The Weekend Economist September 5-7, 2008 Because 5 Days Are Not Enough!

[Demeter]

This is the spot to pass on reports on the US and world economies and all the facets thereto, to peruse the drama, suspense and mysterious ways of money and crooks and corporations, and to blather endlessly when one has had too much of a good, bad, or indifferent thing....

So post early and often, catch up at mealtime or after, and marvel at all that comes down the pike.

And don't mind me, I've had a week and a half...and that's just since Thursday...

[Demeter]

1. "China's Central Bank is Short of Capital"

http://www.nakedcapitalism.com/2008/09/chinas-central-bank-is-short-of-capital.html

Either the Chinese do not understand banking and investing or the line being fed the Western press about the struggle over the Bank of China's reserves is a cover story of some sort.

Given the fact set, Dean Baker's reaction 'Is China's Central Bank Run By Morons?" is not unreasonable. I have a different theory, which we'll get to in due course.

The plot overview:

The Bank of China buys lots of dollar investments to keep the yuan from rising. However, as we all know, the yuan has been permitted to appreciate somewhat. Note that this means the value of those holdings in local terms has fallen.

However, the central bank has still had to keep buying dollars to keep the yuan from rising rapidly. It is running out of capacity and has to go to the Finance Ministry for a handout.

This is the bizarre bit. The Finance Ministry is mad that the central bank lost money on its dollar investments and wants no more yuan appreciation. This of course commits it to even greater dollar purchases, which guarantees that its eventually currency losses will be all the greater.

Key bits of the New York Times article:

The central bank has been the main advocate within China for a stronger yuan. But it now finds itself increasingly beholden to the finance ministry, which has tended to oppose a stronger yuan. As the yuan slips in value, China’s exports gain an edge over the goods of other countries.

The two bureaucracies have been ferocious rivals. Accepting an injection of capital from the finance ministry could reduce the independence of the central bank, said Eswar S. Prasad, the International Monetary Fund’s former division chief for China.

“Central banks hate doing that because it puts them more under the thumb of the finance ministry,” he said.

Mr. Prasad said that during his trips to Beijing on behalf of the I.M.F., he had repeatedly cautioned China over the enormous scale of its holdings of American bonds, emphasizing that it left China vulnerable to losses from either a strengthening of the yuan or from a rise in American interest rates. When interest rates rise, the prices of bonds fall....

The finance ministry, however, has pushed for investments in overseas stocks. Last year, it wrested control of the $200 billion China Investment Corporation, which had been bankrolled by the central bank. That corporation’s most publicized move, a $3 billion investment in the Blackstone Group in May of last year, has lost more than 43 percent of its value....

But even in a country that strongly discourages criticism of its economic policies, hints of dissatisfaction are appearing over China’s foreign investments.

For instance, a Chinese blogger complained last month, “It is as if China has made a gift to the United States Navy of 200 brand new aircraft carriers.”...

China finds itself hemmed in. If it were to curtail its purchases of dollar-denominated securities drastically, the dollar would likely fall and American interest rates could soar. China spent more than one-eighth of its entire economic output last year on foreign bonds, and then picked up the pace during the first half of this year....

Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses.

He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.

“A lot of policy makers in China, at least midlevel policy makers, believe this,” Mr. Shih said.

If US officials privately assured the Chinese government that Fannie and Freddie debt were government guaranteed, as reader Scott's well-placed sources say, there is a germ of truth in the Chinese view.

Still, this is breathtaking reading. How could the Chinese have thought they could maintain a currency peg forever? At some point, the scale of the purchases becomes so large that they are unsustainable, the pegged currency rises and the country takes huge losses on its FX reserves. However, all of its local currency denominated assets are worth more in global terms. If this is a net plus, wealth-wise, why is there a problem? The computation of gains and losses is far from complete.

Equally worrying, neither of the two parties at odds is considering the only way out of this box: encouraging growth of China's domestic economy so it is less export focuses and therefore less in need of managing its currency. Admittedly, this would be a long-term program, while the question of the central bank's capital base is immediate, but it appears that no one is looking at the real problem, which is an economy overly dependent on a big customer.

Baker was more withering than usual:

It is almost inconceivable that anyone who followed economic data did not realize that the dollar would decline from the level it has reached in 2001 and 2002. The United States had a large and growing trade deficit...

It was understandable that China's central bank might buy up dollars in a conscious effort to keep the dollar high and thereby sustain its export market to the United States. This would mean that China was effectively paying people in the United States to buy its exports. This would be a reasonable growth strategy if China for some reason lacked the capability to generate this demand internally....

However, it would be bizarre if China's central bank bought up dollar denominated assets in the last 7-8 years thinking that they were making a good investment.....Apart from buying bonds from Zimbabwe, it's hard to imagine how they could have made a worse investment.

If the people who run China's central bank are really this ignorant, that should have been the headline of the article, which should have been on the front page.

Given the ferocity of bureaucratic battles and the anger in the public at large, the Times may have the story 100% right. But there is one way this might be a brilliant bit of gamesmanship.

Recall that China is suffering from a bad bout of inflation. That inflation is exacerbated by hot money inflows which have reached mind-boggling levels this year. The money is coming in in anticipation of a currency revaluation, and by pushing inflation higher, increases the odds of a revaluation.

Remember the ploy used by Henry Kissinger in his negotiations with the North Vietnamese? He presented Nixon as crazy, not the paranoiac that he was, but violent, impulsive, prone to extreme reactions if provoked. The notion that Nixon was an utter nut who would do something unthinkable (presumably the unspoken threat was dropping a nuclear bomb) was believed to have served Kissinger well.

Something like that may be at work here. Perhaps a genuine internal power struggle is being played up and positioned to persuade the hot money speculators that the finance ministry may soon have the upper hand, and the finance ministry is crazy enough and determined enough to keep the yuan weak, no matter how dangerous that might be in the long term. That would hopefully convince the hot-money players that their fast-profit revaluation hopes were misguided, and they'd shift their mony back overseas, providing some relief to inflationary pressures.

But it is just as plausible that the Finance Ministry is willing to cut off China's nose to spite the central bank's face.

[Demeter]

2. The Perilous Price of Oil By George Soros

http://www.nybooks.com/articles/21792


The following is adapted from testimony given by George Soros before the US Senate Commerce Committee Oversight Hearing on June 3, 2008.

In January 2007, the price of oil was less than $60 per barrel. By the spring of 2008, the price had crossed $100 for the first time, and by mid-July, it rose further to a record $147. At the end of August it remains over $115, a 90 percent increase in just eighteen months. The price of gasoline at the pump has risen commensurately from an average of $2.50 to around $4 a gallon during this period. Transportation and manufacturing costs have risen sharply as well. All this has occurred at the same time as a world credit crisis that started with the collapse of the US housing bubble. The rising cost of oil, coming on top of the credit crisis, has slowed the world economy and reinforced the prospect of a recession in the US.

The public is asking for an answer to two questions. The principal question is whether the sharp oil price increase is a speculative bubble or simply reflects fundamental factors such as rapidly rising demand from developing nations and an increasingly limited supply, caused by the dwindling availability of easily extractable oil reserves. The second question is related to the first. If the oil price increase is at least partly a result of speculation, what kind of regulation will best mitigate the harmful consequences of this increase and avoid excessive price fluctuations in the future?

While I am not myself an expert in oil, I have made a lifelong study of investment bubbles as a professional investor. My theory of investment bubbles, explained more fully in my recent book, The New Paradigm for Financial Markets, is considerably different from the conventional view. According to my theory, prices in financial markets do not necessarily tend toward equilibrium. They do not just passively reflect the fundamental conditions of demand and supply; there are several ways by which market prices affect the fundamentals they are supposed to reflect. There is a two-way, reflexive interplay between biased market perceptions and the fundamentals, and that interplay can carry markets far from equilibrium. Every sequence of boom and bust, or bubble, begins with some fundamental change, such as the spread of the Internet, and is followed by a misinterpretation of the new trend in prices that results from the change. Initially that misinterpretation reinforces both the trend and the misinterpretation itself; but eventually the gap between reality and the market's interpretation of reality becomes too wide to be sustainable....

[Demeter]

3. Price to Rent Ratio by CalculatedRisk

http://calculatedrisk.blogspot.com/2008/09/price-to-rent-ratio.html


Peter Viles at the LA Times (L.A. Land blog) has some excerpts from a Credit Suisse report projecting that house prices might bottom in late 2009. See: Credit Suisse: Home price declines likely until late '09

The report, using two separate methods of predicting home price trends, says both methods "point to home prices moving back in line with past historical 'equilibrium' levels in 12 to 18 months..." The report notes that housing prices could "overshoot" their equilibrium levels, and fall for even longer than 12 to 18 months, in which case, "'cheap' housing is still about two years away."
I think price to rent ratios are helpful, but have flaws. I wouldn't use median house prices because the mix of homes impacts the median price.

Also the Credit Suisse projection of prices declining for another 12 to 18 months is based on prices continuing to fall at the current rate. Historically, during a housing bust, price fall slowly at first, then decline more rapidly for a couple of years, and then slowly for several more years until the eventual bottom. Right now we are in the rapid price decline phase. So I'm still expecting prices to fall for some time (although I expect price declines to start to slow), with a price bottom in the 2010 to 2012 period in the bubble areas, and perhaps sooner in other areas (less bubbly areas and certain low end areas).

One thing is pretty certain - as long as inventory levels are elevated, prices will continue to decline. And right now the inventory of existing homes (especially distressed properties) is at an all time high.

On price to rent ratios, back in October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter: House Prices and Fundamental Value.

Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

I've posted on this before, and here is an update to their graph through Q2 2008:

Click on LINK for graph...

[Demeter]

4. When the wind doesn't blow By Simon Cox BBC News

By 2020, more than a third of Britain's electricity will be generated by wind power, according to government plans. But what happens on calm days?

On a clear summer's day the Horns Rev wind farm off the coast of Denmark could almost double as a tourist attraction. Watching the rows of 200 foot white steel turbines turning gently in the wind, occasionally catching the afternoon sun is beautiful, almost hypnotic.

To see it properly you need a helicopter, as it's in the middle of the North Sea. I had hitched a ride with Bent Johansen, who manages the operations of Danish turbines for the energy company, Vattenfall. For him the future of wind is off-shore.

"Horns Rev can produce as much power as all our 300 onshore turbines put together," says Mr Johansen. Horns Rev is currently the biggest off-shore wind farm in the world, covering an area of over 20sq xkm. In the next decade Britain will be seeing its own versions of Horns Rev cropping up off the coastline.

The government estimates about 35% of electricity will need to be generated from wind power by 2020, to meet an EU target. This will mean a massive increase in the amount of wind power generated, from 2% at present to 35%.

It's a big leap, admits Maria McCaffery of the British Wind Energy Association, "but we believe it is possible".

Denmark is the poster boy for wind power - 20% of the electricity it generates comes from wind, it claims. Horns Rev can provide enough power for 150,000 homes. On the day I visited it would be lucky to power a village. So what does Denmark do when the wind doesn't blow?

The answer is on the giant screens which dominate the control room of Energinet, the Danish national grid. Peter Jorgensen, the vice president of Energinet, directs me to the map of Scandinavia which fills one vast screen. On it are the unique energy connections Denmark has to its neighbours in Norway, Sweden and Germany.

This allows them to import power when it's not windy or export it when they have too much.

Exporting wind

"It would be very difficult to run the system without the inter-connectors, we are very dependent on our neighbours", Mr Jorgensen concedes.

Please turn on JavaScript. Media requires JavaScript to play.

The Investigation: Wind Power

Denmark is proud of the fact that a fifth of its electricity comes from wind. But Hugh Sharman, an energy consultant, says this figure should be treated with caution. Sifting through the charts in his crow's nest office overlooking the Jutland peninsula in Denmark, a different picture emerges.

