The Weekend Economist Aug1-3

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A compendium of articles on the US and global economies, serving as a supplemental reading to the daily Stock Market Watch. All are welcome to post such articles here.

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1. FDIC warns four US banks over liquidity By Sarah Mishkin in New York

http://www.ft.com/cms/s/0/f52c86b4-6018-11dd-805e-000077b07658.html



The Federal Deposit Insurance Corporation revealed on Friday that it had issued warnings to four small US banks that lacked sufficient reserves to cover potential loan losses...The banks receiving cease-and-desist orders in June were MetroPacific Bank in Irvine, California; Bank Haven in Haven, Kansas; Clarkston State Bank in Clarkston, Michigan; and Hastings State Bank in Hastings, Nebraska.

Non-performing loans in Clarkston State’s portfolio nearly doubled to 4.6 per cent between the close of 2007 and the end of the first quarter of 2008, according to first-quarter earnings report released in April. Clarkston State’s chief executive, J. Grant Smith, said in a statement accompanying first quarter earnings that ”business conditions remain weak and commercial loan demand is anemic.”

The FDIC instructed the banks to reevaluate their allowances for potential losses. MetroPacific in California was also told to stop issuing credit “for speculative construction and land development purposes.”

The fifth bank – Columbus Bank and Trust in Columbus, Georgia – received a cease-and-desist order because its credit card program violated consumer protection laws.

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3. Wachovia will walk-over-you by John Hempton

http://brontecapital.blogspot.com/2008/08/wachovia-will-walk-over-you.html

I get about two emails a day seeking my views on Wachovia. I am going to disappoint people who want a really detailed examination. But I will give my quick views before I get to the real point of this post:


Wachovia is a bank with a credibility problem and a funding problem. Whereas I think a smash-em-up insolvency is unlikely at WaMu because WaMu has enough core deposits the same is not true at Wachovia. Core deposits at Wachovia are 390 billion and falling slightly. Total deposits (including hot-money deposits) are 435 and rising.



Loans are 476 billion and rising. The reasons for the rising loan balance are not entirely apparent (and leaves me suspicious). But whatever the reason, rising loans represent rising need for funding.
There is a lot of wholesale funding (especially loans pledged with the FHLB and the Federal Reserve). Bluntly (there) is a shortage of ready funding at Wachovia and Wachovia needs more. And as the loan problems at Wachovia look a lot worse than average it’s unlikely the capital markets will be generous. They might lend to Wachovia – but they will demand collateral, high rates or both.

So what does a bank in that position do?

It pays up for deposits. Big time.

I got this email – which, so far, I have not confirmed: "Wachovia, in two markets I do business in as a financial planner, has begun offering special rate CD way higher than any other market participants. 5% for three years! Non jumbo btw regular deposits and they claim they can offer double insurance protection by using their bank of Delaware Sub.!"

What I can confirm however is that Wachovia is trying very hard to get deposits. Here is the featured deposit advert if you go look on their website. It varies a little by zip code – but they appear to have this high-rate offer in most states. They are offering an APY of 4.25% on a 12 month CD, minimum deposit 5 grand...Wachovia – through its many branches – is offering a rate as high as all but a few diabolical brokered bank CDs. It is paying top dollar.




Now I got to observe something here. The only banks that have a higher rate than Wachovia are Amtrust Direct, Heritage Bank and Corus. Even GMAC bank has a lower rate. But when I did this survey yesterday WaMu wasn't on the list. Now it is. Comment to come... but this weakens my case for WaMu preferred...


I guess 4.25 percent for deposits is not top dollar when your credit default swap is where it is at the moment. But if you have to pay that much over the odds for money then it rather eats into your margin. If you are not convinced that Wachovia really is paying over the odds – then have a look at Wells Fargo CD rates (choosing California as jurisdiction). The advantage of not having a funding problem is large at the moment.


Moral

Banks that are highly dependent on hot-money CDs for their funding have a problem. If Wachovia is competing with you for those large branch CDs then Wachovia will walk-over-you. Or, tempted by high rates, maybe your customers will just walk-over-to-them. Either way – if your funding is “non core” your margins will be under pressure....

[Pale Blue Dot]

17. First Priority Bank in Bradenton, FL fails

http://www.fdic.gov/news/news/press/2008/pr08065.html

First Priority Bank, Bradenton, Florida, was closed today by the Commissioner of the Florida Office of Financial Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with SunTrust Bank, Atlanta, Georgia, to assume the insured deposits of First Priority.

The six branches of First Priority will reopen on Monday as branches of SunTrust Bank. Depositors of the failed bank will automatically become depositors of SunTrust. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. For the time being, however, customers of both banks should use their existing branches until SunTrust can fully integrate the deposit records of First Priority.

Over the weekend, customers of First Priority can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of June 30 2008, First Priority had total assets of $259 million and total deposits of $227 million. At the time of closing, there were approximately $13 million in uninsured deposits held in approximately 840 accounts that potentially exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

[Robbien]

49. Cease and desist?

What the heck does this mean. It appears the FDIC is saying these banks can no longer issue loans because they don't have sufficient reserves.

Then how can the banks be on-going concerns? Without the ability to make loans, is a bank a bank?

[DemReadingDU]

52. If my bank had cease and desist

I think I would move my money someplace else. 'Cease-and-desist' sounds like a warning that the bank is failing.

[Demeter]

2. Unconvinced by economic growth? Blame the deflator By Alister Bull - Analysis

http://www.reuters.com/article/ousiv/idUSN3161434220080731?sp=true


WASHINGTON (Reuters) - Economic growth doubled in the second quarter, but in case it doesn't feel like the economy is expanding robustly, blame the deflator.

Just as a temperature gage doesn't say much about how hot it will feel when you go outside because it doesn't measure humidity, statistics don't always capture economic reality for ordinary Americans.
Real gross domestic product is adjusted for inflation. But the rate of inflation used to perform this complicated calculation excludes import prices like the cost of imported oil. This has soared, pushing up gasoline prices and taking a big bite out of U.S. household budgets.

"The concept of 'real' GDP is intended to measure physical quantities rather than dollar amounts. So that if you paid a higher dollar price but purchased the same number of physical goods, real GDP would be unchanged," said professor James Hamilton of the University of California, San Diego.
On this basis, U.S. GDP advanced at a 1.9 percent annualized pace in the second quarter, after adjustment by an inflation rate -- or deflator -- that was calculated at just 1.1 percent, according to U.S. Commerce Department data published on Thursday.

But consumers face much higher prices. The gross domestic purchases price index, which measures what Americans buy and includes import prices while excluding export prices, was measured at a much higher 4.3 percent in the second quarter.

People who think the United States has already slipped into a recession that has been massaged away by the official data were not persuaded. "That alleged 1.9 percent growth depended on the ludicrous assumption that inflation was just 1.1 percent at an annual rate," said Stefan Karlsson, an economist based in Sweden. "If you instead deflate the nominal GDP growth of 3.0 percent with the 4.3 percent increase in the gross domestic purchases deflator, then growth was -1.2 percent," he wrote on his blog....

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4. IMF sees no end in sight to credit crisis By Krishna Guha

http://www.ft.com/cms/s/0/a3deb7da-5caf-11dd-8d38-000077b07658.html

Global financial markets are “fragile” and indicators of systemic risk remain “elevated” almost a year into the credit crisis, the International Monetary Fund said on Monday. The fund warned credit growth in the US could fall further as a result of ongoing financial system stress and warned that emerging markets would be tested as global financing conditions tighten and policymakers grapple with rising inflation. The IMF also noted that house prices had softened in a number of European economies including the UK, raising the possibility of further problems in those markets.

The assessment came in the July update to the Global Financial Stability Report, led by former Bank of Spain governor Jaime Caruana.

The IMF said that while likely losses on US subprime mortgages have “largely been acknowledged” in the form of writedowns, financial institutions faced a second wave of losses on other loans. Credit quality “across many loan classes has begun to deteriorate with declining house prices and slowing economic growth.” The Fund said bank balance sheets were under “renewed stress” and that the decline in bank share prices had made it more difficult for them to raise new capital. This “increased the likelihood of a negative interaction between banking system adjustment and the real economy.”

...The IMF reaffirmed its controversial earlier estimate that total losses in this cycle could total $945bn – a number that combines mark-to-market losses on subprime-related securities and estimates of likely losses on loans....The IMF said financial institutions globally have written off about $400bn since the crisis began last August, and that while they had raised substantial amounts of capital, the losses “exceeded capital raised.”

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35. Subprime lending not main trigger of real estate bubble

http://www.physorg.com/news136654317.html


...new research led by UC Irvine’s Paul Merage School of Business Center for Real Estate suggests subprime loan products themselves may not be the primary cause of U.S. home prices’ rise and fall.

