"Tim Geithner's Black Hole"

By David M. Smick

The Washington Post

Updated: Tuesday, March 10, 2009

Pity Barack Obama's economic advisers.

The blogs are now demanding their scalps, and Treasury Secretary Tim Geithner and his colleagues face a nasty dilemma: There are no solutions to the banking crisis without extraordinary political and financial risks.

Thus, they have adopted a three-pronged approach, delay, delay, delay, in the hope that somebody comes up with a breakthrough.

Here's the problem: Today's true market value of the U.S. banks' toxic assets (that ugly stuff that needs to be removed from bank balance sheets before the economy can recover) amounts to between 5 and 30 cents on the dollar.

To remain solvent, however, the banks say they need a valuation of 50 to 60 cents on the dollar.

Translation: as much as another $2 trillion taxpayer bailout.

That kind of expensive solution could send the president's approval rating into a nose dive.

Consider: $2 trillion is about two-thirds of the tax revenue the federal government collects each year.

The logical alternative -- talk show hosts' solution du jour -- is to temporarily restructure or nationalize the banks and leave taxpayers alone.

Remove the toxic assets, replace management and cut the too-big-to-fail financial dinosaurs into smaller, nimbler entities.

Then reprivatize these smaller banks and let the recovery begin.

Oh, if it were that simple.

I suspect Obama's advisers would like nothing more than to dismantle an irresponsible firm such as Citigroup.

They are afraid to do so, for one reason: All the big banks are connected to a potentially lethal web of paper insurance instruments called credit default swaps.

These paper derivatives have become our financial system's new master.

The theory holds that dismantling a big bank could unravel this paper market, with catastrophic global financial consequences.

Or not.

Nobody knows, because the market for these unregulated financial derivatives, amounting potentially to over $40 trillion (by comparison, global gross domestic product is now not much more than $60 trillion), is the financial equivalent of uncharted waters.

Geithner has reason to be terrified.

He was part of the Henry Paulson-led team that underestimated the devastating global-contagion effect of the collapse of Lehman Brothers.

Geithner won't make the mistake of underestimation again.

Geithner also knows that the mood in Congress has changed.

Were a global financial brush fire to break out as a result of bank restructuring or nationalization, today's populist Congress might just let it burn.

Congressional anger is likely to intensify when policymakers realize that credit default swaps demand a stream of premium payments like a life insurance policy, not just a payment due at termination.

And recent signs indicate that firms such as Citigroup, in recycling their taxpayer bailout funding, may have helped other financial firms, including some in Europe, meet these payment obligations.

In addition, Geithner worries that because the troubled insurance giant American International Group (AIG) is a conduit for the banks' use of credit default swaps, a collapse of AIG (as an unintended consequence of dismantling the big banks) could be catastrophic.

AIG's more than 300 million terrified holders of insurance-related investments and pension funds, who have investments totaling $20 trillion (U.S. GDP is $14 trillion), could suddenly rush for redemptions -- the equivalent of a run on a bank.

Geithner would face a worldwide insurance collapse to accompany his global banking collapse.

Or again, maybe not.

Nobody knows.

Here's another likely Geithner fear -- that Congress forces the banks' bondholders to take a hit.

So far, only stockholders have lost out because of the banking crisis.

One reason for the fragility in the credit default swap market of late is that markets fear that bank bondholders, who today are protected even before U.S. taxpayers, could soon see their status change.

The worry is that if even bondholders are put at risk, U.S. and foreign investors alike would stop financing all corporate America.

The administration says that won't happen, but market participants believe (probably correctly) that this White House can't control Congress.

So our Treasury secretary has no choice but to talk of bank stress-testing and other tactics to buy time before the big bank bailout.

Notice that the president's budget already contains a contingency fund of up to $750 billion for a future bank bailout -- a politically shrewd number that roughly matches the size of the Paulson bailout.

The true cost is likely to be two or three times as much, unless some last-minute intellectual breakthrough -- a tax holiday for derivatives? -- arises.

The Obama team needs to remember that we got into this mess because of a lack of financial transparency.

It's time to tell the American people what the stock market already knows: that the path to recovery will probably be expensive and politically unpopular, perhaps explosively so.

This dire situation could take us all down, which is why Obama should name a proven, world-class problem-solver who is not from Wall Street as his bank workout czar.

James Baker, the former Republican secretary of state and Treasury secretary, comes to mind.

Other possibilities: former Democratic senators Bill Bradley or George Mitchell.

Perhaps the White House should name a team.

In the end, at least one thing is certain: Our present position is unsustainable.

The longer we delay fixing the banks, the faster the economy deleverages, the more credit dries up, the further the stock market falls, the higher the ultimate bank bailout price tag for the American taxpayer, and the more we risk falling into a financial black hole from which escape could take decades.

David M. Smick is a global financial strategist and the author, most recently, of "The World Is Curved: Hidden Dangers to the Global Economy."

"$1 trillion deficits seen for next 10 years"

By ANDREW TAYLOR, Associated Press Writer

20 MARCH 2009

WASHINGTON – President Barack Obama's budget would generate deficits averaging almost $1 trillion a year over the next decade, according to the latest congressional estimates, significantly worse than predicted by the White House just last month.

The Congressional Budget Office figures, obtained by The Associated Press Friday, predict Obama's budget will produce $9.3 trillion worth of red ink over 2010-2019.

That's $2.3 trillion worse than the White House predicted in its budget.

Worst of all, CBO says the deficit under Obama's policies would never go below 4 percent of the size of the economy, figures that economists agree are unsustainable.

By the end of the decade, the deficit would exceed 5 percent of gross domestic product, a dangerously high level.

The latest figures, even worse than expected by top Democrats, throw a major monkey wrench into efforts to enact Obama's budget, which promises universal health care for all and higher spending for domestic programs like education and research into renewable energy.

The dismal deficit figures, if they prove to be accurate, inevitably raise the prospect that Obama and his allies controlling Congress would have to consider raising taxes after the recession ends or paring back his agenda.

But without referencing the figures, Obama insisted on Friday that his agenda is still on track.

"What we will not cut are investments that will lead to real growth and prosperity over the long term," Obama said.

"That's why our budget makes a historic commitment to comprehensive health care reform."

"That's why it enhances America's competitiveness by reducing our dependence on foreign oil and building a clean energy economy."

Many Democrats were already uncomfortable with Obama's budget, which promises to cut the deficit to $533 billion in five years.

The CBO says the red ink for that year will total $672 billion.

The worsening economy is responsible for the even deeper fiscal mess inherited by Obama.

As an illustration, CBO says that the deficit for the current budget year, which began Oct. 1, will top $1.8 trillion, $93 billion more than foreseen by the White House.

The 2009 deficit, fueled by the $700 billion Wall Street bailout and diving tax revenues stemming from the worsening recession, is four times the previous $459 billion record set just last year.

The CBO's estimate for 2010 is worse as well, with a deficit of almost $1.4 trillion expected under administration policies, about $200 billion more than predicted by Obama.

By the end of the decade, the deficit under Obama's blueprint would go back up to $1.2 trillion.

Long-term deficit predictions have proven notoriously fickle — George W. Bush inherited flawed projections of a 10-year, $5.6 trillion surplus and instead produced record deficits — and if the economy outperforms CBO's expectations, the deficits could prove significantly smaller

Democrats in Congress are readying Obama's budget for preliminary votes next week, and they promise to cut the deficit in half within five years.

Democrats are likely to curb somewhat Obama's request for a 9 percent increase in non-defense agency budgets.

Obama's $3.6 trillion budget for the 2010 fiscal year beginning Oct. 1 contains ambitious programs to overhaul the U.S. health care system and initiate new "cap-and-trade" rules to combat global warming.

Both initiatives involve raising federal revenues sharply higher, but those dollars wouldn't be used to defray the burgeoning deficit.

Republicans say Obama's budget plan taxes, spends and borrows too much, and they've been sharply critical of his $787 billion economic stimulus measure and a just-passed $410 billion omnibus spending bill that awarded big increases to domestic agency budgets.

The administration says it inherited deficits totaling $9 trillion over the next decade and that its budget plan cuts $2 trillion from those deficits.

But most of those spending reductions come from reducing costs for the war in Iraq.

"Senate Republicans brake rush to tax AIG bonuses - Senate taking a longer look at taxing bonuses at AIG, other companies getting bailout money"

By LAURIE KELLMAN and STEPHEN OHLEMACHER, Associated Press

Last updated: 5:26 p.m., Friday, March 20, 2009

WASHINGTON -- Senate Republicans are drawing out a flap that has made the Obama administration squirm, applying the brakes to Democratic attempts to quickly tax away most of the bonuses at troubled insurance giant AIG and other bailed-out companies.

Sen. Jon Kyl, the Republicans' vote counter, blocked Democratic efforts Thursday evening to bring up the Senate version of the tax bill to recoup most of the $165 million paid out by AIG last weekend and other bonuses in 2009.

The House had swiftly approved its version of the bill earlier in the day.

By rushing, Kyl said, Democrats were letting populist outrage trump informed decision making in the Senate, which is supposed to be insulated from the pressures of public passion.

"I don't believe that Congress should rush to pass yet another piece of hastily crafted legislation in this very toxic atmosphere, at least without understanding the facts and the potential unintended consequences," Kyl said on the Senate floor.

"Frankly, I think that's how we got into the current mess."

Senate Democrats said they will try again next week to take up the tax bill and hope to complete it before April 4, when Congress leaves for a two-week spring break.

Combining the disparate House and Senate versions of the bill might have to wait until after the recess.

The Senate voted last month to block the AIG and other bonuses as part of the $787 billion stimulus bill, but Democrats then watered down the measure allowing them after Treasury Department officials warned that the move could trigger lawsuits against the government.

Last week, when Treasury Secretary Tim Geithner couldn't talk AIG out of paying the bonuses, Republicans were quick to blame Democrats, pointing out that they were in charge of Congress and the department when the decision was made about bonuses and the stimulus bill.

Democrats sought to regain the offensive -- and stem the political damage -- with promises to tax the bonuses away.

How to impose those taxes without running afoul of the Constitution or the law is a dispute that has Republicans urging a go-slow approach.

Doing so, of course, would drag out the Democratic discomfort over administration missteps and provide plenty of time for the GOP and others to question Geithner's performance.

Republican reluctance also appeals largely to a key constituency that traditionally finds regulation anathema: Wall Street.

Robert Willens, a corporate tax lawyer in New York, said the Senate bonus tax bill would still allow bailout beneficiaries to negotiate higher salaries with employees to compensate for lost bonuses.

