Wednesday, April 1, 2009

April 1 2009 2: BombBay

Alfred Palmer Bombbay October 1942
Bomb bay gasoline tanks for long-range flights by B-25 bombers await installation at the North American Aviation plant in Inglewood, California.

Ilargi: Our friend Stranded WInd sent me this yesterday, asking me to post it. I had to think about that for a while, but decided to do it. My doubts, I think, have mostly to do with the title he gave the article. Civil war is a laden term, certainly in the US, and one that many people will associate with some form of extreme ideas.

I don't think my views are overly extreme, and I don't want people to think they are, though there will always be voices out there who do. All I try to do is look at what I see around me, and extrapolate that into the future, in as wide and big a picture as I think exists. The risk of unrest and violence inevitable becomes part of that, in view of the policies and power-games going on, be they criminal or just plain sick, as well as the misery that must inevitable follow in their path, but civil war for me is too strong an expression to date. The risk is too great that it will prevent me from reaching those I want to talk to.

The reason why I do post the article after all is that Stranded Wind addresses a set of notions that need -more- attention. Food production in many parts of the world is under a severe threat. I’m not sure 2009 will be the year it starts to seriously sputter, there are many reports that speak of large harvests in various places. But even if it doesn't do so now, the sputter will begin soon. Farmers need large loans to keep their operations going, as do many of the links in eth chain that brings your food to your plate.

It doesn't help that the US food industry is organized pretty much exactly like the finance sector is, with single players that are far too big for anyone's good but their own. The political power exerted through the Monsanto, ADM and Cargill lobbying expenditures is rivaled only by that of Goldman and Citigroup. As I’ve said many times before, if and when we allow our basic needs to be traded for profit, we ourselves will inevitable one day be sold for profit too, or left to die for a lack of profit. With that in mind, here's Stranded Wind.

Stranded Wind: A Proper Civil War

The human race faced the probability of famine at the dawn of the 20th century for a couple of reasons. We've put off that reckoning for a century but instead of seeing things for what they were and governing ourselves accordingly we used our wits and fossil fuel endowment to climb even further out onto the branch of unsustainability. Nearly seven billion of us now perch on that branch, meant for a third of that number, and not all of us will pass through the needle's eye of economic collapse, energy depletion, and environmental change. The light's going to start coming on for the masses this summer and we've got a choice; a rational explanation and a rational response, or falling down the disloyal Christian Right's apocalyptic bunny hole.

The Oil Drum is the center of the universe for serious discussion regarding peak oil, Real Climate aggregates peer reviewed climate change science, and I trust The Automatic Earth as the root for any exploration of global financial issues. As I read them I'm not seeing recession, and I'm not seeing depression; we face epochal change. We used to get our nitrogen fertilizer from various nitrate deposits around the world. The last ones to be worked were in Chile and at the turn of the 20th century the fear they'd run out was very real. You're wondering what this has to do with energy? The replacement for the Chilean deposits' contribution to global agriculture was the discovery of various means of synthesizing ammonia, the first gateway chemical we make on the way to biologically accessible nitrogen.

The hydrogen needed for the process came first from hydroelectric power but today two thirds of production is coal based and the rest runs on natural gas. The United States uses half of the natural gas produced ammonia and very little of that which is made with coal. The coal production will still go on, but at what price? The Holocene age during which our species evolved had a normal carbon dioxide concentration of 180ppm to 280ppm. We became fossil fuel consumers right at the peak of the norm .. and then knocked it a hundred parts per million higher. Good bye Holocene, hello Ohshitocene. The world is going to be hotter, drier, and when the rain comes it's going to be wilder than we've ever seen. Adding to that with coal based ammonia production, the dirtiest possible means, isn't going to help the situation.

Natural gas as a hydrogen source leading to nitrogen production is even more uncertain. Jon Freise has published another report on the natural gas market and it doesn't look good. The economic mess has reduced investment and gas fields depend on a constant flow of new wells to maintain production, as 40% or more of the total production from a gas well happens in the first year. Heating and electric generation are two other big uses. Add those up, factor in the ill conceived Pickens Plan, and it's a real mess in the making. The foundation of our government is based on the thinking of John Locke and he assumed, looking out from 17th century England, that the world was infinite. Everywhere we look we see limits, from the North Pacific garbage patch to the inevitable loss of access to low Earth orbit. Everywhere we go we wipe out resources and leave a mess in our wake. Locke's infinite Earth has been replaced by one that is quite simply irritated with us.

Our economic system depends upon compound interest, compound interest depends on expanding economic activities, and all of those activities and the thinking behind them came together in an era of steadily increasing energy. Wind gave way to coal gave way to bunker oil and we moved goods and people across the seas at will. Wood gave way to coal gave way to natural gas and our homes and places of business were always comfortably warm. Electricity was always a creature of fossil fuel and it's path is a curious reverse as we put in more and more renewable sources. Even with an immediate, forceful move to a purely renewable future the journey back to this planet's solar maximum will look like the Trail of Tears.

The facts of the matter are clear. Less energy means less economic activity and anything we try to do using our old fossil fuel addiction to drive it makes our environmental situation worse. Ammonia production is an energetic and economic activity that produces half of all the protein humans consume. Our warming, acidifying seas are responsible for much of the rest. This story does not end with a happily ever after. We have to interpret our situation so we can find a path forward. We have the choice of reason, understanding the geology of oil and gas depletion, understanding the ecology and atmospheric chemistry of global warming, and debunking the so called 'science' of economics, with its disregard for what economists called 'externalities' once and for all.

The other choice is the irrational domain of religious fanaticism. Instead of seeing cause and effect, see everything that happens as some master plan on the part of a supernatural force, leading up to an apocalyptic 'end of days'. Don't circle the wagons here on our relatively safe, relatively lightly populated continent, but instead focus on those who cleave to a different supernatural force. I think we're going to pick both. We're constrained by our history, constrained badly. We've had a rich, largely empty continent that took two centuries to fill. We had a civil war once, but with separate geographic territories and uniformed, organized armies fighting for formal governments it was like few other civil wars in history. This next conflict, it'll pit the rational against the religious, Hispanics against a subset of the whites, and it'll put great stress upon and perhaps bring an end to the continental United States as we know it today.

We don't have any more room to grow, either geographical or energetically, and as George Monbiot says we'll be "fighting like cats in a sack" soon enough. I wish I was wrong, I truly do. But I look back over the last fifteen months of diaries and two jump right out at me: My prediction of Mexico as a failed state from January 4th of 2008 is first ... and 385 days later the U.S. Joint Forces Command agreed with me. Mexico; poorer than us, drier than us, running smack into the depletion of its massive oil field in the Bay of Campeche, and coming apart due to drugs and corruption, all the while with the best and brightest of the Mexican nation making the way from the Mexican state to ours. This place is our neighbor, our soon to be our failed state as Iraq is to Iran, and it's the canary in the North American coal mine.

Another thing I wrote, a mere review of someone else's work, also seems an appropriate reference at this time. Dmitry Orlov's fine book, Reinventing Collapse. Find a copy of this book and have a look; the parallels are too many to ignore. And we all know about Chechnya, Georgia, and there are other brush fires still burning nearly twenty years after their collapse. Some times I have a little hope and I share. This is not one of those days. There are still things that need to be done to secure what of our nation that can be saved, but understand this well: We've got a visible ethnic minority that'll be a target for scapegoating and a significant fraction of the population with an apocalyptic worldview who can no longer be counted as loyal. The rubbing those two groups together may very well be the spark that ignites a conflagration.

Paris and Berlin take G20 stand
France and Germany have demanded that the G20 leaders meeting in London on Wednesday back tough global action on financial regulation, tax havens, and banking transparency, saying they would refuse to sign a deal that did not meet their "red lines". At a joint press conference in London, Nicolas Sarkozy, French president, and Angela Merkel, Germany’s chancellor, insisted that "concrete results" on future financial regulation was the most important ambition for the G20. "We don’t want results that have no impact in practice but results that change the world as we know it,’’ Ms Merkel said. Mr Sarkozy insisted: "The time for pointless summits is behind us."

Barack Obama, the US president, earlier emphasised the "enormous consensus" on plans to restore growth to the world economy, adding that the core of the summit would be "that government has to take some steps to deal with a contracting global market place and that we should be promoting growth". He insisted that divisions between the US and Europe over a new fiscal stimulus were "massively overstated" but warned that the "voracious" US consumer could no longer be expected to pull the world out of recession. "If there is going to be renewed growth, it can’t just be the United States as the engine," he said.

