A mountain of worry for Fed at Jackson Hole

• Market Watch from Dow Jones
• 08/21/2008 11:40 AM

Nobel Laureates Scholes, McFadden Say Credit Crisis Will Inflict More Pain

• Bloomberg
• 08/21/2008 10:10 AM

The world's biggest bank is Chinese

• Financial Post
• 08/21/2008 08:51 AM

Fed Acted on Lehman Rumor

• WSJ ($)
• 08/21/2008 12:08 AM

I Spy More Road Kill on the Credit-Crunch Highway: Mark Gilbert

• Bloomberg
• 08/20/2008 08:16 PM

B of A, Goldman, Deutsche Bank Are Facing Greater Scrutiny In New York Auction-Rate Probe

• WSJ ($)
• 08/20/2008 05:25 PM

Financial System Not Out Of Woods Yet - A. Evans-Pritchard, Telegraph
Bond Investors: Crazy or Waiting to Exhale? - Caroline Baum, Bloomberg
Profit Without Risk? Not Likely - Floyd Norris, New York Times
Listen to Short-Sellers, Don't Blame Them - Douglas Kass, Financial Times
Paulson's Fannie-Freddie Fix - Colin Barr, Fortune

Financial System Not Out Of Woods Yet - A. Evans-Pritchard, Telegraph
Bond Investors: Crazy or Waiting to Exhale? - Caroline Baum, Bloomberg
Profit Without Risk? Not Likely - Floyd Norris, New York Times
Listen to Short-Sellers, Don't Blame Them - Douglas Kass, Financial Times
Paulson's Fannie-Freddie Fix - Colin Barr, Fortune
FHA Is Riding To The Rescue, Taxpayers Beware - Ann Schnare, Reuters
Fannie & Freddie Soap Opera Needs to End - Steven Pearlstein, Wash. Post
Oil Majors Look Set Fair For Mergers - David Wighton, Times of London
Defund Enemies By Drilling For Energy - Editorial, Inv. Business Daily
In Russia, Cold Cash Will Prevent Cold War - Daniel Gross, Newsweek
China: Economic Hurdles Remain After Olympics - Eliot Cutler, NY Sun
Washington Is Quietly Repudiating Its Debts - Gerald O'Driscoll Jr., WSJ

Off the Street
NY Times Votes Big for Obama Economics - J. Pethokoukis, Cap. Commerce
The Future of Fan & Fred Is Bond Market's Call - Tom Petruno, Money & Co.
California Taxes Going Up - Kurt Brouwer, Fundmastery Blog
Buffett-Gates Vapor Trail Leads to Canada - Liz Claman, Liz-Vision
What Paulson Learned From the Pentagon - Rick Newman, Flow Chart
Meet the Mystery Oil Speculator - DealBook

Off the Street Archive
Transcripts & Videos
BlackRock Global CIO Bob Doll on Lehman's Future - FOX Business
Ira Jersey Says Says Fannie, Freddie Capital 'Not Dire' - Bloomberg
Allan Meltzer Says Fed Is Bowing to Political Pressure - Bloomberg
Ex-Fed Governor Meyer Says Economy on Edge of Recession - Bloomberg

Research Reports
Growth? Cycle? What Really Matters. - Deutsche Bank
US Dollar Consolidation Mutates to Correction - Brown Brothers Harriman
Philly Fed Improved, Signals Weaker Manufacturing - RDQ Econonomics
Leading Indicators: Clouds Darken Over U.S. Economy - Wachovia

MARKET RAP
The cliff edge awaits
Asian stocks are continuing lower, and that is before the US markets show an appreciation of the harsh realities that are out there. That crisis of confidence will come soon enough.

Paulson Might Need to Decide Whom to Hurt in Any Rescue of Fannie, Freddie Treasury Secretary Henry Paulson's response to the sinking fortunes of Fannie Mae and Freddie Mac might boil down to picking which investors get hurt and by how much.

Europe Industrial Orders Fall Most in Six Years, Led by Drop in Transport European industrial orders fell the most in more than six years in June, led by a drop in transport equipment such as planes and rail cars.

Freddie, Fannie Failure Could Be `Catastrophe' for World, China's Yu Says A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank.

Lacker Clashes With Paulson, Wants Fannie Mae, Freddie Mac Taken Private Richmond Federal Reserve Bank President Jeffrey Lacker called for ``demonstrably'' privatizing Fannie Mae and Freddie Mac, becoming the first Fed official to publicly clash with the Bush administration's strategy of keeping them as federally backed firms.

Fed's Lockhart Says Oil Drop Eases Inflation, Sees Weakness Into Next Year Federal Reserve Bank of Atlanta President Dennis Lockhart said the 20 percent drop in oil prices from their peak should help slow inflation, while economic weakness may continue into 2009.

Fed's Stern Says `Modest' U.S. Economic Growth Will Help Inflation to Slow The U.S. economy will probably continue on a path of slow growth, with unemployment rising and inflation easing, Federal Reserve Bank of Minneapolis President Gary Stern said.

That Student Loan, So Hard to Shake

• NY Times
• 08/23/2008 05:16 PM

What Will Mac ’n’ Mae Cost You and Me?

• NY Times
• Morgenson
• 08/23/2008 05:15 PM

U.S. and Global Economies Slipping in Unison

• NY Times
• 08/23/2008 05:14 PM

Ex-BOE official says Fed rate cuts went too far

• Reuters
• 08/23/2008 05:09 PM

In the Ruins of the Housing Bust

• NY Times
• 08/23/2008 05:08 PM

Columbian Bank and Trust of Kansas Shut by Regulators

• Bloomberg
• 08/23/2008 07:39 AM

Treasury wants GSEs shareholder-owned: source

• Reuters
• 08/23/2008 07:35 AM

Fed Chairman Urges Broader Market Oversight

• NY Times
• Uchitelle
• 08/23/2008 07:31 AM

Uncertainty Over Fannie and Freddie

• NY Times
• 08/23/2008 07:30 AM

GM, Ford Seek $50 Billion From U.S., Double Request

• Bloomberg
• 08/22/2008 03:41 PM

How Gov't Is Back at the Heart of Economic Life - John Plender, Fncl Times
Fashioning a More-Perfect Financial System - Michael Sesit, Bloomberg
Is The Global Liquidity Tide Turning? - Randall Forsyth, Barron's
The Fannie/Freddie Mission Goes Off Course - Joe Nocera, New York Times
Bernanke Sends Soothing Message on Inflation - Greg Robb, MarketWatch

