments and the quality of their estimates." "Although deferred tax assets represent real economic benefits, such assets are of limited use in meeting policyholder obligations in a time of stress," Standard & Poor's, a corporate rating agency, said in a recent report. "Although such a change would increase reported statutory capital and surplus, we are aware that the quality of this capital could be lower," S&P wrote. Voss said she would decide on a case-by-case basis whether to let Iowa insurers make expanded use of the tax assets. She said she wouldn't allow anything that would jeopardize consumers' ability to get claims paid. Iowa will require companies to disclose the effect of the accounting change, and it will prevent them from using the change to pay larger dividends, deputy commissioner James Armstrong said. Iowa-based insurers include Transamerica Life, ING and Principal Life Insurance, a part of Principal Financial Group.

"This change allows companies to present a financial statement that more accurately portrays the company's financial position," Susan Houser, a Principal Financial Group spokeswoman, said in an e-mail. In a similar vein, Ohio this week embraced some of the proposals the NAIC had been considering. Ohio's insurance regulator, Mary Jo Hudson, said she would allow financially sound companies to apply the changes to regulatory reports for 2008, which are due in less than a month. Hudson said she acted in light of economic conditions and to keep Ohio-based insurers competitive with insurers from other states. Illinois regulator Michael T. McRaith declined to comment on Allstate's accounting changes, saying he would not discuss any specific company. "Our practice is . . . to be fair-minded and reasonable," he said.

In a news release last week reporting on its financial performance in 2008, Allstate said Illinois gave it permission during the fourth quarter of last year to change the way it accounts for certain annuities. The change blunted the effect of deteriorating market conditions, increasing the Allstate Life Insurance Co. subsidiary's financial cushion by $347 million as of Sept. 30. Though Allstate reported that the Illinois Division of Insurance approved that change during the fourth quarter of 2008, a spokeswoman for the regulator said the change wasn't approved until Jan. 28 -- the same day Allstate issued the earnings report for last year. Illinois spokeswoman Anjali Julka provided a copy of the letter from the regulator to Allstate approving the request, which was dated Jan. 28. Allstate spokeswoman Thielen declined to comment on the discrepancy.

In its news release last week, Allstate said it also changed the way it accounts for deferred tax assets, contributing $365 million to the Allstate Insurance Co. subsidiary's estimated regulatory surplus of $13.4 billion as of Dec. 31. The company reported that the $365 million involved a practice "we have submitted for approval." That change has not been approved, Julka said. Asked how that squared with Allstate executives' statements to the contrary during last week's conference call, Thielen declined to comment.

IMF considers aid for Poland to prevent crisis
The International Monetary Fund is holding talks with Poland, central Europe's largest economy, on a possible loan to fend off contagion from the global financial crisis that forced the Fund to intervene in Hungary. Ex-communist Poland and Hungary joined the European Union in 2004 and although the larger country has sounder finances than Hungary, which has run huge budget and current account deficits for years, it has been hit by financial contagion. "The Poles are saying that they are okay today and I think they are right," IMF Managing Director Dominique Strauss-Kahn said on Saturday after he attended a central bankers meeting in Kuala Lumpur.

"They also say its not impossible that in the future they may be under pressure, so we are discussing with them to see if they need or don't need more global (agreement) with the Fund," Strauss-Kahn said. According to research from investment bank UBS, Poland is the sixth most vulnerable of its universe of emerging market economies based on its short term financing requirements as a percentage of gross domestic product versus its reserves. That means it is reliant on market financing, something that is in short supply as banks shy away from lending outside home markets and credit is in any case in short supply.

The Fund has active lending programmes in a range of countries as they seek to avert financial meltdown and may seek to extend those to others as a precautionary measure. "Even countries having correct policies in place are hit by the crisis and may need some support," Strauss-Kahn said. The Fund has adopted preventative approaches already and has entered a precautionary agreement to lend $800 million to El Salvador. Strauss-Kahn warned on Saturday that there were plenty of risks to the Fund's assumption that global growth would pick up in 2010 after an expected 0.5 percent contaction in the global economy this year. That is the worst outcome since World War Two.

While noting that the European Central Bank, which left interest rates unchanged at 2 percent this year, had room to cut, Strauss-Kahn said that interest rates and fiscal pump priming alone would not solve the root cause of the global crisis. Strauss-Kahn said that he viewed the almost $800 billion rescue package proposed by U.S. President Barack Obama as the "correct" approach but said that governments needed to act more decisively to restore confidence in the banking sector. "The question of interest rates is not the most important question, providing direct liquidity to the markets and restructuring the banking sector may have more influence and demand than interest rates," he said.

Stiglitz:No IMF deal, no problem
While many see a regular stand-by accord with the International Monetary Fund, or IMF, there are some dissenting voices.As business circles continue to pressure the government to make a deal with the International Monetary Fund, or IMF, a voice of dissent has come from Joseph E. Stiglitz, the Nobel-laureate economist. In another development, credit ratings agency Fitch said it would not change Turkey’s sovereign rating, even if no IMF deal was made. "Classical standby agreements of the IMF are not enough to take the global economy out of this crisis," Stiglitz told the Anatolia news agency. "Such deals do not increase credibility, as some claim. The unregulated and unrestrained (architecture) that is one of the reasons for the current crisis resulted from IMF advice to various countries through standby agreements. Also, when one breaks the standby deal, one loses much more credibility compared to the pre-deal period."

Countries that agreed on IMFdeals, such as the Ukraine and Hungary, "had no other choice," Stiglitz said, adding that Turkey’s conditions were different. "In many countries public debt stock is rising, but Turkey’s shape is good in this sense," he said. "If there is no reconcilement in a deal suitable to current conditions, a no-deal might be a better choice." The IMF has a governance problem, the economist said, adding the fund could not predict the current crisis and did not know how to dig out of it. "Turkey is seeing the benefits of the arrangements it undertook (in the aftermath of the 2001 crisis) in banking," he said. "Thanks to such precautions and the institutions it set up, Turkey is less fragile in this environment of global crisis."

Turkish banks and companies have used less foreign financing compared to their peers, the Columbia University professor noted. "Also, as mortgage financing is not widespread, the finance sector is not negatively affected." Still, the slowdown in Western Europe, a key market for Turkey, will affect the country negatively, he noted. "Nevertheless, Turkey will be one of the least affected in emerging Europe," he said. Winner of the 2001 Nobel Economy Prize, Stiglitz is the former chief economist of the World Bank. Meanwhile, credit ratings agency Fitch said Turkey’s sovereign rating would not change even if no deal with the IMF was signed. In a statement Thursday, Fitch said a deal would be positive, but Turkey would find other means of financing even if no accord was signed. The statement is "presumably music to the ears of Prime Minister Recep Tayyip Erdogan," said Timothy Ash, head of Central Eastern Europe, Middle East and Africa, or CEEMEA, research at the Royal Bank of Scotland, in an investor note Friday.

Loophole here, loophole there
Just how was Bernard Madoff able to elude the Securities and Exchange Commission with his confessed Ponzi scheme? What about those tough auditing rules imposed after the Enron and WorldCom scandals? Surely, such a massive fraud would light up enforcers' radar screens. Of course, we know that the radar screens were dim, perhaps intentionally. But of the many regulatory failures that contributed to Madoff's ability to remain undetected, one in particular, a rule that exempted the tiny accounting firm used by Bernard L. Madoff Investment Securities LLC from new oversight rules, stands out as emblematic of the SEC's failure.

Madoff's auditing firm was Friehling & Horowitz, a three-person accounting firm. Because it didn't audit public companies, it wasn't required to register with the Public Company Accounting Oversight Board, created under the Sarbanes-Oxley Act in 2002 to help prevent fraud. But brokerage firms such as Madoff Securities are required to be audited by firms registered with the PCAOB. Yet the SEC provided a temporary reprieve to the rule for privately held brokerage firms and extended it several times. Friehling is so tiny that industry experts say it was preposterous it was allowed to audit an operation the size of Madoff's.

The accountants clearly missed warnings that might have tipped off a more capable firm to the largest Ponzi scheme in history. But because of the exemptions, it was able to continue auditing the Madoff firm without registering with the board. As a result, the PCAOB had no idea Madoff's accountant wasn't up to the task. Waiving the rule was "consistent with the public interest and the protection of investors," the commission determined in 2006, the last time it extended the exemption. The rationale for the SEC's position is unconvincing. Although a privately held firm may have few shareholders who need audited financial statements, it may have many customers who have an interest in knowing that appropriate auditing procedures have been followed. So with little fanfare, and in the wake of the Madoff scandal, the SEC quietly let the exemption expire at the end of 2008.

As a result, the oversight board announced in early January that accounting firms now must register with the board if they are auditing broker-?dealers whose fiscal years end this year. But that dictate might not be as tough as it sounds. According to its mandate, the board only has jurisdiction over public companies and their auditors. "As a result," the board explained in its statement last month, "audits of nonpublic broker-dealers, like other private company audits, are not, under current law, subject to board inspection and cannot be the basis for board disciplinary action." So even if a firm is registered, if it does no audits of public companies, the statement added, "the board cannot inspect it."