While the transatlantic squabble over the main thrust of the G20 summit continued, the heads of international organisations bemoaned the slow progress on cleaning up bank balance sheets, something they see as a pre-requisite for any recovery. Dominique Strauss Kahn, the International Monetary Fund managing director, told the Financial Times that the fund’s experience from 122 banking crises suggested that one common theme is "you never recover before the cleaning up of the banking sector has been done". "The US . . . is rightly insisting on stimulus and the EU rightly insisting on regulation. They are not yet moving quickly enough in doing the cleaning up of the financial system."

His words were echoed by Mario Draghi, head of the Financial Stability Forum, the body of regulators, finance ministers and central bankers. "The main thing we need now is to implement a sense of transparency where we can put a credible floor to the bank losses." Gordon Brown, UK prime minister, said: "We are within a few hours, I think, of agreeing a global plan for economic recovery and reform." But last night, his spokesman told reporters a deal was "not there yet", saying, "there is clearly a lot of detail that needs to be worked through on the reforms to financial regulation".

Mr Brown played down speculation that the French president might walk out of the summit, but UK officials were working last night to deliver a sufficiently tough text on regulating hedge funds and tax havens to satisfy Mr Sarkozy. The French president said tax havens were evidence of "capitalism without a conscience". On the eve of the summit on Wednesday, anti-capitalist demonstrations spiralled into violence in the City of London as protesters besieged the Bank of England and smashed their way into a Royal Bank of Scotland branch, sparking clashes with riot police.

G20 leaders accused over toxic assets
World leaders at the G20 summit on Thursday are ducking the critical issue of cleaning up the toxic assets poisoning the banking system and risk prolonging the worst global recession in generations, the International Monetary Fund chief warned on Wednesday. On the eve of a summit aiming to agree a "global plan for recovery and reform", Dominique Strauss-Kahn told the Financial Times that the fund’s experience from 122 banking crises suggested "that you never recover before the cleaning up of the banking sector has been done". "The rightly insisting on stimulus and the EU rightly insisting on regulation. They are not yet moving quickly enough in doing the cleaning up of the financial system," he said.

His warning came as leaders of the world’s most powerful economies struggled to bridge divisions over the summit’s priorities amid violent anti-capitalist demonstrations in London. Protesters besieged the Bank of England and smashed their way into a nearby bank branch, sparking clashes with riot police. France and Germany threatened to block a deal on Thursday if their "red lines" on tougher financial regulation were not met, raising the prospect of a clash with China over tax havens. Nicolas Sarkozy, French president, and Angela Merkel, German chancellor, laid down explicit conditions for a deal, including tougher regulation of hedge funds, tax havens and bankers’ pay.

At a joint press conference, Mr Sarkozy said: "The time for pointless summits is behind us." Ms Merkel said it was no longer acceptable to "sweep things under the carpet". Although Gordon Brown, the UK prime minister, remains confident Thursday’s summit will end with smiles, the tough Franco-German stance left him trying to broker a deal last night. Mr Sarkozy said he feared China was an obstacle to a clampdown on tax havens and that he suspected that "the interests of Hong Kong and Macao" lay behind it. Downing St officials conceded tough discussions were continuing into the night. Mr Brown sat the French president next to Hu Jintao, the Chinese president, at Wednesday night’s official G20 banquet in an attempt to forge a compromise.

Speaking earlier, Barack Obama, the US president, confirmed that while continental Europeans wanted the summit to focus on regulation his emphasis was on the "enormous consensus" on plans to restore growth to the world economy. He added that the core of the summit would be "that government has to take some steps to deal with a contracting global market place and that we should be promoting growth".He insisted that divisions between the US and Europe over the a new fiscal stimulus were "massively overstated" but warned that the "voracious" American consumer could no longer be expected to pull the world out of recession. "If there is going to be renewed growth, it can’t just be the United States as the engine," he said. Mr Strauss-Kahn’s warnings were echoed by Mario Draghi, the head of the Financial Stability Forum, the new body of regulators, finance ministers and central bankers. "The main thing we need now is to implement a sense of transparency where we can put a credible floor to the bank losses".

G20 divisions on global economic reform threaten summit
World leaders remain at loggerheads over global economic reform as continued demands by France and Germany for tough new regulation over finance markets threaten to derail tonight's G20 summit. Hopes for unity on tackling the global recession sank on the eve of the crucial meeting as French President Nicolas Sarkozy hardened his demand for a tough new global regulatory regime to limit bank autonomy, declaring it non-negotiable. Mr Sarkozy's provocative statement was backed by German Chancellor Angela Merkel and exposed escalating tension between France and Germany and UK and the US, which instead favour increased fiscal stimulus spending to kick-start the global economy.

And it came as Kevin Rudd called for the leaders of the world‘s 20 biggest national economies to put aside personal interest and act in unison to protect millions of jobs across the world. The G20 leaders will meet tonight to consider a range of responses to the global recession, which began in the US last year and has smashed stock and finance markets, slashed trade and left millions out of work. US President Barack Obama and G20 host and UK Prime Minister Gordon Brown have both called for regulatory reform as well as continued government spending to lift economic activity and kick start the global economy. But Mr Sarkozy, under heavy pressure from an angry French public, has instead pressed for heavy regulating of finance markets, arguing poor regulation in the US caused the crisis and that the G20 must adopt tough global standards to prevent a recurrence.

Ms Merkel has explicitly rejected more stimulatory packages as unnecessary and potentially wasteful. Mr Obama and Mr Brown held a joint media conference overnight in London to express confidence over the G20 meeting. The new US President blamed the recession on a mismatch between economic regulatory regimes and the increasing interconnection of national economies and said almost all nations had already spent money on economic stimulus. "The separation between the various parties involved has been vastly overstated," Mr Obama said. "The truth is that that's just arguing at the margins," he said. "The core notion that government has to take some steps to deal with a contracting market place and to restore growth is not in dispute."

But Mr Sarkozy and Ms Merkel emerged later to assert that the leaders owed millions of innocent people hurt by the recession through no fault of their own the confidence that it could not happen again. Mr Sarkozy said he was drawing "a red line" under his demand for regulatory reform on tax havens, hedge funds, banking transparency and a worldwide cap on bankers' pay "There must be supervisory bodies when we see the scandals (caused by) this absence of transparency in some money markets," Mr Sarkozy said in a thinly disguised attack on the US. "I will not sign up to any false compromises. This is a historic opportunity afforded us to give capitalism a conscience, because capitalism has lost its conscience and we have to seize this opportunity."

G20 leaders spent the day before the summit engaged in hectic lobbying including dozens of one-on-one meetings and culminating with a formal dinner at Mr Brown’s resident at No 10 Downing Street catering for by celebrity chef Jamie Oliver. Speaking ahead of the dinner, Mr Rudd, whose pre-summit rhetoric has been almost identical to that of Mr Obama and Mr Brown, downplayed the division, hinting it might be linked to domestic politics. "From time to time governments do what they gotta do in various parts of the world," he said. "The key thing is what governments do together here in London. That’s where the rubber hits the road here -- what’s agreed in this space, what’s agreed in this city.

"We are at an important point in history right now." Mr Rudd said the summit must be about jobs and that the leaders must think collectively, putting aside individual needs. "That’s why we are here," he said. "We may have president and prime ministers around the summit table but what they do affects jobs for plumbers for printers and police officers right around the world including Australia." Mr Rudd agreed the meeting must harden regulation over banks. But he said it must also find consensus on co-ordinated action to remove so-called toxic assets from the balance sheets of globally important banks so they could resume lending to businesses and consumers.

And the Prime Minister said the G20 would also seek agreement to reform the International Monetary Fund because it needed more resources and freedom to deal with an approaching new wave of corporate carnage and finance sector turmoil in developing nations, particularly in central and eastern Europe. "If we don’t agree on new resources for the International Monetary Fund … the consequences for big problems in the global economy later this year will not be dealt with," he said. "And they’ll be consequences for all of us including back home in Australia." He said that if developing economies were allowed to "go under" without IMF assistance, their collapses would ricochet through the world and cause further turmoil in Australia. Mr Rudd also agreed that if the G20 agreed to double or perhaps triple IMF resources beyond their pre-crisis levels, Australian taxpayers would have to lift their funding. "We’ve always played our part," he said. "We’ve always been up there contributing our fair share. It’s happened in the past. We’ll do so in the future."

Why G20 leaders will fail to deal with the big challenge
by Martin Wolf

The summit of the Group of 20 leading high-income and emerging countries in London on Thursday seems set to achieve progress. But achievement must be measured not just against past performances, but against "the fierce urgency of now". Unfortunately, it will come up short. The Organisation for Economic Co-operation and Development now forecasts a 4.3 per cent contraction in the economies of advanced countries this year, followed by stagnation in 2010. In advanced member countries, joblessness may rise by 25m by 2010. Meanwhile, the International Monetary Fund forecasts that the global economy will shrink by between 0.5 and 1 per cent this year. This would be an increase in the "output gap" (gap between actual and potential output) of some 4 per cent.

