financialcrisis

SYMPOSIUM ON INTERNATIONAL RELATIONS: LWVCT ED FUND FOCUS ON SUB-SAHARA AFRICA IN 1990's (PRINTS AVAILABLE)

Arbitration awards; the hedge fund story link as we have been following it in the press, 2008.
And then there is more corporate welfare...the automobile industry. Mr. Ponzi himself;
Global trade, 2008 NYTIMES graphic.
Stimulated yet?

THE GLOBAL FINANCIAL CRISIS:

Breaking News...the end of low-interest as we have known it recently $tuff.
Interesting article from the Internet here: http://baselinescenario.com/2009/08/18/united-states-inequality-in-the-recovey-period/
Events we wonder about...
The full story..."stress test" of banks going to be the best or worst thing in the Obama administration's first 100 days? Next insurance companies?
Small business loan maker in trouble? Story here.
As surely as night follows day, unemployment rises as business contracts;
FINANCIAL REFORM BILL: report on passage.
How about the "D" word or Ponzi schemes, or other economic behavior? Fountain of Youth?
Some positive outlook here.
Across the pond...and if you insist on being depressed...
Global link; How about trading buddy Canada? Japan's experience: http://www.nytimes.com/2009/02/06/world/asia/06japan.html?_r=1&hp
Local link;
States borrow from the Treasury??? CT State link; and California; Cities/Counties;
Other states in the country (http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-07-17-SRR_76.pdf) as well as Federal link.
"Stimulus" bill passes and is finally signed in the U.S. Read about it here.
HIT HOME IN TIME FOR U.S. ELECTION 2008: Or is that "hit home loans?"
Some assorted articles in the heat of crisis: latest storm not natural, but rather financial: Hurricane "K" (as in thousand) hits Wall Street? How about other places? Did the downturn accentuate the prospect of an Obama Presidency? Yup.

Source for this nice Hartford Courant graphic: Bureau of Economic Analysis, U.S. Department of Commerce.

Do you have a problem with this? We do!
Let Treasury Rescue the States
NYTIMES
By CHRISTOPHER EDLEY Jr.
July 7, 2010

Berkeley, Calif.

HERE in California, where people tiresomely boast that the state’s gross domestic product exceeds that of all but seven nations, I keep expecting a ballot initiative demanding admission to the Group of 8 industrialized nations. I’d consider voting for it, too; then maybe Washington would work as hard to synchronize its economic policy with Sacramento as it does with Tokyo and Berlin. The lack of coordination within the United States — and, equally important, the failure to recognize the states as macroeconomic players — helps explain our sluggish recovery.

To make matters worse, several states have country-sized G.D.P.’s, but none has the macroeconomic tools of an independent country. Every state except Vermont has some sort of balanced budget requirement that prevents it from weathering a recession by running up big deficits to keep teachers employed, students in college, welfare payments flowing and construction humming. Nor can New York and California stimulate their economies by, say, printing more currency. Instead, states are managing huge budget crises with the only tools they have, cutting spending and raising taxes — both of which undermine the federal stimulus.

That’s why the best booster shot for this recovery and the next would be to allow states to borrow from the Treasury during recessions. We did this for Wall Street and Detroit, fending off disaster. It’s even more important for states.

Here’s how this would work. States already receive regular federal matching grants to help pay for Medicaid, welfare, highway construction programs and more. For instance, the federal government pays a share of state Medicaid costs, from 50 percent to more than 75 percent, depending on a state’s wealth. The matching rates were temporarily sweetened by last year’s stimulus.

But Congress should pass legislation that would allow a state to simply get an “advance” on these future federal dollars expected from entitlement programs. The advance could then be used for regional stimulus, to continue state services and to hasten our recovery.

The Treasury Department, which writes the checks to the states, could be assured of repayment (with interest) by simply cutting the federal matching rate by the needed amount over, say, five years. Of course, when Treasury eventually collected what it was owed, the state would have to cut spending or find new revenue sources. But that would happen after the recession, when both tasks would likely prove easier economically and politically.

What would this cost the federal government? Nothing. There would be zero risk of default, and a guarantee of full repayment plus interest equal to what Treasury pays in the bond markets to borrow. Congress would need only to appropriate the administrative costs of this program, which would be minimal.

It seems clearer every day that there isn’t the political will for another traditional federal stimulus package large enough to be effective in a $14 trillion economy. This proposal, however, would merely shift the timing of federal payments to states to help offset economic swings. It would have the additional merit of finally forging the federal-state partnership that has been missing since 1787, when the Constitution created a federal government with sufficient legislative authority to shape a nationwide economy out of separate state economies.

Indeed, our best shot at devising United States economic policy may be to give the states the role of creating and carrying out the economic stimulus we so desperately need.

Christopher Edley Jr., the dean of the University of California, Berkeley, School of Law, was a White House budget official from 1993 to 1995.

The point of the day!
Senate votes to rein in mortgage lenders
YAHOO
By JIM KUHNHENN, Associated Press Writer
12 May 2010

WASHINGTON – Taking aim at deceptive lending, the Senate on Wednesday voted to ban mortgage brokers and loan officers from getting greater pay for offering higher interest rates on loans, and to require that borrowers prove they can repay their loans. The Senate, however, rejected a measure that would have required homebuyers to make a minimum downpayment of 5 percent on their loans. The votes were part of the Senate's deliberations on a broad overhaul of financial regulations designed to avoid a repeat of the crisis that struck Wall Street in 2008.

President Barack Obama weighed in on the Senate debate Wednesday, criticizing efforts to exclude auto dealerships that offer car loans from the oversight of a proposed consumer financial protection bureau. Auto dealers — influential figures in their communities — have been aggressively lobbying for an exemption from the law, and the amendment, offered by Sen. Sam Brownback R-Kan., could win bipartisan backing.

"This amendment would carve out a special exemption for these lenders that would allow them to inflate rates, insert hidden fees into the fine print of paperwork, and include expensive add-ons that catch purchasers by surprise," Obama said in a statement.

The administration has fiercely tried to protect the consumer provisions of the bill. It has answered the political power of the auto dealers with an appeal on behalf of the military, arguing that soldiers and their families have been particularly targeted by deceptive dealers. On Wednesday, Holly Petraeus, wife of U.S. Central Command chief Gen. David Petraeus, made a plea for the bill's consumer protections to apply to car buyers.

"It's a fact that military personnel love their cars," she said. "Sadly, many of them end up paying far more for those cars than they should." Petraeus, director of the Council of Better Business Bureau's Military Line Program, said financial counselors at military installations find many of their customers in financial trouble with their auto payments, locked into loans of 15 percent or higher.

In a statement, Brownback argued auto dealers are already regulated by the Federal Trade Commission and by local and state agencies. "If any service member is the victim of predatory lending while trying to buy a car," he said, "I encourage him or her to seek out local and state authorities which already handle these investigations and can take care of the problem."

The Senate unanimously approved an amendment Wednesday that made clear that merchants and retailers that do not engage in a financial services would not be policed by the proposed consumer protection bureau. Critics had argued that the bill could affect small business owners such as orthodontists, who allow patients to pay over time. Separately, the Senate overwhelmingly voted to let the Federal Reserve retain its supervision of smaller banks. The underlying regulation bill would have given the central bank oversight only over the largest financial institutions.

Regional Fed presidents have lobbied senators to allow them to continue watching over smaller bank holding companies and state-chartered community banks. Limiting the Fed's supervision only to bank holding companies with assets of more than $50 billion — as proposed by Senate Banking Chairman Christopher Dodd, D-Conn. — would have left many of the Fed's 12 regional banks with few institutions under their oversight. The lending-related measures attempted to respond to one of the issues at the heart of the financial crisis — the abundance of bad mortgage-backed securities that nearly toppled Wall Street and knocked some of the nation's largest financial institutions to their knees.

"Credit was extended to people who couldn't pay their mortgages back, and those were passed throughout the world," said Sen. Bob Corker, R-Tenn. "So we had a systemic crisis, not only in this country, but around the world."

Senators voted 63-36 to amend an underlying financial regulation bill to place restrictions on how mortgage brokers and bank loan officers get compensated. The measure's lead sponsor, Sen. Jeff Merkley, D-Ore., argued that consumers were steered into higher rate mortgages that they were unable to pay, resulting in foreclosures and toxic mortgage-backed securities that poisoned the markets. Borrowers would have to provide evidence of their income, either though tax returns, payroll receipts or bank documents. That provision seeks to eliminate so-called stated-income loans where borrowers offered no proof of their ability to pay.

But the Senate voted 57-42 against a Republican amendment offered by Corker that set tougher underwriting standards, including the downpayment requirement. That measure also would have eliminated a condition that mortgage lenders retain 5 percent of any mortgages they resell in the securities market. Democrats opposed the Corker plan, citing both their desire to have banks keep some of the risk of the mortgages they write and their concern that the downpayment mandate would hurt lower income families.

Mortgage brokers opposed Merkley's measure, arguing it would create a two-tiered system separating mortgage brokers from bank lenders. They noted that the amendment would permit banks to receive greater payments from investors, such as large Wall Street firms, for bundled mortgages with higher interest rates.

"It's a legal incentivizing payment for those very loans that put the industry in this mess," said Roy DeLoach, executive vice president of the National Association of Mortgage Brokers.

Beware Of The Muni Bond Bubble: States And Cities Can Fail As Well
Investors.com
By NICOLE GELINAS
Posted 04/29/2010 06:15 PM ET

Greece and Spain both suffered S&P downgrades this week — Greece to junk — as bondholders realized the obvious. The nations cannot raise taxes and cut spending fast enough to pay their debt without killing off economic recovery.

But nothing has shaken another massive debt market: American municipal bonds.

You might think that investors would pause before pouring money into obligations of muni debt, particularly obligations of California, New York or Illinois. Like mid-2000s homeowners, state and local governments spent boom years using illusory gains to justify ever-higher spending and borrowing.

By 2008, state and local debt rose to $2.2 trillion — 49% higher, after inflation, than in 2000. The biggest partners in profligacy also promised more benefits to public workers in the future.

As the recession's severity became apparent, officials kept borrowing: States have already borrowed another $15 billion for operating costs over the past two years.

Yet gatekeepers consider municipal bonds low-risk. "We do not expect that states will default on general-obligation debt, even under the most stressed economic conditions," analysts at Moody's wrote in a February 2010 report...full story here.

Congress extends unemployment benefits for another 13 weeks.
"Irrational exuberance" gives way to bankruptcies - the Fed now calls for beginning of "restoration of fiscal balance." "Overseer" of slave bankers; HOW IS THE AMERICAN ECONOMY LIKE A ROLLER COASTER RIDE? . FED Chair. reappointed; Government Motors to face off against Chrysler by fiat (pun intended) and...the only car company to NOT go under is...FORD!

AP IMPACT: Road projects don't help unemployment
YAHOO
By MATT APUZZO and BRETT J. BLACKLEDGE, Associated Press Writers
January 11, 2010

WASHINGTON – Ten months into President Barack Obama's first economic stimulus plan, a surge in spending on roads and bridges has had no effect on local unemployment and only barely helped the beleaguered construction industry, an Associated Press analysis has found.

Spend a lot or spend nothing at all, it didn't matter, the AP analysis showed: Local unemployment rates rose and fell regardless of how much stimulus money Washington poured out for transportation, raising questions about Obama's argument that more road money would address an "urgent need to accelerate job growth."

Obama wants a second stimulus bill from Congress that relies in part on more road and bridge spending, projects the president said are "at the heart of our effort to accelerate job growth."

Construction spending would be a key part of the Jobs for Main Street Act, a $75 billion second stimulus to revive the nation's lethargic unemployment rate and improve the dismal job market for construction workers. The House approved the bill 217-212 last month after House Speaker Nancy Pelosi, D-Calif., worked the floor for an hour; the Senate is expected to consider it later in January.

AP's analysis, which was reviewed by independent economists at five universities, showed that strategy hasn't affected unemployment rates so far. And there's concern it won't work the second time. For its analysis, the AP examined the effects of road and bridge spending in communities on local unemployment; it did not try to measure results of the broader aid that also was in the first stimulus like tax cuts, unemployment benefits or money for states.

"My bottom line is, I'd be skeptical about putting too much more money into a second stimulus until we've seen broader effects from the first stimulus," said Aaron Jackson, a Bentley University economist who reviewed AP's analysis.

Even within the construction industry, which stood to benefit most from transportation money, the AP's analysis found there was nearly no connection between stimulus money and the number of construction workers hired or fired since Congress passed the recovery program. The effect was so small, one economist compared it to trying to move the Empire State Building by pushing against it.

"As a policy tool for creating jobs, this doesn't seem to have much bite," said Emory University economist Thomas Smith, who supported the stimulus and reviewed AP's analysis. "In terms of creating jobs, it doesn't seem like it's created very many. It may well be employing lots of people but those two things are very different."

Transportation spending is too small of a pebble to quickly create waves in the nation's $14 trillion economy. And starting a road project, even one considered "shovel ready," can take many months, meaning any modest effects of a second burst of transportation spending are unlikely to be felt for some time.

"It would be unlikely that even $20 billion spent all at once would be enough to move the needle of the huge decline we've seen, even in construction, much less the economy. The job destruction is way too big," said Kenneth D. Simonson, chief economist for the Associated General Contractors of America.

Few counties, for example, received more road money per capita than Marshall County, Tenn., about 90 minutes south of Nashville.

Obama's stimulus is paying the salaries of dozens of workers, but local officials said the unemployment rate continues to rise and is expected to top 20 percent soon. The new money for road projects isn't enough to offset the thousands of local jobs lost from the closing of manufacturing plants and automotive parts suppliers.

"The stimulus has not benefited the working-class people of Marshall County at all," said Isaac Zimmerle, a local contractor who has seen his construction business slowly dry up since 2008. That year, he built 30 homes. But prospects this year look grim.

Construction contractors like Zimmerle would seem to be in line to benefit from the stimulus spending. But money for road construction offers little relief to most contractors who don't work on transportation projects, a niche that requires expensive, heavy equipment that most residential and commercial builders don't own. Residential and commercial building make up the bulk of the nation's construction industry.

"The problem we're seeing is, unfortunately, when they put those projects out to bid, there are only a handful of companies able to compete for it," Zimmerle said.

The Obama administration has argued that it's unfair to count construction jobs in any one county because workers travel between counties for jobs. So, the AP looked at a much larger universe: The more than 700 counties that got the most stimulus money per capita for road construction, and the more than 700 counties that received no money at all.

For its analysis, the AP reviewed Transportation Department data on more than $21 billion in stimulus projects in every state and Washington, D.C., and the Labor Department's monthly unemployment data. Working with economists and statisticians, the AP performed statistical tests to gauge the effect of transportation spending on employment activity.

There was no difference in unemployment trends between the group of counties that received the most stimulus money and the group that received none, the analysis found.

Despite the disconnect, Congress is moving quickly to give Obama the road money he requested. The Senate will soon consider a proposal that would direct nearly $28 billion more on roads and bridges, programs that are popular with politicians, lobbyists and voters. The overall price tag on the bill, which also would pay for water projects, school repairs and jobs for teachers, firefighters and police officers, would be $75 billion.

"We have a ton of need for repairing our national infrastructure and a ton of unemployed workers to do it. Marrying those two concepts strikes me as good stimulus and good policy," White House economic adviser Jared Bernstein said. "When you invest in this kind of infrastructure, you're creating good jobs for people who need them."

Highway projects have been the public face of the president's recovery efforts, providing the backdrop for news conferences with workers who owe their paychecks to the stimulus. But those anecdotes have not added up to a national trend and have not markedly improved the country's broad employment picture.

The stimulus has produced jobs. A growing body of economic evidence suggests that government programs, including Obama's $700 billion bank bailout program and his $787 billion stimulus, have helped ease the recession. A Rutgers University study on Friday, for instance, found that all stimulus efforts have slowed the rise in unemployment in many states.

But the 400-page stimulus law contains so many provisions — tax cuts, unemployment benefits, food stamps, state aid, military spending — economists agree that it's nearly impossible to determine what worked best and replicate it. It's also impossible to quantify exactly what effect the stimulus has had on job creation, although Obama points to estimates that credit the recovery program for creating or saving 1.6 million jobs.

Politically, singling out transportation for another round of spending is an easier sell than many of the other programs in the stimulus. The money can be spent quickly and provides a tangible payoff. Even some Republicans who have criticized the stimulus have said they want more transportation spending.

Spending money on roads also ripples through the economy better than other spending because it improves the nation's infrastructure, said Bernstein, the White House economist.

But that's a policy argument, not a stimulus argument, said Daniel Seiver, an economist at San Diego State University who reviewed AP's analysis.

"Infrastructure spending does have a long-term payoff, but in terms of an immediate impact on construction jobs it doesn't seem to be showing up," Seiver said. "A program like this may be justified but it's not going to have an immediate effect of putting people back to work."

Report: 10 states face looming budget disasters
YAHOO
By JUDY LIN, Associated Press Writer
November 11, 2009

SACRAMENTO, Calif. – In Arizona, the budget has grown so gloomy that lawmakers are considering mortgaging Capitol buildings. In Michigan, state officials dealing with the nation's highest unemployment rate are slashing spending on schools and health care.

Drastic financial remedies are no longer limited to California, where a historic budget crisis earlier this year grew so bad that state agencies issued IOUs to pay bills.

A study released Wednesday warned that at least nine other big states are also barreling toward economic disaster, raising the likelihood of higher taxes, more government layoffs and deep cuts in services.

The report by the Pew Center on the States found that Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin are also at grave risk, although Wisconsin officials disputed the findings. Double-digit budget gaps, rising unemployment, high foreclosure rates and built-in budget constraints are the key reasons.

"While California often takes the spotlight, other states are facing hardships just as daunting," said Susan Urahn, managing director of the Washington, D.C.-based center. "Decisions these states make as they try to navigate the recession will play a role in how quickly the entire nation recovers."

The analysis, "Beyond California: States in Fiscal Peril," urged lawmakers and governors in those states to take quick action to head off a wider catastrophe. The 10 states account for more than one-third of the nation's population and economic output, according to the report.

Historically, states have their worst tax revenue year soon after a national recession ends. At the same time, higher joblessness and underemployment mean more people need government-sponsored health care and social safety-net programs, further taxing state services.

California leads the most vulnerable states identified by the report, which describes it as having poor money-management practices. Since February, California has made nearly $60 billion in budget adjustments in the form of cuts to education and social service programs, temporary tax hikes, one-time gimmicks and stimulus spending, according to the Legislative Analyst's Office.

Many of those fixes are not expected to last. The state's temporary tax increases will begin to expire at the end of 2010, while federal stimulus spending will begin to run out a year after that.

Gov. Arnold Schwarzenegger estimates California will run a deficit of $12.4 billion to $14.4 billion when he releases his next spending plan in January. The governor warned that the toughest cuts are ahead.

"I think that we are not out of the woods yet," Schwarzenegger said this week.

At the same time, the Legislature is hamstrung by requirements that budget bills and tax increases be passed with a two-thirds majority, a mandate that the report labeled "a recipe for gridlock."

The Pew report was based on data available as of July 31 and scored all 50 states based on revenue changes, unemployment, foreclosures and budget requirements. It also gave them grades. California and Rhode Island scored worst with D-pluses, then New Jersey and Illinois with C-minuses.

In reviewing why some states are suffering more than others, Pew found that the 10 states tend to rely heavily on one type of industry, have a history of persistent budget shortfalls or face legal constraints making it extra difficult to implement major changes, such as tax increases.

Many require a supermajority vote for passing tax increases or budget bills.

Wisconsin officials issued a statement late Wednesday saying the Pew report was inaccurate. Wisconsin Department of Administration Secretary Michael Morgan said the state has balanced its budget by cutting spending and raising revenue. It projects a $270 million budget surplus for the period ending July 1, 2011, Morgan said in his statement.

Several state legislatures have been unable to enact long-term fixes. Instead, they asked voters or governors to make the call, or used accounting gimmicks to put off the hard choices until later.

For example:

• Arizona lawmakers relied on one-time fixes to balance recent budgets as the state's home foreclosure rate surpassed California's and the nationwide average. Among the many ideas being explored by the state are a plan to mortgage state buildings, then rent the property until the state regains ownership at the end of the contract.

• Michigan, where two of the Detroit Three automakers filed for bankruptcy protection this year, continues to offer tax incentives even as they take a toll on the state's pocketbook, leading to declining tax revenue. According to the Pew study, Michigan offered $6.3 billion more in total tax exemptions, credits and deductions than it actually collected in taxes in 2008.

• Illinois, which has run deficits every year since 2001, is facing an $11.7 billion budget gap for its next fiscal year, beginning in July, according to the Center on Budget and Policy Priorities. Pew's Government Performance Project ranked Illinois behind only California and Rhode Island for its lack of fiscal management on paying medical bills and pension liabilities.

• With Florida facing a shrinking population for the first time since World War II, Republican Gov. Charlie Crist and the GOP-controlled Legislature balanced a $5.9 billion shortfall with cuts, federal stimulus money and tax hikes, including a $1-a-pack tax increase on cigarettes. But the future remains uncertain.

"Florida continues to face the same challenges as last year, including a very austere budgetary environment," said Rep. David Rivera, a Miami Republican who chairs both of the Florida House's two appropriations councils.

U.S. unemployment rate hits 10.2 percent
YAHOO
By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. unemployment rate unexpectedly jumped to 10.2 percent in October, breaching the politically sensitive double-digit barrier for the first time in 26-1/2 years, even though the pace of job losses slowed.

A Labor Department report showed on Friday that employers cut 190,000 jobs last month, more than the 175,000 markets had expected. Economists had looked for the jobless rate to rise to only 9.9 percent from 9.8 percent the prior month.

The government revised job losses for August and September to show 91,000 fewer jobs lost than previously reported.

U.S. stock index futures turned negative on the data, while government debt prices rose.

"The unemployment rate of 10.2 percent is problematic because it gives a sense of urgency to Washington, D.C. Washington will be looking for any increase in stimulus," said Tom Sowanick, co-president and chief investment officer at Omnivest Group.

President Barack Obama has called job creation priority No. 1, but the scope to take further steps to lift the economy is limited by record budget deficits.

Mounting unemployment could pose problems for the Democrats who control Congress as they head into congressional elections in November 2010. This week, Republicans wrested control of two state governorships away from Democrats in races where the weak economy figured prominently.

The labor market is being watched for signs whether the economic recovery that started in the third quarter can be sustained without government support. The economy grew at a 3.5 percent annualized rate in the July-September period, probably ending the most painful U.S. recession in 70 years.

Labor market sluggishness and weak wage growth suggest inflation is unlikely to get out of hand anytime soon, giving the Federal Reserve scope to maintain supportive policies.

The U.S. central bank on Wednesday held overnight interest rates close to zero percent and said it would keep them extraordinarily low as long as excess economic slack and a lack of inflation warning signs prevailed.

"The Fed will stay on hold even longer with less likelihood of giving a concrete answer to when and how to withdraw quantitative easing," said Joseph Trevisani, senior market analyst at FX Solution in Saddler River, New Jersey.

Payrolls have declined for 22 consecutive months now, throwing 7.3 million people out of work since December 2007, when the recession started.

However, the pace of layoffs has slowed sharply from early this year, when nearly three-quarters of a million jobs were lost in January. In October, job losses were across almost all sectors, with education and health services and professional and business services bucking the trend.

Manufacturing employment fell 61,000 last month, while construction industries payrolls dropped 62,000.

The service-providing sector cut 61,000 workers in October and goods-producing industries slashed 129,000 positions. Education and health services added 45,000 jobs, while government employment was flat.

The average workweek, which closely correlates with overall output and gives clues on when firms will start hiring, was steady at 33 hours in October. Average hourly earnings rose to $18.72 from $18.67 in September.

Peter Orszag and Tim Geithner add it up - yup, it's 13! I guess Mr. Orszag of OMB had evens.

Orszag says he's leaving as budget head in July
YAHOO
By BEN FELLER, Associated Press Writer
22 June 2010

WASHINGTON – White House Budget Director Peter Orszag says he's stepping down next month, positioning him to be the first high-profile member of President Barack Obama's team to depart the administration.

Orszag confirmed his planned resignation in a brief interview with The Associated Press on Tuesday. He said he views passage of last year's economic recovery act as his most significant accomplishment.

White House Press Secretary Robert Gibbs said Tuesday that "a number of very talented candidates" were being considered to replace Orszag.

"Peter has served alongside and within a valuable economic team that has faced the greatest economic crisis any president has faced since the great depression. It is an enormous task," Gibbs said.

As director of the Office of Management and Budget, Orszag holds Cabinet-level rank and a pivotal role in shaping and defending how the administration spends the public's money. He quickly emerged from a bureaucratic post to become a camera friendly face of Obama's government, often in front on plans to confront the deficit and to spur the economy.

Speculation has for weeks held that Orszag would leave this year after a grueling, nonstop sprint as the head of the budget agency and a key adviser to Obama. During his tenure, Congress has passed the most expensive economic stimulus program in U.S. history and a massive health care reform law. Orszag has overseen Obama's first two budgets, too. Gibbs said Orszag decided to leave before work began on a third.

Orszag, 41, came to Obama's government from the position of director of the Congressional Budget Office, the agency charged with providing nonpartisan analyses of economic issues to lawmakers. He served during Bill Clinton's administration as an assistant to the president for economic policy and a senior adviser at the National Economic Council.

The move comes as Obama continues to face the steep economic challenges of reining in the deficit and rallying support for more stimulative spending. The economic recovery is plodding along but unemployment remains near 10 percent.

U.S. debt flirts with unlucky number
That's 13, as in $13 trillion
Washington Times
Wednesday, May 26, 2010
Stephen Dinan
News reports have jumped the gun in declaring it, lawmakers and staffers on Capitol Hill are awaiting it with a morbid glee, and some congressional aides suspect the government's slow-walking it.

It, in this case, is the nation's public debt, which has hovered just short of $13 trillion for days now, according to the obscure Treasury Department website that tracks this sort of thing.

The site updates every business day with the previous business day's total debt, right down to the penny, and has been within reach of $13 trillion for this entire week. The figure for Tuesday - the most recent available - stood at $12,995,779,490,444.52.

That's led some Republican congressional staffers to question whether the clock hadn't stalled out just below the Big 13, though Treasury says the site is being updated the same way it always has been.

Still, some private "debt clock" websites already have tolled the magic number, which several press outlets have reported and lawmakers have fired off statements on. One senator complained of "an unprecedented level of irresponsibility" in hitting the milestone.

Joyce Harris, a spokeswoman for the Bureau of the Public Debt, said she'd seen the press reports, but said they're based on private estimates and, according to the government, we're not there just yet.

"It's not an official number," she said. "The number for the debt is $12.995 trillion."

At that level, it amounts to more than $42,000 for every U.S. resident.

Part of the confusion is that Treasury only reports once a day, while outside calculations estimate the rise by the second, based on formulas that oftentimes go too high, too fast. They often have to reel those numbers back in after Treasury reports the actual figure -and there are even some days the debt drops, ever so slightly, because more old bills or bonds are cashed than are issued.

Still, the number has been on a steady rise as of late.

Ed Hall's www.brillig.com/ debt_clock topped $13 trillion on Monday, but he dropped his clockback below that figure Wednesday afternoon. Meanwhile, USDebtClock.org topped $13 trillion on Wednesday, prompting several news reports and statements from Congress.

The fascination with $13 trillion far outstrips the significance of that particular number. But with Congress poised to pass bills spending tens of billions of dollars this week, the debt has gotten wrapped up in the debate.

The Republicans on the Joint Economic Committee are using their Twitter feed to give daily updates, and said that since President Obama took office, the debt has increased at a rate of $4.8 billion a day, or nearly three times the daily average of the Bush administration.

The debt passed the $12 trillion mark less than 200 days ago, and if the $13 trillion mark is hit in the next eight weeks, it will be the second-fastest $1 trillion jump in history. The fastest trillion came in late 2008 and early 2009, when the Wall Street bailout rapidly ballooned the debt from $11 trillion to $12 trillion.

Earlier this year, Congress and Mr. Obama raised the country's debt limit to $14.3 trillion, hoping it would to give the government enough room to spend through the end of this year.

Total public debt includes two pots of money. One is normal government debt held in the hands of consumers, such as Treasury bills and bonds, while the other is intragovernmental holdings, or money one part of the government borrows from another agency. That includes money borrowed from the Social Security trust funds.

Some analysts said the key figure is not the total public debt, but the debt held by the public, which stood at $8.478 trillion on Tuesday.

Rudy Penner, a former director of the Congressional Budget Office who is now at the Urban Institute, said in many ways, the debt number is so divorced from spending that it obfuscates the debate. He said the debt debate should be coupled with the spending debate, so lawmakers can couple the red ink with the policies that cause it.

Congress has yet to produce a budget this year for fiscal year 2011, which begins Oct. 1, and Mr. Penner said that's a key failure that should be getting more attention.

The Web page that tracks the debt can be reached from the TreasuryDirect.gov site.

© Copyright 2010 The Washington Times, LLC. Click here for reprint permission.

US economists John Silvia and Mark Perry

John Silvia (left) debates with fellow economist Mark Perry (from our "across-the-pond" source, I-BBC).

Head-to-head: What next for US economy?
I-BBC
Page last updated at 12:06 GMT, Thursday, 29 October 2009

Official data has indicated that the US economy has come out of recession, but analysts warn the continuing recovery will be slow.

Here we bring together two US economists with differing views to discuss what is likely to happen next.

John Silvia is chief economist at Wells Fargo in Charlotte, North Carolina. He sees disappointment ahead for US workers and consumers, with a long-term decline in living standards.

Mark Perry is professor of economics at the University of Michigan-Flint and currently visiting economist at the American Enterprise Institute in Washington. He is more optimistic, expecting a resilient economy to produce job growth by late 2010 and deliver low prices for consumers.

Some fear US growth will fall when President Barack Obama's $787bn (£480bn) fiscal stimulus package comes to an end. What about the possibility of a "double-dip" recession, with a return to economic contraction?

John Silvia: I do not see the case for a double-dip or W-shaped recession/recovery.

Historically, the double dip of 1980-82 was driven by a sharp change in monetary policy.

This recovery is being led by federal spending and gradual recovery in consumer spending and business investment. I do not expect the Obama administration to make any drastic turn in fiscal policy.

In addition, low inflation will stay and allow the Fed to maintain low short-term rates, with only a limited decline in the balance sheet.

Mark Perry: I think the recession ended in June and I also see no chance of a double-dip recession. There will be strong growth in the third quarter (3.5% to 4%) and fourth quarter (4% to 5%), with more moderate growth in 2010, about 2.5% to 3%.

Without some kind of policy blunder, which is unlikely, there will be no double-dip.

Most of the fiscal stimulus hits next year, which will help economic growth.

We will have a "jobless recovery" again through 2010, as we did following the 1990-1991 and 2001 recessions. The unemployment rate is set to remain at 9.8% to 10% through mid-2010, gradually coming down below 9.5% by the end of 2010.

There is only a moderate risk of inflation, which should stay below 2% through next year.

Some signs of consumer recovery are already evident. Air travel was up in September and traffic volume has been up for several months in a row.

Strong global recovery in emerging markets such as China, Brazil, India will help to support the US recovery.

John Silvia: Strong growth in the second half of this year will give way to 2.4% growth in 2010, as we see the stimulus waning in the first half of next year. But the jobless recovery will set up both economic and political conflicts.

The jobless recovery suggests disappointing gains in personal income and spending, as many households realise that their standard of living has been diminished.

At the same time, state and local government budget constraints will continue to tighten as income and sales tax revenues remain disappointing.

Again, the jobless recovery and the Fed's caution suggests the weak housing market will continue. Local governments face a two-year-plus period of minimum gains in property tax revenues - and therefore an inability to deliver on local education expectations.

Unemployment and large federal deficits will mean Democratic losses in Congress of 30-plus seats in the House of Representatives and three seats in the Senate in the 2010 mid-term elections.

On top of that, the dollar will continue to decline and America's standard of living will continue to decline relative to other nations.

Mark Perry: I think the dollar's decline will stabilise before it can damage the economy and cause any decline in US standards of living.

The money supply has been flat this year for both M1 and M2, suggesting that the decline in the dollar today results from monetary stimulus in 2008, but that ended almost a year ago.

Since early 2009, the money supply has grown by only 1% to 2%, which will put a bottom on how far the dollar can fall. Also, the strength in foreign currencies relative to the dollar will help boost US exports - and make a positive contribution to real GDP this year and next year.

The global rebound and recovery will also help stimulate US exports and will help the US economy in ways that didn't happen previously. Global strength will help lift the US economy out of recession this year and next year.

Meanwhile, the stock market will continue to rise, because of huge productivity gains from the reduction in labour force, along with continued increases in output in the third and fourth quarters of 2009. Corporate profits will also rise, boosting stocks.

The housing market is coming back, with sales gains even now in places such as Florida and California. With house prices rising, the housing market will continue to improve, construction will pick up next year, and all of this will offset some of the effects of the weak job growth.

Low and stable interest rates moving forward, with low moderate inflation, will help the housing market and keep corporate and consumer borrowing costs low, providing momentum to growth.

John Silvia: I agree on the forward momentum. My issue is that the pace will be disappointing to a society and political class that has made significant promises in health care and education that will not be deliverable with just moderate growth.

Middle-income and low-income families will see their standard of living below their expectations.

There will be growth, yes, but not enough to keep voters happy. Attempts to provide that standard of living depend on protectionism for jobs, dollar depreciation and continued foreign financial support.

Mark Perry: Passing health care legislation, at least the public option part, is looking less and less likely to me, so that issue could be dead by the end of the year.

With falling prices for just about everything (clothing, food, air travel, housing, cell phone service, prescription drugs etc and historically low interest rates for home and car purchases), there has never been a better time to be a consumer in America, and that will offset some of the income losses. Also, job growth by end of 2010 will help boost confidence and incomes.

The US economy is resilient, and that goes for workers, consumers and companies. A strong economic recovery might surprise everybody.

Emerging from a deep recession will make the economy leaner, more productive and stronger, offsetting the headwinds mentioned by John.

Page last updated at 14:31 GMT, Thursday, 29 October 2009

US economy is growing once again

The US economy grew at an annual pace of 3.5% between July and September, its first expansion in more than a year.

The growth was helped by a substantial government spending plan, including a scrappage scheme to boost car sales.

The official figures indicate recession has ended, but some economists think there could be further setbacks.

The White House said it was "a welcome milestone", but stressed it would be some time before the economy made a full recovery.

Compared with the previous three months, the US economy grew by 0.9%. In the same period, and on the same measure, the UK economy unexpectedly stayed in recession after it shrank by 0.4%.

Global good news

BBC chief economics correspondent Hugh Pym said the 3.5% annualised growth rate was more than the 3.3% expected by most commentators.

I've been out of work a few months here or there but never like this

Unemployed American Jon Polis

"The sheer scale of the stimulus in the US has made a big difference, it was much bigger in percentage terms than that in the UK," he said.

"That the US, the powerhouse of the world economy is growing once again, is good news for the global economy has a whole."

It is the first time US economy has last expanded since the second quarter of 2008, when it grew at an annual pace of 2.4%.

Official confirmation of whether the US is in or out recession will come from the National Bureau of Economic Research, the agency which considers a number of factors in coming to its decision.

Numerous boosts

The figures from the Commerce Department showed that a number of factors helped to lift the economy during the third quarter.

This recovery is being led by federal spending and gradual recovery in consumer spending and business investment

John Silvia, Wells Fargo

Spending on durable manufactured products soared at an annualised rate of 22.3%, the highest quarterly amount since 2001, led primarily by the impact of the cash for clunkers scheme lifting car sales.

The housing market also improved, with spending on housing products up 23.4%, its largest quarterly jump in 23 years.

Analysts said this big leap was sparked by the government's $8,000 tax credit for first-time house buyers.

Meanwhile, total government spending was up 7.9%, as the wider stimulus spending continued to take effect.

In addition, exports were also up strongly, increasing 21.4%, the biggest rise since 1996.

'Distorted by stimulus'

WHAT IS GDP?

Gross Domestic Product, or GDP, measures the value of goods and services produced in a country, reflecting the health of the economy in one number.

The US uses a measure called annualised GDP, which takes the change over a three-month period and works out what the annual change would be if it continued at that pace over a whole year.

This latest figure is the first estimate for the three-month period between July and September. It will be revised twice in coming months.

"It's good to have the economy growing again," said Brian Bethune, economist at IHS Global Insight.

"But we don't think that rate of growth is sustainable because it is distorted by all the government stimulus.

"The challenge here is to get organic growth - growth that isn't helped by fiscal steroids."

Analysts cautious about the slow nature of the US economic recovery point to the fact that the unemployment rate currently stands at 9.8%, and that the labour market traditionally lags behind any wider economic recovery.

They also highlight the fact that the big car firms have already reported a sharp fall in September sales following the conclusion of the popular $3bn cash for clunkers scheme at the end of August.

"You can say that the recession is over, but it sure won't feel like that," said Dean Baker, co-director of the Centre for Economic Policy Research.

"There is a lot of downward momentum that isn't going to go."

U.S. must live within its means: Geithner
YAHOO
By Glenn Somerville and Walter Brandimarte

WASHINGTON (Reuters) – The United States must live within its means once its economy recovers if it is to preserve global confidence in the U.S. dollar's status, Treasury Secretary Timothy Geithner said on Friday. The comments came as the Obama administration reported a record U.S. budget deficit for the fiscal year ended September of $1.4 trillion. At 10 percent of gross domestic product, it was the biggest U.S. fiscal shortfall since World War Two. Rescuing the economy and some of the country's biggest banks from the worst recession since the Great Depression took a toll on U.S. finances, and the White House has forecast deficits of more than $1 trillion through fiscal 2011.

"Future deficits are too high, and the president is committed to working with Congress to bring them down to a sustainable level as the economy recovers," Geithner said in a statement accompanying the fiscal data.

Separately, White House economic adviser Lawrence Summers said financial firms that helped precipitate two years of economic crisis are going to have to bow to stiffer oversight of their activities to prevent it happening again. Geithner and other policymakers will discuss the U.S. economic and budget outlook, and prospects for financial regulatory reform, at the Reuters Washington Summit on October 19-21.

FISCAL OUTLOOK AFFECTS U.S. DOLLAR

On Friday, Geithner said the U.S. dollar's status as a key reserve currency carries special responsibilities that include keeping spending under control, Geithner said earlier on Friday in an interview on CNBC television.

"It is very important that Americans understand that we need to do everything possible to sustain confidence in our ability to keep inflation low and stable over time and to make sure we're getting our fiscal house in order," Geithner said.

Developments over the past year, when many investors put their money into U.S. Treasury securities and the dollar rose at times, showed there was still a great deal of confidence in U.S. economic management.

"The world wanted to be in Treasuries, in the safest and most liquid markets, and you saw the dollar rose when people were most concerned about the future of the world," he said.

"That is a very important thing. It's not something you can count on. It's something we can understand, and we can continue to foster, and we're going to do that," Geithner added.

The administration has to be careful not to withdraw economic stimulus too fast though, Geithner added. But he denied that the administration was ready to consider a second economic stimulus program. Geithner said access to credit in the overall economy has improved dramatically but many small businesses that typically create many jobs still face borrowing constraints. The Obama administration is working on measures to help small businesses get easier access to credit -- possibly by diverting some bank bailout funds to them -- but hasn't yet announced a program to do so.

BANKING NEEDS TO CHANGE

Summers also argued for change to the banking system. After two years of economic crisis and government rescue efforts, he said the banks at the center of the credit debacle had a moral imperative to be part of the solution.

"Financial institutions that have benefited from government support can, should, and must use this moment to think about what they can do for their country -- by accepting the necessary regulation to protect the American people," Summers told an audience of financial market participants. "Wall Street was no small part of the cause of the crisis and Wall Street needs to be part of the solution."

Summers, chairman of the National Economic Council, suggested banks had little choice in the matter.

"There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support," he said. "This has direct relevance on the changing nature of the social compact between the financial sector and the broader economy."

The Obama administration has been pressing for wide-ranging reforms in U.S. financial regulations. It scored a victory on Thursday when a House of Representatives' panel passed a bill to tighten regulation of financial derivatives -- contracts derived from existing securities or transactions that are blamed for amplifying the 2008 crisis. New, tighter regulation doesn't mean, however, that financial firms will never go bust again. In fact, Summers said that such firms must be able to fail for market discipline to work. In addition to that, though, profitability and prudence should be reconciled under any framework of financial regulation.

"The financial system has to be safe for failure," said Summers.

Summers also said officials need to avoid prematurely withdrawing measures meant to stimulate the economy after the worst recession in decades, noting discussion of any "exit strategy" would be different on Main Street than it would on Wall Street.

GDP Declines 1 Percent in 2Q, Better Than Expected
By THE ASSOCIATED PRESS
August 27, 2009
Filed at 10:01 a.m. ET

WASHINGTON (AP) -- The economy shrank at an annual rate of 1 percent in the spring, a better-than-expected showing and more evidence that the recession is drawing to a close.

