Friday, April 24, 2009

April 24 2009 2: Scorched Earth

Ben Shahn The Corner Drugstore October 1935
Advertisements for popular malaria cure. Natchez, Mississippi

Ilargi: Stress tests: we know nothing yet. We think they'll use the word "consolidation" a lot. SunTrust, KeyCorp and Regions are the first victims according to the carefully orchestrated rumor mill. Hank Paulson called NY AG Andrew Cuomo a liar this morning. We are curious what the next step in that farcical play will be. Is Cuomo an humbro? Are other people involved more likely to spill the beans on the Hammer? Sean Egan-Jones says BofA's CEO Ken Lewis and other managers should have stepped down rather than mishandle their shareholders' interest. Something about a legal obligation?!

Banks no. 26, 27 and 28 went down, cease and desist orders served for two others. Chrysler will go bankrupt next week, and picked apart after. GM can't be far behind. Freddie Mac's mortgage investment portfolio grew by 65.8% annualized in March, while defaults on loans are heading for the stars. Its total mortgage portfolio rose at a 21.0 percent annualized rate and now stands at $2.247 trillion. Ever wonder how much of that will turn out to be actual value, if you take your rosy pink glasses off in, say, September? The US Treasury and the FDIC plan a PPiP dress rehearsal in June. The one thing that tells us most of all is that they have little confidence left that it will actually work. A lot can happen in 6 weeks.

43 US states project $121 billion in total deficits next year, with over 33% coming from California alone. Want to bet that it’ll be at least three times as much when push comes to shove? Make it five? Once that reality sinks in across the nation, it’ll resemble something along the lines of scorched earth tactics more than anything else.

Canada's GDP went down 7.3%. The central bank chief, another Goldmanman, now blames the US for all that goes wrong. It’s at most 2 months agp when the same guy said everything was just fine. It’ll now be fine again by Christmas. Homework: keep a tab of all bankers, politicians experts and analysts who make that same claim for their respective countries. I must have seen a nice handfiul just this past week.

One of them is Britain's Treasurer, and you do need to ask how he sees that happening with for instance car production down around 60% for the year so far, and ever louder questions about the AAA status of its debt. Wait, did he specify Christmas in what year? Luckily for Albion, they have Ambrose Evans-Pritchard to write scary tales about how bad the Germans are supposed to be doing. That never fails to make them feel better.

Profits mask coming storm
Contrary to surface appearances such as the recent stock market rally and "glowing" first quarter profitability statements from certain Wall Street banks, multipronged risks for renewed, considerable turmoil in the US financial sector are mounting. The recent six-week rally on Wall Street, led mostly by banking and other financial shares, isn't based on any concrete turnaround in the deeply worrying fundamentals of the financial sector. Instead, it is based largely on the fact that the new administration has trotted out into public view multiple and very large government programs aimed at cleansing the banks' balance sheets of huge sums of toxic assets, unlocking the persistently seized credit markets, stemming the swiftly mounting foreclosure rate, creating jobs, and otherwise stimulating an early economic revival.

None of these aims and goals has been accomplished yet, not even in part, but investors were heartened by the raft of government programs that has been announced, and they have responded by bidding up banking and other shares on Wall Street, hoping that the bottom of the crisis in the financial sector has already been reached. However, that bottom hasn't been reached, and is still nowhere in sight, despite the recent quarterly profit reports by a few of the largest US banks. It should come as no surprise that Wall Street financial institutions that have been in receipt of massive sums of bailout money and have been targeted by varied "liquidity" operations from the government are suddenly able to report a "profit".

Additionally, much of the "profit" reported for the first quarter resulted from one-off events that have little or no chance of seeing a repeat. In these most recent quarterly statements, the accounting and reporting methods have been altered so as to put a better face on their operations and fiscal position. Their already notoriously "fuzzy" math, which permitted banks to arbitrarily designate which assets are included in their profit statements and which ones are not, now also conveniently permits them to arbitrarily decide which losses are "temporary" and can be excluded from the statement altogether. Consequently, "fuzzy" has now gotten even fuzzier. Why? And, why now?

Wall Street financial institutions have suffered a gross loss of investor confidence in this crisis and have seen their share values ravaged as a result. Hence, there is a concerted and vigorous effort underway on their part to bolster that collapsed confidence, with the aim of driving the value of their shares back up. Remember, these big institutions all participated in one way or another in the grossly deceptive schemes and practices that created and artificially inflated fundamentally risky investment assets, grossly overstated their creditworthiness, and sold them on to unsuspecting investors - the massive swindle that brought us into this crisis in the first place, a crisis that emerged right on Wall Street itself.

Hence, it is nothing for such firms and their accounting and credit rating accomplices to engage once again in spin, deceptively cooking the numbers to make their position look much better than it really is, so as to attract investors and drive up share prices. Sovereign wealth funds around the globe, having suffered huge losses on their investments in US banks, can be described by the adage "once bitten, twice shy". Many have decided to largely divest themselves of their holdings in US financial shares. Why? They no longer trust the banks to disclose their true financial position fully, accurately and honestly. The savvy investor will keep such facts very close in mind. Now, with the May 4 deadline for releasing the government stress test results bearing down on us, Wall Street institutions have much greater reason and motive for spinning their financial position (propagandizing investors) - none of Wall Street's big banks wants to take a renewed hit as a result of being portrayed by the stress tests as being in a less-than-desirable financial condition.

Therefore, the Wall Street spin machines are operating at full speed, striving to portray the 19 banks involved in the stress tests as profitable, stable, healthy and vibrant. They are doing everything they can to maintain, and bolster, the fundamentally frail investor confidence they have regained in the past six weeks, and they are trying to position themselves to massively capitalize on the release of the stress test results if they can, or at least to minimize their potential ill effects. The entire idea of the stress tests has come under fire as a bone-headed scheme that was aimed at restoring confidence but will almost certainly accomplish the exact opposite. If the results paint a rosy picture for all 19 banks, then investors will pan the stress tests as having no credibility, and their suspicions and fears that the banks and the government are lying about their true condition will probably skyrocket. If any of the 19 banks get less than flying colors in the stress test results, then those banks will likely see their shares take a renewed pounding as investor confidence collapses again.

There may well be depositor runs on such banks, depleting their capital and bringing on a renewed crisis. If the government and/or the banks themselves do not release meaningful data on May 4, then investors will conclude that the results were too grim, and a new crisis of confidence will result. But if too much information is released, then the same thing could likely be the result because a number of respected experts warn that the US banking system is fundamentally insolvent. The government and the banks do not want investors at large to see hard data that only bolsters that dismal assessment. The Barack Obama administration has thus painted itself into a potentially very grim corner with the stress tests. Almost no matter what is done on May 4, the risks of a new crisis of confidence in the US financial sector are significantly rising.

Why such a bleak assessment here of the current fiscal position of the US financial sector? First, as noted above, the US financial sector is not providing a clear and true picture of its fiscal position. Instead, it is seeking to paper over its fundamental insolvency with quarterly reports that are long on spin and short on hard, uncooked data. Why? The answer is quite simple. Full disclosure of its true position would not be in the interests of reviving America's fundamentally flawed model of "securitization", which has experienced a massive collapse and to this day has not been revived. Can it be revived? At what cost?

Remember that there are two fundamental camps with respect to the answer to the question of what lies at the root of the present crisis. One camp holds that America's new generation of financial assets that resulted from the recently invented financial process known as "securitization" are fundamentally sound in value, and that an over-reaction on the part of investors to the subprime crisis has resulted in a panic-induced collapse in their valuations. This camp believes that the securitization model can and should be revived, and that when investor confidence is restored in financial assets now seen as "toxic", then all will be well again, almost magically, as toxic assets become valuable and attractive once again. All that need be done, it is believed, is for the government to work with Wall Street to jump-start securitization, a model this camp vehemently denies has failed, even though many trillions of dollars both spent and committed already have so far failed to get securitization's heartbeat going again.

The other camp believes that the toxicity is inherent in the very nature of the newly developed financial assets themselves, and that once investors recognized this fact, then that is why their values collapsed. This camp sees the securitization model as fundamentally flawed, based as it is upon artificial inflation of assets, the shortsighted growth of serial asset bubbles created by an unholy de facto alliance of government, big Wall Street banks and credit-rating agencies whose credibility and integrity were profoundly compromised, and unsustainable negative real interest rates (the creation of a massive credit excess), without which the securitization model simply won't run. This camp sees no future for assets that have gone toxic. It sees the collapse that began in late July 2007 with the emergence of the subprime crisis as one that massively discredits the model itself. This camp believes that a revival of securitization will come at the cost of a dollar crisis only a moderate distance down the road, and that even if the model is revived, it won't be able to avoid a second, massive crash.

The US government and Wall Street are laboring feverishly to get securitization's heart beating again. That is fundamentally what is behind all their efforts. Crucial to this task, they believe, is restoring investor confidence in the model itself and in the innovative financial markets and modern financial assets it has created. Much like producers and sellers of tainted wine who've been found out and who've watched their product prices collapse as buyers shun the wine for its toxic risks, they're in cooperation again, minimizing the taint and trying to sell the sparkle as they did before this crisis broke. It is unlikely to succeed in attracting investors on the scale needed to revive securitization. But even if it does, the currency is being set up for a massive collapse when the proverbial bill soon comes due. Therefore, essentially, on the level of the model itself, the US financial sector is headed for a more massive collapse than we've seen already, even if revival efforts were to somehow succeed in breathing life into the sector temporarily.

The second reason that this assessment here of the current fiscal position of the US financial sector is so bleak is because real events on the ground, occurring as we speak, demand such realism. Many times I have drawn attention to the simple concept of the self-reinforcing downward spiral that has come to life within this ongoing crisis, a downward spiral that encompasses both the financial and economic sectors. Turmoil in the financial sector creates both a seizure of credit and higher costs for credit of all kinds, which feeds directly and indirectly down the line into the economic sector, translating into losses for business and individuals. Those losses result in rising business failures, job losses, foreclosures and bankruptcies, and collapsing spending, investment and asset prices. These developments feed back, in turn, into the financial sector as banks and other institutions suffer greater losses and as the list of their toxic assets grows by leaps and bounds.

This, in turn, causes the credit seizure to persist and to tighten, which feeds directly down the line into the economic sector again, and the downward spiral continues and gains momentum. Though simple in nature, this downward spiral has been profoundly resistant to all the trillions of dollars thrown at it so far in an effort to break its grip. Additionally, its dramatic influence over where we're headed is too often minimized or forgotten altogether, until unfolding events bring a painful reminder. In this respect, the first-quarter results of the Bank of America, announced on Monday, April 20, contain such a reminder - despite showing a "profit", credit losses are swiftly mounting as the quality of credit continues to deteriorate rapidly, without any reprieve. The Dow lost nearly 300 points that day, led by a fall in financial shares.

Just ahead, there exist strong indications of the real possibility of renewed, much deeper turmoil in the financial sector, in addition to what we're already seeing. The upcoming release of the stress test results may well provide a trigger for such renewed turmoil, which will feed once again down the line into the real economy, the economic sector, and only strengthen the downward spiral that exists between those two sectors. We may see Wall Street rallies like the one that began six weeks ago, but they won't resolve the fundamentally grim picture for the US, which is firmly in the grip of forces that it unleashed upon itself. The US government and its Wall Street accomplices lack the insight, power, ability and integrity to break the downward spiral anytime soon. Thus, it will run its own course, just as it has been doing for many months already.

Beware The False Bottom in Housing
Residential real estate is about to get very weird. In the coming months, housing-market data is likely to show price stabilization in many of the country’s hardest hit areas. Pundits, government officials and real-estate professionals will loudly proclaim the worst of our real estate woes are behind us. Back in reality, however, this data will simply reinforce the axiom that there are lies, damn lies, and statistics. The lion share of home price declines have, thus far, been focused in low-end markets -areas where property values became the most detached from housing-market fundamentals. Even though the high end is now declining, sales activity is still heavily concentrated in the country's most distressed markets.

Taking a look at the data below compiled by my firm, Cirios Real Estate -- which depict sales transactions for the part of the San Francisco Bay Area between San Francisco and San Jose known as the Peninsula -- one can see how rising home prices from 2003 to 2007 shifted sales transactions towards more expensive properties. This makes intuitive sense, and should naturally push up both average and median home prices. Since the market peaked, however, notice how the percentage of sales of homes under $400,000 shot up to more than 50% of sales in the first quarter of this year, from as low as 9% in 2007. Conversely, sales over $1,000,000 that accounted for almost a quarter of transactions in 2007 now make up less than 9% of total sales so far in 2009.

This heavy concentration of sales in low-end markets is skewing home price data to the downside, exaggerating the impact of depressed markets on broad measures of prices. As the foreclosure epidemic spreads outwards to more well-to-do areas, and job losses force previously stable homeowners to sell into a weak high-end market, more expensive homes will begin to make up a greater percentage of total transactions. This dynamic -- not an overall rise in property values -- is likely to push up average and median home price measures.

In other words, high-end markets will be falling as price discovery rears its ugly head, while low-end markets are flat at best, as price declines reach exhaustion levels and investors step in to buy. High levels of supply and looming shadow inventory of foreclosures will prevent meaningful appreciation in these distressed areas for the foreseeable future. Meanwhile, data will show a housing market on the rebound. No doubt, banks like Wells Fargo, Citigroup and Bank of America will cheer the end of the real-estate slump. Real estate professionals will pound the table that now's the time to buy (just like they said back in 2007). Government officials will proudly assert their mortgage-relief efforts were a success. Nothing, however, could be further from the truth.

Freddie Mac March mortgage investment portfolio balloons annualized 65.8%
Freddie Mac, the second-largest U.S. home funding company, on Friday said its mortgage investment portfolio grew by an annualized 65.8 percent rate in March, while delinquencies on loans it guarantees accelerated. The portfolio increased to $867.1 billion, for an annualized 31.0 percent increase year to date, the McLean, Virginia-based company said in its monthly volume summary. In March 2008, the portfolio was $712.5 billion. The delinquencies that increased stress on the company's capital jumped to 2.29 percent of its book of business in March from 2.13 percent in February and 0.77 percent in March 2008. Freddie Mac said the temporary suspension of foreclosures, which expired on March 6, contributed to the increase in single-family delinquency rates.

Freddie Mac said refinance-loan purchase volume was $52 billion in March, its largest refinance month since 2003. The company's total mortgage portfolio increased at a 21.0 percent annualized rate in March to $2.247 trillion. On Sept. 7, 2008, the U.S. government seized control of Freddie Mac and its larger sibling, Fannie Mae. The takeover came amid heightened worries about shrinking capital at the congressionally chartered companies. The government is now relying heavily on Fannie Mae and Freddie Mac in its efforts to stimulate the U.S. housing market, which is in the midst of its worst downturn since the Great Depression, by buying more mortgage loans, easing refinancing and helping homeowners avoid foreclosure.

Outlook for Home Prices Clouded by Spat Over Historical Trends
Yale University economist Robert Shiller has often dazzled audiences with a chart showing home prices from 1890 to present. Someone even used Mr. Shiller's chart to make a YouTube video that puts its viewer on a roller-coaster ride over peaks and valleys in home pricing. It's a bumpy ride. Now another economist, Thomas Lawler, says Prof. Shiller's chart is "bogus." Mr. Lawler says Mr. Shiller cobbled together data that are inconsistent and sometimes unreliable. Mr. Shiller defends his work and accuses Mr. Lawler of making "wild allegations. The clash is more than just a spat between two of America's most prominent housing mavens. It could affect the debate about exactly where the U.S. is in its housing cycle. The squabble also illustrates the paucity of reliable information on house prices.

If they rely too heavily on house-price gauges, politicians may get a distorted view of the severity of the slump and support overly drastic measures, says Kenneth Rosen, a housing economist at the University of California, Berkeley. Mr. Lawler says the Shiller chart also appears to understate the long-run rate of increase in home prices. No one has found a precise way to measure changes in house prices. Because no two homes are exactly alike, changes in the price of one won't necessarily be matched even by apparently similar homes nearby, much less those hundreds of miles away. Though some indexes track price changes in the same set of houses over time, those can be distorted by major improvements in some of the houses and deterioration in others. The publicly recorded transaction prices, used to create indexes, often are distorted by incentives given to buyers that aren't tallied in the price.

But that doesn't stop analysts from extrapolating from what may be dubious data. In a March 30 report, T2 Partners LLC, a New York hedge-fund manager, drew on the Shiller chart to conclude that on average U.S. home prices need to drop another 13% to get back in line with the long-term trend. Mr. Lawler has created an adjusted version of the Shiller chart, backing up his view that house prices already are nearing a bottom in much of the country. A T2 partner called Mr. Lawler's critique "valid." While updating his book "Irrational Exuberance" in 2004, Mr. Shiller says he was surprised to find little data on long-term house-price trends. So he spliced together his own chart from various price indexes and studies. He conceded that the chart was "imperfect," but added that "it appears to be the best that can be found for this long time period."

For 1890 to 1934, Mr. Shiller used data from a trio of economists led by Leo Grebler. Because he found no index for 1934 through 1953, Mr. Shiller wrote, "I had my research assistants fill that gap by tabulating prices in for-sale-by-owner ads in old newspapers," covering just five cities. For 1953 through 1975, Mr. Shiller used an index compiled by the U.S. Bureau of Labor Statistics, or BLS. An index from the regulator of Fannie Mae and Freddie Mac covers the period through 1986, after which Mr. Shiller uses the S&P/Case-Shiller index he created with another economist, Karl Case. "In other words," Mr. Lawler wrote in a recent edition of his daily housing-market newsletter, "the long-term chart is based on a concatenation of different time series of home prices which use different methodologies, have different samples, measure different things, and all in all are, well, different."

