Friday, June 5, 2009

June 5 2009: Charles Darwin and Marie Antoinette

Samuel A. Cooley St. Augustine, Florida 1865
View of town from bay

Ilargi: I don't think there is a better way to put our situation than this one, from a troubled US pensioner:

"All our life we worked to be where we are, and we're not there anymore."

The Wall Street banking industry is still as bankrupt and insolvent as it was a year or more ago. But you wouldn't know it looking at their profit numbers, or for that matter the mood in the larger economy. That is, if you're willing to look no deeper than the thin single layer of veneer carefully applied by lobbyists and government spin doctors.

And while the banks post their gains and pay back TARP funds in order to raise their own bonuses, one in every 6 dollars of incomes in America originates with the government, and one in 9 American citizens use food stamps to get by. There are inevitably many voices left who would resort to a term such as Social Darwinism to label a society functioning (or more precisely, not functioning) this way. They might perhaps do good to remember that long before Darwin had even been born, Social Darwinism sealed the fate of Marie Antoinette.

It's party hats all over because "only" 345.000 jobs were lost last month -or so claims the BLS, prior to revision- while at the same time unemployment (U3) rose 787.000. Please note that even U3 among teenagers stands at 22.7%. Wonder what U6 is at for them.

Before you think your brain is starting to show cracks and defects (which may be true regardless), Bloomberg has the greatest explanation for the discrepancy, one that shines an even bigger shadow on the stats:
"The labor pool rose to 155.1 million in May from 154 million in March. [..] The participation rate, or the share of people either working or looking for a job, climbed to 65.9 percent, the highest since October. "Some among the ranks of job losers see a greater chance of finding a job and have begun to look in earnest” [..] It strengthens the argument that "the recession may have ended in May or June," he said. The gain in the labor force in part helps explain why the jobless rate jumped to 9.4 percent in May”

It must feel great to be able to present rising unemployment as a positive thing. I have to admit, I do wonder how these things are measured: how do you reliably count people who had given up and now return? You just call a thousand on the phone and extrapolate? in the US, you're considered employed until you look for a job.
"... the share of people who said more jobs will be available in the next six months climbed to the highest level in more than five years.”

WIth a government assuring them GDP growth will be soaring a few months from now, how can they not think that? How many Americans have figured out yet that Obama and his team will say anything at all that makes them and their finance friends look better in the short term? Look, that Egypt speech and all the other things the president does that do not involve the economic issues are pure window dressing.

The only thing that counts is the economy, and the people who shape economic policies, both inside the administration and beyond, are bankers. In Washington, Robert Rubin and his hand puppets Larry Summers and Tim Geithner decide what goes and what does not. Their priorities are simple and obvious: get rid of the banks' losses, and hide what you can't get rid of. The way to do that is simple too: make people believe that all is rosy, so they spend what they have and borrow what they don't have.

But come fall, the writedowns will start afresh. They can't change or evade all the laws that curtail their mad exuberance. Neither can the government, even if that is less clear to the majority of people. A reasonable explanation for the how and why is this graph:

As you can see, M3, the broadest measure of money supply, is not rising that fast at all. M1 and M2 make no difference, since they are part of M3. That graph, by the way, excludes hyperinflation from the menu.

What the industry and the government indeed can do is delay the reckoning, change the outcome in their own favor, and hope that Charles Darwin will never meet Marie Antoinette.

Bank Profits Get Fatter With Accounting Rules Masking Looming Loan Losses
Big banks in the U.S. say they’re on the mend. The five largest were profitable in the first quarter, rebounding from record losses for the industry in the fourth quarter. Share prices have jumped, with the KBW Bank Index doubling since March 6. Treasury Secretary Timothy Geithner, after "stress testing" 19 banks on their ability to withstand a worsening economy, declared in early May that Americans can be confident in the banks’ stability and resilience. Wells Fargo & Co. and Morgan Stanley were among banks raising $43 billion in new capital since then through share sales.

"With our capital and assets, stressed as they have been, we can go back to focusing all our attention on managing our business and restoring value," Citigroup Inc. Chief Executive Officer Vikram Pandit said after Geithner’s examinations were completed. The revival may be short-lived. Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are. The government probably wants to win time for the banks, keeping them alive as they struggle to earn their way out of the mess, says economist Joseph Stiglitz of Columbia University in New York. The danger is that weak banks will remain reluctant to lend, hobbling President Barack Obama’s efforts to pull the economy out of recession.

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. "The big banks’ profits were totally bogus," says Weiss, whose 38-year-old firm rates financial companies. "The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig." Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get.

The accounting rule changes that matter most for the banks came on April 2, when the Financial Accounting Standards Board gave companies greater latitude in how they establish the fair value of assets. Lawmakers, including Representative Paul Kanjorski, a member of the House Financial Services Committee, had complained that existing mark-to-market standards worsened the financial crisis. Along with that change, FASB also let companies recognize losses on the value of some debt securities on their balance sheets without counting the writedowns against earnings. If banks plan to hold the debt until maturity, they can avoid hurting the bottom line. At Citigroup, the recipient of $346 billion in fresh capital and asset guarantees from the government, about 25 percent of the quarterly net income came thanks to the debt securities rule change, the bank said.

Another $2.7 billion before taxes came from an accounting rule that lets a company record income when the value of its own debt falls. That reflects the possibility a company could buy back bonds at a discount, generating a profit. In reality, when a bank can’t fund such a transaction, the gain is an accounting quirk, Weiss says. Citigroup also increased its loan loss reserves more slowly in the first quarter, adding $10 billion compared with $12 billion in the fourth quarter, even as more loans were going bad. Provisions for loan losses cut profits, so adding more to this reserve could have wiped out the quarterly earnings.

Without those accounting benefits, Citigroup would probably have posted a net loss of $2.5 billion in the quarter, Weiss estimates. In the five previous quarters, Citigroup lost more than $37 billion. Wells Fargo also took advantage of the change in the mark- to-market rules. The new standards let Wells Fargo boost its capital $2.8 billion by reassessing the value of some $40 billion of bonds, the bank said in May. And the bank augmented net income by $334 million because of the effect of the rule on the value of debts held to maturity.

The higher valuations Wells Fargo put on its securities probably won’t last, as defaults increase on home mortgages, credit cards and other consumer and corporate lending, Northeastern’s Sherman says. "These changes will help the banks hide their losses or push them off to the future," says Sherman, a former Securities and Exchange Commission researcher. The Federal Reserve, which designed the stress tests, used a 21 percent to 28 percent loss rate for subprime mortgages as a worst-case assumption. Already, almost 40 percent of such loans are 30 days or more overdue, according to Tavakoli, who is the author of three primers on structured debt. Defaults might reach 55 percent, she predicts.

At the same time, the assumptions on how much banks can earn to offset their losses are inflated, partly because of the same accounting gimmicks employed in first-quarter profit reports, Weiss says. "There’s a chance that it might work," Columbia’s Stiglitz says of the government’s attempt to boost confidence. "If it does, then they’ll look like the brilliant general. But all these efforts also bank on the economy recovering and housing prices not falling too much further. Those are not safe assumptions." Indeed, while the government and accounting rule makers try to help the banks look their best, they may make the U.S. economy worse. As long as lenders are stuck with bad loans, they can’t provide new money to consumers or corporations to fuel a potential recovery. The banks may look pretty, but they’ll be zombies until they clean up their books.

Drinking to Excess Is Banking's Hangover Cure
If you can’t blind investors with brilliance, baffle them with gussied-up balance sheets. That’s the approach banks have taken to try and escape the legacy of bad lending and investing. First, banks got bought-and-paid-for backers in Congress to ram through an easing of accounting rules that let them pretend they know better than financial markets when it comes to the value of securities they hold. Now, the banking industry is fighting a rear-guard action to keep trillions of dollars in assets hidden in vehicles that don’t show up on their books.

Investors will again be the losers if banks pull off this latest effort to fudge their true financial condition. After all, banks’ use of these so-called off-balance-sheet vehicles to churn out dodgy loans helped get the financial system into its current predicament. The latest battle is brewing over changes to off-balance- sheet rules approved by the Financial Accounting Standards Board in May. Although these revisions have been in the works for more than a year, banks acting through the guise of a coalition of financial industry and real estate groups on June 1 wrote to Treasury Secretary Timothy Geithner to try and derail them. A similar coalition wrote to FASB the same day, also asking for a postponement of the rule changes.

Now it’s likely only a matter of time before banks get Congress back in on the act. In the debate over the use of market values, banks -- after greasing plenty of palms on Capitol Hill -- used Congress to browbeat FASB into changing these so-called mark-to-market rules, as the Wall Street Journal reported earlier this week. It’s easy to see why banks don’t want to come clean about off-balance-sheet activities. Consolidating these hidden assets will make their balance sheets look weaker than they already are.

In some cases it may even mean that banks, which in recent weeks have issued billions of dollars in common equity to shore up their capital, have to go out and raise even more money. Raising equity helps build up the cushion banks have on hand to absorb losses. New equity, though, also dilutes existing shareholders, making it painful, even if necessary, medicine. Off-balance-sheet vehicles, along with the billions of dollars in fees they generate, are a big deal for banks. The country’s four biggest banks by assets -- Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. -- had $5.2 trillion in assets in these vehicles at the end of 2008, according to their annual filings. That compared with about $7.2 trillion in total assets that the banks had on their books at the end of the year.

Not all these assets would come back onto banks’ books under the accounting-rule changes. In a recent paper on the government-mandated bank stress tests, the Federal Reserve estimated that the 19 biggest banks would see about $900 billion in assets return. The assets mainly relate to credit-card, auto and other consumer loans. They would also include mortgages that aren’t guaranteed by Fannie Mae and Freddie Mac. What is especially galling about the latest attempt to keep the off-balance-sheet game going is that banks want the government to repeat a mistake that was a direct cause of the financial crisis.

Off-balance-sheet vehicles helped inflate the credit bubble by letting banks originate and sell loans without having to put aside much capital for them. So as lending soared, banks didn’t have an adequate buffer against losses. Even worse, off-balance-sheet vehicles hid from investors, and in many cases regulators, the extent of lending and how much individual banks had at stake. That allowed a huge risk to build up unseen within the financial system. Banks claimed that they didn’t control these assets and so they shouldn’t be shown on their own books. That was a sham. Banks in many cases guaranteed that they would roll over debts in these vehicles as they came due. When the financial crisis hit, they were often forced to take these assets onto their balance sheets.

After Enron Corp.’s implosion, FASB tried to curtail off- balance-sheet abuses. The board ended up caving in to pressure from banks and watered down the rules. That let banks game the system, and they soon created scores of vehicles that allowed them to obscure just how much lending they were arranging. The credit crunch exposed the charade. Citigroup, for example, had to take $25 billion of collateralized debt obligations -- a highly toxic type of debt security -- back onto its books because of its guarantee of off-balance-sheet vehicles. Those returned assets contributed to Citigroup’s $27.7 billion loss in 2008.

Banks now argue that, even with all the problems caused by off-balance-sheet vehicles, curtailing them would hurt an economic recovery. Any accounting-rule changes "must be made cautiously and seek to minimize any chilling effect on our frozen credit markets," read the June 1 letter to Geithner. That misses the point. Credit markets froze in large part because banks pretended these off-balance-sheet vehicles didn’t exist. As Barry Ritholtz, chief executive officer of research firm FusionIQ, recently put it when talking about banks, "You can’t drink yourself sober." That’s exactly what banks would like to do.

One in 6 dollars of American income comes from government
The recession is driving the safety net of government benefits to a historic high, as one of every six dollars of Americans' income is now coming in the form of a federal or state check or voucher. Benefits, such as Social Security, food stamps, unemployment insurance and health care, accounted for 16.2% of personal income in the first quarter of 2009, the Bureau of Economic Analysis reports. That's the highest percentage since the government began compiling records in 1929. In all, government spending on benefits will top $2 trillion in 2009 — an average of $17,000 provided to each U.S. household, federal data show.

Benefits rose at a 19% annual rate in the first quarter compared to the last three months of 2008. The recession caused about half of the increase, according to the report. Unemployment insurance nearly tripled in the past year. The other half is the result of policies enacted during President George W. Bush's first term. Following the 2001 recession — when costs normally decline — social spending soared to pay for the Medicare drug benefit, expanded health care for children and greater use of food stamps. The safety net is working, advocates say. "We're not seeing the hunger we saw in the 1930s because the food stamp program is doing what it's supposed to do," says Florida food stamp director Jennifer Lange. What's driving the $209 billion increase in benefit costs from a year ago:
  • Unemployment insurance. One-fourth of the extra spending covers jobless benefits, a program started in the Depression. The stimulus law, passed in February, increased benefits.
  • Social Security. The bad economy has prompted a 10%-15% jump in early retirements, the program's actuary says. A 5.8% increase took effect January 1. Bottom line: $55 billion in new costs.
  • Food stamps. Enrollment hit a record 33.2 million people in March, up 5.2 million from last year. The stimulus law boosted the size of the benefit. Average March benefit: $114 per person.

"The increase in social spending is still relatively modest given the severity of the downturn," says economist Dean Baker of the liberal Center for Economic and Policy Research. "We're not France." Adam Lerrick, economist at the conservative American Enterprise Institute, says the benefits' explosion will eventually lead to an economic crisis. "We've seen this movie before in many countries. It always has the same ending," he says.

One in nine Americans use food stamps
One in nine Americans are using federal food stamps to help buy groceries as the country's deep recession forced another 591,000 people onto the federal anti-hunger program at latest count. Enrollment jumped 2 percent to 33.2 million people in March, the fourth consecutive month that rolls hit a record, said the Agriculture Department. The average monthly benefit was $113.87 per person. "It's tough out there for struggling families and will be for many months to come," Jim Weill, president of the Food Research and Action Center, said.

"It's very likely that the numbers will continue to grow in the coming months as a turnaround in unemployment and wage declines typically lags behind the recovery of the broader economy," he said. In 20 states, as many as one in eight are on the food stamp program, according to the Food Research Center. The U.S. economy has contracted sharply since last fall, with nearly 6 million jobs disappearing since the beginning of 2008. Further job losses are expected as the recession grinds on. Congress allocated some $54 billion for food stamps this fiscal year, up sharply from $39 billion last year. In the new fiscal year beginning Oct 1, costs are estimated at $60 billion.

Jobless Rate Hits 25-Year High 9.4% in May; Layoffs Slow
Employers slashed jobs at a much more measured rate than expected in May, even as the unemployment rate soared above 9 percent for the first time in 26 years, the Labor Department said today. According to data that simultaneously show how deep the recession has become and offer hope that it might taper off in the months ahead, a net total of 345,000 net jobs were cut in May -- terrible by most standards but the smallest rate of job loss since September. Economists had expected a much worse loss, of as many as 525,000 jobs. The Labor Department also said that April job losses were somewhat less severe than originally reported. Meanwhile, the unemployment rate -- which is based on a survey of households rather than of businesses -- rose to 9.4 percent, from 8.9 percent in April. The last time the jobless rate was that high was 1983.

The information was welcome news, despite the rising jobless rate, because it suggested the furious pace of job losses -- which peaked at 741,000 jobs lost in January -- is finally easing. It is the strongest evidence yet that the economy's downdraft of the winter has given way to a more steady, measured decline. That said, the labor market is far from rosy. Since the beginning of the recession in December 2007, 7 million people have become unemployed, including an additional 787,000 in May alone. The unemployment rate rose quickly among almost all groups, with the steepest rises among teenagers (up 1.2 percent to 22.7 percent) and Hispanics (up 1.4 percent to 12.7 percent).

The job loss figures were not as bad as expected in part because the construction industry no longer shed jobs at the same furious pace. Construction employers cut 59,000 jobs, compared with 108,000 in April. Also the leisure and hospitality sector, which had been shedding jobs, recorded a small gain of 3,000 positions, and the pace of job declines lessened among retailers and professional and business services. Manufacturers, by contrast, continued slashing jobs aggressively, cutting another 156,000 jobs. That reflected in part major automakers going on a summer production hiatus, aiming to work off excessive inventories.

Surge in Labor Force Shows U.S. Workers Gaining Confidence
The U.S. labor force posted the biggest back-to-back jump in six years, a sign Americans who’d quit looking for work are gaining confidence their search will pay off as the recession eases. The labor pool rose to 155.1 million in May from 154 million in March, the largest two-month increase since January- February 2003, Labor Department figures showed today in Washington. The participation rate, or the share of people either working or looking for a job, climbed to 65.9 percent, the highest since October.

"Some among the ranks of job losers see a greater chance of finding a job and have begun to look in earnest," John Ryding, chief economist at RDQ Economics LLC in New York, said in a note to clients today. It strengthens the argument that "the recession may have ended in May or June," he said. The gain in the labor force in part helps explain why the jobless rate jumped to 9.4 percent in May, the highest since 1983. Payrolls fell by 345,000, the least in eight months, today’s report also showed.

The data reinforces signs the deepest economic slump in half a century is starting to abate, even as economists predict any expansion may be muted. Other reports corroborate that some of the gloom is lifting from the jobs outlook. A Conference Board survey showed the group’s index of consumer expectations in May rose to the highest level since December 2007, and the share of people who said more jobs will be available in the next six months climbed to the highest level in more than five years.

For some economists, the combination of a jump in the labor force and a drop in employment in May also points to how tough it will be to actually find work in the months ahead. "Getting the unemployment rate down will be a long, drawn- out task," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. Still, "the worst news is behind us, and job declines should progressively soften as the year proceeds.">

Consumer Credit in U.S. Falls Second-Most on Record
Borrowing by U.S. consumers had the second-biggest drop on record in April as the jobless rate reached its highest in a quarter century and accessing loans remained difficult. Consumer credit fell $15.7 billion, or 7.4 percent at an annual rate, to $2.52 trillion, according to a Federal Reserve report released today in Washington. Credit decreased by a record $16.6 billion in March, more than previously estimated. Spending by consumers declined for a second consecutive month in April as the unemployment rate increased to 8.9 percent, a level not seen since 1983. The number of people collecting jobless benefits broke records for 17 weeks before the end of May, causing Americans to put off purchases out of fear they might lose their jobs or take longer to find new ones.

"Consumers have retrenched in the face of rising unemployment and are paying down their debts and increasing their savings," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "Those consumers who do want to spend are having their credit limits cut left and right by banks that are increasing their credit-risk checks." Economists had forecast consumer credit would drop $6 billion in April, according to the median of 29 responses in a Bloomberg News survey. Projections ranged from a $9 billion drop to a gain of $1.5 billion. The Fed initially reported that consumer credit decreased by $11.1 billion in March.

Revolving debt, such as credit cards, decreased by $8.59 billion in April, according to the Fed’s statistics. Non- revolving debt, including auto loans and mobile home loans, decreased by $7.09 billion. The report doesn’t cover borrowing secured by real estate. The savings rate among Americans rose in April to 5.7 percent, the highest in more than 14 years, the Commerce Department said on June 1. Consumer spending, which accounts for about 70 percent of the economy, was down 0.1 percent for the month after falling 0.3 percent in March.

The Labor Department said today that the economy lost another 345,000 jobs in May, boosting total losses during the downturn to 6 million, and the unemployment rate rose to a 25- year high of 9.4 percent. Still, the May job loss was the least in eight months and smaller than forecast, reinforcing recent signs that the recession is starting to abate. American Express Co., the largest U.S. credit-card company by purchases, on May 18 announced plans to cut about 6 percent of its workforce or 4,000 positions as cardholders squeezed by rising unemployment fail to pay debts. Also, industry statistics released May 1 showed auto sales plunged 34 percent in April, the 18th straight monthly drop, as Chrysler LLC’s slide toward bankruptcy helped shrink the industry more than expected.

Department stores Macy’s Inc. and Dillard’s Inc. and luxury chain Saks Inc. yesterday reported steeper-than-forecast sales declines for May. Meanwhile, a Fed program aimed at supporting financing of loans to credit-card borrowers, students, car buyers and small businesses is gaining momentum after a "slow start," New York Fed President William Dudley said yesterday. Dudley cited the fact interest-rate spreads on included securities in the Fed’s Term Asset-Backed Securities Loan Facility are narrowing.