"Every time the wind is high, the exports are high. Every time the wind is low, of course there are few exports". Mr Sharman says more than half of Denmark's wind power is exported - so it only actually uses nine percent of the wind energy it generates. If the Danes couldn't do this, their system wouldn't work.

The UK, however, doesn't have this option. There is a link to France and one being planned to Holland but these won't able to shift the amount of power needed to balance our system. Peter Jorgensen believes it can, but it won't be cheap.

"You could build a system that would balance on it own," says Mr Jorgensen, "but it would be very costly"

Giant batteries

Other options for Britain would be to store its wind power in giant batteries, but this is difficult and very expensive.

Instead the UK will need to look at back-up power stations for the many days when it is not windy enough . In the short term that will come from fossil fuel generation, says Nick Rowe, an energy campaigner with Friends of the Earth.

"It does not mean we will need the fossil fuel generation all the time but it means they need to be turned on when necessary."

This back-up will probably have to be gas-fired power stations as these are the easiest to turn off and on.

But this will mean a "dash for gas" - a resource that Russia, hardly Britain's most cooperative ally, has in spades.

Dieter Helm, professor of energy policy at Oxford University, says Britain could find itself badly exposed. It would be "about the worst possible thing that one could conceive of given what's going on in Russia and given our dependence on Russian gas supplies".

It could also prove costly. The energy company, E.On recently estimated back-up power could cost up to £10bn per year across all the energy suppliers. That would add £400 to the average annual household energy bill.

But supporters of wind power like Maria McCaffrey believe it will make energy cheaper.

"We don't have to pay for wind power it just comes to us naturally and is totally sustainable. The expectation is that it will in time drive down the basic cost of energy and actually help the fuel poverty situation."

The government accepts it is a challenge to manage energy security and price rises but it is fully committed to reaching the 2020 target. And what happens if we don't? The EU is expecting this to become a legally binding target within the next year so we could be hauled before the European courts of justice and face huge fines, which of course would come out of your pocket.

Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/uk_news/magazine/7598212.stm

[Demeter]

5. Sicily mayor offers bargain homes

A small town in western Sicily has come up with a revolutionary solution to solve its property problems. They are offering houses in the town, which sits between two rivers, for just a single euro (81 pence; $1.44). The idea is the brainchild of mayor Vittorio Sgarbi, convinced it is the only way to revitalise its crumbling historic heart. Most of the villas were damaged by an earthquake 40 years ago and since then, much of the local population moved out.

"There are 3,700 houses owned by the council, almost all in the old town, that are in danger of falling down - of crumbling and dying," Mr Sgarbi explained.

There is a catch - those who buy will be obliged to sympathetically renovate the old houses without changing their style within two years at some significant cost. Mr Sgarbi initially offered the houses free of charge, to residents of Salemi who agreed to do the renovations. But then, keen to raise awareness of his cause, he gave the first to football boss Jose Mourinho's new employer, Massimo Moratti, chairman of Inter Milan.

"We're thinking of people who have the sensibility and economic resources to embark on this adventure," Mr Sgarbi said.

"In exchange for a token payment of one euro we will offer them one of these houses and ask that they undertake to restore them within two years while respecting their original characteristics."


Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/europe/7596341.stm

[Demeter]

6. CFTC Investigating Whether Big Traders Lied About Oil Inventories

http://www.nakedcapitalism.com/2008/09/cftc-investigating-whether-big-traders.html


Wow, what happened? The CFTC went from being a lapdog to developing teeth. A little late, now that oil prices are on a forced march downward, but the commission could have backed off as oil became less of a front-burner issue. (Of course, your cynical blogger wonders if there was a risk that this story might get to the media, completely undercutting its credibility). Note that the drift of the investigation is that inventories may have been underreported, which would lead to higher prices.

No names yet, but this looks to be a serious investigation. Admittedly, this is consistent the with the thrust the CFTC said it would take earlier, looking into tankers and storage, but it looks like they are proceeding in a thorough, disciplined manner.


From the Wall Street Journal:

Commodity-market regulators are investigating whether energy-market players are injecting false data into the marketplace to influence perceptions about crude-oil supply and demand...

Among other things, regulators are concerned that companies may be reporting inventory levels that benefit their own trading positions but that may not be accurate....

Unexpected drops in oil inventories reported each Wednesday by the U.S. Energy Information Administration can spark price spikes on the main oil futures benchmark on the New York Mercantile Exchange. A company could theoretically underreport barrels in its tanks, for example, at a key hub to suggest oil is scarcer than it really is, and then sell its physical oil at a premium when oil prices jump on misleading news.

Another concern is whether companies conduct some physical oil sales and purchases solely to influence short-term pricing on oil futures markets....

The agency has become more active in soliciting and acting on leads from traders and experts in physical energy handling, according to people familiar with the CFTC's operations.


In terms of oil storage, regulators will likely focus on Cushing, Oklahoma, the delivery point for crude oil sold on the New York futures market, said Kyle Cooper, director of research at IAF Advisors in Houston. Stockpiles at Cushing amounted to 21.3 million barrels of oil as of last week, 6.8 percent of the nation's total, according to the Energy Department.

``Cushing has always been a bone of contention because of the relatively small size and the influence it has on a market as big as crude oil,'' Cooper said. ``If you have a few players who have a significant influence over the market, then they have the ability to influence prices.''

Back to the Wall Street Journal:

It is illegal to report false data to the EIA. One issue is how much the EIA vets the information it receives; the CFTC is interested in doing more thorough examinations of inventory data that it suspects may be inaccurate....

The CFTC recently hired outside consultants to help it dive into the ins and outs of physical oil shipping and terminals. They are hosting intensive boot camps for its enforcement attorneys to give them a road map of who owns key infrastructure and how they use it. The idea is to better grasp where, if a trader wanted to manipulate prices, the markets might be vulnerable

[Demeter]

7. OPEC to Keep Production at Current Levels to Combat Slowdown

http://www.nakedcapitalism.com/2008/09/opec-to-keep-production-at-current.html


Whether by accident or design, we've just been through a wee experiment on how higher fuel prices affect growth. Admittedly, it is difficult teasing out the impact of the credit crunch versus the oil and commodities spike, but in the US, habits started to change at $4 a gallon of gas, a lower level than most anticipated. Miles driven fell in the US, UK, and EU. "Staycation" entered the popular lexicon.

With oil prices having fallen nearly 40% from their peak, one might imagine OPEC curtailing production to support or increase the price. No such move is in the offing now, although if inventories increase, the cartel may change its posture.

OPEC does not want to kill the goose that lays the golden egg. Having oil prices too high is not optimal for them because while they might in theory maximize short-term revenues, they also lead to conservation (not simply driving less, but a much harder push for more energy efficient devices) and make alternative energy sources more viable.

French minister Jean Baptiste Colbert once said, "The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” A similar process is at work here.

From Bloomberg:

OPEC, the supplier of 40 percent of the world's oil, will probably keep producing at a record pace as $109-a-barrel crude squeezes the global economy.

The 13-nation Organization of Petroleum Exporting Countries will reject calls from Venezuela and Iran to trim supplies at its Sept. 9 meeting in Vienna, according to 29 of the 32 energy analysts surveyed by Bloomberg.

Record oil prices spurred European inflation to 4 percent in July and contributed to the first quarterly contraction in the region's economy since the euro was introduced almost a decade ago. In the U.S., gasoline demand fell for 19 consecutive weeks, according to MasterCard Inc., with fuel now near $3.70 a gallon....

Oil stockpiles, excluding government reserves, were above average in July and enough to meet 54 days of demand, according to the International Energy Agency in Paris.

The agency urged OPEC not to cut back because prices are ``putting a burden on the global economy,'' Executive Director Nobuo Tanaka said in an Aug. 27 interview in Stavanger, Norway.

``If stocks were ballooning then you could see pressure mounting within the cartel for a cut,'' said Harry Tchilinguirian, senior oil analyst at BNP Paribas SA....

OPEC ``probably doesn't want to see another run at $150,'' said Societe Generale's Wittner. ``But they're worried the $35 downward correction will continue.''

[Demeter]

8. Where Was the Safe Place for Savings from 1929-1933?

http://jessescrossroadscafe.blogspot.com/2008/09/where-did-cash-go-in-1929-1933.html


The answer is that there was NO single safe place for your savings, not even 'cash' dollars throughout the three years that marked the stock market crash of 1929-1932. The individual had to use their minds and keep their eyes on the markets to steer through that most perilous of financial times.

Many believe they understand the coming debt deflation and know where THE safe place will be to put their savings. History suggests they may be consumed for their faith in theory rather attention to market reality.

And this was a relatively straightforward case of unwinding and deflation. What twists and turns does this brave new world of derivatives and fiat reserve currencies have in store for us as it unwinds? And what new policy errors unforeseen and consequences unexpected await because of the Fed's continual experimenting in the markets?

We'll be talking more about this in the days ahead.

[Dr.Phool]

9. Good evening Demeter.

I see you have all my week-end reading assignments planned out.

Thanks again for the week-end thread.:hi:

[Hugin]

14. Okay, I'm here...

Is that a quorum yet?

:raisinggavel:

[Dr.Phool]

15. Call to order!

[Karenina]

17. Moved and seconded.

[Dr.Phool]

10. Reports: Fannie Mae, Freddie Mac takeover set

BREAKING NEWS
MSNBC
updated 3 minutes ago

The federal government has prepared a plan to take control of troubled mortgage giants Fannie Mae and Freddie Mac, several news outlets reported Friday night.

The Washington Post reported on its Web site that government officials had told the two companies that their top executives would be dismissed and government funds used to prop them up.

Quoting unidentified sources, the Post said that the companies would be placed under a conservatorship and that the value of the companies' common stock would be diluted but not wiped out, while other securities, including preferred shares, would be protected by the government.

The Post and the Wall Street Journal reported that any infusion of capital would be done quarter by quarter. The Post said that was being done in an attempt to minimize the initial cost of the rescue.

Fannie Mae and Freddie Mac have seen their stock prices plummet as fears mounted they would soon need government support and that any bailout would leave stockholders in the lurch.

http://www.msnbc.msn.com/id/26567533/

[antigop]

16. Here is the WSJ link:

http://online.wsj.com/article/SB122064650145404781.html?mod=hpp_us_whats_news

The Treasury Department is putting the finishing touches to a plan designed to shore up Fannie Mae and Freddie Mac, according to people familiar with the matter, a move that would essentially result in a government takeover of the mortgage giants.

The plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency, said several people familiar with the matter. That would mean the government would take the reins of the companies, at least temporarily.

[DemReadingDU]

20. government funds used to prop them up

Lookie what it says now...
"The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives and prop them up financially, federal officials told the two companies yesterday, according to three sources familiar with the conversations."

Why don't they just say, they are using our taxpayer money?
:mad:


So Paulson is pulling out the bazooka this weekend. Since most citizens are clueless, will they even know a bailout is taking place? Does anyone know how this bailout will immediately impact citizen Joe/Jane?

[Dr.Phool]

21. Since China owns this country now, we can't piss them off too bad.

Otherwise, where would we borrow more money for the next war?

[DemReadingDU]

26. biggest transfer of wealth in human history

not just to China, but to Paulson and his cronies

9/6/08 Some comments about the bailout from ilargi at the http://theautomaticearth.blogspot.com/

Ilargi: After yesterday's focus on the demise of the yen carry trade, the story today is of course the Fannie Mae and Freddie Mac bottomless black hole. Wonder what the connection might be....

I think the best thing to do is simply to provide a range of articles, and -as always- let you make up your own mind. Still, I do have a few comments first.