Mr. Lawler, a former Fannie Mae economist who now is an independent consultant in Leesburg, Va., says the BLS data used by Mr. Shiller was based on a "very small sample" and so isn't reliable. Mr. Shiller's chart shows that home prices from 1940 through 2000 rose at an annual real, or inflation-adjusted, rate of 0.7%. Data from the Census Bureau, however, puts the real rate at 2.3% for that period. Part of the difference may be due to improvements in the quality of homes, Mr. Lawler says, but he doubts that accounts for the whole gap. Mr. Shiller responds in an email that much of the difference "is indeed caused by quality change." He cites Census data showing that nearly a third of American homes lacked running water in 1940.

Home-price indexes all have their flaws. The various S&P/Case-Shiller indexes are limited to 20 metro areas and lately have been heavily affected by sales of foreclosed homes, whose prices reflect banks' need to dump assets quickly. The Federal Housing Finance Agency, or FHFA, index (formerly known as the Ofheo index) is based only on homes financed with loans owned or guaranteed by government-backed mortgage investors Fannie Mae and Freddie Mac; that excludes most homes recently bought with subprime loans,understating the damage. "Measurement is more an art than a science," says Mr. Lawler. He favors more government spending on house-price data. For now, Mr. Lawler says, the government does a better job with its monthly index of pricing for women's undergarments than it does with housing. Despite the criticism, Mr. Shiller's long-run chart is unlikely to fade away. Rich Hodge, a Web site developer in Simi Valley, Calif., who used Mr. Shiller's chart two years ago to create his YouTube roller-coaster video, stands by the economist. Says Mr. Hodge: "He's a pretty accurate guy."

Regulators Shut Banks in Georgia, Michigan, California, Idaho
Regulators seized banks in Georgia, Michigan, California and Idaho with total assets of $2.3 billion, bringing the tally of failures in the U.S. this year to 29, exceeding the total for all of 2008. American Southern Bank of Kennesaw, Georgia; Michigan Heritage Bank in Farmington Hills; and First Bank of Beverly Hills in Calabasas, California, were shut by state agencies. First Bank of Idaho in Ketchum was closed by the Office of Thrift Supervision. The Federal Deposit Insurance Corp. was named receiver of all four. The seizures will cost the FDIC’s insurance fund a total of $698.4 million, with more than half of that tied to the failure of the California bank. While banks in the other three states are being taken over by institutions in their regions, the FDIC couldn’t find a buyer for First Bank of Beverly Hills, forcing the regulator to assume the company’s $1.5 billion in assets.

Bank of North Georgia in Alpharetta, a unit of Synovus Financial Corp., is taking over American Southern’s insured deposits and its single office, which will open April 27. Michigan Heritage’s deposits are being assumed by closely held Level One Bank in Farmington Hills and its three branches will open next week. U.S. Bancorp in Minneapolis, the sixth-largest U.S. bank by deposits, takes control of First Bank of Idaho’s seven branches. "Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage," the FDIC said.

The seizures pushed the tally of failed banks past the 25 reached last year. Foreclosure filings for March totaled 341,180, a record high, according to RealtyTrac, the California- based seller of default data. The economy has lost 5.1 million jobs since December 2007, and unemployment rose to 8.5 percent in March, the highest since 1983. President Barack Obama said last week that his $787 billion economic stimulus package, plans to rescue banks and efforts to reduce home foreclosures are beginning to "generate signs of economic progress." Still, he said there would be "pitfalls" ahead. Bank of North Georgia will buy $55.6 million of American Southern’s deposits and $31.3 million of assets. The deal excludes about $48.7 million in brokered deposits. The FDIC will pay off $50 million of Michigan Heritage’s brokered deposits. Level One is acquiring $101.7 million in deposits and purchasing $46.1 million in assets.

For First Bank of Beverly Hills’s insured deposits placed with the bank, the FDIC will mail customers checks next week. Brokered deposits will be paid directly to the brokers after the FDIC receives the necessary documents. Of the bank’s $1 billion in deposits, about $179,000 are uninsured. U.S. Bancorp, which last year bought assets and deposits of failed California thrift Downey Financial Corp., is assuming First Bank of Idaho’s deposits, excluding $112.8 million in brokered deposits. U.S. Bank agreed to buy $17.8 million of the failed bank’s assets, or less than 4 percent. The toll of failed banks last year was the most since 1993, including Washington Mutual Inc., the biggest U.S. bank failure in history. The closings drained money from the FDIC deposit insurance fund, which tumbled 45 percent in the fourth quarter to $18.9 billion. The agency has estimated future bank failures may cost the deposit insurance fund $65 billion through 2013.

"We are past the crisis stage; I think we’re in the cleanup stage now," FDIC Chairman Sheila Bair said yesterday at a conference in Washington. "It’s going to take some time and everybody needs to be patient, and it is not going to be pretty." To protect FDIC reserves, the agency is forcing the banking industry to pay a one-time, emergency fee. Bair is asking Congress to expand the agency’s borrowing authority from the U.S. Treasury to $100 billion from $30 billion, which may allow the assessment to be reduced. Community banks have said the fee may significantly reduce 2009 earnings. The FDIC received more than 1,675 public comments on the emergency assessment. Bair said the agency expects to make a final decision on the fees by late May.

The banking industry lost $32.1 billion from October through December, the first aggregate quarterly loss since 1990. The agency classified 252 banks as "problem" in the fourth quarter, a 47 percent jump from the third quarter. The FDIC doesn’t identify problem banks by name. The FDIC insures deposits of up to $250,000 per customer at 8,305 institutions with $13.9 trillion in assets.

FDIC issues 'cease and desist' order to Security Bank
Macon-based Security Bank Corp. has been issued a "cease and desist" order by the FDIC for five of its six subsidiary banks to address numerous issues the financial institution is facing.
The order sets out requirements for the banks to take certain action such as to address capital levels and lending policies, place restrictions on brokered deposits and reduce its level of substandard assets. The only subsidiary not affected is Security Bank of North Fulton.

The FDIC and the state commissioner of banking have "determined that they have reason to believe that the bank has engaged in unsafe or unsound banking practices and has committed violations of law and/or regulations," the order states. The agreement between the Federal Insurance Deposit Corp. and Security Bank does not affect customers, said Security marketing director Tom Woodbery. "During this whole process it’s important for customers to understand that banking goes on as usual," Woodbery said. They can continue to bank as usual, their deposits are fully insured as they were yesterday and they will be tomorrow."

FDIC serves Nuestro Banco with cease-and-desist order
The Federal Deposit Insurance Corp. has issued a cease-and-desist order against Garner-based Nuestro Banco, the state’s first Hispanic-focused bank. The order, filed in March but revealed by the bank Friday, tells managers to bolster the Nuestro Banco’ reserves and clean up its books. Under the order, which also was approved by the Office of the North Carolina Commissioner of Banks, the bank was issued sets of deadlines to beef up its management, charge off or collect non-performing loans and implement new auditing controls. Opened in 2007, Nuestro Banco had about $17 million in total assets as of Dec. 31, 2008, and was showing a net loss of $3.31 million. The data was complied by FDIC. The bank’s first quarter 2009 financial performance is not available.

U.S. Plans Test Sales of Distressed Assets, Bair Says
The U.S. government will conduct a trial run of its Public-Private Investment Program by June using at least $1 billion of distressed loans in a pilot sale, Federal Deposit Insurance Corp. Chairman Sheila Bair said today. The FDIC is working with the Treasury Department and the Federal Reserve to complete planning for the program, Bair said today at a conference in Washington. The program will use as much as $100 billion of Troubled Asset Relief Program funds to remove impaired assets from banks’ balance sheets. "We’re working very hard on getting that and we hope to have a pilot sale by at least early June," Bair told reporters after giving a speech. "We do have some interested banks that are willing to be our guinea pigs."

The Obama administration unveiled the program March 23 as the centerpiece of its effort to clean up the U.S. banking system after the worst financial collapse since the Great Depression. The effort aims to use government matching funds and debt guarantees to attract private investors to buy loan pools. The government said the plan will provide as much as $500 billion of buying power to purchase banks’ distressed assets. The FDIC has received a "tremendous amount of investor interest" and has lined up banks willing to unload illiquid loans into public-private investment funds, Bair said. The agency is considering allowing banks selling loans to also take equity stakes in the investment funds, she said.

The pilot sale "will allow for public observation and input -- consistent with the FDIC’s commitment to openness and transparency throughout this process," Bair said in a statement released after she announced the plan. The government is to begin giving companies preliminary results from "stress" examinations of 19 of the largest U.S. banks, meant to determine whether the lenders need additional capital to withstand worsening economic conditions. The FDIC is conducting the tests with the Fed, Treasury and the U.S. Office of the Comptroller of the Currency. "We are past the crisis stage; I think we’re in the clean- up stage now," Bair said today. "It’s going to take some time and everybody needs to be patient, and it is not going to be pretty." The housing market is beginning to show "glimmers of hope," especially in California where excess inventory is beginning to be sold, she said.

Bair repeated her call for a systemic risk regulator to oversee financial markets and endorsed setting up a mechanism to unwind troubled non-bank financial companies in the same way the FDIC resolves and closes failed lenders. Such authority could "impose greater market discipline," she said. U.S. Comptroller of the Currency John Dugan, speaking at the conference after Bair, said the Fed should have the power to close non-bank financial companies, and regulation of the industry needs to be consolidated among fewer agencies. "The crisis really did demonstrate just how badly we needed that window to cover large non-bank systemically significant firms," Dugan said today at a Washington conference. "The Fed is the logical choice to expand that role." Bair and Dugan spoke at a forum on global financial reform, sponsored by the Bretton Woods Committee, Deloitte and Boston University’s Morin Center for Banking and Financial Law.

Fed Stress-Test Methods Stop Short of Signaling U.S. Banks' Capital Needs
The Federal Reserve released the methods it used to conduct stress tests of the biggest U.S. banks, while stopping short of any details that signaled how much new capital regulators will demand. The assessments calculated the capital buffer the 19 biggest banks will need to keep making loans even if the economic downturn worsens this year and next. Regulators accounted for banks incorporating $900 billion of off-balance sheet assets next year, and put a focus on common stock as a key component of capital. They also took account of the writedowns the firms have already recorded, the Fed report showed. Today’s report is part of a federal effort to restore public confidence in banks, some of which have seen their capital "substantially reduced" by the recession and financial crisis. Results from the bank tests are due for a May 4 release.

"We don’t know if they were conservative or too easy," said David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia in New York. "We were looking for the translation of the economic forecasts to loan losses and we didn’t get that." The S&P 500 Financials Index of 80 banks, insurers and investment firms rose 2.5 percent, after declining 1 percent earlier today. The Standard & Poor’s 500 index rose 14.3 points or 1.7 percent to 866.23. The Fed’s report said that a bank’s capital buffer assessment is "not a measure of the current solvency or viability of the firm." Regulators have been concerned that the release of the test results may roil the shares of banks with the largest capital needs, people familiar with the matter have said in the past week.

The 19 firms, which include Citigroup Inc., Bank of America Corp., Goldman Sachs Group Inc., GMAC LLC, MetLife Inc. and regional lenders including Fifth Third Bancorp and Regions Financial Corp., receive preliminary results of the tests today. While the report said that banks’ own assessments were "not necessarily consistent" with the estimates of the regulators, a Fed official added that the firms shouldn’t be surprised at the figures. The official spoke to reporters on a conference call on condition of anonymity. "Losses associated with the deepening recession and financial market turmoil have substantially reduced the capital of some banks," the Fed report said. "Most U.S. banking organizations currently have capital levels well in excess of the amounts required to be well capitalized."

"Lower overall levels of capital -- especially common equity -- along with an uncertain economic environment have eroded public confidence in the amount and quality of capital held by some firms," the Fed said. The document, detailing stress tests assuming a decline in output of as much as 3.3 percent, is partly aimed at answering financial analysts who said the government would whitewash the banks’ weaknesses. The 19 banks in the test hold two-thirds of the assets and more than one-half of the loans in the U.S. banking system, the study said. A team of about 140 Fed officials coordinated the so-called stress tests. The central bank is the primary regulator of bank and financial holding companies. In calculating the capital buffers, regulators accounted for off-balance sheet units that banks will be incorporating in 2010 as a result of proposed accounting rules changes. Banks may bring on about $900 billion to their balance sheets as a result of the change, and supervisors boosted the risk-weighted assets in their assessments by $700 billion, the Fed said.

The firms were also asked to include the level of reserves required at the end of 2010 to cover expected losses in 2011. Regulators used a consistent metric for all 19 banks to measure how much of an additional capital buffer is needed over standard regulatory ratios of capital to risk-weighted assets, officials said, declining to identify what the measure was. The Fed officials said supervisors will work with banks to maintain the buffer over time, indicating that firms with high- risk portfolios will face a larger challenge to maintain it. "They are going to have to do this in a way that produces some significant additional capital requirements," said Douglas Elliott, a former investment banker who is now a fellow at the Brookings Institution in Washington. "If they do not, no one will believe that it is credible." White House Chief of Staff Rahm Emanuel said the tests will reveal "gradation," with some being "very, very healthy" and others needing assistance. Emanuel made the comments in an interview on Bloomberg Television’s Political Capital With Al Hunt.

The reviews were based on two scenarios for the economy. The "more adverse" scenario poses a 3.3 percent contraction in 2009 with 8.9 percent unemployment, followed by 0.5 percent growth and a 10.3 percent jobless rate in 2010. The regulators provided the firms with benchmarks for loss rates under the two scenarios. "Firms were allowed to diverge from the indicative loss rates where they could provide evidence that their estimated loss rates were appropriate," the study said. Regulators used the market shocks of the second half of 2008, when Lehman Brothers Holdings Inc. declared bankruptcy, as the model for testing banks with trading portfolios of $100 billion or more. As they pored over banks’ loan and securities portfolios and off-balance-sheet liabilities, examiners increasingly focused on the quality of credits. They were concerned about wide variations in underwriting standards, a regulatory official said this week.

Supervisors will weigh how much capital each company holds, its ability to retain earnings over the next few years, future access to private capital and the extent any asset writedowns. Taxpayer aid for a troubled bank will come from the Treasury’s $700 billion Troubled Asset Relief Program for banks that need a stronger buffer. The Treasury is also open to converting its current preferred shares into common equity, a step that would boost capital levels and reduce banks’ dividend payments. U.S. regulators failed to address the deteriorating credit standards for the home-lending boom this decade, lawmakers have said. They also underestimated how the housing shock would reverberate through the financial system, tightening credit and undermining economic growth. Foreclosure rates on subprime mortgages soared to 13.7 percent in the fourth quarter of 2008, up from 8.65 percent the same quarter a year earlier, according to the Mortgage Bankers Association. Mortgage delinquencies increased to 7.9 percent of all loans in the final three months of last year, the highest level in records going back to 1972.

Stress-testing the stress test
That's the question investors and analysts are grappling with after the government released the parameters of the Supervisory Capital Assessment Program on Friday, just a couple of hours before the stock market closed. The timing suggests regulators were at least concerned about the market's reaction and wanted to give banks and analysts a couple of days to digest the material before trading resumed. The SCAP looked at how banks would perform during 2009 and 2010, with the hope this would also cover 2011. Regulators looked at how loans on the 19 biggest U.S. banks would fare if gross domestic product fell 2% to 3.3% this year and gained 0.5% to 2.1% next year. Unemployment impact was measured from 8.8% to 10.3% for 2010. Housing prices were evaluated at a national decline of 22% for 2009 and a 7% decline for 2010, according to the Fed. Construction loan default rates were expected at 18% by the end of 2010.

Many economists have predicted rosier numbers for the same period, a point the Fed was trying to offset with its bad-case and worst-case scenarios. But projections have been notoriously off the last two years. Few economists predicted today's massive unemployment rates, GDP growth in 2008 was about half of what economists predicted early in that year, and GDP actually shrank 3.9% in the fourth quarter. Ultimately, the faith in the Fed's stress test will come down to two factors: how much credence customers and investors have in individual institutions that will require more cash -- and some, perhaps many, will -- and how many people have believe that the economy will obey the economists. Should the numbers get far worse, there won't be anymore stress. Everything will be broken.

Banking After The Stress Tests

Once the winners and losers leak, expect a wave of consolidation.

When Uncle Sam tells the country's largest 19 banks today whether they have passed government-run "stress tests," much of the focus will be on capital requirements and which banks are the loudest about the results. (Hint: The silent ones probably didn't fare so well.) But here's another ball to keep your eye on: merger activity. Don't be surprised if some of the weakest of the bunch eventually get scooped up by foreign competitors, which aren't tied down by the strings associated with government intervention. "I don't see how you don't have industry consolidation out of this," says Terry Moore, managing director of Accenture's North American banking industry practice. In particular, he thinks mid-market regional banks, which may be required to raise more capital, could be at risk. Moreover, foreign banks don't have the noose of the government's Troubled Asset Relief Program around their necks.