Many analysts believe the economy is growing in the current quarter, but they caution that any rebound will not be accompanied initially by rising employment. Jobless claims figures released Thursday were better than expected, but remain well above levels associated with a healthy economy.

The Commerce Department's new estimate for the gross domestic product was unchanged from the initial figure it released last month. The drop, while representing a record fourth consecutive decline, was far smaller than the previous two quarters. It also was stronger than the 1.5 percent decline that private economists expected.

The report Thursday found that businesses slashed their inventories more than first reported and cut back more sharply on investment in new plants and equipment. But those reductions were offset by revisions that showed smaller dips in consumer spending, exports and housing construction.

The 1 percent rate of decline in the April-June quarter followed decreases of 6.4 percent in the first quarter and 5.4 percent in the final three months of 2008, the sharpest back-to-back declines in a half-century. The four straight quarterly declines in GDP, which measures the country's total output of goods and services, mark the first time that has occurred on government records that date to 1947.

The recession that began in December 2007 is the longest since World War II, and the deepest in terms of the drop in the GDP, which is down 3.9 percent from its previous peak.

But economists are heartened that the decline slowed to 1 percent in the spring. Many analysts think that the government's $787 billion economic stimulus plan and the Cash for Clunkers program to boost car purchases will lift GDP growth to around 2 percent in the current July-September quarter.

However, the return to economic growth will not mean more jobs, at least at first. Economists believe the unemployment rate, currently at 9.4 percent, will keep rising through the spring of next year.

The Labor Department said Thursday that first-time unemployment claims fell to a seasonally-adjusted 570,000, from an upwardly revised 580,000 the previous week. The tally of those continuing to claim benefits dropped to 6.13 million from 6.25 million, the lowest level since early April. The weekly figures remain far above the roughly 325,000 that analysts say is consistent with a healthy economy. New claims last fell below 300,000 in early 2007.

White House economic adviser Christina Romer said Tuesday the unemployment rate is likely to keep rising and hit 10 percent this year. That could discourage consumer spending and weaken any recovery.

The government makes three estimates of the economy's performance for any given quarter. Each new GDP estimate is based on more complete information. Economists had expected that the second look at GDP for the spring would show the economy contracting at a 1.5 percent rate because they believed companies had cut back more sharply on their inventories.

While inventories were cut more than initially estimated, that weakness was offset by upward revisions in other areas.

The government found that consumer spending, which accounts for about 70 percent of total economic activity, fell at an annual rate of 1 percent in second quarter, a slight improvement from the 1.2 percent decline reported last month. Residential construction and exports also were revised to show smaller declines.

Federal Reserve Chairman Ben Bernanke said last week the economy appeared to be ''leveling out,'' and was likely to begin growing again soon. President Barack Obama appointed Bernanke to another 4-year term Tuesday.

The Cash for Clunkers program, which provides consumers rebates of up to $4,500 for turning in old gas-guzzlers for fuel-efficient cars, has helped spur activity in the auto and related industries. The economy also has been helped by stabilization in the housing sector, as sales of new and existing homes have risen for four straight months.

White House forecasts 10-year deficit of $9T
New Haven REGISTER
By Associated Press
Wednesday, August 26, 2009

WASHINGTON — In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America’s founding. And it says by the next decade’s end the national debt will equal three-quarters of the entire U.S. economy.

But before President Barack Obama can do much about it, he’ll have to weather recession aftershocks including unemployment that his advisers said Tuesday is still heading for 10 percent.

Overall, White House and congressional budget analysts said in a brace of new estimates that the economy will shrink by 2.5 to 2.8 percent this year even as it begins to climb out of the recession.

Those estimates reflect this year’s deeper-than-expected economic plunge.

The grim deficit news presents Obama with both immediate and longer-term challenges. The still fragile economy cannot afford deficit-fighting cures such as spending cuts or tax increases. But nervous holders of U.S. debt, particularly foreign bondholders, could demand interest rate increases that would quickly be felt in the pocketbooks of American consumers.

The White House Office of Management and Budget indicated that the president will have to struggle to meet his vow of cutting the deficit in half in 2013 — a promise that earlier budget projections suggested he could accomplish with ease.

“This recession was simply worse than the information that we and other forecasters had back in last fall and early this winter,” said Obama economic adviser Christina Romer.

The deficit numbers also could complicate Obama’s drive to persuade Congress to enact a major overhaul of the health care system — one that could cost $1 trillion or more over 10 years. Obama has said he doesn’t want the measure to add to the deficit, but lawmakers have been unable to agree on revenues that would cover the cost. What’s more, the high unemployment is expected to last well into the congressional election campaign next year, turning the contests into a referendum on Obama’s economic policies.

“The alarm bells on our nation’s fiscal condition have now become a siren,” said Senate Minority Leader Mitch McConnell of Kentucky. “If anyone had any doubts that this burden on future generations is unsustainable, they’re gone — spending, borrowing and debt are out of control.”

Even supporters of Obama’s economic policies said the long-term outlook places the federal government on an unsustainable path that will force the president and Congress to consider politically unpopular measures, including tax increases and cuts in government programs.

“The numbers today portend the biggest budget fight we’ve probably had in decades in the United States,” said Stan Collender, a former congressional budget official.

The summer analyses by the White House budget office and by the Congressional Budget Office reached similarly bleak conclusions. The CBO’s 10-year deficit figure was smaller — $7 trillion — but that is because it assumes that all tax cuts put into place in the administration of former President George W. Bush will expire on schedule by 2011. Obama’s budget baseline, however, hews to his proposal to keep the tax cuts in place for families earning less than $250,000 a year.

Both budget offices see the national debt — the accumulation of annual budget deficits — as more than doubling over the next decade. The public national debt, made up of amounts the government owes to the public, including foreign governments, stood Tuesday at a staggering $7.4 trillion. White House budget officials predicted it would reach $17.5 trillion in 2019, or 76.5 percent of the gross domestic product.

That would be the highest proportion in six decades.

Not Jackson Hole (Bryce Canyon), but note that the rocks are pointing up! Oops! Read story above on estimated deficit!

Fed Chairman Says American Economy Is Poised to Grow
NYTIMES
By EDMUND L. ANDREWS
August 22, 2009

JACKSON HOLE, Wyo. — Ben S. Bernanke, the chairman of the Federal Reserve, offered his most hopeful assessment in more than a year on Friday, asserting that “the prospects for a return to growth in the near term appear good.”

In a much-awaited speech here to central bankers and economists from around the world, Mr. Bernanke went beyond the Fed’s most recent assessment that the nation’s economy was “leveling out” and that the recession was ending.

Noting that short-term lending markets are functioning “more normally,” that corporate bond issuance is strong and that other “previously moribund” securitization markets are reviving, Mr. Bernanke said that both the United States and other major countries were poised for growth.

In emphasizing not just the imminent end of the recession — the worst since at least the early 1980s if not since the Great Depression — but also the “good” chances of actual growth, Mr. Bernanke’s assessment was in some ways surprising.

Despite encouraging signs on many fronts, American retailers have reported unexpectedly weak sales in the last week — a sign that that consumer spending could drag down economic growth in the months ahead. And on Thursday, the Labor Department reported that new unemployment claims jumped again.

The Fed chairman’s added hopefulness may have reflected the unexpectedly good news from other parts of the world: Germany and Japan both reported positive economic growth this week, an unexpected rebound from their own recessions.

The Fed chairman cautioned that problems remained, and warned that regulators would have to impose much tougher capital requirements on major financial institutions to ensure that they can better withstand the kind of cash crunch that crippled the global financial system last fall.

“Strains persist in many financial markets across the globe,” Mr. Bernanke said, speaking at the Fed’s annual symposium at this resort in the Grand Tetons. “Financial institutions face significant additional losses, and many businesses and households continue to experience considerable difficulty gaining access to credit.”

Repeating the caution that Fed officials and most private forecasters have expressed in recent weeks, Mr. Bernanke predicted that the economic recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

CIT provides funding for small and medium-sized firms

CIT shares rise as company emerges from bankruptcy
YAHOO
December 10, 2009

NEW YORK (Reuters) – CIT Group Inc's new shares rose as much as 6 percent from opening levels in their debut on the New York Stock Exchange on Thursday as the lender to small businesses emerged from one of the largest bankruptcies in U.S. history.

CIT, one of the biggest financial sector victims of the credit crisis, is also the only major firm in the sector to emerge from bankruptcy.

Others, such as Lehman Brothers, Washington Mutual and IndyMac have been unable to continue on their own.

But the comeback may not be easy.

"In the space they are working, it is a tough time trying to secure customers for a company that has gone bankrupt," said Robert Lutts, president and chief investment officer at Cabot Money Management.

"Today, executives making decisions in the financial area are making very low-risk decisions," Lutts said. "That means don't work with the problem childs of the world, and I think that is going to mean a tough sledding for CIT."

Hundreds of thousands of small and mid-sized businesses depend on CIT for financing, and company lawyers had said the company needed to get through bankruptcy quickly to avoid customer defections.

CIT's new stock was up 4.20 percent at $28.14 in mid-morning trading after opening at $27.00. The stock rose as much as 6 percent to $28.63.

The more than 100-year-old lender filed for bankruptcy last month after a debt exchange offer failed.

Earlier this week, it won approval from a New York bankruptcy judge for a prepackaged reorganization plan.

CIT's reorganization plan will reduce its debt by about $10.5 billion to about $55 billion and defer significant debt obligations for three years.

Under the plan, holders of CIT's unsecured debt will receive new notes representing 70 cents on the dollar of original debt, plus new common stock.

The company had won support from bondholders for the plan substantially in excess of the minimum amount required under U.S. bankruptcy law.

Common and preferred stockholders, including the U.S. government, will be wiped out.

CIT bankruptcy reassigned after recusal
YAHOO
November 2, 2009

NEW YORK (Reuters) – CIT Group Inc's bankruptcy case was reassigned on Monday to U.S. Bankruptcy Judge Allan Gropper following the recusal of Judge Robert Gerber, who had been assigned the case hours earlier.

A courtroom deputy for Gropper said Gerber recused himself from the case. The deputy did not give a reason for the recusal. Gerber's chambers had no immediate comment.

CIT, a source of financing to about one million small and mid-sized businesses, filed for Chapter 11 protection from creditors on Sunday after gathering support from most of its bondholders for its "prepackaged" reorganization.

The bankruptcy filing, one of the five largest in U.S. history, followed a failed debt exchange offer.

CIT said it hopes to emerge from bankruptcy by the end of the year and reduce its debt by $10 billion. The New York-based company intends to keep lending, and a quick reorganization is crucial if it expects to retain most customers.

Gropper has been a bankruptcy judge since 2000. His cases have included the reorganization of Northwest Airlines Corp, which later merged with Delta Air Lines Inc, and the current proceedings for the giant mall owner General Growth Properties Inc.

Before joining the bench, Gropper was a partner at White & Case, where he was involved in many of the largest U.S. bankruptcies, including Federated Department Stores and Texaco. He has degrees from Yale University and Harvard Law School.

According to its bankruptcy petition, CIT had $71 billion of assets and $64.9 billion of liabilities on June 30.

In morning trading, CIT shares fell 44 cents, or 61 percent, to 28 cents. The New York Stock Exchange said it would suspend trading in CIT prior to Tuesday's market open.

The case is In re CIT Group Inc, US Bankruptcy Court, Southern District of New York, Case No. 09-16565

CIT Group files for US bankruptcy
I-BBC - Page last updated at 22:06 GMT, Sunday, 1 November 2009

The US lender, CIT Group, has filed for bankruptcy protection, after a debt-exchange offer to bondholders failed.

However, the majority of bondholders have agreed a reorganisation plan that will reduce CIT's debt by $10bn (£6bn) while allowing it to go on operating.

The group's operating subsidiaries, including CIT Bank, were not included in the bankruptcy filing in New York.

CIT Group suffered as the credit crisis left it unable to fund itself, and the recession exposed it to many bad loans.

Under the reorganisation plan which has been approved by bondholders, creditors will end up owning the company.

The decision to proceed with our plan of reorganisation will allow CIT to continue to provide funding to our small business and middle market customers

Jeffrey Peek
Chairman and CEO, CIT Group

Most bondholders will also end up with new CIT debt worth about 70% of the face value of their old debt. Preferred shareholders, including the US government, will get money only after other creditors are paid back.

The government invested $2.33bn in CIT shares in December 2008 through the Troubled Asset Relief Programme (Tarp). It could have lost more, however, had it not declined to give more aid this year.

"The decision to proceed with our plan of reorganisation will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the US economy," said CIT's chairman and CEO, Jeffrey Peek, who will step down by the end of the year.

CIT's bankruptcy protection filing, showing $71bn in finance and leasing assets against total debt of $64.9bn, is the fifth biggest in US corporate history.

Many observers predict that if CIT is able to continue in business after emerging from bankruptcy protection, it will not be able to make anything like the same number of loans to small businesses.

That could mean that thousands of companies which are looking to raise money for investment will struggle to find the cash, the warn.

CIT Group files for prepackaged bankruptcy
YAHOO
November 1, 2009

NEW YORK (Reuters) – CIT Group Inc, a century-old commercial lender, filed for bankruptcy on Sunday, as the global credit crisis left it unable to fund itself and the recession left it with too many bad loans.

CIT's creditors have already approved its reorganization plan. Analysts have said that getting through bankruptcy is crucial for CIT if it wishes to keep its customers, which include Dunkin' Donuts franchisees and film production company Dark Castle Entertainment.

CIT's operating subsidiaries, including CIT Bank, are not included in the bankruptcy filing, and expect to continue operating, the company said in a statement.

CIT, which filed for bankruptcy protection in the Southern District of New York, plans to reduce its total debt by about $10 billion in bankruptcy.

Under the bankruptcy plan approved by bondholders, creditors will end up owning the company. Most bondholders will also end up with new CIT debt worth about 70 percent of the face value of their old debt. Preferred shareholders, including the U.S. government, will get money only after other creditors are paid back. Current common shareholders will receive nothing.

The U.S. government invested $2.33 billion in CIT preferred shares in December 2008 through the Troubled Asset Relief Program.

CIT financed itself mainly by borrowing from bond markets, which has proven to be a flawed strategy as the credit crunch that began in 2007 has made it much more expensive for troubled companies to fund themselves.

CIT near plan to turn over company to bondholders: sources
YAHOO
By Paritosh Bansal and Walden Siew
Wed Sep 30, 1:38 am ET

NEW YORK (Reuters) – CIT Group Inc (CIT.N) is nearing a plan that likely would hand the commercial lender over to its bondholders, sources familiar with the matter said on Tuesday.

CIT was preparing an exchange offer that would eliminate up to 40 percent of its more than $30 billion in outstanding debt, said the sources, who did not wish to be identified because they were not authorized to make public comments about the deal.

The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured company, one source said.

If not enough bondholders agreed to the plan, the company could seek to restructure in bankruptcy court, the source said. This would result in one of the largest Chapter 11 bankruptcy-court filings in U.S. history.

A second source said that while some bondholders supported the plan, a majority was not yet on board.

CIT's board has yet to approve any course of action, the first source said.

CIT spokesman Curt Ritter declined to comment.

Although CIT received $2.3 billion in December under the Troubled Asset Relief Program (TARP), federal regulators this year declined further requests by CIT for funds.

U.S. taxpayers are likely to see much of their investment wiped out under a bankruptcy, but not under a successful exchange offer, the first source said, adding that U.S. regulators had been frequently briefed on the developments of the plan.

The lender to small and medium-sized businesses, as well as to commercial real estate borrowers, has until October 1 to present a restructuring plan to lenders.

CIT Group Wraps Debt Purchase, Dodges Bankruptcy
NYTIMES
By THE ASSOCIATED PRESS
Filed at 9:52 a.m. ET
August 17, 2009

NEW YORK (AP) -- Commercial lender CIT Group Inc. said Monday its offer to repurchase outstanding debt at a discount -- a crucial step to help stave off bankruptcy -- was successful.

The embattled New York-based lender offered to buy $1 billion in debt that was set to mature Monday. CIT warned that if not enough bondholders were willing to sell the debt back to the company, it would likely have to file for bankruptcy protection.

The company said nearly 60 percent of the debt was tendered for purchase, barely topping the 58 percent minimum needed to complete the offer. CIT is paying $875 for every $1,000 tendered as part of the offer.

CIT will pay off the remaining notes that matured Monday but were not tendered for purchase as part of the offer.

''The completion of this tender offer is another important milestone as the company continues to make progress on the development and execution of a comprehensive restructuring plan,'' CIT Group said in a statement.

At the same time that CIT received $3 billion in emergency funding last month from its largest bondholders, it launched the offer to buy back outstanding debt in an effort to ease a cash crunch that nearly forced it out of business. CIT turned to and received funding from its bondholders only after negotiations for a government-led bailout failed.

Some experts feared that if CIT collapsed it would deal a crippling blow to an economy still bleeding hundreds of thousands of jobs a month despite a nearly $800 billion federal stimulus program.

The retail sector would be hit especially hard. CIT serves as short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation. Analysts say 60 percent of the apparel industry depends on CIT for financing.

It could continue to struggle with liquidity issues as more debt is due to mature next year.

Last week, CIT reached an agreement with the Federal Reserve Bank of New York that puts the company under the oversight of federal regulators. The agreement requires CIT to submit a plan for how it will maintain sufficient cash. It must also provide budgets through the end of 2010 that include details about how the company will meet current and future capital requirements.

Shares of CIT fell 11 cents, or 7.8 percent, to $1.30 shortly after Monday's market open.

CIT Delays Report, Could Have to File For Bankruptcy
NYTIMES
By REUTERS
Filed at 7:50 a.m. ET
August 11, 2009

NEW YORK (Reuters) - Troubled lender CIT Group Inc <CIT.N> said on Tuesday it has delayed filing its second-quarter report with regulators and said if it could not complete its debt tender or arrange other financing, it would file for bankruptcy.

CIT is still reviewing assets and businesses that it may sell as well as the related valuation adjustments that must be included in the quarterly report, it said in a filing with the U.S. Securities and Exchange Commission.

New York-based CIT, which last month secured $3 billion in emergency funding from bondholders, has been battling to restructure its debt and avoid bankruptcy.

The company has launched a tender offer for its outstanding $1 billion floating-rate notes due August 17. In a filing on Tuesday, it said if this offer were successful, it would use the proceeds from its emergency funding to complete the tender and make the payment on the August 17 notes.

The 101-year-old lender had already postponed its results, originally expected on July 23, while arranging the emergency funding. It said last month it expected a second-quarter loss of more than $1.5 billion.

Shares in the company slipped slightly to $1.46 in premarket trading, down from $1.48 on Monday.

More on CIT here...in a NYTIMES editorial.
R.I.P., CIT?
NYTIMES
Floyd Norris, Notions on High and Low Finance
July 13, 2009, 6:15 pm

There is widespread speculation that the CIT Group, one of the largest loan companies serving smaller businesses, could be forced into bankruptcy soon. CIT became a bank, like everyone else, but it appears that at least some people in the government view it as too unimportant to save.

CIT is mounting a campaign claiming it is important, and could yet succeed. Either way, the need for the government to make such a decision demonstrates how far the financial system is from being fixed.

The company’s most recent 10-Q sets out its problem:

The Company’s business has been historically dependent upon access to the debt capital markets for liquidity and efficient funding, including the ability to issue unsecured term debt.

It can no longer issue such debt. In June, Standard & Poor’s and Fitch cut the company’s bond rating to junk, and Moody’s followed this week. It seems possible that the company will not last a full month after it stopped being investment grade at all the rating agencies, and perhaps not a week after it lost its last such rating. That sounds like a commentary on the tardiness of the rating agencies, or the perils of an industry so dependent on friendly credit markets.

That quarterly report said it would need to raise $10 billion by March of next year, but now had access to just $6.4 billion — unless the government came through with another bailout.

CIT is trying to shrink — by issuing few new loans — and to issue secured credit. In other words, even if it does survive, it has no plans to be much help to its customers.

If CIT does go under, the $2.3 billion it got from the TARP program will have done no one any good.

Despite the slight opening of financial markets since the winter panic eased, this country does not have a decently functioning financial system. It is the Federal Reserve and the Treasury that decide which financial companies stay in business, which is something you expect from a centrally planned socialist economy, not from the great bastion of the free enterprise system.

Many of the better-off banks were able to repay the TARP money to the government, but they remain dependent on F.D.I.C.-guaranteed loans. CIT would be O.K., at least in the short term, if it could get such loans.

There has been a lot of hand-wringing over the failure of the Obama stimulus plan to get the economy moving, but where attention is really needed is the failure to get the financial system going. That was never going to be easy, but the worst possible decision was to allow the banks to fudge their financial statements. The Obama administration did not lift a finger to prevent Congress from demanding such a move, which the Financial Accounting Standards Board made under duress.

It is not easy to be sure how much difference that made in financial statements, although it clearly allowed some banks to pretend their losses were less than they really were — at least as measured by market values. The banks claim those market values are ridiculously low, but they will not divulge exactly what assets they own, or where they value them.

We are back to a situation where no one knows which balance sheet can be trusted. In that climate, the easiest decision is to trust no one — or at least no one without a credit line backed by Uncle Sam. Citi is too important to fail, but CIT may not be.

What has been needed for a long time is a way to figure out how much toxic assets are worth, and to get them off bank balance sheets and into the hands of speculators with secure funding. Then the financial institutions, with solid capital and believable balance sheets, could go back to lending, both to the public and to each other. It is tragic that has not happened.

26 years ago=1983...interest rates were in double-digits...
467,000 Jobs Lost in June, Far More Than Expected
NYTIMES
By JACK HEALY
July 3, 2009

The pace of job losses quickened in June after falling sharply just a month earlier, casting a shadow over the Obama administration’s attempts to stanch months of stark declines in the labor market.

The American economy shed 467,000 jobs last month, and the unemployment rate rose to 9.5 percent, its highest level in 26 years, the Labor Department reported on Thursday. Job losses were widespread among the construction, manufacturing and business and professional services sectors.

Economists had expected 365,000 job losses for the month, and predicted unemployment would reach 9.6 percent.

The latest figures highlight a somber new reality for workers, economists said. As the recession enters its 20th month, private wages and salaries are falling, working hours are dwindling and more people are without work. In essence, economists say, months of deep, broad job losses are effectively making unemployment a way of life for millions.

The number of people who have been unemployed for more than 27 weeks has more than tripled since the recession began, to 4 million. The median time people go without a job has increased to nearly four months, from slightly more than two months at the outset of the recession in December 2007.

“We have never seen a duration of that magnitude,” Lynn Reaser, vice president for the National Association for Business Economics, said. “There are a lot of ramifications. A lot of these people become discouraged, and they drop out of the work force. It affects their spending, their whole psychological frame of mind.”

In the Brownsville section of Brooklyn, Jeffrey Jones, 40, is feeling the weight of eight months without work. He has not found anything since losing his job as a cook at a senior center in October, and he worries about paying rent and caring for his four children. His blood pressure is up, and some nights he stays up and watches television to distract himself from the worries that keep him from sleeping.

“I know I’m not supposed to be letting it stress me out,” he said. “The way I’m going now, I won’t be able to make it too much longer. I can’t go this long without doing something for my family.”

While the economy is no longer losing jobs at a pace of 600,000 each month, businesses are still cutting positions and imposing pay cuts and hiring freezes as the economy continues to contract. Consumers are saving 6.9 percent of their disposable income, and spending remains sluggish.

Even the White House has lowered its expectations for the job market, and now says that unemployment will hit 10 percent. Many economists say that job losses and unemployment will continue rising even after the economy begins growing again.

“I don’t see any job growth outside of health, education and government spending through the end of the year,” said John E. Silvia, chief economist at Wachovia Corporation.” As more people hunt futilely for jobs or give up their searches altogether, they burn through their savings, fall behind on bills and mortgages, and eventually add to the strains on already strapped aid programs, from government unemployment insurance to private food pantries.

“There are going to be massive, massive numbers of people who are out of work for long periods of time,” said Andrew Stettner, deputy director for the National Employment Law Project. “It’s one of the most important aspects of where the economy is right now.”

Although the number of people filing for unemployment insurance has leveled off recently, more workers are falling back on safety nets intended for the most troubled workers. More than 2.7 million people received emergency or extended unemployment benefits in the first week of June — the most recent period for which data was available — compared with 2 million at the beginning of the year.

As months pass without a job offer, people cut back where they can, turning off the cable, canceling vacations and shift their shopping habits to lower priced retailers.

Some people give up looking for jobs and join the 800,000 discouraged workers.

Others, like Domminique Werdlow, 37, of Houston, keep sending out résumés and sifting through online job boards. Since she lost her job as a customer-service trainer at Waste Management in January, Ms. Werdlow said her car has been possessed and that she now lives unemployment check to unemployment check.

“It’s not getting any better,” she said. “I really try to stay positive. If I really start looking at it, I’d be very depressed.”

Judge denies GM retirees' request for committee
DAY
By BREE FOWLER, AP Auto Writer
Posted on Jun 25, 2:34 PM EDT

NEW YORK (AP) -- A bankruptcy judge on Thursday ruled that a group representing General Motors Corp.'s salaried retirees cannot form a formal committee to negotiate with the automaker as it attempts to reorganize and emerge from Chapter 11 as a new company.

U.S. Judge Robert Gerber said that since GM had the right to modify or terminate the retirees' health care and life insurance benefits before they filed for bankruptcy protection, the retirees can't challenge the automaker's ability to do so now.

"While I do understand the importance of this to the retirees, I can't grant the retirees rights that they don't have outside of bankruptcy," Gerber said in issuing his ruling.

As part of its restructuring plan, GM plans to continue to pay health care and life insurance benefits for its 122,000 salaried retirees and their surviving spouses, but those benefits are expected to be reduced and the retirees will be forced to shoulder a larger share of their health care costs.

Retired hourly workers whose benefits are dictated by contracts with unions like the United Auto Workers are not affected.

Neil Goteiner, an attorney for the salaried retirees group, said that given what's at stake for the retirees, the cost of a committee was warranted.

"Your honor, this is truly a situation where you're dealing with widows and orphans," Goteiner said. "It's grossly unfair. They should get a chance to sit down and at least be the assistant captain of their fate."

But GM attorney Harvey Miller argued that the retirees shouldn't be able to form a committee since GM has always had the right to modify salaried retiree benefits and has done so in the past.

"There can still be discussions with GM and there is a group that periodically has had discussions with GM," Miller said. "This would simply add more costs."

Miller added that the formation of a committee could threaten to slow down the sale of GM's assets to a new company. The sale needs to go through as soon as possible if the company is to have any chance of success, he said. As part of its plan to emerge from court protection, GM plans to sell the bulk of its assets to a new company that would be controlled by the U.S. government. In exchange for up to $50 billion dollars in financing, the U.S. government will take a 60 percent ownership stake in the new company. The Canadian government would get 12.5 percent.

The United Auto Workers union will get 17.5 percent, which it will use to fund its retiree health care obligations, while GM's unsecured bondholders would own the remaining 10 percent.

Earlier in Thursday's hearing, Gerber gave GM final approval to access to its full $33.3 billion in bankruptcy financing. He had given preliminary approval earlier this month for GM to use $15 billion of the total. The billions in U.S. and Canadian government financing is intended to keep the automaker going until it can emerge from Chapter 11.

Also on Thursday, Gerber denied a request from an unofficial committee of people with asbestos-related claims against GM to appoint a "tort czar" that would oversee all future claims against the old GM, not just those related to asbestos. The asbestos group had previously filed a motion requesting formal committee status, but told the court Thursday that it was no longer pursuing that. The group has one representative on the case's unsecured creditors committee.

A pun on "mercy me" perchance? Or is that "crikey" across the pond?

Goldman: Recession? What recession?
I-BBC
Robert Peston | 14:33 PM, Tuesday, 14 July 2009

I'm in a horrible rush, so have to keep my remarks on Goldman Sachs' second quarter results brief.

I could say "crikey" and leave it at that.

But I will translate. Just a few months after Wall Street and the City of London were in meltdown, Goldman has reported record net revenues for a three-month period of $13.8bn, which is a breathtaking 47% higher than those generated in the preceding three months and in the equivalent period of last year.

It's boom time again, especially in the trading of credit and currencies. And oh how Goldman's 29,400 staff have been rewarded. Compensation for the three months was a handsome $6.65bn or $226,000 per employee. That brings remuneration per employee for the first half of the year to a none-too-cheap $384,000. And we're only halfway through the year.

The media and political reaction to Goldman's bounceback will be fascinating to observe. It's true that the investment bank has consistently performed better than most of its rivals. But when that cataclysmic storm broke over the financial system last autumn, Goldman - like the rest - had to turn to taxpayers for a crutch in the form of guarantees for its debt, access to central-bank liquidity and capital.

It has recently declared that it can stand on its own feet again without taxpayers to lean on.

But some may well ask whether taxpayers shouldn't have demanded a bit more for their succour, given that Goldman is once again the world's pre-eminent money-making machine.

Goldman's Cohen Sees Inflation At Bay
NYTIMES
By REUTERS
Filed at 11:40 a.m. ET
June 15, 2009

NEW YORK (Reuters) - One of Wall Street's most influential strategists said on Monday the U.S. Federal Reserve is unlikely to ratchet back efforts to stimulate the economy soon, and that it was too early to worry about inflation choking off what would likely be a fitful recovery.

Abby Joseph Cohen, senior investment strategist at Goldman Sachs Group Inc <GS.N>, said the U.S. central bank "would like to do as little as possible for as long as possible" to let the economy regain its footing, and allow businesses to rebuild inventories and invest more.

Inflation fears are "spectacularly premature" in light of rising unemployment and excess supply, Cohen said at the Reuters Investment Outlook Summit in New York.

"We just don't see that inflation is going to rear its ugly head any time soon. That doesn't mean we won't see some rebound in some prices," including in commodities, she said.

Cohen predicted a "dramatic surge" in U.S. corporate profits in the third quarter and especially the fourth quarter from depressed year-earlier levels.

She expects a slow economic recovery, with annualized growth in gross domestic product of just 1 percent from July to December, in part because consumers are saving more and providing less of a "spunk" to activity.

Cohen is well known for correctly forecasting a bullish run for U.S. stocks during the 1990s.

PRAISE FOR OBAMA

Having pushed benchmark interest rates to near zero, the Fed and the Treasury Department have tried to stimulate economic activity in other ways.

The central bank, for example, is aggressively buying mortgage securities and other debt to add liquidity. Meanwhile, the Treasury has pumped hundreds of billions of dollars to prop up banks and insurers.

"I don't see anything happening in the short run" to reduce the stimulus, Cohen said. "These were intended to be transitional. (Until policymakers) see that markets are moving normally, and the economy is behaving normally, they're going to be reluctant to reverse what they have done."

Cohen added, though: "We have to be very careful in terms of defining what 'normal' is."

The strategist praised early efforts by the Obama administration to stimulate the economy, including a focus on energy efficiency, and trying to bolster the U.S. middle class, which has "fallen behind over the last decade.

"They have been faced by a series of extraordinary problems, and in general I think they have gone about it in a very good way," she said.

Cohen also praised Ben Bernanke, whose term as Fed chairman ends next January.

"History is likely to show that he was an extraordinarily effective Fed chairman," she said. "Financial markets have stabilized, and the economy appears to be moving toward a stable position."

Six Flags Files for Bankruptcy
NYTIMES
June 13, 2009, 11:26 am

Six Flags, the big theme park operator, filed for bankruptcy in early Saturday morning in Delaware after failing to reach an agreement with lenders over a plan to reorganize its debt outside of court.

Six Flags became only the latest company to prove unable to cope with its debt load at a time when previous solutions like refinancings are largely unavailable. The theme park operator, which had $2.4 billion in debt, faced nearly $300 million in payments to preferred stockholders due in August.

But the company is hoping to make its ride through bankruptcy a short one. In a statement, Six Flags said that it is seeking court approval for a pre-negotiated restructuring plan, one that has the unanimous approval of its lenders. That proposal would eliminate $1.8 billion in debt and slice off the $300 million in preferred stock payments.

“The current management team inherited a $2.4 billion debt load that cannot be sustained, particularly in these challenging financial markets,” Mark Shapiro, Six Flags’s chief executive, said in a statement. “As a result, we are cleaning up the past and positioning the Company for future growth.”

In its bankruptcy filing, Six Flags said that 37 of its subsidiaries, including parks like Great Adventure and Hurricane Harbor, had also sought court protection. The parks will continue to operate normally, but analysts have questioned whether attendance would fall off as some consumers shun waiting in line for roller coasters at a bankrupt theme park operator.

The filing is a blow to Dan Snyder, the owner of the Washington Redskins, who took control of Six Flags in 2005 after waging a proxy fight and holds about a 6 percent stake in the company. Mr. Snyder sought to turn around the company, installing a new management team led by Mr. Shapiro, and selling off underperforming parks.

He sought to clean up the remaining parks by banning smoking, increasing security and having more costumed characters like Tweety to roam around.

Other major investors in Six Flags include Bill Gates’s Cascade Investment, which held an 11.1 percent stake, and the hedge fund Renaissance Technologies, with a 5.5 percent stake.

Six Flags said in its statement that the filing comes despite a good 2008, in which the company cut its net loss to $135 million from $275 million a year ago. Its net loss for the first three months of 2009 narrowed nearly 7 percent from the same time in 2008, to $146.3 million.

But the company saw a 24 percent drop in revenue over the same period, as it suffered from lower attendance and spending at its parks.

Because the credit markets remain largely frozen for troubled companies, Six Flags was unable to refinance its massive debt load. The moribund real estate market also precluded the company from selling off property, like unused land in Maryland and New Jersey, to raise additional cash.

Six Flags’s primary advisers are the investment bank Houlihan Lokey Howard & Zukin and the law firm Paul Hastings Janofsky and Walker.

NYTIMES "Pay at the Top" interactive...
Talking Business: Geithner’s Plan on Pay Falls Short
NYTIMES
By JOE NOCERA
June 13, 2009

It was another one of those Timothy Geithner moments.

On Wednesday, the Treasury secretary held a roundtable discussion with a group of about 20 government officials and outside experts; the subject was executive compensation. Kenneth R. Feinberg, the Treasury Department’s new “comp czar,” was there, as was Mary Schapiro, the new chairman of the Securities and Exchange Commission; Daniel K. Tarullo, the newest Federal Reserve governor; and Lucien Bebchuk, the Harvard Law School professor who has turned his academic interest in executive compensation into a crusade.

It was, I heard later, a terrific meeting — a spirited, high-level give-and-take about what the government could do to better align the interests of shareholders with that of top executives, to ensure pay was linked to performance and to rid the system of the kind of compensation incentives that caused so much excessive risk-taking and helped bring about the financial crisis.

“The discussion was surprisingly substantive,” said Nell Minow, the co-founder of the Corporate Library. “Geithner was very engaged in the discussion and genuinely interested in what everyone had to say.”

When the meeting ended, the doors were flung open and the media was invited in. Looking sternly into the cameras, Mr. Geithner read a statement in which he described executive compensation as a “contributing factor” to the crisis. Then he outlined a series of tough-sounding principles, including a “re-examination” of such egregious practices as golden parachutes, a need to align compensation practices with “sound risk management” and the importance of having compensation plans that “properly measure and reward performance.”

But then, as he so often does, he proceeded to follow these tough words with actual proposals that were less than inspiring. The only legislation his department planned to propose — indeed, the only legislation he deemed necessary — were bills that called for compensation committees to be made up of independent directors, along with “say-on-pay” legislation, which would give shareholders the right to vote on a company’s pay plan. That vote, however, would not be binding.

“Finally,” he said, “I want to be clear on what we are not doing. We are not capping pay. We are not setting forth precise prescriptions for how companies should set compensation, which can often be counterproductive. Instead, we will continue to work to develop standards that reward innovation and prudent risk-taking, without creating misaligned incentives.”

Later that afternoon, I called Ira Kay, who heads the executive compensation practice at Watson Wyatt & Company, to ask him what he thought of the government’s proposals. “I was relieved,” said Mr. Kay. I’ll bet he was.

•

Until the financial crisis, most people, myself included, did not make distinctions between different kinds of companies when it came to executive compensation. It was just one big problem, revolving primarily around the idea that there was something fundamentally wrong about executives taking home giant, multimillion dollar pay packages for mediocre performance or even outright failure — something, alas, that happens with annoying regularity in corporate America.

But if the near collapse of the financial system has taught us anything, it is that there should be a distinction. On the one hand, there are companies whose executives can make awful mistakes, even driving their corporations into bankruptcy, but whose actions have little or no effect on the rest of us. Most companies fall under this category.

And then there are those handful of companies — the too-big-to-fail banks and other large financial institutions that pose systemic risk — whose failure can wreak devastating havoc on the economy. For these latter companies, getting compensation right isn’t just a matter of fairness or improved corporate governance. It turns out to be critically important if we are to prevent a repeat of the calamity that has befallen us. But as difficult as it has been to overhaul executive compensation overall, it is going to be even more difficult to take the tougher measures that need to be taken with the banking system.

Let’s look first at the broader issue. In truth, for the first time in my memory, I think there is a decent chance that the compensation games will come to an end — though it won’t be by doing anything so radical as trying to cap pay, something that simply doesn’t work. (Mr. Geithner was right about that.)

Instead, it will be because boards have come under renewed pressure, thanks to the financial crisis, to control executive pay. It is also because, with the Democrats in charge, the issue is high on the agenda. (On Thursday, the House Financial Services Committee held a hearing on executive compensation.) Mr. Geithner’s two proposals will most likely breeze into law — and will certainly make a difference on the margins.

Most important, though, it is because the re-energized S.E.C., under Ms. Schapiro, is preparing a handful of new rules that will force companies to do a great deal more to spell out their compensation rationales, while making it easier for shareholders to express their displeasure if they feel boards have been too generous. In particular, the S.E.C. has begun laying the groundwork for a rule that will make it easier for shareholders to nominate directors — something that is tremendously difficult right now. Ms. Minow is among those who believe that the ability to replace incumbent directors is likely to have the biggest effect in reforming executive pay.

That’s the good news. The bad news is that for the banks, these measures won’t be enough. Banks, as we all now know, are different. Their deposits are insured by the government. When they run into problems, they have access to the Federal Reserve’s discount window. The government has a keen interest in the “safety and soundness” of banks, which is why they are so heavily regulated. Even in good times, taxpayers are at risk if a bank’s management makes too many risky bets. In bad times, excessive risk-taking by bankers can bring down an economy.

With the big banks, there is always a degree of moral hazard because they simply can’t be allowed to fail the way other companies can. Market discipline — or better corporate governance — just isn’t enough; even when a bank’s management is aligned with shareholders, they aren’t necessarily aligned with taxpayers. So it falls on the government to find ways to change the compensation incentives that encouraged the kind of crazy risk-taking that got us into so much trouble.

That is why, in his statement, Mr. Geithner stressed the importance of coming up with a compensation system that accounted for risk — he was speaking directly to the need to change the compensation system at banks. But none of his proposed solutions dealt with that problem. Neither he, nor anyone else in government, has yet figured out what to do about it.

Most of the ideas so far have been aimed at forcing bankers to have their bonuses paid in restricted stock that they could not cash in for years — until it was clear that the profits they had generated were not illusory. But to my mind, the problem really goes much deeper than that.

For one thing, the culture of bankers and traders, unlike at most nonbanks, rests on an “eat what you kill” mentality. That is why so many executives at, say, Merrill Lynch, felt justified in demanding big bonuses despite the firm’s huge losses. After all, they had made money on their trades — so why should they be punished because others had lost money for the firm?

For another thing, compensation at banks needs to be changed not just at the top, but also deep in the ranks, at the level of individual trader — or, indeed, anybody else who can put the firm’s capital at risk. This also makes it more difficult, because you can’t fix the problem with better corporate governance at the top. The changes have to be more systemic than that.

There is a third problem: once banks and investment banks were allowed to tear down walls between them, banking became a greedy profession. Look at all those banks panting to give back their bailout billions — in large part because they don’t want to have to deal with the executive compensation restrictions. And unlike other companies, where people glow with pride at the introduction of a new product, the key moment in the life of a banker is when he finds out what his bonus is for the year. None of this will be easy to change.

In his statement, Mr. Geithner stressed that the Federal Reserve was working on this problem as part of its job supervising banks. I got the strong sense this week that the Fed now views bank compensation as something it will begin to look at much more closely — and will eventually start regulating. The foolish and counterproductive distinction between banks that still have bailout money (which have onerous compensation rules) and those that gave it back (and thus have no rules) will go away, as it should. All banks pose risks to taxpayers, whether they still have bailout money or not. And all banks should have the same set of compensation rules.

