Paulson bailout
Sep 22, 2008 Let me begin with the point on which I am in complete agreement with Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke-- it is hard to overstate just how scary this week's developments in financial markets could be.

Prior to the establishment of the Federal Reserve in 1913, the United States would periodically experience events that are often referred to as "financial panics." Rick Mishkin noted that these usually occurred after a recession began and a major financial institution had failed, and were characterized by a sharp increase in the spread between the interest rate paid by higher risk versus lower risk borrowers.The graph below plots the difference between the interest rate on 3-month certificates of deposit and 3-month treasury bills. The alarming behavior of this spread began in August 2007, when it spiked up to 243 basis points, higher than anything seen in the previous 20 years. Aggressive responses from the U.S. Federal Reserve and other central banks last August succeeded in bringing banks' borrowing costs back down, though we saw subsequent comparable spikes in December 2007 and March 2008. But those events would barely be noticed when compared with what happened last week. Following the bankruptcy of Lehman Brothers, the spread reached 527 basis points on Thursday.Financial intermediaries, who earn their profit by lending at a modest markup over their borrowing cost, simply can not be expected to function in this kind of an environment. Lending institutions that had been solvent before this week would not remain so for long if this situation were to persist. Only the safest customers could be expected to obtain loans, and only after paying very high interest rates.To respond to this situation, Treasury Secretary Paulson has proposed a plan whose key feature is the authorization to spend $700 billion to purchase troubled assets from financial institutions. By my count, the Federal Reserve has already extended something on the order of $455 billion in loans collateralized by some of these same troubled assets, namely $125 billion in repos, $150 billion in the term auction facility, $50 billion in "other loans", $30 billion from the Bear Stearns deal, and $100 billion in "other Federal Reserve assets". That $455 billion total does not include this week's $85 billion loan to AIG, nor the $180 billion in reciprocal currency swap lines.

My primary criticism of these previous unconventional actions by the Fed is that they are better characterized as fiscal policy rather than monetary policy. They unquestionably represent an implicit potential commitment of Treasury dollars. If the latest $700 billion Treasury proposal were to take these assets off the books of the Federal Reserve and put them onto the Treasury's balance sheet, and have Paulson rather than Bernanke be the guy who makes these calls of when and where to put the taxpayers at risk, I would be all for it.

But I gather that instead the $700 billion is construed to be in addition to the comparable sum that's already been committed by the Federal Reserve. And it seems to be in addition to the $1.7 trillion in debts from Fannie and Freddie that the U.S. Treasury has now apparently assumed, and is in addition to the guarantees on $3.1 trillion in agency MBS for which the Treasury has again apparently assumed responsibility.

And do you think that this week's $700 billion is going to be the last such request?

Granted, these numbers I've been adding up represent loans or guarantees, which are something very different from outright expenditures. Actual losses should only amount to a small fraction of this sum. But even a small fraction of $6 trillion is still a huge number.

Before we can solve these problems, we need to agree on what caused them. In a narrow mechanical sense, that seems straightforward to answer. Reckless underwriting standards and excessively low interest rates contributed to bidding up house prices to unsustainable levels. Real estate price declines have now engendered current and prospective future default rates that translate into large capital losses for institutions holding assets based on those loans. This erosion of capital makes creditors wary of extending any new funds to these institutions.

But there is also a deeper question here that is harder to answer. How did the financial system come to be susceptible to such a profound degree of miscalculation and inappropriate leveraging of risk in the first place? My answer would be that the core problem was financial arrangements in which the gains went to one group but the downside risk was borne by somebody else. The loan originators offered unsound loans, but still made big profits because they sold those bad loans off to the loan aggregators. Fannie and Freddie earned themselves nice income while the loans were performing, but the taxpayers absorbed the loss when the loans went bad. CEOs and fund managers earned huge bonuses while the boom went on, leaving stockholders and investors holding the bag when things went sour.

And I agree with the Financial Stability Forum that the key changes we need to make to avoid such problems are more transparency in accounting and stronger capital requirements. Transparency is vital so that that creditors, shareholders, fund investors, and regulators can better perceive the risks to which they are exposed. Stronger capital requirements are necessary to ensure that the principal actors are risking their own capital and not just somebody else's.

How you get from our current situation to one where financial institutions are adequately capitalized is of course one of the key challenges of the moment. We can't just impose tougher requirements and expect everybody to extricate themselves from the mess they're in without some federal contributions. But I do not see that a clear vision of exactly what is expected and required, in the way of modified capital standards and risk management procedures, for any institution that receives federal assistance is a key part of any of the proposals. And it should be.

Transparency strikes me as something that ought to be easier to achieve. I would start with a centralized clearing house for reporting all derivative contracts and collateral pledged for them, and requiring financial statements such as annual reports to communicate clearly the specific exposures that those entail. Perhaps there's a fear that if we had a clear communication of exactly who is holding the bag, that could exacerbate the kinds of destabilizing capital flights with which we've been fighting. But I think the uncertainty itself may be even more destabilizing.

Before the taxpayers are asked to commit such sums, we are owed a coherent and compelling explanation of why this kind of problem is never going to occur again.

There's lots of other good analysis out there in the 'sphere. Brad DeLong has a nice exposition of the conditions in which a government intervention could be successful and desirable, and when it could fail. Calculated Risk offers details of how he would run the bailout. Yves Smith and Paul Krugman [1], [2] express their reservations about the Paulson plan. Representative Barney Frank (D-MA) wants to see a cap on executive compensation be part of any bailout. For some comic relief (and heaven knows we could use some at the moment), see the Washington Post (hat tip: Greg Mankiw).

Run on the $10 Trillion 'Shadow Banking System': Regulators Allow Goldman, Morgan To Become Banks

• Sep 21: Fed approved applications by Goldman Sachs and Morgan Stanley to become Federal Reserve-regulated bank holding companies (BHCs).

• The move effectively spells the end of the investment banking industry as a separate sector, leaving behind only small boutique securities firms. In doing so it ends the decades old division of the US financial industry into two halves, which dates back to legislation passed after the Great Depression.

• It means that both Goldman Sachs and Morgan Stanley will be subject to bank capital requirements which will be phased in over a transition period

Click Here For Full Analysis

Details Of Treasury's $700bn 'Bad Bank': Unchecked Authority to Buy a Wide Range of 'Toxic Waste'?

• U.S. Treasury Fact Sheet: "Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets." Treasury's actions may also not be reviewed by any court of law or any administrative agency

Click Here For Full Analysis

Bailout of the U.S. Housing and Financial Sector: Are Fiscal Costs and Risk for Taxpayers Getting Bigger?

• Treasury plans to use $700 bn to buy bad mortgages of financial institutions; also proposes to raise the ceiling on national debt from $10.6 trillion to $11.3 trillion (the limit was raised to $10.6tr earlier this year under the housing bill)

• Advocates of bailout: Cost of the bailout much less than the risk to financial sector, Main Street and U.S. workers from the credit crisis and govt inaction; Opponents: Risk to taxpayers exceeds any potential upside gain apart from leading to higher debt and credit costs in the future and posing risk to U.S. sovereign debt rating

Click Here For Full Analysis

EM Equities Rally As Authorities Shore up Financial Institutions

• Sep. 19: EM equities and bonds rallied in response to authorities actions to shore up troubled banks and on the back of restrictions to short sales. Russia's Micex index was up 25% while China's CSI 300 was up more than 9.0%
• Largest beneficiaries of the bail-out packages are the most leveraged and high-beta emerging markets such as Turkey, Brazil, South Africa, Hungary, Romania and Iceland

Click Here For Full Analysis

Chinese Banks Go Global: How Will Foreign Regulators Respond?

• Chinese financial institutions like CDB, ICBC, Mingsheng Bank and insurance companies like Ping An are increasing overseas acquisitions taking stakes in Barclays, Standard Bank, Fortis and others. Chinese banks remain flush with cash following IPOs, bond issues, are eyeing foreign purchases to increase their expertise of investment banking, market share but may be wary of investing in global banks given losses from previous investments. They may now be seeking out M&A opportunities that are joint ventures
• First round of Chinese bank M&A took place in mid-90s to 2005, and was focused on greater China. Since 2006, outward M&A has involved bigger deals and a broader range of target countries (Boston Consulting Group)

Click Here For Full Analysis

America appoints a Magister Populi to deal with the financial crisis
Sep 21, 2008
Summary: as our ruling elites use the financial crisis to gather economic and political power, the next step is the granting of extraordinary powers to our Executives. Following historical precedent, these will follow the usual forms while greatly changing the substance.

Contents

1. A historical precedent
2. Hot excerpts from the Paulson proposal
3. Can Congress except Executive actions from Court review?
4. Some experts explain if this is legal

1. Historical Precedent

America's original Founders borrowed extensively from practices of the Roman Republic. So do today's Founders of the new American regime when expanding the government's power. From Wikipedia (slightly edited):

Dictator was a political office of the Roman Republic. Appointed in a time of crisis, the dictator was above the three branches of government in the constitution of the Roman Republic, as no other body or officer could check his power.

A legal innovation of the Roman Republic, the dictator (Latin for "one who dictates orders") — officially known as the Magister Populi ("Master of the People") and the Praetor Maximus ("The supreme Praetor") — was an extraordinary magistrate whose function was to perform tasks exceeding the authority of any of the ordinary magistrates.

The Roman Senate passed a senatus consultum authorizing the consuls to nominate a dictator, who was the sole exception to the Roman legal principles of collegiality (multiple tenants of the same office) and responsibility (being legally able to be held to answer for actions in office); there could never be more than one dictator at any one time for any reason, and no dictator could ever be held legally responsible for any action during his time in office for any reason.

The reasons which led to the appointment of a dictator required that there should be only one at a time and great power was visited upon them — the imperium magnus, having the ultimate imperium maius(a higher degree of imperium), which was the ability to overrule or remove from office the other curule magistrates upon whom imperium was conferred, including the ability to order their death. The dictators that were appointed for carrying on the business of the state were said to be nominated rei gerundae causa (for the matter to be done), for the "putting down of rebellion", or ironically in the case of Sulla, as "Dictator for the making of laws and for the settling of the constitution".

