China Frets About US Treasury Holdings

A quote followed by some discussion:

BEIJING – China’s premier didn’t say it in so many words, but the implied warning to Washington was blunt: Don’t devalue the dollar through reckless spending.

Premier Wen Jiabao’s message is unlikely to be misunderstood at the White House, which responded by asserting there is no safer investment in the world than the United States. It is counting on Beijing to help pay for its stimulus package by buying U.S. bonds.

Link to full article: China Frets About US Treasury Holdings

Washington’s glib response and arrogant assumption[s] underscores a deeper problem – namely, that of narcissism, frivolity and dissolution with which our culture has become affected.

Radical spending at this juncture would be a bad idea for many reasons, not least of which include higher taxes which will hurt jobs (when corporations have less to spend on hiring new talent or retaining the talent they already have). Notwithstanding lessons from history in that government does have a role to play in restoring/maintaining economic vitality, there is a line to be drawn in the proverbial sand. This line represents the break even point in our analysis.

The most recent ’stimulus’ bill is worth almost a trillion dollars, much of which is comprised of pork. The difference between banking ‘bailouts’ and pork projects is thus: The former actually have investment value in that monies are due (i.e., the government is a creditor), while the latter are instances of blowing cash out the expense column. These are grants-in-aid thank you to the state of California for my education by the way. California cannot support its budgets. America cannot support the POTUS’ budget. We are planning to spend like a Sub-Saharan African nation, without any fear of God or inflation before us. Zimbabwe has an expected rate of inflation that exceeds a million percent. A million percent. This is not uncommon in that locale. People, what can I say here?

I will say this: Big government schemes got us into the crisis in the first place; to suggest that big government is the answer to get us out defies logic. That is to say, Johnson’s great society project in the nineteen sixties could not suffice without taking FNMA and FHLMC out of the budget; these entities were thusly privatized to an extent (established as public-private partnerships, which granted capitalist gains and socialized losses). This, in turn, had the effect of taking these home mortgage giants off the government’s books and welfare rolls, public works, etc. were commensurately expanded. Moreover, in the Clinton era, chokeholds, or extortionist headlocks were put on banks to lend to unqualified borrowers by means of regulatory burdens (e.g., Affirmative Action loans with the threat of lawsuits for noncompliance). See Community Reinvestment Actwith a view toward the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.

Is it our fault the Chinese have built their entire economic model around exports to rich countries and primarily to the United States with cheap lending and a devalued currency? Of course not. Nevertheless, it would be foolish to follow an unqualified chain of presumption to the conclusion that the United States can maintain its superior bargaining position* indefinitely. It cannot.

A foreign principality will neither challenge militarily, politically or economically the power of the United States now nor in the forseeable future. The United States, however, poses its own greatest threat. That threat is within.

*superior bargaining position. This alludes to China’s BATNA or ‘Best Alternative to Negotiated Agreement’, which is most likely a combination, at this time, of: GBP, Euro, and Gold, none of which provide a greater degree of stability or [risk weighted] returns than the US dollar.

See also: nathanmorton.net

The night we waved goodbye to America… our last best hope on Earth

http://hitchensblog.mailonsunday.co.uk/2008/11/the-night-we-wa.html
This is Peter Hitchens’ Mail on Sunday column
Anyone would think we had just elected a hip, skinny and youthful replacement for God, with a plan to modernise Heaven and Hell – or that at the very least John Lennon had come back from the dead.
The swooning frenzy over the choice of Barack Obama as President of the United States must be one of the most absurd waves of self-deception and swirling fantasy ever to sweep through an advanced civilisation. At least Mandela-worship – its nearest equivalent – is focused on a man who actually did something.
I really don’t see how the Obama devotees can ever in future mock the Moonies, the Scientologists or people who claim to have been abducted in flying saucers. This is a cult like the one which grew up around Princess Diana, bereft of reason and hostile to facts.
It already has all the signs of such a thing. The newspapers which recorded Obama’s victory have become valuable relics. You may buy Obama picture books and Obama calendars and if there isn’t yet a children’s picture version of his story, there soon will be.

Proper books, recording his sordid associates, his cowardly voting record, his astonishingly militant commitment to unrestricted abortion and his blundering trip to Africa, are little-read and hard to find.

If you can believe that this undistinguished and conventionally Left-wing machine politician is a sort of secular saviour, then you can believe anything. He plainly doesn’t believe it himself. His cliche-stuffed, PC clunker of an acceptance speech suffered badly from nerves.  It was what you would expect from someone who knew he’d promised too much and that from now on the easy bit was over.

He needn’t worry too much. From now on, the rough boys and girls of America’s Democratic Party apparatus, many recycled from Bill Clinton’s stained and crumpled entourage, will crowd round him, to collect the rich spoils of his victory and also tell him what to do, which is what he is used to.
Just look at his sermon by the shores of Lake Michigan. He really did talk about a ‘new dawn’, and a ‘timeless creed’ (which was ‘yes, we can’). He proclaimed that ‘change has come’. He revealed that, despite having edited the Harvard Law Review, he doesn’t know what ‘enormity’ means. He reached depths of oratorical drivel never even plumbed by our own Mr Blair, burbling about putting our hands on the arc of history (or was it the ark of history?) and bending it once more toward the hope of a better day (Don’t try this at home).

I am not making this up. No wonder that awful old hack Jesse Jackson sobbed as he watched. How he must wish he, too, could get away with this sort of stuff.

And it was interesting how the President-elect failed to lift his admiring audience by repeated – but rather hesitant – invocations of the brainless slogan he was forced by his minders to adopt against his will – ‘Yes, we can’. They were supposed to thunder ‘Yes, we can!’ back at him, but they just wouldn’t join in.  No wonder. Yes we can what exactly? Go home and keep a close eye on the tax rate, is my advice. He’d have been better off bursting into ‘I’d like to teach the world to sing in perfect harmony’ which contains roughly the same message and might have attracted some valuable commercial sponsorship.

Perhaps, being a Chicago crowd, they knew some of the things that 52.5 per cent of America prefers not to know. They know Obama is the obedient servant of one of the most squalid and unshakeable political machines in America. They know that one of his alarmingly close associates, a state-subsidised slum landlord called Tony Rezko, has been convicted on fraud and corruption charges.

They also know the US is just as segregated as it was before Martin Luther King – in schools, streets, neighbourhoods, holidays, even in its TV-watching habits and its choice of fast-food joint. The difference is that it is now done by unspoken agreement rather than by law.

If Mr Obama’s election had threatened any of that, his feel-good white supporters would have scuttled off and voted for John McCain, or practically anyone. But it doesn’t. Mr Obama, thanks mainly to the now-departed grandmother he alternately praised as a saint and denounced as a racial bigot, has the huge advantages of an expensive private education. He did not have to grow up in the badlands of useless schools, shattered families and gangs which are the lot of so many young black men of his generation.

If the nonsensical claims made for this election were true, then every positive discrimination programme aimed at helping black people into jobs they otherwise wouldn’t get should be abandoned forthwith. Nothing of the kind will happen. On the contrary, there will probably be more of them.

And if those who voted for Obama were all proving their anti-racist nobility, that presumably means that those many millions who didn’t vote for him were proving themselves to be hopeless bigots. This is obviously untrue.
I was in Washington DC the night of the election. America’s beautiful capital has a sad secret. It is perhaps the most racially divided city in the world, with 15th Street – which runs due north from the White House – the unofficial frontier between black and white. But, like so much of America, it also now has a new division, and one which is in many ways much more important. I had attended an election-night party in a smart and liberal white area, but was staying the night less than a mile away on the edge of a suburb where Spanish is spoken as much as English, plus a smattering of tongues from such places as Ethiopia, Somalia and Afghanistan.

As I walked, I crossed another of Washington’s secret frontiers. There had been a few white people blowing car horns and shouting, as the result became clear. But among the Mexicans, Salvadorans and the other Third World nationalities, there was something like ecstasy.
They grasped the real significance of this moment. They knew it meant that America had finally switched sides in a global cultural war. Forget the Cold War, or even the Iraq War. The United States, having for the most part a deeply conservative people, had until now just about stood out against many of the mistakes which have ruined so much of the rest of the world.
Suspicious of welfare addiction, feeble justice and high taxes, totally committed to preserving its own national sovereignty, unabashedly Christian in a world part secular and part Muslim, suspicious of the Great Global Warming panic, it was unique.
These strengths had been fading for some time, mainly due to poorly controlled mass immigration and to the march of political correctness. They had also been weakened by the failure of America’s conservative party – the Republicans – to fight on the cultural and moral fronts.
They preferred to posture on the world stage. Scared of confronting Left-wing teachers and sexual revolutionaries at home, they could order soldiers to be brave on their behalf in far-off deserts. And now the US, like Britain before it, has begun the long slow descent into the Third World. How sad. Where now is our last best hope on Earth?

Obama as an antidote to self-indulgence

Obama is ageing baby boomers’ justification for lives of inaction and disreputability.

Muslim Policies on Democracy in the West by Mohammad Nazeeh (Toronto, ON) – Facebook

I wanted to continue the conversation we were having regarding voting to bring it in a slightly different direction. As you all know, the muslim brotherhood released a memorandum in 1992 I believe stating that we needed to destroy the west from within so that we could establish Islam as the dominant religion. The words are below taken from an islamophobic webpage lol just for fun so you coudl see how pathetic they are. Islamophobes, ha what racists.

eliminating and destroying the Western civilization from within and “sabotaging” their miserable house by their hands and the hands of the believers so that it is eliminated and God’s religion is made victorious over all religions.

Anywho, I see voting as the perfect way to do this. For those of you who do not, let us say we become 60% of a population through our birthrate inshallah. Now, we get to that point and then what? Do we consider to live under kafir law? do we continue to get robbed because the punishment is light?

For those who do not vote- what do you suggest we do when we are in a position of power and can place an Islamic government in power. We could form OUR own party and just vote them out.

‘Progress’ slogan

Progress of redistribution is regression of liberty as these two ends are mutually exclusive. Or in other words, liberty and redistribution are negatively correlated in that an increase in one predicates a decrease in the other.

Liberals decry reality as a stereotype.

I was waiting in line with gaggles of youth to vote absentee in Arlington County and the following came to me:  Liberals decry, “Reality is a stereotype.”

Cowboys and Muslims (humour)

At a small terminal in the Texas Panhandle, three strangers are awaiting their shuttle flight. One is a Native American passing through from Oklahoma. Another, a local ranch hand on his way to Ft. Worth for a stock show. The third passenger is an Arab student, newly arrived at the Texas oil patch from the Middle East.

To pass the time they strike up a conversation on recent events, and the discussion drifts to their diverse cultures. Soon the Westerners learn that the Arab is a devout Muslim. The conversation falls into an uneasy lull.

The cowpoke leans back in his chair, crosses his boots on a magazine table, tips his big sweat stained hat forward over his face. The wind outside blows tumbleweeds and the old windsock flaps, but no plane comes.

Finally, the Native American clears his throat and softly, he speaks: ‘Once my people were many, Now we are few.’

The Muslim raises an eyebrow and leans forward, ‘Once my people were few,’ he sneers, ‘and now we are many. Why do you suppose that is?’

The Texan shifts the toothpick to one side of his mouth and from the darkness beneath his stetson says, ‘That’s ’cause we ain’t played Cowboys and Muslims yet.’

US-BUSINESS Summary (Reuters)

Central banks poised to act

SINGAPORE/LONDON (Reuters) – Central banks are likely to launch new coordinated emergency action this week to calm panic in financial markets, which could be rocked further by data pointing to global recession. The U.S. Federal Reserve is expected to cut rates sharply following share selloffs and currency collapses in developed economies and the emerging markets of Asia and Latin America.

KeyCorp, Capital One to receive cash infusion: source

WASHINGTON (Reuters) – KeyCorp (KEY.N), Zions Bancorp (ZION.O) and Capital One Financial Corp (COF.N) are some of the banks that will receive cash under the U.S. government’s second round of capital infusions, a source familiar with the Treasury Department’s thinking said on Sunday. Four banks, including PNC Financial Services Group Inc (PNC.N), have already announced they are participating in the second round of capital injections.

 

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/26/AR2008102600292.html

Politics – ‘08 Election (Just Giving It Away)

The right’s response to 9/11 was Iraq. The left’s response to 9/11 is Barack Obama. Need I say more? The financial crisis is one of confidence; the solvent for our present malaise is merely increased due diligence on future initiatives (e.g., conservative capital budgeting decisions). The government should continue to guarantee lines of credit.

The next four years is goinng to be rough; we will be set back even further than we were in the sixties.

Barney Frank’s Bankrupt Ideas

By INVESTOR’S BUSINESS DAILY | Posted Monday, October 06, 2008 4:20 PM PT

Financial Rescue: Democrats created the mortgage crisis by forcing banks to give loans to people who couldn’t afford them. Now Obama and Biden want bankruptcy judges to bail out the same deadbeat homeowners. And once again, Barney Frank is helping.

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Read More: Economy

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It’s been said that history is a lie agreed upon. Democrats are trying to rewrite history by blaming the Bush administration for the current crisis and claiming that the rescue bill is necessary to save the economy from Republican mismanagement.

 

More blarney from Barney.

Last Thursday on Fox News, when Bill O’Reilly tried to suggest that both parties might share the blame, House Finance Committee Chairman Frank, in a not atypical meltdown, disowned any responsibility for his lack of oversight over the last two years and his complicity before that.

Frank also claimed: “The fact is, it was 1994 that we passed a bill to tell the Fed to stop the subprime lending. We tried to get them to do it.” In other words, those rascally Republicans did it all when they took control of Congress that November.

The legislation he spoke of was the Homeowners Equity Protection Act. It was supposed to empower the Federal Reserve to set the rules on mortgages. Problem was, the Clinton administration had its own ideas of what the rules should be.

The Community Reinvestment Act, first passed in 1977 under Jimmy Carter, was intended to increase minority homeownership. It grew out of charges that banks were “redlining” entire inner-city neighborhoods as bad credit risks. Banks now were forced to perform outreach to these areas.

In the ’70s and ’80s, banks could show that they were trying to do that by advertising in minority newspapers and having representatives sit on the boards of local groups. In other words, they were rated on the effort made and not on the results achieved. Creditworthiness still mattered.

In 1995, as Howard Husock pointed out eight years ago in City Journal, “the Clinton Treasury Department’s 1995 regulations made getting a satisfactory CRA rating much harder. The new regulations de-emphasized subjective assessment measures in favor of strictly numerical ones. Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance.”

Creditworthiness and due diligence no longer mattered. As a 1999 New York Times editorial observed: “Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Bill Clinton administration to expand mortgage loans among low- and moderate-income people and felt pressure to maintain its phenomenal growth in profits.”

On Frank’s and Clinton’s watch, the Community Reinvestment Act was changed to force the issuance of bad loans. Banks would be rated on the number of loans, not on their soundness. Fannie Mae and Freddie Mac were then encouraged to buy them up. It was all about affordable housing, even if the housing was unaffordable.

“From the perspective of many people, including me, this is another thrift industry growing up around us,” Peter Wallison, a resident fellow at the American Enterprise Institute, said back in 1999. “If they fail, the government will have to step in and bail them out the way it stepped up and bailed out the thrift industry.”

That prediction came true, but it didn’t have to.

On Sept. 11, 2003, the Bush administration proposed to Congress a new agency under the Treasury Department to assume supervision of Fannie and Freddie. The new agency would have had the authority to set capital-reserve requirements, veto new lines of business and determine whether the two quasi-government lenders were adequately managing the risk of their ballooning portfolios.

When former Treasury Secretary John Snow pleaded for Frank to support Fannie and Freddie reform, Frank responded: “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Democrats believe in affordable housing even if it’s at the expense of the vast majority who watch their credit, work hard and pay their mortgages on time. But for the deadbeats, particularly Democratic constituencies, they have ways to make affordable the housing you couldn’t afford. So first, they forced them into housing they couldn’t afford, and now they give them a financial mulligan.

In the vice presidential debate, Sen. Joe Biden said that “what we should be doing now — and Barack Obama and I support it — we should be allowing bankruptcy courts to be able to re-adjust not just the interest rate you’re paying on your mortgage to be able to stay in your home, but be able to adjust the principal that you owe, the principal you owe.”

To get this bill passed, Obama made a lot of phone calls — particularly to members of the Congressional Black Caucus, including caucus chief Rep. James Clyburn — assuring this would happen.

Those paying their mortgages on time don’t get that break.

Rep. Elijah Cummings said Obama told him that, if elected president, he would direct a Treasury Department official to work with homeowners in foreclosure to restructure their loans. Cummings said Obama also told him he’d seek changes in bankruptcy laws allowing judges to reduce what borrowers owe on their home loans.

Section 110 of the rescue legislation has the Orwellian title of “Assistance to Homeowners” — but only for the deadbeats.

It describes somebody called a “Federal property manager” who “holds, owns or controls mortgages, mortgage-backed securities, and other assets secured by residential real estate.”

Section 110 speaks of “modifications” that this manager can make to these mortgages including not only the reduction of interest rates but the reduction of loan principal.

Not only is Uncle Sam now the world’s largest landlord. He can also arbitrarily set the value of property and the amount owed on it at will, thus distorting the free market.

The vast majority of homeowners who pay their mortgages on time get the shaft. They’re the ones who’ll take up the others’ slack.

Why? And why is the Community Reinvestment Act still law?

 

The International Currency Crisis (by John Mauldin)

Many of us in the US are focused on our own woes. But this is a global credit crisis. In today’s Outside the Box, we take a look at the currency markets, which are in an historic upheaval and also look at what is going on in Europe. I suspect that Europe is in for a period of much distress, as the world begins to deleverage That is why one government after another will back the deposits of banks within their countries, for otherwise capital will flee to countries like Ireland and Germany which ARE guaranteeing the deposits for all banks in their borders. Many European banks are leveraged 50 to 1 (not a misprint). I suspect that more government will do like Belgium and the Netherlands and inject capital directly into their local banks deemed too big to fail.

I am going to give you three brief pieces which all look at a different part of the crisis, but looking at the crisis from a more international perspective. The first is from Dennis Gartman’s letter (www.thegartmanletter.com) with his views on the overnight currency markets. (Note: the yen has risen even more since he wrote!)

The second piece is a short note from my friends at GaveKal (www.gavekal.com) in which they ask can the euro survive and if so, what will it look like? Very provocative, but in line with my thoughts that the euro will one day be once again at par against the dollar.

The last piece is a column by Wolfgang Munchau writing in today’s Financial Times. Munchau argues that the fact that EU member nations managed to survive their first series of bank failures does not mean it can afford to take the risk of defaulting to continued improvisation. Munchau comes out squarely in favor of a coordinated, funded rescue program. Again, thought provoking, and as I noted in this week’s letter, something that the US could face within a few weeks as well.

Fascinating markets and times we live in. Let’s hope for a rally tomorrow.

John Mauldin, Editor
Outside the Box

First, from Dennis Gartman:

The dollar and the Japanese yen reign absolutely supreme as the world continues the rush to exit from the EUR in whatever form it now holds them. Stock markets around the world are imploding it seems, and as they do, “risk” in any form is being unwound, forcing the Yen/EUR cross to move several “Big Figures” in the shortest span of time we have seen in our years of trading. Only in the “Russian/Emerging Markets Panic” in August of several years ago have we seen movements such as these. We stand in awe and we stand in fear.

Thus to begin, we say here this morning, mincing no words whatsoever, we are more frightened now for the future of the global capital markets than we have been at any time in our thirty+ years of watching, commenting upon and taking part in them. We are fearful… and we mean this fully… that we have passed the tipping point; that things are now spinning out of control; that forces have been unleashed that cannot be stopped without some truly massive, truly strong-handed, governmental action including the closure of markets and limits upon bank withdrawals, et al. These are troubling times, and our fear is palpable and growing. Worse, these concerns are giving rise to the likelihood that the Left shall be in ascension, and that manifestly left-of-centre, interventionist government lies ahead here in the US and in Europe. Higher, rather than lower taxes will be the end result. Greater… indeed very much greater… intervention in the capital markets lies ahead. Trade and act accordingly.

To put things into proper perspective, it is reasonable to see the Yen/EUR cross move within a 1 Yen range, high to low in any twenty four hour period of time. Beyond that, the situation becomes uncommon. 1.5 Yen movements, although not rare, are unusual, and 2 yen movements in the cross as “Black Swans” indeed. Now, it seems the world is filled with black swans, looking about for the few white ones that remain, for the Yen/EUR cross, having closed near 144.50:1 on Friday afternoon… which was already rather weak for the cross was trading 156 only a bit more than a week ago…is this morning trading 140.50!

We have long said that this cross relationship is the barometer of the relative health of the global capital markets, for over the course of the past several years as risk was embraced Mr. and Mrs. Watanabe would sell their Yen holdings and “swap” them for investments abroad that might return them more money. At the same time, foreign non-Japanese investors were very willing to borrow in Yen terms, take that low cost capital outside of Japan and invest elsewhere. This was the “Carry Trade” and it was one of the driving forced in the global capital market. Hedge funds around the world employed the “carry,” borrowing cheap Yen and investing into anything, anywhere around the world where the returns were larger. Once confidence began to ebb, however, and once the losses on the carry trade itself began to wane, the pressure upon those exposed grew.

Now, not only are those who borrowed Yen and bought EURs, or Aussie dollars, or Russian Rubles, or gold, or equities anywhere around the world, or debt securities of almost any kind, finding that they are losing money on the “cross” itself, they are losing more and vast sums on the investments they made. It is horror story writ large and getting larger.

Is there any fundamental investment reason to be bullish of the Japanese Yen? No there is not. The demographics of Japan are horrid as her population ages and begins to actually decline. We have written often of this demographic time-bomb that is exploding consistently over time in Japan. The country’s population is imploding and it continues to do so despite government policies aimed at changing that trend. However, once demographics as consequential as what is happening to Japan become entrenched, time… and very, very long periods of time,… decades certainly; centuries perhaps… are needed to reverse the course.

Thus, the only thing driving Yen higher is the panic liquidation of the “carry trade.” This unwinding has been going on for several months, having begun in earnest in July when the cross touched 170:1 ever-so-briefly. It took years to build the trade up as Yen was borrowed and the EUR bought since the turn of the Millennium. It may take months yet to unwind these years of accumulation. The process is not pretty. The damage wrought is enormous. The panic lies still ahead.

Moving on, the unwinding of the long EUR/short Yen cross is being made all the more dramatic as investors find reason to shun the EUR and investments in Europe generally as confusion regarding the EUR’s future has leaped dramatically to centre stage. As we pointed out last week, Dr. Milton Friedman once said regarding the EUR… in which he tended to have very little confidence…that he doubted it would last through its first real recession. His fears are being put to test today. The world is testing the very mettle of the European confederation experiment, and investors the world wide are watching to see just how well the officials in Brussels and Frankfurt can resolve their large and growing differences.

When the economic weather is mild, the “boat” that is a unified Europe runs pleasantly upon the water. The passengers may be a bit unruly, and they may argue amongst themselves, but their arguments rarely will tip the boat for at least the waters are calm. However, when the waters around the boat are riled, the least bit of unruly activity amongst the passengers is amplified and made serious. When the waters are riled, what would have passed for mere annoyance during periods of quiet become life-threatening instead. We are at that point.

The unravelling began last week when Ireland, fearful of a run on its capital markets, touched off by the frightening weakness of her stock market last Monday, moved to guarantee all deposits within the Irish banking system. The other nations of Europe, then fearful that capital would logically rush to Ireland to seek protection, said that Ireland’s decision was at best unwise, perhaps un-European and unconstitutional, and simply downright wrong. They protested. Frankfurt and Paris led the way. Mr. Trichet said that Ireland’s unilateral decision was wrong and that all decisions of this matter should be a pan-European decision, not a parochial one. Confusion, as we have always, said, breeds contempt, and with that confusion the EUR came under assault.

Matters have gotten worse… and indeed much, much worse over the weekend, for Germany, having taken Ireland to task only last week, moved to follow Ireland’s lead as Chancellor Merkel moved to guarantee all deposits in Germany. She really had no choice. Acting to stem these swift changes in the European banking landscape, the EU’s Competition Commissioner, Ms. Neelie Kroes, said that blanket guarantees on bank deposits by individual countries within the European Union shall be considered “discriminatory.” Mr. Kroes made her comments on Dutch television over the weekend.

Ms.Kroes said that Ireland is moving to change its deposit insurance plan so that it will conform with European rules, although we have not seen in what ways Dublin is moving… or even if Dublin IS moving at all. Were we Dublin, we’d not change, for our first responsibility is to the depositors in Ireland’s banks and to the Irish capital markets, not to depositors on the Continent. Ms. Kroes said that on television that

We are now in close contact. My people were in Dublin on Friday and Saturday and returned with reports that changes will be made…. A guarantee without limits is not allowed … [but we expect] that it will be brought into a form for which we can together state that it is in line with the treaty.

Germany disagrees with Ms. Kroes and Brussels, apparently, for a spokesperson for Germany’s Finance Ministry, Mr. Torsten Albig said over the weekend that “The state guarantees private deposits in Germany” while a second spokesman said the guarantee was and can be unlimited. Now that Ireland has moved in this fashion, and now that Germany has followed, Greece has said that it shall also. Others will follow, overwhelming Brussel’s ability to protest Ireland’s and Germany’s decisions, and thus forcing Ireland to take other actions to continue to draw capital to her. Ireland’s Finance Minister, Mr. Brian Lenihan, openly defended his government’s plan to guarantee the deposits and debts of six Irish-owned banks for the next two years and pointed to the panic felt by investors over Irish financial stocks this week. We can find no fault whatsoever with Mr. Lenihan’s position. Were we he, we’d do precisely the same thing… perhaps even a bit faster.

And from my friends at Gavekal:

Was it just ten days ago that Peer Steinbruck railed at the US for the banking crisis and mentioned that, because of the pneumonia in the US, Europe may well have to endure a cold? Ten days later, a cold seems like wishful thinking. Instead, it looks as if the US pneumonia is inflicting a serious case of tuberculosis across Europe!

In the past ten days, not only have we seen European governments forced to offer blanket guarantees for depositors in banks (e.g., Ireland, Greece…) but we have also witnessed a number of banks coming hat in hands to their respective governments (Hypo Real Estate, Glitnir, Fortis, Dexia, Bradford & Bingley…). Which of course begs the question of what the respective European governments can do? Some (Finland, Holland…) with overall low government debt and small budget deficits, can afford bank bail-outs. For others, whose economies may already be in a recession (e.g., Italy, Spain, Ireland…), financing large-scale bailouts may be more of a challenge. Which brings us back to a long-standing GaveKal theme, namely how the (no) Growth and Stagnation pact (see The European Divergence Trade)  hampers EU governments from taking necessary action in the face of a banking crisis. Worse yet, in Europe, investors simply have no idea who the lender of last resort is, or if there is one. And, as we are finding out, this question is no longer a rhetorical question. After all, if the numbers bandied about by Der Spiegel of a necessary €100bn to recapitalize Hypo Real Estate (and that is just one bank!) are even close to the mark, where will the money come from? As we see it, there are two possible options:

• The first option is that the ECB prints money aggressively to finance a European-wide bank bailout. This could prove rather inflationary for the Old Continent as wages there tend to be very sticky. It would also entail an absolute collapse in the Euro.The second option would be for the ECB to tell the various European governments that the banking mess is their own problem, and that they have to deal with it. This would most likely entail a continued divergence in the yields at which European governments borrow (currently standing at post-Euro introduction record highs).
• And this brings us back to a long- standing GaveKal theme: for the Euro to survive, either a) it will have to be a structurally weak currency or b) some of the weakest links (i.e.: Portugal? Italy? Greece? Spain?…) may end up being forced out. The path of least resistance is, of course, for the Euro to a structurally weak currency.

Which seems to be where we are heading. Indeed, despite the baffling decision by the ECB to maintain rates unchanged last Thursday, the Euro has been in a serious freefall against the US$, CHF, Yen, etc… Of course, this weakness could also be a sign that the ECB, with its stubborn unwillingness to adjust monetary policy in the face of rapidly changing events, has seriously undermined investor confidence in the Euro area. After all, 48 hours after the ECB board met, the rescue plans for both Hypo RE and Fortis were struggling. Surely, the ECB had to know that two major banks were in dire straits? Or was the ECB board drinking the same Kool-Aid as Peer Steinbruck?

However one cuts it, it is hard to escape the conclusion that Europe is not only experiencing its own credit crunch, but will experience a nasty recession. This recession will put most European government budgets into serious deficits; foreign investors may thus start to question the logic of owning the debt of governments whose balance sheets and income statements keep on deteriorating, and whose currency is free-falling? Milton Friedman once said that the Euro would likely not survive its first major “bump in the road”. We will soon find out. The great “European Divergence Trade” is no longer about theory; it is happening before our very eyes.

---

And from Wolfgang Munchau in today’s Financial Times:

This has been a week of self-congratulation in Europe. We have saved a handful of banks. We have, in effect, started to cut interest rates. We even had a summit of European leaders that produced warm words of solidarity. It looks as though the Europeans have reached substantive agreement that no systemically important bank should ever be allowed to fail….The rescue of Fortis and Dexia last week, two large, but not too large, cross-border European banks, should be seen as a sign that our emergency procedures are working. Look, they say, we met quickly and decided what needed to be decided. It was fast and unbureaucratic. We do not need a European rescue fund, let alone any new institutional set-up to deal with this, they say. We can do it ourselves.

I agree that the few ad hoc rescues have worked. But do not fool yourself. They worked because they were the first wave of rescues and because they involved banks such as Fortis – of just the right size, based in just the right small- to medium-sized country where political leaders are sufficiently rational not to hold each other to ransom as midnight approaches on Sunday.

But what if this had been a bank with a name of a large European country, or an acronym that refers to a large European city, banks that are simultaneously too big to fail and too big to save? I shudder to think what would happen when Silvio Berlusconi, Angela Merkel, Lech Kaczynski and the next Austrian leader have to meet to discuss the future of a large cross-border European bank.

What worked for banking rescues numbers one to five may not work for rescues number six to 50 – the estimated number of systemically important banks in Europe. And that number does not include some banks we have already rescued, which politicians judged to be important for their domestic banking system, like Germany’s IKB Bank, but with no European relevance whatsoever. We have been squandering money.

Nor does it include the likes of Hypo Real Estate, which is not even a bank at all….

The Europeans are of course right in their overall ambition not to allow systemically important banks to fail. They are also right in their scepticism about their ability to distinguish between illiquidity and insolvency during an emergency. But I fear we are still well short of a strategy. We might be lucky, and scrape through what could well become the most dangerous month of the crisis so far. If, for example, the credit default swap market were to blow up in the next couple of weeks – a non-trivial probability – we have no plan.

Nicolas Sarkozy, the French president, was therefore right when he appeared to back a €300bn rescue fund. Regular readers of this column will probably recall my somewhat constrained enthusiasm for his economic policies. But this had the makings of a good plan. He ended up distancing himself from it, when it became clear that Angela Merkel, the German chancellor, would not support it. But he was right and she was wrong. Of course, a European plan should not have been a copy of the bail-out that was finally adopted by Congress on Friday. The US plan failed to address the problem of an undercapitalised banking sector. That issue is even more important in Europe where many banks have an extremely weak capital base, with leverage ratios of 50 or more.

Europe does therefore not need any bail-out plan, but a plan that specifically addresses the capitalisation problem. Concretely, three things are needed: the first and most important is money. A sum of €300bn will not cover the EU in a worst-case scenario, but it is a sensible number to start with; secondly, you need a semi-permanent crisis committee empowered to take decisions; and finally you need a strategy to apply symmetrically and based on clear rules about when to recapitalise, and when not.

If you pursue a strategy of taking purely national decisions, you run the risk that at least one government will hit its own financial ceiling before this crisis is over, or that decisions have negative spillovers on the banking systems of other countries. Moreover, you end up with a beggar-thy-neighbour regulatory race, as we saw last week when Ireland and Greece unilaterally issued blanket guarantees for large parts of their banking sector. Last night, Germany was preparing a full deposit guarantee for its own banking system. Last but not least is the risk of violent political setback against a process that lacks transparency.

For Europe, this is more than just a banking crisis. Unlike in the US, it could develop into a monetary regime crisis. A systemic banking crisis is one of those few conceivable shocks with the potential to destroy Europe’s monetary union. The enthusiasm for creating a single currency was unfortunately never matched by an equal enthusiasm to provide the correspondingly effective institutions to handle financial crises. Most of the time, it does not matter. But it matters now. For that reason alone, the case for a European rescue plan is overwhelming.

Bury My Goldfish

EU leaders make vows not plans in face of crisis

The global financial crisis forced European leaders to gather for an emergency summit in Paris. From left to right, Luxembourg's Prime Minister Jean Claude Juncker, Italian Prime Minister Silvio Berlusconi, German Chancellor Angela Merkel, French President Nicolas Sarkozy, British Prime Minister Gordon Brown, European Commission President Jose Manuel Barroso and European Central Bank President Jean Claude Trichet.