There is another potential source of new ideas, though: Mr. Feinberg. A large part of his new job will be to determine the compensation for the most highly paid executives at the seven companies, including General Motors, Citigroup and American International Group, that have received the most government aid. But another part of his task, he told me this week, is to devise a compensation structure for all management ranks of those companies, not just the biggest earners.

Mr. Feinberg is, above all else, a practical man who likes solving problems, and he seemed to relish this latter aspect of his new role. “If this job has any long-term impact,” he said, “maybe we can come up with something that can serve as a model.”

Surely somebody needs to — and soon.

A $1.33 Trillion Drop in Net Worth in First Quarter
NYTIMES
By THE ASSOCIATED PRESS
June 12, 2009

WASHINGTON (AP) — American households lost $1.33 trillion of their wealth in the first three months as the recession took a bite out of stock portfolios and dragged down home prices.

The Federal Reserve reported Thursday that household net worth fell to $50.38 trillion in the January-March quarter, the lowest level since the third quarter of 2004. The first-quarter figure marked a decline of 2.6 percent, or $1.33 trillion, from the final quarter of 2008.

Net worth represents total assets like homes and checking accounts, minus liabilities like mortgages and credit card debt.

The damage to wealth in the first quarter came from the sinking stock market. The value of Americans’ stock holdings dropped 5.8 percent from the final quarter of last year.

Another hit came from falling house prices. The value of household real-estate holdings fell 2.4 percent. Collectively, homeowners had 41.4 percent equity in their homes in the first quarter. That was down from 42.9 percent in the fourth quarter.

The latest snapshot of Americans’ balance sheets was contained in the Fed’s quarterly report called the flow of funds.

Despite the drop, the speed at which net worth shrunk slowed to start the year. During the recession’s deepest point in the October-December period, Americans’ net worth fell 8.6 percent, according to revised figures.

With wealth declining and unemployment rising, there are questions about how consumers — the lifeblood of the economy — will behave in the coming months.

If they continue to spend, even at a subdued pace, the recession probably will end this year as predicted by the Fed chairman, Ben S. Bernanke, and other economists. However, if consumers hunker down and cut spending again, that could delay any recovery. In the fourth quarter, Americans slashed spending at an annualized rate of 4.3 percent, the most in 28 years.

Beyond Outrage, Wall Street Payouts Fuel Connecticut's Economy, Tax Debate
The Hartford Courant
By ZEKE MILLER And ERIC GERSHON
August 2, 2009

Five months after the national flap over AIG, outrage over Wall Street bonuses is back, and this time the stakes in Connecticut — for taxes and for economic health — are much higher.

Nearly 5,000 employees working for the nine large banks that accepted $175 billion in federal bailout money got million-dollar bonuses last year. In all, the banks handed out $32.6 billion in "performance-based" bonuses, New York Attorney General Andrew Cuomo disclosed Thursday in a report.

The payouts renewed angry calls for government controls on bonuses and prompted an immediate vote by the U.S. House for such controls — in a bill that would also give shareholders the right to nonbinding votes on executive pay.

In Connecticut, though, the debate takes on special meaning. It provides fodder for Democrats in the General Assembly as they try to push through a tax increase on the highest wage earners.

And even as the payments offend popular concepts of fairness, the billions in broader Wall Street bonuses are a financial boon to the state — much more than AIG's disputed $218 million paid to employees at a Wilton-based office of the failed insurance giant.

There is no public data showing how much of the nine big banks' bonus money went to Connecticut residents on the Fairfield County Gold Coast and elsewhere. But by all accounts the figure is large, and it boosts the state's coffers as well as its overall wealth.

"At minimum, we are talking $100 million for the state budget from direct income tax, let alone indirect spending by those receiving bonuses," said Peter Gioia, vice president for research at the Connecticut Business and Industry Association. "That may upset some people as taxpayers, but it should put a smile on people who own businesses."

The $100 million estimate assumes that the nine banks paid out about $2 billion of the $36 billion to Connecticut residents, based on the current state tax rate.

Whatever the right number, said Nicholas S. Perna, economic adviser for Webster Bank, "If Mr. Cuomo had been successful in banning all bonuses, the state budget would have been in even greater trouble."

Meanwhile, Democrats at the state Capitol have said for many months that the state should fill its two-year, $8.6 billion budget gap by increasing the tax on high-income residents.

"I think this makes it harder for Republicans to claim that raising taxes by just $20 a week on those making $600,000 a year is excessive," said Senate President Pro Tem Donald E. Williams Jr.

What Is Fair?

As Gioia and Perna point out, the so-called multiplier effect of the bonuses will help the state's economy as a whole, not just the few who got the money, since it will diffuse throughout the entire economy as it is spent.

But economic benefit is one thing and fairness is another.

"There ought to be some proportionality between executive bonuses and the health of the overall economy," said Jon Green, director of Connecticut Working Families. "Instead, Wall Street is content to continue to encourage risky gambling with other people's money. Have we learned nothing from the past year?"

Edward J. Deak, a professor of economics at Fairfield University, said he sees "a culture of 'me first'" at these banks, promoted by federal tax laws, that led to the large bonuses. Current law allows employers to deduct only the first $1 million in salaries for any one person for tax purposes, but leaves a loophole for performance-based pay, or bonuses.

"In this system, performance becomes a subjective standard," Deak said, "one that becomes looser and looser as more people want their share of the growing bonus pool."

The banks and insurance companies subject to federal oversight under the federal bailout program argue that they must be able to pay freely in order to attract and retain talent. Pay expert Paul Hodgson, a senior research associate at The Corporate Library, a private group, takes aim at that notion.

"There has been a glut of bankers on the job market," he said, "and I find it hard to believe that there are top performers looking to leave their jobs if they don't get the same bonus as last year."

Spokesmen for three of the largest banks on the bailout list, Bank of America, JPMorgan Chase and Citigroup, declined to comment for this story. The bonus amounts for 2008 were in line with the amounts paid in the past, said Jonathan Koppell, associate professor of politics and management Yale School of Management.

"I think it's surprising they were not lower considering the performance of the companies," Koppell said.

Fallout In Hartford

With seven-figure payouts to thousands of people, many, including key policymakers, doubt that all those bonuses could really have been earned.

"The government tried to help out the economy, by bailing these companies out, and it is disturbing that they took advantage of taxpayer generosity," said state House Speaker Christopher G. Donovan, D- Meriden. "We obviously need more regulation of the private sector."

Donovan, like Williams in the state Senate, believes Cuomo's report will advance the Democrats' argument for a tax hike on high earners — an increase opposed by most Republicans, including Gov. M. Jodi Rell.

"Gov. Rell believes this type of misuse of taxpayers' dollars is shameful. But this is a federal problem which requires a federal solution," said Rell spokesman Adam Liegeot. "Raising the state's income tax is not the answer. In fact, doing so would kill jobs in Connecticut. Gov. Rell will not allow that to happen."

State Attorney General Richard Blumenthal said his office is considering how it might obtain information about whether the bonuses actually compensate individuals for their performance and whether the recipients kept their jobs last year "by virtue of the government bailouts."

Nonetheless, he said, "We're dealing with the lifeblood of the American economy, so we're not going to simply start throwing grenades or making accusations."

Copyright © 2009, The Hartford Courant

Obama Names Overseer to Set Pay at Rescued Companies
NYTIMES
By STEPHEN LABATON
June 11, 2009

WASHINGTON—The Obama administration on Wednesday appointed a compensation overseer with broad discretion to set the pay for 175 top executives at seven of the nation’s largest companies, which have received hundreds of billions of dollars in federal assistance to survive.

The mandate given to the new compensation official, Kenneth R. Feinberg, a well-known Washington lawyer, reflects the federal government’s increasingly intrusive role in the corporate affairs of deeply troubled companies. From his nondescript office in Room 1310 of the Treasury building, Mr. Feinberg will set the salaries and bonuses of some of the top financiers and industrialists in America, including Kenneth D. Lewis, the chief executive of Bank of America; Vikram S. Pandit, the head of Citigroup, and Fritz Henderson, the chief executive of General Motors.

The compensation of executives at some companies receiving aid provoked a firestorm of political outrage earlier this year. In revising a previous proposal to set pay limits, the administration has decided to take an approach that will leave the success or failure of the effort to curtail high compensation at the assisted companies in the hands of Mr. Feinberg. (Mr. Feinberg himself will not receive any government compensation.)

The announcement by the Treasury secretary, Timothy F. Geithner, was part of broader recommendations on executive pay that will affect all publicly traded companies. Mr. Geithner called on Congress to adopt “say on pay” legislation giving shareholders the ability to hold non-binding votes on compensation levels. While in the Senate, Barack Obama sponsored such legislation, which was opposed by many large companies.

“This financial crisis had many significant causes, but executive compensation practices were a contributing factor. Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage,” Mr. Geithner said. “By outlining these principles now, we begin the process of bringing compensation practices more tightly in line with the interests of shareholders and reinforcing the stability of firms and the financial system.”

Mr. Geithner said the administration would seek legislation to give more authority, and promote more independence, by the committees of corporate boards that set compensation for top executives. The proposal would be similar to a provision in the Sarbanes-Oxley law of 2002 responding to a spate of accounting scandals that gave more authority, and imposed more exacting standards, on audit committees of corporate boards.

The latest plan restricting executive compensation at troubled institutions attempts to walk a fine line between satisfying public demand for controlling excessive pay and not spooking Wall Street, which the administration is hoping to rely on to help buy the troubled mortgage-backed assets at weaker banks.

Mr. Geithner told reporters on Tuesday that financial institutions are still worried about the “political risk” of becoming subject to greater government regulation if they participate in the Public-Private Investment program to buy toxic assets and relieve the balance sheets of the most troubled banks.

Instead of deciding compensation levels himself, Mr. Geithner decided to appoint Mr. Feinberg, a well-known mediator whose last high-profile assignment was putting a financial value on the lives of victims of the 9/11 attack, to decide the pay for the top 25 executives at the American International Group, Citibank, Chrysler, Chrysler Credit, General Motors, GMAC and Bank of America.

For 80 other financial institutions that have received federal assistance, Mr. Feinberg will develop the overall compensation structure, but without setting the exact level of pay. For these 80 companies, the goal is to reduce excessive risk-taking by executives whose compensation is tied to performance. Mr. Feinberg will also determine whether it would be in the public interest to force any executives at companies receiving assistance who might have been overpaid to return some of that pay.

Mr. Feinberg became a nationally known figure after the Bush administration assigned him to help settle possible lawsuits by the families of victims of the terrorist attacks on Sept. 11. His job was to put a value on the lives of the victims and offer government settlements to avoid lawsuits. Mr. Feinberg met with many of the families and spoke around the country about how intellectually challenging and emotionally difficult the assignment became. He often sought refuge by cloistering himself in a room in his home to listen to his extensive opera collection.

Before that assignment, he was appointed by federal district judges to help resolve several difficult product liability lawsuits. He played central roles in resolving cases involving victims of asbestos, Agent Orange and the Dalkon Shield, a birth control device that injured more than 200,000 women. He was also one of three arbitrators who determined the fair market value of the Zapruder film that captured the assassination of President John F. Kennedy, resolving a dispute between the heirs of Abraham Zapruder, who shot the footage, and the government, which acquired the 26-second film.

The announcement is the third attempt by Washington to respond to public outrage over high pay at companies receiving taxpayer assistance. On Feb. 4, the administration announced a proposal to set a $500,000 cap on cash compensation for the most senior executives at troubled companies getting “exceptional assistance,” and restrictions on cashing in on stock incentives.

That plan did little to quell outrage as details of bonuses were disclosed at several major companies receiving federal assistance. Two weeks after the Obama plan was announced, Congress approved a $787 billion economic stimulus bill that included more restrictions on the pay of executives at institutions receiving aid. The provision, inserted by Senator Christopher J. Dodd, the Connecticut Democrat, over the objections of the administration, instructed Treasury to come up with tougher rules for the five most senior officers and the 20 highest-paid employees at the most-troubled companies.

The legislation also barred top executives from receiving bonuses exceeding a third of their annual pay. Moreover, any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the company had repaid the government.

That legislation was the basis for the appointment of Mr. Feinberg.

Mr. Dodd recommended the appointment of Mr. Feinberg to Mr. Geithner last month, a person briefed on that conversation said.

Editorial: Congress, the Banks and Derivatives
NYTIMES
June 7, 2009

The Obama administration has made a serious proposal to regulate derivatives — the multitrillion-dollar market in financial contracts that malfunctioned so disastrously last year. The plan goes further than many thought politically possible, especially in its call for federal oversight of all large derivatives dealers. But it does not go far enough.

Those dealers — including big banks like JPMorgan Chase, Goldman Sachs and Morgan Stanley — trade derivatives mainly as one-to-one private contracts, largely without any regulation. The plan would allow regulators to impose rules on dealers and track their activities and presumably put a timely halt to abuses. But it does not demand the full transparency that would come from trading all derivatives on exchanges, like stocks.

Exchange trading allows the market as a whole — investors, economists, researchers — to see how derivatives are structured, priced and traded. Such knowledge is the best defense against speculative excesses.

The plan would require that derivatives that are deemed “standardized” — off-the-shelf contracts with mostly boilerplate language — be traded through a central clearinghouse or on an exchange. But the plan would also allow for “customized” derivatives — no one knows yet with certainty what the difference would be — to continue to be traded privately.

The danger of perpetuating a freewheeling market in customized derivatives is real. The decision to rope them off looks like a sop to the banks, which have fought against disclosure and transparency. They know that customers who rely on derivatives — including investment funds, major corporations and wealthy individuals — would likely pay less if they could compare prices.

The question now is whether Congress will try to improve the plan. Gretchen Morgenson and Don Van Natta Jr. reported in The Times last week on the banks’ post-meltdown lobbying efforts. Lawmakers are being pressed, and plied with contributions, to favor the lightest regulations and the largest loopholes.

Senator Tom Harkin has introduced legislation that would require exchange trading for derivatives. Representative Collin Peterson has introduced a bill that would tighten the regulation of derivatives’ clearinghouses. He acknowledges that his bill is not as strong as he would like but that Congressional politics left him no choice, telling The Times, “The banks run the place.”

Fed Chief Calls for Plan to Curb Budget Deficits
NYTIMES
By JACK HEALY
June 4, 2009

The Federal Reserve chairman, Ben S. Bernanke, said on Wednesday that the United States needed to develop a plan to restore fiscal balance, even as the government racks up huge budget deficits as it tries to spend its way out of the worst economic crisis since the Great Depression.

In remarks to the House Budget Committee, Mr. Bernanke said that the government must address the immediate problems of a crippling recession that has erased trillions of dollars in household wealth, hobbled people’s stock portfolios and raised unemployment to its highest levels in a generation. Still, he said, the government needed to think about putting its fiscal house back in order.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said in prepared remarks.

The deficit is expected to reach $1.8 trillion this year as the country spends feverishly on financial bailouts, a sweeping stimulus package, lending programs, rescues for the automobile industry and more. Those are the highest budget deficit projections as a share of gross domestic product since World War II.

President Obama has vowed to reduce the budget gap by half by the end of his term, a promise made even as tax revenue is falling and the administration is trying to cobble together a potentially costly overhaul of the health care system. And the country faces trillions more in Social Security and Medicare obligations as baby boomers retire in coming years.

“Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance,” Mr. Bernanke said.

Lately, financial markets have started to quaver on worries about the government’s spending plans, and how they are piling more obligations onto the country’s $11 trillion national debt.

Investors in the bond markets, where the Treasury Department goes to raise money to keep the government running, are getting skeptical about the scale of Washington’s spending. The yields on Treasury notes have risen to their highest points in five months as investors who thronged to the safety of government debt begin to invest their money elsewhere.

“These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings,” Mr. Bernanke said.

But Mr. Bernanke made no mention of whether the Fed would increase its purchases of $300 billion worth of government securities. Such a move could help to push down interest rates on longer-term Treasury notes, but it could raise the prospects for inflation down the road.

The movement away from Treasuries, which rose to record prices at the height of the credit crisis, is a good thing on some levels. It suggests that investors are becoming more confident in riskier investments like stocks and corporate bonds.

But rising interest rates on Treasury notes make it costlier for the government to raise money. And higher yields on government debt can also push up interest rates on mortgages and other loans, making borrowing more expensive for consumers and homeowners.

In his testimony, Mr. Bernanke said that some corners of the once-frozen financial markets were edging toward normal. Major banks deemed in need of additional capital are raising money by issuing billions in common stock and notes, and markets for short-term loans among banks are functioning more smoothly, Mr. Bernanke said.

He noted that some financial institutions are weaning themselves off government-backed loan programs as they seek to pay back the money they took under the $700 billion financial bailout.

“It is encouraging that the private sector’s reliance on the Fed’s programs has declined as market stresses have eased, an outcome that was one of our key objectives when we designed our interventions,” he said.

Mr. Bernanke again cited numerous flickers of stability and growth in the economy and said that the economy’s swift declines were slowing and predicted growth would resume later this year. But he swatted away any hopes of a swift recovery, and said that the economy would probably to heal slowly.

“We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly,” he said in his remarks. “In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.”

New G.M. Plan Gets Support From Key Bondholders
NYTIMES
By MICHAEL J. de la MERCED and MICHELINE MAYNARD
May 29, 2009

A proposal by General Motors to let bondholders receive up to a 25 percent stake if they do not oppose its bankruptcy reorganization — a bigger share than G.M. offered the autoworkers union — has received the support of a group representing many of the company’s largest debtholders.

In a regulatory filing, G.M. also set Saturday afternoon as the deadline for other bondholders to support the plan. The company is expected to seek bankruptcy protection by Monday, the deadline set by the Obama administration.

“Unless a sufficient number of bondholders sign statements backing the plan, the amount of stock and warrants for bondholders would be “substantially reduced or eliminated,” G.M. said in the regulatory filing. A person briefed on the matter said G.M. was seeking support from investors holding about 50 percent of G.M.’s $27 billion in bond debt. The plan already has the support of about 35 percent, according to people briefed on the matter.

In a regulatory filing, G.M. filled in many of the details of how it would look once it completed its reorganization plan, crafted under the eye of the Treasury Department. It said the government, which will provide bankruptcy financing of about $50 billion, initially would hold 72.5 percent of G.M., with the United Automobile Workers union receiving 17.5 percent, and bondholders receiving 10 percent

But the percentages held by the bondholders and the union could conceivably be larger because each are being offered warrants in the new G.M., which would be created in bankruptcy.

Under the terms of the plan, bondholders would initially receive 10 percent. They could then exercise their warrants for an additional 7.5 percent when the new G.M. rises to about $15 billion in value. The second set of warrants for the final 7.5 percent would be exercisable when new G.M. rises to $30 billion in value.

The union would initially receive a 17.5 percent stake to finance a health care trust for its retirees. It has also received warrants to raise that holding to 20 percent — but as Thursday’s filing made clear, those warrants are exercisable only if new G.M.’s value hits $75 billion.

Once the union and bondholders achieve their full stakes, the government’s share would drop to 55 percent.

The hope is to create a new G.M. by late August, people with knowledge of the matter said.

On Thursday, the committee representing holders of about 20 percent of the bonds’ value, said they voted unanimously in favor of the proposal. In a statement, the group said it “believes that when contrasted with the alternative — uncertain and costly bankruptcy court litigation — that it represents the best alternative for bondholders in the current difficult and dire situation.”

Another group of bondholders, representing about 30 percent of G.M.’s debt, is in talks with the Treasury, people with knowledge of the discussions said.

Earlier this week, bondholders overwhelmingly rejected a debt exchange offer that would have swapped their bonds for 10 percent of the company’s equity. Bondholders rejected the initial offer because they were upset that the U.A.W.’s health care trust, to which G.M. owes $20 billion, received a larger stake than the debt holders, who were owed $27 billion.

Under the proposal, bondholders conceivably will outrank the health care trust, once the warrants are exercised. Not only does that soothe any ruffled feelings, but it will create good will with the lenders G.M. will need to tap after it emerges from bankruptcy. On the other hand, the union will hold debt and preferred stock that helps guarantee its health care trust will be financed even if the new company falters.

G.M. and the Treasury are striving to resolve several issues before G.M. files for protection. Last week, G.M. reached a deal with the U.A.W. on contract concessions, while the company announced plans to eliminate brands including Hummer, Saturn, Saab and Pontiac. It also seeks to close dealerships and has announced plans to shut several plants.

Thursday’s announcement came after German and American negotiators in Berlin failed to agree on a crucial bridge loan to sustain Opel and the rest of G.M.’s European operations in the event of a bankruptcy filing, following a marathon negotiating session that stretched till nearly 5 a.m. Thursday.

Neither G.M. nor the Treasury Department are willing to invest significant sums of money in the company’s European operations, which they believe hold little value, people briefed on the matter said. G.M. and Treasury officials believe that the company would not be significantly hurt if Opel were forced into insolvency.

But officials did manage to narrow the field of potential suitors for Opel to two companies — Fiat, the Italian automaker, and Magna, a Canadian auto-parts giant. A Belgian private equity firm as well as a Chinese automaker were knocked out of contention.

Where this recession is reaching...

How Does the Current Crisis Compare to the Great Depression?
By Price Fishback
A Guest Post at the "Freakonomics" blog on the NYTIMES
May 11, 2009

Over the past couple of decades, every time we have experienced a slowdown in the American economy, the media mentioned the possibility that this is the next Great Depression. Maybe this is a natural response to the relative lack of downturns over the past 20 years. After experiencing a downturn once every three to seven years for nearly two centuries, the U.S. economy has been averaging a downturn about once every nine or ten years since the early 1980’s. As declines in the economy have become rarer, perhaps people have become more sensitive to them.

In the 1920’s, Soviet economist Nikolai Kondratiev argued for the existence of 40- to 60-year economic super-cycles. Since the Great Depression ended nearly 70 years ago, maybe we are overdue for the next one.

The events of the last year naturally have stimulated comparisons to the Great Depression. Two years ago, few would have ever guessed that there would be no pure major investment banks left on Wall Street. The banking industry is struggling, as many financial institutions face uncertainty about the values of their assets, particularly financial instruments related to mortgages. The U.S. and most of the rest of the world are in recession. Meanwhile, the stock market has lost roughly 40 percent of its value from the all-time peak it reached in late 2007.

How does this compare to the Great Depression? We won’t know the final outcome of this recession for a while, but I can safely say that the current situation is nowhere near as bad as the situation during the 1930’s. There may be surface similarities on some dimensions, but there are far more differences than there are similarities.

Since the start of the recession in late 2007, the monthly unemployment rate has risen from 4.9 percent to 7.6 percent in January 2009. Before thinking about the Great Depression, realize that unemployment rates have exceeded 7 percent in 139 months since World War II. This includes 32 months between 1974 and 1977, 76 months between 1980 and 1986, and 21 more between 1991 and 1993. The Great Depression was far more disastrous. One year after the stock market crash of 1929, the unemployment rate had risen from 2 percent to 10.8 percent. The next year it was 16.8 percent. Then unemployment rates rose above 20 percent for four straight years!

It does not end there. The unemployment rate exceeded 14 percent for five more years until finally dropping below 10 percent again in 1941. These rates include emergency workers, but these were people who were working for their relief payments at hourly wages that were roughly half the norm on other government projects. We treat people receiving unemployment benefits today as unemployed, and all they are required to do is seek work.

Do I sound like your grandparent talking about walking barefoot and backward several miles through the snow to go to school? There’s more. Real G.D.P. fell during the last two quarters, but real G.D.P. in the fourth quarter of 2008 was almost identical to real G.D.P. in the fourth quarter of 2007. Since World War II, there have been 28 quarters where real G.D.P. was below the same quarter in the prior year. How does this compare with the Great Depression? In 1930, Americans produced 8.6 percent fewer final goods and services than in 1929, in 1931 15 percent less, and in 1932 and 1933 roughly 26 percent less than in 1929. It is hard to conceptualize such a drop in G.D.P.

Consider this: the 1932 and 1933 figures would have been the equivalent of shutting down all production of goods and services west of the Mississippi River. Annual real G.D.P. did not reach its 1929 level again until 1936. We are experiencing pain now, but the problems of the Great Depression were several magnitudes greater.

Goldman Would Use Share Sale to Return Bailout Money
NYTIMES
By LOUISE STORY
April 15, 2009

Six months after accepting a financial lifeline from Washington, a newly profitable Goldman Sachs is pushing to return the billions of taxpayer dollars that it received in an effort to extricate itself from heightened government control. Goldman, which rode out the final, tumultuous months of 2008 with the help of a federal rescue, reported strong quarterly profits on Monday and said that it would seek to raise money in the capital markets to repay the government.

If successful, Goldman would become the first major bank to return funds received under the Troubled Asset Relief Program, or TARP. Such a step would probably enable Goldman — long one of the most lucrative places to work on Wall Street — to free itself from government-imposed restrictions on compensation.

Many analysts welcomed the news as the latest in a series of signs that the financial industry is stabilizing. But others warned of a looming divide between a handful of banks like Goldman, which may be strong enough to return their TARP money, and the many others that are too weak to go without government funds. It is unclear how quickly Goldman, which was also a beneficiary of a separate government rescue of the American International Group, might be allowed to return the $10 billion it accepted last October.

In a conference call Tuesday morning, Goldman’s chief financial officer, David A. Viniar, said Goldman never viewed the taxpayer money as long-term capital.

“We view it as our duty to return the funds as long as we can do it without negatively impacting our financial profile,” Mr. Viniar said.

While Goldman’s latest results bolster its case for untangling itself from TARP, federal regulators are nonetheless concerned about the health of the broader financial industry and the implications such a move might have for other institutions. Goldman is not allowed to return the money without the approval of the Treasury and the Federal Reserve, which both declined to comment on Monday.

“The issue is really, will the government give Goldman special dispensation to get out first?” said Brad Hintz, an analyst at Sanford C. Bernstein. “Goldman can walk the halls of Congress waving a check, but is it in the best interest of the marketplace for them to pay it back?”

Goldman indicated in early February that it would seek to repay the funds, and since then, several other banks have said they would like to do the same. Not all banks, however, are likely to bounce back as quickly as Goldman, despite expectations that other banks will report strong results for the first quarter. Goldman announced profits of $1.66 billion in the quarter or $3.39 a share, marking a strong comeback from a loss in late 2008. Goldman’s profit was propelled by record revenues of $6.56 billion in its fixed income, currency and commodities unit, where mortgage and other credit instruments are traded. Over all, Goldman’s revenues were $9.43 billion, up 13 percent from the first quarter a year ago.

Mr. Viniar said Tuesday morning that the bank was able to generate much of its revenues by trading “plain vanilla” investments. Margins were higher-than usual, he said, in part because of the disappearance of some of Goldman’s former competitors, like Bear Stearns and Lehman Brothers.

“Many of our traditional competitors have retreated from the marketplace,” Mr. Viniar said.

Goldman reported its results a day ahead of schedule, setting a positive tone for a slew of other bank results expected in the coming week. While several small banks have returned TARP money, Goldman so far is alone among large institutions.

Last Tuesday, Lloyd C. Blankfein, Goldman’s chief executive, visited Washington to speak before an industry conference, and to meet with Treasury Secretary Timothy F. Geithner. Though rumors have swirled about Goldman’s payback, it was only last week in that meeting that Mr. Blankfein formally asked to return the money and detailed his plan to raise more private capital. Goldman said on Monday that it would seek to raise $5 billion by selling new common stock and use the proceeds, along with other funds, to repay the government.

The amount Goldman owes will be higher than the $10 billion because of warrants that the government was granted that must be valued by an independent firm. Goldman said in a statement on Monday that returning the TARP money depends on the results of a stress test that federal bank examiners are in the process of evaluating for Goldman and other big banks.

Goldman did not address the bonds that it issued with government backing last fall.

While Goldman reported a strong first quarter, it also reported a loss of $1 billion in the month of December, underscoring how quickly its fortunes can change. That month was reported on its own because Goldman is changing the timing of its fiscal year by a month, to match the calendar year. The loss was in part related to write-downs on high-yield bonds, as well as deterioration in real estate.

Goldman did not detail its reasons for wanting to return the TARP money, but the bank’s chief financial officer, David A. Viniar, addressed the topic at a conference in early February.

“We just think that operating our business without the government capital would be an easier thing to do,” Mr. Viniar said. “We’d be under less scrutiny, and under less pressure. Not that we’d be out of the public eye; we’re still going to be in the public eye.”

Since then, the government added new requirements for companies that accepted taxpayer money, including stronger rules about bonuses. In a speech last week, Mr. Blankfein criticized one of the other new rules, which centered on visas issued by banks for foreign workers. The capital markets have been virtually dead for months, so it is unclear how Goldman’s stock offering will fare. Only two companies — HSBC, the big British bank, and Xstrata, a mining company — have issued more than $5 billion in equity this year, without government backing, according to Dealogic.

Some analysts were skeptical about Goldman’s intention to return the money. “If you look at most of the conditions in place that forced TARP onto the banks, those conditions have not changed,” said Roger Freeman, an analyst with Barclays Capital. Since the end of November, Goldman had reduced the number of its employees by more than 2,000, to 27,898, according to the statement. In the last year, the bank has cut 4,000 jobs.

“Given the difficult market conditions, we are pleased with this quarter’s performance,” Mr. Blankfein said in the release. “Our results reflect the strength and diversity of our client franchise, the resilience of our business model and the dedication and focus of our people.”

Some Banks, Citing Strings, Want to Return Aid
NYTIMES
By STEPHEN LABATON
March 11, 2009

WASHINGTON — The list of demands keeps getting longer.

Financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must slash dividends, cancel employee training and morale-building exercises, and withdraw job offers to foreign citizens.

As public outrage swells over the rapidly growing cost of bailing out financial institutions, the Obama administration and lawmakers are attaching more and more strings to rescue funds.

The conditions are necessary to prevent Wall Street executives from paying lavish bonuses and buying corporate jets, some experts say, but others say the conditions go beyond protecting taxpayers and border on social engineering.

Some bankers say the conditions have become so onerous that they want to return the bailout money. The list includes small banks like the TCF Financial Corporation of Wayzata, Minn., and Iberia Bank of Lafayette, La., as well as giants like Goldman Sachs and Wells Fargo.

They say they plan to return the money as quickly as possible or as soon as regulators set up a process to accept the refunds. On Tuesday, Signature Bank of New York announced that because of new executive pay restrictions in the economic stimulus package, it notified the Treasury that it intended to return the $120 million it had received from the government only three months ago.

Other institutions like Johnson Bank of Racine, Wis., initially expressed interest in seeking bailout funds but have now changed their minds. Bank executives told The Milwaukee Journal Sentinel that one reason they rejected the government money was to avoid any disruption in the bank’s role in the local community, including supporting the zoo or opera company if they chose to.

One of the biggest concerns of the banks is that the program lets Congress and the administration pile on new conditions at any time.

The demands to modify mortgages or forestall evictions are especially onerous, some bank executives and experts say, because they could prompt some institutions to take steps that could lead to greater losses.

“We are taking an approach that wants the banks to help the economy and whether it is ultimately good for a particular bank is secondary,” said L. William Seidman, the former senior regulator during the savings and loan bailout. “Weak banks are being asked to do things that will erode their position.”

A senior Treasury official involved in the bailout effort said the administration was carefully trying not to do anything that could harm the banks and was giving financial incentives to modify mortgages. The official said the restrictions were part of a larger effort to clean up bank balance sheets and assist the economy.

“We’re having to take some very unpleasant actions when the alternatives are so much worse,” said the official, who spoke on condition of not being identified.

But a growing chorus of industry experts are warning that asking weak banks to carry out the government’s economic and social policies could increase the drain on the public purse. These experts say that the financial assistance, while helpful in the short run, could force weak banks to engage in lending practices that will lose even more money, and that the government inevitably will become more heavily involved in dictating how banks do business.

“I honestly believe the people in power pushing this policy see it as a win-win — as something that is good for the banking industry and good for homeowners and others,” said Douglas J. Elliott, a former investment banker who is now an economics fellow at the Brookings Institution. “But there is a slippery slope and there are potentially significant negative consequences.”

Mr. Elliott says that by modifying loans, banks that are already fragile could wind up losing more money.

“What gets us in real trouble,” he said, “is when we try to fudge things and pretend that something is in the direct interest of both the government and the financial institutions when it in fact costs the banks money or increases their risk levels.”

Take Fannie Mae and Freddie Mac, the housing-finance companies that the government now controls. In recent months, they have been told to spend billions of dollars buying bundles of mortgages for which there are no other buyers, and to let homeowners refinance their loans — even if they have no equity.

Such commands are echoes of the 1990s, when Fannie and Freddie tried to balance dueling mandates that required them to make a profit for their shareholders and to serve a public mission of increasing homeownership.

In service of both shareholders and what they asserted was the public good, they borrowed extensively in order to buy and hold mortgages in their own investment portfolios. They purchased billions of dollars in risky subprime mortgages.

As a consequence of having a public mandate, they also had a credit line with the Treasury and their risky business strategies were viewed by the markets as being guaranteed by the government.

To satisfy both mandates, the companies also faced fewer restrictions and were allowed to take on more debt than other financial companies. But when buyers began defaulting and home prices plunged, the companies nearly collapsed and last fall were placed under government conservatorship. Mr. Elliott said that some banks participating in the bailout program are now in the same conflicting position that Fannie Mae and Freddie Mac were in.

He and other experts also worry that, by relying on weak banks to carry out the administration’s or Congress’s policies, officials are not biting the bullet and shutting down weak banks that may be insolvent.

At the height of the savings and loan crisis in the 1980s and 1990s, Congress and regulators adopted new rules known as “prompt corrective action” that required the government to quickly close weak financial institutions if they could not raise money to absorb mounting losses.

The rules were a response to a consensus that keeping weak institutions open longer, under an earlier practice known as forbearance, damaged healthy banks competing with the government-subsidized ones and ultimately destabilized the banking system. By shutting weakened institutions before their losses grew, prompt corrective action was also seen as less costly to taxpayers and the deposit insurance fund.

Administration officials say that some of the banks at issue today are simply too large to be seized by the government, making comparisons to the savings and loan crisis less meaningful.

Moreover, they say, the public outrage over the growing cost of the bailout makes it politically imperative that they exert greater control over the way the money is being spent.

But by keeping weak banks operating, the markets continue to sink and taxpayer costs are mounting, outside experts said. “The current policy is likely to result in weaker banks,” Mr. Seidman said. “And keeping insolvent banks in operation does not benefit the system.”

Some community bankers, whose institutions are stronger than the large money center banks, agree.

C. R. Cloutier, the president of MidSouth Bank of Lafayette, La., and a survivor of the savings and loan debacle, said that his institution received $20 million from the rescue fund because he and his board believed it was patriotic and would help them offer loans during a recession.

But faced with what he says is an unwarranted stigma of participating in the program, as well as the new restrictions on banks taking the money, he is now considering whether to return the money, as other institutions have sought to do.

“Two things you learn in the banking business,” Mr. Cloutier said. “The first is, concentration is bad. We now have 64 percent of deposits in eight institutions. The second rule is, your first loss is your best loss. Get it over with. Don’t pump water in a dead fish.”

Op-Ed Columnist
Obama’s Ball and Chain
NYTIMES
By THOMAS L. FRIEDMAN
March 4, 2009

Two signs of the times: First, a banker friend remarked to me that you know your bank is in trouble when its share price is less than the cost of taking money out of one of its A.T.M.’s.

Second, go to Google and type in these four letters: m-e-r-e. Before you go any further, Google will list the possible things or people you’re searching for, and at the top of that list will be the name “Meredith Whitney.” She comes up before “merengue” and “Meredith Viera.” Who is Meredith Whitney? She is a banking analyst who became famous for declaring last year, long before others, that Citigroup was up to its neck in bad mortgages and would not likely survive in its present form.

Do you know how many people have to be searching for you if all you have to do is put in four letters and your name pops up first? A lot! But I am not surprised. Our banking system is in so much trouble that everyone is searching for the silver-bullet solution — and the person who can describe it. Alas, there is no silver bullet.

I’m worried. We’ve just elected a talented young president with many good instincts about how to propel our country forward, extend health care to more people, make our tax code fairer and launch a green industrial revolution. But do you know what I fear? I fear that his whole first term could be eaten by Citigroup, A.I.G., Bank of America, Merrill Lynch, and the whole housing/subprime credit bubble we inflated these past 20 years.

I hope my fears are exaggerated. But ask yourself this: Why couldn’t former Treasury Secretary Hank Paulson solve this problem? And why does it seem as though his successor, Tim Geithner, won’t even look us in the eye and spell out his strategy? Is it because they don’t get it? No. It is because they know — like Roy Scheider in the movie “Jaws,” when he first saw the great white shark — that “we’re gonna need a bigger boat,” and they’re too afraid to tell us just how big.

This problem is more complicated than anything you can imagine. We are coming off a 20-year credit binge. As a country, too many of us stopped making money by making “stuff” and started making money from money — consumers making money out of rising home prices and using the profits to buy flat-screen TVs from China on their credit cards, and bankers making money by creating complex securities and leverage so more and more consumers could get in on the credit game.

When this huge bubble exploded, it created a crater so deep that we can’t see the bottom — because that hole is the product of two inter-related excesses. Some banks are in trouble because of the subprime mortgage securities they have on their books that are now worth only 20 cents on the dollar because of widespread defaults.

And many other banks — the ones that took on the most leverage like Citigroup and Bank of America — are in trouble because of all the loans on their books that can’t now be repaid, such as auto loans, commercial real estate loans, credit card loans, corporate loans. Most of the big banks have not marked down these loans yet because if they did, they would be insolvent. The subprime toxic securities will take billions to bail out; the loans could take trillions.

Climbing out of such a deep crater is going to be tricky. Any big step we try to take could trigger other problems — the full dimensions of which we don’t understand. We need to create a “bad bank” to buy and hold the toxic mortgage assets or have the government buy the first batch and create a market, but that would likely involve bailing out banks that have behaved very recklessly. It is a price I’d pay to save the system, but even doing that is very complicated. Buying securitized toxic mortgages is not like buying a yacht off the books of a bankrupt savings-and-loan.

Nationalizing Citigroup may sound good on paper, but putting Citigroup into receivership could trigger all kinds of defaults on derivative contracts that it has written. It may be inevitable, but we’d better understand all of Citigroup’s counterparty risks so we don’t inadvertently set off more falling dominos, à la Lehman Brothers.

At the moment, the Obama team seems to prefer a gradual attempt to nurse these sick banks back to health with repeated blood transfusions — $30 billion more to A.I.G. today, another $40 billion to Citigroup tomorrow. And Lord only knows how much Bank of America will need after its weekend fling with Merrill Lynch has left it with Toxic Asset Disease. The Federal Reserve and the Treasury seem to be trying to give these banks enough capital to survive the next two years, as they de-leverage and de-risk their portfolios — and then hope for the best.

If they are right, the president (and the rest of us) will just have a wrenching first year and then be able to gradually put the banking crisis behind him.

For now, though, the banks still threaten to consume the Obama presidency. Indeed, I’m sorry to report that if you just type two letters into Google — “b-a” — the first thing that comes up is not Barack Obama. It’s “Bank of America.” Barack Obama is third

Bernanke: Economy Suffering 'Severe Contraction'
NYTIMES
By THE ASSOCIATED PRESS
Filed at 5:32 p.m. ET
February 24, 2009

WASHINGTON (AP) -- The economy is suffering a ''severe contraction,'' Federal Reserve Chairman Ben Bernanke told Congress on Tuesday. But he planted a glimmer of hope that the recession might end this year if the government managed to prop up the shaky banking system, and Wall Street rallied.

Bernanke said the economy is likely to keep shrinking in the first six months of this year after posting its worst slide in a quarter-century at the end of 2008.

Bernanke said he hoped the recession will end this year, but that there were significant risks to that forecast. Any economic turnaround will hinge on the success of the Fed and the Obama administration in getting credit and financial markets to operate more normally again.

''Only if that is the case, in my view there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,'' Bernanke told the Senate Banking Committee.

That -- along with the Fed chief's remarks that regulators don't intend to nationalize banks -- was enough to buoy Wall Street. The Dow Jones industrials added more than 236 points and the Standard & Poor's 500 index also rose, a day after both hit their lowest levels since 1997.

Among the risks to any recovery are if economic and financial troubles in other countries turn out to be worse than anticipated, which would hurt U.S. exports and further aggravate already fragile financial conditions in the United States.

Another concern is that the Fed and other Washington policymakers won't be able to break a vicious cycle where disappearing jobs, tanking home values and shrinking nest eggs are forcing consumers to cut back sharply, worsening the economy's tailspin. In turn, battered companies lay off more people and cut back in other ways.

''To break that adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets,'' Bernanke said.

In an effort to revive the economy, the Fed has slashed a key interest rate to an all-time low and Obama recently signed a $787 billion stimulus package of increased government spending and tax cuts.

In addition, Treasury Secretary Timothy Geithner has revamped a controversial $700 billion bank bailout program to include steps to partner with the private sector to buy rotten assets held by banks as well as expand government ownership stakes in them -- all with the hopes of freeing up lending. The Obama administration also will spend $75 billion to stem home foreclosures.