Instead, the considerable 2003 pullback of government-sponsored financial service corporations Fannie Mae and Freddie Mac from the credit market and their replacement by aggressive, private mortgage securities issuers in late 2003 had a significant impact on home prices and was more responsible than subprime lending for the drastic price runup that peaked in early 2006.

“We were quite surprised to find the intensity of subprime lending was insignificant after controlling for all the other factors influencing the market, but we were really blown away when Fannie’s and Freddie’s continuing presence in the market was shown to be so important,” said Kerry Vandell, UCI finance professor and Center for Real Estate director. Vandell along with Major Coleman IV, finance doctoral student, and Michael LaCour-Little, Cal State Fullerton finance professor, used 1998-2006 housing and mortgage data from a variety of sources – including First American LoanPerformance, the S&P/Case-Shiller Home Price Indices and the Federal Housing Finance Board – to analyze 20 U.S. metropolitan areas.

The researchers found that rising home prices up to 2003 could be explained by economic fundamentals, such as low unemployment rates, expanding household incomes and population growth. These factors fueled housing demand and, in turn, increased U.S. home prices. During this time, Fannie Mae and Freddie Mac actively issued and purchased conventional, conforming mortgage-backed securities.

But in 2003, political, regulatory and economic factors – including accounting irregularities that led to their senior officers’ resignations and the capping of their retained loan portfolios – forced the two entities to significantly slow their lending volume. Private funding in the form of asset-backed securities and residential mortgage-backed securities replaced conventional, conforming mortgage-backed securities as the prevalent source of mortgage capital.

The new credit environment allowed looser underwriting standards and increased tolerance for riskier, high-yield loan products. Such products included adjustable-rate mortgages with low initial “teaser” rates, Alt-A loans that did not require income verification and nonowner-occupied investor products. This borrowing climate provided previously marginal borrowers with additional access to credit. The credit market shift led to a record increase in total mortgage volume and pushed up home prices with momentum characteristic of a bubble.

The researchers also determined that interest rates did not significantly affect house prices. The finding defied conventional wisdom that ties interest rates directly to the monthly cost of housing and assumes an effect on purchase prices....



The research was partly funded by the Homer Hoyt Institute, Freddie Mac, the Mortgage Bankers Association and the National Association of Realtors’ Subprime Crisis Research Consortium. An earlier version of the research was first presented at the 2008 meeting of the Allied Social Science Associations.

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39. Fannie Mae, Freddie Mac Live to Die Another Day: Caroline Baum

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_baum&sid=aHavxqohz8RQ

Commentary by Caroline Baum


July 30 (Bloomberg) -- Two weeks ago, with their stock prices plummeting and accusations of insolvency swirling through the marketplace, Fannie Mae and Freddie Mac, the two giant mortgage-finance companies, stared into the abyss. What looked like a black hole turned out to be a blank check from the U.S. Treasury: an unspecified and unlimited credit line, borrowing privileges at the Federal Reserve's discount window, and a pledge of a capital injection from the government if needed. The Securities and Exchange Commission coughed up additional protection, tightening the rules for short-selling of Fannie and Freddie, along with 17 other financial stocks.

Mission accomplished? With the government making explicit the implicit guarantee of the two government-sponsored enterprises, which together own or guarantee $5.2 trillion of the nation's $12 trillion of mortgage debt, the hope is that Fannie and Freddie won't have to tap the emergency backstops.

The fear is that the needed makeover will stop there.

If these public-private hybrid companies are too big to fail -- and everyone from the Bush administration to Congress to businesses and homeowners agrees that they are -- then by definition they are too big to survive in their current state, a paradox voiced by William Poole, former president of the Federal Reserve Bank of St. Louis, in a July 27 New York Times op-ed.

The lame-duck Bush administration, no fan of Fannie and Freddie until recently, has neither the clout nor the interest to refashion the companies. Treasury Secretary Hank Paulson has said repeatedly that Fannie and Freddie, which play ``a central role'' in the housing finance system, ``must continue to do so in their current form as shareholder-owned companies.'' Congress, for its part, isn't interested in an extreme makeover. As part of the Federal Housing and Economic Recovery Act of 2008, awaiting presidential signature, lawmakers provided for a ``world class'' regulator for the GSEs, according to the Senate Banking Committee's summary of the legislation. (Quotation marks theirs.)

An interesting choice of words. Regulators get their mandate and powers from Congress. Lawmakers, by their own admission, seem to be saying the current GSE regulator, the Office of Federal Housing Enterprise Oversight, is a bantam weight. If Ofheo is, then it's of Congress's choosing: a choice heavily influenced by one of the most effective lobbying machines in Washington.

Earlier this month, Senator Jim DeMint, Republican of South Carolina, said that any federal bailout of Fannie and Freddie should include a ban on their ``lobbying and political activities.''
``Any legislation exposing taxpayers to this risk should include a serious debate on long-term reforms, and a ban on lobbying must be included,'' DeMint said. `` DeMint tried to hold up Senate passage of the bill last week by forcing a vote on an amendment to curtail lobbying by the GSEs, the only government agencies to engage in such a practice. The Senate leadership rejected his request.

Congress isn't known for its long-term thinking. To the extent that the immediate crisis abates -- borrowing isn't a problem now that Fannie's and Freddie's debt carries the full faith and credit of the U.S. government -- it will reduce the impetus to seek a long-term solution, which is exactly what's needed.

A ``world class'' regulator isn't the solution. Eliminating the asymmetric risk/reward from Fannie and Freddie is. If the taxpayer is going to shoulder the burden for bailing out Fannie and Freddie, the taxpayer should stand to benefit. It makes no sense to guarantee the debt of a private company, the benefit of which accrues to the shareholders, and not own the equity. And it isn't only a bunch of right-wing, free-marketeers pushing for a re-evaluation of the role of the GSEs in the 21st century. Former Treasury Secretary and Harvard University Professor Larry Summers, who is an economic adviser to Democratic presidential candidate Barack Obama, said the priority should be protecting the taxpayers and financial system, with the stockholders and subordinated-debt holders taking the hit. Summers's idea is to run the GSEs as public corporations for a few years, after which their government and private functions could be divided, with the latter sold off.

Fannie Mae, created in 1938 and re-chartered as a shareholder-owned company in 1970, and Freddie Mac, chartered in 1970, have strayed far afield from their original mission, which was to provide liquidity, affordability and stability to the housing market. Nothing in there about ``using its cost-of-funds advantage to lever its balance sheet,'' said Josh Rosner, managing director at Graham Fisher & Co. in New York. ``Buying manufactured housing, aircraft lease equipment, Alt-A mortgages: the taxpayers should not fund the non-corporate businesses.''



What's more, only 7 basis points of the GSE subsidy benefited the home buyer, according to a study by Federal Reserve economists. Now that Congress has passed a housing-rescue bill, which authorizes the Federal Housing Administration to insure as much as $300 billion of refinanced mortgages in addition to establishing a new GSE regulator, ``they think the problem is fixed,'' said Jim Bianco, president of Bianco Research in Chicago. Bianco expects the other shoe to drop, perhaps in early August, when Freddie Mac reports quarterly earnings.

``Freddie announced its intentions to raise $10 billion of equity on July 18, filed a shelf offering on the 22nd, and the clock is still ticking,'' Bianco said. ``It took Merrill Lynch 12 hours to pull off an $8.55 billion stock sale.''

In this era of big government, it's good to know there are a few things the market still does better.

(Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.) To contact the writer of this column: Caroline Baum in New York at [email protected].

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5. Eight arrested in FSA insider dealing inquiry By Megan Murphy, Michael Peel and Chris Hughes

http://cachef.ft.com/cms/s/0/039fc65e-5d92-11dd-8129-000077b07658.html


Workers at the Swiss bank UBS and JPMorgan Cazenove, one of the oldest names in the City of London, were arrested for alleged insider dealing on Tuesday as police raids sent a chill through the UK capital’s trading rooms. The arrests mark the third high-profile action the Financial Services Authority has taken in the past week over insider trading, in a sign of a tougher approach to a problem the regulator believes is rife in the Square Mile and a threat to the integrity of the markets.

City of London police and 40 FSA officials arrested eight people and raided premises throughout London and England’s south-east in what the regulator described as “a major ongoing investigation into insider dealing rings”. The FSA suspects that the alleged ring traded on price-sensitive information contained in deal announcements produced at one or both of the banks’ printing facilities but which had yet to be made public.

UBS told the Financial Times: “We can confirm that a junior member of UBS’s support staff in London has been arrested and has been suspended from work while the FSA carries out its investigation.”
Cazenove confirmed that a sub-contractor who worked at the bank but was employed by another company was one of the eight people arrested.

