Friday, May 1, 2009

May 1 2009: Overkill

Ben Shahn I’m waiting for my butler with the Chrysler... Summer 1938
Passing the time outside the bus station in Marion, Ohio

Ilargi: Look, I don't want to bore my readers with more on the same topic, but my question: "Why was Chrysler saved?" still goes unanswered. I sure don't know. So I looked into the field a little more.

Today's April sales numbers come in something awful again. No surprise there, really, by now. Still, the first thing that sticks out is that Chrysler was, not for the first time, the worst performer in the industry, with a 48% decline, according to numbers collected before yesterday's bankruptcy. As for total US car sales for April: Ford "estimated overall industry sales at slightly more than 800,000 vehicles". I think it's safe to assume that Ford would err on the side of more, so I’ll put the annual total sales at 9 million units. Mind you, I’m positive it'll be quite a bit lower. Trendlines speak volumes. But let's stick with the 9 million. And don't let's get into the fact that the US probably imports more vehicles than it exports. That could be a significant factor, don’t get me wrong, but I want to look at domestic production capacity today.

A November 2006 prediction by WardsAuto offers this graph:
They may be off by a few hundred thousand going forward, but for what I want to say, it doesn't even really matter. What does is that production capacity was still rising 18 months ago, expected to peak at 19.2 million vehicles, and declining to 18.8 units this year. You get the idea, don’t you? The capacity to make 18.8 cars with projected sales of -less than- half that. That's what we call overkill.

Chrysler's total American sales are in this funny little table from Wikipedia:

The first thing we notice, ah, but of course, is that in the past decade, which was filled with more cheap credit for more deadbeats than any other in history, Chrysler still managed to lose not just market percentage, but absolute sales. Not just some, but a whopping well over 40% of them. I must admit, that looks like a cheap horror movie. That's the sort of thing that takes a real effort.

Which must be why departing CEO Bob Nardelli feels so good about himself, why Daimler pays $600 million into a pension fund just to get the hell out, and why Cerberus gives up all of the $98 billion it paid 11 years ago. Wait till you see Nardelli's severance package publicized.

Now, if you combine the numbers, the projected 2009 production capacity is 18.8 vehicles, sales projections stand at 9 million units, Chrysler sold 1,45 million in 2008, and their numbers are down 48% from a year ago, meaning they'll be lucky to sell 800.000 cars. And if we turn back to that 18.8 million production capacity, and we subtract the 800.000 Chryslers, we end up with a nicely rounded 50% overcapacity for the 2009 American automobile sales sweepstakes. Without one single Chrysler vehicle on the market.

And how exactly does the Obama government plan to deal with that? What sort of economic recovery are these faith-based people looking for that would raise sales by 100% over the next few years? Just for fun, look at the stories of suppliers and parts-makers going broke by the dozen, a thousand dealers here and another thousand there closing their doors, you know, the trivial stuff. While spending $8 billion and "change" on Chrysler to "save", what is it, 35.000 jobs?, the administration causes the loss of at least as many in the periphery.

What's more, and I indicated this before, since Chrysler is only fighting General Motors and Ford for a few of the remaining jobs that will be left after half of the capacity is eliminated, then, in principle, every job saved at Chrysler is one lost at GM. Saving Chrysler may even well kill off General Motors as a going concern.

So once more: why did Obama save Chrysler?

Ilargi: Colin Hay from Australian band Men at Work, a remarkable voice that is instantly recognizable. They may be largely forgotten now, but they did sell some 30 million albums in the 1980's. That’s Madonna, Springsteen territory, close to Wacko J.. A nice detail is that their first album was refused more than once by their American label, and when finally released stayed at no. 1 in the US for 12 weeks(!). I picked this video because it has the best version of the song.

I don’t remember it being in the film, but it works anyway, since John Forbes Nash winning the fake Nobel for economics was controversial because of his mental illness. What should have been much more so was the blood flowing in rivers off Milton Friedman's 1976 prize. There are still people who think Economics is a true Nobel Prize. It is not. What it is, is a glaring sign that at the right price, anything is for sale. If you care to go back to why Alfred Nobel established the foundation that awards the prizes, you’d realize economics was never going to be in his vocabulary, and that he probably turned over face down in his grave one final time when Kissinger got the Peace Prize, one of the 5 Nobel actually IS responsible for.


I can't get to sleep, I think about the implications
Of diving in too deep, And possibly the complications
Especially at night, I worry over situations
I know will be alright. Perhaps it's just my imagination

Day after day it reappears
Night after night My heartbeat shows the fear
Ghosts appear and fade away

Alone between the sheets, Only brings exasperation
Its time to walk the streets, Smell the desperation
At least there's pretty lights, And though there's little variation
It nullifies the night From overkill

Day after day it reappears
Night after night My heartbeat shows the fear
Ghosts appear and fade away

I can't get to sleep, I think about the implications
Of diving in too deep, And possibly the complications
Especially at night I worry over situations
I know will be alright It's just overkill

Day after day it reappears
Night after night My heartbeat shows the fear
Ghosts appear and fade away

Morgan Stanley tries to blow up Borat's bank
Mention the word "Kazakhstan" to a trader in New York or London, and the image of Borat is likely to spring to mind. Right now, though, bankers have a second – more serious – reason to ponder the Central Asian country, aside from the putative mankini-wearing Kazakh traveller who featured in a comedy film. As the financial crisis virus has swept around the globe in recent months, Kazakhstan’s banking sector has been engulfed in turmoil. This is not just creating a headache for the Kazakh government and Western creditors, but also highlighting issues about the credit derivatives market that extend well beyond those far-flung steppes.

Take the case of Morgan Stanley’s dealings with BTA, Kazakhstan’s largest bank. A few years ago, BTA – like many of its Eastern brethren – was an up-and-coming darling of the capital markets world, with investment bankers furiously competing to float its bonds, provide loans, and much else. But earlier this year, when funding dried up for Kazakh banks, BTA fell under the control of the government. Initially BTA wanted to keep servicing its loans, and its creditors, such as Morgan Stanley, appeared happy to play along. But last week Morgan Stanley and another bank suddenly demanded repayment. BTA was unable to comply, and thus tipped into partial default. That sparked fury among some other creditors, and shocked some Kazakhs, who wondered why Morgan Stanley would have taken an action that seemed likely to create losses.

One clue to the US bank’s motives, though, can be seen on the official website of the International Swaps and Derivatives Association. One page reveals that just after calling in the loan, Morgan Stanley also asked ISDA to start formal proceedings to settle credit default swaps contracts written on BTA. For it transpires that while the US bank has a loan to BTA it also has a big CDS position on BTA, that pays out if – and only if – the Kazakh bank goes into default. Indeed, some of Morgan Stanley’s rivals suspect that notwithstanding its loan, Morgan Stanley is actually net short the Kazakh bank. As a result speculation is rife that Morgan might have deliberately provoked the default of BTA to profit on its CDS, since a default makes the US bank a net winner, not a loser as logic might suggest.

Morgan Stanley, for its part, refuses to comment on this speculation (although its officials note that the bank does not generally take active "short" positions in its clients.) And I personally have no way of knowing whether Morgan is short or long, since Morgan refuses to disclose details of its CDS holding. What is crystal clear is that somebody has been placing big bets on whether or not the banking equivalent of Borat will blow up. Right now more than $700m BTA CDS contracts are registered with the Depositary Trust & Clearing Corp in New York. Last year the BTA CDS contract was so liquid that banks and hedge funds were trading it as a proxy for Kazakh governent debt. Therein lies the crucial reason why the world outside Kazakhstan should note what has happened to BTA. In some respects, the fact that BTA has spawned so much CDS activity has been rather good for Kazakhstan.

After all, if banks such as Morgan Stanley had not been able to hedge their positions in recent years, they might never have provided finance on such a scale to BTA - or any other emerging market banks. Or, to put it another way, if CDS contracts did not exist, Western banks such as Morgan Stanley would now be nursing big losses at BTA, rather than ending up flat (or even making a profit.) But the rub for regulators and investors is that BTA credit risk has not entirely disappeared: somebody right now is holding the other side of Morgan Stanley’s contracts and unfortunately there is little way for outsiders to know exactly who. Worse, the presence of those CDS contracts makes it fiendishly hard to work out what the true incentives of any creditors are. In theory, lenders should have an interest in avoiding default.

In practice, CDS players do not. The credit world has become a hall of mirrors, where nothing is necessarily as it seems. At best, this makes it very difficult to tell how corporate defaults will affect banks; at worst, it creates the risk of needless value destruction as creditors tip companies into default. Either way, the key point to grasp is that this is not just a Kazakh tale. After all, investment banks and hedge funds have written vast volumes of CDS contracts on western names too. And while the corporate default rate has been low in recent years, it is rising fast. What is playing out at BTA, in other words, is merely a foretaste of what awaits part of the Western corporate scene too. Call it, if you like, the new face of financial globalisation, albeit one that is unlikely to look quite as funny as those Borat jokes, as companies and investors finally wake up to the implications of this deceptive new credit world.

Stop Thinking The 30% Stock Rally Means The Bear Market Is Over
Now that stocks have rallied nearly 30% off their low, pundits agree: It's a new bull market.  So be very afraid. Market punditry is a lagging indicator, not a leading one.  Pundits are excellent at describing what has happened, not what is going to happen.

But doesn't the 30% rally off the bottom obviously mean that the bears are fools, that it's finally safe to get back in the water?  No.  It doesn't obviously mean anything.  Take a look at the charts below, from Doug Short.  (Check out the interactive version here >)

First, the "mega-bear quartet"--an overlay chart of the bears that began with the DOW in 1929, the NIKKEI in 1989, the NASDAQ in 2000, and the S&P in 2007.  The last one, the current bear, is the blue line. The horizontal axis is time from the peak, measured in years.

If you're feeling confident that the 30% rally means that happy days are here again, take a look at the humongous rallies in the NIKKEI (red) and NASDAQ (green) that happened at this point in the process.  Then look at what happened afterward:


If that doesn't sober you up, check out the extended dance remix of the same chart, lasting 19 years instead of 10.  It doesn't get much better:


But, yes, you're right, it's also possible that the recent rally is the start of a Great New Bull Market.  Bear markets have always ended eventually (though Japan's hasn't yet).  Here's Doug's snapshot of the past hundred years of bear markets, as well as a slide show showing the details how each one ended:


You can click through a slideshow showing each of these periods in detail here >

Why Are Bankers Still Being Treated As Beltway Royalty?
During Wednesday night's press conference, President Obama said that he's been "sobered by the fact that change in Washington comes slow" and "humbled by the fact that the presidency is extraordinarily powerful, but we are just part of a much broader tapestry of American life and there are a lot of different power centers." Well, one of those different power centers -- the entrenched special interests that continue to call so many shots on Capitol Hill -- is the main reason change in DC comes so slow. This, of course, will not come as news to anyone who has paid even the briefest attention to Washington over the last 30 years. Indeed, I've been writing about it for over a decade. But despite all that I know about the reform-killing power unleashed by the nexus of lobbying, campaign cash, and legislation, I have been flabbergasted by the amount of behind-the-scenes influence recently being wielded by the banking lobby.

Just this week, the bankers and their lobbyists -- who you might have reasonably thought would be the political equivalent of lepers in the halls of power these days -- have kneecapped substantive bankruptcy reform in the Senate, helped pull the plug on a government-brokered deal with Chrysler, and tried feverishly to throw up a roadblock in the way of credit card reform in the House. You heard me right. America's bankers -- those wonderful folks who brought us the economic meltdown -- are still being treated as Beltway royalty by those in Congress. According to Sen. Dick Durbin, the banks "are still the most powerful lobby on Capitol Hill. And they frankly own the place."

When it comes to reforming our financial system, we are truly through the looking glass. I mean, since when did it become "to the vanquished go the spoils"? How do the same banks that have repeatedly come to Washington over the last eight months with their hats in their hands, asking for billions to rescue them from their catastrophic mistakes, somehow still "own the place"? But the banks continue to be rewarded for their many failures. Let's start with bankruptcy reform. The banks scored a lopsided victory on Thursday when the Senate rejected an amendment that would have allowed homeowners facing foreclosure to renegotiate their mortgages under the guidance of a bankruptcy judge. The measure would have helped 1.7 million homeowners keep their houses, and preserved an additional $300 billion in home equity.

Given the tidal wave of foreclosures that have so destabilized our economy, this seems like a no-brainer piece of legislation. There were over 800,000 foreclosures in the first three months of 2009 -- more than 341,000 in March alone. But the banking lobbyists went after it with guns a-blazing - even after Durbin and the measure's other backers seriously diluted the bill. These concessions did nothing to sway the Mortgage Bankers Association (whose members' subprime schemes have helped bring us to the point of collapse), the Financial Services Roundtable, and the American Bankers Association, among other hired guns. And their aim was true -- and deadly. Heading into the vote, those pushing for reform hoped to gather the 60 supporters needed to bring the cramdown amendment to a final vote. Instead, Durbin struggled to find 45 Senators willing to side with consumers. The final tally: Bankers 51, Consumers 45.

Twelve Democrats sided with the banks -- Max Baucus, Michael Bennet, Robert Byrd, Tom Carper, Byron Dorgan, Tim Johnson, Mary Landrieu, Blanche Lincoln, Ben Nelson, Mark Pryor, Arlen Specter, and Jon Tester -- as did every Republican who voted. As HuffPost's Ryan Grim reported, some of the key Democrats who voted against the measure have been on the receiving end of major banking industry campaign contributions:
The banking and real estate industry have funneled roughly $2 million into Landrieu's campaign coffers over her 12-year career, according to data from the Center for Responsive Politics. The financial sector is Nelson's biggest backer; he's taken $1.4 million from banks and real estate interests... Tester has fielded roughly half a million in his two years in office. Lincoln has taken $1.3 million from banking and real estate interests.
In the run-up to the vote, Durbin called it a "test": "Who is going to win this debate?" he asked. "The mortgage bankers and the American Bankers Association or the consumers across America?" We just got our answer. The shocking swagger of those in the financial sector was also evident in the negotiations that resulted in Thursday's announcement that Chrysler would file for Chapter 11 bankruptcy. For much of the back-and-forth between Chrysler, its lenders, and the Treasury Department, those lenders (comprised of banks, including Goldman Sachs, Citigroup and JP Morgan -- all recipients of bailout money -- and private equity firms) were playing hardball. They repeatedly rejected attempts by Treasury to get them to lower the amount of Chrysler's debt.

The car company owes its creditors $6.9 billion. Treasury proposed that the banks and private equity firms accept 15 percent of what they are owed. The creditors scoffed at that and suggested they'd settle for getting 65 percent of what they are owed (around $4.5 billion), plus a 40 percent stake in Chrysler and a seat on the company's board. Picture this for a moment. On one side you have the Treasury, which has helped funnel tens of billions of dollars to these banks, making what it considers an equitable proposal. On the other side, you have the bankers, the recipients of that government largess, showing their gratitude by scoffing at Treasury's proposal and demanding a much, much better deal. Clearly, Goldman has gotten way too used to sweetheart deals like the 100-cents-on-the-dollar payout it received as part of the AIG bailout.

Treasury eventually upped the proposal to $1.5 billion (22 percent of what the creditors were owed) and a 5 percent equity stake in the carmaker. Again the bankers scoffed, before finally, at the 11th hour, agreeing to accept $2 billion (around 29 percent) and a small equity stake. A Treasury official took a victory lap, calling the deal "an exceptional accomplishment in line with the President's firm commitment that all stakeholders sacrifice to make this deal succeed." Then the 12th hour arrived and the hedge fund managers, who hold around 30 percent of the Chrysler debt, decided they didn't want to sacrifice that much after all and refused to sign off on the deal -- even after the offer was sweetened with an additional $250 million.

At least the hedge funds had not improved their balance sheets with billions in taxpayer dollars and government loan guarantees before scuttling the deal. As for credit card reform, the House's resounding 357-70 passage of Carolyn Maloney's Credit Card Holders' Bill of Rights would seem like a rare defeat for the banking lobbyists who furiously opposed it. But a number of elements of the legislation demonstrate that even when the bankers lose, they still win. For instance, despite the desperate urgency of the situation, all but one of the consumer-friendly provisions of the bill won't take effect for a year. And the bill doesn't contain any cap on credit card interest rates -- an amendment to cap rates at 18 percent never got any traction.

And, of course, the bankers will get another crack at derailing credit card reform when the Senate takes up its version of the bill, sponsored by Chris Dodd, later this month. So no matter how badly the banking industry fails and how much its failures cost us, it continues to be Washington's 800 lb gorilla -- and the greatest risk to Barack Obama's presidency. At his press conference, Obama bemoaned the fact that he "can't just press a button and suddenly have the bankers do exactly what I want." It's too bad the same can't be said for the bankers, who keep pressing Congress's buttons, and getting pretty much what they want.