Of course Secretary of the Treasury Paulson will not become a dictator. The term has little utility, weighted down by a millenium of baggage. Nor does history repeat; it just rhymes. Still, the discretionary scope of power and freedom from judicial review to be granted Paulson are without precedent in American history, even in wartime.

2. The Paulson proposal

Go here to see the full text of the legislative proposal from Treasury Department for authority to buy mortgage-related assets. Here are a few of the choice items. Section 8 is my favorite.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.-The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

( Necessary Actions.-The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary's authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

3. Can Congress except Executive actions from Court review?

Section 8 is an essential and necessary requirement for the role of Magister Populi. To make it legal I believe (having no training in the law) that this clause invokes Article III, Section 2 of The Constitution:

In all Cases affecting Ambassadors, other public Ministers and Consuls, and those in which a State shall be Party, the supreme Court shall have original Jurisdiction. In all the other Cases before mentioned, the supreme Court shall have appellate Jurisdiction, both as to Law and Fact, with such Exceptions, and under such Regulations as the Congress shall make.

4. Update: legal analysis

While presumably accurate, these legals experts are telling us that the Constitutional regime is comatose if not yet terminal. Their analysis reads like a follow-up chapter to my 4 July 2006 post "Forecast: Death of the American Constitution." Esp disturbing are references to Nazi philosopher Carl Schmitt (again reminding us that in many ways Hitler was just early).

(a) "The Bailout Statute", by David Zaring, posted at the Conglomerate, 20 September 2008 — Excerpt:

Congress bailed out S&Ls before, and survived constitutional challenge then, I can't see why it wouldn't be able to bail out other financial institutions now. So: can it do this? Yes. However:

* Has Treasury been delegated an unconstitutionally broad amount of power?

These powers are broad, and because of a weird clause in the preamble of the statute, not the only things Treasury can do: "The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation" sales, appointments, regulations, etc. It's that "without limitation" language - suggesting that the powers granted to Treasury are examples, rather than limited authorizations, that might give a nondelegation afficianado a little pause. You know, can Treasury take this new sovereign wealth fund and buy anything it likes? Isn't that unconstitutionally broad? Maybe so …. but your first presumption is that broad grants of power haven't been held to be unconstitutionally broad since 1935. I think this easily passes muster.

* And there's no judicial review.

Courts don't like these clauses - but particularly in civil or constitutional rights cases (see the Supreme Court and GITMO). And for constitutional questions like non-delegation or commerce clause violations, they'd probably just ignore this clause. But otherwise, for run-of-the-mill review of how Treasury implements this scheme, I can't see there being a problem keeping the courts out. Heck, judges probably want to be cut out of the supervision of Treasury's supervision of the economy.

( A stream of excellent analysis at The Volokh Conspiracy. Esp note how these bailouts are crafted so that they pretend to conform to existing law.

© "A further Schmittian (and constitutional?) moment", Sandy Levinson, posted at Balkinization, 19 September 2008 - Excerpt:

This is exactly what Carl Schmitt met by an "exceptional" situation that requires legal transgression and perhaps even "dictatorship." Recall, incidentally, that "Sovereign is he who decides the existence of a state of exception." Well, it's easy enough to identify the "sovereign(s)" this past week: Ben Bernanke and Henry Paulson.

(d) Who is this NAZI guy? See "Our Schmittian Administrative Law", Adrian Vermeule (Harvard Law School), Harvard Law Review, 2009 — Abstract:

Our administrative law contains, built right into its structure, a series of legal black holes and grey holes - domains in which statutes, judicial decisions and institutional practice either explicitly or implicitly exempt the executive from legal constraints. Legal black holes and grey holes are best understood by drawing upon the thought of Carl Schmitt, in particular his account of the relationship between legality and emergencies. In this sense, American administrative law is Schmittian. Moreover, it is inevitably so. Extending legality to eliminate these black and grey holes is impracticable; any aspiration to eliminate the Schmittian elements of our administrative law is utopian.

I think it is time to get angry.

Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

Treasury Department documents

• Paulson Remarks on Housing GSE Actions
• FHFA Director Lockhart Remarks on Housing GSE Actions
• Fact Sheet: FHFA Conservatorship
• Fact Sheet: Treasury Preferred Stock Purchase Agreement
• Fact Sheet: Treasury MBS Purchase Program
• Fact Sheet: Treasury GSE Credit Facility
• Freddie Mac Warrant to Purchase Common Stock
• Freddie Mac Certificate
• Freddie Mac Senior Preferred Stock Purchase Agreement
• Fannie Mae Warrant to Purchase Common Stock
• Fannie Mae Certificate
• Fannie Mae Senior Preferred Stock Purchase Agreement
• Frequently Asked Questions: Treasury Senior Preferred Stock Purchase Agreement
• OMB Director Nussle Statement on the GSEs Budgetary Status

See this page for a current list of Treasury Department documents.

Posts about the current crisis

1. Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
2. High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
3. Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
4. Another voice warning about the nationalization of AIG, 18 September 2008
5. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008
6. A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
7. Another step away from our Constitutional system, with applause, 19 September 2008
8. What do we know about the financial crisis? What are the key questions?, 20 September 2008
9. Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008

A few of the most important posts warning about this crisis

1. A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
2. The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
4. Death of the post-WWII geopolitical regime, III - death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
5. Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
6. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
7. What will America look like after this recession?, 18 March 208 — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
8. The most important story in this week's newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
9. Prof Nouriel Roubini describes "The Decline of the American Empire" ,18 August 2008
10. The World's biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.
11. "The changing balance of global financial power", by Brad Setser, 22 August 2008
12. "The Coming US Consumption Bust", by Nouriel Roubini, 6 September 2008

To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.

Originally published at Fabius Maximus blog

The Liquidation Trap
Sep 21, 2008
The U.S. financial system is caught in a destructive liquidation trap that has falling asset prices cause financial distress, in turn compelling further asset sales and price declines. If unaddressed, it risks sending the economy into deep recession – or even depression.

Current conditions are the result of bursting of the house price bubble and the end of two decades of financial exuberance. That exuberance was fostered by a cocktail of forces.

First, economic policy replaced wages and productive investment as the engines of growth with debt and asset inflation. Second, greed and free market ideology combined to promote excessive risk-taking and restrain regulators. This was encouraged by audacious claims that mathematical economic models mapped reality and priced uncertainty, making old-fashioned precautions redundant.

Recognition of the scale of financial folly has created a rush for liquidity. This is causing huge losses, triggering margin calls and downgrades that cause more selling, damage confidence, and further squeeze credit. That is the paradox of deleveraging. One firm can, but the system as a whole cannot.

Having failed to prevent the bubble, regulatory policy is now amplifying its deflation. One reason is mark-to-market accounting rules that force companies to take losses as prices fall. A second reason is rigid capital standards.

Application of mark-to-market rules in an environment of asset price volatility can create a vicious cycle of accounting losses that drive further price declines and losses. Meanwhile, capital standards require firms to raise more capital when they suffer losses. That compels them to raise money in the midst of a liquidity squeeze, resulting in fresh equity sales that cause further asset price declines.

Bad debts will have to be written down, but it is better to write them down in orderly fashion rather than through panicked deleveraging that pulls down good assets too.

This suggests regulators should explore ways to relax capital standards and mark-to-market rules. One possibility is permitting temporary discretionary relaxations akin to stock market circuit breakers.

Later, regulators must tackle the underlying problem of price bubbles. Currently, central banks are only able to control bubbles by torpedoing the economy with higher interest rates. New flexible measures of control are needed. One proposal is asset based reserve requirements, which systematically applies adjustable margin requirements to the assets of financial firms.

The Fed must also lower interest rates, and not just for standard reasons of stimulating spending. Lower short term rates are needed to make longer term assets (including houses) relatively more attractive, thereby shifting demand to them and putting a bottom to asset price destruction.

Fears about a price – wage inflation spiral remain misplaced. Instead, the threat is deep recession triggered by the liquidation trap. If inflation is a wild card, now is the time to use the credibility the Fed has earned. Emergency rate reductions can be reversed when the situation stabilizes.

The great irony is central banks can produce liquidity costlessly. Usually the problem is restraining over-production: today, it is over-coming political concerns about "bail-outs". Those concerns are legitimate, but they also risk inappropriately restricting liquidity provision and unintentionally imposing huge costs of deep recession.

At the moment the Fed is protecting banks and the treasury dealer network but leaving the rest of the system in the cold. That is perverse given how the Fed went along with expansion of the non-bank financial system. Instead, the Fed should consider an auction facility that makes longer duration loans available to qualified insurance and finance companies too.

The facility's guiding principle should be an expanded version of the Bagehot rule. Accordingly, the Fed would auction funds at punitive rates, with loans being fully collateralized. The goal should be to facilitate repair of distressed financial companies with minimum market disruption and at no taxpayer expense. By creating an up-front facility, the Fed can get ahead of the curve and reduce need for crisis interventions that are always more costly and disruptive.

Among financial conservatives there is a view that financial markets deserve punishment for their "sins" and only that will cleanse them. This view is often presented in terms of need to restore market discipline and stay moral hazard.

The view from the left is strangely similar, arguing Wall Street "fat cats" need to be punished. Asset prices should fall, banks must eat their losses, and all but the most essential financial firms should be allowed to fail.

Both views have a moralistic dimension, and both risk unnecessary economic suffering. The mistakes of the past cannot be undone. All that can be done is to minimize their costs and then truly reform the system so that they are not repeated.

