Financial Turmoil
Housing Bust Fuels Blame Game
Candidates Tiptoe Around Issue
Trying to Grasp the Credit Cr

The Bad Bear Precedent

A Red Flag for Bank Liquidity

High street banks hold out their begging bowls

Poll: 3 in 4 think USA is in a recession

Paulson admits U.S. economy in sharp decline 17-Mar-2008

Wall Street fears for next Great Depression 17-Mar-2008

Fed Acts to Rescue Financial Markets 17-Mar-2008

How bad is the mortgage crisis going to get? 16-Mar-2008

Sell stocks while the selling's good 16-Mar-2008

J.P. Morgan to Buy Bear Stearns 15-Mar-2008

Bear Stearns crisis could hit UK banks

14-Mar-2008 Bear Stearns Gets Emergency Funds From JPMorgan, Fed

14-Mar-2008 Economy hit on multiple fronts

14-Mar-2008 Southland home prices tumble fast

14-Mar-2008 Despite the Federal Reserve's efforts Wall Street fears a big
US bank is in trouble

14-Mar-2008 Caution: Crumbling Wall Street earnings ahead

13-Mar-2008 Another hedge fund falls off a cliff

13-Mar-2008 Drop in Retail Sales Signals Recession

13-Mar-2008 Foreclosures hurt neighbors’ refinance efforts

12-Mar-2008 Finance chiefs more gloomy

12-Mar-2008 Finance chiefs more gloomy

12-Mar-2008 March sales growth could slump to 1%, analysts say

12-Mar-2008 Fed takes boldest action since the Depression

11-Mar-2008 The bankers mess up, and taxpayers foot the bill

11-Mar-2008 Economic woes lead to retail retrenchment

11-Mar-2008 Fed injecting $200B to lending program

U.S. Stocks Drop, Led by Energy, Commodity Makers; Financial Shares Climb U.S. stocks retreated, erasing half of yesterday's rally, after plunging commodity prices sent oil and mining companies lower and an insurer tried to cancel $3.1 billion in protection on Merrill Lynch & Co. mortgage bonds.

Fannie, Freddie Capital Requirements Are Eased to Revive Mortgage Market Fannie Mae and Freddie Mac agreed to expand their purchases of U.S. mortgages and related securities after the Bush administration reduced the amount of capital the companies are required to hold as a cushion against losses.

Three-Month Bill Rates Plunge to Lowest Level Since 1958 on Credit Concern Treasuries rose and three-month bill rates plunged to the lowest level in almost 50 years on speculation credit market losses will widen, prompting investors to seek the relative safety of government debt.

The Fed's Too Easy on Wall Street


Bear bailout not as bad as the alternative


Confused over the credit crisis? You're not the only one

Venezuela's state-run oil company begins demanding payment in euros as US dollar weakens : Rafael Ramirez said the initiative by Petroleos de Venezuela SA, or PDVSA, to charge euros rather than U.S. dollars was ''advancing,'' but not yet completed.

Numerous Countries Have Recently Dropped The Dollar as Their Reserve Currency : In the past couple of years, the following countries have stopped using the dollar as their reserve currency or have dropped their currency's peg against the dollar:

Federal Reserve slashes US rates : The Federal Reserve has cut US interest rates sharply in an attempt to restore confidence to nervous financial markets and boost the ailing economy.

Housing Construction Declines: In another sign of troubles in the beleaguered housing industry, construction of new homes fell by a larger-than-expected amount last month.

Even experts can't grasp this crisis: Raise your hand if you don't quite understand this whole financial crisis.

As the financial markets stare at the abyss, contemplate the cliff, suffering massive falls in selective stocks, a review of ‘Cliff Notes’ might be appropriate. The financial maelstrom is gathering force and fury. The Bear Stearns story has a story behind it, as usual in the Grand Manhattan Den, where violent financial battles give false appearances as desperate measures are played out behind the scenes. The drama on Wall Street will make history. These guys are killing each other, while they cooperate with each other. Like crows, they killed and devoured one of their own.




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BROKERAGE FIRMS REEL

Bear Stearns was fed to the wolves, an easy correct forecast from last early autumn. Denials nowadays constitute confirmations, from mere mention. Their refusal in 1998 during the LongTerm Capital Mgmt bailout to act like a Wall Street team player was the hidden motive to carve them into pieces. One must ask why last Friday it traded around the $30/share price all day long after 10am. The answer is easy, as they wanted to give insiders a chance to sell most of the 186 million shares, a gift of $5 billion sure to anger many. My view is that JPMorgan took its best assets at discount, tossed much of the damaged assets into their Wall Street garbage can, which is never emptied, never sees any balance sheet, blessed by the US Federal Reserve, protected to new security laws. If Bear Stearns share holders reject the JPM seizure takeover, then the gem Bear Stearns headquarter building in Manhattan can be bought by JPM for a song. Actually, JPM might have only started the bidding process, sure to result in JPM upping their own bid. BStearns has (or had) 14 thousand workers, most having been paid in stock share bonuses in recent months. The economy in New York City is sure to be badly harmed, worse than already. Wall Street jobs account for 35% of NYCity wages.



The other story not told is that Bear Stearns was dissolved before the wrecked investment bank had a chance to take advantage of the Term Security Lending Facility. It will be made available by the USFed at the end of March. The sleazy hogs on Wall Street wanted to remove one player at that window. The other story not told is that a liquidation of Bear Stearns would inevitably have resulted in a massive credit derivative meltdown. The consequences cannot be estimated. The derivative upside down pyramid is mammoth. No precedent exists for its partial unwind or dissolution. The pyramid holds together the entire USTreasury complex, attached to interest rate swaps, attached to credit default swaps of various types, and so on. This pyramid is leveraged 70 to 1. The talk is funny though, since the USFed has backstopped only $30 billion in Bear Stearns securities. What about the other $800 to $1500 billion rancid bonds floating within striking distance to Wall Street and major bank balance sheets? In truth, we might later learn that Bear Stearns helped to bail out JPMorgan, in helping to shore up its credit derivatives, in providing some emergency collateral, soon to bust, to prevent a JPMorgan failure!!! JPMorgan owns $7.778 trillion of credit derivatives, two and half times as much as Citigroup, the same toxic stuff that crippled Citigroup. JPMorgan skated on this one without publicity.



The other story is that Bear Stearns CEO Alan Schwartz assured just last week that all was well, liquidity was adequate, and the company was in good shape. Enron CEO Ken Lay said the same thing. And lest one forget, Enron and Bear Stearns have a common denominator in JPMorgan being a key player in the operations and agent during the demise of the two firms. JPM taught Enron everything they knew about offshore special purpose entity firms, yet they escaped all legal challenges by losing clients in court. When the USFed frees JPM from liability on any losses from collateral submitted by Bear Stearns, one has to giggle since the USFed is JPMorgan. Think consolidation of the best bond assets in JPMorgan’s hands. Think more damage and consolidation upon the next victim, like Lehman Brothers. Think building the Fed Reserve bank system. The Mussolini Fascist Business Model might be opening a new chapter.







The XBD banker broker dealer stock index had a horrible day on Monday, with some repair on Tuesday and Wednesday. The XBD stock index fell 11% in a visit to hell and back, rendering big technical damage to many component stocks, especially Lehman Brothers. LEH fell by 19% on Monday. Goldman Sachs was down 10% early in the day, closing down 4%. Citigroup lost another 7% after being down almost 10%, UBS lost 11%, Morgan Stanley lost 8%, Merrill Lynch lost 4% after being down 8%. The stock price action tells the wary observer to expect a challenge or near death experience for Lehman Brothers, possibly worse. Their portfolio is similar to Bear Stearns, only larger. The mortgage bond damage will next shift to the prime adjustable mortgages, so reckless in their innovation. They will crater this summer upon rate reset, victims of their own written time bombs. Thus the deserved name of Exploding ARMs. Even USFed Chairman Bernanke acknowledged last week that 40% of all mortgage defaults are prime, not subprime. On two days, the XBD broker dealers recovered most of the loss. The broker dealers play a significant role, to manage the execution of official policy, full of the requisite manipulation and corruption of markets. See the management of the credit derivative pyramid, the gold ambushes, the currency interventions, the collusion with the debt ratings agencies, and even possibly the intimidation of the monoline bond insurers to serve as the bagholders in the historically unprecedented international sale of fraudulent mortgage bonds. Can anyone defend against my claim that the Untied States upper echelons represent institutionalized and protected dishonesty???







My warning quip to the idealists among us has been often used lately, when people salivate over the prospect of chronic conmen suffering deep losses, enduring insolvency, incapable of shame, yet almost certain to end up in some form of bankruptcy. My stated line is “Beware when billionaires face bankruptcy, since they make a phone call and change the rules. Often those rules conflict with your strategy and plans.” This time the rules might be concerning gathering wealth from strategies that oppose the defense of a national financial integrity. This time those attempting to secure their wealth and protect it from illicit national grabs and seizures might be labeled as unpatriotic. This time the system has been virtually broken by decades of destructive inflation, of misspent funds, of grand theft (see Fannie Mae and military contractors), of encouraged abandonment of the manufacturing sector, of destructive emphasis of a war economy footing, of irresponsible Medicare guarantees, of harmful demographic shifts, and lately of incredibly deep bond fraud. The bond fraud episode is the crowning finale of the US banking system, with toxic outlets to most global banking centers. One might wonder if it were planned.

