Monday, March 23, 2009

March 23 2009: The Good, the Ugly and the Innocent

Alfred Palmer Get Ready! October 1942
B-25 bomber nose wheel and landing gear assembly at the North American Aviation plant in Inglewood, California

Ilargi: Congratulations Aaaaaamerica! The promise of another $1 trillion of your tax money being handed over to the financial system no questions asked can still lift the stocks of the big bad broke financials for a few hours, long enough for the smartest and/or best connected kids in the room to rake in a hefty profit. Which will in time turn into another hefty loss for you and cause stock markets to plunge further. Two major segments of the money buying into the market today -especially into bank stocks- are shorts covering and fast in/out cash. How about covering your shorts in the morning and offloading them nicely in the afternoon? Just wait a day or two and look where the Dow is then.

Three more things:
1) "Taxpayers will share in any upside," says Geithner. That, certainly by now, is the most disingenuous line on the planet today, far surpassing "I love you" to get into a girl's panties. But the US government(s) still won't shy away from it, no matter how ludicrous it has become. And rest assured, the polling teams check the public's reaction to terms like this on a daily basis, so we know the majority still do believe it. Maybe people would understand better why if you point out to them that they don't just not share in any upside, they don’t share in any downside either: that is all theirs.

2) Another thing that's not shared is the risk, even if the Obama team tries all they can to make you think so. Private capital is limited to 3-5% of what is put on the table, and you can rest assured that they can hedge that too, if only through corporate taxes. Sure, to game the system, banks and hedge funds may take a haircut, but who wouldn't accept that if it leads to fancy juicy profits?

3) Another stinking dead carcass of a horse they can't seem to be able to stop themselves from parading (prodded by their pollsters) is that this calamity of a plan will prompt banks to start lending again. They won't, they have huge additional writedowns coming up and besides, who wants to borrow? The millions of newly unemployed, or the millions who were foreclosed upon? The fact that existing home sales were up in February doesn't mean the economy is recovering, it means prices are falling through widening cracks in weakening bottoms, and most of all it means that millions of Americans wouldn't be able to find their own behinds if you stuck a 10-inch needle in them.

Here's my take: there are many attemps to explain how the Geithner plan can be abused. (I put Tyler Durden's's version below.) But how many people are aware that the plan was deliberately set up for abuse, that its very purpose is to create a hidden loophole for Wall Street to transfer its losses to all Americans? James Galbraith comers at teh plan with a sledgehammer, but even he merely calles it "wrong", - or maybe he means "dumb"-.

Still, nobody in positions like Geithner and Summers, and with their know-how and contacts, innocently sets up a plan like this without realizing what the dangers are. It's simply no longer believable. Any failure on their part to close these loopholes can in my view confidently be labeled a criminal act. We're getting into scenario's along the lines of:
"Yes I Had A Gun In My Hand, And I Pointed It At Her, And Yes, I Pulled The Trigger, But I Had No Idea There Was A Bullet In The Gun, Even Though I Checked It Two Minutes Before, So I’ll Have To Plead Innocent And I Fully Expect To Be Aquitted".

Sometimes I get the feeling we need Clint Eastwood for president here. And prosecutor. And then the people can be the judges.

James Galbraith: Geithner Plan "Extremely Dangerous," Banks "Massively Corrupted"

Like it or not, many people seem to be resigned to the idea there's no alternative to the public-private investment fund scheme Treasury Secretary Geithner detailed this morning. That's hogwash, says University of Texas professor James Galbraith, author of The Predator State. Of course there's an alternative: FDIC receivership of insolvent banks. Aside from being legally proscribed, the upside of FDIC receivership is the banks are restructured and reorganized for potential sale (either in whole or parts), Galbraith says. Such was the fate in 2008 of, most notably, Washington Mutual and IndyMac.

Crucially, FDIC receivership also means new management teams for insolvent banks; and Galbraith notes new leaders will have no incentive to cover up the fraudulent or predatory lending practices of their predecessors. Given the entire system was "massively corrupted by the subprime debacle," the professor believes criminal prosecutions on par with the aftermath of the S&L crisis - when hundreds of insiders went to jail - is a likely (and necessary) outcome of the current crisis. But don't expect to see many "perp walks" if Geithner's current plan comes to fruition. That's one reason Galbraith called the plan "extremely dangerous" in part one of our interview.

So why isn't the Obama administration pushing for FDIC receivership? "Political influence of big banks," the economist says.

Hedge Funds: Hurry Up And Apply For The New Bailout
Have you downloaded and filled out the application yet? What the heck are you waiting for. The "Mad Hedge Fund Trader" sent out this missive, saying the government has officially blown its wad:
"I’m sorry I’m late getting my comments out today, but I had to get my application in to manage the Treasury’s latest $1 trillion bailout program. They’re due April 10, and I wanted to get mine in ahead of Black Rock’s.  I only have to show $10 billion in assets under management and the ability to raise $500 million. For this the FDIC will effectively lend me interest free long term loans to buy all of the toxic assets I want at deep discount prices with 6:1 leverage. I’m sorry, but I can’t resist those “heads I win tails, you lose” trades the Feds are offering, hence the rush.

This certainly takes nationalization of the banks off the table, and makes those buyers of Bank of America two weeks ago at $2.50 look pretty smart. The government has now shot its wad, and there is really nothing else they can do now but sit back and pray until the $3 trillion in stimulus/bailout/reliquifying they have committed to starts to work."

Fluke? Credit crisis was a heist
Thanks to a complicit Congress, the reins were systematically loosened on the looters of the financial industry. And they're still at it, looking for new plunder.

It was no accident. The folks in power in Washington and on Wall Street want to pretend that the current global financial crisis -- you know, the one that reduced household net worth in the United States by $11.2 trillion in 2008, according to the Federal Reserve -- was an accident caused by some unfortunate confluence of greed and asleep-at-the-switch regulators. What we're now living through, though, is the result of a conscious, planned looting of the world economy. Its roots stretch back decades. And it wouldn't have been possible without the contrivances of the bought-and-paid-for folks who sit in Congress.

Of course, just because the plan blew up on the looters, taking off a financial finger here and a portfolio hand there, you shouldn't have any illusion that they've retired. In fact, in the "solutions" now being proposed -- by Congress -- to fix the global and U.S. financial systems, you can see the looters at work as hard as ever. The smoke screen -- the official explanation of the global crash -- was on full display at a March 5 hearing led by Sens. Chris Dodd, D-Conn., and Richard Shelby, R-Ala., respectively the chairman and ranking minority member of the Senate Banking Committee, into the $170 billion morass that is American International Group (AIG, news, msgs). Served up on the grill were Eric Dinallo, the supervisor of insurance for New York state, and Scott Polakoff, the acting director of the federal Office of Thrift Supervision.

"Are you trying to evade your responsibility?" Shelby thundered at Dinallo, who was responsible for regulating AIG's insurance business, headquartered in New York. Neither Dinallo nor Polakoff had a convincing explanation for why their agencies hadn't done more to stop the meltdown at AIG, which has so far cost taxpayers $170 billion. At times, they certainly seemed like they were trying to weasel out of responsibility, exactly as Shelby suggested. Dinallo, for example, pointed out his agency regulated only AIG's insurance business and not the London financial-products unit, which had written the derivative contracts that took down the company. Shelby countered by asking why Dinallo's office hadn't done more to stop the risky lending of securities by the company's regulated insurance units, which account for $35 billion of the $170 billion bailout.

Polakoff wound up eating crow and more crow. "AIG was successful in many regards for many years, but it had issues and challenges," he said in his prepared statement for the committee. After that exercise in the numbingly obvious, it was hard to muster up much sympathy for Polakoff when Sen. Jack Reed, D-R.I., got him to participate in his own evisceration. "The perception that this London operation was some rogue group that was unsupervised, that you had no access to it and that your regulator authority didn't reach there is not accurate," Reed said. "Correct," Polakoff answered. "That would be a false statement." By trotting out these sacrificial victims in this show trial, our representatives in Washington hope you won't ask the hard questions, the questions that show that they bear far more responsibility for this crisis and for the destruction of trillions of dollars in global assets than any state insurance commissioner or Washington bureaucrat. What questions? How about these:

Question: How is it that the Office of Thrift Supervision, a unit of the Treasury Department that regulates the savings and loan industry, wound up as the primary federal regulator for insurance giant AIG?
Answer: The company was essentially able to shop for the regulator of its choice. AIG's acquisition of a small savings and loan in 1999 gave oversight responsibility to the Office of Thrift Supervision, a 1,000-employee agency with offices in Washington, Atlanta, Dallas, San Francisco and Jersey City, N.J. The agency hasn't exactly been a regulatory bulldog in recent years. The Treasury's inspector general blasted the agency for its role in propping up IndyMac Bank in the days before the savings and loan collapsed last July. The agency's auditors allowed the company to backdate cash infusions to make it seem like IndyMac had enough capital. The S&L's eventual collapse cost the Federal Deposit Insurance Corp. $9 billion. For the past four years, the agency had staff regularly on site at the AIG financial-products branch office in Connecticut, The New York Times' Gretchen Morgenson reported in September. Either these examiners, used to the world of savings and loans, didn't understand the complex derivatives transactions they were seeing, or, as in the IndyMac case, they decided to go along. In either case, the agency didn't step in to halt the practice.

Question: Why weren't state insurance regulators more aggressive in regulating AIG?
Answer: Because the federal government had forced them to back off. An aggressive interpretation of the definition of insurance could have let state insurance agencies regulate the derivatives contracts that AIG's financial-products group was writing out of London. These were, in fact, insurance policies that guaranteed the companies taking them out (banks, other insurance companies, investment banks and the like) against losses on securities in their portfolios. But Congress had made it very clear in the Commodity Futures Modernization Act -- supported by then-Federal Reserve Chairman Alan Greenspan, steered through Congress by then-Sen. Phil Gramm, R-Texas, and signed into law by President Bill Clinton in December 2000 -- that most over-the-counter derivatives contracts were outside the regulatory purview of all federal agencies, even the Commodity Futures Trading Commission. With the new law on the books, the market for credit default swaps exploded from $632 billion outstanding in the first half of 2001, according to the International Swaps and Derivatives Association, to $62 trillion in the second half of 2007.

Question: Wasn't anybody worried about the risk to the financial system posed by a market that dwarfed the assets of the sellers of this insurance?
Answer: Worry about leverage? You've got to be kidding. In 2004, the Securities and Exchange Commission, after hard lobbying by Wall Street, reversed its 1975 rule limiting investment banks to leverage of 15-to-1. The new limit could be as high as 40-to-1 if the investment banks' own computer models said it was safe.

Question: Why wasn't Wall Street more nervous about the rising tide of leverage and the risk it posed?
Answer: Ah, come on. You know why: The new business model was incredibly profitable. In 1999, AIG's financial-products group had revenue of $737 million, Morgenson reported in the Times. That had climbed to $3.26 billion by 2005. And almost all of that was profit: Operating income was 83% of revenue in 2005. The biggest expense, by far, was compensation. Salaries and bonuses ranged, depending on how good a year the unit had, from 33% to 46%.

Question: Why didn't Washington step to at least temper the risk?
Answer: Money. Just look at the who's who of senators receiving campaign contributions from AIG. According to Federal Election Commission data at the Center for Responsive Politics, Sen. Max Baucus, D-Mont., has received more money from AIG -- $91,000 -- than from any other contributing company. Baucus chairs the Senate Finance Committee. Dodd, the head of the Senate Banking Committee, has received $280,000 from AIG. (In the 2003-08 election cycles, AIG was only the fourth-largest contributor to Dodd; Citigroup ranked No. 1.) And Dodd now admits he's the one who wrote the loophole that allowed AIG to award $165 million in bonuses to its financial-products group. (In his defense, Dodd says he inserted the language at the request of the Obama administration.)

AIG doesn't show up among the top 10 contributors to Shelby, but the ranking Republican on the Banking Committee does count Citigroup (at No. 1) and JPMorgan Chase (at No. 3) among his top donors. Twenty-eight current members of Congress own stock in AIG. Sen. John Kerry, D-Mass., is the biggest investor, with stock valued at $2 million (it was valued at $2 million at the time he filed his lastest financial reports, anyway). Congress has delivered a lot of other goodies in the past decade or so that have contributed to this crisis -- and made the cleanup more expensive and painful. For example, the Office of the Comptroller of the Currency and the Office of Thrift Supervision both moved to block states from enforcing their consumer-protection laws against any nationally chartered bank.

Among the measures states were prohibited from enforcing were rules against predatory lending. Not that the federal government stepped in for the states: The Federal Reserve took all of three formal actions against subprime lenders from 2002 to 2007, and the Office of the Comptroller, with authority over 1,800 banks, took only three enforcement actions from 2004 to 2006, according to Multinational Monitor. But you get the idea by this point.

What should worry you now -- if you can spare a neuron or two from worrying about the economy, your job, your retirement savings, your mortgage and the meltdown of the global financial system -- is that the looters aren't in retreat. If anything, they're getting more brazen. For example, in the early days of the AIG crisis, Goldman Sachs Group denied it had any "material" exposure to AIG's troubles. It wasn't until months after then-Treasury Secretary Henry Paulson, a former CEO of Goldman Sachs, organized a bailout of AIG that taxpayers found out the biggest recipient of taxpayer money, pocketing $12.9 billion of the $170 billion bailout, was -- ta-da! -- Goldman Sachs.

The next round of looting is likely to come in the name of reform. Already, Shelby has called for federal regulation of the insurance industry. For years, the industry itself has been arguing for this, seeking to replace all those pesky state agencies and their differing rules with one federal standard. That's great if the federal standards are tougher than the toughest state standards and the federal regulators are tougher than the best state regulators. On recent evidence, I'm not counting on that. Are you?

I'm just as skeptical about calls to give the Federal Reserve more power, turning it into a superregulator for the financial system. More power to the same Fed that could find only three examples of predatory lending, that fought against regulating derivatives and that did nothing as risk piled up at the nation's banks? I think reform -- stem-to-stern reform -- is an absolute necessity. But I think almost all the existing regulatory bodies have been captured by the industries they are called upon to regulate. Tear them all down, I say, and begin from scratch. Within 20 years, we'll be facing the same problem of regulators captured by their regulated industries, but, as Huey Long said about his plan to redistribute the country's wealth, what a time we'll have had.

Geithner's Last Stand
The political and pundit classes have spent the past week expressing outrage over bonuses paid to AIG executives. In case you have been on Jupiter, this is the company that has received $183 billion from taxpayers to cover part of its gambling losses that helped crash the entire system. The indignation over AIG will serve a useful purpose if it focuses public attention on the much larger issue -- the failure of the entire approach that Treasury Secretary Tim Geithner and White House economic czar Larry Summers are using to rescue the banking system. It would be hard to find two administrations more different than Bush and Obama. Yet, when it comes to bailing out financial firms, Geithner's approach is a seamless continuation of his predecessor, Hank Paulson's. It makes you wonder who is the permanent government. Perhaps Wall Street?

Even the players are the same Goldman-Citigroup crowd. The well named Neel Kashkari, the Citigroup executive brought in by Paulson to run the TARP program, is still in place. Geithner's top assistant, Mark Patterson, is from Goldman. And most of the concepts are coming from the same Wall Street crew. So far, the policy has been an abject failure. The latest idea is to use some of the remaining Treasury funds from the TARP program approved by Congress last October to anchor several trillion more in loans and loan guarantees by the Federal Reserve and FDIC. For weeks, Geithner has announced only vague principles of his next move. Over the weekend, some details were released, and a full blown unveiling is expected any day. But at this writing, despite leaks from the Treasury to friendly reporters, the several agencies who need to be party to the plan are still in disagreement. And the unveiling may well be delayed again. Judging by the versions of the plan leaked to the New York Times and the Wall Street Journal for Saturday, and the Washington Post for Sunday. The plan seems to be changing daily.

In the latest version, the Treasury will put up between $75 to $100 billion to leverage loans and loan guarantees from the Federal Reserve and the FDIC (down from earlier projections as high as $200 billion.) The money will be used to entice a new round of speculative bets by hedge funds and private equity companies. The FDIC is the newly drafted participant in this scheme and its leaders are said to be less than thrilled with its designated role. Compared to the Treasury, the FDIC has been a model of competence and transparency. The FDIC is coming before Congress to seek replenishment of its somewhat depleted insurance funds, and now Treasury is coveting that money to underwrite much of Geithner's latest scheme. But you can only safely insure so many risks with the same capital (shades of AIG!) The scheme is described as a public-private partnership, but most of the real money is slated to come from public agencies. So why go to all this trouble to enlist private money, which will put up little of the capital and bear little of the risk?

Under one part of the plan, the FDIC will put up most of the money to create a new public corporation which will capitalize private funds to buy up sketchy loans. In the second part, hedge fund and private equity speculators will purchase older toxic bonds clogging bank balance sheets, which Treasury now calls by the delightful name, "legacy" assets. (Sorry, a legacy is a gold watch from Grandpa. This legacy is junk.) Under yet another part of the plan, hedge funds and private equity companies are expected to buy newly issued bonds from banks, so that banks resume normal lending. An alarming aspect of the plan is that private investment companies will manage the process on behalf of the government, despite the fact that government is providing most of the capital and insuring most of the risk. Basically, the Treasury is colluding with private speculators to create off-balance sheet entities, to offer new windfall profit opportunities and disguise the true degree of risk. If this all sounds vaguely familiar, Geithner's Treasury, with no sense of irony, is offering a reprise of the several abusive and opaque gimmicks that produced this crisis, a tour that winds back down Memory Lane, from AIG to Enron.

Like everything else about the Paulson-Geithner approach, this latest twist is totally clubby and non-transparent. There is no objective process, and no public criteria. Congress is being kept in the dark. The Congressional Oversight Panel is being denied the documents it needs. (If you want to delve deeper, the Panel's reports are must-reading.) The Treasury does not have the staff resources to do the job properly, so it hires private investment bankers. This recalls the era when J.P. Morgan and his financier pals mounted a private rescue to halt the bank panic of 1907. But Morgan was a purely private banker, and he was using his own bank's money. It this case, the Treasury is supposedly a public institution using taxpayer funds, yet behaving with all the transparency of Morgan.

Further, the problem that stopped Hank Paulson dead in his tracks last fall, when he gave up on trying to have the government purchase toxic assets, continues to stymie Geithner: how to price the assets. If the price that the hedge funds and private equity companies pay is too low, they make a financial killing with government guarantees. If it is too high, government will subsidize the loss. The idea that private speculators will divine the right price because this is "the market" speaking is delusional -- look what these markets have delivered so far. Either way, far too much power is being given to the least regulated and least transparent players in the financial game, and too much is being left to the caprices of speculators. Indeed, these are many of the same firms that took the other side of bets with outfits like AIG, whose gambles crashed the system.

In addition, this desperation use of private equity companies and hedge funds is compromising government's ability to regulate these shadowy players. As recently as late last week, Geithner was sweetening the terms of his deal, because not enough players were coming to the table. At the G-20 economic summit next week in London, the Obama administration and the Europeans are likely to be at loggerheads over whether to toughen regulation of hedge funds and private equity. But it's awfully hard to be a tough regulator when you are begging them to participate in your program. It all adds up to the most expensive and risky way of trying to recapitalize banks, and the least likely to succeed. Instead of simplifying, it is adding complexity and leverage. In effect, Geithner is doubling down on the same kinds of speculations that crashed the system. This time, however, the government guarantees are explicitly negotiated in advance, rather than being cobbled together after the crash.

Since the administration knows that Congress is unlikely to appropriate another nickel for bank bailouts in the current climate, the Treasury is relying on the Federal Reserve as a largely unsupervised piggy bank, and drafting a reluctant FDIC as well. The Fed's operations are beyond the direct scrutiny of Congress. The problem is that even the Fed can go broke, or it must resort to creating money to avoid that fate. The Fed's own balance sheet has roughly doubled since last September to about $2 trillion. With the latest Geithner scheme, it will roughly double again. The Fed is known as a very conservative institution. But increasingly, it is holding the bag for the system's most dubious assets.

On Thursday of last week, the Fed surprised everyone by announcing a plan to purchase $300 billion of Treasury bonds, to keep down the government's borrowing costs. We have not seen this sort of intervention since World War II. The Fed has begun monetizing the public debt, a process that works for now, but one that could end in a far more severe form of the "stag-flation" that wracked the economy in the 1970s. The main purpose of this entire strategy is to disguise the true depth of the hole in bank balance sheets and to prop up insolvent banks, not to repair the larger system. It has been largely designed by and for the same Wall Street players that created the crisis.

In the aftermath of the AIG debacle, the silver lining in this sorry mess is that the Geithner approach could well fall of its own weight. Not only are many inside the government skeptical. Financial markets are unlikely to be impressed. The press commentary is likely to be withering. And Congressional Democrats did not spare Geithner in their assault on the AIG bonuses, and are unlikely to be gentle in their appraisal of the plan when all the gory derails are finally released. Which brings up the question: where in this affair is the president who hired Secretary Geithner and at whose pleasure the embattled treasury secretary serves? For the moment, President Obama is standing by his man, something he has to do until the moment that Obama decides to ease out Geithner, work around him, or fire him. The problem, of course, is larger than Geithner. The entire Obama economic team is far too close to Wall Street and far too much a continuation of the Paulson approach. And though Geithner is primed to take the fall, the plan is the work of senior economic strategist Larry Summers as much as it is Geithner's.

