Monday, March 16, 2009

March 16 2009: You spin me right round baby (like a record)

G. G. Bain The Incredible Flying Cat October 1910
Walter Wellman's hydrogen dirigible America failed 1,370 miles into an attempt at the first air crossing of the Atlantic from New Jersey. All crew left the airship prior to failure near Bermuda, including Melvin Vaniman, first engineer aboard the airship America, and the tabby cat mascot of the ill-fated attempt.

  1. Wait. Hold it. Who designed, and is ultimately responsible for, the AIG bail-out? That would be the president of the New York Fed, right? And who was in that seat at the time the bail-out was executed, back in September? That's right, it was Tiny Tulip Tim Geithner, the same guy whose direct boss these days, one Barack Obama, said this morning he was "choking with anger" over the consequences of the bail-out terms his own Treasury Secretary drew up a mere 6 months ago. If you're the president, you have something better to do than choke, sir. You need to act.

    Larry Summers, the economic behind-the-curtain sorcerer, says he is "outraged" over the bonuses. Makes you wonder when Timmy will start venting his anger over his own bungled broken words? (By the way, I see many different figures for the AIG bonuses float by. I’ll stick with Rep. Elijah Cummings for now, who puts the total at $1 billion.)

  2. Talking about Larry Summers, I don't want to bore you with repetition, but he is the guy who, along with Robert Rubin and their Citi and JPMorgan golf cronies, deregulated US finance 10 years ago, without which none of the disastrous leverage, risk taking, out and down-right gambling and beyond comprehension screwed-up conflicts of banking interests that are the number one core of the present financial mess would have been possible. Want to know who worked closely with them then? yeah, Tiny Tim. He was Under Secretary of the Treasury for International Affairs during Rubin and Summers' stints as Treasury Secretaries, a true crown prince. Geithner is a shadow hand puppet and a docile servant who either badly bungled the AIG "rescue" or meant it to be what it is from the get-go. You choose. Either way, we're back to the theatre of the absurd I’ve talked about many times.

  3. Bennie Bernanke was the first Fed head to do a TV interview in 20 years yesterday. Why do you think he did? Can you spell spin doctor? Here's a quote: "Lehman proved that you cannot let a large internationally active firm fail in the middle of a financial crisis," Bernanke said.. Who was in charge of the Fed when Lehman was unceremoniously sunk? You're 2 for 2, it was Bernanke.

  4. The US government owns 79.9% of AIG, but it can't stop a $105 billion hand-out to big banks, including foreign ones, nor a $1 billion bonus extravaganza for the guys who set up the AIG division which default swaps and stands to lose $1 trillion? How does that boost confidence? It's dirty old town hot air, of course. If you’re the government, YOU set the terms. If you own 80% of a firm, YOU set the terms.

Any lamenting now, after the fait accompli, and without using the powers you have, is just simply criminally false, whether you're Barack Obama, or Tim Geithner, or Ben Bernanke. All you guys were there when it came down, and complaining about the effects of your own decisions is baloney. There were times when politicians "drew" their conclusions when things went wrong that they were ultimately responsible for. Those days are gone, apparently. Today's religion says that the worst screw-ups are the primary candidates to fix their own messes. It's like at AIG, where the bonuses are handed over to the same guys and dolls who bankrupted the company, under the guise that these very losers are the only ones who know how to turn the losses they instigated into gains. The best and brightest....

To be honest, I don't know how many people still believe all this. Bernanke's claim that there'll be a 2009 recovery led to a morning spike in the Dow, but teh index closed negative. As I said yesterday, we're in full-blown spin territory. The Obama people's reaction is that the growing public outrage will risk their subsequent trillion dollar rescue plans. Not that perhaps his own team might be responsible, but that that same team will be hindered from spending ever and even more money on what we now know are very poorly planned rules and regulations.

I don't remember when I first started saying that we are in an all-out political crisis, not a mere financial one. Perhaps it makes sense that politicians don't like that notion, but it doesn't make it any less true. And as long as the financial people in the government show themselves to be abject failures at solving any of the problems they face, let alone that they are responsible to a huge extent for what has caused teh trouble in teh first place, the moment when Obama recognizes teh real problem, as in the political one, just keeps receding over and beyond teh horizon. I mean, is it all that hard for ordinary people to see the pattern here? Do you want the bully who beats you up to heal you? Do you want the guy who burns down your house to build it up again? Do you trust the man who shoots you to death to revive you?

I look at all of this and I sometimes just want to go outside into the spring weather and see if the sheep and the birds and the bees and the trees have any sanity left. A government run by spin doctors does not.

Public outcry could derail future bailout plans
The Obama administration is increasingly concerned about a populist backlash against banks and Wall Street, worried that anger at financial institutions could also end up being directed at Congress and the White House and could complicate President Obama’s agenda. The administration’s sharp rebuke of the American International Group on Sunday for handing out $165 million in executive bonuses — Lawrence H. Summers, director of the president’s National Economic Council, described it as "outrageous" on "This Week" on ABC — marks the latest effort by the White House to distance itself from abuses that could feed potentially disruptive public anger.

"We’ve got enormous problems that need to be addressed," David Axelrod, Mr. Obama’s senior adviser, said in an interview. "And it’s hard to address because there’s a lot of anger about the irresponsibility that led us to this point." "This has been welling up for a long time," he said. Mr. Obama’s aides said any surge of such a sentiment could complicate efforts to win Congressional approval for the additional bailout packages that Mr. Obama has signaled will be necessary to stabilize the banking system. As it is, there have already been moves in Congress to limit compensation to executives at banks and Wall Street firms that are receiving government help to survive.

Beyond that, a shifting political mood challenges Mr. Obama’s political skills, as he seeks to acknowledge the anger without becoming a target of it. A central question for Mr. Obama is whether his cool style — "in a time of crisis, we cannot afford to govern out of anger," he said in his address to Congress last month — will prove effective when the country may be feeling more emotional. Even as Mr. Summers was denouncing A.I.G. for the bonuses, he suggested that there was little if anything the government could do to stop them, seconding the conclusion of Treasury Secretary Timothy F. Geithner. But even if their reasoning was legally sound, they also risked having the administration look ineffectual in the face of what Mr. Summers said was the worst financial abuse of the last 18 months, since the economy began turning down in earnest.

"Never underestimate the capacity of angry populism in times of economic stress," said Robert Reich, a professor of public policy at the University of California, Berkeley, and labor secretary under President Bill Clinton. "A big challenge for President Obama will be to maintain a rational and tactical public discussion in the midst of this severe downturn. The desire for culprits at times like this is strong." In a further development, A.I.G. on Sunday named dozens of financial institutions that benefited from its huge rescue loan from the Federal Reserve last fall. The list included Goldman Sachs, Merrill Lynch and Wachovia.

On Monday, the White House is expected to unveil proposals to help small businesses, an effort to make clear that the administration is not only focusing its attentions on Wall Street and big corporations like the automakers. But the financial crisis is the most acute problem facing the administration, one it will not be able to play down. Christina D. Romer, the White House’s chief economist, said Sunday on "Meet the Press" on NBC that the administration was close to unveiling details of its plan to remove the worst of the bad assets from the books of banks, a move sure to refocus attention on winners and losers from bailouts. The disclosure that A.I.G., which has received $170 billion in government assistance to remain afloat and avert a cascade of failures in the financial system, is paying bonuses to its executives is the latest in a series of episodes that Mr. Obama’s aides said seemed to be feeding a resurgence of public anger.

The public responded angrily to previous disclosures of large bonuses on Wall Street, to auto executives who flew on corporate jets to Washington for Congressional bailout hearings, and to last week’s face-off between Jon Stewart of "The Daily Show" and Jim Cramer, the CNBC financial commentator, over the network’s reporting on the crisis. "There’s unquestionably a strong populist surge out there," said Joel Benenson, Mr. Obama’s pollster, citing his own polls and focus groups. "It’s been brewing for close to four years. For the last two years, Americans were clearly indicating that they believe that one of the biggest obstacles to progress on America’s toughest challenges — notably health care and energy independence — was the influence of special interests and corporate interests on the agenda in Washington."

A New York Times/CBS News Poll in February found that 83 percent of respondents said the government should cap the amount of compensation earned by executives of companies that are getting federal assistance. Mr. Obama’s advisers argued that to at least some extent, this was a sentiment they could tap to push through his measures in Congress, including raising taxes on the wealthy. They pointed out that in his speech to Congress, Mr. Obama denounced corporations that "use taxpayer money to pad their paychecks or buy fancy drapes or disappear on a private jet." "The president has been very clear about this," Mr. Axelrod said. "There is reason for anger, but we also have to solve the problem. We need a functioning credit system. That’s our responsibility, and he intends to meet it."

Still, aides acknowledged the risks of a backlash as Mr. Obama tries to signal that he shares American anger but pushes for more bail-out money for banks and Wall Street. For all his political skills and his capturing of the nation’s desire for change in the 2008 election, Mr. Obama, a product of Harvard Law School who calls upscale Hyde Park in Chicago home, has shown little inclination to strike a more populist tone. The danger, aides said, is that if he were to become identified as an advocate for the banks and Wall Street, people could take out their anger on him. "The change now is you have a free-floating economic anxiety that has expressed itself in a kind of lashing out at those being bailed out and people who are bailing out," Michael Kazin, a professor at Georgetown University who has written extensively on populism. "There’s not really a sense of what the solution is." "I do think there’s a potential for a ‘damn everybody in power’ kind of sentiment," Mr. Kazin said.

Fed's Bernanke sees recession ending 'this year'
The chairman of the Federal Reserve said in a rare interview televised Sunday that the U.S. recession will come to an end "probably this year," but he also warned that the nation's 8.1% unemployment rate will continue to rise. Appearing on the CBS network's "60 Minutes," Fed Chairman Ben Bernanke told correspondent Scott Pelley that concerted efforts by the government likely averted a depression similar to the 1930s. He also said the nation's largest banks are solvent and that he doesn't expect any of them to fail. At the same time, Bernanke expressed concern the U.S. might lack the political will to take further measures to shore up the financial system. Although he said he believes the largest banks are solvent and that "they are not going to fail," Bernanke said a full recovery won't take place until the system is stabilized.

"The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis," he said. Bernanke noted that banks are unable to raise cash from private investors as is normally the case because of fears about their solvency. The 15-month recession, which began in December 2007, is set to become the longest in the post-World War II era. The downturn took a sharp turn for the worst last September after the collapse of the Wall Street brokerage Lehman Brothers. "Lehman proved that you cannot let a large internationally active firm fail in the middle of a financial crisis," Bernanke said.

The same error was made 80 years ago when the U.S. government let thousands of banks fail, contributing to the Great Depression, said Bernanke, a former economics professor who's extensively studied the 1930s. Another big mistake the Fed made back then was to let the supply of money contract, he said. Since the crisis exploded last fall, Bernanke has sought to avoid both mistakes. The Fed and Treasury have committed hundreds of billons to the bailouts of banks, insurers, mortgage lenders and other entities. While Bernanke said he understood the public's outrage at the cost, he said they were necessary to prevent a more severe contraction and steeper job losses.

Bernanke also pointed out the bailout aid doesn't come directly from taxpayers and is "more akin to printing money than it is borrowing." He said the Fed can adopt that approach because the economy is very weak and inflation is low. Once the economy begins to recover, Bernanke said, the Fed will have to raise interest rates and reduce the supply of money to "make sure we have a recovery that does not involve inflation." The Fed chairman said the recovery won't begin until early 2010 and will take time to gather steam. He reiterated his call for an overhaul of the nation's financial regulations -- the first in decades -- to prevent similar financial conflagrations. Bernanke is the first sitting Fed chairman to conduct a television interview in 20 years.

Leaving it to the 'experts', who don't know what they're doing
In the early 1990s, James Carville, Bill Clinton's famously blunt advisor, suddenly realised the power buyers of US Treasury bills had over the government.
"I used to think if there was reincarnation, I'd come back as the President or the Pope," Carville quipped. "But now I want to come back as the bond market. You can intimidate everybody."

Last week, the Bank of England began its woefully misguided policy of "quantitative easing" – or QE. With Gordon Brown's gun to its head, the Bank created money via a complex "reverse auction" procedure. It's tough to understand, but that's the idea. Our so-called leaders hope the public find it so baffling they "leave it to the experts". But the experts don't know what they're doing. The Bank has just created £2bn and bought UK Treasury bills – or gilts – from holders of these bonds in the market. The authorities aim to purchase £75bn of gilts over the next three months – in the hope the new money "kick-starts" commercial lending. Short of setting fire to offices, shops and factories, I can't think of a better way to wreck the UK economy.

In last November's Pre-Budget report, the Government said the UK faced a deficit of 8pc of GDP in 2009/10 – the highest since the Second World War. That estimate was based on the economy returning to growth by July 2009 – which is clearly nonsense. It also didn't include the massive bank bailouts and other measures to tackle recession. In March 2008, Labour said the UK would borrow £38bn this year – already 40pc above the 2009/10 forecast made the year before. By November, that projection had ballooned to £118bn. Since then, of course, the economy has nosedived. So in next month's Budget the new borrowing figure will be way higher.

The Treasury sold £146bn of gilts last year – the highest level ever and three times above the amount raised the year before. Record levels of gilt sales will continue annually until 2012-13 – after which official projections stop. And given Brown's record on failing to admit future borrowing needs, even these jaw-dropping volumes of gilt issuance will be gross under-estimates. Into this fiscal maelstrom Labour has thrown a multi-billion pound "Keynesian" boost and now QE. The authorities claim the first few days of QE have "been a "success" because Bank purchases have bid up gilt prices, so lowering yields. Never mind that that plays havoc with the cost of financing occupational pension schemes – and will spark further scheme closures.

Lower gilt yields push down on all borrowing costs, ministers tell us, so boosting the economy. It is difficult to know how to respond to such nonsense. The UK's problem isn't the price of credit but the lack of credit. Households and firms can't access finance as the inter-bank market is still locked, because the banks – as I say each week – are still lying to each other about the full extent of their sub-prime liabilities. Until they're forced to "fess up", credit lines will remain frozen and jobs will be lost. Even more worrying is the gilts market itself – which, in recent days, has been on an QE-induced high. Yields have plunged because the Bank is buying in large volumes. The notion that the UK faces "deflation" is also crucial – giving the Government political cover to keep pursuing this absurd policy and because falling prices make a non-indexed gilt (the vast majority of those sold) seem a good bet.

But what happens when the Government starts SELLING gilts like crazy, as it must? What happens, above all, when the myth of deflation is exposed, and gilts traders start worrying about inflation instead? High inflation is imminent. Sterling has plunged, base-money has exploded and oil prices are ticking up. When price pressures burst through and the QE "sugar rush" fades, gilt yields will rocket. The market for UK government debt will snap from euphoria to blind panic. Our public finances are under unprecedented pressure, given our demography, years of Brown and the last few months of fiscal abandon. It won't be long before the UK can only sell its debt at ultra-high yields, which will spread across the economy, saddling us with mortgage costs last seen in the late 1980s.

But even that could be a rosy scenario. Over the next few years, a whole host of highly-indebted, inflation-prone Western countries will be trying to sell vast quantities of gilts. Creditor nations won't have it. No wonder China has just warned America that Beijing's huge US T-bill purchases may soon have to stop. The UK faces the very real possibility of a gilts strike – as this column has been warning for months. Who will buy our debt? And if the bond market was intimidating in the early 1990s, remember this recession will be deeper and the fiscal imbalances far, far worse.

Guess Who Screwed You? It's Worse Than You Think
I'm not going to pretend this is the whole story. It's not. But I'm getting close -- I can smell them. The same smell they give off at the "private wealth summits."

Did you ever wonder how we managed to get so far in debt during the Bush years? Have you thought about who bought all those treasuries? And, why did they? Our fundamentals have been lousy for the past decade. We were essentially bankrupt by early 2006. Zombies.

Why would anyone lend to us while our economy and workforce was being systematically gutted and shipped out out of the country? By 2007, American's savings were in negative territory, everyone was on credit, and if they weren't, their neighbors and family were. Same impact. People's jobs basically amounted to servicing each other.

We do know the vast expansion of the national debt came from Japan, China, and the Saudis. They bought Treasuries to fund our wars and and pay for Bush's tax cuts. But did you know that much of that money was not from those governments, but from private entities whose money "operated" out of those nations?

This is a fact. It's right there in the charts and balance sheets from the Federal Reserve. Private foreign investments. It's a tremendous amount of money lent, compared to other nations, but not necessarily unusual. After all, I buy currencies and other agents from foreign governments all the time. So do private investment companies.

The thing is -- I don't buy currencies or notes from nations whose fundamentals indicate that they are bankrupt, and their only plan is to continue borrowing and spending. What's even worse, instead of using that money to investing in the people and infrastructure, which could generate a return in increased productivity -- they are spending the money outside their own nation, spewing it and wasting it with nothing to show for it. They can't even figure out what happened to a lot of it.

Now I ask you, would you buy a promissory note from that nation? Not me, no way. Unless I never want to see that money again. Or, unless I have some kind of insider deal, with insurance and a guarantee. So far, I've never been offered a deal like that.

I spent time this weekend reading reports from the BIS (Bank of International Settlements) and the IMF (International Money Fund) and reading in few select places. And I discovered something new, which I'll tell you about in a minute. But as I'm poking around the Council on Foreign Relations, I overhear a conversation that snaps everything into place for me. This guy says, in banker-talk:, in effect the countries exporting cheap capital to the USA in the past decade were underwriting the political strategy of the Republican party and of their campaign donors, financing deficits caused by Republican tax cuts, fueling asset price rises, and most importantly financing the USA wars in Iraq and Afghanistan.

"As to the latter, in effect purchases of USA government debts at nugatory interest rates has been a purchase of war bonds by foreigners instead of residents. Just like for Gulf War 1, most of the funding for Gulf War 2 has come from the Saudis and Japan (and China this time), but as subsidized loans instead of outright grants.