US vs Europe: Who is the Welfare State?
Today is May Day, and while International Workers’ Day (Labour Day in the UK), means little in the USA, its a big holiday in Europe. Banks and markets are closed on the continent, (England celebrates on Monday). Speaking with Mike Panzner this morning (his clients are mostly Europeans) made me think about this:  Which region is the true Socialist state?
  • Europe has cradle to grave health care plans, generous unemployment benefits, and free or subsidized college costs.
  • The US gives away public assets (oil, gas, mineral rights)  for pennies on the dollar, has huge subsidies and tax breaks, and bails out reckless speculators.
It turns out that both regions are welfare states — only in Europe, the natural population (i.e., people) is the recipient, while in the US, the corporate population is the beneficiary. Food for thought . . .

U.S. to Release Stress-Test Results on May 7
The Federal Reserve and Treasury Department plan to release results of their tests assessing the health of the country's 19 largest banks on Thursday, later than had been previously planned. Regulators are expected to disclose potential loss estimates for each individual bank, a government official said. In addition, the results will be tallied across the banks to give the public a better picture of the health of the banking industry. U.S. officials will disclose the loss estimates for certain loan categories and the banks' ability "to absorb those losses" under more-adverse economic scenarios.

The results were pushed back several days as federal regulators and the banks have continued to debate the results. Several banks, including Bank of America Corp. and Citigroup Inc., have challenged the government's findings. The results are expected to show that several banks may need more capital, or a higher quality of capital, in order to continue lending if the economy worsens through 2010. Government officials have said that any requirement that a bank improve its capital standing does not mean the government thinks the bank is going to fail. In fact, the government has said it would not allow any of the 19 banks undergoing the test to fail.

In order to improve their capital standing, banks will have the option of raising capital from private investors, borrowing more capital from the government, or converting existing government investments into common stock. Exactly how the stress tests would be unveiled has been unclear since February, when the Obama administration announced plans to conduct a thorough exam of the banking industry's ability to continue lending under tough economic conditions. A smooth release is a critical component of the effort, which is designed to restore confidence in banks. Government officials originally hoped to release the results on May 4, but that plan was delayed as the discussions with banks intensified. The plan now is to release the results late in the afternoon on May 7.

Individual "stress tests" may be unveiled
U.S. officials are leaning towards announcing the "stress test" results of individual banks next week instead of just summary results, a source familiar with administration talks said on Thursday. The markets are anxiously anticipating the results and the banks' recapitalization plans, which could dilute common shareholders at some firms. Regulators are expected to encourage some of the banks to boost their capital buffers by converting preferred shares to common equity. The source, speaking anonymously because talks are ongoing, also said officials will likely release the capital requirements of the 19 financial firms at their holding company level, not just the needs of their banking units.

Some of the banks being tested, such as Bank of America, have large non-bank subsidiaries that were included in the assessments, the source said. Regulators have stress-tested the 19 largest U.S. banks to determine their capital needs should economic conditions deteriorate further. The source said the announcement of the results has been pushed back, possibly to May 6. The plan on exactly how to release the results "is not very far along," the source said, adding that regulators are looking to disclose a lot of supervisory information about banks that is usually kept confidential. The information has the potential to alarm investors and send certain bank stocks lower, depending on how large the capital needs are found to be.

Officials have said banks will be encouraged to turn to their own stakeholders first to build capital by extending conversion offers to their preferred shareholders. Regulators are putting more emphasis on common equity, because they say it is more flexible and can absorb losses better than other forms of capital. Conversion offers lessen the chances government officials will have to seek more bailout funds from Congress in the near future. The pain for equity holders could be balanced by an overall stabilization in the banking sector if officials reiterate their promise to stand behind the 19 firms, said Lou Crandall, the chief economist at Wrightson ICAP.

"Clarifying exactly how the bank holding companies as a whole will be recapitalised can be a positive for debtholders and the system as a whole, while still being a negative for shareholders and holders of equity," Crandall said. The stress-test program has evolved since the Treasury Department announced in February that it was embarking on the exams as a way to learn what additional help the top banks might need. Officials said back then that the banks would learn how much extra capital regulators wanted them to have, and then the firms would have six months to raise that amount in the private market or could tap a new government capital facility.

Since then, the market appetite for the results has reached a fever pitch, forcing the Treasury Department to rethink its plan to keep detailed results of individual banks private. The source said officials are well aware of the market's sensitivity to the information, evidenced by the punishment some bank stocks have endured from leaked reports of the results and outside analysts' versions of the tests. "We're now talking about a process that's as much a public relations exercise as it is divulging information regarding the financial health of the 19 largest banks," said Kevin Petrasic, who served at the Office of Thrift Supervision from 1989 to 2008 and is now an attorney at law firm Paul Hastings in Washington.

The government gave their preliminary results to the banks last Friday, and regulators are now negotiating the results and any capital recovery plans with the banking companies. One point of contention is how to disclose information that is supervisory in nature and not generally designed for market consumption. Petrasic says many times the information that examiners work with is specific to an institution's portfolios and should not necessarily be used to gauge the health of the banking system. "Once you try to take that information and extrapolate it, it gets very complicated and it's dangerous," he said. The institutions undergoing stress tests include Citigroup Inc, Bank of America, Goldman Sachs Group, JPMorgan Chase, Morgan Stanley, MetLife, Wells Fargo, PNC Financial Services Group, US Bancorp, Bank of NY Mellon, SunTrust Banks, State Street, Capital One Financial, BB&T, Regions Financial, American Express, Fifth Third Bancorp, KeyCorp and GMAC.

Stress-Test Results Are Delayed as Examiners, Banks Wrangle Over Findings
The Federal Reserve is postponing the release of stress tests on the biggest U.S. banks while executives debate preliminary findings with examiners, according to government and industry officials. The results, originally scheduled for publication on May 4, now may not be revealed until toward the end of next week, said the people, who declined to be identified. A new release date may be announced as soon as today, they said. Regulators and bank executives are concerned about how the disclosure is handled because weaker institutions could suffer a collapse in their stock prices. "Everybody understands they’ve got a tiger by the tail here," said Mark Tenhundfeld, a senior vice president at the American Bankers’ Association in Washington. "If they don’t let him go gently, there will be a lot of mauling going on."

The 19 firms 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. The banks in the test hold two-thirds of the assets and more than half of the loans in the U.S. banking system, according to a Fed study released April 24. Regulators are pushing higher minimum capital levels for the banks to determine whether they can survive a worsening recession. Officials favor tangible common equity equal of about 4 percent of a bank’s assets and Tier 1 capital worth about 6 percent, according to people familiar with the tests of the largest 19 banks. Financial institutions received preliminary results and are being judged on whether they need more capital to ensure they stay above those levels. Earlier in the process, regulators discussed a TCE target of 3 percent, said two people with knowledge of the deliberations.

The Fed, which oversaw the stress tests, wants common equity to be the "dominant" element in a bank’s primary capital, according to a central bank report on the test methodology released a week ago. TCE is a measure of a bank’s financial health that excludes intangible assets such as brand names that can’t readily be used as payments. Investors and analysts have focused on the TCE ratio as a more accurate benchmark of a bank’s ability to absorb losses. Tier 1 capital is a broader measure of bank health that is commonly used by regulators. Regulators typically look at risk- weighted assets when assessing banks’ financial strength. The Standard & Poor’s 500 Financials Index, which comprises 80 companies, is up 30 percent in the past month as officials played down the prospect of nationalization and the economy showed signs of stability. Shares of Goldman Sachs are up 28 percent over the same period and JPMorgan Chase & Co. has rallied 33 percent.

"One thing the stress tests will do is herald a fundamental shift in approach toward the financial system," said Stephen Stanley, chief economist at RBS Securities Inc. in Greenwich, Connecticut. Initially, Stanley said, the Treasury’s Troubled Asset Relief Program treated all banks equally. "Now, finally, there is going to be differentiation. Some banks will get a clean bill of health and others will not," he said. The Fed led the stress tests, using as many as 140 staff members working in consultation with 60 people from other bank oversight agencies. While the banks were ordered not to release the results of the stress assessments prematurely, Goldman Sachs yesterday may have provided a hint with its decision to sell bonds and shares, issuing $2 billion in five-year notes without a government guarantee and making a $750 million stock offering. A spokesman for Goldman Sachs declined to comment.

"You can read between the lines on it that nothing adverse will be coming out next week" about Goldman Sachs, said Ralph Cole, a money manager at Portland, Oregon-based Ferguson Wellman Capital Management Inc., which oversees $2.2 billion. At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests, people briefed on the matter said this week. While some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, the people said. By pushing conversions, rather than federal assistance, the government would allow banks to shore themselves up without the political taint that has soured both Wall Street and Congress on the bailouts. The risk is that, along with diluting existing shareholders, the government action won’t seem strong enough.

Treasury Secretary Timothy Geithner told U.S. lawmakers yesterday that there is no need for new bank bailout money as of now, said Senate Budget Committee Chairman Kent Conrad.
"He said ‘no, not in the foreseeable future and they’re hoping not at all’," Conrad, a North Dakota Democrat, said in an interview after Democrats held a closed meeting with Geithner in Washington. Geithner has said that banks can add capital by a variety of ways, including converting government-held preferred shares dating from capital injections made last year, raising private funds or getting more taxpayer cash. With regulators putting an emphasis on common equity in their stress tests, converting privately held preferred shares is another option.

Bank of America Owners Declare War on Taxpayers
The votes are in at Bank of America Corp. And the message to America is unmistakable: It’s them versus us. The big news from Bank of America’s annual meeting this week was that a majority of shareholders are content with the performance of the company’s directors. All 18 of them, including Chief Executive Officer Kenneth Lewis, were re-elected with at least 63 percent of the votes cast. All except Lewis and lead director Temple Sloan got more than 72 percent. This outpouring of satisfaction leads to a question surely on many good citizens’ minds: What in heaven’s name could the geniuses who voted for these people have been thinking? The same goes for the shareholders who cast their ballots last week to re-elect all of Citigroup Inc.’s directors, each with more than 70 percent of the vote. Even Citigroup’s CEO, Vikram Pandit, got a decisive majority.

Almost two years into America’s great financial fondue, we still haven’t tamed our nation’s systemically dangerous banks. That’s not just the fault of captive banking regulators, or cash-craving congressmen, or willfully blind credit-rating companies, or the people who run the banks. The shareholders who own the banks are just as much to blame. Sure, Lewis is now out as chairman of Bank of America’s board, after a bare 50.3 percent of votes were cast in favor of splitting the bank’s chairman and CEO positions. Yet far from a revolt, this was more like throwing the bums in. Lewis’s replacement as chairman, Morehouse College President Emeritus Walter Massey, has been on the bank’s board since 1998. Doing what, exactly, is far from apparent.

These votes were the best chance we had for a taste of accountability at Citigroup or Bank of America, which together have received $90 billion of taxpayer bailout money. The banks’ shareholders rose to the challenge by flipping us all the bird. It’s not as if anyone was asking them to place the country’s needs ahead of their own. No, the worst part is that so many of them were too lazy or stupid to vote in their own best interests. Who in their right mind could be satisfied with the boards of Citigroup or Bank of America, which in the past year have destroyed most of their stock-market value, crawled like beggars in search of government rescue money, and turned their brand names into household curse words?

There are some logical, if cynical, explanations. Perhaps some shareholders feel fortunate to have anything left of their stakes at all, and decided to reward the banks’ directors for driving such hard bargains with the taxpayers. Or maybe a bunch of institutional investors that do business with the banks, such as brokerage firms that vote their customers’ proxies, chose not to risk retaliation by rocking the boat. The good-governance pundits say we should take note of all the votes withheld from the companies’ board members as a sign of restlessness. Charles Elson, the oft-quoted director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, told a Bloomberg News reporter that the size of the opposition to Lewis and Sloan "symbolizes the deep level of discontent with the management of the company" and that shareholder activists had "made their point."

The main point I see, however, is that the majority of these banks’ shareholders need to have their heads examined. They have to know they face even more dilution of their stakes because the banks probably don’t have enough capital to avoid returning to the bailout trough. And Bank of America’s shareholders must remember how Lewis’s board royally hosed them in December, by not disclosing the 11-figure losses at Merrill Lynch & Co. until after the purchase of Merrill was completed. Or maybe not. I’m all for shareholder rights and protecting investors from wayward managers and boards. This time, however, the investors needing protection are the American people, who seem destined to become the majority owners of these banks. The rest of the shareholders at Citigroup and Bank of America are lucky they haven’t been wiped out already. They certainly deserve to be now.

Cuomo to Expand Pension Probe to Unregistered Agents
New York opened a new phase of its investigation into pension-fund corruption by probing the role of unregistered and unlicensed agents who seek the investments, state Attorney General Andrew Cuomo said. The state is issuing more than 100 subpoenas to investment firms and their agents, officials said today at a press conference. It’s the latest step in a broadening investigation into alleged kickbacks to officials in return for pension-fund business. So-called placement agents with few exceptions ought to be registered with the U.S. Securities and Exchange Commission, Cuomo said. As many as half the agents working with the $122 billion state pension fund are unregistered, he said.

"The troubling pattern of unlicensed agents highlights yet another systemic weakness in New York’s pension fund, creating a situation which is fraught with peril and prone to abuse," Cuomo said in a statement. Additional regulation is needed to close "loopholes" in present rules, the attorney general told reporters. "Every time we do another fact pattern, we learn another loophole," he said. Cuomo said his office is working with the SEC and state officials across the country to combat "corruption and abuse of pension funds." He said he planned to confer by phone today with attorneys general in other states.

Chrysler’s 48% Drop in Sales Is Industry’s Worst
Chrysler said Friday that its sales fell 48 percent in April, the steepest drop in the industry, as the company descended into bankruptcy. But the company said it sold 11,400 cars and trucks on Thursday, the day it filed for bankruptcy, when President Obama urged Americans to buy a vehicle made by Chrysler or the other Detroit carmakers. "We closed a lot of deals after the fact," Steven J. Landry, Chrysler’s executive vice president of North American sales, said. "Our showrooms were busy last night. Dealers said customers came into the showroom and bought a car based on President Obama’s speech." The Ford Motor Company, which reported a 31 percent sales decline for the month, estimated overall industry sales at slightly more than 800,000 vehicles, down from 857,735 in March. Ford and General Motors estimated the year-over-year decline at roughly 35 percent.

G.M., despite national attention on its financial troubles, said its April sales, though down 34 percent from a year ago, were up 11 percent from March. Toyota was among those that had a more dismal month than anticipated. The Japanese carmaker said its sales dropped 42 percent from April 2008. Nissan said its sales fell 38 percent. Honda, in contrast, reported just a 25 percent decline. Ford and G.M. were helped by new programs that cover payments for buyers who lose their jobs. Ford said sales across the industry fell considerably in the last week, when G.M. unveiled a broad restructuring plan and a Chrysler bankruptcy started to appear inevitable. "It was more turbulence in the minds of the consumer," Ken Czubay, Ford’s vice president of sales and marketing, said on a conference call.

Analysts had hoped to see signs that new-vehicle sales had stopped falling, but there was little evidence that the industry is starting to climb out of its worst slump in decades, particularly as the troubles for Chrysler and G.M. worsened in April. G.M. could follow Chrysler into bankruptcy by June 1, the deadline set by the Obama administration for the company to show that it should receive more government loans. Chrysler and G.M. have borrowed $15.4 billion since December. Chrysler, which has announced an alliance with the Italian automaker Fiat to help it emerge from bankruptcy, is slated to get $8 billion more in public aid, and warranties on its vehicles are being backed by the government. The Canadian government plans to contribute $2.4 billion to Chrysler.

Some Chrysler dealers could have difficulty making sales this month after the company’s lending arm, Chrysler Financial, said it would be shutting down as part of Chrysler’s restructuring. G.M.A.C. Financial Services, the lending arm of G.M., will begin to finance vehicles sold by Chrysler dealers instead. Friday will be the last day of production at many Chrysler plants, which are scheduled to be shut for 30 to 60 days while the company goes through the bankruptcy process. Meanwhile, G.M. is closing 13 of its factories for up to 11 weeks, starting as soon as Monday.

Chrysler leads broad declines in April U.S. sales
The major automobile makers on Friday posted further sales declines in April, punctuating a brutal week for an industry that saw one of its icons plunge into bankruptcy and signs that a similar fate awaits its biggest U.S. player. Chrysler LLC, steered into Chapter 11 by the Obama administration a day earlier, saw its sales nearly halved as potential customers were bombarded with a gloomy news flow for much of the month. "We know where the bottom is, and, as the economy struggles to recover, vehicle sales should follow," President Jim Press said. "Chrysler retail sales and share were well above expectations, which shows the real strength of our dealers and products in the marketplace in spite of a month filled with troubling headlines."