Europe’s economies to coordinate responses to help ailing banks

updated 8:18 p.m. ET, Sat., Oct. 4, 2008

PARIS – Europe’s four major powers vowed Saturday to do all they could to prevent Wall Street’s turmoil from destabilizing their banking systems — even as a $48 billion plan to save a German lender fell apart.

But aside from vague statements of intent and calls for tighter regulation, the leaders of Germany, France, Britain and Italy shied away from the sort of massive bailout passed by the U.S. Congress on Friday.

Europe’s four largest economies pledged to coordinate national responses to help banks in distress, but their failure to agree an EU-wide plan reflects divisions in Europe on how to deal with the crisis washing up on the continent’s shores from the United States.

France had mooted a multibillion-dollar EU-wide government bailout plan, but backed off after Germany said banks must find their own way out.

The EU’s failure during the past week to pull together on dealing with the crisis has caused worry. Both Ireland and Greece angered their EU neighbors by acting independently and guaranteeing to protect all savings.

The Saturday afternoon summit was arranged hastily with the aim of reassuring jittery markets and investors. A day earlier, U.S. legislators approved a $700 billion government plan to buy up bad debt from banks and help unfreeze lending.

The four leaders — French President Nicolas Sarkozy, British Prime Minister Gordon Brown, German Chancellor Angela Merkel and Italian Premier Silvio Berlusconi — vowed to ensure the soundness and stability of Europe’s banking and financial system, but they gave few specifics.

Instead, they took a swipe at European subsidy rules designed to ensure fair competition by preventing governments propping up failing companies.

Given the “exceptional circumstances,” they said, EU regulators should be flexible on laws that restrict how much governments can give companies in trouble.

European states have pumped billions of dollars into banks to keep them afloat over the last week, trying to assure savers that their money was safe and avert a panic that has frozen lending across the world.

Bank bailout fails
The latest institution to run into trouble was Germany’s No. 2 commercial property lender, Hypo Real Estate Holding AG, which said its $48 billion rescue plan had unraveled Saturday when private banks pulled out. They said they did not want to provide the bank with credit.

The European leaders also demanded more room for maneuver on EU economy rules as European growth slows sharply. A statement distributed after the meeting said guidelines for EU nations to keep budget deficits under 3 percent of GDP “should reflect the current exceptional circumstances.”

France’s deficit is veering near the limit, and other euro nations may also come close or exceed the maximum — reversing recent efforts for the 15 nations that share the currency to reduce debt and deficits.

Easier for the leaders to target were the “golden parachutes” that allow chief executives of failing firms to walk away with millions in leaving bonuses.

Sarkozy, the summit host, said all four nations “pledged that in cases of public support to banks in difficulty, the managers will be punished, and shareholders as well will bear some of the consequences.”

They pledged to help small companies seeking credit by speeding up the release of $41.5 billion in European Investment Bank loans.

Sarkozy suggested that, with the United States focused on its November presidential election, it was important that Europe act to reshape a more responsible global economy.

“We want to put down the foundations of a capitalism of the entrepreneur and not of the speculator. We want transparency, we want moralization. We want the creation of value. We want people to have confidence,” he said.

But he recognized the need for global cooperation, calling for a summit of world leaders to tighten control over hedge funds and other high-risk investment funds that don’t currently face all the same rules as banks and insurers.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Hypo Real Gets EU50 Billion Government-Led Bailout (Update1)

By Brian Parkin and Oliver Suess

Oct. 6 (Bloomberg) — The German government and the country’s banks and insurers agreed on a 50 billion euro ($68 billion) rescue package for commercial property lender Hypo Real Estate Holding AG after an earlier bailout faltered.

Germany’s financial industry agreed to double a credit line for Hypo Real Estate to 30 billion euros, Torsten Albig, a spokesman for Finance Minister Peer Steinbrueck, said late yesterday in an e-mailed statement. The federal government’s guarantee for the credit line remains unchanged, Albig said.

The government and the Bundesbank have said that Hypo Real Estate, Germany’s second-biggest property lender, is too big to fail. They met with banks and insurers in Berlin all day yesterday to discuss a revamped rescue package after private banks on Saturday withdrew their support for a 35 billion-euro rescue package brokered a week ago.

Under the previous rescue plan, the Bundesbank intended to contribute 20 billion euros to a credit line for Hypo Real Estate, while a group of unidentified financial institutions agreed to provide another 15 billion euros. The German government and banks and insurers also planned to provide an additional guarantee for the repayment of the 35 billion-euro loan, of which the government would cover 26.5 billion euros.

Hypo Real Estate, run by Chief Executive Officer Georg Funke, 53, since it was spun off from HVB Group in 2003, was forced to seek the lifeline after its Dublin-based Depfa Bank Plc unit, which lends to governments, failed to get short-term funding amid the credit crunch

Hypo Real Estate spokesman Hans Obermeier declined to comment on any details of the new bailout.

Paris Meeting

Governments from Dublin to Moscow are racing to shore up Europe’s faltering financial institutions as the global banking crisis widens. European leaders meeting in Paris this weekend pledged to bail out their own nations’ banks, while stopping short of a regional rescue effort.

BNP Paribas SA, France’s biggest bank, will take control of Fortis’s units in Belgium after a government rescue of the Brussels and Amsterdam-based company failed.

Belgium and France on Sept. 30 threw Dexia SA, the world’s largest lender to local governments, a 6.4 billion-euro lifeline. UniCredit SpA, Italy’s biggest bank, plans to boost its capital by as much as 6.6 billion euros and the Icelandic government is reportedly trying to arrange a 10 billion-euro injection into its banking system.

Government Guarantee

The German government yesterday said it will fully guarantee personal savings accounts in a bid to ease concerns about the stability of the nation’s banking system. Until now, private savings accounts, including the accounts of small, privately held companies, have been guaranteed by 180 banks in Germany. This covers 90 percent of an account’s balance to a maximum of 20,000 euros.

Failure to provide the rescue package to Hypo Real Estate “may have triggered unpredictable consequences for the German financial and economic system similar to those of the collapse of U.S. financial group Lehman Brothers,” the Bundesbank and German financial-services regulator BaFin said in a joint letter dated Sept. 29 and addressed to Finance Minister Steinbrueck.

Hypo reported a surprise 390 million-euro writedown on collateralized debt obligations on Jan. 15. The company said Aug. 13 that second-quarter pretax profit plunged 95 percent because of further markdowns on debt-related investments.

A group led by J.C. Flowers & Co., the buyout firm run by Christopher Flowers, bought a 24 percent stake in Hypo Real Estate for about 1.13 billion euros in June.

Hypo Real Estate’s shares have declined 79 percent this year, valuing the Munich-based company at 1.6 billion euros.

To contact the reporter on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Oliver Suess in Munich at osuess@bloomberg.net.

Last Updated: October 5, 2008 18:24 EDT

European Nations Struggle to Address Financial Crisis

By VOA News
05 October 2008

Governments across Europe are scrambling to save failing banks Sunday, a day after European leaders called for a more coordinated response to the global financial crisis.

In Germany today, government and business leaders met to discuss efforts to save the troubled commercial property lender, Hypo Real Estate AG.  A $48 billion rescue plan to salvage the German company fell through Saturday.

German Chancellor Angela Merkel said officials are working hard to secure the lending company.  She said Berlin will not allow the distress of one financial institution to distress the entire system.

In Belgium, financial officials struggled to find a buyer for Fortis, a Belgian and Dutch banking and insurance group.  The Netherlands recently nationalized the group’s Dutch operations.

French President Nicolas Sarkozy (l), and the head of the International Monetary Fund Dominique Strauss-Kahn following their meeting at the Elysee Palace in Paris, 04 Oct 2008

The leaders of France, Britain, Germany and Italy met Saturday in Paris and agreed to sign a formal pact to support their individual banking sectors.

Europe’s financial system has been hard hit by the U.S. economic crisis.

In the United States, banking giant Citigroup announced today that a judge has agreed to temporarily block the sale of troubled Wachovia Bank to rival Wells Fargo Bank.  Citigroup says the deal violates an earlier agreement it had reached to take over Wachovia.

U.S. lawmakers approved $700 billion financial bailout plan on Friday.  The plan allows the U.S. government to buy failing investments from troubled financial companies in an effort to restore lender and investor confidence, and to restart economic growth.

Bird and Fortune – Subprime Crisis

Germany guarantees bank deposits

Chancellor Angela Merkel and Finance Minister Peer Steinbrück announcing their plan for Hypo Real Estate in Berlin on Sunday. (Pool photo by Rainer Jensen)

By Carter Dougherty

Published: October 5, 2008

 

FRANKFURT: As German leaders and bankers worked feverishly to rescue a lender considered too big to fail, the government announced Sunday that it would guarantee all private savings accounts in Germany – worth about €500 billion – in an effort to reinforce increasingly shaky confidence in the financial system.

Officials in Berlin were frantically trying to salvage a €35 billion, or $48 billion, bailout devised just a week ago for Hypo Real Estate, a major German property lender based in Munich and member of the benchmark stock index, after commercial banks withdrew their support, fearing greater losses.

The Belgian authorities, meanwhile, were looking for ways to secure the future of Fortis operations in Belgium, after its Dutch operations had been nationalized by the Netherlands on  Friday.

In Iceland, where the government seized control of a bank last week, officials were considering more sweeping measures to stabilize finances there as well.

And the board of UniCredit, which is based in Milan and also operates in Germany and much of Eastern Europe, met to consider a capital increase after being buffeted by a week of speculation about its solvency. A nightmare outcome for Europe would be the failure of a major, border-straddling bank like Unicredit.

Much of the weekend activity was undertaken with a view toward having solutions in place by the time financial markets opened Monday in Asia, a trigger point that officials around the world have come to view warily.

With memories of how the bankruptcy of Lehman Brothers put the crisis into high gear three weeks ago, officials fear letting investors wake up to a festering problem. That could easily provoke new losses in stock markets and test the limits of tight credit markets, the core of the crisis.

Worried that the continued turmoil at Hypo Real Estate would lead to a depositors’ panic at other German banks, Chancellor Angela Merkel and Finance Minister Peer Steinbrück made a rare Sunday appearance before television cameras in Berlin on the steps of the Chancellery to assure a jittery public about the safety of their savings.

The government first promised the deposit guarantee obliquely and later added a more explicit promise, with plans to seek any necessary legislation to carry it out.

“This is an important signal,” Steinbrück said, “so that it comes to some calming down, not to reactions that would be out of proportion and would make our crisis management and crisis prevention that much more difficult.”

Mindful of the rising public anger at the use of public money to buttress the business of high-earning bankers, Merkel promised a day of reckoning for them as well.

“We are also saying that those who engaged in irresponsible behavior will be held responsible,” Merkel said. “The government will ensure that. We owe it to taxpayers.”

German deposits are already guaranteed through a mixture of deposit insurance plans, with the first line of defense being a state fund.

A second line is the programs to which Germany’s public, private and community banks contribute. The Finance Ministry said the new blanket guarantee would be effective immediately, although it was unclear whether new legislation would be needed.

“We think this will create the confidence we need,” said a ministry spokesman, Stefan Olbermann. “That means the cost could be nothing.”

Reports about the banking crisis had created “great uncertainty” among ordinary Germans, prompting the guarantee, Olbermann said. Over the past week, the German media have engaged in an angst-ridden discussion about the safety of private savings.

However radical, the German move stops short of what Ireland did with its banks last week. The Irish government backstopped savings accounts as well as other liabilities of six domestic banks, a step that effectively lent a sovereign guarantee to creditors of the banks and ensured their solvency.

Senior German officials meeting in the chancellor’s office Sunday morning were joined by Josef Ackermann, chief executive of Deutsche Bank, and Klaus-Peter Müller, chairman of the Association of German banks and Commerzbank, a large retail and corporate bank.

The Hypo Real Estate rescue plan, announced last Monday, quickly fell apart over the company’s liabilities, which are linked to the U.S. municipal bond market, according to a person briefed on the talks, who requested anonymity because the outcome was still unclear.

Talk in Berlin of winding the bank’s operations down as the price for the bailout had accelerated its problems – and further depressed its share price – over the past week, said a Hypo spokesman, Hans Obermaier.

Depfa Bank, a Dublin-based lender that was acquired by Hypo last year and specializes in government lending, is at the center of its problems. Depfa underwrote a package of U.S. municipal bonds that were subsequently downgraded by ratings agencies. That step obliged Depfa to buy the bonds back, a contractual requirement that would create almost immediate liquidity problems at Hypo itself, given the difficulty of getting short-term funding in today’s credit markets.

Banks from outside Hypo uncovered the problem after the bailout plan was completed last week, and they soon realized that the €35 billion that was supposed to sustain the bank through the end of 2009 was inadequate. Instead, it would need €50 billion by the end of this year and €10 billion in 2009.

After the magnitude of the problem became clear, the banks – which were not publicly identified – revoked their participation in the plan, which had been a joint public-private deal.

One option now might be to allow Hypo to use the bonds as collateral for drawing liquidity from the European Central Bank, the person briefed on the talks said.

“The problem is not outrageous,” the person said. “You can get a solution, but you need the assistance of the government.”

 

Wachovia Says Court Order Doesn’t Invalidate Wells Fargo Bid

By Rick Green

Oct. 5 (Bloomberg) — Wachovia Corp., the North Carolina bank that’s received bids from two suitors, said a court order preserving Citigroup Inc.’s exclusive right to negotiate hasn’t derailed a higher offer from Wells Fargo & Co.

The order by New York State Supreme Court Judge Charles Ramos yesterday doesn’t have “any effect on the validity of the Wells Fargo agreement,” Charlotte-based Wachovia said today in a statement distributed by PR Newswire, adding that the latter deal requires no government assistance. “The agreement is in the best interests of shareholders, employees, creditors and retirees as well as the American taxpayers.”

Citigroup, the biggest U.S. bank by assets, is bidding for Wachovia while trying to rebuild after losses tied to the collapse of mortgage markets. The New York-based bank wants to buy parts of Wachovia for about $2.16 billion, and San Francisco-based Wells Fargo is offering about $15 billion for the whole company.

Last Updated: October 5, 2008 13:44 EDT

Reversal of fortune: House approves $700-billion bailout bill

 Four days after rejecting a similar plan, the House of Representatives approves the measure by a 263-171 vote. Bush quickly signs the bill into law.

By Richard Simon and Nicole Gaouette, Los Angeles Times Staff Writers
October 4, 2008

WASHINGTON — The House of Representatives approved the $700-billion Wall Street bailout Friday, setting in motion the biggest government intervention in the financial system since the Great Depression.

President Bush quickly signed the bill, and Treasury Department officials vowed to move swiftly to use sweeping new powers to try to stabilize financial markets and ease deepening fears about the economy.

continue reading here

 

Sarah Palin claims Barack Obama would ‘pal around with terrorists’

Republican vice presidential candidate Sarah Palin speaks to an enthusiastic crowd of more than 8,000 in Carson.

John McCain’s running mate questions the Democrat’s ties to William Ayers during a rally in Carson. The Republican running mate also visits Costa Mesa, and is expected to appear today in Burlingame.

By Robin Abcarian, Los Angeles Times Staff Writer
October 5, 2008

You can’t say she didn’t warn them.

Alaska Gov. Sarah Palin introduced herself to the nation with a now-famous joke about lipstick being the only difference between a certain dog breed and a hockey mom. On Saturday, the Republican vice presidential nominee unleashed her inner pit bull, accusing Democratic presidential candidate Barack Obama of being someone who would “pal around with terrorists.”

Her accusation — made before an overflow crowd of more than 8,000 at Home Depot Center’s tennis stadium in Carson, and earlier in the day at a Denver fundraiser — signaled an increasingly abrasive stance toward Obama on behalf of her running mate, Republican nominee John McCain.

In Carson, Palin signaled her intentions early on in her 23-minute speech.

“One of my campaign staff said as I was walking out here, ‘OK, the heels are on, the gloves are off,’ ” she said.

The “terrorists” to whom Palin was referring is William Ayers, founder of the 1960s radical group Weather Underground, who is now an education professor at the University of Illinois at Chicago and an acquaintance of Obama.

Palin began the attack with a wry observation about her disastrous Katie Couric interview — she appeared to draw a blank when asked which newspapers and magazines she reads. Palin, who later told Fox News that she reads the New York Times and the Wall Street Journal, among other publications, said she was annoyed by Couric’s question.

Clearly buoyed by a well-received performance against her Democratic opponent, Sen. Joe Biden, in their only debate Thursday, Palin apologized for what she described as her “impatient” response to Couric.

“Evidently there’s been a lot of interest in what I read lately,” she said. “I was reading today a copy of the New York Times. And I was really interested to read in there about Barack Obama’s friends from Chicago. Turns out one of his earliest supporters is a man who, according to the New York Times, was a domestic terrorist, that, quote, ‘launched a campaign of bombings that would target the Pentagon and the United States Capitol.’ “

The New York Times article, an investigation published Friday into whether Obama had a relationship with Ayers, concluded that the men were never close and that Obama has denounced Ayers’ radical past, which occurred when Obama was a child. The article also said Obama “has played down his contacts with” Ayers.

“This is not a man who sees America as you and I see America,” Palin said of Obama. “We see America as a force for good in this world. We see America as a force for exceptionalism. . . . Our opponents see America as imperfect enough to pal around with terrorists who would bomb their own country.”

The Obama campaign responded forcefully. “Gov. Palin’s comments, while offensive, are not surprising, given the McCain campaign’s statement this morning that they would be launching Swift Boat-like attacks in hopes of deflecting attention from the nation’s economic ills,” said spokesman Hari Sevugan.

“In fact, the very newspaper story Gov. Palin cited in hurling her shameless attack made clear that Sen. Obama is not close to Bill Ayers, much less ‘pals,’ and that he has strongly condemned the despicable acts Ayers committed 40 years ago, when Obama was 8. What’s clear is that John McCain and Sarah Palin would rather spend their time tearing down Barack Obama than laying out a plan to build up our economy.”

Republicans have long been expected to attack Obama on the issue. In August a major fundraiser for McCain spent $2.8 million on an ad by the American Issues Project that questioned Obama’s relationship with Ayers.

(The donor, Texas billionaire Harold Simmons, helped fund Swift Boat Veterans for Truth, the group that damaged John F. Kerry’s 2004 presidential campaign when it called his Navy service into question.)

The anti-Obama ad aired in Ohio and Michigan in the summer. Last week, the McCain campaign said it would pull out of Michigan, a tacit admission that it expected Obama to carry the state. Palin, who did not know the campaign pulled out of Michigan until she read about it Friday, according to McCain aides, implied Saturday in Denver that she regretted the decision.

“Well, as I said the other day, I would sure love to get to run to Michigan and make sure that Michigan knows we haven’t given up there,” Palin said as she left a diner after visiting with soldiers’ mothers. “We care much about Michigan and every other state.”

California is a reliably Democratic state in the presidential race — yet it also is a reliable source of cash for Republicans. After the Carson rally Saturday, Palin attended a fundraiser in Costa Mesa.

Today she is scheduled to headline a fundraiser in Burlingame, after which she is expected to leave for Florida. McCain, meanwhile, will take time off to prepare for his second debate with Obama, on Tuesday.

In Carson, Palin was interrupted numerous times by protesters, who were in turn shouted down by the crowd. She said that her father, Chuck Heath, was born in North Hollywood and that her grandfather was a Los Angeles photographer who specialized in shooting boxers. “I learned a few points about fighting from him,” she said.

Many people in the Carson crowd compared Palin favorably with Ronald Reagan.

“What’s wonderful about Sarah is that she’s liberated without being liberal,” said LaDell Jorgensen, 42, who drove from San Clemente for the rally. “She really connects with the old Ronnie Reagan patriotic people who love America.”

Paul Nissan, 56, of Culver City, said it gets kind of lonely being a Republican on the Westside of Los Angeles.

“What’s been set in motion with her makes it seem like California can get in the mix,” he said. “It’s encouraging for those of us out here in Reagan Country.”

Nissan’s friend, Jeanne Tanigawa, 57, said she was a McCain supporter even before he chose Palin.

“She’s like the cherry on top,” Tanigawa said.

Neither Nissan nor Tanigawa was bothered by Palin’s claim that Obama “would pal around with terrorists.”

“I’m aware of the background there,” Nissan said. “I think it’s down to where we’ve got to be blunt about associations and values. The ideological differences are so stark.”

robin.abcarian@latimes.com

Emotions connect old OJ acquittal, new conviction

By KEN RITTER – 2 hours ago

LAS VEGAS (AP) — Jurors had been told to ignore what they knew about O.J. Simpson’s past, but for many observers, the line connecting the former NFL star’s murder acquittal last decade and his new conviction for robbing memorabilia peddlers couldn’t have been clearer.

 

The attorney for the family of Ronald Goldman — who was killed along with Simpson’s ex-wife Nicole Brown Simpson in Los Angeles in 1994 — said he thought his hounding of Simpson for years to collect a $33.5 million wrongful death judgment pushed him to a desperate gambit to recover personal items he had lost.

“We drove him into that room to grab the sports memorabilia before we could seize the stuff,” said David Cook, who represents Goldman’s father, Fred. “Going to jail for beating Fred Goldman out of footballs and family mementos. Is this closure for Fred Goldman? No. Is this closure for America? Yes.”

Simpson lawyer Yale Galanter said Saturday, the day after Simpson and Clarence “C.J.” Stewart were convicted of all 12 charges against them in the hotel room confrontation, that the Las Vegas jury was “on an agenda” to make up for Simpson’s murder acquittal. The two face up to life in prison.

“This was just payback,” Galanter said.

“A lynching from the first second to the end,” agreed Thomas Scotto, a close Simpson friend who testified and was overcome by emotion in the courtroom after the verdicts were read. “It’s a total injustice.”

Scotto later told reporters he would remain in Las Vegas to seek out witnesses and show they were forced into their testimony.

“I need these witnesses to come forward and start telling the truth,” he said.

The case against Simpson was won the moment the jury was chosen, according to the consultant who helped prosecutors pick the panel.

“That was the best possible jury prosecutors could ever have,” said Howard Varinsky, who drafted a questionnaire for the prosecution that formed the basis of a survey used to cull 12 jurors and six alternates from a pool of 500 prospects.

“I was surprised that we got all the counts,” he said Saturday. “But it wasn’t an accident that the jury wound up looking like that.”

Whatever the jury was thinking, Fred Goldman praised the verdict.

“We’re absolutely thrilled to see the potential that he could serve the rest of his life in jail where the scumbag belongs,” he told CNN.

Brown Simpson’s relatives said in a statement that they want to be left alone as they “work through many mixed emotions.” They said they are primarily concerned about the children from the marriage, Sydney and Justin.

The jury that convicted Simpson consisted of three men and nine women, including one woman who identified herself as Hispanic, a court spokesman said. The jury contained no blacks, the race of both defendants.

Jurors declined interviews and avoided the media after the verdicts were read.

According to jury questionnaires released Saturday, five of the 12 jurors wrote that they disagreed with the 1995 verdict that cleared Simpson of murder. Most others claimed to be uncertain or did not answer the question.

Redacted versions of the questionnaires were made public by Clark County District Judge Jackie Glass after The Associated Press and Stephens Media LLC, owner of the Las Vegas Review-Journal, petitioned for their release.

Prosecutors have declined to comment throughout the trial.

Lawyers and jury analysts recalled that prosecutors succeeded in removing two black jurors from the final panel.

Varinsky insisted that Simpson and Stewart got fair trials, saying jurors answered several questions attesting to their ability to set aside their feelings about the Los Angeles case.

But he acknowledged the questions also reminded jurors about that case.

AP Special Correspondent Linda Deutsch and writers Kathleen Hennessey in Las Vegas and Christina Hoag in Los Angeles contributed to this report.

No Joint European Strategy On Banks

4 Top Economies Seek World Summit 

By Edward Cody

Washington Post Foreign Service
Sunday, October 5, 2008; Page A01

 

PARIS, Oct. 4 — The leaders of Europe’s four largest economic powers vowed Saturday to protect their banks from the continuing reverberations of the increasingly global financial crisis but could not agree on a common Europe-wide strategy.

Unlike the United States, which last week committed $700 billion in government money to shoring up Wall Street, Europe plans to continue dealing with its financial problems on a case-by-case basis. That approach, which has involved tens of billions of dollars at a step, is complicated by the transnational presence of so many large European financial institutions.

But the European leaders did call for a global economic summit by year’s end aimed at revamping the international financial system, which is a legacy of a conference held at Bretton Woods, N.H., in the waning months of World War II.

French President Nicolas Sarkozy, Europe’s most vocal advocate of a continent-wide response, announced that for now, he and the leaders of Britain, Germany and Italy agreed in four hours of discussions only that each country would use “its own means” to safeguard banks from collapse but would do so “in a coordinated way.”

The outcome seemed to fall well short of the common policy that French and other officials had spoken of in recent days amid a rapid series of financial failures and a freezing up of the capital markets in Europe, which rival or by some measures exceed the size of the U.S. markets. The disunity in Europe also was apparent in complaints by some other countries that they were not even included in the discussion.

Failure to pursue a broader bailout reflected particularly strong opposition from Chancellor Angela Merkel of Germany and Prime Minister Gordon Brown of Britain to any attempt at pooling resources for a Europe-wide fund to protect weak banks. Each government should handle its own banking problems, they said, because each country — and even each bank — has specific problems that must be dealt with in different ways.

Indeed, even as the leaders discussed restoring confidence in the banking system, news reports said Germany’s $49 billion rescue last week of the Hypo Real Estate Bank may not have been enough and that a further injection of government cash is under discussion. Similarly, the governments of Belgium and Luxembourg were said to be in negotiations to buy up remains of the giant Fortis financial group in their countries, following up on the Netherlands’ nationalization last week of Fortis operations there. The Fortis rescue demonstrated the transnational nature of Europe’s financial problems.

The lack of common strategy among leaders of Europe’s main economies at a time of crisis with direct effects on the well-being of their citizens suggested that the 27-nation European Union, while united in many ways, still has a long way to go before becoming the continent-wide economic and political authority it has set out to be. In addition, some of the grouping’s smaller members chafed at being left out of Saturday’s summit, with Finnish Finance Minister Jyrki Katainen calling the restricted invitation list “a very bad idea.”

Seeking to reassure nervous Europeans, however, the four leaders described their summit as a demonstration of resolve to prevent further bank crashes, make sure depositors do not lose their savings and get money flowing through the choked financial system again for businesses and consumers.

“Today was expressed with great clarity the will of our countries to guarantee citizens’ savings and preserve citizens’ confidence in the banking system, which must continue to support the real economy,” Prime Minister Silvio Berlusconi of Italy told reporters.

Merkel, whose government irritated French officials with public opposition to the European bailout fund proposal, called the summit conference “an important contribution” to restoring confidence in the continent’s financial system. She and others pointed to the expression of determination not to let banking failures spread, indicating European governments are ready to intervene individually if not collectively.

“We jointly commit to ensure the soundness and stability of our banking and financial system and will take all the necessary measures to achieve this objective,” a communique said.

“We will work cooperatively and in a coordinated way within the European Union and with our international partners,” it added. “In the spirit of close cooperation within the European Union, we will ensure that potential cross-border effects of national decisions are taken into consideration.”

This language was seen as a rebuke to Ireland, which last week decided to offer guarantees to all Irish depositors. The decision, taken unilaterally, irked Brown and his lieutenants in London, who feared it might lead Britons to pull their money out of British banks and put it in Irish banks instead to enjoy the guarantee.

Sarkozy, speaking to reporters on the sidelines of the summit, emphasized that the financial crisis is a global problem and should be dealt with in cooperation with nations outside Europe as well, particularly the United States. “It is a worldwide problem, and it should get a worldwide response,” he said.

At his urging, the four European leaders endorsed an earlier French call for an international summit conference before the end of the year to begin revamping the world financial system set up at Bretton Woods in 1944. In addition, they made it clear that increased regulation around the world should be part of the retooled system, a message Sarkozy has been sending strongly since the crisis erupted.

“We call for the holding of a summit at the earliest possible date,” they said in their statement. “Such a reform should notably be underpinned by a comprehensive framework of supervision. All parties with significant financial impact should be appropriately regulated or under surveillance.”

The four leaders also issued a call for establishing clear rules of responsibility between banking executives and regulators, on one hand, and the failure of banks under their control on the other. This also has been a Sarkozy rallying cry, a politically popular stand insisting that high-flying bankers must pay if their institutions go under.

For instance, a top executive at Dexia, a collapsing bank rescued by the French and Belgian governments last week, was forced not only to resign but also to renounce his severance package on insistence from the French government, which since the rescue holds a 25 percent stake in the bank’s capital.

Citigroup Girds for Wachovia Takeover Battle With Wells Fargo

By David Mildenberg and Josh Fineman

Oct. 4 (Bloomberg) — Citigroup Inc., hobbled by $61 billion of subprime-related losses, now faces its biggest takeover battle in a fight with Wells Fargo & Co. for control of Wachovia Corp.

Citigroup fell as much as 21 percent yesterday in New York trading after Wells Fargo, the biggest U.S. bank on the West Coast, agreed to acquire all of Charlotte, North Carolina-based Wachovia for $15.1 billion. The bid trumped Citigroup’s government-backed offer of $2.16 billion for Wachovia’s banking operations.

“The taxpayer doesn’t pay a penny” for the Wells Fargo deal, Wells Chairman Richard Kovacevich, 64, said yesterday in an interview. His company’s bid is superior to Citigroup’s also because it’s a higher price and the combining banks “share similar cultures and values.”

Vikram Pandit, Citigroup’s chief executive officer, is counting on the Wachovia purchase to help rebuild after three quarters of losses totaling more than $17 billion. The bank’s market value has dropped 38 percent this year to about $100 billion, leaving it below Wells Fargo. If Wells Fargo winds up with Wachovia, it would creep up on its New York rival with deposits of $787 billion, compared with Citigroup’s $826 billion.

Pandit insisted Citigroup will prevail, citing an exclusive agreement signed by Wachovia. Kovacevich told investors during a conference call the deal with Wachovia is “solid.”

Citigroup dropped 18 percent to $18.35 yesterday in New York Stock Exchange composite trading, after having its biggest share decline in about 20 years. Wachovia rose 59 percent to $6.21. Wells Fargo declined 1.7 percent to $34.56.

Citi’s Claim

Citigroup demanded Wells Fargo abandon the takeover. Buying Wachovia would give Citigroup the third-biggest U.S. bank network and cement its status as the nation’s largest lender by assets.

“Any such agreement between Wachovia and Wells Fargo is illegal,” Pandit, 51, said in the e-mail yesterday. “We continue to vigorously pursue Citigroup’s interest and rights in completing this transaction.”

Citigroup may take legal action to block the deal, or may increase its offer, said a person with knowledge of the deliberations.

“I’m still not convinced that Citigroup can force this sale to happen,” said Elizabeth Nowicki, a professor at Tulane University Law School in New Orleans and a former M&A lawyer at Sullivan & Cromwell. “Citigroup may be facing the chance to get themselves a small settlement, and that’s a nice shot in the arm for a company that’s struggling.”

A court challenge and a bidding war aren’t the only possible roadblocks for Wells Fargo: Its offer may lead to a face-off with federal regulators.

Regulators

The Federal Deposit Insurance Corp., helped broker Citigroup’s purchase when Wachovia’s health faltered. Chairman Sheila Bair said until a review of Wells Fargo’s offer is completed, the agency will stand behind the Citigroup deal.

“We wanted to make clear that until things are settled with what’s going on with this Wells bid, that the Citi deal was still there,” Bair said yesterday in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be broadcast over the weekend. Bair said the FDIC is reviewing the offer, and she told Hunt: “You shouldn’t” assume the U.S. opposes Wells’s offer.

Other bank regulators said they haven’t evaluated Wells Fargo’s offer.

“We have not yet reviewed the new Wells Fargo proposal and the issues that it raises,” the Federal Reserve and Office of the Comptroller of the Currency said today in a statement. “The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability.”

Wells Fargo’s Plan

Wells Fargo, run by Chief Executive Officer John Stumpf, had avoided bets on the subprime-mortgage market that contributed to $588 billion in writedowns and credit losses for financial firms worldwide. Wachovia in 2006 purchased Oakland, California-based Golden West Financial Corp. for $24 billion, acquiring a portfolio of option-adjustable rate mortgages that helped lead to $9.6 billion in losses this year.

Wells Fargo, in bidding for Wachovia, deviates from a strategy of seeking smaller acquisitions with less risk to fill gaps in its branch network. After the combination, the bank would have $1.42 trillion in assets, which may rank third in the U.S. depending on what other bank mergers are completed. It would have 10,761 branches in 39 states.

