Life in OUR America, The Livyjr Files Volume 7 Options

[Livyjr]

"Stocks decline as investors mull economy"

By TIM PARADIS, Associated Press

Last updated: 5:52 p.m., Monday, February 4, 2008

NEW YORK -- Wall Street retrenched Monday, closing sharply lower as investors showed their cautious side and cashed in profits from the market's best week in nearly five years.

The Dow Jones industrial average fell more than 100 points.

Given the scope of last week's gains, a pullback Monday wasn't unexpected and perhaps reflected the normal ebb-and-flow of trading.

"It's not like all of our problems went away because the market was up a couple of days last week."

"There are still some problems hanging over," said Tom Higgins, chief economist at Payden & Rygel Investment Management in Los Angeles.

He said investors chiefly remained concerned about the labor market -- given the huge effect of consumer spending on the economy -- and on the feasibility of efforts to aid struggling bond insurers.

The session's move lower continued even after a Commerce Department report showed that orders at U.S. factories rose by 2.3 percent in December -- the biggest increase since July.

Analysts had been expecting a 2 percent increase after a 1.7 percent gain in November.

While stocks showed little reaction to the factory orders report, Wall Street remains eager for any clues about the nation's economic health.

It continued to watch earnings reports trickle in; the readings could help indicate whether Wall Street last week carved the beginnings of a sustainable recovery.

Last week, the Dow Jones industrial average jumped 4.39 percent, the Standard & Poor's 500 index gained 3.75 percent, and the Nasdaq composite index advanced 4.87 percent.

Downgrades of credit card companies American Express Co. and Capital One Financial Corp. also weighed on stocks Monday.

The Dow fell 108.03, or 0.85 percent, to 12,635.16.

Broader stock indicators also lost ground.

The S&P 500 index fell 14.60, or 1.05 percent, to 1,380.82, and the Nasdaq fell 30.51, or 1.26 percent, to 2,382.85.

The Dow is 10.8 percent below its record close of 14,164.53 from Oct. 9, but is up 8.6 percent from the 15-month lows it hit in January.

The Federal Reserve's second interest-rate cut in about a week helped boost stocks last week.

Bond prices fell.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.64 percent from 3.60 percent late Friday.

The dollar slipped against most other major currencies, and gold prices also fell.

Light, sweet crude oil rose rose $1.06 to settle at $90.02 a barrel on the New York Mercantile Exchange.

In corporate news, Google Inc. said Sunday that Microsoft Corp.'s $42 billion bid for Yahoo Inc., announced Friday, amounts to an attempt to gain illegal control over the Internet.

Microsoft Chief Executive Steve Ballmer said Monday the proposed deal would leave the software maker as a "strong No. 2 competitor" against Google.

Google, whose stock is down about one-third from its high of $741.79 on Nov. 6, fell $20.47, or 4 percent, to $495.43, Dow component Microsoft dipped 26 cents to $30.19, and Yahoo rose 95 cents, or 3.4 percent, to $29.33.

Financial stocks, which helped drive last week's gains, fell after the Financial Times reported that major private equity firms aren't likely to take part in efforts to shore up the finances of troubled bond insurers Ambac Financial Group Inc. and MBIA Inc.

Ambac fell $1.81, or 13.7 percent, to $11.39, while MBIA declined 97 cents, or 5.9 percent, to $15.39.

American Express, one of the 30 stocks that make up the Dow industrials, fell $1.94, or 3.9 percent, to $47.66, while Capital One fell $4.32, or 7.6 percent, to $52.65.

"We have some downgrades in the financial sector that are hitting those stocks," said Peter Cardillo, chief market economist at Avalon Partners.

"And we also had a fairly good week last week, so it would only be natural to fall this week."

"The market also needs closure on what is going to happen to the bond insurance industry."

"Until we know if it gets a rescue plan, the stock market is likely to stay defensive."

Wendy's International Inc. fell $1.25, or 5 percent, to $23.93 after reporting its fourth-quarter earnings rose 42 percent amid increased profit margins but missed expectations.

Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange.

Consolidated volume came to 3.38 billion shares Monday, down from 4.51 billion shares Friday.

The Russell 2000 index of smaller companies fell 7.04, or 0.96 percent, to 723.46.

Overseas, Japan's Nikkei stock average rose 2.69 percent, Hong Kong's Hang Seng index climbed 3.77 percent, and China's benchmark but often-volatile Shanghai Composite index jumped 8.13 percent after reports indicated the economic effects from harsh winter storms in China might not have been as bad as feared.

Britain's FTSE 100 fell 0.05 percent, Germany's DAX index rose 0.46 percent, and France's CAC-40 fell 0.09 percent.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

[Livyjr]

"Treasurys off; investor confidence grows"

By LESLIE WINES, Associated Press

Last updated: 5:42 p.m., Monday, February 4, 2008

NEW YORK -- Long-term Treasury prices closed lower Monday, as investors pulled away from safe haven investments and reassessed the economic outlook.

A number of rallies linked to economic worries earlier in the year sent yields to multi-year lows, as prices and yields move in opposite directions.

But sentiment has improved somewhat after the Federal Reserve's recent rate cuts; investors also are cautiously hopeful about a government effort to stimulate the economy and a consortium of banks that is trying to locate funding for ailing bond insurers.

These developments Monday caused investors to unload long-term Treasurys.

Government bonds tend to perform best in time of economic challenge and to falter when a better outlook entices investors into riskier asset.

There was limited demand for 2-year notes, which pushed its yield lower.

The 2-year yield mirrors market expectations for monetary policy, so sending it lower is a way that traders signal that they expect more rate cuts from the Fed.

The benchmark 10-year Treasury note fell 7/32 to 104 20/32 with a yield of 3.64 percent, up from 3.63 percent late Friday, according to BGCantor Market Data.

Prices and yields move in opposite directions.

The 30-year long bond fell 27/32 to 110 10/32 with a yield of 4.37 percent, up from 4.28 percent late Friday.

The 2-year note rose 3/32 to 100 3/32 with a 2.06 percent yield, down from 2.35 percent late Friday.

Long-term Treasury yields didn't move during after-hours trading.

At 5:30 p.m. Eastern time, the 10-year yield remained at 3.64 percent and the 30-year yield was still 4.37 percent.

However, the 2-year yield rose slightly to 2.07 percent.

The yield on the 3-month note rose to 2.24 percent from 2.15 percent late Friday as the discount rate advanced to 2.19 percent from 2.09 percent.

The sense that the economy was improving was reinforced by news from the Commerce Department that businesses stepped up their demand in December for capital equipment to expand production.

Core capital equipment orders rose 4.5 percent in December, revised up from 4.4 percent estimated a week ago, the government said.

Throughout most of January, investors were anxious about a faltering economy and the continuing fallout from the bond insurance and subprime mortgage crises.

These worries fueled an unusually strong Treasury market rally, as investors usually opt for government-guaranteed assets when the economy appears weak.

Although there remain many risks to the economy, sentiment has improved in the wake of recent rate cuts, economic stimulus efforts on the part of the Federal government and recent sizable interest reductions by the Federal Reserve.

"Nobody is going crazy, mind you, but you are getting the sense that investors are beginning to believe that between the Federal Reserve and the fiscal stimulus package, the U.S. economy can be saved," said Kevin Giddis, managing director of fixed income at Morgan Keegan.

[Livyjr]

"Oil drops on recession fears"

By GEORGE JAHN, Associated Press

Last updated: 6:53 a.m., Tuesday, February 5, 2008

VIENNA, Austria -- Oil prices retreated Tuesday, dragged down by persistent concerns about the U.S. economy and stock markets that declined globally.

The Dow Jones industrial average fell more than 100 points Monday on Wall Street as investors cashed in profits from the market's best week in nearly five years.

Meanwhile, the Nikkei 225 stock index fell 0.82 percent in Tokyo on Tuesday and Hong Kong's Hang Seng was down nearly 1 percent in late trade.

Energy investors often view stocks as a proxy for economic growth, and in some recent sessions, movements in the oil market have closely followed that of global equities.

Light, sweet crude for March delivery lost 87 cents to $89.15 a barrel by noon in European electronic trading on the New York Mercantile Exchange.

Brent crude declined 68 cents to $89.79 a barrel on the ICE Futures exchange in London.

"The market is in uncertain territory as worries about the economy in the U.S. continue to weigh -- it's unclear how deep the recession will be, if there is a recession," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

"Meanwhile, the market tends to move in tandem with global equities markets."

Oil prices should drop further in the coming weeks as demand diminishes with the end of the Northern Hemisphere winter, Shum said.

"We're entering the shoulder season between the Northern Hemisphere winter, which is ending, and before the U.S. summer driving season ... pricing should soften," he said.

The Schork Report, edited by energy analyst Stephen Schork, said at least one market mover -- OPEC -- already appeared to have made up its mind about the state of the U.S. economy, with bullish consequences likely.

Noting that the Organization of Petroleum Exporting Countries at its Vienna meeting last week had referred to a "full-blown U.S. 'financial crisis,'" the news letter concluded that "with demand, both seasonal and economic, for crude oil drying up, the odds of a cut when OPEC meets again next month are shortening."

The contract rose $1.06 to settle at $90.02 a barrel on Monday after the U.S. government reported strong data on factory orders, raising hope that the world's largest economy will dodge a recession that would curtail demand for energy.

A temporary closure of the Houston Shipping Channel and a ship channel near Port Arthur, Texas, both key waterways used to transport crude oil to Texas refineries, also pushed prices higher Monday.

Also supporting prices Monday were new reports of violence in northern Iraq and Nigeria.

Turkish warplanes bombed 70 Kurdish rebel sites in northern Iraq, while a Nigerian rebel group attacked security forces near a Royal Dutch Shell PLC oil-pumping station, killing three soldiers.

Violence in both regions contributed to oil's rise to $100 a barrel earlier this year.

Heating oil and gasoline fell by more than 2 cents to $2.4608 and $2.2893 a gallon (3.8 liters) while natural gas futures added more than 6 cents to $7.933 per 1,000 cubic feet.