General Motors Corp., facing a deadline of its own at the end of the month, said its light-vehicle sales dropped 33.2% in April to 172,150 vehicles. GM also set its second-quarter production forecast at 390,000 vehicles, down 53% from a year ago as it continues to grapple with lower demand Ford Motor Co., the healthiest of the U.S. trio, said its sales fell by a third. Toyota Motor Corp. and Nissan Motors proved once again that it's not just Detroit that's suffering from the prolonged downturn, with both showing steep double-digit percentage declines. The broad declines come amid indications that customers may be ready to swing back into action after a historic showroom drought. Consumer confidence rose in April, marking the first year-to-year increase since July 2007.

"The consumer is poised to jump back in when the right things happen in terms of an auto stimulus bill or some continual gradual improvement in the economy," GM sales analyst Mike DiGiovanni said in a conference call. Ford, the first of the majors to report, posted a 31.6% drop in April U.S. sales to 134,401 cars and trucks from 196,385 a year ago. Truck sales slid 33% to 77,435 units, with sales of the flagship F-Series pickup down 35.8% to 28,757. Ford, Lincoln and Mercury combined car sales fell 28.8% to 52,463 units, and the Volvo brand's sales slumped 36.9% to 4,503 vehicles. "We continue to operate in a very challenging economic and competitive environment," Ken Czubay, Ford's vice president of sales and marketing, said in a statement. The Dearborn, Mich.-based company pointed out that it has managed to grow its retail market share in six of the past seven months.

Ford is the only one of the major domestic car makers not being kept alive on the government dime and has apparently benefited from customer reluctance to buy cars from companies in or on the brink of bankruptcy. And now that the Obama administration has finally pushed Chrysler into Chapter 11, Standard & Poor's Equity Research analyst Efraim Levy said he sees even more Chrysler customers turning to Ford in a trend that will likely continue if GM also files for bankruptcy. "We believe Ford's estimated retail-market share gain reflects the benefit from domestic competitors' pain and ... we believe some domestic-oriented shoppers prefer to buy from the relatively more stable brand," he said.

Ford shares have been on a tear so far this year, up 156%. At last check, they were down 2% at $5.86. GM's stock was down 5.7% at $1.81 and has lost 43% since the beginning of the year. Toyota reported U.S. sales of 126,540 vehicles, down 41.9% from 217,700 a year ago, with equal weakness on the car and the truck sides. Toyota has also benefited from problems at Chrysler, though stingier incentives have kept some potential buyers from closing the deal, according to data. Nissan Motors said sales fell 37.8% to 47,190 vehicles from 75,855 a year ago. Car sales dropped 38.3% to 30,249, while truck sales slid 36.9% to 16,941. The company noted that sales of its mainstay Maxima model were up 62.7% to 3,901 last month.

Honda fared the best of all the major manufacturers, but even it saw sales fall 25.3% in April to 101,029 cars and trucks. Overall, analysts polled by Thomson Reuters are looking for the total April sales rate for the industry, on average, to inch higher to 9.9 million cars and trucks. Last month, the rate came in at 9.86 million cars and trucks, according to Autodata, easily topping analyst targets of 8.9 million. It was an improvement from 9.12 million vehicles in February, which was the lowest level since December 1981.

Chrysler Must Sell Cars Amid Plan to Engineer Rebound
Chrysler LLC should leave bankruptcy in a month or two with a slimmed-down balance sheet, new management, a global partner, fewer dealers, lower labor costs and maybe even a new name. If a quick bankruptcy is successful, it will accomplish many of the things executives for the automaker have been trying to do for decades. None of it guarantees success because the new Chrysler still has to sell cars, as well as pickups, Jeeps and minivans. Its U.S. sales are down 46 percent this year. The automaker and the U.S. government plan to use a surgical bankruptcy to sell Chrysler’s best assets, such as its Dodge Ram pickup, to a new company with streamlined costs and debt, which would team up with Fiat SpA. The alliance would create the world’s sixth-largest car manufacturer and in turn the new company would also bring some of Fiat’s small cars to the U.S.

"Chrysler and Fiat have formed a partnership that has a strong chance of success," U.S. President Barack Obama said yesterday. The filing for protection from creditors would give the company "a new lease on life," he said. "It’s a partnership that will save more than 30,000 jobs at Chrysler and tens of thousands of jobs at suppliers, dealers, and other businesses that rely on this company," Obama said. It appeared Chrysler might escape bankruptcy as recently as April 29, after four major lenders holding 70 percent of $6.9 billion in secured debt agreed to a $2 billion cash offer to eliminate their claim. A group of investment funds in the 46- lender group held out, turning down a sweetened $2.25 billion offer from the U.S. Treasury, which Obama said forced the filing.

In bankruptcy, Chrysler will ask Judge Arthur Gonzalez to allow the sale of its assets with the consent of the majority of the creditors’ claims, forcing the dissident lenders to come along. Those creditors intend to object to the company’s reorganization plan, a person familiar with their thinking said. That might thwart Obama’s goal of finishing a bankruptcy within 60 days to put a viable carmaker quickly into the market. Chrysler’s lead lawyer, Corinne Ball, 55, of New York-based Jones Day, is said to be a brilliant strategist, capable of reaching agreements with opponents. "It has the potential to be good," said Jim Hall of 2953 Analytics in Birmingham, Michigan. "The question is: What is Chrysler going to be able to do between now and when the Fiat products are available?"

The first Fiat vehicle built in the U.S. with a Chrysler brand hood ornament is 18 months away, said Tom LaSorda, a company president who announced his retirement yesterday in a call with reporters. Chrysler has a stream of new cars it developed on its own expected next year in the U.S., including a new Jeep Grand Cherokee and Chrysler 300 sedan. Long before Fiat’s cars will be riding on U.S. roads, the Turin, Italy-based automaker’s management will be running the company. A new nine-member board of directors will be created with three chosen by Fiat. The board will choose a new chief executive officer to replace Bob Nardelli after the bankruptcy when he returns to owner Cerberus Capital Management LP. Fiat, which will operate the company, already has in mind the management structure for Chrysler, a person with direct knowledge of the situation said. Marchionne will have a close role in managing the company, said the person, who declined to be named because the matter is private.

Marchionne had said in an April 15 interview that he would be willing to serve as CEO if asked. "There certainly is going to be some Fiat officer, most likely Marchionne is going to take the helm," said Marino Marin, managing partner of Gruppo, Levey & Co., an investment banker who has worked has with Fiat. Fiat will hold an initial stake of 20 percent in the new company in exchange for licensing its technology, and may raise its stake to 35 percent by building a car in the U.S. that gets 40 miles per gallon, putting an engine in a U.S. plant and selling Chrysler vehicles at its dealerships abroad. After all government loans are repaid, Fiat has the option to purchase an additional 16 percent, to take a 51 percent majority. A trust fund to pay for health care for United Auto Workers retirees will start with 55 percent ownership of the company before it sells any shares. The U.S. government will hold 8 percent and the Canadian government 2 percent.

Fiat’s stake may cost Chrysler an alliance with Nissan Motor Co., Japan’s third-largest carmaker. Nissan said it was reviewing the terms of agreement to build small cars for Chrysler in exchange for pickups from the U.S. company. The two companies had struck the agreement last year to broaden their product offerings without incurring extra development costs. Chrysler will get $8.08 billion in loans from the U.S. government and $2.42 billion from Canada and Ontario. The UAW itself doesn’t have any stake in the company. The trust is run by an independent board, said a senior Obama administration official. After bankruptcy, Chrysler’s finance company will be GMAC LLC. Its current lending arm Chrysler Financial will continue to service existing loans and gradually wind down its operations. GMAC will get a capital infusion from the U.S. government in order to finance Chrysler customers and inventory sales to dealerships.

Chrysler will also pare down its dealership base by canceling contracts in bankruptcy. "We do not have a concrete list yet. It won’t be a huge catastrophic number," said Jim Press, president and vice chairman of Chrysler in a call with reporters today. "There will be a noticeable reduction in the number of dealers going forward." Cerberus, which agreed to give up its ownership to allow for the carmaker’s restructuring, retains ownership of Chrysler Holding, and Chrysler Financial. Those companies aren’t included in the bankruptcy filing. Chrysler Financial received a $1.5 billion, five-year loan from the U.S. Treasury, prompting the automaker to offer no- interest financing to buyers of some of its vehicles. Cerberus bought 80 percent of Chrysler from DaimlerChrysler AG in 2007 for $7.4 billion, its largest investment, with unnamed partners. This week it took Daimler AG’s remaining stake, making Cerberus the sole owner prior to the bankruptcy filing.

Chrysler is idling most of its factories starting May 4 while in court because suppliers are halting shipments. Regular production may resume when the company emerges or sooner if it resolves supply issues, LaSorda said. There will be more capacity reductions for Chrysler, LaSorda said, without detailing what plants or shifts may be cut. Chrysler’s bankruptcy filing says the automaker plans to leave eight plants to be liquidated in Chapter 11 after its good assets are sold to the new government-financed automaker. The filing doesn’t say which plants, though it likely includes several that Chrysler has already closed, including factories near St. Louis and in Newark, Delaware. No job cuts were announced yesterday. Chrysler has shed 35,000 jobs, Nardelli said, leaving about 54,000.

Founded in 1925 by Walter Chrysler, the Auburn Hills, Michigan-based company began its history with a reorganization of the Maxwell Motor Co. Known for high-technology vehicles in the 1930s, it produced models that included Imperial, DeSoto, and Valiant before slimming down to a lineup of Chrysler, Dodge and Jeep vehicles. The U.S. government provided Chrysler with $1.5 billion in loan guarantees to prevent a bankruptcy in 1979. CEO Lee Iacocca helped lead the company back to profitability, sparked by the pioneering Dodge Caravan minivan and his personal ad pitches. "If you can find a better car, buy it," he told customers in advertisements in the 1980s. Chrysler Corp., as it was known then, repaid its $1.2 billion in loans in 1983, ahead of schedule.

Toyota Motor Corp. overtook Chrysler in U.S. sales in 2006, by which time Asian carmakers had 42 percent of that market. Now Chrysler becomes the first U.S. automaker to follow dozens of suppliers into bankruptcy in recent years. They include Delphi Corp., Dana Corp., Dura Automotive Systems Inc., Collins & Aikman Corp., Tower Automotive Inc. and Lexington Precision Corp. What will the new Chrysler be named? Nardelli said he didn’t know, though he expected it would include the founder’s name. "If you are considering buying a car, I hope it will be an American car," Obama said. "I want to remind you that, if you decide to buy a Chrysler, your warranty will be safe, because it is backed by the United States government."

Would You Buy a Car from Chrysler?
Now that Chrysler has done what was once unthinkable for Detroit's Big Three carmakers—filing for Chapter 11 bankruptcy reorganization—everyone from President Barack Obama to the automaker's own public relations department has tried to assure car owners and would-be buyers that the company is going to continue operating and that its warranties are safe. But the question for consumers is, should I buy a Chrysler now? And how about one of those Fiats I hear are coming to America? Consumers can be spooked by the idea of buying from a bankrupt company; many equate bankruptcy with "closing the doors." Car-buying site says 21% of consumers it polled said a bankruptcy would affect their decision on which company they would buy a car from.

So Chrysler and its dwindling army of dealers know that the job of selling cars just got a lot tougher. They will have to do a lot of advertising and communicating in the next 60 days to keep people coming into showrooms. "They should shout from the mountain tops in ads and every other way they know how that they are here and not going anywhere," says Jason Vines, former communications chief at Chrysler as well as Ford, who has dealt with several public relations crises. "Now is not the time to be shy." Even before this, talk of a bankruptcy filing had been hammering Chrysler's U.S. sales. They are down 46% so far this year, worse than the 38% decline for the industry. Part of that, of course, is the impact of the recession and scarcity of consumer credit. But it is hard to feel good about Chrysler's vehicles based on the independent data available on reliability and quality.

Consumer Reports, for example, recommends no Chrysler, Dodge, or Jeep vehicles in its auto guide this year. Nor does J.D. Power & Associates (like BusinessWeek, a unit of The McGraw-Hill Companies) have great things to say. It rates Chrysler's vehicles considerably lower on quality than rivals and industry averages. Worse, J.D. Power also scores Chrysler very low in its Automotive Performance Execution & Layout Study, which surveys buyers on how well a vehicle is executed and designed after they have lived with it a while. All three Chrysler brands score well below the industry average. Several of Chrysler's key models—Chrysler Sebring, Jeep Liberty, and Grand Cherokee—score at or near the bottom of each category. All three brands also score well below average on Power's Vehicle Dependability Study, which measures how reliable vehicles are over three years of ownership.

Chrysler executives says that it takes time for any improvements in cars to be proven. "We have made great progress in the nearly two years we have been working at it, but it takes time for these improvements to be reflected in the scores," said Chrysler Vice-Chairman James Press in a recent interview with BusinessWeek. One worry that automakers have about bankruptcy -that buyers will assume no one will be around to fix their car- should be allayed by the fact that warranties on Chrysler products have been guaranteed by the U.S. government since Mar. 31. That continues through the Chapter 11 bankruptcy process. Since the company is virtually assured to reemerge from bankruptcy as part of a new company combined with Italian automaker Fiat, warranties will continue to be honored by Chrysler and the new company that emerges from bankruptcy without the government having to be involved.

If car shoppers are still interested, they'll find plenty of deals. The clouds of bankruptcy over Chrysler and General Motors have greatly reduced demand. As a result, leading car-shopping site says the average discount being offered on Chryslers, Dodges, and Jeeps is about 23% off sticker, vs. an average of 16% for the rest of the industry. It's not impossible to find discounts of more than $10,000 on Chrysler minivans and SUVs, as well as Dodge pickup trucks that dealers are trying to clear from their lots. Older car models, such as the Chrysler PT Cruiser and Chrysler 300, are also seeing discounts of more than $5,000 at some dealerships. But those heavy incentives may dry up soon as Chrysler idles its production plants while it is in bankruptcy reorganization.

"No one can blame car buyers who shied away from brands that were mentioned in the same breath as the word bankruptcy," says consumer advice editor Philip Reed. "[But] now that their warranties are being guaranteed, Chrysler and GM vehicles are good deals that are worth considering." Let's say, though, that a consumer is wowed by the design of a Jeep Grand Cherokee or Chrysler 300 and wants to take advantage of the huge incentives. The next question might be whether their dealer is going to be around to service it a year from now. Forty-five Chrysler dealers went out of business in April, and more will be shuttered in the weeks ahead. Under Chapter 11, Chrysler can cut dealers without worrying about repercussions from state franchise laws. The company has about 3,150 dealers and is said to want to cut as many as 1,200 to 1,500 of them in markets where too many are competing for too few sales.

So the dealer that is 15 minutes down the road might be gone in a matter of months, with a dealer 45 minutes away the closest to service a vehicle. Other repair shops can perform warrantied repairs, but many car owners prefer to have service done at the dealer where it was purchased. Earl Hesterberg, CEO of Group 1 Automotive, a company that manages dealerships of several manufacturers, including Chrysler, says a lot of local dealer advertising, combined with the company's national advertising, will need to make the case that buyers don't need to worry about being abandoned. "The good news is that the brands have a future," said Hesterberg. Is there an argument to be made for waiting to see what Fiat brings over to sell in Chrysler showrooms, or even longer to see what new vehicles the combined company comes up with?

Unfortunately, Fiat suffers from some of the same quality problems as Chrysler. Fiat models do not score high for quality and reliability in Europe and South America, where they are sold now. Fiats and Fiat-owned Alfa Romeos sold in Europe are near the bottom in reliability and "need to improve significantly to move away from the foot of the table, where they have languished for several years," says U.K.-based Which?, a consumer advice publication similar to Consumer Reports in the U.S. A survey of people who owned Fiat models in Britain, by J.D. Power and magazine What Car?, put Fiat last of 28 brands in a 2008 Customer Satisfaction Index for two-year-old vehicles. Quality and reliability count for 30% of the score. For now, Chrysler has found refuge. But it's not clear how its new partner will make its future any more promising.

Chrysler warns court of risk to jobs
Chrysler began its stint in bankruptcy court on Friday with a plea for haste and a warning that hundreds of thousands of jobs could be lost if it cannot execute its proposed restructuring within two months. "We have to hit it in high gear," Corinne Ball of Jones Day – the law firm which is representing Chrysler – told a packed courtroom in lower Manhattan during the first hearing on Chrysler’s bankruptcy petition. Chrysler is hoping that because it convinced many of its stakeholders to accept significant concessions in exchange for supporting its restructuring plan, bankruptcy judge Arthur Gonzalez will allow it to cancel contracts with dealers and impose the plan on debtholders, who have resisted it.

Senior debt-holders rejected an offer under which creditors would have received $2.25bn in cash for their $6.9bn in debt. Four leading banks, holding 70 per cent of Chrysler’s debt, agreed to take 29 cents on the dollar. The US Treasury said in a court filing that Chrysler must be reconstituted and pulled quickly out of bankruptcy by Fiat, its new Italian partner, or its value could wither. The car industry’s importance to America "cannot be overstated," the Treasury said. Such pleas can fall on deaf ears in court, however, where judges must place the legality of an issue ahead of the fear and politics surrounding it.