“Citi’s purchase was too cheap for the assets and operations involved,” said Jason Pride, research director at Haverford Trust Co. in Haverford, Pennsylvania. “It’s an excellent strategic deal for Wells Fargo given the geography of the branch network.”

To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net.

Last Updated: October 4, 2008 00:00 EDT

13 years on, O.J. Simpson’s luck runs out in Vegas

Sat Oct 4, 2008 3:14pm EDT 

By Dan Whitcomb

 

1 of 11Full Size

LAS VEGAS (Reuters) – O.J. Simpson, who more than a decade ago stunned much of America by beating murder charges, found himself in a Las Vegas jail on Saturday, facing the possibility of life in prison after a jury found him guilty of kidnapping and robbery in a dramatic late-night verdict.

 

The former football star who walked away from his “Trial of the Century” a free man amid widespread views he had stabbed and slashed his ex-wife and her friend to death, was handcuffed and led to jail on Friday night after he and a co-defendant were convicted of robbing a pair of sports memorabilia dealers at a Las Vegas hotel.

 

A court clerk quickly rattled off a dozen guilty verdicts against him and co-defendant Clarence “C.J.” Stewart that jurors returned after 13 straight hours of deliberations, 13 years to the day after his October 3, 1995 acquittal in Los Angeles.

 

Simpson’s family members were left sobbing in the front row of the courtroom and his sister, Carmelita Durio, was treated by paramedics after collapsing.

 

Clark County District Court Judge Jackie Glass summarily rejected requests by lawyers for Simpson, 61, and Stewart, 54, that they be allowed to remain free until the December 5 sentencing.

 

Both men, who were found guilty of conspiracy, burglary, kidnapping, robbery and assault, face mandatory minimum penalties of five years in prison but could end up with life terms.

 

FEW SCREAMING HEADLINES

 

In contrast to the murder case which captivated much of the world, divided Americans sharply along racial lines and ushered in a new age of celebrity journalism, Simpson’s three-week Las Vegas trial drew few screaming headlines and none of the circus-like atmosphere.

 

But prosecutors told jurors during opening statements that the armed confrontation at the Palace Station hotel and casino grew out of grudges Simpson had nursed since his murder trial and civil case, and suggested that they could right a wrong by convicting him.

 

“You will be able to write that final chapter, the chapter of arrogance and hypocrisy and that will be the true verdict. The verdict you can feel good about,” prosecutor Christopher Owens said at the time.

 

Witnesses said the former star athlete once known as “The Juice” and five sidekicks stormed into Room 1203 of the Palace Station and held sports memorabilia dealers Bruce Fromong and Alfred Beardsley at gunpoint, making off with thousands of dollars in collectibles.

 

Defense lawyers argued that much of the property belonged to Simpson and that he wasn’t aware that two of his cohorts were carrying guns. Four of Simpson’s accomplices that day agreed to plead guilty and testified against him at the three-week trial.

 

Simpson’s ex-wife Nicole Brown Simpson and her friend Ron Goldman were found stabbed and slashed to death on June 12, 1994.

 

Simpson was quickly charged and after a trial that lasted for more than a year was acquitted on October 3, 1995.

 

A civil court jury later found Simpson liable for the deaths and ordered him to pay $33.5 million in damages to the victims’ families, a judgment that remains largely unpaid.

 

(Additional reporting by Bernie Woodall and Steve Gorman in Los Angeles, editing by Vicki Allen)

Bush: Effects of financial bailout will take time

WACO, Texas (Reuters) – President George W. Bush said on Saturday that benefits from the recently passed financial bailout will take time to show up in the U.S. economy.

One day after Bush signed the $700 billion rescue package into law, he sought to assure the public that the government would be careful in implementing the legislation aimed at easing a credit crisis that has created turbulence in global financial markets.

“In addition to addressing the immediate needs of our financial system, this package will also help to spur America’s long-term economic growth,” Bush said in his weekly radio address.

Bush had pressed all week for Congress to approve the legislation, which was dealt a blow on Monday when the House of Representatives rejected it.

A modified version that raised limits on insured bank deposits received final congressional approval on Friday.

“While these efforts will be effective, they will also take time to implement,” Bush said.

“My administration will move as quickly as possible, but the benefits of this package will not all be felt immediately,” he said.

“The federal government will undertake this rescue plan at a careful and deliberate pace to ensure that your tax dollars are spent wisely.”

Bush, a Republican whose two terms in office will end in January after the U.S. presidential and congressional elections on November 4, was spending the weekend at his ranch in Crawford, Texas. 

Responding for the Democrats, Ohio Governor Ted Strickland said the loss of 760,000 U.S. jobs so far in 2008 showed that ordinary people were feeling the pinch of a slowing economy all year long, not just as financial market turbulence reached a crescendo in recent weeks.

 

“The crisis that hit Wall Street a couple weeks ago isn’t news to families on Main Street all across this country,” Strickland said.

 

He also criticized Republican presidential candidate John McCain’s economic policies and championed those of Democratic contender Barack Obama.

 

“John McCain just doesn’t get it. He hasn’t said one thing he’d do to make his economy look any different than George Bush’s economy,” Strickland said.

 

“Right now, the change we need is Barack Obama’s plan to jumpstart our economy and move America forward.”

 

(Reporting by Tabassum Zakaria; Editing by John O’Callaghan)

Muslim MP becomes justice minister

Shahid Malik promoted as part of cabinet reshuffle

• Rachel Stevenson and agencies
• guardian.co.uk,
• Saturday October 04 2008 17:10 BST
• Article history

Britain’s first Muslim minister, Shahid Malik, has been promoted to the department of justice as part of Gordon Brown’s cabinet reshuffle.

The Dewsbury MP, who is currently a minister for international development, said he hoped to make Britain “a more just society” in his new role as a minister in the department for justice.

“While I have truly loved my international role working to deliver justice for the poorest around the world, I’m now relishing the opportunity to make Britain an even fairer and more just society for all its citizens,” he said.

As an MP, Malik gained experience of violent youth crime in Britain when a teenager was murdered by a gang of young people in his constituency in May this year.

After the killing, the MP, who lives just a few minutes walk from the scene of the attack, called for “a change in society”, warning that too many young people were adopting a culture where violence was an accepted part of life.

In another government move, Tom Harris, transport minister, has been sacked. The Glasgow South MP said: “Obviously I’m disappointed; I really enjoyed being a minister. But I was always realistic – ministerial jobs come and go, but the role of an MP is more important than any other. And of course I will continue to support the government from the backbenches.”

The finishing touches to the government reshuffle are being announced over the weekend. The posts of immigration minister and police minister at the Home Office have yet to be filled.

A number of senior ministers have today been speaking out in support of Peter Mandelson, who has been brought back to the cabinet as business secretary.

Ed Miliband, who was appointed to the new post of Energy and Climate Change Secretary in yesterday’s reshuffle, said Mandelson would make the government “stronger”.

Speaking on BBC Radio 4’s Today programme he said: “Peter Mandelson has people who like him and people who don’t like him, but even his critics would accept that this is someone of immense talent and someone of even greater experience now that he has been the EU Trade Commissioner for three years.”

Ed Balls, the schools secretary, described Mandelson’s appointment as “the right thing to do”.

The Curve in the Road

 

 

 

 

 

10/4/2008 1

The Curve in the Road

Necessary but Not Sufficient

Why the Government Had to Step In

All the King’s Horses

How Can I Be 59?

By John Mauldin

The “Bailout Plan” was passed. Will it work? The answer depends on what your

definition of “work” is. If by work you mean no more government intervention and no

further costly programs and a functioning market, then the answer is no. But there are

things it will do. This week I try to help you see what might lie ahead around the Curve in

the Road. We look at how the rescue plan will function, see what is happening in the

economy, and finally muse as to whether Muddle Through is really in our future. It will

make for an interesting, if not very upbeat, letter, so strap in. I would like your promise to

not shoot the messenger. I am just trying to give you some of my thoughts as to what may

lie in our future. And remember, as you read this, we will get through it. There are better

days “a’coming.”

But first, a few housekeeping items. Let me welcome some 200,000 new readers

from EQUITIES Magazine. I have recently joined EQUITIES Magazine as a regular

contributing editor. My column, Back to the Frontline, is featured in both their print

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esteemed magazine with a rich history covering the global markets for over 57 years.

They’ve once again agreed to offer any reader of mine a free subscription to

EQUITIES Magazine. For those who did not take advantage of the free subscription the

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The Curve in the Road

10/4/2008 2

managers on the platform, simply click on the following link, fill out the form, and they

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(In this regard I am president and a registered representative of Millennium Wave

Securities, LLC, member FINRA. And please read all the risk disclosures.) And now,

let’s jump in to the letter.

The Curve in the Road

When you are out driving on a strange new road, you can’t see around the curve

ahead. But you can read the warning signs to get an idea of what might be coming. And

while we can’t really know how the developments in the economic world will actually

unfold, there are some signs we can point to that might give us a few ideas.

First, let’s look at the “rescue plan” as passed by Congress. As I pointed out last

week, this is a bad bill. But it was necessary to pass something, and soon. Earlier this

week I sent out a report that reviewed a study of 42 major baking crises. The conclusion:

navigating them successfully depended upon quick action.

As everyone should know, the credit markets are almost completely frozen.

LIBOR is bid only, no offers. Commercial paper markets are imploding. And what is

trading is often at rates that are much higher than they were a few months ago.

Corporations are being strangled on high rates. Corporations have little or no access to

normal credit markets, and they will face massive problems when it comes time for them

to roll over short-term debt.

LIBOR has gone crazy. This is not an orderly market.

The Curve in the Road

10/4/2008 3

Look at the following chart from friend Greg Weldon. For most readers, the

commercial paper market is something you don’t think about. But it is the lifeblood of

business. We have seen this market drop by almost 30% in a year and by 10% in just the

last three weeks! I simply cannot overstate how serious this is. Left unchecked, business

activity in the US would soon slow enough to bring thoughts of the Great Depression. It

will not be left unchecked.

The credit crisis is not simply a Wall Street issue. It has fast become a Main Street

issue. And Main Street is where jobs are created and maintained.

As I have said repeatedly for months, the problem is that financial institutions are

having to deleverage. They have massive losses and simply have to raise capital in order

to survive. If you can’t raise equity capital (and most can’t), one of the ways you do that

The Curve in the Road

10/4/2008 4

is to make fewer loans and to take less risk. You also charge more for the loans you do

make.

Larger institutions cannot raise capital on competitive terms. GE is an AAA-rated

company. Yet they had to pay Warren Buffett 10% to get $5 billion, plus in-the-money

warrants worth at least another 10%. Buffett is likely to double his money on this deal

over 4-5 years. A short while ago, GE could get short-term commercial paper for a few

percentage points. That difference is going to significantly impact GE’s bottom line. But

they had no real choice. They took the money.

As did Goldman Sachs. Yet another Buffett $5 billion preferred-share purchase

(with more warrants) at a rate that even Goldman will find it hard to make money on. But

they had to raise capital quickly, and they had little choice.

I had lunch with Michael Lewitt and Joe Harch yesterday. They were in town to

meet with a client, and we took the opportunity to get together and share notes. They run

(among other things) a collateralized loan obligation fund. They buy bank and corporate

debt. They now have the opportunity buy well-collateralized loans from rated companies

at prices well below par. They related story after story of debt from quality, highly rated

companies selling below $.90 on the dollar, and some much lower.

If GE and Goldman are paying 10%, what do you think it costs a firm with “only”

a B rating? 15%? More? Junk bond yields have simply gone ballistic. Firms which used

the credit market to access capital now are simply shut out. If they are a small public

company, they can go to what are known as PIPE hedge funds (Private Investment in

Public Equity) and sell equity at usurious rates (which is what Buffett does but on a larger

scale). But a small or medium-sized private company? It is a hard time to go looking for

money.

Left alone for the markets to work out, the economy of the US and the world

would be in a depression within two quarters and would need years to recover. Think

Japan.

Necessary but Not Sufficient

Now for the bad news. The Rescue Plan was necessary but not sufficient to fix the

crisis. There is going to have to be more heavy lifting, I am afraid. Let me offer a few

ideas about what possible actions might be taken in the future. I am not advocating these

actions, I am simply telling you what might happen. These are possible, because

authorities will do whatever they deem necessary to avoid a systemic economic

meltdown and a potential depression.

If you are a large investor or sovereign wealth fund which put money into banks

last year, you are down anywhere from 35-50% (unless you invested in Washington

Mutual, and then you are down 100%). You are unlikely to invest more in any financial

institution without some very real understanding of what is on the balance sheet of the

The Curve in the Road

10/4/2008 5

bank that is asking for your money. What the Paulson plan potentially does do is remove

the questionable debt. The bank may have to write down assets in order to sell the debt to

the government, but they end up with a transparent balance sheet with hopefully known

risks. Then they can go to the market and try and raise capital. Shareholders will get

diluted. Such is the way of the world.

Sidebar: taxpayers really must demand that someone like Bill Gross of PIMCO

and/or other savvy market specialists run this new government operation. He offered to

do it, and I think we should take him up on his offer. Taxpayer losses should be kept to a

minimum, and I believe someone like Gross would do his best to see that would be the

case. The point of this exercise is to restart the frozen credit markets, NOT to bail out

banks. Some banks may get bailed out in the process, but it should be at a cost to their

shareholders and management, not to the taxpayer.

I am asked, why can’t private money solve the problem? Because there is simply

not enough private money. Buffett offered to take 1% of the new government pool. If that

is all the largest pile of free money in the world can take, why does anyone think there is

enough private capital to take the other 99%? Insuring the mortgage bonds is not

sufficient, because there is not enough money to buy them in this market. When things

have sorted themselves out in a few years, I think the bonds can be insured and sold, and

likely at a profit if bought correctly. But we do not have the luxury of waiting a few

years.

Between the relaxation of the mark-to-market rules and removing ambiguously

priced loans from financial institutions at prices which allow the government pool to

make a small profit, if held for five years, that part (the lack of a known price) of the

problem can be solved. Banks can hopefully buy themselves time in which to work their

way out of the problems they created.

It is much like 1982, when every major US bank thought it was a good idea to

loan lots of money to Latin American countries. It was a most profitable business, right

up until the countries decided to default. Then every US bank was more than just

technically bankrupt. In a mark-to-market world, every large US bank would have

collapsed. It would have been the end of the world as we knew it.

What did they do? The Fed let the banks keep the loans on their books at face

value. Over time, they worked their way through the debt, making enough money to be

able to write down the loans. That was done simply to give the banks the ability to buy

time.

We are in a very similar situation. We have to buy some time in order for

financial institutions to heal.

Why the Government Had to Step In

The Curve in the Road

10/4/2008 6

I had a lot of readers write me very nice letters this week, starting out with how

much they like my letter, my insights, etc. Then they (mostly – but not all – and politely)

launched on me for backing the rescue plan. Many of you had much better ideas than

what was passed by Congress, which is not surprising.

I really do hate the idea of having to support a rescue plan. It goes against my

every instinct. But I also know that doing nothing would result in an economy which

would blow right through 10% unemployment within a few quarters, and take years to

recover. The stock markets and the savings of millions of retirees would be wiped out.

Home values would really go into a tailspin. Being right in theory is not worth seeing that

kind of devastation.

Herbert Hoover sat by and decided to let the market solve the problems of 1929.

He decided to run budget surpluses and ignore collapsing institutions. Combined with

disastrous Federal Reserve policy (raising rates in a recession) and Smoot Hawley (which

caused major trade wars and a slowdown in global trade), what should have been a

serious recession turned into the Great Depression and resulted in the conditions for

World War II.

The rescue plan does not address the need for the increased levels of capital

needed by banks. As noted above, it simply creates the conditions under which capital

might be raised. Banks have already raised $440 billion. They have written down $590

billion. Losses are estimated from a mere $1 trillion to as much as $2 trillion. About half

of those losses would be in banking institutions worldwide. That means anywhere from

$200 to $400 billion more must be raised in order for banks to get back to capital

adequacy. It is probably closer to the latter number.

Until banks are adequately capitalized, they are not going to be able to do normal

business lending. Further, large deposits are fleeing banks. Even with the new level of

$250,000 of FDIC insurance, there is $1.9 trillion in uninsured deposits. These are mostly

deposits of small to large businesses and financial institutions, which can leave a bank at

the push of a button.

Nouriel Roubini tells us that there are 800 billion dollars deposited in US banks

by foreign counterparties. Up until this week, if you were a foreign operation, would you

rather be in large money-center US banks or European banks? Tough choice, but on

balance you would pick the US. Then this week Ireland decided to simply insure every

deposit in Irish banks, no matter the size. Predictably, money started flowing from all

over Europe into Ireland. National banks and finance ministers are furious with Ireland.

However, Ireland may have no choice but to backstop its own depository

institutions to keep them from losing deposits and becoming insolvent from a bank run by

corporations acting in their own best interests. Belgium, The Netherlands, and

Luxembourg each took 49% of their respective parts of Fortis Bank in return for a

massive injection of capital, declaring the bank too big to fail – also wiping out a lot of

already diminished shareholder equity. Europe has its own quite serious problems.

The Curve in the Road

10/4/2008 7

But what if the various countries, one by one, decide to guarantee deposits in

order to protect their own banks? If you are an international corporation, especially if you

are outside the US, do you want your $10 million in Europe or the US if Europe

guarantees your deposits with no limit? Could we see silent runs on US banks?

I think it is about an even chance that the government will have to guarantee for a

period of time (say 6 months to a year) every bank deposit, regardless of size, in the US.

That is a staggering thought. The potential will be large for almost-insolvent

banks to pursue risky behavior to try and work their way through problems. If such a

policy is pursued, tight controls must be administered so risky banks do not offer high

CD rates in order to garner assets. The FDIC must closely monitor such activity. Perhaps

such guarantees should be for existing depositors and not new customers. Insolvent banks

and those on the edge must be shut down quickly in such an event, to prevent risky

behavior.

Unthinkable? I bet you there is a working committee of government and Fed

officials thinking about just that very thing and how to do it. It would be even more scary

if there is not one. We are in completely uncharted waters, and every contingency needs

to be thought through well in advance. We simply don’t need more last-minute Paulson

plans.

In the next few weeks and months, I think you can count on more extraordinary

actions by the Fed and Treasury to try and jump-start the credit markets. Actions which

were highly improbable a few months ago will be on the table. Will the Fed open its

balance sheet to non-banks? Possibly. If they can guarantee money markets, will there be

a scheme to insure commercial paper at some price? Not out of the question. Will

European governments take more equity in large European banks? Very likely. Will the

Fed and/or the Treasury invest even more capital in larger financial institutions? Given

that We the People now own 80% of AIG and 100% of Fannie and Freddie, it is certainly

within the realm of possibility that we will be the proud owners of even more private

institutions.

Again, this is not just a US issue. We will likely see similar actions in Europe and

some of the developing world. This is a worldwide crisis, and the response will be from

central banks all over the world.

Understand, I am not advocating these actions. I am simply trying to help you

understand what actions might be put into place by the various government of the world

in an effort to avoid systemic economic collapse.

All The King’s Horses

The reality is that the rescue plan does not fundamentally alter the US economic

landscape. There can be no doubt we are in a recession. I think it will be dated from the

The Curve in the Road

10/4/2008 8

beginning of the year, notwithstanding the odd 2

 

nd

quarter growth. The manufacturing

ISM was a dismal 43.5 (under 50 means a contracting US manufacturing industry). Such

a level is typically associated with recessions, as the chart below shows. Given the

financial crisis and the freefall in auto sales, this index is likely to fall further.

The “good news” is that the service portion of the economy is right at 50, which

means that at least that important area is not contracting.

Unemployment rose by 159,000, with nearly every sector affected. Almost

1,000,000 jobs have disappeared over the last 12 months, and it is likely that we will lose

another 1,000,000 jobs in the coming year. Since December, the ranks of the unemployed

have grown by 1.8 million, and those not in the labor force but wanting a job by 370,000.

Almost 3/4 of the increase in the unemployed have been job losers, with half the increase

from permanent job losers (not temporary layoffs). (The Liscio Report)

Next week we will explore the economic landscape in detail, but let me provide a

few thoughts. As I have said for a long time, we will be talking about deflation this time

next year. Recessions are by definition deflationary events. Given that we have had two

bubbles burst (housing and credit), there is even more potential for deflationary pressures.

Add into the mix the deleveraging process, which will take years to finally abate, and the

recent bout of price inflation caused by energy and food will pass, as demand destruction

for oil will hold oil prices in check.

As I have said for a long time, the next move of the Fed is likely to be a cut. We

are now close to such an action. A 1% Fed funds rate is again a real possibility. I am not

The Curve in the Road

10/4/2008 9

sure it will help as much as some market participants think, but I think it likely the Fed

will move before the end of the year, if not much sooner.

Europe and Japan are also probably in recession, and it is likely we are going to

see a worldwide global slowdown. It would be nice if the European Central Bank, the

Bank of England, and the Fed could coordinate a joint rate cut to signal that they are

working together on the problems. I would not want to be short the markets that day.

At the beginning of the year, I was predicting a small recession with a lengthy and

slow recovery period. I now think that the recession could be deeper than a 1%

contraction. I think we could see a rather lengthy recession. Quite simply, the credit crisis

has been allowed to spin out of control. That Congress almost failed to act is beyond

belief. Given the above circumstances, it is not out of the realm of possibility that a

recession lasts through the middle of 2009. As recessions go, that is a long time. But trust

me on this, it will pass. The recovery will be a slow Muddle Through affair, though. It

will be a few years before we are growing at a sustained 3%. Over the next few weeks,

we will look at what that means for earnings and the stock markets. Investors who utilize

a traditional 60% stocks, 40% bonds portfolio are not going to be pleased. We will look

at alternatives.

Stay tuned.

How Can I Be 59?

This has been a particularly hard letter to write, as I know it is rather gloomy, and

I wish had more encouraging news. I have been writing this letter for over eight years.

Every letter since the beginning of 2001 is in the archives, so my record is open for

inspection. I have no particular axe to grind. Since I basically help investors (in

conjunction with my partners) find investment managers and funds, we can adjust the

choice of funds and management ideas to suit the times, and frequently do make changes

in the mix. My goal in this letter is to help us all think about the economy and our

investments and to be as “right” as I possibly can. Sometimes, like today, that means not

being very upbeat. But it also means looking for ways to go with the tide rather than

against it. I actually hope I am wrong and the bulls are right. But that is not the way I see

it tonight.

Tomorrow is my birthday. The years seem to roll by at an ever accelerating pace.

(I had the reason this happens explained to me once. When you are 10, a year is 10% of

your life. When you are (sigh) 59, it is 1.6% of your life. It makes some sense.) It is hard

to believe I am 59. Maybe it is because I am around my kids so much, but I don’t feel that

old. Seven kids from 31 to 14 (plus assorted spouses and their friends) can do that. And

they are all coming to town to celebrate next weekend, so tomorrow will be a quiet day.

And Tiffani is already planning for a serious 60

 

th

birthday weekend next year.

Life has been good to me, for all its ups and downs. And I firmly believe that my

best years are ahead of me. I am simply having more fun than at any time in my life, with

The Curve in the Road

10/4/2008 10

more opportunities than I know what to do with. I am blessed with great business

partners. I have the best readers of any analyst anywhere. One million closest friends. I

am truly one of the world’s wealthiest men when it comes to friends and family, and at

the end of the day that is what counts.

Thanks for being part of my life. I plan on writing for a long time, so take care of

yourself so you can keep reading. And have a great week!

Your actually optimistic analyst,

John Mauldin

Welcome To Camp Obama

By INVESTOR’S BUSINESS DAILY | Posted Friday, October 03, 2008 4:20 PM PT

Election ‘08: Voters coast-to-coast are receiving e-mails from the Obama campaign encouraging them to sign up to learn pre-election agitation tactics at “Camp Obama.” Red kerchiefs, anyone?

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Read More: Election 2008

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When readers first alerted us to the camps, we thought it might be another hoax that migrated into inboxes. But it’s for real.

The unsolicited pitch goes like this: “Camp Obama attendees will receive real world organizing experience that will have a direct impact on this election. Graduates of Camp Obama will go on to become Deputy Field Organizers who will lead this campaign to victory in crucial battleground states around the country.”

The letter continues, “By participating in Camp Obama you’ll get the kind of experience that Barack got as a community organizer on the South Side of Chicago, where he learned that real change happens from the bottom up.”

While the letter neglects to identify the source of that “experience,” a slide on a camp blog linked to the Obama Web site offers a clue. Underneath a “Welcome to Camp Obama” banner, a trainer at Obama headquarters in Chicago is seen speaking next to a wipe board with the words “Saul Alinsky” scrawled across it.

Alinsky is the late Chicago socialist and street agitator who is considered the father of community organizing.

Another slide of a camp trainer identified as Mike Kruglik is equally telling. Kruglik happens to be the Alinsky disciple who first taught Obama hardball organizing tactics on the South Side. He was Obama’s boss in the ’80s. Kruglik now works for the Chicago-based Gamaliel Foundation, which trains and deploys radicals across the country.

Kruglik once declared Obama “the undisputed master of agitation,” according to David Freddoso, author of the best-seller “The Case Against Barack Obama.”

Obama learned well from the master agitator. Alinsky taught future radicals that bad things are often done for the right reasons, love without power is sentimental mush, power must be taken, and all change comes about as a result of threat and pressure.

Obama calls his Alinskyite experience “the best education I ever had.”

Now he’s passing it on to his groupies. He recently told supporters in Nevada, a state that will be hotly contested, to sharpen their elbows in the final lap of the race. Confront Republicans, he said, and “get in their faces.”

“Be absolutely ruthless,” adds Camp Obama director Jocelyn Woodards, who leads the intensive two-day training course for campers in Chicago.

In the Alinsky model, organizing is code for agitating. For revolution. He had no patience for liberals who merely talked of change.

“Liberals protest,” he wrote in “Rules for Radicals,” while “radicals rebel.” Liberals become “indignant,” while “radicals become fighting mad and go into action.”

“Liberals give and take oral arguments,” Alinsky added. “Radicals give and take the hard, dirty, bitter way of life.”

Alinsky’s paragon of radicalism was Satan, to whom he dedicated the first edition of “Rules”: “Lest we forget at least an over-the-shoulder acknowledgment to the very first radical known to man who rebelled against the establishment and did it so effectively that he at least won his own kingdom — Lucifer.”

Dirty street fighting is at the heart of Obama’s organizing. While he stands above the fray, his minions at ACORN are threatening, intimidating, confronting and even committing voter fraud. This is Alinsky’s end-justifies-means morality in action. Whatever it takes to win the revolution.

Obama needs more agitators, so he’s set up these camps to train them.

ACORN has the minority communities covered, while the camps are churning out mostly coed organizers. The Chicago program has already trained some 2,000 agitators to go back to their college campuses and reproduce more Obama clones.

No campaign has been successful at mobilizing students to vote en masse. But Obama hired the founder of MTV’s Rock the Vote to organize students and train them to use Alinsky tactics on campuses in battleground states.

They have been training these students since the primaries. They in turn are registering fellow students in droves to vote, while creating massive phone banks to help get out the vote on Election Day. Meanwhile, ACORN is registering thousands of minorities to vote in key states.

Such potential new voters don’t show up in the national polls of “likely voters,” which show a relatively tight race, because they’ve never voted and don’t show on past rolls.

If they turn out at the polls on Nov. 4, it could translate into a landslide for Obama.

If he can garner better than 50% of the popular vote, he can claim a mandate for his radical agenda.

What’s more, all these first-time minority and student voters wouldn’t vote for just Obama. They’d also more than likely vote down-ballot for other Democrats, padding their majorities in Congress.

If Democrats score supermajorities, filibuster-proofing the Senate, Obama could get most of his agenda rammed through in the first 100 days, surely in the first two years, before Americans could get a chance to check Democrat power in the midterm election of 2010.

How much damage could they do? Well, look at how much damage the Clintonistas did. We’re now seeing the financial fruits of their social experiment to apply affirmative action to the lending business. Obama plans to conduct a far more radical social experiment.

Few during this long campaign have wanted to talk about Obama’s days as a community organizer or his ties to radicals, because they didn’t want to raise the S word. Well, guess what? The avoidance has given him license to apply his organizing skills on a mass scale.

It made the difference in the primaries when he beat the Clinton machine, and it may now make the difference in the general election.

Not calling attention to Alinsky and the other socialists behind the Obama movement has even allowed creation of camps to indoctrinate American youth.

If John McCain hopes to win, he’ll have to act as ruthlessly as Obama’s campers.

He can start by exposing for voters the socialist underpinnings of community organizing.

 

A Flawed But Necessary Rescue

By INVESTOR’S BUSINESS DAILY | Posted Friday, October 03, 2008 4:20 PM PT

Like the metastasizing federal tax code, the rescue bill swelled from three pages and $700 billion in its first incarnation to more than $800 billion and 451 pages in just a matter of days.

Special interests that have nothing to do with the rescuing of the financial system are today’s happy beneficiaries of more than $100 billion in tax breaks — or “sweeteners,” as the plan’s negotiators called them.

But, in the end, we agreed even with House Democratic Rep. John Lewis of Georgia, who decided that “the cost of doing nothing is greater than the cost of doing something.”

And just what did this rescue package contain — in addition to money for our distressed financial system, that is?

Well, the makers of wooden arrows for children came out as big winners in the larger package, as that small industry got $2 million in tax benefits.

Meanwhile, auto racetrack owners sucked a $100 million tax break into their intake manifold and domestic wool fabric producers spun $148 million in tax relief.

As should be expected, companies developing politically correct solar and wind power were heavy favorites. They will get roughly $15 billion in tax breaks, 10 times as much as businesses dealing in fossil fuels — even though the simplest way to ease our current energy crisis is by drilling for the billions of barrels of oil we have here in the U.S. but which Congress has kept out of bounds.

An additional $8 billion in relief will go to the victims of natural disasters.

It’s a shame that the recovery legislation was weighted down with extras, particularly that $10 million credit that is intended to help businesses defray the costs of storing the bicycles their employees pedal to work, and the nearly $500 million in tax breaks for movie companies that produce films here in the U.S.

Congress should have had the courage to pass a quick and clean package, not a bill that includes an obscure and unnecessary provision for controlling carbon emissions.

It essentially required bribery to get some House members turned around (though others no doubt changed their votes to “yea” because they felt it was better to approve it before Capitol Hill “leaders” came back with an even worse bill laden with more pork).

The disgraceful way this legislation weaved its way through the process is a measure of how corrupt U.S. lawmakers have become. This Congress has earned its all-time low approval rating.

All that said, in the end Congress did what it had to do in the main part of the plan. The Senate approved the regrettably imperfect bill by a 74-25 vote Wednesday night, with the House following Friday afternoon, 263-171. Americans’ confidence in the financial system needed to be restored, and this is where that starts.

It would have been dangerous for Washington to allow the flow of capital, threatened by the troubles of America’s financial giants, to shut down and slam the brakes on the U.S. economy.

There’s roughly $70 trillion or so in total global investment capital available, by some estimates, but it does nothing if it is not put to use and simply sits idly. If global capital markets had frozen up, we would, at best, have been trapped in economic stagnation; at worst, we would have been consumed by a deep downturn.

Sclerotic capital markets send negative waves across an economy like water ripples away from a rock tossed into a lake.

Companies across the land, many of them large enterprises with thousands of employees, would wither without access to the money market, where they go to finance their daily operations, including inventories and payrolls.

Lenders needed to be assured that the market they operate in isn’t collapsing — and that the loans they routinely make wouldn’t go bad.

Sometimes in policymaking, a half loaf is better than none. That may be the case now. Americans got the half loaf they needed but with a lot of moldy rolls thrown in that will be hard to chew.

We’re grateful the rescue package was passed on Friday — before Congress could come back for another vote cluttered with even more rubbish.

 

Is This Slump Just Like 1929? No — Not Yet

By ROBERT SAMUELSON | Posted Friday, October 03, 2008 4:30 PM PT

Watching the slipping economy and Congress’ epic debate over the unprecedented $700 billion financial bailout, it is impossible not to wonder whether this is 1929 all over again.

Even sophisticated observers invoke the comparison. Martin Wolf, the chief economics commentator for the Financial Times, began a recent column: “It is just over three score years and 10 since the (end of the) Great Depression.” What’s frightening is the prospect that things are slipping out of control. Panic — political as well as economic — is the enemy.

There are parallels between then and now, but there are also differences. Now as then, Americans borrowed heavily before the crisis — in the 1920s for cars, radios and appliances; in the 2000s, for homes or against inflated home values.

Now as then, the crisis caught people by surprise and is global in scope. But unlike then, the federal government is a huge part of the economy (20% vs. 3% in 1929) and its spending provides greater stabilization.

Unlike then, government has moved quickly, if clumsily, to contain the crisis.

We need to remind ourselves that economic slumps — though wrenching and disillusioning for millions — rarely become national tragedies. Since the late 1940s, the United States has suffered 10 recessions.