The grave political and economic risk is that Obama continues to let Summers and Geithner lead him down the garden path; the industry-oriented mortgage rescue saves too few homeowners; housing remains in the doldrums and mortgage securities with it; the hedge funds and private equity companies make some money with government guarantees, but the banking system remains comatose; and Republicans increasingly become the instruments of public anger. For the moment, the president is a prisoner of this thinking and these appointees. If this were merely The West Wing, it would be the stuff of terrific drama. But alas, it's reality; and we all will live with the consequences. In a different possible scenario, however, Obama lets the financial and political marketplace test the Geithner plan for another week or two. Then, when its failure is palpable, Obama announces a dramatically different approach, either with or without a different treasury secretary.

If this movie were Bull Durham, the most plausible veteran that Obama could bring in to play Crash Davis to Geithner's Ebby Calvin LaLoosh would be Paul Volcker. The former Fed chairman is no fan of the Paulson-Geithner approach. If Obama handed Volcker the ball, as some kind of senior counsel, they could drastically change the game plan without even having to fire Geithner. This would be the smoothest and least awkward way of changing course. Obama could simply say that we tried variants on the Paulson formula and it didn't work. Now it's time to try something else. The alternative course, which is winning converts across the political spectrum, is a variant on the Reconstruction Finance Corporation of the Roosevelt era.

With an R.F.C. temporarily taking over the insolvent banks, you wouldn't have to bribe hedge funds and private equity companies to speculate on toxic securities. Government would take over zombie banks and use government auditors to determine just how much new money was required to bring a vastly simplified financial system back to life. Shadow banks, loan securitization, and convoluted high-risk schemes would loom smaller, not larger. The process would have far greater simplicity and transparency. And it would be far more likely to get the banking system working again, more quickly and at less public expense. Barack Obama is a president of great promise, reassurance, and political skill. In the next few weeks, we will learn how he performs in a crisis that is being worsened by his own appointees.

My Plan for Bad Bank Assets
The private sector will set prices. Taxpayers will share in any upside.

The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions. No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk. Those decisions have caused enormous suffering, and much of the damage has fallen on ordinary Americans and small-business owners who were careful and responsible. This is fundamentally unfair, and Americans are justifiably angry and frustrated. The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises.

Over the past six weeks we have put in place a series of financial initiatives, alongside the Recovery and Reinvestment Program, to help lay the financial foundation for economic recovery. We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure. We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today -- making it less likely that the more negative economy they fear will take place.

We started a major new lending program with the Federal Reserve targeted at the securitization markets critical for consumer and small business lending. Last week, we announced additional actions to support lending to small businesses by directly purchasing securities backed by Small Business Administration loans. Together, actions over the last several months by the Federal Reserve and these initiatives by this administration are already starting to make a difference. They have helped to bring mortgage interest rates near historic lows. Just this month, we saw a 30% increase in refinancing of mortgages, which means millions of Americans are taking advantage of the lower rates. This is good for homeowners, and it's good for the economy. The new joint lending program with the Federal Reserve led to almost $9 billion of new securitizations last week, more than in the last four months combined.

However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers. Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government. The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets. The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

Moving forward, we as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently to strengthen the financial system, while also ensuring the trust of those market participants who we need to do their part to get credit flowing to working families and businesses -- large and small -- across this nation. This requires those in the private sector to remember that government assistance is a privilege, not a right. When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders. These provisions need to be designed and applied in a way that does not deter the participation by the private sector in generally available programs to stabilize the housing markets, jump-start the credit markets, and rid banks of legacy assets.

We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little. In working with Congress to put in place strong conditions to prevent misuse of taxpayer assistance, we need to be very careful not to discourage those investments the economy needs to recover from recession. The rule of law gives responsible entrepreneurs and investors the confidence to invest and create jobs in our nation. Our nation's commitment to pursue economic policies that promote confidence and stability dates back to the very first secretary of the Treasury, Alexander Hamilton, who first made it clear that when our government gives its word we mean it.

For all the challenges we face, we still have a diverse and resilient financial system. The process of repair will take time, and progress will be uneven, with periods of stress and fragility. But these policies will work. We have already seen that where our government has provided support and financing, credit is more available at lower costs. But as we fight the current crisis, we must also start the process of ensuring a crisis like this never happens again. As President Obama has said, we can no longer sustain 21st century markets with 20th century regulations. Our nation deserves better choices than, on one hand, accepting the catastrophic damage caused by a failure like Lehman Brothers, or on the other hand being forced to pour billions of taxpayer dollars into an institution like AIG to protect the economy against that scale of damage.

The lack of an appropriate and modern regulatory regime and resolution authority helped cause this crisis, and it will continue to constrain our capacity to address future crises until we put in place fundamental reforms. Our goal must be a stronger system that can provide the credit necessary for recovery, and that also ensures that we never find ourselves in this type of financial crisis again. We are moving quickly to achieve those goals, and we will keep at it until we have done so.

Take Two on Geithner's Toxic-Mortgage Plan
The Treasury Secretary lobbies private equity and hedge fund executives as he prepares to roll out a more detailed plan to save the banks. Taking no chances this time, Treasury Secretary Timothy Geithner and other Obama Administration officials worked late Sunday to line up support from private equity and hedge fund executives for their plan to rid the nation's banks of toxic mortgage assets. That program, which will lean heavily on public-private partnerships, will be announced on Monday, Mar. 23, Administration sources confirmed. As first reported in The Wall Street Journal, the Geithner plan has broadened somewhat since he first announced in early February that the Treasury intended to join with hedge funds, private equity firms, and other investors in so-called "public-private partnerships" to buy up the bad assets weighing down banks.

Following that speech, investors and others on Wall Street heavily criticized Geithner for providing only vague details as to how the partnerships would work. The stock market immediately tanked, with the Dow Jones industrial average finishing down 4.6% that day. In addition to lobbying investment executives—some of whom worry that Congressional anger about AIG's bonuses could wash back on them—Geithner wrote an op-ed in the Wall Street Journal in which he said his plan is "part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer." A source familiar with the Administration's plans says, "They will make sure they come out with very supportive statements first thing in the morning."

Estimates are that it will take anywhere from $1 trillion to $2 trillion to cleanse the banks' balance sheets of bad assets. But Treasury has nowhere near that amount of money available and Congress—particularly after the explosion of public outrage over AIG's bonuses—is in no mood to allocate more funds to save the banks. Treasury is hoping to leverage its dwindling resources by getting private money to invest in the assets, alongside Uncle Sam's resources. "There's no question that some companies have appeared to move irresponsibly with those [government] funds. There is an understandable backlash," warns Melissa Bean (D-Ill.), a member of the House Financial Services Committee and a key player among moderate Democrats. "It makes it more difficult to get money out of Congress, no question about it."

So how would Geithner's plan work? The partnerships he proposes would be run by private sector investment managers. They would take an investment interest, but Treasury would commit government funds for as much as an 80% equity stake in the partnerships. The government would lend the partnerships additional funds to increase their ability to buy assets. Uncle Sam will also put a floor under losses, limiting the risks of buying into the toxic assets. In short, Geithner hopes that by heavily subsidizing the asset purchases—and limiting the downside risk—he will be able to entice private investors into jump-starting the frozen market for bad mortgage loans. "We'll essentially have the government trying to drive the market by giving a subsidy to private investors to lower the spread" between what the banks are willing to sell for and what the buyers are willing to pay for the toxic assets, says Daniel Clifton, Washington policy analyst for institutional brokers Strategas Research Partners.

"But it's too early to tell if investors will jump in, or how far down the banks will go in terms of selling the assets." Government officials are counting on those players to participate in establishing market prices for the troubled assets. The difficulty of coming up with a price banks would accept—but which wouldn't leave taxpayers paying too much—has bedeviled previous federal efforts to buy up the assets. Under Geithner's new plan, banks looking to sell off bad loans and mortgage backed securities would put them up for auction and several partnerships would make competitive bids. "The key is that private-equity and hedge-fund players will vie for the assets," says Scott Talbott, head of government affairs for the Financial Services Roundtable. "That's how you get a pricing mechanism going."

At the same time, Treasury also plans to announce an expansion of the effort it has been making with the Federal Reserve to unfreeze the stalled consumer credit markets. The program, known as the Term-Asset Backed Securities Loan Facility, or TALF, got started this past week in an effort to reinvigorate the securitization market for credit cards, auto loans, and small business loans. Previously, TALF financing from the Fed had only been available for newly originated loans. Now Treasury will expand the program to make eligible loans that originated as long ago as 2005. It is also expected to begin including mortgage assets, too. In addition, Geithner will announce a new program under which the FDIC will also create an entity to buy up and hold mortgage loans.

It is unclear how those purchases will differ in detail from the asset purchases made by the public-private partnerships, though the key may simply be that the FDIC can provide another source of funding to help stretch the limited money available to the Treasury for the bank rescue. Analysts estimate that of the original $750 billion allocated by Congress, no more than $100 billion remains uncommitted and available. "It gives them another arrow in their quiver," says Clifton. No matter how well the plan is now detailed on the page, the central question remains: Will private investors participate? Even before the debacle over the American International Group (AIG) bonuses, many expressed fear that if they joined in with the government, the rules might later change. That has happened repeatedly, as the government has revised the rules governing executive pay for banks that have already received Treasury funds.

The furor over AIG's bonuses—which in only a week led to competing proposals to tax away most bonuses at virtually all major banks and Wall Street firms—has spread even more fear that the government is an unreliable investment partner. While Treasury officials have tried to assure investors that there will be no restrictions on bonuses among participating firms, no one believes Treasury has the final say. As with AIG, Congress will step in if the furor continues, whatever Treasury now promises. One fear, of course, is that if the bank rescue plan succeeds, private investors could be criticized for having made a lot of money investing in bad banking assets, using government funds. Many worry that they could end up being hauled before Congress to explain what might come to be seen as unreasonable gains if the public's ire doesn't diminish. "The reactions to AIG last week could have a chilling effect on participation in the program," warns the Roundtable's Talbott. "If people are unwilling to participate, the whole rescue effort could tank."

The Amazing TALF Bait And Switch
The greatest bait and switch of this generation in all its visual splendor. As a result of the TALF's non-recourse/non-margin nature, a hedge fund X can buy Bank X's MBS Portfolio which is marked on the bank's books at 80 cents on the dollar (but has a market price of 20 cents) for the marked price with a 3% equity check and TALF filling the balance. A day later, Bank X repurchases the portfolio from hedge fund X at the 20 cent market price, and pays HF X a $5 million fee for the "trouble."

The way this would be effectuated is that at t+1, the Hedge Fund decides to run a loss model via TREPP of what have you, and, lo and behold, realizes the loan will default in 1 day (assumptions and outcomes can be easily fudged) and threatens to default on the entire TALF portion. The key word here is non-recourse: the HF would not be liable for anything over its first-loss equity component. In the case of a declared portfolio default, the TALF portion would have to be marked at pure market value, and taxpayers would get stuck with as close to a donut as possible.

So here is Bank X running back to the rescue, offering to buy back the original portfolio at market price (even a 1 cent premium would make it politically palatable), in this case 20 cents. For the sinister minded, it become immediately evident, why hedge funds, once loaded up on these investments, would have an incentive to push down the value of the entire portfolio complex, especially if they, wink wink, bought protection via CMBX or other derivatives. The recent spike in CMBX spreads (massive buying pressure) may be one indication of just how hedge funds might be positioning themselves.

Once purchased the bank waits for the portfolio to appreciate to 50 cents on the dollar by 2014 (although the appreciation is not necessary and is a best case example of how the bank would fare if the market does pick up). Hedge fund X takes a 75% loss on its nominal equity stake but more than makes up in transaction fees. The TALF portion takes a 75% loss with no recourse and no margin to fall back on.

As a result Bank X takes no writedown now, and in 5 years may book an equity profit of as much as $25 million (net of transaction fees paid to the Hedge Fund X), while Hedge Fund X books a profit of $3.2 million for one day's work... Lastly the U.S. taxpayer loses $54.3 million on a $77.6 million TALF Investment, or 70% (net of 5 years of interest income).

Note: the maximum TALF size is $1 trillion. Will U.S. taxpayers suffer $700 billion in losses from the TALF? Ask your congressman.

Click to enlarge in new window

Financial Policy Despair
by Paul Krugman

Over the weekend The Times and other newspapers reported leaked details about the Obama administration’s bank rescue plan, which is to be officially released this week. If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the "cash for trash" plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson. This is more than disappointing. In fact, it fills me with a sense of despair.

After all, we’ve just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldn’t do anything, and anyway it was someone else’s fault. Meanwhile, the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money. And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing. It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

Let’s talk for a moment about the economics of the situation. Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets. As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

That’s what Sweden did in the early 1990s. It’s also what we ourselves did after the savings and loan debacle of the Reagan years. And there’s no reason we can’t do the same thing now. But the Obama administration, like the Bush administration, apparently wants an easier way out. The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to "fair" levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use "the expertise of the market" to set the value of toxic assets. But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

The likely cost to taxpayers aside, there’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive. But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

You might say, why not try the plan and see what happens? One answer is that time is wasting: every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost. Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place. All is not lost: the public wants Mr. Obama to succeed, which means that he can still rescue his bank rescue plan. But time is running out.

Summers Sees 'Considerable' Investor Interest in Bad-Debt Plan
The Obama administration has found "considerable" investor interest in its plan to purge toxic assets from banks’ balance sheets, National Economic Council Director Lawrence Summers said. "Some of the major firms have suggested a willingness, and perhaps even an eagerness, to take part," Summers said today in an interview on Bloomberg Television. "There’s considerable investor interest from a number of different quarters." Treasury Secretary Timothy Geithner unveiled a program today that aims to use government financing to spur the purchase of $500 billion to $1 trillion in frozen assets.

The effort relies on federal partnerships with hedge funds, private equity firms and other investors to buy the securities. Summers said the administration is "gratified" that stocks are rallying today. "We’re not managing to markets in the short run," he said. "We don’t panic when markets go down and we don’t become euphoric when markets go up." Summers also said that investors in the Public-Private Investment Program won’t be subject to the compensation limits applied to major banks rescued by the government.

Geithner Banks on Private Cash
Treasury Secretary Timothy Geithner said the only way to remove troubled assets clogging banks' balance sheets -- which lie at the heart of the financial crisis -- is to work with the private sector, even at a time when Wall Street moneymakers are being vilified by the public and politicians. In an interview with The Wall Street Journal Sunday, Mr. Geithner said the government cannot fix the financial crisis alone. "Our judgment is that the best way to get through this is if we can work with the markets," he said. "We don't want the government to assume all the risk. We want the private sector to work with us."

Mr. Geithner's three-pronged program, which will be unveiled Monday, envisions the creation of a series of public-private investments to soak up $500 billion, and maybe as much as $1 trillion, in troubled loans and securities at the heart of the financial crisis. To encourage investors to buy those assets, the U.S. government will offer lucrative subsidies and shoulder much of the risk. Stocks rallied 2% in Tokyo in early trading Monday, on expectations of the Geithner bank plan's announcement. Taxpayers will stand to reap gains -- alongside investors such as hedge funds and private-equity firms -- if the investments ultimately prove profitable.

The effort is part of Mr. Geithner's broader plan to stabilize the financial system and builds on earlier programs to pump capital into banks, restart consumer and small-business lending, and help some homeowners pay their mortgages. Many economists argue that financial firms need to purge troubled loans and securities clogging their balance sheets if they are to regain the confidence to resume lending. Mr. Geithner outlined the latest effort in general terms last month, and Wall Street has been eagerly awaiting details. But the rollout comes at an inopportune time, with bailout fatigue turning to rage amid a furor over bonus payments to employees of American International Group Inc.

As a result, whether or not the prescription is correct to fix what ails the financial sector, there is likely to be concern about an effort that appears to reward Wall Street. Some investors have already said they're leery of working with the government for fear the rules will change midstream, as is happening with Congress's moves to cap Wall Street bonuses for firms receiving financial aid. To encourage investor participation, the Treasury believes participants in the program shouldn't be subject to executive-pay rules imposed by Congress. The law authorizing the $700 billion bailout and a provision in the $787 billion stimulus package impose tough pay restrictions on firms that receive government funds, including limits on bonuses.

The Obama administration believes those provisions shouldn't apply to such broad programs, and an exception was made last month for participants in the Federal Reserve's consumer-lending facility, which provides loans to investors who agree to buy certain asset-backed securities. Administration officials are hoping the public will draw a distinction between financial firms that receive a government rescue, such as AIG, and those such as hedge funds and private-equity firms that participate as investors in broad government programs. Some on Wall Street say they want to buy assets but need the government to provide financing. "No one is putting any money to work because every time you dip your toes in, they get cut off," said Blackrock Inc. CEO Lawrence Fink, who was briefed on the plan by the Treasury. He called the furor in Congress over executive compensation "very frightening" but said it wouldn't dissuade Blackrock from participating: "Our intention is to be one of the participants in the program."

Others on Wall Street, shell-shocked from the assault on their practices from Washington, are withholding judgment until they see more details. Banks still holding troubled assets at relatively high values may be reluctant to sell for fear they won't get a high enough bid to avoid having to take a huge write-down. Other firms, such as Goldman Sachs Group Inc. and Morgan Stanley, have already written down the value of their troubled loans and may have an easier time selling assets into the public-private partnerships. An official at one large U.S. bank said the program will be launched more smoothly if a high income tax on some bonuses, such as passed by the House last week, is watered down or tabled. In recent days, various financial-industry executives have warned against a tax that's retroactive, saying it would hurt their ability to keep valued employees.

The Treasury plans to contribute between $75 billion and $100 billion from its $700 billion bailout to the programs to remove troubled real-estate-related assets from bank balance sheets, with the possibility of additional money in the future. The Fed and the Federal Deposit Insurance Corp. will provide other forms of financing, including low-risk loans. Targeting mortgages that banks no longer want to hold, the Treasury and the FDIC will provide financing to buyers. The FDIC will auction off pools of loans that a bank wants to sell and will become a co-owner by forming a partnership with the highest bidder. The partnership will then raise FDIC-guaranteed debt to finance a portion of the purchase price, with the Treasury willing to kick in between 50% and 80% of the equity needed to buy the assets. The Treasury will be an equal investor in the partnerships.

To tackle risky securities, such as those backed by mortgages, the Treasury will create several investment funds run by private investors who meet certain criteria, such as experience managing similar assets. Treasury again will act as a co-investor, in most cases contributing $1 for every $1 contributed by the private sector and sharing equally in any gains or losses. Lastly, the government will expand the Fed's Term Asset-Backed Securities Loan Facility, or TALF, to help absorb risky assets dating back several years. In an op-ed piece in Monday's Wall Street Journal, Mr. Geithner wrote that the efforts will help tackle the glut of assets clogging bank balance sheets and will help provide some kind of normal price for these assets, which the Treasury believes are currently undervalued.

"Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets," Mr. Geithner wrote. "The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury." The rollout represents a test for Mr. Geithner, whose tenure has been marred by controversy over his personal taxes, criticism of the lack of detail in his February bank-bailout announcement, and his involvement in the AIG bonus furor. Some questioned why he didn't know of the AIG bonuses sooner.

President Barack Obama said on CBS's "60 Minutes" Sunday that Mr. Geithner is "as sharp and as skilled a public servant as we have." The president joked that were Mr. Geithner to offer his resignation, he would say, "Sorry, buddy, you've still got the job." Two senior Republican senators, Charles Grassley of Iowa and Judd Gregg of New Hampshire, offered their support. "In the area of trying to stabilize the financial sector of our economy, they're doing the right things," Sen. Judd said on CNN's "State of the Union."

Strike faster on death-wish finance
The outcry in the US over bonuses paid by AIG, the stricken insurer, has been astonishing. By recent standards the sums involved are tiny but the story refuses to die down. Its implications could be, and should be, far-reaching. Responding to an onslaught of popular protest, the House of Representatives has passed an atrocious and probably unconstitutional law, using the tax system to void contracts that its own recent stimulus bill sought to protect. Tim Geithner, the Treasury secretary, is implicated in the scandal and may yet be driven from office. The surge of anger may also cripple the long-awaited financial stability plan that Mr Geithner is about to reveal.

This plan will give an important role to private investors acting alongside the government in acquiring toxic assets. Good luck with that: the shredding of contracts and the use of the Internal Revenue Service as a bankers’ punishment squad are hardly conducive to the “partnership” the administration of Barack Obama seeks. Moreover, the government may be unable to take up the slack. The Treasury devised this scheme in the first place because taxpayers were so opposed to spending hundreds of billions more dollars to prop up the banks. Yet propped up they must be. The US president has vacillated between stoking the outcry and trying to calm people down. He should have condemned the House’s bill of attainder. If his financial repairs are to succeed, the president must foster a more calculating, less self-destructive mood. Regardless, AIG should remain at the front of the government’s mind as it considers longer-term regulatory reform.

It is striking if unsurprising that popular rage has centred on the bonuses. As Eliot Spitzer, former governor of New York, has pointed out, it is no less outrageous that a large part of the support AIG received – maybe 250 times as much as it spent on the bonuses – went to trading partners such as Goldman Sachs, recipients of public support in their own right, settling its obligations to them in full. Any company facing bankruptcy without taxpayer support should indeed be told to review its workers’ contracts; but the same goes for obligations to creditors. In an outright bankruptcy, all such claims are on the table and everybody is in line to take losses. Bankruptcy was tried, of course, in the case of Lehman, and was not a great success: many see that as a catalyst for the worst phase of this crisis. After the Lehman debacle, keeping counterparties whole to avoid systemic collapse was the entire point of coming to the rescue of AIG and the others.