REMINISCENT OF GREAT DEPRESSION

When Bear Stearns was dissolved and its assets rescued, the USFed and JPMorgan invoked a feature of banking policies not used since the Great Depression. Too many other comparisons can be made to that dreaded era. The bank insolvency is the biggest commonality. The ability to print money, shovel printing press output from one room to another easily, permit phony accounting of balance sheets, hide within offshore subsidiaries, and extend the risk model to great heights, these are new & better innovations not available 70 years ago. Well tragically, these innovations are being unmasked as thin, flimsy, unable to withstand storms, and possibly even fraudulent. As the stock market and bond market suffer blow after blow, fail to stabilize, fail to recover, only to endure more breakdown in the structure, memories come to the Great Depression, when recoveries only led to deeper losses as the catastrophe unfolded. This time around, another catastrophe is expected in a bank system meltdown, a bond system total seizure, and a risk model system dissolved.



Amidst all this maelstrom, one must ask if wisdom prevailed during the Clinton Administration to repeal the Glass Steagall Law from the Great Depression era. That law created the Federal Deposit Insurance Corp for insuring individual banks and depositors, up to $100k per account. The law also blocked any attempt to merge banks, brokerage firms, and insurance companies. The legislation intended to protect a meltdown to spread to all critical structural elements of the financial system. With the Glass Steagall repeal, one has to wonder if some destruction was planned, or else a major consolidation was the ultimate goal. My belief is firm, that powers in Old Europe and London that control the USFed more than is publicly known are restoring power back to Switzerland. They have resented the arrogant and reckless US bankers for two generations.



By the way, the FDIC insures bank accounts. But the SIPC guarantees participating brokerage accounts up to a $500k limit, plus $100k on cash accounts. People might soon hear more about their stock protection if giant financial conglomerates go bust. Some stock accounts might be frozen, as the courts sort it all out. When an SIPC member becomes insolvent, SIPC will ask the court to appoint a trustee to supervise the liquidation of firm assets and to process investor claims. Coverage of bank and brokerage accounts will be a popular topic soon.

3 SCARY GRAPHS: BANKS, MONEY & HOUSEHOLDS

Some have asked in private emails whether the bigger the bank, the safer their future. My answer is simple. The bigger the bank, the more likely they are to hold a much riskier portfolio, and thus the more likely their failure. Most big Wall Street banks and broker dealers, along with a scattering of major US banks are in the same pickle, from owning too many mortgage bonds and related credit derivatives leveraged from them, even being saddled with bonds scheduled for interrupted private equity deals. Bank assets have vanished. The neighborhood bank with branches of operation only within a corner of their resident state is probably much more insulated from the bond market debacle. They likely originated loans, own some, but might have recycled most of them through Fannie Mae in order to continue to earn fees on new loans. Some have asked if the USFed can make unlimited number of bank bailouts, can refund on unlimited number of mortgage bonds submitted by banks. Well yes, sure, but the accumulating risk to the USDollar is being recognized and felt. The US$ decline is not done; it is going lower.







The US banking system is teetering at the precipice, the brink of collapse. Almost two years ago, in the Hat Trick Letter, my forecast was made crystal clear, that the housing crisis and mortgage debacle would topple and destroy the US banking system, just like what happened to Japan in the 1990 decade. The US banking system cannot withstand insolvency like the stronger Japanese banking system, which survived temporarily as vampire entities. Weekly events point to wrecked mechanisms in the US banking system. They will continue to worsen unfortunately. The financial condition of institutions within the US banking system has gone critical, with core assets gone negative. Total deposits held, free of borrowed USFed reserves, have vanished. US banks have burned through their entire capital core, melted down from disastrous mortgage portfolios, their bonds, and related CDO leveraged bond derivatives. They must now rely upon borrowed reserves from the USFed in order to continue to function as lending institutions. They have turned heavily to the USFed Term Auction Facility and now the Term Security Lending Facility for resupplied capital. That is not injected, donated, free money. It must be returned, or such is the plan. With the TSLF, the USFed now extends loans for AAA-rated mortgage bonds of private vintage, not just Fannie & Freddie type. They expanded to $200 billion per month and 28 days in duration, with a lowered 3.25% borrowing rate, and likely renewable feature. As we know, many AAA bonds are crappy. So banks might be unloading some rancid meat. The masters who control the USFed cannot be happy.



The US banks by early December had about $43 billion in total reserves. The current statement by the Federal Reserve offers a daily average ‘Non-Borrowed Reserves’ at MINUS $20 billion. Worse, the Fed Reserve estimates by early April that amount will be MINUS $60 billion. The US banks are living off borrowed money, and time. Be prepared for some high profile bank failures, a process already begun. Home loan defaults have combined with falling home collateral valuation to destroy mortgage bonds and related securities to the extent that banks have lost their entire capital. The only way to recover from this situation is for banks to find a way to make a lot of money really fast. The time has grown urgent to inflate rapidly, or else face an unstoppable chain reaction of bond failures followed by bank failures. Big banks do not have adequate loan loss reserves set aside. Money and wealth will be destroyed either from falling home portfolios and mortgage bond values, from reckless lending and much fraud at all levels.



The shocking reality is that the banking system has gone from a 10% reserve requirement to a minus 5% requirement. Still too much bank capital is in illiquid overvalued bonds. The USFed is trying to increase the money supply faster than banks can write down losses. Keep in mind what New York University economics professor Nouriel Roubini says, “For every dollar loss of capital, you reduce lending by ten dollars.” The Shadow Govt Statistics folks do such great work in removing deceptive games and gimmicks. They report the US$ money supply is growing at an annual 18.0% rate, March 2007 over March 2007. The sitting Secy of Inflation Bernanke, when pressed in Congress recently to comment on the monetary inflation gone haywire, simply said they monitor the Consumer Price Inflation only. Wow! Talk about riding a horse while sitting backwards on the saddle! What a hack! What a lousy cowboy!







Many standing loans involve homeowners who owe a greater loan balance than the home is worth, the home equity having evaporated. And home prices are heading lower. Chronicling the Great American Tragedy, the New York Times writes, “Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3% of the total are underwater. That is more than double the percentage just a year ago.” To this date, USFed, Dept Treasury, and USGovt efforts have not accomplished much toward reversing this trend. Tragically, of mortgages originated from 2006 onward in recent vintage, 30% are now burdened by negative equity. The ratio of under-water mortgages, those with negative equity, the ‘Upside Down’ loans, for these more recent loans is forecasted to rise to more than 50%. The mortgages of older vintage are also rising in their negative equity ratio. They are catching up to the newer vintage home loans. The national housing foundation is going underwater. Contrast with falling home values, which might not stabilize in 2008 as the graph shows. Note two different scales describe the two series.







The latest data on home foreclosures, delinquencies, late payments, existing home inventory, new home inventory, and median home value does not indicate in any manner whatsoever that the housing market has even remotely stabilized. More mortgage bond pain and bank writeoffs are to be expected by anyone not hindered by rose colored glasses, banker public relations motives, or USGovt mental handicaps. California and Florida continue to bear more than their share of national foreclosures. The two states accounted for 30% of mortgages entering the foreclosure process. Arizona and Nevada are sure to increase sharply in the next couple quarters. The big new twist is voluntary foreclosures, abandonment of homes and their loans, in direct response to running under-water with home equity gone, perhaps negative. People are choosing not to service debt on a deflating failed asset.



CENTRAL BANK INTERVENTION NEXT

As the USDollar continues to reel, to decline to low levels never seen before, support does not exist. Clearly, some form of central bank intervention is next. However, in order for such extraordinary action to be effective and not futile, monetary policy must be coordinated and cooperative. The major central banks must work together to support the USDollar. They must cut official interest rates in concert with the USFed. That means the Euro Central Bank must agree to an official cut in its rigid interest rate. They might employ an interim rate cut. Even a 25 basis point cut would be significant. They must publicly state that they are defending against a rising euro currency, and that price inflation will be a risk to stomach. The planned goal would be to end the US$ decline. The extra benefit would be seen in the bond market and banking system, from added liquidity and soon housing price stability. Without dispute, the underlying problem is the housing crisis and price declines in collateral.



My attention is squarely focused on the Euro Central Bank, which has the greatest potential to quickly change the awful sentiment plaguing the USDollar. The USFed just cut interest rates again by 75 basis points. The USDollar had moved down in anticipation of this latest cut. The Bank of Canada has cut twice its interest rate. The Bank of England has also cut its official rate, only once, and surely will again. The Bank of Japan is talking about a rate cut. But the Europeans are dominated by the Germans, who want no rate cut at all. The Germans warned of the precise problems seen right now, do not wish to fix a problem with more of the same actions that produced the problem, and resent having to foot the bill during the aftermath of these problems.



The gold price will not stop at the $1000 milestone. The silver price will not stop at the $20 milestone, and will vastly outperform gold. The crude oil price might go below the $100 milestone briefly, but will return and shoot past the century mark. No no no!!! All are heading much higher, because the banking problem is not to be soon fixed, the bond problem is not to be soon fixed, the economy is not to be soon fixed, household distress is not to be soon fixed. Maybe none can be fixed, even as money thrown at the problem accelerates parabolically. The limited power of USFed solutions, and limited arsenal of devices to treat the problem, will ensure that monetary inflation will be the main tool. Still, adding liquidity in rescues, repairs, and bailouts is not seen as the cause of the problem. It still is seen as the immediate solution. SUCH IS THE HERESY THAT HAS DESTROYED THE US BANKING SYSTEM. They operate under an objective to revitalize the housing market, and stop its price decline. They must enable the bank system to become solvent. All that administered inflation means much more gains to gold, silver, and even crude oil. Bigger problems than rising gold, silver, and crude oil come if Consumer Price Inflation starts to grow without bounds. The USTreasury Bond market will suffer heart attacks, the beneficiary being gold, silver, and crude oil!!!