For the past two months, U.S. regulators have run these banks through not-so-unrealistic nightmare scenarios that include unemployment as high as 10.3%. Trouble is, unemployment isn't uniform across the U.S. In other words, the stress tests aren't necessarily equal for all involved, and those who perform worse than others make prime consolidation targets. Foreign banks stand to benefit because the government's oversight hampers consolidation by domestic banks. Analysts point out that the financial crisis has put pressure on big U.S. financial conglomerates like Citigroup, one of the biggest acquirers in recent history, to slim down rather than bulk up. In addition, many of the 19 banks have tapped the TARP, which comes with significant strings as long as taxpayer money is on the line. Strong U.S. banks that are would-be acquirers, like Goldman Sachs and JPMorgan Chase, have said they want to repay the TARP money as quickly as possible, limiting their taste for spending sprees or attention-attracting acquisitions.

During the next 10 days, banks will have an opportunity to dispute the government's findings. While much information about the stress tests is certain to be leaked during the next week, regulators plan to make some of the information public May 4. The Federal Reserve is supposed to make the methodology (the level of detail is yet unknown) public on Friday. Analysts say the devil will be in that detail. If the government puts all the numbers out, analysts will be able to quickly plug in their spreadsheet models and find the winners and losers. One big question mark is how draconian the stress tests were. Some analysts believe the government didn't have pessimistic enough assumptions on unemployment. Most believe the stress test will set a bar for tangible common equity, a measure of financial strength that divides the value of outstanding stock by assets. Looking at tangible common equity to risk-weighted assets in the first quarter, the stress-test banks that have already reported their profits would clear a 3% hurdle.

If regulators take a stricter view and set the bar at 4%, some banks just cross the line, including Bank of America (4.1%), Bank of New York Mellon (4.2%), Fifth Third Bancorp (4.6%) and U.S. Bancorp (4%), according to data gathered by SNL Financial. Wells Fargo, viewed as one of the stronger banks, could potentially have to raise capital under a 4% threshold, since its tangible common equity to risk-weighted assets was 3.8% in the first quarter. Gerard Cassidy, an analyst at RBC Capital Markets, said the tests will divide those that made the varsity squad from those that got cut. JPMorgan Chase and Goldman Sachs will likely be named starters, he says, while Morgan Stanley, PNC Financial and U.S. Bancorp would be off-the-bench players. On the bubble are Wells Fargo, Bank of America, Regions Financial, SunTrust Banks and Citi, Cassidy says. Already cut are KeyCorp and Fifth Third.

Other analysts point out that the anticipated results are already being played out in the stock market. Capital One Financial traded up 12% Thursday on rumor it had passed the test. "It is probably fairly obvious" writes Friedman Billings Ramsey's Paul Miller, "but we are facing a binary event: results will dictate who trades up strongly and who trades down." As far as Friday trading goes, the sentiment was scattered. Bank of America and JPMorgan stocks were trading flat. Citi, Fifth Third, Key, Goldman, Morgan Stanley and Regions were down. Regions fell much as 12% after analysts from Oppenheimer predicted it would fail the stress test. Shares of Wells, U.S. Bank, Sun Trust and PNC all traded higher. Keefe, Bruyette & Woods analysts said Thursday they believe the U.S. banking industry needs $1 trillion in capital. Bank of America likely needs another $15 billion to $20 billion in capital from the government's program. Earlier this week, Chief Executive Kenneth Lewis said he didn't think the bank needed more capital.

Stress Test Scores ‘C’ If Name Ends in ‘itigroup’
The U.S. authorities are scheduled to disclose the methodology for the stress tests that will gauge the creditworthiness of the 19 largest U.S. banks. Below are a few examples of the kinds of searching, penetrating questions the Treasury Department should ask. Some sections have point scores. Others will be judged more subjectively.

(1) Award your institution five points for every ex-Goldman Sachs Group Inc. manager on your board. Double that tally if former Federal Reserve Chairman Alan Greenspan ever took part in a private conference call for your favorite clients. Lose all points if the head of your executive compensation committee has a worse golf handicap than your chief executive officer.

(2) This week, an anonymously sourced blog entry said the government’s stress test would show that 16 of the 19 banks in the study are technically insolvent, with none of the 16 able to survive a disruption of their cash flow or additional defaults on their loans. On hearing this, your first reaction was:
(a) Please, please, please let me be in the threesome. I’ve worked like a dog selling assets and raising capital.
(b) Please, please, please let me be in the 16. I’m tired and I’d like to spend more time with my money.
(c) Only 16? Surely some mistake . . .

(3) Your accounts are audited by:
(a) Pricewaterhouse Coopers LLP.
(b) Ernst & Young LLP.
(c) Deloitte & Touche LLP.
(d) Moe, Larry and Curly in Rockland County, New York.

(4) A mob gathers at the doors of your institution. Your instinctive reaction is that:
(a) Barbarian rioters, led by Naomi Klein, are at the gates demanding the end of capitalism.
(b) Your customers have finally lost patience with counting their losses and are demanding your head on a plate.
(c) All those derivatives specialists you fired last month have finally found their collective spines and want to reclaim the portion of your previous bonuses that their spreadsheet- shuffling was responsible for generating.

(5) Gather your board members around the executive table, and make them bare their wrists. Lose 2 points for every wristwatch with a retail price of more than $5,000. Lose 50 points for any board member who owns the Breitling Emergency model that claims to summon the international rescue services at the push of a button. Lose 100 points if he has ever accidentally pressed the button and had to pay for the helicopter.

(6) Gain 10 points if you, the current CEO, have been asked to be or already are:
(a) a member of the U.S. Treasury.
(b) an employee of the Federal Reserve.
(c) Bo’s pooper-scooper.

(7) Your current company vehicle is:
(a) a Cessna Citation X jet.
(b) a Maybach limousine.
(c) a Toyota Prius
(d) a Segway scooter.
(e) a rusty bicycle.

(8) Which best describes your ability to sell bonds on the international capital markets without the benefit of a U.S. government guarantee?
(a) Bill Gross backs up the truck and says "fill ‘er up."
(b) Bill Gross laughs so hard that he snorts coffee out of his nose and down the front of his shirt.

(9) Timothy Geithner says the "vast majority" of the nation’s banks have more capital than they need. Your response is:
(a) Which nation is he talking about? ‘Cos it certainly isn’t the U.S. of A.
(b) What is he smoking and where can I get some?
(c) You laugh so hard you snort coffee out of your nose.

(10) Your institution is positioned to remain solvent in a world economy resembling that of:
(a) the past decade.
(b) Japan.
(c) Cuba.
(d) Zimbabwe.

(11) Lose 10 points if your CEO plays bridge. Lose another 10 points if he’s up to tournament standard.

(12) Lose five points for each of the following:
(a) The words "never sleeps" feature in your slogan.
(b) There’s an umbrella in your logo.
(c) The name of your institution begins with "C" and ends with "itigroup."

U.S. Mortgage Losses: Another $375 Billion?
The housing slump and mortgage-debt downturn that has already caused record losses for financial institutions could generate another $260 billion to $375 billion in losses among securities backed by U.S. home loans, according to new research from Standard & Poor's. About $1.7 trillion in so-called private-label mortgage securities remain outstanding, down from the $3.7 trillion issued since 2004, according to data compiled by S&P's Market, Credit & Risk Strategies Group, which is a separate division from the ratings service. The securities, which exclude those issued or guaranteed by government agencies Freddie Mac and Fannie Mae, are backed by subprime home loans, prime mortgages or Alt-A loans to prime borrowers that didn't fully document their incomes.

"There are going to be more defaults, but the worst of the big downward lurches are probably over and the systemic threat from the residential mortgage market is diminished," said Michael Thompson, managing director of S&P's MCRS group. Financial institutions, however, continue to face losses from the weakening commercial-real-estate market and rising corporate defaults. Banks' exposure to troubled mortgage securities exceeds the amount of actual home loans outstanding, as many financial firms also own securities that replicated the performance of subprime debt using credit-default swaps.

Mortgage repayments and defaults to date have sharply reduced the volume of outstanding debt, but a large chunk of the remaining mortgages are delinquent. S&P's data, aggregated from roughly two dozen mortgage servicers across the country, indicates 45% of $557 billion in outstanding subprime-mortgage debt is classified as "nonperforming." The same goes for 31% of the $745 billion in Alt-A debt and 7% of prime mortgages, of which $406 billion is still outstanding. After analyzing the data and factoring in amounts likely to be recovered from home sales under defaulted loans, S&P analysts forecast total additional losses from legacy residential mortgage-backed securities at $260 billion. They said that in a "worst-case economic scenario," future losses could hit $375 billion.

Take That, Paulson: Finally, One for the Good Guys
I remember the weekend in question last September very clearly. Fannie and Freddie had failed. AIG was teetering. A meeting was called, ostensibly to find a buyer for Lehman Brothers (Barclays ultimately balked at the absence of Fed assistance-sharp Brits!), but the surprise was Ken Lewis hooking up with John Thain, and Bank of America buying the tangled morass that was Merrill Lynch. BAC paid a huge premium for Merrill and that outrage notwithstanding, the purchase itself was the most idiotic in the banking space since Wachovia gorged on Golden West Financial at the peak of the bubble in May 2006. Every soul on the street outside of Bill Miller knew Lewis overpaid and that Merrill's balance sheet was a radioactive nightmare.

The criticism was so uniform in the days that followed that we assumed that it had to have been an 'encouraged marriage.' Lewis couldn't be so dense as to believe he struck a good deal.
I think the jury is still out on whether Lewis was prodded to do the deal, or even whether he was offered future assistance from the FedTreas if he agreed to take on Merrill's liabilities. Regardless, Lewis still overshot massively. Granting a premium for Merrill at the time was a low point in bank deal-making history, and offered a hint that he had lost his mind. He and his board should not be approved by shareholders when they vote next month.

And then there was today. A day of rare, exquisite joy as the 'he-said, he-said, he-said' romp around the Cuomo subpoena was played out before millions of smiling viewers. Cuomo, Lewis, Bernanke and Paulson. It couldn't get any better for payback junkies. But then it did. There were rebuttals, contradictions, restatements, and denials. It was a good day for the home team, a day for laughing and smirking and feeling that maybe, just maybe, the guilty will be punished after all. Without polling, I believe most of us desire intense social and psychological pain for one man in particular, Henry Paulson. And for once, we got what we wanted. Here's a toast to today's circus and to the dream that Bernanke is not re-appointed, that Paulson is indicted, and that Ken Lewis loses his motherfreakin' J-O-B. Harrruuuumppphhhh.

U.S. lawmakers seek BofA-Merrill probe
Momentum is building among U.S. lawmakers for a probe into the merger of Bank of America and Merrill Lynch, amid allegations that federal officials gave the bank's chief executive an ultimatum to complete the deal with the troubled investment house. A senior Republican Senator joined House Democrats on Friday, calling for a congressional investigation, after New York's attorney general said that CEO Kenneth Lewis had testified he was pressured by former Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke to do the merger, or lose his job. "That was very disturbing," Sen Richard Shelby, ranking Republican on the Senate Banking Committee told the Reuters Global Financial Regulation Summit in Washington on Friday.

Earlier, lawmakers in the House of Representatives demanded documents from the Federal Reserve and the U.S. Treasury Department related to the deal. New York Attorney General Andrew Cuomo said Lewis testified that Paulson and Bernanke also pressured him to keep quiet about losses at the troubled Merrill Lynch, which rose to $12 billion from $9 billion in a matter of days. This account has been disputed by representatives for Bernanke and Paulson. "I don't know if there is securities fraud in there or what," said Shelby. Representative Ed Towns, chairman of the House Oversight and Government Reform Committee, and domestic policy subcommittee chairman Dennis Kucinich, have expanded their probe of the deal.

"The implications of Mr. Lewis' testimony, if accurate, are extremely serious," they said in letters to the Fed and Treasury that were dated April 23 and released on Friday. Securities experts said the law may have been broken if Lewis wanted to terminate the merger and kept key financial information from investors. Publicly-traded companies are supposed to widely publicize so-called material information, information an investor needs to decide whether to buy or sell a stock. "Bank of America and Ken Lewis are, in my mind, in deep trouble," said James Cox, a securities professor at Duke Law School. "Both under state law and federal law disclosure standards there was clear duty to correct earlier statements regarding the viability and wisdom of the acquisition of Merrill Lynch." The SEC is reviewing the disclosure surrounding the merg

Egan Jones Urges Accountability Over BofA Deal
Proxy adviser Egan-Jones said if Bank of America Corp. directors knew about the woes at Merrill Lynch ahead of the takeover's Dec. 31 closure and were pressured not to disclose it, "they had a duty to resign rather than be complicit in such failure to make appropriate disclosures." The comments come as Chairman and Chief Executive Ken Lewis told investigators for New York Attorney General Andrew Cuomo that he was pressured by former Treasury Secretary Henry Paulson and the Federal Reserve to complete the deal and not immediately disclose the mounting woes at Merrill. Egan-Jones, which on Monday urged Bank of America shareholders to withhold their votes for five of the 18 board nominees at Wednesday's annual meeting, including Mr. Lewis, said Friday that the company "had a duty to disclose material information to its shareholders, regardless of any pressure not to do so." As such, any board member who supported Mr. Lewis in keeping mum "should be deemed unfit to represent shareholders."

Besides Mr. Lewis, Egan-Jones earlier this week advocated shareholders withhold votes for lead independent director O. Temple Sloan Jr. and governance committee Chairman Thomas M. Ryan "for failure of the board to protect the interests of the shareholders" during the Merrill takeover. "Critical information regarding huge losses at Merrill Lynch were neither fully determined nor disclosed to the company's shareholders in the rush to get a deal completed." In a transcript of Mr. Lewis's testimony reviewed by The Wall Street Journal, he didn't say he was explicitly instructed to keep silent about the losses piling up at Merrill. But his testimony indicates he believed the government wanted him to remain silent. Bank of America shares were recently up 4.2% at $9.19. The stock is down 35% this year.

Cuomo Urges Probe of BofA Deal Pressure
New York's attorney general urged federal regulators to scrutinize the pressure applied by former Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke to Bank of America Corp.'s chief executive as the bank wrestled with its takeover of Merrill Lynch & Co. A slew of documents sent by New York Attorney General Andrew Cuomo to Washington officials on Thursday detail negotiations between BofA CEO Kenneth Lewis and federal officials and demonstrate the extent to which senior officials were influencing the decisions of a public company. Testimony provided by Mr. Lewis and minutes from BofA board meetings show Messrs. Bernanke and Paulson insisted that the merger be completed, despite the discovery of billions of dollars in new losses at Merrill. Mr. Lewis's testimony indicates he felt pressured to keep quiet about his concerns and the talks about potential government support.

"What we have uncovered about the Bank of America acquisition of Merrill raises fundamental questions about the interaction of regulators and those they regulate, as well as important issues of corporate responsibility and shareholder rights," Mr. Cuomo said. "No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure," said Michelle A. Smith, spokeswoman for the Fed's Mr. Bernanke. "It has long been the Federal Reserve's view that questions of this nature are best addressed by individual institutions and their legal counsel, as they are in a position to understand clearly their obligations and responsibilities." Mr. Paulson's discussions centered on the Fed lawyers' opinion that BofA's merger contract with Merrill was binding and the Treasury's commitment to ensuring that no systemically important financial institution would be allowed to fail, said a spokeswoman for Mr. Paulson.

The testimony shows the intricate role played by the Fed and Treasury during the weeks leading up to the Jan. 20 announcement of Merrill's $15.84 billion in losses for the previous quarter and the government's agreement to help support BofA. It was made public by Mr. Cuomo less than a week before Mr. Lewis faces shareholders at the Charlotte, N.C., bank's annual meeting on Wednesday. The CEO is under pressure from some holders to step down, in part because they feel he withheld material information about the deteriorating state of Merrill. The documents were released after The Wall Street Journal reported Thursday that federal officials didn't want to immediately make public information about potential losses from BofA's purchase of Merrill or the government's promise of more aid from TARP, the Treasury's Troubled Asset Relief Program. One email released by Mr. Cuomo shows that all three men were concerned about revealing the discussions about another government bailout. "I just talked with Hank Paulson," Mr. Lewis wrote in an email to bank officials. "He said that there was no way the Federal Reserve and the Treasury could send us a letter of any substance without public disclosure which, of course, we do not want."

According to a letter released by Mr. Cuomo, Mr. Lewis "testified that the question of disclosure was not up to him and that his decision not to disclose was based on direction from Paulson and Bernanke: 'I was instructed that 'We do not want a public disclosure.'" In part of the testimony, Mr. Lewis says a decision about what to disclose "wasn't up to me." Mr. Cuomo sent the letter, attached with almost 100 pages of Mr. Lewis's testimony, minutes from two BofA board meetings in December and some details of an interview with Mr. Paulson conducted in March. He sent the materials to Senate Banking Committee Chairman Christopher Dodd, House Financial Services Committee Chairman Barney Frank, Securities and Exchange Commission Chairman Mary Schapiro and Elizabeth Warren, chairman of the Congressional Oversight Panel, which oversees bank bailouts. Sen. Dodd discussed the testimony with Mr. Cuomo on Thursday and is "deeply concerned" about the allegations, a spokeswoman said. "He will decide on next steps soon." A spokesman for Ms. Warren said her panel may use some of the information in reports on government programs.

The SEC has been "actively reviewing the disclosure surrounding the merger between Bank of America and Merrill Lynch," a spokesman said. "The issues identified in New York Attorney General Andrew Cuomo's letter are part of our review." A spokesman for Mr. Frank said "the government needs to have authority to wind down financial institutions so we're not in the business of picking winners and losers." Mr. Cuomo's letter says Mr. Paulson said he made the threat to remove BofA's management and board at the request of Mr. Bernanke. According to people present during the interview, Mr. Paulson said that Mr. Bernanke called Mr. Lewis two days later. The Fed chief then called Mr. Paulson and told him that Mr. Lewis had gotten the message, the people said, citing the testimony.