President Obama has blamed debtholders who refused to accept concessions, for Chrysler’s inability to restructure out of court. But those investors paid a premium for top-priority debt that was backed by Chrysler’s assets, and their chances in court could be strong. "These hedge funds that didn’t agree – they’ve got a darn good case because they’re secured," said one bankruptcy attorney who is not advising the funds. "We’ve got a constitution in this country." On one side of the argument, Chrysler and the government can claim that without their plan, which includes $10.5bn in new government financing, an agreement with workers, and partnerships with Fiat and GMAC, Chrysler would collapse and its $6.9bn of debt could be worthless.

Some debtholders, however, have claimed Chrysler could get a better price from Fiat or other buyers. If the judge honours that argument, he may require Chrysler to set up a formal auction. Chrysler said on Friday that it would idle facilities to conserve resources, and won permission to reject leases on certain properties. It planned to file motions later in the day to secure approval of a $4.5bn government debtor-in-possession loan and to establish procedures for the sale of most of its assets to Fiat, which dissident debtholders are expected to contest. General Motors, which has one month left in its own attempted out-of-court restructuring, is closely watching?Chrysler’s?progress.

Surveying Chrysler as Wheels Fall Off
Strange things happen on planet Chrysler. A car company bought for $38 billion in 1998 gets unloaded to another buyer at a cost of about $1 billion almost a decade later. Two years after that, another company, Italy's Fiat this time, stands ready to take a 20% stake plus options for more in exchange for know-how, but no cash. Employees plan on taking a majority stake. Oh, and secured lenders to Chrysler get offered 33 cents on the dollar to go away. Dissident creditors are justified in holding out against this two-thirds haircut. After all, the United Auto Workers union is set to get an implied 50 cents on the dollar -- plus a 55% stake in the new company. The large banks that hold the majority of Chrysler's $6.9 billion of secured debt and negotiated the terms on offer are recipients of aid from a government desperate for a quick fix. Not for nothing do the dissident creditors call themselves Chrysler's "Non-TARP Lenders."

Bankruptcy court, however, is an unpredictable place, and the dissident group shows signs of unraveling already: Late Thursday, prominent hold-out Perella Weinberg Partners conceded. In court, Chrysler would likely argue its brands are deteriorating by the day. It would hope to press the judge to force the existing deal in the best interests of preserving the business, similar to the quick sale of Lehman Brothers' North American businesses to Barclays in September. Chrysler mightn't be as much of a melting ice cube as Lehman. But drivers' faith in Chrysler is arguably fragile already. Concerns over damage to the wider automotive supply chain might also color the judge's thinking. Six parts suppliers were placed on watch by Standard & Poor's following Chrysler's bankruptcy filing Thursday.

Despite their sound argument, therefore, those Non-TARP Lenders left face formidable obstacles. Bondholders at General Motors, offered awful terms earlier this week, should be nervous. So the president, the UAW and Fiat look set to win? Not completely. The administration risks distorting America's capital markets: If the current plan is pushed through, then good luck to any unionized firm trying to raise secured debt on decent terms in the future. As for the UAW, making a success of the new Chrysler will likely require taking the sort of painful decisions unions are programmed to resist.

That leaves Fiat. With no cash upfront, the car maker has limited its potential losses. But it isn't hard to envision a scenario in a few years where Chrysler is still struggling and stretching Fiat's management, while the Italian company takes flak from U.S. politicians and union members. Daimler and Cerberus Capital Management can testify that strange things happen when you land on planet Chrysler.

Max Keiser on Chrysler Bankruptcy

In Chrysler Saga, Hedge Funds Cast As Prime Villain
President Obama's harsh attack on hedge funds he blamed for forcing Chrysler into bankruptcy yesterday sparked cries of protest from the secretive financial firms that hold about $1 billion of the automaker's debt. Hedge funds and investment managers were irate at Obama's description of them as "speculators" who were "refusing to sacrifice like everyone else" and who wanted "to hold out for the prospect of an unjustified taxpayer-funded bailout." "Some of the characterizations that were used today to refer to us as speculators or to say we're looking for a bailout is really unfair," said one executive who spoke on condition of anonymity because of the sensitivity of the matter. "What we're looking for is a reasonable payout on the value of the debt . . . more in line with what unions and Fiat were getting."

George Schultze, the managing member of the hedge fund Schultze Asset Management, a Chrysler bondholder, said, "We are simply seeking to enforce our bargained-for rights under well-settled law." "Hopefully, the bankruptcy process will help refocus on this issue rather than on pointing fingers at lenders," he said. Political veterans said, however, that it would be tough for hedge funds to overcome their image as villains. Most politicians have a favorite punching bag. Many Republican politicians like to bash trial lawyers. Many Democrats like to take aim at big oil companies. Hedge funds can serve as a safe diamond-studded scapegoat in tough economic times.

"It's hard to go wrong right now being tough on those guys," said Jeff Shesol, a former speechwriter for President Clinton who noted that Obama had been criticized earlier for not showing enough outrage about AIG bonus payments. He said that Obama's "frustration, while it may be calibrated, is real. And it's certainly where the public is." A senior administration official said the tough words on hedge funds were born of frustration, not politics. "The president has been pretty hard-nosed about the whole matter," said the official, who spoke on condition of anonymity. "There was no calculation involved," he added. Obama "was very willing to praise those who went the extra mile to help make this work, and that included financial institutions."

"In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout," Obama said. "They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don't stand with them." The president's harsh criticism may play well on Main Street, but it flopped on Wall Street yesterday. There hedge funds -- privately run funds that invest in an unlimited variety of securities and which theoretically balance different kinds of risks -- are part of the landscape. "It sounds like people are being bullied right now," said Ron Geffner, a partner at the law firm Sadis and Goldberg, which represents hedge funds. "To play the 'I stand with Chrysler, I stand with families, I stand with the dealers, I stand with the consumers' -- that's great conceptually, but . . . I stand with the fact that we live in a capitalist society where companies who don't modify their business plans and stay current die and go by the wayside."

Geffner added that Obama's remarks made it difficult for the lenders that rejected the offer to speak publicly for fear of appearing "anti-American." Indeed, a group of lenders issued a statement yesterday -- but did not identify its members. The group said it included approximately "20 relatively small organizations" that represented "the country's teachers unions, major pension and retirement plans and school endowments who have invested through us in senior secured loans to Chrysler." The funds hold about $1 billion in Chrysler bonds and have turned down the government's terms. The government would have paid just under a third of the value of those bonds. However, many funds bought the bonds at deep discounts from other investors who feared the bonds might ultimately be worthless.

A few firms stepped forward to defend themselves openly. "OppenheimerFunds sought fair treatment for the shareholders of our funds and we were willing to make very significant sacrifices to reach an agreement," the firm said in a statement. But it said the government "unfairly asked our fund shareholders to make financial sacrifices greater than those being made by" other creditors. The firm said its bonds "are entitled to priority in long-established U.S. bankruptcy law." But other observers said that the hedge funds were oblivious to Americans' worries about jobs. "They're not getting it in their heads that this is the worst crisis since the 1930s. People are going to have to take a hit," said Sarah Anderson, director of the Global Economy Project at the Institute for Policy Studies. "It seems rather short-sighted to risk having the auto sector collapse so that they can get a few more cents on the dollar for their investors."

Chrysler’s Chief Says He Believes He Has Saved the Automaker
He is the first chief executive in decades to lead a major car company into bankruptcy, but Robert L. Nardelli hardly considers himself a failure. Instead, Mr. Nardelli was holding his head high Thursday for helping keep Chrysler in business — bankruptcy or not. "It’s not the fate I would have chosen, but it has allowed us to save the company," Mr. Nardelli said in an interview. "I think the cup is half full, and not half empty." His efforts were recognized Thursday by President Obama, who singled out Mr. Nardelli in his remarks for his "positive and constructive role" in getting deals with the Italian automaker Fiat, the United Automobile Workers and Chrysler’s largest lenders that will be integral to a successful restructuring in bankruptcy court.

Once Chrysler emerges from Chapter 11, Mr. Nardelli, 60, will leave the company as it transitions to new management selected by a reconstituted board. It was his decision to leave at that point, he said. "I got us here," he said. "And I feel good about getting us here." Still, Chrysler’s trip into bankruptcy was hardly the comeback that Mr. Nardelli envisioned when he was hired by Cerberus Capital Management to run the automaker in August 2007. Mr. Nardelli came to Detroit with a reputation as an autocratic executive who had clashed with shareholders and directors at his previous company, Home Depot. He methodically tried to change that perception at Chrysler, where his long days of work and disciplined approach to business decisions won over many skeptical employees and industry experts.

A year ago, the privately held Chrysler was flush with cash and leaner than at any time in its history after rounds of job reductions, plant closings and production cuts. Mr. Nardelli said he believed that Chrysler was poised for a renaissance — until the slumping United States economy dragged new-car sales into the ditch. By last fall, Chrysler was spending billions of dollars in cash reserves and running dangerously close to insolvency. Only a $4 billion federal loan kept the company from shutting its doors months ago. When he joined his fellow chief executives from General Motors and the Ford Motor Company last November to seek government aid for the industry, Mr. Nardelli was set against taking Chrysler into bankruptcy.

Even during marathon negotiations in recent days with Chrysler’s unions and banks, he held out hope that bankruptcy could be avoided. "I’m disappointed that we couldn’t get all of the lenders to agree," he said. "Filing for Chapter 11 was obviously not my preference." He says he sees a bright future for Chrysler in its alliance with Fiat, which can provide small cars and fuel-efficient engine technology that Chrysler sorely lacks. Once out of bankruptcy, Chrysler will have a new board of nine members — the government will select six and Fiat will choose three. That board will select a chief executive for Chrysler. While Mr. Nardelli said he was never told he could not compete for the job, he felt it was "the right time to transition" to a new chief executive, possibly Fiat’s leader, Sergio Marchionne.

"I tend to be proactive," Mr. Nardelli said. "I felt, let’s get past this issue and get it off the table and behind us." Thomas LaSorda, a vice chairman who was Mr. Nardelli’s immediate predecessor as chief executive, will also be leaving Chrysler. Mr. LaSorda, 54, said Thursday that he planned to retire, but had not set a date. Another vice chairman, James Press, did not make his future plans known during a conference call with reporters. In his relatively short time at the top of Chrysler, Mr. Nardelli did fulfill much of the agenda laid out for him by Cerberus. He streamlined the company and significantly lowered its costs, although tens of thousands of jobs were eliminated in the process. He said he would go back to Cerberus as an adviser, and then evaluate other opportunities.

Yet wherever he ends up, Mr. Nardelli’s business career will be defined, in part, by Chrysler’s trip into bankruptcy. It has been an emotionally charged experience, particularly Thursday morning when he flew back to Detroit from Washington to be at Chrysler headquarters in time to watch Mr. Obama’s speech. "I wanted to be here with our people to provide some confidence and assurances about the future," he said.

Chrysler bankruptcy slams state
President Barack Obama described Chrysler LLC's historic bankruptcy Thursday as necessary to build a viable future, but the short-term pain rained down on metro Detroit almost immediately. Three metro Detroit plants -- Sterling Heights, Detroit Axle and Conner Assembly -- are to close by December 2010, along with three other U.S. plants. While Obama billed it as a "surgical" bankruptcy, stamping plants in Sterling Heights and Warren shut down Thursday afternoon because suppliers stopped shipping parts out of fear they won't be paid. "Suppliers have decided not to ship product," said Tom LaSorda, a Chrysler vice chairman and former chief executive officer who announced Thursday that he would retire. "It's not in every facility. It was going to happen on Monday anyway."

Beginning Monday, Chrysler will close all its U.S. plants for the next 60 days, when a new Chrysler is expected to emerge from court. Chrysler said it hopes to eventually sell eight plants, including two already idled, and assorted machinery valued at $2.3 billion to help pay debt. Chrysler's bankruptcy will be the sixth largest in U.S. history, and the case is to be heard by veteran U.S. Bankruptcy Judge Arthur Gonzalez, who oversaw the bankruptcies of Enron and WorldCom. Even if Chrysler's bankruptcy is as quick and orderly as Obama hopes -- numerous lawyers and other experts doubt it will be -- it will cost taxpayers. The U.S. government likely will lose much of the $4-billion loan it gave Chrysler at the end of last year as part of its bankruptcy case, administration officials said Thursday. The federal government also might lose part of the $1.5 billion lent to Chrysler Financial and backed by auto loans.

The Obama administration said the new Chrysler would be funded through a total of $10.5 billion in loans -- with $8.1 billion from the United States and $2.4 billion from the Canadian government. The U.S. government is to provide Chrysler with up to $3.3 billion in bankruptcy court financing through the $700-billion financial industry bailout funds, as well as $4.7 billion in loans for Chrysler to exit bankruptcy and launch its partnership with Fiat SpA. The cost of Chrysler's bankruptcy also will be felt in factories, showrooms and working-class homes across metro Detroit. More than 20,000 hourly workers on temporary layoff will get just 80% of their normal take-home pay while laid off, LaSorda said. "Chrysler's bankruptcy is going to be a difficult period for many Macomb County workers and families," said Paul Gieleghem, chairman of the Macomb County Board of Commissioners. Chrysler is the county's second-largest employer and taxpayer.

Suppliers -- already reeling from General Motors Corp.'s decision to shutter some of its factories for up to nine weeks this summer -- also could be devastated. One supplier executive who asked not to be named because he does business with the companies estimated that GM and Chrysler will together cut production by 340,000 vehicles over the next two months. That will slash suppliers' revenue by at least $3.4 billion and suck at least $500 million from their cash flow. Who will run Chrysler after it emerges from bankruptcy remains unclear. The new nine-member board of directors is to include six people appointed by the U.S. and Canadian governments; Fiat is to appoint three, including one of its own executives. The board then is to select a new chairman and a CEO.

Chrysler CEO Bob Nardelli is to step down when Chrysler comes out of bankruptcy, and LaSorda is retiring. Vice Chairman Jim Press said he has had no conversation about his future with Fiat CEO Sergio Marchionne, who will either succeed Nardelli or decide who will. Chrysler and Obama contend if the reorganization moves quickly, it could save thousands of jobs and strengthen the domestic auto industry and U.S. economy. Gov. Jennifer Granholm called Chrysler's bankruptcy disappointing but noted that it would result in a net increase in Chrysler's current Michigan workforce of 21,000 after the company merges with Fiat.

"We have the certainty now, as a state and as a nation, that Chrysler will emerge from this stronger, more vibrant and capable of producing the kind of vehicles that will lead our nation to energy independence," said Granholm, who added that Michigan will compete for an additional 5,000 jobs Fiat is to bring to the United States. Among the criteria Fiat must meet to raise its ownership from 20% to 35% are producing a fuel-efficient engine and assembling a car that can get at least 40 miles per gallon in Chrysler's U.S. plants. Nardelli said the first Fiat models would reach Chrysler showrooms in about 18 months, but no decision has been made on where they would be assembled. Bankruptcy also allows Chrysler and Fiat to reduce the number of dealers.

Ilargi: Now the commercial mortgage- backed securities market needs to be bailed out over your backs. Which will fail just like all the other rescues, but of course you will lose in the process regardless. In a decade or so, I see thousands of strip-malls returning to nature.

Fed Said to Be Close to Offering Five-Year TALF Loans for Commercial Mortgage- Backed Securities
The Federal Reserve is close to offering investors five-year loans to buy commercial mortgage- backed securities, granting an industry request, a person familiar with the matter said. The decision on extending the term of such loans under the Fed’s Term Asset-Backed Securities Loan Facility isn’t yet final, the person, who spoke on condition of anonymity, said yesterday. The Wall Street Journal reported the state of the decision earlier yesterday. In December, the Fed lengthened the term of TALF loans to three years from one year. Fed officials had been considering a compromise of charging higher fees after three years. That would be aimed at giving a greater incentive for investors to borrow from the Fed and helping restart markets for commercial mortgage-backed securities, while protecting the Fed’s flexibility to raise interest rates in the broader economy once consumer demand recovers. "It continues to illustrate that it’s just a patchwork quilt of trying to shore up whichever asset du jour happens to be in trouble," said Julian Mann, a manager of asset-backed bonds at First Pacific Advisors LLC in Los Angeles. In addition, "the taxpayer is encumbered for another few years," Mann said.

Fed policy makers had been wary of loosening limits on the TALF because longer loans would make it more difficult to tighten credit if inflation picks up. At the same time, rejecting the request may have further stymied the TALF after a slow start that’s hindering Chairman Ben S. Bernanke’s efforts to revive the economy. Lobbyists in the commercial mortgage-backed securities industry have said the Fed needs to provide loans of at least five years to better match debt terms and avert a meltdown in the market. The Fed started the TALF in March, lending to investors buying securities backed by auto, credit-card, education and small-business loans. In coming months, the program will expand to include securities backed by commercial real-estate loans.