The Senate bill authorizes the Treasury to issue regulations preventing firms from masking bonus payments as salaries, but it does not prevent firms from handing out raises.

"If the vast majority of bonuses become fixed salaries that would harm the institutions because they would have higher fixed costs," Willens said.

"What happens if the bank suffers through a poor year?"

"It has all these fixed obligations they have to meet."

"That's the beauty of the bonuses."

The House bill, which passed 328-93 and split Republicans almost evenly, would impose a 90 percent tax on bonuses paid after Dec. 31, 2008, by companies that have received more than $5 billion in government bailout money.

The tax would not affect workers with adjusted gross incomes below $250,000.

The Senate bill is much broader, affecting bonuses paid after Jan. 1, 2009, by firms receiving more than $100 million in government bailout money.

The Senate bill would impose a 35 percent excise tax on the companies that pay the bonuses, and a 35 percent excise tax on the employees who receive them.

Those taxes would be in addition to the 25 percent now withheld by the IRS on bonuses up to $1 million, and 35 percent withholding on bonuses above that.

Retention bonuses, like the ones paid to AIG employees, would be fully taxable.

The first $50,000 of other bonuses, such as performance bonuses, would be exempt.

The Senate bill would also cap deferred compensation for top executives at $1 million a year.

Deferred compensation above that amount would come with steep penalties.

More bills are on the way.

House Financial Services Committee Chairman Barney Frank, D-Mass., is holding a hearing next week on legislation that would apply to bailout recipients such as Fannie Mae and Freddie Mac and prohibit them from paying "any bonus to any employee, regardless of when any agreement to pay a bonus was entered into."

Republicans say there are enough problems or unknowns about the bonus-limiting bills to merit a closer look.

Imposing too high a tax rate, doing it retroactively and targeting a narrow group of people could violate several of the Constitution's prohibitions against government takings without due process, Republicans say.

Even House Ways and Means Committee Chairman Charles Rangel, D-N.Y., warned against using the tax code as a political weapon, but later backed off and supported the bill because, he said, that was the consensus and he saw no other way.

In practical terms, too, Senate Republican leaders do not yet know where members of their caucus stand on the measures, particularly the Senate bonus limits bill co-sponsored by Republican Sen. Charles Grassley of Iowa, GOP officials said Friday.

"I think the outrage is so obvious that we need to pass the legislation to send a clear message to corporate America that when your sucking the taxpayers, you don't do these outrageous things," Grassley said.

"When you're under water, you don't suck in more water because then you die."

Then there's the question of the sanctity of contracts.

If the government goes around canceling contracts like those calling for AIG bonuses, people might stop entering into contracts that call for using government bailout money designed to get credit flowing again to help spend the nation out of recession.

Some firms could be scared away from the bailout program, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable.

"Ultimately it will undermine the recovery efforts," Talbott said.

"It will have a chilling effect on ability to attract and retain employees," Talbott said.

------

The House bill is HR 1586, the Senate bill is S 651.

"FDIC: Banks actually lost $32.1B in 4Q - FDIC: Banks lost $32.1 billion in fourth quarter, worse than initial report of $26.2 billion"

By MARCY GORDON, Associated Press

Last updated: 3:55 p.m., Friday, March 20, 2009

WASHINGTON -- Federal regulators now say the nation's banks lost $32.1 billion in the final quarter of last year, even worse than the $26.2 billion originally reported last month.

The Federal Deposit Insurance Corp. said Friday that "significant" revisions it received from banks also lowered the industry's net income for all of last year to $10.2 billion from $16.1 billion.

Rising losses on loans and eroding values of assets bit into the revenue of U.S. banks and thrifts in late 2008, causing them to post the first quarterly deficit in 18 years.

The $26.2 billion loss originally reported for the October-December period already was the largest on 25 years of FDIC records.

It compared with a $575 million profit in the fourth quarter of 2007.

And the originally reported 2008 net income of $16.1 billion was the smallest annual profit since 1990, during the savings and loan crisis.

The FDIC's revised banking industry data also include "substantially higher" charges for an accounting item known as goodwill impairment, which reduced the overall net income for the quarter.

Goodwill is an asset on a company's balance sheets, which gives an idea of what it is worth beyond the tangible -- the added value from the potential for future success, for example.

The recession and stressed financial markets have reduced the goodwill value, for example, of companies that were acquired by others.

So the acquiring company has had to write down the asset and take a goodwill impairment charge on it.

The FDIC said last month that there were 252 banks in trouble at the end of 2008, up from 171 in the third quarter.

The agency expects U.S. bank failures to cost the deposit insurance fund more than $40 billion over the next four years.

Seventeen federally-insured institutions already have failed this year, extending a wave of collapses that began in 2008.

Last year's tally of 25 failed banks was more than in the previous five years combined, and up from only three in 2007.

The failures sliced the amount in the deposit insurance fund to $18.9 billion as of Dec. 31, the lowest level since 1993.

That compares with $52.4 billion a year earlier.

"Lawmakers offer new tools in financial fraud fight - Lawmakers eager to provide new funds, legal tools to agencies fighting financial fraud"

By MARCY GORDON, Associated Press

Last updated: 4:45 p.m., Friday, March 20, 2009

WASHINGTON -- Lawmakers appeared eager to provide fresh funding and possible new authority to law enforcement agencies pursuing fraud in the financial crisis, as government officials on Friday detailed efforts to counter rising abuses with already stretched staffs.

Mortgage fraud, which has spiked to record levels in the wake of the subprime loan collapse, is an especially intense area of focus by federal and state prosecutors.

Mortgage fraud investigations by the FBI have more than doubled to over 2,000 in the current fiscal year, from 881 three years ago.

The financial distress also has revealed a growing number of Ponzi investment schemes that were undetected in stronger economic times -- the highest-profile being the multibillion-dollar fraud by Bernard Madoff that went on for decades.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, cited "a justifiable level of anger" among a populace suffering through a recession over deficiencies in the regulatory system that allowed financial misconduct to flourish.

"We have to satisfy the American public that everything that can be done legitimately is being done," Frank said at a hearing of the panel.

Illinois Attorney General Lisa Madigan lashed out at federal banking regulators for what she called "an abdication of meaningful oversight" of mortgage lenders during the housing boom of recent years.

"Now we are all in the challenging position of pursuing the wrongdoers after the damage is done," Madigan said.

The Federal Reserve and Treasury Department have been blamed by a number of lawmakers and consumer advocates for lax oversight of the banking industry that was considered a factor in worsening the subprime mortgage crisis.

Frank asked officials from the Fed, Justice Department, Treasury Department, Securities and Exchange Commission and other agencies what they needed in terms of more funding or expanded legal powers "to enhance your ability to protect the public."

Rep. Bobby Scott, D-Va., noted that the FBI is conducting about 2,000 mortgage fraud investigations with only 240 agents.

Rita Glavin, acting assistant attorney general in the Justice Department's criminal division, said that office is "committed to adopting a proactive approach for better detecting and deterring fraud in the future."

Nationwide enforcement sweeps against mortgage fraud brought criminal charges against more than 400 defendants last year, she said.

The mortgage industry saw a record number of fraud incidents last year, with the number of such reports in mortgage loans rising 26 percent from 2007.

The recession has increased pressure on shady mortgage lenders and brokers -- as well as borrowers -- to lie on loan applications.

The FBI also has more than 566 ongoing corporate fraud investigations, including 43 cases related to the financial crisis, said FBI Deputy Director John Pistole.

The mortgage and corporate fraud caseload "is straining" the FBI's limited resources for pursuing white-collar crime, he said.

SEC Commissioner Elisse Walter said the agency's funding hasn't kept pace with a growing enforcement caseload involving securities and corporate fraud and a variety of investment violations.

The SEC, which has drawn heavy criticism for its failure to detect the Madoff fraud over years despite red flags raised to its staff, will have to make cuts in its operations without increased funding it is seeking from Congress, the agency's chairman has said.

Bart Chilton, a member of the Commodity Futures Trading Commission, said separately Friday that regulators are uncovering an increasing number of Ponzi schemes in what he called "rampant Ponzimonium."

The CFTC is investigating scores of individuals and entities linked to Ponzi schemes -- financial scams in which early investors are paid returns using money from later investors, Chilton said in remarks to a group of law students.

The Internal Revenue Service issued guidelines Tuesday that will allow tax relief and refunds for some Ponzi scheme victims on investment earnings that turned out to be nonexistent.

"Feds shut bank in Georgia; 18 failures this year - Regulators close FirstCity Bank in Georgia; 18th bank failure so far this year"

By MARCY GORDON, Associated Press

Last updated: 7:25 p.m., Friday, March 20, 2009

WASHINGTON -- Regulators on Friday shut down FirstCity Bank in Georgia, marking the 18th failure this year of a federally insured bank.

More are expected to succumb to the prolonged recession.

The Federal Deposit Insurance Corp. was appointed receiver of the failed bank, located in Stockbridge, Ga.

It had about $297 million in assets and $278 million in deposits as of March 18.

The FDIC said it will mail checks to depositors of FirstCity Bank for their insured funds on Monday morning.

Direct deposits from the federal government, such as Social Security and veterans' benefits payments, will be transferred to SunTrust Bank.

At the time of closing, FirstCity Bank had an estimated $778,000 in deposits that exceeded the insurance limits, the FDIC said.

Regular deposit accounts are insured up to $250,000.

The FDIC estimates that the cost to the deposit insurance fund from the closing of FirstCity Bank will be about $100 million.

The last bank closing, two weeks ago, also involved a Georgia bank, Freedom Bank of Georgia in Commerce, Ga.

As the economy sours, unemployment rises, home prices tumble and loan defaults soar, bank failures have cascaded and sapped billions out of the deposit insurance fund.

It now stands at its lowest level in nearly a quarter-century, $18.9 billion as of Dec. 31, compared with $52.4 billion at the end of 2007.

The FDIC expects that bank failures will cost the insurance fund around $65 billion through 2013.

The agency said Friday that the nation's banks and thrifts lost $32.1 billion in the final quarter of last year, even worse than the $26.2 billion originally reported last month.

"Significant" revisions also lowered the industry's net income for all of 2008 to $10.2 billion from $16.1 billion.

Rising losses on loans and eroding values of assets bit into the revenue of U.S. banks and thrifts in late 2008, causing them to post the first quarterly deficit in 18 years.

The $26.2 billion loss originally reported for the October-December period already was the largest in 25 years of FDIC records.

It compared with a $575 million profit in the fourth quarter of 2007.

And the originally reported 2008 net income of $16.1 billion was the smallest annual profit since 1990, during the savings and loan crisis.

