Financial crisis threatens US influence
The added burden of a US$700 billion Wall Street bailout to the US$15 billion the US is already spending every month on the wars in Iraq and Afghanistan will almost certainly damage Washington's ability to get its way abroad. Apart from the international loss of face incurred by the former champion of the free market, cuts can be expected in foreign aid, which the US uses to influence the behavior of countries. - Jim Lobe (Sep 26, '08)

Monday, Bloody Monday by Randall W. Forsyth House rejection of $700 billion rescue plan wipes out $1 trillion in stock-market value.

TARP Can't Cover Up Panic on Wall Street by Steven M. Sears Volatility surges as the rescue plan fans global-recession fears.

How Low Can Things Go?
by Eric Savitz

Dow, S&P Post Point-Loss Records; Walloping Wilshire
by Bob O'Brien

European Banks Tank The sector is having one of the worst days in recent times.

WaMu Deal May Mean More Sector Markdowns Bank of America and Wachovia could increase reserves for real estate.

Redemption fears encircle industry

• FT ($)
• 09/29/2008 07:10 PM

For Stocks, Worst Single-Day Drop in Two Decades

• NY Times
• 09/29/2008 04:21 PM

Commodity falls sharpest for half century

• FT ($)
• 09/29/2008 03:19 PM

U.S. House Rejects $700 Billion Financial-Rescue Plan

• Bloomberg
• 09/29/2008 02:13 PM

Fed Expands Swap Agreements to $620 Billion to Aid Bank Funding

• Bloomberg
• 09/29/2008 09:44 AM

Citigroup Agrees to Buy Wachovia's Banking Business

• Bloomberg
• 09/29/2008 07:57 AM

Lehman's Demise Triggered Cash Crunch Around Globe

• WSJ ($)
• 09/29/2008 05:49 AM

Governments rescue Fortis but bank woes spread

• Reuters
• 09/29/2008 05:34 AM

Money-Market Rates Rise as Bank Rescues Stoke Lending Concern

• Bloomberg
• 09/29/2008 05:28 AM

European Lenders Get Bailouts as U.S. Crisis Spreads

• Bloomberg
• 09/29/2008 05:27 AM

Credit Bubble Bulletin
by Doug Noland | Sep 26

Changed Financial Landscape

Recent financial developments are momentous and a harbinger of economic adjustment.


Read more
The Bear's Lair
by Martin Hutchinson | Sep 26

Creating a Great Depression

Financial downturns are unpleasant, but they do not need to turn into the Great Depression, which historians now agree was the product primarily of a number of egregious policy mistakes.

Read more

U.S. Stocks Plunge After House Votes Against Bailout Plan

• Bloomberg
• 09/29/2008 04:18 PM

Gold Advances on Demand for Haven as Governments Prop Up Banks

• Bloomberg
• 09/29/2008 04:37 PM

U.S. Corporate Bond Risk Jumps as House Defeats Bailout Bill

• Bloomberg
• 09/29/2008 04:41 PM

Oil, Metals, Crops Tumble After Financial Rescue Plan Defeated

• Bloomberg
• 09/29/2008 04:35 PM

Treasuries Soar as House Rejects $700 Billion Bank-Bailout Plan

• Bloomberg
• 09/29/2008 04:20 PM

A Crisis Resists the Usual Remedies - Robert Samuelson, Washington Post
In Times of Crisis, Trust Capitalism - Joseph Calhoun, RealClearMarkets
Don't Call It a Bailout. Or a Depression - Irwin Kellner, MarketWatch
As Storm Rages, Only Gov't Can Save Us - Gerard Baker, Times of London
Paulson Plan Is a Rescue of Main Street - Editorial, Wall Street Journal
Rescue Package Is a Pig, Even With Lipstick - Caroline Baum, Bloomberg
The Bailout Plan Is a Wealth Transfer - Editorial, New York Sun
Rescue Might Actually Worsen Things - John Berlau, American Spectator
Daring To Say Loans Made No Sense - David Carr, New York Times
What's Next, A Ban On Stock Sales? - Bill Fleckenstein, MSN Money
Taxpayers Can Benefit From a Bailout - Lawrence Summers, Fncl. Times
The Two Biggest Things We Can Do - Steve Forbes, Forbes

Off The Street
Those Whom The Gods Would Destroy, They First Make Mad - Maverecon
How To Rescue a Bank - Felix Salmon, Market Movers
Are Banks Too Big To Save? - Yves Smith, Naked Capitalism
Citi-Wachovia: a Banking Behemoth Is Born - DealBook
What Was Hank Paulson Thinking? - R. Ehrenberg, Information Arbitrage
On The Financial Crisis, Part II - Becker-Posner Blog

House Rejects Bailout Proposal 228-205 - C. Hulse & D. Herszenhorn, NYT
What Happens If/When The Bailout Gets Done? - Randall Forsyth, Barron's
Gov't Hand in the Economy Is as Old as the Republic - Robert Shiller, WaPo
Main Street Turns Against Wall Street - Nina Easton, Fortune
You Must Be Able To Read a Balance Sheet - J. Hussman, Hussman Funds
Shorting Financial Stocks Should Resume - Arturo Bris, Wall Street Journal
Magic Ring To Save Us: Accounting Overhaul - Kevin Hassett, Bloomberg
How To Estimate Value of U.S. Mortgage Assets - Daniel Gros, VoxEU

Bailout Bill Falls in House
The House on Monday rejected a $700 billion bill to bail out the nation's troubled financial system. Cato scholar Jagadeesh Gokhale comments, "The impasse shows how blunt fiscal policy is and how inept politicians are in managing the economy. ...Overall, it's not a pretty picture -- but score one for supporters of the free market who insist on allowing market reorganization of the financial sector to continue unimpeded...albeit at high risk to the economy over the next few months."