Those and other bold steps -- including a soon-to-be-operational program to boost the availability of consumer loans -- for autos, education, credit cards and other things -- should over time provide relief and promote an economic recovery, Bernanke said. That program is ''about to open,'' he told lawmakers, without providing an exact date.

Sen. Christopher Dodd, D-Conn., chairman of the panel, and other senators suggested expanding that program overseen by the Fed and Treasury, to help squeezed local governments. Radical actions by the government since last fall when the financial crisis intensified have relieved some credit and financial strains, Bernanke said.

''Nevertheless, despite these favorable developments, significant stresses persist in many markets,'' he said.

Although Bernanke didn't mention any financial institutions by name, Citigroup Inc. -- the industry's troubled titan -- apparently is in line for additional government help.

Sen. Bob Corker, R-Tenn., worried the government was ''creeping'' toward bank nationalization through a new option announced by the administration Monday. The new plan allows the government to greatly expand its ownership in a bank by converting preferred shares into common shares.

''It is not nationalization,'' Bernanke said.

Looking ahead, Corker was skeptical about the effectiveness of bank-rescue efforts saying he saw a continuation of ''sort of dead-man walking, zombie bank.''

Critics worry the Fed's actions have the potential to put ever-more taxpayers' dollars at risk and encourage ''moral hazard,'' where companies feel more comfortable making high-stakes gambles because the government will rescue them.

The public's anger over the government's bailout efforts is understandable, the Fed chief said. ''A lot of this goes against American values of self reliance and responsibility,'' Bernanke said.

Stress tests on the nation's biggest banks, which regulators will start conducting Wednesday, are designed to give regulators a better idea of how much additional capital and the type needed for banks to lend if the crisis were to grow worse than anticipated, Bernanke said. Regulators will assess banks' capital needs over a two-year horizon.

''The outcome of the stress test is not going to be fail or pass,'' he said, stressing that the goal is to return banks to health -- not take them over.

''We've always worked with banks to make sure that they're healthy and stable, and we're going to work with them. I don't see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize the bank when it just isn't necessary,'' he said.

Separately Tuesday, the Fed issued a guidance letter that said banks need to be careful when they decide to pay dividends to shareholders that could raise ''safety and soundness concerns.''

The new guidance was intended for all banks the Fed regulates but was particularly aimed at banks ''experiencing financial difficulties and/or receiving public funds.'' The letter said the bank holding company should inform the Fed if it is planning to pay a dividend that exceeds earnings for a given quarter or that could effect's the bank's capital position in an adverse way.

All the negative forces have battered consumers and businesses. ''The economy is undergoing a severe contraction,'' Bernanke said.

The nation's unemployment rate is now at 7.6 percent, the highest in more than 16 years, and it will climb higher -- even in the best-case scenario that an economic recovery happens next year. The Fed expects the jobless rate to rise to close to 9 percent this year, and probably remain above normal levels of around 5 percent into 2011. The recession, which started in December 2007, already has killed a net total of 3.6 million jobs.

Fed policymakers think that a ''full recovery'' of the economy is likely to take more than two or three years, Bernanke said.

To brace the economy, many analysts predict the Fed will leave its key rate at record lows through the rest of this year.

Debt burden tests global investments
Washington Times
Patrice Hill
Thursday, January 15, 2009

President-elect Barack Obama will be testing the limits of the global markets' ability to absorb U.S. government debt by piling an $800 billion stimulus plan on top of more than $1 trillion in new obligations already scheduled this year.

Wall Street analysts worry that China, Japan and other nations that readily helped finance U.S. debt in the past won't have the willingness or wherewithal to buy what will amount to three to four times the previous yearly record of Treasury-issued debt of $455 billion. Some analysts predict a calamity such as the failure of a U.S. bond auction, which could drive interest rates sharply higher just as the economy is struggling to recover.

Others are less worried, but evidence is mounting that the debt burden could rise to unmanageable levels. The mere mention by Mr. Obama in a news conference last week that the U.S. could run deficits exceeding $1 trillion for several years sent a shudder through the Treasury bond market, where those deficits must be financed, sending interest rates temporarily higher.

A bond auction failed last week in Germany, which has comparatively little debt to finance, raising concerns about whether the United States faces similar problems on a much larger scale. Wall Street rating agencies Moody's and Standard & Poor's Corp. said they are closely watching the surge in debt and the willingness of foreign investors to finance it.

"Fiscal risk has noticeably increased," said S&P analyst Nikola G. Swann, while "the country's exposure to a change in international investors' willingness to add to their portfolio of U.S. dollar assets grows with each year."

On Thursday, the Senate Budget Committee will hold a hearing on the so-called debt bubble and is expected to ask a panel of economists about the ability of world markets to finance the growing U.S. obligations.

"In a world where you are running a deficit profile of staggering proportions, it all comes down to the confidence of foreign investors," said Alex Jurshevski, a strategist at Recovery Partners who expects the Treasury to borrow as much as $2 trillion more this fiscal year to finance its bank bailout program as well as budget deficits that are burgeoning as a result of the recession and the massive stimulus Mr. Obama is planning.

A flight to safe-haven Treasury bills since the fall has made it easy thus far for the nation to finance its increased debts, but analysts say that trend is abnormal and should not be taken for granted. Moreover, when as much as $2 trillion in new debt in the next year is combined with $4.3 trillion of outstanding debt that is coming due and must be rolled over, Treasury will have to find buyers for $6.3 trillion of debt, Mr. Jurshevski said.

"This is unparalleled," and will test the "entente cordiale" the United States has with China, Japan and other Asian and oil-producing nations that in the past have purchased about half of outstanding U.S. debt in a tacit exchange for U.S. consumers buying their products, Mr. Jurshevski said. The unstated agreement has enabled the U.S. to run gigantic budget and trade deficits with little consequence because the financing has been readily available.

China, the largest holder of U.S. debt, has invested about $1 trillion of its foreign reserves in U.S. bonds, but the yearly addition to its reserves from export earnings is expected to drop to $177 billion this year from a high of $415 billion last year. That leaves the Asian giant with much less money to invest at a time when new U.S. debt is potentially quadrupling. With its economy deteriorating fast, China also has a massive stimulus program as well as social welfare and unemployment programs to finance at home.

Oil-exporting states like Russia and Qatar that were brimming with surplus revenues as oil hit a record high of $147 a barrel in July also have seen their economic fortunes and revenues nose-dive in the past six months as the price of oil fell to as low as $30 per barrel.

As the financial reversal set in during the second half of last year, China, the oil states and other foreign investors started selling off some of their U.S. holdings of Fannie Mae's and other mortgage and corporate bonds, in a move that helped precipitate the September U.S. financial crash. The Treasury temporarily benefited as those investors - along with investors fleeing stricken stock and commodity markets - parked their money in T-bills and other short-term debt instruments that are considered the equivalent of "cash" on Wall Street.

But now that the surplus nations are also in severe economic downturns with critical needs to fund at home, Mr. Jurshevski questions whether they will be able or willing to take on exponentially more U.S. debt - particularly at the near-zero yields that Treasury instruments are offering. He thinks that some attempted auctions of U.S. debt will fail to find buyers, and that will force up interest rates across the board as the Treasury ups the ante to attract investors.

Ian Campbell, an analyst with Breakingviews.com, said the failure of a German 10-year bond auction on Jan. 7 should serve as a warning to the United States and Britain, which also is heaping unprecedented amounts of debt into the markets in an effort to revive its economy and banking system. Germany was unable to find buyers for one-third of its bond issue, even though its budget is close to balance.

"The U.K. and U.S. have deficit-spent, consumed and imported their way into trouble, and now are planning an ill-afforded government spending and tax cut binge to get them out of it," driving their public debt to post-World War II highs well over 8 percent of economic output, Mr. Campbell said. "Are investors ready to take it?"

Moody's Investors Service this week said the difficulty Germany and a few other European governments have had issuing bonds shows that heavy borrowing plans on both sides of the Atlantic will test the limits of the debt markets.

"Issuance of government debt and government-guaranteed debt at all levels of the rating scale is rapidly swelling," said Arnaud Mares, Moody's senior vice president. "The proposition that the highest-rated governments are totally immune to liquidity risk is being put to the test."

After the German auction failure, Moody's suggested that governments may have to offer a mix of more short-term debt versus long-term debt to satisfy investors' appetites for instruments where they can put their money for a few months while they wait out the turmoil in global stock markets. But Mr. Jurshevski said the skewing of fast-rising government debt toward short-term bills that must be rolled over every few months poses dangers in itself.

The only alternative for the U.S. if investors balk at buying Treasury bonds, analysts say, may be for the Federal Reserve to buy the debt - a prospect recently raised by Fed Chairman Ben S. Bernanke. The central bank would finance its purchases of U.S. debt by printing money. But that would scare off foreign investors even more, analysts say, as the flood of dollars into the economy and markets raises the risk of setting off inflation once the economy recovers.

Some economists say that Americans will start saving more and purchasing more of their own bonds, enabling the U.S. to finance its own deficits after depending heavily on foreigners for decades. The paltry U.S. savings rate recently has ticked up from near zero to about 2.8 percent.

Richard Berner, chief economist at Morgan Stanley, said he expects the savings rate to surge to 6 percent this year, but ironically that would occur only as a result of Americans saving a substantial share of the $300 billion tax cut Mr. Obama is planning.

Peter Schiff, president of Euro Pacific Capital, said he expects the Fed to absorb all the debt, creating a big inflation problem for the U.S. in the long run. The mere suggestion by Mr. Bernanke that the Fed will buy U.S. debt has set off a speculative frenzy, with investors snapping up Treasuries and hoping to sell them to the Fed in the future, he said.

Mr. Schiff faulted Mr. Obama for not telling the public of the dangers of so much borrowing, while touting the benefits of the stimulus legislation.

"The truth is that the only way out of this mess is less government, more savings and increased production. Obama's plan will prevent all three," he said. "He intends to force-feed more consumer spending and debt into an economy already suffering from an excess of both."

Op-Ed Contributors
The End of the Financial World as We Know It
NYTIMES
By MICHAEL LEWIS and DAVID EINHORN
January 4, 2009

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.

This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what? Read the two article op-ed here.

AUTHORS:
Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s Poker,” is writing a book about the collapse of Wall Street. David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article.

The Reckoning: By Saying Yes, WaMu Built Empire on Shaky Loans
NYTIMES
By PETER S. GOODMAN and GRETCHEN MORGENSON
December 28, 2008

“We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”

— Kerry K. Killinger, chief executive of Washington Mutual, 2003

SAN DIEGO — As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.

Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer. Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

“I’d lie if I said every piece of documentation was properly signed and dated,” said Mr. Parsons, speaking through wire-reinforced glass at a California prison near here, where he is serving 16 months for theft after his fourth arrest — all involving drugs.

While Mr. Parsons, whose incarceration is not related to his work for WaMu, oversaw a team screening mortgage applications, he was snorting methamphetamine daily, he said.

“In our world, it was tolerated,” said Sherri Zaback, who worked for Mr. Parsons and recalls seeing drug paraphernalia on his desk. “Everybody said, ‘He gets the job done...’ ” Full story here.

Bernanke’s How-To on Rate Increase Lacks a When
NYTIMES
By SEWELL CHAN
February 11, 2010

WASHINGTON — “At some point.” “At the appropriate time.” “When the time comes.”

On Wednesday, the Federal Reserve’s chairman, Ben S. Bernanke, outlined a strategy — but not a timetable — for scaling back the extraordinary measures it began taking in 2007 to prop up the economy as financial markets teetered on collapse.

The Federal Reserve has eased borrowing by lowering short-term interest rates to nearly zero and built up a $2.2 trillion balance sheet by scooping up assets like mortgage-backed securities and vast sums of Treasury bonds and notes.

Eventually, to avoid inflation, both actions will have to be reined in. But Mr. Bernanke, in a 10-page statement, provided few hints as to how long that period will be.

“Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding,” he wrote. “We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.”

However, Mr. Bernanke did provide new details of a major concern: how, as the recovery proceeds, to gradually shrink the balance sheet, which along with a vast array of assets also includes $1.1 trillion that banks are holding with the Fed.

Mr. Bernanke suggested that a new policy tool — the interest rate on excess reserves, which the Fed began paying in October 2008 — would be a vital part of the Fed’s strategy.

Increasing that interest rate, he said, will have the effect of pushing up other short-term interest rates, including the benchmark fed funds rate — the rate at which banks lend to each overnight.

It is even possible, Mr. Bernanke said, that the Fed “could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities,” to communicate its policy stance to the markets. Since 1994, the fed funds rate has been the much-watched centerpiece of statements by the Federal Open Market Committee, the Fed’s crucial policy-making arm.

For days, economists have been trying to forecast what Mr. Bernanke would say about the sequence of steps and the combination of tools the Fed will use to tighten credit. On that subject, Mr. Bernanke offered only hints of his thinking.

“One possible sequence would involve the Federal Reserve continuing to test its tools for draining reserves on a limited basis, in order to further ensure preparedness and to give market participants a period of time to become familiar with their operation,” he wrote. “As the time for the removal of policy accommodation draws near, those operations could be scaled up to drain more significant volumes of reserve balances to provide tighter control over short-term interest rates. The actual firming of policy would then be implemented through an increase in the interest rate paid on reserves.”

But Mr. Bernanke suggested that “if economic and financial developments were to require a more rapid exit from the current highly accommodative policy” — that is, if fears emerge about inflation — the Fed “could increase the interest rate paid on reserves at about the same time it commences significant draining operations.”

Along with raising the interest rate on reserves, Mr. Bernanke discussed three other options for draining reserves. The first involves reverse repurchase agreements, in which the Fed would sell securities from its portfolio with an agreement to repurchase them at a later date.

The second involves term deposits — similar to certificates of deposit — to banks. That would convert part of the banks’ reserves into deposits that could not be used for short-term liquidity needs and would not be counted as reserves.

A third tool involves redeeming or selling securities. That strategy could carry risk, as the Fed’s large portfolio of mortgage-backed securities is helping to prop up the housing market and keep mortgage-interest rates low.

Mr. Bernanke did note that the balance sheet would shrink a bit on its own, over time, as assets like mortgage-backed securities and debt guaranteed by Fannie Mae and Freddie Mac are prepaid or mature. “In the long run, the Federal Reserve anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities,” he wrote.

Mr. Bernanke also reviewed the controversial lending assistance it extended to “help avoid the disorderly failure” of Bear Stearns, which was sold to JPMorgan Chase, and the American International Group, which was bailed out by the government. Mr. Bernanke said that the credit extended under those arrangements totaled about $116 billion, or about 5 percent of the balance sheet.

“These loans were made with great reluctance under extreme conditions and in the absence of an appropriate alternative legal framework,” he said, emphasizing that he did not believe that the loans would result in any losses to taxpayers.

As part of its special lending programs to inject liquidity into the market, the Fed modified its discount window — its traditional program for direct lending to banks — to make terms more generous and to make nonbanks eligible for borrowing. That effort is winding down, and Mr. Bernanke said that “before long, we expect to consider a modest increase in the spread” between the discount rate — the rate at which the Fed directly lends to banks — and the fed funds rate. He emphasized the change “should not be interpreted as signaling any change in the outlook for monetary policy.”

Mr. Benanke’s statement was prepared for a House committee hearing that had been scheduled for Wednesday but was postponed because of snow. Mr. Bernanke decided to release the statement anyway.

Also on Wednesday, the president of the Federal Reserve Bank of Dallas, Richard W. Fisher, said in a speech that Fed officials had been “constantly discussing internally the ways and means to shrink our balance sheet back to historical norms,” trying both to minimize disruptions to the credit market while avoiding inflationary pressures.

Mr. Fisher focused on the federal deficit, saying that the government’s borrowing relied on foreign savings and the instability in countries like Greece. “We cannot count forever on the largess or the misfortune of others to mask our own imbalances here at home — for fiscal profligacy in Washington today hinders our ability to address fiscal challenges tomorrow,” he said.

Mr. Fisher echoed fears expressed by Mr. Bernanke over a proposal in Congress that would subject the central bank’s monetary policy to audits by the Government Accountability Office, a move that the Fed believes would jeopardize its independence.

“As bad as the situation is, I know one thing that would make it worse, and that is if the Congress took the easy way out by turning to the Fed to simply print our legislators’ way out of their misery, devaluing the debt they have incurred through their spendthrift ways,” Mr. Fisher warned.

Greenspan: U.S. recovery "extremely unbalanced"
YAHOO
By David Lawder
Feb. 23, 2010

WASHINGTON (Reuters) – Former Federal Reserve Chairman Alan Greenspan said on Tuesday the U.S. economic recovery was "extremely unbalanced," driven largely by high earners benefiting from recovering stock markets and large corporations.

Small businesses and the jobless are still suffering from the aftermath of a credit crunch that was "by far the greatest financial crisis, globally, ever" -- including the 1930s Great Depression, said Greenspan in an address to a Credit Union National Association conference.

"It's really an extraordinarily unbalanced system because we're dealing with small businesses who are doing badly, small banks in trouble, and of course there is an extraordinarily large proportion of the unemployed in this country who have been out of work for more than six months and many more than a year," said Greenspan, who headed the Fed from 1987 to 2006.

With both housing starts and auto sales "dead in the water," he said he thought it would be difficult to make the case that the economy is poised for a strong rebound.

Greenspan did see signs pointing toward a modest recovery in job creation, saying that staffing levels at U.S. firms, which were deeply cut, remain below what is sustainable in the long run. But unemployment rate could still remain stubbornly high.

"The reason why the unemployment rate is going to be sticky is that as soon as employment starts picking up, a lot of the people who have not been seeking jobs are going to come back into the labor force, and they will keep the official unemployment rate in the 9 percent area, something like that," Greenspan said.

He also said it was important for U.S. policy makers to prevent perceived expectations of inflation that could push up yields on long-term U.S. Treasury securities, which would raise mortgage interest rates and prevent a recovery in the housing market.

The 10-year Treasury yield is the "one statistic that I watch every morning and every afternoon," he said.

Mr. "Irrational Exuberance" himself...
Greenspan says Fed balance sheet an inflation risk
YAHOO
October 2, 2009

WASHINGTON (Reuters) – Former Federal Reserve Chairman Alan Greenspan said on Friday that the Fed risks igniting a burst of inflation if it does not withdraw its extensive support for the economy at the right moment.

"You cannot afford to get behind the curve on reining in this extraordinary amount of liquidity because that will create an enormous inflation down the road," Greenspan said at a forum hosted by The Atlantic magazine, the Aspen Institute and the Newseum.

In its battle against the worst financial crisis in 70 years, the Fed has chopped interest rates to zero and flooded the financial system with hundreds of billions of dollars in the process. In so doing, it has more than doubled the size of its balance sheet to over $2 trillion.

The Fed has said that with high unemployment and a record level of factory idleness, none of the pressures that would ignite inflation is on the horizon. A government report on Friday that showed a weaker-than-expected job market in September is likely to provide additional support for that view.

Greenspan said the economy is "undergoing a disinflationary process," and stressed that the Fed faces no urgent need at the moment to unwind its monetary stimulus.

Still, his comments echo concerns raised by some policymakers who worry that delays in shrinking the Fed's bloated balance sheet will tempt fate and recommend action sooner rather than later.

"It's critically important the Fed's doubling of its balance sheet be reversed," Greenspan said. "If you allow it to sit and fester, it would create a serious problem.

Greenspan chaired the Fed from 1987 until his retirement in 2006. Hailed by many as a sage during his Fed tenure for a long period of prosperity, his legacy has been called into question over the long period of ultra-low interest rates and the Fed's hands-off approach to overseeing the financial industry before the global economic crisis.

NY Labor Union Chief to Chair New York Fed
NYTIMES
By THE ASSOCIATED PRESS
August 24, 2009; Filed at 1:42 p.m. ET

WASHINGTON (AP) -- The Federal Reserve Bank of New York has named a top state labor union official its chairman, the bank announced Monday.

Denis M. Hughes, president of the New York State AFL-CIO, has been deputy chairman since January 2007. He became acting chairman in May after the surprise resignation of Stephen Friedman. News reports had raised questions about Friedman's ties to Goldman Sachs Group Inc.

Hughes, 59, has been a director of the New York Fed since January 2004. The Fed's Board of Governors appointed him chairman for the remainder of this year.

The board also designated Lee Bollinger, president of Columbia University, as vice chairman of the New York Fed for the remainder of 2009. Bollinger, 63, has been a director since January 2007, and was reappointed for a three-year term beginning Jan. 1, 2010.

On Washington: U.S. Budget Is Scrutinized by a Big Creditor
NYTIMES
By DAVID E. SANGER
July 29, 2009

No sooner had President Obama greeted nearly 200 of the bankers, bureaucrats and policymakers who could make or break his economic plans on Monday than they started grilling his economic team with the hardest questions about his economic strategy.

How long are these huge deficits sustainable, they wanted to know. How long do you keep stimulating the economy, and when do you break for the exits? If the dollar nosedives compared other major currencies, what’s the administration’s Plan B?

The questions were mostly asked in Chinese — by a delegation from Beijing that, diplomatic niceties aside, has come to check in on the investment of more than $1.5 trillion that China has made in United States government-issued securities.

“We are concerned about the security of our financial assets,” China’s assistant finance minister, Zhu Guangyao, said with uncharacteristic bluntness during a briefing for reporters covering the “U.S.-China Strategic and Economic Dialogue” on Monday.

It was a comment that underscored how much the global financial crisis has changed the subtle balance of power in meetings of “the G-2,” the shorthand now used to describe sessions between the world’s largest economy and its fastest-rising economic power. Gone, probably forever, are the days when American delegations would show up in Beijing with advice about how the Chinese could become a “responsible stakeholder” in the world — the phrase coined by the Bush administration. The demands that the Chinese let their currency appreciate, clean up their banks or get rid of the subsidies for state-owned enterprises have been toned down.

You do not talk to your biggest creditor that way — especially when you have a record-sized loan application pending.

Throughout the two-day conference, which ends Tuesday, the subtext has been that Mr. Obama must persuade more than just Blue Dog Democrats, moderate Republicans and skeptical economists that he has a plausible long-term plan to bring down a record-breaking federal deficit. He also has to convince the occupants of the Great Hall of the People, whom he needed to show up at this week’s $200 billion Treasury auction, and the many auctions that will follow.

They will show up — but the lingering question for the next few years is how often, and how enthusiastically they will bid.

There is little real danger, despite the periodic warnings from cable-television doomsayers, that the Chinese will sell off their huge holdings in American debt. As one senior Chinese official involved in the country’s investment strategy put it several weeks ago, “As the biggest holder of Treasuries, we would suffer the most from starting a panic.” The euro and the yen do not seem especially attractive — China’s most expensive import is oil, and oil is still priced in dollars.

But domestic pressure is growing on the Chinese government to proceed with care. One of the first big investments by China’s state-run sovereign wealth fund was a $3 billon stake in the Blackstone Group; when it went sour two years ago, the Chinese press printed angry screeds about how the government had gambled and lost the country’s assets.

When Fannie Mae went into freefall last year, Chinese officials were on the phone to the United States Treasury, demanding an explanation about how their investment in the mortgage agency’s bonds would be protected. There were no threats made about the future of Chinese investments in the United States, but the message was clear. Ultimately, China was protected when the Bush administration took over control of the housing lender in September, one of the government’s first steps to try to halt a broader financial implosion.

Now, with the immediate crisis past, China’s questions have taken a different turn. The sessions yesterday — attended by the Treasury secretary, Timothy Geithner; by the chairman of the Federal Reserve, Ben Bernanke; and by the director of the National Economic Council, Lawrence H. Summers — were dominated by questions about how quickly the United States could halt the huge deficit spending.

“I think there were serious questions about what the economic outlook is, what our plans are for withdrawing some of the stimulus — you know, when we think the right time to do that is, to bring our fiscal deficit down to a sustainable level,” the Treasury’s coordinator for China affairs, David Loevinger, said on Monday evening.

The administration, Mr. Loevinger said, brought along Peter Orszag, the budget director, to make the case to the Chinese. He “was very clear — and he was also backed up by Summers on this — that the fiscal stimulus we’ve put in place was necessary and it’s the right thing and it’s designed to extend through 2011, but it’s not sustainable at the current rate and that we’re committed by the end of the Obama administration to bring it down to a sustainable level,” he said.

Even five years ago, it would have been hard to imagine any administration trotting out its budget director to justify fiscal strategy to the Chinese. But as Mr. Obama said, slightly amending a phrase that once was commonly used to describe the United States-Japan relationship, the interchange between the America and China now is as “important as any bilateral relationship in the world.”

Mr. Obama has a big agenda for it — joint action on global warming, on containing North Korea and Iran, on nudging the Chinese away from their neuralgic views of Taiwan and Tibet. So far the Chinese have insisted that they have no plans to use their financial leverage to influence American policy — just as Mr. Obama has said he will not use the government’s role as the majority shareholder in General Motors to dictate what kind of cars the company makes.

Skeptics abound on both pledges. Financial crises can change the balance of power as surely as wars do — but it may be a few years before we know how that power is employed.

SEC Top Examiner Lori Richards to Leave Agency
By REUTERS
Filed at 3:44 p.m. ET
July 8, 2009

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission's top inspector and examiner, Lori Richards, plans to leave the agency August 7, the SEC said on Wednesday.

Richards, director of the compliance inspections and examinations unit since it was created in 1995, leaves after a controversial year in which her division and the SEC enforcement unit were accused of failing to spot Bernard Madoff's $65 billion investment fraud.

The division was created under former Chairman Arthur Levitt and has been criticized for being unable to respond effectively to the changes on Wall Street.

Richards has spent more than two decades at the SEC in various capacities including administrator for the agency's enforcement program in Los Angeles and senior adviser to Levitt.

Richards, who will be taking some time to explore "new opportunities," said she first started talking about leaving in May but wanted to stay to implement changes to her division.

Those changes include improving the tools available to examiners to detect fraud and improving surveillance and risk-based targeting, as well as examiners' training and expertise in fraud detection, among other things.

When asked whether any of the criticism played a part in her decision to leave, Richards said: "Absolutely not."

"I have been focused for 14 years on making the exam program as vigorous as it could possibly be to provide oversight of the securities industry," Richards said in an interview.

The division's associate director and chief counsel John Walsh will serve as its acting director when Richards leaves.

Friedman Resigns as Chairman of New York Fed
NYTIMES
May 7, 2009, 5:57 pm

Stephen Friedman, the chairman of the New York Federal Reserve Board, abruptly resigned on Thursday, days after questions arose about his ties to Goldman Sachs.

Mr. Friedman was chairman of the New York Fed at the same time he was a member of Goldman’s board. He also had a substantial stake in the firm as the Fed was crafting a solution to keep Wall Street banks afloat. Denis M. Hughes, deputy chair of the board, will take over as the interim chairman, the New York Fed said in a statement. (Read Mr. Friedman’s letter after the jump.)

Because the New York Fed approved a request by Goldman to become a bank holding company, the chairman’s involvement in Goldman was a violation of Fed policy, The Wall Street Journal said in an article earlier this week.

The New York Fed asked for a waiver, which, after about two and a half months, the Fed granted, the newspaper said. During that time, Mr. Friedman bought 37,300 more Goldman shares in December, which have since risen $1.7 million in value.

In his resignation letter, Mr. Friedman said his public service on the board was being characterized as “improper” despite his compliance with the rules. “The Federal Reserve System has important work to do and does not need this distraction,” he said.

“With respect to Steve’s purchases of Goldman shares in December of 2008 and January of 2009, which have been the object of some attention lately, it is my view that these purchases did not violate any Federal Reserve statute, rule or policy,” Thomas C. Baxter, the general counsel of the New York Fed, said in a statement. “I enjoyed working with Steve, and will miss his contributions in the boardroom.”

Many voices on these matters

Bernanke’s Exit Dilemma: Does anyone really believe the Fed will contract the money supply as the economy starts to show growth?
The Wall Street Journal
By GEORGE MELLOAN
AUGUST 4, 2009, 12:41 A.M. ET

Federal Reserve Chairman Ben Bernanke assured readers of this page (“The Fed’s Exit Strategy,” July 21) that he has the tools to prevent the huge reserves he’s pumped into the banks from generating an inflation that would abort an economic recovery.

But does the Fed have the guts to use those tools? Will it risk censure from Congress and the Obama administration if it tightens money at the crucial juncture when inflationary omens accompany a reviving economy? Mr. Bernanke signaled the probable choice by writing that “economic conditions are not likely to warrant tighter monetary policy for an extended period.”

The Fed’s past record of judging when and how to use its tools for regulating the money supply is not impressive, particularly in times of economic distress. Its financing of large federal deficits in the mid-1970s sent inflation up to an annual rate approaching 15% before Jimmy Carter repented in October 1979 and installed Paul Volcker at the Fed with orders to kill the monster.

More recently, the Fed’s continued easing of interest rates during the 2003 economic recovery created the credit bubble that collapsed last year with such devastation.

The Fed’s difficulties in getting money policy right stretch back to its creation in 1913. In 1930 it starved the banks, creating a string of failures that worsened the effects of the 1929 stock market crash. In 1937, it starved them again, contributing to a prolongation of the Depression that had been manufactured in Washington by the clumsy taxation and interventionist policies of Herbert Hoover and FDR.

To be sure, the Fed has had its good years. It financed the 20-year period of low-inflation growth and prosperity that began in 1983 when the Reagan tax cuts became fully effective.

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But because of its often self-contradictory double mandate to promote both monetary stability and full employment—plus the rap it has taken from economists like Mr. Bernanke for stinginess in the 1930s—it often overreacts to recessions with excessive generosity. With its federal-funds interest rate target at near zero, the spigots are now wide open. And as Mr. Bernanke promises, they will likely remain that way for an “extended period.”

Quite apart from the question of the Fed’s will, there is another large issue. Mr. Bernanke’s assurances to the contrary, there can be doubts about whether his tools are really adequate to deal with the powerful inflationary pressures the politicians are in the midst of creating in the form of a mountainous and rising federal deficit.

Mr. Bernanke showed that he is well aware of that danger when, in his semiannual report to Congress on July 21, he pleaded with that body to bring the deficit under control. The federal budget deficit is projected at an incredible $1.8 trillion for the fiscal year ending Sept. 30, almost half of proposed federal spending. The Treasury’s financing needs will be even higher than that when you count in the various “investments” the government has made in auto, housing and other dubious ventures.

But the day after he issued that plea, President Barack Obama was pleading with the American people to support his nationalized health plan. This plan would yet add hundreds of billions more to the deficit.

The Fed has been financing a significant part of the government’s profligacy, and it is riding a runaway horse. Even if it has the means to cope with present financing needs, will it be able to do so when, and if, the economy actually recovers and it has to finance both a recovery and a spending-crazed government?

Martin Hutchinson, a former merchant banker who blogs as “Prudent Bear,” wrote in May that the German Weimar Republic was monetizing 50% of government expenditure when it brought on the ruinous hyperinflation that destroyed the mark in the early 1920s. The Fed in May 2009 had monetized 15% of federal expenditures over the preceding six months—well short of the rate that destroyed the German economy, but not negligible.

The Treasury (and Congress) has been depending on the Fed’s massive buying of Treasury bonds to keep the government’s financing costs within reasonable bounds—as weakening international demand puts downward pressure on bond prices and upward pressure on the interest rate the Treasury must pay. The yield on the 10-year Treasury bond is below where it was a few weeks ago but well above early this year when investors world-wide were seeking the safety of U.S. Treasurys. Even massive Fed support hasn’t been enough to prevent slippage in bond prices this year.

The Fed has more than doubled the size of its balance sheet in the last year to over $2 trillion. As of July 30, it held $695 billion in Treasurys, up $216 billion from a year earlier. In addition, it has added nearly half a trillion of mortgage-backed securities it purchased to keep Fannie Mae and Freddie Mac, now wards of the government, afloat.

Adjusted reserve balances of member banks exploded in late 2008, soaring to $950 billion from $100 billion in four months as the Fed has pumped liquidity into the banking system. They peaked at nearly $1 trillion in May. The reserves provide banks with a shield against runs but they also are high-octane fuel for bank lending, which means they can touch off another credit bubble, and the accompanying inflation, when credit demand picks up again.

In his Journal op-ed, Mr. Bernanke listed ways he can keep this monster in check. The Fed can pay interest on the bank reserves it holds. This would lessen the incentive of banks to find private borrowers and keep some reserves out of the credit stream, damping inflation potential. But the net effect would be to add still more liquidity to the system, which would run counter to the longer-term goal of mopping up liquidity.

He said that the Fed could also sell securities to the banks with an agreement to repurchase them, but these “reverse repos” would only mop up liquidity temporarily.

The standard way for the Fed to soak up liquidity, mentioned last on Mr. Bernanke’s list, is to sell Treasurys to the banks. That would draw down bank reserves and reduce their inflationary potential. Under the Basel I international banking rules, Treasurys are zero-risk investments and don’t have to be matched at 8% of their value with additional capital, as does private lending.

With the huge volume of Treasury financing coming down the road, the Fed will have plenty of bonds to sell (it already has, in fact). But the Fed buys Treasurys primarily by creating new money, or in other words by inflating the money supply. Will it have the nerve or even the capacity to “sterilize” inflation by reselling the bonds to soak up bank liquidity? Again, there are those political pressures. Will the Fed’s admittedly bright money managers be able to strike a balance between warding off inflation and leaving the banks with sufficient liquidity to finance an economic recovery?

As to that huge volume of mortgage-backed securities the Fed is now holding, what is to be done with them? They are “toxic,” which is why the Fed bought them as a means of keeping Fannie and Freddie solvent. They are “guaranteed” by Fannie and Freddie, which means they now are guaranteed by the U.S. Treasury. So they are yet another liability to add to all the other liabilities being piled on the Treasury. The Fed already has financed them once; will it have to finance them again when they come up for redemption?

In short, there are very good reasons to doubt that the Fed can cope with the political problems of avoiding inflation. The technical problems don’t look very easy either.

Mr. Melloan is a former deputy editor of the Journal editorial page. His book, “The Great Money Binge,” will be published in November by Simon & Schuster.

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

Cash-Strapped States Turn to Furloughs
NYTIMES
By KATHARINE Q. SEELYE
April 24, 2009

Gay marriages were supposed to start in Iowa this Friday. But because of a crimped state budget, court employees will be on mandatory furlough that day and the courts will be closed. Gay couples cannot start filing for their marriage licenses until Monday.

As they try to cope with gaping budget deficits, at least 15 states from every region — including Alabama and Georgia; California, Washington and Arizona; and New York, New Hampshire and Massachusetts — are in various stages of considering or implementing furloughs.

“This may very well be the most widespread use, or consideration of use, at least since the emergence of the post-World War II economic boom,” Robert Bruno, professor of labor relations at the University of Illinois, Chicago, said of furloughs.

But furloughs can be problematic for states in a way they may not be for a private company, where demand for a product has dropped. Government services remain in even greater demand in a weak economy. Furloughs often mean fewer workers handling a larger load. For instance, there are already signs of disability claims piling up in seven states.

“The word ‘furlough’ sounds nice and fluffy, like, ‘This isn’t painful, we aren’t doing layoffs,’ ” said Hetty Rosenstein, director of the largest state-worker union in New Jersey, where an appeals court last week upheld a plan to make state workers take two furlough days by June 30, the end of the fiscal year, and 12 more in the next fiscal year.

“But,” Ms. Rosenstein added, “furloughs are fundamentally a cut in pay. And furloughs are a cut in service. If you don’t have people working, the work isn’t going to magically get done.”

The longest state furloughs so far appear to be 24 days in Alabama, the same number proposed in Minnesota.

Private companies, too, are increasingly turning to furloughs as they try to ride out the recession; a Watson Wyatt survey released this week found that 17 percent of 141 companies surveyed had imposed furloughs in April, up from 11 percent in February.

But with state and local governments, furloughs can affect critical services like police and fire protection, prison guard duty and hospital care. States and local governments have to select which workers they furlough, which can undermine the idea that furloughs spread the pain equally.

For the most part, it is too soon to judge the impact of furloughs on the delivery of public services, but there are early signs of a ripple effect.

One stark example has been in the Social Security Administration, a program paid for by the federal government but administered by state workers. Officials said earlier this month that in seven states, 2,700 of those workers had been furloughed, further delaying the processing of tens of thousands of disability claims, which already take an average of 488 days to resolve.

In California, services in several counties were already curbed due to layoffs before the state instituted furloughs for the first time in its history in February, when it ordered 90 percent of its 238,000 employees to take off two days of unpaid leave per month.

Now, at the Orange County Social Services Agency, Herman Martinez, an eligibility specialist and president of the local unit of the American Federation of State, County and Municipal Employees, said the agency cannot keep up with applications for public assistance, which have only grown in the economic downturn. “It’s a whole can of worms for us to try to service the most needy and vulnerable clients,” Mr. Martinez said.

In Iowa, furloughs have delayed the start of gay marriages by only one business day but they have also reduced the time that the public has access to the courts. All courts are closed every other Friday through June, which means clerks are falling behind in their case loads. To help them make up for lost time, their offices are closed to the public early on Tuesdays and Thursdays.

“That gives them an opportunity to catch up with paperwork, but it further limits access of the public to the court,” said Steve Davis, a spokesman for the state’s Supreme Court.

Furloughs allow companies and agencies to keep valued employees, are easier and faster to implement than layoffs and are not as demoralizing, analysts say. Workers often accept them because they are presented as the only alternative to layoffs, although some unions resist.

In New Jersey, the state worker unions are angry that they did not have the chance to negotiate the furlough package, which was imposed unilaterally, as it was in California.

“Conditions have gotten so hard that employees who would have been less inclined to accept furloughs have a sense that there’s a permanent economic restructuring going on, something deeper and more lasting, and that means employees have fewer options,” said Mr. Bruno, the labor-relations professor. “The power has shifted to the employer, and employees are more desperate.” While employees often worry that furloughs will not actually prevent layoffs, some have been able to negotiate better job security. In Connecticut, state union leaders have tentatively agreed to unpaid furloughs as part of a package that would guarantee no layoffs for two years. In New York, Gov. David A. Paterson has said that if the state employee unions do not agree to proposed furloughs and pay cuts, he will lay off some 9,000 of the state’s 200,000 workers.

Utah has found an alternative to furloughs. State workers there have been on a mandatory four-day work-week since August as a way to cut energy costs. Salaries have not been cut because offices are open an hour earlier and close an hour later.

“We’re just repacking how we do the 40 hours,” said Jeff Herring, Utah’s executive director of human resources. But he said the move had reduced costs in many ways; overtime payments and absenteeism are down, for example, and online services have been expanded, which has cut the waiting time at places like the Department of Motor Vehicles. Employee morale is up, internal surveys say. But the energy savings has not been as great as anticipated.

President Obama’s stimulus package could eventually relieve some of the pressure on state budgets. But for now, states are relying more on furloughs, though their long-term value is still being assessed.

“Furloughs can save you money and help you avoid layoffs, at least initially,” said Alan Ehrenhalt, editor of Governing magazine. “But employees do lose income, services are disrupted, and it turns out you can’t really close all the things on Friday you thought you could, so the savings aren’t as great. And you’re not solving any long-term problem.”

Democrats Try Trickle-Down Economics: Growing government won't stimulate the real economy.
Wall Street Journal
By KARL ROVE
Feb. 5, 2009

As a presidential candidate, Barack Obama attacked "trickle down economics" as "bankrupt" and an "old, discredited" philosophy that "didn't work." He was wrong. Even worse, though, is that he and congressional Democrats are embracing a Democratic version of trickle-down economics that won't work.

It's embodied in the House-passed "stimulus" bill, H.R. 1, whose deeply flawed assumption is that spending $1 trillion to grow government will trickle down to help people who lost jobs. The Democrats' spending is horribly mismatched with industries that have suffered job loss.

Since December 2007, Americans lost 791,000 jobs in manufacturing, 681,000 jobs in professional and business services, 632,000 jobs in construction, 522,000 jobs in retail, 167,000 jobs in hospitality, and 576,000 jobs in the rest of the service industry. It would be logical for policy makers to focus on job creation in these sectors.

Instead, Democrats want to spend $88 billion to increase the federal share of Medicaid. What American will be hired by a small business, factory, retail shop, hotel, restaurant or service company because of this spending? The answer is very few.

In H.R. 1, there's $41 billion set aside for school districts, $1.5 billion for university research grants, $2 billion for Energy Department labs, and $3 billion for the National Science Foundation. Yet education is one of the few sectors that added jobs last year.

There's also $4 billion for health programs like obesity control and smoking cessation, $2 billion for the National Institutes of Health, $462 million for the Centers for Disease Control, and $900 million for pandemic flu preparations. Health care also added jobs last year.

