Friday, May 28, 2010

May 28 2010: Lent, spent and guaranteed

Russell Lee Close quarters February 1940
"Farm boys at play party in McIntosh County, Oklahoma"

Ilargi: No, I'm by no means the only one who thinks this thing will not end well.

Let's start with Gerald Celente of Trend Forecasters:
"It did collapse. It collapsed in March of 2009. The world equity markets collapsed. What they did was they propped them up. And they propped them up with stimulus packages worldwide. The United States has lent, spent and guaranteed $11 trillion, to prop up this economy.

So the collapse happened. But it hasn't crashed. And we are looking for the crash to come.[..]

I want to make this clear: capitalism is dead in America. And it’s not socialism, like all these people are yelling about. The merger of state and corporate powers, by definition, according to someone who knew the definition really well, is called fascism. That's what Mussolini called it. Fascism has come to America."

Hedge funder Hugh Hendry needs less words:
'I would recommend you panic'.

Canadian fund manager Eric Sprott has this (about the US):
"The debt, the deficits are enormous. The industrial capacity has been gutted. One cannot make a positive story for it other than some temporary trading phenomenon because something else is uglier than the dollar."

The US M3 money supply (the most comprehensive number, albeit no longer supplied by the government, is sinking like an anvil, with an annualized rate of contraction of 9.6%. And even though nobody I’ve read seems prepared to call this spade for what it is, this, dear grasshoppers, is what constitutes deflation. Not falling prices, they are but a consequence of a falling money supply and velocity (which today is slower than the heavy mud BP so far fails to use to plug its "leak").

And as much as it may seem astonishing to see the money supply fall that hard and fast, it does so, and we at The Automatic Earth did tell you well in advance. The deleveraging going on inside all the fields combined that make up the economy is simply too much of a force to plug with a bunch of trillions of dollars and/or golf balls. Yes, the comparisons between the failed and failing US financial policies on the one side, and the botched beyond belief BP disaster inevitably come to the forefront as President Obama visits the Gulf region for a second time in 38 days.

Where are his priorities? Why does he act as he does? It was clear for many from the get-go that Deepwater Horizon had the potential to be the worst environmental calamity in US history. Where was Obama? How does a president decide he doesn’t have to be where it hurts? Now, after all this time, he shows up and claims that Washington won't let the people of the Gulf of Mexico fall. Problem is, Washington, and the president, already have. And neither can have those 38 days back.

California's municipalities are, ever more of them, considering bankruptcy as a last resort to escape at least some of their worst and darkest dreams. So does Miami. New York State seems set to increase borrowing from its own funds to keep up appearances a little longer.

Never mind. It's over, guys, it really is. Look at the stock markets, look at Europe, look at Sacramento, Miami, Ohio, Illinois. Does anyone near you really still believe that we’ll have an economic recovery, with real economic growth, anytime in the next little, say, decade? If they do, please refer them to the M3 number. And if they don't even get that one, give up. You must surely be talking to a pride of religious crazies.

Fannie and Freddie need more aid (and much more than they let on, they feed it bite-size), while the lenders they urge to buy back non-performing loans from them cry foul, and want the government to furnish them with taxpayer money or else. Exactly like the public/private pension plans Congress is, and I kid you not, considering bailing out. Everyone will be bailed out who has sufficient political influence, it’s all just like a giant auction where Washington, Sacramento and Albany are selling the kitchen sink right before your eyes and right before dinner time.

In the game of political musical chairs, you're doomed and done for if you don't have that influence, if you’re neither rich nor a member of an organization present on Capitol Hill or its state peers. The final bits of bread are being laid out on the table as we speak, and if you don’t have a seat, you are now expendable. The US Senate today didn't even bother to stay open for an emergency unemployment extension bill; other matters, like getting home for a nice meal or two at the country estate, were more important. At least it leaves no doubts as per their genuine intentions.

It’s hard to gauge, for all sorts of reasons, how long the American people will keep on taking all of this lying down. Does it need to be children starving by the side of the road? And even then, who will do what?

In Europe, these matters are far less obscure, opaque and oblique. We've seen Athens, and multiple times. And if you take a good look at what's lined up in budget cuts and austerity measures in Spain, you know it's only a matter of time till human bulls will wreak havoc on the streets of Pamplona. France wants to lift its retirement age above 60 years of age, and though I think that's reasonable considering what their neighbors do, I don’t kid myself about the power and the riot potential the French have in them.

Behind the European fighting spirit there is something that seems largely lacking stateside: the profound heartfelt conviction that it's not the poorest who should pay for the games of the richest. And I know that’s not what today's French protests are about, but that is where it's all heading. If the unions in Paris get their way, someone else will have to pay. And that will be the poorest, the eldest, the youngest and the sickest, in short anyone who has no voice but their sole own one.

But they will find a common voice, just not through orderly meetings that elect chairmen and secretaries. They'll find it out in the streets, when they meet people just as desperate as they are, and just as angry.

Until quite recently, I figured the unrest would lay dormant through the Northern Hemisphere summer, what with holidays, heat, nice weather, pretty girls and all. And certainly in Europe with the soccer World Cup, something the Spanish, Greeks, Italians, Portuguese, Brits and all the rest hold dear above their own yaya's, grandmothers.

Today, I'm not so sure anymore. The soccer matches may even well set off the political blazes. This thing can blow up in our faces any moment now, with one fire igniting another across countries and within them. There’s just too many people falling by too many waysides, and too many of them will very simply not go gently into that night without a fight.

People on both sides of the Atlantic have been taught to believe that they have a right to a decent human existence, and to a genuine pursuit of their own happiness. They will not abandon these lessons lightly.

Ilargi: Dear Readers:

At this point in time, we need you more than ever to either donate money directly and/or visit our advertisers. Don’t worry, we have no intention of selling you cheap. On the contrary, we want to, and will, expand TAE to a great extent, tentatively as per July 1. Having to prepare, organize and execute that on a scrape-by budget makes it that much harder. And believe us: we don’t take any of this lightly; we know how close we may be already to the real major economic changes we've long predicted but haven't yet seen. But then, that’s exactly why we feel we have to do more for our readers. Still, hard as we try, hard as we work, it’s just not going to happen without you.

Ilargi: Great Celente video from a local US station. Good editing, not too long, very well done. Strange, though, to hear him talk about zero-point energy, charge clusters, cold fusion, permanent magnets as live-savers. That and Buy American are things he doesn't often mention. The TV presenter then says:

"So there is a glimmer of hope. BUT. Celente is also predicting a bank holiday, to stop a run on the banks; a 9-11 style attack on the US; and a US-led global war sparked by an incident with Pakistan or Iran. So is this guy on the mark or is he nuts?"

Gerald Celente : Financial Armageddon 2.0

"It did collapse. It collapsed in March of 2009. The world equity markets collapsed. What they did was they propped them up. And they propped them up with stimulus packages worldwide. The United States has lent, spent and guaranteed $11 trillion, to prop up this economy.

So the collapse happened. But it hasn't crashed. And we are looking for the crash to come.[..]

I want to make this clear: capitalism is dead in America. And it’s not socialism, like all these people are yelling about. The merger of state and corporate powers, by definition, according to someone who knew the definition really well, is called fascism. That's what Mussolini called it. Fascism has come to America."

Hugh Hendry: 'I would recommend you panic'
Exerpt from BBC talkshow with guests Hendry, FT's Gillian Tett and Shock Doctrine villain Jeffrey Sachs.

Eric Sprott Says S&P 500 Index Slump Just Starting
by Matt Walcoff - Bloomberg

The monthlong slump that erased 12 percent from the Standard & Poor's 500 Index is the beginning of a collapse that will drive the measure below its weakest level of 2009 in the next year, money manager Eric Sprott said.The $1 trillion European rescue package announced May 10 has failed to stop the global equity drop, showing investors are skeptical that efforts to address the debt crisis will work, said Sprott, manager of the best-performing Canadian mutual fund with at least $1 billion in assets in the past 10 years. In response, Sprott is buying gold and betting against stocks. Sprott is betting that governments around the world have run out of ammunition in their attempt to boost economic growth and counter banking losses through stimulus spending and lower interest rates.

The S&P 500 surged as much as 80 percent after sinking to a 12-year low on March 9, 2009, after the U.S. government spent, lent or guaranteed up to $9.66 trillion to end the financial crisis. "Our thesis is we're in for a long, deep cycle, and we've thought that since 2000, but up to this point, governments and central banks have always tried to stave it off," Sprott, manager of the Sprott Canadian Equity Fund, said yesterday in his Toronto office. With budget deficits surpassing 10 percent of gross domestic product in Ireland, Greece, the U.K. and Spain, and the U.S. at 9.3 percent, policy makers have no choice but to pare spending, threatening economic growth, he added.

Fund's Closure
The Sprott Canadian Equity Fund returned 519 percent in the 10 years that ended April 30, compared with a 62 percent gain for the S&P/TSX Composite Index. The Sprott Hedge Fund, which the 65-year-old investor also manages, has jumped more than 488 percent since its establishment in November 2000. Sprott's bet that molybdenum, a metal used to strengthen oil pipelines, would rise failed. He closed Sprott Molybdenum Participation Corp., a fund established in 2007, last year after it lost 70 percent since inception because the metal plunged. The commodity had surged 15-fold between the end of 2000 and June 2005, prompting companies including Freeport-McMoRan Copper & Gold Inc. to boost production. U.S. stocks surged today, joining a global equity rally, as China said it remains a long-term investor in Europe, damping concerns that the region's debt crisis will worsen. The S&P 500 rose 3.3 percent to 1,103.06 today.

In December, Sprott said the S&P 500 would eventually sink below 676.53, its closing level on March 9, 2009, without providing a timeline. European deficit concerns helped drag the gauge down 12 percent from its 2010 high on April 23 to a close of 1,067.95 yesterday. U.S. stock markets are oversold and may rally strongly in the next few days, investor Barton Biggs, who runs New York- based hedge fund Traxis Partners LP, told Bloomberg Television.

Sprott said U.S. consumers, China and the turmoil in Europe have convinced him this month's equity retreat, unlike previous drops in the past year, marks the return to a bear market. The S&P 500 plunged 57 percent between October 2007 and March 2009. U.S. consumers are showing signs of financial stress that wouldn't be present in a sustainable recovery, he said. Chain- store sales as measured by the International Council of Shopping Centers fell 2 percent in the first three weeks of May. In a conference call on May 18, Wal-Mart Stores Inc. Chief Financial Officer Tom Schoewe said, "More than ever, our customers are living paycheck to paycheck."

China Weakens
China, the fastest-growing major economy, is starting to struggle, Sprott said. The Shanghai Composite Index has tumbled 23 percent since climbing to a 14-month high on Aug. 4. The government took steps to cool the nation's expansion and reduce the risk of asset bubbles, or unsustainable price increases. Finally, the European debt crisis has raised the prospect that austerity measures will reduce growth -- a phenomenon Sprott said will spread to the U.S. because of the record American budget deficit. "We can see the dots aligning that the world's economies are not what they thought they would be, and they're not going where we thought they would go," he said. "It seems more clear-cut now." Economists anticipate 3.2 percent growth in U.S. GDP this year and 10.1 percent in China, according to the median estimates in a Bloomberg survey.

10th Annual Rally
Sprott has added to his holdings of gold, which is rallying for a 10th straight year in New York, and shares of the metal's producers this month. He boosted bets against financial companies and maintained short sales on Toronto-Dominion Bank and Bank of Nova Scotia, both based in Toronto, and National Bank of Canada, which has its headquarters in Montreal. His view puts him at odds with the World Economic Forum, which has said for two straight years that the nation's banking system is the soundest globally.

Short selling is the sale of borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder. Investors have driven the S&P/TSX Bank Index to an 11 percent gain since Jan. 31 as analysts forecast a 22 percent combined profit increase this year for its nine companies. The bank measure advanced to a record 112 percent premium yesterday over an index of insurers in the S&P/TSX, which started at the same level as the bank gauge in 2000.

Bank taxes are likely to rise around the world despite the opposition of the Canadian government, and Canadian lenders remain overleveraged and too dependent on government support, Sprott said. "There hasn't been as much critical analysis of the government's involvement in the Canadian banking system as there certainly has been in the U.S.," he said. Sprott continues to favor precious metals as a haven. On March 31, gold and silver accounted for 34 percent of the net asset value of the Canadian Equity Fund, with reseller Gold Wheaton Gold Corp. of Vancouver the top equity holding.

While both gold and the U.S. dollar have gained this month as investors shy from risk, only the former will continue to advance as the crisis deepens, Sprott said. "The debt, the deficits are enormous. The industrial capacity has been gutted," he said of the U.S. "One cannot make a positive story for it other than some temporary trading phenomenon because something else is uglier than the dollar."

US money supply plunges at 1930s pace as Obama eyes fresh stimulus
by Ambrose Evans-Pritchard - Telegraph

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history. The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened. 

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever. "It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015. Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said. 

David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. "You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip," he said. The White House request is a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade.

Recent data have been mixed. Durable goods orders jumped 2.9pc in April but house prices have been falling for several months and mortgage applications have dropped to a 13-year low. The ECRI leading index of US economic activity has been sliding continuously since its peak in October, suffering the steepest one-week drop ever recorded in mid-May. Mr Summers acknowledged in a speech this week that the eurozone crisis had shone a spotlight on the dangers of spiralling public debt. He said deficit spending delays the day of reckoning and leaves the US at the mercy of foreign creditors.

Ultimately, "failure begets failure" in fiscal policy as the logic of compound interest does its worst. However, Mr Summers said it would be "pennywise and pound foolish" to skimp just as the kindling wood of recovery starts to catch fire. He said fiscal policy comes into its own at at time when the economy "faces a liquidity trap" and the Fed is constrained by zero interest rates.

Mr Congdon said the Obama policy risks repeating the strategic errors of Japan, which pushed debt to dangerously high levels with one fiscal boost after another during its Lost Decade, instead of resorting to full-blown "Friedmanite" monetary stimulus. "Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantititave easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty," he said. 

Mr Congdon said the dominant voices in US policy-making - Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke - are all Keynesians of different stripes who "despise traditional monetary theory and have a religious aversion to any mention of the quantity of money". The great opus by Milton Friedman and Anna Schwartz - The Monetary History of the United States - has been left to gather dust. Mr Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use. 

This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 - just as the Fed raised rates - gave a second warning that the economy was about to go into a nosedive. Mr Bernanke built his academic reputation on the study of the credit mechanism. This model offers a radically different theory for how the financial system works. While so-called "creditism" has become the new orthodoxy in US central banking, it has not yet been tested over time and may yet prove to be a misadventure. 

Paul Ashworth at Capital Economics said the decline in M3 is worrying and points to a growing risk of deflation. "Core inflation is already the lowest since 1966, so we don’t have much margin for error here. Deflation becomes a threat if it goes on long enough to become entrenched," he said. However, Mr Ashworth warned against a mechanical interpretation of money supply figures. "You could argue that M3 has been going down because people have been taking their money out of accounts to buy stocks, property and other assets," he said. Events may soon tell us whether this is benign or malign. It is certainly remarkable.

U.S. debt reaches level at which economic growth begins to slow
by Walter Alarkon - The Hill

The level of U.S. debt has reached a point at which economic growth traditionally begins to slow, a bipartisan fiscal commission making recommendations to the White House and Congress was told Wednesday. The gross U.S. debt is approaching a level equivalent to 90 percent of the country's gross domestic product, the level at which growth has historically declined, said Carmen Reinhart, a University of Maryland economist. When gross debt hits 90 percent of GDP, Reinhart told the commission during a hearing in the Capitol, growth "deteriorates markedly." Median growth rates fall by 1 percent, and average growth rates fall "considerably more," she said. Reinhart said the commission shouldn't wait to put in place a plan to rein in deficits.

"I have no positive news to give," she said. "Fiscal austerity is something nobody wants, but it is a fact. Gross debt is at 89 percent and will reach 90 percent by the end of the year, said Sen. Kent Conrad (D-N.D.), a member of the commission. Another commission member, Rep. Jeb Hensarling (R-Texas), described the situation: "Essentially, the needle is hitting the red zone in respect to economic growth." Gross debt, unlike the public debt measure used by the Congressional Budget Office (CBO) and other economic forecasters, includes the money the government owes to all entities it supports, such as mortgage firms Freddie Mac and Fannie Mae, Reinhart said. The CBO expects public debt to grow from 63 percent this year to 90 percent in 2020, largely because of rising healthcare costs.

The bipartisan fiscal commission, which was created by President Barack Obama and contains lawmakers from both parties, is tasked with producing a plan to rein in debt by December 1. Leaders in both the House and Senate have said the commission's proposals would receive votes on the floor later that month. Reinhart cautioned policymakers against seeing the strengthening of the dollar as a sign that investors can wait for the United States to show how it will deal with the debt. "I am concerned about complacency," she said. "I am concerned that because the dollar has renewed its role as a reserve currency, we may wait too long."

Bankruptcy talk spreads among California muni officials

Two years after Vallejo, California, filed for bankruptcy protection, officials in nearby Antioch are also tossing around the 'B' word. Antioch's leaders earlier this month said bankruptcy could be an option for the cash-strapped city of roughly 100,000 on the eastern fringe of the San Francisco Bay area. Antioch's fiscal woes are standard issue for local governments in California: weak revenue from retail sales and property taxes is forcing spending cuts, layoffs and furloughs. But cost-cutting measures may not be enough to keep Antioch's books balanced, so its city council is openly discussing bankruptcy. "We just want to alert people to the possibility," Antioch Mayor Pro Tem Mary Helen Rocha said.

Orange County Treasurer Chriss Street would not be surprised if more local governments across the Golden State sound a similar alarm. Street expects more talk of municipal bankruptcy across California because local government finances are in such dire shape -- a situation underscored on Wednesday when a top finance officer for Sacramento County projected a worse-than-expected shortfall for the county of $181 million, which could force more than 1,000 layoffs from the county's payroll. "You don't have the easy out of increasing revenue and you have a lot more call on services because of the economy," Street said. "There's no such thing as entertaining bankruptcy; there's ending denial."

Orange County, California's third most populous county, declared bankruptcy in 1994, at the time marking the biggest municipal bankruptcy in U.S. history, after suffering $1.7 billion in losses from bad investments. The county emerged from bankruptcy in 1996 and its credit rating has since recovered from its post-bankruptcy "junk" status. Fitch Ratings earlier this month affirmed its 'AA' rating on the number of the county's long-term obligations. Marc Levinson, a lawyer with Orrick, Herrington & Sutcliffe LLP who is representing Vallejo in its bankruptcy proceeding, agrees that California's hard times and lean local budgets are forcing local leaders to weigh bankruptcy. "It's a topic on everyone's lips because cities and counties and local governments are hurting," Levinson said.

Overcoming The Stigma
Municipal officials, however, are unlikely to pile into bankruptcy court in search of relief from their financial woes, Levinson said. Chapter 9 bankruptcy filings are rare to begin, in part because many states limit them and, more important, their consequences include harm to credit ratings that determine borrowing costs, said Jim Spiotto, a partner at the Chicago law firm of Chapman & Cutler, who works on municipal finance matters.
A filing for Chapter 9, the part of U.S. bankruptcy code that applies to municipalities could also result in being locked out of the municipal debt market, adding to fiscal trouble. "We take that very seriously," Amy Doppelt, a managing director at Fitch Ratings, said of how talk of bankruptcy could affect credit ratings.

Bankruptcy could also scare away investment and new jobs at time when California's unemployment rate is in the double-digits -- 12.6 percent in April -- and payroll growth is critical to bolstering the consumer spending and property markets that fill the coffers of local governments. Ron Loveridge, the mayor of Riverside, California, and president of the National League of Cities, called bankruptcy a last resort. "It becomes a description of who you are," he said.

Despite its stigma, bankruptcy has paid an important dividend for Vallejo: It has forced public employee unions to the negotiating table, providing city leaders an opportunity to rein in compensation, which city officials said accounts for more than three-quarters of Vallejo's general fund spending. City Councilwoman Stephanie Gomes said the effort has led to concessions from three of four city unions. Like Vallejo, Los Angeles is suffering from weak revenue at the same time the cost of its pensions and other retirement benefits are rising. Former Mayor Richard Riordan said those factors put the government of the second largest U.S. city on track to declare bankruptcy between now and 2014.

Riordan sees bankruptcy as a necessary tactic for squeezing concessions from the city's public employee unions. It could also pave the way for 401(k) retirement accounts for new city workers instead of defined pension benefit plans with escalating costs, he said. "The threat of bankruptcy is really the only way you're going to get them to make major changes," Riordan recently told Reuters. Los Angeles officials dispute Riordan's bankruptcy outlook, published earlier this month in an opinion piece in The Wall Street Journal. City Administrative Officer Miguel Santana said Los Angeles does not want its "brand" tarnished by bankruptcy and that the city can avoid it by continuing to cut spending, by reducing its work force and by handing off some services to the private sector and nonprofits.

"Bankruptcy is what you do when you run out of options. The city has a lot of options and has been exercising those options," Santana said. Talk of municipal bankruptcy has not escaped California's politically powerful public employee unions. A number of them are pressing the legislature to pass a bill that would require local governments to get the approval of a state board before filing for bankruptcy. Since the board could be stacked with union-friendly appointees, bankruptcy pleas could be rejected or delayed. "It's a horrible bill," Levinson said. "If you don't have the bankruptcy outlet, what do you do? If you can't pay your bills what do you do?"

Miami Budget Begging for Bankruptcy
One commissioner says bankruptcy might be the Magic City's only hope.

click to open video in new window

New York State Is Almost Out of Cash
by Betsy McCaughey - Wall Street Journal

Guess how long it is before the state of New York runs out of cash? Less than a week, according to the state's comptroller. On June 1, New York is due to send $3.8 billion in aid to local school districts, including $2.1 billion that was supposed to be paid in March but not sent for lack of funds. Yet New York is still $1 billion short. This could affect school operations, the solvency of any business that sells goods or services to the state, the paychecks of state workers, and ultimately home values.

At the state capitol in Albany, you wouldn't sense there's a crisis. The state senate still meets only half a work-week, Monday evening through Wednesday. Meanwhile, Democratic legislators (in the majority) are shuttling back and forth between Albany and the Democratic Party's state nominating convention at the Rye Town Hilton in Westchester County, 150 miles away. The crowded meeting rooms and festooned ballrooms are where you'll find the action. Legislators are securing their nominations for another two-year term. Never mind that legislative malpractice is to blame for the cash running out.

Legislators were supposed to vote on a state budget by April 15. Because of the economic downturn, tax collections fell so far short of predictions that the state government ended last year $8.5 billion in the red, a shortfall that will grow to $9.2 billion by year's end. Gov. David Paterson has proposed ways to close the gap, especially cuts in school aid of $1.1 billion, but the legislature refused to act on them. Lawmakers don't want teachers unions, state employee unions, and hospital workers picketing outside their offices, showing up at the state party convention, and putting their re-election prospects in peril.

And so, every Monday the legislature in Albany votes to extend last year's unaffordable spending levels another week, instead of agreeing on a budget that cuts spending. Party now and make all of us pay laterthat's the game plan of politicians here and in other states, not to mention Washington, D.C. New York state Assembly Speaker Sheldon Silver is floating a proposal to increase income taxes on the rich. That isn't a realistic solution to the state's escalating financial woes.

As Kathryn Wylde of the Partnership for New York City observes, with the expiration of the Bush tax cuts at the end of the year, high-income earners in New York City will pay more than 52% of their earnings to federal, state and local government. "Does anyone really believe that high income individuals will stick around New York," she asks. The remedy is to cut government spending. Opportunities are plentiful. Between 2001 and 2009, public school enrollment declined 4.6%, according State Education Department data.

Yet more staff were hired, and the fastest growing category was non-teachers, up a staggering 26%. There's room to trim without hurting children. According to the Reason Foundation's annual report on state highway systems, New York ranks in the bottom five of all 50 states in the condition of its roads and bridgesdespite spending $407,122 per mile on repair and maintenance, compared with the national average of $134,535. Reason called New York's highway maintenance "extremely inefficient," noting that work rules put too many employees at the same work site or on the same shovel. Those rules need to be changed.