Remarkably, when the USFed was about to predictably cut the official interest rate again, gold mysteriously got hit on Monday. On the day of the rate cut Tuesday and the following day Wednesday, gold got hit again and the USDollar rallied. The Boyz were busy. The smackdown of gold under $950 and of silver under $19 only managed to remove and cleanse these two important metals markets of their overbought situation. The Boyz have cleared the path for gold to reach $1100 and for silver to reach $26. Nothing has been solved yet on most critical battle fronts. The bigger moves up are yet to come!
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Was Bear Stearns the Sacrificial Lamb? by Lawrence KudlowDid Bear Stearns really need to go down in flames? It's a question that needs to be asked, and …

Bailing Out the Banks

It's a Welfare State ... If You're Rich
By WALTER BRASCH

Listen to conservative talk show pundits and blowhards. Listen to any of the political candidates who proudly amend their names with the phrase "conservative Republican." One theme resonates in all of the heavy wind-keep the government out of our private lives; let business enjoy a free market economy. Not only should government regulation be minimal, they say, but we must end the "welfare state."

Of course, what they mean is don't help the individual; help only corporations by giving them significant tax breaks and low-interest loans.

The Federal Reserve last week approved a $200 billion loan program at significantly less than market rates to aid the nation's largest banks. It has also created an almost unlimited credit line for the top 20 struggling investment firms. This past Sunday, it approved a $30 billion credit line to allow financial giant JP Morgan Chase to take over failing financial giant Bear Stearns. Less than a year earlier, Morgan Chase was the recipient city and state subsidies of more than $750 million over a 15 year period; with assets of about $1.6 trillion, it is the nation's third largest financial institution. The $236 million sale, brokered and sanctioned by the Fed and the Department of Treasury, includes Bear's New York skyscraper and about $30 billion in assets of a company days from filing bankruptcy. Bear's stock one year ago was about $170 a share; Morgan Chase paid just $2 a share. As many as one-third of Bear's 15,000 employees, and several thousand of Morgan Chase's 175,000 employees, are likely to be laid off in the acquisition.

Twice in the past three years, Fortune magazine rated Bear Stearns as the nation's "most admired securities firm. The 85-year-old company had survived the Great Depression of 1929 and several recessions; it couldn't survive the current recession, the one George W. Bush doesn't believe exists.

Bear's problems, like that of dozens of major lenders, stemmed from aggressive sub-prime lending practices. About $1.3 trillion of sub-prime loans is still outstanding, according to the Center for Responsible Lending. The materialistic greed of two years ago, which led to inflated stock prices, has become the financial panic of George Bush's last year in office.

Perhaps the Fed's multi-billion dollar dealings will help the economy. George Bush says he's "on top of the situation." He says that although there is "a lot of uncertainty," things are "not that bad." He says he wants Americans "to understand that in the long run we're going to be just fine."

That isn't much consolation to all Americans who are paying more than $3 a gallon for gas, or to the 7.4 million Americans who are unemployed, the two million Americans who were forced to declare bankruptcy the past two years, or the one million Americans, most of whom have unblemished work histories, who have already lost their homes-none of whom are beneficiaries of the government's corporate welfare system.

Walter Brasch's 17th book is Sinking the Ship of State: The Presidency of George W. Bush. Dr. Brasch, an award-winning social issues journalist, is professor of journalism at Bloomsburg University.

Sarbanes-Oxley’s Real Cost
by Nicholas Vakkur / March 20th, 2008

The Sarbanes-Oxley Act and its impact upon capital formation and the ability of U.S. firms to compete in global markets has been a topic of significant concern since its inception in 2002. Recent estimates suggest in cumulative firms have spent $6 billion complying with the Act. However, compliance costs represent only one type of cost associated with the Act. My co-authors, Preston McAfee (Cal-Tech Yahoo) and Fred Kipperman (RAND Corporation) and I recently completed a research study, with funding from the RAND Corporation, which investigated the non-pecuniary costs of SOX. (Full article …)

Can You Afford to Feed Your Family?
by Nicole Colson / March 19th, 2008

“These are tough times. The economy shed more than 80,000 jobs in two months. Prices are up at the gas pump and in the supermarket. Housing values are down. Hard-working Americans are concerned.” (Full article …)

Questionable Trading Practices May Have Led to Bear Stearns’ Collapse
by Jason Leopold / March 19th, 2008

Last March, Scott Coren and Michael Nannizzi, analysts at Bear Stearns, issued a report upgrading the stock of New Century Financial, a company that provides sub-prime mortgages to low-income homebuyers, from “underperform” to “peer-perform.” (Full article …)

Billions for Wall Street, A Kick in the Pants for You and I
by John Kelley / March 18th, 2008

Gretchen Morgenson reported this in an article called “Rescue Me: A Fed Bailout Crosses a Line”� published in the New York Times (3/16/08): “For the government to print money at the expense of taxpayers as opposed to requiring or going about a receivership and wind-down of any insolvent institutions should be troubling to taxpayers and regulators alike,”� said Josh Rosner, an analyst at Graham Fisher & Company and an expert on mortgage securities. “The Fed has now crossed the line in a very clear way on ‘moral hazard,’ because they have opened the door to the view that they are required to save almost any institution through non-recourse loans — except the government doesn’t have the money and it destroys the U.S.’s reputation as the broadest, deepest, most transparent and properly regulated capital market in the world.” (Full article …)

Dollars tough to sell: - The U.S. dollar's value is dropping so fast against the euro that small currency outlets in Amsterdam are turning away tourists seeking to sell their dollars for local money while on vacation in the Netherlands.

US economist calls financial crisis worst since 1930s: The current financial crisis is the worst the world has seen since the Great Depression of the 1930s and the US Federal Reserve move to cut interest rates will not make much difference, the Nobel Prize winning economist Joseph Stiglitz said on Wednesday

World trade decelerates almost to a standstill: Global trade slowed almost to a standstill over the new year, threatening to shrink for the first time since the US economy went into recession in 2001.

Lehman sees risk of double-dip U.S. recession: Investors already coming to grips with the prospect of a looming U.S. recession face the even bleaker notion of a "double-dip" economic downturn, U.S. investment bank Lehman Brothers (LEH.N: Quote, Profile, Research) said on Thursday.

Jim Rogers: FED is using taxpayers money to buy Bear Sterns Maseratis: Video

US leading index tumbles for fifth straight month: The US leading index fell by 0.3 per cent and six of the 10 economic indicators that form the index were down on the month, the New York-based Conference Board said.

Factory and other data adds evidence of recession: Evidence of a U.S. recession mounted today with reports showing Mid-Atlantic factory activity in its worst slump since the start of the Iraq war and more workers claiming jobless benefits.

Jobless benefit rolls hit 3-1/2 year high: The number of U.S. workers filing initial claims for unemployment aid climbed 22,000 last week, while the overall number on the benefit rolls hit a 3-1/2 year high a week earlier, the government said on Thursday

What If Your Broker Goes Belly Up?


Recession Time


Partying like it's 1929


Is the worst over, or just beginning?


Catering to the bailout nation

Great Depression questions resurface


Higher-yield bond funds run into trouble


Wall Street banks slashing workforces


Consumer confidence at 5-year low

3/26/2008
Caterpillar CEO Says U.S. Likely in Recession
- Reuters 3/26/2008
Paulson Looking at Financial Regulation
- Houston Chronicle 3/26/2008
Something's Got to Give in Tough Economic Times
- Miami Herald 3/26/2008
Rise in Debt Among Older People
- Financial Times 3/26/2008
Wall Street May Face $460 Bln in Losses
- Bloomberg 3/26/2008
FDIC Plans for Rise In Bank Failures
- Washington Post 3/26/2008
Durable Goods Slump Fuels Growth Fears
- Reuters 3/26/2008
New Home Sales Hit 13-Year Low in February
- Atlanta Journal Constitution 3/26/2008
Consumer Confidence Crumbling
- Chicago Tribune 3/26/2008
High Energy Costs Hit Cotton Producers
- Associated Press

U.S. Stocks Fall on Banking Outlook, Durable Goods Orders; Citigroup Falls U.S. stocks fell for the first time in four days on a worsening outlook for bank profits, an unexpected drop in durable goods orders and concern that financing for buyouts will collapse.

Motorola Plans to Split Into Two Public Companies Amid Pressure From Icahn Motorola Inc. plans to split into two companies next year amid pressure from billionaire investor Carl Icahn to break off the money-losing mobile-phone business that it pioneered 25 years ago.

Paulson Says Fed Should Broaden Bank Oversight, Including Primary Dealers Treasury Secretary Henry Paulson said the Federal Reserve should broaden its oversight to include the Wall Street investment firms that are borrowing from the central bank at the same interest rate as commercial banks.

Durable-Goods Orders in U.S. Unexpectedly Drop as Machinery Demand Slumps Orders for U.S. durable goods unexpectedly fell in February, led by a slump in demand for machinery, as the housing downturn and the prospect of a recession made companies hesitant to invest.

Crude Oil, Gasoline Surge After U.S. Inventories Climb Less Than Forecast Crude oil rose and gasoline surged to a record after a government report showed that supplies of the motor fuel dropped more than forecast as refiners shut units.