It is not surprising that the stimulus package is laden with new spending programs. Congressional appropriators, not job creators, wrote H.R. 1. Much of it is spending Democrats couldn't get approved in the normal course of affairs. And it should not shock Americans that Democratic appropriators would funnel tax dollars to the Association of Community Organizations for Reform Now, unions and other liberal special interests. Putting budgets of political allies above the budgets of struggling families is apparently the new Democratic trickle-down economics.

Mr. Obama has only his own lack of engagement and leadership to blame. He outsourced the drafting of the bill to House Appropriations Committee Chairman David Obey through inaction. He refused to get his administration's hands dirty in crafting the legislation by laying out a detailed plan in December. Then saying he looked forward to Congress passing a bill for him to sign on Inauguration Day was an invitation for liberal spenders to roll him. They did.

The package's size is disturbing. The federal government's discretionary, nonsecurity spending was $391 billion in fiscal 2008 and $393 billion was requested for this fiscal year. H.R. 1 contains $317 billion in additional fiscal 2009 discretionary nonsecurity spending. If passed, this 81% increase would be history's largest.

Nor will Democrats treat this additional spending as a one-time expense. They'll simply start next year's budget writing with a new baseline of $712 billion for the federal government's discretionary domestic budget, nearly doubling it in just a year. This is only part of the Democrats' spending damage. In H.R. 1, they also add $308 billion in new "mandatory" spending (for entitlement programs), which would help produce a 25% increase in 2009, the largest increase in mandatory spending in more than three decades.

And later...http://www.nytimes.com/2009/02/04/business/04pay.html?scp=1&sq=limit%20on%20salaries&st=cse
Obama Calls Wall Street Bonuses ‘Shameful’
NYTIMES
By SHERYL GAY STOLBERG
January 30, 2009

WASHINGTON — President Obama fired a warning shot at Wall Street on Thursday, branding bankers “shameful” for giving themselves $18.4 billion in bonuses as the economy was spinning out of control and the government was spending billions to bail out many of the nation’s most prominent financial firms.

Speaking from the Oval Office with Treasury Secretary Timothy F. Geithner by his side, Mr. Obama lashed out at the industry over a report, compiled by the New York State comptroller, Thomas P. DiNapoli, which found that over all, financial executives received the same level of bonuses as they had in 2004, when times were more flush.

It was a pointed and unusual flash of anger — if a premeditated one — from the president, and it suggested that he intended to use his platform to take a hard line against excesses in executive compensation.

“That is the height of irresponsibility,” Mr. Obama said angrily. “It is shameful, and part of what we’re going to need is for folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.

“The American people understand that we’ve got a big hole that we’ve got to dig ourselves out of, but they don’t like the idea that people are digging a bigger hole even as they’re being asked to fill it up,” Mr. Obama said, adding that “there will be time for them to make profits and there will be time for them to make bonuses. Now is not that time.”

News of the report, and Mr. Obama’s remarks, came a day after the president met privately at the White House with business leaders, including Richard D. Parsons, the new chairman of the board of Citigroup. This week, Citigroup, which received an infusion of taxpayer money last year, canceled its plans, at the administration’s urging, to buy a $50 million business jet.

Mr. Obama did not spare the company in his remarks on Thursday, although he did not mention Citi by name. “Secretary Geithner already had to pull back on one institution that had gone forward with a multimillion-dollar plane it purchased at the same time as they are receiving TARP money,” he said, using the acronym for the government’s $700 billion Troubled Assets Relief Program, intended to rescue shaky financial firms. “We shouldn’t have to do that, because they should know better.”

Mr. DiNapoli’s report was compiled based on the annual December-January bonus season, mostly through personal income tax collections. In an interview published on Thursday, he said it was unclear if banks had used taxpayer money for bonuses.

“The issue of transparency is a significant one,” Mr. DiNapoli said in the interview, “and there needs to be an accounting about whether there was any taxpayer money used to pay bonuses or to pay for corporate jets or dividends or anything else.”

Earlier Thursday, the White House press secretary, Robert Gibbs, said Mr. Obama had a one-word reaction to the report: “Outrageous.” He announced in advance that Mr. Obama would put forth his views in person, which he did at the end of a meeting with Mr. Geithner.

Earlier photo, in flusher times, of Rubin and Greenspan...and in 2009, Greenspan and Geithner (pictured at right, replace his photo for Rubin) on evaluation of the situation.

Talking Business...New York and London: Twins in Finance and Folly
NYTIMES
By JOE NOCERA
May 9, 2009

London

I can’t tell you how many times I heard the words “Glass-Steagall” here this week.

“Should we have a new Glass-Steagall?” asked Liam Halligan, the chief economist with Prosperity Capital Management, a London-based asset manager, who also writes a weekly column for The Telegraph. He felt very strongly that the answer was yes.

“We’ll see a Glass-Steagall-like environment,” predicted Michael Spencer, the billionaire founder of ICAP, a large interdealer broker whose headquarters is in the City of London.

“We need to bring back Glass-Steagall,” said Terry Smith, the chief executive of Tullett Prebon, another big interdealer broker.

Every time I heard the phrase, it caught me up short. Glass-Steagall, of course, was an American law passed during the Depression to separate investment banking and commercial banking. It was dismantled 66 years later, in 1999, because it was viewed by the American political establishment, starting with Treasury Secretary Robert Rubin, as an outmoded relic of an earlier age. Glass-Steagall never existed in Britain.

And it wasn’t just Glass-Steagall that kept coming up in conversations here. Londoners were conversant with the ins and outs of the stress tests and President Obama’s recovery plan. They knew that Representative Barney Frank was busy reining in bonuses. They had opinions on how Timothy F. Geithner, the Treasury secretary, was doing. No matter how much I pressed people to talk about how London was dealing with the financial crisis, they kept turning the conversation back to America. What kind of regulations were likely to emerge? Was the American banking system going to shrink? And so on.

All of which served as a useful reminder that, for all the talk in recent years about whether the City of London was “overtaking” Wall Street as the world’s financial capital, they have really become one and the same. All the big financial institutions operate in both places — with surprisingly little distinction between what the London office does and what the United States office does. The financial products unit of the American International Group traded credit-default swaps in both Wilton, Conn., and London, for instance.

Hedge funds are as large a part of the financial world in the City of London as they are on Wall Street. Banks in London chased the same deals, hired the same traders and followed the same business practices as their American competitors. “The right way of thinking about New York and London is that they are Siamese twins,” said Martin Wolf, the economics columnist for The Financial Times. “They were the same institutions doing the same things with the same set of regulations.”

Which is why it is only natural that Londoners would be closely tracking America’s response to the crisis — and thinking about whether old laws like Glass-Steagall should be revived. Because it turns out that, having hitched its wagon to Wall Street more than a decade ago, the City of London cannot afford to untether itself. It simply has too much at stake.

•

I had heard, before coming here, that the mood in London was darker than it is in New York, but I didn’t really find that to be the case. Like us, Londoners are starting to wonder, ever so cautiously, whether the worst is over. People talked about consuming less conspicuously and saving more. Although plenty of financial executives have lost their jobs, I also met a man named Michael Tory, who went down with the ship at Lehman Brothers in London and has now co-founded a new advisory business, Ondra Partners.

“There has been a profound inversion,” he said. “People have lost faith in the large firms, and now any start-up is viewed as lower risk.” Well, maybe. Certainly, he was as optimistic as anyone I’ve met in finance this year. And there was still a lot of deal-making in the air.

Whereas American anger is mostly reserved for the banking industry, the British are primarily angry at their politicians. People are dumbfounded at the risks their banks took, and stunned that some of them have needed huge government bailouts — unlike with us, bank failure is almost completely foreign to their experience.

But they also feel the path to ruin was paved by the country’s regulators. These days, the reputation of the former chancellor of the Exchequer, Gordon Brown, who presided over the bubble when Tony Blair was prime minister, is as tattered as that of Alan Greenspan, the former Federal Reserve chairman. The difference is that Mr. Greenspan is retired — while Mr. Brown is the current prime minister.

“Since 1997, the City has been a metaphor for New Labor,” said Philip Augar, author of “Chasing Alpha,” a book that chronicles the events that led to the financial crisis in London. (Labor took power in 1997.) At the time, he said, the asset management business was struggling, mired in a series of scandals, and there was fear in the City that Mr. Blair’s Labor Party would make things worse. But that didn’t happen.

“Gordon Brown instituted a lot of pro-City policies,” Mr. Augar said. “He cut the capital gains tax. He combined about nine different regulators into the F.S.A.” — the Financial Services Authority — “which adopted something it called ‘proportional regulation.’ ” Mr. Brown himself had a more apt phrase: “light touch regulation,” he called it. In other words, he consciously aligned regulation in Britain with the free-market, deregulatory approach being promoted by Mr. Greenspan and Mr. Rubin.

Mr. Augar says he believes that the regulatory environment helped bring about the “Americanization” of the City of London, and that it was ultimately ruinous. All the big American investment banks raced to London — which they saw as a place to do business not just in Britain but all over the Continent. After the abolition of Glass-Steagall, the commercial banks came roaring in as well.

British banking had for hundreds of years been a safe, even stodgy business — even during the Depression, banks remained relatively healthy. But in their desire to compete with the American invaders, banks like the Royal Bank of Scotland transformed themselves into turbo-charged, high-growth institutions, just like our own. They traded mortgage-backed securities, made unwise loans, did deals for the deal’s sake and not necessarily for the sake of the client, and used credit-default swaps to lower regulatory capital requirements to absurd levels. Finance became the dog instead of the tail.

Needless to say, not everyone agrees with Mr. Augar’s thesis. A number of people pointed, in particular, to the Royal Bank of Scotland, which, in addition to its poor lending, did itself in by buying the Dutch bank giant ABN Amro at the very peak of the market. “Was Royal Bank of Scotland buying ABN an example of the American disease?” asked Alan Gemes, the global head of financial services for the consulting firm Booz & Company. “No. American banks and U.K. banks fell prey to the same problem.”

But I would argue that, even if there weren’t any Americans on the premises, the Royal Bank of Scotland did indeed get caught up in the Americans’ game. The ABN Amro deal sounds to me just like the Bank of America-Merrill Lynch deal. Had the ethos of the City of London not changed so drastically, it would never have made so foolish a deal.

Now, of course, Britain is paying the price. The Royal Bank of Scotland has been partly nationalized, and the government has spent billions of pounds propping up the banking system. The country is drowning in debt. Mr. Brown’s Labor government is running large deficits in an effort to stimulate the economy.

If that, too, sounds like the response of the Obama administration to the financial crisis, it is indeed quite similar. Here’s the big difference. New York is a big city in a big country, and our national banks, as big as they are, are much smaller as a percentage of gross domestic product. London is a big city in a small country, and during the bubble, its banks became truly immense, outsize really, given the size of the country they operated in.

•

Royal Bank of Scotland grew from a regional Scottish bank to the largest bank in the world by assets — some $3.8 trillion. Citigroup’s assets, by comparison, were a “mere” $2.2 trillion — and for that matter, the gross domestic product of all of Britain itself is only $2.1 trillion. The big banks combined probably had five times the asset base of the country’s G.D.P.

So everything the government does in response to the crisis has larger potential consequences — a greater likelihood of inflation down the line, and a far higher level of debt as a percentage of G.D.P. Because the City of London was such an outsize source of tax revenue, the subsequent hit to the tax rolls has been worse. British taxpayers are much more likely to be paying for generations to atone for the sins of light-touch regulation. No wonder Mr. Brown is in so much political trouble.

Which brings me back to Glass-Steagall. In any banking crisis, said Mr. Gemes, the Booz & Company consultant, banks revert to being national institutions rather than international ones. In the United States, the political focus, for instance, is on persuading banks to start lending to American companies. In London, the big British banks have all tempered their once grandiose ambitions, at least for now.

But Glass-Steagall? It is highly unlikely that Britain would ever take such a drastic step. Just a few days ago, Barclays reported profits that were almost entirely attributable to its new investment banking division — the one it bought from the ashes of Lehman Brothers. Besides, although no one will say this out loud, Britain can’t regulate unilaterally anymore — it is simply too dependent on American institutions. Its regulatory response will be to mimic whatever the Obama administration decides to do.

“If regulation is transformed in London it is because of what the U.S. does,” Mr. Wolf said. “The U.S. will say, ‘You are to follow us.’ We now have no regulatory autonomy.”

It’s tough being a Siamese twin.

Rubin Is Stepping Down at Citigroup
NYTIMES
By ERIC DASH
January 10, 2009 - a day ahead

Robert E. Rubin, the former Treasury secretary who is an influential director and senior adviser at Citigroup, will step down after coming under fire for his role in the bank’s current troubles, the bank confirmed Friday.

Since joining Citigroup in 1999 as an adviser to the bank’s senior executives, Mr. Rubin, 70, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has made one misstep after another.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

“This is not a decision that I have come to lightly,” Mr. Rubin said in a statement from the bank. “But as I enter my 70’s and with all that is now in place at Citi, I believe the time has come for me to make these changes.”

Mr. Rubin has moved seamlessly between Wall Street and Washington. After making his millions as a trader and an executive at Goldman Sachs, he joined the Clinton administration.

As chairman of Citigroup’s executive committee, Mr. Rubin was the bank’s resident sage, advising top executives and serving on the board while, he insisted repeatedly, steering clear of daily management issues.

In December, federal regulators approved a radical plan to stabilize Citigroup in an arrangement in which the government could soak up billions of dollars in losses at the struggling bank.

The complex plan calls for the government to back about $306 billion in loans and securities and directly invest about $20 billion in the company. Under that plan, Citigroup agreed to certain executive compensation restrictions, which will be reviewed by regulators.

Once the nation’s largest and mightiest financial company, Citigroup lost 86 percent of its value in the stock market in the last year as the bank confronted a crisis of confidence.

With more than $2 trillion in assets and operations in more than 100 countries, Citigroup is so large and interconnected that its troubles could spill over into other institutions. Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.

Biden Defends Expanded Recovery Plan
NYTIMES
By JACKIE CALMES and BRIAN KNOWLTON
December 22, 2008

WASHINGTON — Vice President-elect Joseph R. Biden Jr. defended on Sunday plans for an expanded economic recovery plan against charges it would unwisely inflate the national deficit, saying bluntly that the incoming administration’s first and most urgent goal was “keeping the economy from absolutely tanking.”

Faced with worsening forecasts for the economy, President-elect Barack Obama is expanding his economic recovery program and will seek to create or save 3 million jobs in the next two years, up from a goal of 2.5 million jobs set just last month, several advisers to Mr. Obama said Saturday.

Mr. Obama and Mr. Biden had spoken during the presidential campaign of a stimulus plan worth perhaps $150 billion to $200 billion. Now, Mr. Biden confirmed: “There’s going to be real significant investment, whether it’s $600 billion, or more or $700 billion. The clear notion is, it’s a number no one thought about a year ago.”

What had changed, he said on ABC’s “This Week,” was that “the economy is in much worse shape than we thought.” He said that economists of all stripes agreed that “the scope of this package has to be bold; it has to be big.”

Yet, even Mr. Obama’s more ambitious goal would not fully offset as many as 4 million jobs that some economists are projecting might be lost in the coming year, according to the information he received from advisers in the past week. That job loss would be double the total this year and could push the nation’s unemployment rate past 9 percent if nothing were done.

The new job target was set after a meeting last Tuesday in which Christina D. Romer, who is Mr. Obama’s choice to lead his Council of Economic Advisers, presented information about previous recessions to establish that the current downturn was likely to be “more severe than anything we’ve experienced in the past half-century,” according to an Obama official familiar with the meeting.

Officials said they were working on a plan big enough to stimulate the economy but not so big to provoke major opposition in Congress. Mr. Obama’s advisers have projected that the multifaceted economic plan would cost $675 billion to $775 billion. It would be the largest stimulus package in memory and would most likely grow as it made its way through Congress, although Mr. Obama has secured Democratic leaders’ agreement to ban spending on pork-barrel projects.

Mr. Biden said, as Mr. Obama has before, that the plan will aim not just to create jobs, but to do so in ways that will benefit the country over the long term. Examples, he said, would be inbuilding a “smart” nationwide electric grid that makes it easier to transmit wind- and solar-generated energy; or in transferring medical data from paper to electronic form, with near-term costs but long-term savings.

For now, the vice president-elect said, the urgent goal was “to stem this bleeding” in jobs; the fast-rising deficit would be dealt with later.

The message from Mr. Obama was that “there was not going to be any spending money for the sake of spending money,” said Lawrence H. Summers, who will be the senior economic adviser in the White House.

Mark Zandi, chief economist of Moody’s Economy.com, who was an adviser to Senator John McCain’s presidential campaign, said, “My advice is, err on the side of too big a package rather than too little.” In an interview, Mr. Zandi, who lately has advised Democratic leaders in Congress, also said he would probably soon raise his own recommendation of a $600 billion stimulus.

Besides new spending, the Obama plan would provide tax relief for low-wage and middle-income workers of roughly $150 billion, Democrats familiar with the proposal said. The government would probably reduce the withholding of income or payroll taxes so that most workers received larger paychecks as soon as possible in 2009, an Obama adviser said.

The sorts of jobs Mr. Obama would propose to create involve construction work on roads, mass transit projects, weatherization of government buildings and installation of information technology in medical facilities, among others.

The outlines for Mr. Obama’s emerging plan, which he is developing in consultation with Congress, including some Republicans, were mostly settled last Tuesday when he met for four hours with economic and policy advisers. Mr. Obama and his family left Saturday for a two-week vacation in Hawaii, his native state, but the advisers will take his guidance — including instructions to be “bolder,” according to one — and complete a draft in time for his return on Jan. 2.

The new Congress convenes on Jan. 6. The House and Senate, with larger Democratic majorities, will work to pass a bill for Mr. Obama to sign shortly after his inauguration, on Jan. 20.

The Obama blueprint covers five main areas of spending and tax breaks: health, education, infrastructure, energy, and support for the poor and the unemployed.

Mr. Summers said the president-elect set short- and long-term themes in choosing the plan’s components: “Creating jobs for people who need them, and doing things that need to be done to lay the foundation for an economy that works for middle-class families.”

At the meeting on Tuesday, Ms. Romer also laid out recommendations from private sector analysts and liberal to conservative economists for a government stimulus that ranged from $800 billion to $1.3 trillion over two years. Those consulted included Martin Feldstein, a conservative economist and longtime Republican presidential adviser, who is at the low end, and Lawrence B. Lindsey, a Federal Reserve governor and Bush administration economist, who has recommended up to $1 trillion.

Even before the election, Mr. Feldstein was publicly arguing that whoever was elected should immediately begin working with Congress on a big spending package. Since then, Mr. Feldstein has also been revising his assessment upward as the economy weakened further. “Without action,” he wrote in an e-mail exchange, “the economy will continue to decline rapidly.”

Many decisions about the details have not been made, or are tentative pending consultations with Congress. Several hundred billion dollars could go to states and cities to finance public works and subsidize their health and education programs so that local governments do not have to raise taxes and cut essential programs, steps that would be counterproductive economically.

The Obama team has a list of $136 billion in infrastructure projects from the National Governors Association that consists mostly of transit construction but also includes port expansions and renewable energy programs. For education, besides money to build and renovate schools, Mr. Obama will call for money to train more teachers, expand early childhood education and provide more college tuition aid.

Federal money to local governments would come with a “use it or lose it” clause under Mr. Obama’s plans, advisers say. The president-elect will also propose to direct some money to public and private partnerships for major projects like a national energy grid intended to harness alternative energy sources such as wind power.

For those “most vulnerable” because of the recession, as the Obama team describes the needy and jobless population, the president-elect will propose expanding the length of unemployment compensation, as well as food aid and additional support.

With millions more Americans losing their health care coverage, either through job losses or because they can no longer afford to pay for insurance, Mr. Obama will propose major new spending to subsidize states’ share of Medicaid and their children’s health programs, and to expand health care coverage for those who lose insurance from their employers.

Mr. Obama plans a down payment on his campaign promise to help pay for hospitals and other medical providers to computerize their health records to save billions in paperwork and administrative costs. He might also propose subsidies to train more nurses, both to create jobs now and address a looming shortage in the health professions.

Mr. Obama has spoken in recent days with the Senate majority leader, Harry Reid, and the House speaker, Nancy Pelosi. Last week, Mr. Reid’s office sent an e-mail message to senators saying that in conversations with the Obama transition team, “we have communicated our willingness to work within these parameters as closely as possible and urge all offices to do the same.”

2007 hearing before Senate Committee - Countrywide second from left.

June 5, 2009
S.E.C. Accuses Countrywide’s Ex-Chief of Fraud
NYTIMES
By THE ASSOCIATED PRESS

WASHINGTON — The government is charging Angelo R. Mozilo, the former chief executive of the mortgage lender Countrywide Financial, and two other company executives with civil fraud. The Securities and Exchange Commission said Thursday afternoon that its case also accused Mr. Mozilo of illegal insider trading. Countrywide was a major player in the subprime mortgage market, the collapse of which in 2007 touched off the financial crisis that has gripped the United States and global economies.

Mr. Mozilo is the highest-profile person to face formal charges from the federal government in the wake of the crisis. Mr. Mozilo has denied any wrongdoing. His lawyer did not immediately return an e-mail message seeking comment Thursday afternoon. Civil fraud charges were also filed against Countrywide’s former chief operating officer, David Sambol, and the former chief financial officer, Eric Sieracki.

Paul Kranhold, a spokesman for Mr. Sambol, declined to comment because he had not seen the charges yet. An e-mail message to Mr. Sieracki’s lawyer, Shirli Fabbri Weiss, was not immediately returned.

The S.E.C. and federal prosecutors have undertaken wide-ranging investigations of companies across the financial services industry, touching on mortgage lenders, the Wall Street investment banks that bundled home mortgages into securities sold to investors and other market players. The S.E.C.’s scrutiny of Mr. Mozilo’s stock sales began in the fall of 2007 with an informal inquiry.

The filing of the agency’s civil lawsuit in federal court in Los Angeles is a striking turn for Mr. Mozilo, the man who 40 years ago co-founded what grew into the nation’s largest mortgage lender. He moved the company in 1969 to suburban Los Angeles from New York, guiding Countrywide through numerous boom-and-bust housing cycles. After the mortgage crisis hit, the Calabasas, Calif.-based Countrywide was forced to cut thousands of jobs and saw its shares plummet. Its downward spiral ended in it being bought by Bank of America last July for about $2.5 billion. Countrywide itself is the target of multiple lawsuits related to the mortgage meltdown.

Mr. Mozilo’s influence stretched from the California real estate market through the corridors of power in Washington.

The Democrats were roiled a year ago by revelations that Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee, and Senator Kent Conrad, the North Dakota Democrat who is chairman of the Budget Committee, obtained mortgages at favorable rates through a V.I.P. program dispensed by Countrywide for so-called "friends of Angelo."

Mr. Dodd insisted that the controversy over the two loans he received did not compromise his ability to lead Congress’s efforts to address the effects of the subprime mortgage meltdown.

Mr. Mozilo sold about $130 million in Countrywide stock in the first half of 2007 through a prearranged 10b5-1 trading plan. These plans, popular among corporate executives, allow a company insider to set up a program in advance for such transactions and proceed with them even if he or she comes into possession of significant nonpublic information.

North Carolina’s state treasurer, who asked the S.E.C. in 2007 to investigate Mr. Mozilo’s stock sales, raised questions about changes made to Mr. Mozilo’s plan in the months before the company’s stock plunged, which allowed Mr. Mozilo to significantly increase his sales of Countrywide shares.

Mr. Mozilo had sold company shares through prior arrangements since 2004; the pace of his sales began to quicken in October 2006 when he put a new plan into effect. Mr. Mozilo has said that he did so to reduce his stake in Countrywide and diversify his personal investments in an orderly fashion before his retirement, which was slated for December 2009.

Inept Handling Of Conflicts Leave Dodd Politically Exposed
DAY
By Morgan McGinley
Published on 12/14/2008

For the first time in his Senate career, Christopher J. Dodd, the senior Democratic senator from Connecticut, is politically vulnerable. In part, that's because both the Senate Ethics Committee and the Public Integrity unit of the Justice Department are looking into mortgage loans he got from Countrywide Financial.

The Justice Department investigation is broader. It seeks details not just of Dodd's loans but also of other loans made under Countrywide's VIP program meant to seek better loan terms for FOAs (Friends Of Angelo, a reference to then-Countrywide company Chairman Angelo Mozillo). NBC news has reported that the program made mortgage loans to a variety of politically powerful Washington insiders over a number of years.

Dodd, who is cooperating with the Senate investigation, says he got market interest rates from Countrywide that were available from other mortgage companies, that he did not know he was getting any special treatment and has not met Mozillo . He was just remortgaging because industry-wide rates had fallen, he says. But the pertinent question for Dodd, the Senate banking committee chairman and longtime member, is why in the world he would go for a loan to one of the largest brokers in the country, a firm selling mortgages to Fannie Mae and Freddie Mac, businesses that come under the scrutiny of Dodd's committee?

Why didn't Dodd go to The Savings Institute in his hometown of Willimantic, or either of the local banks in Norwich, where he started his political career, or even smaller shoreline banks whose business is not directly subject to the powerful role of his Senate committee?

And now that he is the subject of an ethics probe, why doesn't Connecticut's senior senator make available to the public and the media all the documents relating to his loans from Countrywide? His excuse - that he is awaiting completion of the Senate Ethics Committee probe - is a lame one that damages him politically. Dodd's handling of the matter has involved bad political judgment. The senator uncharacteristically displays a political tin ear on this issue and he is paying dearly for his handling of the matter.

First, he denied that he had sought or knew he was getting any favorable treatment. A week later, he said he knew he was part of Countrywide's VIP program, but said he thought the arrangement was “more of a courtesy.”

But Robert Feinberg, a former loan officer for Countrywide in charge of the company's VIP program, told The Wall Street Journal that he spoke directly to Dodd and to his wife, indicatating to them that they were getting a special deal because they were “Friends of Angelo.” Feinberg said Dodd and his wife got a “float down.” This means that even after allegedly getting a premium rate, the rate was reduced again without any additional charge because rates had fallen between the time of the negotiation and the closing.

Dodd has denied that he and his wife had spoken with Feinberg about special treatment on the re-mortgaging.

Approval ratings sink

Dodd, for many years the state's most popular politician, saw his approval rating fall to 51 percent in a Quinnipiac Poll last July. This is the lowest rating ever for Dodd. Further, 59 percent of those polled said Dodd's loans from Countrywide deserve more investigation.

Connecticut Democrats say they have fielded a lot of questions from the public about Dodd's housing loans. Dodd's political exposure is all the more visible because he has been in the middle of the congressional group negotiating the bailouts for Wall Street and the rescue plan for Detroit's automakers. Dodd's efforts to try to get relief for average Americans on mortgages that were punitive was a welcomed act, one that failed because of a lack of support from the Bush administration.

And Dodd may be right on another count, the possible loss of much of the United States' industrial base if Congress fails to help the automobile companies. But regardless of the conclusions reached by the ethics committee or the Justice Department, any political opponent is certain to resurrect the question of the loans. The other thing hurting Dodd is that he has received about $13 million in campaign contributions from financial organizations over the length of his Senate career, including $6 million in the past several years.

These contributions are legal under the federal rules for campaign donations, but they could be politically damaging because the public asks: what is the Senate banking committee chairman doing getting all this money from financial institutions? The public gets it: the campaign contribution system involves an inherent conflict of interest between an elected official's duties and the taking of money from businesses the politician is regulating.

Eighteen of Dodd's top 20 contributors have been financial institutions. Dodd himself, questioned by The Hartford Courant about this potential conflict of interest, said:

”It's an ugly system and I hate it. I never have, nor would I ever let a campaign contribution affect what I care about. What I champion, how I vote, how I hold hearings. Ever!”

The investigations now going on may entirely clear Dodd, whose Senate record has been free of any similar controversy. But what will remain are his poor judgment regarding loans from Countrywide and his willingness to take huge amounts of money from an industry his committee regulates.

Tribune Files for Bankruptcy
NYTIMES
December 8, 2008, 1:55 pm

The Tribune Company filed for bankruptcy protection in a federal court in Delaware on Monday, as the owner of The Los Angeles Times, The Chicago Tribune and the Chicago Cubs baseball team struggled to cope with rising debt and falling ad revenue.

Tribune, which was acquired last year by billionaire real estate investor Samuel Zell, had hired bankruptcy advisers like Lazard and the law firm Sidley Austin in recent weeks as it negotiated with creditors over debt covenants. (Read the bankruptcy petition here.)

It is only the latest — and biggest — sign of duress for the newspaper industry yet. Several newspaper companies have struggled to cope with declining revenues and mounting debt woes. Tribune has pared back the newsrooms of many of its papers, and it sold off Newsday to Cablevision’s Dolan family earlier this year. It is unclear what Tribune’s filing means for other newspaper publishers on the brink.

In a court filing, Tribune said it had nearly $13 billion in debt, compared to $7.6 billion in assets. Most of that debt was taken on when Mr. Zell acquired the company — a deal he struck using mostly borrowed money. All of the now privately held company’s equity is owned by an employee stock-ownership plan.

Tribune has sought to ameliorate its woes by selling off assets like the Chicago Cubs, but the company still faces a looming debt crunch.

While Tribune must contend with hefty interest payments over the next year, its most pressing problem was a maintenance covenant on some of its debt that limits the company’s borrowings to no more than nine times earnings before interest, depreciation and amortization.

Even if the company continues to make interest payments, failure to maintain that level of debt means technical default — which does not always lead to a bankruptcy filing, though in Tribune it apparently did. Other newspaper publishers have halted making interest payments on their debt, but have yet to file.

The top creditors listed by Tribune in its court filing include big banks like JPMorgan Chase, Merrill Lynch and Deutsche Bank. JPMorgan listed some of the firms it had syndicated its debt to as well; that list comprises private investment firms like Kohlberg Kravis Roberts’s KKR Financial, Highland Capital Management and Davidson Kempner Capital Management.

A CreditSights analyst, Jake Newman, wrote in a research report published last month that Tribune avoided technical default in the third quarter partially through some accounting adjustments. “We think the company will have difficulty meetings its year-end covenant compliance,” Mr. Newman wrote.

Tribune hired Lazard several weeks ago to assess its options, these people said. It also hired Sidley, a longtime outside adviser to Tribune that has a well-respected bankruptcy practice as well.

In its filing Monday, Tribune also said that it has retained Alvarez & Marsal, a restructuring adviser, as a consultant. Alvarez & Marsal is also advising Lehman Brothers, the collapsed investment bank whose filing was the largest corporate bankruptcy in American history.

Tribune’s problems have long been reflected in the price of its bonds. Tribune bonds maturing Aug. 15, 2010 with a 4.88 percent coupon traded at $13.25 on Friday, suggesting severe levels of distress.

–Michael J. de la Merced

The Employment Crash
NYTIMES Editorial
December 7, 2008

The headline numbers in the employment report for November were worse than dreadful — and they did not reflect the true extent of the weak and worsening outlook for American jobs.

Employers axed 533,000 jobs last month, the worst monthly loss since December 1974, bringing the number of lost jobs in the last year to 1.9 million. Worse, two-thirds of the losses were in the past three months, a sign of an intensifying downturn and of more job cuts ahead.

The unemployment rate for November — which rose to 6.7 percent, or 10.3 million people — also understates the weakness in the job market.

Job loss in a recession is related to the number of jobs created while the economy was expanding. Job creation during the Bush-era business cycle was the weakest since the end of World War II, so there are simply not as many workers to lay off as in past downturns. Instead, workers’ hours have been cut, sharply increasing the number of people working part time who want full-time jobs. Involuntary part-timers and out-of-work people who are discouraged from job hunting because their prospects are dim are measured in the underemployment rate, which at 12.5 percent is now the highest since the government started keeping track in 1994.

Joblessness and the threat of joblessness will depress already dismal consumer spending, which in turn will depress business investment, leading to higher unemployment. Rising unemployment will also fuel more foreclosures, which will further destabilize the financial system and reinforce economic weakness.

One in 10 borrowers in America were either delinquent or in foreclosure in the third quarter, according to the Mortgage Bankers Association, a stunning tally that does not even reflect the drag of rising unemployment in October and November. Unemployment among 25- to 34-year-olds, which includes most first-time homebuyers, is rising fast. Yet, rather than attack foreclosures directly, the Bush administration’s latest economic rescue proposal is to try to spur home buying by reducing mortgage rates. Good luck.

The political reality is that any serious response to unemployment and foreclosures will probably not occur until the Obama administration takes over. Members of Congress should be working now on another round of economic stimulus, consisting of bolstered unemployment compensation and food stamps and aid to states and localities, including money for creating jobs by rebuilding the nation’s infrastructure. An anti-foreclosure plan to rework troubled mortgages en masse is long overdue and should also be passed, either as part of the stimulus or as a stand-alone measure.

Beyond stimulus, President-elect Barack Obama will need a larger recovery plan that puts employment, rising wages and savings at the center of the agenda. The selection of a strong labor secretary, whose input will be as valued as that of Mr. Obama’s Wall-Street-oriented economic advisers, is crucial. The work force needs a champion who has the president’s full attention.

Consumers saving up for Xmas?
Consumers Unexpectedly Trimmed Borrowing in Oct.
By THE ASSOCIATED PRESS
Filed at 3:01 p.m. ET
December 5, 2008

WASHINGTON (AP) -- U.S. consumers unexpectedly cut back on their borrowing in October as the economy sunk deeper into recession.

The Federal Reserve says consumer credit fell at an annual rate of 1.6 percent in October. That compares with a 3.1 percent growth rate logged in September, and marks the deepest cutback since August.

Economists expected consumers to boost their borrowing by around $2 billion in October from the previous month. Instead, consumer debt dropped by $3.5 billion to $2.58 trillion.

The Fed's measure of consumer borrowing does not include any debt secured by real estate, such as mortgage or home equity loans.

Click above for side comment, then below for our expanation of why the world is worried - who's going to buy their STUFF if the US consumer can't or won't?

A Shopping Guernica Captures the Moment
NYTIMES
By PETER S. GOODMAN
November 30, 2008

From the Great Depression, we remember the bread lines. From the oil shocks of the 1970s, we recall lines of cars snaking from gas stations. And from our current moment, we may come to remember scenes like the one at a Long Island Wal-Mart in the dawn after Thanksgiving, when 2,000 frantic shoppers trampled to death an employee who stood between them and the bargains within.

It was a tragedy, yet it did not feel like an accident. All those people were there, lined up in the cold and darkness, because of sophisticated marketing forces that have produced this day now called Black Friday. They were engaging in early-morning shopping as contact sport. American business has long excelled at creating a sense of shortage amid abundance, an anxiety that one must act now or miss out.

This year, that anxiety comes with special intensity for everyone involved — for shoppers, fully cognizant of the immense strains on the economy, which has made bargains more crucial than ever; for the stores, now grappling with what could be among the weakest holiday seasons on record; and for policy makers around the planet, grappling with how to substitute for the suddenly beleaguered American consumer, whose proclivities for new gadgets and clothing has long been the engine of economic growth from Guangzhou to Guatemala City.

For decades, Americans have been effectively programmed to shop. China, Japan and other foreign powers have provided the wherewithal to purchase their goods by buying staggering quantities of American debt. Financial institutions have scattered credit card offers as if they were takeout menus and turned our houses into A.T.M.’s. Hollywood and Madison Avenue have excelled at persuading us that the holiday season is a time to spend lavishly or risk being found insufficiently appreciative of our loved ones.

After 9/11, President Bush dispatched Americans to the malls as a patriotic act. When the economy faltered early this year, the government gave out tax rebate checks and told people to spend. In a sense, those Chinese-made flat-screen televisions sitting inside Wal-Mart have become American comfort food.

And yet the ability to spend is constricting rapidly. Credit card limits are getting cut. Millions of Americans now owe the bank more than the value of their homes, making further borrowing impossible. The banks themselves are hunkered down, just hoping to survive.

Live within our means and save: This new commandment has entered the conversation, colliding with the deeply embedded imperative to spend. And yet much of the distress is less the product of extravagance than the result of the fact that in many households the means are nowhere near enough for traditional middle-class lives.

Wages for most Americans have fallen in real terms over the last eight years. Pensions have been turned into 401(k) plans that have just relinquished half their value to an angry market. Health benefits have been downgraded or eliminated altogether. Working hours are being slashed, and full-time workers are having to settle for jobs through temp agencies.

Indeed, this was the situation for the unfortunate man who found himself working at the Valley Stream Wal-Mart at 5 a.m. Friday, a temp at a company emblematic of low wages and weak benefits, earning his dollars by trying to police an unruly crowd worried about missing out.

In a sense, the American economy has become a kind of piñata — lots of treats in there, but no guarantee that you will get any, making people prone to frenzy and sending some home bruised.

It seemed fitting then, in a tragic way, that the holiday season began with violence fueled by desperation; with a mob making a frantic reach for things they wanted badly, knowing they might go home empty-handed.

All Fall Down
NYTIMES
By THOMAS L. FRIEDMAN
November 26, 2008

I spent Sunday afternoon brooding over a great piece of Times reporting by Eric Dash and Julie Creswell about Citigroup. Maybe brooding isn’t the right word. The front-page article, entitled “Citigroup Pays for a Rush to Risk,” actually left me totally disgusted.

Why? Because in searing detail it exposed — using Citigroup as Exhibit A — how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.

So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made a fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.

Citigroup was involved in, and made money from, almost every link in that chain. And the bank’s executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank’s risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.

These are the people whom taxpayers bailed out on Monday to the tune of what could be more than $300 billion. We probably had no choice. Just letting Citigroup melt down could have been catastrophic. But when the government throws together a bailout that could end up being hundreds of billions of dollars in 48 hours, you can bet there will be unintended consequences — many, many, many.

Also check out Michael Lewis’s superb essay, “The End of Wall Street’s Boom,” on Portfolio.com. Lewis, who first chronicled Wall Street’s excesses in “Liar’s Poker,” profiles some of the decent people on Wall Street who tried to expose the credit binge — including Meredith Whitney, a little known banking analyst who declared, over a year ago, that “Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust,” wrote Lewis.

“This woman wasn’t saying that Wall Street bankers were corrupt,” he added. “She was saying they were stupid. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale... For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.”

Lewis also tracked down Steve Eisman, the hedge fund investor who early on saw through the subprime mortgages and shorted the companies engaged in them, like Long Beach Financial, owned by Washington Mutual.

“Long Beach Financial,” wrote Lewis, “was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, Calif., a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.”

Lewis continued: Eisman knew that subprime lenders could be disreputable. “What he underestimated was the total unabashed complicity of the upper class of American capitalism... ‘We always asked the same question,’ says Eisman. ‘Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.’ He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S.& P. couldn’t say; its model for home prices had no ability to accept a negative number. ‘They were just assuming home prices would keep going up,’ Eisman says.”

That’s how we got here — a near total breakdown of responsibility at every link in our financial chain, and now we either bail out the people who brought us here or risk a total systemic crash. These are the wages of our sins. I used to say our kids will pay dearly for this. But actually, it’s our problem. For the next few years we’re all going to be working harder for less money and fewer government services — if we’re lucky.

Economy Faces ‘Significant Weakness,’ Fed Says
NYTIMES
By THE ASSOCIATED PRESS
November 20, 2008

WASHINGTON (AP) — The Federal Reserve on Wednesday sharply lowered its projection for economic activity this year and next, and signaled that additional interest rate reductions may be needed to help combat the worst financial crisis in more than a half-century.

With the economy forecast to lose traction, or even jolt into reverse, unemployment will move higher, the Fed predicted.

Facing the likelihood of “significant weakness” in the economy, some Fed officials suggested “additional policy easing could well be appropriate at future meetings,” according to documents from the Fed’s most recent deliberations on interest rate policy at the end of October.

At that Oct. 29 session, the Fed lowered rates to 1 percent, a level seen only once before in the last half-century. Many economists predict the Fed will lower rates again at its last meeting of the year on Dec. 16, to help brace the sinking economy.

Even while hinting that another rate reduction could be forthcoming, Fed officials worried that the effectiveness of previous rate cuts “may have been diminished by the financial dislocations, suggesting that further policy action might have limited efficacy in promoting a recovery in economic growth,” the documents said.

To help ease financial turmoil and spur banks to lend money more freely again to customers, the Fed has taken a series of other unprecedented steps, including offering short-term cash loans and buying mounds of short-term debt that companies rely on to pay day-to-day expenses like payrolls and supplies.

Under its new economic forecast, the Fed now believes gross domestic product could be flat or grow by 0.3 percent this year. G.D.P. could actually shrink or expand by 1.1 percent next year. Both sets of projections are lower than the Fed’s forecasts delivered to Congress in July.

G.D.P. is the value of all goods and services produced within the United States and is the best measure of the country’s economic health.

These forecasts are based on what the Fed calls its “central tendencies,” which exclude the highest three forecasts and the lowest three forecasts made by Fed officials. The Fed also gives a range of all forecasts that showed some Fed officials projecting a 0.3 percent dip this year, followed by a deeper 1 percent contraction next year.

