Wednesday, May 19, 2010

May 19 2010: Teutonic Hyperbole

John Vachon Where do you think you're going? September 1939
"Trucks loading at farm implement warehouse, Minneapolis, Minnesota"

Ilargi: For a moment yesterday I was under the impression that Germany had stolen back -from his grave- Wernher Von Braun from NASA and made him drop a V2 rocket on Lower Manhattan. The headlines couldn't have been more capped, bolded and exclamated if Japan had resurrected Godzilla and set him loose on Bowery Park.

German Political And Financial Leaders Have Taken Incompetence To A New Level, squeals Business Insider's Joe Weisenthal, citing Bill O’Rourke. And: Stocks HAMMERED After Germany's Giant Blunder. At the same digital once-promising rag, Gregory White, talking about Angela Merkel, asks: Does This Woman Have Any Idea What She's Doing? The Telegraph's Harry Wilson manages to add: Market chaos warning after German ban on shorting.

And there were many more Grand Utterances just like these. Stocks, according to many in this class of journalism, were HAMMERED, the euro PLUNGED, and general panic hit the streets and the markets. Grown up men shrieking like little 12 year old girls in damp underwear are never an attractive sight.

Stocks got hammered? Hardly. The Dow closed down just over 1% last night, the S&P less than 1.5%. The Euro lost about 1.5% or so. Red ink, for sure, but not even deep red. And surely not all that spectacular if you're running a black swan plan by a crowd of shrieking suits, as Merkel did. Major European stocks were down 2-3% today, but the Euro actually recovered all of last night’s losses. And Wall Street opened slightly up, not armageddon-like down, and is off about 1% now. Gold, though, really gets pounded, way below $1200, so the very panic escape route is one that people retreat from, not flee into.

Tyler Durden at Zero Hedge, no stranger to "boldness" himself (or themselves?!) was at least right on one point: Berlin yesterday declared war on Wall Street (albeit without involving Von Braun). And on the City of London, not to forget, the proud European center of swaps and shorts.

But is that really so bad? And if so, for whom? For the public, or for the banks? See, what underlies these hyperbolic reactions to Germany's announcement smacks an awful lot of Goldman CEO Lloyd Blankfein's declaration that he and his firm were doing the "Work of God", or at least that what’s good for Wall Street is good for Main Street. That's what many of them like to think so much they get to believe it. But unless God wishes his people to be desperate, unemployed and homeless, developments on Wall Street and in Washington lend very little credence to that noble notion.

Don't forget that, you know, just in case you'd forgotten, none of the main Wall Street or City banks would still be standing as they are today without trillions in public funds, and that these bailed out institutions deemed too-big-to-fail "lest the economy collapse" are now hugely profiting from bets directed essentially square against those same public funds, a practice that very realistically risks collapsing those same very real economies.

The US government itself, the White House, Congress, Senate and the regulatory alphabet soup, is busy talking about "reform" and restrictions in its financial markets, and, in typical present day American fashion, diluting the conversation as it progresses. The main reason why this happens is obvious. While the finance sector accounts for some 20% of the entire US economy these days (bad enough in itself), through K-Street lobbying and campaign donations the financial industry has obtained far more than 20% of the power in the government. And perhaps in Germany, things haven't gotten so out of hand -yet-.

So what's the market function of shorts and swaps? Basically, metaphorically, theoretically, they have a great and beneficial role to play: like lions and hyenas, they keep the "population" healthy by taking out the sick. Still, for the same reason we don't send hyenas into our shopping malls, hospitals and pensioners homes to target anyone who's limping, distracted or simply old, we should perhaps not let short sellers and hedge funds do whatever they feel like, and wherever they feel like it, to get the most "meat".  The notion of the laws of nature may be appealing to those who stand to profit from that appeal, but we ain't been swinging from no trees no more for a fair bit of time.

And that may be all that Merkel has done yesterday: to say that there are places where the short sellers and hedge funds can roam freely, and others where they can't. There comes a time when if you don't invoke such boundaries, predators risk taking over everything. Perhaps that has already happened to a -much- larger degree, globally and in the US, then we would deem desirable if we were truly aware of the extent and consequences. 

Do we want the whole world, including our own cities and communities, to be a wild park where hyenas rule, or will we check their numbers and their range so we don't have to live in constant fear and under their thumbs? It's a simple issue really: who's the boss? The party with the most money, or the one with the most votes?

Yes, Greece is ailing, and many others don't look all that great either, but do we therefore feed them to the pack, or do we try and tend to the patients? And even if chances of recovery are slim, would that be a reason to throw them out the window to let them be torn to shreds, or do we let them die in dignity and take care of their children?

The US appears so far unable to come up with adequate and satisfactory answers to the issues raised in response to the actions of its own financial institutions. And until and unless the US body politic restricts their political power, either through breaking them up into little pieces, or through kicking out the lobbyists, or through severe campaign funding limits, it appears safe to say those answers will remain elusive for a long time to come.

Makes you wonder, doesn't it, at what point Merkel informed the White House of her steps. Not that she's done yet; mind you, this was probably just a first step. She will push hard for her measures to be adopted throughout the EU. Which puts her on a one of a kind collision course with the UK, for one thing. Merkel knows this. She still hasn't lost her marbles, no matter what some pundits say. She wanted the drive the Euro down (check!), and wants to drive it down further still; my guess is in about the $1.10-$1.15 range.

And no, she doesn't have total control over that, but that's not really the point either. To understand why, you need to look at what various parties' thoughts are on global economic prospects. Some of which are quite rosy, while others are not at all. And the bleaker those thoughts, the more important export revenues are in one's vision.

Angela Merkel's vision, though she would hesitate to say so, being a politician and all, is that a strong Euro is what you want in a strong or at least recovering global economy, while a weak economic future makes a weaker Euro the preferred target. All nations today are in deficit (even China, according to some reports), so all need to borrow. The only ways to not get ever deeper into debt are 1) overall economic growth -impossible to control for any one nation, and not very bloody likely- and 2) stimulate your own exports -which decrease the need to borrow (and pay interest)-. The fall of the Euro is a major defeat to President Obama and his goal of doubling US exports in 5 years.

Still, perhaps the main danger to the US markets today lies in the fact that without the potential profits now potentially lost to Wall Street financials, it will become much harder to keep their balance sheets intact and their own -toxic- losses hidden. That would risk quite a few trillion worth of US investment in its banks. After all, without US taxpayer money, most Wall Street firms would look a whole lot worse than even Greece does. It's more a battle among the severely wounded propped up by various special interests than it is one of the strong vs the weak.

We’ll have to see how it all pans out, but the ideas of imminent chaos and mayhem that crowded yesterday's headlines have already been proven false. And the only people who look like they don't know what they're doing are those who wrote them. Still, yes, we all have a long way to go down yet. And yes, any and all talk of recovery is that much hot political air. It’s more like a game of musical chairs, and Merkel has let it be known that she doesn't plan to be shoved aside.

Lastly, don’t lose sight of the fact that there are plenty of authoritative voices out there who claim that stocks and markets are -substantially- overvalued anyway. Let them drop, till they price in the distortion generated by all the bail-outs and political grandstanding. What we get to see then will not be pretty, but it will at least be more real.

And don't kid yourself into thinking that volatility and major price swings in stocks, currencies and commodities have subsided or even left the building. They haven't even set foot on the porch.

From yesterday's German magazine Der Spiegel:

"EU und Bundesregierung kündigen einen großangelegten Angriff auf die Finanzindustrie an. Mit der Aktion verfolgen Merkel und Co. vor allem ein Ziel: Die Wähler sollen endlich das Gefühl bekommen, dass sie nicht alleine für die Krise zahlen."

The EU and German government announce a broad-based attack on the financial industry. In doing this, they have one goal in particular in mind: Voters must finally get the feeling that they are not the only ones paying for the crisis.

Germany Bans Naked Short-Selling, Default Swap Speculation
by Alan Crawford and Shannon D. Harrington - Bloomberg Business Week

Germany prohibited naked short- selling and speculating on European government bonds with credit-default swaps in an effort to calm the region’s financial markets, sparking anxiety among investors about increasing government regulation. The ban, which took effect at midnight and lasts until March 31, 2011, also applies to the shares of 10 banks and insurers, German financial regulator BaFin said late yesterday in an e-mailed statement. The step was needed because of "exceptional volatility" in euro-area bonds, BaFin said.

Chancellor Angela Merkel’s coalition is seeking to build momentum on financial-market regulation, with lower-house lawmakers due to begin debating a bill today authorizing Germany’s contribution to a $1 trillion bailout to backstop the euro. U.S. stocks fell, Treasuries soared and the euro extended its decline as the announcement, made after Europe markets closed, caught traders by surprise. "It represents an escalation of regulatory risk for the investing community," said Keith Wirtz, who oversees $18 billion as chief investment officer at Fifth Third Asset Management Inc. in Cincinnati. "The German action suggests that the drama in Europe continues to unfold and escalate."

Allianz SE, Deutsche Bank AG, Commerzbank AG, Deutsche Boerse AG, Deutsche Postbank AG, Muenchener Rueckversicherungs AG, Hannover Rueckversicherungs AG, Generali Deutschland Holding AG, MLP AG and Aareal Bank AG are covered by the short-selling ban. The Standard & Poor’s 500 Index tumbled 1.4 percent at 4 p.m. in New York, erasing an early rally of 1 percent. The 4.375 percent Treasury bond due in May 2040 climbed 2 points, or $20 per $1,000 face amount, to 102 1/4,as its yield fell 12 basis points, or 0.12 percentage point, to 4.24 percent.

The announcement came the same day that a report showed German investor confidence plunged in May as Europe’s deepening debt crisis stoked concern about the euro’s future. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations dropped to 45.8 from 53 in April, the biggest decline since the collapse of Lehman Brothers Holdings Inc. in September 2008. Concern that nations led by Greece will struggle to meet the European Union’s austerity requirements to lower their budget deficits has driven the euro to below $1.22 from last year’s high of $1.5144 in November.

The DAX Index fell as much as 9.7 percent after reaching a 19-month high in April. The Athens Stock Exchange General Index has fallen 26 percent, while Portugal’s PSI General Index has dropped 13 percent and Spain’s IBEX 35 slipped 19 percent. "Massive" short-selling was leading to excessive price movements which "could endanger the stability of the entire financial system," BaFin said in the statement. Short-selling is when investors borrow shares they don’t own and sell them in the hope their prices will go down. If they do, the investors buy back the shares at the lower price, return them to their owner and pocket the difference.

Finance Minister Wolfgang Schaeuble said the government decided it was best to introduce the ban on naked short-selling as soon as possible. "If you do something like this, you don’t let it drag out but you implement it right away," he said yesterday in an interview on ZDF television. Merkel and French President Nicolas Sarkozy have called for curbs on speculating with sovereign credit-default swaps. EU Financial Services Commissioner Michel Barnier called this week for stricter disclosure requirements on the transactions. Last month the EU proposed that the Financial Stability Board, set up by the Group of 20 nations to monitor global financial trends, "closely examine the role" of CDS on sovereign bonds.

"In some ways, it’s a battle of the politicians against the markets" and "I’m determined to win," Merkel said May 6. "The speculators are our adversaries." Germany, along with the U.S. and other EU nations, banned short selling of banks and insurance company shares at the height of the global financial crisis in 2008. The nation still has rules requiring disclosure of net short positions of 0.2 percent or more of outstanding shares in 10 companies.

"The way it’s been announced is very irresponsible, and it’s sent many market participants into panic mode," said Darren Fox, a regulator lawyer who advises hedge funds at Simmons & Simmons in London. "We thought regulators had learned their lessons from September 2008. Where is the market emergency that necessitates the introduction of an overnight ban?"

The move may also add to concern that the EU nations are not working in coordination, damping their credibility. "This is a mistake of a serious fundamental nature and of severe consequence and once again demonstrates to me how little the European politicians understand about the world’s financial markets," Mark Grant, managing director of Fort Lauderdale, Florida-based Southwest Securities Inc. wrote in a note to clients. "They are making, in fact, an obvious attempt to control financial markets across the globe by this action just as they plead for investors to provide funding for the European governments and the banks in the European Union."

Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- fails to meet its debt obligations. Traders in naked credit-default swaps buy insurance on bonds they don’t own. Prohibiting speculation in the contracts may cause trading in the market for swaps tied to Europe government bonds to freeze up, possibly increasing borrowing costs or limiting the flow of capital, said Tim Backshall, the chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.

"This will close the CDS markets if it is anything like what it appears to be," Backshall said. "The removal of the possibility to hedge government bond risk will necessarily cause risk premia to rise in bond markets, which could easily lead to a broad-based repricing of government bond risk."

Bets made with swaps on the bonds of 10 European nations including Greece, Spain, Italy and Portugal is less than $108 billion, according to the Depository Trust & Clearing Corp, which runs a central registry that captures most trading. That’s 0.97 percent of the $11 trillion in outstanding debt of those countries, International Monetary Fund data show. BaFin itself said two months ago it found "no evidence" that credit-default swaps were being used excessively to speculate against Greek bonds. Depository Trust data "do not support the conclusion that speculation is taking place on a massive scale," the regulator said in a March 8 statement on its website.

Euro, U.S. Stocks, Oil Tumble as Germany Bans Naked Short Sales
by Michael P. Regan and Elizabeth Stanton - Bloomberg Business Week

The euro slid to a more than four- year low against the dollar, U.S. stocks extended declines and commodities trimmed gains as Germany’s ban of certain bearish investments fueled concern the region’s debt crisis will worsening. The euro slid below $1.22 for the first time since April 17, 2006, at 3:12 p.m. in New York. The Standard & Poor’s 500 Index tumbled 1.4 percent, erasing a rally of more than 1 percent triggered by better-than-estimated housing starts and results at Wal-Mart Stores Inc. Oil erased a 3.5 percent rally, falling 1.5 percent to $69.04 a barrel in electronic trading. Treasuries rallied, sending the benchmark 10-year note’s yield down 12 basis points to 3.37 percent.

The euro and stocks extended losses as Germany’s BaFin financial-services regulator said that it will introduce a temporary ban on naked short selling and naked credit-default swaps of euro-area government bonds starting at midnight. The ban will also apply to naked short selling in shares of 10 banks and insurers that will last until March 31, 2011, BaFin said today in an e-mailed statement.

"It makes it look as if the Germans are worried about something behind the scenes that the market’s not aware of," said Michael O’Rourke, chief market strategist at BTIG LLC in Yardley,
Pennsylvania, which provides trading services to institutional investors. "It almost looked panicked, which further undermines confidence in the markets. They’ve done as poor a job as one can do in delivering a message."

Short selling involves the sale of borrowed securities in the hope of profiting by buying the securities later at a lower price and returning them to the owner. When securities are sold naked, the trader fails to borrow the assets before sending an order to sell. Investors own naked credit-default swaps when they don’t hold the bonds the derivatives are linked to.

Market chaos warning after German ban on shorting
by Harry Wilson - Telegraph

Traders are predicting chaos on the world's second-largest government bond market after the German authorities on Tuesday announced a ban on all naked short-selling in European public debt, as well as shares in the country's 10 largest financial institutions. The unprecedented step saw the euro sink to a four-year low after Germany said that from midnight shorting of credit default swaps of any European government would be banned. The prohibition is an attempt to counter speculators that Berlin believes are trying to destabilise the region's sovereign bond market.

Traders greeted the move by BaFin, the German regulator, with a mixture of anger and astonishment. One bond trader said he expected Wednesday's trading session to be one of the most volatile in living memory: "It will be complete chaos, I really don't know what the Germans think they are doing." One immediate effect was that the cost of insuring European government debt fell as markets were hit by a so-called "short squeeze" where investors with short positions are forced to offload their holdings and buy the bonds, causing the price to increase.

This is certain to please the German authorities, who have waged an increasingly hostile war of words with supposed speculators. BaFin said the ban was being introduced due to "extraordinary volatility in debt securities issued by eurozone countries". It will last until March 31, 2011. In a statement, it said short-selling had led to excessive price movements "which could have led to significant disadvantages for financial markets and have threatened the stability of the entire financial system". However, traders said that the measures, which will also prohibit the naked short-selling of shares in major German financial institutions, such as Allianz. Commerzbank, and Deutsche Bank, could lead to an immediate backlash from investors around the world.

They added that the ban was likely to be effectively unenforceable. It will not stop traders from shorting the bonds and shares using other European markets. "Without the two-way flow the German market is likely to become utterly dysfunctional," said one London-based bond trader. "Nobody ever thought they'd do this in a million years and it raises the long-term question of who is now going to want to buy their debt." Germany, like other European governments, must raise hundreds of billions of euros by selling new bonds, but banning short-selling could jeopardise demand. Analysts at Bank of America Merrill Lynch summed up the mood with a note titled What's Germany going to ban next? Rainy days, harsh words, the Macarena?

US shares fell as traders began to assess the consequences. After an early rally, the Dow Jones closed down more than 100 points, despite a day of gains for European markets. The German authority's actions echo those taken by many major Western governments in the wake of the financial crisis in late 2008 following the collapse of US investment bank Lehman Brothers. Britain and the US both temporarily banned shorting bank shares, fearing that speculators could cause the collapse of other major financial institutions. Speaking to Reuters, Lawrence Glazer, managing partner of Boston-based Mayflower Advisors, said: "The motive is probably more towards limiting volatility and trying to prevent some sort of raid on debt, or equities. We have seen this before, but whenever you see any type of regulatory changes it is worth paying attention."

Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year
by Joe Weisenthal - Business Insider

Richard Russell, the famous writer of the Dow Theory Letters, has a chilling line in today's note:

Do your friends a favor. Tell them to "batten down the hatches" because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, "How the dickens does Russell know -- who told him?" Tell them the stock market told him.

That's pretty intense!

Update: By popular demand, here's more on what he sees in the market. The gist is that the markets recent gyrations are telling him that the economy is in trouble:

And I ask myself, "Am I seeing things? The April 26 high for the Dow was 11205.03. The Dow is selling as write at 10557 down 648 points from its April high. If business is even better than expected, then why is the Dow down over 600 points? And why, if there were 674 new highs on the NYSE on April 26, were there only 20 new highs on Friday, May 14? And if my PTI was 6133 on April 26, why is it down 17 points since its April high?

The fact is that I've been seeing deterioration in the stock market ever since early-April, and this in the face of improving business news. The D-J Industrial Average is composed of 30 internationally known top-quality blue-chip stocks. These are 30 of "America's biggest companies." If Barron's is so bullish on the future of America's biggest companies, then why isn't the Dow advancing to new highs?

Clearly something is wrong. But what could it be? Much as I love Barron's, I trust the stock market more. If I read the stock market correctly, it's telling me that there is a surprise ahead. And that surprise will be a reversal to the downside for the economy, plus a collection of other troubles ahead.

About Dow Theory -- First, we saw the recent April highs in the Averages. Then we saw a plunge in both Averages to their May 7 lows -- Industrials to 10380.43, Transports to 4298.12, next a short rally. If ahead, the two Averages turn down and violate their May 7 lows, that would be the clincher. Such action would signal the certain resumption of the primary bear market.

Just as for years I asked, cajoled, insisted, threatened, demanded, that my subscribers buy gold, I am now insisting, demanding, begging my subscribers to get OUT of stocks (including C and BYD, but not including golds) and get into cash or gold (bullion if possible). If the two Averages violate their May 7 lows, I see a major crash as the outcome. Pul - leeze, get out of stocks now, and I don't give a damn whether you have paper losses or paper profits!

EU ministers back new hedge fund rules
by Nikki Tait - Financial TImes

Controversial new rules for hedge funds and private equity funds were on Tuesday backed by European Union finance ministers in Brussels. The move follows a similar endorsement by a group of EU lawmakers on Monday – and means that regulation of the industry in Europe has now moved much closer. There are, however, significant differences in the detailed regulation proposals agreed by the member states’ ministers and parliamentarians. As a result, there will have to be potentially difficult negotiations between the member states, parliamentarians and eurocrats at the European Commission in an effort to arrive at a single common set of rules that all three parties are willing to support.

Those discussions will start on May 31. It is hoped that the issue could be finally resolved before the long summer break in Brussels, which starts at the end of July. Tuesday’s approval of draft rules by finance ministers proceeded smoothly and quickly, without any public invention by George Osborne, who is on his first visit to Brussels as UK chancellor. Britain, which is home to about 80 per cent of Europe’s hedge fund industry, has been particularly unhappy about aspects of the proposed rules – arguing that they are unnecessarily burdensome and discriminatory.

But the UK did win a concession in the wording of the declaration. The EU countries’ statement said that ministers had noted "the concerns expressed by some member states on certain aspects of the… proposed general approach, in particular as regards to the third country provisions". Future negotiations should take these concerns into account, it added. The so-called "third country" issue refers to the terms on which funds and managers based outside the EU can market to professional investors within the bloc. The proposal backed by EU finance ministers on Tuesday would give national authorities a say over this, and not provide conditions under which EU-wide marketing rights could be obtained.

This has worried some countries based outside the EU – including the US, where a large portion of the global hedge fund industry is housed. It is also of concern to the UK, since many London-based fund managers run their funds through offshore jurisdictions, such as Jersey, for tax reasons. By contrast, under the parliamentary version approved by the parliament’s economic and monetary affairs committee on Monday night, funds and managers outside the EU would be able to get EU-wide marketing rights, provided strict conditions were met. This stance is preferred by Michel Barnier, EU internal market commissioner. "I’m in favour of equal treatment once managers respect the (EU) rules to the letter," he said on Monday.

But hedge funds, investors and others in the industry are deeply unhappy about some of the other clauses which are now incorporated into the parliamentary text, and will be lobbying hard to get changes made in the course of the three-way negotiations. One big concern is a clause which says that professional investors based within the EU can only invest in shares or units of funds outside the bloc if five strict conditions – dealing with anti-money-laundering rules, co-operation agreements, tax policies and the like – are met.

This, they warn, could severely restrict the ability of professional investors to invest as they see fit. "We are concerned that this will ultimately reduce returns to savers and pensioners and prevent investors from diversifying risk," said Kerrie Kelly, director general of the Association of British Insurers. That sentiment was echoed by hedge funds themselves. "This will have negative social consequences across the EU because it will be European institutional investors like pension funds who will be affected," said Andrew Baker, chief executive of the Alternative Investment Fund Management Association.

Still to be settled
• "Third country rules", the conditions under which funds and managers based outside the EU can market to professional investors within the bloc.
• EU-wide marketing rights, a so-called "passport" allowing a fund to be marketed anywhere in the EU providing certain standards are met.
• Whether national authorities within the EU should still have some discretion to decide whether funds can market within their own jurisdictions, under private placement regimes.
Remuneration rules, where parliament and member states take a different approach.
• The ability of EU-based professional investors to buy shares or units in funds based outside the bloc.

Greek Crisis Is ‘Tip of Iceberg’ in Euro Region, Roubini Says
by Svenja O’Donnell - - Bloomberg Business Week

The crisis engulfing the euro area is not over yet as Greece remains the "tip of an iceberg," New York University professor Nouriel Roubini said. "It’s not over," Roubini said in an interview with BBC radio broadcast today. "What we’re facing right now in the eurozone is a second stage of a typical financial crisis." The European Union’s 750 billion-euro ($931 billion) rescue package to stop contagion from Greece hasn’t calmed the markets while questions remain about whether governments are strong enough to implement the austerity measures required, Roubini said.

The European Union said today it has transferred the first instalment of emergency loans to Greece, one day before 8.5 billion euros of bonds come due. Markets remain concerned about the solvency of some European countries as there is "significant economic and financial trouble in the eurozone," Roubini told the BBC’s "Today" program. The recent riots in Greece in response to fiscal cuts have fueled doubts about some European governments’ ability to solve these problems, he said. "There’s a question mark whether we can be confident the government is going to be strong enough to do the fiscal austerity," Roubini said.

"If these packages of austerity are going to be implemented markets are going to stabilize." Roubini also said the U.K.’s new Conservative-Liberal Democrat coalition government has yet to be tested. The government will spell out how it plans to cut Britain’s record deficit in an emergency budget on June 22. "We’ll see when things are going to have to happen, when the tough decision is going to have to be made on revenues, on spending, whether that coalition is going to remain strong or not," he said.

Top Fed Official Offers Dire Forecast, Says Economy Will Suffer For Years
by Shahien Nasiripour - Huffington Post

A top Federal Reserve official warned Tuesday that one consequence of the Great Recession will be a "new normal" in which Americans have lower expectations for a better life. In a speech, Federal Reserve Bank of Cleveland President and CEO Sandra Pianalto said that she expects "our journey out of this deep recession [to] be a slow one" because of the loss of skills jobless Americans have experienced as a result of prolonged unemployment, and the "heightened sense of caution" consumers and businesses are operating under as they navigate the worst economic downturn since the Great Depression.

Citing the fact that the average unemployed worker is out of a job for more than 30 weeks -- a new record -- Pianalto told the Economic Club of Pittsburgh that "the longer someone is out of work, the harder it is to find a job." About half of those currently unemployed have been out of work for at least six months. "Research...tells us that workers lose valuable skills during long spells of unemployment, and that some jobs simply don't return," she said in her prepared remarks. "So workers who are lucky enough to find jobs may be going to jobs that aren't familiar to them, which means they and the companies they join may suffer some loss of productivity. "Multiply this effect millions of times over, and it has the potential to dampen overall economic productivity for years," she warned.

The second effect of the Great Recession is "deep uncertainty about where the 'new normal' or baseline might be." "A whole generation of Americans who began their working careers in the mid-1980s had experienced only long periods of prosperity punctuated by just two very brief downturns," said Pianalto, a voting member of the Fed's main policy-making body, the Federal Open Market Committee. "Those experiences encouraged an expectation for relatively smooth growth. "Now everyone's expectations have shifted as a result of this long and deep recession," she added.
"People's attitudes about their own prospects have fundamentally changed. In a recent survey by Ohio's Xavier University, 60 percent of those polled believe attaining the American dream is harder for this generation than ones before. And nearly 70 percent think it will be even more difficult for their children. Many people are now just aiming for 'financial security' as their American dream."

This "new normal" has forced consumers to delay major purchases, she said. Consumer spending accounts for about 70 percent of the economy. A slowdown in consumer spending stunts economic growth. Businesses also are cautious, Pianalto said. "Most business leaders say that they're not planning on significant hiring until there's more clarity about how the recovery is going to progress," she said, adding that uncertainty over policies debated in Washington, like on health care and taxes, also is playing a role. "This caution translates into fewer job opportunities, fewer equipment purchases, fewer building projects -- and on and on," said Pianalto, an economist who's led the Cleveland Fed since 2003.

Switching to monetary policy, Pianalto, who as a voting member of the Federal Open Market Committee helps set interest rates, said that her researchers at the Cleveland Fed have noticed a drop in prices over the past three months for about half of the consumer goods they track. That's led to companies "really holding the line on prices to boost sales" -- something they can do profitably "in part because labor costs are so restrained."

Referencing the high growth in productivity that's occurred during the recent downturn -- the effect of employers squeezing more out of their remaining employees despite the loss of millions of workers -- Pianalto said that "[h]igher rates of productivity growth reduce the amount of labor needed to produce a given amount of goods and services. In today's labor market, wages are likely to be restrained by the unemployment situation -- labor supply far exceeds labor demand.

"Combining rising productivity with restrained wages causes the cost of producing goods and services to fall," she said. Labor costs have fallen by nearly five percent since the fourth quarter of 2008, she added. In other words, workers aren't getting paid like they used to. And it's not likely to get any better for the nation's workers. "[M]any of my business contacts continue to talk about wage and price reductions, not increases," Pianalto said.

A Greece in waiting?
by Bill Bonner - Daily Reckoning

We just stepped off the plane in [Beijing, China]... We’ll have to catch our breath and open our eyes before we have anything to say about China... In the meantime, let’s look back at what is happening in Europe and America. And we will begin by thanking Paul Krugman, economiste ordinaire at the New York Times.

Sometimes, in the dark of night, we are haunted by demons of doubt and worry. Especially when we’re alone. And far from home. Maybe we’re wrong. Maybe we’re leading thousands of loyal Dear Readers astray. Maybe the Great Correction isn’t what we think it is. Maybe deficits are good. And maybe the US will never run itself into the Greek-style yoghurt.