Will the G20 rise to? these exceptional challenges? No, is the answer. What is needed is a large increase both in aggregate demand and a shift in its distribution, away from chronic deficit countries, towards surplus ones. On both points, progress will be far too limited. The OECD argues that the discretionary stimulus measures taken by governments in response to the crisis will on average boost gross domestic product by just 0.5 per cent in 2009 and in 2010. In addition, the extra demand is coming at least as much from deficit as from surplus countries. This is not a recipe for resolution of global imbalances, but for their indefinite prolongation. Unfortunately, no consensus exists on the underlying causes of this crisis or on the best ways to escape from it.

The US and UK agree that the excesses of the financial sectors have their roots not just in deregulation, but also in the massive excess supply of surplus countries, of which China, Germany and Japan (with respective current account surpluses of $372bn, $253bn and $211bn in 2007) are the most significant. But China and the continental European countries, led by Germany, argue it is all the fault of profligate deficit countries. Yet China also hopes that the world will soon be able to absorb its excess supply again. In last week’s FT interview with Angela Merkel, the German chancellor said that: "The German economy is very reliant on exports, and this is not something you can change in two years." Moreover, "It is not something we even want to change." To paraphrase: "The rest of the world needs to find a way of absorbing our excess supply, but sustainably, please."

Yet what happens if that cannot be achieved for the excess potential supply of all surplus countries together? In 2007, the three countries ran current account surpluses of $835bn (€629bn, £585bn). Logically, counterpart deficit countries must spend that much more than their incomes. Yet today deficit countries have run out of willing and creditworthy private borrowers. That change is what this crisis is all about, as the charts show. Between 2007 and 2009, the crisis-hit private sectors of the US, UK and Spain will, on these forecasts, shift their financial balances (the difference between their incomes and expenditures) massively towards surplus, as savings rise and spending is cut. In Spain, the shift is forecast to be 11.7 per cent of GDP. The main offsets in these deficit countries will be huge jumps in fiscal deficits, although the current account deficits are also, inevitably, shrinking.

Surplus countries, which relied on the private sectors of deficit countries to do their irresponsible borrowing for them, show a very different pattern: their private sector balances will change rather little and, in all cases, will be in large surplus throughout: big current account surpluses nearly always mean private sector excess savings. But, as their external surpluses shrink, fiscal deficits will grow, partly because of deliberate policy but also because of the automatic consequences of recessions. So fiscal positions are deteriorating and current account surpluses and deficits are dwindling everywhere, as the private sectors of deficit countries cut back their spending dramatically. But the expected fiscal deterioration is bigger in the deficit countries than in the surplus ones. With the exception of Japan, the fiscal deficits will also be bigger in the deficit countries. The small size of the expected shift in China’s fiscal deficit, the modest level of its 2009 fiscal deficit and the persistence of the massive surpluses of its private and state-owned enterprise sector is striking. This is a country expecting (or at least hoping for) a recovery in external demand.

What this analysis is telling us is quite simple: next to no adjustment in underlying structural imbalances is occurring. In particular, the non-fiscal sectors of the three big surplus countries are expected to continue to run huge surpluses. The change – temporary, the surplus countries surely hope – is that domestic fiscal expansion is modestly offsetting the decline in demand coming from deficit countries with over-leveraged private sectors. But that decline in private demand is also offset by massive fiscal boosts in deficit countries. This is not a path towards a durable exit from the crisis. It is a path on which the fiscal deficits needed to offset persistent current account deficits, and collapsing private spending in external deficit countries, continue indefinitely. Unless and until surplus countries recognise that this cannot continue, no durable escape from the crisis will be achieved.

Understandably, but foolishly, they are unwilling to do so. So what is to be done? That must be a central agenda item of the next G20 summit. The world economy cannot be safely balanced by encouraging a relatively small number of countries to spend themselves into bankruptcy. The answer lies partly in changing the policies of surplus countries. But it lies as much in rethinking the international monetary system. The case for sizeable and ongoing allocations of special drawing rights – the IMF’s reserve asset – is powerful, as, among others, Zhou Xiaochuan, governor of the People’s Bank of China, has argued in a fascinating recent paper*. I hope soon to return to this huge challenge and opportunity. In the meantime, the G20 summit is largely dealing with the immediate symptoms of the illness. Finding a longer-term cure for chronic global excess supply still lies ahead.

Treasury's Very Private Asset Fund
The Obama Administration insists it wants to "partner" with private investors for its new toxic-asset purchase plan. But the more details that emerge, the more it seems Treasury wants to work with only a select few companies. This is no way to conduct a bank clean-up. The investment community was already suspicious last week when Secretary Timothy Geithner unveiled his plan, announcing that Treasury would select four or five companies as "fund managers" to purchase toxic securities. Given that the whole idea is to create a liquid market for these assets, we'd have thought Treasury would encourage as many players as possible. But the bigger shock was when Treasury released its application to become a fund manager, a main rule of which is that only firms that already have a minimum of $10 billion in toxic securities under management can apply.

Few hedge funds, private equity players or sovereign wealth funds come near this number. The hurdle would bar many who specialize in the very distressed assets that the Obama Administration is trying to offload from banks. Hedge Fund Intelligence recently estimated total assets under management at Avenue Capital Group at $16.4 billion, King Street Capital at $15.8 billion, Fortress Investment Group at $13.7 billion, and Elliot Associates at $12.8 billion. Presumably, the portion of these portfolios devoted to toxic assets is significantly smaller. "It's difficult to imagine why most firms would even bother to apply now," one hedge fund manager told us. Treasury rules also say the $10 billion limit must be comprised of commercial and residential mortgage-backed securities that are "secured directly by the actual mortgage loans, leases or other assets and not other securities."

This is another way of saying that they must be "first tier" assets, for instance collateralized debt obligations (CDOs). But what many private players instead deal in are "CDOs squared" or CDOs secured by other CDOs, which would not count toward the requirement. This, too, will make it harder to take part in the program. While dozens of banks and insurance companies today hold more than $10 billion in toxic securities, the vast majority are trying to get these assets off their books -- not lining up to buy more. As for asset management firms that hold such a big portfolio -- and are also healthy enough to serve as fund managers -- there is only a small pool, such as Black Rock, Pimco, Goldman Sachs or Legg Mason, as well a titan or two of the hedge fund industry, such as Bridgewater.

"This is ugly," says Joshua Rosner, the managing director of Graham, Fisher & Co., an independent research firm. "As long as they are experienced, there is no rational reason for creating limitations on who becomes a bidder and manager of assets. It doesn't serve the public good, though it may serve those few large firms that appear to have a privileged relationship with Treasury." We have no idea if Treasury is playing favorites, but it certainly doesn't look good. All the more so given that some of these big players may have consulted informally with the Obama Administration as it was writing the plan. Not to mention that the big asset management companies that are most likely to land plum fund-management jobs are also the ones that have been most vocally praising the Treasury plan. (Treasury declined to comment.)

None of this bodes well for the bank rescue. The purpose is to create new buyers for these toxic securities, a process that, in Treasury's own words, will lead to better "price discovery." The best way to accomplish that is with highly competitive bidding that includes any player with a solid track record in handling distressed assets. The weaker asset-holding banks are already wary of selling into this program, worried that low bids will result in big losses that will further hurt their balance sheets. They will be even less likely to take part if only a handful of managers, who have every incentive to keep prices low, are doing the bidding. There is also the worry that Treasury is creating a new set of problems by concentrating these sold-off toxic securities into funds run by few entities. If this program is a roaring success, Treasury is guaranteeing that a select group of hand-picked firms are set to reap enormous profits, via a program that was largely underwritten by taxpayers.

As it is, smaller players can now only take part in this program if they agree to "buy" into the funds run by one of the exclusive managers. So not only is the government going to be anointing a favored few to invest in these assets. It is also giving those favored few the opportunity to collect fees and profit-sharing from anyone else that wants to go in with them. In the wake of the AIG bonfire, Mr. Geithner is tempting another outcry. Investors were happy that Treasury finally settled on a strategy last week, but no one should underestimate the enormous challenges the government still faces in making this work. Given the outrage over the lack of transparency that has existed in the federal bailouts to date, the last thing Treasury needs is to be seen as running a program that will benefit a select few. The government needs all the help it can get, and that means lowering the barriers to entry, not raising them.

FDIC Chief Backs Higher Capital for Banks
The head of the Federal Deposit Insurance Corp. says new oversight of big financial institutions deemed to be high risk should include raising their capital requirements to help protect the financial system. FDIC Chairman Sheila Bair's comment that some big banks and other financial institutions should be mandated to hold more capital as a buffer against risk in times of stress brought vigorous applause from an audience of bankers Wednesday. Many were executives from smaller, community banks. Ms. Bair is calling for a new system of regulation that prevents institutions from taking on excessive risk and becoming so big their failure would endanger the financial system.

