The Weekend Economists--Happy Hallowe'en 2008!

[Demeter]

Welcome to WE, where folks who haven't taken enough punishment during the week's wild ride on the exchanges come to recover, if not recoup. Free dramamine and soft pillows provided.

The cynical part of my brain says that they want to push the Dow up to 10,000 and then let go around noon on Election Day, with some fancy puts and calls for flourishes, so that there is a resounding crash, and then the enemies of the People can point and say:

"See! See! That's what Obama did on the very first day!"

Nothing else makes sense. Or does it? Post them if you've got them (opinions, facts, Hallowe'en goodies, whatever). We're here until Monday morning. Stop in often for updates. I've got 50 new emails on top of the remaining 26 from last weekend, so here goes!


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[Dr.Phool]

1. Federal Regulators Shut Down Freedom Bank

Just posted this in LBN.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x3577058

That's number 17, I believe.

[Demeter]

3. Thank You, Dr!

They sure know how to trick or treat at the Fed.

[Demeter]

2. Fed Watch: More Easing Expected

http://economistsview.typepad.com/economistsview/2008/10/fed-watch-more.html


... the Fed lowered the target interest rate to 1%. Will the Fed lower the target rate even further if things don't improve?:

More Easing Expected, by Tim Duy: The FOMC performed as expected today, delivering a 50bp cut that returns rates to their lows of the Greenspan era. More importantly, Bernanke & Co. made clear that further policy easing remains on the table.

The FOMC statement describes an economy in recession without actually using the “R” word:

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

Any other assessment would have been surprising; by all measures, economic activity fell off a cliff as we entered the second half of this year. Today’s durable goods report is no exception, with nondefense, nonair capital goods declining 1.4% in September, extending a 2.2% decline the previous month. The intensification of the credit crunch (yes, Virginia, it is a crunch), increased hesitation to expand capital outlays in the current environment, and slowing global growth suggest that investment activity will show even greater declines in the months ahead.

Consistent with the darkening outlook, the incoming flow of data is likely to be horrid, especially during the next two quarters. In particular, the employment report will soon reveal the big declines in nonfarm payrolls consistent with a recession. An increased pace of job losses will sap aggregate household budgets of the real gains afforded by falling energy prices. Consequently, spending data will remain weak. Overall, the data will argue for additional policy response, and the Fed’s statement makes clear that they are prepared to ease policy further as required.

But will that easing come in the form of lower rates? And how far would the Fed go?

Brad DeLong reminds us that the Taylor Rule places the policy rate at zero, but there is some concern that rates lower than 1% will interfere with the normal operations of money market funds – they need to remain profitable if the Fed expects them to continue to function. Also note that only four district banks requested a decrease in the discount rate, which some believe indicates the rate cut cycle is near its end, or that there was less support than the unanimous vote would seem to indicate. If so, expect some hawkish talk from district presidents.

Still, unless the Fed believes that technical reasons prevent moving much below 1%, I doubt anything short of a dramatic improvement in financial markets would eliminate the possibility of another rate cut. Even under such conditions, the pressure to ease further will be immense as labor markets deteriorate (this has always been a risk of the Fed’s aggressive push). But suppose that conditions warrant a prolonged period of constant rates. In the current environment, even holding rates at 1% is not the same as the end of the easing cycle. Indeed, the effectiveness of rate cuts at this point is questionable. The reaction of market participants to the coordinated 50bp cut earlier this month was not exactly a vote of confidence in the efficacy of this particular policy tool. Given the ongoing problem in financial markets, are any of us under an illusion that the price of money is the dominant policy challenge? How many believe that the final 100bp will have a measurable impact on economic activity? This is especially true with regard to the near term; if the last 100bp has much effectiveness left, the impact will not be felt until late next year. That is not meant to say that we should reverse course and start raising rates. Only that future policy easing will be more about the extension of tools that increase the Fed’s balance sheet rather than on the level of rates in the overnight markets.

Of course, expanding the balance sheet, effectively replacing liquidity that is drying up in various parts of the financial markets (by, for example, purchasing commercial paper), should not be seen as a panacea to the current turmoil. I view it, along with Treasury’s capital injections, as more of an effort to prevent the turmoil from leading to an outright collapse in the banking system rather than something that will increase lending. Policymakers would be happy to see lending activity expand. But deleveraging threatens to dry up credit at a pace faster than the Fed and Treasury can compensate. Moreover, a portion of the credit crunch is attributable to a reversion to traditional underwriting standards; policy will be unlikely to reverse this trend (nor should it). And, with economic conditions deteriorating, and unemployment expected to rise, banks will increase their loan loss provisions, further weighing on lending activity. In short, at best Fed and Treasury can limit the extent of the crunch, and hopefully prevent significant overshooting.

With the reversal of commodity prices since the summer, policymakers no longer worry about inflation. This provides room for additional easing, although some think it is shortsighted:

With today’s cut the Fed is throwing gasoline on an inflationary fire that it created but continues to ignore. The Fed has mistaken temporary drops in commodity prices, which merely resulted from de-leveraging, for clear evidence that the inflation menace has been quelled. However, once highly leveraged players have been flushed out, commodity prices will resume their ascent, pushed skyward by the most inflationary monetary policy in history. –Peter Schiff, Euro Pacific Capital

The argument is that underlying conditions place the Dollar’s newfound gains at risk of another reversal. Once the deleveraging is complete, foreign investors will realize they are now awash in Dollar denominated assets at a time when the US Treasury is expected to unleash an unprecedented quantity of such assets on global financial markets. The Dollar and commodities will reverse direction accordingly. I admit to being sympathetic to this story, but would note that sufficient slack looks to be opening up in the global economy to absorb these assets (especially if China continues to backstop the US economy). I assume this is the Fed’s view as well. If the Fed is in error, the yield curve should steepen dramatically in coming months. Bernanke & Co. would then be forced to reassess their policy choices.

Bottom Line: The combination of the Fed’s statement and the likely path of data suggest another 25bp of easing in December. The global slowdown, dollar strength, and commodity reversal all leave inflation off the table as a concern. Only technical considerations or a dramatic improvement in financial markets would prevent the Fed from further cuts, but with the ability to pay interest on deposits, a zero interest rate is not an impediment to expanding the Fed’s balance sheet. Indeed, this is almost certainly the policy focus at this point. Inflation hawks might be unsettled by continued rate cuts, but hawks have had little impact on policy outcomes in this cycle. Consequently, the safe bet has always been for additional easing – even when only 100bp remain.

[Demeter]

4. Could Junk Bond Defaults Reach 20%?

http://www.nakedcapitalism.com/2008/10/could-junk-bond-defaults-reach-20.html

As the economy weakens, a predictable result is an increase in corporate defaults. In the early 1990s, the default rate on high-yield bonds peaked at 12+% (note some define the universe differently and come up with somewhat lower figures)

The most recent Standard & Poor's forecast, while noting a marked deterioration in the economy and revising up its expected level of defaults accordingly, still forecasts that defaults over the next year will be considerably lower than the worst periods in the early 1990s recession and the dot-bomb era. However, in part that is because they are forecasting only as far out as full year 2009. From Research Recap:

Standard & Poor’s expects the rate of default in the U.S. speculative-grade segment to increase materially in the next 12 months, reaching 7.6% by September 2009, the highest level in nearly six years. Under a “pessimistic scenario,” the rate could go as high as 9.6%....

The pessimistic scenario yields a mean default rate of 9.6%, more than double the long-term average of 4.4% but still below the peaks of 10.8% in the 2001-2002 recession and 12.5% in the 1991-1992 recession. The optimistic scenario yields an average default rate of 6.1%. In the next 12 months.

But Accrued Interest, in "20% high-yield defaults? Don't underestimate the power of the autos!" argues that Motown defauls could swamp forecasts:

On Monday the yield on the Merrill Lynch High Yield Master index reached a shocking 19.6%..... In short, if we're getting 20% yield, could we wind up suffering 20% losses in defaults?

According to Moody's, the largest default rate in history was 15% in 1933. In the post Depression era, there have been three years which produced double-digit default rates: 1990 (10.1%), 1991 (10.4%) and 2001 (10.6%). The average recovery rate (i.e., the amount the bond is worth immediately after default) is 32% for the three peak default years. So if a portfolio suffers 10% in defaults with 30% in recovery, it has actually suffered 7% in total credit losses.

That history would seem to favor high-yield....But risks remain. First, the proximate cause of most corporate bankruptcies is either an inability to roll over debts or a demand by creditors for collateral which the company cannot obtain.

Right now roll-over risk in high-yield is higher than any time since at least the early 90's. Junk-rated companies can obtain funding through one of two routes, either bank loans or the public bond market. But neither of those are open to lower-quality borrowers right now. There have not been any new high-yield issues for the entire month of October. And banks remain highly unwilling to lend to anyone, much less to high-credit risk firms.

Should the credit markets thaw somewhat in the near term, new deals may be possible. But even if that happens, how many companies will be able to operate where the cost of debt is 20%?...

Then there is the 900-pound gorilla in the junk bond market: the autos. Ford and General Motors alone make up about 7% of the high-yield index. Recent stories in the media suggest that GM will need a loan from the government to complete a merger with Chrysler, and even then there are no assurances that the companies significant problems can be solved....

If high-yield defaults follow the "normal" recessionary pattern of about 10% defaults, but GM and Ford default as well, that would bring total defaults to about 17%, disturbingly close to the 19.6% yield on the index currently.

[Demeter]

5. AIG Arbitrages the Fed Via Its New Commercial Paper Program

http://www.nakedcapitalism.com/2008/10/aig-arbitrages-fed-via-its-new.html


Let's see, AIG had to ask to be included in the Fed's new commercial paper program. AIG was reported to have said it needed a wee bit more money, but no more than $10 billion. No reasons were given in any news stories.

Now we find out the intended use. From Reuters (hat tip reader Steve A):

American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) reduced the amount it owes under a U.S. Federal Reserve credit line by $6.8 billion, but only by borrowing from a different government lending program.

AIG currently owes $83.5 billion under two emergency facilities from the Fed, which were necessary to prevent the company from filing for bankruptcy. That figure was $90.3 billion a week ago.

An AIG spokesman said neither the company nor the Fed plan to disclose the exact amount the Fed was repaid.

The company was able to repay part of the amount already borrowed by voluntarily participating in a program that the Fed started on Monday to buy short-term debt known as commercial paper from companies.

Surprisingly, a Bloomberg story on the same snookering gamesmanship was entirely approving and indicates the amount borrowed through the CP program to repay the other credit lines was even larger:

American International Group Inc., the insurer bailed out by the U.S., reduced its debt under two credit lines to $83.5 billion by using cash from the Federal Reserve's commercial paper program.

The insurer got as much as $20.9 billion from the program, which swaps commercial paper for cash, AIG spokesman Nicholas Ashooh said yesterday in an interview. The terms of the commercial paper funding are better than the U.S. loan made last month to save New York-based AIG from collapse, he said.

``They're paying off a Fed loan with another kind of government subsidy -- it's like using one credit card to pay off another credit card,'' said Robert Haines, an analyst at CreditSights Inc. ``If they make progress paying off debts over time, I don't think it'll be viewed as necessarily a bad thing.''




The interest on the $85 billion Fed facility is 8.5% over Libor, which (assuming it was 3 month Libor) is 3.19$, for a total of 11.69%. The commercial paper rate was 1.74% today plus an additional 1% for firms that did not post collateral. Thus the most AIG would be paying for the CP is 2.74%, almost 9% lower than the initial rescue package.

The terms of that were designed to be punitive but the Fed let AIG slip its supposedly short leash.

[Demeter]

15. A Question for A.I.G.: Where Did the Cash Go? By MARY WILLIAMS WALSH

http://www.nytimes.com/2008/10/30/business/30aig.html?_r=1&adxnnl=1&oref=slogin&ref=business&adxnnlx=1225500142-Bd1d19Q9GL3ALzNHaPl4mw


The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

“You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.

Mr. Vickrey says he believes A.I.G. must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.

But losses on that scale do not show up in the company’s financial filings. Instead, A.I.G. replenished its capital by issuing $20 billion in stock and debt in May and reassured investors that it had an ample cushion. It also said that it was making its accounting more precise.

Mr. Vickrey and other analysts are examining the company’s disclosures for clues that the cushion was threadbare and that company officials knew they had major losses months before the bailout.

Tantalizing support for this argument comes from what appears to have been a behind-the-scenes clash at the company over how to value some of its derivatives contracts. An accountant brought in by the company because of an earlier scandal was pushed to the sidelines on this issue, and the company’s outside auditor, PricewaterhouseCoopers, warned of a material weakness months before the government bailout.

The internal auditor resigned and is now in seclusion, according to a former colleague. His account, from a prepared text, was read by Representative Henry A. Waxman, Democrat of California and chairman of the House Committee on Oversight and Government Reform, in a hearing this month.

These accounting questions are of interest not only because taxpayers are footing the bill at A.I.G. but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate.

Edward M. Liddy, the insurance executive brought in by the government to restructure A.I.G., has already said that although he does not want to seek more money from the Fed, he may have to do so.

...A.I.G. has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.

A.I.G. has outlined only broad categories: some is being used to shore up its securities-lending program, some to make good on its guaranteed investment contracts, some to pay for day-to-day operations and — of perhaps greatest interest to watchdogs — tens of billions of dollars to post collateral with other financial institutions, as required by A.I.G.’s many derivatives contracts.

No information has been supplied yet about who these counterparties are, how much collateral they have received or what additional tripwires may require even more collateral if the housing market continues to slide.

Ms. Tavakoli said she thought that instead of pouring in more and more money, the Fed should bring A.I.G. together with all its derivatives counterparties and put a moratorium on the collateral calls. “We did that with ACA,” she said, referring to ACA Capital Holdings, a bond insurance company that filed for bankruptcy in 2007.

Of the two big Fed loans, the smaller one, the $38 billion supplementary lending facility, was extended solely to prevent further losses in the securities-lending business. So far, $18 billion has been drawn down for that purpose.

For securities lending, an institution with a long time horizon makes extra money by lending out securities to shorter-term borrowers. The borrowers are often hedge funds setting up short trades, betting a stock’s price will fall. They typically give A.I.G. cash or cashlike instruments in return. Then, while A.I.G. waits for the borrowers to bring back the securities, it invests the money.

In the last few months, borrowers came back for their money, and A.I.G. did not have enough to repay them because of market losses on its investments. Through the secondary lending facility, the insurer is now sending those investments to the Fed, and getting cash in turn to repay customers.

...An estimated $13 billion of the money was needed to make good on investment accounts that A.I.G. typically offered to municipalities, called guaranteed investment contracts, or G.I.C.’s.

When a local government issues a construction bond, for example, it places the proceeds in a guaranteed investment contract, from which it can draw the funds to pay contractors.

After the insurer’s credit rating was downgraded in September, its G.I.C. customers had the right to pull out their proceeds immediately. Regulators say that A.I.G. had to come up with $13 billion, more than half of its total G.I.C. business. Rather than liquidate some investments at losses, it used that much of the Fed loan.

For $59 billion of the $72 billion A.I.G. has used, the company has provided no breakdown. A block of it has been used for day-to-day operations, a broad category that raises eyebrows since the company has been tarnished by reports of expensive trips and bonuses for executives.

The biggest portion of the Fed loan is apparently being used as collateral for A.I.G.’s derivatives contracts, including credit-default swaps.

The swap contracts are of great interest because they are at the heart of the insurer’s near collapse and even A.I.G. does not know how much could be needed to support them. They are essentially a type of insurance that protects investors against default of fixed-income securities. A.I.G. wrote this insurance on hundreds of billions of dollars’ worth of debt, much of it linked to mortgages.

Through last year, senior executives said that there was nothing to fear, that its swaps were rock solid. The portfolio “is well structured” and is subjected to “monitoring, modeling and analysis,” Martin J. Sullivan, A.I.G.’s chief executive at the time, told securities analysts in the summer of 2007.

Gathering Storm

By fall, as the mortgage crisis began roiling financial institutions, internal and external auditors were questioning how A.I.G. was measuring its swaps. They suggested the portfolio was incurring losses. It was as if the company had insured beachfront property in a hurricane zone without charging high enough premiums.

But A.I.G. executives, especially those in the swaps business, argued that any decline was theoretical because the hurricane had not hit. The underlying mortgage-related securities were still paying, they said, and there was no reason to think they would stop doing so.

A.I.G. had come under fire for accounting irregularities some years back and had brought in a former accounting expert from the Securities and Exchange Commission. He began to focus on the company’s accounting for its credit-default swaps and collided with Joseph Cassano, the head of the company’s financial products division, according to a letter read by Mr. Waxman at the recent Congressional hearing.

When the expert tried to revise A.I.G.’s method for measuring its swaps, he said that Mr. Cassano told him, “I have deliberately excluded you from the valuation because I was concerned that you would pollute the process.”

Mr. Cassano did not attend the hearing and was unavailable for comment. The company’s independent auditor, PricewaterhouseCoopers, was the next to raise an alarm. It briefed Mr. Sullivan late in November, warning that it had found a “material weakness” because the unit that valued the swaps lacked sufficient oversight.

About a week after the auditor’s briefing, Mr. Sullivan and other executives said nothing about the warning in a presentation to securities analysts, according to a transcript. They said that while disruptions in the markets were making it difficult to value its swaps, the company had made a “best estimate” and concluded that its swaps had lost about $1.6 billion in value by the end of November.

Still, PricewaterhouseCoopers appears to have pressed for more. In February, A.I.G. said in a regulatory filing that it needed to “clarify and expand” its disclosures about its credit-default swaps. They had declined not by $1.6 billion, as previously reported, but by $5.9 billion at the end of November, A.I.G. said. PricewaterhouseCoopers subsequently signed off on the company’s accounting while making reference to the material weakness.

Investors shuddered over the revision, driving A.I.G.’s stock down 12 percent. Mr. Vickrey, whose firm grades companies on the credibility of their reported earnings, gave the company an F. Mr. Sullivan, his credibility waning, was forced out months later.

The Losses Grow

Through spring and summer, the company said it was still gathering information about the swaps and tucked references of widening losses into the footnotes of its financial statements: $11.4 billion at the end of 2007, $20.6 billion at the end of March, $26 billion at the end of June. The company stressed that the losses were theoretical: no cash had actually gone out the door.

“If these aren’t cash losses, why are you having to put up collateral to the counterparties?” Mr. Vickrey asked in a recent interview. The fact that the insurer had to post collateral suggests that the counterparties thought A.I.G.’s swaps losses were greater than disclosed, he said. By midyear, the insurer had been forced to post collateral of $16.5 billion on the swaps.