South and South-East Asia in the Midst of a Global Recession

• ASEAN countries are witnessing record inflation led by food and commodity prices and govt’s fuel price hike. Delayed monetary response has raised concerns among foreign investors leading to stock market decline and capital outflows in many countries, and putting downward pressure on the currency
• Export growth has taken a hit starting mid-2008 while headline inflation has made its way through second-round price effects via higher wages, production and transportation costs
• Spread of the U.S. slowdown to G-7 economies, Europe, Japan and several EMs (China, Latam, Middle-East) and its impact on exports may lead Asia to pursue a loose monetary policy and undervalued currency, thus creating the risk of a stagflation-like environment

Click Here For Full Analysis

Is Korea Development Bank About to Buy Lehman?

• Talks to sell 50% of company's equity stake to Korea Development Bank and Citic Securities failed at first over price and conditions disagreement; by August 22 LEH surged 15% percent after Reuters reports Korea Development Bank said it may purchase the firm

Click Here For Full Analysis

CREDIT BUBBLE BULLETIN
Temporarily immune
from reality
The US markets appear temporarily immune from reality. Abroad, tensions remain over Russian troops in Georgia. At home, financial firms have to refinance billions of dollars in debt, concern grows over the trillion-dollar industry in repackaged credit derivatives and Fannie Mae and Freddie Mac threaten "catastrophe for the global financial system". Yet stocks declined less than 1% in the week.
Doug Noland looks at the previous week's events each Monday.

THE MOGAMBO GURU
Profits hit with an ugly stick
Turning to food banks because you haven't been given a pay rise? This is disastrous. And with inflation ghastly even with fudged numbers, profits are being hit, which means fewer raises, fewer jobs, less money to buy gold ... all ugly and getting uglier.
MARKET RAP
The cliff edge awaits
Asian stocks are continuing lower, and that is before the US markets show an appreciation of the harsh realities that are out there. That crisis of confidence will come soon enough. (Aug 22, '08)

Rumors swirl about potential Lehman sale By Aaron Siegel | August 22, 2:39 PM EST Shares of Lehman Brothers surged as much as 15% on reports that it may be acquired by Korea Development Bank.
| Read 0 | Recommended 0 | Average Rating 0 (Rated 0 times) articleIds.push("Article823487"); Lehman mortgage chief to retire By Andrew Coen | August 22, 1:30 PM EST Ted Janulis, 49, will be the third Lehman Brothers executive to leave the New York-based firm in as many months.
| Read 0 | Recommended 0 | Average Rating 0 (Rated 0 times) articleIds.push("Article823461"); Bernanke: Battered economy will revive By Aaron Siegel | August 22, 2:41 PM EST This is "one of the most challenging economic and policy environments in memory,” the Fed chief said today.

• Paul Krugman: Can It Happen Here? by Mark Thoma
• Paul Krugman: It’s the Economy Stupor by Mark Thoma
• Robert Pindyck on Energy Policy by Mark Thoma
• Paul Krugman: Now That’s Rich by Mark Thoma
• Obama's Tax Plan and Basic Honesty by Mark Thoma
• The Greek Menace by Mark Thoma
• Oil prices and demand by James Hamilton
• Iran buys wheat from American - is this significant? By Fabius Maximus

he Fannie & Freddie Question

• WSJ ($)
• 08/29/2008 08:55 PM

Real Estate Lender Is 10th Bank to Fail This Year

• AP
• 08/29/2008 08:55 PM

U.S. Junk Bond Sales Slump to Lowest in Decade as Defaults Rise

• Bloomberg
• 08/29/2008 03:33 PM

Bank of China Reduces Fannie, Freddie Debt Holdings

• Bloomberg
• 08/29/2008 02:17 PM

Bank of China flees Fannie-Freddie

• FT
• 08/29/2008 10:49 AM

Consumer Spending in U.S. Slowed in July as Prices Rose Most in 17 Years

• Bloomberg
• 08/29/2008 07:46 AM

When sorrows come

• Economist
• 08/29/2008 06:41 AM

Tropical Storm Floods Jamaica as Louisiana Prepares

• Bloomberg
• 08/29/2008 06:07 AM

• U.S. Consumers on a Tightrope as Headwinds Only Get WorseAug 29, 2008
• USD Rally: Is the Dollar a Safe Haven from Global Slowdown?Aug 29, 2008
• India's Q2 GDP Growth Slows: Will Global Slowdown Falter the Indian Economy?Aug 29, 2008
• Triple Hit on Emerging Economies?Aug 29, 2008

Shallow Recessions, Shallow Recoveries
By FLOYD NORRIS
Economic recoveries in the decade after World War II were
brisk affairs, but then they slowed. After stabilizing in
the 1980s and 1990s, they seem to have taken another step
down.

Full Story:
http://www.nytimes.com/2008/08/30/business...amp;tntemail1=y

Tax Rebates Redistribute Wealth - Steven Malanga, RealClearMarkets
Bust Going Boom - Editorial, Investor's Business Daily
Economy Really is as Bad as All That - David Wighton, Times of London
Tax. Spend. Create Great Jobs. - John Schwarz, Washington Post
The Perils of the Four Deficits - Debra Saunders, Washington Times

Banking Systemic Crisis as Losses Pass $500 Billion - 23rd August 08 - John_Mauldin

British economy facing 'worst downturn in 60 years': Darling

• AFP
• 08/30/2008 06:12 AM

GM Offers Early Retirement to 9,000 Salaried Workers

• Bloomberg
• 08/30/2008 06:11 AM

Hurricane Gustav Strengthens, Accelerates, Heads for Cuba, Gulf

• Bloomberg
• 08/30/2008 06:09 AM

ECB Plots Clampdown

• WSJ ($)
• 08/30/2008 06:06 AM

The Fannie & Freddie Question

• WSJ ($)
• 08/29/2008 08:55 PM

Real Estate Lender Is 10th Bank to Fail This Year

• AP
• 08/29/2008 08:55 PM

U.S. Junk Bond Sales Slump to Lowest in Decade as Defaults Rise

• Bloomberg
• 08/29/2008 03:33 PM

Bank of China Reduces Fannie, Freddie Debt Holdings

• Bloomberg
• 08/29/2008 02:17 PM

Bank of China flees Fannie-Freddie

• FT
• 08/29/2008 10:49 AM

Consumer Spending in U.S. Slowed in July as Prices Rose Most in 17 Years

• Bloomberg
• 08/29/2008 07:46 AM

Commercial Banks are Next Act in Credit Crisis - The Economist

• Incomes Drop Sharply in July
• Oil Prod. Stops as Gustav Nears
• Stocks Down on Pers. Income Data
• Euro Stocks Snap Two-Week Drop
• U.K. Economy at 60-Year Low