As spreads narrow, potential returns will diminish, limiting the program’s attractiveness to hedge funds and others seeking high returns. The Fed is working to increase participation by bringing in investors not permitted to use leverage, such as pension funds and insurers, Dudley said. "The broader the investor base, the greater the demand for the securities, the lower the yield levels, and the greater the improvement in credit availability," he said. The Fed’s quarterly survey of senior loan officers released on May 4 showed a larger share of banks reported tightening terms on residential mortgages compared with the previous survey, even as more domestic respondents saw increased demand for prime mortgages.

That survey indicated most banks anticipate loan delinquencies and losses to increase this year, and that more banks also made it tougher for consumers to get credit-card loans in the past three months. The average consumer credit rate for a 60-month car loan was 7.52 percent as of two days ago, little changed from the end of April and compared with 6.53 percent on April 30, 2008, according to data from For personal credit union loans, the rate two days ago was 12.5 percent, up from 12.42 percent on April 30 and 12.25 percent a year before that. The year-over-year change in consumer credit issued throughout the economy was negative in March for the first time since September 1992.

Mortgage crisis robbing seniors of golden years
Howard Weiss is 77 and scared. This year, the semiretired distributor from Phoenix ran into financial problems and stopped making his mortgage payments. He was told his home was scheduled for a foreclosure auction in May. So Weiss scraped together more than $2,000 to stave off the foreclosure. He's still trying to figure out if he can get a mortgage modification so he can afford his home. "This is the biggest mess I've had in my life," Weiss says. "I could break down and cry. I was about to lose everything. I've been through (the Korean War), through a lot of crises. Now I've turned everything over to the Lord. ... I'm so stressed this is going to kill me."

The worst economic crisis since the Great Depression has slashed home values and triggered an unprecedented surge in foreclosures across the nation. It's also taking an especially harsh toll on an often overlooked demographic: seniors who are retired or nearly so. Conventional wisdom holds that most seniors have paid off their mortgages or have significant equity in their homes, but in reality hundreds of thousands are suffering in the housing crisis. This population is being hit on all fronts. More than 600,000 seniors are delinquent or in foreclosure, according to AARP. A separate report by AARP found that 25.5 million seniors ages 50 and older have a mortgage. Unlike younger people, many are on fixed incomes and lack the money or job opportunities to catch up on payments when they fall behind.

Some seniors have been victimized by predatory lenders or made bad financial decisions, taking on adjustable-rate mortgages that reset to payment levels they couldn't afford. For others, their mortgage problems grew out of other financial pressures, such as staggering medical bills or helping adult children through financial difficulties. Even those who own their homes free and clear are finding they can't rely on equity as a retirement nest egg because home values have dropped severely, especially in retirement-rich areas such as Florida, Nevada and California. Some seniors who had planned to sell their homes and move into retirement communities have had to postpone their plans because they can't afford to take a loss on the sale of their current homes. Some older homeowners had been so confident that rising home values would provide retirement wealth that they neglected to save.

Now they face their final years with a dearth of financial resources to draw on. Thirty-six percent of workers ages 55 and older say the total value of their household's savings and investments — excluding the value of their primary home and any defined benefit plans — is less than $25,000, according to the Employee Benefit Research Institute. "It's terrible," says Dean Wegner, a certified credit counselor and mortgage specialist in Phoenix who has worked on Weiss' case. "I've got a lot of seniors who have just been nailed. They don't have retirement savings, and they've exhausted their equity. They're upside down (owing more on their mortgage than their homes are worth), they can't refinance and they're on a fixed income. They're scared to death. You can hear it in their voices. It's a sad situation."

Weiss' case reflects what many seniors are going through. He was paying about $1,700 a month on his mortgage when he began having problems making payments because he was helping his son, who was unemployed. Because his home had lost so much value — from $290,000 to about $120,000 today — he couldn't refinance and lock in a lower rate. Instead, he contacted an organization in Florida that he says offered to help him get a loan modification from his lender before Wegner got involved in the case. Weiss says a counselor there advised him not to make payments on his home loan so he would be in a better position to negotiate a modification with his bank. He says he sent the organization $2,400 upfront to get the modification started.

So far, Weiss hasn't gotten any modification of his mortgage. And because he got behind in payments, Weiss' lender began foreclosure proceedings on his home. According to Wegner, Weiss' bank also tacked the three months of back payments he hadn't made onto his loan balance. That has left Weiss, who lives on a fixed income, scrambling to come up with money to save his home and pay $2,400 a month to catch up. That includes interest on the payments he didn't make. His monthly income is about $4,000, which includes veteran disabilitychecks, money from his wife's retirement fund, his income and Social Security. His wife, who lives at home with him, has Alzheimer's disease and is unaware of the situation, leaving Weiss to carry much of the financial worry.

Many others share his plight. Americans 50 and older represent nearly 30% of all delinquencies and foreclosures, according to an AARP analysis released in September. The analysis found that more than 684,000 seniors 50 and older were delinquent on their mortgages or in foreclosure. Among those, nearly 50,000 were in foreclosure or had lost their homes. The impact of subprime lending also has fallen disproportionately on those 50 and older. Older Americans with subprime first mortgages — those given to borrowers with less-than-perfect credit — are nearly 17 times more likely to be in foreclosure than Americans of the same age with prime loans, according to AARP. For those under 50, the comparable multiple is about 13.

Such seniors "have saved up very little outside of their home and banked on home prices rising. No one talked about them falling, so they were heavily leveraged," says Dean Baker, an economist at the Center for Economic Policy and Research. "This whole group is going to be hugely dependent on Social Security, and people don't fully appreciate the magnitude of the problem." Some are simply planning to walk away from homes they no longer can afford. Shawn Lee, 56, a retiree who owns a home in Seattle, had planned to sell it and retire to his other property in Mesa, Ariz. He bought the Arizona home for $400,000 a few years ago; it's now worth about $200,000. With his retirement savings hit hard by stock market declines, he doesn't want to spend what savings he has making payments on the second home.

"I would have to spend my little bit of savings. It's a very tough situation," says Lee, who retired from the import and export business. "I decided I have to walk away. I won't have any money for retirement if I keep up with the payments." Many seniors still owe on their homes. In the fourth quarter of 2008, about 46% of older Americans around 60 who researched reverse mortgages had an existing traditional mortgage with an average debt of $149,683, according to Golden Gateway Financial. A reverse mortgage is one that makes payments to the homeowner from a home's equity. There are few special programs among lenders or government agencies geared to help seniors with mortgage problems.

Mortgage giants Freddie Mac and Fannie Mae have none, and neither do some of the nation's largest lenders, such as JPMorgan Chase and Bank of America. The Department of Housing and Urban Development does offer a reverse-mortgage program for seniors. Much of the help comes from non-profits and other services aimed at helping seniors. Legal Services, which provides counseling for low-income clients, reports that seniors with fixed incomes are especially vulnerable to being displaced by foreclosure. The mortgage woes facing seniors also are creating challenges for retirement communities and assisted-living centers, which are finding that new members can't move in because they are saddled with homes they can't sell.

"We have found that the retirement communities, in particular, are struggling, since people usually sell their homes to finance the entry fees," Lauren Shaham, spokeswoman for American Association of Homes and Services for the Aging, said in an e-mail. Two years ago, Fred Schoch, 75, a retired butcher in Hartwell, Ga., got on a waiting list for a retirement community. But now he can't sell his lakefront, 1-acre property because the market is so sluggish. A neighbor has had his home on the market for more than a year. So Schoch and his wife, Joyce, have had to delay their retirement plans and are struggling to maintain the land. "Sooner or later, it'll be too much to take care of," Schoch says. "To buy into another place, we need money from this place. If we could sell, we'd move now."

A substantial proportion — perhaps one-third — of older householders ages 55 to 64 will be less secure in retirement because of the housing bubble and its aftermath, according to a September analysis by the Center for Retirement Research at Boston College. Vanished equity may be most threatening to seniors who own homes in markets that have seen the steepest price drops, such as Arizona, Southern California and South Florida. "Their home is their largest asset, and that's taken a substantial hit. It's really impacting retirees right now," says Pete Flint, CEO of, a real estate search service. "It's sad to see them go into foreclosure in their twilight years. It's very tragic," says Flint.

Macon McDavid and her husband, Jim, aren't facing foreclosure, but the vision they once had of their golden years is no more. Instead of retiring, McDavid, 72, is sending out résumés in hopes of getting a job to help make ends meet. She and Jim own a home in Raleigh, N.C., and a vacation cottage in Sunset Beach, N.C. When their son became ill, they spent about $70,000 on his medical care before he died. They were forced to take out a second mortgage. Meanwhile, the retirement savings they'd invested in the stock market lost about half its value. Macon McDavid says they now have no choice but to sell one of the properties. The problem: There are no buyers, and the couple can't afford to take the loss they'd incur at current market prices. "Our concern is about making payments. We have to decide which house to sell, but just because you put it on the market doesn't mean it will sell," McDavid says.

"All our life we worked to be where we are, and we're not there anymore."

Discounting by Pricier Chains Fails to Give Retail Sales a Lift
U.S. retailers continued to struggle with weak sales again last month as even heavy discounting at some pricier chains failed to lift the sector. Discounters stood out as having the best results amid a bleak May. Some of the better performers were chains offering department-store cast-offs while luxury-goods companies and midpriced department store chains continued to suffer. "What we've seen recently is a very strong sentiment and sensitivity toward value" said Tom Wyatt, president of Gap Inc.'s Old Navy division. The low-priced unit of Gap posted a 3% increase in sales even as its parent reported overall sales at stores open a year declined 6%.

TJX Cos. reported a 5% increase in stores open more than a year. Ross Stores Inc. posted a 4% increase, while Kohl's Corp. reported a 1% decline from a year ago. Their showings illustrate "the discount apparel format is starting to emerge" from the decline in consumer spending, said Brendan Langan, an analyst at retail consultants Management Ventures Inc. Still, overall sales at stores open at least a year, a closely watched measure of retail health, slid 4.4%, according to an index of 28 retailers compiled by Retail Metrics Inc. Results didn't include industry behemoth Wal-Mart Stores Inc., which stopped releasing its monthly sales figures. By the same measure, April sales declined a less steep 2.7%.

Among those reporting declines, Target Corp. said same-store sales fell 6.1%, Costco Wholesale Corp. posted a U.S. same-store sales drop of 1% excluding fuel, and BJ's Wholesale Club Inc. said sales fell 6.8% from a year ago. BJ's said it faced a difficult comparison against higher gas prices last year. In part, all retailers faced a similar hurdle compared with results from a year ago: Government checks, meant to boost the economy, had a positive impact on sales throughout the summer of 2008. "We didn't have that boost this year," said Thomson Reuters retail analyst Jharonne Martis.

May's steeper slide may show retailers efforts to woo shoppers with discounts are being ignored. Hot Topic Inc., the teen retailer, discounted its denim prices by as much as 30% and 40%. Abercrombie & Fitch Co. shifted from its full-price strategy by erecting big summer clearance signs in front of stores. Yet neither returned high dividends: Same-store sales at Hot Topic fell 6.4% last month, and Abercrombie & Fitch reported a 28% decline, far more than analysts had predicted.

Aeropostale Inc. offered a rare bright spot among middle-tier, teen apparel retailers, posting a 19% increase in same-store sales. Buckle Inc. posted a 13.4% increase, its 22nd month of double-digit gains. In the luxury sector, Saks Inc. and Nordstrom Inc. reported steep declines, reflecting the continued woes for high-end retailers. Mid-priced department stores did not fare much better. Dillard's Inc. said same-store sales fell 12%, Bon-Ton Stores Inc. reported a 12.1% decline while at Macy's Inc. same-store sales fell 9.1%

Crowded debt sales risks causing 'auction fatigue'
A few decades ago, when global financial markets rocked to a more gentlemanly tune, many western governments took an informal break from the business of selling their bonds during the summer. For back then, it was presumed pension fund managers – or anyone else with a penchant for government bonds – would spend August on the beach. And the media-shy bureaucrats who typically work at government debt management offices usually presumed they would have plenty of time during the rest of the year to go about selling bonds.

No longer. This year, according to the Organisation for Economic Co-operation and Development, projected gross issuance by OECD governments will jump to almost $12,000bn of debt, up from $9,000bn two years ago (and many times the level a decade ago.) The US alone is projected to sell almost $8,000bn, in gross terms. So deep in the bowels of western DMOs, some officials are now scanning the calendar and wondering how they can organise all those looming debt sales. Most governments hold auctions on particular days of the week and there are only 52 weeks in the year.

Thus, even if the DMOs cancel their summer holidays – which some will – it may be tough to schedule all these looming sales. No wonder some western government officials are starting to mumble about the risk of "auction fatigue", or the chance that investors get so overwhelmed with these sales that they go on strike. Nor is it little surprise that some western government officials are quietly debating whether they can can dramatically expand the size of individual auctions, to get these bonds sold, without creating a market glut, or panic.

Thus far, thankfully, there is little sign of any such panic. This week, one government auction of short-term treasury bills failed to get any bids in Latvia, sparking jitters in East European markets. But that auction "fail" reflected local concern about looming devaluation, and so it may be a "one-off". Other wobbles in the US or European markets have also been quickly snuffed out, partly due to adroit footwork by the DMOs. But the gyrations of the US treasuries market last month shows just how jittery the tone of the market is. And as the DMOs know, the logistical challenge of organising all those auctions to sell all those trillions of debt is unlikely to get easier anytime soon.

In part, that is due to the maturity of debt. Some countries, such as the UK, have a tradition of selling long-dated government debt to local pension funds, which reduces the need to roll over the existing debt stock too freque- ntly. In the UK, for example, the average maturity of government debt was 14 years at the end of 2007, or just before the crisis broke. Australia, France, Austria and Greece also have long(ish) maturities, of between seven and 10 years. But other European nations such as Hungary and Norway, have average maturities below five years.

Meanwhile, the average US maturity in late 2007, was just 4.7 years and will almost certainly decline further. This year, the OECD projects that no less than 70 per cent of US issuance will be short term. That leaves the treasury market now exposed to a mild version of the same problem that plagued conduits or structured investment vehicles that relied on short-term funding in the commercial paper market: namely "rollover risk". Mindful of this, debt management officials on both sides of the Atlantic are brushing up on their marketing skills. A few weeks ago Citi organised a novel conference in Tokyo at which different European DMO officials were each given a chance to present a sales pitch for their own debt to local Asian institutions.

Until quite recently, that type of event might have been viewed as unseemly, or unnecessary, by many DMOs. After all, Japanese investors used to stick to buying US treasuries or German bunds, and European DMOs shied away from promoting themselves in a competitive or vulgar manner. But Asian investors no longer consider treasuries to be the only option in town – and European governments are waking up to the reality of competition. Indeed, the gossip in some government bond circles is that the American debt officials will soon be forced to get more pro-active in marketing their wares too. If not, they may face more jitters soon. Thus far, I should stress again, such jitters have not turned yet into anything serious.

Government officials have danced through this minefield relatively well, on both sides of the Atlantic. And if they continue to do so for the rest of the year, some of those faceless bureaucrats in the debt sales teams may deserve a medal. But make no mistake: the potential for an accident is rising, as the auction calendar fills. Fingers crossed that the phrase "government bond auction fatigue" is not something that ever hits the headlines of the mainstream press this year. Even – or especially – in those dangerous summer months.

California's Fight over What to Cut
If California voters had any remaining hopes that their state would somehow avoid drastic cuts in government services to help plug a $24 billion budget shortfall, they were surely dashed after Governor Arnold Schwarzenegger's rare midyear appearance before the California legislature Tuesday. Proposing historic cuts in education and social-welfare spending, the governor said, "California's day of reckoning is here ... Our wallet is empty. Our bank is closed. Our credit is dried up."

Two weeks after voters decisively defeated five ballot measures that would have eased the state's fiscal crisis, Schwarzenegger says the message he heard is, "Do your job. Don't come to us with these complex issues. Live within your means. Get rid of waste and inefficiencies. And don't raise taxes." In addition to the $24 billion budget deficit, California faces a dangerous cash-flow shortage in the coming weeks. State controller John Chiang has called on the governor and legislature to balance the books by June 15 so the state can, in the midst of a tight credit market, raise the short-term financing needed to fund day-to-day operations in the new fiscal year that starts July 1. Tax receipts in the Golden State have dropped 27% from last year, and without bridge financing, Chiang warns, the state could run out of money by the end of July.

Since the May 19 special election, the governor has proposed cutting public schools' funding by $5.2 billion, closing 220 state parks, firing 5,000 state workers, selling state property and, most dramatically, eliminating the safety net of subsistence economic support and health care to 1 million children living in poverty. Acknowledging the pain these cuts will cause to million of state residents, Schwarzenegger declared, "We are not Washington. We cannot print money. We cannot run up trillion-dollar deficits. We can only spend what we have. That is the harsh but simple reality."

The Republican governor and GOP legislators say they will not raise taxes, especially after Schwarzenegger and six Republican legislators brokered a budget deal in February that combined deep cuts and $12.8 billion in higher taxes. At that time, the governor said, "We solved $36 billion of a $42 billion deficit," but the continuing economic meltdown has spilled even more red ink. Schwarzenegger has done his best to make the case that the budget woes are as much "an opportunity to make government more efficient" as a funding crisis, but that is little comfort to average residents. "People come up to me all the time, pleading, 'Governor, please don't cut my program,' " Schwarzenegger said Tuesday. "I see the pain in their eyes and hear the fear in their voice. It's an awful feeling. But we have no choice."

Critics are appalled. "With a reckless cuts-only approach, the governor proposes life-threatening cuts to deny coverage for kidney dialysis, cancer treatments, HIV testing, mental-health care and many other needed services. For over 1 million children, Governor Schwarzenegger would eliminate Healthy Families coverage altogether, leaving those kids and their families at severe medical and financial risk," said Anthony Wright, executive director of Health Access California, a nonprofit advocacy group.

Despite their relatively small numbers in the California legislature, Republicans wield lots of leverage, because both a budget and a tax increase require a two-thirds vote of the Assembly and Senate. Democrats realize raising any revenue will be difficult but still hope to target "sin taxes" and specific business taxes to avoid closing the budget shortfall entirely with historic cuts in services. Assembly speaker Karen Bass, a Democrat from South Los Angeles, says she is optimistic the state can close the budget gap in the next three weeks.

For his part, Schwarzenegger continues to argue that there are smart ways to make the necessary cuts. If the state has to cut billions of dollars from the schools, he argues, why not "give districts more freedom and flexibility"? And with state spending on prisons having nearly doubled in the past five years, the governor believes it is time to follow the lead of other states that have "privately run correctional facilities that operate at half the cost."

Ilargi: Amazing -or is it really?- that the Wall Street Journal publishes and entire aticle on North Dakota's riches without even mentioning the fact that it's the only state with a state-owned bank, let alone what influence that little fact might have on those riches. It makes one very suspicious of the paper.

In North Dakota, the Good Times Are Still Rolling
California has the Golden Gate Bridge, New York has the Empire State Building, Illinois has the Magnificent Mile. And North Dakota? It has a hefty budget surplus those states would envy. While many states scrounge for ways to repair budget deficits, North Dakota is cutting taxes and fretting over how much of its budget surplus to spend or save. "We all ought to move to North Dakota," joked Raymond C. Scheppach, executive director of the National Governors Association. The group said in a report Thursday that North Dakota and Wyoming remained the only two relative bright spots in a nation mired in recession.

Both resource-rich states expect revenue collections to come in above their budgeted forecasts, while 38 states anticipate revenue shortfalls, according to the report on state finances, which was co-written by the National Association of State Budget Officers. Meanwhile, North Dakota expects to have a surplus of about $700 million in June 2011, the end of its next budget cycle. In the legislative session ended last month, North Dakota lawmakers shifted more of the responsibility for funding education to the state and required local governments to reduce property taxes proportionately, saving taxpayers $295 million. Individuals and businesses also received about $100 million in income-tax cuts. At the same time, lawmakers increased spending on K-12 and college education, health care, infrastructure and other programs.

The remote Plains state, with a population of just over 640,000, has benefited from spikes in oil and crop prices. While the rest of the U.S. economy was tumbling last year, energy and agricultural commodities stayed frothy before beginning a long slide in the summer. Lately, they have begun climbing again. Oil prices dropped below $40 a barrel in February as the global recession strengthened, but they have since jumped to nearly $70. Crop prices are off last year's peaks, but are still well above long-term averages.