On average, they’ve lasted 10 months and involved peak monthly unemployment of 7.6%; the worst (those of 1973-75 and 1981-82) both lasted 16 months and had peak unemployment of 9% and 10.8%, respectively. We are almost certainly in a recession now; but joblessness, 6.1% in September, would have to rise spectacularly to match post-World War II highs.

The stock market tells a similar story.

There have been 10 previous postwar bear markets, defined as declines of at least 20% in the Standard & Poor’s 500 index. The average drop was 31.5%; those of 1973-74 and 2000-02 were nearly 50%. By contrast, the S&P’s low point so far (Friday, Oct. 3) was 30% below the October 2007 peak.

The Great Depression that followed the stock market’s collapse in October 1929 was a different beast. By the low point in July 1932, stocks had dropped almost 90% from their peak.

The accompanying devastation — bankruptcies, foreclosures, bread lines — lasted a decade. Even in 1940, unemployment was almost 15%. Unlike postwar recessions, the Depression submitted neither to self-correcting market mechanisms or government policies. Why?

Capitalism’s inherent instabilities were blamed — fairly, up to a point. Over-borrowing, over-investment and speculation chronically govern business cycles.

But the real culprit in causing the Depression’s depth and duration was the Federal Reserve. It unwittingly transformed an ordinary, if harsh, recession into a calamity by permitting a banking collapse and a disastrous drop in the money supply.

From 1929 to 1933, two-fifths of the nation’s banks failed; depositor runs were endemic; the money supply (basically, cash plus bank deposits) declined by more than a third. People lost bank accounts; credit for companies and consumers shriveled.

Economic retrenchment fed on itself and overwhelmed the normal mechanisms of recovery. These included: surplus inventories being sold, so companies could reorder; strong firms expanding as weak competitors disappeared; high debts being repaid so borrowers could resume normal spending.

What’s occurring now is a frantic effort to prevent a modern financial disintegration that deepens the economic downturn.

It’s said that the $700 billion bailout will rescue banks and other financial institutions by having the Treasury buy their suspect mortgage-backed securities.

In reality, the Treasury is also bailing out the Fed, which has already — through various actions — lent roughly $1 trillion.

The increase in federal deposit insurance from $100,000 to $250,000 aims to discourage panicky bank withdrawals. In Europe, governments have taken similar steps.

The cause of the Fed’s timidity in the 1930s remains a matter of dispute. Some scholars suggest a futile defense of the gold standard; others blame the flawed “real bills” doctrine that limited Fed lending to besieged banks. Either way, Fed chief Ben Bernanke, a scholar of the Depression, understands the error. The Fed’s lending and the bailout aim to avoid a ruinous credit contraction.

Today, the housing glut endures. Cautious consumers have curbed spending. Banks and others will suffer more losses.

But these are all normal signs of recession.

Our real vulnerability is a highly complex and global financial system that might resist rescue and revival. The Great Depression resulted from a weak economy and perverse government policies.

If we can avoid a comparable blunder, the great drama of these recent weeks may prove blessedly misleading.

© 2008 Washington Post Writers Group

A Replay Of 1929? Don’t Count On It

By INVESTOR’S BUSINESS DAILY | Posted Friday, October 03, 2008 4:20 PM PT

Financial History: Those who don’t know history are destined to repeat its serious mistakes. Today some have asked if we could have another 1929-like depression. No, it should not happen.

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IBD Series: After The Rescue: Challenges Ahead

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Those who don’t know history are destined to repeat its serious mistakes. Today some have questioned whether we could have another 1929-style Depression. The answer is no — at least, it shouldn’t happen.

Then we had over 25% unemployment; now it’s 6% and could move somewhat higher, which is typical for economic corrections. Then, by 1934 about one-half of mortgages were in default, today it is only 6%. Nearly 94% of homeowners are still making their monthly payments.

View larger image

America is far bigger today, more diversified, productive, innovative and resilient and the government’s rescue package will help stabilize our banking credit system and economy for the benefit of all Americans. The price of oil and other commodities has topped, so interest rates can and should be lowered, helping all consumers.

Understanding history now is absolutely vital: How did we get where we are? What was the real cause, what were the true reasons behind our current subprime real estate loan mess — and not what politicians are now attempting to falsely claim? Finally, what are the most serious threats America will face in the next five years?

The reason we shouldn’t have another 1929 is our Nasdaq composite (the stock index that includes America’s modern-day entrepreneurial leaders) already had its 1929-like break in the three years from 2000 through 2002. Since then it put in a strong five-year recovery up to last November. That recovery was due to the broad-based, and highly successful, tax cuts pushed through by President Bush in 2001 and 2003. We are now in the midst of a normal cyclical market correction, with the economy having created 9 million jobs since the 2003 tax cuts.

The Nasdaq’s price action since the 1990s, like clockwork, closely parallels, tracks, and eerily replicates the Dow Jones Industrials’ wild speculative run-up to its 1929 bubble peak, the ensuing three-year, 88% collapse to the Depression lows in June 1932, followed by the recovery run-up to 1937 and the ensuing sharp correction. Based on historical data, today’s market is likely to be a repeat of 1938 — not 1929.

To show what we mean, the accompanying chart overlays the Nasdaq index from the early 1990s to October 2008 with the Dow industrials chart from the early 1920s to the end of 1942.

Maybe you’re surprised to see these two indexes seem so remarkably similar — both their up cycles and their down cycles. The reason for this is simple: while technology continually changes, human nature remains the same. The stock market is human nature on daily display, and history continually repeats itself.

Psychologically, the roaring 1920s were just like our “anything goes 1990s.” America had just won World War I (the war to end all wars). It was the auto and airplane age, the radio was invented and speakeasies boomed.

Likewise, in the 1990s we had just won the Cold War when the 70-year-old Soviet Union disintegrated onto the ash heap of history as Ronald Reagan’s successful policy of “we win, they lose” replaced containment and the nuclear doctrine of Mutual Assured Destruction — dubbed “MAD.”

The “peace dividend” resulting from sharp cuts in defense spending helped Bill Clinton achieve a balanced budget. It was the new age of the Internet, biotech and high tech stocks. For nearly five years, prices on the Nasdaq soared. Indeed, to its peak the Nasdaq increased 2 1/2 times what the Dow Jones industrials did during its 1920s climax run.

But those astronomical Nasdaq price gains culminated in the Clinton stock market bubble, which burst in early 2000. Within the space of months, an estimated $8 trillion in U.S. stock market wealth was erased.

So how did we get where we are now? What was the real true cause of the current subprime real estate debacle that endangered not only our entire financial system, but put so many lower income people out of their homes and forced the government to an emergency rescue package?

Every American should know the truth about who engineered the rules for this extraordinary mess so that we all learn a valuable lesson. We need to be much smarter the next time around.

In 1977, President Carter and a Democrat Congress created the Community Reinvestment Act mandating that banks must meet the credit needs of everyone in the banks’ community, including uncreditworthy borrowers. It was done for a good social purpose and had the greatest intentions — expanding home ownership. And, through the 1980s and into the 1990s at least, it seemed to work.

However in 1995, President Bill Clinton imposed more and stronger regulations and performance tests. These coerced banks into significantly increasing their loans to low-income borrowers in economically-troubled communities, or face possible fines and expansion restrictions.

These new rules encouraged banks to bundle their risky subprime loans together with prime loans and re-sell them in packages to other financial institutions, thereby freeing the original lenders from any further risk. Thanks to the new rules and oversight from the CRA, Fannie Mae and Freddie Mac got involved in a big way, buying literally trillions of dollars of the questionable loans from banks and feeding the dangerous cycle that had begun.

Eventually, it turned into a kind of pyramid scheme that overwhelmed some lending organizations when housing prices softened in late 2006 and 2007.

So what’s the big lesson to be learned here by the public? That this financial crisis was the result of yet another Big Government program that had great intentions but created devastating unintended consequences that hurt millions of people.

It was not the fault of African American groups, which naturally want to help their people. Nor was it the fault of America’s free enterprise system, or a lack of enough regulation. No, it was Big Government once again trying to run a private industry.

You can’t take one dollar and loan it 50 times. Watch out when Big Government spenders tell you they can run our entire medical industry, give you far better care and save you lots of money.

On Tuesday we look at national security challenges.

 

How the massive rescue package will affect you

Some will benefit from tax breaks, but impact on markets will take time

ANALYSIS

By John W. Schoen

Senior producer

MSNBC

updated 3:35 p.m. ET, Fri., Oct. 3, 2008

John W. Schoen Senior producer • Profile • E-mail

Four days after the Bush administration’s financial rescue package ran off the rails in Congress, the House of Representatives gave the plan a second look and — after loading it up with a bunch of goodies — liked what they saw.

The plan, passed by the House and quickly signed into law by President Bush Friday, is supposed to jump-start the crippled credit markets and get the money flowing normally again to consumers, businesses, corporations and governments. But it remains to be seen whether it will work.

Here’s a look at what may — or may not — happen next.

Are my taxes going up to pay for this?
Over the long term nobody really knows, but in the short run, your taxes may actually go down. To get the bill passed, Congress loaded it up with more than $100 billion in tax breaks and other special provisions.

The biggest was a fix for the alternative minimum tax, a measure originally designed to make sure rich people paid their fair share. But over the years, millions of middle-income taxpayers have been mauled by the AMT beast. Many of those people will catch a break under the bailout bill.

Over the long run, though, those tax breaks will have to be made up with tax increases or spending reductions elsewhere. For decades, the rest of the world has been happy to loan its hard-earned savings to Uncle Sam to help our government fund its deficit spending. Those days are rapidly coming to a close.

Taxpayers also could be on the hook for some — but probably not all — of the $700 billion being used to buy up bad mortgage-backed investments, which the Treasury calls “troubled assets.”

How, exactly, is this going to work?
That’s still the $700 billion question. What Congress has done is to set up what amounts to a government-run hedge fund to buy up troubled securities that nobody else will buy because it is virtually impossible to figure out what they’re worth.

The reason is that no one can predict how many more homeowners will default on the mortgages backing up these investments. Once they do default, it’s even harder to predict how much the house backing the mortgage is worth.

Under the plan, the Treasury will buy these securities and hold them until credit and housing markets settle down, hoping that their value will increase. If so, Uncle Sam will make money. But no one has explained how the government will come up with the right price. Treasury officials have deflected any questions about what they call “implementation issues.”

In theory, the program will jump-start a market for these “trouble assets,” and private investors will then finish the job when they see what Treasury pays for the paper.

I keep hearing that the credit markets are “frozen.” But when I stick my ATM card in the machine, money still comes out. What’s the big deal? What do I care if these big Wall Street firms lose money?

The problem is that for better or worse, the global economy runs on credit. And that credit is drying up. It’s already harder to get a mortgage or a loan to buy a new car than it was even six months ago.

The credit drought has spread to the multitrillion-dollar pool of money that businesses use to fund their operations. The problem has begun to hit big companies such as General Electric, which recently had to pay 10 percent interest on what amounted to a private loan from Warren Buffett.

If that problem continues to spread, businesses will have to start laying off people faster than they already are. (Msnbc.com is jointly owned by Microsoft and GE’s NBC Universal unit.)

Will this keep the economy from getting worse?
If it works, it will prevent a deeper recession than otherwise would be expected. But it should not be expected to boost economic growth, according to the White House.

“No one should be overpromising what this bill will do,” White House spokesman Tony Fratto said Friday. “It’s not been sold as giving a boost to the economy — it’s to avoid a crisis.”

It could be months before the impact of this plan would be felt. Though the stock market can — and does — turn on a dime, the problem in the credit market is a lack of confidence. That takes longer to fix.

In the meantime, there are clear signs that the economy is still on a downward path. Friday’s employment report showed a ninth straight month of job losses. While the government’s official jobless rate held steady at 6.1 percent, that counts only people who are actively job hunting. If you count people who have given up looking, the so-called “augmented” jobless rate rose to 9.1 percent in September from 8.9 percent in August.

Consumers are nervous and are cutting back sharply on spending. Roughly two-thirds of the economy is based on consumer spending; if that spending slows further, so will the economy.

What about home prices?
In theory, repairing the credit markets could lower mortgage rates and make loans more available for home buyers. That boost in demand could help pull the housing market out of its deepest recession since the 1930s.

But it won’t help reduce the backlog of unsold homes — especially foreclosed, bank-owned homes that are being dumped on the market at fire-sale prices. Every time a bank sells a house cheaply to get it off their books, that price becomes the neighborhood’s new market rate.

It’s also harder for a lender to extend a loan for willing buyers in neighborhoods where home prices are still falling. That means buyers have to put up more money, reducing the number of eligible buyers.

Why isn’t more being done to stop foreclosures?
Good question. Many of the House Democrats who balked at approving the plan last week cited the lack of foreclosure relief as their biggest problem voting for the bill. Congress has been debating this issue for more than a year.

Various plans have been floated, but opponents insist that home buyers who borrowed more than they could afford should not be “bailed out” by the government. That’s one reason supporters of this emergency plan are calling it a “rescue” — not a “bailout” — of the financial system.

The debate over how to stop foreclosures will likely continue, though. Lenders say they’ve been working with homeowners to work out some of the worst mortgages written during the easy-money lending frenzy. But it’s been slow going.

Democrats have argued for more than a year that these voluntary efforts won’t fix the problem. Some want to change the bankruptcy law to let judges set new mortgage terms that will keep people in their homes. The idea came up again last week, but was shot down once more. If judges can cut payments on a mortgage, lenders say they’ll have to charge more for all mortgages to make up for that new risk.

Bottom line: Is all this going to work?
No one knows. Nothing like this has been done before — certainly not on this scale.

 

 

Networks nervous over election night exit polls

Polling place surveys frequently overstated Obama vote during primaries

updated 3:10 p.m. ET, Fri., Oct. 3, 2008

NEW YORK – Barack Obama’s tendency through the Democratic primaries to perform better in exit polls than he actually does at the ballot box has some media organizations nervous heading into Election Night.

Television networks want to avoid having their performance become an issue for the third straight presidential election. Their political experts hope that experience gained during the primaries will help things run smoothly Nov. 4.

ABC, CBS, NBC, CNN, Fox News Channel and The Associated Press pool resources to conduct exit polls in select precincts, hoping to glean information about why people vote the way they do and to help predict a winner or loser. A combination of actual vote counts and exit polls is generally used to “call” a state for one candidate or another.

Exit polls frequently overstated Obama’s vote during the primaries by as much as 3 percentage points.

“We’re concerned about it, but not, ‘Oh, my god, the exit polls are going to be wrong,”’ said NBC Political director Chuck Todd. “We’re aware it’s an issue and we’re doing everything we can to correct it during our survey work.” (Msnbc.com is a joint venture between NBC and Microsoft.)

Well-educated and young voters are more likely to agree to fill out an exit-poll survey, and both these groups have tended to favor Obama, the experts said.

Enthusiastic voters are also more likely to seek out pollsters, or at least not go out of their way to avoid them. That was true about Obama during the primaries, just as it was for Republican Pat Buchanan during the 1992 New Hampshire primary, said Kathleen Frankovic, CBS News director of surveys.

Danger of calling the race too soon
It was the exit polls’ overstatement of John Kerry’s support in 2004 that caused problems for the networks, particularly when the first wave of results were leaked on the Web. That led to a “quarantine room” reform that will be in place this year; the people with access to poll results are locked away until at least 5 p.m. EST, giving them time to check for any problems and keeping the early numbers from conveying false information and possibly affecting turnout.

The problems were more serious in 2000, when networks prematurely “called” Florida, and thus the election, for George Bush. It led to a congressional investigation into their practices.

For the Obama-McCain contest, there’s concern about whether some voters will say they voted for Obama but, for racial reasons, actually didn’t.

Frankovic said this was a real issue for pollsters years ago, but studies show it has virtually gone away. The false reporting was more pronounced when voters were actually interviewed by pollsters, but the current exit poll is a paper survey that voters fill out in private. It was only in the Northeast that Todd said he saw false reporting problems during the primaries.

A presidential election with a black man leading the ticket is uncharted territory for the United States, however.

Who talks to pollsters?
In general, Republicans tend to be less enthusiastic than Democrats about taking exit polls. An unknown this season will be whether resentment toward the media fomented by John McCain’s campaign will make his supporters even less willing to “help” them by taking a survey.

The smallest of factors can play a role in the makeup of a poll; some older voters, for instance, are uncomfortable dealing with young pollsters, and are turned off if they’re standing near partisan demonstrators. News organizations this week sued the state of Minnesota to block a state law that would keep pollsters more than 100 feet from a polling place.

Simply knowing all of this will help the news organizations be ready, the experts said.

“I wouldn’t overstate the concerns,” said Dan Merkle, decision-desk director for ABC News. “They are the kinds of things we’ve seen before with different elections and different candidates.”

Kathleen Carroll, executive editor of The Associated Press, said she’s aware of the issues but isn’t worried about the Election Night performance. In states where a race is close, the AP relies on vote counts to pick a winner, she said.

“The AP has never run out and called a close race based on exit polls,” Carroll said. Where they can be used to make a call is when the exit polls confirm pre-election polls in contests that are lopsided, she said.

 

Bush signs bailout after House votes yes

By David M. Herszenhorn

Published: October 3, 2008

WASHINGTON: The House of Representatives gave final approval on Friday to the $700 billion bailout for the financial system, reversing course to authorize what may be the most expensive government intervention in history.

At 1:21 p.m., applause and cheers echoed through the House chamber as the number of “aye” votes crossed the threshold needed for passage with just seconds remaining in the official 15-minute voting period. The vote was 263 to 171.

And in a sign of the urgency surrounding the package, congressional staff rushed the newly printed legislation into a news conference where Democratic leaders gathered after the vote and Speaker Nancy Pelosi, Democrat of California, signed it, at exactly 2 p.m.

Within an hour, the legislation had been conveyed to the White House and signed by President George W. Bush. Standing in the Rose Garden shortly before signing the document, the president thanked congressional leaders of both parties by name and said they had achieved something “essential to helping America’s economy weather the financial crisis.”

Earlier, Pelosi said the measure was essential to “begin to shape the financial stability of our country and the economic security of our people.”

Representative John Boehner of Ohio, the Republican minority leader, had urged passage by warning that “if we do nothing, this crisis is likely to worsen and to put us into an economic slump like most of us have never seen.”

Most Democrats favored the bill (172 yeas to 63 nays), while a slighter majority of Republicans voted against (91 yeas to 108 nays). Every member of the House voted. (There is one vacancy, created by the recent death of Stephanie Tubbs Jones, a Democrat of Ohio.)

A significant number of Republicans changed their votes from last Monday, when only 65 voted in favor. Bush spoke to “about three dozen” House members this week to try to persuade them to switch from “no” to “yes,” the White House spokesman Tony Fratto said.

Another kind of persuasion surrounded the Senate deliberations of the bill. A portfolio of popular tax provisions was added before the Senate voted in favor of the program on Wednesday night by 74 to 25.

Treasury Secretary Henry Paulson Jr. said agency workers were already working on details to put the rescue plan into effect, so that no time will be lost now that the president had signed the legislation. Paulson called the House action “a vote to protect the American people — and their jobs.”

Paulson, who appeared with Bush in the Rose Garden, was asked how he felt now that the rescue plan has cleared Congress.

“Better,” Paulson replied.

Financial markets, already weighed down by another round of bleak economic data, including a report showing 159,000 jobs were lost in September, had a mixed response to the House action. Ahead of the vote, the Dow was up about 290 points, but it later sagged, hovering around 100 by 2 p.m., then dipped briefly into negative territory before climing back.

After the remarkable defeat of the bailout package on Monday, congressional leaders took no chances on Friday. Democrats had said they would not bring the bill back to the floor unless they were certain of victory.

The revolt earlier this week by the House’s rank and file was quelled both by fears of a global economic meltdown, and by old-fashioned political inducements added to the deal by the Senate.

And just to be sure, the leaders had a backup plan, giving them the option to interrupt the proceedings and debate an increase in unemployment benefits, so that they could round up additional votes. In the end, it was not needed.

Many lawmakers who changed sides, said they had agonized over the decision amid a torrent of calls and e-mail messages from constituents, and several cited a provision added by the Senate increasing the amount of savings insured by the U.S. government to $250,000 an account from $100,000.

Several Democrats in the congressional Black Caucus said they were persuaded to support the bill by Senator Barack Obama, the party’s presidential nominee. But many lawmakers said they were motivated most by fears of economic calamity.

“Nobody in East Tennessee hates the fact more than me that I am going to vote ‘yes’ today after voting ‘no’ on Monday,” Representative Zach Wamp, a Republican, said in a speech on the House floor.

“Monday I cast a blue-collar vote for the American people,” he said. “Today I am going to cast a red, white and blue-collar vote with my hand over my heart for this country, because things are really bad and we don’t have any choice. We’re out of choices and our backs are up against the wall.”

Friday’s action capped an extraordinary two-week dénouement to the 110th Congress. Lawmakers, eager to get home for the fall campaign season, had intended to wrap up by adopting a budget bill to finance government operations through early March.

Instead, they found themselves still in Washington just five weeks before Election Day, facing the most important vote of the year — the most important vote of their lives, many lawmakers said — and under extreme pressure by the White House, the presidential nominees and congressional leaders of both parties to make a quick decision.

On Monday, they balked, defeating the bailout package by 228 to 205 and sending the Dow into a 777-point decline.

Supporters said the bailout was needed to prevent economic collapse; opponents said it was hasty, ill-conceived and risked too much taxpayer money to help Wall Street tycoons, while providing no guarantees of success. In the Senate, lawmakers who opposed the plan on Wednesday warned that it still did not address the root problems in the American financial system, including lax regulation.

The rescue plan allows the Treasury to buy troubled debt from financial firms in an effort to ease a deepening credit crisis that is choking off business and consumer loans, the lifeblood of the global economy, and contributing to a string of bank failures in the United States and Europe. The hope is that clearing the balance sheets of bad debt will keep credit flowing and prevent normal economic activity from stalling

Whether it succeeds or fails, elected officials and business leaders alike said it stands to fundamentally alter the relationship between government and the private markets perhaps in ways that are not immediately clear.

But it was a hollow victory for the administration. After long favoring a hands-off approach and relentlessly pursuing deregulation, the administration found itself interceding repeatedly in the private market this year to avert one calamity after another. And finally after it proposed perhaps the biggest intervention in history, Bush found himself abandoned by fellow Republicans in the House.

After the House rejected the plan, the Senate stepped in, and attached a $150.5 billion package of popular provisions, including tax breaks for the production and use of renewable energy and protection for millions of American families from paying the alternative minimum tax, which was initially aimed at the wealthy.

The Senate and the House had been fighting all year over the energy tax provisions, called “extenders” because they perpetuate current law. The energy package provided a ready bundle of goodies that the Senate had been dangling to win over fiscal conservatives who had opposed the Senate version because it did not fully offset the tax breaks with spending cuts or other tax increases.

The approval of the bailout plan came 13 days after the administration put forward a three-page proposal that would have given the Treasury secretary unfettered authority to run the $700 billion effort, in what Pelosi called “czarlike powers.”

Tense negotiations over eight days — including an extraordinary and contentious meeting at the White House between Bush, top lawmakers and the two presidential candidates, Senator John McCain and Obama — produced a compromise that all sides said they could support, if unenthusiastically.

From Arizona, McCain commended the House on Friday for passing the bailout bill, but said further action was needed to help the U.S. economy, Reuters reported from Flagstaff. “This rescue bill isn’t perfect,” McCain said. “It’s an outrage that it’s even necessary.” “Our economy is still hurting, hurting badly. Further action is needed and it shouldn’t take a crisis to get this country to act.”

The final agreement called for the $700 billion to be disbursed in parts: $250 billion at first, to get the program started, followed by $100 billion at the discretion of Bush and the remaining $350 billion upon request of the Treasury with Congress empowered to block the last installment by acting within 15 days.

It is impossible to predict the final cost of the bailout but officials insist it will be far less than $700 billion. Because the Treasury will purchase and then resell assets, potentially at a higher price, there is a chance the program will break even or perhaps turn a profit.

The deal provides for tight oversight by two boards, including an independent congressional panel. And requires the government to use its status as an large-scale owner of distressed, mortgage-backed securities to take more aggressive steps to prevent foreclosures

The bill also seeks to limit the pay of executives of some companies that sell bad debt to the government, including restrictions on so-called “golden parachute” retirement plans.

It also provides several taxpayer protections, including a mechanism for the government to take an equity stake, in the form of stock warrants, in some of the firms that seek government help, which will give taxpayers a chance to make money should the companies profit in the months and years ahead.

And, if the rescue plan has lost money after five years, the bill requires the president to submit a plan to Congress for recouping the losses from the financial industry, perhaps through fees or a tax on securities transactions.

Carl Hulse and Robert Pear contributed reporting 

Wells Fargo to buy Wachovia

Wachovia’s chief executive Robert Steel believes that the deal would enable the bank to remain intact and preserve the value of an integrated company without government support. (Paul Sakuma/The Associated Press) [

By Eric Dash

Published: October 3, 2008

NEW YORK: In a stunning reversal, Wachovia said Friday that it planned to be acquired by a rival bank, Wells Fargo, for about $15.1 billion in stock.

The announcement came four days after Citigroup believed that it had cemented a deal with Wachovia to buy most of its banking operations for $1 a share, or $2.2 billion, in a deal brokered by federal regulators. With Wachovia on the brink of collapse, the government agreed to cover any losses above $42 billion, an indication of the urgency of regulators to get a deal done.

But Wachovia has now apparently rejected Citigroup in favor of Wells Fargo in a deal that calls for Wells Fargo to buy all of Wachovia for $7 a share and requires no assistance from the federal government. Wachovia customer deposits would be protected in both deals.

Still, the agreement requires the approval of Wachovia shareholders and regulators. The Federal Deposit Insurance Corp., which brokered the Citigroup-Wachovia deal, said Friday that it “stands behind its previously announced agreement with Citigroup.”

Officials from the Federal Reserve, the Treasury Department and the Office of the Comptroller of the Currency were all involved in original Citigroup-Wachovia deal. It is unclear how they will respond.

Citigroup executives learned that its deal was being scuttled on Friday morning after Wachovia’s advisers stopped taking their telephone calls, said people briefed on the transaction. The move left Citigroup executives fuming, and they are weighing their legal options.

Citigroup said the Wells-Wachovia deal was “in clear breach” of an exclusivity agreement between Citigroup and Wachovia. Citigroup demanded that Wachovia and Wells Fargo halt their proposed transaction and that Wachovia follow through with the original deal.

If Citigroup decides to take legal action, its case would have some striking parallels to the landmark case between Pennzoil and Texaco in the mid-1980s. The two sides engaged in a nasty, long-running legal battle when the Texaco oil company swooped in with an offer for Getty Oil after it appeared to have landed in Pennzoil’s arms. That case led to more than $10.5 billion in damages.

In Friday afternoon trading in New York, shares of Wells Fargo were up $3.21, or 9.1 percent, at $38.37. Citigroup shares were down $1.91, or 8.5 percent, at $20.59. Wachovia shares were up $3.03, or 77.5 percent, at $6.94.

Under the agreement that has been approved by directors of each company, Wachovia shareholders would receive 0.1991 shares of Wells Fargo stock in exchange for each share of Wachovia stock. The transaction, based on Wells Fargo’s closing stock price of $35.16 on Thursday, is valued at $7 a share. To pay for the deal, Wells Fargo will have to raise up to $20 billion in capital by issuing new common shares.

Wells Fargo and Wachovia executives asserted that their new deal was better for shareholders and taxpayers. “This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support,” said Wachovia’s chief executive, Robert Steel.

Under the Citigroup deal, Wachovia would retain parts of its wealth management businesses, including the Evergreen and Wachovia Securities franchises, and Citigroup would receive the banking subsidiaries. In addition, the Federal Deposit Insurance Corp. had agreed to guarantee losses above $42 billion in exchange for preferred stock and warrants worth about $12 billion.

Wachovia’s deal with Wells Fargo will further concentrate Americans’ bank deposits in three banks: Bank of America, JPMorgan Chase and Wells Fargo. Together, those three would dominate the industry, and given their size, they would probably come under greater scrutiny from federal regulators.

For Wells Fargo, a deal would extend its reach east of the Mississippi River, creating a coast-to-coast branch network to compete with Bank of America and now JPMorgan Chase.

Wells and Wachovia have been the subject of merger speculation for years. But Wachovia, like Washington Mutual, has been hobbled by bad mortgages, which had made a merger more urgent and had prompted federal regulators to push for a quick sale.

With a big presence along the California coast, Wells Fargo has racked up big losses on mortgages and credit card loans as the housing market has melted down. But it has not been crippled by the bust like many of its big competitors, and maintained relatively strong finances.

As the credit crisis has deepened, a consolidation in the financial industry that analysts have predicted for years seems to be playing out in a matter of weeks.

The effect will be felt on Main Street, Wall Street and in Washington. While the tie-ups might restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts. Some small and midsize banks might be unable to compete with these behemoths.

 

Will bailout crimp Democrats’ spending plans?

Pelosi pledges bailout will not ‘dampen our ability to make investments’

Speaker of the House Nancy Pelosi, D-Calif., in her office Friday awaiting the House vote on the financial sector rescue bill.  View related photos

 

By Tom Curry

National affairs writer

MSNBC

updated 5:19 p.m. ET, Fri., Oct. 3, 2008

Tom Curry National affairs writer • Profile • E-mail

WASHINGTON – Friday’s House approval of an $800 billion bill to keep banks and investment firms afloat heralds a new fiscal era.

At first blush, an era of constrained federal spending appears to be dead ahead:  Every $1 billion going to the bailout and the tax provisions in the bill would be $1 billion less for highway construction or federal aid to public schools.

But House Speaker Nancy Pelosi and other Democratic leaders do not see it that way.

 

House Financial Services Committee Chairman Barney Frank, D-Mass., said shortly before the House voted that the cost of the bailout will not be $700 billion, but far less than that. For that reason, he said, the bailout will not inhibit the ability of Congress to spend on roads, bridges, public education and other items.

“It’s not going to cost $700 billion,” he said, referring to the bailout portion of the bill. “It’s going to cost something. We are buying assets with that money, which we will own and we will resell. Nobody knows what the net cost will be. … It depends on how the economy performs.”

Limp economy, robust federal spending
As Friday’s employment data indicated, the economy is not performing well right now. The Bureau of Labor Statistics reported that nearly 160,000 jobs were lost last month, the ninth straight month of net job losses.

Yet federal spending and borrowing are robust, with federal outlays growing nearly three times as fast as the economy itself.

The nonpartisan Congressional Budget Office reported that, as of August, federal spending for the first 11 months of the current fiscal year was 8 percent higher than in the same period the prior year.

But receipts are down 1.4 percent so far this fiscal year and are sure to decline further given the dismal employment data.

The revenue forecast facing the new president and the new Congress looks grim, largely due to that unemployment.

Fewer Americans are earning income and thus fewer are paying federal taxes. Higher unemployment means higher federal outlays for the Medicaid program for low-income people, as laid-off workers lose their employer-provided medical coverage.

‘Revenue is going to dry up’
That has many Republicans calling for restraint on spending.

“Revenue is going to dry up because we’re going into a recession, so you can’t whet your spending appetite when you have a recession and eroding revenues,” said Rep. Paul Ryan, R-Wis., the senior Republican on the House Budget Committee. Ryan voted for the bailout.

“We’re going to have lower revenues next year because I think a recession is unavoidable,” he said. “The question this (bailout) bill hopefully will answer is whether it is a short recession or a long recession.”

An increasing number of House Democrats, looking at Obama’s campaign momentum, assume he will be president. But many do not believe his and their spending desires will be limited by huge debt, borrowing costs and inflation.

Indeed, Obama made phone calls Wednesday and Thursday to several House Democrats, including freshmen members such as Rep. Mazie Hirono, D-Hawaii, and Rep. Betty Sutton, D-Ohio, assuring them that, if elected, he will sign a new economic stimulus spending bill.

At Pelosi’s press briefing Thursday, she indicated that the $800 billion is expected to be offset, in part, by congressional action raising tax rates on higher-income people.

‘Investing in the future’
And if the bailout bill ends up costing the Treasury money, she said, “the financial services industry and those affected by this would have to make up that shortfall.”

Turning to new spending, Pelosi used the word “invest” or “investment” five times in response to a question, using it in the accepted Capitol Hill sense: federal spending on items that Congress deems useful and likely to encourage economic growth.

“Nothing brings more money back to the Treasury than investing in the education of the American people,” she said.

She also argued for “investing in the future, whether it is infrastructure, whether it is investing in innovation to create good paying jobs in America, whether it is investing in our health care system in a way that reduces costs, reduces harm and improves health care.”

The spending would, she predicted, have the salutary effect of “creating good paying jobs, bringing jobs to America.”