Originally published at Thomas Palley weblog

<h1 class="posttitle">What Wall Street Should Be Required to Do, to Get A Blank Check From Taxpayers </h1> PrintShare Delicious Digg Facebook reddit Technorati Robert Reich | Sep 22, 2008 The frame has been set, the dye cast. Treasury Secretary Hank Paulson, presumably representing the Bush administration but indirectly representing Wall Street, and Fed Chief Ben Bernanke, want a blank check from Congress for $700 billion or possibly a trillion dollars or more to take bad debt off Wall Street’s balance sheets. Never before in the history of American capitalism has so much been asked of so many for (at least in the first instance) so few.Put yourself in the shoes of a member of Congress, including our two presidential candidates. The Treasury Secretary and Fed Chair have told you this is necessary to save the economy. If you don’t agree, you risk a meltdown of the entire global financial system. Your own constituents’ savings could go down with it. An election is six weeks away. Besides, in the last two days of trading, since rumors spread that the Treasury and the Fed were planning something of this sort, stock prices revived. Now – quick -- what do you do? You have no choice but to say yes.

But you might also set some conditions on Wall Street.

The public doesn’t like a blank check. They think this whole bailout idea is nuts. They see fat cats on Wall Street who have raked in zillions for years, now extorting in effect $2,000 to $5,000 from every American family to make up for their own nonfeasance, malfeasance, greed, and just plain stupidity. Wall Street’s request for a blank check comes at the same time most of the public is worried about their jobs and declining wages, and having enough money to pay for gas and food and health insurance, meet their car payments and mortgage payments, and save for their retirement and childrens’ college education. And so the public is asking: Why should Wall Street get bailed out by me when I’m getting screwed?

So if you are a member of Congress, you just might be in a position to demand from Wall Street certain conditions in return for the blank check.

My five nominees:

1. The government (i.e. taxpayers) gets an equity stake in every Wall Street financial company proportional to the amount of bad debt that company shoves onto the public. So when and if Wall Street shares rise, taxpayers are rewarded for accepting so much risk.

2. Wall Street executives and directors of Wall Street firms relinquish their current stock options and this year’s other forms of compensation, and agree to future compensation linked to a rolling five-year average of firm profitability. Why should taxpayers feather their already amply-feathered nests?

3. All Wall Street executives immediately cease making campaign contributions to any candidate for public office in this election cycle or next, all Wall Street PACs be closed, and Wall Street lobbyists curtail their activities unless specifically asked for information by policymakers. Why should taxpayers finance Wall Street’s outsized political power – especially when that power is being exercised to get favorable terms from taxpayers?

4. Wall Street firms agree to comply with new regulations over disclosure, capital requirements, conflicts of interest, and market manipulation. The regulations will emerge in ninety days from a bi-partisan working group, to be convened immediately. After all, inadequate regulation and lack of oversight got us into this mess.

5. Wall Street agrees to give bankruptcy judges the authority to modify the terms of primary mortgages, so homeowners have a fighting chance to keep their homes. Why should distressed homeowners lose their homes when Wall Streeters receive taxpayer money that helps them keep their fancy ones?

Wall Streeters may not like these conditions. Well, you should tell them that the public doesn’t like the idea of bailing out Wall Street. So if Wall Street doesn’t accept these conditions, it doesn’t get the blank check.

posted by Robert Reich

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Lehman's Bankruptcy and the Hidden $138 Billion "Bailout" of JP Morgan
Companies / Derivatives Sep 21, 2008 - 06:38 PM

By: Rob_Kirby



We are living in heady times. On Monday morning, something VERY strange occurred:

$138 Billion Post-Bankruptcy JP Morgan Advance to Lehman[

At Least $87 B Repaid by Fed


Two readers, Steve and Julian e-mailed us about the Bloomberg story below , that the Fed repaid JP Morgan for an advance made to Lehman after its bankruptcy filing:

Lehman Brothers Holdings Inc., the securities firm that filed the biggest bankruptcy in history yesterday, was advanced $138 billion this week by JPMorgan Chase & Co. to settle Lehman trades and keep financial markets stable, according to a court filing.

One advance of $87 billion was made on Sept. 15 after the pre-dawn filing, and another of $51 billion was made the following day, according to a bankruptcy court documents posted today. Both were made to settle securities transactions with customers of Lehman and its clearance parties, the filings said.

The advances were necessary ``to avoid a disruption of the financial markets,'' Lehman said in the filing.

The first advance was repaid by the Federal Reserve Bank of New York, Lehman said. The bank didn't say if the second amount was repaid. Both advances were ``guaranteed by Lehman'' through collateral of the firm's holding company, the filing said. The advances were made at the request of Lehman and the Federal Reserve, according to the filing.

Lehman disclosed the advances in a motion seeking court permission to give JPMorgan's claims special status in its attempts to recover any advances. Lehman said that if that status isn't granted, JPMorgan may not be able to make future advances needed to clear and settle trades.

``The granting of the relief requested is in the best interests of the estate and its stakeholders and the public markets,'' Lehman said, adding the advances would be ``essential to Lehman's customers.''

JPMorgan may make future advances at its sole discretion, all of which would be guaranteed by Lehman under its agreement to pledge collateral, Lehman said.

JPMorgan said in a statement in court documents that it has had a clearing agreement with Lehman since June 2000, and had pledged its collateral under an Aug. 26 guarantee.

Since the Federal Reserve reimbursed J.P. Morgan, presumably and ostensibly, with public monies [that taxpayers will be on the hook for] – doesn't the public have the right to know what that 138 billion was spent on?

Investment banks are dropping like flies, owing to their involvement in credit derivatives – this is a fact.

J. P. Morgan is – HANDS DOWN – the largest derivatives player in the world with a book of 90 Trillion in notional value at March 31, 2008 – with 9% of the book composed of Credit Derivatives. That amounts to a cool 8.1 Trillion worth of Credit Derivatives. We know this from the Office of the Comptroller of the Currency's Quarterly Derivatives Report – pg. 24

[b]

BUSH SAYS FAILURE TO ACT ON FINANCIAL BILL WOULD HAVE BROAD CONSEQUENCES BEYOND WALL ST...
HIGH STAKES RESCUE VOTE...
Greenspan's sins return to haunt us...
Europeans ridicule America's money meltdown...
Chinese government paper urges new world order for economy...
FURY AT $2.5 BILLION BONUS FOR LEHMAN'S NEW YORK STAFF...
'How the Democrats Created the Financial Crisis'...[/b]

• Goldman, Morgan Become Banks
• Paulson Urges Quick Action
• Editorial Reaction to $700B Plan
• Street Fastens Seatbelt
• Europe Halts World Equity Rally

• More Commentary & Opinion
  • Hedge Funds Face Chaos
  • Can the Dollar Weather Bailout?
  • Is SEC's Cox to Blame?
  • Can Goldman/Morgan Go It Alone?
  • Credit Crunch Will Go On
  • Greenspan's Sins Return To Haunt

Goldman, Morgan to Become Full-Fledged Banks - DealBook
Companies Left Off SEC Short List - Jon Ogg, 24/7 Wall Street
Bailout Mania Hits the Markets - Prieur du Plessis, Postcards from C-Town
Will the Guilty Pay - In DC or On Wall Street? - K. Brouwer, Fundmastery
Washington's Mother of All Bailouts - James Pethokoukis, Capital Commerce
Paying for the Bailout: In Defense of the U.S. Taxpayer - Info Arbitrage

Transcripts & Videos
Paulson, Bloomberg, Pearlstein & Liesman on Fncl Crisis - Meet The Press
Barack Obama & John McCain on "The Plan" - Maria Bartiromo, CNBC
Will The Feds' Plan Work? Interview w/ Sec'y Paulson - Face the Nation
Is The Proposed Bailout Plan Bad for the Dollar? - CNBC

Falling Into Fall
So many shoes are poised to drop this week that the American scene might be confused for the world's greatest-ever clog dancing festival, but a closer look will reveal a circle of cavorting skeletons.
Last week's ripe moment turned out to be the Thursday night Washington photo op when Treasury Secretary Paulson and Fed Chief Bernanke emerged from a huddle with House Speaker Nancy Pelosi and just about every other legislative eminentissimo in an attempt to reassure the nation that its financial system had not turned into something like unto a truckload of stinking dead carp. I don't know about you, but I got two distinct vibes from the faces in that particular tableau: 1.) abject fear, and 2.) a total lack of conviction that they knew what they were doing.
The product of that huddle was a cockamamie scheme for the US treasury to absorb all the losses from a twenty-year binge in which Wall Street created and retailed the most complex set of swindles ever seen on this planet Earth. The background music to the tableau was the whoosh of a several trillion dollars exiting the US financial system never to be seen again.
The next day (Friday) many particulars of that scheme began to emerge -- such as the complete lack of oversight and review mechanisms for Treasury's new power to monetize private business failures and frauds -- and the stock market soared in response. Other new features of the reformed capital landscape also resolved later that day, like a new experiment aimed at eliminating the short sale as a way of guaranteeing that henceforth market bets could only be placed on the upside of the table. It will be interesting to see how that reform works out in the days ahead.
Over the weekend, all these various playerz retreated into their gilded bunkers to negotiate the details, and by Sunday night, among other things, Goldman Sachs and Morgan Stanley -- the two remaining investment giants left standing -- announced that they would metamorphose into regular banks in order to qualify for additional truckloads of government loans in exchange for any leftover fraudulant securities still lurking in their vaults. Another new provision had the Treasury rescuing swindled foreign companies, too -- in effect, saving the world, which seemed at least, how you say, pretty ambitious.
By this morning, many new arguments had been raised by a suddenly de-zombified congress as to whether the proposed grand bail-out might reward recent Wall Street turpitudes and incentivize future mis-deeds and it looks like enough objections may be lodged to gum-up the process before it even goes into effect -- which, of course, would tend to revert the whole reeking cargo of trouble to its original train-wreck trajectory. I guess we'll see what happens now.
Any way you paint this grotesque panorama, it looks like a very new chapter of history for life in the USA. Basically, we are a much poorer nation than we were even a couple of years ago, and we have a much-reduced ability to project our will around the world, or even among our own floundering sectors and regions. Most troubling to me is the question of legitimacy that now hangs over the proscenium like a guillotine blade. Factoring in the old saw that history doesn't repeat but it rhymes, I think the situation emerging is rather like the crisis of legitimacy that preceded the Civil War. Then, in the 1850s, the nation's two symbiotic political parties, Whig and Democrat, entered a zone of fatal discredit. The White House had been occupied by a sequence of empty cravats named Fillmore, Pierce, and Buchanan, and so much pent-up mistrust roiled the centers of power that the nation entered a convulsion.
At issue then was the great festering unresolved polity of slavery. The Whig party, in its oafish, craven fecklessness, disappeared so quickly from the scene that an embarrassed God Almighty seemed to have hooked it off-stage in a nanosecond. Into the vacuum stepped an awkward lawyer from Illinois -- widely mocked by the coarser elements of what was then called the press as a figure resembling an ape in a stovepipe hat. He accomplished one crucial thing in the process of his emergence: he deployed a potent rhetoric that captured the essence of the crisis and clarified it for all to understand what was at stake -- and then the convulsion commenced in earnest.
The Republican Party amounts to today's Whigs. Their candidate for president, John McCain, is trying to run away from his own party -- as one might shrink away from a colony of importuning lepers. I am actually not kidding when I label the Republicans "the party that wrecked America," because I believe that is truly how the popular strain of history will regard them when (maybe if) the wreckage of their ministrations ever clears. But history doesn't repeat exactly. The current figure from Illinois, Barrack Obama, has yet to offer a truly crisis-clarfying rhetoric, though he labors under the expectation of being able to do so. Like his long-ago predecessor, he is mocked by the coarser elements of what we call "the media" these days -- Fox News and the moron-rousers of talk radio.
Some of the issues yet-to-be-clarified concern the behavior of the American public in the broad sense. We have obdurately resisted the reality of the energy crisis that hangs over everything we do (as slavery hung over the 1850s), from the way we inhabit the landscape to the way we do daily business in our 240-million-plus fleet of cars and trucks that ply the ribbons of asphalt and the lagoons of parking that now run from sea to shining sea where the fruited plain was replaced by the Wal Marts.
Mr. Obama isn't kidding either when he alludes to the change America faces, though history has not yet rhymed enough for his rhetoric to really set forth the terms of this change in its stark particulars. And even if he is able to articulate these things, he won't forestall the convulsion anymore than Lincoln held back a war between the states. That prior crisis was when America learned good and hard how tragic life could be, and it colored our national character for a century -- until we chucked it all to become a society of overfed clowns, with God Almighty replaced by Ronald McDonald. That pageant of happy idiocy is now ending. Like everyone else in this fraught and nervous land, I'm standing by to see what transpires in the days just ahead.