Congress must now rewrite the law to beef up regulators' authority. House Financial Services Committee member Paul Kanjorski, D-Pa., is already making plans to close the "loophole" that keeps the PCAOB from inspecting all auditors of broker-dealers. Kanjorski, who leads a subcommittee overseeing capital markets, says he is working on legislation to let the Public Company Accounting Oversight Board inspect and take enforcement action against auditors of closely held broker-dealers. The PCAOB "has advised me that it needs statutory authority" to conduct the inspections, Kanjorski said in a letter to the SEC. "I would also like an explanation as to why the commission has not publicly called on Congress to take this action," he says.

The PCAOB is funded by fees paid by the registrants and is endowed with subpoena power and the authority to discipline accountants. The SEC, which oversees the board, oversees its five-member panel. The SEC should have spotted red flags from a December 2007 audit report filed by Madoff Securities, Kanjorski said in the letter. The report, publicly available at the SEC's Washington headquarters, "appears to offer several red flags that could have helped the commission to find this sizable investor problem earlier" and prevented losses for people who invested with Madoff in 2008, the lawmaker wrote.

New SEC Chairwoman Mary Schapiro then told the Senate Banking Committee during her confirmation hearing that she believes the agency may "need a legislative fix to the PCAOB's authority" over the audits of nonpublic broker-dealers. She added that she "would absolutely support" it. Some states also demand that accounting firms should face a "peer review" by another accounting firm, but a loophole in the New York rules enabled Friehling & Horowitz to dodge that oversight as well.

The American Institute of Certified Public Accountants says David Friehling, who is a member, enrolled in the AICPA's peer review program, but the firm last completed a review in 1993. Since then, he has regularly checked off a box on a required AICPA form indicating his firm does not perform audits. The institute is now investigating whether Friehling lied. That loophole is also closing. New York's state Senate passed legislation last month requiring peer review as a licensing requirement. Gov. David Paterson signed the bill Jan. 30.

100,000 Australian small firms tipped to fail
More than 100,000 small- and medium-sized enterprises could hit the wall this year as banks tighten their lending requirements and big business customers delay paying invoices. According to research from Dun & Bradstreet, the country's leading credit report company, one in nine companies have fallen into the "high risk" category of financial distress, with small businesses facing the biggest likelihood of failure. The research, released exclusively to The Weekend Australian, reflects the next phase in the economic crisis likely to play out domestically.

Small- and medium-sized businesses are the lifeblood of the economy and the traditional generators of jobs. They contribute more than 30per cent to GDP and employ half the country's workers, or 5.5million people. If this sector starts to shake, it will have massive implications for consumer confidence and economic growth, despite the Rudd Government's stimulus package and the further cut in interest rates. The Weekend Australian has learnt that David Murray, head of the Future Fund, has advised the Government it should evaluate credit to the small and medium enterprise sector as a priority. Kevin Rudd has repeatedly referred to the crucial need to get private credit flowing as a precondition for economic recovery.

The gloomy forecast reinforces the warnings in the Reserve Bank's latest monetary statement that conditions in the business sector have deteriorated sharply in recent months. "As a result of the problems in global financial markets, it has become increasingly difficult for many firms to access finance," the RBA says. The D&B research identifies finance, insurance and real estate as having the highest number of firms at risk of financial distress. It finds manufacturing accounted for the second-highest jump, up 15 per cent on last year. D&B's chief executive, Christine Christian, blamed the jump in business failures in the past year on the sharp increase in credit and financial risks.

"With the economy set to weaken in 2009, cashflow and debt refinancing problems are becoming a significant burden for Australian firms," Ms Christian said yesterday. Unlike mortgage holders, most business owners have not benefitted from the big Reserve Bank rate cuts. Instead, the major banks are increasing their margins to take into account the greater risks of lending to the sector and the prospect of more bad debts to come. Typically the banks have more than doubled their margins from about one per cent to about 2 1/2 per cent while making it higher still for businesses with more problems.

Although they are still reluctant to foreclose on existing clients in difficulties, they will be watching closely for any signs of further weakness as they are determined to protect their own balance sheets first. Most businesses are not looking for credit to expand in this climate but merely to keep afloat as their cash flow collapses. The decline of competition in the finance sector means the businesses have little alternative if they are refused by the big four banks, or charged interest rates that are too high for them. The ACCI-Westpac Survey of Industrial Trends shows the proportion of firms in the manufacturing sector reporting difficulties obtaining finance in the December quarter rose to its highest level in more than 30 years. This will only get worse as banks continue to report ballooning bad and doubtful debts.

NAB yesterday increased its provisions for bad and doubtful debts in last year's final quarter to $824 million. Chief executive Cameron Clyne said that there was a decline in customer credit ratings across all businesses. But he said that while no further high-profile names had emerged as problems in the corporate sector, the bank was starting to see more deterioration and "general stress" in the small and medium enterprise market. Queensland's biggest bank, Suncorp, will also tighten its lending requirements after being forced to raise almost $1billion after making too many poor decisions in lending to property developers, building and construction, and financial engineering companies.

There are 1600 listed companies in Australia and 1.6 million registered companies. D&B's corporate risk analysis was conducted on a sample of 371,053 companies. Of this sample, 31,000 were categorised as "high risk", and of those, less than 100 of the companies were listed. Goe Pafumi, national credit manager at diesel engine manufacturer Cummins South Pacific, said yesterday conditions were extremely tough for Cummins and its customers. "We have about 9500 customers in Australia and we are finding that our SME customers are struggling to meet payments at the moment," he said. Mr Pafumi said the banks had tightened their lending requirements markedly in the past few months and many of Cummins's clients were complaining that they couldn't pay their bills because the banks were withdrawing overdrafts or making it too expensive. "The banks are getting nervous and we think it is about to get much worse," he said. Another concern is that with credit tightening, the impact of late payments on cashflow can be devastating.

Australia's bad debts spiral amid shockwave fears
The nation's biggest banks have warned shock waves are spreading into most reaches of the economy at a faster-than-expected pace, with lenders such as National Australia Bank now facing a bad debt charge in excess of $3 billion if losses continue at the current rate. The lending giant, along with Australian & New Zealand Banking Group, has added to the slew of bad news that is coming from the bank sector, which is grappling with the highest level of bad loans since the 1991 recession, slowing lending growth and a run-up in funding costs. NAB chief executive officer Cameron Clyne said: "The economic outlook is clearly not getting any better and we face a challenging market environment. The future is very uncertain."

The banking giant left open the prospect that dividends could be cut if the environment deteriorates further. Such a move would follow the lead of Suncorp Metway, which this week warned it was slashing dividends as profits were shrinking. Still, NAB, like rival Commonwealth Bank of Australia, appears to be benefiting from the rapid consolidation of the banking sector, as smaller players find it harder to compete and some struggling offshore lenders exit the market. In a first-quarter update to investors, NAB yesterday said cash earnings were about $1.1 billion for the three months to end-December, largely flat on the same period a year ago. Despite a rapid slowdown in most of NAB's key markets, including the recession-hit Britain and New Zealand, NAB said overall revenue growth was strong, but was not specific.

Earlier this week, CBA said a revenue surge should help it deliver a bigger-than-expected $2 billion interim cash profit when it delivers its first-half results on Wednesday. But the nation's largest bank admitted it would also be hit by a sharp jump in bad debts. CBA's $1.6 billion first-half charge will be nearly five times the $333 million loss incurred by the bank in the first half of last year. Second heavyweight ANZ yesterday said bad loans were rising and first-half profits would be down more than 15 per cent from the same time last year. ANZ was prodded into its confession by the Australian Securities Exchange, which had raised concerns over a drop in the bank's share price over the past few days. Most of ANZ's share weakness is largely thought to have been a result of fallout from Suncorp-Metway's $900 million capital rasing launched this week to prop up its balance sheet.

NAB yesterday revealed its bad and doubtful debt charges during the December quarter had come in at $824 million. Of this, $521 million was against existing corporate bad debts, thought to be Babcock & Brown, struggling shopping mall operator Centro, and collapsed child-care operator ABC Learning. Still, the quarterly figure suggests bad debts could top $1.6 billion for the first half, well up on the $726 million for the first half of last year, especially as NAB has been forced to top up its collective provisions — that is, to cover for anticipated losses as the environment deteriorates. "It's clear in the current environment with the slowdown there's going to be more and more businesses and people getting stressed on debt, so they're expected to go up," said Peter Vann, head of investment research at Constellation Capital Management.

While losses were rising even with a hard economic landing, bad debt charges still expected to come in at less than half the devastating losses of the early 1990s, Mr Vann said. In 1992, bad debt charges peaked at 2.72 per cent of total loans, but this could range between 0.53 per cent and 1.08 per cent, according to estimates compiled by brokers UBS. Although no new large corporate losses have emerged in recent months, NAB's Mr Clyne said bad debts were emerging more broadly, including "stress" among small to mid-size businesses. Suncorp was caught out this week when it warned bad debts would jump to $355 million also on its Babcock exposure and hits to its portfolio of commercial property loans.