The 18 bank collapses this year follow 25 failures in 2008, which included two of the biggest savings and loans, Washington Mutual Inc. and IndyMac Bank.

Last year's total was more than in the previous five years combined and up from only three failures in 2007.

The FDIC had 252 banks and thrifts on its list of troubled institutions at the end of 2008, up from 171 in the third quarter.

The agency recently raised the fees that U.S. banks and thrifts pay, and levied a hefty emergency premium in a bid to collect $27 billion this year to replenish the insurance fund.

President Barack Obama has outlined a federal budget proposal that calls for spending up to $750 billion for additional financial industry rescue efforts atop the $700 billion that Congress has already approved.

Citigroup Inc. and Bank of America Corp., for example, have had to go back to the government well for more cash amid continuing losses from toxic assets and soured consumer loans.

They each have received $45 billion in bailout money, and the government recently agreed to exchange up to $25 billion of Citigroup's portion for as much as a 36 percent equity stake in the struggling banking giant.

"Obama makes pitch for budget priorities"

By LOLITA C. BALDOR, Associated Press Writer

21 MARCH 2009

WASHINGTON – President Barack Obama says that while the details may change, any budget passed by Congress must cut the deficit, reform health care, invest in education and reduce U.S. dependence on foreign oil.

After a week dominated by outrage over enormous corporate bonuses at bailed-out companies, Obama used his weekly radio and Internet address to turn the focus back on his budget proposal and getting it through Congress.

But even as he outlined his four key requirements for a spending plan that would top $3.6 trillion, there was growing unease on Capitol Hill over a budget that congressional auditors say will generate $9.3 trillion in red ink over the next decade.

"I realize there are those who say these plans are too ambitious to enact," Obama said.

"To that I say that the challenges we face are too large to ignore."

"I didn't come here to pass on our problems to the next president or the next generation — I came here to solve them."

Republicans, however, slammed Obama's budget as a breathtaking spending spree.

As states and families are struggling to cut spending, the president's budget "spends too much, taxes too much and borrows too much," said Gov. Haley Barbour of Mississippi, in the weekly Republican address.

Obama spent two days in California this week taking his sales pitch directly to the people.

The campaign took him from town-hall meetings to Jay Leno's "The Tonight Show" set in an effort to garner support for a budget that will pay for his key priorities.

At the same time, he is promising to cut the deficit in half by the end of his four-year term.

His message, however, was drowned out for much of the week by revelations that American International Group Inc. paid out $165 million in bonuses to employees, including to traders in the financial unit that nearly caused the insurance giant's collapse.

The public outrage was followed by congressional efforts to impose punitive taxes on those payouts.

In his Saturday message, Obama contended that ordinary Americans are more concerned about having a paycheck and being able to pay their college or medical bills more than they are about "the news of the day in Washington."

And those are the concerns, he said, that he addresses in his budget, calling it an economic blueprint for the future.

It is, he said, "a vision of America where growth is not based on real estate bubbles or over-leveraged banks, but on a firm foundation of investments in energy, education and health care that will lead to a real and lasting prosperity."

With a nod to Capitol Hill, he said the specific dollar amounts in his budget plan will likely change, but in the end his four priorities must be met.

Those are plans to boost investments in clean energy technologies, including wind and solar power; increased funding for childhood education programs, affordable college costs and higher standards for schools; health care reform that will lower costs, including Medicare and Medicaid; and a scrutiny on domestic spending that will lead to cuts in the deficit.

"The American people sent us here to get things done, and at this moment of great challenge, they are watching and waiting for us to lead," Obama said.

"Let's show them that we are equal to the task before us."
___

On the Net:

Obama address: http://www.whitehouse.gov

THE TIMMY AND THE "POODLE", BEN BERNANKE, ARE EXCEEDING THEIR LAWFUL AUTHORITY, JURISDICTION AND DISCRETION TO DO AN END RUN AROUND THE UNITED STATES CONGRESS IN TERMS OF GETTING MONEY TO BAIL OUT ALL THEIR RICH BUDDIES AND PALS ....

AND AMERICA CHEERS THEM ON IN TRAMPLING ALL OVER OUR CONSTITUTION AND FORM OF GOVERNMENT, WHICH HAS CONTROL OF GOVERNMENT EXPENDITURES IN THE HANDS OF CONGRESS, NOT THE TIMMY OR THE "POODLE" ...

And so ...

"Toxic asset plan expected to be unveiled soon"

By MARTIN CRUTSINGER, AP Economics Writer

21 MARCH 2009

WASHINGTON – Treasury Secretary Timothy Geithner is putting the finishing touches on a plan to get toxic assets off the books of the country's struggling banks, according to administration and industry officials.

The plan could be announced as soon as Monday, they said.

Geithner's proposal will employ the resources of the Federal Reserve and the Federal Deposit Insurance Corp. to make the government's $700 billion financial rescue fund go further, these officials said Friday.

The Fed and the FDIC are being tapped for support because the prospects for getting additional money from Congress for the bailout effort have dimmed significantly with this week's uproar over millions of dollars in bonuses provided to troubled insurance giant American International Group Inc.

The officials, who spoke on condition of anonymity because they were not authorized to speak publicly about Geithner's plan, said it will have three major parts.

One part will be an effort Geithner spoke about last month which would be the creation of a public-private partnership to back purchases of bad assets by private investors.

A second part of the plan will expand a recently launched program being run by the Federal Reserve called the Term Asset-Backed Securities Loan Facility, or TALF.

That program is providing loans for investors to buy assets backed by consumer debt in an effort to make it easier for consumers to get auto, student and credit card loans.

Under Geithner's proposal, this program would be expanded to support investors' purchases of banks' toxic assets.

The third part of the Geithner plan would utilize the resources of the FDIC, the agency that guarantees bank deposits, to purchase toxic assets.

When Geithner announced the administration's overhaul of the troubled financial rescue program on Feb. 10, it was widely panned by investors with the Dow Jones industrial average plunging by 380 points.

Geithner's new plan on toxic assets would attack what many analysts see as the major failing of the bank rescue effort so far, the failure to rid banks' of more than $1 trillion in bad loans and other troubled assets weighing down banks' books.

As a result, banks have been unable to shake off the effects of the worst financial crisis to hit the country in seven decades.

While the administration included a placeholder in its budget request last month for as much as an additional $750 billion in rescue funds, more than doubling the current commitment, the uproar over the AIG bonuses has underscored the dim prospects that Congress would vote to bolster the size of the current $700 billion fund.

The effort to deal with toxic assets is the latest in a string of initiatives the administration has put forward to deal with a severe financial crisis that has crimped consumer and business borrowing and deepened a recession that is already the longest in a quarter-century.

The administration's other programs include efforts to deal with mortgage foreclosures, bolster lending to small businesses, unfreeze the markets that support credit card, student loan and auto debt and begin so-called stress tests of the country's 19 largest banks to make sure they have sufficient reserves to withstand an even more severe recession.

A major unknown is whether the new plan to deal with toxic assets will succeed in attracting private investors to begin buying banks' bad assets in markets that essentially have dried up under the weight of billions of dollars in losses.

Hedge funds and other big investors may be even more leery of accepting the government's enticements to purchase these assets for fear of the imposition of tighter government restraints in such areas as executive compensation in the wake of the uproar over AIG.

In addition to unveiling his plan for toxic assets, Geithner is also expected to put forward next week the administration's proposals to overhaul the government's current financial regulatory structure.

President Barack Obama said this week that this plan will include a proposal to give the administration expanded authority to take control of major troubled institutions that are deemed too big to fail because their collapse would pose a risk to the entire financial system.

"Activists protest bonuses at AIG executives' homes"

By JOHN CHRISTOFFERSEN, Associated Press Writer

21 MARCH 2009

FAIRFIELD, Conn. – A busload of activists — outnumbered 2-to-1 by reporters and photographers — are paying visits to the homes of American International Group Inc. executives in Connecticut to protest tens of millions in bonuses awarded by the company.

About 40 protesters parked at a cul-de-sac Saturday afternoon and walked to the Fairfield home of Douglas Polling.

They were met on the curb by two security guards, and one activist read a letter detailing the financial struggles that many Connecticut residents have faced.

The group then left the note in Polling's mailbox.

Polling already agreed to forfeit his bonus, but the protesters want AIG executives to do more to help working families.

AIG has received more than $182 billion in federal aid.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

NEW HAVEN, Conn. (AP) — The attorney general of Connecticut said Saturday that he is asking American International Group Inc. why documents appear to show the company paid $53 million more in bonuses to its financial products division than previously reported.

Documents turned over late Friday show AIG paid $218 million in bonuses last weekend, higher than the $165 million that was previously disclosed, said the office of Attorney General Richard Blumenthal, who had issued a subpoena.

Bonuses were "showered like confetti" on AIG employees, Blumenthal said.

AIG had previously disclosed that the company was contractually obligated to pay a total of about $165 million of previously awarded "retention pay" to employees in the financial products unit, based in Connecticut, by March 15.

It said another $55 million in retention pay had already been distributed to about 400 AIG Financial Products employees.

That total of $220 million is about $2 million more than the figure disclosed Friday, and Blumenthal said he was seeking clarification from the company on whether the new papers differ from what was previously reported.

"Unless the number can be explained, it will undercut any lingering rationale the company may have for these unjustified payments," Blumenthal told The Associated Press on Saturday.

AIG spokesman Mark Herr declined to comment.

The newly released documents show that the nation's largest insurer, which has received $182.5 billion in federal money to keep it from failing, paid bonuses of more than $1 million to 73 employees, with five of them getting bonuses more than $4 million, Blumenthal said.

The company did not release the names of the employees, citing worker safety.

"The initial number was so outrageous that it will further fuel the justified anger and revulsion that people feel," Blumenthal said.

"It simply shows how these people should been shoved out the door, not showered with cash."

News of the bonuses last week ignited a firestorm, and even some death threats.

Congress began action on a bill that would tax 90 percent of the bonuses, and the company's chief executive urged anyone who received more than $100,000 to return at least half.

Activists are expected to rally at AIG's Wilton office on Saturday to protest the bonuses.

A busload are also touring some AIG executives' homes in Connecticut, organizers said.

IT SOUNDS LIKE TIMMY GEITHNER IS TURNING INTO OBAMA'S DONALD RUMSFELD ...

"Obama defends Geithner, focuses on passing budget"

22 MARCH 2009

WASHINGTON – Amid the continuing backlash over AIG bonuses, President Barack Obama is defending his embattled treasury secretary and touting his ambitious $3.6 trillion budget proposal as a boon for ordinary Americans.