http://jameshowardkunstler.typepad.com/

Hoping a Hail Mary Pass Connects
Wachovia-Morgan Stanley merger reportedly seen unlikely
A long way to go, even if it’s the end of the beginning

Regulators Push and Banks Scramble as Auction-Rate Securities ...
Markets Media (press release) - New York,NY,USA
By Riley McDermid, Reporter Settlements agreed by banks entangled in the auction-rate securities debacle dominated headlines for much of August, ...


McCain Floats Cuomo as Possible SEC Chair
New York Times Blogs - New York,NY,USA
... about Mr. Cox and the agency he runs: “A lot of investors are looking at the SEC and saying, ‘Where were you with respect to auction-rate securities? ...


Cox `Asleep at Switch' as Paulson, Bernanke Encroach (Update1)
Bloomberg - USA
``A lot of investors are looking at the SEC and saying, 'Where were you with respect to auction-rate securities? And where were you with the securitization ...

By Kevin Hassett

Op-Ed

September 22, 2008



PDF Format



The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story. ...



Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally. ...



Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''



What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets. ...



But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.



That such a reckless political stand could have been taken by the Democrats was obscene even then. ...



Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.



But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.



Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000. ...



There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.



Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.



To View The Entire Article, Please Visit: http://www.bloomberg.com/apps/news?pid=206...lumnist_hassett

No Bailout May Be Big Enough to
Bring a Quick End to This Bear Market
by Sharon A. Daniels
Monday, September 22, 2008 3:00 PM
The Dow first brushed up against the 1,000 level when I was just a kid, and by the time it closed above 1,000 for good, I was old enough to have kids of my own. The entire period of the late ... [More...]

To Congress: Please Do Not Spread the Panic
by Martin D. Weiss, Ph.D.
Monday, September 22, 2008 7:30 AM
The proposal before Congress for a $700 billion mega-bailout is far too little to repair the damaged debt and derivatives markets ... and, at the same time, far too much for investors ... [More...]

Warning: Nasty Surprises Coming Next Week
by Martin D. Weiss, Ph.D.
Sunday, September 21, 2008 7:30 AM
America's $47-trillion bubble of debt has burst. America's $180-trillion balloon of derivatives has popped. And all the president's men cannot put them back together again. Last year, they ... [More...]

Bailout proposal grants sweeping powers to Paulson, but are they legal?
Marcia Coyle / Staff reporter

In the massive financial bailout proposal, Treasury Secretary Henry Paulson may assume powers seemingly akin to an economic Man of Steel. But would they be constitutional? A provision in the administration's bailout legislation essentially granting the secretary carte blanche in order to protect the economy raises red flags, say legal scholars.

The Treasury's Plan Is Breathtakingly Bad
This act would be such a wholesale delegation of the power of the purse that Steve Waldman wonders whether it is even constitutional. "This is overreach. This is bad." ... more » • R. Ehrenberg: Robin Hood in Reverse

• Counterpoint from Nadav Manham: In Defense of the Paulson Plan

• 5 Failures of SEC Chairman Cox
• If You Think the Dow Did Well Today, You're Wrong
• Gold Bull Sees Huge Run for Gold
• Preserving U.S. Economy Over Free Markets (Short Sellers)
• Ambac Collapse: Anticlimax of the Week
• Irate Icahn - Fast Money Recap (9/19/08)
• Wall Street, R.I.P. Now What?
• Wall Street Breakfast: Must-Know News

The Dollar

• The Undisclosed Costs of the U.S. Government Bailouts on Sep 22, 2008 | by J. S. Kim | about FRE, FNM, UDN
• Short Squeeze Brings Down the Dollar on Sep 22, 2008 | by Grace Cheng | about UUP, UDN
• Fed Bailout Will Create Weaker Dollar, Higher Commodity Prices on Sep 22, 2008 | by J Clinton Hill | about DBA, DBC, UDN
• Keiser: US Dollar 'Backed by Bananas' on Sep 22, 2008 | by Max Keiser | about DBV, SPY, UDN
• What Effect Will Hyperinflation Have? on Sep 22, 2008 | by Avery Goodman | about DIA, SPY, IVV
• The U.S. Risks Losing Its AAA Credit Rating on Sep 22, 2008 | by Sean Maher
• 5 Things You Can Bet on Following the Treasury's Plan on Sep 22, 2008 | by Gaurav

OUCH

Paulson plan
throws oil on fire
US Treasury Secretary Henry Paulson has made the unfolding financial crisis even more dangerous with his plan to create a trust to take on the liabilities of failing institutions. It could ignite the worst inflation in the US and reverse globalization to levels not seen since the Great Depression. - Hossein Askari and Noureddine Krichene

Marriott blast rips further
hole in Pakistan economy
The owner of Islamabad's Marriott has pledged to reopen the hotel, shattered in Saturday's weekend suicide blast, by the end of the year. Pakistan's fast-detiorating economy may take longer to recover from this latest savage blow. - Syed Fazl-e-Haider

The downside fans out
Asia's turbulent markets are establishing a pattern which, once broken, can be followed by a move to the upside from which the charts never look back. Unfortunately, the evidence points to a long wait for that event. - R M Cutler

THE BEAR'S LAIR
The wrong rescues
The US and UK governments have displayed an unerring talent for ignoring history with their most recent bailouts of financial companies. The wrong institutions have been saved and basically solid ones allowed to go to the wall. The consequences include high and unecessary bills for the taxpayer and, further ahead, the movement of financial activity to more competently run locations. - Martin Hutchinson

THE MOGAMBO GURU
Budget insanity
US state governments are finding that growing losses on Wall Street and a declining economy mean tax revenues tumble. That still isn't stopping them from continually raising their budgets. And that means more inflation. And higher gold prices! Thank you, thank you, thank you.
CREDIT BUBBLE BULLETIN
Misdirected credit
runs unabated
More alarming than recent efforts to stem the financial crisis is that emergency measures are being taken so early - with the Dow still above 11,000 and GDP growth strong. An unprecedented circumvention of free market forces has been unleashed - but to what end? It will definitely worsen the inevitable financial and economic dislocation. (Sep 22, '08)
Doug Noland looks at the previous week's events each Monday.

SPENGLER
E pluribus hokum
Americans are taxing themselves, hugely, to keep the US financial casino running, even though it will not profit them. Why does the government not, instead, let the Chinese, or the Saudis, take control of failed US banks? Where, in fact, is the leader who will drive out the American oligarchs who have stolen the country's treasure? (Sep 22, '08)

CHAN AKYA
Terminal velocity
Bailouts in the United States and elsewhere in the West fast forward the decline of the Group of Eight industrialized countries, and mark another key moment in the rise of Asia as the world's sole economically viable region. These trends will only accelerate if existing G-8 governments are voted back to power - and if Asia's central bankers display intelligence. (Sep 22, '08)

Rules, leverage and the fall of man
As the whispering axe of reality terminates this era of the capitalist world, with a bill possibly higher than it cost to defeat Nazism and fascism in World War II, the politicians have a few days to calculate how they can benefit most as the entrails still steam. The rest of us can ask how and when it was allowed that markets alone of human activity were so pure as to require no regulation. - Julian Delasantellis (Sep 22, '08)

Too big to fail versus moral hazard
Alan Greenspan, when Federal Reserve chairman, noted that the US economy, "with its wide financial safety net, fiat money, and highly leveraged financial institutions, has been a conscious choice of the American people since the 1930s". The costs of that choice are coming headlong like a runaway freight train. - Henry C K Liu (Sep 22, '08)

1. The Road Ahead

2. The Pain of Deleveraging Will Be Deep and Wide

3. B of A's Biggest Bet Ever: Big Risks, and Rewards

4. Bailout or Not, Credit Will Be Crunched

5. Going for Broke

6. Bank of America Slides

7. Paulson's Rally: Turning Point for the Market?

8. A Historic Government Bailout Has its Limits

9. Stocks With a Built-In Advantage

10. The Fix Is In for Stocks

Paulson, Lawmakers Narrowing Differences, Frank Says (Update2)
By Alison Vekshin

Sept. 22 (Bloomberg) -- House Financial Services Committee Chairman Barney Frank said lawmakers and Treasury Secretary Henry Paulson narrowed their differences on a $700 billion plan to buy bad investments and agreed the U.S. should get equity in the participating companies.