"We simply need to end 'too big to fail,' " Ms. Bair told the gathering of the American Bankers Association, adding that she sees "some glimmers of hope" in the lending pipeline beginning to thaw, though credit is still tight and "there is still more pain to go." "If you're looking for a quick fix, we're not going to get it," Ms. Bair said. What is needed to replace the "too big to fail" model is a "fail-safe system" that will limit the dangerous size and concentration in high-risk activities of banks and other financial institutions, she said. Policy makers are trying to craft a new financial rulebook to replace the "too big to fail" stamp put on federal policy in the financial crisis, as the government rushed in to rescue insurance giant American International Group Inc., and pumped tens of billions of dollars into Citigroup Inc. and Bank of America Corp.

The Obama administration last week presented to Congress an extensive overhaul of financial regulation meant to prevent a repeat of the banking crisis that toppled iconic institutions and wiped out trillions of dollars in investor wealth. A pillar of the plan is creating a so-called systemic regulator to monitor against the risks that plunged markets world-wide into distress last year. Ms. Bair has maintained that a mechanism is needed to resolve troubled financial institutions similar to what the FDIC does with federally insured banks and thrifts. Such a special-receivership process -- replacing "very messy" bankruptcies for large failed companies -- as well as higher capital requirements for high-risk institutions should be part of the new system, she said.

National Economic Council Chairman Lawrence Summers also drew the distinction between large, complex financial institutions and smaller banks. "One cannot paint all institutions with the same brush," he told the bankers, while stressing the importance of President Barack Obama's massive economic stimulus plan. "We cannot have a completely healthy financial system in a profoundly unhealthy economy," Mr. Summers said. In Europe, meanwhile, the leaders of France and Germany prepared to create a united front ahead of the G-20 summit of global leaders in London, where they will jointly call for governments to focus on tighter regulation of financial markets as opposed to more economic-stimulus measures.

US banks stand to benefit from mark-to-market rules change
Large US banks like Citigroup, Bank of America and Wells Fargo stand to receive a surprise first-quarter earnings boost from Thursday’s expected loosening of controversial accounting rules by the Financial Accounting Standards Board. Wall Street executives and auditors say the accounting watchdog’s likely approval of changes to "mark-to-market" rules could lead to increases of up to 20 per cent in quarterly profits of large commercial banks. Rushed through by FASB after lender and political pressure, the changes have been strongly opposed by investment banks, investors, auditors and analysts.

The changes will make it easier for companies, including banks, to value assets using their own internal models rather than market prices. They will also only have to recognise a part of any impairment in their profits. Proponents of the changes, such as Citi, BofA, Wells and their political allies, argue the current regime unfairly magnifies losses by requiring banks to use market prices even though those prices are illiquid and often from fire sales. Critics say changing the rules would further undermine investor confidence in the battered sector by reducing the transparency of banks’ balance sheets.

The accounting overhaul, they add, counters the US government’s bid to create a liquid market for troubled assets through private/public partnerships. In comments sent to FASB, the CFA Institute, trade body for more than 80,000 analysts and fund managers, said the new rules would damage the credibility of the rulemaker and US accounting standards generally. The rules are also being considered by the International Accounting Standards Board which had promised to work with its US counterpart.

The IASB softened its own fair value rules last October under pressure from the European Union. Opponents of the change fear Brussels will exert new pressure to get the IASB to follow FASB’s lead. In a letter in Thursday’s Financial Times, Dutch securities regulator chief Hans Hoogervorst calls political meddling in accounting a "dangerous development". If accounting standard-setting is seen as a political process "confidence in the markets will be further undermined", he said.

New York Fed to Push Banks to Open Credit Clearing to Clients
Federal Reserve Bank of New York officials will today urge Wall Street banks to offer hedge funds and other clients access to clearinghouses that protect against losses in the $28 trillion credit-default swaps market. JPMorgan Chase & Co., Deutsche Bank AG and Goldman Sachs Group Inc. are among nine banks that last month began using Intercontinental Exchange Inc.’s New York-based clearinghouse for the credit derivatives. Bankers are meeting in New York with Fed officials today to discuss the timing of expanded market access, according to a person familiar with the agenda. The push follows the collapse of Lehman Brothers Holdings Inc., one of the largest credit-swaps dealers, and the U.S. rescue of American International Group Inc. after it made bad bets using credit-default swaps. The privately traded, unregulated contracts complicated government efforts to assess systemic financial risk because no one knew how interconnected the banks had become.

"I support the Federal Reserve wholly in this," New York Insurance Superintendent Eric Dinallo said in an interview yesterday. "When they urge it, it comes close to a requirement" because the Fed sets capital requirements for banks to get what it wants. Since March 13, $50 billion of credit-default swaps have been cleared by Intercontinental in a system that is open only to the nine banks. Credit-default swap clearinghouses created by Intercontinental competitors CME Group Inc. and NYSE Euronext haven’t attracted any customers from the banks. Capitalized by its members, a clearinghouse acts as the buyer to every seller and seller to every buyer, reducing the default risk between parties to a trade. It also allows regulators to assess market positions and prices.

The Fed isn’t necessarily demanding that the clearinghouses grant broader access to funds to become full members. Dealers and Intercontinental Exchange already plan a framework in which funds would be granted protections against counterparty default, such as segregated collateral accounts. The lack of segregated accounts led to losses for funds that had posted excess collateral with Lehman after the securities firm filed for bankruptcy protection. "Every credit-default swap should be on some clearinghouse or exchange or get an exemption so we know where all this is," Dinallo said. Today marks the fifth meeting between the Fed and the banks since Timothy Geithner, then the New York Fed’s president and now the Treasury Secretary, almost four years ago started pushing dealers to clean up trading in the privately negotiated market, in which outstanding contracts ballooned about 100-fold to as much as $62 trillion at the end of 2007.

Fed officials want to promote a system for credit derivatives clearing modeled on how futures exchanges are organized. There, a bank acts on behalf of its client to make a trade backed by a clearinghouse so the hedge fund is exposed to the bank and the bank is exposed to the clearinghouse. The system also has bankruptcy protections built in so that if the bank goes into default, its client funds, which are segregated, are protected and not lumped in with other creditors. At this point, Fed officials aren’t convinced that bankruptcy protections are strong enough and will ask the banks to clarify their positions so regulators can map out how the clearinghouse structure develops.

Four Regional Banks Are First to Return U.S. Aid
Four regional banks from around the country yesterday became the first firms to repay emergency aid from the government, but the show of strength also underscored concerns about the health of a key element of the federal economic recovery program. The Treasury Department has invested almost $200 billion in more than 500 banks to support new lending to consumers and businesses, but the growing clamor among recipients to repay the aid earlier than planned threatens to diminish the impact. The largest bank to exit, Signature Bank of New York, said it was acting to avoid the effects of congressional restrictions on aid recipients, including limits on pay that could drive away its most productive employees. Chief executive Joseph J. DePaolo also said that the aid had become an undeserved scarlet letter because of public perception that the program was being used to save troubled banks, rather than buttressing healthy firms.

"We didn't want to be subject to taxpayer and lawmaker outrage," DePaolo said. Other returns included $100 million from Old National Bancorp of Indiana, $90 million from IberiaBank of Louisiana and $28 million from California's Bank of Marin Bancorp. The repayments are the latest challenge for the investment program, which was introduced in November with the stated goal of investing $250 billion in thousands of banks. The Treasury immediately put half the money in the largest banks but since has distributed less than 60 percent of the remaining funds. Most of the money has gone to the nation's 25 largest banks, which did not increase lending. Lending by the five largest banks fell at an annualized rate of 16 percent in the fourth quarter, Federal Reserve Governor Elizabeth Duke said in a speech Monday. Lending by the next 20 largest banks fell at an annual rate of 4.25 percent, Duke said.

Officials have said that the investments prevented an even larger decline. "We're pleased with the success of this voluntary program, which has helped bank lending remain resilient in the face of a severe economic downturn," a Treasury spokesman said yesterday. The concern now is that repayments by healthier banks will pressure less healthy banks to follow suit when they should conserve resources and that it will damage confidence in banks that cannot repay the money. The departures reflect changes in the original program. The Bush administration imposed few restrictions on recipients. But Congress grew increasingly convinced that the terms were too lenient, in part because aid flowed disproportionately to troubled banks.