"There's no question that we've seen a much faster deterioration in conditions over the past three months than expected when we came out with our update in November," Suncorp chief financial officer Chris Skilton said. These losses, a capital raising and a deteriorating performance across its insurance business combined to trigger the resignation of chief executive John Mulcahy, who has headed the Brisbane-based firm for the past six years. For banks, there are also worrying signs the economic downturn is starting to play out into mortgages, with the first signs of cracks appearing across this usually low-risk class of lending. New figures that track securitised mortgages — a proxy for the broader home lending markets — show the level of missed repayments are on the rise. Of particular concern, the November arrears data shows that an increasing number of so-called prime borrowers are experiencing some degree of mortgage stress.

Citigroup Hides Mystery Meat in Balance Sheet
Even now, Citigroup Inc.’s bosses can’t get over their delusions of grandeur. You can see their shiny optimism in a $44 billion balance- sheet item called deferred-tax assets, which is a fancy term for pent-up losses that the bank hopes to use later to cut its tax bills. That figure tells you Citigroup’s executives, in spite of their bank’s near-collapse, are still forecasting future profits as far as the eye can see. They have every incentive to do this, too. If they ever turned pessimistic, the assets might go poof. While you won’t find any mention of deferred taxes in Citigroup’s latest earnings release, this may be the most important asset on the bank’s books today. It also looks the fishiest, at more than three times what it was a year ago, and more than double the company’s $19 billion stock-market value.

Those assets represented 55 percent of Citigroup’s common shareholder equity as of Dec. 31. And one crucial question still unanswered is how much of that $44 billion Citigroup is including in its closely watched Tier 1 capital, the primary gauge the government uses to measure a bank’s ability to survive losses. Deferred-tax assets, or DTAs, typically consist of losses carried forward from prior periods. Under the accounting rules, these carryforwards are valuable only to companies that make money and pay income taxes. If a company is losing money and doesn’t expect to be able to use these assets, it’s supposed to record an offset, or allowance, to reduce their value. Deferred taxes also can take the form of carrybacks, which let companies claim refunds on past taxes paid.

Citigroup’s chief financial officer, Gary Crittenden, disclosed the $44 billion figure during the company’s earnings conference call last month. He said the bank had made no adjustments to their value, on the grounds that "these DTAs are expected to be realized in the future periods." Those periods, he said, extend as far as 20 years out. The $44 billion is roughly equal to the taxes that would be owed on about $125 billion of income, assuming Citigroup had a 35 percent rate. Citigroup reported an $18.7 billion net loss for 2008. It’s hard to say when the bank might make money again. This is the same Citigroup that didn’t see the subprime- mortgage meltdown coming, or the credit crisis, or that it would need federal bailouts to stay afloat.

That hasn’t shaken its executives’ confidence in their ability to predict Citigroup’s profits for the next two decades, or their conviction that the tax assets are worth every cent of that $44 billion. "Good luck making that kind of money," says Robert Willens, a tax and accounting specialist who teaches at Columbia Business School in New York. The last time I wrote about this subject, back in November, Citigroup had just disclosed in filings with banking regulators that its net deferred-tax assets were $28.5 billion, as of Sept. 30. It included $18.5 billion of that amount in its Tier 1 capital. The upshot: About 19 percent of Citigroup’s $96.3 billion of Tier 1 consisted of deferred taxes at the time.

That looked odd for a few reasons. Under the Federal Reserve’s rules, the only way a bank can include carryforwards in Tier 1 is if it expects to use them all within 12 months. Even then, the rules say that carryforwards aren’t supposed to exceed 10 percent of a bank’s Tier 1 capital. There’s no such limit on carrybacks. But Citigroup has never disclosed any information showing it has vast amounts of carrybacks. Willens estimates Citigroup’s carrybacks might be a few billion dollars, based on the bank’s federal tax provisions for 2007 and 2006. A Citigroup spokeswoman, Shannon Bell, declined to say how much of the bank’s DTAs were carrybacks.

For a while, it seemed Congress might help Citigroup and other large banks by expanding the federal carryback period for operating losses to five years from two. Not anymore, though. Under a bill passed by the U.S. House of Representatives that’s now before the Senate, companies wouldn’t be eligible if they had accepted federal bailout money, which Citigroup did. Citigroup hasn’t disclosed in dollar terms how much Tier 1 capital it had as of Dec. 31. Bell wouldn’t tell me that, either. Nor would she say how much of Citigroup’s Tier 1 capital at the end of 2008 came from deferred-tax assets. Citigroup will have to disclose those figures in the coming weeks when it files its annual reports with securities and banking regulators. When it does, the bank’s executives are sure to face more questions about how these assets could be so big. We’ll see if they come up with answers that show a firmer grasp on reality.

Obama's promised health care overhaul delayed
President Barack Obama's push to revamp the costly and inefficient U.S. healthcare system was facing delay even before Tom Daschle, who was chosen to head the initiative, withdrew his nomination as health secretary. With the administration and Congress preoccupied with righting the foundering economy, work on Obama's promise to make affordable care available for all Americans has been limited in Obama's first weeks in power. Health care reform advocates are pushing for quick action and want Congress to act by the end of the year, well before lawmakers start political maneuvering for congressional elections next year. But the Democratic-led Congress is taking longer than expected to approve Obama's economic stimulus plan, which has topped $900 billion in the Senate, and Obama has to cope with a budget deficit some estimate could top $1 trillion this year.

Creating a comprehensive plan to control soaring healthcare costs and cover 46 million uninsured Americans has eluded previous administrations and is an ambitious goal for lawmakers with so much on their plates. Daschle's decision to withdraw from consideration as Health and Human Services Secretary on Tuesday, citing a political backlash over his late income tax payments, dealt Obama's health care overhaul a serious blow. Daschle, a former Senate majority leader who was also named to a White House post in which he would lead the overhaul of the $2.3 trillion industry, was seen as an inspired choice. "Senator Daschle's withdrawal could make the process harder, but it doesn't change the urgency of reform," said Nancy LeaMond, executive vice president of AARP, an influential advocacy group for people over age 50.

Any health care overhaul would require an all-out effort by Obama and administration officials to bring business, unions and other interest groups in line behind legislation and to build public support. Advocates of change note the impact the current system has across the economy, especially at a time of severe budget deficits. Michigan Democratic Senator Debbie Stabenow, for example, pointed out that U.S. automobile manufacturing plants have been moving from Detroit across the river to Canada because Canada's national healthcare system means companies do not have to provide expensive health insurance to workers. Daschle's decision to bow out caught many lawmakers by surprise. The White House scrambled to find a replacement but the vetting and confirmation process for the new choice could take weeks. Congressional Democrats put on a brave face.

House Speaker Nancy Pelosi said on Wednesday there was "no question" Daschle would have been a "great leader" in the effort. "But the effort is one that will happen." Senate Finance Committee Chairman Max Baucus said congressional committees were continuing work on developing legislation and did not see Daschle's withdrawal having a major effect on the timetable. "Maybe a little blip, but I don't think it's much," said Baucus, who as head of the Finance Committee will play a major role in writing the legislation. Obama plans to hold a "fiscal responsibility summit" with members of Congress to address major budget issues involving the Social Security retirement program and Medicare health care program for the elderly, key elements in any major changes.

More Lemon Socialism -- And Why The Limits on Wall Street Pay Are For Show
by Robert Reich

Wall Street and its allies are in a tizzy over the Obama administration's proposed $500,000 limit on executive pay, saying it will threaten their ability to attract and retain executive talent. I do not mean to deprecate Wall Street executives when I point out that the far higher level of compensation they received in recent years has not exactly elicited talent -- at least not talent for much of anything other than the accumulation of personal wealth at the expense of millions of investors and of the economy overall. Wall Street compensation has been geared to short-term bets on high-leveraged investments, after which players quickly collect any winnings and run for cover. Many Streeters grew rich in the process but most of the rest of us are undeniably poorer. One additional pernicious side effect over the years has to lure many of America's most talented young people into prestigious MBA programs leading to jobs on the Street at starting pay higher than most Americans ever dreamed of and, with luck and hard work, subsequent shares in the firms' Ponzi-like pickings.

If one is looking for silver linings in the devastation of Wall Street it may be that this sort of talent will henceforth be less demanded and less rewarded -- not because of Obama's plan to limit pay of executives living off public bailouts but because the Street has imploded. The plan itself is a bit of a ruse. If truth be told, the $500,000 seems little more than a symbolic gesture designed to reassure the public that the large amounts about to be asked for the next stage of bank bailout -- likely far more than the $350 billion remaining in "TARP" (more on this in a moment) -- will not simply feather the nests of those who created the mess in the first place. The guidelines don't actually put a cap on total pay but only on salaries (usually a small portion of total pay), and even then apply only to firms receiving "exceptional assistance" -- presumably especially large bailouts in the tens of billions of dollar range, such as went to Citigroup and AIG -- rather than to those receiving run-of-the-mill bailouts amounting to, say, under ten billion.