• Full statements from Jagadeesh Gokhale and Daniel J. Mitchell
• The Politics of Bailouts, featuring John Samples, 09/29/2008 (MP3 )
• "The D E Fs of the Financial Markets Crisis," by Warren Coats
• "'Wall Street' No Longer Exists," by Alan Reynolds
• "Political Perils of Overregulation," by Patrick Basham
• Additional Cato research on this topic

Crash Test
By Nicholas von Hoffman
This financial crisis may not be worse than 1929, but we’re less prepared to cope.

Dollar Goes Down Along with Bailout Plan by Kathy Lien | about: UUP, UDN, JYN
The longer the US government takes to agree on a plan, the greater the recessionary risks.

• Moving the Deck Chairs on the Economic Titanic by Paul Kedrosky

• -777.7: Where Do We Go from Here? on Sep 29, 2008 | by Toro | about QQQQ, DIA, SPY
• How Risk Aversion Is Evolving on Sep 29, 2008 | by Felix Salmon
• Don’t Blame Wall Street - At Least Not Completely on Sep 29, 2008 | by Markos Kaminis | about IWD, DIA, DOG
• Looking for Hope on Sep 29, 2008 | by Felix Salmon | about QQQQ, DIA, SPY
• Crash Opportunities: Part II on Sep 29, 2008 | by Paul J. Lamont | about EWJ, EWT, DIA
• Rescuing the U.S. Dollar on Sep 29, 2008 | by Joseph Trevisani | about EWU, FXB, EWQ
• My Proposal for Improving Lending Between Banks on Sep 29, 2008 | by Thomas Kee | about C, DIA, JPM

• Don’t Blame Wall Street - At Least Not Completely on Sep 29, 2008 | by Markos Kaminis |
• Rescuing the U.S. Dollar on Sep 29, 2008 | by Joseph Trevisani |
• Key Flaws in the Bailout Legislation on Sep 29, 2008 | by Peter Morici |
• Why This Bailout Can't Work - And What Will on Sep 29, 2008 | by Julian Van Erlach |
• The Great Bank Rush of 2008: What's the Money For? on Sep 29, 2008 | by Ronald Pires |
• Weekly Street Sentiment: Sell-Side Says the Bailout Will Help on Sep 29, 2008 | by First Coverage |
• Monday, September 29: Week in Review on Sep 29, 2008 | by Jonathan Cavuoto |

The Dollar

• Dollar Goes Down Along with Bailout Plan on Sep 29, 2008 | by Kathy Lien |
• No Dead-Bank Bounce; Pound Sharply Lower on Sep 29, 2008 | by Grace Cheng |
• Market Safe Havens Rapidly Dwindling on Sep 29, 2008 | by Graham Summers |
• Is the Dollar Becoming Less Global? on Sep 29, 2008 | by Tim Iacono |
• Global Financial Woes and the Forex Domino Effect on Sep 29, 2008 | by Kathy Lien |
• Rescuing the U.S. Dollar on Sep 29, 2008 | by Joseph Trevisani |
• Bye, Bye U.S. Dollar on Sep 29, 2008 | by David Bailey |

Nouriel Roubini's Global EconoMonitor The US and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever by Nouriel Roubini Sep 29, 2008

THE BEAR'S LAIR
Creating a great depression
A re-run of the Great Depression, with or without hyperinflation, is still by no means inevitable. Yet we are a lot closer than we were a month ago, and the outlook only looks bleaker when considering the likely actions of the next White House occupant. - Martin Hutchinson

Oligarchs on opposite
sides of cash crisis
The gap between fantasy money and financial reality is weighing on Russia's oligarchs as commodity prices and share values tumble. Not least are those with interests in mineral giants Norilsk Nickel and United Company Rusal, which is currently testing whether Asian investors are willing to buy up a share issue. - John Helmer

Danger - Ben and Henry at work
United States Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson have failed to cope with the US's financial crisis, and their bailout plan was inequitable, morally unacceptable, in total contradiction to sound banking principles, dangerously inflationary and potentially highly disruptive for the long-term health of the economy. - Hossein Askari and Noureddine Krichene

The cost of 'no government'
Americans for six successive congressional elections voted into power the anti-government Republican Party. The bills for "getting the government off our backs" - including its crucial regulatory function - are now coming in. - Julian Delasantellis

THE MOGAMBO GURU
The world's
most powerful currency
Consumers who thought they could get a perpetual free lunch by borrowing money to pay for it are discovering that the bill comes sooner or later. But the golden lining to this dark cloud is visible in the East.
CREDIT BUBBLE BULLETIN
A changed financial landscape
US Treasury Secretary Henry Paulson's bailout of the financial sector may haul the economy back from the precipice. Either way, less finance will now go towards entrepreneurial activities, productive endeavors and the asset markets - and ample government-directed purchasing power will ensure stubborn consumer price inflation. (Sep 29, '08)

Buried in this article:



http://www.financialsense.com/fsu/editoria.../2008/0929.html





The reason why the banks are going bust in simple terms is:

The banks traded in complex derivatives products between themselves, in what is termed as the over the counter market. The exposure to the Securitized debt packages was further exaggerated by the use of leverage of in many cases more than 30X the banks assets against valuations based on complex models that inflated the packages values during the boom times which allowed huge profits and bonuses to be banked (Fraud?). However the critical point is in the final link in a long chain of sliced and diced debt packages was the US housing market.