High prices help North Dakota in myriad ways. State revenues rise thanks to taxes on oil production and extraction. Energy-industry workers and farmers pay more in income taxes and spend more, boosting sales-tax receipts. Chiefly because of the commodities boom, North Dakota had the fastest-growing economy in the nation last year, as the state's gross domestic product increased 7.3%, the Commerce Department said Tuesday. The state also missed much of the bubble in housing prices and dubious lending practices that bedeviled much of the nation, so it isn't struggling as much with foreclosures.

Republican Gov. John Hoeven likes to credit his administration's efforts to diversify the economy, including fostering "value-added" agriculture, such as food-processing plants, and alternative-energy production, from wind to ethanol and other biofuels. "Jobs and opportunities change, and we have to be developing these new industry areas," he said. Spinning wind turbines have become a more common sight on the state's rolling plains. North Dakota has 865 megawatts of wind power completed or under development, up from less than two megawatts four years ago.

State and local officials have been traveling to Ohio and Michigan to recruit laid-off workers. North Dakota's seasonally adjusted unemployment rate -- 4.0% in April -- is the lowest in the U.S. Still, the state's economic strength posed difficult questions in the latest legislative session: Spend more now to help vulnerable groups like children and the elderly? Or save more as a hedge against future busts? Some lawmakers say their job actually becomes tougher in boom times. "When the bank account is flush, people just are very skeptical when we say, 'We don't have enough money to do this,' " said state Sen. Ray Holmberg, a Republican from Grand Forks.

Legislators say they want to avoid the roller coaster of spending sprees followed by cutbacks. The state isn't immune to recession ripple effects: Heavy-equipment maker Bobcat Co., the state's biggest manufacturer, recently laid off nearly 250 workers at its plants in the state. Microsoft Corp. and American Express Co. also have announced layoffs or closures. Some argue that North Dakota could spend more of its surplus today without jeopardizing the future. State Sen. Tracy Potter, a Democrat from Bismarck, criticized the Republican-dominated legislature for failing to substantially expand children's health insurance during its recent session. "Things like that are not just poor choices, but really dumb," he said.

The state plans to spend $8.85 billion over its next two-year budget cycle, almost 37% above its current $6.48 billion budget. "I think our expenditures cannot continue to go up at the same rate that they went up this year," said Pam Sharp, the state's budget director. Much of the spending is targeted at one-time outlays, she said. The state accepted about $600 million in federal stimulus money, a portion of which will be used to repair roads damaged in massive spring floods. Gov. Hoeven said he worries about the federal deficit. "I'm also concerned about some of the states, like California," he said. "At what point does their deficit problem become our collective problem?"

FDIC Pushes Purge at Citi
The Federal Deposit Insurance Corp. is pushing for a shake-up of Citigroup Inc.'s top management, imperiling Chief Executive Vikram Pandit, people familiar with the matter said. The FDIC, under Chairman Sheila Bair, also recently pressed a fellow regulator to lower the government's confidential ranking of Citi's health -- a change that would let regulators control the firm more tightly. The FDIC's willingness to take an increasingly tough position toward one of the nation's largest and most troubled financial institutions is setting up a bitter clash between regulators -- some of whom disagree with the FDIC's position -- and between the FDIC and Citigroup, whose officials have argued that Ms. Bair is overstepping her authority.

"The FDIC is our tertiary regulator," behind the Office of the Comptroller of the Currency and the Federal Reserve, said Ned Kelly, Citigroup's chief financial officer. Citigroup has taken steps to shrink itself and clean up its financial mess. Just last month, the bank performed better than expected on the Federal Reserve's "stress test" of top banks' strength. Still, some officials across the government are frustrated at the company's pace of change. FDIC officials in particular are concerned about the lack of senior executives with experience in commercial banking. Mr. Pandit himself comes from an investment-banking background, but most of the bank's current problems stem from troubled consumer loans.

Federal officials have reached out to Jerry Grundhofer, the former U.S. Bancorp CEO who recently joined Citigroup's board, to gauge his interest in the top job, according to people familiar with the matter. Mr. Grundhofer, who didn't return calls seeking comment, is well-regarded in the industry for steering U.S. Bancorp to profitability while avoiding the risky lending that hurt Citigroup and many other banks. Citigroup's woes have set off repeated clashes within the government following last year's extraordinary effort to recapitalize the bank with at least $45 billion in taxpayer money. After a planned share conversion, taxpayers will own up to 34% of the company. The FDIC's aggressive stance comes just ahead of the Obama administration's big revamp of financial oversight, which is expected in mid-June.

Several regulators, including the FDIC, are hoping to win additional powers, and some may end up losing authority. The FDIC's influence has grown in the past year because of Ms. Bair's willingness to challenge her peers, as well as her agency's central role responding to the financial crisis. Ms. Bair warned about the housing crisis before many of her colleagues. The FDIC traditionally hasn't been nearly as assertive in management of a large firm. But Ms. Bair's agency is heavily exposed to Citigroup. The FDIC is helping finance a roughly $300 billion loss-sharing agreement with the company. It also insures many of Citigroup's U.S. bank deposits. Citigroup has issued nearly $40 billion in FDIC-backed debt since December, according to Dealogic, a financial-data provider.

Some government officials believe that Citigroup should be given more time to implement its new capital plan, but it is unclear which regulator might ultimately prevail because the bank depends on large amounts of federal aid.
Since late 2007, Citigroup has had more than $50 billion in write-downs and loan defaults. It's in substantially worse shape than many of its peers, many of whom have been able to raise billions of dollars in fresh capital recently. The Fed, in its recent stress tests of the nation's 19 largest banks, estimated that Citigroup could face up to $104.7 billion in loan losses through 2010 under the government's worst-case economic scenario. The test found that Citigroup could face nearly $20 billion in losses in its huge credit-card portfolio, which is suffering from rising defaults.

However, the Fed's conclusion that Citigroup needed to beef up its capital by only $5.5 billion to withstand a deteriorating economic environment surprised many investors and analysts, who feared the company faced a much steeper shortfall. Last year, under pressure from federal regulators, Mr. Pandit agreed to make changes aimed at slimming down the financial giant and shedding risky assets. These included a spinoff of the company's Smith Barney brokerage arm into a joint venture with Morgan Stanley. Some federal officials have told Citigroup they remain worried that the firm hasn't sold off unwanted assets quickly enough, which could come back to haunt the company if financial-market turmoil flares up again, according to people familiar with the matter.

Mr. Pandit and his allies argue he isn't to blame for Citigroup's mess and that he has taken major steps to stabilize the company. "We went through a rigorous stress-test process, the results of which were agreed to by appropriate regulatory agencies and clearly reflect the significant progress made by this management team over the last 15 months to turn Citi around," said Richard Parsons, the firm's chairman, in a statement. He said the firm is on track to be "among the best-capitalized banks in the world." Since becoming CEO in December 2007, the 52-year-old Mr. Pandit has beefed up Citigroup's risk-management apparatus, raised new capital and sold assets. But for his first year on the job, Mr. Pandit insisted Citigroup's business model was basically sound.

The discord between Citigroup and the FDIC dates to last fall. In September, Citigroup agreed to buy faltering Wachovia Corp. in a government-arranged marriage. Days later, however, Wells Fargo & Co. swept in with a higher offer for Wachovia. Citigroup officials felt blindsided and faulted Ms. Bair for endorsing the Wells Fargo bid over their own. On a 2 a.m. conference call at that time, the usually mild-mannered Mr. Pandit launched into an obscenity-laced tirade about the FDIC chairman, according to people familiar with the call. Citigroup soon filed lawsuits against Wells Fargo and Wachovia, accusing them of improperly breaking up the Citigroup deal. Citigroup executives came to blame the deal's demise as the catalyst for a plunge in Citigroup's stock price, one cause of the federal bailouts.

After months of not talking to the agency, Citigroup executives in the past couple of months have tried to repair relations with the FDIC. Board members including Mr. Parsons, the new chairman, have reached out to FDIC officials, according to people familiar with the matter. Their message: "We're here to help," one person said. "Please use us as your avenue. We want to facilitate your review of Citi." In public statements, Ms. Bair has declined to discuss Citigroup. In private conversations with other regulators, FDIC officials have argued the government should be tougher on Citigroup.

In what is becoming a classic Washington turf battle, the Comptroller of the Currency has countered that replacing the bank's management could be too disruptive. The agency, which oversees Citigroup's national bank division, believes Citigroup needs more time to implement its turnaround strategy. In March, senior officials from the FDIC and Comptoller sparred over the confidential financial-health rating the government assigns to the company's Citibank unit, people familiar with the matter said. The FDIC wanted the rating lowered, these people say. Banks rated a 4 or 5, on a scale of 1 to 5, are deemed "problem banks," which means they're at greater risk of failure.

Government officials decided to keep Citigroup off the "problem" list at the end of March, which became clear after the FDIC disclosed that the 305 banks on the anonymous list had a total of only $220 billion in assets, meaning Citi couldn't be among them. Still, Citigroup officials believe that the FDIC will push them onto the "problem" list if they don't remove Mr. Pandit and his team. They fear being on the list could limit Citigroup's access to federal programs and prompt trading partners and clients to yank business.

Bank of Lincolnwood becomes 37th failed U.S. bank
U.S. banking regulators seized Bank of Lincolnwood on Friday, a small two-branch institution that became the 37th U.S. bank to fail this year. The Federal Deposit Insurance Corp said Bank of Lincolnwood of Lincolnwood, Illinois, had $214 million in assets and $202 million in deposits as of May 26. The failure is expected to cost the FDIC deposit insurance fund an estimated $83 million. Republic Bank of Chicago agreed to purchase about $162 million in assets, said the FDIC, which will retain the remaining assets for later disposition. Bank of Lincolnwood's two branches will reopen on Saturday as branches of Republic Bank of Chicago.

The pace of bank failures has accelerated in 2009 as the 18-month-old recession continues to take a toll on financial institutions. There were 25 failures in all of 2008 and just three in 2007.
Seattle-based Washington Mutual became the biggest bank to fail in U.S. history when it was seized in September with $307 billion in assets. JPMorgan Chase & Co acquired the assets of Washington Mutual. The FDIC insures up to $250,000 per account at member institutions. The agency also has a running tally of problem banks that its examiners closely monitor. At the end of the first quarter, 305 unnamed financial institutions were on that list.

FDIC Shuts Down Silverton Bank
The Federal Deposit Insurance Corp. has shut down Silverton Bank, the failed Atlanta "bank of banks," instead of selling it to private-equity investors, according to a person familiar with the situation. An FDIC spokesman didn't immediately return a call and email for comment. A consortium including Carlyle Group had been in discussions with federal regulators about a deal. Its failure to reach one illustrates the perils of distressed bank investing.

In addition to Carlyle, the group included private-equity investors Lightyear Capital, Harvest Partners and Colony Capital. Last month, Carlyle along with three other private-equity firms acquired the banking operations of Florida's BankUnited Financial Corp. from federal regulators. That transaction seemed to demonstrate the government's willingness to sell banks to private-equity firms. But regulatory hurdles and restrictions on ownership are still making it difficult to get these deals done.

Silverton provides services to other banks and doesn't take consumer deposits. After seizing the bank on May 1, regulators created a "bridge bank" to operate Silverton while it looked for a buyer. The same happened with IndyMac Bank, Pasadena, Calif., which the FDIC sold to a group of investors earlier this year. Because Silverton doesn't have retail deposits, its closure doesn't present the same problems that the shuttering of a more traditional bank would. Small community banks, which are Silverton's main customers, can take their business elsewhere.

TARP Recycling: Cut It Out, Says House GOP
Republican leadership in the House of Representatives wants the Treasury Department to give taxpayers their money back when bailed-out firms repay government investments under the Troubled Asset Relief Program. Republican Minority Leader John Boehner (Ohio) and Whip Eric Cantor (Va.) proposed new budget cuts on Thursday to reduce the deficit. An item near the top of their list: "Devote Repaid TARP Funds To Deficit Reduction."

In April, Treasury Secretary Timothy Geithner announced that the department would reuse $25 billion in funds paid back by banks participating in the TARP's Capital Purchase Program (CPP). Geithner subsequently announced that repaid funds would be invested in small banks. Rep. Brad Sherman (D-Calif.) questioned the legality of reusing TARP funds, since the law says repaid money "shall be paid into the general fund of the Treasury for reduction of the public debt." The Wall Street Journal reported in November that Neel Kashkari, former assistant to then Treasury Secretary Henry Paulson, said that the department "has no plans to recycle funds from the $700 billion Wall Street rescue package to make more capital injections into financial institutions."

When the Huffington Post raised the issue with the Treasury Department in early May, spokeswoman Stephanie Cutter wrote that dividends from CPP investments went to debt reduction but repaid principal went back under the TARP. On May 20, Geithner came up with an entirely new justification for reuse of the funds. He said at a Senate hearing that because the law allows only $700 billion "outstanding at any one time," money returned to the government can be reused for more bailouts so long as the total amount in the TARP at any one time doesn't exceed the $700 billion cap.

The TARP's Congressional Oversight Panel will weigh in on the recycling issue in its June 9 report. Just give it back to the taxpayers already, says the House GOP. "Recycling these funds means they will not be available for deficit reduction and instead will be used for additional bailouts," said the Republicans in their proposal. "Consistent with the intent of the TARP program all repaid TARP funds as well as any proceeds from TARP investments should be immediately used to reduce the deficit."

HSBC Faces Round Two of Subprime Punishment
When the subprime-mortgage crisis hit in the U.S., global banking giant HSBC Holdings PLC was among the first to get clobbered. Now it could be headed for round two. Through its subsidiary, HSBC Finance Corp., HSBC is a big holder of risky U.S. consumer loans, a toxic portfolio on which it has already taken more than $40 billion in impairment charges. This year, HSBC raised $18.5 billion in fresh capital and said it would wind down most of HSBC Finance, moving to close a bad chapter in the parent bank's 144-year history.

But because economic and housing data suggest many more U.S. consumers are likely to default, analysts are wondering how many billions of dollars more the bank may lose on loans it currently records as good. "There is the potential there for a large loss," says Adam Steer of research firm CreditSights. HSBC entered the U.S. subprime market in 2003 with the purchase of lender Household International Inc. and quickly built up a large portfolio of assets consisting mostly of risky mortgage loans. As of March 31, HSBC placed a value of $90 billion on those assets, well above the $57.5 billion the bank believed the loans would fetch were it to sell them in the markets.

The bank's rationale is that while things might look very bad now, and cash-strapped investors are wary of buying such loans, chances are good that its customers will ultimately pay the loans back. An HSBC spokesman said the bank understands the value of the loans better than the market, because it sees day to day how borrowers are paying, and the "vast majority" in fact do pay back the loans. Mr. Steer, though, isn't so sure. In a research report, he and colleague David Hendler note a steady increase in the number of home loans that HSBC Finance has modified or "re-aged" -- meaning, respectively, that the bank lowers the payments on delinquent loans, giving borrowers more time to catch up, or tacks missed payments onto the balance if borrowers manage to make their current payments.

As of March 31, the bank had modified or re-aged some $28.8 billion in mortgage loans, up 12% from the end of last year and amounting to 41% of such holdings. "They had to provide longer-term assistance in order to avoid foreclosure," Mr. Steer said. "We know from experience that this generally doesn't work." In one ominous sign, borrowers are already falling behind on the modified loans at a high rate. As of March 31, 24% of loans modified or re-aged since January 2007 were more than 60 days delinquent again, and 3% had already been written off. In principle, HSBC doesn't have to take the hit should its U.S. unit have heavy losses. HSBC Finance is a separate entity with $75 billion in long-term debt, holders of which could be left to absorb losses. HSBC management, though, has said the parent bank will stand behind the U.S. unit.

Not everyone shares the view that problems at HSBC Finance are worsening. In a report this month, UBS analyst Alastair Ryan estimated that three-year losses would be $17 billion, down from a $20 billion estimate he made in March. He cites, among other things, the fact that overall nonperforming loans increased only slightly in the first quarter as evidence of a "peaking of losses." The Household debacle still rankles shareholders. At HSBC's annual general meeting in London last month, shareholders vented their anger over the money-losing acquisition, questioning the board's judgment at the time and demanding an apology from Chairman Stephen Green. Mr. Green didn't personally apologize but said again that in hindsight HSBC wishes it hadn't done the deal.

Ailing, Banks Still Field Strong Lobby at Capitol
As he often does, President Obama took the opportunity in a bill-signing ceremony last month to remind Congress "to do what we were actually sent here to do — and that is to stand up to the special interests, and stand up for the American people." But Mr. Obama did not mention that the measure he was signing, the Helping Families Save Their Homes Act, was missing its centerpiece: a change in bankruptcy law he once championed that would have given judges the power to lower the amount owed on a home loan.

It had been stripped out three weeks earlier in a showdown between Senate Democrats and the nation’s banks, including many that are getting big government bailouts. As Congressional Democrats and the White House crow about multiple victories over the financial industry, including new rules for credit card issuers, banks are quietly savoring an even bigger victory of their own. The defeat of the bankruptcy proposal is a testament to the enduring influence of banks, even as the industry struggles financially and suffers from its role in the economic crisis. It also shows that in the coming legislative battles that will shape the future of the economy, the financial industry — through a powerful and well-financed lobbying force — may have a far stronger hand to play than might seem evident.

Documents and interviews with lawmakers, lobbyists and administration officials show that the banks defeated the bankruptcy change — the industry picturesquely calls it the "cramdown" provision — by claiming that it would push up interest rates and slow the housing market’s recovery, even though academic studies have countered such claims. The industry also steadfastly refused offers to negotiate over a weaker version. And it poured millions of dollars into lobbying: four of the industry’s top trade groups spent nearly as much on lobbying in the first three months of this year as they did in all of 2001. But an industry strategy of dividing the Democrats had the most success.

One target was Senator Mary Landrieu, the moderate Democrat from Louisiana. On April 1, about 30 bankers from Louisiana crowded into a room off the Senate floor to press their view that the bankruptcy measure would force them to raise mortgage rates and hurt the very homeowners Congress was seeking to help. Donnie Landry, a senior executive vice president at MidSouth Bank of Lafayette, La., recalled that last year Ms. Landrieu had "not been very receptive to some of our concerns. But this time she could not have been more cordial," even helping them get to see Senator Christopher J. Dodd, the Connecticut Democrat who is the chairman of the Senate banking committee, while they were at the Capitol.

Ms. Landrieu was among 12 Democrats joining 39 Republicans to vote against the measure, while Mr. Dodd was one of the 45 Democrats and independents who supported it — still 15 votes shy of the 60 needed to shut off a filibuster. Aaron Saunders, a spokesman for Ms. Landrieu, told reporters at the time that the senator had voted against the measure because of the concerns raised by Louisiana bankers that the provision could cause mortgage rates to rise. Throughout it all, the banks took advantage of the Obama administration’s seeming ambivalence. Despite its occasional populist rhetoric, the White House was conspicuously absent from weeks of pivotal negotiations this spring.

"This would have been a much different deal if Obama had pressed it," said Camden R. Fine, head of the Independent Community Bankers of America and one of the chief lobbyists opposing the bankruptcy change. "The fact that Obama effectively sat it out helped us a great deal." In the end, the banks’ startling success in defeating the provision, which was pushed hardest by Senator Richard J. Durbin, Democrat of Illinois, caught even their lobbyists by surprise. Not only did they defeat the cramdown provision, but the banks walked away with billions in new bailout money. The housing bill Mr. Obama signed on May 20 saves banks and credit unions at least $13 billion in special fees that they would have had to pay to replenish dwindling deposit insurance funds.

The outcome left some Democrats frustrated and fuming. "This is one of the most extreme examples I have seen," said Senator Sheldon Whitehouse, Democrat of Rhode Island, shortly before the vote, "of a special interest wielding its power for the special interest of a few against the general benefit of millions of homeowners and thousands of communities now being devastated by foreclosure." The lament was a far cry from the outlook in January, when banking lobbyists believed their situation was hopeless. Some 10,000 homes were being foreclosed on every day. A new president who had campaigned in favor of the proposal — and who co-sponsored similar legislation as a senator — was about to take office. While Republicans had defeated the measure in 2008, Congress was now more solidly in Democratic hands.