Though the company has not disclosed how much collateral it has posted since then, its $447 billion portfolio of credit-default swaps could require far more if the economy continues to weaken. More federal assistance would then essentially flow through A.I.G. to counterparties.

“We may be better off in the long run letting the losses be realized and letting the people who took the risk bear the loss,” said Bill Bergman, senior equity analyst at the market research company Morningstar.

[Demeter]

6. Major Tax Incentive For Bank Purchases: IRS Eliminates the Limitation on Banks' Built-In Losses Post

http://www.jonesday.com/pubs/pubs_detail.aspx?pubID=S5513


Carl M. Jenks, Ralph F. MacDonald III, Candace A. Ridgway, Edward A. Purnell


On September 30, the IRS issued a notice that creates a major tax incentive for buying or making major investments in banks. Losses and deductions attributable to a target bank's troubled portfolio can now be used to shelter the buyer's operating income without limitation after a merger. This action greatly increases the investment and merger opportunities for banks and bank holding companies.


Background


1. If a loss corporation undergoes an ownership change (i.e., a more than 50 percent change in stock ownership over a three-year period), the loss corporation's net operating losses ("NOLs") will be subject to an annual limitation equal to the annual long-term tax-exempt bond rate (approximately 4.6 percent) times the value of the loss corporation's equity immediately before the change of ownership.


2. If a loss corporation has a net unrealized built-in loss (a "NUBIL") in its assets on the effective date of the change of control, then deductions attributable to that NUBIL will in most cases be subject to a similar limitation for the next five years.


3. Many distressed banks are likely to be in a NUBIL position, because the writedowns that they have taken to date for book purposes (which are generally mirrored by tax deductions reflected in their additions to bad debt reserves) have been insufficient to reflect the lower true value of their assets in today's distressed markets. Therefore, under the law as it stood prior to the issuance of Notice 2008-83 on September 30, 2008 (the "Notice"), a bank in a NUBIL position that underwent a change of ownership (either at the bank level or at the holding company level) would be subject to an annual limitation on its use of future tax deductions attributable to its built-in losses in its loan and debt portfolio.


4. Notice 2008-83 changed that result by announcing that "any deduction properly allowed after an ownership change . . . to a bank with respect to losses on loans or bad debts (including any deduction for a reasonable addition to a reserve for bad debts) shall not be treated as a built-in loss or a deduction that is attributable to periods before the change date." See FAQ #4 below for a discussion of the items that are treated as "bad debts."


5. FASB Statement No. 141R requires mark-to-market on all assets and liabilities in a merger. With most asset prices currently depressed, this accounting treatment has discouraged mergers in the banking industry. Notice 2008-83 offers tax benefits that may offset some of the economic effects of FASB 141R and facilitate consolidation in the industry.


The Notice creates a major tax incentive for buying or making major investments in banks. Losses and deductions attributable to the target bank's troubled portfolio could be used to shelter the buyer's operating income without limitation after a merger or to substantially improve after-tax returns to investors in a bank that has undergone a change in control for tax purposes. Combined with the Federal Reserve's September 22 Policy Statement on Equity Investments in Banks and Bank Holding Companies, the Notice greatly increases the investment and merger opportunities for banks and bank holding companies.

SEE LINK FOR MORE INFO AND EXPLANATIONS

[Demeter]

7. Mirabile Dictu! Wall Street May Start to Rein in Compensation

http://www.nakedcapitalism.com/2008/10/mirable-dictu-wall-street-may-start-to.html


Hauling executives from the private sector before Congress and lambasting them about pay has had zero impact on top level compensation. However, now that the banking industry is a ward of the state and the Democrats might not just win the Presidency but also could get a filibuster-proof majority in the Senate, the banking industry appears to realize it might behoove them to make stronger efforts to curtail hard-to-defend pay levels before restrictions are imposed on them.

The Journal has two related pieces, one on how Wall Street is taking the idea of curbing its practices seriously, the second on how most of the complaints about pay have overlooked a big source of future outgo: pension and deferred comp programs for ex-execs.

Before you contend that these moves are unreasonable, consider the criticism from a former Wall Street co-CEO, John Whitehead, from a post last year:

John Whitehead, former co-chairman of Goldman, who with John Weinberg, presided over the firm when it went from being a commercial paper dealer and institutional equity broker to a top investment bank, decried Wall Street compensation levels in a Bloomberg interview:

"I'm appalled at the salaries," the retired co-chairman of the securities industry's most profitable firm said in an interview this week. At Goldman, which paid Chairman and Chief Executive Officer Lloyd Blankfein $54 million last year, compensation levels are "shocking," Whitehead said. "They're the leaders in this outrageous increase."

Whitehead went even further, recommending the unthinkable, that Goldman cut pay:

Whitehead, who left the firm in 1984 and now chairs its charitable foundation, said Goldman should be courageous enough to curb bonuses, even if the effort to return a sense of restraint to Wall Street costs it some valued employees. No securities firm can match the pay available in a good year at the top hedge funds.

"I would take the chance of losing a lot of them and let them see what happens when the hedge fund bubble, as I see it, ends," Whitehead, 85, said....

Goldman during its rise to preeminence had a very different compensation formula. The joke at the firm was that partners lived poor and died rich. That wasn't precisely true, but new partners actually had lower cash earnings than senior vice presidents (their interest on the debt borrowed to buy their partnership interest left them with modest pay packages in their early years as partner, a brilliant formula to keep them working hard). Consider that Bob Rubin, who was co-chairman of the firm after the Whitehead/Weinberg era, had an estimated net worth when he left the firm of $100 million. Not shabby, but the point is that Blankfein in one year earned half of what Rubin made in this career at Goldman.

From the Wall Street Journal:


...Since the start of 2002, Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. have paid a total of $312 billion in compensation and benefits. Bonuses generally account for about 60% of total Wall Street compensation, meaning that the five firms paid out an estimated $187 billion in bonuses...

Part of the problem for Wall Street is that some politicians contend that executives and employees responsible for fueling the credit crisis should now pay a steep penalty, especially since huge profits during the housing boom are being swept away by losses and write-downs. Since the start of 2007, for example, Merrill has had net losses of nearly $20 billion -- or nearly all of the profits made by the company from 2003 to 2006...

Overall, top Wall Street executives who might have earned $30 million last year could see their pay plummet to $8 million this year, predicts Mr. Johnson, the compensation consultant. Most of that is likely to come in the form of restricted stock with little or no cash. Other pay experts predict Wall Street bonuses will decline an average of 40% to 45% from last year, reflecting sharply lower revenue and profits.

Yves here. The pay cuts are being depicted as due to pressure, which is clever, when it typically drops like a stone in down times. In the dot-bomb era, managing directors in M&A who had made $2-4 million in the boom years saw it drop to $400,000-500,000, assuming they still had a job.

To the second Journal story, "Banks Owe Billions to Executives,"on the magnitude of deferred pay:

Financial giants getting injections of federal cash owed their executives more than $40 billion for past years' pay and pensions as of the end of 2007, a Wall Street Journal analysis shows.

The government is seeking to rein in executive pay at banks getting federal money...But overlooked in these efforts is the total size of debts that financial firms receiving taxpayer assistance previously incurred to their executives, which at some firms exceed what they owe in pensions to their entire work forces.

The sums are mostly for special executive pensions and deferred compensation, including bonuses, for prior years. Because the liabilities include stock, they are subject to market fluctuation. Given the stock-market decline of this year, some may have fallen substantially...

Few firms report the size of these debts to their executives. (Goldman is an exception.) In most cases, the Journal calculated them by extrapolating from figures that the firms do have to disclose.

Most firms haven't set aside cash or stock for these IOUs. They are a drag on current earnings and when the executives depart, employers have to pay them out of corporate coffers...

The liabilities are an essentially hidden obligation. Even when the debts to their executives total in the billions, most companies lump them into "other liabilities"; only a few then identify amounts attributable to deferred pay.

The Journal was able to approximate companies' IOUs, in some cases, by looking at an amount they report as deferred tax assets for "deferred compensation" or "employee benefits and compensation." This figure shows how much a company expects to reap in tax benefits when it ultimately pays the executives what it owes them.

J.P. Morgan, for instance, reported a $3.4 billion deferred tax asset for employee benefits in 2007. Assuming a 40% combined federal and state tax rate -- and backing out obligations for retiree health and other items -- implies the bank owed about $8.2 billion to its own executives. A person familiar with the matter confirmed the estimate.

Applying the same technique to Citigroup Inc. yields roughly a $5 billion IOU, primarily for restricted stock of executives and eligible employees. Someone familiar with the matter confirmed the estimate.

The Treasury is... imposing some restrictions on how they pay top executives in the future, such as curtailing new "golden parachutes" and barring a tax deduction for any one person's pay above $500,000. But the rules won't affect what the banks already owe their executives or make these opaque debts more transparent...

Bear Stearns Cos., the first financial firm the U.S. backstopped, owed its executives $1.7 billion for accrued employee compensation and benefits at the start of the year, according to regulatory filings. When Bear Stearns ran into trouble after investing heavily in risky mortgage-backed securities, the government stepped in, arranging a sale of the firm and taking responsibility for up to $29 billion of its losses.

The buyer, J.P. Morgan, says it will honor the debt to Bear Stearns executives, which it said is shrunken because much of it was in stock that sank in value.

J.P. Morgan will also honor deferred-pay accounts at another institution it took over, Washington Mutual Inc. It couldn't be determined how big this IOU is. J.P. Morgan's move will leave the WaMu executives better off than holders of that ailing thrift's debt and preferred stock, who are expected to see little recovery. J.P. Morgan's share of the federal capital injection is $25 billion.

Obligations for executive pay are large for a number of reasons. Even as companies have complained about the cost of retiree benefits, they have been awarding larger pay and pensions to executives. At Goldman, for example, the $11.8 billion obligation primarily for deferred executive compensation dwarfed the liability for its broad-based pension plan for all employees. That was just $399 million, and fully funded with set-aside assets.

The deferred-compensation programs for executives are like 401(k) plans on steroids. They create hypothetical "accounts" into which executives can defer salaries, bonuses and restricted stock awards. For top officers, employers often enhance the deferred pay with matching contributions, and even assign an interest rate at which the hypothetical account grows.

Often, it is a generous rate. At Freddie Mac, executives earned 9.25% on their deferred-pay accounts in 2007, regulatory filings show -- a better deal than regular employees of the mortgage buyer could get in a 401(k). Since all this money is tax-deferred, the Treasury, and by extension the U.S. taxpayer, subsidizes the accounts.

In addition, because assets are rarely set aside for executive IOUs, they have a greater impact on firms' earnings than rank-and-file pension plans, which by law must be funded...

While disclosing its liability for executive pensions, the bank doesn't disclose its IOU executives' deferred compensation, and it couldn't be calculated. The bank's share of the federal capital injection is $25 billion...

To be sure, deferred-compensation accounts can shrink. Those of lower-level executives usually track a mutual fund, and decline if it does. Often the accounts include restricted shares, which also may lose value, especially this year. To the extent financial-firm executives were being paid in restricted stock, many have lost huge amounts of wealth in this year's stock-market plunge.

The value of Morgan Stanley Chief Executive John Mack's deferred-compensation account declined by $1.3 million in fiscal 2007, to $19.9 million; much of it was in company shares. Mr. Mack didn't accept a bonus in 2007.

Executives can even lose their deferred pay altogether if their employer ends up in bankruptcy court. When Lehman Brothers Holdings Inc. filed for bankruptcy last month, most executives became unsecured creditors. The government didn't come to Lehman's aid.

[Joe Chi Minh]

38. Fool us once.... How long would their new-found enthusiasm for self-

regulation last. If the days of smash and grab ram-raiding are over, will they turn to a more subtle, incremental, bleeding of their companies?

REGULATE THEM. PERIOD!

Find most of them honest jobs in a reborn manufacturing industry. If they want to gamble, let them play the horses.

[Demeter]

8. Where to Find Out Stuff

http://www.26econ.com/economics-blog-directory-ranking/


For those who want to know....

[Demeter]

9. California Cuts Water Deliveries For 2009

http://news.yahoo.com/s/ap/20081031/ap_on_re_us/california_water


SACRAMENTO, Calif. – California said Thursday that it plans to cut water deliveries to their second-lowest level ever next year, raising the prospect of rationing for cities and less planting by farmers. The Department of Water Resources projects that it will deliver just 15 percent of the amount that local water agencies throughout California request every year.

Since the first State Water Project deliveries were made in 1962, the only time less water was promised was in 1993, but heavy precipitation that year ultimately allowed agencies to receive their full requests.

The reservoirs that are most crucial to the state's water delivery system are at their lowest levels since 1977, after two years of dry weather and court-ordered restrictions on water pumping out of the Sacramento-San Joaquin Delta. This year, water agencies received just 35 percent of the water they requested...

[Demeter]

10. Closing the Gates of Hedge Hell

http://pensionpulse.blogspot.com/2008/10/closing-gates-of-hedge-hell.html

...Dozens of hedge funds have told investors they cannot get their money back right now as managers try to limit a wave of redemptions to safeguard all their clients' investments -- as well as their own futures.
Only a few months ago, hundreds of the world's estimated 9,000 hedge fund managers made it tough for wealthy investors to put money into their funds by requiring high investment minimums of $1 million or more and charging heavy fees.

Now managers are making it hard for investors to get out...

[Demeter]

11. New Mortgage Rescue Proposal to Kick Can Down the Road a Few Years

http://www.nakedcapitalism.com/2008/10/new-mortgage-recuse-proposal-to-kick.html


Before we debate the merits (more accurately, the lack thereof) of the latest trial balloon of a plan being floated to rescue overextended mortgage borrowers, we need to consider a few not sufficiently discussed facts:

1. The problem is that banks are not making loan modifications as they did in the past. That is turn is due to securitization In the old days, including in the nasty (in the Southwest and Texas) housing bear market of the early 1990s, it was standard practice for banks to modify mortgages. That was not charity on the part of the bank but a cold-blooded economic calculation, that in the majority of cases, it would take a lower loss by changing mortgage terms than by foreclosing.

80% of mortgages are now securitized, however, and the servicers do not do mods in the vast majority of cases, despite over a year of tough talk, pressure, and various half-baked programs (Hope Now Alliance as the poster child).Why? Our belief is the big reason is the most obvious: servicers get pretty well compensated for foreclosing, but cannot charge (much if any) for the work of doing a mod. Servicers are also set up like factories, with highly standardized procedures. They are not set up to do anything on a one-to-one basis, lack knowledge of the borrower (no doc and low doc mortgages mean the initial files are skimpy, and I am told they are often a mess) and have no experience in assessing borrower ability to pay (ie, they never were in the credit-extension business). To top that off, many servicers have lousy relationships with their borrowers, and so borrowers would probably not be as forthcoming as they would need to be to work out a fair and viable deal (the borrower would assume anything could and would be used against them).

2. A foreclosure lowers the value of all other homes in the neighborhood. Readers have said that recent studies have found 5% is a typical level; anyone with better data or links is encouraged to speak up.

3. I am amazed that the banking industry is and remains opposed to the idea of letting bankruptcy judges modify mortgages. This is not a radical new idea; in fact, it is standard practice in commercial bankruptcies. And bankruptcy judges are not pinkos; most come from the creditor side of private practice and so would understand the banks' viewpoint, but they are also pretty savvy about lender games-playing. Moreover, filing for bankruptcy has high personal costs; it is not something people do casually (anyone who thinks so I would hazard does not know anyone personally who has gone through bankruptcy, It is demeaning and isolating). So while any program of borrower relief has the potential for abuse, this one is a pretty unlikely candidate.

Moreover, it does NOT demand that servicers do something that they are not set up to do and are pretty likely to be bad at doing, And existing servicing agreements DO have provisions for how servicers get paid when the borrower declares bankruptcy, so servicers would not suffer under this approach.

But instead of admitting and addressing the securitization problem in a more direct fashion, the latest remedy has all the trappings of a costly workaround that does little to solve the real problem. In fact, it appears most likely merely to push the problem down the road a few years.

The proposed arrangement, at least as presented in the New York Times, is to offer borrowers lower payments for a few years (three seems to be the magic number) and only in very exceptional cases reduce the principal balance. What does that accomplish? It does nothing to improve the borrowers' ability to repay, and with real wages stagnant since the 1970s, there is no reason to think most borrowers will be magically earning more in 2012. It is just about certain NOT to reduce the ultimate amount of foreclosures, just push off some until the relief expires.

With Alt-A and Option ARM resets kicking in at high levels in 2010 and 2011, all this program looks likely to do is delay the housing recovery further by giving temporary relief that will expire on the heels of resets petering out. Unless we have high inflation in the intervening years that erodes the real value of the mortgage and monthly payments, there is no reason to think with a deep recession just starting that most borrowers will be in markedly better shape in three years.

I am also bothered by the slant of the story, focusing on the resentment of those who might not get assistance, rather than on the practical shortcomings of the program. although it admittedly seems to be in the high concept stage and may not come to fruition.

In the Great Depression, one of my relatives ran the general store of a large island off the Maine coast. When people could not pay for food, he would take their deed. He wound up with all the deeds for the entire island.

He gave them all back when the local economy recovered.

From the New York Times:

As the Treasury Department prepares a $40 billion program to help delinquent homeowners avoid foreclosure, it confronts a difficult challenge: not making the plan too tempting to people like Todd Lawrence.

An airline pilot who lives outside Norwich, Conn., Mr. Lawrence has a traditional 30-year mortgage that he has no trouble paying every month. But, thanks to the plunging real estate market, he owes more on his house than it is worth, like millions of other people.

If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Mr. Lawrence says he believes sober souls like himself are also due a break.

“Why am I being punished for having bought a house I could afford?” he asked. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.”...

“If the lunch truly is free, the demand for free lunches will be large,” said Paul McCulley, a managing director with the investment firm Pimco....

Government officials say that homeowner bailouts are not a gift. For one thing, they assert, most mortgages will simply be revamped so the monthly payments become affordable for the next few years. Reductions in loan balances, which are drawing the most attention, will generally be a last resort.

“This is not about trying to create fairness,” said Michael H. Krimminger, special adviser for policy at the Federal Deposit Insurance Corporation, which is working with Treasury on the latest plan. “The goal is to keep people in their houses.”

Still, he acknowledged, “a lot of people are angry because they feel some people are getting something they don’t deserve.”...

Though hard numbers are scarce, estimates are that foreclosures will surpass one million this year. Losses on home loans are piling up faster than banks can deal with them. First Federal Bank of California said this week that as of June 30 it owned 380 foreclosed houses. It managed to sell 329 of them during the third quarter but acquired another 450.