Democrats won’t let the fiscal picture discourage them, Pelosi said.

And yet she also said, “We have said all along that when we go forward we do not want to increase the deficit.”

The paradox: How to spend more — much more — and yet not increase the deficit and borrowing at a time of sluggish income growth and with $800 billion in revenue potentially already spoken for?

Evoking Ronald Reagan
Using the phraseology of Ronald Reagan, Pelosi spoke of “subjecting the spending of the federal government to the harshest scrutiny to remove waste, fraud and abuse.”

And Pelosi assumes the $120 billion per year being spent on Iraq will go away fairly quickly.

But one longtime Pelosi ally, Rep. George Miller, D-Calif., the chairman of the House Education and Labor Committee, did not sound quite as bullish as the speaker.

Miller said, “I don’t know yet” when asked whether the bailout and tax extenders bill might inhibit Congress’ desire to spend more on domestic items.

“When you’re inheriting an $11 trillion debt, you have to have a fundamental conversation,” Miller said. “The new administration and the Congress have to decide, because there are so many unmet needs. Whether it will inhibit or not, or whether we’ll have to figure out another way to finance it, I don’t know yet.”

He added, “There’s a pent-up demand in the country for infrastructure, for research and development dollars. We’re falling way behind here.”

Perhaps the U.S. should pull out of Chicago ?

Body count: In the last six months 292 killed (murdered) in Chicago ; 221 killed in Iraq .

Sens. Barack Obama & Dick Durbin,
Rep. Jesse Jackson Jr.,
Gov. Rod Blogojevich,
House leader Mike Madigan,
Atty. Gen. Lisa Madigan (daughter of Mike),
Mayor Richard M. Daley (son of Mayor Richard J. Daley)
…..our leadership in Illinois …..all Democrats.

Thank you for the combat zone in Chicago
Of course, they ‘ re all blaming each other.
Can ‘ t blame Republicans; they ‘ re aren ‘ t any!

State pension fund $44 Billion in debt, worst in country.
Cook County ( Chicago ) sales tax 10.25% highest in country. (Look ‘ em up if you want).
Chicago school system rated one of the worst in the country.
This is the political culture that Obama comes from in Illinois .  And he ‘ s gonna  ‘fix ‘  Washington politics for us!

Lack Of Confidence, Not Capital, Is Issue

By INVESTOR’S BUSINESS DAILY | Posted Monday, September 29, 2008 4:20 PM PT

Rescue: As the financial turbulence in the U.S. spreads, we’ve heard talk, especially from overseas pundits, of a “crisis of capitalism.” But what we really have is a crisis of confidence, and the sooner it’s solved, the better.

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Read More: Economy | Business & Regulation

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The $700 billion rescue for the troubled global financial system foundered on a 228-205 vote Monday as both sides in the political debate feared being blamed for passing an unpopular bill.

Polls show more than 50% of Americans oppose what the pollsters call a “bailout” (but what we prefer to call a rescue). Meanwhile, a USA Today poll found that nearly a third of Americans think we’re in a depression.

Concern about the financial system is fully justified. But excessive gloom is not. In the most recent quarter, GDP rose 2.1% year over year, 3.1% excluding housing. Hardly a depression. So let’s not talk ourselves into one.

We, too, have qualms about the rescue effort. Washington under Democrat-led Congresses wrote the rules that made this mess possible, and we have little confidence in their ability to get us out of it.

We have even less confidence after watching Democrats try to insert things in the plan — from money for the radical community group ACORN to new taxes on Wall Street — that made no sense at all. We’re glad Republicans opposed these and made the bill better.

But now it’s time for all to hold their noses and vote as soon as possible on a compromise. Both the public and the investment community need to be reassured their leaders aren’t dropping the ball.

Failure won’t just cost billions; it will cost trillions — in lost output, a shrunken job market, smaller retirements and lost productivity. Is this the future we’ll choose for ourselves? We hope not.

Republicans who voted against the bill did so for legitimate reasons. They don’t like government getting too involved in the economy, and this package permits just that. But they also don’t want to be blamed, as the minority party, if the deal turns sour.

That’s already happening. Yes, more than 60% of Republicans voted against the rescue bill, but so did 40% of Democrats. That said, it’s time for Republicans to take a deep breath, pull up their pants and help pass a bill. The nation’s confidence is riding on it.

Americans must be made to realize it’s not Wall Street that’s being “bailed out,” as the media keep putting it. It’s Main Street.

The reason President Bush and Treasury Secretary Paulson moved so quickly and boldly is they fear a “seizing up” of financial markets. That means banks will stop lending to one another. It means companies that finance in the money markets — as many medium- and large-size businesses do — will be frozen out.

No lending, no business. Here’s where Main Street comes in. Thousands and maybe millions will be laid off as commerce grinds to a halt. That’s a real threat. Republicans will never get a perfect bill out of this Congress; compromises must be made by both sides.

We hope the $700 billion requested of Congress is enough to cover the problem. But we also note that on Monday, without Congress’ interference, the Fed made $630 billion available to world financial markets. That brings this rescue to $1.4 trillion.

The ability of the nation’s and the world’s financial markets to finance this shouldn’t be questioned. As the nonpartisan Congressional Budget Office noted Monday, the cost of any eventual rescue plan would likely be “substantially smaller” than $700 billion because of asset resales. And, around the world, there’s some $70 trillion or so in investment capital, according to estimates.

We’re not short on capital, as we said, but on confidence. Passing a bill, even if flawed, would go a long way to restoring the latter.

 

Bungle & Bust

British banking

 

Another small bank capsizes in a storm-tossed sea

AFTER a frenetic weekend spent trying to rustle up a buyer for Bradford & Bingley, a small British bank down on its luck, Britain’s government was poised, late on Sunday September 28th, to nationalise its second bank in a year. To the last minute talks were continuing to find buyers for some parts the bank. Potential purchasers included Spain’s Santander and a clutch of big British banks. But efforts to find a buyer for all of it had foundered, leaving little choice but to take it into public ownership to prevent a run on deposits, which had already started at the weekend, gathering pace when branches reopened.

This is the fourth British bank to have crumpled in the face of ongoing turmoil in the credit markets. Northern Rock was nationalised in February and both HBOS, Britain’s biggest mortgage lender, and Alliance & Leicester, a small bank, have since sought refuge in takeovers by bigger banks amid worries that they would not be able to raise new loans to repay existing debts.

This particular failure, however, is a sign of more than just the fear and uncertainty roiling international credit markets. It also marks another worrying point in the credit crisis. For much of the past year attention has been on bad debts arising from American mortgages and how losses on them have been spread around the world’s financial system by a bewildering array of credit derivatives. Bradford & Bingley’s problems, in contrast, are largely homegrown and raise the worrying possibility that the international banking system will face a second wave of losses as housing markets and economies wilt around the world.

To some extent Bradford & Bingley’s injuries were self-inflicted. The institution was a boring mortgage lender that was owned by its members until it transformed itself into a private company in 2000. It then became an early and enthusiastic proponent of the raciest type of mortgage lending in Britain. Last year more than three-quarters of its new loans were either made to landlords or were “self-certified” mortgages, which are commonly known as “liars’ loans” because borrowers are not asked to prove their income or employment. Moreover it was a keen buyer of mortgages that other banks had written. Even so, its failure sounds a warning for large mortgage lenders and for regulators in countries such as Spain and Ireland, where housing bubbles have also been pricked.

During Britain’s long housing boom Bradford & Bingley seemed to do no wrong. Losses on its loans were trifling because borrowers, often landlords, had every reason to avoid foreclosure and could always sell their properties at a profit if they struggled with repayments. Now that Britain’s housing markets has turned, however, the bank’s strategy is unravelling. Arrears are rising with alarming speed and the values of homes underpinning mortgages are falling just as quickly. The bank has also struggled to borrow from anyone but the central bank as credit-rating agencies have repeatedly cut its rating, most recently last week, on worries about the quality of its loan book. A crucial point was reached last week when, amid worries over its ability to keep funding itself and, if needed, raise additional capital, its share price slumped. At one point the bank was valued at just £289m ($533m), less than a tenth of its peak of £3.2 billion in 2006. By Saturday depositors were bombarding its website and starting to queue at its branches.

The government’s (likely) swift action suggests that it has learned some important lessons from the failure of Northern Rock. A year ago regulators at the Financial Services Authority seemed to have been asleep at the wheel. This time they have been watching closely. The Treasury, which dithered as Northern Rock floundered, letting worries about the funding of one of Britain’s smaller lenders develop into a full-blown bank run that threatened the stability of all banks, is also moving swiftly. A quick nationalisation should halt a run on the bank and avert wider panic. Just as regulators and governments studied the Northern Rock fiasco closely as an example of how not to rescue banks, this nationalisation will also be examined in countries that may soon have to put its lessons into practice.

Covert Nationalization of the Banking System (Naked Capitalism)

Saturday, March 8, 2008

Covert Nationalization of the Banking System

One of the upsides of blogging is sometimes other inquiring minds get to the bottom of matters that have been nagging at you.

We had warned a couple of months ago that a colleague with serious connections into the Treasury and Fed told us they were working on plans for a quasi-nationalization of the banking system. Their view was that while banks would technically be solvent, they’d have enough bad credits that they would be unable to extend new loans.

Steve Waldman, in a terrific post at Interfluidity, concludes that nationalization is underway, via the expansion of the Term Auction Facility and Fed’s new 28 day repo program.

Readers may know that there has been a lot of disquiet regarding the negative non-borrowed banking reserves that resulted form the TAF. Bond market mavens, such as commentator Caroline Baum at Bloomberg, dismissed those worries as reflecting a lack of understanding of Fed operations.

I remained troubled, not by the negative non-borrowed reserves figures per se, but by the fact that the Fed was downplaying an operation which was extraordinary. The TAF is a discount window of sorts, but with somewhat longer-term loans and no stigma. Note the TAF accepts the same types of collateral at the same haircuts as the discount windows.

But the discount window is a “break glass in case of emergency” facility. It’s when liquidity is so scarce that banks can’t borrow on normal terms, so they go to the Fed, post collateral, and get dough. The fact that a supposedly temporary operation has become semi-permanent and was increased (it was initially $40 billion, then it was quietly increased to $60 billion) was a troubling sign, yet the Fed acted as if this was business as normal.

Waldman does a thorough job of parsing the two initiatives announced Friday, the further expansion of the TAF, plus the establishment of the new repo facility.

Differences in degree can be differences in kind, and that’s what Waldman argues has happened. The US banking system is on life support. The Fed has now become a very big prop, far more significant than the highly publicized sovereign wealth fund investors.

From Interfluidity:

The Fed announced that it would auction off $100B in loans this month rather than the previously announced $60B via its TAF facility. In the same press release, the FRB announced plans to offer $100B worth of 28 day loans via repurchase agreements against “any of the types of securities — Treasury, agency debt, or agency mortgage-backed securities — that are eligible as collateral in conventional open market operations”.

The second announcement puzzled me. After all, the Fed conducts uses repos routinely in the open market operations by which they try to hold the interbank lending rate to the Federal Funds target. In aggregate, the quantity of funds that the Fed makes available is constrained by the Fed Funds target. So, what do we learn from this? Fortunately, the New York Fed provides more details:

The Federal Reserve has announced that the Open Market Trading Desk will conduct a series of term repurchase (RP) transactions that are expected to cumulate to $100 billion outstanding… These transactions will be conducted as 28-day term RP agreements.. When the Desk arranges its conventional RPs, it accepts propositions from dealers in three collateral “tranches.” In the first tranche, dealers may pledge only Treasury securities. In the second tranche, dealers have the option to pledge federal agency debt in addition to Treasury securities. In the third tranche, dealers have the option to pledge mortgage-backed securities issued or fully guaranteed by federal agencies in addition to federal agency debt or Treasury securities. With the special “single-tranche” RPs announced today, dealers have the option to pledge either mortgage-backed securities issued or fully guaranteed by federal agencies, federal agency debt, or Treasury securities. The Desk has arranged single-tranche transactions from time to time in the past.

There are a couple of differences, then, between this new program and typical repo operations:

1. The loans are of a longer-term than usual. Ordinarily, the Fed lends on terms ranging from overnight to two weeks in its “temporary open market operations”. The Fed will now offer substantial funding on a 28 day term.

2, The Fed is effectively broadening its collateral requirements by collapsing what are usually 3 distinct levels of collateral which are lent against at different rates to a single category within which no distinctions are made.

The Fed offered the first $15B of repo loans under the program today, so we can see how things are going to work. First, how did the Fed square the circle of ramping up its repos without pushing down the Federal Funds rate? Just as it had done with TAF, the Fed offset the “temporary” injection of funds with a “permanent open market operation”. The Fed purchased outright $10B of Treasury securities today at the same time as it offered $15B in exchange for mortgage-backed securities under the new program (at a low interest rate than in traditional repos against MBS collateral). The net cash injection was small, but the composition of securities on bank balance sheets changed markedly, as illiquid securities were exchanged for liquid Treasuries.

In James Hamilton’s wonderful coinage, the Fed is conducting monetary policy on the asset side of the balance sheet. This is an innovation of the Bernanke Fed. Conventionally, monetary policy is about managing the quantity of the central bank’s core liability, currency outstanding. When the Fed wants to loosen, it expands its liabilities by issuing cash in exchange for securities. When it wants to tighten, it redeems cash for securities, reducing Fed liabilities. The asset side is conventionally an afterthought, “government securities”. But the Bernanke Fed has branched out. It has sought to lend against a wide-range of assets, actively seeking to replace securities about which the market seems spooked with safe-haven Treasuries on bank balance sheets without creating new cash. By doing this, the Fed hopes to square the circle of helping banks through their “liquidity crisis” without provoking a broad inflation.

“Monetary policy on the asset side of the balance sheet” is a bit too anodyne a description of what’s going on here though. The Fed has gotten into an entirely new line of business, and on a massive scale. Prior to the introduction of TAF, direct loans from the Fed to banks, including the discount window lending and repos, amounted to less than $40B, the majority of which were repos collateralized by Treasury securities. By the end of this month, the Federal Reserve will have more than $200B of exposure in its new role as Wall Street’s genial pawnbroker. Assuming the liability side of the Fed’s balance sheet is held roughly constant, more than a fifth of the Fed’s balance sheet will be direct loans to banks, almost certainly against collateral not backed by the full faith and credit of the US government (and beyond that we just don’t know). This raises a whole host of issues.

Caroline Baum wrote a column last week poopooing concerns about the Fed taking on credit risk via TAF lending. (Hat tip Mark Thoma.) I usually enjoy Baum’s work, but this column was poorly argued. In it, she points out that the Fed has all the tools it needs to manage credit risk. The Fed offers loans only against collateral, and requires that loans be overcollateralized. If the collateral has no clear market value or if there are questions about an asset’s quality, the Fed has complete discretion to force a “haircut”, writing down the asset (for the purpose of the loan) to whatever value it sees fit. And the Fed can always just say no to any collateral it deems sketchy.

All of that is quite true, and (as Baum snarkily points out) not hard to find on FRB websites. But it fails to address the core issue. Sure the Fed has all the tools it needs to manage credit risk. But does it have the will to use those tools? In word and deed, the Fed’s primary concern since August has been to “restore normal functioning” to financial markets. The Fed has chosen to accept some inflation risk in its fight against macroeconomic meltdown. Why wouldn’t it knowingly accept some credit risk as well? No one has suggested that the Fed is being “snookered”. Skeptics think the Fed is intentionally taking on bank credit risk while still lending at very low rates. Some of us find that troubling.

Which brings us to the more postmodern issue of what credit risk even means to a lender with unlimited cash and an overt unwillingness to let those it lends to default. In a way, I agree with Baum. Until the current crisis is long past, I think it unlikely that any large bank will default and stiff the Fed with toxic collateral. Why not? Because for that to happen, the Fed would have to pull the trigger itself, by demanding payment on loans rather than offering to roll them over. Since TAF started last fall, on net, the Fed has not only rolled over its loans to the banking system, but has periodically increased banks’ line of credit as well. In an echo of the housing bubble, there’s no such thing as a bad loan as long as borrowers can always refinance to cover the last one.

The distinction between debt and equity is much murkier than many people like to believe. Arguably, debt whose timely repayment cannot be enforced should be viewed as equity. (Financial statement analysts perform this sort of reclassification all the time in order to try to tease the true condition of firms out of accounting statements.) If you think, as I do, that the Fed would not force repayment as long as doing so would create hardship for important borrowers, then perhaps these “term loans” are best viewed not as debt, but as very cheap preferred equity.

Let’s go with that for a minute, and think about the implications. One much discussed story of the current crisis is the role of sovereign wealth funds in helping to capitalize struggling banks. Will they, won’t they, should we worry? Sovereign wealth funds have invested about $24B in struggling US financials. Meanwhile, the Fed is quietly providing eight times that on much easier terms.

If we view TAF and the new 28-day, broad-collateral repos as equity, what fraction of bank capitalization would they represent? I haven’t been able to find current numbers on aggregate bank capitalization in the US. In June of 2006, the accounting net worth of U.S. Commercial Banks, Thrift Institutions and Credit Unions was 1.25 trillion dollars. Putting together remarks by Fed Vice Chairman Donald Kohn and data on bank equity to total assets from the St. Louis Fed yields a more recent estimate of about 1.6 trillion. The average price to book among the top ten US banks is about 1.3. So, a reasonable estimate for the current market value of bank equity is 2 trillion dollars. The $200B in “equity” the Fed will have supplied by the end of March will leave the Federal Reserve owning roughly 9.1% of the total bank equity. Obviously, the Fed isn’t investing in the entire bank sector uniformly. Some banks will be very substantially “owned” by the central bank, whereas others will remain entirely private sector entities. As Dean Baker points out, the Fed is giving us no information by which to tell which is which.

What we are witnessing is an incremental, partial nationalization of the US banking system. Northern Rock in the UK is peanuts compared to what the New York Fed is up to.

You may object, and I’m sure many of you will, that our little thought experiment is bunk, debt is debt and equity is equity, these are 28-day loans, and that’s that. But notionally collateralized “term” loans that won’t ever be redeemed unless and until it is convenient for borrowers are an odd sort of liability. Central banks are very familiar with the ruse of disguising equity as liability. Currency itself is formally a liability of the central bank, but in every meaningful sense fiat money is closer to equity.

I do not, by the way, object to nationalizing failing banks. There are (unfortunately) banks that are “too big to fail”, whose abrupt disappearance could cause widespread disruption and harm. These should be nationalized when they fall to the brink. But they should be nationalized overtly, their equity written to zero, and their executives shamed. That sounds harsh. It is harsh. One hates to see bad things happen to nice people, and these are mostly nice people. But running institutions with trillions dollar balance sheets is a serious business. Accountability matters. These people were not stupid. They knew, in Chuck Prince’s now infamous words, that “when the music stops… things will be complicated.”, and they kept dancing anyway.

But accountability has gone out of style. The Federal Reserve is injecting equity into failing banks while calling it debt. Citibank is paying 11% to Abu Dhabi for ADIA’s small preferred equity stake, while the US Fed gets under 3% now for the “collateralized 28-day loans” it makes to Citi. Pace Accrued Interest (whom I much admire), I still think this all amounts to a gigantic bail-out. And that it is a brilliantly bad idea from which financial capitalism may have a hard time recovering. Like a well-meaning surgeon slicing up arteries to salvage the appendix, the Federal Reserve is only trying to help.

From a corporate finance perspective, Waldmans’ argument about the Fed effectively being an equity provider isn’t as off base as it sounds. If you as a creditor are unable to call in your loans or otherwise exercise your contractual rights, your position is so badly subordinated that you are effectively equity. And there is no indication that the Fed will take any more action relative to the banks that become dependent on it beyond its normal supervisory role. To behave otherwise, after all, would make it even more difficult for those organizations to function in the marketplace, which risks damaging their ability to function even further.

Topics: Banking industry, Credit markets, Federal Reserve

Posted by Yves Smith at 4:29 AM

Who’s Afraid of a Big, Bad Bailout? – John Mauldin’s Weekly E-Letter

Flying last Tuesday, overnight from Cape Town in South Africa to London, I read in the Financial Times that Republican Congressman Joe Barton of Texas was quoted as saying (this is from memory, so it is not exact) that he had difficulty voting for a bailout plan when none of his constituents could understand the need to bail out Wall Street, didn’t understand the problem, and were against spending $700 billion of taxpayer money to solve a crisis for a bunch of (rich) people who took a lot of risk and created the crisis. That is a sentiment that many of the Republican members of the House share.
As it happens, I know Joe. My office is in his congressional district. I sat on the Executive Committee for the Texas Republican Party representing much of the same district for eight years. This week, Thoughts from the Frontline will be an open letter to Joe, and through him to Congress, telling him what the real financial problem is and how it affects his district, helping explain the problem to his constituents , and explaining why he has to hold his nose with one hand and vote for a bailout with the other.
Just for the record, Joe has been in Congress for 24 years. He is the ranking Republican on the Energy and Commerce Committee, which is one of the three most important committees and is usually considered in the top five of Republican House leadership. He is quite conservative and has been a very good and effective congressman. I have known Joe for a long time and consider him a friend. He has been my Congressman at times, depending on where they draw the line. I called his senior aide and asked him how the phone calls were going. It is at least ten to one against supporting this bill, and that is probably typical of the phones all across this country. People are angry, and with real justification. And watching the debates, it reminds us that one should never look at how sausages and laws are made. It is a very messy process.
I think what follows is as good a way as any to explain the crisis we are facing this weekend. This letter will print out a little longer, because there are a lot of charts, but the word length is about the same. Let’s jump right in.
It’s the End of the World As We Know It
Dear Joe,
I understand your reluctance to vote for a bill that 90% of the people who voted for you are against. That is generally not good politics. They don’t understand why taxpayers should spend $700 billion to bail out rich guys on Wall Street who are now in trouble. And if I only got my information from local papers and news sources, I would probably agree. But the media (apart from CNBC) has simply not gotten this story right. It is not just a crisis on Wall Street. Left unchecked, this will morph within a few weeks to a crisis on Main Street. What I want to do is describe the nature of the crisis, how this problem will come home to your district, and what has to be done to avert a true, full-blown depression, where the ultimate cost will be far higher to the taxpayers than $700 billion. And let me say that my mail is not running at 10 to 1 against, but it is really high. I am probably going to make a lot of my regular readers mad, but they need to hear what is really happening on the front lines of the financial world.
First, let’s stop calling this a bailout plan. It is not. It is an economic stabilization plan. Run properly, it might even make the taxpayers some money. If it is not enacted very soon (Monday would be fine), the losses to businesses and investors and homeowners all over the US (and the world) will be enormous. Unemployment will jump to rates approaching 10%, at a minimum. How did all this come to pass? Why is it so dire? Let’s rewind the tape a bit.
We all know about the subprime crisis. That’s part of the problem, as banks and institutions are now having to write off a lot of bad loans. The second part of the problem is a little more complex. Because we were running a huge trade deficit, countries all over the world were selling us goods and taking our dollars. They in turn invested those excess dollars in US bonds, helping to drive down interest rates. It became easy to borrow money at low rates. Banks, and what Paul McCulley properly called the Shadow Banking System, used that ability to borrow and dramatically leverage up those bad loans (when everyone thought they were good), as it seemed like easy money. They created off-balance-sheet vehicles called Structured Investment Vehicles (SIVs) and put loans and other debt into them. They then borrowed money on the short-term commercial paper market to fund the SIVs and made as profit the difference between the low short-term rates of commercial paper and the higher long-term rates on the loans in the SIV. And if a little leverage was good, why not use a lot of leverage and make even more money? Everyone knew these were AAA-rated securities.
And then the music stopped. It became evident that some of these SIVs contained subprime debt and other risky loans. Investors stopped buying the commercial paper of these SIVs. Large banks were basically forced to take the loans and other debt in the SIVs back onto their balance sheets last summer as the credit crisis started. Because of a new accounting rule (called FASB 157), banks had to mark their illiquid investments to the most recent market price of a similar security that actually had a trade. Over $500 billion has been written off so far, with credible estimates that there might be another $500 billion to go. That means these large banks have to get more capital, and it also means they have less to lend. (More on the nature of these investments in a few paragraphs.)
Banks can lend to consumers and investors about 12 times their capital base. If they have to write off 20% of their capital because of losses, that means they either have to sell more equity or reduce their loan portfolios. As an example, for every $1,000 of capital, a bank can loan $12,000 (more or less). If they have to write off 20% ($200), they either have to sell stock to raise their capital back to $1,000 or reduce their loan portfolio by $2,400. Add some zeroes to that number and it gets to be huge.
And that is what is happening. At first, banks were able to raise new capital. But now, many banks are finding it very difficult to raise money, and that means they have to reduce their loan portfolios. We’ll come back to this later. But now, let’s look at what is happening today. Basically, the credit markets have stopped functioning. Because banks and investors and institutions are having to deleverage, that means they need to sell assets at whatever prices they can get in order to create capital to keep their loan-to-capital ratios within the regulatory limits.
Remember, part of this started when banks and investors and funds used leverage (borrowed money) to buy more assets. Now, the opposite is happening. They are having to sell assets into a market that does not have the ability to borrow money to buy them. And because the regulators require them to sell whatever they can, the prices for some of these assets are ridiculously low. Let me offer a few examples.
Today, there are many municipal bonds that were originally sold to expire 10-15 years from now. But projects finished early and the issuers wanted to pay them off. However, the bonds often have a minimum time before they can be called. So, issuers simply buy US Treasuries and put them into the bond, to be used when the bond can be called. Now, for all intents and purposes this is a US government bond which has the added value of being tax-free. I had a friend, John Woolway, send me some of the bid and ask prices for these type of bonds. One is paying two times what a normal US Treasury would pay. Another is paying 291% of a normal US Treasury. And it is tax-free! Why would anyone sell what is essentially a US treasury bond for a discount? Because they are being forced to sell, and no one is buying! The credit markets are frozen.
Last week, I wrote about a formerly AAA-rated residential mortgage-backed security (RMBS) composed of Alt-A loans, better than subprime but less than prime. About 5% of the loans were delinquent, and there are no high-risk option ARMs in the security. It is offered at 70 cents on the dollar. If you bought that security, you would be making well over 12% on your money, and 76% of the loans in the portfolio of that security would have to default and lose over 50% of their value before you would risk even one penny. Yet the bank which is being forced to sell that loan has had to write down its value. As I wrote then, that is pricing in financial Armageddon. (You can read the full details here.)
Let’s look at the following graph. It is an index of AAA-rated mortgage bonds, created by www.markit.com. It is composed of RMBSs similar to the one I described above. Institutions buy and sell this index as a way to hedge their portfolios. It is also a convenient way for an accounting firm to get a price for a mortgage-backed security in a client bank’s portfolio. With the introduction of the new FASB 157 accounting rule, accountants are very aggressive about making banks mark their debt down, as they do not want to be sued if there is a problem. Notice this index shows that bonds that were initially AAA are now trading at 53 cents on the dollar, which is up from 42.5 cents two months ago.
Accountants might look at the bond I described above, look at this index, and decide to tell their clients to mark the bonds down to $.53 on the dollar. The bank is offering the bond at $.70 because it knows there is quality in the security. They are being forced to sell. And guess what? There are no buyers. An almost slam-dunk 12% total-return security with loss-coverage provisions that suggest 40% of the loans could default and lose 50% before your interest rate yields even suffered, let alone risk to your principal – and it can’t find a buyer.
 
One of the real reasons these and thousands of other good bonds are not selling now is that there is real panic in the markets. The oldest money market fund “broke the buck” last week, because they had exposure to Lehman Brothers bonds. We are seeing massive flights of capital from money market funds, including by large institutions concerned about their capital. What are they buying? Short-term Treasury bills. Three-month Treasury bills are down to 0.84%.
It gets worse. Last week one-month Treasury bills were paying a negative 1%!!! That means some buyers were so panicked that they were willing to buy a bond for $1 that promised to pay them back only $.99 in just one month. The rate is at 0.16% today. If something is not done this weekend, it could go a lot lower over the next few days. That is panic, Joe.
I don’t want to name names, as this letter goes to about 1.5 million people and I don’t want to make problems for some fine banking names; but there is a silent bank run going on. There are no lines in the street, but it is a run nevertheless. It is large investment funds and corporations quietly pulling their money from some of the best banks in the country. They can do this simply by pushing a button. We are watching deposit bases fall. It does not take long. Lehman saw $400 billion go in just a few months this summer. Think about that number. Any whiff of a problem and an institution that is otherwise sound could be brought low in a matter of weeks. And the FDIC could end up with a large loss that seemed to have come from out of nowhere.
The TED Spread Flashes Trouble
There is something called the TED spread, which is the difference between three-month LIBOR (the London Inter Bank Offered Rate which is in euro dollars, also called The Euro Dollar Spread, thus TED) and three-month US Treasury bills. Three-month LIBOR is basically what banks charge each other to borrow money. Many mortgages and investments are based on various periods of LIBOR. Look at the chart below. Typically the TED spread is 50 basis points (0.50%) or less. When it spikes up, it is evidence of distress in the financial markets. The last time the TED spread was as high as it is now was right before the market crash of 1987. This is a weekly chart, which does not capture tonight’s (Friday) change, which would make it look even worse. Quite literally, the TED spread is screaming panic.
 
The Fed has lowered rates to 2%. Typically, three-month LIBOR tracks pretty close to whatever the Fed funds rate is. Starting with the credit crisis last year, that began to change. Look at the chart below.
 
Remember, LIBOR is what banks charge to each other to make loans. Lower rates are supposed to help banks improve their capital and their ability to make loans at lower interest rates to businesses and consumers. Look at what has happened in the past few weeks, in the chart above. The spread between three-month LIBOR and the Fed funds rate is almost 200 basis points, or 2%! That is something that defies imagination to market observers. On the chart above, it looks like it has not moved that much, but in the trading desks of banks all over the world it is a heart-pounding, scare-you-to-death move. The chart below reflects what traders have seen in the past two weeks, and it moved up more today.
 
Now let’s look at the next chart. This is the amount of Tier 1 commercial paper issued. This is the life blood of the business world. This is how many large and medium-sized businesses finance their day-to-day operations. The total amount of commercial paper issued is down about 15% from a year ago, with half of that drop coming in the last few weeks. Quite literally, the economic body is hemorrhaging. Unless something is done, businesses all over the US are going to wake up in a few weeks and find they simply cannot transact business as usual. This is going to put a real crimp in all sorts of business we think of as being very far from Wall Street.
 