The average state employee earns a whopping $92,332 total compensation for an average workweek of 37.5 hours, according to the Empire Center for New York State Policy (based on figures from the state comptroller's office). New York's governor has control over two-thirds of the state work force, and he can reduce its size or negotiate contracts more favorable to the public. Attorney General Andrew Cuomo, who will be nominated as the Democratic candidate for governor this week, proposes a special commission to solve the state's fiscal challenges. Like the bipartisan Commission on Fiscal Responsibility created by President Obama, Mr. Cuomo's commission is a ploy to avoid unpopular actions until after the fall election. But the crisis is now, and state lawmakers are duty-bound to solve it.

Compared To Our Bailout, The Euro Bailout Is NOTHING
by Gregory White - Business Insider

In what is the clearest expression of the size of the European debt problem right now, Birinyi Associates have put together a display of U.S. private sector bailout debt compared to the problems of Greece, Ireland, and Spain. Spain is the only serious problem of the three, and explains why its condition is of special interest to markets right now.

‘Critical’ Fannie Mae, Freddie Mac Need More Aid
by Lorraine Woellert - Bloomberg Business Week

Fannie Mae and Freddie Mac, the mortgage companies operating under U.S. conservatorship, will require additional government aid amid losses stemming from the 2008 credit crisis, the nation’s top housing regulator said in its annual report to Congress. “While critical to supporting the ongoing functioning of the nation’s housing finance system, the enterprises would be unable to serve the mortgage market in the absence of the ongoing financial support,” said Edward DeMarco, acting director of the Federal Housing Finance Agency, said in the report released today. 

The so-called government-sponsored enterprises, which own or guarantee half the loans in the $11 trillion U.S. mortgage market, operated as private companies before they were seized by the federal government amid soaring losses in September 2008. Since then, Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, have survived on a promise of unlimited U.S. aid, drawing $145 billion in Treasury Department funding. Because the companies have tightened their underwriting standards, nearly all their losses are from loans made in 2005, 2006 and 2007, “during the height of the home mortgage boom,” said DeMarco, who is scheduled to testify tomorrow at a House Financial Services Committee hearing.

Mortgage Lenders Seek Relief on Bad Debt Repurchases
by Jody Shenn - Bloomberg Business Week

Mortgage lenders are seeking relief from Fannie Mae and Freddie Mac as the government-supported companies force them to buy back more soured debt, said John Courson, president of the industry’s largest trade group. While his members “certainly understand” their contracts require repurchases of defaulted loans when faulty appraisals, inflated borrower incomes or missing documentation are discovered, the Mortgage Bankers Association has started to “aggressively” push the two companies and their regulator to ease up, he said.

“We’re trying to see if we can’t reach some type of a system that says there is a bright line out there, if this loan has been making payments and defaulted for a reason that is neither fraud nor related to the underwriting of the loan, it shouldn’t be subject to a repurchase,” he said. Last quarter, the companies forced lenders to repurchase $3.1 billion of loans, up 63 percent from a year earlier, after defaults surged to the highest since the Great Depression, according to regulatory filings. Bank of America Corp. and JPMorgan Chase & Co. are among banks that reported setting aside money to cover such demands.

Repurchase Requests
Freddie Mac, based in McLean, Virginia, had $4.8 billion of repurchase requests pending as of March 31, up from $3.8 billion on Dec. 31. Washington-based Fannie Mae hasn’t made a similar disclosure. Repurchases are “triggered when loans are out of compliance with our contractual requirements” or legal ones, or involve fraud, Brad German, a spokesman for Freddie Mac, said in a telephone interview. “Because we are trying to be good stewards of taxpayers’ dollars, it is very important that not one of those dollars goes to loans that should have not been sold to us.”
Corinne Russell, a spokeswoman for the Federal Housing Finance Agency, the companies’ regulator, declined to comment.

“We make repurchase requests when issues related to compliance with our underwriting and eligibility guidelines are detected after loans become delinquent or have gone through the foreclosure process,” Janis Smith, a Fannie Mae spokeswoman, said in an e-mail. The company is creating new upfront lender requirements to “promote improved loan delivery data that is complete, accurate, and fully reflective of the terms of the mortgage,” which should reduce future repurchase demands, she said. The so- called loan quality initiative takes effect June 1.

The U.S. government seized Fannie Mae and Freddie Mac, which own or guarantee almost $5 trillion of U.S. housing debt, in September 2008, and has guided their actions during their so called conservatorships. They’ve drawn $145 billion in aid from the Treasury Department. The companies are being too tough on so-called put-backs, following the Federal Housing Finance Agency’s encouragement to be aggressive, Courson said. If a borrower made on-time payments for two or three years before defaulting, that’s a sign that underwriting quality wasn’t a problem and a lender shouldn’t be forced to take back the loan, he said.

Multiple Requests
“Lenders are getting repurchase requests on the same loan at multiple times for multiple issues, which shows you they’re going from station one, to station two, to station three” as the companies and their contractors “scrub” loan files looking for errors that weren’t material or never occurred, he said. Freddie Mac goes “through a process with our customers to give them an opportunity to correct deficiencies,” German said.

Lenders are spending “huge” amounts defending against requests and documenting how items flagged as errors actually aren’t, Courson said. The mortgage bankers’ group held one workshop on dealing with the issue, and plans another next month. Mortgage insurer MGIC Investment Corp. and bond guarantor MBIA Inc. are among companies also overcoming potential losses by denying claims or seeking reimbursement because loans didn’t match lenders’ descriptions. Mortgage insurers have been turning down 20 percent to 25 percent of claims in recent quarters, up from 7 percent historically, according to a December report by Moody’s Investors Service.

Mortgage Insurance
When loan insurers rescind coverage on a Fannie Mae or Freddie Mac mortgage, which requires such protection when loan- to-value ratios exceed 80 percent, lenders typically need to buy back the debt. Repurchases by bigger lenders often prompt banks to try to return loans to the lenders from whom they acquired them before they were sold to Fannie Mae or Freddie Mac. Repurchases will be “an issue for the next 24 to 36 months for all us,” Steven Jacobson, chief executive officer of Madison, Wisconsin-based Fairway Independent Mortgage Corp., said in a May 24 interview at a conference held in New York by the Washington-based Mortgage Bankers Association.

The company last year originated more than $3 billion in mortgages. “Any big bank can put any one of us out of business.” JPMorgan set aside $523 million to cover losses from future buybacks in the first quarter, bringing its total provision to $2 billion, the company said in a securities filing this month. The bank said it repurchased $322 million in loans from Fannie Mae and Freddie Mac during the quarter.

Bank of America said it had a liability of $3.3 billion on March 31 for its so-called representations and warranties on mortgages. The lender said in a May 7 filing it “has experienced increasing repurchase and similar requests from, and disputes with, buyers and insurers including monoline financial guarantors. The corporation has and will continue to contest such demands that it does not believe are valid.” Monolines refers to the bond insurers.

US Probes Goldman's Timberwolf Deal, Alleged Victim Says 'Whole Thing Was Fraudulent Concoction'
by Marcus Baram - Huffington Post

The federal prosecutors investigating Goldman Sachs are focusing on Timberwolf, the infamous "shitty deal" repeatedly cited in a tense Senate hearing last month, according to people who have been contacted by the Manhattan U.S. Attorney's office. The probe raises the possibility of criminal charges against the storied Wall Street firm, which was charged in April by the U.S. Securities and Exchange Commission with civil fraud for allegedly misleading investors about another subprime mortgage-related security called Abacus.

Investigators from the U.S. Attorney's office have reached out to individuals involved in the deal, including David Mapley, the former independent director of an Australian hedge fund who claims that the firm collapsed shortly after Goldman sold it $100 million of securities in Timberwolf, a $1 billion collateralized debt obligation. In an interview with the Huffington Post from his office in Geneva, Mapley said that he has been contacted by the U.S. Attorney's office and that he expects to be interviewed by them soon. Mapley brought his complaints about Goldman's role in the deal to the SEC in December 2007, met with SEC lawyers several times in 2008 and he says that he continues to talk to them.

"Overall, the whole thing was a fraudulent concoction," says Mapley, who says that it was one of the most egregious cases he had seen in his decades working in finance. "We examined the whole trade, what led up to the trade, the way it was marketed and everything about it was inaccurate. You think you're buying one thing and what you see is totally different." Among the most serious allegations, Mapley claims that Goldman sold Timberwolf securities to the fund at marked-up prices -- while Goldman's trading desk was busy shorting such CDOs tied to toxic subprime mortgage securities.

Mapley says that the hedge fund, Basis Yield Alpha Fund, where he was an outside director, ultimately went into liquidation "with Timberwolf tipping the balance." Asked if it was indeed a "shitty deal" -- as it was dubbed by Sen. Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations at last month's hearing -- Mapley had a one-word answer: "Absolutely." The fund, which claims that its managers were deceived by Goldman when it bought two $50 million tranches of Timberwolf, is negotiating with the firm over a possible settlement, reported Reuters reporter Matthew Goldstein last week.

Michael DuVally, a spokesman for Goldman, declined to comment on whether the firm has been contacted by the U.S. Attorney's office. As for Mapley's claims, DuVally noted that Goldman lost several hundred million dollars on Timberwolf, adding: "Basis advertised itself as a highly experienced professional CDO manager and investor and I would also say that Basis had the same information regarding the underlying portfolio as Goldman Sachs had."

The law firm did not return calls for comment. Several other parties involved in the deal, as well as partners in the Australian hedge fund, declined comment. The SEC focus on Abacus surprised Mapley, since the Timberwolf deal seemed to him to be a stronger case as it involves allegations that Goldman bet against a deal it marketed to clients. In comparison, the Abacus case involves claims that Goldman failed to disclose that a short seller -- Paulson & Co. hedge fund -- helped select the assets in a CDO tied to subprime mortgages.

Of the two deals, the Timberwolf case seems better suited to the Justice Department, says Columbia University professor John Coffee, who recently testified in Congress about whether Wall Street fraud necessitates tougher civil and criminal laws and jail time for bad bankers. But Coffee cautions that the Justice Department will proceed very carefully, considering that it lost one of the few criminal cases brought in the wake of the financial crisis -- two Bear Stearns traders were found not guilty last November of subprime fraud in a case that touched on the Timberwolf deal.

"Usually, these cases end up in a deferred prosecution agreement," says Coffee, referring to a common option in white-collar cases where a defendant agrees to pay fines, implement reforms and cooperate with an investigation. He explains that such agreements, as well as settlements, are preferred under the assumption that firms could not survive a federal indictment. A spokesperson for the U.S. Attorney's office declined comment, as is their standard practice.

Private pay shrinks to historic lows as government payouts rise
by Dennis Cauchon - USA Today

Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds. At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010. Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn.

The result is a major shift in the source of personal income from private wages to government programs. The trend is not sustainable, says University of Michiganeconomist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. "This is really important," Grimes says.

The recession has erased 8 million private jobs. Even before the downturn, private wages were eroding because of the substitution of health and pension benefits for taxable salaries. The Bureau of Economic Analysis reports that individuals received income from all sources — wages, investments, food stamps, etc. — at a $12.2 trillion annual rate in the first quarter. Key shifts in income this year:

  • Private wages. A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007.

  • Government benefits. Individuals got 17.9% of their income from government programs in the first quarter, up from 14.2% when the recession started. Programs for the elderly, the poor and the unemployed all grew in cost and importance. An additional 9.8% of personal income was paid as wages to government employees.

The shift in income shows that the federal government's stimulus efforts have been effective, says Paul Van de Water, an economist at the liberal Center on Budget and Policy Priorities. "It's the system working as it should," Van de Water says. Government is stimulating growth and helping people in need, he says. As the economy recovers, private wages will rebound, he says. Economist Veronique de Rugy of the free-market Mercatus Center at George Mason University says the riots in Greece over cutting benefits to close a huge budget deficit are a warning about unsustainable income programs. Economist David Henderson of the conservative Hoover Institution says a shift from private wages to government benefits saps the economy of dynamism. "People are paid for being rather than for producing," he says.

Congress Weighs a Pension Bailout
by John D. McKinnon - Wall Street Journal

U.S. lawmakers are laying the groundwork for a possible federal bailout of some faltering pension plans that are jointly run by companies and unions. The effort reflects a worrisome new problem in the nation's troubled retirement-savings system: the grim financial condition of such pension plans, known as multi-employer plans. They are common in the hotel, construction, trucking and other industries, and cover about 10 million workers, or almost one in four workers who have a private pension.

Many multi-employer plans are struggling after years of financial hits and relatively light regulation. In the past two years, almost 400 plans have announced they are in bad condition, according to lawmakers.
In response, some lawmakers are pushing a plan that would provide federal aid to a few of the ailing pension funds. But some conservatives and anti-union groups oppose the aid effort, arguing it could lead to a broader taxpayer bailout of the whole class of pensions, costing tens of billions of dollars.

A 2009 study from ratings firm Moody's Investors Service estimated that the country's largest multi-employer plans have long-term deficits of about $165 billion. Some employer groups that are supporting efforts to help the plans question whether that estimate accurately reflects the government's potential exposure, however. At a Senate hearing Thursday on the matter, Sen. Mike Enzi (R., Wyo.) termed the possibility of a broader taxpayer bailout "extremely dangerous." While expressing concern for workers, Mr. Enzi added: "We have to ensure the taxpayer is not on the hook."

Legislation sponsored by Sen. Bob Casey (D., Pa.) would provide federal financial assistance to a few of the more troubled multi-employer plans, including a Teamsters Central States fund and another Teamsters pension plan in western Pennsylvania. Labor officials said another 10 to 20 smaller plans also could benefit, though they would add relatively little to the proposal's cost. Mr. Casey said his approach is not a federal bailout. He said troubled plans taking advantage would have to pay the first five years' worth of retiree benefits themselves.

His bill would make a federal agency, the Pension Benefit Guaranty Corp., responsible for the longer-term costs, and would cost taxpayers an estimated $8 billion over the next decade. It would cover workers in the plans whose employers have gone out of business. It also would boost benefits available to affected retirees to about $20,000 a year. Currently, when the PBGC helps a beneficiary of a multi-employer plan, the benefits are limited to $12,870. A separate provision moving through Congress would buy time for struggling private pension plans through accounting changes that would let them spread recent losses over longer periods. That provision is part of a bigger economic-relief package sitting in Congress.

Although the outlook for Mr. Casey's proposal is uncertain, Congress likely will be forced to address the problem soon. The Moody's study estimated that multi-employer plans in the construction industry are only about 60% funded, with long-term liabilities of $158 billion versus assets of $85.5 billion. In the transportation industry, including many Teamsters plans, the overall funded status was 58.6%. Multi-employer plans sprang up in industries where workers shifted jobs frequently and employers were typically small—hotels, retailers, trucking and construction firms. In recent years, multi-employer plans have been hurt by changes in the U.S. economy, such as deregulation of trucking, as well as by the financial crisis of 2008 and other factors.

Many employer groups are supporting lawmakers' efforts. A letter on Thursday from a wide array of employer groups, including the U.S. Chamber of Commerce and a number of construction and transportation groups, encouraged lawmakers to "continue to work…to find appropriate solutions. … Without a real resolution to this problem, more employers will be forced into bankruptcy and more workers will be left without a secure retirement." A number of conservative groups, including the Alliance for Worker Freedom and the Competitive Enterprise Institute, wrote in a letter to lawmakers this week: "Using taxpayer funds to pay for private pensions would be a first" for the federal government.

Tier 5: The Despair Of The 99ers
by Arthur Delaney - Huffington Post

Hundreds of thousands of long-term unemployed people across the country are watching in despair as Congress limps toward a reauthorization of jobless aid programs that won't even help them. They are the 99ers, people who have exhausted the maximum 99 weeks of unemployment benefits available in some states. They're a new animal, as Congress extended the number of weeks available to the laid-off in response to this recession, and their ranks will swell to a million this year. The House will vote on a bill today to preserve the four "tiers" that make up those 99 weeks, set to expire on June 1, through November. The Senate has already left town for its Memorial Day recess; the program will briefly lapse before the senators return to give their approval.

The National Employment Law Project, the foremost professional lobbying force in favor of extending unemployment benefits, is fighting just to maintain the existing tiers. Some 99ers have launched their own grassroots lobbying campaigns from outside the Beltway. One woman started a petition demanding a "Tier V," which was delivered to Washington last week. And one layoff victim started a coalition of his peers, called AFTLU: Advocacy for the Long Term Unemployed.

Few members of Congress have said they support adding more weeks of benefits to begin with, but on Thursday House Speaker Nancy Pelosi (D-Calif.) delivered one of the most definitive statements shutting the door on a fifth tier. When a reporter asked Pelosi if Congress would give the long-term unemployed more weeks of benefits, she said, "No. This bill will go until the end of November, at that time we'll take up something, but not between now and then." That statement didn't go over well with 99ers, who devour all news related to unemployment benefits online.

"I can not believe it - I cannot believe that she actually smirked as she was talking about it," wrote one person on, who watched Pelosi's press conference on C-SPAN. This 99er's post seemed to give voice to many of the frustrations of the group:
"I called the White House and spoke to a very nice operator (sounded like an older women). I never have broke down in tears before when making phone calls, but this time I did. I told her how Nancy appeared during the briefing, almost laughing at the notion that people need additional weeks. I vented on everything from money sent out of country to help with disasters, to the Republicans and Dems going round and round in Washington and how thousands of us will be exhausting our benefits each and every month.

Wanted to know why the president is not coming out publicly and talking to the nation about the unemployment problem. The more I talked the harder I was crying. The operator kept trying to calm me down, saying she was going to pass the info onto the President. She said that we shouldn't be treated this way. She told me to call Pelosi's office - I cut her off and said that as soon as her aide hears the word unemployment they either put you through to voice mail or hang up on you. She said that this info would definitely be passed on (What good will it do? Don't know but can always hope).

Sure enough I called Pelosi's office and when I started to speak got transferred to her voice mail - twice - 3rd time I told the aide not to transfer me but to listen to what I had to say. Went on to say that she laughed at us and what a despicable thing that was to do. He said he can't believe she did that, was I sure - told him it was all over the internet and to watch the video himself. He asked if he could transfer me to her voice mail - he did and I left her a message - ending with what a horrible horrible person she is and that the country will pay back in November.

"Dear God I dont know what I am going to do - I have just one more week of benefits, and a little in the bank. There are not enough jobs plus my age is not helping. I'm just so afraid for all of us - afraid for this country. Why won't someone help up."

Fitch downgrades Spain's ratings to 'AA+' vs 'AAA'
by Sue Chang - MarketWatch

Fitch Ratings on Friday downgraded Spain's long-term foreign and local currency issuer default ratings to AA+ from AAA. "The downgrade reflects Fitch's assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term," said Brian Coulton, the head of EMEA sovereign ratings, in a statement. "Despite government debt and associated interest costs remaining within the AAA range, Fitch anticipates that the economic adjustment process will be more difficult and prolonged than for other economies with AAA rated sovereign governments, which is why the agency has downgraded Spain's rating to AA+," Coulton added. The outlook on Spain's ratings is stable.

Spain orders banks to come clean on debts to restore shattered faith
by Ambrose Evans-Pritchard - Telegraph

The Bank of Spain has ordered the country's lenders to face up to bad debts and set aside reserves of up to 30pc on property holdings in a bid to restore global confidence in the Spanish financial system after weeks of investor flight. The new rules target the savings banks or cajas that account for the lion's share of the €445bn (£377bn) of property debt accumulated during the credit boom, when real interest rates were negative. The authorities acted after severe strains in the inter-bank market had begun to raise questions about the ability of Spanish lenders to access routine funds from global peers. Deutsche Bank said Spanish lenders need to refinance €125bn by late 2011. "Liquidity is our main area of concern. Savings banks are in a very weak and risky position," it said.

Even the strongest banks – Santander and BBVA – are paying a stiff premium over Libor. The Wall Street Journal reports that BBVA has been unable to roll over €1bn in commercial paper. This has raised fears of a chain reaction through Europe's banks due to the nexus of loans. Data from the Bank for International Settlements show that European banks – led by German lenders, in some trouble themselves – have $851bn (£584bn) in exposure to Spain, as well as $240bn to Portugal and $189bn to Greece. No Spanish bank has raised money on the capital markets for a month. They are relying on the European Central Bank's lifeline. ECB funding has reached €89bn, the highest level since the Lehman Brothers crisis.

The new rules will force lenders to write down bad debts within a year instead of stretching out the pain for up to six years. They must set aside reserves on €60bn of foreclosed property still sitting on their books at face value, using a rising scale of up to 30pc. Santander and BBVA have already done this. "Spanish accounting was completely out of line with the rest of Europe," said Hans Redeker, currency chief at BNP Paribas. "It had reached a point where investors no longer believed in Spanish balance sheets because equity ratios are distorted by overvalued holdings of real estate. This move was absolutely the right thing to do. You can't camouflage bad debts any longer. Those days are over," he said.

The Bank of Spain risks opening a Pandora's Box since nobody knows how many cajas are insolvent once loans are marked-to-market. Last weekend it seized CajaSur, a 150 year-old lender in Cordoba controlled by the Catholic Church. The lender lost €596m last year, much of it on holiday homes on the Costa del Sol. The regulator said the measures would cut bank earnings by 10pc on average but warned of a "very heterogeneous" effect, a polite way of saying that it will purge cajas that ran amok. The crackdown will bring matters to a head rapidly, forcing cajas to disgorge property holdings onto the market. This is a gamble, risking a house-price crash that could tip Spain deeper into debt deflation.

Caixa Catalunya said the stock of unsold homes reached 926,000 last year. Madrid consultants RR de Acuña are gloomier, saying buildings in the pipeline will push the overhang to 1.6m and will take six years to clear. New home starts have fallen 90pc from their peak in 2007. Santiago Lopez from Credit Suisse said the new rules may prove "the last straw" for weak cajas but praised the central bank for "finally deciding to get tough". He said the non-performing loan rate in Spain is 5.33pc but past interventions by the central bank revealed "dramatic" rises in NPL ratios after a fresh audit. Once the full truth comes out on CajaSur we will know how bad the picture is for others.

Mr Lopez said Spain's Achilles Heel is private debt of 211pc of GDP. This is much like Britain (213pc), but takes places in the very different context of deflation. Spain cannot easly grow its way out of the crisis because it is structurally overvalued within the EMU. Regulators are hoping to break the political resistance to shotgun mergers or debt restructuring. Four other cajas have been ordered to merge already. The policy of throwing banks together entails its own dangers, risking a repeat of the Lloyds TSB deal with HBOS or a string of 1990s mergers in Japan where bad banks polluted good banks. There is no magic wand to conjure away a stock of bad debt.

IMF presses Spain for major shifts in spending, labor rules
by Howard Schneider - Washington Post

The International Monetary Fund on Monday urged Spain to push forward with a major restructuring of its economy, including an overhaul of union-dominated labor markets and progress on cutting government budget deficits. The IMF statement, issued at the end of a routine consultation with the country, served as a reminder of how the same issues that have caused an acute panic in Greece are troubling other European nations.

In Greece's case, issues including high government debt and uncompetitive labor markets pushed the country to a near-default before the IMF and a collection of European Union countries offered an emergency bailout. Spain has not requested similar assistance, but E.U. nations and the IMF have assembled a trillion-dollar fund to try to assure global bond markets that the 16 nations that share the euro will repay any money they borrow. But the long list of IMF recommendations for Spain shows just how tough a climb it might be for the euro area, as it tries to renew growth and regain its competitive footing.

Spanish labor markets are "dysfunctional," the IMF said, using a set of collective bargaining agreements that "hamstrings" companies' ability to hire and fire and set wages. The situation "is ill-suited to membership of a currency union," the IMF said, because it allows other nations in the eurozone with more flexible wage and work arrangements, such as Germany, to produce more cheaply and attract more investment. Although Spain's still-stagnant economy should begin growing again, the country's recovery will be "weak and fragile" without efforts to restructure, the fund said.

The IMF also demanded a clearer accounting of the Spanish banks that are at risk of failure. Banks are still plagued by the collapse of a real estate bubble and uncertainty about the real value of assets they hold, the IMF said. The country's banks overall have "robust" levels of capital, it said, but "the risks remain elevated and unevenly distributed" in different institutions. As in Greece, the IMF has been pressing highly indebted countries such as Spain to reduce their budget deficits. The fund complimented recent public-sector wage cuts and other efforts to bring down spending, but it said the country needed to do even more to meet deficit-reduction goals. Given the sensitivity of the situation, with markets reacting zealously to bad news, "any slippage should be aggressively pre-empted."