The industry’s worst fears began to come true in early January when Senator Charles E. Schumer announced that he had persuaded Citigroup to endorse the idea. Mr. Schumer had held discussions with Vikram S. Pandit, Citigroup’s chief executive, and Lewis B. Kaden, a vice chairman. Mr. Schumer then spoke to other top executives, including Jamie Dimon, chief executive of JPMorgan Chase, hoping to peel more big banks away from the opposition. Housing advocacy groups argued that it was unfair that bankruptcy judges have had the authority since 1978 to modify mortgages on vacation homes, farms and even luxury yachts, but not on primary residences.

They also argued that a string of federal programs to help reduce foreclosures had been ineffective because of resistance by lenders and investors who own pools of loans, all of whom stand to lose money when a mortgage is modified. Those arguments won the day in the House, which adopted the legislation on March 5 by a 234-191 vote. In the Senate, where Republicans were looking for a chance to recoup after narrowly failing to block Mr. Obama’s huge stimulus package, the banks argued that the proposal interfered with their contractual rights. But the real threat was to their profits. The proposal would have shifted negotiating power to the millions of troubled homeowners who could use the threat of bankruptcy to wrest lower monthly payments from lenders. The banks claimed that that would force them to raise rates.

That claim is in dispute. For one thing, the legislation would not have applied to new mortgages. Moreover, until a Supreme Court decision in 1993, some bankruptcy judges had modified mortgages on primary residences, and recent studies by Adam J. Levitin, an associate law professor at Georgetown University Law Center, concluded that those modified mortgages did not result in increases in lending rates. Still, Mr. Durbin knew he had a fight on his hands. Within his own party, moderates were badly split. Some, like Senator Tim Johnson of South Dakota and Senator Thomas R. Carper of Delaware, represent states that are the corporate home to major banks. The industry has showered both lawmakers with campaign cash.

Senator Carper’s three largest contributors this election cycle have been executives and political action committees at Citigroup, Bank of America and JPMorgan Chase, according to the Center for Responsive Politics, which tracks money and politics. Out of the $4.6 million he has raised, some $375,000, or 8 percent, has been from banks, credit unions and related trade groups. Senator Johnson has raised about $6.2 million, of which at least $280,000, or 4.5 percent, has come from groups opposed to the legislation. To win industry support in enlisting more of his colleagues, Mr. Durbin approached the trade associations.

Shortly after negotiations began, the American Bankers Association abandoned the talks, saying there was no compromise they could ever support. Soon after, Mr. Fine’s community bankers also left the talks, having refused a demand by Mr. Durbin to publicly announce support for the principle of allowing bankruptcy judges to reduce mortgage payments. Mr. Durbin next sought a compromise with credit unions and three large banks — Bank of America, JPMorgan Chase and Wells Fargo. In April, at a delicate stage in the talks, Mr. Durbin gave the banks a proposed compromise that was marked not to be circulated, a senior Congressional aide involved in the talks recalled.

Within six minutes, the memo was distributed to the entire Republican caucus — along with a warning from Senator Mitch McConnell of Kentucky, the minority leader, to stay away from it. The compromise went nowhere. While Mr. Obama reaffirmed his support for the proposal shortly after becoming president, administration officials barely participated in the negotiations, a factor that lobbyists said significantly strengthened their hand. Lawmakers who have discussed the issue with the administration said that the president’s senior aides had concluded that a searing fight with the industry was simply not worth the cost. Moreover, Timothy F. Geithner, the Treasury secretary, did not seem to share Mr. Obama’s enthusiasm for the bankruptcy change.

Mr. Geithner was lobbied by the industry early. Two days after he was sworn in, he invited Mr. Fine from the community bankers to his office for a private meeting. The association, with influential members in every Congressional district, is one of Washington’s most powerful trade groups. A senior adviser to Mr. Geithner said the administration supported the cramdown proposal, but it preferred that distressed homeowners seek to modify their loans through the Treasury’s new $75 billion program, which rewarded banks if they modified home loans, rather than through bankruptcy court. Mr. Durbin acknowledges that it was a mistake not to call on the administration for help.

"If I would have known how it would unfold, I would have called on the White House earlier to get involved," he said. While Mr. Durbin had trouble rounding up Democratic votes, Republican leaders kept their members — and potential renegade banks — in line. Senator Jon Kyl, the Arizona Republican leading the charge against the bankruptcy change, told bankers there would be consequences if they dealt with the Democrats. According to an April 20 e-mail message between industry officials in touch with Mr. Kyl, he told them "not to make a deal with Durbin and then come looking to Republicans when they need help on something like regulatory restructuring."

In an interview, Mr. Kyl, the Senate’s No. 2 Republican, did not recall whether he had made the statement, although he remembered telling bankers that he could not defend them if they did not first defend themselves. "I very pointedly said, ‘Don’t make a deal with Durbin on this. You don’t need to. If he has the votes he wouldn’t be dealing,’ " Mr. Kyl recalled. There was no counterweight to that legislative muscle. Bankrupt homeowners do not have a political action committee or lobbyists. Mr. Fine reports that the political action committees run by his association alone have built a war chest of nearly $2 million, a 40 percent jump over the last year, even though members have had to cut other expenses in the recession. "The banks get it," Mr. Fine said. "They understand you need a strong political action committee to get access to the fund-raisers. That’s where the lawmakers are."

The Fed Loses the Mortgage-Rate Battle?
Despite the best efforts of the Federal Reserve and the Treasury Department, the free market is winning the battle over mortgage rates. Tens of trillions of dollars in support for the financial system can't change the stark reality: Giving out home loans remains risky business. Borrowers looking to take advantage of rock-bottom interest rates are seeing the opportunity slip through their fingers, as rates have risen by more than 0.50% in the past few weeks.

According to the Wall Street Journal, the pop in rates is due to expectations  of economic recovery, combined with fears that the mounting pile of debt incurred by Washington's central economic planners may not be sustainable. As the government prints money and plunges the country into an ever-deeper deficit, holders of US Treasuries (e.g. China) are getting skittish. These investors are quietly demanding a higher return on their bet that our economy will pull out of its current tailspin. This, in turn, is pushing up mortgage rates, which doesn't bode well for nascent signs of recovery.

Big lenders like Wells Fargo, Bank of America and JPMorgan Chase -- despite offloading nearly all default risk to taxpayers via Fannie Mae, Freddie Mac, or the Federal Housing Administration -- are asking prospective borrowers to pony up hefty points up front to get the lowest rate possible.  And this at a time when pundits and performance-chasing portfolio managers are latching onto the absurd notion that the nation's housing market is making some sort of fundamentally sound turnaround.

A contributor to CNBC actually said with a straight face that our economy can't grow with mortgage rates this "high," and that the Fed is derailing the recovery by letting rates move up. To say that our economy is undergoing some sort of legitimate recovery, and at the same time assert mortgage rates a hair above 5% are too high is to confirm that those declaring the recession in our rear view mirror are delusional at best, talking their book at worst. As renewed fears of inflation percolate and investors begin to snatch up commodities in expectation of future prices, pressure will mount on the Fed to keep rates of all kinds low to ensure the economy doesn't remain mired in its current malaise.

This means more printing press activity, more "quantitative" easing, and more social-welfare programs packaged as "progressive" economic policy. Battle lines are being drawn: Washington bureaucrats on one side, advancing the theory that money can be printed seemingly without limit to generate legitimate economic growth - and the market on the other. And each time the Fed takes its foot off the dollar-debasement accelerator, we get a peek into what will happen when the printing presses finally run out of ink.

Fed damps hopes on mortgage-backed securities
The US Federal Reserve on Thursday damped expectations that it was preparing to prop up the market for distressed bubble-era securities backed by mortgages. Hopes that the Fed would in the coming months start providing financing to investors seeking to buy residential mortgage-backed securities (RMBS) – many of which have lost their triple A credit ratings – have pushed prices on these assets higher in recent months. William Dudley, president of the Federal Reserve Bank of New York, said on Thursday that a decision had not been made. "We have not made a final decision on whether it is doable and, if it is doable, whether it is worth the cost," he said.

Mr Dudley, who took over from Tim Geithner in January, has overseen the implementation of the $1,000bn term "asset-backed securities loan facility" (Talf), a key plank in the US government’s efforts to plug the hole left by the collapse of the asset-backed securities markets. So far, the Talf has been used to finance the purchases of securities backed by loans to consumers, such as car and credit card loans. The Talf lends money to investors such as hedge funds on favourable terms, which encourages the purchases. This week, Talf financed 13 deals worth $16.4bn.

"We’re not back yet to the $200bn annual rate of issuance [for consumer loan-backed securities] before the crisis and we don’t expect to get there, but we are making a good start," Mr Dudley said, stressing that the "securitisation markets are still significantly impaired". Now, the Fed is working to extend the Talf into more complex areas, such as loans backed by commercial property and also purchases of existing mortgage-backed securities, part of the pool of toxic assets that have contributed to billions of dollars of writedowns.

Funding purchases of toxic assets presents huge administrative hurdles because each security has to be analysed. Mr Dudley said many of these securities were no longer rated triple A, which may make them too risky. His comments on residential mortgage-backed securities are believed to also apply to commercial mortgage-backed securities. Although most of these are rated triple A, a wave of downgrades is anticipated soon by Standard and Poor’s. It is in the commercial mortgage market – used to fund office blocks and shopping centres – that the Talf is most needed, however.

Fed dismisses Tarp objections
US regulators insisted that JPMorgan Chase and American Express raise equity this week before repaying bail-out funds, in spite of strong objections from executives who claimed the banks did not need the money, people close to the situation said. In fraught talks last week, Wall Street chiefs disagreed with the authorities over whether the Federal Reserve should require an equity offering as a condition for inclusion in the first wave of repayers of the troubled asset relief programme.

People close to the situation said the Fed imposed the requirement on JPMorgan and Amex because they were the only institutions that had passed the recent "stress tests" but had not yet raised equity. The offerings by JPMorgan, which sold $5bn of shares on Tuesday, and Amex, which raised $500m, took many investors by surprise because the two were among the eight banks deemed not to need capital after last month’s tests. Jamie Dimon, JPMorgan’s chief executive, said on Monday he did not believe that the ability to tap capital markets should have been a relevant test for his bank.

"Any argument you could think of, you could assume we made with our regulators. And, as you could also expect, they won," he said. "The primary reason was access to equity capital markets, and it’s hard for me to imagine that really applies in JPMorgan’s case." The idea that banks seeking to repay bail-out funds could be required to demonstrate that they could raise equity as well as non-guaranteed debt was revealed by the Financial Times on May 6. However, it was not included in the statement issued that day by the authorities, leading many to conclude that banks meeting the stress test standard and able to raise non-guaranteed debt would not be asked to raise equity as well.

US officials indicate that the May 6 statement was never intended to provide a detailed list of the repayment conditions. Supervisors all along intended that banks seeking to repay bail-out funds should meet a higher standard than the stress test. They want to be confident that if any of these banks need more equity they will be able to raise it from private sources, while continuing to lend to business and consumers even without government aid.

Appeals Court Refuses to Block Chrysler’s Sale
A federal appellate court on Friday rejected a bid by Indiana state pension funds to block Chrysler’s sale to Fiat, but left open the door for the Supreme Court to rule on the matter. The United States Appeals Court for the Second Circuit in Manhattan put the Chrysler deal on hold until Monday afternoon to allow the funds to make their appeal to the Supreme Court. The appeal was filed by lawyers for the Indiana pension funds, which objected to the sale because they were seeking more compensation for the Chrysler secured debt they hold.

A federal bankruptcy court in Manhattan had previously approved the sale, which would transfer most of Chrysler’s assets to a newer, healthier company run by a group led by Fiat. Richard Mourdock, Indiana’s treasurer, had argued that “Indiana retirees and Indiana taxpayers have suffered losses because of unprecedented and illegal acts of the federal government.” Lawyers for Chrysler and the government argued that the sale to Fiat needed to be completed as quickly as possible to preserve its viability and to save thousands of jobs.

Fiat can walk away if no agreement is struck by June 15, although that deadline can be pushed back by one month to allow for certain regulatory approvals. Late Sunday, Judge Arthur J. Gonzalez of the federal bankruptcy court approved the sale to Fiat, overruling more than 300 objections. On Monday night, he agreed to shorten a customary 10-day stay of the sale to four days, allowing Chrysler to complete the transaction by Friday at noon.

When Chrysler emerges from bankruptcy, it will have a new ownership structure, with a union retiree trust owning 55 percent, Fiat holding a 20 percent share that could eventually grow to 35 percent and the United States and Canadian governments taking minority stakes. The Indiana funds making the challenge, which include those representing state teachers and police officers, hold about $42.5 million of Chrysler’s $6.9 billion in first-lien debt, so called because it is first in line for repayment. But holders of about 92 percent of those loans agreed to a government plan whereby they would receive 29 cents on the dollar in cash for their claims. The Indiana funds bought its holdings in July 2008 for 43 cents on the dollar.

Lawyers for the funds have questioned whether Chrysler could have realized a better deal than the Fiat transaction or through a liquidation. They have also raised objections to the sale on constitutional grounds, arguing that the Obama administration was not allowed to give bailout money earmarked for financial institutions to Chrysler. In his order Sunday night, Judge Gonzalez disagreed with the notion that alternatives to the Fiat deal existed. He also said that holders of 92 percent of Chrysler’s secured debt had backed the plan. In a separate order, Judge Gonzalez ruled that the pension funds lacked standing to challenge the administration on its use of federal bailout money.

Chrysler bankruptcy: personal injury claims null and void
As with any bankruptcy agreement, there is usually someone who loses out. In the case of the Chrysler Corporation, it's those who claim they have been injured by faulty auto parts. Previous to the bankruptcy, the auto giant paid out around $250 million a year in lawsuit fees. That money will no longer exist when the bankruptcy deal is finalized, and that's because lawsuits fall under "unsecured creditors" - they get paid last in any bankruptcy deal, if there is any money left, which in this case seems unlikely. About 700 suits are filed in a typical year against the auto-maker. A local attorney we spoke with says victims can file an appeal with the bankruptcy court, but in this case it will likely prove to be a fruitless action.

Magic Act: Conjuring Up a Profit at GM
Like a magician who artfully controls his audience's attention, the government's General Motors investment is all about financial diversion. Here's the fancy trick: It won't be very hard for a revamped GM to succeed at making a buck. Its debts will be cut from about $73 billion to about $17 billion. Its labor costs will be reduced by as much as $2 billion a year. On Wednesday, GM got even more help. GMAC, which funds dealers and car buyers, began issuing $3.5 billion in three-year debt backed by the federal government. This should cost GMAC about 2.2% annually. Ford Motor Credit just priced a five-year bond. It's paying 8%.

"New GM" will thus have a far easier road to turning a profit over the next 12 to 18 months. And you can bet that first profitable dollar will be cause for celebration in Washington and Detroit. But let's break the magician's credo and show how the trick works. Beneath the magician's table is a black box. It happens to be stuffed with about $65 billion in cash. That's taxpayer money. Some $20 billion of it was given to GM over the past few months, and another $30 billion is being used for the company's reorganization. About $15 billion of it goes to support GMAC, which the Obama administration says is essential to keeping GM alive. Like any lender, the government would be expected to demand this money be repaid. But that's not really happening here. Save for $8 billion in debt and another $2.1 billion in preferred stock, the money is being converted into an illiquid 60% stake in GM.

Why didn't the government take more debt and less equity in GM? It worried that GM couldn't bear the interest expense. Explained another way: The new GM may "succeed" at getting to profitability, but only as much as taxpayers have absorbed tens of billions of losses in upfront equity. In President Obama's view, this is all part of the path to helping "this iconic company rise again and move toward profitability." Measuring it as an investment, it appears nearly impossible that taxpayers will get their $65 billion in equity back. The government's 60% stake backs into an implied GM market capitalization of about $70 billion. It will support another $26 billion in debt and preferred stock owed to the U.S. Treasury and the UAW.

GM's best market cap was $60 billion in 1999, when it was cranking out high-margin SUVs. Even with huge amounts of debt and other liabilities, GM produced record annual revenue of $176 billion. Also, its pretax, preinterest profit margins were a stellar 12.6%. With the bankruptcy plan, GM will have shed four brands, its majority-ownership stake in GMAC and most of its European operations. Roughly speaking, this might put its annual revenue at about $100 billion. Assuming GM can return to Ebitda margins of 10% (they're currently negative) would mean GM's earnings power will have been cut by over half compared with a decade ago.

What is that revenue stream worth? Through most of this decade, one of the world's best car companies, Toyota Motor, has been valued at about eight times its cash flow to enterprise value. Say an outside investor is willing to value GM's cash flows at six times. Roughly speaking, that makes GM's equity worth $33 billion, meaning taxpayers' stake would be worth only $20 billion, less than half their original $42 billion equity investment. And that doesn't include the uncertain fate of the $15 billion given to GMAC. Still, one day in 2010 or 2011, GM will declare itself profitable. The government's bailout plan will be hailed. But it will be an illusion created by taxpayers' black box of billions.

GM: Retardation

When GM First Messed Up
It was 1974, and America was racked by the worst recession since the Great Depression, a direct result of the Arab Oil Embargo of 1973. At 21, trying to find my way in the world with somewhere around $5 left in my checking account, I took a sales job at Sam White Oldsmobile in Houston. Even though car sales were beginning a collapse—from 14.6 million annually to 11.1 million two years later—things were still good in Houston. Sam White would end up No. 2 in the nation that year with 5,200 Oldsmobile sales, beaten for the top slot by Bill McDavid Oldsmobile on the other side of town.

Over the next 10 years I would have a front-row seat to the self-inflicted destruction of General Motors. It started in 1975, and the undoing of General Motors was the result of three problems. First, GM creative designs were quickly heading south. Second, GM executives seemed not to care about major engineering mistakes that would ultimately cost them the loyalty of their large core audience. Finally, the arrogance of GM's executives was incredible. Anyone who gave them an honest appraisal of their products' shortcomings would have his head handed to him and his ears blistered.

Sam White Oldsmobile was the perfect first spot for a young man in the auto industry. Most important, Bill Buxton, Oldsmobile's general manager, was in our store on a regular basis. However, he didn't care for any criticism that suggested GM's products might cause a defection in its customer base. It started with the 1975 Olds Starfire. The interior space was cramped because the transmission required a large center hump. The car had originally been designed to use Mazda's Wankel rotary engine, but at the last minute GM realized that the engine could not be certified to meet 1975 emission standards. So GM quickly decided to use its old Odd-Fire V6, having repurchased the patent rights from Jeep.

In spite of its smaller size, the Starfire drove like a tank and gulped gasoline, and its engine was noisy and rough. Anybody who bought an Olds Starfire (or its cousins the Chevy Monza or Buick Skyhawk) would be a motivated buyer for Japan's next offerings. 1975 also marked the year that GM decided to remove the conventional bucket seats from the unbelievably popular Cutlass Supreme and replace them with the swivel buckets used in the Chevrolet Monte Carlo. Salespeople groaned: That design never allowed easy access to the backseat. Plus the seats squeaked, and they started wobbling soon after purchase.

Customers hated the seats for the inconvenience; dealers hated them because of their known problems. The entire sales staff at Sam White Olds politely told Bill Buxton of our concerns. Bad decision. Buxton launched into a tantrum that you might expect from a 5-year-old. Red-faced, he told the entire staff that they were the worst salesmen in all of General Motors if they didn't understand the brilliance of GM's decision. It was shocking to see a GM executive behave in that way. But GM's callous disregard for its customers was just beginning.

In early 1976 tire manufacturers experienced a national strike. Car companies were forced to build their products without including a spare tire—in a period when customers cared about that safety item. The promise was that once the strike was over, GM would send spare tires to the dealerships to be added to its cars. Only…in fulfilling that promise GM simply sent tires—not specifically the same models or tread designs on the customers' vehicles—meaning that virtually everyone got a mismatched spare. It was a huge deal to GM customers back then; I'd never seen customers as angry about any issue as that deception.