As US house prices fell, the gap between the real value and the banks inflated model values to boost profits grew, until the crunch point of August 2007, when it dawned upon market participants that in actual fact they did not have a clue as to the real value of these mortgage backed securities and hence the credit markets froze as no one wanted to buy something they could not value and nor lend to financial institutions that may default on their obligations. The impact hit all banks, whether or not they had exposure to the US housing market, as those banks whose business model relied heavily on the short-term money markets to finance long-term mortgages were in deep trouble, i.e. Northern Rock and to a lesser extent ALL of the other UK mortgage banks.



Now many banks are left with assets that are worth LESS than 50% of their "mark to market" booked value. Now that does not mean a 50% loss for the banks on investments, remember the greedy banks deployed LEVERAGE of as much as 30 times of assets, so capital of say £100 million is controlling risk of as much as £3,000 million. Therefore a 50% loss results in a loss of value of £1,500 million, that's 15 TIMES the capital. Hence the banks have been reluctant to price their debt packages at the real market price as that would mean that the bank is effectively bankrupt with losses far greater than the banks capital base. So the market remains frozen until all of the illiquid mortgage backed debt has been transferred over to the tax payers in exchange for liquid cash, hence prompting the US Mother of All bailouts plan.



So Basically there are TWO related problems at work driving the Banks Bust:

1. One of collatorised debt that is not being valued at market prices, hence frozen money markets with banks sitting on over leveraged time bombs that have started to explode in recent weeks, as the credit markets tighten further.

2. Mortgage banks reliant on short-term money markets to finance long-term mortgages that threw caution to the wind and loaned far too much money to people who could not afford to repay the mortgages are now being hit by increasing defaults as the western housing markets crash from over inflated 'bubble' levels, as their losses mushroom but now find that they are unable to borrow money to cover day to day operations due to the increased risk of default and thus hoarding of cash (if they have any left) amongst investment banks in advance of further asset price mark downs. Therefore the only avenue available for short-term cash is from either the Bank of England or individual savers, hence high savings interest rates relative to the base interest rate of 5%.

And there's more .... mortgage backed securities are the tip of the credit crunch iceberg, the next inline are credit default swaps which are basically investor insurance to protect themselves against losses on the debt packages. However as we saw with collapse of and nationalisation of the worlds biggest insurer AIG, this is another huge part of the derivatives market that is imploding, perhaps in the region of $60 trillion.



Its the reason why ordinary people are going to find problems with the credit card freeze next as defaults rise and retailers start to charge a premium on card transaction due to risk of default on the transactions, or even refuse to accept credit cards, but that has yet to happen..



United States Answer To Collapsing Banks is a $700 Billion Bailout Plan

Despite all of the noise of Congress's qualms that we will witness played out during the next 24 hours or so, the bailout plan will more or less pass . Despite the fact that it represents madness, an ultimate manifestation of the subprime contaigent spreading and infecting the US Treasury with all of the consequences of loss of confidence in ALL US paper as the value of US debt devalues in the eyes of all investors.



The US Treasury and Central Bank are eager to get the US Congress to pass a blank check bill so as much of the toxic mortgage backed bonds can be bought up to prevent a further collapse of the financial system. $700 billion is not enough, not in the face of the huge deleveraging of the $500 trillion dollar market, as I warned of 6 months ago. The $700 bailout plans two un-said objectives are -

a. To delay the potential of financial collapse until AFTER the November election.

b. That the real bailout cost will run to several trillion dollars as the US government seeks to prevent a chain reaction of collapsing banks in the wake of counter party failures amongst the huge $500 trillion global derivatives market.



The latest tactics is to suggest that the US Tax payer may even make a profit on these toxic securities. The fact of the matter is that the US will probably be looking at a loss of over 50% on maturity of the anticipated price paid as there is no way that market prices will be paid, as primary reason for the freeze of the interbank money markets is that the securities are NOT being priced by the market for if they were then the market valuations would imply that the financial institutions are bankrupt, hence the free market has been suspended. Taking an estimated eventual exposure of some $2 trillions, therefore implies an eventual US tax payer loss of at least $1 trillion. Which is more than enough to send the US bond market toppling as the US is heading for a budget deficit of more than $1 trillion.



The real question that the peoples representatives should be focusing themselves on is how do we bring those who benefited from the greatest fraud in history to account for their actions and the possible repatriation of wealth stolen in recent years to the tune of more than $1 trillion due to huge bonuses paid on the back of boosted fake asset valuations. That would probably increase confidence in US paper more than signing a blank check for $700 billion .