Europe's Banks Hoard Cash
by Carrick Mollenkamp, David Enrich and Mark Gongloff - Wall Street Journal

In the latest signs of stress for European banks, new data show they are increasingly hoarding cash while borrowing far less in a key short-term funding market. In the past month, the amount of short-term IOUs, or commercial paper, issued by some European banks in Spain, Portugal and Italy has fallen, according to bankers operating in the financial hubs of London and Brussels. That is potentially a sign money-market funds and others that buy the debt are refusing to do business with these banks. At the same time, banks fortified with cash are keeping a tighter rein on it by moving it to the European Central Bank rather than lend it to other banks.

According to data-research firm Dealogic and one London trading desk, banks from Spain's Banco Santander SA to Portugal's Millennium BCP have posted drops of about $1 billion in outstanding euro commercial paper in the past two months. European banks are heavily dependent on such short-term financing, making them vulnerable to any pullback from the conservative money-market funds. Bank deposits with the European Central Bank are increasing daily, rising to about €268 billion ($331 billion) on Wednesday, from €264 billion on Tuesday and €253 billion the day before. Banks including Santander and Banco Bilbao Vizcaya Argentaria, or BBVA, recently began shifting funds to the ECB, preferring to accept lower interest rates in exchange for less risk, according to people familiar with the matter.

Euro commercial paper issued out of Ireland also has shown a drop. Some Spanish and Portuguese banks put offshore units in Ireland, which could account for the drop. The decrease also could represent a move by banks to rely more on stable deposits from customers and less on volatile wholesale-funding markets. Portugal's Grupo Banco Popular also showed a reduction in euro commercial paper. A spokesman for Banco Popular said the bank has substantially increased deposits and cut back on short-term wholesale loans.

Markets largely calmed yesterday, and the upward march of key measures of credit stress slowed. But the bank borrowing data show a financial contagion is moving across Europe. The spread so far has been contained, thanks largely to credit being made available by the ECB. A key area showing signs of weakness is the short-term IOU market, where banks sell commercial paper to investors such as money-market funds. In London, a market for euro commercial paper for some 68 countries outside the U.S., big banks are showing declining outstanding debt. A separate commercial-paper market in the U.S. also is showing weakness.

European banks are also active participants in the U.S. commercial-paper market. Demand for their short-term debt was brisk until the latest flare-up of sovereign-debt worries, and they accounted for at least a third of all borrowing in the $1 trillion market at the beginning of May, according to some estimates. As the crisis intensified, U.S. money-market funds and other investors in commercial paper lost some of their appetite for short-term European bank debt. Though a breakout of European commercial-paper outstanding isn't available, the total amount of foreign banks' commercial paper outstanding has shrunk by about $32 billion, or 15%, since the week of April 21, according to Federal Reserve data. The Fed is due to update its weekly commercial-paper data Thursday.

European banks' reluctance to lend to one another, even on a short-term basis, is evident in the increasing amount of funds they are stashing overnight at the European Central Bank. While the deposit levels are volatile, bankers and traders say they offer an approximate proxy for banks' appetites for lending to each other. The ECB is a virtually risk-free home for banks' overnight deposits, but the central bank offers a paltry interest rate of 0.25%. That is well below what banks could fetch by lending their funds to other banks overnight, bankers say.

In early May, when concerns about Greece's fiscal woes reached a fever pitch, the ECB's deposit facility totaled nearly €315 billion in bank deposits, the highest level since July 2009. After dropping off in subsequent weeks, the deposits have been on the rise again. Banks have been shifting their funds into the ECB, preferring to accept lower interest rates in exchange for less risk, according to people familiar with the matter. Backstops do exist, and that is giving the market some comfort. Banks struggling to borrow in the market at a reasonable rate can turn to the ECB for a loan. The ECB currently has more than €800 billion in loans outstanding to banks, a level that is approaching the peak hit last July, according to a report Wednesday by UBS AG banking analysts Alastair Ryan and John-Paul Crutchley.

"We believe the current stress in funding markets will take it back to record levels in coming weeks," the analysts wrote. The availability of funds from the ECB means European banks are less likely to encounter the sorts of liquidity crises that killed or crippled major financial institutions like Lehman Brothers Holdings Inc. and Royal Bank of Scotland Group PLC in the heat of the financial crisis in 2008 and 2009. But bankers and analysts say lenders that rely on funding from the ECB could be perceived by the markets as weaker, making it even harder for them to drum up financing from private sources and thereby becoming even more dependent on the government as a source of liquidity.

Europe facing strikes over austerity packages
by Ambrose Evans-Pritchard - Telegraph

Spain's parliament has passed a €15bn (£12.7bn) austerity package by just one vote, leaving the Socialist government nakedly exposed to popular fury. Its glaring lack of political solidarity is the latest sign of rising resistance to deflation policies across the eurozone. Prime minister Jose Luis Zapatero had to rely on the abstention of Catalan nationalists to push through public sector wage cuts of 5pc this year and a freeze in 2011. The 1930s-style pay squeeze was effectively imposed upon Spain by Brussels as a quid pro quo for the EU's €750bn "shield" for eurozone debtors. It is a bitter climb-down for a workers party that vowed to resist salary cuts. Public sector unions have called a strike on June 8 to protest an act of "ultimate aggression" against the people.

The conservatives voted against the measures, prompting a fiery rebuke from finance minister Elena Salgado. "Unpatriotic, irresponsible, and hardly very European: one day they will pay for this," she said. The measures include cancellation of the €2,500 "baby cheque" and lower pension benefits. Mr Zapatero hopes to cut the deficit by an extra 1.6pc over GDP over two years, though unemployment is already 20pc. The deficit will fall from 11.2pc in 2009 to 6pc this year. Raj Badiani from IHS Global Insight said cuts may not be enough. The government is relying on growth projections that are "far too optimistic" to do the heavy lifting of the deficit reduction.

In Italy, the main CGIL trade union is launching two sets of strike in June to protest "unjust and unsustainable" cuts announced on Tuesday night, claiming that axe falls squarely on ordinary workers. "Those who earn over €500,000 won't have to put up a single cent," it said. Premier Silvio Berlusconi said the sovereign bond scare sweeping the eurozone had forced Italy to build up a security buffer. "This crisis has been provoked by speculation and is like no other. These sacrifices are necessary to save the euro," he said. The €24bn austerity package (1.6pc of GDP) over two years aims to cut the bloated bureaucracy, chiefly by reducing grants to regional governments. "Italy's spending is out of control: this irresponsible system worked as long as we could devalue the currency," said Mr Berlusconi."

French unions stage protests against plans for retirement age hike
by AFP

French labour unions staged a day of strikes and street rallies on Thursday to protest against President Nicolas Sarkozy's plan to raise the retirement age beyond 60 years. Opinion polls show most voters oppose the reform and by midday tens of thousands of marchers had gathered in several cities, but there were mixed reports about participation in strike action. Teaching unions announced that 40 percent of primary and secondary school teachers had gone on strike, whereas the education ministry put the figure at just over 12 percent.
Public transport was only mildly disrupted nationwide, with three quarters of regional trains and all high-speed TGV services running as normal and only very minor delays for some Paris commuters. Nevertheless, a strike by air traffic controllers in support of the protest saw 30 percent of flights from Paris Orly airport cancelled and 10 percent from Charles de Gaulle, the environment ministry said. "What happens today will be fairly decisive for how things develop," said Bernard Thibault, leader of the CGT, the largest of the broad coalition of trade unions organising the national protest. "I'd like to see us exceed the mobilisation we achieved on March 23," he told Europe 1 radio, referring to France's last large-scale labour protest, when unions estimated turnout at 800,000 and the police at 350,000.
If the unions fail to mobilise a similar number this week, it will be seen as a victory for the government, but labour and opposition leaders said they were confident of a big turnout. The postal service said that 12.58 percent of staff were on strike, slightly more than the 11.45 percent who walked out on March 23. Polls published Thursday in two newspapers, Le Parisien and L'Humanite, found that around two thirds of French voters were prepared to join one of the dozens of rallies being organised around the country. This appears to reflect growing opposition to Sarkozy's plan, which the government only confirmed this week. A previous poll conducted this month by CSA/CECOP showed a narrow majority accept the change is inevitable, whereas a later survey found a similarly narrow majority think it unnecessary.
In common with much of Europe, France is grappling with a huge public deficit, and the government argues that reforming pension rules and delaying the minimum retirement age will help control mounting debt. Many of France's neighbours have announced harsh spending cuts but Sarkozy, who is suffering record unpopularity and faces a re-election fight in two years, has been cautious, refusing to speak of an austerity programme. Nevertheless, this week ministers confirmed what had long been suspected: that he plans to abolish retirement at 60, a cherished symbol for the French left of its victories under late president Francois Mitterrand.
French retirees receive 85 percent of their pension payments from state schemes, compared to an average of 61 percent among member states of the Organisation for Economic Cooperation and Development (OECD). Although 60 is the theoretical minimum age for retirement on a full state pension, various special schemes exist in the public sector for those with jobs perceived as tough or those who started in work in their teens. On average French men retire at 58.7 years and women at 59.5, compared to an OECD average of 63.5 and 62.3, according to the body.

"It's a demographic problem. France is behind Malta as the country where we work the least," Budget Minister Francois Baroin told i-Tele. Pensions account for the bulk of the social security budget, which can no longer in itself cover payments, with the excess being covered by state borrowing, forcing up France's public deficit. According to the French government's panel studying pension finance, the shortfall between pension contributions and spending was 10.9 billion euros in 2008 and will rise to between 71.6 billion and 114.4 billion by 2050.

Italy Joins Europe's Wave of Belt-Tightening
by Der Spiegel

The Italian government has joined a European movement to slash public spending -- to the surprise of many Italians. Until recently, Prime Minister Silvio Berlusconi had promised to avoid big budget cuts. But the euro must be defended, say Italian officials. Italy's government approved a €24 billion ($30 billion) austerity package Tuesday evening, less than two months after Prime Minister Silvio Berlusconi claimed his country could survive the euro crisis without drastic cuts. The package aims to reduce the nation's budget deficit -- which last year stood at 5.3 percent of its gross domestic product -- to within the euro zone limit of 3 percent by 2012. It's also meant to tame Italy's public debt, which at 115.8 percent of GDP is the highest in the 16-nation euro zone.

About half the cuts involve a sharp reduction in funds paid by the central government to Italy's regions and cities. Wage freezes and cuts for public-sector workers will save some €6 billion. Salaries for government ministers and parliamentarians will take a 10 percent shave, and the government will slow its hiring. Only one in every five government positions that come open between 2011 and 2013 will be filled, according to the Reuters news agency. Average Italians won't see their taxes rise, though taxes on stock options and private-sector executive bonuses will increase. The government will crack down on tax evasion, and introduce a measure called "construction amnesty" -- a grace period for Italians who have built houses without proper zoning approval. The amnesty allows homeowners to pay a fine lower than the taxes owed on their property, according to the Wall Street Journal.

Berlusconi's Volte-Face
Prime Minister Berlusconi said in early April that Italy could ride out the euro crisis without resorting to drastic measures. A deficit of 5.3 percent of GDP is, after all, not outrageous compared to other euro-zone nations. It's modest compared to Greece's 12.7 percent deficit, for example, and less than half the deficit levels in Ireland and Spain. But on May 6 Berlusconi's government revised its public debt estimate for 2010 upward -- from 116.9 percent of GDP to 118.4 percent -- which sparked a selloff on the Milan bourse. A day later, Berlusconi made an appeal for leadership in the EU. "We are in a state of emergency, we need to take decisions," he said at a summit in Brussels, according to Agence France-Presse.

The cuts follow similar austerity measures in Spain, Portugal, and Great Britain. Germany, after backing a massive €750 billion package of loans to ensure other EU governments can meet their debt payments, will have to decide in June how to slash €3 billion from its own budget. The aim is to save the euro's currency union from breaking apart despite pressure from financial traders skeptical of debt and deficit levels in Europe. "It's absolutely necessary to do our part for Europe; to contribute to the financial stability of monetary union and to economic growth," Italian President Giorgio Napolitano said on Tuesday in Washington. "The fairytale is over," wrote La Repubblica, a pro-opposition paper, on Wednesday in reaction to the government's about-face.

But early reaction from economists was positive. "The combination of these austerity measures with even a mediocre improvement in growth should be enough to bring the deficit below 3 percent of GDP by 2012," said Deutsche Bank economist Gilles Moec, according to Reuters. "This is an encouraging first step," Raj Badiani, an economist at Global Insight Inc. in London, said in a research note quoted by Bloomberg. "However, we feel this should be a forerunner of a prolonged period of better fiscal management."

Greek bondholders jittery over haircuts
by Gillian Tett - Financial TImes

Last week, some of China’s most powerful sovereign wealth fund officials held discreet discussions with investment banks about the outlook for the eurozone. And one of the hottest topics was the thorny issue of haircuts. More specifically, as the eurozone writhes in turmoil, what the Chinese (and others) are trying to work out is just how big the losses on government bonds might be if, say, Greece were to restructure. Equally crucial, they (and others) are also trying to work out who might take that haircut. It is a crucial question for the bond markets. Unfortunately, however, it is also a topic that eurozone leaders are adamantly refusing to discuss – or even recognise.

As ever, the problem starts in Greece. Slightly more than two weeks ago, eurozone leaders and the International Monetary Fund unveiled a €750bn ($920bn) package that, in effect, guarantees that Greece will be funded for the next couple of years. That pot is also big enough to cover Portugal and Spain, if those countries needed aid. So far, so good. But what is crucially unclear is what happens after that point. Right now, of course, Greece is implementing a sweeping austerity plan. But the underlying maths of its fiscal problems – with its public debt to gross domestic product forecast to hit 150 per cent – makes it extremely hard to believe that Greece will really fix its woes before the aid runs out.

Now, it is possible that markets will have calmed down by that point; or maybe the aid package will be rolled over, indefinitely. But bond investors feel nervous about assuming that, given the mounting political pressures on both sides of the Atlantic. So the worry for Greek bondholders today is that they are now becoming subordinate to the IMF and the eurozone, but without any guarantee that this bail-out will work. Hence the concern that this game will eventually result in a restructuring. If so, just how big might any haircuts be? History points to a wide range of possibilities: as the IMF notes, in some recent restructurings (such as Ukraine) some investors got less than 20 cents in the dollar; in others (Russia and Argentina) they got more than 60 cents.

But if you imagine, for the sake of argument, a gloomy scenario where Greece produced a 50 per cent haircut, there would be nasty implications for European banks that hold a big chunk of those bonds. Bank for International Settlement data suggest that German banks’ exposure to Greece is about $50bn, while the French exposure is $75bn, and both countries banks also have exposure of more than $250bn to Spain and Portugal. If, in a worst case scenario, haircuts were ever imposed on a chunk of that, it would be tough for the banks to swallow, particularly given that countries such as Germany have been very tardy about actually writing off the legacy rot from the credit bubble.

So it is little surprise that markets are now in a funk. Or that German and French leaders are reluctant even to say the word “restructuring”. Nor is it a surprise that Germany keeps lashing out at hedge funds: as the political pressures mount, Germany’s leaders need to assuage the anger – but cannot afford to attack the real problem (banks). Given that, hedge funds offer useful distraction instead. Getting out of this mess will be very hard. One option would be simply to bite the bullet, and restructure Greek debt right now – and then, if necessary, use part of the €750bn package to plug the hole in German and French banks. But, as Jeffrey Sachs, the American economist points out, that “Armageddon” option now has drawbacks.

An early default could undermine Greek political will for an austerity plan. History of other restructurings implies it would also be harder for Greece to rebuild market confidence. That, Sachs argues, is still a cost too far to bear, given that there is still a chance (however slim) that Greece will produce miracles. But the alternative to restructuring will probably be grim too. If Greece staggers on, without a miracle, fears about future “haircuts” will continue to poison the bond markets and interbank world. That will essentially produce a pattern similar to Japan in the late 1990s: a world of gnawing, half-concealed anxiety, where asset prices keep stealthily slipping because investors cannot shrug off their fears of more bad news to come.

That second, Japanese-style scenario might theoretically be averted if German and French leaders, say, made serious efforts to “come clean” about their banks. Better still, eurozone leaders might force banks to make big provisions for sovereign risk (dipping into that €750bn pot if necessary). But it is hard to believe this will really happen now. That nervous chatter in Beijing – or Baltimore – will not vanish soon.

US and EU Oceans Apart on Fiscal Policy
by Der Spiegel

Europe is eager to begin paying down sovereign debt. The US wants to see Germany and France continue stimulus measures. With Treasury Secretary Timothy Geithner in Germany on Thursday, the trans-Atlantic differences in fiscal policy have become difficult to ignore. The two were eager to demonstrate unanimity. US Secretary of the Treasury Timothy Geithner and his German counterpart, Finance Minister Wolfgang Schäuble, went before the press in Berlin on Thursday and announced that they had reached "broad agreement" on the need to regulate the global financial system.

Geithner also praised Berlin's "leadership role" in putting together the €750 billion ($920 billion) plan, agreed on earlier this month, to help European governments struggling with sovereign debt and said that he is working closely with Europe "to make sure that we are strengthening and reinforcing global recovery." But the camaraderie displayed on Thursday belied some recent tension in the trans-Atlantic relationship. For one, the US has not been impressed with Germany's recent decision to ban certain kinds of naked short selling, considering it an unhelpful bit of unilateralism. On a more fundamental level, however, Washington is concerned that, should Europe overreach in its rush to cut government spending, it could endanger the fragile economic recovery that has taken hold on the Continent and around the globe. In particular, the US would like to see countries like Germany and France continue efforts to stimulate their economies.

Rush for the Exits
During a stop in London on Wednesday, Geithner held discussions with his British counterpart George Osborne. According to a report in the Wall Street Journal, Geithner underlined the dangers should Europe turn away from fiscal stimulus. Christina Romer, who heads up the White House Council of Economic Advisers and who was with Geithner in London on Wednesday, said that European countries should be wary of cutting spending too quickly. "There is a certain amount of rush for the exits on fiscal policy," she told reporters. The US is hoping that stimulus-fueled growth will ultimately result in higher tax revenues which can then be used to pay down debt.

Paul Volcker, former chairman of the US Federal Reserve and an economic adviser to US President Barack Obama, also argued recently that Europe should focus on encouraging growth rather than cutting spending. Referring specifically to France and Germany, he said in an interview with Bloomberg radio earlier this month that "it would help a lot if the rest of Europe, the strong part of Europe ... if they have more growth, that will help these countries on the periphery." Germany, however, is taking the opposite approach.

Rather than take on even more debt to ramp up the economy, Chancellor Angela Merkel wants to set an example for Europe on how to cut spending and reduce budget deficits. Her government is currently looking into ways to make significant spending cuts. Many economists in Europe even view deficit and debt reduction as a key precursor to economic growth. "Crises often present opportunities, and it looks like Europeans are eager to take advantage," says Michael Hüther, head of the Cologne Institute for Economic Research. "Many studies show that (budget cuts) prepare the way for above average growth."

Oceans Apart
Given the different approaches, Geithner and Schäuble on Thursday were eager to emphasize their areas of agreement. Geithner did not repeat his Wednesday call for a globally consistent approach to fiscal reform -- seen as a swipe at Germany's surprise announcement last week that it was imposing a unilateral ban on some kinds of naked short selling -- and instead insisted that progress had been made on amending the global financial system ahead of next month's G-20 summit in Toronto. Leaders, he said, were "in a very good position to put in place a much better system than we had coming into this crisis."

He also insisted that the US wanted "to cover the cost of this crisis and the cost of future crises by imposing a fee on the largest financial institutions." Schäuble said: "As far as what could be done or what needs to be done with financial market regulation, we're actually a lot closer with our assessments than it might appear at times." That may be true when it comes to financial regulation. But when it comes to fiscal policy, Germany and the US are an ocean apart.

Spare Britain the policy hair shirt
by Martin Wolf - Financial TImes

The UK should tighten fiscal and monetary policy now, in the depths of a slump. That, in essence, is what the Organisation for Economic Co-operation and Development calls for in its latest Economic Outlook. I wonder what John Maynard Keynes would have written in response. It would have been savage, I imagine. The OECD argues: “A weak fiscal position and the risk of significant increases in bond yields make further fiscal consolidation essential. The fragile state of the economy should be weighed against the need to maintain credibility when deciding the initial pace of consolidation, but a concrete and far-reaching consolidation plan needs to be announced upfront.” Furthermore, monetary tightening should begin no later than the fourth quarter of this year, with rates rising to 3.5 per cent by the end of 2011.

Let us translate this proposal into ordinary language: “If you are unwilling to starve yourself when desperately ill, nobody will believe you would adopt a sensible diet when well.” But might it not make sense to get better first? Here are some facts, to keep the hysteria in check: the UK economy is operating at least 10 per cent below its pre-crisis trend; the OECD estimates the “output gap” – or excess capacity – at slightly over half of this lost output; the UK government is able to borrow at a real interest rate of below 1 per cent, as shown by yields on index-linked gilts; the yield on conventional 10-year gilts is 3.6 per cent; the ratio of gross debt to gross domestic product was 68 per cent at the end of last year, against 73 per cent in Germany and 77 per cent in France and an average of 87 per cent since 1855; the average maturity of UK debt is 13 years, according to the International Monetary Fund’s Fiscal Monitor; and, yes, core inflation has risen to 3.2 per cent, but that is hardly a surprise, given the large – and essential – sterling depreciation.

Above all, the private sector is forecast by the OECD to run a surplus – an excess of income over spending – of 10 per cent of GDP this year. On a consolidated basis, the UK’s private surplus funds nearly 90 per cent of the fiscal deficit. Thus, fiscal tightening would only work if it coincided with a robust private recovery. Otherwise, it would drive the economy into deeper recession. Yes, that is a Keynesian argument. But this is a Keynesian situation. I agree that there needs to be a credible path for fiscal consolidation that would lead to a balanced budget, if not a surplus. That will be essential if the UK is to cope with an ageing population in the long term. I agree, too, that the path needs to be spelled out. Given the high ratios of spending to GDP – close to 50 per cent – the best way to proceed is via tight, broad-based, long-term control over expenditure. But a substantially faster pace than envisaged by the last government might threaten recovery: the OECD, for example, forecasts economic growth at 1.3 per cent this year and 2.5 per cent in 2011. Even this would imply next to no reduction in excess capacity.

Of course, one might argue that ultra-loose monetary policy should be used as an offset. But the OECD wants to remove that support, too. Why the OECD makes this recommendation is beyond me. A good argument might be that monetary policy is a damaging way of refloat the economy, since it tends to weaken the exchange rate (and so raise inflation), increase prices of houses and other assets, and encourage borrowing by a grossly over-indebted private sector. But if one took this line, one should surely argue against rapid fiscal tightening. Thus, while the conventional wisdom is that the best combination is tight fiscal policy and ultra-loose monetary policy, that might be a mistake.

Against the background of rapid fiscal tightening, even ultra-loose monetary policy might prove ineffective. The growth of broad money and credit remains very low, for example. Moreover, sterling’s real effective exchange rate has stabilised since early 2009 and the pound has recently strengthened against the euro. None of this suggests that monetary policy is now too loose. That would be still more true after a big fiscal contraction. If there were a sharp monetary tightening as well, the chances of renewed recession are very high, particularly now that the eurozone seems likely to be more feeble than hoped a few months ago. The OECD seems to take the view that the only big risk is a loss of fiscal and monetary “credibility”. It is not. The other and – in my view, more serious – risk is that the economy flounders for years. If that happened, eliminating the fiscal deficit would be very hard.

If, as the OECD and Britain’s coalition government believe, fiscal tightening must be accelerated, the corollary is ultra-loose monetary policy, until recovery is established. If, alternatively, monetary policy is ineffective, as it may be, fiscal tightening should be announced, but implementation should be postponed until recovery is secure. I have now lost faith in the view that giving the markets what we think they may want in future – even though they show little sign of insisting on it now – should be the ruling idea in policy. So now should the OECD.