Apparently, the lesson of the Lehman case was drawn too hastily. Do not worry too much about moral hazard, many concluded. Letting banks that took excessive risks fail in order to encourage more prudent behaviour is all very well in theory; in practice, you pull the ceiling down on your head. Yes, but then one must also understand that the AIG outcome – keep everybody whole but taxpayers – is the alternative, and this no longer looks so good either. It fails the test of fairness, which is what the outcry is all about. It fails the test of efficiency too. The company’s death-wish business model, which involved insuring risks being taken by other financial groups on a literally insupportable scale, had moral hazard written all over its transactions. As James Hamilton of the University of California at San Diego has pointed out, if AIG’s counterparties were betting that the government would stand behind those suicidal credit default swaps, which in turn allowed them to keep rolling the dice, they turned out to be right.

So the question is this: if you cannot let a systemically significant bank or shadow bank collapse, and you cannot keep it whole at taxpayer expense, how do you dispose of it in an orderly way? How do you arrange a fair and efficient sharing of the losses? A template exists for US banks, though not for shadow banks or for hedge funds pretending to be insurance companies, in the resolution procedures of the Federal Deposit Insurance Corporation. The FDIC in effect devises pre-packaged bankruptcies for troubled banks. The most obvious failing in the regime – that it applies to too narrow a set of institutions – is certain to be addressed as regulatory reform proceeds. Indisputably, an orderly resolution regime is required for all financial institutions, banks and non-banks alike. But in light of the AIG fiasco, a less obvious aspect also needs to be kept in mind: the need for early intervention. The FDIC can cope with a few bank failures at a time; its procedures cannot cope with a system-wide collapse.

Undercapitalised banks and shadow banks have to be shut down well before their capital is exhausted and well before the collateral damage to uninsured depositors and other creditors has grown big enough to set other dominoes falling. Regulators need to think this through, working backwards from AIG. No doubt rules can be devised to forbid AIG-like business models. That is important but not enough. Financial groups will still get into trouble. The regime we need is one that would have seen the risks that AIG was running, declared it critically undercapitalised according to announced criteria and put it into receivership. Intervene early or risk having to choose between Lehman and its consequences in 2008 and AIG and its consequences in 2009.

Geithner Aides Worked With AIG for Months on Bonuses
Since the fall, senior aides to Timothy Geithner have closely dealt with American International Group Inc. on compensation issues including bonuses, both from his time as president of the Federal Reserve Bank of New York and as Treasury secretary. The extent of their involvement, which wasn't widely known, raises fresh questions about whether Mr. Geithner could have known earlier about AIG's $165 million in bonus payments. When the bonuses sparked a political firestorm last week, Mr. Geithner said he learned about their full scope in early March, just days before they were paid. Mr. Geithner and Federal Reserve Chairman Ben Bernanke will be grilled by Congress on Tuesday in a hearing that is likely to focus heavily on AIG. The flap has prompted lawmakers to seek curbs on an array of bonuses, tested the Obama administration and undermined Mr. Geithner's standing as he attempts to implement measures to stabilize the financial system.

Treasury officials say the department's staff kept Mr. Geithner in the dark until March 10. "Secretary Geithner, who has been actively engaged in shaping and executing the president's broad economic agenda, takes full responsibility for not being aware of these programs" before that date, Treasury spokesman Isaac Baker said Sunday in a written response to questions. This account of how Mr. Geithner and his aides were apprised of the AIG bonuses was based on interviews with government officials, lawmakers and congressional testimony. As New York Fed president, Mr. Geithner was central to AIG's initial $85 billion bailout in September, which was carried out in a tumultuous four-day period. After Edward Liddy took over as AIG chief executive, the company hired consultants to look at its payment plans around the world. One of Mr. Geithner's top bank supervisors at the New York Fed, Sarah Dahlgren, became the government's lead overseer of AIG. She sat in on AIG board meetings, joined at times by other top Fed staffers, and also participated in compensation-committee meetings. It isn't clear whether the issue rose to the board level until this month.

AIG received an expanded government rescue in October and another in November, bringing the total to about $150 billion, including $40 billion in Treasury funds.
In early November, the Fed, outside auditor Ernst & Young and AIG officials began examining through a committee the bonuses set to be paid to AIG's financial-products division, including those that sparked last week's furor. The committee concluded that the bonuses, which were in contracts signed before the government takeover, couldn't be legally blocked, according to a person familiar with the matter. The Obama administration has since agreed with that legal interpretation. AIG cited the retention plan in a public filing in early November, and Fed officials were aware AIG planned to pay $55 million in bonuses to financial-products employees the next month. Mr. Geithner remained involved in major AIG matters, seeking updates from Ms. Dahlgren and other top Fed staffers. He recused himself from dealing with aid to specific companies around the time of his Nov. 24 nomination as Treasury secretary. Fed officials declined to make Ms. Dahlgren available to comment on the bonus issue.

Lawmakers were also scrutinizing AIG's operations. Some raised the matter of the AIG bonuses at a hearing in December where they grilled Neel Kashkari, a Bush Treasury official who remains at the department. In late January, news outlets reported that AIG planned a total of $450 million in bonuses to help retain employees winding down the complex trades in the unit at the heart of the company's collapse. In the weeks that followed, Mr. Liddy and other AIG officials briefed some lawmakers about the retention payments and other aspects of the AIG rescue. On Feb. 28, as government officials worked on a fourth AIG bailout, the New York Federal Reserve Bank emailed Stephen Albrecht, a Treasury lawyer, laying out the AIG bonus issues and promising further detail, according to two people familiar with the email. Mr. Albrecht did not return a call seeking comment. It was an intense weekend, as Treasury and Fed officials frantically prepared to close the AIG deal. "When we heard there was this executive compensation thing floating out there, we thought, 'We'll deal with this later,'" said one Treasury official.

On March 2, AIG announced both record losses and $30 billion in fresh Treasury aid. The following day, Mr. Geithner appeared at a hearing of the House Ways and Means Committee. Rep. Joseph Crowley, a New York Democrat, asked the secretary about more than $160 million in bonuses that AIG would be paying to financial-products employees "in the coming weeks." Treasury officials say the AIG problem didn't register with Mr. Geithner at the hearing amid the other issues he faced. Mr. Baker, the Treasury spokesman, acknowledged that information about the financial-products bonuses was "in the public arena...for many months." But, he said, it wasn't until March 10 -- five days before the big batch of retention payments were due -- that department staff spelled out the situation for the secretary. The following day, March 11, Mr. Geithner, alert to the potential political fallout, called Mr. Liddy to protest the bonus payouts. At a congressional hearing last week, Mr. Liddy described the call as "open and frank."

According to Mr. Liddy's sworn testimony from that hearing, Mr. Geithner indicated on the call that he had learned about the bonus "situation about a week" earlier.
A Treasury spokeswoman said Mr. Liddy was "wrong." An AIG spokeswoman said the CEO was passing on his impression from the conversation. "If that impression was incorrect, he certainly defers to the Treasury secretary," she said. Over the weekend, administration officials contended the uproar wouldn't derail their efforts. President Barack Obama and a pair of Republican senators -- Judd Gregg of New Hampshire and Charles Grassley of Iowa, the top Republican on the Finance Committee -- disagreed with those calling for Mr. Geithner's resignation. "I think Geithner is going to survive this -- I think he has the trust of the president," Rep. Elijah Cummings (D., Md.), an Obama ally and early critic of AIG's bonuses, said in an interview. But "he has to put a very high-powered microscope on AIG," he added.

IMF says clean up banks to tackle dire world crisis
The world is in a dire economic crisis, but no recovery is possible until the financial sector is cleaned up, the head of the International Monetary Fund said on Monday. The crisis will push millions into poverty and unemployment, risking social unrest and even war, and urgent action is required, IMF Managing Director Dominique Strauss-Kahn said. "Bluntly the situation is dire," he told a meeting on the crisis at the International Labour Organisation, a United Nations agency representing unions, employers and governments that studies labour issues. Strauss-Kahn was talking less than two weeks before a summit of the G20 leading nations on April 2 to tackle the crisis.

As the crisis spills over into developing countries, millions of people will be pushed back into poverty and hardship, Strauss-Kahn said. "All this will affect dramatically unemployment and beyond unemployment for many countries it will be at the roots of social unrest, some threat to democracy, and may be for some cases it can also end in war," he said. Strauss-Kahn confirmed that the IMF would shortly update its economic forecasts to show the world economy contracting by between 0.5 and 1.0 percent this year -- the first reversal in more than 50 years of sustained growth.

Developed countries would shrink by a post-war record of about 3 percent, he said. But the IMF still believed recovery was possible in 2010 provided bold policies were followed. Firstly this involves boosting demand, but monetary policy -- moving interest rates -- has reached its limits, even with the unconventional tools central banks are using, he said. That is why the IMF had called for governments around the world to pump money in the economy to the tune of 2 percent of gross domestic product, he said. He noted that this did not mean that all countries should provide this fiscal stimulus, as some were in too fragile a financial position to increase spending.

But so far those countries that could afford it had pumped in about 1.6-1.7 percent of world GDP. "I do believe there is still some room to go further in some countries, but taking it all round it's not that bad," Strauss-Kahn said, adding this showed that international coordination was working well. But the prerequisite for success was the restoration of a healthy financial sector, he said. Although bailing out banks was politically unpopular, businesses and households could not survive without a working banking system, he said.

The IMF's experience of 122 banking crises around the world had taught it that economic recovery was impossible until banks were cleaned up, whether this was done quickly or slowly. "You can put in as much stimulus as you want. It will just melt in the sun as snow if at the same time you are not able to have a generally smaller financial sector than before but a healthy financial sector at work," he said. Despite the need for many countries to run huge deficits, emerging countries must not ignore the importance of rebuilding confidence in order to attract private capital in a globalised world, he said.

Defaulting Commercial Properties Hit Banks as Lost Jobs Increase Vacancies
U.S. banks, battered by record losses from the worst housing slump since the Great Depression, now must weather increasing loan delinquencies from owners of skyscrapers and shopping malls. The country’s 10 biggest banks have $327.6 billion in commercial mortgages, which face a wave of defaults as office vacancies grow and retailers and casinos go bankrupt. A projected tripling in the default rate would result in losses of about 7 percent of total unpaid balances, according to estimates from analysts at research firm Reis Inc. Commercial property prices are down almost 20 percent in the past year, and with the global recession worsening, there’s "significant stress" in the market, said William Schwartz, a credit analyst at DBRS Inc. in New York. Moody’s Investors Service is reviewing the financial strength ratings of 23 regional lenders, as "these losses are likely to meaningfully weaken the capital position of many banks in 2009," said Managing Director Robert Young in New York.

Bank of Hawaii Corp., City National Corp., Comerica Inc. and Sovereign Bancorp Inc. were among the companies put on Moody’s list of lenders with a "negative outlook" on March 12, partly because of their "risk concentrations" in the commercial market. Wells Fargo & Co. and Bank of America Corp. account for about half of commercial mortgages owned by the 10 largest banks, company reports show. With U.S. unemployment at 8.1 percent, the highest in a quarter-century, and more than 100,000 people and companies filing for bankruptcy in February, commercial property defaults are poised to rise. That may lift the vacancy rate at office buildings to 16.7 percent this year from 14.5 percent at the end of 2008, analysts at New York-based Reis estimate. "In the office market, you’re starting to see signs of mammoth job losses," said Mark Scott, senior vice president of NorthMarq Capital LLC, a commercial real estate brokerage and property-management company in Parsippany, New Jersey. "And, as people aren’t buying as many goods, they’re not shipping as many goods, so we have stress in the industrial market."

While the housing boom of the past decade drove banks to issue tens of thousands of subprime and option adjustable-rate residential loans, lenders also made cheap credit available to builders and buyers of high-rise office buildings, strip malls and apartment complexes. The number of retail properties seized by banks or in some state of default rose to 464 this month, more than triple the number on Dec. 18, with a total value of $7 billion, according to Jessica Ruderman, a research analyst at Real Capital Analytics Inc. in New York. That means banks aren’t being repaid and are stuck owning properties that have plunged in value. Wachovia Corp., now owned by San Francisco-based Wells Fargo, foreclosed on the 46-store Bridgewater Falls mall in Hamilton, Ohio, in February. The borrower, Indianapolis-based Premier Properties USA Inc., defaulted on an $80 million loan from Wachovia at the peak of the real estate bubble. Wachovia sold the property to itself for $33 million, or 59 percent less than the original loan, after no higher bids emerged at an auction earlier this month.

At the Bridgewater Falls complex about 30 miles north of Cincinnati, a Target Corp. store was the first to open about four years ago, followed by companies including J.C. Penney Co., Best Buy Co. and PetSmart Inc., said Julie Krause, the mall’s marketing manager. Premier Properties, the site’s former owner, filed for bankruptcy last April. Krause said the foreclosure was a reflection of the borrower’s struggles, not retail sales. Susan Stanley, a spokeswoman at Wells Fargo, which has $103 billion of commercial mortgages, more than any U.S. bank, declined to comment on the property or the company’s loans. Wells Fargo Chairman Richard Kovacevich said earlier this month that he doesn’t expect commercial real estate to cause a surge in losses for diversified banks because underwriting in the past decade was more disciplined than in earlier periods. He did acknowledge that writedowns lie ahead.

Wells Fargo said in its annual report that $594 million of commercial mortgages, including those inherited from Wachovia, were no longer collecting interest, or about 0.6 percent of its loans. That compares with $128 million in 2007. The bank increased its allowance for commercial mortgage credit losses to $1.01 billion at the end of 2008, or about 1 percent of the loans, from $288 million, or 0.8 percent, a year earlier. "The only thing we are facing today in commercial real estate is the fact that we have a weakening economy," Kovacevich, 65, said in a March 13 speech at Stanford University in Palo Alto, California. "In a weakening economy, you have higher unemployment, you have fewer people who need to occupy office buildings, you have fewer retailers who need to exist." Among the retailers that couldn’t find a way to survive the recession is Circuit City Stores Inc., the electronics chain that went bankrupt last year as sales plunged. It closed its 567 U.S. stores this year after negotiations with prospective buyers failed. Retailers Mervyn’s LLC and Linens ‘n Things Inc., which had more than 750 stores combined, liquidated late last year.

New York-based Citigroup Inc. foreclosed last week on the Oakwood Shopping Center in Gretna, Louisiana, after its owner, General Growth Properties Inc., missed a March 16 deadline to pay a $95 million loan. Citicorp North America owns $27.5 million of the loan, according to the foreclosure filing. Last month Citigroup took back Fuller Lofts, a planned redevelopment and expansion of a 1920s Los Angeles industrial building that was to be turned into 104 housing units. The tenant was a non-profit called Livable Places. "We began construction as speculation and frenzied demand drove up construction costs, and we started marketing homes as the turmoil in financial and real estate markets began," Livable Places said in an undated message on its Web site. "The impact on the southern California economy has been dire, and for Livable Places, the economic downturn has proved fatal."

Matt Ehrhard, Fuller’s construction manager for four months in 2007, said work began at the same time the housing slide did. "Eventually the funds just ran out, and they couldn’t get any further with the project," Ehrhard said in an interview. "I’ve never been involved with anything that’s been as derailed as much as this one." Citigroup is less exposed to commercial mortgages than its biggest competitors. The bank has $6.6 billion, or 0.9 percent of its loans, in real estate, compared with 12 percent at Wells Fargo, 7.5 percent at New York-based JPMorgan Chase & Co. and 6.9 percent at Bank of America in Charlotte, North Carolina, according to company reports. Danielle Romero-Apsilos, a spokeswoman for Citigroup, declined to comment about the Oakwood mall, Fuller Lofts or its other holdings.

Most troubled commercial properties have loans that are either syndicated or packaged into securities and sold to investors, and aren’t owned by a single lender. One Riverwalk Place, an 18-story office building in San Antonio, defaulted this year, as did Riviera Holdings Corp., a Las Vegas-based casino owner. Neither loan is owned by a single lender. Banks, like real estate developers, sold off most of the riskiest debt, said Dan Fasulo, a London-based managing director at Real Capital Analytics. "They keep the good deals for themselves, and they do the riskier, shadier stuff with a partner," Fasulo said. "What are you going to do with the bad stuff? You’re going to try to syndicate it privately." While the highest delinquency rates may be in the areas that got most overheated, such as parts of Florida and California, the increase in job cuts will lead to vacancies in areas once thought safe, said Walter Mix, managing director of the Secura Group of LECG, a consulting firm in Los Angeles. "Occupancies will continue to decline for at least the next couple of years," said Mix, a former commissioner of the California Department of Financial Institutions. "For the industry as a whole and for certain banks -- large, regional and community -- you’ll see more of an impact."

What If Washington Bailed Out of Bailouts?
Many experts say that if troubled banks, automakers, and AIG were allowed to die, the economy would be devasted. But others aren't so sure. What if the U.S. government got out of the bailout business? The idea certainly seemed all right to throngs of Americans who were outraged by news that American International Group (AIG) paid out millions of dollars in executive bonuses after it was rescued with taxpayer cash. But would no bailout be even worse? Financial analysts and federal officials have warned that doing nothing to save AIG—or banks or the auto industry—would be a catastrophe, an economic domino effect of bank losses, stock market chaos, and job cuts. No one—at least no one in the government—has the stomach for that.

Here's what might happen if companies deemed "too big to fail" were allowed to do just that. For bailout backlash, it's hard to beat AIG. The government has made four separate loans and cash infusions to the crippled insurer, including $30 billion earlier this month. Total tab: $170 billion. Public outrage reached new heights when word spread that AIG had paid executives $165 million in bonuses. President Barack Obama ordered his Treasury Secretary to grab back what he could, and one senator even suggested the recipients kill themselves. So why not pull the plug? Because AIG has 74 million customers and operates in 130 countries, and letting it implode would positively unhinge financial markets around the world. AIG built a murky, unregulated business issuing insurance for mortgage-backed securities and other debt held by banks. When the housing bubble popped and those securities went bad, AIG was left on the hook for billions of dollars in claims it couldn't pay.

Letting AIG die would make all of that insurance worthless. Banks around the world would be forced to take massive losses. Some could collapse, unnerving markets, driving up unemployment, and maybe turning the recession into a depression. The U.S. got a taste of that scenario in September, when bad debt forced investment bank Lehman Brothers into the biggest bankruptcy in U.S. history. Thousands of other firms were exposed to Lehman's complex financial contracts, and the resulting fear and uncertainty sent stocks plunging. And that was just a small taste. "AIG is about five times bigger than Lehman Brothers, and we learned that Lehman Brothers should not have gone bankrupt," says Mark T. Williams, a former Federal Reserve bank examiner who is now professor of finance and economics at Boston University.

It's not just AIG's life at stake. Over the weekend, the company named the trading partners who indirectly benefited from the taxpayer rescue. Those partners included Goldman Sachs ($12.9 billion) and Merrill Lynch ($6.8 billion). So by bailing out AIG, the government is essentially bailing out those and other financial institutions whose fate depends on AIG's survival, says Sung Won Sohn, an economics professor at California State University, Channel Islands. "If the money dries up, we'd see a lot more bad banks," Sohn said. AIG itself has predicted nothing short of a financial apocalypse unless it stays on government life support. In a bleak report to the Treasury Dept. late last month, AIG said its collapse could batter credit markets, bankrupt the U.S. insurance industry, depress the dollar, increase U.S. borrowing costs, and shatter consumer and business confidence everywhere. "The failure of AIG," the company warns in the report, "would cause turmoil in the U.S. economy and global markets, and have multiple and potentially catastrophic unforeseen consequences. What happens to AIG has the potential to trigger a cascading set of further failures which cannot be stopped except by extraordinary means," the report adds.

Not everyone buys the doomsday scenario. Some critics, including billionaire investor Jim Rogers, say keeping the company on the public dole is ruining the U.S. economy. And Phil Kerpen, director of policy at Americans for Prosperity, an antitax lobbying group, says the government "should stop throwing good money after bad" and allow AIG to go into bankruptcy. "There might be some contagion. There might not be. But we know for certain that the course we're on now isn't working," he says. The government says letting AIG fail simply is not an option. Federal Reserve Chairman Ben Bernanke, speaking to legislators earlier this month, warned that the damage to the world economy of an AIG failure would run into the "multiples of trillions." That doesn't mean the government hasn't at least considered a world without AIG. On its Web site, the Treasury tracks what it calls "Systematically Significant Failing Institutions." There's a single company on the list: AIG.

So far, the government has invested $200 billion total in about 400 banks, and it says it stands ready to spend even more. Two titans of the industry, Citigroup and Bank of America, have received $45 billion apiece. And the banks may actually be stabilizing. JPMorgan Chase, Citigroup, and Bank of America all say they were profitable in January and February. Citigroup stock, which traded below $1, has bounced back to more than $3. For now, the government has a 36% ownership stake in Citigroup. If the government pulled its cash and investors lost confidence and drove the bank into bankruptcy, financial markets would be devastated. The Federal Deposit Insurance Corp. points out that no American has ever lost a penny in a failed bank. But the FDIC has also never handled a failure as big as a Citigroup or a Bank of America. Bert Ely, an independent banking analyst in Alexandria, Va., says pulling the plug on the banks could have a destructive impact on markets similar to the convulsions unleashed by Lehman Brothers' collapse. Letting Citigroup and Bank of America go down in the same way would be "like taking a house that had some damage and burning it down," Ely says. "It's economic arson."