And, as early as Monday, the administration is expected to roll out a plan to rid banks of their toxic assets and speed the flow of loans.

Some industry officials familiar with the details said they expected the approach would try to remove as much as $1 trillion from banks' books.

Obama used his weekly radio and Internet address to turn the focus back to his budget proposal, calling it "a firm foundation of investments in energy, education and health care that will lead to a real and lasting prosperity."

He plans a network television interview airing Sunday and a prime-time news conference Tuesday to continue bolstering his case.

The disclosure that American International Group Inc. paid out $165 million in bonuses to employees, including to traders in the financial unit that nearly collapsed the insurer, has dominated the news this week.

It has left the Obama administration on the defensive and seeking to refocus attention.

In the interview with CBS' "60 Minutes," Obama made clear he was standing behind beleaguered Treasury Secretary Timothy Geithner, who was roundly criticized over the bonus flap and steps to revive the economy.

Obama said that if Geithner offered his resignation, the answer would be, "Sorry buddy, you've still got the job."

CBS released excerpts Saturday.

Obama noted that corporate executives would better understand the public's outrage over bonuses if they ventured out of New York and spent time in Iowa or Arkansas.

There, he said, people are thrilled to be making $75,000 a year with no bonuses.

Still, Obama said ordinary Americans are more concerned about having a paycheck and being able to pay college or medical bills than they are about "the news of the day in Washington."

Those are the concerns, he said, that he addresses in his budget, which he calls an economic blueprint for the future.

It is "a vision of America where growth is not based on real estate bubbles or over-leveraged banks, but on a firm foundation of investments in energy, education and health care that will lead to a real and lasting prosperity," Obama said Saturday.

Being heard above the din may prove difficult.

Lawmakers are wrangling over taxing people who got big bonuses and worrying the president's budget could generate $9.3 trillion in red ink over the next decade.

"U.S. shoppers likely to remain frugal: report"

Mon Mar 23, 12:25 am ET

SAN FRANCISCO (Reuters) – Shoppers who have cut back on purchases in the grim U.S. economy are likely to continue their conservative shopping habits even if the economy improves, according to a new study.

That signals continued bad news for retailers, who have been struggling to respond to a dramatic cutback in spending as consumers have opened their wallets only for essential items, while cutting back on extraneous purchases.

According to a report from retail consultancy Retail Forward and PricewaterhouseCoopers, current shopping behavior "will have plenty of opportunity to get entrenched."

The report, which estimates retail sales growth to be flat this year, found that three-quarters of respondents to a monthly survey of 4,000 consumers said they had shifted their shopping behaviors because of the economy.

Most said they were making do with less, or going without some favorite items.

"The habits learned during this economic crisis have the potential to permanently alter the mind-set of consumers," the report said.

"The vast majority of shoppers who are changing their near-term shopping behaviors say they plan to continue them as the economy improves."

In the past year, U.S. consumers have reeled from job losses, tighter credit and a weak housing market, which have forced them to save money, often by cutting back on nice-to-have items or trading down to lower-cost chains.

To combat the consumer malaise, smart retailers will focus on downsizing, the report said, as adding stores to an already crowded retail landscape is out of vogue.

It cited smaller initiatives to build shopping buzz, such as limited editions of products or having existing stores target local markets.

The report also forecast that retailers will increasingly focus on private label brands to lure cost-conscious shoppers, while adding complementary categories of goods to their stores to make "one-stop" shops for consumers.

While warehouse clubs, like Costco Wholesale Corp, and supercenters, like Wal-Mart Stores Inc, are expected to fare the best in the weak environment in 2009, discount department stores and supermarkets will be the weakest, the report warned.

Sales of apparel, though expected to rebound in 2010, will be the hardest hit and slowest to recover, according to the report.

(Reporting by Alexandria Sage; Editing by Gary Hill)

"Fed should play 'central role' to prevent crises - Treasury, Fed say central bank should play key role in preventing financial crises"

By JEANNINE AVERSA, Associated Press

Last updated: 5:55 p.m., Monday, March 23, 2009

WASHINGTON -- The Federal Reserve should play an expanded, "central role" in preventing future financial crises like the one now gripping the country, the U.S. central bank and the Treasury Department said Monday.

The joint statement from the agencies now leading the United States' efforts to end the crisis and lift the country out of recession came as the Obama administration and Congress seek to overhaul the nation's financial structure to avoid future meltdowns.

The Fed -- already the lender of last resort to troubled financial companies -- could end up with a much larger role once a regulatory revamp is finalized.

Congress created the Fed in 1913 in large part in response to the periodic panics and crises that plagued the U.S. financial system in the 19th and 20th centuries.

"For these reasons, it is natural and desirable that the Federal Reserve should play a central role, in cooperation with the Department of the Treasury and other agencies, in preventing and managing financial crises," according to the joint statement.

The Fed will work closely with Treasury and other agencies to improve the functioning of credit markets and help prevent the failure of huge financial institutions that could cause major damage to the economy, the statement said.

Both Treasury and the Fed once again called on Congress to set up a system that would allow a failure of a single major financial institution to be handled in such a way to minimize fallout to the national economy -- similar to how the Federal Deposit Insurance Corp. deals with bank failures.

Looking ahead, the Treasury said it will seek to "liquidate" or "remove" from the Federal Reserve's balance sheet billions of dollars worth of risky assets it now holds because of last year's bailout of Bear Stearns and American International Group.

It didn't provide details on the timing of such a move, other than to say it would be in the "longer term."

"Bank rescue: Wall St. likes it, but will it work? - Wall Street likes Obama plan for toxic assets, but key details are left unaddressed"

By STEVENSON JACOBS and DANIEL WAGNER, Associated Press

Last updated: 6:16 p.m., Monday, March 23, 2009

NEW YORK -- Wall Street gave the new bank rescue plan an enthusiastic embrace.

Whether it will actually work -- restoring solvency to the banks, restarting lending and ultimately lifting the economy out of recession -- is far less clear.

One big question is a conundrum that stumped the last administration: How to determine a price for the thicket of mortgage-related securities so banks can move them off their books and then ramp up lending to consumers and businesses.

And even more critical to investors: Will the boiling anger over Wall Street bailouts and bonuses lead Congress to impose harsh restrictions on would-be buyers of toxic assets, making them shy away from doing a deal?

The new program unveiled Monday by Treasury Secretary Timothy Geithner aims to entice investors to buy up to a half-trillion dollars of bad assets, to shore up banks' capital and unlock credit.

The program could later be expanded to $1 trillion.

Among the investors who endorsed it was Bill Gross, a respected bond manager and founder of the Pimco investment firm.

Gross said Pimco, which has more than $840 billion in client assets, would start buying troubled assets possibly within 45 days.

Another well-known investor, billionaire Wilbur Ross Jr., a specialist in distressed assets, said he plans to invest $1 billion in the plan.

He said it would help banks earn the "maximum rational price" for their hard-to-value assets.

"It's a better way than to keep pumping equity in," Ross told The Associated Press.

Wall Street responded with its best day of 2009, sending the Dow Jones industrial average soaring almost 500 points, a rally of almost 7 percent.

Other investors are more leery.

They first want to see guarantees from Congress, well attuned to the epic backlash against bonuses paid out at bailed-out financial firms, that it won't punish investors who buy bank assets and later turn a profit.

"There's a lot of fingers flying around, and I'm very worried about having a high profile right now," said Steven Persky, a Los Angeles hedge fund manager who has already invested $400 billion in toxic mortgage-backed securities.

Before investing any new money in toxic assets with government help, Persky said he'd want an ironclad contract guaranteeing that his profits or compensation wouldn't be threatened later.

He added: "The level of animosity is so high."

So are the stakes.

The Bush administration abandoned its own toxic-asset purchase plan last fall because of the complexity of valuing the securities.

It had proposed creating a reverse auction in which banks burdened with bad loans would accept the lowest-price bids for the assets.

By contrast, the Obama administration will try to lure hedge funds, private equity firms and other big investors to buy assets by offering them low-interest loans drawn from the $700 billion financial bailout and backed by the Federal Deposit Insurance Corp. and the Federal Reserve.

The new plan leaves it up to investors to figure out a price.

The value of banks' mortgage-related securities imploded last year after the housing crisis worsened and foreclosures soared.

The government's goal is to get investors to pay a price at a financial sweet spot: high enough that banks will sell -- but low enough that the government won't absorb too much risk in financing the deals.

But the new plan offers few specifics on how that will be done.

"The original plan foundered on the issue of how to price the assets, and this new plan doesn't fundamentally solve that problem," said William Poole, former head of the Federal Reserve Bank of St. Louis.

"Pricing these assets is still going to be very complicated."

That's because not all toxic assets were created equal.

Some are simply home loans offered by banks that have since soured as people fell behind on their mortgage bills.

The more pernicious assets are those backed by home loans that were chopped up and packaged into securities and sold to investors across the globe.

Putting a value on those securities means going through each one and figuring out the status of the loan.

That process will be time consuming and expensive, experts say.

Eugene Ludwig, a former comptroller of the currency, said it was crucial that the Treasury Department establish the private sector partnerships quickly "so this thing doesn't drag on for another six months."

Ludwig, now chief executive of Promontory Financial Group, noted that the $700 billion bailout fund is mostly exhausted, meaning that the Treasury and Federal Reserve must make best use of the remaining money and whatever private money they attract.

"It's like Hamburger Helper," he said.

"It's a way to stretch the hamburger as much as possible."

But success in attracting that private cash will depend on soothing investors who have been spooked by the uproar over AIG's bonuses and other government interventions they see as heavy-handed.

Bill Seidman, a former regulator who ran the government bailout during the savings and loan crisis, said Congress' perceived anti-Wall Street sentiment will "almost certainly keep some investors out" of the plan.

Investors "are going to want assurances" that their money will be safe, Seidman said.

Addressing those concerns Monday in an interview with CNBC, Geithner vowed to work with Congress to do what's necessary to make sure investors step forward and buy the banks' bad assets.

"For us to get the economy back on track, we're going to need investors to take risks," he said.

------

AP Business Writer Daniel Wagner reported from Washington.

"Cuomo says 15 AIG execs agree to return bonuses - NY Attorney General Andrew Cuomo says 15 AIG execs agree to return $30 million in bonuses"

By SARA LEPRO, Associated Press

Last updated: 7:25 p.m., Monday, March 23, 2009

NEW YORK -- New York Attorney General Andrew Cuomo said Monday that 15 employees who received some of the largest bonuses from American International Group Inc. have agreed to return the money in full.