Lehman's Bankruptcy Estate Sues J.P. Morgan
by Mike Spector and Susanne Craig - Wall Street Journal

Lehman Brothers Holdings Inc.'s estate sued J.P. Morgan Chase & Co., alleging J.P. Morgan illegally siphoned billions of dollars from Lehman in the days before the troubled investment bank filed for the largest bankruptcy in U.S. history. The lawsuit alleges that J.P. Morgan Chief Executive James Dimon and other top executives used inside knowledge to take advantage of Lehman as its financial state worsened. J.P. Morgan, the suit alleged, coerced Lehman to turn over $8.6 billion in collateral in September 2008, triggering a liquidity squeeze that contributed to Lehman's collapse.

The estate is hoping to recoup billions in collateral the bank demanded, and billions in other damages. J.P. Morgan spokesman Joe Evangelisti said the lawsuit "is ill-conceived and meritless, and we will vigorously defend it." The lawsuit, long expected, contains among the most-significant allegations to date about the interplay between Lehman and its onetime Wall Street brethren. J.P. Morgan served as Lehman's main "clearing bank," meaning it acted as a middleman between Lehman and its lenders and investors. In this capacity, it knew more than most market players about Lehman's financial condition, which was growing more dire in the summer and fall of 2008. 

The lawsuit alleges J.P. Morgan used this advantage to squeeze billions of dollars out of Lehman by demanding more collateral to cover its risks, ensuring J.P. Morgan "would stand ahead of all other [Lehman creditors]—not just for its clearance exposure, but for all possible exposure that could result from [a Lehman] bankruptcy." Lehman bowed to J.P. Morgan's demands, said the suit, claiming Lehman feared that if J.P. Morgan ceased its clearing activities, it would have triggered the firm's immediate collapse.

A bankruptcy-court examiner found in a recent report that Lehman could pursue a legal claim against J.P. Morgan for making "excessive collateral requests," though he labeled it "not a strong claim." The examiner said Lehman could have a legal claim to claw back $6.9 billion of the $8.6 billion pledged to J.P. Morgan. The bankruptcy-court examiner assailed Lehman for using certain accounting techniques to mask its leverage and mislead market participants before its collapse. Meantime, J.P. Morgan was among the only institutions to continue lending to Lehman before and after its bankruptcy. J.P. Morgan's Mr. Evangelisti said: "As the examiner's report makes clear, it was the ill-advised decisions of Lehman itself and its principals to take on perilous leverage and to double-down on subprime mortgages ... and not any conduct by J.P. Morgan that led to Lehman's demise and the enormous losses to its various constituencies." He added that there was "absolutely no inappropriate use of confidential information by any employee."

Lehman outlined a series of events in which it claimed J.P. Morgan took advantage of being the "ultimate insider" and contributed to Lehman's tumble into bankruptcy court. The following timeline is based on Lehman's versions of events contained in the suit: In late August, J.P. Morgan, aware that Lehman's situation was deteriorating, asked Lehman to revise its clearance agreement to give J.P. Morgan added protections. Not long after, in early September, senior J.P. Morgan and Lehman executives met to discuss Lehman's upcoming quarterly results. J.P. Morgan was given access to Lehman's books and records. 

On Sept. 9, Mr. Dimon met with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson to discuss Lehman's fate and the government's intention to avoid rescuing the firm. Those meetings prompted J.P. Morgan to accelerate efforts to get Lehman collateral, the suit alleges. The same day, Steve Black, co-head of J.P. Morgan's investment banking division, agreed to send a deals team to Lehman to discuss pumping money into the troubled firm—an idea Mr. Dimon had discussed with Lehman's chief executive, Richard Fuld.

But J.P. Morgan instead sent bankers to probe Lehman's records and plans, Lehman's suit alleges. The team later told Mr. Dimon and others that Lehman wanted a credit line from J.P. Morgan. In an email, Mr. Black responded by asking about the "drugs they apparently have been taking to think that we would do something like that." In the evening hours of Sept. 9, J.P. Morgan's in-house lawyer, Diane Genova, called Andrew Yeung, a junior Lehman lawyer, alerting him that J.P. Morgan was drafting a new set of security agreements Lehman needed to sign before it released earnings results the next morning, the suit alleges. 

Executives authorized to sign the agreement, including finance-chief Ian Lowitt, were unavailable, the suit alleges. J.P. Morgan told Mr. Yeung that Mr. Fuld, Lehman's CEO, had agreed to the new deal's terms in a conversation with J.P. Morgan's Mr. Black. Lehman said in the complaint that was "untrue." The new agreement gave J.P. Morgan broader protections, requiring Lehman's holding company give broad guarantees to all J.P. Morgan's exposures to all Lehman entities, regardless of their nature. The new deal also canceled Lehman's access to previously pledged collateral through an overnight account, the suit alleges.

With the threat of J.P. Morgan stopping clearing activities looming, Mr. Yeung sent the agreement back, signed by Lehman treasurer Paolo Tonucci. J.P. Morgan demanded more collateral over the next week, culminating in a $5 billion request late Sept. 11. Senior Lehman officers circulated a "Back-Up Contingency Plan" that noted J.P. Morgan continued to ask for collateral. "If we don't provide the cash, they refuse to clear, we fail ... , " part of the plan said. On Sept. 12, Lehman delivered "what was essentially its last available $5 billion in cash," the complaint said. Over the weekend, Lehman "repeatedly" requested access to some of the collateral to stay afloat long enough to sell itself or wind down. J.P. Morgan refused. The government declined to rescue Lehman. On Sept. 15, the then fourth-largest investment bank in the U.S. filed for bankruptcy, setting off the financial crisis.

Goldman, BNP Paribas Downgraded by Bondholders
by John Glover - Bloomberg

Bond investors aren’t waiting for ratings companies to act before downgrading Goldman Sachs Group Inc., BNP Paribas SA and the rest of the world’s biggest financial institutions. Bank debt yields 253 basis points more than government securities, according to Bank of America Merrill Lynch’s Global Broad Market Financial Index, which comprises bonds with an average rating equivalent to A1 at Moody’s Investors Service. That’s approaching the 268 basis point spread on an index of industrial company notes rated as much as five grades lower. The gap between the two benchmarks was as narrow as 11 basis points this month, down from 177 basis points at the start of 2009.

Investors are marking down bank bonds on concern Europe’s sovereign debt crisis will reduce lenders’ creditworthiness and that regulatory efforts to control risk taking will crimp their profits. Banks may have a capital deficit of more than $1.5 trillion by the end of 2011 and some may require state support, according to Independent Credit View, a Swiss rating company. Debt holders are “reacting first rather than waiting for events to unfold,” saidMichael Donelan, who oversees $3.5 billion of bonds as director of trading and head portfolio manager at Ryan Labs Inc. The New York-based firm cut holdings of finance company debt at the start of the month, Donelan said. BNP Paribas bonds included in the Bank of America Merrill Lynch index yield an average 438 basis points, or 4.38 percentage points, more than Treasuries. The firm is rated Aa2 by Moody’s. Those of New York-based Goldman Sachs, ranked A1, pay a spread of 340 basis points.

Elsewhere in credit markets, Goldman Sachs may sell 10-year notes in a benchmark offering, according to a person familiar with the transaction. The senior fixed-rate debt may yield 280 basis points more than similar-maturity Treasuries, said the person, who declined to be identified because terms aren’t set. The notes may be sold as soon as today, the person said. Benchmark offerings are typically at least $500 million. A basis point is 0.01 percentage point. Goldman Sachs sold $2 billion of 5.375 percent, 10-year notes on March 1 at a spread of 190 basis points, according to data compiled by Bloomberg. It issued an additional $750 million of the debt on March 19 at a 175 basis-point spread, Bloomberg data show. The extra yield investors demand to own corporate bonds instead of similar-maturity government debt rose 7 basis points to 196 basis points, the highest since Oct. 22, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. The spread peaked at 511 on March 30, 2009, and dropped to as low as 142 on April 21. Average yields rose 2.4 basis points to 3.997 percent.

Company Bond Risk
Corporate credit risk eased today as speculation of rising demand in emerging markets overshadowed European debt concerns that dragged the euro lower. Investor sentiment improved after the Organization for Economic Cooperation and Development raised its growth forecasts for this year and next as economies such as China outpace debt-burdened developed countries to drive the global expansion. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 2.1 basis points to a mid-price of 121 basis points as of 1:24 p.m. in New York, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates. Credit-default swaps on the Markit iTraxx Crossover Index of 50 mostly junk-rated European companies, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 18 basis points to 606.3 at 6:16 p.m. in London, according to Markit Group.

The cost of insuring Asian bonds from non-payment fell today from a 10-month high. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 12 basis points to 160.5, according to Royal Bank of Scotland Group Plc. Credit-default swaps on South Korea dropped 11.8 basis points to 159.7, CMA DataVision prices show. They surged yesterday after a report by a defector group that North Korean leader Kim Jong Il ordered his military to prepare for conflict. In a show of support for South Korean President Lee Myung Bak, U.S. Secretary of State Hillary Clinton will visit Seoul today. Two-year interest-rate swap spreads soared to the highest in 13 months before easing back in late New York trading yesterday, and the London interbank offered rate that banks say they pay for three-month loans in dollars climbed for an 12th day today.

‘Cleanest Proxy’
The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, widened as much as 11.96 basis points to 64.21 basis points before trading at 49.56 in New York. The spread has expanded from this year’s low of 9.63 basis points on March 24, the narrowest since 1993, as investors fled all but the safest government securities. “The two-year swap spread is the cleanest proxy to express a concern about increased systemic risk,” said Christian Cooper, senior rates trader in New York at Jefferies & Co., one of 18 primary dealers that trade with the Federal Reserve. “Every day we walk in we’re seeing another headline bomb that pushes these spreads wider.” Libor for three months advanced to 0.538 percent, the highest level since July 6, from 0.536 percent yesterday, according to data from the British Bankers’ Association. Libor, a benchmark for about $360 trillion of financial products worldwide ranging from mortgages to student loans, has more than doubled this year.

“It’s all part of concern about the system, about whether the sovereign-debt crisis will morph into a bigger systemic crisis,” said Padhraic Garvey, head of investment-grade strategy at ING Groep NV in Amsterdam. “We’re not quite at a point where that’s imminent, but that risk is being priced in.” High-yield debt has lost 3.6 percent this month, on track for the first monthly drop since February 2009 and the biggest loss since falling 8.43 percent in November 2008, Bank of America Merrill Lynch index data show. Emerging-market bonds fell as spreads widened 10 basis points to 348 from this year’s low of 230 on April 15, according to JPMorgan Chase & Co.’s EMBI+ Index. Financial company bonds have lost 0.74 percent this month on average, compared with a gain of 0.52 percent for industrial companies, based on Bank of America Merrill Lynch indexes. That would be the biggest monthly loss since March 2009, when they tumbled 1.72 percent.

Ten Widest Spreads

The companies with the 10 widest spreads in the bank’s Global Broad Market Financial Index are all in Europe, except for American International Group Inc., the insurer that needed four bailouts amid losses on credit derivatives. Paris-based BNP has the widest spreads, followed by Societe Generale SA, whose bonds have an average gap of 420 basis points. The risk is “that the contagion spreads to financials or is accompanied by renewed bank failures,” ING analysts led by Mark Harmer and Jeroen van den Broek in Amsterdam wrote in a note to clients. “The effect on the already worsening money markets is clear to see.” The study by Independent Credit View compared estimated capital needs for the end of 2011 with capital ratios reported at the end of last year. “Without state aid or debt restructuring these banks will hardly be able to raise capital,” Christian Fischer, a partner and banking analyst at Independent Credit, told reporters in Zurich yesterday. About 2 trillion euros ($2.47 trillion) of debt issued by public and private borrowers in Greece, Spain and Portugal is held outside those countries, according to RBS.

Most Exposed
Banks are the institutions that are most exposed to the peripheral nations, with a total of about 1 trillion euros outstanding at the end of 2009, the firm wrote. German and French lenders, with claims against the three countries totaling almost 230 billion euros each, were the most exposed. European leaders must address debt sold by nations such as Greece and Spain now to avoid a costlier bank bailout later, JPMorgan Chief Executive Officer Jamie Dimon said at the Japan Society’s annual awards dinner in New York on May 24. In the U.S., Moody’s said last week it planned to see how lawmakers implement legislation approved by the Senate before deciding whether to cut bank ratings. Francesco Meucci, a Moody’s spokesman, and Standard & Poor’s spokeswoman Lisa Nugent, both based in London, declined to comment. Spreads on Goldman Sachs bonds contained in the Bank of America Merrill Lynch index are up from 163 basis points in mid- April. Morgan Stanley’s spreads have jumped to 295 from 167, while Citigroup Inc.’s are at 306, up from 211.

The average yield top-rated financial firms pay to sell commercial paper due in 90 days jumped to a daily average of 0.47 percent last week, the highest since the period ended May 1, 2009, from 0.29 percent a month ago, according to Fed data. The gap in rates on the debt and the Fed funds rate reached an 11-month high of 34 basis points on May 21. Credit-default swaps on BNP Paribas fell 11 basis points to 124, according to CMA. That means it costs 124,000 euros annually to protect against default on 10 million euros of debt for five years and compares with 91 basis points May 12. Contracts on Goldman Sachs dropped 20 basis points to 180, Deutsche Bank AG declined 8 to 171, Bank of America Corp. fell 16.5 to 154 and HSBC Holdings Plc was 5 lower at 105. “The pressure has stepped up a notch,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London. “Things have taken a turn for the worse over the past month because of Europe’s sovereign debt crisis. It’s a multidimensional picture, but all the dimensions look pretty grim.”

Wall Street's War
by Matt Taibbi - Rolling Stone

It's early May in Washington, and something very weird is in the air. As Chris Dodd, Harry Reid and the rest of the compulsive dealmakers in the Senate barrel toward the finish line of the Restoring American Financial Stability Act the massive, year-in-the-making effort to clean up the Wall Street crime swamp word starts to spread on Capitol Hill that somebody forgot to kill the important reforms in the bill. As of the first week in May, the legislation still contains aggressive measures that could cost once-

indomitable behemoths like Goldman Sachs and JP Morgan Chase tens of billions of dollars. Somehow, the bill has escaped the usual Senate-whorehouse orgy of mutual back-scratching, fine-print compromises and freeway-wide loopholes that screw any chance of meaningful change.

The real shocker is a thing known among Senate insiders as "716." This section of an amendment would force America's banking giants to either forgo their access to the public teat they receive through the Federal Reserve's discount window, or give up the insanely risky, casino-style bets they've been making on derivatives. That means no more pawning off predatory interest-rate swaps on suckers in Greece, no more gathering balls of subprime shit into incomprehensible debt deals, no more getting idiot bookies like AIG to wrap the crappy mortgages in phony insurance. In short, 716 would take a chain saw to one of Wall Street's most lucrative profit centers: Five of America's biggest banks (Goldman, JP Morgan, Bank of America, Morgan Stanley and Citigroup) raked in some $30 billion in over-the-counter derivatives last year. By some estimates, more thanhalfof JP Morgan's trading revenue between 2006 and 2008 came from such derivatives. If 716 goes through, it would be a veritable Hiroshima to the era of greed.

"When I first heard about 716, I thought, 'This is never gonna fly,'" says Adam White, a derivatives expert who has been among the most vocal advocates for reform. When I speak to him early in May, he sounds slightly befuddled, like he can't believe his good fortune. "It's funny," he says. "We keep waiting for the watering-down to take place but we keep getting to the next hurdle, and it's still staying strong."

In the weeks leading up to the vote on the reform bill, I hear one variation or another on this same theme from Senate insiders: that the usual process of chipping away at key legislation is not taking place with its customary dispatch, despite a full-court press by Wall Street. The financial-services industry has reportedly flooded the Capitol with more than 2,000 paid lobbyists; even veteran members are stunned by the intensity of the blitz. "They're trying everything," says Sen. Sherrod Brown, a Democrat from Ohio. Wall Street's army is especially imposing given that the main (really, the only) progressive coalition working the other side of the aisle, Americans for Financial Reform, has been in existence less than a year and has just 60 unpaid "volunteer" lobbyists working the Senate halls.

The companies with the most at stake are particularly well-connected. The lobbying campaign for Goldman Sachs, for instance, is being headed up by a former top staffer for Rep. Barney Frank, Michael Paese, who is coordinating some 14 different lobbying firms to fight on Goldman's behalf. The bank is also represented by Capitol Hill heavyweights like former House majority leader Dick Gephardt and former Reagan chief of staff Ken Duberstein. All told, there are at least 40 ex-staffers of the Senate Banking Committee and even one former senator, Trent Lott lobbying on behalf of Wall Street. Until the final weeks of the reform debate, however, it seemed that all these insiders were facing the prospect of a rare defeat and they weren't pleased. One lobbyist even complained toThe Washington Postthat the bill was being debated out in the open, on the Senate floor, instead of in a smoky backroom. "They've got to get this thing off the floor and into a reasonable, behind-the-scenes" discussion, he groused. "Let's have a few wise fathers sit around the table in some quiet room" to work it out.

As it neared the finish line, the Restoring American Financial Stability Act was almost unprecedentedly broad in scope, in some ways surpassing even the health care bill in size and societal impact. It would rein in $600 trillion in derivatives, create a giant new federal agency to protect financial consumers, open up the books of the Federal Reserve for the first time in history and perhaps even break up the so-called "Too Big to Fail" giants on Wall Street. The recent history of the U.S. Congress suggests that it was almost a given that they would fuck up this one real shot at slaying the dragon of corruption that has been slowly devouring not just our economy but our whole way of life over the past 20 years. Yet with just weeks left in the nearly year-long process at hammering out this huge new law, the bad guys were still on the run. Even the senators themselves seemed surprised at what assholes they weren't being. This new baby of theirs, finance reform, was going to be that one rare kid who made it out of the filth and the crime of the hood for everybody to be proud of.

Then reality set in.

Picture the Restoring American Financial Stability Act as a vast conflict being fought on multiple fronts, with the tiny but enormously influential Wall Street lobby on one side and pretty much everyone else on the planet on the other. To be precise, think World War II with some battles won by long marches and brutal campaigns of attrition, others by blitzkrieg attacks, still more decided by espionage and clandestine movements. Time after time, at the last moment, the Wall Street axis has turned seemingly lost positions into surprise victories or, at worst, bitterly fought stalemates. The only way to accurately convey the scale of Wall Street's ingenious comeback is to sketch out all the crazy, last-minute shifts on each of the war's four major fronts.


The most successful of the reform gambits was probably the audit-the-Fed movement led by Sen. Bernie Sanders, the independent from Vermont. For nearly a century, the Federal Reserve has been, within our borders, a nation unto itself with vast powers to shape the economy and no real limits to its authority beyond the president's ability to appoint its chairman. In the bubble era it has been transformed into a kind of automatic bailout mechanism, helping Wall Street drink itself sober by flooding big banks with cheap money after the collapse of each speculative boom. But suddenly, with both the Huffington Post crowd and the Tea Party raising their pitchforks in outrage, Sanders managed to pass by a vote of 96-0 an amendment to force the Fed to open its books to congressional scrutiny.

If Alan Greenspan and Ben Bernanke don't take that 96-0 vote as a kick-to-the-groin testament to the staggering unpopularity of the Fed, they should. When 96 senators agree on something, they're usually affirming their devotion to the flag or commemorating the death of Mother Teresa. But as it turns out, the more than $2trillion in loans that the Fed handed out in secret after the 2008 meltdown is something that both the left and the right have no problem banding together to piss on. One of the most bizarre alliances of the bailout era took place when Sanders, a democratic socialist, and Sen. Jim DeMint, a hardcore conservative from South Carolina, went on the CNBC show hosted by crazy supply-sider Larry Kudlow and all three found themselves in complete agreement on the need to force Fed loans into the open. "People who come from very different places agree that it ought not to be done in secret, that the Fed isn't Skull and Bones," says Michael Briggs, an aide to Sanders.

The Sanders amendment, if it survives in conference, will lead to some delicious disclosures. Almost exactly a year ago, Sanders questioned Bernanke at a Senate-budget hearing, asking him to name the banks that had been bailed out by the Fed. "Will you tell the American people to whom you lent 2.2 trillion of their dollars?" Sanders demanded.

After a little hemming and hawing, a bored-looking Bernanke Time magazine's 2009 Person of the Year, by the way bluntly said, "No." It would be "counterproductive," he explained, if clients and investors learned that these poor banks were broke enough to need a public handout.

Bernanke's performance that day so rankled Sanders that he wrote up his amendment specifically to bring the Fed's goblin-in-chief to heel. The new law will force Bernanke to post the identity of loan recipients on the Fed's website for all to see. It also mandates that the Government Accountability Office investigate potential conflicts of interest that took place during the bailout, such as the presence of Goldman CEO Lloyd Blankfein in the room during the negotiations of the AIG bailout, which led to Goldman's receiving $13 billion of public money via the rescue.

The Sanders amendment was perhaps the headline victory to date in the ongoing War for Finance Reform, but even this battle entailed some heavy casualties. Sanders had originally filed an amendment that was much closer to a House version pressed by libertarian hero Ron Paul, one that would have permanently opened the Fed's books to Congress. But as the Senate crawled closer to a vote, the Sanders camp began to hear that the Obama administration opposed the bill, fearing it would give Congress too much day-to-day involvement in Fed policy. "The White House was saying how wonderful transparency is, but they still had 'concerns,'"Briggs says. "Within a couple hours, those concerns were being worked out."

The end result was a deal that restricted the audit to a one-time shot: Congress could only examine Fed loans made after December 2007. Once the audit was complete, the Fed's books would once again be sealed forever from public scrutiny. Sen. David Vitter, a Democrat from Louisiana, countered with an amendment to permanently open up the Fed's books, but it was shot down by a vote of 62-37. In one of the most absurd and indefensible retreats of the war, a decisive majority of senators voted to deny themselves the power to audit the Federal Reserve on behalf of the American people. When it comes to protecting the world's wealthiest banks from public scrutiny, it turns out, Democrats and Republicans have no trouble achieving bipartisanship.


The biggest no-brainer of finance reform was supposed to be the Consumer Financial Protection Bureau. The idea was simple: create a federal agency whose sole mission would be to make sure that financial lenders don't rape their customers with defective products, unjust fees and other fine-print nightmares familiar to any American with a credit card. In theory, the CFPB would rein in predatory lending by barring lenders from making loans they know that borrowers won't be able to pay back, either because of hidden fees or ballooning payments.

Wall Street knew it would be impossible to lobby Congress on this issue by taking the angle of "We're a rapacious megabank that would like to keep skull-fucking to death our customers using incomprehensible and predatory loans." So it came up with another strategy one that deployed some of the most inspired nonsense ever seen on the Hill. The all-powerful lobbying arm of the U.S. Chamber of Commerce, which has been fierce in its representation of Wall Street's interests throughout the War for Finance Reform, cued up a $3million ad campaign implying that the CFPB, instead of targeting asshole bankers in flashy suits and hair gel, would and this isn't a joke target your local butcher, making it hard for him to lend you the money to buy meat.

That's right: The ads featured shots of a squat butcher with his arms folded, standing in front of a big pile of meat. "The economy has made it tough on this local butcher's customers," the ad reads. "So he lets some of them run a tab and pay the bill over time to make ends meet. But now Washington wants to make it tougher on everyone." After insisting falsely that this kindly butcher would be subject to the new consumer protection bureau, the ad warns that the CFPB "would also have the ability to collect information about his customers' financial accounts and take away many of their financial choices."

Sitting in the Senate chamber one afternoon not long before the vote, I even heard Sen. Mike Enzi, an impressively shameless Republican from Wyoming, insist that the CFPB would mean that "anyone who has ever paid for dental care in installments could be facing the prospect of paying for dental care upfront." Other anti-reform ads claimed that everyone from cabinetmakers to electricians would be hounded by the new agency even though the CFPB's mandate explicitly excludes merchants who are "not engaged significantly in offering or providing consumer financial products or services."