I could go on. Credit spreads on high-yield bonds that many of our best high-growth businesses use to finance their growth are blowing out to levels which make it impossible for the companies to come to the market for new funds. And that is even if they could find investors in this market! There are lots of other examples (solid corporate loans selling at big discounts, asset-backed securities at discounts, etc.), but you get the idea. Suffice it to say that the current climate in the financial market is the worst since the 1930s. But how does a crisis in the financial markets affect businesses and families in Arlington, Texas, where my office and half of your district is?
The Transmission Mechanism
The transmission in a car takes energy from the engine and transfers it to the wheels. Let’s talk about how the transmission mechanism of the economy works.
Let’s start with our friend Dave Moritz down the street. He needs financing to be able to sell an automobile. To get those loans at good prices, an auto maker has to be able to borrow money and make the loans to Dave’s customers. But if something does not stop the bleeding, it is going to get very expensive for GM to get money to make loans. That will make his cars more expensive to consumers. Cheap loans with small down payments are the life blood of the auto selling business. That is going to change dramatically unless something is done to stabilize the markets.
Credit card debt is typically packaged and sold to investors like pension funds and insurance companies. But in today’s environment, that credit card debt is going to have to pay a much higher price in order to find a buyer. That means higher interest rates. Further, because most of the large issuers of credit cards are struggling with their leverage, they are reducing the amount of credit card debt they will give their card holders. If they continue to have to write down mortgages on their books because of mark-to-market rules which price assets at the last fire-sale price, it will mean even more shrinkage in available credit.
Try and sell a home above the loan limits of Fannie and Freddie today with a nonconforming jumbo loan. Try and find one that does not have very high rates, because many lenders who normally do them simply cannot afford to keep them on their balance sheets. And a subprime mortgage? Forget about it. This is going to get even worse if the financial markets melt down.
We are in a recession. Unemployment is going to rise to well over 6%. Consumer spending is going to slow. This is an environment which normally means it is tougher for small businesses and consumers to get financing in any event. Congress or the Fed cannot repeal the business cycle. There are always going to be recessions. And we always get through them, because we have a dynamic economy that figures out how to get things moving again.
Recessions are part of the normal business cycle. But it takes a major policy mistake by Congress or the Fed to create a depression. Allowing the credit markets to freeze would count as a major policy mistake.
I have been on record for some time that the economy will go through a normal recession and a slow recovery, what I call a Muddle Through Economy. This week I met with executives of one of the larger hedge funds in the world. They challenged me on my Muddle Through stance. And I had to admit that my Muddle Through scenario is at risk if Congress does not act to stabilize the credit markets.
Let’s Make a Deal
Why do we need this Stabilization Plan? Why can’t the regular capital markets handle it? The reason is that the problem is simply too big for the market to deal with. It requires massive amounts of patient, long-term money to solve the problem. And the only source for that would be the US government.
There is no reason for the taxpayer to lose money. Warren Buffett, Bill Gross of PIMCO, and my friend Andy Kessler have all said this could be done without the taxpayer losing money, and perhaps could even make a profit. As noted above, these bonds could be bought at market prices that would actually make a long-term buyer a profit. Put someone like Bill Gross in charge and let him make sure the taxpayers are buying value. This would re-liquefy the banks and help get their capital ratios back in line.
Why are banks not lending to each other? Because they don’t know what kind of assets are on each other’s books. There is simply no trust. The Fed has had to step in and loan out hundreds of billions of dollars in order to keep the financial markets from collapsing. If you allow the banks to sell their impaired assets at a market-clearing fair price (not at the original price), then once the landscape is cleared, banks will decide they can start trusting each other. The commercial paper market will come back. Credit spreads will come down. Banks will be able to stabilize their loan portfolios and start lending again.
Again, the US government is the only entity with enough size and patience to act. We do not have to bail out Wall Street. They will still take large losses on their securities, just not as large a loss as they are now facing in a credit market that is frozen. As noted above, there are many securities that are being marked down and sold far below a rational price.
If we act now, we will start to see securitization of mortgages, credit cards, auto loans, and business loans so that the economy can begin to function properly.
What happens if we walk away? Within a few weeks at most, financial markets will freeze even more. We will see electronic runs on major banks, and the FDIC will have more problems than you can possibly imagine. The TED spread and LIBOR will get much worse. Businesses which use the short-term commercial paper markets will start having problems rolling over their paper, forcing them to make difficult cuts in spending and employment. Larger businesses will find it more difficult to get loans and credit. That will have effects on down the economic food chain. Jim Cramer estimated today that without a plan of some type, we could see the Dow drop to 8300. That is as good a guess as any. It could be worse. Home valuations and sales will drop even further.
The average voter? They will see stock market investments off another 25% at the least. Home prices will go down even more. Consumer spending will drop. What should be a run-of-the-mill recession becomes a deep recession or soft depression. Yes, that may be worst-case scenario. But that is the risk I think we take with inaction.
A properly constructed Stabilization Plan hopefully avoids the worst-case scenario. It should ultimately not cost the taxpayer much, and maybe even return a profit. The AIG rescue that Paulson arranged is an example of how to do it right. My bet is that the taxpayer is going to make a real profit on this deal. We got 80% of AIG, with what is now a loan paying the taxpayer over 12%, plus almost $2 billion in upfront fees for doing the loan. That is not a bailout. That is a business deal that sounds like it was done by Mack the Knife.
This deal needs to be done by Monday. Every day we wait will see more and more money fly out the doors of the banks, putting the FDIC at ever greater risk. Panic will start to set in, moving to ever smaller banks. Frankly, we are at the point where we need to consider raising the FDIC limits for all deposits for a period of time, until the Stabilization Plan quells the panic.
I understand that this is a really, really bad idea according classical free-market economic theory. You know me; I am as free market as it comes. But I also know that without immediate action a lot of people are really going to be hurt. Unemployment is not a good thing. Losses on your home and investments hurt. It is all nice and well to talk about theories and contend the market should be allowed to sort itself out; and if we have a deep recession, then that is what is needed. But the risk we take is not a deep recession but a soft depression. The consequences of inaction are simply unthinkable.
Joe, I am telling you that the markets are screaming panic. Yes, Senator Richard Shelby has his 200 economists saying this is a bad deal. But they are ivory tower kibitzers who have never sat at a trading desk. They have never tried to put a loan deal together or had to worry about commercial paper markets collapsing. I am talking daily with the people on the desks who are seeing what is really happening. Shelby’s economists are armchair generals far from the front lines. I am talking to the foot soldiers who are on the front lines.
Every sign of potential disaster is there. You and the rest of the House have to act. It has to be bipartisan. This should not be about politics (even though Barney Frank keeps talking bipartisan and then taking partisan shots, but I guess he just can’t help himself). It should be about doing the right thing for our country and the world. I know it will not be fun coming back to the district. Talking about TED spreads and LIBOR will not do much to assuage voters who are angry. But it is the right thing to do. And I will be glad to come to the town hall meeting with you and help if you like.
With your help, we will get through this. In a few years, things will be back to normal and we can all have stories to tell to our grandkids about how we lived through interesting times. But right now we have to act.
Colorado, California, London, and Sweden
It is time to hit the send button. This was personally a great week. For whatever reason, I did not suffer jet lag flying to South Africa for just two days, then overnight to London, and back the next day. It was a good trip. I will report more about South Africa in a later letter, but this e-letter is already a little long.
I leave Sunday for a quick trip to Longmont, Colorado (near Boulder) to look at a very interesting technology company (InPhase) that makes holographic memory disks, with good friend Dr. Bart Stuck of Signal Lake Partners.
I will be in San Diego and Orange County the 16th and 17th of October for back-to-back speeches, then I leave Sunday for London for two days and then on to Sweden for a conference and speeches there, a quick trip to Malta, and then back home, where I will be chained to my desk by daughter Tiffani as we do interviews and write a book.
I do enjoy traveling from time to time, seeing the rest of the world. One of my secret pleasures is reading International Living and thinking about what it would be like to have another home somewhere. Cheap thrills. You can subscribe if you like by following this link.
Have a great week. I fully believe (OK, deeply hope) that Congress will act. We can all breathe a collective sigh when they do.
Your still believing in Muddle Through analyst,

John Mauldin
John@FrontLineThoughts.com
Copyright 2008 John Mauldin. All Rights Reserved

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Leaders Without Followers – The Paulson Plan and the week that was.

by Lawrence B. Lindsey 10/06/2008, Volume 014, Issue 04 The Weekly Standard

Just over a week ago the collapse in credit markets forced the secretary of the Treasury to assemble a bipartisan group from both houses of Congress to sell a record-setting government-bailout plan of the financial industry. Trouble was no such plan existed at the time of the meeting. He set off a mad scramble to come up with the barest outlines of a plan on Saturday followed by two Democratic outlines, one for the House and one for the Senate, on Sunday.

By Monday the 22nd, it was obvious to markets and most other observers that, when it came to the plans, there was not a lot of “there” there. Unintended consequences multiplied. So, when Henry Paulson and Federal Reserve chairman Ben Bernanke began their gauntlet of testimonies on Tuesday, the mood was intensely skeptical, even bordering on hostile. Equity markets crashed. Credit markets seized up again on Wednesday, even though stocks stabilized.

By Thursday stocks had rallied on expectations that Congress would pass a bill by the end of the weekend. Democrats announced they had an agreement amongst themselves, but their rank and file were decidedly not on board. Nonetheless, the president arranged a seal-the-deal ceremony for Thursday afternoon at the White House with the congressional leadership and both McCain and Obama present. It was to be followed by a photo opportunity with the current president and the two men who might succeed him collectively blessing a bailout package.

It was not to be.

Senator Richard Shelby, deeply suspicious of the Paulson plan, left the meeting early and declared there was no deal. Obama headed for the Mayflower Hotel to hold his own press conference. The Democratic leadership focused on mocking McCain, blaming him for the failure, a narrative that the media parroted, ignoring the fact that if what the Democrats claimed was true, they had the votes to pass the law.

Still, as of this writing on Friday night, a bill was almost certain to get passed. The Democratic congressional leadership and the White House have had a “Continuing Resolution” strategy in their back pocket all along. The plan was to roll goodies for the auto industry and other special interests, a “safety net” package, and the latest version of the Paulson plan in with authority for the government to spend money after midnight on Tuesday. The alternative would be a government shut down.

Thus stands the state of governance of the greatest economic power in the history of the world. And on this basis politicians claim that what is needed is more regulation by government.

The central problem of the deal was that it takes a commanding heights approach. The key beneficiaries are to be the very largest New York-based financial institutions and a few billionaires like Warren Buffett and Bill Gross. Buffet even said as much. He plunked down a cool $5 billion to buy preferred stock yielding 10 percent in Paulson’s old firm, Goldman Sachs, saying he was confident that Congress would pass the Paulson bailout bill.

The plan had a commanding heights problem in the Congress as well. The Democratic leadership, including committee chairmen Barney Frank, Chris Dodd, and Chuck Schumer, were enthusiastic. But it was hard to find an ordinary member who exuded confidence. The president gave a prime-time speech to push the bill on Wednesday night. It was a good performance, but on Thursday morning it wasn’t any easier to find Republican congressmen who supported the plan.

 But the greatest commanding heights problem was that the plan had virtually no public support. Congressmen reported record-breaking email and phone calls from constituents, running as much as 300 to 1 against. The public saw it as a bailout of Wall Street. What had not been explained was how bailing out Wall Street would also help them. There is a good case that could be made on that score, but it hasn’t been.

 

Ultimately the bill will be a missed opportunity. No one with experience in these matters believes the Treasury purchase plan is workable. It will take weeks, maybe months, to set up-not something that makes sense when the country is allegedly teetering on a precipice. The plan, moreover, should have been accompanied with measures that would stabilize the banking sector and prevent any possiblity of a bank run. On Thursday night the FDIC did a forced sale of Washington Mutual to J.P. Morgan just to avoid the potential disaster of the bank runs that would follow if uninsured depositors were not protected. Eighteen billion had left WaMu in the days leading up to the purchase. On Friday a similar run began on Wachovia. In this environment, not removing the deposit insurance cap could be a recipe for disaster, more than undoing any possible benefits from the legislation.

When the people atop the commanding heights of the economy think that they know best, and their followers’ concerns are ignored, problems inevitably follow. We can only hope that America will be spared relearning this lesson of history, too painfully, this time around.

–Lawrence B. Lindsey, for the Editors

 

© Copyright 2008, News Corporation, Weekly Standard, All Rights Reserved.

Day of Reckoning

 

by  Patrick J. Buchanan

09/26/2008

How did the United States of America, the richest nation on earth, whose economy represents 30 percent of the Global Economy, arrive at the precipice of a financial panic and collapse?

The answer lies in the abject failure of both America’s financial elite and the political elite of both parties — the same elites now working together to determine how much of our wealth will be needed to bail the nation out of the crisis of their own creation.

Big Government is riding to the rescue — saddlebags full of our tax dollars — to save us from the consequences of the stupidity and folly of Big Government. New York and Washington, the twin cities responsible for the crisis, are now being hailed by the media as the 7th Cavalry, coming to rescue a beleaguered nation.

 

Had there not been a steady and constant infusion of easy money and credit into the U.S. economy by the Fed, for years on end, a housing bubble of the magnitude of the one that has just exploded could never have been created.

Had the politicians of both parties not coerced and pressured banks, S&Ls, Fannie Mae and Freddie Mac to make all those sub-prime mortgages, then to tie this rotten paper to good paper, convert it into securities and sell to banks all over the world, there would have been no global financial crisis.

Had they seen this coming and acted sooner, the Federal Reserve and U.S. Treasury would not today, like Henny Penny, be crying, “The sky is falling!” and the end times are at hand, unless we give them 5 percent of our gross domestic product to buy up suspect securities backed by sub-prime mortgages.

Consider what the “Paulson Plan” of Treasury Secretary Hank Paulson, against which Sen. Richard Shelby and the House Republicans rebelled, entails.

Since Americans save nothing and have to borrow from abroad to finance our trade and budget deficits, wars and foreign aid, what the secretary proposes is this: that Congress authorize the Treasury to spend $700 billion to buy up the toxic paper on the books not only of U.S. banks, but of foreign banks operating in the United States. According to The Washington Times, the Treasury would also be authorized to buy up securities backed by rotten auto loans, student loans and credit card debts.

Thus America would be borrowing from China, Japan and the Middle East to tidy up the balance sheets of the banks of China, Japan and the Middle East. And all the rotten paper will be offloaded onto U.S. taxpayers, who hopefully will be able to recoup some of their losses, because some of the paper will be good.

Why should we do this? Because otherwise there will be a financial panic, followed by a market collapse, wiping out pensions, 401Ks, portfolios and defined benefit plans of Middle America, forcing millions into bankruptcy and millions more to put off retirement and continue working until they drop.

In a democracy, it is said, you get the kind of government you deserve. But what did the American people do to deserve this? What did they do to deserve the quality of financial, corporate and political leadership that marched them into this mess — and that today postures as their rescuers?

Consider what this mess has already cost taxpayers: $29 billion to buy the rotten paper of Bear Stearns so J.P. Morgan would buy the investment bank; $85 billion for 80 percent of AIG to nationalize it; $150 billion in a stimulus package to flood the nation with cash; perhaps $300 billion to bail out Fannie Mae and Freddie Mac; and now $700 billion to begin taking the toxic paper off the hands of America’s big banks.

And even if this is passed, say Paulson and Fed Chairman Ben Bernanke, there is no guarantee this will resolve the crisis. If the $700 billion is not provided and the toxic paper is not pulled off the books of the world’s banks by U.S. taxpayers, however, we face an almost certain collapse, surging bankruptcies, rising unemployment, a shrinkage of GDP and a recession, if not worse.

Yet, the fellows who tell us we face a financial mushroom cloud over every American city if we do not act at once to provide the $700 billion did not see this coming and can make no guarantee that this will succeed and end the crisis.

Nevertheless, it must be done, and done now, as collapse is imminent.

Looking at all the money being ladled out by the U.S. government to prevent a collapse, and the diminished revenue coming in, it is hard to see how America avoids future deficits that reach $1 trillion a year. These will imperil both the dollar itself and the ability of the United States, which saves nothing, to borrow from the rest of the world. The downsizing of America is at hand.

Yes, indeed, we have arrived at the Day of Reckoning for Uncle Sam.

---

Mr. Buchanan is a nationally syndicated columnist and author of Churchill, Hitler, and “The Unnecessary War”: How Britain Lost Its Empire and the West Lost the World, “The Death of the West,”, “The Great Betrayal,” “A Republic, Not an Empire” and “Where the Right Went Wrong.”

Troubled Wachovia Seeks Out a Merger

By ROBIN SIDEL, DAVID ENRICH and DAN FITZPATRICK

Wachovia Corp. has entered into preliminary talks with a handful of possible buyers — the latest in a parade of banks to look for safety in the arms of a suitor amid concerns that the weak economy is pushing them deeper into peril.

The talks came as Washington Mutual Inc.’s late-Thursday failure rattled the shares of other troubled banks. Shares in Wachovia fell 27% on Friday as investors fretted about its massive mortgage portfolio.

Getty Images

People walk by a Wachovia branch in New York City.

Investors are growing concerned that a host of banks nationwide, both large and small, could come under fresh pressure to either raise more capital or else find someone willing to buy them. The trouble stems in part from the fact that a broad range of borrowers, not just mortgage holders, are now starting to default on their debt. For instance, about 2.4% of payments on credit cards are more than 90 days overdue, according to the Federal Deposit Insurance Corp., the highest level since 1991.

Wachovia is talking to potential buyers including Wells Fargo & Co., Banco Santander SA of Spain and Citigroup Inc., according to people familiar with the situation. Wachovia officials don’t believe they need to rush into a deal, and the bank isn’t feeling immediate pressure on its financial condition, people familiar with the company said.

Wachovia declined to comment on the discussions. Earlier Friday, a spokeswoman said the bank is “aggressively addressing our challenges.” Since June, Wachovia has opened 745,000 new checking accounts, she added, indicating confidence among its customers.

Banco Santander, Citigroup and Wells Fargo declined to comment.

In a sign of the depth of tension among financial institutions broadly, banks on Friday remained very skittish about making short-term loans to each other — a crucial ingredient in the banking business. The rate on three-month loans between banks eased slightly, to 3.7%, on Friday. Still, that’s almost double the level that would be expected if the market were more stable.

This reluctance to lend has implications for a broad swath of the business community: Interest rates on short-term loans that corporations routinely use to fund day-to-day expenses also remain extremely elevated.

For financial institutions, “the clock is ticking a heck of a lot faster today,” said Matthew Kelley, a bank analyst at investment-banking firm Sterne, Agee & Leach Inc. The federal government’s seizure of WaMu in the largest bank failure in U.S. history shows that regulators are “not going to mess around” with shaky banks and thrifts, especially given the chaos gripping financial markets.

The structure of J.P. Morgan Chase & Co.’s purchase of WaMu’s banking operations also sent shudders through the market for investment-grade bonds. In the deal, bondholders — who typically have a priority claim over common-stock shareholders — are likely to recover only between zero and 50 cents on the dollar, according to an analysis by independent research firm CreditSights. That could sour investors’ appetite for a wide range of financial-industry bonds.

Washington Mutual’s seizure by the government late Thursday helped push financial stocks lower on Friday. Some of the hardest hit stocks included BankUnited Financial Corp., of Coral Gables, Fla., which fell 21% to 79 cents on Nasdaq and Downey Financial Corp., Newport Beach, Calif., down 48% on the New York Stock Exchange.

Tom Richlovsky, chief financial officer at National City, said the Cleveland-based bank’s 44% stock-price drop Friday is “a temporary, irrational phenomenon.” The decline “ignores the fact that the difference between [National City and WaMu] is like night and day,” he said. National City’s woes relate to its abandoned push into mortgages in places like Florida, far from its home turf.

Overall, stocks jumped in Friday trading, largely on renewed hopes that a proposed $700 billion government bailout of the financial sector might be back on track.

U.S. leaders and bank executives hope that the federal bailout package being hammered out in Washington will help steady the industry by giving banks a way to shed some of their most toxic mortgage assets. The vast majority of U.S. banks also remain well-capitalized, giving them a cushion against the sluggish economy and further declines in housing prices.

Across the country, WaMu’s branches opened as usual Friday morning, albeit under new owner J.P. Morgan Chase & Co., which bought WaMu’s banking operations for $1.9 billion.

At a Chicago WaMu branch on Friday, Catriona Johnson, 27 years old, said she had come intending to take out all her money. “I wanted to close my account and hold it in my bra or something,” she said. However, after being told that her account balance is federally insured, Ms. Johnson, the administrative coordinator at a Chicago company that tests homes for the presence of toxins, decided to leave the money alone for now.

WaMu’s seizure by the government eliminated one of the shakiest institutions. But the fact that no one was willing to buy its vast consumer-banking business until the institution actually failed shows how deep the industry’s woes are. In recent years, its prized network of more than 2,200 branches would likely have triggered a bidding war among suitors.

In recent weeks, Wachovia had been talks about a potential merger with Morgan Stanley. But that scenario was apparently put on hold by Morgan’s move Sunday night to convert into a bank holding company instead of an investment bank.

In addition to the problem of widening defaults on credit-card debt, delinquent loans on non-residential real estate rose 20% in the second quarter from a year earlier. Late payments on bread-and-butter business loans, which account for the bulk of the loan portfolios at many banks, jumped 15%. All those percentages are expected to keep rising.

“The housing thing is kind of behind us” in terms of the write-downs, said Ted Salter, chief financial officer of Gateway Financial Holdings Inc., a bank-holding company in Virginia Beach, Va. Now it has “moved into commercial loans, construction loans, development loans,” he said. “Next week, it’ll be something else.”

The 13 bank failures so far this year don’t come close to the savings-and-loan crisis of the late 1980s, when hundreds of shaky institutions failed, costing taxpayers about $130 billion. By other measures, though, some bank executives say the current turmoil is worse, since it is more geographically widespread and involves a broader mix of loans.

Alan Worrell, chief executive of Sterling Bank, a Montgomery, Ala.-based unit of Synovus Financial Corp., says the industry’s problems now are “far worse” because the real-estate market is so backlogged with unfinished homes and other construction projects that it will haunt lenders and borrowers for years.

After generating record profits during the housing boom, it has taken only a year for the banking industry’s profitability to evaporate. Second-quarter profit fell to just $5 billion from $36.8 billion a year earlier, its second-lowest level since 1991.

About 18% of federally insured lenders lost money in the second quarter. Dividends paid to bank-stock investors plunged by $35 billion in first six months of 2008.

Third-quarter results could show the industry’s first overall loss since the fourth quarter of 1990. One big reason: Banks need to set aside more money to cover loans that have gone sour, a move that cuts deeply into profitability.

Forced to conserve capital in order to cover ballooning losses, commercial banks are far more reluctant to lend money than they were just even a few months ago. Of 3,000 companies surveyed by RBC Capital Markets, 25% said it is harder to borrow money than 90 days ago.

There isn’t a clear way out of trouble. There aren’t many investors willing to take a bet on banks right now, particularly given WaMu’s example: In April, it received a $1.35 billion investment from the giant investment firm TPG — which lost the entire amount this week when WaMu failed.

Aside from J.P. Morgan’s purchase of WaMu, few weak banks have been snapped up by stronger ones, partly because would-be buyers have their own headaches.

Some banks are paying unusually high interest rates on deposits to replenish their capital levels. That strategy raises red flags with many bankers because it is often viewed as a sign of desperation.

It can also be a double-edged sword: Banks that don’t want to compete on rates can’t attract deposits that are critical to making loans. In any case, that strategy didn’t work for WaMu, which paid some of the highest rates in the country.

Saddled with a mountain of troubled adjustable-rate mortgages inherited through its 2006 takeover of Golden West Financial Corp., Wachovia has seen its financial condition weaken. The bank’s CEO, Robert Steel, has said the bank has ample capital, noting that it added $20 billion to its certificate-of-deposit balances last summer due in part to a high-interest-rate promotion that began in June.

“I spend a lot of time trying to lay out the fact that we believe we’re liquid,” he said earlier this month. “We believe we have the ability with our current financial position to respond to issues, and we also have some other levers to pull” to improve its financial position, he said.

—Carrick Mollencamp, Ilan Brat and Liz Rappaport contributed to this article.

Write to Robin Sidel at robin.sidel@wsj.com, David Enrich at david.enrich@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com

Wachovia, Looking for Help, Turns to Citigroup

By BEN WHITE and ERIC DASH

 

Published: September 26, 2008

As concern spread Friday that more banks might run into trouble even with a $700 billion rescue for the financial system, Wachovia, one of those hardest hit by the housing crisis, became the latest to reach for a lifeline.

Weighed down by a huge portfolio of troubled mortgage loans, the nation’s fourth-largest bank by assets entered into preliminary deal talks with Citigroup, and extended feelers to Wells Fargo and Banco Santander of Spain, people briefed on the matter said. The talks are early, and no deal may emerge from them. But it appeared Wachovia was seeking potential alternatives should the bailout plan being debated in Washington not pass quickly, or fail to provide enough help.

Wachovia has a $120 billion portfolio of mortgages loaded with adjustable interest-rate loans that allow borrowers to skip part of their monthly payments, much of which it inherited from its ill-timed acquisition of Golden West, the big California lender, at the end of the housing boom in 2006.

In July, the bank hired Robert K. Steel, 56, a former vice chairman at Goldman Sachs, from the Treasury Department, where he worked with Treasury Secretary Henry M. Paulson Jr., trying to resolve the mortgage market crisis. Mr. Steel vowed to keep Wachovia independent and sought to raise $5 billion in capital over the next year by selling noncore assets.

But the bank’s shares, which are down nearly 80 percent in the last year, plunged 27 percent Friday, to $10, as investors wondered about its health after the government’s seizure of Washington Mutual on Thursday.

“Wachovia has a real problem,” said Len Blum of the investment bank Westwood Capital. “Option ARMs are probably the worst mortgage products out there and Wachovia has a lot more of them than it has in tangible equity.”

A spokeswoman for Wachovia, Christie Phillips-Brown, said: “We are aggressively addressing our challenges and are working to strategically strengthen and manage capital and liquidity in this challenging environment.” The bank, she added, expects “that the Treasury plan under consideration by Congress is a constructive and important step toward restoring confidence and stability in our financial system.”

The discussions involving Wachovia and other banks came as Congress sought to break an impasse over the rescue plan proposed by Mr. Paulson, which would buy soured assets from troubled banks to prevent further failures. But no matter what a final package contains, analysts say it is unclear how much it would help a number of regional and community banks stretched by falling home prices.

“The Treasury Department plan will not prevent more bank failures,” said Chip MacDonald, a lawyer who advises banks at the law firm Jones Day. “The plan proposes to make purchases based on market prices, which are likely to be at a loss to the sellers. Such losses will deplete the sellers’ capital, which only strongly capitalized institutions can absorb without raising additional capital or a merging with a stronger bank.”

The Federal Deposit Insurance Corporation deemed 117 banks “troubled” at the end of June, up from 90 in the first quarter. Sheila C. Bair, the F.D.I.C. chairwoman, said Thursday that more failures are likely, although they would constitute only a handful of the nation’s 8,400 banks.

Many small and midsize banks do not have much exposure to the assets that are hardest to sell. “The sludge is primarily in the structured products, exotic residential mortgages and commercial mortgage-backed securities,” said Gerard Cassidy, a banking analyst at RBC Capital Markets.

Those securities have tended to be held by big banks and Wall Street firms. Small and midsize banks, by contrast, have built up big positions of corporate and commercial real estate loans for which there is a market, albeit a depressed one. Unless the government offers higher prices, it is unclear how many of them would use the fund.

What the bailout might do, however, is relieve pressure on the government’s insurance fund, which guarantees deposits of up to $100,000 per account holder if a bank fails. As of the end of June, the F.D.I.C. fund stood at about $45.2 billion after suffering a nearly $9 billion loss from IndyMac Bank’s sudden collapse.

“It’s not exactly a panacea,” said Mr. MacDonald. “For stronger banks, the plan will help them reduce risk, attract new capital or merger partners. For failing banks, it will help the F.D.I.C. resolve them at a lower cost to its deposit fund.” Instead, the Treasury Department coffers would directly absorb more of the losses.

Those concerns were reflected in the stock market Friday, where investors pushed down financial shares as conditions for banks continued to worsen. In addition to mortgage defaults, losses tied to auto loans, credit cards and commercial real estate are increasing along with unemployment. Analysts now project that several hundred banks could fail over the next three years, far more than the roughly 150 or so that they estimated this summer.

Smaller regional banks with troubled loan portfolios came under particular assault. Shares in National City, based in Cleveland, sank 25.7 percent to $3.71 even as the bank sought to assure investors that it remained well-capitalized and had not had an outflow of customer deposits, as Washington Mutual did.

Thomas A. Richlovsky, National City’s chief financial officer, said in an interview that investors had the impression his bank was a savings and loan institution regulated by the Office of Thrift Supervision, as Washington Mutual was. “That is like saying Tina Fey is Sarah Palin,” he said. “We are not a thrift, we are not a mortgage company, we are a bank. National City has no option-ARM mortgages on its books but is selling off a portfolio of troubled home equity, subprime mortgage and other bad loans.”

Downey Financial Corporation, a $13 billion savings and loan saddled with option-ARM mortgages, slid 48 percent to $2.03 Friday. Earlier this month, the Office of Thrift Supervision told Downey to provide a detailed plan to reduce its assets and strengthen management.

Shares in Morgan Stanley, which suspended merger talks with Wachovia last week after the investment bank changed into a bank holding company, also dropped 8.7 percent to $24.75, after investors began to doubt that the Mitsubishi UFJ Financial group of Japan would follow through on a commitment to pump around $8 billion in fresh capital into the bank.

In a memo to employees Friday, John J. Mack, Morgan Stanley’s chief executive, said that the Mitsubishi deal was moving ahead “as anticipated” and that the two banks were exploring different ways in which they could collaborate.

Michael J. de la Merced contributed reporting.

Wachovia Credit-Default Swaps Soar to Record After WaMu Failure

By Shannon D. Harrington and Abigail Moses

Sept. 26 (Bloomberg) — The cost to protect against a default by Wachovia Corp., the fourth-largest U.S. bank, soared to distressed levels after Washington Mutual Inc. was seized by regulators and its deposits sold off to JPMorgan Chase & Co.

Credit-default swaps protecting $10 million of Wachovia bonds from default for five years traded for as much as the equivalent of $3.5 million initially and $500,000 a year, according to broker Phoenix Partners Group. That compares with $670,000 a year and no upfront payment yesterday.

Wachovia’s 2006 purchase of Golden West Financial Corp. saddled the company with option adjustable-rate home loans that allow borrowers to make minimum payments less than what they owe, which is then added to their total debt balance. With JPMorgan saying they expect 20 percent losses on WaMu’s option ARM portfolio, Wachovia may need to raise $11 billion in capital to protect against losses from its loans, Deutsche Bank AG equity analyst Mike Mayo said in a note to clients today.

Wachovia is an “attractive target,” though “it’s not clear who wants to take them on at this time,” Bert Ely, president of consulting firm Ely & Co. in Alexandria, Virginia, said today in a Bloomberg Television interview.

Seattle-based Washington Mutual was taken over by the government yesterday after customers had withdrawn $16.7 billion from accounts since Sept. 16. New York-based JPMorgan acquired WaMu’s branch network for $1.9 billion.

Potential Suitors

The initial cost for credit-default swaps on Wachovia bonds dropped back to 25 percentage points, or $2.5 million, after the New York Times reported the Charlotte, North Carolina-based bank is in preliminary talks to merge with Citigroup Inc.

Wachovia has entered into preliminary discussions with banks including Spain’s Banco Santander SA, San Francisco-based Wells Fargo & Co. and New York-based Citigroup, the Wall Street Journal reported, citing a person familiar with the situation.

Morgan Stanley broke off merger talks with Wachovia to focus on a partnership with Japan’s Mitsubishi UFJ Financial Group Inc., CNBC reported earlier this week.

“We may yet see that type of deal,” Ely said. Morgan Stanley, along with Goldman Sachs Group Inc., “at some point in time need to acquire a large banking franchise, and Wachovia certainly becomes a very attractive target.”

Wachovia Bonds

Wachovia’s credit-default swaps are trading at levels that imply a 63 percent chance the company will fail within five years, according to a JPMorgan valuation model. That assumes bondholders would receive 30 cents on the dollar in the case of a default.

Wachovia’s $750 million of 4.375 percent bonds due in 2010 plunged 29 cents to 51 cents on the dollar, as of 1:03 p.m. in New York, according to Trace, the Financial Industry Regulatory Authority’s bond-pricing service. The yield increased to 51.6 percent, or 49.6 percentage points more than Treasuries with similar maturities.

“We are focused on managing our company and serving our customers with excellence,” Wachovia spokeswoman Christy Phillips-Brown said. “Our core franchises — retail banking, the nation’s third largest brokerage firm, wealth management and our commercial and corporate banking activities — are extremely valuable and continue to operate well relative to our competition.”

Chief Executive Officer Robert Steel, a former Treasury official who was hired to replace Kennedy Thompson in July, has said he’s firing workers and cutting more than $1.5 billion in annual costs to cope with losses from the loan portfolio.

Morgan Stanley

Credit-default swaps on Morgan Stanley also rose to distressed levels today, coming close to a record high reached last week after Lehman Brothers Holdings Inc. filed for bankruptcy protection. Morgan Stanley and Goldman both won approval from the Federal Reserve to become bank holding companies, moving away from a business model that investors have deemed too dependent on borrowed money, or leverage.

Morgan Stanley contracts traded at 17.5 percentage points upfront in addition to 5 percentage points a year, according to Phoenix Partners. That compares with 783 basis points a year and no upfront payment yesterday, CMA data show. They earlier traded at a record 22 percentage points upfront, Phoenix prices show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements.

Goldman, Citigroup

Credit-default swaps on other banks also rose today. Contracts on Merrill Lynch & Co., which agreed to sell itself to Bank of America Corp. last week as Lehman collapsed, rose 94 basis points to 415, according to CMA. Goldman contracts rose 86 to 449.

Contracts on Citigroup jumped 115 basis points to 325 basis points, CMA data show. Bank of America rose 13 basis points to 161 basis points, Wells Fargo increased 38 to 159 and JPMorgan climbed 34 basis points to 156 basis points.

Contracts on the Markit CDX North America Investment Grade Index, a benchmark gauge of credit risk linked to 125 companies in the U.S. and Canada increased 2.5 basis points to 163.5 basis points, Phoenix prices show.

Contracts on WaMu traded at 61 percentage points upfront today, Phoenix prices show, down from 74 percentage points earlier.