The commitments amount to more than $30 million of the $165 million in bonuses awarded earlier this month by the troubled insurer.

Cuomo said he still hopes that more AIG employees will return their bonuses.

He expects his office will be able to recoup about $80 million of the money the insurer paid out -- roughly the amount of bonuses paid to American employees.

AIG Chief Executive Edward Liddy told Congress last week that some of the employees were willing to give the money back.

AIG has come under heavy criticism because the bonuses were given to employees after the company received $170 billion in government bailout money.

Cuomo had sought the names of the employees who received bonuses from Liddy through a subpoena.

"I applaud the employees who are returning the bonuses," Cuomo said during a conference call with reporters.

"I think they are being responsive to the American people."

Cuomo said 9 of the 10 people receiving the largest awards have agreed to return their bonus.

Additionally, 15 of the top 20 bonus recipients have consented to returning their money.

Cuomo said some have refused to return the money, while others are still considering it.

"We are deeply gratified that a vast majority of Financial Products' senior leadership have expressed a willingness to forsake their recent retention payments," wrote spokeswoman Christina Pretto in a statement e-mailed to The Associated Press.

She added that the company is continuing to review the responses of the other employees.

Cuomo said he doesn't plan to release the names of the employees who have agreed to return the bonuses, and said there is no implied threat that if an employee doesn't consent to returning the bonus that their name will be released.

He said his office is continuing to assess the security of the employees.

About 400 employees and future employees in AIG's financial products division received bonuses.

Documents provided by AIG to the Treasury Department said the awards ranged from $1,000 to nearly $6.5 million.

Seven employees were to receive more than $3 million.

Last week Cuomo said AIG paid bonuses of $1 million or more to 73 employees, including 11 who no longer work there.

Separately, Connecticut's consumer protection division has subpoenaed AIG, demanding that the contracts and names of employees who received the bonuses be provided by March 27.

Gov. M. Jodi Rell has said she wants the division to determine whether the bonuses can be voided under the Connecticut Unfair Trade Practices Act.

AIG's financial products division is headquartered in Wilton, Conn.

Connecticut Attorney General Richard Blumenthal says his office also demanded the bonus recipients' names and the amounts.

Last week, the House passed a plan to slap a punitive, 90 percent tax on bonuses paid to AIG employees whose family income surpasses $250,000.

Not all of the AIG employees earned more than the income threshold specified by the House bill.

But President Obama has signaled opposition to the House's tax bill on constitutional grounds.

The Senate is soon expected to take up its own plan on the tax.

"Recipe for Disaster: The Formula That Killed Wall Street"

By Felix Salmon 02.23.09

In the mid-'80s, Wall Street turned to the quants—brainy financial engineers—to invent new ways to boost profits.

Their methods for minting money worked brilliantly... until one of them devastated the global economy.

A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize.

After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field.

Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all.

Not that his achievement should be dismissed.

He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before.

With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators.

And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart.

Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected.

The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon.

One result of the collapse has been the end of financial economics as something to be celebrated rather than feared.

And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

How could one formula pack such a devastating punch?

The answer lies in the bond market, the multitrillion-dollar system that allows pension funds, insurance companies, and hedge funds to lend trillions of dollars to companies, countries, and home buyers.

A bond, of course, is just an IOU, a promise to pay back money with interest by certain dates.

If a company—say, IBM—borrows money by issuing a bond, investors will look very closely over its accounts to make sure it has the wherewithal to repay them.

The higher the perceived risk—and there's always some risk—the higher the interest rate the bond must carry.

Bond investors are very comfortable with the concept of probability.

If there's a 1 percent chance of default but they get an extra two percentage points in interest, they're ahead of the game overall—like a casino, which is happy to lose big sums every so often in return for profits most of the time.

Bond investors also invest in pools of hundreds or even thousands of mortgages.

The potential sums involved are staggering: Americans now owe more than $11 trillion on their homes.

But mortgage pools are messier than most bonds.

There's no guaranteed interest rate, since the amount of money homeowners collectively pay back every month is a function of how many have refinanced and how many have defaulted.

There's certainly no fixed maturity date: Money shows up in irregular chunks as people pay down their mortgages at unpredictable times—for instance, when they decide to sell their house.

And most problematic, there's no easy way to assign a single probability to the chance of default.

Wall Street solved many of these problems through a process called tranching, which divides a pool and allows for the creation of safe bonds with a risk-free triple-A credit rating.

Investors in the first tranche, or slice, are first in line to be paid off.

Those next in line might get only a double-A credit rating on their tranche of bonds but will be able to charge a higher interest rate for bearing the slightly higher chance of default.

And so on.

The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time.

One person might lose his job, another might fall ill.

But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.

But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk.

Some things, like falling house prices, affect a large number of people at once.

If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well.

If, as a result, you default on your mortgage, there's a higher probability they will default, too.

That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are.

Investors like risk, as long as they can price it.

What they hate is uncertainty—not knowing how big the risk is.

As a result, bond investors and mortgage lenders desperately want to be able to measure, model, and price correlation.

Before quantitative models came along, the only time investors were comfortable putting their money in mortgage pools was when there was no risk whatsoever—in other words, when the bonds were guaranteed implicitly by the federal government through Fannie Mae or Freddie Mac.

Yet during the '90s, as global markets expanded, there were trillions of new dollars waiting to be put to use lending to borrowers around the world—not just mortgage seekers but also corporations and car buyers and anybody running a balance on their credit card—if only investors could put a number on the correlations between them.

The problem is excruciatingly hard, especially when you're talking about thousands of moving parts.

Whoever solved it would earn the eternal gratitude of Wall Street and quite possibly the attention of the Nobel committee as well.

To understand the mathematics of correlation better, consider something simple, like a kid in an elementary school: Let's call her Alice.

The probability that her parents will get divorced this year is about 5 percent, the risk of her getting head lice is about 5 percent, the chance of her seeing a teacher slip on a banana peel is about 5 percent, and the likelihood of her winning the class spelling bee is about 5 percent.

If investors were trading securities based on the chances of those things happening only to Alice, they would all trade at more or less the same price.

But something important happens when we start looking at two kids rather than one—not just Alice but also the girl she sits next to, Britney.

If Britney's parents get divorced, what are the chances that Alice's parents will get divorced, too?

Still about 5 percent: The correlation there is close to zero.

But if Britney gets head lice, the chance that Alice will get head lice is much higher, about 50 percent—which means the correlation is probably up in the 0.5 range.

If Britney sees a teacher slip on a banana peel, what is the chance that Alice will see it, too?

Very high indeed, since they sit next to each other: It could be as much as 95 percent, which means the correlation is close to 1.

And if Britney wins the class spelling bee, the chance of Alice winning it is zero, which means the correlation is negative: -1.

If investors were trading securities based on the chances of these things happening to both Alice and Britney, the prices would be all over the place, because the correlations vary so much.

But it's a very inexact science.

Just measuring those initial 5 percent probabilities involves collecting lots of disparate data points and subjecting them to all manner of statistical and error analysis.

Trying to assess the conditional probabilities—the chance that Alice will get head lice if Britney gets head lice—is an order of magnitude harder, since those data points are much rarer.

As a result of the scarcity of historical data, the errors there are likely to be much greater.

In the world of mortgages, it's harder still.

What is the chance that any given home will decline in value?

You can look at the past history of housing prices to give you an idea, but surely the nation's macroeconomic situation also plays an important role.

And what is the chance that if a home in one state falls in value, a similar home in another state will fall in value as well?

Enter Li, a star mathematician who grew up in rural China in the 1960s.

He excelled in school and eventually got a master's degree in economics from Nankai University before leaving the country to get an MBA from Laval University in Quebec.

That was followed by two more degrees: a master's in actuarial science and a PhD in statistics, both from Ontario's University of Waterloo.

In 1997 he landed at Canadian Imperial Bank of Commerce, where his financial career began in earnest; he later moved to Barclays Capital and by 2004 was charged with rebuilding its quantitative analytics team.

Li's trajectory is typical of the quant era, which began in the mid-1980s.

Academia could never compete with the enormous salaries that banks and hedge funds were offering.

At the same time, legions of math and physics PhDs were required to create, price, and arbitrage Wall Street's ever more complex investment structures.

In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled "On Default Correlation: A Copula Function Approach."

(In statistics, a copula is used to couple the behavior of two or more variables.)

Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data.

Instead, he used market data about the prices of instruments known as credit default swaps.

If you're an investor, you have a choice these days: You can either lend directly to borrowers or sell investors credit default swaps, insurance against those same borrowers defaulting.

Either way, you get a regular income stream—interest payments or insurance payments—and either way, if the borrower defaults, you lose a lot of money.

The returns on both strategies are nearly identical, but because an unlimited number of credit default swaps can be sold against each borrower, the supply of swaps isn't constrained the way the supply of bonds is, so the CDS market managed to grow extremely rapidly.

Though credit default swaps were relatively new when Li's paper came out, they soon became a bigger and more liquid market than the bonds on which they were based.

When the price of a credit default swap goes up, that indicates that default risk has risen.

Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market.

It's hard to build a historical model to predict Alice's or Britney's behavior, but anybody could see whether the price of credit default swaps on Britney tended to move in the same direction as that on Alice.

If it did, then there was a strong correlation between Alice's and Britney's default risks, as priced by the market.

Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).

It was a brilliant simplification of an intractable problem.

And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool.

What happens when the number of pool members increases or when you mix negative correlations with positive ones?

Never mind all that, he said.

The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.

The effect on the securitization market was electric.

Armed with Li's formula, Wall Street's quants saw a new world of possibilities.

And the first thing they did was start creating a huge number of brand-new triple-A securities.

Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities.

All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.

As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked.

The consequent pools were often known as collateralized debt obligations, or CDOs.

You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A.

You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included.

But it didn't matter.

All you needed was Li's copula function.

The CDS and CDO markets grew together, feeding on each other.

At the end of 2001, there was $920 billion in credit default swaps outstanding.

By the end of 2007, that number had skyrocketed to more than $62 trillion.

The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.

At the heart of it all was Li's formula.

When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable.

It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.

"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie, a Stanford University finance professor who served on Moody's Academic Advisory Research Committee.

The Gaussian copula soon became such a universally accepted part of the world's financial vocabulary that brokers started quoting prices for bond tranches based on their correlations.

"Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus," wrote derivatives guru Janet Tavakoli in 2006.

The damage was foreseeable and, in fact, foreseen.

In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable."

Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters.

And he wasn't alone.

During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect.

Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial.

Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was.

Every time, he would warn them that it was not suitable for use in risk management or valuation.