What a relief it was to find Krugman in yesterday’s International Herald Tribune! Naturally, Krugman disagrees with us completely. Which puts our mind at ease. If Krugman agreed with us, we’d have to re-think out position.

"America is not Greece," he says. So far, so good. His geography is correct. It is all downhill from there. Krugman won a Nobel Prize for his early work. Which makes us wonder about the Nobel committee.

The US is running about the same size deficit as Greece; but don’t focus on that, says Krugman. The two places are not the same, he insists. Because the US has a "much lower debt level". He’s wrong about that. If you add to the US national debt the debts of Fannie Mae, GM and all the other financial holes which the government will ultimately have to fill, the crater is about 120% of GDP – the same as Greece’s debt.

"Even more important," he writes, "is that we have a clear path to economic recovery."

Oh. Where’s that? As near as we can tell, the path is twisty, poorly lighted and full of lethal obstacles.

The number of people relying on the US government for food is now equal to the entire population of Spain. There are about as many people unemployed as the entire population of the Netherlands. And there are as many people who have gotten negligible income gains as... well... the entire population of America. Without more income, how can Americans increase spending? Without more spending, how can the economy really grow?

The government can do the spending! Well, good luck with that. Already, the return on additional borrowing in the private sector is so marginal that banks are generally unwilling to lend. And the return on government debt? It looks like a positive return, at first. People spend transfer payments just like any other money. Economists like Krugman can’t tell the difference. But government spending generally produces negative real growth.

Nevertheless, Krugman explains that IF the economy improves... and IF the administration cuts deficits... and IF the new health care programme doesn’t cost more than the Obama team says it will… heck... everything will work out just fine! With a few tax increases, of course. Then, he tells us that, yes, over the long run we’re going to hell in a handcart. But that can problem can be solved by a "combination of health care reform and other measures".

Finally, he’s right about something. Enough ‘other measures’ and you’ve got the problem licked. What other measures? Well, the deficit is now at about 10% of GDP. So, all you’ve got to do is to cut spending by 11% of GDP and you’ve got a surplus. Let’s see, where are we going to cut $1.4 trillion dollars? That’s cutting out 100% of the defense budget. And 100% of Social Security too.

And if you don’t do that... you get more deficits. And if you get more deficits, you end up with more debt. And if you keep adding debt faster than real GDP growth, you eventually get to the point where the markets cannot or will not finance it. And then you’re Greece.

What is likely to happen is that yields will stay low enough for long enough to make people think Krugman knows what he is talking about. They’ll think that the US can borrow as much as it wants for as long as it wants... In the Washington Post, economist James Galbraith is already a believer. He argues that the chance of getting into a Greek-style jamb is "zero". He says deficits don’t lead to trouble. The US has been running deficits since the ‘70s, he points out. And look at the Japanese, he adds. They’ve been running huge deficits (fiscal stimulus) since their economy slipped up in 1989. And they’re still able to borrow at practically zero interest. Makes you wonder how Greece got into trouble. It ran plenty of stimulating deficits. Then again, everything was all right in Greece until it wasn’t.

A man jumped off the 65 th floor of a skyscraper. As he went by the 11 th floor, the secretaries heard him remark: "All right so far." The US is all right so far. So is Japan.

It's Time to End Risky Gambling on Wall Street
by Sen. Jeff Merkley and Sen. Carl Levin - Huffington Post

When historians look back at the financial crisis of 2008 and the Great Recession that followed, they will fix their blame, in part, on the invention of complicated financial products that hid massive risks and spread them throughout the economy. They will record how Wall Street chased short-term gains at the expense of functioning markets, long-term economic stability and the well-being of the financial institutions themselves.

Those future historians will also look at how the government responded to the mess. They will examine whether members of Congress took the serious steps needed to avoid another crisis. The votes taken in the Senate this week will be crucial in determining the answer. The high-risk trading of these complex and opaque instruments with a firm's own money -- and not on behalf of a client or investor -- is known as "proprietary trading." This trading became an increasingly large share of the business of Wall Street in the last decade. But when those gambles went south, the financial fortresses on Wall Street crumbled, and taxpayers were stuck paying a $700 billion bailout for the bad bets because pension funds, educational institutions, endowments and other institutions would have been severely damaged in the process.

It was no accident that these firms have increasingly focused on trading for their own account instead of serving their clients. The huge amounts of information and capital they control gives them advantages in betting on market trends. There is a lot more money to make if those bets pan out than by simply serving their clients. Of course, as we all have learned, the bets don't always pan out and this strategy carries huge risk. The increasing reliance on high-risk trading to drive profits also creates enormous conflicts of interest between a big firm and its own clients.

As the Senate Permanent Subcommittee on Investigations uncovered, Goldman Sachs traders made huge sums betting on the collapse of mortgage-backed securities that Goldman itself had created and sold to its customers. It's as if Goldman built and sold a car with no brakes and then took out life insurance on the new owner. Even in the absence of a spectacular collapse, the focus on proprietary trading damages families and businesses. Every dollar spent on trading is a dollar not lent on Main Street. We need our banks to return to the primary business of making loans to businesses and consumers who can get our economy rolling, not operating their own trading desks.

This week we have the chance to address the problems caused by these hazardous investments in three ways. The Merkley-Levin amendment restores the wall that keeps high-risk investing out of commercial lending banks. It requires greater capital requirements at investment banks to protect against losses. And finally, it eliminates conflicts of interest, such as those we saw with Goldman Sachs, in which bankers package and sell a security, and then bet against it. We can enact these common-sense rules of the road, while preserving the flexibility that financial firms need to conduct business. But we can only do it if Americans tell their senators loud and clear that it is time for a change.

Wall Street opposition to reform is no surprise -- the old system worked out pretty well for them. In the short-term, they made profits through risky bets. When those bets went bad, they were bailed out. Thus, there is little downside for banks in keeping the existing rules on Wall Street. But there is huge downside for Americans. We have barely begun to recover the jobs and savings that were lost. History can't be allowed to repeat itself.

The vote this week will answer a critical question: is Congress on the side of the American worker who lost so much in the Great Recession or is it on the side of the Wall Street firms that put all of us at risk? We need every American to make their voice heard and send a message loud and clear: the days of Wall Street recklessly betting against our futures are over.

GOP Blocks Three Key Anti-Wall Street Amendments
by Ryan Grim - Huffington Post

Senate Republicans blocked Democrats from voting on three amendments Tuesday that are strongly opposed by Wall Street.

Sen. Richard Shelby of Alabama, the top-ranking Republican on the Banking Committee, rose to object to a vote on one of the most talked-about amendments, cosponsored by Sens. Carl Levin (D-Mich.) and Jeff Merkley (D-Ore.). Levin-Merkley would ban commercial banks from trading for their own benefit with taxpayer-backed money.

Shelby also objected to an amendment from Sen. Kay Hagan (D-N.C.) that would rein in predatory practices of payday lenders and one from Sen. Byron Dorgan (D-N.D.) that would have banned naked credit default swaps, which were at the heart of the financial crisis. Dorgan's amendment was expected to fail, but Levin-Merkley had been surging in recent days.

When it looked as if Levin-Merkley had at least 50 votes, the threshold was moved up to 60. Now that it appears within striking distance of 60 votes, the new tactic is to deny it a vote altogether.

Negotiations around Levin-Merkley have been going on throughout the day, with Levin and Merkley working out details of the bill with holdouts. But without an opportunity for a vote on the floor, those successful negotiations add up to little.

"Republican Minority Leader Mitch McConnell is yet again doing the bidding of Wall Street and is blocking the Merkley-Levin amendment that will ban high-risk trading inside the lending and depository institutions from coming up for a vote today," said Merkley after the blockade. "They won't even allow a vote with a 60 vote threshold. On a day two Democrats are missing from the chamber. Wall Street lobbyists, and consequently Senator McConnell and the Republicans, want to kill the Merkley-Levin amendment by attrition because they're afraid of losing a vote. If this isn't a sign of the Republicans having the backs of the big banks on Wall Street over the American people, I don't know what is."

UPDATE: Here's Sen. Bernie Sanders and MSNBC's Dylan Ratigan going over the current state of play of the bank reform bill and various key amendments:

Goldman Sachs Advice Hands Clients Losses in Most Top Trades
by Ye Xie - Bloomberg

Goldman Sachs Group Inc. racked up trading profits for itself every day last quarter. Clients who followed the firm’s investment advice fared far worse. Seven of the investment bank’s nine "recommended top trades for 2010" have been money losers for investors who adopted the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday. Clients who used the tips lost 14 percent buying the Polish zloty versus the Japanese yen, 9.4 percent buying Chinese stocks in Hong Kong and 9.8 percent trading the British pound against the New Zealand dollar.

The struggles for analysts at Goldman Sachs, which is fighting a fraud lawsuit from U.S. regulators who accuse the company of misleading investors in a mortgage-linked security, show the difficulty of predicting market movements as widening budget deficits, a fragile global economic recovery and tighter financial regulations increase volatility. Stock and currency fluctuations rose to the highest in a year this month as Europe pledged about $1 trillion to stop a debt crisis in the region. "This says that Goldman’s guys are only human," said Axel Merk, who oversees $500 million as president and chief investment officer of Merk Investments LLC in Palo Alto, California. "No one is always right. There are a lot of cross currents in this market."

China’s Bear Market
Goldman Sachs’s trading profits come from capturing bid- offer spreads when its traders act as intermediaries for clients, Gary Cohn, the firm’s president and chief operating officer, said last week in New York. Proprietary trading isn’t a main driver of earnings, he said. The trade advice for customers is distributed by Goldman Sachs’s global markets economic research group. It tracks the performance of the trades in a daily research note. The time period of the recommendations is 12 months.

The performance this year is a reversal from 2009, when nine of Goldman Sachs’s 11 trading recommendations made money. Investors saw a 22 percent return owning Chinese stocks and a 12 percent gain buying the British pound versus the dollar, according to a Goldman Sachs note on Dec. 1. Goldman Sachs analysts made eight trade recommendations for this year in December, including telling clients to buy the British pound against the New Zealand dollar. On April 1, Goldman Sachs added a ninth "top" trade, telling clients to buy Chinese stocks listed in Hong Kong and predicting the Hang Seng China Enterprises Index would rise 19 percent to 15,000.

Since then, the gauge has slid 9.4 percent to 11,426.18. The Shanghai Composite index has entered a bear market, losing about 21 percent this year. That’s the third biggest decline in the world after Greece and Cyprus. The decline accelerated this month on concern Greece, Spain and Portugal will struggle to finance their budget deficits and dismantle the euro. The Chinese stock recommendation was made by a group led by Dominic Wilson, a senior Goldman Sachs economist in New York. Wilson cited inexpensive valuations and "robust" economic growth. He also said investors have already factored in the risk of higher interest rates in China.

Exit Calls
"Emerging markets appear superior to the developed world, but the market isn’t trading that relationship," said Eric Fine, who manages Van Eck Associates Corp.’s G-175 Strategies emerging-market hedge fund. "It may be that some assets are mispriced, but if the market starts to discount the end point of the game, such as the collapse of the euro, it’s not that mispriced."

Analysts at Goldman Sachs recommended investors exit two trades in February, one involving interest-rate swap rates in the U.K. and another advising clients to buy credit-default swaps in Spain and sell similar contracts in Ireland. The first trade had a potential loss of 24 basis points and the other had a return of 2.9 percent, according to figures issued in the appendix of the research note in February. Owning currencies that are tied to growth is the only remaining trade that has increased in value this year, according to Goldman Sachs. The Goldman Sachs FX Growth Index has climbed 3.4 percent since the firm made the recommendation in December.

Betting on Markets
Goldman Sachs makes more money from trading than any other Wall Street firm. In the first quarter, the bank’s $7.39 billion in revenue from trading fixed-income, currencies and commodities dwarfed the $5.52 billion made by its closest rival, Charlotte, North Carolina-based Bank of America Corp. In equities, Goldman Sachs’s $2.35 billion in revenue was about 50 percent higher than its nearest competitor.
Cohn told investors at a May 11 conference in New York that the firm lost money on only 11 days in the last 12 months. He said that uncanny streak of success refutes suspicions that the bank depends on proprietary bets with its own money.

"It is implausible that a proprietary-driven business model could be right 96 percent of the time," Cohn said. Instead, he said the "simple answer" is that the firm makes money by capturing bid-offer spreads when acting as an intermediary for client trades. Goldman Sachs executives have grappled before with questions about whether they’re better at making money for the firm than for their clients, according to an internal e-mail dated Sept. 26, 2007, that was released by a U.S. Senate subcommittee last month.

The e-mail to Chief Executive Officer Lloyd Blankfein from Peter Kraus, who was then co-head of the company’s investment- management division, explains that individual investors, unlike institutional clients, occasionally make "comments like ur good at making money for urself but not us." The U.S. Securities and Exchange Commission filed a lawsuit against Goldman on April 16 accusing the company of misleading investors in a mortgage-linked asset. Goldman denies those allegations and said it will fight the charges.

Goldman Seeks Bigger Share of U.S. Retirement Savings
by Amy Feldman - Bloomberg

Goldman Sachs Group Inc., fighting a fraud lawsuit from U.S. regulators who accuse the company of misleading investors, is trying to persuade more Americans to trust the firm with their retirement funds. The New York-based company is promoting alternative asset funds and designing target-date funds that provide guaranteed income to grab a bigger piece of the $2.7 trillion 401(k) market, said Bill McDermott, a managing director at Goldman Sachs Asset Management and head of its defined-contribution business.

"We understand risk and we understand asset allocation," said McDermott, who joined the firm in February to strengthen its retirement-plan products and marketing. "We’re looking to leverage that for the 401(k) market."
Goldman’s 401(k) plan assets totaled $17.5 billion as of March 31, according to the company. Fidelity Investments, the largest 401(k) asset manager, had $347.8 billion as of December 31. Assets in 401(k) plans are estimated to increase 41 percent, to $3.8 trillion, by the end of 2014, according to data from Cerulli Associates in Boston. Goldman and BlackRock Inc., the world’s largest asset manager, don’t administer retirement plans and have been seeking more 401(k) business. The business has been dominated by firms such as Boston-based Fidelity and Vanguard Group, based in Valley Forge, Pennsylvania, which administer plans as well as manage assets.

"A lot of investment-only managers are trying to get in," said Lori Lucas, defined contribution practice leader at San Francisco-based Callan Associates, an investment consulting firm. "They see the writing on the wall," as traditional pensions are replaced by 401(k) plans. The U.S. Securities and Exchange Commission filed a lawsuit against Goldman on April 16 accusing the company of misleading investors in a mortgage-linked investment. Goldman denies those allegations and said it will fight the charges. A Senate panel grilled executives, including Chief Executive Officer Lloyd Blankfein, on April 27 about the case.

"Having issues certainly isn’t going to help. But all the signs so far are telling us that clients are sitting tight," said Teresa Epperson, a partner at Mercatus, a Boston-based financial consulting firm. "Goldman’s capabilities are in trading strategies and hedging risks. The extension of those absolute-return strategies could be attractive to plan sponsors."

The asset management division that McDermott works in is separate from the mortgage unit that sold the securities at the center of the SEC’s fraud suit against Goldman. A key difference between the two businesses is that the asset management division operates under a fiduciary duty to its clients, whereas the sales and trading division doesn’t. "When a client gives us their money and their assets to manage, we are 100 percent their fiduciary, we must manage their money in the most prudent fashion possible using our best judgment possible," Goldman Sachs President Gary Cohn said on May 11 at an investor conference in New York. "The rest of Goldman Sachs is not in the fiduciary business."

Goldman’s total assets under management at the end of the first quarter were $840 billion, down 4 percent, primarily because of outflows in money market funds, according to the company’s first-quarter earnings release. Asset management is a smaller department at Goldman than investment banking or trading, representing 8.8 percent of the firm’s 2009 revenue of $45.2 billion, according to Goldman’s yearend earnings release.

Lower Risk
Alternative assets, such as commodities and real estate, can increase a portfolio’s return and lower risk. They’re gaining in 401(k) plans because more companies are creating their own custom target-date funds, said Callan’s Lucas. Target- date funds move money from riskier investments such as stocks to more conservative alternatives like bonds as an investor approaches retirement. The market drop of 2008, when the Standard & Poor’s 500 Index declined 38 percent, showed that "there were very, very, very few safe havens," said Bud Pernoll, senior managing director of Santa Monica, California-based Bay Mutual Financial LLC, which advises corporate retirement plans on their investment options and works with Goldman. "You’re starting to see plan sponsors look outside the traditional asset classes."

Pernoll has added Goldman’s Satellite Strategies Portfolio, a mutual fund with a portfolio of other mutual funds invested in assets such as real estate, commodities and emerging markets, to more than a dozen 401(k) plans he advises since the start of the year. The fund, with $585 million in assets, returned 28.6 percent in the last 12 months, according to data compiled by Bloomberg. Goldman already has sold its funds to the 401(k) plans of companies including Intel Corp., Sun Microsystems Inc., and Sysco Corp., according to data compiled by BrightScope Inc., the San Diego-based 401(k) research firm.

The most popular Goldman funds for 401(k) plans are Goldman Sachs Mid Cap Value Fund and Goldman Sachs Small Cap Value Fund, according to BrightScope. The mid-cap fund returned 42.9 percent for the last 12 months, and the small-cap fund returned 45.2 percent in the same period, according to data compiled by Bloomberg. Goldman is developing target-date offerings that include guaranteed income during retirement, McDermott said. That puts it in competition with BlackRock and AllianceBernstein L.P., the money management unit of AXA Group, in developing target-date funds that include annuities.

"There’s a lot of interest in product development, but not a lot of plan sponsor usage," Callan’s Lucas said. That may be because big corporate plan sponsors are waiting for guidance from regulators. The Department of Labor has been studying annuities in retirement plans, and the Senate’s Special Committee on Aging is scheduled to hold hearings on lifetime income June 16. "We want to be a major player," said Goldman’s McDermott, who previously worked in the corporate retirement divisions of AXA Equitable and Fidelity. He said he expects to increase the number of people on his team to 30 from 20 by yearend.

Goldman’s alternative asset push "is ahead of the curve right now, so they see an opportunity to dominate that niche," said Steven Dimitriou, managing partner of Mayflower Advisors LLC, a Boston-based retirement plan consultant. "As soon as these funds start gaining traction, they’re going to get copy- catted."

Clients Worried About Goldman’s Many Hats And Dueling Goals
by Gretchen Morgenson and Louise Story - New York Times

"Questions have been raised that go to the heart of this institution’s most fundamental value: how we treat our clients."
Lloyd C. Blankfein, Goldman Sachs’s C.E.O., at the firm’s annual meeting in May

As the housing crisis mounted in early 2007, Goldman Sachs was busy selling risky, mortgage-related securities issued by its longtime client, Washington Mutual, a major bank based in Seattle. Although Goldman had decided months earlier that the mortgage market was headed for a fall, it continued to sell the WaMu securities to investors. While Goldman put its imprimatur on that offering, traders in the same Goldman unit were not so sanguine about WaMu’s prospects: they were betting that the value of WaMu’s stock and other securities would decline.

Goldman’s wager against its customer’s stock — a position known as a "short" — was large enough that it would have generated at least $10 million in profits if WaMu collapsed, according to documents recently released by Congress. And by mid-May, Goldman’s bet against other WaMu securities had made Goldman $2.5 million, the documents show. WaMu eventually did collapse under the weight of souring mortgage loans; federal regulators seized it in September 2008, making it the biggest bank failure in American history.

Goldman’s bets against WaMu, wagers that took place even as it helped WaMu feed a housing frenzy that Goldman had already lost faith in, are examples of conflicting roles that trouble its critics and some former clients. While Goldman has legions of satisfied customers and maintains that it puts its clients first, it also sometimes appears to work against the interests of those same clients when opportunities to make trading profits off their financial troubles arise.

Goldman’s access to client information can also give its traders an advantage that many of the firm’s competitors lack. And because betting against a company’s shares or its debt can create an atmosphere of doubt about a company’s financial standing, Goldman because of its size and its position in the market can help make the success of some of its wagers faits accomplis. Lucas van Praag, a Goldman spokesman, declined to say how much the firm earned on its bets against WaMu’s stock. He said his firm lost money on its bets against the other WaMu securities. In an e-mail reply to questions for this article, he said there was nothing improper about Goldman’s wagers against any of its clients. "Shorting stock or buying credit protection in order to manage exposures are typical tools to help a firm reduce its risk."

WaMu is not the only Goldman client the firm bet against as the mortgage disaster gained steam. Documents released by the Senate Permanent Subcommittee on Investigations show that Goldman’s mortgage unit also wagered against Bear Stearns and Countrywide Financial, two longstanding clients of the firm. These documents are only related to the mortgage unit and it is unknown what other bets the rest of the firm made. Goldman also bet against the American International Group, which insured Goldman’s mortgage bonds, and National City, a Cleveland bank the firm had advised on a sale of a big subprime mortgage lender to Merrill Lynch.

While no one has accused Goldman of anything illegal involving WaMu, National City, A.I.G. or the other clients it bet against, potential conflicts inherent in Wall Street’s business model are at the core of many of the investigations that state and federal authorities are conducting. Transactions entered into as the mortgage market fizzled may turn out to have been perfectly legal. Nevertheless, they have raised concerns among investors and analysts about the extent to which a variety of Wall Street firms put their own interests ahead of their clients’.

"Now it’s all about the score. Just make the score, do the deal. Move on to the next one. That’s the trader culture," said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University and former counsel to the Federal Reserve Board. "Their business model has completely blurred the difference between executing trades on behalf of customers versus executing trades for themselves. It’s a huge problem." Goldman has come under particularly intense scrutiny on such issues since the financial and economic downturn began gathering momentum in 2007, in part because it has done so well, in part because of the power it wields in Washington and on Wall Street, and in part because regulators have taken a keen interest in its dealings.

The Securities and Exchange Commission filed a civil fraud suit against the firm last month, contending that it misled clients who bought a mortgage security that the regulators said was intended to fail. Goldman has said it did nothing wrong and is fighting the case. Legislators in Washington are also considering financial reforms that limit potential conflicts of interest in the way that firms like Goldman trade and invest their own money. Still, Goldman’s many hats — trader, adviser, underwriter, matchmaker of buyers and sellers, and salesperson — has left some clients feeling bruised or so wary that they have sometimes avoided doing business with the bank.

During the early stages of the mortgage crisis, Goldman seems to have unnerved WaMu’s former chief executive, Kerry K. Killinger, according to an e-mail message that Congressional investigators released. In that message, Mr. Killinger noted that he had avoided retaining Goldman’s investment bankers in the fall of 2007 because he was concerned about how the firm would use knowledge it gleaned from that relationship. He pointed out that Goldman was "shorting mortgages big time" even while it had been advising Countrywide, a major mortgage lender. "I don’t trust Goldy on this," he wrote. "They are smart, but this is swimming with the sharks."

One of Mr. Killinger’s lieutenants at Washington Mutual felt the same way. "We always need to worry a little about Goldman," that person wrote in an e-mail message, "because we need them more than they need us and the firm is run by traders." Mr. Killinger does not appear to have known that Goldman was selling short his company’s shares. His lawyer did not respond to requests for comment. But because Bear Stearns, National City, Countrywide and WaMu all were hammered by the mortgage crisis, any bets Goldman made against each of those firm’s shares were likely to have been profitable. Even though Goldman had frequently shorted the shares of other firms, it, along with another bank, Morgan Stanley, successfully lobbied the S.E.C. in 2008, at the height of the mortgage collapse, to forbid traders from shorting financial shares, sparing its own stock.

As Trading Arm Grows, a Clash of Purpose

When new hires begin working at Goldman, they are told to follow 14 principles that outline the firm’s best practices. "Our clients’ interests always come first" is principle No. 1. The 14th principle is: "Integrity and honesty are at the heart of our business." But some former insiders, who requested anonymity because of concerns about retribution from the firm, say Goldman has a 15th, unwritten principle that employees openly discuss. It urges Goldman workers to embrace conflicts and argues that they are evidence of a healthy tension between the firm and its customers. If you are not embracing conflicts, the argument holds, you are not being aggressive enough in generating business.

Mr. van Praag said the firm was "unaware" of this 15th principle, adding that "any business in any industry, has potential conflicts and we all have an obligation to manage them effectively." But a former Goldman partner, who spoke on condition of anonymity, said that the company’s view of customers had changed in recent years. Under Lloyd C. Blankfein, Goldman’s chief executive, and a cadre of top lieutenants who have ramped up the firm’s trading operation, conflict avoidance had shifted to conflict management, this person said. Along the way, he said, the firm’s executives have come to see customers more as competitors they trade against than as clients.

In fact, Mr. Blankfein and Goldman are quick to remind critics that Wall Street deals with sophisticated investors, who they say can protect themselves. At the bank’s shareholder meeting earlier this month, Mr. Blankfein said, "We deal with the most demanding and, in some cases, cynical clients." Even Goldman’s mortgage department compliance training manual from 2007 acknowledges the challenges posed by the firm’s clients-come-first rule. Loyalty to customers "is not always straightforward" given the multiple financial hats Goldman wears in the market, the manual notes.

In addition, the manual explains how Goldman uses information harvested from clients who discuss the market, indicate interest in securities or leave orders consisting of "pretrade information." The manual notes that Goldman also can deploy information it receives from a wide range of other sources, including data providers, other brokerage firms and securities exchanges. "We continuously make markets and take risk based on a unique window on the market which is a mosaic constructed of all of the pieces of data received," the manual said.

Mr. van Praag, the Goldman spokesman, said that the "manual recognizes that like many businesses, and certainly all our competitors, we serve multiple clients. In the process of serving multiple clients we receive information from multiple sources." "This policy and the excerpt cited from the training manual simply reflects the fact that we have a diverse client base and give our sales people and traders appropriate guidance," he added.

Fostering a Market Then Abandoning It

Even now, two years after a dispute with Goldman, C. Talbot Heppenstall Jr. gets miffed talking about the firm. As treasurer at the University of Pittsburgh Medical Center, a leading nonprofit health care institution, Mr. Heppenstall had once been pleased with Goldman’s work on the enterprise’s behalf. Beginning in 2002, Goldman had advised officials at U.P.M.C. to raise funds by issuing auction-rate securities. Auction-rate securities are stock or debt instruments with interest rates that reset regularly (usually weekly) in auctions overseen by the brokerage firms that sell them. Municipalities, student loan companies, mutual funds, hospitals and museums all used the securities to raise operating funds.

Goldman had helped to develop the auction-rate market and advised many clients to issue them, getting an annual fee for sponsoring the auctions. Between 2002 and 2008, U.P.M.C. issued $400 million; Goldman underwrote $160 million, while Morgan Stanley and UBS sold the rest. But in the fall of 2007, as the credit crisis deepened, investors began exiting the $330 billion market, causing interest rates on the securities to drift upward. By mid-January 2008, U.P.M.C. was concerned about the viability of the market and asked Goldman if the hospital should get out. Stay the course, Goldman advised U.P.M.C. in a letter, a copy of which Mr. Heppenstall read to a reporter.

On Feb. 12, less than a month after that letter, Goldman withdrew from the market — the first Wall Street firm to do so, according to a Federal Reserve report. Other firms quickly followed suit. With the market in disarray, the interest rates that U.P.M.C. and other issuers had to pay investors skyrocketed. Rather than pay the rates, U.P.M.C. decided to redeem the securities. Although Goldman had fled the market, it refused to allow a redemption to proceed, Mr. Heppenstall said, warning that its contract with the hospital barred U.P.M.C. from buying back the securities for at least another month. U.P.M.C. had to continue paying lofty interest rates — as well as Goldman’s fees, even though the firm was no longer sponsoring the auctions, according to Mr. Heppenstall.