In February, Congress imposed tighter pay limits on aid recipients. At the same time, it eliminated a requirement that companies raise money from private investors to replace the government funds, basically opening the exits for healthier banks. Companies still must secure permission from the Treasury. So far, only smaller banks have announced repayment applications. The largest, TCF Financial of Minnesota, is less than 1 percent the size of Bank of America. Several larger banks, including Goldman Sachs and Northern Trust, have expressed interest, but have not announced applications. The Treasury has estimated that banks may return as much as $25 billion in the near term, about 13 percent of the money invested so far. The government still is reviewing hundreds of applications for federal aid, and a Treasury spokesman said it will continue making new investments.

President Obama told chief executives of the nation's largest banks last week that the administration would allow repayment only if a bank's lending capacity was unaffected. A Treasury spokesman yesterday declined to comment on whether that standard applied to smaller banks. The strict application of such a standard would require a bank to raise replacement funds from investors. But yesterday's repayments make clear that the Treasury is applying a looser definition. The Bank of Marin, for example, said it borrowed the money it used to repay the government instead of raising capital to do so. Banks seeking permission to repay the Treasury, however, argue that compensation restrictions are the real threat to lending.

Neil M. Barofsky, the special inspector general who oversees the investment program, testified before Congress yesterday that a survey of nearly 400 aid recipients found widespread concern that limits on pay will hamper retention of top employees, putting aid recipients at a competitive disadvantage. Investors in the four banks that returned money yesterday cheered the decision. Shares of Old National Bank climbed 8 percent yesterday. Signature Bank and IberiaBank were up 6 percent. Bank of Marin Bancorp was up 2 percent.

Goldman partners leave after large fund losses
Two Goldman Sachs partners who helped lead the so-called quantitative investment movement on Wall Street have left the firm following large losses at their marquee fund, known as Global Alpha, during the global credit crisis. Goldman told clients on Tuesday that Mark Carhart and Ray Iwanowski, managing directors and co-heads of its quantitative investment strategy team, had left the bank along with another member of their team, Giorgio De Santis.

Until the summer of 2007, when the US subprime credit crisis wreaked havoc with global markets, the two men were known for their success in employing quantitative investment strategies, which rely on complex algorithms to dictate buying and selling decisions. Mr Carhart, who studied the performances of mutual funds over a 30-year period and wrote an academic treatise on the subject – On ?Persistence in Mutual Fund Performance – came to Goldman from the University of Southern California. In 1997, he and Mr Iwanowski took over Global Alpha, and helped increase its size from less than $100m to $10bn in assets as of 2006.

Not only did the fund become a big contributor to Goldman’s bottom line, but Global Alpha spawned a host of imitators among hedge funds, and fuelled the market on Wall Street for "quants" – academics who could devise complex trading models based on past market performance. In the summer of 2007, the credit crisis blew up most of the quant models, and Goldman’s Global Alpha fund sustained heavy losses, said to be as much as 30 per cent at the time. Goldman Sachs confirmed the departure of the three individuals. In a letter to clients, the firm said Katinka Domotorffy would become chief investment officer of the quant team. Along with managing director Bill Fallon, she will run the Global Alpha fund.

The firm remains committed to quantitative investment strategies, and still employs more than 100 people, the letter said. Mr Carhart and Mr Iwanowski are the latest among a series of well-known Goldman executives who have stepped down from the firm. Byron Trott, an investment banker best known for his close association with Warren Buffett, is leaving the bank to set up his own fund, it was revealed on Monday. Like Mr Buffett, he plans to invest in family-run businesses. Jon Winkelried, co-chief operating officer and president of Goldman Sachs, also left on Tuesday, after a 26-year career at the firm. Mr ?Winkelried announced his departure in February, saying that his last day would be March 31. Last week, Goldman disclosed in a proxy statement that it had entered into a related-party transaction with Mr Winkelried last ?September.

U.S. auto sales continue plunge in March
U.S. auto sales continued sliding in March, but the auto makers pointed to a sales rebound in the last week of the month, driven by incentives as the companies look to revive volumes that are at their lowest level in a quarter of a century. "The market is starting to show small signs of life which need to be nourished like seedlings," Chrysler LLC Vice Chairman and President Jim Press said. "It's too early to see a trend, but spring shows signs of hope." The top five manufacturers all reported narrower year-on-year declines compared with February. General Motors Corp. reported a 45% drop in sales for the month, while Chrysler LLC and Japan's Toyota Motor Corp. both posted a 39% slide. Ford Motor Co. saw a 41% decline.

The drop--extending the industry's months-long slide--is likely to ratchet up the pressure on GM and Chrysler to demonstrate they deserve fresh financial aid from Washington, part of a historic makeover of the nation's troubled auto industry. Annualized industry sales of cars and light trucks in the U.S. are forecast to fall below nine million in March, compared with 9.12 million in February, which was the lowest sales figure since 1981. GM light-vehicle sales dropped to 155,334 from 280,713, which was better than expected. Car sales fell 41% and light trucks dropped 47%. There were 25 selling days in March, one fewer than a year earlier.

GM executives suggested that U.S. industry sales had bottomed out despite a year-on-year decline of more than 40% in March. The company, facing a May 31 deadline to meet a U.S. government-imposed restructuring, offered a more optimistic outlook than Ford, which hasn't requested government aid. Ford executives said it was too early to call a bottom, though economic indicators suggested improved demand conditions would emerge in around three months. The car makers all reported an improvement in business at the end of the month, largely driven by new buyer incentives. Mike DiGiovanni, GM's sales analyst, said the trends "bode well" for an annualized industry selling rate of 10.5 million for 2009. "We're seeing some stability in the overall SAAR," he said on a conference call, noting "the first signs of brightening."

Toyota's car and light-truck sales fell to 132,802 from 217,730, in line with expectations. Car sales dropped 38%, while trucks fell 41%. SUV sales continued falling, down 33%. Chrysler's sales of light vehicles and trucks dropped to 101,001 from 166,386, topping 100,000 for the first time since September. Inventory dropped 17% from a year earlier. Ford's light-vehicle sales fell to 131,102 from 221,642, topping analysts' estimates. SUVs continued their slump with a 73% decline, while sales of trucks and vans dropped 40%. Honda Motor Co., meanwhile, reported a 36% sales drop, to 88,379, with car sales falling 34% and trucks tumbling 40%. 

To jump-start sales, U.S. auto makers offered, on average, a record $3,169 in incentives on each vehicle sold in March, said car-shopping Web site The figure represents a jump of $733, or 30.1%, from a year earlier and $171, or 5.7%, from February. "Auto makers are pulling every lever in their effort to attract buyers, as evidenced by the new programs from Ford and GM," said Edmunds analyst Jesse Toprak. "The typical incentive programs simply do not resonate in today's economy." Meanwhile, European car sales fell by a quarter in February, but initial March data released Wednesday showed a rebound in some markets driven by government-led incentives. Sales in France rose 8.1% in March, ending five months of declines.

GM Said to Be Warned Obama Won’t Make Debt Payment
General Motors Corp.’s 60-day deadline to restructure is unlikely to be extended because the U.S. won’t repay $1 billion in convertible notes maturing June 1, according to a person with knowledge of the discussions. President Barack Obama’s auto task force told the biggest U.S. automaker it doesn’t want taxpayer funds used to repay debt maturities, said the person, who declined to be identified because the talks are private. Detroit-based GM has $1 billion of 1.5 percent convertible securities coming due June 1. The debentures, issued in increments of $25, fell $2.89 to $6.36 as of 3:26 p.m. in New York, which would be the lowest closing price since December, according to data compiled by Bloomberg.

GM Chief Executive Officer Fritz Henderson yesterday said that June 1 was the final deadline for completing the debt restructuring and that the automaker may enter bankruptcy sooner if it’s clear an agreement out of court isn’t possible. "The government has been very specific in providing a deadline by which we have to complete this process and we plan to aggressively pursue them in the next 60 days," GM spokeswoman Renee Rashid-Merem said, declining additional comment. Obama gave GM 60 days to come up with deeper cost and debt reductions than the carmaker proposed in its plan submitted in February. GM is trying to prove it’s viable, a U.S. requirement to keep $13.4 billion in federal loans.

The president believes a quick, negotiated bankruptcy is the most likely way for GM to restructure and become a competitive automaker, according to people familiar with the matter. As part of its restructuring, GM must shrink $27.5 billion in debt by getting bondholders to swap their claims for equity. The carmaker must also reduce $20.4 billion in obligations to a union-run health-are fund. Bondholders doubt a debt exchange will succeed outside of bankruptcy because there isn’t enough time under the administration’s deadline, according to a person familiar with the thinking of the committee representing creditors who declined to be named because the discussions are private. A prepackaged bankruptcy is more likely to work, the person said.