The concern, not unlike with AIG, is that letting a big bank go under would leave its trading partners saddled with huge losses, shattering confidence and leading investors to pull out the money they have left in the market. But others say keeping the bailout money flowing is only making things worse. Bill Seidman, a former chairman of the FDIC who ran the government bailout during the savings and loan crisis, says he does not believe letting failing banks die would trigger a brutal domino effect. He's calling for a temporary nationalization that would end bailouts for insolvent banks, clean up their balance sheets, and sell them back into the private sector. "I don't think we would bring down the system by doing that," he said. The White House isn't taking that chance. Obama's 2010 budget proposal sets aside up to $750 billion more in bailout money if banks fall deeper into the abyss. That's on top of the $700 billion bank bailout launched by the Bush Administration. In the meantime, the Obama Administration is urging patience. "It is surely tempting to say the hell with them all,"

White House economic adviser Lawrence Summers said in a speech last month. But he added, "You can't responsibly govern out of anger." General Motors (GM) and Chrysler have received more than $17 billion in government loans and asked to borrow $21.6 billion more. Their financing arms have received $6.5 billion on top of that. The auto industry contends the failure of either of the two would set off a chain reaction that could ultimately cost 3 million jobs and suck $400 billion out of the economy over three years. That's because hundreds of companies that supply parts to the Big Three, not to mention dealerships, would also be hurt. In fact, the Center for Automotive Research in Ann Arbor, Mich., which is heavily funded by the auto industry, contends that just 239,000 lost jobs would come from the automakers themselves. The industry contends that if just one of the Big Three failed, 1.5 million jobs would disappear in a year.

Ilhan Geckil, senior economist for the Anderson Economic Group, which also studied the impact of losing an automaker, says Michigan's unemployment rate would probably rise from the current 11.6% to as high as 14%. The good news: The job pain would be eased somewhat because both the surviving Detroit automakers and foreign automakers who have plants in the U.S. would start to pick up the slack. And some doubt the job losses would be so dire to begin with. Susan Helper, an economics professor at Case Western Reserve University in Cleveland who has studied the auto industry, says the chain reaction would be smaller—although suppliers of parts for certain car models might be out of luck. "I think the auto supply base is fairly intertwined," she said in an e-mail. "I think it's unlikely that every single supplier would be forced to stop production."

US Existing-Home Sales Rebound, but Prices Plunge
Existing-home sales rebounded in February, climbing above expectations, but prices plunged again. Home resales climbed to a 4.72 million annual rate, a 5.1% increase from January's unrevised 4.49 million annual pace, the National Association of Realtors said Monday. Foreclosures and short sales reflect about 45% of total existing-home sales. Distressed properties are discounted, so the abundance of these sales prices new homes out of the market, discouraging construction and weakening the overall housing sector further. With so many distressed sales, the median price for an existing home fell last month. At $165,400 in February, the median price was down 15.5% from $195,800 in February 2008. The median price in January this year was $164,800. The 15.5% plunge is the second biggest ever, behind January's 17.5% drop.

The sharp tumble in prices, falling because of bloated inventory, is restraining demand. Monday's data showed inventories of previously owned homes rose 5.2% at the end of February to 3.8 million available for sale, which represented a 9.7-month supply at the current sales pace. There was a 9.7-month supply at the end of January. The February resales level of 4.72 million reported Monday by NAR was above Wall Street expectations of a 4.48 million sales rate for previously owned homes. The 5.1% increase was the largest since 5.6% in July 2003. "This is a rebound from January," said NAR economist Lawrence Yun. "Home sales are still very soft." Mr. Yun added that realtors hope the Obama administration's economic stimulus helps the market in the next few months.

The average 30-year mortgage rate was 5.13% in February, up from a record low 5.05% in January, according to Freddie Mac. The rate was 5.92% in February 2008. But lower lending rates don't change the facts: Credit is tight and layoffs have been rising. Since the recession began in December 2007, the economy has shed 4.4 million jobs, including 651,000 jobs last month. Previously owned home sales, year over year, were down 4.6% from the pace in February 2008, Monday's report said. Regionally, sales rose 15.6% in the Northeast, 1% in the Midwest, 6.1% in the South and 2.6% in the West.

China to Keep Buying Treasuries, Top Official Says
China’s top foreign-exchange official said the nation will keep buying Treasuries and endorsed the dollar’s global role, supporting the U.S. as the Obama administration increases spending to revive growth. Treasuries form "an important element of China’s investment strategy for its foreign-currency reserves," Hu Xiaolian, director of the State Administration of Foreign Exchange, said at a briefing in Beijing today. "We will continue this practice." Hu’s remarks came as Treasuries extended the worst start to a year since 1996 and less than two weeks after Premier Wen Jiabao said he was "worried" about the safety of the securities. U.S. President Barack Obama is relying on China to keep buying Treasuries as his administration sells record amounts of debt to fund a $787 billion stimulus package.

"China’s so heavily invested in U.S. Treasuries that to stop buying now would have a negative impact that would see China’s investments fall in value," said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. "It’s pretty important for the U.S. that the main buyers keep making purchases." The yield on the 10-year note rose two basis points to 2.66 percent as of 9:25 a.m. in London, according to BGCantor Market Data. The 2.75 percent security due in February 2019 fell 6/32, or $1.88 per $1,000 face amount, to 100 25/32. The Obama administration will announce details of a plan today to expand the $700 billion rescue of the financial system that will rely on enticing private investors to buy the troubled assets clogging banks’ balance sheets. China, the biggest foreign holder of U.S. debt, increased its Treasury holdings by 46 percent in 2008 and holds about $740 billion of the securities, according to Treasury Department data.

Wen called March 13 for the U.S. "to honor its promises and to guarantee the safety of China’s assets." China was "worried" about its holdings of Treasuries, he said at a press conference after the annual meeting of the legislature, the National People’s Congress. Yu Yongding, a former adviser to the central bank, said Feb. 10 that the nation should seek guarantees that its Treasury holdings won’t be eroded by "reckless policies." Today’s briefing in Beijing was ahead of the Group of 20 nations summit due to start April 2. Chinese officials emphasized the importance of combating protectionism and reforming international financial institutions. Vice Foreign Minister He Yafei called for a "clear timetable and road map" for changes to global bodies, including giving developing nations a larger voice.

The international community should focus on the supervision of the global monetary system rather than debating a replacement for the dollar as the reserve currency, regulator Hu said. That comment came as a Reuters report said a United Nations panel will next week recommend replacing the dollar and Chinese central bank Governor Zhou Xiaochuan said that the International Monetary Fund should aim in the long term to create a non- sovereign reserve currency. Reuters cited Avinash Persaud, a member of the U.N. panel. Zhou’s comments were in a speech posted on the central bank’s Web site. Treasuries declined for a third day before a record sale of $98 billion of notes this week and as gains in stocks damped demand for government securities. The 10-year note gained earlier after Hu’s comments.

China calls for new reserve currency to replace dollar
China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund. The goal would be to create a reserve currency "that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies," Zhou Xiaochuan, governor of the People’s Bank of China, said in an essay posted in Chinese and English on the central bank’s website. Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system. "The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," Mr Zhou wrote. Analysts said the proposal was a clear indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China. "This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money," said Qu Hongbin, chief China economist for HSBC.

For now, China has little choice but to hold the bulk of its $2,000bn of foreign exchange reserves in US dollars and this is unlikely to change in the near future. To replace the current system, Mr Zhou suggested expanding the role of Special Drawing Rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that system collapsed in the 1970s. Today, the value of SDRs is based on a basket of four currencies – US$, Yen, Euro and Pound Sterling – and they are used largely as a unit of account by the IMF and some other international organizations. "The US dollar is still the most important currency for settling international trade, pricing and payment in the current international monetary system," Hu Xiaolian, director of the State Administration of Foreign Exchange, which manages the country’s foreign exchange reserves, said at a press conference earlier in the day. "Investing in US Treasury bonds is an important element in China's forex reserve investment and we will continue this practice."

China’s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be widely used in international trade and financial transactions. Countries would entrust a portion of their SDR reserves to the IMF to manage collectively on their behalf and SDRs would gradually replace existing reserve currencies. Mr Zhou said the proposal would require "extraordinary political vision and courage" and explicitly acknowledged a debt to the theories of John Maynard Keynes, who made a similar suggestion in the 1940s. More recently, US economist and Nobel prize winner Joseph Stiglitz, who is visiting China this week, has suggested expanding the role of SDRs to lay the foundation for the creation of a world currency. In the short term, China expects the IMF to "at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings," Mr Zhou’s essay said.

Falling greenback fuels BRIC dollar reserve rethink
A push by the world's leading emerging economies to dislodge the dollar as the dominant global reserve currency appears to be gaining momentum even as a weakening greenback adds further urgency to the discussion. China on Monday added its voice to a growing international chorus seeking the replacement of the dollar as the main reserve currency, urging for an overhaul of the global monetary system to allow for wider use of Special Drawing Rights (SDRs) allocated by the International Monetary Fund (IMF). Chinese central bank chief Zhou Xiaochuan said the SDRs, created by the IMF as international reserve assets in 1965, could be used as a super-sovereign reserve currency, eventually displacing the dollar.

His comments come a week after Russia said it would put forward a proposal for the creation of a new reserve currency issued by international financial institutions at the G20 meeting in April. Russia said it had the broad support of its fellow BRIC countries -- Brazil, India and China -- as well as South Korea and South Africa for its proposal. The push underscores growing concerns among emerging-market leaders about the long-term value of the dollar. The dollar saw its biggest weekly slide since 1985 .DXY last week after the Federal Reserve's decision to buy long-term government debt raised the specter of oversupply in dollars.

That emerging economies -- among the largest dollar holders in the world thanks to strong export revenues -- want to diversify reserves away from the dollar is not only sensible but inevitable, argues Jerome Booth, Ashmore Investment Management research head. "The unknowns are how fast and the disruption this may cause," Booth said. China, which has the world's largest foreign-currency reserves at close to $2 trillion, would be especially keen to avoid a widespread dollar sell-off. Chinese Premier Wen Jiabao said earlier this month that he was worried about China's heavy exposure to the United States -- which, taking into account its US Treasuries and other bond holdings, is estimated to represent about a two-thirds of its reserves.

Any Chinese move to reweight its reserves portfolio could be destabilizing to the value of the greenback because of the level of market scrutiny. "As soon as you sell-off a part of your reserves, people will expect you to sell the rest so the value of everything you have would plummet," said Jon Harrison, emerging foreign exchange strategist at Dresdner Kleinwort. SDRs, which have a value based on a basket of key international currencies, also serve as the unit of account of the IMF and some other international organizations. "If you really believed that (the SDR adoption) was going to happen, you'd want to sell the dollar and buy other currencies that would be part of the SDR basket -- euros, yen and perhaps the pound," said Dresdner's Harrison.

China's Zhou has said global acceptance of a new reserve currency would take a long time, and would be "a bold initiative that requires extraordinary political vision and courage." Russia, which has significantly reduced the dollar's share of its own reserves in recent years in tandem with the 2005 introduction of a euro/dollar basket for tracking the rouble, has signaled it does not expect to see any reforms rising from the Group of 20 nations meeting in London on April 2. Still, Russia and China's push for a global super-sovereign reserve currency could have resonance beyond the corridors of power in the developing world -- possibly even in Washington.

Adopting a super-sovereign reserve currency such as SDRs could do away with the global imbalances of recent years that allowed the United States to run up large twin budget and external deficits while export-oriented emerging economies accumulated dollar-denominated reserves. This global imbalance has been blamed for the cheap borrowing costs in the U.S. that contributed to subprime mortgage bust that triggered the global credit crunch. A United Nations panel of experts this week is set to recommend the world ditch the dollar as its reserve currency in favor of a shared basket.

Avinash Persaud, a member of the UN Commission of Experts on International Financial Reform, said the creation of something like the old Ecu -- or European currency unit -- as a hard-traded weighted basket was one of the recommendations that would be delivered to the U.N. on Wednesday. Politics will determine the timing of any diversification moves, Ashmore's Booth said. "Central banks are watching each other...Many countries may want to start a senior dialogue with the new US administration before selling their Treasuries," he said.

Economic crisis in European Union
How is the economic crisis affecting the European Union? This interactive map shows the figures for all the member states by year and quarter and let's you compare budget deficit, unemployment rate, national debt and economic contraction.

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ECB Chief Says Boost In Stimulus Not Needed
The president of the European Central Bank said Europe doesn't need to boost spending more to combat the global financial crisis, throwing the bank's weight behind Europe's governments in their battle with the U.S. over how to overcome the worst recession in a generation. In an interview with The Wall Street Journal, Jean-Claude Trichet said that instead of pushing new measures, governments around the world should move faster on what they've already announced -- referring in part to delays and difficulties in the U.S. government's rescue of its troubled banks.

Europe and the U.S. should "now, as efficiently and rapidly as possible, do what has been decided," said Mr. Trichet, chief of monetary policy for an economy second in size only to the U.S. "Nothing will really work until the financial sector is back on track and ready to lend on a sustainable basis. I would say exactly the same with the budget. Decisions have been taken; they are very important. Let's do it! Quick implementation, quick disbursement is what is needed." The U.S. has hoped to press global governments to pass stimulus packages similar in scale to its $787 billion plan at a meeting of the Group of 20 leading economies in London on April 2. European leaders, who have pledged less than half the U.S. amount, have rebuffed that notion, most recently and directly 10 days ago as finance ministers including U.S. Treasury Secretary Timothy Geithner met to prepare for the summit.

Mr. Trichet's comments siding with European governments are particularly significant because he has, at times, been a stern critic of their fiscal and other policies. He also is a fierce guardian of the bank's political independence, and has periodically rebuffed governments' calls for the bank to do more itself to spur growth. With forecasts saying the global economy will contract this year for the first time in six decades, governments from China to Britain have unveiled huge spending plans. But the Obama administration's financial-sector rescue plan has moved in fits and starts since last fall, hampered in part by political opposition to ballooning bailout costs and, now, by bonuses paid to financial executives. Fiscal-stimulus packages in other countries have been announced but not yet implemented. Germany's most recent €50 billion ($68 billion) plan includes income- and payroll-tax cuts that don't take effect until July 1.

The U.S. and many private-sector economists have urged European authorities to be more assertive in combating a Continental recession likely to be steeper than in the U.S. "When you take the actions of the government and the Fed together, the U.S. has been demonstrably more stimulative in getting its economy moving again," says James Nixon, an economist with Société Générale in London. "Europe's efforts have been, shall we say, modest in comparison." He is calling for Germany, Europe's biggest economy, to spend more and run a bigger deficit to help bolster demand for its neighbors' exports, and for the ECB to contemplate buying government debt as the U.S. Federal Reserve is doing.

Mr. Trichet suggested the bank won't make that move, though it is the only major central bank without such a program. He mounted an unapologetic defense of European capitals' response to the U.S. "On both sides of the Atlantic, what has been done on the fiscal side corresponds to the gravity of the situation," he said in a conversation on Friday in his office near the top of the ECB's steel and glass tower. He said "useless and counterproductive quarrels" over the different stances had been resolved. The U.S. Treasury Department declined to comment. European leaders contend their more-generous social-welfare states provide a buffer that offsets the need for bigger fiscal boosts. Mr. Trichet also warned that if governments went too deeply into the red, the move could backfire by pushing up long-term interest rates and puncturing public and business confidence.

"To be efficient in rebuilding confidence, you have to demonstrate that you are doing, immediately and audaciously, what is necessary," said Mr. Trichet. "But at the same time, you have also to reassure your own people that you have an exit strategy." The economic downturn in the 16 nations that now share the euro currency is deepening. Output contracted by 5.8% on an annualized basis in the fourth quarter of 2008, the worst showing for countries sharing the euro since World War II. The International Monetary Fund forecast last week that the euro zone's economy will shrink by 3.2% this year, compared with a 2.6% contraction in the U.S. Mr. Trichet, whose eight-year term as head of the ECB runs to 2011, predicted effective government action could help the global economy enjoy a moderate recovery in 2010. But he said 2009 will be "very, very difficult."

The downturn could be particularly fierce in Ireland and Spain, where housing booms are bursting, as well as heavily indebted countries including Italy and Greece. Before they adopted the euro, cash-strapped countries could boost competitiveness by devaluing their currencies. With that option gone, they will need to slash wages and other costs even as their economies slide. Ireland's government expects output to shrink 6.5% this year after strong expansion for much of the past decade. But its budget deficit is projected at near 10% of gross domestic product this year, and the government plans to raise income and other taxes in April. In Greece, facing a budget gap of 3.7% of GDP, the government last week announced wage freezes for almost a half-million civil servants and tax increases for workers earning more than €60,000, or about $82,000.

Mr. Trichet said that in countries where high costs have long made it unattractive to produce goods, cost-cutting would have been called for even without the crisis because they are losing their competitiveness. Mr. Trichet strongly suggested the ECB won't follow the U.S. Federal Reserve and Bank of England in buying government bonds to free up credit. The Fed said last week that it will buy as much as $300 billion of long-term Treasury securities. The ECB has taken unconventional steps to keep euro-zone banks flush with funds. Last October, it began offering them unlimited loans at fixed interest rates for up to six months. Mr. Trichet said most euro-zone private-sector funding comes from banks -- not from securities markets as in the U.S. -- and hinted that the ECB is preparing new programs to help banks further. But he suggested purchasing government assets wouldn't fit the euro-zone financial system.

The ECB also is wary of a "blending of responsibilities" between the central bank and the euro zone's 16 different national finance ministries that would result from buying government debt, he suggested. Mr. Trichet reaffirmed that the ECB could lower its key rate further. The ECB has cut its policy rate to 1.5%, the lowest in the central bank's 10-year history, from 4.25% in October. But it remains well above official rates near zero in the U.S. and U.K. Markets expect at least a quarter-percentage-point cut at the ECB's next meeting April 2. Mr. Trichet suggested that comparing policy rates is misguided. "It is not a race," he said. He noted that the ECB's moves to date have brought some euro-zone market interest rates below the equivalent rates in the U.S.

Euro Currency of Choice as Fed Easing Devalues Dollar
Less than a month after lambasting European Central Bank President Jean-Claude Trichet for failing to keep up with Ben S. Bernanke’s efforts to stem the recession, foreign-exchange traders are glad he’s behind the curve. The 16-nation currency strengthened 7.7 percent versus the dollar since February, after tumbling 9.3 percent in the first two months of the year. JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc. are advising investors to buy euros. Traders are looking past forecasts from Germany’s Kiel- based IfW institute for the European Union economy to shrink 3.3 percent this year, and snapping up currencies where central bankers are resisting calls to purchase debt securities as a way of lowering interest rates and pump cash into their financial systems. Those options are becoming scarce after Federal Reserve Chairman Bernanke joined the Bank of England, Bank of Japan and Swiss National Bank in so-called quantitative easing.

"The dollar is a sell near term versus those currencies where quantitative easing is off the table," said John Normand, head of currency strategy at JPMorgan in London. "The top on euro-dollar will come when the ECB looks likely to join the quantitative easing crowd. For now, it’s content to stay on the sidelines." The euro will probably rise 2.8 percent to $1.40 in a month after soaring 5.1 percent last week as long as the ECB refrains from purchasing assets, Normand predicted. The dollar will rebound to $1.30 by June, he said. The Euro Index, which tracks the currency against the dollar, pound, yen, Swiss franc and Swedish krona, climbed 2.7 percent to 118.53 since March 16. The euro gained 0.5 percent today to $1.3652 as of 11:17 a.m. in London.

The Fed said March 18 that it plans to expand its balance sheet by as much as $1.15 trillion as it buys up to $300 billion of U.S. government bonds and steps up purchases of mortgage securities. Bernanke’s goal is to reduce consumer borrowing rates such as those for mortgages and encourage banks to lend in an effort to boost the economy. The trade-weighted Dollar Index, measured against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, posted its biggest one-day drop since 1971, tumbling 2.69 percent, and fell 4.1 percent last week to 83.841. It was down 0.6 percent at 83.35 today. "This is a historic moment -- the start of debasement of the world’s reserve currency," wrote Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. "It feels to many participants that in the grand sweep of history we are witnessing the end of ‘Rome’ on the Potomac."

U.S. gross domestic product shrank 6.2 percent last quarter, the most since 1982. The Congressional Budget Office said March 20 that President Barack Obama’s administration will generate a budget deficit of $1.85 trillion this year, and expenses will exceed revenue by a total $9.27 trillion between 2010 and 2019. That’s about $2.3 trillion more than the administration forecast. At 8.1 percent, the unemployment rate is the highest in more than a quarter century. The flood of dollars also increases the chances for quicker inflation in the global economy, spurring demand for commodities and currencies of raw materials producers. The Standard & Poor’s GSCI Index of commodities is up 22.4 percent since Feb. 18 to 375.5260, and last week posted its biggest gain in two months, rising 8.6 percent.

"Quantitative easing across the board will diminish the fiat currencies as a store of value," said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. "Investors may then seek refuge in harder currencies such as commodities." Hardman recommends Norway’s krone, the Australian dollar and New Zealand dollar. Demand for Australian coal, iron ore and wool drove 17 consecutive years of economic expansion. Norway is the world’s fifth-largest oil producer and New Zealand relies on sales of milk powder, butter, cheese and aluminum. Australia’s dollar climbed 4.4 percent last week to 68.69 U.S. cents, while the krone rallied 6.5 percent to 6.3773, the biggest gain since 1973 and the most among the 16 most-traded currencies. New Zealand’s dollar appreciated 6.4 percent to 55.87 U.S. cents. Melbourne-based BHP Billiton Ltd., the world’s largest mining company, climbed 1.6 percent to A$32.18 on the Australian stock exchange. Trichet, 66, took over the ECB from the Netherlands’ Wim Duisenberg in November 2003. Under his watch, the euro appreciated to a peak of $1.6038 in July 2008 from about $1.15.