Ten Days That Changed Capitalism - David Wessel, Wall Street Journal
New Regulations Won't Deter Collapses - David Callaway, MarketWatch
Bear Fire Sale Leaves Owners Without Say - John Berlau, IBD
Ignore Bear Hysteria, Embrace Risk - Max King, Daily Telegraph
Where No Fed Has Gone Before - Peter Coy, BusinessWeek
Five Economists Weigh In on Ben Bernanke - The American
Fine Line Between Taxation and Tyranny - Richard Rahn, WashTimes
Fixing the Housing Crunch - Steven Ratner, Washington Post
How Not to Prevent Foreclosures - Editorial, New York Times
Underwriting Failure is Foolishness - Allan Meltzer, Wall Street Journal
Poverty Is An Essential Market Signal - John Tamny, RealClearMarkets
Fed Keeps Us Guessing With Bear Rescue - Amity Shlaes, Bloomberg

Fixing the Credit Crunch - Richard Berner, Morgan Stanley
The Price of the Fed's Help - Marc Chandler, Brown Brothers Harriman
Durable Goods Orders Weaker Than Expected - Bear Stearns
Implications of U.S. Participation in the IMF - U.S. Treasury

Off the Street
Taking the Free Out of Markets - Todd Harrison, Minyanville
The Bear Stearns Debacle - Russell Roberts, Cafe Hayek
Bear Stearns: Let the Litigation Begin - DealBook, NY Times
Who Is Surprised by Economic Data? - Barry Ritholtz, Big Picture

S Korea pension fund shuns US debt
By Song Jung-a in Seoul, Andrew Wood in Hong Kong and Michael MacKenzie in New York

Published: March 26 2008


The world's fifth-largest pension fund will no longer buy US Treasuries because yields are too low. The move signals what could be a big shift by financial institutions away from US government debt into higher-yielding assets.

South Korea's National Pension Service, which has $220bn in assets, said on Wednesday it wanted to broaden its range of overseas investments.

"It is difficult to buy more US Treasuries because the portion of our Treasury investment is already too big and Treasury yields have fallen a lot," said Kwag Dae-hwan, head of global investments at the NPS. "We need to diversify our portfolio away from US Treasuries and we find asset-backed securities and corporate debt more attractive because of wider credit spreads."

The yield on two-year US securities was 1.77 per cent in Asian trading on Wednesday, well below yields of 5 per cent in June. The rate recently fell below 1.5 per cent after several interest rate cuts by the US Federal Reserve.

Investors seeking safe haven assets have also driven Treasury yields sharply lower, with three-month Treasury bills recently near 0.5 per cent.

The NPS holds about $14bn of US government debt, a small amount compared with the overall $4,500bn Treasury market.

The pension fund has $24bn in overseas assets with $7.2bn in foreign equities. But it plans to diversify its portfolio and boost returns because it faces a shortfall in funds due to the country's ageing population.

A manager at the NPS's overseas investment team said: "The Fed continues to cut interest rates. We are still making profits from the Treasuries that we bought in the past but we think we'd better dispose of them and had better buy higher-yielding European-government debt."

Central banks from 16 Asian countries said last weekend at a meeting in Jakarta that they might invest more of their $1,000bn of official reserves in one another's sovereign bonds instead of US Treasuries, given the dollar's volatility.

"[The Korean decision] is symptomatic of the times and the problems that the US is facing," said David Cohen, head of Asian economic forecasting at Action Economics in Singapore.

"This is the sort of pressure the US is facing after running this big current account deficit for years. Lots of people have said it's unsustainable."

Copyright The Financial Times Limited 2008

Germans Fear Meltdown of Financial System


Deutsche Bank: Fed cuts won't solve US woes


Food stamp rolls at record high


Central bank liquidity moves help stocks higher


Equity Loans as Next Round in Credit Crisis

Reviving the R.T.C.

The Next Big Plan From The Bernanke Politburo

By Mike Whitney

28/03/08 "ICH' -- - The Federal Reserve is presently considering an emergency operation that is so risky it could send the dollar slip-sliding over the cliff. The story appeared in the Financial Times earlier this week and claimed that the Fed was examining the feasibility of buying back hundreds of billions of dollars of mortgage-backed securities (MBS) with public money to restore investor confidence and clear the struggling banks' balance sheets. The Fed, of course, denied the allegations, but the rumors abound. Currently the banking system is so clogged with exotic investments, for which there is no market, they can't perform their main task of providing credit to businesses and consumers. Bernanke's job is to clear the credit logjam so the broader economy can begin to grow again. So far, he has failed to achieve his objectives.

Since September, Bernanke has slashed interest rates by 3 percent and opened various auction facilities (Term Securities Lending Facility, the Term Auction Facility, the Primary Dealer Credit Facility, and the new Term Securities Lending Facility) which have made $400 billion available in low-interest loans to banks and non banks. He has also accepted a “wide range” of collateral for Fed repos including mortgage-backed securities and collateralized debt obligations (CDOs) which are worth considerably less than what the Fed is offering in exchange. But the Fed's injections of liquidity have not solved the basic problem which is the fall in housing prices and the persistent downgrading of mortgage-backed assets that investors refuse to buy at any price. In fact, the troubles are gradually getting worse and spreading to areas of the financial markets that were previously thought to be risk-free. The credit slowdown has also put additional pressure on hedge funds and other financial institutions forcing them to quickly deleverage to meet margin calls by dumping illiquid assets into a saturated market at fire-sale prices. This process has been dubbed the “great unwind”.

In the last six years, the mortgage-backed securities market has ballooned to a $4.5 trillion dollar industry. The investment banks are presently holding about $600 billion of these complex debt instruments. So far, the banks have written-down $125 billion in losses, but there's a lot more carnage to come. Goldman Sachs estimates that banks, brokerages and hedge funds will eventually sustain $460 billion in losses, three times greater than today. Even so, those figures are bound to increase as the housing market continues to deteriorate and capital is drained from the system.

The Fed has neither the resources nor the inclination to scoop up all the junk bonds the banks have on their books. Bernanke has already exposed about half of the Central Bank's balance sheet to credit risk. ($400 billion) But what is the alternative? If the Fed doesn't intervene, then many of country's largest investment banks will wind up like Bear Stearns; DOA. After all, Bear is not an isolated case; most of the banks are similarly leveraged at 25 or 35 to 1. They are also losing more and more capital each month from downgrades, and their main streams of revenue have been cut off. In fact, many of Wall Street's financial titans are technically insolvent already. The generosity of the Fed is the only thing that keeps them from bankruptcy.

It's generally accepted that the market for MBS will not improve until housing prices stabilize, but that's a long way off. Mortgages are the cornerstone upon which the multi-trillion dollar structured investment market rests, and that cornerstone is crumbling. If housing prices continue to fall, the MBS market will remain frozen and banks will fail; it is as simple as that. No one is going to purchase derivatives when the underlying asset is losing value. The Bush administration is pushing for a “rate freeze” and other clever ways to keep homeowners from defaulting on their mortgages, but its a hopeless cause. The clerical work needed to change these complex mortgages is already proving to be a daunting task. Plus, since 60 percent of these mortgages were securitized, it is nearly impossible to change the terms of the contracts without first getting investor approval; another fly in the ointment.

Also, the tentative plans to expand Fannie Mae and Freddie Mac, so they can absorb larger mortgages (up to $729,000 jumbo loans) is putting an enormous strain on the already-overextended GSE's. By attempting to reflate the housing bubble, the administration will only increase the rate of foreclosures and put the two mortgage behemoths at risk of default without any clear sign that it will help.

Yesterday's release of the Case/Schiller Index of the 20 largest cities in the country, shows that housing prices have slipped 10.7 percent in the last year while sales were down 23 percent year over year. That means that retail equity of US homes just took a $2 trillion haircut. Still, prices have a long way to go before they catch up to the 50 percent decline in sales from the peak in 2005. From this point on, prices should fall and fall fast; following a trajectory as steep as sales. Many economist expect housing prices to drop at least 30% (Paul Krugman and G-Sax) which means that $6 trillion will be shaved from aggregate home equity. In a slumping market, many homeowners will be better off just “walking away” from their mortgage instead of making payments on an asset of steadily decreasing value. Who wants to make monthly payments on a $500,000 mortgage when the current value of the house is $350,000? It's easier to pack the kids and vamoose then waste a lifetime as a mortgage slave. Besides, the Bush administration has no interest in helping the little guy stay out of foreclosure. Its a joke. All of the rescue plans are designed with just one purpose in mind; to save Wall Street and the banking establishment. Period.

There is a widespread belief that Bernanke has been proactive in addressing the turmoil in the credit markets. But it's not true. The Fed chairman has simply responded to events as they unfold. The collapse of Bears Stearns came just weeks after the SEC had checked the bank's reserves and decided that they had sufficient capital to weather the storm ahead. But they were wrong. The bank's capital ($17 billion) vanished in a matter of days after word got out that Bear was in trouble. The sudden run on the bank created a risk to other banks and brokerages that held derivatives contracts with Bear. Something had to be done; Rome was burning and Bernanke was the only man with a hose.

According to the UK Telegraph: “Bear Stearns had total (derivatives) positions of $13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP - at least in "notional" terms. The contracts were described as "swaps", "swaptions", "caps", "collars" and "floors". This heady edifice of new-fangled instruments was built on an asset base of $80bn at best.

On the other side of these contracts are banks, brokers, and hedge funds, linked in destiny by a nexus of interlocking claims. This is counterparty spaghetti. To make matters worse, Lehman Brothers, UBS, and Citigroup were all wobbling on the back foot as the hurricane hit.

"Twenty years ago the Fed would have let Bear Stearns go bust," said Willem Sels, a credit specialist at Dresdner Kleinwort. "Now it is too interlinked to fail." (Ambrose Evans-Pritchard, UK Telegraph)

Bernanke felt he had no choice but to step in and try to minimize the damage, but the outcome was disappointing. Bernanke and Secretary of the Treasury Henry Paulson worked out a deal with JP Morgan that committed $30 billion of taxpayer money, without congressional authority, to buy toxic mortgage-backed securities from a privately-owned business that was failing because of its own speculative bets on dodgy investments. Wow. The transaction turned out to be bad for shareholders, bad for employees and bad for taxpayers. It made the Federal Reserve look like the unelected and unaccountable oligarchy of bankster sharpies they really are. The only people who made out were the investors who were holding derivatives contracts that would have been worthless if Bear went toes up.