Goldman had been U.P.M.C.’s investment banker for about six years, Mr. Heppenstall noted in an interview, but this incident marked the end of that relationship. He said that the other Wall Street firms that had underwritten U.P.M.C.’s auction-rate securities, Morgan Stanley and UBS, had allowed it to redeem them. Goldman was the only firm that did not. "This conflict was the last straw in our relationship with Goldman Sachs and we no longer do any business with them," he said. Mr. van Praag, the Goldman spokesman, declined in his e-mail message to respond in detail to U.P.M.C.’s complaints, other than to say that a contract is a contract and that governed how Goldman interacted with the hospital. "The legal agreements that governed U.P.M.C.’s A.R.S. securities did not allow U.P.M.C. to bid for its own securities in the auctions," he said.

Brokering State Debt and Advising Against It

A state assemblyman in New Jersey named Gary S. Schaer also has had unsettling encounters with Goldman. Mr. Schaer, who heads the New Jersey Assembly’s Financial Institutions and Insurance Committee, said he became wary in 2008 when he learned that Goldman, one of the state’s main investment bankers, was encouraging speculators to bet against New Jersey’s debt in the derivatives market. (At the time, a former Goldman chief executive, Jon Corzine, was New Jersey’s governor). Goldman had managed $4.2 billion in debt issuance for the state since 2004, receiving fees for arranging those deals.

A 59-page collection of trading ideas that Goldman put together in 2008, and which was reviewed by The New York Times, shows the firm recommending that customers buy insurance to protect themselves against a debt default by New Jersey. In addition to New Jersey, Goldman advocated placing bets against the debt of eight other states in the trading book. Goldman also underwrote debt for all but two of those states in 2008, according to Thomson Reuters.

Mr. Schaer complained to Mr. Blankfein in a letter in December 2008. A response came back from Kevin Willens, a managing director in Goldman’s public finance unit; he argued that Goldman maintained impermeable barriers between its unit that had helped New Jersey raise debt and another unit that was urging investors to bet against the state’s ability to repay that debt. Mr. Schaer replied that he doubted the barriers were impenetrable. "New Jersey taxpayers cannot be expected to pay tens of millions of dollars in investment banking fees while another department of the very same firm — albeit one clearly and strategically walled off — actively or aggressively advocates the sale of the very same or similar bonds in the aftermath," Mr. Schaer wrote.

Mr. Schaer said in an interview that he tried to get regulations passed to prevent banks from playing such dual roles in state finances, but has made little headway. "I hope the federal government will undertake this problem, and it is a problem," he said. "It’s unrealistic to think the wall — no matter how thick or how tall — will be effective." Goldman’s many financial roles have raised concerns well beyond the state level. Over the years, it has played the role of adviser and fund-raiser for a diverse range of countries, while occasionally drawing criticism for simultaneously betting against the ability of some countries, like Russia, to repay their debts.

As Client Positions Sour, Goldman Defends Own

Goldman’s powerful and nimble trading desk has become a reliable fountain of profits for the firm. But it has also instilled fear among some clients who say they believe, as Mr. Killinger and others at Washington Mutual did, that Goldman trades against the interests of some of its clients. Trading desks make big bets using the firm’s and clients’ money. Goldman’s trading operation has grown so pivotal and influential that many analysts say the firm as a whole now operates more like a hedge fund than an investment bank — another benchmark of the firm’s internal evolution that can create new friction with clients.

For example, if Goldman makes a proprietary bet in a particular market, as it did in early 2007 when it amassed a huge wager against mortgages, what stops it from positioning itself against clients who operate in that market? Bear Stearns, a now defunct investment bank, is a case in point. With the housing crisis gathering steam in March 2007, Goldman created and sold to clients a $1 billion package of mortgage-related securities called Timberwolf. Within months, investors lost 80 percent of their money as Timberwolf plummeted.

Bear bought a $300 million slice of Timberwolf through some of its funds, and the investment was disastrous. The funds collapsed under the weight of Timberwolf and other errant investments, beginning a downward spiral for Bear itself that ended a year later with the firm forced into the arms of JPMorgan Chase to prevent a bankruptcy. Goldman, however, benefited from the problems its securities helped to create, Congressional documents show. Around the same time that Bear was investing in Timberwolf, Goldman was placing a bet that Bear’s shares would fall. Goldman’s short position in Bear was large enough that it would have generated as much as $33 million in profits if Bear collapsed, according to the documents.

Mr. van Praag, a Goldman spokesman, declined in the e-mail message to say how much the firm earned on those bets or whether they were still on when Bear finally collapsed. Goldman was busy with other clients as well during 2007, including Thornburg Mortgage, a high-end lender. Goldman was one of 22 financial companies that lent money to Thornburg; it was using about $200 million of a Goldman credit line backed by mortgage loans. In August 2007, Goldman was the first firm to begin aggressively marking down the value of Thornburg assets used as collateral for the loan. Goldman said the assets were not valuable enough to repay the loan if Thornburg defaulted. Goldman demanded more cash to shore up the account.

According to five people briefed on the relationship who requested anonymity because they didn’t want to damage continuing business relationships, Goldman told Thornburg that the request was justified because the value of similar mortgages traded by other parties had been priced at lower levels. But Goldman, according to two people with knowledge of the situation, had not actually seen such trades. Thornburg officials, however, pushed back on Goldman’s request, questioning the values the firm put on Thornburg’s portfolio. "When we tried to negotiate price, they argued that they were aware of transactions that were not broadly known on the Street," said a former Thornburg employee briefed on the talks with Goldman. "That was their justification for why they were marking us down as aggressively as they were — that they were aware of things that others were not."

Even as Goldman pressured Thornburg for cash, a Goldman banker pitched Thornburg to hire the firm to help it raise new funds. Thornburg turned elsewhere. Thornburg wasn’t the only firm Goldman pressured this way. It made similar demands — using similar arguments — of A.I.G., the insurer that stood behind many of Goldman’s mortgage securities. Ultimately, Goldman’s demands drained the insurer of so much cash that a hobbled A.I.G. required a taxpayer bailout in September 2008. Meanwhile, Goldman had been buying protection against a possible debt default by A.I.G. at the same time that it was pressuring A.I.G. to pay it additional cash. Because Goldman’s own cash demands were weakening A.I.G., Goldman had a front-row seat to the distress the company was experiencing — giving Goldman added insight that buying default insurance on A.I.G. was probably a shrewd investment.

Although Goldman’s financial insight derived from proprietary dealings with A.I.G., and included facts that others in the market most likely didn’t have, Mr. van Praag, the Goldman spokesman, said that his firm was not capitalizing on nonpublic information. Like A.I.G., Thornburg found that arguing with Goldman was fruitless, because the firm had favorable contracts with Thornburg governing disputes. So Thornburg accepted Goldman’s valuations, but then established credit lines with other banks. Although Goldman lost a customer, its mortgage unit had gained a victory: the firm could cite the valuations that Thornburg accepted as proper pricing for mortgage securities when it got into similar disputes with other clients.

"If they could move our positions, they could then argue with A.I.G. or some of their other big positions that our marks were where the market was," the former Thornburg employee said. "They could have this sort of client arbitrage going on." Mr. van Praag, the Goldman spokesman, said his firm’s dispute with Thornburg was about differing standards for valuing collateral, nothing more. "We are a ‘mark to market’ institution and we mark our positions on a daily basis to reflect what we believe is the current value for a security if we decided to sell it," he said. "Those marks are verified by our controllers department, which is independent from the securities division."

Goldman said that the mortgage collapse and Thornburg’s financial problems vindicate the posture it took on how to value Thornburg’s collateral. "Subsequent events clearly indicated that our marks were accurate and realistic," Mr. van Praag said. Indeed, soon after Goldman demanded more funds from Thornburg, analysts began downgrading its shares on news of the collateral calls. Beaten down by the broader mortgage collapse, Thornburg filed for bankruptcy protection on May 1, 2009.

The Lingering Stench Of Bad Home Loans
by Peter Eavis - Wall Street Journal

Just how many home loans written during the craziest days of the boom were rotten? That is the central question for investors as they assess how big a liability banks could face for bad mortgages written during the housing boom. Companies that insured home loans and mortgage-backed bonds, as well as investors in such bonds, have booked big losses as home-loan defaults have soared. But now they are sifting through thousands of mortgages to see how many didn't comply with agreed guidelines on some criteria, like borrower income.

If it can be shown that a high proportion of loans breached underwriting guidelines, the firms that sold or originated the mortgages may have to reimburse insurers and investors for large sums. In some cases, banks and insurers are squabbling over this issue in court. Bond insurer MBIA is separately suing Credit Suisse Group and Countrywide Financial, now owned by Bank of America. In other cases, disputes have been resolved privately. Either way, banks in recent quarters have substantially increased the amounts they set aside to cover potential reimbursements.

Just how widespread were the alleged underwriting missteps? In one Countrywide complaint, MBIA said a review of some defaulted second mortgages showed that 91% had "material discrepancies from underwriting guidelines." On a Credit Suisse deal, MBIA said 85% of a loan sample had issues. And a 2009 Securities and Exchange Commission complaint against Countrywide executives said the firm wrote an "increasing number" of loans in the boom that "failed to meet its already wide underwriting guidelines."

Not that such appraisals can be taken at face value. First, the insurers' analyses are typically performed on small samples from disputed groups of loans. Second, the underwriting guidelines often aren't public, so it is hard to know the specifics of the breach. Third, the identity of the firm performing the analysis often isn't known. MBIA declined to name any firm it is using.

Fourth, it is important to note that insurers are focusing mostly on second mortgages, which back only a small proportion of mortgage-backed securities. If the underwriting behind the far-larger first-mortgage pools is analyzed, the results may be different. And, finally, borrowers behind many of the disputed loans were allowed at the time to supply limited documentation on things like income. The originators, therefore, argue that insurers and investors knew all along that they were getting an incomplete picture of the borrower's ability to repay, and can't go back and portray such omissions as bad underwriting.

Clearly, much rests on the underwriting guidelines. If these are made public, and are clear enough to show who is right, we may soon be able to tell whether the stench of rotten mortgages comes from a handful of loans, or most of them.

Toxic CDOs Beset FDIC as Banks Fail
by Robin Sidel - Wall Street Journal

The FDIC has inherited hundreds of potentially worthless bonds that have come back to haunt the Wall Street firms that sold them, the credit-rating firms that graded them and the hundreds of small banks that bought them. The Federal Deposit Insurance Corp., and by extension the U.S. taxpayer, owns more than 250 collateralized debt obligations that were purchased by small institutions that later failed. Although the bonds have a book value of more than $400 million, they are a headache for the agency as it grapples with the toxic assets flowing from many banks around the country.

"We're getting more of [the CDOs] all the time," said Miguel Browne, an assistant director in the FDIC's division of resolutions and receiverships. The agency has inherited such securities from about two dozen banks that have failed in the current crisis, including Omni National Bank in Atlanta, Venture Bank in Lacey, Wash., and San Diego National Bank. The FDIC's mountain of bad securities has grown even bigger in recent weeks following the failure of Riverside National Bank of Florida, a small firm that had stuffed its investment portfolio with 27 CDOs known as trust preferred securities. Although it was a community bank with 58 branches in Florida, its pile of CDOs has almost doubled the notional value of bonds owned by the federal agency.

Now, in an unusual move, the FDIC may be preparing battle back directly. It has asked a New York court for permission to replace Riverside as plaintiff in a six-month-old lawsuit in which the bank accused more than a dozen financial firms of misrepresenting the value of the CDOs. The FDIC's focus on CDOs comes at a time when the financial instruments are being scrutinized by regulators and prosecutors. Several Wall Street firms, including Goldman Sachs Group Inc. and Morgan Stanley, have attracted particular attention in recent weeks for what they told investors about the nature of the CDOs when the initially sold them.

The problem is that it is difficult to pin down the value of something for which there may be no market. According to FDIC estimates, that the book value of the CDOs that the agency now holds is more than $400 million. But "a lot of these things will have little or no market value," Mr. Browne said. The agency hopes to auction off any CDOs that have value this summer. If it can't unload them, the FDIC could be forced to write off their value, saddling taxpayers with the losses.

Many of the 200 bank failures since the beginning of 2009 have been accelerated by losses in trust preferred securities, which are a hybrid between debt and equity. More than 1,500 banks issued such securities between 2000 and 2008 after regulators ruled that they could be counted as capital, making their balance sheets appear healthier. Wall Street brokerage firms then bought the securities from individual banks that had issued them and packaged them into CDOs. The brokerage firms then sold slices of the CDOs to other small banks. Community banks bought roughly $12 billion of these trust preferred CDOs between 2000 and 2008, according to Red Pine Advisors LLC, a New York firm that values illiquid investments.

Riverside, based in Fort Pierce, Fla., bought 27 trust preferred CDOs with a book value of $211 million between 2005 and 2007. Only two of those CDOs revealed the underlying collateral the investments relied upon, according to a lawsuit that Riverside filed last year in New York Supreme Court. It bought the securities from Wall Street firms, including Merrill Lynch, which is now owned by Bank of America Corp., FTN Financial, a unit of First Horizon National Corp., and boutique financial-services firm Keefe, Bruyette & Woods Inc. Defendants also include McGraw-Hill Cos., which owns credit-ratings firm Standard & Poor's, and Moody's Corp.'s Moody's Investor Service; the suit says that the credit raters determined the CDOs to be investment grade when they weren't.

When the financial crisis struck, the banks that issued CDOs couldn't afford to make interest payments on them. Credit-rating firms then downgraded the securities, battering their value. That dealt a blow to Riverside, which was already stumbling under the weight of soured loans. Its CDOs dropped an average of 11 rating levels within four years. Its portfolio of trust preferred securities dropped more than 60% to $79 million by the end of 2009, according to the lawsuit.

Riverside has sued more than a dozen firms that sold it the trust preferred securities, saying they were "based on inflated investment-grade ratings, undisclosed material conflicts of interest," among other misrepresentations, according to the lawsuit. "We believe we have meritorious defenses in this matter and intend to defend ourselves vigorously," said a spokesman for First Horizon. Representatives of KBW and Merrill declined to comment. "We believe the claim has no legal or factual merit," said an S&P spokesman. A Moody's representative declined to comment.

But in a motion to dismiss the case, the defendants said Riverside's losses "result from the risks it knowingly assumed and from the unprecedented market cataclysm, rather than any flaw in the specific CDOs at issue here." When Riverside failed last month, Toronto-Dominion Bank of Canada acquired the most valuable pieces, including its branches, $2.76 billion in deposits and most of its $3.42 billion of assets. The Canadian bank left the trust preferred securities to the FDIC, which also inherited Riverside's lawsuit. Earlier this month, the FDIC filed a motion to replace Riverside as plaintiff in the case. The agency also is seeking a 90-day stay in the case as it tries to determine what the CDOs are worth.

CalPERS to seek $600 million more from 'broke' California
by Marc Lifsher - Los Angeles Times

The hike in the annual contribution to the public pension fund is $400 million more than fund executives had expected to seek. It's likely to heighten pressure from the governor to cut pension costs. Taxpayers would be on the hook for increasing their contribution to the state employees' pension fund by $600 million a year — at a time when the state budget is $19 billion in the red — under a recommendation approved Tuesday by a committee of the California Public Employees' Retirement System.

The increase, which is expected to be endorsed by the 13-member board at a meeting Wednesday, is $400 million more than fund executives had expected to seek from the state. The state currently contributes $3.3 billion a year to employees' pensions. The jump in the state's annual contractual payment is sure to heighten calls by Gov. Arnold Schwarzenegger and other critics for immediate action to shrink California's burgeoning pension costs. "This is further evidence of an unsustainable pension system that must be reformed," Schwarzenegger said. "Every additional dollar we spend on state employee pensions is a dollar we take from education, health and public safety."

And CalPERS is not the only big pension system that says it needs more money from the state, local governments or school districts. The California State Teachers' Retirement System is expected to ask the Legislature and governor next year to increase its employers' contributions significantly. But CalPERS' board, unlike the teachers' fund, doesn't need to ask lawmakers or the governor for permission to raise contributions. CalPERS is seeking the hike to compensate for steep investment losses. The $206-billion pension fund suffered a 24% loss in the 12-month period that ended June 30. The jump in the state contribution for the fiscal year starting July 1 also was based on updated actuarial studies that indicate that more of California's 1.3 million state workers are retiring and are living longer.

Other reasons for seeking the increase include a need to reduce the gap between what CalPERS expects to have on hand and what it needs to meet future retirement obligations. Currently, the fund has only about 61% of what it needs. The proposed hike would take it to 75% by 2042. Schwarzenegger, who has become a strong advocate for cutting the state's pension benefits, is expected to make the CalPERS rate hike request his prime exhibit in this year's budget negotiations with the Democrats, who control the Legislature.

Chrysler loan loss may be pebble on road to $34 billion taxpayer hit
by Chris Woodyard - USA Today

If you think the $1.6 billion loss that the Treasury Department said it was taking today on its loan to Chrysler last year, consider it a downpayment on the losses yet to come. Losses on taxpayer loans and investments in Chrysler and General Motors are expected to rise as high as $34 billion, the Associated Press points to congressional auditors as having said. The "old" Chrysler has repaid taxpayers $1.9 billion of its $4 billion in loans, which was extended before the company filed for a Chapter 11 bankruptcy reorganization. The government wants more:

The AP says the government hopes to get another $500 million from the company that emerged from bankruptcy, now officially known as Chrysler Group LLC and controlled by Italy's Fiat. The original $4 billion loan was made in January 2009, when the Bush administration was scrambling to rescue Chrysler, GM and their auto financing arms. The Congressional Budget Office estimated in March that the government's $85 billion bailout of the automakers would cost taxpayers $34 billion. GM has repaid its loans, but the government took a huge ownership position in the automaker, and it's unclear whether it can be cashed in even with the company's promising first-quarter earnings.

Senators Seek Curbs on Foreign Bailouts
by Greg Hitt and Victoria Mcgrane - Wall Street Journal

The Senate approved Monday a measure that could make it harder to deploy U.S. funds in rescuing foreign governments, signaling Congress's unease with the sort of global economic aid recently given to Greece. The measure, adopted by a 94-0 vote as an amendment to the financial regulatory overhaul bill the Senate is considering, would require the Obama administration to certify that any future loans made by the International Monetary Fund would be fully repaid.

Absent such as certification, U.S. representatives to the IMF would be required to oppose the lending. The U.S. is a major funder of the IMF, which provided loans to Greece as part of a larger support package. "American taxpayers should not be involved in bailing out foreign governments," said Sen. John Cornyn (R., Texas), chief sponsor of the amendment. "Greece is not by any stretch of the imagination too big to fail." "The thrust of the amendment is the correct one," added Senate Banking Chairman Chris Dodd (D., Conn.). "This is a good amendment deserving of our support."

In a recent interview with Bloomberg TV, Treasury Secretary Timothy Geithner voiced concern about the proposal. He said the U.S. has "never lost a penny" while supporting the IMF. "We have a big stake in helping Europe manage through these things and we're going to do it in a way that is sensible for the American economy and the American taxpayer," he said. The bipartisan support for the amendment underscored the desire of lawmakers to avoid any measure that could be seen as a taxpayer-funded bailout.

But in practice, it is not clear how significant Mr. Cornyn's proposal would be. Country loans of the sort extended to Greece require the approval of a simple majority of the IMF board. That means no single IMF stakeholder—even the U.S.—can block them. Moreover, IMF loans rarely proceed without already being assured of wide support. Historically, countries supporting IMF activities haven't lost money when a recipient nation defaults on its obligations.

The Senate also passed an amendment that removed restrictions in the original overhaul bill that made it tougher for so-called "angel investors" to finance start-up businesses. The bill would have increased the regulatory requirements for this class of investor, and would have included an extended review by the Securities and Exchange Commission. The amendment, which passed by voice vote, removed these requirements.

In other developments Monday, Senate Democratic Leader Harry Reid raised the pressure on fellow senators to close debate on the broader overhaul bill. Mr. Reid filed a petition Monday to shut off debate, setting the stage for a vote Wednesday. If debate is closed, as expected, a vote on the Senate bill itself would soon take place. If it passes, it will still need to be reconciled with a regulatory overhaul bill the House of Representatives has already passed. Mr. Reid wants to clear the way for action before Memorial Day on a handful of other high-priority measures in Congress, including a bill to continue funding the wars in Iraq and Afghanistan. "This cannot be delayed any longer," the Nevada Democrat said. "The end must come."

The regulatory overhaul bill aims to increase consumer protections and limit risk-taking in the banking system, among other things. It is meant to address some of the perceived weaknesses in current regulation that may have contributed to the recent crisis in the financial sector. Dozens of amendments are still pending. One proposal from Sens. Jeff Merkley (D., Ore.) and Carl Levin (D., Mich.) would restrict bank trading activities, prohibiting "proprietary" trading at banks that have access to federal deposit insurance. It would also direct the Securities and Exchange Commission to ban "conflicts of interest" in securities trading.

Another proposal, promoted by Sens. Maria Cantwell (D., Wash.) and John McCain (R., Ariz.), would reinstate Depression-era rules that barred commercial banks from affiliating with investment banks. Another, from Sen. Sheldon Whitehouse (D., R.I.), would allow individual states to impose interest-rate caps on credit cards and other lending by out-of-state banks.

States' Tax Collections Falter, Widening Budget Gaps
by Amy Merrick - Wall Street Journal

April tax collections are falling short of forecasts and even dropping below last year's depressed levels in a number of states, complicating budget troubles and prompting some governors to dip into rainy-day funds. Following several months of modest improvement, the weak April revenue numbers are disappointing for states that hoped for economic recovery soon. Based on reports from more than a dozen states, the figures suggest the recession may have taken a heavier-than-expected toll on employment last year, cutting into income taxes.

The shortfalls also are punching fresh holes in state budgets. Widening state deficits could in turn put pressure on the federal government to issue new stimulus funding; a 2009 cash injection from Washington has helped shore up battered state finances, but much of that will dry up by the end of this year. April is the biggest revenue month for many states because it is when they collect a large portion of income taxes. The month's collections came up short of expectations in California by 26.4%, or $3.6 billion; in Pennsylvania by 11.8%, or $390.1 million; and in Kansas by 10.2%, or $65.3 million. More states will report in the next few weeks.

In some states—including a few where April tax collections fell short of forecasts—revenue actually increased slightly from the same month a year ago. But even if the results topped last year's, states that received lower-than-expected income in April still may need to reduce spending to balance budgets. All states except Vermont have at least a limited requirement to balance their budgets, so must adjust to revenue shortfalls. The weak tax revenue also could mask good news, such as improving sales-tax collections, said Donald Boyd, a senior fellow at the Nelson A. Rockefeller Institute of Government at the State University of New York. Sales taxes better reflect current economic conditions than some other revenue categories.

But states tend to balance budgets so precariously that any shortfall late in the fiscal year can "lead to some sharp, unexpected reactions," Mr. Boyd said. Thirty-eight states and Puerto Rico project a combined budget deficit of $89 billion for the coming fiscal year, which begins July 1 for most states, according to a report last month from the National Conference of State Legislatures.

California's budget outlook worsened considerably in April. Revenue collected from July 1, 2009, through March was $2.3 billion above expectations, spurring hopes that the state's economy was mending. April's general-fund revenue was up 1.4%, or $142 million, from April 2009, but collections came in far below predictions by Gov. Arnold Schwarzenegger's office. On Friday, Mr. Schwarzenegger proposed a revised spending plan that pegged the state's budget shortfall at $19.1 billion. He called for steep cuts to welfare and health programs to close the gap.

The new shortfall estimate is higher than the previous projection of $18.6 billion, partly because the state collected less tax revenue than expected in April for the 2009 tax year. "We've seen a slight uptick—the technology sector is doing better, and we're having more activity in the international trade arena," California State Controller John Chiang said in an interview. "But there is still fundamental weakness in California."

The Pennsylvania budget deficit also widened significantly, from $720 million at the end of March to more than $1 billion on May 3, when the state disclosed that April income-tax collections were well below forecasts. Gov. Ed Rendell has proposed increasing taxes, cutting spending and shifting state funds to balance the budget. In Illinois, where lawmakers are fighting over a $13 billion deficit, a $501 million drop in April revenue—due mostly to lower personal and corporate income taxes—is "not good news," said Jim Muschinske, revenue manager for the state legislature's economic-forecasting service. "We're still anticipating being at least a year or two away from seeing any real, measurable gains," he said.

Kansas lawmakers are hoping the federal government will help. After the state's April revenue missed estimates set just two weeks earlier, the legislature responded by changing the state budget to assume Congress will extend more federal support for Medicaid through the end of the year.

Increased federal spending on Medicaid—the health-insurance program for the poor funded jointly by Washington and the states—was a major component of last year's stimulus package, and it has helped many states prop up their budgets. But it is uncertain that Congress will approve more such funding. In some states, governors are responding to the April shortfalls on their own. Missouri's April tax revenue decreased $13.2 million, or 3.6%, from the same month a year ago. State budget director Linda Luebbering ordered agencies to hold back $45 million in appropriated spending because tax collections were so far below projections.

Arkansas Gov. Mike Beebe released state rainy-day funds and allowed money to be shifted around to cope with a $41 million reduction in the state's budget forecast, after April revenue fell below projections and year-ago levels. Idaho Gov. C.L. Otter also plans to use rainy-day funds to offset an unexpected $55 million shortfall in April revenue. A drop in income taxes collected by the federal government last month may have foreshadowed the state-level declines. Through April 30, federal income taxes not withheld from workers' paychecks fell 17.6% from the same month a year earlier, the Rockefeller Institute reported May 4.

Fannie And Freddie Need To Go -- NOW
by Jim Boswell - Business Insider

No institution or group of institutions should be held more accountable for the current financial crisis in America than the Government Sponsored Enterprises (GSEs) with the endearing names of Fannie Mae and Freddie Mac.  And it is long past time that we put these culprits out of our misery.

Management of long term mortgage debt is too important to the U.S. economy (and thus the world’s economy) to leave in the hands of two entities that make up less than one percent of the Fortune 500 companies in America.  Although supposedly sponsored by the Government, Fannie Mae and Freddie Mac never worked for the Government, nor did they ever serve the general welfare of the American public.

As private companies, whose stock is still being bought and sold on the New York Stock Exchange, Fannie Mae and Freddie Mac were out to make money for themselves and their stockholders.  By manipulating mortgage rates to their advantage, lowering credit standards, holding their own securities funded by ultra-cheap treasury debt, and trading on inside information, the two GSEs intentionally strategized on ways to increase mortgage debt beyond reasonable means.

Because of the oligopoly-like control over mortgage lending given to the GSEs by Congress (and conceded by the Federal Reserve), mortgage debt in the U.S. grew nearly three fold from $2.8 Trillion to $10.2 Trillion in the fifteen-years between 1992 and 2007 (See Exhibit).  This growth in mortgage debt grew larger and faster than the better known National Debt which grew from $4.1 Trillion to $9.0 Trillion during the same time period.


In truth, without the housing bubble collapse, there would have been no bank bailouts, no Lehman bankruptcy, no Countrywide failure, no Fed lending, no AIG (the list could go on and on).  And if you are looking for the people most responsible for the housing bubble, then that leads you right to the front doors of Fannie and Freddie. 

If it had not been for the self-serving business strategies of the GSEs’ to increase debt and keep housing prices escalating for their own company gains, the housing bubble that caused the recession would never had occurred in the first place.  And even though GSE Executive Management may not have intended to create a global financial crisis with criminal intent in mind, that same management must still be held accountable for the global financial crisis none-the-less. 

Either through ignorance or a need to satisfy their own personal greed, the GSEs mismanaged their power over mortgage rates and their underwriting systems for nearly a thirty-year period going back as far as the early 1980s.  And no one should overlook the fact that the GSEs regularly used inside information to purchase their own securities prior to selling the remainder to unsuspecting global investors, thus enhancing their bets on how their securities would pay down over the counter bets of those unsuspecting investors. 

Now here is the solution to our current dilemma about what to do with the GSEs. 

Abolish Fannie Mae and Freddie Mac.  Replace them with a much smaller and more conservative government agency modeled after that of Ginnie Mae.  Ginnie Mae (with less than eighty government employees) managed the risk of its MBS programs better than the GSEs.  In fact, this little guy, unlike the GSEs who have now accrued more than $200 billion in losses since 2007, managed to make money during the same time period. 