House of Representatives Rejects the Troubled Asset Relief Program (TARP) Legislation

• TARP legislation is voted down in the House of Representatives by a narrow margin.
• Sep 28: Tentative deal included general but unspecified provision that financial industry would pay for any outstanding cost for the program after five years. Main components: 1) $700bn released in installments: $250bn right away, $100bn later if results positive and option to block the remaining $350bn; 2) equity warrants in return for bad asset purchase to recapitalize institutions and retain upside for taxpayers; 3) The plan would let the govt buy troubled assets from pension plans, local govts and small banks; 4) restrictions on executive compensation; 5) independent oversight board; 6) "the govt could use its power as the owner of mortgages and mortgage-backed securities to help more struggling homeowners modify the terms of their home loans" but Democrats jettisoned Bankruptcy reform to lower debt value of purchased mortgages

Click Here For Full Analysis

U.S. Stocks Plunge Most Since 1987 in a Crisis of Confidence

• Sep 29: Stocks slumped as investors worried TARP won't do enough to restore liquidity to credit markets. House rejected TARP plan, intensifying largest 1-day market drop since 1987 crash. DJIA fell 777.68 pts or -7%, S&P 500 -8.7%, Nasdaq -9.1%

Click Here For Full Analysis

Money Markets, Interbank and TED Spreads More Stressed Than Ever

• On Sep 30: Libor rose 431bps to an all-time high of 6.88% after the U.S. Congress rejected the 700bn bank rescue plan. Two-month euro Libor rose to 5.13% today, also a record. The Libor-OIS spread, widened to 246 basis points, showing cash scarcity is at a record. TED spread, was at 338bps today after breaching 350bps for the first time yesterday (TED was 11bps one month ago)

Click Here For Full Analysis

How Much Will U.S. Housing Prices Fall and How Long Will the Downturn Last?

• S&P Case Shiller index: 10 City and 20 Composite reached new record annual declines of 17.5% and 16.3%, respectively. The 10-City level marked its 10th consecutive monthly report of a record decline. While the annual returns of the two indices continue to reach record lows, the pace of the decline has slowed.There are signs of a slow down in the rate of decline across the metro areas, but no evidence of a bottom

Click Here For Full Analysis

UAE Introduces Liquidity Facility: Will Other GCC Countries Follow?

• UAE Central bank announced special 50b dirham ($13.6b) liquidity facility to provide capital to banks which are exposed to the withdrawal of foreign capital and freezing of global credit markets. Credit growth - loan growth of 31% vs deposit growth of 13% in H1 was funded in large part by external financing, making local banks vulnerable to global credit conditions and increasing their exposure to the property sector

Click Here For Full Analysis

Hong Kong Money Markets: Hibor Spikes: Warning Sign for Asia and Hong Kong Property Owners?

• Sep 30: Hong Kong Monetary Authority to expand collateral accepted for accessing the discount window to include US dollar assets of suitable credit quality and waive limitations on using Hong Kong exchange fund paper as collateral. It will extend the duration of funds available on a case-by-case basis and may conduct US/HKD swaps with affected banks - All measures are to take effect Oct 2 and will remain in place until March 2009

Click Here For Full Analysis

• WaMu Seized By FDIC, JPMorgan Acquires Deposits And Troubled Mortgage Portfolio
• What Kind Of Banks Are Potential Watch-List Candidates?
• FDIC Q2 Quarterly Banking Profile: Regional Bank Indicators Deteriorate Further, Number of Troubled Banks Increases
• Can the FDIC Handle the Coming Banking Bust?

1. 
   Financial crisis: Western world will become significantly less wealthy
2. 
   Banking crash hits Europe as ECB loses traction
3. 
   Financial crisis: Dow Jones bounces on renewed bail-out hopes
4. 
   US Economy: Even Hank Paulson`s bail-out plan cannot detox global banking
5. 
   Financial crisis: Gordon Brown confident of HBOS rescue

Greetings from RGE Monitor!



After Congress surprisingly rejected the $700bn bail-out of Wall Street by Main Street, the U.S. stock markets tanked the most since Black Monday in 1987. See: U.S.Congress Battles with the Troubled Asset Relief Program (TARP) Legislation



The rejected draft bill included a general but unspecified provision that the financial industry would pay for any outstanding cost for the program after 5 years. The main components include: 1) $700bn released in installments: $250bn right away, $100bn later if results were to be positive, with an option to block the remaining $350bn; 2) equity warrants in return for bad asset purchase to recapitalize institutions and retain upside for taxpayers; 3) ability for the government to buy troubled assets from pension plans, local governments, small banks; 4) selective restrictions on executive compensation; 5) independent oversight board; 6) the government’s ability as the owner of mortgages and MBSs to help more struggling homeowners to modify the terms of their home loans. However, Democrats jettisoned a reform of the Bankruptcy law to lower debt value of purchased mortgages. Separately, Democrats' call for a second stimulus package was rejected by Republicans in the Senate.



Among the possible changes in the bill that will be put to the vote again are: 1) expanding the role of FDIC to inject capital into credit markets by assisting banks with troubled assets, 2) raising size of bank accounts insured by FDIC to $250,000 from $100,000 currently, 3) mandatory insurance program for MBSs, 4) suspension of mark-to-market accounting, 5) required assessment of real value of troubled assets by bank regulators, 6) extension of unemployment insurance. Most economists agree that this package is not addressing the underlying problems and that there are alternative, more efficient solutions. A reform of the Bankruptcy law – that Democrats have been pushing for – is not among the proposed changes.



Credit and money markets effectively seized up after the House failed to pass the bill. Unsecured overnight lending among banks virtually stopped, sending the USD LIBOR rate to over 6%, an all-time high. Note that LIBOR is the baseline for pricing the interest-rate instruments universe of over $350 trillion, including unsecured bonds, interest rate derivatives, and credit default swaps. If banks stop lending and hoard cash instead, any liquidity pumped into the system by central banks will not be used for new loans to feed real economic consumption and investment. Non-financial corporations that seemed distant from the financial storm are already encountering more difficult funding conditions both in the commercial paper and in the corporate bond markets.