Tuesday’s raids came less than a week after the agency charged a veteran former Cazenove partner with a dozen counts of insider dealing between 2003 and 2005. Bankers said the FSA’s high-profile crackdown had led to alarm in the City, where criminal prosecutions are seen as a new threat.
Since it was given the power to bring criminal charges in 2001, the regulator has launched only three insider dealing cases, all of which have been filed this year. Insider dealing carries a maximum sentence of seven years in prison.

“The FSA are doing a really good job at scaring people,” one senior trader said.

All eight people arrested on Tuesday are men aged between 27 and 48. The FSA would not confirm their names, employers or job titles, nor the amount of profits thought to be at stake.



Additional reporting by Neil Hume

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6. Hedge funds have worst month since 2000 By James Mackintosh

http://www.ft.com/cms/s/0/03ca4db2-5a7b-11dd-bf96-000077b07658.html

Hedge funds are having their worst month in eight years after popular bets against banks and in favour of rising commodity prices went badly wrong.

Among those hit by the unwinding of the bank/energy trade, according to letters to investors, are two of the best-performing hedge funds of the past 18 months – Harbinger Capital and Clarium Capital.
New York-based Harbinger, which manages $26bn, lost 12 per cent in the first 2½ weeks of July, while San Francisco’s Clarium plunged 10 per cent in a week to leave it down 4.3 per cent for the month to the 18th – although both remain strongly up for the year.

“Over the last week the numbers are coming in quite negative,” said one investor in hedge funds. “There has been a ferocious bear squeeze in banks and it is becoming apparent that financials/energy position was much more widely held than had been understood.”

According to Chicago-based Hedge Fund Research’s daily index, hedge funds were down 2.77 per cent for the month to Wednesday. If that is sustained to the end of the month, it will make July the worst since the dotcom bubble burst in April 2000...Many hedge funds have been betting that bank stocks would fall further as the credit crunch continued to bite, and that oil and other commodity prices would keep rising – a trade that generated big profits this year, helping offset losses in other areas. But over the past fortnight the trade has been hit by a double whammy: one of the most vicious falls in commodity prices on record and a leap in financial stocks.

“One of the things that’s obvious with the financials/resources trade is that everybody had it on,” said Paul Meader, director of Guernsey-based hedge fund investor Corazon Capital....Several investors said many hedge funds had scaled back the trade but were still betting on a rebound in commodities and more trouble for the banks.

Clarium and Harbinger may be feeling pain but their spectacular performance this year will shield them from investor anxiety....


BUT THERE'S NO SPECULATION IN OIL'S PRICING--NOT A DROP! OF COURSE NOT!

FOR MORE POO=POOING OF OIL SPECULATION, SEE THIS LINK:

http://www.ft.com/cms/s/0/4796e556-5962-11dd-90f8-000077b07658.html

Fuelling a bubble?

[Demeter]

7. Biotech companies hit by patent ruling By Megan Murphy, Law Courts Correspondent

http://www.ft.com/cms/s/0/c2649894-5f54-11dd-91c0-000077b07658.html

Biotechnology companies that have staked lucrative claims to parts of the human genetic sequence were on Thursday dealt a blow by the High Court in a decision that may set a higher threshold for intellectual property protection. In the first UK case to examine how “bioinformatics” – the use of powerful computer programmes to work out the relationship between the human genome and the design of new drugs – affects patentability, the court revoked a patent held by Human Genome Sciences on a disease-linked protein known as “neutrokine-alpha”. The ruling is a big boost to Eli Lilly, the US pharmaceutical company that has spent $50m (£25m) developing an antibody to neutrokine-alpha and expects to spend another $250m bringing the therapy through clinical trials.

The origins of the case stretch back to the early 1990s, when the renewed push to map the entirety of the human genome triggered a “land grab” to snap up patents on genes, proteins and human stem cells....

One such group of proteins was the “tumour necrosis factor”, or TNF superfamily, which was found to trigger inflammation in the body. Given that a number of widespread diseases – such as arthritis, asthma and chronic pulmonary disease – are associated with inflammation, the discovery of neutrokine-alpha was of immense potential value to the pharmaceutical industry. Human Genome Sciences, the US biotechnology company, was the first of several companies to apply for a patent on the protein in the mid-1990s, without specifying its precise biological function, the conditions it caused or the diseases it would be able to treat. Mr Justice Kitchin on Thursday invalidated HGS’s UK patent on neutrokine-alpha, ruling the company had failed to identify any practical use at the time its application had been filed. His ruling is a blow to HGS, which has been collaborating with GlaxoSmithKline on a neutrokine-alpha antibody known as lymphostat for the potential treatment of rheumatoid arthritis and lupus.

[Demeter]

8. Science Briefing: Solar power goes all night By Rebecca Knight

http://www.ft.com/cms/s/0/8798e6ca-5f54-11dd-91c0-000077b07658.html



In what scientists are calling a “giant leap” toward clean energy, researchers at MIT have developed a way to store solar energy for use when the sun does not shine, paving the way to large-scale solar power.

Sunlight has the greatest potential of any power source to solve the world’s energy problems. In one hour, enough sunlight strikes the Earth to provide the entire planet’s energy needs for one year. Until now, however, solar power has been a daytime-only energy source, because storing extra solar energy for later use is both expensive and inefficient.

Inspired by photosynthesis, the researchers created a process that enables the sun’s energy to be used to divide water into hydrogen and oxygen gases. Later, the oxygen and hydrogen may be recombined inside a fuel cell, creating carbon-free electricity to power a house or an electric car, day or night. The key component in the process – detailed in the latest issue of the journal Science – is a new catalyst that produces oxygen gas from water. Another catalyst produces hydrogen.

The system consists of cobalt metal, phosphate and an electrode that are placed in water.
When electricity, whether from photovoltaic cell, wind turbine or other sources, runs through the electrode, the cobalt and phosphate form a thin film on the electrode and oxygen gas is produced.
Combined with another catalyst, such as platinum, that can produce hydrogen gas from water, the system can copy the water-splitting reaction that occurs during photosynthesis.


IF I REMEMBER CORRECTLY FROM 9TH GRADE BIOLOGY CLASS, COBALT IS THE KEY TO CHLOROPHYLL...THE ATOM TO WHICH ALL OTHER "ORGANIC" MOLECULES CONNECT. WE USED TO LEARN THINGS IN SCHOOL....
1969--THAT WAS THE YEAR DNA HIT THE TEXTBOOKS---LONG BEFORE CREEPING CREATIONISM STIFLED SCIENCE.

[northernlights]

16. Carbon,, not cobalt

You're remembering your h.s. biology wrong. Carbon, not cobalt, is the element that is key to life and the basis of organic chemistry. There is no cobalt in chlorophyll -- it's some combination of carbon, hydrogen, oxygen, nitrogen and maybe magnesium.

[Demeter]

21. Thank You

It was magnesium, that trace that makes it all go...cobalt is the key in vitamin B12...

[Demeter]

9. Lawyer suggests Scruggs got witness help from Lott

http://cbs4denver.com/businesswire/22.0.html?type=national&serviceLevel=f&category=f&filename=APFN-MS-Katrina-State.xml

JACKSON, Miss. (AP) An insurance company's attorney suggested during a sworn deposition that former U.S. Sen. Trent Lott urged witnesses to give false information in a Hurricane Katrina lawsuit, according to court records.

The implication was made last week during a deposition with Lott's nephew, Zach Scruggs, who represented the former Mississippi Republican senator after his Pascagoula home was destroyed by the 2005 storm. Zach Scruggs is the son and law partner of disgraced former attorney Richard ''Dickie'' Scruggs, Lott's brother-in-law.

''Has it been your custom and habit in prosecuting litigation to have Senator Lott contact and encourage witnesses to give false information?'' State Farm Fire & Casualty Cos. attorney Jim Robie asked, according to a transcript of the deposition.

''I invoke my Fifth Amendment rights in response to that question,'' Zach Scruggs responded...

[Demeter]

10. Bush threatens to veto equal pay for women

http://thinkprogress.org/2008/07/30/bush-threatens-to-veto-equal-pay-for-women/

This week, the House is expected to bring the Paycheck Fairness Act to the floor for a vote, legislation that would help close the wage gap between working men and women and “close loopholes that have allowed employers to avoid responsibility” for discriminatory pay. In an official statement, the White House said it would veto the bill:

The bill would unjustifiably amend the Equal Pay Act (EPA) to allow for, among other things, unlimited compensatory and punitive damages, even when a disparity in pay was unintentional. It also would encourage discrimination claims to be made based on factors unrelated to actual pay discrimination by allowing pay comparisons between potentially different labor markets. In addition, it would require the Department of Labor (DOL) to replace its successful approach to detecting pay discrimination with a failed methodology that was abandoned because it had a 93 percent false positive rate. Thus, if H.R. 1338 were presented to the President, his senior advisors would recommend that he veto the bill.