Put some respected financial person in charge of the new Federal entity, not some “political hack”.  Treat this position like you would when choosing a Federal Reserve Chairman or Secretary of Treasury.  Mortgage debt in the United States has grown to be one of the most important factors that we need to manage for a growing economy.

Keep this new entity simple and operate it like Ginnie Mae operates.  In fact, merge Ginnie Mae into this new agency.  Ginnie Mae doesn’t purchase its own product, but instead, sells it all to investors.  Compare annual reports.  You’ll find it fifty times easier to understand the business model behind that of Ginnie Mae compared to the business models of the GSEs.  

End the government’s involvement in subprime and outright purchase subsidies.  These activities just put houses in the hands of people who ultimately cannot afford them.  Instead, the government should encourage and reward financial responsibility.  And here’s how to do that.

Have the new agency establish a 30-year 4.0% fixed rate mortgage program for highly qualified purchasers and refinancers with a minimum of 10-15% equity and good credit for “primary” residences under $500,000.  This approach offers two major advantages: (1) it will reduce our long term debt obligations; and (2) it is a way to stimulate the economy better than we have been able to in the last eighteen months through increased government spending.

Back these loans and securitize them with the Full Faith and Credit Guaranty of the United States Government.  Think of these new securities like long term U.S. Treasury Notes.  Marginal borrowers that don’t meet new strict underwriting standards used by the new agency must go to the private sector banks for their mortgages which “will not” carry the same Government Guaranty.

One thing we should learn from this latest financial crisis.  Not everything has been all bad.  During this latest recession, heroes have stepped forward, and I would like to tip my hat to two of the most important: (1) the FDIC, which despite the TARP bailouts, has continued doing its essential job like it has in the past—shutting down the riskiest and most dysfunctional banks in America; and (2) maybe the most important of all, those American homeowners who month after month continued making their monthly principal and interest payments despite their deteriorating financial circumstances during the crisis.  It is because of heroes like these that we are continuing to recover from the Greatest Recession since the Great Depression.

Jim Boswell (MBA, MPA, BA) directed the analytical risk monitoring activities of Ginnie Mae’s $500 billion portfolio of mortgage-backed securities for twelve years (1988-2000), including the period of the S&L crisis. 

Reserve Managers in Spotlight as Euro Drops
by Katie Martin - Wall Street Journal

The euro's tumble to a four-year low in recent days has raised an inevitable question: will the market's biggest investors start pulling out? Many currency-market watchers are growing increasingly worried that central-bank reserve managers—some of the biggest investors in the world—could be having second thoughts about their euro holdings as the European debt crisis highlights flaws in the currency's structure. Signs are emerging that some reserve managers are taking fright. Monday, it emerged that Russia had trimmed its euro holdings from 47.5% of total reserves to 43.8%. Iran's central bank chief said Tuesday that the euro's decline may prompt a rethink on its reserves.

South Korea's central bank said last week that the euro zone's sovereign-debt stresses are hitting the European single currency's attraction as a reserve currency. As such worries build, those who believe that the euro is set for a catastrophic fall grow more confident. "This is all consistent with a trend that has been developing, where we're seeing central banks that have been diversifying into euros slowing down that process," said Ian Stannard, a currencies analyst at French bank BNP Paribas, which expects to see the euro sink by a further 20% to parity against the dollar by the early part of next year. "They are concerned about the euro, for obvious reasons, and hence the weighting of the euro of their holdings is going down," Mr. Stannard added.

The hard evidence of a flight from the euro among these slow-moving and very conservative investors is patchy and comes with a lag. Russia's reduction in euro holdings, for example, happened by the end of last year, before the Greek crisis intensified. The People's Bank of China—the undisputed heavyweight in this space—also said Tuesday that the euro's slide won't deter it from diversifying its enormous foreign-currency reserves, although it has raised serious concerns about sovereign debt in the past. Officials in China have voiced concern about the dollar in recent years because of Washington's growing deficits, and have said that China wants to diversify its holdings, which analysts widely interpret to mean putting more money into euros, the second most liquid currency after the dollar.

Spurts of anecdotal and real evidence of similar reallocations out of the dollar in 2004 and 2005 were a big reason for that currency's hefty multi-year slide, regardless of how reliable some individual reports of shifts turned out to be. Mindful of that experience, analysts and investors are wary that the euro could soon find itself in a similar swirl of nerves. Central banks, which held a combined total of around $7.5 trillion in reserves at the end of last year, form the backbone of the currencies markets. Their slow and steady shifts out of the dollars they generally receive from trade or commodities exports, and into other currencies, play a big role in determining exchange rates.

The issue of alternatives weighs heavy, though. The U.K.'s fiscal and debt problems make it tough for reserve managers to park funds in sterling. Debt problems also hamper the yen, while other currencies are simply too small to accommodate large inflows, particularly when the bond markets behind them are relatively limited. That means the euro zone, in whatever eventual form it takes, will probably still see official inflows. When the euro was launched in 1999, several years passed before reserve-fund investors started to accept it and incorporate it into their reserves. But analysts broadly agree that when they did, starting in around 2003, that was a turning point for the now 16-country currency—a shift that helped it to climb by some 60% against the dollar to the middle of 2008, when it hit its peak of $1.60.

Reserve managers wouldn't need to sell euros at this point to hit the currency hard. Instead, they would merely need to slow down the pace of euro purchases, and that risk is needling market watchers now. Paul Lambert, who runs a macroeconomy-focused fund at Polar Capital in London, said he thinks the damage to the euro-zone economy itself from the sovereign-debt crisis could be smaller than many people assume.

"I don't really buy the idea that all this is bad for the euro zone's cyclical outlook," he said. More fundamental concerns over the currency's structure, however—a big consideration for reserve managers—are more warranted. "What's driving the euro is that fact that people are worried, and they need to attach a probability to the doom scenario, which is the breakup of the euro area ... Maybe central bank reserve managers are reducing their euro reserves."

Conspiracy of Banks Rigging States Came With Crash
by Martin Z. Braun and William Selway - Bloomberg

A telephone call between a financial adviser in Beverly Hills and a trader in New York was all it took to fleece taxpayers on a water-and-sewer financing deal in West Virginia. The secret conversation was part of a conspiracy stretching across the U.S. by Wall Street banks in the $2.8 trillion municipal bond market. The call came less than two hours before bids were due for contracts to manage $90 million raised with the sale of West Virginia bonds. On one end of the line was Steven Goldberg, a trader with Financial Security Assurance Holdings Ltd. On the other was Zevi Wolmark, of advisory firm CDR Financial Products Inc. Goldberg arranged to pay a kickback to CDR to land the deal, according to government records filed in connection with a U.S. Justice Department indictment of CDR and Wolmark.

West Virginia was just one stop in a nationwide conspiracy in which financial advisers to municipalities colluded with Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Wachovia Corp. and 11 other banks. They rigged bids on auctions for so-called guaranteed investment contracts, known as GICs, according to a Justice Department list that was filed in U.S. District Court in Manhattan on March 24 and then put under seal. Those contracts hold tens of billions of taxpayer money.

The workings of the conspiracy -- which stretched from California to Pennsylvania and included more than 200 deals involving about 160 state agencies, local governments and non- profits -- can be pieced together from the Justice Department’s indictment of CDR, civil lawsuits by governments around the country, e-mails obtained by Bloomberg News and interviews with current and former bankers and public officials. "The whole investment process was rigged across the board," said Charlie Anderson, who retired in 2007 as head of field operations for the Internal Revenue Service’s tax-exempt bond division. "It was so commonplace that people talked about it on the phones of their employers and ignored the fact that they were being recorded."

Anderson said he referred scores of cases to the Justice Department when he was with the IRS. He estimates that bid rigging cost taxpayers billions of dollars. Anderson said prosecutors are lining up conspirators to plead guilty and name names. "This will go on for a long time and a lot of people will be indicted," he said in a telephone interview.

The U.S. Treasury Department encourages public bidding for GIC contracts to ensure that localities are paid proper market rates. Banks that conspired in the bid rigging for GICs paid kickbacks to CDR ranging from $4,500 to $475,000 per deal in at least 10 different transactions, government court-filed documents say. A GIC is similar to a certificate of deposit, but its rates aren’t advertised publicly. Instead, towns rely on advisory firms such as CDR to solicit competing offers. In the bid-rigging deals, CDR gave false information to municipalities and fed information to bankers allowing them to win with lower interest rates than they were otherwise willing to pay, the indictment says. Banks took their illegal gains from the additional returns and paid CDR kickbacks, according to the indictment.

Wolmark, 54, who was indicted by a federal grand jury in Manhattan on antitrust, conspiracy and wire fraud charges, to which he pleaded not guilty, declined to comment when reached by telephone at CDR’s office. Goldberg, who hasn’t been charged, declined to comment, says his attorney, John Siffert. Court records in the broadest-ever criminal investigation of public finance shed new light on how Wall Street’s biggest banks were cheating cities and towns during the same decade in which they were setting the stage for a global economic collapse. As the banks were steering the world’s financial system to the brink of catastrophe by loading more than $1 trillion of subprime mortgage loans into opaque debt investments, they were also duping public officials across the U.S.

Many of the same bankers and advisers who sold public officials interest-rate swap deals that backfired for taxpayers are now subjects of the criminal antitrust investigation involving GICs. The swaps are derivatives designed to keep monthly interest payments low as lending rates change. Municipal- derivative units of the largest U.S. banks also sold the contracts, public records across the nation show.

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Options and futures are the most common types of derivatives. A key witness in the government’s case is a former banker whom the government hasn’t named, according to a civil lawsuit filed by Baltimore, Maryland, and six other municipal borrowers against Bank of America, JPMorgan and nine other banks. The banker is providing evidence against his peers.

The witness, who was employed by Bank of America Corp. starting in 1999, has laid out the inner workings of the scheme in confidential meetings with investigators, according to the civil lawsuit. Bank of America, based in Charlotte, North Carolina, has also been providing prosecutors with evidence since at least 2007. The bank voluntarily reported its own illegal activity and agreed to cooperate with the Justice Department’s antitrust division, according to a press release from the company.

In exchange, the government promised in an amnesty agreement not to prosecute the bank. Bank of America spokeswoman Shirley Norton in San Francisco said in an e-mail the firm is continuing to cooperate. The banker who has been cooperating with the Justice Department said he overheard his colleagues change Bank of America’s bids after coaching from brokers or other banks bidding on the same deal, according to information that the firm provided to plaintiffs in the civil case filed by seven municipalities.

At least five former bankers with New York-based JPMorgan, the second-biggest U.S. bank by assets, conspired with CDR to rig bidding on investment deals sold to local governments, according to the Justice Department list now under seal. At least three other former JPMorgan bankers are targets of the investigation, according to filings with the Financial Industry Regulatory Authority. Six bankers with Bank of America, the biggest U.S. lender, are also named in the sealed Justice Department list as participants.

Eighteen employees at 16 other companies, including units of General Electric Co., UBS AG and FSA, then a unit of Brussels lender Dexia SA, are also cited as co-conspirators by the Justice Department, according to the list under seal. None have been charged in the case. Citigroup spokesman Alex Samuelson, Dexia spokesman Thierry Martiny, GE spokesman Ned Reynolds, JPMorgan spokesman Brian Marchiony, UBS spokesman Doug Morris, and Ferris Morrison, a spokeswoman for Wells Fargo & Co., which acquired Wachovia in 2008, declined to comment.

Former CDR employees Douglas Goldberg, Daniel Naeh and Matthew Rothman, pleaded guilty in federal court in Manhattan in February and March to wire fraud and conspiracy to rig bids. In October, CDR was charged with criminal conspiracy and fraud, along with Chief Executive Officer David Rubin, 48, vice president Evan Zarefsky and Wolmark. They pleaded not guilty. Rubin, who was also charged with making fraudulent bank transactions, faces as much as $3 million in fines and more than 30 years in jail if convicted.

No Law Broken
Rubin declined to comment in a telephone call. "Mr. Rubin doesn’t think that CDR broke the law in any of these transactions," said Laura Hoguet, his attorney in New York. Daniel Zelenko, a lawyer for Zarefsky in New York, said he was confident his client will prevail at trial. "The government continues to show that it simply doesn’t understand how this market operated," Zelenko said in an e- mail. During more than three years of investigation, federal prosecutors amassed nearly 700,000 tape recordings and 125 million pages of documents and e-mails regarding public finance deals.

Municipalities and states raise $400 billion a year by selling bonds. They invest much of those proceeds in GICs, sold by banks or insurance companies. Those accounts hold taxpayer money and earn interest before public agencies spend it. Banks and advising firms illegally siphoned money from taxpayers by paying artificially low interest rates in the GICs, the CDR indictment says. The money was intended to build schools, hospitals, roads and sewers and refinance higher-cost debt. The bid-rigging schemes were orchestrated by CDR and other advisory firms, according to the indictment and the civil suits. Advisers are unregulated private firms hired by local governments to consult on public finance deals -- and are almost always paid by the banks that arrange the transactions or manage the GICs.

CDR, which was located on Wilshire Boulevard in Beverly Hills, California, during the transactions under investigation, has provided advice on more than $158 billion in public transactions since it was founded in 1986, according to its website. CDR helped arrange deals in which financial firms took millions of dollars in profits from GICs, Bloomberg News reported in October 2006. Almost all of the deals were shams: As much as $7 billion in bond-issue proceeds were invested in GICs but never spent for the intended purpose of providing services to taxpayers.

CDR signed off on interest-rate swaps to municipalities, as banks took hidden fees sometimes 10 times as much as they charged on fixed-rate bond deals, according to data compiled by Bloomberg. For the public, the swaps were fraught with risks. In the past decade, banks have peddled swaps the world over, from Jefferson County, Alabama -- which was forced to the brink of bankruptcy -- to the hill towns of the Umbria region of Italy. Many of these swaps soured when the credit crisis began in 2007.

Dozens of municipalities have paid banks billions to get out of swap contracts. The agency that oversees the San Francisco-Oakland Bay Bridge said it spent $105 million to escape its deal in July 2009. "They were gouging the municipalities," said retired IRS investigator Anderson, 59. "Beside the excessive fees, some of the swap deals just didn’t work. It was just awful. The same people were involved in the GIC end of the market."

Bid rigging not only cheated cities and towns, it also illegally denied the IRS required taxes from GIC income, Anderson said. The evidence is clear in telephone recordings made on GIC desks, he said. "We could hear people talking about how everyone knew who was going to win the bid. You could tell it was just everyday business." The Securities and Exchange Commission is conducting a probe of bid rigging from its Philadelphia office that’s parallel to the Justice Department investigation.

More Probes
State attorneys general in California, Connecticut and Florida are also investigating. Bank of America, JPMorgan, Fairfield, Connecticut-based GE, and Zurich-based UBS have disclosed in regulatory filings that they may be sued by the SEC. The Federal Bureau of Investigation has raided at least two of CDR’s competitors, Pottstown, Pennsylvania-based Investment Management Advisory Group Inc., known as Image, and Eden Prairie, Minnesota-based Sound Capital Management. Neither has been charged.

Robert Jones, a managing director of Image, declined to comment, after answering a call to the firm’s office. Johan Rosenberg of Sound Capital didn’t return calls seeking comment. Tape recordings cited in a letter by Justice Department prosecutor Rebecca Meiklejohn show how those deals worked. In two GIC bids for the Utah Housing Corp., CDR’s Zarefsky advised an unidentified trader that his firm could lower its offer by "a dime," or 10 basis points (a basis point is 0.01 percentage point).

The West Valley City-based housing agency accepted contracts with GE’s FGIC Capital Market Services division for 5.15 percent and 3.41 percent in 2001, public records show. Zarefsky didn’t return calls seeking comment. "I can actually probably save you a couple bucks here," Zarefsky told the trader, according to the letter citing the tape recording. The Utah agency, which finances mortgages for low-income residents, didn’t know that financial firms were cheating it out of money that could have been used to help home buyers, said Grant Whitaker, who runs the agency. "It sounds like somebody got a better deal than we did," he said in a telephone interview. Such deals could produce large illegal profits by banks, said Bartley Hildreth, public finance professor at the Andrew Young School of Policy Studies at Georgia State University in Atlanta.

"Just a basis point on many of these deals is tens to hundreds of thousands of dollars," he said. This isn’t the first time Wall Street has faced accusations of reaping excessive fees on investment deals with public officials. Goldman Sachs Group Inc., Lehman Brothers, which filed for bankruptcy in 2008, Merrill Lynch & Co. and other securities firms agreed by 2000 to pay more than $170 million to settle SEC charges that they had sold overpriced Treasury bonds to municipalities. The so-called yield burning drove down the returns that local governments earned and trimmed required payments to the IRS. The firms neither admitted nor denied wrongdoing.

Even as the banks were settling with regulators, they devised another way to burn yield, this time by skimming money from GICs, according to the indictment, which said the conspiracy went from 1998 to at least 2006. In the lawsuit against Bank of America and JPMorgan filed in New York in June 2009, the city of Baltimore, two Mississippi universities and four other municipal borrowers say that bankers from those two companies colluded in bidding for GIC contracts in Pennsylvania.

At a holiday party sponsored by advising firm Image at Sparks Steak House in Manhattan early in the past decade, the Pennsylvania deals were discussed by the Bank of America trader who is cooperating with prosecutors and Sam Gruer of JPMorgan, the civil antitrust lawsuit says. The Bank of America trader told Gruer that he was happy that the two banks weren’t "kicking each other’s teeth out" on bidding for certificates of deposits for bond proceeds, the suit says. That information was provided by Bank of America to the plaintiffs. Gruer, who was informed by prosecutors in 2007 that he was a target of the investigation, declined to comment.

Coaching a Bidder
The trader who is now a federal witness joined Bank of America after being recommended by Image, according to information that the bank turned over to the Baltimore-led plaintiffs. He was assigned by Phil Murphy, who headed the municipal trading desk, to be Bank of America’s point person for investment contracts bid by Image, the lawsuit says. Image coached Bank of America in winning an investment contract in Pennsylvania, according to an internal e-mail exchange in May 2001 between Bank of America trader Dean Pinard and Image’s Peter Loughhead that was obtained by Bloomberg News. The e-mail was provided to Bloomberg by a person who got it from Bank of America and asked to remain unidentified. Loughead, who ran bids for Image, advised Pinard on how much to offer for managing the cash fund for a $10 million bond issued by the sewer authority of Springfield Township, York County, 100 miles (161 kilometers) west of Philadelphia.

Pinard said in the e-mail to Loughead that Bank of America was willing to pay the town as much as $40,000 upfront to win the deal. Loughead wrote that the bank didn’t need to pay that much. "Don’t fall on any swords," Loughead wrote to Pinard the day before bids were submitted. He suggested that the bank could win the contract with a bid of slightly more than $30,000. The next day, Bank of America offered $31,000. It won the bidding, authority records show. Loughead didn’t return calls seeking comment. Pinard didn’t respond to telephone requests for an interview and no one responded to a knock on the door at his Charlotte home.

Image ensured that Bank of America would dominate GIC deals in Pennsylvania by soliciting sham bids from other banks to make the process look legitimate, according to testimony from the trader cooperating with the Justice Department. Bank of America would return the favor to Image by submitting so-called courtesy bids at the adviser’s request, allowing JPMorgan to win some of the deals, according to information that Bank of America gave plaintiffs’ attorneys.

Bank of America has cooperated with the municipalities that were suing the bank as part of its 2007 amnesty agreement with the Justice Department. Traders such as FSA’s Goldberg often had worked for several banks and insurance companies that had a role in GIC contracts, according to employment records with Finra, the self-regulator of U.S. securities firms. CDR employees went on to work in the derivative departments of Deutsche Bank AG and UBS, the records show. Before joining Bank of America, Pinard, 40, worked at Wheat, First Securities Inc. in Philadelphia with two bankers who would later join Image, according to broker registration records. "Few people understand this part of public finance," Georgia State’s Hildreth said. "It is a very small band of brothers who know the market. So, of course, they are going to reap the benefits."

34 States
For nearly a decade, CDR founder Rubin, Wolmark, and Zarefsky helped fix prices on investment deals that cheated taxpayers in at least 34 states, according to their indictments and records filed in the case. FSA’s Goldberg, who received a bachelor’s degree in accounting from St. John’s University in Queens, New York, worked with CDR employees on GIC deals, according to the indictment and public records. Goldberg worked from 1999 to 2001 at GE, which gets 35 percent of its revenue from financial services.

Goldberg was referred to only as "Marketer A" in the CDR indictment. "Marketer A" was then later identified as FSA’s Steven Goldberg in the Justice Department list of co- conspirators. At GE, Goldberg worked with Dominick Carollo, a senior investment officer for FGIC, and Peter Grimm, who worked there from 2000 until at least 2006, according to court documents and public records. GE sold FGIC in 2003 to a group led by mortgage insurer PMI Group Inc.

Funneling Kickbacks
Goldberg and Grimm worked with CDR to increase their gains on GIC deals, according to the CDR indictment and conspirator list. Carollo left GE in 2003, joining the derivatives unit of Royal Bank of Canada. Grimm and Carollo didn’t respond to telephone calls and e-mails seeking comment. Goldberg continued to participate in the conspiracy after he left for FSA in 2001 and used swap deals with Toronto-based Royal Bank of Canada and UBS to funnel kickbacks to CDR, according to the indictments and the Justice Department list of conspirators. Royal spokesman Kevin Foster said the company is cooperating the government.

FSA, Royal Bank of Canada and UBS all worked on public finance deals in West Virginia that prosecutors say involved bid rigging. At least three times, Goldberg conspired with CDR to pick up deals with West Virginia agencies, according to a guilty plea by former CDR employee Rothman and other records filed in federal court in Manhattan. Among them was a $147 million investment contract with the West Virginia School Building Authority.

That state’s schools need every penny they can get, said Mark Manchin, executive director of the school authority. With 17 percent of West Virginians below the poverty line in 2008, the state was 45th among the 50 U.S. states, according to a 2009 Census Bureau report. Manchin said some students study in dilapidated, century-old buildings. "It’s just raw greed at the expense of the most vulnerable," he said in a telephone interview. "With deteriorating facilities all over the state, that money is what we use to build schools."

Bank of America’s municipal derivatives division, which was formed in 1998, worked on the 14th floor of the Hearst Tower in Charlotte. The space was so tight that the banker who’s cooperating with the Justice Department said he could hear others in the office change their bids when they got word from financial advisers, according to information Bank of America gave Baltimore. Bank of America’s Murphy told the banker helping prosecutors that Image would use sham auctions to steer deals to Bank of America if the employee told Image that he "wanted to win" and "would work with" Image, according to the civil suit filed by Baltimore. Murphy declined to comment.

They would use verbal cues to communicate. The banker would ask whether the bid was a "good fit" to get information on competing bids from Image. Sometimes Image’s Martin Stallone said Bank of America’s bids were "aggressive," or too high, and had to be reworked. At other times, Stallone would ask the banker to bid a specific number, according to the civil suit. Stallone didn’t respond to messages left for him at work or to a list of questions faxed and e-mailed to Image.

Like Financial Security Assurance, Bank of America also paid kickbacks to brokers for their help in getting deals, according to the Baltimore lawsuit, which based its allegations on information provided by Bank of America. On June 28, 2002, Douglas Campbell, a former municipal derivatives salesman at Bank of America, wrote in an e-mail to his boss, then managing director Murphy, that he had paid $182,393 to banks and brokers not tied to any particular deals.

Three payments totaling $57,393 went to CDR, which played no role in any transaction connected to that amount. A copy of the e-mail was contained in a North Carolina lawsuit filed by Murphy against Bank of America in 2003. "The CDR fees have been part of the ongoing attempt to develop a better relationship with our major brokers," Campbell wrote. The bid rigging in GIC contracts has reduced public funding for schools and housing across the U.S. "If this was going on in a small state like West Virginia, it must have been huge elsewhere," the state’s Assistant Attorney General Doug Davis said.

Chinese Stocks Retreat Abruptly From 2009 Gains
by David Barboza - New York Times

After a spectacular rise last year, China’s stock market has plummeted on what analysts say are growing concerns about Europe’s debt crisis and expectations that Beijing is about to take strong action to slow the nation’s booming economy and prevent it from overheating. Investors are worried that Chinese exports to Europe will slow in the coming months and that government efforts to tame this country’s economy by tightening credit will hamper a wide array of industries, including the nation’s fast-growing real estate market.

Although share prices in Shanghai rose modestly Tuesday after falling 5 percent Monday, the Shanghai composite index remains near its lowest level in a year, down about 21 percent this year. Stock prices have also fallen sharply over the last few months in Hong Kong and Shenzhen, largely because Beijing is expected to raise interest rates and tighten bank lending to help rein in inflation and soaring property prices. In Hong Kong, the Hang Seng index is down about 9 percent this year.

China’s economy has been red hot since late 2009, when Beijing’s huge economic stimulus package began to kick in along with record lending by state-owned banks. In the first quarter of this year, China said its economy grew 11.9 percent. The aggressive lending helped revive China’s building boom and sent Chinese stock prices soaring. Last year, the Shanghai composite rose about 80 percent, making it the world’s best-performing major stock market. But now, with mixed signals about the prospects of a solid global recovery by the end of this year, analysts say Chinese investors have grown cautious.

"This doesn’t really reflect what’s happening in the economy now, but it reflects what investors think will happen in the future," said Zhao Xinge, an associate professor of finance at the China Europe International Business School in Shanghai. "The new policies could cool the real estate market. And the real estate market plays a major role in the economy — not just steel and construction companies, even home appliances." Although China’s economy is still roaring, many economists expect growth to slow modestly in the latter part of this year, partly because of tighter monetary policies. And some warn of potentially bigger trouble ahead, particularly if exports to the United States and Europe — China’s two biggest markets — are weak, and government stimulus money dries up.

Perhaps in anticipation, some investors are already pulling back from the stock market. "This was a cash-driven rally, and now liquidity’s being driven down a bit," said Stephen Green, a Shanghai-based economist at the Standard Chartered Bank. Henry Cao, a professor of finance at the Cheung Kong Graduate School of Business, says some Chinese investors are already looking to invest overseas. "They’re hoping returns there might be better," Professor Cao said.

But other analysts caution that the Shanghai and Shenzhen stock markets are known for attracting speculators and, unlike the more stable Hang Seng index, are prone to volatile price swings. In late 2007, the Shanghai composite soared as high as 6,036 before collapsing in 2008 and falling to about 1,717. Only late in 2009 did it start sprinting forward again. The Shenzhen index is down about 17 percent this year.

And yet, there is often a sense of optimism among investors in China, particularly in Shanghai, that any slowdown is just a breather before the next great stock rally. That was evident Saturday, when this city unveiled a huge bronze sculpture of a charging bull and placed it in the Bund financial square. The sculpture is a replica of the one located in New York, on Wall Street. Both were produced by the Italian-American artist Arturo di Modica.

Europe’s Debt Crisis Casts a Shadow Over China
by Keith Bradsher - New York Times

The pain of the European debt crisis is spreading as the plummeting euro makes Chinese companies less competitive in Europe, their largest market, and complicates any move to break the Chinese currency’s peg to the dollar. Chinese policy makers reached a rough consensus early last month about breaking the dollar peg and letting the currency, the renminbi, rise in value somewhat, according to people close to Chinese currency policy makers. Uncoupling the currencies would make American goods more competitive against Chinese products. But for various reasons, China has not yet put that policy into place.

And in light of the euro’s nose dive, such a move could be difficult. Letting the renminbi rise against the dollar would also mean a further increase in the renminbi’s value against the euro, creating even more problems for Chinese exporters to Europe. The euro has plunged against the renminbi in recent weeks, at one point Monday reaching its lowest level since late 2002. The steep rise of the renminbi prompted a Commerce Ministry official in Beijing to warn Monday that China’s exports could be threatened.

The official’s comments were the most explicit yet on the implications for China of Europe’s recent financial difficulties. The comments also suggest that even China — the world’s fastest-growing major economy and increasingly the engine of global growth — is not immune to the crisis that started in Greece and threatens to spread across much of Europe. "The yuan has risen about 14.5 percent against the euro during the last four months, which will increase cost pressure for Chinese exporters and also have a negative impact on China’s exports to European countries," Yao Jian, the ministry’s spokesman, said at a news conference in Beijing, according to news services, using another term for China’s currency.

