Thursday, July 2, 2009

July 2 2009: Irrelevant exuberance

George N. Barnard City Occupied 1864
Marietta Street, Atlanta, Georgia
The city had a population of below 10,000 at the time it was conquered
The battle features as the backdrop to Gone with the Wind

Ilargi: Seven banks closed to start off the second half and third quarter of the year. A subdued reaction from the administration to job numbers that looked as if they could have been spun into something not all that awful. After all, the unemployment rate, which had been rising 0.45% on average in the first five months, rose "only" 0.1% in June.

Maybe we are witnessing the start of a policy and media campaign that is less based on irrelevant exuberance, and more on preparing the people for what is really to come than on what they would like to happen. It is now abundantly clear that unemployment will continue to rise for quite a while. It's just as clear that government action, especially through the $787 billion stimulus plan, has so far utterly failed when it comes to job creation. And finally, everyone seems to agree that even if (make that capital IF) the US economy stabilizes somewhat, it will take a very long time to get all those who are now out of a job, back into the workforce.

John Williams at Shadowstats has updated his unemployment numbers as well. His alternate version of the U6 rate, the U.S. Bureau of Labor Statistics' broadest measure, has eclipsed the 20% barrier for the first time. That means over 40 million working age Americans are now directly affected in their welfare and well-being by an economy that keeps sinking ever deeper into a debt morass. A large component of that number is young people, who are robbed of the chance to enter the workforce at a crucial time in their lives.

This development continues to widen the growing gap between the young on the one side and the generation of their parents on the other, which is a dangerous and potentially explosive situation, certainly when you’re talking about 10-20 million of them.. No benefits, no pension and no health care for the majority of the lucky few who find work. No job for the rest. And no income. No chance to buy a home and raise a family. That's the kind of material that is tailor-made for breaking societies apart. A free market system is fine by me, but only if there are fair and equal opportunities for everyone.

Against this backdrop, Wall Street banks are returning to their former wages, salaries and sometimes even bonus systems. They can do this because of the money they received from taxpayers. Money that could also have been used to create jobs for those young people that now come of age in a very dark setting. And while it's true that the Obama people have to date bungled that part in spectacular fashion, if you would get better people together $14 trillion could create a lot of jobs.

The main reason why none of it has worked so far, and none of it will, lies in the political power of vested interests, banks politicians, industries, you name it. Nobody lobbies for a bunch of poor young kids, no matter how bright they are. And without lobbying, nothing will get done. You would need to break that vested interest power, and that can't be done through the present political system, because the politicians that voters have to choose from are part of that power.

It’s like racing towards a really steep cliff in a vehicle with no breaks, no reverse and no steering wheel. It's all you can do is to get out of the vehicle, to jump out while it's moving at mile-high speed and risk whatever it is that will come after. Or you can choose to believe those nice smiling folks on TV in their expensive suits who every day seek to assure you that there is no cliff, or it ain't all that steep, or that they'll find the steering wheel any day now. And every day brings more tidings that contradict their hopeful promises.

Regulators Close 7 Banks, Bringing Year's Total To 52
Bank regulators closed seven more banks Thursday, which meant 52 banks have been closed this year, double the number that failed last year. One of the failed banks was in Texas and the remaining six were in Illinois. No advance notice is given to the public when a bank is being closed, according to a statement by the Federal Deposit Insurance Corporation on its Website.

The FDIC was named as receiver for all the closed banks. Deposits were transferred to other banks and were immediately available. All the failed banks will be closed July 3, 4 and 5 for the holidays and reopen Monday as branches of the assuming banks the deposits were respectively transferred to, according to the FDIC Website.

Millennium State Bank of Texas, Dallas, TX will reopen as a branch of State Bank of Texas. The First National Bank of Danville, Danville, IL reopens as First Financial Bank, National Association, Terre Haute, IN. The Elizabeth State Bank, Elizabeth, IL will reopen as Galena State Bank and Trust Company, Galena, IL. Rock River Bank, Oregon, IL reopens as The Harvard State Bank, Harvard, IL.

The First State Bank of Winchester, Winchester, IL will reopen as The First National Bank of Beardstown, Beardstown, IL. The John Warner Bank, Clinton, IL reopens as State Bank of Lincoln, Lincoln, IL. And Founders Bank, Worth, IL will reopen as The PrivateBank and Trust Company, Chicago, IL.

77 banks failed since 2008, 25 in 2008 and 52 in 2009 till now.

1) John Warner Bank,Clinton, IL :
  • As of March 31 has $71 million in assets and $64 million in deposits
  • State Bank of Lincoln, Lincoln, IL will assume all deposits of failed bank
(2) First State Bank of Winchester, Winchester, IL :
  • As of March 31 has $32.9 million in assets and $33.3 million in deposits
  • All deposit accounts have been transferred to The First National Bank of Beardstown, Beardstown, IL
(3) Rock River Bank, Oregon, IL :
  • As of March 31 has $77 million in assets and $75.9 million in deposits
  • All deposit accounts have been transferred to The Harvard State Bank, Harvard, IL
(4) Elizabeth State Bank, Elizabeth,IL :
  • As of March 31 has $58.7 million in assets and $50.3 million in deposits
  • All deposit accounts have been transferred to Galena State Bank and Trust Company, Galena, IL
(5) First National Bank of Danville, Danville,IL :
  • As of March 31 has $164.7 million in assets and $144.8 million in deposits
  • All deposit accounts have been transferred to First Financial Bank, National Association, Terre Haute, IN
(6) Millennium State Bank of Texas, Dallas,TX:
  • As of March 31 has $126.7 million in assets and $120.2 million in deposits
  • All deposit accounts have been transferred to State Bank of Texas, Irving, TX
(7) Founders Bank, Worth, IL:
  • As of March 31 has $966 million in assets and $828 million in deposits
  • All deposit accounts have been transferred to The PrivateBank and Trust Company, Chicago, IL

Banking system like South Sea bubble, says senior Bank of England official
A senior Bank of England official today compared the banking system over the last 20 years to the South Sea bubble of the early 18th century and said bankers had merely "resorted to the roulette wheel" to keep up with each other.

The Bank's executive director for financial stability, Andy Haldane, said in a speech in Chicago that having been stable over much of the 20th century, returns in the banking system relative to the wider stockmarket shot up after 1986 until 2006.

"Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison," he said.

He said bankers and policymakers became seduced by the excess returns available: "Banks appeared to have discovered a money machine, albeit one whose workings were sometimes impossible to understand.

"One of the South Sea stocks was memorably 'a company for carrying out an undertaking of great advantage, but nobody to know what it is'. Banking became the 21st-century equivalent."

He said banking returns over the period were magnified by leverage as banks borrowed excessively, he said.

Returns on banking shares relative to the wider stockmarket

Returns on banking shares relative to the wider market

"During the golden era, competition simultaneously drove down returns on assets and drove up target returns on equity. Caught in this crossfire, higher leverage became banks' only means of keeping up with the Jones's. Management resorted to the roulette wheel."

He noted that the 80% slump in bank shares since the credit crunch hit meant that returns from the sector were now back in line with their longer-run average (see graphic above). The market capitalisation of global banks has fallen by $3tn (£1.8bn) since the crisis began, he said.

"We should aspire to a financial system where there is greater market and regulatory scrutiny of future such money machines. In achieving this, there is a role for some body – a systemic overseer – which is able to detect incipient bubbles and fads and, as importantly, act to correct them. This role is about removing the punchbowl from future financial sector parties."

He said that in future there would have to be a greater distinction between management skill, which improves return on assets, and luck, when return on equity can be magnified by leverage.

"Good luck and good management need to be better distinguished. Put differently, returns to investors and managers need to be more accurately risk-adjusted if the right balance between risk and return is to be struck for individual firms and for the financial system as a whole."

A second lesson, he added, was that there would have to be much stricter system-wide limits on leverage, particularly among big banks whose stability is crucial to the whole financial system.

"For a number of diseases, 20% of the population account for around 80% of the disease spread. The present financial epidemic has broadly mirrored those dynamics," he said, adding that the failure of a core set of large, interconnected institutions such as Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers and AIG contributed disproportionately to the spread of financial panic.

"Epidemiology provides a second key lesson for financial policymakers – the importance of targeted vaccination of these 'super-spreaders' of financial contagion. Historically, financial regulation has tended not to heed that message."

He welcomed a recent move by US authorities to bring the trading of credit derivatives, which were at the heart of the crisis, on to exchanges so they could be better understood and controlled. "This is a bold measure and one which deserves international support."

Haldane's speech was part of a growing debate among global policymakers to try to build a better system of regulation and control of the financial system to prevent such crises as the current one from occurring again.

Job market takes turn for worse
Employers cut more jobs than expected in June and unemployment rate climbed for the ninth straight month, hitting 9.5%.

The battered U.S. labor market took a step backwards last month as employers trimmed more jobs from their payrolls in June, according to a government report Thursday. There was a net loss of 467,000 jobs in June, compared with a revised loss of 322,000 jobs in May. This was the first time in four months that the number of jobs lost rose from the prior month. The June job losses were also far worse than the forecast of a loss of 365,000 jobs by economists surveyed by

The unemployment rate rose for the ninth straight month, climbing to 9.5% from 9.4%, and hitting another 26-year high. Economists had been expecting that the unemployment rate would hit 9.6%. Nearly 3.4 million jobs have been lost during the first half of 2009, more than the 3.1 million lost in all of 2008. "It's not the catastrophic numbers we saw earlier this year, but they're still pretty damn lousy," said Keith Hembre, chief economist with First American Funds.

The job losses don't tell the full picture of the pain the labor market either. The average hourly work week fell to 33 hours from 33.1 hours in May, a record low in readings that go back to 1964. Average hourly wages were unchanged, so the shorter week shaved $1.85, or 0.3%, off of the average weekly paycheck. The so-called underemployment rate, which counts those who are working part-time jobs because they couldn't find a full-time position as well as discouraged job seekers who have stopped looking for work, rose to a record high 16.5%.

Those who have been out of work for six months or more, and thus have run out of unemployment benefits, climbed to nearly 4.4 million, also a record high. Tig Gilliam, CEO of Adecco Group North America, a unit of the world's largest employment staffing firm, said he's concerned about continued sluggish spending by consumers, which will delay any hopes for an economic recovery. "The 90.5% who have jobs aren't spending," said Gilliam.

But Robert Brusca of FAO Economics said the hopes for a turnaround that accompanied the previous jobs report should not be completely wiped out by the weak June report. "It's a disappointing month but the trends are still quite positive on the whole," he said, pointing to the smaller rise in unemployment and a three-month average of job losses that continues to slow. Others said they see little hope for a quick turnaround in hiring or unemployment.

"The green shoots in the job market are hard to find," said Sung Won Sohn, economics professor at Cal State University Channel Islands. "Businesses are determined to trim costs by cutting payrolls. Employers want to make sure that a sustained economic recovery is here before hiring. The job market will become the Achilles' heel of the coming recovery." The only good news reported by the Labor Department Thursday was that the number of workers filing initial jobless claims fell to 614,000 last week from 630,000 the week before. That was roughly in line with forecasts.

U.S. Workers’ Pay Strained by Mounting Unemployment
Americans’ wages are starting to buckle under the strain of mounting unemployment, threatening to erode the consumer spending essential to an economic recovery. Earnings per hour climbed at a 0.7 percent annual pace on average over the last three months, the smallest gain since records began in 1964, figures from the Labor Department showed today in Washington. Payrolls fell more than anticipated and the jobless rate rose to a 26-year high, the report indicated.

"When we do get a recovery, it won’t be much of one," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. "There’s no bargaining power for workers. Discretionary income is just cratering, and this will have a profound effect on the economy." Employers are not only being stingy with raises, they are also cutting back on hours, causing the average weekly paycheck to drop to $611.49 in June, down 0.5 percent since February. The squeeze is unlikely to end soon, because there are 14.7 million workers who have been without a job for an average 24.5 weeks, the longest since records began in 1948.

"Employers don’t have to pay workers so much because there’s a queue of people waiting outside to get a job," said Heidi Shierholz, an economist at the Economic Policy Institute in Washington, a research group typically aligned with the labor movement. "It’s reducing workers’ ability to negotiate higher wages. We’re looking at a couple of years of really slow wage growth, possibly even lower than inflation." Stocks fell and Treasuries rose after the jobs report. The Standard & Poor’s 500 Index closed down 2.9 percent at 896.42 in New York. The yield on the 10-year note fell to 3.498 percent at 6 p.m. from 3.538 late yesterday.

Today’s report showed employers cut 467,000 workers from payrolls last month after a 322,000 decline in May. The jobless rate jumped to 9.5 percent, the highest since August 1983. Hourly earnings were up 2.7 percent from June 2008, the smallest gain since September 2005. The average workweek for private production and non- supervisory workers fell to 33 hours, the fewest since records began in 1964, from 33.1 hours in May.

The U.S. has lost 6.5 million jobs since the recession began in December 2007, the Labor report showed. All growth in jobs in the U.S. over the last nine years has now been wiped out, and the economy currently has fewer jobs than in May 2000, according to the policy institute. Stagnant wages are the newest hurdle facing American households, whose spending accounts for 70 percent of the economy. As recently as the three months ended in December 2008, hourly wages were growing at a 4.2 percent annual clip on average, even as the economy lost almost 1.7 million jobs.

Pay "was the last labor-market indicator to deteriorate in this recession, and it’ll be the last one to pick up," Shierholz said. "That’s a sign of a further drain on consumption, just what we don’t need right now." Industries including manufacturing, wholesalers, retailers, utilities and leisure and hospitality cut average hourly earnings last month, today’s report showed. "Scattered reports of outright wage deflation are becoming more widespread," Ian Morris, chief U.S. economist at HSBC Securities USA Inc. in New York, said in a note to clients. "Workers appear willing to take the wage cuts, which makes this recession very unusual."

Gannett Co., the largest U.S. newspaper owner, said it will cut about 1,400 publishing jobs and decrease wages for broadcast employees by as much as 6 percent this month. Utility owner Exelon Corp. said it plans to freeze executive pay, trim annual and long-term incentives, and slash about 500 jobs. Tax cuts and Social Security payments under the Obama administration’s stimulus plan temporarily propped up disposable incomes in April and May, supporting household purchases.

Consumer spending rose in May as personal incomes climbed 1.4 percent, the most in a year, the Commerce Department reported last week. Additional gains may be in question once the government assistance fades. "The only wage growth we are getting is through government transfer payments, and that can’t go on," said Deutsche Bank’s LaVorgna. "Even that isn’t enough."

Unemployment Is Really 10%
Today, when the June unemployment numbers came out, the market probably had mixed feelings. The report said 467,000 jobs were lost, and unemployment had risen to 9.5%. The market expected around 325,000 jobs to be lost and unemployment to rise to 9.6%. The bad news: more jobs were lost than anticipated. The kind of good news: unemployment only increased by 0.1% instead of 0.2%, as anticipated. But that kind of good news does not look so good when discouraged workers are considered.

I dug into the Bureau of Labor Statistics report this morning. If you ever took economics, you might remember that unemployment has a sort of strange definition: it doesn't include discouraged workers. For example, imagine some finance guy who got laid off back in mid-2008. He's been looking for work for a year. There's nothing, so he's given up. He decided to take some of his savings and rent a beach house for the summer. He intends to look for work again in the fall, when he hopes the economy will be a little better. He's not considered part of the labor force, so he's not considered unemployed -- even though he really is.

Deep in the BLS unemployment report, you can find discouraged worker statistics in Table A-12. According to that table, the seasonally adjusted percentage of unemployed workers, including discouraged workers, is 10% for June. That's up from 9.8% in May. As you can see, those numbers are significantly worse -- a half percentage higher than reported unemployment in June. That increase of 0.2% also matches the market's expectation for the increase in unemployment. So much for that kind of good news.

BLS wrote another report specifically addressing discouraged workers (opens up .pdf) a few months back. In it, they included this ugly chart:

Discouraged Workers.JPG

(The "marginally attached" data can get tricky, so I won't refer to the top line here.)

As you can see, the worse the recession, the more workers get discouraged. The longer our current recession drags on, the further off the reported unemployment rate will be versus the true number that includes discouraged workers. That also means, once the economy really starts getting better, the unemployment number will unexpectedly jump, because all those discouraged workers will be encouraged to give it another go.

Strapped States Play for Time as Fiscal Year Starts
Many Face Big Cuts in Programs and Staff as Lawmakers Haggle Over Budgets

States turned to stopgap measures to keep operating after seven failed to enact budgets before their new fiscal year began on Wednesday. In Connecticut, Republican Gov. Jodi Rell signed an executive order that would continue spending for essential services, and then vetoed the budget enacted by the Democrat-controlled legislature. In Ohio the legislature has authorized a one-week spending bill; a similar measure in North Carolina will last two weeks.

In Illinois, Gov. Pat Quinn vetoed a portion of the budget passed by the state legislature; lawmakers plan to return July 14 for a special session to deal with the stalemate. Government services weren't shut down Wednesday, but the state's comptroller says he can't issue July 15 paychecks without a budget. In Pennsylvania, Democratic Gov. Ed Rendell announced Tuesday that local banks had agreed to make loans to state workers if their paychecks were delayed by "a prolonged budget impasse."

In Arizona, Republican Gov. Jan Brewer said Wednesday she would veto portions of what she described as "a fatally flawed legislative budget." She said government services would continue, but called lawmakers back July 6 to revisit the budget, as well as a temporary sales-tax increase she favors. While California's multibillion-dollar budget woes have become notorious, almost every state in the U.S. is facing severe financial problems. Sales- and income-tax revenues have plunged in the recession.

Many states face further spending cuts; about half have raised taxes or fees this year, according to the Center on Budget and Policy Priorities, a left-leaning Washington think tank. In seven states, officials couldn't reach tax and spending agreements before July 1, the start of the fiscal year for every state except Alabama, Michigan, New York and Texas. All states except Vermont are required by law to balance their budgets.
Todd Haggerty, an analyst with the National Conference of State Legislatures in Denver, said there haven't been so many states without budgets since the recession year of fiscal 2003.

States that have passed budgets aren't out of the financial woods. Revenues are shrinking faster than many had forecast. State-government finances are unlikely to rebound soon, said Katherine G. Willoughby, a professor of public management at Georgia State University. "States are in for a very, very rough ride," she said.

California Budget and Housing Financial Escapades: $26.3 Billion Budget Deficit with State Issuing Monopoly Money
The state has officially run out of money. The state government unable to govern themselves out of a paper bag missed the fiscal year deadline (again) and here we are starting the second half in a massive deficit. The crony bailout continues with absurd ideas but the second half recovery pundits are out in full force. Since this is the bottom, the Governator with no re-election and nothing to lose decided to give 200,000 state employees another day off formalizing a 14 percent wage cut. As I discussed in a previous article we are in the midst of deflation created by demand destruction. California has relied on two gigantic bubbles with technology and now real estate over the span of two decades to spend beyond its means. Now, with no other bubble in the foreseeable future time has run out.

Why has the state run out of money? First, a large portion of money is pulled from personal income taxes and another large portion comes from sales and use tax:

california taxes breakdown

Over 83 percent of the states revenue comes from two extremely volatile sources. This week I happened to get the wonderful news that Los Angeles County now has a 9.75 percent sales tax! So not only do you get taxed on your income, now you will get taxed when you go buy goods. And look at what kind of great government we have in Sacramento for this high tax rate. The best that IOU money can buy!

Here is a problem with the current system. No one has the ability to tell people in the state that we are flat broke! I’ve noticed the pundits are out in full force again with horrible ideas about buying toxic mortgages and bottom callers are out in mass again preaching to their housing gods.

Dumb and Dumber - I.O.U.

In another smart move worthy of a Noble Prize, the state has decided to offer IOUs:

SACRAMENTO - In a move certain to draw national ridicule and exact financial hardship on business owners and taxpayers across the state, California is slated today to begin paying billions of dollars in bills with IOUs instead of cash.

Nearly 30,000 IOUs totaling more than $53 million are expected to be sent out by state Controller John Chiang this afternoon, the day after Gov. Arnold Schwarzenegger declared a fiscal emergency in the face of a staggering $24.3 billion deficit. The state Legislature remained in its familiar state of gridlock, raising the prospect of an extended standoff that further damages the state’s financial reputation.”

If you have noticed unlike the early 1990s not many banks have come out and stated publicly that they’ll honor these IOUs. It is likely that many will honor the IOUs but the banks are flat out broke too! We are going to give people monopoly money so they can go and deposit their funds into a bank that is broke so it can then lend it out to people with no money! This is the solution to the $26.3 billion shortfall.

But wasn’t it $24.3 billion on Tuesday night? Yes it was. So by the end of the month people in jail will be getting legit get out of jail cards.

“CHICAGO, June 29 (Reuters) - Michigan has to close prisons to save money. California’s are bursting at the seams.

Both states are struggling with huge budget gaps.

Now, Michigan Governor Jennifer Granholm has offered California some of the state’s prisons that are slated to close at a yet-to-be-determined cost.”

Well I guess we’ve found one export we can depend on. The budget is in shambles because each year, we go through this song and dance and eventually, a budget does pass but it is basically a patchwork of delaying reality for another day. That day has come. Asking the Federal government to bail us out would be a nice form of beggar thy neighbor. Even though Bernard Madoff is getting 150 years in prison, there are far more corrupt things going on right now.

Two of those things involve California and National Housing.

OCC and OTS Show Country insane like State

Earlier this week the OCC and OTS released their first quarter results on the health of the mortgage market. As you may have guessed, lenders across the country are as blind as those in California. Some have thrown out the idea that the government should simply buy up all the toxic debt. When they say the government, they mean you and every other taxpayer. The public-private investment program, which ironically is anything but an investment and does not resemble a partnership, is one of these crony banking ideas. Yet that doesn’t resolve the fact that if you are unemployed or have a mega-mortgage then any housing payment is a burden that isn’t within your budget! These programs are to aid Wall Street and all lenders that are still living in their delusional crony world of housing bubble economics.

Yet some of the public are taking notice. During the Great Depression the word banker took on a negative connotation and I don’t see how it is avoided during our Great Recession. But let us look at those OCC and OTS stats:


This is important information so let us spend some time here. This data covers approximately 64 percent of all first lien mortgages. In the data covered by the report, we have a sample of 34 million mortgages. Of these 34 million mortgages, we can say that 11.8 million loans (the Alt-A, subprime, and other) are questionable. Essentially 34 percent of the entire portfolio is made up of junk! Here is the breakdown of the loan categories:


This is junk! In fact, that “other” category is a mix of Alt-A, subprime, and prime but these are loans made with no credit scores or low documentation! Who in the world knows what this crap is. We have a better chance of guessing what is floating in the Los Angeles River. And those in the housing industry are eagerly waiting to unload this crap to the public. Let us just assume that the entire portfolio has mortgages with the same balance. 34 percent of $6 trillion is $2.04 trillion! As you all know 634,000 of those Alt-A loans are here in California with an average balance of $420,000+. According to data from the OCC and OTS, there are still 3.5 million Alt-A loans floating out there. But fear not, loan modifications are way up. Let us look at that data:


The crap California is doing is nationwide. That is, with loan modifications and workouts the main strategy is to convert loans into option ARM, low teaser rate, 40-year mortgages. Take a look at those principal reductions! Bwahahaha! Now you know why they ripped out all that cram-down legislation. With bankruptcies skyrocketing many of these loan modifications and workouts are basically converting people to renters and locking in the bubble price of the home.

Think of a situation in our current market. You buy a home at the peak for $500,000 and the home is now worth $300,000. Their idea of a workout is turning your loan into a 40-year mortgage with a teaser rate. But what happens when you want to sell? You can’t! Homeowners are now being swindled once again by the same banks that issued this toxic waste under the guise of “helping” you. Sort of like how Bernard Madoff helped all his investors; things look good until you read the fine print or dig deeper. The Alt-A and option ARM wave is going to hit California like a tsunami especially in the more so-called prime areas. Some of these people think they are insulated from the rest of the state economy in silos. They are going to find out the hard way in the next few months.

What the OCC and OTS data tells us is this problem goes beyond California. You can look at Florida, Nevada, and Arizona and these states are loaded as well with these toxic mortgages. Yet you will find the toxic waste in every state. And to show you how much a waste of time this is look at the re-default rates:


If we extend this out to another year and break the data out by Alt-A, subprime, and prime I bet you would see in some categories a 90 percent plus re-default rate. The data is telling us this is a waste of time. It seems like people are hell bound to repeat the lessons from Japan.

Some people have told me, “but California housing is now affordable. It is a good time to buy.” I have decided to compile a list of median household income and median home prices for all California counties to show you that we are still over priced in many regions:


The above chart sums up the California situation. What you have is the lower-end being pummeled and now having more modest price to income metrics. Yet those higher priced areas, those areas with the 643,000 Alt-A mortgages with a nice average sum of $420,000+ are going to take it on the chin next. These numbers are simply unsupportable. Bottom callers are drinking the Kool-Aid once again. Ironically, we may see the median price stabilize but this does not show the real story. The mid to upper range of the market will fall, creating more sales, and thus creating volume to shift the median price up. For example, say a place like Culver City has a $600,000 home that sits on the market for ages. The place has a nice Alt-A, the borrower walks away and the bank is forced to unload it. It goes for $400,000. The median price for L.A. County is $300,000 so this gives fuel to a higher median price but the place took a $200,000 hit. This will happen.

The state has an 11.5 percent unemployment rate (the highest in record keeping history), the state is slashing the wages of 200,000 employees, more layoffs are in the pipeline, the Alt-A and option ARM problem is not being addressed by delusional loan mods and workouts, and yet this is the bottom. What high paying industry is being created to give birth to the new era of suckers that will over pay for housing in those so-called prime areas? Maybe we can start buying homes with IOUs.

Orange County had a median price of $258,000 in 2000 and Los Angeles County had a median price of $192,000. Just think of that when you see the current median price for Orange County of $411,000 and $300,000 for Los Angeles. To describe the problem takes much analysis. Solution? Let these homes foreclose as quickly as possible and let banks fail. But too many people believe in the Angelo Mozilo school of, “homeownership is not a privilege but a right

California rolls out $3.36 billion in IOUs today
California plans to begin issuing billions of dollars in IOUs today to scores of creditors, including private businesses and county governments. The move will not affect many individuals who receive government assistance. Low-income people, the elderly and the disabled will receive their regular checks on schedule. Schools, state workers, Medi-Cal providers, pension funds and In-Home Supportive Services are all protected by law from receiving an IOU in lieu of a real check.