To start with, someone suggested this morning that Hank Paulson took the job of Secretary of the Treasury in order to earn his place in the history books as the hero who saved the US economy. While that is funny, it's not true.

Paulson's goal has been, all along and from the start, to transfer the losses incurred in the credit markets to the population at large, the taxpayers, and away from his friends and peers, who form a substantial part of the Wall Street banking establishment. It's easy to recognize who is not a friend of Hank: just look at who holds the empty bag.

A lot of questions are out there about the timing of the imminent bail-out, as well as the precise shape it will take.

As for the timing: here's a few thoughts. I read somewhere that the government has frantically tried to stop this from happening on their watch. While that sounds right at first sight, I keep coming back to the notion that if they DO let in happen while they're in charge, they are, well, in charge.

Paulson now controls who gets what and when. He'll be gone in January. That's a lot of power. He may know more than me about who'll follow in his footsteps, but then again, he may not be so sure. Plus, neither of the presidential candidates may want this on their watch either. There's plenty of pressure on Bush to clean up his garbage. Which is also why I expect GM and Ford to go under between the election and the inauguration of the next drone.

More on the timing: Within weeks, Fannie and Freddie have to refinance $225 billion in -mostly short term- debt. There is no guarantee they will succeed, and in fact this is where Paulson may certainly have the edge on us. If he's been told by the CEO's of both firms that they can't get it done, there's a good reason for your timing.

And there's something potentially much bigger. The Federal Accountancy Standards Board, FASB, has announced new standards, a.k.a. FASB-140. It looks like they will be implemented, although they have been delayed. If memory serves, they will now come into effect in January 2009. They will require Fannie and Freddie to take an additional $3.7 trillion of debt on their balance sheets.

And even with the insanely low reserve requirements that they are under as "semi-government" companies, they would need to raise new capital to the tune of $80-100 billion ($46 billion for Fannie alone), in one big whopping step. In view of the fact that the markets have a collective orgasm these days if Freddie manages to raise a mere $3 billion, the potential problems are obvious.

A last point on the timing: Kenneth Rogoff predicted the failure of one of the big US banks within months. If that is about to happen, it would not be a good idea to let it coincide with the Fannie and Freddie bail-out, since this failure would land the FDIC in the ER.

As for the shape and form of the bail-out: It looks like the government will opt to for "conservatorship", a sort of bankruptcy protection that lets them fire all the people they want, and bring in "overseers". Who will then dole out a few billion of your tax money every so often, instead of in one big batch: looks much nicer, even though the result is the same or worse.

While most analysts think holders of common shares will be left with zero, there are some who argue with that. I think it all depends on who's holding it: if they're friends of Hank, they'll be fine. As for holders of preferred shares and junior debt (last in line, unsecured), they will be "made whole" (or lose little), so goes the consensus.

There have been a lot of borderline xenophobic arguments about the Chinese "blackmailing" the US over the GSE-issued mortgage backed securities they hold. But I think that the priorities lie elsewhere (I also despise xenophobia). The Chinese central bank reportedly holds $340 billion of the paper. But Pimco, the US' largest bond investor, has over $500 billion worth. Still, the rant is about China.

Also, as for why the "preffered share"-holders (and perhaps even common shares) will be protected: there is a huge amount of it in US banks, big and small. That means that letting it sink to zip would detonate a whole series of A-bombs inside the US banking system. Which in turn would necessitate an almost instantaneous bail-out of banking deposit insurer FDIC. Since pension funds are the other main holders, many of them would be wiped clean overnight too.

So the whole train is still on track, and it's the taxpayer that will be wrecked. The biggest transfer of wealth in humen history continues on schedule, and it will leave in its wake poverty on a scale that has not been seen in a very long time in the western world.

One last thing: Remember what Nouriel Roubini said: "These GSEs were designed to make losses."

Click to read a collection of articles...
http://theautomaticearth.blogspot.com/2008/09/debt-rattle-september-6-2008-put-load.html


Here's Karl Denninger's essay today about the bailout...
http://market-ticker.denninger.net/archives/2008/09/05.html

Edit to add a second Denninger essay today...
http://market-ticker.denninger.net/archives/2008/09/06.html

[Dr.Phool]

27. Now that's scary.

They've only got a little over 4 months to finish us off. And it also explains a lot of Bill Gross' crying lately. He's usually a lot quieter.

[DemReadingDU]

28. I feel like a deer frozen scared in headlights

There's so much to do to prepare, and I can't get moving.

It's not like we haven't seen this train wreck coming, it's that it's coming so much faster.

Truly frightening days befall us all.

[psychmommy]

30. i am truly disturbed

i read both of the denninger links. is everybody taking off on monday and shutting stuff down?

[DemReadingDU]

31. Denninger really tells it like it is, and how it's going to be

I don't know how people can get contacted and motivated though.

It's a great idea, I just seriously doubt it would generate even a few
hundred people. That in itself is very sad and disturbing.

To me, it needs to come from, maybe Obama? Look at the thousands Obama is generating for a rally. But would people come out to protest Paulson and his bazooka based on something he sent to his email readership? Surely Obama knows and understands the peril this government is in?

[psychmommy]

32. there's a video of obama addressing it.

i made a comment and mentioned demeter's weekend economist thread. first we have to educate each other online. then we can push the info out. they can only get away with it if the people aren't aware. i can't say i totally understand but, i feel the urgency to get the info out.

[DemReadingDU]

33. Do you have the link to the video?

Most people probably aren't even aware of the severity of the financial crisis, until it hits them in the wallet.

I think the media has kept the severity very low, don't want to panic the masses. Duh, that's what we need!

The more people who become aware, the better able to do something,

[psychmommy]

58. ok i suck at doing links. i hope this works.

i hope this works. if not it is in the video section. i will kick it hopefully it will survive the weekend.


http://www.youtube.com/v/AjGiDqzU4d8










edit because i suck at doing links.

[DemReadingDU]

59. Thank you, works great!

Apparently today Paulson's plan is announced. I'm thinking it will be a bandaid, for now, to keep the stock market up. Then after the elections, the Treasury will be looted out of our taxpayer money in order that the super-rich don't lose their investments. After that, they'll let the market go into freefall.

But what do I know?
:shrug:

[psychmommy]

60. keep me informed please.

i just started reading Demeter's weekend economist. i am not well versed but i am interested. i will be trying to keep up with this economic stuff. this is my kid's future and my future grandkids-hell it's my reality. i am concerned.

[DemReadingDU]

64. Monday thru Friday, check out the Stock Market Watch threads

They are started every morning usually by poster ozymandius, Monday thru Friday, in Latest Breaking News. The Stock Market Watch thread is so popular, it always makes it to The Greatest page!

There are probably about 6 or 7 regular posters in the SMW, and about a dozen others who jump in to post articles concerning not only the stock market, but also news related to the economy.

Check us out on Monday, and don't hesitate to post articles or questions! Someone in there seems to always know an answer!

It was Demeter who recently started this weekend thread where we hang out for the Latest SMW news. :)
The mods moved this weekend thread to the Editorials forum :shrug:

http://www.democraticunderground.com/discuss/duboard.php?az=show_topics&forum=102

P.S.
At the end of the day, I always check back to read the news that had been posted throughout the day.

[Demeter]

63. I Don't Think They CAN Loot The Treasury for the Stockholders

I think that's why there's been so much opinion against it--there are knowledgable people working hard to educate and prevent it.

And there simply isn't that much money. It's all going to Iraq. Now, if Bush gave up his toys...but the fool wants to be a war president. He never heard the saying, "Those who live by the sword, die by the sword." Or he thinks it doesn't apply to him.

And Cheney's off insulting the people on the steppes of Central Asia, trying to stir up another conflagration. Where is Congress? These boobs ought to be put in prison!

[DemReadingDU]

68. Well, I didn't mean literally, to loot the Treasury

I think what happens, is that the amount of bailouts gets added to the national debt which is the amount of money that is owed by the taxpayers. So it's still the taxpayers who are saddled with still more debt which they somehow still need to pay with their taxes. Ugh.

[Demeter]

69. I Don't Think They Can Do That, Either

They broke the economy and the government--there's no way they can do any more looting. Now they can only destroy on the cheap with Chinese poisonous imports and loose nukes.

[DemReadingDU]

72. The bailouts get added to the national debt

The Fannie – Freddie bailout proposals are being discussed in the light that the US government/Treasury can just about double the so called national debt from $9 trillion by possibly adding another $5 plus trillion, as they effectively have to guarantee those GSE bonds.

http://www.marketoracle.co.uk/index.php?name=News&file=article&sid=6048

Worst case scenario to bail out all Freddie and Fannie losses
:(


edit to add:
9/6/08 Barr blasts latest government bailout
“The federal government is preparing to take over Freddie Mac and Fannie Mae,” says Bob Barr, the Libertarian Party presidential nominee. “Congress set up the taxpayers for big losses when it established these quasi-government agencies to subsidize the housing industry, and then earlier this year voted to approve direct federal support for them. Policymakers should learn from the latest financial disaster and say never again,” Barr argues.

Barr says the bailout alone could cost $100 billion or more, and blames Fannie Mae and Freddie Mac’s for its role in creating the overall subprime lending crisis that prompted Congress to approve a $300 billion bailout of the housing industry.

“First, government subsidizes an industry,” says Barr. “Then, after the industry crashes, government bails it out! The one factor that never changes is: the taxpayers lose,.

“The Fannie/Freddie bailout would be bad enough,” says Barr, noting it comes on top of the Federal Reserve bailing out the brokerage house Bear Stearns. “The automakers are lining up with their hands out for $40 billion in assistance. The federal deficit this year will run $400 billion, and next year’s red ink is likely to hit a half trillion dollars. That will inflate a national debt that already runs $9.5 trillion,” he adds.

“It is time to say no more. Fannie Mae and Freddie Mac need to be privatized and sold off. And Congress must stop treating the federal government like a national soup kitchen for businesses in trouble,” says Barr. “Even former Federal Reserve Chairman Alan Greenspan has cautioned against bailouts such as the Bush Administration is now championing for Fannie Mae and Freddie Mac.”

more...
http://www.smallgovtimes.com/2008/09/barr-blasts-latest-government-bailout/

[fedsron2us]

73. The credit crisis is simply migrating through all classes of financial instruments

It started out as a problem in the private mortgage market and its associated securities, has moved through the GSE's (it was less than a year ago that it was Fannie and Freddie that were being touted by some as the rescuers who would bail out the housing market) and will ultimately wind up in the Treasury market now that the government has decided that the taxpayers should pick up the costs. Sovereign debt is the end game of the crisis.

At core it is all stunningly simple. The US government, US corporations and US consumers along with some of their counterparts in some other countries in the western world (the UK being the most obvious example) have lived way beyond their means. The revenues they have generated and the wages they have received have been insufficient to support their spending ambitions so they have had to borrow money from foreign lenders to live in the manner to which they have become accustomed. In a way the unraveling has been accelerated by the greed and stupidity of those at the top of US politics and business who have actively encouraged the process whereby workers earning power was suppressed making it inevitable that sooner or later they would have no choice but to default on their debts and thereby start the inevitable unwind.

The problem with this bail out is that is simply trying to shuffle the debt back to very taxpayers who triggered the crisis because they no longer had the means to meet their obligation. The only way that this move can succeed is by printing more money to meet the interest payments that will fall due on future public debt liabilities. Such an attempt to inflate away the losses is bound to meet strong resistance from foreign debt holder who will see the value of their saving and dividends fall. They are either going to demand a hefty interest rate premium for the additional risk or they are simply not going buy treasuries at all. Both results are likely to floor any hopes for a quick recovery in the world economy.

[DemReadingDU]

74. Thanks for the detailed explanation

Any way this is looked at, it is a horrible mess. There really is no good effective way to solve it without hardships on the taxpayers.