The flight to quality as measured by the TED spreads renders traditional funding conditions by former investment banks in the repo markets equally expensive. Moreover, the model of borrowing short at a discount and lending or investing in long term esoteric and lightly traded complex derivatives no longer seems viable. Goldman’s desire to create a deposit base by purchasing the assets of failed banks may very well be too little, too late. Buffett’s $5bn investment in GS, though substantial, seems only to buy it time to look for a bigger and stronger (probably foreign) partner. Mitsubishi Bank’s investment in Morgan Stanley of $9bn, though substantial as well, seems to only provide a cushion of time – over the past week hedge funds have been voting with their feet by withdrawing one third from Morgan’s brokerage unit.



In his latest writing, Nouriel Roubini states the reasons for why the U.S. and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever since the credit crunch is gripping European banks as well. In the past four days, the governments of no less than seven European countries were required to nationalize banks or guarantee the deposits of large cross-border banking institutions. The exposure of European banks is threefold: first, as direct buyers of ABS based on U.S. originated assets; second, there is substantial credit enhancement for EU banks provided by AIG and U.S. based monolines; third, because of the bursting of domestic housing bubbles in UK, Ireland, Spain, France, emerging Europe with a 2-year lag with respect to the U.S.



Interbank rates in Hong Kong and Singapore also shot up this week, leading their monetary authorities to inject liquidity and expand the allowable collateral. Australia and Japan continued to inject liquidity into the domestic markets – over $20bn yesterday alone.



The central banks of several oil exporters are trying to avoid a sharp contraction of credit growth, now that foreign roll-over credit is not available. The Russian government has stepped in to provide another $50bn to its corporate and financial borrowers whose external financing is maturing and it is encouraging bank consolidation. So far, the UAE’s new liquidity facility has done little to ease interbank rates, with Eibor above 4% ahead of the Eid Holiday, likely because the banks are unwilling to avail themselves of the conditions. And other GCC countries, led by Kuwait, are reportedly loaning directly to the banking sector.

12 Eye-Opening Thoughts About the Bailout's Defeat

Joshua Holland, AlterNet

Corporate Accountability and WorkPlace: Experts discuss the politics of the bailout's defeat in the House, the fundamentals of the plan and where we might go from here.


Here's a Better Bailout Plan

Joseph Stiglitz, TheNation.com

Corporate Accountability and WorkPlace: There are four fundamental problems with our financial system. The Paulson plan addresses only one.

SPENGLER
Truth, lies and ticker tape

The world will not end if the US Congress refuses to pass a redrawn financial sector bailout plan. Unfortunately, nor will it be the end of America's financier caste, which will live to fleece another day. But when you hear that there is no choice but a bailout, remember: it just ain't so. (Oct 1, '08)

Chinese doubts weigh on commodities
Concern over the state of the global economy was weighing on commodity prices even before US legislators rejected Treasury Secretary Henry Paulson's financial sector bailout plan. The impact of declining Chinese economic growth is also having an impact that is set to intensify. - R M Cutler

CHINA'S DOLLAR MILLSTONE
Gold, manipulation
and domination
For China, the world's biggest creditor nation, to allow successful national development it must cease having its currency a derivative of the US dollar and stop relying on a US-dollar denominated trade surplus to finance domestic development. The historic role of gold and its manipulation tells it as much. - Henry C K Liu
This is the fourth part of a continuing series.
Part 1: Breaking free from dollar hegemony
Part 2: Developing China with sovereign credit
Part 3: History of monetary imperialism

China eases open bonds door
A market for commercial corporate bonds may be emerging in China, which would greatly increase the opportunities for companies to raise cash without recourse to bank loans or share issues. Even so, serious obstacles to the development of capital markets remain. - Pieter Bottelier

THE MOGAMBO GURU
Inflation in stereo
Thanks to the ceaseless creation of ever-more money and credit, inflation is seeping into every aspect of US life, and it doesn't just affect price labels. Just try getting a product warranty honored. All thanks to former Fed head Alan Greenspan.
CREDIT BUBBLE BULLETIN
A changed financial landscape
US Treasury Secretary Henry Paulson's bailout of the financial sector may haul the economy back from the precipice. Either way, less finance will now go towards entrepreneurial activities, productive endeavors and the asset markets - and ample government-directed purchasing power will ensure stubborn consumer price inflation. (Sep 29, '08)

THE BEAR'S LAIR
Creating a great depression
A re-run of the Great Depression, with or without hyperinflation, is still by no means inevitable. Yet we are a lot closer than we were a month ago, and the outlook only looks bleaker when considering the likely actions of the next White House occupant. - Martin Hutchinson (Sep 30, '08)

THE MOGAMBO GURU
The world's most powerful currency
Consumers who thought they could get a perpetual free lunch by borrowing money to pay for it are discovering that the bill comes sooner or later. But the golden lining to this dark cloud is visible in the East. (Sep 30, '08)

SPENGLER
US wealth in shrink mode
Leverage is the secret of American wealth, helping to triple over the past 40 years the proportion of wealth held by the average US family compared with its annual income. With leveraging now broken, the bottom could be a long way down. (Sep 29, '08)