But thousands of vendors who provide goods and services to the state will be given IOUs instead of cash. From a company that sells french fries for prisoners to a firm that pumps out latrines in state parks, many businesses are trying to save cash and hoping their banks will accept the IOUs. Meanwhile, the University of California has not yet decided whether it will front the money for educational Cal Grants, another program that will get IOUs.

State Controller John Chiang expects to disburse $3.36 billion in IOUs and $10.9 billion in regular payments this month. After officials decide this morning how much interest they'll pay on the IOUs and when they can be redeemed, the controller's printing presses will churn out the first batch of IOUs for 28,742 state tax refunds totaling $53.3 million, said Garin Casaleggio, a spokesman for the controller. The IOUs probably won't be cashed by the state for 90 days - and then only if the treasury has the money to cover them.

Bank of America said it will accept IOUs from existing customers until July 10, with no dollar limits. Wells Fargo and Bank of the West have not yet decided whether to accept them. About 19 California credit unions will accept the IOUs, including Chabot in Dublin, Contra Costa in Martinez, SRI in Menlo Park, Provident in Redwood City, San Francisco in San Francisco and Kaiperm Diablo in Walnut Creek.

Many companies said they will simply tighten their belt and wait to redeem their IOUs. Ken Jackson, owner of Vallejo's Ktek Products and Systems, sells office supplies, computer accessories and janitorial supplies to the state. "The key is to have cash flow to weather the storm," he said. "My cash flow is about 60 days out. If it goes beyond that, I'm in trouble."

American Transit Supply in Hayward does about three quarters of its business with the state, providing air filters, oil filters and hydraulic filters for state vehicles such as CHP cars and fire service trucks. "We figure we've got about $50,000 to $70,000 in accounts receivable with California," said Brian Beery, vice president. His firm has stockpiled cash to make it through and will temporarily transfer its 10 employees to a sister firm.

Thompson's PortaSeptic Services in Fort Bragg, a self-described "mom and pop shop," expects to receive IOUs for pumping out septic tanks in Mendocino County state parks, said owner Melissa Berman. "It would be a hardship," she said. "We can handle it but we will have to scramble to cover all of our standard expenses. But a couple of months (of IOUs) would not put us in jeopardy." At French Fry Xpress in Milpitas, owner Art McCoy said he expects to get IOUs for his french fry deliveries to state prisons. "It's just two of us, my son and myself, so we don't have any payroll," he said. "We'll just have to wait until the budget is settled."

Some of the IOUs' impact will not trickle down to Californians because of backfilling from the federal government, counties and colleges. For instance, cash assistance for aged, blind and disabled people will be paid in full by the federal Social Security Administration during July and August. As part of a February agreement, counties already plan to cover CalWorks temporary assistance in July and August. The controller will issue IOUs to the California Student Aid Commission, which administers Cal Grants, the state-funded financial aid that helps about 143,000 students attend college. Grants top out at $7,788 for a state college and $9,708 for a private one.

"If I'm not able to get it, I might have to take a leave of absence from school to work and pay for tuition," said UC Santa Cruz senior Tommy Le, who works two jobs on campus and helps support his family. "Our state is divesting from students. It's heartbreaking." In the past when state budgets have been late, UC and CSU have advanced the grant money to students, interest-free. UC spokesman Ricardo Vazquez said the university has not yet decided whether it will do so this year. CSU students "will definitely be covered," said spokeswoman Claudia Keith.

Some state contractors have their own revenue sources. Bart Ney, Caltrans spokesman for the Bay Bridge project, said that financing for the bridge will go through because it comes mainly from tolls, the result of AB144, approved in 2005. "It's good for us," Ney said. "We get to keep going."

One firm said it chose not to do business with companies that rely on state payments. San Mateo's Bay View Funding provides short-term financing for companies. One client was a temporary staffing agency that works for the state, which used Bay View to meet its weekly payroll. "We were uncomfortable with the state and their ability to put a budget in place so we decided to exit any relationships involving California," said Andrew Aquino, senior vice president. "We told our client to find a new source."

Questions and answers: IOUs
Q: What are state-issued IOUs?
A: They're promises to pay a certain amount of money plus interest. By issuing IOUs, the state can hold onto cash to pay state workers and cover other debts. The interest rate will be set today as will the maturation date, which will likely be about 90 days from now.

Q: Has this been done before?
A: In summer 1992, Gov. Pete Wilson issued about $4 billion in IOUs. However, since then, the federal courts have ruled that it is illegal to issue IOUs to state workers. The Constitution also gives priority to debt holders and schools. Officials must continue to pay into pension plans, in-home supportive services and Medi-Cal providers. Businesses with state contracts and taxpayers awaiting refunds are among the likely recipients of the IOUs. Earlier this year, the state delayed some payments but did not issue IOUs.

Q: Can you sell or cash an IOU?
A: While the state won't redeem them before the maturity date, they likely will be accepted by some banks and credit unions, which will pocket the interest after maturation. Some large banks have not yet decided whether to accept the IOUs as if they were regular checks.

Q: What if the governor and Legislature agree to a budget solution after the IOUs are sent?
A: The state controller decides when to stop issuing IOUs. However, a budget fix doesn't mean you could cash an IOU early. You'll still have to wait until the maturation date to redeem the IOU if your bank refuses to cash it before then.

Q: Who should I complain to about this?
A: Your elected officials. The governor's office telephone number is (916) 445-2841. Find the contact information for your state senator and Assembly member at

Dear Californians: We'll Pay You $500 For $1000 Worth Of IOUs*
Dear Californians,

It sucks to be you today, though our weather here in NYC is awful so you might have it better on that front. Nevertheless, a lot of you who in some way are connected to the state are getting paid in IOUs. Some banks will accept them on a case-by-case basis, but good luck buying groceries with them, or paying your auto loan or even your rent. The good news is that one (1) of you will get some cash today, courtesy of Clusterstock! We're offering to pay one (1) of you $500 (can be via PayPal) for $1,000 worth of bona fide, California state-issue IOUs, provided we can work out the transaction.*

We think $.50 on the dollar is a fair price, and we'd love to buy more, but we don't want to be overwhelmed by you desperate Californians looking to unload your worthless paper for our valuable paper (you know, the kind we use in New York, the money capital of the world. It's green, in case you've forgotten. It doesn't tear easily and it's hard to counterfeit. In short, real money is pretty awesome, and if we were you, we'd be happy to get our hands on some) So send us an email and we'll see what we can work out.

*We reserve the right to not buy your IOUs for whatever reason, including, but not limited to acts of god, changes in the California political landscape, cold feet, better IOU prices found elsewhere.

Update: We've been calling around to various pawn shops, check cashing places, rare coin dealers and even a Wells Fargo branch. So far none have said they're going to be doing business in CA IOUs, so it looks like our offer is the best you've got going for you.

Disappointing Jobs Data Intensify Fight Over Obama Agenda
Republicans seized on downbeat economic news to say the $787 billion economic stimulus plan isn't working as advertised and took swipes at President Barack Obama's broader agenda, while the White House vowed to do "whatever it takes" to revive the still-struggling economy. The unemployment rate rose to 9.5% last month, as nonfarm payrolls sank by 467,000, disappointing numbers that raise questions about when the long-awaited economic recovery will finally begin.

Since the recession started at the end of 2007, the economy has lost 6.5 million jobs. The jobless rate -- already at its highest level in a quarter century -- is expected to eclipse 10% before the end of the year. The Republican National Committee said those figures are evidence the stimulus plan, which the administration says will save or create 3.5 million jobs over two years, isn't doing its job. Christina Romer, who heads Obama's Council of Economic Advisers, said the White House wished Thursday's data were better, but urged people to keep the figures in perspective. The 467,000 jobs lost last month reflect an improvement from the massive monthly losses earlier this year, she said in an interview on CNBC.

She pointed to private-sector forecasts that suggest economic growth will return toward the end of the year, but conceded that employment, a lagging indicator, will take longer to improve. Asked if the administration is considering a second stimulus package to jolt the economy back to life, Ms. Romer said, "We'll do whatever it takes." "I think we'll be monitoring this and looking at everything," she said. While the White House's top economist declined to rule out a second stimulus, Republicans pounded the effectiveness of the first package. "June's unemployment report shows a job loss of 467,000 and proves that the stimulus package is not a "Recovery Act,'" said RNC Chairman Michael Steele.

House Republican Whip Eric Cantor (R., Va.), accused the White House of shunning GOP lawmakers and taking a "go it alone" approach that hasn't created jobs. He said Obama's health care and energy plans will worsen the situation. "Inexplicably, instead of focusing on jobs and restoring the financial security that has been lost by millions of struggling families, the President continues to push an agenda that the majority of Americans are uneasy with," Mr. Cantor said in a statement. House Republican Leader John Boehner (R., Ohio), criticized congressional Democrats for "spending, taxing, and borrowing with reckless abandon" without producing results. "That's the same failed formula that has cost Americans their jobs in the past, and it's costing them their jobs once again," he said.

Labor Secretary Hilda Solis counseled patience as recovery programs continue to be implemented. Results could take time to appear, she cautioned. "We've only been at this 130 days," Ms. Solis said. She said manufacturing-based jobs in the construction arena will see a rebound as more infrastructure funds are becoming available and reaching businesses. Martin Regalia, chief economist at the U.S. Chamber of Commerce, said the stimulus is providing some cushion to the economy, which expects to start growing sometime in the third quarter. "We're now coming into the time period where the fiscal stimulus will have its biggest impact," Mr. Regalia said. "It's had some salutary benefits so far and we'll have even more over the next year."

Obama Optimistic on Economy Despite 'Sobering' Job Losses
President Obama called the job figures released today "sobering" but said he is "absolutely confident" that the country will recover from the recession and prosper over the longer term.
But he predicted that recovery will take a long time. "As I've said from the moment that I walked into the door of this White House, it took years for us to get into this mess, and it will take us more than a few months to turn it around," Obama said.

White House officials tried to put the job losses in the best light, noting repeatedly that the workforce is now shrinking at a slower pace than it was during the early months of the year. "While the average loss ... this quarter is less devastating than the 700,000 per month that we lost in the previous quarter, and while there are continuing signs that the recession is slowing, obviously this is little comfort to all those Americans who have lost their jobs," the president said.

Speaking to reporters in the Rose Garden after meeting with the CEOs of several energy companies, Obama expressed confidence that new energy-related jobs will help lift the country's job market up. "It's men and women like these who will help lead us out of this recession and into a better future. My job -- and our job as a government -- is to do whatever we can to unleash the great generative powers of the American economy by encouraging their efforts," Obama said.

Obama met with John Berger of Standard Renewable Energy, Stephanie A. Burns of Dow Corning, Amit Chatterjee of Hara, Alex Laskey of Positive Energy, Jim Robo of the FPL Group, David Rosenberg of Hycrete, Michael R. Splinter of Applied Materials and Chuck Swoboda of Cree Lighting. He used the opportunity to urge passage of the energy legislation that passed the House last week and is now working its way through the Senate. "It's now up to the Senate to continue the work that was begun in the House to forge this more prosperous future," he said.

Obama Holds Out Hope that Energy Will Help US Jobs Picture
Flanked by executives from energy-efficiency and renewable-energy companies, U.S. President Barack Obama held out hope that the country could work its way out of its worst unemployment picture in more than 25 years through energy investments.

"As our economy adapts to the challenges of a new century, new ways of producing and saving and distributing energy offer a unique opportunity to create millions of jobs for the American people," Obama said on Thursday at a press conference in the Rose Garden. The comments - on a day when new figures showed a 9.5% jobless rate in the U.S. - came after a private meeting between Obama, Energy Secretary Steven Chu, Environmental Protection Agency Administrator Lisa Jackson, and executives from companies including Dow Corning, FPL Group Inc. (FPL), Applied Materials Inc. (AMAT), and home energy-audit firm Positive Energy.

The ideas discussed at the meeting ran the gamut, according to participants. John Berger, the chief executive of Standard Renewable Energy, a Houston firm that performs home-energy audits and installs solar panels, told Obama that an inexpensive way to help the solar-panel industry would be to ease restrictions on some installations. "There's a rule for the satellite-dish companies that you couldn't restrict that as a homeowner association even though you may have put [restrictions] in place," Berger said in an interview after the meeting. "There's nothing in the law about that for solar and there should be."

The solar industry played a prominent role at the meeting. Applied Materials, a California semiconductor company, has been lobbying for funding for solar-energy programs, including changes to the way the Energy Department helps finance renewable-energy investments. FPL Group, an electric utility that currently has three solar-power projects under construction, has also been pushing for government support. The companies have gotten a lift in recent months, as the U.S. House of Representatives passed a landmark energy and climate-change bill, and a U.S. Senate panel approved an energy bill that could become part of a broader measure in the Senate. Still, Obama said that more needed to be done.

"These companies are vivid examples of the kind of future we can create, but it's now up to the Senate to continue the work that was begun in the House to forge this more prosperous future," Obama said. "We're going to need to set aside the posturing and the politics - and when we put aside the old ideological debates, then our choice is clear. It's a choice between slow decline and renewed prosperity. It's a choice between the past and the future." Obama was asked by a reporter when he would install solar panels and a wind turbine at the White House. Obama said that Energy Secretary Chu would consult with the energy executives, and Standard Renewable Energy's chief spotted a business opportunity. Raising his hand, he announced: "I'll do it."

American jobs data are worse than we think
by Mohamed El-Erian

What if the US unemployment rate rises above 10 per cent and stays there for an extended period? This is a question that is not being asked enough, even though it entails yet another historical anomaly that will further complicate policy formulation and open it up to greater political interference. The unemployment rate is traditionally characterised as a lagging indicator and, as such, is viewed as having limited forward-looking information. After all, unemployment is a reflection of decisions taken earlier in the cycle so the rate always lags behind the realities on the ground – or so says conventional wisdom.

This conventional wisdom is valid most, but not all of the time. There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviours and outlooks. Today’s broader interpretation is warranted by two factors: the speed and extent of the recent rise in the unemployment rate; and, the likelihood that it will persist at high levels for a prolonged period of time.

As a result, the unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system. In just 16 months, the US unemployment rate has doubled from 4.8 per cent to 9.5 per cent, a remarkable surge by virtually any modern-day metric. It is also likely that the 9.5 per cent rate understates the extent to which labour market conditions are deteriorating. Just witness the increasing number of companies asking employees to take unpaid leave. Meanwhile, after several years of decline, the labour participation rate has started to edge higher as people postpone their retirements and as challenging family finances force second earners to enter the job market.

Notwithstanding its recent surge, the unemployment rate is likely to rise even further to 10 per cent by the end of this year and potentially beyond that. Indeed, the rate may not peak until 2010 in the 10.5-11 per cent range; and it will likely stay there for a while given the lacklustre shift from inventory rebuilding to consumption, investment and exports. Beyond the public sector hiring spree fuelled by the fiscal stimulus package, the post-bubble US economy faces considerable headwinds to sustainable job creation. It takes time to restructure an economy that became over-dependent on finance and leverage.

Meanwhile, companies will use this period to shed less productive workers. This will disrupt consumption already reeling from a large negative wealth shock due to the precipitous decline in house prices. Consumption will be further undermined by uncertainties about wages. This possibility of a very high and persistent unemployment rate is not, as yet, part of the mainstream deliberations. Instead, the persistent domination of a "mean reversion" mindset leads to excessive optimism regarding how quickly the rate will max out, and how fast it converges back to the 5 per cent level for the Nairu (non-accelerating inflation rate of unemployment).

The US faces a material probability of both a higher Nairu (in the 7 per cent range) and, relative to recent history, a much slower convergence of the actual unemployment rate to this new level. This paradigm shift will complicate an already complex challenge facing policymakers. They will have to recalibrate fiscal and monetary stimulus to recognise the fact that "temporary and targeted" stimulus will be less potent than anticipated. But the inclination to increase the dose of stimulus will be tempered by the fact that, as the fiscal picture deteriorates rapidly, the economy is less able to rely on future growth to counter the risk of a debt trap.

Politics will add to the policy complications. The combination of stubbornly high unemployment and growing government debt will not play well. The rest of the world should also worry. Persistently high unemployment fuels protectionist tendencies. Think of this as yet another illustration of the fact that the US economy is on a bumpy journey to a new normal. The longer this reality is denied, the greater will be the cost to society of restoring economic stability.

The Raise and Fall of Wall Street Bankers
Congress wants to lower Wall Street bonuses, blaming them for encouraging the excessive risk-taking that helped cause the financial crisis. But the haphazard way that pay practices are being altered may yet yield the worst of all worlds, higher fixed costs and less accountability, without removing the threat of talent walking out the door. Banks like Citigroup and Bank of America that still have funding from the Troubled Asset Relief Program are dealing with restrictions on the bonuses they can pay top employees.

To keep the rank and file happy, Citigroup is raising base salaries for many of its 300,000 employees who are eligible for a bonus. Morgan Stanley also has increased base pay, from about $300,000 to $400,000 for managing directors. Even stronger performers, such as J.P. Morgan Chase, are considering raising base pay. Credit Suisse is considering all options. The result: higher fixed costs, even as many banks continue to struggle. When guaranteed salaries rise, so do a range of juicy benefits, as well as severance packages, which are based on salaries. With banks facing increased regulation and higher capital requirements, reducing flexibility on pay could be another blow to investors.

There also is a question of whether higher cash salaries really will mean lower bonuses. The danger is that, even if the likes of Goldman Sachs Group pay out less than half of net revenue in compensation, less-profitable firms might feel forced to pay out a higher portion to keep up. Goldman said it has no plans to adjust the way it pays employees; stars will continue to receive the bulk of pay in bonuses tied to performance.

A perverse outcome of the Wall Street crisis is that compensation as a proportion of revenue could actually rise. Pearl Meyer, of Steven Hall & Partners, estimates that Wall Street pay will end up topping 60% of revenue for the foreseeable future, up from about 50% in past years. It could hit 70% at some smaller financial firms, she said. To be sure, the "comp ratio" mightn't stay at elevated levels as revenue improves. Morgan Stanley said its payouts looked high in the first quarter because movements in the price of its debt reduced net revenue. Banks said bonuses will be trimmed to keep overall compensation about the same.

Citigroup said its changes were aimed at reducing the focus of employees on short-term results and keeping more of them at the bank for the long haul. But salaries are paid in cash, while bonuses are usually in cash and shares that vest over time. More cash upfront arguably gives them fewer reasons to stick around or worry about the long-term performance of their firms. At the same time, bonuses aren't going away, so some traders and bankers will continue to embrace risk to try to score the highest payouts.

A rise in base pay might help retain middle-performing staff, but it is unlikely to attract or retain the best traders and bankers. The crisis should lead to a more rational pay structure on Wall Street, with pay remaining flexible and bonuses paid largely in stock that can be clawed back if necessary. Instead, as salaries rise and guaranteed bonuses start to make a comeback, Wall Street firms risk adopting a new set of bad habits.

Big Pay Packages Return to Wall Street
Business is back on Wall Street. If the good times continue to roll, lofty pay packages may be set for a comeback as well. Based on analysts' earnings forecasts for 2009, Goldman Sachs Group Inc. is on track to pay out as much as $20 billion this year, or about $700,000 per employee. That would be nearly double the firm's $363,000 average last year, and slightly higher than the $661,000 for the average Goldman employee in fiscal 2007, according to analyst estimates reviewed by The Wall Street Journal.

Morgan Stanley, the only other huge U.S. securities firm left as an independent company, will likely pay out $11 billion to $14 billion in compensation and benefits this year, analysts predict. On a per-employee basis, payouts are expected to exceed last year's average of $262,000. Howard Chen, an analyst at Credit Suisse, projects that the company's average pay will come close to the $340,000 paid out by Morgan Stanley in fiscal 2007. Some of the most lucrative pay packages are being offered in businesses that are improving, such as junk-bond trading. Jobs and pay remain iffy in areas like asset-backed securities where markets remain frozen.

Russ Gerson, who runs an executive-recruiting firm that fills jobs on Wall Street, says it is too soon to tell if the strong results from securities firms in the first and second quarters will translate into huge paychecks at the end of the year. "All this euphoria about bonuses is based on the expectation that the business is returning to normal and that we will be in a robust environment again. If the fourth quarter is significantly down, I would expect bonuses not to recover too much from 2008 levels," he said.

Whether the higher payouts occur will depend on whether Wall Street earnings continue to recover from last year's bruising losses on troubled assets and bad trading bets. If the market's resilience since early March fades or a new crisis erupts, then securities firms would likely set aside far less to pay their employees than they did in this year's first two quarters. Firms can set aside money for compensation and then decide not to pay it later. Still, the comeback in compensation so far this year shows how hard it is for Wall Street to break its old habits. Repaying last year's capital infusions from the government freed Goldman, Morgan Stanley and other big financial firms from curbs on compensation. Meanwhile, non-U.S. banks that didn't get Troubled Asset Relief Program funds are becoming increasingly aggressive.

Deutsche Bank AG, for example, has discussed a two-year guarantee with prospective fixed-income traders and salespeople in conversations about potential job offers, according to people with knowledge of the discussions. Deutsche Bank declined comment. "I'm seeing deals like it's 2007 again," says Steven Eckhaus, an executive-employment lawyer at Katten Muchin Rosenman LLP in New York. He's worked on several deals recently that featured eight-figure guaranteed pay packages stretched over one to three years.

The recent increases in compensation reflect efforts by Wall Street executives to keep pay high enough to remain competitive but low enough to avoid the wrath of angry lawmakers. In at least one case, bank executives or their representatives have discussed pay with the Obama administration's pay czar Kenneth Feinberg ahead of time, seeking to head off any public reprimand, according to a person familiar with the meetings. A Treasury spokesman said Mr. Feinberg "has just begun his process for reviewing compensation at the seven firms receiving exceptional assistance; he has yet to approve any plans."

While Wall Street firms remain loath to cap pay levels, some are changing the mix of salary and bonus, partly in response to the financial crisis and added scrutiny from Washington. Some are boosting salaries and adding more stock, as well as so-called "clawback" provisions aimed at tying employee pay packages more closely to the long-term fortunes of their firms. As a rule, securities firms pay out about 50% of revenue in compensation. The practice of offering two-year guarantees in compensation to certain new hires isn't widespread so far, with just a handful of firms doling out such packages.

J.P. Morgan Chase & Co. executives, for example, feel the company's relative strength is enough of a selling point to prospective employees. Citigroup Inc. is steering clear of such guarantees partly because its pay practices already are under tough scrutiny from investors and the government. Goldman, which has suffered less than most of its rivals since the credit crisis began in 2007, remains committed to using bonuses, increasingly from stock, to reward its top performers. Still, the firm is trying to carefully manage compensation, perks and other expenses that could be criticized.

When the company repaid its $10 billion in TARP last month, Goldman President Gary Cohn left a companywide voicemail message reminding employees to keep their focus and not to change what they were doing. Other Goldman officials warned junior employees not to go out to bars near the office and pay with a corporate credit card, according to a person familiar with the matter. "We've only accrued one quarter for compensation and benefits" for 2009, a Goldman spokesman said, noting that the 18% increase from a year earlier was "primarily due to higher revenues." He added that "compensation practices at Goldman Sachs remain fundamentally tied to the firm's performance."

In the first quarter, Morgan Stanley set aside $2.08 billion for compensation. That's down from the previous year's first quarter, but represents an unusually high 68% of its revenue. Mr. Chen, the Credit Suisse analyst, expects the firm to set aside roughly 54% of 2009 revenue for compensation and benefits, showing "the need to competitively pay employees," he wrote.Morgan Stanley declined to comment on Mr. Chen's report.

Crisis Won't End Until Balance Sheets Get Real
Investors are feeling better about financial companies’ balance sheets than they were a few months ago. That’s not to say they have a lot of confidence in them. Compare, for example, the stock-market value of Regions Financial Corp. with the bank’s reported net worth. At $3.97, the Birmingham, Alabama-based company’s stock is up 69 percent since its February low, giving Regions a $4.5 billion market capitalization. That’s still only a third of the $13.5 billion book value it showed as of March 31. In the market’s view, the bank’s asset values remain grossly overstated.

The same story is playing out across the financial-services industry. Financial stocks in the Standard & Poor’s 500 Index rocketed 35 percent during the second quarter, fueling the index’s biggest quarterly advance since 1998. Yet for hundreds of U.S. banks and insurance companies, a vast credibility gap remains when it comes to their accounts. As of June 30, there were 336 U.S.-listed financial companies trading for less than 60 percent of their book value, including Citigroup Inc., SunTrust Banks Inc. and Marshall & Ilsley Corp. Together, they had a stock-market value of $233.1 billion, compared with $463.1 billion of book value, or common shareholder equity, according to data compiled by Bloomberg.

When I ran the same stock screen for a column about this same time last year, it turned up 168 companies with a combined $120.3 billion market value and a book value of $270.3 billion. The way the credit crunch was playing out then, market declines were begetting writedowns, leading to more market declines and then more writedowns, and so on. That downward cycle finally has been broken, only nobody knows what will come next.

Often when companies see their shares trading at large discounts to the net asset values on their books, their managers will feel pressure to take big writedowns and corresponding charges to earnings, especially for intangible assets such as goodwill leftover from past acquisition sprees. These are strange times, though. After peaking during the fourth quarter of 2008, writedowns and credit losses at U.S. financial companies fell more than half to $101.8 billion in the first quarter, according to Bloomberg data. That was when financial stocks generally were at or near their lows.

Bank managers may not be any more inclined to cleanse their books now than they were then. Prices and liquidity have improved for many of the mortgage-backed bonds that helped spur the global financial crisis. Loans generally don’t have to be marked down to market values anyway, under the accounting rules. What’s worrisome about the financial sector’s rally is that it has been government-induced. So far this year, the Federal Reserve has printed lots of money, hyped stress tests for large banks that were hardly stressful, and made clear it won’t let big institutions such as Citigroup die.

The Treasury Department promised subsidies for buyers of banks’ toxic debt securities, a program now having trouble getting started. Banks and insurers got Congress to browbeat the Financial Accounting Standards Board into making rule changes that will let them plump earnings and regulatory capital. There also was Fed Chairman Ben Bernanke’s line in March about "green shoots," which sparked a media epidemic of alleged sightings. For all this, we still have hundreds of financial companies trading as though the worst of their losses are still to come. Just imagine what their prognosis might be if the government hadn’t pulled out all the stops.

Meanwhile, housing prices keep falling. Bank regulators this week said delinquency rates on prime home mortgages more than doubled in the first quarter to 2.9 percent of such loans, up from 1.1 percent a year earlier. The peak of the interest- rate resets on adjustable-rate mortgages won’t hit until 2011, according to analysts at Credit Suisse Group AG. And while there’s a meltdown in commercial real estate, hardly any of the credit losses have shown up on lenders’ financial statements.