• Why Does It Feel Like a Recession? - Menzie Chinn, Econbrowser
• Don’t Turn Off The Recession Siren Yet - Real Time Economics
• Should The Fed Be Worried About Inflation? - Economics Unbound

• I.O.U.S.A - A Nation in Debt - Barry Ritholtz, Big Picture
• Calling a European Recession - James Hamilton, Econbrowser

U.S. Consumers on a Tightrope as Headwinds Only Get WorseAug 29, 2008

• Personal spending slowed sharply to 0.2% in July after growing by 0.6% in June and 0.8% in May; spending plunged 0.4% in real terms (the biggest drop in four years)
• Incomes dropped 0.7%, the first decrease since August 2005, reflecting the end of the rebates; Disposable income decreased 1.1%. It fell 1.7% after declining 2.6% in June
• Income fell much faster than consumption, the savings rate declined for the second consecutive month, easing to 1.2% in July, down from a peak of 4.9% in May
• Households are facing loss of net wealth (net worth fell most since 2002 by 3.6% or $1.7 tr in Q1-08) on declining home prices, job loss (of 438k in H1), erosion of returns from from stock market, pension and mutual funds; Personal income grew 4.6% in Q1-08 compared to 10% in Q1-07 w/ significant slowdown in income in states hit by housing and financial sector crisis while oil and agro-based states still holding up (Global Insight)
• Rising food and gas prices that are eroding real wages (which have been negative since Oct-07 , negative home equity (for about 25 mn homes), tighter credit conditions/borrowing standards esp. for mortgages are impacting consumer spending on goods and services (esp. on discretionary, big-ticket items), affecting corporate earnings and thus spreading economic slowdown and job losses to other sectors of the economy
• Income and wealth loss is leading to rising debt and delinquencies on mortgages (home-equity credit lines delinquency rose to 1.1 % in Q1 - highest since 1987), auto loans (overdue accounts rose to 1.92%), consumer loans (rose 2.55%), credit cards (delinquent accounts increased to 4.51% - highest since 2006), foreclosures rose 121% y/y in Q2
• Various indicators of consumer sentiment have been weakening indicating consumers are increasingly pessimistic about the current and future financial, economic and price conditions
• Fed: Consumer spending is slowing or sluggish in most districts
• According to various estimates consumers spent up to 30-50% of rebates mostly on discount/wholesale stores to offset higher food and gas prices while the rest of the rebate may have been used to pay-off debt or saved for future consumption
• Merrill Lynch (not online): Once rebates are exhausted, consumer spending will hit the mid-70s type downturn, contracting by 3% in Q4-08 and Q1-09
• Goldman Sachs (not online): Stimulus-induced boost to consumer spending and retail sales growth is peaking; worst on-record indicators of consumer financial well-being (employment, real wages, credit access, home prices, equity prices) imply consumer spending will contract in Q4-08/Q1-09
• Moody's (USA Today): Consumers are behind schedule in payments or have defaulted from around $800 bn in different kinds of debt; defaults are expected to rise further as home prices will fall 26% from 2006-peak and negative home equity and unemployment rate trend up
• Unicredit: Rebates will boost real consumer spending 1.5% in Q3 before stalling in Q4 of 2008; consumer spending will start recovering in H1-09 and grow at over 2% starting H2-09

Associated Readings (18 Articles)

Is the FDIC another troubled monoline?| Aug 29, 2008 Reading Reggie Middleton's latest blog here on RGE (he looks much younger than I'd have guessed!) reminded me of a metric which is critical to assessing the velocity of a financial crisis as it affects a financial institution. In looking at American Express, he highlights (among a lot of other useful data) the extent to which charge-offs on credit cards are exceeding the growth of reserves. Both numbers are moving. Charge-offs are going up. Reserves are going up too to cover the losses from charge-offs, but are not growing as quickly.

As we all know, it is liquid reserves that enable a credit institution to cope with periods of uncertainty, underperformance and/or illiquidity. In the banking industry, the relationship between losses and reserves is referred to as the "coverage ratio" and it is a critical indicator of stress.

Those with too low reserves must borrow or recapitalise just at that point in the cycle when lenders and investors become wary sceptics as they contemplate the worsening business climate in general and deteriorating performance of the needy in particular. Those unable to secure credit or attract investment must look to official liquidity facilities, if available, and/or face forced asset liquidations and/or insolvency. Those who can secure credit or attract investment typically do so at a cost which impairs future profitability and so undermines future reserve growth (see From Capitalist to Capital-less Economies).

It occurred to me to examine the coverage ratio in another context that I already planned to write about today: the FDIC.

For the past month or so, I haven't been able to look at the FDIC without seeing a big, undercapitalised, monoline insurer. I didn't want to see the FDIC that way, especially since Mervyn King, governor of the Bank of England and normally a very sensible bloke, is a huge admirer of the US deposit insurance system and wants to import FDIC principles here to the UK. If the FDIC is fundamentally flawed, then the UK may once again follow the US over yet another cliff with too little reflection of our inherent self-interest in avoiding yet another public policy disaster.

Facing my fears, as we all should if we aspire to be rational and make superior judgements, requires assessing the facts.

The following excerpt from Wikipedia describes the characteristics of a monoline insurer:

Monoline insurers (also referred to as "monoline insurance companies" or simply "monolines") guarantee the timely repayment of bond principal and interest when an issuer defaults. They are so named because they provide services to only one industry.

The economic value of bond insurance to the governmental unit, agency, or company offering bonds is a saving in interest costs reflecting the difference in yield on an insured bond from that on the same bond if uninsured.