To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Abigail Moses in London Amoses5@bloomberg.net

Last Updated: September 26, 2008 18:13 EDT

Anti-White Attacks in Yorkshire: Gangs of Asian Youths Terrorise Pensioners

 

Gangs of Asian youths are tormenting elderly and disabled people in Staincliffe, Yorkshire, with foul-mouthed racist abuse, according to local newspaper The Press.
Residents living in a cul-de-sac on the edge of Staincliffe Estate say they are at the end of their tether after months of abuse.
The youths, aged from about 15 upwards, start congregating in Manor Way, close to Manorfields Infants School, from 4.10pm and hang around for hours on end, often up to midnight.
The yobs hurl abuse at passers-by, spitting racist comments at the elderly residents – all of whom are in their 70s and 80s.
The gang also makes lewd suggestions to girls and young women and on Saturday mocked a disabled man and threatened to tip him out of his wheelchair. In the past street signs have been pulled down and bins overturned. Cars have also been vandalised.
Police have been repeatedly called out but residents say nothing gets done. Now the residents, most of whom are too afraid to speak out publicly, are fighting back.
Residents’ spokesman Tony Gott, 71, said old people shouldn’t have to put up with the abuse.
“It has gone too far,” he said. “People are at the end of their tether and don’t know where to turn.”
“No one should have to live their lives in fear like this and when we go out to ask these youths to move on all we get is abuse.”
“They called me a ?fat, white bastard’ and the other day I was showered with a pile of bricks.”
“We had the police up here the other day and they spoke to this gang but they denied everything and the police said there was nothing they could do.”
“The police say ?we’ve taken their names’ but all that is a slap on the wrist. It doesn’t stop them.”
Retired builder Mr Gott, who has four sons, 11 grandchildren and five great-grandchildren, has lived in the street for almost 15 years.
On Saturday teatime Mr Gott heard the youths hurling abuse at a disabled man in a wheelchair who lives further down the estate.
“They were wanting to have a fight with him so I went out and told them to stop picking on people in wheelchairs.”
“All I got was abuse and that it was nothing to do with me. They threatened to turn the wheelchair over.”
“The police think we are exaggerating but we are not. We are all poorly people up here and two of the residents have cancer. We just can’t go to bed and have a good night’s sleep anymore.”
The cul-de-sac is also a magnet for drug dealers and users who lurk in dark corners behind Manorfields school but it is the gangs that make residents most afraid.
“I think there should be a curfew to get them off the streets,” said Mr Gott. “Something has to be done.”
Insp Neil Money, of the Batley Neighbourhood Policing Team, said “We are working very closely with local schools, mosques, shopkeepers and our partner agencies in order to ensure that the quality of life for residents is improved.”
Something tells us they are not addressing the real cause of the problem.

Drilling Forward

By INVESTOR’S BUSINESS DAILY | Posted Wednesday, September 24, 2008 4:20 PM PT

Energy: In a stunning defeat, congressional Democrats were forced to allow the quarter-century-old offshore drilling ban to expire. But the fight has only begun, with the struggle now shifting to state legislatures.

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Funny how the Democrat-controlled Congress can’t get the things it wants enacted, can’t even get a single appropriations bill passed, yet minority Republicans this week succeeded in ending a supposedly sacrosanct ban on oil and gas offshore drilling that dates back to the early 1980s.

It was an unexpectedly powerful knockdown of Democrats and their enviro-extremist allies, but they are not yet counted out.

GOP Sen. Jim DeMint of South Carolina noted in a letter to Senate Majority Leader Harry Reid, D-Nev., the possibility that Democrats would “use environmental lawsuits to block exploration until they can reinstate these energy bans after the November elections.” DeMint warned Reid that it “would be a major mistake.”

So with the ban ending, what are the next moves toward reducing America’s dependence on oil from hostile regimes in places such as the Middle East, Russia and leftist Venezuela?

DeMint has introduced a bill to expedite drilling leases, ensure that states share in oil and gas revenues, and prevent frivolous litigation designed to delay exploration for and production of oil.

Meanwhile, some state officials are already looking forward to the benefits for their citizens.

“The potential royalties to our state could be significant and could jump-start our economy in the midst of rising unemployment rates,” South Carolina State Sen. Shane Massey, a Republican, told the Greenville News.

Massey noted that Virginia has already made moves to get into the U.S. Interior Department’s five-year offshore drilling plan.

In California, where Gov. Arnold Schwarzenegger and leading Golden State Democrats adamantly oppose offshore production, a majority of Californians now favor drilling. Even the board of supervisors of Santa Barbara County, site of an infamous 1969 oil spill, last month voted to support drilling.

There are tens of billions of barrels of oil and hundreds of trillions of cubic feet of natural gas in our Outer Continental Shelf waiting for American consumers. That doesn’t include the 10 billion barrels of oil in the North Slope of Alaska. The oil shale in our Western states could provide hundreds of billions, if not trillions, of barrels of oil, dwarfing the crude reserves of current No. 1 Saudi Arabia.

House Minority Leader John Boehner, R-Ohio, is calling the end of the ban just the beginning of a new comprehensive energy policy. The House Republicans’ American Energy Act would expand drilling in remote areas, both on land and at sea, plus employ conservationist measures and promote alternative fuels.

It would also establish a “renewable energy trust fund” financed by oil revenues and use revenue sharing to give states an incentive for increased oil production.

According to Boehner, “If Democrats continue to block a vote on this plan, just as they blocked a real debate and vote on the outdated drilling bans for months on end, Republicans and the American people will hold them accountable.”

Republicans are obviously basking in a congressional victory few expected. With public opinion so transformed, and oil drilling now an issue that Republicans have proved they can use to embarrass Democrats, can this year’s presidential and congressional elections also be transformed to the GOP’s advantage?

The answer will have huge implications not just for energy, but for both our economy and our national security.

 

Fwd: Denmark-cost of Social liberalism & Islam

Salute the Danish Flag – It’s a Symbol of Western Freedom

 By Susan MacAllen

 

In 1978-1979, I was living and studying in  Denmark ..
But in 1978 – even in  Copenhagen , one didn’t see Muslim immigrants.

The Danish population embraced visitors, celebrated the exotic, went out of its way to protect each of its citizens. It was proud of its new brand of socialist liberalism, one in development since the conservatives had lost power in 1929 – a system where no worker had to struggle to survive, where one ultimately could count upon the state as in, perhaps, no other western nation at the time.

The rest of  Europe  saw the Scandinavians as free-thinking, progressive and infinitely generous in their welfare policies. Denmark boasted low crime rates, devotion to the environment, a superior educational system and a history of humanitarianism.

Denmark was also most generous in its immigration policies – it offered the best welcome in Europe to the new immigrant: generous welfare payments from first arr ival plus additional perks in transportation, housing and education. It was determined to set a world example for inclusiveness and multiculturalism.

How could it have predicted that one day in 2005 a series of political cartoons in a newspaper would spark violence that would leave dozens dead in the streets – all because its commitment to multiculturalism would come back to bite?

By the 1990’s the growing urban Muslim population was obvious – and its unwillingness to integrate into Danish society was obvious.

Years of immigrants had settled into Muslim-exclusive enclaves. As the Muslim leadership became more vocal about what they considered the decadence of  Denmark ’s liberal way of life, the Danes – once so welcoming – began to feel slighted. Many Danes had begun to see Islam a s incompatible with their long-standing values: belief in personal liberty and free speech, in equality for women, in tolerance for other ethnic groups, and a deep pride in Danish heritage and history.

The  New York  Post in 2002 ran an article by Daniel Pipes and Lars Hedegaard, in which they forecasted accurately that the growing immigrant problem in  Denmark  would explode In the article they reported:

‘Muslim immigrants constitute 5 percent of the population but consume upwards of 40 percent of the welfare spending.’ ‘Muslims are only 4 percent of Denmark’s 5.4 million people but make up a majority of the country’s convicted rapists, an especially combustible issue given that practically all the female victims are non-Muslim. Similar, if lesser, disproportions are found in other crimes.

”Over time, as Muslim immigrants increase in numbers, they wish less to mix with the indigenous population.

A recent survey finds that only 5 percent of young Muslim immigrants would readily marry a Dane.’ ‘Forced marriag es – promising a newborn daughter in Denmark to a male cousin in the home country, then compelling her to marry him, sometimes on pain of death – are one problem’

‘Muslim leaders openly declare their goal of introducing Islamic law once Denmark ’s Muslim population grows large enough – a not-that-remote prospect. If present trends persist, one sociologist estimates, every third inhabitant of  Denmark  in 40 years will be Muslim.’

It is easy to understand why a growing number of Danes would feel that Muslim immigrants show little respect for Danish values and laws.

An example is the phenomenon common to other European countries and the  US  : some Muslims in  Denmark  who opted to leave the Muslim faith have been murdered in the name of Islam, while20others hide in fear for their lives. Jews are also threatened and harassed openly by Muslim leaders in Denmark , a country where once Christian citizens worked to smuggle out nearly all of their 7,000 Jews by night to  Sweden  – before the Nazis could invade. I think of my Danish friend Elsa – who as a teenager had dreaded crossing the street to the bakery every morning under the eyes of occupying Nazi soldiers – and I wonder what she would say today.

In 2001,  Denmark  elected the most conservative government in some 70 years – one that had some decidedly non-generous ideas about liberal unfettered Immigration. Today  Denmark  has the strictest immigration policies in  Europe  . ( Its effort to protect itself has been met with accusations of ‘racism’ by liberal media across Europe – even as other governments struggle to right the social problems wrought by years of too-lax immigration.)

If you wish to become Danish, you must attend three years of language classes.. You must pass a test on  Denmark ’s history, culture, and a Danish language test.

You must live in  Denmark  for 7 years before applying for citizenship.. You must demonstrate an intent to work, and have a job waiting. If you wish to bring a spouse into  Denmark  , you must both be over 24 years of age, and you won’t find it so easy any more to move your friends and family to  Denmark  with you.

You will not be allowed to build a mosque in  Copenhagen  . Although your children have a choice of some 30 Arabic culture and language schools in  Denmark  , they will be strongly encouraged to assimilate to Danish society in ways that past immigrants weren’t..

In 2006, the Danish minister for employment, Claus Hjort Frederiksen, spoke publicly o f the burden of Muslim immigrants on the Danish welfare system, and it was horrifying: the government’s welfare committee had calculated that if immigration from Third World countries were blocked, 75 percent of the cuts needed to sustain the huge welfare system in coming decades would be unnecessary. In other words, the welfare system as it existed was being exploited by immigrants to the point of eventually bankrupting the government. ‘We are simply forced to adopt a new policy on immigration.

The calculations of the welfare committee are terrifying and show how unsuccessful the integration of immigrants has been up to now,’ he said..
 

A large thorn in the side of  Denmark  ’s imams is the Minister of Immigration and Integration, Rikke Hvilshoj. She makes no bones about the new policy toward immigration, ‘The number of foreigners coming to the country makes a difference,’ Hvilshøj says, ‘There is an inverse correlation between how many come here and how well we can receive the foreigners that come.’ And on Musl im immigrants needing to demonstrate a willingness to blend in, ‘In my view,  Denmark  should be a country with room for different cultures and religions. Some values, however, are more important than others. We refuse to question democracy, equal rights, and freedom of speech.’

Hvilshoj has paid a price for her show of backbone. Perhaps to test her resolve, the leading radical imam in Denmark , Ahmed Abdel Rahman Abu Laban, demanded that the government pay blood money to the family of a Muslim who was murdered in a suburb of Copenhagen , stating that the family’s thirst for revenge could be thwarted for money. When Hvilshoj dismissed his demand, he argued that in Muslim culture the payment of retribution money was common, to which Hvilshoj replied that what is done in a Muslim country is not necessarily what is done in Denmark. The Muslim reply came soon after: her house was torched while she, her husband and children slept. All managed to escape unharmed, but she and her family were moved to a secret location and she and other ministers were assigned bodyguards for the first time – in a country where such murderous violence was once so scarce.&n bsp;

Her government has slid to the right, and her borders have tightened. Many believe that what happens in the next decade will determine whether  Denmark  survives as a bastion of good living, humane thinking and social responsibility, or whether it becomes a nation at civil war with supporters of Sharia law.

And meanwhile, Americans clamor for stricter immigration policies, and demand an end to state welfare programs that allow many immigrants to live on the public dole. As we in America look at the enclaves of Muslims and illegal Hispanics amongst us, and see those who enter our shores too easily, dare live on our taxes, yet refuse to embrace our culture, respect our traditions, participate in our legal system, obey our laws, speak our language, appreciate our history. We would do well to look to  Denmark , and say a prayer for her future and for our own.

Betting on Financial Armageddon (John Mauldin)

In this issue: Pricing in Financial Armageddon Inside a RMBS Ratings to Collateral to Ratings: A Vicious Cycle This Too Shall Pass South Africa, Boulder and Stand Up to Cancer

My Dad used to tell me there is no accounting for standards when looking at something that seemed odd. Today, we have faulty standards for accounting that are ripping apart the fabric of the world’s economy. How can a security that has a high probability of full repayment be downgraded from AA to junk levels? What we will explore today tell us a lot about why we are in the crisis state of affairs. Since I wrote you last Friday, the financial landscape of the world has changed even more. And what will happen this weekend will change it even more. And our kids will be paying for it for a long, long time. At the end I offer a few thoughts on the events, and if there is time my thoughts on the new short covering rules. All in all, it should make for an instructive and interesting letter. We’ll jump right in with no “but first.” I was invited to an invitation only presentation to a room of chief executives of a number of small Texas banks made by Rich Berg of Performance Trust Capital Partners this week (http://ptcp.performancetrust.com). He graciously gave me permission to go over the main points of his presentation. I think you will find it eye-opening to say the least. You probably have seen Rich, as he is all over the media lately. Let’s jump back 18 months. I spent several letters going over how subprime mortgages were sold and then securitized. Let’s quickly review. Huge Investment Bank (HIB) would encourage mortgage banks all over the country to make home loans, often providing the capital, and then HIB would purchase these loans and package them into large securities called Residential Mortgage Backed Securities or RMBS. They would take loans from different mortgage banks and different regions. They generally grouped the loans together as to their initial quality as in prime mortgages, ALT-A and the now infamous subprime mortgages. They also grouped together second lien loans, which were the loans generally made to get 100% financing or cash-out financing as home owners borrowed against the equity in their homes. Typically, a RMBS would be sliced into anywhere from 5 to 15 different pieces called tranches.  They would go to the ratings agencies, who would give them a series of ratings on the various tranches, and who actually had a hand in saying what the size of each tranche could be. The top or senior level tranche had the rights to get paid back first in the event there was a problem with some of the underlying loans. That tranche was typically rated AAA. Then the next tranche would be rated AA and so on down to junk level. The lowest level was called the equity level, and this lowest level would take the first losses. For that risk, they also got any residual funds if everyone paid. The lower levels paid very high yields for the risk they took. Then, since it was hard to sell some of the lower levels of these securities, HIB would take a lot of the lower level tranches and put them into another security called a Collateralized Debt Obligation or CDO. And yes, they sliced them up into tranches and went to the rating agencies and got them rated. The highest tranche was typically again AAA. Through the alchemy of finance, HIB took subprime mortgages and turned 96% (give or take a few points depending on the CDO) of them into AAA bonds. At the time, I compared it with taking nuclear waste and turning it into gold. Clever trick when you can do it, and everyone, from mortgage broker to investment bankers was paid handsomely to dance at the party. Will we ever forget Charlie Prince’s line, the CEO of Citigroup, saying that “As long as they are playing music, you have to get up and dance?” just a few weeks before the market imploded? Apart from having his rhythm being proven totally horrendous and overseeing an implosion which cost Citigroup tens of billions, it was a great statement of the zeitgeist of the financial world at the time. The key word here is model. The ratings agencies used data supplied by the investment banks on what the likely default rates would be. It was something like taking an open book test where you get to write the questions. And since home values had only gone up, default rates were low. And of course, the data was from an ear when bankers lent money actually expecting to get paid back. Inside a RMBS Let’s look at a RMBS. As Berg points out, when you are buying a mortgage backed security, there are really only three questions you need to know the answers to: How many mortgages will default? How much will I get back on a defaulted loan? How much credit enhancement is there in the security? Let’s set the table by looking at a few terms and definitions. Using his example, let’s take a mortgage where the home was originally appraised for $400,000 and there is a $300,000 mortgage on the home. Let’s assume a default and the bank takes back the home. If they sell the home and recover $240,000 that means they lose $60,000. This is called a 20% severity. If they sold and recovered $150,000 it would be said to have a 50% severity. Next, let’s look at how the rating agencies come up with the AAA rating. First they model the expected losses, with emphasis on the word model. If they figure that worst case that 8% of the loans default at a severity of 50%, then the security would lose 4% of its value. To get an AAA rating you have to have at least two times the coverage of the “modeled” loss. In this illustration, that means that 92% of the loans would be put into the AAA tranche. An A rating assumes a coverage of more than 1 times but less than 2. B means you expect to get your money back and if they model that you will get below 100% back then the rating would be at junk levels. Now, this next fact is important. All ratings assume a par value of 100. The rating of these bonds has nothing to do with price. After the presentation, Rich sat down with me and pulled up an actual mortgage backed security that was being offered that day on his screen. It was once a AAA rated Alt-A security. If I remember correctly it was a 2006 vintage security. As of the latest reporting, a little over 5% of the mortgages were over 60 days past due or in foreclosure. In this security, there are no toxic option ARMS. The numbers of mortgages in this security that are in trouble are rising. S&P has downgraded that AAA tranche to BBB, which of course means its value is going down. And sure enough, the offered price of the security is 70 cents on the dollar, or 70% of the original par value. Now remember, this particular AAA bond will only start to lose money after the lower tranches take up the first 8% of losses. Thus, this bond can be said to have an 8% credit enhancement. Pricing in Financial Armageddon Now, let’s stress test that loan. For the AAA portion of the loan to lose money, that would mean that 16% of the loans would have to default with a severity of 50% losses. Could that happen? Sure. But let’s look at what buying that loan at 70 cents on the dollar does for the new owner. First, you are getting a much higher yield (interest rate) because you are buying the security at a lower valuation. But something else even more interesting happens. Even though the security sold at 70 cents, it still gets all of the first of the proceeds of the home owners who pay their mortgages, up to 92% of the original value in the security. How many loans would have to default in order to make the buyer at 70 cents lose money? Remember, we already had credit enhancement of 8%. But at 70 cents, we just “bought” or priced in another 30%. Let’s think Armageddon and that 50% of the mortgages default and they only recover 50% of the loans. That would only be a total loss of 25% to the entire collateral of the deal, but it would mean that the new investor still get all of my 70 cents plus another 13% back! The proud new owner could get up to 92% of the monies paid. Even in a pretty bad scenario, you get more than you paid for the security. Let’s walk through the math. Let’s say the original security was $100 million (which would be a very small RMBS). The AAA tranche would have cost $92 billion. If you have it at 70 cents on the dollar you paid approximately $64 billion. In my Armageddon scenario above, the security loses 25% or $250 million. The lower rated tranches are completely wiped out losing $8 billion. Your tranche loses the remaining $17 billion which means you get $75 billion and you only paid $64 billion. So, how bad would things have to get to lose money on this security? If I am doing the math right, 72% of the loans would have to default with a severity of 50% before your investment of $64 billion was impaired by even so much as 1 dollar. If that happened, it would be Armageddon. So, why is it rated BBB? Because the rating is over the entire tranche and it is made at a par price of 100. The rating is not affected by the current price. As of today, assuming that even double the number of mortgages currently delinquent default with a 50% severity, your returns over the life of the security would be well over 12%. You would get back $92 million for your $64 billion dollar investment along with interest payments. The reason this presentation was being made to banks and institutions? Because if you are a bank, you can generally only get prime plus 2% on a loan you make. But if you buy this security with your capital, you can make prime plus 6%. That is a large difference to a bank. Performance Trust has sold billions of this type of paper to banks and institutions. If this is such a good deal, then why isn’t everyone hitting the bid? Because these securities are very difficult to analyze. It is time consuming. You need to analyze every loan and develop your own valuations. You simply can’t trust the ratings, as they are measuring something completely different. And the real truth is that many of the various RMBS securities will in fact be totally wiped out or lose a great deal. Many are seeing default rates of 30% or more. You have to be very careful when you walk through this minefield. And in a time of crisis, it is not clear what the new rules will be. What if the government forces lenders to re-set mortgages at some loss level? What if the housing crisis gets worse? On the other hand, what if the government comes in and buys up all the bad mortgages in an attempt to stop the erosion in the home markets. The level of uncertainty in these times makes people a lot more cautious. There are Alt-A RMBS like the one mentioned above that are probably not worth even 70 cents on the dollar. These things are marked to a market that is frozen. Everything gets lumped into the same basket and it all has to be marked to market by the new accounting rules called FASB 157. The institution selling the above mentioned security is being forced to do so, either because they are in financial trouble or they are not allowed to hold BBB securities in their portfolios and by law are required to sell. And in times of crisis, the selling price is not that of normal times. Ratings to Collateral to Ratings: A Vicious Cycle What’s a recipe for a perfect financial storm? Let’s make a massive amount of bad loans and get them on the books of most of the major financial institutions because they are rated investment grade. Then let’s have the loans start to go bad. Throw in some general panic as everyone tries to sell the loans. No one is buying. Let’s make a new rule that you have to mark your illiquid securities to the last price paid by someone desperate to sell. That means that many institutions now have to mark their capital down and that means those pesky rating agencies must by their own rules mark down the ratings of the institutions which of course means that it costs them more to raise capital at a time when they can’t get it which means they get lower ratings and so on. It becomes a vicious cycle. In the early 80’s, every major US bank was bankrupt because they had loaned Latin American countries far more than their capital they had on their books. The Latin American countries defaulted. If the US banks had been forced to mark to market, they would have all gone down taking the US economy along with them. So, the Fed simply allowed them to carry the loans at book value, offering liquidity and allowing the banks to buy time to make enough money to eventually write off the loans. The current mark to market rule, while nice in theory, works in normal times. But it has the unintended consequence of making things worse in crisis times. Why should an institution have to write down a security which over time is going to pay back the lion’s share or more of its value just because a severely stressed institution was forced to sell that security at a very low price in a time of crisis? Yes, there needs to be transparency and we as investors need to know what is on the books of the companies that we invest in. But it is somewhat like my bank asking me to mark to market my home and pricing my loan daily based on that new price. If my neighbor loses his job and sells his home at auction, does that mean my home is now worth less two years from now. Maybe an even better analogy, if I am renting that home to a very good tenant, does my neighbor’s price impair my income? I was, and am, a fan of mark to market pricing. But we need to think through what a market price is. Not all things can be easily marked to market. This is doubly true when “market price” is a nebulous index of mortgage securities which may or not have a fundamental relationship with an illiquid security on the books of an institution which has no intention of selling, especially in a time of credit crisis. It is one thing to require that you mark your stocks or bonds to market values. It is another thing entirely to require all mortgage backed securities, which are extremely complex things, can be very different one from another and which require a lot of time and effort to value, to be priced as though they are all the same. FASB 157 needs to be amended this week. If Congress can create a new Resolution Trust Corp in a week, the surely the accounting board, with the suggestion of Treasury, can figure out a better way to price illiquid securities. This Too Shall Pass I know that you probably are reeling from all that has happened the past few months and especially the past two weeks. Lehman and Mother Merrill gone? We the people own AIG? Fannie and Freddie? A new housing bailout which will cost hundreds of billions? The Fed creating whole new programs to provide liquidity? Did you notice they loaned some $250 billion this last week to banks all over the world? Stopping short selling? Want to see in graph form how bad it got and what spooked Paulson, Bernanke and company to act so quickly? Look at these graphs from my friends at Casey Research (http://www.caseyresearch.com/crpmkt/crpSolo.php?id=119&ppref=JMD119ED0908A). 30 day commercial paper went to 5% from 3% a week ago. The market was literally freezing. And the amount of paper issued is in free fall. Commercial paper is the life blood of the financial and business world. Without it commerce will soon grind to a halt. It simply takes your breathe away. As President Bush said today, it does not help to find who is at fault today, we have to figure out how to get out of this mess. It is going to cost the taxpayers a lot of money. While I think the losses on AIG will be rather minor in the grand scheme of things, if you add up Fannie and Freddie and a new RTC, coupled with the stimulus package, you can easily get to $500 billion, and that is probably a low number. For such a price, we had better get a new regulatory scheme which requires reduced leverage. Want to get really mad? Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three down. As Barry Ritholtz wrote: “So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis.“  (Don’t get me started on blaming the short sellers. Let’s not blame the people who leveraged up their companies 40 to 1 with bad investments.) We absolutely must move credit default swaps to a regulated exchange, no matter how much investment banks and hedge funds scream. Must be done. Do it now. Real rules about writing mortgages, although now that losses are in the hundreds of billions, underwriting rules are already becoming quite restrictive. And while we are at it, a thorough revamping of the rating agencies and the rules they use should be at the top of someone’s list. South Africa, Boulder and Stand Up to Cancer It is time to hit the send button. Chuck Butler of Everbank and Thomas Fischer of Jyske Bank just walked into the office to watch the Texas Rangers play Anaheim from my balcony (which is inside the Ballpark where the Rangers play). That would be baseball to those not from the states. Chuck is a huge baseball fan and when I heard he was going to be in town I had to have him come, even on a writing day. Everbank is known for letting clients open CDs denominated in scores of different currencies. If you are interested in diversifying away from the dollar, you can go to Everbank.com. Or call EverBank at 800-926-4922. Chuck has had some very serious cancer, and has been going through lots of chemo. He just told me that his latest scan shows him 100% cancer free, and he is going off the chemo. Sometimes good things do happen to good guys. And speaking of cancer, Stand Up to Cancer is a charity formed to raise money to find cures for cancer and fund innovative new therapies and research. SU2C is going to make a difference in how cancer research is conducted over the next five years, with its focus on targeted treatments that interrupt the mechanisms of uncontrolled cell growth.  This is the kind of emphasis that can make cancer into a disease patients live with, rather than one they die from (sort of like AIDS has become for most of its victims in developed countries). You can and should see the program broadcast live a few weeks ago on most major networks. And then send money. Their web site, with tons of information is http://www.standup2cancer.org/ and the TV show is at http://www.nbc.com/Movies_Specials_More/Stand_Up_To_Cancer/video/episodes/. I leave for Cape Town in South Africa tomorrow morning. I will be speaking at the ABSIP (Association for Black Securities & Investment Professionals) Annual Conference in Cape Town on September 23. Then that evening I fly to London for meetings with my partners and clients there and fly back to Dallas on Thursday. I hope to be able to keep up with what is going on and write the letter next Friday. And then Sunday I fly to Boulder to meet with Dr. Bart Stuck and learn about a company called InPhase which is making holographic memory. Pretty cutting edge stuff. I mention this because it is companies like InPhase, and a thousand more like them, which will power the next big wave of change. The crisis on Wall Street will pass and the world will continue to change. I think it is going to change for the better for most people. The game ahs started, so I think I am going to find an adult beverage and really, truly celebrate with Chuck, who was on the road when he got the news. I know he will be celebrating with his family when he gets home. Your not looking forward to a 15 hour flight analyst, John Mauldin John@FrontLineThoughts.com Copyright 2008 John Mauldin. All Rights Reserved Note: The generic Accredited Investor E-letters are not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for accredited investors who have registered with Millennium Wave Investments and Altegris Investments at www.accreditedinvestor.ws or directly related websites and have been so registered for no less than 30 days. The Accredited Investor E-Letter is provided on a confidential basis, and subscribers to the Accredited Investor E-Letter are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private investment offerings with other independent firms such as Altegris Investments; Absolute Return Partners, LLP; Pro-Hedge Funds; EFG Capital International Corp; and Plexus Asset Management. Funds recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor’s services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.

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You have permission to publish this article electronically or in print as long as the following is included: John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore To subscribe to John Mauldin’s E-Letter please click here: http://www.frontlinethoughts.com/subscribe.asp To change your email address please click here: http://www.frontlinethoughts.com/change.asp If you would ALSO like changes applied to the Accredited Investor E- Letter, please include your old and new email address along with a note requesting the change for both e-letters and send your request to wave@frontlinethoughts.com To unsubscribe please refer to the bottom of the email. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. John Mauldin is also president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. All material represents the opinions of John Mauldin. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staff at Thoughts from the Frontline may or may not have investments in any funds cited above. Mauldin can be reached at 800-829-7273.

Poll: McCain has slight lead in Ohio over Obama

By The Associated Press – 6 hours agoTHE POLL: The Ohio Newspaper Poll, presidential race, likely Ohio voters (20 electoral votes).

THE NUMBERS: John McCain 48 percent, Barack Obama 42 percent.

OF INTEREST: Almost half of Ohio voters, or 47 percent, say they are worse off than four years ago. About one-third, 34 percent, said they were the same, while 19 percent said they were better off. The candidates have lined up support within their own party, with 85 percent of Republicans saying they would vote for McCain and 81 percent of Democrats in favor of Obama. Obama has the edge among independent voters, 38 percent to 33 percent for McCain, with 19 percent still undecided.

DETAILS: Conducted from Sept. 12-16 by landline telephones among 869 likely Ohio voters. Sampling error plus or minus 3.3 percent.

MORE: http://blog.cleveland.com/openers/2008/09/ONOpoll.pdf

Tolerance and Diversity

Tolerance is a false label to promote double standards. Otherwise, the use of the word tolerance – usually in connexion with another word: diversity – would not mean what it is ostensibly connoted for. That is, tolerance without diversity means forebearance. On the other hand, tolerance with diversity means parallel or ‘double’ standards. In the sense that tolerance is a good thing in and of itself, lobbyists for the same might as well be promoting lawlessness, because that is what tolerance is in the context in which it is used – i.e., in terms of social standards. However, when tolerance is coupled with diversity – i.e., ethnic and cultural – it refers to multiple standards for judging social behavior.

Huge shifts ahead after financial titans fall (Wash Post)

Investment banks took ever-greater risks on esoteric investment

Employees leave the New York Stock Exchange on Friday after a tumultuous week. Stocks rallied Friday with the Dow rising 369 points.

The credit crisis shaking the global economy is forcing a dramatic reconfiguration of Wall Street, where the financial industry in recent years has been driven to take ever-greater risks on increasingly esoteric investments.

The fragility of Wall Street’s architecture was exposed this week when two icons of investment banking and the world’s largest insurance company were fed into the maw as their competitors pushed for a historic government bailout to help salvage their own shaky businesses.

It is too early to tell whether Wall Street has truly been transformed by the series of upheavals or is simply witnessing a shuffling of its players. But as dealmakers and policymakers now sift through the debris, some shifts are already evident, both in the structure of high finance and the culture of those who practice it.

“The competitive landscape of finance is changing before our eyes and the losers are the investment banks,” said Roger Leeds, director of the Center for International Business and Public Policy at Johns Hopkins University. “What we’re having now is a fundamental correction, not only of the market but of the institutions themselves.”

Three out of five fallen
Three of the five free-standing investment banks have fallen. Bear Stearns was sold at a fire sale, 158-year-old Lehman Brothers went bankrupt and Merrill Lynch is being acquired by Bank of America. The surviving titans, Morgan Stanley and Goldman Sachs, remain under pressure and have been weighing their options.

As financial analysts survey the horizon, they see the emergence of a handful of giant, global firms that manage a wide range of business activities alongside several boutique advisory firms that court blue-chip clients. Newer players will remain on the scene, including hedge funds and private-equity firms — both lightly regulated entities that manage pools of money for wealthy investors and often buy large holdings in securities or sometimes directly invest in companies.

These changes could be accompanied by a cultural shift as the sheen comes off a longtime career destination for those with the brains, ambition and fortitude to place high-stakes wagers in return for outsize paydays.

Already, the shakeout is costing jobs and ruining fortunes. New York Mayor Michael Bloomberg estimates 40,000 workers in New York state, including many well beyond Wall Street, could lose their jobs as a result of the financial crisis.

Birth of a new system?
Whether these changes portend a permanent remaking of Wall Street remains uncertain. The answer could turn in part on whether the government’s rescue plan announced Friday succeeds. If the massive bailout fails, the destruction wrought on global financial markets could be staggering, ultimately clearing the way for the birth of a new system.

If the federal plan works, most of Wall Street could be spared and the business model that has powered it in recent years — centered on complex securities, tremendous borrowing and opaque dealings — could resume much as before. That is, unless the inevitable excesses are tamed by new regulation.

The fall of the investment bank was of its own making, analysts said. Starting in the 1980s, investment banks began straying from their traditional roles as intermediaries to mergers and acquisitions, investment advisers to corporations and individuals, traders of securities and portfolio managers for wealthy clients.

Driven by competition and the hunger for bigger profits, they began to aggressively push exotic products like asset-backed securities and other derivatives.

The investment banks not only sold these instruments to investors but also began purchasing them for the firms’ own accounts, using larger and larger amounts of borrowed money. The more risks investment bankers took, the more money they made. Internal controls were lax.

“I don’t think they had a good appreciation of the risks they were taking,” said Ray Hill, a finance professor at Emory University.

Balkanized oversight

Nor were government regulators fully aware of the gathering storm. They were hobbled by balkanized oversight and gaps in disclosure rules.

“The problem is transparency because regulators weren’t able to assess risks at investment banks in the way they are able to with commercial banks,” said Mark Gertler, an economics professor at New York University.