[Demeter]

11. Can central banks go broke? Willem Buiter

http://blogs.ft.com/maverecon/2008/05/can-central-banks-go-broke/#more-242


... I ask whether it matters if a central bank suffers a large capital loss. Can the central bank become insolvent? How and by whom or by what institution should the central bank be recapitalised, if its capital were deemed insufficient? These are relevant questions not just in Zimbabwe and Tajikistan today, but wherever central banks have taken on or may be asked to take on large exposures to private credit risk. This includes the USA, the Euro Area, the UK, Iceland and many other advanced industrial countries.

Special problems arise where private financial institutions (or the central bank and the Treasury itself) have large liquid foreign exchange-denominated liabilities or index-linked debt. Examples of countries that have an internationally active banking system with very large foreign currency-denominated liabilities and assets (including a significant amount of short-term liabilities) include Iceland (whose currency does not have an international reserve currency role) and the UK, where sterling is a much-diminished global reserve currency, with 4.7% of the total global stock of reserves at the end of 2007, against 26.5% for the euro and 63.9% for the US dollar.

The central bank’s lender of last resort and market maker of last resort capacity is diminished if the liquidity needed by the banking system it is responsible for, is foreign exchange rather than domestic currency. The ability of the national sovereign (central bank, Treasury, sovereign wealth funds etc.) jointly to beg or borrow the foreign exchange resources required to provide credible lender-of-last-resort and market-marker-of-last-resort-support to their banking system and financial system, then becomes crucial for the financial viability of the banking sector, including the central bank.

Even if the exposure is domestic-currency denominated, the lender-of-last-resort and market-maker-of-last-resort-role may conflict with maintaining price stability. In that case it is essential that the central bank is backed fiscally by the Treasury, that is, by the tax payer....

[Demeter]

12. Job Market for New College Grads Worse Than 2001

FROM NAKED CAPITALISM MAY 15

This weak market, which appears unlikely to improve much for the 2009 cohort, raises troubling issues. Much of the sense of disillusionment in America is coming from the fact that elements of our collective social beliefs are being revealed, like our financial institutions, to be bankrupt. Most people have faith that if they apply themselves, as in get a good education and work hard, they will have at least a middle class lifestyle (and similarly, if you go to top schools, you can if you choose join the upper middle class). Now we have rampant job insecurity (you can be good at what you do and still lose your perch due to no fault of your own), stagnant wages for everyone save those at the top in what was a supposedly growing economy, and now even the new grads are facing tough times.

From the Economic Policy Institute:

This month’s crop of new college graduates will confront a more inhospitable job market than their predecessors faced in 2001, the beginning of the last recession.



In particular, wage and benefit trends show that the labor market for recent college graduates (ages 23-29) was weaker in 2007 than before the last recession in 2001. Inflation-adjusted average hourly wages for young college graduates were $21.09 for men and $18.17 for women in 2007 (Figure A). While the hourly wages for both men and women have ended their steady decline, they have barely risen and are still lower by about $0.60 for women and $1.60 for men than they were six years ago.



What’s more, a college degree has become less of a guarantee of receiving health and retirement benefits on the job. Over the last recession and recovery, college graduates in entry-level jobs became less likely to receive employer-provided health insurance and pension coverage.1 The incidence of health insurance coverage is over 5 percentage points lower than in 2001, and less than half of young college grads now receive any form of pension coverage on the job (see Figure B).



The fact that new college grads are doing poorly is a troubling sign, since those with higher education and more skills required in the new economy (e.g., computer literacy) are expected to be faring well. With persistent job losses and rising unemployment expected, there is little evidence to suggest that the job market will improve for recent college graduates in the near future.

[Demeter]

13. "Is the Securitization Crisis Driven by Nonlinear Systemic Processes?"

naked capitalism 12 May 2008

SOMETHING FOR ALL YOU CLASSICAL ENGINEERING GEEKS!

An anonymous reader offered a complex systems theory view of our modern financial system. The opening paragraphs:

"Perhaps a lesson to be learned here is that liquidity acts as an efficient conductor of risk. It doesn't make risk go away, but moves it more quickly from one investment sector to another.

From a complex systems theory standpoint, this is exactly what you would do if you wanted to take a stable system and destabilize it.

One of the things that helps to enable non-linear behavior in a complex system is promiscuity of information (i.e., feedback loops but in a more generalized sense) across a wide scope of the system.

One way you can attempt to stabilize a complex system through suppressing its non-linear behavior is to divide it up into little boxes and use them to compartmentalize information so signals cannot easily propagate quickly across the entire system."


I hope I am not oversimplifying what either the anonymous reader or Richard (Klein) intend to convey, but the non-linear issue is not trivial. Processes that are described by non-linear equations are unpredictable. That is why, per above, inducing or enabling non-linear behavior is Not A Good Idea.

Worse, non-linear math is really hard, so while lots of mere mortals can model linear processes, it takes high powered skills to deal in non-linear modeling. And you therefore get a second problem: due to computational convenience, most practitioners will try to describe a system using linear models, and if it works well enough in most cases, it gets a go. To illustrate: pretty much every mainstream financial model (Black Scholes, for instance) assumes continuous markets, which simplifies the math. This, for instance, is the origin of the classic fat tails problem. Pretty much everyone knows that models that use a normal distribution underestimate tail risk (the odds of outliers, which in this case is dramatic price rises or falls). Yet the flawed models are still consulted out of convenience (note I am not saying other models aren't used, but the reliance on models known to have fundamental shortcomings is considerable).

Richard has provided a through, thoughtful exploration out of some of the issues. After a general discussion, he sets forth five questions and works through the first one. on innovation (note the discussion ranges far beyond the financial markets). Recall that one of the defenses of our current financial mess is that the products were innovative and hasty regulation will curtain other useful advances (this argument is that the products weren't the problem, it was the practitioners, or in popular terms, "guns don't kill people, people kill people"). But as Richard illustrates, that level of discussion is simplistic; there are ways to parse the problem that can lead to better thinking about possible remedies.


... I've edited his piece slightly to make it a bit less formal.

Now to Richard Kline;

To what extent have nonlinear processes promoted the Securitization Bubble, precipitated its collapse, or prolonged the resulting instabilities in the financial system? I'll keep the discussion non-technical, i.e. non-mathematical. While I have an informed opinion, I don’t pretend to expertise, and hope to elicit further comment and debate.

While there is evidence for most of my contentions, it isn’t conclusive;. I raise ideas more than offer conclusions. Some general, but valuable, further reading is suggested for those interested. Comment by those with technical background in nonlinear complex systems, especially economic systems, is welcome---but I’m not holding my breath. Though nonlinear dynamics in financial markets received no little initial research ten years ago and more, many of the specialists involved have since been hired into the hedge fund industry where their work has presumably become proprietary. Not only do we not know what they are doing, we don’t even know what they know now; there has been little recent publication of consequence.

To delve into this issue, then, let us first briefly consider financial markets as systemic phenomena. Given their inherent complexity and diversity of inputs, modern financial markets are inherently complex systems with numerous nonlinear phenomena embedded within their actions, that is phenomena whose transformations are not smooth, not continuous, or both. Such overlapping dynamical phase spaces appear less complex than they are because salient stable equilibria within them are defined by firm, cohesive, and above all observable parameters such as priced units of exchange, transaction terms, regulatory limits, and the like. Such firm parameters do typically though not invariably have the virtue of precluding overtly chaotic behaviors in their respective financial event-spaces, and to a degree in the larger interaction systems which contain them. Indeed, while complex systems will often self organize with emergent properties developing within them in consequence, the intervention of human participants in these markets tends to limit or swiftly capture observable systemic properties---or at least that is the idea.

Since these defined and manipulated parameters are of lower dimension than the market processes to which they map, they give the illusion to the observer that markets themselves are more solid and of lower dimension than is really the case, like skin on hot chocolate. This illusion is compounded by the fact that the very large volume of quantitative data regarding finance and markets, including trend analyses beloved by academically trained economists, are presented in linear analytic terms; ants crawling on that skin, if you will. Such linear models tell something regarding ‘what dwells below,’ but less then we often lead ourselves to believe.