Mr. Paulson "does not take exception with the attorney general's characterization of his conversation with Ken Lewis," a spokesman said. "His prediction of what could happen to Lewis and the board was his language, but based on what he knew to be the Fed's strong opposition to Bank of America attempting to renounce the deal." Inside the bank, the testimony bolsters the view that Mr. Lewis did what he had to do in December. Thursday's disclosures didn't damage Mr. Lewis's standing with the board, which has supported him thus far, said people familiar with the situation. Outside the company, the news of Mr. Lewis's predicament did nothing to calm investors who had been advocating for his ouster. "It doesn't change a thing," said Jon Finger of Houston-based Finger Interests Ltd., which controls more than one million shares and has been waging a campaign to remove Mr. Lewis as chairman. "Ken Lewis and the board still had a fiduciary duty to shareholders."

Who Else Did Hank Paulson Push Around?
I just sat down and digested the B of A/Merrill Lynch Merger Investigation letter and I felt like I was reading excerpts from a Godfather IV script treatment. Ken Lewis is no innocent, but Hank Paulson comes off like a fracking psycho in Andrew Cuomo's letter to the SEC and TARP oversight committee. Cuomo basically gets Lewis to admit that he was taking one for the team (America) at the expense of his own shareholders, but would only admit that the negative impact of buying loss-laden Merrill would affect shareholders with a short-term time horizon. That's like a deli owner knowingly poisoning customers with day-old egg salad only between noon and two pm, followed by a fresh batch being put out for the dinner rush.

There are also several insinuations uncovered by Cuomo's investigation that Paulson threatened the board of Bank of America with losing their jobs if they publicly discussed Merrill's imploding financial condition or sought to terminate the merger agreement. Ben Bernanke's Fed looms largely in the background of some of these discussions as well, although it doesn't seem that Lewis coughed up any direct quotes from the Bearded One. This is probably the last straw for many B of A shareholders who were on the fence about Ken Lewis's future.  I predict he gets shown the door come April 29th at the Annual Shareholder Jamboree or he resigns over this coming weekend to spare himself the humiliation. Now that we've gotten some glimpses into how this was going down last fall in the heat of the crisis, we should ask ourselves the following questions...
  • "Who else was strong-armed into poor decisions by Hank the Tank under the guise of preventing systemic risk?"
  • "Was Bernanke using similar tactics in his dealings with corporate officials behind closed doors?"
  • "Given that Bernanke's Fed is not actually a part of the US government, shouldn't we be concerned about its ever expanding authority, which apparently now includes dictating the terms of corporate mergers?"
    "Were there other government-coerced shotgun weddings or TARP recipient actions that need to be looked into so that we, as investors and citizens, can get a more clear picture about what the new rules of the game may be?
  • "Where did that Bond Villain-lookin' Neel Kashkari sneak of to and was he shaking his fist while shouting about 'being back' or petting a cat on his way out?"
OK, I got carried away with that last one, but certainly, these questions and others will linger for a long time to come...Especially if you were a shareholder of Wells Fargo during the Wachovia deal.

Insider Selling in U.S. Jumps to Highest Level Since 2007 as Stocks Gain
Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market. Gap Inc.’s founding family sold $45 million of shares in the largest U.S. clothing retailer this month, according to Securities and Exchange Commission filings compiled by Bloomberg. Daniel Warmenhoven, the chief executive officer at NetApp Inc., liquidated the most stock of the storage-computer maker in more than six years. Sales by the co-founders of Bed Bath & Beyond Inc. were the highest since at least 2001. While the Standard & Poor’s 500 Index climbed 26 percent from a 12-year low on March 9, CEOs, directors and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show. That’s a warning sign because insiders usually have more information about their companies’ prospects than anyone else, according to William Stone at PNC Financial Services Group Inc.

"They should know more than outsiders would, so you could take it as a signal that there is something wrong if they’re selling," said Stone, chief investment strategist at PNC’s wealth management unit, which oversees $110 billion in Philadelphia. "Whether it’s a sustainable rebound is still in question. I’d prefer they were buying." Insiders from New York Stock Exchange-listed companies sold $8.32 worth of stock for every dollar bought in the first three weeks of April, according to Washington Service, which analyzes stock transactions of corporate insiders for more than 500 mostly institutional clients. That’s the fastest rate of selling since October 2007, when U.S. stocks peaked and the 17-month bear market that wiped out more than half the market value of U.S. companies began. The $42.5 million in insider purchases through April 20 would represent the smallest amount for a full month since July 1992, data going back more than 20 years show. That drop preceded a 2.4 percent slide in the S&P 500 in August 1992.

The index rose 1 percent to 851.92 yesterday after better- than-estimated earnings at companies from Marriott International Inc. to ConocoPhillips and EBay Inc. overshadowed falling home sales and higher jobless claims. The S&P 500 has rallied 26 percent over 32 trading days, the sharpest rally since 1938, as speculation increased that the longest contraction since World War II will soon end. Stocks rebounded as President Barack Obama outlined a $787 billion package of spending and tax cuts to stimulate growth, the Treasury unveiled plans to finance as much as $1 trillion in purchases of banks’ distressed assets and the Federal Reserve pledged to buy more than $1 trillion of Treasuries and bonds backed by mortgages to drive down interest rates. With corporate America stuck in its seventh straight quarter of earnings decreases, the longest in seven decades, executives may have become too cautious, said Penn Capital Management’s Eric Green.

Investors are looking to the final quarter of the year, when S&P 500 companies will increase operating income by 74 percent, according to analyst estimates compiled by Bloomberg. They forecast profits will fall 32 percent in the second quarter and 19 percent in the third. "Things are a lot better than they were," said Green, director of research at Penn Capital, which oversees $3 billion in Cherry Hill, New Jersey. Recent history also shows that "insiders have been wrong," he said. Jeffrey Immelt, CEO of General Electric Co., purchased 50,000 shares at prices from $16.41 to $16.45 on Nov. 13, when the stock closed at $16.86. The shares have since fallen 30 percent after the Fairfield, Connecticut-based company reduced its dividend for the first time since 1938 and lost the AAA credit rating from S&P that it held for more than 50 years.

Insiders of consumer and technology companies have been selling the most stock relative to the amount they purchased this month, data compiled by Washington Service show. John Fisher, Robert Fisher and William Fisher, whose parents Donald and Doris Fisher founded San Francisco-based Gap in 1969, sold a combined 2.99 million shares at between $15.11 and $15.36 a share on April 3 and April 17, SEC filings show. Gap rebounded 54 percent from its low on March 6. The stock gained 0.5 percent since the Fishers’ last sale. Gap spokesman Bill Chandler said that "from time to time, based upon the advice of financial advisers, the members of the Fisher family will decide to sell stock." Warren Eisenberg and Leonard Feinstein, who founded Union, New Jersey-based Bed Bath & Beyond in 1971, sold 1.05 million and 1.1 million shares at $30.90 apiece on April 9, the most since at least December 2001, the filings show.

The offerings came one day after Bed Bath & Beyond surged 24 percent, the biggest advance in nine years, on a smaller than estimated decline in fourth-quarter profit. Spokesman Ken Frankel said Eisenberg and Feinstein, who currently serve as co- chairmen of the largest U.S. home-furnishings retailer, sold for "estate-planning purposes and diversification." At NetApp, Warmenhoven sold 1.25 million shares, the most since at least 2002, for about $21.3 million between April 3 and April 21 at prices from $16.10 to $18.10 a share, the SEC filings show. Shares of the Sunnyvale, California-based company, up 47 percent from the March 9 stock market low, gained 1.8 percent since then. Warmenhoven sold shares he received from exercising stock options that were due to expire next month, according to an e- mailed response by Lindsey Smith, a spokeswoman for NetApp. "They’re going to say, ‘Thank you very much,’ and move on to cash or something else," said David W. James, who helps manage about $2 billion at James Investment Research Inc. in Xenia, Ohio. "This is not a situation that suggests to us we’re seeing an economic recovery."

Goldman Sachs Shook Tens of Billions Out of Tax-Payers -- Now They're Whining All the Way to the Bank
Lloyd Blankfein, the CEO of Goldman Sachs, is very upset with the Troubled Asset Relief Program (TARP). Last fall, Mr. Blankfein borrowed $10 billion through the TARP at below market interest rates. Now, the government is starting to tie some real conditions to this money, for example, by limiting what Goldman can pay its executives. Mr. Blankfein argues that such conditions are making it impossible to run his business and is now anxious to return the TARP money. It is great to see that Goldman is finally prepared to go forward into the market without its government training wheels of TARP aid, but, unfortunately, Mr. Blankfein isn't yet confident enough in his business acumen to actually forego government assistance. Goldman Sachs has benefited and continues to benefit enormously from other forms of government aid.

For example, last fall Mr. Blankfein also took advantage of the opportunity to borrow $25 billion with an FDIC guarantee to his creditors. If this government guarantee reduced his borrowing costs by two percentage points, then it means that the taxpayers handed Goldman $500 million a year in lower interest costs. Goldman Sachs also has the opportunity to borrow at several of the Federal Reserve Board's special lending facilities at below market interest rates. We don't know how much taxpayers have given Mr. Blankfein through this channel because the Fed won't tell us. Fed Chairman Ben Bernanke's position is that when the Fed gives out money, the taxpayers just get to write the checks; taxpayers don't get to know where they went. Mr. Blankfein also got a big wad of taxpayer money from the A.I.G. bailout. It was the biggest single beneficiary of the government's largess, pocketing more than $12 billion. If matters had been left to the market and A.I.G. had gone under, Goldman Sachs likely would have gotten almost none of the money that A.I.G. owed it.

In short, Mr. Blankfein is not at all prepared to go out on his own in the rough and tumble of the market; he just doesn't like government programs that come with conditions, like the TARP. He would much rather get his government money with no strings attached. And, since there are channels through which Goldman can get government money without any strings, it is perfectly understandable that Mr. Blankfein would opt out of a program with strings. In this sense, Mr. Blankfein's attitude might be comparable to a mother receiving Temporary Assistance for Needy Families (TANF). To receive their benefits of roughly $500 per month, mothers must meet a variety of work and other requirements and endure lectures on the virtues of being married. Undoubtedly, many mothers find these TANF requirements to be quite annoying. However, unlike Mr. Blankfein, most of the mothers receiving TANF do not have friends in high prices in the administration and Congress. As a result, the mothers receiving TANF will just have to live with the conditions the government imposes on their behavior.

Mr. Blankfein's whining is reminiscent of the resignation letter of Jack DeSantis, an A.I.G. executive who resigned in response to the public outcry over the huge A.I.G. bonuses. In this letter, which was reprinted in The New York Times, Mr. DeSantis complained that he worked 60- to 70-hour weeks to help in the unwinding of A.I.G. Of course, unlike the vast majority of people who put in long weeks, who earn less than $100,000 a year, Mr. DeSantis felt entitled to a salary of close to $1 million a year. Furthermore, Mr. DeSantis apparently had a poor understanding of contract law. As a bankrupt company, A.I.G. could not make binding commitments for future payments -- it didn't have the money. At the insistence of the government, hundreds of thousands of autoworkers are now faced with the loss of the retiree health benefits for which they worked decades. Mr. DeSantis thinks that he is deserving of sympathy because the public is angry over his $750,000 bonus.

The basic story is straightforward. The Wall Street crew thinks that they are entitled to pilfer as much as they want from the public and from the government. These people have no interest in a "free market"; they would be scared to death of being forced to work for a living in the absence of a government safety net. The Wall Street crew has relied on its political power to rig the rules to make them incredibly wealthy. They are relying on this political power to ensure that the rules remained rigged, even though their crooked deck wrecked the economy, costing tens of millions of people their jobs, their homes and their life savings. So far, it looks like the Wall Street boys are winning.

Wells Fargo Buffers in Silence
Something was curiously absent from Wells Fargo's triumphant first-quarter earnings material: Any statement that the bank would try and quickly pay back government capital. That may be because it needs every penny of the $25 billion the government invested in the bank last year as part of the Troubled Asset Relief Program, or TARP. First-quarter numbers show that Wells Fargo is coining large profits from the mortgage-refinancing boom, and it has a net interest margin on its overall loan book that many rival banks would envy. But these positive factors could be overwhelmed as credit losses in its lower-grade loan portfolios erode the San Francisco bank's relatively thin capital base. Fears of such an outcome aren't reflected in Wells Fargo's share price. They trade at around 2.2 times tangible-book-value per share, way in excess of the 1.4 times for J.P. Morgan Chase.

Yet J.P. Morgan Chase has far higher capital ratios. Its tangible common equity ratio is 4.18%, compared with 2.79% for Wells, using similar calculations. And Wells Fargo's Tier 1 ratio, a regulatory capital measure, is much lower than some of its peers. On this yardstick, J.P. Morgan is at 11.3%, against 8.28% for Wells Fargo. This means J.P. Morgan is in a much better position to repay TARP dollars. If it did so, its Tier 1 ratio would fall to about 9.4%, well above the 6% threshold that regulators consider a bank well-capitalized. If Wells Fargo repaid, its Tier 1 would be about 6.1%, barely above this all-important cutoff. In other words, the bank doesn't have much room for maneuver. And the government may decide that Wells Fargo needs more capital if its stress tests predict elevated losses at the bank. A look at its balance sheet suggests such an outcome is not unthinkable.

First, investors should focus on valuations within Wells Fargo's $178 billion securities portfolio. After mark-to-market accounting rules were tweaked, the bank was able to reverse $4.4 billion of unrealized securities losses in the first quarter, boosting equity by $2.8 billion. J.P. Morgan last week said the accounting-rule change had "essentially no impact" on its first-quarter earnings. Many of Wells Fargo's loan books are deteriorating fast. Past-due commercial real-estate loans more than doubled in the first quarter to $1.3 billion. And, with a charge-off rate of 10.1%, the bank's $22.8 billion credit-card portfolio is faring worse than those of many of its rivals. Falling house prices are likely to continue adding stress to Wells Fargo's huge home-equity and first-mortgage books. As property prices fall well below loan amounts, borrowers are more likely to default. For instance, 49% of Wells Fargo's $119 billion of core home-equity loans are now on properties where the combined loan-to-value ratio is over 90%, up from 43% in the fourth quarter. With risks like these, don't expect Wells Fargo to repay the taxpayers anytime soon.

Bank of Japan governor says US must tackle household debt
Japan's central bank chief said on Thursday the United States must take "painful" steps to root out ills such as household debt to pull out of its downturn, warning that stimulus measures alone were not enough. Speaking in New York ahead of annual World Bank and International Monetary Fund meetings in Washington, Bank of Japan governor Masaaki Shirakawa also cautioned not to mistake glimmers of economic hope for a real recovery. Mr Shirakawa welcomed monetary easing and stimulus packages around the world, saying governments and central banks needed to convince the public that unpopular plans to salvage banks were for the greater good. But he warned: "Policymakers are not omnipotent. I think the US economy needs to work out excesses, which include unsustainable financial leverage, household over-indebtedness and perhaps the over-extension of the financial industry," he told the Japan Society. "This will be painful but inescapable. In view of Japan's decade-long experience, there are no palpable alternatives," he said.

Referring to the slump in the world's second largest economy after the crash of the speculative bubble in the early 1990s, he said: "Japan's economy did not resume sustainable recovery until it eliminated excess debt, excess capacity and excess labor." Japan has again plunged into a biting recession as the global economic crisis saps worldwide demand for its cars, televisions and other signature exports - key drivers of the country's recovery earlier this decade. Mr Shirakawa called for policymakers to be hard-nosed in assessing whether the economy was improving. "In a severe economic crisis, policymakers have to be careful not to mistake a temporary rebound in the economy, or a false dawn I would say, for a genuine recovery." But he also signaled that the Bank of Japan wanted eventually to lift rates. The central bank had been determined to raise Japan's rates - long among the world's lowest - until the global economic crisis hit. Both Japan and the United States have since slashed rates to virtually zero in hopes of freeing up the flow of liquidity, the lifeblood of the financial system. "There is no economic crisis that never ends," Mr Shirakawa said.

Finger of blame points to shadow banking’s implosion
by Gillian Tett

These days, banker-bashing is a popular sport for politicians of all stripes. For not only are the banks being blamed for unleashing financial disaster – while paying the bankers fat bonuses – they are also being blamed for slashing loans in a way that is now triggering a recession. But is that perception really right? If you take a look at some recent research produced by Citigroup, it might seem not. For if Citi data are correct, the real source of the current credit crunch is not a collapse in bank loans, but the implosion of the shadow banking world. And that in turn provokes a wider question: namely whether there is anything that policymakers could, or should, be doing now to revive the activities that were once performed by those peculiar shadow banks. The numbers highlight the scale of the challenge. According to Citi (which has crunched its own figures and those of Dealogic), almost $1,500bn worth of new corporate loans were issued across the global financial system in 2008. That was well down from 2007, when more than $2,000bn of loans were made.