It is a potentially awkward moment. The American secretary of commerce, Gary Locke, is in China this week leading the first cabinet-level trade mission of the administration of President Obama. Some economists warn that China may face more problems. The biggest reason Chinese exports plunged early last year was not weakening demand in industrialized countries but a sudden, temporary disappearance of trade finance from Chinese and foreign banks. The availability of trade finance could easily become a serious problem again soon, said Dong Tao, the chief Asia economist at Credit Suisse.

Chinese exporters rely very heavily on bank letters of credit to finance their shipments. The availability of the letters of credit is closely linked to overnight lending rates between banks. When banks have trouble borrowing money themselves — as has been happening as a result of worries about European banks’ possible losses from the region’s sovereign debt crisis — they tend to cut sharply the issuance of letters of credit for trade finance. The banks see that as a quick, easy way to conserve cash without violating the terms of other financial obligations, like established lines of credit for big corporations.

Interbank lending rates surged late last week and on Monday and must now come back down very quickly to persuade banks to keep issuing letters of credit, Mr. Tao said. "Without trade finance, trade won’t happen," he said. The Shanghai stock market plunged Monday, with the composite index falling 5.1 percent on worries about global demand as well as concerns about possible further moves in China to limit a steep rise in real estate prices this spring.

Some Chinese companies are already running into difficulty because of the euro’s fall against the renminbi. "We have been receiving calls from some European clients who signed contracts with us earlier this month, and they all want to cancel their orders, since the depreciation of the euro has eroded all their margins and then some," said Elvin Xu, the sales manager of Guangdong Ouyi Electrical Appliance in Zhongshan, China, which makes gas stoves, heaters and water heaters. "They say they cannot increase the prices at their end to their customers, given intense competition in their marketplace," Mr. Xu added.

The renminbi is rising along with the dollar against the euro. The Chinese government has continued to intervene heavily in currency markets in recent weeks to prevent the renminbi from rising against the dollar, maintaining an informal peg of 6.827 renminbi to the dollar, the level since July 2008. Because American companies in particular compete in the Chinese market with European companies in many industries, the euro’s weakness against the renminbi is putting American companies at a disadvantage. The American commerce secretary, Mr. Locke, said Monday in Hong Kong that Mr. Obama’s goal was to double American exports by 2015. Short-term currency fluctuations do not detract from that goal, he said in an interview, adding, "Who knows what the euro will be next month, six months from now or a year from now?"

Steve Jennings, one of the American executives traveling with Mr. Locke, said that the weakness of the euro would help European companies compete against American companies in export markets all over the world. "As the euro continues to decline, they’re going to have some advantages," said Mr. Jennings, the chief marketing officer of BPL Global, a company based in Oregon that manufactures electricity monitoring equipment. Chinese leaders reached a consensus in early April to break the renminbi’s peg to the dollar. That ended a dispute that had spilled into public view in March when Commerce Ministry officials warned in speeches and interviews in Beijing and Washington about the dangers of any change in the renminbi’s value. The ministry halted those warnings immediately after the consensus was reached, and Chen Deming, the commerce minister, even reversed himself publicly by saying that China’s trade deficit in March was nothing to worry about.

But events since then have delayed adoption of the consensus, including public attention paid to a visit to Beijing by the United States Treasury secretary, Timothy F. Geithner, followed by the Qinghai earthquake and now the euro’s slide. The United States is far from alone in calling for China to let the renminbi rise. Government officials in Singapore, India and Brazil have also called publicly in the last three weeks for the Chinese government to break the renminbi’s peg to the dollar. Continued Chinese inaction would antagonize many commercial rivals of China, and could fuel pressures in Washington for Congress to draft trade legislation threatening restrictions on Chinese exports.

The euro’s difficulties have also inflicted tens of billions of dollars in losses on the value of China’s $2.4 trillion in foreign exchange reserves, according to Western economists. China had been trying to limit its dependence on United States Treasury securities for those reserves in recent years, fearing that the United States might someday suffer from budget problems or inflation, and did so by expanding its holdings of European government bonds. But China’s State Administration of Foreign Exchange, which administers the reserves, does not have to mark them to market daily — record their fluctuating value — so it is not clear what effect, if any, the losses will have on policy.

How the 'Flash Crash' Echoed Black Monday
by Scott Patterson - Wall Street Journal

Soon after the Black Monday crash of 1987, exchanges and regulators scrambled to enact new rules to prevent a repeat of the biggest stock market shock in 50 years. Even then, they worried they hadn't done enough. "I simply cannot give you assurances that we have fixed the system," the chairman of the Securities and Exchange Commission at the time, David Ruder, told the Senate Agriculture Committee in early 1988.

After two decades of rule-changing and technological advancements, those comments seem haunting, especially as investigators of May 6's "flash crash" stumble upon echoes of the Black Monday meltdown.
Technological innovation has been widely touted as having made the market more efficient—and more resilient. Instead, the May 6 drop—while much smaller than the 1987 crash—showed that technology mainly served to speed up trading and magnify the market moves.

On May 6, "The velocity of the volatility was stunning, beyond anything I had ever seen, with the exception of October of 1987, when I was on the trading floor," said Ted Weisberg, president of Seaport Securities in New York. "There's a strong parallel between the Black Monday crash and the flash crash," said Michael Wong, an analyst at Morningstar who tracks stock exchanges.

On Oct. 19, 1987, the Dow Jones Industrial Average tumbled more than 20%, and the swoon extended into the following day, before a rebound. Floor traders, working by telephone, dominated the action and computer-generated trading was still in its infancy. Dark pools and high-frequency trading were the stuff of science fiction. Trading reached 600 million shares, according to the SEC. Fast forward to May 6, 2010: The worst part of the lightning descent lasted roughly 10 minutes and the decline hit 9.8% at its worst. Trades, many executed in milliseconds, reached 19 billion shares. In both cases, troubles first appeared in the stock futures market, which precipitated a decline in the regular "cash" market. The two created a feedback loop, dragging both markets lower.

Perhaps the most concerning parallel was how professionals abandoned the market. In 1987, some human market-makers on the floor of the exchange stopped providing bids for certain stocks. Two decades later, in a market dominated by technology, high-speed traders who often provide liquidity for the market, just switched off their computers. Other big players, including fast-trading hedge funds, also pulled out of the market, according to traders and exchange officials. "Go back to the 1987 crash, every major firm pulled out," said Chris Concannon, a senior partner at Virtu Financial LLC, a New York electronic market making firm, which continued trading during the May 6 turmoil. "In every break you find evidence of major firms withdrawing their buying and selling interest from the market."

Ahead of Black Monday, many agreed the market was past due for a slide, having staged a 40% run-up earlier that year, part of a bull run that had started in 1982. And in the past 12 months, many market observers watched warily as the Dow staged a spectacular 60% rally from its lows of March 2009. On the morning of Black Monday, futures contracts dropped sharply before the start of regular stock trading on the floor of the New York Stock Exchange. When New York opened, stocks plunged to reflect the lower futures prices.

That led to more futures selling. A relatively new financial product in the 1980s called portfolio insurance, in which investors used futures to hedge against losses in stocks, amplified the downdraft. Heavy selling of futures pushed down stock prices. Investors looking to protect themselves from further losses in stocks in turn sold futures—sparking another wave of stock selling. While portfolio insurance has long since gone by the wayside, a large number of traders still use futures to hedge against losses. The May 6 selloff appears to have been led by a wave of futures selling. Commodity Futures Trading Commission Chairman Gary Gensler, in congressional testimony a week ago, said trading between futures and stocks became "highly converged" in the May 6 decline. The plunge in futures caused stocks to fall, leading to even more selling of futures.

The link means that in times of stress, these two key parts of the market—stocks and futures—can have a self-reinforcing effect that can turn an average selloff into a crash. Selling pressure on both days became so intense that any remaining buyers were overwhelmed, creating an "air pocket" in stocks and other securities that led to vertiginous drops. Many market makers on Black Monday had exhausted their funds, while others were overwhelmed by the volatility. The NYSE later took steps to boost traders' capital.

Some of the key changes in the markets helped magnify the selling pressure on May 6, rather than helping cushion the market. This time around, many investors rushing to sell unloaded exchange-traded funds, which didn't exist in the 1980s. Heavy selling of ETFs spread losses to other parts of the stock market. ETFs linked to indexes such as the Russell Midcap index spiraled in value in the selloff; indeed, the value of many ETFs actually fell to pennies. About two-thirds of all securities that had canceled trades on May 6 were ETFs, according to Yet there is one last parallel between 1987 and 2010. Mr. Ruder, the former NYSE head and currently an emeritus professor at Northwestern University, is now part of the government committee examining the "flash crash."

US Consumer Prices Fall
by Luca Di Leo and Jeff Bater - Wall Street Journal

U.S. consumer prices edged lower in April for the first time in more than a year and underlying inflation was flat, giving the Federal Reserve leeway to keep supporting the economy with record-low interest rates. The Labor Department said in a report Wednesday the seasonally-adjusted consumer price index fell 0.1% last month, the first drop since March 2009, as energy prices fell. In March, consumer prices were up an unrevised 0.1%. Underlying consumer prices, which strip out volatile energy and food items and are closely watched by the Fed, were unchanged for the second month in a row.

Economists surveyed by Dow Jones Newswires were expecting the headline inflation rate to remain unchanged and the core consumer price index to rise by 0.1%. Compared to April 2009, consumer prices rose an unadjusted 2.2% last month. Excluding food and energy, consumer prices in April were 0.9% higher than a year earlier. The economic slack from the worst recession in 80 years is keeping inflation tame. With unemployment still close to 10%, wages and incomes are rising very slowly, forcing companies to keep prices low in order to sell their products and services. Without rounding, Wednesday's report showed that consumer prices fell by 0.069% in April. Excluding food and energy items, consumer prices were up 0.047% unrounded.

The Labor Department's report showed that energy prices dropped by 1.4% on the month, the biggest drop since March 2009, with the gasoline index falling by 2.4%. Over the past 12 months, the gasoline index has increased by 38.3%. Food prices, meanwhile, rose by 0.2% last month. The increase was due to a rise in the prices for meats, poultry, fish and eggs, which rose 1.4% in April and have now risen by four months in a row.

The latest figures should provide the Fed, whose aim is to keep inflation close to 2% and unemployment low, with more ammunition to leave short-term interest rates at a record low to bolster the recovery. At their last meeting April 27-28, Fed officials reiterated they expect high unemployment and low inflation now and in the future to warrant ultra-low rates for an "extended" period. Federal Reserve Bank of Cleveland President Sandra Pianalto Tuesday said she expects inflation to slow in the coming months -- and to remain low farther ahead. Even with all the stimulus the Fed has provided to fight the recession, Ms. Pianalto noted how "inflation expectations over the medium to longer term have remained anchored at near 2%."

In a separate report, the Labor Department said real average weekly earnings rose by 0.4% in April from March. Over the past six months, average weekly earnings have risen by just 1.2%, as a soft labor market prevents workers from demanding higher pay.

Wal-Mart Same-Store Sales Fall
by MIguel Bustillo and Karen Talley - Wall Street Journal

Wal-Mart Stores Inc. sounded a pessimistic note about the pace of the economic recovery Tuesday. Reporting its fourth consecutive quarter of sluggish U.S. sales, it cautioned that its customers are still struggling with high unemployment and rising gasoline prices. The world's largest retailer still posted a 10% profit increase for the quarter ended April 30, thanks to tighter expense controls and strong sales internationally, particularly in Canada, Mexico, China and Brazil.

But the Bentonville, Ark., discount giant said that U.S. sales at stores open at least a year fell 1.1%, and store visits dropped despite recent attempts to attract shoppers with price cuts. Wal-Mart warned that U.S. sales would continue to be slow in coming months as the working-class customers who form Wal-Mart's base continue to feel economic pain. "Our customers, particularly in the U.S., are still concerned about their personal finances and unemployment, as well as higher fuel prices," Chief Executive Mike Duke said.

During the recession, many Americans left supermarkets and department stores in search of bargains, and Wal-Mart's sales and profits improved. But as the economy gets better, Wal-Mart is facing the same problems that hindered its U.S. growth before the economy soured: limited opportunities for expansion with its trademark warehouse-sized superstores, a failure to penetrate the largest urban markets amid union opposition, and stiff competition from arch rival Target Corp., whose blend of style and thrift has attracted many moderate-income Americans.

Wal-Mart's forecast was considerably gloomier than recent guidance from other retailers such as J.C. Penney Co., Macy's Inc. and Kohl's Corp., which this month reported that customers had regained confidence and slowly resumed discretionary spending. Home Depot Inc. on Tuesday reported a 41% jump in profit, for example, as more U.S consumers spent money sprucing up lawns and buying patio furniture and barbecue grills. Wal-Mart Chief Financial Officer Tom Schoewe conceded that Wal-Mart's struggles may be a sign that it is losing some of the more affluent shoppers it gained during the worst of the recession.

"Have we lost some customers we picked up during the most difficult time? Possibly, yes," Mr. Schoewe said in a conference call with reporters. But he quickly added that the larger factor in the sales decline was economic pressure on Wal-Mart's traditional shoppers. "More than ever, our customers are living paycheck to paycheck," he said.

Wal-Mart also said that gasoline prices were 41% higher in the three-month period than a year earlier, which reduced the number of store trips some customers made and left them with less money to spend. Nationally, gas prices have shot up since the beginning of the year, and they now average $2.86 a gallon, according to the American Automobile Association, up from $2.31 a year ago. But the retailer also acknowledged that some of its U.S. wounds were self-inflicted during its year-long store redesign. In an admission that its effort to simplify product assortments may have gone too far, crimping sales, the company is now returning to the shelves hundreds of products it had removed

Its clothing business, which has long lagged behind Target's, also continued to struggle. "Our apparel performance was below expectations and continues to be a work in progress," said U.S. stores chief Eduardo Castro-Wright. Overall, Wal-Mart reported a profit of $3.32 billion, or 88 cents a share, up from $3.02 billion, or 77 cents a share, a year earlier, thanks in part to benefits in foreign currency exchange rates, which added roughly two cents a share. The results exceeded the company's projections in February of 81 cents to 85 cents a share. Revenue rose 5.9% to $99.1 billion. Wal-Mart shares rose 98 cents to $53.71 in Tuesday trading on the New York Stock Exchange.

Junk Bonds Sell With Weakest Creditor Protection Since 2007
by Tim Catts - Bloomberg Business Week

Two years after suffering $213.2 billion of losses when debt markets froze, investors in junk bond are accepting what Moody’s Investors Service calls the weakest creditor protections since 2007. Even with housing starts hovering at their lowest levels on record, Beazer Homes USA Inc. managed to sell bonds this month on terms that allow it to add more debt. The Atlanta-based builder couldn’t even do that when it issued debentures at the height of the housing bubble in 2006 and its credit rating was seven levels higher. In a report last week Moody’s singled out CF Industries Inc., Standard Pacific Corp., AK Steel Corp. as borrowers offering debt on terms historically available only to higher-rated companies. 

"We got ourselves in trouble with that in the past and here it is again," James Kochan, the chief fixed-income strategist at Wells Fargo Fund Management in Menomonee Falls, Wisconsin, said of the trend toward looser debt covenants. "It’s not that surprising, but it is disturbing," said Kochan, who helps oversee $179 billion. Lenders are letting down their guard just as worsening government finances raise doubts about the sustainability of the global economic recovery. Money managers say they have little choice but to go along. They need to find a home for the record $29.4 billion that has flowed into high-yield bond mutual funds the past 16 months from retail investors seeking to join in a rally that has produced an average 69 percent return since the market bottom in March 2009.

About 60 percent of high-yield borrowers this year offered weaker investor safeguards than on debt they issued previously, according to Covenant Review LLC, a New York-based research firm that analyzes bond offerings. Those include no limits on the amount of debt companies can have and few restrictions on using assets as collateral for future borrowing, reducing what’s available to satisfy creditor claims in a bankruptcy. "This trend represents more than an episode of ‘back to the future,’" Moody’s analysts including Alex Dill, the firm’s senior covenant officer, wrote in their report. "It reflects a weakening in covenant protections even below those existing at the peak of the market, in 2006 and 2007."

Beazer sold $300 million of 9.125 percent bonds due in 2018 on May 4 that carry lighter restrictions than its 2006 issue on the amount of debt the builder can add and how it can use money raised from selling assets. The terms also allow Beazer to double its capacity to pay dividends to shareholders even after a 90 percent drop in its stock, according to Covenant Review.

‘Poor Standing’
The company’s senior unsecured bonds are rated Caa2, which Moody’s defines as "judged to be of poor standing and are subject to very high credit risk." Beazer was rated Ba1, one step below investment grade, in June 2006, when it issued $275 million of 8.125 percent 10-year notes. Jeffrey Hoza, a vice president and treasurer of Beazer, and Chief Financial Officer Allan Merrill didn’t return calls seeking comment. Junk bonds are rated below Baa3 by Moody’s and less than BBB- by Standard & Poor’s. Overseas Shipholding Group Inc., the largest U.S.-based oil-tanker owner, sold $300 million of bonds in March, its first offering in six years. Debtholders gave the company the leeway to sell assets, new secured debt and pay dividends to equity holders, according to Covenant Review. The bonds, due in 2018, are rated Ba3 by Moody’s and an equivalent BB- by S&P.

"We were not going to do a deal if we were not able to get that kind of flexibility," said Morten Arntzen, the chief executive officer of the New York-based company. "We had no resistance to it" from potential investors, he said. Proceeds from the sale were used to repay debt under a revolving credit facility, the company said in a March 29 statement. Overseas Shipholding’s covenants are "nearly useless," according to Covenant Review. Investors bid up the debt anyway, pushing the 8.125 percent notes to as high as 102.25 cents on the dollar last month, according to Trace, the Financial Industry Regulatory Authority’s bond-price reporting system. 

"They’re a high-yield issuer that’s getting away with investment-grade covenants," said Adam Cohen, founder of Covenant Review. "You shouldn’t have a high-yield bond that gives you less protection than a lot of the high-grade bonds out there." Cash is flowing into mutual funds that specialize in high- yield debt at an accelerating pace. EPFR Global, a research firm in Cambridge, Massachusetts, estimates that before last week, investors put $8.57 billion into the funds, up from $7.33 billion in the same period of 2009.

That money helped push down yields on speculative-grade bonds to 8.23 percent on April 27, the lowest since July 2007, from 21 percent in March 2009, Bank of America Merrill Lynch indexes show. Yields averaged 8.77 percent as of yesterday. Borrowers are taking advantage of the demand, issuing $109.1 billion of debt this year, compared with the record $162.7 billion in all of 2009, data compiled by Bloomberg show. Investors are also snapping up junk bonds as Federal Reserve policy makers pledge to hold interest rates near zero for an "extended period" to stoke the economy.

Of the 460 companies in the S&P 500 that reported first-quarter results, 77 percent said earnings exceeded analysts’ estimates, Bloomberg data show. Gross domestic product may expand 3.2 percent this year, after contracting 2.4 percent in 2009, according to the median estimate of 72 economists surveyed by Bloomberg. Housing starts climbed to an annual rate of 626,000 in March, up 1.6 percent from February’s 616,000 pace, though still half the level from October 2007, according to Commerce Department data.

Ratings Raised
For all the concern about weaker creditor protections, Moody’s has raised the ratings on 156 junk-rated companies this year and lowered 111, based on data compiled by Bloomberg. The 1.41-to-1 ratio is the highest for any two-quarter period since at least 1999. S&P said last week the corporate default rate for speculative-grade-rated borrowers was 0.97 percent at the end of the first quarter. Relative yields that are high by historical measures offer some protection from loose covenants, according to Richard Inzunza, a money manager at Northern Trust Global Investments in Chicago, with $647 billion of assets. Junk-bond spreads average 6.36 percentage points, compared with the record low of 2.41 percentage points in June 2007, based on Bank of America Merrill Lynch indexes. "There are some deals that may have weaker covenants but we think we’re getting paid enough to participate in the issue," said Inzunza, whose firm owns bonds of Overseas Shipholding.

Martin Fridson, the chief executive officer of New York- based money manager Fridson Investment Advisors, said the loosening of covenants isn’t at a level yet that would signal the end of the bull market in junk bonds. Covenants are typically strengthened following periods in which high-yield issuers are blocked from the market, "and at the end of that cycle, there’s an ‘anything goes’ mentality," said Fridson, 57, who was Merrill Lynch’s head high-yield strategist before leaving to form his own firm in 2002. "We haven’t reached that final stage." Cracks in the junk bond rally are emerging on speculation that rising budget deficits in European countries such as Greece, Spain and Portugal may cause lawmakers to curb spending, slowing the global economy.

High-yield bonds in the U.S. have lost 2 percent this month, according to Bank of America Merrill Lynch index data. This would be the first down month since February 2009, when they fell 3.47 percent. CF Industries, the Deerfield, Illinois-based fertilizer maker, sold $1.6 billion of bonds on April 20, before the upheaval. The debt doesn’t restrict liens on the company’s property, plants and equipment worth less than 1 percent of its assets or located outside the U.S., according to Moody’s. Previously, covenants typically had tougher restrictions that affected property worldwide. That could allow CF to use the property as security for future borrowings, reducing what’s available to pay investors in the notes in a default, according to Dill. Terry Huch, a CF spokesman, declined to comment.

The loosened provision, typically used by investment-grade borrowers, first began appearing in debt sold this year, Dill said. It was included in $400 million of securities offered last month by West Chester, Ohio-based AK Steel, the third-largest maker of the metal by sales after Nucor Corp. of Charlotte, North Carolina, and Pittsburgh-based United States Steel Corp., according to Dill. "Once you get a structure into the market, it replicates itself like a meme and it survives because the investors keep buying it," Dill said. 

Rising demand for junk bonds has also allowed companies emerging from bankruptcy, including Houston-based Lyondell Chemical Co., which sold $2.75 billion of debt in dollars and euros on March 24 and Lear Corp. of Southfield, Michigan, which issued $700 million of notes on March 23, to borrow with few restrictions, Covenant Review’s Cohen said. Lyondell’s covenants offer no clear limits on the amount of additional secured debt the company can sell and permit it to shift as much as $1.25 billion of assets to units that aren’t covered by the bonds’ limitations, reducing the collateral available to creditors, according to a Covenant Review report.  "In 2008, all the companies that we said would screw the bondholders did it," said Cohen of Covenant Review. "Now, it feels like 2007 to me. We’re telling them they’re going to get screwed and they’re not paying attention."

Seeking less scrutiny, hedge funds flock to Asia
by Kevin Lim - Reuters

As regulators in developed markets step up oversight of hedge funds, these free pools of capital are increasingly set to make their home in Singapore and Hong Kong. That will accelerate the flow of talent and foreign funds into Asia's top two financial centers, at a time when asset managers are already eyeing the region's rising wealth and strong economic growth. Assets of Asia (ex-Japan) funds are seen rising 70 percent over the next two years, outpacing the 50 percent growth in global assets, according to industry estimates.

"Asia, and Singapore in particular, could definitely benefit from the stupid regulatory environment in Europe," said Lionel Martellini, director of France's EDHEC Risk and Asset Management Research Center. Scrutiny of hedge funds has heightened in Europe as politicians in Germany and France blamed the industry for causing the financial crisis -- though the crisis was caused more by regulated banks in the United States, Martellini said. The G20 nations want greater supervision of hedge funds, with the European Union debating more contentious rules that could make it harder to offer non-EU funds to European investors. London has objected to the proposed EU rules.

Tim Rainsford, managing director Asia Pacific at hedge fund manager Man Investments, which manages $39 billion globally, said the increasing focus on emerging markets was also playing a key role in encouraging hedge funds to move to Asia. "Certainly regulation always has some influence on where hedge funds choose to start or establish themselves. But I actually think that outside of their regulatory environment, much more importantly, is that the hedge funds always have done and will continue to follow very closely the flow of global capital." 

He said hedge funds are seeking exposure to Asia, encouraged by the developments in China as a global engine of growth as well as the growing importance of Asian currencies to global trade. Hedge funds with Asia ex-Japan mandates had assets of $105 billion at end-2009, or about 7 percent of global hedge fund assets of around $1.5 trillion, Singapore-based consultancy Eurekahedge estimates. By end-2012, that will rise to at least $182 billion, as global hedge fund assets grow to $2.25 trillion. A Deutsche Bank survey of the hedge fund industry in March showed 45 percent of investors wanted to raise allocations to Asia (ex-Japan) funds, compared with 18 percent in 2009.

Critical Mass
Singapore, which has not escaped the global pressure to regulate derivatives and hedge funds, recently proposed regulations to license bigger hedge funds and force smaller funds to maintain a minimum capital base. These rules are set to increase costs, especially for startups, but will not halt the wave of new funds heading to Asia. New York-based Fortress Investment is planning to return to the region through a Singapore office. Soros Fund Management is eyeing Hong Kong for its Asia office and London-based Algebris Investments plans to operate an Asia office from Singapore. UK-based hedge fund firm Prana Capital is setting up an office in Singapore and its founder, Peregrine Cust, will relocate to the city-state.

"The regulatory arbitrage that Singapore has will be reduced to a certain extent when it moves to the licensing regime which is a bit more stringent," said Lian Chuan Yeoh, an attorney with Allen & Overy in Singapore.  "But the regime is still not heavy touch, it is pretty much similar to what people expect these days. There will be a few more capital requirements, more requirements on compliance, but it's nothing too onerous," Yeoh said. Tax rates on top earners of 17 percent in Hong Kong and 20 percent in Singapore compare favorably with the UK, especially given a controversial plan to raise the highest British rate to 50 percent from 40 percent. Start-up costs are also generally lower than in London's expensive West End -- Europe's hedge fund hub -- and boutique funds can therefore get going with smaller asset bases than the $50 million or $100 million that many in UK see as critical mass.

But some strategies may struggle in Asia because the region's financial markets do not match the depth seen in the West. Citadel Group, for example, more than a year ago trimmed its special situations team in Hong Kong. Data from Eurekahedge also shows that about half of hedge fund strategies employed in Hong Kong and Singapore are focused on long or short equities strategies. "Managers will consider relocating to Asia as long as they know that major institutional investors such as pension funds, endowments, insurance companies and foundations in the region are there to invest in alternative investment schemes," said Aureliano Gentilini, hedge fund research head at Lipper, a unit of Thomson Reuters.

That trend is gathering pace. The Government of Singapore Investment Corp has been increasing its allocation to alternative investments, while China Investment Corp last year allocated $500 million in a hedge fund unit of Blackstone Group. "I can say from my conversations with institutional investors around the region, not only are they planning to maintain their hedge fund allocation, I think in many instances, they are planning to increase those over time," Man Investments' Rainsford said

Financial markets regulation: The tipping point
by Venkatachalam Shunmugam - VoxEU

Over-the-counter markets for derivatives have been a subject of blame for the global crisis. This column argues that the rising opacity and barriers to entry in these markets have been sorely overlooked leading to dark pools, flash trading, and front-running. These unfair practises can – at any time – cripple markets. They undermine the premise of free markets and should be stopped.

While over-the-counter markets for collateralised debt obligations and credit default swaps are blamed for the financial crisis of 2007-2009, what has been overlooked is the menace of rising opacity in the exchange-traded market. This raises questions about the fundamentals of this market’s very existence, i.e. transparency and equal access to one and all in the price discovery process. Traditionally, trading in securities had been executed in pits as a central location (Gorham and Singh 2009), with traders exchanging buy and sell orders on their own or on behalf of their clients. In that system, personal interactions bred collusion among unscrupulous traders to front-run their competitors (Schlegel 1993).

Front-running refers to an illegal practice of executing orders on a security early with the advance knowledge of pending orders from customers/competitors. Computerisation helped to eliminate front-running, and was better able to handle rising volumes, reduce transaction costs, and improve speed and accuracy. Naturally, the bulk of trade shifted to the online platform. What happened next? To attract volumes amid increasing competition, increased technology support and reduced delays became the fashion for online exchanges the world over.