Lawmakers ``made it clear'' the U.S. should get stock warrants ``so that if the company becomes profitable, we get more than the general share for taking these risks,'' and Paulson agreed, Frank told reporters today in Washington. Negotiators support letting Treasury use the authority while Congress writes oversight rules, Frank said in a Bloomberg Television interview.

Frank and Senate Banking Committee Chairman Christopher Dodd are leading efforts to halt a financial crisis that forced Lehman Brothers Holdings Inc. into bankruptcy and led the U.S. to take over American International Group Inc. Senator Richard Shelby, ranking Republican the banking panel, said the Treasury plan may not work and urged lawmakers to consider alternatives.

The Bush administration is seeking to buy as much as $700 billion in devalued assets from investment firms to unfreeze the financial system. The proposal, sent to Congress during the weekend, would prevent courts from reviewing the Treasury's actions while raising the nation's debt ceiling.

``We understand that bad market choices have put us in a situation where something has to happen,'' Frank said. ``We want it to happen with the best possible chance of it working, of the taxpayers ultimately being made whole.''

Congressional Proposals

Frank and Dodd have proposed changes that include strengthening foreclosure-prevention efforts, curbing executive pay for companies that need the U.S. to buy their assets and expanding oversight of the Treasury program. Paulson has opposed limits on executive pay.

Republican Senator Mel Martinez of Florida said there is bipartisan support for limits on compensation and severance for senior executives of bailed-out firms. ``Some element of that has to be in'' the legislation, he said after a meeting of Senate Banking Committee members.

Martinez said the administration's proposal should only be changed ``on the margins.'' Congress doesn't have time now to debate the issue of whether to alter existing home mortgages to avert foreclosures, he said.

``Hastily Crafted'

Shelby, of Alabama, called on Congress to explore alternatives to the plan proposed by Paulson.

``Treasury's proposal is neither workable nor comprehensive, despite its enormous price tag,'' Shelby said in an e-mailed statement. ``In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted, and may actually cause the government to revert to an inadequate strategy of ad hoc bailouts.''

Congress should ``immediately undertake a comprehensive, public examination of the problem'' and explore ``alternative solutions rather than swiftly pass the current plan with minimal changes or discussion,'' Shelby said.

The Treasury proposal gave Paulson ``much too much authority,'' Frank said. ``We have restored the notion of judicial review and accountability.''

Frank proposed the U.S. comptroller general ``commence ongoing oversight of the activities and performance'' of the plan, according to legislative language his office presented to Treasury officials yesterday.

Oversight Plans

The comptroller general, who is director of the Government Accountability Office, and other GAO officials would have access to financial records, have audit powers and would report findings to Congress under Frank's proposal. The GAO is Congress' financial watchdog.

Dodd's proposal would give the Treasury an equity stake when it helps companies and create a five-member oversight board to supervise the purchase and sale of distressed mortgage debt. Frank said he and the Senate ``are pretty close'' on the plan.

Democrats proposed revising a provision in the plan that would bar judicial scrutiny of any acquisition of assets and Dodd offered a plan that would let courts step in when they find that a decision about a troubled loan was arbitrary or illegal.

``I think that may be illegal, not to be able to challenge things,'' Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, told reporters. ``I'm not sure that would hold up anyway.''

Frank said Democrats and Treasury are still at odds over the Democrats' executive-pay proposal and a provision to allow judges to modify loan terms for struggling borrowers in bankruptcy proceedings.

``Without some limitations on CEO compensation and compensation for the other top executives, this bill is going to be rejected not just by the Congress but by the country,'' Frank said today in an interview with Bloomberg Television.

The bankruptcy provision is ``one of the things that we'll see how hard they fight,'' Frank said. ``It's something we care about.''

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: September 22, 2008 17:05 EDT

CBO: Budget deficits likely to mount

Federal bailout on Wall Street deepens debt in the trillions

David M. Dickson (Contact)
Monday, September 22, 2008
As the U.S. government embarks on a financial-rescue mission - whose cost is impossible to predict - the nation is already headed for a sustained period of budget deficits on a scale never seen before, said Peter R. Orszag, director of the Congressional Budget Office.

Mr. Orszag recently outlined a scenario in which $7 trillion in cumulative deficits could be piled up over the next 10 years.

The so-called "on-budget deficits," which exclude Social Security surpluses, would exceed $9 trillion over the next 10 years, CBO data reveal.

Under the plausible fiscal-policy scenarios detailed in CBO's latest "Budget and Economic Outlook," which was released earlier this month, the budget deficits for 2017 and 2018 could exceed $1 trillion each year.

Trillion-dollar deficits would be arriving just as the cash-flow surpluses from Social Security turn into cash-flow deficits, a development that would require the federal government to use general revenues to meet Social Security benefit payments.

If the projections hold true, these deficits would become the primary force that would add $10 trillion to the national debt, more than doubling it by 2018.

"Unfortunately, that's the good news," Mr. Orszag said, "because thereafter we start to experience the longer-term budget pressures that are at the heart of the long-term fiscal problems the nation faces."

David M. Walker, the former comptroller general of the United States, said, "It is very possible that the numbers could be worse" than the 10-year, $7 trillion deficit projected by the CBO director. Mr. Walker, who, as head of the Government Accountability Office, conducted a nationwide Fiscal Wake-Up Tour chronicled in the documentary "I.O.U.S.A," recently became president and CEO of the Peter G. Peterson Foundation, which was established to alert Americans about the forthcoming fiscal crisis.

The impact of $700 billion deficits

UNITED PRESS INTERNATIONAL President Bush makes a statement on the economy outside the Oval Office on Thursday. He has been meeting with advisers concerning the banking debacle.

If the deficits unfold as Mr. Orszag projects, "it would clearly have an adverse long-term effect on our economic position, but the scarier thing is that it is just the beginning. Baby boomers don't begin retiring in big numbers until after 2018, when a fiscal tsunami could swamp our country," Mr. Walker said




It is worth noting that none of these figures includes a dime of costs that the taxpayer might be forced to bear after the government's recent takeover of mortgage-financing giants Fannie Mae and the Federal Home Loan Mortgage Corp. (Freddie Mac) and other bailouts.

Mr. Orszag estimated deficits averaging $700 billion per year would "hover" in the 4 percent to 5 percent range of gross domestic product (GDP).

Except during the 1940s, when budget deficits during World War II averaged 22 percent of GDP, the 1980s was the only decade since the beginning of the 20th century when deficits averaged more than 4 percent of GDP. According to a study by Lawrence H. Summers, the Harvard economist who served as Secretary of the Treasury under President Clinton, real (inflation-adjusted) interest rates for short-term business loans averaged 4.1 percent during the 1980s, a level higher than any other decade since 1900.

In the near term, the U.S. budget deficit will likely exceed half a trillion dollars for the first time ever in fiscal 2009, which begins Oct. 1, Mr. Orszag said. That's more than three times the $162 billion budget deficit for 2007.

Compared with the $236 billion surplus in 2000, America's annual fiscal situation will have deteriorated by three-quarters of a trillion dollars in 2009.

The sobering deficit numbers would seriously complicate the tax and spending policies of the incoming administration, regardless of who is elected. "The next president, whoever he is, will be forced to tackle this problem," said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget.

"Deficits of that magnitude or even smaller magnitude do impose economic costs because they slow the rate at which we're accumulating capital over time for the future and thereby impair our future income," Mr. Orszag said.

"Most economists would say that budget deficits of that scale would tend to push up interest rates in the United States," said Robert E. Scott, a senior international economist at the Washington-based Economic Policy Institute. The rising interest rates would apply to government borrowing, to mortgages for home buyers, to bonds financing business investment and to loans for interest-rate-sensitive consumer purchases, such as automobiles, Mr. Scott said. As a result, "rising interest rates could slow the U.S. economy," he said.

"For the past decade, there has been tremendous demand for U.S. financial assets, and we haven't seen a big run-up in interest rates despite recent large budget deficits," Mr. Scott acknowledged. "But the housing debacle could change that by raising the risk premiums."

If annual deficits were sustained at a $700 billion level, they would damage the U.S. economy in both the short term and long term by pushing up interest rates and crowding out investment, which would lower future productivity gains, explained Brian A. Bethune, chief U.S. financial economist at Global Insight.
Diane Lim Rogers, chief economist at the Concord Coalition, a nonpartisan grass-roots organization dedicated to eliminating the budget deficit, agreed that current and ongoing fiscal irresponsibility would exact a price in terms of future economic growth.

"We are going to see higher interest rates because even the world capital markets have limits, and we are testing those limits," Ms. Rogers said. "We have been lulled into the sense that borrowing is cheap, but that is about to change as we bump up against the world's capital constraints."

If America postpones closing today's fiscal gap by making it even larger by running deficits averaging $700 billion per year, it simply means that the cost of closing the gap today will become three times as high after we dig the fiscal hole deeper and deeper, she estimated.

"Such a large, sustained budget deficit would usually be expected to put upward pressure on interest rates, especially in an economy with such a low savings rate - at least if it is not offset by large inflows from abroad on very generous terms," said Brad W. Setser, a fellow for geoeconomics at the Council on Foreign Relations and the author of the "Follow the Money" blog. "Running sustained, large, long-term deficits in a country with such a low private savings rate is risky."

Mr. Setser also said that relying on the rest of the world, especially foreign governments, to prevent upward pressure on U.S. interest rates would require a huge inflow of financial capital from the rest of the world and likely from central banks intervening in the market to keep their currencies down. Moreover, the attendant external trade deficits would be unhealthy for the U.S. economy, would exacerbate trade-protectionist sentiments in the United States and would worsen the currency conflicts the United States has with China, he said.