Many of the largest banks and insurance companies have taken advantage of the run-up in their stock prices to raise badly needed common equity, including Regions, which had a $1.6 billion stock sale in May. (Its books still show $5.6 billion of goodwill, about $1 billion more than Regions’ market cap.) Most distressed financial companies, however, have been shut out of the capital markets and face dim takeover prospects.

To name a few, Colonial BancGroup Inc., a Montgomery, Alabama-based lender with $26.4 billion of assets, is down to a $126 million market cap, or 10 percent of its book value. Flint, Michigan-based Citizens Republic Bancorp Inc., with $13 billion of assets, has a $91 million market value, or 7 percent of book. Austin, Texas-based Guaranty Financial Group Inc., with $15.4 billion of assets, this week said it may not survive and that it may revise its 2008 net loss to $2.2 billion from $444 million.

Truth is, there’s no way to know if the economy has turned the corner, or if last quarter’s market rally will prove sustainable. Yet when this many banks still have balance sheets that defy belief, it means the industry probably hasn’t re- established trust with the investing public. Trust, you may recall, is the financial system’s most precious asset. On that score, we still have a long way to go before we can say this banking crisis is over.

German Finance Minister Accuses Brits of Kowtowing to Bankers
Peer Steinbrück is back on the verbal warpath. This week's target is a returning guest -- Britain. The alleged offense at 10 Downing Street: torpedoing efforts at EU financial reform to keep London bankers happy. German Finance Minister Peer Steinbrück is known for speaking his mind and not pulling his punches. And things were no different on Wednesday when Steinbrück told an audience that Britain was blocking efforts to reform the world's financial markets -- just to keep London bankers happy.

In his speech to a Wednesday meeting organized by the Confederation of German Trade Unions (DGB), Steinbrück accused the British government of having its policy interests "practically aligned" with the desires of the financial community there, which was opposed to any changes that might make it less competitive. "At times," Steinbrück said, "I see a great deal of resistance to regulatory measures whenever they matter to the City of London and the British government." Steinbrück believed that the British were hindering reform because they wanted things to return to how they were before the crisis. "I think London in particular is very suspect," Steinbrück said. "They have in mind a certain sort of restoration, most likely a return to former conditions."

Although he scolded the British, Steinbrück had much praise for the Obama administration's efforts to push through financial market reforms. He attributed the US's enthusiasm to its high dependence on capital imports, which makes it keen to reestablish the integrity of its financial markets. Steinbrück went on to say that the British were swimming against the global tide of pro-reform sentiments. As an example, he cited the EU summit in Brussels a few weeks ago held to discuss the establishment of a European financial supervisory board. Steinbrück accused the British of intervening to block the passage of measures both Germany and France considered necessary.

Steinbrück stressed that, in his opinion, the reaction to the financial crisis isn't about "creating a "tabula rasa" but, rather, about having the state set up "guard railings" to prevent "a repetition of the crisis." This is not the first time Steinbrück has had harsh words for London. In December, Steinbrück ruffled diplomatic feathers with his harsh criticism of Britain's economic stimulus plans during an interview with Newsweek magazine, saying that "the same people who would never touch deficit spending are now tossing around billions."

Still, Steinbrück's comments about the British are not quite as harsh as what he has said about the Swiss. Last fall, he unleashed a diplomatic storm when he threatened to "take a whip" to Switzerland unless it relaxed its banking secrecy laws. And then there was the incident in May when Steinbrück said that Switzerland, Austria and Luxembourg could be on a par with Burkina Faso when it came to the OECD's gray lists of tax havens. Steinbrück's comments come just a few days before world leaders and diplomats meet for the G-8 summit in Italy, where discussions on financial market reforms will continue.

At Wednesday's meeting, Steinbrück also had a few things to say about plans by Chancellor Angela Merkel's Christian Democrats (CDU) to centralize German banking regulatory functions with the country's central bank, the Bundesbank. Germany's central bank currently shares oversight responsibilities with the Federal Financial Supervisory Authority (BaFin). "In terms of quality," Steinbrück said, "Germany's banking oversight is just as good as all the others in Europe and definitely better than America's."

Ruble Bonds Beat Dollar Sales as Currency Stabilizes
Russian companies shut out of the international debt markets are selling more ruble bonds than dollar notes for the first time since 2006 as the domestic currency recovers from its 35 percent devaluation. OAO Russian Railways, the railroad monopoly, and X5 Retail Group NV, the largest food-store operator, led 261.6 billion rubles ($8.4 billion) of bond sales this year, according to data compiled by Bloomberg. That’s more than double the combined value of the two dollar issues, by state-owned gas exporter OAO Gazprom and farming lender Russian Agricultural Bank.

"Domestic debt looks attractive for investors assuming the ruble remains stable," said Luis Costa, an emerging markets debt analyst at Commerzbank AG in London. "In the dollar bond market we’re now back to a blue-chip game, while ruble issuance is accessible to a much wider group of companies." With international banks and insurers struggling under $1.5 trillion of losses, dollar bonds are all but off limits for companies in Russia, whose economy shrank an annual 9.8 percent in the first quarter, the most in 15 years. The ruble rallied 17 percent against the dollar since the government devalued the currency between August last year and January, making domestic bonds a safer purchase for Russian banks.

The ruble strengthened to 30.47 per dollar on June 3, the highest this year, from as low as 36.56 on Feb. 18. Russia weakened its currency between August and January to protect exporters after oil, their No. 1 product, tumbled. Crude fell to as low as $32.40 a barrel on Dec. 19, before recovering to as high as $69.74 today. The rebound in the ruble has "added some degree of allure" to the domestic bond market, said Costa. Investors have pared expectations of a weaker ruble since February, according to an indicator that forecasts the currency’s value versus the dollar. So-called non-deliverable forwards on the ruble signal the Russian currency will be worth 31.87 per dollar in three months, from as weak as 39.08 Feb 2.

Demand for ruble bonds is also helped because Russian lenders are able to pledge the notes as collateral for loans from the central bank, helping create demand for the securities even as the nation remains more badly affected by the global credit crisis than most of its European neighbors. Without the central bank’s refinancing program, even "selling bonds locally would’ve been difficult," said Mikhail Galkin, a fixed-income analyst at MDM Bank in Moscow.

Prices of ruble-denominated bonds have risen as the currency stabilized. The notes climbed 7.2 percent this year, after tumbling 19 percent in 2008, according to the Micex Corporate Bond Index. The index advanced to 87.20 on June 25, the highest level since Oct. 20, a month after the collapse of Lehman Brothers Holdings Inc. in the U.S. roiled debt markets worldwide. Russian companies have about 1.6 trillion rubles of domestic-currency bonds outstanding, according to data compiled by Bloomberg. Even as investors are willing to buy ruble bonds, rising demand for funds is driving up interest costs, said Maxim Tishin, a money manager at UFG Asset Management in Moscow, which oversees more than $300 million of debt.

"Ample supply" is causing even state-owned borrowers to pay more, according to Tishin, who said he’s "expecting even more supply from blue chip companies." Russian Railways, the Moscow-based operator of the world’s longest rail network, paid 14.25 percent for its 15 billion rubles of bonds issued on June 24, its sixth deal of that size since March, according to Bloomberg data. The seven-year notes have a so-called put option that allows investors to sell them back to the company at face value after 3 1/2 years.

The coupon on Russian Railways’ bonds compares with the 8.5 percent interest the company paid on 20 billion rubles of three- year notes a year ago. Raising foreign-currency bonds is "of secondary importance" to Russian Railways, even though the cost of selling bonds in rubles is "inflated," said Alexei Tokar, head of the treasury department at the state-owned company. X5 Retail, the Moscow-based retail chain operator that plans to open 100 stores this year, paid a coupon of 18.46 percent on 8 billion rubles of seven-year notes with a two-year put option it sold on June 11.

The interest is more than double the 7.6 percent Russia’s largest food retailer paid investors two years ago for its 9 billion rubles of bonds due in 2014 with a 2010 put option. The company’s borrowing costs are "justified" by the return it expects to get from investing the proceeds, said Anna Kareva, X5’s head of investor relations in Moscow. The increase in ruble bond sales isn’t helping relieve pressure on Russian companies with foreign-currency debt coming due because of the domestic market’s relatively small size, and because the borrowers that are able to sell ruble debt "are not the ones that are desperate to refinance," said Galkin at MDM.

OAO Mobile TeleSystems, Russia’s largest mobile-phone company, is holding onto the 15 billion rubles it raised from a sale of bonds in May, the biggest domestic-currency issue by a private company this year, according to Bloomberg data. The Moscow-based company will use the funds as a "liquidity cushion" to pay off debt coming due in 2010, said Alexei Kaurov, the director of corporate finance. MTS’s five-year ruble notes with a two-year put option have a coupon of 16.75 percent, almost twice the 8.7 percent the company paid a year ago on 10 billion rubles of bonds due in 2018 and redeemable in 2010, Bloomberg data show.

"The ruble is the right currency for us" to sell bonds "because our revenue is in rubles," Kaurov said. Russian companies have $147 billion of foreign debt maturing this year, central bank data show. Bank loans aren’t available as an alternative for refinancing dollar bonds to many borrowers, with foreign banks tightening lending, put off as Russia’s economy heads for its first recession in a decade. Companies borrowed the equivalent of $6.1 billion from foreign lenders this year, compared with more than $36 billion in the same period of 2008, Bloomberg data show.

The two issuers of dollar-denominated bonds this year, Russian Agricultural Bank and Gazprom, both based in Moscow, sold $3.3 billion of debt in the U.S. currency between them. That’s down from $12.7 billion of dollar sales in the same period of 2008 and is the least for a first half since 2002. Gazprom is considering raising money in both foreign currency and rubles, Moscow-based spokesman Sergei Kupriyanov said. The company also sold 500 million Swiss francs ($461 million) of notes in April, the only other foreign-currency issue by a Russian company this year, Bloomberg data show.

Russian Agricultural Bank’s dollar fundraising costs are "acceptable" and the company may also sell more debt in rubles, said a spokesman in Moscow, who wouldn’t be identified citing company policy. "A Russian company has to be a tier-one name to issue dollar bonds today," said Max Wolman, a money manager at Aberdeen Asset Management Plc in London, where he helps oversee $4 billion of emerging-market debt.

Russian banks need up to $60 billion fresh capital, warns Fitch
Russian banks may need to raise $60bn (£36bn) in fresh capital if the recession drags on and energy prices wilt again, according to a report by Fitch Ratings. The agency said a tenth of all bank loans have already gone bad and the final tally would rise to 40pc before the crisis is over under its "pessimistic scenario". James Watson, Fitch’s Russia analyst, said the loss ratios were significantly worse that anything seen so far in Western countries, though not as bad as in Kazakhstan, Ukraine and Latvia. Even under Fitch’s base case, bad loans will reach 25pc and require $22bn in fresh capital.

Vladimir Putin, Russia’s prime minister, this week ordered banks to step up lending as deepening social unrest increasingly rattles the Kremlin. "I am asking the heads of financial institutions to control this situation and not to plan any summer holidays until this has been dealt with as it should," he said. Russia’s economy is expected to contract by 8.5pc this year despite the commodity rebound. Industrial output is still 15pc below last year’s levels. The budget deficit is ballooning towards 6pc of GDP, although the exact oil price is crucial. Each $1 rise in crude adds $10bn to state revenues.

There is little danger of a systemic banking crisis or a repeat of the 1998 default since the Kremlin still has deep pockets. It is drawing up plans to recapitalise banks by swapping state debt for preference shares. Fitch said the nation’s four big banks have already raised $24bn in capital. Mr Watson said it was hard to gauge the risk since data is thin, and bank disclosure "does not always capture all asset quality problems". Russia’s saving grace is that most debt is in roubles. "This isn’t like other parts of Eastern Europe where people borrowed up to the hilt in euros and Swiss francs," he said. The banks must roll over $57bn foreign debt year, a modest figure set against Russia’s $400bn foreign reserves.

Keep an eye on Russia's imploding banks
Russia is sinking into a swamp of bad loans. The scale of credit rot in the Russian banking system exposed by Fitch Ratings this week is truly staggering. The report is yet another cold douche to those betting that the BRICs (Brazil, Russia, India, and China) can pull us out of our mess. Lenders will need to raise $60bn (£37bn) in fresh capital if the "pessimistic scenario" unfolds. Bad loans could reach 40pc, although analysts are flying blind since bank disclosure "does not always capture all asset quality problems." Uhhm.

The report follows an equally disturbing (if very different) note on the banks in China, where a "margin squeeze" has set off a explosion of unstable loan growth. Some might see as this as `good’, ie stimulatory, but since the liquidity is sloshing around a crushed economy that still lives off deflated US and EU export markets, it is largely leaking into asset speculation. This is much like the US from mid-1928 to late-1929, a strange 15 months, often forgotten.

By then the world economy had tipped over. Trade was contracting. Commodity prices were deflating. Yet leveraged funds flooded Wall Street, decoupled from the underlying reality. We all know what happened. The markets buckled for no obvious reason in September 1929, then cratered in October.

As for India, excuse me but with a combined budget deficit of 13pc of GDP (including fuel subsidies, which are kept off books) and "real" interest rates of minus 5.5pc, Delhi already has its foot to the floor. India is heading towards a debt compound trap as fast as Britain — and there is a shocker. No doubt India and China will thrive in the end, but it is wishful thinking to expect the BRICS to pull the whole global economy out of the debt-leverage dump.

But I digress. Fitch is coy about the exact meaning of a "pessimistic scenario" for Russia, but it is closely tied up with price of oil and metals. Commodities make up 80pc of Russia’s exports. Crude has of course jumped back up from the February low of $30s to around $70 a barrel, but is still half its mad peak of $147 last year. Whether it will stay there is a disputed matter. The level of "cheating" by OPEC members is creeping up again.

The International Energy Agency has slashed its outlook for the next five years, saying demand in 2013 will be 3.3m barrels a day less than previously expected: a) global growth is not going to roar back, given the massive headwinds, b) a lot more has been done to raise fuel efficiency than often realized. Vladimir Putin has not yet fully understood the mess that he is in (he is not alone in that). This week he ordered banks to step up lending, ie to dig themselves deeper into a hole.

"I am asking the heads of financial institutions to control this situation and not to plan any summer holidays until the moment that this has been dealt with as it should," he said. Even by the Kremlin’s own count, Russia’s economy will contract by 8.5pc this year. Capital Economics says more like 10pc, with unemployment rising to 13pc by the end of next year. This is worse that the economic crunch following Russia’s default in 1998.

How far we are from the giddy heights of last summer, when Russia could imagine for a moment that it was a superpower once again, and Georgia felt the lash. It is a fair bet that Russia will weather the crisis. Some $57bn in foreign debt must be rolled over this year but that is manageable. The Kremlin still has deep pockets. ($400bn in reserves, the world’s third largest). It can and certainly will step in to prevent a systemic crisis. The biggest four banks have already received $24bn in fresh capital. There will be no state default.

But if you want to plunge into Russian equities on the ground that they are still cheap, follow the advice of Kingsmill Bond, chief strategist at the Moscow investment bank Troika Dialog. Avoid cash guzzlers such as Transneft and Gazprom with an attitude problem, ie contempt for investors. The government has a strategic stake in 68pc of listed stocks. Stick to those with both free cash flow and eagerness to offer a decent dividend such as Sberbank, Peter Hambro Mining, Raspadskaya Coal, Baltika, TNK-BP, MTS, Uralkali, and NOVATEK.

Do your research. "Investors are starting to call into question the fanciful nature of calculations that underpin certain company valuations," he said Note a final warning from Mr Bond. The Moscow bourse tipped over a month or so before the oil price peaked in July last year. Equities were the early warning signal. It has tipped over again, falling over 20pc since the start of June. We have been warned.

Fissures Appear at the New York Fed
The board of the Federal Reserve Bank of New York is packed with powerful executives. But the selection process leading up to January's promotion of William Dudley to president underscored the lack of clout among the Fed's regional directors as the central bank navigated the crisis. Mr. Dudley, a 56-year-old former Goldman Sachs Group Inc. economist who ran the New York Fed's markets division, got the top job after a two-month search, succeeding new Treasury Secretary Timothy Geithner.

Behind the scenes, the hiring process triggered concerns with some New York Fed directors, including General Electric Co. Chief Executive Jeff Immelt and PepsiCo Inc. CEO Indra Nooyi, according to people familiar with the situation. One reason: Mr. Geithner took an active role in recommending his successor, lobbying hard for Mr. Dudley and against other candidates, attendees said. It isn't unusual for outgoing Fed presidents to provide such input. But Mr. Dudley's case is different, some observers said, because Mr. Geithner was a political nominee at the time. Injecting a White House appointee's views into the process, they suggested, may have meddled.

"The right thing for the Treasury secretary to do is to allow the central bank to be independent and not have a say in who gets chosen," said Allan Meltzer, a Fed historian. Tom Baxter, the New York Fed's general counsel, said it made sense for Mr. Geithner to be involved because his successor "would be working closely with the new Treasury secretary." Given that, "it was seen as appropriate and consistent with good-governance principles" for the board to invite Mr. Geithner's input.

A Treasury spokesman said it is "only natural that the outgoing head of an institution would be asked to share his views on the set of candidates who may serve as his replacement." Concerns about the selection process come at a sensitive time for the Fed, as its role in the financial crisis has been questioned by some lawmakers. The recent resignation of New York Fed board chairman Stephen Friedman after a conflict over his holdings in Goldman Sachs, a bank regulated by the Fed, sparked criticism in Washington. Some are calling for more oversight of both the reserve banks and the central bank.

Within the system, some New York Fed directors also have bristled at times at the board's rules -- which place parameters on some board members' stock holdings, affiliations with banks, and partisan activities -- and even its overarching mission, which is to act largely as an advisory board rather than a more activist, corporate board. J.P. Morgan Chase & Co. CEO James Dimon, for instance, aired frustrations to associates that New York Fed rules curbing directors' political activities stymied his backing of Barack Obama for president.

Yet some directors have told associates their role at the New York Fed is important and their input, especially during this time of stress, is meaningful. A reserve-bank board, says former Federal Reserve Board lawyer Oliver Ireland, is "a valuable information source on the regional economy." The nine-member panel in New York currently has three vacancies, but officials there said the successors could be named by the end of the summer.

The Federal Reserve has played a major role, influenced strongly by the New York Fed, in launching more than $2 trillion in new lending and asset-purchase programs to help revive the economy. President Obama, who recently proposed to broaden the Fed's oversight of the financial system, also asked the central bank to offer recommendations "to better align its structure and governance with its authorities and responsibilities."

The boards of the nation's 12 reserve banks were integral to the original compromise that created the Fed in 1913, which was meant to address fears that too much power would be consolidated in Washington through the Federal Reserve Board, leaving regional business voices out of the mix. Their original task was to set local discount rates and be more engaged with regional business. Now the discount rate is effectively nationalized, and directors' role in crises is hands-off.

The lack of clout upsets some directors. Ms. Nooyi was critical during an audit-committee meeting late last year where she and other directors were briefed, after the fact, on how the New York Fed handled the bailout of American International Group Inc. If directors couldn't have a bigger role, attendees said Ms. Nooyi asked colleagues at the meeting, "What are we doing here?" In February, she stepped down from the Fed board, citing scheduling conflicts. Mr. Baxter declined to comment on specific directors.

Selecting a new president is one of the board's most important duties. A reserve bank's president has a five-year term and, in the case of New York, a permanent seat on the Federal Open Market Committee, which sets the federal-funds rate, or the rate at which financial institutions borrow from one another. The New York Fed president's geographic perch also gives him close oversight of some of the nation's largest banks. The search to replace Mr. Geithner began immediately after he was tapped in late November to be Treasury secretary. Mr. Friedman led it.

By early January, the list was narrowed to six, including Kevin Warsh, a member of the Federal Reserve Board in Washington; Rodgin Cohen, who specialized in banking law at Sullivan & Cromwell LLC; and Mr. Dudley, who had been head of the New York Fed's markets division since 2007. Momentum for Messrs. Warsh and Cohen was strong, said people who were involved in the discussions, with Mr. Friedman speaking favorably about Mr. Warsh. Directors, including Mr. Dimon and Richard Carrión, CEO of Popular Inc., a banking company in Puerto Rico, advocated for Mr. Cohen, the people said.

On Jan. 10, the board convened early for a full day of interviews. The final candidates met with the board for about 45 minutes, attendees said, after which directors discussed their performances. That afternoon, Mr. Geithner, shared his own views, attendees said. Along with Federal Reserve Chairman Ben Bernanke and Vice Chairman Donald Kohn, these people said, Mr. Geithner had been briefed privately on the list of candidates and qualifications throughout the process.

At the meeting, Mr. Geithner argued that Mr. Warsh was too large a part of the Washington establishment, an attendee said, a link that could cause tension with the New York Fed. He said Mr. Cohen, who has represented investment banks and banks in private legal matters, could be considered too close to the Wall Street establishment, the attendee said. Mr. Geithner's preference was clear, attendees said: Mr. Dudley, with his intimate markets knowledge and home-court advantage, was the best choice. "Good decisions" and "execution" were among the economist's strong points, Mr. Geithner said, according to an attendee.

After Mr. Geithner left the room, GE's Mr. Immelt noted that an outgoing president's point of view shouldn't carry too much weight, attendees said. But during the discussion that followed, opinions seemed to be shifting toward Mr. Dudley, for some of the reasons Mr. Geithner had cited. Ms. Nooyi, who argued for Credit Suisse Group investment-banking chief Paul Calello, appeared angry, an attendee said. She criticized the process, saying: "If a Wall Street guy presented such issues, why interview this person?" according to attendees. Five days later, the board reconvened. The directors' recommendation, Mr. Dudley, was conveyed to the Federal Reserve Board in Washington, which has final say over such matters. He got the nod.

For Watchdogs, Tracking Specifics Of GM Bailout Nearly Impossible
In bankruptcy hearings that went late into the night on Tuesday and resumed again on Wednesday, executives from General Motors laid out the pricey process through which the company will be restructured. Company officials testified that it would cost approximately $1.25 billion to wind down the old GM, which is being retired in hopes of building a leaner, more modern company. Then an infusion of an additional $30 billion would be required to jump start the new GM. Any deviation from the plan, such as a refusal on behalf of the bankruptcy judge to allow the company to sell off assets, could result in liquidation.

The numbers and testimony provided remarkable window into how the company, once considered the pride of the U.S. economy, has collapsed. They also were a reminder that, as GM goes through a massive process of consolidation and rebirth, it is the taxpayer who will be footing the bill. Already the U.S. government has given the car company more than $19 billion for restructuring. The final tab will surpass $50 billion. With lofty sums like these being granted for an expedited bankruptcy process, there is a heightened demand to know just where the money is going. But tracking the checks the government is writing is a difficult process. Even seasoned automotive industry and financial reporters say they're not entirely sure where to look.

"If you figure it out, I'd like to know myself," said Bill Visnic, a veteran automotive journalist. "When you give a company money there starts to be certain questions asked about how it is going to be used and what is it going to pay for. And it gets pretty murky when you start looking at how a company spends money on its operations. For me, I guess, I think it would be nice to know broadly: Are you spending the money to pay for improvements on your fixed assets, which are always an ongoing investment? Or is it going to go to a softer side of the business -- the advertising and the marketing? I would guess that if you start to touch those buttons too hard with the general public that is the stuff that would raise some scrutiny."

At this point it is nearly impossible to see detailed breakdowns of how GM is spending taxpayer money. The bankruptcy process will determine what portion of debts are repaid and assets sold. But the government is also paying to keep the company operational during these proceedings. Details regarding these expenditures are, as GM itself acknowledges, largely nonexistent. "The easiest way to describe this is that the bridge loans were intended for general U.S. operating and restructuring expenses while GM and the [Treasury Department] worked on a long-term restructuring plan," said Tom Wilkinson, a spokesman for the company.

"You can't say that Treasury loans went to X, while revenue from ongoing operations went to Y. The goal from day one was to stabilize and rapidly restructure GM so that it could return to health and start paying back the taxpayers. And so far, we are making good progress on that path." Would more transparency and a different funding structure necessarily be a good thing? Wilkinson noted that if the GM bailout was funded by earmarks, the process of restructuring the company would "slow down... and cost more money in the end." Meanwhile, as Visnic and others note, opening up GM's books could be a double-edged sword, presenting problems both politically and economically.

Taxpayers, the argument goes, should be told exactly where their money is going. But as GM attempts a complicated and massive restructuring, disclosing proprietary business information, such as how much money the company is investing in a particular type of battery technology, could put it at a competitive disadvantage. In addition, while the U.S. government will become the majority shareholder of the restructured company, with 60 percent of the stock, the administration is acutely sensitive to charges that it is meddling in private industry.

"The people managing these companies are so afraid of being called socialist that they can't do anything at all. But then it ends up that they are acting like bad capitalists," said Susan Helper a professor of economics at Case Western Reserve University and an expert on the automotive industry. "I agree that we want to avoid micro-managing," Helper added. "On the other hand I also feel that we should use our investments to promote our interests and that the taxpayer has a slightly different interest than other investors. We should be spending money to keep people employed and building green cars.

At the very least, the government should be considering a long-time horizon growth -- a patient-capital-type private investor. More controversial would be if the money was being spent on externalities... Are they spending it on retooling a plant in China, or revamping an office? "I think the view that the administration's take is that these are managers and they know how to spend the bailout money," Helper concluded. "It is crazy because here are these managers who are so bad at managing that they are calling on the government for support. But somehow it is our role as taxpayers to only hand them the money and then hands off from there."

There are some ways to chart some of the money going to GM, but observers and watchdogs say that the data is hard to access and vague. For example, the president's Automotive Industry Financing Program is part of the Troubled Asset Relief Program and so, amidst the detailed transaction reports listed on the Treasury Department's website, one can get a general sense of how much capital has been transferred to the company. But the explanations of what that money has purchased is not clear. On April 22, 2009, General Motors Corporation was granted $2 billion from Treasury for the purposes of "Debt Obligation" On June 3, the $30 billion payment was made, again for "Debt Obligation."

As part of the latter transaction, the U.S. government will receive roughly $8.8 billion in debt and preferred stock in the new GM. The company, in turn, will establish an independent trust, valued at $9 billion in funds and preferred stock, to provide health care benefits to retirees and TO continue to honor consumer warranties. The company has set aside a pool of funds ($361 million) to provide a backstop for payments on warranties for cars sold during the bankruptcy transition.