Investors have borrowed $6.4 billion through the TALF in its first two months of operation, out of a potential $1 trillion. Companies have issued about $11 billion of eligible asset-backed securities. The Fed program is aimed at restarting the market for the securities, which should help lower interest rates and expand credit for consumers and businesses. Sales of CMBS plummeted to $12.2 billion last year from a record $237 billion in 2007, according to estimates by JPMorgan Chase & Co. That raises the risk of increasing defaults on commercial mortgages, making it tougher for borrowers to refinance maturing debt and avoid delinquency or foreclosure, industry officials say. The third monthly round of applications for TALF loans is due May 5. General Electric Co., Harley-Davidson Inc., Volkswagen AG and Honda Motor Co. lead companies selling debt for next week’s round, according to people familiar with the sales.

CMBS Defaults, Delinquencies Tripled Last Quarter
Defaults and late payments on property loans sold as commercial mortgage-backed securities tripled to 1.8 percent of outstanding balances in the first quarter and may rise to the highest in almost two decades, Reis Inc. said today. Almost $10.7 billion of roughly $610 billion of CMBS loans outstanding were 30 days or more past due last quarter, Christopher Stanley and Kyle McLaughlin, analysts at New York- based Reis, said in the report. The default and delinquency rate on CMBS loans rose from 1.14 percent in the fourth quarter and 0.53 percent a year earlier, the property research firm said. The rate could hit 6 percent by year’s end, the report said.

The credit crisis and recession are reducing occupancies and rents for apartments, offices, shopping malls, warehouses and hotels, cutting the cash flow landlords need to repay debt. ProLogis, the world’s biggest warehouse owner, posted lower earnings in the first quarter and Marriott International Inc., the largest U.S. hotel chain, recorded a loss as mall owner General Growth Properties Inc. filed for bankruptcy. "We expect default rates to worsen considerably over the next two years," the Reis analysts wrote, saying the biggest problems loom for loans maturing in 2010 to 2012. "Unless credit availability improves, it is likely that a good portion of these loans maturing will seek extensions or be forced to enter default on maturity."

The last time overall commercial delinquency rates broke 6 percent was in 1991, following the savings and loan crisis, according to Reis. That year, the market consisted of about $3.1 billion in commercial mortgage-backed securities, according to data compiled by Bloomberg. That’s less than 1 percent of today’s volume. A loan is delinquent when it’s 30 to 89 days past due and in default when 90 or more days late. The firm said 17.3 percent of loans are on its CMBS "watchlist," up from 15.2 percent in the fourth quarter and 12.5 percent a year earlier. The biggest increase was in hotel and industrial loans, reflecting slower economic growth. Global gross domestic product will shrink this year for the first time since World War II and trade will fall the most in 80 years, the World Bank said on March 9.

Apartment owners had the highest percentage of past-due loans, with 3 percent, or $3.76 billion delinquent or in default. Hotels were next, with 2 percent of loans past due. About 1.6 percent of CMBS loans on retail properties were late and office delinquencies and defaults stood at 1.1 percent, according to Reis. The overall first-quarter past-due rate "is ridiculously low relative to the tsunami of default we are expecting," said Fred Fellows, managing principal of Basalt Capital LLC, a Chicago-based investment firm that specializes in CMBS. "Vacancies are climbing rapidly and properties are not able to make debt payments." Fellows said the firm expects defaults will exceed those of prior recessions because of the high debt on properties now and because capital markets "do not appear to have stabilized."

He predicted most borrowers will fund any shortfall in rental income themselves rather than leaving loans unpaid. "People are going to come out-of-pocket if they think there’s a way to salvage their asset’s value or maintain control," Fellows said. Detroit had the highest past-due rate among U.S. cities in the first quarter, with 5.7 percent of loans delinquent or in default, up from 1.6 percent a year earlier. San Bernardino, California, was second at 4.6 percent, versus 0.01 percent a year earlier. The increase was driven by the retail sector, which had a past-due rate of 7 percent, led by the $125.2 million Promenade Shops at Dos Lagos, a loan that went into foreclosure, said Reis. CMBS sales soared 38 percent from 2005 to 2007 as buyers sought low-interest-rate debt to pay for properties at ever- higher prices, while banks sought to boost profits by selling more loans.

Many loans made during those three years relied on projected rent increases, known as "pro forma lending" rather than the traditional commercial mortgage formula that limited debt on a property to a multiple of its current rental income. In addition, almost 98 percent of the loans made in 2006 and 2007 were interest-only or partial interest-only, according to Reis. The balance swung back in 2008, when 55 percent of loans originated were fully amortizing, said Reis. CMBS issuance in the U.S. rose to a record $248.7 billion in 2007, from $221.9 billion in 2006 and $179.7 billion in 2005, according to Bloomberg data. By contrast, CMBS sales averaged $75.1 billion a year for the previous five years. The CMBS market represented 21 percent of total commercial loans outstanding as of the end of 2008, according to the Mortgage Bankers Association.

Ilargi: I don't think that the Wall Street Journal cheerleading department understands how nervous certain parties may get when they hear Rahm Emanuel dictates financial policy.

At Treasury, Big White House Role
On Jan. 20, Timothy Geithner took control of the Treasury Department, directing the government's response to the financial crisis. Within three weeks, the White House tightened its grip, alarmed by the poor reaction to Mr. Geithner's performance during the rollout of his rescue plan, government officials say. Since then, White House Chief of Staff Rahm Emanuel has been so involved in the workings of the Treasury that "Rahm wants it" has become an unofficial mantra among some at the Treasury, according to government officials. The White House involvement is welcomed by some officials at the Treasury, including Mr. Geithner, given that the department is short-staffed and not always attuned to the politics of the hour. But the White House also has pushed to announce programs before details were ready. Other times, the department has been left waiting for White House input -- even on such mundane matters as Web-site design.

Still, in a little more than three months, Mr. Geithner and the White House together have crafted complex programs to combat the financial crisis. Mr. Geithner said White House involvement is critical to the success of the financial rescue, in part because the popular president can help sell the plan to the public. "I made a judgment...that to do this right, we had to have a fully integrated approach," Mr. Geithner said in an interview. "The president's capacity to lay out for the nation and the world a path through this crisis is as essential as everything we're going to do." The former head of the Federal Reserve Bank of New York, Mr. Geithner, 47 years old, is described as a smart tactician who reviews scenarios before making a decision. Where former Secretary Henry Paulson -- who ran something akin to an imperial Treasury -- would make decisions while marching down the hallway, Mr. Geithner is slower and more deliberative, say government officials.

Mr. Geithner is in daily contact with the White House, often with Mr. Emanuel. The new relationship is a switch from Mr. Paulson, who was working with a weakened White House, and partly reflects the severity of the U.S. economic crisis. "On any major policy -- on finance at Treasury or national-security efforts -- the White House is going to play a major role," said David Axelrod, a White House senior adviser. "This is no different. We face in essence an economic emergency. It's an all-hands-on-deck situation." He said Mr. Geithner is held in high esteem. The shift also reflects Mr. Geithner's early problems, including a flap over his personal taxes, which raised concerns at 1600 Pennsylvania Avenue. During the administration's first few weeks, Wall Street was expecting a revamp of the Paulson bailout plan, including a so-called bad bank funded and run by the government to buy troubled mortgages and other toxic assets. A Feb. 10 speech by the Treasury secretary on the new plan was scheduled by the White House.

Mr. Geithner knew markets wouldn't like what he had to say. At a presidential economic briefing just ahead of the rollout, Mr. Geithner was candid. "I'm laying out a strategy," he told the assembled officials, including the president, according to an aide present. "They're hungry for the tactics, and the tactics are going to take a little time." It was a warning the White House didn't seem ready to fully hear. President Barack Obama pumped up the rollout at a prime-time news conference Feb. 9. The following day, Mr. Geithner spoke in front of a national TV audience, awkwardly flanked by teleprompters and American flags. After he finished, markets plunged nearly 5%. A senior White House official said later that Mr. Geithner had not been well served by the president and his aides. "There's not a hell of a lot here to get a sense of," Sen. Robert Menendez (D., N.J.) said at the time.

At the president's urging, Mr. Emanuel began to take a close interest in helping Mr. Geithner, a longtime friend. "There was an understanding that the chain of communication hadn't been great," said one official. "I think Rahm felt personally for Tim that there was a lot of responsibility to go around." In February, the White House had pushed the Treasury to cobble a deal that would help American International Group Inc., which was going to need more rescue funds. The White House wanted to announce the deal on a Friday, to stop the news from spilling over into the following week, said people familiar with the matter. Some at the Treasury and the Federal Reserve said they needed more time to make sure the ratings firms wouldn't downgrade AIG, which would have spelled disaster for the firm. Officials moved fast to hash out the deal over a weekend, announcing on Monday, March 2 that the U.S. would give AIG access to another $30 billion.

About a week later, a Treasury staffer told Mr. Geithner that AIG was set to pay a series of retention bonuses to employees. That hadn't surfaced during the speedy rescue. Mr. Geithner tried to stop the bonuses, but after learning they were contractual agreements, he concluded the government had no choice. The resulting furor prompted calls for Mr. Geithner's resignation. Many in Washington wondered how long he would last. Mr. Geithner remained calm, but a glimmer of the turmoil surfaced during a meeting with his senior staff. At one point, while he was trying to forge agreement, according to government officials, he smiled and said: "Come on, guys, I need your help. I'm getting killed here." With Wall Street still awaiting details of how the bailout plan would work, the White House moved to make sure the relaunch went well.

On March 15, Messrs. Obama, Emanuel and Geithner, along with the president's economic team, gathered for a meeting in the Roosevelt Room to hear Mr. Geithner lay out details. For three hours, Mr. Obama and his aides hashed over the plans with the Treasury secretary. As dinnertime approached, around 6 p.m., the president said he was leaving to eat with his family. "We're not leaving until this gets resolved. Stay at it," he said, standing to go. "I'll be back, and I'll stay as long as we need," he said, according to government officials present. As darkness fell and the president returned, Mr. Geithner took control of the meeting. He concluded: "Mr. President, in a perfect world there may be other options. In the world in which we live...this is the best option," according to one participant. The meeting adjourned around 10 p.m. As he rolled out details of the administration's financial rescue plan March 23, the markets responded. This time, the Dow Jones Industrial Average rose nearly 500 points.

French warned of "revolutionary risk", "social explosion"
Hundreds of thousands of people are expected to march through the streets of France today as the traditional May Day rallies become a focus point for anger over factory closures, job cuts and Nicolas Sarkozy's handling of the economic crisis. Union leaders are calling the day "historic" as a record number of almost 300 demonstrations are planned across the country. All trade unions will march as a united front for the first time on May Day since the second world war. Public support for the demonstrations is over 70%, as protesters take to the streets for various reasons. Many are angry at mass lay-offs while they feel fat-cat bosses are being protected by the government.

Unemployment is rising at its fastest rate in a decade as France enters its deepest depression since the war. Others joining the marches are opposed to the French president's reform of universities and hospitals. Unions are hoping that today's bank holiday will bring out record numbers to rival the 2.5-3million who took to the streets in March protests. Today's demonstration is the third national protest over the handling of the economic crisis in four months. Unions will meet on Monday to decide whether to organise a general strike for the coming weeks.

Tension is growing in France over factory closures and lay-offs. Workers' protest actions are getting more radical: a wave of "boss-napping" by desperate workers intensified last month and some protesters ransacked state offices. The peaceful marches planned for today come as unions try to calm the mood and harness workers' anger. The former prime minister, Dominique de Villepin, has warned of a "revolutionary risk" in France. In one poll yesterday for Challenges magazine, 66% people felt there was a risk of "social explosion" over the coming months.

French protest against economic crisis
Thousands joined May Day demonstrations around France on Friday to protest President Nicolas Sarkozy’s social policies and his handling of the financial crisis. Unions have organised nearly 300 marches and turnout is expected to be high, reflecting frustration about soaring unemployment, weak purchasing power and plant closures that have also led to a wave of "bossnappings". Union rallies are held on May Day in many European countries but turnout is expected to rise this year because of the crisis that has sent jobless numbers soaring.

In France the opposition Socialist party has called for its members to join the protests for the first time since 2002 and unions, which have been bickering over how to respond to Sarkozy, were trying to present a united front. In a sign of how far disillusion has spread, even staff in management positions are expected to take part in marches. "It is absolutely not in our tradition to protest on May 1 but given the economic context in France and crisis we decided to join in," said Carole Couvert, a leader of the CFE-CGC union for executives. "It’s a first for us because our method is negotiation." The first marches started at around 0830 GMT in major towns such as Marseille, Toulouse, Le Mans, Orleans and Avignon. The Paris demonstration was due to start at 1130 GMT.

In Germany dozens of police were injured in clashes with protestors that erupted in the early hours of Friday. Turkish riot police fired water cannon and tear gas in clashes with May Day demonstrators in Istanbul. The police cordoned off the city’s main Taksim square. Couvert’s organisation wants help from the government with training. Other unions are pushing for more support to help seniors and youths who are struggling to find jobs. They also complain that the government’s 26 billion euro investment-led stimulus put money in bosses’ pockets but did nothing to help consumers. French unemployment jumped by 63,400 to nearly 2.5m in March, with a sharp rise in the number of young people seeking work. The latest figures show that more than 440,000 jobs have disappeared in mainland France over the past year as the economic gloom has spread.

"For young people this May 1 is important because we feel as though we’re in the front line of this economic crisis, the front line of the rise in unemployment," said Jean-Baptiste Prevost, head of the Unef student union on LCI television. The protests follow on from a March 19 day of protests attended by up to 3 million in the largest demonstrations since Sarkozy’s election in 2007. There have also been more violent protests with several managers at factory sites held for periods of 24 hours and more by angry workers threatened with plant closures, job cuts or reduced working hours. A series of scandals over millions of euros in payouts to senior executives in companies that have benefited from government bailouts has fuelled anger about Sarkozy’s response.

Sarkozy has pledged tax cuts for the lower paid and extra support for youth training as part of a raft of measures to help struggling households. But he has resisted calls for more steps to help consumers as the left has demanded, pointing out that household spending has held up well throughout the crisis. He can also take advantage of divisions among unions about how to respond to the crisis which could be seen on Friday despite the show of May Day unity. Jean-Claude Mailly, head of the Force Ouvriere union suggested a 24-hour strike to follow up on the protests, an idea that is opposed by the moderate CFDT union.

World Bank's Bonds Show What Happens When Big Governments Rush to Rescue
Federal guarantees by 13 countries on more than $400 billion of financial company bonds are punishing the AAA-rated World Bank Group with record borrowing costs -- an indication of what can go wrong when government gets in the way. The Washington-based World Bank, founded in 1944 to rebuild economies after World War II, sold $6 billion of three-year notes March 26 priced to yield 30 basis points more than the benchmark for such borrowings. The so-called spread was the widest for a dollar-denominated bond offering by the supranational lender, said George Richardson, the institution’s head of capital markets, in an interview.

Just seven months ago, the World Bank paid a record low 35 basis points less than the midswap rate, a market measure for exchanging fixed- and floating-rate cash flows. The sudden rise in World Bank relative bond yields is an unintended consequence of sales of taxpayer-backed debt by more than 50 companies, including Goldman Sachs Group Inc., Bank of America Corp. and JPMorgan Chase & Co. While these special offerings were designed to bring stability to the credit markets after $1.4 trillion in losses and writedowns in the past 28 months, no one realized the World Bank would be depreciated by such government policies. "Governments started announcing guarantees for their banks, and then the whole world changed," said Richardson, a former Goldman Sachs banker.

Rising risk premiums are also affecting the Washington- based Inter-American Development Bank, which lends to Latin American and Caribbean countries, and Germany’s state-owned Kreditanstalt fuer Wiederaufbau, whose credit supports housing, education and small business. Banks and financial companies worldwide sold 320 billion euros ($424 billion) of state-guaranteed debt since October, denominated in euros, dollars and U.K. pounds, according to Leef Dierks, a fixed-income analyst at Barclays Capital in Frankfurt. They may issue a total of 900 billion euros in bonds for all of 2009, Dierks said. The total includes $235 billion of dollar-denominated debt in the U.S. with backing from the Federal Deposit Insurance Corp. as of yesterday, according to data compiled by Bloomberg. Lenders backed by multiple governments, known as supranationals, have the flexibility to borrow billions in multiple currencies and at any part of the yield curve, making their bonds among the most liquid securities.

The financial acumen of the World Bank, which pioneered the first use of derivatives to obtain Swiss francs and German marks by exchanging cash flows with International Business Machines Corp. in 1981, hasn’t protected the institution from widening borrowing spreads. Average yields relative to midswap rates on dollar- denominated supranational debt rose to 164.4 basis points, as of yesterday, from 46.8 basis points at the start of October, according to the Credit Suisse Liquid U.S. Corporate Sovereign Spread Over Swap index. The midswap index, which contains bonds sold by the World Bank and the IADB, reached a record-high of 217.4 basis points on Jan. 2, Credit Suisse data show. A basis point is 0.01 percentage point. A benchmark for borrowers, the midswap index lies between the bid and asking yields on contracts exchanging fixed for floating interest-rate cash flows.