Most firms getting bailouts may continue to pay their executives whatever they want to pay them as long as they disclose it to their shareholders and give shareholders an opportunity to express their views about it. So why is Wall Street so upset about the faux $500,000 limit? Precisely because of its symbolism. It's as if the administration is planning to subject executives of the banks that take the next dolop of bailout money to a kind of public shaming -- the equivalent of a scarlet G, for greed -- when the executives don't view the bailout that way at all. Few if any of them think they did anything wrong in the first place; they don't even view the bailout as a "bailout" but rather as a necessary injection of liquidity to keep credit markets going.

By the way, get ready for some really horrifying bailout numbers. Goldman Sachs -- not one to exaggerate the overall problem -- recently estimated the total value of troubled U.S. bank assets to be $5.7 trillion. Hence, do not be surprised if the next stage of the bank bailout dwarfs the cost of the stimulus package. My guess is that's reason the administration wants the stimulus bill approved before it fully unveils the price tag of the next bank bailout.

France’s Noyer: No Countries Will Leave Euro Zone
The solidity of the euro zone is intact and there’s no risk that a country might decide to leave it because of difficulties it’s facing due to the economic crisis, Bank of France Governor Christian Noyer said Saturday. In an interview broadcast on the France Classique radio station, Noyer, who also sits on the policy-setting board of the European Central Bank, said it’s "unthinkable" that any country might leave the single-currency area. "There’s no risk that current difficulties - even the difficulties that some countries have with their budget deficits and credit ratings - might lead to a weakening of the euro zone," Noyer said.

"Leaving the euro zone is unthinkable. It would have dramatic consequences for any country that did that, and no one is thinking about it." There has been some speculation in recent weeks that one or two countries might seek to leave the system to escape its rigid policy rules. But Noyer observed that recent investment rating downgrades of sovereign debt by some rating agencies have been "very excessively exaggerated." The governments and lawmakers of countries that are facing severe difficulties will attack them seriously, Noyer said, adding: "They don’t have a choice

Home Buyer Tax Credit’s Price Tag: $35 Billion
Homebuilders are optimistic that Congress will add a $15,000 tax credit to the $900 billion stimulus package, and some builders are trying to take advantage of the offer by rolling out incentives of their own. Shea Homes’ Trilogy division, which develops homes in California, Arizona and Florida for aging baby boomers, is already promoting a 3.875% fixed mortgage rate on new home purchases. Senate Republicans added the buyer tax credit on Wednesday night, but the price tag of the measure, at $35 billion, is nearly double the $18.9 billion that was originally estimated.

The tax credit can only be used for primary residences and unlike the $7,500 tax credit passed last year, the money wouldn’t have to be repaid to the government. There’s also no income restriction on who can claim the credit. The credit is nonrefundable and can be claimed over two years, so buyers whose tax liability is less than $15,000 would have a second year to capture the credit. For example, a buyer who owes $10,000 in taxes would be able to take a $10,000 credit in the first year after their purchase, and a $5,000 credit for the year after that.

Paulson to China: I Don’t Blame You. Really.
From the WSJ’s China Journal blog: "Henry Paulson made improving relations with China one of the central priorities of his tenure as U.S. Treasury Secretary. But after leaving office, he seems to have been caught up in a rearguard action to protect his reputation in a country he has spent years visiting." For the last month or so, Mr. Paulson has been repeatedly attacked by name in Chinese state media for reportedly claiming that the global financial crisis was China’s fault. This week, China’s official Xinhua news agency said Mr. Paulson had sent it a statement clarifying his views.

"In assessing the financial market crisis, I have repeatedly and consistently targeted the vast majority of my criticism at problems in the United States, particularly our flawed and outdated regulatory structure," Xinhua quoted Mr. Paulson as saying. "Whenever I have commented on global imbalances, it has been against that backdrop and I have gone out of my way to say that no single country is to blame for the imbalances." The origin of the exchange seems to be a January article in the Financial Times that paraphrased Mr. Paulson as saying that "in the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China and oil exporters — at a time of low inflation and booming trade and capital flows — put downward pressure on yields and risk spreads everywhere."

Those comments were widely interpreted as casting blame for the outbreak of the crisis on China. That was, to put it mildly, not well received. A commentator for the Xinhua news agency in January wrote that those "remarks made headlines but cannot change the facts. It is widely accepted that the U.S. low interest rate policy, which encouraged excessive spending and caused the sub-prime crisis, was at the root of the problem." "When a morally upright person is mired in difficulties, he or she will engage in introspection rather than shift responsibility," the Xinhua commentator wrote. "It is not time to play a blame game."

To be fair, it doesn’t seem that Mr. Paulson ever actually put the blame for the crisis squarely on China’s shoulders. His clarification to Xinhua does not differ much from remarks he made while in office, when he highlighted both failures in the U.S. as well as global factors. For instance, in a speech in Washington on Nov. 12, Mr. Paulson said, "We in the U.S. are well aware and humbled by our own failings and recognize our special responsibility to the global economy. The U.S. housing correction exposed gaping shortcomings in the outdated U.S. regulatory system, shortcomings in other regulatory regimes and excesses in U.S. and European financial institutions."

It is now widely accepted that "global imbalances" –- economists’ shorthand for the combination of large current-account surpluses in Asia and the Middle East and large current-account deficits in the U.S., U.K. and some European nations –- played some role in setting the stage for the financial crisis. But by their nature, these capital flows among nations are hard to ascribe to one country alone. In the Nov. 12 speech, Mr. Paulson said: "Over a period of years, persistent and growing global imbalances fueled a dramatic increase in capital flows, low interest rates, excessive risk taking and a global search for return. Those excesses cannot be attributed to any single nation. There is no doubt that low U.S. savings are a significant factor, but the lack of consumption and accumulation of reserves in Asia and oil-exporting countries and structural issues in Europe have also fed the imbalances."

Mr. Paulson was really making the suggestion, on the face of it fairly reasonable, that a global crisis probably had global origins. And the enormous increase in the size and openness of China’s economy means it has clearly influenced the shape of the global economy. But drawing attention to China’s role in the lead-up to the crisis seems not very welcome there.

OECD Sees Bleak Global Outlook
The outlook for the world’s developed economies is the bleakest since the oil shock of the early 1970s, an indicator of future activity released by the Organization for Economic Cooperation and Development showed Friday. Adding to the gloom, the OECD’s leading indicator data suggest that the large developing economies are increasingly being dragged down by the recession in richer nations. The OECD’s leading indicator for its 30 developed-country members fell again in December, as did the individual indicators for each of the Group of Seven leading industrial nations. The leading indicators for non-members China, India, Russia and Brazil also fell sharply.

"Leading indicators…continue to point to a weakening outlook for all the major seven economies," The OECD said. "The outlook has significantly deteriorated in the major non-OECD member economies who are now also facing strong slowdowns." Important parts of some G-7 economies are already experiencing slowdowns on a scale last seen in the early to mid 1970s, when a surge in oil prices and a shortage of energy led to severe cutbacks in industrial production. The OECD’s leading indicators are designed to provide early signals of turning points between the expansion and slowdown of economic activity, and are based on a wide variety of data series that have a history of indicating swings in future economic activity. A total of 224 series are used, or between five and 10 for each country.

The Other Unemployment Rate: 13.9%
The Labor Department’s official unemployment rate hit 7.6% in January, and its jump from 4.9% a year earlier marks the largest annual increase in the unemployment rate since 1975. But the government’s broader measure of unemployment hit a more stunning level: 13.9%, up from 13.5% in December. The figure, which largely accounts for people who have stopped looking for work or can’t find full-time jobs, is the highest since the Labor Department started the data series in 1994. It’s just shy of a discontinued and even broader measure that hit 15% in late 1982, when the official unemployment rate was 10.8%. (That data series goes back to the 1970s.)

How does the government calculate two unemployment rates? The widely followed figure is based on people who do not have a job, are available for work and have actively looked for work in the prior four weeks. The official definition of "actively looking for work" includes contacting an employer, employment agency, job center or friends; sending out resumes or filling out applications; and answering or placing ads, among other things. The 13.9% unemployment rate — known as the "U-6" for its Bureau of Labor Statistics classification — includes everyone in the official unemployment rate plus "marginally attached workers," who are neither working nor looking for work but say they want a job and have looked for work recently, and people who are employed part-time for economic reasons — they want and are available for full-time work but took a part-time schedule because that’s all they could get.

Because it’s a relatively young data series, the U-6 doesn’t get much attention beyond researchers. But it may deserve more focus over the coming year as the labor market continues its purge. Many employers are still focused on cutting jobs quickly to get through this downturn, pushing job-seekers aside for an extended period. After long searches — we’re in the fifteenth month of this recession — some job hunters are likely to give up and wait out the recession. Without the broader unemployment rate, many of them wouldn’t be counted.

The rise and (almost) fall of America's banks
These days, Americans can roll up to an ATM at the grocery, the pharmacy, the gas station, the hardware store, the office, even the ballpark. They can check their Bank of America balance on their iPhone. They can text Chase, and Chase will text them back. That's banking today: It has grown from an almost quaint relationship between teller and customer into a massive, dizzyingly interconnected network that touches almost every adult in the United States. And right now, the federal government -- working without a road map, and without a net -- is putting together a plan to keep American banks from collapsing. Not just to get the banks lending again. To keep them alive. The U.S. is expected to announce Monday a plan that analysts expect will include lifting soured mortgage assets off selected banks' books, possibly along with guarantees against other losses and maybe more direct injections of cash.