In 1977, GM was caught swapping engines between car divisions. Today that's a normal part of the business, but salespeople had been trained to sell their customers on why a Chevrolet engine was not a Buick engine and so on. With this revelation, General Motors had managed to make liars out of half of its national sales force. As always, GM execs could not understand why this was a problem at all, and their attitude was: "What are they going to do, buy a Ford?" Then came GM's infamous diesel engine, followed by the 8-6-4 engine, both promising exceptional fuel efficiency. Both were disasters.

Next came the X-Cars, led by the Chevrolet Citation. Suddenly GM was offering a compact front-wheel-drive, V6-powered car that not only had serious braking system issues but actually delivered far less fuel efficiency than the older V8 models GM customers were trading in. The arrogance of GM continued. How else can one explain taking the lowly Chevrolet Cavalier and turning it into a full-fledged Cadillac Cimarron? To be fair, GM President Pete Estes warned Cadillac's general manager, Ed Kennard, that there wasn't enough time to make the design changes to bring the little Chevy up to Cadillac standards—and Estes was ignored.

In 1985, when GM introduced its new front-wheel-drive and full-size near-luxury cars, such as the Oldsmobile 98, the V6 engine suddenly developed a nasty habit of building up carbon at the fuel injector and refusing to run. In those years the Chevrolet Suburban was offered with either panel doors in the back or a station wagon-like tailgate. But when you hit a pothole with the tailgate-style Suburbans, the back glass was likely to drop out of its track and shatter. It had been a problem for years; GM ignored it. Of course, in this period the Pontiac Fiero made its debut, and in terms of sales it was possibly the hottest car Pontiac had retailed in 16 years. But it was hot elsewhere, too: It had a poor engineering design that always left the engine starved for oil and liable to catch fire. GM engineers knew that from their presale testing and brought it to market anyway.

Another serious issue started hitting GM: Its dealers' salespeople were defecting in droves to foreign manufacturers. It was not unheard-of in that period to earn a $1,000 commission selling a Mercedes or BMW, and many dealers paid a Honda salesperson half that much for selling a Prelude or Accord. This was a far cry from what had become a $50 minimum commission at most GM dealerships, made worse by the fact that you had little opportunity to sell your customers a second vehicle. The fact is that for 11 years every time GM promised new and exciting cars, or breakthrough technology in its engines, GM owners got burned, and they started leaving in droves.

The one area in which GM did not fail was its pickup truck lines; hence the GM truck loyalty that exists to this day. But the decisions GM made starting in the late 1960s, which became the GM "car" culture of 1975 to 1986, explain why GM no longer owns half of all auto sales in America. It is true that from the early '90s on, GM quality was starting to improve, although its designs were bland at best. But it is fair to say that GM's renaissance should have occurred under Jack Smith's chairmanship, and he blew it. Because I had a front-row seat to GM's implosion in 1975-86, the period in which it completely broke the trust of loyal customers, I became extremely impressed with the way Rick Wagoner ran the company.

Wagoner did everything right in correcting long-standing mistakes the corporation had made. He hired Bob Lutz, so GM design was vastly improved. Quality problems became a thing of the past. GM executives no longer walked around as if they were the gods of the automotive world, and sales input from dealers became a critical part of the GM process. In spite of what others have written, everything that had been wrong with General Motors for so long was slowly becoming a bad memory. Still, Wagoner was not a miracle worker. And yes, he made his fair share of mistakes. The real issue was time, a luxury Wagoner never had. No one could undo overnight the damage that those who ran and worked for GM had wrought for decades.

Moreover, no one could have forecast last year's complete collapse of the auto industry, which has hit even Toyota with a $28 billion turnaround in profits in the first quarter of this year. At GM, it was as if Wagoner had been put into a basketball game in the middle of the fourth quarter and with his team down by 25 points. The clock ran out before he and the GM team could make a difference. More than two decades ago I walked away from General Motors, infuriated with the arrogance of its executives, embarrassed by the quality of its products, and disgusted with GM's total disdain for anyone who suggested a way to improve things. That is not General Motors today, but that's irrelevant. GM is still bankrupt—sunk by the sins of its past.

Federal Reserve to Hire Enron Lobbyist, Summers/Rubin Adviser in Campaign to Buttress Its Image
The Federal Reserve intends to hire a veteran lobbyist as it seeks to counter skepticism in Congress about the central bank’s growing power over the U.S. financial system, people familiar with the matter said.
Linda Robertson currently handles government, community and public affairs at Johns Hopkins University in Baltimore, and headed the Washington lobbying office of Enron Corp., the energy trading company that collapsed in 2002 after an accounting scandal. She was also an adviser to all three of the Clinton administration’s Treasury secretaries. Robertson would help the Fed manage relations with lawmakers seeking greater oversight of a central bank that has used emergency powers to prevent Wall Street’s demise. While she wasn’t tied to Enron’s fraud, her association with the firm may raise questions, analysts said.

"Some members of Congress think there are votes in attacking the Fed" after it "unnecessarily and unwisely entangled monetary policy with fiscal policy," said former St. Louis Fed President William Poole. "The Fed is going to have a tricky time of unwinding what has been done" and will need to "keep in touch with members of Congress more thoroughly," said Poole, now senior fellow with the Cato Institute in Washington. Robertson served under Treasury Secretaries Lawrence Summers, Robert Rubin and Lloyd Bentsen. She didn’t return calls seeking comment.

Summers now heads the White House National Economic Council. Along with Treasury Secretary Timothy Geithner, he is leading Obama administration efforts to broaden the economic rescue and overhaul financial regulation. He has been mentioned as a possible successor to Fed Chairman Ben S. Bernanke should Bernanke not be renominated when his term ends in January. Robertson is likely to start at the Fed in July and have the title of senior adviser to the Board of Governors, the people familiar with the situation said. She was considered for a senior post under Geithner at the Treasury but ran up against the Obama administration’s restrictions on hiring lobbyists, the people said. "People have been asking whether the Fed is capable of getting its job done right," said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. "Hiring a former lobbyist from Enron will surely make one wonder."

Robertson would confront a range of issues in the newly created position. Congress is looking to subject the Fed to more scrutiny, and some lawmakers have suggested that district bank presidents should be confirmed by the Senate. Some legislators have also expressed opposition to the Obama administration’s attempt to make the Fed the regulator in charge of financial companies deemed too-big-to-fail. In addition, the central bank has been become a target to some members of Congress who’ve posted online videos of their interrogations of Fed officials during public hearings. One YouTube clip, of Florida Democratic Representative Alan Grayson’s grilling of Inspector General Elizabeth Coleman, has garnered almost 500,000 views in about a month.

Robertson is expected to advise the Fed on communications strategy, the people said. In recent months, Bernanke has pushed to make the traditionally secretive institution more open. He’s done a television interview with CBS’s "60 Minutes" program and taken questions from reporters at a National Press Club function in Washington. According to her biography on the Johns Hopkins Web site, Robertson has spent more than 25 years working on federal legislative issues. While Robertson’s Hopkins biography makes no mention of her work at Enron, federal disclosure documents show she joined the company in 2000 after working at the Treasury. Robertson, who signed some of the forms, said she lobbied on energy and tax issues.

Bank of America Taps Four Outside Directors
Four outside directors with experience in banking or financial oversight joined Bank of America Corp.'s board today, a move aimed to satisfy strong suggestions from federal regulators that the troubled Charlotte, N.C. lender improve its corporate governance. The new members, according to people familiar with the situation, are former Federal Reserve Governor Susan Bies; former Federal Deposit Insurance Corporation Chairman Donald Powell; former Compass Bancshares Inc. CEO D. Paul Jones and former Bank One Corp. executive William Boardman. All are in their 60s.

Ms. Bies and Mr. Powell, in addition to their stints as regulators, also have banking expertise. Ms. Bies formerly was chief financial officer at First Tennessee National Corp. and Mr. Powell was the president and CEO of the First National Bank of Amarillo. In 2005, Mr. Powell took charge of Hurricane Katrina reconstruction efforts for the Bush administration. The new faces arrive amid a board and management shake-up at the nation's largest bank by assets, as regulators urge the company to improve operations. The pressure to install new people increases scrutiny on 62-year-old CEO Kenneth Lewis, who has lost key supporters in recent weeks. While Mr. Lewis's departure "is not imminent," said a person close to the process, new outside chairman Walter Massey is being asked by regulators to think seriously about a succession plan.

One of Mr. Lewis's longtime deputies, 53-year-old chief risk officer Amy Woods Brinkley, is leaving June 30 as the result of the U.S.-mandated management review, while directors Temple Sloan and Robert Tillman resigned last week. Mr. Sloan and Mr. Tillman were among the last directors with North Carolina roots; Mr. Sloan is the owner of a Raleigh-based auto parts distributor and Mr. Tillman is the former chairman and CEO of Mooresville, N.C.-based Lowe's Cos. Both Mr. Sloan and Mr. Tillman were members of the board's influential executive committee. Mr. Sloan was lead director before shareholders stripped Mr. Lewis of his chairmanship during an unusual vote at the bank's April 29 annual meeting.

Mr. Sloan decided to step down on his own, said a person familiar with his thinking, knowing that he had become a target of bank critics. At the annual meeting, Mr. Sloan received the fewest 'yes' reelection votes of any Bank of America director. Another longtime North Carolina-based director, Meredith Spangler, also stepped down from the board in April after turning the mandatory retirement age of 72. Two others directors who have not been identified have also resigned recently, according to a person familiar with the matter. The size of the board is expected to shrink even further, the person said.  

Canadian mint can't account for missing gold
A significant quantity of gold, silver and other precious metals is unaccounted for at the Royal Canadian Mint. External auditors are investigating a discrepancy between the mint's 2008 financial accounting of its precious metals holdings and the physical stockpile at the plant on Sussex Drive in Ottawa. The mystery raises possibilities from sloppy bookkeeping to a gold heist. Officials with the commercial Crown corporation are saying little and refuse to confirm the amount and value of the unaccounted for gold, silver and palladium.

"An unprecedented demand in gold in 2008 has led to an unreconciled difference between the mint's financial statements and the physical count of precious metals. There's a difference there that we're looking into," Christine Aquino, mint spokeswoman, said in a prepared statement Tuesday in response to questions from the Ottawa Citizen. "We're taking this very seriously. We're conducting a thorough review and we're expected to have that completed within the month. (It) includes the analysis of precious metal by-products and financial data. We've allocated all necessary resources to this review."

She stressed police have not been called into what mint officials consider an internal matter. She would not say whether the gold and other metals in question were part of the refinery and bullion operation or one of the mint's three other business lines: producing Canadian circulating coins, designing and producing coinage for foreign countries, and numismatics. "We're looking at many different angles right now," she said. The mint's Ottawa headquarters houses one of the world's leading gold and silver refineries, turning out almost 2.8 million Troy ounces of refined gold in 2007.

Another 369,000 ounces of refined silver were produced as a byproduct of refining the gold from a number of sources, including gold ore, scrap recyclers, financial institutions and industry. (A Troy ounce is the traditional unit of weight for precious metals and equals 1.097 ounces.) The volume of precious metals refined in 2007 climbed by eight per cent over 2006, to 5.4 million ounces. Bullion and refinery revenues increased to $286 million. Total mint revenue in 2007 was a record $632 million. Annual figures for 2008 have yet to be released. Further, production of the mint's Gold Maple Leaf coins last year surged by 325 per cent over 2007, fuelling the "unprecedented demand" for gold, said Aquino.

Stealing gold or other metals from the refinery would be a considerable feat. "The rigour of our production standards is equalled by the stringency of our security protocols, which are implemented at every level of refinery operations," according to the mint's website. "The refinery is a restricted environment controlled by security personnel supported by state-of-the art surveillance technology." It's not known when or what triggered the audit review or what external auditor is conducting the review. The corporation's year fiscal 2008 runs Jan. 1 to Dec. 31 and its normal external auditor is the auditor general of Canada, who is required to audit the mint's year-end consolidated financial statements. Security is paramount to the mint's success, including its reputation with foreign governments.

In 2001, during a court hearing for a mint employee convicted of smuggling counterfeit coins from the mint's Winnipeg plant, a statement from management said the theft could have "significant economic impact" for the Crown corporation because security breaches threatened future contracts. The largest reported theft at the mint was in 1996, when a machinist at the Sussex Drive plant pocketed 85 ounces or eight bars of almost-pure gold called "anodes," the final step in the refining process before 24-karat ingots are made in an acid bath. He sold it for $8,000 to another man, who sold it to a company for $22,000. It was resold once more for $40,000.

A charge of theft against the man was later dropped for unexplained reasons and the mint was spared the humiliation of a trial that would have explained how the man snuck the precious metal past metal detectors, surveillance cameras and electronic sensors. Prior to that, there were only two reported incidents of gold theft in the mint's 101-year history. In 1988, a 23-year veteran janitor at the plant stole at least $30,000 in gold. The man worked in an area of the mint where objects that come into contact with liquid gold, such as tools, are crushed and recycled so the gold can be recovered. Police found he had more than $150,000 in unexplained income between 1985 and 1988.

Canada Jobless Rate Hits 11-Year High
Canada’s economy cut jobs for the sixth time in seven months in May and recorded the highest unemployment rate in 11 years as factories continued to fire workers amid the first recession since 1992. A net 41,800 people lost their job during the month and the unemployment rate climbed more than expected to 8.4 percent, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg predicted employment would fall by 36,500 and the jobless rate would rise to 8.2 percent. The world’s eighth-largest economy is shrinking in the face of a global slump that has sapped orders for Canada’s lumber, automobiles and metals. Factories in the manufacturing hub of Ontario now employ the lowest number of workers since the agency’s current survey method began in 1976. The province also saw its jobless rate soar to a 15-year high of 9.4 percent.

"The report shows the economy is not out of the woods and a recovery may be several months away," said Sal Guatieri, a senior economist with BMO Capital Markets in Toronto. "This report could mark the re-opening the chasm in economic performance between the Western resource-based provinces and central Canada’s manufacturing-based economy." Canada’s economy contracted at a 5.4 percent annual rate in the first quarter, the fastest pace since 1991, as the country’s businesses scaled back spending. The recession led the Bank of Canada to keep its benchmark lending rate at a record 0.25 percent yesterday, and renew a commitment to keep it there until June 2010.

The economy is expected to shrink another 2.1 percent in the second quarter, according to the median estimate of 11 economists surveyed by Bloomberg News. Guatieri predicts the economy will shrink 2.5 percent in the second quarter. The currency depreciated 0.4 percent to C$1.1016 per U.S. dollar at 7:44 a.m. in Toronto, compared with C$1.0970 yesterday. One Canadian dollar buys 90.77 U.S. cents. The currency touched C$1.0785 on June 1, the strongest since Oct. 3. About 2.1 percent of the country’s workers -- a total of 362,500 -- have lost their jobs since October, Statistics Canada said. Full-time employment fell by 58,700 positions in May, Statistics Canada said. Part-time jobs rose by 17,000 positions.

Manufacturers fired 58,400 workers in May, mostly in Ontario, and have cut 9.4 percent of their workforce since October. The transportation and warehousing industry lost 15,700 jobs in May, the agency said. Construction firms cut 4,100 workers in May, while natural resources companies fired 3,200 workers. Services offset some of May’s decline among goods producers, with public administration adding 19,000 workers and education services hiring 10,400. Average hourly wages grew 3.4 percent from a year earlier, Statistics Canada said, the slowest pace since May 2007 and down from the 4.3 percent gain seen in April.

European banks in spotlight as Baltic crisis hits Sweden
Sweden is preparing to part-nationalise banks exposed to the economic collapse in Baltic states, raising fears that a string of Western European countries could face similar fallout from rising defaults in the former Communist bloc. Finance Minister Anders Borg said the Swedish state will buy stakes in distressed banks if they fall deeper into trouble but will impose draconian terms. "We want to be very clear so that people know what could happen," he said. "If the banks come to us with big credit losses, where they have previously earned big money on lending, then shareholders will take the consequences. We're going to be clear that insolvent banks that don't meet legal requirements will see an injection of funds, primarily through government ownership."
Swedish banks have lent more than $75bn (£46bn) to Latvia, Lithuania and Estonia, led by Swedbank and SEB. Hakan Berg, Swedbank's head of operations in the Baltics, said his bank can cope with the shock losses from devaluations across the region. "We have tested the worst-case scenarios. We have adequate capital. It would not bring the bank down," he said. The dramatic situation in Latvia went from bad to worse on Thursday as overnight rates reached 140pc, a sign that the country's currency peg in Europe's Exchange Mechanism is close to snapping. Credit default swaps measuring risk on Latvian debt rocketed above 750 after Latvia's treasury failed to sell a single note at a $100bn debt auction on Wednesday.

Latvian premier Valdis Dombrovskis said the country needs help "fast" from the European commission and International Monetary Fund, which has withheld the latest tranche of its €7.5bn (£6.6bn) bail-out because of the surging budget deficit. "Fears of a domino effect in the region are to a certain extent justified," he said. The Baltic trio are all defending currency pegs at overvalued rates in a region where every other country (except Finland) has devalued by a third or so. They are each caught in a trap after allowing mortgage lending in euros and Swiss francs to mushroom out of control. However, there are ways of dealing with this as Argentina proved by passing a law that switched all dollar mortgages into pesos in 2001 – entailing a 70pc "haircut" for foreign creditors.

It is understood that Latvia is quietly exploring options to shield its homeowners from the exchange risk. This risks a bitter clash with Brussels, which has been insisting on peg discipline for ideological reasons – against the advice of the IMF. But the current course amounts to a slow crucifixion of the Baltic economies. Latvia's GDP is expected to contract by 18pc this year, and Lithuania's by 15pc. Samir Patel from BH2 Research said the pegs are causing "monetary asphyxiation" and cannot be endured for long by any democracy. The inevitable devaluations may reach 50pc or more given the experiences of Thailand (52pc) and Indonesia (81pc) in the East Asia crisis. "Of course devaluations will unleash nasty economic and financial demons, but so will stubbornly holding currencies aloft. The demons are simply different," he said.

It is unclear whether Sweden's bank troubles are the first sign of broader strains for West European banks, which have lent $1.6 trillion to the former Communist bloc. Sweden's exposure to the region at 22pc of GDP is not the highest. Austria's exposure is 70pc of GDP, with $246bn outstanding in Central Europe, Ukraine and the Balkans. The situation varies from country to country, with the lowest risk in Poland and the Czech Republic. Even so, Danske Bank warns that Austria could face losses reaching 11pc of GDP in an "ugly scenario". Sweden's losses would be 6pc, and Belgium's 3.6pc, the Netherlands' 2.3pc, and Italy's 1.5pc. "The risk of contagion is serious, Nobody thought Iceland would set off a crisis in Hungary last year, but it did, and the same could happen again," said Lars Christensen, East Europe expert at Danske Bank.

Strains In Latvia Money Market As Spillover Fears Grow
More signs of strain emerged in Latvia's banking system Friday, as concern rose that the Baltic country's financial crisis could spill over to the rest of the region. The rate at which banks in Latvia are willing to lend to each other hit another record high Friday amid ongoing speculation that the country may be forced to devalue its currency, the lat. Data from Latvia's central bank show that the overnight bank lending rate now stands at 19.6%, up from 16.8% Thursday. "The rise in interest rates is consistent with the operation of the fixed exchange-rate regime and appears to reflect both an increase in the risk premium and a tightening in domestic money-market liquidity, partly owing to an increase in bank provisioning," Fitch Ratings said in a report.

Earlier this week the government in Riga suffered a series of failed bond auctions, as investors steered clear out of fear of an imminent currency devaluation to ease strains on the economy. Currencies around the region - including the Swedish krona and currencies in central and eastern Europe - have been under pressure this week as investors worried about knock-on effects. Dariusz Filar, a member of Poland's Monetary Policy Council, said Friday that effects of Latvia's financial crisis could spill over in the region if allowed to go unchecked. "The situation in Latvia is a threat. Everyone is afraid of regional spillover, though we see that different markets are reacting differently," Filar said Friday. "The situation requires an international response."

European Commissioner for Economic and Monetary Affairs Joaquin Almunia said at a Warsaw bankers conference Friday that the European Union was working with the Latvian authorities to support that country's ailing economy.
Almunia said Latvia needs to pass necessary reforms - including to the budget - to avoid a regional contagion effect. Swedish banks are particularly exposed in the Baltic region, moving the Swedish government to pledge support in the event of heavy losses. Swedish Finance Minister Anders Borg Friday urged Latvia to take steps to reduce its budget deficit and pledged continued support for the recession-hit Baltic nation when Sweden assumes the rotating E.U. presidency in July.