The World Bank, which now finances AIDS prevention in Botswana, will more than double borrowings to as much as $35 billion this year to help provide food, health and education services through the International Bank for Reconstruction and Development, Richardson said. Robert Zoellick, the bank’s president, recently announced plans for $100 billion of new loans over the next three years to relieve the recession. The lender issued $1.5 billion of five- year notes on Oct. 1 at 35 basis points below the midswap rate, a record low for that maturity, according to Richardson. The International Monetary Fund, a Washington-based agency of the United Nations that monitors the global economy, may sell its first bonds to China and Brazil to raise money to combat the downturn. IADB borrowings will total $15 billion to $20 billion this year, up from $6 billion to $7 billion in 2007 and $11 billion in 2008, said Soren Elbech, the bank’s treasurer.

"There is a major crisis going on, and institutions like ourselves have been asked to step up to the plate and use our financial strength and pass it on to the regions that we cover," Elbech said. "The IADB is heeding that call." While development lenders’ spreads more than tripled since October, the yield premiums on World Bank and other supranationals’ bonds have narrowed since their sale as corporate credit markets begin to heal. The three-year notes sold by the World Bank on March 26 rose to 100.4 cents on the dollar as of yesterday to yield 50.8 basis points more than Treasuries, according to Bloomberg data. That’s down from 82.2 basis points when they were issued. Spreads on the IADB’s five-year notes sold April 13 fell to 109.8 basis points over Treasuries as of yesterday, from 140.25 basis points at their sale.

Increased financing costs are being passed to borrowers, according to Horst Seissinger, head of debt capital markets at Frankfurt-based KfW, which has a direct guarantee from the German government. "What we are doing is what all the banks have to do," he said. "The interest rates for the loans we grant to our customers have to reflect the re-pricing we have seen in capital markets over the last few months." Nathalie Druecke, a spokeswoman for the bank, said she couldn’t specify which projects are paying more because of the cost increase. KfW’s increased borrowing costs aren’t reflected "on a one to one basis," in its lending, she said. Development lenders face higher costs than the AAA-rated World Bank. IADB, which last month said it’s supporting $2 billion in Latin American and Caribbean energy-efficiency projects with the Export-Import Bank of Korea, paid 83 basis points more than the midswap rate on notes sold April 13 and due in 2014, according to Bloomberg data. That compares with 24 basis points below the benchmark on similar debt sold in February 2008.

KfW, a sovereign agency, sold $4 billion of notes due 2014 on March 3 priced to yield 162.8 basis points more than similar- maturity Treasuries, or 95 basis points over midswaps. The bank paid 83.5 basis points more than Treasuries, or 20 basis points less than the midswap rate on five-year debt sold in July, Bloomberg data show. Supranational borrowers’ costs "went from the best of times to the worst of times within a matter of weeks," said Daniel Shane, head of Morgan Stanley’s supranational and sovereign debt syndicate in London. Banks began issuing government-backed debt on Oct. 22, when Barclays Plc of London sold 3 billion euros of three-year notes. The guarantees were intended to help unlock credit markets, which had been effectively shut since the bankruptcy of Lehman Brothers Holdings Inc. a month earlier.

New York-based Goldman Sachs opened the market for FDIC- backed debt on Nov. 25, issuing $5 billion of three-year notes. With top AAA rankings, they were priced to yield 200 basis points more than similar-maturity Treasuries, according to Bloomberg data. Bank of America, based in Charlotte, North Carolina, is the biggest user of the FDIC program, raising $41.7 billion of dollar-denominated debt since Dec. 1, Bloomberg data show. "Credit market conditions have improved in response to government stabilization efforts such as the TLGP," Andrew Gray, an FDIC spokesman, wrote in an e-mailed statement. "The FDIC has taken steps to reduce reliance on this program, including establishing the deadline of Oct. 31, 2009 for any new issuances," Gray wrote. "Clearly this is not a program that will exist in perpetuity."

Worldwide losses tied to distressed loans and securitized assets may reach $4.1 trillion by the end of 2010, prompting private banks to further curtail lending, the International Monetary Fund said in an April report. The IADB, which may approve a record $12 billion of loans to finance projects and enhance social programs in 2009, has raised lending rates, Elbech said. He wouldn’t elaborate. Borrowers from the World Bank are still paying about the London interbank offered rate, the same as a year ago, according to Richardson. The institution’s cost of new debt hasn’t yet affected the overall average yield on existing bonds, Richardson said. Libor is the rate banks say they charge each other for loans. It was set at 1.02 percent yesterday for three-month credit. "If we’re going to be issuing at these wider, above-Libor spreads for a while, then you’ll see that lending rate move slowly higher," he said.

UBS Says U.S. Wants Bank to Break Swiss Criminal Law
A U.S. lawsuit to force Zurich- based UBS AG to reveal names of 52,000 American customers would require the bank to violate Swiss criminal law that bars such disclosures, the company said in a court filing. UBS, Switzerland’s largest bank by assets, responded today in federal court in Miami to the Feb. 19 lawsuit, saying the U.S. action seeks to trample on Swiss sovereignty by trying to enforce summonses from the Internal Revenue Service. Such a request also would violate tax treaties between the U.S. and Switzerland, according to the filing. "The IRS now asks this court to force a Swiss financial institution and its employees, over the express objection of the Swiss Government, to violate Swiss law by producing a massive quantity of confidential account information located exclusively in Switzerland," according to the bank’s response.

The lawsuit came one day after UBS avoided U.S. prosecution for helping wealthy Americans evade taxes. UBS agreed to pay $780 million in penalties, admitted it helped taxpayers hide money in Swiss accounts, and gave the IRS more than 250 client names. Two UBS clients have been prosecuted for tax crimes since then, and the IRS is encouraging others to avoid criminal charges by disclosing their offshore accounts voluntarily. "Having received $780 million from UBS for UBS’s violations of the laws of one country, the U.S. Government would now force UBS and its employees to break the criminal laws of another," according to the UBS filing. UBS employees would "commit at least three crimes under Swiss law" that prohibit disclosure of personal financial data to third parties, according to the filing.

Saying the case is "fundamentally an issue for diplomats, not litigators," UBS lawyers wrote that the U.S. and Swiss have agreements in place for exchanging tax information. Under a 1996 treaty, Switzerland may turn over account data only on a reasonable suspicion of "tax fraud or the like." Unlike the U.S., the Swiss don’t view tax evasion as a crime. Switzerland negotiated for years "with the understanding that the inroads on Swiss sovereignty and financial privacy the treaty authorized" at U.S. insistence "would be the only ones Switzerland would be expected to permit." U.S. courts have refused to enforce similar summonses from foreign countries, according to the filing.

By seeking records spanning seven years for so many clients, the action "appears to be one of the broadest, if not the broadest, ever served by the IRS on any institution, domestic or foreign," the lawyers wrote. The IRS voluntary disclosure program, which requires taxpayers to pay taxes and interest for six years on offshore accounts, will better serve the agency’s goals, they wrote. UBS has offered to provide clients with documentation for voluntary disclosures and "many thousands of clients have requested the necessary documentation or transferred their assets" to the U.S., according to the filing.

As part of its deferred-prosecution agreement, UBS admitted Feb. 18 that from 2000 to 2007, its Swiss private bankers helped Americans evade U.S. taxes through sham offshore companies in tax havens such as Panama, Hong Kong and the British Virgin Islands. UBS said it created misleading forms saying those companies, not taxpayers, were the beneficial account owners. UBS also admitted that its private bankers marketed securities and banking services in the U.S., even though it didn’t have the required license from the Securities and Exchange Commission. Those bankers, UBS admitted, met with clients in the U.S. and communicated with them regularly as they traded securities in their accounts or transferred assets. As many as 60 Swiss-based private bankers traveled to the U.S. with encrypted laptop computers to maintain client secrecy and received training on how to avoid detection by U.S. authorities, according to the bank’s admission.

Record numbers go bankrupt in Britain
A record number of people went bankrupt during the first quarter of the year as the economic downturn continued to take its toll, figures from the Insolvency Service showed. A total of 19,062 people were declared bankrupt on a seasonally adjusted basis during the first three months of the year, 23.4 per cent more than during the same period of 2008, the Insolvency Service said. The number of people who went insolvent, which includes both bankruptcies and those taking out an Individual Voluntary Arrangement (IVA), also rose to a new high of 29,774. Within this total, 10,713 people took out an IVA, under which interest on debt is frozen in exchange for a set amount being repaid each month, 3.6 per cent more than during the previous quarter and an 11.8% rise year-on-year.

The rise in bankruptcies was even more dramatic on a non-seasonally adjusted basis, soaring by 14% compared with the previous quarter to 20,446, while they were 29% higher than a year earlier. The total number of people declared insolvent jumped to 30,253 on a non-seasonally adjusted basis, up from 28,471 in the previous quarter. Experts expect the number of personal insolvencies to continue to increase during 2009, to reach a record 150,000 for the year, well up on the previous high of 107,000 in 2006. The figures also showed a steep increase in the number of companies going into liquidation, soaring by 56% in the past year to 4,941 on a seasonally adjusted basis. On a non-seasonally adjusted basis the figure was the highest level for 16 years.

UK company failures jump by 56%
Company failures and personal insolvencies rose sharply in the first quarter of the year as the recession continues to bite. Figures from the Insolvency Service show that 4,941 companies in England and Wales went into compulsory liquidation or creditors’ voluntary liquidations – where shareholders opt to put a company into liquidation because it is insolvent – in the first three months of this year. This is a jump of 56 per cent from the same period in 2008 and a 7.1 per cent rise on the fourth quarter of 2008. One in every 130 active companies went into liquidation in the 12 months ended March 2009. This compares with one in every 150 actively traded companies going into liquidation in the 12 months ended December 2008. The number of troubled companies falling into insolvency continues to soar, with 1,311 being placed into administration in the first quarter of 2009, compared with 859 in the first quarter of 2008.

The figures show the growing impact of the recession – particularly as the number of individuals declaring themselves insolvent has also started to rise. There were 29,774 individual insolvencies in the first quarter, up 19 per cent on the first quarter of 2008, as the recession started to hit over-indebted consumers. Personal bankruptcies rose to 19,062 – up by 23 per cent from the first three months of 2008. KPMG, the consultants, expect around 150,000 people to be declared insolvent during 2009, up from a previous high of 107,000 in 2006. These will include people who take out individual voluntary arrangements (IVAs), a form of insolvency, and people who opt for a debt relief order, a new form of bankruptcy for people with debts of less than £15,000 that was introduced earlier this month. Pat Boyden, at PricewaterhouseCoopers Business Recovery Services, said: "We expect to see the trends continue, particularly the rise in bankruptcies, as the recession bites. "What may be interesting is that in the 1990s recession, bankruptcies continued to increase for nearly three years after the worst of the recession had passed.

If that is the case this time, we may be seeing record figures every quarter until 2012. "We are already seeing the impact of the recession on the self-employed, with a 10 per cent increase in the number of traders going bankrupt in 2008 in comparison with the previous year. We expect this to increase more sharply during 2009." Insolvency experts say company insolvencies were continuing to rise despite attempts by banks and the government to extend credit lines to companies. "Unfortunately, the trickle of liquidity beginning to seep back into the financial markets is too late for these businesses," said Malcolm Shierson, partner at Grant Thornton’s recovery and reorganisation practice. "As company insolvencies typically lag behind overall economic performance, it is safe to say that we haven’t seen the worst" he added.

British MPs blame bankers for 'astonishing mess'
Bankers have been accused of making an "astonishing mess" of the financial system, in a report by Treasury Select Committee. There had been a "comprehensive failure of the banking system at all levels", said chairman John McFall In the committee's second report on the banking crisis published on Friday. He added that senior executives in banks, non-executive directors, governments and regulators were all partly to blame. The MPs said it was "deplorable" that banks, which have been propped up with billions of pounds of taxpayers' money, are not extending new loans to customers. The committee also called on the Financial Services Authority to review the Financial Services Compensation Scheme (FSCS) "with urgency". The funding scheme to help consumers of failed financial institutions penalised building societies and should be made more fair, according to the committee.

Building societies complain that they have to put up a disproportionate amount of funding for the FSCS compared with banks because of the way the industry-wide levy is structured. The scheme collects a fee from each bank and building society based on its share of deposits. As building societies fund a far greater proportion of their business from customer deposits than from the wholesale money markets, the fee represents a larger chunk of the profits of mutually-owned businesses. The Treasury Select Committee said it was "entirely inappropriate" that building societies, which are broadly seen as having safer business models than banks, have been penalised. The committee has grilled a string of former bankers such as Sir Fred Goodwin, the ex-chief executive of Royal Bank of Scotland, and Andy Hornby, the former boss of HBOS, about the collapse of some of the UK's biggest banks.

While critics have said the committee failed to land any body blows, the sessions prompted bankers to apologise for the devastation of the banking system, though none took personal responsibility. The group of MPs said there was a "pressing need" for the Government to give more clarity on its plans for the controlling stakes it owns in Royal Bank of Scotland and Lloyds, and over Northern Rock, which was completely nationalised in February 2008. They also said UK Financial Investments, set up by the Treasury to manage the Government's bank holdings, should be formally separated from the Treasury and for its objectives to be spelled out. The MPs also called for more information about the quality of banks' assets which have put into the Government's insurance scheme. Taxpayers will fund payouts form the scheme. Vince Cable, the Liberal Democrats Treasury spokesman, said the report was "disappointingly weak". Mr Cable added: "It fails to meet the previous standards of tough criticism advanced by the select committee when interrogating the bankers."

Toyota Partmakers in Japan Hire Detectives to Hunt Bankruptcies
Hironori Minezawa, a private detective, spends his days investigating struggling autoparts makers in Toyota City, Japan, as cuts by Toyota Motor Corp. end a 7-year expansion for the city’s thousands of parts suppliers. Toyota slashed production following the automaker’s first loss in 59 years, pushing some partsmakers into bankruptcy. Minezawa said he is employed by Toyota suppliers to find out whether subcontractors may fail, leaving his clients unable to fill their own orders. "A rumor of a possible bankruptcy gets out, and we are called in to find out what’s going on," said Minezawa, who works for Tokyo Shoko Research, based in nearby Nagoya. "These companies aren’t getting any work and are at the end of their tethers."

Failure of the weak links in the chain may force Toyota to turn to suppliers outside its traditional network, ending the company’s stranglehold over a procurement system that has driven down profit margins at subcontractors to 1 percent or less, said Takeshi Miyao, a Tokyo-based supply chain analyst at CSM Worldwide, which advises the auto industry. "This would change the balance of power and could become reflected in prices," Miyao said. Toyota’s supply network consists of two groups: the 217 primary partsmakers that deal directly with the carmaker and their subcontractors. Toyota spokeswoman Ririko Takeuchi declined to comment on the company’s pricing practices or negotiations between its suppliers and their subcontractors. Minezawa expects bankruptcies to mount over the next six months, particularly in the lower ranks of Toyota’s supply chain.

"Profit is next to nothing," said Kazushi Kawabata, president of Comco Holdings Inc., a maker of machine tools, that supplies Toyota. "The suppliers are totally in Toyota’s grip." Nationwide, bankruptcies in the auto sector surged 52 percent to 41 cases in March compared with last year, according to Tokyo Shoko. The number of newly registered unemployed in Aichi prefecture, which includes Toyota City, jumped 88 percent in February. About 80 percent of the labor force in Toyota City serves the auto industry, according to Norio Seki, the head of the city hall’s industrial affairs division. Domestic production of Toyota and Lexus cars fell last year to 4 million vehicles, the first decline in 7 years. The cuts have rippled through the local economy.

In the Meitetsu Toyota Hotel, opposite Toyota City rail station, occupancy rates have halved since October to as low as 30 percent, said front desk manager Chiharu Suzuki. Foreign suppliers, who used to make up more than half the hotel’s guests, are gone, leaving the once popular samurai swords untouched in the gift shop, she said. At the Hello Work employment agency, Satoru Tsuda, a 31- year-old Japanese-Brazilian from Parana in southern Brazil, is trying to find work to meet his family’s 41,500 yen monthly rent. He, his two brothers and his parents worked for 12 years at an engine-parts factory until they were fired in March, he said. Toyota may post a 227 billion yen ($2.34 billion) loss for the year ending March 2010, according to the median of 20 analyst estimates compiled by Bloomberg. The company forecast a loss of 350 billion yen for last fiscal year. It reports earnings on May 8th. The carmaker said it may cut global production by 12 percent this fiscal year to about 6.2 million vehicles. As Japanese companies report earnings for the fiscal year ended March, more bankruptcies may come to light, said CSM’s Miyao.