[Dr.Phool]

34. I am

But, it's not going to do much good, since I'm on disability anyway.

It's a sad, sad state of affairs when the only time people find to launch a revolution, is during commercial breaks for Big Brother and American Idol.

We're a nation lazy, fat, uninformed buy-bots.

The reason European governments have strong labor laws, universal health care, and guaranteed retirements is that their governments fear the people. The French will take to the streets at the drop of a hat. At least they used to. Our government laughs at us. Democrats and Republicans alike. The Republicans are just a little more sadistic about it.

[Dr.Phool]

11. Boeing, machinists talks fail; union to strike

BREAKING NEWS
updated 1 hour, 43 minutes ago

SEATTLE - Despite a 48-hour contract extension, negotiations between Boeing Co. and Machinists union officials failed Friday and the union said a strike was set to begin at 12:01 a.m. PDT Saturday.

When the talks broke off, the union sent out a message to members saying: "The strike is on!"

The company said it would not try to assemble planes during the strike.

Boeing spokesman Tim Healy said the company is open to further discussion, but both sides were too far apart to reach agreement. He added no additional talks were scheduled.

The Machinists bargain for about 25,000 aircraft assembly workers in the Puget Sound area and about 2,000 more in Wichita, Kan., and Portland, Ore.

Union members on Wednesday voted 80 percent to reject Boeing's final three-year contract offer and 87 percent to go on strike, mainly over job security. Both sides agreed to the extension at the request of Gov. Chris Gregoire and federal mediators.

Negotiators for Boeing and the machinists union jetted off to a Disney resort in Florida for talks following the extension, in part so Tom Buffenbarger, International Association of Machinists international president, could participate. Buffenbarger was at the resort for an IAM convention.

(snip)

http://www.msnbc.msn.com/id/26565614/

[Pale Blue Dot]

12. Regulators Shutter Silver State Bank

State and federal regulators on Friday shut down Silver State Bank, the latest in a series of bank failures and one that could ripple through the presidential campaign.

Until recently, the son of Republican nominee Sen. John McCain sat on Silver State's board and was a member of its three-person audit committee, which was responsible for overseeing the company's financial condition.

Andrew McCain left the Henderson, Nev., bank July 26 after five months on the board, citing "personal reasons." He is Sen. McCain's adopted son from his first marriage.

There is no evidence that Mr. McCain, 46, committed any wrongdoing. Nor are there signs that Sen. McCain, the Arizona Republican who on Thursday accepted his party's presidential nomination, had any knowledge of or involvement in Silver State's problems.

A spokesman for the McCain campaign couldn't be immediately reached for comment.

The lender, the 11th bank to fail in the U.S. this year, was overexposed to risky real-estate loans, a problem that's vexing many banks amid the worst financial crisis in a generation. Silver State had nearly $2 billion in assets and 17 branches in Arizona and Nevada.

http://online.wsj.com/article/SB122066426856206115.html?mod=googlenews_wsj

Between this and Freddie and Fannie, I'm now terrified.

[Hugin]

13. Hey, Finnfan...

Pulled the ol' handle on that one, didn't they?

Thought of you when I saw the news.

Edit: Dayum, $2Billion in assets... It were a whopper. No wonder the FDIC has been scrounging change
out of the couch cushions. (Still no mention of Liabilities)

Like Father, like son. Looks like Andy hit the silk just in time. :sarcasm: <-- If needed.

[Demeter]

18. Got Your Liabilities Right Here

http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=AP&date=20080905&id=9109600

Silver State Bank in Nevada is shutSeptember 6, 2008

.

It was the 11th failure this year of a federally insured bank.

Nevada regulators closed Silver State and the Federal Deposit Insurance Corp. was appointed receiver of the bank, based in Henderson, Nev. It had $2 billion in assets and $1.7 billion in deposits as of June 30.

[DemReadingDU]

22. Chris Martenson Crash Course videos

I think I have finally found something that may get my family and friends to wake up. It is the Chris Martenson website
https://www.chrismartenson.com/

He has an 8-minute summary an upcoming Documentary, The End of Money
http://www.chrismartenson.com/documentary

and even better, he has an entire Crash Course of short videos to explain how we got to where we are now. I am sending this link to everyone in my email address book
http://www.chrismartenson.com/crashcourse

[Dr.Phool]

23. It looks good.

I bookmarked it for tonight and later.

I'll be in and out all week-end, getting prepped for a blow-job from Ike. Not really that much to do, since I never unprepped from Fay, which ran circles around us, but completely missed.

[DemReadingDU]

70. What's the latest with Ike?

Is this hurricane going blow in your direction? From the path, Ike looks like it is heading into the Gulf?

[Dr.Phool]

96. Looks like we're probably out of the woods.

The latest tracking (which is about as accurate as a Fannie Mae accounting) has it pointed at Texas, maybe the Houston area by Saturday. There's way too much unpredictability that far out.

http://www.wunderground.com/tropical/tracking/at200809.html

[Hugin]

24. Great!

Good find DemReadingDU!


Incidentally, did you ever figure out the stilts and roller-skates cartoon last week?

[DemReadingDU]

25. stilts and roller-skates cartoon

I never figured it out, did you?





It reminded me of those old Far Side toons. Some of those I couldn't figure out either.

[Hugin]

29. Nope, I never did.

Outside of my speculation it looked like a difficult task.

[Demeter]

35. There's a Riddle That Went

What's High in the middle and round on both ends?

the answer is O-HI-O.

What this has to do with the election, aside from the fact that Ohio was last election's Florida, and is surpassed only by Michgian as far as economic misery goes, I don't know at all.

And the stilts, roller skates and the mud is really cryptic.

Maybe the cartoonist had a nightmare, and this is his way of purging.

[Robbien]

44. Perhaps it means

What's Hi in the middle and round at both ends is a old child's brain teaser with the answer being O-hi-O.

The Stilts on roller skates are high in the middle and round at the ends of both the stilts.

Controlling Ohio's politics would be has hard as controlling a thing that is high in the middle and round at the ends, or stilts on roller skates.

Muddy underneath needs no interpretation. Ohio politics is nothing but muddy.

[Hugin]

62. That would make sense, Robbien.

Thanks for putting it in context. :)

[DemReadingDU]

66. So true, thanks!

[Demeter]

40. Two Surprisingly Costly Bank Failures in Two Weeks

http://www.nakedcapitalism.com/2008/09/two-surprisingly-costly-bank-failures.html

Reader Steve A has been on the Friday night FDIC bank euthanasia watch, and in the last two weeks, he has discerned a disturbing trend. If this pattern persists, it seems a sign that things in bank-land may be much worse than is widely acknowledged.

From last week's post, "This Week's Bank Failure Surprisingly Costly," on the demise of the faith-based Integrity Bank of Alpharetta:

$250 to $300 million of losses for a mere $1.1 billion in assets bank? As reader Steve A noted:

Today's failure of the amusingly named Integrity Bank of Alpharetta, GA, confirms two very ugly trends: once again, FDIC was only able to pass cash and cash-equivalents to the assuming bank, and the FDIC's loss estimate is extremely high ($250M - $350M on $1.1B of assets). I don't have hard numbers handy but I seem to recall that receivership losses in the range of 25% - 35% were unusual in the commercial bank failures of the late 80's. I could be wrong, but the numbers this year are extremely high. FDIC's expected losses certainly make me wonder what on earth the bank examiners were doing for the last year besides critiquing the bank's coffee and color scheme.

Now to this week's FDIC prepack, Silver State Bank of Henderson, Nevada:

As of June 30, 2008, Silver State Bank had total assets of $2.0 billion and total deposits of $1.7 billion. Nevada State Bank agreed to purchase the insured deposits for a premium of 1.3 percent....

Silver State Bank also had approximately $700 million in brokered deposits that are not part of today's transaction. The FDIC will pay the brokers directly for the amount of their insured funds....

In addition to assuming the failed bank's insured deposits, Nevada State Bank will purchase a small amount of assets comprised of cash and securities. The FDIC will retain the remaining assets for later disposition.

The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund is between $450 and $550 million.

The losses are stunning. and proportionately almost identical to the levels last week. a range of 22.5% to 27.5%. One wonders why the same loss estimate ranges are being applied to banks in two different states. Regardless, the estimates raise questions as to how these banks could have gotten in such bad shape without anyone taking notice.

And Steve A called our attention to another worrisome aspect (boldface ours):

FDIC ...has again retained all assets except cash and ``certain securities'' (i.e. govies). There appears to be no market for performing bank loans..

[antigop]

19. GE gets Wells notice for its hedge accounting

http://financialweek.com/apps/pbcs.dll/article?AID=/20080905/REG/809059976/1036

Reuters)—General Electric said on Friday it had been notified by U.S. regulators they were considering filing a civil complaint against the company following a three-year probe into GE’s use of hedge accounting for derivatives.

The company said the U.S. Securities had issued a so-called “Wells notice” on Thursday, advising GE the agency is “considering recommending to the SEC that it bring a civil injunctive action against GE for possible violations of the securities laws.”

GE said it was continuing to cooperate with the agency but disagreed with its latest move.

[Demeter]

36. I'm Sure GE Isn't the Only One

[Demeter]

37. Solar energy can meet all the world's energy demands: expert

http://www.physorg.com/news139844301.html


The world must speed up the deployment of solar power as it has the potential to meet all the world's energy needs, the chairman of an industry gathering which wrapped up Friday in Spain said.


"The solar energy resource is enormous, and distributed all over the world, in all countries and also oceans," said Daniel Lincot, the chairman of the five-day European Photovoltaic Solar Energy conference held in Valencia.

"There is thus an enormous resource available from photovoltaics, which can be used everywhere, and can in principle cover all the world energy demand from a renewable, safe and clean source," he added.

Lincot, the research director of the Paris-based Institute for Research and Development of Photovoltaic Energy, said solar energy was growing rapidly but still made only a "negligible" contribution to total energy supply.

Last year the world production of photovoltaic models represented a surface of 40 square kilometres (16 square miles) while meeting the electrical consumption of countries like France or Germany would require 5,000 square kilometres, he said.

Under current scenarios, photovoltaic models will represent about 1,000 square kilometres by 2020 accounting for about only 3.0 percent of energy needs in the 27-member European Union, he added.

Over 200 scientists and solar power experts have signed a declaration calling on the accelerated deployment of photovoltaic power which was launched at the conference.

More than 3,500 experts and 715 sector firms took part in the gathering, billed as the largest conference ever organised in the field of photovoltaic conversion of solar energy.

Germany and Spain are the world leaders in solar energy power. Germany has 4,000 megawatts of installed capacity while Spain has 600 megawatts.

[Demeter]

38. Oil, Stock, and Housing Declines

http://bespokeinvest.typepad.com/bespoke/2008/09/oil-stock-and-1.html


Ironically, oil is now down more than the stock market and even home prices! From their peaks, oil is down 27.18%, the S&P 500 is down 22.16%, and the S&P/Case-Shiller 10-City Median Home Price index is down 20.46%.

[Demeter]

39. U.S. wants "substantial" prison for Gen Re, AIG execs

http://www.reuters.com/article/ousiv/idUSN0529237520080906

Fri Sep 5, 2008 10:18pm EDT
By Gina Keating

LOS ANGELES (Reuters) - U.S. prosecutors on Friday asked a Connecticut judge to sentence five former executives of Berkshire Hathaway Inc's General Re Corp and American Insurance Group Inc to "substantial" prison terms for misleading investors about AIG's (AIG.N: Quote, Profile, Research, Stock Buzz) financial condition.

In a sentencing memorandum filed late on Friday, prosecutors argued that sentences for the five defendants should be stiffer than the range of 168 months to 210 months calculated in a pre-sentence report.