"The irony in all this is that the source of the the cheap capital lent to the USA by foreigners to subsidize Republican tax cuts, asset bubbles and wars, has been the USA itself, via its trade deficit. The lending countries have in effect collected trade "tax" from the USA, thanks to the massive offshoring and outsourcing of productive capacity from the USA to themselves, greatly aided by the "strong dollar" policy.

"Then, they lent the deficit back to the USA to support the political strategies of the Republicans (which included that massive offshoring and outsourcing and "strong dollar" policies to break the back of the unions enemies of that party and reward the asset owners sponsoring that party).


Can it get any sicker than that? Yes it can.

Guess who the US borrowed the most from (via Treasuries)? You're going to hate this.

Take a look at this chart:

Now, we've been carrying debt from all these nations for quite a long time. The chunk from China has swelled to a larger size. There are our fellow war criminals, the United Kingdom. You can clearly see why they're going down. Look at all that money they are never going to see again!

Wait... what's this? The Caribbean? Where'd that big chunk from the Caribbean come from? That's new from the Bush years. What's that all about?

Here's the explanation according to one BIS paper I read today -- and brought into sharp focus by international economist researcher, Brad Stetser, who commented on it:

By the way, US banks were net borrowers from the rest of the world – but most of their borrowing came from a few Caribbean islands – and those islands borrowed heavily from "non-bank" counterparties in the US. The BIS doesn’t think this represents a true external flow: "this could be regarded as an extension of US banks domestic activity since it does not reflect (direct) funding from non-banks outside the United States."

Most of our Bush years borrowing came from the Caribbean? wtf? No wonder the Caribbean hasn't shown up on so many of the Debt stats. Now who has such massive amounts of Dollars in the Cayman Islands? (I'm assuming it's not coming from Haiti.)

Could that be where the defense contractors and our other war criminals and profiteers have hidden all our missing wealth? Hey, maybe the Madoff money is in Treasuries? Where else can you hide $50 billion?

What else can you do with wealth like that but invest it in US Treasuries where no one would think to look? It's such a discrete place to hide....

Until Now!


Hey, you crooks out there. Hello? I know you're reading this. I've seen your tracks from my last Diary in those exclusive Online Clubs where we both have passwords.

So, you going to the Bermuda thing? Great. I'll see you there.

Merkel Keeps Cashbox Closed as She Spurns Obama’s Stimulus Plea
Forget Nicolas Sarkozy. Ignore Gordon Brown. Angela Merkel, taking advantage of Germany’s economic heft, is now the European Union’s dominant figure. And leaders from Warsaw to Washington had best not forget it. Just as the German chancellor vetoed a bailout for eastern Europe on March 1, she is now leading European opposition to U.S. President Barack Obama’s call for a global pump-priming package. She’ll determine the fate of a 5 billion-euro ($6.4 billion) infrastructure proposal at an EU summit in Brussels later this week. "It’s Merkel who holds the key to the cashbox, and she doesn’t want to give it up," says Jean-Dominique Giuliani, chairman of the Robert Schuman Foundation, a research center in Paris.

Merkel’s rejection of more stimulus touched off the first trans-Atlantic clash of the Obama administration and led critics to say she risks deepening the global recession. Even as finance ministers from the Group of 20 nations were meeting in southern England March 14, seeking to paper over differences with a pledge to deliver a "sustained effort" to boost growth, Merkel was 42 miles (67 kilometers) away in London, defending her opposition to further spending. "Germany really has contributed its share," said Merkel, 54, as she stood alongside Brown, the U.K. prime minister. The remarks were her third rebuff in three days to Obama’s March 11 call for "concerted action around the globe to jump- start the economy," comments echoed by Lawrence Summers, his top economic adviser, and Treasury Secretary Timothy Geithner.

It is a reversion to type for Germany, which built its postwar society on the principle of monetary stability after the economic havoc of two world wars. Germany authored the limits on budget deficits for countries using the euro currency -- only to flout them during the reign of Merkel’s Social Democratic predecessor, Gerhard Schroeder. With the world economy set to shrink for the first time since World War II, Merkel has forged a European position not to go beyond tax cuts and emergency spending that the EU says amounts to 3.3 percent of gross domestic product. Nobel laureate economist Paul Krugman says Merkel is underestimating the scope of the crisis. Germany is a "giant stumbling block" to global efforts to fight the recession, he told Der Stern magazine last week. Obama on March 14 said there isn’t a fundamental "conflict or contradiction between the positions of the G-20 countries" on how to deal with the crisis, only "a difference in details."

Merkel’s defenders point to International Monetary Fund data that show Germany spending 2 percent of GDP to fight the recession in 2010, edging out the U.S.’s planned 1.8 percent. U.S. spending of 2 percent this year will top Germany’s 1.5 percent. Germany has enacted two special spending packages since late last year, including 100 billion euros to boost company liquidity and 82 billion euros in measures including a premium for people who scrap old cars in order to buy new, energy- efficient vehicles. While the EU forecasts that the German economy will shrink 2.3 percent in 2009 -- the second-worst in the 16-nation euro region, after Ireland -- economists say its relative strength will likely re-emerge whenever the recession ebbs. Europe’s largest economy has used the 10-year-old euro to rebuild its competitiveness, and the EU’s eastward expansion in 2004 moved Germany from the edge of the European market to the center.

"Germany is the only anchor, and everyone wants to grab it," says Peter Becker, an EU expert at the German Institute for International and Security Affairs in Berlin. "And the Germans say: ‘Please don’t everybody hold onto us, otherwise we won’t make it either.’" From 2000 to 2008, German labor productivity grew at an annual average of 1.1 percent, the third-fastest rate among the 11 countries that founded the euro in 1999, according to the Conference Board, a New York-based research group. In Italy, by contrast, output per hour shrank at an annual average of 0.1 percent. While the euro now locks in Germany’s terms of trade in a $12 trillion market, saving exporters from shocks like the deutsche mark’s 68 percent surge against the Italian lira from September 1992 to April 1995, the EU’s enlargement has shored up German markets in the east.

An 18 percent jump in eastern European sales contributed to a 30 percent profit increase at Volkswagen AG’s Audi luxury division last year. SMT Scharf AG, maker of 45 percent of the world’s mining railways, expanded its workforce in eastern Europe after Poland became its top export market. German exports to the EU’s 10 eastern states totaled 116 billion euros in 2008, surpassing exports of 72 billion euros to the U.S., a country with three times the population of eastern Europe. "German dominance of the economic situation and the scene in the European Union is even greater than ever because of this colossal competitive advantage that they now have," says Peter Ludlow, a historian and author of "The Making of the New Europe."

A child of communist-era East Germany, Merkel has made common cause with eastern Europe. She has bridged the continental divide in a way alien to France’s President Sarkozy, 54, who last month fumed that it "isn’t justified" for carmakers Renault SA and PSA Peugeot Citroen to create jobs in the Czech Republic instead of at home. Sarkozy’s slap at eastern Europe and initial plan to tie aid to French carmakers to domestic job-protection pledges squandered some of the EU-wide credibility he had banked during his first stint in the bloc’s six-month presidency last year. The French leader’s accomplishments included negotiating a ceasefire in the August war between Russia and Georgia, marshaling the EU’s emergency response to the banking crisis in October and persuading the Irish government to hold a second referendum on a new EU governing treaty that Irish voters shot down last June.

The EU moment for Britain’s Brown was even briefer. His 50 billion-pound ($69 billion) bailout of U.K. banks on Oct. 8 came as the U.S. was still debating buying up toxic assets and before continental European leaders grasped the depth of the crisis. It prompted Krugman to wonder whether the U.K. leader had "saved the world financial system." Five months later, and 15 months before the deadline for the next election, Brown, 58, is battling to save himself politically. With unemployment at a 10-year high of 6.3 percent and the EU predicting a full-year economic slump of 2.8 percent, only 28 percent of Britons trust Brown’s Labour Party to steer the economy, compared with 35 percent for David Cameron’s opposition Conservatives, according to a ComRes Ltd. poll for the Independent newspaper on March 2.

"In October, he was seen as the only leader who was able to take the bull by the horns," says Philip Whyte, a senior research fellow at the Centre for European Reform in London. "It turns out that his recapitalization of banks is insufficient and the second stage of the downturn is worse than expected." The same quirks of the electoral cycle could yet haunt Merkel, who is up for a second term on Sept. 27. Her Christian Democrats plumbed a two-year low in an Infratest dimap poll released March 6, with 32 percent; still, she remains in front of the Social Democrats, led by Foreign Minister Frank-Walter Steinmeier, by 5 points. "Merkel is definitely a woman to watch," says Robert Leonardi, senior lecturer in European politics at the London School of Economics. While Sarkozy may be more flamboyant, he says, "she’s emerging more and more as a strong leader" of Europe.

Obama defends progress in economic war
The Obama Administration has begun a full-scale defence of its progress in dealing with the credit crisis and the US recession. The move comes as it faces a wave of public anger over use of taxpayer funds by the insurance giant AIG to pay $165 million in bonuses to the very division that sent the company broke. The head of the Federal Reserve, Ben Bernanke, gave a rare television interview on 60 Minutes to reiterate his upbeat assessment that the recession could be over by the end of the year and that the "green shoots" of recovery were already evident in the economy. His assessment was again contingent on stabilising the financial sector, and he expressed confidence that the political will was there to act to avoid a depression.

Mr Bernanke's optimism was echoed by the chairwoman of Mr Obama's Council of Economic Advisers, Christina Romer, who said: "It is an economic war. We haven't won yet. We have staged a wonderful battle. The fundamentals are sound in the sense that the American workers are sound, we have a good capital stock, we have good technology." But the failure over a month ago of the Treasury Secretary, Tim Geithner, to give more than a broad outline of the plan to stabilise the credit markets, and his diffident performances before congressional committees, has made him the butt of comedy shows and severely undermined the Administration's ability to sell its message.

Over the weekend the White House faced a barrage of questions over when the markets could expect to see details of its much-vaunted plan to combine with the private sector to buy toxic assets and remove them from banks' balance sheets, thereby restoring confidence in the health of the banking sector. The chairman of the White House Economic Council, Lawrence Summers, said the "pillars" of the plan to free up the credit markets were already in the public domain and that more would be revealed once the stress testing of the banks was complete. The Administration was due to unveil a plan overnight Australian time to make $10 billion available to help free up capital for small business, which Dr Summers said was an important part of getting credit flowing again.

As for the plan to allow the private sector to buy toxic assets, with a substantial cushion against risk from the US Government, Dr Summers said it would be "much better to have the President and have Secretary Geithner lay out their approach so that everyone can see it". Dr Summers also responded to the Chinese Premier, Wen Jiabao, about concerns that a devaluation of the US currency due to too much spending could undermine the value of China's huge holdings of US treasury bonds. Dr Summers noted that US treasury bonds had been regarded as a safe haven in the crisis and that large levels of fiscal stimulus were necessary to protect the economy.

Public bail-out a gift that keeps on giving
Anger at the handling of the banking crisis was expected to rise after revelations that much of the $US180 billion ($273 billion) taken from the public purse to bail out AIG had gone to foreign bank counterparties that took insurance on credit default swaps. On Sunday the insurance giant disclosed payments of $US105.3 billion had been made between September and December. Some of the biggest recipients were European banks. Societe Generale, in France, was the top foreign recipient, at $US11.9 billion; Deutsche Bank of Germany got $US11.8 billion and Barclays, in England, was paid $US8.5 billion. Of the American banks, Goldman Sachs got the largest amount, $US12.9 billion.

The disclosure followed revelations at the weekend that AIG paid $US165 million in bonuses to the division that wrote insurance on what turned out to be toxic assets. The chairman of the White House Economic Council, Lawrence Summers, said the bonuses were outrageous. The Administration had written to AIG's chief executive, Edward Liddy, about the bonuses, but the rule of law prevented it from doing more, he said. "We are a country of law. There are contracts. The Government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken."

Furious Cuomo Demands AIG Bonus Details
Andrew Cuomo's mad as hell about those AIG bonuses, too.  And unlike Ben Bernanke and Tim Geithner, he might actually do something about them. Today's letter to AIG:
"We were disturbed to learn over the weekend of AIG's plans to pay millions of dollars to members of the Financial Products subsidiary through its Financial Products Retention Plan. Financial Products was, of course, the division of AIG that led to its meltdown and the huge infusion of taxpayer funds to save the firm. Previously, AIG had agreed at our request to make no payments out of its $600 million Financial Products deferred compensation pool.

We have requested the list of individuals who are to receive payments under this retention plan, as well as their positions at the firm, and it is surprising that you have yet to provide this information. Covering up the details of these payments breeds further cynicism and distrust in our already shaken financial system. In addition, we also now request a description of each individual's job description and performance at AIG Financial Products.

Please also provide whatever contracts you now claim obligate you to make these payments. Moreover, you should immediately provide us with a list of who negotiated these contracts and who developed this retention plan so we can begin to investigate the circumstances surrounding these questionable bonus arrangements. Finally, we demand an immediate status report as to whether the payments under the retention plan have been made.

We need this information immediately in order to investigate and determine: (l) whether any of the individuals receiving such payments were involved in the conduct that led to AIG's demise and subsequent bailout; (2) whether, as you claim, such individuals are truly required to unwind AIG Financial Product's positions; (3) whether such contracts may be unenforceable for fraud or other reasons; and (4) whether any of the retention payments may be considered fraudulent conveyances under New York law.

U.S. Industrial Production Fell 1.4% in February
Industrial production fell in February for the fourth consecutive month as auto cutbacks and collapsing exports hurt the broader U.S. economy. Output at factories, mines and utilities dropped 1.4 percent last month, more than forecast, after a revised 1.9 decline in January, the Federal Reserve said today in Washington. The amount of factory capacity in use slumped to 70.9 percent, matching the lowest level on record. The worst financial crisis in seven decades has choked off credit to consumers and businesses worldwide, leading to a slump in sales of cars, houses, airplanes and computers. Boeing Co. and United Technologies Corp. are among companies that have announced thousands of jobs will be cut to trim costs as the global economy contracts.

"The industrial sector is still struggling with a glut of inventories and both employment and production are likely to continue to fall," said Zach Pandl, an economist at Nomura Securities International Inc. in New York. "We’re not out of the woods yet." Economists forecast industrial production would drop 1.3 percent, according to the median projection in a Bloomberg News survey of 68 economists. Estimates ranged from declines of 2.2 percent to 0.3 percent. In the 12 months ended in February, industrial output was down 11.2, the biggest year-over-year decline since 1975. Another report today showed manufacturing in New York state contracted in March at the fastest pace on record as orders, sales and inventories plunged. The Fed Bank of New York’s general economic index dropped to minus 38.2, the lowest level since data began in 2001, from minus 34.7 in February.

The proportion of plants in operation matched the December 1982 reading as the lowest since data began in 1967. Economists had forecast that figure would fall to 71 percent, according to a separate Bloomberg survey. Factory output, which accounts for about four-fifths of industrial production, decreased 0.7 percent, led by declines in furniture, appliances, machinery and computers. Motor vehicle and parts production improved 10 percent in February after plummeting 25 percent the prior month, the report said. Automakers assembled cars and light trucks at an annual rate of 4.73 million during the month, second only to the 3.83 million assembled in January as the weakest since records began in 1967.

Excluding automobiles, factory output dropped 1.2 percent. Utility production decreased 7.7 percent, propelled by unseasonably warm weather that caused declines in the use of electricity and natural gas. Mining output, which includes oil drilling, decreased 0.4 percent. The auto industry is at the center of the manufacturing slump. Car sales in February slid 41 percent to the lowest rate since December 1981, according to Autodata Corp., led by a 53 percent drop for General Motors Corp. "This remains a very challenged industry that is the reflection of the severe economic crisis," Mike DiGiovanni, chief auto market analyst at GM, said on a conference call last week. Pittsburgh-based PPG Industries Inc., the world’s second- biggest paint maker, last week said it will cut an additional 2,500 jobs because of the decline in auto sales.

Others are suffering from slumping demand, both here and abroad. American exports plunged in January to the lowest level since 2006, according to figures from the Commerce Department last week. The drop reflected falling sales of automobiles, semiconductors, telecommunications gear and drilling equipment. Boeing is slashing about 10,000 jobs and has said it could cut production by about 10 percent next year if more bookings are deferred or canceled. The Chicago-based plane maker has won just 22 orders this year, down from 190 by this time in 2008, and has logged 32 cancellations. United Technologies, the maker of Otis elevators and Carrier air conditioners, said last week it plans to cut 11,600 jobs as sales slow.

Economists surveyed by Bloomberg say the economy may shrink at a 5.2 percent pace in the current quarter after a 6.2 percent contraction in the previous three months that was the worst since 1982. "Reports on manufacturing activity suggested steep declines in activity in some sectors and pronounced declines overall" in January and February, the Fed said March 4 in its latest regional business survey. "The drop in activity was especially pronounced for makers of capital goods and construction-related equipment and materials."

G-20 Turns Sights on Toxic Assets in United Call to Cleanse Balance Sheets
Finance chiefs from the Group of 20 vowed to work together to clean up the toxic assets that helped trigger the financial crisis and led banks to rack up more than $1 trillion in losses. Officials meeting near London this weekend outlined guidelines on how governments should rid banks of distressed securities that have devastated companies from Citigroup Inc. to Royal Bank of Scotland Group Plc. With the G-20 calling the fight its "key priority," Treasury Secretary Timothy Geithner vowed in an interview to "move quickly." The commitment, made three weeks before G-20 leaders gather in London, comes as investors demand faster action in the face of turmoil that’s showing few signs of abating. The Standard & Poor’s 500 Financials Index has dropped 35 percent this year and a lack of lending is pushing the global economy deeper into its worst recession in six decades.