In addition, the Treasury Department has made many documents public related to General Motor's pledges and plans to streamline its operations. This includes a 264-page credit agreement between the company and the U.S. Treasury dated from April and a 117-page restructuring plan that GM presented to Treasury in February. Both of these files provide a detailed framework for where taxpayer money is going and for what purposes. In terms of tracking individual expenditures, however, those details are lacking.

Finally, the president has assigned an independent team of economists, energy experts and business managers, to oversee the restructuring of General Motors. And as a Treasury official noted, because "all the money that has been committed to GM comes out of TARP funding" the company is now "subject to all of the same corporate governance and compensation guidelines as any TARP recipient." But, in the end, a large portion of the plan for rebuilding the company is being conducted away from the public's view.

It may be, as Wilkinson notes, part of the normal bankruptcy process. "All loans and the [debtor-in-possession] financing are for use in general operating and restructuring activities here in the U.S.," he said. "That's as precise as this gets." And it could simply be because the U.S. government, as the Treasury official argued, "isn't interested in managing the day to day operations of any TARP recipients." "As the majority shareholder on behalf of taxpayers," the official added, "the U.S. government will be involved in discussions in the same way a private investor would be."

But with taxpayers in uncharted waters in terms of the size of the monetary investment in a private company, some observers feel more transparency (regardless of the administrative costs associated with it) are deserved. "This is an important public policy decision with unprecedented money involved," said Douglas Elliott, a fellow at the Brookings Institute who has followed the automotive bailout. "And it would be nice if it were clear how much money were used and for exactly what."

Green Shoots or Green Observers?
Economists have long had to endure being called "Dismal Scientists", but really that’s not hard enough on them. With their proclivity to invent trite phrases to describe complex issues, they deserve to be known as Dismal Poets as well. The latest cliché off the economic jargon production line is "Green Shoots of Recovery".

With governments having laid liberal amounts of fertiliser – in the forms of handouts, budget deficits, slashed interest rates and "quantitative easing" (another new piece of jargon for giving good money to bad lenders in return for bad assets) – they now report signs of economic recovery sprouting like alfalfa everywhere. At least this analogy has a better foundation than previous favourites like "stepping on the accelerator" (or the brake), which implied the economy was something as straightforward as a car. This one has hints of biology, which is a bit closer to the organic, evolutionary thing an economy actually is.

But economists’ knowledge of the economic garden reminds me more of Chance the Gardener from Being There – a simpleton who those in authority thought was profoundly intelligent because he answered questions about complex issues with simple analogies. The complex issue being buried by this latest analogy is "what caused the crisis in the first place?" The answer, as I’ve been arguing for years now, is that a debt-financed speculative bubble generated illusory wealth as it grew, but its collapse has now left us with a mountain of private sector debt.

Now that the Ponzi folly of leveraged speculation on asset prices is over, debt has stopped growing and the contribution that growing debt made to demand has disappeared. That alone is enough to cause a crisis: in the USA in 2006-07, private debt grew by $4 trillion, boosting aggregate demand in that $14 trillion economy by over 20 per cent. Even stabilising debt at its current level results in demand falling by 23 per cent in America. And now the debt bubble is acting in reverse – reducing demand as firms and families reduce debt, and necessarily spend less in the process.

The result is a plunge in demand that drives unemployment up and production down. Government attempts to stop this by throwing large amounts of public money at it can attenuate the process, but they are too small to counteract it because the debt levels are so huge. So while temporary salves may flow from government stimuli, the recoveries such largesse have engineered in the past – during the recessions of the 80s and 90s – worked only because they restarted private debt growth.

With US private debt at 300 per cent of GDP, there is no prospect of that lending taking off again. So the stimuli will slow the pain, but not stop it. The "Green Shoots" will turn brown, whither and die. And to see them amidst all the global data itself requires distorted vision (wearing grass-coloured glasses perhaps?). As economic historians Barry Eichengreen and Kevin H. O’Rourke have shown, on a whole host of indicators to date, this crisis is progressing in step with The Great Depression. How green will neoclassical economists appear to be in a year’s time? Watch this space.

Doug Casey on the Greater Depression
Q: Doug, you’ve been, as one subscriber recently dubbed you, "the town crier of America" for some time now, warning about what you call the Greater Depression. Do you really see that as being what’s ahead for America? You have seen the country seemingly headed for the precipice before, but it somehow missed going over the edge… what makes you think that it’s going to happen this time?

Doug: Clearly it’s a judgment call. There are things that could put off what I see as the inevitable, for another cycle. It seemed in the ‘70-‘71 recession that things could have gone over the edge. Even more so in the ‘74 recession. Things were even more serious in the ‘80-‘82 recession. And actually, in the early ‘90s, it once again looked like we were going to bite the dust.

But every time, the government came to the rescue. As unemployment went up, businesses started to fail, and the stock market went down, they "solved" these problems by lowering interest rates and printing up money. And those things are not the solutions to the problem but are ultimately the cause of the problem.

When you have a house of cards, you should let it collapse – and build a proper house. Using the financial equivalent of chewing gum and bailing wire to build the house of cards even higher can’t prevent it from eventually falling after it reaches some ridiculous height. Fifty stories? A hundred stories? That’s exactly what they’ve been doing, and it’s going to be a big mess to clean up.

As to whether we’re actually going into the Greater Depression now, can I be certain about that? Well, perhaps not. Perhaps friendly aliens will land on the White House lawn and gift us with a magical technology that will solve all these problems. It’s a judgment call, and I don’t see any way out of it this time.

As bad as things were in the past, we’ve never had six or seven trillion dollars outside of the U.S. We’ve never had such an acute and chronic balance of trade deficit as we have today – which, incidentally, is a sign that the country is consuming more than it’s producing. We’ve never gone into a really nasty downturn with interest rates already at historic lows.

I think the odds of this being the start of the Greater Depression are extremely high.

I don’t see any green shoots.

Q: Don’t see ‘em, or don’t believe ‘em?

Doug: There’s always a certain cyclicality to everything. In the episode from 1929 to 1933, it didn’t go straight down. In 1930 and 1931, people thought they saw signs of recovery along the way. I think it’s going to be very much the same way this time.

One thing to remember is that while the depression that started in 1929 may have come to a bottom in 1933, it took a long time to recover. There was a cyclical recovery in 1937, and why was that? Roosevelt had the good luck to have been elected dead flat at the bottom. So it wasn’t his policies that cured the last depression, it was luck and good timing, combined with the fact that they were creating a lot of money after Roosevelt took the dollar off the gold standard. That resulted in a false recovery, from 1933 to 1937, and it went downhill again.

People say that World War II cured the depression, but in fact, it made it worse. As bad as things were in the ‘30s, they were worse during the war in the ‘40s. You couldn’t get shoes. You couldn’t get gasoline. You couldn’t get tires. You couldn’t get just about anything that was being used for the war. The war prolonged and deepened the depression. The thing that ended the depression was not the war but the fact that since people could not consume, they were forced to save. That delayed consumption resulted in a huge amount of savings, and that’s what caused the recovery in the late 1940s.

The point I’m making is this: You’ve heard the old saying that history doesn’t repeat, but it rhymes? I’m afraid that for many reasons, the government is doing just about everything possible to push the economy over the edge. First of all, the government is much more powerful than in the 1930s. People are much more used to thinking of the government as being the solution to the problem, instead of being the cause. They are going to make exactly the same mistakes – but bigger this time.

They are going to wind up destroying the currency.

It’s probable that American will end up in a war, for a number of reasons.

What we’re looking at is something that’s going to be long, dismal, and really unpleasant – much worse than what happened in the ‘30s and ‘40s.

Q: Okay, so this is what you see coming, and it’s a big part of why you advocate setting up a crib outside of the U.S. We get a lot of questions from readers about that, which you’ve answered with your comments about Argentina and Thailand, etc. But we also hear from those who don’t want to leave or feel they can’t for any number of reasons. Is there a way for those who stay to insulate themselves from the coming Greater Depression? There are fixed-rate, long-term mortgages, as we spoke of last week – what else can people do?

Doug: For those who stay in the U.S., the answer to the economy’s problem is going to be the same as the answer to every individual’s problem: you have to produce more than you consume and save the difference. Regardless of what happens to the economy in general, if you do that as an individual, you will survive and prosper.

But remember, it’s not going to be easy.

Listen, all the real wealth in the world is still going to exist. It’s just going to be reallocated from old owners to new owners. And you can become one of the new owners of the wealth that people have created over the millennia by producing more than you consume. That’s the key. It’s also just the opposite of what most Americans have been doing for the last couple of generations.

I’ve got to say, however, that there are a lot of reasons not to want to stay in the U.S. Government controls of all sorts are going to become more stringent. There’s going to be a lot more state surveillance, a lot more police activity. The crime level is going to go up as things get bad – the government is going to respond to that. Despite the fact that everyone’s got a flat-screen TV and a McMansion, I think it could get quite unpleasant in the U.S.

Q: If things really get that chaotic, do you think the U.S. could slip into open revolution? If things turn as ugly as you say, the government will go for people’s guns, and there are a lot of those in the U.S. who have sworn to use them rather than lose them.

Doug: Yes, I’ve met some of those people. I think it could get that unpleasant, I really do.

One of my favorite songs is Al Stewart’s "On the Border," and one of the lines from that song I like a lot is: "On the wall, the colors on the map are running." This has happened throughout history. These arbitrary lines on maps are not written in stone. They can change very easily for all kinds of reasons.

People say that the U.S. Civil War – which is a misnomer; it should be called the War Between the States – settled the issue of entities leaving the U.S.

I don’t think so. I think it could happen in any of a number of ways, formally or informally over the next generation or two. If the entity controlled by those in Washington looks at all the same in 100 years, or even 50 years, I’ll be very surprised.

Things change.

Why people think that borders and governments are set in stone is actually beyond my comprehension. People forget that there are areas of France, Spain, and Britain, to name just a few among old and stable European countries, where even today, people are actively talking about leaving. And they’re at least as stable as the U.S. is – and notice that I call it the United States, not America. As far as I’m concerned, America has disappeared. America was an idea, not a place, and it’s been replaced with the United (by force) States.

Freddie Mac gets another $6.1 billion from government
Battered mortgage giant Freddie Mac received $6.1 billion in new funds from the Treasury Department to help offset its mounting liabilities, according to a regulatory filing submitted Wednesday. The company could also be close to naming a new, permanent CEO, according to a report in The Wall Street Journal. The Federal Housing Finance Agency, which has been operating Freddie Mac since last fall, requested the funds for Freddie Mac after the mortgage firm's liabilities exceeded its assets by more than $6 billion, according to the filing with the Securities and Exchange Commission.

After drawing the funds, Freddie Mac has now received $51.7 billion from the Treasury Department and still has access to an additional $149.3 billion to help it finance operations. In early May, Freddie Mac said it would seek the additional funds to help offset its worsening books as it continues to hemorrhage cash amid the ongoing housing market downturn. It was the third time since Freddie Mac was taken over in September that it has requested funds.

The McLean, Va.-based company posted a loss of $9.9 billion, or $3.14 per share, for the quarter ending March 31. The results were driven by $8.8 billion in credit losses due to soaring delinquency rates and falling home prices, and $7.1 billion in write-downs of the value of its mortgage-backed securities. Continued struggles at Freddie Mac come while the company's management is in flux. Freddie Mac's board of directors is eyeing Charles Haldeman Jr. as the primary candidate to become its new CEO, according to the Journal report.

John Koskinen has been serving as interim CEO since March, when he took over as head of the company after the resignation of David Moffett, the former government-appointed CEO. Haldeman's appointment would have to be approved by the Federal Housing Finance Agency, according to the Journal. A spokeswoman from Freddie Mac declined to comment on Haldeman potentially being named CEO, noting the company is still in the recruitment process and would not comment on any potential candidates. Calls to the Federal Housing Finance Agency were not immediately returned.

On Tuesday, mutual fund manager Putnam Investments said Haldeman stepped down as chairman of Putnam Investment Management LLC, president of Putnam Funds and trustee of the funds. Freddie Mac has been among the hardest hit financial firms, along with fellow mortgage guarantor Fannie Mae, amid the housing slump, credit crisis and ongoing recession. Mounting losses led to government takeovers amid concern the collapse of the mortgage companies would throw the housing market into further chaos.

Washington-based Fannie Mae and Freddie Mac play a vital role in the mortgage market by purchasing loans from banks and selling them to investors. Together, the companies own or guarantee almost 31 million home loans worth about $5.5 trillion. That's about half of all U.S home mortgages.

Euro zone May jobless hits 10-yr high of 9.5 pct
Euro zone unemployment hit its highest level in 10 years in May, data showed on Thursday, bolstering market expectations the European Central Bank will leave interest rates at record lows for now. The unemployment rate in the 16-nation euro zone rose to 9.5 percent from April's 9.3 percent as 273,000 people lost their jobs in the month, bringing the number of those out of work to 15.013 million, European Union statistics office Eurostat said.

"For the euro area this is the highest rate since May 1999," Eurostat said of a figure higher than the 9.4 percent expected by economists polled by Reuters, and which augured badly for any quick exit from the worst recession since World War Two. Eurostat calculated that 3.4 million people in the currency zone lost their job in the year from May 2008, when joblessness had stood at 7.4 percent. Some 5.1 million joined jobless queues across the 27-nation EU in the 12 months from May 2008, when EU unemployment was just 6.8 percent.

The data came as the European Central Bank was meeting in Luxembourg, with economists expecting it to leave its main interest rate on hold at 1.0 percent, a record low. "(This) demonstrates that the 'green shoots of recovery' are not yet showing up in the labour market," ING economist Martin van Vliet said. Van Vliet said the data argued against expectations among some in the market that the ECB would start raising rates early next year. The previous rate-hiking cycle did not start until months after unemployment had begun to fall, he said.

"This process actually has a long way to go," said Nick Kounis at Fortis. "We think that unemployment is likely to continue to rise certainly through this year and actually through most of next year as well," Kounis added, forecasting a peak of 11.5 percent by the end of 2010. Separately, Eurostat said prices at euro zone factory gates logged their biggest annual fall in May, pointing to continued negative inflation in coming months. Producer prices fell 0.2 percent month-on-month and 5.8 percent annually, the biggest yearly drop since the data series started in 1982. A 14.0 percent year-on-year plunge in energy prices drove the annual decline.

Economists polled by Reuters had expected producer prices to rise 0.1 percent on the month and fall 5.6 percent on the year. Producer prices show inflationary pressures early in the pipeline as their moves are usually reflected later in consumer prices, which the ECB wants to grow by just under 2 percent year-on-year. Euro zone inflation dipped into negative territory for the first time in June as consumer prices fell 0.1 percent year-on-year, data showed on Tuesday.

The European Commission expects unemployment in the euro zone to rise to 9.9 percent this year from 7.5 percent in 2008 and to 11.5 percent in 2010. The Commission expects the euro zone economy to return to growth in year-on-year terms from the middle of 2010. Spain had the highest unemployment rate in the EU at 18.7 percent, up from 18.0 percent in April, followed by Latvia on 16.3 percent, up from 15.3 percent. In Germany, the euro zone's biggest economy, unemployment remained unchanged at 7.7 percent, while in France, the second-biggest, it rose to 9.3 percent from 9.1 percent.

ECB leaves rates unchanged at 1%
Eurozone official interest rates were left unchanged at 1 per cent by the European Central Bank on Thursday as policymakers await signs of the region’s economic recovery gaining momentum. Earlier on Thursday data showed eurozone unemployment had hit its highest level in 10 years in May, climbing to 9.5 per cent from April’s 9.3 per cent as 273,000 people across the region lost their jobs. The decision by the ECB’s governing council was widely-anticipated, and financial markets have little expectation of Jean-Claude Trichet, ECB president, announcing additional steps to combat the eurozone recession later on Thursday.

Instead attention is likely to focus on Mr Trichet’s assessment of the eurozone economic outlook and the impact of emergency measures already announced by the ECB. Although the eurozone’s recession has shown signs of losing its intensity, the "green shoots" of recovery appear less well established than in the US. The governing council had gathered in Luxembourg – at one of the two meetings a year that the ECB holds outside its home town of Frankfurt, Germany. Since October, the ECB has cut its main interest rate by 325 basis points to the lowest ever.

ECB policymakers have been wary about bringing the main policy rate closer to zero, especially as overnight market interest rates are already lower than 1 per cent. But the ECB has massively expanded its operations providing liquidity to the banking system. Last week the ECB pumped in €442.2bn in one-year loans – the largest amount it had ever injected in a signal operation – in the hope that a revival in the eurozone banking system will feed through into the wider economy. Mr Trichet is likely to step up calls for banks to use the extra funds to grant re-start the flow of credit to businesses and households. Eurozone GDP contracted sharply at the end of last year and early in 2009.

Signs of a subsequent recovery have been based largely on economic confidence surveys. Meanwhile, the ECB has also seen inflation turning negative for the first time since records began, and hugely undershooting its target of an annual rate "below but close" to 2 per cent. Data earlier this week showed consumer prices were 0.1 per cent lower in June than a year before, and Mr Trichet has warned the annual rate could be negative for some months. ECB forecasts released last month showed the target range still being undershot next year.

They showed 2010 inflation in a range between 0.6 per cent and 1.4 per cent. Such low levels would usually justify further ECB monetary policy action. However Mr Trichet argues the long-term inflation expectations remain firmly anchored in line with the ECB. At the same time, the central bank is wary about the longer term impact on inflation and financial stability of the emergency measures it has taken already. Mr Trichet has argued that the eurozone could return to positive quarterly growth rate in the middle of next year.

Northern Rock losses grow by more than £500 million
Bank estimated to have made further heavy losses in the past six months, putting it in breach of regulatory rules. Northern Rock is expected to heap further embarrassment on the Government next month when it reports losses for the half in excess of £500m, putting it in breach of even specially relaxed regulatory rules. The nationalised lender revealed yesterday that its capital base, the key measure of financial strength, "has now reduced to a level below its minimum regulatory requirement".

The breach occurred despite a special waiver from the Financial Services Authority (FSA) that allowed the bank to flatter its reserves levels. Analysts calculated that, to be in breach, the bank must have lost more than £500m in the past six months alone. Last year, Northern Rock made a £1.36bn loss after £1.15bn of bad debts. In December, a third of its £67bn mortgage book was in negative equity. Despite breaking the rules, the FSA is letting the bank continue to write new mortgages and take deposits.

Northern Rock is planning a capital restructuring that requires European state aid clearance and the regulator has agreed that "it does not currently intend to restrict the activities while the plan is implemented". The bank plans to convert £3bn of the taxpayer’s £14bn loan into equity to recapitalise as part of a restructuring which will see bad loans put into a "bad bank" and the £20bn of deposits, 76 branches and about £10bn of good lending plus £10bn of other assets put into a "good bank".

The Government hopes the restructuring will make it easier to sell the "good bank" to the private sector. Interest is expected from private equity companies and smaller retail banks, which could include Tesco Personal Finance and Virgin Money. Analysts said the Government would be lucky to get £1bn from a sale. There is a risk, however, that the proceeds will be used to shore up capital reserves at the "bad bank" rather than generate a profit for the taxpayer.

'Kick in the teeth' for British students as grants are frozen
Student grants and loans will be frozen next year, while tuition fees rise, sparking warnings of financial misery for thousands of undergraduates. Ministers announced that financial support for students would be capped because of "difficult economic times". But at the same time, tuition fees will increase by two per cent to £3,290. The announcement was described as a "kick in the teeth" for the record number of young people applying to university because of the dire state of the job market.

Student leaders warned that the freeze in grants and loans represented a real-terms cut and would saddle graduates with higher debts. Many current graduates face debts of more than £20,000. Student groups and university lecturers warned that yesterday's announcement would only increase that total still further. Grants for new teacher trainees will also be cut, bringing them in line with support for other students. It follows figures showing that the number of young people out of work and training will top one million this summer.

An additional 60,000 teenagers also face being turned away from university in September, as the number of new places available has increased only slightly while applications have risen steeply because of the recession. David Lammy, the Higher Education Minister, defended the student funding freeze, which will affect undergraduates from 2010/11, saying the Government was being forced to make "decisions on funding in the interests of students, universities and taxpayers alike, particularly in tough times". But the Conservatives accused Labour of breaking a pledge to provide more money for students.

David Willetts, Tory shadow skills secretary, said: "In his first week as Prime Minister, Gordon Brown promised to increase financial support for students. But he has run out of money and he has been cutting back support for students ever since. Students from poor backgrounds have been let down by a Government that has given up on them." In a statement, ministers said students from families earning £25,000 or less would be eligible for a full grant to subsidise living costs.

From September 2010, this will be capped at £2,906, the same as the 2009/10 academic year. Students with a household income of less than £50,020 will be eligible for a partial grant. At the same time, the maximum loan for living expenses will remain unchanged at £4,950 a year. Ministers insisted that the package reflected the "current low inflationary environment". But Labour stood accused of "double standards" after announcing tuition fees would actually rise by two per cent - from £3,225 this September to £3,290 in 2010. A package of loans - available to cover fees and separate to loans for living costs - will rise by the same amount to cover the cost, although this will inevitably result in higher debts.

The announcement sparked widespread anger last night. Sally Hunt, general secretary of the University and College Union, which represents academics, said: "This is a kick in the teeth for the thousands of people who have already applied to university. We should be doing all we can during these difficult times to make education and learning as accessible as possible. For all the Prime Minister's warm words and promises that education would not become a victim of the recession, we are yet to see any actions to back up his rhetoric."

It is the latest blow to students. The Government has already announced financial support for thousands of students starting university this September will be cut. This was because the Government underestimated the numbers that would be eligible for full grants. It was originally thought a third would be eligible, but around 40 per cent qualified. This left a funding shortfall of around £200 million. Mary Bousted, general secretary of the Association of Teachers and Lecturers, said: "This is a cynical move by the Government and will undoubtedly increase the amount of debt among students."

And Wes Streeting, president of the National Union of Students, said: "It appears that the inflation rate is being applied where it suits universities, but not where it will improve student support. In the context of the current recession, these real terms cuts in student support will be felt in students' pockets." Student loan repayments are currently calculated using the Retail Prices Index, which includes housing costs and living expenses.

RPI is currently running at -1 per cent although it reached a high of more than five per cent last autumn. Analysts warn that inflation could rise significantly next year following the Government's financial injection.
Some 710,000 students already take out loans to pay living costs, with an average loan of £3,600. At the moment, the size of students' loans are capped depending on income. Diana Warwick, chief executive of Universities UK, which represents vice-chancellors, said: "It is unfortunate that Government has had to take this decision to hold maintenance support at the 2009/10 levels for 2010/11. We recognise that inflation is low at present, but were it to rise, we hope that in the interest of students, Government would re-consider this."

But Mr Lammy said: "We remain committed to ensuring finance is not a barrier to higher education and will be spending over £5 billion on student support this year, an increase of four per cent overall from last year. Our priority is to ensure that financial support is available to those that most need it which is why we are maintaining the current package of maintenance support and up-rating the loan available to pay for tuition fees." The announcement came as it emerged the proportion of poor sixth-formers going on to higher education has barely changed in the last six years. Students from the most deprived families account for 21 per cent of all students - a rise of just three percentage points since 2003.

Moody's Strips Ireland Of AAA Government Bond Ratings
Moody's Investors Service stripped Ireland of its coveted Aaa government-bond ratings, cutting the ratings one notch to Aa1, saying the debt's affordability, financeability and reversibility are weakened compared with Aaa countries. Ireland's economy, once the envy of Europe, has been going through one of the most severe downturns in the region. The ratings agency said the policy response to the economic downturn had been decisive and the government had a strong balance sheet before the crisis struck, so there was only a need for a moderate downgrade.

It had put the ratings on watch for possible reduction in April. "The review process focused on the nature of the policy response and the extent to which the Irish economic model was durably affected by a sudden and brutal economic and financial adjustment," said Dietmar Hornung, a senior analyst in Moody's Sovereign Risk Group.

In financial markets, the euro dipped to the day's low of $1.4045 and stock prices dropped immediately after the news. The cost of insuring Irish debt with credit default swaps rose by seven basis points and the premium the Irish government has to pay on borrowing also rose. Yield spreads between 10-year Irish government bonds and German bunds widened to around 232 basis points from 229 basis points. Syndicate bankers in London said Moody's decision is unlikely to have any impact on Ireland's access to bond markets or the country's cost of funding, as most investors have already factored in the impact of the country's indebtedness.

"Most investors use the majority rating, and since Ireland is already double-A at Fitch and S&P, Moody's decision doesn't really change anything," one banker said. "Plenty of double-A rated sovereigns have access to international capital markets, so it can be done." Speaking at the opening of a business park in Dublin earlier Thursday, Irish Prime Minister Brian Cowen told reporters, "There is no room for complacency. We have the plan. We have the requirements that will bring us to recovery."

He was referring to a recent report by a government taskforce which outlined EUR5 billion in cutbacks to help stem the decline in Ireland's public coffers. More bad news is expected later Thursday, when the Department of Finance publishes exchequer data for June. Moody's still has a negative outlook on the ratings, citing a risk of further gradual deterioration in terms of debt affordability - the share of government revenue used for interest payments - and financeability, or the cost at which the country can raise more debt.

The ratings agency said debt dynamics will remain unfavorable for the country for several years, and that downside risks outweigh upside risks in the near to medium term. "The pronounced weakness in the economic activity has been translating into a severe deterioration of Ireland's public finances, and the country is set to emerge from the current economic crisis with a considerably higher debt burden for the foreseeable future," Hornung said.

He added the strength of the economic recovery will depend on the country's ability to restore competitiveness - particularly to reduce nominal wages, which Moody's said are currently among the highest in the euro zone. More downgrades could follow if the country's adjustment capacity isn't enough to keep debt affordability and financeability at levels sufficient for a high Aa rating. Moody's said it would closely watch the measures to be announced by the government this autumn as part of its fiscal consolidation plan.

In March, Standard & Poor's Ratings Services lowered Ireland's sovereign rating and banking risk assessment. A month later, the country said it would take commercial-property assets off the books of six of its biggest lenders and house them in a new state agency, a plan it hopes will restore international confidence in the nation's financial system.

Sweden cuts rates to record low as European crunch deepens
Sweden's Riksbank has cut interest rates a quarter point to 0.25pc and signalled emergency stimulus until late-2010, fearing that the downturn will prove deeper than previously expected. The move caught markets by surprise and suggests that global investors have jumped the gun by expecting a quick return to inflation. "It is too early to talk of 'exit strategies' by central banks," said Jacques Cailloux, Europe economist at RBS. "The Riskbank has hardly begun. This is a reminder that it is going to be a long path to recovery," he said.