In hindsight, ignoring those warnings looks foolhardy.

But at the time, it was easy.

Banks dismissed them, partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe.

Besides, they were making too much money to stop.

In finance, you can never reduce risk outright; you can only try to set up a market in which people who don't want risk sell it to those who do.

But in the CDO market, people used the Gaussian copula model to convince themselves they didn't have any risk at all, when in fact they just didn't have any risk 99 percent of the time.

The other 1 percent of the time they blew up.

Those explosions may have been rare, but they could destroy all previous gains, and then some.

Li's copula function was used to price hundreds of billions of dollars' worth of CDOs filled with mortgages.

And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared.

Naturally, default correlations were very low in those years.

But when the mortgage boom ended abruptly and home values started falling across the country, correlations soared.

Bankers securitizing mortgages knew that their models were highly sensitive to house-price appreciation.

If it ever turned negative on a national scale, a lot of bonds that had been rated triple-A, or risk-free, by copula-powered computer models would blow up.

But no one was willing to stop the creation of CDOs, and the big investment banks happily kept on building more, drawing their correlation data from a period when real estate only went up.

"Everyone was pinning their hopes on house prices continuing to rise," says Kai Gilkes of the credit research firm CreditSights, who spent 10 years working at ratings agencies.

"When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge."

"And there was just no getting around it."

"Why didn't rating agencies build in some cushion for this sensitivity to a house-price-depreciation scenario?"

"Because if they had, they would have never rated a single mortgage-backed CDO."

Bankers should have noted that very small changes in their underlying assumptions could result in very large changes in the correlation number.

They also should have noticed that the results they were seeing were much less volatile than they should have been—which implied that the risk was being moved elsewhere.

Where had the risk gone?

They didn't know, or didn't ask.

One reason was that the outputs came from "black box" computer models and were hard to subject to a commonsense smell test.

Another was that the quants, who should have been more aware of the copula's weaknesses, weren't the ones making the big asset-allocation decisions.

Their managers, who made the actual calls, lacked the math skills to understand what the models were doing or how they worked.

They could, however, understand something as simple as a single correlation number.

That was the problem.

"The relationship between two assets can never be captured by a single scalar quantity," Wilmott says.

For instance, consider the share prices of two sneaker manufacturers: When the market for sneakers is growing, both companies do well and the correlation between them is high.

But when one company gets a lot of celebrity endorsements and starts stealing market share from the other, the stock prices diverge and the correlation between them turns negative.

And when the nation morphs into a land of flip-flop-wearing couch potatoes, both companies decline and the correlation becomes positive again.

It's impossible to sum up such a history in one correlation number, but CDOs were invariably sold on the premise that correlation was more of a constant than a variable.

No one knew all of this better than David X. Li: "Very few people understand the essence of the model," he told The Wall Street Journal way back in fall 2005.

"Li can't be blamed," says Gilkes of CreditSights.

After all, he just invented the model.

Instead, we should blame the bankers who misinterpreted it.

And even then, the real danger was created not because any given trader adopted it but because every trader did.

In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust.

Nassim Nicholas Taleb, hedge fund manager and author of The Black Swan, is particularly harsh when it comes to the copula.

"People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says.

"Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south.

"Anything that relies on correlation is charlatanism."

Li has been notably absent from the current debate over the causes of the crash.

In fact, he is no longer even in the US.

Last year, he moved to Beijing to head up the risk-management department of China International Capital Corporation.

In a recent conversation, he seemed reluctant to discuss his paper and said he couldn't talk without permission from the PR department.

In response to a subsequent request, CICC's press office sent an email saying that Li was no longer doing the kind of work he did in his previous job and, therefore, would not be speaking to the media.

In the world of finance, too many quants see only the numbers before them and forget about the concrete reality the figures are supposed to represent.

They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years.

Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.

As Li himself said of his own model: "The most dangerous part is when people believe everything coming out of it."

— Felix Salmon (felix@felixsalmon.com) writes the Market Movers financial blog at Portfolio.com.

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant/

"Geithner seeks new powers over financial companies"

By JEANNINE AVERSA, AP Economics Writer

24 MARCH 2009

WASHINGTON – Treasury Secretary Timothy Geithner asked Congress on Tuesday for broad new powers to regulate nonbank financial companies like troubled insurer American International Group whose collapse could jeopardize the economy.

"AIG highlights broad failures of our financial system," Geithner told the House Financial Services Committee.

"We must ensure that our country never faces this situation again."

At the same time, Federal Reserve Chairman Ben Bernanke revealed that he had considered filing suit to keep AIG from paying millions in executive bonuses but that his legal advisers counseled him against it.

Geithner acknowledged that the current climate of anger, including the furor over those retention bonuses, will complicate any effort by the Obama administration to get more bailout money from Congress.

"We recognize it will be extraordinarily difficult," he said.

The administration sought to use that rancor to build support for its financial overhaul proposals.

Geithner joined Bernanke in calling for greater governmental authority over complicated and troubled financial companies — power they likened to the authority wielded over banks by the Federal Deposit Insurance Corporation.

That includes the power to seize control of institutions, take over their bad loans and other illiquid assets and sell good ones to competitors.

AIG is a globally interconnected colossus, with 74 million customers worldwide and operations in more than 130 countries.

The government decided it was simply too big to let fail.

"Its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs," Bernanke told the panel.

Geithner, Bernanke and New York Fed President William C. Dudley testified in a rare joint appearance before the panel.

Their testimony came a day after the Fed unveiled a new bank rescue plan under which the government would take responsibility for up to $1 trillion in sour mortgage securities with the help of private investors.

That delighted Wall Street and the Dow industrials shot up nearly 500 points.

On Tuesday, Wall Street gave back some of its gains and the Dow was down just over 45 points in midday trading.

Much of Tuesday's discussion centered on ways to help the government better deal with future AIG-like companies whose failure could devastate the financial system and the drag down the economy.

"As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can," Geithner said.

"The administration proposes legislation to give the U.S. government the same basic set of tools for addressing financial distress at non-banks as it has in the bank context"

Geithner made it clear he believes the treasury secretary should be granted unprecedented power, after consultation with Federal Reserve Board officials, to take control of a major financial institution and run it.

The treasury chief is an official of the administration, unlike the FDIC, which is an independent regulatory agency.

The witnesses were asked if AIG would have been treated any differently, including the payment of $165 million in bonuses earlier this month, if such powers had existed last September, when the Fed began the government bailout of the insurer.

"Quite differently."

"It could have been taken into receivership or conservatorship."

"...The bonus issue would not have arisen," Bernanke said.

He said that contracts providing for the bonuses could have been adjusted and "we could have taken haircuts" against some of AIG's financial obligations to other companies.

AIG has become a symbol of reckless risk-taking on Wall Street.

The bonuses came even as AIG reported a stunning $62 billion loss, the biggest in U.S. corporate history.

The government has bailed out AIG four times, to the tune of more than $180 billion altogether.

New York Attorney General Andrew Cuomo said Monday that 15 employees who received some of the largest bonuses from AIG have agreed to return them in full, totaling about $50 million.

The House last week voted overwhelmingly to slap 90 percent taxes on the largest bonuses.

Similar but more limited legislation is before the Senate.

Still, White House support for using the tax code in such a fashion has been tepid at best.

And Democrats seem to be moving off the concept.

"If the money is returned, the legislation may no longer be necessary," said House Majority Leader Steny Hoyer, D-Md.

As to Geithner seeking more authority, Hoyer said he wanted to discuss with committee Chairman Barney Frank, D-Mass., "whether or not such delegation is appropriate or whether there should be greater oversight."

Geithner has been sharply criticized for his role in the AIG bailout because he helped put the deal together last September as then-president of the New York Fed, yet said he did not learn of the big bonuses until two weeks ago.

In a sharp exchange, Geithner was asked by Rep. Brad Sherman, D-Calif., whether there were other financial companies besides AIG who took taxpayer bailouts and then paid big bonuses to their executives.

"You're right, this goes well beyond AIG," said Geithner.

Sherman asked for a public list of those companies and an accounting of the bonuses they paid.

Geither was noncommital.

Sherman told him he was trying to "hide the ball."

"I'm not going to hide the ball," Geithner said.

"I'll reflect on the suggestion you made."

Bernanke said it was "highly inappropriate to pay substantial bonuses" to the employees.

Bernanke said he asked that the payments be stopped but was told that they were mandated by contracts agreed to before the government seized control of AIG on September 16.

"I then asked that suit be filed to prevent the payments," he said.

Bernanke said that his legal staff counseled against this action on the grounds that Connecticut law provided for substantial punitive damages in the event any such suit failed.

AIG's financial products division has a base in Connecticut.

The AIG bonuses created a public relations headache for President Barack Obama at a time when he was trying to gin up public and political support for his economic policies, bank-rescue plan and overhaul of the nation's regulatory structure.

Government bailouts of AIG, Citigroup Inc., Bank of America Corp. and others have put billions of taxpayers' dollars at risk over the past year and have angered the American public.
___

Associated Press writer Martin Crutsinger contributed to this report.

"Bernanke wanted to sue AIG"

Lisa Lerer

24 MARCH 2009

Federal Reserve Chairman Ben Bernanke wanted to sue AIG to stop the company from handing out hundreds of millions in bonus payments over the past two weeks.

But Federal Reserve lawyers advised against litigation, fearing the bank would lose the suit and allow AIG to recoup huge punitive damages.

Bernanke also said the Fed knew about the bonuses last fall and warned AIG management it had “deep concern” about the payouts.

“Legal action could thus have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees,” Bernanke told the House Financial Services Committee Tuesday morning.

AIG told the Federal Reserve that the bonus payments were mandated by binding contracts, even those to its financial products division, which was responsible for creating the credit default swaps that contributed to the current economic crisis.

“My reaction upon becoming aware of these specific payments was that, notwithstanding the business purposes that might be served by this action, it was highly inappropriate to pay substantial bonuses to employees of the division that had been the primary source of AIG’s collapse,” Bernanke told the committee.

Fifteen of the top 20 employees at AIG who received bonuses have agreed to give them back — a refund that totals about $50 million — New York Attorney General Andrew Cuomo annouced Monday.

Republicans have jumped on the AIG bonuses as a political issue, blaming the Obama administration and Treasury Secretary Timothy Geithner for failing to stop the company from distributing as much as $165 million in bonus payments.

“An unfortunate partisan effort has slipped in here,” said Financial Services Chairman Barney Frank (D-Mass.), who stressed that Bush administration Treasury Secretary Henry Paulson also agreed to give AIG government funds.

