Sunday, March 29, 2009

March 29 2009: The markets according to Darwin

John Vachon Board with Room April 1937
Rooming house in slum district, Washington, DC

Ilargi: George Soros isn't worried by the failed gilt (sovereign debt) auction in Britain last week. He calls it "a blip". He would still buy UK bonds, saying: "it depends on the price". I’m not so sure. First, international bond markets are about to run into a big bad brick wall. Sovereign, municipal and corporate debt will be unleashed in such amounts that portions of it are certain to fall by the wayside. This risk will prod many issuers to try and sell their debt sooner rather than later. Ironically, they'll do so partly because they fear it will be more expensive to issue their bonds as time goes by. If enough parties follow this logic, it will get more expensive sooner. With interest rates close to 0%, yields of 5% or more start to look attractive, if you can finance the purchases with borrowed money. Who has access to such credit? Large financials, through central banks. Thus, wealth gets more concentrated by the day. Nice world if you can get it to live in. Still, even the big boys will only buy if they know they can easily get rid of the paper when they want or need to.

As for Britain, its financial situation, coupled with the plummeting status of Gordon Brown, could indeed give it a label of "not sufficiently attractive", or "too risky", for a bond market that can pick and choose at will. And, again given the surplus of bonds about to be issued, it is entirely possible that market will freeze, or rates go up so much that it becomes fiscally irresponsible to offer sovereign debt for sale. Of course, if Britain can't do it, it won't be alone among countries. And it makes you shudder to think what will happen to towns and companies that will for all intents and purposes lose the sole remaining vehicle to finance their operations. I know I'm -partly- speculating here, but then, so is anyone thinking it'll all be a smooth ride. There is less investment money available for a fast growing amount of debt. The outcome is obvious.

And while Britain may be the weakest of the strong, the weaker among the weak can be sure they will be pushed aside by the traditionally strong countries, kind of like we're watching the markets according to Darwin. They may be "interesting", pretty they won't be. The biggest theme coming out of this week's G20 could be that developing countries turn their backs on the rich and formerly rich parts of the world, if only to protect themselves from more blood riddled exploitation. What do they have to lose but shackles?

We’re In A Whole New Territory
Joseph Stiglitz on the coming global economic order.

The power shift from west to east continues, as developing nations flexed their muscles at the G20 in London recently, and China and Russia called for a new international reserve currency to replace the dollar. Nobel laureate Joseph E. Stiglitz, who pioneered the idea of "global greenbacks" in his book "Making Globalization Work," and is now at the center of many debates over the future of global capitalism, spoke to NEWSWEEK'S Rana Foroohar about Asia's big bucks, America's bad loans and why the European welfare state still works.

FOROOHAR: You've been talking for years about how the dollar reserve system is broken. Why is everyone getting on the bandwagon now?
A reserve currency has to be stable to be effective, and for some time now, it's been clear that the dollar is not. The financial crisis has brought this home with a vengeance. The Fed's balance sheet is surreal. They are in uncharted territory, and there are serious concerns about inflation, and its subsequent effects on the dollar. The Chinese are clearly very concerned about this. They see that some of their investments in the U.S. (like Blackstone) have gone badly wrong, and they worry that they will have worked so hard to save their $2 trillion in reserves, only to see it blown away by inflation. At the same time, there's this broader concern about how the current reserve system basically entails poor countries lending to the U.S. at very low interest rates. It's inequitable, and it also reduces consumer demand at a time when it's really needed.

Why can't the euro help fill the currency void?
A two-currency reserve system would be even more unstable than what we have now, because people would move in and out of the dollar and the euro depending on which is up or down, increasing volatility.

You proposed a new reserve system at the U.N. recently. How would it work?
The new system would be supported by an already approved IMF measure to double the Special Drawing Rights [SDRs] available to countries in need. Rather than putting their money into dollar reserves which do nothing to increase consumption, countries could draw from this SDR $42.8 billion fund at need. That way, they spend the income, rather than storing it in the ground.

Do you think China's support of a non–dollar reserve system represents a new and more aggressive economic policy stance in the world?
I think that China's been taking a more active role for some time in a way that's been overlooked. We know about their aid to Africa, and attempt to buy Rio Tinto and things like that, but what's not covered is that they are winning the most World Bank contracts in Africa. They are very competitive. I think they are trying to represent the less developed nations, but have tried mostly to do it in a nonconfrontational way, so as not to upset the U.S., which often sees itself in competition with China in a way that the Chinese themselves do not.

You just came back from China. How is the economy there?
I think they are running things very well. They've got a large and much deeper stimulus package than we do. And they don't have our financial market troubles.

And how about Europe? You've been working with the French government to come up with a new way of measuring economic growth that would account for the benefits of education, staterun health care, etc. How would that work?
GDP is a misguided accounting number. Input figures are almost always more important than output figures. I'll give you two examples. In the U.S., we spend a lot of money on health care, but we have much poorer outcomes in terms of life expectancy, morbidity, etc., than many European nations. Yet that spending has the effect of increasing our GDP, even though much of the health-care spending is actually wasted money. Another example: we have the highest percentage of people in prison of any developed nation. This is a symptom of a dysfunctional society. Yet prison spending increases our GDP; it's a perverse effect. So, we're trying to come up with a method of accounting that would factor in things like this, as well as the benefits of education and health care and many other factors. It's not easy, and it certainly won't happen overnight, but it's meant to start a conversation about how we can achieve real, sustainable growth.

Do you think that the European welfare model is actually better suited to the economic needs of the moment?
Yes, definitely. Europe's social safety net can actually act as a kind of economic stimulus encouraging people to keep spending, or not to save so much, because they feel more secure. What's clear is that the American model of corporate welfare —taking care of companies, but not of people—is broken.

What's your take on the Geithner plan to offload bad bank assets in the U.S.?
It's terrible. Investors don't have to take responsibility—they can still walk away if it all goes bad. It's what I call American socialism—you socialize the losses and privatize the gains.

High mortgage (refinance) fees help keep U.S. banks afloat
Home refinancing is forecast to hit a two-year high and banks are reaping the profits. Meanwhile, home purchase mortgage origination fees are the costliest in eight years, according to data compiled by the Federal Housing Finance Agency. Banks are raising loan costs for customers ahead of an April 1 increase in the "adverse market" fee that Fannie Mae and Freddie Mac charge lenders. "We came through an incredibly competitive environment in the last few years, when banks were practically giving away loans, and now they're able to widen their profit margins," said Anthony Polini, an analyst at Raymond James & Associates Inc. in New York. "Mortgage lending is having a positive contribution to earnings growth."

The average cost of getting a U.S. mortgage was $640 per $100,000 in December and January, the highest since October 2000, according to Federal Housing Finance Agency data. In 2005, the end of a five-year housing boom, the cost was $280 per $100,000, the lowest on record. The FHFA data is for house purchases only and doesn't include refinancings. The agency doesn't keep that data. Banks are benefiting as the Federal Reserve benchmark rate stands close to zero, the lowest in its history. The difference between the fixed rates that banks charge for mortgages and the Fed rate that shows their cost of borrowing is averaging 4.83 percentage points in the current quarter. That's the second-widest spread since 2004, after the fourth quarter's high of 4.89 percentage points, according to data compiled by Bloomberg.

The average spread between fixed mortgage rates and 10-year Treasuries is 2.3 percentage points. That's close to the 22-year high set in the fourth quarter. The Mortgage Bankers Association last week boosted its forecast for 2009 home-loan originations by $800 billion, to $2.78 trillion, as a wave of refinancing and low interest rates spur homeowners to seek new loans. Refinancing will total $1.96 trillion in 2009 and purchase originations will increase to $821 billion, the group said in a statement. Total originations may rise to the fourth-highest on record.

"Banks are able to borrow short and lend long," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Mass. "They get their financing at rock-bottom rates and charge higher fees, meaning their margins are extremely high." Wall Street may have found a way out of its misery as earnings from creditworthy borrowers help rebuild the banks' balance sheets. Eight months after buying unprofitable Countrywide Financial Corp. to become the largest U.S. mortgage lender, Bank of America Corp. Chief Executive Officer Kenneth Lewis told an audience in Boston on March 12 he won't need any additional bailout funds from the Treasury. A "boom" in refinancing is spurring his mortgage unit to hire staff to handle the volume, Lewis said.

One person who has refinanced is David Rapaport, a professor at the University of California San Diego Medical School. He paid an upfront fee of $3,500 to refinance his mortgage at 5.13 percent. A year ago, his rate was 6.25 percent and there were no fees. "I'm happy just to be able to get a 'refi' and reduce my monthly payment," said Rapaport, 57, who owns a two-bedroom townhouse in San Diego, where house prices have dropped 32 percent since June 2006. He is saving $264 a month with the new loan from San Ramon, Calif.-based CMG Mortgage, meaning it will take about a year to recoup the fees he paid.

Vikram Pandit, chief executive officer of Citigroup Inc., said March 10 his bank is having the best quarter since 2007 after more than a year of losses. Jamie Dimon, JPMorgan Chase & Co.'s chief, said March 11 that the nation's biggest bank by stock market value had a profitable January and February. He wasn't more specific. Bank of America in Charlotte, N.C., and New York- based Citigroup and JPMorgan received $120 billion in federal loans since last year. JPMorgan, Bank of America, Wells Fargo & Co. in San Francisco and New York-based Goldman Sachs Group Inc. and Morgan Stanley probably will report a combined net income gain of 65 percent this year, according to analysts surveyed by Bloomberg News. Citigroup's loss could narrow to $3.2 billion from $27.7 billion, analysts estimate.

JPMorgan, Bank of America and Wells Fargo's 2008 results included costs and gains associated with acquisitions. Banks started raising fees three months ago, before Fannie Mae and Freddie Mac increased the "adverse market delivery charges" they pass on to banks when buying loans. Loans to people with credit scores of 680 to 699, the minimum required to be considered a "prime" borrower, will have a fee of 1.5 points. Borrowers with credit scores of 660 to 679 will pay 2.5 points, according to Fannie Mae. Financial institutions use credit scores to assess risk.

Borrowers hunting for new mortgages face "sticker shock," said Robert Davis, branch manager at Black River Mortgage Co. in Chester, N.J. "Zero-cost" home loans are harder to get because banks aren't paying brokers enough to absorb closing costs, he said. Borrowers typically add at least 0.25 percent to their rate when they don't pay upfront fees. Joanne Lee, a nutritional consultant in Boston, said she would rather pay $3,500 to refinance her $350,000 mortgage, currently at 6.18 percent with Citizens Financial Group in Providence, R.I., than roll the closing costs into the rate. She has a credit score of 760 and about $90,000 of equity in her 2,330-square-foot Boston townhouse.

"These are probably the lowest rates my generation is going to see," said Lee, 60, who has completed the paperwork for the refinancing and is waiting for her mortgage broker to lock a rate of 4.8 percent or lower. "I'm calling it my last 'refi,' because I'm going to try to get it at rock bottom and then stay put." Extra cash from lower monthly payments is helping to increase consumer spending, which accounts for more than two-thirds of the economy, said Barton Biggs, managing partner at New Yorkbased hedge fund Traxis Partners LLC. "Mortgage refinancings are one reason we're expecting a 1 percent to 1.5 percent gain in consumer spending this quarter," Biggs said. "Everyone is wondering where the money is coming from. Certainly part of it is from lower mortgage payments."

U.S. banks had combined losses of $26.2 billion in the fourth quarter because of writedowns and loan-loss provisions related to mortgage-backed securities and subprime defaults at the biggest companies, data compiled by the Federal Deposit Insurance Corp. show. It was the industry's first loss since 1990. The Federal Reserve began buying $500 billion of bonds backed by conforming loans in January to drive down fixed rates. That pushed the average U.S. rate for a 30-year fixed mortgage to an all-time low of 4.96 percent during the week that ended Jan. 15, according to Freddie Mac. The Fed announced March 18 it would triple the purchases to $1.25 trillion.

George Soros, the man who broke the Bank, sees a global meltdown
George Soros was 13 when the Nazis invaded his homeland of Hungary. As a Jew, he was forced to adopt a false identity and live separately from his parents in Budapest. Instead of being traumatised by the experience, though, he found the danger exhilarating. "It was high adventure," he says, "like living through Raiders of the Lost Ark." Sixty-five years later, he still thrives on danger. He famously made $1 billion on Black Wednesday by shorting the pound, earning him the label of "the man who broke the Bank of England". Last year, as the world tipped into financial chaos, Mr Soros pocketed another $1.1 billion by correctly predicting the downturn. "I’m an expert in crises," he says.

The man who has a phobia about maths has made his name as the philosopher king of economics – his book The Crash of 2008, out in paper-back next week, has been a bestseller on both sides of the Atlantic. Since 1944 he has believed in what he calls "reflexivity" – the idea that people base their decisions on their own perception of a situation rather than on the reality. He has applied this both to investment and to politics: his skill has been to predict moments of seismic change by identifying a disjunction between perception and reality.

When everyone else was convinced that the markets would automatically correct themselves, the 78-year-old "old fogey", as he calls himself, was one of the few warning of recession. He put all his chips on "the Barack guy" early on when all around him were still gunning for Hillary Clinton. It’s almost as if he has been waiting for the Great Recession for the past ten years. When we ask whether he prefers booms or busts, he replies: "I have to admit that actually I flourish, I’m more stimulated by the bust."

This recession, he explains, is a "once-in-a-lifetime event", particularly in Britain. "This is a crisis unlike any other. It’s a total collapse of the financial system with tremendous implications for everyday life. On previous occasions when you had a crisis that was threatening the system the authorities intervened and did whatever was necessary to protect the system. This time they failed." The financial oracle does not know how long it will last. "That depends on how it’s handled. Allowing Lehman Brothers to fail was the game-changing event. That’s when the financial crisis went over the brink." We could end up with a depression. "Unless we handle it well then I think we would. The size of the problem is actually bigger than in the 1930s."

The problem in Britain, he believes, is in many ways worse than in America or Germany. "American memory is seared by the Depression, the German memory is seared by hyperinfla-tion but Britain has a pretty serious problem in many ways worse than America because the financial sector looms bigger and the overvaluation of real estate is bigger than in America." He is not worried that an auction of government bonds failed this week – "that was a blip", he says. He would still buy British bonds – "it depends on the price" – but he agrees with Mervyn King, the Governor of the Bank of England, that debt is a real problem. It will, he says, put people off investing in Britain. "I think it will have an effect, yes. It is a matter of worry because effectively the hole in the banking system is replaced by increasing the national debt."

There has been some talk that Britain might have to go cap in hand to the International Monetary Fund. "It’s conceivable," Mr Soros says. "You have a problem that the banking system is bigger than the economy . . . so for Britain to absorb it alone would really pile up the debt . . . if the banking system continued to collapse, it’s a possibility but it’s not a likelihood." He refuses to say whether sterling has yet hit its lowest point. Has he shorted the pound recently? "I had shorted it last year, but I’m not shorting the pound now." Is the euro under threat? "There is stress in the euro because of the differential in the interest rate that the different countries have to pay," he replies.

Mr Soros is critical of the tripartite regulatory system set up when the Bank of England gained independence. "I have a different view on how the market operates than the prevailing view. I believe that the authorities have the responsibility to forestall, to counter the mood of the markets . . . I think that the problem was that the Bank of England didn’t have the supervisory authority." He does not, however, blame Gordon Brown. "He underestimated the severity of the problem, but then so did most people. Part of the perceived role of a leader is to cheerlead, so you can’t really blame him for that."

From the day he was born, Mr Soros says, he was attracted to crisis. "It precedes me. I inherited it from my father." His father had lived through the Russian Revolution and every day after school he would take his son swimming and talk about his experiences. "I sucked it in that way. And then when I was not yet 14, the Germans occupied Hungary, and I would have been deported to Auschwitz if my father hadn’t arranged for false papers. So that was a pretty profound crisis. I had to assume a false identity and live a different life." He was separated from his parents. "We met occasionally in the swimming pool. But imagine you are 14 years old, you like adventure, and you have a father who seems to understand the situation better than others. It’s very exciting."

He feels a similar thrill in an economic crisis. "On the one hand there’s tremendous human suffering, which is very distressing. On the other hand, to be able to handle the situation is exhilarating." He has always been something of an outsider. He thinks that this makes it easier for him to see through conventional wisdom. "I have always understood how normal rules may not apply at all times," he says. In recent years he has been arguing against "market fundamentalism" – "the accepted theory was that markets tend to equilibrium".

He believes that the credit crunch has proved him right. "It reminds me of the collapse of the Sovi-et system, events are always exceeding people’s understanding. The situation is out of control. There’s a shortage of time to adjust to the change. Change is accelerating." Like Warren Buffett, he thinks that the complex financial instruments used by the banks were economic weapons of mass destruction. If anything he expected the tipping point to come earlier. "Everybody who realised that this was unsustainable expected it to collapse much sooner," he says. "It is so devastating exactly because it took so long."

The urgent task now, he says, is to realise that the system that collapsed was flawed. "Therefore you can’t restore it. You have to reform it." He worries that politicians have not yet accepted the need for fundamental change and that "a lot of bankers have their head in the sand". He was cast as the villain when Britain was forced out of the exchange-rate mechanism. "I didn’t speculate against sterling to benefit the public. I did it to make money," he says. He tells us that he has psycho-somatic illnesses – backaches and pains – that tip him off to changes in the market. "It’s as if you’re a jungle animal, and you see another animal facing you. You have to make a decision: fight or flight? Your hair stands up and you growl and you decide, ‘Am I going to attack because I’m stronger or am I going to run away because otherwise he’s going to eat me?’ You are very tense. And that’s the tension that gives you the backache."

The G20 summit in London next week is, he says, the last chance to avert disaster. "The odds would favour that it fails because there are such differences of opinion. It’s difficult enough to get it right in your own country let alone with 20 governments coming together, but if it’s a failure I think then the global financial and trading system falls apart." If the G20 is nothing but a talking shop then he thinks we are heading for meltdown. "That could push the world into depression. It’s really a make-or-break occasion. That’s why it’s so important." The chances of a depression are, he says, "quite high" – even if that is averted, the recession will last a long time. "Look, we are not going back to where we came from. In that sense it’s going to last for ever."

Life and times
• Born Budapest, 1930. A Jew, he survived the Nazi occupation using a false identity. Fled communist Hungary for Britain in 1947
• Education: Worked as a railway porter and waiter to pay his way as a student at the London School of Economics, graduating in 1952
• Career: Took job with Singer and Friedlander in London before moving in 1956 to New York, where he worked as a trader and analyst. In 1970 he set up his own private investment company, the Quantum Fund. Made his fortune, on September 16, 1992, when he short-sold more than $10bn of sterling. Now chairman of Soros Fund Management and the Open Society Institute and said to be worth $11bn

Bank stress tests could broadly hurt corporate debt
Optimism that the latest U.S. tarnished asset cleanup plan will refloat foundering banks may soon fade, triggering a renewed surge of risk aversion and selling of both financial firms' and industrial companies' corporate bonds, analysts said. The U.S. government's stress tests for banks that are due to be finished by late April have raised concern among investors holding investment-grade corporate debt and may force companies to issue debt now for fear that yields will jump back to extremes and make borrowing even more expensive. The risk is that some banks may fail the test, forcing them to ask for yet more government money.