The government also said losses to AIG investors could be estimated at more than $400 million -- with the government's expert calculating fraud-related losses as much as $1.4 billion -- a factor that should enhance the defendants' sentences...

In February, a federal jury in Hartford, Connecticut, found the five guilty of conspiracy, securities fraud, making false statements to the SEC and mail fraud.

The defendants were convicted in connection with a reinsurance deal that prosecutors said misled AIG investors because it enabled the company to improperly inflate its loss reserves, painting an artificially bright picture of its financial results.

AIG previously acknowledged accounting improprieties and restated $3.8 billion in earnings from 2000 through 2004 and agreed to a $1.64 billion regulatory settlement in 2006.

I FEEL SORRY FOR THE REPORTER--GINA KEATING--A NAME TO CONJOUR WITH!

ISN'T BERKSHIRE HATHAWAY THE STOMPING GROUND FOR WARREN BUFFETT?

[Robbien]

46. Convicted in February

and here it is September and the crooks are still walking freely around not sentenced.

Billions are missing and these guys are probably expecting a walk.

[Demeter]

48. Good Evening, Robbien!

And here I thought I was the only one still up.

The wheels of justice are grinding finely, as usual. Don't worry-their financial losses will punish them more than jail time.

Sorry to be posting so slowly...I've had computer tantrums and such.

[Robbien]

49. I really do appreciate the weekend thread Demeter

So many good articles get posted here and usually my free weekend time is spent absorbing them all with little time left over to post comments.

This Fannie/Freddie deal is something isn't it?

[Demeter]

51. It Is the Defining Moment of Our Lives, I Fear

More than the assassinations, the impeachments, the wars, this economic collapse and aftermath will stain generations.

[Robbien]

52. DemReadingDU's post and links up there are some scary shit

Deer in headlights is exactly how I've been feeling all day since the word came out on the web. And from the small amount of chatter out there on this, it appears very few are aware of what this means. Other than the web, everyone is silent on it.

What a world we are living in.
:utter disbelief:

[Demeter]

54. That Lack of Chatter Means EVERYONE Is a Deer in the Headlights

It's good to put some fear in the PTB so that they get derailed off the Greed Express. And before the election, too.

On the other hand, one never wants the nasty medicine.

[Demeter]

41. Paulson Asked to Spurn Rubin's Inflation Indexed Debt (Update1)

http://www.bloomberg.com/apps/news?pid=20601109&sid=atKnQFruecww&refer=home

By Sandra Hernandez

Sept. 2 (Bloomberg) -- Almost 12 years after then-Treasury Secretary Robert Rubin championed inflation-linked bonds as a way to lower U.S. borrowing expenses, advisers to Henry Paulson say they have cost taxpayers an extra $30 billion.

The Treasury Borrowing Advisory Committee, consisting of officials from 14 investment firms including Goldman Sachs Group Inc. and Soros Fund Management, recommends eliminating five-year Treasury Inflation-Protected Securities. At a minimum, the supply of TIPS, now $517 billion outstanding, should be reduced relative to the amount of nominal Treasuries, the committee says.

Treasury Secretary Paulson would be shortsighted to follow that advice, according to Mihir Worah, who oversees the $15.6 billion Real Return Fund for Newport Beach, California-based Pacific Investment Management Co. Depriving investors of one of three maturities in the TIPS market is a step toward raising borrowing costs, not lowering them, he said.

``You can't do this,'' Worah said in a telephone interview. The market ``needs all those liquidity points -- five, 10, and 20 years. I would strongly argue against eliminating the five- year TIPS.''

Defenders say TIPS will save the government money as they become easier to trade. Since Rubin, 70, created the market, only 10-year notes have been auctioned continuously. The government started selling 5- and 20-year maturities at semi- annual auctions in 2004.

Lower Yields

TIPS pay interest on a principal amount that rises and falls with the consumer price index, which increased 5.6 percent in the year ended July 31. Yields are lower than those of Treasuries because investors expect the inflation payment to make up the difference. The gap between yields on the bonds represents the rate of inflation investors expect during the life of the securities.

The yield on the five-year inflation-linked note due in April 2013 ended last week at 1.23 percent, compared with 3.09 percent for the benchmark 3.125 percent note due in August 2013. The yield climbed to 1.30 percent today.

If inflation ends up higher than expectations, the government pays more on TIPS than on bonds. That's the main reason TIPS cost an extra $30 billion since 1997, according to the Treasury Borrowing Advisory Committee, or TBAC.

Paulson, 62, wasn't available for comment, said Treasury spokeswoman Brookly McLaughlin, declining to say whether he has spoken to Rubin about TIPS. Rubin, who, like Paulson was a chairman of Goldman, didn't return messages left with his office seeking comment...


The U.S. started selling TIPS in 1997, saying the market would help Americans' retirement savings keep pace with inflation...The bonds account for 11 percent of the Treasury market, up from 6.2 percent at the end of 2004.

TIPS ``have certainly not been an attractive form of financing for the U.S. Treasury,'' the TBAC said in a July 29 report published on the Treasury's Web site. Paulson ``should consider eliminating'' five-year TIPS and focus on longer maturities that better meet needs of pension funds and insurance companies, it said.

...The Treasury stopped selling 30-year bonds nine months after the committee recommended in 2001 that the U.S. eliminate the securities -- just before the government went from budget surpluses to deficits. Sales of the so-called long bond resumed in 2006.

...``I'd be very quick to dismiss the recommendations,'' said John Brynjolfsson, chief investment officer of Armored Wolf LLC, a hedge fund in Aliso Viejo, California. ``The five-year TIPS is probably the lowest-risk, best inflation hedge that retirees, foundations, endowments, and other savers can purchase. So it would eliminate their access to the market.''

Brynjolfsson, who formerly managed $80 billion at Pimco, estimates that TIPS have saved the U.S. $275 billion since 1997 by lowering yields on regular Treasuries by 0.25 percentage point to 0.5 percentage point.

Real-Time Referendum

That's because TIPS serve as a real-time referendum on the ability of the central bank and government to contain inflation. Investors who have confidence in the resolve of policy makers to keep consumer prices in check are more willing to lend them money at lower rates, Brynjolfsson said.

Consumer prices rose at an average annual pace of 2.7 percent since 1997, compared with 3.7 percent in the decade before TIPS were sold. The yield on the five-year Treasury averaged 4.53 percent since the market started, versus 7.11 percent in the previous 10 years.

TIPS issued since 2004 may save the government as much as $4 billion because liquidity has improved, according to a 2007 paper by Washington-based Fed economist Jennifer Roush. Liquidity refers the ease with which an investor can trade securities. In general, the less liquid a security, the lower the price and the higher the coupon payments investors demand to own it.

Increased Trading

``Any efforts to foster greater liquidity would be helpful,'' said Wan-Chong Kung, who helps oversee $76 billion in fixed income as a bond fund manager at Minneapolis-based FAF Advisors, the asset-management arm of U.S. Bancorp. ``Paulson perhaps contemplating cutting out five-year issuance would very much run counter to that.''

The primary dealers of U.S. government securities traded an average of $8.2 billion in TIPS each week the last four years, compared with $3 billion in the preceding four. The government sold $63 billion in TIPS in 2004, more than double the amount in 1997. It issued $57 billion last year.

Benefits to Taxpayers

The TBAC is wrong to highlight past costs of a relatively young market without acknowledging TIPS' benefits to taxpayers, said Kenneth Volpert, who manages $17.5 billion of the debt for Vanguard Group in Valley Forge, Pennsylvania. TIPS allow the Fed to make better decisions on setting interest rates to keep consumer price gains in check, he said.

Fed officials referred to TIPS in 12 of 13 policy-setting meetings since 2007, according to minutes of the gatherings. Policy makers led by Ben S. Bernanke mentioned five-year TIPS as recently as their April 30 meeting, where they lowered the benchmark lending rate a quarter-percentage point to 2 percent.

``The bigger TIPS are as a share of the Treasury funding, the more aligned they are with taxpayers' interests,'' Volpert said.

[Demeter]

42. Credit Card Junk Mail Decreases By 260 Million

http://consumerist.com/5044611/credit-card-junk-mail-decreases-by-260-million


The number of credit card offers clogging mailboxes took a nosedive in this year's second quarter, 1.54 billion vs 1.8 billion for the same period last year. An aftershock of the credit crunch and sub-prime meltdown, the decrease reflects a shift in the banking industries thinking, trending towards higher standards from its borrowers than merely the fact that they are carbon-based lifeforms. A good way to take that number even lower is to register with OptOutPrescreen.com and stop the tide of credit card offers almost entirely.

[Dr.Phool]

56. Optoutprescreen.com works like a charm.

I was getting 50-75 a week. Now nothing.

The final straw was during a 3 day period, my wife and I got 20 solicitations between us from Citi alone! I wore out 2 shredders on the things last year.

[Demeter]

43. Hedge Funds Continuing to Take It on the Chin

http://www.nakedcapitalism.com/2008/09/hedge-funds-continuing-to-take-it-on.html

We've remarked from time to time this year that a lot of hedge funds aren't having a particularly good time these days. The volatility that has punished mere mortals has also taken a toll on many Masters of the Universe.

The Wall Street gives an update, showing that even some of the biggest names have been bloodied. The most interesting development is that investors are starting to negotiate fees, a development observers and participants swore would never happen.

I also recall in the 1980s, when all credit cards had an annual fee and charged the legal maximum on balances (I believe 19.8%; banks could and did shop jurisdiction), experts insisted they'd never, NEVER cut prices either.

From the Wall Street Journal:

Some of the biggest hedge funds are having their worst years, and the flood of new money going into funds has slowed. That is pressuring an industry bracing for investor withdrawals and worrying about how to survive without lucrative performance fees.

Some investors willing to put new money in funds are even beginning to ask about better terms, a contrast to the situation just last year, when investors needed to beg to get into hot funds.



Big funds run by star investors, such as Steve Mandel's Lone Pine Capital, Dinakar Singh's TPG-Axon Capital Management, Tim Barakett's Atticus Capital and Tom Steyer's Farralon Capital, have lost between 7% and 25% so far this year, investors say. Ken Griffin's biggest fund at Citadel Investments is down 6% this year, its worst performance in 14 years.

Overall, hedge funds -- private partnerships that invest money for wealthy investors and institutions -- are having their worst year since at least 1990, the year that Hedge Fund Research Inc. began tracking the data. The average fund lost 3.43% this year through July, faring better than the decline of 12.65% in the Standard & Poor's 500 but below the gain of 1.05% in the Lehman Brothers bond index. August data haven't been calculated yet.

[Robbien]

79. Winners and Losers

The Standout Performers

* $35 billion Paulson & Co: +18% ytd
* $26.3 billion Brevan Howard: +16% ytd
* $37.1 billion D.E. Shaw: +8% ytd
* $30.9 billion Bridgewater Associates: +6% ytd
* $33.3 billion Och-Ziff Capital: +0.5% ytd
* $16 billion Winston Capital: +10% ytd
* $10 billion Caxton Associates: +5% ytd
* $17 billion Tudor Investment Corp: +3% ytd
* $16 billion SAC Capital: +1.5% ytd


The Not-so Standout Performers

* $49.3 billion Highbridge/JP Morgan (Multistrat fund): -2% ytd
* $33 billion Farallon Capital: -6% ytd
* $23.7 billion GLG Partners: -14% ytd
* $13 billion Eton Park Capital: -1% ytd
* $19 billion Citadel Investment Group: -6% ytd
* $18 billion Lone Pine Capital: -8.5% ytd
* $12.5 billion TPG-Axon: -11% ytd
* $8 billion Cantillon Capital: -12% ytd
* $15 billion Atticus Capital: -25% ytd


The Slightly Mixed Bag

* $29.5 billion Renaissance Technologies: One of their funds is -1% ytd, while their signature Medallion fund is +40% ytd
* $26.9 billion Goldman Sachs: One of their funds is -2% ytd, while their Global Alpha fund is +17% ytd

http://seekingalpha.com/article/94178-hedge-funds-are-getting-their-butts-kicked-too

Interesting to see who is actually doing the winning and who is not. Surprising to see JPMorgan in the batch of losers.