So what is the FDIC then? The FDIC "guarantee[s] the timely repayment of [deposits] when a[n insured financial institution] defaults." The FDIC "provide[s] services to only one industry. The economic value of [FDIC deposit insurance] to the [insured banks] offering [deposit accounts and certificates of deposit] is a saving in interest costs reflecting the difference in yield on an insured [deposit] from that on the same [deposit] if uninsured."

The similarities are too great. The FDIC is a monoline insurer in all the ways that matter.

Taking that as a starting point then, what makes the FDIC better able to withstand the rigours of a financial crisis than its private sector monoline brethren? Let's look at the advantages the FDIC has over lesser monolines.

Regulatory Powers: The FDIC has the power to compel banks to increase their capital, limit their riskier business activity, and otherwise intervene to curb management's rush toward bank failure.

Mandatory Participation: American banks have no choice but to buy their deposit insurance from the FDIC, and are obligated to do so. They have no choice but to pay the premia assessed by the FDIC when due if they want to remain in business. With more than 6,000 banks participating, the risks should be diversified (except, of course, that banks are herd animals so that risk outcomes are highly correlated for the sector as a whole). Risk-Weighted Premia: Theoretically, the FDIC's risk-based CAMELS rating system should require riskier banks to pay more. It would be interesting to apply rigorous market backtesting methodologies to see whether CAMELS is performing as expected in this downturn, or whether like so much else, CAMELS has been distorted by forbearance and crony capitalism into another tool for industry concentration and selective competitive advantage favouring well-connected big banks during the M&A boom years.

Statutory Receiver of Failed Banks: When a bank fails, the FDIC takes over the assets and liabilities, and is able to rapidly arrange for bridge banks, purchase and assumption transactions to healthy banks, and otherwise realise value from failed banks while minimising systemic disruption to retail and commercial account holders. This is a critical function as the surest way to prevent draws of deposit insurance is to compel a work out that secures depositors unimpaired access to their accounts.

Treasury Credit as a Backstop: If it runs into trouble, the FDIC can borrow from the Treasury (just like everyone else in corporate America, it seems).

This is a formidable armory of powers and privileges. And we know the FDIC is experienced at using its powers to good effect, having proven itself several times through the past 75 years. Nonetheless, these powers may be insufficient if the scale of losses insured by the FDIC overwhelm the capitalisation of the insured banks and the resources of the FDIC.

This is where Reggie's test of losses relative to reserve growth becomes a telling indicator of future problems.

Looking at the most recent Quarterly Banking Profile from the FDIC, we see an ugly picture:

[b]Net Charge-Off Rate Rises to Highest Level Since 1991 [/b]

Loan losses registered a sizable jump in the second quarter, as loss rates on real estate loans increased sharply at many large lenders. Net charge-offs of loans and leases totaled $26.4 billion in the second quarter, almost triple the $8.9 billion that was charged off in the second quarter of 2007. The annualized net charge-off rate in the second quarter was 1.32 percent, compared to 0.49 percent a year earlier. This is the highest quarterly charge-off rate for the industry since the fourth quarter of 1991. At institutions with more than $1 billion in assets, the average charge-off rate in the second quarter was 1.46 percent, more than three times the 0.44 percent average for institutions with less than $1 billion in assets.

Note that big banks – those presumably with favourable CAMELS ratings in years past, allowing them to gobble up their less favourably rated peers – have much worse charge-offs than smaller banks.

[b]Large Boost in Reserves Does Not Quite Keep Pace with Noncurrent Loans [/b]

For the third consecutive quarter, insured institutions added almost twice as much in loan-loss provisions to their reserves for losses as they charged-off for bad loans. Provisions exceeded charge-offs by $23.8 billion in the second quarter, and industry reserves rose by $23.1 billion (19.1 percent). The industry's ratio of reserves to total loans and leases increased from 1.52 percent to 1.80 percent, its highest level since the middle of 1996. However, for the ninth consecutive quarter, increases in noncurrent loans surpassed growth in reserves, and the industry's "coverage ratio" fell very slightly, from 88.9 cents in reserves for every $1.00 in noncurrent loans, to 88.5 cents, a 15-year low for the ratio.

I had to smile at the heading. The clumsy phrasing of "Does Not Quite Keep Pace" has been carefully drafted in preference to the less wordy but more apt "Lags".

The bottom line is that the "coverage ratio" is worsening for the FDIC flock, and the coverage ratio for the FDIC is not looking too healthy either. At the end of the second quarter, the FDIC reserve fund was down to a mere $45.2 billion after just 9 bank failures this year. While it does not publish a coverage ratio in respect of itself, IndyMac alone will require an estimated $8.9 billion of FDIC reserves to resolve, almost twenty percent of remaining reserves. The FDIC intends to raise reserves through a premium increase in October, but a lot can happen in two months in these febrile times.

So the FDIC may well become yet another troubled monoline insurer. Indeed, Sheila Bair, serial forbearance artiste chairman of the FDIC (formerly a Treasury official and Republican congressional aide), conceded as much when she raised the possibility this week that the FDIC might be joining the queue for a Treasury hand out to see it through short term liquidity problems.

"I would not rule out the possibility that at some point we may need to tap into [short-term] lines of credit with the Treasury for working capital, not to cover our losses," Bair said in an interview.

The FDIC is too critical to the fabric of the US banking system to become another monoline casualty of the forbearance backlash crippling the banking industry. If there ever was a case for "systemic risk" deserving a bailout, the FDIC would get my vote (and presumably every Congressman's too). But an FDIC bailout would be yet another signal to international creditors of America that the financial methods and models so widely exported and extolled over the past quarter century were fundamentally misguided and dangerous.

If the FDIC model fails, then what are the alternatives for deposit insurance? An intriguing idea floated in the Financial Times a couple weeks ago was to partially privatise deposit insurance through the excess liability reinsurance markets, allowing Warren Buffett to run his sliderule over the regulatory and risk management profile of banks to set a market price for insuring a failure.