Two of the big five investment houses have landed in the arms of commercial banks with Bank of America’s purchase of Merrill and J.P. Morgan Chase’s takeover of Bear Stearns. Meanwhile, the British bank Barclays is acquiring choice bits of Lehman (a bankruptcy judge in New York yesterday approved the sale of nearly all Lehman’s assets), and Morgan Stanley is considering a merger with Wachovia, one of the country’s largest commercial banks.

With the merger of investment banks into commercial banks and leaders of both political parties pressing for new regulations to enhance transparency and control over banks’ investments, analysts say the new Wall Street could be a throwback to previous decades.

Investment and commercial banking was separated by law in 1933, when Congress passed the Glass-Steagall Act in response to a banking crisis that ushered in the Great Depression. By banning banks from selling stocks and bonds, the government aimed to end abuses that caused the collapse of thousands of banks across the country, wiping out the deposits of millions of customers who, at the time, did not have the benefit of federally guaranteed deposit insurance.

In recent decades U.S. banks, facing competition from foreign counterparts that had no restrictions barring them from owning brokerages, found loopholes in the law to open or acquire new business lines. In 1999, Congress conceded to the new reality, repealing the 1933 law with the passage of the Gramm-Leach-Bliley Act.

Commercial banks moved increasingly into the traditional domain of investment houses, in some cases acquiring them outright, such as the marquee purchase of Chase Manhattan Bank by J.P. Morgan in 2000. As investment banks faced heightened competition in their traditional business lines, these enterprises leveraged up with borrowed money and went looking for profits, betting on ever-riskier securities and derivatives. That is the trend the crisis of 2008 may reverse, at least for a time.

“It will tend to tone down some of the behaviors,” said Thomas Atteberry, a partner in First Pacific Advisors, who moved 5 percent of his company’s portfolio out of mortgage-related securities in 2006 in anticipation of a credit market meltdown.

‘Take risks to get paid’
But even as the formal line between different stripes of banks became blurry, investment and commercial banking remained divided by culture.

“Investment bankers get paid for performance, so they take risks to get paid,” said Sam Weiser, a former Citigroup employee who now is chief operating officer of the Chicago-based hedge fund Sellers Capital. “The prevailing goals of commercial bankers are to protect assets.”

Investment banks also tend to be more decentralized. “What makes Merrill’s investment banking model work is that they attract high-powered, entrepreneurial people who build businesses within a business, and commercial banks do not work that way,” said Hill, the Emory finance professor. “The question is: Does the culture of Merrill that made it so successful, is that going to survive in a huge organization?”

Traditionally, many investment bankers shunned their colleagues on the commercial side as stodgy and risk-averse. But now, as institutions meld so must the psychology, analysts say.

“There will be a merger of two ways of doing business,” said Seamus McMahon, a financial services partner at Booz & Co., a global management consulting firm. “The stand-alone investment bank may have been an accident of history. It had its run and it’s over or at least vastly diminished.”

The new management, analysts say, will emerge from the ranks of commercial bankers.

“That is the superior force, and that changes the nature of how things are approached,” said Len Rushfield, adjunct professor of finance at Pepperdine University. “The commercial banking world is built on relationships and continuity and not on high levels of incentive compensation.”

Future for compensation levels
The first test for the future of Wall Street banking could come over compensation levels: whether the investment banking stars who placed big bets and were awarded big salaries and bonuses in return continue to get paid.

When John Thain was still Merrill’s chief executive earlier this year, for example, he hired a legendary trading manager from Goldman Sachs named Thomas K. Montag. The tab, disclosed in a filing with the Securities and Exchange Commission: annual salary of $600,000, signing bonus of $39.4 million plus a promise to reimburse him for Goldman shares he forfeited for an estimated total of $50 million.

Analysts wonder if Bank of America Chairman Kenneth D. Lewis would agree to pay that amount.

If Wall Street loses its lure of big riches, it could have trouble attracting top talent.

“Most business students don’t go into investment banking because they love finance so much, but because it pays well,” said Francisco Cabeza, a student at the University of Pennsylvania’s Wharton School of Business who has a job offer at a private-equity firm in London.

Richard X. Bove, an analyst at Ladenburg Thalmann & Co., predicted that the crisis could spark a start-up boom on Wall Street, with hot demand for small boutique investment firms focused on one or two specialties. He said these firms could fill a niche as behemoths like Bank of America and Citigroup grow so large that they cannot serve all their corporate clients because of conflicts of interest.

World centers to benefit
Some analysts also see some of Wall Street’s influence being redistributed overseas as business migrates to other places with money. “New York will be the first among equals but absolutely not the place. Normally it was London and New York,” said McMahon, the management consultant. “I think we’ll see Abu Dhabi grow. Singapore. I think we’ll see India if they can get their regulations straightened out.”

Nor was the earthquake that rocked U.S. financial markets a tragedy for all involved. For those with strong enough balance sheets and money to spend, the recent weeks have presented a unique chance to buy. Bank of America’s Lewis was one notable winner.

Even Lewis posits that a chastened financial industry is entering a new phase.

“It seems unlikely that most companies would simply volunteer to pull back the reins on profit and growth in a hot market. But, in fact, that’s precisely what needs to happen,” said Lewis, according to a prepared text of a speech he gave Friday in Washington. “We must embrace the reality of what will be, at least in the short term, a smaller industry with a simpler approach to finance.”

Special Correspondent Heather Landy in New York and staff writer Robin Shulman contributed.

© 2008 The Washington Post Company

Campaigns have to face financial mess

Obama, McCain say they have a solution

By TODD SPANGLER
FREE PRESS WASHINGTON STAFF

WASHINGTON –There’s more to it than lipstick on pigs.

The defining issue of the presidential campaign — the economy — confronted the nominees this week in the starkest of terms. This came about as the meltdown on Wall Street and government bailouts sent Sens. John McCain and Barack Obama scrambling to find footing on uncertain terrain where any misstep could end their hopes for the White House.

It sets the stage for a six-week run to Nov. 4 that promises to look more like off-road racing in mud-covered monster trucks than a dignified dash between two thoroughbreds.

Today, as Treasury Secretary Henry Paulson talked up a still-vague program — expected to be finalized and approved as early as next week — potentially committing hundreds of billions of tax dollars to buy up bad loans and stabilize housing and financial markets, both candidates honed their messages with the possibility the U.S. economy could collapse before Election Day. “This is just an incredible outcome,” said Dana Johnson, Comerica’s chief economist, based in Dallas. “The only precedent that comes close is the bank failures of the 1930s.”

Now voters can add to the long list of issues — the solvency of Social Security, health care, energy policies, tax policies and the war in Iraq — this big one: who has the best plan to bring regulatory reform to the financial markets.

“The array of economic issues that are going to have to be dealt with by the next president is just mind-boggling,” Johnson said. That doesn’t make the choice easier for voters, but it sharpens campaign strategy.

It also adds import to next Friday’s first of three presidential debates. It is to focus on domestic issues. “The first debate may well decide the whole thing,” said Joe Trippi, who ran Howard Dean’s unsuccessful 2004 presidential campaign, but also helped provide a model for the grassroots support Obama has tapped this year.

Accusations fly both ways

A week ago it seemed the bright shiny object in the campaign — McCain’s pick of Alaska Gov. Sarah Palin as his running mate — might divert attention from tough issues. It all changed with Wall Street’s meltdown and the Bush administration’s response — a rush toward federal intervention that may have seemed surprising for the Republican White House but was generally supported by both nominees.

Obama should have an advantage on economic doubts in battleground states like Michigan and Ohio precisely because a Republican is president and a backlash could be expected.

But that edge is dubious, especially in Michigan where a Democratic governor has been unable to steer the economy into safer harbor.

The Wall Street turmoil gives McCain an opportunity — as long as he can avoid serious missteps like early this week when he said the economy was “fundamentally strong.”

Already staking a claim to being “the original maverick” for bolting his party at times — on immigration and tax cuts, for example — the financial crisis gives him a chance to appear strong and bipartisan, as well as well-prepared to moderate a free-market philosophy for the good of the country.

Obama, of course, has the same chance to make his case as the agent of clear-thinking change.

McCain called today for more investment transparency, regulatory reform and creation of a trust to bolster mortgage holders and financial institutions. On Thursday, he said he’d fire the Securities and Exchange Commission chair (though there’s a question whether the president can).

But he also sounded a partisan note, taking to task Democrats leading a “do-nothing Congress” and Obama, whom he linked to the excesses of mortgage backers Fannie Mae and Freddie Mac.

The problem is it set off a new round of finger-pointing. Democrats sent reporters a newspaper article listing McCain’s campaign links with Fannie, Freddie and the mortgage meltdown — while Obama, after meeting with his economic advisers in Florida, suggested that what the markets need is confidence that “partisan wrangling” won’t slow reform.

Obama set down the tenets he believes need to guide Washington — saying whatever happens needs to help people on Main Street as well as Wall Street, be coupled with new regulations and be developed to stabilize global markets as well.

“John McCain and I can continue to argue about our different economic agendas for next year, but we should come together now to work on what this country urgently needs this year,” he said.

Partisans take their sides

The reality is that it is difficult for either party or candidate to win the blame game except with their partisans.

McCain is an unapologetic free market believer who has voted for deregulating markets in the past (though he also supported regulation at times as necessary). His friend and former adviser Phil Gramm helped to create a system to deregulate financial institutions — but it was approved by Democrat Bill Clinton’s White House and supported by some of the same people now advising Obama.

Unless there’s a major misstep, the race probably won’t come down to specific proposals. The intricacies of the market don’t, as Comerica’s Johnson said, lend themselves “to sound bites.”

McCain will smear Obama as the president who’ll raise your taxes. Obama has said he wants to keep middle-class tax cuts and raise taxes only on people making more than $250,000 a year and on oil company profits. Obama will smear McCain as a tool of rich corporate interests and their lobbyists, which, if nothing else, his support for financial reform this week seems to throw into doubt.

Which brings the campaign back — albeit more urgently — to where it was.

Can Obama lure the new voters who seem to be registering in battleground states, convince blue-collar voters that he will protect their interests and win the argument that McCain represents four more years of President George W. Bush’s policies?

Or can McCain keep his conservative base energized (without Palin in the forefront), swing the same blue-collar voters and, critically, women, to his side by getting them to find their comfort level with him?

The battle lines may not have changed, but now we’re talking about the cut and quality of the pork, instead of the shade of the makeup.

Contact TODD SPANGLER at tspangler@freepress.com.

Financial Repression Dogs China (Cato Institute)

by James A. Dorn  James A. Dorn is a China specialist at the Cato Institute and coeditor of China’s Future: Constructive Partner or Emerging Threat?  Added to cato.org on October 10, 2006  This article appeared in the Australian Financial Review on October 3, 2006.

Since the start of the reform movement in late 1978, China’s leaders have declared that their top priority should be to achieve robust economic growth and improve the standard of living. They chose this path of ”peaceful development” to minimise the likelihood of civil and economic unrest that dominated the Mao regime. China’s accession to the World Trade Organisation in December 2001 was evidence of the commitment to liberalise trade and the financial sector.

Progress has been made since 2001, but much remains to be done. It is clear that opening capital markets without reforming state-owned banks and without maintaining monetary stability could lead to substantial capital flight and exacerbate the problem of non-performing loans. Moreover, there must be an effective legal system to protect newly acquired private property rights.

If Beijing chooses to keep the yuan, also known as the renminbi (RMB), undervalued and maintains capital controls, China will continue to experience stop-go monetary policy as the domestic money supply responds to the balance of payments and the People’s Bank of China tries to sterilise capital inflows–that is, withdraw excess base money.

The State Council announced earlier this year that it wanted to achieve an external balance in 2006, but China’s overall trade surplus will match or exceed last year’s historic high of $US102 billion. Likewise, the PBC constantly says its goal is to pursue a ‘’sound monetary policy” and ”keep the RMB exchange rate basically stable at an adaptive and equilibrium level”. Yet, money and credit continue to grow at rates inconsistent with long-run price stability, and the exchange rate is still pegged at a disequilibrium level.

In a May 23, 2006 press release, the PBC recommended ”better coordination among the various macro-policies, transformation of government functions, and institutional innovation”. It also promised that the ”foreign exchange system reform will be deepened”, and committed itself to ”preserve the continuity and stability of monetary policy, and promote appropriate growth of money and credit, in order to provide a stable monetary and financial environment for economic restructuring”.

Those objectives are laudable, but the rhetoric has failed to match the reality. In its monetary policy report for 2003, the PBC said it would maintain the yuan exchange rate ”at an adaptive and equilibrium level”. Yet, the yuan/dollar rate remained fixed at 8.28 from 1994 until July 21, 2005, when it was revalued by 2.1 per cent, and has only appreciated slightly since then to about 7.98 yuan.

As a result, China’s foreign exchange reserves have more than doubled since 2003. Clearly, financial repression is the hallmark of China’s state-directed financial regime. If China is to carry out its plans for financial liberalisation and have a flexible exchange rate regime, the PBC must have greater independence.

Are You Conservative or Liberal?

Here’s your litmus test:

1. If you say: “I’m concerned about where my money goes when the government takes it,” you are conservative.

2. If you say: “I’m concerned that other people have more money than me,” you are liberal.

Bailout of Money Funds Seems to Stanch Outflow (WSJ)

Fear That Had Gripped $3.4 Trillion Market Abates,
Ending the Reluctance of Funds to Buy Vital Commercial Paper

By DIYA GULLAPALLI and SHEFALI ANAND

The federal bailout of money-market funds seems to have stanched the outflow of investments that bedeviled the industry this past week — and ended the economy-threatening reluctance of the funds to buy vital commercial paper.

As news broke that the government will insure fund assets and the Federal Reserve will lend to funds, the fear that had gripped the $3.4 trillion money-fund realm abated. Larry Fink, chief executive of asset manager BlackRock Inc., which sponsors nine money funds, said the situation “is stabilizing.” The investor rush out of money funds appeared to end, and the commercial-paper market came back to life.

The news came too late for the embattled Reserve Primary Fund, which had helped touch off the crisis. Almost all the fund’s investors have requested withdrawals. On Friday, the fund, run by Reserve Management Co., announced it is suspending redemptions and delaying payment for longer than its previously disclosed seven-day hiatus.

On Friday, the U.S. Treasury said it was establishing a temporary guaranty program for the money-fund industry. For the next year, it is insuring retail and institutional funds, though not those investing exclusively in municipal and government debt. Funds must pay a fee to participate in the program.

The insurance program will be financed with as much as $50 billion from the Treasury’s Exchange Stabilization Fund, which was created in 1934. President George W. Bush had to sign off on Treasury’s use of the fund. Also, the Federal Reserve said it will essentially lend as much as $230 billion to the industry, via banks, to be used against their illiquid asset-backed holdings.

The withdrawals from money funds were stunning. They generated by far the highest redemptions on record, losing $144.5 billion through earlier this past week, according to AMG Data Services. The industry had only $7.1 billion in redemptions the week before.

The redemptions subsequently created huge problems for the $1.7 trillion commercial-paper market. Money funds weren’t buying the paper anymore and were dumping it to cash out fleeing investors. This threatened to tip the economy into recession by cutting off a vital funding source for U.S. business.

The funds’ push into Treasurys helped pull their short-term yields down to zero, which backfired on the money funds. On Friday, fund tracker Lipper said that more than 40% of the 1,263 U.S. taxable money-market mutual funds it tracks posted zero returns amid their negligible returns from their concentration in government paper.

As a result of money funds’ buyers strike, commercial paper became increasingly expensive, soaring to 8% yields from a little more than 2% the week before as investors demanded to get paid more for taking on increasing risk. Companies like International Business Machines Corp. had to pay as much as 6% for such borrowing this week.

The possibility of businesses shutting down for want of funding, said Paul Schott Stevens, the Investment Company Institute president, was bracing for the government. He told Washington officials of the worry conveyed by his talks with executives this past week at dozens of fund firms.

Although system-wide statistics for money funds weren’t immediately available Friday, anecdotal evidence suggests that the investor exodus was receding, barring some new eruption.

Some money-fund customers canceled plans to redeem their investments in cash, according to Legg Mason, which manages $187 billion in money funds. Meanwhile, funds across the industry that had charged into the relative safety of Treasurys reversed course.

At Federated Investors Inc., which manages more than $240 billion in money funds, fund manager Deborah Cunningham noticed a swift decline in calls from worried clients on Friday. The tone of money-fund investors who did call, she said, “is a thousand times lighter.” Instead of asking about the funds’ exposure to troubled names like Lehman Brothers Holdings Inc. and American International Group Inc., “today’s question is: are you going to participate in the insurance,” she says. Federated money funds don’t own Lehman or AIG paper.

Investors’ historic run on money funds began after one of the largest, Reserve Primary Fund, on Tuesday “broke the buck,” or went under the sacrosanct $1-a-share net asset value. The cause was its debt holdings in Lehman, which went to zero when the firm filed for bankruptcy. The fund’s dip under $1 NAV eroded investors’ confidence, causing them to pull out in droves across money funds on Wednesday and Thursday. That stampede out the door caused another prominent fund, the $12.3 billion Putnam Prime Money Fund (Institutional) to shut down on Thursday.

While the stock market cheered the federal rescue plan, small bankers decried the Federal Deposit Insurance Corp.-like protection extended to money funds. Camden R. Fine, head of the Independent Community Bankers of America, cautioned that the federal plan risked draining funding from small banks.

Fallout from the Reserve fund debacle continued. Ameriprise Financial announced on Friday that it has filed a suit in U.S. District Court in Minnesota against the fund’s parent, Reserve Management. Ameriprise and a subsidiary hold more than 300,000 retail-client accounts in the fund. Third Avenue Institutional International Value Fund also filed a suit on Friday in U.S. District Court in the Southern District of New York alleging, among other things, that Reserve misled investors earlier in the week about its ability to preserve $1 net asset value. Reserve declined requests for comment.

—Anusha Shrivastava contributed to this article.

Write to Diya Gullapalli at diya.gullapalli@wsj.com and Shefali Anand at shefali.anand@wsj.com

The Nation – A Financial Drama With No Final Act in Sight (NYT)

By ALEX BERENSON

Published: September 13, 2008

A lot of smart people have tried to call the bottom on Wall Street this year.

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A Drama With New Twists and Turns

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Times Topics: Lehman Brothers Holdings Inc.

Times Topics: Washington Mutual Inc.

So far, they have all been wrong.

Since the financial crisis first hit in August 2007, markets — and the financial industry — have gone through a series of swoons, each more dizzying than the last. Last week, the crisis reached a new pitch, as Lehman Brothers, the fourth-largest United States investment bank, struggled to avoid joining Bear Stearns on the trash heap, and Washington Mutual, the largest savings and loan, saw its shares briefly fall below $2.

Now even Wall Street’s professional optimists have given up predicting exactly when their industry might stabilize. One senior executive at a top investment bank, speaking anonymously so he could speak freely, recently observed that the crisis was entering its “19th inning,” with no ending in sight.

Until now, the cataclysm in the banking and securities industry has damaged but not derailed the rest of the economy and the Fed and the Treasury signalled last week that they were not ready to bail out Lehman Brothers with taxpayer money. Economists generally predict that the United States will grow slowly over the next few months but avoid a deep recession, especially if oil prices fall further, easing pressure on consumers, and exports remain strong.

But as the Wall Street crisis moves into its second year, the risks to the overall economy are increasing. While the economy grew during the first half of the year, businesses are cutting jobs and consumers reducing spending. In August, the unemployment rate reached 6.1 percent, compared with 4.7 percent less than a year ago.

Until the worst turmoil on Wall Street ends, the economy will struggle, said Sung Won Sohn, an economist at California State University, Channel Islands, who studies financial markets.

“Until and unless we have financial markets stabilize, I don’t think we will see a meaningful recovery in housing, and therefore in the economy,” Dr. Sohn said. He said he expected economic growth to remain close to zero through the middle of 2009 before finally beginning to accelerate.

Steven Wieting, the United States economist for Citigroup, said: “We’re describing the U.S. economy as recessionary.”

Unfortunately, Mr. Wieting — and other economists — say that the Federal Reserve and the government have few good options left to ease the pressure on financial firms or the economy. The Fed has already cut short-term interest rates to 2 percent, below the rate of inflation, and the government has offered consumers and businesses $150 billion in tax rebates and cuts this year.

The Fed has also taken several measures to buoy the financial industry, such as allowing more banks access to low-interest, short-term loans. Yet Wall Street continues to struggle through the aftereffects of the biggest speculative bubble in history.

Financial services companies have cut more than 100,000 jobs this year, according to Challenger, Gray & Christmas, an executive placement firm, and deeper layoffs may come this fall.

Yet the picture may not be entirely bleak. When the chaos finally ends, Wall Street will almost certainly be smaller and more risk-averse. That change could eventually put the economy on firmer footing.

This year’s crisis appears to mark the end of a bubble in the financial markets that has lasted nearly two decades. The speculation began in technology stocks in the 1990s and turned to real estate, commodities and private equity buyouts this decade. Along the way it powered the New York City economy and helped drive income inequality nationally.

While the stock market has not been as frenzied this decade as it was at the end of the 1990s, rampant speculation took over many other financial markets, Mr. Wieting said. “In the last couple of years, financial activity became less related than we’ve seen before to real economic developments,” he said.

Now Wall Street is reeling, as a significant fraction of the speculative real estate loans that banks made during the boom years are underwater. Because banks have limited capital to absorb losses, investors worry that those losses will overwhelm them.

The problem has been worsened by the financial instruments that banks and hedge funds and insurance companies have created to swap loans and risk with each other. In theory, those products can help investors and companies diversify risk, but they are nearly impossible to value.

“Investors just don’t know what these assets are worth,” said Ed Yardeni, president of Yardeni Research. “There’s no transparency. It’s totally up to management to decide what these assets are worth and tell their accountants.”

For example, Lehman said last week that it had $20 billion in tangible equity— money that would theoretically be available to its shareholders if Lehman had to be liquidated. But those same shareholders valued Lehman at only $2 billion as of Friday, proof that they do not have confidence in the way Lehman has calculated its assets.

Now investors are demanding that banks like Lehman and Washington Mutual raise capital or sell their assets to raise cash and prove that they are solvent. But when banks are under pressure, they cannot easily find new investors or purchasers for their assets. It is as if a family were told to sell their home overnight, for cash, or lose it. They would surely receive a far lower price than the property would generate in a more orderly sale.

So, one by one, the banks that took on the most risk are facing the real possibility of going under. Those with stronger balance sheets, such as Morgan Stanley and Goldman Sachs and JPMorgan Chase, are suffering much less.

For Wall Street, the lesson has been sobering — and unlikely to be forgotten for several years, said Dr. Sohn, the California State economist.

“The restraint in the credit markets will last quite some time,” Dr. Sohn said. In the mortgage business, which saw the worst excesses, loan practices may remain stricter for at least a decade, he said. The results will be both positive and negative, he said.

The speculation that has produced wide swings in commodities prices and vacant subdivisions across California and Florida may become less prominent. But people who want to buy homes may continue to struggle to get mortgages, even if they have excellent credit. Companies who need loans to expand, or just to survive rough economic patches, will also have a harder time finding financing.

“We went overboard,” Dr. Sohn said. “As a result, the financial market is imposing some discipline on our behavior, and it’s painful. But that’s how the system works.”

Jared Bernstein, senior economist at the Economic Policy Institute, a liberal research group in Washington, said that, in a best-case scenario, greater risk aversion in the financial markets might eventually encourage the United States to rely less on bubbles and speculative lending to drive economic growth.

Instead, the government could pursue policies designed to drive wages higher for middle- and lower-class Americans, he said, allowing them to buy homes and cars without taking on ruinous debt.

“We have to find a new way — or maybe it’s an old way — to stimulate enough demand for the economy to do what it’s supposed to do without speculative excess,” Mr. Bernstein said. “A recovery that’s driven by more broadly shared prosperity, where consumption is fairly evenly shared through the economy, that kind of growth is more sustainable.”

Even so, Mr. Bernstein said he was not cheering Wall Street’s deep struggles. “The financials are the heart of the credit system, and credit is the lifeblood of our economy,” he said. “There’s no question that we will pay a cost in terms of much diminished growth if this continues.”

A Prediction on the’08 Election – Insight into Obama’s Candidacy

by Survivor @ 6:18pm – Sat Sep 13th, 2008

It’s time to throw my hat in the ring as regards predicting the election results. So here it is: Barack Obama will be defeated. Seriously and convincingly defeated. Not due to racism, not due to the forces of reaction, not even due to Karl Rove sending out mind rays over the national cable system. He will lose for one reason above all, one that has been overlooked in any analysis that I’ve yet seen. Barack Obama will lose because he is a flake.

I’m using the term in its generally accepted sense. A flake is not only a screwup, but someone who truly excels in making bizarre errors and creating incredibly convoluted disasters. A flake is a “fool with energy”, as the Russian proverb puts it. (“A fool is a terrible thing to have around, but a fool with energy is a nightmare”.)

Barack Obama is a flake, and the American people have begun to see it. The chief characteristic of a flake is that he makes choices that are impossible to either understand or explain. These are not the errors of the poor dope who can’t grasp the essentials of a situation, or the neurotic who ruins things out of compulsion, or the man suffering chronic bad luck.

The flake has a genius for discovering solutions at perfect right angles to the ordinary world. It’s as if he’s the product of a totally different evolutionary chain, in a universe where the laws are slightly but distinctly at variance to ours. When given a choice between left and right, the flake goes up — if not through the 8th dimension. And although there’s plenty of rationalization, there’s never a logical reason for any of it. After awhile, people stop asking.

Obama’s rise has been widely portrayed as a kind of millennial Horatio Alger story — young lad from a new state on the outskirts of the American polity, a member of once-despised minority, works his way by slow degrees to within arm’s length of the presidency itself. That’s all well and good — we need national myths of exactly that type.

But what has been overlooked is the string of faux pas marking each step of Obama’s journey, a series of strange, inexplicable actions, actions bizarre enough to require some effort at explanation, through such efforts have rarely been offered. It’s as if the new Horatio made it to the top by stepping into every last manhole and open trapdoor in his path. And we, the onlookers, the voters who are being asked to put this man in the White House, are supposed to take this as the normal career path for a successful chief executive.

What are these incidents? I’m sure many of you are way ahead of me, but let’s go to the videotape.

Here’s a young man who graduated from Columbia with high marks, with a choice of positions anywhere in the country. He comes from a state generally held to be a close match to Paradise. One, furthermore, that can be characterized as the most successful multiracial society in the world, with harmonious relations not only between whites and blacks, but also Japanese-Americans and native Hawaiians as well. To top it off, a state controlled in large part by a smoothly-functioning Democratic machine. So where does he choose to go?

To Chicago. One of the windiest, coldest, most brutal cities in the country. One that is also infinitely corrupt in a sense that Hawaii is not. One that remains one of the most racist large cities in the U.S. (Cicero, Al Capone’s old stomping grounds, a suburb that is effectively part of the city, is completely segregated to this day.) It would be nice to learn which of these aspects most attracted young Obama to the city. But if you’d asked at the beginning of the campaign, you’d still be waiting.

And what does he do when he reaches the city? Why, he joins a cult. Jeremiah Wright’s Trinity United Church has been turned inside out since the videotaped sermons appeared early this year, without anyone ever quite explaining exactly what Obama was thinking of when he joined up in the first place. Street cred, so it’s claimed. But there are a plethora of black churches that would have provided him that without the taint of demented racism that Wright’s church offered.

Obama apparently had to swear an oath of belief in “black liberation theology” when he joined the church. (It is the little touches of that sort that make it a “cult”, and not simply a “church”.) Did the thought of his career ever cross his mind? Didn’t he realize that church would inevitably cause him trouble somewhere down the line? That he’d be required to repudiate it and its ideas eventually? We can ask — but we won’t get an answer.

Back at school, Obama got himself named editor of the Harvard Law Review. This is a signal achievement, no question about it. The kind of thing that would be mentioned about a person for the rest of his life, as has been the case with Obama. But then… he writes nothing for the journal.

Now, let’s get this straight: here we have one of the leading university law journals in the country, one widely cited and read. Entire careers in legal analysis and scholarship have been founded on appearances in the Review, including some that have led to the highest courts in the country. Yet here’s an individual who, as editor, could easily place his own work in the journal — standard practice, nothing at all wrong with it. But he fails to do so. And the explanation? There’s none that I’ve heard. We can go even farther than that, to say that there is no explanation that makes the least rational sense.

We follow Obama down to Springfield, where as a state legislator, he voted “present” over 120 times. What this means, as far as I’ve been able to discover, is that he voted “present” nearly as much as he voted “yes” or “no”.

Now, statehouses work very simply: a member approaches his colleagues and asks them them to vote for his bill. Some comply, some do not. Some ask, “Is it a good bill?” and some don’t. Either way, they customarily, except in unusual circumstances, vote “yes’ or “no”. All except for Barack Obama. And how did get away with it? How did mollify his colleagues? How did he square himself with the party bosses? Echo answereth not.

(A good slogan could be made of this: “You can’t vote present in the Oval Office.” I hereby commend it to the McCain campaign.)

We turn eagerly to learn what his term in the U.S. Senate will reveal, only to be disappointed. But it’s not surprising, really. After all, he was only there for 143 days.

And there lies one of the keys to Obama’s rise. David Brooks pointed out in a recent New York Times column that Obama spent too little time in any of his positions to make an impact one way or another. This is what saved him from the normal fate of the flake: he was never around long enough for his errors and strange behavior to catch up with him.

But a presidential campaign is a different matter. A man running for president is under the microscope, and can’t duck anything, as many a candidate has had reason to learn. If Obama is a flake in the classic mode, now is when it would come out. And has it?

The case could be made. Here we have a campaign with everything going for it — the opposition party in a shambles, a seriously undervalued president, the media in the candidate’s pocket, the candidate himself being worshiped as nothing less than the new messiah. And yet the results have comprised little more than one fumble after another.

First came the Wright affair. Obama apparently thought he was above it all — a not-uncommon phenomenon with flakes — and allowed the revelations to take on a life of their own before bothering to respond. Even then, his thoughtful and convincing explanation (that he hadn’t been listening for twenty years) did little to settle the crisis, which instead guttered out on its own after nearly crippling his campaign. Even months afterward it threatens to pop back up at any time. The latest word is that Wright — now a deadly enemy of his onetime protégé — has written a book. I can’t wait.

Obama learned his lesson, and confronted the next threat immediately, tackling The New Yorker cover with the avidity of a man having discovered zombies in the basement. A development that could have been defused with a chuckle and a quip (the customary method is for the politician to ask the cartoonist for the original) was allowed to explode into a major issue. The campaign’s relentless attacks on one of the oldest liberal magazines extant merely perplexed the country at large. After all, any Republican has had to endure far worse.

Almost simultaneously, the birth certificate saga was unfolding. On no reasonable grounds, the campaign blew off requests for a copy of the document, at last releasing it through one of the least reputable sites on the Internet, and so badly copied that literally anything could be read into it — and was. I’m not one of those who believes that Obama was actually born in Indonesia/Kenya/Moscow/the moon, but I still have plenty in the way of questions, almost all of them arising from how the matter was handled. Well played.

The latest pothole (or one of them, anyway) involves Jerome Corsi’s The Obama Nation. Corsi has been given the full New Yorker treatment, with the campaign hoping to avoid John Kerry’s “error” in not challenging Corsi’s 2004 book, Unfit for Command. What Obama missed was the fact that Kerry’s major problem was not with Corsi but with the Swift Boat Veterans for Truth, who were disgusted with Kerry’s hypocrisy in running as an experienced military veteran, and set out to take him down. Corsi’s effort dovetailed with the veteran’s campaign and to a large extent was swept up with it. No such campaign is in operation against Obama. The smart method of answering Corsi would have been to allow the media to handle it, instead of drawing attention to the book and raising it to level of an issue. This appears to be a real talent for the Obama campaign.

We could go on. The victory tour of Europe, and the speech in which Obama declared himself “citizen of the world”, a trope guaranteed to focus the attention of Middle America. His inept handling of Hillary, in which he wound up appearing frightened of the opponent he’d just beaten. Allowing Hillary (and her husband there, what’s-his-name) a starring role in the Democratic convention is not a solution any sane individual would be comfortable with — much less a roll-call vote. This threatens the near-certainty of turning the entire affair into BillandHillarycon, with the nominee winding up as a footnote. But it’s all of a piece with the campaign Obama has waged up until now.

We’ve never had a flake as president. We’ve had drunks, neurotics, cripples, louts, and fools, but never a career screwup. (I except Jimmy Carter, whose errors arose from sincere, misguided goodwill.) And I don’t think we’re going to get one now. Another three months of flailing, incompetence, and a collapsing image will do little to assure voters concerned with terrorism, the oil crunch, a gyrating economy, and a bellicose Russia. (Anyone doubting that Obama will go exactly this route can consider the Saddleback church fiasco, which