Some corporate borrowers are trying to get to market ahead of the possible bad news about banks in case riskier assets sell off as a result. Kedric Dines, an interest rate strategist at Mizuho Corporate Bank in New York said the bank had fielded several calls about this recently. "Some companies are calling to get their risk down," Dines said. "People are really scared about this stress testing, about how bad a bank will look, so people have gone to their corporates and said 'issue now': get those deals across the finish line now." U.S. corporate bond issuance has rebounded since the start of this year as more investors have ventured out of government bonds into riskier assets. The pace of U.S. corporate bond issuance has accelerated to $6 billion per day; the briskest clip since 2001, according to the 60-day moving average, said T.J. Marta, founder and market strategist with Marta on the Markets, a financial markets research firm in Scotch Plains, New Jersey.

The government aims to peel up to $1 trillion of bad assets off banks' books, unlocking credit and restoring the flow of loans. But a tougher assessment of how much more cash financial institutions need to survive the worst recession in decades could make banks look so shaky that investors will scramble for safer assets such as government Treasuries. "That factor of the stress tests is the sword of Damocles hanging over our heads," said Kevin Flanagan, fixed income strategist for global wealth management with Morgan Stanley in Purchase, New York. Roughly 20 U.S. banks with assets over $100 billion will be subjected to stress tests. The government will not publicly disclose the results, but once supervisors determine how much additional capital a bank needs, the bank will have six months to raise private capital or opt to participate in the Treasury's new Capital Assistance Program.

Meanwhile, bonds of major banks are languishing as financial institutions continue to make write-downs and credit losses.  For instance, the costs to insure Citigroup against defaulting on its debt hit a record close of 621 basis points in early March for 5-year credit default swaps, according to Markit. The costs have since slipped to 581 basis points, meaning it costs $581,000 per year to insure $10 million in debt over five years: a level still reflecting investors' deep concerns about the quality of the debt. The all-time high for U.S. financial entities bonds aggregated yield spreads over government Treasuries was just above 8 percentage points in the fourth quarter, a level retested in early March before it narrowed to 760 basis points on March 20, according to Morgan Stanley's data.

To be sure, if banks fare better than expected in the tests then their bond prices, which move inversely to yields, could surge. "If we go through all the stress tests and we find out that there are no more capital infusions needed, I would expect a rally in financials," said Flanagan. Even so, "I wouldn't dive into the pool," he added. Until the impact of the stress tests on major U.S. banks is clear, Flanagan said he would be very cautious about substantially raising exposure to those traditional bank bonds that are not guaranteed by the Federal Deposit Insurance Corp (FDIC) under the government's temporary liquidity guarantee program. The type of bank debt that is not government guaranteed "is really drawing a high-yield buyer or one using it as a substitute for equity," said Lawrence Glazer, managing partner of asset management company Mayflower Advisors in Boston.

Where Are the Leaders?
You wake up in the morning and once again the financial weather report calls for the Apocalypse followed by brief showers of despair. Seeking a ray of hope, you turn on the television and settle in to watch a Capitol Hill hearing. There in the hot seat is the man who holds the entire U.S. economy in his hands. And he looks like Harry Potter. You listen, eager for new ideas, but somehow much of what he says seems dispiritingly predictable. Is this the best America can produce? Aren't great crises supposed to bring forth great men? Did President Obama really just compare Timothy Geithner to Alexander Hamilton? We need Roosevelt and Churchill. Even watching Obama at times, it seems that we've elected -- despite their smarts and earnestness -- a government of stumbling technocrats whose solutions either fall short or go too far. It's enough to make you want to pull the covers back over your head.

Go online, meanwhile, and you find the HTML version of the French Revolution, with left and right calling for poor Tim to be strung from a lamppost. You actually start feeling sorry for the guy. Arianna Huffington snipes that "the issue isn't his delivery, it's what he's delivering." Nobel Prize-winning economist Joseph Stiglitz concludes that Geithner's plan "amounts to robbery of the American people." Next you find Connie Mack, Republican senator from Florida, fulminating that "quite simply, the Timothy Geithner experience has been a disaster. . . . America needs and deserves a Treasury secretary who can truly lead us forward." On that point, at least, he's right. We do need strong leadership. The world is in chaos. There are riots from Greece to China. Iceland has collapsed, and Mexico teeters on the edge. Pakistan is broke, melting down and awash in nukes. Yes, the stock market soared with Geithner's toxic asset plan, but didn't he and Obama dismiss Wall Street's response when the first version of the bank bailout landed with a thud last month? Don't we hate Wall Street? Obama and Geithner subsidize hedge funds on Monday and come back with heavy regulations on Thursday. What gives?

Gradually it becomes clear. This is not just a global economic crisis. It's a global leadership crisis. Obama is still finding his footing, Gordon Brown is on his way out, Hugo Chávez is nuts and Wall Street management is larcenous. Isn't there someone somewhere with decent values, a firm hand on the tiller and at least one big new idea? Where have all the leaders gone? Tim Geithner, love him or hate him, is only one illustration of the problem. Everywhere you look, it seems that the men and women in positions of power are receding. The closer you look, the smaller they get. Once there were titans running the financial and business worlds, lions of the legislature, great statesmen astride the global stage, individuals who weren't just victims of history but who bent it to their wills. Or maybe it's just that people in the rearview mirror appear larger than they really were.

But there is the president of the United States sitting in the same "Tonight Show" seat that Paris Hilton and Lindsay Lohan once occupied. And just ask the heads of the Big Three automakers or of the big banks who were hauled down to testify before Congress how it feels to be a captain of industry today. So it's left to a nebbishy comic from New Jersey, the host of a fake news show, to stand in as the nation's moral conscience and call out those responsible for the collapse of journalistic, political and economic values in America. The problems go beyond just the quality of leaders today, extending to nearly every one of the alphabet soup of institutions they purport to lead worldwide. Already, expectations are low and sinking for the upcoming meeting of the G20 in London. This is due in part to the First Law of International Meetings: The amount of leadership that comes out of any meeting is in inverse proportion to the number of leaders attending.

In this case, the G20 is already too large; in fact, 26 delegations will gather in London. But beyond the unwieldy size, there are more rifts than there are delegations, rifts over whether there should be big coordinated stimulus programs, a new reserve currency or a new financial architecture. All the meeting is likely to produce is a photo op, a schedule of future meetings and a promise to pump some money into the International Monetary Fund -- a promise the participants might find hard to keep. How did we get here? In hindsight, the sequence of history is clear. After Vietnam and Watergate and oil crises and the failures of Eurosocialism in the 1970s, many people bought into the idea of government as the problem. The efficient markets would tell us what and who should succeed. Here in the most powerful country in the world, Republicans and Democrats alike bought into the philosophy. The values of business -- profit above all, wealth as the prime measure of success, short term over long term -- became society's values. We came to expect too much of our business leaders and too little of our political ones.

Then it all came undone. Bubble after bubble burst, in emerging markets, technology and real estate. The gap between the richest and the poorest started to rival historical extremes. During the past few years, the world's most important leader, the U.S. president, became reviled and disrespected. And as this latest crisis has unfolded, the myth that the people in charge knew better collapsed faster than an over-leveraged investment bank. The result has been a leadership void. So if we face a leadership deficit that rivals our economic deficit, who's going to bail us out of it? Certainly people and ideas will ultimately fill this void, and institutions will emerge reshaped by them. The question is when? Even as we search for leaders to follow, we must recognize -- especially as we are weighing the initiatives of today's would-be leaders -- that even though great leadership happens in real time, we often fail to appreciate it except in retrospect.

Despite FDR's unprecedented legislative output in his first 100 days, including 14 major pieces of legislation and a bank bill that was turned around in mere hours, he was hammered by H.L. Mencken and other commentators as being out of touch. Even Churchill spent much of the 1930s frustrated and on the fringes of power. But gradually, answers do emerge in times like these. As Daniel Roth recently wrote in a perceptive article in Wired magazine, tough times force-feed innovation, while good ones often cultivate complacency. The Depression produced inventions such as television and nylon, and it refocused IBM into an eventual computing colossus. The recession of the early 1990s gave birth to software giants and the first Internet companies. The bursting of the dot-com bubble led to Apple's reinventing itself and the entire music industry with the iPod. Individual business leaders from Thomas Watson to Steve Jobs came to the fore or reemerged in these times as well, much as a new generation of political leaders was defined by the Depression and World War II.

In each case, the leaders who succeeded looked beyond the crisis, beyond old ways, and found something new. They kept their eye on the post-crisis world.  This tumultuous moment has also thrown up some names of people who may be on to something, who may be leading the way for the leaders of this era. Last week, Ratan Tata unveiled the Nano, India's "people's car," which, for a $70 down payment and $2000 overall, can deliver an automobile to poor populations. Tata is already struggling to keep up with a demand for more than 1 million vehicles a year. Chilean Finance Minister Andrés Velasco earned scorn four years ago when he insisted that his country set aside its huge copper surpluses for a rainy day. Now that the rainy day has come, he is one of the most highly regarded figures in Latin America. Here in the United States, there is Barack Obama. At a time of great crisis, there are invested in him -- as they were in Roosevelt -- the hopes of a nation and of the world. He has embraced the example of Lincoln, surrounding himself with powerful, independent-minded advisers. But as we watched his news conference last week, and as we listen to Geithner's testimonies and see the administration's economic team in action, we have to wonder: Will they emerge as the leaders we need, with new ideas, courageous enough to shape new institutions? The record so far is mixed.

Obama has made missteps in his first two months, and we can only guess whether they are due to his learning curve or his predisposition. The president's economic team is so uniformly drawn from one time and place -- Bob Rubin's farm team -- that they look like a poster child for the early warning symptoms of groupthink. Geithner & Co. have floundered in breaking free of the ideas that dominated in the 1990s, but they have also been bold about reintroducing government's role where it must be greater. Thus far, there is as much to worry us as there is to comfort us. Soon, we will have to judge this crew and, if they fall short, demand change yet again. But to paraphrase Roosevelt, Obama can only be as great a president as the people let him be. If citizens had turned on Roosevelt early, he would have faltered, along with the nation's recovery. Because what is often lost in such discussions is the idea that leadership implies collaboration. We get the leaders we demand and thus deserve. (As the United States and England were making Roosevelt and Churchill, Germany and Italy were making Hitler and Mussolini.)

Lately, it feels harder to live up to our share of the bargain. Imagine if partisanship, impatience and short-sightedness make it impossible for this new cast of leaders to have a full chance to define this new era. It is worth remembering that prior to their greatest successes, Lincoln and others as diverse and illustrious as George Washington and Mohandas Gandhi were written off as failures. In the end, a big part of the answer in our quest for leadership resides with the American public. We are the ones who will embrace the ideas and empower those who act on them. We are the ones who will decide what we accept or demand as the proper role of government, of markets and of America in the world. This will require more reason than emotion, more patience than impulse, more focus on core values than on economic value creation, more of a long-term view and less focus on instant gratification. After all, our wrong choices in these arenas helped create our leadership vacuum in the first place.

'Blue-eyed bankers' prompt G20 divide
The small town of Jwaneng - which means "place of small stones" - in the Kalahari desert has helped to make Botswana one of the most stable countries in southern Africa. It is the home of the world's richest diamond mine. But last month the diamond company De Beers shut down production at Jwaneng and at its three other mines in Botswana. Demand for precious stones - which made up 70% of the country's exports - has collapsed in the wake of the recession. Mines also lie mothballed in Namibia, while workers have been laid off in the Democratic Republic of Congo. It is a stark illustration of how wealthy westerners tightening their belts can hurt the vulnerable who scrape a living producing their now unwanted luxuries - from the sparkle in an earring to the coffee in a latte. While the recession threatens redundancy and repossession in Britain, in Africa it means life or death.

The struggle of the world's poorest to survive a crisis minted by the richest is shooting up the agenda of this week's G20 summit in London, the largest gathering of world leaders here for 46 years. And Lord Malloch Brown, the Foreign Office minister, fears the economic storm buffeting a fragile continent may have violent consequences. "If you look at the Democratic Republic of Congo, 200,000 miners have lost their jobs: in Katanga [the mining province] it is living hand to mouth with a few days' worth of foreign exchange, waiting to get an IMF loan," he said. "The effort to integrate rebels in the national army, all that peacebuilding, is being incredibly affected by the fact they can't afford to pay the army. There have been four coups in Africa in the past 12 months, not all of them solely as a consequence of this, but I have a sense of a creeping tide of instability coming back.

"This is not to belittle people here losing their homes and their jobs, but in Africa I heard Bob Zellick, chairman of the World Bank, say that 400,000-500,000 infant deaths could occur as a result. People are dropping back into poverty, with a real risk to life." Last autumn in Washington, the G20 concluded that the developing world would be largely untouched by the banking crisis. Ten days ago, African leaders, including Botswana's PM, met Gordon Brown to convince him otherwise. Now ministers are working frantically on a package of aid, credit and trade boosts for Africa to unveil this week. But will that be enough to bridge the dangerous rift opening in the G20 - not between America and Europe, but between the developed countries who wrecked their own economies and the emerging nations suffering as a result?

The attack last week by Brazil's president, Luis da Silva, on "white blue-eyed bankers" revealed a new anger among some of the world's most populous countries at being dragged into a mess not of their making - and a determination to hold the west to account. India's prime minister will use the summit to challenge what it says is creeping protectionism costing Asian jobs. China will exact more influence over the IMF in return for bailing it out. Chile's Michele Bachelet used a joint appearance with Brown to stress how, unlike Britain, her country saved vast revenues "during the good times" - which it is now having to spend. Even George Soros, the currency speculator and major Africa donor, yesterday warned that the G20 must insulate developing countries "against a calamity that is not of their making".

So will a new world order emerge from this clash of nations? And if so, will it be one in which Britain - the City neutered, its seats on international institutions from the UN to the IMF under pressure, and its military prowess threatened by tightening budgets - must accept it can no longer be a first-rank power? In London's Docklands, at the waterfront ExCeL Centre, they have spent the week preparing for war. Volunteers have role-played battles, debated military tactics and scrutinised conflict scenarios. Fortunately, the war-gaming exhibition being staged at the G20 summit venue will have been dismantled by the time Barack Obama arrives on Tuesday night. But the predominant mood swirling around this summit remains one of anger, from the corridors of power to the streets of London where protesters threaten to hang effigies of bankers from the lampposts.

The emergence of such hardliners worries Malloch Brown, who hopes the anger "can get channelled towards strong outcomes and not towards an atavistic rage". But will there be a genuine breakthrough? After weeks of hyping the summit as the answer to Brown's prayers, ministers are now lowering expectations. Asked about it last week, the education secretary, Ed Balls, retorted: "Are they in one weekend going to solve the problems of the world? Of course not." Brown has given up on a worldwide financial stimulus: climate change has dropped off the agenda, although the communiqué will commit to make a success of December's global warming summit in Copenhagen. Ominously, Germany's Angela Merkel predicted yesterday that there would not be a final deal on banking regulation or trade, and the summit "will naturally not solve the economic crisis either", adding they would need a second meeting.

Malloch Brown, however, is upbeat about the chances of a "big package" to boost Africa and a return of confidence to the financial markets. But the sheer logistics of getting agreement from a group that may control 85% of the world's GDP but also spans huge differences of opinion and vested interests are daunting. "There are 20 of them and they are in a room for maybe 10 hours. So they've got 30 minutes each, in effect," says Tony Dolphin, chief economist at the IPPR, a think tank. "Even if there were only six issues, that's five minutes per person per issue: what can they say in that time?" Which is why Brown has spent five days travelling, seeking to nail down a deal before the summit begins. But the risk of last-minute hiccups is still real.

"It's a Rubik's cube, and if just one person objects to one piece there's a risk that other pieces get pulled out and the whole thing doesn't hang together," admits Malloch Brown. "This is a much bigger group of people than the typical summit and the final negotiations are much more complex." As a result, many Labour MPs fear it may not produce results the public understands, thus widening a gulf between ordinary families anxious about their prospects and politicians seen as out of touch. Ministers are now belatedly trying to humanise a potentially dry and technical debate. Harriet Harman, the equalities minister, will tomorrow publish a report to the summit which warns that women losing their jobs may not show up in the unemployment figures, since some will stay at home to raise children. It cites anecdotal evidence that many taking voluntary redundancy are women on maternity leave who cannot face fighting for their jobs.

Ed Miliband, the climate secretary, yesterday entertained a delegation of American steelworkers, international union leaders and development charities for coffee and croissants at the Treasury to insist that their concerns over jobs, aid and climate change were not forgotten. Aides say, however, that the financial system must be fixed before moves to protect homes and livelihoods can succeed. But that does not mean that the conclusions of this summit will not affect the millions of ordinary Britons. Far from it. With Jamie Oliver preparing a summit dinner showcasing "budget British cooking", and world leaders offered a downgraded goodie bag including a tea-towel, the mood of the summit is studiedly austere. But it is not only VIPs who will have to adjust their expectations.

One key issue for debate on Thursday is what role the difference in saving and spending habits between the two economic powerhouses of America and China played in triggering the crisis. While Americans love to shop, often on credit, Chinese households traditionally put money aside. For years, China used those savings to invest abroad, particularly in US bonds - thus pumping billions into the US economy and helping fund more cheap credit. Many economists believe a recovery now requires bursting that artificial bubble and rebalancing the economy so that Chinese consumers are encouraged spend a little more - reducing America's trade deficit - and Americans a little less. Malloch Brown suggests Britons, too, will need to relearn the art of saving.

"There is the recognition that you are not going to go back to the world as it was before, and we must get a new balance between spending and saving and borrowing. You can't have the old model where it was the US consumer who was widely seen as driving growth through his or her spending and borrowing. "You are going to see a situation where countries in Asia begin to spend and consume more at home and countries in the west have to move towards a more prudent lifestyle and live within their means." Consumers will also have to learn "within environmental limits", he said, which could also affect standards of living for those wedded to cars and cheap flights. But the toughest set of negotiations this week are likely to centre on trade. The communiqué is expected to include pledges not to resort to protectionism, but is unlikely to specify what protectionism means - to the anger of emerging nations, who think it should forbid rich countries such as the US and UK forcing their bailed-out banks to prioritise domestic mortgage and business lending over overseas loans.

It may not, however, be only the economic world order that shifts this week: the banking crisis is starting to shake the kaleidoscope of foreign policy, too. As MPs debated Iraq last week, three government departments slipped out a short joint statement to Parliament. Buried in it was the news that Britain is cutting its role in world peacekeeping and will be "unable to sustain funding levels to all regions". The UK will withdraw from the UN mission to Kosovo, reduce activity in the Balkans, shift resources from west Africa and scrap programmes in Latin America. The move was blamed on falls in sterling, making Britain's bills for the UN, EU and other international organisations that charge in dollars more expensive, as well as on new demands. But it underlines the other big question facing Britain this week: how long can it afford to remain a military world power?