But the loan total last year was similar to that seen in 2006, and twice the scale of activity in 2004. Moreover, when non-financial loans are measured, an even more notable pattern crops up: at the end of last year, the volume of non-financial corporate loans was still growing at an annual rate of 10 per cent in both the US and Europe. That was well below the 20 per cent expansion seen in Europe before the peak of the boom, and in some sectors new bank-lending has tumbled. But those figures do not point to a credit drought. After all, from 2002-2004, loans to non-financial companies in the US shrank at an annual rate of more than 5 per cent. What is imploding though is the securitisation world. If you exclude agency-backed bonds, in 2006 banks issued about $1,800bn of securities backed by mortgages, credit cards and other debts. Last year, though, a mere $200bn of bonds were sold in markets, and this year market issuance is minimal. Indeed, the only group really acquiring repackaged debt now are western central banks, which have taken huge volumes of securities on to their own books (and away from the market), as part of their liquidity-injection measures.

So far this pattern has prompted relatively little wider political debate. After all, before the summer of 2007, most non-bankers had no idea that a shadow banking world even existed. But the longer that this drought continues, the bigger the policy issues become. After all, no politician wants to see the government buying mortgage-backed bonds forever; but nobody really believes that traditional, old-fashioned lending can take up all the slack. So either the system needs to find a way to restart securitisation or we face a world where credit will remain a highly rationed commodity for a long time to come. Is there any answer? This week the UK government made one attempt to break the impasse by unveiling a scheme to provide state guarantees for some mortgage-backed bonds (the idea, as my colleague Paul J Davies explains, is to prod the banks into repackaging such debt again). In America, officials are playing around with similar ideas. One concept being mooted, for example, is that the Federal Deposit Insurance Corporation should help troubled banks securitise a swathe of assets.  

On both sides of the Atlantic, industry leaders are also drawing up plans to make the securitisation process much more transparent, and thus, hopefully, more credible to future investors. Another idea is to impose a so-called "5 per cent rule". This would force banks that issue securities to retain at least 5 per cent of them on their own books, to ensure they have a vested interest in monitoring the creditworthiness of end borrowers. On paper many of those ideas look sensible. And if they are all implemented, they might eventually enable the securitisation market to return to life, albeit on a more sober scale. But "eventually" is the key word here: right now, most parts of the securitisation market are all but dead. The longer that politicians wail about the supposed "failure of banks to lend", while ignoring the bigger source of the credit crunch, the harder it will be to wean the system away from government support.

Recession hurts state budgets
The national economic recession has hammered state budgets nationwide, with at least 43 states projecting deficits totaling more than $121 billion next year, a new report found. The survey released Tuesday by the National Conference of State Legislatures also found two-thirds of states expect budget deficits in 2011, forcing lawmakers to find further savings on top of deep cuts they've already made to education, health care, corrections and other programs. Corina Eckl, director of the NCSL's fiscal program, called the states' budget situation "jaw dropping" and said little relief was in sight, as the weak economy has led to precipitous drops in state tax revenue.

"We're seeing reductions in higher education funding, with universities looking at cutting programs and raising tuition," Eckl said. "K-12 education, which is usually preserved, is getting hit, with programs being eliminated outright. That's the magnitude of the problem." Unlike the federal government, nearly every state is legally required to balance its budget. The report found that 19 states and Puerto Rico face shortfalls equal to or greater than 10 percent of their budgets, with Alaska, Arizona and Puerto Rico above 20 percent. Only Iowa and Nebraska had gaps below one percent of their budgets.

California, the nation's most populous state, has struggled to close the biggest shortfall of all — about $42 billion over budget years 2009 and 2010. Gov. Arnold Schwarzenegger signed an agreement in February to close the gap, but voters must ratify several of its provisions in a special election next month before it can take effect. Eckl said the funding directed to states through the $787 federal stimulus plan President Obama signed in February was "the one bright spot" that would ease some budget pressures. "Without the stimulus money, things would be a lot worse," Eckl said.

Political Credit Cards
If you use credit cards -- and actually read your mail -- you don't need anyone to tell you that card issuers have been raising fees and interest rates while often cutting credit limits too. The political class has also noticed. Yesterday the House Financial Services Committee passed a so-called cardholders bill of rights. Chris Dodd, desperately looking for a chance to appear tough on the banks he used to succor, has written an even more draconian bill in the Senate. And today President Obama is meeting with the heads of several large banks in what the White House has advertised as a little friendly arm-twisting session over their rates and billing practices.

Credit card issuers are the companies that consumers love to hate, which makes them an easy populist target. But despite our conflicted relationship with the card companies, Americans enjoy some of the best and easiest access to consumer credit anywhere in the world. Or did enjoy. This past weekend, Presidential adviser Larry Summers berated the card companies, saying consumers were being "deceived into paying extraordinarily high rates" of interest on the debt they've accumulated by, well, buying things they want. No one disputes that rates have been going up this year, which may seem unfair with the fed funds rate pegged at near-zero and the prime rate at an all-time low of 3.25%. But card issuer greed doesn't begin to explain what's happening.

Far more important, credit-card delinquencies are rising and will continue to rise as long as the economy keeps bleeding jobs. Many credit-card issuers, having seen in housing what happens when you lend people money they can't pay back, don't want to repeat the experience. So they're pulling back or increasing the cost of credit, or both. The once-booming market for securitizing and selling credit-card receivables has also dried up along with most of the rest of the securitized debt market, forcing banks to keep that debt on their balance sheets. And in December the Federal Reserve approved regulations that impose most of what Barney Frank and Caroline Maloney want in their bill anyway -- effective July 2010. These columns warned at the time that the new rules would restrict consumer access to credit and increase interest rates and fees. This wasn't soothsaying, merely judgment based on price-control experience. Q.E.D.

Faced with mounting charge-offs and looming restrictions on their prices, card issuers have been raising prices now, in advance of the Fed hangman. Banks are also closing accounts and raising rates now to recalibrate their risk levels before the new restrictions take effect. But that is exactly what the Fed expected them to do, and it's one of the reasons it gave them a year and a half to prepare. Even the House bill, for the most part, wouldn't take effect for a year. But then this week's credit-card dog-and-pony show isn't about helping consumers. It's about once again blaming the bankers for what ails the economy, even if the political class is partly responsible. Our politicians spend half of their time berating banks for offering too much credit on too easy terms, and the other half berating banks for handing out too little credit at too high a price. The bankers should tell the President that they'll start doing more lending when Washington stops changing the rules.

China reveals huge rise in gold reserves
China revealed on Friday that it built up its gold reserves by three quarters since 2003, making it the world’s fifth largest holder of bullion. The move comes as European central banks continue to sell their gold and the International Monetary Fund has discussed selling some of its bullion reserves. "This is probably the most significant central bank announcement since the Central Bank of Russia announced at the LBMA gold conference in Johannesburg in 2005 that it wanted to hold 10 per cent of its foreign exchange reserves in gold," said John Reade of UBS. Ahead of this month’s G20 meeting in London, China said reliance on the dollar as the world’s reserve currency should be reduced by making greater use of special drawing rights, the synthetic currency run by the International Monetary Fund. This led to speculation China was considering changing its policy which has seen the majority of its foreign exchange reserves channelled into the US govermnemt bond market and other dollar denominated assets.

This has raised the question of whether China plans to increase the proportion of its foreign exchange reserves that it holds in gold and how much it could buy. Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE), told the Xinhua news agency in an interview on Friday that the country’s reserves had risen by 454 tonnes from 600 tonnes since 2003, when China last adjusted its state gold reserves figure. The value of its total holding was reported as $31bn. China now holds 1,054 tonnes of gold and has overtaken Switzerland, Japan and the Netherlands to become the fifth largest official holder of gold. The price of gold, which rose above $1,000 an ounce in February, on Friday rose to $912.80 on Friday after ending trading in New York on Thursday at $902.00. "The comments [on Friday] indicate that China will buy more gold to improve its foreign reserve portfolio. This is a trend," said Yao Haiqiao, president of Longgold Asset Management. As the world’s largest gold producer, China might decide to source the supplies from local mines and through refining scrap metal.

The International Monetary Fund has indicated that it wishes to sell 403.3 tonnes of its gold holdings which has raised speculation that China might try to do a deal with the IMF. But China’s central bank has other options available if it has decided that greater foreign exchange diversification is desirable. "We would not rule out purchases on the open market," said UBS: "China could buy gold in the open market and add to its holdings, although it would only be able to do so at a slow and steady rate." Virtually all major official sector sales have been restricted under the Central Bank Gold Agreement since 1999 but the IMF is not a signatory to this agreement so the proposed sale might provide an opportunity for China to boost its gold holdings rapidly. Hou Huimin, vice general secretary of the China Gold Association, said China should build its reserves to 5,000 tonnes. "It’s not a matter of a few hundred, or 1,000 tonnes. China should hold more because of its new international status, and because of the financial crisis," he said. "The financial crisis means the US dollar’s value is changing fast, and it may retreat from being the international reserve currency. If that happens, whoever holds gold will be at an advantage."

Canada's GDP Falls 7.3 Percent
Canada's central bank said Thursday the country's gross domestic product fell 7.3 percent in the first three months of 2009, dropping at the steepest pace in decades. The Bank of Canada said that's the biggest contraction since comparable records began being kept in 1961. Mark Carney, the head of the central bank, expects the Canadian economy will shrink by 3 percent this year as opposed to the 1.2 percent he predicted in January. Carney blames inaction in the United States and Europe in dealing with toxic bank assets for a recession that has been deeper and longer than expected.

''If we had to boil it down to one issue, it's the slowness with which other G7 countries have dealt with the problems in their banks,'' Carney said. ''There has not been as much progress as we had expected in January.'' Canada has avoided government bailouts and has not experienced the failure of any major financial institution. There has been no crippling mortgage meltdown or banking crisis. Canada and the U.S. have the largest trading relationship in the world, however, so the financial crisis and the global sell-off of commodities have hit Canada hard since last fall.

Alberta's once-booming oil sands sector has cooled as every major company has scrapped or delayed some expansion plans. Canada lost a record 273,300 jobs in the first three months of the year. The Bank of Canada cut its trendsetting interest rate by a quarter point to a record-low 0.25 percent on Wednesday and took the unprecedented step of saying it will likely stay there through June 2010. The latest interest rate cut means the bank has sliced 4.25 percentage points off the overnight rate since it began easing its policy in December 2007. Carney is a former Goldman Sachs executive who took over the central bank's top post on Feb. 1, 2008 from David Dodge.

Carney blames U.S., Geithner for slow recovery
Bank of Canada Governor Mark Carney is signalling frustration with the Obama administration's handling of the financial crisis, saying delays in shoring up the banking system in the United States have exacerbated the recession in Canada. With remarkable frankness, Mr. Carney singled out the U.S. government for criticism in his quarterly economic report Thursday, placing much of the blame for Canada's economic woes on U.S. Treasury Secretary Timothy Geithner's abortive attempts to cleanse financial institutions of their toxic assets. "Timely and credible action is required to address the impaired assets on bank balance sheets and to restore the normal flow of credit – a precondition for sustained economic recovery," the central bank said. "Progress on these measures has been slower than expected in the United States and other major financial centres."

Mr. Carney's criticism sets the stage for a tense meeting of finance ministers and central bank governors from the Group of Seven rich industrial countries Friday in Washington, where banking issues will be the main topic of discussion. While the world's leading economic policy makers have agreed on the broad strokes to restore confidence in the financial system, they now must put their ideas into action. Mr. Carney is one of the few central bankers who hasn't had to bail out a financial institution. As such, he put a lot of stock in pledges by the U.S. and European governments to quickly implement programs to restore confidence in banks pushed to the brink of insolvency by the financial crisis. The Bank of Canada bet in January that Canada's economy's would rebound at a relatively robust annual rate of 3.8 per cent next year, a prediction premised in large part on the billions of dollars the U.S. government said it would spend rebuilding banks' capital and pumping money into the world's largest economy.

Now, the central bank foresees the Canadian economy growing at annual rate of 2.5 per cent in 2010 because of the persistent strains in the financial system and the collapse of demand for exports brought on by the global recession. Mr. Geithner, who conceded this week the U.S. bears much of the blame for the world recession, has endured an onslaught of criticism for his handling of the financial crisis, at one point facing calls from some lawmakers to resign. "He hasn't been decisive," Ian Lee, the head of the MBA program at Carleton University's Sprott School of Business and a former banker, said of Mr. Geithner. "In Canada, we are doing a lot of good things. The Bank of Canada is on its game. Mr. Carney must be frustrated by the lack of resolution of the banking problem" While U.S. President Barack Obama's economic stimulus program passed Congress relatively quickly, his economic lieutenants have only in the past few weeks completed a banking strategy. They plan to subsidize private investors who agree to take a risk on the toxic assets. They're also going to run stress tests on the biggest banks to determine whether they need more help from the government and to convince investors that the lenders are sound.

"Comprehensive programs have recently been outlined to provide additional liquidity, guarantee bank balance sheets, dispose of bad assets and recapitalize as appropriate," the Bank of Canada said in its report. "The challenge now is to ensure their rapid and effective implementation" The depth of Canada's economic despair is reflected in the Bank of Canada's revision to its estimate for the Canadian economy in the first quarter to contract at an annual rate of 7.3 per cent. Figures like that have opposition politicians demanding further stimulus spending from Finance Minister Jim Flaherty, who in January pledged a $40-billion program that will sink the federal government into deficit until at least 2013.

Prof. Lee said Mr. Carney's criticism of the U.S. and European response to the financial crisis, which was echoed by Mr. Flaherty, might also be an effort to distract attention from the problems at home.
"My sense is there is frustration, and probably there is a little bit of displacing blame," Prof. Lee said. "It's not turning around as quickly as we thought, and it's not our fault." While maintaining that he trusted his counterparts in the U.S. to resolve their banking issues, Mr. Carney remained blunt in his assessment of their handling of the situation to date at a press conference after the release of his report. "They are always difficult to deal with, but they also are relatively straightforward," Mr. Carney said. "There's a need to separate the assets and recapitalize the institutions that are going concerns and that can survive," Mr. Carney said. "Any country that faces those situations, it is always in its best interest and in the global economy's best interest that they're dealt with as quickly as possible."

Canada’s Lenders Become Easy Targets for Ottawa 'Bank Bashers'
Ahmad Golestani, a Vancouver taxi driver, is holding off repairing the leaky roof on his house after Royal Bank of Canada increased the borrowing cost on his line of credit last week. "When money’s tight, they raised the interest rate to more than 8 percent," said Golestani. "I’m very mad. I’m a good customer with a good credit rating." Canadian lawmakers, responding to complaints from consumers such as Golestani, are turning up the heat on the country’s banks. Some opposition politicians say the lenders may be "gouging" clients with credit-card rates as high as 20 percent when the Bank of Canada overnight rate is 0.25 percent. They want the government to impose limits on rates and fees as the economy falls into its first recession in 17 years. "The banks are very visible and when times are tough they’re very easy targets, especially Canadian banks, because they’ve weathered the storm very well," said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier Inc. in Toronto, which manages $2.4 billion including banks.

As many as three parliamentary committees in the Senate and House of Commons in Ottawa may hold hearings, including the finance committee. The U.S. is also probing credit-card fees, with President Barack Obama scheduled to meet bank executives today to push for lower rates. Finance Minister Jim Flaherty, who has pledged to impose a minimum grace period on credit-card purchases and improve disclosure, said yesterday he’s working on new regulations to protect consumers. "There are a number of issues we can address with respect to credit cards," Flaherty told reporters. The Canadian banks, ranked the soundest by the World Economic Forum, haven’t done enough to provide affordable credit, said Senator Pierrette Ringuette, who introduced a motion in January to review the fees. Ringuette said she was motivated by the banks’ lack of "response" to rate cuts by the Bank of Canada and rising credit-card charges on retailers. "They are overcharging consumers and they are overcharging the business community," Ringuette said. "It’s pure greed."

The Bank of Canada this week lowered its benchmark interest rate to a record low, from 4.5 percent in December 2007. At the same time, commercial lenders have been raising borrowing costs for some credit cards, lines of credit and other products. Royal Bank, Canada’s biggest bank, charges 19.5 percent for its Visa Classic card, up from 18.5 percent two years ago. The average U.S. credit card rate was 12 percent at the end of 2008, according to the U.S. Federal Reserve. Canadian regulators don’t track average card rates. Canadian Imperial Bank of Commerce said it raised rates on its credit lines by 1 percentage point this month, following increases by other banks. "We should put a cap on credit card rates," said lawmaker Thomas Mulcair, whose New Democratic Party is one of three in the legislature that hold the balance of power. "It’s all the more galling with the Bank of Canada rate at an all-time low and the credit-card rates have simply not followed."

The Canadian Federation of Independent Business, which has 105,000 members, has met senior bankers to vent their concerns that lenders aren’t doing enough to extend credit to businesses, said group president Catherine Swift. Redishred Capital Corp., a Mississauga, Ontario-based firm that’s seeking financing for acquisitions, "gave up" on the banks nine months ago after they declined to back the business, said Chief Financial Officer Jeffrey Hasham. Criticizing banks is nothing new in a country where the six biggest lenders account for about 90 percent of commercial bank deposits. "Consumers are concerned, so the political whims go back to Canada’s second-favorite pastime" after hockey, which is "bank bashing," said John Aiken, a bank analyst at Dundee Securities Corp. in Toronto.

The House of Commons finance committee study is expected by lawmakers to begin next month. Canada’s Competition Bureau is also probing possible anticompetitive behavior by credit-card rivals Visa Inc. and MasterCard Inc. The Canadian Bankers Association says the country’s commercial banks have increased lending amid the credit crisis. Consumer lending, excluding mortgages, rose 14 percent in February from a year ago while financing to businesses climbed 9.4 percent. The banks need to raise rates and fees for some products and clients to help manage risks as delinquencies and bankruptcies soar, the association said. Royal Bank regularly reviews its credit offerings to clients and may change rates to reflect their financial profile, spokeswoman Stephanie Lu said.