The prospects for weaker economic activity will push up unemployment. The Fed projected that the national unemployment rate will rise to 6.3 percent to 6.5 percent this year. The rate in October was 6.5 percent, and last year the rate averaged 4.6 percent.

Next year, the Fed expects the jobless rate to climb to be 7.1 percent to 7.6 percent — also higher than its summer forecast.

Inflation, meanwhile, is expected to be lower this year and next compared with the Fed’s previous forecast. A global economic slowdown is sapping demand for energy, food and other commodities, driving down prices and reducing inflation risks.

Lawmakers Told More Is Needed to Aid Economy
By BRIAN KNOWLTON and JOHN H. CUSHMAN Jr.
November 19, 2008

Top financial officials warned Congress on Tuesday that the economy continued to need urgent attention, with the credit markets remaining tight, millions of homeowners sliding toward foreclosure and the government’s relief payments unlikely to flow into the markets for a few more months.

Ben S. Bernanke, chairman of the Federal Reserve, described signs of only modest improvement in the credit markets, warning that “overall, credit conditions are still far from normal, with risk spreads remaining very elevated.”

And, in a statement prepared for a hearing Tuesday morning before the House Committee on Financial Services, he strongly urged banks to improve the flow of loans to their most creditworthy borrowers.

“There are some signs that credit markets, while still quite strained, are improving,” Mr. Bernanke said. He pointed to some technical improvements: banks were charging one another less for short-term lending; money market mutual funds and the commercial paper market were stabilizing.

But now that banks’ access to capital had improved, he said, they must ease their grip on lending. “It is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met in a manner consistent with safety and soundness,” Mr. Bernanke said.

At the same hearing, Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, said she planned to continue her campaign to get relief into the hands of troubled homeowners.

She said a program that her agency had proposed to the Treasury Department would modify mortgages and ease repayment terms, which could prevent “as many as 1.5 million avoidable foreclosures by the end of 2009.”

But, in her statement, she also projected a gloomy picture for foreclosures, saying that over the next two years, four million to five million mortgage loans will enter foreclosure if nothing is done.

That means that even with the approach she advocates, delinquencies would continue at about the same rate as in the last year or two.

Appearing along with Ms. Bair and Mr. Bernanke, Treasury Secretary Henry M. Paulson Jr. said in his prepared testimony that the Bush administration decided this week to defer reaching much more deeply into the $700 billion in bailout funds approved by Congress in October until the next administration takes over Jan. 20.

“If we have learned anything throughout this year,” Mr. Paulson said, “we have learned that this financial crisis is unpredictable and difficult to counteract.”

Having spent most of the money provided by Congress, which split the October package into two equal parts and told the Treasury to come back for renewed permission to spend the second half, Mr. Paulson said it would be “only prudent” to reserve the remainder until next year, in the interest of maintaining “not only our flexibility but that of the next administration.

Some lawmakers have suggested that some money might be diverted to the auto industry, an idea that Mr. Paulson has not supported.

Bailout to Nowhere
NYTIMES
By DAVID BROOKS
Published: November 14, 2008

Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity.

But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be.

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. It crosses a line, a bright line. It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations. A Detroit bailout would set a precedent for every single politically connected corporation in America. There already is a long line of lobbyists bidding for federal money. If Detroit gets money, then everyone would have a case. After all, are the employees of Circuit City or the newspaper industry inferior to the employees of Chrysler?

It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state...full article here.

U.S. jobless rate soars again
CT POST
By ASSOCIATED PRESS
Article Last Updated: 11/07/2008 08:48:38 AM EST

WASHINGTON - The nation's unemployment rate bolted to a 14-year high of 6.5 percent in October as another 240,000 jobs were cut, the government reported this morning. It was stark proof the economy is almost certainly in a recession.

The new snapshot, released by the Labor Department, shows the crucial jobs market deteriorating at an alarmingly rapid pace.

The jobless rate zoomed to 6.5 percent in October from 6.1 percent in September, matching the unemployment rate in March 1994. Employers have cut jobs each month this year.

Unemployment has now surpassed the high seen after the last recession in 2001. The jobless rate peaked at 6.3 percent in June 2003.

Employers got rid of 240,000 jobs in October, marking the 10th straight month of payroll reductions.

Job losses in August and September turned out to be much deeper. Employers cut 127,000 positions in August, compared with 73,000 previously reported. A whopping 284,000 jobs were axed last month, compared with the 159,000 jobs first reported.

So far this year, a staggering 1.2 million jobs have disappeared.

But Have We Learned Enough?
NYTIMES
By N. GREGORY MANKIW
Published: October 25, 2008

LIKE most economists, those at the International Monetary Fund are lowering their growth forecasts. The financial turmoil gripping Wall Street will probably spill over onto every other street in America. Most likely, current job losses are only the tip of an ugly iceberg.

But when Olivier Blanchard, the I.M.F.’s chief economist, was asked about the possibility of the world sinking into another Great Depression, he reassuringly replied that the chance was “nearly nil.” He added, “We’ve learned a few things in 80 years.”

Yes, we have. But have we learned what caused the Depression of the 1930s? Most important, have we learned enough to avoid doing the same thing again?

The Depression began, to a large extent, as a garden-variety downturn. The 1920s were a boom decade, and as it came to a close the Federal Reserve tried to rein in what might have been called the irrational exuberance of the era.

In 1928, the Fed maneuvered to drive up interest rates. So interest-sensitive sectors like construction slowed.

But things took a bad turn after the crash of October 1929. Lower stock prices made households poorer and discouraged consumer spending, which then made up three-quarters of the economy. (Today it’s about two-thirds.)

According to the economic historian Christina D. Romer, a professor at the University of California, Berkeley, the great volatility of stock prices at the time also increased consumers’ feelings of uncertainty, inducing them to put off purchases until the uncertainty was resolved. Spending on consumer durable goods like autos dropped precipitously in 1930. Next came a series of bank panics. From 1930 to 1933, more than 9,000 banks were shuttered, imposing losses on depositors and shareholders of about $2.5 billion. As a share of the economy, that would be the equivalent of $340 billion today.

The banking panics put downward pressure on economic activity in two ways. First, they put fear into the hearts of depositors. Many people concluded that cash in their mattresses was wiser than accounts at local banks. As they withdrew their funds, the banking system’s normal lending and money creation went into reverse. The money supply collapsed, resulting in a 24 percent drop in the consumer price index from 1929 to 1933. This deflation pushed up the real burden of households’ debts.

Second, the disappearance of so many banks made credit hard to come by. Small businesses often rely on established relationships with local bankers when they need loans, either to tide them over in tough times or for business expansion. With so many of those relationships interrupted at the same time, the economy’s ability to channel financial resources toward their best use was seriously impaired. Together, these forces proved cataclysmic. Unemployment, which had been 3 percent in 1929, rose to 25 percent in 1933. Even during the worst recession since then, in 1982, the United States economy did not experience half that level of unemployment.

Policy makers in the 1930s responded vigorously as the situation deteriorated. But like a doctor facing a patient with a new disease and strange symptoms, they often acted in ways that, with the benefit of hindsight, appeared counterproductive. Probably the most important source of recovery after 1933 was monetary expansion, eased by President Franklin D. Roosevelt’s decision to abandon the gold standard and devalue the dollar. From 1933 to 1937, the money supply rose, stopping the deflation. Production in the economy grew about 10 percent a year, three times its normal rate.

Less successful were various market interventions. According to a study by the economists Harold L. Cole and Lee E. Ohanian, both of the University of California, Los Angeles, and the Federal Reserve Bank of Minneapolis, President Roosevelt made things worse when he encouraged the formation of cartels through the National Industrial Recovery Act of 1933. Similarly, they argue, the National Labor Relations Act of 1935 strengthened organized labor but weakened the recovery by impeding market forces.

LOOKING back at these events, it’s hard to avoid seeing parallels to the current situation. Today, as then, uncertainty has consumers spooked. By some measures, stock market volatility in recent days has reached levels not seen since the 1930s. With volatility spiking, the University of Michigan’s survey reading of consumer sentiment has been plunging.

Deflation across the economy is not a problem (yet), but deflation in the housing market is the source of many of our present difficulties. With so many homeowners owing more on their mortgages than their houses are worth, default is an unfortunate but often rational choice. Widespread foreclosures, however, only perpetuate the downward spiral of housing prices, further defaults and additional losses at financial institutions.

The Fed and the Treasury Department, intent on avoiding the early policy inaction that let the Depression unfold, have been working hard to keep credit flowing. But the financial situation they face is, arguably, more difficult than that of the 1930s. Then, the problem was largely a crisis of confidence and a shortage of liquidity. Today, the problem may be more a shortage of solvency, which is harder to solve.

What’s next? Perhaps the most troubling study of the 1930s economy was written in 1988 by the economists Kathryn Dominguez, Ray Fair and Matthew Shapiro; it was called “Forecasting the Depression: Harvard Versus Yale.” (Mr. Fair is an economics professor at Yale; Ms. Dominguez and Mr. Shapiro are at the University of Michigan.)

The three researchers show that the leading economists at the time, at competing forecasting services run by Harvard and Yale, were caught completely by surprise by the severity and length of the Great Depression. What’s worse, despite many advances in the tools of economic analysis, modern economists armed with the data from the time would not have forecast much better. In other words, even if another Depression were around the corner, you shouldn’t expect much advance warning from the economics profession.

Let me be clear: Like Mr. Blanchard at the I.M.F., I am not predicting another Great Depression. We have indeed learned a lot over the last 80 years. But you should take that economic forecast, like all others, with more than a single grain of salt.

Stocks fall on belief global recession is at hand
DAY
By TIM PARADIS, AP Business Writer
Posted on Oct 24, 3:40 PM EDT

NEW YORK (AP) -- Wall Street joined world stock markets in a pullback Friday, with the Dow Jones industrials dropping 175 points and all the major indexes falling more than 2 percent. The growing belief that a punishing economic recession is at hand had investors abandoning stocks.

While the market came off its worst lows of the day, the final hour of trading remains a crucial period, with many inventors trying to square away their positions at the last minutes. In the past few weeks, some of the market's worst volatility has come in the last 30 minutes of the session.

The pullback on Wall Street wasn't as steep as some observers had feared though the pace of selling at times accelerated. Massive declines occurred overseas Friday after another round of grim corporate news stirred fears about global economies. Investors also grew nervous after U.S. stock futures - the bets traders place on where the market will go - fell so sharply that selling halts were imposed.

But the session began and then progressed with more orderly selling than in other drops in the past month, including two that slashed more than 700 from the Dow industrials in a single day. Still, investors' anxiety was clear Friday. The limits on futures and gyrations in everything from gold to the dollar underscored the fear and uncertainty that has gripped markets since the mid-September bankruptcy of investment bank Lehman Brothers Holdings Inc. and the subsequent freeze-up in the world's credit markets.

The urgency to resuscitate lending since then was aimed at avoiding some of the problems that have nonetheless spread around the world. A profit warning Friday from electronics maker Sony sent its shares tumbling in Japan and offered only the latest example that companies are girding for a slowing economy and a pullback among consumers worried about falling home prices and losses on their investments.

And in Germany, Daimler's stock fell sharply after the automaker reported lower third-quarter earnings and abandoned its 2008 profit and revenue forecast. That followed news in the U.S. late Thursday from Microsoft Corp., which issued a weaker-than-expected forecast for its fiscal second quarter, pointing to the economy.

"People have been saying that we're in a recession. This is the realization," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York.

It is clear that many investors are convinced the world economy is headed for a severe downturn even as governments have raced to jump-start credit markets on the hope that a return of more normal lending levels by banks and other financial houses will fan economic activity.

But some say the recent pullbacks have been set off by forced selling, keeping some bargain-seeking traders from entering the market.

"There's nothing new going on," said Scott Bleier, president of market advisory service CreateCapital.com. "This is all about the unwinding of massive leverage."

Bleier attributed the declines to margin calls and investors in hedge funds and mutual funds cashing out. A margin call occurs when investors are forced to sell holdings, like stock, to raise cash at the demands of brokers.

"Market participants' fear is not that the economy is slowing," he said. "The fear is there is an endless supply of things for sale, regardless of price."

Steve Gross, principal at alternative investment and advisory firm Penso Capital Markets, said most large hedge funds have already slashed their positions. Instead, he sees a lack of demand.

"There are no buyers at all," he said.

Fearing more carnage in world equity markets, big hedge funds and other institutional investors have been pulling out their money en masse. Meanwhile, some individual investors who have seen their holdings decimated in recent weeks have been yanking money from the market, even as many market observers say it is wiser to wait out the market's decline.

Jason Weisberg, a New York Stock Exchange trader for Seaport Securities, contends the selling has been overdone.

"Technically we're way oversold," he said. "We have these downdrafts on very light volume. But all that being said, historically speaking this is all unprecedented."

In the final half-hour of trading, the Dow fell 175.78, or 2.02 percent, to 8,515.47 after falling 504 in the early going and trading down more than 400 at times. Still, the blue chips remained above the 8,000 level; at its recent low of Oct. 10, the Dow traded as low as 7,882.51. The Dow hasn't closed below that level since March 31, 2003, when it ended at 7,992.13.

Broader stock indicators also fell. The S&P 500 index declined 18.52, or 2.04 percent, to 889.59, and the Nasdaq composite index fell 33.84, or 2.11 percent, to 1,570.07.

The Russell 2000 index of smaller companies fell 12.97, or 2.65 percent, to 476.95.

Declining issues outpaced advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 1.17 billion shares.

Friday was the 79th anniversary of the day that, according to many market historians, the October 1929 stock market crash began. Selling began on Thursday, Oct. 24, and accelerated the following week on the days that have since become known as Black Monday and Black Tuesday, Oct 28 and 29.

At its lows Friday, the Dow was down 42 percent from its Oct. 9, 2007, record close of 14,164.53, while the S&P 500 was off 46 percent from its peak of a year ago. The Nasdaq was down 48 percent.

"We've moved from credit market concerns to economic concerns and people really don't know what the impact on the economy is going to be, they don't know the full impact. The market abhors uncertainty," said Ben Halliburton, chief investment officer of Tradition Capital Management in Summit, N.J.

Demand for U.S. Treasurys remained high as investors sought safe places to put their money. The three-month bill, regarded as the safest asset around, fell to 0.85 percent from 0.94 percent late Thursday.

There were signs that credit markets continue to thaw but are doing so more slowly amid growing economic fears. The rate on three-month loans in dollars - a key bank-to-bank lending benchmark known as the London Interbank Offered Rate, or Libor - fell to 3.52 percent from 3.54 percent on Thursday.

The rates have fallen steadily for 10 days as confidence in the banking industry has been helped by government rescue measures. However, the improvements were smaller Friday on concerns about the health of the global economy.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.71 from 3.66 percent late Thursday.

Gold futures briefly fell to their lowest level in 21 months Friday as the dollar strengthened and the drop in the world's stock markets led investors to sell commodities to offset massive losses in equities. Gold regained much of what it lost later in the day though prices remain down by about 20 percent since the start of the month.

Ordinarily, gold is seen as a safe-haven investment during market upheavals.

The dollar has risen as a safety holding despite fears about the U.S. economy. Investors appear more worried about the stability of emerging markets. That's hurting the euro, for example, because in Europe Iceland, Hungary, Ukraine and Belarus are all in talks with the International Monetary Fund to discuss possible loans. Investors are pulling money out of countries in Latin America and Asia amid worries about vulnerable countries.

Other commodities declined. Light, sweet crude fell $4.21 to $63.63 on the New York Mercantile Exchange. The sell-off, another sign that investors fear a severe recession, came despite OPEC's announcement that it will cut production by 1.5 million barrels a day in a bid to shore up sagging prices.

The pullback in global markets comes ahead of a planned meeting next week of the Federal Reserve's interest rate committee. Policymakers are scheduled to announced a decision on interest rates on Wednesday.

Investors had been bracing for a rocky start on Wall Street after futures contracts for the Dow and the S&P 500 fell so low they triggered "circuit breakers," which froze selling until the market's 9:30 a.m. EDT open. That slide raised the possibility that these emergency breaks intended to prevent panic selling could be triggered during the regular session - something that hasn't happened since 1997. But the Dow's decline was well short of the 10 percent, or 1,100-point, decline that would be needed to halt trading.

The panicky feeling ahead of the opening bell Friday came after Japan's Nikkei stock average fell a staggering 9.60 percent. In Europe, Germany's benchmark DAX index lost 4.96 percent, France's CAC40 dropped 3.54 percent while Britain's FTSE 100 sank 5 percent after the government said its gross domestic product fell 0.5 percent in the third quarter, putting the country on the brink of recession.

Hong Kong's Hang Seng index fell 8.3 percent. Markets in India, Thailand, Indonesia and the Philippines were also down sharply as investors bailed from emerging markets to cut their exposure to risky assets and meet redemption needs at home. Stocks fell so sharply in Russia that the two main exchanges closed early.

Alan Greenspan and John Snow testify - there are a lot of lines from "Casablanca" that apply here...Bernie Madoff center: how did he do it? How about India?

What We Don’t Know Will Hurt Us
NYTIMES
By FRANK RICH
February 22, 2009

AND so on the 29th day of his presidency, Barack Obama signed the stimulus bill. But the earth did not move. The Dow Jones fell almost 300 points. G.M. and Chrysler together asked taxpayers for another $21.6 billion and announced another 50,000 layoffs. The latest alleged mini-Madoff, R. Allen Stanford, was accused of an $8 billion fraud with 50,000 victims.

“I don’t want to pretend that today marks the end of our economic problems,” the president said on Tuesday at the signing ceremony in Denver. He added, hopefully: “But today does mark the beginning of the end.”

Does it?

No one knows, of course, but a bigger question may be whether we really want to know. One of the most persistent cultural tics of the early 21st century is Americans’ reluctance to absorb, let alone prepare for, bad news. We are plugged into more information sources than anyone could have imagined even 15 years ago. The cruel ambush of 9/11 supposedly “changed everything,” slapping us back to reality. Yet we are constantly shocked, shocked by the foreseeable. Obama’s toughest political problem may not be coping with the increasingly marginalized G.O.P. but with an America-in-denial that must hear warning signs repeatedly, for months and sometimes years, before believing the wolf is actually at the door.

This phenomenon could be seen in two TV exposés of the mortgage crisis broadcast on the eve of the stimulus signing. On Sunday, “60 Minutes” focused on the tawdry lending practices of Golden West Financial, built by Herb and Marion Sandler. On Monday, the CNBC documentary “House of Cards” served up another tranche of the subprime culture, typified by the now defunct company Quick Loan Funding and its huckster-in-chief, Daniel Sadek. Both reports were superbly done, but both could have been reruns.

The Sandlers and Sadek have been recurrently whipped at length in print and on television, as far back as 2007 in Sadek’s case (by Bloomberg); the Sandlers were even vilified in a “Saturday Night Live” sketch last October. But still the larger message may not be entirely sinking in. “House of Cards” was littered with come-on commercials, including one hawking “risk-free” foreign-currency trading — yet another variation on Quick Loan Funding, promising credulous Americans something for nothing.

This cultural pattern of denial is hardly limited to the economic crisis. Anyone with eyes could have seen that Sammy Sosa and Mark McGwire resembled Macy’s parade balloons in their 1998 home-run derby, but it took years for many fans (not to mention Major League Baseball) to accept the sorry truth. It wasn’t until the Joseph Wilson-Valerie Plame saga caught fire in summer 2003, months after “Mission Accomplished,” that we began to confront the reality that we had gone to war in Iraq over imaginary W.M.D. Weapons inspectors and even some journalists (especially at Knight-Ridder newspapers) had been telling us exactly that for almost a year.

The writer Mark Danner, who early on chronicled the Bush administration’s practice of torture for The New York Review of Books, reminded me last week that that story first began to emerge in December 2002. That’s when The Washington Post reported on the “stress and duress” tactics used to interrogate terrorism suspects. But while similar reports followed, the notion that torture was official American policy didn’t start to sink in until after the Abu Ghraib photos emerged in April 2004. Torture wasn’t routinely called “torture” in Beltway debate until late 2005, when John McCain began to press for legislation banning it.

Steroids, torture, lies from the White House, civil war in Iraq, even recession: that’s just a partial glossary of the bad-news vocabulary that some of the country, sometimes in tandem with a passive news media, resisted for months on end before bowing to the obvious or the inevitable. “The needle,” as Danner put it, gets “stuck in the groove.”

For all the gloomy headlines we’ve absorbed since the fall, we still can’t quite accept the full depth of our economic abyss either. Nicole Gelinas, a financial analyst at the conservative Manhattan Institute, sees denial at play over a wide swath of America, reaching from the loftiest economic strata of Wall Street to the foreclosure-decimated boom developments in the Sun Belt.

When we spoke last week, she talked of would-be bankers who, upon graduating, plan “to travel in Asia and teach English for a year” and then pick up where they left off. Such graduates are dreaming, Gelinas says, because the over-the-top Wall Street money culture of the credit bubble isn’t coming back for a very long time, if ever. As she observes, it took decades after the Great Depression — until the 1980s — for Wall Street to fully reclaim its old swagger. Not until then was there “a new group of people without massive psychological scarring” from the 1929 crash.

In states like Nevada, Florida and Arizona, Gelinas sees “huge neighborhoods that will become ghettos” as half their populations lose or abandon their homes, with an attendant collapse of public services and social order. “It will be like after Katrina,” she says, “but it’s no longer just the Lower Ninth Ward’s problem.” Writing in the current issue of The Atlantic, the urban theorist Richard Florida suggests we could be seeing “the end of a whole way of life.” The link between the American dream and home ownership, fostered by years of bipartisan public policy, may be irreparably broken.

Pity our new president. As he rolls out one recovery package after another, he can’t know for sure what will work. If he tells the whole story of what might be around the corner, he risks instilling fear itself among Americans who are already panicked. (Half the country, according to a new Associated Press poll, now fears unemployment.) But if the president airbrushes the picture too much, the country could be as angry about ensuing calamities as it was when the Bush administration’s repeated assertion of “success” in Iraq proved a sham. Managing America’s future shock is a task that will call for every last ounce of Obama’s brains, temperament and oratorical gifts.

The difficulty of walking this fine line can be seen in the drama surrounding the latest forbidden word to creep around the shadows for months before finally leaping into the open: nationalization. Until he started hedging a little last weekend, the president has pointedly said that nationalizing banks, while fine for Sweden, wouldn’t do in America, with its “different” (i.e., non-socialistic) culture and traditions. But the word nationalization, once mostly whispered by liberal economists, is now even being tossed around by Lindsey Graham and Alan Greenspan. It’s a clear indication that no one has a better idea.

The Obama White House may come up with euphemisms for nationalization (temporary receivership, anyone?). But whatever it’s called, what will it mean? The reason why the White House has been punting on the new installment of the bank rescue is not that the much-maligned Treasury secretary, Timothy Geithner, is incapable of getting his act together. What’s slowing the works are the huge political questions at stake, many of them with consequences potentially as toxic as the banks’ assets.

Will Obama concede aloud that some of our “too big to fail” banks have, in essence, already failed? If so, what will he do about it? What will it cost? And, most important, who will pay? No one knows the sum of the American banks’ losses, but the economist Nouriel Roubini, who has gotten much right about this crash, puts it at $1.8 trillion. That doesn’t count any defaults still to come on what had been considered “good” mortgages and myriad other debt, whether from auto loans or credit cards.

Americans are right to wonder why there has been scant punishment for the management and boards of bailed-out banks that recklessly sliced and diced all this debt into worthless gambling chips. They are also right to wonder why there is still little transparency in how TARP funds have been spent by these teetering institutions. If a CNBC commentator can stir up a populist dust storm by ranting that Obama’s new mortgage program (priced at $75 billion to $275 billion) is “promoting bad behavior,” imagine the tornado that would greet an even bigger bank bailout on top of the $700 billion already down the TARP drain.

Nationalization would likely mean wiping out the big banks’ managements and shareholders. It’s because that reckoning has mostly been avoided so far that those bankers may be the Americans in the greatest denial of all. Wall Street’s last barons still seem to believe that they can hang on to their old culture by scuttling corporate jets, rejecting bonuses or sounding contrite in public. Ask the former Citigroup wise man Robert Rubin how that strategy worked out.

We are now waiting to learn if Obama’s economic team, much of it drawn from the Wonderful World of Citi and Goldman Sachs, will have the will to make its own former cohort face the truth. But at a certain point, as in every other turn of our culture of denial, outside events will force the recognition of harsh realities. Nationalization, unmentionable only yesterday, has entered common usage not least because an even scarier word — depression — is next on America’s list to avoid.

Greenspan Says He Was Mystified by Subprime Market
NYTIMES "Dealbook"
February 12, 2009, 7:50 am

Alan Greenspan, the former chairman of the Federal Reserve, told CNBC in a documentary to be shown Thursday night that he did not fully understand the scope of the subprime mortgage market until well into 2005 and could not make sense of the complex derivative products created out of mortgages.

“So everybody in retrospect now knows that that boom was developing under the markets for quite a period of time, but nobody knew it,” Mr. Greenspan told CNBC’s David Faber. “In 2004, there was just no credible information on that. It wasn’t until we got well into 2005 that the first inklings that that was developing was emerging,” he said.

Mr. Greenspan’s critics have argued that the former Fed chairman expanded the money supply well beyond the growth in the nation’s gross domestic product by keeping interest rates too low for too long. The Fed’s “easy money” policy created an excess of cash that inflated equity and asset prices, leading to both the technology bubble of the late 1990s and the housing bubble in this decade.

While Mr. Greenspan acknowledges that he could have done something to avert the housing crisis, he contends his hands were tied.

“If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress?” Mr. Greenspan said. “When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.”

Mr. Greenspan said that if he had taken steps to prevent the crisis, the outcome would have been painful.

“We could have basically clamped down on the American economy, generated a 10 percent unemployment rate,” he said. “And I will guarantee we would not have had a housing boom, a stock market boom or indeed a particularly good economy either.”

Mr. Greenspan also lays the blame on the ratings agencies and the people that trusted their judgment for the proliferation of the mortgage derivatives that were a major part of the current financial crisis.

“What we have created in this world is an aura around the credit rating agencies about certification from them is the Good Housekeeping Seal of Approval, ” Mr. Greenspan said. “I will tell you the record of a lot of the forecasters of ratings have not been distinguished. They never were.”

The interview is part of a two-hour documentary, “House of Cards,” to be shown on CNBC on Thursday at 8 p.m. and 12 a.m. Eastern time.

–Cyrus Sanati

In India, Crisis Pairs With Fraud
NYTIMES
By JOE NOCERA
January 10, 2009

“It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice.”

Thus begins, in calm but painful fashion, one of the most extraordinary corporate confessions ever written, a letter sent Wednesday from B. Ramalinga Raju, the founder and chairman of Satyam Computer Services, to the company’s board. Among the startling facts Mr. Raju proceeds to disclose is that most of the cash on the company’s balance sheet does not exist, that Satyam’s revenue has been overstated for years, and that its real profit for the quarter that ended Sept. 30 was only $12.5 million — rather than the $136 million the company had reported to investors. Mr. Raju, in other words, had been cooking the books.

Satyam is a company I had been reading a lot about in the business papers during my recent trip to India. Mr. Raju, 54, founded the company 21 years ago, and turned it into what appeared to be one of India’s glittering technology success stories, a consulting and outsourcing powerhouse that rivaled the likes of Infosys and WiPro, with 53,000 employees, and 185 Fortune 500 companies among its roster of clients. Mr. Raju himself was a much-admired chief executive who won awards for entrepreneurship and established philanthropies to help Indians who lived in rural poverty.

When I was in India, however, Mr. Raju was grabbing headlines for a less exalted reason. He had tried to push through a deal to buy two companies in which he held ownership interests — Maytas Infra and Maytas Properties, which were run by his sons. (Maytas is Satyam spelled backward.) Satyam’s directors had rubber-stamped the deal — but to the surprise of the Indian business community, accustomed to seeing such inside deals go through, Satyam’s shareholders revolted.

Institutional investors denounced Mr. Raju for seeking to buy infrastructure and real estate companies that were far afield from technology outsourcing. Indian mutual fund managers complained anonymously in the business pages that Mr. Raju was using shareholders’ money to give himself and his sons a rich and undeserved payday. The board was raked over the coals in the press for approving the deal. The stock was pummeled.

And lo and behold, the investor backlash succeeded: Mr. Raju beat a hasty retreat and withdrew the offer to buy the two companies. Even after the deal fell through, it remained big news, and everyone I interviewed had an opinion about it. Some thought it gave India a black eye, because it exposed the country’s lackadaisical attitude toward corporate governance. Others thought it would ultimately be good for India, because it showed all Indian investors that they did not have to roll over every time a corporate executive tried to pull a fast one. No one, however, realized the truth. As Mr. Raju put it in his letter, “The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.” When the deal fell through, the jig was up.

And thus came the final bit of proof — as if one was needed — that the credit crisis had hit India. Here in the United States, the extraordinary Ponzi scheme that Bernard L. Madoff is accused of running was exposed when the credit crisis caused his investors to seek wholesale redemptions — money he did not have. The credit crisis also helped bring Mr. Raju’s fraud to light. He had been keeping the company afloat by borrowing against his Satyam shares. But when the Indian stock market crashed last fall — and Mr. Raju could not meet the margin calls — his lenders began selling his shares. He made his confession because he no longer had any means to funnel money into the company. Any halfway decent financial crisis has to have its signature fraud, and thanks to Mr. Raju, India now has one.

•

Every bubble develops its own mythology — its variation of that old mantra, “It’s different this time.” In the United States, during the housing bubble, the mythology was that we could build an economy out of endless debt, and no harm would come because the foundation upon which that debt was built — the price of housing — was indestructible.

India had a different mythology. It was called “decoupling.” The Indian economy, so the theory went, had become decoupled from the American economy, so that even if our economy ran into trouble, theirs would continue humming along. Indeed, India might even find itself in a position to take advantage of our troubles, by selling us more outsourcing services that would lower corporations’ overhead costs.

In the United States, we tend to think of Indian business as one giant outsourcing operation. But Indian economists are quick to point out that outsourcing is a much smaller part of the economy than we in the West realize: less than 10 percent. In fact, unlike China, which had built its economy around low-cost exports — and was thus obviously vulnerable to an economic downturn in the West — only 22 percent of India’s overall economy is export-related. India has been growing at a rate of 9 to 10 percent a year not so much because of its exports but because it has a thriving domestic economy, with a newly emergent middle class.

As India took comfort in the decoupling theory, it became easy to overlook the signs that a bubble was forming. The stock market was rising rapidly, and those new members of the middle class were jumping in with both feet.

The mutual fund industry went from $5 billion in assets to around $40 billion almost overnight. The price of real estate was skyrocketing. Companies were growing at a breakneck pace of 50 to 60 percent a year.

Foreign investment was pouring into the country. And some Indian companies were piling up debt — like the Tata Group, which borrowed money last year to make its triumphant purchase of Jaguar and Land Rover for $2.3 billion. The deal was struck around the time Bear Stearns was collapsing — proof, surely, that decoupling was real.

Perhaps if we had just lived through a stock market bubble, rather than a credit bubble, the decoupling theory might have held up. Stock market bubbles tend to be self-contained. But as we have learned, credit is different. When a credit bubble bursts it becomes a contagion that jumps oceans and national borders, spreading from bank to bank, institution to institution, even person to person, until the entire financial system is bereft of confidence. No country, it turns out, is immune, no matter how robust its domestic economy.

Starting early last year, the Indian stock market began a slow and steady decline. Foreign investors started pulling out, as they sold off liquid Indian securities to raise cash for their own needs. For the same reason, all that foreign capital that had flowed into the country suddenly began to dry up. Banks, seeing the liquidity crisis spread across the Western world, started preserving their own capital — and thus loans became increasingly difficult to come by. Sure enough, the Indian domestic economy slowed down.

Then came the Lehman Brothers bankruptcy — and like everywhere in the world, for the next six weeks, business in India came to a near standstill.

“When liquidity dries up, it doesn’t matter where you are,” said Jamshid Pandole, a managing partner of Inspire Capital Management, a hedge fund firm that invests in the Indian market. Icici Bank, the country’s largest privately held bank, actually had a short-lived run on the bank when it disclosed that it had a small amount of Lehman Brothers bonds in its portfolio.

And now? India’s stock market is down 60 percent from its highs. The country is woefully short of the capital it needs to meet its growth expectations, which have been reduced to 5 percent this year, instead of the 9 percent that had become routine.

“It’s still growth,” said Neeraj Bhargava, the chief executive of WNS, a rapidly expanding outsourcing company based in Mumbai. “But for us, 5 percent practically feels like a recession.”

In New Delhi, a huge airport construction project is stalled because the developer cannot get the funds he needs to finish it. Tata, which is struggling under its debt load, has asked the British government for a £1 billion loan to tide over troubled Jaguar. The stock of all the big technology consulting companies — most of whom had Wall Street firms as clients — has been hammered, and their profits are dropping, as a result of the credit crisis.

And decoupling? Nobody believes in it anymore. “Decoupling is a myth,” said Anand G. Mahindra, vice chairman and managing director of Mahindra & Mahindra, a conglomerate that is one of the country’s biggest companies. He should know. Mahindra & Mahindra is perhaps best known in India as a manufacturer of cars and trucks, mainly for the domestic economy. Last month, the company cut production and temporarily shut some plants because demand for vehicles had fallen off significantly.

And, of course, there is Mr. Raju and the Satyam fraud. In many ways, the Satyam scandal is having the same effect in India that the Madoff scandal is having here. Mr. Madoff was an important, highly respected figure on Wall Street, just as Mr. Raju was an important, highly respected figure in the Indian business world.

They were the last people anyone suspected of committing huge fraud. To have it then turn out that the two frauds went on for years, under the noses of regulators and accountants, made them all the more shocking. They will both wind up causing immense pain and suffering. Many people who trusted Mr. Madoff have lost everything, while it seems a sure bet that many of the 53,000 Satyam employees will wind up jobless.

Of course, it is also true that thanks to Mr. Madoff, the hedge fund industry will never be the same. Regulation that the country has long needed, but which the fund industry fought off, will surely be enacted in the next year or so, allowing regulators to more closely track hedge funds, to prevent a recurrence.

And it seems pretty likely that the Satyam scandal will have a similar effect in India. In their aftermath, financial crises generally lead to new, tougher rules that protect investors, and sniff out fraud. If that turns out to be one final way India is coupled with America, it will not be such a bad thing.

Talking Business: How India Avoided a Crisis
NYTIMES
By JOE NOCERA
December 20, 2008

MUMBAI

“What has taken a number of us by surprise is the lack of adequate supervision and regulation,” Rana Kapoor was saying the other day. “This was despite the fact that Enron had happened and you passed Sarbanes-Oxley. We don’t understand it. Maybe it’s because we sit in a more controlled economy but ....” He smiled sweetly as his voice trailed off, as if to take the sting off his comments. But they stung nonetheless.

Mr. Kapoor is an Indian banker, a former longtime Bank of America executive with a Rutgers M.B.A. who, along with his business partner and brother-in-law, Ashok Kapur, was granted government permission four years ago to start a private bank, which they called Yes Bank. In the United States, Yes Bank is the kind of name a go-go banker might give to, say, a high-flying mortgage lender in the middle of a bubble. (You can even imagine the slogan: “Yes is part of our name!”) But Yes Bank is not exactly the Washington Mutual of India. One news release it hands out to reporters who come calling is an excerpt from a 2007 survey by The Financial Express: “#1 on Credit Quality amongst 56 Banks in India,” reads the headline.

I arrived in Mumbai three weeks after the terrorist attacks that killed 200 people — including, tragically, Yes Bank’s co-founder Mr. Kapur, who had served as the company’s nonexecutive chairman and was gunned down while having dinner at the Oberoi Hotel. (His wife and two dinner companions miraculously escaped.)

My hope in traveling to Mumbai was to learn about the current state of Indian business in the wake of both the credit crisis and the attacks. But in my first few days in this grand, sprawling, chaotic city, what I mainly heard, especially talking to bankers, was about America, not India. How could we have brought so much trouble on ourselves, and the rest of the world, by acting in such an obviously foolhardy manner? Didn’t we understand that you can’t lend money to people who lack the means to pay it back? The questions were asked with a sense of bewilderment — and an occasional hint of scorn. Like most Americans, I didn’t have any good answers. It was a bubble, I would respond with a sheepish shrug, as if that were an adequate explanation. It isn’t, of course.

“In India, we never had anything close to the subprime loan,” said Chandra Kochhar, the chief financial officer of India’s largest private bank, Icici. (A few days after I spoke to her, Ms. Kochhar was named the bank’s new chief executive, in a move that had long been anticipated.) “All lending to individuals is based on their income. That is a big difference between your banking system and ours.” She continued: “Indian banks are not levered like American banks. Capital ratios are 12 and 13 percent, instead of 7 or 8 percent. All those exotic structures like C.D.O. and securitizations are a very tiny part of our banking system. So a lot of the temptations didn’t exist.”

And when I went to see Deepak Parekh, the chief executive of HDFC, which was founded in 1977 as the country’s first specialized mortgage bank, practically the first words out of his mouth were these: “We don’t do interest-only or subprime loans. When the bubble was going on, we did not change any of our policies. We did not change any of our systems. We did not change our thought process. We never gave more money to a borrower because the value of the house had gone up. Citibank has a few home equity loans, but most banks in India don’t make those kinds of loans. Our nonperforming loans are less than 1 percent.”

Yet two years ago, the Indian real estate market — commercial and residential alike — was every bit as frothy as the American market. High-rises were being slapped up on spec. Housing developments were sprouting up everywhere. And there was plenty of money flowing into India, mainly from private equity and hedge funds, to fuel the commercial real estate bubble in particular. Goldman Sachs, Carlyle, Blackstone, Citibank — they were all here, throwing money at developers. So why did the Indian banks stay on the sidelines and avoid most of the pain that has been suffered by the big American banks?

Part of the reason is cultural. Indians are simply not as comfortable with credit as Americans. “A lot of Indians, when you push them, will say that if you spend more than you earn you will get in trouble,” an Indian consultant told me. “Americans spent more than they earned.”

Mr. Parekh said, “Savings are important. Joint families exist. When one son moves out, the family helps them. So you don’t borrow so much from the bank.” Even mortgage loans tend to have down payments in India that are a third of the purchase price, a far cry from the United States, where 20 percent is the new norm. (Let’s not even think about what they used to be.)

But there was also another factor, perhaps the most important of all. India had a bank regulator who was the anti-Greenspan. His name was Dr. V. Y. Reddy, and he was the governor of the Reserve Bank of India. Seventy percent of the banking system in India is nationalized, so a strong regulator is critical, since any banking scandal amounts to a national political scandal as well. And in the irascible Mr. Reddy, who took office in 2003 and stepped down this past September, it had exactly the right man in the right job at the right time.

“He basically believed that if bankers were given the opportunity to sin, they would sin,” said one banker who asked not to be named because, well, there’s not much percentage in getting on the wrong side of the Reserve Bank of India. For all the bankers’ talk about their higher lending standards, the truth is that Mr. Reddy made them even more stringent during the bubble.

Unlike Alan Greenspan, who didn’t believe it was his job to even point out bubbles, much less try to deflate them, Mr. Reddy saw his job as making sure Indian banks did not get too caught up in the bubble mentality. About two years ago, he started sensing that real estate, in particular, had entered bubble territory. One of the first moves he made was to ban the use of bank loans for the purchase of raw land, which was skyrocketing. Only when the developer was about to commence building could the bank get involved — and then only to make construction loans. (Guess who wound up financing the land purchases? United States private equity and hedge funds, of course!)

Then, as securitizations and derivatives gained increasing prominence in the world’s financial system, the Reserve Bank of India sharply curtailed their use in the country. When Mr. Reddy saw American banks setting up off-balance-sheet vehicles to hide debt, he essentially banned them in India. As a result, banks in India wound up holding onto the loans they made to customers. On the one hand, this meant they made fewer loans than their American counterparts because they couldn’t sell off the loans to Wall Street in securitizations. On the other hand, it meant they still had the incentive — as American banks did not — to see those loans paid back.

Seeing inflation on the horizon, Mr. Reddy pushed interest rates up to more than 20 percent, which of course dampened the housing frenzy. He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry. He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis.

Did India’s bankers stand up to applaud Mr. Reddy as he was making these moves? Of course not. They were naturally furious, just as American bankers would have been if Mr. Greenspan had been more active. Their regulator was holding them back, constraining their growth! Mr. Parekh told me that while he had been saying for some time that Indian real estate was in bubble territory, he was still unhappy with the rules imposed by Mr. Reddy. “We were critical of the central bank,” he said. “We thought these were harsh measures.”

“For a while we were wondering if we were missing out on something,” said Ms. Kochhar of Icici. Banks in the United States seemed to have come up with some magical new formula for making money: make loans that required no down payment and little in the way of verification — and post instant, short-term, profits.