Swedish rates are now the lowest in the 350-year history of the Riksbank, the world's oldest central bank. The institution is also intervening on the currency markets, supporting industry by holding down the krona. The European Central Bank yesterday kept its key rate steady at 1pc, waiting to see how markets respond to the launch of its €60bn (£51bn) purchase of covered bonds next week. Jean-Claude Trichet, the ECB's president, said the bank is keeping a close eye on credit to companies and households. Lending has contracted over the last two months, raising the risk of a credit crisis.

Mr Cailloux said firms may struggle to roll over loans or raise new funds over coming months. "Central banks all over the world have reacted by supporting their corporate sectors when the see numbers like this, so people are going to ask why the ECB is not doing the same. We think they should buy syndicated loans to boost to confidence," he said. Eurozone unemployment jumped from 8.9pc to 9.2pc in May, the highest since the launch of the euro. Job losses have reached 3.1m over the last year. The figure would be even higher if it were not for short-term job support in Germany and Holland. The EC expects the jobless rate to reach 11.5pc next year. Youth unemployment is already 37pc in Spain.

What's Wrong with the BIS Annual Report
Wishing that the Bank for International Settlements (BIS) had issued its annual report 2009 a day earlier - when Vienna drowned in torrential rain - I nevertheless attempt to provide readers with an executive summary that the central bank of central banks has omitted in its version.

This leads me to the first conclusion that world finance must have become really complicated when not even several dozen BIS economists with months of preparation time can sum up 250 pages of data and events. Please recline your chair and hang around as this annual report from what should be the highest-ranking group in the know unwittingly delivers ironies rat-tat-tat like an AK-47 in the loose hands of a kid soldier in one of these African countries we only know about because their soil holds rare elements needed to make your iPhone.

Starting with a stark notice that even the BIS profit declined from SDR 544.7 million to SDR 446.1 million (FRN 660 million) YOY we are told that in a world once dominated by the Markowitz' model of portfolio diversification not even the BIS with a portfolio supposedly filled with assets (or just papers?) from all over the world was able to outperform markets.

If you read some sarcasm into this, you are right. After all, there are enough bloggers who had warned about the current global crisis as many as 5 years early.

Sarcasm is the mildest form I can call my lines following below. Or was it just plain ignorance of warning voices that lead the authors of this annual report to start off with a question?

How could this happen? No one thought that the financial system could collapse.

Maybe they had better look at the irresponsible monetary policy of the Federal Reserve in this millennium that did not create a society of house owners but a universe of debtors who have sunk below the water line called negative equity.

And how about reading other stuff than the Bubble Street Journal (WSJ) or other lamestream media? Simple "Go ogle" searches on various topics and reading their very own statistics could have alerted them to such fundamental changes like the USA morphing from the biggest creditor (until Nixon closed the gold window) to the biggest debtor in 3 decades that managed to stuff its unbacked FRNs down the throat of more or less all other nations under the disguise that these unbacked greenbacks were a "reserve currency."

As I am already so enraged I refer you to pages 2 to 10 of Alice in Wonderland, sorry, I meant the BIS annual report.

I have only one explanation for their explanations: One does not bite the hand that feeds one. I bow my head in honour of former World Bank chief economist Joseph Stiglitz who overcame this rule in order to set the record straight with his books. The same applies to former economic hit man John Perkins who tells in 2 books how he was contracted to draw unrealistic growth scenarios for developing countries, to be used by US banks and companies as a reason to indebt such nations while reimporting the loans by handing out contracts to US firms, greasing the local elite's hands on the way.

You don't really have to read these 9 pages if you have been following my blog on a post-by-post basis since April 2005.

You can also skip page 11, containing such wisdom like:

Commentators cautioned about the deterioration of credit standards, especially in the issuance of mortgages. And they warned about the risks that come with rapid financial innovation.

Do they allude to the blogosphere or did I just drink too much vin du pays this sunny afternoon?

Page 12 shines a light on the true problem for the first time:

Monetary policymakers’ only available instrument was the short-term interest rate, and there was a broad consensus that this tool would be ineffective against the alleged threat.

How many SDRs does one get paid for such enlightenment - after the world's investors were pared of half their savings in 2008, according to Blackstone?

As the BIS writers begin mind games whether more regulation - currently a hot issue in the EU especially stressed by German chancellor Angela Merkel - could have helped avoid the mess we currently live in, I humbly remind everybody that in a truly free market it is every investors own occupation to do his due diligence on prospected investments. There has never been a free lunch.

Before you get tired, the BIS is good at drawing tables of events that truly simplify recollecting what lead to the biggest financial/economic crisis in mankind's written history.

TABLE: Most important events leading to the current crisis. Source: BIS Annual Report. (Click all graphs for a larger image)

If you did not replicate Robinson Crusoe's life on an isolated island you can also skip pages 16 and 17. But the following timeline of key events from 2007 to mid 2009 is a useful guide for future historians.


  • 9 August Problems in mortgage and credit markets spill over into interbank money markets when issuers of asset-backed commercial paper encounter problems rolling over outstanding volumes, and large investment funds freeze redemptions, citing an inability to value their holdings.
  • 12 December Central banks from five major currency areas announce coordinated measures designed to address pressures in short-term funding markets, including the establishment of US dollar swap lines.


  • 16 March JPMorgan Chase (JPM) agrees to purchase Bear Stearns in a transaction facilitated by the US authorities.
  • 4 June Moody’s (MCO) and Standard & Poor’s take negative rating actions on monoline insurers MBIA and Ambac, reigniting fears about valuation losses on securities insured by these companies.
  • 13 July The US authorities announce plans for backstop measures supporting two US mortgage finance agencies (Fannie Mae (FNM) and Freddie Mac (FRE)), including purchases of agency stock.
  • 15 July The US Securities and Exchange Commission (SEC) issues an order restricting “naked short selling”.
  • 7 September Fannie Mae and Freddie Mac are taken into government conservatorship.
  • 15 September Lehman Brothers Holdings Inc files for Chapter 11 bankruptcy protection.
  • 16 September Reserve Primary, a large US money market fund, “breaks the buck”, triggering large volumes of fund redemptions; the US government steps in to support insurance company AIG (and is forced to repeatedly increase and restructure that rescue package over the following months).
  • 18 September Coordinated central bank measures address the squeeze in US dollar funding with $160 billion in new or expanded swap lines; the UK authorities prohibit short selling of financial shares.
  • 19 September The US Treasury announces a temporary guarantee of money market funds; the SEC announces a ban on short sales in financial shares; early details emerge of a $700 billion US Treasury proposal to remove troubled assets from bank balance sheets (the Troubled Asset Relief Program, TARP).
  • 25 September The authorities take control of Washington Mutual, the largest US thrift institution, with some $300 billion in assets.
  • 29 September UK mortgage lender Bradford & Bingley is nationalised; banking and insurance company Fortis receives a capital injection from three European governments; German commercial property lender Hypo Real Estate secures a government-facilitated credit line; troubled US bank Wachovia is taken over; the proposed TARP is rejected by the US House of Representatives.
  • 30 September Financial group Dexia receives a government capital injection; the Irish government announces a guarantee safeguarding all deposits, covered bonds and senior and subordinated debt of six Irish banks; other governments take similar initiatives over the following weeks.
  • 3 October The US Congress approves the revised TARP plan.
  • 8 October Major central banks undertake a coordinated round of policy rate cuts; the UK authorities announce a comprehensive support package, including capital injections for UK-incorporated banks.
  • 13 October Major central banks jointly announce the provision of unlimited amounts of US dollar funds to ease tensions in money markets; euro area governments pledge system-wide bank recapitalisations; reports say that the US Treasury plans to invest $125 billion to buy stakes in nine major banks.
  • 28 October Hungary secures a $25 billion support package from the IMF and other multilateral institutions aimed at stemming growing capital outflows and easing related currency pressures.
  • 29 October To counter the protracted global squeeze in US dollar funding, the US Federal Reserve agrees swap lines with the monetary authorities in Brazil, Korea, Mexico and Singapore.
  • 15 November The G20 countries pledge joint efforts to enhance cooperation, restore global growth and reform the world’s financial systems.
  • 25 November The US Federal Reserve creates a $200 billion facility to extend loans against securitisations backed by consumer and small business loans; in addition, it allots up to $500 billion for purchases of bonds and mortgage-backed securities issued by US housing agencies.


  • 16 January The Irish authorities seize control of Anglo Irish Bank (AIB); replicating an approach taken in the case of Citigroup (C) in November, the US authorities agree to support Bank of America through a preferred equity stake and guarantees for a pool of troubled assets.
  • 19 January As part of a broad-based financial rescue package, the UK authorities increase their existing stake in Royal Bank of Scotland (RBS). Similar measures by other national authorities follow over the next few days.
  • 10 February The US authorities present plans for new comprehensive measures in support of the financial sector, including a Public-Private Investment Program (PPIP) of up to $1 trillion to purchase troubled assets.
  • 10 February G7 Finance Ministers and central bank Governors reaffirm their commitment to use the full range of policy tools to support growth and employment and strengthen the financial sector.
  • 5 March The Bank of England launches a programme, worth about $100 billion, aimed at outright purchases of private sector assets and government bonds over a three-month period.
  • 18 March The US Federal Reserve announces plans for purchases of up to $300 billion of longer-term Treasury securities over a period of six months and increases the maximum amounts for planned purchases of US agency-related securities.
  • 23 March The US Treasury provides details on the PPIP proposed in February.
  • 2 April The communiqué issued at the G20 summit pledges joint efforts by governments to restore confidence and growth, including measures to strengthen the financial system.
  • 6 April The US Federal Open Market Committee authorises new temporary reciprocal foreign currency liquidity swap lines with the Bank of England, ECB, Bank of Japan and Swiss National Bank.
  • 24 April The US Federal Reserve releases details on the stress tests conducted to assess the financial soundness of the 19 largest US financial institutions, declaring that most banks currently have capital levels well in excess of the amount required for them to remain well capitalised.
  • 7 May The ECB’s Governing Council decides in principle that the Eurosystem will purchase euro-denominated covered bonds; the US authorities publish the results of their stress tests and identify 10 banks with an overall capital shortfall of $75 billion, to be covered chiefly through additions to common equity.

Sources: Bank of England; Federal Reserve Board; Bloomberg; Financial Times; The Wall Street Journal.

If you need more detail, read a longer version of these key events thru page 36, multi-colored graphics included.

Page 37 headlines "The financial sector under stress" but I presume readers of alternative media have grappled already long ago that the world's central banks were not digitizing all these fresh trillions just for fun. Correctly stating that we saw a level of unprecedented policy intervention (by central banks, I assume) since the onset of "a full-fledged crisis that reached historic proportions."

Looking into the future the BIS arrives at the aha-conclusion that further developments will depend on the dynamics of both financial institutions and the macro economy:

Over the medium term, the health of financial firms will depend on the interplay between their response to losses and the dynamics of the macroeconomy. The feedbacks between the two become particularly strong when the capital cushions of financial firms are depleted. In the first stage of the crisis, capital raised from private investors met the cost of writedowns on securities portfolios. In subsequent stages, private capital had to be supplemented on a large scale by public sector resources to address mounting losses on institutions’ loan books driven by rapidly deteriorating macroeconomic conditions. The pace and shape of recovery will be critically linked to the ability of financial firms to manage their leverage and capital positions in a challenging environment without unduly restricting the flow of credit to the economy.
From a longer-term perspective, the crisis carries important messages for the structure and stability of the financial system. The events of the past two years highlighted how strong the interdependencies between financial system components can become. Market participants and also, arguably, prudential authorities underestimated the complementarities in the roles of different actors along the securitisation chain, the close interlinkages among financial markets and institutions, and the interplay between asset market and funding liquidity.

Things get more interesting on page 40 again.

TABLE: So far bank losses seem to have peaked in the 2nd half of 2008. But all unofficial talk that reaches my ears focuses on the BIG whoppers still ahead of us. Especially corporate inter-linkages between banks and insurers may prove to be the major problems as accounting at insurers allows to hide losses much longer than on balance sheets of banks. And don't forget the yet unsolved $700 TRILLION problem of over-the-counter (OTC) derivatives. Search that figure yourself in the BIS report. Last time I checked it was "only" $600 TRILLION.

Here Some Color Before You Doze Away
Realizing that my blog post is in imminent danger to resemble the boring (but very readable) layout of the BIS original, here comes some color concerning the investment banking sector, whose limitless greed for ever larger bonuses for its employees is in my humble opinion the root of all the problems we face today.

GRAPH: These charts are self-explaining and are in line with bankers bonuses over the past years. I notice that a decline in private risk securitization is now being substituted with more government debt business. As all other underwriting sectors have gone from boom to bust in the hands of pinstriped investment bankers I think this may forebode soon-to-happen disasters with public debt, i.e. the default of sovereigns. Check out this post about the pending risk of defaulting nations/fiat currencies.

Hedge Funds Going To Where They Came From: Nothing Left
Sorry for having water boarded you with too much black ink for the past couple of screens. You don't need to read page 48 and onwards to find out that 2008 was the year where the guys in front of an array of Bloomberg screens literally jumped out of the window together with most markets they had been betting on in the years before.

GRAPH: No need to say much here. Hedge funds were only riding the wave of markets and disappeared at the same velocity with which the markets of their choice went down. To be fair: Policy interventions limiting trading the short side did not leave them much room for survival in what turned out to be one of the worst years for all kinds of markets.

The last decade was not only marked by leveraging equity to the max (most institutions went down or were bailed out once leverage exceeded a level of 30, meaning banks, funds and all other players with access to easy money (thank you Alan Greenspan, thank you Jean-Claude Trichet, thank you Ben Bernanke) were playing with 30 times as much money as they actually had in the till.

A World Full of Debt Slaves

As if turning the better part of the world into debt slaves by pushing mortgages on more or less everybody who could make it to a bank's office unaided was not enough banks were looking for still more business (and bonuses). Saturated home markets left them only one choice: Expanding into new territories, kind of a financial recolonization of formerly dependent territories.

GRAPH: Having grazed off domestic markets, engulfing them in the highest debt levels of history, banks set the sail and started lending all over the world. Of course it is always easy to have the winnining lottery numbers on a Monday; but how the hell is it possible that a generation of whiz kids excelling in constructing sophisticated Excel sheets completely missed out on the unbending fact that growth has its limitations and every excess ends in a mutual cannibalization of market share?

Becoming a little tired to reprint the BIS explanations about the obvious mega-problems in the financial sector one is happy that after 55 pages the BIS begins to focus on what matters most: Financial crashes have always been the precursor of extended economic downturns.

Think South Sea Bubble, think France before the revolution in 1789, think Vienna stock exchange in the 70s of the 19th century (then the biggest stock market in the world) and then again in the late 1980s after Jim Rogers kissed it awake from a century long slumber.

When the easy money begins to dry up, so does the real economy (that is where all other people except bankers make their money).

GRAPH: The real economy followed the downturn in the financial sector with a delay of about one year, proving again an old market rule that stock markets discount the future at a range between 12 and 18 months.

I absolutely disagree with this charts low showings of inflation. Inflation indexes are governments tools to keep the wages of public employees and the pensions of retirees as low as possible. This is not a science but simply a sophisticated way of lying in the face of the public.

Finally, Some Sort of Summary

Oh, on page 72 I find out I criticized the BIS for not coming up with some sort of executive briefing. Well, the black ink proves me wrong. Here we go:

The global financial crisis has led to an unprecedented recession accentuated by rapid declines in trade volumes, large employment cuts and a massive loss of confidence. How deep and prolonged the downturn will be is uncertain. In the industrial countries, there are some signs that the rapid pace of decline in spending witnessed since the fourth quarter of 2008 has started to ease. But a strong, sustained recovery in those countries could be difficult given attempts by households and financial firms to repair their balance sheets.
Nevertheless, substantial fiscal stimulus and exceptional monetary easing in many countries should help bring the recent contraction to an end. The policymakers’ task in the near term will be to ensure a sustained recovery. In the medium term, however, it will be to ensure that policies are adjusted sufficiently to maintain the stability of long-term inflation expectations.

Feeling that many readers will never have scrolled to this piece, I relieve the busy bee readers with another BIS conclusion beginning on page 136. Get this last dose of what I would not exactly call mythic wisdom of central bankers but a statement every economic and financial observer will agree with. In short: We need an instant reform but there are so many obstacles. Here's the longer BIS version:

We have no choice but to take up the challenge of first repairing and then reforming the international financial system, all the while cushioning the impact of the crisis on individuals’ ability to live productive lives. Efforts so far have fully engaged fiscal, monetary and prudential and regulatory authorities for nearly two years. The public resources devoted to economic stimulus and financial rescue have been staggering, approaching 5% of world GDP – more than anyone would have imagined even a year ago.
Recovery will come at some point, but there are major risks. First and foremost, policies must aid adjustment, not hinder it. That means moving away from leverage-led growth in industrial economies and export-led growth in emerging market economies. It means repairing the financial system quickly, persevering until the job of restructuring is complete. It means putting policy on a sustainable path by reducing spending and raising taxes as soon as stable growth returns. And it means the exit of central banks from the intermediation business as soon as financial institutions settle on their new business models and financial markets resume normal operations.
In the long term, addressing the broad failures revealed by the crisis and building a more resilient financial system require that we identify and mitigate systemic risk in all its guises. That, in turn, means organising financial instruments, markets and institutions into a robust system that will be closer to fail-safe than the one we have now: for instruments, a system that rates their safety, limits their availability and provides warnings about their suitability and risks; for markets, encouraging trading through central counterparties (CCPs) and exchanges, making clear the dangers of transacting elsewhere; and for institutions, the comprehensive application of enhanced prudential standards combined with a system-wide perspective, beginning with the application of something like a systemic capital charge (SCC) and a countercyclical capital charge (CCC).
Successfully promoting financial stability requires that everyone contribute. Monetary policymakers must take better account of asset price and credit booms. Fiscal policymakers must ensure that their own actions are consistent with medium-term fiscal discipline and long-term sustainability. And regulators and supervisors must adopt a macroprudential perspective, worrying at least as much about the stability of the system as a whole as they do about the viability of an individual institution. An encompassing policy framework with observable objectives and implementable tools is at an unfortunately early stage of development. But the suggestions made here and elsewhere are a start. The work will have to be coordinated internationally. In particular, institutions with expertise in the field – including the Basel-based standard-setting committees and the Financial Stability Board – will need to play a leading role in making such a framework operational. This is going to be a long and complex task, but we have no choice. It has to be done.

As in most of my past 600+ posts I disagree with this official attitude that has landed us where we are. It may be of help if all insiders REALLY read David Ricardo and Adam Smith and then followed these centuries old guide lines for free markets. My two cents can be found here and will be extended in the future.

Unwinding at AIG Prompts Pasciucco to Ponder Systemic Failure
Gerry Pasciucco stared out from his fourth-floor office at the hurly-burly of midtown Manhattan’s 48th Street, weighing the riskiest trade of his life. Over a 26- year career, he had risen to managing director at Morgan Stanley and earned a seven-figure-plus pay package. It was October 2008, and Edward Liddy, the new chief executive officer of insurer American International Group Inc., had just asked Pasciucco to head the subsidiary at the vortex of the world financial cataclysm: AIG Financial Products Corp.

The mission: unwind AIGFP’s portfolio of 44,000 often complex, long-dated derivatives with a notional value of $2 trillion, close the unit, then fire what remained of its 428 employees and resign. Pasciucco called friends and former colleagues for advice. "Go do it," Morgan Stanley co-president Walid Chammah, a longtime mentor, told him. "Make the decision and don’t look back." Pasciucco, 48, says his one overarching concern was, "How afraid of the unknown should I be?"

The answer turned out to be -- very afraid. In March, four months after Pasciucco started the job, he was sucked into a maelstrom of criticism after AIG paid $165 million in retention bonuses to the financial products unit’s employees. The company was pounded by the U.S. Congress and threatened with a subpoena by New York Attorney General Andrew Cuomo. Protesters picketed the homes of AIG staff members, while the company received a barrage of letters and e-mails, some of which read like death threats.

New York-based AIG’s gargantuan gambles have become synonymous with the near collapse of the global financial system and the ensuing worldwide economic slump. The efforts by Pasciucco, a Boston native with degrees from Williams College and Harvard Business School, to unwind those trades will be a test of the ability of Washington and Wall Street to repair the damage to the system and restore public confidence. "It’s ground zero in terms of what regulation is going to look like going forward -- whether government intervention is viewed as a success or a failure," Pasciucco says.

Restoring credibility will be a long-term process. "AIG’s collapse set a precedent in its size and scale," says George David Smith, a business historian at New York University’s Stern School of Business. "This has shaken the investing community and the broader public’s faith in the financial system. It will take many years for that system to regain the stature it once had." It was AIG’s gambits on mortgage-related debt that brought the world’s largest insurance company to the edge of bankruptcy last September. On Sept. 15, the company lost its AA- credit rating -- it had already been downgraded from AAA in 2005.

The downgrade forced the firm to hand over billions of dollars in collateral to its trading partners. It didn’t have the money. The U.S. government stepped in on Sept. 16, when the Federal Reserve extended an $85 billion credit line to the company in exchange for 79.9 percent of AIG stock. While the credit crunch is predominantly a banking crisis, it is AIG, not a major bank, that’s the biggest recipient of government largesse. The Fed and the Treasury have paid out or guaranteed a total of $182.5 billion for AIG, more than four times the $45 billion Bank of America Corp. and Citigroup Inc. each got through the Treasury’s Troubled Asset Relief Program, or TARP. The U.S. has committed as much as $70 billion of TARP money to AIG.

AIG, more than any other institution, has thrown a spotlight on the tangled world of derivatives -- securities whose value is derived from underlying stocks, bonds, currencies or commodities -- and especially on credit-default swaps. CDSs are lightly regulated insurance-like contracts used to protect investors against the default or loss in market value of a security they hold. The government rescued AIG to avert "systemic failure," Federal Reserve Chairman Ben S. Bernanke said at the time. If AIG had collapsed, a dozen other big financial companies that were counterparties in its derivative trades and insurance contracts might have gone down along with it, Bernanke told Congress in March.

By the end of 2008, more than $60 billion was paid to AIG counterparties that had bought CDSs from AIG. In a May 2009 filing to the Securities and Exchange Commission, AIG disclosed for the first time the full extent of those payments, including cash that had flowed to banks before AIG’s bailout. Paris-based Societe Generale got $16.5 billion in collateral and other payments from late 2007 through 2008; New York-based Goldman Sachs Group Inc. received $14 billion; Frankfurt-based Deutsche Bank AG, $8.5 billion; and Merrill Lynch & Co., $6.2 billion.

The payments were triggered by the credit-rating downgrades of AIG and declines in the market value of the assets protected by the swaps. The most volatile of those assets were collateralized-debt obligations, or CDOs, which are agglomerations of subprime mortgages and other debt that are divided up and sliced into tranches, each of which has a different risk and income stream. The filing, which is heavily redacted and uses abbreviations for counterparty names, reveals the extent to which Goldman Sachs was the leader in demanding -- and receiving -- collateral on the problem CDOs that AIG had insured.

It got $5.9 billion before the insurer was forced into the government’s arms on Sept. 16, more than any other counterparty. Goldman Sachs spokesman Michael DuVally declined to comment. "There was no reason to pay the contracts in full," says Janet Tavakoli, founder of Tavakoli Structured Finance Inc. in Chicago and author of "Dear Mr. Buffett: What an Investor Learns 1,269 Miles From Wall Street" (Wiley, 2009). "We’ve run roughshod over the interests of the American taxpayer; we’ve bailed out the Wall Street creditors; we’ve used AIG as a huge slush fund."

In September, Moody’s Investors Service, Standard & Poor’s and Fitch Ratings all downgraded AIG two or three grades in response to its accelerating cash crunch. The company was rated AAA from 1983 to March 2005, when it lost that designation after CEO Maurice "Hank" Greenberg was forced to resign. The September downgrades sealed the firm’s fate by triggering the collateral calls by Goldman Sachs and the other banks to which AIGFP had sold swaps.

In the weeks after the government rescue, dozens of McKinsey & Co. consultants hired by the Fed swarmed AIGFP’s headquarters in Wilton, Connecticut. After Pasciucco arrived, they worked with him and FP employees to sort the subsidiary into 22 component businesses, most of them involving derivatives. What brought the company down, Pasciucco says, was its exposure to fewer than 200 insurance contracts that were sensitive to AIG’s credit ratings and the value of the underlying CDOs.

Pasciucco’s job is to extricate AIG from tens of thousands of derivatives contracts, or trades, entered into by what amounted to a hedge fund within the insurance company -- one whose managers worked independently and took home 30 percent of the profits. No winding down on this scale has ever been attempted. The effort that comes closest may be the dismantling of hedge fund Long-Term Capital Management LP, which in 1998 lost more than 90 percent of its value amid the Russian bond default.

The Fed assembled a consortium of banks to rescue LTCM, and it took 15 months, from September 1998 to January 2000, to negotiate their way out of trades tied to more than $1 trillion in bets.
"The AIG portfolio is much more complex," says David Rogers, who was drafted from Goldman Sachs to help close out LTCM. He is now CEO of hedge fund JD Capital Management Inc. What Pasciucco -- pronounced pah-SHOO-koh -- is doing is part of a larger dismantling of parent AIG, which comprises 200- plus subsidiaries in more than 30 countries. At its peak in 2006, AIG posted annual net income of $14 billion and had a market value of $186.4 billion. "It was one of the iconic global institutions," NYU’s Smith says. "It was a marvelous global company of great innovations."

After taking over in September, Liddy, a former Allstate Corp. CEO, concluded he had to break AIG into pieces and sell the units to the highest bidder to have any shot at paying back the government. He has created a holding company for AIG’s property and casualty operations called AIU Holdings Inc. And he’s also transferring preferred equity in two of AIG’s big life insurance companies, American International Assurance Co. and the American Life Insurance Co., to the Federal Reserve Bank of New York as part of a plan to get them ready for sale. The transactions will reduce AIG’s debt by $25 billion.

AIG’s International Lease Finance Corp., the world’s largest jet-leasing company, is also on the block, with a group that includes buyout firms Onex Corp. of Toronto and Rye, New York-based Greenbriar Equity Group LLC as the favored bidder, according to people familiar with the situation. It may fetch less than $7.8 billion, the unit’s book value, one person says. As of mid-June, AIG had struck deals to sell sundry insurers, banks, credit card and fund companies around the world for a total of at least $6.6 billion -- a small step toward repaying loans included in the $182.5 billion rescue. AIG owes about $40 billion on its $60 billion Fed credit line.