The CFPB was always a pretty good bet to pass in some form. Just as pushing through anything that could plausibly be called "health care reform" was a political priority for the Obama administration, creating a new agency with the words "consumer protection" in the title was destined from the start to be the signature effort of the finance bill, which is otherwise mostly a mishmash of highly technical new regulations. But that didn't stop leading Democrats from doing what they could to chisel away at the thing. Throughout the process, Chris Dodd, the influential chairman of the Senate Banking Committee, has set new standards for reptilian disingenuousness playing the role of stern banker-buster while taking millions in Wall Street contributions.

Dodd worked overtime trying to craft a "bipartisan" bill with the Republican minority in particular with Sen. Richard Shelby, the ranking Republican on the committee. With his dyed hair, porcine trunk and fleshy, powdery-white face, Shelby recalls an elderly sumo wrestler in drag. I happened to be in the Senate on the day that Shelby proposed a substitute amendment that would have stuffed the CFPB into the FDIC, effectively scaling back its power and independence. Throughout the debate, I was struck by the way that Dodd and his huge black caterpillar eyebrows kept crossing the aisle to whisper in Shelby's ear. During these huddles, Dodd would gently pat Shelby's back or hold his arm; it was like watching a love scene in a Japanese monster movie.

Shelby's amendment was ultimately defeated by a vote of 61-37 but he and Dodd still reached a number of important compromises that significantly watered down the CFPB. The idea was to rack up as many exemptions as possible for favored industries, all of which had contributed generously to their favorite senators. By mid-May, Republicans and Democrats had quietly agreed to full or partial "carve-outs" for banks with less than $10 billion in deposits, as well as for check-cashers and other sleazy payday lenders. As the bill headed toward a vote, there was also a furious fight to exempt auto dealers from anti- predatory regulations a loophole already approved by the House even though car loans are the second-largest source of borrowing for Americans, after home mortgages. The purview of the CFPB, in essence, was being limited to megabanks and mortgage lenders. That's a major victory in the war against Wall Street, but it will be hard to be too impressed if Congress can't even find a way to vote for consumer protection against used-car salesmen.


Perhaps the fiercest fight of all over finance reform involved a part of the bill called "resolution authority" also known as, "The next time an AIG or a Lehman Brothers goes belly up, do we bail the fuckers out? And if so, with whose money?" In its original form, the bill answered these crucial questions by requiring that banks contribute to a $50billion fund that could be used to aid failing financial institutions. The fund was hardly a cure-all $50 billion "wouldn't even be enough to bail out Citigroup's prop-trading desk," as one industry analyst observed but it at least established a precedent that banks should pay for their own bailouts, instead of simply snatching money from taxpayers.

The fund had been established after a fierce battle last fall, when Democrats in the House beat back a seemingly insane proposal backed by the Obama administration that would have paid for bailouts by borrowing from taxpayers and recouping the money from Wall Street later on, by means of a mysterious, convoluted process. That heroic stand in the House, which was marked by long nights of ferocious negotiations, was wiped out in one fell swoop on May 5th, after Dodd and Shelby huddled up in another of their monster-love sessions and hammered out a deal to strip the bailout fund from the bill. The surprise rollback was introduced by the Senate leadership late on a Wednesday and voted on three hours later. Just like that, taxpayers were back to fronting the nation's biggest banks the money when they find themselves in financial trouble.

One day after the Shelby-Dodd wipeout, another key reform got massacred. This was the "Too Big to Fail" amendment put forward by two reform-minded freshmen, Sens. Ted Kaufman of Delaware and Sherrod Brown of Ohio. The measure would have mandated the automatic breakup of any bank that held more than 10 percent of all insured deposits, or had at risk more than two percent of America's GDP. The amendment was just the kind of common-sense, loophole-proof, no-bullshit legislation that, sadly, almost never passes in the modern Senate.

Brown is an interesting character. Whenever I talk to him, I often forget he's a U.S. senator; he feels more like a dude you met on an Amtrak train and struck up a conversation with. He remains the only member of Congress I've ever met who took off his shoes and socks in the middle of an interview. But when I catch up with him in an anteroom outside the Senate chamber on the day his and Kaufman's amendment ends up being voted on, he seems harried and tense, like a man waiting for bad news in a hospital lobby. In recent weeks, he confides, he has found himself facing both barrels of the banking lobby.

"There are 1,500 bank lobbyists in this town, and they're coming by all the time," he says. "And it's not just the lobbyists. When the bank lobbyist from Columbus comes by, he brings 28 bankers with him."

At the moment, though, Brown has a more pressing problem. He and Kaufman are both making themselves conspicuous in the Senate chamber, and the reason why is illustrative of the looniness of Senate procedure. Unlike in the House, where a rules committee decides in advance which amendments will be brought to a vote, senators have no orderly, dependable way of knowing if or when their proposals will get voted on. Instead, they're at the mercy of a strange and nebulous process that requires them to badger the leadership, who have the sole discretion of deciding which amendments go to a vote. So Brown is reduced to hanging around the Senate floor and trying to get a committee chair like Chris Dodd to put Too Big to Fail to a vote before other amendments use up all the time allotted for debate. It's not unlike fighting a crowd of pissed-off airport passengers for a single seat on an overbooked flight you're completely at the mercy of the snippy airline rep behind the desk.

Near the end of the day, to Brown's surprise, Dodd actually allows his amendment to go to a vote. In the end, however, the proposal to break up the nation's riskiest banks gets walloped 61-33, with an astonishing 27 Democrats including key banking committee heavyweights like Dodd and Chuck Schumer of New York joining forces to defeat it. After the debate, Kaufman, a gregarious and aggressive advocate of finance reform, seems oddly unfazed that his fellow Democrats blew the best chance in a generation to corral the great banking monsters of Wall Street. "For some of them, it was just a bridge too far," he says. "There's an old saying: Never invest in anything you don't understand." Given the bizarre standards of the Senate bureaucracy, Kaufman considers it a victory just to have gotten his amendment into the woodshed for an ass-whipping.

I encounter that same "just glad to be here" vibe from Sen. Jeff Merkley, a Democrat from Oregon who co-authored one of the handful of genuinely balls-out reforms in the entire bill. The Merkley-Levin amendment couldn't have been more important; it called for restoring part of the Glass-Steagall Act, the Depression-era law that prevented commercial banks, investment houses and insurance companies from merging. The repeal of Glass-Steagall in 1999 paved the way for the creation of the Too-Big-to-Fail monsters like Citigroup, who drove the global economy into a ditch over the past 10 years.

Merkley-Levin was the Senate version of the "Volcker Rule," a proposal put forward by former Fed chief and Obama adviser Paul Volcker, that would prevent commercial banks from engaging in the kind of speculative, proprietary trading that helped trigger the financial crisis. When I meet with Merkley, he is in the same position as Brown and Kaufman, waiting anxiously for a chance to get his amendment voted on, with no idea of when or if that might happen. A vote even if it means defeat is all he's hoping for. When I ask if he's excited about the prospect of restoring a historic piece of legislation like Glass-Steagall, he smiles faintly. "I'm not saying I'm real optimistic," he says.

In the end, Merkley is forced to resort to the senatorial equivalent of gate-crashing: He attaches his amendment to the sordid proposal to exempt auto dealers from the CFPB, which has already been approved for a vote. That Merkley has to invoke an arcane procedural stunt just to get such a vital reform a vote is a testament to how convoluted American democracy looks by the time it reaches the Senate floor.

As with the whittled-down victories over the Fed audit and the Consumer Finance Protection Bureau and the brutal defeat of Too Big to Fail the stalling over the Volcker Rule underscores the basic dynamic of the Senate. With deals cut via backroom consensus, and leaders like Reid and Dodd tightly controlling which amendments go to a vote, the system allows a few powerful members whose doors are permanently open to lobbyists to pilot the entire process from beginning to end. One Democratic aide grumbles to me that he had no access to the negotiations for months, while a Wall Street lobbyist he knows could arrange an audience with the leadership. The whole show is carefully orchestrated from start to finish; no genuinely tough amendment with a shot at being approved receives an honest up-or-down vote. "It's all kind of a fake debate," the aide says.


When all the backroom obfuscation doesn't work, of course, there is always one last route in Congress to killing reform: the fine print. And never has an amendment been fine-printed to death as skillfully as the proposal to reform derivatives.

Imagine a world where there's no New York Stock Exchange, no NASDAQ or Nikkei: no open exchanges at all, and all stocks traded in the dark. Nobody has a clue how much a share of IBM costs or how many of them are being traded. In that world, the giant broker-dealer who trades thousands of IBM shares a day, and who knows which of its big clients are selling what and when, will have a hell of a lot more information than the day-trader schmuck sitting at home in his underwear, guessing at the prices of stocks via the Internet.

That world exists. It's called the over-the-counter derivatives market. Five of the country's biggest banks, the Goldmans and JP Morgans and Morgan Stanleys, account for more than 90 percent of the market, where swaps of all shapes and sizes are traded more or less completely in the dark. If you want to know how Greece finds itself bankrupted by swaps, or some town in Alabama overpaid by $93 million for deals to fund a sewer system, this is the explanation: Nobody outside a handful of big swap dealers really has a clue about how much any of this shit costs, which means they can rip off their customers at will.

This insane outgrowth of jungle capitalism has spun completely out of control since 2000, when Congress deregulated the derivatives market. That market is now roughly 100 times bigger than the federal budget and 20 times larger than both the stock market and the GDP. Unregulated derivative deals sank AIG, Lehman Brothers and Greece, and helped blow up the global economy in 2008. Reining in derivatives is the key battle in the War for Finance Reform. Without regulation of this critical market, Wall Street could explode another mushroom cloud of nuclear leverage and risk over the planet at any time.

The basic pillar of derivatives reform is simple: From now on, instead of trading in the dark, most derivatives would have to be traded on open exchanges and "cleared" through a third party. Last fall, Wall Street lobbyists succeeded at watering down the clearing requirement by pushing through a series of exemptions for "end-users" that is, anyone who uses derivatives to hedge a legitimate business risk, like an airline buying swaps as a hedge against fluctuations in jet-fuel prices. But the House then took it even further, expanding the exemption to include anyone who wants to hedge againstbalance-sheet risk. Since every company has a balance sheet, including giant insurers like AIG and hedge funds that gamble in derivatives, the giant loophole now covered pretty much everyone except a few megabanks. This was regulation with a finger crossed behind its back.

When it came time for the Senate to do its version, however, the lobbyists were in for a surprise. Sen. Blanche Lincoln of Arkansas best known as one of the few Democrats to vote for Bush's tax cuts suddenly got religion and closed the loophole. Facing a tough primary battle against an opponent who was vowing to crack down on Wall Street, Lincoln tweaked the language so derivatives reform would apply to any greedy financial company that makes billions trading risky swaps in the dark.

Republicans went apeshit, pulling the same tactics they tried to gut the Consumer Finance Protection Bureau. Sen. Enzi, back at the lectern after his failed attempt to claim that the CFPB was a government plot to control the orthodontics industry, barked to the Senate gallery that Lincoln's proposal would harm not millionaire swap dealers at JP Morgan and Goldman Sachs, but "a wheat-grower in Wyoming." Unmoved by such goofy rhetoric, the Senate shot down an asinine Republican amendment that would have overturned Lincoln's reform by a vote of 59-39.

Then reform advocates started reading the fine print of the Lincoln deal, and realized that all those Wall Street lobbyists had really been earning their money.

That same day the GOP amendment failed, the derivatives expert Adam White was at his home in Georgia, poring over a "redline" version of the Lincoln amendment, in which changes to the bill are tracked in bold. When he came to a key passage on page 570, he saw that it had a single line through it, meaning it had been removed. The line read, "Except as provided in paragraph (3), it shall be unlawful to enter into a swap that is required to be cleared unless such swap shall be submitted for clearing."

Translation: It was no longer illegal to trade many uncleared swaps. Wall Street would be free to go on trading these monstrosities by the gazillions, largely in the dark. "Regulators can't say any longer if you don't clear it, it's illegal," says White.

Once he noticed that giant loophole, White went back and found a host of other curlicues in the text that collectively cut the balls out of the Lincoln amendment. On page 574, a new section was added denying the Commodity Futures Trading Commission the power to force clearinghouses to accept swaps for clearing. On page 706, two lines were added making it impossible for buyers who get sold an uncleared swap to void the deal. Taken altogether, the changes amount to what White describes as a "Trojan Horse" amendment: hundreds of pages of rigid rules about clearing swaps, with a few cleverly concealed clauses that make blowing off those rules no big deal. Michael Greenberger, a former official with the Commodity Futures Trading Commission who has been fighting for derivatives reform, describes the textual trickery as a "circle of doom. Despite the pages and pages of regulations, violating them is risk-free."

On May 18th, as the clock ran out on the deadline to file amendments, reform-minded Democrats staged a concerted push to close the loopholes. But when Sen. Maria Cantwell of Washington offered a proposal to eliminate the "Trojan Horse" sham, Reid tried to slam the door on her and everyone else working to strengthen reform. The majority leader called for a vote to end debate a move that would squelch any remaining amendments. This extraordinary decision to cut off discussion of our one, best shot at revamping the rules of modern American finance was made, at least in part, to enable senators to get home for Memorial Day weekend.

But then something truly unexpected took place. Cantwell revolted, joined by Sen. Russ Feingold of Wisconsin. That left Reid in the perverse position of having to convince three Republicans to come over to his side to silence a member of his own party. On May 20th, Reid got the votes he needed to kill the debate. A few hours later, the Senate passed the bill, loopholes and all, by a vote of 59-39.

In a heartwarming demonstration of the Senate's truly bipartisan support for Wall Street, Sen. Sam Brownback a Republican from Kansas stepped in to help Democrats kill one of the bill's most vital reforms. At the last minute, Brownback mysteriously withdrew his amendment to exempt auto dealers from regulation by the CFPB a maneuver that prevented the Merkley-Levin ban on speculative trading, which was attached to Brownback's amendment, from even being voted on. That was good news for car buyers, but bad news for the global economy. Senators may enjoy scolding Goldman Sachs in public hearings, but when it comes time to vote, they'll pick Wall Street over Detroit every time.

The rushed vote also meant that the Democratic leadership wasn't able to gut 716, the amazingly aggressive section of Lincoln's amendment that would cut off taxpayer money to big banks that gamble on risky derivatives. Not that they didn't try. With just three minutes to go before the deadline, Dodd had filed a hilarious amendment that would have delayed the ban on derivatives for two years and empowered a new nine-member panel to unilaterally kill it. Sitting on the panel would be Bernanke, Treasury Secretary Tim Geithner and FDIC chief Sheila Bair, all of whom violently opposed 716.

Dodd was forced to withdraw his amendment after Wall Street complained that even this stall-and-kill tactic would create too much "uncertainty" in the market. That left 716 still alive for the moment but even its staunchest supporters expected the leadership to find some way to gut it in conference, especially since President Obama personally opposes the measure. "Treasury and the White House are in full-court mode, assuring everybody that this will be fixed," says Greenberger. "And when they say fixed, that means killed."

Whatever the final outcome, the War for Finance Reform serves as a sweeping demonstration of how power in the Senate can be easily concentrated in the hands of just a few people. Senators in the majority party Brown, Kaufman, Merkley, even a committee chairman like Lincoln took a back seat to Reid and Dodd, who tinkered with amendments on all four fronts of the war just enough to keep many of them from having real teeth. "They're working to come up with a bill that Wall Street can live with, which by definition makes it a bad bill," one Democratic aide explained in the final, frantic days of negotiation.

On the plus side, the bill will rein in some forms of predatory lending, and contains a historic decision to audit the Fed. But the larger, more important stuff breaking up banks that grow Too Big to Fail, requiring financial giants to pay upfront for their own bailouts, forcing the derivatives market into the light of day probably won't happen in any meaningful way. The Senate is designed to function as a kind of ongoing negotiation between public sentiment and large financial interests, an endless tug of war in which senators maneuver to strike a delicate mathematical balance between votes and access to campaign cash.

The problem is that sometimes, when things get really broken, the very concept of a middle ground between real people and corrupt special interests becomes a grotesque fallacy. In times like this, we need our politicians not to bridge a gap but to choose sides and fight. In this historic battle over finance reform, when we had a once-in-a-generation chance to halt the worst abuses on Wall Street, many senators made the right choice. In the end, however, the ones who mattered most picked wrong and a war that once looked winnable will continue to drag on for years, creating more havoc and destroying more lives before it is over.

Matt Simmons: "Theres another leak, much bigger, 5 to 6 miles away"

Spill Could Make BP Vulnerable to a Takeover
by Rob Cox and Christopher Swann - Reuters

BP is likely to eventually stop the flow of oil from its explosion in the Gulf of Mexico. After that happens, the autopsy of the spill will begin in earnest. But if the information dribbling into the public domain proves correct, the British energy giant will be a weakened creature — so weak it will be vulnerable to a takeover. Royal Dutch Shell and Exxon Mobil are almost certainly running the numbers. Government leaders ought to be plotting their strategy, too.

The fiasco in the gulf, which killed 11 workers, has shined a new light on BP’s poor safety track record. The current disaster is the company’s third American offense in recent years, coming shortly after the 2005 Texas City refinery explosion that killed 15 workers and the 2006 Prudhoe Bay spill that leaked more than 200,000 gallons into Alaskan waters. The list of problems reflects poorly on management and furthers the impression of a corner-cutting culture that the chief executive, Tony Hayward, had, until recently, been widely credited with improving. The response by BP’s board has been somewhat tepid, with little public support offered to management or guidance provided to shareholders.

Add these factors up, fold in the potential cost of cleanup, and it is little wonder that investors have wiped as much as $46 billion off the company’s market value since mid-April. At $141 billion on Thursday, BP’s capitalization is half of Exxon’s and less than the $165 billion value of Shell, which has traditionally traded at a discount to BP. Even before BP’s latest troubles, the arguments for a deal were compelling, largely because of the cost savings that could accrue. Mr. Hayward’s predecessor, John Browne, wrote in his memoirs that BP had aimed for $9 billion in annual synergies from a possible merger with Shell a few years ago. Those would in theory be worth some $60 billion to investors.

And though a combination with Shell or BP would be huge, the antitrust implications might not be. The company would control no more than about 6 percent of the world’s proven oil reserves. At a time when nearly 90 percent of the planet’s crude oil is controlled by even larger national energy groups — including Saudi Aramco and Russia’s Gazprom — that kind of scale seems defensible. It might even be viewed as a positive factor in securing Western energy independence from potentially unfriendly oil-rich governments.

Some operations in the United States and Britain would probably need to be sold, including refineries and service stations. That was envisioned in the discussions the companies held a few years ago, according to Mr. Browne’s book. But these would account for only a small fraction of the deal’s value. Such wrinkles are tiny compared with BP’s other attractions for a Shell or an Exxon. Though BP has operations worldwide, it has a big footprint in the politically stable areas that the major oil firms increasingly crave. It is the largest producer in the Gulf of Mexico and Britain’s North Sea. And its Prudhoe Bay field in Alaska is still the largest in North America.

So what’s stopping Exxon or Shell from pouncing? For starters, there is still no clear indication of what happened on Deepwater Horizon, who was at fault and what it will cost to clean up things. Any responsible acquirer would probably wait for greater clarity on these contingent liabilities before making a move. That could be months away. And though antitrust concerns could be assuaged, the politics could prove trickier. For one, Britain’s new government might object to seeing a former national champion sold to a Texas corporation — even though BP was permitted by American authorities to buy Amoco and Atlantic Richfield in years past.

Washington, too, might fear the creation of a company so big it would be difficult for the government to put its “boot on their neck,” to use the language of the interior secretary, Ken Salazar, in relation to BP’s cleanup efforts. A merged BP-Exxon would effectively reconstitute a substantial part of John D. Rockefeller’s Standard Oil. But times have changed. In 1911, when the government broke up Standard, oil was a domestic business. Today, private Western members of the oil fraternity operate on a global stage facing well-off competitors. A weakened BP could struggle in that environment anyway. If rivals start circling, the company — and interested governments — may need to contemplate even bigger oil giants.

Gulf oil spill now largest in U.S. history as BP continues plug effort
by Rick Jervis - USA Today

The Gulf of Mexico oil spill has spewed more oil than originally estimated, surpassing the Exxon Valdez tanker disaster in 1989 in Alaska to become the biggest oil disaster in U.S. history, federal scientists said Thursday. Scientists at the U.S. Geological Survey said the well has gushed 500,000 to 1 million gallons a day — greater than the original estimate of 210,000 gallons a day offered by the National Oceanic and Atmospheric Administration several weeks ago.

At that pace, at least 17 million gallons and possibly as much as 39 million gallons have spilled into the Gulf in the five weeks since the Deepwater Horizon rig exploded and sank 50 miles off Louisiana's coast, killing 11 crew workers and unleashing an ecological emergency. Exxon Valdez spilled about 11 million gallons into Alaska's Prince William Sound. British energy giant BP leased the rig from Transocean and leads the cleanup efforts. Thursday, BP engineers continued to pump hundreds of thousands of gallons of heavy mud into a massive device atop the runaway well in the latest attempt to stem the flow. The procedure — known as a "top kill" — started Wednesday afternoon and continued through the night, BP spokesman Graham MacEwen said. "The operation is continuing as planned," he said.

BP and federal officials have come under increased pressure for failing to plug the gushing well and keep oil out of coastal marshes and beaches. The oil has impacted more than 100 miles of Louisiana's coast, including 35 acres of fragile marshland, said Doug Suttles, BP's chief operating officer. Thursday, Interior Secretary Ken Salazar announced the resignation of Elizabeth Birnbaum, head of the Minerals Management Service, which oversees offshore drilling. Salazar announced Birnbaum's resignation at a congressional hearing hours before a news conference in which President Obama plans to address the spill and announce new safety protocols and an extension of a deepwater drilling moratorium.

Suttles said BP officials will monitor the top kill operation for at least 24 hours, gauging pressure coming from the well. More than 7,000 barrels — or 294,000 gallons — of the heavy drilling mud has been jammed into the damaged blowout preventer, he said. About 50,000 barrels of the mud sits on a supply vessel on the surface, ready to be pumped into the device. If the mud stems the flow, engineers will pump cement to seal the well. Two relief wells being drilled simultaneously will permanently seal the well, he said. Those wells will not be completed until August. "We have the very best people in the world working on this," Suttles said. "We're doing everything we can to bring it to a close."

Count Crimes Committed in Oily Gulf of Mexico
by Ann Woolner - Bloomberg

At least one federal crime had indisputably been committed when oil started spewing into the Gulf of Mexico and approached land. Another criminal act became clear when the first oil-covered sea bird died. Even if everyone involved in the Deepwater Horizon disaster did precisely what they were supposed to do, if every crew member, each manager and all suppliers followed every regulation diligently, the oil globs reaching shore and the deadly crude covering pelicans signal crimes just as clearly as would a body with a dagger through the heart.

“Someone’s going to be criminally prosecuted for this,” says David M. Uhlmann, who for 17 years worked as a prosecutor for the Justice Department’s environmental crimes section, including seven years as the unit’s chief. The questions are: who, and for what crimes?

BP Plc tops the list of suspects because the company leased the rig, owns the oil and to some degree oversaw the operation. But Transocean Ltd., which owns the rig and supplied most of the staff, no doubt has its lawyers working defensively right about now. And then there’s Halliburton Co., which cemented the well. As for laws that were clearly broken, there are two that let prosecutors slam-dunk convictions with no evidence of negligence or intentional wrongdoing. Many a white-collar case has floundered on the problem of proving criminal intent. These environmental laws make that unnecessary.

Environmental Statutes
The 1918 Migratory Bird Treaty Act protects fowl. The Refuse Act, part of the 1899 Rivers and Harbors Act, outlaws industrial discharge in navigable waters. OK, they are both misdemeanors punishable by minor fines, but stay with me here. Even a misdemeanor conviction would remove the $75 million cap on damages that the Oil Pollution Act sets. BP says it will pay all legitimate damages from the spill, regardless of the cap, but fisherman still suffering from the Exxon Valdez spill 20 years ago would urge caution in believing such promises.

Bumping it up a notch by showing negligence, prosecutors can win a conviction under the Clean Water Act, and there’s every reason to believe that can be shown here. Negligence means an absence of due care, say in keeping the blowout preventer working to, um, prevent a catastrophic blowout, for example. All right, a negligence conviction would be a misdemeanor, too, but it carries a fine that could decimate any company charged in this catastrophe: up to twice the damages the spill caused. And an individual charged could spend a year in jail, which would seem a lot for an oil-company manager.