Economists said market jitters are unlikely to dissipate without agreement from the International Monetary Fund and E.U. to extend the second portion of the EUR7.5 billion financing package created in December. The distribution of these funds has been delayed, partly because of IMF concerns that Latvia isn't doing enough to consolidate its public finances. Latvia has been pressing for a quick agreement on the second tranche of the package. "Without the loan the likelihood of devaluation will increase clearly," Nordea economists said in a note. "Thus Latvia is likely to try very hard to secure the loan, because without it devaluation might become the only way out." A team of E.U. and IMF officials were wrapping up a mission to Riga on Friday to report on Latvian progress in reducing its budget deficit, which the Latvian government now projects will rose to 9.2% of gross domestic product this year. The results aren't expected until next week at the earliest.

The IMF had earlier agreed to revise the target for the budget deficit to 7% from an original 5%. Fitch Ratings said in its report that the Latvian government's revision of its forecast contraction in 2009 GDP to 18% from 12% "underlines the severity of the economic challenges facing the country." Meanwhile, the government in neighboring Lithuania continues to have its own cash needs. Lithuania has borrowed EUR40 million from Swedish financial group Nordea Bank AB (NDA.SK) through a private placement to patch up its budget, a spokesman for the finance ministry said Friday. Financial markets are speculating over whether Lithuania will have to follow Latvia's lead and seek funding help from the IMF as tax revenue declines amid weakening economic activity.

Inside the SEC Case Against Mozilo
He's the most public face of the housing bust, the former head of the nation's largest mortgage lender. But according to a complaint filed June 4 by the Securities & Exchange Commission, Angelo Mozilo, the co-founder and former chief executive of Countrywide Financial, was leading that most simple of stock swindles—the "pump and dump."

In its civil complaint, the SEC accuses Mozilo and two of his top lieutenants, former Countrywide Chief Operating Officer David Sambol and former Chief Financial Officer Eric Sieracki, of misleading investors about the risk underlying the billions in mortgages the company sold. The complaint alleges that Mozilo made $139 million in profit by exercising Countrywide stock options from November 2006 to August 2007, knowing all the time his ship was sinking. Countrywide, which was based in Calabasas, Calif., was swallowed by Bank of America last year.

In a series of e-mails released by the SEC, Mozilo can be seen writing to Sambol and others that some of Countrywide's own loan products were "poison," "toxic," and that the company was "flying blind" in making some its more aggressive mortgages. Mozilo describes one type of loan made to borrowers with bad credit who put no money down "the most dangerous product in existence." The government also appears to have a star witness in Countrywide's former chief risk officer, John McMurray, who the complaint says warned Sambol and others that the company's nonconforming loans were twice as likely to default as loans Countrywide historically made. McMurray also recommended the company provide investors more disclosure.

"This is the tale of two companies," Robert Khuzami, director of the SEC's Enforcement Div., said in a statement. "Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk." Not so, says Mozilo's attorney, David Siegel, of the Los Angeles firm Irell & Manella. "The SEC's allegations are baseless," he said. "Mr. Mozilo acted properly and lawfully at all times." The stock sales, Siegel says, "were made under the terms of a series of written sales plans which were reviewed and approved by responsible professionals."

Attorneys representing Sambol and Sieracki were equally dismissive. "The SEC has no case against David Sambol," says his attorney Walter Brown, a partner at Orrick, Herrington & Sutcliffe in San Francisco. "Countrywide's investors, bondholders, rating agencies, and the financial industry were all well aware that mortgage lending practices were liberalized at Countrywide and almost all other financial institutions." Added Sieracki's attorney, Nick Morgan of DLA Piper in Los Angeles: "Mr. Sieracki lost money just like all other investors. He did not sell, he purchased Countrywide stock."

Anticipation of a complaint against Mozilo had been bubbling since the mortgage market first began to collapse in 2007. To date, relatively few cases have been brought against major players in the mortgage meltdown. Last year, the Justice Dept. filed fraud charges against two former Bear Stearns fund managers whose case has yet to go to trial. In April, the SEC charged two former executives of American Home Mortgage with fraud. One of them agreed to pay $2.4 million to settle the charges. Justice and the FBI have task forces looking at mortgage fraud. "There will be more filings, everything from federal fraud cases to state complaints," says Michael Kraut, a former prosecutor now in private practice in Los Angeles.

Attorneys with experience in white-collar cases say the SEC is shrewd in keeping its complaint against Mozilo, Sambol, and Sieracki focused, arguing that Countrywide told investors its mortgages were clean when they were actually tainted by risk. "Mozilo holds the company to be the Tiffany & Co. of the business, when in fact it's not," says Thomas Ajamie, an attorney with his own white-collar practice in Houston. That version of events will not be difficult to explain to a jury, lawyers say.

Among the biggest concerns for Mozilo, attorneys say, are comments he made internally in April 2006 about the company's pay-option ARMs, a type of loan where borrowers could choose whether to pay interest or roll part of their payment onto the principal of the loan. "It's just a matter of time that we will be faced with…much higher delinquencies," Mozilo wrote. In public conferences and earnings announcements, however, Mozilo defended the product as a "sound financial management tool for consumers."

However, that doesn't mean the government's case is a slam dunk. John R. Fahy, a former SEC prosecutor now in private practice in Fort Worth, says he was surprised the government didn't include any evidence the company was actually filing false quarterly and annual reports. "This is a disclosure case, and there's no allegation of inaccurate financial statements," Fahy says. "The defense is going to say the financials aren't false." He notes that the defense will also likely bring forward evidence that Countrywide discussed its disclosure levels with outside advisers.

It's also evident in the e-mails that the government released that Mozilo was concerned about the growing risk in the company's loans and wanted to cut back. "Whether you consider the business milk or not," he wrote to Sambol in April 2006, "I am prepared to go without milk irrespective of the consequences to our production." But that's no excuse, says New York attorney Jake Zamansky, who has brought several fraud cases against Wall Street banks on behalf of small investors. "Mozilo's responsible for the disclosure," Zamansky says. "He should be held accountable."

A Structural Change in the Global Debt Based Financial and Economic System
Brett Jordaan writes: What politicians and central bankers around the world are either neglecting to tell us, or to consider, is that the current economic crisis, now a global recession and fast becoming a depression, is a result of a fundamental structural shift in the very makeup of the world economy. The credit crisis is widely accepted as the trigger for the current economic woes, but those who take a broad view of the world will see that our current predicament was actually years in the making, and ultimately, inevitable. As inevitable as the collapse of a house of cards, or the implosion of a Ponzi scheme. In fact, the global monetary system actually fits the description of a Ponzi scheme.

In your standard Pyramid or Ponzi scheme, those players that get in early are paid out by those that enter underneath them, who are in turn paid out by those that they recruit below them. Now from an objective distance, anyone with a right mind can see that Ponzi schemes are destined to fail, as their existence is predicated upon a continuous stream of players or "investors" entering the scheme with new money. From a simple perspective, if one considers that nothing is actually produced and no net benefit is gained through such a scheme, it becomes evident that they are doomed to collapse, almost intended to do so by design.

But Ponzi schemes have and do exist, and some have managed to prevail for a surprisingly long period of time, al la Bernie Madoff’s gigantic scam. In a staggering testament to personal greed and complacency, people became blinded in their pursuit of profit, ignoring the warning signs for well over a decade. This is a classic example of the human tendency towards cognitive dissonance.

Cognitive dissonance in terms of investing is a psychological term to describe the phenomenon whereby investors will change their memories to suit their desired outcomes. Thereby previous wins become exaggerated with importance and losses are either forgotten, or relegated to the unimportant far-flung corners of once mind. This is what has occurred in the public mind in accepting the legitimacy of the greatest, most pervasive Ponzi Scheme in all history; the current global monetary system. This is actually a number of inter-locking, interconnected Ponzi structures (the massive derivative bubble, the housing bubble, debt-financed national spending plans, etc), all underpinned and made possible by the existence of fiat currency.

Every fiat currency ( paper money that is not backed by anything except the "faith in the government") in history since Roman times has failed, recent examples being the German Weimar Republic and of course Zimbabwe. It is clear that the world is increasingly losing faith in fiat currencies, as governments borrow ever greater astronomical sums to finance record deficits and central banks print ever greater quantities of paper, or "money" as it is currently called, to finance spending. This is evident in the surge in the price of gold , which is the only currency to maintain its value throughout history and was in fact the only value behind the strength of the world’s currencies until the final abolition if the gold standard by US president Carter in the 1970s. Since then we have embarked on a grand global monetary experiment, where no country’s currency is backed by anything tangible, except the "full faith of the government", whatever that’s supposed to mean.

The current structure of the world economy is so unbalanced and unsustainable, it is a wonder that we have not entered into a crisis earlier. When one considers that the majority of the economies of the Developed West, such as US, UK and Western Europe, are driven by consumption, and those of the East through manufacturing and exports, the cause of the "recession" begins to become apparent. The West consumes goods made by the cheap workshops of the East. But the West cannot afford to buy the East’s goods, so it borrows money in order to buy more.

Take the world’s largest economy, the United States. Over 70% of U.S. GDP is attributable to consumer spending. In a nutshell, China manufactures cheap goods which are consumed in the U.S. and paid for by money borrowed from China. So every month, the U.S. govt sells IOUs (Treasury bonds) to China, enabling the US to buy more of China’s goods. Every month the U.S goes into greater debt and every month China saves more dollars. The irony is that as the Fed (US Federal Reserve) prints ever greater sums of money (most notably recently through "quantitative easing"), China will be left sitting on a pile of steadily declining Dollars as the inevitable devaluation that results from oversupply of money takes hold.

China knows this and this is why it has been making calls for a new international reserve currency and has tripled its gold reserves in 8 years.

Another irony here is that this scenario is a mirror image of what has happened at a household level, where individuals have spent more than they earned each month, and borrowed to pay for it. The main source of financing was of course home equity, which entered a massive bubble caused by the creation of cheap credit (easy money) by the US Federal Reserve and central banks around the world. Households went on a spending binge on the crazed basis that home prices will always rise. Similarly, the U.S govt has entered on a spending binge on the failing assumption that the world will continue to loan it money and to demand continually devaluing dollars.

The U.S. makes little of real value, and it would have entered into serious recession to rectify this a long time ago, had the US dollar not been in the enviable position as the world’s reserve currency.
Now the engine of growth in the US and the West has seized, as the housing bubble continues its inevitable collapse and consumers logically reduce their spending to rational levels. People are actually saving, as the light of sanity shines some truth on the utter lunacy of continual throwaway consumerism.

Unfortunately it seems that sanity is incompatible with running a government and economy nowadays. The solution to our problem trumpeted by the US and other governments is…. More DEBT! Yes, we must borrow and spend our way out of this mess they say. Oh, and if we cannot borrow at a national level (because other countries are seriously starting to doubt lending us money), we’ll print more money to magically create wealth and go back to the good old days of borrowing to buy a lot of junk we just don’t need.

Now I find it very difficult to believe that Nobel prize-winning economists and the brilliant central bankers are experiencing such tremendous cognitive dissonance, that they actually believe that the current system can continue, or in fact be rejuvenated by more of the actual causes of this crisis. More spending and more debt, to solve the problem of excessive spending and excessive debt.

Is it just me, or are we being taken for a ride? Are the people in control deliberately sending us headfirst into an economic and social catastrophe in order to gain more power and take more of our feeedoms, or are they so incompetent that they do not see the writing on the wall?

We are in a structural recession. The global economy is structurally adjusting into a more balanced and sustainable system, one driven by savings and production, not borrowing and debt. Savings will finance investment in production of goods and services that actually provide a benefit to society and the biosphere. We live in a world of finite resources. Continual population growth, consumption and environmental degradation are not compatible with this reality.

Any attempts to turn back the clock, to return to that hitherto unsustainable status quo will just cause this transition to be more painful. The excesses of the past are gone and those that realise this and adjust their lifestyles and paradigms, will be the pioneers of the new age to come. It seems that we cannot trust our lead


timekeepr said...

I & S, when do you think ag land prices will start coming down?

Farms are still selling for ~$1.7M for 100-200 acres 60 miles north of Wash DC.

Too expensive to make it economical for farming.

RC said...

I live in a place {US colony} where 70% of the population is on food stamps, actually we use a debit card issued by Sam.
Life goes on, we have all adjusted our horizons downward, we do eat, the grocery store does very well, in fact I just bought a food store. Yes, I will be accepting "The Family Card". I do often wonder what will happen the day those wonderful little credits fail to make it to the debit accounts. Of course, we have fish and iguanas here, but still, there may be shortages of those after a while.
I also wonder wonder wonder -- what happens when all those persons in the US on unemployment have no unemployment checks left, just the food stamps? We're used to that existence here, but statesiders may be somewhat challenged. Poverty is really not as charming as some would believe.

In the final post, it mentions that Carter eliminated the Gold Standard.
I had thought that was Nixon.

Anonymous said...

Great piece today, Ilargi. On CNBC the level of optimism has moved from "green shoots" to "green plants".

Anonymous said...

Husband just lost job! I think we can use 401k access to pay off home equity and revolving debt loans before 401k crashes and before debt rates go up. He balks, thinking 401k will rise again, and he doubts rates will rise. [But he wants to cash out early my life insurance investments to pay off the debts instead.]

I think we may be able to sell house now at original mortgage loan cost, [but not if we wait much longer]. He balks again, thinking he'll find a similar job soon, that housing price will turn back around in 2 years.


-longtime reader who used to dream of buying cheap land up north with her insurance dividends

rapier said...

The quasi gold standard of Bretton Woods was ended by the 'market', of central banks. Nixon only made it official. That's one way to tell the story and I think a pretty good one. History, events, move on, people adopt to them.

The winners are those who adopt best to the new conditions.

Anonymous said...

Regarding the first article and the banks' accouting changes making them profitable. March 10, 2009 is when Citibank said they had their best quarter since the third quarter of 2007 and the stock market has been on a rise ever since. Seems like that news just changed the whole mood of the economy.

Anonymous said...

Mish can barely contain his glee that the Minnesota Governor will get the checkered flag to cut the state budget by starting to use his executive power to unilaterally cut spending.

Mish apparently doesn't think of himself as a Social Dawinista but his latest screed says other wise.

"Let The Cutting Begin

Cutting services rather than raising taxes is the right thing to do....

Pawlenty is looking to cut health and welfare spending, college and university appropriations and state agency budgets. That's a good start, with start being the operative word. Eliminate would be a better word for many state agency departments."

I never visualized it before, but Mish actually would look kinda foxy in a Marie Antoinette drag outfit.

Some big hair, over stuffed brassiere and a bustled corset to compliment his hour glass waist.

"Let them eat gold futures" whispers Mish in a casual off hand manner, while blow a kiss to his carefully censored comment section of butt boyz.

EconomicDisconnect said...

I have argued that Iceland and Latvia debt failures are a matter of scale, not principle. What matters now is that the US is busted, but nobody can say that out loud. The song and dance continues (see the harpy scene from the animated film "The Last Unicorn" and the maintenance of illusion has become real.
Great post, as usual. Wish we could get 51.1% of Americans to read here!

Anonymous said...

The Kriminalklass of Overlords in the US wish to convince almost everyone that yes, you shall all get a Pony, even if it is the Last Unicorny.

Taizui said...

Brian M. @8:39 (previous post)

The rule of law in the US isn't exactly inspiring confidence, in me at the moment.

Thanks Ilargi, for another week of keeping us informed and repeatedly recalibrating shock thresholds. From Monday's Grand Theft Auto article to Friday's final Structural Change piece, it's like a broken record, "Heads the banks win, tails, everyone else loses," and our legal and regulatory systems see no evil.

Rescue boats arrive at the sinking Titanic, but they have come only to rescue the passengers’ valuables from the vaults, fuel from the tanks, and even the deck chairs and furnishings, as the passengers sink beneath the waves.

cowpoke said...

Gerald Celente 1st hour on the economy of fsn this week. No mp3 at the moment, should be posted soon though.

Mugabe said...

I was curious to juxtapose two of Stonleigh's remarks from yesterday and consider the implications:

[snip 1]
The day QE ends is when 30yrs go to 7, 8, even 9%. The hit to real estate values, and the MBS based CDO/CDS L3 assets from which they are constructed, will cascade throughout the 19 TBTF banks and take the Fed down with them. [comment by Centaire]

Agreed again.
[/snip 1]

[snip 2]
Treasury yields are approaching a reversal IMO.
[/snip 2]

Taken together, do these views suggest that:
1) the Fed will abandon QE soon, avoiding the Denniner scenario of bond market dislocaton; and the end of QE will contribute to falling t-bond rates; or
2) QE will not slam into Centaire's high-rate scenario, but rather continue apace and perhaps even be effective in lowering rates, or at worst neutral. If not QE itself, then other forces are about to pull bonds up and yields down.

Put another way, what has caused the recent spike in t-bond yields? Two alternate stories:

1) The stock market rally, and advice by big-time advisors to increase stock allocation in portfolios vs. bonds, has sucked money out of the bond market and into stocks, thereby lowering bond prices and raising yields. It's the "end of flight to safety" or "renewed appetite for risk" scenario mentioned by some of the green-shooters. Combine that with the massive supply of government debt hitting the market worldwide, which has meanwhile started to outstrip demand. The Fed's modest amount of t-bond purchases to date has perhaps trimmed a couple of basis points off the spike, but certainly did not cause it.

2) The promise of ongoing t-bond purchases by the Fed has spooked investors, because it suggests that the Fed is propping the market, and bonds will take a fall when the Fed eventually stops buying (or inflation will roar if the Fed never stops buying). So best to sell now. QE has the paradoxical effect of actually raising rates, because the impact on market psychology is larger than the impact on supply demand in the market. (Somewhat the Denninger thesis as I understand it.)

Which story best explains the recent rate spike? -- assuming Stoneleigh is correct, that it's about to end and go into reverse. Will the reversal come because the sucker rally is about to end, and money will head back to safety? Or because the Fed will concede to the Denninger thesis and declare an end to t-bond purchase?

Mugabe said...

As usual, I seem to be the only one puzzled by Ilargi's intro. A rising % of national income from the government seems to be the exact opposite of social Darwinism. The latter says let people live or die based on their own efforts; 0% of income from the government.

When informed that the peasants had no bread, Marie Antoinette said "Let them eat cake." When informed that the lumpen proletariat of America have no bread, the response is "Give them food stamps." That seems rather more like an opposite answer than the same.

The looming question seems to be more like this: when the goverment can no longer afford to give billions to the banksters, and blank checks to the Israel lobby to fight its proxy wars in the Middle East, and big contracts to the MIC, and benefits to the unemployed, and food stamps to the poor, and social security checks to "seniors" and so on, what will give way? And how will it fall apart?

It's an important question, because doomers always assume kleptocracy will prevail; that the worst will continue and the best will end as surely as the sun will rise. It could be true, but it's not a given. And by saying it is given, you promote apathy and hoplessness and political resigation among the population. Eventually it will come to a vote (or in the event of canceled elections, the prospect of a vote) -- banksters, MIC and proxy wars; or food stamps, social security, rebuilding America. If elites don't accept the votes, there will be a fight. Elites might win. But the people should not concede the fight even before it happens.

Anonymous said...

All of the 'green shoots' talk has the feel of a jockey desperately whipping a spent horse down the backstretch. A momentary burst out of the final turn may spur some temporary excitement and hopeful exuberance, but the straightaway demands nothing less than authenticity.

And what good are green shoots if they only serve as jungle thickets concealing a cracked essential structure. So far, I detect complex layering and manipulation of superficial details, thickets if you will. "Details" are nothing but the breaking down of larger shapes into smaller and perhaps more diverse shapes. Amplifications of their source, these details are not capable of reinventing or correcting the flawed underpinnings of their seminal progenitors.

Humans, however, are suckers for the "details." Give an infant a crayon and they will draw the eyes, ears, nose, and mouth of their perceived subject, completely oblivious to the underlying structure and planes of the skull on which these details reside. Confounding this tendency is the concept of "equalization " in which details merge to form indistinguishable patterns of complex mirroring as right appears to be left, and up no different from down.