The currency began to slide as the ECB waited until October 2008 to cut interest rates as the global economy slowed, more than a year after Bernanke began slashing borrowing costs. The ECB’s main rate is 1.5 percent, compared with a target range of zero to 0.25 percent for the Fed. A drop in two-year German bund yields in February to the lowest relative to longer-maturity debt since 1997 was a sign that the ECB needs "to wake up to reality," Komal Sri-Kumar, chief global strategist at Los Angeles-based TCW Asset Management, which oversees about $118 billion, said last month. "European policy makers are behind the curve," said Neil Mackinnon, chief economist and partner at ECU Group, a London- based hedge fund with about $1 billion in assets. "The European economy will sink deeper into depression." While the ECB has refrained from quantitative easing, the European Union has taken other steps to bolster the economy. EU leaders said March 20 that they will double to 50 billion euros ($68 billion) a credit line for countries in financial distress.

Even Mackinnon says the euro rally may be short-lived as the ECB cuts its main refinancing rate close to zero. He expects the currency to depreciate to $1.245. None of the 53 analysts surveyed by Bloomberg forecast the currency will return to its previous high of $1.6038. "All major central banks will have to follow the Fed and adopt quantitative easing," said Mackinnon, a former economist for the U.K. Treasury. "If the European policy makers are hoping they will get a free ride on the U.S. stimulus, hoping they will look more prudent, they are deluding themselves." Trichet said March 17 in a speech to business leaders in Paris that his policy of loaning banks unlimited funds is sufficient for now. "In the context of the euro area, guaranteeing firms and households a steady access to credit largely means ensuring the banking system has appropriate liquidity," Trichet said. "In the euro area, it is natural for ‘credit easing’ to be implemented primarily through the participation of banks."

In a March 19 report titled ‘Sprint to Print,’ Morgan Stanley recommended selling the dollar against the euro, forecasting it will depreciate to $1.45 in a year.
"This move may mark the turning point for the dollar," wrote Morgan Stanley currency analysts led by Sophia Drossos and Ron Leven in New York. "The Fed’s action exposes the dollar to its vulnerabilities, but this leaves the euro and the yen facing appreciation." Citigroup’s London-based global head of currencies, Jim McCormick, said in a research report to clients last week that the euro may rise to $1.40. "We’ve been selling dollars and we’re now adding to that short," he wrote in the report. Samarjit Shankar, a director of strategy for the global markets group in Boston at Bank of New York Mellon, which administers more than $23 trillion, also predicts $1.40. "You have Bernanke taking a page from Greenspan’s book and reflating assets," said Shankar. Former Fed Chairman Alan Greenspan cut interest rates to 1 percent in 2003, the lowest level since World War II, to boost growth after the 2001 recession. The ECB takes "a very orthodox, almost straitjacketed approach," he said.

Werner Eppacher, head of foreign exchange at Deutsche Bank AG´s DWS Investment unit in Frankfurt, said he bought call options on the euro versus the dollar and used forwards to bet on the common currency gaining versus the greenback. Calls give the buyer the right to purchase an asset at a predetermined price, and forwards are agreements to trade a currency pair in the future. "The U.S. is facing more structural problems than other regions," Eppacher said. "As soon as we have some moderation in financial markets, the conversation will go back to U.S. households deleveraging and external deficits, fiscal deficits, money printing." He predicts the euro will rise to $1.40 in six months, and the Australian dollar will appreciate to 75 U.S. cents. "The euro is not rising on its own merits," said Hans- Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France’s biggest bank. "The U.S. is exporting its expansionary monetary conditions abroad, which ultimately is very positive for equity markers and is going to be very positive for risk takers."

ECB to cut rates to buoy ailing German economy
The European Central Bank (ECB) is certain to cut interest rates to a record low of 1% early next month after fresh forecasts suggested the German economy could shrink by as much as 7% this year. The ECB, which has cut borrowing costs by 275 basis points to 1.5% since October, is also likely to move closer to adopting quantitative easing or further non-conventional measures to help kick-start lending in the depressed euroland economy. The bank's meeting, which coincides with the opening day of the G20 summit in London next Thursday, takes place against a background of dire forecasts for the 16-strong eurozone's biggest economy, which saw orders and output collapse by 8% in January alone.

To the dismay of senior politicians, Jörg Kramer, chief economist at Commerzbank, today forecast that the German economy would contract by 6% to 7% this year as world trade freezes and exports slump. Kramer, who had been predicting a 3% to 4% shrinkage, said the dramatic collapse in output and exports meant that unemployment would soar to just over 4 million by the end of this year and 4.75 million in 2010. He said he did not expect any recovery next year. Last week, the Munich-based Ifo Institute forecast a 4% contraction after Norbert Walter, veteran chief economist at Deutsche Bank, predicted a 5% decline. Today, the Essen-based RWE Institute added its gloomy voice, suggesting a 4.3% decline. The ECB said the eurozone could contract by 2.7% in 2009, with virtually zero growth in 2010.

Axel Weber, Bundesbank president and ECB 'hawk', reiterated his view that the eurozone central bank had "room to cut rates further". But he opposed a zero-rate policy – as does ECB president Jean-Claude Trichet, who repeated today that rates could decrease. Trichet told the Wall Street Journal there could be a "progressive, gradual recovery" in 2010, spurred by government and central bank measures. But he insisted the principal task was to turn around "a very sharp and abrupt disappearance of confidence". The ECB chief, criticised for reacting too late, said the extraordinary measures to recapitalise European banks and offer them loan guarantees amounted to a boost worth 23% of GDP.

He said this, alongside falls in commodity prices, fiscal expansion and central bank injections of liquidity – €600bn (£561bn) in euroland or a further 6% of GDP – could reactivate the economy. "So it depends very much on us that 2010 could be, or not, a year of progressive, gradual recovery. It depends on the capacity of authorities and private sector together to re-inject into the economy of the world these elements of confidence that have disappeared since mid-September 2008," he said in an interview. He added, in reference to reported transatlantic rifts: "Let's do it. Quick implementation, quick disbursement is what is needed. Not embarking upon useless and counterproductive quarrels which fortunately are over now." Trichet said quantative easing in the form of purchases of government debt was harder in the eurozone, where commercial banks account for 70%, than in the US and UK.

Europe needs a better plan for its banks
by Wolfgang Münchau

This is not a crisis that will be solved by central bankers. Its length and depth, and the shape of the recovery, will depend almost entirely on how fast we can sort out the banking sector. On that front, the news is not good on either side of the Atlantic. Maybe that will improve when Tim Geithner, US Treasury secretary, announces the details of his bank rescue plan this week. Judging by his statements so far, I am not hopeful. Last week’s irrational outbreak of optimism in the financial markets appears premature. The Federal Reserve decided to buy long-term bonds, mortgage-backed securities, and other assets with the goal of lowering effective long-term interest rates for households. But I doubt some of the optimistic projections of how much these purchases will affect real-world mortgage rates. There are counteracting forces at work that may keep long-term rates high. Those include an evaporation of foreign demand for several classes of US securities and an increasing number of investors who react allergically to the word "trillion" when it is applied to rising federal deficits – rightly or wrongly, they fear inflation will result from current economic policies.

One of the most frequently asked questions is whether the European Central Bank should follow the Fed into quantitative easing. The good news is that the ECB has already adopted a zero interest rate policy. It has done so after some delay and not in a particularly transparent way. The official interest rate is still 1.5 per cent – but this so-called benchmark rate does not tell us what is happening on the ground. Overnight interest rates in the eurozone are now not much higher than in the US. The ECB has achieved this trick through a clever shift in its liquidity policies. I also suspect that the ECB will follow the Fed and expand its balance sheet further. Two years ago, the ECB’s balance sheet totalled €1,120bn. Now it is €1,830bn ($2,485bn, £1,715bn). This is unlikely to be the end of the process. The structure of the eurozone’s financial system is a little different, however, and the response will vary accordingly. The Fed has been pursuing a policy that works through the asset side of its balance sheet. By buying mortgage-backed securities, for example, it hopes to improve the availability of mortgages and to reduce mortgage rates. In the eurozone, long-term mortgage rates are not the big issue they are in the US. But the ECB could, for example, buy up the underpriced bonds of various eurozone governments that have recently been subject to speculative attacks.

Snapping up some of this paper would boost its balance sheet while helping to stabilise European bond markets. I would not be surprised if the central bank even made a profit from such an operation. The euro’s exchange rate is meanwhile shooting through the roof. If this persists, it will almost certainly delay the economic recovery. I am loath to forecast exchange rates but an extended period of dollar weakness may be both necessary and desirable. But the prospect of an overshooting exchange rate in conjunction with a slowdown in global demand requires a much more assertive policy response than the complacent display put on by leaders during last week’s European Union summit would suggest. The ECB will clearly come under pressure to do more, as monetary conditions in the eurozone are growing tighter. As European leaders focus on tax havens and hedge funds, it is hard to detect a sense of urgency in dealing with the wider crisis. They seem to think that they did enough last October, when they issued blanket guarantees on bank debt and offered voluntary recapitalisation schemes.

Against this backdrop, the effectiveness of central bank policy, however well executed, is limited. What has to happen is for governments to rethink, relaunch and co-ordinate their bank rescue strategies. It is important that these strategies are not only transparent but comprehensive. Participation should not be voluntary. In Germany, for example, the cap on salaries for bankers whose banks receive financial aid has provided a powerful incentive not to take up government funds. The US Congress should study this example carefully. It is not necessary that all governments pursue the same strategy. A state-owned "bad bank" that takes on toxic assets in exchange for injecting equity is a frequently mentioned possibility. My preference would be for a state-owned "good bank", similar to the plan proposed by Willem Buiter from the London School of Economics, which is more likely to lead to a fundamental clean-up of the banking sector. But we should not get bogged down in technical minutiae. The important thing is that countries choose one of the plausible alternatives and implement it soon. Partial nationalisation of the banking system may be part of that process but any nationalisation should be regarded as a means to an end. What matters is new capital and restructuring. Quantitative easing may be cool. But it should not be the main priority right now.

Peripheral care should be the central concern
by George Soros

The forthcoming Group of 20 meeting is a make-or-break event. Unless it comes up with practical measures to support the less developed countries, which are even more vulnerable than the developed ones, markets are going to suffer another sinking spell just as they did last month when Tim Geithner, Treasury secretary, failed to produce practical measures to recapitalise the US banking system. This crisis is different from all the others since the end of the second world war. Previously, the authorities got their act together and prevented the financial system from collapsing. This time, after the failure of Lehman Brothers last September, the system broke down and was put on artificial life support. Among other measures, both Europe and the US in effect guaranteed that no other important financial institution would be allowed to fail.

This necessary step had unintended adverse consequences: many other countries, from eastern Europe to Latin America, Africa and south-east Asia, could not offer similar guarantees. As a result, capital fled from the periphery to the centre. The flight was abetted by national financial authorities at the centre who encouraged banks to repatriate their capital. In the periphery countries, currencies fell, interest rates rose and credit default swap rates soared. When history is written, it will be recorded that – in contrast to the Great Depression – protectionism first prevailed in finance rather than trade. Institutions such as the International Monetary Fund face a novel task: to protect the periphery countries from a storm created in the developed world. Global institutions are used to dealing with governments; now they must deal with the collapse of the private sector. If they fail to do so, the periphery economies will suffer even more than those at the centre, because they are poorer and more dependent on commodities than the developed world. They also face $1,440bn (€1,060bn, £994bn) of bank loans coming due in 2009.

These loans cannot be rolled over without international aid. Gordon Brown, the UK prime minister, recognised the problem and designated the G20 meeting to address it. Yet profound attitudinal differences have surfaced, particularly between the US and Germany. The US has recognised that the collapse of credit in the private sector can be reversed only by using the credit of the state to the full. Germany, traumatised by the memory of hyperinflation in the 1920s, is reluctant to sow the seeds of future inflation by incurring too much debt. Both positions are firmly held. The controversy threatens to disrupt the meeting. Yet it should be possible to find common ground. Instead of setting a universal target of 2 per cent of gross domestic product for stimulus packages, it is enough to agree that the periphery countries need aid to protect their financial systems. This is in the common interest. If the periphery economies are allowed to collapse, the developed countries will also be hurt.

As things stand, the G20 meeting will produce some concrete results: the resources of the IMF are likely to be doubled, mainly by using the mechanism of the "new arrangements to borrow", which can be activated without resolving the vexed question of reapportioning voting rights. This will be sufficient to enable the IMF to help specific countries at risk but it will not provide a systemic solution for the less developed countries. Such a solution is readily available in the form of special drawing rights. SDRs are complex but they boil down to the international creation of money. Countries that can create their own money do not need them but periphery countries do. The rich countries should therefore lend their allocations to the nations in need.

Recipient countries would pay the IMF interest at a very low rate, equivalent to the composite average treasury bill rate of all convertible currencies. They would have free use of their own allocations but would be supervised in how the borrowed allocations were used to ensure they were well spent. In addition to the one-time increase in the IMF’s resources, there ought to be a big annual issue of SDRs, of say $250bn, as long as the recession lasts. It is too late to use the April 2 G20 meeting to agree this, but if it were raised by President Barack Obama and endorsed by others, this would be sufficient to give heart to the markets and turn the meeting into a resounding success.

Suncor to Buy Petro-Canada in C$19.3 Billion Takeover
Suncor Energy Inc., the world’s second-largest oil-sands producer, agreed to buy Petro-Canada for C$19.3 billion ($15.6 billion) in a record takeover that will create the biggest Canadian energy company. Owners of Petro-Canada will get 1.28 shares of the combined company for each of their shares, the Calgary-based oil producers said today in a statement. The transaction values Petro-Canada at C$39.55 a share, 33 percent higher than its March 20 closing price. The deal is the biggest in history for a Canadian oil company and is the industry’s largest worldwide since January 2007, according to Bloomberg data. It will yield expense savings and help Suncor shoulder high-cost oil-sands projects in northern Alberta after crude prices tumbled more than $100 a barrel from last year’s all-time high.

“It’s a good opportunity for Suncor to snap up some good assets at fairly depressed prices,” said Greg Smith, managing director at investment adviser Fat Prophets U.K. Ltd. in London. “Oil sands are the legitimate solution to the long-term energy problem, but it’s a lot more costly to get the oil out of the ground.”
Petro-Canada, the nation’s second-largest refiner, jumped 27 percent to C$37.60 at 11:11 a.m. in Toronto Stock Exchange trading. Suncor rose 2.1 percent to C$31.55. Credit-default swaps, contracts that essentially ensure payment of the corporate bonds to which they’re tied, fell 183 basis points to 343.3 basis points for Petro-Canada, the lowest price since November, according to CMA Datavision. A lower price indicates investors see less risk in owning the debt. Contracts on Suncor debt dropped 112 basis points to 413 basis points.

The combined company can trim C$1 billion of capital spending annually by consolidating work and choosing the most lucrative projects, Suncor and Petro-Canada said. Consolidating operations will cut costs by another C$300 million a year. Suncor can funnel cash from Petro-Canada’s producing wells in eastern Canada and in the North Sea into planned oil-sands expansions, Andrew Potter, a Calgary-based analyst for UBS AG, wrote today in a note to clients. Suncor reported the first quarterly loss in its history in January and slashed its capital budget after prices plunged and costs jumped. Petro-Canada also posted a fourth-quarter loss amid falling prices, unfavorable currency fluctuations and project delays.

Petro-Canada produced about 409,000 barrels of oil equivalent a day in the fourth quarter, 46 percent more than Suncor’s total, from its operations in Canada, the U.S., the North Sea and Africa. The Ontario Teachers’ Pension Plan increased its stake in Petro-Canada to 3.3 percent in the fourth quarter and said it would push for ways to boost the share price after the stock lost half its value last year. The stock underperformed the Standard & Poor’s/Toronto Stock Exchange Composite Index five years in a row, a period when oil prices almost tripled. “If you look at how badly Petro-Canada has underperformed over the last five years, you’d say it’s a fair deal,” said Gavin Graham, director of investments at Bank of Montreal Asset Management in Toronto. “Suncor has to demonstrate that it can actually run those assets better. Given their track record, they are very likely to do so.”

Suncor, which lost 56 percent of its market value last year, had jumped 30 percent this year before today, the most among Canadian oil companies valued at more than C$1 billion. As recently as Jan. 20, Suncor Chief Executive Officer Rick George said he wasn’t considering any major acquisitions because asset prices remained inflated. “I think there’re some people hanging on to the history of it rather than the go-forward basis,” George, who will run the combined company, told investors and analysts on an earnings conference call.

Suncor is Canada’s third-biggest oil and gas producer by market value, while Petro-Canada ranks sixth. Buying Petro- Canada will give Suncor the greater size it needs to make the “sizable” investments required in Alberta’s oil sands, George said today on a conference call with analysts. Canada needs a larger energy champion to compete for oil- sands production with the likes of Royal Dutch Shell Plc and Exxon Mobil Corp., George said. CIBC World Markets and Morgan Stanley are advising Suncor, and Petro-Canada is being advised by RBC Capital Markets and Deutsche Bank AG. The breakup fee if either party walks away is C$300 million, the companies said. The combined company will have about proved and probable reserves equivalent to 7.5 billion barrels of oil. Suncor’s oil- sands operations are based near Fort McMurray in northern Alberta, where it recovers bitumen and upgrades it to refinery- ready feedstock and diesel fuel.

Suncor explores for natural gas in western Alberta and northeastern British Columbia. It also operates two refineries, in Sarnia, Ontario, and Commerce City, Colorado. The deal is expected to close in this year’s third quarter, according to the statement. The merged company’s board will include eight directors from Suncor and four from Petro-Canada. Suncor Energy Chairman John Ferguson will serve as chairman. Suncor’s existing shareholders will own about 60 percent of the combined company. Formerly owned by the government, Petro-Canada has investments in offshore fields near Newfoundland, including Hibernia and Terra Nova. It went public in 1991, and the government sold its remaining 19 percent stake in 2004.

The combined company will be governed by the Petro-Canada Public Participation Act, a Canadian law that bars anyone from owning more than 20 percent of Petro-Canada’s stock, the companies said. The law is a legacy of the company’s former status as a Crown, or government-owned, corporation. The acquisition is subject to regulatory approval. Syncrude Canada Ltd., a joint venture led by Canadian Oil Sands Trust of Calgary, is the biggest oil-sands producer. Imperial Oil Ltd., which is owned mostly by Exxon Mobil Corp., is Canada’s biggest refiner.

Ontario Teachers’ Gains C$286 Million on Petro-Canada Takeover
Ontario Teachers’ Pension Plan, the money manager that’s pushed to revive Petro-Canada’s stock, stands to gain about C$286 million ($231 million) from Suncor Energy Inc.’s proposed takeover of the Canadian oil company. Ontario Teachers’ 3.3 percent stake in Petro-Canada is worth about C$632.8 million under the terms of the takeover offer, based on March 20 closing prices. That’s 82 percent more than the stake was worth three months ago, according to regulatory filings.

Suncor, the world’s second-largest oil-sands producer, agreed today to buy Petro-Canada for C$19.3 billion in stock to create Canada’s biggest energy company by revenue. Ontario Teachers’ said last month it nearly quadrupled its Petro-Canada stake in the fourth quarter to 16 million shares, and was talking with the company about measures to boost its share price. “Ontario Teachers’ and others have taken a major stake with a view of shaking things up,” said Gavin Graham, director of investments at Bank of Montreal Asset Management in Toronto, which oversees about C$40 billion, including Petro-Canada and Suncor.

“Perhaps there was a willingness on the part of Petro- Canada’s management to contemplate getting together that there wouldn’t have been two or three years ago.” Investors of Petro-Canada will get 1.28 shares of the combined company for each of their shares, the Calgary-based oil producers said today in a statement. The transaction values Petro-Canada at C$39.55 a share, 33 percent higher than its March 20 closing price. Ontario Teachers’ will receive 20.48 million shares in the combined company if the takeover is approved by two-thirds of shareholders at both firms. The Toronto-based fund manager’s stake was valued at C$347.3 million in the fourth quarter, according to regulatory filings. Ontario Teachers’ also owned 24,800 shares of Suncor as of Dec. 31, filings show.

Ontario Teachers’ spokeswoman Deborah Allan declined to comment on the transaction until the fund manager “can evaluate the offer.” Canada’s third-biggest pension fund manager, with C$108.5 billion in assets, has used its clout to become an active shareholder, pushing for changes at underperforming companies. The fund manager raised its stake in BCE Inc. in 2007 to become the largest shareholder before leading a takeover bid for Canada’s biggest phone company. The C$51.7 billion deal collapsed in December.

The consumer crisis will really show its teeth as more jobs vanish
Until recently it has been possible to believe that we are in a phantom crisis. Banks may be all but bust and house prices sliding yet out there in the real world things seemed to be going on much as before. London restaurants were full to bursting. The shops seemed busy. No wonder that a lot of people thought that the crisis was something stirred up by the media. For everyone who has believed that, last week's unemployment figures should have come as a wake-up call. The claimant count rose by 138,000 in February alone, the biggest monthly rise since the series began in 1971. Unemployment is now back to where it was about 10 years ago and yet we are only at the beginning of what will prove to be a long rise.

Recessions do not hit everything all at once. As I said last year, you should think of them as a plague which spreads from sector to sector. Unemployment is the hinge which links the corporate sector to the personal. When problems hit companies they do not immediately fire employees. They initially bear the pain and hope that things will get better but, once they can bear the pain no more and/or they believe that things will not get better, they ease their own position by reducing headcount – and thereby pass their pain on to employees. They, in turn, then reduce their spending, which then transmits the pain back to companies through reduced orders and output, and so on and so forth. The current crisis began in the banks. There will be much more bad news to come as ordinary loans to consumers and businesses turn sour. Yet, with massive public support already in place and more on the way if needed, I suspect that the banking aspect of this crisis may already be past the worst.