This week sees the publication of a review of military reservists, which is expected to accept they should be better prepared to meet increasing demands to back up over-stretched regular forces. And once Thursday's summit is over, many of the same leaders will reassemble at Friday's Nato summit. President Barack Obama's blunt message will be that Washington has shouldered too much of the burden in Afghanistan, and that Nato partners should do more. But amid a recession that threatens EU members' defence budgets, he risks an equally blunt response. Merkel has promised to "explain forcefully" why Germany's contribution to the war effort is already impressive - meaning Britain, which had resisted offering extra troops, may now do so. The summit is expected to agree a strategic review of Nato's future role, but the elephant in the room - particularly given the absence of Obama's defence secretary, Robert Gates, who is finalising US defence spending cuts - will be how much members are prepared to pay for their armed forces in leaner times.

Senior Labour figures are already debating whether to advocate slashing defence spending after the election and joining a common European defence policy instead. "We need to be honest about what we can do," says one former cabinet minister. Such thinking has broad consequences. Amid the pre-summit horse-trading last week, Britain endorsed Brazil's campaign for a permanent seat on the UN Security Council, although new members risk diluting British influence. "A crisis forces decisions," notes Malloch Brown, who, as a former UN deputy secretary general, oversaw years of stalled talks on security council reform but who now argues it may be time to act. So will Britain, as one former treasury minister suggests, find itself bumped a few rungs down the international pecking order once the recession is over? Malloch Brown admits we may take a "cut in our cloth" internationally, but insists Britain still punches above its weight in peacekeeping, overseas aid and institutional reform: similarly, the IPPR's Dolphin suggests Britain's boldness in experimenting with measures such as quantitative easing will ensure that others keep looking to the UK for leadership.

For now, however, Brown still faces a troubled few weeks finalising the 22 April budget. Any dreams of a major package of tax cuts and spending to kickstart the economy died when the Bank of England governor, Mervyn King, publicly warned that Britain could not afford it. But the prime minister insisted in Chile that he could still take "targeted actions" to boost cashflow - which could include heeding pleas from Labour MPs to channel more money to the poor, who are most likely to spend it. This week's summit may just be the start of a worldwide redistribution, however small, from the chastened rich towards the angry poor. And if it is not, the G20 leaders may suffer the consequences.

World leaders urge crisis reform
Center-left world leaders including Britain's Gordon Brown and Brazil's Luiz Inacio Lula da Silva on Saturday called for global financial reforms at next week's G20 summit, but the U.S. warned against over-regulation. Meeting in the Chilean coastal resort of Vina del Mar in a pre-G20 warm-up, Brown, Lula, host Chilean President Michelle Bachelet and Spanish Prime Minister Jose Luis Rodriguez Zapatero said deep financial reforms were vital to avert a another financial meltdown. "The whole world is paying the price for the collapse of a reckless venture of those that have turned the world economy into a gigantic casino," Lula told fellow leaders in a roundtable discussion.

"We are rejecting blind faith in the markets." Brown said the G20 summit in London had to focus on concrete ways to revive growth and create jobs while protecting the environment and the world's poor. "We have got to be very clear that banking cannot be unsupervised any more; there's got to be cross border supervision," he said, calling for an overhaul of the system of international finance and coordinated policies to help underpin sustainable growth. U.S. President Barack Obama has called on fellow G20 leaders to agree on immediate action to help boost the struggling global economy, while Brown wants the group to back a $100 billion expansion of trade financing and agree upon a long-delayed global trade pact.

U.S. Vice President Joe Biden told the meeting overlooking Chile's Pacific coast the United States was eager to coordinate international policy to reduce systemic risk to global markets, but warned over-regulation could hurt healthy markets. "We should not over-react. It is not a choice of markets or governments," Biden said. "A free market still needs to be able to function." Thousands of people marched in Britain, France, Germany and Italy on Saturday to protest the economic crisis and urge world leaders to act to reduce poverty, create jobs and avert climate change at the G20 summit. "We have to democratize the economy, globalization and the financial system. How to do this? We already know: with information, transparency and responsibility," Zapatero said.

G20 summit: blow for Gordon Brown as $2 trillion spending blueprint is leaked
In an embarrassing disclosure, a draft of the final communiqué to be signed off by world leaders at the end of the one-day gathering on Thursday appeared in the German magazine Der Spiegel. There were suspicions that the leak was a deliberate act of sabotage by sources within the German government, where Chancellor Angela Merkel is adopting a more cautious approach to fiscal moves to boost the national economy than Mr Brown, who will chair the summit. A Downing Street spokesman said the leak was an "old document with out of date figures" and that the £1.4 trillion was an estimate by the International Monetary Fund (IMF) of stimulus measures already introduced by G20 countries. No new money was included, the spokesman added.

The comments, though, only served to increase speculation that Mr Brown was being forced to scale down ambitious plans because of international opposition, led by Germany and France. Ahead of the summit, which will be held at the ExCel centre in London's Docklands, Mr Brown unveiled plans for a new crackdown on tax havens across the world. Lord Owen, the former Labour foreign secretary, also warned that unless inflation was controlled, Britain's economy might have to be constrained by the IMF. David Cameron's Conservative Party also widened its lead over Labour to 13 per cent in an ICM opinion poll for The Sunday Telegraph.

The leaked communiqué mentioned a figure of $2 trillion – £1.4 billion – in brackets, signifying it was a proposal for spending by G20 nations by Britain, as summit host, that still had to be formally agreed. According to the leak, this would boost growth by two per cent and employment by 19 million. The draft also suggested that Britain wanted the G20 to come up with a target for global growth in 2010 – although no figure was mentioned. The document stated: "We are determined to restore growth, resist protectionism and to reform our markets and institutions for the future. "We believe that an open world economy, based on the principles of the market, effective regulation and strong global institutions, can ensure sustainable globalisation with rising wellbeing for all."

Insiders at Der Spiegel said the magazine had obtained the leak from German government sources. British officials, however, declined to blame Mrs Merkel's inner circle directly, pointing the finger of blame instead at smaller political parties inside her ruling coalition. A No 10 spokesman said the £1.4 trillion figure did not amount to "extra money" which Britain was calling for governments to spend to try to rescue economies which have been crippled by the credit crunch, but referred instead to estimates of expenditure which had already been made. Mr Brown has faced claims that he wants to use the Budget, on 22 April, to unveil a big new fiscal stimulus for Britain while Alistair Darling, the Chancellor, and Mervyn King, the Bank of England Governor, are advocating caution.

The Prime Minister wants a main focus of the summit to be a clampdown on tax havens, with a three-point plan aimed at building on moves which have already seen Switzerland and Liechtenstein agree to abide by new transparency standards. Britain will push for support on new moves to use tax incentives to stop companies and individuals trading with those who are resident in "non-compliant jurisdictions", Government sources said, while there will also be new measures requiring companies to disclose more details of dealings with tax havens. The third part of the proposed clampdown involves a review of investment policies of institutions such as the IMF and retail development banks with a view to cutting the funds available to tax havens.

Amid the frantic preparations for the summit Lord Owen, foreign secretary under Jim Callaghan in the late 1970s, uses an article in today's Sunday Telegraph to warn that Britain's economy might have to be subject to "IMF disciplines" – which would require painful public spending cuts – to halt a "precipitate loss of confidence". Lord Owen sounded the alert about the twin threats of a falling pound and inflation, which crippled Callaghan's government, being repeated under Mr Brown. "There is an air of breathtaking unreality in Westminster and Whitehall that reminds me of 1975," he wrote. "Hard choices need to be taken now, not postponed until after an election in 2010."

His comments are certain to infuriate ministers, Labour MPs and activists, many of whom still blame him for his role in splitting Labour by forming the Social Democratic Party (SDP) in the early 1980s. In autumn 2007, two months after Mr Brown became Prime Minister, the two men held talks in Downing Street, leading to speculation that the peer was considering returning to the Labour fold. Lord Owen's warning about the IMF echoed similar alerts sounded recently both by George Soros, the Hungarian financier, and Mr Cameron.

Meanwhile, George Osborne, the shadow chancellor, used a speech yesterday to Welsh Conservatives in Cardiff to taunt Mr Brown over his stewardship of the British economy. Mr Osborne said: "When Gordon Brown sits down with the other G20 leaders in London next week, he will have to explain why he, of all the people sitting around the table, has the highest budget deficit – why the economy he presides over, of all the economies represented at the table, is forecast to still be in recession next year."

Hannan downs Brown
European Parliament speech of 26/03/09. Daniel Hannan is a Conservative MEP for the South East of England and author of "The Plan: Twelve Months to Renew Britain"

Prime Minister, I see you’ve already mastered the essential craft of the European politician, namely the ability to say one thing in this chamber and a very different thing to your home electorate. You’ve spoken here about free trade, and amen to that. Who would have guessed, listening to you just now, that you were the author of the phrase ‘British jobs for British workers’ and that you have subsidised, where you have not nationalised outright, swathes of our economy, including the car industry and many of the banks? Perhaps you would have more moral authority in this house if your actions matched your words? Perhaps you would have more legitimacy in the councils of the world if the United Kingdom were not going into this recession in the worst condition of any G20 country?

The truth, Prime Minister, is that you have run out of our money. The country as a whole is now in negative equity. Every British child is born owing around £20,000. Servicing the interest on that debt is going to cost more than educating the child. Now, once again today you try to spread the blame around; you spoke about an international recession, international crisis. Well, it is true that we are all sailing together into the squalls. But not every vessel in the convoy is in the same dilapidated condition. Other ships used the good years to caulk their hulls and clear their rigging; in other words – to pay off debt. But you used the good years to raise borrowing yet further. As a consequence, under your captaincy, our hull is pressed deep into the water line under the accumulated weight of your debt.

We are now running a deficit that touches 10% of GDP, an almost unbelievable figure. More than Pakistan, more than Hungary; countries where the IMF have already been called in. Now, it’s not that you’re not apologising; like everyone else I have long accepted that you’re pathologically incapable of accepting responsibility for these things. It’s that you’re carrying on, wilfully worsening our situation, wantonly spending what little we have left. Last year - in the last twelve months – a hundred thousand private sector jobs have been lost and yet you created thirty thousand public sector jobs.

Prime Minister, you cannot carry on for ever squeezing the productive bit of the economy in order to fund an unprecedented engorgement of the unproductive bit. You cannot spend your way out of recession or borrow your way out of debt. And when you repeat, in that wooden and perfunctory way, that our situation is better than others, that we’re ‘well-placed to weather the storm’, I have to tell you that you sound like a Brezhnev-era apparatchik giving the party line. You know, and we know, and you know that we know that it’s nonsense! Everyone knows that Britain is worse off than any other country as we go into these hard times. The IMF has said so; the European Commission has said so; the markets have said so – which is why our currency has devalued by thirty percent. And soon the voters too will get their chance to say so. They can see what the markets have already seen: that you are the devalued Prime Minister of a devalued government.'

Gordon Brown's G20: is it too late to call the whole thing off?
The Prime Minister's run-up to the G20 in London just carries on getting better. My colleague Toby Harnden had the scoop  that the President will have a meeting with the leader of the opposition after he flies in to Britain on Wednesday. If you listen very carefully, you can hear the sound of mobile phones being thrown against walls inside Number 10.Initially, as Toby says, the Tories had not requested a meeting with Obama, presumably wanting to avoid a rejection. But now they will meet.

Team Cameron is refusing to get into the question of who made the first move. Although I wouldn't be surprised if it involved some quiet diplomacy by Ed Llewellyn, Cameron's mandarin-style chief of staff and former aide to Chris Patten when he was in Hong Kong Anyway, the PM will hardly be delighted at this development, as it suggests that the White House is preparing for there being a new occupant of Number 10.   Brown has worked tirelessly, although he looks exhausted, in the build up to G20. But for his pains he has been told by the Governor of the Bank of England that he has no room for the further fiscal stimulus he is trying to persuade the world to adopt.

He was duffed up in the European parliament by Dan Hannan. His trip to Chile was a low point, when the Chilean President said that her government had saved in the good times so it could afford to spend to mitigate the effects of recession. Unlike you know who. Coupled with the noises suggesting that Obama thinks the G20 summit itself is a giant waste of time, and now Cameron's coup, Brown must be wondering whether its too late to call the whole thing off.

Ilargi: Yes, it's the broken record Ambrose Evans-Pritchard again. Not content to repeat himself entirely, he ventures into the wild wide world of opinionating over yonder. Of course people are entitled to see things in varying ways and degrees. But you lose about all you have left when you praise Gordon Brown for "trying to hold the world together" and call the Bank of England’s actions to date "heroic". The English just can't stand the fact that they are deeper in the doghouse than any other (formerly?!) rich country. There may alwys be a chance, however small I think it is, that Europe's policies of financial restraint lead to less favorable results than the Anglo models. Amid the uncertainties regarding varioua policies, though, one thing is sure: what the US and UK are doing is a gamble. It’s never been done before. Which means calling it the only right answer is questionable, no matter how hard you shout.

Only a united front at the London G20 can save the world from ruin
By the time world leaders gathered to vent their spleens at the London Economic Conference in June 1933, the Slump had already done its worst. Catastrophic policy errors – tight money – had caused the 1930-31 recession to metastasize into debt deflation. Hitler had been let into government with three cabinet seats, enough to give him the Prussian police and Reich interior ministry. It was all he needed. Any country that tried to reflate alone was punished by creditors. Most stuck grimly to liquidation. Europe and America undercut each other with beggar-thy-neighbour moves on trade and gold. The surplus countries refused to play their part in restoring demand – just as they refuse today, either because they will not (Germany and the Netherlands, who between them have a surplus of $294 billion) or because they cannot for structural reasons (China, $401 billion).
It was impossible for deficit states to fill the breach, so the system folded on itself. Today, the biggest deficits are: the US ($673 billion), Spain ($155 billion), Italy ($73 billion), France ($57 billion), Greece ($50 billion), Britain ($46 billion). When the Banque de France withdrew gold deposits from New York in October 1931, the US Federal Reserve was forced to raise rates from 1.5 per cent to 3.5 per cent at a terrible moment. It knocked the stuffing out of the US banking system. Needless to say, France was the bigger loser from this petulant act, though that took time to become evident. The London Conference was a fiasco. President Roosevelt refused to attend. He took a sailing holiday to flag his contempt for Old World posturing. FDR feared a trap to draw America back onto the Gold Standard – the source of the misery – and to lock the White House into Europe's deflation orthodoxies. As delegates waited, he cabled a message mocking the "old fetishes of so-called international bankers". Keynes defended him as "magnificently right".

The London G20 comes earlier in the depression cycle. A good thing too. The fundamental circumstances are worse today than in the early 1930s. The debt burden is higher. The global economy is more tightly intertwined. The virus spreads more swiftly. Do not be misled by apparent normality. Unemployment lags, and social devastation lags further – although it has already hit the Baltics and Ukraine. Do not compress the historical time sequence either. Life seemed normal in early 1931 when the press reported "green shoots" everywhere. Part Two of the Depression was the killer. Part Two is what we risk now if we botch it.

Yes, we have done better this time. We saved the credit system. Central banks have slashed rates to near zero in half the world economy. The heroic Bank of England has pioneered monetary stimulus a l'outrance, even if the ungrateful wretches of this island mock their own salvation. But we must move faster because world manufacturing is collapsing at three times the speed. The damage that occurred from late 1929 to early 1931 has been packed into six months. Japan's exports fell 49 per cent in January. Holland's CPB Institute says global trade shrank 41 per cent (annualised) from November to January. Industrial output has fallen heavily over the last year: by 31 per cent in Japan, 24 per cent in Spain, 19 per cent in Germany, 17 per cent in Brazil, 13 per cent in Russia and by 11 per cent in the UK and US. Almost all has occurred since September.

In any case, the European Central Bank (ECB) is still standing pat. It is partial to medieval leech-cures – and hamstrung by the lack of EU debt union. Now, if the G20 were to convey the world's wrath at Europe's monetary paralysis, we might get somewhere. But Gordon Brown has been sidetracked by fiscal flammery. We are past that stage. Only the printing presses can rescue us, and the ECB refuses to print. Tactically, Mr Brown erred gravely by promising "the biggest fiscal stimulus the world has ever seen". It is not his gift, and comes ill from a deadbeat state that cannot sell its own bonds. There again, was it wise for the Czech premier and titular EU president to rubbish Barack Obama's fiscal blitz as the "road to hell"? That too comes ill from a leader who has just lost a no-confidence vote over his handling of the Czech economy. But the hapless Bohemian speaks for Europe, where Hooverism is written into EU Treaty law. Indeed, last week Brussels fired anathemae at Greece, Spain, France, Britain and Ireland, for breach of the 3 per cent deficit rule. We must retrench under Regulation 1466/97. Laugh not.

Germany's finance minister, Peer Steinbruck, is still digging in his heels against "crass Keynesianism". No matter that his economy will shrink 6-7 per cent this year. Germans must sweat it out: some more than others. Unemployment may reach five million in 2010. No doubt spending is a poor instrument, and we are all sick of bail-outs. But Mr Steinbruck might brush up on history. It was the deflation of 1930-1932 – not the hyperinflation of 1923 – that killed Weimar democracy. (Communists and Nazis won half the Reichstag seats in July 1932). The neo-Marxist Linke Party is already angling for 30 per cent in June's Thuringia poll.

You may agree with Mr Steinbruck. Fine. Capitol Hill does not. The most protectionist Congress since Bretton Woods is not going to acquiesce as precious US stimulus leaks abroad to the benefit of "free-riders". Patience will snap. "Buy American" is already US law. The risk is that this G20 becomes the defining moment when a disgusted American political class – sorely provoked – turns its back on the open trading system. The US alone has the strategic depth to clear its own path, and might find eager partners in a "pro-growth bloc" – much as Britain led a reflation bloc behind Imperial Preference in the early 1930s. As the world's top exporters, Germany and China should take great care to restrain their body language this week. Well done, Mr Brown, for trying to hold the world together. But if the summit degenerates into a shouting match between mercantilist creditors and prostrate debtors, it may serve only to frighten markets and tip us into the next – more violent – downward leg of this slump.

The 'revolution' starts here as 35,000 pack the G20 march
They hoped for 10,000, but in the end more than triple that number turned out on London's streets for the biggest demonstration since the beginning of the economic crisis. The Put People First march yesterday was organised by a collaboration of more than 100 trade unions, church groups and charities including ActionAid, Save the Children and Friends of the Earth. The theme was "jobs, justice and climate" and the message was aimed at the world leaders who will be gathering for the G20 summit here this week.

The marchers, estimated at 35,000 by police, accompanied by brass bands and drummers and a colourful assortment of banners and flags, walked the four miles from Embankment to Hyde Park, where speeches from comedian Mark Thomas and environmental campaigner Tony Juniper, and music from the Kooks, made for a party-like atmosphere. People came from all over the country and families with children in pushchairs were among those marching. Jyoti Fernandes, an organic farmer who travelled from Somerset with her four children, said: "We are here to remind people that we have to look after our land and look after our food."