Technology unlocks the door
Online trading threw markets wide open to all armed with a desktop and access to a public network. It brought in the much-desired transparency, as trading activities became visible through real-time price dissemination. The market order book – at least in terms of the best buy and sell orders and their respective quantities – could be viewed by participants. Soon, technology took over human involvement to change the way trading was done.

The start of "informal trading"
While exchange-traded securities markets had been struggling to build the much needed width and depth, large institutions that could have provided the same found comfort in the absence of a regulatory framework monitoring trades happening among them. No wonder, they were tempted to start an informal electronic trade matching and settlement system, later termed "dark pools". This not only denied exchange-traded markets the necessary depth and width but also kept out well-researched information that these institutions could have brought in to make price discovery more efficient (Krause 2008).

In essence, what was started as an "informal trading system" for a handful of big entities with vested interest became a business opportunity of matching, clearing, and settling trades and front-running the information that gets pooled into the system with them being the owners, managers, and traders themselves. Liking by what they saw, many more large institutions joined the bandwagon, substantially raising the tally of dark pools and trade handled by them (Caplan et al. 2009). According to the Securities and Exchange Commission, the number of active dark pools dealing in stocks on major US stock markets trebled to 29 in 2009 from about 10 in 2002. For April to June 2009, the total dark pools volume was about 7.2% of the total volumes of all US exchanges.

What is so dark about dark pools?
Dark pools are a private or alternative trading system that allows participants to transact without displaying quotes publicly. Orders are anonymously matched and not reported to any entity, even the regulators (Younglai and Spicer 2009). Thus, the mainstream exchange-traded market does not have any clue about the volume of transactions happening in this parallel market or the prices at which they are being executed. Obviously, price discovery on the mainstream market, without dark pools information, becomes inefficient. Moreover, transactions carried out in dark pools effectively become over-the-counter in nature as the prices are not reported and financial risks not effectively managed. More critically, these risks can spread like wild fire as we saw in collateralised debt obligations and credit default swaps markets.

With no clear dividing line between the ownership, management, and participants in these markets, they are more prone to mismanagement and malpractices. Greed, competition, and incentives drive their business – these markets remain opaque and inefficient. Dark pools defeat the very purpose of a fair and transparent market participated by a large number of heterogeneous participants with diversified information converging on its platform. This fragmentation with some markets accessible to a privileged minority and others used by a vast majority can only be detrimental to healthy evolution of markets.

No wonder, experts think that dark pools can, anytime, blow splinters of systemic risks into the global economy, very much like how the sub-prime lending-induced contagious risks reared their ugly heads to trigger the largest financial crisis since the Great Depression. According to reports (Younglai and Spicer 2009), a surge in the dark pool volumes in US markets is giving the Securities and Exchange Commission sleepless nights.

The regulator has reportedly been planning to bring them into the mainstream. Its proposals, if implemented, will require dark pools to make information about an investor’s interest in buying or selling securities public. Clearly, an attempt has finally been made to bring "dark" transactions under a regulatory scanner through accountability. For post-trade transparency, the Commission has also proposed that dark pools publicly announce trades happening on specific platforms. What remains to be seen is measures being taken now and in near future to make these markets increasingly streamlined and to prevent them from becoming systemic risks. This will require standardisation of their operations and risk management procedures as well.

Flash trade – a privilege to a handful
Flash trading is a two-pronged strategy using superior technology and the privilege of a minority of traders to "flash trade". This allows them to assess markets so that their algorithms can catch the reaction of mere mortals to take advantage of the overall market sentiment. As it becomes mass produced or serviced, the technology is expected to be affordable for all. But we have to wait to see this really happening. Some propose there is nothing really wrong if an organisation that pays for reducing delays seeks returns to it.

As algorithmic trading becomes mass produced and adopted, and also trusted by common investors to leave their hard-earned wealth to software programmes running on sophisticated hardware to multiply, it may set aside human inability to see between a second unlike the machine that can see the orders being punched into the system with a difference of a few milliseconds and help common investors reap the benefit that a privileged few have been enjoying.

But what is unacceptable is the practice of allowing a privileged minority to flash trade to track the reaction with high-speed processing capacity and the algorithm that can take advantage of the reaction to reap benefits – as this is akin to front-running. It is an example of high-frequency trading system with knowledge of asymmetric information that confuses common investors by simultaneously issuing and cancelling orders and entices them to shell out more for a particular security and, thus, squeezes out their profits.

It was the Chicago Board Options Exchange which pioneered flash orders early this decade to increase its execution speed (Patterson et al. 2009). Flash orders remained in the dark until a newspaper report in 2009 blew the whistle on how Goldman Sachs had made a killing through this route. According to Rosenblatt, flash trading accounted for about 2.4% of the total US stock volumes in June 2009.

In fact, high-frequency trading was designed to make markets more efficient through liquidity augmentation, but its use for flash trade can defeat this purpose by misdirecting markets. This practice, which enables (still) unregulated hedge funds to employ high-frequency strategies without coming under the view of US regulation as applicable to brokers, also puts a big question mark on systemic stability of the financial system. Liquidity is important indeed. But can "chasing liquidity" at the expense of transparency and fairness be healthy for market growth?

Market innovations for "forward mutation" and not "reverse mutation"?
Market innovations such as dark pools and flash trade that evolved to circumvent the limitations of exchange-traded markets involve systemic risks like the ones of sub-prime lending that caused the financial crisis. Moreover, they can defeat the very purpose for which markets were created, i.e. to deep root capitalism to help businesses de-risk their margins from information that moves prices in the marketplace. These practices have also placed a barrier in front of markets wishing to function as a level-playing field for participants ranging from large institutions to seasoned traders to small investors.

There is a pressing need for formulating appropriate regulations to stop all practices that offer a privileged minority an unfair advantage over a vast majority of general market participants. Allowing a natural evolution of markets and discouraging the ‘mutated evolution’ that these market innovations represent needs to be one of the regulatory priorities. If flash traders are allowed to get away with their continuous mutation of markets, what purpose is this evolution (of online markets) serving?

This only points to a self-defeating weakness of markets – the recent financial crisis has amply demonstrated how fragile the global financial system can be. Unfair practices like dark pools and flash trade erupting in the supposedly organised marketplace can only add to this fragility. The question is: how long will it be before these unfair practices are stopped from destabilising markets and destroying their efficiency? Markets are essential support institutions for the economic evolution of humankind. Can policymakers afford to allow the creation and continuation of mechanisms that can – at any time – destroy these institutions and make the public turn against the wisdom of capitalism?

Oil spill scrutiny turns to Obama administration
by Matthew Daly - AP

Last week, it was oil executives who faced the wrath of lawmakers eager to find blame for the massive oil spill spreading in the Gulf of Mexico. On Tuesday, Interior Secretary Ken Salazar and other federal officials will come under questioning for what the government did — or did not do — to prevent the oil spill, and how they have responded since oil started streaming into the Gulf last month. Salazar, who oversees the federal agency that monitors offshore drilling, will testify before two Senate committees. Environmental Protection Agency Administrator Lisa Jackson and Coast Guard Commandant Thad Allen also will testify at separate hearings, and oil company executives are back for a second round of questions.

The hearings come amid the first high-level resignation related to the oil spill and a decision by President Barack Obama to name a presidential commission to investigate the cause of the rig explosion that unleashed millions of gallons of oil into the Gulf of Mexico, where engineers are struggling after three weeks to stop the flow. The presidential panel will be similar to ones that examined the Challenger space shuttle disaster and the Three Mile Island nuclear power plant accident, said a White House official, speaking on condition of anonymity because the decision had not been formally announced. The commission would be one of nearly a dozen investigations and reviews launched since the April 20 explosion, although it probably would be the most comprehensive.

With BP PLC, the company that owns the well, finally gaining some control over the amount of oil spewing into the gulf, scientists are increasingly worried that huge plumes of crude already spilled could get caught in a current that would carry the mess all the way to the Florida Keys and beyond, damaging coral reefs and killing wildlife. Scientists said the oil will move into the so-called loop current soon if it hasn't already, though they could not say exactly when or how much there would be. Once it is in the loop, it could take 10 days or longer to reach the Keys. The U.S. Coast Guard reported that 20 tar balls were found off Key West on Monday, but said a lab analysis would have to determine their origin. The Florida Park Service during a shoreline survey found balls that were about 3 to 8 inches in diameter.

Last week, Obama decried what he called a badly failed offshore drilling system and said failures extended to the federal government and its "cozy" relationship with oil companies. The Minerals Management Service, the federal agency that oversees offshore drilling, has long been criticized for being too close to industry. On Monday, White House press secretary Robert Gibbs said government failures "certainly" include the Obama administration, which took office in January 2009.

"But my guess is you guys did some stories in the previous decade on what was going on at MMS, which is what caused Secretary Salazar, when he came in, to begin reforming that," Gibbs told reporters.
Salazar, anticipating tough questioning on Capitol Hill, announced Monday he is tightening requirements for onshore oil and gas drilling. The new measures would not apply to oil rigs at sea, and Salazar had outlined the broad outlines of the reforms in January. Even so, he tried to portray them as more evidence of the Obama administration's aggressive response to the Gulf spill. "The BP oil spill is a stark reminder of how we must continue to push ahead with the reforms we have been working on and which we know are needed," Salazar said in a statement.

Chris Oynes, associate administrator of the minerals agency, became the first administration official to resign in the wake of the oil spill. Oynes, who was regional director in charge of Gulf offshore oil programs for 13 years before being promoted in 2007 to head all offshore drilling programs, informed colleagues he will retire at the end of the month, according to an e-mail obtained by The Associated Press. Oynes, like other MMS officials, has come under criticism for being too close to the industry. A 35-year government employee, Oynes had earlier indicated his plans to retire but decided to accelerate his departure, said an administration official who spoke on condition of anonymity because the issue involved a personnel matter. It was unclear what pressure, if any, was put on him.

Members of Congress, meanwhile, were continuing to focus attention on the Gulf spill. Sen. Barbara Boxer, D-Calif., and seven other senators asked the Justice Department to determine whether BP made false and misleading claims to the government about its ability to prevent a serious oil spill when it applied for permission last year to drill the Deepwater Horizon well that has unleashed environmental havoc along the Gulf coast.
Boxer, who chairs the environment panel, said BP claimed to have the capability to prevent a serious oil spill in case of a well blowout.

"In the wake of the Deepwater Horizon oil spill ... it does not in any way appear there was 'proven equipment and technology' to respond to the spill" as BP claimed, she and the other senators wrote Attorney General Eric Holder. They asked the Justice Department to determine whether any criminal or civil laws may have been violated as far as misleading the government. In the month since the oil rig exploded, killing 11 workers, BP has struggled to stop the leak, trying in vain to activate emergency valves and lowering a 100-ton box that got clogged with icy crystals. Over the weekend, the oil company finally succeeded in using a stopper-and-tube combination to siphon some of the gushing oil into a tanker, but millions of gallons are already in the Gulf.

BP withholds oil spill facts — and government lets it
by Marisa Taylor and Renee Schoof - McClatchy Newspapers

BP, the company in charge of the rig that exploded last month in the Gulf of Mexico, hasn't publicly divulged the results of tests on the extent of workers' exposure to evaporating oil or from the burning of crude over the gulf, even though researchers say that data is crucial in determining whether the conditions are safe. Moreover, the company isn't monitoring the extent of the spill and only reluctantly released videos of the spill site that could give scientists a clue to the amount of the oil in gulf.

BP's role as the primary source of information has raised questions about whether the government should intervene to gather such data and to publicize it and whether an adequate cleanup can be accomplished without the details of crude oil spreading across the gulf. Under pressure from senators, BP released four videos Tuesday, but it hasn't agreed to better monitoring. The company also hasn't publicly released air sampling for oil spill workers although Occupational Safety and Health Administration, the agency in charge of monitoring compliance with worker safety regulations, is relying on the information and has urged it to do so. "It is not ours to publish," said Dean Wingo, OSHA's assistant regional administrator who oversees Louisiana. "We are working with (BP) and encouraging them to post the data so that it is publicly available."

Much of the worker exposure data is being collected by contractors hired by BP. Toby Odone, a BP spokesman, said the company is sharing the data with "legitimate interested parties," which include government agencies and the private companies assisting in the cleanup. When asked whether the information can be released publicly, he responded, "Why would one do it? Any parties with a legitimate interest can have access to it."

Joseph T. Hughes Jr., the director of the worker education training program for the National Institute of Environmental Health Sciences, said he didn't think "anyone has seen much of that data at all."
"The hard part about it is that in a normal response, when the government is doing this, there might be more transparency on the data," Hughes said. "In this case, when you have BP making the decisions and collecting the data it's harder to have that transparency." Unlike the response to other past national disasters such as Hurricane Katrina where the government was in charge, BP has been designated as the "responsible party" under federal law and is overseeing much of the response to the spill. The government is acting more as an adviser.

So far, the government has been slow to press BP to release its data and permit others to evaluate the extent of the crisis. "I think that one of the lessons learned here is whether the federal government should have more of a role in the response and not leave that decision-making in the hands of the responsible parties," said Hughes, whose institute was one of the first to raise questions about air quality at the World Trade Center site in the wake of the Sept. 11 attacks.

A recent report in the New England Journal of Medicine found that many Sept. 11 rescue workers still suffer from impaired lung function. The Center for Toxicology and Environmental Health, one of BP's consultants, is collecting air quality samples over the coast and the water. "It's fair to say that a majority of the air monitoring along the shoreline is being done by our organization," said Glenn Millner, a partner with the CTEH and a principal toxicologist.

Gina Solomon, a medical doctor and a senior scientist with the Natural Resources Defense Council, said her environmental organization has been pressing the government to release the data, after hearing reports of fishermen concerned about exposure. "The fact that OSHA is saying that it's safe is important because they have access to data that we don't have," she said. "It's sort of awkward to have to take that on face value given the fact that there are fishermen who feel they are getting sick."

The Environmental Protection Agency is releasing shoreline data on its website, but not information about the air quality workers encounter on the water. OSHA has access to that data and is monitoring it to determine what type of equipment the workers should be issued and other questions related to worker safety. So far, the air quality does not require workers to receive respirators, Wingo said. Millner said that data as a matter of practice is shared only with the oil clean up worker and the company overseeing the cleanup.

BP also has exercised considerable control over how much is known about the amount of oil gushing into the gulf. Early on, the government estimated that 210,000 gallons was being released daily. That estimate was based on satellite observations of the water's surface. The first look at the oil coming out of the pipe on the sea floor was a video clip that BP released last week in response to demands from reporters and others. It caused a stir because some experts who analyzed it estimated that the amount of oil pouring into the gulf was many times the government's official estimate.

Sens. Bill Nelson, D-Fla., and Barbara Boxer, D-Calif., on Monday asked BP on Monday to provide all available video footage. BP provided clips from several days of the spill on Tuesday. The clips, however, would still result only in rough estimates because the oil flows at different rates at different times and it's mixed with gas, said BP spokesman Mark Proegler. The company had no other equipment on the sea floor to monitor the amount of the flow, and no plans to install any. "We've said from the beginning . . . it's difficult if not impossible to measure from the source of the flow," Proegler said on Tuesday. BP's focus is stopping the flow and keeping the oil away from shore, he said.

Jeff Short, an oil pollution expert and former National Marine Fisheries Service official who now works for the environmental group Oceana, said the estimate based on surface observations was very imprecise, and that looking at the flow rate from the pipe would be better. "The public has the right to see what harm the environment is exposed to, and knowing the flow rate is fundamental to that," he said.

Judy McDowell, the chair of the biology department and a senior scientist at the Woods Hole Oceanographic Institution in Massachusetts who's studied many oil spills, said that in addition to knowing the amount of oil flowing in, scientists also need to figure out how it's dispersing and breaking down in order to know what effect it would have on living organisms in the water. Jane Lubchenco, the administrator of NOAA, said in testimony to a Senate committee Tuesday said it was important, but difficult to get a better estimate of the amount of oil. She said that the Coast Guard planned to set up a team to get a better estimate.

Some university researchers have been frustrated by the lack of data and the refusal of federal agencies to press BP to collect detailed measurements from the broken well pipe or fully assess what might be happening underwater. "We have been screaming from day one for data,'' said Peter Ortner, a fisheries biologist at the University of Miami. Ortner also said that NOAA had been slow to consider sub-surface effects and didn't deploy the sophisticated gear that might help surveying for submerged oil.

Lubchenco said Monday that the agency had been discussing ideas about more sensing gear on the ocean floor but said "the priority at this point is to stop the flow.'' Meanwhile, an analysis of satellite imagery by the University of Miami's Rosenstiel School of Marine and Atmospheric Science, reported Tuesday that the spill has grown to more than 7,500 square miles, or about the size of New Jersey.


bosuncookie said...

Reposted from tail end of previous post:

For TAE readers in eastern NC, southeastern NC, and northeastern SC, please take note that Stoneleigh will be making a presentation in Wilmington, NC on Tuesday, May 25, 2010.

The location is at the Community Action Center, 317 Castle Street, Wilmington, NC 28401. Feel free to contact me (Steve Lee) at (910) 791-4877 for more info. (Yes, I know it's not good to put your number on the Internet; mine's already plastered all over anyway.)

If you’re a cash-strapped, out-of-town TAE reader and need a place to stay in Wilmington that night, I can arrange for that.
See flyer here!

Greenpa said...

For some reason, Ilargi's intro today reminded me strongly of Monty Python's "Crimson Permanent Assurance" ; their short bit before "The Meaning Of Life."

Seemed funny at the time, but, like so much of their work, the comparison to piracy is 100% accurate.

Greenpa said...

"During this latest recession, heroes have stepped forward, and I would like to tip my hat to two of the most important: (1) the FDIC, which despite the TARP bailouts, has continued doing its essential job like it has in the past—shutting down the riskiest and most dysfunctional banks in America; and (2) maybe the most important of all, those American homeowners who month after month continued making their monthly principal and interest payments despite their deteriorating financial circumstances during the crisis. It is because of heroes like these that we are continuing to recover from the Greatest Recession since the Great Depression."

Polka Dot Gallow stuff if ever I saw any!

#1) = "Brownie, you're doing a heckuva job!";
#2) = "It's because of the heros who so willingly gave their lives in Iraq that we have the stunning success of democracy there today."


Starcade said...

Greenpa: Propaganda at it's worst, eh?

Greenpa said...

Ok, remember the lady who successfully sued McDonalds because her coffee was hot?

"If it can be shown that a high proportion of loans breached underwriting guidelines, the firms that sold or originated the mortgages may have to reimburse insurers and investors for large sums."

And why should the homeowners, now underwater and unable to pay, not also be eligible to sue?

I'd think they have more reason than the hotwater lady. They went to the bank, as the expert- and the bank "determined" it was appropriate to loan them a lot of money, based, theoretically, on the belief they would be able to repay it.

You sue the doctor, when he misdiagnoses and your life is subsequently ruined.

Any lawyers out there reading? Go for it, quick; before all their money disappears.

Starcade said...


It's really that damned simple.

When I say that your lives are not yours, I'm not saying that to be quaint or morbid: The banks own your asses, because the whole economy is built on the fraud and deceit which has been formulated over the last 2-3 decades or so.

Once it unwinds, forget the stock market - it'll be blood and a bath of it.

Greenpa said...

Predictions, please? Which country will next slip into civil war because of collapsed economies?

The flaming buildings in Thailand are getting little attention. The new normal.

Coming soon, to a theater near you.

Greenpa said...

Ok, one last for the moment.

Polka Dot Gallows!!!

Rand Paul took his victory celebration to... a private country club, of course! Man of the people! And he weasels about it!

Off to the tractor.

Stoneleigh said...

Test_Junkie (from yesterday),

Can't agree AT ALL that the financial disaster is worse than ecological.

As bad as it is - the economic slow down may be a mitigating factor in climate problems.
But the oil spill will likely cause irreparable harm to the ecosystem.

Both are awful of course. I agree about the oil causing ghastly harm to the environment. I think that you underestimate what a gargantuan global financial crash can cause by way of ecological harm though, if we think in the longer term for a moment. that fact that you refer to it as an 'economic slowdown' suggests that you don't really understand what we are facing.

IMO we are a very long way over global carrying capacity, even at the artificially high level achievable with fossil fuels. As our energy subsidy disappears, carrying capacity will plummet - to perhaps a billion people or less, as we actively degrade carrying capacity on the way down.

Financial crisis is going to be the key driver of that crash for several years, amplifying the impact of the inevitable energy crisis. Financial innovation created future resource claims that will be defaulted upon. As well as picking the pockets of the rest of the world spatially, we tried to borrow from the future, but that never works. The extinguishing of those excess claims will not only be a financial calamity, but also an ecological disaster.

snuffy said...

The blocking of reform by the republicans may bite them soon,as the deeper the pain of our "new norm",the more folks pay attention to what their clown in the senate actually does...or at least I hope it will.
For way to long the counter-consumer/counter-citizen actions of our "owned" branches of .gov have not been questioned,or when they have,been shouted down by calls to"make the .gov more "business like"...and let the "free market" reign...

Ok,we did.

Now where are we...


The world economies are smoking ruins,as is the gulf of Mexico...

[Has anyone thought about how many Mexican economic refugees are liable to hit the USA when this catastrophe hits the Mexican beaches?]

This incredible mess is just now getting underway.Both in Washington DC,and the gulf.Here is a prediction.They will be hunting executives of BP with dogs by the end of the year,as the true extent of this catastrophe become common knowledge,and the refugees from the south head to all parts of the country with their heart-rending stories.BP will be seized.Mexico will sue the crap out of the USA in world court for the damage to its fishing and tourist industry,blaming the gringo thirst for oil for this disaster.

I see populism rising,and big problems for anyone"In the way"


VK said...

The extinguishing of those excess claims will not only be a financial calamity, but also an ecological disaster.

When people can't afford fuel, they're going to turn to chopping down the trees and using whatever resources are available locally to survive.

tooearly said...

bit naive to think Merkel is a populist in anything other than drag

moreover, hard to imagine more govt intervention of this sort is truly designed for anything other than transfer of wealth schemes getting a new lease

tooearly said...

On September 8th 2008, the U.S. banned naked short-selling... Need I tell you how badly stocks performed from that date to March of 2009?

message_in_a_bottle said...


I do like the automatic earth quite a bit
and thus was distraught to find that it is blocked by my latest IP blocklist.

So I ran a whois query against
to find that this is the IP address ----> GOOGLE INC.

I was forced to block this Google network since port scans were against my machine from

In case you don't know this: a port scan is a hacker attempt to take over a machine.

Now my question is: how come the automatic earth is hosted on a Google server on a Google network from where hacker attacks are initiated.

Please clarify.

Rumor said...

When people can't afford fuel, they're going to turn to chopping down the trees and using whatever resources are available locally to survive.

Haiti spring to mind.

Starcade said...

The Automatic Earth is a Blogger situation -- Blogger being run by Google.

Rototillerman said...


Not all port scans are done with the intent of taking over your machine... sometimes it is just large, faceless corporations mapping out private networks, say, for the purpose of identifying the type of machines that inhabit them (the responses from different ports tells the scanner what operating system is in use). This makes it easier for said corporation to match up browser cookies with search habits and sites visited. Hmm, I guess that isn't going to make you feel better either, is it?

Greenpa said...

Off the tractor for a bit to rest my back and ears.

"Rumor said...
When people can't afford fuel, they're going to turn to chopping down the trees and using whatever resources are available locally to survive.

Haiti springs to mind."

As does Easter Island, of course. There are a few places and times where people have behaved better, in spite of personal need.

China's ancient rural roads are often lined with trees. The poor folks do indeed cut the lower branches for fuel. It's pretty much expected. But the don't ever cut the trees. Lots of mitigating circumstances; of course they'd get in serious trouble if they did. But. At rock bottom, triad members could get away with it just fine- but they just don't do it.

The cities out in the country also- the people there are poor; making and selling "lotus coal" one briquet at a time. But the cities are totally covered by big trees (plane trees where I was), providing shade for everyone. Easy to climb up and take a branch. But they don't.

soundOfSilence said...


And? I can log into my router and assuming it's been up 2+ months probably find a 30 second "flood" on SYN packets at some point in the last 2 months.

I'm sorry if this comes across sounding harsh - but it sounds like a blindly followed "security policy" that came from a friend.

I'll leave discussion of the hosting choice, all the work and costs involved in various options to the moderators if they are so inclined... as far as "it's Google" all you got to do is go to scroll down and click "about." It's not exactly a state secret.


justjohn said...

gpp asked about a Google port scan: "In case you don't know this: a port scan is a hacker attempt to take over a machine."

Well, no, a port scan is a port scan, to see what is out there. Google has this side business of indexing the web, perhaps they just wanted to see if you had a web server?

TAE is using Blogger as a host, I don't think they have much control over what server it resides on. It is likely a "cloud" service, and changes frequently. If I check it from Michigan, right now it seems to be on

And why would you block .191 if .148 scans you?

Ilargi said...

"... how come the automatic earth is hosted on a Google server on a Google network from where hacker attacks are initiated."

Baloney. Your server just isn't very smart. It's not that "hacker attacks are initiated", it's that your server software is programmed to think they might be at some undefined point in an undefined future.

Don't worry, it happens almost daily, especially with Gmail accounts. Tell your ISP to wisen up or get a better one.

But then, you won't be able to read this, cause you're blocked, right?


EconomicDisconnect said...

Hidden among the headliens were some more long range items:
-FED will not sell the crap from their balance sheet until after they have raised rates. 2013 would be the very earliest in my mind.
-Above is related to deflation still being the read by all counts; poo poo in pants times for the central banks
-Expect easy money expansion, as was always going to be the case

The bankers thought they finally figured out how to print money without any ill effects; make a bunch of money and then make sure it never gets in the hands of regular people via wages so inflatiion remains tame. Somehow this will allow practically unlimited printing with no ill effects. Get ready for the application of said discovery.

Anonymous said...

Scandia (yesterday),

Thank you for your kind thoughts.

Re your question, "Why is BP being protected by this administration?"

Obama was top recipient of BP campaign contributions. The Corporatocracy rules! The United States of American should be renamed The United Empire of Corporations!

Mr. Kowalski said...

Part of the reason might have been the passage of the "Cornyn Amendment" here in the US, which essentially makes it very hard for the US to participate in IMF or other foreign bailouts. With the US possibly unable to assist in any EU Zone rescues, the Germans probably felt as though they were going to be left holding the bag so to speak. In Germany there is to be a vote on their part of the €440 bailout; today's actions might've been the political price demanded for a yes vote.

Peter said...

Just finished "The Big Short" today. Michael Lewis is a great writer! Although I've been reading our illustrious hosts since early '08, having it all re-capped, along with the fascinating portraits of those few who, like Ilargi and Stoneleigh, had the courage and honesty to tell the truth, was amazing. I thought I was immune by now to revelations of chicanery and greed, but the book was as depressing as it was illuminating. A must read...

NZSanctuary said...

Coast Guard under direction of BP?;photovideo

deflationista said...

can anyone tell me if stoneleigh's washington dc presentation time and location have been nailed down?

my cousin lives there and i want to make him aware of it---

or he will provide me with an excuse that he already made plans...


deflationista said...

repost from yesterday:

One thing I have been trying to communicate strongly is a sense of urgency. The time around rally tops is a time of complacency. Watch the markets, as where finance leads, the real economy will follow. IMO the markets are telling us that the rally is over, which means that fear will follow. We should see far more dramatic moves to the downside in this phase of the decline. People need to take action to protect themselves now.

Since time seems to be of the essence, may I suggest that the upcoming blog posts deal with what types of preparations one can make at this point in time?

We thought we were prepared for future reality, but we realized that having debt was going to be problematic. So, we sold our homestead because it was a huge debt burden.

We are also selling off most of our non essentials. But now we are sort of just floating here, renting, waiting for the down turn to come, and hoping that it is pushed off into the future a bit more as we figure out what to do. We have even considered moving out of this country (US) as staying here seems to be fraught with all sorts of extraordinary dangers.