But don't be fooled into thinking that this means the recession is almost over, for the consumer crisis is only just beginning. As unemployment rises, plenty of innocent families will feel the backwash from the financial excesses of recent years. Admittedly, retail sales have so far held up surprisingly well. This won't last. We get the official measure for February retail sales this Thursday. They could easily register a monthly fall – the first of many. I think that real consumer spending will fall by around 3pc this year and around 1.5pc next. That will make the employment situation worse. On the broadest measure, I reckon that unemployment will rise to 3.5m, compared with its current level of 2m and its trough of 1.6m at the end of 2007. The unemployment rate could peak at around 11pc, broadly equal to the peaks seen in previous recessions.

Of course, many economists say that the importance of the unemployment figures is exaggerated. Unemployment, they say, is a "lagging indicator", and is not useful as a forecasting tool. Once output starts to pick up, they say, we will be able to say that the recession is over, yet unemployment will still be rising. They are right about that. Indeed, in the past three recessions, it took between one and three years after GDP had troughed for unemployment to peak. I reckon that GDP may start to rise again by the end of 2010. If that is right, then, even allowing for shorter lags this time, the earliest we could see unemployment peaking would be the middle of 2011 but the peak could easily not be seen until 2012. This, and not the technical measure of recession used by economists, gives the better gauge of both the human and economic disaster that has befallen us.

Modern economies are used to growth – that is what they normally do. So the technical definition which signals the end of a recession, when output starts to grow again, is nowhere near demanding enough. Recessions are all about resources lying idle in the midst of want and the most important of all resources to be lying idle is people. So, in both a human and a real economic sense, the recession will not be over until unemployment gets back to its minimum sustainable level. That might not be for 10 years. Compared to previous recessions, this one is likely to be spread more evenly across different types of workers, different sectors and different regions. It won't just be the manufacturing north that is hit, as it largely was in the recession of the early 1980s. In another sense, the pain will be spread very unevenly. On past form, we should expect some big drops in pay inflation. In the early 1980s, average earnings growth slowed from 11pc-plus to a trough of 5pc.

In the early 1990s, it slowed from 10.5pc to a trough of 3pc. I expect overall average earnings growth to slow from 3.5pc last year to less than 1pc by 2010. This sounds pretty grim for workers but remember the coming collapse of inflation and the shift into deflation. In this environment, for those people who retain their jobs, even minimal pay rises will generate increases in real incomes. For those with hefty mortgages, the fall in interest payments implies an even greater rise in disposable incomes. But those who have lost their jobs will be snookered – and any savings they have will yield next to no interest. The greatest contrast, though, is between the public and private sectors. On the latest figures, while pay in the private sector was down over the year by 1.1pc, in the public sector it was up by 3.7pc. If you are employed by the public sector you don't know what recession is all about. No reductions in salary or disappearing bonuses; no worries about your pension; no anxiety about losing your job; no increased tensions at work because of the pressure. You just sail blithely on.

Whenever I travel about the country I never cease to be struck by the depth of anger about this contrast. It is going to intensify.But this contrast will be temporary. For there will be yet another stage to the recession. As soon as the economy starts to recover, and maybe even before, the next government will have to bring in massive cuts to public expenditure programmes. If it is serious about improving both the financial position of the government and the productivity of the economy, these will have to involve substantial cutbacks in public sector employment. So the pain in the public sector could be intensifying well after the private sector position has started to stabilise. Indeed, if this economy is to return to health, it will have to.

CBI calls on Darling to hold back borrowing
The Chancellor risks causing long-term damage to the UK economy if he attempts to launch any further fiscal stimulus in next month’s Budget, the CBI has warned. Richard Lambert, the director-general, cautioned the benefits of a short-term fiscal package, such as tax cuts or extra spending, would be limited, while the long-term costs to the UK’s battered public finances would be "very real". The CBI’s pleas will add to the pressures Alistair Darling faces in his attempts to find a way to stabilise the economy in the Budget on April 22. "A further significant addition to borrowing could only exacerbate the pain caused by future fiscal consolidation over a protracted period," Mr Lambert said in the business lobby group’s annual Budget submission.

"It might simply promote increased saving on the part of households, and greater caution on the part of businesses, in anticipation of future tax bills." Should the Chancellor rein in spending, this would mark a stark contrast to the US’s strategy to solve the credit crisis. Last night, speculation mounted that President Barack Obama was putting the final touches to a trillion-dollar plan to aid the US’s crippled banking system. Hundreds of billions of pounds have already been set aside by Mr Darling in an attempt to prevent the collapse of the British banking system, while, in November’s pre-Budget report, spending in public sector projects was brought forward and VAT cut to 15pc in an attempt to stimulate spending.

The UK’s budget deficit is heading towards a record high with borrowing set to exceed 10pc of GDP. The Ernst & Young ITEM Club has predicted that unlike the Obama administration, the UK has limited options to implement a large stimulus package. It estimated that public sector net borrowing would shoot up to £180bn in 2009/2010 – equivalent to 12.6pc of GDP. It added that this trend of borrowing would continue well into the next decade, and that over the course of the next five years total borrowing will be £270bn higher than the Chancellor’s current forecasts. The perilous state of the UK economy was further highlighted by estimates that the number of companies ceasing to trade is forecast to reach its highest peak in 16 years.

Data from accountants Wilkins Kennedy predicted there will be 23,713 liquidations in the year to March 31 . This is the highest number since 1992-1993, when liquidations reached 28,700 . Concerns have also been mounting that the United Kingdom will be caught up in a deflation trap, despite moves by the Bank of England to pump money into the economy. Official figures are expected to confirm tomorrow that the Retail Price Index has fallen by 0.8pc compared to a year ago, marking its first drop into negative territory in nearly 50 years. George Osborne, the shadow chancellor, said: "Gordon Brown is now looking increasingly isolated at home and abroad in his attempt to make the argument for even more borrowing."

Sweden Says No to Saving Saab
Saab Automobile may be just another crisis-ridden car company in an industry full of them. But just as the fortunes of Flint, Mich., are permanently entangled with General Motors, so it is impossible to find anyone in this city in southwest Sweden who is not somehow connected to Saab. Which makes it all the more wrenching that the Swedish government has responded to Saab’s desperate financial situation by saying, essentially, tough luck. Or, as the enterprise minister, Maud Olofsson, put it recently, "The Swedish state is not prepared to own car factories." Such a view might seem jarring, coming as it does from a country with a reputation for a paternalistic view of workers and companies.

The "Swedish model" for dealing with a banking crisis — nationalizing the banks, recapitalizing them and selling them — has been much debated lately in the United States, with free-market defenders warning of a slippery slope of Nordic socialism. But Sweden has a right-leaning government, elected in 2006 after a long period of Social Democratic rule, that prefers market forces to state intervention and ownership. That fact has made the workers of Trollhattan wish the old socialist model were more in evidence. "I don’t think the government knows the situation in this town, how many people depend on Saab," said Therese Doeij, 25, a clerk at a photo shop who has several friends who work at the company. "To them it’s just a factory. They don’t see the people behind it."

Governments all over the world are confronting the disintegration of the global automobile market in different ways, with loans, bailouts and takeovers. But Sweden’s approach has been particularly hard-nosed, and particularly unequivocal. Why is the government apparently dead set against helping Saab, an iconic brand that stands as a global symbol of Sweden, with Ikea, Volvo and Abba? That is what Paul Akerlund, the local chairman of the automobile workers’ union, wonders. "I’m a little surprised," he said. "They say the market should help itself, but the market has collapsed around the whole world. It’s an extraordinary situation."

He added, with a note of accusation in his voice, "In Germany, France and England, the government is going in to help the car manufacturers." Swedish officials have condemned what they see as protectionism by other European countries that have pledged to prop up their own failing car industries. They have also been scathing about General Motors, Saab’s owner, and the last thing they want is to seem to be bailing out a despised foreign company. Struggling for its own survival, G.M. has said it will completely pull out of Saab by the end of 2009, a course that Ms. Olofsson, the enterprise minister, described as tantamount to declaring "that they wash their hands of Saab and drop it into the laps of the Swedish taxpayers."

She said: "We are very disappointed in G.M., but we are not prepared to risk taxpayers’ money. This is not a game of Monopoly." Saab lost about $343 million last year. It is now going through a Swedish process known as reorganization, a step short of bankruptcy, as it tries to persuade its creditors to prop it up while it looks for a buyer. Joe Oliver, a spokesman, said in an interview that "around six serious investors," from Sweden and abroad, had expressed interest. Time is running out. But the prospect of failure is too awful for Trollhattan’s mayor, Gert-Inge Andersson, to even contemplate. In a city of about 54,000 people, Saab employs 4,000. "I’m being optimistic, because I can’t envision a time when Saab doesn’t exist," Mr. Andersson said in an interview in City Hall.

His son worked at Saab for a decade; his daughter’s boyfriend works there now. "Saab is our identity," he said. "We have lived with it for many years, and it’s very important to all of us." Saab was always known for its innovative engineering. But analysts say that in recent years, with General Motors’s emphasis on volume rather than individuality, it has lost its edge. "Under G.M.’s ownership, they denuded the intellectual content behind the brand," said Peter Wells, who teaches at Cardiff Business School in Wales and specializes in the automotive industry. "Its products are not exciting enough, and Saab doesn’t have a strong brand identity anymore." The numbers speak all too loudly. Saab sold just 93,295 vehicles worldwide last year, 21,383 of them in the United States. As global demand plummets, the expectations for this year are even more dire. The company announced this month that it planned to lay off 750 workers in Trollhattan.

This is not a rich city. Besides Saab, the largest employer is the municipal government. The houses run mostly to modest wooden two-story structures and low-rise brick apartment buildings. But about 40 percent of the people here drive Saabs, Mayor Andersson said. On a cold evening last month, 3,000 people held a torchlight ceremony to show their support for the company. Leave the tourist office and you come immediately to the Saab Museum. A shining, sparkling valentine to a company and an industry, it features treasures like the groundbreaking turbo engine unveiled at the 1977 Frankfurt automobile show, and the prototype of the very first Saab car, from 1947 — Ur-Saab, its license plate says proudly. All the cars here, even the rarest and most precious, are still driven from time to time by enthusiasts.

Some 50,000 tourists visit each year, said Ola Bolander, who works at the museum. Saab sponsors a festival for its fans every other year; 20,000 came to the last one, in 2007. "Saab has always been a bit different, a bit more interesting," Mr. Bolander said. "It’s gone its own way, and it’s in the heart of the Swedish people." Sweden has nine million people. Labor leaders say Saab’s collapse would disproportionately affect southwest Sweden, an industrial belt that is also home to Volvo. But it would reverberate through the rest of the economy, which depends heavily on industrial exports, jeopardizing perhaps tens of thousands of jobs.

Sweden is famous for its generous unemployment provisions, which include retraining for laid-off workers. But unemployment is quickly rising. Tomas Eneroth, a member of Parliament and the spokesman for industry and trade for the opposition Social Democrats, said the government’s tough line was foolish. "The fact that they are so passive," he said, "is every day now making it worse and jeopardizing the possibility of having Saab still in Sweden." Around the corner from City Hall, Johann Riden, a sales clerk in an electronics store, said about half his customers worked either at Saab or at companies that do business with Saab. "I have friends there, my colleagues have family there, and my friends have family there," said Mr. Riden, 32. "If you look around, you see Saab everywhere."

ING Seeks Return of Bonuses to Ease Taxpayer Anger
ING Groep NV, the first Dutch bank to tap a government rescue package, asked 1,200 workers including its 200 "top employees" to return last year’s bonuses, joining rivals including UBS AG in cutting pay to assuage taxpayer criticism. The Amsterdam-based bank also deferred 2009 variable cash compensation for all workers until a new policy is established next year, it said in a message to employees and obtained by Bloomberg News today. "Given the continuing public scrutiny of variable pay practices in our industry, ING is moving to align its variable compensation practices with the new reality," it said.

Banks are calling on executives to forfeit bonuses amid growing public criticism. Societe Generale SA, France’s third- largest bank, said yesterday senior executives would return their stock options in response to public "indignation," while UBS reduced bonuses after a $59.2 billion lifeline from the Swiss government. New York-based American International Group Inc., which received a $173 billion federal bailout, sparked an outcry by paying $165 million in bonuses this month. President Barack Obama has called the payments "the height of irresponsibility." ING, which received a 10 billion-euro lifeline in October and is transferring the risk on most Alt-A mortgage assets to the government, paid 300 million euros in bonuses for 2008.

"In this environment, we must show how seriously we take this matter," Jan Hommen, chief executive officer designate, said in the message. "Most important, we must put this issue behind us so we can focus on what matters most, our customers and how we take the company forward." ING rose 18 percent to 5.11 euros as of 12:19 p.m. in Amsterdam, paring its decline this year to 30 percent. That values the financial-services company at 10.5 billion euros. The Dutch newspaper De Volkskrant today reported ING asked its top 1,200 employees to return their 2008 bonuses.

The bank said earlier this month that the 2008 bonus total had been cut by more than half, joining rivals such as Morgan Stanley and Deutsche Bank AG that are reducing payments to employees after the banking industry racked up more than $1 trillion of losses and writedowns. ING employees at all levels of the company have offered to forgo variable cash compensation for 2008. "Given the response from employees, I have asked my top 200 leaders and their direct reports to consider whether they accept their 2008 cash pay," Hommen’s message to staff said. "This is strictly voluntary, targeting the senior levels of the organization," Hommen said.

ING spokesman Nanne Bos declined to comment on how much in variable cash compensation the 200 management council members and their 1,000 team members received last year. Dutch Finance Minister Wouter Bos will investigate whether he can block 2009 bonuses at financial companies receiving government aid, he said in a letter sent to parliament today. ING, created in the 1991 merger of Nationale-Nederlanden and NMB Postbank Group, is cutting 7,000 jobs to reduce operating costs by 1 billion euros this year and is reviewing which divisions it may sell in the coming months. The company posted a fourth-quarter loss of 3.71 billion euros last month.


el gallinazo said...


"and the sinister amino-acids (didn't know H2O selects for left-handed molecules in solution)."

I am quite skeptical about this claim. I tried to find a link to this research without success (though I must admit I did not pursue it rigorously).

The synthesis of alpha amino acids is usually done in an aqueous solution and invariably results in a 50/50 racemic mixture, which implies that the free energy of both forms are identical. The claim, that over time the levo form should predominate in aqueous solution strongly implies that the levo form has a lower free energy in solution. But water is totally symmetric and should not impose a lower hydrated energy to either isomer. In the word of the Car Talk guys, Click and Clack, I think this assertion is booooooogus.

Hombre said...

"It makes you wonder who is the permanent government. Perhaps Wall Street?"

Now there is a HUGE mouthful!

Elections come and go -- nothing changes!


bluebird said...

Famous Clint Eastwood lines:

"You've got to ask yourself one question: Do I feel lucky? Well, do ya punk?" ("Dirty Harry")

Go ahead, make my day." ("Sudden Impact")

"Ever notice how you come across somebody once in a while you shouldn't have f- with? That's me." ("Gran Torino")

"We all got it comin', kid." ("Unforgiven")

"If you want a guarantee, buy a toaster." ("The Rookie")

el gallinazo said...


A few days ago, I wrote a comment with an idea to organize an email clearing house for commenters here. The idea being to foster greater communication among an emerging TAE community while minimizing risks of the loss of privacy, abusive correspondence, or having spam spiders disseminating your email address to the universe (and beyond). So far, the only one who has responded to this idea is Stoneleigh, who, in private communications, has endorsed the idea wholeheartedly.

So with a positive response from one of our site hosts, this is how I suggest that the idea work. People can email me with their blogspot tag or their signatures. I will keep a database of them. If someone wishes to contact another commenter, he/she can contact me and I will pass on the request message as a forward with the email of the originator. The contacted party can either email the originator back or not as he/she deems fit. From time to time, I will post the tags or signatures of people who have registered, so originators can see if it is sensible to try to contact them this way

It would also be kind of interesting if registering people include their state/province and country of residence. This would be kept anonymous but might make an interesting graphic as to the geographical demographics of the blog.

I am open to suggestions and improvements.

My email address is hpaulfuchs who may be found on gmail, a commercial organization.

HappySurfer said...

I & S

Whilst reading your blog I am reminded of a chapter in a book called “ Parkinson’s Law or The Pursuit of Progress” by C Northcote Parkinson ( he of the Parkinson’s Law fame) in it the chapter aptly called “High Finance” he goes on to describe the workings of a committee.

Quoting from the opening paragraph:-
“People who understand high finance are of two kinds; those who have vast fortunes of their own and those who have nothing at all. To the actual millionaire a million pounds is something real and comprehensible. To the applied mathematician and the lecturer in economics ( assuming both to be practically starving ) a million pounds is at least as real as a thousand, they having never possessed either sum. But the world is full of people who fall between these two categories, knowing nothing of millions and being accustomed to think in thousands, and it is of these that finance committees are mostly comprised. The result is a phenomenon that has often been observed but never yet investigated. It might be termed the Law of Triviality. Briefly stated, it means that the time spent on any item of the agenda will be in inverse proportion to the sum involved.”

In the following paragraphs he goes to describe the conduct of the committee on the passing of the Pd 10,000,000 Nuclear Reactor in 2 and a half mins, basically most of the committee being clueless as to what it is, and the only one person who does so, not having the courage to try and explain so merely keeps quiet. This is contrasted with another item the Pd 350 for the new policeman’s bicycle shed which then takes 45 mins. As most of the committee can relate.

Seems to echo the haste that Billions have been passed and Millions are now argued about.

A really good book for some light hearted look at life.

Posted this on yesterdays comment blog not realising "today" had started - time zone problems ;)

Thanks as usual for all your wonderful work.

el gallinazo said...

I repeat my earlier posting:

Either he is Wall Street's Manchurian candidate or much, much dumber than anyone suspected. There are really no other alternatives now.

Gravity said...


I thought the same thing,
didn't think there would be difference between isomeres.

But the mystery remains, then,
why do all known life-forms only utilize left-handed amino acids?
Economy of rotation?

They found a 20% over-abundance of lefties in the meteoroid samples
they analyzed, the working theory presented indicates these could have selected in aqueous solution inside the rock. Or perhaps there was once a breeding colony of space-microbes inside, which left the sinister residue,
or cosmic radiation somehow busts up the right-handed varieties.

Bigelow said...

el gallinazo said...

I would be interested in your idea IF it was to be used for a broadcast email from I or S with a sudden alert like "time to dump those dollars kiddies". Regarding that broadcast email might work with an old fashioned phone-tree (you mail 5 who then mail 5...). Otherwise not ready to join just yet.

Anonymous said...

Let me guess tomorrow's news;

WSJ: Treasury plan still bad, Dodd and Frank in news somewhere.

Marketwatch: Market rallies, bulls party

NYT: Protests in Europe

Telegraph: UK hard hit but Europe even worse. (Euro bashing)

Times Online: Why this recession won't turn into a depression (some fancy economist says so)

Mike Ruppert, LATOC: The end of the world is coming!!!

Blog round up: The govt is still ripping us off, why oh why will no one listen, the greatest scam in history. (65% - Still not going to be a depression, 25% - depression, 10% - collapse)

I&S: It's still Heads you lose, tails you die.

FT: GM cries for more bailout money

TOD: Existential angst on turning 4 years old and the fact that people have forgotten peak oil...

Orlov: boondoggles and fuffles rule the day

Salon: Climate change going to wipe out birds, trees, fish, etc etc (always by 2050 for some reason)

Reuters: Dollar weak against Euro, Gold holding steady.

CNBC: Buy, buy, buy!

KD: Brilliant insight followed by bashing of goldbugs and socialists and the FED, CONgress and Obama.

Mish: Deflation, deflation, don't even think about the opposite of deflation.

LA times: Bank Chief says economy turns around in Q4 2009, Govt official agrees, sees banks being profitable again.

Me: Still waiting for the event that we're supposed to be waiting for...

Phil said...


Anonymous said...

More women needing cash go from jobless to topless

CHICAGO (AP) — As a bartender and trainer at a national restaurant chain, Rebecca Brown earned a couple thousand dollars in a really good week. Now, as a dancer at Chicago's Pink Monkey gentleman's club, she makes almost that much in one good night.

The tough job market is prompting a growing number of women across the country to dance in strip clubs, appear in adult movies or pose for magazines like Hustler.

Employers across the adult entertainment industry say they're seeing an influx of applications from women who, like Brown, are attracted by the promise of flexible schedules and fast cash. Many have college degrees and held white-collar jobs until the economy soured.

"You're seeing a lot more beautiful women who are eligible to do so many other things," said Gus Poulos, general manager of New York City's Sin City gentleman's club.

He said he got 85 responses in just one day to a recent job posting on Craigslist.

The transition to the nightclub scene isn't always a smooth one — from learning to dance in five-inch heels to dealing with the jeers of some customers.

Some performers said they were initially so nervous that only alcohol could calm their nerves.


On the above articles note, Chris Hedges writes, America Is in Need of a Moral Bailout

We live in an age of moral nihilism. We have trashed our universities, turning them into vocational factories that produce corporate drones and chase after defense-related grants and funding. The humanities, the discipline that forces us to stand back and ask the broad moral questions of meaning and purpose, that challenges the validity of structures, that trains us to be self-reflective and critical of all cultural assumptions, have withered.