CHAN AKYA
Deaf frogs and the Pied Piper
The United States financial crisis is being hailed as the death of market capitalism and has resurrected enthusiasm for socialism, notably as practiced in various parts of Asia. Choose that route, and Asian governments can yet manage to heap misery on their unsuspecting populations for years to come. (Sep 29, '08)

DISPATCHES FROM AMERICA
We have the money
Few blinked when a US$612 billion Pentagon budget sailed through the US Congress, even as negotiators in Washington were scrambling to find a similar sum to deal with financial meltdown. Congress has been corrupted by the military-industrial complex into believing that, by voting for more defense spending, they are supplying "jobs". In fact, they are diverting scarce resources from the desperately needed rebuilding of the American infrastructure. - Chalmers Johnson (Sep 29, '08)

Financial crisis threatens US influence
The added burden of a US$700 billion Wall Street bailout to the US$15 billion the US is already spending every month on the wars in Iraq and Afghanistan will almost certainly damage Washington's ability to get its way abroad. Apart from the international loss of face incurred by the former champion of the free market, cuts can be expected in foreign aid, which the US uses to influence the behavior of countries. - Jim Lobe (Sep 26, '08)

CHINA'S DOLLAR MILLSTONE
History of monetary imperialism
Given US dollar hegenomy, China and Japan have little choice but to invest their export earnings in US Treasuries or other dollar-denominated assets. In consequence, China now lends to the US more than double the vast sums Washington lent to war-torn Europe in 1947 under the Marshall Plan. And the US is anything but war-torn. - Henry C K Liu (Sep 25, '08)
This is the third part of a continuing series.
Part 1: Breaking free from dollar hegemony
Part 2: Developing China with sovereign credit

Hedge Funds: The Next Shoe to Drop
by: Felix Salmon posted on: September 30, 2008

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You think things are bad now? Just you wait: the chart above gives you a very good indication of what Christine Williamson calls the "bloodbath ahead" in the hedge-fund industry.

No one wants to be invested in an underperforming hedge fund right now -- and half of the hedge funds in America are underperforming. What happens when investors decide to take their money out tomorrow, as they're generally allowed to do on the first day of any quarter?

Sources said they expect the body count to total as many as 2,000 hedge funds and 500 hedge funds of funds between now and the end of March...

Most hedge funds operate on an end-of-quarter deadline for requests from clients to have their money returned. If experts' predictions of very large collective redemptions come true, managers will have to liquidate their holdings en masse, pushing down prices and forcing many smaller hedge funds or those with poor returns out of business. The wave of closures could span six months, likely beginning in earnest in November and December at the end of the typical 45- or 65-day waiting period when fund managers have to return investor cash.

What you see in the chart is the enormous range of returns between the best-performing and worst-performing hedge funds -- a range which has never been wider. Ironically, it's the result of the fact that hedge-fund returns during the Great Moderation of 2002-7 were very closely grouped together -- something which prompted funds to take on extra leverage to boost their returns. In turn, all that extra leverage helps explain why the top 10% of funds is up more than 50% over the past 12 months, while the bottom 50% is down more than 25%.

It's not just redemptions which underperforming hedge funds have to worry about, either: it's also employees, who are going to have a much smaller performance-related bonus pot to split between amongst them this year.

These problems are propping up elsewhere on the buy-side, too: according to the WSJ, the reason that Lehman Brothers (LEH) ended up selling Neuberger Berman for $2.15 billion rather than somewhere between $7 billion and $13 billion was that

the deal was held up in recent weeks due in part to protracted contract negotiations with the Neuberger money managers. People involved the discussions have described the process of persuading them to sign on to the deal as something akin to "herding cats."

Could it be that all these fund managers were simply paid far too much money over the past few years? After all, they can't all find well-remunerated work elsewhere. But for many of them, that probably doesn't matter:They can live quite comfortably off what they've earned already, and if they feel like making more they can just start investing their own funds, without having to worry about office politics or the trader sitting next to them blowing up the entire firm.

In any event, the hedge-fund shakeout over the coming months could be brutal, and have nasty systemic consequences if hundreds or thousands of hedge funds are all trying to unwind their positions at the same time. In the worst-case scenario, a fund which wrote a lot of credit protection could go bust, leaving its investors with nothing and its counterparties with very little. If the counterparty dominoes then started to fall, the financial system could end up in much worse shape than anything we've seen so far.

Secret War on the Dollar
The Four Horsemen of the Financial Panic of 2008
Buchanan: Day of Reckoning
Professors Against the Bailout
Pols Behaving Badly

U.S. Senate Approves Landmark U.S.-India Nuclear Deal

• U.S. Senate approves Indo-U.S. civilian nuclear deal by 86-13 vote ending three decades of India's nuclear isolation by permitting the sale of civilian nuclear technology and fuel to India despite India's refusal to sign the Treaty on the Nonproliferation of Nuclear Weapon. In return, India has agreed to open its non-military nuclear sites to inspections by the International Atomic Energy Agency (IAEA).
• In the U.S.-India agreement on civilian nuclear-power cooperation, Congress has the opportunity to create thousands of U.S. high-tech jobs, to encourage adoption of the safest, non-polluting energy-generation technology and to help solve the energy needs of India (Immelt)

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Will Expanding Deposit Insurance Coverage to $250,000 from $100,000 Prevent The 'Mother of all Bank Runs'?