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Associated Press Writer Gillian Wong contributed to this report from Singapore

[Livyjr]

"U.S. stocks head for mixed open"

By TIM PARADIS, Associated Press

Last updated: 7:02 a.m., Tuesday, February 5, 2008

NEW YORK -- U.S. stocks headed for a mixed open Tuesday as investors awaited quarterly corporate reports and data to help indicate where the economy might be headed.

Stock futures traded in a narrow range, having pulled back Monday following steep gains last week.

Beyond quarterly results from names such as Duke Energy Corp., investors were awaiting figures on the service sector and retailing.

Wall Street expects the Institute for Supply Management's report on service sector growth for January to show a slight slowdown.

Also, investors predict the weekly ICSC-UBS chain store sales index will register a decline.

Beyond economic figures, investors continued to look for signs about the health of corporate dealmaking -- one barometer of the robustness of the economy.

Some of investors' enthusiasm over Microsoft Corp.'s bid for Yahoo Inc. perhaps dissipated Tuesday after Banc of America Securities lowered its rating on Yahoo to neutral from buy, saying the proposed acquisition could run up against regulatory challenges, according to Dow Jones Newswires.

The bank said regulatory difficulties could be steepest in the European Union.

Dow Jones industrial average futures fell 8, or 0.06 percent, to 12,604.

Standard & Poor's 500 index futures slipped 0.80, or 0.06 percent, to 1,378.00, and Nasdaq 100 index futures rose 1.25, or 0.07 percent, to 1,828.00.

Bond prices fell.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.65 percent from 3.64 percent late Monday.

The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude oil was down 85 cents at $89.17 a barrel in premarket trading on the New York Mercantile Exchange.

Overseas, Japan's Nikkei stock average closed down 0.82 percent and Hong Kong's Hang Seng index fell 0.89 percent.

In morning trading, Britain's FTSE 100 fell 0.42 percent, Germany's DAX index fell 0.51 percent, and France's CAC-40 fell 0.87 percent.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

[Livyjr]

"Hedge fund settles with NY, SEC for $40M in trading case"

By MICHAEL VIRTANEN, Associated Press

Last updated: 1:32 p.m., Tuesday, February 5, 2008

ALBANY -- Hedge fund Ritchie Capital has settled investigations into late trading in 2001-2003 for $40 million, New York and federal regulators and the company said Tuesday.

Under the agreement, Ritchie Multi-Strategy Global Trading Ltd. will pay $30 million of "disgorgement" and $7.44 million in interest, which will be distributed to affected mutual funds.

Ritchie Capital Management LLC, the fund's investment manager, agreed to pay a $2.5 million penalty.

"This agreement ensures that wrongdoers are held responsible, appropriate reforms are adopted, securities laws are honored and long-term investors are assured a level playing field," said New York Attorney General Andrew Cuomo, whose office investigated the case along with the federal Securities and Exchange Commission.

Ritchie Capital Management separately agreed to adopt reforms, he said.

The investigation showed that from 2001 through 2003, Ritchie Capital -- in concert with certain broker dealers such as Trautman Wasserman, CIBC Oppenheimer, Bear Stearns and Prudential -- engaged in late trading, buying and selling mutual fund shares after the 4 p.m. close of the markets, Cuomo said.

The company sold mutual funds at pre-close prices based on post-close information, using a complicated model to predict how the market would react on the next trading day, he said.

The SEC said that resulted in a profit of approximately $30 million.

Cuomo said Ritchie Capital and broker-dealers concealed late trading and manipulated time-stamped trade sheets to show transactions were done before the closing.

Under the settlement, the fund and investment manager neither admitted nor denied the investigators' findings.

"We are pleased to put this matter behind us, and we will continue our other efforts to maximize value for all of our investors," Thane Ritchie, CEO of Lisle, Ill.-based Ritchie Capital, said in a prepared statement.

The SEC order also named Thane Ritchie and two employees.

"This action demonstrates the Commission's willingness to take strong action against hedge fund advisers and their employees when they violate the federal securities laws," said Linda Chatman Thomsen, director of the SEC's Division of Enforcement.

[Livyjr]

"U.S. stocks head for mixed open"

By TIM PARADIS, Associated Press

Last updated: 7:02 a.m., Tuesday, February 5, 2008

NEW YORK -- U.S. stocks headed for a mixed open Tuesday as investors awaited quarterly corporate reports and data to help indicate where the economy might be headed.

Stock futures traded in a narrow range, having pulled back Monday following steep gains last week.

Beyond quarterly results from names such as Duke Energy Corp., investors were awaiting figures on the service sector and retailing.

Wall Street expects the Institute for Supply Management's report on service sector growth for January to show a slight slowdown.

"U.S. service sector slows down"

By VINNEE TONG, Associated Press

Last updated: 4:53 p.m., Tuesday, February 5, 2008

NEW YORK -- Lingering hopes that the U.S. economy might avert a recession withered Tuesday after the nation's service sector --its banks, travel companies, contractors and stores, among others -- shrank for the first time in five years.

It was unwelcome news for many investors, who were beginning to believe that the Federal Reserve might engineer a way out of the worst economic slowdown since 1991.

Stocks slumped and bonds rose as investors fled to the safety of government-backed securities.

Much of the talk was not about whether there would be a recession, but about how bad it might be.

"The number's so terrible it's almost beyond belief, especially among the optimists," said Scott Anderson, senior economist at Wells Fargo & Co.

"I think the writing's on the wall."

"More and more economists are talking about recession, and whether it'll be a severe or mild one."

The January reading from the Institute of Supply Management "was about as big a shock as you can probably get," said Joel Naroff, chief economist at Commerce Bancorp.

The Dow Jones industrial average fell 370 points, its biggest point drop since last August.

Anderson said he believes January may end up being the official start of a recession.

Many businesses already suspect as much.

Moving company Allied Van Lines filed for bankruptcy on Tuesday, saying it had fallen victim to the downturn in the housing market and its own heavy debt load.

Charming Shoppes Inc. -- which runs the Petite Sophisticate and Lane Bryant clothing stores -- said it would cut 200 jobs and close 150 stores.

Stocks of rental car companies plunged Monday after Dollar Thrifty Automotive Group Inc. slashed its 2007 earnings guidance.

The company said it sees weak demand in the travel market and soft used-car sales.

Ryan Kaminski, who runs a Mexican restaurant in Sarasota, Fla., said the squeeze he has felt as both a business owner and a consumer since last summer is growing worse.

The restaurant's traffic started thinning out last summer, pulling 2007 sales down 10 percent from a year earlier, and so far this year sales are down 15 percent from a year ago.

"I used to be able to find a person from any trade -- carpenters, electricians, plumbers -- in the restaurant every day," he said.

"Since the housing market crashed, it's just dried up."

"Those type of customers are just gone."

Kaminski, 31, said he and his wife don't spend much anymore either.

"We've cut out eating out and we didn't go on vacation last year," he said.

"It's getting bad."

In the tourism sector, water park operator Great Wolf Resorts Inc. is seeing a drop in business at its resorts in Traverse City, Mich., and Sandusky, Ohio -- two areas where jobs are dependent on the sagging auto industry, said the company's chief executive, John Emery.

Business is up slightly overall for the Madison, Wis.-based operator of 10 resorts.

But at the Rust Belt parks, families are cutting their spending by 2 percent to 4 percent.

"Those are tough markets for families for right now," Emery said.

Executives surveyed for the service sector report by the Institute for Supply Management fretted over the economy, high oil prices, the falling stock market, lower customer demand, stiffer competition and sluggish sales, said Anthony Nieves, chairman of the trade group's non-manufacturing business survey committee.

The ISM's new composite index measuring the health of the service sector was 44.6 in January, below the level of 50 that indicates expansion.

The group's measure of non-manufacturing business activity fell to 41.9 in January from a revised reading of 54.4 in December -- its largest drop ever.

Economists surveyed by Thomson Financial/IFR had expected a slight slowdown but had still forecast growth, with a median estimate of 53.

The last time the ISM reported that the service sector shrank -- that is, registered less than 50 -- was March 2003.

"I think it will be tipping plenty of people over the edge" in convincing economists that the U.S. is in a recession, said Nigel Gault, chief U.S. economist at Global Insight.

Gault said that in March 2001, the beginning of the last recession, the index had a break-even reading of 50.

And during that recession, the index hung around 48 or 49 -- several points higher than January's reading.

"This is an absolute collapse of this index," he said.

Two measures that fell were those for new orders and employment, and that could signal more trouble ahead.

New orders fell to 43.5 while employment fell to 43.9.

The drop in employment is especially troubling, because the service sector has been the overall economy's engine of job growth for months.

Factories eliminated 28,000 jobs in January and have cut 269,000 jobs over the past 12 months, the government reported last week.

The economy as a whole lost 17,000 jobs last month, which was the first nationwide loss of jobs since August 2003.

The financial services industry, part of the wider service economy, has been especially hard hit by falling home prices, mortgage defaults, and the devaluation of mortgage-backed investments.

After writing down their portfolios and putting money in reserve to prepare for further losses, banks, mortgage lenders and brokerages are now strapped for cash and have pared their payrolls to cut costs.

Challenger, Gray & Christmas Inc., a placement consulting firm, said companies announced 69 percent more job cuts in January than in December, and about 21 percent of those were in the financial sector.

According to the firm, the financial sector eliminated more than 153,000 jobs in 2007, a record amount.

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AP Business Writers Dave Carpenter in Chicago, Emily Fredrix in Milwaukee and Madlen Read in New York contributed to this report.

[Livyjr]

"Bubble Trouble: Are Treasurys overbid?"

By LESLIE WINES, Associated Press

Last updated: 3:13 p.m., Tuesday, February 5, 2008

NEW YORK -- Investors' raging demand for safe assets over the past six months may have created a bubble in the Treasury market -- and some onlookers expect to hear a bursting sound any minute now.

A market bubble exists when asset prices are driven well above their intrinsic value, as occurred with stocks in 1999 and housing prices in many parts of the country in 2006.

Often the end of a bubble is marked by disruptively sharp price declines as investors abruptly conclude assets are overvalued.