Nihon Koshuha, a maker of car-door parts for Toyota affiliate Toyota Boshoku Corp., halted operations on March 3 after orders dropped and the company couldn’t service debt on a new plant built in 2007. Taishin Kasei Inc., a maker of plastic car interior and body parts in Nagoya, ceased production in April and filed for bankruptcy. Former President Eiji Toyoda, great-uncle to incoming President Akio Toyoda, once said "water can be wrung even from a dry towel if you put your mind to it," to explain how the company overcame the economic crisis following the 1973 oil shock, according to the company. This philosophy permeates the supply chain, Miyao said. Sub-suppliers’ profit margins are restricted because they are expected to open their books and show their costs to customers, he said. The price of their products is then typically decided after delivery, Kawabata and Miyao said. "Part of Toyota’s success is based on its ability to squeeze parts makers," said Bob Sliwa, advance design director at Nagoya-based Cobo Design Co., which works with Toyota suppliers such as Denso Corp., the world’s largest listed auto- parts maker.

Toyota group companies like Denso and Aisin Seiki Co., Japan’s largest maker of car transmissions, in which Toyota has equity stakes, sell to automakers around the world. Sales to carmakers other than Toyota make up about half of Denso’s business. In contrast, most secondary suppliers in Toyota City make parts only for Toyota. Denso set up a taskforce in January to help sub-suppliers cut costs, said spokesman Goro Kanemasu. Comco’s Kawabata said the company’s relationship with Toyota "shocked" him when he joined his father’s business in 1981, leading him to diversify his company from being completely dependent on the Toyota group to getting 80 percent of sales from other companies. Subcontractors "are pushed to cut costs in units of hundredths of a yen at times," Tokyo Shoko’s Minezawa said. "It’s that kind of world."

For a happier life, shake off your misplaced optimism
It has been clear for a while, at least since the first talk started about "green shoots" of recovery, that what we have to fear above all is hope. Attempts to trust that the worst is over and to stop frightening ourselves seem doomed to project us into yet worse disappointment. We are not only unhappy but – believing calm and happiness to be the norm – unhappy that we are unhappy. It is time to recognise how odd and counter-productive is the optimism on which we have grown up. For the last 200 years, despite occasional shocks, the western world has been dominated by a belief in progress, based on its extraordinary scientific and entrepreneurial achievements.

On a broader perspective, this optimism is a grave anomaly. Humans have spent most of recorded history drawing a curious comfort from expecting the worst. In the west, lessons in pessimism have derived from two sources: Roman Stoic philosophy and Christianity. It may be time to revisit some of these teachings, not to add to our misery but precisely so as to alleviate our sorrow. To focus on the first of these sources, the philosopher Seneca should be the author of the hour. Living in a time of financial and political upheaval (Nero was on the Imperial throne), Seneca interpreted philosophy as a discipline to keep us calm against a backdrop of continuous danger. His consolation was of the stiffest, darkest sort: "You say: ‘I did not think it would happen.’ Do you think there is anything that will not happen, when you know that it is possible to happen, when you see that it has already happened ... ?"

Seneca tried to calm the sense of injustice in his readers by reminding them – in AD62 – that natural and man-made disasters will always be a feature of our lives, however sophisticated and safe we think we have become. If we do not dwell on the risk of sudden calamity, in the money markets or elsewhere, and pay a price for our innocence, it is because reality comprises two cruelly confusing characteristics: on the one hand, continuity and reliability lasting decades; on the other, unheralded cataclysms. We find ourselves divided between a plausible invitation to assume that tomorrow will be much like today and the possibility that we will meet with an appalling event, after which nothing will ever be the same again. The Goddess of Fortune can scatter gifts, then watch as with terrifying speed a 50-year-old company disappears or a balance sheet is destroyed by toxic assets.

Because we are hurt most by what we do not expect, and because we must expect everything ("There is nothing which Fortune does not dare"), we must, argued Seneca, hold the possibility of the most obscene events in mind at all times. No one should make an investment, undertake to run a company, sit on a board or leave money in a bank without an awareness, which Seneca would have wished to be neither gruesome nor unnecessarily dramatic, of the darkest possibilities. Given our financial prowess, we have for too long thought of ourselves as in control of our destiny. We have trusted in the mathematical geniuses who promised us "risk management" and fashioned derivatives so complex we dared not look inside. Such trust could not be further from a Stoic mindset. We must, stressed Seneca, expand our sense of what may go wrong in our lives: "Nothing ought to be unexpected by us. Our minds should be sent forward in advance to meet all the problems, and we should consider, not what is wont to happen, but what can happen. What is man? A vessel that the slightest shaking, the slightest toss will break. A body weak and fragile."

Christianity only backed up the Stoic message. It pointed out that while humans might strive for perfection, it is a problem – indeed a sin – to suppose that such perfection can ever occur on earth. Nothing human can ever be free of blemishes. There cannot be an end to boom and bust, mayhem and death. We have tended to cast such gloomy messages aside. The modern bourgeois philosophy pins its hopes firmly on two great presumed ingredients of happiness, love and work. But there is vast unthinking cruelty discreetly coiled within this magnanimous assurance that everyone will discover satisfaction here. It is not that these two entities are invariably incapable of delivering fulfilment, only that they almost never do so for too long. When an exception is misrepresented as a rule, our individual misfortunes, instead of seeming to us quasi-inevitable aspects of life, weigh down on us like particular curses.

In denying the natural place reserved for longing and disaster in the human lot, the bourgeois ideology denies us the possibility of collective consolation for our fractious marriages, unexploited ambitions and exploded portfolios, and condemns us instead to solitary feelings of shame and persecution for having stubbornly failed to make more of ourselves. We should, of course, instead remember the great pessimistic voices of history. There are two quotes I cherish for these sorts of times. One is from Seneca: "What need is there to weep over parts of life? The whole of it calls for tears." The other is from the French moralist Chamfort: "A man should swallow a toad every morning to be sure of not meeting with anything more revolting in the day ahead."


rapier said...

I'll say again Chrysler was 'saved' so as not to damage confidence. More than one analysis I have seen, can't link to and might have shown up here, is that the administration and the financial world are in the thrall of behavioral economics which posits that expectations, confidence, or whatever words you chose are the main driver of economic results. Not say 100% overcapacity or the still massive overhang of systematic debt.

So they are playing the confidence game and confidence game is the root of con game. I can't say if they believe their own con or not. The last six weeks are certainly not going to discourage them.

The stock market is the engine of the confidence game for virtually every American. The stock market is the grand totem of all our hopes and fears. It is a self contained thing in that it is the medium and the message, not in the McLuhan sense exactly. When it's rising it means confidence is growing and engenders more confidence and more rise. The obverse pertains as well.

The dirty secret is that the rise and fall is based upon liquidity, the amount of money available to throw at it. The growing promises of money for the financial realm from March 04 going from $4 trillion to six, eight, ten and finally 12 trillion took hold when Ben finally put the press into action for the Primary Dealers.

Stocks have had an historic rally and green shoots appear everywhere. It must be appreciated that the Fed will print till CPI rises. Which followed to a logical conclusion could lead to my nightmare/daydream prediction of many years ago. DOW 36,000 and tribes of homeless wandering the land. Not saying it will happen. Just that is one possible outcome that a simple logic implies.

Anonymous said...

The previous set of comments were having a bad hair day.

I hope someone hit the RESET button.

Anonymous said...

What if a portion of all the bailout/failout Tarpapolooza faux money was diverted from the get go back into the stock market.

It was a below the boards condition of receiving Tarp dough in the first place.

The legendary Plunge Protection Team's new lease on life, a huge new stream of funds to play the confidence card with.

You can pump and dump a lot with a revenue stream like TARP.

Attempting to influence herding behavior by grossly manipulating the Stock Market with taxpayer failout money laundered through TARP seems like a marriage made in heaven for gang banksters.

Jim R said...

Hmm. I wonder what Mr. Keiser would say about the UAW owning 55% of GM. Or what TAEers would say.

Is the UAW really a union any more, and doesn't that deal make it part of management?

Unknown said...


Wasn't there an economist back when who said something about workers owning the means of production.:)

I'd imagine that this deal, if it goes through is just a sign that everyone believes that Chrysler is worthless and bound to disappear.

SanderO said...

The decision to preserve the auto industry in America is wrapped up in America's love of the automobile. As this part pf her (his) self esteem is torn asunder moral will further weaken and the down sprial will gain momentum

It is to preserve the illusion of America and her freedom and command of the open road. All of course nonsense, But so is NASCAR.

America can't take the medicine she needs and that is to dump all the old financial institutions, redefine what are public utilities and in the interest of the people. America needs to grow up and realize that it was living in a fog, fairy tale of endless wealth and energy.

She needs to find sustainable solutions which includes population control and disarmament as her military adventurism has only accomplished angering the rest of the world that wasn't involved in the raping.

None of these palliatives will matter as this house of cards is going down. It may be the only thing which will enable someone to rise from the ashes. We obviously (our leaders) haven't accepted that this system cannot be fixed. This Humpty Dumpty cannot be put back together again..

*** said...

Just curious to hear from any biology buffs among readers...

We are somewhat outside of Guadalajara, and are seeing strange things among animals. First, last Saturday our neighbors took their beautiful, healthy little puppy to Mexico City where they work, and the little dog quite suddenly died of respiratory failure.

Here, for the last three days we've been finding dead sparrows in the horses' water, also on the ground.

There's a lot of strange dusty material blowing around.

We don't ordinarily see dead birds.

This is why I think there's something different going on than the human-to-human scenario.

Thanks and I'll "take my answer off the air."

Anonymous said...

Happy first of May!

jal said...

US vs Europe: Who is the Welfare State?
-Europe has cradle to grave health care plans, generous unemployment benefits, and free or subsidized college costs.
-The US gives away public assets (oil, gas, mineral rights) for pennies on the dollar, has huge subsidies and tax breaks, and bails out reckless speculators.
It turns out that both regions are welfare states — only in Europe, the natural population (i.e., people) is the recipient, while in the US, the corporate population is the beneficiary.
No true republican or neoliberal would accept that coporate america are benefiting from government hand outs.

My point of view is that the "bankers" are the monkeys on everyones back and they are the ones making the decisions of who can best survive to continue paying compound interest to them.

Chaos said...

This is the "long con", not the "short con." Takes awhile, as I understand it.

@ Ilargi,

This post, far from being repetitive, was one of your best. Eviscerated the entire rationale for saving an already bankrupt company. I'd sure like to hear the counterargument, if there is one, but I suspect there's not.

EBrown said...

"Eventually the market calls all bluffs." I think in any nominally free-market society this is true, and one of these days it will call the US Government to task for trying to bluff its way through to better times. Not quite yet, in my opinion. I think 2010 will be one heck of a tough year...

rapier said...

The April auto sales numbers project to over 9 million cars a year. This production is still a stupendous undertaking. That production is still an important part of the physical economy. As opposed to the financial economy.

The fear, probably misplaced, is that the entire supply chain and manufacturing infrastructure might collapse. This is something the political sphere cannot allow. A nation nation without an auto manufacturing base is not considered a first world nation. Next to being self sufficient or nearly so in food production auto production is for politicians and citizens a near existential necessity.

The tens of billions of dollar, duck tape and super glue, ad hoc auto bailout isn't rational. It's practically a lizard brain response to the economic crisis.

lineup32 said...

"The fear, probably misplaced, is that the entire supply chain and manufacturing infrastructure might collapse."

Well if they geared up for 19 million car production and only have 9 million on the table then the supply chain will collapse or at least contract significantly. Lets not forget that the suppliers have loans for all that high tech equipment and inventory to produce enough parts to supply the 19 million production so major banks are on the hook for a large part of the auto production shrinkage. Floor funding for the car dealers etc can all be added to the every expanding debt pile.

Mugabe said...

I would join the ranks of puzzled regarding "saving" Chrysler. Regarding Rapier's theory -- it seems that confidence would have been better served by liquidating Chrysler so GM and Ford have a better chance to stop bleeding. Two observations:

1) The most politically happy and confidence-building result would have been a liquidation under the guise of a merger with GM, whereby GM picks up the Jeep brand, the unused pens in the supply cabinet, whatever other assets of real value that Chrysler has; but none of its liabilities so as not to GM's already unbearable burdens. To do that, the deal would have needed to be lubricated by >$10 billion of taxpayer cash never to be seen again. The fact that BO and team did not do that (it hasn't been on the table for a long time) means that they are cutting their (our) losses. For once they passed up something because it would be a waste of money.

2) It's not at all clear that Chrysler would be "saved" by the vaunted government-backed deal that those evil hedge funds blocked, or that it has been saved now by bankruptcy. The government basically wrote off its earlier gift to Chrysler, and cut it loose to float down the river (or did I miss something??). BO didn't want to be the one who dragged Chrysler out behind the tool shed to be shot. But they washed their hands of it, and when it fails later they can just let it go.

jal said...

The recorded seminars are available at
PIRSA:C09006 - The Economic Crisis and It's Implications for The Science of Economics
The conference will begin on May 1, 2009, with a day of invited talks by leading experts to a public audience of around 200 on the status of economic and financial theory in light of the crisis. We will then continue for three days of focused discussion and workshops with an invited group of around 30, aimed at defining research agendas that address that question and beginning work on them.

Starcade said...

I state again, Obama "saved" Chrysler to avoid the social unrest which comes from true 25%+ unemployment (we're going over 20% this month, and that's without Chrysler and GM, which will both be gone once the bondholders get a whiff of what Obama is cooking up)...

Starcade said...

SanderO: But here's the back side of what you are saying...

Once you limit the process of energy and growth, you _MUST_, as an immediate corollary, limit the population of that same culture as well -- and I assert that such a limit for the US would be a SIGNIFICANT culling of the herd.

Anonymous said...

The more I watch this unfolding slow-motion train wreak with the car companies,the worse I feel..... the long term chances of a "fix"for the economy,that does a not include a catastrophic reversal for the average citizen are becoming slimmer daily.

We are still eating,their is geehaws in the big box stores,and the TV works.Everything must be just fine...Except it isn'.I spend my days in the garden,or tending hives,or practicing my carpentry skills...but I am not working at a somewhat specialized task that took me ten years to learn well...I am not using the skillset that took me twenty years to learn
at the level I am now....Its almost like a mental itch ,wanting to go do the thing I did well...and oh,yes do miss the pay...
Ah well...

One uncomfortable thing about my current situation is that I have lots of time to dwell,and research,whats going on in the wide wide world

I have to stay off the box,or I will not get done the work a small place needs...and the bees always need attention...

That said,our gentle hosts have distilled the information we all need down to a manageable drink,not the firehose of the web...thank you again I&S for your labors...they are appreciated.

This controlled collapse of the car manufacturing capacity of the usa disturbs me on whats seems to be a oddball level...I wonder what the .Mil boyos will use for their base of heavy manufacture for all the toys a .mil needs...or will they buy overseas versions of tanks,and humvees,and other specilised .mil manufacture is the base those other specilised industries stand on...where they get their trained staff,ect

We have lost shipbuilding...aircraft is going to china......most railcare and heavy gear is in Mexico now...If the car manufacturing goes,just what the hell are we going to make?
Wind turbines and photo-cells?I do not think so..the largest manf. in the world is here in Oregon making solar cells ...and they were talking like 200-300 jobs...
Not much of a "major" industry...
They do not want to admit 3 things.1.That 20% of the work in the USA was construction 2.Those jobs are gone gone gone jack...3.You cannot take 20-30% of a entire countries employment w/o screwing up EVERYTHING.Totally.For a long time....
Those boys aren't the sharpest knives in the drawer,but they will figure out ,eventually,who screwed them.
When all the working folk start to show just how angry they are i think this will scare hell out of a lot of people who should be paying better attention then they are.Those congresscritters that voted with the banks will have some 'splaining to do I folks are paying attention now.Saying you dance with whom brung you wont cut it very long with the sentiment of many now..At least I hope they are paying more than lip service to the public..
It really burned me that Tester ,[D Montana new senator] went with the banks...I had thought better of him.
You ask why the banksters are still listened to....

I do understand why...they write big checks.It does not matter if they stink ...the smell of money over-rides the stench of corruption to those in the nations capital,god help us.Until the rule of law is returned to the USA we will have no justice,poor governess and little better rule than a banana republic.O-man has been chumped[punked] by the banksters.

Which means we all are screwed...
Too tired...gnite


Anonymous said...

Bicycle Mechanic

Chrysler Dodge, saved. Perhaps that wasn't the point.

The US does not have any real tool, die, and machining done anymore, except at NASA and the Car companies.

Let the car companies go away and a resource that could be needed for self defense or offense depending on who has the Job as the big cheese, to protect the United States (not the people per say) on his watch. Kind of thing that could bite you back in all kinds of ways.

America and cars are like mom and apple pie to the locals, and a dream then spread around the world.

The dream is fading, and if the tools that built it are gone, then it can't be rebuilt.

NOT saying it could be, or should be, but if you're the big cheese, then you have to show hope, perhaps even when there isn't any.

The song wasn't in the movie. A youtube creation of a new music video.

Mental Illness, or a talent that got out of control. I saw the movie, and didn't read the book. Though I was told their was subtle difference in the two.