Excess liability insurance would spread deposit insurance risk beyond the UK banking sector to global catastrophe insurance markets, reducing the pro-cyclical liquidity impact of any deposit insurance claim. In normal circumstances it should cover the risk of a large UK bank failure at a cost well below pre-funding, particularly in upswings of the economic cycle, while spreading the costs in a managed way if claims are sustained during downswings. Periodic tendering would ensure that market pricing reinforces discipline in the banking sector toward better management throughout the business cycle, co-operation on rescues of troubled banks and efficient resolution processes. The capital efficiency of these flexible arrangements should give UK banks a competitive edge.

In globalised markets, with globalised banks, perhaps globalised deposit insurance through excess liability insurance and/or catastrophe bond finance is not such a bad option. It may not be popular, however, with the crony capitalists and their political clientele who prefer the cheaper option of socialising losses via the Treasury to taxpayers and global public creditors, but at least it's an alternative to the US model for the UK and others to consider.

Who Resembles JFK on Taxes, McCain or Obama? - P. Ferrara, Forbes

The Drill-Down on Sarah Palin - Telis Demos, Fortune

Alaska: To Drill, or Not to Drill? - Stephen Hayes, Weekly Standard

Better Way to Power Your Car? It's a Breeze - Lester Brown, Wash. Post

Fannie and Freddie: A Damage Report - David Bogoslaw, BusinessWeek

Commercial Banks are Next Act in Credit Crisis - The Economist

A Growing Economy - Editorial, New York Sun

The Four Horsemen of the Market - Jonathan Burton, MarketWatch

Trichet's Price Phobia Stymies Growth Chances - M. Sesit, Bloomberg

The Growth Future – India and China - Arvind Subramanian, VoxEU

Emerging Markets: Sinking Like a BRIC - Dan Burrows, Smart Money

After Katrina: Economic Health of New Orleans - Liu & Holmes, NYT

The Market and Presidents
Historical Perspective
Joblessness and Education
Foreign Investment
Productivity Gains in Manufacturing
Mortgage Crisis
Fraud Taints Mortgages
The Rich and Taxes
Immigration, Assimilation

MARKET RAP
A deceptive Wall
Street bounce
Late-in-the-week US economic data stirred positive movements around Asia, but such Wall Street-inspired bounces are rarely the stuff of sustainable rallies, and certainly not under current conditions.
Robert M Cutler runs his eye over the ups and downs in the week's markets.

THE MOGAMBO GURU
Intaxicating rebate checks
Tax-refund-induced euphoria is a great buzz, until you realize it was your money to start with. Then a hangover-like throb takes over as you recognize double-digit inflation means the rebate is fast becoming worthless. And it used to be that 2% inflation was bad! Yikes!

CREDIT BUBBLE BULLETIN
Temporarily immune
from reality
The US markets appear temporarily immune from reality. Abroad, tensions remain over Russian troops in Georgia. At home, financial firms have to refinance billions of dollars in debt, concern grows over the trillion-dollar industry in repackaged credit derivatives and Fannie Mae and Freddie Mac threaten "catastrophe for the global financial system". Yet stocks declined less than 1% in the week. (Aug 25, '08)

CREDIT BUBBLE BULLETIN
Ponzi dynamics still in play
Many investors seem willing to believe the worst of the US credit crisis has passed, a view they see supported by the most recent economic data. Yet output appears to be usefully overstated, marketplace liquidity deteriorates and Fannie- and Freddie-related problems are far from resolved. Optimism is misplaced.
Doug Noland looks at the previous week's events each Monday.
THE WEEK AHEAD

THE MOGAMBO GURU
No credit for central bankers
It appears from the Jackson Hole annual confab of central bankers and their like that the US Federal Bank and its counterparts are finally going to restrict credit and keep the money supply from growing. Unfortunately, central bankers are known as liars, and always have been.
MARKET RAP
A deceptive Wall
Street bounce
Late-in-the-week US economic data stirred positive movements around Asia, but such Wall Street-inspired bounces are rarely the stuff of sustainable rallies, and certainly not under current conditions. (Aug 29, '08)
Robert M Cutler runs his

Lehman in Talks With Korea Development Bank, Min Says

• Bloomberg
• 09/02/2008 08:19 AM

Hurricane Gustav's Insured Damage Losses May Reach $10 Billion

• Bloomberg
• 09/02/2008 05:37 AM

Reset loans add to US home woes

• FT
• 09/01/2008 08:20 PM

Manhattan shows first cracks

• FT
• 09/02/2008 05:39 AM

Hedge Funds Are Caught in a Tight Spot

• WSJ ($)
• 09/02/2008 05:38 AM

Central bankers in Asia intervene as dollar gains

• IHT
• 09/02/2008 05:32 AM

Will private equity ride to banks’ rescue?

• Economist
• 09/02/2008 09:21 AM

Citadel, SAC Capital Get Pick of Casualties as Carnage Worsens

• Bloomberg
• 09/02/2008 05:47 AM

U.S. Stocks at 25.8 Times Profit Means Rally May End

• Bloomberg
• 09/02/2008 05:08 AM

Using Nest Eggs Before Maturity

• Washington Post
• 09/02/2008 05:16 AM

Pangs of Seller’s Remorse in Miami Market

• NY Times
• 09/01/2008 08:19 PM

Running a hedge fund loses its allure

• IHT
• 09/01/2008 05:55 PM

Winter heat crisis looms, little relief seen

• CNN/Money
• 09/02/2008 09:34 AM

Laboring longer a growing trend for Americans

• San Diego UT
• 09/02/2008 05:29 AM

Housing slump drags on broader Southern California economy

• LA Times
• 09/02/2008 05:34 AM

Fed's response to crisis hurt its key role: Hoenig

• Reuters
• 09/01/2008 05:52 PM

September: Cruellest Month for Stocks - Gerard Baker, Times of London
Stocks: New Season, Same Worries - Ben Steverman, BusinessWeek
Washington Is Starving the World's Poor - Redenbaugh & Juliano, RCM
The Fed's Liquidity Focus Is Correct - George Magnus, Financial Times
McCain's Tax Plan Will Create Jobs - Feldstein & Taylor, Wall St. Journal
R.I.P. 'Reaganonomics Revolution' 1981-2011 - Paul Farrell, MarketWatch
The Richer We Get, The Harder We Work - Dalton Conley, NY Times
Safer Investing for Pensions - Charles Millard, Washington Times
The Recessionistas Were Wrong - Jerry Bowyer, National Review
Making Bankruptcy Worse - Leon Bayer, RealClearMarkets
From Dems, Change That's Hard to Find - Kevin Hassett, Bloomberg
Renewing America's 'Contract With the Middle Class' - Leo Hindery, LAT