"We are working hard to determine the destiny of the component parts of AIG," Liddy told a House committee on May 13. "Our plan contemplates that AIG’s best businesses will establish separate identities from the parent holding company. The parent company will become smaller. The financial products unit will cease to exist." CEO Liddy, who is also AIG’s chairman, announced in May that he would leave AIG as soon as replacements could be found for his positions, which will be filled separately. "We believe there is an excellent chance we can repay the government," Liddy told investors at AIG’s annual meeting yesterday.

The breakup of AIG will be remembered as the epilogue to one of history’s great business stories -- how a two-room insurance agency founded by Cornelius Vander Starr in Shanghai in 1919 grew into one of the world’s largest financial conglomerates. Starr’s successor, Greenberg, who hired on at AIG in 1960, led the insurer through nearly four decades of growth into new territories and businesses -- including the derivatives that undid the firm.

Greenberg’s AIG was one of the first firms to write CDSs back in 1998. They were the newest product to come out of AIGFP, which had already been around for a decade creating and trading derivatives. In April, Greenberg said in congressional testimony that the subsidiary had generated more than $5 billion in profits for AIG before he left the firm. Greenberg, 84, was ousted by the AIG board in March 2005 amid an investigation by then-New York Attorney General Eliot Spitzer into bogus reinsurance. The executive who replaced him, Martin Sullivan, proved incapable of managing the risk taken on by Greenberg and aggravated it by allowing new derivative bets on CDOs. AIGFP could have protected itself, as other sellers of CDSs did, by shorting subprime mortgage indices.

"This was not some technical problem," says Charles Calomiris, a finance and economics professor at Columbia Business School in New York. "They didn’t understand the meaning of risk management." Greenberg says that most of the damage was done after he resigned. "Management fell asleep after I left the company," he told the congressional committee. He declined to be interviewed for this article. Pasciucco’s job of winding down AIGFP has turned into a grueling exercise carried out in the public spotlight. He lightens his work with a patter of wisecracks. Pasciucco says he has a message for the friends who advised him to accept the AIG challenge: "I’m holding all those people responsible for the position I find myself in today."

During an interview in Manhattan in late May, Pasciucco reaches into his briefcase, pulls out a dog-eared presentation on the AIGFP portfolio that’s marked "highly confidential" and slides it across a conference room table. It details the scale of the winding down of AIGFP -- as well as the progress made. In the course of the 2008 government bailout, the Federal Reserve Bank of New York bankrolled a special-purpose vehicle called Maiden Lane III, named for the Fed’s location in lower Manhattan, that bought insured CDOs from FP’s counterparties with a par value of $62.1 billion. The counterparties got to keep their collateral and AIGFP got to tear up its swap agreements. The government gets two-thirds of the upside from that portfolio, with AIG getting the rest.

That left derivatives with a notional value of some $1.8 trillion for Pasciucco to deal with at year-end. The report that Pasciucco brandishes shows that the value of the derivatives still to be unwound had fallen 16.7 percent to $1.5 trillion as of May 12. The number of trade positions was down 24 percent, to 26,700 from 35,000, during the same period. AIGFP was in effect a multistrategy hedge fund engaged in a variety of businesses. In addition to CDSs, it wrote and traded equity, currency and commodity derivatives. It even owned a collection of solar power plants in Spain.

Most of the trades were profitable, Pasciucco says, and many of them still are. The blowup happened only because AIG couldn’t come up with the collateral on fewer than 200 CDO swaps. Even today, 97 percent of the underlying CDOs continue to pay, Pasciucco says. The daily task for AIGFP’s 350 employees -- located in Wilton, London, Paris, Tokyo and Hong Kong -- is to find buyers for its positions.

Pasciucco’s first goal when he took over AIGFP was to exit the riskiest trades. He points to the portfolio’s gross vega, a measure of risk that in its simplest application gauges the dollar impact of an increase in volatility. Vega, Pasciucco explains, was down 38 percent as of May 12, to $770 million from $1.25 billion.

"The risk in the book is down far more than the trade count," he says. "That’s because the trades we’re unwinding have been the riskier trades." Some of the most treacherous deals are also the longest dated. In the first quarter, the number of trades lasting more than 50 years was cut to 11 from 67. Pasciucco notes that his predecessors didn’t shy away from complicated derivatives. "They were often combining commodity risk with equity risk and with puts and calls," he says. "They were very comfortable with complexity."

When it comes to the disposition of a specific trade, Pasciucco and his colleagues have three courses of action. The firm can decide to let the trade expire according to its normal terms, an option Pasciucco has often taken for short-dated positions. Or AIG can "tear up" the trade, which means negotiating a price to get out of the deal with the counterparty. The company can also "novate" the trade -- from the Latin novare, to make new. That means it finds another party to take over AIG’s side of a trade. If AIGFP has swaps with Morgan Stanley, Pasciucco says, it will show them to a firm eager to own an offsetting position with Morgan Stanley. "Then we talk to Morgan about a tear-up," he says.

AIGFP’s mathematicians and computer programmers have databases that keep track of the holdings of thousands of counterparties, making it easier to find those interested in taking over its side of trades. "That gets us much better pricing," Pasciucco says. As of mid-June, AIGFP had disposed of 5 of its 22 "books of business," including the Spanish power plants and several bundles of derivatives. In May, it completed the sale of its commodity index business to Zurich-based bank UBS AG for $15 million. The unit maintains indexes that track prices on everything from lean hogs to zinc. AIG started it in 1999 with Dow Jones & Co.

AIGFP’s deal with UBS includes a so-called earn-out, giving the insurer the right to as much as $135 million during the 18 months after the sale closed in May, based on the profits the unit generates for UBS. One of Pasciucco’s priorities when he took over was to get out of a $7 billion derivatives business called power reverse duals, or PRDs. These were essentially bets against the consensus view on the yen’s strength versus the U.S. dollar. The derivatives are extremely long dated, expiring 30 years or more in the future. The PRDs were costing tens of millions of dollars a year to hedge, which is done by constantly adjusting a variety of offsetting put options, call options and futures.

"It was the biggest problem I saw when I arrived in terms of the cost of managing the hedge," Pasciucco says. Options are contracts that provide the right, but not the obligation, to buy or sell a security at a set price within a certain period. Traders and risk managers worked eight weeks slicing the dollar-yen portfolio into different configurations and negotiating with European banks that were interested in the trades. They were sold or novated to three of those banks. Pasciucco declines to identify the banks or the prices paid.

Given the handicaps, Pasciucco is winning some praise for his efforts. "I think he’s wound down a surprisingly large amount," says Eric Dinallo, New York state insurance superintendent. "The unwinds are very complicated. I think they hired a very, very competent guy." Dinallo was scheduled to step down from his post this month. Before moving to AIGFP, Pasciucco had spent his entire professional career at Morgan Stanley and had never sat on a trading desk.

A graduate of Jesuit-run Boston College High School, he got a degree in economics from Williamstown, Massachusetts-based Williams College in 1982. He had an entrepreneurial streak. In 1979, when Pope John Paul II visited the United States, Pasciucco printed T-shirts with "Welcome" written in Polish and hawked them in downtown Boston. After graduation, he did a two-year stretch as an entry- level analyst at Morgan Stanley in New York before returning to Massachusetts to pick up an MBA from Harvard Business School in 1986. Pasciucco was named a George F. Baker Scholar, finishing in the top 5 percent of his class.

Back at Morgan Stanley, he was soon turning heads as a capital markets banker, negotiating terms of bond and equity underwritings with retailers, entertainment companies and airlines. Those skills helped Pasciucco rise rapidly. He was named a vice president of the capital markets division in 1991, a principal in 1993 and managing director in 1995. By 2004, Pasciucco was chairman of the capital commitment committee: His job was to make sure the terms agreed to reflected the risk when the firm’s capital was at stake.

"I admired his courage to stand up to people like me or John Mack or clients," says Zoe Cruz, former co-president of Morgan Stanley, of which Mack is CEO. "He’d come back beet red from having been berated by clients, but he was no pushover." Pasciucco started his new job on Nov. 11, 2008, when he said goodbye to his wife at their Georgian-style home in Greenwich, Connecticut, and drove his black Porsche Cayenne along the winding Merritt Parkway for the 15-minute commute to Wilton, where AIGFP had moved its offices in 2002.

AIGFP’s headquarters are on the second floor of a nondescript building in a redbrick office park. In May, no sign was posted identifying the firm as a tenant. For nearly two decades AIGFP was a profit-generating juggernaut and the envy of Wall Street. The business was the brainchild of Howard Sosin, a Stanford University business Ph.D. who once headed the interest-rate arbitrage unit at New York- based Drexel Burnham Lambert Inc., professional home of junk bond king Michael Milken.

In 1986, Sosin and Drexel colleagues Randall Rackson and Barry Goldman hatched a plan to write sophisticated contracts that let big multinationals reduce their exposure to interest rate risks through swaps, which can be used to replace variable and volatile interest-rate streams with stable, fixed rates. The key to the venture would be the backing of a financially strong company, one with a credit rating of AAA. That would give it a big competitive advantage in the markets and keep financing costs low.

Sosin, 58, approached AIG’s Greenberg and struck a deal. With the backing of AAA-rated AIG, Sosin and his colleagues soon rented offices on Madison Avenue in New York. At the beginning, FP was a joint venture between AIG and Sosin, with Sosin taking 38 percent of the profits generated, nearly double what hedge fund operators typically get. Greenberg agreed to the setup with a key condition: that Sosin and his crew do nothing to imperil AIG’s AAA credit rating, according to Sosin. They didn’t, taking care to minimize risk, according to Sosin and former colleagues. All trades were hedged. The average counterparty was rated AA. Any bond falling below BBB was immediately sold.

In addition to interest-rate swaps, the firm wrote currency swaps -- which let a buyer insure against volatility in the foreign exchange market -- and moved into equity derivatives, which are instruments tied to the price of an underlying stock or index. AIGFP helped finance its operations by selling guaranteed investment contracts, or GICs, which provide municipalities a place to park cash in exchange for a guaranteed return. "We were a group of intelligent people who could solve other people’s problems," Sosin says. Sosin was a "visionary," says Marc Holtz, a former head of AIGFP’s new product group who’s now in charge of risk management at Structured Portfolio Management LLC in Stamford, Connecticut. "Howard was fair, brilliant and demanding," Holtz says. "It was an exciting institution."

By 1990, tension was growing with Greenberg, Sosin says. Though his business was highly profitable, Sosin says he couldn’t get face time with Greenberg to discuss expansion and other matters. In late 1992, AIGFP stumbled, losing what Sosin says was about $50 million on some Canadian bonds. Greenberg was furious, Sosin says, and demanded that he agree to fundamental changes in the terms of the joint venture. Sosin refused, and terminated the joint venture. AIG’s board fired both Sosin and Rackson.

Sosin’s final payment was settled in arbitration, in which he was awarded $125 million and proceeds from some notes, according to a court document. AIG then took control of AIGFP and eventually put Tom Savage, a former Drexel analyst and math Ph.D., in charge. AIGFP’s share of the profits was cut to 30 percent. Under Savage, AIGFP earnings soared, rising from $150 million in 1993, when Savage took over, to $323 million in 1998 and then to $758 million in 2001, according to AIG filings.

Working with Savage was chief financial officer Joseph Cassano. As part of his duties, Cassano, part of the original Drexel team, ran the firm’s back office, the operational part of the business that settles trades and deals with accounting matters. According to former AIGFP employees, he also oversaw credit risk matters. Cassano had attended Brooklyn College, according to an AIG biography, not Wharton or Harvard. He’s the son of a New York police officer. While several former AIGFP employees describe Cassano as an exceptional back office manager, they say he did not have the quantitative background of Savage or Sosin.

In 1998, Savage and Cassano oversaw AIGFP’s first foray into CDSs. The swaps it sold are sometimes referred to as regulatory capital trades because they’re designed to reduce a bank’s obligation to hold capital against its loans, according to AIG’s 2008 annual report. By buying credit insurance on those loans, banks could reduce their capital requirements, the report says. The first AIGFP CDSs were sold to European banks through AIG’s Banque AIG subsidiary in Paris. Greenberg deemed them sufficiently safe that he considered it unnecessary to hedge them, according to his congressional testimony. By Sept. 30, 2008, AIG had $250 billion in net notional CDS exposure to such loans, and has had no material losses on them, Pasciucco says.

In 2001, Savage retired and Greenberg tapped Cassano as his replacement. By 2003, according to his AIG bio, Cassano was running the AIGFP operation from Paris. He later moved to the AIG London office, though AIGFP’s base remained in Connecticut. Key facts concerning when and how rapidly Cassano expanded the derivatives exposure are in dispute. Greenberg told the Washington Post that AIGFP wrote only $7 billion worth of swaps on CDOs before he was ousted.

"There is no question that management took their eye off the ball and that risk management was not getting the right instructions, and that’s what led to the downfall," Greenberg told Congress.
AIG spokesman Mark Herr says that AIG’s potential CDO exposure rose to $40 billion under Greenberg. Several qualities of AIG’s swaps on CDOs made them perilous deals, according to current and former AIGFP employees. First, they were mostly unhedged, and by the time the subprime crisis began to gather steam in 2007, it would have been prohibitively expensive to hedge them, the employees say.

The swaps’ terms required AIG to post billions of dollars of collateral if its credit rating was cut. AIG was downgraded in 2005 and several times in 2008. AIG also agreed to post collateral if the market value of the CDOs it insured fell, even if there were no credit downgrades or defaults on the CDOs. Once highly rated insurers such as Ambac Financial Group Inc., which competed with AIGFP, seldom agreed to such terms in their swap agreements, according to a person familiar with the situation. "The people at AIG were basically the laughingstocks of derivatives desks around the country," Tavakoli says.

Ambac and its rivals were rocked last year by multiple credit downgrades that required them to post collateral on other derivatives and guaranteed investment contracts. As late as August 2007, Cassano had failed to recognize the danger. "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing a dollar in any of those transactions," he told AIG investors that month on a conference call.

It was barely more than a year later that the government moved in to take over AIG. By that time, Cassano was gone. He resigned on March 31, 2008. At that point, AIGFP’s CDO swap exposure was $77.5 billion. CEO Sullivan retained Cassano as a $1-million-a-month consultant until June of that year. And Sullivan himself took home a pay package worth $29.2 million for the first six months of 2008, according to a company proxy. He left the firm in June of that year.

When Pasciucco arrived in November 2008 to take over AIGFP, he didn’t get a rousing welcome. "I had expected there to be a gathering, a speech," he says. Instead, he was greeted by an AIG executive from New York and a human-resources person. He made most of his introductions to the downcast staff by himself. "The place felt rudderless, leaderless," he says. Pasciucco found there was no regular schedule of meetings, no firmwide financial reporting standard and no support staff to generate reports. "It really was like a hedge fund where everybody was a frontline person," he says.

He started up a financial management group, under Diane Cenci, to impose new procedures for keeping track of the various business lines’ profits and losses, and to track the winding down.
Pasciucco got a taste of his predecessor’s management style on his first visit to the London operation. Upon Pasciucco’s arrival at the Mayfair office, an executive asked him to choose the pattern for some carpet that needed replacing. "Why are you asking me?" Pasciucco says he responded. "Who normally makes these decisions?" "Joe used to make them," the executive said.

Cassano, Pasciucco learned, had made all the decisions. "He was in charge of replacing light bulbs and what was served for lunch, as well as how many CDOs on subprime we were going to do," Pasciucco says. "And you know, that sounds a little bit like that other guy, Hank Greenberg." A lawyer for Cassano didn’t return repeated phone calls seeking comment. Pasciucco set up an operating committee of 18 people to help make decisions previously made by Cassano alone.

The bonus uproar set back his work by weeks, Pasciucco says. Over a two-month period, AIG received hundreds of phone calls a day, as well as more than 6,000 e-mails, many of them threatening. One example: "Your top people have some surprises in store for them." Another: "All the executives and their families should be executed with piano wire around their necks." The firestorm took a psychological toll on AIGFP employees. "I can’t describe to you how many senior people who had been through a lot broke down on the trading floor with 200 people watching," Pasciucco says.

Says Jim Shepard, president of the AIGFP’s Banque AIG subsidiary in Paris: "Everyone felt like we were being personally vilified." Pasciucco maintains that the bonuses were justified. "We are a company of 44,000 contracts," he says. "We honored these contracts too." Pasciucco says the retention plan was instituted in early 2008, under previous AIG management, and covered the 12 months the AIGFP employees had already worked.

When he arrived, Pasciucco says, he didn’t encourage any AIGFP employees to leave, even if they had been involved in CDO swaps. "Their institutional knowledge was irreplaceable," he says. Moreover, some of the swaps on CDOs made money, and some of the people who wrote those swaps had campaigned to start shorting the subprime mortgage market as early as 2006, only to be overruled by Cassano, Pasciucco says.

Pasciucco keeps his staff motivated by delegating and then standing back. "We say, ‘Take this narrow group of trades for this line of business and focus on that,’" he says. "‘This is your mission. Go take the hill.’" Still, Pasciucco is looking for ways to reduce the firm’s head count. One method is to persuade firms that take over AIG’s positions to also hire its staff. When UBS bought AIGFP’s commodity index business, it hired 14 AIGFP personnel to manage it.

Another group of traders worked for eight weeks to put together data on the risk-reward dynamics of a group of 50-year derivatives linked to the Austrian stock market. A nonbank financial institution expressed interest in taking over the trades, yet said it lacked the trading expertise to manage them. Pasciucco offered the buyer the expertise of several AIGFP employees to do the job. "That solves a problem for me, too," Pasciucco says. "I move a bunch of people off the payroll."

Pasciucco expects to get out of the vast majority of AIGFP’s positions by year-end. If necessary, he may shepherd any remaining trades to the parent company. He plans to leave by the end of 2009, whatever happens, to go back to Wall Street, work at a hedge fund or write a book. Meanwhile, the AIG fiasco has helped inspire a raft of new plans to regulate derivatives. Under pressure from the administration of U.S. President Barack Obama, derivatives dealers in March began moving the most actively traded contracts through a new clearinghouse operated by Atlanta-based Intercontinental Exchange Inc. Dealers also agreed to make public all derivative trades in the CDS market by July 17.

On June 17, Obama and Treasury Secretary Timothy Geithner announced an overhaul of financial regulation, under which all derivatives will be overseen by Washington and all dealers will also be subject to government supervision. Obama said in an interview with Bloomberg News on June 16 that "what is lacking right now is the resolution authority so that when a single institution like an AIG breaks down there is an ability to unwind that individual institution without bringing down the entire system."

None of the regulatory changes are likely to save AIG from its inglorious legacy as a trigger for financial catastrophe and government bailouts. The system itself may never be the same, NYU’s Smith says. "After AIG, people will be able to go back to Wall Street to make money," he says. "But it will be a long time before they enjoy the respect and status they once had."

World failing to halt biodiversity decline
Governments are failing to stem a rapid decline in biodiversity that is now threatening extinction for almost half the world's coral reef species, a third of amphibians and a quarter of mammals, a leading environmental group warned Thursday. "Life on Earth is under serious threat," the International Union for Conservation of Nature said in a 155-page report that describes the past five years of a losing battle to protect species, natural habitats and geographical regions from the devastating effects of man.

IUCN, the producer of the world's Red List of endangered animals, analyzed over 44,000 species to test government pledges earlier this decade to halt a global loss in biodiversity by 2010. That target will not be met, the Gland, Switzerland-based body said, describing the prospects of coral reefs as the most alarming. It also said slightly more amphibians, mammals and birds were in peril compared to five years ago, with species most prized by humans for food or medicine as disproportionately threatened.

"Biodiversity continues to decline and next year no one will dispute that," said Jean-Christophe Vie, the report's senior editor. "It's happening everywhere." Vie told The Associated Press that biodiversity threats need to be highlighted and combatted, even at a time when many world leaders are preoccupied by economic recession and financial instability. Unlike markets and debts, animal extinction is an irreversible element of today's "wildlife crisis."

He urged governments to usher in major changes to society, such as reducing energy and overall consumption, redesigning cities and reassessing the environmental consequences of globalization — producing goods in one part of the world and sending them thousands of miles to be sold. Vie said climate change only threatened to make the situation worse. Governments pledged in 2002 at a meeting of the U.N. Biodiversity Convention and the World Summit on Sustainable Development to halt biodiversity decline by the end of the decade. European governments have set a similar goal among themselves.

In Europe, "about 50 percent of species are under threat or vulnerable," said Barbara Helfferich, a European Union spokeswoman. "Habitats are shrinking and a lot needs to be done. We are doing a lot, but it's not enough as promised to halt biodiversity loss." Helfferich said a report last year suggested a number of steps for European governments to better protect biodiversity. They included expanding conservation sites, cutting down on overfishing, expanding protection to marine environments and better incorporating ecological concerns in government decisions.


D. Benton Smith said...

Sooner or later (my guess is sooner) the desperate need of 40 million unemployed people for income of any sort is going to hit the jobs market like a battering ram.

And employers, faced with the seemingly endless decline in sales and profits, have desperate needs of their own... such as how to stay in business when all of the numbers (except loss) are going down.

The inevitable consequence of these matching needs is going to be a sudden, drastic and quite probably violent drop in wages as the unemployed vie with the currently employed in a contest to see how little wage they are willing to make... just to have a job at all.

Laws will be changed or defied, contracts broken, picket lines crashed, and heads bashed by goons.

40 million workers (and don't forget their dependent families!) can get by with no income for only so long and then they must act or die.

No one knows just how long that might be.

But it won't be much longer.

D. Benton Smith said...

correction: 14 million, not 40 (yet)

Ilargi said...


At John Williams' 20% U6, you're not that far away from 40 million.

jal said...

Unwinding at AIG Prompts Pasciucco to Ponder Systemic Failure

It's too bad that AIG was one of the suckers that "covered bets". If it had not "covered bets" it would not have gotten into trouble.

Pasciucco s job is to find some other suckers to take on AIG s bets.

thethirdcoast said...

@ Stoneleigh

Now I run 5-6km most days and do serious weight training at the gym. I signed up with a personal trainer to show me how to use the machines properly, and after watching me for an hour she told me I could out run her and out lift her. I can beat my 16 year old son at weight lifting and can do 5 times as many pull ups as my athletic 18 year old daughter using the same weight (set by the machine). Ilargi and I play soccer every week, which is something I never thought I'd be able to do. I'm still a work in progress after 18 months, but I feel great. My doctor told me I have the blood pressure of a teenager and I am in my 40s.

Good god.

What are the chances I could lift with you and discuss the feasibility of my mom's place as a doomstead sometime?

I'm pretty sure I can keep up.

Stoneleigh said...


What are the chances I could lift with you and discuss the feasibility of my mom's place as a doomstead sometime?

It depends where you live :)

Dr J said...

@ el g - from earlier post. Your desire to get into shape is laudable and it is never too late. One thing to consider is whether you might have developed insulin resistance. The reason I bring it up is that if you have, you will find it difficult to get into an exercise program as your internal messaging will be telling you to conserve energy. The fact you describe yourself as a little overweight is one marker. If you have ever been told that your blood sugar was a little high or if you have had a cholesterol test that showed HDL a little on the low side and triglycerides a little on the high side or if you have high blood pressure, any of these would clinch the diagnosis. This is important since the best approach to fitness for someone with insulin resistance is to stop eating carbs. This will correct the IR and within a couple of weeks you will feel a surge of energy that will make exercise much easier. You will also lose the excess weight and correct the HDL/TAG problem and blood pressure, too. When you get to Peru, feel free to gorge on the guinea pigs but hold the potatoes.

BTW - I would venture to say that Stoneleigh's exceptional stamina is in large part due to her adherence to a low-carb diet.

Anonymous said...

CLAWS: Creating Livable Alternatives to Wage Slavery

Screw that working to support a corrupt government spending it's way to insolvency for the banking pimps that pay for the elections and the lobbyist who write the bills they pass along with a central bank that's doing it's damn best to destroy the currency.


Y2Kunstler said...

A few days ago Oarwell said:

If you want to see someone pretend expertise and be really, really wrong, go read some of North's stuff about Y2K.

I was wondering if Oarwell would say the same thing about Jim Kunstler. Many here, including myself, love Jim Kunstler, but he was also one of the voices predicting Y2K disaster.

He said: "Y2K is real. Y2K is going to rock our world.
People will consequently suffer. I don’t know how much. Some people may lose their lives - but more likely at the hands of a disabled medical establishment than because of civil disorder, loss of power, starvation, bad water, or other projected horrors (though these, too, are possible). Some will suffer the loss of fortunes, some of any income whatsoever, and many of something in between. Quite a few will find themselves suddenly without an occupation, and few ideas about how to make themselves useful to other people (without occupations themselves). Many will suffer a loss of comfort and modern convenience, and if that goes on any longer than a week, it may escalate into serious problems of public sanitation and infectious disease."

JK's predictions about Y2K never materialized. Some say that this is an indication that he is also wrong about his peak oil predictions (I do not agree). They say he cannot be trusted anymore. Some say that the predictions made by I&S will fall into the same sort of category.

So, Oarwell, do you hold JK to the same standard that you hold Gary North? Simply because he was wrong about Y2K?

Anonymous said...

Greyzone and Stoneleigh--

Thanks. It all makes sense to me but it is complicated to explain to my neighbors who think we have years to spend slowly shifting to renewable energy. Sigh...

By the way, Stoneleigh: Did you plant the kellogg yellow breakfast tomatoes? I have a batch of them growing. This is a rainy summer so far...lord knows when we'll get tomatoes.


Anonymous said...

I talked to a friend of mine back east. His brother was forced into foreclosure in Delaware. The bank, however, told him that they have too many foreclosures to deal with and that they are going to lower his monthly payments. His payments are now going to be cut in half. I am not sure if this includes a reappraisal value on the home or not. I will try to get more details.

Why wouldn't the banks not do this exact thing across the board, for every mortgage in the country? How much money would be put back into the economy? How much debt could be paid off?

They appear to be doing this in Delaware so why not nationwide?

Gary North said...

There are ten questions that the deflationists need to answer. If your favorite guru predicts inevitable price deflation, send him this article and ask that he respond on-line to these ten questions. If he refuses to answer all ten, with a link back to this article for his readers to see, find a new guru.

1. Was price inflation after 1933 caused by central banks and fractional reserve banks? The answer is yes. If they answer anything else, they are crackpots. They won't.

2. Is price inflation primarily a monetary phenomenon? Ludwig von Mises said it is. Milton Friedman said it is. See if the deflationist has another answer. Make sure he points to detailed studies that prove his answer: several books and a lot of scholarly articles on price history.

3. Is newly created money from a central bank or commercial banks created by purchasing an asset, usually a debt? It is. Since deflationists rest their case on this fact, they will answer in the affirmative.