Our press, which should promote such intellectual and moral questioning, confuses bread and circus with news and refuses to give a voice to critics who challenge not this bonus payment or that bailout but the pernicious superstructure of the corporate state itself. We kneel before a cult of the self, elaborately constructed by the architects of our consumer society, which dismisses compassion, sacrifice for the less fortunate, and honesty.

The methods used to attain what we want, we are told by reality television programs, business schools and self-help gurus, are irrelevant. Success, always defined in terms of money and power, is its own justification. The capacity for manipulation is what is most highly prized. And our moral collapse is as terrifying, and as dangerous, as our economic collapse.

Anonymous said...

Simple equation:

Follow the flow that follows energy that attempts to replace the dollar as reserve currency.

The rest is anecdotal.

China may love treasuries but what is Japan doing? If they drop out of the race, it's over.

Russia's expansion ambitions will determine the outcome of Eastern Europe's troubles and Western Europe's challenges.


And for those who bought into the current upswing, the mantra is sell, sell, sell. The RSI is over 80, the Bollingers have been hit, and the MACD has crossed. Go short young man. Short on energy and gold. Short on the S&P and short short term gain.

Short, short, short.

Anonymous said...

Geithner Plan "Extremely Dangerous" Economist Galbraith Says - Tech Ticker Yahoo Finance (VIDEO)
The transfer of $12.9 billion from AIG to Goldman looks fishier and fishier - by Elliot Spitzer
Law Firm Interview (Video)
@Persphone - Thanks for correct code
@Ilargi & Stoneleigh - Hi

Anonymous said...

@VK - Great summary of what will be featured as news. In reality however, most news is actually nothing more than noise. Content producers have to fill air time & page space with something, anything, to keep the momentum of the conservation running. ("Stickiness" in 90s parlance.)

So by implying that which is treated as news is important, and that which is important is reported as news, we are caught in a self-referential loop bounded by its own limits.

In reality, there are certain immutable trends that once launched will eventually reach their logical end-points regardless of periodic fluctuations.

* Germany lost WWII in 1933. Reason: persecuting & driving out scientists/engineers who could build the bomb consigned them to eventual defeat.
* USSR lost the Cold War in 1945. Reason: command economy could never keep pace with free-market surpluses re-invested in armaments.
* FIRE economy ended in late 2007. Reason: law of exponents dictated that income growth/asset inflation could not outrun compounding debt+interest charges.

Regarding the last point, here we are 1.5 yrs out and we're still marveling over the death throes. It just further proves Darwin's observation that self-preservation/survival is the primary imperative of every organism (which in turn drives speciation).

It's not really necessary to follow day-day events. The die is cast and there is really no way out. The markets will never recover until the debt overhand is cleared and asset values are reset back to a supportable level. And that only gets us back to point -0-.

We still won't have a new economic model that is able to leverage technological innovation onto a new growth stage. That will only come about through time and the near eclipse of state intervention. That is, a dramatic decrease in regulation & taxes (along with the cessation of the welfare state) and a return to rewarding capital risk undertaken in the development of new products & services.

That's why, while I like to check in here, my primary focus is keeping an eye on the ultimate end game. Americans will never settle for living shitty lives, so we're gonna get to were we need to be by hook or crook. Count on it.

Anonymous said...

Law Firm Interview (Video) antidote du jour
code corrected

Anonymous said...

I was just listening to the NationalPravdaRadio while picking up the kids. Their "Marketplace" segment. Judging from the blather that emanated from the announcer and all the reporting segments, there are *a lot* of people that believe this plan will work, and I think the behavior of the markets over the past week or so supports that view. People think credit will flow, more houses and cars will sell, unemployment will reverse directions and "we will be out of recession by the end of 2009."

I think Geithner, Summers, Obama, and Bernanke really believe this too. It may be hard to believe but it is perfectly possible for people, really smart people at that, to believe their own bullshit unequivocally. I see it all the time in Higher Education where I work. No amount of contrary evidence or careful reasoning will change their views once established.

Obama comes from this culture of self-assured infallibility, and his success at Harvard Law only underscores his ability to take on the pronouncements of the elite and accept it as his own. These people are arrogant. They cannot accept that their view could possibly be wrong and they are not interested in contrary views. They believe in their heart of hearts that economies self-correct after a few months of turmoil during any normal recession (and all downturns are normal). Since faith leads policy, there is no need to look at the larger pictures and see how the various parts seem to fit together,

So, no I do not see this as malfeasance but plain old hubris of the Greek tragedy variety (too bad we don't do tragedy anymore -- we need it). Obama struts around like a proud peacock, he is so cock sure of himself I imagine that he loses very little sleep over the possibility that he will be unelectable in 3 years. But I have been following his economic policy pronouncements since the inauguration. He has absolutely no idea how the economy works, none, zero, zilcho!! Otherwise he would no be on record as proposing that every singly adult American get out there and take some college courses so they can be more competitive in the global labor markets. This was the first of many, many hairbrained statements (like getting credit going so Americans can buy houses and cars).

Look the dude is Harvard Educated, top of his class, he can weave the English language together like any good ivy league law grad should be able to. But, to date he has shown very little understanding of how the economy works and he is too goddamned cocksure of himself to think even for a second that he could be getting bad advice from another incredibly arrogant cocksure SOB, Larry Summers. So, no I don't think these guys are evil nor are they stupid ... it is worse than those to they are Grade-A tragic anti-heroes, Icarus flying arrogantly to the sun sort of delusional f*ups ... filled with such grand self assurance that it is beyond their capacity to conceive of themselves as dead wrong. In the mean time, we move ever closer to the USG Sovereign dept crisis -- almost certain in 2009 now.

Anonymous said...

@ Centiare

Americans will never settle for living shitty lives, so we're gonna get to were we need to be by hook or crook. Count on it.


So what do you call the consumer culture that encourages people to be shoppers instead of citizens? 50% divorce rates? soaring teen pregnancies? 31 million people on anti depressants? 35 million people on foodstamps? Economic, political and moral collapse? Drug addictions and gun crime? Dr Phil??! The division of the country into blue and red states? The distribution of wealth?

Americans have pretty much settled for American Idol and a triple cheese burger and to hell with everything else. Though I guess maybe that is the good life. What evolution led humanity too and America excelled at.

It's food for thought that the American way of life and consumption will never be exceeded on this planet again. You all have lived at the peak and survived to tell the tale! Circa Naughties - The American reached the peak of human growth and ascendancy :-)

ps - Indonesia has the same level of happiness as America and they use 1/8th of the energy Americans use per capita.

Anonymous said...

@ Edlowe

I think this passage (hat tip Nate Hagens at TOD) sums up the situation with Obama, Summers and all the cheerleaders very well.

"Planck Problem - From Michael Shermer -How Thinking Goes Wrong

In day-to-day life, as in science, we all resist fundamental paradigm change. Social scientist Jay Stuart Snelson calls this resistance an ideological immune system: "educated, intelligent, and successful adults rarely change their most fundamental presuppositions" (1993, p. 54). According to Snelson, the more knowledge individuals have accumulated, and the more well-founded their theories have become (and remember, we all tend to look for and remember confirmatory evidence, not counterevidence), the greater the confidence in their ideologies. The consequence of this, however, is that we build up an "immunity" against new ideas that do not corroborate previous ones. Historians of science call this the Planck Problem, after physicist Max Planck, who made this observation on what must happen for innovation to occur in science: "An important scientific innovation rarely makes its way by gradually winning over and converting its opponents: it rarely happens that Saul becomes Paul. What does happen is that its opponents gradually die out and that the growing generation is familiarized with the idea from the beginning" (1936, p. 97).

Psychologist David Perkins conducted an interesting correlational study in which he found a strong positive correlation between intelligence (measured by a standard IQ test) and the ability to give reasons for taking a point of view and defending that position; he also found a strong negative correlation between intelligence and the ability to consider other alternatives. That is, the higher the IQ, the greater the potential for ideological immunity. Ideological immunity is built into the scientific enterprise, where it functions as a filter against potentially overwhelming novelty. As historian of science I. B. Cohen explained, "New and revolutionary systems of science tend to be resisted rather than welcomed with open arms, because every successful scientist has a vested intellectual, social, and even financial interest in maintaining the status quo. If every revolutionary new idea were welcomed with open arms, utter chaos would be the result" (1985, p. 35)."

That is why I am glad to see Ilargi routinely post articles that are quite optimistic, articles which suggest recovery, improvement in confidence, "rising" home sales, car sales etc. It shows (hopefully) that he still listens to counter arguments and not just articles that he likes or those which agree with his world view.

el gallinazo said...


Your analysis misses the point that they have constructed an elaborate and needlessly complicated plan of bells and whistles that inevitably transfers Wall Street's gambling debt to the American taxpayer. I will agree with you only if you concede that the same motivations of tragic Greek hubris apply equally to Al Capone and John Dillinger.

Anonymous said...

see: videoclip of Gerald Celente in snips from a keynote speech:

"The United States is not a beacon of democracy. It is a plutocracy...98% of incumbents get reelected."

"The United States is NOT number one!"

" The fire in the north tower is under control. Go back to your offices."

"Think for yourself!"

"Now I know why Mark Twain said: Sometimes I wonder if the world is being run by smart people who are putting us on or by imbeciles who really mean it."

Anonymous said...

"Americans will never settle for living shitty lives"


Duhmericans painted themselves into this corner by their astonishing 'Willfull Ignorance' and mindless obedience to authority.

Judging by their current, 'bend over and screw me again' non-action response to the bank failouts, they are like a drunk who lights their own hair on fire and then tries to put it out with a hammer.

Mission Accomplished

Persephone said...

What a day! I was shocked - I really thought Geithner's plan would would not be well received. Geithner is indeed parading "a stinking dead carcass of a horse"

From yesterday
@Stoneleigh - Thanks for sharing your insight. You are helping many people navigate a field of landmines.

@Ahimsa - Hope you found the Argentina videos useful. After watching it, I realized that I have SO much more preparation to which I need to attend.

No need to have a stroke. There is plenty in this world to be pissed about - what someone posts on a blog is not one of them.
I hear you. I can separate the message from the delivery.

Anonymous said...

VK @ 5:53

:) Funny stuff!

I'm guessing if you are waiting for some definitive "event", either you'll be disappointed or the world will already have crashed and burned... enjoy the show as it unfolds!

Anonymous said...

Interesting post regarding night club dancers. I have a feeling most new applicants will be washouts as Suzy Real Estate broker learns the hard way that erotic dancing is a legitimate art form. Along that vein, I still recall that sultry, languid dancer moving to the sound of Marvin Gaye's ' Let's Get It On " so many years ago. Felinity crossing the Do, Re, Mi, Fa , SOOUUUL bridge into the land of pure visual ecstasy, transcending base sexual expectations with a gift that was truly artful and special. As the song goes, 'sometimes you get shown the light, in the strangest of places if you look at ir right.'

Speaking of career paths walking down compromised paths: A friend of mine who owns one of the premier custom furniture building companies in the country is receiving 10 to 15 applications a week from architects out of work. These highly trained chaps are really hurting these days and I empathize right along with them.

Persephone said...

No due diligence on the assets? Geithner thinks the market will dictate the "fetching price", but if the government is subsidizing the losses what do "Private Investors" care what they are worth?

I hope someone is writing a book on this. Amazing storyline!

Ventriloquist said...

@ Persephone

What a day! I was shocked - I really thought Geithner's plan would would not be well received. Geithner is indeed parading "a stinking dead carcass of a horse"

I'm not sure exactly what you were shocked about.

If you were surprised that the market upticked, well . . .

it was just what the Doctor ordered.

A simple excuse for the Gamesters to play a run on the money again.

It's just a gambling table.

Don't be surprised about anything that happens . . . after all, New York is just another variation of Casino Royale.

Anonymous said...

Hi VK!
You forgot 75% overweight, 35% obese (check the numbers), and as a result diabetic, and unfit to do more than cross the street without talking a breather.
(Canadian numbers not as bad but also alarming)

Persephone said...

LOL @ jal and VK

Gamblers, maybe - I, however, overestimated their collective intelligence.

Just to keep it all in perspective
4 Bad Bears

Anonymous said...

el gallinazo,

Don't take this personally, but someone volunteering to create and maintain a database of bloggers on a site such as this raises red flags.

The government either runs or watches most conspiracy sites. Obviously this is not a government conspiracy site per se, but IMO, the truth and depth of insight offered here by I & S makes it a target of government shills to infiltrate and eventually undermine if it has its way.

Chaos said...

@Anonymous 8:24

You have it exactly right, IMO. I've been posting for years that the US public does not have the character to handle the hard stuff, whether it be peak oil, the economic meltdown, or climate forcings. Our mathematic illiteracy is now coming back to bite us...

Anonymous said...

Sent contact ,old bird.

I think today it hit me on a gut level that we are auguring in faster and faster.
I was requested to work 3 hrs today....then stopped at a store on the way home to pick up a new battery for the truck...[which had crapped out on me this a.m. getting ready to leave for work..]
Thought to myself,I have some time,why not play with he pistols this afternoon,and "get my hand back"which is necessary if you wish to use a firearm and not embarrass yourself with 2 brothers whom really do know how to shoot.I thought to pick up a brick of 22 shells,and some .38 to run thru the wheel gun...


No ammunition.Anywhere.Period.

Store clerk and I chatted while buying battery...."No ammo since the election"...Hmmm...interesting observation there.

Did some net research.Now it hits.This is a control measure boys and girls.One could have their choice of 6 countries ammo,at a discount,90 days ago.Now nada.Another point made by the clerk."Ill go by the gunshow next week" says I.She says"They were sold out in ten minutes last time". Oh.WoW.
As I finished getting up my odds and ends it struck me hard that we are very much at the end of a very long chain..something I had thought about theoretically,and have prepped for,but didnot/hadnot come to the gut understanding the trucks are going to stop. soon.
Thought long and hard about that on the drive home.

I went way,way in the hole when y2k didn't happen.And was thought a fool by some in my family,for having really prepped for tetwawki.Surprise!Its happening 10 years later,in slow motion,on the tv and net.The good thing is all those changes I made in my life ...becoming a Master Gardener,planting a orchard,and deciding to become the eco-citizen type...careful about what I eat,ect. ect.,and cutting my carbon footprint down as much as I become the "survival tools"I need in this next stage of my life.
Ferfal explains it best when he wrote that you still have to get to work,and make a living after tshtf...

What each of us has to face,and deal with,is how the "change" the O-man spoke of will hit each of us.

Each of us will have events begin to hit us that will begin to shape the new reality all of us are going to have to deal with.Faster,and faster,harder and harder.I understand now, a lot better whats coming.

I had always thought of myself as a person whom could climb any mountain,fight any battle...go 3 rounds with a tiger and spot him two bites and a scratch.The employment thing has hurt bad,real bad.Not only the realization that the words spoken to me about my job security and place at this company were dust in the wind,but facing the fact, I am in my mid-fifties,busted up from old work injuries and likely not to ever see the pay or bennies I had at this lab,with the world the way it is.I made a bad investment,thinking the promises would be kept.

I believe that when a promise is made it should be kept.

I guess I am a little too old fashioned.

And people wonder what will bring the rest out into the streets.These kinds little betrayals of the working folk,as well as the thousands upon thousands who are losing everything...becoming homeless.

Its becoming clearer and clearer to me where this country is headed..and sweet Jesus I hope those whom put us on this path pay the blood-price that the rest of us will...

The little betrayals ,and the big ones we see every day,from our leaders, are the fuel that will start the radicalization of the "formerly"middle class.When every day you see a new indignity,a new example of waste of the public's monies,while you are getting grows..and grows.

Then there will be a spark.

Thats what happened in the Furor over the bonus money...

I really hope the O-man saw the "Katrina"editorial...or someone close to him.Get it to him...the anger is there and getting bad bad bad.

I still hope,[old bird]that he is not the banks man in a suit and tie,but I fear I am wrong,and you have hit it spot on.If this is the case and he has sold his soul like Clinton,keep your head down,and eyes open...the screwing of the public,and uglyness,hasn't even started yet.

Centiair,I think your belief that Americans will never settle for living shitty lives,is a bit,"out there".What other civilized nation on earth has as poor health care for money expended,as little care for the worker whose labor makes it all possible,invades its citizens privacy at the slightest whim,sometimes with tragic results,and allows the most despicable actions of its political class,as well as its wealthy,with no punishment?
and to top it off,allows its oldest and most feeble to live in conditions approaching third world
status.Unless you are well of...really well off...old age sucks.

Honestly,Americans have had shitty lives for a long time now,they just don't have way of "calibrating the scale".
I am not comparing to the third world...but American workers do not have it so good.And god-damn it we are wealthy enough as a nation to have everything needed for every citizen to have a decent,good life,and a certain amount of dignity and care in our old age.So what if they end the limit on ssn and raise it a couple of points...That check keeps millions alive and is part of the social contract that we have here in this land

I want Canadian health care,French un-employment insurance,German "holidays",and the same retirement package congress gets.

I agree Americans are not going to settle for whats being put on their plate now.Were I the chef,I would realize the folks get mean when they are hungry,and the Madder,and more hungry,and meaner people get,the more of the pie they are going to want.The wealthy had better figure that out.I recall what happened to a certain woman whom told the poor to "eat cake"when they had no bread...


Anonymous said...

Bailed-out JPMorgan Orders Two New Luxury Jets and a Deluxe Hangar
Satyam Khanna, ThinkProgress, 3/23/09
Bailouts Of Bondholders Will Sock Taxpayers With $10-$14 Trillion Loss
Henry Blodget, Business Insider, 3/23/09

Anonymous said...

About Geithners Plan,

Denninger says:

"Here is how I can rig the game so as to avoid an otherwise-inevitable loss:

I become a "bidder" and "bid" on my own assets at 75 cents.
I am providing 5 or 10% of the money. The rest is covered by Treasury, The Fed and the FDIC via guaranteed bond issuance.
The loan, ex my contribution, is non-recourse. That is, I can lose 5 or 10% of the total portfolio purchased, but nothing more."

Now, as well as that, if banks bid their own offal at what they like for price? What keeps them from stuffing the ordure back in their socks, smile and go whistling on. Out of darkness it comes and back into darkness it goes only it has a market value, at least for a time.

I am sure I am missing something.

Yours constantly,

-Thickasa Plank-

Anonymous said...

Maybe snuffy can answer my question...

15 of 20 AIG give back their bonuses ...

I say that they know more ways to get a tax refund than what I could imagine..

A donation ... a 5 year averqge of income ... capital loss adjustments.

Is the US tax system so good that it would be impossible for them to get their bonus with a tax refund?
Maybe the amunition is being sent to the mexican drug lords???
@ -Thickasa Plank-
I am sure I am missing something.
Yep! these guys don't talk to each other (insider trading)
You probably missed 10 other ways for them to become rich.


Anonymous said...

only ten J'ai?

Okay not a go but, well then, maybe you buy for me and I pay you a hiders fee....what sort of thing would that be in the way of a CDS? (hehe to you too:)

Still constant and still yours,

-thick asa Plank-

Anonymous said...

Great link to Dmitry Orlov latest on ClubOrlov!

It was fufflious!

Anonymous said...

I think part of the problem with 'we the gutless' is that there's so much mud in the water we don't know who to bite first.

13 firms receiving bailouts owe back taxes:

Anonymous said...

"I want Canadian health care,French un-employment insurance,German "holidays",and the same retirement package congress gets".
In Spain we would settle for American Food Stamps. We are supposed to have a Socialist party in government, but you lose your job and after some months (OK I'm not going to cheat: Maximun a year and a half) of unemployment benefits, we get "nada, zilch", as you say.
Zapatero doesn't have a heart. After six months on almost full salary, they start cutting off our subsidy to stimulate us to work.
And they call themselves Socialists. Ah, Stalin, Stalin, why did you abandon us!!

Anonymous said...

“As long as this huge mass of kited derivatives was experiencing positive cash flow and positive leverage, the profits generated at the apex of the pyramid were astronomical. But disturbances at the base of the pyramid turned the cash flow and exponential leverage negative, and the losses at the top of the pyramid became immense and uncontrollable. By 2005-6, the disturbances were visible in the form of a looming crisis of the automobile sector, plus the slowing of the housing bubble cynically and deliberately created by the Federal Reserve in the wake of the collapse of the dot com bubble, the third world debt bubble. and the other asset bubbles favored by Greenspan. Financiers are trying to blame the current depression on poor people who acquired properties with the help of subprime mortgages, and then defaulted, thus it is alleged -- bringing down the entire world banking system!

This is a fantastic and reactionary myth. The cause of the depression is derivatives, and this means that the perpetrators to be held responsible are not poor mortgage holders, but rather globalized investment bankers and hedge fund operators, the derivatives merchants. We are now in the throes of a world wide derivatives panic. This panic has been gathering momentum for at least a year, since the fall of Bear Stearns. There is no power on earth which can prevent this panic from destroying most of the current mass of toxic derivatives. It is however possible that the ongoing attempts to bail out, shore up, and otherwise preserve the deadly mass of derivatives will destroy human civilization as we have known it. We must choose between the continued existence of derivatives speculation on the one hand, and the survival of human society worldwide on the other. If this be crude populism, make the most of it.”
G-20 Must Freeze The $1.5
Quadrillion Derivatives Bubble
Webster Tarpley

Anonymous said...

@ -Thickasa Plank-
The edge fund operators are a breed all to themselves.
Their whole motif is to out think, out fox, any system and come out out top.

It's the process, the game, the excitement, the rush, the thrill, the excitement ... the drug

They could be working for peanuts as long as their pile of peanuts are recognized as a symbol of their success. (It's too bad for us that money is the present measuring stick)

Now is not like before, many are watching and many are listening ... secrets cannot be kept for a long time.
Also, the desire for recognition will result in someone spilling the beans.