"Markets are looking to policy makers around the world to move from the recognition and design stages to implementation, and to do so in a coordinated, or at least correlated, fashion," Mohamed El-Erian, the co-chief executive officer of Pacific Investment Management Co. in Newport, California, said in an interview. "Tackling toxic assets is a necessary condition for sustainable progress." Separately, the Obama administration may give the Federal Reserve new powers to impose tougher capital requirements for large banks, the Wall Street Journal said today, citing people familiar with the matter. Governments have struggled to tackle toxic assets head on, allowing concern to seep through markets that banks still haven’t revealed all their exposure. The Bush administration’s $700 billion Troubled Asset Relief Program was redirected away from buying the tainted securities and Geithner has disappointed investors by not giving details of a promised $1 trillion plan.

Germany has had several false starts and Barclays Plc is so hesitant about the terms of Prime Minister Gordon Brown’s asset guarantee program that it still hasn’t signed up. "There have been too many promises already and investors now want to see concrete actions getting rapidly underway," said Marco Annunziata, chief economist at UniCredit MIB in London. Citigroup, Commerzbank AG and Lloyds Banking Group have lost more than half their value this year Speaking after their talks, officials conceded that until banks are cleansed and can start lending again, attempts to revive growth by cutting interest rates and taxes would pack little punch. "We aren’t going to have a substantial recovery in the real economy until we solve the bank issue," Canadian Finance Minister Jim Flaherty said. Fed Chairman Ben S. Bernanke said in an interview with CBS Corp. that aired yesterday the biggest risk to an economic recovery is a shortage of "political will."

Action may be imminent. Chancellor Angela Merkel is considering taking over Germany’s non-performing assets until they mature, according to three people familiar with the proposal. Geithner will this week roll out enough information on his public-private partnership plan for investors to gauge their interest in it. "We have and expect to see a lot of support for this program" among potential buyers of the assets, he said in an interview after the Horsham talks. To govern such programs, the G-20 proposed a dozen principles for authorities to follow with the hope that a united front would avoid distorting capital flows or sparking protectionism. The parameters are meant to guide a "cooperative and consistent approach by national authorities." "Financial institutions are global in their reach so it’s important governments adopt a common approach," said Daniel Price, President George W. Bush’s G-20 negotiator and now senior partner for global issues at Sidley Austin LLP in Washington.

Among the guidelines: shareholders should be exposed by the "maximum possible" to losses or risks prior to a government intervening. There should also be flexibility when judging which assets can be aided and it should be clear how they are valued. Credit rating companies, hedge funds, and credit derivatives markets will be subjected to greater oversight. The parameters were drawn up to guide a "cooperative and consistent approach by national authorities," the G-20 statement said. Companies that receive help should be run according to business principles and agree to impose conditions on executive compensation. Governments should provide only temporary assistance and spell out exit strategies.

"The key question is whether this framework is detailed and concrete enough to reassure markets that the normalization of banking systems is at hand," said Annunziata. As Obama embarks on a revamp of U.S. financial rules, Geithner also wants the Fed to have authority to look broadly at markets to spot signs of systemic risk, such as huge bets made by investment banks on mortgage debt, the Wall Street Journal said. The G-20 also pledged a "sustained effort" to end the worldwide recession, setting aside transatlantic differences over whether that should include more fiscal stimulus as the U.S. wants. Data will this week show U.S. factories and home builders scaled back even more last month and European industrial production dropped the most on record in January, according to surveys of economists by Bloomberg News.

"We are prepared to take whatever action is necessary to ensure growth is restored and we are committed to do that for however long it takes," said U.K. Chancellor of the Exchequer Alistair Darling. The International Monetary Fund will monitor budget policies and judge if more is needed to be done after euro- region finance ministers said they had spent enough and wanted to preserve fiscal discipline. "I was worried we wouldn’t arrive at an agreement, but we all agreed that the re-launch has to go ahead on four wheels," said France’s Christine Lagarde. The IMF was told it will have its resources at least doubled to $500 billion after being inundated with loan requests from Pakistan to Hungary.

Smaller countries will be granted more say in how it is run within two years and its next boss will be selected by an "open" process and not automatically a European, the G-20 said. In a bid to prevent future crises, the officials said they would strengthen ties between their individual banking supervisors. The financial system will also have more curbs introduced to ensure regulations "dampen rather than amplify economic cycles." Options include buffers that limit leverage and encourage banks to save capital in good times. "All in all, the Horsham statement should be regarded as a positive sign of progress," said Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London. It "gives hope that the G-20 leaders will be able to present a common stance in responding to the extraordinary challenges."

Should you be able to sell what you do not own?
by Willem Buiter

Insurable risk
When insurance began to develop as an industry, it was soon felt necessary by those trying to enhance the reputation and respectability of the industry to distinguish it from gambling. The outcome of this process is that today, for a financial activity to classify as insurance and to be regulated as insurance, it has to offer products or contracts that protect against loss; gambling seeks or creates opportunities for speculative gain. More precisely, insurance hedges an open position in order to reduce exposure to risk; gambling creates or increases open positions to boost exposure to risk. There are a host of deep issues here, such as ‘what is the right metric for risk’ or ‘the risk to what: financial wealth, consumption, utility’? I will acknowledge these deep issues, ignore them and proceed.

For the insurance industry, the insurance vs gambling distinction was operationalised using the concept of insurable interest. An insurable interest is what economists would call an open position that is reduced in size by the insurance contract. In life insurance, this means that a person or a legal entity can insure the life of a third party only if the value of the life to the party wishing to purchase the insurance is greater than the value of the payout under the life insurance policy. In property insurance, people have an insurable interest in property they own up to the value of the property, but not beyond that.

The obvious reason for limiting my capacity to take out insurance on the life of a complete stranger (whose life presumably has little intrinsic value for me) is moral hazard - what I will call micro-level endogenous risk. If the stranger’s life is insured for a sufficiently large amount, and if I can overcome the internal resistance of conscience and ‘thou shalt not kill’, I could arrange to have the highly insured stranger bumped off. When the probability of the insured-against contingency occurring is not exogenous, but can be influenced by the party purchasing the insurance, and if this cannot be verified and deterred by the party selling the insurance or by the forces of law and other and of contract enforcement, we have moral hazard.

In the case of life insurance and property insurance, the scope for moral hazard is obvious. In other financial markets that sell products that can be used either for insurance (covering or reducing open positions) or for gambling (increasing the size of an open position), similar micro-level endogenous risk or moral hazard may be found. In addition, macro-level endogenous risk can be created through the interaction of many individually insignificant agents, unless the principle of an insurable interest is extended to contingent claims in general.

Imposing an ‘insurable risk’ requirement for all derivatives
The financial sector would be decimated by the across-the-board imposition - for all contingent claims - of the requirement that an insurable risk must be present for a person or legal entity to buy or write a contingent claim. Hernando de Soto, the Peruvian economist who has done more than anyone else to encourage the conversion of unproductive informal possessions into productive capital, by registering and recording clear title to what had hitherto been informal sector possessions, estimates that there may be about $170 trillion worth of (private and public) bonds and equity and other traditional forms of credit in the world, and at at least $600 trillion (possibly as much as $1000 trillion) worth of derivatives (and yes, I know that bonds and equity can themselves be viewed as contingent claims - derivatives - also).

At the peak of the CDS market in mid-2007, there was at least $60 trillion of CDS outstanding (these are notional gross values, of course; the notional net value of all CDS is, of course, zero, as with all derivatives). The underlying bonds (against whose default the CDS provided insurance or on whose default the CDS permitted bets to be taken) were a small fraction of that $60 trillion - I have never been able to get anyone to come up with a hard number about the underlying notional value of the bonds. It is certainly likely that notional outstanding stocks of derivatives and the trading volumes would fall to a quarter or less of their 2007 levels if derivatives could be used only to buy insurance, not to place bets.

Some examples
The application of the insurable interest principle to the CDS market would bar investors from purchasing default protection via credit default swaps on corporations without owning the underlying bonds. It would not be necessary to make ‘naked CDS purchases’ illegal, I believe. Just making a CDS contract unenforceable in court unless the claimant had ownership of the right amount of the underlying bonds, would suffice to discourage the trade. The application of the insurable interest principle to short selling equity is straightforward. It certainly would rule out naked short selling - selling shares that you neither own nor have borrowed. Whether short selling stock you have borrowed qualified as an insurable interest is an interesting issue, which has would seem to depend on whether the contract under which the stock is borrowed, transfers ownership (temporarily) to the borrower.

Another application would be to equity puts (the right to sell a share of common stock at a given price at or before a given date). Requiring an insurable interest here would mean that you can buy an equity put only if you already own the equity, that is, no naked equity puts, and that you would have to sell the equity put if you sold the equity. You could hold the equity without the put, but not the put without the equity. Spread betting also would be illegal (or its contracts would be unenforceable) unless the party betting on an asset price fall either owned the right amount of the asset (or, in the case of insurable interest ‘lite’, had borrowed the asset).

Macro-endogenous risk as a reason for requiring an insurable interest
For any contingent claim it is possible to define and verify an insurable interest. But why would you want to ban the discretionary taking of open speculative positions? The first reason is our old friend moral hazard - or micro-endogenous risk. Financial markets can be manipulated. Employees of a now-defunct investment bank met in an Icedlandic bar/restaurant to discuss whether to attack the Icelandic currency, the stock of its banks and its debt, by using and abusing the CDS markets. Market abuse and manipulation through trash-and-trade strategies occur even in the deepest and most liquid financial markets.

But more important than moral hazard, which refers to conscious, deliberate individual behaviour, is macro-endogenous risk. Allowing naked CDS trading resulted in the creation of a massive gambling opportunity - a lottery of unprecedented size. This lottery worked through tickets that were traded in financial markets. Like all financial markets, the CDS market is inherently unstable. Even if all other conditions for market efficiency are satisfied as regards micro-market structure, individual rationality etc. , there is no ‘auctioneer at the end of time’, who ensures that the market cannot be corrupted, as regards its impact on resource allocation, by (rational) speculative bubbles. Furthermore, herding instincts, fads and fashions, mood swings from euphoria and irrational exuberance to fear and depression and irrational despondency, leading to market illiquidity, distressed asset sales at rock-bottom prices, are defining features of real-world financial markets. Some present and former colleagues of mine at the LSE are working on formal, rigorous models of macro-endogenous risk pathologies (see Jon Danielsson, Hyun Song Shin, Jean-Pierre Zigrand (1) and (2, for the young at heart)).

What the creation of markets for (naked) CDS and other derivatives has done is create a large number of new opportunities for taking additional risk. The lotteries or bets that are the essence of contingent claims/derivatives markets could increase allocative efficiency if they permitted the given, exogenous risk in the economy to be born by those most able to bear it. Instead that risk has ended up with those most willing but not, judging by results, most able to bear it. Opening a few additional financial markets (relative to the infinite number it would take to create a complete set of contingent claims markets), and doing so without any long-run (expectations) co-ordinating device, can create additional endogenous risk and uncertainty. It creates more opportunities for going bankrupt. Defaults and fear of defaults (triggered by market participants who were able to take open, speculative positions way in excess of what they could have achieved without these partial but inherently insufficient attempts to create additional markets for trading risk over time), are a source of macro-endogenous risk, even if no individual trader has market power or attempts to manipulate markets. Bets taken in the CDS markets, through naked equity puts, through naked equity shorting or through spread betting cause massive redistributions of wealth and income that can destroy real resources, influence the prices of ‘outside’ assets and bring down otherwise viable economic entities. And to this one has to add the non-negligible amount of resources (wages, profits and rents) absorbed by the firms that manage these betting shops.

Conclusion: time for Shari’a standards?
The principle that you cannot sell what you do not own (which also means you cannot sell debt) is a cornerstone of traditional Islamic finance, or Shari’a law-based finance (see e.g. Shari’a Standards for Islamic Financial Institutions; 1429 H -2008, Accounting and Auditing Organisation for Islamic Financial Institutions, Bahrain). During the height of the financial craze that swept the world prior to August 2007, there was some erosion of this key principle in the rulings of a few of the trendier Shari’a scholars who were willing, for a fee, to sign off on products as Shari’a-compliant, even though these instruments were substantially equivalent to standard ‘naked’ derivatives and indeed often were barely disguised clones. But one assumes that a return to basics is likely now also in Islamic finance, which never strayed that far from its origins. The traditional Islamic opposition to trading risk without there being an insurable risk - to gambling, that is - extends well beyond the financial sphere. Indeed, in much of traditional Judaism and Christianity as well, gambling and betting are viewed as signs of moral weakness - as sins. But these moral, ethical and medical (gambling as an addiction) arguments are quite separate from the argument I have explored in this post, that risk trading without an insurable interest may be economically inefficient and destructive, not (just) for familiar moral hazard or micro-endogenous risk reasons but for macro-endogenous risk reasons.

Requiring an insurable interest to be present for risk trading to be allowed (or for such contracts to be legally enforceable) means interfering with the right of two or more parties to enter freely into contracts they all understand. At the very least it amounts to discrimination against such ‘naked’ trades by not enforcing them in a court of law. There are paternalistic arguments against gambling and betting, especially if it is addictive and can hurt or even ruin dependents. And there are conventional utilitarian efficiency arguments for interfering with the freedom to contract if there are significant negative externalities (such as the creation of macro-endogenous risk). It is less obvious that a ‘rights-based’ significant negative externalities argument can be made for interference with the freedom to contract when there is no insurable risk. At the very least, we should have a serious debate as to whether ‘naked’ derivative trading should be declared haram everywhere.

Credit Default Swaps – Exercises in Surrealism
by Satyajit Das

At the quantum level, the laws of classical physics alter in intriguing ways. In financial markets, at the derivative level, the rules of finance also operate differently. The derivative industry’s indefatigable advocacy of credit default swaps (“CDS”) centers on the fact that contracts related to recent defaults settled and the overall net settlement amounts were small. Closer scrutiny suggests causes for caution. The CDS contract is triggered by a “credit event”; broadly, default by the reference entity. CDS contracts on Freddie and Fannie were ‘technically’ triggered as a result of the conservatorship necessitating settlement of around $500 billion in CDS contracts with losses totaling $25 to $40 billion. Government actions were specifically designed to allow the firms to continue fully honouring their obligations. Triggering of these contracts poses questions on the effectiveness of CDS contracts in transferring risk of default.

Practical restrictions on settling CDS contracts has forced the use of “protocols” – where counterparties may substitute cash settlement for physical delivery. In cash settlement, the seller makes a payment to the buyer of protection to cover the loss suffered by the protection buyer based on the market price of defaulted bonds established through an “auction” system. For the GSEs, the auction prices resulted in the following settlements by sellers of protection: Fannie Mae – around 8.49% for senior debt and 0.01% for subordinated debt. Freddie Mac – around 6.00% for senior debt and 2.00 % for subordinated debt.

Subordinated debt ranks behind senior debt and is expected to suffer larger losses in bankruptcy. The lower payout on subordinated debt probably resulted from subordinated protection buyers suffering in a short squeeze resulting in their contracts expiring virtually worthless. Differences in the payouts between the two entities are also puzzling given that they are both under identical “conservatorship” arrangements and the ultimate risk in both cases is the US government. In other CDS settlements in 2008 and 2009, the payouts required from sellers of protection have been highly variable and large relative to historical default loss statistics. This may reflect poor economic conditions but are more likely driven by technical issues related to the CDS market.

For example, the Washington Mutual payout (around 43%) may have been affected by capital remaining at the holding company, Washington Mutual Inc. (estimated at $2.8 billion). More recently, the auction settlement of Lyondell (around 80-85%) reflected complication from the role of debtor in possession financing and complex collateral allocation mechanisms. Skewed payouts do not assist confidence in CDS contracts as a mechanism for hedging. In addition, the large payouts are placing a material pressure on the price of underlying bonds and loans exacerbating broader credit problems. Low overall net settlement amounts may also be misleading. In practice, there are actually two settlements. The ‘real’ settlement where genuine hedgers and investors deliver bonds under the physical settlement rules (i.e. those who actually own bonds and were hedging). The ‘auction’ where dealers who have both bought and sold protection and have small net positions settled via the auction.

In the case of Lehman Brothers, the net settlement figure of $6 billion that was quoted refers to the auction. Some banks and investors that had sold protection on Lehmans did not participate in the auction choosing to take delivery of defaulted Lehman debt resulting in losses of almost the entire face value. CDS contracts can amplify losses in credit market. Lehman Brothers defaulted with around $600 billion in debt implying a maximum loss to creditors of that amount. In addition, according to market estimates, there were CDS contracts of around $400-500 billion where Lehmans was the reference entity. Market estimates suggest that only around $150 billion of the CDS contracts were hedges. The remaining $250-350 billion of CDS contracts were not hedging underlying debt. The losses on these CDS contracts (in excess of $200-300 billion) are additional to the $600 billion. The CDS contracts amplified the losses as a result of the bankruptcy of Lehmans by (up to) approximately 50%.

The CDS market is also complicating restructuring of distressed loans as all lenders do not have the same interest in ensuring the survival of the firm. A lender with purchased protection may seek to use the restructuring to trigger its CDS contracts. As the global economy slows and the risk of corporate default increases sharply, the identified issues with CDS contracts are likely to complicate the problems of credit markets and banks generally. In October 2008, Alan Greenspan, the former Chairman of the Fed, acknowledged he was “partially” wrong to oppose regulation of CDS. “Credit default swaps, I think, have serious problems associated with them,” he admitted to a Congressional hearing. Ludwig von Mises, the Austrian economist from the early part of the twentieth century, once noted: “It may be expedient for a man to heat the stove with his furniture; but he should not delude himself by believing that he has discovered a wonderful new method of heating his premises”.

Collective action on the crisis is our best hope
by Wolfgang Münchau

While global leaders disagree about what to do, the world economy tumbles at accelerating speed. Last week’s news of the virtual collapse of the German manufacturing sector is the clearest sign yet that Europe is heading into a depression. Japan is going the same way, as are other Asian countries. The fall of the German and Japanese economies is also interesting because of what it tells us about the nature of this crisis. Global trade has become one of the main shock transmission mechanisms. Global factors are the main drivers of the downturn. This is not the same as saying that everyone is affected. It means that if you want to stop the rot, relying purely on domestic instruments will no longer to do the trick.