At the end of the day it really is a matter of perception. Which is probably why the educational impetus in this country is increasingly divorced from big picture training and funneled into cubicles of specialization. It's as easy and natural as giving a youngster a crayon.

To simplify and see beyond the infantile proclivity for diversion via detail and complexity-- that's the most difficult accomplishment for a human being. And why I have little hope concerning this cuurent financial meltdown.

Stoneleigh said...


The apparent contradiction is one of timescale. I think we'll see a reversal now, along with a substantial market pullback, but I think (on balance of probabilities) that both yields and the market will reverse again and rise as the rally continues. When the rally is over, I would expect the flight to safety to resume, with a predictable effect on yields. This could continue for a while. Eventually we'll see the long-predicted bond market dislocation, but not imminently.

Ilargi said...

The use of the term 'doomers' makes its user irrelevant, since it is nothing but an ill-defined preconception.

The apparent contradiction between food stamps and social Darwinism exists only for those who will not or cannot think beyond the veneer and/or don't understand what social Darwinism is.

What it is not is killing off on the spot any individual who can't defend herself.

Food stamps are poverty. $114 per capita per month is less than a minimum. Feeding a child adequately for less than $4 a day is not possible unless you grow your own food, and it certainly doesn't contradict much.

And still, the number of Americans who need food stamps rose almost 20% in one year.

Trillions in taxpayer funds for bankers and an exponentially growing segment of the population that receives so little it can't feed its kids.

That's a confirmation, not a contradiction.

Gegner said...

Charles Darwin & Marie quaint!

That said, I suspect you're right, the US public will react, um, violently to rising prices and falling paychecks.

The official unemployment rate vs. the 'real' unemployment rate continues to vary widely.

9.4% vs, 50 percent. Where 50% of working aged adults can't find work.

Worse is the failure to recognize that the 'surge' in unemployment is driven by rising prices!

What are these fucktards thinking...?

It's time for 'A Simple Plan' where the workweek is shortened (considerably) and taxes no longer exist because everyone works for a paycheck rather than fucking their fellow man because they can!

The solution to our current woes lie with the 'human anti-exploitation law.' and nothing else.

Think about it.

Starcade said...

So when does the violence start??

Who's going to be the first state to cut welfare enough that the people riot??

California might not be able to pass a budget to do that -- and it sounds like Minnesota wants to jump to the front.

Mugabe said...

Stoneleigh --

I didn't see any contradiction. The two comments noted could easily be consistent -- in fact, there seemed to be more than one line of reasoning under which they were consistent. I just wondered which of those lines of reasoning you would favor, or perhaps a third even.

Mugabe said...

Social Darwinism is a label applied retrospectively to certain writers and arguments from the 19th century, such as Spencer and Galton. In the most general sense, social Darwinism says that social welfare mechanisms enable inferior people to survive and reproduce more than they otherwise would, worsening the gene pool, and weakening the nation and/or sending the human race into reverse.

Neither the banksters collecting their billions, nor the politicians who enable them, are thinking in social Darwinian terms now. They are simply being opportunistic -- the banksters grabbing loot and the politicians taking a cut in the form of campaign checks or post-official employment. Even mentioning social Darwinism in this context strikes me as spurious. Stoneleigh's rhetoric about an unphilosophical free-for-all wealth grab seems more accurate.

I understand that it's hard to write an interesting and new reflection on the day's events every day, and Ilargi doesn't get a paycheck for doing it, so perfection is unreasonable to expect. But I much preferred the Ilargi of ten months ago, who focused more on teasing apart the financial news to reveal the hints of what is coming. Since the new year, it's been more broad brush ideological statements, sometimes (in my view) not well considered. I also realize that few or none of the blog's audience share my views on this particular, so never mind.

Mugabe said...

Ilargi --

On the particulars of food stamps:

When I was a graduate student, I had a food budget of $100 per month, and it was no problem. I didn't buy any prepared food except pasta sauce. The only hardship was needing to cook everything from basic ingredients, and not eating out.

Comparing to now, the general CPI is probably up 80% or more -- not sure about food specifically, but I was an 85-kg lad. I currently have an 8-kg baby who is fed on $60 per month which includes the most expensive milk powder in the store. So I am guessing $114 per month could feed a small child, and provide more than half the diet for a teenager -- though not the with the junk food they see advertised on TV, nor with frozen microwaveable foods you might need when working two jobs.

I would agree with RC above -- poverty is not glamorous but food stamps are an alternative to starvation and natural selection.

VK said...

Don't think many saw this on yday's thread but here's the link for "A Tale of Two Depressions Update"

See the pretty cliff diving pictures and see if you can sniff a green shoot?

The authors note in this update,
"World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’."

ca said...

Ilargi --

The numbers regarding unemployment in the following post, I believe are similar to yours. I was wondering what you thought of the methodology used?

Persephone said...

I was thinking of Starcade last night as I was watching a expose' documentary on Xe (formerly Blackwater). In the event of social unrest, our military sons and daughters may not have the heart to fire on U.S. citizens - but paid mercenaries would.
There are more U.S. private contract military personnel in the Afghanistan and Iraq, than U.S. militia.

Ilargi said...

"I was wondering what you thought of the methodology used?"

As far as I can see at a quick glance, it's not bad. That said, a turn around by August will certainly not happen. And that, according to Andrews himself, will mean we will "easily exceed the Great Depression."

One needs to be cautious when it comes to the way unemployment was calculated today vs 1929; it's doubtful that the exact same criteria were used.

centiare said...

@anon 11:12pm - Check out the video of Mish's presentation at Google and then get back to us on your sentiment.

For those that don't have the patience to watch, I'll summarize it for you:
* Mish was unemployed for 3 years after 9/11;
* He used Blogger because it was free;
* He still lives like a miser.

One thing that will probably strike you if you do happen to watch is how the theme of frugality & sheer survival runs throughout his comments and personal demeanor. I mean, he reminds me of stories you hear from Depression era survivors.

Mish is preaching his own very personal brand of close living. As it just so happens, the way he lives is exactly how the vast majority of Americans used to live as well.

The drug of cheap credit has debased us all. But like all drugs, the effects eventually wear off, leaving the abuser(s) to deal with such mundane realities as figuring out a way to clothe, house & feed themselves.

Anonymous said...

The Supplemental Nutrition Assistance Program (formerly food stamps) uses an electronic benefits transfer system similar to debit cards to credit the transfer of federal funds to participating merchants and vendors almost instantly.

This program, along with Women, Infant's and Children (WIC) have already begun to partner with local farmer's market associations to allow families to spend their allocated food dollars at more informal local outlets. In many instances, families are allowed to go directly to their choice of local farms and handpick their produce (which often increases their alotment of certain items).

There are often numerous senior programs, local schools and food pantries receiving additional donations from CSA's, markets, local vendors and growers.

Depending upon your location, you might not be able to get all your staples at such sources, but it is pleasantly surprising how much is available this way and how far $114 can go to feeding a child when you have all the extra time to cook real meals.

There have even been programs started in some areas where seeds have been donated and even sprouted to be dispersed to low-income families to begin their own gardening adventures.

This latter particularly is one area where it would be nice to see some real support growing within communities, especially if we are truly in a potentially unstable transition economy here in the U.S.

Anonymous said...


No, you're not alone. In fact, you're spot on.

RC said...

AnonAnon 10.32, thank you for the details, but I must state that here we don't get the full benefit as we are not actually first class citizens. That's a different topic for a different day and a different blog. The future of food in the US is all about SNAP and WIC, so if you, dear TAE readers, have only a marginal knowledge of how the system is applied, perhaps some study would be in order because while you may not be needing the benefits soon, I am very sure some of your friends will be needing them. As for the application of the funds and staving off hunger, the daily diet here is rice and beans, rice and beans, rice and beans, with some other decorative items thrown in.
Obesity and diabetes are of course pandemic.
I, personally, have so far avoided being a beneficiary of Sam and his magical credits, but I'm quite crazy and have been known to bite my nose to spite my face, even given the contortions needed to effect the maneuver. Most folks capitulate to the economic disaster we are living {in our sector of the colony we are already in the 13th quarter of the depression if defined as 25% unemployment} and since there is little or no stigma attached to using the Card, and now that the traditional means of redemption, which was moving stateside and finding a job, is proscribed by widespread collapse, the society here just drags along waiting, waiting, waiting. My neighbors ask me every day to explain what is happening and to say when it will get better. I'm reluctant to tell them that it isn't really all that bad yet, but I do. I suggest they enjoy life as best they can right now since the near term expectations aren't rosy. There is a general belief {similar to the Cargo Cult} that somehow on the first day of the new fiscal year, July 1, money will come from Washington to San Juan and then to the {very mismanaged} 78 municipal governments, workers will be rehired, paychecks will bloom, life will be renewed, wonderful, and so on. I've told them repeatedly, I don't think so, but I would be very very pleased to be very wrong.
So here we are, eating our rice and beans, waiting for the July 1 Miracle of Obama and who can tell?
Meanwhile, I am continuing to plant food and encouraging everyone else to do so. Not that many do.
Will they plant when Sam forgets to electrify those credits, or will it be far too late then?

bluebird said...

So people don't necessarily get food stamps anymore, but use an electronic debit/credit card at the grocery store for food.

What if the trucks can't delivery food to the grocery because credit is gone, gas too expensive, whatever. Those cards will be useless.

The cards would also be useless if electronic baking was eliminated.

Wouldn't the government need to setup places to distribute food, a gigantic food pantry? Or is that going to be too late too?

g-minor said...

Why aren't you all out in your gardens instead of sitting in front of a computer screen? I'll go back out, too.


bluebird said...

oops, in previous post, I meant to say electronic banking, not baking. But I suppose electronic baking could be gone if there were no electricity.

Anonymous said...

Cervantes, who in an earlier life was a mercenary, compared mercenaries to whores. They did not kill for King or country or Kin, they killed for money and the thrill of it.

The fact that America has such a huge pool of these 'whores' working for it as a privatized army of thugs is a pretty good summation of where the country has devolved to.

Libertarians probably love the idea of 'privatizing' defense. After all, they love the idea of privatizing prisons and the military-corporate complex is the flip side of the prison-corporate complex.

Food stamps and welfare, as far back as the 60's, were viewed as cheap alternatives to civil unrest, widespread mayhem and disorder and the sheer cost of the legal process and prison.

Now, thanks to the diseased fanaticism of Free Market Lazy Fare privatizing everything, food stamps and welfare are actually seen as Competing with the Prison-Industrial Complex's junkie like addiction to ever increasing profits from locking up everyone possible.

You pay one way or another. Pacify the Proles with state welfare OR 'let them eat cake', force them to steal to live or work at slave wages and then lock them up with the for-profit-prison-planet mentality.

So what's it gonna be, all you efficiency freaks out there?

How 'cost effective' is paying private corporations to lock up huge chunks of the populous vs giving them Bread & Circuses with some cheap pot and booze thrown in?

Phase two of the American Fascist State will be to lower prison costs below the Bread & Circuses solution in the form of 'labor camps'.

An ultimate 'outsourcing' to the private 'free market' sector.

You know, the Final Solution.

RC said...

My point is, Bluebird, the whole game is very fragile, the population {at least here, wherever the rest of you are, I claim no knowledge as I definitely am too isolated to know anything worthwhile} is ignorant of the circumstances--their own shaky circumstances, the prices may start to jump again or rice may disappear from the market again, the Miracle of Sam or Obama may not continue, the boats may stop running {we get everything on a boat, speaking of the Cargo Cult}
all manner of necessary physical assumptions may be in a state of decay, failure or imminent peril due to hurricane, earthquake, electricity collapse, or political and economic undertow or, at present, most likely all of the above. I feel that the community would be best served here by some serious postage stamp gardening, yet there is very little will to do that as a large part of this population escaped cane slavery back in the last century and the younger people for the most part find the concept of growing that stuff that they buy with the electrons to be a preposterous concept.
Exigencies may eventually intervene. Time will tell.

el gallinazo said...

Does a diet of rice and beans really result in diabetes? I thought it was 7-11 Big Gulps. I know that there is a major genetic component to it a well. During the year I was a science teacher on the Zuni Res in NM, testing indicated that over half the senior high school class had severely elevated blood sugar. If yes, if one could throw in some salad greens and fruit, would that help. Would brown rice help? Aren't beans the vegans primary source of protein particularly lysine, methionine, and tryptophane? (I use to sell that stuff to pigs and chickens by the truckload in my chemical trader/drug peddler incarnation).

bluebird said...

RC - People here discuss the economy all the time. But no one thinks it will get 'that bad'. Everyone carries on as normal, they just haven't been personally affected, yet. Even spouse thinks the government will setup food distribution warehouses and he will motor there to get the food or go to McDonalds. He sees the economy going from bad to worse, that his pension eventually be gone, but it is unthinkable to him that in this country, there would never be his preferred junk food.

el gallinazo said...

Mish and Denniger are both Libertarians, and not renown for their (conservative :>) compassion for the disposessed of the earth. I feel much more at home here. But they are excellent analysts of the current economic situation, and well worth checking out if you take their politics through a strainer. However, not even all of Mish's politics are medieval. He is stridently against TARP, the Fed, all the bail outs, the wars in Iraq and Afganistan, the encroaching police state, and for the legalization of marijuana. So while not my ideological ideal, he is head and shoulders about your Faux News Fascist.

Social Darwinism grew up during the early decades after the Origin of the Species (1859?) and perhaps peaked in the 1890's with Spencer. Besides being abhorrent, it was really, really bad science. Back in those days, biologist drew a continuous evolutionary line between gorillas and whites, with the steps being other "races."

Anonymous said...

One needs to be cautious when it comes to the way unemployment was calculated today vs 1929; it's doubtful that the exact same criteria were used.

Also pretty hard to consider unemployment then and now, without considering how our fossil fuel 'slaves', leverage a workers hands.

'-Little Bennie Annie-

RC said...

Gallinazo, the preferred poison is medium grain white sticky rice, in large quantities. Be careful of the fruit idea, that can lead to diabetes too if you eat too much and are susceptible. The idea of brown rice has taken hold here amongst a minuscule percentage of the public, but other habits such as beer and rum add to the deleterious dietary defects. Sedentary lives also lead to illness.
I am really not sure where we will end up {here in my little town and throughout the developing and developed world} this time around, but I already lived through some very hard times in PR from 1980 to 1987 {Depression level activity, you can look it up} and I survived then by flying to NYC from 1983 until 1987 every few months and doing some projects {construction}
and just never having work in PR at all for over 4 years.
Maybe I should be investigating North Dakota soon. But I hate the cold, and unlike in NYC, I have no family there.
This time, I will just stay put and devolve as necessary.

Ilargi said...

Ideological statements?

Why am I thinking it's people whose ideologies are shaken by what I write that accuse me of having and expressing some sort of alleged ideology?

The nutty takes on what some mistakenly perceive the meaning of socialism to be, recently and repeatedly featured in this comments section, reflect that pretty accurately.

But seriously, I am not aware of any ideology in what I write. Taking care of the weakest in a society, for one thing, is a purely practical matter, not an ideological one: if you don't take care of them in times of hardship, your society is history. There''s this persistent, though long debunked, notion that if only you work hard enough blabla, you will be successful, rich or whatever.

I don't mind discussing these matters, but I do have a problem with how such discussions invariably seem to unfold; people come ill-prepared most of the time, unaware of what terms mean etc, and unwilling to listen. Which they would never admit, of course. You know, it's not an interesting territory that way, and that's one of my biggest issues with a comments section.

Mind you, I think my comments section, overall, is miles ahead of most of what I read elsewhere. Still, when I look at what is being said here directly about what I write on a particular day, it''s mostly preciously little. The comments seem more to embody their own entity, while the -lately very positive, and increasingly so- reactions to my words come from beyond the Automatic Earth.

This week, Sean Brodrick at Money and Markets, who's in the thick of things on a purely financial basis just from his job description, not only put TAE in his favorite top 7 blogs, but after I humbly thanked him for that, wrote " I stand in awe of your work, Ilargi."

I'm not saying that never reflects here, don't get me wrong, and I'm far too clever to only wait for tummy rubs, but in view of what Sean, and GYC, and many others say about what I write, I think perhaps a more direct discussion on a daily basis of what it is I write might add a certain value to this comments section.

But yes, do first pick up a dictionary and figure out what "socialism" really means. I'd suggest the same for the word "inflation", though perhaps that definition has been so clouded by now that it's too late.

Just some thoughts, I'm back to preparing today's helping.


PS El Gaz et al

Social DArwinism is the sort of term that pops back up whenever and wherever some bright light feels it might help his/her cause.

I used it more like in referring to its underlying theme, i.e. you get what you deserve. Hence Marie Antoinette, because in the social Darwinism train of what passes for thought, it could always be your turn to be ritually slaughtered tomorrow, and it would fit the theory you live by, one day after you've defended your riches by claiming over caviar that the poor deserve their fate.

el gallinazo said...


As you know, our islands are only 50 miles apart and at exactly the same latitude. I am much more of a cooler weather person, and while I get by here fine w/o A/C, when the trades stop in the summer, I would be totally miserable without an electric fan to sleep with. In 13 years, I never slept with anything beyond a top sheet. For me, as I get older, climate is a really important factor. One solution is to pick a spot in the tropics with serious mountains, and then adjust your altitude to taste (and malaria). While precipitation tends to vary with the time of year, the temperature stays fairly constant.

Speaking of malaria, I was listening to Book TV this morning with my breakfast. They had an author on about the building of the Erie Canal in the 1820's. The greatest hazard seemed to be the malarial swamps. For those of you unfamiliar with the niceties of Usano geography, the Erie Canal is in upstate New York, only a couple of hundred miles from the Canadian line. Winter temperatures often go below -15 C. Greenpa, what's the deal with this?

VK said...

Aaah! Good ol' manipulation and saving face.

CHINA’S stockmarket has been one of the best performing in the world this year, and the country’s firms have so far steered through the global financial crisis better than many of their global peers. Partly they may have been buoyed by robust business conditions in China. But two recent studies, which raise serious questions about the credibility of China’s corporate earnings, suggest that companies may also have had an artificial boost.

Also Electricity consumption is down especially in the industrial commercial heartland, "Power consumption decrease in Guangdong, Shanghai, and Zhejiang reached about 10%, 13.6%, and 6.1%, all higher than the country's average.

This from

Anonymous said...

"Why aren't you all out in your gardens instead of sitting in front of a computer screen? I'll go back out, too."

The garden is in the only problem is is that thanks to the eruption of the Redoubt volcano a few months back it is 49 degrees here and this time of year where I'm at it should be well in the mid 70's. While this is great weather for say spinach and radishes they went to seed with the three days of 90 degree weather a couple of weeks ago.
Being a farmer or gardener is never easy. Last year the grasshoppers eat everything in sight even the squash plants down to the dirt. I had enough to take care of my needs but not enough to help neighbors, relatives and friends. The Apple crop did great though and I had plenty to share.

Anonymous said...

It is a shame to see Illargi get his panties in a bind simply because one or two posters challenge what he says.

I do not think Mugabe or whoever else deserved Illargi's self-righteous temper tantrum.

JustJohn said...

I'm curious why you are looking at mid-size farms near DC (at that price)?

I would suggest you should get farther out. I'm in Michigan and pretty sure you can buy 80 acres in the upper peninsula for $80,000. While not great farm land, global warming might make it a very nice location. Or lower Michigan, on the west coast, perhaps a 20 acre farm for $200,000? You would only be a few hours from Chicago, and the area used to called the fruit belt (along the lake).

I'm on 26 acres and can't imagine farming it with only a few people if oil gets scarce. Most of the suburban houses around here are on a one acre lot, that could keep one person pretty busy.

Seems like you would need a commune of twenty people to keep a 100 acre place going, with less fossil fuel.

I know location is everything in real estate, so maybe MI is too far, but what about PA or Ohio? It seems like prices around DC will crash last, since lots of wealth gets moved there.

VK said...

Well from Wikipedia, this is the definition of socialism,

"Socialism refers to any one of various economic theories of economic organization advocating state or cooperative ownership and administration of the means of production and distribution of goods, and a society characterized by equal opportunities/means for all individuals with a more egalitarian method of compensation based on the full product of the laborer."