Still,the prospect of a system-wide derivatives meltdown left Bernanke with few good options, notwithstanding the moral hazard of bailing out a maxed-out, capital impaired investment bank that should have been fed to the wolves.

It is worth noting that derivatives contracts are a fairly recent addition to US financial markets. In 2000, derivatives trading accounted for less than $1 trillion. By 2006 that figure had mushroomed to over $500 trillion. And it all can be traced back to legislation that was passed during the Clinton administration.

“A milestone in the deregulation effort came in the fall of 2000, when a lame-duck session of Congress passed a little-noticed piece of legislation called the Commodity Futures Modernization Act. The bill effectively kept much of the market for derivatives and other exotic instruments off-limits to agencies that regulate more conventional assets like stocks, bonds and futures contracts.

Supported by Phil Gramm, then a Republican senator from Texas and chairman of the Senate Banking Committee, the legislation was a 262-page amendment to a far larger appropriations bill. It was signed into law by President Bill Clinton that December.” (“What Created this Monster” Nelson Schwartz, New York Times)

Now the investment giants are lashed together by trillions of dollars of unregulated counterparty swaps. If one bank fails, it could domino through the whole system. Bernanke now finds himself in the unenviable position of having to make sure that all the equity bubbles are properly inflated so the banking system doesn't suddenly come crashing to earth. Meanwhile, the tumbling housing market has paralyzed the corporate bond and structured investment markets which means that Bernanke's job will get much harder, if not impossible.

The Fed chief is now facing a number of brushfires that will have to be put out immediately. The first of these is short term lending rates, which have stubbornly ignored Bernanke's massive liquidity injections and continued to rise. The banks are increasingly afraid to lend to each other because they don't really know how much exposure the other banks have to risky MBS. This distrust has sent interbank lending rates soaring above the Fed funds rate to more than double in the past month alone. So far, the Fed's TAF hasn't helped to lower rates, which means that Bernanke will have to take more extreme measures to rev up bank lending again. That's why many Fed-watchers believe that Bernanke will ultimately coordinate a $500 billion to $1 trillion taxpayer-funded bailout to buy up all the MBSs from the banks so they can resume normal operations. Of course, any Fed-generated scheme will have to be dolled up with populous rhetoric so that welfare for banking tycoons looks like a selfless act of compassion for struggling homeowners. That shouldn't be a problem for the Bush public relations team.

The probable solution to the MBS mess is the restoration of the Resolution Trust Corp., which was created in 1989 to dispose of assets of insolvent savings and loan banks. The RTC would create a government-owned management company that would buy distressed MBS from banks and liquidate them via auction. The state would pay less than full-value for the bonds (The Fed currently pays 85% face-value on MBS) and then take a loss on their liquidation. “According to Joseph Stiglitz in his book, Towards a New Paradigm in Monetary Economics, the real reason behind the need of this company was to allow the US government to subsidize the banking sector in a way that wasn't very transparent and therefore avoid the possible resistance.”

The same strategy will be used again. Now that Bernanke's liquidity operations have flopped, we can expect that some RTC-type agency will be promoted as a prudent way to fix the mortgage securities market. The banks will get their bailout and the taxpayer will foot the bill.

The problem, however, is that the dollar is already falling against every other currency. (On Wednesday, the dollar plunged to $1.58 per euro, a new record) If Bernanke throws his support behind an RTC-type plan; it will be seen by foreign investors as a hyper-inflationary government bailout, which could precipitate a global sell-off of US debt and trigger a dollar crisis.

Reuters James Saft puts it like this:

“It is also hugely risky in terms of the Fed's obligation to maintain stable prices.... it could stoke inflation to levels intolerable to foreign creditors, provoking a sharp fall in the dollar as they sought safety elsewhere.” (Reuters)

Saft is right; foreign creditors will see it as an indication that the Fed has abandoned standard operating procedures so it can inflate its way out of a jam. According to Saft, the estimated price for this folly could be as high as $1 trillion dollars. Foreign investors would have no choice except to withdraw their funds from US markets and move them overseas. In fact, that appears to be happening already. According to the Wall Street Journal:

"While cash continues to pour into the U.S. from abroad, this flow has been slowing. In 2007, foreigners' net acquisition of long-term bonds and stocks in the U.S. was $596 billion, down from $722 billion in 2006, according to Treasury Department data. From July to December as jitters about securities linked to US subprime mortgages spread, net purchases were just $121 billion, a 65% decrease from the same period a year earlier. Americans, meanwhile, are investing more of their own money abroad.” ("A US Debt Reckoning" Wall Street Journal)

$121 billion does not even put a dent the $700 billion the US needs to pay its current account deficit. When foreign investment drops off, the currency weakens. Its no wonder the dollar is falling like a stone.

Bernanke should seriously consider the consequences of his next move before he acts. Once the dollar starts to free-fall, there's no telling where it will land.

http://www.informationclearinghouse.info/article19632.htm

THE MOGAMBO GURU
Your number's up
Like they were sucked into some sort of vast, sucking, gaping whirlpool of economic insanity, US families blew US$74 TRILLION in extra household debt in a mere eight years and that money ain't coming back, no matter that the Fed has just created $9.6 billion in extra cash to bail out its Wall Street pals. That's extra liquidity for you - and it is worse than poison.

CREDIT BUBBLE BULLETIN
Nationalization and dislocation
Many investors may believe the Fed and the administration have discovered the right antidote to the credit crisis - witness the recent stocks rally. Yet rule changes regarding Fannie Mae and Freddie Mac are nothing less than a transfer of massive prospective credit losses directly to the taxpayer and the US and global markets in reality had "dislocation" written all over them. (Mar 25, '08)
Doug Noland reviews the previous week's events each Monday.

THE BEAR'S LAIR
Wall St greed to feel the squeeze
The present unwinding of the US financial system, with serious and repeated losses still to come, will lead to fundamental change in the regulatory environment. Even as some new rules will prove as counterproductive as those they replace, the altered Wall Street that will emerge will be less exciting for the greedy - providing one of the few unequivocal benefits of the miserable recession ahead. - Martin Hutchinson (Mar 26, '08)

Bush proposes financial regulation overhaul

In an effort to deal with the problems highlighted by the current severe credit crisis, the Bush administration is proposing a sweeping overhaul of the way the nation's financial industry is regulated, giving major new powers to the Federal Reserve.

http://www.counterpunch.org/morici03242008.html


Time to Get Tough with China and the Banks

Digging Out of the Recession
By PETER MORICI

The U.S. economy is in recession with no end in sight. Falling housing prices are blamed, but the root causes are bad economic policies and lousy banking practices.

U.S. imports exceed exports by more than $700 billion, thanks mostly to expensive oil and lopsided commerce with China. To finance this gap, Americans sell bonds and other securities to foreigners, and Wall Street banks, like Citigroup and Merrill Lynch, recycle those funds to American consumers.

U.S. consumers borrow from mortgage companies, local banks and finance companies through mortgages, auto loans and credit cards. Those firms sell the loans to Wall Street banks, who bundle loans into bonds for sale to big fixed income investors. The Chinese government, Middle East royals and other foreign investors purchase huge sums of such U.S. interest bearing securities.

Last year, this scheme started coming unglued, because many homeowners borrowed more than their paychecks and home values could support. Loan officers encouraged home buyers to exaggerate incomes on mortgage applications and hired real estate appraisers that would inflate home values. Wall Street disguised bad loans in complex derivatives, instead of creating simple bonds, which fooled fixed income investors into believing they were buying securities backed by solid loans. Other rouses propagated like aggressive adjustable rate mortgages, and bogus credit default swaps alleged to make risks disappear.

When the worst bonds failed-those backed by subprime adjustable rate mortgages-the fixed income market closed to U.S. banks.

Banks don't have enough deposits to make all the loans the U.S. economy needs, because Americans increasingly by-pass banks, investing directly in mutual funds, retirement accounts and the like. Hence, banks must turn about half of their loans into bonds.

Now investors, ranging from U.S. insurance companies to foreign investors, are not willing to buy bonds from U.S. banks, and banks cannot make enough loans to credit-worthy homebuyers, consumers and businesses. Housing prices plummet, car sales sink, businesses can't invest, and the economy tanks into recession.

The Federal Reserve has cut interest rates and temporarily loaned banks $600 billion dollars, but those steps help little because the bond market is closed to banks.

Moreover, foreign investors are getting nervous about all the money they have loaned Americans to finance huge trade deficits. They are fleeing the dollar by moving cash into euro denominated securities, gold, oil, and other investments.

Fixing the trade deficit will require Americans to use less gasoline and balance commerce with China. Americans must either let the price of gas double to force conservation or accept tougher mileage standards cars. Fifty miles a gallon by 2020, instead of the 35 required by current law, is achievable, but that means more hybrids and lighter vehicles.

China subsidizes exports by selling its currency, the yuan, for dollars at artificially low values in foreign exchange markets, making Chinese goods artificially cheap at Wal-Mart. The U.S. government should tax dollar-yuan conversions at a rate equal to China's subsidy until China stops manipulating currency markets. That would reduce imports from, and increase exports to, China.

Finally, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are working to clean up the practices of mortgage brokers, loan officers and real estate appraisers but Wall Street banks must be willing to create simple bonds from mortgages and other loans that investors can understand and whose risks can be reasonably accessed. This is less profitable than the complex bonds and derivatives that were sold prior to the subprime meltdown.

Paulson and Bernanke should bring together the largest banks and fixed income investors, among insurance companies and the like, to lay out the requirements for such bonds and require the banks to stick to them.

Banks may resist, because plain vanilla mortgage underwriting doesn't pay outsized fees and bonuses they have been spoiled to expect from complex derivatives. However, Americans need the banks to make mortgages and other loans to get the economy back on track, and Bernanke and Paulson have the leverage to bring them to the table-the $600 billion the Federal Reserve is loaning banks to keep them afloat.