Budget deficits for the previous 40 years have averaged 2.4 percent of GDP. The 2009 deficit of $530 billion would be 3.6 percent of GDP, and that assumes the economy grows by 0.8 percent in fiscal 2009. The enactment of a second economic-stimulus package could easily tip the 2009 deficit above $600 billion, and a recession could shift it above $700 billion, or more than 5 percent of GDP.

The largest post-World War II deficit in relation to GDP - 6 percent - occurred in fiscal 1983, when unemployment averaged more than 10 percent. In contrast, CBO projects the unemployment rate will average 5.1 percent for the 2009-2018 period, when deficits would "hover" in the range of 4 to 5 percent of GDP. Worth noting is the fact that from 1983 through 1987, when budget deficits averaged 4.8 percent of GDP, real interest rates were exceptionally high.

International dimensions of U.S. debt

Deficits in the range projected by Mr. Orszag almost certainly would require the United States to become increasingly indebted to foreign countries, which owned 45 percent of America's publicly held debt at the end of fiscal year 2007 (up from 15 percent in 1985).

"The federal debt will grow at an unsustainable rate, which means more borrowing from China, more borrowing from Japan and more borrowing from oil exporters like Saudi Arabia," said Sen. Kent Conrad, North Dakota Democrat, who chairs the Senate Budget Committee. As foreign investors hold larger shares of U.S. government debt, interest payments on that debt would increasingly go abroad.



Years ago, a standard Economics 101 argument held that the national debt was not a problem because we owed nearly all of it to ourselves and Americans received the interest payments. If that was true in 1970, when foreigners owned 5 percent of publicly held debt, it cannot be true today, with foreign investors owning 45 percent of that debt.

If foreign investors balk at financing ever-larger U.S. government debts, perhaps because they fear a depreciating dollar, then the deficits would have to be financed internally. This, too, would tend to raise interest rates because the U.S. economy has so little savings today.

Presidential promises

Just as President Clinton felt compelled to break his campaign promise to enact a middle-class tax cut in order to concentrate on reducing a budget deficit that averaged 4.6 percent of GDP during 1990 and 1991 and 4.8 percent throughout the 1980s, the next president may be forced to rearrange priorities in the face of the unending onslaught of red ink that will greet him on Inauguration Day.

Inheriting an annual budget deficit north of $500 billion, which is far more likely on its way to $1 trillion than to zero, a President Obama could feel constrained by the markets, if not by a Democratic Congress, in his efforts to dramatically expand government-subsidized health-insurance coverage ($65 billion per year) and to eliminate the "doughnut hole" in the Medicare prescription-drug program ($43 billion per year). Those are only the health programs.

Just as Mr. Clinton deep-sixed his middle-class tax cut in 1993, will Mr. Obama feel obliged to cancel or delay his refundable "Make Work Pay" tax credit ($72 billion per year), his refundable "Saver's" tax credit ($21 billion per year), his refundable college tax credit ($13 billion per year) and his refundable "Universal Mortgage" tax credit ($13 billion per year)? What will become of his $15 billion per year green-technology program, his $6 billion per year infrastructure-reinvestment bank and his $15 billion per year increase in basic research? (The cost estimates were provided by the Committee for a Responsible Federal Budget.)

In an environment of half-trillion-dollar deficits on their way to being doubled, where might a President McCain find the funds to finance the reduction in the top corporate income-tax rate from 35 percent to 25 percent, which could cost $68 billion per year?

Impact on the national debt

Large budget deficits will, of course, raise the national debt, which was $5.6 trillion at the end of fiscal 2000. It is now $9.6 trillion. Before consideration of any costs from the Fannie and Freddie takeover, the national debt would increase by $10 trillion during the next 10 years under the plausible scenario that Mr. Orszag outlined.

The national debt, which exceeded 120 percent of GDP at the end of World War II, reached its postwar low of 33 percent of GDP in 1981. It is 67 percent today. Under Mr. Orszag's fiscal scenario, the national debt would reach 87 percent of GDP in 2018. That also assumes no recessions, which always cause the deficit and the national debt to rise faster than otherwise.



CBO's plausible scenario

To arrive at the 10-year, $7 trillion deficit, CBO made several assumptions, which mostly extended current policy. For example, CBO assumed the Bush tax cuts, which are scheduled to expire at the end of 2010, would be extended through at least 2018.

In addition to extending virtually all of the Bush tax cuts, Republican presidential nominee Sen. John McCain, as noted, would also cut the top corporate income tax rate from 35 percent to 25 percent. Sen. Barack Obama, the Democratic nominee, would extend all the Bush tax cuts for those earning under $250,000, while giving substantial tax relief to lower- and middle-income households.

ROD LAMKEY JR. / THE WASHINGTON TIMES Congressional Budget Office Director Peter R. Orszag, here testifying before a House committee, says the budget deficit will likely exceed half a trillion dollars for the first time ever in fiscal 2009.

CBO also assumed the routine extension of other tax provisions, such as the popular research and development tax credit, which both candidates support. CBO assumed Congress and the White House would continue to adjust the alternative minimum tax (AMT) for inflation, a position each presidential candidate embraces. In fact, Mr. McCain has promised to eliminate the AMT.

CBO assumed that the number of troops in Iraq and Afghanistan would be reduced from about 175,000 today to 30,000 by 2011. Given that the United States already has more than 30,000 troops in Afghanistan and that both presidential candidates want to expand that force, this assumption seems very reasonable, if not overly optimistic.

Finally, CBO assumed that discretionary spending, excluding funding for the global war on terrorism, would grow at the same rate as nominal GDP. That would mean discretionary spending would remain at the same percent of GDP that it is today.

Notwithstanding both candidates' pledges to continue increasing U.S. military forces and the need to replace much of the equipment lost in Iraq and Afghanistan, this last CBO assumption still might seem overly generous on the spending side, according to James R. Horney, the director of federal fiscal policy at the D.C.-based Center on Budget Policy and Priorities.

If discretionary spending, which excludes interest payments and entitlements such as Social Security, Medicare and Medicaid, were to grow only by the rate of inflation, CBO projects that the 10-year cumulative deficit would total $5.75 trillion, or $575 billion per year. Mr. Horney estimates a deficit that size would average about 3.1 percent of GDP, comfortably above the average for the past 40 years.

Looking at the past, Ms. MacGuineas of the Committee for a Responsible Federal Budget believes CBO's assumption about discretionary spending is realistic. Since Democrats would be very aggressive in meeting their perceived pent-up spending needs, the pursuit of "a faster growth rate of spending is not at all out of the realm of the possibility, and seems likely to occur if Democrats control both the White House and Congress," she said.

"Deficits averaging $700 billion per year are certainly outside the comfort zone," Ms. MacGuineas said. "Given that this is the first year baby boomers have become eligible for Social Security, there is no excuse for not saving in advance."

"If you think these numbers are bad," said Mr. Walker, the former GAO head, "you ain't seen nothing yet. We are headed for unprecedented deficit and debt levels that threaten our future economy, our standard of living, our international standing and our national security."

Gold may regain luster for World's Central Banks
Turmoil, weak dollar raise metal's profile; Chinese 'nibbling'?

Andrea Hotter And Matt Whittaker, Wall Street Journal
22 September 2008 05:20
Central banks may be starting to turn to one of the few assets in which they can invest: gold.

Turbulence in the financial markets and recent U.S. dollar weakness are helping the precious metal claw back its reputation as the central monetary anchor within the international monetary framework, industry participants say.

This is a marked change from a decade ago, when 14 European central banks decided to reduce their gold holdings in an orderly fashion. They signed a pact to sell no more than an agreed sum between them each year. In addition, the U.S., the Bank for International Settlements and the International Monetary Fund adhere to the pact informally.

But the amount sold has been dwindling of late, and banks are now far more likely to be holders of gold, analysts note. Nonsignatories -- and especially Asian banks -- are seen as keen buyers.

"I'd be surprised if the Chinese hadn't been nibbling at the gold market when prices were lower," said Mark O'Byrne, Dublin-based director of Gold & Silver Investments Ltd.

Chinese officials have already said they view gold as a strategic asset and would like to diversify their foreign-exchange reserves away from the dollar. China holds just 1% of its reserves in gold, World Gold Council data show, equivalent to roughly 600 metric tons. Even so, it is the ninth-largest official holder of gold.

The U.S. is at the top of the list of official holders. It holds 78.2% of its reserves in gold, which is about 8,133.5 tons of gold.

There is debate on how much, if any, central-bank buying was done last week, when gold saw a record single-day gain Wednesday and posted another outsized rise Thursday before pulling back Friday. For the week, thinly traded nearby September gold on the Comex division of the New York Mercantile Exchange jumped $100.30, or 13%, to settle at $860.60 an ounce. Most-active December also gained 13% on the week, to $864.70.

"We could not see a footprint from a central bank," said Jon Nadler, an analyst at Kitco Bullion Dealers in Montreal. The Swiss central bank doesn't appear to have been buying back what it recently sold, he said.

But investors bought for much of the week as they searched for a refuge from financial-market turmoil. Friday's decline came as the U.S. government worked on a plan to take over troubled financial assets.

But even central banks that signed on to the sales program are starting to publicly state the value of gold in their portfolios.

The Austrian central bank said in a recent report that the surge in gold prices and "the concomitant depreciation of the U.S. dollar over the past few years have shown clearly how important gold is as an instrument for portfolio diversification for a central bank."

Germany's Bundesbank, the world's second-largest official holder of gold with 3,417.4 tons, or 66.3% of its reserves, has indicated it is more willing to hold or buy gold than before.

Freddie and Fannie bank losses grow
By Saskia Scholtes in New York

Published: September 23 2008 00:08 | Last updated: September 23 2008 00:08

US regulators have underestimated potential bank losses on preferred stock issued by Fannie Mae and Freddie Mac, the American Bankers Association said on Monday.

Nearly a third of US banks hold preferred stock issued by the two mortgage financiers that were taken into conservatorship this month, according to an industry survey conducted by the ABA. The average bank exposure to such securities relative to core equity capital was 11 per cent.