Bear in mind, though, that such linear models only map to the nonlinear trajectories and higher dimensions of the underlying event-spaces, if with fair reliability, rather than fully describe them. These are fuzzy, noisy spaces in that they largely describe human behavior which is intrinsically inexact, information which can be imperfect and/or corrupt(ed), and rule-parameters which are not always followed and which do not capture all relevant processes. Phase spaces and their properties are best described as geometric structures with a time dimension which describe relationships whereas our analyses in a modern educated context are overdefined by linear mathematical methods which abstract fixed values. The present conceptual mismatch of methods to phenomena further leads to an insufficient cognitive engagement with systemic and nonlinear processes on their own terms, in economic behavior and elsewhere:

Our tools are yet poorly matched to the natural phenomena we wish to understand. I will pose it as a truism that processes which appear disjointed or broadly nonlinear do so when they are viewed from perspectives which are or lower dimensionality than are the structures observed; Flatland views of Squareland trajectories. Tensor analysis may prove sufficient to effectively analyze some complex processes; perhaps. Since most of us cannot execute it competently, nor are the guidelines clear by which to operationalize available data into tensor matrices, we will have to sharpen our ‘complex reasoning’ to make heuristic judgments better suited to the data-events instead. This exercise is valuable in and of itself. It is even more true in considering complex systems than otherwise that as you define your questions you describe the parameter space of your possible answers. So, let’s build some better questions.

From that position, here are five questions recently and variously posed which I find personally interesting:

Does innovation require untrammeled information flow across social/ economic event spaces?

Is the crisis in securitized debt the result of a ‘black swan’ event?

Was the creation of the Securitization Bubble the result of nonlinear processes in the financial markets?

Is a financial event-space optimized for propagation desirable?

If not, what structure or process parameters might improve process outcomes?

Innovation: Does innovation require untrammeled information flow notwithstanding any potential costs to an economy or society of undampened interactive trajectories? Not . . . quite.

The stated assumption that innovation requires untrammeled flows of any kind embeds two misconceptions. First, there is an implied confusion between discovery and innovation. Discovery is just that, finding something not previously understood to exist. Exposure to large bodies of information may raise the probabilities of discovery, but so may improved observation of putatively well-known information. Either way, discoveries are comparatively rare; significant discoveries rarer still.

Second and more fundamentally, the stated assumption conflates innovative design and innovation diffusion. The popular belief is widespread that innovative design results from ‘throwing many ideas up against the wall and seeing what sticks;’ that no one really knows what they are doing so innovative ideas and designs are both essentially fortuitous and random. And certainly fortuitous and random innovations do occur. What is required, then, from this perspective is the largest possible supply of things to throw up against the wall. In fact, much the opposite is the case. To site Edison’s well-known dicta as a benchmark, “Genius is 1% inspiration and 99% perspiration.” This overstates the case, but innovative design tends to happen in small environments which can be effectively modeled to the point where changes from shifts in composite parameters can be approximated hypothetically, additional variables or inputs can be added to the context in a controlled fashion, or both.

Engagement with those environments---i.e. knowledge and skill---tend to improve the frequency and coherence of designs, to which quality of outcome correlates. Fortuitous manipulations do happen, yes; information putatively extraneous to context can provide valuable guidance or comparison, again yes. Innovative design does not necessarily flourish in noisy environments maximally in flux. There, relationships can be hard to grasp, and innovations may soon be suboptimal in ever changing contexts; indeed, conservative but stable designs may better reward success. In brief, innovative design occurs best in the enriched niche, not in the middle of a crossroads.

Innovation diffusion, by contrast, occurs best where information and adaptation are minimally constrained across a context. Consider the adoption of mobile phones in Europe or Korea, where a single technical standard was publicly designated, adoption of mobiles was rapid and deep, and use-driven development burgeoned. In contrast in the US, competing technical
standards and incompatible service provider networks slowed adoption, and have left services fragmented. Diffusion is a process which implies point autonomous use of what is adopted or put to use. In contrast, propagation is more nearly a spread whose nodes remained linked.

Consider Linux an example of diffusion and Windows an example of propagation. Linux point sources can transform or adapt independently, while Windows point sources are under heavy systemic pressures (incompatibility drift) to transform in relation to nodal (i.e. Redmond) based changes. It isn’t commonly understood that many innovative designs are effected well before they diffuse (or are propagated), perhaps because salient fads can diffuse with great rapidity in modern societies. A typical example is the Internet, which was functionally extant well before software refinements turned it into a mass medium, a medium whose greater scales drove product and organizational developments thereafter. The adoption trajectories of innovations most typically are logistic functions in form, but with longer low adoption under-the-radar initial tails then considered, even much longer. Whether relatively rapid diffusion is a social version is debatable, but it is certainly an economic gain if only for implementation investment.

There are two points to making this distinction between innovative design and innovation diffusion (or propagation). First, the two processes can be facilitated or inhibited separately. For example, a society with low barriers to diffusion may still be the one to capitalize upon innovations, regardless of source, because they scale the markets and formalize product parameters. Second, large profits come to those investing in innovations which diffuse due to market scale-ups, while huge profits come to those investing in innovations which propagate since they remain substantially intermediated in subsequent capital flows. The arguments one typically hears for lowering barriers to innovation diffusion and damn the consequences are from those hoping that their innovations or the industries tied to them will get the market scale-up opportunities. ‘Pro-adoptionists,’ to give them a name, typically have a stake in the outcome so their perspective is not disinterested (presuming that anyone else’s could be, either). To get innovative designs we need enriched niches whether or not we have low barriers to innovation adoption. We can have rapid adoption without being particularly innovative. Societies can, in fact, deliberately choose whether or not to have rapid adoption.

Moreover and more importantly societies can deliberately choose which innovations to rapidly adopt (within limits); consider China in the latter regard of selective adoption. Choices about which innovations to permit rapid adoption are choices about who will get very rich, however. Much of the shouting about innovation is, at its base, concerned with the last proposition.

Further reading:

Nebojsa Nakicenovic and Arnulf Grübler. 1991. Diffusion of Technologies and Social Behavior.
Jacob Getzels and Mihalyi Csikszentmihaliy. 1976. The Creative Vision.

found. Of course they are the least known.]

[Hugin]

22. Well, DUH!

I've been saying this for years! Geeze.


And how does one make a linear system out of a non-linear system? Huh? Anyone? Anyone?


I'll leave the answer to the reader....

Hint #1: Look in any introductory Systems Textbook.

Hint #2: The answer has already been proposed and is continually shot down by the 1%ers.

[Demeter]

23. Regulation?

Doing my Hermione Granger impersonation

[Hugin]

27. Said almost in a whisper,

Yessssss...

and what pray-tell would be the active critical damping agent in the system?

Hint #1: http://en.wikipedia.org/wiki/Damping <-- Added because there's a cool spring mass animation on the right-hand
side of the page.


Very good, BTW. If I could afford a cookie. I'd give it to you. :D

[Demeter]

36. Interest Rates That Were Reality Based?

Heart in mouth, she waited. She didn't need a cookie--no doubt, the computer was full of them, and ready to crash on her next post.

[Hugin]

40. Well, partially...

in an undamped, uh... Unregulated financial system damping is achieved through *coff*fines*coff* and to
a larger extent *cough*taxation*cough*. NOT through so-called 'voluntary compliance'. But, the
supply-siders refuse to recognize the need for any damping of this sort, even though not bringing the system into
balance (while seeming to deliver almost unbounded returns) will ultimately go into some sort of undamped
oscillation and beat itself to death rendering all of their gains worthless. But, they obviously aren't
that far sighted and most of them have 2-semesters of business math (if that) under their belts.

Yes, reasonable interest rates and adjusted expectations of returns-on-investment would certainly help.

I mean, hahahaha, 20% annual returns on $11 Trillion.... HAHAHAHAHAHAHAHAHA! It's so obvious they don't
have a clue. HAHAHAHAHAHAHA! I just wonder if they have any idea just how big that number would get. In
the first 6 years of this idiocy... Just the regular debt has more than doubled.

Edit: added emphasis.

[Demeter]

38. By the Way, What's With the Voldemort Imitation?

[Hugin]

41. You started it.

;)

[Demeter]

42. But You Were Supposedly Doing the Professor--Not the Villain!

Serious Severus Snape fan, here.

[Hugin]

28. .

Edit: Damned tabs. :crazy:

[Demeter]

14. Fed lays on extra liquidity support By Krishna Guha

http://www.ft.com/cms/s/0/a9dba646-5e41-11dd-b354-000077b07658.html

The Federal Reserve ramped up its liquidity support operations again on Wednesday in an effort to reduce money market strains and pre-empt the possibility of funding crises at the year-end or at other stress points. The US central bank said it would offer three-month cash loans to banks and create a new options auction facility. It also said it would give investment banks and other primary dealers extended access to emergency cash and loans of Treasury securities until January 30. The Fed said it was extending its support to primary dealers “in light of continued fragile circumstances in financial markets”.