• FDIC Chairman Sheila Bair took a step toward broadening the FDIC's coverage by asking Congress to approve a temporary increase in its deposit- insurance limit from $100,000. The Senate is slated to vote tonight on a measure that would raise the amount to $250,000 as part of its consideration of the financial-rescue plan. House Republicans have also proposed expanding the FDIC's authority to handle more troubled institutions. They are exploring plans to revive a 1980s-era program that would let the FDIC issue certificates banks could use as capital and then repay with interest

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As Goes GE, So Goes The Economy?

• General Electric (GE) stated that the global credit crisis in financial markets could bring down its overall profits by up to 12% this year. It is GE's second profit warning this year. The company will halt its $15 billion share buy-back program, postpone the sale of its credit card unit and not increase its dividend in 2009. This will be the first time in 32 years that the conglomerate has not increased its dividend

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EU Institutions Respond to the Credit Crisis: Is A €300bn Pan-European Bank Equity Fund In The Making?

• VoxEU: The national responses and ad-hoc cooperative efforts to date have been useful. Yet interdependence among European banks is too deep and too wide-spread for national responses or case-by-case coordination to be enough. Each national policy intervention and each cooperative intervention by a small number of countries can have unpredictable implications for other European nations. It is critical that national authorities sit together and coordinate their responses, developing Europe-wide solutions where appropriate

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China's Manufacturing Sector Weathering Global Slowdown and Cost Pressures

• Chinese Purchasing Managers Index (PMI) collected by China Federation of Logistics & Purchasing for manufacturing rebounded to 51.2 in September from 48.4 in August led by increase in output and new orders, indicating some improvement in manufacturing conditions, perhaps the impact of post-Olympics factory reopenings

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THE NEW YORK TIMES
Show Us the Hope nytimes.com — At last count, six million people were expected to default on their mortgages this year and next, putting them at risk of losing their homes. As prices drop, millions of people who have never missed a mortgage payment stand to lose their home equity. Leaving these Americans out of the bailout bill is unwise and unfair, but neither Congress nor the Bush administration has ever shown anywhere near the sense of urgency to rescue homeowners at the bottom of the collapse as they have for the financiers at the top of it.

SEN. BERNIE SANDERS
Don't Make Working People Bail Out Wall Street huffingtonpost.com — This country faces many serious problems in the financial market, in the stock market, in our economy. We must act, but we must act in a way that improves the situation. We can do better than the legislation now before Congress.

JONATHAN WEIL
If There Must Be A Bailout, Here's How To Do It bloomberg.com — Treasury Secretary Hank Paulson's $700 billion bailout plan was one part robbery (with the banks doing the robbing) and one part accounting sleight of hand. No wonder House members rejected it. If the government wants to save dying banks before they take others down with them, it should choose the clean and direct path: Inject capital into them. Take ownership stakes in return. And, where that's not feasible, seize them and sell their assets in an orderly way.

ROBERT KUTTNER
What Comes After Senate Approval of the Bailout Bill? prospect.org — Congressional leaders need to look to more than just passing the bill in the House.

DEAN BAKER
Responsibility and the Bailout: Will They Resign If It Fails? huffingtonpost.com — If it is not possible to stop the bailout, how about a fallback position? Perhaps we can force our political leaders to take responsibility for their actions. Remember, we are only in this economic mess because the people who designed this bailout failed to stem the growth of the housing bubble. Rather than take responsibility for this disaster, they are demanding $700 billion bailout to patch up their mistakes. How about a commitment to take responsibility this time?

ROBERT B. REICH
The Almost-Done Deal, and the Era of Angry Populism tpmcafe.talkingpointsmemo.com — While more Americans are coming around to "supporting" the bailout bill, the vast majority still hate the idea of bailing out Wall Street. They're for the bailout bill now only because they fear that a failure to pass it will have worse consequences — drying up credit at a time when Main Street is struggling. But make no mistake: America is mad as hell. They resent what they perceive as extortion by the Masters of the Universe.

MATTHEW YGLESIAS
How Does Iraq Play Into the Economic Crisis? prospect.org — The focus is on our unstable credit markets — but we shouldn't forget that Bush's foreign policy has exacted its own costs on our economy.

DAVID LEONHARDT
Connecting the Dots on the Economy nytimes.com — It's not enough to say that markets could freeze up, loans could become impossible to get and the economy could slide into its worst downturn since the Great Depression. Mr. Bernanke and his fellow worriers need to connect the dots. They need to use their bully pulpits to teach a little lesson on the economics of a credit crisis — how A can lead to B, B to C and C to Depression.

Paul Craig Roberts
Can a Bailout Succeed?

Joe Bageant
Speaking in the Tongues of Brokers: the Bailout in Plain English

Ralph Nader
Soulmates in Deregulation

Mike Whitney
Why the Bailout Stinks

Madis Senner
When Push Comes to Pull: How a Foreign Banker Invasion Sent the Markets Reeling

Winslow T. Wheeler
Congress as Usual:the Crisis Will Pass, But This Bunch Will Remain the Same

William Blum
A Boy's Game: the Origins of the Financial Crisis

P. Sainath
Wall Street Transforms Presidential Race

So Begins the Great Hedge Fund Shakeout? - Sam Jones, FT Alphaville
Accounting Rules Do Not Affect Cash Flows - David Merkel, Aleph Blog
Bailing out the Bailer-Outer: the FDIC Fund - Heidi Moore, Deal Journal
EU Proposes Kicking Banks When They Are Down? - Naked Capitalism
Understanding the Significance of Mark-to-Mkt Accounting - Big Picture
How Not To Build a Bailout Proposal - Ken Houghton, Angry Bear

September 29, 2008, "The Hoover Analogy Flunks," Alan Reynolds, Forbes. The Congress appears determined to let Treasury Secretary Paulson do some speculative trading in mortgage-backed securities with $700 billion of borrowed money. Reasonable people have reasonable arguments for and against this idea. But unreasonable people prefer unreasonable arguments, like saying we're in for another Great Depression unless we "do something" right away.