This sense of rapidly losing ground underlies the urgency behind the Treasury’s new plan, which is being developed even as various homeowner bailouts that were announced earlier are just getting under way.

A White House spokeswoman, Dana M. Perino, said on Thursday that the plan was not “imminent” and that several different proposals were being considered.

“If we find one that we think strikes the right notes and could meet all of those standards that we want to protect taxpayers, make sure that it’s also fair and that it would actually have an impact, then we would move forward and we would announce it,” Ms. Perino said.

[Demeter]

47. On JP Morgan's "Mass Mods" for Residential Mortgages

http://www.nakedcapitalism.com/2008/11/on-jp-morgans-mass-mods-for-residential.html

In a move the stock market greeted with considerable cheer, JP Morgan announced that it was widening its program to modify mortgages. From the New York Times:

JPMorgan Chase became the latest big bank to pledge to cut monthly payments, by lowering interest rates and temporarily reducing loan balances for as many as 400,000 homeowners. Early in October, Bank of America, which acquired the large lender Countrywide, announced a similar effort aimed at 400,000 borrowers as part of a settlement with state officials....

“The banks are doing the cost-benefit analysis,” said Gerard S. Cassidy, a banking analyst with RBC Capital Markets. “The banks don’t want these customers going into foreclosure because it is a costly and punitive way of trying to collect your money.”

Roughly 1.5 million homes were in foreclosure at the end of June, and economists expect several million more borrowers may default in the coming year as housing prices erode and job losses rise. Nearly one in 10 mortgages is either delinquent or in foreclosure.

Chase officials said their effort was not an act of charity or a response to government pressure. By renegotiating loans with borrowers, the bank is hoping to reduce the losses that it incurs in the foreclosure process and when it sells repossessed homes. Chase said it has already modified 250,000 loans since the start of 2007....

The bank, which will open 24 counseling centers and hire 300 employees to work with borrowers, will suspend foreclosures on loans it owns for at least 90 days while it puts its new policies into place at Chase and the two banks it acquired this year, Washington Mutual and Bear Stearns.

Like other banks, Chase is largely aiming at loans that the bank owns and not the mortgages that it services on behalf of bond investors who own mortgage-backed securities. Banks have less leeway in changing the terms of loans packaged into securities, because contracts that govern them can be very restrictive....

Those contracts could limit the impact of loan modification programs at Chase and other banks. For instance, Chase owns $350 billion of the $1.5 trillion in the home mortgages it services; the rest are owned by investors.

We have stressed in this blog for some time that modifying mortgages is NOT charity; banks in the past have preferred to go that route when the owned the mortgage and had a borrower with some ability to make mortgage payments. And that was before trashing the house prior to eviction became popular.

The NY Times piece makes clear the mods will be limited to JP Morgan's owned mortgages, not the one it only services. So that begs the question: if this is such a great idea, why the ramp-up now? Morgan had a program underway already, as again the article notes.

This all smacks of a hasty effort to pre-empt regulatory intervention, particularly with the FDIC's Sheila Bair on the warpath to Do Something, JP Morgan having been forced to take an equity infusion from the Treasury, and a presumably-interventionist Obama administration likely to be on its way in.

But that still gets to the basic question: why would JP Morgan not do this voluntarily? While some readers think that too many borrowers are in debt too deeply for this to make sense, the flip side is there are some markets where the prospective losses on sale are so large that a meaningful reduction in the mortgage balance would still leave the bank ahead of the game for at least some borrowers.

I think the reas issue is different. Some further details from the Wall Street Journal:

The move by the New York bank will cover as many as 400,000 borrowers. They'll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms.

The changes will particularly focus on a type of loan structured in such a way that the borrower's outstanding balance sometimes grows month after month. J.P. Morgan inherited $54 billion of such loans with its takeover of the beleaguered thrift Washington Mutual Inc. in September....

The move also suggests that banks are realizing they can improve the value of their loan portfolios through mass modifications rather than foreclosures, which tend to produce larger losses. Until now, mortgage holders have been reluctant to renegotiate loans or have been doing so one-by-one, a time-consuming process.

So despite the use of mortgage counsellors, borrowers are NOT being assessed on an individual basis. I hate to sound like a perennial skeptic, but I doubt that these programs will be terribly successful (although pushing foreclosures off even two or three quarters will probably make the bank's financials look better, and they presumably extract some more cash from the hapless borrower in the interim even if the mod fails).

Why is this program likely to score little in the way of success? Consider what created this mess in the first place: reliance on highly automated, credit score driven credit approval processes with little to no data gathering about borrowers' ability to pay.

So how, pray tell, are these mass mods going to be made? We all know credit scores are not very useful guides. The mass approach suggests the bank will do no investigation into the borrower's income, and perhaps will take a statement of income, length of time in job, type of job. But this is where the loss of local knowledge has put banks at a huge disadvantage. A lender in a community knows in the vast majority of cases how stable local employers are. And commitment to keeping the house is an important intangible that will not factor into these decisions.

The reasons mods historically have been done one on one is that the bank needed to assess both the likely loss on foreclosure and how much the borrower could afford to pay to decide whether a mod was likely to be viable and how to structure it. Here, it seems the banks have only very rough area parameters as to how much of a loss they might take on foreclosure, and a grossly inadequate reading on borrowers' financial condition. Any successes will be random.

But perhaps I am not being cynical enough. The point may not be to make the mods work, but to claim that mass mods are the only option and then prove that they don't work to forestall government intervention.

[Demeter]

12. A Note About Natural Gas Prices

http://www.nakedcapitalism.com/2008/10/is-commodities-as-anti-dollar-trade.html


Reader Michael also passed this thought along:

I almost forgot about nat gas…its bounced back with oil, but that’s got $4 written all over it…we can’t export the stuff yet we increased drilling to a level not seen since 83. These producers saw $20+nat gas overseas, and figured that’s where we were headed…but the demand picture is obviously different here…That’s why tboone and mcclendon were spending money on commercials, pleaing for people to create some sort of demand that would soak up this massive supply that will hit the mkt over the next few months.

[Demeter]

13. U.S. airfares hit record high

http://www.latimes.com/business/la-fi-fares30-2008oct30,0,1202485.story?track=rss

Reporting from Dallas -- Average U.S. airfares jumped 8.1% in the second quarter to their highest level since the government started keeping track 13 years ago.

The Transportation Department said Wednesday that the average domestic itinerary fare in the second quarter rose to $352, breaking the record of $348 set in 2001.

Airlines raised fees and fuel surcharges this year as they tried to offset high costs for fuel, which peaked at record levels in the first week of July -- just after the second quarter ended. Even with the increases, however, most major U.S. airlines lost money in the quarter.

In the last two months, many airlines have cut back on flights, which could push fares even higher.

The Transportation Department based its figures on a sample of itineraries from April through June, excluding "abnormally high" fares...Since hitting bottom at $307 in early 2005, average fares have risen 14.7%, and they've risen nearly 45% since 1995, according to the department's Bureau of Transportation Statistics.

[Demeter]

14. Disgruntled call centre worker 'froze customer's bank account in revenge prank'

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/3279370/Disgruntled-call-centre-worker-froze-customers-bank-account-in-revenge-prank.html

A bank customer who criticised an "unhelpful" worker at an Indian call centre has alleged the clerk played a revenge prank on him by freezing his account and changing his identity to that of a Ugandan divorcee.

By Richard Savill
Last Updated: 7:33AM GMT 30 Oct 2008

George Bates, 23, said he found the operator at Abbey's call centre to be "rude and arrogant" and gave him a low rating in a post-call customer satisfaction survey.

However, when the self-employed carpenter later rang the bank he was unable to access his account for "security reasons".

Mr Bates, who is single, then visited his local branch and discovered his identity had been changed to that of a 33-year-old Ugandan divorcee.

Mr Bates also found his overdraft facility had been withdrawn and direct debits totalling £750 had been cancelled - resulting in £60 worth of bank charges.

Abbey has since cancelled the charges, apologised, and offered Mr Bates £200 in compensation.

Mr Bates alleged that the operator had "obviously seen that I have given him bad feedback and has decided to change all my details in revenge."

He added: "When I heard my details had been changed to Ugandan I was terrified that my account had been emptied by somebody else and I would never get my money back."

Mr Bates said the episode began when he contacted Abbey's telephone banking service on September 23 to extend his overdraft to cover direct debits.

The operator, who spoke with an Asian accent, extended the overdraft from £1,500 to £1,700. But when Mr Bates later asked to extend the overdraft further, the operator refused as the limit could not be changed twice in one day.

"He was really unhelpful but he had the cheek to pester me to give him a good rating after the call," he said.

Mr Bates, from Bristol, said that as a result he gave the operator a bad review in a questionnaire.

When he found out he was locked out of his Abbey account, his manager at his local branch corrected his details, and his overdraft and direct debits were reinstated.

Abbey agreed to pay the charges for cancelling his overdraft and for non-payment of the direct debits.

Mr Bates said, however, that he planned to change banks.

He said: "I am not happy with the service and the fact that the call centre Abbey uses is in India.

"I've been forced to take lots of time off work which has costs me several day's wages and the stress of it all is really frustrating.

"Even though they did eventually sort everything out I am still unhappy and I will be switching back to a bank with call centres in Britain."

Abbey said it had "fully investigated" Mr Bates's claims but it could not say whether any disciplinary action had been taken.

A spokesman said: "An error occurred on Mr Bates's overdraft. We have since returned his account to the correct position and refunded any charges relating to this error.

"In relation to Mr Bates's other claims, we can confirm that we have fully investigated these complaints but we do not comment on individual employees."

[Hugin]

19. Here's how cynical I am...

If this had happened in the U.S... He wouldn't have gotten his money back or an apology.

Which U.S. Bank was it that was recently charged with converting years worth of various 'money that was just laying
there in accounts' to the Bank's money and had to give several million back to depositors?

I'll have to search for it.

[DemReadingDU]

16. Debt Rattle, October 31 2008: Scramble for Pennies

10/31/08 from ilargi at http://theautomaticearth.blogspot.com/

Ilargi: In Britain, the average homeowner has lost more on the value of his property in the past year than his/her annual salary is worth. Moreover, more than 30% of the value of all private pensions is gone. While £6.7 billion was paid in, £157 billion disappeared.

in the US, the Case/Shiller housing index is down 22%, which means American homeowners lost on average about $45.000 in real estate value. As for their pensions, the news coming out these days leaves no room for hope American citizens are any better off than their UK counterparts.

While in continental Europe home prices have held up better, it’s getting increasingly clear that is merely the result of a time lag. The financial mayhem sweeping through the old continent is so severe that many parts of it will be hit much harder still than the US. The more leverage you have, the further and faster you will end up falling.

The 21st century Tulip Bubble, meanwhile, keeps on spreading. In Eastern Europe, access to foreign currencies is firmly restricted, raising people’s debts through their tattered roofs. Bank runs throughout the Arab world are a nasty sign of things to come. Wait till the effects of the latest oil price plunges starts to really seep through.

I’ve said for years that nobody presently under 50 years old will ever see more than a few pennies of their pensions. The 30% drops we have already seen so far, in a world that hasn't even begun to admit to being in a recession, let alone a depression, should be a wake-up call the size of a church bell on your night stand. Moreover, companies in many countries now want to pay less into pension funds, whose investments at the same time are bleeding billions of dollars.

Yes, there will be backlash against the loss of people’s retirement funds.

There will also be a backlash against the dropping home prices. You just wait till they fall below 50%, and people realize they won’t stop falling.

Another backlash will come against governments propping up banks and other failed businesses, while letting their populations go hungry.

A fourth backlash will rise up to stop increases in taxes of all sorts and on all levels. They will come. And you can't raise taxes on a people that is losing money and wealth left right and center. Not for long at least.

A fifth backlash, and perhaps the first one to erupt, will involve the $100's of billions in bonuses and other fees that Wall Street intends to spend on its executives and traders. If I were them, I would make sure to loudly proclaim that I have refused my 2008 bonus.

I would almost start to think that the present US government aims to leave a country mired in civil war and martial law come January 20. Just a few weeks ago, I was making lists of countries that were in financial trouble.

I’m now considering a list of those where people are about to take to the streets.

click to read related articles and comments
http://theautomaticearth.blogspot.com/2008/10/debt-rattle-october-31-2008-scramble.html

[DemReadingDU]

55. Debt Rattle, November 1 2008: Cold Turkey

11/1/08 from ilargi at http://theautomaticearth.blogspot.com/

Ilargi: Fannie Mae and Freddie Mac don’t issue mortgages, they buy loans issued by private lenders. If Fannie and Freddie are now made some sort of perpetual backstop for all mortgages, as Ben Bernanke suggests, the lenders can happily continue to try and issue loans and make huge profits, while all the risks and losses are transferred to the taxpayer.

If you would want to use Fannie and Freddie as a permanent backstop, then that can only be properly achieved with a model in which they issue the loans as well. The first thing needed is for whoever writes the mortgage to also run the risk of the borrower defaulting, and without selling the risk to investors. That way, there'll be a normal, read: much stricter, level of scrutiny.

And if you were thinking about coming up with arguments about free market capitalism, you need to realize that it no longer exists, it is a dead economic model, certainly in the US. It will never come back either. For that matter, the entire growth model is dead. Let's celebrate that. Perpetual growth is a dumb principle to use as a foundation on which to organize your society. It's not even an economic model, it's a ridiculous form of fringe religion. A sect. And all its proponenets should be forced to answer the question whether they think the laws of their religion trump the laws of physics.

Any religion based on the hope of a better life tomorrow, no matter how contorted, will attract followers, and speaking out against growth is a blasphemy in the eyes of the priests and flock of the world's largest congregation, far bigger than Christianity.

Yet, instead of focusing on the new found reality, instead of feeling liberated by the opportunity to move away from delusion and into a model that actually has a chance of succeeding, Bernanke et al want to try to revive the securitization freakishness through Fannie and Freddie. He should be forced under oath to explain before Congress what would happen if home prices in the US keep dropping, what that would mean for the taxpayer.

After all, every single rescue plan so far has failed miserably. 20% of all US homeowners are underwater, 50% of those in Nevada. The Case/Shiller index shows a 22% loss in average home values, with some California regions down as much as 65%. And it all gets worse rapidly. Should I reiterate once more Meredith Whitney's prediction that an overall 33% loss is so low as to be mathematically impossible? Might as well ask Ben and Hank a question or two before the next trillion dollar plan is adopted.

Mortgage backed securities are dead, and that is a good thing. They are perverse financial instruments that serve only the Hamptons crowd addicted so badly to 8 and 9 figure bonuses that they didn't think twice about mauling the hand that fed them. And no, the public hand should not now be forced to be the next and last resort to satisfy their appetite. That makes things worse, not better.

Everyone who's ever known a junkie from up close knows that there comes a point where you have to say ‘No Mas’; if you don't, you’ll be dragged down into helpless misery along with the addict. That is the point we are at. But "Bernanke Says the US Needs to Maintain a Role in Mortgage Securities". Oh, really, or else what, Ben? Or else home prices will be allowed to fall, and to realistic values to boot? Tell us who that would be bad for, please. All junks are good liars, don't forget that.

All this nonsense is directed at one simple goal: to prop up a hugely inflated market toiling at levels that defy gravity. And that goal can best be compared with a hopeless crack slave carrying a machete and threatening to kill his own mother if she doesn’t pay up yet another time for his next fix. And she knows her son will be back for more tomorrow. It takes a lot of courage for that mom to say no, even as she knows the inevitability of the outcome. Religions based on hope for a better tomorrow are hard to get rid of. When it comes to Bernanke and the perverted delusions he preaches, you, the taxpayer, are no different from a junkie's mom.

As for Fannie and Freddie, their existing portfolio’s will continue to bleed billlions for a long time to come, even as the US government demands they buy $500 billion more in additional loans over the next year. It truly is a limitless black hole. I still see folks like Gordon Brown and the US Fed and Treasury cabal talking about the profits the taxpayer will make on the trillions thrown at the banks, once the markets rebound.

These guys urgently need for Stephen Hawking to give them a black hole crash course. Hawking, after all, brilliantly figured out that there is indeed a possibility of information escaping from a black hole’s event horizon. He is therefore the ideal party to explain how minimal and elusive the returns will be.

It won't be easy, it never is, and there's not much hope for better on the horizon when you consider the utterly useless braindead economic reform proposals from both the US presidential candidates. But it's time to show these folks the door. You owe it to your children's children to shake the delusions. Cold Turkey.


click to read related articles and comments
http://theautomaticearth.blogspot.com/2008/11/debt-rattle-november-1-2008-cold-turkey.html

[Dr.Phool]

17. Kick! or Treat for in the morning.

[Hugin]

18. ...

:kick:

[DemReadingDU]

20. Columbus, Oh - National Century Trial: Poulsen guilty!

10/31/08 Poulsen guilty in National Century fraud trial
Friday, October 31, 2008 - 4:02 PM
by Kevin Kemper

A federal court jury has found National Century Financial Enterprises’ co-founder Lance Poulsen guilty of directing what the government called the biggest corporate fraud to surface at a privately held U.S. business.

Friday’s verdict marked the second time this year that Poulsen, once National Century’s CEO, was convicted on federal charges.

The 12-member jury in U.S. District Court in Columbus came to its decision Friday afternoon following nearly five hours of deliberations and ending the month-long trial.

The 65-year-old Poulsen was found guilty on all of the charges facing him – one count each of conspiracy to commit securities fraud, wire fraud and conspiracy to commit money laundering, as well as three counts of money laundering and six counts of securities fraud.

While National Century’s collapse and the criminal trials of its executives generated considerable public attention, Poulsen’s day in court was strikingly devoid of observation. Only about a dozen people peppered the gallery as Judge Algenon Marbley read the verdict.

Poulsen’s wife, Barbara, who testified this week on his behalf, cried alone in the courtroom Friday. Poulsen briefly hung his head after the verdict was delivered. U.S. marshals later handcuffed Poulsen and led him out of the courtroom.

“We’re obviously extremely disappointed,” said Peter Anderson, Poulsen’s attorney.

Anderson said defense lawyers think evidence of Poulsen’s prior conviction on witness tampering charges should not have been allowed into the fraud trial. William Terpening, another Poulsen attorney, said an appeal is expected.

Justice Department lawyers declined to comment following the verdict.

Poulsen founded and ran National Century until the suburban company collapsed into bankruptcy in 2002.

A financier for health-care providers like doctors’ offices and hospitals, National Century’s bread and butter was buying accounts receivable from care providers at a discount, then securitizing the receivables into AAA-rated bonds for sale to investors.