I do understand that we still have some time to make preps, but I would like to hear what our hosts and others recommend as the 'hour draws near'. We have gone from living rurally and having a huge garden, knowledge about our micro-climate, chickens etc. to living in a small city in a rental home. It is a bit overwhelming and sort of leaves us paralyzed. A bit disoriented.

I am aware that these sorts of discussions flare up every now and then in the comments and that the primers make many suggestions as well.

But maybe as we begin our final approach, our captains can get on the intercom and let us passengers know exactly what we should be doing before we land (or did they say crash)? Or maybe we should just buckle our seat belts, close our eyes, squeeze our ass cheeks and hope for the best? We feel that we are doing more of the latter these days, rather than taking definite actions.

Anonymous said...

My contribution to the giant pool of oil containment suggestion box:

BP should try containment again with two different layers using something like this shower curtain suggestion.

I like this image courtesy of Seattle's Best Coffee

Draw the logo on paper, flip it upside down and you have the man's shower curtain suggestion over the leak and then another perimeter around that.

Anonymous said...

btw, I don't have a car anymore but I would gladly donate a dollar a month to BP's clean up fund as soon as they plug the leak.

el gallinazo said...

tooearly said...
"On September 8th 2008, the U.S. banned naked short-selling... Need I tell you how badly stocks performed from that date to March of 2009?"

Wrong! The SEC didn't ban naked shorts. Naked shorting has been a felony for many years, but like bank fraud, never enforced since Bush the Lesser had the strings attached to arms and legs (and perhaps before).

Notice in the last Mad Max Keiser RT how Jim Rogers reacts to badmouthing naked shorting.

The SEC banned fully clothed and modest shorts. If Mother Teresa had been wearing shorts, she would have been banned. 1000 shorts on equities of the FIRE variety (including CVS drugs stores ? - they sell fire extinguishers?)

carpe diem said...


Why are you being so nice? Why not call it by it's true name?
The United States of Crap-or-rations..... :=)

I'm on the other side of the pond but I really hope a lot of people are having hissy fits over this oil spill - i.e. 'mad as hell and not going to take it anymore' kind of thing.
Sadly I don't see it from here.

zander said...

Some new crystal clear footage of the gusher, small screen but still absolutely shocking.,67918.0.html


zander said...

I have a nagging feeling TPTB will spin this oil disaster into some sort of narrative for the second dip of the economic collapse managing to blame this spill and not the fiscal predicament they have brought about. That is not to understate the financial consequences of the leak of course, but it may be exploited as wiggle room for unrelated shortcomings.


Anonymous said...

Now might be a good time to get all of your medical needs updated. Make sure your teeth are in good shape, get your immunizations updated, get your eyeglass prescriptions updated, etc.

bluebird said...

@zander - That second part of the video looks more like a volcanic gusher of oil, definitely not any kind of a spill.

Dan said...


Stoneleigh spoke in Norwich, VT last night: it was wonderful!

jal said...

carpe diem said...

"I'm on the other side of the pond but I really hope a lot of people are having hissy fits over this oil spill - i.e. 'mad as hell and not going to take it anymore' kind of thing."

Have you ever considered that the US citizens might be more religious than expected. Perhaps they have been pleading/praying the almighty to take the "blob" to the other side of the pond?

Everyone should be treated equally ... booties for everyone wanting to walk on the beaches.

jal said...

The virtual world is leaking into the Canadian reality and disrupting a possible end of the recession.
The virtual world is not the Canadian reality.
The $C is going down vs $US.
The employment is getting better in Canada vs worst in US.

Rumor said...

Morning news:
- BP is using a subpar, overly-toxic dispersant in the Gulf because they have interests in the company making that particular dispersant
- the US federal gov't doesn't want the public knowing any more about the deepwater blowout than it can manage and massage

Quelle surprise, as Yves Smith might say. She also might say (and did say) this:

Note that the Administration is behaving with BP exactly as it did vis as vis the banksters in early 2009: believing that the problem is too complex and scary for them to assert control, casting its lot in with the people who caused the problem in the first place (while calling them bad names often enough to create plausible deniability). And enabling BP’s coverup of how bad the leak means, as Obama did with the financial services industry, of having to support, or at least not undermine too much, its PR efforts.

Circle the wagons; protect the Imperial centre; peddle illusions for the servant classes while the system grinds itself into catastrophe. This couldn't be Tainter's Rome any more clearly if it put it out billboards to that effect. Things fall apart; and eventually the centre won't hold, but so many will be dead or destroyed by then.

Ilargi said...

Markets down 2,5-3% to start the day. Initial jobless claims rose almost 6% (25,000) from the prior week.


Steve From Virginia said...

Merkel's actions are unsurprising seeing that the sovereigns are (unwritten) counterparties to all those 'naked' positions.

The bailout machine has been maxed out and now the shorting machine is making funny noises.

What will break next?

Ilargi said...

McClatchy reporrts:

"The latest glimpse of video footage of the oil spill deep under the Gulf of Mexico indicates that around 95,000 barrels, or 4 million gallons, a day of crude oil may be spewing from the leaking wellhead, 19 times the previous estimate, an engineering professor told Congress Wednesday."


gillt said...

I'll echo Dan's comments from above. Stoneleigh's presentation in Tamworth NH was awesome. I'd definitely recommend traveling to see her speak.

Malmo's Ghost said...


It looks as if the little siphon device is an abject failure, and yet you wouldn't know it from MSM reports.

BP's stock price was up today too. LOL. When this is over--months from now--does anyone really believe they'll be a going concern?

Anonymous said...

Stoneleigh is being optimistic and nice to people again.

Humanity long ago exceeded biological capacity of the planet to sustain our population. And a billion survivors is optimistic in my estimation. Based on past crashes in various mammalian populations that can be studied, I estimate at least 96% population fall over the next 100 years, meaning an estimated 280 million survivors worldwide within 100 years. I have estimated that the population slide over the 30 years immediately following the collapse of ponzi-nomics will be at least 1-2 billion, with the remaining 4.5 billion dying over the remaining 70 years due to ecological collapse, climate change, and loss of fossil fuel energy subsidies.

Hunter-gatherer carrying capacity before agriculture peaked somewhere in the 10-30 million range. Due to ecological damage worldwide, global hunter-gatherer capacity will be far lower, maybe a few million. After the initial dieoff to the 280 million range, if homo sapiens doesn't get its act together in some rational form, it's back to the caves and there will be no more than a few million of us left within 250 years, meaning that if we fail that second test there will be another 99% dieoff over that ensuing 150 years.

To put all this in perspective, global population grew during WWII when we were busy killing each other as fast as we could manage with the tools of that time. A population decrease will be such a psychologically horrific event that I am not sure any of us alive are fully capable of understanding it.

VK notes "When people can't afford fuel, they're going to turn to chopping down the trees and using whatever resources are available locally to survive."

What VK is either not saying or has not considered is that not only will they chop down trees, they will chop down other humans to eat. Yes, cannibalism, which is surprisingly common in human history especially in collapsing societies. And now the entire global society is about to collapse.

And people have to wonder why I suggest arming ourselves?

el gallinazo said...


In addition to your individual solution of arming oneself, perhaps you might publish a book on the Internet such Donner Pass recipes. Let's turn our lemons into lemonade.

While I agree with you that we are facing a spectacular die-off of humans on the planet, I suspect (barring a total thermonuclear exchange which you didn't mention), that your figures are quite a bit lower than that which will come to pass and based more on your internal psychological needs.

Nestorian said...


I just spoke to Stoneleigh on the phone this morning re hosting a talk of hers in the Washington DC area on either May 26 or May 27. It would be at my new private home in Rockville, Maryland.

Stoneleigh would need a projector for her powerpoint presentation and also a screen to project on, in case anyone in the DC area could provide one. More details to follow; the arrangements will be somewhat late in developing owing in part to the fact that I am moving up from South Florida to Rockville this very weekend!

But I wouldn't want that to stop me from being involved in Stoneleigh's tours.

jal said...

Re.: pot calling the kettle black

The MSM pundits are doing a good job of analyzing the EU problems.

They are putting into words the US problems and few of them realize it.

It will not be very entertaining for US J6P when they realize the truth also includes their situation.

scandia said...

@ Greyzone...Re " Stoneleigh is being optimistic and nice to people again." Exactly!
I have attended a Stoneleigh presentation. Her presentation is excellent. What excited me more though was to witness a person not react to aggression, her ability to hear what others are saying, the generous effort she puts out to develop,deepen the knowledge that others have.
Stoneleigh modelled a way of being in the world that inspired me.
I now try to demonstrate
generosity,integrity and courage a la Stoneleigh.

" ...A population decrease will be a psychologically horrific event that I am sure any of us alive are fully capable of understanding." This comment brought to mind the history of the Ukraine in 1930- HOLODOMOR.

scandia said...

I am keeping an eye on the North Korea situation wondering what the odds are for war to break out there.
I doubt anyone in the area wants war. However with a starving population NKorea may risk armegeddon just to get out of that box Greyzone writes of- more mouths to feed than foodstuff to fill them.

Greenpa said...

Yeah, yeah, markets down. What I find a good deal more significant, the VIX is up- 26% - just today. From 35 to 44. yeeeee.

Somebody should go down to Wall Street- peek in all the doors- and just yell - BOO!

carpe diem said...


All to aware of America's religiosity!! :O
I have satellite TV with 500 channels (I rarely watch much TV but thats what I have). Of the 500 channels about 50 of them are those American religious channels with the pastor going hoarse yelling at the people in the audience and at the camera. All of that scares me just about as much as the oil spill.


Ilargi said...

Backup Plan 1:

Break window in the back of the museum, force gate, know the alarm has been off for 2 months, cut out 5 paintings worth $600 million.

Then purchase lifeboat.


zander said...

95,000.... thats, I thought going for the median guesstimate (catastrophic as it was at circa 40,000) between the various factions arguing the toss over what is looking like the worst EVENT in modern history, was bad enough, but I truly never expected that figure. What a shock.
It's time to 'fess up. For a long while now I've been secretly egging on collapse, maybe as a sort of punishment for modern society and it's wicked ways, at times I was disappointed things weren't getting tough enough quickly enough. Now I truly understand the wisdom of the hosts here when they advised to enjoy what was left of the old paradigm as the new one would not be pretty, well for the first time I really feel the change/collapse whatever it is, and I don't like it, this isn't how I thought it would be, it's sort of like I've been dropped into a strange place and I'm not sure what comes next, I thought I would know the moves and stay ahead of the game. I don't.
This is spooky, things are changing, thank god I've got this place.
Anyone else feel slightly disorientated lately??


Ilargi said...

BP Capturing 5,000 Barrels a Day From Gulf Oil Leak

"BP Plc is capturing 5,000 barrels of oil a day from its leaking well in the Gulf of Mexico. The company couldn’t say whether that was all of the crude from the well, which has been estimated to be leaking at that rate.

“That’s 5,000 barrels a day of oil that is not going onto the seabed,” said Mark Salt, a spokesman in Houston for BP. “We are continuing to optimize the flow.”

The oil is flowing through a mile-long tube inserted May 16 up to a drillship equipped to store oil, decant water and flare natural gas. The ship is flaring natural gas from the well at a rate of 15 million cubic feet a day, said Salt. BP, based in London, estimated the daily flow to the ship yesterday at 3,000 barrels of oil and 14 million cubic feet of gas.

The company and federal agencies have been estimating the spill rate as 5,000 barrels (210,000 gallons) a day since April 28. That figure is disputed by independent scientists, including Purdue University Associate Professor Steve Wereley, based on video of the leaking well."


Kurt said...


Ever consider audio or videotaping one of your presentations?

Or doing an online presentation as a webinar?

Ilargi said...


BP now claims capture it's capturing 5000bpd, or 100% of what their estimate of the leak is. Well, that should be easy to see and confirm, shouldn't it?

It's not true, of course, and that's why they'll have to change their estimate soon. I deplore Obama's role in this. He unnecessarily paints himself into a corner he'll have a hard time coming out of. Transparent government my derrière.


Ilargi said...


We're working on a DVD and looking at how best to deal with it. Maybe even hand it out as part of a TAE membership.


el gallinazo said...

Some reasons why I see it as unlikely (barring all out thermonuclear war) that total human populations would drop to 280 million from 6-7 billion currently in 100 years.

1) The use of fossil fuels, particularly coal, will not totally disappear over the next 100 years though it will be reduced to perhaps 10% or less of current usage. Depending on what percentage of the remaining use will be military, it will be used far more efficiently and productively than currently in terms of human survival. People will not longer squander any remaining fossil fuels.

2) The idea that most people of the world will completely give up most or all forms of agricultural in a few generations and totally revert to hunter gatherers is, IMO, an absurd projection.

3) World hunter gather populations in the distant past were dominated to some extent by world glaciation and recovery from such, which only began to recede 10-12,000 years ago. Hunter gathering was far more practical in a deep freeze world than agricultural.

4) A high percentage of fertile land, namely the entire western hemisphere, probably had no humans in it at all until about 13,000 years ago according to modern scientific consensus.

50 As to climate change, what exactly it will mean in terms of a major human die-off is very difficult to predict. The one thing we can be sure of is that it certainly won't improve things on a world wide basis. IMO, the question of rising sea levels will kill a lot of people in land already very over populated such as Bangladesh. But even a hundred meter rise is not going to be a Noah like event in most places. It's just going to screw the seaports and deltas of the globe.

As to cannibalism - in one sense - so what? If people just kill you to steal your means of survival, or kill you and eat you as well, it doesn't make that much difference to me. Just a way of painting the future even uglier for no good reason. Cannibalism also has it's downside survival in terms of the spread of deadly diseases and parasites.

In any event, surviving through a die-off even down to 1.5 billion people will be a horrific experience. So why are these numbers even important. I think it boils down to hope. Are 25% or 3% of people today or their children or grandchildren going to survive the next century. 25% aren't great odds, but they are grounds for reasonable hope for co-operation and preparation. 3% is not.

Linda said...

I wish I could figure how to post a link here. Here's a 6 minute video by a wonderful HS chemistry teacher about the dip in the DOW last week. Non-linear systems & chaos theory. If you search for it look for wonderingmind42 then Fat Finger My A**. Short & sweet. These idiots look all around for an explanation, when the explanation is their system with too fast for feedback algorithm trading. Not a fluke, but completely predicable & very likely again. How can we trust it, & it needs more resiliency...just like our food supplies and oil drilling protocols. Linda.

Greenpa said...

Ilargi's comment: "I deplore Obama's role in this. He unnecessarily paints himself into a corner he'll have a hard time coming out of. "

:-) ok. Please remember- I'm NOT an advocate for Obama. I'm just trying to see where puzzle pieces MIGHT fit. And once again; his actions are subject to several interpretations, often seemingly diametrically opposed.

A good thing to remember- Obama so far has slipped out of all painted corners. He's a very skillful politician/herder. What he does is "take the best available advice" - and when it's wrong; gosh, it wasn't HIM, it was the advisors.

Are the government oil regulators wholly owned by the oil industry? Oh, yeah. Is there any sane excuse for the Coast Guard not stepping in and simply taking control of all BP operations in the Gulf, installing good scientists right along side BP staff, and giving the media full and instant access to everything? Nope. Could the the oil industry own CG admirals? duh.

What Obi wan kabama gains here is great public and congressional pressure to throw the bums out, and increase transparency. Easy for him to kind of back away and say "gosh, you're right!" The power of the oil industry will decrease.

There's already been one "resignation". There sure as hell will be more.

And regardless of whether it was planned in advance or not, Obi will come out of it smelling like a gardenia.


Greenpa said...

oh, yeah. Could Obi have acted earlier and saved the turtles? Very questionable. BP would have screamed bloody murder, the Rethuglicans would have screamed government interference and "takeover" of private enterprise- etc. Pushing on a glacier. Now, the glacier may be moving his way.


carpe diem said...





Greenpa said...

Carpe -"IDIOTS, MORONS, CRETANS!!!!!!!!!


What were you expecting, pumpkin juice?


bluebird said...

@Linda - I searched and found it...

Dear Wall St. & Washington: "Fat Finger" My A**! by wonderingmind42

Rumor said...

Cretans? Are those like croutons? Are you suggesting they can be used to sop up oil? Do they perform better than using the idiots and morons to absorb the oil?

(I am just fooling with you, carpe!)

Ric said...

Stoneleigh modelled a way of being in the world that inspired me. I now try to demonstrate generosity,integrity and courage a la Stoneleigh.

She's my hero too. :-)

This isn't how I thought it would be, it's sort of like I've been dropped into a strange place and I'm not sure what comes next

Reminds me of when I cared for my brother before he died of cancer. His pain was so horrible I prayed for him to go--I wanted him to go--but when it happened I was absolutely unprepared for the grief. One thing I've noticed is that people who have gone through true loss never want it to happen to others, even their enemies.

Part of me wants things to happen so the cognitive dissonance will be less--but I also know that despite all my preparations and plans, I'm unprepared for the coming losses. But isn't this true of life in general? We grow and then decline. It sounds trite--but I gain heart from the fact that the sun always rises. The idea of surviving tomorrow does not have the urgency for me it once did as much as living fully today.

Rumor said...

"[Of the PIIGS, UK, Germany and Canada,] Canada is marginally in second place to Ireland in terms of total debt-to-gdp. Canada has significantly higher household debt than all other countries. In fact Canadian households owe more than both Greek households and businesses combined."

Straightforward graphs at AmericaCanada blog.

jal said...

Re.: North Korea torpedo

Why does it look like there are barnacles on those pieces?
The white in the pictures.
If so ... yep it was fired by N. Korea but not at the same time as the sinking of the ship.

Wolf at the Door said...

@ Greenpa

"Somebody should go down to Wall Street- peek in all the doors- and just yell - BOO!"

Hilarious man....I needed the laugh.

gavinthornbury said...

Interesting article in New Scientist that seems to link closely to Stoneleigh's philosophy, "The wisdom of herds: How social mood moves the world". Written by John Casti and based on his new book "Mood Matters: From rising skirt lengths to the collapse of world powers".

zander said...

@Ilarghi 5000 bpd "captured"

God only knows what skeletons will eventually emerge from this cupboard mate. I don't know WTF to believe !

@ Ric

I'm still in the surviving tomorrow camp Ric, although I think your mindset is the better one, I remeber Orlov saying in an audio piece "know when it's your time go and let go easily" my outlook is the antithesis of that, I got lots to learn.


I hope all the good people here who appreciate the wonderful oasis that is TAE are giving that donate button a hard time. :)

...and finally.... a blowout day on the market again, damn near 400 points down DJI. somebody call the fire brigade


soundOfSilence said...

@Linda... try looking at I took a stab at it... my my description was coming up unintelligible.

If you want to test your link to see if you've got it... open note pad, but the HTML in there, save the file as file.html in the save box (the .html is important) and it'll save a file that looks like web page short cut. Open in a browser, double click to test.

Google "create html link" and you should be able to find some other "simple" examples.

Wolf at the Door said...

@ Zander

"Anyone else feel slightly disorientated lately??"

You could say that. 2 Thursdays ago it was as if I had a religious conversion experience. Not in terms of what I think is coming but in terms of the timeframe it is likely happening in. I had been waiting for Strange Events to presage or signal the next leg down and IMO they don't come any stranger than a suprise flash crash followed up by an emergency weekend trillion dollar bailout package.

I have always had a sensitive nervous system in terms of reading or feeling the mood of the crowd and I can literally feel or perceive Risk in my bones before most. I have always gotten out of every scrape and jam, financial or otherwise by relying on these internal signals.

I can tell you this. What I felt 2 thursdays ago was the most intense warning signal my nervous system has ever registered. It was as if Klaxons were going off inside me. Never in my life have I percieved a higher level of risk from almost every direction and I believe that it means something. I trust it. Scary shit it is.

Those events brought it all home for me and instantly exposed certain areas of extreme weakness in my assumptions and preparations which I am now purposefully and quickly working to eliminate.
I thought I was fairly well prepared but I have taken more concrete action in the past two weeks than I have over the past 2 years.

scandia said...

@VK...speaking of cutting down the trees see:

" Afgans choke Over Loss of Nuts"

zander said...

@ wolf at the door

Yeah, somethings happened, but I can't quite put my finger on it, something intangible, even a trip to the hills aint shook it, maybe I'm losing it :)
Glad to know it's not just me tho'


zander said...

And also, I'm hearing some American whitecoat has created a completely new life form... whatever that entails.
Damn shame we couldn't just take better care of the lifeforms we already have.


mistah charley, ph.d. said...

Population issues

"Holodomor" was a new word to me, although I had heard of the famine during USSR collectivization - the Wikipedia article states:

There is documentary evidence of widespread cannibalism during the Holodomor. The Soviet regime of the time even printed posters declaring: "To eat your own children is a barbarian act."

At the blog Some Assembly Required CKMichaelson usually has an "edgy" headline - yesterday it was "When the going gets tough, the tough eat the weak."

One wonders if it will come to that degree of utilizing available resources - hopefully not, unless we have a really bumpy ride ahead. But on the other hand, a really SMOOTH ride is pretty unlikely, isn't it?

In general, with regard to the planet's carrying capacity for humans, the loss of agricultural land to sea level change will be a step-by-step sort of thing, but I can imagine much more discontinuous changes in total agricultural production of calories and protein - disruption of inputs (money, fuel, fertilizer, water) as well as distribution.

Well, it's hard to make predictions, especially about the future, but it must be time to get ready - for whatever.

As Bob Dylan sang during his Jesus Freak phase,

"Are you ready to meet your Maker?
Are you where you want to be?
Will He know you when he sees you?
Or will He say, 'Depart from me'?
Are you ready?
I hope you're ready"

Brad said...

In case you don't know this: a port scan is a hacker attempt to take over a machine.

No, they're not. A port scan is used to find out information about a computer on a network. Such as what kind of OS it's using and what services it's running. By itself it's harmless, though the information gained through the port scan can be used by hackers.

I don't know how you're detecting the port scans, but it could be that some other activity was misinterpreted as a port scan.

carpe diem said...


'Boo' imagery - too funny.
Pumpkin Juice - wtf is that? :)


The pleasure is mine - I like being fooled with ;)

Ilargi said...

Bunch of sick puppies, the lot of them.

BP: Oil gusher bigger than we estimated

BP acknowledged Thursday that the gusher of oil pouring from its damaged Gulf of Mexico well is bigger than estimated to date, as new video showed a cloud of crude billowing around its undersea siphon. Company spokesman Mark Proegler said Thursday that the siphon is now drawing about 5,000 barrels (210,000 gallons) a day up to a ship on the surface.

That's as much as government and company officials had estimated the spill was pouring into the Gulf every day for a month. Proegler declined to estimate how much more oil was escaping. BP America Chairman Lamar McKay said Wednesday the figure used by the oil spill response team had a degree of uncertainty built into it.

But figures by independent researchers have run up to many times higher: Steve Wereley, a professor of mechanical engineering at Purdue University, told CNN's "American Morning" that the spill could be as big as 20,000 to 100,000 barrels a day. And members of Congress released video from the company that showed much more oil pouring out of the damaged well than the siphon was capturing.

"Most of the oil is gushing like mad out there, with just a little bit being siphoned off, which tells you there is a much greater volume than BP said," California Democratic Sen. Barbara Boxer, the chairwoman of the Senate Environment and Public Works Committee, said Thursday.

And Rep. Ed Markey, who leads a House subcommittee investigating the disaster, told reporters, "I think now we are beginning to understand that we cannot trust BP." "People do not trust the experts any longer," said Markey, D-Massachusetts. "BP has lost all credibility. Now the decisions will have to be made by others, because it is clear that they have been hiding the actual consequences of this spill."

The Obama administration Thursday ordered BP to release all data related to the massive oil spill, telling the company that Americans deserve "nothing less than complete transparency."...


carpe diem said...



Thanks for the spelling clarification. Spelling and grammar were never my fortés. At least you caught my drift!

If you come up with any ideas of how to round up all the idiots, morons and cretins of the world and send them off on a melting icecap please advise.


carpe diem said...

'Americans Deserve Nothing Less then Complete Transparency'



zander said...

more oil leak possible outcomes


Anonymous said...

Carpe diem said:

"Americans Deserve Nothing Less then Complete Transparency'



Yeah, what a joke...

Of course, Obama is a shameless sociopath! The ruling oligarchy allowed him to become President because he can lie so well to the masses. He mesmerizes people, especially the Democrats!

Anonymous said...

El G,

You are free to believe whatever you wish to believe. My numbers are drawn from direct studies of mammalian populations that have experienced overshoot and dieoff in observed and recorded events. You are also ignoring that global population pre-fossil fuels "breakout" was reaching critical mass at just under 1.5 billion.

Today estimates place as much as 60% of food production as the direct result of fossil fuels. That means 60% of the human population is the direct result of fossil fuels. Take 90% of that away and what do you get right off the bat? A 54% decline in human population without invoking any other factors. And that's your own 90% number right there.

Now if you and others believe that homo sapiens will go quietly into the night, then I suggest you study history again. A key result of fossil fuel decline in the 21st century will be continued resource wars. These wars will both directly and indirectly kill more human beings. Additionally, these resource wars will do additional damage to the ecology - the carrying capacity - of the planet itself.

Then there are the acts of desperation in search of yet more fossil fuels. The Gulf BP disaster is one such. It's not going to be the last. How much food production in the Gulf region will be lost because of this and for how long? Now multiply that by dozens of such events over the next century and what is left?

You are free to ignore biological facts. You are free to believe humans are somehow different and therefore exempt from whichever physical laws disturb your beliefs. However, that will not affect the reality of what occurs.

P.S. Agriculture often has to simply be abandoned as no longer even tenable as ecosystems decline to degrees never before expected.

scandia said...

@mistah charlie...The starvation in the Ukraine was not due to famine. It was a classic example of what Stoneleigh speaks of, that being resources taken from the periphery to the centre of power. In this case Russia. It is important history to know for those who think, " Oh they( TPTB) wouldn't do that!"
Oh yes they would!

Ilargi said...

Well, well, only a month and a day and perhaps as much as half a billion liters too late:

Federal Flow Rate Technical Team Established To Determine Extent of BP Oil Spill

Admiral Thad Allen, the National Incident Commander for the Deepwater Horizon Response team, has today established the Flow Rate Technical Team, a multi-agency federal effort to determine oil flow rates from the BP spill at multiple time periods following the explosion, fire, and subsequent loss of the Deepwater Horizon oil rig.

Led by the U.S. Coast Guard, Minerals Management Service (MMS) and the National Oceanic and Atmospheric Administration (NOAA), along with technical representatives from the Department of Energy (DOE) and U.S. Geological Survey (USGS), the team will work on a multi-agency level in order to compute the total outflow of the BP oil spill, a critical question that still has not been answered by BP.


Greenpa said...

Carpet- pumpkin juice, I confess, is a Harry Potter reference. Since I have a 5 year old, it seeps in.

When Harry does a voluminous spit-take after drinking a glass of Skele-gro, to replace the missing bones in his arm, the matron says "well, what did you expect, pumpkin juice?!

Hey, listen, that was an easy one. The other day, elsewhere on the web, I closed a post with "Here we are! Pismo Beach, and all the clams you can dissect!"

Another classic reference which, alas, few will appreciate.


Archie said...


Yes, I too saw that article at HuffPo and immediately thought, "Why not expose some reality now? Afterall, BP is recovering oil from the site now, so no need to provide further cover."

Noted activist Jim Hightower had this article on Alternet today which makes a strong case for Tony Hayward as the front runner for this year's "Icky Awards". (For those uninitiated, the Icky Awards are "the coveted corporate prize which goes to the group of CEOs whose performances in the past 12 months exhibit the best combination of greediness, goofiness and grossness). Now, I am sure most here would agree that there are so, so many deserving candidates that Vegas (or Goldman) should be making book on them. IMO though, Barack is the class of the field. Notwithstanding Greenpa's earlier comment, I believe that history will show that he, Barack Hussein Obama, is a bigger POS than GWB. And that is really saying a lot.

Also, for all of us CT lovers out there (or should I refer to us as truth seekers?), I would like to mention that Wayne Madsen has been posting some really good insider shit at lately. Here's a tidbit:

There is also evidence that BP, Halliburton, and Transocean sank a drill to a depth of 35,000 feet at the Deep Horizon site some six months ago without the required permits from the federal government. WMR has learned from U.S. government sources that the drilling at 35,000 feet caused a major catastrophic event that required the firms' oil rig personnel to quickly pull up the drill and close the drill hole.