There are mixed views about whether the recent buying spree in the Treasury market has driven prices up to unjustified bubble levels.

The rally, which has also sent bond yields plunging to multiyear lows, was fed first by fallout from the subprime mortgage crisis and then by growing worries about a recession.

"I'm one who believes there is a bubble."

"Everyone has been focused on Treasurys because they are afraid of the alternatives," said Michael Metz, chief investment officer at Oppenheimer & Co.

"It has nothing to do with the value of Treasurys, which are overvalued."

"The stampede has been because of fear."

Metz believes the bubble is likely to give way to selling soon, particularly for the longer-term 10-year note and the 30-year bond.

Furious buying in January sent the 30-year bond's yield below its 1977 debut level of 4.15 percent to a historic low of 4.13 percent.

The 10-year yield, meanwhile, touched a four-year low of 3.29 percent.

In Metz' view, foreign demand for long-term Treasurys already is waning, as overseas investors back away from dollar-denominated assets and opt for instruments in the higher-yielding euro, British pound and Swiss franc.

He expects that trend to accelerate, driving long-term rates well above their current paltry levels.

People who think a bubble exists also claim that the Federal Reserve's monetary policy is not responding appropriately to rising inflation -- but will be forced to soon.

The Treasury rally was in part a reaction to Fed interest rate cuts and the bank's professed willingness to cut rates further to support a flagging economy.

Traders often buy Treasurys, particularly the two-year note, and push their yields lower when Fed rates are expected to decline.

Bubble theorists worry that the rally and the Fed moves are at odds with news about inflation.

The Commerce Department last month said inflation was a heady 2.7 percent in the fourth quarter, well above the Fed's comfort level of 1 percent to 2 percent.

If future reports suggest inflation jumping out of control, the Fed may have to forgo its economic stimulation program and take steps to lower prices, the argument goes.

That would send bonds falling.

Of course, many analysts do not buy the idea that the Fed will halt rate cuts soon.

Paul Nolte, director of investments at Hinsdale Associates, believes the central bank made clear with its latest rate cut last Wednesday that it now is preoccupied with economic weakness and likely to keep cutting rates.

If that is true, investors won't want to liquidate Treasurys.

Others question just how big a threat inflation poses.

The current creaky economy is likely to slow the march of inflation as the year unfolds, according to Sal Guatieri, an economist at BMO Capital Markets.

And there are many who think the "fear trade" may not be going away any time soon.

Lyle Gramley, a former Fed governor and senior analyst with the Stanford Financial Group, thinks buyers of Treasurys will continue to appear, now matter how elevated the prices and how weak the yield.

People will continue to demand the safest assets they can find as long as worries persist about a possible recession and the subprime mortgage and bond insurance crises, he thinks.

Whether an observer believes there is a bubble or not hinges partly on whether he or she thinks Treasurys are overpriced -- although the fact that prices are very high does not necessary mean the prices aren't justified.

"I wouldn't call it a bubble, because the motivation for buying them is different than with the housing bubble," said Steve Rodosky, head of Treasurys trading at PIMCO, the world's largest bond fund.

"This is more of a flight to quality."

This means that, if other assets really are as weak as perceived, Treasurys actually could be worth the heady prices investors have been willing to pay.

[Livyjr]

"Wheat nears record on supply concerns"

By STEVENSON JACOBS, Associated Press

Last updated: 5:02 p.m., Tuesday, February 5, 2008

NEW YORK -- Wheat prices soared near their highest levels ever Tuesday on concerns that growing demand in Asia coupled with dwindling stockpiles could lead to a grain shortage in the United States.

Other commodities markets mostly declined, with energy, other agricultural products and precious metals moving lower.

U.S. wheat stockpiles have thinned as bad weather has battered crop after crop around the world, most recently in Argentina and India.

The scarcity has fed seemingly relentless demand for wheat supplies, often at any cost.

U.S. wheat exporters have sold more than 15 million bushels a week for seven of the last 11 weeks, well above the U.S. Department of Agriculture's weekly target of about 1 million bushels a week.

"We continue to export wheat at too fast a pace," said Jason Ward, analyst with Northstar Commodity in Minneapolis.

"You've got enough forward contracts overseas so the fear is that what you've got sold thus far is possibly more than you've got planted."

Wheat for March deliver surged the daily limit on the Chicago Board of Trade, jumping 30 cents to fetch $10.03 a bushel.

Wheat was just shy of its all-time high of $10.095 a bushel.

Dry weather in India, the world's second largest wheat producer, has contributed to global supply tightness.

India's grain-belt has been stricken with long periods of drought since December, threatening roughly half the country's 2.8 billion bushel crop.

"They're stuck in that (dry) pattern."

"The damage isn't done yet, but it will be done if we stay in this pattern for the next two or three weeks," Ward said.

Unprecedented demand for agricultural products from fast-growing countries including China and India has exacerbated the supply crunch.

In the market panics of previous years, prices would rise to a level that developing countries couldn't afford.

But as the economies of some development countries strengthen, high prices have not slowed their buying of major food commodities.

Other agriculture futures traded lower Tuesday.

Corn for March delivery lost 1.25 cents to settle at $5.0925 a bushel on the CBOT, while March soybeans slipped 3 cents to settle at $13.23 a bushel.

In precious metals, gold tumbled to a two-week low and platinum fell from a record-high after the dollar strengthened against its main rivals.

A stronger greenback tends to diminish the appeal of dollar-denominated commodities and makes them appear more expensive to overseas buyers.

Precious metals prices have been erratic in recent days following an energy crisis in South Africa, the world's largest platinum producer and second largest gold producer, that led to an unprecedented mining shutdown last month.

Gold for April delivery plunged $19.10 to settle at $890.30 an ounce on the New York Mercantile Exchange.

Gold earlier fell as low as $888.40 an ounce, its lowest level since Jan. 23.

Platinum for April delivery surged to $1,815 an ounce -- its highest ever -- before falling back sharply to settle at $1,785.50 an ounce, down $12.10.

March silver lost 43.5 cents to settle at $16.345 an ounce, while March copper slipped 8.65 cents to settle at $3.2120 a pound.

Meanwhile, oil futures fell below $89 after U.S. data that indicated the traditionally strong service sector shrank dramatically last month, renewing concerns that a recession will slow demand for energy.

Light, sweet crude for March delivery fell $1.61 to settle at $88.41 a barrel on the Nymex.

Other energy futures also fell.

March heating oil fell 3.68 cents to settle at $2.4465 a gallon on the Nymex, and March gasoline fell by 4.7 cents to settle at $2.2647 a gallon.

[Livyjr]

"Cities fight glut of vacant houses"

By JOE MILICIA, Associated Press

Last updated: 4:53 p.m., Tuesday, February 5, 2008

CLEVELAND -- Judge Raymond Pianka views his courtroom as the emergency room of the foreclosure crisis.

Weary of lenders and wholesalers who don't show up to answer to housing code violations like unsecured doors and windows on foreclosed properties, he began holding trials without them.

He's put 12 companies on trial in absentia and has fined most, leaving each unable to sell any properties in the area until it pays up.

Rust Belt cities, already beaten down by a miserable economy before foreclosures began spiraling nationally, are moving to cut the number of houses left vacant when the mortgage can't be paid.

At stake are valuable tax dollars and the survival of neighborhoods.

County treasurers and mayors are filing lawsuits and developing land banks to buy distressed properties and either demolish them or repair and sell them.

Buffalo, N.Y., brings property owners and lenders together in court on monthly "Bank Days" to find solutions for cleaning up vacant homes.

"It's not a matter of if we do it."

"It's a matter of when we do it," City Councilman Tony Brancatelli said of the land bank planned in Cleveland.

"We can't afford to miss this opportunity."

"The countywide land bank is going to be a great opportunity for us to seize real estate."

"We have to stop the cycle of abandonment," he said.

A record-setting number of foreclosures nationally has helped drive down the U.S. economy.

A report commissioned last November by the U.S. Conference of Mayors projected that 361 metropolitan areas would take an economic hit of $166 billion in 2008.

Cuyahoga County, which includes Cleveland, has about 17,000 vacant foreclosed properties -- roughly 4 percent of its 395,000 houses.

Baltimore has 16,000, up from 12,300 in 2000.

"The homeowner just assumes, well the bank's going to take my house, but the bank can make the economic decision not to take the house," said Cindy Cooper, a Housing Court prosecutor in Buffalo.

"Then that leaves two parties walking away, each one thinking that the other is going to take care of the house."

Pianka still lives in the neighborhood where he grew up and knows firsthand the blight of houses with boarded-up windows.

"The scrappers are taking the jewelry off the corpses that are left," he said from his 13th-floor office which overlooks frozen Lake Erie.

He's well regarded among members of the Warsaw Neighborhood Block Watch Club, who have spent time in his courtroom, determined to see something done about open, vandalized homes in their Slavic Village neighborhood.

Vacant houses, some stripped bare of aluminum siding, dot the streets, casting a gloom on their well-maintained neighbors.

"It scares people," said Joyce Porozynski, a block watch member who has lived in the neighborhood most of her life.

"Many people have given up."

Across the street from Charles Gliha's cozy 120-year-old home stand three vacant houses, including one with the first-floor windows broken out.

Another is being repaired, and a sign in the window warns would-be thieves that there are no copper pipes inside.

Gliha, a woodworker, has not given up hope and has no plans to leave the home where he grew up.

"People are the critical resource and as long as we have good people like Joyce, we'll be fine," he said.

"We may be in better shape in 20 years than the suburbs because we've got a culture in this neighborhood that outer ring suburbs don't."

Cleveland, among cities hardest hit by the foreclosure crisis, is modeling its land bank after a program in Genesee County, Mich., home to Flint, which made tax delinquent properties available for redevelopment.

About 6,300 residential, commercial and industrial properties have been obtained since the Genesee County Land Bank started the program in 2002.

About 2,300 parcels have been passed to new owners.

The goal of Cleveland's program, which must be authorized by legislation, would be to spend $6 million to $10 million a year.

The Genesee County Land Bank also is serving as a model for Baltimore where abandoned properties are as symbolic of the city as crab cakes and purple Ray Lewis jerseys.