At its peak, the company employed more than 350 workers at its office campus in Dublin while recording annual revenue of more than $250 million.

But government lawyers alleged much of that revenue was due to fraud that cost investors billions of dollars. In addition to purchasing legitimate accounts receivable, the government says National Century also funded companies owned by Poulsen without getting receivables in return, effectively making risky unsecured loans with investor cash.

The company charged its clients for those advances, the government said, which inflated National Century’s revenue and generated bonuses for senior executives. Prosecutors accused Poulsen of directing that the advances be hidden from auditors, investors, bank trustees and lawyers by keeping two sets of books and moving money between accounts to disguise shortfalls.

Investors never lost money until the company fell apart, but prosecutors said that was only because National Century was operating a pyramid scheme, paying off old investors with newly attracted money.

During his trial, which began Oct. 1, Poulsen argued National Century’s governing documents allowed executives to make advances. He insisted the company disclosed everything to investors.

Had National Century not made the advances, he claimed several hospitals would have gone out of business, hurting inner-city patients.

National Century went out of business not at the hand of fraud, Poulsen said in his trial, but because it was swamped by a series of events, including its inability to get a clean audit and an economy in recession following the dot-com bubble.

Poulsen heard a guilty verdict earlier this year on a related case. He and associate Karl Demmler were convicted in the witness tampering trial in March after trying to bribe government witness Sherry Gibson into changing her planned testimony. Poulsen was given 10 years in prison and ordered to pay a $17,500 fine on the bribery conviction, but Demmler has yet to be sentenced.

It also was the second time a federal jury found National Century executives guilty of crimes. Five of Poulsen’s co-executives were convicted in March of multiple fraud-related charges. Donald Ayers, Rebecca Parrett, Roger Faulkenberry, Randolph Speer and James Dierker are serving prison terms. Parrett, a co-founder of National Century, disappeared in March before she was scheduled for a court appearance and remains at large.

Jon Beacham, John Snoble and Gibson, also senior executives at the company, pleaded guilty to similar charges.

James Happ, the eleventh executive indicted, is scheduled to stand trial in December.
http://www.bizjournals.com/columbus/stories/2008/10/27/daily41.html?jst=b_ln_hl




10/31/08 Former National Century Financial Enterprises CEO Convicted of Conspiracy, Fraud and Money Laundering

WASHINGTON, Oct 31, 2008 /PRNewswire-USNewswire via COMTEX/ -- Fraud cost investors more than $2 billion
A federal jury today convicted Lance K. Poulsen, former president, owner and chief executive officer of National Century Financial Enterprises (NCFE) of conspiracy, fraud and money laundering, Acting Assistant Attorney General Matthew Friedrich of the Criminal Division and U.S. Attorney Gregory G. Lockhart for the Southern District of Ohio announced. The charges stemmed from a scheme to deceive investors about the financial health of NCFE that cost investors more than $2 billion. The company, which was based in Dublin, Ohio, was one of the largest healthcare finance companies in the United States until it filed for bankruptcy in November 2002.
The Columbus, Ohio, jury convicted Poulsen, 65, after a four-week trial on all 12 charged counts contained in a July 2007 superseding indictment, including one count of conspiracy, six counts of securities fraud, one count of wire fraud, one count of money laundering conspiracy and three counts of concealment money laundering.
At trial, witnesses testified that Poulsen engaged in a scheme from 1995 until the collapse of the company to deceive investors and rating agencies about the financial health of NCFE and how investors' money would be used. NCFE bought accounts receivable from healthcare providers using money NCFE obtained through the sale of asset-backed notes to institutional investors, including pension funds, insurance companies and churches.
Evidence at trial showed that NCFE misused investors' money and made unsecured loans to health care providers, including those owned in whole or in part by Poulsen and other owners. Former employees testified that Poulsen and other NCFE executives covered up the fraud by lying to investors and ratings agencies. The government presented evidence that Poulsen and others created investor reports containing fabricated data, and moved money back and forth between programs, in order to make it appear that NCFE was in compliance with its own governing documents. Evidence showed that Poulsen knew the business model NCFE presented to the investing public differed drastically from the way NCFE did business within its own walls.
"Today's conviction closes another chapter in the long effort to bring former NCFE executives to justice for deceiving investors," said Acting Assistant Attorney General Matthew Friedrich of the Criminal Division. "The Department will continue to hold accountable those corporate executives who misrepresent a company's financial health and then leave the public to pick up the pieces."
"Poulsen and others made millions of dollars in unsecured loans to companies they owned," U.S. Attorney Lockhart said. "Their actions were designed to hide a financial house of cards from investors, eventually costing investors $2 billion."
"The IRS, along with our law enforcement partners, will vigorously pursue corporate officers who victimize their investors and violate the public trust," said Internal Revenue Service (IRS) Criminal Investigation Special Agent in Charge Jose A. Gonzalez. "Today's verdict demonstrates the government's determination to restore and ensure that trust."
FBI Cincinnati Special Agent in Charge Keith L. Bennett stated, "The FBI notes that today's convictions are the culmination of a six year investigation which included the review of millions of pages of financial documents by federal investigators. The resolve of this cooperative effort demonstrates that the FBI and other law enforcement will not permit a few corporate executives to hijack our financial system for personal gain."
The maximum penalty for each count of concealment money laundering, money laundering conspiracy and wire fraud is 20 years in prison and a $500,000 fine. The securities fraud and conspiracy charges are each punishable by up to five years in prison and a $250,000 fine. A sentencing date has not been set.
Poulsen, the sixth NCFE executive convicted in connection with the fraud, has been in custody since he was arrested on Oct. 17, 2007, on charges of witness tampering. A jury convicted him of conspiracy, witness tampering and obstruction on March 26, 2008, and Poulsen was sentenced to ten years in prison on those charges.
On March 13, 2008, five former NCFE executives were found guilty for their roles in the scheme to defraud investors. Donald H. Ayers, of Fort Myers, Fla., an NCFE vice chairman, chief operating officer, director and an owner of the company, was found guilty on charges of conspiracy, securities fraud and money laundering. Rebecca S. Parrett, of Carefree, Ariz., an NCFE vice chairman, secretary, treasurer, director and an owner of the company, was found guilty on charges of conspiracy, securities fraud, wire fraud and money laundering. Randolph H. Speer, of Peachtree City, Ga., NCFE's chief financial officer, was found guilty on charges of conspiracy, securities fraud, wire fraud and money laundering. Roger S. Faulkenberry, of Dublin, Ohio, a senior executive responsible for raising money from investors, was found guilty on charges of conspiracy, securities fraud, wire fraud and money laundering. James E. Dierker, of Powell, Ohio, associate director of marketing and vice president of client development, was found guilty on charges of conspiracy and money laundering.
The case was prosecuted by Assistant U.S. Attorney Douglas Squires of the Southern District of Ohio, Senior Litigation Counsel Kathleen McGovern and Trial Attorneys Leo Wise and N. Nathan Dimock of the Criminal Division's Fraud Section, with assistance from Fraud Section Paralegal Specialist Sarah Marberg, FBI Agents Matt Daly, Ingrid Schmidt and Tad Morris, IRS Special Agents Greg Ruwe and Mark Bailey, U.S. Postal Inspector Dave Mooney and Immigration and Customs Enforcement Agent Celeste Koszut.
SOURCE U.S. Department of Justice
http://www.marketwatch.com/news/story/Former-National-Century-Financial-Enterprises/story.aspx?guid=%7BA6352BF5-F060-4E86-86D2-8F4D85E3A840%7D




link backwards to Thursday's articles, and older
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=3575630&mesg_id=3575726


I'll repost in Monday's SMW thread

[Demeter]

21. Maybe There's Hope for Ohio!

Congrats to the victims getting a little justice!

[Demeter]

22. More on Trade Woes: "Firefighters better scramble to save letters of credit"

http://www.nakedcapitalism.com/2008/10/more-on-trade-woes-firefighters-better.html


In a bit of synchronicity, it seems that some mainstream commentators are starting to to take interest in a topic we've commented on in recent weeks, namely, how the difficulty in getting letters of credit is playing a significant role in the contraction in international trade (see our related post earlier today).

John Dizard in today's Financial Times provides a useful long-form treatment which we hope will start to get this topic on the official radar screen. There is only one aspect of the story we quibble with. He calls letters of credit "plain vanilla". That isn't an accurate characterization.

Now if nothing rates as complex unless it involves very fancy math and lots of market risk, then yes, L/Cs are plain vanilla. But they have a lot of operational complexity. Financial letters of credit are pretty simple, but a second type, which is vital for the conduct of a lot of types of trade, documentary letters of credit, are not.

When an international seller is unsure that he will be paid, and an international buyer worries that he might receive something quite different than what he was promised, a documentary L/C is the answer. The buyer's bank must release the funds once certain DOCUMENTARY requirements are met, hence the name. Some of them relate to the national tax and customs requirements of the port of origin and port of arrival; there may also be port-specific requirements. And there are a whole host of documentary requirements particular to the goods shipped (third party verification of quantity/weight and grade, in some cases multiple quality validations). So the requirement are in fact very complex: and vary with the port pair and the goods involved, and there may be additional wrinkles depending on buyer stringency.

Any one document being out of order means the shipment will be rejected, even if the shipment itself is in fact exactly what the buyer wanted. You then get into matters of custom: for some ports and goods, the buyer may be willing to waive exact conformity to the documentary requirements; some banks are not flexible; in some ports, it is ill advised. So the business requires a good deal of accumulated knowledge of a rather nerdy kind. That doesn't fit my definition of plain vanilla.

From the Financial Times:

There's been some low-bandwidth chatter lately about the plunge in the Baltic Dry Index, which is intended to track the price of shipping dry cargo along key routes. In the sort of "oh . . . wow . . . " manner passing drivers remark on multiple collisions on the highway, it's been noted that the BDI is down. A lot.

While the BDI has been dropping for months, the real collapse took place from the week after the Lehman bankruptcy. From a level of 4949 then, the BDI had, by last week, come down to 1149, for a decline over about a month of 76 per cent. This doesn't represent some piece of high-concept securitised paper meeting its maker in front of a judge; this is the real world of physical assets being employed to do actual work.

I had followed shipping in past years, but had never seen a rate of change like that. So I called friends of mine in that world to get closer to the car wreck.

I had wondered if the BDI was truly representative of real-world values, or if it was oversold in the way some credit default swap indices might be.

Nope. Ships really are that cheap. As one broker told me: "I just chartered a Handymax to go to the US Gulf from India for $1,000 a day. So the BDI really is pretty accurate." A Handymax vessel would typically displace about 40,000 deadweight tonnes. You would notice it if it dropped anchor near your dock. The cash operating costs are at least $1,500 to $2,000 a day. On top of that, figure another couple of thousand dollars a day for the capital costs.

To put that in Presidential election language, what does that mean for hardworking, middle class, average, families who are sitting around the kitchen table playing by the rules? Why should they care that some Greek or Lebanese is under water, so to speak, on his ship?

How about because what you need to stay middle class and average, or hardworking, is being carried on those ships? Those low charter rates indicate that not much is being shipped, apart from cargoes going from one corporate subsidiary to another, or from one highly creditworthy entity to another.

It all goes back to that Lehman bankruptcy. Among the more serious casualties of that colossal failure of leadership was the letter of credit business. There is nothing more vanilla than the l/c for an international shipment. One bank tells another bank that it will accept the credit risk of an individual importer or exporter. They document that, with forms that have been around forever, clerks and computers shuffle the paper around. A fee is charged and goods are released for shipping, inspection, and delivery. The most boring business in the world. Until it stops.

After Lehman those clerks, and their computers, stopped trusting the clerks and computers at other banks. Treasury secretary Hank Paulson's ignorant and clumsy attempt to avoid moral hazard and systemic risk resulted in uncounted quantities of goods piling up on loading docks, and customers living off inventories and consuming less.

No, I don't think the Lehman leadership, or the shareholders who went along with them, deserved to be saved. It was not, however, necessary to sacrifice the worldwide flow of goods and credit to make them an example.

The government and banking leaders might think that those clerks and computers will have been reassured by the business cable channels telling them that things will be fine. Well, it hasn't happened yet.

Some critical institutions were caught in the middle of this. Wachovia, as I mentioned last week, did a lot of letters of credit for the Latin American trade. Royal Bank of Scotland has huge exposure to shipping. The line people working on trade finance need to be told that it is okay for them to take these risks, that they won't be laid off if they make one good-faith mistake.

Maybe secretary Paulson could go down to the docks in New Jersey, Norfolk, Long Beach, or Jacksonville to symbolically sign some documents. I know, it's the unfamiliar real world of production and transportation, but the pain of walking around the Port Newark-Elizabeth Marine Terminal will be over quickly.

The BDI will not recover to its bubble highs, of course, and a lot of marginal ships will need to be scrapped over the next few years. This is normal. Shipping people are bipolar by nature, and now we have to go through the depressive phase.

As for freight rates, they will have to recover to the point where the owners can cover their operating costs. That could take a few months longer than you would think, because the cost of mothballing a ship for that period could be higher than keeping it going at today's rates.

The Chinese shipyards that have taken on a lot of new orders can expect many of those to be cancelled, if there is any leeway in the contracts. As one ship broker told me: "Values are down by half within the past six months, but nothing is actually being sold right now. The problem isn't with a single trade route. It's global."

[Demeter]

23. Reserve Fund’s Investors Still Await Their Cash By DIANA B. HENRIQUES

http://www.nytimes.com/2008/10/29/business/29fund.html?_r=1&ref=business&oref=slogin


The national “bank holiday” that ushered in the New Deal in 1933 locked up the public’s cash for four days. The crisis that hit last month at the Reserve Fund, the nation’s oldest money market fund, has frozen hundreds of thousands of customer accounts for more than six weeks — with no sure end in sight.

At least 400,000 people, and perhaps as many as a million, can’t get access to their savings, a problem that has quietly persisted in spite of widely publicized federal efforts to restore confidence in money-fund investments.

Some of these customers — who, like most Americans, assumed their money funds were as safe and accessible as bank accounts — are getting desperate... insomnia began soon after Sept. 15, when the Reserve Fund was hit by a wave of redemptions, apparently because its largest fund had a stake in notes backed by the newly bankrupt Lehman Brothers.

The next day, its $62 billion Primary Fund and two small offshore funds “broke the buck,” incurring losses that pushed their per-share price below a dollar.

Only one other money fund, a small bank fund, had ever broken the buck, and the announcement on Sept. 16 sent tremors from Wall Street to Washington. It ultimately played a role in persuading the Treasury to set up a temporary insurance program for money market funds.

And the Reserve Fund had seemed the least likely candidate for trouble, given its long and stable history — its founder, the legendary Henry B. R. Brown, had invented money market funds.

Initially, the company simply announced that it would delay redemptions from the Primary Fund for up to seven days, as allowed by law. Customers were somewhat reassured, but anyone trying to get additional information was met with busy phone lines and unanswered e-mail.

The news occasionally posted on the fund’s Web site got steadily worse. On Sept. 18, investors in a host of other Reserve money funds learned that their money would be tied up for as long as a week; that delay later became open-ended. On Sept. 19, the fund delayed redemptions from both the Primary Fund and the US Government Fund indefinitely.

Since then, investors have been on a roller coaster of broken promises, with the company repeatedly blaming its record-keeping systems for delays.

Several requests for comment from management of the Reserve Fund have been declined... eight cases pending against the fund company, including one that accuses the fund management of tipping off big investors before the Primary Fund broke the buck so they could get out in time — an allegation the fund has denied...

The largest fund, the Primary Fund, is not eligible for the ad hoc insurance program the Treasury set up for money funds last month. The big US Government Fund seems to meet the criteria and has applied for coverage, but no announcement of its acceptance has been made.

The biggest mystery is why redemptions from that government fund have not been handled more promptly... Records from last year showed the Reserve had about 170,000 separate accounts, but many of those were large omnibus accounts that could serve tens of thousands of individuals, businesses and local governments.

The mutual fund industry is equally frustrated, said Paul Schott Stevens, chief executive of the Investment Company Institute, a trade association. “I can’t emphasize too strongly that this absolutely is not typical of money funds,” he added.

He cited a large money fund at Putnam Investments, which was also hit with heavy redemption demands the week of Sept. 15. But it promptly froze the fund and sold it to Federated Investors with scarcely a glitch in customer’s access to their money.

[Demeter]

24. Dow Up 890 After Ten-Times Increase in Commercial Paper Sales (So Now We Know Why, Maybe)

http://www.nakedcapitalism.com/2008/10/dow-up-890-after-ten-times-increase-in.html


US equity markers were already having a very good day, even by the standards of recent high market volatility, where big snapbacks have become normal after sharps declines. But the very good day turned into a stunner after the announcement today of record commercial paper sales yesterday. The Dow rose 890 points, with a near hyperbolic rise at the close, and the S&P 500 was up just over 7%.

From the Wall Street Journal:"The market is moving around right now, but there's absolutely no liquidity," said Michael Davis, an independent trader active in Treasury and stock-index futures at the Chicago Board of Trade. "The investment banks aren't playing right now," due to their recent struggles to survive....

At the same time, the stock market lately has often been plagued by forced selling among hedge-funds and other deep-pocket players, who have to raise cash to cover margin calls as the market goes down. While such activity has often produced avalanches of selling lately, some veteran investors are still looking for a one-time market plunge, accompanied by big volume, to confirm that the forced selling has truly run its course, paving the way for a more sustained rally.

"There are still people hanging on by their fingernails who need to be moved into the sell column," said Michael Farr, president of the Washington money-management firm Farr, Miller & Washington. "I'm a buyer in waiting. I know what I want to buy, but Ihaven't seen the wash-out that I want to see first."

This is the revised version (same link) as of ten minutes later:

The Dow Jones Industrial Average leapt 889.35 points, or 10.9%, to 9065.12, aided by gains in all 30 of its components. The rally was its second-best this month, behind only the 936-point leap on Oct. 13 to break a painful eight-day losing streak.

Rallies in overseas shares and favorable news at two blue-chip companies boosted market participants' mood early in the session. That enthusiasm briefly wavered after the release of downbeat economic data, but came roaring back as the closing bell approached, with buyers rushing in either to rebalance beaten-down portfolios or to place speculative bets at bargain-level prices.

"People are starting to take a long-term view, and the long-term looks pretty good," said Anthony Conroy, head trader at BNY ConvergEx, a New York brokerage.

Alluding to the Dow's steep decline from it's year-ago record, he said: "If you went to Macy's and you saw that all the merchandise was 45% off, people would be buying like crazy. That's what's going on in the stock market right now."