RCM Morning Archive
Off the Street
How To Squelch Economic Recovery - Kurt Brouwer, Fundmastery
Over a Barrel (of Oil) - Daniel Ben-Ami, FundStrategy
Words from the Investment Wise - P. duPlessis, Postcards from Cape Town
So What Has Been Causing The New Inequality? - Economic Principals
Inequality and the Credit Crisis - Steve Waldman, Interfluidity
Is It How Much You Make or How Much You Spend? - Market Movers

Off the Street Archive
Transcripts & Videos
Economic Focus on U.S. Jobs Report, Auto Sales, ISM - Bloomberg
IDEAGlobal's Pomery: Benign Neglect of the Dollar Over - FT
Worst U.K. Economy in a Generation - Bill Watts, MarketWatch
Political Chaos in Asian Economies - CNBC

Is History Siding With Obama’s Economic Plan?
- Alan Blinder, NYT
The Death of the Credit Card Economy
- Daniel Gross, Slate
Dem's Economic Pessimism Not Shared by Most
- Editorial, WSJ
Is it 1930's Deflation or 1970's Stagflation?
- Barry Eichengreen, VoxEU

U.S. Payrolls Fell 84,000 in August; Unemployment Rate Increases to 6.1% The U.S. lost more jobs than forecast in August and the unemployment rate climbed to a five-year high of 6.1 percent, a sign that the economic slowdown is worsening two months before Americans elect their next president.

Mortgage Foreclosures in U.S. Highest in at Least 29 Years as Values Drop Foreclosures accelerated in the second quarter to the fastest pace in almost three decades as interest rates increased and home values fell, prompting more Americans to walk away from homes they couldn't refinance or sell.

Japan's Businesses Cut Spending 7.6% Last Quarter as Material Costs Surged Japanese business investment fell more than estimated in the second quarter as oil and commodity prices surged to a record and the global slowdown damped demand for the country's exports.

U.S. Growth Is `Stagnant,' Europe Faces Recession, Conference Board Says The U.S. economy is ``stagnant,'' Europe is falling into a recession, and central banks won't have much room to cut borrowing costs amid elevated prices, the Conference Board said today.

Japan Government May Issue Bonds to Finance Extra Spending, Officials Say Japan may sell bonds to help pay for a budget overrun for the first time in six years, two Finance Ministry officials said, a sign that the government is failing to contain the world's largest public debt.

European Banks Face Higher Finance Costs as ECB Tightens Access to Capital Banks in the U.K., Spain and Ireland that have relied on the European Central Bank for low-cost funding will have to pay more as it tightens lending rules.

Trichet, Stark Indicate Inflation Still a Concern Even as Recession Looms European Central Bank President Jean- Claude Trichet and Executive Board members Juergen Stark and Jose Manuel Gonzalez-Paramo signaled they're still concerned about inflation even with the euro-region economy on the brink of a recession.

Spanish Industrial Output Falls for Third Month; Consumer Demand Slumps Spanish industrial production contracted for a third month in July as a strong euro made exports less competitive and demand at home weakened.

German Production Falls More Than Expected as Demand for Machines Declines German industrial production declined more than economists expected in July, led by a drop in demand for investment goods such as machinery.

Armed Robberies, Carjackings Increase in Portugal as Economy Deteriorates Teresa Paiva says she assumed the man with the gun in her local bank was a security guard.

U.S. Unemployment Rate at 6.1 Percent; Payrolls Fell: Table of the Day Following is a summary of the August employment situation from the Labor Department.

Yellen Sees `Substantial' Risks to Growth, Citing `Severe' Credit Crunch Federal Reserve Bank of San Francisco President Janet Yellen said there are ``substantial'' risks of slower U.S. economic growth, and inflation is likely to slow, declining to rule out the chance of an interest-rate cut.

Fed's Fisher Sees 50% Odds of Accelerating Inflation Even as Growth Slows Federal Reserve Bank of Dallas President Richard Fisher said there's a 50 percent chance inflation will accelerate even amid slowing economic growth.

Fed Says Discount-Window Loans Rise to Record $19 Billion Average in Week The Federal Reserve said lending to commercial banks rose to the fifth record in seven weeks, while loans to securities firms showed a zero balance for a 10th straight week.

Greece's Karamanlis Says `No Easy Solutions' to Financial Woes
Volcker Says Finance System `Broken,' Losses May Rise
U.S. Mortgage Foreclosures, Delinquencies Reach Highs
U.S. to take control of Fannie and Freddie
Big Summer Sell-Off Hits the Russian Stock Market

Main Bank of China Is in Need of Capital
Credit strains linger, Pimco pleads for help
Global wealth to fall for first time in 7 years
Defaults Could Net Bigger Fish
The Labor Market's Cruel Summer
Auto sales down sharply in August
Fed, ECB Must Switch Off Life Support
U.S. Must Buy Assets to Prevent `Tsunami,' Gross Says
Fed governor sees US contagion, not 'decoupling'
Weak economy set to hit credit card companies hard
Lehman lifeline plan in doubt as Korean banks cool

Retailers slash prices, but run risk of hurting profit margins
U.S. Manufacturing Shrank in August, ISM Index Shows
Fed's response to crisis hurt its key role
Reset loans add to US home woes
Is inflation the right battle?
Gustav sends oil higher
Lehman Brothers in urgent talks on capital injection
Money Market Strains to Continue `for Some Time,' BIS Reports

Eight painful months for job market
The unemployment rate jumped to 6.1% last month, the highest jobless rate since September 2003, and payrolls fell by 84,000 jobs, the eighth consecutive month of declines. In every period since 1948 when payrolls have declined this consistently, the economy has been in an official recession. EPI's new Jobs Picture analyzes the latest data and includes a special supplement focusing on job losses for African Americans and Hispanics.