Proving Felonies
To get into felony territory is trickier. For that, prosecutors need to show that companies or people acted “knowingly.” Surely no one knew they would be wreaking ecological devastation on the Gulf of Mexico, ruining a coastal fishing industry, crippling tourism or trashing beachfront property values when they were operating the Deepwater Horizon, even if they took a shortcut or two.

That kind of knowledge doesn’t have to be proven to make a felony case. A BP subsidiary admitted felonious guilt in a deadly 2005 explosion at a Texas City, Texas, refinery and when another BP operation spilled 200,000 barrels of oil into Prudhoe Bay in Alaska. Uhlmann, who now teaches law at the University of Michigan, says that if sufficient evidence emerges, the government could win felony convictions under the Clean Water Act by proving those in charge knew the operation had serious problems and continued to run it anyway.

Eyewitness Account
That seems the case laid out in a CBS “60 Minutes” interview with Mike Williams, chief electronics technician on the Deepwater Horizon. He said that before the explosion, the rig’s blowout preventer coughed up broken pieces of a crucial rubber seal. A supervisor said it was no big deal. And when a crew member’s error broke part of the blowout device’s emergency backup system, no one much cared about that, either, Williams told “60 Minutes.”

Then, when it came time to close the new well in preparation for pumping, a BP manager demanded the crew use a quicker, riskier way than the standard process the Transocean manager had planned, according to Williams. It could turn out that Williams’ account is flawed, or that none of those problems led to the explosion, or that BP and Transocean did everything they reasonably could to prevent the 11 deaths and thousands of barrels of still-spewing oil that’s now coating wildlife and washing ashore on beaches and wetlands.

Legal Thresholds
But if someone filed a false report, manipulated a test result or showed any attempt at deceit, that would ratchet up a Clean Water case to a felony. It could also trigger prosecution for fraud, obstructing justice or filing a false statement against the individuals involved, as well as their employer. In this case prosecutors will be driven to be as aggressive as possible, says Uhlmann, given the gravity of what’s occurred and previous convictions by BP subsidiaries, all of them accompanied by promises to do better. And yet, even the misdemeanor crimes we know were committed led to a calamitous result. They could also lead to ruinous penalties to those responsible.

BP Suspends Top Kill Operation a Second Time
by Clifford Krauss - New York Times

BP’s renewed efforts at plugging the flow of oil from its runaway well in the Gulf of Mexico stalled again on Friday, as the company suspended pumping operations for the second time in two days before resuming the procedure Friday evening, according to a technician involved with the response effort.

In an operation known as a “junk shot,” BP engineers poured pieces of rubber, golf balls and other materials into the crippled blowout preventer, trying to clog the device that sits atop the wellhead. The maneuver was designed to work in conjunction with the continuing “top kill” operation, in which heavy drilling liquids are pumped into the well to counteract the pressure of the gushing oil. The company suspended pumping operations at 2:30 a.m. Friday after two junk shot attempts, said the technician, who spoke on the condition of anonymity because he was not authorized to speak publicly about the efforts. They resumed the procedure at about 3:45 local time, after the nearly 12-hour interruption.

The suspension of the effort was not announced, and appeared to again contradict statements by company and government officials that suggested the top kill procedure was progressing Friday. Word that the top kill had been suspended came as President Obama, accompanied by Adm. Thad W. Allen of the Coast Guard, the leader of the government effort, toured the region affected by the largest oil spill in United States history. Mr. Obama walked along a beach dotted with balls of tar in Port Fourchon, La., and met with the parish president, Charlotte Randolph, and with the governors of Alabama, Florida and Louisiana.

In Grand Isle, La., Mr. Obama said that “we don’t know the outcome of the highly complex top kill procedure,” and added that if it was ultimately unsuccessful, experts were ready to intervene with alternative maneuvers. Standing on the beach with state and local officials, Mr. Obama called the spill “an assault on our shores, the people, our regional economy and on communities like this one.” “This isn’t just a mess that we’ve got to mop up,” he said. “People are watching their livelihoods wash up on the beach,Mr. Obama said he was ordering an increase in manpower involved in the containment and cleanup effort in the Gulf Coast and sought to reassure area residents that “you are not alone, you will not be abandoned, not left behind.” He added that even after the news media tired of the story, “we are on your side, and we will see this through.”

On ABC’s “Good Morning America” on Friday, Admiral Allen said the top kill effort was continuing, and that BP engineers had been able “to push the hydrocarbons and the oil down with the mud.” But the technician working on the effort said later Friday that despite the injections at various pressure levels, engineers had been able to keep less than 10 percent of the injection fluids inside the stack of pipes above the well. He said that was barely an improvement on Wednesday’s results when the operation began and was suspended after 11 hours. BP resumed the pumping effort Thursday evening for about 10 more hours. “I won’t say progress was zero, but I don’t know if we can round up enough mud to make it work,” the technician said. “Everyone is disappointed at this time.”

Andrew Gowers, a BP spokesman, said he would not give “blow-by-blow commentaries.” He added: “The operation is by definition a series of phases of pumping mud and shooting bridging materials and junk and reading pressure gauges. It is going to keep going, perhaps 48 more hours.” If the top kill and junk shots fail, BP officials planned to try again to place a containment vessel over the leak, which might allow them to capture the oil but would not stop the leak. A previous attempt failed.

Tony Hayward, BP’s chief executive, said on “Good Morning America” that efforts to plug the well were "going pretty well according to plan." “Much of the volume you see coming out of the well in the last 36 hours is mud,” he said, referring to live video shots of the oil leak. While he was optimistic, Mr. Hayward gave the effort a 60 percent to 70 percent chance of success because it had never been tried in water this deep.

At a news conference in Washington on Thursday, Mr. Obama said he was angry and frustrated about the catastrophe, and he shouldered much of the responsibility for the continuing crisis. “Those who think we were either slow on the response or lacked urgency, don’t know the facts,” Mr. Obama said. “This has been our highest priority.” But he also blamed BP, which owns the stricken well, and the Bush administration, which he said had fostered a “cozy and sometimes corrupt” relationship between oil companies and regulators at the Minerals Management Service. Earlier Thursday, the chief of the Minerals Management Service for the past 11 months, S. Elizabeth Birnbaum, resigned, less than a week after her boss, Interior Secretary Ken Salazar, announced a broad restructuring of the office.

Mr. Salazar on Friday said he would name Bob Abbey, the director of the department’s Bureau of Land Management, as interim director of the scandal-ridden agency responsible for oversight of offshore drilling. Mr. Abbey, a longtime state and federal lands public lands official will run the agency as it is being dismantled over the next several months. Mr. Salazar announced last week that he intends to break the agency into three parts to handle leasing and oil extraction; safety and environmental oversight; and revenue collection. Currently all those functions are combined, leading to numerous conflicts of interests, with the same group of officials responsible for collecting fees from oil drilling on public lands and offshore while also policing their operations.

Mr. Obama ordered a suspension on Thursday of virtually all current and new offshore oil drilling activity pending a comprehensive safety review, acknowledging that oversight until now had been seriously deficient. Mr. Obama’s trip Friday to inspect the efforts in Louisiana to stop the leak and clean up after it, will be his second trip to the region since the explosion of the Deepwater Horizon rig on April 20. He will also visit with people affected by the spreading slick that has washed ashore over scores of miles of beaches and wetlands.

Even as Mr. Obama acknowledged that his efforts to improve regulation of offshore drilling had fallen short, he said oil and gas from beneath the Gulf, now about 30 percent of total domestic production, would be a part of the nation’s energy supply for years to come. “It has to be part of an overall energy strategy,” Mr. Obama said. “I mean, we’re still years off and some technological breakthroughs away from being able to operate on purely a clean-energy grid. During that time, we’re going to be using oil. And to the extent that we’re using oil, it makes sense for us to develop our oil and natural gas resources here in the United States and not simply rely on imports.”

In the top kill maneuver, a 30,000-horsepower engine aboard a ship injected heavy drill liquids through two narrow flow lines into the stack of pipes and other equipment above the well to push the escaping oil and gas back down below the sea floor. As hour after hour passed after the top kill began early Wednesday afternoon, technicians along with millions of television and Internet viewers watched live video images showing that the dark oil escaping into the gulf waters was giving way to a mud-colored plume. That seemed to be an indication that the heavy liquids known as “drilling mud” were filling the chambers of the blowout preventer, replacing the escaping oil.

Engineers had feared the top kill was risky because the high-pressure mud could have punctured another gaping hole in the pipes, or dislodged debris clogging the blowout preventer and pipes and intensified the flow. The engineers also said that the problem they encountered was not entirely unexpected, and that they believed that they would ultimately succeed. Mr. Obama’s action halted planned exploratory wells in the Arctic due to be drilled this summer and planned lease sales off the coast of Virginia and in the Gulf of Mexico. It also halts work on 33 exploratory wells now being drilled in the gulf.

The impact of the new moratorium on offshore drilling remains uncertain. Mr. Obama ordered a halt to new leasing and drilling permits shortly after the spill, but Minerals Management Service officials continued to issue permits for modifications to existing wells and to grant waivers from environmental assessments for other wells. Shell Oil had been hoping to begin an exploratory drilling project this summer in the Arctic Ocean, which the new restrictions would delay. Senator Mark Begich, Democrat of Alaska and a staunch supporter of drilling in the Arctic, said he was frustrated because the decision “will cause more delays and higher costs for domestic oil and gas production to meet the nation’s energy needs.”

“The Gulf of Mexico tragedy has highlighted the need for much stronger oversight and accountability of oil companies working offshore,” Mr. Begich said in a statement. “But Shell has updated its plans at the administration’s request and made significant investments to address the concerns raised by the gulf spill.” Environmental advocates, however, expressed relief. “We need to know what happened in the gulf to cause the disaster, so that a similar catastrophe doesn’t befall our Arctic waters,” said William H. Meadows, president of the Wilderness Society.

Admiral Allen on Thursday approved portions of Louisiana’s $350 million plan to use walls of sand in an effort to protect vulnerable sections of coastline. The approved portion involves a two-mile sand berm to be built off Scofield Island in Plaquemines Parish — one of six projects that the Corps of Engineers has approved out of 24 proposed by Gov. Bobby Jindal of Louisiana. Investigators also continued their efforts to understand what caused the explosion of the rig, which killed 11 workers.

At a hearing Thursday in New Orleans, the highest ranking official on the Deepwater Horizon testified that he had a disagreement with BP officials on the rig before the explosion. Jimmy Harrell, a manager who was in charge of the rig, owned by Transocean, said he had expressed concern that BP did not plan to conduct a pressure test before sealing the well closed. It was unclear from Mr. Harrell’s testimony whether the disagreement took place on the day of the explosion or the previous day.

The investigative hearings have grown increasingly combative. Three scheduled witnesses have changed their plans to testify, according to the Coast Guard. Robert Kaluza, a BP official on the rig on the day of the explosion, declined to testify on Thursday by invoking his Fifth Amendment right not to incriminate himself. Another top ranking BP official, Donald Vidrine, and James Mansfield, Transocean’s assistant marine engineer on the Deepwater Horizon, both told the Coast Guard that they had medical conditions.

BP bused in 100s of temp workers for Obama visit, state official says
by Brett Michael Dykes - Yahoo! News

Perhaps you saw news footage of President Obama in Grand Isle, La., on Friday and thought things didn't look all that bad. Well, there may have been a reason for that: The town was evidently swarmed by an army of temp workers to spruce it up for the president and the national news crews following him. Jefferson Parish Councilman Chris Roberts, whose district encompasses Grand Isle, told Yahoo! News that BP  bused in "hundreds" of temporary workers to clean up local beaches. And as soon as the president was en route back to Washington, the workers were clearing out of Grand Isle too, Roberts said.

"The level of cleanup and cooperation we've gotten from BP in the past is in no way consistent to the effort shown on the island today," Roberts said by telephone. "As soon as the president left, they were immediately put back on the buses and sent home." Roberts says the overnight contingent of workers was there mainly to furnish a Potemkin-style backdrop for the event — while also making it appear that BP was firmly in command of spill cleanup efforts.

New Orleans NBC affiliate WDSU reports that the workers were paid $12 an hour and came mostly from neighboring Terrebonne and Lafourche parishes. News of 11th-hour spruce-up brigade spread rapidly Friday afternoon and infuriated locals. One popular radio host, WWL's Spud McConnell, suggested that the Coast Guard and the White House may have been involved in setting up the "perfect photo op." "Who else has the kind of authority to bring a bunch of strangers to Grand Isle when the president is in town for a visit? You think they did background checks on all those people?" wondered McConnell. "I'd be a lot less upset about this if they would have at least stayed to clean the beach."

He Was Supposed to Be Competent
by Peggy Noonan - Wall Street Journal

I don't see how the president's position and popularity can survive the oil spill. This is his third political disaster in his first 18 months in office. And they were all, as they say, unforced errors, meaning they were shaped by the president's political judgment and instincts. There was the tearing and unnecessary war over his health-care proposal and its cost. There was his day-to-day indifference to the views and hopes of the majority of voters regarding illegal immigration. And now the past almost 40 days of dodging and dithering in the face of an environmental calamity. I don't see how you politically survive this.

The president, in my view, continues to govern in a way that suggests he is chronically detached from the central and immediate concerns of his countrymen. This is a terrible thing to see in a political figure, and a startling thing in one who won so handily and shrewdly in 2008. But he has not, almost from the day he was inaugurated, been in sync with the center. The heart of the country is thinking each day about A, B and C, and he is thinking about X, Y and Z. They're in one reality, he's in another.

The American people have spent at least two years worrying that high government spending would, in the end, undo the republic. They saw the dollars gushing night and day, and worried that while everything looked the same on the surface, our position was eroding. They have worried about a border that is in some places functionally and of course illegally open, that it too is gushing night and day with problems that states, cities and towns there cannot solve. And now we have a videotape metaphor for all the public's fears: that clip we see every day, on every news show, of the well gushing black oil into the Gulf of Mexico and toward our shore. You actually don't get deadlier as a metaphor for the moment than that, the monster that lives deep beneath the sea.

In his news conference Thursday, President Obama made his position no better. He attempted to act out passionate engagement through the use of heightened language—"catastrophe," etc.—but repeatedly took refuge in factual minutiae. His staff probably thought this demonstrated his command of even the most obscure facts. Instead it made him seem like someone who won't see the big picture. The unspoken mantra in his head must have been, "I will not be defensive, I will not give them a resentful soundbite." But his strategic problem was that he'd already lost the battle. If the well was plugged tomorrow, the damage will already have been done.

The original sin in my view is that as soon as the oil rig accident happened the president tried to maintain distance between the gusher and his presidency. He wanted people to associate the disaster with BP and not him. When your most creative thoughts in the middle of a disaster revolve around protecting your position, you are summoning trouble. When you try to dodge ownership of a problem, when you try to hide from responsibility, life will give you ownership and responsibility the hard way. In any case, the strategy was always a little mad. Americans would never think an international petroleum company based in London would worry as much about American shores and wildlife as, say, Americans would. They were never going to blame only BP, or trust it.

I wonder if the president knows what a disaster this is not only for him but for his political assumptions. His philosophy is that it is appropriate for the federal government to occupy a more burly, significant and powerful place in America—confronting its problems of need, injustice, inequality. But in a way, and inevitably, this is always boiled down to a promise: "Trust us here in Washington, we will prove worthy of your trust." Then the oil spill came and government could not do the job, could not meet the need, in fact seemed faraway and incapable: "We pay so much for the government and it can't cap an undersea oil well!"

This is what happened with Katrina, and Katrina did at least two big things politically. The first was draw together everything people didn't like about the Bush administration, everything it didn't like about two wars and high spending and illegal immigration, and brought those strands into a heavy knot that just sat there, soggily, and came to symbolize Bushism. The second was illustrate that even though the federal government in our time has continually taken on new missions and responsibilities, the more it took on, the less it seemed capable of performing even its most essential jobs. Conservatives got this point—they know it without being told—but liberals and progressives did not. They thought Katrina was the result only of George W. Bush's incompetence and conservatives' failure to "believe in government." But Mr. Obama was supposed to be competent.

Remarkable too is the way both BP and the government, 40 days in, continue to act shocked, shocked that an accident like this could have happened. If you're drilling for oil in the deep sea, of course something terrible can happen, so you have a plan on what to do when it does. How could there not have been a plan? How could it all be so ad hoc, so inadequate, so embarrassing? We're plugging it now with tires, mud and golf balls?

What continues to fascinate me is Mr. Obama's standing with Democrats. They don't love him. Half the party voted for Hillary Clinton, and her people have never fully reconciled themselves to him. But he is what they have. They are invested in him. In time—after the 2010 elections go badly—they are going to start to peel off. The political operative James Carville, the most vocal and influential of the president's Gulf critics, signaled to Democrats this week that they can start to peel off. He did it through the passion of his denunciations.

The disaster in the Gulf may well spell the political end of the president and his administration, and that is no cause for joy. It's not good to have a president in this position—weakened, polarizing and lacking broad public support—less than halfway through his term. That it is his fault is no comfort. It is not good for the stability of the world, or its safety, that the leader of "the indispensable nation" be so weakened. I never until the past 10 years understood the almost moral imperative that an American president maintain a high standing in the eyes of his countrymen.

Mr. Obama himself, when running for president, made much of Bush administration distraction and detachment during Katrina. Now the Republican Party will, understandably, go to town on Mr. Obama's having gone before this week only once to the gulf, and the fund-raiser in San Francisco that seemed to take precedence, and the EPA chief who decided to cancel a New York fund-raiser only after the press reported that she planned to attend.

But Republicans should beware, and even mute their mischief. We're in the middle of an actual disaster. When they win back the presidency, they'll probably get the big California earthquake. And they'll probably blow it. Because, ironically enough, of a hard core of truth within their own philosophy: When you ask a government far away in Washington to handle everything, it will handle nothing well.


jal said...

"Regulations are an irritation.

There will not be any money to enforce the regulations."

-quote from PLAN B

Rumor said...

Great intro, Ilargi, and to the point: you and Stoneleigh have seen this coming; this is unfortunate confirmation. And still, almost no one dares utter the word "deflation".

Anonymous said...

Ilargi, thank you for another excellent intro and insightful articles.

Matt Simmons' analysis is very scary, but probably accurate since he's so knowledgeable in his field.

Steve From Virginia said...

Went to meet and listen to Stoneleigh lsst night. This took place in the Washington, DC area.

At the tail end of rush hour it took two hours to travel nine miles! There was a six- mile long backup on the one and only route (major or minor) between the start and finish of the trip.

There is a six- mile long backup on this stretch of road at this time, every single working day.

This is the finance/credit/oligarch crisis or whatever name you want to attach to it. Our entire society chokes on the effluvia of prosperity.

One jurisdiction spends a billion (borrowed) dollars to make their part of the road bigger. The project is instantly obsolete as the other jurisdiction's part of the road cannot be made bigger as well. The site of the traffic jams is to move a small bit ... for a billion dollars! Plus, the five years the project takes adds years of additional delays that can never be 'made up' by the road's 'improvement'.

Also ... the state funds are disappearing; the entire project may never be finished!

Our society cannot afford to pay for its precious self which constantly expands while the means to pay in general shrinks. Oh my ...

Up the page you have the gold bug (Sprott), the servile (Sachs), the curmudgeonly (Hendry) and the insane (Celant, who conveniently touts perpetual motion machines, something that instantly discrdits him to the point where he rates lower than the vile Sachs.)

Sensible Gillian Tett is really out of place within this collection of 'characters' who belong in a Dick Tracy comic strip.

All the collected wisdom of the 'Great (media) Deflationists' refuses to see what is right in front of them, what they cannot possibly avoid. None can imagine a life without (their own) excesses. A rising tide indeed lifts all yachts ...

Anonymous said...

I saw and met Stoneleigh the other night in Rockville, MD.

In both her core presentation, digressions thereupon, and Q&A, the woman does not waste a word, moreover radiates intelligence like a stove.

Her complete ignoring of the political realm and its clownshow buffoonery helped me a lot.

More later as i continue digesting.

snuffy said...

I always enjoy Hugh Hendrys when he gets rolling,and carefully skins any who oppose his well thought out positions.The guy is 3 steps ahead of most people who he discusses issues with..

It is a sad truth that there will be no changes that will prevent further looting by the carnivores of wall street.Such is life.It seems that the whole effort of this administration is aimed at trying to restore the expense of gutting the future of this country.

We are soooo screwed.

The good news,if there is any is that more folks are waking up...but at this rate,things will detonate before enough folks are awake to effect the outcome

Keep prepping....Sure,you know that it will never be enough,but its better to have half a blanket,than freezing with none...

Bee good or
Bee careful


Anonymous said...

Great job in bringing the deflation/oil spill metaphor together.

Also glad you linked to the Noonan article. I never thought I would ever say this, but I kind of wish Hillary would have won the Dem primary. Obama is just exactly the wrong person in the wrong place at the wrong time. His dithering weakness and corruption has become impossible for anyone to ignore in the last month. It doesn't bode well for the next couple of years, and particularly the backlash that will certainly happen in 2012 when .gov support payments to people who will be homeless and starving have been almost eliminated and the torches and pitchforks have come out.

I think this lady says it all (in the article about the 99ers):

"Dear God I dont know what I am going to do - I have just one more week of benefits, and a little in the bank. There are not enough jobs plus my age is not helping. I'm just so afraid for all of us - afraid for this country. Why won't someone help up."

My daughter is in the same situation except her husband has racked up $80K in medical bills in the last six months because of uncontrolled diabetes and a MRSA infection. She also has my two grandchildren. I am going to have to take them in eventually but they live 200 miles away in a city and we don't have the medical facilities here that he needs. They will certainly have to go bankrupt once he gets well.

For me, the future is here, now...

gylangirl said...

Rockville Maryland. Listening to Stoneleigh in person helps the coherent overall message sink in better, I think. Crystal clear. Wonderful also to be in a whole roomful of TAE readers who can finish your sentences instead of contradicting them. And we resolved to continue the local conversation in the DC area. Thanks for that.

VK said...

And still, almost no one dares utter the word "deflation".


In other news I found this helpful little chart. Enjoy!

VK said...

Transmission Loss of Monetary and Fiscal Policy.

To continue an analogy that Eric Sprott started off a few days ago on GDP Growth vs Deficit spending i.e. the Asset and Liability side of a countries balance sheet for an analogy.

US GDP Growth of 3% annualized is effectively negated by the near 12% in deficit. So 9% of the US economic collapse in GDP has been hidden from view by massive borrowing. Over the last 2 years GDP has been negative overall and deficit spending is going to total 3 Trillion in that period and lets not forget to mention all the stimulus, TARP, son of stimulus, cash for clunkers and cash for caulkers and the wonderful FED liquidity alphabet soup for the banks.

The real US economy aka Private sector has contracted by around 20%, while the rest of it is being held on life support. As we head into the next wave down, the bottom should fall out at a much quicker pace. I wouldn't be surprised to see a 50% drop in Canadian and Australian housing prices in a matter of months as happened in Dubai when credit evaporated to a large extent.

The eerie normality we see all around us will experience a discontinuity. A sharp fall is in the cards. As wave 3 should see an acceleration of events. On a proposed reading of DOW 3000, we could quite possibly see more than half of publicly listed companies go bankrupt.

I think this leg down should be marked as a wave of acceleration and discontinuity. With sharp spikes in unemployment, massive drops in GDP and overall a much faster pace of contraction as the twin clowns of monetary and fiscal policy fail to gain any traction due to a vaporisation of confidence.

Erin Winthrope said...

Hugh Hendry and TAE (continued)

Hugh Hendry makes another very surprising recommendation in the interview -- a recommendation that seems so deviant from the sort of thing that TAE would recommend, I even wonder if the interviewer misquoted him or misunderstood him. According to the interview, when asked what an investor should do once hyperinflation arrives, Hendry recommends investments in large companies with very low debt and strong balance sheets. He specifically cites consumer staple companies like Unilever and Proctor and Gamble (P&G). Since these companies sell very basic consumer necessities like soaps, toothpaste, cleaning supplies, etc. they will survive the medium term deflationary collapse and their stock price will rise during the hyperinflationary stage. Thus, the rising stock price of companies like P&G could be a source of paper wealth preservation once hyperinflation arrives.