Heading into the end of October, the Dow has plunged 17%, on track to register as the worst month in its history. But that plunge has whetted bargain hunters' appetites and forced some money managers whose funds are required to hold a certain percentage of money in stocks to come back into the market as the time approaches to mail month-end statements.

At the same time, some participants remain concerned that trading volume has been light, making it difficult to gauge investors' level of conviction that the gains can continue. Exchange-only volume at the New York Stock Exchange on Tuesday was slightly below the month-to-date average of 1.7 billion shares...

Note that highs on low volume, from a technical standpoint, say a rally is tenuous and subject to reversal. However, one positive sign was the the recent lows were seeing fewer and fewer new lows for individual stocks.

Bloomberg reports on the big improvement in the commercial paper market:

Sales of longer-term commercial paper soared 10-fold after the Federal Reserve began buying the corporate IOUs, a sign that the central bank's efforts toward unlocking the market may be working.

Companies yesterday sold 1,511 issues totaling a record $67.1 billion of the debt due in more than 80 days, compared with a daily average of 340 issues valued at $6.7 billion last week, according to Fed data. The central bank probably absorbed about $60 billion of the total, said Adolfo Laurenti, a senior economist at Mesirow Financial Inc.

``That's the very first really good news in quite some time,'' said Laurenti, who is based in Chicago. ``It's probably something the government can do and the normal investor would not otherwise do.''

The Fed began buying commercial paper from companies yesterday to reduce rates, lure back investors and unlock the market, which seized up last month following the bankruptcy of Lehman Brothers Holdings Inc....

Companies sold $232 billion of commercial paper yesterday, the most in five years, with 29 percent maturing in more than 80 days, according to Fed data. That's the biggest percentage on record and compares with a previous high of 13 percent in 2002.

The previous daily record for commercial paper due in more than 80 days was set on Oct. 10, 2003, when companies sold $32.9 billion of the debt, according to Fed data.

The Fed today set the rate it's willing to accept for 90-day unsecured commercial paper at 2.89 percent, including a 1 percentage point credit surcharge, up 0.01 percentage point. The 90-day secured asset-backed rate is 3.89 percent, according to Fed data compiled by Bloomberg. The rates are set under the Fed's Commercial Paper Funding Facility and are available on CPFF.

``The facility is helping to free up money for investors to place in other assets and it is also reducing the corporate sector's dependency upon bank credit, freeing up money for the inter-bank market,'' Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co., in New York, wrote today in a note to clients...

The commercial paper market shrunk by $366 billion, or one- fifth, to a three-year low of $1.45 trillion from Sept. 11 to Oct. 22, its worst slump on record, Fed data show. During the last recession seven years ago, the commercial paper market declined 17 percent from its then peak in December 2000 to September 2001, according to Fed data.

The surge in borrowing longer-term means more issuers, especially financial companies, will have fewer funding concerns through the end of the year, Laurenti said. The Fed is absorbing some of the ``stress'' in the market by buying debt from higher- rated companies, while distressed issuers are still locked out, he said....

``Commercial paper yields are adjusting, volumes across the maturity spectrum are expanding and maturities have lengthened, although we are still far from what might be called `normal' conditions,'' Ryan said today at a Securities Industry and Financial Markets Association conference in New York, according to prepared remarks....

The average yield financial companies paid yesterday to issue 90-day commercial paper plunged 70 basis points to 2.55 percent, or 1.05 percentage points more than the target lending rate, according to the Fed, signaling the program may be working.

Historically the rates are about the same. Financial company yields reached a nine-month high of 3.99 percent on Oct. 6. By contrast, non-financial issuers paid 1.95 percent yesterday.

While this is good news, it is also important to recall that banks tighten up on lending to each other even in normal times in December to square their books, and last year, the crunch started early, in the first two weeks in November, leading the Fed to implement its first emergency program, the Term Auction Facility. These CP sales will bridge lending over the year end. We will soon see how much conditions improve in other short term markets.

[Hugin]

31. As per...

My Forecast from last week.

I knew this was going to happen... It's interesting to note how thin a mention of how unprecedented the purchase of
Junk Bonds Commercial Paper by the Treasury is in this article.

It's written in such a way as to make it seem like the Treasury has been doing it all along and that most of
last week's gains were driven by the Corporations purchases of each other's Junk Bonds Corporate Paper.

[Demeter]

25. Treasury Handouts Focus on Strongest Banks, Forcing Weaker to Fail or Sell

http://www.nakedcapitalism.com/2008/10/treasury-handouts-focus-on-strongest.html

This Bloomberg article treats as a news item the fact that the Treasury is focusing its equity infusion efforts on strong banks, leaving the rest to find their own exit strategy.

But this approach is not surprise; in fact, it is exactly what Treasury said it would do in a conference call to analysts exactly a month ago.

In theory, this might not be a bad idea. The banking industry needs to be rationalized, since excessive leverage permitted the entire industry to grow well beyond sustainable levels. In 1980, financial firms accounted for 8% of S&P 500 earnings. At the industry's peak, they were 46% of S&P earnings.

However, the way the Treasury is going about this assures that big firms will become even larger. That is not a plus for systemic stability. The only thing worse than firms to big to fail is firms too big to rescue.

From Bloomberg:

The U.S. government's $160 billion handout to banks from Niagara Falls to Beverly Hills is going mostly to lenders that need it least, putting weaker rivals at risk of being shut down or taken over, analysts say.

``This has the unintended effect of making the strong stronger and the weak weaker,'' said Gray Medlin, founder of Carson Medlin Co., a Raleigh, North Carolina, investment bank focused on banking deals. ``Banks that are getting bad exams and are under intense pressure from regulators won't be successful in applying.''

The government buying spree has so far targeted two dozen regional lenders. One, PNC Financial Services Group Inc., immediately bought a competitor, National City Corp. Another, Saigon National Bank, had almost four times the minimum level of capital before selling a $1.2 million stake.

Treasury Secretary Henry Paulson is doling out cash to recapitalize lenders and jump-start takeovers. Besides PNC and Saigon National, regional lenders that have accepted government stakes in exchange for cash include SunTrust Banks Inc., Capital One Financial Corp. and KeyCorp. They also include City National Corp., in Beverly Hills, and First Niagara Financial Group Inc., in upstate New York.

``The goal with this over time is to drive consolidation,'' said Ron Farnsworth, chief financial officer of Umpqua Holdings Corp. in Portland, Oregon, which expects to sell a $246 million stake to the government...

``Those struggling the most probably aren't going to participate,'' said Karen Dorway, president of BauerFinancial, a Coral Gables, Florida-based research firm that studies the financial health of banks. She included as examples Downey Financial Corp., BankUnited Financial Corp. and Vineyard National Bancorp....

The government isn't forthcoming on explaining the purchase program because of concern it may spark bank runs, said Randy Dennis, president of DD&F Consulting, a Little Rock, Arkansas,firm that advises banks. ``Banks that are left out will have to deal with the PR effect of not being included,'' he said.

DOESN'T SEEM FAIR, EQUITABLE, OR FREE MARKET, DOES IT?

[Demeter]

26. Thousands of Banks May Get Bailout Bucks, As Treasury Bribes Its Way Out Of Political Mess

http://www.clusterstock.com/2008/10/thousands-of-banks-may-get-bailout-bucks


John Carney | Oct 28, 08 4:54 PM
The Wall Street Journal is reporting that Treasury Department officials are considering ways to expand the bailout to include smaller, non-publicly traded banks, "potentially opening up the program to thousands of new institutions."

Keep in mind that we still really have no idea how the Treasury Department is deciding which lenders qualify for capital infusions. For some reason, that's still secret.

Update: The Wall Street Journal has now posted a full article on the burgeoning bailout. It looks like this latest move to expand the list of those on the dole is just straight out bribery to get private banks to go along with the financial rescue plan. You didn't really think this was going to be confined to failing banks or those whose collapse would cause systemic risk did you? It's now more or less an entitlement program for banks.

From the Journal:

Such a move could serve as a peace offering to the politically powerful community banking industry, which has been outspoken in its criticism of Treasury's execution of TARP. The decision to provide billions of dollars in rescue money to some of the nation's largest banks has stoked fears among smaller rivals that the government is encouraging consolidation of the industry at their expense.

Banking industry officials argue that privately held firms may be able to better use the new capital than their larger rivals. Non-public banks are typically more conservatively run and may be more ready to lend money back into the financial system, said Wayne Abernathy, executive vice president of regulatory affairs at the American Bankers Association. "Most of these privately held banks they are probably healthier than the industry as a whole," Mr. Abernathy said.

Mr. Abernathy was part of a group of ABA officials who met Tuesday afternoon with Treasury to discuss including non-public banks. He said Treasury appeared open to creating a different set of eligibility rules for non-public banks, calling the process "very methodical." A Treasury spokeswoman declined to comment.

The banking industry's trade group estimates that as many as 6,500 closely held financial institutions aren't eligible for the capital program under the current rules. In part, that's because their structure doesn't permit them to issue preferred shares that the Treasury would buy. Firms have also balked at the idea of Treasury requiring warrants from firms that participate in the rescue plan, because such a move could compromise their status as a privately-held business because of limits on the number of shareholders an institution may have.

[Demeter]

27. How Credit Default Swap Settlements Are Draining Liquidity From Interbank Market

http://www.nakedcapitalism.com/2008/10/how-credit-default-swap-settlements-are.html


This informative discussion, that sheds further light on the stresses created by credit default swap settlements, comes in the current issue of the Institutional Risk Analytics weekly, "In the Fog of Volatility, the Notional Becomes Payable":

Another example of the ongoing discontinuity in the markets comes in the linkage between the unwind of credit default swap ("CDS") positions written regarding Lehman Brothers, Fannie Mae and Freddie Mac, and dollar LIBOR rates in Europe.

The auction process begun by DTCC, by which holders of CDS on bankrupt Lehman Brothers settled in cash via the DTCC's facility, caused many tongues to wag as to the "net" amount providers of protection must pay to holders of CDS. Several members of the media called last week to ask if Don Donahue, CEO of DTCC, was speaking truth when he said that the net payments on Lehman contracts processed by the DTCC's warehouse were a mere $6 billion or so.

Of course Don Donahue is providing the straight skinny on the flow of transactions which have actually participated in the DTCC auction. But consider that other than holders of CDX and some holders of single name CDS not offended by the prospect of cash settlement, there remain a large number of total holders of CDS for Lehman who do not wish to take cash settlement and indeed are expecting to receive the underlying bonds. (!!!)

Now the apparent non-event from the Lehman CDS auction is a source of media frustration. Wasn't there supposed to be a breakdown in the CDS markets, a dramatic failure event a la Lehman Brothers? But the merchants of doom should take heart.

The bad effect of the CDS market comes not merely from when there is market dysfunction and an individual counterparty fails. That happens often enough, but the prime broker-dealers clean up the mess quietly so as not to roil the markets. Remember, the dealer already owns the counterparty's collateral through the credit agreement, so there is no point forcing the issue with a messy and noisy bankruptcy. Right? This is why the media rarely hears of fails in CDS.

No, as with the repatriation of the Structured Investment Vehicles onto the balance sheets of C and other money center banks, the true significance of CDS comes when the markets function smoothly, as after a default event like Lehman. The trigger event putting a single name CDS contract in the money results in a liquidity-raising event for the seller of protection, who must fund the purchase of the debt at par less recovery value - whether or not the other party actually owns the debt!

This process of funding the CDS is reportedly a factor behind the high rates of dollar LIBOR in London and illustrates how cash settlement derivatives actually multiply risk without limit. Through the wonders of cash settlement, the derivative-happy squirrels at the Fed, BIS and ISDA created a liquidity-sucking monster in OTC derivatives that multiplies risk many times, for example, above the amount of underlying debt of Lehman Brothers. But remember two things: a) In some single-name CDS contracts, the buyer of protection must deliver to get paid; and b) in those contracts, where the buyer fails to deliver, the provider of protection can walk away.

We hear that there are more than a few EU banks which wrote CDS on Lehman over the past several years, CDS which were written at relatively tight spreads. These banks did not participate in the DTCC auction and instead have chosen to take delivery on the Lehman debt, forcing them to fund a nearly 100% payout on the collateral. A certain German Landesbank, for example, took delivery on $1 billion in Lehman bonds that are now worth $30 million, and had to fund same. Does this example perhaps suggest a reason why the bid side of dollar LIBOR in London has been so strong?

As one veteran CDS trader told The IRA on Friday, "It's not that people can't fund, it is that people have got to fund these CDS positions. These banks don't have access to sufficient liquidity internally to fund, so they hit the London markets... The Fed and the other central banks must start to deal with the huge overhang of currently hidden funding needs from the CDS and other derivatives." Another market observer suggests this is precisely why the Fed and other central banks have been furiously putting reciprocal currently swap lines in place.

Then there is the situation with Fannie and Freddie paper, which is currently trading 200-300 over the curve despite the Paulson quasi-nationalization this past August. Some of the very same EU banks that are getting killed on Lehman paper are also taking delivery of GSE paper on CDS positions. In this case, the payout on the CDS is small since the GSE debt is money good, at least in nominal terms, thus the net recovery value is high. But the huge overhang of paper in the markets is making the in theory "AAA" rated GSEs trade like poor quality corporates.

In both cases, the normal operation of the OTC derivatives markets is creating a cash position that must be funded in the real world and is thus distorting these benchmark cash markets such as LIBOR. This distortion is magnified by the dearth of liquidity due to the breakdown in the rules regarding valuation and price. So far, the Fed and other central banks have addressed the on-balance sheet liquidity needs of global banks. But as retail and corporate default rates rise, funding the trillions of dollars in notional off-balance sheet speculative positions in CDS, which become very real and require funding when a default occurs, could prolong the economic crisis and siphon resources away from the real economy.:


MY HEAD HURTS

[Demeter]

28. Avoiding a Great Depression: Rescue, Rebalance, Reform

http://jessescrossroadscafe.blogspot.com/2008/10/great-depression-lesser-known-aspects.html


The 1920's were marked by a credit expansion, a significant growth in consumer debt, the creation of asset bubbles, and the proliferation of financial instruments and leveraged investments. The Federal Reserve expanded the money supply and the Republican government pursued a laissez-faire approach to business.

This helped to create a greater wealth disparity, and saddled a good part of the public with debts on consumables that were vulnerable to an economic contraction.

The bursting of the credit bubble triggered the stock market Crash of 1929. The Hoover administration's response was guided by Secretary of the Treasury Andrew Mellon. As noted by Herbert Hoover in his memoirs, "Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.'"

Indeed, the collapse of consumption and credit, and the ensuing 'do nothing' policy of liquidation by the government crippled the economy and drove unemployment up to the incredible 24% level at the climax of the liquidation and deleveraging.

Although some assets fared better than others, virtually everything was caught up in the cycle of liquidation and everything was sold: stocks, bonds, farms, even long dated US Treasuries, all of them collapsing into the bottom in late 1932.

The Federal Reserve made tragic policy errors most certainly with regard to interest rates. They were hampered by a lack of coordinated effort because of the official US policy focus on liquidation and non-interference, along with mass bank failures which rendered their attempts to reflate the money supply as largely futile.

Thrifty management of the credit and monetary levels when the economy is balanced in the manufacturing, service, export-import, and consumption distribution levels is a good policy to follow.

But good policies applied with vigor during a period of economic illness may be like forcing patients seriously ill with pneumonia to swim laps and run in marathons because you think such physical activity is inherently good and beneficial in itself at all times.

Additionally, monetary expansion alone also does not work, as can be seen in the early attempts by the Fed to expand the monetary base without policy initiatives to support expansion and consumption. Hoover's administration raised the income tax and cut spending for a balanced budget.

A combined monetary and government bias to stimulating consumption while restoring balance and correcting the errors that fostered the credit bubble is the more effective course of action.

Today it seems to us that the Fed and Treasury are trying to cure our current problems by filling the banks full of liquidity with the idea that it will eventually trickle down to the real economy through their toll gates.

We believe this will not work. The financial system is rotten, and not only in its toxic and fraudulent assets. It is a weakened, rotten timber that will provide scant leverage for the rescue attempts.

Better to cauterize the bleeds in the financial system and assume a 'trickle up' approach by reaching the econmy through the individual rather than the individual through the banks.

Provide secure FDIC insurance to everyone to a generous degree , and let those banks who must fail, fail. You will encourage reform and savings, we guarantee it. Stimulate work and wages, and then consumption, and the financial system will follow.

While the financial system as it is constituted today remains the centerpiece of our economy, we cannot sustainably recover since it is a source of recurring infection.



Globalists like to cite the introduction of the Smoot-Hawley tariffs as a major factor in the development of the Great Depression. This appears to be largely unsubstantiated, and attributable to a dogmatic bias to international trade as a panacea for failing domestic demand.

In fact, before Smoot-Hawley both exports and imports were in a steep decline as consumption collapsed around the world. If the US had declared itself open for free trade, to whom would they sell, and who in the US would buy? Consumption was in a general collapse around the world. Smoot Hawley did not help, but it also did not hurt because it was largely irrelevant.

It is a lesser discussed topic, but the US held the majority of the gold in the world in 1930 as the aftermath of their position as an industrial power in World War I and the expansion that followed. Since the majority of the countries were on some version of the gold standard, one could make a case that the US had an undue influence on the 'reserve currency of the world' at that time, and its mistaken policies were transmitted via the gold standard to the rest of the world.

The nations that exited the Great Depression the soonest, those who recovered more quickly and experienced a shallower economic downturn, were those who stimulated domestic consumption via public works and industrial policies: Japan, Germany, Italy, Sweden.



As a final point, we like to show this chart to draw a very strong line under the fact that the liquidationist policy of the Hoover Administration caused most assets to suffer precipitous declines. Certainly some fared better than others, such as gold which was pegged, and silver which declined but not nearly as much as industrial metals and certainly financial instruments like stocks which declined 89% from peak to trough.

FDR devalued the dollar by 40%, but he never followed Britain off the gold standard, maintaining fictitious support by outlawing domestic ownership. As the government stepped away from its liquidationist approach the economy gradually recovered and the money supply reinflated, despite the carnage delivered to the US economy and the world, provoking the rise of militarism and statist regimes in many of the developed nations.

There is a fiction that the economy never really recovered, and FDR's policies failed and only a World War caused the recovery. In fact, if one cares to look at the situation more closely, the recession of 1937 was a result of the aggressive military buildup for war in the world, the diversion of capital and resources to non-productive goods and services, and of course the general reversal of the New Deal by the US Supreme Court and the Republican minority in Congress.