About six years ago, the city began aggressively buying up abandoned properties, acquiring more than 6,000 in that span.

The city has done little to reinvigorate those properties.

A housing department report last fall said it generally took the city more than three years to foreclose on and dispose of one piece of property.

The department recommended creating a land bank that would take possession of abandoned properties and streamline their sale.

In the interim, Baltimore plans to create a nonprofit this year that would perform similar functions.

"The goal is, ultimately, we spent the last five years buying property, and we want to, in a really disciplined, aggressive way, be able to return those properties to some kind of private ownership," Deputy Mayor Andrew Frank said.

Baltimore and Cleveland also have sued mortgage lenders, saying they're losing millions of dollars in tax money and in protecting or demolishing abandoned homes.

Buffalo Mayor Byron Brown last year announced a plan to demolish 5,000 vacant structures in five years.

The city will put up $20 million of the $100 million cost and ask the state and federal government for much of the balance.

In cases of foreclosure, the city charges the homeowner and the bank with the same building violations for things such as peeling paint and broken windows.

On "Bank Days," the idea is to hammer out who will take care of repairs.

"If the house is not in a terrible state, a lot of times the bank will discharge the mortgage so that the property can be donated either to a neighbor to be demolished or a nonprofit organization for rehabilitation," Cooper said.

Other times, each side pays a share.

In Cleveland, Destiny Ventures of Tulsa, Okla., sent Pianka's court a check for $53,036.75 a few weeks ago to cover its fine plus interest and attorney fees.

Destiny Ventures did not return a phone message seeking comment on the judge's trials.

Jerry Reisman, a New York real estate attorney whose clients include major banks and finance companies, believes land banks are promising and that Pianka's tactics are justified.

He doesn't think those actions will affect prudent lenders' willingness to work with homeowners in those cities -- if the lenders are acting responsibly, they won't be affected.

"We need more effort by the government to step in here to assist homeowners," he said.

As a housing court judge, Pianka is on the low rung of the judicial system, a bungalow among mansions.

He's heard himself referred to as a "rat court judge" at judicial conferences.

He embraces the role.

"Many times I feel like the mouse that roared," he said, later adding, "Finally, they're paying attention to us."

------

Associated Press writers Ben Nuckols in Baltimore and Carolyn Thompson in Buffalo, N.Y., contributed to this report.

------

On the Net:

Cleveland Housing Court: http://www.clevelandhousingcourt.org

Genesee County Land Bank: http://www.thelandbank.org

[Livyjr]

"Stocks plunge on service sector weakness"

By MADLEN READ, Associated Press

Last updated: 5:43 p.m., Tuesday, February 5, 2008

NEW YORK -- Wall Street plunged Tuesday, driving the Dow Jones industrials down 370 points after investors saw an unexpected contraction in the service sector as evidence the economy is sinking into recession.

It was the Dow's biggest percentage drop in almost a year.

The volatility that pummeled stocks in January returned with the news that the service sector shrank last month for the first time since March 2003.

The report from the Institute for Supply Management wiped out the nascent optimism about the economy that had sent stocks surging higher last week.

"The report drives a nail into the coffin from investors' minds that we're in a recession[/u]," said Todd Salamone, director of trading at Schaeffer's Investment Research.

"That doesn't mean stock prices in the months ahead will be lower."

"But when you see headline numbers like this, there tends to be a reactionary sell."

The ISM said its index of service sector activity, which accounts for about two-thirds of the economy, dropped below 50, a level that indicates contraction.

The market had expected another month of growth, and the disappointment contributed to Tuesday's $500 billion loss in the Dow Jones Wilshire 5000 Composite Index, an index that measures the movement in 5,000 U.S. stocks.

Alongside the Labor Department's report last week showing the first monthly U.S. jobs decline in more than four years, the data on the service sector -- which includes businesses ranging from restaurants to retailers to banks -- was particularly worrisome to investors.

Though Wall Street hopes the Federal Reserve will keep slashing interest rates to stoke the economy, some believe the central bank, which lowered rates 1.25 percent in just over a week last month, acted too late.

Rate cuts take several months to take effect, and moreover, many analysts are skeptical that rate cuts are the correct remedy for an economy saddled with bad debt in the wake of a housing market implosion.

Fitch Ratings' plans to lower the rating on more than $100 billion wrapped up in bond funds called collateralized debt obligations added to the host of concerns plaguing Wall Street.

Downgrades would mean the securities -- many of which are backed by mortgages -- are worth even less than many investors thought.

That could cause more problems for strugging banks, brokerages, and bond insurers hurt by investments in mortgages that went sour.

The Dow fell 370.03, or 2.93 percent, to 12,265.13, after falling 108 points on Monday.

Tuesday's slide was the blue chip index's largest one-day percentage drop since it lost 3.3 percent on Feb. 27, 2007, and its largest point drop since it fell 387 points last Aug. 9.

The broader Standard & Poor's 500 index lost 44.18, or 3.20 percent, closing at 1,336.64, while the Nasdaq composite index tumbled 73.28, or 3.08 percent, to 2,309.57.

In Monday and Tuesday's trading, the Dow gave up most of the gains it made last week, when it jumped 536 points, or 4.39 percent, in a burst of optimism about the economy.

It's not surprising that the volatile market would pull back on any bad economic news -- but some analysts claim stocks should be near their bottom given how low investors sentiment is right now.

According to JPMorgan equities analyst Thomas J. Lee, the three worst readings on record in the ISM's service sector index are associated with stocks rising in the ensuing three months -- on average, by 6 percent.

Even if the stock market is near its low point, though, it has a lot of ground to recover.

The Dow is down more than 13 percent since its Oct. 9 record settlement of 14,164.53.

Meanwhile, the S&P 500 -- the measure most watched by market professionals -- is down 8.9 percent for the year, the worst year-to-date performance for the index ever.

The S&P 500 has fallen 14.6 percent from its Oct. 9 high.

Bond prices jumped as investors sought the safety of government-backed debt.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, sank to 3.56 percent from 3.64 percent late Monday.

The ISM report is particularly alarming, said Bernard Baumohl, managing director of the Economic Outlook Group LLC.

Because Americans will not pare back spending significantly on necessary services like health care and transportation, January's rapid decline in service sector activity suggests that investors may have underestimated how damaged the economy is, he wrote in a research note.

On Tuesday, the biggest losers in the stock market were banks, which have already suffered huge losses in their investment portfolios last year and are now socking billions of dollars away to prepare for debt-burdened consumers to stop making payments.

Dow component Citigroup Inc. fell $2.17, or 7.4 percent, to $27.05, while JPMorgan Chase & Co., another Dow component, fell $2.33, or 5 percent, to $44.28.

Washington Mutual Inc. fell $1.08, or 5.6 percent, to $18.08; Bank of America Corp. fell $1.66, or 3.8 percent, to $42.37; and Wachovia Corp. fell $1.35, or 3.8 percent, to $34.18.

"When you have the financials in intensive care such as they are, for any economy like ours, they must heal," said Quincy Krosby, chief investment strategist at the Hartford.

"They drew us into this; they must lead us out."

Light, sweet crude oil declined $1.61 to $88.41 a barrel on the New York Mercantile Exchange, as traders bet that a slower economy would dampen energy demand.

An extended drop in energy prices could aid businesses that are finding their supply costs are rising, but that their customers are having trouble taking on price increases.

The dollar rose against other major currencies, while gold prices fell.

Declining issues outnumbers advancers by about 4 to 1 on the New York Stock Exchange.

Consolidated volume came to 4.18 billion shares, down from 4.51 billion on Monday.

The Russell 2000 index of smaller companies fell 21.88, or 3.02 percent, to 701.58.

Stocks overseas also retreated.

Japan's Nikkei stock average fell 0.82 percent; Hong Kong's Hang Seng index fell 0.89 percent; Britain's FTSE 100 fell 2.63 percent; Germany's DAX index fell 3.36 percent; and France's CAC-40 fell 3.96 percent.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

[Livyjr]

"GMAC Financial swings to loss on ResCap"

By J.W. ELPHINSTONE, Associated Press

Last updated: 3:03 p.m., Tuesday, February 5, 2008

NEW YORK -- GMAC LLC said Tuesday it lost $724 million in the final quarter of 2007 as the housing slump and disruptions in the credit and capital markets battered the lender's home mortgage division.

The Detroit-based lender got in the mortgage business in 1985 after decades of originating only car loans for parent company General Motors Corp.

Trouble in GMAC's mortgage business, Residential Capital LLC, first surfaced in the latter half of 2006 when growing numbers of people began defaulting on home loans.

The automaker owns 49 percent of GMAC after selling the remainder of the business in that year to an investment group led by Cerberus Capital Management LP for $14 billion.

The company said its mortgage business Residential Capital, or ResCap, lost $921 million during the quarter, marking its fifth straight quarterly loss.

Losses skyrocketed from write-downs on credit residuals and mortgage-backed securities, restructuring charges and higher funding costs.

Investors have avoided securities backed by home loans because of a surge in mortgage defaults and foreclosures.

Declining home values have prevented many borrowers from refinancing into more manageable loans.

GMAC is reviewing its options for the residential lending unit but declined to comment on specific plans Tuesday.

The lender has taken "aggressive actions" to stem the unit's drag and forecasts a return to profitability in 2008.

"We still believe that ResCap is an integral part of our overall strategy at GMAC," said GMAC Chief Financial Officer Robert Hull.

"We're committed to ResCap."

"We've invested billions of dollars in 2007 in multiple forms."

"I think we have resilient support and we have demonstrated that."

GMAC bought $740 million of the division's debt in the fourth quarter to keep the unit from violating minimum net worth covenants and said it may buy more.

While the move offset ResCap's fourth-quarter losses by $521 million, Moody's Investor Services slashed the "junk" status credit ratings of both on Tuesday.

Moody's said it's concerned that more funding from GMAC could strain the lender's capital and liquidity positions.

On the flip side, GMAC's support may diminish if the mortgage lender continues to lose money, putting ResCap's minimum net worth at risk.