A group of fewer than 200 anarchists joined the march and were kept isolated and surrounded by police. Chants of "Burn the bankers!" were the closest anyone came to any show of aggression despite a heavy police presence and a few buildings along the route, including the Ritz Hotel, boarding up their windows. As protesters passed the gates of Downing Street, there were chants and shouts of "Enjoy the overtime". Thomas told the Observer he believed the protest marked "the start of a grassroots movement". He added: "This is a moment. This is the first time people have had a chance to come out on to the streets in a big way."

Kevin Stevens, 43, ignored police warnings for City workers to keep a low profile and came dressed in a pinstripe suit as a banker. "I thought I might prove all the talk about attacking City workers is nonsense," he said. Chris Knight, the anthropology professor suspended from the University of East London last week for suggesting that bankers might be lynched, was wandering the march alone. "I just met a copper and I said to him, 'Is this the revolution?' He said: 'No, this is the dry run, the revolution starts on Wednesday. Midweek is when we will really start to dance'."

Updates on the event and messages of support were quickly posted on social networking websites such as Twitter, which organisers encouraged people to use to provide live coverage. One blog dubbed the event as "Protest 2.0". Claire Melamed of ActionAid said the organisers were delighted with the turnout. "We're really pleased. We are hearing every day about people losing jobs and not being able to feed their children as this economic crisis deepens. We want the G20 to listen to us - this began as a financial crisis and it's turning into a humanitarian one." Police said there had been no arrests as of mid-afternoon, by which time the rain and wind began to disperse the crowds. But Scotland Yard is expecting a greater challenge on Wednesday 1 April, dubbed "Financial Fools Day", with a series of protests aiming to cause disruption in the Square Mile and elsewhere.

European protesters march in G20 rallies
Thousands of people marched through European cities Saturday to demand jobs, economic justice and environmental accountability, kicking off six days of protest and action planned in the run-up to the G20 summit next week in London. In London, more than 150 groups threw their backing behind the "Put People First" march. Police said around 35,000 attended the demonstration, snaking their way across the city toward Speaker's Corner in Hyde Park. Protest organizers said they wanted leaders from the world's top 20 economies to adopt a more transparent and democratic economic recovery plan.

Brendan Barber, who heads an umbrella group for Britain's unions, told assembled protesters in London's Hyde Park that the G20 needed to "take actions to lay the foundation for a better world." "If we can generate fabulous wealth, as we can, then surely we can learn how to distribute that wealth more fairly. If we can unleash a technological revolution then surely we can ensure that everyone on this planet gets the food, the shelter and the health care that they need," he said. Not all demonstrators focused on the economic main message. Some chanted "Free, free, Palestine." One man dressed in a banana suit waved a sign reading: "Bananas for Justice."

Big protests were also held in Germany. Around 15,000 people gathered in Berlin, and a demonstration also was held in Frankfurt, Germany's banking capital, under the slogan: "We won't pay for your crisis." Demonstrators in Berlin sported headbands reading "pay for it yourselves" and some carried a black coffin topped with red roses symbolizing what they said was the death of capitalism. Some protesters in Berlin skirmished with police toward the end of the demonstration, and the windows of some police cars were broken.

In Vienna, around 6,500 people gathered in the city center, with paper piggy banks, balloons or signs that read "We won't pay for your crisis" and "Capitalism can't be reformed." Others blew whistles, chanted or danced to music blasting from trucks or a stage in front of parliament. In Paris, a small but focused group of around 400 protesters dumped a pile of sand outside the city's stock market to mock supposed island tax havens. Protesters sat atop the sand pile in beach chairs — tossing around colored bills with "5,000 euros, tax free" written on them. Trade unions and left-wing groups in Geneva mobilized some 250 people who marched through town with banners reading "Capitalism is a mistake" and chants of "Revolution."

More protests are planned in London on Wednesday and Thursday, while left-leaning teach-ins, lectures, and other demonstrations are scheduled throughout the week. Protesters said the crisis could energize those hoping to challenge the economic and political status quo. "The whole economic meltdown ... There's a really good opportunity for governments to get together and invest in a sustainable future," said unemployed Steve Burson, 49. Security was tight around a small group of people waving anarchist flags Saturday. They and others have promised violence before the G20 meeting Thursday, and the British capital is bracing for a massive police operation as delegates fly in to London. "We've got a long week ahead," said Christian Evans, 40, an anarchist supporter flanked by black and red flags in London. "The streets are our streets."

Will there be blood?
A week or so ago America was seized by a spasm of fury over the bonuses paid to executives at AIG, a troubled insurance company. Across the country Americans were enraged that people who had helped to cause the financial meltdown were being rewarded for their incompetence. And Washington responded in kind. Congressmen queued up before the television cameras to tell everybody how upset they were. Larry Summers, the president’s chief economic adviser, described the bonuses as “outrageous”. Even Barack Obama tried to drop his ultra-cool persona to say how “angry” he was. The House voted overwhelmingly to impose a 90% tax on such bonuses.

The media responded to the storm of outrage by producing a stream of articles on American populism—the political disposition that damns established institutions, from Wall Street to Washington, and tries to return power to “the people”. Newsweek devoted almost an entire issue to the subject. But no sooner was the ink dry on these articles than the populist storm seemed to blow itself out. Many of the journalists who had been fanning the flames of anger attended a white-tie Gridiron Dinner in Washington on March 21st to perform silly song-and-dance routines.

Wall Street rallied two days later when the treasury secretary, Tim Geithner, published his plan to tackle toxic assets held by banks. Steny Hoyer, the House majority leader, suggests that bonus legislation “may not be necessary” now that 15 of the top 20 “bonus babies” at AIG have agreed to give their bonuses back. Was the fuss over AIG a sign of a new populist mood in America? Or was it just a storm in a teacup? It is hard to answer this question in a country in which anger is a form of entertainment and where the political parties have turned partisanship into a fine art. Television personalities such as Bill O’Reilly are always angry about something or other. Many of the politicians who proclaimed their outrage at the “malefactors of great wealth” are delighted to take campaign contributions from the very same malefactors.

But, for all that, there are good reasons for taking the resurgence of populism seriously. One is the breadth of the discontent in the country. Left-wingers complain that Mr Obama is selling out his supporters in order to rescue irresponsible financial institutions. Right-wingers worry that he is using taxpayers’ money to save people from the consequences of their own profligacy. This fear has plenty of resonance outside the world of political enthusiasts: a recent Harris poll shows that 85% of Americans believe that big companies have too much influence on politicians and policymakers.

Another factor is the size of the slump. America has lost almost 2m jobs in the past three months. The number of job openings is down 31% from a year ago. Consumer confidence is falling on all fronts. Mortgage delinquencies are at a record high. The future of attempts to stimulate the global economy is also in jeopardy: European leaders have implied that they will oppose pressure from Americans and Chinese to produce their own stimulus programme at the forthcoming G20 meeting.

America may be witnessing the return of an old-fashioned version of populism, driven by economic anxiety and directed at economic interests. The people who gave the name to “populism” in the late 19th and early 20th centuries were worried about a prolonged agricultural depression and furious at the vested interests in Wall Street and Washington who, they thought, were responsible for that depression. Populists accused the elites of turning America into a land of “tramps and millionaires”. This brand of populism went underground during the boom years, but Franklin Roosevelt revived it during the Depression. In one of his most passionate speeches, in 1936, he attacked the “economic royalists” of big business and the Republican Party.

In the 1960s economic populism was trumped by cultural populism. The Republican Party championed the interests of the “silent majority” against bra-burning feminists, civil-rights activists and effete liberals who were more interested in protecting the rights of criminals than preserving law and order. The Democrats made desultory attempts to revive economic populism in 2000 and in 2004: Al Gore campaigned for “the people against the powerful” and John Kerry denounced outsourcing companies. But this proved to be no match for the Republicans’ cultural populism. Now economic populism is returning to the heart of American politics.

This economic populism is made particularly potent by the long-term decline of faith in American institutions. The General Social Survey has been polling Americans about their confidence in major institutions (among other things) since 1972. The preliminary data for 2008 show a marked drop in confidence in every American institution since 2000 except military ones and education. The proportion of people expressing “a great deal of confidence” fell from 30% in 2000 to 16% in 2008 for big business, from 30% to 19% for banks, from 29% to 20% for organised religion, from 14% to 11% for the executive branch and from 13% to 11% for Congress. It was up, to 52%, for the armed services. These figures are the stuff that nasty movements are made of.

Populism poses serious problems for both political parties, not least because the very institutions which they spend their lives squabbling over are some of the least respected in the country, just above television and the press. The danger for Mr Obama and the ruling Democrats is that the administration is relying heavily on private investors and Wall Street banks to implement its various rescue plans. This inevitably means rewarding some of the people who were responsible for the crisis. The president hopes that his budget will channel destructive anger into support for his policies. But he could also find his administration blown off-course or even swept aside by popular outrage.

Ilargi: I can't shake the feeling that letting Geithner loose into the Sunday talkshow rounds equals giving up on him, maybe even hoping he says something too silly to defend.

Geithner Says Some Banks to Need 'Large Amounts' of Aid
U.S. Treasury Secretary Timothy Geithner said some financial institutions will need substantial government aid, while warning against any attempt to tax investors who join a federal program to buy tainted assets from banks. "Some banks are going to need some large amounts of assistance," Geithner said today on the ABC News program "This Week." The terms of a $500 billion public-private program to aid banks "cannot change" for investors or they’ll lose confidence in the plan, he said on NBC’s "Meet the Press." The Obama administration is pursuing the most costly rescue of the U.S. financial system in history while facing taxpayer concerns the aid is bailing out Wall Street firms that took excessive risks. After allocating about 80 percent of $700 billion in aid approved by Congress, administration officials want to keep open the option of seeking more.

Geithner said the Treasury has about $135 billion left in a financial-stability fund while declining to say whether he will request additional money.
"If we get to that point, we’ll go to the Congress and make the strongest case possible and help them understand why this will be cheaper over the long run to move aggressively," he told ABC News. Geithner announced this month a plan shore up the nation’s banks with a public-private partnership to finance the purchase of illiquid real-estate assets. The program will ensure banks emerge from the crisis "cleaner" and "stronger," Geithner told ABC News. The plan is designed to purchase as much as $500 billion of bad debts and securities from banks, allowing the institutions to remove tainted assets, attract private capital and resume active lending, according to Geithner.

"The great risk is that we do too little rather than too much" to revive credit and stem what economists say may be the worst recession in seven decades, he said. Banks need to show more willingness to take risks and restore lending to businesses in order for the U.S. economy to recover from the recession, Geithner said. "To get out of this we need banks to take a chance on businesses, to take risks again," he said. Increases in housing purchases and small business lending indicate government aid is reviving markets, he said. "Where we are acting, we are seeing progress and impact," Geithner said on NBC today. Geithner defended the public-private partnership by saying it was better than the alternatives of requiring banks to weather the crisis with limited federal backing or having the government buy the financial institutions’ toxic assets.

"The investors are taking risk, their money is at risk and at stake," he said. Allowing investors to leverage their money with government contributions and guarantees "is a relatively conservative structure," similar to when an individual obtains a mortgage to buy a house, he said. Geithner’s comments are part of an effort by the Obama administration to leverage public anger over the financial crisis to win support for giving the Treasury sweeping new powers. The public-private partnership plan has been criticized by Nobel Prize-winning economist Paul Krugman and other analysts as eliminating risk for investors. Arizona Senator John McCain, the Republican nominee for president last year, said that while he hopes the new plan works, the Treasury’s efforts to bolster the economy have suffered from "a great deal of incoherency for a long time. It seemed like every few days there was a target du jour."

Most members of Congress probably wouldn’t support a request for new bailout funds because they aren’t clear about how the government used the $700 billion authorized in the first legislation, McCain said. "We still don’t have the transparency and oversight," McCain said on "Meet the Press." He said his biggest concern is that the cost of stemming the financial crisis will worsen annual deficits projected to exceed $1 trillion for many years. "What I am most worried about is laying the debt on future generations of Americans," he said. When asked on "This Week" whether Treasury had enough resources to provide a similar level of aid to struggling U.S. automakers, Geithner said the administration was "prepared as a government to help that process."

"We want to have a strong automobile industry," he said. "We want it to emerge from this period of challenge stronger." "We’re prepared as a government to help that process if we believe it’s going to provide the basis for a stronger industry in the future that’s not going to rely on government support." Geithner proposed last week bringing large hedge funds, private-equity firms and derivatives markets under federal supervision for the first time. A new systemic risk regulator would have powers to force companies to boost their capital or curtail borrowing, and officials would get the authority to seize them if they run into trouble.

The administration’s regulatory framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission, subjecting them to new disclosure requirements and inspections by the agency’s staff. The SEC would be able to refer those firms to the systemic regulator, which could order them to raise capital or curtail borrowing. The strategy also would require derivatives to be traded through central clearinghouses. And it would add new oversight for money-market mutual funds to reduce the risk of a run on those funds after a shock such as last year’s failure of Lehman Brothers Holdings Inc.

Obama says GM, Chrysler "not there yet"
U.S. President Barack Obama said in an interview broadcast on Sunday that struggling U.S. automakers had not done enough yet to become "lean, mean and competitive" under federal oversight. Obama is expected to announce additional aid for General Motors Corp and Chrysler LLC on Monday as both automakers run down cash reserves that had been bolstered by $17.4 billion in emergency loans from the U.S. government.Obama, who appeared in a taped interview on the CBS-TV news program "Face the Nation," did not specify what steps he would announce, but said the automakers had more work to do to reduce costs in the face of slumping demand.

"We're trying to let them know that we want to have a successful auto industry, U.S. auto industry. We think we can have a successful U.S. auto industry. But it's got to be one that's realistically designed to weather this storm and to emerge ... much more lean, mean and competitive than it currently is," Obama said. "That's going to mean a set of sacrifices from all parties involved -- management, labor, shareholders, creditors, suppliers, dealers. Everybody's going to have to come to the table and say it's important for us to take serious restructuring steps now in order to preserve a brighter future down the road," he said. Obama added: "They're not there yet."

GM and Chrysler have won pending contract concessions from the United Auto Workers to bring hourly wage costs in line with Japanese automakers operating factories in the United States. But other targets set for the companies under the bailout approved in December by the Bush administration have not been met ahead of a Tuesday deadline for them to demonstrate they can be made viable with new government aid. Together, GM and Chrysler have asked for another $22 billion in loans from the U.S. Treasury to ride out the weakest market for new cars in the United States in almost 30 years.

GM and Chrysler have so far failed to win deals to reduce their debt as required by their federal loans. Chrysler, which is owned by Cerberus Capital Management, has set a target of eliminating $5 billion from the $11 billion it now owes to banks and the U.S. government by converting that to equity or negotiating other arrangements. GM has been in talks with its bondholders to reduce the $27 billion in debt that they hold by two-thirds. GM and advisers to its bondholders have exchanged proposals on a debt restructuring but have made little progress toward a deal.

JPMorgan not sure will disclose stress test results
JPMorgan Chief Executive Jamie Dimon said on Friday the company is "thinking about what we want to do" about releasing the results of a government stress test on the company. Dimon said the company already conducts stress tests on its performance and makes regular disclosures, but would not say that JPMorgan will make public the results of the regulators' test. The U.S. government is testing 19 of the largest U.S. banks to see how they would perform under more adverse economic conditions than they are expected to face. Officials have said the tests are not pass/fail, and are instead designed to determine the amount of capital they might need if conditions further deteriorate.

The government has until the end of April to complete the tests. Dimon, speaking after a meeting with President Barack Obama and other top bank CEOs, also said that "we don't need the money, we don't need the capital" when asked if JPMorgan planned to participate in the government's toxic asset plan. The U.S. Treasury Department on Monday provided more details on a government plan to cleanse banks' balance sheets of up to $1 trillion in distressed assets. Further, Dimon said the mark-to-market accounting guidance that the Financial Accounting Standards Board (FASB) has proposed will "mean almost nothing to us" but might help some other banks.

FASB plans to vote next week on the guidance, which would give banks more leeway to interpret how they should apply mark-to-market accounting standards. Mark-to-market accounting is aimed at giving investors an accurate view of financial companies' books, but some banks and lawmakers have blamed the rules for accelerating the financial crisis.

FDIC orders changes at six California banks
Revealing the recession's rising toll on financial firms, the Federal Deposit Insurance Corp. disclosed Friday that it had ordered six more California banks to clean up their acts in February after the agency examined their books and operations. The banks -- two in Los Angeles County, two in Riverside County, and one each in Stockton and La Jolla -- received "cease and desist" orders that spell out publicly what the banks must do, such as boost capital levels, beef up management and rein in risky loans. The number of such regulatory actions has been increasing rapidly. The FDIC, a primary regulator of many state-chartered banks as well as the guardian of federally insured deposits, has announced 10 public enforcement actions against California banks and bankers in the first two months of this year, compared with 24 in all of 2008 and no more than seven in each of the preceding three years.

By the end of 2009, two-thirds of the state's banks will be operating under cease-and-desist orders or other regulatory actions, Anaheim-based banking consultant Gary S. Findley predicts. "While it is not quite Sherman's march to the sea, the examination process for most has been disappointing, brutal, contentious and the basis of severe frustration among the bankers," Findley writes in a newsletter to be published next week. Most banks targeted in such actions eventually tighten up operations and continue in business or merge with stronger institutions, but regulators are preparing for a major wave of failures.

The FDIC recently began working to hire as many as 600 employees to liquidate the assets of failed banks in the West from a new office in Irvine. FDIC chief Sheila Bair predicts that failures will cost the federal deposit insurance fund $65 billion over the next five years. To keep the fund sound, the FDIC is raising premiums on the insured banks and thrifts that pay into the fund, which because of failures dropped from $34 billion on Sept. 30 to $18.8 billion on Dec. 31. The fund can borrow from the U.S. Treasury, so there is no chance it could run dry, FDIC officials have stressed. In addition to public cease-and-desist orders, banks are subject to a variety of regulatory sanctions, including so-called memorandums of understanding, which are informal directives to correct problems. Regulators don't release those memos, but banks sometimes disclose them to shareholders.

In his upcoming newsletter to clients, consultant Findley describes sitting in on 11 final conferences between regulators completing examinations and bank officials. To drive home their points, he said, the regulators have been using such adjectives as "severe," "significant," "excessive," "out of control" and "rapid." Not all the banks in the latest announcements were criticized for loan problems. The crackdown at Stockton's Bank of Agriculture & Commerce deals with a sideline business that helped a client route Social Security checks electronically to retailers and check-cashing businesses for people without bank accounts.