GM Use of Bankruptcy to Survive Will Encounter Surprise, Delay
General Motors Corp.’s plan to use a quick, negotiated, controlled bankruptcy as the most likely means to become a viable business will encounter surprises, intransigence and delay, reorganization experts said. President Barack Obama believes such a bankruptcy is the most likely way for GM to become a competitive automaker, people familiar with the matter said. To get needed U.S. aid without court protection, GM still has two months to come up with deeper cost and debt reductions than the biggest U.S. automaker proposed in a bailout plan last month.

More likely, the Detroit-based automaker will pursue a pre- arranged reorganization with the backing of enough workers, creditors, suppliers and dealers to smooth the way, advisers to the company and the U.S. auto task force said. This plan to control what is often an unpredictable, lengthy process may encounter surprise obstacles and delay, bankruptcy lawyers said. "The more constituents there are, the more the risk that a necessary piece doesn’t fall into place after the bankruptcy filing," said Richard Hahn, co-chair of law firm Debevoise & Plimpton LLP’s bankruptcy group. "What the government thought was a controlled bankruptcy turns out to be less controlled."

GM, which once had half the U.S. car market, needs a lender to finance court-supervised reorganization at a time when few troubled companies have been able to find one amid the financial crisis. The U.S. government, which has already lent GM $13.4 billion and is willing to provide more to finance a viable business plan, has said it is the likely candidate. The Obama administration, as lender, will aim to keep control of the bankruptcy under the so-called golden rule: he who has the gold makes the rules, said one of the advisers, who declined to be named because the plan is still confidential. Once GM files a bankruptcy petition, it becomes the prime mover and is likely, following past practice, to have the exclusive right to present a reorganization plan for court approval without initial interference from creditors.

The randomly assigned judge, who will control the company’s fate as it seeks to shed debt and other obligations to become viable, will try to balance the goal of getting GM back in business while taking into account claims by its creditors. How the case unfolds "will depend partly on who the judge is," said Andrew Rahl, co-leader of Reed Smith LLP’s bankruptcy group. "Doubtless there’ll be a political spotlight, and judges are human beings like everybody else." To help the judge to move forward, the company hopes to have in hand enough concessions from key stakeholders to limit debate about who wins or loses in dividing up GM assets.

"I don’t believe bankruptcies are ever as quick and smooth as people might lead the public to believe," Jeanne Darcey, a bankruptcy lawyer with the firm Edwards Angell Palmer & Dodge LLP in Boston, said in an interview. "They’re always subject to potential objections and delays." At stake is bond debt of $27.5 billion and $20.4 million owed to a union-run health care fund, plus money owed suppliers. The car maker had been asking bondholders to swap more than three-quarters of their debt for equity and tried to reach a similar agreement with retirees, the GM and task-force advisers said. A total swap of bonds for equity should be the new goal, the government adviser said. The fund might get some cash as part of a reduced payoff, the GM adviser said. Central to this plan is putting GM’s best assets, such as its Cadillac and Chevrolet divisions and valuable foreign operations, into a stripped-down entity that would not be burdened by debt or uncompetitive wages.

Unprofitable brands, such as Hummer, surplus dealers and financial obligations would be hived off in bankruptcy court, said one of the advisers. "The bankruptcy code was envisioned for manufacturing companies," lawyer Rahl said. "It’s a perfectly natural approach to addressing balance sheet issues." Vital to sustaining the new business would be a government plan to back warranties for the new entity’s cars and trucks to lure customers otherwise unwilling to buy vehicles from a bankrupt company. It will be up to GM to make sure customers focus on the new company, not on the mess of a bankruptcy. "The benefit of bankruptcy that also makes it more difficult to manage is that all parties of interest have a right to be heard on every issue," said David Feldman, partner at Gibson, Dunn & Crutcher LLP and co-chair of the firm’s restructuring practice. "Every creditor or shareholder can stand up and object, and that makes the bankruptcy process that much less predictable" than out-of-court restructurings, he said.

GM also needs to ensure that suppliers stay in business to provide needed parts and services to produce the vehicles. The government has promised $5 billion in aid for the suppliers. The new company, which may be sold later, could be created in the first 30 days, allowing GM’s best lines to operate without interruption. The bankruptcy, focused on bad assets, might go on much longer, said the GM adviser. Marketing and selling the new company could take six months or more because buyers are scarce and creditors want the best price, he said. GM would need to create a liquidating trust for its bad assets and sort out all claims, including secured, unsecured, inter-company and benefit ones, the adviser said.

Stakes of any dissident creditors, including bondholders, would be "crammed down" or forcibly reduced in a bankruptcy, said the advisers. "GM will take whatever steps are necessary to successfully restructure our company," GM spokeswoman Renee Rashid-Merem said. "During the next 60 days, we will work aggressively on restructuring our financial obligations with bondholders, unions and other stakeholders outside of court. We recognize the challenges of an in-court restructuring and would work with the administration to expedite an in-court process should it be necessary."
GM fell 12 cents to $1.82 at 1:44 p.m. in New York Stock Exchange composite trading.

U.S. airline passenger traffic to drop 9 percent: FAA
Passenger traffic aboard all airline flights in the United States will drop nearly 9 percent this year due to recession compared with 2008, when they carried 679 million people, the government said on Tuesday. The Federal Aviation Administration (FAA) estimate, if it proves accurate, would represent the largest decline in annual domestic capacity since the industry was deregulated in 1978. Major airlines slashed capacity by more than 8 percent when demand plummeted in the year following the 2001 attacks on New York and Washington. The FAA also said the number of passengers boarding international flights on U.S. carriers is expected to drop 2.4 percent.

American carriers have scaled back transatlantic routes due to a sharp drop in business travel. The global financial services meltdown has hurt travel between New York and London, industry officials have said. Aircraft operations are forecast to fall 5.7 percent in 2009 as carriers cut service and flights by some larger aircraft due to falling demand. Most flights, however, should remain full or nearly full, with load factors expected to hover around 80 percent, the FAA said. The FAA also estimated domestic carriers would board 1 billion passengers for the first time in 2021, instead of the previous forecast of 2016.

China extends banks lock-up
Foreign investors in Chinese banks will in future be forced to accept a lock-up period of at least five years, China’s top banking regulator said, after a series of share sales by US and European financial institutions. In recent months, companies such as Bank of America, UBS and Royal Bank of Scotland have sold down all or part of their stakes in China’s largest state-owned banks immediately after lock-up periods of three years expired. The new five-year minimum lock-up was necessary to "ensure the safety of China’s banking system", Liu Mingkang, chairman of the China Banking Regulatory Commission, told a seminar in Beijing, according to people familiar with the matter and also state media reports.

Mr Liu also said Beijing would not reconsider current ownership limits for Chinese banks, which restrict single foreign investors to a 20 per cent holding and all foreign investors to no more than a combined 25 per cent stake in any Chinese bank. The Chinese regulator decided last year not to allow a higher level of foreign involvement in domestic institutions. That decision had not been publicly acknowledged until now and could affect the strategy of the few foreign banks that still have the ability and appetite to expand their presence in China.

HSBC, for example, bought 19.9 per cent of China’s Bank of Communications in 2004 in an agreement that would allow it to raise its stake to 40 per cent if and when the government was to raise foreign investment limits. BofA, RBS, Goldman Sachs, Germany’s Allianz, Singapore’s Temasek and others bought shares in China Construction Bank, Bank of China and Industrial and Commercial Bank of China with promises they would help to improve the Chinese banks’ risk management and managerial capabilities.

But apart from a few minor initiatives, the partnerships largely failed to produce tangible results and when three-year lock-up periods started to expire in recent months most of these "strategic" investors sold all or part of their holdings at a profit at a time when most global banking institutions were in dire need of fresh capital. Only Goldman has made a public commitment to hold the majority of its stake in ICBC for at least another year. Temasek, Singapore’s state investment agency that has stakes in both BoC and CCB, has made private commitments not to dump its shares in the market, according to Chinese banking executives.

Mexico Requests $47 billion IMF Funding, Taps Fed Swap To Support Economy
Mexico has requested a credit line from the International Monetary Fund and plans to use a $30 billion currency swap facility with the U.S. Federal Reserve to shield its economy from the global financial crisis. The Foreign Exchange Commission, which includes Finance Ministry and Bank of Mexico officials, said Wednesday that Mexico doesn't currently plan to borrow on the IMF's credit line, but that it could be used in the event it was needed. "In the extreme case where there was a much greater deterioration in the global economic environment than what is expected today...with these resources we would have the security of having sufficient amounts [of financing] to confront any contingency," Bank of Mexico Gov. Guillermo Ortiz said at a press conference in Mexico City.

The commission said the one-year credit line would be used to support employment as well as credit access for individuals and companies during the current economic and financial crisis. It would also boost the Bank of Mexico's reserves, which stood at $79 billion last week, giving policy makers greater firepower to stabilize the local currency. Mexico stands to be the first country to access the IMF's new flexible credit line, which was designed to help developing countries with sound economic policies and fundamentals cope with temporary financial strains, but without the onerous requirements of previous lending facilities.