Financial industry experts say it is a matter of choosing the best of several options, none of them very palatable. And no one knows for sure what will work because nothing like this has happened in living memory. Getting it wrong could trigger a replay of what happened after Lehman Brothers collapsed last fall -- the stock market in free fall, seizure of the credit markets, ripples of layoffs. Perhaps even a run on other banks -- so many customers rushing to pull out their cash that it would make the bank run in "It's a Wonderful Life" look like, well, a feel-good holiday movie. "The banks are at a terrible junction," says Robert Reich, a labor secretary under President Bill Clinton. "The bottom is falling out. Almost every area of the credit markets, we're finding people unable to repay their loans. That means many banks are basically insolvent."  "If one big bank implodes," he says, "the reverberations could be endless."

So how did Americans get into this mess? And how do they get out? Washington and Wall Street are still playing the blame game. But most financial experts agree that a cocktail of bad economic policies and lax government oversight led lenders, borrowers and investors to take huge risks. Greed and recklessness trumped fear and reason, and they led banks to the brink. To understand how the things went awry this time, go back a couple of decades, to a time when people could walk into their hometown bank branch and speak to a teller who knew their name and kept a pen-and-paper record of their mortgage. Banking was a simpler affair, and a no-nonsense one: If you didn't make enough money to qualify for a loan, you didn't get one. But in the 1980s, falling interest rates and loose lending standards opened banking to the masses. Credit was cheaper, and the government pushed to make more Americans homeowners. The housing boom was on. Banks and savings and loan associations, or S&Ls, spread across the U.S. offering cheap, 30-year mortgages. By 1980, banks had $1.5 trillion in outstanding mortgage loans, more than double the amount from 1976.

It was, says Eugene White, an economics professor at Rutgers University and an expert on the Great Depression, all about the government's postwar policy of selling a "piece of the American dream." "But by doing that, we forgot about the risks," he says. Then came the bust. Unable to pay their mortgages, homeowners and businesses began defaulting in droves. Deliquencies soared, triggering the savings and loan crisis, battering the stock market and prompting a huge, taxpayer-financed bailout. Sound familiar? Fast forward to today. Not exactly an example of lessons learned. Some ingredients of the S&L mess, such as cheap credit, loose lending standards and weak oversight, also are part of the current debacle. But two new trends -- the rise of the global banking behemoth and the packaging of debt into securities that investors could buy and sell -- made this meltdown unique. And much worse.

In the span of a decade, Citigroup, Bank of America and JPMorgan Chase, once bread-and-butter providers of free checking accounts, grew into international banking conglomerates that buy and sell stocks and manage assets for fees. The "universal bank" model, which took hold in the late 1990s, changed the face of global finance. And it linked Main Street with Wall Street in a way never seen before. Banks themselves became ubiquitous in American life. From 1995 to 2008, the number of bank branches grew from 81,000 to 99,000. Over the past decade, the number of ATMs swelled from 187,000 to 406,000. These banks lured first-time homeowners, many of whom believed housing prices would go up forever, with attractive lending rates and lax requirements. Bad credit, no credit -- it seemed almost anyone could get a mortgage loan. But instead of holding on to the loans themselves, a modern version of the old pen-and-paper model, the banks bundled them into securities and sold them to investors across the globe. In a flash, a mortgage for a home in California or Florida could be sold to a hedge fund in London or Singapore -- a huge shift.

In the old days, credit had been based on the borrower's ability to pay back the loan. "But now it was based on the lenders' ability to securitize the loan and sell it," says Barry Ritholz, a financial analyst and author of "Bailout Nation: How Corrupt Money Shook Wall Street." "That is absolutely unique in the history of finance." Sure, the risks were big. But so were the rewards. Using vast sums of borrowed money, Goldman Sachs, Morgan Stanley and other investment banks bought and sold mortgage-backed securities and other complex financial products, reaping astronomical profits that helped pay for outsized bonuses for executives. In 2006, Goldman Sachs turned a $9.4 billion profit, the highest in Wall Street history. The bonanza netted chief executive Lloyd Blankfein a bonus of $53.4 million, more than any other Wall Street CEO for that year. That was followed by the $41.4 million pay package received by Morgan Stanley CEO John Mack, who led his firm to a profit of more than $7 billion of profit in 2006.
But the good times didn't last long.

When the housing market began to decline in 2006, subprime loans -- those made to people with the worst credit -- were the first to self-destruct. That caused massive financial losses at the big banks and claimed the first casualties of the financial crisis. Then, early last year, Bear Stearns, a venerable 85-year-old investment bank, began to teeter. The bank suffered huge losses tied to subprime securities. Its stock plunged, and investors raced to pull their money. Bear Stearns was bought by JPMorgan for a meager $10 a share in a government-brokered fire sale. Six months later, the crisis spread to Lehman Brothers, a 158-year-old investment bank that helped finance America's railroads. And, this time, the government decided not to step in. Lehman collapsed in the biggest bankruptcy in U.S. history. Immediately, banks around the world, seized by fear, stopped trusting almost anyone, and lending, the lifeblood of the economy, dried up. Seemingly overnight, two of the biggest names in global finance were gone.

To the even greater alarm of most Americans, the stock market went haywire. The Dow Jones industrials, in what amounted to a slow-motion crash, plunged 2,400 points over eight straight trading days in October. By late November, retirement accounts were cut almost in half. To many observers, the big banks broke one of Wall Street's cardinal rules: Be greedy, but be greedy over the long term. "They forgot their instinct for self-preservation," says Lisa Endlich, author of "Goldman Sachs: The Culture of Success." This January, the government took over six failed banks, including three on a single day. Last year, it took over a total of 25. When it happens, the government swoops in and try to minimize disruption. Recently, it has tended to close banks on a Friday and achieve something close to business as usual by Monday morning, arranging for other banks to take on the assets. ATMs have kept working, and people have had access to their cash. So far, most of the failed banks have been relatively small, many with assets only in the hundreds of millions of dollars. But what would happen if one of the big U.S. banks, the kind that manage hundreds of billions in assets, went down? "That would probably cause a complete meltdown of the American financial system," says Andreas Hauskrecht, an associate professor of money, banking and finance at Indiana University.

After the financial crisis accelerated last fall, the government increased the limit for the amount of bank deposits it will insure for individual depositors, from $100,000 to $250,000, effective through the end of this year. And while few Americans have to worry about keeping anything bigger than that in the bank, the government could eliminate the limit altogether and insure all deposits regardless of size if a huge bank, such as Citigroup or Bank of America, were to fail, says Jim Wilcox, a professor of financial institutions at the University of California at Berkeley. No one has ever lost money in an account insured by the Federal Deposit Insurance Corp. But no one has ever seen a bank that size go under, and news of a giant bank's downfall would probably touch off a panic in which even depositors with money in safe banks rush to get it out. But there's a bigger economic problem: Other lenders, which hardly trust everybody these days anyway, would stop trusting anybody. Businesses, unable to borrow money day to day, would fail, with worldwide consequences. It doesn't take an economics degree to realize that would be nothing short of catastrophic for the economy.

"Not to say there's not good aspects of letting someone fail," says Robert G. Hansen, senior associate dean at Dartmouth College's Tuck School of Business. "But the short-term costs of inflicting that punishment to everybody are really high, and I don't think the Obama administration has the stomach for it." Already, the new administration is treating the Lehman failure as a lesson. Treasury Secretary Timothy Geithner suggested at his confirmation hearing before Congress that the feds would not let another big bank go down. "Lehman's failure was enormously complicated, an enormously complicated set of events," he said. "It didn't cause this financial crisis, but it absolutely made things worse." So what now? Financial experts don't expect the United States to go the way of Iceland, where a collapse of the banking system last month threw the tiny country into turmoil and toppled the goverment. What keeps them up at night is a scenario closer to that of Japan, which bungled its own bank bailout in the 1990s and limped along during a "lost decade" of anemic economic growth and high unemployment.

To prevent that, the Obama administration must choose the best of several difficult options, or a combination. The emergency medicine prescribed by the last administration -- flooding the financial system with billions of federal bailout dollars -- hasn't worked. If anything, banks are sicker. One idea under consideration is the creation of a government-run aggregator bank, or a "bad bank," that would buy up hundreds of billions of dollars in banks' toxic assets. The government also may decide to pump more money into banks and offer billions in dollars in guarantees against future losses. But no single fix is seen as a magic bullet, and financial experts say the government is quickly running out of lifelines. "The longer they wait, the more damage there is to the economy and the more it will cost taxpayers," says Frederic Mishkin, an economics professor at Columbia Business School and a former member of the Federal Reserve Board. In theory, the government-run bad bank would buy soured debt that's gumming up the banks' books and clogging the flow of credit. That could shore up banks' base of capital, soothe investors and get banks lending again. But in practice, it's far from simple.