It's time to get realistic about using less oil and to get tough with China and the banks.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

A Picnic for Wall Street Insiders

The Money Launderers
By ALAN FARAGO


A week ago, on the day President Bush disavowed government intervention in financial markets, the Federal Reserve announced the fruit of its weekend labor: essentially guaranteeing hundreds of billions in toxic financial derivatives owned by banks. Money laundering has become the de facto standard of Federal Reserve policy.

The financial press has been filled with praise for the US government rescue of Bear Stearns, one of the worst offenders of reason and logic in the issuance of securitized mortgage debt. You have to turn to blogs to get a sense of the malfeasance.

Excerpt from the Hussman Funds' Weekly Market Comment (3/24/08) regarding the Fed's involvement on JPMorgan's (JPM) deal to buy out Bear Stearns (BSC):

In effect, the Federal Reserve decided last week to overstep its legal boundaries ­ going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion "non-recourse loan" to J.P. Morgan, secured only by the worst tranche of Bear Stearns' mortgage debt. But the bank ­ J.P. Morgan ­ was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, "we might as well put a hammer and sickle on the flag."

What is a "non-recourse loan"? Put simply, if the homeowners underlying that weak tranche of debt go into foreclosure, they will lose their homes, and the public will lose as well. But J.P. Morgan will not lose, nor will Bear Stearns' bondholders. This will be an outrageous outcome if it is allowed to stand.

... ­ it's a picnic for insiders, bought and paid for through the abuse of public funds by government officials too unprincipled even to recognize the abuse. The only good thing about this deal is that it buys time while principled ways of busting and restructuring it can be settled.

At a moment in history when the US treasury is hemorraging ($5000 per second in Iraq), the Bush White House is setting up to do something that can be understood only through a corrective lens that takes every sighting and reverses it: the party of laissez faire, free markets and minimal regulation supports the costliest nationalization of industry in US economic history.

Last week, in addition to rescuing Bear Stearns, the shadow financial system intervened in metals and commodity markets-- beating down anxiety indexes more sharply than at any time in the past half century. At the same time, the coordinated release of quarterly reports whose numbers ever so slightly "exceeded expectations" was enough justification--along with massive buying by US government operations that can only be faintly glimpsed--to send world stock markets back upwards.

Various metaphors have been used to describe US government intervention in the markets, like band-aid solutions to cure a gaping wound. In fact, the US government's attempts to calm investor anxiety at the observable financial disarray is like using chemical foam at the surface to kill a deep-burning coal fire.

There was more micromanaging of the news cycle by the money launderers this morning:

March 24 (Bloomberg) -- Forget lower interest rates. For the Federal Reserve to keep the financial markets from imploding it needs to buy troubled mortgage bonds from banks and securities firms, say the world's biggest Treasury investors.

Even after cutting rates by 3 percentage points since September, expanding the range of securities it accepts as collateral for loans and giving dealers access to its discount window, the Fed has been unable to promote confidence. The difference between what the government and banks pay for three- month loans doubled in the past month to 1.92 percentage points.

The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. While purchasing some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.

The US taxpayer is about to be force fed bad mortgage debt, that honest people didn't ask for-- created by Wall Street where incomes average $387,000 (NY Times, March 24, 2008 "With Economy Tied to Wall St. New York Braces for Job Cuts") and fostered by a culture of corruption rippling all the way down through mortgage brokers, appraisers, and local zoning officials for whom the hard currency of fraud is as likely Bahamian poker chips as dollars.

Poor America.

Alan Farago of Coral Gables, who writes about the environment and the politics of South Florida, can be reached at alanfarago@yahoo.com

http://www.counterpunch.org/vidal03262008.html
Bail Outs and the Shadow Banking System

So Much for the Self-Regulating Market
By MATT VIDAL


Last week the Federal Reserve ratcheted up its ongoing efforts to halt the burgeoning financial crisis. The Fed first engineered an injection of money into failing investment bank Bear Stearns, an 86-year-old Wall Street giant, and soon after facilitated a buyout of Bear by JP Morgan Chase.

The Fed's lending of money directly to an investment bank, an unprecedented move, follows on the heels of the US government having passed a $170 billion stimulus package last month. Once again, the state comes to the rescue of the so-called free market.

The market economy is celebrated as much for its supposed self-regulatory nature as for its theoretical associations with efficiency, innovation and freedom. But once one removes the ideological blinders of free market theory, the history of actual markets consistently demonstrates that far from being self-regulating, the crisis-prone capitalist market economy is, in all successful cases, deeply dependent on active and extensive state intervention.

One may look at the role of the state in establishing sustainable labor markets (via The Factory Acts) and securing international trade in 19th century England; in creating a stable international monetary system in the early 20th century, including the creation of the US Federal Reserve, the IMF and the World Bank; or in actively developing the highly successful export economies of the East Asian Tigers and China in the late 20th century. But the current crisis provides a case study in the fragility and utter dependence of the "free" market on the state.

The trouble for Bear, the first Wall Street bank to fail, began last summer when two of its hedge funds specializing in the subprime mortgage market collapsed. The highly-leveraged Bear, holding 30 times more debt than equity, was ultimately done in by an old-fashioned run on the bank.

To date, in addition to countless consumers who got duped into shady mortgages, the subprime mortgage debacle has taken out the titans Countrywide and Bear Stearns, the hedge fund Carlyle Capital, and other smaller mortgage companies.

The current crisis, however, is more than just dubious mortgage lending, bad bets, and a loss of market confidence. Behind the mortgage crisis is a lax regulatory environment and the development of a shadow banking system -- complex financial instruments created by the investment community and traded privately outside the existing regulatory structure.

More broadly, the bubbles currently being deflated in the property and credit markets stem ultimately from speculation, fueled to a significant extent by the loose monetary policy of the Fed since the late 1990s. The current liquidity crunch began as the bubbles finally began to burst, a situation worsened by the fact that key players are overleveraged banks.



Crisis is inherent to the capitalist market economy

The foundation underlying all these macroeconomic troubles is the real economy -- the production of goods and services. The troubles in the real economy, as opposed to those in the paper economy of the financial sector, are the same they have been since Marx first articulated a historically-based theory of the capitalist economy (while other economists continued to theorize the virtues of pristine free markets); namely, the contradiction of socialized production and private appropriation, and the tendencies generated by the anarchy of the market.

The anarchy of markets, populated by profit-seeking individuals and businesses in cut-throat competition, quickly generates strong pressures for regulatory agencies such as central banks (e.g., The Fed). Central banks and other regulatory agencies can only attempt to mitigate market swings and to stave off the worst effects of the tendencies of market anarchy, that is, to prevent episodes like the Great Depression that are the natural outcome of unregulated markets: speculation leading to bubbles and then to bank runs.

At an even more fundamental level are the problems resulting from the contradiction between socialized production and private appropriation. Although the productivity of American businesses is a function of the coordinated labor power of the workers, the output is privately appropriated by the owners and their organizations.

Private appropriation has generated extreme levels of income inequality; labor's share in US productivity gains has been declining for 30 years, and remuneration is again as completely out of sync with levels of effort and skill as it was in the early 20th century.

The concentration of wealth in the hands of a small percentage of the population, which generates serious problems for the purchasing power of regular workers, was arguably a fundamental cause of the economic imbalances leading up the stock market crash of 1929.

More generally, the problem of matching supply and demand, specifically, ensuring a high level of demand to meet the capacity for supply, is an enduring one for capitalist economies. It was temporarily dealt with by Keynesian demand management policies in the decades from WWII through the early 1970s. Since then, the institutional fix to problem of matching supply and demand has been an economy run on debt spending, including the trade deficit, overleveraged banks, and consumers spending on credit financed by a combination of the property and housing bubbles.

These contradictions and problems in the real economy are intimately related to the current crisis. According to Stephen S. Roach of Morgan Stanley Asia, "Over the past six years, income-short consumers made up for the weak increases in their paychecks by extracting equity from the housing bubble through cut-rate borrowing that was subsidized by the credit bubble."



The politics behind the economics

Although crises are inherent to capitalism, the current crisis, with its roots partly in the shadow banking system, is a natural outgrowth of neoliberal policies. Classical liberalism, the political doctrine of individual freedom and limited government, was the reigning political order until the unregulated market imploded in the US in the late 1920s, setting off a sustained worldwide depression.

From these ruins emerged both the New Deal and the Keynesian consensus, leading to broad agreement that the state has a fundamental role to play in the economy: establishing a safety net and actively managing the macroeconomy.

But as corporate profit rates were squeezed and international competition intensified in the early 1970s, the conditions were ripe for the free marketeers to stage a political comeback.

Thus was born neoliberalism, the post-Keynesian political project of reasserting -- as official state policy -- the doctrine that free trade and deregulation are the best ways to ensure economic efficiency, economic growth, and individual freedom.

Far from being a free and self-regulating market, today's neoliberal economy is one highly organized by the state and a variety of institutions, nearly all of which are explicitly structured in the interests of investors, against those of working families. So-called deregulation is more accurately called neoliberal regulation.

The same system generating the current financial crisis, as well as the manufacturing crisis in which 3.7 million jobs have been lost in the last seven years, is not any old free market. Rather it is neoliberal capitalism, which has, for its 30 year run, also generated rising inequality and labor market instability throughout the same period.

A saner policy environment would begin by rejecting the dogma of self-regulating markets, so that regulatory institutions may be fortified and public investment dramatically increased. The state should invest in badly-needed infrastructure and could develop an export oriented industrial policy to help rebalance the debt-driven economy.