Anonymous said...


Longtime lurker. Just wanted to commend I&S on the good work.

Have to leave my 2cents today, though. I really wish I were a big bank today - they must be thanking their lucky stars and spending all sorts of time and effort to become a hedge fund - or figure out some other way they can finagle their way into the bidding process. Think about it - create some "arms-length" investment vehicle or other back-room deal, bid on your own assets, and let the government subsidize the rest. Who knows - perhaps the gov't can even turn the bank's losses into a gain by letting them bid beyond full value. At that point, they might be happy to eat a 3% "loss" and unload the paper back to the gov't. Ahhh, the possibilities are endless. And I'm sure they'll be just as perfect legal as any AIG employment contract.

Anonymous said...

Hey, Jal, wait a minute, I'm American and vegan, eat 100% organic, BMI 19.5 and walk 4 miles daily at age 58. No SUV in my family either. We drive a Honda Fit and ride bikes! :) I know, I know, I'm an exception to the rule.

Was Cheney right when he said that "the American lifestyle is not negotiable"?

Usacos (Armando's word), go to a footprint calculator and check yourselves out.

"Live simply that others may simply live." ~ MOHANDAS K. GANDHI

Anonymous said...

regarding the 75% overweight, 35% obese, comment earlier, i just want to say have a good look at that photo posted on TAE today, notice how thin the guy is?
he wasn't ingesting high fructose corn syrup in most everything he ate.
the USA didn't have those weight issues back then, or diabetic issues. what changed? in the mid/early 1970's high fructose corn syrup was introduced to be a replacement sugar.the body can't process it. explains why coca cola switched to new coke, and back to regular or classic coke, except it's not the same as it was before. sums it up real well.

Bigelow said...

“China’s central bank governor has issued a bold proposal to overhaul the global monetary system and one day replace the dollar as the world’s main reserve currency with the International Monetary Fund's (IMF) Special Drawing Right”
China proposes replacing the US dollar

Anonymous said...


I learned a new word from the Argentina videos: Mafiocracia (Mafiacracy)

So do we have a Mafiacracy in the US? Or is it more of a plutocracy, kleptocracy, oligarchy or a combination of all of these? I know one thing, though. It ain't a democracy!

Submit your advice said...

I have no mouth and I must scream. Luckily, Ilargi does that very well for me. I come to see him scream what I mutter, and he never disappoints.

Anonymous said...


I am struggling to catch up on the reading, am about a week late and just discovered that Snuffy lost his job.

Very sorry to hear that. I agree with the old bird that we can be intellectually prepared and that is definitely a plus, but it still hurts. It just does.


About Ilargi and his languages, I share three of the four with him, but his first and my last differ. (This is beginning to sound like Mastermind.) I agree that the Dutch are good at languages, in part due to their broad phonetic spectrum.


About dietary debates, I have nothing against them on dietary blogs…


P.S. Tremendous snow storm here. Wind strong enough to knock you off your feet, visibility down to a few metres.

Persephone said...

@snuffy Right on!

@Ahimsa and el gal:
Obama may be our Menem,
Obama has certainly abandoned many of his campaign promises only a few months into his administration. Someone is pulling the strings.

It's important to keep in mind that Argentina was in recession for 3 years prior to their collapse. In the 30's Depression, the stock market crash was in 29, but the average American wasn't truly affected until 1932/1933. So, if we look to historical precedent, the worst IS yet to come. Add significant capital flight, it will be sooner rather than later.

More importantly is that in the U.S., we had a deluge of younger voters in this election - not tainted by the Johnson/Nixon days. What will happen when THEY realize they have been misled?

@jal and Anon 12:12
We have obesity AND malnutrition. The corn has been genetically altered for yield and less nutritional substance. It is very cheap (right now, anyway). Keep in mind that it is also feed to cattle in Feed Lots. (Cattle cannot process the amounts of corn given to them in their final days- creating all sorts of intestinal infections that get into our meat markets.)
PBS did a great special called King Corn - explaining what is happening with the corn industry.

I urge caution in buying "organic". A lot of marketers are latching onto Green-Washing. If I can't see where it originates, I'm not buying that it is organic.

Geithner and Bernake are going to the Hill today for testimony.

Naked Capitalism has a story on the Treasury seeking powers to seize non-banks. Yves calls it a Trojan Horse.

"Given the lack of any mention of a special resolution regime, or intent to develop one, the point of this bill is NOT, appearances to the contrary, to be able to put more firms into receivership. It is to get broader authority to bail them out."

Calculated Risk explains why the Feb housing numbers are not as positive as the face value.

I'll refrain from posting courtesy links so as not to offend the Link Police.

Anonymous said...

@ Anonymous 11:48
Excellent post. Was Hitler Germany's logical response to an impossible debt load after WWI? Something like, 'Germany is never anyone's bitch-slave; of course, it fights against this. Who wouldn't?' The world's financial system bears responsibility for creating Hitler as much as Germany? And now, the world system's derivatives are doing it again (attempting to enslave the nation-state)? No one can possibly ever pay it so in order to preserve the nation-state, World War? Getting a return on investments is THAT important to Daddy War Bucks? Is profiting from war is the real cause of slavery? Lincoln didn't let DWB profit from the war between the states and look what happened to him.

Persephone said...

@Anon 10:04 pm
Thanks for the bailout article!

It might as well have been called "The Sodomy of the Taxpayer Continues"

Anonymous said...

anonymous @ ahimsa,

you go girl!

i am your swiss sister. 57 (look 15 years younger! :), vegan, never been more fit, healthy, happy, spiritually fulfilled.....walk miles daily, do yoga, swim, cross country ski. live a simple, quiet life (wabi sabi).
best of all, i leave the animals alone.


el gallinazo said...


"Don't take this personally, but someone volunteering to create and maintain a database of bloggers on a site such as this raises red flags."

I am not taking it personally. I just thought it was a good idea for further developing a community here. If the idea doesn't catch on, it saves me a lot of work.

I didn't mention anonymity from the government as an advantage for a reason. About six months ago, the whole question of posting anonymously on this site as a protection from the government came up. Two computer experts, who really knew their shit, starting laughing uncontrollably and explained in some detail that the NSA could find the real names of anonymous posters in a heartbeat. Oh well.

Hope this reminder doesn't bring the comment section down to five a day :-)

So far RC, Snuffy, and pdh1953 have joined the registry.

~J~ said...

just a quick note this morning to snuffy - I absolutely love reading your comments

to I and S - many thanks for all that you do

el gallinazo said...


Great post Snuffy. With your nickname, I wonder if you are somehow connected to Snow White :-)

I won marksmanship awards as a teenager, but am lucky to see beyond the end of a barrel now. I had been hoping to pick up a .22 rifle, .308 modified assault/hunting rifle, and a 9mm automatic along with lots of ammo when I get to Florida in August, but the prospects do not look good now. I would have had to hide them in my cave anyway as I obviously couldn't take them out of the USA. Interesting conjecture whether the problem is supply or demand.

Anonymous said...

So much remains mysterious about the Geithner plan:

1) If the toxic asset sales are not really arms-length transactions (i.e. some round-about seller financing is provided), someone gets a broomstick enema. (Conventionally we say it's the taxpayers, though as each new ring is added to the circus, who really thinks the taxpayers will ever really pay? Maybe the bend-over crowd is really those dumb foreigners who bought our bonds and continue to throw good money after bad.) Ilargi suggests that these non-arms-length transactions are the whole purpose of the scheme, but on what evidence? Has the point been raised with Timmy and what did he say?

2) How much money gets printed in the process of operating this program? I.e. how much does the Fed take onto its balance sheet? Some is FDIC-guaranteed loans presumably raised from the private markets, but it's hard to keep the numbers straight.

3) How they achieve the necessary alchemy behind the whole scheme -- getting the "market" prices of the assets high enough to save the banks -- is still not clear. If it's just a convoluted screw job, never mind; but what would Timmy say? If private investors will only pay 20 cents in the market now, how does this plan make them want to pay 60?

And one speculation on why the market loved the plan so much: the big Wall Street houses put their cash to work to bid up stocks. Next when the market has a big down day (inevitable, planned), "traders on Wall Street" will say it was because Senator Schmoe or Rep. Dithers expressed skepticism about the bank bailout. Perhaps it's all giant market manipulation designed to make Congressional opposition impossible.

Anonymous said...

I & S

So ... in this deflationary world, what do you make of UK inflation? The CPI was *up* today to 3.2%, which is above the Bank of England's target of 2%. Causes include higher food & energy prices; the falling £ has exceeded any overseas price falls.

I well remember the stagflation of the 1970s. Could some countries be headed directly for that?

One friend has put 50% of their ££ into index linked govt savings bonds.


el gallinazo said...


I'll give you 12 to 1 odds (93% pay off) that Tiny Timmy Two Lips does not give a meaningful answer to these questions regardless of how direct and succinct that the question is posed.

As to whether foreign T debt holders, domestic T debt holders, or the taxpayer gets screwed, try "all of the above."

Whether tax payers can ever actually pay off the debt is irrelevant. It is the **attempt** to pay off the debt which will enrich TPTB. It will be the theft that keeps on giving.

"How they achieve the necessary alchemy behind the whole scheme -- getting the "market" prices of the assets high enough to save the banks -- is still not clear."

How about collusion of the holders of the toxic waste and the bidders. Mszil gives a nice thumb nail sketch today.

There is no way in this political climate that additional TARP funds can be allocated. Two Lips' plan deliberately bypasses Congress. What a country - land of the free - dubba bubba doo.

Anonymous said...

Dark Musings 3/24/09
Steve Randy Waldham, Interfluidity, Today's Must Read, Naked Capitalism

Anonymous said...

Globochem (Video) Today's Antidote du Jour

Anonymous said...

Bloomberg has a different "SPIN"

The S & P rose 22 percent in the past 10 trading days, the fastest two week advance since 1938 in the depths of Roosevelt's Great Depression I.

Happy Days are coming.

Darn those Canadians ... they can't make creative headlines like that.

Anonymous said...

@el gal ...

As Willem Buiter likes to point out, there is a permanent disconnect between the tax collection rate that is politically feasible in the USA, and the government's obligations. Taxes are determined by politics, and raising taxes is political suicide, so what the taxpayer pays is not linked to what happens in the financial circus.

Of course, you could say that bank subsidies drain cash from programs that citizens really need, and which really benefit the country -- that the country will be bled dry by a TARParasite.

On the other hand, when the choice finally comes about whether to cut back social security or pay foreign bond holders, what will really happen? Will American "seniors" die on park benches, or will foreign bond holders be told to go eat sand? I know that Prez. Obama is currently cooking up plans to cut back social security. (His secret service code name, I heard, is "one-term.") In the end, the USA will simply default on its bonds, with middle finger blazing.

Personally, as a voter, I would eagerly support any candidate who ran on a platform of default. Our massive debt has been run up for Israeli proxy wars, homeland security boondoggles, and Wall Street bailouts, all orchestrated by corrupt elites, and none of which reflected the honest will of the American people or benefitted the people. It's the same argument made for the periodic forgiveness of poor countries' debts -- corrupt elites stole it all so it's unreasonable to expect payment from the blood of the people. Lend to kleptocrats and you don't get paid back, duh. That is the argument that will be made.

Elite-sanctioned talking heads will cluck about the "consequences" but it's all stuff that would happen anyway on the way to the Mad Max world of I&S.

Anonymous said...

Anon. @ 7:11 AM - (Hi, Swiss sister!)

I could have written your comment, excluding cross-country skiing. I plan to learn to ski when we eventually move to our tiny country home in Vermont.

Wabi and sabi, the two dominant principles of Chinese and Japanese art and culture, are so important for us Westerners to understand. My family and I love these principles.


el gallinazo said...

TAE Registry (as of now)

Persephone (maybe)

Anonymous said...

Ilagi said:

"Question: Why weren't state insurance regulators more aggressive in regulating AIG?"

Well that was the core of Spitzer's Washington Post piece a couple of days before he, as an avid advocate of strong State Regulation, was neutralized.

Here's the WaPo piece link:

This was February 18, 2008

A sample:

"Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks.... the widespread nature of these practices, if left unchecked, threatened our financial markets.

This was there for all to see, but everybody was SO shocked and outraged at his personal conduct, that this message was BURIED bacause his personal conduct was SO MUCH MORE IMPORTANT.

And here we sit today, a year and a month since that article, with our collective thumb up our collective butt, wondering where it All Went Wrong.

Outrage? Not so much. All the material to understand the situation was there on a silver plate and the Public was M.I.A.and still is.

Organized White Collar Crime loves this response from the 'electorate'
Sheep to the slaughter, easy money, a piece of Cake, thanks suckers!

The Criminal Class is going to eviscerate all state regulatory statues, in the not to distant future, and the US public is going to bend over and love it, usual.

Anonymous said...

"..the widespread nature of these practices, if left unchecked, threatened our financial markets"

The Banksters don't really need to be that smart to steal from the America public, it's like taking candy from a baby.

Anonymous said...


Go ahead and post your favorite links. Some participants here appreciated them. The Link Police has an anger problem.

Yes, sadly, Obama may turn out to be our Menem. Many people, especially the young voters who supported Obama, will be deeply disappointed. There is not much they can do or not much that will be tolerated by a police state.

Re organic

Certified organic and local non-certified organic (if you know the farmer) is the best we have, along with growing one's own, of course. Corporations (Monsanto in particular) would love to destroy the organic food industry. Genetically modified seeds have already contaminated organic farms and many small organic food producers have been bought off by corporations. Eden Foods is one company among a few that has not been bought off by the multinationals. I try to buy as much as possible from Eden.

Anonymous said...


I wouldn't worry about the link police I am sure ilargi will let you know if you offend. Also I enjoy links and if you make them part of your scribe I do not see any harm at all (unless of course you duplicate our hosts material)

You can make the link part of your writing by using this: xa href= site address x your word(s)x/ax

Replace the x with curser marks as follows: < > < > . Sorry can't put the code in directly as it screws things up. (If anyone knows how to do that let me know.)

-Constant Plank's-

Ilargi said...

"Ilagi said:

"Question: Why weren't state insurance regulators more aggressive in regulating AIG?""

No, I did not say that. Jim Jubak did.

Ilargi said...

And of course Jubak answers his own rhetorical question as well.

Anonymous said...

I still have faith that President Obama will push a progressive agenda. Indeed, the "reconciliation" chatter emanating from the Democrat side of the aisle indicates that health care reform will get passed this fall--one way or another.

As far Centaire's claim of President Obama as an "affirmative action" hire, and other posters insinuating that the President is something less than brilliant, I can only say nonsense. Obama is a self-made man--something that right-wing "by the boot straps" types like to espouse when it suits their agenda--as far as recent American Presidents go (excluding Clinton). Miles and miles above those " born on third thinking they hit a triple" silver-spooned fortunate sons nominated by right-wing hypocrites who now deride Obama's truly legitimate by the boot strap efforts.

At any rate, change is coming. The Bush tax cuts will expire next year and I would guess that serious progressive discussions concerning higher rates are potentially in the works as well. Most on the right still have no reason to despair, however. Joe the Plumber, or the mechanic from Alabama are never going to be millionaires anyway. In the meantime, and if socially responsible health-care reform is enacted, Joe might actually be able to receive medical care that he otherwise might not be able to afford due a metaphorical pre-existing condition clause that relegates self-insuring for the self-employed as cost prohibitive. The don't get sick health plan days of the far-right are coming to a grinding halt in the near future.

President Obama is transporting the economic equivalent of a wagon load of nitro over rocky roads. Those on the far left howling at Obama cannot get their minds around the reality that incrementalism is what will bring the wagon home in one piece. Learn to see in the half-tones, the areas of subtle transition between light and dark before making declarative proclamations about what the easily read regions of light and dark will ultimately resemble.

z said...

the demo account reached 100% gain today - a bit less than 5 weeks since inception but still a bit longer than expected. 'tis the season to spend most of time working on soil, fence and chicken tractors... email if interested in getting a copy of the full statement.

el gallinazo said...

Anon 2:11

"I still have faith that President Obama will push a progressive agenda."

Your faith and $5 will buy you a cappucchino. But you seem to have less faith in signing your comments.

I am sure that you will continue to maintain your faith in Obama regardless of the data that Stoneleigh and Ilargi present right up to the point where you and yours starve or freeze to death. Yes, faith is a wonderful thing. Without it and its traveling companion, stupidity, politicians and banksters would be in a world of pain.

At to the Limberger ditto heads attacking Obama - yeah that makes his policies A-OK even if he sells us out to Wall Street. You know, Hitler attacked Stalin, so I guess that made Uncle Joe Stalin A-OK also. So he killed 40M of his fellow countrymen. The right hated him so he is OK in my book.

One question to challenge your faith. After Obama gives $1-2T to the zombie banks and we enter a bond dislocation, where is he going to get the money for health care reform? But stick to your faith - logic sucks.

Anonymous said...

This is from Steve Waldman at Interfluidity by way of the Economists View:

"My little conspiracy theory is that the Blackrocks and PIMCOs of the world, the asset managers who do well by "shaking hands with the government", will agree to take a hit on relatively small investments in order first to help make banks smell solvent, and then to compel and provide "good optics" for a maximal transfer from government to key financial institutions. ...

Looks like there are others out there thinking dark mistrustful thoughts these days.

My question though after thinking these DMT's ( Dark Mistrustful Thoughts) is does it matter? They may unclog the pipes but since the vandals have already stolen our handles we'll still be flush out of luck.

-Plank's Constant-

Zaphod said...

So is the AIG bonus kerfuffle a simple shill to raise ire and then transfer still more power to the Geitner/Bernanke team? AIG is already bought and paid for several times over, yet they "need" more power to dissolve it NOW?

Any good despot knows the manufactured crisis are a superb and proven mechanism to consolidate power. This team has demonstrated it well.

With no control over the economy Congress is rapidly heading toward irrelevance. Rather like the UN, really -- lots of noise, little action. If Congress had any sense they'd dissolve the Treasury and the Fed and do the rest of the dirty work themselves, and meet their obligations to the public and the Constitution while doing so.

But they won't. They'll take the table scraps and fawn at the legs of their masters. Mangy curs, all!

Anonymous said...

That old pearl,'the enemy of my enemy is not necessarily my friend' should be the new watchword.

The ruling party has two wings which are used on the populous like 'good cop/bad cop'

The Democrats are the 'Mommies' and the Republicans are the 'Daddies'

It is a stereotype made in heaven

Anonymous said...

"the Bush tax cuts expire next year."

Well, maybe. But if no IRS agent follows up, did failure to pay up really occur?

It is pretty clear that the only ones getting harrassed by IRS enforcement are 'the little people' [as per Leona]. Geitner himself is just the latest example.

Penn said...

widening cracks in weakening bottoms,

Anonymous said...

PS incrementalism is not what the far left are howling about.

el gallinazo said...

The "far left" in the USA is the center in a sane country. If Bush the Least, Paulson, Obama, and Geithner follow identical policies, what does left and right mean? As a plumber, I have this image of the slops pouring down a long steep pipe from Wall Street and enters into a horizontal Tee trough. On the left side of the slop trough you have Obama & Co. and on the right side McInsane and Co. Same pigs, same slops, same feeder pipe from the castle on the hill. Jeez we are stupid!

Anonymous said...

Heads of PimpCo & Goldman Love Geither Plan Because It Was Their Idea
Even if Geithner's Plan Succeeds, all it does is return us to the status quo: Banks to big to fail & too powerful to regulate
Some nuggets...

Anonymous said...

Cracks are forming in the feed line old bird.The only joy I take at the destruction of FIRE economics is a lot of fat ass suddenly needing to learn gardening...with a spoon instead of a shovel.


Anonymous said...

I misspelled PIMCO, on purpose.

Anonymous said...

I misspelled PIMCO, on purpose.

Anonymous said...

Meredith Whitney: Big Banks Are Dead
one more nug

Anonymous said...

Can You Cheat Geithner's Bank Plan?
a critique of Denninger's shit

Anonymous said...

el gallinazo writes:

"Your faith and $5 will buy you a cappucchino. But you seem to have less faith in signing your comments"

What does that have to do with anything? In fact, the hosts of this site choose to remain anonymous.

But after your urgings for public disclosure yesterday, I can only conclude the plumbers butt is sticking a little too far out of the toliet.

Boomerang of the obnoxious returning to the source, with a little added hot air as a propellant.

Greenpa said...

Fr. Gallinazo: "One question to challenge your faith. After Obama gives $1-2T to the zombie banks and we enter a bond dislocation, where is he going to get the money for health care reform?"

It's not a matter of faith with me- but I'm not sure you understand the concept of "revolution".

How about, at some point, The Big Bammer gets the clout to say "look folks- none of this shit has worked; we're starting over!" and...

He sends federal troops (now his buddies, as I noted some time back) - and marches them onto the estates of every person suspected of being involved in organized crime. And Banking. All the mafiosi, and bankers, are shipped to Guantanamo, citing George the Least's precedents.

And all the assets of all the mafiosi, and bankers, are declared forfeit; and seized.

Now there would be a big pile of billions.

Illegal? sure. Can't do it? That's a different question. Act first- apologize later. Much, much later.

Somebody has to find a way to Cut the Gordian Crap. If they do- by definition, it will be via a pathway nobody else saw. It's been done, historically.

Anonymous said...

@ Walk in the woods
'good cop/bad cop'

FINALLY !!! don't know if this has been said elsewhere before, but this is EXACTLY right.

Somehow all the previous comparisons of the "two" parties seemed fall short, but this is IT.

Thank you.