Regulators were requiring such detailed monitoring of the third parties involved that the bank is exiting the transfer business, Chief Executive Bill Trezza said. He described the incident as embarrassing, but said it was nothing like the problems plaguing much of the industry. "There are more than 300 banks in California, and the reality is that more than a third of those are losing money," Trezza said. Here are the other banks listed in the FDIC's log of February enforcement actions:

• Calabasas-based First Bank of Beverly Hills was ordered to raise capital after suffering heavy losses on real estate lending. The bank recently agreed to a takeover by a Chicago financial firm that pledged to provide new capital.
• Imperial Capital Bank of La Jolla, whose delinquent loans more than quadrupled in the last year, was ordered to raise capital and hire a chief executive "with proven ability in managing a bank of comparable size, and experience in upgrading a low-quality loan portfolio." The bank said in a recent news release that it had made "significant progress" toward strengthening itself.
• First Regional Bank of Los Angeles was ordered to raise capital and tighten lending standards after sustaining losses on commercial real estate mortgages and loans to builders. A bank official said First Regional had received $12 million in new capital from its parent company and was changing the composition of its loan portfolio to reduce risk.
• Desert Commercial Bank in Palm Desert was ordered to strengthen its management, raise capital, reduce its exposure to commercial real estate and overhaul its lending standards. Bank officials couldn't be reached for comment.
• Temecula Valley Bank was ordered to bring in managers capable of "upgrading a low-quality loan portfolio [and] improving earnings," raise capital and dispose of troubled assets. Frank Basirico, the bank's new chief executive, said in a news release this month that the bank had begun dealing with the FDIC's demands.

Bair Is Open to Banks Profiting on Problem Loans
Federal Deposit Insurance Corp. Chairman Sheila Bair said Thursday she would be open to letting banks see some of the profits if they dump problem loans that ultimately recover some value. The comments, made in a conference call with bankers Thursday, address a key industry concern with the government's plan for ridding banks of toxic assets. While bankers understand unloading troubled loans will help clean up their books, taking bargain-basement prices could cause immediate pain and transfer the prospect of any future recovery to the buyers.

The Treasury Department's Public-Private Investment Program involves setting up investment funds to buy loans from banks. Ms. Bair said banks might be able to take an equity stake in those funds as partial payment for their loans, which would give them a payoff if the loans ultimately rise in value and would provide bankers with more incentive to sell troubled assets. "We'd be open to comments on that," Ms. Bair said. Domestic U.S. banks held loans valued at $6.5 trillion on their balance sheet last month, almost 60% of which are tied to consumer and commercial real estate. Those real-estate loans are causing the biggest headache and are likely the ones banks will hope to sell.

The problem is few investors will be willing to pay anything close to face value for such assets. If the price for impaired loans is below the face value of the loans minus the provision banks took to reserve for potential losses on the loans, banks' capital could suffer. The FDIC's disposal of assets seized from failed banks gives some indication of the wide range of values the market is placing on bad loans. Last year, the FDIC auctioned off $38.6 million of real-estate loans that were originally valued at $58.4 million. Loans made by banks in hard-hit states like California, Arizona, Michigan and Florida are valued the least, said Kingsley Greenland, chief executive of DebtX, an auctioning firm under contract with the government agency.

Top-tier, income-generating properties sell for as much as 90 cents on the dollar in regular FDIC auctions, Mr. Greenland said. At the other end of the spectrum, COF Capital Partners LLC of Rocklin, Calif., paid $1.78 million, or only four cents on the dollar, for a portfolio of eight loans with a face value of $44.6 million, according to the FDIC's sale database. The Treasury program aims to get investors to bid on the high side by letting them buy assets with lots of government-backed borrowed money and little cash down. But observers said bankers may still hesitate to sell. Some of the troubled loans still generate cash flow, and bankers might fear losing out on big gains in the loans when the economy improves.

Welcome to America, the World's Scariest Emerging Market
Back in the spring of 1998, when Boris Yeltsin was still at Russia's helm, I led a group of global investors to Moscow to find out firsthand where the Russian economy was headed. My long career with the International Monetary Fund and on Wall Street had taken me to "emerging markets" throughout Asia, Eastern Europe and Latin America, and I thought I'd seen it all. Yet I still recall the shock I felt at a meeting in Russia's dingy Ministry of Finance, where I finally realized how a handful of young oligarchs were bringing Russia's economy to ruin in the pursuit of their own selfish interests, despite the supposed brilliance of Anatoly Chubais, Russia's economic czar at the time.

At the time, I could not imagine that anything remotely similar could happen in the United States. Indeed, I shared the American conceit that most emerging-market nations had poorly developed institutions and would do well to emulate Washington and Wall Street. These days, though, I'm hardly so confident. Many economists and analysts are worrying that the United States might go the way of Japan, which suffered a "lost decade" after its own real estate market fell apart in the early 1990s. But I'm more concerned that the United States is coming to resemble Argentina, Russia and other so-called emerging markets, both in what led us to the crisis, and in how we're trying to fix it.

Over the past year, I've been getting Russia flashbacks as I witness the AIG debacle as well as the collapse of Bear Stearns and a host of other financial institutions. Much like the oligarchs did in Russia, a small group of traders and executives at onetime venerable institutions have brought the U.S. and global financial systems to their knees with their reckless risk-taking -- with other people's money -- for their personal gain. Negotiating with Argentina's top officials during their multiple financial crises in the 1990s was always an ordeal, and sparring with Domingo Cavallo, the country's Harvard-trained finance minister at the time, was particularly trying. One always had the sense that, despite their supreme arrogance, the country's leaders never had a coherent economic strategy and that major decisions were always made on the run.

I never thought that was how policy was made in the United States -- until, that is, I saw how totally at sea Treasury Secretaries Henry Paulson and Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke have appeared so many times during our country's ongoing economic and financial storm. The parallels between U.S. policymaking and what we see in emerging markets are clearest in how we've mishandled the banking crisis. We delude ourselves that our banks face liquidity problems, rather than deeper solvency problems, and we try to fix it all on the cheap just like any run-of-the-mill emerging market economy would try to do. And after years of lecturing Asian and Latin American leaders about the importance of consistency and transparency in sorting out financial crises, we fail on both counts: In March 2008, one investment bank, Bear Stearns, is bailed out because it is thought to be too interconnected with the rest of the banking system to fail.

However, six months later, another investment bank, Lehman Brothers -- for all intents and purposes indistinguishable from Bear Stearns in its financial market inter-connectedness -- is allowed to fail, with catastrophic effects on global financial markets. In visits to Asian capitals during the region's financial crisis in the late 1990s, I often heard Asian reformers such as Singapore's Lee Kuan Yew or Japan's Eisuke Sakakibara complain about how the incestuous relationship between governments and large Asian corporate conglomerates stymied real economic change. How fortunate, I thought then, that the United States was not similarly plagued by crony capitalism! However, watching Goldman Sachs's seeming lock on high-level U.S. Treasury jobs as well as the way that Republicans and Democrats alike tiptoed around reforming Freddie Mac and Fannie Mae -- among the largest campaign contributors to Congress -- made me wonder if the differences between the United States and the Asian economies were only a matter of degree.

On Wall Street there is an old joke that the longest river in the emerging-market economies is "de Nile." Yet how often do U.S. leaders respond to growing signs of economic dysfunctionality by spouting nationalistic rhetoric that echoes the speeches of Latin American demagogues like Peru's Alan Garcia in the 1980s and Argentina's Carlos Menem in the 1990s? (Even Garcia, currently in his second go-around as Peru's president, seems to have grown up somewhat.) But instead of facing our problems we extol the resilience of the U.S. economy, praise the most productive workers in the world, and go on and on about America's inherent ability to extricate itself from any crisis. And we ignore our proclivity as a nation to spend, year in year out, more than we produce, to put off dealing with long-term problems, and to engage in grandiose long-term programs that as a nation we can ill afford.

A singular characteristic of an emerging market heading for deep trouble is a seemingly suicidal tendency to become overly indebted to foreign creditors. That tendency underlay the spectacular collapse of the Thai, Indonesian and Korean currencies in 1997. It also led Russia to default on its debt in 1998 and plunged Argentina into its economic depression in 2001. Yet we too seem to have little difficulty becoming increasingly indebted to the tune of a few hundred billion dollars a year. To make matters worse, we do so to countries like China, Russia and an assortment of Middle Eastern oil producers -- none of which is particularly well disposed to us.

Like Argentina in its worst moments, we never seem to question whether it is reasonable to expect foreigners to keep financing our extravagance, and we forget the bad things that happen to the Argentinas or Hungarys of the world when foreigners stop financing their excesses. So instead of laying out a realistic plan for increasing our national savings, we choose not to face up to the Social Security and Medicare crises that lie ahead, embarking instead on massive spending programs that -- whatever their long-run merits might be -- we simply cannot afford.

After experiencing a few emerging-market crises, I get the sense of watching the same movie over and over. All too often, a tragic part of that movie is the failure of the countries' policymakers to hear the loud cries of canaries in the coal mine. Before running up further outsized budget deficits, should we not heed the markets that now see a 10 percent probability that the U.S. government will default on its sovereign debt in the next five years? And should we not be paying close attention to the Chinese central bank governor's musings that he does not feel comfortable with the $1 trillion of U.S. government debt that the Chinese central bank already owns, let alone adding to those holdings?

In the twilight of my career, when I am hopefully wiser than before, I have come to regret how the IMF and the U.S. Treasury all too often lectured leaders in emerging markets on how to "get their house in order" -- without the slightest thought that the United States might fare no better when facing a major economic crisis. Now, I fear time is running out for our own policymakers to mend their ways and offer real leadership to extricate the United States from its worst economic calamity since the 1930s. If we insist on improvising and not facing our real problems, we might soon lose our status as a country to be emulated and join the ranks of those nations we have patronized for so long.

US Treasury: $134.5 Billion Left In TARP; Expects Cos To Repay 25 Billion
The U.S. Treasury Department estimates that it has about $134.5 billion left in its financial rescue fund, which would mean that about 81% of the $700 billion program has been committed. In its estimate, Treasury projects that it will receive about $25 billion from banks that have participated in the department's Troubled Asset Relief Program, or TARP. Several banks in recent weeks have publicly-announced plans to pay back the bailout funds they have received from the government. Factoring in those so-called pay-backs, Treasury estimates that its current rescue programs total $565.5 billion.

The estimate, provided to Dow Jones Newswires Saturday evening, represents the first official projections from Treasury since the Obama administration announced a slew of new, multi-billion programs to help stem foreclosures, unlock tight credit markets, revive consumer and business lending and boost domestic auto makers. Earlier this week, Treasury would not disclose the total number of Troubled Asset Relief Program, or TARP, funds that had been committed. Instead of providing a specific number, Treasury Secretary Timothy Geithner only said that the remaining resources were very substantial.

Dow Jones Newswires' calculations - which were in line with a Goldman Sachs estimate, among others - showed $52.6 billion was left in the government rescue fund, meaning about 92% of the $700 billion fund had already been committed. While Treasury projects that it has a much greater amount of funds left in TARP, there are key reasons for the difference. For one, Treasury's projections don't include $250 billion for a program launched last year to inject taxpayer funds into banks around the nation. In the Treasury projections provided Saturday, the department puts that program at just $218 billion. A Treasury official Saturday said that while the program could cost as much as $250 billion, the $218 billion number is a more accurate estimate given that a key application deadline for the program has already passed.

Secondly, Treasury projects that it will receive $25 billion in repayments given that several banks have announced plans to return taxpayer funds. And even that $25 billion is a highly conservative estimate, the Treasury official said. Additionally, the Treasury official said that Treasury plans to put $95 billion, not $100 billion as originally announced, toward a key lending program called the Term Asset-Backed Securities Loan Facility, or TALF. Furthermore, Treasury's $100 billion plan to help restart a market for banks' toxic assets only represents $75 billion in new money, the official said. He said the remaining $25 billion for that asset program, the Public Private Investment Program, would come from the $95 billion TALF initiative.

Federal stimulus funds won't save California from tax hikes, spending cuts
As the state's budget continued swirling into the red, top finance officials said Friday that California won't get enough federal stimulus money to avoid all of the tax hikes and service cuts lawmakers approved last month. The announcement by state Treasurer Bill Lockyer and Finance Director Mike Genest reaffirms that California residents will be hit with a $1.8-billion personal income tax boost and nearly $1 billion in slashed spending. After weeks of number crunching, the pair determined that about $8.17 billion of the hoped-for $10 billion in federal revenue for budget relief would be available through 2010.

California's personal income tax rate will rise by a quarter percentage point, effective with the 2009 tax year. The current maximum of 9.3% for the highest wage earners will rise to 9.55%. The increase would have been half that if enough federal stimulus money had been available to completely offset the state's budget problems. Meanwhile, $948 million in spending reductions will affect higher education, healthcare, welfare and in-home care programs for the disabled and elderly. Those cuts would not have been made if enough stimulus money had been available.

"This is a shameful day for California," said Doug Moore, executive director of the 65,000-member United Domestic Workers Homecare Providers Union. "Our governor and our legislative leaders have played a game of Russian roulette with the lives of nearly a half-million of California's most vulnerable citizens and the people who care for them." Lockyer expressed regret about Friday's announcement in a letter to Gov. Arnold Schwarzenegger and legislative leaders, saying he was "deeply concerned about all these consequences, both fiscal and human." He also recommended that the Legislature reconsider two spending cuts -- the decision to slice $200 million in optional Medi-Cal dental benefits and pay increases for in-home care providers. Lockyer said the harmful consequences of those cuts "greatly outweigh any savings."

Assembly Speaker Karen Bass (D-Los Angeles), one of the state leaders who negotiated the budget, embraced such a reappraisal. "I wish those cuts weren't there at all," Bass said, adding that many of the most painful decisions to trim spending were necessary to win over enough Republican lawmakers to end the three-month budget stalemate. As part of the budget deal, lawmakers empowered Lockyer and Genest to roll back some of the income taxes and restore some of the cut funds if adequate federal funds arrived. The news came as state tax revenue continued to plunge. Five weeks after Schwarzenegger signed the budget, lawmakers face the prospect of a new $8-billion shortfall.

That sum could grow if the state economy slumps further -- and if voters reject a half-dozen budget-related ballot measures in a special election May 19. Those proposals would raise $6 billion to help balance the budget beginning in July. California is receiving about $31 billion in federal stimulus funds through 2011. Most of the money is earmarked for education, transportation and other needs, with less than a third available to address budget woes.

AIG Fights a Fire at Its Paris Unit
Amid the flap over bonuses at American International Group Inc. two of the company's top managers in Paris have resigned. Their moves have left the giant insurer and officials scrambling to replace them to avoid an unlikely but expensive situation in which billions in AIG trading contracts could default. Representatives of the Federal Reserve, AIG's lead U.S. overseer, are talking with French regulators and AIG officials to deal with the consequences of a complicated legal scenario in which the departures of the managers in Banque AIG, a subsidiary of AIG's Financial Products unit, could trigger defaults in $234 billion of derivative transactions, according to people familiar with the situation and a document AIG provided to the U.S. Treasury.

Defaults, by no means inevitable, could not only hurt AIG but also could force European banks involved in the trades to raise billions in capital to cushion potential losses, according to AIG documents. That is because the banks used Banque AIG to hedge the risk in some of the assets they own, allowing them to hold less capital against those assets, which could include securities such as mortgages and corporate debt. The executives at Paris-based Banque AIG, Mauro Gabriele and James Shephard, have resigned in recent days but have agreed to stay on for a transition, according to people familiar with the matter. In the wake of their resignations, AIG must replace them to the satisfaction of French banking regulators.

If they don't, French regulators may appoint their own designee to manage the bank -- an outcome that could trigger defaults under the bank's derivative contracts. The private contracts say that a regulator's appointment of a manager constitutes a change in control, according to a person familiar with the matter; the provision is often included in derivative contracts where parties want to preserve a way out if something about their counterparties changes. Messrs. Gabriele and Shephard didn't respond to requests for comment.

AIG said in a statement that the departing managers "have agreed to stay on to help ensure an orderly transition. They, AIG, and our stakeholders have been in communication with the regulatory authorities in France to discuss our plan to replace them." AIG said Thursday that given Messrs. Gabriele and Shephard's commitment "to effect an orderly transition ... we believe that the status of the Banque AIG derivatives book will remain unchanged and in good standing." France's Commission Bancaire, the banking regulator, declined to comment.

Regulators and the company are motivated to find a solution in Paris. AIG described the issues in a five-page white paper submitted to the U.S. Treasury Department earlier this month along with a letter about $165 million in retention payments the company made to employees in the financial-products unit, the unit responsible for the worst of AIG's woes. The company was rescued by the federal government in September. After a public outcry this month about the bonuses, employees were urged to return them, and now several have quit, according to AIG. The two departing managers at Banque AIG have offered to return their bonus payments, AIG says.

In the white paper, AIG said it had legal obligations to make the retention payments, but it also discussed the "significant business ramifications" of failing to pay. AIG said that employees at the financial-products unit are needed to wind down and sell pieces of that business, which has $1.6 trillion in outstanding trades. Referring to the circumstances at Banque AIG, the company said that at a minimum, the "disruption associated with significant departures related to a failure to honor contractual obligations would require intensive interactions with regulators and other constituents (rating agencies, counterparties, etc.) to assure them of the ongoing viability of AIGFP as well as its commitment to honoring counterparty contracts and claims."

The risk that the Banque AIG transactions would default if managers departed would represent an unexpected problem for what had been one of the AIG Financial Products businesses that hadn't run seriously aground in recent months, according to AIG securities filings. Banque AIG enabled AIG to generate revenue by helping European banks lower the amount of capital they are required to hold to protect against losses on assets such as mortgage and corporate loans. The bank was set up in the early 1990s, and was licensed by French banking regulators in early 1991. More recently, a Banque AIG branch has been located in London's Mayfair district along with the financial-products unit.

In the event of a default, European banks that have done these trades with AIG could be forced to take back responsibility for billions of dollars in assets. That could require them to raise billions of dollars in capital, AIG has said. The deals worked like this, according to a Banc of America Securities-Merrill Lynch report and a person familiar with AIG's contracts: A European bank with a hypothetical $1 billion portfolio of assets could unload some of the risk by having AIG protect the top and largest layer, or tranche, against losses with insurance-like derivative contracts. The move greatly reduced the regulatory capital charge for AIG clients.

In May 2007, a British executive in the financial-products office in London told investors: "For the European banks and the Asian banks, this is very much a regulatory capital arbitrage business. By structuring their businesses, whether it's their mortgage lending or their corporate loans into these sorts of trades and tranching the risk up, they're able to significantly reduce the capital they have to hold against their portfolios."

AIG Bonuses as Fraudulent Transfers
We’ve heard Fed Chairman Bernanke and Treasury Secretary Geithner say that there are no legal avenues to clawing back the AIG bonuses.  I’m not so sure that’s true.  What about good old fraudulent transfer law?  That’s a cornerstone of creditor-debtor law.  Would fraudulent transfer law apply? Every state in the union has a fraudulent transfer law.  But there is also a special (and virtually unknown) federal fraudulent transfer statute just for the United States government, as creditor.  The federal government could, of course, proceed under a state fraudulent transfer law (I’m not sure which state’s law would apply to AIG), but why bother when it could proceed under its own law?

So would the government be able to clawback AIG’s bonuses with a fraudulent transfer action? Maybe.  As far as I know AIG has received loans from the Federal Reserve Bank of New York and the US Treasury has purchased preferred shares in AIG, but not made any loans directly.  The government’s argument would be that AIG made the transfers when it was thinly capitalized and/or insolvent or likely to become so and that AIG did not receive "reasonably equivalent value."  Discretionary bonuses are also per se not reasonably equivalent value. 