State of Working America 2008/2009
Released in time for Labor Day, the advanced edition of EPI's authoritative volume The State of Working America 2008/2009 is now available. Described as the "most comprehensive independent analysis of the U.S. labor market" by the Financial Times, the 11th edition shows that the business cycle that started in 2001 will be one for the record books. In fact, for the first time on record, middle-class families are at the end of a recovery without ever having regained the ground they lost during the previous recession. Gross domestic product and historically high productivity growth should have raised paychecks up and down the income ladder, but instead the benefits of that growth have bypassed most of the people who made it possible. Prepared biennially since 1988, The State of Working America scrutinizes family incomes, jobs, wages, unemployment, wealth, poverty, and health care coverage, describing the economy's effect on our nation's standard of living. Visit the State of Working America Web site now and in coming months to read the executive summary, introduction, select chapters, press releases, and other related material, as well as to order your copy of the advanced and final edition (to be released by ILR/Cornell University Press in January 2009). (Press release [PDF])

Fannie, Freddie Capital Concerns Prompt Paulson to Take Control
By Dawn Kopecki and Alison Vekshin

Sept. 7 (Bloomberg) -- Treasury Secretary Henry Paulson decided to take control of Fannie Mae and Freddie Mac after a review found the beleaguered mortgage-finance companies used accounting methods that inflated their capital, according to people with knowledge of the decision.

Morgan Stanley, hired by the Treasury to probe the companies' finances, concluded the accounting, while legal, enabled Freddie, and to a lesser extent Fannie, to overstate the value of their reserves, according to the people who declined to be identified because the findings are confidential.

The Treasury plans to put Fannie and Freddie into a so- called conservatorship and pump capital into the companies, House Financial Services Committee Chairman Barney Frank said in an interview yesterday. The government would make periodic capital injections by buying convertible preferred shares or warrants, according to a person briefed on the plan. Paulson is seeking to end a crisis of confidence in the companies sparked by concern the companies didn't have enough capital to weather the biggest housing slump since the Great Depression.

The Treasury was ``convinced that the markets simply wouldn't respond until after something like this,'' said Frank, who was brief by Paulson. ``I think it's an important combination.''

Paulson is likely to make the announcement today, according to people familiar with the decision. He gathered Federal Reserve Chairman Ben S. Bernanke, Federal Housing Finance Agency Director James Lockhart, Fannie Chief Executive Officer Daniel Mudd and Freddie CEO Richard Syron to discuss the plan to take control of the government-sponsored enterprises, which have operated as private shareholder-owned corporations for almost 40 years.

Debt Holders Protected

Holders of the companies' common and preferred stock are ``very unlikely to come out of this at all happy,'' and the chief executive officers will be forced out, Frank said. Senior and subordinated debt holders will likely be protected, said other people who were briefed on the plan.

Fannie and Freddie own or guarantee almost half of the $12 trillion in U.S. home loans and the government had been leaning on the companies to help pull the economy out of the housing crisis. Instead, they got caught in the same slump that left the world's banks with more than $500 billion of losses since the collapse of the subprime-mortgage market last year.

Rising Costs

Concern over the companies' capital pushed their borrowing costs to record levels over U.S. Treasuries, sent their common and preferred stocks tumbling and boosted mortgage rates. Washington-based Fannie is down about 66 percent in New York Stock Exchange trading since the end of June. McLean, Virginia- based Freddie has fallen about 69 percent.

Paulson met with Mudd, 50, and Syron, 64, Sept. 5 to tell them of the decision to remove the executives from their jobs, according to two people briefed on the discussions. Mudd, who replaced three top executives almost two weeks ago, is negotiating with regulators to stay on in a consultative role for several months, according to people with knowledge of the talks.

A government takeover would be the latest attempt to blunt the impact of the yearlong credit crisis, after the Fed provided financing for Bear Stearns Cos.'s takeover by JPMorgan Chase & Co.

``They have to open their wallet,'' Bill Gross, manager of the world's biggest bond fund at Newport Beach, California-based Pacific Investment Management Co. About 61 percent of Gross's holdings were mortgage-backed securities as of June 30, mostly debt guaranteed by Fannie, Freddie or government agency Ginnie Mae, according to data on Pimco's Web site.

Obama, McCain Briefed

Pimco and other large investors may put in their own money once the Treasury decides to inject government funds, Gross said Sept. 5 in a Bloomberg Television interview.

Paulson hired Morgan Stanley a month ago to advise on Fannie and Freddie. Mark Lake, a spokesman for Morgan Stanley, declined to comment. Paulson also consulted with Bank of America Corp. Chief Executive Officer Kenneth Lewis on his plan, according to people with knowledge of the talks. Bank of America spokesman Scott Silvestri declined to comment.

The Treasury briefed Democratic presidential candidate Barack Obama yesterday and has contacted Republican contender John McCain's staff. Officials also discussed the plans with House Speaker Nancy Pelosi, Senate Majority Leader Harry Reid and Senate Banking Committee Chairman Christopher Dodd.

``We are making progress on our work with Morgan Stanley, FHFA and the Fed,'' Treasury spokeswoman Brookly Mclaughlin said Sept. 5 in Washington, declining to comment on any specific plans. FHFA spokeswoman Stefanie Mullin declined to comment.

Losses Grow

Fannie was created by the government in 1938 as part of President Franklin D. Roosevelt's New Deal. Freddie was chartered in 1970 to compete with Fannie.

As losses on the mortgages grew late last year, the companies recorded $14.9 billion in combined net losses, eating into their capital. Fannie raised $14.4 billion since November and Freddie sold $6 billion of preferred securities. Plans for a $5.5 billion sale were delayed as the company's fortunes sank.

Fannie had $47 billion of capital as of June 30, according to company filings. The company is required by its regulator to hold $37.5 billion. Freddie's capital stood at $37.1 billion, compared with a requirement of $34.5 billion, filings show.

Critics including former Federal Reserve Chairman Alan Greenspan and Richmond Federal Reserve Bank President Jeffrey Lacker have called for the companies to be nationalized. William Poole, the former head of the St. Louis Fed said in July that Freddie Mac is technically insolvent and Fannie Mae's fair value may be negative next quarter.

Fed Involvement

Fannie and Freddie dropped in after-hours trading on Sept. 5. Fannie fell $2.25, or 32 percent, to $4.79 at 5:50 p.m. in New York Stock Exchange trading and Freddie slumped $1.40, or 27 percent, to $3.70. The market value of Fannie's $21.7 billion in preferreds had dropped 64 percent to $7.87 billion late last month, according to Friedman Billings & Ramsey & Co. The market value of Freddie's $14.1 billion in preferreds has fallen 61 percent to $5.44 billion.