As an aside, it is interesting to read about the efforts of some US industrialists to foster a fascist solution here in the US, as their counterparts and some of them had done in Europe.

What finally put the world on the permanent road to recovery was the savings forced by the lack of consumer goods during World War II and the rebuilding of Europe and Asia, devastated by war, significantly aided by the policies of the Allied powers.



A Depression following a Crash caused by an asset bubble collapse is a terrible thing indeed. But it does not have to be a prolonged ordeal.

Governments can and do make policy errors that prolong the period of adjustment, most notably instituting an industrial policy that discourages domestic consumption and money supply growth in a desire to obtain foreign reserves through exports.

From what we have seen thus far, we believe that the Russian experience in the 1990's is going to be closer to what lies ahead for the US. Unless the US adopts an export driven, low domestic consumption, high savings policy bias, non-productive military buildup and public works, and discourages population growth we don't believe the Japanese experience will be repeated.

Preventing the banking system from collapsing is a worthy objective. Perpetuating the symptom of fraud and abuse and 'overreach' that was becoming pervasive in the system before the collapse is not sustainable, instead leading to more frequent and larger collapses.

Balance will be restored, and a reversion to the means will occur, one way or the other. It would be most practical to accomplish this in a peaceful, sustainable manner, with justice and toleration.


SEE LINK FOR COOL GRAPHS--THIS IS A NEAT BLOG, TOO

[Hugin]

29. Same formula, same results... Must be science.

""Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.'"

So, is that why they're bailing out the Magic Financial Investment Banks which produce wealth without Labor? (or so
they claimed.)

[Demeter]

32. NO, It's G R E E D, and Paying Off the Buddies of Your Buddies

After all, they're all generations removed from anything close to (ick) Labor!

[Hugin]

35. I was, of course, referring to the consequence of precipitating a recession...

of Depressianic Proportions.

But, then... You were discussing motive. Same consequences for the greedy, too.

[bemildred]

30. Too much capital

Re: “Don’t blame the victims,” editorial, Oct. 25

Your analysis does not sufficiently blame the current economic situation on the oversupply of investment capital. There can be too much of a good thing.

Simply put, when good investment opportunity is used up, people must resort to bad investment. The situation is exacerbated when speculation replaces sound investment strategy. When speculation drove the stock market to unsustainable heights, investors switched to real estate. But real estate value was inflated by the very same investment pressure -- and when it became unsustainable too, investment money went into commodities, driving up the price of oil.

Losses sustained by investors will lower the pressure for a while, but the long-term solution is higher taxes on the rich. The alternative is a pogo-stick economy and inflation.

Author redacted.

Found here: http://www.latimes.com/news/opinion/letters/la-le-letters1-2008nov01,0,7225233.story

Putting this up for discussion. An idea that I see crop up once in a while, but rarely in public discourse. I think it bears mentioning that the people with all the "excess capital" are generally being taken to the cleaners, as in all Ponzi schemes, which any bubble is.

But, is "excess capital" a problem? Can you really have too much capital?

[Demeter]

33. If Greenspan Hadn't Dropped Interest Rates To Zero and Below

Most of that money would have been happily earning interest in CDs and Treasuries, we wouldn't need to go to foreign lands to finance the National Debt, and banks would be just fine. And the mortgage bubble wouldn't have happened, either. Nor the Shadow Banks, most likely. Pensions wouldn't be imperiled, either.

[bemildred]

34. So then is it too much fake capital?

Too much gambling winnings and fiat money, rather than real capital based on saved earnings? I actually like that idea, a distinction to be made between fake money pulled out of someones ass and loaned to "consumers" versus real money earned by productive economic activity.

So are we back to bad money always drives out the good? I think that is not a bad characterization of the current situation.

[Demeter]

36. It's Too Much A Rigged Game

in which regular people cannot win. A fraud, a con, a scam, and a crime.

[Hugin]

37. Counterfiting...

They've had an unregulated license to create a fiat currency for quite some time... Unfortunately, it was the Dollar.

[Hugin]

39. Edit: Counterfeiting.

I didn't think that looked correct. Spell checker didn't catch it either.

:spank:

[Demeter]

40. Financial Roadkill (DailyReckoning Predicts!)

http://www.dailyreckoning.com/Issues/2008/DR103008.html


Here, we think we see another ‘trade of the decade’ coming up. Dan Denning offers this insight:

“The 30-year Treasury bond yield plunged 27 basis points last week to 4.062 percent. It reached 3.8676 percent on Oct. 24, the lowest since regular issuance of the security began in 1977.

“This is the last big bubble. There’s going to be a stiff penalty for staying in Treasuries as the supply increases (the three-year note is coming back, monthly auctions for ten-year notes will resume). Plus, you know, all that new stimulus. All that new borrowing. <[br />
“Yields will be going up for sure...

“I think the big takeaway is that equities – certain ones mind you – make much better inflation hedges than bonds, especially U.S. government bonds. If you don’t want to own best-of-brand businesses now at these prices (including resource and energy companies) then would you ever want to own them? If you’re going to be in the equity markets at all, you could probably make a list of just five or ten companies to own for the next ten years, buy them now, then throw away the key.

“This is actually advice I gave to my family. I said, ‘Look, being in cash is safe now. But it’s going to be a liability. You have a little time before everyone comes out of their caves and begins buying again. The panic that swept the markets has abated. Obama is Messiah. It’s all good. This looks like the 1929-1930 50% rally. But more importantly, cash will get trashed in an inflation...and believe me...it’s coming. Big stimulus (Roubini says $400 billion plan). Democratic veto proof majority in Congress. Stocks will be better than bonds or cash (as Buffett said in the NY Times). But which stocks? You could buy as few as five – and you might not ever need to buy stocks again (you might never want to either). But if all you do is buy these five now – you probably won’t regret it in five or ten years. And if it IS the Great Depression...well then...you’ll have other things to worry about anyway...like a roof over your head...or your empty belly...or how to avoid that gassy smell coming from Uncle Rufus.’”

*** Dan is probably right. But here at The Daily Reckoning we are not speculators. We buy food to eat and wine to drink. We buy gold as insurance. We buy property when we want to use it. We buy businesses when we understand them and believe they will make a profit. And we buy stocks only when they pay acceptable dividends. When the dividend yield reaches 6% – on strong, growing companies – call us.

Until tomorrow,

Bill Bonner
The Daily Reckoning


THEY ARE ALSO PREDICTING A BOTTOM ON THE DOW OF 5,000

"It probably would have corrected to the 5,000-range already. But the feds intervened. And now we’ve really got trouble. Because in trying to head off a recession/bear market, the authorities provoked a housing bubble, a financial bubble, and a worldwide credit bubble. Homeowners over-bought. Banks over-lent. Consumers over-stretched. Almost everyone seemed to over-do it. So, what might have been a typical bear market has been transformed into a monster of deleveraging."

[Demeter]

41. Gedankenexperiment: How Could This be Worse Than the Depression?

http://paul.kedrosky.com/archives/2008/10/31/gedankenexperim.html

Provocative piece up earlier this week over on the (excellent) FT economists’ forum. Authored by Anders Aslund of the Peterson Institute, the piece takes people to task for stubbornly insisting that the current crisis could not end up being worse the the Depression. While it very likely won’t end up being worse than the Depression, taking it as an article of faith is over-rigid thinking that helps no-one.

Here are Aslund’s points with respect to where the “why it could be worse” risks lie. He is not saying it will be worse, just that the following represent some of the possible blind spots.



Then


Defended exchange rates over-aggressively
Allowed monetary supply to shrink dramatically
States did not go bankrupt
Subprime loans existed, but market were simpler
Emanated from two countries: US and Germany
Minimal over-leveraging of major financial institutions
Global trade was frozen in wave of protectionism
Relatively slow advance and loose coupling


Now


Floating exchange rates could lead to trade panic
Monetary expansion and budget deficits lead to currency collapses
States could go bankrupt, leading to hyperinflation
Deeper and more complex markets with connective tissue everywhere
Coming from everywhere, i.e., with worst real estate bubbles in Moscow and Middle east
Massive over-leverage of major financial institutions
Global trade freezing in credit contraction
Fast advance and tight coupling via trade and global media

[Demeter]

42. Fear of Deflation Lurks as Global Demand Drops By PETER S. GOODMAN

http://www.nytimes.com/2008/11/01/business/economy/01deflation.html?_r=2&hp&oref=slogin&oref=slogin



As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years. The word for this is deflation, or declining prices, a term that gives economists chills. Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan’s so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament...With economies around the globe weakening, demand for oil, copper, grains and other commodities has diminished, bringing down prices of these raw materials. But prices have yet to decline noticeably for most goods and services, with one conspicuous exception — houses. Still, reduced demand is beginning to soften prices for a few products, like furniture and bedding, which are down slightly since the beginning of 2007, according to government data. Prices are also falling for some appliances, tools and hardware.

Only a few months ago, American policy makers were worried about the reverse problem — rising prices, or inflation — as then-soaring costs for oil and food filtered through the economy. In July, average prices were 5.6 percent higher than a year earlier — the fastest pace of inflation since 1991. But by the end of September, annual inflation had dipped to 4.9 percent and was widely expected to go lower.

The new worry is that in the worst case, the end of inflation may be the beginning of something malevolent: a long, slow retrenchment in which consumers and businesses worldwide lose the wherewithal to buy, sending prices down for many goods. Though still considered unlikely, that would prompt businesses to slow production and accelerate layoffs, taking more paychecks out of the economy and further weakening demand.

The danger of this is the difficulty of a cure. Policy makers can generally choke off inflation by raising interest rates, dampening economic activity and reducing demand for goods. But as Japan discovered, an economy may remain ensnared by deflation for many years, even when interest rates are dropped to zero: falling prices make companies reluctant to invest even when credit is free.

Through much of the 1990s, prices for property and many goods kept falling in Japan. As layoffs increased and purchasing power declined, prices fell lower still, in a downward spiral of diminishing fortunes. Some fear the American economy could be sinking toward a similar fate, if a recession is deep and prolonged, as consumers lose spending power just as much of Europe, Asia and Latin America succumb to a slowdown.

“That’s a meaningful risk at this point,” said Nouriel Roubini, an economist at New York University’s Stern School of Business, who forecast the financial crisis well in advance and has been warning of deflation for months. “We could get into a vicious circle of deepening malaise.”...

[Demeter]

44. The Problem Is the Crash of the Housing Bubble: Not Deflation

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=10&year=2008&base_name=the_problem_is_the_crash_of_th

Suppose computer prices are the same this year as last year. Is that a problem? Most people (including economists) would say no. Now, suppose that the computers you can buy this year cost the same as the computers you bought last year, but they are 10 percent better. Is that a problem? Well, the folks who get really concerned about deflation would say yes. (Our price measures adjust for quality.)

On the face of it, it is difficult to understand how the economy can be harmed by the fact that goods and services are improving in quality. But, those who believe that modest rates of deflation are harmful are in fact troubled by such quality improvements. If we have a measured rate of deflation of less than 1.0 percent, then prices would almost certainly be rising without adjusting for quality improvements, so the implication is that the economy is being harmed by the improvement in the quality of goods and services. Deflation does mean that real interest rates would be higher than if prices were flat with the same nominal interest rate, but demand is not that sensitive to modest changes in real interest rates.

The concern over deflation confuses cause and effect. In a weak economy prices may be falling. But it is not falling prices that make the economy weak.

The bulk of the economics profession, as well as the media, somehow managed to overlook an $8 trillion housing bubble as it was growing. Even as it is now collapsing, they are still missing it.

The economy is taking a big hit for an incredibly simple reason. Homeowners have lost an enormous amount of equity and therefore they are cutting back their consumption. When they cut back their consumption, companies lose business and profits. Some go out of business. This will lead to sharp declines in investment, which we have already been seeing.

There is no need to look to credit crunches or deflation. The problem is quite simply a massive lost of housing wealth, compounded by the recent loss of stock wealth. The only cure will be finding alternative sources of demand. In the short-term, government will have to fill the gap. In the longer term, it will be necessary to get the dollar down so that the country's trade is closer to balance.

It really is simple.

--Dean Baker

[Demeter]

43. Rescued bank to pay millions in bonuses RBS 'making monkeys' out of the government, says Vince Cable

http://www.guardian.co.uk/business/2008/nov/01/royal-bank-scotland-vincent-ca

Simon Bowers The Guardian

Royal Bank of Scotland, which is being bailed out with £20bn of taxpayers' money, has signalled it is preparing to pay bonuses to thousands of staff despite government pledges to crack down on City pay.

The bank has set aside £1.79bn to cover "staff costs" - including discretionary bonuses - at its investment banking division for the first six months of the year alone. The same division caused a £5.9bn writedown that wiped out the bank's profits for the same period.

The government had demanded that boardroom directors at RBS should not receive bonuses this year and the chief executive, Sir Fred Goodwin, is walking away without a pay-off. But below boardroom level, RBS and other groups are preparing to pay bonuses to investment bankers who continue to generate profits.

The disclosure drew fierce criticism from Vince Cable, the Liberal Democrat Treasury spokesman.

"The government said they would attach strict conditions on bonuses and it is very clear they are doing nothing of the kind.

"The banks are just making complete monkeys of them."

He suggested the government would not have agreed to bail out any standalone investment bank. RBS and others had become "entangled with casino-style investment banking operations", he said.

Despite the continuing financial turmoil and widespread criticism of the bonus culture in the City, the bank is understood to believe the payments are defensible.

A source said: "I think everybody would expect would not get a bonus. But there are people who still made fairly substantial money in other product areas - you cannot just not pay them bonuses, they will just go elsewhere." Asked about the likely bonus culture after taxpayer-funded bail-out, the source said: "If the government does end up becoming a shareholder, RBS is still a listed entity. It remains the board's responsibility to ensure it is run commercially."

Several US politicians have seized on an investigation by the Guardian last month which showed six Wall Street banks - Goldman Sachs, Citigroup, Morgan Stanley, JP Morgan, Merrill Lynch and Lehman Brothers - had set aside $70bn (£42.5bn) in pay and bonuses for the first nine months of the year.

Five are in line to benefit from a $700bn US taxpayer bail-out. The sixth, Lehman Brothers, has collapsed - though not without securing considerable bonus payouts for staff in the US.

Henry Waxman, chairman of the House oversight committee, wrote to chief executives of America's nine largest banks this week asking them to hand over information about their pay and bonus plans.

In his letter Waxman cites the Guardian report and says: "Some experts have suggested that a significant percentage of could come in year-end bonuses and that the size of the bonuses will be significantly enhanced as a result of the infusion of taxpayer funds."

Staff costs at RBS's investment banking division include salaries already paid in the first six months of the year, national insurance and profit-sharing contributions as well as funds earmarked for end-of-year bonuses. The sum set aside is 20% lower than the equivalent figure for the first six months of 2007.

Banking sources privately acknowledge that the sight of these bonus accruals may provoke anger. They concede the industry's pay and bonus regime is under unprecedented strain as it fails to reflect profitability, asset writedowns or share price declines.

THE WORST PART IS: IT WILL PROBABLY BE PAULSON'S BAILOUT MONEY THAT PAYS FOR SCOTLAND'S BONUSES.

[Demeter]

45. Banks to Treasury: Keep Your Bailout. We’ll Keep Our Bonuses.

http://blogs.wsj.com/deals/2008/10/31/banks-to-treasury-keep-your-bailout-well-keep-our-bonuses/

Posted by Heidi N. Moore

Investment bankers and lawyers have been suffering from a kind of post-traumatic stress disorder of late. Each Friday the jitters return: to which financial institution will the contagion spread this weekend, they wonder, followed by the inevitable feelings of relief over the subsequent government bailout.

Still, it was only a matter of time before the backlash against government control began. And now Barclays has collected $12 billion from private investors, saving it from having to accept U.K. government bailout money–and the subsequent control over operational decisions and, say, bonuses.

Here in the U.S., American Bankers Association (Deal Journal Trivia: the phone number is 1-800-BANKERS) wrote to Treasury Secretary Hank Paulson Thursday, objecting to the government’s plan to forcibly inject capital into many banks and the demand that banks change their bonus structures. “At this point, there is great anxiety about whether or not to sign up….this is not a program the banking industry sought,” ABA president Edward Yingling wrote. “Many banks would be interested in , but not if they are going to run the risk of being labeled–falsely–as needing government support, or of appearing to be asking for a handout, or being subjected to additional unknown government requirements or restrictions in the future–restrictions that could have the perverse effect of discouraging private investment in banks.”

Yingling tried to persuade Paulson that most U.S. banks have no subprime-mortgage related troubles: “Almost 95% of banks in this country remain well-capitalized. Since that time, many banks have been contacted by regulators, and urged, sometimes forcefully, to participate in the .”

Of course, control over bonuses is a big issue: “Restrictions on compensation would be impossible to administer across banks of all sizes and types and would cost the participating banks good employees in a competitive employment market,” Yingling wrote. You can read the whole letter here.

Over at eFinancialCareers, a Web site that covers Wall Streeters, Jon Jacobs protested that curbs on bonuses would turn bankers into government bureaucrats, incapable of thinking profitably:

If Cuomo, Frank, Waxman et al succeed in imposing a radically different compensation model–eliminating substantial bonuses for most employees, slashing total pay, and subjecting individual and aggregate compensation decisions to high levels of transparency and public oversight typically associated with public services such as school systems–the predictable outcome will be to transform Wall Street into a subsidiary of Washington. Instead of limiting taxpayers’ exposure to financial-sector troubles, the reforms would have the perverse effect of locking in that exposure for a decade or more….Corporate chieftains have a well-known fondness for empire-building. Does anyone seriously believe that politicians are any different?

Jacobs poses this question. The U.S. government has a far uglier budget than any U.S. bank, with a deficit expected to more than double to $407 billion this year from last year’s $161 billion. It also is the home of $640 toilet seats and $1 trillion in missing transactions. No bank in the U.S. has been as irresponsible as that. So who is in a better position to push the banks into more responsible performance–the government or the markets and shareholders?

[Demeter]

46. Investment Banks Hoist on 2005 Bankruptcy Law Changes' Petard

http://www.nakedcapitalism.com/2008/10/investment-banks-hoist-on-2005.html


Investment banks? What investment banks, says the alert reader. They are all gone, either bought by big banks, dead, or forced to become them so as to be able to pull funds from the Federal Reserve more readily.

The Financial Times report that the changes to the bankruptcy law in 2005 may have played a role in the undoing of these firms. The danger for an investment bank, as the Bear Stearns case illustrated, is that counterparties can become nervous about having credit exposure and can start curtailing certain types of activities and close accounts that would be frozen in bankruptcy. Worse, if a firm is downgraded beyond a certain point, counterparties will stop trading with the troubled firm because exposure to that firm would get them downgraded. And an inability to trade is a death knell for a securities firm.