As Luis Miranda, who runs a private equity firm devoted to developing India’s infrastructure, put it: “We kept wondering if they had figured out something that we were too dense to figure out. It looked like they were smart and we were stupid.” Instead, India was the smart one, and we were the stupid ones.

Ms. Kochhar said that the underlying risks of having “a majority of loans not owned by the people who originated them” was not apparent during the bubble. Now that those risks have been made painfully clear, every banker in India realizes that Mr. Reddy did the right thing by limiting securitizations. “At times like this, you tend to appreciate what he did more than we did at the time,” said Mr. Kapoor. “He saved us,” added Mr. Parekh.

As the credit crisis has spread these past months, no Indian bank has come close to failing the way so many United States and European financial institutions have. None have required the kind of emergency injections of capital that Western banks have needed. None have had the huge write-downs that were par for the course in the West. As the bubble has burst, which lenders have taken the hit? Why, the private equity and hedge fund lenders who had been so eager to finance land development. Us, in others words, rather than them. Why is that not a surprise?

When I asked Mr. Kapoor for his take on what had happened in the United States, he replied: “We recognize it as a problem of plenty. It was perpetuated by greedy bankers, whether investment bankers or commercial bankers. The greed to make money is the impression it has made here. Anytime they wanted a loan, people just dipped into their home A.T.M. It was like money was on call.”

So it was. And our regulators, unlike theirs, just stood by and let it happen. The next time we’re moving into bubble territory, perhaps we can take a page from Mr. Reddy’s book — sometimes it’s better to apply the brakes too early than too late. Or, as was the case with Mr. Greenspan, not at all.

•

None of this is to say that the global credit crisis hasn’t affected India. It certainly has. I’ll be back after the holidays with more columns from India, including how Sept. 15 — the day Lehman Brothers defaulted — changed everything, even here, on the other side of the world.

Madoff Surrounded by Mob of Cameras After Court
By THE ASSOCIATED PRESS
Filed at 8:21 a.m. ET
December 18, 2008

NEW YORK (AP) -- Free on $10 million bond during an investigation into an alleged $50 billion investment fraud, Bernard Madoff had to push his way through a swarm of media to reach his posh Manhattan apartment, where he is under a nighttime curfew.

He must be at the Upper East Side residence from 7 p.m to 9 a.m. and wear an ankle-bracelet to monitor his movements. His wife was ordered to surrender her passport.

Cameras awaited Madoff as he walked out of the courthouse Wednesday toward his black SUV. Minutes later, a smirking Madoff was swarmed by more cameras as he entered his apartment building, with the scrum at one point turning into a shoving match between Madoff and a journalist.

He was then fitted with an electronic-monitoring bracelet, according to his lawyer, Ira Lee Sorkin, and placed under house detention in the $7 million apartment.

Madoff's chaotic commute came on a day when the fallout over the scandal spread through the nation's capital, with the Securities and Exchange Commission taking more heat and Congress jumping into the fray.

The chairman of the House capital markets subcommittee, Rep. Paul Kanjorski, D-Pa., announced an inquiry that will begin early next month into what may be the biggest Ponzi scheme ever and how the government failed to detect it. The SEC is also looking into the relationship between Madoff's niece and a former SEC attorney who reviewed Madoff's business.

Madoff, who has already surrendered his passport, made his appearance in the courthouse to shore up conditions of his bail package. The judge had required him to find two additional co-signers to vouch for Madoff, but he was apparently unable to find anyone as the cloud of scandal swirls around him.

Judge Gabriel W. Gorenstein responded by approving a modification to the bail package. As a result, Madoff had to sign over his Upper East Side apartment and his homes in Palm Beach and the Hamptons.

In Washington, SEC Chairman Christopher Cox again found himself on the defensive after days of withering criticism that his agency did not do enough to root out the fraud.

''We have thus far no evidence of any wrongdoing by any SEC personnel,'' Cox told reporters at SEC headquarters. ''We need to go about this in a thorough, professional way.''

SEC Inspector General David Kotz is looking into the agency's failure to uncover the alleged fraud in Madoff's operation. One area Kotz said he will examine is the relationship between a former SEC attorney, Eric Swanson, and Madoff's niece, Shana, who are now married.

As an SEC attorney, Swanson was part of a team that examined Madoff's securities brokerage operation in 1999 and 2004. Neither review resulted in any action against Madoff. In a statement about Swanson's role, the SEC compliance office cited its strict rules prohibiting employees from participating in cases involving firms where they have a personal interest.

A spokesman for Swanson said that he and Shana Madoff met at a breakfast in October 2003, started dating in April 2006 and married last year.

Another potential conflict also emerged in Washington on Wednesday.

U.S. Attorney General Michael Mukasey removed himself from the probe because his son, Marc Mukasey, is representing Frank DiPascali, a top financial officer at Madoff's investment firm. The Justice Department refused to say when Mukasey became aware of the conflict but confirmed he was removing himself from all aspects of the case.

DiPascali was the Madoff employee who had the most day-to-day contact with the firm's investors. Several described him as the man they reached by phone when they had questions about the firm's investment strategy, or wanted to add or subtract money from their accounts.

The events unfolded the day after Cox delivered a stunning rebuke to his own career staff, blaming them for a decade-long failure to investigate Madoff.

Credible and specific allegations regarding Madoff's financial wrongdoing going back to at least 1999 were repeatedly brought to the attention of SEC staff, Cox said. He said he was gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate the allegations or at any point to seek formal authority from the politically appointed commission to pursue them.

Cox's critics said that targeting the staff was Cox's attempt to salvage his own reputation.

''He put in place the people he is now shifting the blame to,'' said Ross Albert, a former SEC senior special counsel and federal prosecutor and now a private attorney in Atlanta.

Senate Majority Leader Harry Reid, D-Nev., suggested Cox bears some of the responsibility for what went wrong.

''I served in Congress with Christopher Cox, but I don't think he's going to make the All-Star team,'' said Reid.

Kotz said his office would move as quickly as possible to complete the inquiry into why regulators didn't pursue Madoff more aggressively.

Kanjorski, the lawmaker, said his inquiry will examine the alleged fraud and try to determine why regulators ''failed to detect these substantial evasions.''

Greenspan "Shocked" At Credit System Breakdown
NYTIMES
By REUTERS
Published: October 23, 2008
Filed at 10:24 a.m. ET

WASHINGTON (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets and that he expects the unemployment rate to jump.

Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief," he said.

Banks and other financial institutions need public support, such as the recently approved $700 billion bailout package, to avoid serious retrenchment, he said.

Greenspan was hailed as one of the most accomplished central bankers in U.S. history when he retired in January 2006. However, his decision to keep interest rates low during his final years at the Fed has been blamed in part for the housing bubble and crash that has led to the current deep financial crisis.

The former Fed chair said stabilization of U.S. housing markets -- a necessary precondition for the economy to heal -- is "many months in the future."

At the heart of the breakdown of credit markets was the securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, Greenspan said.

"Without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer," he said.

"The consequent surge in global demand for U.S. subprime securities by banks, hedge and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem," he added.

The Absent Gorilla: Social Security, Medicare • Presidential candidates step gingerly around entitlements dilemma
Hartford Courant editorial
October 17, 2008

One of these years, unless something is done about it, the federal government will be unable to meet its Medicare and Social Security obligations. There will be too many old Americans and not enough revenue to pay for their health care and retirement income.

Some, like former U.S. Comptroller General David Walker, the Concord Coalition and the Heritage Foundation, are waving the warning flags, talking in apocalyptic but reality-based terms of the government being scores of trillions of dollars in the hole in the not-too-distant future and unable to make good on what aging Americans feel entitled to.

But there has been little said about entitlement reform on the campaign trail this fall. Presidential and congressional candidates don't want to touch this hot topic with the proverbial 10-foot pole. They have approached it only in the most general terms.

In the final debate between Barack Obama and John McCain on Wednesday night, the issue was raised, sort of, by moderator Bob Schieffer. He asked, in light of mounting national debt and huge projected budget deficits, what spending cuts each man would make if elected. Mr. Obama said he would cut a $15 billion subsidy to insurance companies and would go over the budget line by line and cut programs that don't work. Mr. McCain favors a spending freeze — but would exempt the military and veterans budgets. He said he'd veto all earmarks, which this year total about $18 billion. These are inadequate answers on the part of both presidential candidates.

The world faces the prospects of a long, deep recession. But the fallout from that might not be nearly so bad as what America's elderly will suffer if Medicare and Social Security crash.

"D" stands for a few things...

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Economic indicators up more than expected in April
DAY
By TALI ARBEL, AP Business Writer
Posted on May 21, 2009 11:30 AM EDT

NEW YORK (AP) -- A private research's group forecast of economic activity rose more than expected in April, the first gain in seven months and fresh evidence that the recession could end later this year.

The Conference Board said Thursday its index of leading economic indicators, designed to forecast economic activity in the next three to six months, rose 1 percent last month. Economists surveyed by Thomson Reuters expected a 0.8 percent increase.

Conference Board economist Ken Goldstein said that means declines in activity could switch to growth in the overall economy in the second half of the year. The recession began in December 2007.

In April, the index posted its biggest gain since November 2005, said Ian Shepherdson, chief U.S. economist at High Frequency Economics. It is now even with its level from last November.

The index is derived from 10 components including stock prices, the money supply, jobless claims and new orders by manufacturers.

The Conference Board said strengths among the components exceeded weaknesses for the first time in more than a year. "This is more broad-based. It's not just the stock market rally," Goldstein said.

Seven indicators rose, including stock prices, as the Dow Jones industrials are up by about a third since March. Consumer expectations, the average work week, manufacturers' new orders for consumer goods and deliveries by vendors grew, while initial jobless claims dropped, also a positive.

However, some analysts expressed reservations about the strength of the gain.

"How strong the upturn will be is still in doubt, and it is possible that the improvement in (consumer) sentiment seen the last couple months, which has lifted the index of leading indicators, could stall out," Deutsche Bank chief U.S. economist Joseph LaVorgna wrote in a research note. He doesn't expect the economy to grow until early 2010.

Weekly claims for jobless aid had been dragging the index down. The U.S. unemployment rate stands at 8.9 percent and is expected to hit double digits later this year or in 2010.

The Labor Department on Thursday said new requests for jobless benefits fell to a seasonally adjusted 631,000, down from a revised figure of 643,000. Claims had reached a 14-week low of 605,000 earlier this month, which many economists thought heralded an easing in the wave of layoffs.

Earlier this week, computer giant Hewlett-Packard Co. said it would cut 6,400 jobs, or 2 percent of its work force, while credit-card issuer American Express Co. said it was slashing 4,000 jobs. Beleaguered auto makers General Motors Corp. and Chrysler LLC recently announced they will terminate their contracts with around 2,000 dealerships nationwide, which likely will result in shutdowns for many. The National Automobile Dealers Association, a trade group, said the auto makers' decisions could result in 100,000 job losses.

Meanwhile, the Conference Board said building permits, manufacturers' orders for capital goods and the real money supply weighed down the index last month.

The recession was precipitated by a crisis in housing, and while homebuilders' confidence has ticked higher, both building permits and housing construction fell to record low annual rates in April, the government said earlier this week.

Jobless Rate Rises to 6.7% as 533,000 Jobs Are Lost
NYTIMES
By LOUIS UCHITELLE
December 6, 2008

With the economy deteriorating rapidly, the nation’s employers shed 533,000 jobs in November, the 11th consecutive monthly decline, the government reported Friday morning, and the unemployment rate rose to 6.7 percent.

The decline, the largest one-month loss since December 1974, was fresh evidence that the economic contraction accelerated in November, promising to make the current recession, already 12 months old, the longest since the Great Depression. The previous record was 16 months, in the severe recessions of the mid-1970s and early 1980s.

“We have recorded the largest decline in consumer confidence in our history,” said Richard T. Curtin, director of the Reuters/University of Michigan Survey of Consumers, which started its polling in the 1950s. “It is being driven down by a host of factors: falling home and stock prices, fewer work hours, smaller bonuses, less overtime and disappearing jobs.”

The jobless rate was up from 6.5 percent in October. The job losses far exceeded the 350,000 figure that was the consensus expectation of economists.

Over all, the job losses since January now total more than 1.9 million, with most coming in the last three months as consumers and businesses cut back sharply in response to the worsening credit crisis.

The report on Friday by the Bureau of Labor Statistics included sharp upward revisions in job-loss figures for October (to 320,000 from the previously reported 240,000) and for September (to 403,000 from 284,000).

The employment report increased the likelihood that Congress, with the support of President-elect Barack Obama, will enact a stimulus package by late January that could exceed $500 billion over two years. More than half that money would probably be channeled into public infrastructure spending. Many economists consider such investments an effective way to counteract, through federally financed employment, the layoffs and hiring freezes spreading through the private sector.

“Basically $100 billion of public investment in such things as roads, bridges and levees would generate two million jobs,” Robert N. Pollin, an economist at the University of Massachusetts, said. “That would offset the two million jobs that we are now on track to lose by early next year.”

The manufacturing sector has been particularly hard hit, losing more than half a million jobs this year. That is nearly half the 1.2 million jobs lost since employment peaked in December and, in January, began its uninterrupted decline. The cutbacks seem likely to accelerate as the three Detroit automakers close more factories and shrink payrolls even more as they try to qualify for the federal loans they asked Congress this week to approve.

While manufacturing has led the way, the job cuts are rising in nearly every sector of the economy. “My sense is there is just a collapse in demand,” said Marc Levinson, research director for the union Unite Here, whose 450,000 members are spread across apparel manufacturing, hotels, casinos, industrial laundries, airport concessions and restaurants. “Our members are being laid off big time,” Mr. Levinson said.

The latest jobs report came during a week of compelling evidence that the American economy is falling precipitously. On Monday, the National Bureau of Economic Research ruled that a recession — the 12th since the Depression — had begun last December, even earlier than many people had thought.

That news was followed by fresh reports of cutbacks or declines in construction spending, home sales, consumer spending, business investment and exports. And companies in every industry sector announced layoffs this week, including AT&T, the telecommunications company, with 12,000 job cuts; DuPont, the chemical company, 2,500; and Viacom, the media company, 850.

Even retail sales in the Christmas season were off sharply. The International Council of Shopping Centers on Thursday described November sales at stores open at least a year as the weakest in more than 30 years.

With all this in mind, and particularly the shrinking employment rolls, economists are estimating that the gross domestic product is contracting at an annual rate of 4 percent or more in the fourth quarter, after a decline of 0.3 percent in the third quarter.

“Our G.D.P. forecast for 2009 is now minus 1.8 percent, rather than minus 1 percent,” HIS Global Insight, a forecasting and data gathering service, informed its clients in an e-mail message this week, explaining that all the latest bad news left it no choice but to issue a sharp downward revision.

“We see the unemployment rate at 8.6 percent by the end of 2009,” Global Insight said.

Consumer Price Decline Prompts Fear of Deflation
NYTIMES
By JACK HEALY
November 20, 2008

In another sign that the struggling economy continues to slow, consumer prices tumbled by a record amount in October, carried lower by skidding energy and transportation prices, raising the specter of deflation.

A key measure of how much Americans pay for groceries, clothing, entertainment and other goods and services, fell 1 percent in October, according to the Labor Department, the biggest drop in the 61-year history of the consumer price index. Much of the decline could be traced to a sharp drop of 14 percent in the price of gasoline, but the cost of a broad range of goods including clothes, milk and vegetables also fell sharply.

A sustained drop in prices could worsen the slowdown by straining businesses and workers. It could also blunt the impact of interest rate cuts and other actions by the Federal Reserve and force policy makers to use more unconventional tools to revive the economy.

“This month, it’s more than slowing, it’s outright contraction,” said James O’Sullivan, United States economist at UBS. “And yes, if you extrapolate that, it’s deflation.”

In a speech Wednesday at a Washington conference, the vice chairman of the Fed, Donald L. Kohn, said the risk of deflation remained slight but was increasing. “Whatever I thought that risk was, four or five months ago, I think it is bigger now even if it is still small,” Mr. Kohn said. The Fed, he added, needs to be aggressive, if necessary, to prevent a drop in prices.

The United States is not alone. Consumer prices also dipped in Britain, France, Germany and the Netherlands in October, though the declines were much smaller than the fall in America.

“The risk to the economy from pricing has rapidly moved from that of rapid inflation to the disinflation that is now moving through the system,” Joseph Brusuelas, chief economist of Merk Investments, wrote in a note.

While lower prices, particularly in the case of gasoline, may feel like good news, analysts say a broad and sustained decline in consumer prices would be bad for the economy. Businesses that are forced to cut prices to attract buyers will likely also be forced to cut workers, eliminate overtime or cap wages.

The talk about falling prices is all the more remarkable because just a few months ago many economists were concerned about inflation and the prospect of stagflation, in which inflation and unemployment rise simultaneously.

“It’s funny that just a few months ago everyone was wringing their hands over inflation,” said Nariman Behravesh, chief economist at Global Insight. “It’s gone. It’s over.”

But the data suggest that several years of growth in conspicuous consumption have been quickly revered and in many respects the nation is entering into a more frugal era.

For instance, room rates at luxury hotels fell 5.4 percent in the 28 days ended on Nov. 15, compared with a 1.3 percent increase at mid-scale hotels that do not serve food, estimated Smith Travel Research, a firm that studies the industry. Over all, hotel prices fell 1.6 percent in October, according to the Labor Department.

Retailers are resorting to drastic discounts to lure customers into stores. Executives at Nordstrom, the department store chain, said on a recent conference call with analysts that the company had lowered its regular prices on more than 800 clothing styles by an average of 22 percent.

Saks, another department store, is promising customers who spend more than $2,000 loans that carry no interest and require no payments for 12 months.

Economists said the tumbling consumer prices offered more evidence that Americans have tightened their spending as job losses mounted and easy credit dried up.

“We’re looking at a pretty deep recession now,” Mr. Behravesh said. “ All of a sudden, any pricing power that companies might have had is gone. You’re going to see discounting like crazy going on. All kinds of sales. You’re going to see all kinds of prices being slashed.”

A report on the beleaguered real estate market showed that housing starts fell 4.5 percent in October, to a seasonally adjusted 791,000. Housing starts last month were 38 percent lower than their October 2007 levels.

Talks of another Depression are overblown
Norwalk HOUR column
Thursday, October 16, 2008

Q: I'm hearing more talk about a stock market crash and another depression. I read an article on MarketWatch saying that we're in a meltdown and that criticized financial journalists for not telling it like it is. What's your take on this?

A: Columnist Jon Friedman did use the term "meltdown" and criticized financial journalists for using what he calls wimpy, sugar-coated language.

In speaking with Friedman recently, he said: "It is a meltdown. We are seeing a historic change where nothing will ever be the same. It's ludicrous for the media to parse words and not tell people what's going on."

Friedman pointed to how stocks came "roaring back" after the one-day, 22 percent stock market crash on Oct. 19, 1987, whereas stocks have continued to fall in this decline. He also said "now, all of these layoffs are happening, including to some of the smartest people in investment banking ... these jobs are going away and we won't need people to do investment banking."

Friedman actually is wrong about the 1987 stock market recovery being so quick. In fact, it actually took about 15 months for the market to make back that one day's loss of 22 percent and nearly two years to recoup that quick bear market decline totaling 36 percent.

I also think he is off base regarding the investment-banking industry, which has had few job losses thanks to the absorption of failed companies into healthy ones (e.g. Bear Stearns taken over by JP Morgan, Lehman by Barclays, etc.).

I also see a different problem with some of the media coverage. In recent weeks, I have observed an escalation among many in the media using explosive, inflammatory language. More and more reporters are using terms like "crash" when referring to the stock market and "depression" while discussing the economy.

During the Great Depression of the 1930s, our nation's unemployment broke 25 percent and our gross national product plunged by half by the time the Depression ended. Our current unemployment is a tad over 6 percent and our gross domestic product hasn't eve yet had a down quarter so it has yet to decline from its peak.

"It seems to me the media is using the most super-heated possible language," says Don Luskin, chief investment officer for Trend Macrolytics, who added, "If the media is holding back at all, which I don't think it is, maybe it's because they don't want to just be the conduit for the administration's or Congress's hype."

For sure, the stock market has suffered a significant decline the past 12 months -- amounting to about 25 percent from the peak to the most recent low. And much of the housing and financial sectors have suffered major declines. High energy prices hurt the airline and auto industries. The unemployment rate has increased and now stands above 6 percent. But, there are reasons for optimism:

* Diversity of our economy

* Growth of emerging markets provides growing markets for our goods

* Increased productivity

* Energy prices have dropped significantly and inflationary concerns waning

* Tax rates and interest rates are low.

Financial expert Eric Tyson is a Fairfield County resident, and a smart guy. Author of "Mind Over Money" (CDS Books), "Investing for Dummies" and "Personal Finance for Dummies" (Wiley), via e-mail: eric@erictyson.com.

G L O B A L

Canada Says Deficit Larger Than Expected
NYTIMES
By THE ASSOCIATED PRESS
May 25, 2009Filed at 4:58 p.m. ET

TORONTO (AP) -- Canada's finance minister said Monday the federal deficit will be substantially more than projected because the economic slowdown has been worse than expected.

Finance Minster Jim Flaherty predicted in January a deficit in Canada for the first time in more than a decade, and said Monday that the financial shortfall for 2009-2010 will be higher that the orginal forecast of 34 billion Canadian dollars ($30 billion).

Flaherty said lower tax revenues and increased spending on unemployment insurance are two of the major reasons.

Canada's central bank has projected that then country's gross domestic product fell 7.3 percent in the first three months of 2009, dropping at the steepest pace in decades.

Canada has avoided bank bailouts and none of its major financial institutions have failed. However, Canada and its economically hard-hit neighbor, the United States, have the largest trading relationship in the world and the financial crisis and the global sell-off of commodities have hit Canada hard since last fall.

The government unveiled a $32 billion economic stimulus package in January.

But Alberta's once-booming oil sands sector has cooled as every major company has scrapped or delayed some expansion plans.

Canada lost a record 273,300 jobs in the first three months of the year.

Goldman CEO Opposed to Full Bank Nationalization
NYTIMES
By REUTERS
Filed at 9:50 a.m. ET
March 8, 2009

FRANKFURT (Reuters) - Goldman Sachs' <GS.N> chief executive said he opposed the full nationalization of banks, but thought government stakes could be sensible in extreme situations, in an interview with German weekly Welt am Sonntag.

"I don't think that nationalization is a good solution. It is decisive that the financial system is being stabilized and governments have to act in a pragmatic manner," Lloyd Blankfein was quoted as saying.

"In extreme situations, it can be meaningful when the government takes a stake. However, full control should be avoided," he added.

Asked about the case of stricken German property lender Hypo Real Estate <HRXG.DE>, which has already received 87 billion euro ($110 billion) in state guarantees, Blankfein said: "There can be extreme situations, where there is no alternative. Then the following must apply: If the tax-payer raises the whole capital of a company, it has to belong to him. Otherwise, the state is in danger of taking only risks, without having the opportunities."

Blankfein also commented on the cases of U.S. bank Citigroup <C.N> -- in which the U.S. government will hike its stake to 36 percent -- as well as struggling carmaker General Motors <GM.N>. Asked whether it would only be a matter of time until both companies would be fully nationalized, Blankfein said that, so far, both companies were still not completely state-owned.

"Secondly, the main point was to avert immediate threats. In the case of Citigroup, a real systemic risk for the financial markets had to be contained. In the case of General Motors, the social implications of a sudden breakdown would have been huge," he said.

The Bush administration in December approved a $17.4 billion bailout for GM and Chrysler LLC <CBS.UL>, requiring the administration of President Barack Obama to determine by March 31 whether both companies can be commercially viable.

Blankfein said that the company would remain committed to its business in Germany, adding that it is the "central economy in continental Europe and for us the bridge to eastern Europe."

He also pointed to uncertainty within the European Union with regard to state finances, particularly about who would contribute what, should a member of the EU run into financing problems.

"How much has to be raised by the single state and how much will be contributed by the European Union? Those questions are unanswered. Unanswered questions make the markets feel insecure."

The market crisis has highlighted differences between economies in the single euro zone with some countries, such as Ireland, seeing their deficits balloon and there has been much talk about how euro zone states can maintain solidarity.

($1=.7909 Euro)

Who Got AIG's Bailout Billions?
NYTIMES
By REUTERS
Filed at 8:30 a.m. ET
March 8, 2009

NEW YORK (Reuters) - Where, oh where, did AIG's bailout billions go? That question may reverberate even louder through the halls of government in the week ahead now that a partial list of beneficiaries has been published. The Wall Street Journal reported on Friday that about $50 billion of more than $173 billion that the U.S. government has poured into American International Group Inc since last fall has been paid to at least two dozen U.S. and foreign financial institutions.

The newspaper reported that some of the banks paid by AIG since the insurer started getting taxpayer funds were: Goldman Sachs Group Inc, Deutsche Bank AG, Merrill Lynch, Societe Generale, Calyon, Barclays Plc, Rabobank, Danske, HSBC, Royal Bank of Scotland, Banco Santander, Morgan Stanley, Wachovia, Bank of America, and Lloyds Banking Group. Morgan Stanley and Goldman Sachs declined to comment when contacted by Reuters. Bank of America, Calyon, and Wells Fargo, which has absorbed Wachovia, could not be reached for comment.

The U.S. Federal Reserve has refused to publicize a list of AIG's derivative counterparties and what they have been paid since the bailout, riling the U.S. Senate Banking Committee. Federal Reserve Vice Chairman Donald Kohn testified before that committee on Thursday that revealing names risked jeopardizing AIG's continuing business. Kohn said there were millions of counterparties around the globe, including pension funds and U.S. households.

He said the intention was not to protect AIG or its counterparties, but to prevent the spread of AIG's infection. The Wall Street Journal, citing a confidential document and people familiar with the matter, reported that Goldman Sachs and Deutsche Bank each got about $6 billion in payments between the middle of September and December last year.

Once the world's largest insurer, AIG has been described by the United States as being too extensively intertwined with the global financial system to be allowed to fail.

The Federal Reserve first rode to AIG's rescue in September with an $85 billion credit line after losses from toxic investments, many of which were mortgage related, and collateral demands from banks, left AIG staring down bankruptcy. Late last year, the rescue packaged was increased to $150 billion. The bailout was overhauled again a week ago to offer the insurer an additional $30 billion in equity.

AIG was first bailed out shortly after investment bank Lehman Brothers was allowed to fail and brokerage Merrill Lynch sold itself to Bank of America Corp. Bankruptcy for AIG would have led to complications and losses for financial institutions around the world doing business with the company and policy holders that AIG insured against losses.

Representative Paul Kanjorski told Reuters on Thursday that he had been informed that a large number of AIG's counterparties were European.

"That's why we could not allow AIG to fail as we allowed Lehman to fail, because that would have precipitated the failure of the European banking system," said Kanjorski, a Democrat from Pennsylvania who chairs the House Insurance Subcommittee.

TOXIC ASSETS/TOXIC WASTE

As part of its business, AIG insured counterparties on mortgage-backed securities and other assets. The collapse of the U.S. subprime mortgage market, which triggered a global financial crisis, left the insurer and some of its policy holders facing possible ruin as the value of assets declined.

U.S. regulators failed to recognize how much risk AIG was piling on in credit-default swaps, and by the time they understood, they had no choice but to pour in billions of public dollars, Kohn and other officials told the Senate panel. Senators were outraged by the lack of details about where the bailout money has gone.

"That we find ourselves in this situation at all is ... quite frankly, sickening," said Senator Christopher Dodd, the Democrat who chairs the committee. "The lack of transparency and accountability in this process has been rather stunning."

Eric Dinallo, superintendent of New York State's Insurance Department, railed on Friday against AIG's failed business model, likening its insuring credit-default swaps as gambling with somebody else's money.

"It's like taking insurance on your neighbor's house and even maybe contributing to blowing it up," he said at a panel sponsored by New York University's Stern School of Business.

U.S. lawmakers have said they are running out of patience with regulators' refusal to identify AIG's counterparties.

Battle Over UBS Secret Accounts Heads to Court
NYTIMES
By THE ASSOCIATED PRESS
Filed at 11:53 a.m. ET
February 23, 2009

MIAMI (AP) -- The battle between the Internal Revenue Service and Swiss bank UBS AG is heading to court.

The IRS wants a federal judge to order UBS to turn over about 52,000 names of wealthy Americans with secret accounts. UBS contends that doing that would be a violation of Swiss law and could force the bank to lose its license to do business.

A hearing was set Monday. The IRS is pushing U.S. District Judge Alan Gold to issue an immediate ''show cause'' order requiring UBS to demonstrate why it can keep the names of its U.S. customers secret. UBS wants more time to make its arguments.

The IRS says U.S. taxes haven't been paid for years on those accounts, which hold about $14.8 billion in assets.

Japan's economy shrinks at fastest pace in 35 years
Norwalk Hour
By TOMOKO A. HOSAKA, Associated Press
Posted on 02/15/2009

Japan's economy contracted in the fourth quarter at the fastest pace in 35 years as a collapse in global demand battered the world's second-largest economy.

Japan's gross domestic product, or the total value of the nation's goods and services, dropped at an annual pace of 12.7 percent in the October-December period, the government said today. That's the steepest drop for Japan since the oil shock of 1974. It far outpaces declines of 3.8 percent in the U.S. and 1.2 percent in the euro zone. The contraction underscores the vulnerability of Asia's export-driven economies during global downturns and point toward more cuts in jobs, production and profits in the coming months.

A survey of economists by the Kyodo news agency had projected an 11.6 percent fourth-quarter contraction. Japan had its third straight quarter of decline. The GDP fell 1.8 percent in the July-September period.
Fourth-quarter GDP fell 3.3 percent from the previous three-month period, and for 2008, it contracted 0.7 percent -- the first decline in nine years, according to the Cabinet Office. With recovery nowhere in sight, Japan is now in the midst of its worst downturn since World War II, analysts say.

"Since October, economic indicators have deteriorated at a pace that defies any rule of thumb," Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs, said in a recent report. "There has been an unprecedented large decline in exports and production-related indicators in particular, not only in Japan but throughout Asia."

Japan's real exports plummeted a record 13.9 percent in the fourth quarter, the government said, as the deepening global slowdown choked off demand for the country's cars and gadgets. An appreciating yen also hurt the country's exporters, including Toyota Motor Corp. and Sony Corp.

Japanese electronics company Pioneer Corp. said last week it will cut 10,000 jobs globally, joining a growing list of the country's corporate giants scrambling to slash their payrolls. Sony Corp. is shedding 8,000 workers, while Nissan Motor Co. and NEC Corp. are each cutting 20,000.

Japan slipped into recession in the third quarter after its GDP contracted an annualized 3.7 percent in the April-June period. A recession is commonly defined as two consecutive quarters of negative growth, though many economists using other parameters say the current downturn actually began in late 2007. Media reports over the weekend said Japan may be considering additional measures to shore up its economy with fresh spending likely to top 10 trillion yen ($109 billion).

Lawmakers are debating a record 88.5 trillion yen ($963 billion) budget for the fiscal year starting in April. The Yomiuri Shimbun said once parliament passes the budget, Prime Minister Taro Aso -- who faces dismal approval ratings -- will announce the extra economic measures. Japan's central bank, which lowered its key interest rate to 0.1 percent in December, has introduced various steps to try to thaw a corporate credit crunch. But there is little it can do to address the unprecedented decline in external demand.

The Bank of Japan policy board is scheduled to start a two-day meeting Wednesday.

In stock markets, the benchmark Nikkei 225 index was down 0.99 percent at 7,702.24.

Laid-Off Foreigners Flee as Dubai Spirals Down
NYTIMES
By ROBERT F. WORTH
February 12, 2009

DUBAI, United Arab Emirates — Sofia, a 34-year-old Frenchwoman, moved here a year ago to take a job in advertising, so confident about Dubai’s fast-growing economy that she bought an apartment for almost $300,000 with a 15-year mortgage.

Now, like many of the foreign workers who make up 90 percent of the population here, she has been laid off and faces the prospect of being forced to leave this Persian Gulf city — or worse.

“I’m really scared of what could happen, because I bought property here,” said Sofia, who asked that her last name be withheld because she is still hunting for a new job. “If I can’t pay it off, I was told I could end up in debtors’ prison.”

With Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills). Some are said to have maxed-out credit cards inside and notes of apology taped to the windshield.

The government says the real number is much lower. But the stories contain at least a grain of truth: jobless people here lose their work visas and then must leave the country within a month. That in turn reduces spending, creates housing vacancies and lowers real estate prices, in a downward spiral that has left parts of Dubai — once hailed as the economic superpower of the Middle East — looking like a ghost town.

No one knows how bad things have become, though it is clear that tens of thousands have left, real estate prices have crashed and scores of Dubai’s major construction projects have been suspended or canceled. But with the government unwilling to provide data, rumors are bound to flourish, damaging confidence and further undermining the economy.

Instead of moving toward greater transparency, the emirates seem to be moving in the other direction. A new draft media law would make it a crime to damage the country’s reputation or economy, punishable by fines of up to 1 million dirhams (about $272,000). Some say it is already having a chilling effect on reporting about the crisis.

Last month, local newspapers reported that Dubai was canceling 1,500 work visas every day, citing unnamed government officials. Asked about the number, Humaid bin Dimas, a spokesman for Dubai’s Labor Ministry, said he would not confirm or deny it and refused to comment further. Some say the true figure is much higher.

“At the moment there is a readiness to believe the worst,” said Simon Williams, HSBC bank’s chief economist in Dubai. “And the limits on data make it difficult to counter the rumors.”

Some things are clear: real estate prices, which rose dramatically during Dubai’s six-year boom, have dropped 30 percent or more over the past two or three months in some parts of the city. Last week, Moody’s Investor’s Service announced that it might downgrade its ratings on six of Dubai’s most prominent state-owned companies, citing a deterioration in the economic outlook. So many used luxury cars are for sale , they are sometimes sold for 40 percent less than the asking price two months ago, car dealers say. Dubai’s roads, usually thick with traffic at this time of year, are now mostly clear.

Some analysts say the crisis is likely to have long-lasting effects on the seven-member emirates federation, where Dubai has long played rebellious younger brother to oil-rich and more conservative Abu Dhabi. Dubai officials, swallowing their pride, have made clear that they would be open to a bailout, but so far Abu Dhabi has offered assistance only to its own banks.

“Why is Abu Dhabi allowing its neighbor to have its international reputation trashed, when it could bail out Dubai’s banks and restore confidence?” said Christopher M. Davidson, who predicted the current crisis in “Dubai: The Vulnerability of Success,” a book published last year. “Perhaps the plan is to centralize the U.A.E.” under Abu Dhabi’s control, he mused, in a move that would sharply curtail Dubai’s independence and perhaps change its signature freewheeling style.

For many foreigners, Dubai had seemed at first to be a refuge, relatively insulated from the panic that began hitting the rest of the world last autumn. The Persian Gulf is cushioned by vast oil and gas wealth, and some who lost jobs in New York and London began applying here.

But Dubai, unlike Abu Dhabi or nearby Qatar and Saudi Arabia, does not have its own oil, and had built its reputation on real estate, finance and tourism. Now, many expatriates here talk about Dubai as though it were a con game all along. Lurid rumors spread quickly: the Palm Jumeira, an artificial island that is one of this city’s trademark developments, is said to be sinking, and when you turn the faucets in the hotels built atop it, only cockroaches come out.

“Is it going to get better? They tell you that, but I don’t know what to believe anymore,” said Sofia, who still hopes to find a job before her time runs out. “People are really panicking quickly.”

Hamza Thiab, a 27-year-old Iraqi who moved here from Baghdad in 2005, lost his job with an engineering firm six weeks ago. He has until the end of February to find a job, or he must leave. “I’ve been looking for a new job for three months, and I’ve only had two interviews,” he said. “Before, you used to open up the papers here and see dozens of jobs. The minimum for a civil engineer with four years’ experience used to be 15,000 dirhams a month. Now, the maximum you’ll get is 8,000,” or about $2,000.

Mr. Thiab was sitting in a Costa Coffee Shop in the Ibn Battuta mall, where most of the customers seemed to be single men sitting alone, dolefully drinking coffee at midday. If he fails to find a job, he will have to go to Jordan, where he has family members — Iraq is still too dangerous, he says — though the situation is no better there. Before that, he will have to borrow money from his father to pay off the more than $12,000 he still owes on a bank loan for his Honda Civic. Iraqi friends bought fancier cars and are now, with no job, struggling to sell them.

“Before, so many of us were living a good life here,” Mr. Thiab said. “Now we cannot pay our loans. We are all just sleeping, smoking, drinking coffee and having headaches because of the situation.”

A New York Times employee in Dubai contributed reporting.

Global Worries Over U.S. Stimulus Spending
NYTIMES
By NELSON D. SCHWARTZ
January 30, 2009

DAVOS, Switzerland — Even as Congress looks for ways to expand President Obama’s $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all.

Few people attending the World Economic Forum question the need to kick-start America’s economy, the world’s largest, with a package that could reach $1 trillion over two years. But the long-term fallout from increased borrowing by the United Stated government, and its potential to drive up inflation and interest rates around the world, seems to getting more attention here than in Washington.

“The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”

Mr. Zedillo said that Washington, unlike most other countries, had the option of simply printing more money, because the dollar was a reserve currency for the rest of the world.

Over the long run, that could force long-term interest rates higher and drive down the value of the dollar, undermining the benefits that come with its special status.

Until now, most fears about surging government debt have focused on borrowing by European countries like Spain, Greece and especially Britain, which is also in the midst of a sizable bank bailout. That recently forced the British pound to a 23-year low against the dollar.

While the dollar’s status as refuge in a time of turmoil should prevent that kind of sell-off for now, a number of financial specialists warned that if fundamental factors like the lack of American savings and bloated budget deficits did not change, the dollar could eventually fall sharply .

“There aren’t that many safe havens,” said Alan S. Blinder, a Princeton economist who is a former vice chairman of the Federal Reserve in Washington, explaining why the dollar’s status as a reserve currency is unlikely to be threatened.

Instead, it is the dollar’s long-term value against other currencies that is vulnerable. “At some point, there may be so much Treasury debt, that investors may start wondering if they are overloaded in dollar assets,” Mr. Blinder said.

While the focus in Washington has been on putting together a stimulus package that will attract broader political support when it comes up for a vote in the Senate, here in Davos the talk has been about the coming avalanche of Treasury debt needed to pay for the plan on top of the bailout measures approved last fall, like the $700 billion Troubled Asset Relief Program, or TARP.

The stimulus was approved Wednesday by the House without Republican support, and could grow larger — mostly likely with additional tax cuts — to attract a bipartisan coalition.

American officials maintain they are aware of the challenge. A top White House adviser, Valerie Jarrett, promised in Davos on Thursday that once the stimulus plan achieved its intended affect, the United States would “restore fiscal responsibility and return to a sustainable economic path.”

To be sure, Congress and the White House will ultimately need to refill the government’s coffers, but how they might do that is barely on the radar screen in Washington at this point.

“Even before Obama walked through the White House door, there were plans for $1 trillion of new debt,” said Niall Ferguson, a Harvard historian who has studied borrowing and its impact on national power. He now estimates that some $2.2 trillion in new government debt will be issued this year, assuming the stimulus plan is approved.

“You either crowd out other borrowers or you print money,” Mr. Ferguson added. “There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term.”

Mr. Ferguson was particularly struck by the new borrowing because the roots of the current crisis lay in an excess of American debt at all levels, from homeowners to Wall Street banks.

“This is a crisis of excessive debt, which reached 355 percent of American gross domestic product,” he said. “It cannot be solved with more debt.”

While Mr. Ferguson is a skeptic of the Keynesian thinking behind President Obama’s plan — rather than borrowing and spending to stimulate the economy, he favors corporate tax cuts — even supporters of the plan like Mr. Zedillo and Stephen Roach of Morgan Stanley have called on the White House to quickly address how it will pay for the spending in the long-term.

“It’s huge,” Mr. Roach, the chairman of Morgan Stanley Asia, said. “President Obama has now laid out a scenario of multiyear, trillion-dollar deficits.”

The stimulus is widely expected to pass, but once it does, Mr. Roach said the focus would shift to “who foots the bill and what is the exit strategy. We don’t have the answer to either question.”

Mr. Zedillo, who remembers how Mexico was forced to tighten its belt when it received billions from Washington to keep its economy from collapsing in 1994, was even more blunt.

“People are not stupid,” Mr. Zedillo said. “They see the huge deficit, the huge spending, and wonder what comes next.”

REMEMBER MARC RICH AND HIS PARDON (RELATED TO ATT'Y GENERAL DESIGNATE ERIC HOLDER)?
Marc Rich Is One Victim Unlikely to Go to Court
NYTIMES
By ALISON LEIGH COWAN
January 9, 2009 Many investors who have lost money as clients of the financier Bernard L. Madoff have done what anyone might be expected to do in that situation: seek recourse through the courts.