September 29, 2008, "Why Opting Out Is No "Third Way," Will Wilkinson, Reason (Online). At first blush, "libertarian paternalism" seems a linguistic miscarriage, a self-crippling idea condemned to limp aimlessly in eternal darkness on the island of misfit creeds alongside "humanitarian sadism" and "color-blind racism." But that hasn't stopped Richard Thaler and Cass Sunstein, law and economics superstars at the University of Chicago, from pushing the catchphrase and concept as a solution to the nation's problems for a half-decade now. And this year libertarian paternalism has achieved manifesto status with the new Thaler/Sunstein book, Nudge: Improving Decisions about Health, Wealth, and Happiness.

September 26, 2008, "Equal Opportunity Corrupters," David Boaz, American Spectator. John McCain's campaign is under fire for his campaign manager's ties to Freddie Mac. Rick Davis's lobbying firm, it turns out, was still receiving monthly payments until very recently, despite previous assurances that the relationship had ended three years ago.

September 25, 2008, "Lehman Brothers and Bear Stearns: What's the Difference?," Peter Van Doren, Cato.org. In Friday's presidential debate on foreign policy (assuming the show still goes on), we can be sure that Barack Obama will hit John McCain hard for supporting what Obama has called a "dumb war" in Iraq. But in doing so, Obama has at least one major handicap to overcome: his running mate.

September 24, 2008, "Study Ranks Canada Economically Freer," Will Wilkinson, Marketplace. Wanna dodge the draft, get gay-married or smoke a joint without fear of life in the clink. Where do you go? Canada!

September 24, 2008, "The Bush Legacy: Deflation or Inflation?," Steve H. Hanke, Globe Asia. Since 2001, the Bush administration has entangled the United States in a war that is undefined in terms of its scope, scale and duration. It has also been interventionist in the domestic economy, overseeing what the U.S. Congressional Budget Office terms a "substantial increase in spending" which has put the economy "on an unsustainable path."

September 18, 2008, "What Russia Wants," Ted Galen Carpenter, American Conservative. Russia's military intervention in Georgia has provoked a storm of negative reactions in the United States and Europe. To most Americans-and apparently to spluttering Bush administration officials-Moscow's actions came as an unpleasant surprise. Pundits and policy experts immediately began to speculate about the Kremlin's motives in Georgia and beyond.

September 17, 2008, "Bailout-Mania," Jagadeesh Gokhale and Kent Smetters, Forbes.com. Bear Stearns--OK; Fan and Fred--OK; Lehman--No; AIG--OK. Can anyone fathom what the message is here? About $1 trillion of taxpayer funds are committed to rescuing financial firms that made bad decisions. The officials at the Fed may claim that the government's getting control of valuable assets and that all will be fine when markets calm down. Can we be sure?

September 15, 2008, "What Price Stability?," James A. Dorn, South China Morning Post. The US Treasury's takeover of Fannie Mae and Freddie Mac, the nation's largest mortgage financers, was predictable. The drive for profits while housing prices were rising, and the expectation that the federal government would not let these market-socialists fail, allowed Fannie and Freddie to accumulate a huge portfolio of mortgages and mortgage-backed securities.

September 13, 2008, "Too Few Regulations? No, Just Ineffective Ones," Tyler Cowen, New York Times Upfront. There is a misconception that President Bush's years in office have been characterized by a hands-off approach to regulation. In large part, this myth stems from the rhetoric of the president and his appointees, who have emphasized the costly burdens that regulation places on business. But the reality has been very different: continuing heavy regulation, with a growing loss of accountability and effectiveness. That's dysfunctional governance, not laissez-faire.

September 10, 2008, "Another Nonproblem," Richard W. Rahn, Washington Times. To address the problems associated with rising food prices, we must understand what has caused prices to rise. This report identifies a major cause of the rise in food and other commodity prices since 2001: a weak U.S. dollar.

· Latest Bailout Plan Spin: Its a Money Maker! by Barry Ritholtz · Once Again, It Wasn't Fannie and Freddie by Mark Thoma · Saving the Financial System by Thomas Palley · Gross domestic income and recessions by James Hamilton · Understanding the TED spread by James Hamilton · Speculating on the Future by James Picerno

Worst Year Ever For the Hedge Fund Industry: Frozen Assets And Redemptions Spell More Trouble

• Perfect Storm for Hedge Funds: Short-selling rules were altered in a flash, the implosion of brokerages reduces the possibility for borrowing money, they're stuck with deleveraging, and to top it off, many are getting hit with redemptions as September comes to a close, marking the end of the year for many funds. Redemptions could lead to fire sales and vicious circle. Moreover, hedge funds are net sellers of credit protection in the $62 trillion credit derivatives environment and might be called to perform on their obligations

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