[Demeter]

45. 56,000 People – and One Guest Blogger – Can’t be Wrong

http://www.creditslips.org/creditslips/2008/08/56000-people--1.html
posted by Angie Littwin
When the Federal Reserve asked for comments on its proposal to prohibit credit-card issuers from engaging in “certain unfair or deceptive acts,” it had no idea what it was getting into. The draft rules generated approximately 56,000 comments, most of them from angry consumers. This is an overwhelming response to what is known in legal jargon as a “Notice and Comment Period,” a regulatory tradition that is usually about as exciting as it sounds. While many of these were form letters that people had clipped or copied from advocacy materials, a large percentage were from individuals sharing their own stories. That is a lot of effort on the part of a lot of people.

The New York Times has published a helpful editorial about the proposed rules and the overwhelming response to them. From a Credit Slips perspective though, the most interesting part is that it cites guest blogger Ronald Mann. And the editorial board didn’t just call him up for a quick quote. The editors actually read and digested his article Bankruptcy Reform and the Sweatbox of Credit Card Debt. They even provide a link. In this article Professor Mann argues that the real reason credit-card companies benefit from BAPCPA is that they get more time to collect penalty interest and assorted late fees as distressed borrowers wait longer to file for bankruptcy. What’s so interesting about this framework is that it takes something that people used to characterize as a side effect – the piling on of interest and fees when borrowers default – and places it front and center, arguing that it is now the distressed borrowers, rather than the paying customers, who are at the heart of the credit-card issuers’ business model – and their lobbying efforts.

The paper is quickly becoming a classic in the field. It’s one of those rare articles that takes the same events all of us were looking at and frames them in a completely new way. So it’s especially exciting to see it prominently featured in the mainstream press. The academic debate is shifting from one where we think of defaulting borrowers as something lenders need to protect themselves from to one where we see defaults as something issuers actively solicit and worked to enshrine in law. If this point can penetrate into popular discussion, we’ll be making some real progress.

[Hugin]

61. Great Jehosaphats!

Wow! I take back everything I've ever said about people being out-of-touch. (As they're portrayed on
the Corporate Propagada Transmission Machine.) 8)

:patriot:

[Demeter]

47. Stage two of the gold bull market is just beginning

http://blogs.telegraph.co.uk/ambrose_evanspritchard/blog/2008/08/12/stage_two_of_the_gold_bull_market_is_just_beginning


A war breaks out in the Caucasus, pitting Russia against a close ally of the United States. Inflation reaches a new peak in the euro-zone. The CPI reaches the highest in Britain since Bank of England independence. Rampant inflation sweeps the developing world.


All that glitters is not reliable in these uncertain times

Yet gold crashes. It has failed to deliver on its core promises as a safe-haven and inflation hedge, at least for now. Why?

Four possible answers:

1) Nobody seriously believes that Russia will over-play its hand. The world could not care less about Georgia anyway. Ergo, this is a bogus geopolitical crisis.

2) The inflation story is vastly exaggerated in the OECD core of countries that still make up 60pc of the global economy. The price of gold is already looking beyond the oil and food spike of early to mid 2008 (a lagging indicator of loose money two to three years ago) to the much more serious matter of debt-deflation that lies ahead.

3) The seven-year slide of the dollar is over as investors at last wake up to the reality that the global economy is falling off a cliff. Indeed, the US is the only G7 country that is not yet in or on the cusp recession. (It soon will be, but by then others will be prostrate). As an anti-dollar play, gold is finished for this cycle.

4) The entire commodity boom has hit the buffers. Looming world recession (growth below 3pc on the IMF definition) trumps the supercycle for the time being.

Gold has fallen from $1030 an ounce in February to $807 today in London trading. It has collapsed through key layers of technical support, triggering automatic stop-loss sales. The Goldman Sachs short-position that I have been observing with some curiosity has paid off.

For gold bugs, the unthinkable has now happened. The metal has fallen through its 50-week moving average, the key support line that has held solid through the seven-year bull market. This week is not over yet, of course. If gold recovers enough in coming days, it could still close above the line.

Courtesy of my old colleague Peter Brimelow - whose columns on gold are a must-read - note that Australia's Privateer point and figure chart has also broken its upward line for the first time since 2002. This is serious technical damage.

So have we reached the moment when gold bugs must start questioning their deepest assumptions. Have they bought too deeply into the "dollar-collapse/M3 monetary bubble" tale, ignoring all the other moving parts in the complex global system? Nobody wants to be left holding the bag all the way down to the bottom of the slide, long after the hedge funds have sold out.

Well, my own view is that gold bugs should start looking very closely at something else: the implosion of Europe. (Japan is in recession too)

Germany's economy shrank by 1pc in Q2. Italy shrank by 0.3pc. Spain is sliding into a crisis that looks all too like the early stages of Argentina's debacle in 2001. The head of the Spanish banking federation today pleaded with the European Central Bank for rescue measures to end the credit crisis.

The slow-burn damage of the over-valued euro is becoming apparent in every corner of the eurozone. The ECB misjudged the severity of the downturn, as executive board member Lorenzo Bini-Smaghi admitted today in the Italian press. By raising interest rates into the teeth of the storm last month, Frankfurt has made it that much more likely that parts of Europe's credit system will seize up as defaults snowball next year.

As readers know, I do not believe the eurozone is a fully workable currency union over the long run. There was a momentary "convergence" when the currencies were fixed in perpetuity, mostly in 1995. They have diverged ever since. The rift between North and South was not enough to fracture the system in the first post-EMU downturn, the dotcom bust. We have moved a long way since then. The Club Med bloc is now massively dependent on capital inflows from North Europe to plug their current account gaps: Spain (10pc), Portugal (10pc), Greece (14pc). UBS warned that these flows are no longer forthcoming.

The central banks of Asia, the Mid-East, and Russia have been parking a chunk of their $6 trillion reserves in European bonds on the assumption that the euro can serve as a twin pillar of the global monetary system alongside the dollar. But the euro is nothing like the dollar. It has no European government, tax, or social security system to back it up. Each member country is sovereign, each fiercely proud, answering to its own ancient rythms.

It lacks the mechanism of "fiscal transfers" to switch money to depressed regions. The Babel of languages keeps workers pinned down in their own country. The escape valve of labour mobility is half-blocked. We are about to find out whether EMU really has the levels of political solidarity of a nation, the kind that holds America's currency union together through storms.

My guess is that political protest will mark the next phase of this drama. Almost half a million people have lost their jobs in Spain alone over the last year. At some point, the feeling of national impotence in the face of monetary rule from Frankfurt will erupt into popular fury. The ECB will swallow its pride and opt for a weak euro policy, or face its own destruction.

What we are about to see is a race to the bottom by the world's major currencies as each tries to devalue against others in a beggar-thy-neighbour policy to shore up exports, or indeed simply because they have to cut rates frantically to stave off the consequences of debt-deleveraging and the risk of an outright Slump.

When that happens - if it is not already happening - it will become clear that the both pillars of the global monetary system are unstable, infested with the dry rot of excess debt.

The Fed has already invoked Article 13 (3) - the "unusual and exigent circumstances" clause last used in the Great Depression - to rescue Bear Stearns. The US Treasury has since had to shore up Fannie and Freddie, the world's two biggest financial institutions.

Europe's turn will come next. We will discover that Europe cannot conduct such rescues. There is no lender of last resort in the system. The ECB is prohibited by the Maastricht Treaty from carrying out direct bail-outs. There is no EU treasury. So the answer will be drift and paralysis.

When EU Single Market Commissioner Charlie McCreevy was asked at a dinner what Brussels would have done if the eurozone faced a crisis like Bear Stearns, he rolled his eyes and thanked the Heavens that so such crisis had yet happened.

It will.

Gold bugs, you ain't seen nothing yet. Gold at $800 looks like a bargain in the new world currency disorder.

[Demeter]

50. The Reagan Myth: Conservatives and Greed

http://ataxingmatter.blogs.com/tax/2008/08/the-reagan-myth.html

When we talk about this country's values and beliefs, we tend to think that we are a caring people who want government to help in those cases of poverty and disability that leave people homeless and hungry. We tend to think of ourselves as a caring nation, but that may be becoming more myth than reality.

Ever since Ronald Reagan and the ascendancy of the right-wing faction in national politics, there has been a tendency to tone down talk of altruism (anything that isn't market business is sometimes labelled "socialism" and treated as inherently evil under the free marketarian ideology propagated by the Chicago School boys) and a tendency to paint "competition" and "profits" in god-like colors, along with all the baggage of greed and self-centeredness that accompany them.

This free marektarian mixture of greed and selfcenteredness has become so pervasive that it colors the way many think about programs for the homeless, "entitlements" like social security and medicare benefits for the elderly, and medicaid for the uninsured. It factors into tax policy, in that the trickle-down approach is used to justify elimination of progressivity in the tax system and the claim that competition is the heart of capitalism is used to justify eliminating any taxes on business that "distort" competition or make it difficult for US multinationals to compete. Tax policy seen through this lens is merely a routine application of free marketarian ideology--less taxes on the rich, so the rich can make more money competing, and (hopefully) some of the riches will leak down to everybody else in the country.

This needs to change. We have experimented, really since Reagan, with increasing focus on profits and growth, without any focus on how the benefits are distributed. And we've seen that it doesn't work. We have increasing inequality, and falling standards of living for the overwhelming majority, while the ultra rich have income and lifestyles that are almost unimaginable for the rest of us. We've done that at tremendous cost for the society as a whole--one that is now the largest debtor nation in the world, with its debt owned in large part by rival countries like China and India; one that is fighting too many wars for too weak reasons at exorbitant cost because of the extension of Reagan's "privatize and deregulate" orthodoxy to almost every governmental endeavor, including warmongering, at the great benefit to those crony corporations called on to execute no-bid contracts, paid for sloppy performance, and paid much more than government workers had formerly been paid to do the same jobs. (I understand that some Blackwater security guards make many times what an Army soldier would have made for the same work.) Corporatism, in other words, is destroying the value system that made this country great, and destroying the economy and government to boot.

There is a piece in Salon from August 7 that is worth reading. It is Thomas Frank's How Conservative Greed and Corruptions Destroyed American Politics. I will just call your attention here to the following paragraph excerpted from the piece, though I would substitute "free marketarians" for "conservatives" to be more accurate in condemning the corporatist state approach that Reagan began and the Bushes have continued.

Fantastic misgovernment of the kind we have seen is not an accident, nor is it the work of a few bad individuals. It is the consequence of triumph by a particular philosophy of government, by a movement that understands the liberal state as a perversion and considers the market the ideal nexus of human society. This movement is friendly to industry not just by force of campaign contributions but by conviction; it believes in entrepreneurship not merely in commerce but in politics; and the inevitable results of its ascendance are, first, the capture of the state by business and, second, all that follows: incompetence, graft, and all the other wretched flotsam that we've come to expect from Washington.

***

When conservatives appoint the opponents of government agencies to head those government agencies; when they auction their official services to the purveyor of the most lavish "golf weekend"; when they mulct millions from groups with business before Congress; when they dynamite the Treasury and sabotage the regulatory process and force government shutdowns -- in short, when they treat government with contempt -- they are running true to form. They have not done these awful things because they are bad conservatives; they have done them because they are good conservatives, because these unsavory deeds follow naturally from the core doctrines of the conservative tradition. And, yes, there has been greed involved in the effort -- a great deal of greed. Every tax cut, every cleverly engineered regulatory snafu saves industry millions and perhaps even billions of dollars, and so naturally securing those tax cuts and engineering those snafus has become a booming business here in Washington.