Hence by this definition, Europe is not socialist (not even those pesky French) as co-operatives are a rare breed indeed in the European model.

The European model is more a hybrid of capitalism and some aspects of socialism with some countries having greater safety nets and benefits then others. But over time and as this depression progresses, those safety nets will eventually become unaffordable.

But with all economic and political ideologies, there is one root problem - MAN himself. Marx thought that communism would mean the dissolution of the state and a worker's paradise would ensue, I don't think he envisaged the Iron Curtain of communism would concentrate even more power among an elite politburo and far from being a worker's paradise it was rather a hellish experience.

Capitalism at it's core is pretty good but not the crony capitalism we have today and leaning towards fascism.

Again from wikipedia,

"Fascism comprises a radical and authoritarian nationalist political ideology and a corporatist economic ideology. Fascists advocate the creation of a single-party state. Fascists believe that nations and/or races are in perpetual conflict whereby only the strong can survive by being healthy, vital, and by asserting themselves in combat against the weak."

In America what we have today is a defacto single party state advocating the no banker left behind policy. As for the perpetual conflict, anyone recall the "War on Terror" and neo-conservative ideology which so influences the US. It's a strategy to 'unite' the country and shape it against an external threat which basically disappeared when the Soviet Union collapsed (though the Soviets were in no state to fight a conventional war against the US)

g-minor said...

@El G 2:06

I live in a small town in the western Catskill Mountains of upstate NY, about 50 miles south of the Mohawk
Valley (where the Erie Canal was built). During the 19th Century, there was an excellent residential secondary school here. In the mid-19th century brochures prepared for prospective parents, they were proud to claim that, at 1500 feet above sea level, they were "malaria free." I guess that tells us something about the lowlands of downstate NY, New Jersey, and other mid-Atlantic coastal states.


Starcade said...

Persephone: An additional point to ponder:

Especially if it gets to the point where the last line of defense is paid mercenaries who would gladly do the job, they may also be giving the orders to the rank and file...

If this is the case, the rank and file of the military, in such a situation, might well be shooting their own at gunpoint themselves.

Ilargi: Keep in mind the recent study. 1/6 of all income in this country is now government benefits. Add to that the massive disparity in income toward the top 1%, and you get the potential for real trouble if the budget is balanced by ending government benefit programs.

centiare: And, because of free credit, many of these people will be completely unable to do any of the three (house, clothe, or feed themselves), and that's when the situation becomes deadly.

bluebird: Too late, because of two things:

In that scenario, where is the government going to get the ability to move food...

... especially when it won't take long before TSHTF.

Anon 1237: Slave labor camps is another way they're going to try to keep order. You can basically read between the lines at places like Ticker Forum and see a lot of people who would be more than happy to lock up at least a third of the (remaining) US population in them.

The ONLY way many of these budgets are ever going to be balanced again is the elimination of a significant portion of society from the open society.

Anonymous said...

@El G 2:06

Farther north: "Among the many diseases that ravaged workers during the building of the Rideau Canal [Kingston - Ottawa], three of the worst were dysentery, small pox and malaria. Malaria, extremely rare today in North America, is a mystery disease to many. It has been suggested by some that malaria was unique to the Rideau, perhaps brought by the soldiers working on the Rideau who had previously been stationed in tropical climates where malaria was rampant. This isn’t true; malaria was in Ontario both before and after the building of the Rideau Canal [...]"


RC said...

Gallinazo, you haven't had Dengue Fever yet? Also, the higher one gets in the mountains in the tropics with steeper hillsides, the less standing water, the less available mammals and reptiles and birds for the mosquitos to breed on and in, then, the less mosquitoes, or none.
Above 2500 feet in El Yunque I never saw any mosquitoes of any kind even though rainfall was hundreds of inches a year. I lived at 1500 feet for years and there were plenty, but at 3000 feet {for 18 months} there were none.
Malarial mosquitos were eradicated in the US. The blow by blow history is available on line. I think a lot of the credit goes to DDT.

RC said...

It's also claimed that at high elevations the tree toads are so numerous in the bromeliads attached to the trees that they keep the mosquitos to a minimum. But that has nothing to do with the Erie Canal.

Anonymous said...

Illargi said: "Taking care of the weakest in a society, for one thing, is a purely practical matter, not an ideological one: if you don't take care of them in times of hardship, your society is history."

Maybe you should grab a dictionary and figure out what 'ideological' really means. While you are at it, look up 'practical'.

If you want to be 'practical', we would have to cull several billions of people to get back to a workable number. Most of these people are only alive today because of the green revolution and cheap petro.

If I was 'practical' under your 'ideology', I might simply pretend I am weak and expect the noble state to take care of me. After all, it is easier to extend your hand for help than it is to actually put your hands to use.

There are too many people on the earth. Most are dependent on a make believe system created over the last 200 years. This dependency, in my opinion, should not be encouraged. Especially in times like these. It should be clear that becoming dependent on unreliable, unsustainable, unrealistic systems is dangerous. This is essentially what your blog is about.

Anonymous said...

@ilargi In my 'The New Dictionary of the English Dictionary 1928 edition' I do not find a definition of the word 'inflation', I do find:'inflate': to swell or inflate with air or a gas.... or 'inflator': a mechanical device for producing inflation (I guess that could be a printing press if you want to press the issue) I do find a definition for the word 'inflationist': one in favor of an increased issue of paper money.

On that other word:

Socialism: an economic theory or system of the reconstruction of society on the basis of cooperation of labor and community of property.

I guess we will have to wait till our so called civilization is a dead one with a dead language before we come up with definitive English definitions of these words but till then what do you think of the definition of socialism here, incidently I am sure you realize this is an American definition as you can see by the incorrect spelling of several 'English' words.?

Anonymous said...

By the way ilargi that is no cheapo dictionary either it has over a thousand pages with lots and lots of words in it.

-Little Bennie Annie-

Anonymous said...

Hey Illargi:

When you are finished looking up words in the dictionary, try googling these three: "jump the shark".

Sit on it!

Ilargi said...

And so, my reservations about -part of- the comments section prove themselves to be valid faster than you can say "discussion". And I find that a shame, but don't know how to solve it. The more serious and open you try to get, the more drivel comes your way.

Dr J said...

@ el g 1:12 pm said:

"Does a diet of rice and beans really result in diabetes? I thought it was 7-11 Big Gulps. I know that there is a major genetic component to it as well."

At the risk of getting into a prohibited topic area, the short answer is 'yes'. Type 2 diabetes is essentially an acquired intolerance of carbohydrates. It seems to happen in genetically susceptible people when they consume too many carbs. The mechanics of this are being studied but it is probably due to membrane damage resulting from the high output of reactive oxygen species that happens when your cells burn glucose. BTW the preferred fuel is fat - glucose is burned preferentially only because the body must dispose of it.

el gallinazo said...


At great risk to adding to the drivel:

I can recognize the reasons for your frustration that so much of the commenting here is “off topic.” But at least from Stoneleigh’s point of view, and she has stated it repeatedly, the purpose of this blog is to enable the readers to best weather and survive the coming financial apocalypse. And for many of the readers, this may not involve an in-depth study of how the banks holding GM bonds stole billions from the UAW pensions or the shape of the treasury curve (in which I personally am quite interested). It might involve how to raise bees, or potatoes, or avoid dangerous diseases. Or the proverbial, inflation or deflation.

I, for one, when I have time, try to skim all the articles and I read maybe 25% in depth. Frankly, the articles are usually from the MSM, and after reading TAE almost every day for a year, a lot of it is repetitious. So I just skim – anything new or interesting here? When I find something, then I read. My friends consider me an economics wonk, but in the immortal words of Larry Holmes, I am not fit to carry your jockstrap :>)

But I must disagree with you about your concept of ideology.

1 ( pl. -gies) a system of ideas and ideals, esp. one that forms the basis of economic or political theory and policy : the ideology of republicanism.
• the ideas and manner of thinking characteristic of a group, social class, or individual : a critique of bourgeois ideology.
• archaic visionary speculation, esp. of an unrealistic or idealistic nature.
2 archaic the science of ideas; the study of their origin and nature.

IMO, any vantage point with social or political ramifications falls under the rubric of ideology. I do not use it pejoratively. IMO some ideologies are much closer to the truth and some are much closer to basic decency (namely the ones which I subscribe to.)

When you write:

“But seriously, I am not aware of any ideology in what I write. Taking care of the weakest in a society, for one thing, is a purely practical matter, not an ideological one: if you don't take care of them in times of hardship, your society is history. There''s this persistent, though long debunked, notion that if only you work hard enough blabla, you will be successful, rich or whatever.”

I agree 100 percent with what you write here and regard it as fundamentally true and based on fact, yet it certainly represents an ideology or political point of view. It is quite obvious to me. But arguing semantics further is pointless.

Anonymous said...

ilragi take a breather these are the start of dog days and no reason to get excited. Found a neat description of same on wiki:

Popularly believed to be an evil time "when the seas boiled, wine turned sour, dogs grew mad, and all creatures became languid, causing to man burning fevers, hysterics, and phrensies" - Brady’s Clavis Calendarium, 1813.

-Little benie Annie-

Anonymous said...

Jesus Christ el G, I really don't know what to make of anyone who believes 100% of what some other guy has to say!

-Little bBnnie Annie-

Anonymous said...

Bigelow said...


Still, when I look at what is being said here directly about what I write on a particular day, it''s mostly preciously little.

I like your non-ideology. If I agree with what you write what is the point of offering "Yeah! What he said..."? If I should feel you are talking through your hat, I don't write easily or well enough to argue with you anyway.

My one complaint is when you rhetorically demand to know why we are not doing something. The only things that really work, like street actions, produce causalities. The Big French Revolution was an exception. Usually governing structures like Nazis or Romans had little difficulty dealing with efforts to oppose them. I am causality adverse.

Bigelow said...

After partaking of your blog some days my head is spinning. And another thing, I have had a probably obsessive interest in how the money works for at least 45 years. And still there is more. Like El Vulture so colorfully put it I'm not fit to carry your jock either.

Ilargi said...

"My one complaint is when you rhetorically demand to know why we are not doing something. "

That's rare, and quiet a while back. But since the question is rhetorical, and not everyone necessarily has your point of view, why not ask it?

I think it's largely a deer in headlights issue: people don't know what to do, where to go. And that is indeed very hard, the best suggestion may be to cherish what you have and not plan long term, sort of following the spirit of that great line from yesterday:

""All our life we worked to be where we are, and we're not there anymore.""

D. Benton Smith said...

I don't want to be be nit picky, but Dr. J was quite mistaken when he said : "BTW the preferred fuel is fat - glucose is burned preferentially only because the body must dispose of it."

In point of fact, glucose is the ONLY thing burned as fuel by the cells, and the only thing they are able to burn. Certain components of other substances (such as fats and proteins) can be converted into glucose when dire need arises to fuel the body, but ultimately it is glucose oxidation that fires the furnace inside all cells.

Insulin enables cells to uptake glucose from the blood by enabling the sugar to pass through the cell's outer membrane. Diabetes Type 1 is the absence of insulin production, and Type 2 can be either low insulin production, or the inability to use the insulin that is present.

Ironically, craving sweets is the urgent demand for sugar by cells that are starved for it, even as it builds to highly destructive levels in the blood stream.

Since glucose is a highly oxidizable substance, when dissolved in the blood it has a propensity to bond with whatever oxygen it can get its sticky little hands on.

The earliest damage is therefore to the smallest blood vessels (capillaries) and the organs most dependent on them, which of course are the smallest (but most numerous) components of the circulatory system that deliver the goods to individual cells through the arterial system, and then returns the de-sugared and de-oxygenated blood back to cardio-pulmonary works via the veins.

Thus Diabetes tends to worsen as this capillary damage mounts, with particular danger to eyes and kidneys, plus a tendency to develope unmanageable infections in the extremities where circulation is inadequate.

A balanced diet that delivers less erratic quantities of glucose, exercise which improves cardio pulmonary health (and good oxygen levels), and of course supplementary insulin to enable sugar to pass out of the blood and into the cells) are effective treatments.

Diligently managed and treated it is the most survivable of the deadly diseases, but don't make the mistake that just because it doesn't hurt that it won't kill ya!

If you have it, learn everything you can about it... and follow the rules! (I do not have it, by the way.)

Live a nice long time.

Anonymous said...

Oh my God!

Is it really that bad Illargi? Me thinks you need to grow some thicker skin! Maybe they don't grow 'em thick where you come from?


greatdogs said...

One point about the North Dakota budget surplus. North Dakota recieves nearly two dollars in federal funding for every dollar they send to Washington. Getting double on your money makes it a whole lot easier for them to be in the black.

Anonymous said...


My mother used to say.....if you see a 'poop' in the road just walk around it, look away, pay it no heed.

The moral of this story is:

If you give them the attention they are craving (the kook/s) they stick around. If you ignore them they go away.


Anonymous said...


Looking forward as always to tomorrows blog.

Could you , or could someone explain what a bond dislocation means exactly and does that apply to bonds in Europe as well? I have some corporate/government European bonds which don't mature for 3 years. I'm just wondering if the bond dislocation relates only to US bonds or ALL bonds and what the term means (in a nutshel).

centiare said...

Illargi, it's time you moved/turned off the the standard Blogger comments function. ZH is using Disqus, Mish uses js-kit, and there are plenty of others out there that are available.

It's a two edged sword - bloggers seek to maximize exposure & readership interaction, yet once they've achieved those basic objectives, the trolls show up at the party.

At this point it appears you need to enforce non-anon posting. Either force users to register or use open ID. Once you have that baseline requirement, it's easy to eliminate comments by user and ban user accounts at the same time.

Sure, trolls can try and sign up again with a new handle, but the good registration systems prevent them from using the same email address, while the next level of security prevents the use of throw away email addys.

Just all part of the growing pains of becoming a top 10 site.

Dr J said...

@ D. Benton Smith said - "I don't want to be nit picky, but Dr. J was quite mistaken when he said : "BTW the preferred fuel is fat - glucose is burned preferentially only because the body must dispose of it." In point of fact, glucose is the ONLY thing burned as fuel by the cells, and the only thing they are able to burn."

I gather from this that you have never taken a first-year biochem or physiology course. It is not my intention to embarrass you and I don't think our hosts want a lengthy discussion on this side-topic so I'll just suggest that you should do a bit of reading before you publicly challenge someone with bona fide expertise.

Anonymous said...

Honestly? KOOK ALERT? Can you really say there is a troll problem here? Really? After one day of comments from registered users and anon users that questioned Illargi? It is amazing that some people find it so hard to fathom that there may be differing opinions out there. This certainly does not qualify one as a troll or a kook. I happen to think that Illargi's tantrum today in regards to Mugabe's post was a bit overboard. Others, including longtime registered users, seemed to join into that thread (even if they had to qualify their dissent with a comment about not being able to carry Illargi's jock strap).

A few comments directed toward the blog's author does not mean we have a troll problem.

Censoring posts that are not agreeable to the author is a sure way to achieve a very dull discussion. But if that is what is desired, I say go for it.

Anonymous said...

Speaking of "European Socialism":

Across Europe, Left-Leaning Parties See Clout Faltering

el gallinazo said...

Anon 6:45

I'll give it a brief shot as Stoneleigh seems to be off-line today. VK could do a better job than I.

A bond dislocation is when the required interest rate to sell a bond at auction shoots up precipitously, usually at the long end (10-30 year) of the curve. This happens because money is tight or the bond market has lost faith and confidence in the issuer of the bonds, or both. The term is currently being used mainly with US treasuries. The Fed is printing money and buying bonds when the auctions fail to keep the interest rates down and the projected US budget deficit has more than tripled in the last 18 months. So either the treasury sells enough bonds to cover the exploding deficit as well as maturing bonds, or the Fed prints and buys them. The current 10 year rate is about 3.7%, so a dislocation, which is a severe term, is usually considered a jump in a very short period of time to 6.5% or higher.

The economic effect would be huge. Since treasuries are typically the lowest rate bonds, corporate bonds would also jump, forcing many companies into insolvency. Whatever mortgage money was still available would become vastly more expensive, causing real estate to plummet in nominal value. The stock market would take a hit as the cost of leveraging would grow. Bond prices would sink in the secondary market as who would want to buy an old 3% bond at face when one could buy a spanking new one at 7% in the current auctions? It's basically TEOTWAWKI.

Denniger thinks it's right around the corner. Stoneleigh doesn't think it will happen for a least a year (as I recall).

Anonymous said...

Sorry for the off-topic, but I'm adding it in the hopes that it is useful to at least one person out there. And probably more.

There was a recent Medical paper published which showed that Type 2 Diabetes was actually reversed (eliminated IIRC) in most of the test subjects within one month.

This has been unheard of before.

And the simple prescription was a diet solely of vegetables.

I'm sure google can show the original publication.

Yes, get rid of the anon postings! I don't usually post, but that would eliminate any reason for tempting me to contribute.

el gallinazo said...

anon 7:30 aka Little Bennie Annie

We are not putting in time here for stupid flame wars, snide comments, and ad hominem attacks. People who show a modicum of respect would not be effected.

So I am a spit licker for agreeing 100% with Ilargi on a **very short paragraph** that he wrote after pointedly disagreeing with him on a larger issue?

By the way, the jock strap comment was something we humans use here called humor. Go back to your home planet - you are not wanted here.

Persephone said...

I find your vision and perspective extremely informative, as well as thought provoking. I learn something new with every TAE intro. Stoneleigh's vision and understanding is amazing.

I think of blogs somewhat like being at a seminar. You go to listen to main presentation, but while you're there, you meet other interesting people who add and augment that presentation.

As much as I have learned from you, I have also learned a great deal from others here. Many days commentaries are cheerleading and reinforcing. Other days they are just venting. All of us here see the oncoming train wreck. Many of us have tried to warn those for whom we care - sometimes to no avail. It is a anxious time - with more anxiety to come.

But, we will be prepared - thanks to you and everyone that contributes.

Persephone said...

Starcade: That's a great point!

To the Marxism/Socialism debate. Don't confuse Marx with Lenin's perversion of Marx. Marx expressed sound ideas in the Communist Manifesto - and was spot on in many regards.

Ian said...

I was following the comment by Ilargi that those posting in the comments section are really holding a parallel discussion rather than commenting on what he labors to post every day. Yet I tend to agree with El G’s point of view … he skims the articles posted. I think we all do, we can’t read every word of this “stuff” every day yet we absorb the direction and often the detail nevertheless.

What I see going on in the comments section is a parallel discussion yet one that in in essence accepts and is informed by the world that Ilargi observes and is commenting on and posting bits and pieces from. I think, Ilargi, you should be happy to have fostered this community that essentially accepts your global view and discusses the minutiae of adapting to it. If it were my blog I would be, I know.

What I can say is that in my view there are almost no trolls on this blog. Ilargi tolerates no nonsense, that we have seen, and any serious attempts to undermine him are quickly dismissed one way or another. And so it should be. And that there are, in fact, so few trolls is a mark of the respect that he engenders.

Speaking for myself, I follow TAE every day and for me it and the comments (including especially Stoneleigh's) are a primary source of information and perspective on the ever-changing new world in which we find ourselves. I hope it can continue roughly as it is.

Ilargi said...

New post up

And as for the above: it's necessary to at times stir the pot a little.

Ventriloquist said...

@Anon @ 10:52 AM


No, you're not alone. In fact, you're spot on.

I LOVE the fact the Mugabe is here.

Someone with an intellect equal to I & S (far as much as many here would deny it) and who has the incredible capability to put Illargi on the defensive.


Anonymous said...

My guess is Ilargi has many intellectual equals here, many of which happen to be reading and commenting on Ilargi's blog. No truly clear thinker wants to be worshiped, and those who worship are not clear thinkers.

Anonymous said...

Ilargi, I love your blog. Look forward to it every day, recommend it to friends and family. You are the best!

I have read that diabetes (type 2) can be reversed in 3 days. Read the book Neanderthin, by Ray Audette.

Hope that helps someone.

Anonymous said...

To El G @ 7.42

Thanks for the info on the bonds. Helps clarifies things for me. Much of what is going on is way over my head but I'm learning.