I find this idea fascinating. Up until this point, I imagined that paper wealth preservation would be largely impossible after the deflationary collapse and the onset of hyperinflation. TAE has recommended preserving one's assets as cash-in-hand and short dated Treasuries in order to preserve savings during the deflationary collapse. Then, after 1-3 years of collapse, convert that paper wealth to real-world tangible wealth such as land prior to the onset of hyperinflation -- an event that will rapidly erode remaining paper wealth. TAE has been generally skeptical about gold as a hyperinflation hedge due to the strong risk of capital controls that will make gold ownership illegal. Thus, gold would become a particularly dangerous source of long-term wealth preservation during hyperinflation. Hugh Hendry's Unilever and P&G recommendation seems to be interesting because it at least offers the possibility for a legal mechanism of wealth preservation after deflationary collapse and the onset of hyperinflation. In fact, unlike gold ownership that will probably be treated very harshly by authorities, stock participation post collapse will probably be actively encouraged by authorities. Since, I'm more emotionally more inclined to go with the flow rather than fight against it, I'm intrigued by Hendry's longer term recommendation of stock ownership in companies like P&G and Unilever. What does TAE think about it?

Erin Winthrope said...

Re: Hugh Hendry and TAE

Hugh Hendry and TAE are two of my favorite sources for information and guidance about our impending financial and economic collapse. In many respects, the views of Hendry and TAE seem to be closely aligned. However, there are a few differences that I perceive and I'd like to highlight those differences to make sure I understand them correctly. Also, Hendry recently made an unusal recommendation regarding long term wealth preservation, and I'd like to know what TAE thinks about it (see below)

Zero hedge posted a pdf file with a recent Hugh Hendry interview with MoneyWeek magazine. In that interview, Hugh made some predictions about the timing of deflation (it's occurring now and gaining momentum) and hyperinflation (it will happen in the longer term future in response to extreme turmoil such as a China collapse). These ideas are closely aligned with TAE's views (I think). Unlike TAE, Hendry doesn't specifically refer to the collapse of the sovereign bond market as the event that precipitates hyperinflation, but a bond market collapse seems to be the general type of trigger that Hendry is implying when he mentions the Chinese collapse.

The interviewer asked Hendry what the average investor should do in this environment when deflation is gathering momentum. Hendry predicts that 30-year US treasury bonds and long dated UK gilts will do well in the deflationary collapse. If I remember correctly, Hendry's long term govt. bond recommendation seems to deviate from TAE recommendations. TAE has stated that long term bonds (US, UK, German) might do well in the very early stages of the deflationary collapse, but these long term bonds are a risky investment because yields might spike if the deflationary panic gathers extreme momentum. Furthermore, even if long-term sovereign bonds do well during the initial stage of the collapse, the average investor might fail to bail-out before the trend reverses. The volatility associated with a deflationary collapse could create a very sharp and violent trend reversal from falling yields to rising yields -- especially when the risk of social instability is rising.

Ilargi said...


I think it would be wise not too get too far lost in guessing games.

Whether P&G will survive deflation or not is by no means certain. What is certain is that post-deflation, very few people will have to worry where to park their wealth, because they won't have any.

This focus on hyperinflation is really not very smart, but for some reason it draws people like flies to honey. Focusing on the short term will be much more useful.


Mr. Kowalski said...

I watched the BBC Hendry interview, and although he at times comes off pushy and over-animated, he's actually three steps ahead of the others mentally.

If the LIBOR continues upward, we'll be in some trouble. But I must say the last few trading day have in fact been relatively normal battles between bulls and bears; there have been no central bank interventions, flash crashes or other events:

scandia said...

Re the BBC interview with Tett, Hendry and Sachs...Wow, I had never seen Sachs before. What a smug creep. If I was a student at Columbia I'd ask for my money back!
Sachs said something quite significant concerning Greece in that the goal is not to repay debt but to service debt. Ho hum, endless serfdom, here we come. That's if the Sachs of the world continue to win the day as they have so far.
I hadn't realized until this interview that the eagerness of central gov'ts to borrow is intentional, not a last resort.
It is not a response to fix a crisis but a plan to maintain servicing this debt burden as a wealth creation vehicle for TPTB.

sensato said...

As the not-so-proud resident of the city where P&G makes the disposable Swiffer, I'd reckon many of the product lines P&G is in are themselves disposable. Many of us will return to straight razors, vinegar, and baking soda at a fraction of the cost.

theyenguy said...

Regarding the Jody Shenn Bloomberg Business Week article Mortgage Lenders Seek Relief on Bad Debt Repurchases

The current GSE bail out WILL FALL THROUGH, and the Timothy Geithner promised 2010 funding for the GSEs WILL EVAPORATE ... One might ask how? I go to and look at the chart of IEF, TLT, and ZROZ, that is at the chart of the 10, 30 and zero coupon US Government debt. On Thursday May 27, 2010, it has turned parabolically lower.

There is a day coming very soon when investors will no longer see US Treasuries as a safe haven investment. The Google Finance chart of IEF, TLT and ZROZ, shows these to now be a failing investment with -.4%, +.5% and -5% for the week.

There will come a failed US Treasury auction, to be followed by monetization of debt, either by money center bank Treasury purchases or printing of money by the Federal Reserve. Either way the US Treasures will further decline in value; soon thereafter funding of the GSEs terminated, along with austerity measures imposed on social security recipients as they receive discretionary income: housing values will fall and loan servicers, that is the banks, will turn to kicking out the squatters, and begin to leasing the properties.

When the GSEs fail, and their funding fails, the souring debt will go back to the banks that underwrote the original loan! Jody Shenn in Bloomberg Business Week article Mortgage Lenders Seek Relief on Bad Debt Repurchases that contracts require repurchases of defaulted loans when faulty appraisals, inflated borrower incomes or missing documentation are discovered; so when the primary insurer, the GSE, and FHA, fail, then the debt goes back to the banks such as JP Morgan, Bank of America and others. Think of the tsunami of debt that is coming to the banks.

Stoneleigh said...

Ed Gorey,

Thanks for participating here. You always ask great questions. I'll try to answer as soon as I can, but I have to head north in a few minutes, so I may not be able to answer for a while.

scandia said...

I think it was Souperman2 (?) who described Stoneleigh's essay, " Economics and the Nature of Political Crisis " as akin to reading about a crime scene. An insightful comment as, yes, there is a forensic quality to her analysis. The essay also demonstrates Sharkbabe's comment that " the woman doesn't waste a word".
In the essay Stoneleigh points out the differeces between expansionary times and times of contraction. With this insight still fresh in my mind I heard a debate on MP travel expenses in a new way. Apparently many MP's with young families travel with their families and consequently have huge travel expenses, a burden to the taxpayer. It seems our Cdn society still feels expansionary as there was consensus that all should be done to support MP's being good fathers. ( Note no mention of women MP's being good mothers).
As one who sees contraction not only will MP's with family attached be unsustainable so will governance that requires MP's to travel thousands of miles to cast an opinion or a vote.
Is it not a recent phenomenon that our elected officials are much younger than the historical norm? Is that a good idea when previous committments to parenthood have been made. When did it become the norm to guarantee family time? Actually a norm of the west. Many heads of families in the third world work " away " and don't see their families for years.
Large land mass countries like Canada will have its national federation tested. Creating the image of a " family man " during expansion will become a liability during contraction.

theyenguy said...

Regarding the article Europe's Banks Hoard Cash: Relying on the ECB for funding and leaving money on deposit with the ECB translates directly into a loss of national sovereignty and creates a beast of integrated banking and centralized government authority. No nation, not Germany, not France, will be able to pull out of the Euro. As the European banks become increasingly integrated with the ECB and are ever more unlikely to find funding, their risk of failure increases dramatically, raising the likelihood that the state, that is the regional government will become the banking and financial institution in Europe. With such integration, I see how the 666 credit system prophesied in the bible in Revelation 13:16-18 can easily be implemented. At the May 2010 Summit, the EU Finance Ministers and Leaders of State announced funding for a common treasury, hence an EU Treasury, to be overseen by Mr. Trichet with the authority to sell debt, buy distressed sovereign debt and issue seigniorage aid to Greece; this appoints him as Treasurer and Central Banker for what amounts to a federal European Government. On June 7th and 8th, Herman Van Rompuy, the EU President, will convene a work group to address issues of European Economic Governance and to recommend policies and mechanism for the stability of the Euro which could be announced by leaders as early as October 2010.

Greenpa said...

El Gall - re the unit for the shit index; yours is not bad; I'd been considering the "KeynesPain".

Could sound good on TV. "This VIX is up 15 points today, to 78; and the Excrement Increment is up 27 Keynes Pains."

Greenpa said...

Snuffy- many thanks for your comments the other day.

So, in your honor, and stimulated by your urge to "continue prepping"; here is today's Polka Dot Gallows piece.

Just substitute the right word.

And now try to get that out of your head. :-)

The Onion needs this one.

jal said...

scandia said...

“... the eagerness of central gov'ts to borrow is intentional, not a last resort. 
It is not a response to fix a crisis but a plan to maintain servicing this debt burden ...”

Now ... put all of the borrowers on a scale ... (gov., companies, individuals), and you will see that the borrowers reach a tipping point where he discards the idea of ever repaying the loans. Its impossible because of lack of income. This awareness is also known to the lenders.

As a result everyone is resigned to the eventual outcome but few can see the consequences.

The money lent out will never be re payed.

Let me use a simple example, that you hear every day.

It is the one used in determining how much money you will need to have in savings to be able to have income in your retirement years.
You need millions so that your capital will not be used and so that you can live off the revenue stream of that investment/savings.

The reason given is that you do not want to outlive you savings.

The truth is that if everyone was spending their savings/investments, the system would crash.

There is no way that the money can be given back to all of the savers. The money was spent by whoever you gave it to. The borrowers can only pay the interest, the dividends etc. but never payback the loan or investment.

The few times that the money is payed back is in a share buyback. Guess! Who is positioned to get his money back? Yep! its an insider or friends of insiders.

When looking at a different example, such as a gov. pension plan, the revenues received by the pensioner is made up of dividends AND new contributions.
Guess what? They can never get the money back from where they had lent it. Doing so would mean bankruptcy etc.

Its all about “following the money” ... “revenue stream”

The capital is gone and has always been gone!


Greenpa said...

Oh, yeah- the phrase to substitute is "I read TAE, and.."

Greenpa said...

On a more serious note; there's a statistic I'm not seeing- that would be the rate of CEO's and upper management execs selling their own stock. What are they doing? As if we can't guess.

Eeyores Enigma said...

scandia said..."the goal is not to repay debt but to service debt. Ho hum, endless serfdom,"

Exactly, and thats only after SEVERE austerity measures, aka cut education, healthcare, foodstamps, welfare, social security, unemployment, etc.

Cut everything so they can pay the interest only loan of money the banks never had to begin with.

Pure unadulterated slavery.

Eeyores Enigma said...

Did something last night that I haven't ever done before.

Sitting at an outdoor establishment down by the river, listening to a great blues trio and sipping on a stellar Syrah. The band went into this classic blues progression with the lead guitar stepping out with some awesome Stevie Ray quality licks now and then when these lyrics popped into my head. Next thing I knew I was walking up to the mike and the lead guy bowed me in so I grabbed the mike and started to sing. After the first word came out I thought to myself WTF are you doing, but then I just left everything behind and got so lost in the music that it felt ….almost like …..SEX!

Here's what I sang;

Deep Horizon - deep horizon
Deep Horizon - deep horizon
Pool 'ol Louisiana's got those
Deep Horizon Blues
Dying fish and birds
turtles, reefs and whales
everything in the ocean
right down to tiniest sea snails
The Gulf of Mexico's got those
Deep horizon blues
100 mile long plumes
sucked into the loop
picking up the gulf stream
Cuba-Bahama-Florida- The Keys
Everybody's got 'em got those
Deep Horizon Blues

Don't know where it came from but the crowd loved it. Well it was my birthday after all so WTH.


Mr. Kowalski said...

Here's my version of Economic Doomsday:

scrofulous said...

About this statement:

"US money supply plunges at 1930s pace as Obama eyes fresh stimulus"

Also read Jesse's article:

M3 Hysteria and a Look M2, MZM, GDP and PPI

Interesting bit from Jesse's article:

"Now, looking at this chart, it appears that the Fed is following their usual gameplan. The excess reserves that the banks are holding, at least indirectly in response to the balance sheet expansion and interest rate payments on their own deposits by the Fed, are enormous and unprecedented. If the Fed were to start pulling some levers to motivate those reserves into the real economy through loans, the impact could be dramatic. The Fed will do this if their fear of inflation begins to be overcome by their fear of deflation."

JP said...


I always enjoy your take on recent events in Canuckistania, particularly since you often approach them from an angle I hadn't considered.

I'm still very agnostic about Canada's future as a nation. Hell, I'm agnostic about it's past as a nation, beyond the hard-sell pipe-dream of a bunch of dead politicians. As someone who lives in Ottawa and constantly has to listen to the a capella tune, "It's different here" from the local civil servants, I welcome a a way of thinking that is actually different.


If any of you have been considering attending one of Stoneleigh's talks but have been sitting on the fence, please, go! And bring a friend! I have had the good fortune to attend one of her talks in Ottawa as well as meet her and Ilargi. They both have a way of giving you a whack on the head (in a nice way) which is key for newbies.

Also, donate generously. Consider how much all the wisdom in the primers is worth. Consider how much Ilargi's essays and data mining are worth. At least the price of a newspaper subscription, yes? One of those financial self-help books (which are usually dross)? Basic cable? A week of lattes?


VK said...

@ Ed Gorey

Maybe Hendry was misconstrued but I find the idea very misleading that P&G and Unilever could survive in their present state.

When the credit markets collapse, the whole chain flow starts breaking down. Today we have globalized supply chains. One car has about 6,000 to 10,000 various parts. One mobile phone has items from virtually the continents. All these supply chains are reliant on the availability of cheap credit, cheap oil and political stability. All 3 will be in short supply and especially credit.

The future is really about localization, not giant multi-national corporations with global supply chains built on cheap energy that is the early stage of decline.

The question of political stability is not questioned in that article. Frankly no one knows if the US will survive as an entity or break off. There are some chart analysts who reckon the DOW is headed to ZERO.

The future is all about localization. Not globalization.

scandia said...

@Eeyores Enigma...I love the blues!
I wish I could have been there to share in your song from the heart!

Greenpa said...


Awesome. :-)

M said...

Leave it to a Gemini… equating spur of the moment musical inspiration to sex.

On the other hand, there is something beautifully erotic in this divine and rapturous performance by Martha Argerich

A beautiful, brilliant woman performing a magnificient composition by Rachmaninov…evoking the foliage of fall tumbling into the Russian steppe.

soundOfSilence said...

Gravity out there??

BP says so far, Gulf well plug isn't working.

Release an idea however outlandish to the public. They may initially react with shock... but give it some time and they will come to accept it.

Ric said...

Steve's comment about Celente's credibility put me in mind of the risk we take speaking aloud:

Celant, who conveniently touts perpetual motion machines, something that instantly discredits him to the point where he rates lower than the vile Sachs.)

What is it that gives someone credibility? In the light of our extreme limitations as human beings, does anyone deserve any credibility at all? Does anyone have the omniscience or experience others might want us to have? Should we stay silent when we are so limited? I don't ask that people be "right"--I ask that they be honest.

EE--what fun!

Ilargi said...

Video: Matt Simmons says best estimate of oil leak is it's spewing 120.000 barrels a day. Yes, that would be 5 million gallons. Every day, for 40 days now.


Gravity said...

Oh, snap, this is just fiction now, but I have been semi-seriously contemplating exotic alternative methods by which one could nukelessly seal similar ruptures and perhaps simultaneously allow for partial containment and cleanup of the massive plumes, mostly by utilising those non-existant geophysical weapon arrays, somehow involving electrostatic repulsion fields combined with resonant polymerization induced by microwave cascade, depending on electrodynamical properties of target molecules, but because those arrays don't exist as such it wouldn't be applicable, nor could such theoretical effects be created at that scale, or at all, without risking unforeseen consequences, such as the likely death of all organisms in the vicinity.

Of the tools that are known to exist, a small nuclear detonation, or timed series of detonations, may be viable to seal the rupture, but would of course do nothing to facilitate containment or cleanup of the plumes. Say there's a 10%-20% chance of success, and the rupture would be sealed, a 2%-5% chance of catastrophic failure, so it becomes even worse, and no change otherwise, then I'd still recommend taking a chance when we've run out of saner options, if the only alternative is to let the field drain out completely.

VK said...

What is it that gives someone credibility?

A University degree from the Ivy League?

Gravity said...

Maybe some oil-eating microbes could be designed specific for the cleanup, also to clear the mid-oceanic plastic drift, though they'd better not widely spread into the remaining sources of crude, or mutate into an aggressive polymer-metabolising unstoppable scourge capable of eating flatscreens.

scandia said...

What is it that gives someone credibility?
Their track record.

soundOfSilence said...

VK said...

What is it that gives someone credibility?

A University degree from the Ivy League?

What if the degree is in economics?


Glennjeff said...

Eeyore, geat stuff.

You got a shag from a muse for your birthday, cool.

memphis said...

What is it that gives someone credibility?

I'm not sure we can identify what gives someone credibility; we can only identify credibility once it's lost, at which time it's almost impossible to regain.

Steve From Virginia said...

I had the opportunity on Thursday to meet and listen to Deflationary Angel of Mass Economic Destruction Stoneleigh, who authors substantial and credible primers along with her associate Ilargi over @ The Automatic Earth.

Stoneleigh is the least Cassandra- like of the current crop of social- economic Cassandras: Roubini, Taleb, Greer, Kunstler, Faber, Prechter, Grant, along with the horde of gold- bugs who always crawl out of the woodwork like cockroaches when order falters and some group's misery stands to produce a safe profit for someone else.

Her talk was unlike most finance product sales events, which clutter 'conference centers' in anonymous freeway- side motels drawing the delerious and gullible anxious to be fleeced so that they may avoid being fleeced elsewhere. This event was much like the clandestine meetings of the French Resistance during the Second World War, shuttled to the rear of the anonymous house in a distant and mazelike suburb, far away from the prying eyes of Gestapo informants, well fortified by massive and endless traffic jams in all the surrounding roads.

snuffy said...


I am a little older than he,but I do wear a vest most of the winter[grin]..
Bee good,or
Bee careful


snuffy said...

Never thought about it that way jal,but you hit the nail square on.Its all about making the interest payment,and remaining a debt slave.This is how a entire generation was enslaved.Cheap,easy everyone.

The smart ones figure out after a while that a credit card is a chain around your neck,a tithe to the bank of every nickle you spend....and get by without one.

Mrs snuffy and I got rid of them 9 years ago,and ask to be put on the "Don't bother us" list.Funny,we seem to have all the cash we need and then we do not use credit cards,and work.[yes it does help we are both frugal by nature]

bee good or
Bee careful

Unknown said...
This comment has been removed by the author.
VK said...


Can anyone point me to a historical book on the political trigger
required for the transition from deflation to hyperinflation. Is it
politically feasible to simply 'print' at lets say a 30-40% drop in wages. I suspect the public would clamour for such action though the bond market on hearing this would precipitate a faster collapse in the economy as investors would flee. Can the transition happen in a matter of weeks or days or this is a long term thing happening over years?

For eg, let's say DOW's at 2000, Wages have dropped 30%, Home prices
have plummeted etc. Won't there be political clamouring for 'printing'. Let's say such talk gains traction. In that event, the
market would collapse even more - DOW below 500, wages down 60% etc
all in the space of weeks. Now lets say the decision to print goes
ahead. Then we're talking about a matter of days before notes begin to circulate in the economy.

That poses a huge problem for imports and exports obviously and
capital as a country which is hyperinflating would see what remaining capital there is to a neighbouring country which is less toxic, also why would any country sell anything to a country with worthless currency - redemption would be in gold. Which would be very painful as well. So printing is really no panacea.

What I'm concerned with, while talking to myself, is that the coming deflation will be hyperaccelerated due to political pressures. Is there some sort of historical guidance on the transition period from deflation to inflation?

Is there a threshold below which the populace refuses any wage cuts
and goes ape shit, though that would precipitate civil war or
international conflict. And any strike in the straight of Hormuz would see already declining oil supplies decline even more. So either way living standards are going to plummet and localization is the watchword.

What's interesting is that deflation might actually be a favourable outcome - path of least crappiness - in the grand scheme of things. If people globally accept the pain, there might be some semblance on international trade and stability. LOLOLOL (my inner self laughing at me)

I've been debating in my head the political limits of deflation and
then hyperinflation.

BTW hyperinflation might not even be inevitable. What if they just
issue currency at a 2% per annum growth rate, I think hyperinflation
within current constructs is terribly difficult to achieve with the bond markets being so concentrated at the short end of the curve.

Unknown said...
This comment has been removed by the author.
PanIdaho said...

Is Stoneleigh still considering a trip to Wyoming and thereabouts later this year? I'd love to be able to go listen in person to what she has to say. I know that we probably just don't have the population in this part of the country to merit a stop. But, I can still hope, right? ;-)

scandia said...

@VK...Jesse's Cafe American posted an audio interview with Felix Zulauf ( Barron's ) who speaks to the timing issue. ...

Erin Winthrope said...

@ VK

Re: deflation and hyperinflation

Here is my take on deflation and eventual hyperinflation:

With so much debt still outstanding, hyperinflation is impossible. Printing money would cause interest rates to rise and thereby force greater numbers of debtors into default. Thus, the only thing printing achieves is greater deflation, not inflation.

Once deflation has run its course and most debtors have defaulted and most creditors have been wiped-out, then there is no longer any barrier to printing. Hyperinflation is thus impossible until all the overlapping pieces of the wealth pie have evaporated. Then, at that point, the tiny real-world wealth pie of actual goods and services can be divided into smaller and smaller pieces to try and maintain some semblance of order. Of course, the living standards supported by those tiny slivers of real-world wealth pie are about 10% of the living standards supported by virtual and overlapping pieces of imagined wealth pie.

zander said...

The BP mud-golfballs-rope fiasco has failed according to UK radio this morning, what now eh? 120,000 BPD... someone pinch me.
On Celente, I'm afraid he might have lost a certain amount of cred in many eyes with some of his latest remarks, and unfortunately once a sensibilty lapse has taken place it sticks, unlike the mud being pumped into the horizon well (not funny, sorry)
it's a pity because on so many issues the man has it nailed down.
Ditto Ruppert.


Ilargi said...

BP has abandoned the Top Kill procedure, and offers a new robot submarine effort in 4 to 7 days.

Maybe Matt Simmons isn't exaggerating about the 120.000 barrels per day anymore than he is about the much bigger leak 6 miles out.

This tidbit from Friday fits the picture perfectly:

'Army Of Temp Workers' Bused To Grand Isle For Obama Appearance Leave Soon Afterward

This afternoon, President Barack Obama made a trip to Grand Isle, Louisiana to discuss the measures being taken to bring some form of relief to the region and the actions being taken to both stem the Deepwater Horizon oil spill and prevent future calamities from happening.

Over at Yahoo's Newsroom, Brett Michael Dykes reports that for the occasion, Grand Isle was "invaded by an army of temp workers to spruce it up for the president and the national news crews following in his wake." How temporary were these workers? As it turns out, pretty damn temporary!

"Chris Roberts, a Jefferson Parish councilman whose district encompasses Grand Isle, told Yahoo! News that BP had bused in "hundreds" of temporary workers to work on the cleanup of local beaches. And as soon as the president was en route back to Washington, the workers were clearing out of Grand Isle, as well.

"The level of cleanup and cooperation we've gotten from BP in the past is in no way consistent to the effort shown on the island today," Roberts said by telephone. "As soon as the president left, they were immediately put back on the buses and sent home."


carpe diem said...

I don't get it.

Why aren't people marching on Washington or something? Why isn't anything being organized? Just to show their sense of outrage if nothing else. The leak will not be staying in the Gulf. I have read that it will pollute the worlds oceans- worldwide (obviously). Next time you order your filet of sole you may think twice.