However, the Deep Horizon re-sank the drill some six months after the unspecified "catastrophe," resulting in another, more destructive chain of events following the explosion that destroyed the rig, killing eleven workers. When the Deep Horizon blew up, WMR has been told it also "blew down," cracking the the sub-seabed pipe that may have been re-drilled to a depth of between 25,000 to 30,000 feet, again, without a government permit.

Read the reports yourselves. They are quite interesting, to say the least.

Linda said...

@ Bluebird, What'd you think of the complexity video from the HS teacher?

@Sound of Silence, Thanks for the link info.

Anybody else happy the safety valve on the DOW is finally relieving? I wish it'd settle down around 7 or 9000 for awhile or a long time to make more sense of things.


Rumor said...

A quick video on fucking oil booming school. Later you will understand my use of profanity.

pasttense said...

"Today estimates place as much as 60% of food production as the direct result of fossil fuels. That means 60% of the human population is the direct result of fossil fuels. Take 90% of that away and what do you get right off the bat? A 54% decline in human population without invoking any other factors. And that's your own 90% number right there."

Nonsense. What would happen is that people would switch from eating meat which requires several pounds grain for each pound of meat produced to eating the grain directly. (they would also waste much less food)

mistah charley, ph.d. said...

Washington DC area (Rockville) event with Stoneleigh - AV issues

I don't have a projector or screen, but I do have a physical cable with connects a laptop to a TV (S-Video output from the computer to RCA connector/phono plug on the TV or VCR) which I would be glad to bring along.

Lukas said...

Greyzone: If you are so doomerish enough to believe that population will fall by 98 % in years ahead, how can you be so optimistic to think that weapons would help? If the reduction of population would happen in this way, only few greatest human predators would survive and only in some localities. You can learn to shoot and you cannot learn how to be a predator-psychopat. So it is completely rational to prepare somehow - but there are only two choises at the end - to hope or to die.

carpe diem said...

My outburst last night came after a day of witnessing one absurdity after another play out across the world stage. The 'Americans deserve transparency' thing was the last thing I read at 12.30 at night. Only possibility left was to go and hide under the covers. Safest place to be as things unwind and become more surreal by the minute.


I love Harry Potter! (and he loves me ;) - even seen some of the films but missed the pumpkin juice reference. Thanks for making me more au courant.


It's a pity about Obama really because after suffering 8 years of the horror of all horrors, George Bush (I was living in the US at that time), at least some of us felt hopeful. Sadly it has not been realized. We're going downhill fast.

ben said...

brian you can buy back your homestead now amen


my father lives in cyprus. i discovered myself telling him today that my visit in september may be the last time we see each other.

in a way i envy you your temporary bewilderment. M and i are still trying to offload the apartment. my neighbors ask me why the price is so low and i briefly tell them my beliefs and then look down because of the implications for them that i dare not speak. always this indirectness.

i would say i just want my savings back, but i'm also trying to recoup some of the remodel costs i put into it as i can't get anyone in my family to hold some cash. or is it just to keep up appearances? or is it greed, since i tend to minimize to myself the coming increase in the value of dollar?

the plight of the middle class - isn't it wrenching?


in a figurative cannibalizing, unlike greyzone's forthcoming book, here is how to make lemonade (waves).

el gallinazo said...

Lukas said...
Greyzone: If you are so doomerish enough to believe that population will fall by 98 % in years ahead, how can you be so optimistic to think that weapons would help?

Sure weapons would help. Greyzone could contribute to his predictions.

el gallinazo said...


If I ever commit an international atrocity, can I hire you for my defense team? You got the right stuff.

scandia said...

Okay, the Volker Rule has passed. So-o what is the process for getting the fiscal WMD off bank books? Will this provide transparency? Will the counterparties cancel each other or...Will we have mark to market?There has to be a scam somewhere. Perhaps a date line in the sand?

zander said...

I smell a rat


Rumor said...


Never give a sucker an even break. Experience with petty crime teaches lessons that are just as applicable to Wall Street. Good, short read.

The Obama Administration's discretionary budget priorities in handy graph form. Spoiler: the priority is blowing people up.

Rumor said...

Woah! Britain's new Tory/Lib-Dem coalition gov't has announced a judicial inquiry into the outgoing Labour gov't's role in torture and rendition. A judicial inquiry is quite a more independent option from the government itself than, say, a royal commission or parliamentary committee would be (see, for example, the failures in Canada to address anything close to these issues, except in the case of Maher Arar).

I don't want to get my hopes up.

My hopes are up.

scandia said...

@Ilargi, Just reading about the alarm being off at the museum. Seems like there has been a long wait of several weeks for repairs. Hm-m...
I am wondering if the insurance was current or perhaps not as a budget reduction measure. Have you, with your ear to the European ground, heard anything about the insurance and who the insurance company is?

g-minor said...


I smell a rat

And so you should. But it's not that little mole or vole or field mouse crossing in front of the podium.


scandia said...

@ Ilargi...duh, I'm slow connecting the dots. If the alarm wasn't working then the Insurance Co. is off the hook, right?

Anonymous said...

Greyzone said:

"Yes, cannibalism, which is surprisingly common in human history especially in collapsing societies. And now the entire global society is about to collapse.

And people have to wonder why I suggest arming ourselves?"

Cannibalism might become common when the collapsing of our civilization intensifies, but look at history and notice that kind deeds and fearlessness in the practice of virtue has been and might become common as well.

Don't think that weapons will save you. Always, always, there will be someone better armed than you, more powerful.

My armor is the desire to abide by my principles and do no harm, courage is my weapon.

"There are many causes that I am prepared to die for but no causes that I am prepared to kill for." MOHANDAS K. GANDHI

zander said...

@ g minor.

What field mouse or vole?


Lukas said...

Good points. If the situation gets really so bad, the escape will likely be better for survival than attack. I recommend the film Hotel Rwanda to know why.

Top Hat Cat said...

Australian politician defending oil company's equipment 'best practices'.

Sounds like he's auditioning to be a BP spokesman.

The Front Fell Off


Anonymous said...

Wow, Lukas, Ahimsa, and El G are all so concerned that I choose to arm myself.

You know I am not really concerned that you choose not arm yourselves. Your choice, you made it, you deal with it as your eyes close that last time when it happens. Just pray to whatever deities you worship that you die peacefully in bed. And besides, each of you deliberately choosing to be a potential victim rather than at least attempt to survive simply means one less competitor on this finite planet.

Ghandi himself knew that non-violence only works with civilized, moral people. When morals go out the window, you get Chaco Canyon, Easter Island, Serbia, Somalia, and Cambodia. Ah, but this time will be different, right? Somehow, in few short years we will have all "evolved spiritually" to some "higher plane" and we'll all sing Kumbayah and hold hands while human population crashes around us, while civilization collapses, while entire ecosystems cease functioning. Yep, sure thing.

I do not discount acts of kindness at all. In fact I plan on them, but I am not so stupid as to think that acts of kindness will be all I encounter in a world undergoing collapse. Heck, they are not all I encounter now in our so-called "civilized" world.

The typical thinking that only the most predatory can survive is directly refuted by Lebanon, Somalia, Serbia, Rwanda, and other reasonably recent examples of humanity's shining essence. In fact, there's one preacher in Africa who recovers children who have been pressed into military service by the Lord's Resistance Army (LRA) - at gunpoint because that is the only way that he can. Read about the Machinegun Preacher to learn more.

He's facing down an entire army, folks, and saving children. Ah, but he carries a gun so he must be a bogeyman, right? That mindset right there says everything that is wrong with the pacifist approach. The meek shall inherit the earth, in 6 foot by 3 foot plots. Good luck with your choices, gentlemen. I do not begrudge you that but you are going to need a boatload of luck if you are not prepared to defend yourself or those you love.

VK said...

@ Greyzone

Your blackberry will work in Somalia. They have a really great mobile network, capitalism is working great there. Just ask the Pirates. LOL.

On a side note, I recall Jared Diamond's article in the NY Times that if compared to the average poor pissant, the rich west consumes 32 times more per capita.

That means that the 1 billion 'rich' people in the world are in reality 32 Billion. Now he says if we allow for the consumption factor, the world population is around 74 Billion or so. A 90% correction of that would allow for 7.4 Billion people to live sufficiently on the planet.

Energy use can be cut by 90% without much problem, there are billions in the world who live on much less. Meat consumption can fall drastically without adverse consequences as well as other resource use.

Now I'm not saying that population decline won't happen. I fully expect it will but the first culling will be in the homo consumus, a 90% decline of his kind would leave us a breathing gap for some sort of cultural change.

I've read the likes of Tainter, Diamond, Dawkins and Hanson but I'll stick with Nate Hagens on this one, change the culture, change the world (well atleast the one locally), there is huge scope for downshifting and living with less without losing our collective humanity. No point in surviving for the sake of survival if one has lost his humanity at that point.

Ilargi said...

"@ Ilargi...duh, I'm slow connecting the dots. If the alarm wasn't working then the Insurance Co. is off the hook, right?"

I wouldn't know, devil's in the details, not if the insurer installed the alarm, for example.

"Have you, with your ear to the European ground, heard anything about the insurance..."

No, it was the NYT that reported that first.

jal said...

How did the financial advisors react to loosing 10%-15% of their clients' money?
See letter that I received.


As it's been a busy couple of weeks in the markets so I have also included CIBC World Markets global report that has some good comments on world debt. Also, as bad as the markets have been there has been a lot of good news too so things aren't all bad.

Hope you have a great long weekend!

Anonymous said...

Hey VK,

Good comment just above on the relative weights of population and how that may create some room to manoeuvre.


Anonymous said...

The planet was in trouble trying to support a billion of us at 1800 level lifestyles. 7.4 billion? At what level, VK? As dirt subsistence farmers? There's not enough arable land to do that.

Your example is precisely why I think the dieoff will be so extreme. We can't just go back to 1800 and 1 billion people globally. Die offs always over swing the other direction, sometimes to the point of extinction. Sometimes a species comes out of a die off and begins rebuilding its population and sometimes they don't, and biologists are not even sure why. Instead the population may linger at extraordinarily low numbers, well below the carrying capacity of the ecosystem.

But as I said, you are free to believe whatever you choose to believe. Just don't expect me to believe things not backed by fact. You (and others here) are the ones arguing from a position of hope, fantasy, and fear of reality. Dr. Albert Bartlett said we have a choice. We can decide how to handle our problems, or nature will decide how to handle our problems, and nature doesn't care what we think. And so far homo sapiens is doing its very best to let nature choose.

I think I am done arguing with utopians today. Insanity and refusal to recognize who and what we are, as a species, eventually causes me to become very cynical towards the people that cling to such beliefs. In my adult life, from places as diverse as Lebanon to the Congo to El Salvador, I've seen things that make me very aware of the animal within each of us. You are free to pretend that beast is not there. I, on the other hand, have seen the beast and know that it is real. Don't try to tell me it is not real because then I will know you for a fool.

mistah charley, ph.d. said...

using whatever resources are available to survive

To Serve Man: A Cookbook for People

Published in 1976, available at Amazon

More shocking than utilitarian cannibalism (even of one's prisoners of war, as some Japanese did during WWII) is an account of an event in The Hague in 1672.

"In a sudden turn of events, of the sort that define this politically volatile era, [Spinoza's patron and Dutch political leader Grand Pensionary Jan] De Witt and his brother were assassinated by a mob, on the false suspicion that they were traitors to the Dutch cause in the ongoing war with France. Assailants clubbed and knifed both De Witts as they dragged them on the way to the gallows, and by the time they arrived there was no need to hang them anymore. They proceeded to undress the corpses, suspend them upside down, butcher-shop style, and quarter them. The fragments were sold as souvenirs, eaten raw, or eaten cooked, amid the most sickening merriment."

--Antonio Damasio, Looking for Spinoza: Joy, Sorrow, and the Feeling Brain

I quote this example of meat eating partly to point out that there are deeply emotional, as well as nutritional, issues involved in anthrophagy - and to point out that norms of civilized behavior sometimes break down in a spectacular way.

jal said...

April core inflation 1.8%

See!! ... My barber does not want to reduce his lifestyle. He is making me reduce my lifestyle. Is my barber taking advantage of the deflation to buy a house in Cal.?

thethirdcoast said...

@ Frank A:

I hold a pretty conspiratorial worldview, but even I feel the Wayne Madsen is a weak source. I read that story and there are several items that just don't ring factually true to me.

I was also shocked to see that item posted so prominently by TD over at Zero Hedge.

scandia said...

I have just been watching a film. One line in the script spoken as an accusation against an elite few covering up crimes of the state,
"You have formed an allegiance above your allegiance to humanity".
So one could charge our leadership to-day.So one could charge BP... Mustn't forget Blair!
Whoops,sorry Zander ;)

jal said...

Who said that there is not enough money for everything.

Here is a nice summary.

“the internets is so's Friday night and I can't decide if I should watch the "Debt Clock", the live feed of the "Oil Spill", or monitor the Ekyystlkjghs;lk and sister Katla volcano.  So many choices.   Ohhh, I've decided to go w/ Bank Failure Friday watch instead!!! Grab the popcorn.”
by hambone
Me! I would like to count the votes for a strike by the Brithish Airway airline which is loosing money.

VK said...

@ Greyzone,

Who are you calling a Utopian?

You are free to believe that humanity is going to collapse, that is your belief system. Here in Africa a population of near 1 billion is being supported with fertilizer use being around 10-15% of what it is in the West. Energy use is 10% of what it is in the West. Do I expect a 40-50% drop in the population? Yes. But the 90% fails to take into account that Homo Economicus is the species most under threat. The world has an abundance of resources if consumption is drastically reduced. The people who point out over-population are really pointing out over-consumption.

As you point out about Dr Albert Edwards and yes I have seen his documentaries and articles, even he links the possibility to a cultural change. Look at N. Korea vs S. Korea, the same people but culturally two very different societies with the North being more adept to a social collapse.

Even take a look at Burma, no banking system, 50 million population, still surviving on very, very little.

And what evidence do you have that pre-1800 the world was pushing against it's natural limits? I would like some scientific papers on that and how they managed to come to that conclusion. (Or is that in William Catton's overshoot?)

Cultures can change and the coming great collapse can and will change mindsets and culture. You may have met the beast but even during the worst of recent human atrocities we managed to see only a tiny fraction of the human popn. decline that drastically. You're talking about 200 Million excess deaths per year every year for as far as the eye can see.

M said...

The real utopians might be those who would even seek to survive in a Greyzone future world. I imagine a European soccer game gone berserk or a stampede to a Who concert will be mild in comparison. Forget a gun or self-defense, my idea of preparation would be handy dose of whatever provides the most pleasant and painless exit from such a dreary existence. And for those who do survive, one can only imagine the torture it would be as the “survivalists” beat their chests and polish their rifles. A new dark age indeed.

Thank god for the Imagination as an antidote to such a wretched vision.

Ric said...

Greyzone writes:
I've seen things that make me very aware of the animal within each of us. You are free to pretend that beast is not there. I, on the other hand, have seen the beast and know that it is real.

I think it was F. Scott Fitzgerald who wrote: "The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time"

Human nature contains a horror which is far, far worse than any "beast" (which moves by necessity while humans move by intention.) The horror in us, though, is not the whole story, which is what makes the tale interesting.

el gallinazo said...

From today's post:

"The problem is that it is difficult to pin down the value of something for which there may be no market. "

Relating to CDO's that the FDIC inherited from failed banks that drank the GS and MS Koolade. Hmmm. Maybe we can make a Zen koan out of it for future Harvard MBA's to ponder.

What is the value of one hand clapping when there ain't no market for it?


What is your personal position upon eating one's neighbors?

Bukko Boomeranger said...

@ Top Cat, you probably know this already, but that "Front Fell Off" bit is a comedy routine by Clark and Dawe, a couple of humourists who appear on the ABC News in Oz. They're in the same vein as "Yes Minister" in the U.K.

Aussies have a droll sense of humour about politics in some ways, but when I lived there, I preferred the cheeky over-the-topness of "The Chaser's War on Everything." The latter is like "Saturday Night Live" used to be when it was good.

Bukko Boomeranger said...

El Gallowsnose asked...


What is your personal position upon eating one's neighbors?

I reckon his position would be sitting on his haunches in front of a fire pit, because there will be no furniture in the Hun/cannibal world Greyzone dreams of.

Nelson said...

IMO Greyzone may even be too optimistic.

All those resources that 1800's man used were the richest and most readily available deposits - now long gone. Even if we had the seed, skills and physical fortitude, we couldn't possibly recreate the farms of 200 years ago on depleted lands. Subsaharan Africa? Bangladesh? You must be kidding - they're veritable poster children for unsustainable ag teetering on collapse.

Even coal will become a challenge, as we try marching down a mile-deep pit out in the hinterlands, with no way to trade our crappy lignite over the distances required to get the food and water we need to dig again tomorrow. As a child my father dug bituminous coal by hand right on his family farm in Ohio during the Depression, but that option has been long foreclosed.

And then there are the other Black Swans, like genetically engineered organisms/biowar agents, the Methane Bomb, and old-fashioned deuterium fusion devices. After those are deployed, what remains won't be uniformly distributed. Even if the Earth could sustain a billion people, they won't be able to get to the best places - or even know where they are.

I also tend to agree that this crash will be 'fast,' by civilization's standards: one century sounds right, not the three that Rome took.

Does all this make me want to give up? Of course not. Life lives - it's all it can do.


Lukas said...

Greyzone: You are free to prepaire however you want to for future which you are so sure of as if it was mathematically proven. It is not. And I still stick with the argument that in such collapse only predatory humans would survive. 20 percent of population died in Rwanda 1994 and the remaining 80 percent were certainly not predatory animals. 2 percent is almost exactly the number of predators in human society. Thinking locally would be the way how to make the decline acceptable at some places. If it doesn't work, than that potential world would not be the one I would like to survive anyway.

Finally, I am afraid you are misinterpreting M. Gandhi. He certainly didn't live in a society full of kind and generous people.

HappySurfer said...

@ El G re Greyzone

Eating ones neighbour - this is subjective and clearly depends on how hungry one is and the prospect of getting food; Secondly decisions as these are not "arm chair ones" - one has to be "there" to decide.

@ Lukas

Re Ghandi: Carrol Quidgely makes an interesting observation that the methods of Ghandi worked because the English WERE cogniscent of a hunger strike and peaceful resistance. How well do you think Ghandi's methods would have worked against a Stalin, Hitler or Pol Pot? The book is available online free and worth reading, search for
a "Brief History of the World"

when I get a chance will post the url.

Enjoy the weekend


zander said...

@Greyzone.......".I've seen things that make me very aware..."

I suspect what you are saying is true, although the denial in me hopes it is not. I lived slap bang through the middle of the UK football casual phenomenon and these people had plenty.

Not a Charles Hugh Smith fan then? :)

@ scandia. re Blair

BTW. as a wise poster pointed out yesterday, the Tory party, yes the right wing Tory party are launching an investigation ( a serious one) into Britian's - ergo the Labour government's - complicity in internationally outlawed rendition and torture methods, and I still hear twats going on about Labour being the anti - establishment, working mans, left wing, reformist, blah blah blah party.... head in the clouds, ain't got a clue, don't get it...period.
You couldn't make this stuff up. We Have Conlibour, US has Republicrats, and I'm willing to bet ALL so called democracies could barely squeeze a Rizla paper between their main parties.

Same snakes different ladders, I'd rather listen to Crass.


HappySurfer said...

Sorry guys got the book slightly wrong here it is can load page - its huge and search for Ghandi to read about it

Carroll Quigley, Tragedy and Hope: A History of the World in Our Time (1966)


scandia said...

@TopCat...Just opened The Front Fell Off...LOL!

scandia said...

@Greyzone....Thank-you for this focus on survival thread. I agree with the probable outcome on a particular scale. Such a dark scenario brings an individual to planning, to develop a strategy. Therin lies the appearance of conflict on the board.
Using myself as an example, although I may want to emulate your strategies I cannot. I am a senior (66) female lacking the physical strength and agility required for the tasks involved. I may have the appropriate mindset but not capabilities. Yet I too desire to live!
A good strategy needs to be one that can be executed. I am reminded of the yin and the yang.
I am thinking one needs a defense, one needs an offence, one needs luck. Perhaps one needs to know what cards to play, when to fold them. I don't mind the dying. What I do mind is the stealing of my existence by some greedy psychopath!

mistah charley, ph.d. said...

I'm a position similar to scandia - although very slightly younger, and having a Y chromosome (who knows if it's good or bad?), I have to recognize that many options are not available to me for practical reasons - I just can't get there from here. I hope to live the rest of my life here in my modest but paid-for suburban townhouse, with grid electricity, public water and sewer, food for sale at the supermarket and the money to buy it with, and high speed internet. Only the last is optional unless I move somewhere else, which requires using up resources which might last spouse and self for a number of years if society continues in a quasi-BAU way. Another way to put it is - if the aforementioned services end, rather than just being interrupted, so will life as I know it, within a few months, most likely. The overwhelming majority of my neighbors in this major metropolitan area are in the same situation. If push comes to shove, we are the shovees (and there won't be enough shovelers to provide us all with decent burials, even if they wanted to).

I watched the video of Mike Ruppert's recent talk in Vermont last night (most of it - I fell asleep at the end.)

He's VERY pessimistic (I believe unwarrantedly so) about the impact of the Gulf oil leak, and predicts the stock market will fall by half in a year (maybe, maybe not). But one thing he said that seemed like it could be fact-based, at least in the general ballpark, was that each calory of food consumed in the industrialized world contains 10 calories of fossil fuel energy. As fossil fuel energy becomes scarcer, world population MUST shrink. The devil's in the details.

el gallinazo said...

HappySurfer said...
"@ El G re Greyzone

Eating ones neighbour - this is subjective and clearly depends on how hungry one is and the prospect of getting food; Secondly decisions as these are not "arm chair ones" - one has to be "there" to decide."

I doubt there will be many armchairs left for the deciders when the time comes. Whether one chooses to eat one's neighbor is an act of will. Many people have died in volitional hunger strikes in political protest while the "authorities" rammed feeding tubes down their throats. I went on a 10 day cleansing fast this year. It was not awful after the first few days. Admittedly, 10 days is not starving to death.

As a buzzard recently gone vegetarian (a rather singular ecological niche :-), I am not particularly squeamish. I do not condemn people finding themselves in dire circumstances munching on the haunches of deceased acquaintances - the Donner Pass party and the plane crash in the Andes come to mind. I do object to people murdering their ambulatory neighbors for such purposes.

(I asked my girlfriend recently about trout in Argentina. She replied, "You come to my country to kill our animals?")

As to GreyZone's projections, I believe that the biological models that he projects are selected and overly severe. Perhaps our resident biologist would care to weigh in on this? Do over-populations hitting peak rapidly drop to 2% population levels as a matter of course? I am sure it has happened, I am wondering if it is typical. And humans, though I am not particularly enamored of the species, are not voles are lemmings. Even devoid of a potential spiritual component, they are quite different animals.

That said, I also think that we are headed for a horrendous die off in the coming century, but barring a total thermonuclear exchange or comparable disaster of the "black swan" variety, I would imagine (note the verb "imagine") population levels in 100 years at 15-20% of current. But the argument is largely mute. Time will tell, and as an incipient geezer, I will not be around to keep score, even in the early innings.

What bothers me about GreyZones presentation is:

1) The completely unwarranted assurance of his projections.

2) His strange delight in them.

3) The effect it might have on the weaker willed of the commentariat to attempt to prepare. He is quite clear on the exchange in this thread, at least, that the **only** positive preparation is firearms.

jal said...

Remember ...

" an incipient geezer, I will not be around to keep score, even in the early innings..."

ALSO remember ...

“Should have, could have, would have”

don’t forget ...

Humanity has “... done that and been there ...” somewhere in the past and will do so again in similar circumstances.

Does anyone want to talk about something more imminent?

I can now buy EU products at a 10% deflated value.

EU residence can now buy Us products at 10% inflated values.

D. Benton Smith said...

re : Regarding the Eating (Or Not) Of One's Neighbors

Teach people to cannibalize and they eat but once.

Teach them to enslave and they eat forever.

Lukas said...

My last comment to "greyzone" visions: The biggest flaw in his argumentation is following: He keeps saying his theory is based on facts but in fact :) it is based on premises. Inside the system build on these premises (for example pure darwinistic approach to human culture and society) it works completely fine. Outside these premises, his heart-breaking belief is getting much more ridiculous.

The irony is that it actually resembles the religions which he is criticizing so much. The world is gonna end because of peak oil (= apocalypse) and only the chosen ones, survivalist (= those who believe in God) are able to survive. And he will always deny that he might be wrong.

Greenpa said...

el gallinazo said...

If I ever commit an international atrocity, can I hire you for my defense team? You got the right stuff."

lol! I'm still trying to figure out whether you intend that as an insult, or a compliment. :-) Or both, possibly. And I'm not even a lawyer!

Evolutionary ecologists do have a lot of practice in teasing apart really complicated situations; the point being to try to see what the possibilities are.

Big Bammer noise at the moment- he's just announced that he wants to establish a "new international order." Here's my comment on that over on WAPO-

"Wow. What IS he up to? He really HAS to know that "new international order" is a huge red flag to the bull; for those who constantly dither about "a new world order". It's a buzzword for all the conspiracy enthusiasts.

I'll bet my shirt he wants to stir them up. Why, however, is beyond me."

It is, though evidence of superior herding skills. I just really really can't see him saying that by accident.

Top Hat Cat said...

A while back, I read an interview with P.D. James on the only sci-fi novel she ever wrote, The Children of Men.

It is a tale of a not too distant future where a virus has sterilized the entire human race, leaving the human race to slowly wind down to nothing with a last generation of aging adults and a last cohort of children getting out of grade school with no one to follow. Wide spread crushing despair and dysfunction are the norm.

James said she wrote it to explore the notion of how people would treat and miss the loss of all children forever. A post modern variation on the Pied Piper.

She mused in the interview that adults in general would treat children much better if they became rare. Treat them the way they should be treated, cherished.

Taking this idea forth, most industrialized countries have native birth rates below replacement already. When the Soviet Union collapsed, I remember Dmitry Orlov saying the birth rate plunged, probably in no small part from severe despair and psychological depression (especially the men drinking themselves to death) at the bleak outlook of the future going forward.

A quick glance at life expectancy rates for all races of men in the U.S.1929-1930 was about 48, in 2004 about 70.

A quick glance at life expectancy rates for all races of women in the U.S.1929-1930 was about 50, in 2004 about 76.

(Whites did better than these numbers but I'm not concerned with that at the moment.)

I'm assuming, that all things being equal going forward (i.e. no wars or mass violence, ha), that just the diminishing effects of less medical coverage, poorer diet, increased domestic abuse and severe psychological stress will drop U.S. life expectancy rates to at least the 1930's levels fairly quickly. Also, people had a lot fewer children in the 1930's as compared to other decades.

As a thought experiment, if we applied a male 1930 life expectancy rate of 48 to all new male babies born today forward, as a cohort, the bulk of them would be dead by 2060.

Quite a turn over rate, assuming no new kids.

If the P.D James Children of Men scenario started today, no more children at all, the last of the 300 million plus U.S. citizens would be gone in about 2090.

Mission Accomplished® (all rights reserved GB the Lesser)

That will give an idea of how severe the circumstances would have to be to achieve a Greyzone Crash®.

Rototillerman said...

Greenpa said, "I'll bet my shirt he wants to stir them up. Why, however, is beyond me."

If you've got a third of the country foaming at the mouth over a new world order, then that's two thirds of the country not worrying about ecological disaster or the implosion of the financial system (the other third are the political opposites drawn into defending Obama).

ogardener said...

@ el gallinazo

"(I asked my girlfriend recently about trout in Argentina. She replied, "You come to my country to kill our animals?")"

They don't practice catch and release in Argentina?

Ilargi said...

New post up.

As goes the nose, so go the toes