Gillian Tett: The era of leverage is over - Sep-22

Comment: Washington must heed alarm bell - Sep-22

Editorial Comment: Paulson's plan still needs some work - Sep-22

Editorial Comment: One size fits all - Sep-22
"The negative impact on banks – particularly Main Street community banks – is far greater than regulators first thought," wrote Edward Yingling, chief executive of the ABA in a letter to the Treasury, the Federal Reserve and other banking regulators.

The government takeover of Fannie and Freddie all but wiped out the value of $36bn of their preferred shares. This would force exposed banks to take writedowns at the end of the third quarter that could impede future lending, the ABA warned.

"When the actions were contemplated to reduce dividends on Fannie Mae and Freddie Mac preferred stock, the bank regulators estimated that only a dozen banks would be affected by it," Mr Yingling said.

Regulators said this month only a small handful of banks had "significant" holdings in Fannie Mae and Freddie Mac relative to their capital bases and that they would help develop plans to restore capital at these banks.

However, the ABA survey suggests the impact of writedowns could be more widespread and more severe than regulators initially indicated, particularly among small community banks that engage in lending for small and medium-sized local businesses.

The ABA's letter called for regulators to reconsider the suspension of dividend payments on Fannie and Freddie preferred stock to alleviate the capital impact on banks and avoid a multi-billion dollar decline in lending.

Copyright The Financial Times Limited 2008

Money market funds suffer huge outflows
By Deborah Brewster in New York

Published: September 22 2008 22:57 | Last updated: September 22 2008 22:57

Money market funds in the US suffered an estimated $197bn of net outflows last week as confidence in their safe-haven status weakened after one fund "broke the buck" and others closed.

The outflows mark a new and potentially dangerous phase for the $3,400bn money market fund industry as continued redemptions could result in forced selling of their securities into illiquid bond markets.


Interactive guide: money market funds - Sep-19

Money markets signal fears over banks - Apr-09

Insight: Time to rethink floating rate debt - Apr-09

Mack says crisis could be over soon - Apr-08

Analysis: Why two top central banks are taking different views - Apr-09

Banks take blame for credit crisis - Apr-10
Some money market fund operators are facing the prospect of either closing funds to halt redemptions or engineering more costly bail-outs of their funds.

The funds, which in the past two years had huge inflows from retail and institutional investors, were rocked last week by the news that the oldest, Reserve's Primary fund, would return only 97 cents in the dollar. It was the first time in 14 years that a fund had "broken the buck" with its shares falling below their par value of $1, meaning that investors selling them will receive less than they paid in.

On Friday, shareholders in the Reserve fund filed a lawsuit in the US District court in Manhattan, charging that the fund had failed to follow its objective of preserving capital and instead had pursued yield by buying $785m in Lehman commercial paper. The fund had to write down the value of that paper to zero and closed the fund.

Putnam last week closed a money market fund to avoid losing investors' money. The fund did not close because it held subpar holdings but because high levels of redemptions were going to cause it to begin forced selling in an illiquid market. That would have resulted in heavy losses to investors.

On Friday, Lehman Brothers closed three Dublin-based cash funds for similar reasons.

Investors last week continued to seek safer ground, taking big sums from money market prime funds, which invest in corporate debt, and putting some of that into Treasury funds, which buy government bonds.

The single biggest outflow was from institutional prime (non-government) funds, which had outflows of $130bn on Wednesday alone, according to iMoneyNet, which tracks the industry. Total industry net outflows added up to $197bn over the whole week.

Investors have viewed money market funds as virtually as safe as a bank account, but the funds have not been backed by Federal guarantee.

Copyright The Financial Times Limited 2008

GOLDMAN SACHS & MORGAN STANLEY

Giant Investment Banks Grasp for Government Safety Net
Washington Post Staff Writers
Monday, September 22, 2008; Page A01

The Federal Reserve approved the conversion last night of the two remaining investment titans on Wall Street, Goldman Sachs and Morgan Stanley, into bank holding companies, offering them broader government protection in exchange for tighter regulation and constraints on their once fabulously profitable business.


With the federal government continuing its rapid and radical reshaping of the U.S. financial system, the two investment banks agreed to transform themselves in an effort to escape the financial turmoil that last week put their existence in jeopardy.
The move, approved by the Fed with unusual haste, gives Goldman Sachs and Morgan Stanley greater latitude to borrow from the Fed and access to stable sources of funding -- namely, deposits from ordinary people and businesses. But the firms are also accepting regulation by the Fed that will make it far more expensive for them to borrow huge sums of money -- long an essential ingredient in their investment strategy -- and restrict what sorts of business activities they can engage in.

This development completes a sweeping transformation of Wall Street. Now extinct are the specialized trading houses that broke off from larger financial companies during the Great Depression, enterprises that once prized their independence of regulation and exploited their agility to make fortunes. Over the past 30 years, these firms even surpassed commercial banks as the prime funding source for corporate America.

The conversion of investment banks into the kind of banking companies that once were their rivals will have profound and long-lasting implications for the economy.

Seven months ago, there were five major independent investment banks, selling stocks and bonds, advising companies on mergers and engaging in ever more arcane financial engineering. Since then, Bear Stearns was bought in a fire sale by commercial bank J.P. Morgan Chase, Lehman Brothers went bankrupt, and Merrill Lynch agreed to be bought by Bank of America.

Now, the two biggest, strongest and most prestigious of those firms will become traditional commercial banks, too. The firms concluded that it was worth it to accept the safety net of government protection, even though it will probably lead to much more scrutiny by Fed regulators into what businesses they can engage in.

The change is likely to make easier, and could intensify, both companies' efforts to link up with commercial banks. Now that Goldman Sachs and Morgan Stanley have committed to using deposits to fund their operations, they have a tremendous incentive to gain access to the largest possible networks of bank branches.

In trying to save themselves, Goldman Sachs and Morgan Stanley are agreeing to surrender some of the activities that drove their profitability over the past decade. The two companies made massive bets while putting little money on the table. And they invested vast sums in a wide range of commercial enterprises.

As bank holding companies, Goldman and Morgan will be forced to put more money on the table when they make investment bets. Goldman Sachs, for example, currently holds about $1 for every $22 in investments. Morgan Stanley's ratio is even more dramatic. By contrast, Bank of America, which will soon be the nation's largest bank holding company, holds about $1 for every $11 in investments. And Goldman and Morgan will be sharply limited in their ability to make equity investments in non-financial companies.

"The marketplace won't give them leverage, the regulators won't give them leverage and so now we have formal confirmation that the model of freestanding investment banks is kaput," said Ed Yingling, president of the American Bankers Association.

Currently, the Fed has about a half-dozen examiners in Goldman and Morgan combined. By contrast, major bank holding companies host dozens of examiners, who monitor and restrict the firms' activities.

It's too early to tell what restrictions the Fed will put in place. The Fed must now send in its examiners and assess the companies' businesses, which are in flux.

Conventional banks, such as Bank of America and J.P. Morgan, have weathered the financial crisis much better than investment firms, despite incurring vast losses of their own. One key is that their deposits offer a steady source of funding, unlike the short-term debt that investment banks have relied on. That left them susceptible to runs, as Bear Stearns and then Lehman Brothers experienced.

It is in many ways a move to the business model used by banks in Europe, where large firms engage in both investment banking and commercial banking.

Also yesterday, the Treasury Department issued a major caveat to its Friday announcement that it would guarantee investments in money-market mutual funds, emulating the long-standing federal guarantee of deposits in bank accounts. The Treasury said yesterday that it would only guarantee existing investments in money-market funds.

The caveat came after loud pressure from the banking industry, which worried that a guarantee on new investments would encourage customers to pull money from bank accounts because money-market funds, which pay higher interest rates, would now be seen as equally safe. Both banks and banking regulators were concerned about how an exodus of deposits could impact already-

• GOLDMAN SACHS & MORGAN STANLEY: Giant Investment Banks Grasp for Government Safety Net
• As Hill Debates Bailout, Wall St. Shifts Continue
• ON MAIN STREET: A Sense of Resentment Amid the 'For Sale' Signs

Scramble to handle structured credit

• FT
• 09/22/2008 08:25 PM

Democrats, Treasury Dept. Agree on Outline of Rescue Package

• Washington Post
• 09/22/2008 05:37 PM

Fannie Mae, Freddie Mac Takeovers Cost U.S. Banks Billions

• WSJ ($)
• 09/23/2008 06:14 AM

Faith in Ratings

• WSJ ($)
• 09/23/2008 05:34 AM

Eveillard Says Gold May Surge as Investors Seek `Insurance'

• Bloomberg
• 09/23/2008 05:15 AM

New York Tries Taming Credit-Default Swaps

• WSJ ($)
• 09/22/2008 09:44 PM

Money market funds suffer huge outflows

• FT
• 09/22/2008 09:42 PM

Hedge Funds Also Caught in Tempest

• Washington Post
• 09/23/2008 05:49 AM

Funds look to circumvent shorting ban

• FT ($)
• 09/23/2008 05:30 AM

Push for central credit derivatives counterparty

• FT
• 09/22/2008 09:53 PM

Freddie and Fannie bank losses grow

• FT
• 09/22/2008 08:29 PM

Stronger Oversight Gets Nod in Talks

• WSJ ($)
• 09/22/2008 09:41 PM

Currency's Dive Points to Further Pain

• Washington Post
• 09/23/2008 05:43 AM

Bailout Plan Talks Advance in Congress

• NY Times
• 09/23/2008 05:15 AM

Retail trade group forecasts weak holiday sales growth

• LA Times
• 09/23/2008 05:15 AM

Paulson Plan May Push National Debt to Post-World War II Levels

• Bloomberg
• 09/23/2008 05:13 AM

More to Fear in World of Retirees

• NY Times
• 09/22/2008 08:24 PM

Workers to pay 9% more for health-care in 2009

• Chicago Tribune
• 09/23/2008 05:18 AM

U.S. high-tech exports slip as imports grow

• SF Gate
• 09/23/2008 05:51 AM

More Americans strain to meet housing costs

• USA Today
• 09/23/2008 05:50 AM

Federal Reserve makes it easier for private equity firms to take minority stakes in banks

• Chicago Tribune
• 09/23/2008 05:22 AM

The Mother of All Power Grabs

• NY Times
• 09/23/2008 08:26 AM

A Bailout Above the Law

• NY Times
• Sorkin
• 09/23/2008 05:27 AM

Weak Institutions Must Be Allowed To Fail - Kenneth Rogoff, Guardian
The Fannie/Freddie Bailout's Good News - Jim Cramer, TheStreet.com
Paulson Propping Up The Living Dead - Editorial, Wall Street Journal
Paulson Changes Rules of the Capital Game - Colin Barr, Fortune
Beginning of the Financial 'Surge' - Randall Forsyth, Barron's

$5 Trillion Cash Pool Needed to Stop Rout, Ohmae Says (Update1)
By Bei Hu


Sept. 23 (Bloomberg) -- Treasury Secretary Henry Paulson's $700 billion plan to buy devalued assets from financial companies is ``a joke'' because it doesn't go far enough to calm markets, said Kenichi Ohmae, president of Business Breakthrough Inc.