"Given GMAC's strategic importance to General Motors, we think that GMAC's owners will not risk the firm's viability in its efforts to stabilize ResCap," said Moody's analyst Mark Wasden.

"Beyond this horizon, we believe further support from GMAC to be less certain, as continued underperformance on the part of ResCap could signal a failure of the firm to regain solid footing."

To mitigate losses, ResCap has sharply curbed loan production and tightened lending standards.

Currently, it's originating mostly prime mortgages that can be sold in the secondary market.

ResCap also cut its work force last year by 35 percent, or 5,000 employees.

ResCap continues to drag down GMAC's results, however.

Last year, GMAC lost $2.33 billion, including a $4.35 billion ResCap loss that more than offset profits elsewhere.

GMAC's auto lending division earned $137 million during the quarter and $1.49 billion in 2007.

However, GMAC noted a small uptick in auto loan delinquencies, mostly in its nonprime portfolio in areas hardest hit by falling home prices, Hull said.

The delinquency rate remains within historical averages, but the company "remains concerned about the outlook of consumer credit," he said.

GMAC's insurance division posted earnings of $68 million in the fourth quarter and $459 million for the year.

The company attributed the division's underperformance compared to the previous year to the rebalancing of its investment portfolio.

[Livyjr]

"Will rebates spur spending?"

By RACHEL BECK, Associated Press

Last updated: 12:33 p.m., Tuesday, February 5, 2008

NEW YORK -- "Just Do It," one of Nike's ad slogans, might also be something the government should use to encourage consumers to spend their expected tax rebates.

A large part of the economic stimulus plan's success will hinge on whether Americans go shopping with their newfound cash.

Proponents say a surge in buying could kick start the economy from its current dismal state.

But before anyone counts on that, consider why consumers may not blow those rebate checks:

Their mounting debts and worries about their economic future may lead to more saving than spending.

It's a clear sign that times are tough when the government starts looking for ways to use fiscal stimulus to prop up the economy.

While it's still unclear if a recession is upon us, there is evidence that the collapse in the housing and mortgage markets has spilled over to the broader economy.

Businesses have begun to clamp down on hiring and credit conditions have tightened.

The Federal Reserve has been trying to control the situation through monetary measures, including aggressively cutting the federal funds rate -- the overnight lending rate for banks -- by 2.25 percentage points since September to 3 percent.

Now Washington's politicians are working on a stimulus plan that includes tax relief for businesses and consumers.

The House has overwhelmingly passed a $146 billion aid package that includes rebates of $600-$1,200 for most taxpayers.

The plan would send at least some rebate to anyone with at least $3,000 in income, with more going to families with children and less going to wealthier taxpayers.

Congressional leaders have been aiming to send the measure to President Bush by Feb. 15, but that date is now in question amid the partisan wrangling in the Senate.

Both Democrats and Republicans want to add expensive components to the stimulus package, which includes rebates of $500 for individuals and $1,000 for couples in the Senate's version.

The earliest the rebates are expected to reach consumers would likely be in the late spring or early summer.

This isn't the first time that tax rebates have been included in efforts to recharge the economy -- they were also used in 1975, 2001 and 2003.

But those lump-sum cash payments provided only a "modest stimulus to consumption," according to a study by the congressional Joint Committee on Taxation.

That view was echoed by a new paper from the Congressional Budget Office, which said "most studies of purely temporary, one-time changes in taxes have suggested that they have only a moderate effect on household consumption."

The CBO also said in a paper issued in January that "households not facing liquidity constraints will not alter consumption very much in response to a temporary change in income because it has a relatively small effect on lifetime wealth."

During the 2001 recession, one-time rebates were paid starting in the third quarter, and consumer spending rose at an 7 percent annualized rate in the fourth quarter.

That failed to offset the downturn in business investment, and the economy only grew at a sluggish 1.6 percent annual rate in that quarter, according to the Heritage Foundation. a Washington-based think tank.

By the first quarter of 2002, consumer spending slowed to a 1.4 percent growth rate, hardly enough to trigger faster economic growth.

At the same time, the personal savings rates as the rebates were given out jumped to 3.4 percent from an average of 1.2 percent in the prior quarter.

Economists at Merrill Lynch characterized that as a "vivid sign that much of the rebates went into the mattress."

We could see a similar pattern today, especially given the budget pressures faced by consumers.

Gasoline prices are double what they were in 2001, debt-to-income ratios are at 140 percent versus 100 percent back then and the savings rate has turned negative, according to Merrill Lynch.

Financially strapped consumers are also worried about how economic deterioration in the months ahead could affect their wallets.

The Conference Board's Consumer Confidence Survey fell in January largely due to concerns over the weakening of business conditions and the job market.

That's why Americans might not eagerly put their tax windfalls toward the kinds of purchases -- buying new cars or appliances, sprucing up their wardrobes or taking big trips -- that could really recharge the economy's engines.

Instead, as was the case in 2001, the tax money they don't save or use to pay down debt could find its way to restaurants, drugstores, bookstores, electronics chains and toy shops, according to Merrill Lynch.

Six years ago, lotteries and casinos also claimed some of those tax-rebate dollars.

That's how some Americans bet on a brighter tomorrow.

------

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org

[Livyjr]

"Asian stocks sink after Dow's plunge"

By MALCOLM FOSTER, Associated Press

Last updated: 5:52 a.m., Wednesday, February 6, 2008

BANGKOK, Thailand -- Asian markets plunged Wednesday after a steep drop on Wall Street overnight fanned investors' fears the U.S. economy was sliding into a recession that would sap demand for Asian exports.

European stocks fell modestly in early trading after having tumbled the previous day, while U.S. futures indexes were mixed.

Global investors dumped shares after figures released Tuesday showed the U.S. service sector shrank last month for the first time since March 2003.

That wiped out some renewed confidence about the American economy after the U.S. Federal Reserve's two big rate cuts late last month.

"It's unbridled pessimism," said Francis Lun, general manager at Fulbright Securities Ltd. in Hong Kong.

"Everyone is concentrating on a U.S. recession, but Europe is also looking bad ...."

"We are in for a bear market now."

In Hong Kong, the benchmark Hang Seng index plunged 1,339.24 points, or 5.4 percent, to close the half-day session at 23,469.46.

Japan's Nikkei 225 index tumbled 4.7 percent to 13,099.24.

Global financial markets have turbulent since the start of the year, mostly tumbling amid worries about a U.S. -- and worldwide -- slowdown and massive losses racked up by banks that made bad bets on securities backed by risky mortgages.

While the Fed's rate cuts lifted many markets last week, investor confidence evaporated after the Institute for Supply Management reported that its December index of activity in the U.S. service sector, which accounts for about two-thirds of the economy there, dropped below 50, indicating contraction.

The Dow Jones industrial average plunged 2.93 percent, its largest one-day percentage drop since Feb. 27, 2007.

U.S. stock index futures were narrowly mixed before trading Wednesday.

Dow futures were down 2 points at 12,317, while Standard & Poor's 500 futures were up 1 point to 1,344.

Asian investors also appeared increasingly anxious about a slump in Europe, another vital export market.

"There's a real probability that both the U.S. and Europe will go into recession at the same time," said Lun.

"It's a financial mess on the two continents with the subprime crisis and the SocGen debacle."

The financial industry, already reeling from losses linked to the credit crisis, was dealt another blow last month when major French bank Societe Generale said it had lost about $7.1 billion in cleaning up unauthorized transactions by a rogue trader.

In morning trading in Europe, the U.K.'s FTSE-100 Index was down 0.3 percent after having dropped 2.6 percent Tuesday.

France's CAC-40 Index, which tumbled 4 percent the previous day, was down 0.2 percent, and Germany's DAX Index was also down 0.2 percent.

Elsewhere in the Asia-Pacific, Australia's key index fell 3.2 percent, while India's Sensex was down nearly 3 percent.

Thailand's market slid 1.6 percent.

Some traders said Wednesday's decline in Hong Kong was overdone and largely driven by investors keen to avoid risky exposure during the long Lunar New Year holidays.

Markets in Hong Kong and Singapore were closed Wednesday afternoon and would remain shut Thursday and Friday.

Markets in China, South Korea and Taiwan were closed Wednesday through Friday for the Lunar New Year holidays.

[Livyjr]

"Global stocks jangled by US recession fears"

Wednesday February 6, 2008, 10:47 pm

LONDON (AFP) - European equities faced another turbulent day on Wednesday after another major sell-off on Wall Street and the Asian markets that was sparked by growing fears of a US recession, dealers said.

In late morning trade, Europe's main stock markets had reversed early losses, with London's FTSE 100 index of top shares up 0.15 percent, Frankfurt's DAX 30 gaining 0.35 percent and the Paris CAC 40 index ahead 0.31 percent.

There had been concerns that after a sharp downturn Tuesday -- when the FTSE 100 index lost 2.63 percent, the CAC 40 3.96 percent and the Dax 3.36 percent -- Europe would be in for another trouncing.

The Asian markets were hit very badly overnight, with some down by five percent or more as growing fears of a US recession roiled sentiment again after a few steadier days, dealers said.

The damage was done first in New York, where the Dow Jones Industrial Average lost 2.9 percent on news of a very sharp contraction in the US service sector -- the most important part of the economy.

That triggered fresh concerns that the world's largest economy may be in even worse condition than previously feared and put the European markets on the slide in late trade on Tuesday.

On Wednesday, Hong Kong lost 5.4 percent, Tokyo was down 4.7 percent, Mumbai tumbled 2.81 percent, Singapore gave up 3.5 percent and Sydney fell 3.2 percent.

At the start of the week, Asian and European markets had risen on hopes that the United States would avoid a recession after the US Federal Reserve slashed American interest rates by a total of 1.25 percentage points last month.

But investor hopes crumbled on Tuesday after yet another bout of negative US economic data.

"The optimism that had crept into the financial markets over the outlook for the US economy in the wake of the aggressive monetary easing by the (Federal Reserve) has quickly evaporated as US economic data highlighted the scale of recent deterioration in economic conditions," said economist Derek Halpenny at the Bank of Tokyo-Mitsubishi UFJ in London.