Mexico last used IMF credit in the mid-1990s during the height of a home-grown financial crisis that saw a collapse in the peso and a wave of bank failures. The country paid the last of its IMF debt in 2000 with a single $3 billion payment made five years ahead of schedule. First Deputy Managing Director of the IMF John Lipsky said at a press conference in London that Mexico is an "excellent" pioneer candidate for the flexible credit line, and that the IMF will seek board approval as soon as possible. He was accompanied by Mexican Finance Minister Agustin Carstens, who downplayed the stigma attached to borrowing from the IMF, saying the credit line will "bullet-proof" the country from any further deterioration in financial markets.

"We feel confident that this will provide better conditions for a prompt recovery of the Mexican economy and for further employment," he said. Mexico's economy is expected to contract 3.3% this year as a recession in the U.S., Mexico's largest trading partner, reduces demand for its exports, according to a central bank survey of private sector economists last month. Recession fears and investor risk aversion to emerging markets in recent quarters have walloped the peso, which slid from a multi-year high against the U.S. dollar of around MXN9.88 last August to a record low of about MXN15.60 early last month.

The peso's rapid depreciation has raised the cost of servicing foreign-denominated debt held by Mexican corporations, and triggered major losses on foreign exchange derivatives at companies such as retailer Comercial Mexicana SAB, corn flour and tortilla maker Gruma SAB, and glass maker Vitro SAB. A weak currency has also started to fuel inflation, which could hamper the Bank of Mexico's monetary easing cycle. The central bank has slashed its key policy rate by 150 basis points to 6.75% since January, even though inflation, which is nearly double its 3% target, has only gradually fallen after peaking at an annual rate of 6.53% in December. Ortiz also said Wednesday the central bank will tap a $30 billion dollar swap facility with the U.S. Federal Reserve to help local corporations finance foreign-currency debt. He said the funds will be auctioned to commercial banks and government development banks. "In the coming days we will announce the first auction related to this credit line and in the same announcement the conditions, amounts and other characteristics of this operation will be made public," he said.

Plans to activate the flexible credit line and tap the Fed swap line ignited a rally in the peso Wednesday. The local currency was quoted trading in Mexico City at MXN13.9525 to the dollar around 2:33 p.m. EDT, compared with MXN14.1850 at the close Tuesday. Mexico's benchmark IPC stock index was up 1.6%, led by gains in firms with significant exposure to foreign currency denominated debt, like cement maker Cemex. Goldman Sachs economist Alberto Ramos said in a note the IMF facility should help anchor the local currency, giving the central bank more room to lower rates. "The impact in the equities space should be more limited as it does little to dampen the recessionary forces gripping the real economy... The activation of the Fed swap line could, however, be more positive for equities as these funds can be used to alleviate external debt roll-over pressures local corporates might be experiencing," Ramos said.


Anonymous said...

It is suggested that you leave comments in the today's previous post here

Ilargi said...


"But because it was taxpayer money being put at risk, not by bankers, but by politicians, social engineering objectives trumped unemotional business practices."

You need to start figuring out that in the US there is no distinction between politicians and bankers. And if one might occur, guess what. To say that taxpayer's money was NOT put at risk by bankers reveals a 800 pound blind spot.

A The Boss is always right
B If he's not, refer to A.

And all Cretans lie.

And the problem with Democracy is not the bankers, it''s the people themselves, who figure out one day that they can vote themselves an ever bigger piece of the pie. And will vote out anyone who doesn't provide it. And if that don''t work.....

jal said...

A different layout for me ... I got post #2 at the top with a comment section
I got post #1 with their comments at the bottom.

jal said...

If I click on the side link I only get post #1 or #2 with their comments

Gravity said...

Monetarism can never reform mankind,
because monetarism is slavery.

Anonymous said...

Graft occurs at every level.

Persephone said...

Thank you Ilargi for posting Stranded Wind's enlightening post.
Stranded Wind: "Everywhere we go we wipe out resources and leave a mess in our wake. Locke's infinite Earth has been replaced by one that is quite simply irritated with us."

So sad
So true

According to CR, this is the worst Corporate Default rate since WWII
Moody's downgraded $1.76 trln U.S. corp debt in Q1
"The most prominent new driving force behind credit rating reductions would be deterioration of commercial real estate," Lonski said. That is taking a toll on regional banks and companies that manufacture equipment and material used in construction, he said.

The downgrades included one of the largest on record, $326 billion of bonds and preferred shares of General Electric Co (GE.N) and its units. Other major borrowers downgraded included Ford Motor Co (F.N), Citigroup (C.N) and Bank of America (BAC.N).

In addition to housing, sectors under rating pressure included automakers and auto parts suppliers, media companies, casinos and retailers.

Among the downgrades were 22 fallen angels, or companies cut to junk status. In addition, 82 ratings were downgraded to the lowest categories, Caa3 or lower. That means that the U.S. high-yield default rate, which stood at 5.7 percent in February, is destined to climb sharply in short order, Lonski said.

Moody's has forecast that the U.S. default rate will peak around 14.5 percent in November."


Persephone said...

A different layout for me ... I got post #2 at the top with a comment section
I got post #1 with their comments at the bottom

Me too

@Chaos (from yesterday)
Thanks for the book recommendations!
I ordered 2 of each. One for me and one for him.

jal said...

If the republicans had won the election this is what you would have gotten.
They want a smaller gov. and only a gov. that will enhance the capitalist agenda.
They would have left the banks to collapse. They would withdraw funds from Medicare, Medicaid and Social Security health and retirement programs that threaten to drain government.
Republican US budget plan would cut taxes, spending

In February, Congress approved $787 billion to jump-start the struggling economy. The Republican plan would only fund expanded unemployment insurance benefits next year as part of the stimulus.
The alternative plan also calls for savings in the huge Medicare, Medicaid and Social Security health and retirement programs that threaten to drain government coffers because of the aging population and growing healthcare costs.
I expect that the details will be released …. Soon.

Persephone said...

jal said...
If I click on the side link I only get post #1 or #2 with their comments

Oh I just noticed that! Usually by the time I get home, both posts are up and I read them all as one- with different tabs for each of the comments sections.

Thanks Jal

Gotta love the GOP great ideas! At least they are straightforward about who they intend to rape and pillage.

Chaos said...

Actually, Persephone, Greer's essay on catabolic collapse can be read on the internets. Since it is, in part, a critique of some of Tainter's conclusions (the only credible ones I've read, btw), it's probably better to read Tainter first...his work is considered the "bible" of the subject. for a more accessible read, I'd also recommend The Upside of Down, Thomas Homer-Dixon.

Stoneleigh said...


Here's my review of Homer-Dixon's book. I thought it was very good and would recommend it highly.

Persephone said...


oops! What did I order then? LOL

Actually I have read Greer, already. I agree with Greer (and Stoneleigh) about the catabolic collapse.

Thanks for clearing that up for me.

Thanks Stoneleigh!

The advantage that I have with giving books to my brother - is that he feels obligated to read them. He has little time (except on flights) and it is hit or miss that he will read web links.

Keep the info coming, though! The more I know - the better prepared that I (and hopefully those I care for) will be.

jal said...

Re: G20
Don’t you find it strange that the most capitalist country, (US) is pushing for more gov. intervention in the market place while the most socialist countries, (France Germany) are opposing government intervention in the market place (more stimulus)?

Wyote said...

Warren Peace Conclusion

The lower bunnies had quietly wound around the Mercantile building several deep. They held the pitchforks and torches that Lila and Winthrop had provided.

Someone inside noticed the flicker and the music stopped.

Winthrop called out loudly: “We put these questions to all of you inside. What is the penalty for robbery in the warren? What is the penalty for murder? What is the penalty for abandoning your fellow rabbits to poverty and starvation?”

There was silence from within. The evening breeze had mounted.

The lower bunnies waited a bit more. There was a shift of movement inside as the police began moving to the windows.

A torch was thrown. Then, many more. The breeze pushed the fire.

Winthrop said: “I pledge allegiance to the flag of the United Acres of Blackberries, and to the thicket for which it stands, one bunny nation, impenetrable, secure under brambles, with shoots and roots for all.”

”It’s shoots and leaves, Win, shoots and leaves” said Lila.

Footnote: You may be pleased to learn that the band, having previously become tired and annoyed at the thinning crowd, had adjourned to a neighboring lawn to take a “smoke break.” As far as is known, none returned for their instruments.)

Anonymous said...

And that is the usual end of the cycle...

Then some where,the cycle starts again...first a little,then some more ,then a lot ,then they want it all.