For starters, no one -- including the banks themselves -- knows how much these assets are worth. The complex nature of mortgage-backed securities, credit default swaps and other contaminated products has made investors too afraid to touch them. Pricing them is tricky, to say the least. If it pays too little, the government risks forcing banks to record huge losses on their books, potentially putting them out of business and wiping out shareholders. If it pays too much, it risks shortchanging taxpayers by hundreds of billions of dollars. "It's a can of worms," says Sung Won Sohn, an economics professor at California State University, Channel Islands. The forensic nightmare of appraising these bad assets forced the Bush administration to abandon the idea in the early days of the bailout. With the markets spiraling lower, there simply wasn't enough time. And even if the government figures out how much to pay for the assets this time, the question is how much to buy.

Goldman Sachs estimates the government would need to shell out $4 trillion or more to absorb all the banks' troubled mortgage and consumer debt. How big is $4 trillion? It's more than one-third of the economic output of the United States in a year. It's more than twice as big as the first federal bailout and the coming economic stimulus combined. Just look at all those zeroes: $4,000,000,000,000. Another vexing issue: Who would be in charge of poring over the banks' books and valuing the assets? Experts say the people best qualified to do that are the same ones who created the faulty products -- Wall Street bankers and other investment professionals. That prospect makes some financial observers queasy. "We're asking the same people who got us into this mess to get us out. These are the guys who buy airplanes and decorate their offices for a million bucks," says Bill Seidman, a former chairman of the FDIC who ran the government bailout during the savings and loan crisis.

Seidman and others are calling for an alternative rescue plan that they say would avoid the pitfalls of past efforts: a short-term nationalization of the banks. To many people, that very thought is an affront to the free-market system, more Argentina than America. But that's exactly what the U.S. government did in the S&L debacle of the 1980s. With Seidman at the helm, the government-run Resolution Trust Corp. took over failed S&Ls and sold off their depressed assets -- repossessed homes, offices, cars, planes and even artwork. Any institution needing help had its management fired and its shareholders wiped out. During the next six years, the RTC sold nearly $400 billion in assets on the books of more than 700 failed thrifts. Then it sold the cleaned-up S&Ls back into the private sector. The cost to taxpayers? About $125 billion to $150 billion by the time the bailout was completed in 1995, which was about 2 percent of one year's gross domestic product at the time.

Seidman believes a similar plan has the best chance of success. And he claims it would cost taxpayers far less because the government wouldn't have to buy bad assets or inject more money into troubled banks. Instead, the government's expenses would be largely limited to the cost of cleaning up the seized banks and selling them back into the private sector, Seidman says. "If we don't do it, we risk staying right where we are -- pumping more money into insolvent banks and keeping them alive at the expense of healthy ones," he says. That's what happened to Japan, which injected billions of taxpayer dollars into the banking system and spawned a legion of "zombie banks" -- financial institutions that take government money but don't lend it out. Nationalization isn't a sure thing either. In the S&L days, the government recouped some taxpayer money by selling the physical assets of the banks, things like real estate and cars -- not the hard-to-value paper assets held by banks today. That wrinkle makes it much harder for the government to follow the RTC strategy, says Jonathan Macey, deputy dean at Yale Law School and the author of a book about a government bailout of Sweden in the 1990s. "We're not talking about valuing buildings and dirt," Macey says. "This is quite a bit different." In other words, it's uncharted territory once again.

Savings lost to Madoff, elderly forced back to work
After losing his entire life's savings to disgraced fund manager Bernard Madoff, 90-year-old Ian Thiermann abandoned retirement and now works the aisles of a grocery store to make ends meet. Handing out fliers hawking avocados and pork ribs at a supermarket in Ben Lomond, California, Thiermann is one of many facing dramatic lifestyle changes after losing their savings in Madoff's suspected $50 billion Ponzi scheme. Thiermann wasn't even aware he had invested with Madoff until December 15, when a friend who managed his investments called him on the telephone. "He said, 'I've lost everything and you have lost everything.'" For Thiermann, that meant $750,000.

Days after the release of a list of thousands of Madoff customers -- from Hall of Fame baseball pitcher Sandy Koufax to actor John Malkovich -- a picture is emerging of a scandal that has reverberated far beyond America's still-wealthy to those who have lost nearly everything. And swept up in the pain are many who should be savoring the twilight of their lives in peaceful retirement rather than scrambling for a living. Thiermann, owner of a pest-control company in Los Angeles before retiring 25 years ago, enjoyed returns of 10 to 12 percent each year on his savings for about 15 years regardless of whether markets rose or fell. He lived on those returns, devoting much time to nonprofit work.

"We don't have any cash reserves now. And we still owe money on our houses," he said in a telephone interview. He learned of his losses while shopping in a local grocery store with his wife, Terry. "The store manager who we know very well said, 'What's wrong?' We said, 'Have you heard about this Madoff?' And he said, 'Oh my god!" Thiermann explained. "I now work there as a beginner and I deeply appreciate it." About 2,490 miles to the east in West Chester, Pennsylvania, Maureen Ebel has also surrendered a comfortable retirement, and works as a cleaner after losing her family savings of $7.3 million to Madoff.

On December 17, six days after learning of her losses, the 60-year-old widow found work cleaning the home of a friend and caring for a 93-year-old woman. Ebel's husband, a doctor, died in 2000 at age 53. The former nurse is also selling her luxury Lexus SUV and a winter home in Florida. "On the first day I went to work, after pushing that vacuum cleaner around, I came home and said to myself 'this is what my life has come to,' and I held onto my dog and I cried," Ebel said in a telephone interview.

In Pompano Beach, Florida, 73-year-old Irwin Salbe also expects to return to work after losing about 75 percent of his investment portfolio to Madoff, who according to court documents confessed to his sons on December 10 that the firm's investment-advisory business was "basically a giant Ponzi scheme." Such schemes use money from new investors to pay distributions and redemptions to existing investors. Salbe said his family investments with Madoff date back to the 1960s, although he declined to say exactly how much. "We were pretty heavily in it with my children and my grandchildren. They all had accounts with mine. We're all in it and it's substantial," he said.

"Now we're downsizing. I had two cars. We've gotten rid of one. I've canceled some trips. I've reduced my expenses with every opportunity. We don't eat out like we did. If we go out, we got to a neighborhood place like for a pizza," he said. "I used to get my income from there. Now, there's no more expensive dinners. I don't hug my kids anymore like I used to," he said. "The image of Madoff's main clientele is of rich people. That's not true. A lot of people have been devastated like me," said Salbe, who had met Madoff several times. Salbe, a general manager for a newspaper and magazine distribution company in New York before retiring in 1991, inherited the Madoff investments when his father died in 1984. Over the years, he poured in his own money and eventually parked his entire retirement savings with Madoff. "I'm going to definitely have to go back to a part-time job," he said.

In Wisconsin, Abby Frucht ponders the fate of her parents, whose $1 million in life's savings seemingly evaporated with the collapse of Bernard L. Madoff Investment Securities LLC, Madoff's investment-advisory business. Her parents lived off the money in a retirement home in Sante Fe, New Mexico. "My dad is 85 and my mom is 79. We don't know how long they can stay there. We're working that out now," she said. Her father suffers from Alzheimer's disease and may not fully comprehend what's happening, she said in a telephone interview. "They are very elderly and can't possibly go back to work. They are very comfortable and happy where they are."

Her parents have enough savings to stay in New Mexico another two months. After that, they may have no choice but to move in with her in Wisconsin. "My sisters and I have power of attorney over them so we have been putting our heads together to try and find a way to keep our parents comfortable." Some want industry regulators or the government to pay. After losing money to Madoff, Lawrence Velvel, dean of the Massachusetts School of Law, said both the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority could be held liable for investors' losses. "The brokerage industry is responsible for this because these are the people that caused all of this," he said.


Gravity said...

All our banks are downward-born
and crippled with their
original doublespin.

Anonymous said...

It would be too cool if this image could lead today's Comments.

George Seurat, A Sunday Afternoon on the Island of La Grande Jatte


Bigelow said...

I just sent your intro to "my" Senator. Yeah, I know its misplaced faith.

Anonymous said...

I wonder if the difference between Stiglitz's recommendations for the UK vs. US is that most 401k's and pension funds here in the US are heavily invested in the financials. They would be wiped out if the banks are allowed to fail. Is it different in the UK?

Ilargi said...


Yes, it's a beautiful painting. But pics in comments is not possible.

Ilargi said...


The amount of money already dumped into banks, plus the one that will soon follow, is more than enough to cover bank deposits and pension plus 401-like provisions. This is true in both the UK and US. The intention is simply not to do right by you.

Anonymous said...

God, that last piece of elderly people losing everything to Madoff is just about the most depressing thing one could read.

Ilargi said...

"God, that last piece of elderly people losing everything to Madoff is just about the most depressing thing one could read."

A 90 year-old man is forced to hawk stuff in a supermarket aisle, Alzheimer patients will be thrown out of retirement homes.

Meanwhile, Bernie Madoff sits in his plush and posh apartment in New York, confident that it may take years before he has his day in court, simply because the whole scheme is so damn complex. Considering his age, why would he worry too much?