Policymakers by and large understand there is a crisis. But many of them, including a majority of European leaders in particular, still underestimate its likely impact; and, more importantly, they misjudge the dynamics. They congratulate themselves on the moderate stimulus packages they have been able to agree on. There is a sense of resignation that there is not much one can do except wait until it is over. This attitude worked in the past because Europe generally relied on the US to create global demand. I sense that European leaders are again hoping for an American miracle. Only this time, it is not going to happen. This is a different kind of crisis and, whatever happens, it will not end with a resurgent US consumer.

This time, the US will not be able to create a global recovery on its own. Tim Geithner, US Treasury secretary, and Larry Summers, director of the National Economic Council under President Barack Obama, have pushed for a co-ordinated response by the Group of 20 summit in London on April 2. The Europeans immediately rejected those overtures. Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, who otherwise agree on very little, are united in their opposition to global co-ordination. The French and the Germans want the G20 summit to focus only on the long-term issues. Maybe they can still be co-opted into a quid-pro-quo deal, as part of which the US accepts Europe’s agenda for financial regulation in exchange for some policy co-ordination. That would not be the worst result, but I would not bet on such a benign outcome yet.

The case for global co-ordination is overwhelming. There are at least three issues that could be tackled far more effectively by the G20 than by national governments alone. The first is a co-ordinated stimulus. The economic rationale for co-ordination is to increase the effectiveness of the stimulus – the so-called multiplier. Many national stimulus items, such as the French subsidies for the car industry, or German cuts in indirect wage costs, are zero-sum measures from a global perspective. France helps its car industry at the expense of someone else’s car industry. Germany improves its competitiveness at the expense of other countries’. To get the global economy going, we need a stimulus that raises public and private-sector consumption and investment, not an individual country’s relative position in a league table. But countries with large import shares in particular would take such measures only if they knew others would do the same. This is a textbook example of a collective action problem.

The second issue is crisis prevention. We are facing the problem of a massive withdrawal of finance from central and eastern European (CEE) countries. I was shocked to hear last week that the European Commission will soon run out of money for balance-of-payment assistance after Romania’s request. The crisis may be a lot nearer than we are ready to admit. It is politically correct to point out that the CEE countries are all different. So let me state for the record that this is indeed so. The only problem is that those differences are completely irrelevant. If the region were to be subject to a speculative attack, it would matter little whether you were Hungary or the Czech Republic. This is another example of a collective action problem, at the level of CEE states, as well as the EU.

Third, there is a need for global co-ordination when we finally come to sort out the banking system. There are some huge cross-country spillovers. Through the bail-out of AIG, the US taxpayer has indirectly protected several European banks from large losses, since the banks have received large payments from AIG as counterparties in credit derivative contracts. There is an accident waiting to happen, similar to Lehman Brothers. Global co-ordination is absolutely essential when it comes to too-large-to-fail cross-border institutions. Our ability to solve these various collective action problems will ultimately determine how bad this crisis is going to get. The G20 is clearly not the ideal forum because it is too large for effective intergovernmental co-ordination. But for the moment, there is no alternative. The US proposals offer a glimmer of hope. The European reaction is disappointing. But this is probably the global economy’s last chance to avoid a depression.

European Payrolls Shrink by Record as Economic Slump Deepens
European payrolls contracted by the most on record in the fourth quarter as the global financial crisis forced companies to scale back production and cut jobs. Employment in the euro region shrank 0.3 percent from the previous three months, the second straight contraction and the biggest decline since the data series started in 1995, the European Union statistics office in Luxembourg said today. Compared with the year-earlier period, payrolls stagnated in the fourth quarter, and full-year growth slowed to 0.8 percent from 1.8 percent in 2007. A separate report showed inflation held near the lowest in 10 years in February. Companies from auto-parts maker Continental AG to oil company Total SA are laying off workers to weather the deepening global recession. With euro-area unemployment at a two-year high and inflation at a decade low, growing concerns about deflation are putting pressure on the European Central Bank to announce new measures to stimulate lending.

"We’re definitely going to see employment fall a lot further," said Howard Archer, chief U.K. and European economist at IHS Global Insight in London. "It’s likely to bring inflation down further, or at least keep inflation limited," he said, adding that employment may continue to decline "well into next year." With oil prices down by two-thirds since a July peak, consumer prices in the euro area rose 1.2 percent from a year earlier in February, holding near the lowest rate since 1999. Retail sales have declined for eight months and Carrefour SA, Europe’s largest retailer, said on March 12 that it would step up price cuts. Goldman Sachs Group Inc. expects the euro-area economy to shrink by 3.6 percent this year and lowered its forecast for the global economy on March 13 to a 1 percent contraction. The World Bank has also said the world economy may contract this year for the first time since World War II.

Finance chiefs from the Group of 20 meeting in Britain over the weekend pledged a "sustained effort" to end the worldwide slump. As the credit freeze threatens to push the global economy deeper into its worst recession in six decades, the G-20 vowed to clean up the toxic assets that helped trigger the financial crisis and led banks to rack up more than $1 trillion in losses. Hanover, Germany-based Continental, Europe’s second-biggest auto-parts manufacturer, said on March 11 that it plans to eliminate 1,900 jobs in the next 12 months. Paris-based Total, Europe’s third-largest oil company, plans to cut 555 positions at its refining and petrochemicals operations in France. The ECB has reduced its key interest rate by more than half since early October to a record low of 1.5 percent in its efforts to combat the worst global recession since World War II. The central bank expects inflation to average just 0.4 percent this year, and ECB President Jean-Claude Trichet said last week that deflationary risks were "negligible" even as he left the door open to another rate cut.

"Most analysts, including us, are thinking the ECB is underestimating the risk of deflation," said Martin van Vliet, senior economist at ING Bank in Amsterdam. "There’s a risk that lower headline inflation, lower core inflation will start to impact on expectations of households and markets and that’s what the ECB is sort of in denial about." Data last week added to deflation concerns. European producer prices unexpectedly fell on an annual basis in January for the first time since 2004 as German wholesale prices declined the most in almost 22 years. The statistics office estimates that the total number of people employed in the euro area was 145.4 million in the fourth quarter. The total in the 27-nation EU was 225.3 million.

Central Banks Gorge on Dollars as Englander, JPMorgan See 'Crowded' Trade
For the first time since 2001, foreign governments and private investors are both pouring money into dollars, a sign to Steven Englander that the U.S. currency is peaking. Englander, Barclays Capital Inc.’s chief U.S. currency strategist, estimates foreign purchases of American assets have reached record levels, with individuals buying $133 billion a month on average since November, based on government statistics. Central banks were net buyers of Treasuries for 29 of the past 30 weeks, a streak unmatched since at least January 1983, data compiled by Bloomberg show.

While the dollar strengthened 24 percent against the euro since falling to a record on July 15 as investors sought the safety of U.S. assets, zero percent interest rates and signs the financial crisis is abating will help lead to a 13 percent drop in the next year, Englander said. He’s not alone. JPMorgan Chase & Co. warns the dollar trade is becoming "crowded." Half of 50 currency strategists surveyed by Bloomberg News predict the dollar will fall against the euro by Dec. 31. "People are sitting there holding massive amounts of zero- yielding dollar assets," said Englander, a Yale University Ph.D. who started his career at the Federal Reserve Bank of New York and studied the currency markets for 25 years. "If there is any sort of good news, demand for dollars can drop off very, very quickly."

The last time Englander’s calculations showed the public and private sectors both betting the dollar would rise was during the March-to-November 2001 U.S. recession. Back then, investors had flocked to the dollar on expectations of a recovery. It hit a 15-year high that July and then slid 8 percent in the next two months against Intercontinental Exchange Inc.’s Dollar Index, a basket of the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona. This year, that gauge has surged 12.2 percent, reaching 89.624 on March 4, the highest since April 2006, as investors sought a haven from the worst financial crisis since the 1930s. It ended last week at 87.428, down 1.22 percent, and traded at 87.686 at 8:39 a.m. in Sydney.

The dollar’s climb intensified in the two months following the September collapse of Lehman Brothers Holdings Inc., which deepened the global credit freeze and prompted investors to flee higher-risk investments. Last week showed how good news in financial markets may be bad for the dollar. On March 10, New York-based Citigroup Inc. said the bank is having its best quarter since 2007. Then JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told CNBC that the New York- based company was profitable in January and February. Two days later, Bank of America Corp. CEO Kenneth Lewis said his Charlotte, North Carolina-based bank was also profitable in the year’s first two months. The MSCI World Index of stocks in 23 developed economies rallied 8.5 percent in the best week since November, and the dollar fell 2.1 percent against the euro to $1.2928. The weekly decline was the steepest since December.

Englander predicts the dollar will slide to $1.45 per euro. He bases his conclusions on data that includes trading by clients with $1.4 trillion under management at Barclays Global Investors, the asset management unit of London-based Barclays Plc. He also looks at Treasury Department statistics on the flow of capital into and out of the U.S. Foreign buying of American financial assets by both private investors and governments averaged $141 billion from September to December, Treasury data show. Shorter-term securities made up more than half of the international purchases in December. Demand was so strong that, for the first time, investors accepted rates below 0 percent on three-month Treasury bills to safeguard their capital. The rate has rebounded to 0.2 percent.

Trading on foreign-exchange futures contracts shows investors are bullish on dollars. Hedge funds and other large speculators have about 60,000 more bets that the dollar will rise against nine other industrialized nations’ currencies than wagers it will fall, Commodity Futures Trading Commission data show. In September, when Lehman went bankrupt, those bets peaked for the year at about 140,000 contracts, CFTC data tracked by JPMorgan show. Central banks’ almost uninterrupted 30-week streak of net buying Treasuries left them with $1.78 trillion worth on deposit at the Federal Reserve as of March 11, up $36 billion since Aug. 13. Central bank holdings of all publicly traded securities at the Fed increased in 12 of the past 13 weeks, to $2.591 trillion.

Greg Gibbs, director of foreign-exchange strategy in Sydney at Royal Bank of Scotland Group Plc, disagrees with Englander. "Yes, the market is generally long the U.S. dollar against most major currencies as per the futures position data," but it’s not excessive, said Gibbs, who has analyzed currency trends for more than two decades. "It is inaccurate to characterize the market as being structurally long the U.S. dollar. For many central banks, such as that in Russia, reserves are falling. We’re looking for another significant fall in the euro versus the dollar as the European economy is really struggling." The median forecast of 50 strategists surveyed by Bloomberg is for the dollar to fall to $1.30 per euro by March 31 and end the year at $1.29, about where it ended last week. The euro traded at $1.2863 at 10:45 a.m. in Sydney.

"Long the U.S. dollar is becoming a crowded trade," said John Normand, head of global currency strategy in London at JPMorgan Chase & Co., in an interview March 12. "The key question is when a safe-haven currency loses its appeal. The tipping point will be when the U.S. looks like a worse investment environment relative to other countries or if the situation in Europe stabilizes," which is likely to be soon, he said. JPMorgan forecasts the dollar will slide about six percent versus the euro by the end of the year, to $1.37. The sudden decline of the Japanese yen as a refuge shows how quickly sentiment can change, Normand said. In 2008, the yen rose the most of the 171 currencies tracked by Bloomberg, climbing 23 percent versus the dollar and 29 percent against the euro, as credit markets froze, equity markets collapsed and global economic growth stalled. The yen hit 87.13 per dollar on Jan. 21, its strongest since July 1995. Then, Japan’s economy contracted last quarter by the most in more than three decades and its trade deficit reached the widest in more than two decades in January as exports plunged 46 percent. The yen has plummeted 11 percent since that January peak.

Maxime Tessier, head of foreign exchange in Montreal at Caisse de Depot et Placement du Quebec -- Canada’s largest pension fund, with C$120.1 billion ($94.3 billion) in assets -- said a primary catalyst for a slide in the dollar will be an escalating threat of rising prices sparked by Fed purchases of Treasuries. Faster inflation hurts the value of a currency as it erodes the value of future returns in that denomination. Fed Chairman Ben S. Bernanke said Dec. 1 that the central bank may buy longer-term U.S. debt to keep yields and interest rates down. On March 6, Federal Reserve Bank of New York President William Dudley said policy makers have decided for now not to expand the range of securities they purchase.

The Fed lowered its target rate for overnight loans to zero to 0.25 percent and more than doubled the assets on its balance sheet to $1.9 trillion during the past year, expanding bank reserves and beginning lending programs to bolster the financial system. President Barack Obama is seeking Congressional approval for a $3.55 trillion budget for the year starting in October that would increase spending by 32 percent to kick start the economy. "The Fed has a policy of very, very aggressive re-flation," Tessier said. "A weaker dollar goes in the right direction, from a U.S. standpoint, as it stimulates economic growth. The trading strategy over 2009 is to gradually build up a short U.S. dollar position."

New York Manufacturing Contracts Most on Record as Orders, Sales Slump
Manufacturing in New York contracted in March at the fastest pace on record as orders, sales and inventories plunged. The Federal Reserve Bank of New York’s general economic index dropped to minus 38.2, the lowest level since data began in 2001, from minus 34.7 in February, the bank said today. Readings below zero for the Empire State index signal manufacturing activity is shrinking. The collapse in global trade, alongside a U.S. economy in its second year of recession, is causing manufacturers to pare back production as demand plummets. The subsequent payroll cuts have prompted the Obama administration to pledge to save or create 3.5 million jobs through tax cuts and more spending.

"The demand for manufactured products -- both domestically and globally -- has evaporated," Steven Wood, president of Insight Economics LLC in Danville, California, said before the report. "This has forced factories to substantially reduce production and employment to keep inventories from ballooning." Economists forecast the Empire State index would climb to minus 30.8, according to the median of 45 estimates in a Bloomberg News survey. Projections ranged from minus 25 to minus 40. The measure of new orders decreased to minus 44.8 and a gauge of shipments fell to minus 26.7, the lowest levels on record. The index of inventories decreased to minus 27, the weakest since August 2001, from minus 8.1.

The index of prices paid dropped to minus 14.6 from minus 13.8, and the gauge of prices received decreased to minus 23.6 from minus 20.7. A measure of employment improved to minus 38.2 from minus 39.1. Factories in the state turned optimistic about the future. The gauge measuring the manufacturing outlook for six months climbed to 3.1, the first positive reading in three months, from minus 6.6. Today’s report is one of the earlier measurements of regional manufacturing this month. The Philadelphia Fed report, due this week, may show manufacturing in the region also contracted in March, according to the Bloomberg survey median. Another Fed report today is forecast to show industrial production nationwide decreased in February for a fourth straight month, according to the survey median. Manufacturing accounts for four-fifths of industrial production.

The U.S. trade deficit narrowed in January to $36 billion, the lowest level in six years, on tumbling American demand for everything from OPEC oil to Japanese automobiles, Commerce Department figures showed last week in Washington. American exports also decreased the lowest level since September 2006, as sales of automobiles and telecommunications equipment dropped, the government report showed. The slowdown in global demand is hurting U.S. companies. United Technologies Corp., the maker of Otis elevators and Carrier air conditioners, said last week it plans to cut 11,600 jobs.

Louis Chenevert, chief executive officer of the Hartford, Connecticut-based company, said in a March 10 statement that "the economic recovery previously anticipated in the second half of 2009 now appears unlikely." U.S. manufacturers reduced payrolls by 168,000 workers last month, following the 257,000 jobs cut in January, according to data from the Labor Department. Economists surveyed by Bloomberg News March 2 to March 9 projected the U.S. jobless rate will reach 9.4 percent this year and the economy will shrink 2.5 percent. The global economy is likely to contract this year for the first time since World War II, and trade will decline by the most in 80 years, the World Bank said last week without providing a specific estimate.

AIG Says $105 Billion of Bailout Funds Flowed to Goldman, Société Génerale, U.S. States
American International Group Inc., under pressure to reveal how it spent billions of dollars in taxpayer funds since its September bailout, said $105 billion flowed to U.S. states and banks including Goldman Sachs Group Inc., Societe Generale SA and Deutsche Bank AG. Banks that bought credit-default swaps or traded securities with AIG got $22.4 billion in collateral, $27.1 billion in payments from a U.S. entity to retire the derivatives, and $43.7 billion tied to the securities-lending program, AIG said yesterday in a statement. States led by California and Virginia got $12.1 billion tied to guaranteed investment contracts. "It puts a sour taste in the American taxpayer’s mouth, but you have to look at that in terms of the bigger picture," said Donald Powell, chairman of the Federal Deposit Insurance Corp. from 2001 until 2005. "If you’re going to have any chance of recovery you probably have to stay with it."

The disclosure may fuel a backlash over AIG’s bailout, valued at about $160 billion as of March 2, which has already drawn expressions of anger and frustration from Congress, Treasury officials and Federal Reserve Chairman Ben S. Bernanke. AIG was lambasted yesterday for awarding $165 million in retention pay to employees of the unit that sold the swaps, deals that helped trigger the global credit crisis. AIG has said it plans to spend as much as $1 billion to keep people from leaving as it sells units. Goldman Sachs led beneficiaries, with $12.9 billion, followed by SocGen, France’s No. 3 bank, with $11.9 billion, and Deutsche Bank, Germany’s biggest lender, with $11.8 billion. New York-based AIG and the Fed had previously refused to reveal the counterparties, saying the contracts were confidential and that the information could damage AIG’s business prospects.

"I was happy to see that AIG finally handed over the counterparty information we’ve been requesting for months," said Representative Elijah Cummings, a Maryland Democrat on the House Oversight Committee. "However, I am deeply concerned that Goldman Sachs received so much money from AIG considering the relationships between the two companies. We will certainly be investigating this further to ensure that this is merely a coincidence." Henry Paulson, former CEO of New York-based Goldman Sachs, made the decision to save AIG while he was Treasury Secretary. He appointed AIG CEO Edward Liddy, formerly CEO of Allstate Corp., whom he knew from the executive’s service on the board of Goldman Sachs.