Ultimately, to deal with the ongoing problems in the economy -- crisis, underfunded infrastructure and schools, inequality, poverty, etc. -- we need to reject the entire ideology of the free market. Freedom is more than a choice between dozens of kinds of TVs. Efficiency is important, but shrewd state investment and intervention can increase efficiencies, and there is an immense ground for potentially-satisfactory tradeoffs between the extremes of American-style hyper-capitalism and Soviet-style planned economy.

Matt Vidal is a Postdoctoral Fellow at the UCLA Institute for Research on Labor and Employment. He can be reached at mvidal@irle.ucla.edu.

Fed Offers $100 Billion More to Banks The Federal Reserve announced Friday it will auction an additional $100 billion in April to cash-strapped banks as it continues to combat the effects of a credit crisis. Fed Chairman Ben Bernanke will face questions about the Fed's recent moves when he testifies on Wednesday before the congressional Joint Economic Committee.

Is an International Financial Conspiracy Driving World Events? Was Alan Greenspan really as dumb as he looks in creating the late housing bubble that threatens to bring the entire Western debt-based economy crashing down? Was something as easy to foresee as this really the trigger for a meltdown that could destroy the world’s financial system? Or was it done, perhaps, "accidentally on purpose"?

Ben Bernanke Is My Kind of Guy by Lawrence Kudlow

Lighten Up!by Doug FabianThe U.S. dollar is down, down, down, and the greenback continues declining to unprecedented lows against the euro and other foreign currencies. Indeed, the dollar has fallen against most of the major currencies as traders increasingly expect the Federal Reserve to cut the target lending rate by as much as a half-percentage point in April to help revive flagging U.S. economic growth...

Turning The Corner: Has the Market Bottomed?by Nicholas A. VardyWhat a difference a week makes. It has been barely 10 days since the U.S. financial system stood on the brink of collapse and the Fed had to engineer the takeover of investment bank Bear Stearns. Yet since last Monday, the S&P 500 is up almost 6% from its lows and the S&P financials index has soared a breathtaking 18%.

An Opportunity to Fix What's Wrongby Doug FabianTuesday's dramatic rally in stocks brought renewed buying vigor back to Wall Street -- at least for one day. What happened yesterday was, in my opinion, just another day in a long line of big bear market rallies. No surprise here, as the nature of stocks is that they basically want to go higher...

Is an International Financial Conspiracy Driving World Events? - by Richard C. Cook - 2008-03-27 Bankers now control national monetary systems in their entirety.

Economic Cycles and Political Trends in the United States Part I- by Prof. Rodrigue Tremblay - 2008-03-28

Sweeping Changes in Paulson Plan Treasury Secretary Henry Paulson plans Monday to present a complete reworking of the U.S. regulatory system for finance. The blueprint, which would merge some agencies and broaden the authority of the Fed, is aimed at revamping a system of oversight built piecemeal since the Civil War. 10:09 p.m. • Q&A With Paulson | Executive Summary Text • Treasury Plan Garners Mixed Response • Treasury Backs Federal Insurance Regulation • Washington Wire: Obama Calls Plan 'Inadequate'

Bear Stearns Buyout Illegal - Grounds for Bush Impeachment! In direct violation of The Federal Reserve Act of 1913 and grounds for impeachment, George W Bush and Treasury Secretary Henry Paulson provided to JPMorgan a $30 billion bribe flowing from the US Treasury, via The Federal Reserve, ...

Articles of Impeachment? Bear Stearns Buyout Illegal? "On or about March 16th, 2008, George W. Bush, both personally and through his Treasury Secretary Henry Paulson, caused to be provided to JP Morgan/Chase a bribe(1) ultimately flowing from the United States Treasury in an amount not to ...

stupidity Market Ticker: Articles of Impeachment? Bear Stearns Buyout Illegal? I hate to give the guy more hits, but how the "expletive deleted" does he make that connection

Bear Stearns Buyout Illegal Re-yapping so Digg picks it up. On or about March 16th, 2008, George W. Bush, both personally and through his Treasury Secretary Henry Paulson, caused to be provided to JP Morgan/Chase a bribe(1) ultimately flowing from the United ...

GOP market analyst calls for Bush impeachment for Bear Stearns bribe giantstockticker.jpg Market Ticker Articles of Impeachment? Bear Stearns Buyout Illegal? "On or about March 16th, 2008, George W. Bush, both personally and through his Treasury Secretary Henry Paulson, caused to be provided to JP ...

Bush Bear Belongs Behind Bars A bear of little brain. Ilargi: We'll open tomorrow with the news that JPMorgan has quintupled its offer for Bear Stearns. Meanwhile, Here's Karl Denninger: Articles of Impeachment? Bear Stearns Buyout Illegal? "On or about March 16th, ...

Market Ticker: Articles of Impeachment? Bear Stearns Buyout Illegal? Market Ticker: Articles of Impeachment? Bear Stearns Buyout Illegal?

The "Non-recourse" Loan Did the Fed break the law by giving JPM the "non-recourse" loan? Some think so and I think so as well although that thought had never crossed my mind. From The Market Ticker: Articles of Impeachment? Bear Stearns Buyout Illegal? ...

Criminal collapse of Citibank and Morgan Stanley imminent

Despite the Hype, the Market Isn't Better - Michael Kahn, Barron's

New Plan Would Give Fed Wide-Ranging Power - Edmund Andrews, NYT
Not Yet Time for a Bail-Out of Banks - Editorial, Financial Times
Keeping U.S. Financial Markets Competitve - Paul Maidment, Forbes

Look for Dow 16,000 by 2009?
- Mark Hulbert, MarketWatch
Dollar Is Falling at the Right Time
- Martin Feldstein, Financial Times
A Perspective on Current Mkt. Conditions
- E. G. Corrigan, Goldman Sachs
For Americans, a Bit of the Swagger Is Gone
- Floyd Norris, NY Times

March 29 / 30, 2008
Slip Sliding Away

Bernanke's Next Big Bail Out Plan
By MIKE WHITNEY

The Federal Reserve is presently considering an emergency operation that is so risky it could send the dollar slip-sliding over the cliff. The story appeared in the Financial Times earlier this week and claimed that the Fed was examining the feasibility of buying back hundreds of billions of dollars of mortgage-backed securities (MBS) with public money to restore investor confidence and clear the struggling banks' balance sheets. The Fed, of course, denied the allegations, but the rumors abound. Currently the banking system is so clogged with exotic investments, for which there is no market, it can't perform its main task of providing credit to businesses and consumers. Bernanke's job is to clear the credit logjam so the broader economy can begin to grow again. So far, he has failed to achieve his objectives.

Since September, Bernanke has slashed interest rates by 3 per cent and opened various auction facilities (Term Securities Lending Facility, the Term Auction Facility, the Primary Dealer Credit Facility, and the new Term Securities Lending Facility) which have made $400 billion available in low-interest loans to banks and non banks. He has also accepted a "wide range" of collateral for Fed repos including mortgage-backed securities and collateralized debt obligations (CDOs) which are worth considerably less than what the Fed is offering in exchange. But the Fed's injections of liquidity have not solved the basic problem which is the fall in housing prices and the persistent downgrading of mortgage-backed assets that investors refuse to buy at any price. In fact, the troubles are gradually getting worse and spreading to areas of the financial markets that were previously thought to be risk-free. The credit slowdown has also put additional pressure on hedge funds and other financial institutions forcing them to quickly deleverage to meet margin calls by dumping illiquid assets into a saturated market at fire-sale prices. This process has been dubbed the "great unwind".

In the last six years, the mortgage-backed securities market has ballooned to a $4.5 trillion dollar industry. The investment banks are presently holding about $600 billion of these complex debt instruments. So far, the banks have written down $125 billion in losses, but there's a lot more carnage to come. Goldman Sachs estimates that banks, brokerages and hedge funds will eventually sustain $460 billion in losses, three times greater than today. Even so, those figures are bound to increase as the housing market continues to deteriorate and capital is drained from the system.

The Fed has neither the resources nor the inclination to scoop up all the junk bonds the banks have on their books. Bernanke has already exposed about half ($400 billion) of the Central Bank's balance sheet to credit risk. But what is the alternative? If the Fed doesn't intervene, then many of country's largest investment banks will wind up like Bear Stearns; DOA. After all, Bear is not an isolated case; most of the banks are similarly leveraged at 25 or 35 to 1. They are also losing more and more capital each month from downgrades, and their main streams of revenue have been cut off. In fact, many of Wall Street's financial titans are technically insolvent already. The Fed is the only force keeping them from bankruptcy.

Case in point: "Citigroup may write down $13.1 billion of assets including leveraged loans and collateralized debt obligations in the first quarter..... U.S. bank earnings overall will tumble 84 percent in the quarter....``We anticipate further downside to both estimates and stock prices'' because banks will be under pressure to mark down assets to reflect falling market indexes." (Bloomberg News)

It's generally accepted that the market for mortage-backed securities (MBS) will not improve until housing prices stabilize, but that's a long way off. Mortgages are the cornerstone upon which the multi-trillion dollar structured investment market rests. And that cornerstone is crumbling. If housing prices continue to fall, the MBS market will remain frozen and banks will fail; it is as simple as that. No one is going to purchase derivatives when the underlying asset is losing value. The Bush administration is pushing for a "rate freeze" and other clever ways to keep homeowners from defaulting on their mortgages. But it's a hopeless cause. The clerical work needed to change these complex mortgages is already proving to be a daunting task. Plus, since 60 percent of these mortgages were securitized, it is nearly impossible to change the terms of the contracts without first getting investor approval.