And the same thing happens.

Would have been nice not to go thru the "uprising" part of this saga.Were I in my 20s I would have a whole different attitude

The bands break for its herb of choice was a good survival decision.


Rototillerman said...

Tonight on the way home I listened to an absolutely first rate lecture by Palagummi Sainaith, called The Age of Inequality. He reports on the effects of the financial crisis as it pertains to the poor, saying that the crisis started fifteen years ago for the poor, leading to 180,000+ suicides among Indian farmers over the past 11 years. However, his brush is broad, and really gathers in many different facets of what we have allowed ourselves to become.

Some choice quotes:

"For two decades now the United Nations Development Program, and other organs of the United Nations have been telling us that an additional expenditure of 60 to 80 billion dollars a year will help the human race sort out all the basic problems of hunger, health, sanitation, education, literacy, and issues like that... and it has never happened, because governments have told us "There's no money. There's just no money. We can't do it. Where's the money going to come from?" But when crisis struck The Suits in Wall Street, governments figured out that they could raise one and a half trillion dollars in seven days."

"At some point the planet will discover that it can live without oil if it has to, because you know the human race did manage that for a few thousand years. But you can't live without food and water. And therefore you had food prices going up as index funds were investing unprecedented sums of money in purchasing land, in purchasing companies that manufacture pesticide or seed... you had also unprecedented levels of speculation in the futures markets and forward trading. The very same process that pushed up oil prices so high and then brought them down, pushed up food prices and bringing them down, though not to the same level as before."

"Every great Depression, every economic catastrophe, every major economic collapse in history has been preceded by years of absolutely unsustainable levels of inequality."

Armando Gascón said...

Nothing much happened in the London G-20 demos, in spite of the police harassing and herding the mostly peaceful young people.
Any night after a football match in Leeds or Northampton is a lot worse.
So the window of one RBS branch was broken, Oh, OH ! Anarchy in the streets! One demonstrator threw an lcd screen against a window, there were 20 photographers there. Just look at the photos in the Guardian, there's a bit of a scuffle, and 20 cameras taking the photo opportunity. In the 'front line' there were more cameras than policemen.

If there were any agent provocateurs they did a very poor job at feeding the flames of protest.

It figures. A well fed, well educated, prosperous, easy going English people. I love them. They blew off a bit of steam, made themselves get noticed. Good, I say.

For similar reasons there won't be any Civil War in the USA over these small matters, I know one or two things about civil wars. In any case, even if this shocks you, remember that civil wars are the only moral wars. In them you really know why you are shooting the other fellow!

Anonymous said...

to ilargi from anonnymous,

thanks for the new format. too much sensory imput at one time didn't work for those of us over 50.


Persephone said...


The protesters had the cajones to break the RBS windows - more than I can say for the NYC counterparts.
Tons of videos showing the protest
G20 Financial Fool's Day Rioting In London!

The Sept NYC protest was much more calm

NYC Wall St. Bailout Protest 25 September 2008

Gravity said...

The BBC coverage of the G20 was going on
about the revival of growth,
the question being if we're going to enjoy
2% or 2,5% metastasization of the economy
when all is back to normal.

"What is happiness?
The feeling that power is growing,
that resistance is overcome."

What is empire?
The feeling that growth is power,
that resistance is futile.

Its all about momentum.

VK said...

Some words of wisdom from the archdruid, JMG,

"Arnold Toynbee, whose monumental work on the rise and fall of civilizations has been discussed in these essays several times, offered a useful way of thinking about this dysfunction. He argued that civilizations rise under the leadership of a creative minority, who are able to offer a vision of human destiny and possibility strong enough to overcome the inertia of tradition and launch a new phase of social integration. As long as the creative minority continues to come up with successful responses to the challenges and curve balls the world throws at every human society, the society they lead continues to expand. Sooner or later, though, the creative minority becomes so deeply committed to some particular set of solutions that it keeps on trying to apply those solutions, whether or not they actually fit the challenges. At that point the creative minority degenerates into a dominant minority, ruling its society by increasingly blatant coercion rather than inspiring it with the force of its ideas. Unsolved problems pile up as failed responses are repeated on an ever more lavish scale, and the death spiral of decline and fall begins."


"One of the telltale signs that a creative minority has become a dominant minority is that failure no longer carries any penalty. Consider what happened to executives and middle management in the last quarter century or so when their actions, as so often happened, drove their companies into the ground. The number of them who had trouble finding new jobs was vanishingly small; members of a well-networked class that generally takes care of its own, they were shielded from the consequences of their own incompetence. Even those who openly looted failing companies rarely suffered any penalty, since this has long been standard practice in American corporate life; the cult of the bonus and the plundering of business assets to line the pockets of executives reaches far beyond the handful of financial firms where it has recently become infamous."

Persephone said...

The Chimerica riddle:

China needs U.S. over-consumption to fuel the Chinese export industry.
The USG and all consuming constituents are broke.
The only way to continue to fuel consumerism in the U.S. is to provide more (irresponsible) credit - further pushing the nation (and the constituents) in the red.

So we have the push for more synthetic growth by suspending mark-to-market further muddying the values of the banks' toxic assets- and continuing to prop up the "corpse".

I'm pulling for Steinbrueck, though it seems that Chimerica's agenda will prevail.
SCENARIOS - What to expect from the G20 Summit

Rototillerman said:
"There's no money. There's just no money. We can't do it. Where's the money going to come from?" But when crisis struck The Suits in Wall Street, governments figured out that they could raise one and a half trillion dollars in seven days."

And that money was ripped out of the hands of those asking for the basic essentials.

Anonymous said...

The amount of "all our troubles are over" talk today is really scary. A lot of people will jump back in and get clobbered. I can see now how dramatic the next downturn could be--not just in its financial devastation but the psychological impact will be alarming. I wonder who gets blamed when people's hopes are dashed. I'm not sure people can blame their reps. It seems like people feel they are pointing the fingers at themselves when they do that and are not willing to have that kind of self knowledge.

cramer says he will no longer call anything a toxic asset. thats all over now and 6600 is the bottom.

oh my.

scandia said...

Wyote,Conclusion? I think the successful execution of " the plan"
is perhaps the conclusion to chapter 2. Of course there will be consequences.....I'll be awaiting further insight from the muse.

scandia said...

Mark to fantasy,the fantasy that 1 trillion will save the world has the market jumping for joy.
More and more evidence of fraud yet no consequences( excepting Warren Peace)...this is the most disturbing of all.
Still haven't changed my view that the centre cannot hold.

Wyote said...


Banking has always been based on illusion and this is, of course, what dawned on Winthrop. We are the marks in the mark-to-market scam. Winthrop is now just another criminal in a society that protects the confidence game at all costs.

I'll have to go down the rabbit hole to find chapter 2.

All the best and stay on the path.

jal said...

RE: G20
They will meet again in the fall.
The Nov. crash was averted.
They do not expect a new crash to happen.
Timelines need to be adjusted.
G20 has changed the economic flow.

Government are now into the market BIG TIME.

When the elephant are stomping its time for the rabbits to get underground.

Xmas will come again this year.


Gravity said...

G20 sez:
No more protectionism,
more free trade,
which means forced trade,
as in: North American Forced Trade Agreement.

If they really despise protectionism,
more of it could be beneficial.

Stoneleigh said...

Anon @10:56,

The amount of "all our troubles are over" talk today is really scary. A lot of people will jump back in and get clobbered. I can see now how dramatic the next downturn could be--not just in its financial devastation but the psychological impact will be alarming.

This is a very important point. If you think the optimistic talk is loud now, just wait until the rally is in its latter stages when optimism will peak. For a large scale rally such as this appears to be, the optimism at its peak could rival the optimism at the October 2007 market high. In other words, despite the awful fundamentals we could see near-euphoria, probably sometime this summer.

As you say, the psychological impact of the resumption of the decline will be devastating. People will have thrown caution to the wind and piled into the market thinking the good old days are back, only to have the rug pulled out from under their feet. Being psychologically prepared is half the battle. Don't buy into the euphoria and you won't get caught in the rush for the exits. If you just can't resist playing this move, make sure you get in early and out early.

I think we could see the first real panic this fall - a panic that goes beyond Wall Street to encompass Main Street. Last year I said that this would be the year when Wall Street eats Main Street for breakfast, and I stand by that statement, but it won't happen until the rally is over.

jal said...

Stoneleigh said...
I think we could see the first real panic this fall ...

I expect santa, (G20), to bring me a Xmas gift.

VK said...

Hi Stoneleigh,

A question for you, what do you make of investing in treasury bonds outside of America?

I reckon the following countries are good for short term t-bills


Also do you think the bond markets of emerging nations will survive? Such as those of South Africa and India?

Many thanks.