Goldman Sachs spokesman Michael Duvally declined to comment on the statement from Cummings. On AIG, he said, "Goldman Sachs’s exposure to AIG has always been collateralized and hedged." Spokespeople for the other U.S. and European banks named by AIG either declined to comment or couldn’t be reached for comment. The collateral payments were made from the government’s initial $85 billion emergency loan to AIG. The company almost collapsed in September after credit-rating downgrades triggered payments to banks that had bought swaps. AIG got another $37.8 billion in October when its securities lending program, which invested in subprime securities, had a cash shortfall.

AIG’s third bailout, in November, totaled $150 billion and included the government-created Maiden Lane facilities to wind down contracts tied to some of the insurer’s swaps and securities lending program. The company needed its rescue revised again this month, easing previous loans, swapping units to pay down debt and providing a new $30 billion credit line after AIG posted a $61.7 billion fourth-quarter loss, the biggest in U.S. history. AIG’s disclosure came after consultation with the Fed and is intended to provide transparency for the use of government funds, the company said in its statement. In a prepared statement, the Fed thanked AIG "for finding a balance between its concerns with confidentiality and the concerns of the public interest that may be served through the release of this information."

The Fed’s stance was at odds with the view earlier this month of Fed Vice Chairman Donald Kohn. He told senators at a March 5 hearing that the counterparties should be kept secret, saying that releasing the names would drive business away from AIG and worsen turmoil in financial markets. "We need AIG to be stable and to continue in a stable condition," Kohn told the senators. "I would be very concerned that if we gave out the names of counterparties here, people wouldn’t want to be doing business with AIG." Bernanke yesterday elaborated on comments earlier this month that the AIG bailout made him angrier than any other incident during the financial crisis, saying he "slammed the phone more than a few times" when discussing the company.

"It’s absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets," Bernanke said in an interview on CBS Corp.’s "60 Minutes" program. Yet failing to rescue the company would "risk enormous impact, not just in the financial system, but on the whole U.S. economy," he said. AIG released the counterparty information in the aftermath of a scolding from Treasury Secretary Timothy Geithner and lawmakers over its bonus plans. Public anger has been stoked by revelations of bonuses paid by firms at the center of the financial-market meltdown that has plunged the U.S. into what may become the deepest recession since World War II. New York Attorney General Andrew Cuomo is investigating $3.6 billion in bonuses paid by Merrill Lynch & Co. shortly before it was acquired Jan. 1 by Bank of America Corp.

After an inquiry by Geithner, AIG agreed to reduce some retention payments in 2009 by 30 percent and tie bonuses to the company’s recovery, according to a person briefed on the matter and a letter from Liddy. AIG still planned to distribute about $165 million yesterday because of legally binding contracts, said the person, who declined to be identified because the talks weren’t public. "I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them," Liddy wrote to Geithner in a March 14 letter, which said the contracts predated his arrival. Geithner telephoned Liddy on March 11 to demand changes to AIG’s plan, an administration official said. The Treasury didn’t try to halt yesterday’s payments after determining that AIG was legally bound to make them.

Lawrence Summers, director of the White House National Economic Council, called the AIG bonus payments "outrageous" in an interview yesterday on ABC’s "This Week" program. AIG is "abusing the system," Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, told "Fox News Sunday." Retention payments for employees in the unit will be cut by at least 30 percent for 2009, Liddy wrote. The top award in the unit was about $6.5 million, and six other employees got more than $3 million, Liddy wrote. About $165 million tied to 2008 must be paid by March 15, on top of $55 million already handed out in December, according to an AIG summary. Another $230 million for 2009 retention may be reduced as parts of the business are sold and employees are laid off.

The Treasury may try to recoup some of the payments to financial products unit employees, according to the person familiar with the talks. "Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system," Summers said. Even so, "The government cannot just abrogate contracts." Liddy’s letter didn’t mention any cuts in retention payments at other business units. In addition to the financial products unit, AIG planned to award $148 million to top executives, and about $470 million for three other subsidiaries, according to a person familiar with the plans and company documents. An AIG filing on March 2 confirmed a Bloomberg report that all the insurer’s employee retention plans might cost $1 billion.

Another Credit Crunch: National Regulators Tighten the Screws
As governments step in to help, their bureaucrats are imposing rules that can make even the safest debt harder to sell. As a lawyer who prepares prospectuses for bond offerings from major banks, Anna Pinedo never thought she'd have to assemble hundreds of pages of facts on the creditworthiness of Federal Deposit Insurance Corp. and the U.S. government. But a frustrated Pinedo is doing just that, in a telling example of the new sand that's grinding the gears of the global financial system. This grit was thrown in by regulators in London who won't authorize Pinedo's bank clients to sell newly guaranteed debt to European investors without detailed disclosures about the FDIC, which is promising to make sure the bonds are repaid. So Pinedo and her firm, Morrison & Foerster, are rounding up all manner of facts about the FDIC's solvency, about dates U.S. government debt matures, about trends in the U.S. trade balance, and so on. It doesn't seem to matter that U.S. currency and creditworthiness are still among the strongest in the world. "We've been held up for months trying to get the U.K. Listing Authority to sign off on our disclosures about the U.S. economy and the FDIC," says Pinedo.

Absurd? Get used to it, experts predict. Bureaucrats and politicians are assuming new power now that many financial firms and capital markets are on their knees and desperate for government help. "It is going to be a pain in the ass and it will cost more as well," says Willem Buiter, professor of European Political Economy at the London School of Economics. In some cases, the new barriers will amount to simple overregulation by nervous bureaucrats. In others, Buiter says, they will be weapons in international trade battles. The only difference is that these protectionist measures will involve securities and lending instead of goods and services. "Financial protectionism is spreading on a much wider scale," says Buiter. It is a shift that's also reflected in increasing complaints from politicians that their own international banks are using that nation's bailout money to fund loans to foreigners. Some of the new hurdles will emerge from stern applications of existing rules to new situations. A prime example is the burden on bonds guaranteed by the FDIC.

The U.S. offered the guarantees to banks in October to quickly try to stop the tightening credit crunch. The guarantees were intended to encourage investors from anywhere in the world to lend to the banks so that the banks would have money to lend to customers. But the U.S. goal isn't such a priority for regulators in Britain, whose approval of bond sales would open the door to investors throughout Europe. They won't let the bonds through without the reams of information about the FDIC and the U.S. A spokesman in London for the Financial Services Authority, Joseph Eyre, says that is because the FSA is following a Dec. 17 memo from the Committee of European Securities Regulators, of which Britain is a member. The memo says regulators should require disclosures about guarantees as they have in the past—unless the guarantors are from European governments, which are members of the committee. Then, of course, exceptions can be made. The result is that European regulators are quickly approving sales of bonds guaranteed by their governments, a big advantage in raising scarce capital. It doesn't seem to matter that in the past the regulators allowed the U.S. banks to sell bonds without the new safety provided by the U.S. government.

Other battlefronts are opening, too. Bankers are worried about brewing fights between governments over new regulations on credit-rating agencies and credit-default swaps, a type of derivative. The European Commission is proposing to require that ratings used there be issued by rating agencies operating in Europe with approval of European authorities. The new requirement would mean, as a practical matter, that banks and corporations wanting to sell bonds in Europe and in the U.S. would have to get ratings from both sides of the Atlantic. The Securities Industry and Financial Markets Assn., a trade group, complained last year that the European proposal "does not sit well with the global trend towards facilitating cross-border business…and elimination of bureaucratic obstacles." The extra burden will likely discourage companies from raising money where it is cheapest. European officials say they must exercise more oversight of rating agencies because U.S. authorities aren't doing enough. Meanwhile, U.S. and European regulators have been taking separate steps to have credit-default-swap clearing houses set up in their own jurisdictions.

Different clearing systems would work against the goal of centralizing markets in derivative contracts to reduce risk from defaults, according to a recent study by Darrell Duffie and Haoxiang Zhu of Stanford University. Public officials, of course, say they intend to cooperate internationally. In a Feb. 14 communiqué, finance ministers and central bankers from the so-called Group of Seven large economies said they intend to develop "common principles and standards" for finance. It is a pledge likely to be repeated in the runup to the Apr. 2 meeting of heads of state from the G-20, which includes the G-7 plus other economic powers. Ahead of that meeting, the G-20 finance ministers and bankers were searching this past weekend in London for consensus on ways to coordinate economic stimulus programs and new financial regulations.

Christine Lagarde, finance minister of France, said recently at a conference at Columbia University in New York that to make regulation effective, nations must work together to write rules that are consistent with one another. Otherwise, she warned, financial institutions will play one set of rules off another to profit through what's known as "regulatory arbitrage." "Coordinated supervision is particularly needed for big, international players," Lagarde said. The cooperation pledges sound good, says Malcolm Knight, vice-chairman of Deutsche Bank (DB) and former general manager of the Bank for International Settlements, who was at the conference with Lagarde. Knight says he's encouraged that officials have been quietly discussing possible international agreements on credit-rating agencies and credit default swaps. Still, he worries that the costs to taxpayers of bank failures will overwhelm the best intentions. "Deep government involvement means that politicians must satisfy their own domestic constituents," Knight says. The boundaries between nations were shrinking. Now they seem poised to rise at what may well be the worst possible time.

Volcker Should Have 'Real Authority' on Economy, Bradley Says
Former Senator Bill Bradley urged President Barack Obama to grant former Federal Reserve Chairman Paul Volcker “real authority” as part of his economic team. Bradley, managing director of Allen & Co. LLC and a one- time Democratic presidential candidate, said Volcker’s Economic Recovery Advisory Board can offer a “balanced view” to White House insiders such as Treasury Secretary Tim Geithner and National Economic Council Director Larry Summers. “Larry Summers and Tim Geithner are great people, but a president needs to also have a balanced view from the outside,” Bradley said during an interview on “Political Capital with Al Hunt” airing today on Bloomberg Television.

“The wise decision would be to invigorate that committee and give him real authority,” Bradley said of Volcker. Obama would “have the best on the outside and the best on the inside.” Volcker, 81, has called for a two-tiered financial system that would limit risk-taking by the most systemically important firms, an idea that Summers and Geithner haven’t embraced. Volcker also blamed Summers for slowing down the effort to organize the recovery advisory board. He has complained that Summers doesn’t regularly invite Volcker to White House meetings and is unwilling to collaborate on policy ideas. Geithner and Summers, through their careers, have had closer ties with Wall Street firms than Volcker, and one senior bank executive recently dismissed Volcker’s views on financial regulation as representing an outlier.

Volcker is among the biggest critics of repeal of the Glass-Steagall Act, which allowed commercial banks to get into the investment business. Congress changed the law in 1999 with support from Summers, who was then Treasury secretary. “That was a major mistake,” said Bradley, a longtime Volcker ally. Volcker, who met with Obama along with members of his recovery advisory board at the White House today, said fixing the financial system is “a very complicated matter.” Volcker told reporters after the meeting that he’s “sure” a program will be developed. “But there are big economic problems behind the financial system too that are going to take longer to work out, and you can’t neglect those problems while we’re working on this immediate crisis,” he said.

A lack of regulatory oversight in the last decade has allowed banks to evaluate their own risk, which helped fuel trading of low-grade collateralized debt obligations. As commercial banks sought to compete with investment banks, they took bigger trading risks and created off-balance- sheet financing vehicles to help reduce the capital they needed to hold to protect against loan losses. Investment banks became more aggressive in lending to companies and increased their own borrowing to buy securities or real estate. European banks and the insurance giant American International Group Inc., for example, “bought bad CDOs that they couldn’t possibly have gotten a triple-A rating,” Bradley said. “They then bought insurance from AIG, which had a triple- A rating.”

Bradley said the Obama administration must develop “a clear plan” to address the banking crisis and urged the public to “have a little patience.” Bradley dismissed recent criticism of Geithner’s public appearances. Bradley said he would advise Geithner to “not worry about the press chatter.” Geithner, he said, needs “some time” to produce results. “The key thing is not whether his face twitched in his first press conference, but whether the policies actually produce the results,” Bradley said.

One idea for stimulating the economy is to use part of a $787 billion stimulus package to invest in public offerings, Bradley said. “What would happen if you were a young high-tech company and you were able to get your public offering? You would immediately employ people,” Bradley said. He endorsed the administration’s plan to use a public- private approach to helping U.S. banks sell distressed assets. He cited Citigroup Inc., one of the biggest beneficiaries of government aid, as an example. The government has given about $350 billion in loans and aid to the New York-based financial services company, which has a current market capitalization of about $8 billion. “You buy it and you’d have good assets and bad assets. Within six months, you sell the good assets, making all of your money back and more,” Bradley said. “You already have the bad assets, and you then take 20 years to figure how to write it off.”

Bradley, 65, sought the Democratic presidential nomination in 2000 against former Vice President Al Gore after serving as a New Jersey senator for 18 years. He is managing director of New York’s Allen & Co. LLC, a boutique investment bank. He endorsed Obama during the presidential primary, though he said he has no plans to join the administration. “This is not going to happen,” he said. Before entering politics, Bradley played for 10 years with the New York Knicks, winning National Basketball Association championships in 1970 and 1973. He was enshrined into the Basketball Hall of Fame in 1983. Bradley predicted that LeBron James, an all-star forward for the Cleveland Cavaliers, won’t join the New York Knicks.

Wells Fargo Chief Blames TARP for Payout Cut, Calls Stress Test 'Asinine'
Wells Fargo & Co. Chairman Richard Kovacevich criticized the U.S. for retroactively adding curbs to the Troubled Asset Relief Program, which he said forced the bank to cut its dividend, and called the administration’s plan for stress-testing banks "asinine." When the U.S. Treasury persuaded the nation’s nine biggest banks to accept capital investments in October, it signaled the whole industry was weak, Kovacevich, 65, said in a March 13 speech at Stanford University in California. Even though Wells Fargo didn’t want the money, it must comply with the same rules that the government placed on banks that did need it, he said. "Is this America -- when you do what your government asks you to do and then retroactively you also have additional conditions?" Kovacevich said. "If we were not forced to take the TARP money, we would have been able to raise private capital at that time" and not needed to cut the dividend to preserve cash, he said.

Kovacevich joins a growing list of bankers who are chafing at restrictions imposed by the TARP program, which affect lending, foreclosures, pay and perks. Lenders including Bank of America Corp., U.S. Bancorp and Goldman Sachs Group Inc. have said they want to give back the money. More than 500 banks, insurers and credit-card companies applied for TARP capital, and the government has distributed almost $300 billion. While Bank of America aims to return the funds, Chief Executive Officer Kenneth Lewis praised TARP last week for preventing a financial "meltdown." JPMorgan Chase & Co. CEO Jamie Dimon said it helped stabilize the banking system. Wells Fargo slashed its dividend by 85 percent on March 6 to 5 cents a share, citing savings of $5 billion and the need to build a capital cushion in case the market deteriorates further. Last month the San Francisco-based bank made a quarterly payment of $371.5 million to the Treasury for interest on the $25 billion TARP investment.

The company reported its first loss since 2001 in the fourth quarter after accounting for the acquisition of troubled home lender Wachovia Corp. In February, as the government made its third attempt to save Citigroup Inc., Wells Fargo suspended cash bonuses for executives including Kovacevich and CEO John Stumpf. Any bank receiving government funds has to limit annual pay for top executives to no more than $500,000. Wells Fargo has also canceled a sales conference in Las Vegas and removed Wachovia’s name from a professional golf tournament in its hometown of Charlotte, North Carolina, amid government pressure. The dividend cut is "the right move for the company, as it will allow it to retain capital in this uncertain and challenging economic environment," RBC Capital Markets analyst Joseph Morford in San Francisco wrote in a March 9 report.

The company sees the dividend as a "core part of its relationship with its shareholders and part of the long-term return they expect," wrote Morford, who rates the shares outperform and owns some personally. Kovacevich said the government is still making mistakes as it tries to save the industry. The "stress test," designed to determine which of the 19 largest U.S. banks need more capital, provides opportunities for short-sellers to drive down bank stocks and can hurt confidence in the system even more, he said. The Obama administration announced the test last month and said it will help determine which banks are healthy enough to withstand surging unemployment and tumbling home prices. Results are due by late April, according to the Treasury.

"We do stress tests all the time on all of our portfolios," Kovacevich said. "We share those stress tests with our regulators. It is absolutely asinine that somebody would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks." Isaac Baker, a Treasury spokesman, said the stress test will protect the banking system. "This program will help ensure banks have the capital they need to continue lending through an economic downturn that is more severe than expected and help restore confidence that our financial system is sound," Baker said in an e-mail. Wells Fargo fell 1 cent on March 13 to $13.94 on the New York Stock Exchange, leaving the shares down 51 percent in the past year.

Britain showing signs of heading towards 1930s-style depression, says Bank of England
Britain is showing signs of sliding towards a 1930s-style depression, the Bank of England says today for the first time. The country is displaying early symptoms of being trapped in a so-called "debt deflation trap" where families find themselves pushed further and further into the red every month, according to a Bank report published today. The stark warning will cause serious concerns, since it was this combination of falling prices and soaring debt burdens that plagued the US in the 1930s. The Bank is using its Quarterly Bulletin to highlight the threat posed to the economy by deflation – where prices fall each year rather than rise. Although inflation is currently in positive territory, it is expected to become negative in the coming months.

The Bank is worried that this may combine with high levels of indebtedness to squeeze families further. It says that families with high debts could fall prey to the debt deflation trap. This means that the cost of their debts, which are fixed, would rise compared to average prices throughout the economy. While inflation erodes debts, deflation makes them relatively higher. The Bank’s paper suggests that Britain is particularly at risk because there is a high proportion of families with significant levels of debt, and many of them are on fixed mortgage rate, which means they will not benefit from rate cuts. Britons’ total personal debt – the amount owed on mortgages, loans and credit cards – is, at £1.46 trillion, more than the value of what the country produces in a year. Total personal debt has risen by 165 per cent since 1997 and each household now owes an average of about £60,000. The Conservatives claim this is the highest personal debt level in the world.