The irony is that carveouts in the 2005 bankruptcy reform bill intended to help investment banks appear to have worked in the opposite fashion. From the Financial Times:

Wall Street unwittingly created one of the catalysts for the collapse of Bear Stearns, Lehman Brothers and American International Group by backing new bankruptcy rules that were aimed at insulating banks from the failure of a big client, lawyers and bankers say.

The 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company’s assets until a court decides how to apportion them among creditors.

The new rules were intended to insulate financial companies from the collapse of a large counterparty, such as a hedge fund, by making it easier for them to unwind trades and retrieve collateral.

However, experts say the new rules might have accelerated the demise of Bear, Lehman and AIG by removing legal obstacles for banks and hedge funds that wanted to close positions and demand extra collateral from the three companies.

“The changes were introduced to promote the orderly unwinding of transactions but they ended up speeding up the bankruptcy process,” said William Goldman, a partner at DLA Piper, the law firm. “They wanted to protect the likes of Lehman and Bear Stearns from the domino effect that would have ensued had a counterparty gone under. They never thought the ones to go under would have been Lehman and Bear.”...

The changes in the code expanded the scope and definition of financial transactions not covered by bankruptcy rules to include credit default swaps and mortgage repurchase agreements – products used widely by Lehman, Bear and AIG.

Lawyers said under the old rules, creditors of companies facing financial difficulties were wary of settling trades or seeking extra collateral because they knew such demands could precipitate a bankruptcy filing and potentially freeze their claims.

However, when the financial health of Bear, Lehman and AIG took a sharp turn for the worse this year, their trading counterparties – mainly hedge funds and other banks – were not deterred from seeking to settle their trades or forcing the three companies to put up more collateral.

Such pressure exacerbated the liquidity squeeze that ultimately forced the three companies to hoist the white flag. Bear was sold to JPMorgan in a cut-price deal in March, while Lehman filed for bankruptcy last month and AIG was rescued by a $120bn government loan.

Lawyers said the 2005 exemptions also could apply to non-financial companies, potentially complicating the bankruptcy process of any company that uses derivatives. Stephen Lubben, professor at Seton Hall University School of Law, said: “These provisions affect a non-financial firm, such as a car company or an airline, because they also engage in derivatives trading.”

[Demeter]

49. An Ugly Marriage of Convenience

http://crookery.blogspot.com/2008/10/ugly-marriage-of-convenience.html


The shotgun marriage of Merrill Lynch to Bank of America inches warily towards consummation (merger arb presently 16% & 5 year bond spread differential c.130bps). To date Ken Lewis has tossed a few gobbets towards performing brokers in Merrill's retail channel and assured jobs for some senior executives. For the investment banking franchise however, radio silence so far.

Compensation expenses accrued at Merrill were $11.2 billion for the first nine months of 2008, down 3 percent from the comparable 2007 period. Although this sounds promising for those clinging on to their jobs, in conversation last week one Merrill MD found it inconceivable that BoA will let this cash out the door. Judging by his sense of resignation, if there ever was a year where managing expectations is a piece of cake, this should be it.

Ken Lewis declared he had had as much fun as he could stand in investment banking in October 2007. He only agreed to buy Merrill, warts and all, because he wants the 15,000+ brokers. He is desperate to sell fee laden, poor performing investment products to price insensitive retail customers through an army of salesmen masquerading as advisers. Good business that, always has been: three cheers for the wealthy financially illiterate. But investment bankers? Not so much.

...advice for careerists follows--see link

[Demeter]

48. The hedonists’ reckoning By Christopher Caldwell

http://www.ft.com/cms/s/0/edece056-a776-11dd-865e-000077b07658.html

Published: October 31 2008 18:14 | Last updated: October 31 2008 18:14

We are in for a time of austerity. Are we ready for it? The US Department of Commerce has just released its advance third-quarter gross domestic product figures. They do not look good. The economy contracted over the past three months, due to the deepest fall in consumer spending since the Carter administration. Disposable income fell 8.7 per cent. This is an international downturn. Shop sales in the UK fell for the sixth month in a row in September, according to the British Retail Consortium. The European Commission announced that consumer confidence in the eurozone was the lowest in 15 years.

We should worry less about the bigness of our problems than about the smallness of our character. We are out of practice at handling a world of repossessed cars, hand-me-down clothes and cancelled vacations and graduation parties. For many decades, people were steeled against recession by a knowledge that things could be a lot worse. Britain had memories of postwar rationing. In the US, 8m people were unemployed throughout the 1930s. Even people in their mid-40s may remember Edward Heath’s three-day week and Jimmy Carter’s “malaise” speech.

Most people, though, are too young to remember that stuff. Perhaps that is why we are in the mess we are in. The US has not had a deep nationwide recession since at least 1981-82. The present consumer pessimism has not been equalled since December 1974, just after the Nixon resignation, when the US was still reeling from the oil embargo and President Ford was exhorting citizens to wear buttons that said “whip inflation now”. The youngest Americans who can remember the difficulty of paying for their children’s college education under such circumstances are approaching 70.

The US is not the same country it was the last time people had to tighten their belts. It has changed socially, economically and demographically. The range of problems has widened and the range of solutions has narrowed. Back in the 1970s, there were relatively few people with credit cards and hardly any who were “maxed out” on half a dozen. But the US now has $2,600bn (€2,000bn, £1,600bn) in outstanding non-mortgage debt, and The New York Times recently reported that 5.5 per cent of outstanding credit card debt had been written off by card issuers as losses. Indications are that the credit card problem in Britain is considerably worse.

Many of the arrangements and institutions that got Americans through the 1970s are gone. It is not often remembered how socialistic the US was in those days. It was a disguised socialism, administered by huge corporations, but it was socialism. The flabbiness and misrule of American companies was a kind of insulation. No one mentions it now, not even in the heat of an election campaign. Republicans fear telling voters that things of value have indeed been stripped from them in recent decades, just as Democrats warned. Democrats fear telling voters that heavy-handed socialism is indeed their ideal, just as Republicans warned.

Many avenues out of adversity have been closed. This crisis started because people were unable to keep borrowing on their houses – especially in places such as Phoenix and Las Vegas, where home valuations are down by a third. Financial institutions have cleverly lobbied to protect themselves from a predictable headlong rush of unvetted, unsecured borrowers into credit card debt.

The US Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 steered troubled borrowers away from Chapter 11 into Chapter 7 bankruptcies, which are more expensive to file for and carry a longer-lasting stigma. In the UK, the 2007 Tribunals, Courts and Enforcement Act may allow increasing use of “charging orders” – that is, court-imposed post facto attaching of security to loans that were contracted as unsecured.

In many countries it is becoming easier for banks to share information on clients, permitting such practices as “universal default”, whereby a borrower who misses payments on one debt can have his interest rates raised on others. So where is the nest egg of last resort that will get us through this emergency? In the US, it is in the 401(k)s and other private retirement funds set up to replace old corporate pensions.

If people engage in the financial equivalent of burning their furniture for firewood, the politics of western countries will turn invidious and populist. As the first outlines of the Treasury department’s plan to bail out troubled mortgage-holders emerged this week, there was an understandable public anger at payoffs to people who made bad decisions and spent on vacations the money they ought to have spent on their mortgages.

For quite a while, we lived unapologetically as rich people. We even patted ourselves on the back for it. If poverty causes so many social ills, then luxury ought to cure them, right? If you want to cut misery and social unrest you should let people go shopping. If you want to be “tough on the causes of crime”, let me have that flat-screen television.

As E.F. Schumacher wrote in his classic diatribe, Small Is Beautiful, in 1973: “This dominant modern belief has an almost irresistible attraction, as it suggests that the faster you get one desirable thing the more securely do you attain another. It is doubly attractive because it completely bypasses the whole question of ethics.” It turns out you cannot do that. So here we are, stuck in some dismal, minatory, moralistic, pre-information age fable. For a long while, banks lent and people borrowed as if we were living in an era of post-ethical hedonism. Now we face a reckoning as if we never left the era of neither-a-borrower-nor-a-lender-be.

The writer is a senior editor at The Weekly Standard

[Demeter]

50. Emerging Markets Capital Flight Exacerbated By Goldman and Morgan Stanley Becoming Banks

http://www.nakedcapitalism.com/2008/10/emerging-markets-capital-flight.html


I somehow managed to fail to connect the dots on this one. When Morgan Stanley and Goldman, the far and away two biggest prime brokers (as in lenders to hedge funds) became banks, tougher regulatory requirements forced them to curtail hedge fund lending significantly.

To give you an idea of the concentration in this business, Morgan, Goldman, and number three (until late 2007) prime broker Bear Stearns had among them 70% market shares, with some sources saying as high as 75%. So with all three now regulated as banks, the reduction in credit availability, even absent adverse market conditions, margin calls, and redemptions, is considerable.

From Roger Peston at the BBC (hat tip reader Doc Holiday):

As for this most recent phase of the withdrawal of credit, which has caused financial crises for a series of emerging economies in eastern Europe, Asia and South America (see "Now there are runs on countries") and also global falls in share prices, it was in a way wholly foreseeable.

It was caused, to a large extent, by an exceptional and unprecedented shrinkage in the prime brokerage industry, which in turn led to a serious reduction in the volume of credit extended to hedge funds, which in turn forced hedge funds to sell assets, especially those perceived as higher risk.

This contraction in loans provide through prime brokers was the inevitable consequence of the collapse of Lehman, but also - far more importantly - of the recent conversion into banks of Morgan Stanley and Goldman Sachs.

Morgan Stanley and Goldman are - by far - the biggest prime brokers, with Morgan Stanley the number one. But as banks, they're prevented by regulators from lending as much relative to their capital resources as they had been as securities firms.

So the US authorities should have known - and presumably did know - that by allowing Morgan Stanley and Goldman to become banks they were in effect forcing a serious contraction in the hedge-fund industry, which in turn would lead to sales of all manner of assets held by hedge funds and precipitate turmoil throughout the financial economy.

Which, as if you needed telling, only goes to show that regulatory intervention carried out with the best of intentions can have consequences that - in the short term at least - can be very painful.

[Demeter]

51. Fiscal Bang for the Buck

[Demeter]

52. I Think That's a Good Place to Stop for the Night

Even if there are 46 more emails to slog through...my eyes need a break.

Hope this helps make sense and planning for you all!

[Dr.Phool]

53. Thank you very much. Your work is appreciated.

I've been out of the loop all week, and have a lot of catching up to do.

Let's all kick back, pour a cocktail, and relax.

:toast:

[DemReadingDU]

56. Thanks!

You always find some really good articles to read!

[Hugin]

59. Thirded!

I hope you know I'm always grateful for the WE and for the SMW.

Helps me pass the time while We're...


Waiting for Godot! :7

[Dr.Phool]

54. Morning Kick

:kick:

I always hate getting up at 2:00am to change those damned clocks.

[Demeter]

57. Good Morning, Dr. Phool! You Could Have Waited

The clock wasn't going anywhere, except around in circles...

Anyway, happy Standard Time to all except Arizona, and Hawaii, who somehow managed to avoid the chain gang, and are happy all the time.

[Hugin]

58. I used my extra hour to...

upgrade the OS on my laptop, Lappy.

I'm trying to come up with something funny to say about it... I can't.

[Ghost Dog]

60. Europe's looming crisis

Iain Macwhirter (New Statesman)
Published 30 October 2008

It was Europe’s dark secret. While American banks were lending irresponsibly to homeowners who couldn’t pay, European banks were lending to emerging countries who couldn’t pay. Europe’s sub-prime crisis has now come home as heavily-indebted nations of the eastern bloc – Hungary, Ukraine, Belarus, Bulgaria, the Baltic states – are collapsing one by one into the arms of the IMF. “Icelandisation” is the new spectre stalking Europe.

And, as with sub-prime in urban America, this latest crisis was shockingly predictable. I visited Latvia at the height of the credit bubble 18 months ago, and it was clearly an accident waiting to happen. Riga, the capital, was bristling with upmarket shopping malls and classy bars that were all quite empty. Stalin-era flats were being sold for $200,000 in a country where the average wage was less than $400 a month. Latvia has hardly any industry, no energy and few natural resources apart from trees. But such was the irrational exuberance of foreign banks like Swedbank, it was awash with credit.

According to the Bank for International Settlements, western European banks have lent more than $1.5trn to eastern Europe. Austria has loans equivalent to 80 per cent of GDP and stands to make huge losses as Hungary and Ukraine collapse.

This week, the Austrian government had to cancel an auction of government bonds because it could not be sure that investors would buy them. It is not inconceivable that Austria itself could end up needing to be rescued.

Other European countries implicated in global sub-prime include Spain, which has loaned immense sums ($316bn) to Latin American countries such as Argentina. Britain has $329bn tied up in Asia - or did until values collapsed in the Asian stock market rout. Japan's Nikkei index fell to a 26-year low this week, wiping out tens of billions of yen. The losses are now winging their way home to British pension funds and banks such as the Royal Bank of Scotland and HSBC.

Banks behaving badly, then, but what's new there? Well, the Bank of England told us this week that global losses so far from the financial crisis amount to $2.8trn. But this includes only a fraction of the likely losses from global sub- prime, which have yet to land on balance sheets.

...

Ultimately, what is needed is an international central bank with the resources to provide liquidity guarantees, recapitalise banks and regulate international financial flows. This is an immense task, and the world may not yet be ready for it. But it is not a new idea: John Maynard Keynes argued for precisely this during the Bretton Woods negotiations in 1944. He even suggested a world reserve currency "bancor". This is the kind of thinking we need today.

The alternative, if nothing is done, is international tension, even war. Consider failing Ukraine with its large Russian population and its dependency on Russia for energy supplies, right at the moment when Russian dreams of becoming an energy superpower have been dashed by the collapse of the oil price bubble. Or look at nuclear Pakistan, where the entire country is disintegrating in financial chaos. And what about China? Will all those unemployed workers - where half the toy manufacturers have gone bust - go peacefully back to the paddy fields?

When heads of the "G20" group of nations meet in Washington on 15 November for what is being called "Bretton Woods II" they will not just be dealing with a banking crisis. They will be deciding the future of civilisation.

/... http://www.newstatesman.com/economy/2008/10/european-banks-crisis-imf

[Demeter]

63. Were They Crazy? What Were They Thinking?

It must have been contagion spread by US B-schools.

[Ghost Dog]

73. Well, there _is_ room for development in emerging markets,

... at a sensible pace.

But, yes: too much kool-aid :(

[Demeter]

61. IMF firepower could soon run short

http://www.ft.com/cms/s/0/a08c1fc4-a457-11dd-8104-000077b07658.html

By Alan Beattie in Washington



With its $2bn (£1.3bn, €1.6bn) rescue loan to Iceland and $16.5bn to Ukraine, the International Monetary Fund has started to dip into an arsenal that is full to the brim. Yet the IMF could soon run short of firepower.

In spite of the period of relative peace in recent years among emerging markets, the private armies of global finance have grown much faster than the fund’s store of ammunition. The IMF, headed by Dominique Strauss-Kahn, has about $200bn in easily reachable money and another $50bn or so it can access rapidly. But Simon Johnson, a former IMF chief economist now at the Massachusetts Institute of Technology, says that is relatively small. “Maybe if the IMF had two trillion dollars it could be a serious global player,” he says. “But $200bn can go very quickly. There are a lot of countries in the same position as Ukraine, and you only need to add one or two of the really big countries to use it up.” Mr Johnson reckons that with other countries also in trouble, the IMF has probably already had to pencil in committing about a quarter of its $200bn over the next few months.

Despite a long and sometimes fractious discussion about funding and governing the IMF, it has not kept pace with the rapid rise in the size of global capital markets. Countries in trouble are normally supposed to be limited to three times “quota”, or their own financial contribution to the fund. Ukraine’s loan was eight times its quota; Iceland’s 11 times bigger.

But even stretching its resources does not produce overwhelming firepower. Investment bank analysts estimate, for example, that Ukraine needs to raise some $55bn-$60bn next year in external financing. And while most of that will be borrowed by the private sector rather than the government to which the IMF lends, it still illustrates the huge size of gross financial flows.

Nor is the IMF money likely to be the only cash on the table or even the biggest contribution in many crisis-hit countries. Iceland is seeking several billion dollars more from its Nordic neighbours to supplement the fund’s loan. If, as seems likely, the IMF agrees a loan to Hungary, it will follow emergency lending from the European Central Bank.

The administration of President George W. Bush used to argue that the IMF alone, not bilateral lenders, should be in charge of rescues. That doctrine, like several others, appears to have been discarded.

“The IMF has enough funds to play an active role in the smaller and poorer emerging market countries,” says Ken Rogoff, another former IMF chief economist. “But it doesn’t have the resources to be lender of last resort for a country of any size like Brazil, Turkey or Argentina. The fund cannot backstop crises in emerging markets the way the Fed can backstop the crisis in the US.”

The fund has insisted it stands ready to get money quickly to countries that need it and is considering granting rapid access to richer and more stable emerging market countries via a “liquidity swap facility”. But this only means getting existing resources out of the door faster. Increasing the money at its disposal is harder. Japan has floated the idea of lending some of its foreign exchange reserves – perhaps as much as $200bn – to the IMF for use in rescues: experts say Tokyo appears to be concerned that countries such as China or Russia will gain foreign policy leverage by bilateral loans. Other potential solutions would include the IMF creating more Special Drawing Rights, an intergovernmental currency.

But the main obstacle to the IMF single-handedly saving the world is not technocratic but political. Its member governments are wary of handing over that much power to a single institution.

Mr Rogoff says: “The IMF is a necessary part of fixing problems in emerging markets, as it has the expertise that almost no one else does. But it doesn’t, and probably shouldn’t, have the resources to do it alone.”

[Demeter]

62. IMF to speed lending to select countries

http://www.ft.com/cms/s/0/6fae4a4e-a5e2-11dd-9d26-000077b07658.html
By Alan Beattie in Washington

The International Monetary Fund on Wednesday unveiled a new emergency lending programme that will get money to well-run countries quickly and with almost no conditions attached if they are hit by financial volatility.

The new liquidity facility is the culmination of a decade of attempts at the IMF, after the Asian financial crisis of 1997-98, to come up with a way of protecting big emerging markets from financial contagion. The IMF’s executive board on Wednesday agreed to allow countries with sustainable debt and a good policy track record to borrow up to five times their “quota”, or financial contribution to the IMF, with almost no conditions.