The Institute of Supply Management (ISM) reported Tuesday that the US services sector shrank in January for the first time in nearly five years.

The ISM non-manufacturing business activity index tumbled to 41.9 in January from 54.4 in December, confounding forecasts for a much smaller fall.

It was also the worst reading since the terrorist attacks on September 11, 2001.

"This is exactly what occurred back in October 2001 when the US moved into recession," said Juliana Roadley, an equities analyst at CommSec in Sydney.

Share prices had regained some stability after a terrible start to the year as Federal Reserve rates cuts and a US economic stimulus plan helped to calm jitters about the plight of the world's largest economy.

But the latest plunges showed that markets remain extremely nervous, making shares vulnerable to any bad news, analysts said.

"Given that Wall Street tanked ... and there are recession worries again, it's not a huge surprise that Singapore and the other regional markets fell."

"That, coupled with many traders going on holiday," said Song Seng Wun, regional economist with CIMB-GK Research in Singapore.

The latest turbulence will inject an additional sense of urgency into this weekend's meeting of finance ministers and central bankers from the Group of Seven rich nations in Tokyo.

However, most analysts predict that the G7 will offer little more than words of reassurance to investors over the US subprime home loan problems that have curbed US economic growth and rattled global markets.

http://au.biz.yahoo.com/080206/33/1lh8q.html

[Livyjr]

FOR IMMEDIATE RELEASE:

January 18, 2008

"GOVERNOR SPITZER LEADS FIRST MEETING OF COMMISSION TO MODERNIZE REGULATION OF FINANCIAL SERVICES - Commission Discusses Regulatory Reform to Help Maintain New York’s Status as World Financial Capital and Ensure the Highest Standards of Consumer Protection for New Yorkers"

Governor Eliot Spitzer today hosted the first formal meeting of the Commission to Modernize the Regulation of Financial Services, which includes heads of major financial services organizations, consumer advocates, the business community, legislators and regulators.

After the meeting, Governor Spitzer was joined by Herbert M. Allison, Chairman, President and Chief Executive Officer, TIAA-CREF, Laurence D. Fink, Chairman and Chief Executive Officer, BlackRock, John J. Mack, Chairman and Chief Executive Officer, Morgan Stanley and Martin J. Sullivan, President and Chief Executive Officer, AIG at a press conference to discuss the work of the commission and how principles-guided regulation will lead to a focus on outcomes rather than process.

The principles guide the regulator to focus on outcomes, rather than the rules in and of themselves.

Senator James L. Seward, Chair of Insurance Committee said:

“The financial services industry is a key component of the economy of New York State and the nation."

"I believe that it is important that we continue to review ways to ensure the most effective and efficient regulation of the financial services industry in New York State."

"I am hopeful that the deliberations of the commission will help to ensure that New York State continues to be a leader in the regulation of insurance and financial services.”

Assemblyman Joseph D. Morelle, Chair of the Insurance Committee said:

“Principles-based regulatory reform will establish the foundation for a more market-responsive and prosperous financial sector while at the same time providing the ethical guidelines and consumer protection the public requires."

"Our current rules-based approach places us at a disadvantage in terms of more progressive overseas markets."

"In order to maintain New York's primacy in the financial world, a prudent change of approach is needed now.”

Assemblyman Darryl Towns, Chair of the Committee on Banks said:

“I look forward to serving on the commission and working together with the financial services community to improve the regulatory framework governing this vital industry so that New York can retain its status as the world financial capital, and ultimately, so that we can provide our consumers with quality, innovative financial services.”

Insurance Superintendent Eric Dinallo, the Chair of the Commission to Modernize the Regulation of Financial Services, said:

“The benefit of state regulation is that states can be the laboratory for developing best practices."

"We want to offer New York as a national model of how to regulate financial services.”

http://www.ny.gov/governor/press/0118081.html

THIS ARTICLE IS INSERTED HERE FOR BACKGROUND

THE FINANCIAL TIMES

"Banks pressed to bail-out bond insurers"

By Ben White, Aline van Duyn and Francesco Guerrera in New York

Published: January 23 2008 20:25 | Last updated: January 24 2008 00:45

Leading US banks are under pressure from New York state’s insurance regulator to provide as much as $15bn to support struggling bond insurers, people familiar with the matter said on Wednesday night.

Eric Dinallo, New York insurance superintendent, held a two-hour meeting with bank executives on Wednesday and urged them to provide as much as $5bn in initial capital to support the insurers – the largest of which are MBIA and Ambac – and ultimately to commit up to $15bn.

There is widespread concern that rating agency downgrades of the specialist insurers known as monolines could force a fresh round of writedowns by banks, which could damage already battered investor confidence.

This has led to speculation that banks would band together to prop up the insurers, which guarantee payments on thousands of ­billions of dollars worth of bonds issued by municipal governments and other borrowers.

A spokesman for Mr Dinallo had no comment on details of the meeting.

People familiar with the matter said the specifics of a possible capital infusion had yet to be decided, but contributions would not necessarily be based on how much exposure each bank has to bond insurers.

Some participants in the meeting described the discussions as at an early stage.

Wall St rebounds on talk of credit rescue

Mr Dinallo’s effort has not met with uniform support among the banks, which in some cases have their own capital-raising needs following the collapse in value of mortgage-related securities on their books.

The banks also still feel stung after a failed bail-out plan backed by the US Treasury under which they would have bought assets from structured investment vehicles, known as SIVs.

Wilbur Ross, the US financier who specialises in distressed businesses, said he was seriously considering buying a stake in a monoline and would make a decision on which company to back “soon”.

He expressed scepticism that Mr Dinallo would be able to persuade banks to provide the funds.

“I think it’s good that the New York insurance superintendent is coming with proactive and creative ideas for the industry but I am not so sure that he can do much to persuade banks to provide capital [to the insurers],” Mr Ross told the Financial Times.

News of a possible bail-out sent share prices for both Ambac and MBIA soaring, making any potential investments more expensive.

Ambac shares rose 71.9 per cent to $13.70 while MBIA rose 32.6 per cent to $16.61.

Concerns about the future of MBIA and Ambac grew last week when Fitch Ratings downgraded Ambac from triple-A to double-A.

The business model of both companies depends on a top-level credit rating.

Banks such as Merrill Lynch, Citigroup and others have been forced to writedown the value of insurance for mortgage-backed securities that they own.

XL Capital, the Bermuda insurer, on Wednesday night said it expects a net loss in the fourth quarter of $1.0bn-$1.2bn, blaming charges connected to its investment in Security Capital Assurance.

The Federal Reserve, the Treasury and the Securities and Exchange Commission have set up at a joint group to examine risks to the financial system that might arise from problems at the bond insurers.

Federal officials were understood to be monitoring the discussions between the New York regulators and the banks.

However, they were not thought to be actively involved.

Unlike banking, insurance is largely regulated in the US by the states.

Mr Dinallo became well known on Wall Street this decade when he worked with Eliot Spitzer, then the New York attorney-general, on an investigation into conflicts of interest in research by investment banks.

Mr Spitzer has since been elected governor of New York and appointed Mr Dinallo to his current position.

Additional reporting by Saskia Scholtes in New York

http://www.ft.com/cms/s/0/107a1c0c-c9eb-11...0077b07658.html

[Livyjr]

THIS ARTICLE IS INSERTED HERE FOR BACKGROUND

THE FINANCIAL TIMES

"Regulator offers hope for bond insurers"

By Aline van Duyn, Saskia Scholtes and Gillian Tett

Published: January 23 2008 22:11 | Last updated: January 23 2008 22:11

Hopes of a rescue effort is buoying sentiment in at least one corner of the equity market, with investors hoping that saviours will emerge for the hard-hit US bond insurers.

These monoline insurers, the biggest of which are MBIA and Ambac, are hanging on to their crucial triple-A credit ratings by a thread.

Yet share prices for both Ambac and MBIA rose on Wednesday by 70 per cent and 30 per cent respectively on rising expectations of a capital injection.

The largest US banks are under pressure from New York State insurance regulators to provide as much as $15bn in fresh capital to support struggling bond insurers, people familiar with the matter said.

Eric Dinallo, New York insurance superintendent, on Wednesday met executives at the banks and has strongly urged them to provide $5bn in immediate capital to support the bond insurers and to ultimately commit up to $15bn.

Regulators in the US have worked round the clock to find some way of getting the monolines to patch up their capital bases after they miscalculated the risks associated with insuring payments on bonds backed by risky mortgage loans.

New York State’s insurance regulator has tried to lead the efforts, and on Tuesday said it was “engaged with insurers, banks, financial advisers, credit rating agencies, other regulators and government officials, and other stakeholders in examining and developing measures to help stabilise the market.”

Ambac said on Tuesday it was seeing “strong interest” from a “number of potential parties” about capital infusions.

MBIA, which recently secured $1bn from private equity group Warburg Pincus and is working on other deals, is due to report its earnings next week.

One of the concerns is that, even if Ambac and MBIA raise sufficient capital to prevent imminent downgrades, they will again be short of sufficient funds in a few months.

Rating agencies continue to shift their requirements as the extent of risks and exposures have come to light and as the way risks are measured have changed.

Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington-based financial consultancy, says part of the challenge was calculating exactly how much capital was needed to support the triple-A rating.

“The key is not what the reality is, but what the rating agencies say it is,” she says.

“Now that the rating agencies are in a game of non-stop revision of their models, the monolines have been left chasing their tails to try to keep the triple-A.”

The loss of their top-notch ratings, apart from threatening their ability to guarantee billions of dollars of payments on bonds by municipal and other borrowers, could feed through to further losses at banks exposed to complex bonds guaranteed by the bond insurers.

Already, exposure to collateralised debt obligations has resulted in tens of billions of dollars of writedowns at banks across the globe.

“The guarantee [from bond insurers] has allowed banks not to write down the value of these positions,” said analysts at UBS.

“If monolines fail, the guarantee is worth nothing and these assets have to be written down."

"This is the latest development for the mortgage crisis and is another negative for banks.”