The Bank’s paper also says that consumers were suffering as banks keep the cost of borrowing high, despite Government attempts to get them lending again. Alistair Darling, the Chancellor, and fellow finance ministers used their pre-G20 meeting this weekend to warn that more drastic action was necessary to help bring the world economy back from the brink of a possible repeat of the 1930s. The Bank’s report puts pressure on Gordon Brown, who this weekend faced further calls to apologise for the recession, to secure agreement on an effective international rescue strategy when he hosts the G20 leaders at a summit in London at the start of April. It comes as figures this week are expected to show the number of people unemployed will reach the two million mark. The Bank’s report says: "This configuration of falling asset prices and depressed economic conditions in the face of an adverse demand shock is consistent with recent and prospective macroeconomic developments in the United Kingdom and internationally". It helps explain why it took such dramatic action earlier this month to pump extra cash into the economy.

The bank slashed interest rates to just above zero and pledged to create £150 billion worth of cash with which to buy up government and corporate debt. This so-called quantitative easing is regarded as a radical measure to help prevent a repeat of the conditions associated with the Great Depression. Many experts believe that the US authorities’ initial reluctance in the 1930s even to cut interest rates was partly responsible for causing the worst economic slump in Western history. The Chancellor acknowledged at the G20 meeting that the economic situation was "grave" but pledged not to allow a repeat of the Depression years. The ministers promised to pump more cash into their economies if necessary in the next few months. However, some have expressed concern that the meeting failed in its aspiration to reach a specific agreement on the amount of cash countries need to spend in the coming year. Others have warned that it does not set a clear enough agenda for the much-anticipated full G20 summit on April 2.

Some speculate that the Prime Minister may use the G20 as a justification for a series of further tax cuts and spending increases in the Budget next month, though many economists have warned that despite the scale of the recession faced by the UK the Treasury has little capacity to borrow more. Mr Darling has signalled that the meeting must not be allowed to mirror a 1933 summit in London which failed to halt the Great Depression. He said failure to agree co-ordinated action then meant that the Depression continued for years when it "need not have done so". Writing in The Sunday Telegraph George Osborne, the Shadow Chancellor, said Mr Brown must use the G20 as "the moment to send the clearest of signals that, unlike in the 1930s, this banking crisis will not send the world spinning into a protectionist spiral." He said that "ministerial promises" had failed to deliver any real benefits to struggling home owners or desperate businesses.

Medvedev Says Crisis Is 'Cleansing' Time for Russian Oligarchs
President Dmitry Medvedev said Russia’s worst economic crisis in a decade will help "cleanse" the country of businessmen who harm the country by ignoring their social and moral obligations. "Now it’s the time to repay debts, moral debts, because this is a test of maturity," Medvedev said in an interview on state television yesterday. A businessmen who sells his assets and "runs off somewhere" will help the economy in the long run because "he’s not a real entrepreneur," he said. Medvedev, who was elected a year ago, has repeatedly attacked Russians’ "legal nihilism" and called for a concerted crackdown on corruption.

A protégé of his predecessor Vladimir Putin, the 43-year-old St. Petersburg lawyer addresses citizens directly via video blogs on his Web site and televised fireside- style chats with selected anchors. A handful of politically connected Russians made fortunes in the 1990s by buying some of the country’s best assets for pennies on the dollar. The number of Russians on Forbes magazine’s list of billionaires plunged to 32 this year after reaching a record 87 in 2008, following a drop in asset prices and the onset of the global recession. "Perhaps nowhere in the world has business developed so quickly in recent times as in our country," Medvedev said. "People became very wealthy in a very short period of time."

Ilargi: OPEC has given up on pretty much just about all of its powers. Oil demand decreases fast, but production cuts are not practically possibly anymore. As i said a long time ago, OPEC is the sort of club that functions only in good times. When things go bad, its members have no choice but to put their own interests first. Last week, OPEC claimed compliance with previous cuts was at 80%. Don’t believe such nonsense. Even in much better days, complaince averaged about 50%. The reality is that production today is at full speed mode, and there are enormous surpluses building up, wit tankers functioning as storage space. OPEC has become a sideshow, which deserves no attention any longer.

Opec decides against deeper cuts
Opec decided on Sunday against more supply cuts, signalling that it would delay its goal of boosting oil prices to $75 a barrel at least until next year. The decision marks a significant shift in the policy of the oil cartel, which supplies about 40 per cent of the world’s oil and had given the impression that it wanted to push up prices as quickly as possible. But it now seems Opec fears that more radical action to achieve the $75 target could harm the fragile world economy. The oil price fell $2 on Monday as traders unwound positions taken in the run-up to the Vienna meeting. In London the ICE Brent crude contract for April, which expires at the end of trade on Monday, fell $2 to $42.93. April Nymex crude oil futures were down around $2 at $44.30 a barrel, having briefly touched $43.85

Abdalla Salem el-Badri, Opec’s secretary-general, said this year would probably be the most difficult the world was going to face. "We took into consideration what is happening in the world," he said. "We have not abandoned this price but the time is not right." Steven Chu, the US energy secretary, said he was pleased with the decision, although he still believed that the US should seek to become energy independent. But a relatively benign outcome for consumers also showed that some Opec members would struggle politically and financially if they were to cut production significanly futher than they have already. The cartel urged its members to comply fully with the 4.2m barrel a day cuts pledged since September. Compliance stands at 79 per cent, leaving about 800,000 barrels to be removed. Most Opec ministers want an oil price of $70-$80 a barrel. They argue that this would allow cartel members, and other oil producers, to continue investing in projects that will yield the oil and gas needed once the world economy recovers.

Many western oil executives back that assessment, warning that low oil prices might bring under-investment and an eventual supply crunch. Oil traded last week in the mid-$40 range, well below its July record of $147 a barrel. However, prices have recovered from lows in the $30 range in the past weeks as supplies from Opec began to drop. Saudi Arabia, Opec’s most important member, had argued over the past week that members needed to comply before pledging a new round of cuts. So far, the group’s most disciplined members include Saudi Arabia, the United Arab Emirates, Kuwait, Qatar and Algeria. "Saudi Arabia has delivered almost half the group’s collective 3.3m b/d production cuts since September and this past month may have produced below its nominal target" the International Energy Agency, the rich countries’ watchdog, said in its most recent report. "By contrast, Iran, Venezuela and Angola have collectively reduced output by only around 600,000 b/d, or half the pledged 1.17m b/d. Combined, they account for 63 per cent of current over?production versus target," Opec has agreed to meet again in May in case Sunday’s decision drives oil prices to lower levels than members can tolerate.

Natural Gas Rigs Shutting Means Prices May Double
Natural gas drillers from Devon Energy Corp. to XTO Energy Inc. are idling rigs at the fastest pace since 2002, setting the stage for this year’s worst commodity to almost double as supplies drop faster than demand. About 45 percent of U.S. rigs have been shut since September, which means fourth-quarter gas production will tumble 5.2 percent, faster than the 1.9 percent decline in use, the Energy Department forecast. Prices will rise to $7 per million British thermal units by January from $3.89 today on the New York Mercantile Exchange, according to a Bloomberg News survey of 20 analysts. The gain would be the largest since the first half of 2008.

The last time drillers stopped rigs at this pace was seven years ago, when futures advanced 86 percent. The world’s biggest hedge funds have already started to close bets on a drop in prices, government data show. Natural gas tumbled 30 percent this year, the worst start since 2006, as sales weakened with the recession. "When the recession ends and the economy starts booming, we’re going to have less natural gas than we do today and prices are going to spike back up," said Larry Nichols, chief executive officer of Devon Energy Corp., the largest independent oil and gas producer. Devon and Chesapeake Energy Corp., both based in Oklahoma City, slashed 2009 drilling budgets as gas prices tumbled more than 70 percent from a July high. The companies lost a combined $7.68 billion in the fourth quarter, mostly from writing down the value of gas and oil properties to reflect falling prices.

"The drop in supply will be so steep, it could easily catch up to where demand has dropped to before the recession ends," said Nichols, who declined to give a price forecast. Devon has declined 62 percent in New York trading to $45.17 on March 13 since the fuel set a 2008 high of $13.694 on July 2. Chesapeake tumbled 78 percent to $15.46 and XTO lost 55 percent to $29.70. The number of exploration rigs in the U.S. has fallen to 884 from a record 1,606 in September, according to Baker Hughes Inc., the third-largest oilfield-services provider, based on data through March 13. XTO of Fort Worth plans to cut its rig count to 60 by the end of this month from 73 in the fourth quarter and keep it at that level for the rest of 2009, the company said Feb. 19.

Companies are idling rigs just as President Barack Obama spends $787 billion to revive the economy by improving roads, bridges and related public works. The effort will kick in later this year and accelerate in 2010, Michael Moran, chief economist at Daiwa Securities America Inc. said March 12. Demand from industrial users, which accounted for 29 percent of U.S. consumption last year, declined 5 percent in the fourth quarter from a year earlier as the recession deepened, according to the Energy Department. The decline would be the largest since 2005 should it last through the year. By the fourth quarter, analysts expect the economy to expand. Gross domestic product will grow 1.6 percent in the final three months of 2009 and 1.8 percent in 2010, according to the median estimate of 61 analysts surveyed by Bloomberg.

"The next big move for gas is obviously going to be up," said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania, an energy markets consultant. "If we are higher, I’d expect to see us at $7 by the start of next winter." Speculators, who anticipated lower prices more than two years ago by increasing short positions, are signaling the worst may be past. A speculative short is a bet that prices will decline. Large speculators trimmed their net short positions in gas by 11 percent to 114,064 futures in the week ended March 10, the smallest total since July, Commodity Futures Trading Commission data show. Any recovery depends on a rebound in the U.S. economy, which may not happen until next year, said Tom Orr, research director at Weeden & Co., a brokerage in Greenwich, Connecticut.

"A lot of the stimulus spending is going to be on the construction side, but that’s going to take a while to feed back into the main economy," said Orr. "The market is operating on a show-me first basis, and you need a ton of things to work to lift prices." Weeden forecast in January that natural gas would average $5 per million British thermal units in the fourth quarter and into 2010, with a supply glut weighing on the commodity. Total marketed U.S. production soared 7.2 percent to 21.5 trillion cubic feet in 2008, while consumption gained 0.8 percent, according to the Energy Department. The decisions to reduce gas production are similar to steps by the Organization of Petroleum Exporting Countries to end a flood of crude. OPEC reduced output three times, and crude oil gained 37 percent from a December low to $46.25 a barrel on March 13. Gasoline futures have rallied 34 percent this year to $1.3529 a gallon, leading commodities tracked by the S&P GSCI Index.

OPEC agreed at a meeting yesterday in Vienna to keep production quotas unchanged, deciding against a further cut that risked damaging the ailing global economy. The group will aim to complete last year’s reductions and meet again on May 28 to review the policy. The decision led oil futures to plunge as much as 5.2 percent to $43.85 a barrel in New York and the April contract was trading at $44.31 at 11:39 a.m. in London. Natural gas futures for delivery in January 2010 are trading at a 33 percent premium to the April contract, indicating speculators, industrial consumers and utilities anticipate higher prices. A year ago, the January 2009 contract traded at a 12 percent premium to the April 2008 futures. "We’re starting to see a downward production trend" for natural gas, said Martin King, an analyst at FirstEnergy Capital Corp., a Calgary-based brokerage.

Lower supplies coupled with a rebound in demand will push natural gas to an average of $7.75 in 2010, he said. Gas fell to $3.759 per million British thermal units on March 12, the lowest in more than six years. Natural gas for April delivery was trading at $3.908 per million Btu, down 0.6 percent, at 11:31 a.m. in London. Should the number of rigs drop more and stay there, production by the end of 2009 may be as much as 4 billion cubic feet a day less than a year earlier, King said. Spending on U.S. exploration and production will drop an estimated 40 percent to $22.5 billion this year, Theresa Gusman, the head of equity research for Deutsche Bank AG’s DB Advisors unit, said in New York. "These dramatic cutbacks in capital expenditures are going to lead to shortages as we move through this recession and come out the other end," she said.

New York Flood Risk to Grow as Weaker Currents Raise Sea Level
The Big Apple faces a greater flood risk over the next century as weaker Atlantic currents raise sea levels on the U.S. East Coast by more than in London or Tokyo. Global warming will alter Atlantic Ocean circulation in a way that will move more water to New York by 2100, Florida State University-led scientists said in a study in Nature Geoscience today. Including the expansion of water as it warms, the total gain may be 51 centimeters (20 inches), they said, not counting effects of melting ice sheets in Greenland and Antarctica. Low-lying nations such as the Maldives, Bangladesh and Tuvalu aren’t alone in facing risks posed by rising seas, the research indicated. U.S. centers of economy, politics and education in the northeast also have to face up to the threat, said Jianjun Yin, the study’s lead author.

"This important region will experience some of the fastest and largest sea level rises this century," Yin said in a phone interview from Tallahassee, Florida. That will put New York, Boston and Washington more at risk from flooding and storm surges, he said. New York authorities have already begun looking at impacts of climate change on the city, which is an average of 5 meters above sea level. Last month, the city’s panel on climate change published a report saying sea levels could rise 12 to 23 inches this century, and emphasizing the need to adapt infrastructure. The ocean level isn’t uniform across the ocean. Water circulation in the Atlantic serves to keep seas relatively lower along the U.S. East Coast. The system of currents, called the Atlantic meridional overturning circulation, channels the warm Gulf Stream to the northeast and moves colder, deeper waters southwards. Its effect of lowering U.S. sea levels will be dimmed as warming slows the currents, Yin’s team said.

The process is similar to mixing hot and cold water in a bathtub by moving it around with your hand, according to Katherine Richardson, professor of Oceanography at the University of Copenhagen. "When you slosh the water around, you create currents and you can see that the water’s higher at some parts than others," Richardson said in a telephone interview. "When you change currents you change sea levels in some areas more than others." Richardson last week chaired a meeting of 2,500 researchers in Copenhagen to discuss the latest climate change science. Research unveiled there showed average sea levels this century may rise than more than a meter because of faster-than-expected ice-melt in Greenland and Antarctica. That’s more than the 18- to-59-centimeter increase forecast in 2007 by the United Nations.

Yin’s team examined different scenarios for emissions of heat-trapping greenhouse gases, the main driver blamed for global warming. They found that even for a low future emissions scenario, slower currents produced 36 centimeters of sea level gain at New York, 37 centimeters in Boston and 33 in Washington, including the effect of expanding waters. With high emissions, the increases were 51, 52 and 44 centimeters for the three cities. Higher temperatures serve to slow the Atlantic’s currents because they cause sea ice, glaciers and ice sheets to melt, reducing the surface salinity and lessening the ability of shallower waters to sink and circulate back south, according to the U.K.’s National Oceanography Centre in Southampton.

"We do expect the meridional overturning circulation to slow down over the next 50 to 100 years" as a result of global warming, Stuart Cunningham, who researches ocean currents at the centre, said in a telephone interview. "The general principal of slower currents leading to sea-level change is well known, but there haven’t been many specific modeling studies." The effect of the changes in currents alone in New York would add 26 centimeters to local sea levels, assuming greenhouse gas emissions follow a "medium" trajectory, according to the paper. That compares with rises of about 6 centimeters in Miami, 2 in San Francisco and Cape Town, 12 in London and 7 in Tokyo and Sydney, Yin said. He didn’t have figures for Bangladesh and Pacific and Indian Ocean islands. "Climate change is real and could have serious consequences for New York if we don’t take action," New York Mayor Michael Bloomberg said in a Feb. 17 statement. "We cannot wait until after our infrastructure has been compromised to begin to plan for the effects of climate change now."


rachel said...

I look at all of this and I sometimes just want to go outside into the spring weather and see if the sheep and the birds and the bees and the trees have any sanity left

The sheep and birds and bees and maybe a few folks I know are the ONLY things remaining that have any sanity.
How can we stay safe and sane when surrounded by such insanity?

Anonymous said...

So I'm just going with that Bernanke guy who says this'll all be over later this year. Lalalalala. Have my ears plugged.

Good news. Canadian geese and snow geese flying through in the 10,000's. Saw the first ducks and seagulls today. Might be able to salvage some of those beets that quick froze in the ground last fall afterall. Get this-- the temperature is 120 degrees warmer today than 1 week and 1 day ago (+70 today, high of -11 with -60 windchill week ago). 120 degrees warmer-- imagine that. One of the old timers said it was downright unnatural.

Anonymous said...

Boy I sure am mad! Spittin mad! Boiling over with ire, I dare say! Not like I have the IRS or the Department of Justice under my control or anything. Not like I can use every means at my disposal to shove microscopes into the arses of every single executive at AIG and keep them their until I hear the words, "Bonuses?! We don't want no stinkin' bonuses!"

No sir, I am only the president of the United States after all, not much I can do ... legally I mean. So I am here this morning just to tell everyone how really, very angry I am about this whole situation. Yes very angry indeed.

Now, would you please send a small donation to my internet fundraising campaign for 2012. I'm going to need it to save us from all of this nonsense over there in wall street.

XOXO (in righteous anger of course)

POTUS Obama (aka The Spinner)

Anonymous said...

The strangest thing about the political crisis is that Obama is leading himself and the Democrats right over a cliff. There is no upside for them, politically. Obama's continued warnings about how the citizen economy is going to get worse before it gets better is going to be a very tiny and rotten fig leaf come November 2010.

That's the thing I don't get. The bailout regime is bad politics on a monumental scale. It's one thing to make policy mistakes but how can you explain the loving embrace of bad politics.

Well sure the right has been there a long time and it's getting worse, except for their embrace of populism on the bailouts, but they have an excuse; ideology.

The entire thing has me confused

Anonymous said...

Prairie Boys see Banksters working through ATB Financial no less than the Caymans. Any wonder why Dubya chose Calgary as his first speaking engagement?

Persephone said...

Thanks Ilargi for the Buiter articles. Always a great read.