***

As we make our rounds of conservative Washington, we glimpse something much greater than single acts of incompetence or obstruction. We see a vast machinery built for our protection reengineered into a device for our exploitation. We behold the majestic workings of the free market itself, boring ever deeper into the tissues of the state.

[Demeter]

53. Good Night, All! Back in the Sunday Morning to Continue to Turn Over this Compost Heap

I've got to get that inbox below 30 items sometime!

[Robbien]

55. Audit being requested of Bankrupt oil pipeline co SemGroup (Carlyle)

The agent bank among SemGroup's creditors sided Friday with the U.S. Trustee in calling for a bankruptcy judge to appoint an examiner who will investigate oil futures trading by the collapsed Tulsa energy company.

Bank of America's motion follows a request by U.S. Trustee Roberta A. DeAngelis last month. U.S. Bankruptcy Judge Brendan L. Shannon is scheduled hear the motion Wednesday in Wilmington, Del.

SemGroup filed for Chapter 11 bankruptcy protection July 22 after reporting that it lost $2.4 billion on failed oil futures positions. . .

The U.S. Trustee is a Department of Justice position focused on overseeing bankruptcy cases as a third party. The office has questioned the complexity of SemGroup's cash management system while also wanting a federally appointed examiner to look into trading and transactions between the parent company and its publicly traded subsidiary, SemGroup Energy Partners, in the months before the cash-flow crisis and Chapter 11 filing became known.

Bank of America wants the examiner's scope limited to those specific issues and funded by a $100,000 budget and 30-day timeline. Another creditor, RZB Finance, also has joined the call for an investigator.

The agent bank, however, disputes the need for a separate search for documents requested in an Aug. 22 motion by the Unsecured Creditors Committee. Those creditors want the judge to allow depositions and documents related to SemGroup trading from various hedge funds, lenders such as Tulsa-based BOK Financial Corp. — which financed some of SemGroup's hedging efforts — and company co-founders Tom Kivisto and Gregory Wallace, among others . . .

Two of SemGroup's main equity holders, Carlyle/Riverstone Energy Partners II LP and Ritchie Capital Management LLC, filed documents Friday indicating that they had reached an agreement with the Unsecured Creditors Committee about the documents pertaining to oil futures trading. The two capital firms may release some documents but reserved the right to withhold others based on legal considerations.

SemGroup's longtime Tulsa legal firm objected to the unsecured creditors' request. Hall Estill, which represented SemGroup and/or Kivisto since the company's founding in 2000, argued that the document search unnecessarily duplicates any future examiner's probe and oversteps legal boundaries.

The Aug. 22 motion "is not burdened by concerns of proportion, propriety or common sense," the firm's attorneys wrote. "It seeks production of confidential and/or privileged documents of Hall Estill clients."

Kivisto is accused of losing $290 million of SemGroup's money through speculative transactions by his own private company, WestBack Holdings, according to reports. Some creditors are curious about who oversaw SemGroup's alleged "unauthorized" hedging and/or knew just how deep in debt the company was before the "insider transactions" and the common stock offering of SemGroup Energy Partners, court documents show.

http://www.tulsaworld.com/news/article.aspx?articleID=20080906_351_E1_hKeyle700842

IMO SemGroup's bankruptcy played one of the big roles in the hedge fund bubble bursting. Funny that the small paper TulsaWorld.com seems to be the only news site covering the ins and outs of what has been happening since the fall.

[DemReadingDU]

57. morning kick

[Demeter]

65. Prosecutor becomes figure in mortgage mess By Gina Keating

http://news.yahoo.com/s/nm/20080907/bs_nm/subprime_prosecutor_dc_1

LOS ANGELES (Reuters) - Thomas O'Brien, the U.S. Attorney for California's Central District, is emerging as a likely prosecutor in criminal cases expected from the U.S. mortgage meltdown. In the past, he has faced gang members in court and since becoming U.S. Attorney in October 2007, he has shown he is willing to bring aggressive and sometimes even creative charges. His office is already looking into New Century Financial Corp and IndyMac Bancorp Inc (IDMC.PK), according to securities filings by those two mortgage lenders. Countrywide Financial Corp, based in Calabasas, California, is also on his patch.

Executives charged with wrongdoing would face a straight shooter who is developing a reputation for being tough on white collar crime, according said Brian Sun, a former federal prosecutor who is now a trial lawyer with international law firm Jones Day. If O'Brien brings cases to trial, it would mark the first time California's Central District has prosecuted a major financial fraud case since the 1980s savings and loan crisis.

"Is he ambitious? Of course he is," said Brian O'Neill, another former federal prosecutor who is also an attorney at Jones Day. "People don't get there unless they are ambitious." Seeking justice for victims of the worst banking debacle in a generation could help the telegenic O'Brien, a Republican, launch a political career or at least keep his post under a new U.S. administration.

He made a splash this year by allowing a case to go ahead against a Missouri woman accused of creating a fake online profile to harass a 13-year-old girl who then committed suicide. In that case, and in a fraud indictment against Broadcom Corp (BRCM.O) founder Henry Nicholas III, defense attorneys said O'Brien overreached his powers. His team suffered a high-profile loss last month when a jury acquitted a former Marine charged with killing Iraqi detainees in Fallujah, the first time a civilian jury had decided whether a soldier violated military law in combat. "Oftentimes when we charge something we are the first in the nation to have done so," O'Brien told Reuters in an interview in August. "Somebody's got to lead the way."


INTERESTING!

[Demeter]

71. 9% of homeowners are late with bill or in foreclosure, study says

http://www.usatoday.com/money/economy/housing/2008-09-05-foreclosure_N.htm?csp=34


By Alan Zibel, AP Business Writer
WASHINGTON — An industry group says a record 9.2% of American homeowners with a mortgage were either behind on their payments or in foreclosure at the end of June, as damage from the housing crisis continued to mount. The latest quarterly snapshot by the Mortgage Bankers Association on Friday broke records for late payments, homes entering the foreclosure process and for the inventory of loans in foreclosure.

The percentage of loans at least 30 days past due or in foreclosure was up from 8.8% in the January-March quarter, and up from 6.5% a year earlier.

In one bit of positive news, delinquencies on subprime adjustable-rate loans dipped 1 percentage point from the first quarter to 21%.

The seasonally adjusted foreclosure starts rate, the percentage of loans that entered the foreclosure process during the April-June quarter, was 1.19%, up from 0.99% in the first three months of 2008 and 0.65% in the second quarter of 2007.

The percentage of loans in the foreclosure process at the end of the second quarter was 2.75%, up from 2.47% in the first quarter and from 1.40% in the second quarter of 2007.

"The national foreclosure numbers continue to be driven by the hardest-hit states continuing to get much worse," Jay Brinkmann, the association's chief economist and senior vice president for research and economics, said in a news release.

The increases in foreclosures in California and Florida overwhelmed improvements in states such as Texas, Massachusetts and Maryland, he said.

For the quarter, a majority of the states saw relatively little change one way or the other, with California and Florida alone accounting for 39% of all of the foreclosures started in the country during the second quarter and 73% of the increase in foreclosures between the first and second quarters, he said.

The U.S. mortgage delinquency rate of 6.41% was the highest since at least 1979, which was when the trade group began its current method of measuring failing home loans.

The increase in the overall delinquency rate was driven by increases in the number of loans 90 or more days past due, primarily in California and Florida. The 30-day delinquency percentage remains below levels seen as recently as 2002, the MBA said.

[Demeter]

67. GSE plan expected at Treasury news conference By Glenn Somerville

http://news.yahoo.com/s/nm/20080907/bs_nm/fannie_freddie_dc_9



WASHINGTON (Reuters) - The U.S. government was expected to take control of mortgage finance companies Fannie Mae and Freddie Mac on Sunday in its latest effort to shore up the slumping U.S. housing market.



Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart will hold a news conference at 11 a.m. on Sunday, the Treasury Department said. FHFA regulates the two companies.

[Demeter]

77. Well, Here It IS: The Fannie--Freddie Fix

http://www.marketwatch.com/news/story/us-government-takes-control-fannie/story.aspx?guid=%7bC99D796B-CB3C-47A8-8A56-284A9A4D5C85%7d&siteid=yahoomy&print=true&dist=printMidSection

Washington takes over Fannie Mae, Freddie Mac

End of an era comes, as Paulson says equity buy wouldn't have been enough

By Greg Morcroft & Greg Robb, MarketWatch

Last update: 12:59 p.m. EDT Sept. 7, 2008NEW YORK (MarketWatch) -- The Treasury Department announced Sunday a plan to takeover home mortgage giants Fannie Mae and Freddie Mac in one of the biggest government rescues in U.S. history.

The end of the era came when Treasury Secretary Henry Paulson told reporters that a careful review of the two mortgage giant's books made it "necessary to take action."

Paulson said he had decided, along with the Federal Reserve and the Federal Housing Finance Agency, that his initial plan just to take an equity investment in the two firms was unworkable.

James Lockhart, the head of FHFA which will now oversee Freddie and Fannie, said the recession in the housing market ultimately proved too strong for the companies to overcome.

"As house prices, earnings and capital have continued to deteriorate, Fannie and Freddie's ability to fulfill their mission has deteriorated. In particular, the capacity of their capital to absorb further losses while supporting new business activity is in doubt," Lockhart said.

There were reports that auditors called in by Treasury and FHFA had found accounting irregularities at the two firms and that their capital base was smaller than expected.

As a result, a full-scale takeover of the two firms was seen as the only option.

Federal Reserve Chairman Ben Bernanke said that he fully supported the government takeover.

"These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets," Bernanke said.

Dividends ended, CEOs leaving

Technically, the government placed the two companies in conservatorship.

The FHFA will assume the power of the board and management. Dividends will be eliminated and all lobbying activity halted.

The move will also replace the chief executives of both...Fannie Mae Chief Executive Daniel Mudd and Freddie Mac CEO Richard Syron will leave their positions after a brief transitional period.
Mudd will be replaced by Herb Allison, the former vice chairman of Merrill Lynch and who is currently chairman of the TIAA-CREF teachers' pension funds. Syron will be replaced by David Moffett, who was the vice chairman and chief financial officer of U.S. Bancorp.

In essence, the plan is similar to a Chapter 11 bankruptcy that will give the two companies breathing room to reorganize.

Paulson said the plan was a "time out" to stabilize the two companies. Congress will have to decide their future role and structure, he said.

Government buying stock, MBS

To support the plan, Treasury will purchase up to $100 billion in each company to ensure they maintain a positive net worth.

It will also buy mortgage-backed securities from the firms in the open market, with a lending facility held at the Federal Reserve Bank of New York.

Under the terms of the proposal, the government would make periodic injections of funds by buying either convertible preferred shares or warrants in the two companies as needed, as opposed to a large, up-front cost.

Massive assets involved

The bailout involves total assets that would dwarf the savings-and-loan rescue in the 1980s that shook the banking sector to its core.

Fannie and Freddie hold roughly $1.5 trillion in direct debt, guarantees on which could be as large as $5 trillion as well as possible off-balance sheet obligations that could reach $3 trillion, according to recent estimates from Ladenburg Thalmann & Co....


Fannie Mae's market capitalization stands at $7.5 billion and Freddie Mac's is about $3.3 billion.
Together, Fannie Mae and Freddie Mac form the cornerstones of the U.S. mortgage market and own or guarantee almost half the home loans in the country's roughly $12 trillion mortgage market. Over the past year, the companies have recorded combined losses of around $14 billion.