Funding needs
On August 10 2007 – the day after the credit crisis broke – the Federal Reserve said that banks might “experience unusual funding needs because of dislocations in money and credit markets”, writes James Politi. It promised to “provide reserves as necessary” to maintain its desired overnight interest rate and reminded banks they could use the “discount window” to access emergency cash.

The Fed has had to improvise to support market functioning – becoming more like the European Central Bank, which started the crisis with a wider range of liquidity tools. In the process the Fed extended its reach beyond commercial banks to investment banks...The European Central Bank and the Swiss National Bank will also offer three-month dollar loans through an offshore facility set up with the Fed. The Fed will increase the amount of dollars it provides to the ECB in exchange for euros by $5bn to $50bn....

The US central bank does not believe it can solve what are in many cases capital problems by providing extra liquidity. But it does believe it can support the adjustment process by reducing the risk of a liquidity run on any individual institution or any forced firesales of illiquid assets.
The Fed’s acknowledgement of the continuing stress in financial markets makes it improbable that it will raise interest rates soon...The decision to offer $75bn in three-month loans (replacing $75bn of one-month loans) marks an important concession by the Fed, which had resisted pressure from banks to extend the term from the previous single month...The creation of the options facility, meanwhile, is intended to pre-empt stress “in advance of periods that are typically characterised by elevated stress in financial markets, such as quarter ends” and the year-end.

[Demeter]

15. Iraqi oil output rises as security improves By Demetri Sevastopulo

http://www.ft.com/cms/s/0/660bac90-5e5f-11dd-b354-000077b07658.html

Iraqi oil production has risen to its highest level since the 2003 invasion on the back of improved security across the country, according to a new US government report. Iraq pumped an average of 2.43m bpd between April and June, according to the special inspector general for Iraq reconstruction.

The report by the Special Inspector General for Iraq Reconstruction (Sigir) said the combination of record production and high global oil prices would likely provide a windfall to the Iraqi government, which previously forecast that 2008 oil revenues would be $35bn (€22bn, £18bn).

“With oil now hovering around $125 per barrel – about five times what it was five years ago – and Iraq’s oil production at record levels, Sigir estimates that oil revenues for 2008 could exceed $70bn,” said Stuart Bowen, the inspector-general in his quarterly report to Congress. Sigir attributed the record production to the decline in violence across Iraq, in addition to a special exclusion zone created to protect a pipeline that runs from the oil-rich city of Kirkuk to the oil-refining city of Baiji.

It also acknowledged that the success of the $34m project was underscored by there having been no attacks on northern pipelines this year. Iraq is now extending the pipeline exclusion zone from Baiji to Baghdad.

[Pale Blue Dot]

18. Goldman: "Second Half Slowdown Ahead"

Goldman Sachs put out a research note late today lowering their projections for the second half.

"e are on the cusp of a renewed deceleration in growth."

I think others will follow and the 2nd half recovery will be cancelled.

There is always next year!

http://calculatedrisk.blogspot.com/2008/08/goldman-second-half-slowdown-ahead.html

[Pale Blue Dot]

19. Automakers Race Time as Their Cash Runs Low

G.M. and Ford had expected economic conditions to improve in the second half of this year, but now are forecasting an even more dismal sales environment.

Neither company appears in immediate danger of failure. But analysts say Detroit is in a race against time.

“Things are pretty bad, and the river is getting deeper, faster and wider,” said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. “The question is, can they get to other side before the cash runs out?”

American automakers have decided — critics would say, belatedly — to shift production from trucks and sport utility vehicles to smaller, more gas-efficient cars, including hybrids. But it takes time to switch equipment for production. And it is unclear whether the automakers have sufficient cash to remain solvent until their new vehicle lines are ready for customers.

The overall United States auto industry is headed for its worst year in more than a decade. Sales so far this year have fallen 10 percent from 2007, including a 13 percent decline in the month of July.

http://www.nytimes.com/2008/08/02/business/02gm.html?_r=1&partner=rssnyt&emc=rss&oref=slogin

[Demeter]

20. Not a Good Sign When NYT Measures You For a Coffin

or when they deign to notice you at all....

[Demeter]

24. I Think They Meant "Cliff", not "Cusp"

Bombs away!

[AnneD]

25. Happy to...

K&R to keep it up on the front page and recommend others do the same. Will post later. The A/C repairman came at 7:45 pm and I have a dehydration head ache today, even after drinking over 3l yesterday.

Thanks Demeter.:hug:

[Dr.Phool]

26. Glad to hear you got your air back!

[AnneD]

30. I swear...

it may have saved our marriage.:spray:
Hubby laughs, I don't banish him to the dog house-I banish him to the club house when he gets on my last nerve. Now it may sound like I am mean, but he has diabetes and it does a number on you mentally. He forgets things and swears I didn't tell him, gets grumpy and snaps at me when his blood sugar is low. It took me a year and lots of hurt feelings to figure this out. But once I did, I just throw it back him, ask him when the last time he ate was, feed him and go about my business. If he really is on my last nerve-it's the club house. Better to be separated and cool off than say something you'll be sorry for. We eventually get a big laugh out of it.

[Hugin]

29. Hey AnneD!

:hippie:

Glad to see you made it!

In case you didn't recognize me in my loud hibiscus print Hawaiian shirt, cut-offs, and surfur-slippahs. It's me
Prag!

I could get used to this weekend posting stuff. I don't feel the need to put on my formal posting-on-the-Internet
attire. It's much less formal. I'm not sure if you'll recognize me without the smoking jacket, ascot, and monocle! As
the kids say, W00T!

[AnneD]

31. Prag....

I demand a DNA test. I swear we are related. Was your daddy a military man??????:spray:

[AnneD]

32. Plenty of hours ahead for lawyers in debt cases

Lawyers who collect bad debt from consumers, or defend them, already have plenty of job security.
But things could be getting even better.
One reason is that those failing in current tough times will hit the legal system in a few months. Another is a recent U.S. Supreme Court case that will make suing over bad debt possible for those who don't even have a financial stake in the debt.
"In the past five years, a secondary market has developed in credit card debt that mirrors the one in the mortgage market. There's been a growth in brokers, resellers and people getting into the business — including lawyers," said Anh Regent, a Houston lawyer who specializes in representing creditors trying to collect from debtor businesses and consumers.

www.chron.com/disp/story.mpl/business/5920510.html

I don't know about you guys, but I think the company that makes KY Jelly has great growth potential.

[AnneD]

33. A good nonprofit web site for you young pups....

and those of us thinking about retirement.


www.choosetosave.org

[Dr.Phool]

34. Economic Free Fall? by William Greider

Washington can act with breathtaking urgency when the right people want something done. In this case, the people are Wall Street's titans, who are scared witless at the prospect of their historic implosion. Congress quickly agreed to enact a gargantuan bailout, with more to come, to calm the anxieties and halt the deflation of Wall Street giants. Put aside partisan bickering, no time for hearings, no need to think through the deeper implications. We haven't seen "bipartisan cooperation" like this since Washington decided to invade Iraq.



In their haste to do anything the financial guys seem to want, Congress and the lame-duck President are, I fear, sowing far more profound troubles for the country. First, while throwing our money at Wall Street, government is neglecting the grave risk of a deeper catastrophe for the real economy of producers and consumers. Second, Washington's selective generosity for influential financial losers is deforming democracy and opening the path to an awesomely powerful corporate state. Third, the rescue has not succeeded, not yet. Banking faces huge losses ahead, and informed insiders assume a far larger federal bailout will be needed--after the election. No one wants to upset voters by talking about it now. The next President, once in office, can break the bad news. It's not only about the money--with debate silenced, a dangerous line has been crossed. Hundreds of billions in open-ended relief has been delivered to the largest and most powerful mega-banks and investment firms, while government offers only weak gestures of sympathy for struggling producers, workers and consumers.

The bailouts are rewarding the very people and institutions whose reckless behavior caused this financial mess. Yet government demands nothing from them in return--like new rules for prudent behavior and explicit obligations to serve the national interest. Washington ought to compel the financial players to rein in their appetite for profit in order to help save the country from a far worse fate: a depressed economy that cannot regain its normal energies. Instead, the Federal Reserve, the Treasury, the Democratic Congress and of course the Republicans meekly defer to the wise men of high finance, who no longer seem so all-knowing.

Let's review the bidding to date. After panic swept through the global financial community this spring, the Federal Reserve and Treasury rushed in to arrange a sweetheart rescue for Bear Stearns, expending $29 billion to take over the brokerage's ruined assets so JPMorgan Chase, the prestigious banking conglomerate, would agree to buy what was left. At the same time, the Fed and Treasury provided a series of emergency loans and liquidity for endangered investment firms and major banks. Investors were not persuaded. Their panic was not "mental," as former McCain adviser Phil Gramm recently complained. The collapse of the housing bubble had revealed the deep rot and duplicity within the financial system. When investors tried to sell off huge portfolios of spoiled financial assets like mortgage bonds, nobody would buy them. In fact, no one can yet say how much these once esteemed "safe" investments are really worth.