I don't think the economy matters much if the ecosystem is dead.

Stoneleigh said...

I would like to thank all the people who made my latest excursion so wonderfully memorable, and all the people who made such kind comments here as well. I had a great time traveling round the eastern seaboard.

I was asked to return to the Washington area for another talk later in the year, and I promised to do so.

zander said...


I gotta feeling simmons isn't exaggerating, there's something not quite right about this - info wise, something tells me there is a big piece of jigsaw missing here, some significant thing were not being told.
Damned if I can put my finger on it

@Carpe.D. "I don't think the economy matters......"

well exactly.


zander said...

Orlov's new piece is quite brilliant and really nails the disorientation experience I was banging on about a few posts ago.
It's a great relief when someone joins up the dots for you, none more so than here of course.


Stoneleigh said...

Ed Gorey,

TAE has stated that long term bonds (US, UK, German) might do well in the very early stages of the deflationary collapse, but these long term bonds are a risky investment because yields might spike if the deflationary panic gathers extreme momentum.

That remains my view. I think there could be a sharp divide between countries though. I think the US will initially benefit from capital flight from Europe, which seem destined to see sovereign debt contagion first. This COULD keep yields on long bonds in the US low for a period of time, in comparison with European countries (which are likely themselves to see a divergence of fortunes between the centre and the periphery). Flights to safety such capital from riskier areas to those perceived as less risky, so that yields fall in the safest areas and rise elsewhere.

Long bonds have an investment risk associated with them that people like Hendry are perfectly well positioned to deal with, because he watches these things all the time and will be looking for advance warning signals. IMO ordinary people are better off out of the market all together, sitting on the sidelines in cash and cash equivalents (short term treasuries). Those with more capital and greater risk tolerance may take a different view.

I must say that when Hugh Hendry talks, I listen. He's one of the most interesting and intelligent voices available.

According to the interview, when asked what an investor should do once hyperinflation arrives, Hendry recommends investments in large companies with very low debt and strong balance sheets.

I'm not at all convinced the companies he mentions will even survive deflation. They are large and unwieldy vehicles that may not be able to adapt to radically different circumstances. Besides, I think all but the wealthiest people are best served by concentrating heavily on deflation first. Navigating that will be hard enough.

For the truly wealthy, like Hendry, the luxury of the long term view will still exist, but it won't for most people. Those who preserve capital as liquidity will retain some ability to plan, depending on the assets at their disposal, but others will be reduced to a permanent state of short-term crisis management.

I do think we'll see hyperinflation once the deleveraging is over (once the power of the bond market is broken), but I think that will take several years, as deflation and depression are mutually reinforcing, meaning that the downward spiral is likely to last for several years at least.

I tell people to take it one step at a time - deal with what will hit you first and tackle the longer term challenges as they arrive. People who initially hold cash, but transition to hard goods over a number of years will be perfectly positioned to ride out any inflationary crisis down the line. I wouldn't get all hung up over hyperinflation at all though. It's not tomorrow's problem or next year's problem.

Up until this point, I imagined that paper wealth preservation would be largely impossible after the deflationary collapse and the onset of hyperinflation.

The situation looks different for the very wealthy. They're usd to risk management. Some companies may still be standing after deleveraging, but I wouldn't like to hazard a guess as to which they might be. The risk is simply too high.

TAE has been generally skeptical about gold as a hyperinflation hedge due to the strong risk of capital controls that will make gold ownership illegal. Thus, gold would become a particularly dangerous source of long-term wealth preservation during hyperinflation.

Long before that actually. I think confiscation would happen during deflation, when the money supply is shrinking rapidly and the centre will want to control what's left.

Ilargi said...

Zander tried just now to link to Orlov's latest, but for some reason can't figure out how the link should be. I'm thinking fear of the machine.

Here goes: Lost Leaders

Don't give up Zander. The truth will prevail.

Oh, and for a consolation: your national team soccer skills stink even worse than your programming ones.


Top Hat Cat said...

.Matt Simmons mentioned something very ominous when he said. the real leak is not at the well head but 6 or7 miles away. My first thought was that as the natural gas bypassed the capping manuver and exploded the drilling rig, the 'gas vein' under tremendous pressure from the reservior tens of thousands of feet below, found a side channel (6 or 7 miles away) that was a path of less resistance than the well head and BOP and broken riser.

If true, then the whole junkshot/topkill thing is a diversion from the real unstoppable leak. The sideshow of hovering over the wellhead area is PR to show 'something'. is being done and that BP is not Satan incarnate.

Which of course they are.

soundOfSilence said...


I gotta feeling simmons isn't exaggerating, there's something not quite right about this

After I saw the article over on ZH then Ilargi posted the 120,000 barrel a day comment ... I got to start wondering what the hell happened down there. They opened a door to the underworld?

Man thinks he can control nature/the Earth. In the end we will only be humbled -and in less than a "positive way."

Eeyores Enigma said...

IMO we will skip inflation and jump straight to third world like rationing.

Most peoples reasoning for inflation and hyperinflation is for US to pay off debt. Right as if we cared about that. I don't believe we could ever reach a period in the global situation where everyone says "OK US pay up now".

Also when everyone is pretty much in the same boat who pays who and with what?

No I think we will keep the can clanking along the road until things converge and then...COLLAPSE! After that the status of global debt becomes irrelivant. There is only one issue and that is survival and it will be all government/military can do to keep any degree of order and rationing is a great way to control a population.

Just my take.

Carpe - the reason no one is marching is because they all have to go to work the next day.

jal said...

Eeyores Enigma said...
“Carpe - the reason no one is marching is because they all have to go to work the next day.”

hahahah heheheh lol

Except in Greece!

The demonstrators are all drawing a pension, unemployment or welfare.

hahahah heheheh lol


zander said...


LOL, well if thats the case I better book myself into some sorta computer skills class quick smart, anyway ta. for sparing my blushes, after I had committed the comment I had a horror cringe moment at the thought of it appearing and the so-called link sitting there on the screen about as much use as Obama has been to deepwater the last 40 days.

@SOS "...They opened a door to the underworld?"

Don't man, that sounds worse than the "hole in the ocean floor" comment someone used early doors in this crisis, I'm really quite freaked out about WTF has and is happening down there, I ain't the foil hatty type but I'm fearing the worst about this for some strange reason, I'll just be glad when they finally seal the damn thing up, the damage already done is beyond repair IMO and will just have to be lived/died with. It's a crying shame.


Unknown said...
This comment has been removed by the author.
Gravity said...

In defense of Celente, I think his technotopian comment was merely a what-if type proposition to illustrate the magnitude of salvation required to stave off a horrible crash at this point; only if revolutionary energy flux densities were freely tapped within two years, providing a society-wide innovative wave of sorts, could further collapse be forestalled, and thats a big 'if'.

Therefore, assuming a pre-existent triangulation of complementary electrojet capacitor arrays,
the most cost-feasible and theoretically least damaging of the remaining nukeless options would reasonably include the projection of a sub-saline electrostatic torsion flux at the fissure, greatly enabling a coincident deepwater microwave cascade to induce resonant polymerization of encompassed hydrocarbon volumes, optimally producing a soylent-sealant polymer mesh or plaque perhaps. Similar methods might also be employed to centripetally concentrate and contain buoyant drifts of deep plume in conjunction with electrocalamically attenuated thermocline coupling.

There are small drawbacks to over-utilising harmonic geoenergetics in this way, inevitably resulting in the classic stray flare or coronal mass ejection overcharging the ionospheric torrent, so vaporising half of earths oceans, though any oil would be cleared certainly.

ApleAnee said...

Dark Rain is gonna fall:

1. Weather systems heading north from the Gulf will contain distillates (especially since they have used the magic dispersants to create tiny, tiny, molecules).

2. Distillate Rain will put a light film of oil on all of the crops of the Midwest. Because profit is paramount in the USA, the crops containing this distillate will be harvested anyway (with the FDA assurance that it is just fine) and shipped off to Kellogs, Sara Lee, Wonder Bread, and Coca Cola (high fructose crude corn syrup anyone?)
It will also be fed to the cattle, hogs and chickens.

3. People will begin to get ill from eating anything that has been harvested in the Mid West. The animals will be fed the alfalfa, corn and oats, and they will also begin to sicken.

4. Crop failures will begin to occur.

5. Distillate will begin to slowly creep into the aquifer of the Mid West and the Okeechobee Swamp (Miami water) and the aquifer of Central Florida from the rain.

6. Millions of homes and businesses in the Gulf Area will be abandoned as the residents realize that to stay is to get sicker and sicker.

7. As people flee the area, and leave their assets behind, the banks will be brought to total ruin.

Perhaps we should try to forecast the upcoming catastrophe of our oily future with the same zeal that we do the financial collapse, because in my opinion this oil gusher has changed our futures for decades to come, and financial collapse will become just one of the worries of our new reality.

What to eat and drink is going to become a REAL issue in a few months.

Ilargi said...

Just in case you were worried:

BP says crude may continue flowing into gulf until August

"As BP prepared to implement another fallback plan to contain the worst oil spill in U.S. history, Obama administration and BP officials said crude could continue flowing into the Gulf of Mexico until August. The "American people need to know that it is possible we will have oil leaking from this well until August when the relief wells will be finished," presidential adviser Carol Browner said on the CBS show Face the Nation.

Browner also warned that the spill could get worse for several days as BP attempts to put in place another containment structure. That effort will involve cutting a pipe that rises from the seabed, and because a kink in the riser may be limiting the flow, cutting it could release as much as 20 percent more oil over a period of four to seven days, Browner said.

Hopes for an earlier solution were dashed Saturday when BP conceded defeat in its attempt to plug the well through a maneuver known as a "top kill." The effort involved pumping mud into the runaway well, but the pressure of the leak proved overpowering. The failure of the top kill left a deepening sense of despair in the Gulf region, where the spill threatens the ecology, the economy, and a way of life for people in the fishing industry."


My view, and I had that from the beginning, as you know, is that this thing has the potential to be far worse than anyone wishes to admit to, and if Obama screws up this one, and he's doing everything in his power to get there (it may already be too late for him), it may well finish his career. That may seem overblown, but imagine that 120.000 barrels will be flowing into the Gulf for at least another two months, and then the hurricane season spreads it around in all directions, north, west, south and east.

And that Obama then will still be claiming he'll make everyone affected whole.

He better hope BP has a solution. Well, they don't. They're down to gambling something may work, with no guarantee. Everyone who was hopeful about Top Kill should realize it was their Plan K, and that they really would have liked for Plan A to work.


Ilargi said...

" Gravity said...
In defense of Celente, I think his technotopian comment was merely a what-if type proposition to illustrate the magnitude of salvation required to stave off a horrible crash at this point;"

Spot on, and all this blubber about Celente losing his credibility comes from who has far less than he has. The man is not an energy analyst.


zander said...


Can't, we are having the driest may in living memory there is hardly any water in the scottish border rivers to make fishing worthwhile, maybe that's the true source of my consternation :)


That kind of answwers a question I put out ages ago about the evaporation cycle and tainted water being drawn up into the atmosphere. scandia made a good point too but I've forgotten it now.


I too, had a bad feel about this from day one and have now renounced my atheism for prayer coz I don't think they know WTF they're doing at this point, they are quite literally out of their depth.


Rumor said...

Carpe said,

Why aren't people marching on Washington or something? Why isn't anything being organized?

I can't answer that, if there is a concise answer, but there's a lot of discussion of this question going on at the Agonist as well as here; you might find it interesting.

Rumor said...


After I saw the article over on ZH then Ilargi posted the 120,000 barrel a day comment ... I got to start wondering what the hell happened down there. They opened a door to the underworld?

They delved too deep, and awoke an ancient monster...

Ilargi said...

Rumor said...
Carpe said, Why aren't people marching on Washington or something? Why isn't anything being organized?
I can't answer that, if there is a concise answer, but there's a lot of discussion of this question going on at the Agonist as well as here; you might find it interesting.

Rumor said...
After I saw the article over on ZH then Ilargi posted the 120,000 barrel a day comment ... I got to start wondering what the hell happened down there. They opened a door to the underworld?
They delved too deep, and awoke an ancient monster...

A-ha, so you got one group of well-meaners discussing from behind their computer screens why they can’t get their fat asses distached from their computer screens (no, you first, no, YOU first) , while another group can’t be bothered and instead flees straight into digital mythology.

And that, grasshoppers, is the very future of mankind you’re looking at.


Gravity said...

At what point will the market begin to price in these abyssfull events, or doesn't it matter anymore?

Worst ecological disaster in the history of the US, they announced. By August this could well become the worst environmental cataclysm since the growth of cities, in respect to compound loss of biomass, which might reverberate throughout oceanic and terrestrial food chains for centuries, indirectly starving tens of millions.

In the short term, for several of the reasons ApleAnee lists, or just the percieved risk of them, real estate prices in the gulf states could easily crash by 90% within six months, I expect, though they might have done so by deflationary stressors anyway.

Chaos said...


I really liked that discussion at the usual, Numerian's contribution was outstanding. However, I do have to say, again, that people who spout off about the US public rising up need to brush up on history. As Tainter notes, peasants generally don't revolt. They withdraw their support for the regime, passively refuse to participate, or vote with their feet. There is very little modern evidence of a culture of meaningful protest in the US, and, in my opinion, it's unlikely to happen until it's much too late.

scandia said...

@ zander & ApleAnee
My point/question was could the surface oil reduce evaporation thereby affecting climate? How extensive an area of ocean covered in oil would there need to be to interfere with weather patterns?
@zander. Water levels in the Great Lakes are low as well.

By the way I heard an author/veteran of the oil industry complain that stiff regulations imposed on land drilling have forced the oil industry to drill off shore! In other words gov't and those pesky environmentalists caused this crisis. All I heard was some lobbyist working the crisis to reduce regulation of land drilling and mining.
Ha! While we are engaged with assessment, projections and grief, the dark side is working on developing other opportunities on shore.And this crisis gives them some leverage.

ApleAnee said...

We just spent a few weeks in Costa Rica Central Valley watching the marine layer roll in each morning over Volcano Poas. We have been planning for a while now to retire there. We are beginning to re-think our entire retirement. Don't want to be anywhere near the weather coming out of the Gulf (double ditto that if they decide to do the nukular option). Also been studying the ocean currents. I am sure entire doctoral programs have been taught on this subject, but still, it is worthwhile to know how the ocean moves (especially if it is full of oil) and how long it takes to move from place to place. We will wait until after this hurricane season to see what develops, and then get a real sense of urgency about where we need to go (not want, need).

I think a better book to reference than Lord of the Rings might be

On The Beach

A perfect study in denial.

John said...

ApleAnee @1:38
I pray that your forcast is so wrong, however I suspect many of the travisties about which you write will come true. Only God can save us then. John

justaguy said...

May 30 (Bloomberg) -- BP Plc and U.S. government officials have decided to risk accelerating the largest oil spill in the country’s history in a bid to capture more of the crude before BP’s leaking well can be plugged in August, White House Energy Adviser Carol Browner said.

ApleAnee said...

Looks like it worked pretty good in 1950. Full speed ahead!!!

carpe diem said...

Before casting aspersions it may be best to listen first before the knee jerk reaction.

The point I was trying to make is that there are countless groups in the states: The Sierra Club,
The Audobon Society, Greenpeace, Nature Conservancy, NRDC, Clean Water Network, Defenders of Wildlife, Friends of the Earth just to name a handful. These people do 'go to work' every day. Their day job is to serve the earth and the other life forms we share the earth with.They get paid for this! I was wondering why the likes of these very people do not bond together and organize something big. The US citizens are capable of organizing million man marchs on washington, marches against the immigration laws, marches for gay rights. So I ask - why is there no uproar en masse?? I see a lot of individuals who are fuming (including Carvill) but little else at this point.
I suppose a revolution is asking too much!

And to whom it may concern: I do not have a fat ass but am in fact perfectly proportioned.- 108 pounds. I have sent numerous letters to the white house (this is also possible online), enviromental groups and been active petitioning. This is much as I can do at this point sitting on another continent. I am leaving for the states in 3 weeks but need that time to organize my animals including the ones that come with me. I cannot depart at the drop of a hat leaving my animals to fend for themselves.

So my question really goes out to those on the American continent with their big asses and small asses. What noises are each of you making about this ongoing calamity....? I'm afraid I know the answer and it ain't pretty.


Et tu Brutus? or should I say Grasshopper?

JP said...


The USDA has a tendency of buying products that are known to be tainted (or at least suspected as such) from large industrial producers as a form of corporate welfare. Although tainted food is supposed to be destroyed, these products have been donated to school boards and served as part of the free (or subsidized) school food program. Although I would never imagine this was done on purpose, it has happened (see this).

Archie said...

Re: Gulf Oil Disaster

Common Dreams has picked up a brief video interview with Naomi Klein from Al Jazeera. This is the link to the video..

Of more interest, perhaps, was the following comment to this post:

This morning's news reports & CSPAN interviews confirm BP's Top Kill" operation has failed.

One commentator stated that all of BP's contingency plans were based on having a functioning rig in place over the well. Since the rig was destroyed by the blowout, they are now flying blind at depths and pressures with which they have no experience.

One channel interviewed theoretical physicist Michio Kaku who gave a simple, straightforward explanation of the difficulties involved in stopping the gusher, covering why all efforts have failed through this morning and the next big idea called "cut & cap" scheduled for the next week or two. He didn't seem very optimistic about that nor the relief wells that BP says will be finished in August. He concluded by stating that the gusher could go on "for years".

Thus far, professor Kaku is the only authority I would trust on this matter.

I fear this situation will prove far more grim than Obama's ritual visit to a sunny, pleasant beach and posturing rhetoric would lead people to believe. As Ms. Klein observed, even the most immediate victims are largely silent about the oil industry's culpability because they are so dependent upon it economically. Just like the coal miners who believe their lives are totally dependent upon Massey Energy and its psychopathic management.

I further suspect that BP's main response, like Exxon's to the Valdez spill, will mainly be devoted to legal manipulations of the judicial system to delay and diminish their financial liabilities. That effort, unlike "top kill" and "cut & cap", is likely to succeed because, of course, they're too big to fail.

Unfortunately, it takes a few days for CSPAN to make their videos and podcasts available.

ogardener said...

I think ApleAnee's commentary was spot on today. What particularly struck me was her comments about a dark rain and the millions of people leaving the Gulf area and additionally the comment about Nevil Shute's novel - On The Beach. I was thinking about that novel today. Amazing!

Archie said...

Sorry for that snafu. Let me try this link to the Naomi Klein video.

gylangirl said...


Thank you for confirming my darkest assumptions about BP's plans A thru K.

Capturing spilled oil in order to sell it: that's clearly more important to BP than stopping the spill/shut the oil well altogether. Covering BP's ass is clearly more important to Obama than protecting the US coastline. GOP is delusional as usual about visions of government boots on corporate necks. It's corporate boots on politician's necks if they don't accommodate.

We're not in the streets because for years street protests have been portrayed by our media as merely nutcase theater. The adolescent theatrics of professionalized .Orgs only reinforced this dismissive perception. Americans just want to have fun at their music concerts er protest marches.

Anonymous said...

Topcat and Soundofsilence,

Well said re Matt Simmons' comments. Sadly, I also think his assessment of the situation is correct.

Carpe diem,

Most "Americans" will not march en masse (in large numbers or in the millions in an attempt of make a difference) for any cause. Too much narcissism in this culture. I'm reminded that 70 or 80 percent of "Americans" supported the invasion of Iraq, unlike Europeans.


Archie said...

Well, if Ilargi is correct that "Top Kill" was Plan K, then this is Plan L or beyond. As they say in baseball, "you can't tell the players without a program". Introducing LMRP, your next best fix.

EconomicDisconnect said...

I watched the film "The Road" tonight. Terrible, scary film.

soundOfSilence said...

@carpe diem

Since my "door to the underworld" was at the center of it –just by way of my reaction ...did it "sting?" ...yes. To me it came across as something more akin to pointing out (and I so do not want to use this phrase but I have nothing else) an "inconvenient truth" in order to get someone to face it.

What can I say? What he has already said. Groups like Greenpeace are almost religiously accepted as being highly beneficial, but in reality they are some of the worst players around, since they facilitate the perpetuation of the lies and illusions about saving and preserving, while the roof, the roof, the roof is on fire.

I need to go nurse that sting.

scandia said...

After 911 Bush told the people to go shopping.
After Deepwater Horizon Obama told the people to go swimming.

carpe diem said...

To Sound of Silence,

Don't quite follow you but thanks for posting the Sept. 9th 'Worth of the Earth'. I think I missed that one as I was travelling then.
I used to work for Greenpeace back in the 80s for awhile. I do know that the people I worked with all had the best intentions. As for the corporate structure I know little.
I do believe the world would be a much sadder place if these groups did not exist at all.



Thanks for you thoughts.

and a final thought from my end: apparently there are experts on oil spills sitting on their respective rear ends in the UAE waiting to be 'called' by the US. Astounding to me that they haven't been called.

mistah charley, ph.d. said...

As to America's practically non-existent history of public protests -

there are some exceptions -

the anti-Vietnam war movement (I was there) -

the civil rights movement (it was successful, I'd say)

The Bonus Army of 1932 (see the Wikipedia article - I believe this event is never taught to schoolchildren, but it was a big deal at the time)

The anti-saloon movement, which led to Prohibition

The suffragettes

In this new millennium the usefulness of nonviolent public protest is questionable - lots of us marched against invading Iraq, to no effect - and the protests in January, 2001, during W's inauguration, about his selection by the Supreme Court were so effectively ignored by the corporate media that I never heard of them until I watched Michael Moore's Fahrenheit 911.

Jason said...

Good on Stoneleigh too for having picked up on the fascist rise inevitable at such times. I've been tracking this for a while; those in the UK who missed it might be interested in this:

The English Defence League

Remarkable how it all happens, like clockwork on the Automatic Earth.

bluebird said...

Thanks Jason, I had not heard of the English Defence League. That's scary and ominous.

carpe diem said...

'Protests planned as oil spill threat widens' from Reuters this afternoon. Gee, whoe'd a thunk it?

Mistah PHD,

Thanks for pointing out the big protests of the past that even I forgot about. So long ago....seems like a past life.

Rumor said...

Despite Ilargi pooping all over my links earlier, I would point out that open-minded, intelligent discussion, even that done whilst sitting on one's fat ass, sometimes bears glorious fruits, which is of course the point.

To wit, the discussion I linked at the Agonist gave rise to this fascinating comment, which further linked to this very interesting speech by Lawrence Goodwyn, circa 1989, on the history of populist movements and the concept of democratic money. Very much worth reading in its entirety. An excerpt will not do; you must go peruse it in toto.

Ilargi, I await your apology. I have packed myself a large lunch in anticipation of the time I shall be spending.

(Should it be necessary to add: I am just kidding, you grumpy old man.)

Gravity said...

There are some unlikely best-case scenarios remaining, maybe its less than 50,000 barrels per day, maybe the reports of deep plumes are exaggerated, maybe corexit isn't as toxic as some have suggested, maybe there are no additional fissures several hundred feet across erupting oil and gas, unsealable even by nukes, maybe they already sealed most of it and are milking the disaster for some reason.

The deep plumes are especially problematic, if they're even half as big as has been reported, these would presumably anoxify an immense volume over many years, wholly decimating ecosystems and fisheries, perhaps in conjunction with overly-toxic dispersants, and since these plumes have unique dispersal patterns which would bypass coastal protection measures, the region might become uninhabitable if they start to wash ashore and infiltrate aquifers, or after hurricane season.

In light of some worst-case scenarios, it would be reasonable to assume evacuation plans for several densely pollutable areas are being prepared, which could become a humanitarian catastrophe in its own right, moreover since fema would be managing the operation, as best they can.

ApleAnee said...

Interesting video of ocean currents from NOAA. Time frames and other good info, for those that may be curious about it.

I am going to work the garden this beautiful day and find consolation in digging in the dirt. Can one say Happy Memorial Day? (Seems sort of wrong)

Ilargi said...

Well, I'm obviously neither old not grumpy, the Agonist piece bores me to tears and that other thing is too long and academic for me to care a hoot. Make a video.

Ilargi said...

New post up.

9000 days and a dying economy