Republican committee aides distributed a timeline detailing the sequence of events that lead up to the AIG bonus controversy.

But some Democrats also had questions about the events.

“We’re not sure what happened when and in what circumstance,” said Rep. Paul E. Kanjorski (D-Pa.), who told Geithner that Americans “feel boxed out of what’s happening in this economic crisis.”

Kanjorski said that lack of information by the Treasury Department and recipients of government funds will make it extremely difficult for Congress to authorize the additional financial bailout money for the administration plans to request.

“We recognize it’s going to be extraordinary difficult,” said Geithner.

"EU presidency: US stimulus is 'the road to hell' - EU president calls Obama's plans to spend his way out of recession 'the road to hell'"

By AOIFE WHITE, Associated Press

Last updated: 3:45 p.m., Wednesday, March 25, 2009

BRUSSELS -- The head of the European Union slammed President Barack Obama's plan to spend nearly $2 trillion to push the U.S. economy out of recession as "the road to hell" that EU governments must avoid.

The blunt comments by Czech Prime Minister Mirek Topolanek to the European Parliament on Wednesday highlighted simmering European differences with Washington ahead of a key summit next week on fixing the world economy.

It was the strongest pushback yet from a European leader as the 27-nation bloc bristles from U.S. criticism that it is not spending enough to stimulate demand.

Shocked by the outburst, other European politicians went into damage control mode, with some reproaching the Czech leader for his language and others reaffirming their good diplomatic ties with the United States.

The leaders of EU's major nations -- France, Britain and Germany, among others -- largely ignored Topolanek and his remarks.

Obama pays his first official visit to Europe next week, aiming to thrash out reforms to the global financial system with the Group of 20 nations and call on NATO allies to commit more troops to the U.S. war in Afghanistan.

Europeans leaders hope the new U.S. administration will agree with them on tightening oversight over the global financial system -- which they see as crucial to fixing the global economy.

Instead, the United States is focusing its efforts on economic stimulus and plans to spend heavily to try and lift itself out of recession with a $787 billion plan of tax rebates, health and welfare benefits, as well as extra energy and infrastructure spending.

To encourage banks to lend again, the U.S. government will also pump $1 trillion into the financial system by buying up treasury bonds and mortgage securities in an effort to clear some of the "toxic assets" -- devalued and untradeable assets -- from banks' balance sheets.

Obama insisted Tuesday that his massive budget proposal will put the ailing U.S. economy back on its feet.

"This budget is inseparable from this recovery," he said, "because it is what lays the foundation for a secure and lasting prosperity."

But Topolanek took aim at Washington's deficit spending.

"All of these steps, these combinations and permanency is the road to hell," Topolanek said.

"We need to read the history books and the lessons of history and the biggest success of the (EU) is the refusal to go this way."

"Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the liquidity of the global financial market," Topolanek said.

Topolanek spoke the day after he was ousted by his own parliament.

The Czech Republic currently holds the six-month rotating EU presidency but its leadership is in question, with Topolanek hanging on to a caretaker government at home after losing a "no confidence" Tuesday.

In Washington, State Department spokesman Gordon Duguid said he did not expect the Czech poltical turmoil to affect Obama's upcoming trip to Prague because the president was traveling to attend an EU event.

Analyst Nicolas Veron, a research fellow at the Bruegel think tank, said Topolanek's view is not widely shared by EU leaders.

"I don't think the damage can be as large as the very strong wording of this would lead one to think," he said.

"Many people have doubts about the U.S. plan but what he said is much stronger."

Veron said European leaders worry that the U.S. plan may not work or could cost taxpayers heavily -- but he did not doubt the U.S.' "fiscal robustness" or that it still had extra room to maneuver to stoke economic growth.

Martin Schulz, leader of the Socialist group in the European parliament, immediately chided Topolanek, saying his comments were "not the level on which the EU ought to be operating with the United States."

"You have not understood what the task of the EU presidency is," he told the Czech premier.

EU Commission President Jose Manuel Barroso also said it was "not helpful ... to try to suggest that Americans and Europeans are coming with very different approaches to the crisis."

"On the contrary, what we are seeing is increased convergence," he told the parliament.

But Europe's resistance to the U.S. call for new stimulus measures is starting to weaken despite Germany's fierce opposition to any new spending program this year.

French President Nicolas Sarkozy said Tuesday he is prepared to support the economy with a new spending package.

EU officials say they can't rule anything out -- even an EU-wide stimulus that could help nations like Ireland and Spain, which can't afford any extra stimulus.

British Prime Minister Gordon Brown has also supported U.S. calls to ramp up fiscal stimulus -- government spending and tax cuts -- although the Bank of England has warned that Britain's swelling public deficit may make it unable to afford new spending.

------

Associated Press writers Raf Casert in Strasbourg, France, Jane Wardell in London and Desmond Butler in Washington contributed to this report.

"Stimulus, bailout will lead to more fraud: FBI"

By Andy Sullivan

25 MARCH 2009

WASHINGTON (Reuters) – The FBI is bracing for a wave of fraud and corruption cases stemming from the government's multitrillion-dollar effort to get the economy moving again, the agency's chief told Congress on Wednesday.

The expected surge in economic crimes will place further strain on an agency already stretched thin as it investigates mortgage fraud, terrorism and corrupt politicians, FBI Director Robert Mueller said.

"Our expectation is that economic crimes will continue to skyrocket," Mueller said.

After the September 11, 2001 hijacking attacks, the FBI moved more than 2,000 investigators out of its criminal division to place greater emphasis on national security.

But that reduced the agency's ability to cope with a subsequent explosion in corruption, fraud and gang-related cases, Mueller said.

Over the past three years the FBI has more than doubled the number of agents investigating mortgage fraud to 254 to keep up with its doubled caseload, he said.

Bank data suggest that the pace will continue to increase.

Public corruption cases have increased by more than half since 2003 to 2,500 pending investigations, he said.

Gang-related cases have doubled since 2001 as the agency has had to cope with the emergence of international criminal groups like MS-13 and Mexican drug-smuggling cartels.

The agency's caseload will only increase as federal dollars flow from the $787 billion economic stimulus package and several bank bailouts, he said.

"The unprecedented level of financial resources committed by the federal government to combat the economic downturn will lead to an inevitable increase in economic crime and public corruption cases," Mueller said.

Mueller noted that the FBI had more than 1,000 agents to cope with the last financial crisis, the savings-and-loan debacle of the late 1980s and early 1990s, roughly double the number it has now for economic crimes.

The agency has stepped up its recruiting efforts this year, Muller said, but was set back when the House of Representatives cut out a provision of the stimulus package that would have paid for 165 new FBI agents.

Senate Judiciary Chairman Patrick Leahy said the Senate is expected to take up legislation in April that would give $245 million a year to the FBI and other law enforcement agencies to fight financial fraud.

Mueller said the FBI was working with a number of U.S. attorneys and the Justice Department for what he called fast-track prosecutions in a number of areas.

"We're prioritizing our cases to hit the most egregious early and put those persons away," he said.

(Editing by Cynthia Osterman)

"Administration unveils financial system overhaul"

By MARTIN CRUTSINGER, AP Economics Writer

26 MARCH 2009

WASHINGTON – The Obama administration on Thursday unveiled a sweeping overhaul of the financial system designed to impose greater regulation on major players like hedge funds.

Treasury Secretary Timothy Geithner told lawmakers that the changes are needed to fix the flaws exposed by the current financial crisis, the worst to hit the country in seven decades.

The goal is to repair a system that has proven "too unstable and fragile," he said.

"Over the past 18 months, we have faced the most severe global financial crisis in generations," Geithner said in testimony to the House Financial Services Committee.

"To address this will require comprehensive reform."

"Not modest repairs at the margin, but new rules of the game."

The administration's proposal, which will require congressional approval, would represent a major expansion of federal authority over the financial system.

Highlights of the plan include:

• Imposing tougher standards on financial institutions judged to be so big that their failure would represent a risk to the entire system.

• Extending federal regulations for the first time to all trading in financial derivatives, exotic financial instruments such as credit default swaps that were blamed for much of the damage in the meltdown.

• Requiring hedge funds and other private pools of capital, including private equity funds and venture capital funds, to register with the Securities and Exchange Commission if their assets exceed a certain size.

The threshold amount has yet to be determined.

• Creating a systemic risk regulator to monitor the biggest institutions.

Geithner did not designate where such authority should reside, but the administration is expected to support awarding this power to the Federal Reserve.

The plan also includes a measure that Geithner and Fed Chairman Ben Bernanke discussed before the committee on Tuesday to give the administration expanded powers to take over major nonbank financial institutions, such as insurance companies and hedge funds that were teetering on the brink of collapse.

That power was aimed at preventing a repeat of the problems surrounding insurance giant American International Group Inc., which sparked a furor last week when it was revealed the company had distributed $165 million in bonuses to employees of its financial products group.

The unit specialized in trading credit default swaps, the instruments that drove the company to near-collapse last fall.

"Let me be clear," Geithner told the committee.

"The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers must end."

The administration, pushing for quick action on its reform agenda, sent Congress a 61-page bill dealing with the expanded powers to seize control of nonbank institutions late Wednesday.

The House committee, chaired by Rep. Barney Frank, D-Mass., has indicated it could move on the measure as early as next week.

Frank said the overhaul should ensure the government has more options and can avoid repeating the unattractive choices it faced last fall of letting Lehman Brothers fail, which sent a shock wave to the entire financial system, and propping up AIG with billions of dollars.

"We are looking for an alternative method to avoid those polar extremes," he said.

While many Democratic lawmakers expressed support for Geithner's proposals, Republicans questioned whether the overhaul would give federal regulators too much power.

"Forgive me if I am a skeptic ... when I hear that if we only have a systemic regulator it will never happen again," Rep. Scott Garrett, R-N.J., told Geithner.

Sen. Charles Schumer, D-N.Y., a key member of the Senate Banking Committee, generally praised Geithner's proposal as a "good first outline" suggesting it will undergo extensive changes in Congress, including "some major consolidating and rearranging" of the government agencies that regulate the financial industry.

At a Senate Banking Committee hearing, SEC Chairman Mary Schapiro and key senators agreed it could be harmful for any one regulator to become too powerful.

"The devil is in the details," Schapiro said, adding she was concerned that "we don't create a monolithic entity" that would diminish the role of investor protection.

A "college of regulators," each overseeing different areas of potential risk according to their expertise, would be constructive in the new system, she suggested.

Such a regime would be relatively decentralized but more rational than the current patchwork system of financial authorities, which dates to the Civil War, supporters say.