Banks have also lowered rates in some cases. Bank of Montreal cut its five-year variable mortgage rate to 3.05 percent on April 21. The banks’ prime rate, which determines borrowing costs on most credit lines, dropped by more than half in the last year, to 2.25 percent, the lowest since the 1930s. "The banks owe it to the Canadian public to continue to be standing and be stable and strong and have good risk-management practices," said bank group Chief Executive Officer Nancy Hughes Anthony. "That’s why we are now the envy of the world." Golestani, 62, says the banks’ high rates on credit lines aren’t helping revive the economy. "I should not pay as the banks get bigger and more profitable at a time that they should cooperate with people," he said.

UK car production down 51.3% in March
Car production in Britain was down 51.3 percent in March compared to a year ago, the Society of Motor Manufacturers and Traders said Friday, more evidence of the dramatic effects of the recession on the automaking industry. For the first four months of the year, production of cars is down 56.6 percent and output of commercial vehicles is down 63 percent below last year's levels, the society said. The government announced on Wednesday that it would join with manufacturers to offer cash incentives of 2,000 pounds to owners of cars more than a decade old who trade in on a new car. The program is set to begin in mid-May and run through March. While welcoming that plan, the group's chief executive, Paul Everitt, forecast that "it will be some months before we see any significant increase in output."

Borrowing puts UK's AAA rating in danger after Budget 2009
The prospect of the UK losing its AAA sovereign credit rating, resulting in higher interest rates for companies and households, moved a step closer after ratings agencies voiced fears about the UK's vast public debt burden. Moody's and Standard & Poor's are reviewing the UK's rating in light of the Chancellor's revelation in the Budget that national debt will reach £1.4 trillion over the next five years. Spain, Ireland, Greece and Portugal have already been downgraded. Arnaud Mares, lead analyst at Moody's for the UK, said: "Treasury projections that public sector net borrowing will remain above 5pc of GDP five years from now... are a cause for concern. This suggests that fiscal policy will have to be tightened much further than currently envisaged. The alternative would be that the Government chooses to live with a permanently higher debt burden which would likely have rating implications over time." A Standard & Poor's spokesman said: "We are looking at the details of the Budget and have no comment to make at this stage." Sources in the bond trading market claimed credit agencies were already stress-testing the UK again for a possible downgrade. "You have to assume the risk of a ratings downgrade has increased after this Budget. It is certainly much more likely than we thought a few months ago," said John Wraith, head of rates strategy at RBC.

Last November, Frank Gill, S&P's director of European sovereign ratings, said public debt above 60pc of GDP could undermine an AAA rating. At its peak in 2013, the Government is forecasting debt at 79pc of GDP. Economists last night raised concerns that the Chancellor's estimates for public borrowing over the next few years are still too low, adding to fears that the true risk of a downgrade has not been reflected in the Budget's figures. "A downgrade happened to Ireland and our net borrowing to GDP ratio is already approaching the levels seen there," said Howard Archer, chief UK economist at Global Insight. Jonathan Loynes, head of European economics at Capital Economics, estimates that the Chancellor will need to borrow £200bn this year – £25bn above the amount forecast by the Treasury on Wednesday. A ratings downgrade would be devastating for the economy, pushing up the cost of borrowing for the Government, which would then feed through to higher taxes and higher interest rates nationwide. Many investors are limited to trading in AAA bonds, and therefore a huge number could be dumped on the market in the event of a downgrade. Traders already expect long-term interest rates to rise as a result of the record level of gilt issuance to plug the black hole in the nation's finances, even without a downgrade.

According to the Debt Management Office (DMO), which issues the bonds on the state's behalf, gilt sales between now and 2013 will total an unprecedented £696bn. Deutsche Bank reckons the estimate is too low, predicting the markets will be flooded with £815bn of Government bonds. Marc Ostwald, fixed income strategist at Monument Securities, said: "The markets are running scared. If they are going to hit us with this supply, the market will push up yields. It will increase debt service costs and the Government will have to borrow more." This year alone, the issue of medium-term gilts has increased from an expected £32bn to roughly £70bn. The oversupply is raising fears that the DMO may struggle to find buyers, which itself could prompt a rating downgrade. Mr Mares said: "Another important assumption underpinning [the UK] rating is Moody's assessment that the Government does not face quantitative limits to its access to liquidity. [But] success depends on fickle notions such as market trust in the currency and the overall policy framework." Robert Stheeman, the DMO chief executive, has warned that "uncovered auctions are a possibility".

The DMO is resorting to new measures to avoid auction failures, as happened last month for the first time since 1995. It will syndicate £25bn of the £220bn being issued this year with pension funds in a move Moody's welcomed for "reducing execution risk in the delivery of a historically high borrowing requirement". City sources said syndication could herald a £94m bonanza for the investment banks running the process. Yields on 10-year gilts rose nine basis points to 3.52pc following Wednesday's 12-point increase, indicating that it will cost the Government more to raise the money it needs. Rising gilt yields also threaten to undermine the Bank of England's policy of quantitative easing – an attempt to reduce long-term interest rates and make corporate debt more affordable. The Bank is buying back £75bn and has the option of purchasing another £75bn from the end of June to help absorb the oversupply of gilts and so keep rates down.

British economy shrinks 1.9 percent in Q1
The British economy shrank in the first quarter at its sharpest rate since the early days of Margaret Thatcher's government thirty years ago as the financial crisis continued to wreak havoc on banks, retailing and manufacturing. In its first estimate for the January-March period, the Office for National Statistics said Friday that gross domestic product, or GDP, contracted by a massive 1.9 percent from the previous three month period -- the biggest drop since 2.4 percent posted in the third quarter of 1979. That was far more than the 1.6 percent decline posted in the fourth quarter of 2008 and above analysts' expectations for a more modest 1.4 percent drop. The latest decline means that Britain's economy has shrunk for three consecutive quarters and there are very few indications that things will improve in the near future. Compared with a year ago, Britain's GDP was 4.1 percent lower in the first quarter.

Earlier this week, the British government laid out the hope the economy will start to grow towards the end of this year but still forecast that output this year will shrink by a post-World War II record of 3.5 percent. The average postwar recession in Britain has lasted for around 15 months, which would, if replicated during this current downturn, mean that the economy will continue contracting until the autumn of this year. However, most economists think that this recession will last longer, and possibly last well into 2010. "It's early days yet, but the drop opens up the possibility of GDP in 2009 as a whole falling by even more than the 4 percent we currently expect," said Vicky Redwood, economist at Capital Economics. According to the International Monetary Fund's latest forecasts, Britain would likely be one of the worst hit economies because of its dependence on the housing and financial sectors.

The IMF is projecting that Britain's output will contract by 4.1 percent this year, much more than its previous forecast of a 2.8 percent decline. A more detailed look at the figures shows that the weakness in the economy was broad-based, with both services and manufacturing output sharply down in the wake of the banking crisis, the seizing up of lending and already-confirmed recessions around the world, from the U.S. to Germany and Japan. In a separate release, the statistics office did post some moderately good news. It said that retail sales during March rose by a monthly 0.3 percent, primarily because of higher food sales. The rise offered some cheer for the retail sector after grim figures for February revealed a worse-than-expected 1.9 plunge plunge in sales.

Is the UK once again the economic sick man?
by Martin Wolf

Is the UK once again the economic sick man? Or is it, as Alistair Darling, chancellor of the exchequer, argued in his Budget speech on Wednesday, just one of a number of hard-hit high-income countries? The answers to these questions are: yes and yes. The explanation for this ambiguity is that the fiscal deterioration is extraordinary, but the economic collapse is not. Let us start with the economy. According to the International Monetary Fund’s latest World Economic Outlook, the UK economy will contract by 4.1 per cent this year, followed by a further contraction of 0.4 per cent next year. This, it should be stressed, is far worse than the 3.5 per cent contraction in 2009 and 1.25 per cent expansion in 2010 forecast by the Treasury. The IMF puts forward the following forecasts for other big economies: -3.8 per cent in 2009 and 0.0 in 2010 for all advanced countries; -2.8 per cent and 0.0 for the US; -4.2 per cent and -0.4 per cent for the eurozone; -5.6 per cent and -1.0 per cent for Germany; and -6.2 per cent and 0.5 per cent for Japan. Thus, the UK’s forecast performance is close to the mean for all advanced countries and better than for Germany and Japan.

The striking feature, indeed, is that the worst-hit economies are not those of profligate, high-spending countries, such as the UK and US, but of prudent, high-saving countries, such as Germany and Japan. People in the latter tend to see this as unfair, because it is undeserved. Well, life is unfair. The serious answer is that the economic and financial health of sellers and creditors cannot be divorced from that of buyers and debtors. If customers are bankrupt, suppliers are likely to be in the same predicament. This is why Japan has suffered a collapse in manufacturing output comparable to that of the US during the Great Depression: a fall of 37 per cent since the start of 2008. Now turn to the fiscal position. The IMF forecasts the UK general government deficit at 9.8 per cent of GDP in 2009 and 10.9 per cent next year. In the UK Budget, the Treasury forecasts the general government deficit at 12 per cent of GDP, or over, in 2009-10 and 2010-11. This suggests that the IMF forecasts are much too optimistic. Whether it is equally over-optimistic about other countries’ fiscal positions I do not know.

In any case, the IMF forecast deficit for the UK for next year is the highest in the Group of Seven leading high-income countries. Only Japan, on 9.8 per cent, and the US, on 9.7 per cent come close. Meanwhile, Germany’s deficit next year is forecast at "only" 6.1 per cent of GDP. Moreover, the 8.3 percentage point deterioration in the UK deficit between 2007 and 2010 is also the highest in the G7, with only Japan (a 7.3 percentage points deterioration) and the US (a 6.8 percentage points deterioration) coming close. Not surprisingly, the UK is also forecast to have a relatively large deterioration in its net public debt, with a rise of 29 percentage points between 2007 and 2010 from 38 to 67 per cent of GDP. This time Japan, with a deterioration of 34 percentage points, is ahead, and the US, with 27 percentage points, just behind. But Germany’s rise is only 16 percentage points. Moreover, the UK’s net debt is forecast to continue to rise thereafter. It could well hit 100 per cent of GDP. So why has the fiscal deterioration been so severe in the UK, when the economic deterioration has not been? The obvious answer is that the sectors of the UK economy that have collapsed – housing and finance – are particularly revenue-intensive. As a result the ratio of current receipts to GDP is expected to shrink from 38.6 per cent in 2007-08 to 35.1 per cent in 2009-10 – a fall of 3.5 percentage points.

A deeper answer is that it is the countries where the debt-fuelled spending of the private sector was highest that have seen the largest swings in the balance between private income and spending. The shift in this balance in the UK’s private sector between 2007 and 2010 is forecast (implicitly) by the IMF at 9.6 per cent of GDP (from minus 0.2 per cent to plus 9.4 per cent). The swing in Germany, in contrast, is just 0.6 percentage points. When the private sector shrinks its spending relative to incomes, either the current account or the fiscal balance must shift in equal and opposite directions. The current account deficit always changes relatively slowly. It is hard to change the economy’s structure quickly. So it has been the fiscal position that has deteriorated massively. Thus, in the crisis-hit countries themselves, the consequence of the private sector cutback has been the fiscal deterioration. In the export-oriented countries, the result has been a massive contraction in exports and output. The huge fiscal deteriorations in the UK (and US) and the huge declines in manufactured output and exports in Germany and Japan are two sides of one coin. So where does this leave us? The answer is that the next leg in the crisis, for both sides, will come when (or if) the huge fiscal deficits themselves become unsustainable. This is the great economic peril that lies ahead – and not just for the UK.

Germany's slump risks 'explosive' mood as second banking crisis looms
A clutch of political and labour leaders in Germany have raised the spectre of civil unrest after the country's leading institutes forecast a 6pc contraction of gross domestic product this year, a slump reminiscent of 1931 and bad enough to drive unemployment to 4.7m by 2010. Michael Sommer, leader of the DGB trade union federation, called the latest wave of sackings a "declaration of war" against Germany's workers. "Social unrest can no longer be ruled out," he said. Gesine Swann, presidential candidate for the Social Democrats, said "the mood could turn explosive" over the next three months unless the government takes drastic action. While authorities have belatedly agreed to create a "bad bank" to absorb toxic loans and stabilise the credit system, further financial troubles are almost certainly in the pipeline. Swiss risk advisers Independent Credit View said a "second wave" of debt stress is likely to hit the UK and Europe this year as the turmoil moves from mortgage securities to old-fashioned bank loans.

A detailed "stress test" of 17 lenders worldwide found that European banks have much lower reserve cushions than US banks, leaving them acutely vulnerable to the coming phase of rising defaults. "The biggest risk is in Europe," said Peter Jeggli, Credit View's founder. Deutsche Bank has reserves to cover a default rate of 0.7pc, against non-performing assets (NPAs) of 1.67pc; RBS has 1.23pc against NPAs of 2.43pc, and Credit Agricole has 2.63pc against NPAs 3.64pc. None have put aside enough money. By contrast, Citigroup has reserves of 4pc against NPAs of 3.22pc; and JP Morgan has 3.11pc against NPAs of 1.95pc. "The Americans are ahead of the curve. European banks are exposed to US commercial real estate and to problems in Eastern Europe and Spain, where the situation is turning dramatic. We think the Spanish savings banks are basically bust and will need a government bail-out," said Mr Jeggli.

The IMF said European banks have so far written down $154bn (£105bn) of bad debts, or just 17pc of likely losses of $900bn by 2010. US banks have written down $510bn, 48pc of the expected damage. Analysts say America's quicker response has given the impression that US banks are in worse shape, but this is a matter of timing and "transparency illusion". Europe risks repeating the errors made by Japan in the 1990s when banks concealed losses, delaying a recovery. Europe's banks are exposed to a hydra-headed set of bubbles. They not only face heavy losses from US property, they also face collapsing credit booms in their own backyard and fallout from high levels of corporate debt in the eurozone. Mr Jeggli said the financial crisis was "front-loaded" in the Anglo-Saxon countries and Switzerland because their banks invested heavily in credit securities. As tradeable instruments, these suffered a cliff-edge fall when trouble began, forcing harsh write-downs under mark-to-market rules. It takes longer for damage to surface with Europe's traditional bank loans, which buckle later in the cycle as defaults rise. The ferocity of Europe's recession leaves no doubt that losses will be huge this time.

Fiat CEO 'astounded' by EC official's skepticism
Fiat Group CEO Sergio Marchionne said Friday that he was "astounded" by remarks from the European Union's industry commissioner expressing skepticism about the Italian automaker's ability to afford acqusitions. Fiat is in well-publicized negotiations to enter an alliance with the U.S. automaker Chrysler LCC with an April 30 deadline set by the U.S. government, while top German officials have said it was also in talks to take on General Motors' European operations, which includes Germany's Opel. Marchionne told analysts Thursday that Fiat had no direct talks with Opel to his knowledge. "Fiat is not the European automaker that is doing the best at the moment," EU industry commissioner Guenther Verheugen said on Bavarian Radio on Friday, adding that his first reaction to Fiat's reported ambitions was "surprise."

"I ask myself, where this indebted company will get the means to support two such operations at the same time," Verheugen said. Marchionne said he was "astounded by the tone and content" of the remarks, adding that the EU commissioner was not supposed to show national favoritism. Verheugen is German. "This is the second time in a matter of a few months that commissioner Verheugen has expressed views which have not been supportive of the auto industry, suggesting at some point that not all automotive houses will survive," Marchionne said in a statement. "These comments are not helpful to the ultimate goal of re-establishing a sound footing on which to build the future of this industry." Marchionne said that Verheugen should "engage in constructive dialogue ... rather than issuing death sentences for the industry, or unilaterally selecting who will survive."

Marchionne departed on Friday for the United States to continue talks aimed at completing the Chrysler deal, a Fiat spokesman said. The government deadline to seal a deal is just six days away. Under terms, Fiat would take a 20-percent stake of Chrysler in exchange for small car and other technology that will help widen Chrysler's palate fuel-efficient cars, as well as management support and entree into the European market. Marchionne has been firm that Fiat is not willing to put up cash for the equity, and that it would not take on Chrysler debt. Terms of any possible Opel deal are not known. German officials say other potential investors are in contact, including Magna International. Verheugen noted in the radio interview that Opel and Fiat are direct competitors, both operating primarily in the small car segment. He also said he would like to know how Fiat would imagine the structure a new company and which factories would be closed. Fiat has been making great inroads into the German market, where sales by more than 200 percent in March, thanks in large part to the German government's incentive program for people to scrap old cars and buy new ones.

Fiat Risks Indigestion
Is Fiat boss Sergio Marchionne the most realistic CEO in the auto sector, or the most deluded? Fiat's pursuit of consolidation -- with Chrysler and now perhaps General Motors' European operations -- to achieve scale makes sense. But Mr. Marchionne's claim that the worst of the auto makers' cyclical downturn is over looks seriously optimistic. Not to mention the idea that Fiat could manage such a complex set of assets after a deal. For Chrysler, Fiat has to conclude negotiations by April 30. Fiat's proposed initial stake, in return for technology transfer, has already been trimmed to 20% from 35%, raising the hurdle for Fiat to extract value from the deal.