The big banks and investment houses are also stuck with lots of bad paper, and some have dumped it on their unwitting customers. The largest banks and brokerages have already lost enormously, but lending portfolios must shrink a lot more--at least $1 trillion, some estimate. So wary shareholders are naturally dumping financial-sector stocks.

(snip)more

http://www.thenation.com/doc/20080818/greider

[Demeter]

37. Can You Say "Miserable Failure"?

Because that's what is written all over the so-called "mortgage bailout". It's a shareholder bailout, and it's fundamentally wrong.

[Dr.Phool]

43. "Miserable Failure"!

Yep, I can say it.

And, that's what it is. And just how Congress can pass this shit legislation, without so much as one hearing is beyond me. The corruption that runs through both parties, especially in the Senate is staggering.

When they finally had a hearing on credit card consumers being raped by the banks, they decided not to introduce any protective legislation, but tell JP Morgan Chase, Citi, et al, to please play nice and stop stirring up the natives. After a slight pause, they're back up to their horse thievery again.

I'm really tired of my tax money going to bail out millionaires and zillionaires, when every decent government program or service is being gutted.

[DemReadingDU]

44. And what happens when our tax money runs out?

What happens when the treasury is bare from bailing out those zillionaires?

What happens when so few people have good jobs to pay taxes to refill the treasury?

What happens when so many are unemployed and can't pay taxes?

What happens when our country is broke?

We clearly need some different leadership in Washington with critical thinking skills to solve these problems.

[Dr.Phool]

50. My feeling is that before that happens.

Our equity line of credit with the rest of the world will be cut off.

Sooner or later, and I think sooner, the rest of the world will catch on to our Ponzi scheme, and figure out that we're functionally insolvent. Look at the list of shareholders in Freddie and Fannie. The majors are China, Japan, Mideast Oil Sheikdoms. Australia is taking a beating in our mortgage mess, as is Europe.

With deregulation and no rules, who in their right mind is going to want to invest here any more, much less keep lending us money?

The world's buyer of last resort, American consumers are out of money, and in hock up to their eyeballs. We're already broke.

[DemReadingDU]

53. Then they will buy up America, cheap

We will end up being owned by China, Japan, Mideast Oil Sheikdoms. They will make our laws. There needs to be a revolt before that happens, will America finally wake up?

[Dr.Phool]

54. Karl Marx said that religion was the opiate of the people.

Just think of what he'd say if he were around today, and turned on the tee vee.

Revolt? Maybe after the preview of next week's Survivor or Big Brother.

[Demeter]

45. S&P emails slammed mortgage debt products

http://news.yahoo.com/s/nm/20080802/bs_nm/sec_creditraters_journal_dc_1;_ylt=Aj7GKn_yUn5F4zTLOOV1RUGb.HQA



Analysts at Standard & Poor's Rating Services warned against mortgage-related debt products in internal e-mails that, in one case, called the complex financial deals "ridiculous," the Wall Street Journal reported in its weekend edition.

The Journal cited a draft revision of a U.S. Securities and Exchange Commission report on bond-rating firms that was first released on July 8.

In one email message, an S&P analyst called a mortgage or structured finance deal "ridiculous" and wrote "we should not be rating it." In another email, an S&P manager said ratings agencies were helping to create an "even bigger monster -- the CDO (collateralized debt obligation) market. Let's hope we are all wealthy and retired by the time this house of card falters."

Rating agencies struggled with the growth of asset-backed securities and saw breaches in their conflict-of-interest policies, according to the report released early last month on an industry blamed for helping contribute to the subprime mortgage crisis. An SEC examination "uncovered serious shortcomings," SEC Chairman Christopher Cox said when the report was released, adding that the problems are being fixed.

The SEC spent 10 months looking at the biggest ratings firms: Moody's (MCO.N), Standard & Poor's and Fimalac SA's (LBCP.PA) Fitch Ratings. A spokesman for Standard & Poor's, a unit of McGraw-Hill Companies Inc (MHP.N), was not immediately available to comment on the Journal report.

(Reporting by Jim Marshall; Editing by John O'Callaghan)


McGraw-Hill--isn't that part of the BFEE?

[Demeter]

46. The Real State of the US Economy: Henry Paulson Has Lost Control Over US Finance/ William F. Engdahl

http://www.informationclearinghouse.info/article20404.htm



02/08/08 " Global Research" -- -- When Henry Paulson agreed to leave his job as chairman of the powerful Wall Street investment bank, Goldman Sachs to go to Washington as Treasury Secretary in 2006 he demanded extraordinary powers as de facto economic czar. He got it. Paulson is also head of the President’s Working Group on Financial Markets -- the secretary of the treasury and the chairmen of the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The Working Group is the financial world's equivalent of the Pentagon war room. Paulson, not Fed chairman Bernanke, is the person running the Administration’s crisis management. And his recent actions indicate he has lost control as the snowballing problems from the semi-government mortgage companies Freddie Mac and Fannie Mae to the collapse of the multi-trillion dollar market in Asset Backed Securities (ABS) to the real economy are compounding into the worst crisis since the 1930’s Great Depression.

In an eerie echo of President Herbert Hoover in 1930, during a Presidential campaign against Roosevelt, following the stock market crash and collapse of numerous smaller banks, Paulson recently appeared on national TV to declare "our banking system is a safe and sound one." He added that the list of "troubled" banks "is a very manageable situation." In fact what he did not say was that the US bank deposit insurance fund, the Federal Deposit Insurance Corporation (FDIC) has a list of problem banks that numbers 90. Not included on that list are banks such as Citigroup, until recently the largest bank in the world...The statement is hardly reassuring. The California savings bank, IndyMac Bank which was declared insolvent a month ago was not on the FDIC list a week before it collapsed. The reality is the crisis created by "securitizing" millions of home mortgages into new financial instruments and selling the packages to pension funds and investors is unfolding like a snowball rolling down the Swiss Alps. Indication of the lack of control is the statement just weeks ago by Paulson that "financial institutions must be allowed to fail." That was two weeks before Paulson went to Congress to ask for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac." As I noted in my recent piece, Financial Tsunami: The Next Big Wave is Breaking: Fannie Mae Freddie Mac and US Mortgage Debt , those two private companies insured some $6 trillion worth of home mortgages, half the entire US mortgage debt. Paulson defended the request by calling Freddie Mac and Fannie Mae "the only functioning part of the home loan market."

That comes back to the statement about a "sound banking system". Can we have a sound banking system where the only functioning part is literally insolvent—its debts greater than its assets?

It is well known on Wall Street that some of the largest financial institutions have huge undeclared problems with Asset Backed Securities they have valued far above their worth to make their books look better than they are. The names Citigroup, Lehman Bros., Morgan Stanley, even Paulson’s old firm, Goldman Sachs and of course the inventor of sub-prime mortgage securitization, Merrill Lynch, all hold a huge percentage of what are called Level Three assets, these being assets where no one is willing to buy but the bank declares their worth based on "fantasy." In short the value of those core financial institutions of the US financial system is massively overvalued compared with their value were they forced to sell into the open market today. In a sobering aside, readers should not expect any serious economic remedies for the crisis from a President Barack Obama. Obama’s National Campaign Finance Chairman is Chicago real estate billionaire, Penny Pritzker, who is heir to among other things the Hyatt Hotels. It was Pritzker together with Merrill Lynch ten years ago who first developed the model for securitizing "sub-prime" real estate, the trigger for the current Financial Tsunami crisis....Already Citigroup has been forced to go to Dubai hat in hand and ask for billions in cash. After it announced it would not need more capital. Now Citigroup just announced plans to sell some $500 billion more assets to raise funds. Is Citigroup really solvent is the question sober investors are asking. Similarly Merrill Lynch raised $6.6 billion from Kuwait Mizuho, stated it was fine and weeks later had to raise still more capital. Morgan Stanley sold a 10% share of the company to China International Corp.

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The real economy contracting rapidly

Behind the reassuring statements from Paulson and others that the "worst is over" the reality of the credit collapse since August 2007 is a deepening economic contraction which I have said several times in this space will surpass the Great Depression of the 1929-1938 period. A good friend who is an unemployed homebuilder in a prosperous part of Arizona just sent me the following list of US department retail store closures. It is worth noting that over 70% of the US GDP is consumer spending and that the entire Federal Reserve strategy of Alan Greenspan after the March 2000 collapse of the stock market bubble, was to bring US interest rates to their lowest levels since the 1930’s in order to stimulate consumer spending on credit, i.e. debt, to avoid "recession." Note the scale of the following store closings across America in recent weeks:

Ann Taylor closing 117 stores nationwide.