Also, the tentative plans to expand Fannie Mae and Freddie Mac, so they can absorb larger mortgages (up to $729,000 jumbo loans) is putting an enormous strain on the already-overextended Government Sponsored Enterprises (GSEs; financial services corporations created by the United States Congress. By attempting to reflate the housing bubble, the administration will only increase the rate of foreclosures and put the two mortgage behemoths at risk of default without any clear sign that it will revive the market.

Yesterday's release of the Case/Schiller Index of the 20 largest cities in the country, shows that housing prices have slipped 10.7 per cent in the last year while sales were down 23 per cent year over year. That means that retail equity of US homes just took a $2 trillion haircut. Still, prices have a long way to go before they catch up to the 50 percent decline in sales from the peak in 2005. From this point on, prices should fall and fall fast; following a trajectory as steep as sales. Many economists expect housing prices to drop at least 30 per cent, which means that $6 trillion will be shaved from aggregate home equity. In a slumping market, many homeowners will be better off just "walking away" from their mortgage instead of making payments on an asset of steadily decreasing value. Who wants to make monthly payments on a $500,000 mortgage when the current value of the house is $350,000? It's easier to pack the kids and vamoose then waste a lifetime as a mortgage slave. Besides, the Bush administration has no interest in helping the little guy stay out of foreclosure. It's a joke. All of the rescue plans are designed with just one purpose in mind; to save Wall Street and the banking establishment.

The Fed chairman has simply responded to events as they unfold. The collapse of Bears Stearns came just weeks after the SEC had checked the bank's reserves and decided that they had sufficient capital to weather the storm ahead. But they were wrong. The bank's capital ($17 billion) vanished in a matter of days after word got out that Bear was in trouble. The sudden run on the bank created a risk to other banks and brokerages that held derivatives contracts with Bear. Something had to be done; Rome was burning and Bernanke was the only man with a hose.

According to the UK Telegraph:

"Bear Stearns had total (derivatives) positions of $13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP - at least in 'notional' terms. The contracts were described as 'swaps', 'swaptions', 'caps', 'collars' and 'floors'. This heady edifice of new-fangled instruments was built on an asset base of $80bn at best.

"On the other side of these contracts are banks, brokers, and hedge funds, linked in destiny by a nexus of interlocking claims. This is counterparty spaghetti. To make matters worse, Lehman Brothers, UBS, and Citigroup were all wobbling on the back foot as the hurricane hit.

"' Twenty years ago the Fed would have let Bear Stearns go bust,' said Willem Sels, a credit specialist at Dresdner Kleinwort. 'Now it is too interlinked to fail.'"

Bernanke felt he had no choice but to step in and try to minimize the damage, but the outcome was disappointing. Bernanke and Secretary of the Treasury Henry Paulson worked out a deal with JP Morgan that committed $30 billion of taxpayer money, without congressional authority, to buy toxic mortgage-backed securities from a privately-owned business that was failing because of its own speculative bets on dodgy investments. The only people who made out were the investors who were holding derivatives contracts that would have been worthless if Bear went toes up.

Still,the prospect of a system-wide derivatives meltdown left Bernanke with few good options, notwithstanding the moral hazard of bailing out a maxed-out, capital impaired investment bank that should have been fed to the wolves.

It is worth noting that derivatives contracts are a fairly recent addition to US financial markets. In 2000, derivatives trading accounted for less than $1 trillion. By 2006 that figure had mushroomed to over $500 trillion. And it all can be traced back to legislation that was passed during the Clinton administration.

"A milestone in the deregulation effort came in the fall of 2000, when a lame-duck session of Congress passed a little-noticed piece of legislation called the Commodity Futures Modernization Act. The bill effectively kept much of the market for derivatives and other exotic instruments off-limits to agencies that regulate more conventional assets like stocks, bonds and futures contracts.
Supported by Phil Gramm, then a Republican senator from Texas and chairman of the Senate Banking Committee, the legislation was a 262-page amendment to a far larger appropriations bill. It was signed into law by President Bill Clinton that December." ("What Created this Monster" Nelson Schwartz, New York Times)

The Fed chief is now facing a number of brushfires that will have to be put out immediately. The first of these is short term lending rates, which have stubbornly ignored Bernanke's massive liquidity injections and continued to rise. The banks are increasingly afraid to lend to each other because they don't really know how much exposure the other banks have to risky MBS. This distrust has sent interbank lending rates soaring above the Fed funds rate to more than double in the past month alone. So far, the Fed's Term Auction Facility (TAF; under the Term Auction Facility (TAF), the Federal Reserve will auction term funds to depository institutions) hasn't helped to lower rates, which means that Bernanke will have to take more extreme measures to rev up bank lending again. That's why many Fed-watchers believe that Bernanke will ultimately coordinate a $500 billion to $1 trillion taxpayer-funded bailout to buy up all the MBSs from the banks so they can resume normal operations. Of course, any Fed-generated scheme will have to be dolled up with populous rhetoric so that welfare for banking tycoons looks like a selfless act of compassion for struggling homeowners. That shouldn't be a problem for the Bush public relations team.

The probable solution to the MBS mess is the restoration of the Resolution Trust Corp., which was created in 1989 to dispose of assets of insolvent savings and loan banks. The RTC would create a government-owned management company that would buy distressed MBS from banks and liquidate them via auction. The state would pay less than full-value for the bonds (The Fed currently pays 85 per cent face-value on MBS) and then take a loss on their liquidation. "According to Joseph Stiglitz in his book, Towards a New Paradigm in Monetary Economics, the real reason behind the need of this company was to allow the US government to subsidize the banking sector in a way that wasn't very transparent and therefore avoid the possible resistance."

The same strategy will be used again. Now that Bernanke's liquidity operations have flopped, we can expect that some RTC-type agency will be promoted as a prudent way to fix the mortgage securities market. The banks will get their bailout and the taxpayer will foot the bill.

The problem, however, is that the dollar is already falling against every other currency. (On Wednesday, the dollar fell to $1.58 per euro, a new record) If Bernanke throws his support behind an RTC-type plan; it will be seen by foreign investors as a hyper-inflationary government bailout, which could precipitate a global sell-off of US debt and trigger a dollar crisis.

Reuter's James Saft puts it like this:

"It is also hugely risky in terms of the Fed's obligation to maintain stable prices.... it could stoke inflation to levels intolerable to foreign creditors, provoking a sharp fall in the dollar as they sought safety elsewhere." (Reuters)

Saft is right; foreign creditors will see it as an indication that the Fed has abandoned standard operating procedures so it can inflate its way out of a jam. According to Saft, the estimated price could be as high as $1 trillion dollars. Foreign investors would have no choice except to withdraw their funds from US markets and move them overseas. In fact, that appears to be happening already. According to the Wall Street Journal:

"While cash continues to pour into the U.S. from abroad, this flow has been slowing. In 2007, foreigners' net acquisition of long-term bonds and stocks in the U.S. was $596 billion, down from $722 billion in 2006, according to Treasury Department data. From July to December as jitters about securities linked to US subprime mortgages spread, net purchases were just $121 billion, a 65% decrease from the same period a year earlier. Americans, meanwhile, are investing more of their own money abroad." ("A US Debt Reckoning" Wall Street Journal)

$121 billion does not even put a dent the $700 billion the US needs to pay its current account deficit. When foreign investment drops off, the currency weakens. It's no wonder the dollar is falling like a stone.

Mike Whitney can be reached at fergiewhitney@msn.com

http://bloomberg.com/apps/news?pid=2067000...id=awTVtVvJeSJQ



Wall Street May Face $460 Bln in Losses, Goldman Says (Update1)
By Zhao Yidi



March 25 (Bloomberg) -- Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said.

``There is light at the end of the tunnel, but it is still rather dim,'' Goldman analysts including New York-based Andrew Tilton said in a note to investors today. They estimated that residential mortgage losses will account for half the total, and commercial mortgages as much as 20 percent.

Earnings and share prices at U.S. financial institutions tumbled in the past year as fallout from the mortgage crisis spread to other markets. Demand for mortgage-backed securities evaporated, leading to the collapse of Bear Stearns Cos., once that market's largest underwriter, and a Federal Reserve-led bailout by JPMorgan Chase & Co. earlier this month.

Goldman's own share-price estimate was cut 3.7 percent to $210 at Fox-Pitt Kelton Cochran Caronia Waller. The research firm also reduced its profit estimates for the world's biggest securities firm for the rest of this year and all of 2009.

Merrill Lynch & Co. had its 2008 profit estimates cut by 45 percent at JPMorgan on concern the third-largest U.S. securities firm by market value may disclose further writedowns on subprime mortgages. Merrill may report a total of $5 billion in additional losses on collateralized debt obligations, so-called Alt-A mortgages and commercial mortgages, New York-based analyst Kenneth Worthington said.

Bank of America

Bank of America Corp., the second-biggest U.S. bank by assets, was downgraded to ``sell'' from ``neutral'' at Merrill Lynch. The company, based in Charlotte, North Carolina, also had its earnings-per-share estimate lowered to $3.30 from $3.50 in 2008 and to $4.00 from $4.40 in 2009, analysts including New York-based Edward Najarian wrote in a note to clients today.

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, had its share-price forecast cut 16 percent to $70 at Fox-Pitt. The brokerage's 2008 and 2009 profit estimates were also reduced.

Goldman said the $460 billion in credit losses it foresees may ``result in a substantial tightening in credit conditions as these institutions pull back on lending to preserve their reduced capital and to maintain statutory capital adequacy ratios.''

Credit-card loans, auto loans, commercial and industrial lending and non-financial corporate bonds make up the rest of the $460 billion in credit losses.

Goldman, which has lost 16 percent this year on the New York Stock Exchange, rose 75 cents to $179.63 in composite trading at 4:07 p.m. Merrill fell 53 cents to $47.85, Lehman declined $1.43 to $45.21 and Bank of America dropped $1.48 to $40.97.