Meanwhile, any value Fiat might get out of GM's European operations is dependent on what it's prepared to pay for a stake. If Fiat tries the same strategy as with Chrysler -- of paying in kind -- the downside is limited. And a linkup with GM's Opel and Vauxhall brands has industrial logic. Fiat, with Chrysler and GM Europe, would hit Marchionne's 5.5 million unit annual production target. Fiat and GM have continued to share vehicle platforms and engines since their troubled partnership was dissolved in 2005. And there's potential to slash capacity. Opel runs at just 68% utilization in western Europe, with excess capacity of 600,000 units, according to Royal Bank of Scotland.

The big risk is that Fiat's management will be sorely stretched trying to revive two troubled car makers on different continents while managing Fiat through the remainder of the global downturn. After all, Chrysler has already defeated both Daimler and Cerberus Capital Management. In the first quarter, Fiat swung to a 410 million euros ($544 million) net loss from a 405 million euros net profit in 2008. Government subsidy schemes will artificially boost demand in Europe, but there is a risk that sales turn down again when those run out of gas in 2010. Should that happen, the curse of Chrysler could strike again.

Chrysler's Looming Tag Sale
If the carmaker is forced to sell assets, as bondholders claim they want, what would Chrysler's Jeep, minivan, and Dodge truck lines go for? It's looking more and more like there's a bankruptcy filing in Chrysler's future—maybe as soon as next week. White House officials, Chrysler executives, and the banks holding the struggling automaker's debt all point to a strong likelihood that Chrysler will fail to win the concessions needed from debt holders and auto worker unions by Apr. 30 to merit additional loans from the U.S. Treasury. On Wednesday, Apr. 22, Michael Robinet, head of global forecasting for CSM Worldwide, said he placed a "95% likelihood" on a Chrysler bankruptcy filing. Behind that hard arithmetic is a calculation by the banks that they would do better selling Chrysler's assets in bankruptcy court than by taking a $1.5 billion deal being offered by Chrysler owner Cerberus Capital Management and Treasury, say officials close to the negotiations who spoke on background. The banks are led by Citigroup, Goldman Sachs, JPMorgan Chase, and Morgan Stanley, with some smaller banks and hedge funds involved as well. There has been some movement in negotiations. On Thursday the Treasury's auto task force proposed that banks holding $6.9 billion of Chrysler's secured debt—collateralized by hard assets such as factories, real estate, and brands such as Jeep—accept $1.5 billion and 5% equity in the company, according to sources familiar with the negotiations. But that's a long way from the $4.5 billion and 40% equity that bankers and private equity firms have been demanding.

Political pressure is being applied to the banks by the White House as well as by officials such as Michigan Governor Jennifer Granholm and members of Congress. They express outrage that banks that took taxpayer money from the Troubled Asset Relief Program would take such a hard-line position, which would jeopardize the U.S. auto industry and hundreds of supplier companies if Chrysler and/or General Motors (GM) go bankrupt. So far, the banks are dug in. But it wouldn't be easy to find buyers for Chrysler's dented assets if a sale were forced in the current economic climate. Here's an asset-by-asset valuation of what a broken-up Chrysler might be worth. By most accounts, Chrysler's Jeep brand is its most valuable asset. Jeeps, after all, are world renowned for their off-road ruggedness. But they're also gas-thirsty SUVs. Any company taking on Jeep is going to have a hard time meeting tougher fuel-economy and C02 emissions standards in the U.S. and Europe. Last year, Jeep sales in the U.S., the brand's biggest market by far, dropped 30% from the year before, to 334,000. (Globally, Jeep sold 497,000 vehicles.) Buy Jeep, and you get a sprawling, costly, unionized manufacturing complex in Toledo, Ohio. And customers have gotten used to seeing sales incentives on Jeeps as high as $10,000. The most likely buyers of Jeep would be Chinese automakers or Indian SUV/pickup maker Mahindra & Mahindra, which is planning to enter the U.S. next year with its own brand in more than 200 dealerships. "There is value there, but making a profitable business model internationally in this environment is going to be tough for a lot of automakers," says Gary Dilts, senior vice-president for global auto operations at J.D. Power & Associates (a unit of The McGraw-Hill Companies (MHP), as is BusinessWeek).

Meanwhile, Chinese automakers have taken a hard look at all the up-for-grabs U.S. auto brands—Hummer, Volvo, Saturn, even Chrysler when Daimler-Benz was shopping it to buyers in 2007. They haven't yet bought any. It's hard to go by recent transactions in finding a value for Jeep. Ford sold Jaguar and Land Rover to Indian automaker Tata Motors in March 2008 for $2.3 billion. But that was before the meltdowns of Wall Street and the credit market. More recently, GM has been trying to sell Hummer—for which it paid more than $1 billion in 1999—with experts estimating it will get about $150 million. In a good market, Jeep might fetch $4 billion, said one executive who works with auto companies on valuations and asked not to be identified because he is involved in other transactions. "But this is a total buyer's market, and there are very few buyers, so a market price is very hard to set." Chrysler has long dominated the minivan market with Dodge Caravan and Chrysler Town & Country—heck, the company basically invented them in the 1980s. It still holds 39% of the market. But minivans have been on a long slide: Only 592,000 were sold by all companies in the U.S. market last year, down from a peak of 1.37 million in 2000. Chrysler has had to offer huge incentives to maintain its hold on the market, discounting the vehicles by $10,000 and more. Over half of Chrysler's 124,000 Dodge Caravan sales last year were to rental and commercial fleets; most of that is not profitable. Nevertheless, Toyota and Honda keep increasing their share.

Families have increasingly been choosing SUVs and crossovers (SUVs built on passenger-car platforms instead of those of pickup trucks). Ford and GM have exited the minivan business. Hyundai is pulling out. And Nissan may leave as well. Volkswagen last fall launched the Routan minivan, which Chrysler builds for the German automaker by adapting its Chrysler Town & Country and allowing VW to slap its brand on it. VW has built more than 22,000 but has sold fewer than 5,600 so far. It will likely exit the business when its agreement with Chrysler expires. A buyer of Chrysler's minivan business would have to take on the Windsor (Ont.) unionized factory where the vehicles are built, and buy a transmission plant in order to keep building them, unless it shipped the tooling to a cheaper labor market. "There is so much overcapacity for factories for assembly, engines, and transmissions, and for a segment in decline, it is not all that attractive," says former Chrysler President Thomas Stallkamp, now a partner in private equity firm Ripplewood Holdings. On paper, the Dodge Ram pickup-truck business looks like it might be attractive. An all-new truck was launched last fall, and Car & Driver magazine pronounced it better than the Chevy Silverado and Ford F150. But with housing sales and starts so depressed and the general uncertainty about a rebound, there are few investors who want to enter the cutthroat arena of selling pickups against GM and Ford. That says a lot about how the truck market has shifted in recent years. "So goes the housing market, so goes pickup sales," says Mark Fields, Ford's president of the Americas. "A much bigger percentage of the truck business is going to the traditional work-truck contractor market, not the weekender so much anymore."

Last year, Dodge sold 246,000 Ram trucks, down 31%. Toyota, which has entered the full-size truck market with its bruising Tundra, is running into problems luring traditional pickup buyers. And Nissan, which launched the Titan pickup in 2004 with big expectations, has already said it is quitting the category. Instead of making its own pickup, it has contracted with Chrysler to supply a truck it can re-badge as its own. But Nissan executives say privately they have no interest in buying the whole truck business from Chrysler. "The pickup market is changing, and GM and Ford are going to be the ones to battle for it," says one Nissan official. "We'll let Toyota beat its head against that wall." Both the Chrysler and Dodge brands have little equity in the passenger-car marketplace, say industry analysts. Chrysler last year had a 2.5% market share. Dodge, including pickup trucks, had a 5.9% share. But even those figures are deceptive: Industry data show that almost 50% of Chrysler Sebring, Dodge Charger, Dodge Caliber, and Chrysler 300 cars that moved were low-margin or unprofitable sales to rental and government fleets. The industry considers a healthy level to be more like 15% to 20%. Worse, Consumer Reports did not recommend any Chrysler, Dodge, or Jeep vehicles in its 2009 buying guide—a clear statement for any would-be buyer.

If that's not enough to render Chrysler's car brands near worthless to potential buyers, the factories where those vehicles are made are all unionized. The big makers of small cars—Volkswagen, Toyota, and Honda—continue to build plants in the U.S. and Canada but do not want to buy union-organized plants. The Chrysler headquarters building is a spectacular sight from I-75 in Michigan. But the Auburn Hills edifice and its sprawling campus sit in the middle of one of the most economically depressed areas in the country. When the building was erected in the early 1990s, it was designed so it could be repurposed into a shopping mall without too much modification if the perennially troubled Chrysler should go out of business. But there is no interest in another shopping mall in a commercial corridor where unemployment and foreclosure rates are both above 20%, and one of the best-performing malls in the state, The Somerset Collection, sits 15 minutes away in Troy, Mich. Much will depend on what Fiat is willing to give up to get Chrysler, access to the U.S. market, and the $6 billion of U.S. government loans the White House has placed on the table. Fiat and Chrysler have a deal in place that calls for Chrysler to use Fiat's vehicles and engines as the basis for new vehicles.

Fiat, which would eventually own a majority stake in Chrysler, wants to build Fiats and Alfa Romeos alongside Chryslers and distribute them in the U.S. through Chrysler dealers. Executives with knowledge of the negotiations between the White House, banks, and Cerberus say there is a growing possibility the Treasury will provide debtor-in-possession financing that would allow Chrysler to enter Chapter 11 and reemerge with Italian automaker Fiat as an alliance partner. But even in that scenario the banks would have to be taken care of, and secured debt holders fare the best in bankruptcy court. Unless Fiat strikes a deal with the banks in bankruptcy court, the Italian carmaker could see some of the Chrysler assets it coveted sold off to other companies. On Apr. 22, Sanford C. Bernstein issued a report stating it believed Fiat may have to sell its CNH Global agricultural and construction-equipment unit to fund a partnership with Chrysler. That successful agricultural business has at times sustained Fiat while its auto operation rose or fell. That may be one road that Fiat CEO Sergio Marchionne—who would likely run Chrysler if a deal is reached—doesn't want to go down.

Regulators Fell One Bank, Spare a Rival
When federal regulators forced National City Corp. to sell itself in October, the head of another struggling bank right across the street watched from his office window as television crews swarmed. "That could be us," Robert Goldberg, AmTrust Financial Corp.'s chief executive at the time, recalls worrying. Both banks were reeling from real-estate loans made before the housing market crashed. Both had asked federal regulators for a financial lifeline from the Troubled Asset Relief Program. National City got the cold shoulder. The government threw billions of dollars at PNC Financial Services Group Inc. so it would buy the 163-year-old bank. AmTrust, however, got a second chance. In late February, regulators agreed to a turnaround plan proposed by AmTrust, according to people familiar with the matter, even though its capital was much thinner than its Cleveland rival's was last fall.

The starkly different fates of the neighboring banks show how the U.S. government's approach to dealing with the industry's worst crisis in a generation has shifted. The decision to allow only one of the two banks to survive has fueled criticism that regulators are picking winners and losers, without disclosing their criteria for making the calls. That, in turn, has shaken the confidence of bankers and private investors trying to decide whether to wade into the troubled sector. Government officials were "trying to make an example" out of National City, complains Cleveland Mayor Frank Jackson. "I don't want the same thing happening to AmTrust." Uncertainty about the condition of U.S. banks has roiled financial markets for months, prompting the Obama administration to take the controversial step of performing "stress tests" on the country's 19 largest banks. Government officials plan to begin meeting with banks on Friday to go over the results.

AmTrust's survival owes something to timing. Last fall, federal officials hoped that shoving the industry's weakest institutions into the arms of stronger banks, with financial aid from TARP, would solve the problem. Since then, it's become clear that shaky banks outnumber potential buyers. Now, the Obama administration is pinning its hopes largely on the creation of a public-private entity to buy bad assets from banks. The evolving strategy can be confusing even to banking regulators. The Office of Thrift Supervision, or OTS, which oversees AmTrust, recently told lawmakers it has been slow to take action on some troubled institutions because of uncertainty about what its parent agency, the Treasury Department, might do next.

National City, AmTrust and KeyCorp, another regional bank based in Cleveland, together established the city as a Midwestern banking center. The three banks had 51,050 employees at the end of 2007. As manufacturing slowed, they began looking toward faraway states to fuel growth. All three banks became nationwide mortgage lenders. That brought them big profits when times were good. Privately held AmTrust, founded in 1889 and majority-owned by Mr. Goldberg's family, branched into Florida and Arizona. National City expanded in Florida. When home prices tumbled and foreclosures ballooned in those two states, both National City and AmTrust were hammered. Last spring, National City executives and directors considered seeking a buyer. They decided instead to raise about $7 billion in capital from a group of private investors. Bank officials said the infusion made National City one of the best-capitalized banks in the U.S.

Meanwhile, AmTrust was under pressure from the OTS to shrink. The bank sold assets and eliminated hundreds of jobs. Executives told dispirited employees the restructuring would put AmTrust on solid financial ground. Behind the scenes, both banks were sinking deeper into crisis. As of last June 30, about 7.2% of loans at AmTrust, which had $16 billion in assets and about 70 branches, were classified as "noncurrent," meaning borrowers were behind on payments. About 2.8% of its loans had been written off as hopeless. By comparison, the average bank or savings institution had a noncurrent rate of 2% and a charge-off rate of 1.3% in last year's second quarter, according to the Federal Deposit Insurance Corp. By Labor Day, AmTrust was nearing a deal with private investors to pump hundreds of millions of dollars into the bank, according to people familiar with the matter. But the investors balked shortly after the federal government seized Fannie Mae and Freddie Mac, and Lehman Brothers Holdings Inc. sought bankruptcy protection.

National City, which had $144 billion in assets and more than 1,400 branches, didn't look quite as sick, although it was significantly worse off than the average institution. About 3.8% of the bank's loans were noncurrent as of June 30, and about 2.2% of loans had been charged off. As concerns grew about the health of many U.S. banks, the two Cleveland banks tried to reassure customers and regulators. National City executives grew alarmed that some trading partners were reluctant to do business with the bank, potentially threatening a crucial source of day-to-day funding, according to people familiar with the situation. AmTrust executives say their bank wasn't facing a cash crunch. But both AmTrust and National City advertised interest rates on deposits that were well above local averages, according to, which tracks deposit prices. That's a common tactic for banks struggling to attract and retain deposits, a key source of low-cost funding. AmTrust cut its rates later in 2008.

Congress's authorization of TARP in October offered a new glimmer of hope. In its original form, the rescue program called for the government to buy risky loans and other assets from banks, freeing up space on their balance sheets for new loans. Executives at National City and AmTrust were eager to participate. After consulting with federal regulators, they fleshed out plans to sell risky mortgage assets into the program at a loss. But in mid-October the Treasury announced it was revamping TARP. Instead of buying bad assets, it would inject hundreds of billions of taxpayer dollars into "healthy" banks. (KeyCorp eventually received such finds.) National City executives worried the emphasis on healthy institutions was likely to exclude their bank. Within days, U.S. Comptroller of the Currency John Dugan told CEO Peter Raskind the company probably wouldn't qualify for federal aid, say people familiar with the talks. The message: Find a buyer -- and fast.

On Oct. 24, National City announced that PNC was buying it for about $5 billion. The Pittsburgh bank received $7.6 billion in government funding in return for buying National City. Within hours of the shotgun marriage, Ohio politicians were howling that regulators had acted capriciously. They feared thousands of lost jobs. Clevelanders were rankled by the loss of a local institution to Pittsburgh. In a letter to then-Treasury Secretary Henry Paulson, Ohio Republican Sen. George Voinovich complained about "the lack of transparency" in how TARP money was being doled out. Without more clarity, Mr. Voinovich wrote, people will "start questioning whether Treasury officials are picking winners and losers." At congressional hearings and a rally in downtown Cleveland, politicians argued that National City didn't deserve to die. AmTrust's CEO, the 70-year-old Mr. Goldberg, didn't have much hope that things would turn out better for his institution. His family has run AmTrust since 1961, when his father, Leo, bought a controlling stake. Nine family members work at the bank.

In mid-October, AmTrust executives approached the OTS to express interest in getting a capital infusion from the federal government. AmTrust officials figured they would be eligible for as much as $295 million, according to people familiar with the matter. They were crestfallen by the agency's response: To get taxpayer money, AmTrust would have to raise an equal amount of capital from private investors. David Goldberg, Robert's brother and the company's co-chairman, says he knew immediately "that would be hard to do....The fact is, there's no outside capital." On Sept. 30, AmTrust's Tier 1 capital ratio, a closely watched gauge of a bank's financial health, had fallen to 5.4%. To be considered well-capitalized, banks need a ratio of at least 5%. By comparison, National City had a Tier 1 ratio of about 9.1%. Concerned about AmTrust's declining capital cushion, the OTS slapped the bank in November with a cease-and-desist order demanding that it increase its Tier 1 ratio to 7% within six weeks. It also barred AmTrust from making construction loans and certain mortgages, citing "unsafe and unsound banking practices."

Robert Goldberg fumed to colleagues that the order was unnecessary, since the bank had stopped making construction loans about a year earlier. Finding new outside investors "was a joke," he said at the time, concluding it would be impossible. OTS officials decline to comment on their oversight of AmTrust. "The OTS uses the same supervisory approach for all of its regulated institutions," a spokesman says. The agency was under pressure not to appear soft on the banks it supervised. Lawmakers and rival regulators had accused it of neglecting to clamp down on risky lending before the failure of such lenders as Washington Mutual Inc. and IndyMac Bank. One of the few things AmTrust had going for it was the backlash over National City. An Ohio agency created to help banks and insurers get federal aid arranged meetings between AmTrust executives and lawmakers. The Goldbergs bent the ears of lawmakers to whom they had donated money.