Anonymous said...

It is not possible to have a strong global economy when there are large pockets of economic turmoil.

I guess we can forget about that strong global economy then, can't we?

rachel said...

"The intention is simply not to do right by you."
I wish I could join the protest in front of Madoff's luxury dwelling, but I am done with protesting. As ilargi states regardless of our pleas (and common sense), they have no desire to to what is right by the people. I just keep reading TAE, start my seeds and talk to anyone who will listen one to one.
good luck

Anonymous said...

Ilargi said...

The amount of money already dumped into banks, plus the one that will soon follow, is more than enough to cover bank deposits and pension plus 401-like provisions. This is true in both the UK and US. The intention is simply not to do right by you.
Everyone is talking about the fact that the bail out borrowing will have to be paid back by our children, grand chidren ...

I don't believe that there is anything left in the bank deposits and pension plus 401-like provisions.

I don't believe the bank statements etc. they are all bankrupt.

Anonymous said...

Krugman, from here:

The short answer: to appease the centrists, a plan that was already too small and too focused on ineffective tax cuts has been made significantly smaller, and even more focused on tax cuts.


My first cut says that the changes to the Senate bill will ensure that we have at least 600,000 fewer Americans employed over the next two years.

The real question now is whether Obama will be able to come back for more once it’s clear that the plan is way inadequate. My guess is no. This is really, really bad.

My guess is ... yes. He will come back again, and again. Each time will be easier than the last, because things will be getting more visibly worse.

The early stages of this meltdown were pretty theoretical for most people. Now it is hitting home. The old saying is "a recession is when you lose your job, a depression is when I lose my job".

As things get worse, voters will demand action (whether or not it does any good). Action will be taken. Obstructionists will be steamrolled. We get to observe an experiment in how quickly money can be piled up and burned. A little bit of it might actually do some good along the way.

Anonymous said...

We're sprinting down the Road to Serfdom:

Anonymous said...

I have watched the market lately and found that it is insane: manic-depressive. If you talk about marking assets to market, are you talking about marking it to manic or marking it to depressive? Who decides whether assets should be marked to today's or yesterday's, which may be 20% different?

Anonymous said...

That quote from Larry Summers up top just ruined my bean supper.

I now feel a need to hurt somebody. But I'm a puss, really.

I'm soooo over Obama.

What the hell are we going to do?

What the HELL are we going to DO?

Anonymous said...


"What the HELL are we going to DO?"

I take it you haven't read the primers? The one on "How to build a lifeboat" is an excellent start.

Understanding the big picture also helps. That's covered to a large degree in the rest of the primers.

Also, violence isn't the solution.

Anonymous said...

Stiglitz said "There is an argument for letting the banks go bust. It may cause turmoil but it will be a cheaper way to deal with this in the end."

Well, let's see. There was about $7 Trillion in Bank Deposits a year ago, in the U.S.. Since then, we've dumped in $8-10 Trillion, and are about to dump another $1 Trillion next week.

All with nothing to show for the effort.

So, yes, there is indeed a VERY good argument for letting them go bust, and insuring all of the depositors.

It would've been far cheaper. It would probably have saved us about $10 Trillion by the time everything is done.

Alas, it would've cost Hank Paulson's buddies hundreds of millions in bonuses though. Funny how that works.

Anonymous said...


I gave up activism as well. Protests tend to be effective in democracies. The US Empire does not resemble any democracy. Some say it's a plutocracy or a kleptocracy, not a democratic republic. I don't expect Patriot Acts or the Military Commission Act of 2006 to be rescinded by Congress or the new administration. Democracy is dead in the US, as Ilargi says.

I'm also cultivating my garden and chatting with those who are receptive to my words.

Anonymous said...

"Meanwhile, Bernie Madoff sits in his plush and posh apartment in New York, confident that it may take years before he has his day in court, ..."

Well, all I have to say to that is..

"China to execute two over poisoned baby milk scandal"

Yankee Stadium would be the proper venue for such a spectacle.

Anonymous said...

I thought some of you might enjoy the below lonk; a beatiful rant from Dec 06 on the decadence of art as investment. From a very respected artist/professor.

ogardener said...

Lawrence H. Summers: The laws of economics are like the laws of engineering. There's only one set of laws and they work everywhere. One of the things I've learned in my time at the World Bank is that whenever anybody says "But economics works differently here", they're about to say something dumb. [ p. 106 ]

There are no...limits to the carrying capacity of the earth that are likely to bind any time in the foreseeable future. There isn't a risk of an apocalypse due to global warming or anything else. The idea that we should put limits on growth because of some natural limit, is a profound error and one that, were it ever to prove influential, would have staggering social costs. [ p. 109]

What a freakin' nightmare!

weatherman said...

Apropos of Bernie Madoff, check out this documentary about liars and our inability to detect them.

Approximately 15 minutes into the doc there is the story of Jay Zubick, a so-called "investment advisor" who duped 29 people in Carmel CA out of $15.8 million of their savings, which he used to pay for his extravagant lifestyle.

According to an article in the US News and World Report dated May 2, 2008, ...Zubick used an elaborate method of "cut and paste" to carry out the fraud. Zubick "went to concerted efforts to create inflated numbers on the computer, print the numbers, cut them out, and paste them over and on top of the actual numbers from the actual investment account statements generated by the online brokerage firms...

"...Zubick kept the scheme going for years by honoring the victims' sporadic requests for disbursements; fabricating investment statements to reflect grossly inflated values; altering actual stationery from brokerages to create the illusion of accounts that didn't exist; fabricating and disseminating K-1 statements to reflect phantom income on which the victims paid taxes...

The California presiding judge threw the book at Zubick, imposing the maximum sentence of 25 years.

Since Madoff's admitted fraud is said to have amounted to $50 billion, perhaps he can look forward to a proportionally higher sentence, of maybe 75,000 years

Starcade said...


You're one order of magnitude short...

This is why I believe nothing of America survives -- society, economy, currency, country -- and the only question now is how much of this was a plan (either for the NAU or the NWO)??

Starcade said...

Re Summers: He at least has the idea of what will happen once the limits are imposed...

Where he's absolutely f*cked in the head is that we won't have those limits imposed.

Anonymous said...

The article on Job losses spreading to workers with College Degrees was rather disingenuous, by omission.

The Corporate Universities (to use Wolin's term) are now heading towards getting students (or their parents) into as much debt as possible.

So, students graduate with a huge debt load these days. All in the effort to try to obtain higher paying jobs. No where did it mention that younger people being laid off have to face servicing this debt.

And those about to graduate are looking at a dismal job market, AND having to start paying on that debt.

Add to that the guest worker programs which are designed to bring in as many cheap workers as possible, across as many employment fields as possible, and it looks very grim for recent grads, and those about to graduate.

Honestly, I have to wonder how they expect to make it?

Anonymous said...

Probably around $9 trillion of the estimated $10 trillion "spent" on the bailouts has not been spent it has just been pledged. Offers of insurance against losses on bad paper. The insurance has no backing. If and when the Fed and Treasury have to provide the payments for the losses there are two choices. Get the money appropriated by congress and borrow it or have the Fed print it.

The whole idea of this insurance is that by having it that it won't be needed. The insurance will bring ever elusive confidence to the market so the paper can trade and in the best case scenario rise in value as the economy recovers.
In other words it's a confidence game. A con game.

One thing we can have confidence in is that congress will never fund insurance payments on the most of crappy paper. That leaves the printing press.

The press is already starting to run. The only certain amount so far is the $500billion pledged to buy up mortgage backed securities. Other printing is going on we can assume in the alphabet soup programs but Fed operations have become very opaque. Where this money will end up. Which thing it might inflate or stop deflation in is impossible to know.

The best guess it will tend to find it's way into equity markets. Do not be shocked if there is a significant rally in stocks during the spring. That's not a prediction. Just pointing out that it could happen. We could be days or weeks from new lows too.

The medias mood is determined by the stock market. If the market does rally then the news and comments will paint a rosy picture and that will lift the social mood. Everybody loves a con game.

Anonymous said...

Immigration policy has always been about manipulating labor costs.

NeoConJobs and other assorted reactionaries have always used racism publicly to whip up fury in their sheeple shock troops, all the while privately profiting from the policy of cheap, abundant immigrant labor.

Their hypocrisy knows no bounds. NeonaziConJobs wet dream is forced labor camps, free labor. Debt slavery (huge student loans) is their prerequisite conidition to reaching their perverted 'promised land' of dirt cheap labor.

They're almost there.

Stoneleigh said...


The whole idea of this insurance is that by having it that it won't be needed. The insurance will bring ever elusive confidence to the market so the paper can trade and in the best case scenario rise in value as the economy recovers.
In other words it's a confidence game. A con game.

Absolutely. It's all smoke and mirrors, and promises no intends to have to keep. Confidence is everything and the circus goes on in an attempt to reignite it. Unfortunately the market will call their bluff. Eventually they will have to concede as their bailouts are overtaken by events.

The press is already starting to run. The only certain amount so far is the $500billion pledged to buy up mortgage backed securities. Other printing is going on we can assume in the alphabet soup programs but Fed operations have become very opaque. Where this money will end up. Which thing it might inflate or stop deflation in is impossible to know.