Fannie's market capitalization is now $7.6 billion, down from $38.9 billion at the end of last year. Freddie's has fallen to $3.3 billion, from $22 billion over the same period.

Bernanke participated in the meetings because the central bank was given a consultative role in overseeing Fannie's and Freddie's capital under legislation approved in July. Paulson's decision won the approval of Bernanke and Lockhart, the person briefed on the discussions said.

Conservatorship

The FHFA has the authority to place Fannie or Freddie into conservatorships or receiverships under the law. The legislation that President George W. Bush signed July 30 also gave the Treasury the power through the end of next year to extend unlimited credit to or make equity purchases in the firms.

Under a conservatorship, the authorities would aim to preserve Fannie and Freddie assets, rather than dispose of them, the law says.

The FHFA was scheduled to release its assessment of the companies' capital levels as early as last week as part of a quarterly appraisal of their finances.

Analysts have speculated that the Treasury would wipe out common shareholders, while seeking to shield preferred stockowners from total loss. Fannie and Freddie preferred shares are typically owned by banks and insurance companies. Their $5.2 trillion of debt outstanding is held by investors including Asian central banks, and would probably be guaranteed, analysts said.

Frank said the federal government will take a senior repayment position to ``all shareholders, preferred and common.''

The Treasury is ``going beyond no dividends, I believe, in terms of what's going to happen to the shareholders,'' Frank said. ``I think shareholders are going to find themselves in a very subordinate position.''

Debt Markets

``Treasury's main concern is the debt markets, and if it was to say that it will do whatever is necessary to keep Fannie and Freddie running, the better it is for their funding,'' said Alex Pollock, fellow at the American Enterprise Institute in Washington and former president of the Chicago Federal Home Loan Bank.

Fannie and Freddie sell billions of dollars of bonds each month to pay maturing debt. As of mid-August the companies had $223 billion of debt to refinance by the end of the quarter.

While they have continued to issue securities, Fannie and Freddie have paid record yields over U.S. Treasuries to attract investors reluctant to take on the debt even with its implicit backing from the government.

Freddie sold $3 billion of two-year reference notes this week at 3.229 percent, or 97.5 basis points more than Treasuries of similar maturity, the highest since at least 1998, based on company and market data compiled by Bloomberg.

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

Fannie Mae, Freddie Mac Are Taken Over by U.S. Treasury to Avoid Collapse The U.S. government seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market.

Fed, FDIC Will Help Small Banks Holding Fannie, Freddie to Restore Capital U.S. regulators said they will help develop plans to restore capital at banks with ``significant'' holdings in Fannie Mae and Freddie Mac after the government seized control of the two mortgage-finance companies.

Treasuries Drop Most in Two Months After U.S. Takes Over Fannie, Freddie Treasuries fell the most in almost two months as the government takeover of Fannie Mae and Freddie Mac gave investors confidence to buy higher-yielding assets.

Yen Declines Against Dollar After U.S. Government Rescues Fannie, Freddie The yen fell by the most in seven weeks against the euro and dropped versus the dollar on speculation the U.S. government's takeover of Fannie Mae and Freddie Mac prompted investors to buy higher-yielding assets.

Paulson Says Fannie, Freddie Can't Remain in Current Form: Statement Text Following is the text of a statement by U.S. Treasury Secretary Henry Paulson on the U.S. government takeover of mortgage companies Fannie Mae and Freddie Mac:

Fed, FDIC Will Help Small Banks Holding Fannie, Freddie to Restore Capital U.S. regulators said they will help develop plans to restore capital at banks with ``significant'' holdings in Fannie Mae and Freddie Mac after the government seized control of the two mortgage-finance companies.

U.S. May Lose $300 Billion on Fannie, Freddie Takeover, William Poole Says William Poole, former president of the Federal Reserve Bank of St. Louis, said taxpayers may face a $300 billion bill to revive Fannie Mae and Freddie Mac, the mortgage giants being taken over by the Federal government.

Fed's Fisher Sees 50% Odds of Accelerating Inflation Even as Growth Slows Federal Reserve Bank of Dallas President Richard Fisher said there's a 50 percent chance inflation will accelerate even amid slowing economic growth.

LTCM Is a Short-Term Memory - Roger Lowenstein, New York Times
A Delicate Balance in Fannie/Freddie Action - Mohamed El-Erian, FT
Paulson's Seizure Smacks of Expropriation - Editorial, New York Sun
Intervention Should Assure Recovery - Anatole Kaletsky, Times of London
Fannie, Freddie: The Biggest Losers - Colin Barr, Fortune

THE MOGAMBO GURU
The assets of penultimate fools
The chances of US consumers pulling out their wallets to stop the economy disappearing into a black hole are pretty faint as they are already borrowed-out and overspent enough to make eyes water. That's a big wheel to fall off the economy. And the US is not alone.
MARKET RAP
Darkest week in a year
Asian markets suffered a week of near non-stop declines and with objective macroeconomic and financial reasons for worsening sentiment, there are few if any points of light. Don't curse the darkness - just stay inside. (Sep 5, '08)
R M Cutler runs his eye over the ups and downs in the week's markets.

U.S. Seizes Mortgage Giants

• WSJ ($)
• 09/08/2008 05:30 AM

In Crisis, Paulson's Stunning Use of Federal Power

• Washington Post
• Pearlstein
• 09/08/2008 05:04 AM

Radical Options In Play for New Structure of Firms

• Washington Post
• 09/08/2008 05:02 AM

As Crisis Grew, a Few Options Shrank to One

• NY Times
• 09/08/2008 04:50 AM

U.S. Takeover of Fannie, Freddie Offers `Stopgap'

• Bloomberg
• 09/08/2008 04:47 AM

US takes control of Fannie and Freddie

• FT
• 09/07/2008 08:23 PM

Few Stand to Gain on This Bailout, and Many Lose

• NY Times
• Dash
• 09/07/2008 07:44 PM

Treasury Extends Secured Credit Line to Federal Home Loan Banks

• Bloomberg
• 09/07/2008 06:57 PM

Paulson Engineers U.S. Takeover of Fannie, Freddie

• Bloomberg
• 09/07/2008 06:55 PM