Republican Rep. Steven LaTourette, who received $4,800 in contributions from the Goldbergs the week National City was sold, offered to help AmTrust. An AmTrust spokesman says: "As demonstrated during the height of the nation's financial crisis, the congressman has been a strong advocate for jobs and growth for Northeastern Ohio." In a Dec. 2 meeting with Neel Kashkari, the Treasury official who heads the TARP program, Rep. LaTourette maintained that National City had been well-capitalized when it was forced to sell. "If you're going to screw one Cleveland bank, don't screw another," Rep. LaTourette recalls saying. Mr. Kashkari responded that Treasury only considers applications forwarded by federal regulators, and in AmTrust's case, the OTS hadn't formally recommended that it receive TARP money. On Dec. 1, as the capital-raising deadline neared, a senior AmTrust official sent a 7:30 a.m. email summoning about 100 employees to a meeting, where they were laid off. Other employees faced an across-the-board salary freeze. The Goldbergs took unspecified pay cuts.

Battered by defaults on large construction loans, AmTrust posted a net loss of $513 million in 2008. The bank's Tier 1 capital ratio sank to 4.9% as of Dec. 31. In early January, the FDIC began contacting banks to gauge their interest in bidding for parts of AmTrust, say people familiar with the matter. AmTrust wasn't aware of the FDIC activity, and executives submitted new plans to the OTS, hoping to win the bank more time to raise capital. On Jan. 27, Rep. LaTourette attended a White House reception held to give lawmakers a chance to mingle with President Barack Obama and top aides. Rep. LaTourette says he pleaded with an official, whom he won't identify, about AmTrust. Since then, the OTS has told AmTrust that it is willing to give the bank's restructuring strategy a chance to work, even if the bank can't attract additional capital, people close to AmTrust say.

AmTrust is reducing its assets and deposits by roughly one-third, selling branches, trimming its work force and launching a loan-modification program. "This isn't a plan they dictated to us," one top AmTrust executive says. "We came up with it, and they bought it." AmTrust executives say they've even talked to regulators about possibly selling bad assets through the government's planned public-private bank-cleanup initiative. The OTS won't say why it backed off with AmTrust. Asked about AmTrust, Tim Ward, the agency's deputy director in charge of examinations, said that the OTS tries to avoid shutting down banks "if you have the liquidity and the capital to work down the risk in your portfolios." Peter Goldberg, the 39-year-old son of co-chairman Gerald Goldberg, took over as AmTrust's CEO in March. "We have been implementing actions to significantly reduce the bank's risk profile," he says. Meanwhile, PNC is cutting about 4,000 jobs at the former National City. The Cleveland bank's name and logo will begin disappearing from branches later this year.

Industry Ignored Its Scientists on Climate
For more than a decade the Global Climate Coalition, a group representing industries with profits tied to fossil fuels, led an aggressive lobbying and public relations campaign against the idea that emissions of heat-trapping gases could lead to global warming. "The role of greenhouse gases in climate change is not well understood," the coalition said in a scientific "backgrounder" provided to lawmakers and journalists through the early 1990s, adding that "scientists differ" on the issue.
But a document filed in a federal lawsuit demonstrates that even as the coalition worked to sway opinion, its own scientific and technical experts were advising that the science backing the role of greenhouse gases in global warming could not be refuted.

"The scientific basis for the Greenhouse Effect and the potential impact of human emissions of greenhouse gases such as CO2 on climate is well established and cannot be denied," the experts wrote in an internal report compiled for the coalition in 1995. The coalition was financed by fees from large corporations and trade groups representing the oil, coal and auto industries, among others. In 1997, the year an international climate agreement that came to be known as the Kyoto Protocol was negotiated, its budget totaled $1.68 million, according to tax records obtained by environmental groups. Throughout the 1990s, when the coalition conducted a multimillion-dollar advertising campaign challenging the merits of an international agreement, policy makers and pundits were fiercely debating whether humans could dangerously warm the planet. Today, with general agreement on the basics of warming, the debate has largely moved on to the question of how extensively to respond to rising temperatures.

Environmentalists have long maintained that industry knew early on that the scientific evidence supported a human influence on rising temperatures, but that the evidence was ignored for the sake of companies’ fight against curbs on greenhouse gas emissions. Some environmentalists have compared the tactic to that once used by tobacco companies, which for decades insisted that the science linking cigarette smoking to lung cancer was uncertain. By questioning the science on global warming, these environmentalists say, groups like the Global Climate Coalition were able to sow enough doubt to blunt public concern about a consequential issue and delay government action.

George Monbiot, a British environmental activist and writer, said that by promoting doubt, industry had taken advantage of news media norms requiring neutral coverage of issues, just as the tobacco industry once had. "They didn’t have to win the argument to succeed," Mr. Monbiot said, "only to cause as much confusion as possible." William O’Keefe, at the time a leader of the Global Climate Coalition, said in a telephone interview that the group’s leadership had not been aware of a gap between the public campaign and the advisers’ views. Mr. O’Keefe said the coalition’s leaders had felt that the scientific uncertainty justified a cautious approach to addressing cuts in greenhouse gases. The coalition disbanded in 2002, but some members, including the National Association of Manufacturers and the American Petroleum Institute, continue to lobby against any law or treaty that would sharply curb emissions. Others, like Exxon Mobil, now recognize a human contribution to global warming and have largely dropped financial support to groups challenging the science.

Documents drawn up by the coalition’s advisers were provided to lawyers by the Association of International Automobile Manufacturers, a coalition member, during the discovery process in a lawsuit that the auto industry filed in 2007 against the State of California’s efforts to limit vehicles’ greenhouse gas emissions. The documents included drafts of a primer written for the coalition by its technical advisory committee, as well as minutes of the advisers’ meetings. The documents were recently sent to The New York Times by a lawyer for environmental groups that sided with the state. The lawyer, eager to maintain a cordial relationship with the court, insisted on anonymity because the litigation is continuing.

The advisory committee was led by Leonard S. Bernstein, a chemical engineer and climate expert then at the Mobil Corporation. At the time the committee’s primer was drawn up, policy makers in the United States and abroad were arguing over the scope of the international climate-change agreement that in 1997 became the Kyoto Protocol. The primer rejected the idea that mounting evidence already suggested that human activities were warming the climate, as a 1995 report by the United Nations Intergovernmental Panel on Climate Change had concluded. (In a report in 2007, the panel concluded with near certainty that most recent warming had been caused by humans.) Yet the primer also found unpersuasive the arguments being used by skeptics, including the possibility that temperatures were only appearing to rise because of flawed climate records.

"The contrarian theories raise interesting questions about our total understanding of climate processes, but they do not offer convincing arguments against the conventional model of greenhouse gas emission-induced climate change," the advisory committee said in the 17-page primer. According to the minutes of an advisory committee meeting that are among the disclosed documents, the primer was approved by the coalition’s operating committee early in 1996. But the approval came only after the operating committee had asked the advisers to omit the section that rebutted the contrarian arguments. "This idea was accepted," the minutes said, "and that portion of the paper will be dropped."

The primer itself was never publicly distributed. Mr. O’Keefe, who was then chairman of the Global Climate Coalition and a senior official of the American Petroleum Institute, the lobby for oil companies, said in the phone interview that he recalled seeing parts of the primer. But he said he was not aware of the dropped sections when a copy of the approved final draft was sent to him. He said a change of that kind would have been made by the staff before the document was brought to the board for final consideration. "I have no idea why the section on the contrarians would have been deleted," said Mr. O’Keefe, now chief executive of the Marshall Institute, a nonprofit research group that opposes a mandatory cap on greenhouse gas emissions.

"One thing I’m absolutely certain of," he said, "is that no member of the board of the Global Climate Coalition said, ‘We have to suppress this.’ " Benjamin D. Santer, a climate scientist at Lawrence Livermore National Laboratory whose work for the Intergovernmental Panel on Climate Change was challenged by the Global Climate Coalition and allied groups, said the coalition was "engaging in a full-court press at the time, trying to cast doubt on the bottom-line conclusion of the I.P.C.C." That panel concluded in 1995 that "the balance of evidence suggests a discernible human influence on global climate." "I’m amazed and astonished," Dr. Santer said, "that the Global Climate Coalition had in their possession scientific information that substantiated our cautious findings and then chose to suppress that information."


VK said...

I must say I do like Ambrose Evans and the Telegraph in general. They have some hard hitting commentary on Britain as well. Ambrose is merely there to please Europhobes. The Brits do a very good job of bashing their own economy and country. Anyone whose spent some time in the UK knows that the tabloids can be pretty nasty.

There's never been a worse time to be richCurrent estimates suggest that the 1,000 wealthiest people in the country have seen more than half of their cumulative wealth wiped out by the recession, from £412 billion in 2008 to around £200 billion today.

They include the steel magnate Lakshmi Mittal, the biggest faller of all, whose £33 billion fortune has shrunk to £9.5 billion; Charles Dunstone, the Carphone Warehouse founder, whose £904 million stake in the company is now worth around a third of that; and Sir Richard Branson, whose £2.7 billion fortune has been cut in half.

Sir Elton John is also among those hit by the recession, with his fortune falling 26 per cent from £238 million to £175 million. He is joined by Bono, who sees U2's fortunes diminished by £70 million.

We'll be lucky to get a bowl of soupIt has been said, not least by the Tories, who don't quite know what to do, that the rise in the top rate of tax to 50p is a ploy to distract us from the proposed borrowing of an incomprehensible £606 billion over the next four years.

The huge new debt is to pay the bribes to Labour's client state. In fact, the two are linked by their base politics, and in their destructiveness. Borrowing of that order will not merely beggar our children, and quite possibly their children too. It will also force up interest rates and harm people by that means. And the top rate of tax will not merely hit "the rich".

Many of those in Labour's core vote will soon find they are punished too when, in order to pay their extra taxes, "the rich" stop using the products and services provided by blue-collar workers, or simply move abroad. Every aspect of this Budget was designed to make Britain poorer.

Persephone said...

Happy Friday!

and one credit union
Sheila's crew is working overtime this week.

Erin Winthrope said...

Question: When to convert the T-Bills to cash?

What signs will tell me when it's time to cash-in my 1 month Treasury-Bills? I think I want to be holding physical cash prior to the impending cascade of big-bank failures.

Chaos said...

I know this isn't really an investment site, per se, but...

anybody feel that the recent lows in SRS are just, well, unbelievable? At 23 and change, I'm either looking at the greatest bargain in the history of the world or a sucker's bet...whaddaya think, smarties?

el gallinazo said...

Chaos Theory

After giving back about 20% of my winnings over the past couple of months, I have decided not to go long in anything and not to touch SDS (my preferred ultrashort) before June 1 at the earliest, come hell or high water. (I am expecting both).

Doom and Gloom Dad

I suggest you study Stoneleigh's primers. I really don't think you have a firm grasp where they are coming from. Also, 9 acres in Hawaii sounds like a serious asset to people living in the tent cities.

Rototillerman said...

Well, I had been guessing that 2-3 banks a week was all that the FDIC could handle in terms of personnel to cover the task, but then this week they stretch to four. Go figure.

EconomicDisconnect said...

Another great post. I am glad I am going on vacation for the next week, but I know I will have some serious reading to do when I return. My best for Ilargi and the well informed commenters here; rare to find such high content dialog.

Anonymous said...

el gallinazo, well if you won't be using your Stockcharts till then how about letting me borrow them? I got a great itch in the palm of my left hand and that's the one that says you will be getting money , it is isn't it?


Ilargi said...




when I posted, there was 1 failure, and they just kept going. note this from Sheila Bair tonight:

"We are past the crisis stage; I think we’re in the cleanup stage now[..] It’s going to take some time and everybody needs to be patient, and it is not going to be pretty."

Anonymous said...

Ah yes, Evans....

the day the guy ever says anything good about the rest of Europe will be the day the world as we know it has come to an end.

What I "don't get" is just how much "play" the guy gets though.

At best he belongs to the type of Brit who hasn't quite grasped that Britannia is not ruling the sea anymore, at worst he's an agitator and opportunist.

Anonymous said...

Just a thought on The Big Picture & reallocation of resources -

Africa to get anti-malaria nets

Unicef says there is enough money available to provide bed nets to everyone in Africa

VK said...

Satyajit Das's latest musings,


"Analysis of recent financial performance does not also take into account the underlying favourable current dynamics of the banking industry. Banks are currently beneficiaries of very low and, in some cases, zero cost of deposits. Banks also benefit from a sharply upward sloping yield curve that allows them to generate significant earnings from borrowing short and lending long. Banks have also benefited from subsidies and support from governments. They have also benefited from favourable changes in the fair value accounting treatment of securities. Banks have also benefited from sharply lower competition in most market segments.

Adjusting for these factors, it is surprising that banks haven’t actually performed better. (Me: ROFL at this point!!!)

VK said...

Manufacturing cliff diving, the Dutch win this one!On a side note, this is a very interesting article on the Indian Railway King, longish article but very interesting characters.

Only Bollywood does more to unite India than its railways. The statistics beggar belief: every year, Indians take 5.4 billion train trips, 7 million per day in suburban Mumbai alone. New Delhi Station sees daily transit of 350,000 passengers, which is roughly five times more than New York’s LaGuardia Airport, and enough to make Grand Central look like Mayberry Junction. The railways’ total track mileage rivals the length of the entire U.S. Interstate Highway system, even though the United States is three times the size of India. Among human resource problems, the railways of India are an Everest. Its employees outnumber Wal-Mart’s by a figure comparable to the population of Pittsburgh. The world’s only larger employer is the People’s Liberation Army of China. (The third-largest employer is the British National Health Service.)

My note: Indian Railways employs 2.4 million people and has 1 million pensioners. (A lesson for GM in management?)

Persephone said...


I usually wait until 9:00 pm Eastern before I get excited about the weekly closings - giving time for the verdict on West Coast banks.

Bair can spin that the "crisis" stage is over - I think we all know -it's only just begun.

Roto: I look to the FDIC to gain more personnel - they are going to need them to keep up. I haven't looked it up on, but I heard from someone in the FDIC, they are opening additional branches.

Anonymous said...


@ Doom and Gloom Dad

I suggest you read the article by Gillian Tett in today's batch.

Some credit is still available, true, but the instruments that enabled the bubble are flat, i.e. the overall money supply is decreasing. Housing will continue to drop.


Ilargi said...

Jeez, man, what planet is that?

Every dollar a bank loses takes on average some $10 of credit out of the market. Meredith Whitney's estimate is that $2.7 trillion in credit card lines will be retracted this year. Close to 90% of mortgages that do still pass are sold on the same day to the GSE's. Banks providing credit? They can't.

Stoneleigh said...

Rapier (quoting Doug Noland) yesterday,

It’s my view that the markets generally lead the economy – not vice-versa. If this stock market rally is sustained, I would expect the summer home selling season to surprise on the upside in many locations. When some semblance of confidence returns to housing markets, I would not be surprised to see some pent up demand positively impact auto sales. Anecdotally, it appears consumer Credit conditions are beginning to loosen – even in auto finance.

If we step back and ponder the unprecedented scope of today’s global fiscal and monetary stimulus, we shouldn’t be all that surprised by the fledgling reflationary forces observable both at home and abroad. I have labeled emerging dynamics the “Government Finance Bubble.” There is mounting evidence that this Bubble is developing critical mass and should be taken seriously.

I agree with Mr Noland. The dynamic he is talking about is the sort of thing that sustains a large-scale sucker rally for longer than people currently think possible. He's right that economic effects lag the markets, so that some of the on-going downside momentum in the real economy is a lagging effect of the decline that ended in March.

We could indeed see some upside in the real economy this summer when the rally is at its height, and perhaps for a while afterwards. Watch out beyond that though. The surprises this autumn should all be to the downside. Ultimately Mr Noland's scenario should prove relatively short-lived, but it could easily give us a care-free summer relative to recent times, remembering that humans only seem to have two modes - complacency and panic.

As always, resist getting too caught up in the mood, as pleasant as it could be. The crisis not only isn't over, it's barely begun. This is a false dawn, but depending on your circumstances you may be able to enjoy a little sunshine while it lasts.

Unknown said...

Does anyone have a suggestion for a good resource on the mechanics of the bond market? Specifically, I'm trying to fill out my understanding of how governments borrow.


Anonymous said...

found this graph, "The Double BubbleNew Housing and New Stocks, 1910-1934", on the comment section of Zero Hedge


el gallinazo said...


Reversing the negative fundamentals of this suckers rally is building up downside tension like winching up a crossbow. The release will be cataclysmic and rapid.

For myself, this is a sure bet, and will be the last opportunity in my life to make some money. This is the one time I am going to go past my "mad money" bets and even withdraw some T-Bills to short the market. I just hope that money will be worth something in 3-4 years.

Anonymous said...

hello... hapi blogging... have a nice day! just visiting here....

Gravity said...

WHO identifies pig-men as primary vector of swine-flu, all to be quarantined indefinitely.

el gallinazo said...

Ah yes, the pig-men. I believe that Ming the Merciless sired that race in the early episodes of Flash Gordon.

Gravity said...

Todays picture seems to provoke slight Hexakosioihexekontahexaphobia,
fear of the number 666, does this help to sell more malaria drugs? Did they intentionally use that number as a form of advertisement of medicines to religious folk?

Ilargi said...

New post up