I found this earlier today. Had to love it for this one line:
"Our Treasury Secretary is wounded both from his pre-confirmation revelations and because his attempts to speak clearly have resulted in obfuscation. Sadly for him and for the country, Geithner has become the financial world’s whipping boy."

Systemic Risk

Erin Winthrope said...

Question Regarding Quantitative Easing by Britain.

Ilargi and Stoneleigh or anyone else,

I am curious about your thoughts on the Telegraph article entitled "leave it to the experts, who don't know what they're doing."

The author argues, as stoneleigh has previously, that quantitative easing will eventually lead to a spike in interest rates on sovereign debt. However, unlike Stoneleigh, the author says that this spike in interest rates will be derived from investors' fears of imminent inflation. Stoneleigh and Ilargi have both argued that inflation won't be an issue for many years to come. If the two of you are not worried about inflation, then what is your rationale for expecting interest rates for sovereign debt to spike following the initiation of quantitative easing? If deflation is the overriding factor in this financial crisis (as both Stoneleigh and Ilargi have repeatedly argued), then I would expect that most creditors will continue to hold onto sovereign debt even when the debtor nation engages in quantitative easing. It seems to me that Larry Summers and Tim Geithner are betting on this outcome with respect to China continuing to hold our Treasuries despite the upcoming need for quantitative easing by the US.

Persephone said...

Great Intro Ilargi

Why hasn't AIG been forced to open their books?
Isn't this supposed to be the "Age of Transparency"?

I'm seeing a lot of dog-and-pony shows, but no real, substantial action.

If the derivatives market is up to 10 x Gross World Product - how much is AIG holding? Is there anyway they CAN be saved? If not, why are we still pumping $$ in to the abyss?

I hear you, rapier. I'm disappointed, too.

Anonymous said...

I look at all of this and I sometimes just want to go outside into the spring weather and see if the sheep and the birds and the bees and the trees have any sanity left.


They do, enjoy.

Anonymous said...

I don't regard this as a 'political' crisis unless you define politics as an ideological struggle between say conservative vs liberal or Democrat vs Republican.

It's not about a political ideological battle.

It's about criminals versus a vast majority of law abiding citizens.

The fact that the Corporate Criminal Class has short circuited the law writing process itself by buying off the legislature is just another perversion atop many.

This Professional Criminal Class is well schooled the art of 'white collar' thievery, from the finest universities in the country I might add.

A dictator says,"Everything I do is lawful, everything you do is not until I say so".

How is this substantively different than what we have right now?

The Professional Criminal Class is making it up as they go, paying attention to defining all that they do to be lawful.

Pretty hard to break the back of a Beast like that short of rolling up tanks to the building they are in and giving them a cease and desist order to end the thievery or else.

This will not stop folks.

Didn't with Bush, won't with Obama because It Is Not About Politics.

It's about having some sort of moral compass and a backbone to back it up with.

The Criminal Class is like a mean drunk beating up the wife and kids and dog.

They stop when you make them stop, not by asking pretty please and making excuses for their disgusting behavior and endlessly discussing the pros and cons of them stopping or not.

Their agenda needs to be thrown down a cement stair case, face first, as a starter.

America is a Stockholm Syndrome Poster Child. The Statue of Liberty is little more than a Battered Wife.

Persephone said...


Today’s TIC data …

Anonymous said...

"Most of our Bush years borrowing came from the Caribbean? wtf?"

If true, easy enough to trace the purchases. Who wants a leveraged bet that it won't be done? 13:1? How 'bout 50:1? C'mon, I can get AIG to insure the swap.

No takers?

Anonymous said...

Is Karl turning to the dark side? Now he is backing off locking up the "fraudsters"? Make no mistake, if the government keeps changing the rules and investors aren't sure if they can trust these financial institutions and the market with money, then there will be no confidence. The quality of Denninger's analysis is declining.

Anonymous said...

RE Ed Gorey

I won't pretend to speak for the proprietors.

Last thing first. China is almost precluded from selling its Treasury and agency paper. We are getting into uncharted waters here but this paper is held in a "custodial account" by the Fed.

While modern debt paper doesn't really exist even as paper in a real sense, this "custodial account" means we are or could hold it hostage. They don't possess it even to the limited sense that anyone possesses the bits that are modern financial instruments. They must rely on the Fed to sell it for them, so to speak.

As if China calls up Geithner ben and says please "sell $50 billion of our agencies this week please Mr. Secretary'. To which Tim reply's. "Oh, so sorry, no can do this week. Why don't you call back, oh say, in 2016" (when most of it will be retired anyway)

OK that's fantasy but the bigger issue is if they and others will or even can buy the $4 to $6 trillion in new paper we will need to float the next two years.

If the demand does not meet the supply interest rates will rise. If on one or two occasions there are not enough bids to cover the supply at auction, a failed auction which has happened with Germany and Korea this year, then in a certain sense the Treasury is bankrupt. Once the worlds benchmark financial instrument does not find enough buyers an important milestone will be reached.

What happens then I don't know. I only know it would be an historic event with probable profound long term consequences.

Persephone said...


For Snuffy:
Pirsig has a site and a blog. Great book!

"Now it's become apparent that this [cultural change] isn't a fad that going to go away next year or the year after. It's here to stay because it's a very serious and important way of looking at things that looks incompatible with reason and order and responsibility but actually is not... It was an intrusion on his reality. It just blew a hole right through his whole groovy way of looking at things and he would not face up to it because it seemed to threaten his whole lifestyle."

Persephone said...

America faces new Depression misery as financial crisis worsens

z said...
This comment has been removed by the author.
z said...

to those who have expressed interest on this, 2nd update on the demo account:
days since inception: 12
days of trading: 8
initial balance: 100k
current balance: 171.5k
current cash balance: 113k
number of trades: 49
commission paid: 5.75k

Anonymous said...

The TSX finish the day with 1.0% gain.
There are flickers of life in Canada.
Spring is in the air ... credits are thawing ...
CHMC not the banks have the potential bad mortgages

At $0.78 cents Canada is for sale.

Its beyound me why foreign investors would want to put up with AIG, Madoff, etc. when there are such a good looking bargains just a little bit north.

Persephone said...

I have a close friend of the family who lost his job in NYC in early 2000. He moved back to Boston with his family for about a month.
Then he road a bicycle 3000 miles from Boston to San Francisco. It took him 4 months. He wrote letters all along they way - great stories.

He later set up a small food stand near Venice Beach and did very well. He said it was the happiest he had ever been.

It's never too late too appreciate the small things.

Anonymous said...

re 'America as Stockholm Syndrome poster child', this comic strip said it all:

today it's just
same sh**, different date

Anonymous said...

The article "Guess Who Screwed You? It's Worse Than You Think" was good, but it left out a couple of important things.

First, the Caribbean. It would've been nice to mention how this entire whole Ponzi scheme of CDS/CDO's started there.

For those who've been here a while, you might recall that rather interesting article (in October?) which went into detail about how these were created, with well-known non-profits set up as the fall guy.

Done by American Bankers, after Tim and Larry unleashed them.

Second, it failed to mention the impact of Guest Workers. Sorry, but "outsourcing" has multiple meanings.

The entire unemployment in the IT field alone could be eliminated just by canceling the Guest Worker Visas.

Something similar could happen with Construction, since only about 5% of the Illegals work in the fields.

Otherwise, the article was a fine start.

Regaring the article "Leaving it to the 'experts', who don't know what they're doing "

Here's a counter-balancing article:
Bernanke May Buy Treasuries After Gilt Yields Fall

"Early results have been encouraging: Yields on 10-year U.K. government bonds fell to 2.94 percent March 13, at least a 20-year low, from 3.64 percent before King announced the policy March 5."

Loved the Wells Fargo quote. But it seems Kovacevich forgot to mention that Wells no longer has to pay taxes, for years to come.

Truly a case of biting the hand that feeds you.

Anonymous said...

I & S: You are both so awesome. I really look forward to reading your posts. Thank you!!

I: I would throw out that the oil being pumped by OPEC might be intended for another purpose?

Muchos Gracias from my little spot in Argentina to all the posters! You all make my day with your lively bantering.

My husband and I are emigrants from the U.S. He takes care of life here (no small feat), and I telecommute to work in the U.S.-a nice gig if you can get it, I know, but I'm able to do it, so I do:)-from a farm in Mendoza province. We thought the farm would turn out to be a way to make a living, but it turned out to be a dud, like many things in life, eh? It's an expensive dud, actually, in case anyone has a pipe dream like ours and wants to live in another country. Rule #1 from our experience is: have another source of income before you move to another country!

Be strong, Norte Americanis, please. That's what I hear from my Argentine friends (and what we're referred to here at least among the local people I know). Many are worried about how you are doing. Seriously. We represent much to the world in how we tackle right and wrong. And so much is wrong, which is why I look forward each day to the truth, honesty, and love that comes from I & S's writings. Again, thank you!

Anonymous said...

We'll see how the Obama administration ultimately handles the Bush/GOP depression, but what a disturbing sight to see lower and middle-class Americans set up tents down by the riverside. Despite this American tragedy, some Republican disciples of Lucifer are flapping locust wings and licking scavenger lips as they anticipate the economic spoils of destroyed lives and dreams.

Anonymous said...

Denninger has really lost the plot, i think you had it right it seems he wants to go for election, hhhhmmm Job on the Hill, i think So

his latest price is nothing short of crap, i used to respect the Guy for going for justice, now he talks of tax incentives,

The economy is screwed, fix that 1st before i shed my money

So sad to see what has become of karl these past few weeks, sounds like desperation

Thankfully and hopefully TAE never go that route

Anonymous said...

Did I miss this one in the list today?

The dots I am seeing connecting up portend a death spiral of the USG faster than anyone can imagine (my gut sez we don't get through 2009 without a sovereign debt crisis in the US). The Fed and Wall Street are gutting the treasury right in front of our eyes. All the while distracting us with subprime yarn balls.

People are not acting because they are fed a steady diet of bullshit to keep attentioned focused elsewhere.

Anonymous said...

"When the recession ends and the economy starts booming, we’re going to have less natural gas than we do today and prices are going to spike back up," said Larry Nichols, chief executive officer of Devon Energy Corp., the largest independent oil and gas producer.

False premise alert! Wouldn't that mean that, contrary to the article's title, the price of gas will continue down instead of doubling by next fall? The economy may be shutting down as fast or faster than the rigs.

Anonymous said...

Maybe they secretly replaced the old Denninger with a neocon double at the NCPAC convention [after he gave that chastising acceptance speech for the Accuracy[sic]In Media award].

Anonymous said...

Self righteous indignation has been troubling me as for the life of me I couldn't remember that term to express what I consider the antics of Obama and Bernanke today looked to be; doing a song and dance about bonuses, crying crocodile tears pulling the wool over the populous' eyes while 170 billion has gone quietly down the tube.

There is an old word for that - humbug!! .

Erin Winthrope said...
This comment has been removed by the author.
Erin Winthrope said...

Question about quantitative easing:

I'll rephrase my confusion.

Current 2009 US fiscal deficit estimates are $1.75 trillion and guaranteed to rise dramatically in the months ahead.

The US will need to raise this money through issuance of Treasuries.

China's entire foreign currency reserves are only about $2 trillion, and a significant fraction of that money is going to spent propping up the Chinese economy, not the US economy.

Therefore, its very unlikely that there will be enough global capital to satisfy the funding needs of the US government.

Therefore, the US will need to begin quantitative easing to satisfy its fiscal needs and to prevent interest rates from rising to levels that would further slow the economy.

I don't understand why quantitative easing will cause interest rates to rise as Stoneleigh has argued in the past. If deflationary expectations far outweigh inflationary concerns, then the world should continue to buy and hold Treasury securities even while the US government creates money out of thin air to buy its own debt.

It seems insane, but I don't see why this wouldn't work at least for a while (a year or so). Eventually it seems other creditors will say this is ridiculous and throw in the towel, but it seems the quantitative easing could go on for a while before problems arise.

What are your thoughts on this topic?

Anonymous said...

* Noon Summary appreciates Greenpa's offer but has wrong gender, age and hair color and is apparently member of different religious cult than Greenpa; NS is interested in knowing what Greenpa puts in Greenma's tea
* Dr J has no issue with vegans but insists science backs up his views; Feud ensues; Hell hath no fury like a vegan scorned
* Bernanke could get laid in '09; This explains much
* New technologies may still provide opportunity to get rich
* Planting pear trees is therapeutic
* Thin skin won't cut it when TSHTF
* Reports of the death of death have been greatly exagerated; Genetic engineers fantacize too much
* Market does not run on reality
* Will Federal Gummnt exist by 2012 or will it be gone will the dollar?; Treasury reportedly working on 1 Godzillion dollar note for future use, with George W. Bush on face and engraving of XTE J1118+480 on back
* Gravity Channels Moloch
* Sheep, birds and bees saner than people
* Obama full of impotent rage

Anonymous said...

This is getting downright spooky!

IMF poised to print billions of dollars in 'global quantitative easing'
The International Monetary Fund is poised to embark on what analysts have described as "global quantitative easing" by printing billions of dollars worth of a global "super-currency" in an unprecedented new effort to address the economic crisis.

By Edmund Conway
Last Updated: 9:07AM GMT 16 Mar 2009

Alistair Darling and senior figures in the US Treasury have been encouraging the Fund to issue hundreds of billions of dollars worth of so-called Special Drawing Rights in the coming months as part of its campaign to prevent the recession from turning into a global depression.

Should the move, which is up for discussion by the summit of G20 finance ministers this weekend, be adopted, it will represent a global equivalent of the Bank of England's plan to pump extra cash into the UK economy.

However, economists warned that the scheme could cause a major swell of inflation around the world as the newly-created money filters through the system. The idea has been suggested by a number of key figures, including billionaire investor George Soros and US Treasury adviser Ted Truman.

Simon Johnson, former chief economist at the IMF, said: "The principle behind it is that everyone would get bonus dollars and instead of the Federal Reserve having to print them, everyone gets them.

"The objective is to create a windfall of cash. However if everybody goes out and spends the money it could be very inflationary."

Persephone said...

U.S. credit card defaults rise to 20 year-high

U.S. farm exports at risk over Mexico truck dispute

Life in N.Korea dire and desperate, U.N. forum told

Sudan wants aid groups to stop distributing relief

No industry is recession proof
French sex toy sales fall as credit crunch bites

Stoneleigh said...

Ed Gorey,

I don't understand why quantitative easing will cause interest rates to rise as Stoneleigh has argued in the past. If deflationary expectations far outweigh inflationary concerns, then the world should continue to buy and hold Treasury securities even while the US government creates money out of thin air to buy its own debt.

There's a difference between perception and reality. Most people think we are headed for much higher inflation, even as we head into a deflationary downward spiral, hence seeing them act on inflationary expectations is no surprise. There is a strong tendency look only at quantitative easing and not at the on-going destruction of credit, which is a much larger factor.

This is because most do not understand the role of credit in driving expansions and contractions. They don't think of credit expansions as inflation, although these greatly expand the effective money supply. During the expansion phase, money and credit are equivalent, hence the supply of money and credit increases relative to available goods and services. Once the expansion is over, credit loses 'moneyness' and contracts very quickly, reducing the effective money supply at a similar rate.

Quantitative easing has the potential to achieve the worst of both worlds - creating the inflationary expectations that can spark a crisis in the bond market at the same time as failing to actually increase the money supply at all. Not only is the scale of quantitative easing nowhere near enough to compensate for credit destruction, but much of the money created will not be spent, but will be used to pay down debt (which is deflationary) or hoarded. In other words it will not increase the velocity of money at all.

Stoneleigh said...

I'm at a meeting all day today, so I won't see any questions asked until this evening, and maybe not until tomorrow morning as I have a 5 hour drive to get home and may not have time to get to my computer.

The rally of the last few days COULD be ending, or it could evolve into a more complex sideways move (with ups and downs in both directions) lasting a while longer. When it does end, we should see another spike low before a much larger rally. Personally I wouldn't try to play this move as I think the risk is too high. said...

Hey Ilargi,

I really appreciate your writing, but would you reconsider the "Tiny Tulip Tim" and "Bennie Bernanke" namecalling thing. It cheapens your your insightful writing.

All the best,

Chaos said...

@Anon 12:33

Kabuki dance is more like what we saw the last couple of days. I don't know what's worse, the AIG fiasco in all its shameful glory, or the efforts of those who enabled it to pretend to "feel our pain" so they can get on with their ridiculous bailout plans. As the first article perhaps unwittingly revealed, in these people's view, it's not really the bonuses that are wrong, they just look wrong, and piss people off, so we have to take to the airwaves and denounce them, all the while pretending there's nothing we can do about it. I can't think any more about it, it makes my stomach hurt.

Stoneleigh said...

The efforts to reignite confidence are looking increasingly desperate, which of course has the opposite effect to the one intended. Promises of rapid recovery look wildly implausible, and making such assertions furthers impairs the credibility of the predictors.

Confidence will not be restored (beyond enough for temporary rallies at least) until deleveraging has run its course and the (small amount of) remaining debt is acceptably collateralized to the (few) remaining creditiors. All the smoke-and-mirrors games in the meantime achieve nothing at all.

Expect much more cheerleading, long with promises to give people the Earth, moon and stars, because the powers-that-be have no other option. Without confidence it's over and they know it. They make promises they know they couldn't keep (like guaranteeing bank deposits) in the hope that confidence won't evaporate entirely (at least preferably not on their watch), in which case the promise would have done its job anyway. Unfortunately, markets are very good at calling bluffs under these circumstances.

The emperor has no clothes.

Anonymous said...

One word, Ilargi: Spellchecker

Anonymous said...

Persephone..thanks for that link...its bookmarked.I hope the old bird received the message i left on the other post concerning beekeeping material..

off to work


scandia said...