Concerns about the health of bond insurers was one of the triggers for the sharp collapse in the value of equity markets round the world in recent days.

Reflecting the severity of the fate of monoline insurers, the issue has become a key debating topic at the World Economic Forum in Davos, Switzerland.

This marks an extraordinary turnabout from previous years when the issue was considered to be far too specialist to command any wider attention.

In particular, a series of policymakers and officials from the financial world have stressed that the problems in the monolines are a critical issue weighing on market sentiment – and warned that sentiment in the financial markets was unlikely to improve until there were signs of stabilisation in this sector.

However, there is limited consensus about what steps can be taken to fix the issue – given that many policymakers remain uneasy about backing any state bail-out.

George Soros, the billionaire investor, on Wednesday told the Financial Times:

“I don’t think it would be feasible for the US government to organise a bail-out of the monolines right now because it would be an open-ended obligation."

"But I do think the US and European authorities must ensure the major market makers are able to meet their counterparty obligations."

"Until you do that, the banking crisis will last."

"The authorities have to remove this counterparty risk.”

David McCormick, US undersecretary for the Treasury, on Wednesday refused to comment on whether the US government would be willing to organise a bail-out.

Ms Petrou says a state-sponsored bail-out would be impossible anyway.

“There is no way to do that under US law, absent a private sector rescue backed by a ‘wink and a nod’ of the relevant regulators,” she says.

Even when the US government wants to push through a bail-out, it does not always work.

The US Treasury’s recent attempt to curb losses from off-balance sheet liabilities that banks held through structured investment vehicles (SIVs) ran aground as it failed to attract enough private sector support.

Instead, banks had to bring these SIVs back on to their balance sheets, taking writedowns in the process.

While the government seems unlikely to pump money into the sector and with many banks themselves struggling to raise new capital to cover holes in their balance sheets, other potential private sector investors include private equity and sovereign wealth funds as well as billionaires such as Wilbur Ross and Warren Buffett.

Already, Mr Buffett is starting up a new bond insurer after New York regulators fast-tracked his licence to start business.

Insurers, like most of the world’s big banks and investors, underestimated the risks associated with complex bonds backed by assets such as mortgages.

When the level of foreclosures on risky mortgages rose sharply last year, it fed through to higher than expected defaults on CDOs.

Analysts at RBS estimate that triple-A rated monoline insurers guarantee $305bn of US CDOs and $88bn of non-US CDOs.

Concerns about rating downgrades come as a smaller bond insurer, ACA Capital, faces insolvency after being downgraded to junk bond status last year, leading to huge write-offs.

Already, Fitch has taken Ambac’s triple-A rating away from it.

Moody’s and Standard & Poor’s are widely expected to follow unless significant amounts of fresh capital is raised soon.

Additional reporting by Paul J Davies in London and Jeremy Grant in Washington

http://www.ft.com/cms/s/0/dd4035f6-c9fe-11...0077b07658.html

[Livyjr]

THIS ARTICLE IS INSERTED HERE FOR BACKGROUND

THE FINANCIAL TIMES

"Realities of monoline rescue attempt sink in"

By Aline van Duyn, Saskia Scholtes and Michael Mackenzie

Published: January 24 2008 22:08 | Last updated: January 24 2008 22:08

In spite of a welcome ray of hope in the form of regulatory efforts to push for a potential cash injection from banks, sentiment in the bond insurance industry was once again clouded on Thursday by a realisation that a solution might not be imminent.

Hopes that banks might cough up some cash to plug holes left in the balance sheets of bond insurers such as Ambac and MBIA, which miscalculated the risks associated with assets backed by subprime mortgages, pushed their shares up sharply on Wednesday.

On Thursday, however, the euphoria subsided somewhat, not least because there was still a lot of detail to be ironed out and it was far from clear how many banks would back such a scheme.

Ambac’s shares fell 6.8 per cent by midday in New York to $12.77 and MBIA’s shares fell 13.2 per cent to $14.42.

Eric Dinallo, the New York State Insurance Superintendent who held talks with banks on Wednesday and has urged them to come up with as much as $15bn of cash for the bond insurers, made it clear no plan was ready to be announced.

“Clearly it is important to resolve issues related to the bond insurers as soon as possible,” said Mr Dinallo in a statement on Thursday.

“However, it must be understood that these are complicated issues involving a number of parties and any effective plan will take some time to finalise.”

As the behind-the-scenes discussions continued on Thursday, and as bond insurers also continued to talk to potential equity investors such as private equity firms, another bond insurer lost its coveted triple-A rating.

Security Capital Assurance ditched its plans to raise $2bn in fresh capital, leading Fitch Ratings to slash its triple-A credit rating to single-A.

This is not likely to be the end of the story – Fitch warned it may cut the ratings further.

SCA’s shares were down 26.7 per cent at $2.78.

“[This] reflects the significant uncertainty with respect to the company’s franchise, business model and strategic direction; uncertain capital markets; the company’s future capital strategy; ultimate loss levels in its insured portfolio; and the challenges in the [bond insurer] market overall,” Fitch said.

Fitch, which has taken a more negative stance on the ratings of bond insurers than rivals Moody’s Investors Service and Standard & Poor’s, was clearly not anticipating an imminent cash shot from banks.

The downgrade of SCA follows a cut of Ambac’s rating to AA by Fitch last week.

The worry is that other rating agencies may follow suit, and that the widespread loss of triple-A credit ratings could lead to losses for banks and other financial institutions with exposure to some of the over $2,000bn of debt guaranteed by bond insurers or hedges in which they are counterparties.

A bail-out could reduce these concerns, which have been hanging over the entire equity market.

News of the talks about a capital infusion led to a powerful rebound for US stocks on Wednesday after a five-day losing run and on Thursday helped power the biggest gains in European stocks for almost five years.

“It would remove a lot of counterparty concerns that are hurting the financials,” said Doug Peta, strategist at J&W Seligman.

Some analysts said it was too early to say whether such a plan to bail out the monolines was feasible.

“Scepticism about a bail-out lies along three lines: whether the banks can overcome competing interests, whether the banks can actually afford the $15bn, whether the $15bn is enough,” said TJ Marta, fixed income strategist at RBC Capital Markets.

Some analysts speculated that the banks might be forced then to raise additional capital, such as from sovereign wealth funds, given the constraints on their capital.

The problems for bond insurers, of which MBIA and Ambac are the largest, stems from their move into structured finance.

Historically, bond insurers have guaranteed payments on debt borrowed by municipalities in the US.

By allowing lower-rated entities to essentially piggy-back on the insurers’ triple-A credit ratings, for a fee, municipalities were able to sell their bonds to investors who only wanted top ratings.

Structured finance, which includes guaranteeing payments on bonds backed by other debt, some of it in turn backed by assets such as mortgages, has turned out to be riskier than their traditional municipal business, with higher rates of default.

The scale of losses associated with such collateralised debt obligations (CDOs) is still not clear, and estimates have continued to rise in recent weeks.

This has led to shortfalls in capital needed to preserve triple-A credit ratings, and a crisis in confidence which has made it made it hard for MBIA and Ambac to get new business.

In a back of the envelope calculation, Geraud Charpin, analyst at UBS, said that a downgrade from triple-A to double-A would lead to an extra $10bn of higher counterparty risk at banks.

Mr Charpin based this on the assumption that the insurers guaranteed about $2,200bn of debt, of which probably around $1,000bn is non- municipal debt.

“Of course, the writedown would be heavier in case of a complete failure [which would void the guarantee and force a full mark-to-market pricing of the securities],” Mr Charpin said.

“At this stage we are not sure who already made appropriate – preventive – writedowns and who did not."

"It is possible the overhang of additional writedowns in bank books was overestimated by the market.”

Working out answers to these questions is now key, but not easy.

One of the problems is that the level of losses associated with mortgage-backed assets is not yet known.

Many analysts are now factoring in worst-case scenarios in terms of losses – a few weeks ago many only ascribed a low chance of that being the case.

Nigel Myer, analyst at Dresdner, said investment banks might be prompted to back a bail-out if they believe losses could be worse than currently expected.

“If structured finance valuations can be maintained and that market kept open, the cost of injecting new capital may be less than the writedowns that would otherwise be incurred should a [bond insurer] fall below double-A, which we believe to be a critical threshold,” he said.

“Could a sweetheart deal within the industry work – we think it could, but the odds are against it because the incentive for each player is to stay out while others take part.”

Additional reporting by Stacy-Marie Ishmael

http://www.ft.com/cms/s/0/8c8e20d8-cabb-11...0077b07658.html

This post has been edited by Livyjr: Feb 6 2008, 02:31 PM

[Livyjr]

THIS ARTICLE IS INSERTED HERE FOR BACKGROUND

THE FINANCIAL TIMES

"Money market funds wait to see where the buck will stop"

By Saskia Scholtes in New York and Gillian Tett in Davos

Published: January 24 2008 22:44 | Last updated: January 24 2008 22:44

Uncertainty over the fate of the embattled bond insurance industry has in recent months caused some sleepless nights for US money market fund managers.

For decades, money market funds have bought municipal bonds and, more recently, structured finance securities that have been insured by companies such as MBIA, Ambac, FGIC and SCA.

But these investors are increasingly concerned that the insurance may not provide the comfort it once did as the bond insurers face losing their crucial triple-A ratings after losses on mortgage bonds they have insured.

Ambac and SCA have both been downgraded below triple-A by Fitch Ratings in the past week and further downgrades are thought likely.

“The potential problem of the money market funds is what is really scaring people now,” said one senior investment banker on Thursday.

Money market funds are the sacred cow of the US fund management industry, designed to be the safest possible place for investors to park their money.

They pledge never to “break the buck”, meaning that they promise to maintain the value of every dollar invested.

To keep that promise and to ensure that they can redeem investors’ cash whenever needed, money market funds often demand that underwriters agree to buy securities back if needed.

The critical issue now is that investment banks typically only agree to repurchase these assets on the condition that a certain level of ratings is maintained.

However, if the insurers lose their triple-A ratings, the $2,400bn of securities they have insured will also be downgraded.

This could force some money market fund managers to sell to comply with strict investment guidelines, which could in turn force prices on insured securities to distressed levels.