Eddie Bauer to close more stores after closing 27 stores in the first quarter.

Cache, a women’s retailer is closing 20 to 23 stores this year.

Lane Bryant, Fashion Bug, Catherines closing 150 stores nationwide

Talbots, J. Jill closing stores. Talbots will close all 78 of its kids and men's stores plus another 22 underperforming stores. The 22 stores will be a mix of Talbots women's and J. Jill.

Gap Inc. closing 85 stores

Foot Locker to close 140 stores

Wickes Furniture is going out of business and closing all of its stores. The 37-year-old retailer that targets middle-income customers, filed for bankruptcy protection last month.

Levitz - the furniture retailer, announced it was going out of business and closing all 76 of its stores in December. The retailer dates back to 1910.

Zales, Piercing Pagoda plans to close 82 stores by July 31 followed by closing another 23 underperforming stores.

Disney Store owner has the right to close 98 stores.

Home Depot store closings 15 of them amid a slumping US economy and housing market. The move will affect 1,300 employees. It is the first time the world's largest home improvement store chain has ever closed a flagship store.

CompUSA (CLOSED).

Macy's - 9 stores closed

Movie Gallery – video rental company plans to close 400 of 3,500 Movie Gallery

and Hollywood Video stores in addition to the 520 locations the video rental

chain closed last fall as part of bankruptcy.

Pacific Sunwear - 153 Demo stores closing

Pep Boys - 33 stores of auto parts supplier closing

Sprint Nextel - 125 retail locations to close with 4,000 employees following 5,000 layoffs last year.

J. C. Penney, Lowe's and Office Depot are all scaling back

Ethan Allen Interiors: plans to close 12 of 300 stores to cut costs.

Wilsons the Leather Experts – closing 158 stores

Bombay Company: to close all 384 U.S.-based Bombay Company stores.

KB Toys closing 356 stores around the United States as part of its bankruptcy reorganization.

Dillard's Inc. will close another six stores this year.

For anyone familiar with American shopping malls and retailing, this represents a staggering part of the daily economic life of the nation, from furniture stores to clothing to video rentals to leather. The process has only begun and neither major party Presidential candidate has dared to mention this on the ground economic reality, because they evidently have no solutions to offer that would not jeopardize their campaign finances. Obama is tied to not only Pritzker but also to Omaha billionaire, Warren Buffett and George Soros. McCain depends on the traditional money contributions of the Republican Party which demand permanent tax reform for highest income earners and a pro-bank laissez faire treatment of millions of homeowners facing home foreclosure and asset seizure by banks.

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The economic reality is not reflected in official US Commerce Department or Labor Department statistics. There the data is constantly being "revised" to hide the grim reality in an election year.

My good friend, economist John Williams of California, has meticulously tracked such "data revisions" for more than 25 years and found the manipulation of reality so alarming that he founded an independent subscriber service titled "Shadow Government Statistics" (http://www.shadowstats.com/ ), where he makes best estimate calculations of the reality not the official mythology.

By Williams’ calculations the US economy first entered recession, defined as two consecutive quarters of negative GDP growth, at the end of 2006. Ever since, the recession has deepened, dramatically so in the past 12 months. Little known is the fact that the Labor Department also publishes six different unemployment statistics from U1, U2 through to U6 being the most comprehensive. The reported "official unemployment" is the very narrowly defined U3 which stands at 5.5%. However, as Williams notes, U6 is the real measure and that officially shows 9.7% unemployed. His calculations put the figure at 13.7% actually unemployed and seeking work.…




F. William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press) and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca). He is at work on a new book, from which this has been adapted, Power of Money: The Rise and Decline of the American Century. He may be reached through his website, www.engdahl.oilgeopoitics.net.

[Demeter]

47. A year into credit crunch, more pain expected By Alistair Barr, MarketWatch

http://www.marketwatch.com/News/Story/Story.aspx?guid={0FB57E25-4C42-48B8-956D-FE9F71C3F027}



Government bailouts limit the damage, but may delay recovery



Last update: 7:37 p.m. EDT Aug. 1, 2008SAN FRANCISCO (MarketWatch) -- "Troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system," -- Federal Reserve Chairman Ben Bernanke, June 5, 2007, during a speech from Cape Town, South Africa.
Just two months later, last August, those words seemed a distant memory. The financial system was in disarray, forcing the Fed and the European Central Bank to pump more than $250 billion into short-term funding markets to keep them working properly. The subprime mortgage crisis had gone global and the credit crunch had begun....As the first anniversary of the crisis arrives this coming week, the Dow Jones Industrial Average is down 14%, U.S. economic growth has more than halved, financial institutions have suffered $350 billion in write-downs and fired chief executives and thousands of workers, while house prices have slumped as much as 40% in some areas. Bear Stearns, the nation's fifth-largest investment bank, had to be bailed out by the Fed and J.P. Morgan Chase. Fannie Mae and Freddie Mac, the bedrock of the U.S. mortgage market, may be next. Eight U.S. banks have failed since the beginning of the year, including First Priority Bank of Bradenton, Fla. late Friday.

"I doubt we're even a third of the way through it," said Michael Burry, head of Scion Capital, LLC, an $800 million hedge fund firm, which made huge returns betting against riskier parts of subprime mortgage-backed securities. See related story. "A real recovery won't happen until late 2010 or early 2011. A lot of the bills from the credit bubble haven't come due yet." Burry expects inflation to increase and the U.S. dollar to decline further as the government creates more dollars to try to ease the pain of the credit crunch. To prepare, he's invested in commodities, foreign currencies and overseas stocks, with a focus on Asia.

Nowhere near bottom

To be sure, Burry has profited from negative bets against the housing and mortgage markets and may be more bearish than others because of that. However, he isn't alone in his views. "We probably have at least another year to two years to go in this process," said Eric Hovde, chief executive and portfolio manager at Hovde Capital, which manages a series of hedge funds focused on financial services. House prices have taken another sharp leg down recently and that won't show up on the balance sheets of banks and other financial institutions for three to six months, he noted.
"Housing alone will keep credit destruction and depletion of capital in the financial sector at a rapid clip for another year," Hovde said....

[phrigndumass]

48. Giving this fine thread a kick and rec

With a promise to read it with coffee Sunday morning :D

[Dr.Phool]

51. Kick!

For tomorrow.

[DemReadingDU]

55. James Quinn: Is the U.S. Banking System Safe?

8/3/08
some snippets

Our economy and banking system is so complex and intertwined that no one knows where the next shoe will drop. Politicians and government bureaucrats are lying to the public when they say that everything is alright. They do not know. Therefore, it is in our best interest to cut through all the crap and examine the facts with a skeptical eye.

There are 8,500 banks in the U.S. Based on an independent analysis by Chris Whalen from Institutional Risk Analytics, they have identified 8% of all banks, or around 700 banks as troubled. This is quite a divergence from the FDIC estimate. Should you believe a governmental agency that wants the public to remain in the dark to avoid bank runs, or an independent analysis based upon balance sheet analysis? The implications of 700 institutions failing are huge. There is roughly $6.84 trillion in bank deposits.

The U.S. banking system is essentially insolvent. The Treasury, Federal Reserve, FASB, and Congress are colluding to keep the American public in the dark for as long as possible. They are trying to buy time and prop up these banks so they can convince enough fools to give them more capital. They will continue to write off debt for many quarters to come.

We are in danger of duplicating the mistakes of Japan in the 1990s by allowing them to pretend to be sound. We could have a zombie banking system for a decade.

lots more...
http://seekingalpha.com/article/88725-is-the-u-s-banking-system-safe?source=side_bar_editors_picks

[Demeter]

57. Excellent Find! Thanks for Posting

Seems to be comprehensive and truthful, but maybe a bit optimistic in his doomsaying.

[Pale Blue Dot]

56. Stuck in quagmire, Fed likely won’t raise rates

WASHINGTON - An ugly brew of rising unemployment, spiking foreclosures and gyrating energy prices is plaguing the country and making life difficult for Federal Reserve Chairman Ben Bernanke as he tries to right the economy.

Bernanke and his central bank colleagues are faced with dueling problems: weak economic growth and advancing inflation. To treat one risks aggravating the other. So the Fed is widely expected when it meets Tuesday to leave a key interest rate alone.

"It is caught between a rock and a hard place. The (Fed) will stand pat," predicted Sung Won Sohn, an economics professor at California State University.

If Sohn and other economists prove correct, the Fed's rate will stay at 2 percent. And, in turn, the prime lending rate for millions of consumers and businesses would stay at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other lines.

http://www.msnbc.msn.com/id/25999377/