4. Do commercial banks have an incentive to lend money to solvent borrowers? The answer is obviously yes. The debate comes when defining "solvency."

5. Do commercial banks pay interest on deposits? The answer is yes. Even in zero-interest accounts, such as checking accounts, the bank provides services that cost it money.

6. How can commercial banks afford to pay interest on deposits? They pay it by taking in more from borrowers than they pay to depositors. They make it on the spread between these two rates. The deflationist knows this.

7. When a central bank lends money to the government to buy its bonds, what does the government do with the money? The correct answer is "spends it."

8. When someone receives a check from the government, what does he do with it? The correct answers are: (1) "deposits it in his bank; (2) cashes it at a local bank or Wal-Mart or other check-cashing service.

9. What does the check-cashing company do with the check? The correct answer is "deposits it in its bank."

10. What does the bank do with the check? This is the central question. This divides inflationists from deflationists. Let's look at the possible answers.

A. It sends all of it to the regional Federal Reserve Bank as reserves and also excess reserves. The Federal Reserve pays the federal funds rate on excess reserves. These days, this is about 0.15% per annum. This is less than banks pay depositors. They lose money on the deal. The FED does, too: it does not lend this money. It's like vault cash.

B. It sends the minimal reserve (10% or less) to the regional Federal Reserve Bank and lends the rest. Whatever it lends is in the form of a check. The check is deposited in a bank. At that point, the receiving bank must decide what to do with it: A, B, or C.

C. It converts some or all of the money to vault cash. Vault cash is a legal substitute for reserves held at the FED. It pays no interest.

The deflationist argues that at some point, commercial banks will hold most of their money as vault cash or excess reserves. This stops the fractional reserve process. This stabilizes the money supply. But this argument does not answer this question: "How does a refusal to lend shrink the money supply?" Stabilization, yes. Contraction, no.

The inflationist says that banks can and do hold some (not all) deposits as excess reserves. This is a short-term policy. Banks cannot hold all deposits as excess reserves or vault cash. This is because banks must earn a return higher than what they pay to depositors. Otherwise, they go out of business.

team10tim said...

Ilargi and Stoneleigh,

I have a odd question for you. Where are we going to be in 100 or 200 years?

Are we going to learn our lesson from this or are we going to repeat the same mistakes on the next round of civilization? I know that it is an idle question as no one here will be around by then but I am curious.

I've been following peak oil, climate change, and the second great depression for a while now and I know the projections range from a copernican star treck fantasy to a mad max distopian apocalypse.

Put simply, what is going to happen to all the straw dogs on this automatic earth? I know that you are trying to help people through the bottle neck and I find that very admirable, but what happens on the other side?


Anonymous said...

From Center for American Progress: Teen unemployment is a staggering 24%; African-American unemployment is 14.2 %; Hispanic unemployment is 12.2% and white males at 9.2% with only 67.7 working.

So the pain is widespread if not quite equal. But at least the 52 week unemployment benefit extension (on top the original 26 week limit) courtesy of the Recovery Act is a very humane and socially conscious policy. I salute this legislation.

At the end of the day the unemployed--no matter the age, gender or ethnicity--will have to fight to hold on to some sliver of dignity and self-esteem as a consequence of unemployment. For many, the initial tendency is to point devastating fingers of personal blame at themselves as cause for their dire employment status.

For those souls--many of them self-employed-- who weaved their life’s passion and self-identity into their occupational quilt, and who now stand shivering bare on the outskirts of a frozen economy...pray for them. Their pain, fear, uncertainty, and isolation is an amplified hell.

Ilargi said...

Yup, Mr. North is as obnoxious as he is wrong, which he is on so many points it's a waste of time to engage him.

Why would any thinking person answer those questions? Look at them. It's Gary's monologue, not anywhere even near a cordial invitation to a dialogue.

He needs so badly to be right, he's thrown critical thought out the window, and those who could teach him something with it.

Obviously, his wife still beats him.

Ilargi said...

"From Center for American Progress: Teen unemployment is a staggering 24%; African-American unemployment is 14.2 %; Hispanic unemployment is 12.2% and white males at 9.2% with only 67.7 working. "

Those numbers and more are all in today's BLS report.

Unemployment benefits extension means little without job prospects. Give a man a fish vs give him a rod.

Ilargi said...


There may be some pockets of human life left, on the small pieces of land that are still inhabitable. Nature as a whole will perform a giant swing backwards to long gone times when far more primitive species ruled. That is inevitable when huge numbers of the more complex organisms die off.

It's a toss up whether human beings can actually adapt to circumstances our species has never known.

Sir Fred Hoyle, a cosmologist, wrote in 1964:
"It has often been said that, if the human species fails to make a go of it here on Earth, some other species will take over the running. In the sense of developing high intelligence this is not correct.

We have, or soon will have, exhausted the necessary physical prerequisites so far as this planet is concerned. With coal gone, oil gone, high-grade metallic ores gone, no species however competent can make the long climb from primitive conditions to high-level technology.

This is a one-shot affair. If we fail, this planetary system fails so far as intelligence is concerned. The same will be true of other planetary systems. On each of them there will be one chance, and one chance only."

Bukko Boomeranger said...

The smiling people on the telescreen would like you to know that if you have driven off a cliff in your own life, it's all your fault. And you're just about the only one. So don't look around at what seems to be misery. What's wrong with you anyway? Don't harsh our green shoots, man. Just look at the bright shiny Jackson! It's been a week, and he's STILL DEAD!

Bukko Boomeranger said...

Give a man a fish vs give him a rod.

Give a man a can of government surplus tuna. Containing mercury. Expiration date: pre-election...

Anonymous said...

@Dr. J.,

That was good information. Thanks.

Anonymous said...

it keeps going round and round...

I still have a few of this and that from the y2k "drill".Its funny...a lot of the gear,carefully stored is just what the place needs for this crisis...A very,very good grain mill...some good hand pumps...the original pick of this[home] place was for a y2k doomstead.CSy2k was the epicenter of that movement on usenet...then morphed into Timebomb2000 by [i forget]that morphed into a pure survivalist /christian radical /[im gone]/bunch that would make the folks over at latoc blush.......

This is why I have the lifestyle I do.I made "preps"a lifestyle,and planted trees,and lived quiet.This is why I am not nearly as concerned as many over whats coming ....It would be nice to have the place paid off though..



VK said...

This is a one-shot affair. If we fail, this planetary system fails so far as intelligence is concerned. The same will be true of other planetary systems. On each of them there will be one chance, and one chance only.

Grim stuff. I just got Joseph Tainter's Collapse of Complex Socities, should keep me busy for a few days.

bluebird said...

Current and former computer programmers - What do you think, is the following possible?

On 7/2/09 John Xenakis of the blog Generational Dynamics, opinions that computer programs have been setup to buy huge blocks of stocks based on algorithms such that the next buy of a huge block of stocks, is just a tad higher than the previous block. This takes place in milliseconds, over and over again, pushing up prices. Call it panic buying.

Can you see where this is going? Those algorithms could be changed to perform panic selling that could crash the market when desired.

He also includes a transcript of an interview on Tuesday by Bloomberg TV with Joe Saluzzi of Themis Trading, who confirms computerized buy/sell programs are dominating the market these days.

The influence of computerized trading programs

Submit your advice said...

Hi Stoneleigh,

I just turned 50. Ran a marathon last weekend (real slow), a 30 mile run the weekend before to train for it. Running a marathon in Massey, ON in two weeks. No reason, just something to do. Last BP reading a week ago was 106/60, pulse 60, my HDL is 82. I take no medications of any kind. There's good old and bad old and we can choose. The good old is actually better than being young, in many many ways. Bad old just plain sucks. It's a no-brainer but still, most people choose bad old, out of fear or laziness. Faut pas chercher a savoir, pas la peine.

FWIW, I think good old is good financial planning, too, and a great hedge against bad times. It's hard to put a financial value on it, especially considering the exercise I do is basically free and much of my nutrition comes from gathered weeds which are free, and vegetables I grow cheaply (e.g. I buy turnip seeds in the fall when they're marked down to 10 cents a packet, and I eat the greens and roots. Arugula, mustard and cilantro I simply allow to reseed itself, even getting two crops a year of arugula that way).

But you are right in comparing your health to a teenager. Certainly my BP is that of a teenage athlete. All this is possible, if people want it.

I figure the US could trim a third or more of its health care costs this way. Eventually they may have no choice. People used to laugh at me for eating weeds. They don't laugh any more, nobody does. They ask me to show them how.

D. Benton Smith said...

@ Submit your advice

That's right.

What's the difference between weeds and flowers or vegetables other than arbitrary opinions about propriety of place and purpose?

In the spring, when they were easy to spot and transplant, I gathered wild onion, carrot, garlic, arugula, cilantro, day lilly, dill and dandelion and transplanted them to various out of the way parts of my back yard.

Some might call it a weed lot, but to me it is an indigenous garden. It's orderly, beautiful AND I can eat that part of the yard instead of mow it.

Falcor said...

From Ilargi's opening comments:

No chance to buy a home and raise a family. That's the kind of material that is tailor-made for breaking societies apart.

It is more likely that buying a (separate) home to raise a (nuclear) family is one of the most successful methods of breaking the primary component of societies.

What a bizarre and socially corrosive aberration it is to separate families, clans and tribes into far-flung nuclear units - children without cousins, aunts, grandparents having to go to daycare - elderly wasting in nursing homes alone and at great expense, etc.

This coming "great correction" will not be without benefits.

bluebird said...

Rolling Stone has uploaded the Matt Taibbi Article. It is 5 pages, and on each page is a video with Taibbi explaining more about Goldman Sachs.

Matt Taibbi - The Great American Bubble Machine

Unknown said...

We have, or soon will have, exhausted the necessary physical prerequisites so far as this planet is concerned. With coal gone, oil gone, high-grade metallic ores gone, no species however competent can make the long climb from primitive conditions to high-level technology.

Yes, we are destroying the coal and oil, but the metal? We've converted a lot fo the high-grade metallic ore into high grade metal. It might not be feasible to build a bigger/better society out of the wreckage of this one, but go far enough into the future and a lot fo the metal will just be sitting underground, waiting to be dug up again. Old shopping carts, recycling depots, skyscrapers...there will be a lot of metal to find in high concentrations, certainly compared to the concentrations we find in ore.

Civilization built up a long way without using Coal or Oil in any appreciable way. Left alone for a millenia or two, nature will once again have a vast suppply of disposable resources on the surface, like trees and clean fast flowing water.

So no, civlization isn't a one time chance.

Dr J said...

@ anon 3:48 (and el g) - I hasten to add a caution that, if you are medicated for BP or blood sugar control, you will have to quickly reduce or discontinue those meds if you start restricting carbs. There is much more to this than you will learn from the popular books. For instance, you will also need to increase salt consumption (to avoid headache and constipation) and may need a slow-release magnesium supplement (for muscle cramps), as well.

Ahimsa said...

"A List of Corporate Lobbying"

el gallinazo said...

Dr J

Thanks for your feedback.

My blood sugar and BP are normal and my LDL and cholesterol are quite good for my age. Considering my wastrel habits, I have been lucky in this regard with the deal of my genes. When I am in South America, I typically walk at least 10 km a day just going about my business. I drop a KG a week without even trying, and I eat much better than in St. John, where one has to be an oligarch to afford a healthy diet.

Anonymous said...

If you followed the link the other day to the Canadian TV interview with Taibbi, you would have heard the question asked why Rolling Stone ran this article and used 'angry' language and hipper terminology than most economic pieces. Taibbi said it's aimed at a younger audience and needed to be presented that way, to get them angry enough to DO something.

This dovetails with Ilargi's post today about generational tension.

Taibbi piece is the first bucket of gasoline on this particular little campfire.

Any home grown 'corn pone' demagogue, as Jim Kunstler put it, will be working this generational angle very heavily in the not too distant future.

It's also outrageous how the Shadow Government Stats diverge so greatly from the Ministry of Propaganda's pablum.

Wait until that record is held up like a bloody shirt to the unemployed masses.

Anonymous said...

Hey D Benton Smith, don't be such a gloomer and pessimist think positive, bring a little light to our world. Think ... so the machine breaks down, there will be jobs for everyone then .... ever consider candle making as a profession?


Dr J said...

@ el g - you are quite right. The most important determinant of health is who one chose for parents.

Anonymous said...

Ilargi wrote:

“Unemployment benefits extension means little without job prospects. Give a man a fish vs give him a rod..”

For the last 6 months--the amount of time I have been reading you--one dominating theme has resonated in your message: Help for the common people. This help for the commoners, even though ultimately futile based upon your diagnosis of a terminal American (and other nations) economy, would help to soften the blow, to ease the transition into some very troubling times. Or so you have written.

But when I praise the extension of unemployment benefits for an extra 52 weeks, a full year, you dismiss the action as of little consequence. Even more perplexingly, you pull out the “ buy the bootstraps “ card echoing the same exact sentiment employed by the economic Darwinist savages of nineteenth-century England when rationalizing away their decision to withhold food from the starving Irish.

Beyond that, what world are you from anyway? Certainly not any world where you would have to witness the despair and fear in parents and children as a result of the economic torment of unemployment. An extra fifty- two weeks is HUGE, in terms of providing individuals and families the room and time to maneuver for better footing, even if that footing is ultimately on epochal grounds of shifting economic uncertainty. But if you really believe what you write, I dare you to take that ‘ learn to fish’ message to Michigan, to a family whose very existence now depends on unemployment benefits.

Not that it matters to me whether you are a fan of this administration or not, I now suspect your concern for the disenfranchised is superseded by your disdain for of the Obama administration. Otherwise you would not so casually wave aside something as meaningful and crucial as an extra fifty-two weeks of unemployment benefits to economically tortured Americans.

How convenient, and in my opinion false, to take the “ Long View,” when by praising the short term actions of extending unemployment benefits --actions that are congruent with your implorations for a “softer common-man landing”-- you are forced to acknowledge the humane and noble results of a particular legislation from an administration that receives almost daily condemnations in your writings.

You sir, in my opinion, despise Americans, and--AND-- this repugnance is coloring your analysis of the situation and revealing some very hypocritical stances. And please do not confuse the aforementioned as the rant of a vitriolic patriot. I despise the flag-waving and chest-thumping jingoist, but I do recognize the flip side of the coin when I see it.

Adios. My time is over at TAE. This will be my last post.

'The Great Northern, out of Cheyenne, from sea to shining sea'

Anonymous said...

ilargi you say:

It's a toss up whether human beings can actually adapt to circumstances our species has never known.

You greatly exaggerate and when Fred Hoyle states the problem he doesn't look at it whole and clearly. That oil and those resources are not destroyed but translated into a great bank of knowledge. Save that knowledge and you save those resources. A look at history easily shows both you and Hoyle to be having delusions of grandeur in your particular apocalyptic visions.


Ilargi said...

"The Great Northern, out of Cheyenne, from sea to shining sea"

You may think of me what you will, even if most of it is based on nothing but an emotional reaction to your own queasy uncertainties.

I think it's so obvious that it's a good idea not to let people starve, that needs no further comment. Still, some 3 million jobs have been lost since the inauguration, and maybe 150.000 were created. That could and should have been done much better. But I don't even see anyone in Washington or elsewhere really trying, which is very disconcerting. You can sit still and admire the benefits of handouts from one taxpayer to the other, but if you don't mind, I plan to keep my eye on the looting of the nation that goes on behind your admiring back.

If you think you're a more compassionate person than I am, and/or have a better notion of what happens vs what can and should happen to make life better for those you tell yourself you care so greatly for, go for it, indulge yourself.

My alleged anti-Americanism or aniti-Obamaism are Norwegian blues. They bore me to death and I stopped listening. It's like Americans talking about their unique spirit bla bla in order to not have to face themselves. A way to pull people together and make them forget that they can't see eye-to-eye on much of anything else.

brendan said...

I think Anon 10:36 is right, in a way, about some of the dissonance in Ilargi's writings. I don't really think it has to do with Ilargi's despising Americans, though.

Ilargi just has a very peculiar mix of fatalism and idealism. From this point of view, America just comes in for the most criticism because it has the most beautiful ideals. See Ilargi's election-day posts from last year for a rare instance when positive idealism held the upper hand in Ilargi's world-view.

But it's not really Ilargi that you should look to for pragmatism--that's what Stoneleigh's for!

Anonymous said...

A way to pull people together and make them forget that they can't see eye-to-eye on much of anything else.

Them's sour grapes there boy :-)

After living in the cultural chaos in Europe I'm glad to be back where folks can share an ideal or two (or three...etc).

The US has a unique spirit, history, and culture that many envy. Obviously this Ilargi blogger is among them, bored or not.

jal said...

Re.: The influence of computerized trading programs

Since it is the 4th July long weekend, it would appear that the market is not being influenced by the "normal" computerized trading programs. Too many people took time off. (S&P -900)
Re.: anon ..."Adios. My time is over at TAE. This will be my last post...

Gee, don't do that, we need the analysis of the complexity of the meshing of the different actions that are being done to keep this financial structure functioning in a changing economic and social frame.

Did you come to any conclusions.

Should the gov. use ...

1. The Capitalism solution ... let them die (ie. N. Korea),

2. The Socialist solution ... everyone is the same (ie. Cuba)

3. Something else???


el gallinazo said...

Re Great Northern

Always nice to throw the bomb and slam the door (regarding exiting from TAE).

First of all, I do not regard Ilargi or Stoneleigh as particularly anti-American. I think they despise all governments equally that are run by oligarch bankers. They simply focus more on the USA because it has been the dominant economy in the world, and the major source, along with the UK, of the financial instability.

As to extending unemployment insurance, what percentage of the total legislative package does it represent? The rest of it is essentially malinvestment. And add to that the $750B TARP theft, to which Obama has become an accessory after the fact, and perhaps $10T that the Fed has stolen in their cash for trash programs, and it has become minuscule.

The point is, when this money runs out, any further help to the poor and down trodden will be made impossible because of the theft by the financial oligarchs. If a bank steals my house and then the manager flips me a quarter tip for carrying his briefcase, I am suppose to praise him? I think many people (black people in particular) will go to their graves (as skin and bones) praising Obama. They listen to his words but they don't watch his hands. In a few short months he has proven himself to be a complete puppet of the financial oligarchs. The fact that he is not a moron like our last POTUS is almost irrelevant.

As to Ilargi's projections into the next couple of centuries, I think it is unduly pessimistic vis-à-vis the human race, but with a couple of caveats. Homo sapiens may well be the most adaptable land vertebrate the planet has seen. It was found everywhere since the neolithic except Antarctica, and that is probably due to it being isolated by the most deadly seas known to exist.

Peak energy probably means peak greenhouse gas production. The "probably" comes from the possibility that the idiots that be might start making stuff again like fluorochlorocarbons. So the excess greenhouse gases will probably be slowing pulled out of the atmosphere as time goes on through the various natural sinks. There is a serious possibility that Earth's temperature might go into a positive feedback loop from reduction of the polar albedo and such things and most life will be boiled alive. There also is the possibility that the almost inevitable future nuclear exchanges will make land based vertebrate life impossible.

Barring these, I see human population dropping into the hundreds of millions and then stabilizing. As to intelligence, since when does intelligence have anything to do with technology? Is the 21st century couch potato more intelligent than the Vedantic seer of 4000 years ago? Some of the most laudable civilization of mankind were accomplished without fossil fuels. Admittedly, the average lifespan was far less, but since we seem unable to control our reproduction, this is inevitable regardless of technology.

Persephone said...

I was reading Krugman's article That ’30s Show, in which he states that we need a larger stimulus package.
Depending on perspective, the current SP has worked just fine. It was good PR cover for the Banking Bailout.

jal said...

"Is the 21st century couch potato more intelligent than the Vedantic seer of 4000 years ago?"

They had the leisure class that produced their great thinker and found a way to pass on their "insights".
Had they had the "tech." that we do, they might have been able to outdo our achievements.

The same applies to previous social orders.

Unfortunately, most "insights" are continuously being re-discovered since social orders have a habit of "collapsing".

justjohn said...

bluebird asks about computer programs to buy/sell stocks ...

I know there are programs that buy/sell stocks. As I recall, programmed trading was fingered as a major cause of the 1988 stock crash. Afterwards, several rules were put in place to help slow things down to human speeds (trading stops if the market falls by a certain percentage, etc).

You suggest a program that keeps buying higher, bidding up the price. Sure, you could do that, but I think you would need the funds to buy the stocks, so normal people couldn't do something like that. You also don't set the price for the market, so what does your program do if the market goes down?

As a former programmer, one concept I'm very familiar with is GIGO (garbage in, garbage out). Wired magazine had an article about the quants that developed the formulas and programs for pricing mortgage derivatives. Part of the formula was based on the assumption that house prices can only increase. Oops!

There has been buzz on the net lately that stocks have been pumped up by trading between the large investment banks. I'm not sure that it matters if that is done by manual trading, or computerized. You mention "crash the market when desired", it seems to me that the desire would be to maintain BAU.

Anonymous said...

Brendan you say:

America just comes in for the most criticism because it has the most beautiful ideals.

And before them it was the British and their care for 'the white man's burden'. I don't know if you really want to get into this (though it kinda is an apt moment). Suffice to say I would agree, on paper though not in fact, that your country would have the most beautiful ideals if it hadn't been beat out by the French motto 'Liberty, Equality, Fraternity'. Besides, you really gotta do something about that terrible phrase, ' the pursuit of happiness'. That has really been your countries road to ruin. Anyway , in keeping with the circumstances, Happy birthday.


Anonymous said...

@Anon 2:06 AM

So true, especially with regard to the self-employed.

I joined the ranks of the unemployed this June after being underemployed for a year.

Everything has changed. After reinventing myself via grad school, I realize that was probably an expensive mistake. I am approaching 50 in a market flooded with highly qualified people desperately looking for work. And competing with younger, inexpensive workers. So, I am not thinking in terms of making it through the year, I am trying to come up with a plan for the next 20-30 years.


D. Benton Smith said...

@ pinkleberry

Thanks for the good thoughts, but in point of fact I am not at all pessimistic or gloomy... just awake.

Let's say I'm walking down the street all smiles and whistling a happy tune & someone sees I'm about to step onto the pavement in front of an speeding express bus. Would I rather they warn me, and ruin my carefree mood, or spare my feelings with silence?

Career switch to candle maker? Probably not my line, but I have considered fire-brand.

Anonymous said...


When you get to the the part in Tainters book about the Ik people, use your sceptics eyeball when reading, as the facts about that tribe are second-hand, being related to him by a neighbouring tribe that looked on the Ik with a bit of a jaundiced eyeball.

Sorry about that, the thing does read better, strange it does seem, without all those balls:)


Anonymous said...

Hey Illargi-

I asked you to analyze Gary North's article Pushing On a String. I did not ask you to analyze anything else. So far, you have diverted all attention away from the very article I asked you to review. You pointed us to two other articles about Mish and a list of 10 questions.

I have read and re-read Gary North's articles. This time all of them, trying to figure out if they are as bad as you make them out to be.

Again, I say that North is quite rational and calm in his writing (at least the pieces we are talking about). There are no personal attacks. You may disagree with him, but that does not mean you should descend into some exasperated, personalized rant about him, all the while ignoring the real issue. Can you please read and review the said article? You act as if Gary North is the only person out there who is calling for inflation. There are many more. North just happened to cover information that many of them have not covered up to this point, including yourself. That is why I asked for a review. Go ahead and slam me for asking again. Or just review the article- which would be more helpful. What are you afraid of?

brendan said...


The French motto is certainly more beautiful (who would expect otherwise?), but it is distinctly questionable to what extent these ideas have actually functioned as ideals in French history since 1789. I'm not a scholar of French history at all, but it seems to me like "Liberty Equality Fraternity" is a slogan that periodically gets everyone riled up, and then all go back to revised versions of their historical social roles. Do educate me, though, because I'm no scholar of French history.

Not to say that the US has done such a great job, but the ideals laid out in the Declaration and the Constitution have animated two periods that I think we could all call progressive (in the real sense)--the Civil War and the Civil Rights movement.

Given the events of the last 30 years, whether any call back to our ideals in the US is now practicable, or even conceivable, I really doubt.

Ilargi said...

"America just comes in for the most criticism because it has the most beautiful ideals."

"The US has a unique spirit, history, and culture that many envy."

Welcome to la-la land.

Every single country on the face of the earth can make these claims with equal justification, and many do.

In the same vein, many different countries insist that they have the hardest working people in the world.

Popping through those empty bubbles has nothing to do with anti-Americanism, but with bringing some sense and balance into the picture, to get away from the Prussia-inspired "über alles" ideology.

"The most beautiful ideals" sounds catchy, but in the meantime you need to look at what's become of them, and the reality is that the US today looks closer than any other nation to Mussolini's corporate government fascist ideal.

And no, I don't find that something to be envious of. Come to think of it, envious of what exactly?

I think the ideals almost exclusively continue to exist only in spirit, kept propped up in a virtual saddle by a small elite who have recognized the benefits to their privileged circles of the irrational forces of nationalism.

None of this is to say that the US has not in the past brought forth many brilliant expressions of the human mind. But that's nothing unique either: so have countless other nations.

Anonymous said...

We know that inflation and deflation are functions of money supply. We know that money is 'created' when it is lent/borrowed. We have trillions and trillions of dollars in credit/debt created over the last several years.

Questions: If we have all of those trillions of dollars added to the money supply that is now contracting, why did the value of the dollar remain functional?

What mechanism was strong enough to keep the dollar's value in check?


D. Benton Smith said...

@ pinkleberry

Welcome to Dodge.

So, you've elected yourself law man, have you?

Pretty dangerous job around here, pardner.

But if you're serious, then what the hell... go for it. (Let's see, if I rummage around in this old box I'm sure we've got a badge without a hole shot through it.)

Just a hint, though, since you're new to the job and it would be entertaining for the rest of us if you lasted more than the usual 12 hours: double check your load before firing alleged facts into this crowd.
For example, it is disingenuous to challenge Tainter over the authenticity of his sources on the Ik people, since those details are not central to his arguments about the collapse of complex societies.

Anonymous said...

Brendan, I am sure you can educate yourself on the net better than I ever could, but on the Civil Rights movement, I think that goes back to the end of slavery in your country and youse guys were late on that. As far as civil wars, definitely late there:)

The French motto is certainly more beautiful (who would expect otherwise?), but it is distinctly questionable to what extent these ideas have actually functioned as ideals in French history since 1789.

They get the 'on paper' treatment too.


Anonymous said...

LONDON (AP) - PVM Oil Associates, the world's biggest over-the-counter oil brokerage, says it lost nearly $10 million this week because of unauthorized trades that caused a temporary spike in Brent crude markets.
PVM said in a statement late Thursday that it was investigating the trades, which drove up the price of Brent futures by more than $2 in one hour early Tuesday London time. It did not identify the trader involved in the transactions.