But there are some potential problems for the federal government.  First, the federal fraudulent transfer statute only applies to the United States as a "creditor."  Creditor is defined to include the holder of contingent claims, so to the extent the US is a guarantor, it should have standing to bring an action.  I’m less certain that this would hold for being a second-tier guarantor, e.g., Treasury guarantees the Fed, which guarantees AIG, much less if the guarantee of the Fed is implicit. If the United States is not a guarantor, what about bringing an action as a preferred shareholder? Preferred stock is a hybrid debt-equity security.  It has some characteristics of debt and some of equity.  While preferred shares are nominally equity, there are many circumstances (tax, bankruptcy, corporate governance) in which courts have recharacterized preferred shares as debt, including cases in which preferred shareholders have been successful in bringing fraudulent transfer actions.  (If preferred stock is equity, there is still a state corporate law claim for "waste.") 

It is difficult to generalize about preferred stock because there are many possible variations, including whether it is perpetual, cumulative, voting, convertible, redeemable at will or on or after date certain, whether dividends are automatic or must be declared, and whether a dividend has in fact been declared and come due. There is no case law directly on point regarding the federal fraudulent transfer statute. There is, however, case law on whether preferred shareholders have standing to bring fraudulent transfer actions under various state statutes. The case law is mixed.  While most decisions indicate that preferred shareholders lack standing, the decisions are highly dependent on the particular characteristics of the preferred stock.  So it’s uncertain whether the federal government as preferred shareholder could bring a fraudulent transfer action.

It is important to note that while the standing question is unresolved for preferred stock, the Treasury Department’s March 2, 2009 stock exchange agreement with AIG likely weakened any argument the federal government had for standing to bring fraudulent transfer litigation under 28 U.S.C. § 3304 as a preferred shareholder. The agreement provided for Treasury to exchange cumulative, quarterly compounding, automatic dividend Series D AIG preferred stock for non-cumulative Series E AIG preferred stock on which a dividend must be declared.  Non-cumulative preferred shares without an automatic dividend are more like equity than cumulative, compounding, automatic dividend shares.  This makes standing as a creditor less likely.

AIG is clearly a debtor to the Federal Reserve Bank of New York. (Let's put aside the part of the deal in which AIG "lent" the NY Fed a bunch of toxic assets, presumably on a non-recourse basis, and the Fed posted good "cash" collateral).  The Federal Reserve Bank of New York is not part of the federal government.  Although authorized under federal law, it is a privately-owned institution, owned by its member banks.  So the FRBNY can't use the federal fraudulent transfer statute, but it should be able to bring a fraudulent transfer action against AIG under state law, and surely Treasury could persuade the FRBNY to do so.  (I’m uncertain where the Federal Reserve Board fits in here, either in terms of AIG transactions or government/private classification, but the Board might also be able to bring an action.) 

There’s also a question about whether the transfer was made by the relevant debtor.  I am not sure how AIG is structured, but the bonuses might have been paid by a subsidiary of the debtor holding company, which is not itself a co-debtor.  For example, if the United States or FRBNY is a creditor solely of AIG’s holding company, AIG’s Financial Products Division is a separately incorporated subsidiary of the AIG holding company, and the transfer being challenged was made by the Financial Products Division, the United States might not be able to challenge the transfer on the basis of insolvency and lack of reasonably equivalent value because it lacks a creditor relationship with the entity actually making the transfer.  Lastly, as Angie Littwin has noted, the bailout of financial institutions might save AIG from having committed a fraudulent transfer because the bailout arguably rectified the institutions’ insolvency.

The FRBNY could almost certainly bring a fraudulent transfer action against AIG and maybe the US government could as well.  Whether the action would ultimately be successful is uncertain, but there’s certainly a colorable litigation route to take with AIG, and I’d bet there are lots of law firms that would gladly take this on on a contingency fee basis. 

What about the potential double damages issue that Chairman Bernanke suggested scared off the Fed?  My understanding is that is a matter of Connecticut state employment law and is triggered if an employer wrongfully withholds wages.  Even if it covered bonuses, it just doesn't come up as an issue with fraudulent transfer actions, regardless of whether state or federal fraudulent transfer law applies. With fraudulent transfer actions, the bonuses are paid, and then clawed back.  There's no withholding whatsoever, so the double damages issue for an unsuccessful suit doesn't arise.  Instead just the traditional rule that parties bear their own costs. 

We’re seeing a lot of interesting twists as the federal government becomes a market participant in distressed investment and lending situations.  From questions of priority in the GM and Chrysler credit agreements to fraudulent transfers with AIG, the government’s market activities are really a primer in the risks involved in distressed situations.  The government's position is complicated because it has political, as well as economic considerations, and those often argue for taking actions that if unsuccessful leave the government poorly protected down the road. There is a real tension between the attempts to avoid economic failure and the attempts to shield the taxpayers from the impact of such failure.  If the government aims for the former and is unsuccessful, public funds are much more exposed as a result.  

Bank of America Accused in Ponzi Lawsuit
Bank of America effectively set up a branch in a Long Island office that helped Nicholas Cosmo carry out a $380 million Ponzi scheme, according to a class-action lawsuit filed in federal court. The lawsuit, filed in Federal District Court in Brooklyn late Thursday, contends that Bank of America "established, equipped and staffed" a branch office in the headquarters of Mr. Cosmo’s firm, Agape Merchant Advance. As a result, the lawsuit contends that the bank knowingly "assisted, facilitated and furthered" Mr. Cosmo’s fraudulent scheme. "Bank of America was at the epicenter of this scheme," said the lawsuit, which seeks $400 million in damages from the bank and other defendants. "Without Bank of America’s participation, the scheme would not have succeeded and grown to such an enormous size."

Mr. Cosmo surrendered to authorities at a Long Island train station in January in connection with a suspected Ponzi scheme involving what Mr. Cosmo called "private bridge loans" that promised investors returns of 48 percent to 80 percent a year. Many of his 1,500 investors were blue-collar workers and civil servants. Bank of America declined to comment, saying that it had not yet seen the suit. According to the suit, representatives of Bank of America worked directly out of Mr. Cosmo’s West Hempstead office, which was about 30 miles from the branch where Agape and Mr. Cosmo maintained their bank accounts. In addition, Bank of America provided on-site representatives at Agape with bank equipment and computer systems that allowed direct access to the bank’s accounts and systems, the suit said.

"Essentially, Bank of America established a fully functional bank branch manned by its own representatives within Agape’s offices, which is contrary to normal banking practices," the lawsuit said. As a result, the bank’s representatives had "actual knowledge" that Mr. Cosmo was "diverting money to his own account" and "engaging in virtually no legitimate business whatsoever." In a complaint filed against Mr. Cosmo in January by the Commodities Futures Trading Commission, the government contends that from 2004 to 2008, Mr. Cosmo operated a fraudulent trading scheme in which investors were solicited to provide short-term bridge loans but that the money instead went into commodities trading contracts that lost money.

This is the second time that Mr. Cosmo has been accused of fraud. He had previously served 21 months in federal prison in Allenwood, Pa., for mail fraud. Upon his release in 2000, his broker’s license was revoked. He founded Agape after leaving prison. The lawsuit also names a number of futures and commodities trading firms that, the lawsuit said, "assisted Cosmo in running an illegal unregistered commodities pool." The suit says that the trading firms should "never have accepted this business," which violated "know your customer" duties that are required of these firms. One of the firms named in the suit was MF Global. Diana DeSocio, a spokeswoman for MF Global, said that when the firm became aware of Mr. Cosmo’s background last October, it closed Mr. Cosmo’s account and notified regulators. Ms. DeSocio added that the account that Mr. Cosmo had was an individual account and was not an account set up on behalf of his investors.

Hands off our status as a tax haven, Swiss tell critics
Swiss bankers yesterday rejected attempts to clamp down on the country's tax haven status, claiming that other European nations were "jealous". Pierre Mirabaud, president of the Swiss Bankers' Association, said that the country had been a victim of its own success and was an easy target for Germany and France, which he claimed had pushed for Switzerland to be blacklisted at next week's G20 meeting in London. Mr Mirabaud said: "As a world leader in private banking, [Switzerland] triggers jealousies.

In these difficult economic times, it serves as a handy lightning conductor on which financially challenged states can discharge their frustrations and divert the attention of their citizens away from shortcomings in their own complicated and inefficient tax system." Britain has backed the call for economic sanctions against unco-operative tax havens that have refused to change their rules. Under pressure from France and Germany, Switzerland agreed this month to adopt an international code on tax co-operation in an attempt to avoid being blacklisted. Mr Mirabaud said he hoped this would put an end to attacks against the country's banks.

"The Swiss Bankers' Assocation now expects an end to all improper criticism of Switzerland and its legal system, and also an end to attempts to put Switzerland on a blacklist," he said. "The way Switzerland has been treated by the Organisation for Economic Co-operation and Developement [OECD] has been disgraceful. The secret drafting of a blacklist behind a member's back is unacceptable and damages the OECD's credibility." He believed that there were more tax evaders with accounts in Florida and Delaware than in Switzerland.

Seychelles: Paradise goes bankrupt
The Seychelles, the idyllic archipelago in the Indian Ocean off the coast of Africa, is best known as an island paradise playground for celebrities, royalty and the ultra-wealthy. These days, it's better known for something else: bankruptcy. The tiny country's debt burden may be tiny compared to Iceland, which needed a $2.1 billion bailout from the International Monetary Fund last fall, but the Seychelles' problems illustrate the degree to which the global economic crisis has leveled some economies altogether.

And because of its small size, with just 87,000 people, the Seychelles now has the unenviable stature of being perhaps the most indebted country in the world. Public and private debt totals $800 million - roughly the size of the country's entire economy. Last year, as tourism and fishing revenue began slowing, the Seychelles defaulted on a $230 million, euro-denominated bond that had been arranged by Lehman Brothers before its own bankruptcy. The IMF came in in November with a two-year, $26 million rescue package, and the country has since taken a series of emergency steps: It laid off 12.5% of government workers (1,800 people), floated its currency (the Seychelles rupee, which has fallen from eight to the U.S. dollar to 16, effectively doubling the prices of imports), lifted foreign exchange controls and agreed to sell state assets.

The IMF has given a thumbs-up to the initial progress, but it warned that the economy would contract 9.5% this year. The government of Australia is sending tax experts to help overhaul the revenue collection system and audit local companies. Now the Seychelles is negotiating with the governments of Britain, France and other Western countries including the U.S. - the so-called Paris Club - to reschedule $250 million in debt it owes them. It is asking for 50% of it to be forgiven - a rate it hopes its commercial creditors will then apply to its remaining $550 million outstanding.

"We borrowed more than we can repay," complains Ralph Volcere, the editor of Le Nouveau Seychelles Weekly and a vocal government critic. "This was wholly irresponsible." Heavily reliant on tourism, the Seychelles is desperately searching for ways to raise capital - at a time when tourism is forecast to drop precipitously this year. In early March, Seychelles Vice President Joseph Belmont told a meeting of local tourism industry business owners that the country has already seen a drop of 15% in visitor arrivals from the start of 2009; tourism revenue for the year, he said, could drop by some 25% more as a result of the global recession.

Seychelles officials have another idea though: to promote the country's longstanding virtue of being an off-shore business haven, with no corporate tax, no minimum capital requirements, only one shareholder or director required, and an annual licensing fee of just $100. It also hopes to grow revenue from fishing licenses in its territorial waters, and on March 26 it will present a proposal to the United Nations to expand its exclusive rights to the surrounding seabed, potentially increasing prospects of revenue from underwater minerals, oil and gas. And hopes for expanding tourism remain high. In addition to the usual roster of luxury-seeking royals and high-spending celebs, the middle-tier traveler is now being heartily courted, too. The government in early March announced an "Affordable Seychelles" campaign - what would have until recently been an oxymoron - with the motto: "Once-in-a-lifetime vacation at a once-in-a-lifetime price," based on lower prices caused by the halving in value of the currency.

Most hotels and meals in restaurants frequented by foreigners, however, remain priced in euros - like the new Four Seasons Seychelles, which opened its five-star resort, more than two years in the works, in February. Rates start at 1,000 euros ($1,345) per night, although current packages include stay-an-extra-day offers. Free-standing, multi-room houses with private swimming pools, billed as "Presidential" and "Royal" suites, are also available (from 4,500 euros, or $6,055). The company claims it's seeing interest from travelers: "We have extremely strong demand; a lot of people are calling and asking for information," says General Manager Markus Iseli, surveying the property of 67 private, luxury villas perched on a hillside overlooking a stunning powdery-sand beach. But while normal luxury hotel occupancy averages 70-to-75%, he says he expects perhaps 30-to-35% occupancy this year. "That's still good in a recession," Iseli says. "When you look around the world, everybody is suffering."

Ilargi: Tyler Durden with a deeper look into CALPERS. Pensions funds will be among the main calamity stories going forward into 2009. In Holland, a first among nations, a consensus is emerging that all pensions systems are effectively bankrupt. The solution is to give companies more time, much more time, to fulfill their legal obligations. And no, that is of course no solution at all, unless perhaps you truly believe that growth will resume any day now. And even then. Starting in 2005-06, many countries allowed their pensions funds to move into riskier assets. After all, that's where the profits were. Now most are underfunded, some by scary percentages. Everyone invested in a pension plan should demand to know precisely what the situation is that their fund is in, provided thay have strong stomachs.

Two years ago it was said that you if had a direct line to the CIO of CalPERS, one of the nation's largest public pension funds, and specifically to its Alternative Investment Management group, you had it made. None of that Goldman Sachs partners being masters of the universe garbage - this was the real deal. Say you needed $100 million for fund XYZ - you simply dialed that one number in Sacramento, and if you made it past the secretary, you were golden. Of course, this worked best if your name started with Leon and ended with Black, but other managers were also sitting pretty. The reason for this is that unlike the public pension funds of New York State for example, where the bulk of the investments were in the public markets via an internal asset manager (who was pretty horrible at his job judging by the fund IRR), and only occasionally did NY invest in external private and public fund managers (which more often than not included a variety of kickbacks, bribes, and other illegal schemes as recently reported by NY's own Andrew Cuomo), CalPERS has the bulk of its assets invested in 3rd parties. While Thomson Banker gives the total amount of CalPERS public investments at $38 billion, an obscure site within the CalPERS website labyrinth presents the amount allocated and invested in various 3rd parties. And the amount is staggering: it seems that a vast number, maybe even a majority of U.S. private equity firms, owe their existence to CalPERS.

Here are the facts (as of September 30, 2008):

Number of unique investments: 290
Total Capital committed: $53.2 billion
Cash Invested: $30.8 billion
Cash Distributed: $17.4 billion
Cash Distributed Including "Residual" Value: $38.8 billion

It is that last number which we will focus on shortly...

But some more data first. Here is what CalPERS says about its Alternative Investment Management program:

Since inception in 1990 to September 30, 2008, the Alternative Investment Management (AIM) Program has generated $14.2 billion in profits for CalPERS. Given the young, weighted-average age of the portfolio (3.2 years) this amount will continue to grow as the portfolio matures.
CalPERS may need to adjusted this mission statement once the December 31 number are out.

But continuing with the facts. Here are the asset managers that have benefited the most from CalPERS generosity, based on both total capital committed and actual cash invested (this is not an exhaustive list of CalPERS investments).

Apollo: $4.1 billion, $2.7 billion
Aurora: $650 million, $267 million
Avenue: $1.4 billion, $780 million
Blackstone: $1.4 billion, $1.2 billion
Candover: $643 million, $480 million
Carlyle: $4 billion, $2.1 billion
CVC: $2.3 billion, $1.3 billion
First Reserve Fund: $1.1 billion, $685 million
Leonard Green: $850 million, $455 million
Hellman & Friedman: $1.0 billion, $762 million
KKR: $1.6 billion, $880 million
Levine Leichtman: $450 million, $389 million
Lexington Capital: $400 million, $392 million
Madison Dearborn: $710 million, $634 million
MHR: $400 million, $218 million
New Mountain: $550 million, $165 million
Oak Hill: $375 million, $151 million
Pacific Corporate Group: $1.9 billion, $800 million
Permira: $573 million, $388 million
Providence: $525 million, $297 million
Silver Lake: $1.1 billion, $450 million
Tommy Lee: $640 million, $475 million
Tower Brook: $575 million, $220 million
TPG: $3.2 billion, $1.5 billion
Wayzata: $325 million, $218 million
Welsh Carson: $650 million, $601 million
WLR: $698 million, $405 million
Yucaipa: $764 million, $481 million

And many others... But you get the gist: Apollo, Carlyle, TPG, CVC, Silver Lake, Blackstone, and Avenue pretty much hold the fate of the majority of California's teachers and public workers in their hands... And that future is looking really, really ugly.

We dig in: Among the other data, presented on the CalPERS AIM page is the public IRR disclosed per fund. This is probably the best indication of how some of the more troubled private equity firms are gaming the system, and massively misrepresenting actual results.

We randomly picked as a case study the Apollo Investment Fund VI L.P., which CalPERS has committed $650 million to, actually invested $508 million into, withdrawn $10.9 million from and present the residual value (including the withdrawn amount) as $450 million, or a -10.7% IRR. Now we don't have reason to believe that CalPERS is fudging this number: after all it is reporting merely what Apollo is telling it.

So the next question is, is this -10.7% IRR indicative of the investments in Apollo VI?

The names that constitute the $10.2 billion in committed capital Apollo VI are:
Realogy (on verge of bankruptcy)
Harrah's (on verge of bankruptcy)
Claires (on verge of bankruptcy)
The debacle that was the Huntsman LBO
Berry Plastics
Verso (bankrupt)
Jacuzzi brands

We highly doubt -10.7% is anything even remotely close to where CalPERS should consider its residual equity value in Apollo VI. And by fair estimates, this is merely the tip of the iceberg. Nonetheless, presenting public data that shows that the public pensions manager is disclosing over $14 billion in profits when it is hiding potentially much more than that in losses could be interpreted as borderline illegal. The question is, is this a responsibility of Apollo (to show the true sad state of affairs), or of CalPERS (to actually check these numbers and not to pull a Fairfield Greenwich "sorry, we had no clue what was really going on until it was too late").

Regardless, as CalPERS itself points out, the numbers were as of September 30. It is a fact, that the December 31 numbers are due any minutes and we are salivating at the prospect of feasting out eyes on these numbers, to see just how much disconnected from reality the column known as IRR as presented by CalPERS has become. And just as Apollo VI is merely the tip of the asset manager iceberg, so is CalPERS merely a blip in the Alternative Investment Management universe of all public pension managers. Combined together, and based on realistic performance, these two will result in an explosive deterioration in both fund IRRs and public pensioners' patience and empathy, once they realize their money has been mismanaged into oblivion

Money creation and the Fed
A lot of people have seen this picture of the recent behavior of the monetary base and wondered what it means.