But one victim, Marc Rich, would seem unlikely to go that route because of his own legal issues. Mr. Rich is the commodities trader who fled to Switzerland in 1983 to escape prosecution on charges of financial crimes and later received a pardon from President Bill Clinton on the last night of his administration in 2001.

Monika Meili, a spokeswoman for Mr. Rich’s office in Zug, told Bloomberg News on Thursday, “We can confirm that the Marc Rich Group and Marc Rich have an insignificant exposure held indirectly, which has no material impact on the overall financial situation of the group.”

The loss was $10 million to $15 million, according to someone with long knowledge of Mr. Rich’s finances who insisted on anonymity because he had not been authorized to speak.

He and another person, also knowledgeable about Mr. Rich’s finances, said the loss stemmed from Mr. Rich’s association with the money manager J. Ezra Merkin.

Mr. Merkin, a hedge fund investor whose Park Avenue firm said until recently that it had $5 billion under management, has invested for Mr. Rich for years. Mr. Merkin told his clients last month that he had entrusted more than $1 billion of their money to Mr. Madoff and that the likelihood of recovery was difficult to gauge. At least two of those clients, New York University and New York Law School, have sued Mr. Merkin, claiming he mishandled their money and misrepresented how he operated.

Mr. Merkin’s lawyer Andrew J. Levander was traveling on business and was not available, his office said.

Andy Merrill, a spokesman for Mr. Merkin. said, “As a matter of policy, they don’t comment on specific investors.”

The idea that Mr. Rich, once a fugitive, may now turn to an American court to seek redress struck some lawyers as fraught with problems and unlikely at best. “I don’t think you’ll ever see Marc Rich personally,” as a plaintiff in an American courtroom, said John F. Fornaciari, a Washington defense lawyer at Sheppard Mullin, who stifled a laugh about the legal complications stemming from the flight from justice and the contested pardon.

“If there’s some way for him to sue because the investments were made by a corporation, and it was arguably corporate money, and it had a president and it wasn’t him, and they lost money in the Madoff scandal, then that corporation might be able to sue without him being required to show up,” Mr. Fornaciari said. “But if there’s anything that required him to show up, he’s not coming.”

Gerald B. Lefcourt, a former president of the National Association of Criminal Defense Lawyers, also gauged the likelihood of Mr. Rich’s pressing a claim as “little or none.”

“He’ll never appear for discovery proceedings that will be required, and he’s not going to be sympathetic to any party, including the courts, after his failure to appear, notwithstanding the fact he was pardoned,” Mr. Lefcourt said. The pardon backfired in some ways by igniting public outrage and inviting prosecutorial interest in the process for a man who has generally sought to keep a low profile. For that reason, one longtime associate said he doubted Mr. Rich, who he said was not an acquaintance of Mr. Madoff’s, would seek any relief from the courts.

Born in Antwerp, Belgium, 74 years ago, Mr. Rich moved to the United States as a boy and rose to become a swashbuckling figure in international finance. He married Denise Eisenberg, now a songwriter, in 1966. They divorced 30 years later, but he relied heavily on her contacts as a Democratic fund-raiser to help obtain his pardon. He also enlisted scores of other influential people, including Ehud Barak, then prime minister of Israel, and the conductor Zubin Mehta, to help persuade Clinton administration officials to grant the pardon.

Mr. Rich apparently knew Mr. Merkin through the Fifth Avenue Synagogue, where he was once a member. Mr. Merkin’s father, Hermann, was a founder of the synagogue a half-century ago and Mr. Merkin is its current president.

Many of the charitable institutions that once welcomed Mr. Merkin into their inner sanctums, boards and investment committees because of his investment acumen and success have been politely accepting his resignation from those roles in recent weeks as he battles to save his reputation and fortune from angry creditors.

Rabbi Yaakov Kermaier of the Fifth Avenue Synagogue, several of whose members have also had serious financial setbacks in recent weeks because of their association with Mr. Madoff or Mr. Merkin, said in an e-mail message this week that Mr. Merkin’s term was winding down, though not because of the scandal.

“The elections for synagogue president (and other officers) are in the spring, though the formal nomination process begins months earlier,” the message said. “Ezra Merkin’s presidential term concludes this coming spring, and because of constitutional term limits, he is ineligible to run for another term as president. Ezra has led our community with extraordinary dedication and integrity, and I sincerely hope that after he concludes his presidential term, he will continue to serve our congregation in other capacities.”

Austria Names Supervisor for Fraud-Hit Medici Bank
NYTIMES
By THE ASSOCIATED PRESS
Filed at 10:59 a.m. ET
January 2, 2009

VIENNA, Austria (AP) -- The Austrian government appointed a supervisor Friday to oversee Medici Bank, which is reeling from more than $3 billion in losses blamed on Wall Street money manager Bernard Madoff.

Austria's Financial Markets Authority said it named Gerhard Altenberger to the post. Altenberger, a state financial inspector, will oversee all bank operations to ensure the stricken private lender ''carefully adheres to all legal and contractual obligations,'' the agency said in a statement.

Medici disclosed in December that it suffered huge losses it blamed on Madoff, who U.S. prosecutors say defrauded investors worldwide of $50 billion. Medici has said its biggest losses came from its Herald USA Fund and Herald Luxemburg Fund, which totaled $2.1 billion (euro1.5 billion). Both funds, along with other Medici investments, were exposed to alleged the scam.

Medici CEO Peter Scheithauer and Werner Tripolt, who oversaw the bank's executive committee, both resigned Friday.

Manufacturing Cools Around the World
NYTIMES
By BETTINA WASSENER
January 3, 2009 - another forward-dated story!

HONG KONG — Manufacturing activity slumped in some of the world’s leading economies in December, data on Friday showed, heralding more pain for consumers and businesses.

A closely watched index of purchasing managers in the euro zone showed manufacturing hit a low in December, falling to 33.9 from 35.6, with all figures below 50 showing a contraction in manufacturing. Similarly grim readings in Australia, China and India highlighted how the Asia-Pacific region has become caught up in the global turmoil. A report from the United States on Friday was also widely expected to show manufacturing there contracting at its fastest pace in nearly three decades last month. In China, the purchasing managers’ index by the brokerage firm CLSA showed the manufacturing sector had contracted for a fifth consecutive month. The survey showed the steepest decline in its history.

“With five back to back P.M.I.s signaling contraction, the manufacturing sector, which accounts for 43 percent of the Chinese economy, is close to technical recession,” said Eric Fishwick, head of economic research at CLSA in Hong Kong, in a note accompanying the release.

The data added to the flood of statistical evidence from across Asia-Pacific showing that the region is slowing faster than previously thought as demand withers in the United States and Europe.

Australia’s a manufacturing index showed a seventh month of contraction, and a similar survey in India showed activity down for a second month in December. In South Korea, December data showed exports plummeted 17.4 percent from a year earlier.

President Lee Myung-bak of South Korea pledged on Friday that the government would go into “emergency” mode to pull the country out of its economic crisis. And in Singapore, the economy shrank 12.5 percent in the last quarter of 2008 from the previous period, prompting the trade and industry ministry to lower its growth forecast for 2009. The ministry now expects Singapore’s economy to shrink up to 2 percent, with only 1 percent growth at best. Previously, it had expected up to 2 percent growth.

Asian stock markets took Friday’s figures in stride, with the Hang Seng index in Hong Kong gaining 4.5 percent. Stocks in Shanghai fell a moderate 0.7 percent, and the benchmark indexes in South Korea and Singapore both rose more than 2 percent. Shares in Europe were higher. In London, the FTSE 100 was 1.1 percent higher while the CAC 40 in Paris was up 2.2 percent and the DAX in Frankfurt, 2 percent.

Futures on Wall Street point to a higher opening. Still, the worsening data, combined with a stream of company profit warnings, production cuts and layoffs, raises the pressure on policymakers to step up their efforts to bolster their economies. India was due late on Friday to announce its second stimulus package in a month, and countries across the region are widely expected to announce more interest rate cuts in coming weeks.

The central bank in India on Friday cut interest rates for the fourth time in less than three months. The Reserve Bank of India said in a statement that it had cut the repurchase rate to 5.5 percent from 6.5 percent and the reverse-repurchase rate to 4 percent from 5 percent. The so-called cash reserve ratio, or the proportion of deposits banks must hold in reserve, was also cut to 5 percent from 5.5 percent, releasing 200 billion rupees or about $4.1 billion into the banking system.

“China’s economic outlook for 2009 will be best characterized as ‘getting worse before getting better,’ laying the foundation for a firmer recovery in 2010,” said Qing Wang, chief economist for Greater China at Morgan Stanley in Hong Kong.

Mr. Wang expected the pace of growth to continue to slow in the first six months, before existing stimulus measures can take effect. “The authorities have already made delivering economic growth a top policy priority by adopting a campaign-style policy execution approach,” he said. Mr. Wang expects interest rates to be cut aggressively by another 1.35 percentage points this year. The country’s important one-year lending rate is 5.31 percent. He added that a $586 billion stimulus package announced in November “is unlikely to be the first and only stimulus package for the entire year.”

The package includes substantial infrastructure spending, which will begin to lead to increased activity once weather conditions allow construction to begin in the spring. “The stimulus package provides a short-term buffer for the economy, and other policy measures such as health care and land reforms will be a long-term growth driver. This should help the stock market at least to stabilize in 2009,” Yi Tang, general manager at Edmond de Rothschild Asset Management in Hong Kong.

“We are seeing some encouraging signs that institutional investors are starting to consider putting money back into equities in China and the rest of Asia, hopefully in the next month or two,” he said. “But it will take longer for retail investors — who are worried about their job prospects and the wider economy — to go back into the market.”

The Great Unraveling
NYTIMES
By THOMAS L. FRIEDMAN
December 17, 2008

Hong Kong

The stranger, a Western businessman, slipped into the chair next to me at an Asia Society lunch here in Hong Kong and asked me a question that I can honestly say I’ve never been asked before: “So, just how corrupt is America?”

His question was occasioned by the arrest of the Wall Street money manager Bernard Madoff on charges of running a Ponzi scheme that bilked investors out of billions of dollars, but it wasn’t only that. It’s the whole bloody mess coming out of Wall Street — the financial center that Hong Kong moneymen had always looked up to. How could it be, they wonder, that such brand names as Bear Stearns, Lehman Brothers and A.I.G. could turn out to have such feet of clay? Where, they wonder, was our Securities and Exchange Commission and the high standards that we had preached to them all these years?

One of Hong Kong’s most-respected bankers, who asked not to be identified, told me that the U.S.-owned investment company where he works made a mint in the last decade cleaning up sick Asian banks. They did so by importing the best U.S. practices, particularly the principles of “know thy customers” and strict risk controls. But now, he asked, who is there to look to for exemplary leadership?

“Previously, there was America,” he said. “American investors were supposed to know better, and now America itself is in trouble. Whom do they sell their banks to? It is hard for America to take its own medicine that it prescribed successfully for others. There is no doctor anymore. The doctor himself is sick.”

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the “legal” scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds — which Moody’s or Standard & Poors rate AAA — and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn’t a pyramid scheme, what is?

Far from being built on best practices, this legal Ponzi scheme was built on the mortgage brokers, bond bundlers, rating agencies, bond sellers and homeowners all working on the I.B.G. principle: “I’ll be gone” when the payments come due or the mortgage has to be renegotiated.

It is both eye-opening and depressing to look at our banking crisis from China. It is eye-opening because it is hard to avoid the conclusion that the U.S. and China are becoming two countries, one system.

How so? Easy, in the wake of our massive bank bailout, one can now look at China and America and say: “Well, China has a big-state-owned banking sector, next to a private one, and America now has a big state-owned banking sector next to a private one. China has big state-owned industries, alongside private ones, and once Washington bails out Detroit, America will have a big state-owned industry next to private ones.”

Yes, an exaggeration to be sure, but the truth is the differences are starting to blur. For two decades, a parade of U.S. officials came to China and lectured Beijing on the necessity of privatizing its banks, said Qu Hongbin, the chief economist for China at HSBC. “So, slowly we did that, and now, all of a sudden, we see everybody else nationalizing their banks.”

It’s depressing because China in many ways feels more stable than America today, with a clearer strategy for working through this crisis. And while the two countries are looking more alike, they appear to be on very different historical trajectories. China went crazy in the 1970s, with its Cultural Revolution, and only after the death of Mao and the rise of Deng Xiaoping has it managed to right itself, gradually moving to a market economy.

But while capitalism has saved China, the end of communism seems to have slightly unhinged America. We lost our two biggest ideological competitors — Beijing and Moscow. Everyone needs a competitor. It keeps you disciplined. But once American capitalism no longer had to worry about communism, it seems to have gone crazy. Investment banks and hedge funds were leveraging themselves at crazy levels, paying themselves crazy salaries and, most of all, inventing financial instruments that completely disconnected the ultimate lenders from the original borrowers, and left no one accountable. “The collapse of communism pushed China to the center and [America] to the extreme,” said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland.

The Madoff affair is the cherry on top of a national breakdown in financial propriety, regulations and common sense. Which is why we don’t just need a financial bailout; we need an ethical bailout. We need to re-establish the core balance between our markets, ethics and regulations. I don’t want to kill the animal spirits that necessarily drive capitalism — but I don’t want to be eaten by them either.

NEWSMAKERS OF DIFFERENT STRIPES: VICTIMS - http://www.stamfordadvocate.com/ci_11645299?source=most_viewed

NYTIMES biographical long Sunday story and Barron's report from 2001 on Madoff...

Madoff on this page, too; also here and here. Housing bubble story from the NYTIMES. Read about another Ponzi scheme...judge's ruling on bail...
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Ponzi on the Potomac
National Review (from POLITICO)
By: Gov. Tim Pawlenty
February 1, 2010 04:59 AM EST

The U.S. attorney general recently announced that the Justice Department is beefing up its efforts to fight financial fraud such as Ponzi schemes. Good. The agency should start by reviewing the spending habits of the federal government, which is running the largest Ponzi scheme our country has ever seen.

In a Ponzi scheme, organizers create the illusion of profit for early investors by siphoning money from later participants. It works until there is not enough income to pay the promised dividends, exposing the fraud and leaving everyone broke. That is essentially what the federal government is doing, as it continues to spend and promise far more than can ever be paid for by current and future revenues.

Last week, the U.S. Senate increased the nation’s debt ceiling by an additional $1.9 trillion. That vote was necessary to further the Ponzi scheme. It should serve as a wake-up call that this level of spending is unsustainable.

The debate is no longer between competing political philosophies — it is a matter of basic mathematics. Here is a sampling of the facts:

• Federal government spending has grown nearly seven times faster than median income since 1970, according to the U.S. Census Bureau and Office of Management and Budget.

• At more than $12 trillion, the federal debt is already more than 80 percent of the nation’s gross domestic product and growing fast.

• The federal government’s total debt, including unfunded liabilities, means about $600,000 of debt for every U.S. household.

Sooner or later, the federal government’s scheme will come crashing down, and the loss will be mammoth.

But it doesn’t have to end that way. If our country takes bold and decisive action soon, the worst effects can still be avoided.

We should start with the obvious. When the bathtub is overflowing, a wise first response is to turn off the faucet. The federal government’s spending-increase spigot needs to be shut off.

This will require a national understanding and acceptance of the problem: We need to admit our addiction to the illusion of government “free stuff” and demand that spending be cut in almost all areas.

This will not be easy. In recent decades, the national debt has grown regardless of which party is in power because too many politicians seek support by spending more, even though a sound economic future demands they spend less.

That’s why we need an amendment to the U.S. Constitution to require a balanced budget with limited exceptions for war, natural disasters and other emergencies. Every state but one has a balanced budget requirement, and while such requirements make for difficult decisions, they work.

The president also should be given line-item veto authority power as a budget enforcement tool. The experience of the states shows that this is an effective way of preventing excessive spending.

Spending reduction tools alone will not meet this challenge. We must also grow the economy. To that end, Congress should reject federal legislation that places additional burdens on growth, such as the proposed health care overhaul, cap-and-trade bill, labor union card check and tax increases.

Instead, lawmakers should support policies that promote economic growth. For example, the Bush tax cuts should be made permanent and tax burdens on individuals and businesses should be further reduced. To better compete overseas, Congress should finally pass the pending free-trade agreements with South Korea and Colombia, and re-enact trade promotion authority. And we should pass health care reforms that would empower consumers to make smarter medical choices and lead to more competition and lower costs.

Like most other states, Minnesota still faces its share of economic challenges. However, during my two terms as governor, we have dramatically slowed the growth of state government spending and moved the state out of the Top 10 in tax burden. In the current budget biennium, we actually reduced overall spending for the first time in the state’s 150-year history. It has not been easy in a liberal state such as Minnesota, especially during challenging economic times. But it’s possible with a balanced budget requirement, line-item veto authority, pro-growth policies and a lot of hard work and determination.

Ponzi schemes succeed because people want to believe in a free lunch as long as the easy money is rolling in. But a day of reckoning always arrives, and ours is right around the corner. The sooner we open our eyes, the sooner we can clean up this mess.

Civil Madoff-related fraud charges dismissed
YAHOO
By LARRY NEUMEISTER, Associated Press Writer
Feb. 2, 2010

NEW YORK – Finding accusations "speculative and flimsy," a judge has dismissed civil securities fraud charges against a New York brokerage firm and its executives that resulted from a probe into Bernard Madoff's epic fraud.

The charges brought by the Securities and Exchange Commission were dismissed Monday against Cohmad Securities Corp., its chairman, Maurice "Sonny" Cohn, his daughter, Chief Operating Officer Marcia Cohn, and vice president and broker Robert Jaffe.

U.S. District Judge Louis L. Stanton gave the SEC permission to refile the charges but only if it can provide facts to back them up.

"Nowhere does the complaint allege any fact that would have put defendants on notice of Madoff's fraud," Stanton wrote. "Rather, the complaint supports the reasonable inference that Madoff fooled the defendants as he did individual investors, financial institutions and regulators."

Madoff, 71, is serving a 150-year prison sentence after admitting that he operated a giant Ponzi scheme for at least two decades, cheating thousands of individuals, charities, celebrities and institutional investors out of billions of dollars.

Clifford Thau, a lawyer for Cohmad and the Cohns, welcomed the ruling, saying in a statement: "We remain confident that the SEC will not be able to allege any new facts that will cure the deficiencies that Judge Stanton found in the SEC's complaint."

Messages for comment left with the SEC and a lawyer for Jaffe were not immediately returned.

Criminal and civil investigators have been probing the history of the Madoff company, his employees, his relatives and anyone who promoted his private investment business to find those culpable for the financial disaster that was revealed by Madoff in December 2008.

Last year, the SEC accused the defendants in a lawsuit of securities fraud, saying they collected several hundred million dollars in fees from Madoff to solicit affluent though financially unsophisticated people to trust their money to him.

The regulators said the defendants were crucial to Madoff's success because they gave the impression that one could only invest with Madoff as a favor through special access.

In his ruling, the judge noted that Madoff had operated his business since 1960 and that Maurice Cohn is Madoff's former neighbor.

Cohmad was formed in 1985 and Marcia Cohn joined in 1988, three years before Madoff says he began operating his business as a fraud, the judge said. He also noted that the Cohns worked in Cohmad's New York office on the same floors as Madoff's legitimate market-making business.

Jaffe, who lives in Palm Beach, Fla., previously headed Cohmad's Boston office. He is a son-in-law of Carl Shapiro, a prominent Boston-area businessman and philanthropist whose family was said to have lost hundreds of millions of dollars from their investments with Madoff.

In its complaint, the SEC said Madoff directed Cohmad and the Cohns to maintain a cloud of secrecy about his business and banned all written marketing materials, cold calls and emails. It said he also told the defendants he would not accept investors in the finance and banking industry because sophisticated investors ask too many questions.

The Cohns countered the allegations by saying an aura of exclusivity is a common marketing tactic.

The judge rejected the SEC's conclusion that the defendants' fraudulent intent could be inferred from allegations that Cohmad failed to disclose the full extent of its relationship with Madoff in its regulatory filings and books and records.

He said the argument "that that concealment was because any defendant knew that Madoff was committing fraud is speculative and flimsy."

Madoff Arrives at Federal Prison in North Carolina
NYTIMES
By THE ASSOCIATED PRESS
July 15, 2009

The convicted swindler Bernard L. Madoff arrived at a federal prison in Butner, N.C., on Tuesday to start serving a 150-year sentence.

A spokeswoman for Federal Bureau of Prisons, Linda Thomas, said Mr. Madoff arrived at the Butner Federal Correctional Complex on Tuesday morning, after a brief stay at an Atlanta prison while in transit from the Metropolitan Correctional Center in Lower Manhattan.

Mr. Madoff, 71, has a projected release date of Nov. 14, 2139, assuming he gets early release credit for good behavior while in prison. He is listed in Bureau of Prisons records as prisoner No. 61727-054.

Mr. Madoff pleaded guilty in March to fraud charges after he admitted that he ran a multibillion-dollar Ponzi scheme that wiped out thousands of investors and ruined charities.

Mr. Madoff had requested that he be kept in a federal prison in Otisville, N.Y., and Judge Denny Chin, who presided over the case, had recommended that he stay in the Northeast.

The Butner Federal Correctional Complex, located about 45 miles northwest of Raleigh, includes two medium-security facilities, a low-security facility and a hospital, according to the Bureau of Prisons Web site. Within the federal prison system, it is perhaps best known for its hospital facility to treat elderly or ill prisoners.

Among the prison’s other inmates are the founder of Adelphia Communications, John Rigas, and Mr. Rigas’s son Timothy, who were found guilty of securities fraud in 2004.

Madoff Sentenced to 150 Years in Prison for Ponzi Scheme
NYTIMES
By JACK HEALY
June 30, 2009

A federal judge sentenced Bernard L. Madoff to 150 years in prison on Monday for operating a huge Ponzi scheme that devastated thousands of people, calling his crimes “extraordinarily evil.”

In pronouncing the sentence — the maximum he could have handed down — Judge Denny Chin turned aside Mr. Madoff’s own assertions of remorse and rejected the suggestion from Mr. Madoff’s lawyers that there was a sense of “mob vengeance” surrounding calls for a long prison term.

“Objectively speaking, the fraud here was staggering,” the judge said. “It spanned more than 20 years.”

After victims told a packed courtroom that he should be shown no mercy in the case, Mr. Madoff stood up from the defense table to acknowledge the damage he had inflicted and expressed regret.

“I’m responsible for a great deal of suffering and pain, I understand that,” Mr. Madoff told the court. “I live in a tormented state now, knowing all of the pain and suffering that I’ve created. I’ve left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren.”

Addressing his victims seated in the courtroom, he said: “I will turn and face you. I’m sorry. I know that doesn’t help you.”

Prosecutors said that Mr. Madoff deserved the maximum sentence — representing a life sentence and more for the disgraced 71-year-old financier — for perpetrating one of the biggest investment frauds in Wall Street history. Mr. Madoff’s own lawyers said he should receive only 12 years, a sentence that would offer him the chance to walk out of prison at age 83.

Mr. Madoff wore a dark suit, white shirt and a tie and sat at a polished wood table, surrounded by his lawyers. Prosecutors sat opposite them, and the viewing gallery was crowded with onlookers.

The hearing opened shortly after 10 a.m. with statements from victims of the Madoff scheme, which took in some $65 billion before it collapsed. Mr. Madoff’s victims stood up and told wrenching stories of how they had lost everything in his scheme, and were now working several jobs and living hand-to-mouth. They fought through tears, connected Mr. Madoff to villains from Dante’s Inferno, spoke of their feelings of betrayal and mistrust, and described how their families had lost money that would have gone to caring for disabled relatives.

“How could someone do this to us?” said Dominic Ambrosino, a retired New York City corrections officer who said he lost his life savings with Mr. Madoff and was the first victim to speak. “We worked honestly and so hard.”

Another victim, Sharon Lissauer, who said she invested all of her savings with Mr. Madoff, told the court: “He should spend his whole life in jail. He’s ruined so many people’s lives. He killed my spirit and shattered my dreams.”

After Mr. Madoff’s victims finished speaking, his lawyer, Ira Lee Sorkin, stood up and said the government’s request for a 150-year sentence bordered on absurd. He called Mr. Madoff a “deeply flawed individual,” but a human being nonetheless.

“Vengeance is not the goal of punishment,” Mr. Sorkin said.

Still, Mr. Sorkin added that Mr. Madoff expects to “live out his years in prison.”

But in meting out the maximum sentence, Judge Chin pointed out that no friends, family or other supporters had submitted any letters on Mr. Madoff’s behalf, attesting to the strength of his character or good deeds he had done.The hearing on Monday marked a climactic moment in the criminal case against Mr. Madoff, whose name has become synonymous with greed and fraud on Wall Street. Dozens of photographers and television camera crews from New York to Britain to China waited outside the federal district courthouse on Pearl Street as reporters, legal teams and Mr. Madoff’s victims filed toward the courtroom where Mr. Madoff will be sentenced.

“We’re hoping for a big sentence only as a deterrent,” Cynthia Friedman, who said she lost her life savings with Mr. Madoff, said outside the courtroom. “He can’t hurt us anymore.”

It was a scene reminiscent of the morning in March when Mr. Madoff walked into the same courthouse with his lawyers and pleaded guilty to a series of counts of fraud, theft and perjury. This time, however, Mr. Madoff was brought to court from his jail cell at the Metropolitan Correctional Center in Lower Manhattan.

Mr. Madoff’s case was playing out amid a tangle of lawsuits, criminal and civil investigations, and competing claims for restitution prompted by revelations of the outsize fraud at Bernard L. Madoff Investment Securities.

It will be at least another three months before the judge makes a decision on repaying the victims. Prosecutors requested more time to sift through Mr. Madoff’s records to determine how much was lost and how many people are owed.

Mr. Madoff’s accountant, David G. Friehling, was charged with securities fraud in March, and is so far the only other person to face criminal charges connected to the Ponzi scheme. A New York financier whose clients lost $2 billion with Mr. Madoff has been charged with fraud and deception in a civil suit by the New York State attorney general.

The inspector general of the Securities and Exchange Commission is examining how regulators failed for years to catch Mr. Madoff. Investment funds that channeled money to Mr. Madoff have been sued, and two have agreed to return millions they withdrew before Mr. Madoff’s December arrest.

Mr. Madoff will most likely return to his cell at the Metropolitan Correctional Center as federal prison officials determine where he will serve his sentence.

For decades, Mr. Madoff built his reputation — and his client base — on the promise of healthy returns that flowed in as reliably as the tides. Big hedge funds and notables like Elie Wiesel and Sandy Koufax entrusted their money to Mr. Madoff’s investment business, but so did hundreds of retirees and smaller investors.

But the reliable returns and monthly investment statements simply masked a Ponzi scheme that attracted new money to pay existing investors and finance his operating costs.

When the cash ran out, the illusion imploded.

Banco Santander to Pay $235 Million in Madoff Case
NYTIMES
Zachery Kouwe
May 26, 2009, 12:22 pm

Banco Santander, which funneled $3 billion of its clients’ money to Bernard L. Madoff, agreed Tuesday to pay $235 million to settle potential legal claims by the trustee liquidating Mr. Madoff’s now-defunct brokerage firm.

The Spanish bank’s settlement with the trustee, Irving H. Picard, would raise the amount of assets the trustee has recovered for victims of Mr. Madoff’s enormous Ponzi scheme to more than $1.2 billion. As of Memorial Day, letters for commitments in excess of $116 million had been sent by Mr. Picard’s office to 237 victims of the Madoff fraud.

Mr. Picard said Santander, which had 17 million euros of its own capital exposed to the fraud, settled for 85 percent of the original claim against it. The bank steered money to Mr. Madoff through its Geneva-based hedge fund unit, Optimal Investment Services, which earned more than $100 million in fees from clients in 2006 and 2007.

Santander is one of several banks that have offered to compensate its clients who lost money in the fraud. In his lawsuit, Mr. Picard claimed that Optimal “should have known” about the fraud. He has sued several feeder funds that invested with Mr. Madoff for more than $10 billion.

Spanish prosecutors have said they are investigating Santander’s relationship with Mr. Madoff’s firm and are looking into into a trip made by one of the bank’s executives to visit Mr. Madoff a few weeks before he confessed to running a worldwide, multibillion-dollar Ponzi scheme.

Mr. Madoff pleaded guilty to fraud charges in March and is being held in jail in Manhattan ahead of his sentencing on June 29.

Receivers to Control 3 Madoff - Linked Merkin Funds
By REUTERS
Filed at 12:42 p.m. ET
May 19, 2009

NEW YORK (Reuters) - Receivers would take control of three hedge funds run by prominent money manager Ezra Merkin and linked to the Madoff fraud, lawyers for New York's top legal officer and Merkin said on Tuesday.

The lawyers said in court they had reached an agreement in principal for one receiver to handle Ariel Fund Ltd and Gabriel Capital LP and a second receiver to control Ascot Partners LP as part of an effort to recover money for defrauded investors.

"We believe this resolution in principal will be in the public interest and serve the victims of the fraud," David Markowitz, an attorney for New York Attorney General Andrew Cuomo told State Supreme Court Justice Richard Lowe.

The judge gave Cuomo's office and Merkin's lawyers until May 28 to finalize the agreement, which comes after the attorney general sued Merkin for civil fraud in April, accusing him of steering $2.4 billion to confessed swindler Bernard Madoff and lying to investors.

Madoff, 71, a former nonexecutive chairman of Nasdaq, pleaded guilty in March to running a fraud of up to $65 billion, Wall Street's biggest investment scheme. He is jailed awaiting sentencing on June 29 and he is likely to spend the rest of his life in prison.

Merkin's lawyer, Andrew Levander, said in a written statement on Tuesday that the fund founder was working closely with Cuomo's office.

"As part of his continuing efforts to maximize the returns to investors in the Funds, Mr. Merkin has agreed in principle to appoint Guidepost Partners LLC, a leader in global investigations, security, and compliance, as the receiver for the Funds while he remains available to consult regarding the wind-down at no cost to the Funds," the statement said.

When Cuomo sued Merkin, Levander said Merkin performed extensive due diligence on Madoff, but he too was misled just like other investors, which number as many as 7,000, according to court documents.

Merkin also has been sued for more than $500 million by a trustee appointed in Manhattan federal bankruptcy court who is winding down the brokerage arm of Bernard L. Madoff Investment Securities LLC. Merkin faces numerous lawsuits by investors.

The proposal to appoint receivers also needs to be reviewed by lawyers for New York University, one of the institutions that sued Merkin.

The cases are People v J. Ezra Merkin and Gabriel Capital Corp 450879/2009 and New York University v Gabriel Capital Copr, J. Ezra Merkin, et al 603803/2008 in New York State Supreme Court

http://www.madofftrustee.com/HardshipProgram.html
Madoff Trustee Starts ‘Hardship Program’ for Victims
NYTIMES "Deal Book"
May 8, 2009, 2:10 pm

The trustee charged with recovering assets for investors defrauded by Bernard L. Madoff has started a “hardship program” for individual victims to accelerate payments from the Securities Investor Protection Corporation.

The program, announced on Friday by the trustee, Irving H. Picard, requires individual victims to file an additional claim by July 2 to be eligible for an accelerated payment of up to $500,000 from S.I.P.C. Feeder funds, partnerships and other business entities are not eligible for the program, the trustee said.

In order to qualify, the trustee plans to evaluate each application based on various indicators of hardship. They include an inability to pay for necessary living expenses like food, housing, transportation and medical expenses; the necessity to return to work at the age of 65 or older; or declaring personal bankruptcy.

Hundreds of victims of Mr. Madoff’s vast global Ponzi scheme, many who are retirees, have lost their entire life savings and have been forced to sell their homes and move in with relatives. Mr. Picard is liquidating Mr. Madoff’s former firm and collecting assets, which will eventually be divided up among the victims of the fraud.

S.I.P.C., which provides insurance to customers of failed brokerage firms, can reimburse Madoff victims up to $500,000 each depending on how much they ultimately lost from the fraud.

Madoff investors ordered to return false profits
DAY
Published on 4/24/2009

New York -- (AP) The trustee unraveling Bernard Madoff's Ponzi scheme is threatening legal action to recover $735 million from investors who unwittingly made money off the swindle.

For decades, Madoff paid steady profits to his clients, telling them the money came from the stock market. But the gains were fictitious. Madoff pleaded guilty last month to stealing from some investors to pay bogus profits to others.

Trustee Irving Picard has sent letters to 223 investors, ordering them to return money they withdrew before the scheme collapsed. He wants the money to be divided evenly among all victims. Lawyers representing some of those investors expressed dismay over the letters and said they would challenge their legality.

Madoff Is Jailed After Pleading Guilty
NYTIMES
By DIANA B. HENRIQUES and JACK HEALY
March 13, 2009

Bernard L. Madoff pleaded guilty Thursday to all the charges against him and expressed remorse for a vast Ponzi scheme that bilked investors out of billions of dollars.

Standing before Judge Denny Chin in United States District Court in Manhattan, Mr. Madoff was sworn in and reminded that he was under oath. Noting that he had waived indictment, Judge Chin asked, “How do you now plead,” guilty or not guilty?

“Guilty,” Mr. Madoff responded.

His formal confession will cost him his liberty. Rather than letting him remain free on bail and return to his apartment on the Upper East Side of Manhattan, Judge Chin ordered Mr. Madoff immediately jailed as he awaits sentencing.

“He has incentive to flee, he has the means to flee, and thus he presents the risk of flight,” Judge Chin said. “Bail is revoked.”

The 11 counts of fraud, money laundering, perjury and theft to which Mr. Madoff pleaded guilty carry maximum terms totaling 150 years. Sentencing was scheduled for June 16.

Dressed in a gray suit, Mr. Madoff, 70, appeared in a courtroom packed with journalists, lawyers and some of his victims. Flanked by his lawyers, he stood up and began to answer questions from Judge Chin about whether he understood the ramifications of his guilty plea, whether he was satisfied with his legal representation and whether he was competent to enter the guilty plea.

At first, Mr. Madoff’s voice was barely audible as he acknowledged the litany of crimes.

“Try to keep your voice up so that I can hear you, please,” Judge Chin said. At one point, Mr. Madoff asked for water.

In recounting how he sustained a 20-year fraud whose collapse erased as much as $65 billion that his customers thought they had in their accounts, Mr. Madoff said, “I believed it would end shortly and I would be able to extricate myself and my clients from the scheme.”

“I cannot adequately express how sorry I am for what I have done,” he said. “I am deeply sorrowful and ashamed.”

Although Mr. Madoff admitted to operating what he called “a Ponzi scheme through the investment advisory side of my business,” he said all other aspects of his enterprise, operated by his sons and brother, were legitimate, profitable and successful.

The court session marked the first time since his arrest by federal agents on Dec. 11 that Mr. Madoff had spoken publicly about how he ran what was perhaps the largest fraud in Wall Street history, a global scheme that ensnared hedge funds, nonprofit groups and celebrities, and devastated the life savings of thousands of people.

During the 75-minute court hearing, a few victims were permitted to speak up against accepting the plea. One was Maureen Ebel, who said: “If we go to trial we have more of a chance to comprehend the global scope of this horrendous crime. We can hear and bear witness to the pain that Mr. Madoff has inflicted on the young, the old and the infirm.”

A federal prosecutor, Marc O. Litt, said the government was continuing its investigation and was looking for assets and anyone else who might be criminally responsible for the fraud.

It remains unclear where the billions of dollars that his victims lost has gone, and whether those victims will ever see any meaningful restitution. Prosecutors have said the government is seeking $170 billion in forfeited assets from Mr. Madoff, apparently representing all the money that ran through Madoff accounts traceable to the crimes.

A court-appointed trustee liquidating Mr. Madoff’s business has so far only been able to identify about $1 billion in assets to satisfy claims.

This week, the government said Mr. Madoff had 4,800 client accounts at the end of November supposedly containing $64.8 billion in customer savings. But the government said Mr. Madoff’s business “held only a small fraction of that balance.”

As Mr. Madoff arrived at the courthouse early Thursday morning, helicopters buzzed overhead and television news trucks lined the street. The day’s events marked a coda in the saga of a man whose name has become shorthand for an entire era of greed and deceit on Wall Street.

With the promise of steady, unwavering returns, Bernard L. Madoff Investment Securities enticed thousands of investors including boldface names like Senator Frank Lautenberg of New Jersey, the Hall of Fame pitcher Sandy Koufax and a charity run by the Nobel Peace Prize laureate Elie Wiesel.

This week, the government offered more details on how Mr. Madoff ran the fraud that had financed his lush lifestyle of a beachfront mansion in the Hamptons, an estate near the French Riviera and yachts in New York, Florida and the Mediterranean.

Prosecutors said that Mr. Madoff concocted an elaborate charade to make it seem like he was running a legitimate investment business when, in reality, “no such business was actually being conducted.” He hired employees with little training or experience and directed them to generate false monthly account statements. He shuttled millions between banks in New York and London to make it seem as if he was “conducting securities transactions in Europe on behalf of investors when, in fact, he was not conducting such transactions,” prosecutors said. And they said he repeatedly lied to regulators from the Securities and Exchange Commission to cover up his scheme.

Madoff Waives Indictment, to Plead Guilty
NYTIMES
By REUTERS
Filed at 3:48 p.m. ET
March 10, 2009

NEW YORK (Reuters) - There was a "fair expectation" that accused swindler Bernard Madoff will plead guilty on Thursday to criminal charges in Wall Street's biggest fraud, his lawyer said in court on Tuesday.

Asked by Judge Denny Chin in U.S. District Court in Manhattan whether Madoff, 70, will plead guilty to 11 criminal counts by U.S. prosecutors on Thursday, his lawyer, Ira Lee Sorkin, said: "I think that is a fair expectation."

U.S. prosecutor Marc Litt said there was no plea agreement with Madoff.

At a court hearing in New York over potential conflicts of interest for Sorkin, Madoff said "Yes I am" when asked by the judge whether he was satisfied with his attorney continuing to represent him.

U.S. prosecutors have said Madoff, out on $10 million bail but under 24-hour house arrest and electronic surveillance in his luxury Manhattan apartment, ran the biggest Ponzi scheme in history. A Ponzi scheme is one in which early investors are paid with the money of new clients.

The purported swindle ran for decades with amazingly consistent returns of between 10 and 12 percent, but collapsed in last year's market meltdown, shocking thousands of investors worldwide.

Prosecutors indicate Madoff plea may be in works
DAY
By LARRY NEUMEISTER, Associated Press Writer
Posted on Mar 6, 4:02 PM EST

NEW YORK (AP) -- Prosecutors filed court papers Friday indicating Bernard Madoff may be ready to plead guilty to charges arising from one of the biggest financial frauds in history. Madoff, 70, is scheduled for court twice next week, including a Tuesday appearance to waive any potential conflicts of interest involving his lawyer, and a Thursday morning arraignment. A defendant must enter a plea - guilty or not guilty - at an arraignment.

The U.S. attorney's office suggested Friday in a brief court filing that the money manager is ready to waive an indictment and one of Madoff's lawyers said he had already done so. A waiver of indictment is a necessary procedural step before a defendant enters a guilty plea.

Prosecutors have a deadline of next Friday to bring an indictment against Madoff under the speedy-trials law.

Madoff has been confined to his Manhattan penthouse since his arrest in early December after authorities said he told his family that he had engaged in a $50 billion fraud. Authorities have since said money lost by investors might be less than $17 billion and the higher amount may represent false profits.

Madoff has never contested the allegations and recently surrendered millions of dollars in major assets, actions that typically precede plea deals.

Investigators have spent the last three months trying to untangle Madoff's complicated financial operation while attempting to return what is left of his assets to investors who lost billions. Madoff's cooperation could be key to explaining the mysteries and intricacies of his business, and also explain if others were involved in the fraud.

Daniel J. Horwitz, a Madoff defense lawyer, would only say "we've waived the right to indictment and the case will proceed by information."

Typically, a defendant is brought before a judge, waives indictment and enters a guilty plea the same day to a charging document known as an "information." It resembles an indictment but is brought by prosecutors rather than a grand jury.

Prosecutor's spokeswoman Rebekah Carmichael declined to comment.

Matthew Fishbein, a former chief of the criminal division in the federal prosecutor's office in Manhattan who is now in private practice, said a waiver of indictment is often followed quickly by a guilty plea but it does not have to be imminent.

"This seems to be a more complicated information and more back and forth going on. It may simply be that this basically buys them some time," he said.

Madoff already has surrendered rights to his business and any of the assets held by the business. A trustee overseeing his assets said he has identified nearly $1 billion in assets that are available to reimburse investors who have lost money.

Shortly after his arrest, Madoff offered to relinquish many of his and his wife's assets, including properties in Palm Beach, Fla., and Antibes, France, as well as his boats and cars, according to a Jan. 13 court filing signed by Horwitz and fellow defense attorney Ira Sorkin.
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