Some reports estimated the government's cash injection ultimately could be between $15 billion and $20 billion.

Ripple effect

When firms like Washington Mutual and other big banks make home loans, they sell them to Fannie and Freddie, who then package the loans into pools and resell them to investors, or hold them themselves.

The rise of the securitization market means some of the most toxic debt securities backed by risky loans have made their way around the global banking system.

Fannie and Freddie are owned by shareholders, but have long enjoyed the implied support of the federal government that has allowed them access to capital in the market at advantageous terms. In fact, some observers have likened their unraveling to a game of cat-and-mouse between markets and the government. Investors banking on a government bailout were wary of throwing good money after bad at Fannie and Freddie, while the government tried to reassure markets about their solvency without tipping its hand on a potential bailout.

Banks and thrifts are in the business of making loans, and there is no bigger loan the U.S. consumer will take on than a mortgage. If banks could not sell these loans to Freddie or Fannie, the danger of bank failures would rise sharply, economists feared.

Without buyers like Fannie and Freddie, big mortgage lenders would be in even more trouble than they are. See full story.

Banks and thrifts also hold more than $1 trillion in Fannie and Freddie bonds because they are considered as good as cash. Without a bailout, banks and thrifts would have to raise more capital because GSE debt would have to be written down or sold.

Paulson said that the federal banking agencies that only a "limited number" of small banks have holdings of Fannie and Freddie assets "that are significant compared to their capital."

The agencies called on banks worried that their capital would be diminished below regulatory standards to contact Washington so that restoration plans can be undertaken.


I CUT SOME OF THE BOILERPLATE AND GOSSIP...THIS IS IMMENSE!

[Demeter]

78. FDIC to help small banks with Fannie, Freddie exposure By Michael R. Crittenden

http://www.marketwatch.com/news/story/fdic-help-small-banks-fannie/story.aspx?guid={483D04C3-02AA-4639-800E-3066DFC0623E}&siteid=yahoomy



Last update: 12:43 p.m. EDT Sept. 7, 2008WASHINGTON (MarketWatch) -- U.S. banking regulators said Sunday they will work with banks whose holdings of Fannie Mae and Freddie Mac securities could be adversely affected by the federal government's takeover of the two firms over the weekend.

"Any negative impact will be narrowly focused only on a few smaller institutions. Regulators will be working closely with those few banks to develop capital plans to assist their recovery," Federal Deposit Insurance Corp. Chairwoman Sheila Bair said in a statement.

The Treasury Department and Federal Housing Finance Agency jointly announced a takeover of the firms Sunday morning, along with a number of lending and investment plans to be made through Treasury to shore up the two troubled mortgage-finance firms. The plan includes Treasury purchasing mortgage-backed securities in the firms, as well as a senior preferred stock purchase agreement starting at $1 billion with each firm.

Placing the two firms into conservatorship under the FHFA means holders of the firms' common stock and outstanding preferred stock will be first in line to absorb any future losses at the companies.

Some of the holders of these securities are banks, and Treasury Secretary Henry Paulson said regulators will be evaluating the affect of their moves on various institutions.

"The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac...are likely to reduce their regulatory capital below 'well capitalized'," Paulson said. "The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations."

A joint release from the FDIC, Federal Reserve, Office of Thrift Supervision, and Office of the Comptroller of the Currency said that only a limited number of banks have GSE holdings that are significant compared to their capital. The agencies also gave firms guidance on how to account for the holdings.

"All institutions are reminded that investments in preferred stock and common stock with readily determinable fair value should be reported as available-for-sale equity security holdings, and that any net unrealized losses on these securities are deducted from regulatory capital," the joint release from the regulators said.

-Contact: 201-938-5400

[DemReadingDU]

80. and what it all means for us

9/7/08 from ilargi at http://theautomaticearth.blogspot.com/

Ilargi: Well, it’s done: Fannie and Freddie have been taken over, and James Lockhart, the man who only four months ago approved the books that are now judged to be disaster logs, and which allegedly prompted the bail-out, is the new boss. "Director of the new independent regulator, the Federal Housing Finance Agency, FHFA." Independent from what, exactly, you ask? How about: from you...

You know what they present as their main reason for all this? The interest of the taxpayer!!

Yes, "you lied, straight-faced while I cried", to quote Fannie’s great-aunt Maggie May.

In reality, the conditions have been created to slush untold billions from the Treasury into the GSE’s, stealthily over time, and from there directly to the Wall Street banks. That’s why Fannie and Freddie were founded, and that’s why they continue to exist. Government involvement in the housing market has one purpose, and one only: to raise real estate prices, and thus mortgage payments. Who profits? Well, not the buyers, obviously. Remember, this scheme was set up 70 years ago. Americans have paid far too much for their homes, in a scam initiated by their government, since 1938.

The GSE’s, oh irony, will now be more opaque than ever. They no longer have the ”open-your-books" burdens of public companies. Mind you, Fannie and Freddie had in reality stopped opening their books years ago.

To make today a real good reason for a party: Fannie and Freddie will keep on buying loans from factually bankrupt Wall Street banks, and issuing-mortgage backed securities for a long time. Yup, you’re right, that’s precisely what got them into trouble. Not before 2010 will that practice be changed, says Paulson.

And by 2010, who knows what happens? One thing's certain: Paulson will no longer be in office. He'll be back in the banking sector that will be able to suck trillions of dollars more out of the public trough because of the scheme he set up today.

It’s not so much a reason to party as it is a really good reason to drink, and drink a whole big lot, I would say. While you're at it, remember to procreate: this country will need a lot of extra children, just to pay off your debts.

Look: "Treasury will ensure that each company maintains a positive net worth". Yes, that’s for companies with trillions of dollars in -unrevealed- potential debt. The only thing that could prevent the Treasury, read: the taxpayer, from being responsible for that debt is for the housing markets to miraculously revive. That is what all this is based on. If it goes down further, we’ll need a whole new, and 180 degrees different, plan.

America, you have allowed a greedy sticky stinking set of hairy paws inside your pockets and your wallets, and this time they’re there to stay. You’re being told that it’s all in your best interest, and you are the ones swallowing it.

Click to read Hank Paulson’s press statement, and other articles
http://theautomaticearth.blogspot.com/2008/09/debt-rattle-september-7-2008-to.html

edit to add Karl Denninger's opinion...
http://market-ticker.denninger.net/archives/2008/09/07.html

[Demeter]

81. I Give It 6 Months

Such castles in the air cannot exist except in dreams.

The housing market will never recover, because the American family will never recover.

[DemReadingDU]

82. The Great Depression 2.0

coming soon


:(

[Hugin]

83. And so passes the 'New Deal'...

:removeshat:

Murdered by those who despised it because it leveled the playing field.

R.I.P. my friend. I truly wouldn't be where I am today without you. :cry:

[Demeter]

84. Silver Lining? We Get a New Deal 2.0

and Frenchify it--bring back the guillotine!

[Hugin]

85. I'd be happy with a slice of the pie.

Guillotines are fun and all of that... Until somebody gets hurt.

[Dr.Phool]

88. Like it says on the safety sticker, with the little stick people drawings.

Keep hands and fingers away from moving parts of machinery.

[DemReadingDU]

86. The beginning of the end

and the majority of people remain clueless.

Without the Internet, I wouldn't know what is going on either. AT least we get a head start to prepare for what's coming. :cry:

[Hugin]

87. *sigh* Maybe someone should write up some kind words on our lost friend.

I'm not the best at the flowery talk.

All I can say is... If it weren't for the New Deal. It's very likely I wouldn't be here today.

[Pale Blue Dot]

75. Canadian PM calls early elections

I think this is another sign that world leader know what's about to happen and are trying to shore up their positions before the collapse (which I'm more and more convinced will happen no later than mid-November.)

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/07/AR2008090700569.html?hpid=moreheadlines

TORONTO -- Canada's prime minister dissolved Parliament on Sunday and called an early election next month in hopes of strengthening his Conservative minority government's hold on power.

Prime Minister Stephen Harper's party needs to win an additional 28 seats to have a majority in Parliament. Although he has played down that possibility, polls in recent days indicate his right wing party has a chance to do so.

The Oct. 14 election will be Canada's third ballot in four years.

The Conservatives unseated the Liberal Party in 2006 after nearly 13 years in power, but as a minority government the Conservatives have been forced to rely on opposition lawmakers to pass legislation and adopt budgets.

[Demeter]

76. I Hope Harper and His Party Go Down in Flames

He's just a Bushbot.

[Pale Blue Dot]

89. Has anyone else noticed that threads about the economy are sinking like stones?

A month ago my "Friday Night Bank Failure" thread in GD got a ton of responses and recommendations. This week I had to kick it in order for it to get a total of 4 responses, despite the fact that it was about a failure of a bank involving John McCain's son. The Freddie and Fannie threads in LBN and GD are also being virtually ignored.

Here is an important issue that Democrats can take to the electorate - except that we, like the rest of America, seem to want to believe it isn't happening.

[DemReadingDU]

90. Unfortunately, people don't really care to know what's important

They have other priorities
:(

[Demeter]

91. It's Either Resignation From the Downtrodden

or whistling past the graveyard for those still having discretionary income (or delusions thereto).

That was last week.

And frankly, what can people do? We've had 8 years of economic disaster; people have adjusted.

Or not.

We are in the eye of the hurricane--wait for the next big upheaval.

[DemReadingDU]

92. I think a BIG bank is set to fail

The failure of a BIG bank will wipe out the FDIC. I guess the government (tax payers) will bail out the FDIC too.

[Demeter]

93. As Far As I Can Tell, Most Banks Will Fail

We'll be lucky if there's a choice betwen two behemoth banks in every state.

The electronic bank will become the new model--Such as INGDirect, which I use. I've found it very helpful. the only difficulty is depositing paper checks; they want you to have a local account linked to the electronic one. I suppose one could mail a check--or bully the payer to do electronic funds transfer.

It's a Brave New World out there!

[DemReadingDU]

94. I have an INGDirect account too

As well as a Keybank for a checking account and a local credit union. So I should be prepared, as long as they all don't freeze up at the same time. I'm hesitant to move the Keybank account to a different bank, because I'm just not sure which is going to be the safest bank. I'll just wait and see which behemoth bank the accounts all end up at. :)

[Robbien]

95. With the way things are going for Merrill Lynch

if this Fannie/Freddie bailout doesn't save them

My vote is that Merrill Lynch will be the biggie to go under first

[Robbien]

97. In a swap deal JPMorgan got $1.23 million in fees to obtain $755,000 for school

The school district is suing.

http://www.goerie.com/apps/pbcs.dll/article?AID=/20080905/NEWS02/809050397

Now I knew that fees were very lucrative in swap deals, but it is surprising that fees charged can be in excess of the amount being obtained. In this case almost twice as much.

Gah!

[Dr.Phool]

98. Asian markets must love Fannie and Freddie bailout.

They're reaching for the stratosphere.

http://finance.yahoo.com/intlindices?e=asia

http://www.reuters.com/article/marketsNews/idCAT16920020080908?rpc=44

http://www.reuters.com/article/marketsNews/idINSP31177620080908?rpc=44

[DemReadingDU]

99. Denninger's latest and a video

9/7/08 Fraudie and Phoney - The Aftermath

essay and video
http://market-ticker.denninger.net/archives/2008/09/07.html

[Dr.Phool]

100. He's got it.

I got to talk with Dodd for about an hour last year. He's about as dumb as a box of rocks. I just wish I could talk to him again.

I think I have a bridge he'd be interested in buying. He's so dumb, he'd go to his grave talking about what a good deal he got.

[DemReadingDU]

101. Indeed. Thanks for reading

This economic warfare is making me very ill.