Ohmae, nicknamed ``Mr. Strategy'' during his 23 years as a McKinsey & Co. partner, called for a $5 trillion ``international facility'' to be made available to financial institutions. The system could be modeled on one used by Sweden during its banking crisis in the early 1990s, he said.

``This is a liquidity crisis,'' Ohmae said at an investor forum hosted by CLSA Asia-Pacific Markets, the regional broking arm of Credit Agricole SA, in Hong Kong yesterday. ``The liquidity has to be so big that people won't get panicky.''

Paulson's proposal to remove hard-to-sell assets clogging the financial system marks the broadest intervention since at least the Great Depression. Asian stocks fell today, following U.S. shares lower as investors questioned whether the effort is enough to prevent a recession.

The plan came after the collapse of 158-year-old Lehman Brothers Holdings Inc. and the government takeover of insurer American International Group Inc. caused financial markets to seize up last week. The calamity was the culmination of a year during which the U.S. housing market slump left banks and securities firms with more than $520 billion of asset writedowns and credit losses.

Yesterday, Paulson and lawmakers narrowed their differences on the plan and agreed that the U.S. should get equity in participating companies.

Hard to Coordinate

Ohmae, 65, is the author of management books including ``The Mind of The Strategist,'' ``The Borderless World'' and ``The End of the Nation State.'' Business Breakthrough, founded in 1998, provides online management training.

One way of funding the $5 trillion facility would be through contributions from foreign exchange reserves in China, Japan, Taiwan, the Gulf states, the European Union and Russia, Ohmae said.

An international relief effort on that scale might be difficult to coordinate, said Robert Howe, founder of Hong Kong- based hedge fund manager Geomatrix (HK) Ltd., which oversees $32 million. ``I doubt the practicality of getting international cooperation on something like this,'' he said.

Ohmae compared the current financial crisis with Japan's 15- year economic decline that began in 1989. Both started with a property bubble, which wiped out companies' equity when it burst, and like in Japan, the current one could lead to escalating bankruptcies as banks worried about their own survival rein in lending, he said.

`Viagra' Economy

The financial-market upheaval may lead to slower growth in China and the reversal of the commodity boom as ship orders are canceled and steel supply dumped, said Ohmae. What Ohmae called Japan's ``Viagra'' economy and Australia's ``dig and deliver'' boom may also fizzle as China weakens, he said.

Against the backdrop of a potential global market panic, Paulson's plan is insufficient, said Ohmae. Paulson is a former chief executive of Goldman Sachs Group Inc., the world's biggest securities firm.

``He wants to fix problems one by one as if he were still the chief executive officer of Goldman Sachs,'' he said. ``He has to take his CEO hat completely off and come up with a systemic solution as opposed to a one-by-one solution.''

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net

Weak Institutions Must Be Allowed To Fail - Kenneth Rogoff, Guardian
The Fannie/Freddie Bailout's Good News - Jim Cramer, TheStreet.com
Paulson Propping Up The Living Dead - Editorial, Wall Street Journal
Paulson Changes Rules of the Capital Game - Colin Barr, Fortune
Beginning of the Financial 'Surge' - Randall Forsyth, Barron's

Progress Made Toward Bailout
U.S. News & World Report - ‎ Sep 23, 2008 ‎

The Christian Science Monitor, Washington Times, New York Times and Los Angeles Times run similar stories. Stocks Plunge, Oil And Gold Spike ABC World News ... Government Debt Rescue a Boon for Gold! Money and Markets David Brooks thinks he sees a "new establishment" to run economic ... Salon PARALLEL UNIVERSE: Cash for Trash Federal Bailout Plan: When ... HNN Huntingtonnews.net

Bernanke Says U.S. Faces `Grave Threats' as Credit Crisis Hurts Households Federal Reserve Chairman Ben S. Bernanke said the U.S. is facing ``grave threats'' to financial stability and warned that the credit crisis has started to damage household and business spending.

U.S. Existing Home Sales Drop 2.2%, More Than Forecast, as Slump Persists Sales of previously owned U.S. homes fell more than forecast in August and prices dropped the most on record as Federal Reserve Chairman Ben S. Bernanke suggested the housing market may get worse before it gets better.

ECB's Bonello Says Euro-Region Economy to Be Past Worst in Fourth Quarter European Central Bank Governing Council member Michael Bonello said the euro region's economy will probably recover in the fourth quarter, suggesting he sees no need to lower interest rates after the global credit squeeze worsened.

Business Confidence in Europe Drops More Than Forecast as Turmoil Worsens Business confidence in the euro area's three largest economies declined more than forecast this month as the worsening financial crisis in the U.S. imperiled expansion around the world.

Paulson, Bernanke Put Shoring Up Banks Ahead of Cutting Best Taxpayer Deal Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke signaled that their priority is shoring up the nation's banks even if it means they don't get taxpayers the cheapest prices for the devalued assets the government buys.

Fed Arranges $30 Billion Swap Line With Australia, Norway, Denmark, Sweden The U.S. Federal Reserve agreed to channel $30 billion into the global financial system by opening currency swap lines with central banks in Norway, Sweden, Denmark and Australia.

Bringing Down Wall Street Shows How Moody's, S&P Unloosed Subprime Scourge Frank Raiter says his former employer, Standard & Poor's, placed a ``For Sale'' sign on its reputation on March 20, 2001. That day, a member of an S&P executive committee ordered him, the company's top mortgage official, to grade a real estate investment he'd never reviewed.

U.S. Must Save Bank System at Any Cost, Ex-Argentina Governor Blejer Says Mario Blejer, governor of the Argentinean central bank following the 2001 default and a former Bank of England official, said that U.S. authorities must be prepared to do anything to save the banking system.

Americans Oppose Bailouts, Say Obama Would Best Handle Financial Emergency Americans oppose government rescues of ailing financial companies by a decisive margin, and blame Wall Street and President George W. Bush for the credit crisis.

SPEAKING FREELY
US on reverse socialism path
US Treasury Secretary Henry Paulson's proposed US$700 billion financial rescue plan leaves more questions than answers - not least, whether that sum is sufficient. Certainly, by using taxes on the middle class to bail out the rich, corrupt and incompetent on Wall Street, his plan marks a gross erosion of the social contract. - Ronald Solberg

THE MOGAMBO GURU
What is a
gold bug?
The dedication of the gold bug in the face of short-term market fluctuations can defy the minds of even the keenest of analysts. Yet betting with gold against a fiat currency in the hands of politicians is the biggest no-brainer on the planet!
CREDIT BUBBLE BULLETIN
Misdirected credit
runs unabated
More alarming than recent efforts to stem the financial crisis is that emergency measures are being taken so early - with the Dow still above 11,000 and GDP growth strong. An unprecedented circumvention of free market forces has been unleashed - but to what end? It will definitely worsen the inevitable financial and economic dislocation. (Sep 22, '08)
Doug Noland looks at the previous week's events each Monday.

Paulson plan throws oil on fire
US Treasury Secretary Henry Paulson has made the unfolding financial crisis even more dangerous with his plan to create a trust to take on the liabilities of failing institutions. It could ignite the worst inflation in the US and reverse globalization to levels not seen since the Great Depression. - Hossein Askari and Noureddine Krichene (Sep 23, '08)

THE BEAR'S LAIR
The wrong rescues
The US and UK governments have displayed an unerring talent for ignoring history with their most recent bailouts of financial companies. The wrong institutions have been saved and basically solid ones allowed to go to the wall. The consequences include high and unecessary bills for the taxpayer and, further ahead, the movement of financial activity to more competently run locations. - Martin Hutchinson
(Sep 23, '08)

Marriott blast rips into Pakistan's economy
The owner of Islamabad's Marriott has pledged to reopen the hotel, shattered in Saturday's weekend suicide blast, by the end of the year. Pakistan's fast-deteriorating economy may take longer to recover from this latest savage blow. - Syed Fazl-e-Haider (Sep 23, '08)

THE MOGAMBO GURU
Budget insanity
US state governments are finding that growing losses on Wall Street and a declining economy mean tax revenues tumble. That still isn't stopping them from continually raising their budgets. And that means more inflation. And higher gold prices! Thank you, thank you, thank you. (Sep 23, '08)

Timothy Karr:
Why DC Lobbyists Fear 'White Spaces'


Thomas Schaller:
Saving the Wealthy With Socialism, Conservative-Style


Las Vegas Sun:
Protect the Public’s Health


Monday, September 22
Richard Behan:
The $700 Billion Wall Street Bailout: One More Weapon of Mass Deception


Chris Hedges:
Fleecing What’s Left of the Treasury


Glenn Greenwald:
Growing Right-Wing Opposition to the Paulson Plan

Nomi Prins:
Bailout Plan Won't Be End of Wall Street Bailouts


Sarah Anderson/Sam Pizzigati:
The Bailout and CEO Pay: What's 'Excessive'?


Derrick Jackson:
Electronics Dumping Ground