PJ, I rather like the nick names( spelling?) arising for the head honchos of this white collar crime gang. All gangs/Mafia give their members " handles" that capture the character and role of the gang member.
What would you have Ilargi do, call them sir and pull his forelock?It may be that you yet see these banksters/gangsters as honourable men deserving of respect. I don't.
If anything we have missed a creative opportunity to produce the " handles" that capture the true tenor of these men.
I'll bet Wall St has colourful names for them all...
I woke up listening in my head to Obama saying, " I've ordered Geithner to try..." Not ordered him to get the money back, not ordered any investigation of any kind. As for the law the spirit of the law is what is being violated now...
I was a touch snappish with the sincere scientists researching optimum diet. I'd lost it yesterday. Of course I think science/knowledge is important.

Anonymous said...

" toy sales fall as credit crunch bites..."

This is truly shocking, it must really be a crisis of confidence, but of another kind...

Anonymous said...

"All gangs/Mafia give their members " handles" that capture the character and role of the gang member.."

Bush was particularly noted for this habit. His nickname for his chief political hatchman/advisor Karl Rove was "Turdblossom".

Bush's own nickname in prep school (Andover/Exeter) was "Boss Tweed". He was the Concierge of Sin at school.

I guess we grow into our nicknames over time.

*** said...

Our dear neighbor has been documenting a little of "taking it to the streets"



*** said...

To all my fellow emerging farmers:

As to the virtue of animals, in old times this was the primary source of organic fertilizer.

Whatever variety of hoofed being, they do have their merits.

Anyone into horses these days?

Anonymous said...


You keep talking about a big bounce down the road. Based on what? I wouldn't be surprised if this latest bounce is about as big as it gets in this cycle. I'll go on record predicting that we won't see Dow 8k for many many years. History rhymes. Pull up a GD1 Dow chart and you'll see what I'm getting at.


Anonymous said...

Anonymous said...

@Anon 10:42 AM:

Stoneleigh has mentioned this in the past. Quick summary: Herdonomics.

Longer summary: Fractal-based Elliot Wave patterns.

@NS: Another funny collection. Thank you!

@Adios a.b.: I used to use animal fertilizer for gardening and was quite happy with it.

Ecology Action apparently Poo-poo's the notion (sorry, couldn't resist). To be more accurate, they claim it's not as good as what they can put out.

I can't say for myself yet. Just FYI.

*** said...

@ el gallinazo:

progress report: our horse (Capricho) has been giving me lessons on how to relate to people. Tell me when to give him a carrot for a good job...

Dando recuerdos

Anonymous said...

What you eat may be more important than where it came from.

There may be many reasons to eat locally: supporting your local economy, ensuring food freshness, curbing sprawl, or reducing unnecessary energy use. One of the most pervasive arguments in favor of the local food movement has been to reduce or eliminate the environmental impacts of long-haul food shipments. But Carnegie-Mellon researchers Christopher L. Weber and H. Scott Matthews suggest that, at least from a greenhouse gas (GHG) perspective, food miles may not be as important as you may think.

In their recent article entitled “Food Miles and the Relative Climate Impacts of Food Choices in the United States,” appearing in Environmental Science and Technology, Weber and Matthews conclude that “the distance that food travels only accounts for around 11 percent of the average American household's food-related GHG emissions.” According to the authors, the more important factor in food-related GHG emissions is the amount of resources required to produce it.

The authors show that for the average U.S. household, “shifting less than 1 day per week’s consumption of red meat and/or dairy to other protein sources or a vegetable-based diet could have the same climate impact as buying all household food from local providers." On average, they find, red meat produces more GHGs than any other form of food. So, while there are many reasons to support our local farms, there are also strong greenhouse gas reasons to be sure we eat our veggies, no matter where they came from.

Anonymous said...

@ Adios a Babilonia

Horse manure is a great natural fertilizer. We've composted it for our garden. Humanure is supposed to be excellent as well. I have not used it yet. :)


Anonymous said...

If I posted in this comment a phrase such as, "Black Barack" or "Cyclops Gordon" I would, no doubt, be roundly condemned by all & sundry and hustled off the site with accusations of racist, disablist, minority-bashing, right-wing retard or similar. You, Ilargi, as a soft- left commentator on matters economic and otherwise, consider it quite acceptable to describe Mr Geithner in a sneering fashion as "Tiny Tim" for no other reason than the fact that you disapprove of his economic politics. Mr Geithner has no more responsibility for his small stature than Mr Obama has over his blackness or Gordon Brown has over his deficit in the eye department. I don't, myself, take exception to any of the above epithets as I believe entirely in free speech and free insult whether people are offended or otherwise but I wonder about your own position on this, Ilargi.

redcatbiker said...

The Obama Deception
(full length video almost 2 hours)

The Obama Deception is a hard-hitting film that completely destroys the myth that Barack Obama is working for the best interests of the American people. The Obama phenomenon is a hoax carefully crafted by the captains of the New World Order. He is being pushed as savior in an attempt to con the American people into accepting global slavery. We have reached a critical juncture in the New World Orders plans. Its not about Left or Right: its about a One World Government. The international banks plan to loot the people of the United States and turn them into slaves on a Global Plantation. Covered in this film: who Obama works for, what lies he has told, and his real agenda. If you want to know the facts and cut through all the hype, this is the film for you. Watch the Obama Deception and learn how: * Obama is continuing the process of transforming America into something that resembles Nazi Germany, with forced National Service, domestic civilian spies, warrantless wiretaps, the destruction of the Second Amendment, FEMA camps and Martial Law. * Obamas handlers are openly announcing the creation of a new Bank of the World that will dominate every nation on earth through carbon taxes and military force. * International bankers purposefully engineered the worldwide financial meltdown to bankrupt the nations of the planet and bring in World Government. * Obama plans to loot the middle class, destroy pensions and federalize the states so that the population is completely dependent on the Central Government. * The Elite are using Obama to pacify the public so they can usher in the North American Union by stealth, launch a new Cold War and continue the occupation of Iraq and Afghanistan. The information contained in this film is vital to the future of the Republic and to freedom worldwide. President Barack Obama is only the tool of a larger agenda. Until all are made aware, humanity will remain captive to the masters of the New World Order.

Anonymous said...

Re your "I don't remember when I first started saying that we are in an all-out political crisis, not a mere financial one."

Correct, but you are only seeing the consequences of a destroyed legitimate political system on the financial sector.

If you had researched the Thermonuclear Age better, you would have realized the legitimate political system was gone by 1945, otherwise such a fantastic military mistake might not have happened.

Remember Warren Buffett's comments on derivatives? All that is happening is that the destroyed political systems that allowed mayhem to spread throughout the military circa July 16, 1945 via deployment of ballistic missiles on extremely forward-based weapons-platforms armed with atomic weapons is that the tremendous political vacuum wreaked by the annihilation of legitimate political authority in WWI is now swallowing the world financial system in 2009.

My estimate is that the *legitimate* political system began cratering with the firing of the German Chancellor Bismarck in 1895, and that WWI (which he predicted, almost to the year) virtually destroyed the legitimate aristocratic political systems of Europe.

What is happening in the financial sector is easy to understand - but you have to be willing to stop and take a step back.

Standing there in 1919, America, the child of those 1000 year old European political systems, was in shock, cardiac arrest, and in fear & panic pushed Henry Ford, & Harvey Firestone into ramping up a national assembly line factory - which is what the former US became. Read Henry Ford's 1922 autobiography and he correctly ID's America's new religion - what Ernest Jeunger called Total Mobilization.

Ford was struck by the fact that people had no interest in cars - all they wanted to see was racing cars. Ford was mystified, but he started building racing cars anyway - and that's when he started selling lots of them. Ford never understood the fantastic response to his cars was that they were fundamental to what was in effect a panicked reaction to a political vacuum, which was the creation of a new religion of Total Mobilization.

Europe's reaction to 1914-1919 to the creation of a gigantic political vacuum was different: Adolf Hitler and Joseph Stalin.

That the religious systems were smashed in WWI is evident in the appropriation of religious symbols by the Soviet Union and the Nazis. The incredible success of US corporations selling assembly-line inventory is, again, that inventory was being appropriated as fast as it came off the assemble line in a desperate attempt to fill the gigantic political vacuum by mobilizing the entire country.

The former US transmogrified itself into an assembly-line factory, the desperate hope being that if it could stay sufficiently mobilized, it might not catch sight that its parents - the destroyed legitimate political systems in Europe - were destroyed and that it was basically a political orphan standing outside while its parent's house - with them inside - burn to the ground.

America's panicked reaction to a political vacuum after 1919 also was a religious crisis, the former US arrogated assembly lines and the freeway system, everything that could be engineered and mass-produced that could be injected into itself for greater and greater mobilization. And if you take another big step back, you can see that a religion based on mobilization is nothing more than the exact mirror opposite of the equally zealous NEVER-MOVING religious Stylites.

The Stylites never moved, and the former US religion is to stay totally mobilized at all times.

Until 2009, that is.

Actually, it is true that the sudden arrival of the Thermonuclear Age/Ballistic Missile Age did interrupt the pre-occupied US and got its stunned attention for a few decades.

Now in 2009 you're seeing the arrival of trillions in off-balance sheet financial instruments slamming the brakes on the US assembly-line always-in-motion religion.

There is an gigantic political & religious vacuum. And it has been that way for almost 100 years. And that's the actual crisis. You are just seeing some of the consequences of not dealing with it honestly and courageously.


Anonymous said...


This is what the folks on the right do best: fabricate conspiracy. The credibilty of these types was exposed back in the nineties via their continual witch hunts and groin sniffing campaigns against Bill Clinton.

After Bush became President, they slithered back into the weeds.

In other words, same old shit by the same old trash, just a different decade and President

*** said...

@ Ahimsa


Processed (urban) waste has been a great aid to our farming in the past, mixed 50/50 w/excellent dark red clay-type dirt.

With horse manure, it's best when aged some 3-5 years. Your coleus will go psychadelic!

Anonymous said...

There is an announcement that Canadian banks are starting to refuse federal aid.

Would this mean that the Canadian banks find themselves financially capable of standing on their own feet?

The majority of the banks from around the world are already in bed with gov. bailouts.

I guess that the Canadian banks are not going to need any condoms.
I find it interesting that there are so many commentators that are applying "game theory".

"Game theory" can only function when the participants are at the same level of sophistication and if they have a clear, well defined objective with an action plan.

Conspiracy theory is the result of you thinking that that your opponents are striving for an outcome which would conflict with your own intended agenda and outcome.

Give it a rest …. You got nobody to play with.
The elites, (bankers and politicians), are only bungling through life.

Anonymous said...

@ adios a babilonia

Anyone into horses these days?

Got 6 of them. They provide the fertilizer for my hay field, which is going on 10 years old and consists of timothy and alfalfa. Still doing well considering fields generally need turned over after 4 or 5. Cow manure is ideal for gardens since it doesn't "burn" and can be applied immediately prior to planting. Horse manure is "hot" and needs to degrade over the winter.

A neighbor who rents some land put commercial fertilizer on the fields when he planted hay. The fields are pathetic. He invested $5K in my field; $12K in his own. His hay from my property (that he planted) is poor; his is pathetic.

You can't beat manure for fertilizer IMHO.

Re: the comment post on natural gas. Those numbers are somewhat misleading. There's no telling how much is currently produced month-to-month, only the draw down from storage weekly. I do know (from the company that has drilled wells locally) that they're not currently drilling. The cost for sinking a well is $600K (double from 4 years ago), so exploration has virtually stopped. Of course, that's anecdotal evidence locally and can not be taken as a generalization.

z said...

horses? they are more fit for the killers.

Orlov says donkeys -- they work more and demand less -- can even survive on WSJ.

the choice of Laozi? water buffaloes.

scandia said...

Is it not a chinese phrase to describe the collection of human manure as " collecting night soil". I've always thought it meant it was collected in the dark??

Unknown said...

Oh, ladies and gentlemen, this you must read. Excerpt:

CLYTAEMNESTRA [To AIGAMEMNON] So, my dear lord, dismount from your car, but do not set on common earth the foot that has trampled upon global markets. You to whom I have assigned the task to strew with bonuses, salary top-offs and the like, Quick! With something on the order of $160 million let his path be strewn, that Justice may usher him into a new quarter he never should have seen. The rest my unslumbering vigilance shall order duly, for if Geithner can be made to swallow this than, please god, pretty much fucking anything can be subsequently ordained.

Anonymous said...

Black Obama?

Try the Kenyan usurper. Or black nationalist racist (20 years sitting in that pew). Or drug addled crackhead (admittedly is was coke he was abusing, not crack).

Personally, I prefer incompetent communist.

Anonymous said...

Nightly Summary

Female redhead here has same feelings as Greenpa, shares your religion, and likes Green Tea.

Submit your advice said...

anon 10:42 interesting thing about the big sucker rally, when it comes, is that it will have no cause, there will be nothing that it is based on. So, obviously, no one can properly answer your question "what will it be based on?" It will be based on nothing, which is why eventually it will end, but until it does, it will, as with any Ponzi scheme, be based on itself.

An additional word I would like to add to discussion from a few days ago on worthiness of backyard and other home gardens:

the value should not just be based on whether or not it can supply all your food needs or some of them, or save you money. It has other benefits, including fresh air and physical activity, reducing dependence on things outside of your control, boosting your immune system. What everybody needs right now more than anything else, IMO, is to take good care of themselves, stay healthy, sane, cheerful and happy. Already Americans are at record levels of stress, anxiety and depression, not to mention obesity, (pre-)diabetes and other lifestyle-related health problems, the causes of which will all get stronger, not lesser, and so more than ever people need to try to take good care of themselves.

About the only good point in Pollan's recent In Defense of Food, an otherwise unnecessary book after he had already said everything in the Omnivore's Dilemma, is that we don't really understand much about nutrition yet, and the healthy benefits of a decent carrot might not be understood by looking at each of its elements in isolation. That is, there may be something in the totality of the carrot itself that would be missing from taking a carrot pill, vitamin pill or a fiber supplement, hoping it all adds up to a carrot, that rather only a carrot can be a carrot, maybe because there are things in the carrot we haven't discovered yet, or because it all needs to be taken in combination, or both.

In some ways of thinking, the attitude with which one eats (and prepares food for others) is as powerful a force in nutrition as the actual substance. I tend to agree, and because of this I think a backyard garden is a good idea for people even if, strictly in dollar terms, they are no better off producing at least some of their own food. How do you put a price on alienation?

Anonymous said...


I've been reading TAE for 9 months. Your writing is very compelling and a daily "must read" along with Smith, Ritholtz, & Denninger. My only criticism is about grammar: 1) please check spelling before posting; and note2) "the reason is because" and "the reason why" are both redundant phrases - the correct phrase is 'the reason is that..."

I love your shit, man, keep up the good work!

Anonymous said...

El gallinazo,

Thanks for the link to the excellent interview. We have Griffin's books on the topic, but it's great to listen.

Anonymous said...
FSA to cap mortgage borrowing
Homebuyers will be prevented from borrowing more than three times their annual salaries under new mortgage rules to be announced this week.
Last Updated: 11:52AM GMT 17 Mar 2009
Want to hear a discussion of AIG
Try Brad Setser
• “Concretations of risk, plagued with deadly correlations”
Posted on Tuesday, March 17th, 2009

Anonymous said...

Well its great to know that they all survived.

Chaos said...

If you guys are fans of the pitchfork and torches theory, try reading some of the (1800+!) comments on Andrew Ross Sorkin's piece today in the Times advocating paying the AIG bonuses...the anger and outrage is like nothing I've seen lately.


Bigelow said...

"I put a dollar in one of those change machines. Nothing changed."
-George Carlin

*** said...

@ memphis

Bravo for horses, yes. Curious to hear more, we have two colts and one is a very fast learner.


Killers? Do you mean canners? In which case I'd say when the gas goes everyone's going to be sorry if they do kill off these noble animals.

In the Soviet Union the gumt forced people to kill horses for steak:

*** said...

and if I keep talking up horses like this I'll be supper for Nightly Summary

Anonymous said...

ahimsa- I had lunch with your hero, Dr. Barnard, today. Very earnest, genuine fellow, I thought. I wouldn't bet the farm on his interpretation of the science, though.

z said...

@adios a b., killers: hunters and cavalries.

Greenpa said...

Nightly Summary-


Of all sad words
Of book, or pen
The saddest are these:
It might have been.

All the world seems dark and foreboding.
Oh, wait, that's Collapsar World Syndrome, nevermind.

Can we still be friends? snif. snif.

Greenpa said...

Anonymous 2:19pm -"Female redhead here has same feelings as Greenpa, shares your religion, and likes Green Tea."

Yes?? - I'm puzzled though as to the religion involved- which sects separate us?

Stoneleigh said...

Anon @2:40pm,

I've been reading TAE for 9 months. Your writing is very compelling and a daily "must read" along with Smith, Ritholtz, & Denninger. My only criticism is about grammar: 1) please check spelling before posting; and note2) "the reason is because" and "the reason why" are both redundant phrases - the correct phrase is 'the reason is that..."

I would just like to point out that English is Ilargi's third language. There aren't many instances where you would notice he isn't a native speaker of any of the several languages he speaks in addition to his native tongue.

el gallinazo said...

@ Stoneleigh

Well, we know Dutch is his first language. Just out of curiosity, what is his second? As to the market, took a couple of smallish hits and am now sitting in the bleachers, applying sun screen, and booing. Do your waves suggest that the S&P500 will break downward past the number of the AntiChrist when this micro rally collapses?


Speaking as a plumber, many pathogens are species, or at least, order specific. The common knowledge is that the use of human waste in which the pathogens have not been neutralized is a major spreader of disease. This is one area where I would go along with the common knowledge and conventional thinking unless I saw some compelling data to lead me to believe otherwise.

@adios a babilonia

Always good to reward positive behavior with a carrot. I do it to myself sometimes. My island is over run with emancipated feral donkeys. They are amusing and very bright, but a royal pain in the butt for gardeners. I've been told that they are hardier and longer lived than horses. But another reason to keep mares around is that the serious working hayburner is the mule, and you ain't gonna have mules without mares.