In the movie, it was govt. that came to him and recruited him (and it was an figment of his imagination that compelled him to bury himself into this type of code breaking).

And this form of code breaking he did is a real method. Hard to break because the "reader" of the article etc, only knew what to really look for, but it isn't foolproof perhaps.

Oh, in the book, he didn't think he was being asked to help save the world by the US govt.

It was visitors that did not belong to this planet lets say.

Subtle difference for the movie audience, or not.

Persephone said...

Bank Failures Friday

Bank Failure 30: Silverton Bank, National Association, Atlanta, Georgia
Bank Failure 31: Citizens Community Bank, Ridgewood, New Jersey
Bank Failure 32: America West Bank, Layton, Utah

OldSkeptic said...

Hah Optimism.

"An unnatural state of mind that inevitably leads to incorrect decision making, then when the decison fails (as it always does), then regresses to cognitive dissonence and is thus completely seperated from reality".

Basically optimism and life is like taking mind altering drugs and trying to drive at 100mph .. it will always end in tears.

For years now we had it rammed down our throats that optimism was a good thing. Really, unrealistic hope and a distorted view or reality was a good thing?

Anyone want an optimist to make their bridge or plane (then again Boeing is trying that now with the (wet) Dreamliner)? Fancy an optimist operating on you?

No we want unreconstucted pessimists, who work out all the angles, work out all the potential problems and fix them BEFORE they happen .. and have a plan B .. plan C, etc.

One, day when we are civilised (Gahndi when asked what he thought about western civilisation, said he though ot would be a good idea) optimists will be detected in the womb then cured, before they can be born and stuff things up.

Optimism has killed more people, wrecked more lives, created more wars than any other facet of the human mind.

Good things dont happen, they are made to happen. Skeptics, cynics and pessimists know that making good things happen takes a lot of hard work, a lot of thinking and planning and some luck (which is why you need plan B's).

Anonymous said...

There will be only One car company after this Deluge comrade citizen.

One Car Company for the Glorious Road Forward into the New American Century.Everyone can drive the same standard issue vehicle, oddly enough, shaped like a Humvee, but much smaller, kinda like a go-cart.

"Onward and upward" Excelsior!

rapier said...

I have to take issue. The US does have a tool and die industry. The vast majority of such work today however is done for plastic injection molding.

There is not a single area of modern high tech manufacturing that is not being done or is not capable of being done in the US. The manufacturing infrastructure and know how in America still exists. What American has found it difficult if not impossible to do relates to higher volume manufacturing of machine tools. For all practical purposes the US has no machine too industry. There are still thousands of small firms and hundreds of thousands of skilled workers to operate those machine tools. There is also a deep well of design and manufacturing engineers.

As I said before making 9 million light vehicles is still a stupendously large undertaking. Imagine 9 million of anything.

Making a profit in manufacturing in America is exceedingly difficult. The reasons are complex. My crackpot theories start with the culture itself. Would you want to work in a factory? Nobody does. Since the 60's manufacturing has been held in varying degrees of contempt, especially among our elites. The weight of that disrespect has had a pernicious effect on American manufacturing. Institutionally and individually. We still slap made in America stickers on the stuff we make but that is a cheap substitute for real pride.

Since the day WWII ended cost accountants could not justify investment in plant and equipment in manufacturing. They had a point in that making really big money is almost impossible in manufacturing. One way or another investment in American relentlessly skewed to purely financial assets because they could so easily and cleanly be inflated.

Anonymous said...

The US is simply shedding it's veneer of humananist concerns to reveal it's true reptilian nature.

A corporate-military LLC where everything manufactured is filtered through the lense of; does it benefit or hurt the military and pirate profits for the corporate mobsters.

All other considerations are not on the table, ever.

The military/ police state will control the fuel supply, the water supply and the food distribution system.

Everyone will dress in olive, kaki or grey, the new national colors.

Anonymous said...


Why did you edit your reference to American's who bought cars on credit as "deadbeats"?

This type of impassioned and vitriolic rhetoric is actually very revealing. Backpeddling after the act only leaves one with a Will O' The Wisp impression.

As far as reading into the intentions of Obama--that's beyond the capability of the mere journalist. One of these days a truly gifted writer and perceiver of the human psyche will give it a go, and most likely fail. There are only so many Mark Twain's after all. Twain writes:

" A foreigner can photograph the exteriors of a nation, but I think that is as far as he can get. I think that no foreigner can report its interior--its soul, its life, its speech, its thought. I think that a knowledge of these things is acquirable in only one way; not two or four or six--absorption; years and years of unconscious absorption; years and years of intercourse with the life concerned; of living it, indeed;
sharing personally in its shames and prides, its joys and griefs, its loves and hates, its prosperities and reverses, its shows and shabbinesses, its deep patriotisms, its whirlwinds of political passion, its adorations--of flag, and heroic dead, and the glory of the national
name. Observation? Of what real value is it? One learns peoples
through the heart, not the eyes or the intellect.

There is only one expert who is qualified to examine the souls and the life of a people and make a valuable report--the native novelist. This expert is so rare that the most populous country can never have fifteen conspicuously and confessedly competent ones in stock at one time. This native specialist is not qualified to begin work until he has been
absorbing during twenty-five years. How much of his competency is derived from
conscious "observation"? The amount is so slight that it
counts for next to nothing in the equipment. Almost the whole capital of the novelist is the slow accumulation of unconscious observation-- absorption. The native expert's intentional observation of manners,
speech, character, and ways of life can have value, for the native knows what they mean without having to cipher out the meaning. But I should be
astonished to see a foreigner get at the right meanings, catch the
elusive shades of these subtle things. Even the native novelist becomes a foreigner, with a foreigner's limitations, when he steps from the State whose life is familiar to him into a State whose life he has not lived.
Bret Harte got his California and his Californians by unconscious
absorption, and put both of them into his tales alive. But when he came from the Pacific to the Atlantic and tried to do Newport life from study- conscious observation--his failure was absolutely monumental. Newport is
a disastrous place for the unacclimated observer, evidently. "

timekeepr said...

Video link, SNL: Don't Buy Stuff


el gallinazo said...

I used to scan the Huffington Post / business everyday including some comments but gave it up for the most part, about a year ago, and it has been several months since I have been there. I think it would be fair to say that it is by far the largest of the "progressive" blogs. Anyway, today I read the comment section of the article "Citi Could Need $10 Billion In New Capital."

The commenters, and there were hundreds of them, are outraged at the TARP, the Fed, the banksters, and the financial bailouts. I was a bit amazed at their level of understanding as to how we are being looted. If most of the horses weren't already out of the barn, this would be a very positive sign. And of course the Libertarians, as typified by Denniger and Mish, were outraged by the bailouts from before the beginning. Arianna Huffington, a huge supporter of BO, has been ultra critical of him regarding the bailouts. She holds Geithner in total contempt.

It may already be impossible for more TARP money to go through congress traditionally. It would certainly be interesting to watch the attempt. This leaves the Fed and their cash for trash, but even more cleverly, dumping the bailout money onto the FDIC. Looks like Geithner has learned some lessons from the Somali pirates.


Keep those post coming. I look forward to updates of your personal experiences and outlook. We all hope the best for your circumstatnces.


I have been mulling over your comment about the Treasury sending every American a check for a cool million. (I just got a notice from the SSA that I was getting $250 extra from them to prime my pump.) No doubt that it would monetize the debt, but it would also destroy the US Dollar and we would be unable do any international trade. Reminds me of the old Vietnam War maxim, "We had to destroy the village to save it." But perhaps, like the scorpion and the frog, it is simply their nature.

Stoneleigh said...


Be careful what you wish for - in this case you are likely to get it. A world of pessimists is exactly what is coming, and none of us are going to like it at all. Pessimistic periods are characterized by extreme risk aversion, prevailing lack of trust, indifference (at best) as to the suffering of fellow human beings, a mentality of exclusion, racism, active scapegoating, magical thinking and violence.

I do not equate pessimism with thinking things through and planning for eventualities, which everyone should do whichever side of the fence they sit on. I think you confuse pessimism with rationality in this instance, and people are not collectively rational (see the primer Markets and the Lemming Factor on the front page).

We have lived through the largest mania in history, and manias are periods where people collectively take leave of their senses to the upside, but this is not characteristic of more normal optimism. Normal optimism involves, for instance, the risk taking required to start a business and offer employment. It involves at least a presumption of trust in both people and institutions, and a sense of a shared fate for relatively large and diverse groups of people.

Whether it is personally advantageous to be optimistic or pessimistic with regard to risk depends on what the herd is doing. When the herd is pathologically optimistic, as it was for an unbelievably long time long time, it pays to be very skeptical. However, when the herd is pathologically pessimistic, the only opportunities lie in relative optimism.

Many finance types know this, hence the buy-the-dips mentality. The mistake they are making is in the application of the idea - judging what degree of pessimism to associate with a buying opportunity following a mania such as we have lived through over the last couple of decades. People are already talking about buying opportunities now, although we are still far nearer to a top than a bottom. While there can be short term buying opportunities (ie playing rallies), longer term opportunities to buy or build are still years away.

rapier said...

A day late and not the rhetoric I use but deeply appreciate, HT to Illargi for this one.

"blood flowing in rivers off Milton Friedman's 1976 prize."

Ahimsa said...

Adios a Babilonia @10:22

Marijah McCain, a microbiologist and herbalist/naturopath/homeopath, might be able to help you on your inquiry.

She may be contacted via her website:

Anonymous said...

Irrational 'optimism' is what I have suffered with from friends and family for decades.

I despised it. It is the deadly kissing cousin to Willful Ignorance.

Willful Ignorance is something Americans in particular are exceptionly proud of.

Not knowing too much about anything, holistically or otherwise, is seen as a Great Virtue, except in the service flipping a quick profit, or turn another trick on the street, be that Main St or Wall St.

I've tried to live a very low impact lifestyle for decades and gotten nothing but sarcasm, ridicule and disbelief from the majority of people in the communities I've lived in.

I'm not in a particularly generous mood towards the "deathbed conversion' part of the herd right now. You know, the ones who get true religion when they see the hangman's noose being tied for them.

They (the Herd) have done everything in their powers over the last thirty years to destroy the ecology and beauty of the natural world and crank consumption to the absolute max.

It was their decision to make. They have no excuses, such as, "I couldn't help myself, the Herd made me do it!"

That non-excuse sounds as lame and despicable as the old refrain, "The Devil made me do it!"

They made their own bed and they will lie and die in it. Period, end of discussion as far as I'm concerned.

I despise Apologists for the Herd's behavior. They are enablers.

It's like saying someone acts like a criminal because they had a bad childhood. What bull. Plenty have had bad childhoods and rose above Herd GroupThink.

I will foster survival skill in my small community, not because I respect this people who have 'goofed off' the last thirty years, (I don't on any level) but because it is in my own self interest and that of my immediate family.

There is no love lost here on the bulk of the 'herd', just pure practicality.

I live by the reality based Golden Rule, do unto others as they do unto you.

The other version of that is the fantasy, faith based version, for losers.

You know you've finally become a real Adult when you stop using the Herd's behavior as an excuse not to think for yourself and dropping the institutionalized cop-out of Willful Ignorance.

Anyone over eighteen still running with the Herd is a child, not a true adult, by choice.

APC said...

"This post, far from being repetitive, was one of your best. Eviscerated the entire rationale for saving an already bankrupt company. I'd sure like to hear the counterargument, if there is one, but I suspect there's not."Ezra sees it as a victory for Obama, who doesn't appear to have "saved" shit. I'm not saying that I agree, but this has become not just an economic issue, but I would argue, by a larger degree a political one.

Perhaps the american economy has to be eased down, and not just thrown off a cliff, and this president could be just the man to do that. Hope and change, remember?

Anonymous said...


Anonymous said...

Anon 11:21 AM

Well eat the organic and all your minerals vitamins and get lots of rest and maybe you will live long enough to see Armageddon. I get a bit out of sorts, like yourself, about all the newbie's cluttering up the joint but what the hell before me there was a Beat that likely thought the same about me. And what about Ludd poor feller so much ahead of his time? So while I agree that htose newbies do tend to get stuck in ones craw , best to just sit back and be ignorant of them as mucgh aas possible. (BTW anyone know where in the body the craw resides? Used to think, in the throat, but lately I have wondered if it is not more basic and lies in the limbic area of the headbone, whaderya think?)


Anonymous said...

Jan 14, 2004 (CIDRAP News) – One of the worst fears of infectious disease experts is that the H5N1 avian influenza virus now circulating in parts of Asia will combine with a human-adapted flu virus to create a deadly new flu virus that could spread around the world.

That could happen, scientists predict, if someone who is already infected with an ordinary flu virus contracts the avian virus at the same time. The avian virus has already caused at least 48 confirmed human illness cases in Asia, of which 35 have been fatal. The virus has shown little ability to spread from person to person, but the fear is that a hybrid could combine the killing power of the avian virus with the transmissibility of human flu viruses.

Now, rather than waiting to see if nature spawns such a hybrid, US scientists are planning to try to breed one themselves—in the name of preparedness.

The Centers for Disease Control and Prevention (CDC) will soon launch experiments designed to combine the H5N1 virus and human flu viruses and then see how the resulting hybrids affect animals. The goal is to assess the chances that such a "reassortant" virus will emerge and how dangerous it might be.

The U.S. Department of Homeland Security has sent a memo to some health care providers noting procedures to be followed if the swine flu outbreak eventually makes quarantines necessary.

DHS Assistant Secretary Bridger McGaw circulated the swine flu memo, which was obtained by, on Monday night. It says: "The Department of Justice has established legal federal authorities pertaining to the implementation of a quarantine and enforcement. Under approval from HHS, the Surgeon General has the authority to issue quarantines."

McGaw appears to have been referring to the section of federal law that allows the Surgeon General to detain and quarantine Americans "reasonably believed to be infected" with a communicable disease. A Centers for Disease Control official said on Tuesday that swine flu deaths in the U.S. are likely.

Federal quarantine authority is limited to diseases listed in presidential executive orders; President Bush added "novel" forms of influenza with the potential to create pandemics in Executive Order 13375. Anyone violating a quarantine order can be punished by a $250,000 fine and a one-year prison term.

Anonymous said...

Executive Order 13375 of April 1, 2005

Amendment to Executive Order 13295 Relating to Certain Influenza Viruses and Quarantinable Communicable Diseases

By the authority vested in me as President by the Constitution and the laws of the United States of America, including section 361(b) of the Public Health Service Act (42 U.S.C. 264(b)), it is hereby ordered as follows:

Section 1. Based upon the recommendation of the Secretary of Health and Human Services, in consultation with the Surgeon General, and for the purpose set forth in section 1 of Executive Order 13295 of April 4, 2003,
section 1 of such order is amended by adding at the end thereof the following new subsection:

‘‘(c) Influenza caused by novel or reemergent influenza viruses that are causing, or have the potential to cause, a pandemic.’’.

Sec. 2. This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, entities, officers, employees or agents, or any other person.

Bigelow said...


C.A. Fitts has said that the decision to intentionally Pump & Dump the United States was taken back in the early Clinton years. You describe the period with an mania/herding/"irrational exuberance" sort of explanation.

Those that caused this disaster should be treated with jail time, while the symptoms should get more compassion ...neither of which will happen.

EBrown said...

Has anyone else noticed the number of trends that are "getting worse at a slower rate" or indicators that are "worse, but less bad than anticipated" lately? I this slowing of the rate of collapse has given all the bottom callers a slender ledge to stand on. I for one do not plan to get caught when that little foothold crumbles away and we plunge deeper into the chasm of deflation.

Anonymous said...

EBrown, yes and before now and years ago, I noted that my F.F.A. (former financial advisor) would from time to time come out with a rather neat turn of phrase, to describe the current market ... I gradually twigged to the realization it was merely current industry patter and not abnormally intuitive on his part. I think what I am on about is that there seems to be a central clearing house for what's to be considered the current news and views of life in the financial sphere and that includes those side slapping one liners of the standard injection molded FA.


Anonymous said...

“Syncora, formerly known as SCA, suspended payments at the direction of the New York Insurance Department to allow it to replenish its finances and turn a policyholders deficit of $2.4 billion into a state-required minimum surplus of $65 million, a company spokesman said on Friday.
The company is the first U.S. bond insurer to suspend claims payments as it struggles to reduce losses on about $8.6 billion of residential mortgage-backed securities it insured.”

Anonymous said...

This blog amounts to Stoneleigh and a bunch of scare-out-of-their-wits doomseekers!
get a life!

Anonymous said...

Well... and Gall is pretty sharp too

Greenpa said...

I'm really quite optimistic about the value and functionality of my pessimism.

Anonymous said...

Thanks 7:35 PM that's interesting. Here is something from the Financial Times about Syncora as well:

"Banks and other investors face a bill of more than $1bn after a large US bond insurer became the first since the credit crisis struck to cease paying out claims, an event expected to trigger payouts on billions of dollars of credit derivatives."