Figure 1. Adjusted monetary base. Source: FRED.

To understand the explosion in the monetary base since September, let's begin with a little background. The Federal Reserve has the ability to purchase assets or make loans with funds (money) that are created by the Fed itself. To buy a billion dollars worth of assets, the Fed doesn't show up with new cash in a wheelbarrow. Instead the Fed pays for any assets it purchases or loans it extends by crediting the funds that the recipient bank has in an account with the Fed, known as reserve deposits. A bank can later withdraw those deposits in the form of green currency, if it chooses, and that's the point at which an armored truck from the Fed would be involved with physical delivery of cash.

The monetary base is essentially the sum of (1) the currency that's been withdrawn from private banks and is being held by the public, (2) the currency that's sitting in the vaults of private banks that could potentially be withdrawn by the banks' customers if they wanted, and (3) banks' reserve deposits, which you could think of as electronic credits for currency that the banks could ask for from the Fed any time the banks choose. Historically, newly created reserve deposits have usually shown up pretty quickly as currency withdrawn by banks and then by the public. Choosing a pace at which to allow that supply of currency to grow so as to accommodate the increased currency demands from a growing economy without cultivating excessive inflation is one of the main responsibilities of the Fed.

Figure 2 below plots the assorted "factors absorbing reserve funds" from the Fed's H41 release during the halcyon period from 2003 to the middle of 2007. At that time, currency held by the public was by far the biggest component in the liabilities side of the Fed's balance sheet, with the currency supply increasing 20% over these 5 years and with temporary seasonal bumps to accommodate the annual Christmas surge in currency demand. Reserve deposits (the sum of the "reserves" and "service" components in Figure 2) were quite minor relative to total quantity of currency in circulation.

Figure 2. Factors absorbing reserve funds, in billions of dollars, seasonally unadjusted, from Jan 7, 2003 to June 27, 2007. Wednesday values, from Federal Reserve H41 release. Treasury: sum of U.S. Treasury general and supplementary funding accounts; reserves: reserve balances with Federal Reserve Banks; misc: sum of Treasury cash holdings, foreign official accounts, and other deposits; other: other liabilities and capital; service: sum of required clearing balance and adjustments to compensate for float; reverse RP: reverse repurchase agreements; Currency: currency in circulation.

With this increase in newly created money, the Fed was over this period acquiring assets primarily in the form of short-term Treasury securities, which holdings grew 25% over this 5-year period. The Fed at that time used short-term repurchase agreements as a device for adjusting the supply of reserves on a temporary basis. Note that for each date the height of the components in Figure 3 below (essentially the asset side of the Fed's balance sheet) is exactly equal, by definition, to the height of the liabilities portrayed in the previous Figure 2.

Figure 3. Factors supplying reserve funds, in billions of dollars, seasonally unadjusted, from Jan 7, 2003 to June 27, 2007. Wednesday values, from Federal Reserve H41 release.
Agency: federal agency debt securities held outright;
swaps: central bank liquidity swaps;
Maiden 1: net portfolio holdings of Maiden Lane LLC;
MMIFL: net portfolio holdings of LLCs funded through
the Money Market Investor Funding Facility;
MBS: mortgage-backed securities held outright;
CPLF: net portfolio holdings of LLCs funded through the Commercial Paper Funding Facility;
TALF: loans extended through Term Asset-Backed Securities Loan Facility;
AIG: sum of credit extended to American International Group, Inc. plus net portfolio holdings of Maiden Lane II and III;
ABCP: loans extended to Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility;
PDCF: loans extended to primary dealer and other broker-dealer credit;
discount: sum of primary credit, secondary credit, and seasonal credit;
TAC: term auction credit;
RP: repurchase agreements;
misc: sum of float, gold stock, special drawing rights certificate account, and Treasury currency outstanding;
other FR: Other Federal Reserve assets;
treasuries: U.S. Treasury securities held outright.

Beginning in September 2007, the Fed began a process of systematically changing the nature of its asset holdings. Over the course of the next year, the Fed sold off over $300 billion in Treasury securities (about 40% of its holdings of Treasury securities), and replaced them with $150 billion in direct bank lending in the form of term auction credit, $60 billion in loans to foreign central banks in the form of liquidity swaps, and $100 billion in repurchase agreements, used now not for temporary adjustments but instead as a device to create a market for MBS by accepting alternative assets as collateral.

Figure 4. Factors supplying reserve funds, in billions of dollars, seasonally unadjusted, from Jan 3, 2007 to August 27, 2008. Wednesday values, from Federal Reserve H41 release.
Agency: federal agency debt securities held outright;
swaps: central bank liquidity swaps;
Maiden 1: net portfolio holdings of Maiden Lane LLC;
MMIFL: net portfolio holdings of LLCs funded through
the Money Market Investor Funding Facility;
MBS: mortgage-backed securities held outright;
CPLF: net portfolio holdings of LLCs funded through the Commercial Paper Funding Facility;
TALF: loans extended through Term Asset-Backed Securities Loan Facility;
AIG: sum of credit extended to American International Group, Inc. plus net portfolio holdings of Maiden Lane II and III;
ABCP: loans extended to Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility;
PDCF: loans extended to primary dealer and other broker-dealer credit;
discount: sum of primary credit, secondary credit, and seasonal credit;
TAC: term auction credit;
RP: repurchase agreements;
misc: sum of float, gold stock, special drawing rights certificate account, and Treasury currency outstanding;
other FR: Other Federal Reserve assets;
treasuries: U.S. Treasury securities held outright.

Because the Fed funded those measures through August 2008 by selling off its holdings of Treasuries, there was little effect on either currency in circulation or the monetary base through that time.

Figure 5. Factors absorbing reserve funds, in billions of dollars, seasonally unadjusted, from Jan 3, 2007 to August 27, 2008. Wednesday values, from Federal Reserve H41 release. Treasury: sum of U.S. Treasury general and supplementary funding accounts; reserves: reserve balances with Federal Reserve Banks; misc: sum of Treasury cash holdings, foreign official accounts, and other deposits; other: other liabilities and capital; service: sum of required clearing balance and adjustments to compensate for float; reverse RP: reverse repurchase agreements; Currency: currency in circulation.

Beginning in September of 2008, the Fed embarked on a huge expansion in its lending efforts and holdings of alternative assets. The biggest items among assets currently held are $469 billion in term auction credit, $328 billion in currency swaps, $241 billion leant through the CPLF, and $236 billion in mortgage-backed securities now held outright.

Figure 6. Factors supplying reserve funds, in billions of dollars, seasonally unadjusted, from Jan 3, 2007 to March 25, 2009. Wednesday values, from Federal Reserve H41 release.
Agency: federal agency debt securities held outright;
swaps: central bank liquidity swaps;
Maiden 1: net portfolio holdings of Maiden Lane LLC;
MMIFL: net portfolio holdings of LLCs funded through
the Money Market Investor Funding Facility;
MBS: mortgage-backed securities held outright;
CPLF: net portfolio holdings of LLCs funded through the Commercial Paper Funding Facility;
TALF: loans extended through Term Asset-Backed Securities Loan Facility;
AIG: sum of credit extended to American International Group, Inc. plus net portfolio holdings of Maiden Lane II and III;
ABCP: loans extended to Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility;
PDCF: loans extended to primary dealer and other broker-dealer credit;
discount: sum of primary credit, secondary credit, and seasonal credit;
TAC: term auction credit;
RP: repurchase agreements;
misc: sum of float, gold stock, special drawing rights certificate account, and Treasury currency outstanding;
other FR: Other Federal Reserve assets;
treasuries: U.S. Treasury securities held outright.

Where did the Fed get the resources to do all this? In part, it asked the Treasury to borrow on its behalf, represented by the pale yellow region in Figure 7 below, and a sum that last week amounted to a quarter trillion dollars. Note that magnitude is not part of the monetary base drawn in Figure 1. Some of the Fed expansion has shown up as additional currency held by the public, which made a modest contribution to the explosion of the monetary base seen in Figure 1. But by far the biggest factor was a 100-fold increase in excess reserves, the green region in Figure 7. These excess reserves mean that for the most part, banks are just sitting on the newly created reserve deposits, holding these funds idle at the end of each day rather than trying to invest them anywhere.

Figure 7. Factors absorbing reserve funds, in billions of dollars, seasonally unadjusted, from Jan 3, 2007 to March 25, 2009. Wednesday values, from Federal Reserve H41 release. Treasury: sum of U.S. Treasury general and supplementary funding accounts; reserves: reserve balances with Federal Reserve Banks; misc: sum of Treasury cash holdings, foreign official accounts, and other deposits; other: other liabilities and capital; service: sum of required clearing balance and adjustments to compensate for float; reverse RP: reverse repurchase agreements; Currency: currency in circulation.

That idleness, as I read the situation, was something the Fed initially actually wanted, and deliberately cultivated by choosing to pay an interest rate on excess reserves that is equal to what banks could expect to obtain by lending them overnight. As long as banks do just sit on these excess reserves, the Fed has found close to a trillion dollars it can use for the various targeted programs.

But what would happen if those electronic credits start to be redeemed for actual cash? Then we would have a concern, and the Fed would need to call the reserves back in by selling assets or failing to renew loans. But that presents a potential problem, as noted by Charles Plosser, President of the Federal Reserve Bank of Philadelphia:
It is true that a number of the Fed's new programs will unwind naturally and fairly quickly as they are terminated because they involve primarily short-term assets. Yet we must anticipate that special interests and political pressures may make it harder to terminate these programs in a timely manner, thus making it difficult to shrink our balance sheet when the time comes. Moreover, some of these programs involve longer-term assets-- like the agency MBS. Such assets may prove difficult to sell for an extended period of time if markets are viewed as "fragile" or specific interest groups are strongly opposed, which could prove very damaging to our longer-term objective of price stability.

Last Monday's joint statement by the Treasury and the Fed indicated that the plan is for the worst of the Fed's assets (reported as "Maiden Lane" and part of the "AIG" sums in Figure 4) to be taken over by the Treasury, and Plosser for one wants the Treasury to take all the non-Treasury assets off the Fed's balance sheet. But as the Fed has declared its intention to raise its MBS holdings to $1.25 trillion it seems the current plan calls for more, not less of non-Treasury assets. And the following clause in the joint Fed-Treasury statement suggests that perhaps the Fed intends this, like most of the previous balance sheet changes, to not be allowed to impact total currency in circulation:

the Treasury and the Federal Reserve are seeking legislative action to provide additional tools the Federal Reserve can use to sterilize the effects of its lending or securities purchases on the supply of bank reserves.

John Jansen (hat tip: Tim Duy) construes that clause to mean that the Fed is going to request the ability to borrow directly as well as for exemption of any borrowing done by the Treasury on behalf of the Fed from the congressional debt ceiling. Also via Tim, FRB San Francisco President Janet Yellen offers this elaboration:
As the economy recovers, the Fed will eventually have to reduce the quantity of excess reserves. To some extent, this will occur naturally as markets heal and some programs consequently shrink. It can also be accomplished, in part, through outright asset sales. And finally, several exit strategies may be available that would allow the Fed to tighten monetary policy even as it maintains a large balance sheet to support credit markets. Indeed, the joint Treasury-Fed statement indicated that legislation will be sought to provide such tools. One possibility is that Congress could give the Fed the authority to issue interest-bearing debt in addition to currency and bank reserves. Issuing such debt would reduce the volume of reserves in the financial system and push up the funds rate without shrinking the total size of our balance sheet.

In other words, if the Fed decides that, as a result of inflationary pressures, it needs to undo some of the expansion in its liabilities at a time when it is not prepared to unwind its asset positions, Plan B is for the Fed to borrow directly from the public. Which brings me back to the original question. Does the explosive growth of the monetary base in Figure 1 imply uncontrollable inflationary pressures? My answer: not yet, but stay tuned.

Massive Chinese computer espionage network uncovered
A mystery electronic spy network apparently based in China has infiltrated hundreds of computers around the world and stolen files and documents, Canadian researchers have revealed. The network, dubbed GhostNet, appears to target embassies, media groups, NGOs, international organisations, government foreign ministries and the offices of the Dalai Lama, leader of the Tibetan exile movement. The researchers, based at Toronto University's Munk Centre for International Studies, said their discovery had profound implications. "This report serves as a wake-up call... these are major disruptive capabilities that the professional information security community, as well as policymakers, need to come to terms with rapidly," said researchers Ron Deibert and Rafal Rohozinski.

After 10 months of study, the researchers concluded that GhostNet had invaded 1,295 computers in 103 countries, but it appeared to be most focused on countries in south Asia and south-east Asia, as well as the Dalai Lama's offices in India, Brussels, London and New York. The network continues to infiltrate dozens of new computers each week. Such a pattern, and the fact that the network seemed to be controlled from computers inside China, could suggest that GhostNet was set up or linked to Chinese government espionage agencies. However, the researchers were clear that they had not been able to identify who was behind the network, and said it could be run by private citizens in China or a different country altogether. A Chinese government spokesmen has denied any official involvement.

GhostNet can invade a computer over the internet and penetrate and steal secret files. It can also turn on the cameras and microphones of an infected computer, effectively creating a bug that can monitor what is going inside the room where the computer is. Anyone could be watched and listened to. The researchers said they had been tipped off to the network after having been asked by officials with the Dalai Lama to examine their computers. The officials had been worried that their computers were being infected and monitored by outsiders. The Chinese government regularly attacks the Tibetan exile movement as encouraging separatism and terrorism within China. The researchers found that the computers had succumbed to cyber-attack and that numerous files, including letters and emails, had been stolen. The intruders had also gained control of the electronic mail server of the Dalai Lama's computers.

"The investigation was able to conclude that Tibetan computer systems were compromised by multiple infections that gave attackers unprecedented access to potentially sensitive information, including documents from the private office of the Dalai Lama," the researchers concluded in their report. They have now notified various law enforcement agencies, including international groups and the FBI. The news also comes as researchers at Cambridge University prepare to release a report today called Snooping Dragon, which looks at suspected Chinese cyber-monitoring of Tibetan exile groups. The report is expected to detail the unexpected scale and sophistication of such efforts by a government against a private body.


John Hemingway said...

Ilargi, your last sentence today reminded me of another European who once wrote about the economy.

"Let the ruling classes tremble at a communist revolution. The proletarians have nothing to lose but their chains." K. Marx

Anonymous said...


team10tim said...


Top article, We’re In A Whole New Territory, points back to TAE.

Erin Winthrope said...

The final two sentences in the George Soros interview are rather haunting.

"Look, we are not going back to where we came from. In that sense it (economic decline) is going to last for ever."

I wonder how many really powerful people are reading TAE. Alternatively, it seems as though those who occupy the real power circles have been aware of the dire global predicament for a long time. Soros certainly alludes to this idea at one point in the interview.

Ilargi said...

T, link fixed, thanks


Ed G,

You're right, it's a significant thing he says. but how many people notice that? I think I saw a headline at BusinessInsider that got it, something like "Soros predicts recession to last forever".

Anonymous said...

On December 21st., 2000, regulation of credit default swaps was severely curtailed with the passage of the Commodity Futures Modernization Act of 2000. In the Spring of 2001, just a few months later Dick Cheney was conducting Energy Task Force meetings (Peak Oil ?). Six months later the 9/11 "attack" conveniently occurred and gave the U.S. and equally vulnerable Great Britain an emotional window through which they could insert themselves into Iraq and Afghanistan to secure oil.

The Fed lowers interest rates and encourages lending for homes. Bush administration blocks efforts to curtail shady lending. Housing bubble inflates. Mortgage backed securities are sliced, diced and sold around the world while players take fees and take out CDS insurance knowing that the loans would eventually go bad. Massive bonuses become the norm on Wall Street. Executives get rich and the taxpayers become the victim of "too big to fail" policies.

Was the housing bubble planned to provide a last hurrah of larceny for Wall Street? Prime Minister Tony Blair gets a million dollar a year J.P. Morgan advisory position, that's some revolving door. Conveniently Bin Laden is never found. Homeland Security, The Patriot Act and bogeymen keep the herd befuddled.

If you had determined that the world would soon experience an economic apocalypse, would you buy some derivatives on debt that you don't even own but you know will most certainly go into default. Why not create 100 trillion in derivatives, enough to bankrupt every national government on earth as they become the ultimate counter party?

Do you hear that rumbling sound, that's a controlled financial demolition and it's coming down on your head. The perpetrators will collect on your life insurance and dictate the terms of your now diminished existence.

Submit your advice said...

Following a recent suggestion by Ilargi, I have taken the use of the word "sustainable" by anyone to indicate that the speaker is an idiot. The world makes much more sense now. I find this complements nicely Taleb's assertion that you can neither believe nor trust anything said by someone wearing a tie.

Tim Auld said...

Submit your advice,

I take it you have not been exposed to permaculture? It would be unfortunate for you to disregard it based on your rule. It is a pragmatic design system based on natural and empirical principles and techniques, seriously tackling issues of sustainability - with verifiable results.

Anonymous said...

anon6:02 says:

"WTF" (I think regarding John's Marx)

So I says:

*LAYL, **DYC and ***TYF

Nice, takes me back to the good old bible school days of lets play sacrificial goat.

NEWS: The CEO of GM is'going down the road'.

Only question I got is will that be enough to mellow out the pitchfork crew or will there be a need to throw another goat or so on the fire? This could be a fun game but will it feed the kids?

*Look at your life
** Doff yer cap
*** Tug your forelock

-Presidents Choice Brand-

Bigelow said...
This comment has been removed by the author.
The Dude said...

Nice piece from Jerome a Paris: I am a banker. Some of us did not f*ck up. | Energy Bulletin As you can surmise, he's teaching the broad brush crowd a little lesson here. I've heard from people who've had dealings with the reputable/honest/hardworking segment of Enron or Haliburton, too, and it's a shame that many good people at the likes of AIG are being dragged down for the malfeasance of the Financial Products division. That lot must be the Smartest Guys in their particular room to still be on the job.

ca said...

Stoneleigh --

Michael Panzner seems to now think that inflation may arrive earlier than expected.

The Dude said...

I&S - no doubt you've fielded this one before, but at some point won't there be heavy political pressure to tear up or grandfather derivatives out of existence simply for the sake of the continuation of society? Not that I expect this to save the patient; to switch metaphors, if these truly are Buffet's Financial WMDs, then you're not going to gain much by stopping the exchange of warheads after the first salvos are over. Or, switcheroo time once more, can't we just send in the SWAT team and arrest everyone in the casino? That's the entire city budget they're playing craps with!

Ventriloquist said...

So there are some things some people are really good at --

Telling you that you are just good at bringing them down,

After they ask to you tell them what is really going on in your heart!

For Instance,

They don't Really want to hear the truth of which you speak,

they just want you to tell them what they want to hear.

And if what you actually tell them is that things are REALLY not what they seem to be . . .

. . . well then, you have mightily fucked up, because that is not what they wanted to hear you say.


You've just fucked up!!

Anonymous said...

Ilargi, what's so wrong with Ambrose. At least he is much more educated than 90% business reporters in the US and beyond!!
Why are you fixed on him?

Anonymous said...