ICE Futures Europe, the exchange which handled the trades, said Friday that such incidents would be investigated as a matter of course, but declined to comment specifically on this case.

The Financial Times reported that futures contracts for 16 million barrels of oil changed hands in one hour, compared to a typical volume of 500,000 barrels.


Greenpa said...

Ilargi- "Welcome to la-la land."

lol. Well, exactly.

I consider myself a very serious patriot. Though actually for the world, first.

But the first thing any serious patriot needs to do is work as hard as possible; to see the truth. Maintaining old fantasies is really proven to be a bad idea. You cannot help the world, or your country, forward, if you don't actually see reality.

Americans are taught years of fantasy about what America is; starting with George and his non-existant cherry tree. It's an indoctrination on the level of being a life-long member of any other religion; belief becomes automatic, and incontestable.

Not that you don't know this; but I thought it might be worth saying that some Americans know it too.
So. I wouldn't worry much about this guy. He sounds like a very intelligent Jesuit priest with a PhD. Still some serious blind spots in his thinking.

Greenpa said...

"America just comes in for the most criticism because it has the most beautiful ideals."

A more tenable reason is because America IS Rome; hated, feared, admired, and envied by most of the world.

Anonymous said...


"I consider myself a very serious patriot. Though actually for the world, first."

In other words, you'd sell out your Country in a heartbeat if the U.N. told you to do so.

The amount of warped thinking which goes on in this blog is really funny. You have a bizarre notion of patriotism.

And one which, fortunately, won't stand up in a local court.

Good luck in getting a change of Venue to a World Court.

Greenpa said...

Anon, 1:36; as Tolkien put it: "Saruman, I fear I am beyond your understanding."

Which you will never understand. Sad.

Bigelow said...

Y2K didn’t occur thereby becoming a joke; heavy work by programmers mitigating it is ignored. The path we are on today is not comparable to Y2K because there are few attempts to ease the collapse from peak finance and oil for the population as a whole. One Dutch economist said “it is not profitable to slow the decline”.

Anonymous said...

We seem to be getting more than the usual knockdown-dragouts here today...

Seems odd to see gary norths sig again...long time no talk

Old bird,there is a bttle neck coming,I hope its not going to only be the savage,most brutal of our kind that makes it to the other side...or it will take another thousand years to breed the killers down to a acceptable level of violence.. if possible.

Rome had a bad end as I recall...


Anonymous said...

I recall that whole effort...And you are correct that due to a immense amount of work...the world continued... for awhile

You are also correct in stating there is no attempt to stop/slow the decline "because it is not profitable".

That is what will doom the system...self interest outweighing the good of those in a position to correct the problem..

Yes ,we are screwed...


el gallinazo said...

Always nice to have an Amerika über alles aboard. Seig Heil mein freund.

el gallinazo said...


If we are lucky, we will wind up with 10% of today's population in 150 years, and that is probably vastly overstated.

I go along with Stoneleigh that the "cooperationalists" will have a survival advantage. I think the idea of major genetic behavior change in an animal as complex as a human in a couple of generations is absurd. I also think that the mythic survival ideal of the rugged individualist tatooed Marlboro man killer gunslinger is absurd. They always die first though they take a lot of decent people down with them.

Anonymous said...

Brendan said to me:

For example, it is disingenuous to challenge Tainter over the authenticity of his sources on the Ik people, since those details are not central to his arguments about the collapse of complex societies.

You are right Brendan it looks like the guy who got it wrong was a guy called Turnbull and I assumeTainter possibly took his material from him. (note, 'assume'). Further I don't know what correcting a point that you say is immaterial to a thesis is material to your complaint, but tell me do, bring on those candlepower of illumination:)

it would be entertaining for the rest of us if you lasted more than the usual 12 hours

It is a fine thing to feel wanted but I must demure as I am but a flutterby and chrysalis is a nightly affair that cannot be denied.


bluebird said...

justjohn - It is John Xenakis and Joe Saluzzi who are saying that computerized buy/sell programs are dominating the market these days. These computer programs make decisions in microseconds, far faster than human beings can react.

What Saluzzi is telling us is that we're headed for a different kind of crash, where blindingly fast computers will be competing with each other to sell as quickly as possible.
Here is the link again, the fascinating article is appx 7 pages long.

Anonymous said...

Anon July 3, 2009 1:23 PM

Here is a another go by of the unauthorized oil trade. and in that article was some old news I found more fun than the new news:

In May, the FSA banned a former Morgan Stanley trader who built up a hefty unauthorised oil futures position following a long liquid lunch, before hiding the deals overnight.

I wonder what the current malefactor's extenuating circumstances will encompass? Hope it was fun, though one wonders how capricious some accidents are?


Bigelow said...

China Launches Pilot Program for Yuan Trade Settlement

Phil said...

Falcor said:

It is more likely that buying a (separate) home to raise a (nuclear) family is one of the most successful methods of breaking the primary component of societies.

What a bizarre and socially corrosive aberration it is to separate families, clans and tribes into far-flung nuclear units - children without cousins, aunts, grandparents having to go to daycare - elderly wasting in nursing homes alone and at great expense, etc.

This coming "great correction" will not be without benefits.

Nice to see another commenter on here who has seen through the myth of the nuclear family. I salute you.


ccpo said...

The amount of warped thinking which goes on in this blog is really funny. You have a bizarre notion of patriotism.

And one which, fortunately, won't stand up in a local court.

How an American could write such tripe and think they're actually an American, as opposed to a mere resident who happened to be born here is beyond me.

Have they never read the Declaration? The Constitution? The Federalist Papers? America was founded by people who questioned, and then changed, everything. More to the point, they government is not country, thus they started with, "We, the people..."

Franklin: If you are willing to give up your freedom for a little security, you deserve neither.

Jefferson: A little revolution every so often is a good thing.

Obviously paraphrased in both cases.

I can call myself an American BECAUSE I question, protest, and seek the truth. If your motto is my country, right or wrong, then you are but a citizen.


ccpo said...

Dr. J:

Is it really necessary to be so careful after an umbilical hernia surgery? They tell me not to pick up my kid, 18 mo., 11.2 kg., for at least a month! And is lifting the only real restriction?

Stupid to have it done now when we are relocating, but had to do it when we had insurance...

Oh, and your check is in the mail.



Ilargi said...

El gaz et al,

Note, I did say it's a toss-up when it comes to the future of our species.

One aspect that needs more attention is that where complex species disappear, primitive ones -tend to- fill in the space. In the oceans, this means a giant proliferation of jelly fish and toxic bacteria, for instance. I like term "Jellyfish and Chips", but it won't all be a joke.

I must admit, this developement had escaped me as well until three years ago when the LA Times published the Altered Oceans series, for which they later received a Pulitzer. For who hasn't read it yet, do so now. Don't miss it. It's still online here.

The effect is likely to be similar on land, and it may lead to a "reversal in evolution" of millions of years, to a stage when there were no humans, and the overall climate and conditions may not have been suited for us.

Our progeny will have to adapt to much more than a few extra degrees of heat. Whether they will succeed is for me, as I said, a toss-up. Their survival is by no means guaranteed, though.

Dr J said...

@ ccpo - I came very close to doing a surgery residency but, in the end, did not. I would do you a disservice if I offered advice in an area where I am less expert than your own doctor. I would recommend following his/her advice. You would hate yourself if you ruptured that wound!

Anonymous said...

ccpo: You're funny. You rail against warped thinking by missing the point, and then go asking for serious medical advice from a complete stranger on the Internet.

That's not just warped, but it's Darwinian Selection in progress. ROFL.

justjohn said...


I'm pretty sure the NYSE also has a computer, that is the controlling one. For this quarter, if there is a 2600 point drop, the market closes for the day. There are shorter halts for smaller drops, see

So it would take at least four days to zero things out. Presumably, the evening after a circuit breaker going off would find lots of "greater fools" at home, thinking how stocks are underpriced now, and it would be great investment to rush into the market the next day.

I was reading the comments at John Xenakis' site, he seems to think that the NYSE computer couldn't keep up & shut things down fast enough. I doubt that is true (but I'm nowhere near NYC and have never done financial programming).

I should probably shutup now and go cut shingles. I did a tiny bit of trading in the '90s, and came to the conclusion that an individual didn't have much long term chance there.

PS - my earlier post mentioned the '88 stock crash. I meant the '87 one, I had no stocks back then so the year wasn't all that important to me.

Jim R said...

Tree ferns. Perhaps there will be tree ferns. It is looking like we are headed for a P-T event; that little hickey at the end of the Permian, where whatever parameter your were tracking suddenly changes -- est. CO2 concentration, species diversity, sea level, or ice. Or isotope ratios in microfossils (an indicator of temperature).

Humans are a bit like rodents, they are resourceful and can eat jellyfish or anything else that was recently alive. But in some of these events the largest critters that show up in later strata are chicken-sized or smaller.

So it's hard to say whether there will be 10%, or 1%, or 0% of the current human population in the year 2150. What is quite certain is that there will not be six billion of us.

I'm watering my cycad collection, there's no telling what we'll need going forward ;-)

Anonymous said...

Anon July 3, 2009 3:34 PM

ccpo: You're funny. You rail against warped thinking by missing the point, and then go asking for serious medical advice from a complete stranger on the Internet.

So is that any funnier than that you here listening to some stranger tell you the end of the world is nigh?


I'm here for the yucks and to eat popcorn.


VK said...

Anon 12:47

How about you respond to all the comments we made on deflation here.

If you're so damned worried about inflation then go buy a house and invest all your money in stocks and other assets.

You'll make a killing.

For me, anyone who thinks inflation is coming given the facts is a fool.

VK said...

@ Pinkleberry

I'll keep that in mind, it was in the first chapter, the story of the Ik people.

Been through the first two chapters and what was definitely intriguing was the notion of the Divine Center.

Leaders in order to rise above kinship and other misgivings resorting to the use of the supernatural.

Hence the huge reference to God in American elections and the divinity of the founding fathers and the wiseness of Lincoln and Roosevelt. A myth is built around the center, one of grandeur! Even in Europe, even though the center is more secular, the virtues of liberty, eqaulity and fraternity supercede everything else.

The center while all the time exploiting the peripheries is framed into a spiritual, moral and legal power. Quite astonishing.

Anonymous said...


No wonder my stepmother kept telling me to eat my cycads

This blue-green algae produces a neurotoxin called BMAA that is found in the seeds of cycads.


Likely we will have both deflation and inflation , maybe prepare for both? Much more pertinent than worrying recipes for deep fried jellyfish I think.

Ho VK here you are, all over again, before I post

The center while all the time exploiting the peripheries is framed into a spiritual, moral and legal power. Quite astonishing.

Heh there really is no place like home (or here on this range) is there?


VK said...

@ pinkleberry

Likely we will have both deflation and inflation , maybe prepare for both?

No,no,no! There will only be deflation for the next decade or so. What will happen though is prices will rise for neccessities like food while prices will fall for assets like houses, stocks, cars, factories etc. BUT the price falls will be far greater then the price rises - Hence deflationary! But the man on the street will feel the double whammy of having to spend more money on food while his assets and wages decline. This is precisely what happened in Russia and Argentina.

As for this,

"Heh there really is no place like home (or here on this range) is there?"

I have no idea! Though it must be nice :)

el gallinazo said...


Why a mega P-T event. We really don't know what triggered it. Maybe cataclysmic volcanism. Other than green house gases, what's triggering our event? If we are going back to the stone age in the next 15 years, and fossil fuel use is way down, and we haven't already triggered a runaway positive feedback loop vis-a-vis albedo and deep sea methane hydrate, etc., why this cataclysm?

I think I just have more faith in buffering negative feedback loops balancing living systems if human technology would take its collective foot off of its throat.

Ilargi said...

What is with the Gary North fanclub around here? It gets to feel like a kudzu attack.

I don't want to "analyze" Gary North. I don't find that interesting. He's off on too many points, and he's shown himself to be a graceless conversationalist.

He says deflationists (whoever he figures they are) talk about price deflation. I don't, because there's no such thing.

He says deflationists focus on the M1 multiplier. They don't. I don’t, MIsh doesn't.

He says the Fed can force commercial banks to lend. It can't. Not without borrowers. There are no borrowers in the US. Even if the Fed would try to reignite the housing bubble, it would fail. So who would the banks lend to? The 10% (if that) of the population that's not yet knee-deep in debt? That would not save their asses. Whoever's not in debt today doesn't need credit.

He then says, likely in a panic attack, that if there are no borrowers, the government can give the money away to special interest groups, and they'll spend it. As I said, a panic attack.

US consumers are 71% of GDP. Special interest groups are, what, 2%? Unless he sees Wall Street as special interests, in which case they've already gotten trillions, and still there is no inflation.

North admits we are in deflation (though he prefers to call it low inflation), regardless of the $14 trillion already committed to the financial system.

If the Fed can't achieve inflation with $14 trillion, so seems to be the idea, they will be successful with $28 trillion, $42 trillion or $56 trillion. They won't. But I have the idea North will sit back for years and wait till he's proven right, the truth be damned.

Why do people think the Fed and Treasury sell bonds, instead of just printing money?

One more. North says in his 10 questions that every deflationist "must"[sic] answer:
"The deflationist argues that at some point, commercial banks will hold most of their money as vault cash or excess reserves. This stops the fractional reserve process. This stabilizes the money supply. But this argument does not answer this question: "How does a refusal to lend shrink the money supply?" Stabilization, yes. Contraction, no."

He completely ignores the role of credit in the contemporary financial system, especially its role in money supply, which should really be called money/credit supply. Only 3% of our money supply is real money, the rest is all to an extent credit, created by banks when they write loans.

If you stop fractional reserve lending, you don't just stabilize the money/credit supply. Not when there are trillions in debt remaining to be paid off. That’s a simpleton point of view. After all, what will the outstanding debt be paid off with when over 90% of money/credit supply is shut off? Not with credit, apparently, since the banks don’t lend. And even if they would, it would make no difference, since people already have so much debt.

Therefore, it must be with money, if and when possible. Which will then be withdrawn from the supply, since it's not re-lent, as we saw above. So the answer is: Contraction, yes.

Anonymous said...


I didn't mean concurrently, deflation and inflation but merely both to think on'. I do have a son:)


Anonymous said...

Jesse's Cafe

"India Puts Its Weight Behind Alternatives to the Dollar Reserve Currency

When an alternative to the dollar as reserve currency does occur will this be the most widely telegraphed "black swan surprise" in history?

We would agree that it appears to be an almost classic Prisoner's Dilemma

The exits are likely to be rather crowded when this one finally comes home to roost, unless the nations can agree to a longer term phased in approach. But even then, once the announcement is made, it is beyond all doubt the endgame for the dollar bubble.

The system has not crashed, it is crashing."


Oarwell said...

I remember Timebomb2000, when Phil Greenspun set it up. I always thought it was a great experiment in early web sociology. Snuffy, remember the battles between "Mr. Decker" and the rest of the gang?

The IT industry did do a great deal of work to mitigate the effects. I always had the sneaking suspicion the whole thing was a put-on to get institutions to fork over the money to upgrade their systems. Some of the collapse of the tech bubble may have reflected the fact that all the big players had just finished spending millions upgrading, and didn't need any more stuff.

As for Kunstler, I loved his 'Geography of Nowhere.' I didn't know he was a Y2Ker, although it fits with his doomer mentality. He's a pretty good painter, too, particularly some of his twilight pastorals of gas stations. But as far as I know, he was no leader of the Y2K = TEOTWAWKI cult. Gary North most certainly was. He ran the principal Y2K forum on the internet, culling every grim bit of Y2K news, no matter the source, to feature on his weblog. Whether he profited from his rotten vaticination I have no idea. I learned one thing, though: never pay attention to anything he says, ever again. He has zero credibility, in my book.

You want to see more examples of his oddness, read his stuff on Dispensationalism. He's sort of the William Miller of economics: Miller was the religious leader who predicted the world would end on Oct 22, 1843: "The sun rose on the morning of October 23 like any other day, and October 22, became the Millerites' Great Disappointment. "Our fondest hopes and expectations were blasted, and such a spirit of weeping came over us as I never experienced before....We wept, and wept, till the day dawn." I don't know if Gary North wept on January 1, 2000, but the rest of us jsut went to sleep, after watching PBS's wonderful coverage of the Millenium.

Another aside: why is it important that Ilargi come out and do battle with North? North shows up, announces the curious rules and strictures of the combat ("Ilargi must wear only one shoe: Ilargi must have one hand tied behind his back: Ilargi must memorize and recite Tintern Abbey: etc"), and his acolytes pretend the battle won when no one pays heed.

If you don't like someone's blog, don't click on it. It's not like there's a shortage. If you've read all of North's stuff, then you should be well-equipped to assess TAE's point of view. It's not like they've been coy about making their feeling re: deflation known.

A suggestion: don't become so focused on a particular blog that you feel compelled to announce "your last post." You're betraying a bit too much emotional investment in what is, after all, a very incorporeal community.

And now, I have a confession to make: I don't even read the articles here anymore: they're all the same. I just like the comments (and the pics).

PS. Stoneleigh, when you talk about your workout, I can't help but picture Linda Hamilton in T2, doing pullup after pullup while waiting for the robots to reappear. Seriously, though, there are so many benefits to being in top physical condition, mental and physical, that it makes no sense not to be. Don't get too fixated on numbers, HDL and BP and whatnot--just go out and exercise. The benefits will come, and in 6 months, a year, you'll be very pleased, Obamageddon or no.

VK said...

@ Ilargi

Now that's a smackdown! :D

Malcolm Martin said...

Ilargi in this posting you write, "A free market system is fine by me, but only if there are fair and equal opportunities for everyone."

With all due respect, you are showing some irrationally exuberant faith in the nature of capitalism, which you refer to by the euphemism "free market system."

A parable you have no doubt heard before applied to the nature of our economy and the reason it offers no future to those young workers you are rightly concerned for.

The Scorpion and the Frog

A scorpion and a frog meet on the bank of a stream and the
scorpion asks the frog to carry him across on its back. The
frog asks, “How do I know you won’t sting me?” The scorpion
says, “Because if I do, I will die too.”

The frog is satisfied, and they set out, but in midstream,
the scorpion stings the frog. The frog feels the onset of
paralysis and starts to sink, knowing they both will drown,
but has just enough time to gasp “Why?”

Replies the scorpion: “Its my nature…”

The globalizers had to squeeze the last dollar of profit out of the planet and its people. It’s the nature of capitalism. So they have stung all of humanity half way across the river and the paralysis is setting in. The pillars of the economy are crumbling—banking, finance, manufacture, housing, the whole enchilada.

Arable land is dwindling under the strain of historic drought and biblical flooding. Then our daily bread now must be transported over huge distances if we are to eat at all. The same goes for all of life’s other necessities.

If the supply of oil has not begun to run out, it will soon enough. For the sake of a couple extra pennies of gain for Wal-Mart we are to live or die on the availability of cheap and plentiful energy supplies. Dying is becoming the better bet by the day.

Under these developments, the people of the world are struggling with a marked escalation of the class war. Maybe no one has a firm grip on “what is to be done?”, to borrow Lenin’s phraseology. But it is for sure a time to reject fatalism, defeatism, nihilism and any other current which involves the people in rolling over to die quietly.

If Karl Marx was right, we have reached the end times not of humanity but of the capitalist economic system. It is a time when the working class was, through its collective discipline and might, supposed to conduct and win a war with the bourgeoisie and establish its rule. Then the building of socialism was to commence. War, racism and poverty would be banished in the ensuing years along with all of capitalism’s pathological influences on man.

What are the prospects for this scenario? However likely or remote, the idea should not be given up on because the other choices are too horrific to passively accept—the Orwellian state, bands of survivalists roaming a scorched landscape, the extinction of the human being.

Anonymous said...

It is all about the smackdown!

Anonymous said...

Malcom posted:

"Ilargi in this posting you write, "A free market system is fine by me, but only if there are fair and equal opportunities for everyone.""

I would agree with ilargi on this as long as equal opportunities also contains the idea that we all have different abilities and degrees of same. Putting out a pot and giving everyone a spoon is not the complete answer and I doubt that was what was meant.


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

Something stinks or a lack of stench!

Recently there's hardly been much news of Robert Rubin, Fannie and Freddie, AIG, Citigroup. Most of the blogosphere has been focusing on GS manipulating the NYSE and JPM too.

The European banks are even quieter, what of HSBC and Societe Generale? Hmmm...

The silence of the lambs.

el gallinazo said...

Maybe I am prejudice about this living on and leaving a Caribbean island, but here is all you have to know about the coming events in 2009 - 10:

"Black Diamond Bay"

Up on the white veranda
She wears a necktie and a Panama hat
Her passport shows another face
From another time and place
She looks nothing like that
And all the remnants of her recent past
Are scattered in the wild wind
She walks across the marble floor
Where a voice from the gambling room is calling her to come on in
She smiles, walks the other way
As the last ship sails and the moon fades away
From Black Diamond Bay.

As the morning light breaks open the Greek comes down
And he asks for a rope and a pen that will write
"Pardon monsieur" the desk clerk says
Carefully removes his fez
"Am I hearing you right ?"
And as the yellow fog is lifting
The Greek is quickly heading for the second floor
She passes him on the spiral staircase
Thinking he's the Soviet Ambassador
She starts to speak, but he walks away
As the storm clouds rise and the palm branches away
On Black Diamond Bay.

A soldier sits beneath the fan
Doing business with a tiny man who sells him a ring
Lightning strikes, the light blow out
The desk clerk wakes and begins to shout
"Can you see anything ?"
Then the Greek appears on the second floor
In his bare feet with a rope around his neck
While a loser in the gambling room lights up a candle
Says "Open up another deck"
But the dealer say "Attendez-vous, s'il vous pl it"
As the rain beats down and the cranes fly away
From Black Diamond Bay.

The desk clerk heard the woman laugh
As he looked around the aftermath and the soldier got tough
He tried to grab the woman's hand
Said, "Here's a ring it cost a grand"
She said, "That ain't enough"
Then she ran upstairs to pack her bags
While a horse-drawn taxi waited at the curb
She passed the door that the Greek had locked
Where a handwritten sign read, "Do not disturb"
She knocked on it anyway
As the sun went down and the music did play
On Black Diamond Bay.

"I've got to talk to someone quick !"
But the Greek said, "Go away" and he kicked the chair to the floor
He hung there from the chandelier
She cried, "Help there's danger near
Please open op the door"
Then the volcano erupted
And the lava flowed down from the mountain high above
The soldier and the tiny man were crouched in the corner
Thinking of forbidden love
But the desk clerk said "It happens every day"
As the stars fell down and the fields burned away
On Black Diamond Bay.

As the island slowly sank
The loser finally broke the bank in the gambling room
The dealer said "It's too late now
You can take you money, but I don't know how
You'll spend it in the tomb"
The tiny man bit the soldier's ear
As the floor caved in and the boiler in the basemen blew
While she's out on the balcony where a stranger tell her
"My darling je vous aime beacoup"
She sheds a tear and then begins to pray
As the fire burns on and the smoke drifts away
From Black Diamond Bay.

I was siting home alone one night in LA
Watching old Cronkite on the seven o'clock news
It seems there was an earthquake that
Left nothing but a Panama hat
And a pair of old Greek shoes
Didn't seem like much was happening
So I turned it off and went to grab another beer
Seems like every time you turn around
There's another hard-luck story that you're gonna hear
And there's really nothing anyone can say
And I never did plan to go anyway
To Black Diamond Bay.

Jim R said...

El G,

Perhaps I'm just reading too many doomer sites, but I believe we have triggered (or will soon do so) the runaway positive feedback climate loop known as the "clathrate gun". Methane levels haven't yet risen much, but the thawing of the arctic is disturbing. I didn't think we'd see an ice-free arctic for several decades yet.

And pinkleberry,

How about a few nuts :-)

Anonymous said...

I was wondering, why does Illargi wish to remain anonymous? It seems like every other financial blogger is willing to put his/her name and face out there with their message. We have heard complaints about the anonymous comments here, but the hosts themselves post anonymously every day. Is there a plan in the future to reveal who you are and what your qualifications are? I mean no disrespect in asking. I was just wondering this today.

el gallinazo said...

A 8:04

There is a big difference between posting anonymously and with a consistent pseudonym. I have never seen a complaint, until yours, about people posting with a consistent pseudonym. Even Mark Twain did it.

Greyzone said...

Are you serious, Malcom Martin? Communism is just as much a farce as capitalism. If you can't see that then you've had your brain washed one too many times by the Marxist "synthesis" bullshit.

Homo sapiens is an omnivore, a hunter-gatherer (murderer-thief), and a completely irrational animal. Every attempt to impose rationality on the species fails. The only path forward towards some sort of species survival is to recognize what we are and design our social systems to incorporate what we are into our daily lives.

Anonymous said...

communism... capitalism... democrat... republican...

mental fixations that will soon beforgotten by millions dealing with the new reality.

I suggest one listen for a few minutes to Sigfried's Idyll and just be

bluebird said...

justjohn - that is true the NYSE has computer with circuit breakers that stops a freefall in the market on any day. But remember in 1929, the crash did not occur on just one day, it occurred over 3 days, and the collapse continued for a month.

From Wikipedia
Black Thursday, Black Monday, and Black Tuesday—are commonly used to describe this collapse of stock values. All three are appropriate, for the crash was not a one-day affair. The initial crash occurred on Thursday, October 24, 1929, but the catastrophic downturn of Monday, October 28 and Tuesday, October 29 precipitated widespread alarm and the onset of an unprecedented and long-lasting economic depression for the United States and the world. This stock market collapse continued for a month.

Anonymous said...

Gary North wrote:

"Otherwise, they go out of business."

Read the first column. Where's your money multiplier?

Have you already asked for political asylum in North Korea?

bluebird said...

Xenakis comments about circuit breakers and algorithmic trading

Anonymous said...


They is a garden on the far side of the brick wall you are staring at. Communism and capitalism are just systems like you speak of! What we need is not new ones but a change in values, the 'system will form itself.


Ilargi said...

New post up.

ccpo said...

Anon 3:34 said ccpo: You're funny. You rail against warped thinking by missing the point, and then go asking for serious medical advice from a complete stranger on the Internet.

That's not just warped, but it's Darwinian Selection in progress. ROFL.

One of us missed the point, but it wasn't me. Rah! Rah! America! It
s bullshit. It requires an amount of thinking equivalent to deciding to pick your boogers or not.

As for the advice, whether I can pick up my kid or not is major medical?

Bet a brain.