“This fills a gap in the fund’s toolkit of financial support,” said Dominique Strauss-Kahn, the IMF’s managing director. “It shows the fund can act quickly and decisively.”

An IMF official said that a “discrete and not particularly large group” of nations would likely qualify. With the exception of Argentina, which Mr Strauss-Kahn ruled out as a participant, the fund declined to name them. But fund officials said it should be fairly easy for market participants to identify eligible countries from the IMF’s annual assessments of debt sustainability and fiscal and monetary policy.

Independent economists said that the four emerging markets to which the US Federal Reserve offered currency swap lines on Wednesday – Brazil, South Korea, Mexico and Singapore – would certainly qualify, though they would probably choose Fed money first over IMF money. Other countries likely to meet the fund’s criteria included the Czech Republic, Chile and possibly Poland, while economies with large current account deficits such as South Africa and Turkey would probably not, they said.

Lending will be for three months at the fund’s standard interest rates, renewable up to twice within a twelve-month period. IMF officials said that money could be available within 72 hours.

“It will go to the board very quickly under expedited procedures,” the IMF official said. “Countries could be receiving the money within just a very few days of a request.”

The new facility has some similarities in intent to the so-called “contingent credit line” (CCL), a pre-approved insurance-style policy developed by the IMF and the US Treasury in the aftermath of the Asian financial crisis.

Despite strong encouragement, no country ever applied for the CCL, fearing it would signal to investors that the government was worried about financial contagion. The new programme aims to avoid the stigma problem by having countries apply confidentially as they need it rather than in advance.

Given the rapid growth in the global financial markets relative to the size of the IMF, even the amounts of money available under the scheme will be small relative to overall debt levels and capital flows.

Writing in Wednesday’s Financial Times, George Soros, the financier, noted that the potential access for a country such as Brazil – which could borrow around $22bn (£13bn, €17bn) under the scheme – was much smaller than its $200bn foreign exchange reserves.

But Mr Strauss-Kahn said he hoped the programme would encourage complementary lending from rich governments. “There has always been a catalytic role for the fund,” he said. “It is certainly useful for the fund to give a signal to some of our members that they are eligible.”

Japan recently floated the idea of lending up to $200bn of its vast foreign exchange reserves to the IMF to lend on to crisis-hit countries.

[Demeter]

64. Moscow agrees to oligarch bail-out

http://www.ft.com/cms/s/0/b720dfae-a5f6-11dd-9d26-000077b07658.html
By Catherine Belton in Moscow

Russia’s state development bank on Wednesday approved $10bn (£6bn, €8bn) in refinancing for the country’s cash-strapped oligarchs. This came as the first step of a $50bn government bail-out that could redraw Russia’s business landscape.

As part of the package, Oleg Deripaska’s UC Rusal holding company was set to receive a $4.5bn loan. It will use it to repay in full a syndicate of western banks, including Royal Bank of Scotland and Merrill Lynch, that Mr Deripaska has been scrambling to pay by a Friday deadline, people familiar with the situation said. The approval of the government loan – to be disbursed in the next few weeks – would make it easier for Rusal to persuade the banks to agree an extension of the deadline until the end of November, these people said. “It looks like everything is slotting into place,” said one person close to the creditors.

Mr Deripaska, Russia’s richest man, has been racing to secure state refinancing for the loan after the value of the 25 per cent stake in Norilsk Nickel he pledged as collateral tumbled in breach of covenants. Earlier efforts to win refinancing from the western banks failed.

The Russian government is likely to exact a high price, however, for providing the lifeline to his empire. The terms of the bail-out package were yet to be hammered out, one person close to the situation said. However, government officials have said the state development bank, VEB, would demand the same stakes as collateral as those pledged to the western banks.

As a result, Mr Deripaska’s stake in Norilsk, the world’s biggest nickel miner, is likely to remain under pressure.

Some government factions are eyeing the creation of a state metals and mining champion and Mr Deripaska is already battling rival owner Vladimir Potanin for control of the company.

Rusal declined to comment on Wednesday, as did VEB, although it confirmed $10bn in loans had been approved.

Mikhail Fridman’s Alfa Group will also be a recipient of the first wave of state bail-out funds after his telecoms arm, Altimo, failed to meet margin calls last week on $2bn in loans from a syndicate of western banks led by Deutsche Bank.

People close to the creditors said Deutsche Bank had received a letter of credit from VEB on Tuesday.

This allowed the two sides to agree that the loans would be repaid in full.

[Demeter]

65. Goldman partners’ reduced rewards

http://www.ft.com/cms/s/0/92a205ee-a5f7-11dd-9d26-000077b07658.html
By Greg Farrell in New York

Goldman Sachs unveiled its new class of 94 partners, proving that even in the most tumultuous times on Wall Street, the company’s biannual ritual of bringing up-and-comers to its innermost circle would continue.

The class will join Goldman’s elite at a time when a partnership at the firm is no longer a guarantee of a multi-million payday. By the end of this year, the bank’s 349 partners stand to divvy up the smallest bonus pool that Goldman has produced, on a per capita basis, since going public in 1999. While Goldman was willing to confirm the announcement of the partners, it would not comment on the other biannual tradition that goes hand-in-hand with the process: the “de-partnering” of a comparable number of its partner-managing directors.

The bank tries to keep the number of partners at about 1 per cent of employees.

At the end of the third quarter, the firm had 349 partners and 32,600 employees worldwide. With plans to lay off some 10 per cent of its workforce, Goldman will probably try to hold its number of partners at its current level, or shrink it slightly.

That means that with the addition of 94 names in December, the new total of 443 partners will have to be reduced, through attrition and the removal of the designation of “partner” from close to 100 members of the inner circle.

Charles Ellis, author of The Partnership, The Making of Goldman Sachs, likens the culling process to a Darwinian exercise. “It’s entirely rational, ruthless and unemotional,” he says. “There’s no softness and no sentiment to it. The firm just gets the best people and empowers them. Some people react badly to that, but it’s survival of the fittest.”

In many ways, Ellis says, Goldman’s focus on recruiting the best people, promoting them and pushing them ever harder, is what separates it from its rivals. “At most places, once you become a partner, you have tenure,” he says. “You’re a superstar. At Goldman Sachs, that’s not it. You’re expected to accelerate.”

For the first three quarters of 2008, Goldman has reported profits of $4.4bn, down by almost half from last year’s sum. According to SEC filings, it has set aside $11.4bn for pay and benefits, a decline of 32 per cent over 2007. Barring a big change in the firm’s performance, the current partners can expect bonuses, on the average, of $1m or less, according to people familiar with the matter.

[Demeter]

69. Lehman Bros. bankruptcy Fallout--Pretty Gruesome!

http://www.portfolio.com/views/blogs/market-movers/2008/10/31/lehman-europe-and-prime-brokerage-counterparty-risk?tid=true

[Demeter]

66. Two two-trillionaires

http://blogs.cfr.org/setser/2008/11/01/two-two-trillionaires/

By bsetser

The Fed’s balance sheet just surpassed 2 trillion dollars. It has grown by a trillion dollars over the course of the year. Literally. See “total factors supplying reserve balances” at the close of business on October 29. That growth was financed by Treasury bill issuance ($560b from the supplementary financing facility) and a large rise in banks deposits at the Fed ($405b).

The stated foreign reserves of China’s central bank reached $1.9 trillion at the end of September. That though understates the total assets managed by the PBoC by around $200 billion. It is now clear – I think – that the PBoC manages about $200 billion in foreign currency that the state banks have placed at PBoC. This isn’t a secret: the PBoC reports over $200 billion in “other foreign assets.” That means the PBoC already has a foreign currency balance sheet of over $2 trillion.

The pace of growth in that balance sheet slowed a bit in q3 – and may slow more in q4. But between q3 07 and q3 08, the PBoC added about $600 billion to its foreign portfolio (and another $100b or so was handed over to the CIC). The CEQ summary of my article for them covers this — though it only goes through q2 2008.

It consequently is natural to compare the balance sheet of the Fed with the external balance sheet of the People’s Bank of China — a balance sheet that is managed by the State Administration of Foreign Exchange (SAFE).

The Fed has a somewhat under $500 billion in Treasuries on its balance sheet. But it has lent about $220 billion of those securities to liquidity starved broker-dealers. It consequently has fewer Treasuries on hand than it reports. Its “uncommitted” Treasury portfolio is around $270b.

SAFE has – if it is safe to assume that SAFE accounts for the majority of China’s reported holdings of Treasuries – about $540 billion of Treasuries. But this total understates China’s real holdings; China probably accounts for about ½ (maybe more) of the Treasuries sold to investors in the UK (look at the pattern of past revisions). It consequently has more Treasuries on hand than reported in the US data – probably about $700 billion.

The Fed has provided about $1 trillion in credit — ok, $920 billion — to the US financial system – whether repos ($80b), term credit ($300b), other loans ($370b), purchases of commercial paper ($145b), or its holdings of the Bear assets JP Morgan didn’t want ($27b now).


Basically, the Fed is currently “funding” an awful lot of the US financial sector –

So too is SAFE.

Adding China’s purchases of Agencies since last June to its reported total in the last survey implies that China now has about $450b in Agencies – down a bit from its peak. No doubt it will come down more (the Fed’s custodial data indicates an ongoing shift out of Agencies by central banks, and the still-high spreads on long-term Agencies are widely attributed to a lack of Asian demand). On the other hand, China’s total Agency portfolio is underreported in the US data – based on the pattern of past revisions, Arpana Pandey of the CFR and I estimate that China’s Agency holdings peaked at around $575b – and have now fallen to around $550-540b.

The Agencies, lest we forget, are financial intermediaries. But they generally have a higher quality mortgage portfolio than private financial institutions, so the underlying risk here arguably isn’t as high as the risk on the Fed’s balance sheet. In some sense though it doesn’t really matter now that the Treasury has indicated it won’t allow systemically important financial institutions to fail: in both cases though the ultimate guarantor against losses is the US Treasury.

SAFE likely has extended some credit to US financial institutions as well – whether by buying their bonds or investing in short-term money market funds that hold some of their paper. I would estimate this exposure is in the $50-100b range – but this is very much a guess.

The Fed now has a foreign portfolio of around $540b – as it has accepted foreign currencies (mostly euros and pounds) as collateral for the dollars it lent to foreign central banks through its swap lines. The structure of these swaps though implies that the Fed has little foreign currency risk; other central banks will eventually pay the Fed back in dollars, and the Fed will hand the foreign currency back.

I suspect that somewhere between 30% and 40% of SAFE’s portfolio is also in reserve currencies other than the dollar (mostly euros, yen and pounds). That works out to a total of between $630b and $840b. SAFE’s non-dollar reserve portfolio would be the world’s second largest reserve portfolio if managed on a stand alone basis. Unlike the Fed, SAFE has the currency risk, for better (2002-q1 2008) or worse (q3 2008, October …)*

All in all though their respective balance sheets look fairly similar. It is almost scary.

They even each likely have a somewhat toxic portion of their portfolio. SAFE is widely thought to have been given permission to put around 5% of its portfolio in equities at some point in 2007. That implies that it likely bought close to $100b of global equities before equity markets started to slide. Its losses here likely exceed the CIC’s losses on Blackstone and Morgan Stanely – at least in dollar terms. It had the bigger absolute exposure to equity markets.

The Fed is the proud owner of nearly 80% of AIG. And its holdings of Bear debt may have some equity like properties …

There are two key differences between the Fed and SAFE though.

One, the Fed has been increasing its exposure to risky assets while SAFE has been reducing its (relative) exposure to risky assets. The Fed’s Treasury holdings are going down; SAFE’s are going up fast – largely because it seems to have stopped adding to its Agency portfolio.

Two, the PBoC’s liabilities are in RMB, while the Fed’s liabilities are in dollars. That means that the PBoC has an underlying currency mismatch — and all the associated risks.

You could argue that SAFE and the Fed have combined forces to keep the US economy afloat over the past year. SAFE financed the lion’s share of the United States external deficit – and did most of the heavy lifting earlier in the year when private investors didn’t like the dollar. The Fed’s financing has kept the US financial sector afloat. That incidentally is something that financial sector executives might want to consider as they award bonuses; many financial firms would have failed and not been able to pay anything absent taxpayer support –

On the other hand I would argue that the US shouldn’t give to much credit to SAFE for helping...

[Demeter]

67. CDS Pricing in Increasing Treasury Default Risk

http://www.nakedcapitalism.com/2008/11/cds-pricing-in-increasing-treasury.html


We have noted that Treasuries (and the dollar) are the remaining bubbles, although some doubts are starting to surface on the Treasury front. Paul Amery at Prudent Bear gives a good recap:

The tectonic plates underlying the whole superstructure of debt have started to shift.

On the surface nothing remarkable is happening – the 30 year US Treasury bond yield recently hit an all-time low of 3.88%, as investors sought a safe haven during equity market turbulence. Yet while nominal bond yields have declined, the credit risk component of US Treasuries has been on an increasing trend since last year. According to data provided by CMA DataVision, the credit specialists, the 10-year credit default swap spread – a form of insurance contract against issuer default – has risen steadily - from 1.6 basis points (0.016%) in July 2007, to 16 basis points in March 2008, to 30 basis points in September, to over 40 basis points on October 27 – see the chart below for the spread history so far this year. In other words the cost of insuring against a US government default has risen by 25 times in little over a year. Similar trends have been evident in the UK and German government bond markets.



This has perplexed, and even amused, some market observers. How, they ask, could a private sector contract against default be expected to pay out in the case of a US government default – which would be the equivalent of a nuclear explosion in the financial markets? So what’s the point of buying such a contract?

Moreover, how could the US government ever renege on its debts? After all, it supplies the world’s reserve currency, and the Federal Reserve Chairman reminded us a few years ago of the US authorities’ ability to print money in unlimited quantities. Any “default” would at least be through the time-tested mechanism of inflation and currency devaluation, according to this view.

On the other hand a longer-term examination of debt markets reminds us that, throughout human history, regular default is the rule than the exception. And while sovereign defaults on external, foreign-currency debt are most common, Carmen Reinhart and Kenneth Rogoff demonstrated in a paper released earlier this year that defaults on domestic debt have happened far more often than might have been expected, particularly in times of severe economic duress.

In both the US and UK, budget deficits are poised to explode....the really big impact is coming from the rescue packages being thrown at the financial sector. Morgan Stanley recently estimated that the 2009 fiscal deficit in the US would reach 12.5%, over double the previous record of 6%, set in 1983...

When measured as a percentage of GDP, the US national debt is expected to pass 70% next year, which, though much higher than recent years, is still short of the record 122% registered in 1946, at the end of the Second World War. Some observers point to this comparison as an argument for the sustainability of the current position.

Yet others argue that government debt must be seen in the context of, and as part of, the overall debt burden on the economy. With the US private debt to GDP ratio at levels never seen before – close to 300%, according to Steve Keen, the Australian economist – the question is surely whether the whole debt pyramid can avoid crashing down via a violent and uncontrollable chain of defaults, dragging the government bond market down with it. If this seems far-fetched, it helps to remember that the Latin root of the word credit comes from credere – to believe, but also to trust. For large sections of the private sector bond market, it is precisely that trust which has disappeared over the last year and a half. To suggest that such “credit revulsion”, to use an old term, might spread to governments’ debt obligations is surely not beyond the realms of possibility

Signs of strain in the US Treasury market are already there, despite the current low yields. Recent auctions have shown poor bid-to-cover ratios, and long tails (the difference between the average accepted yield, and highest yield), both signs of shallow demand. Delivery failures in the secondary market have also hit record levels, a sign of poor liquidity. Market observers should keep a close eye on the progress of future auctions, particularly as the issuance schedule picks up.

How can investors take cover if concerns over government solvency spread? For the early part of any credit-related decline in bond prices, there are obvious hedges, such as credit default swaps, short Treasury bond futures positions and inverse Treasury ETFs. But ultimately a US debt default would have cataclysmic consequences for the financial economy, bankrupting the entire system. So the ultimate safe haven is in the precious metals, which would rapidly regain monetary status in such a scenario.

[Demeter]

68. Terrorism Financing Meets Judicial Review Posted by David Zaring

http://www.theconglomerate.org/2008/11/terrorism-finan.html


The Washington Post's big Sunday story is on how badly the American pushed international terrorism financing prevention regime has done in courts in Europe. That regime is designed to freeze the assets of people associated with terrorism, at least in the view of Treasury bureaucrats, before they can move those assets somewhere sinister.

Who could be against that? Not me, in theory, but terrorism is something that you want your law enforcement officials to stop. That's why the FBI and CIA spend considerable time on the issue. The banking regulators who have also gotten involved have frozen the assets of an exceptionally wide array of people, and they've done it on the administrative quick. They've been wrong a lot, and it still isn't clear how often they've been right. The high error rate hasn't apparently bothered the Treasury Department - the upside of the asset freeze is that it is an extremely onerous sanction (imagine if you found yourself suddenly unable to use your credit or debit cards, house, phone, computer, car, or office - it's all freezable property) that can be put in place without any procedural protections. Listings, both at the UN and the US, have continued apace.

A lot of people think the risk is worth the cost in error. I've written a piece with Elena Baylis that begs to differ given the civil structure of the regime, and it's here, if you want a look.

[Demeter]

70. US businesses ask Congress for relief on pensions

http://www.reuters.com/article/marketsNews/idUSN2950742120081029?sp=true

By Emily Chasan

NEW YORK, Oct 29 (Reuters) - Fifteen U.S. business groups have asked legislators to provide relief on a pension plan funding law to help companies avoid having to freeze or end pension plans that may be inadequately funded because of the financial crisis.

They want Congress to lower levels at which pension plans must be funded and to clarify whether they could smooth out the market values of pension plan assets over several years in financial reports.

In a letter dated Oct. 28 to Rep. Charles Rangel, chairman of the U.S. House of Representatives Ways and Means Committee, and the committee's ranking Republican Rep. Jim McCrery, the groups said: "The drop in the value of pension plan assets coupled with the current credit crunch has placed plan sponsors in an untenable position."

"At a time when companies need cash to keep their businesses afloat, they are also required to make unexpectedly large contributions to their plans in order to meet funding requirements. Consequently, many companies will have to consider whether to freeze or terminate their pension plans or reduce retirement benefit accruals in order to survive."

....
Pension plans at Standard & Poor's 500 .SPX companies were overfunded by $63 billion last year and are on track to be underfunded by more than $219 billion this year, according to S&P...

[Demeter]

71. Politics Before and After a Crash, Depression

http://benbittrolff.blogspot.com/2008/11/politics-before-and-after-crash.html

[Demeter]

72. And That Says It All!

I couldn't stop on a higher note. Have a great week, folks!