Tyler Durdan at ZeroHedge has another must see exclusive about AIG.

Hang on to your shorts.

Anonymous said...

Michael Panzner of Financial Armageddon seems to have a worry:

"The deflationary consequences of the credit crisis may persist for some time. However, an early revival of inflation is not off the cards. Prudent investors should start implementing measures to protect their portfolios against such an outcome."

Just a slight case of nerves or something to think seriously about?

Nightly Summary said...

* Starcade NFL says we live at the pleasure of our slave masters; Will we be cannon fodder or soylent green?; El Gallinazo asks if TPTB want to eliminate people why have they fostered overpopulation?
* Armando Gascon says unrest in the streets only happens because someone powerful benefits from it; Don't waste your energy on violence; Snuffy replies this doesn't comprehend the US situation; People are mad; Only belief in the bailout has postponed panic in the streets; People are as nasty as snakes
* Most people will have to work for as long as they live; There won't be enough jobs for the young and strong, let alone the old and frail; entitlements to be essentially gutted in 2 to 3 years; We will return to the extended family model; The nightmare will be brewing while the world relaxes into a suckers rally
* VK asks if maybe a an electronic bank run is not as bad as a physical bank run; Some think it won't make a difference, real question is when will the FDIC go broke
* Markets are all about self fulfilling prophecies; Get out or REITs ASAP; Commerical real estate will be an epic disaster
* Democracy: Nice concept, poor implementation; America is already a police state; Two tier society coming
* TPTB want to put Humpty Dumpty together again; Soros says we are not going back to where we were
* Most of us in the first world don't yet no what desparate means; Not affording take-out isn't desperate
* Bunny Winthrop is planning something big, and it doesn't sound pretty; Tune in next time ...
* D. Benton Smith suspects he is an alien; Same mother ship apparently dropped off El Gallinazo, Ahisma and Brimstone as well; Submit your advice prefers to be a local; EG recants, thinks he is also a local, it is other people who are aliens; Jal is glad there are other seekers out there
* Lessons from near starvation: Rotted caribou ribs taste great, desperation is dangerous, true leaders save lives, best advice is to find and follow best advice; Avoid fights, survival is not vengeance; The future belongs to those who can adapt (Note: last point was not from Alaska but seemed to fit)
* Gardening season nears; Several interested in terra preta
* What happens when graduating students can't pay back student loans?
* The two great questions: Why is there a universe and how did beings that can ask that question arise; Don't let religion get in the way of spirituality; Neither atheists nor theists really know, they just interpret the shadows on the wall differently; What a man believes about God says more about him than it does about God; Ditto woman
* Baboons are efficient and insufferable; Surprisingly none have posted to TAE (or have they?)
* Only idiots use the word sustainable; Only liars wear neckties; Um...

APC said...

Wow, this thing about the 2 AIG managers in France seems very interesting. Wonder what that's all about. Both leaving at the same time smells of worry, perhaps even legal worries. I mean, these have got to be some of the best jobs in the world to have, so you'd think they'd try to keep them. I'm speculating of course, as I have no way of knowing. I do my banking at SocGen, and figure they'd be out of business already if it hadn't been for the largesse of the american taxpayer in the form of AIG bailouts. 12 billion dollars is no small sum and dwarfs the losses incurred by Kerviel. I wonder if there are outstanding CDS contracts maturing soon with the big banks here in europe. Any ideas?

jal said...

Okay, okay, I know there are lots of things to worry about and you don't want to hear about another one.
In any case, let's keep an eye on the CO2 market and think about how the average person will end up being nickeled and dimed and the luscious plum that the traders will be getting.
AIG was small time to what is coming.

Markey Taps FERC Over CFTC as U.S. Carbon Market Fuels Turf War
Markey and Peterson are jockeying for control of the biggest regulatory plum to hit Washington in years: a proposed system for trading carbon-dioxide permits that would be one of the world’s largest derivatives markets.

“Some believe this will create the largest new derivatives market in the world,” Senator Debbie Stabenow, a Michigan Democrat, said at a hearing last month.

jal said...

I got to follow the last post with good news for j6p. (It’s bad for governments.)
Tax Dodgers Multiply as ‘Underground Economy’ Cushions Job Cuts
Growth in the underground economy is depriving governments of revenue just as their countries are reeling from the effects of the recession and stimulus measures.
It’s “an unsustainable situation for the public coffers,” said Armando

Anonymous said...

Stoneleigh,That was a very kind comment.I think you might make a good neighbor too.As is,the net allows us the pleasure of each others company,without the strain of each of our vice,I hope to continue as long as TAE does.[smile]

Way way tired.I tried to keep up working w/a 35 year old tough Mexican hand,building fence and planting.When I sit for 20 min I stiffen up...tomorrow will be a no joy.
At some point the ones running this show will make some real stupid comments that will be seized on by the agi-propaganda types..thats when the fuse will be lit.Two lips Timmy has no clue how out of touch with the common folk he is..."Why yes,we need ALL of the money"..can he even comprehend what he sound like to Mr&Mrs Joe Sixpack whose kids just moved back in after losing their house...whose sick kid prevents insurance...ect ect.

Soros knows whats going on.He is probably poised to make another billion or so...

I had one of those "WTF?" moments... When it was ask how long could you keep the game going if you controlled the whole board..I.E. who can cause a bank run when the cards are all covered?

....Think hard boys and girls....

This is where we are at now!!

ALL the banks are insolvent.Everyone with more than 2 braincells working in unison knows this...The problem is no one can figure out how to profitably be the first one to panic...or how to win in end game play,cause if you rock this boat,it IS the end of the game..for good.
Nobody has figured out a better way than the garbage Timmy has come up with,and it smells bad bad bad..Tell me if there is any pol dumb enough to support this package besides O-man...and he looks mighty unhappy at this POS left on his plate."From the previous administration" He needs to rid himself of the previous administrations treasury sec ...

Too tired..night folks


Anonymous said...

One quick point my too fuzzy brain forgot...That calpers story should scare everyone shitless.When you see the pensions go down,you will see the radicalization of a large part of the people whom "keep the system running"I hope "they"{TPTB} know that...and I dont think they can/will be bailed out.Talk about a trigger...


thirra said...

Re the G20,blue eyed bankers and all that - the house of cards is collapsing - even Humpty Dumpty's wall has fallen over and all the king's men are running around in circles unable to put anything back together again.

So predictable if one just thinks along one quite obvious line - sustainability.

We,us so clever apes,have overshot,and excess population will be the real killer amongst all the other fol de rol.

I find the whole thing amusing,in a rather sad sort of way.Past caring,actually.

Armando Gascón said...

DYSTOPIA a few miles away from the USA
The language barrier is broken and you can visit the blog of Yoany Sánchez, a woman Cuban journalist, a mother, she lacks everything you take for granted -and freedom, too.
She doesn't have Internet, Yoany writes her blog and takes it to friendly foreign journalists who post it for her. She rarely sees the results. Her heroic efforts earned her the respected Ortega y Gasset prize in Spain, but she's not allowed to travel.
Only the Nomenklatura in Cuba can read her, and of course the rest of the world, but not the cuban people.

You want a glimpse of a Dystopia, pick and choose

How to get a car, or not
They don't let her travel
Lack of lifts
How many chickens have you eaten in your life?
T-shirt police
Request for the school
Nostalgia for pizza
Internet only for the rich
Soviet school snack
Come to Dystopia and live it
Taken for a yuma
Brief encounter with Mariela, daughter of Castro
Control for food
Hospitals, you bring everything
Short-cycle crops

If you were fascinated by the Argentinean collapse this will blow your mind.

Starcade said...

GM's death warrant got signed tonight by Obama. The car czar's report came out, and said neither GM nor Chrysler were viable in present form.

GM might get 60 more days to submit, but a BK is the only real way out now.

Anonymous said...

My WTF? was all I could muster up 2am EU time after reading the whole blog.
I reviewed it briefly again this morning with a fresher mind (what's left of it) and all I have to say is WTF?
REALLY! What is there to say at this point in response to the daily news.
How about Googoogoo and gagaga?


Persephone said...

Financial Warfare begins -

From Reuters this morning:
Watch China's FX swaps, not just super-currency plan
On the chess board of currency politics, China has disclosed its endgame in a striking show of confidence ahead of this week's Group of 20 summit in London.

Just as significant, it is already advancing its pawns.

Beijing's ultimate goal is to replace the globally dominant dollar with a beefed-up Special Drawing Right, the International Monetary Fund's in-house unit of account, which would become a "super-sovereign reserve currency".

The plan, laid out a week ago by central bank governor Zhou Xiaochuan, is bold, thoughtful and visionary. It is also magnificently unrealistic.

The political intent of Zhou's message could not be clearer: as the crisis of capitalism erodes U.S. influence, China is losing faith in the dollar and sees the time ripening for the yuan to assume its rightful role as a major world currency.

Thank you for your response and clarification to my remarks yesterday.

Time is running thin for me these days, but I am still following TAE with any extra time I have.

mistah charley, ph.d. said...

Here’s a slightly condensed excerpt from the transcript of William Greider’s appearance on Bill Moyers’ March 27 show

BILL MOYERS: I read just this morning that there’s a nation wide grassroots protest planned for April 11th…. They’re young people who want to take on banking reform, and reform the financial systems, as a campaign, an ongoing witness.

WILLIAM GREIDER: I know. They call themselves A New Way Forward….

Young people are part of my optimism. They smart kids, want to be engaged in their times, see the injustices of their society. And they don’t quite trust the great, big existing organizations. And with some good reason, as you know. And particularly, they’re not totally sold on the Democratic Party as the vessel of reform.

So they’re now engaged in putting together the 11, 12, I’m sure they’d like to have 50, little bonfires around the country. These demonstrations. There’s going be one in Washington and one in Wall Street, and a number of other cities. I think if people do those things with or without any help from big organizations, that collectively becomes the voice that tells Washington, we’re on to your silly ideas that Wall Street wants you to do about reform. We see through them. And we have some ideas of our own. And we’re going to come talk to you, and if you decline to talk to us, we’re going to come after you. That’s the voice of democracy speaking.


I plan to be at my local gathering.

Shibbly said...

Stoneleigh, Ilargi,
I noticed some major doom from TOD
You two are so way ahead of the trend/herd. Even "cash is king" was stated.

Wyote said...

It was spring and even in Peace Warren where tough times had descended like a dark squall, you could still get bunnies up for a party.

And what a grand affair it was to be. Bunny Winthrop had enlisted all the warren’s important citizens to host a night of revelry. The Business Council had found a suitable building – one that contained no “vagrants” and still had its plumbing and lights. It was decorated with flowers and other edible forbs. A dance band had been arranged and food was to be catered. The theme was to be “Together, we can make a better world” and would emphasize hospitality, graciousness and the dawn of a new prosperity that was surely around the corner.

Winthrop had found the task surprisingly easy. Apparently there was some remorse over the economic devastation of Peace. It would be good to show generosity, he had said. These were good folk that had fallen on hard times. They would welcome a night of cheer and free repast. They would forget.

Anonymous said...


"Some investors worry that the Fed will be too slow.

“If we have a slow recovery, which seems likely, who is going to watch them raise interest rates as the Treasury sells this mountain of debt” stemming from fiscal deficits, Allan Meltzer, author of “A History of the Federal Reserve,” said in a Bloomberg Television interview. Politicians “are not going to let them do that, they are not going to want them to do that.”

Greenpa said...

Today's insight from the Polka Dot Gallows:

Searching for the right metaphor for how it feels to be moderately sentient these days, what popped into my head was the image of a 17 year old kid, riding his first bull in local rodeo. And he drew the bull the pros were all hoping to avoid.

Perfect, I think. "Bumpy ride" does not really begin to describe it; then there's what may, or may not, happen to you once you do get thrown.

I guess that would make I&S the rodeo clowns.

You have to be familiar with rodeo to know that's not an insult- but high compliment.

Zaphod said...
This comment has been removed by the author.
el gallinazo said...

Anyone want to place bets on how the lemmings of Wall Street will react to the soon to be failed G20? They are just smart enough to discount the hype trying to hide the failure to do anything meaningful. This is not to imply that they could do anything meaningful. But guys like Stiglitz and Soros imply that they can, and this is their last chance.

Zaphod said...

So Obama's corp continues to pick and choose who survives and who gets thrown below the bus. Today it's GM who gets to be made an example. Forcefully ousting the CEO (by what right?) and sending the stock down 30% is pretty much saying "go make your bankruptcy plan".

Yet bankers who did worse are not only still on the job, but the view seems to be the gov't has "no authority" to oust the CEOs given the limited gov't "investment". Sure, GM is BK no matter what, but so are the banks and other companies (GE, anyone?) and their CEOs are still pulling down bonuses.

Playing favorites is the worst possible approach. Not only does it destroy confidence, but it must be meant to instill fear and generate compliance. Gov't managed by favors, influence, and fiats is no democracy.

Anonymous said...

Was that a rally that just ended or was that just the result of the manipulations of the marketds by the big boys?
S&P now below 800.

ps I did manage to time that little surge to minimize some losses.

Roberto said...

Paleocon- so to be fair, Obama should have announced today that ALL CEOs of all companies taking bailout money are fired? All at once?

riiiight. Or maybe- he's just sent a message to them all- "Provide new thinking, or you're out. Quick."

Zaphod said...

All at once would be bad, but if they'd ousted CEOs as the deals came and went, it wouldn't be all at once.

What did Lehman and BS not do that GS and Citi did? What did GM not do that AIG did?

There is no clarity as to the decision process, and I submit the administration cannot afford to be making judgment calls as it goes on a case-by-case basis. The market requires clarity and transparency, and to know the rules.

Greenpa said...

Not that this hasn't been going on before; but...

Rio de Janeiro is building walls... around slums...

Submit your advice said...

A quick wrap-up after the end of the technical bear market rally, a summary, if you will.

1. We should have more faith in Stoneleigh than Stoneleigh does. Would one paint the lily? Stoneleigh in crudest rawest freshest form is always the best. Processed Stoneleigh is still good, but diluted. Never doubt Stoneleigh, even if you are Stoneleigh.

2. The rules of the numbers have changed. 20% is the new 15%. Officially, over 20% gain means a bull market. But that is obvious nonsense. And officially, anything over 10 - 15% is not a technical bear market rally. That, too, is nonsense. 20% is the new 15%.

3. When the market has nothing better to do and has at least 3 weeks to kill until some real news or events happens, rather than twiddle its thumbs it might as well have a rally, shake down and shake out some more suckers. I was naked, ears were tortured, by the sirens sweetly singing. Tie yourself to the mast when that happens.

4. Now the shitstorm of bad news will rain upon us, relentlessly, for some weeks, hard. Sylla and Charibdis. I figure down to dow 5500, but given my propensity to understimate people's stupidity, and hence the extreme ends of the pendulum swings, maybe closer to 5000. Before the real monster sucker rally, the biggie, the one that wipes out everything. Après çela, le déluge

5. I think it's time to start thinking about what N. Taleb calls Capitalism 2.0, and how, after surviving the big mess, if we're smart we can get filthy rich when Capitalism inevitably returns, although in a somewhat different form.

el gallinazo said...

re the news about The Weasel and Congress:

Correct me if I am wrong, O Teeming Millions, but The Weasel's plan specifically bypasses any need for congressional approval to implement the next $1T down the rathole. When it is implemented and the FDIC looses hundreds of billions as the leveraging underwriter, then The Weasel will have to go to Congress to give the money to the FDIC, and then Congress will have to go along, as rejecting the appropriating would lead to a bank run from hell. Do I have it right? Actually the bastard is pretty clever in his own, scumbag way.


"Gov't managed by favors, influence, and fiats is no democracy."

Duh! Democracy! We don't need no steenking democracy!

According to Michael Hudson, who is quite brilliant and has most of it right, even from the standpoint of pro-capitalism, industry produces wealth and finance is a parasite on the backs of both industry and labor. This parasite has locked onto and controls what passes for the brain of the beast. (This can actually be found in nature. There is a parasite that has rats and cats as its necessary vectors, and actually produces tranquilizers in the rat phase that goes into the blood stream). So expect to see the Manchurian Candidate and The Weasel to throw industry under the bus to allow more money for the parasites' rathole.

el gallinazo said...

@Submit your advice

"We should have more faith in Stoneleigh than Stoneleigh does. Would one paint the lily?"

Rat on!

Stoneleigh originally saw this micro rally as a foothill to the great suckers' rally with new lows to be found between them. Paradoxically (in terms of logic but not herdononics) she said that there has not been a horrible enough event to trigger the GSR. It is only quite recently that she has sort of indicated that this is probably the start the big one.

Ventriloquist said...

@ Armando Gascon

As someone I know so astutely observed recently . . .

. . . This is not really a major catastrophe, America, you are just slowing drifting towards an existence that is a daily reality for much of the rest of the world.

Zaphod said...

The great thing about skewering GM is you can nail industry, labor, and pensions all in one whack.

For most of the banks there is no industry, no significant or organized labor, and no pension legacy. All you have is petulant executives and fanciful bonus structures.

Stoneleigh sings my siren-song, an epic story with a light tone and a dependably measured cadence, a captivating and compelling ballad that renders features of the darkness with its shimmers of light.

Hombre said...

Nightly sum...
"Baboons are efficient and insufferable; Surprisingly none have posted to TAE (or have they?)"

Gorillas however have a spokesperson!


Knowledge is dangerous because it leads to "civilization."

Unknown said...

re: Stiglitz

"You just came back from China. How is the economy there?

I think they are running things very well. They've got a large and much deeper stimulus package than we do. And they don't have our financial market troubles."

Really? From what I've read here and elsewhere, China is in deep trouble. Perhaps his phrasing "running things very well" is more of a shot at our gov, whom in comparison is very much NOT.

Mugabe said...

Regarding all the noise from China about replacing the dollar as reserve currency with SDRs or whatever -- I would speculate that it's primarily internal politics driving it. The Chinese leadership is deeply embarrassed by their dollar predicament. It's a fiercely nationalistic country, and for a long time the Chinese population was happy in its belief that they were beating us on trade: putting us in debt, piling up a fortune, wiping out our industry. But now they feel a bit foolish finding themselves dependent on US policy to preserve the value of their "fortune." The Chinese leadership is scrambling to keep a step ahead of their version of populist outrage. Never mind if their SDR proposal is realistic, or makes any difference, or is relevant to anything.

jal said...

I’ve been listening to the discussion concerning the auto makers.
Double standards seem to be the predominant theme.
Therefore, my questions … concerning the bank/financial bail out
1. did the employees keep their health packages intact?
2. did the employees keep their pension packages intact?
3. did any contracts get modified? (Getting a hair cut)
Has anyone see any reporting that they have been submitted to the same guidelines that the auto makers must follow to get the bail out money?

Greenpa said...

"Really? From what I've read here and elsewhere, China is in deep trouble. "

What you have to remember is, China has been in deep trouble, and deeper trouble, 100% of the time, for the last 4,000 years; literally.

Considering who they are, and what they're accomplishing; I'm in awe. And yes, it's still China- which means Byzantine, not democratic. Even so.