The presses aren't running literally (in other words no one is churning out new bills). What they're doing is trying to force-feed new credit into a system that's already choking on it.

Credit expansions are inherently self-limiting because eventually the debt they create cannot be supported. When that debt implodes, it is impossible to create inflation, as the scale of the credit/debt economy vastly outweighs the scale of the money economy. When credit loses 'moneyness', as it always does once the contraction phase has begun, the result must be deflation. Inflation will only be possible after the deleveraging is complete.

The best guess it will tend to find it's way into equity markets. Do not be shocked if there is a significant rally in stocks during the spring.

I do expect a significant rally this year, but I expect a new low first.

The medias mood is determined by the stock market. If the market does rally then the news and comments will paint a rosy picture and that will lift the social mood. Everybody loves a con game.

I would say that mood drives both the market and the tone of the news coverage.

Greenpa said...

" Larry Summers is a walking talking lump of brain damage. Who, it just so happens, decides over your children's future welfare. Go read that quote again and tell me how you feel."

Yes, he is, and like Mike, I found the words from Larry Summers very depressing-

At first.

Look, guys- you/we REALLY have to get over looking at the situation one move at a time. It's a game with endless moves. And I will guarantee you Obama is playing at least 6 moves ahead. Chess Grand Masters play 11 moves out, yes?

Yep, Mr. Summers is a flaming idiot. Notice that his comments don't exactly align with Obama's publicly stated beliefs, though.

I would have to say, though, that Summers is NOT "in charge" of our children's future. What happens next in the US economy, and the world economy - is OUT OF ANYONE'S control. Yes? It's way too late to avert a really hellacious collapse.

And who is holding the bag? Why, Mr. Summers.

Which COULD give someone the chance to say - "look, these ideas have now been totally discredited. We're going to try something else."

Anything Mr. Summers can or will do- will be useless. I think that's what most of us here believe. Actions which might actually make a difference- are politically out of reach. At the moment. After we hit the real bottom?

Maybe. Maybe Obama knows we're going to hit bottom, regardless. And just as some of us suspect Obama may have been set up by the powers that be to take the blame for the collapse- could it be he's setting others up?

He can always give us the big Obambi eyes, afterwards "Gosh, folks; I was just taking the BEST advice everyone said there was. I'm SO sorry these guys turned out to be total morons."

I'm not married to the idea this is true- just saying; if I were playing chess here; I'd pay serious attention to this possible pathway.

Anonymous said...
The rise and (almost) fall of America's banks
"We're not talking about valuing buildings and dirt," Macey says. "This is quite a bit different."
In other words, it's uncharted territory once again.

Penn said...

Some of you might be interested in the fact that an arms dealer under indictment in Miami Beach is making millions of dollars during this economic crisis - his imminent trial notwithstanding.

Anonymous said...

Stoneleigh -- How low do you think the new stock market low will be and how high might the rally you expect take it up? I sure I must not he the only reader curious to hear your thoughts on the actual levels you might expect to see....

Anonymous said...

Stoneleigh, thank you for the insightful post.

Anonymous said...

In the Sunday NY Times is the article titled "In Florida, Despair and Foreclosures". Here's a quote: "In Lehigh Acres (Southwest Florida), homes are selling at 80 percent off their peak prices."

Anonymous said...

Greenpa,I hope you are right.I ,in fact,think you may be on to something...
Remember during the campaign when it looked like Ms Clinton was the "winner by a length",right before Obamasan cut her off at the knees?.
I have watched his actions since elected,and he has done something I have never seen a pol do,that is ,start doing the pledges he made from day one.Very little of the excuses that usually follow completion of a campaign.
If a person truely intended to radically change the system,would it not be the best way to insure all his possible critics were silenced by letting the powers-that-be in his own party...and the ones truly holding the reins of try their best..and to fail and to fail so miserably it was obvious to everyone that it was time for "new rules"
Of course,things might get a little rough out here in flyover country
Obama IS playing 6 moves ahead.I just hope he is playing for the working folks of this country


Anonymous said...

I'm anxiously awaiting the renewal of growth in China that a poster some time ago guaranteed was bound to happen (the China bull, I don't remember his name).

He gave a time prediction of June or so 2009 for this renewal of growth there.

This gives China about 4 months now, 5, to turn things around.

Sadly, the recent China articles posted here just don't seem to quite fit with that reality. It couldn't be that the bulls are wrong, so I guess China is just about to turn the corner.

Either that, or some very rich men are about to lose a lot of money believing that China can avoid the global depression using some magical formulas unavailable to any other nation.

I'm just posting this as a reminder to both that poster, if he still comes around here, and to all the other readers. The idea that any market can prosper in this economic downturn, which best view I can find now strongly suggests is the true peak of humanity's process of converting labor and natural resources into - I don't want to call it wealth, because that suggests that something new was created - I guess the image of a cancer feeding itself on its host and trumpeting its growth as production of something of value really has to be closest.

I see China as vastly, today, overpopulated, and not by a little bit, probably by at least 2x, and having possibly as few options long term as Saudi Arabia with its bloated and unsustainable population, fueled of course by carbon fuels/agri inputs at every level.

Ilargi, I will continue to enjoy seeing whether China can fake its way to an appearance of renewed growth temporarily before its serious natural limits begin to create increasingly massive problems in its massive population, or if they just don't bother faking it and the society crumbles as the required real growth rate vaporizes.

To me this is the biggest canary in our global coal mine, China is in overshoot as far as I'm concerned, and every new coal fired power plant they add, every new offshore food production deal they sign, is just one more admission that they are far past overshoot, and are looking up at a quickly deepening hole.

So it's an exciting race, with a very long shot of possible very short term real growth for a brief further period, but not sustainable, of course.

el gallinazo said...


Now that you have a name, I can respond in good conscience. Yes, I did take a poll both of silverback gorillas who had committed infanticide and self-proclaimed and/or generally acknowledged Libertarians. The poll consisted of one question: 1) Do you consider yourself a narcissistic asshole, solely interested in your personal aggrandizement and totally or primarily indifferent to the suffering of others in the process?

Among the Libertarians polled were Ayn Rand (through a medium), Ronald Reagan, Gordon Gecko, Allan Greenspan (back when he was a buddy of Rand), Margaret Thatcher, Augusto Pinochet, Milton Friedman, and a hosts of others.

Results: 96.8% of the gorillas reported no opinion

87.3% of the Libertarians reported that they were not narcissistic assholes, but au contraire, God's gift to humanity. So the poll obviously proves you correct and I withdraw my comment and regret any emotional inconvenience I may have caused you.

Anonymous said...

@ Ahimsa

The other interesting line from that article is:

Real estate agents said the homes that are selling here typically go for only about $45,000, a third of what they cost to build.

This is the only hope I see for a bottom. Builders will keep building as long as they can make $10 on a new house. Prices will need to fall below the cost of construction in order to stop new construction and allow the existing housing stock to slowly be digested.

Shadowfax said...

The quote from Larry Summers is the scariest thing I have read in a long while.
No limits to growth on a finite planet?How can he possibly believe that?

Anonymous said...

@ Shadowfax:

None of these clowns accept limits to growth. Limits imply an end to growth, and the entire structure of society is geared to growth.

If growth is limited, then wealth is limited, and the obvious question becomes how to divide the pie, not how to make the pie bigger.

If growth is limited, you have to manage human population. Discouraging any form of family planning, even contraception for married couples, ensures a growing population and thus CHEAP labor.

And yes, it is scary.

Anonymous said...

A nice poem by IOZ:

Upon the divers Prophecies of Doome if the Bille currently considerred
dos not Attaine Passage

Better made than bought or if bought, best
produced domestically by strong
and thick-necked workin men along
Steinbeckian lines, sun-tanned and tough and blessed
with super strength, or economic death
will creep like plague or sound an iron gong
while slobs collect their checks and hit the bong
and Wall Street burns and all of us regress
to trade and barter, currency in gold,
subsistence farming, handwashed clothes, and light
by lamp and candle, homes of sodden earth,
cave-dwelling anarchy defined by dearth
of higher ed and intenet, oh! slight
doom of a warehoused future world unsold!

Anonymous said...

It's amazing that the finance blogs like calculated risk and the big picture can so confidently say that there is no depression coming.

What makes them so confident? And these are popular blogs. I know i've asked this question and stoneleigh even responded saying she thinks 50% unemployment is coming. But still!!?

It's silly.

Greenpa said...

oarwell - yay, poethry. As Little Orphan Anomie says, to her Daddy WalBucks -
The bubble gums up- tomorrow!
Betcher bottom dollar
That tomorrow-
There'll be gum!

Anonymous said...

Thanks Ilargi-
And where does nationalization of all banks leave us? Which industries are next and how long does 'money' continue to work after these nationalizations? How many of these policy advisors are thinking beyond fiat and about natural resources?

And the $100 trillion was a 'hypothetical' number I made up in my letter to Obama on TOD - didn't think it would be real...(until I saw Simmons ppt on rust/iron ore)