For money market fund managers, if there is any risk that the price of a security might fall, they must sell.

Similarly, if they see the value of their existing investments decline, they may need to seek a bail-out from their bank sponsors, which could create further pressure on their balance sheets, or face a widespread loss of investor confidence.

The potential scale of the problem has added a sense of urgency to the regulators’ concerns about the bond insurance industry, and has helped to drive efforts to co-ordinate a rescue plan.

On Wednesday, the New York State insurance regulator held talks with banks and pressed them to provide up to $15bn of capital to support the ailing industry.

One senior regulator said on Thursday:

“In the old days, what we had to worry about was the idea of runs on banks in terms of retail deposits."

"But there is a prospect that we could see a run centred around the money market funds of the type we have not seen before – this is generating a lot of concern.”

If there were widespread losses in money market funds, policymakers fear the political heat will ratchet up as retail investors start screaming and, worse, it could precipitate a widespread withdrawal of cash from money market funds, which could cripple the entire short-term funding market.

For their part, portfolio managers at money market funds are taking precautions.

“The bond insurers are absolutely a pressing concern,” said Steven Shachat, a money market fund manager at Alpine Woods Capital Investors.

“We have sold out of all our positions in bonds wrapped by MBIA, FGIC, Ambac and SCA – we just don’t want to take that risk.”

The wave of selling from Mr Shachat and other such investors has already pushed prices for insured securities much lower than those for comparable uninsured securities.

Mr Shachat says this has created a “two-tiered market” in which yields for insured securities are up to 350 basis points higher than those for uninsured securities – in a dramatic reversal of conventional pricing.

Thus the fear for investors and policymakers is that downgrades of the bond insurers could set off a further panicky wave of selling by money market funds.

George Soros said in Davos this week:

“There is growing concern about monolines . . . there is also a potential problem with money market funds which could be holding doubtful assets.”

Investors have not lost money on a US money market fund since 1994 and it is unlikely any fund operator now would allow such an event to occur.

Last year, several money market fund sponsors were forced to bail out funds that had suffered losses on investments related to subprime mortgages.

The tally of US money market and cash fund bail-outs hit more than $4bn last year as parent companies stepped in to prevent their funds from “breaking the buck”, or falling below the $1 a share value.

http://www.ft.com/cms/s/0/96b7fbb0-cabb-11...0077b07658.html

[Livyjr]

THIS ARTICLE IS INSERTED HERE FOR BACKGROUND

THE FINANCIAL TIMES

"Banks seek value in monoline rescue plan"

By Paul J Davies

Published: January 28 2008 20:56 | Last updated: January 28 2008 20:56

With the New York insurance regulator pushing for a deal to bail out the bond insurers, or monolines, the banks approached to stump up the cash will be working hard to see where value lies for them.

It is understood that Eric Dinallo, the New York insurance superintendent, is pushing for $10bn-$15bn to prop up the troubled sector.

Some analysts and bankers believe that figure is too high.

Compared with Merrill Lynch’s $3.1bn write-offs linked to monoline hedges, $15bn from all banks may look fairly small, but Merrilll’s contracts were mostly with ACA Capital, the bond insurer closest to insolvency.

Writedowns from ratings downgrades to other monolines would not be half as painful, bankers insist.

Geraud Charpin, analyst at UBS, believes an industry-wide downgrade from AAA to AA would lead to $10bn in total writedowns at the most for banks on monoline-guaranteed structured bonds such as mortgage-backed debt.

Standard & Poor’s said this month it expected total after-tax losses for the monoline industry from mortgage-backed bonds and the more complex collateralised debt obligations to be $13.6bn.

S&P’s assessment could worsen, particularly since its estimates of losses had grown by 20 per cent, or almost $2.5bn, since its previous examination in mid-December.

S&P said this growth was not significant in terms of individual companies’ capital strengthening plans.

A number of monolines have talked about raising $1bn-$2bn of new capital, which across the eight or nine most important groups leads to the proposed $10bn-$15bn.

Some see this figure as inadequate.

Independent Strategy, a London-based research house, believes closer to $140bn is needed.

But this includes higher loss estimates of $73bn and an increase in the ratio of claims paying resources to total insured liabilities from about 2 per cent to 5 per cent.

The average ratio of monoline equity to total net exposure is a shade under 1 per cent, so a new vehicle operating on a similar basis would need more than $21bn to take on the full $2,400bn in existing industry liabilities.

Banks could ask how much might be needed to set up a vehicle to take out the most toxic exposures.

UBS estimates those to amount to about $130.7bn for the six biggest companies, suggesting a starting point for equity of only about $1.3bn.

http://www.ft.com/cms/s/0/0facbe3a-cddb-11...0077b07658.html

[Livyjr]

FROM THE DEPARTMENT OF HAVEN'T WE BEEN HERE BEFORE?

Testimony of Chairman Alan Greenspan - Private-sector refinancing of the large hedge fund, Long-Term Capital Management Before the Committee on Banking and Financial Services, U.S. House of Representatives"

October 1, 1998

Mr. Chairman and other members of the Committee, I thank you for this opportunity to report on the Federal Reserve's role in facilitating the private-sector refinancing of the large hedge fund, Long-Term Capital Management (LTCM).

In my remarks this morning, I will attempt to put into some perspective the events of the past few weeks and discuss some questions of importance to public policy makers that they raise.

The Federal Reserve Bank of New York's efforts were designed solely to enhance the probability of an orderly private-sector adjustment, not to dictate the path that adjustment would take.

As President McDonough just related, no Federal Reserve funds were put at risk, no promises were made by the Federal Reserve, and no individual firms were pressured to participate.

Officials of the Federal Reserve Bank of New York facilitated discussions in which the private parties arrived at an agreement that both served their mutual self interest and avoided possible serious market dislocations.

Financial market participants were already unsettled by recent global events.

Had the failure of LTCM triggered the seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own.

With credit spreads already elevated and the market prices of risky assets under considerable downward pressure, Federal Reserve officials moved more quickly to provide their good offices to help resolve the affairs of LTCM than would have been the case in more normal times.

In effect, the threshold of action was lowered by the knowledge that markets had recently become fragile.

Moreover, our sense was that the consequences of a fire sale triggered by cross-default clauses, should LTCM fail on some of its obligations, risked a severe drying up of market liquidity.

http://www.federalreserve.gov/boarddocs/te...ny/19981001.htm

THIS ARTICLE IS INSERTED HERE FOR BACKGROUND

THE FINANCIAL TIMES

"Fed quiet on bond insurers rescue"

By Gillian Tett, Saskia Scholtes and Krishna Guha

Published: January 28 2008 20:56 | Last updated: January 28 2008 20:56

In autumn 1998 when hedge fund Long-Term Capital Management was imploding, William McDonough, then president of the New York Federal Reserve, pulled the heads of Wall Street banks into an oak-panelled Fed meeting room – and bullied them into organising a collective bail-out.

The meeting is renowned since it quelled the LTCM storm.

With Wall Street now facing the threat of a new financial calamity – this time from the embattled bond insurers – some bankers are wondering if the Fed could repeat its trick.

In public, at least, it would seem not.

In recent days, it has been Eric Dinallo, New York Superintendent of Insurance, who has spearheaded efforts to cut a deal, by approaching 13 large investment banks and issuing public statements on the matter.

By contrast, the New York Fed, and its president, Tim Geithner, have been notably silent, avoiding comment on the issue altogether.

This stance is partly because official responsibility for overseeing the bond insurers rests with the state insurance regulators, not the Fed.

Thus the insurance regulator from Wisconsin, which regulates Ambac, one of the two biggest bond insurers, also took part in the meeting with banks.

Bankers believe the Fed also wants to avoid derailing private sector efforts to resolve the crisis, either by stepping in too early or forcefully.

“LTCM means everyone is now looking to the Fed but the Fed does not want to give the impression that it will just sort things out,” says one former US official, who points out that the “impetus must come from the private sector”.

But there is little doubt that many Wall Street bankers fervently hope the Fed will become involved.

Mr Geithner commands considerable credibility on Wall Street.

Mr Dinallo, by contrast, invokes more mixed emotions among some bankers because of his previous involvement in enforcement actions.

“This . . . should be organised at a Federal level, not by state regulators,” a senior official at one Wall Street bank claimed in Davos last week.

Bankers involved in the monoline discussions say that, while the Fed initially hung back, it is now an active player in the discussions, albeit discretely.

“The Fed is absolutely involved now,” says one policymaker.

Thus far, these talks have not produced any tangible deal, partly because it is, arguably, harder to forge a consensus on the bond insurers than it was to resolve the LTCM saga.

One complicating factor is that there are several bond insurers involved rather than just one hedge fund.

Another problem is that banks have wildly varying levels of exposures, giving them different incentives to participate.

What might, possibly, make it possible to cut a deal is that bankers agree that there could be very damaging implications if bond insurers actually lose their crucial triple-A ratings.

Ambac and SCA have already lost their triple-A stamp from Fitch.

Further downgrades at the monolines are possible as a result of losses on subprime mortgage bonds they have insured.

Meanwhile shortfalls in capital and a crisis of confidence have made it hard for the bond insurers to get new business.

If these downgrades occur, it would cause direct pain for some banks, forcing them to write down their counterparty exposures to the downgraded insurers.

Worse still, it could unleash wider financial turbulence in sectors such as money market funds, which have been heavy buyers of insured securities.

Given this, some officials say there is now a clear financial incentive for some banks to participate since the costs created by a downgrade for the bond insurers would probably top the cost of a bail-out.

Moreover, if a rescue plan simply entails that banks provide back-up liquidity lines to banks rather than direct capital injections into the monolines – as some are suggesting – that could make it more palatable.

The really crucial issue is not simply whether a deal can be done but whether it can be concluded before rating agency downgrades or any money market fund panic.

Nobody, in other words, is ready to declare a LTCM-style victory yet.

“A deal makes sense . . . but it’s not done yet,” says one regulator.

“This is a race against time.”

Report bv Gillian Tett, Saskia Scholtes and Krishna Guha

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