Geithner's plan is silent on whether any consolidation of regulators is needed.

It provided only a broad outline on many of the initiatives, leaving many thorny details to be worked out in Congress.

Administration officials promised that the remaining issues would be hammered out in consultation with lawmakers with the goal of getting legislation approved as quickly as possible.

The proposal on credit default swaps and other derivatives would require the markets on which they are traded to be regulated for the first time, and for the buying and selling of these instruments to be conducted in ways that will foster greater oversight.

Credit default swaps, which trade in a $60 trillion global market without government oversight, are contracts to insure against the default of financial instruments like bonds and corporate debt.

They played a prominent role in the credit crisis that brought the downfall of investment banking giant Lehman Brothers Holdings Inc. last fall and nearly unraveled AIG, forcing the government to provide more than $180 billion in support.

Hedge funds, which hold an estimated $1.5 trillion in assets, operate mostly outside of government supervision.

As the market crisis deepened last fall, hedge fund selling was widely cited as one of the reasons for increased volatility that pounded stocks and bonds.

Hedge funds also suffered huge losses last year, notably from investments in securities tied to subprime mortgages.

The outline of the regulatory reform was unveiled a week before President Barack Obama is scheduled to meet for discussions among the Group of 20 major industrialized and developing countries in London to assess what needs to be done to deal with the global financial crisis.

While the administration is pushing other nations to follow the U.S. lead in putting together sizable economic stimulus programs to jump-start global growth, many in Europe are resisting those calls and arguing that the U.S. needs to do more to toughen financial regulations.

They believe the current troubles can be traced to lax regulation in the U.S. over such key areas as hedge funds and credit default swaps.

Requiring hedge funds to register would open their books to inspection by regulators.

The SEC sought that authority several years ago but was stymied by a federal appeals court in 2006.

Hedge funds have grown explosively in recent years while operating secretively.

They have lured an increasing number of ordinary investors, pension funds and university endowments — meaning millions of people now unwittingly invest in hedge funds indirectly.
___

AP Business Writers Marcy Gordon and Daniel Wagner contributed to this report.

FISCAL GIM-CRACKERY BY ANY OTHER NAME, INCLUDING "RECONCILIATION", IS STILL FISCAL GIM-CRACKERY ....

AND THE OBAMA-ITES ARE MASTERS AT THE TRADE OF FISCAL DECEPTION, HERE ...

AND THAT INCLUDES NANCY PELOSI ....

And so ...

"Obama's Budget Fight Starts with His Own Party"

By JAY NEWTON-SMALL / WASHINGTON

26 MARCH 2009

It's not exactly the can-do, uplifting kind of message that President Barack Obama or Congressional Democrats want to deliver to the voting public.

But in the face of soaring deficit projections and growing Republican and moderate Democratic opposition to the Administration's $3.6 trillion budget plan, it may just be the best they can do.

And so, when the President journeyed to Capitol Hill on Wednesday to rally his party's support for his agenda, he was seeking to make a counter-argument to the rising chorus to scale back his ambitious plans to reform health care, energy and education even as he tries to save the economy and cut the deficit.

"The real question is are we going to have a huge deficit with investment or a huge deficit without investment," said Senator Carl Levin, a Michigan Democrat, emerging from the meeting.

"Those are my words, not [Obama's], but I'm kind of summarizing what the argument is here."

"If you eliminated his investments you'd find the deficit would still be 80% or 90% of what it would be otherwise with his investment."

In other words, since Washington is going to rack up massive deficits, they may as well go all in and get some long-term bang for the buck.

Whether that kind or argument will convince fiscal conservatives and deficit hawks in Congress remains to be seen.

Obama's visit to the other end of Pennsylvania Avenue came as the House and the Senate Budget Committees each introduced their own versions of the budget bill, and less than a week after the Congressional Budget Office estimated that the 10-year shortfall would be $2.3 trillion greater than the White House's more rosy projections.

Both chambers delivered on their recent promises to make sizable cuts to Obama's budget resolution, which is more of a blueprint for future spending than any kind of binding legislation.

But the Administration put its best spin on the differences, arguing that Congress' offerings retained the commitment to the President's four "core principles" - universal health care, expanded education aid, renewable energy investments and regulation of greenhouse gases and provisions to halve the deficit in five years.

"Not only do [the House and Senate versions] embody the four key principles that the President has put forward for the budget, but they are 98 percent the same as the budget proposal the President sent up in February," White House Office of Management and Budget Director Peter Orszag told reporters on a conference call Wednesday morning.

"The resolutions may not be identical twins to what the President submitted, but they are certainly brothers that look an awful lot alike."

Still, even small differences can cause major rifts in any family, and the competing budgets suggest the challenges Obama's agenda faces.

Both the House and Senate, after all, removed Obama's $250 billion to $750 billion placeholder request for more bank bailout funds.

And they both slashed the Administration's proposed 10% increase in non-defense discretionary spending (for education, environment and health initatives, among other things) to 7% in the Senate to 7% and 9% in the House.

The Senate also stripped the President's signature middle class tax cuts, known as "Making Work to Pay," of $400 for individuals and $800 for families.

The Senate plan, crafted by Budget Committee Chairman Kent Conrad of North Dakota, also notably did not include any targeted funding to bankroll health care reform, as Obama's does with $634 billion over 10 years.

"When you lose $2.3 trillion, you have to cut things," said Conrad, whose plan has $160 billion less in discretionary spending over five years than the President's, with a target deficit of $508 billion in 2014.

To some degree, Congress scaled back Obama's budget by resorting to the same kinds of accounting gimmicks that the President had prided himself on avoiding, a fact that Republicans were quick to point out.

It dropped the long-term inclusion of the costly Alternative Minimum Tax fix - an annual must-pass bill to prevent the tax once intended for the super rich from hitting the Middle Class - and opted for a shorter time-line of just five years versus the 10-year budget the White House had crafted.

"Given the state of the economy, everyone agrees that it's very difficult to predict the next five years," said Senator Mark Pryor, an Arkansas Democrat, "let alone 10 years."

The House bill includes a controversial provision for so-called reconciliation - which would leave the door open to piggyback massive programs like universal health care on the budget in case they fail to make it through the regular legislative process.

House Democrats and the Administration support such a move specifically for health care - though, theoretically, the provision would allow for anything, including energy, to be pushed through the Senate with just a simple majority rather than a filibuster proof 60 votes.

Several moderate Democratic senators, including Senator Ben Nelson of Nebraska, have said that inclusion of reconciliation instructions in the final bill would be a deal breaker for them.

"Reconciliation is not where we'd like to start, but we are not willing to take it off the table," Orszag said.

Republicans latched on to the gap between Obama's budget request and the Democratic caucus's counteroffer as evidence that Obama's budget is "so far out of the mainstream" that even members of his own party won't support it, said Rep. Eric Cantor, the number two Republican in the House.

Republicans in both chambers almost all oppose the budget, though there are a few moderates still making up their minds.

"I intend to listen and I intend to be willing to think about things," Senator Arlen Specter, a Pennsylvania Republican, told reporters Wednesday.

Both chambers are expected to pass their respective versions by the end of next week, and then the real fun begins, as members work to hammer out the differences into a final bill.

During this process everyone, Obama noted at the Senate lunch, will have to give a little.

Given GOP opposition, support from a group of moderate Democrats known as the Gang of 16, led by Sen. Evan Bayh of Indiana, is essential.

Though most insisted Obama's presence on Capitol Hill was not a sales job, the luncheon was dominated by talk of his budget.

"These initiatives - education, better health care - are not free," said Senator Mary Landrieu, a Louisiana Democrat, who asked Obama about a provision she strongly opposes that would raise taxes on independent oil and gas producers.

"But he was very open to consider some of those changes, which is what I wanted to accomplish.

IF YOU ARE A PUBLIC OFFICIAL IN NEW YORK STATE WHO GETS CAUGHT WITH HIS HAND IN THE PUBLIC'S TILL, UNDER THIS "SOFT-ON-PUBLIC-CORRUPTION" BUSH APPOINTEE ON THE FEDERAL BENCH IN ALBANY, NEW YORK, YOU CAN EXPECT LENIENCY ....

And so ...

"EXCLUSIVE: Strevell gets no jail for stealing public's money - Judge: 'This is what happens when you get caught with your hands in the public's till'"

By BRENDAN J. LYONS, Senior writer, Albany, New York Times Union

Last updated: 1:18 p.m., Thursday, March 26, 2009

ALBANY - J. Felix Strevell, who was convicted of stealing more than $110,000 from state taxpayers during his scandal-plagued tenure as head of the former Institute for Entrepreneurship, was sentenced to five years probation this morning in U.S. District Court.

Federal prosecutors had asked U.S. District Court Judge Gary L. Sharpe to sentence Strevell to at least a year in prison for his crimes, which took place over a two-year period beginning in July 1999.

Prosecutors said a year in prison is what Strevell deserved under federal sentencing guidelines, which are advisory and took into account Strevell's cooperation with the FBI and Internal Revenue Service during six meetings in 2007.

The guidelines called for a sentence of between 12 and 18 months in prison.

''I don't condone theft in general ... but it is a very serious theft when you steal from public coffers,'' Sharpe told Strevell from the bench.

''It's no different than if you broke into your neighbors' homes and stole $113,000 of their money.''

Still, the judge talked at length about what would be a ''reasonable sentence'' that would ''say to other public officials ... that this is what happens when you get caught with your hands in the public's till.''

Assistant U.S. Attorney Elizabeth Coombe declined to comment as she left court.

Strevell also declined comment as he left the courthouse and hurried away from a reporter.

He was greeted by an unidentified woman outside.

His attorney, William Fanciullo, said:

''We're always happy to have such a detailed explanation of a judicial decision."

"Judge Sharpe's description was excellent and we appreciate that.''

The investigation found that Strevell used the institute's credit card to pay $7,500 in personal expenses, including clothing, home supplies and a family vacation at Disney World; fraudulently gave himself a $95,000 salary increase on top of his $124,000-a-year salary, which already was supplemented by automobile and housing allowances; improperly had the institute pay $9,000 for his father, a Florida resident, to take two trips to China as part of a "delegation" to foster business for New York; and sold his used recreational vehicle to the institute for $64,000 without disclosing his interest in the transaction to the institute's board of directors.

Strevell also gave jobs to his friends, the relatives of powerful Republicans, and his then-14-year-old daughter and her boyfriend "at higher-than-usual salaries for which they performed little or no work," court records show.

The Institute for Entrepreneurship, which had strong support from top officials including then-Gov. George Pataki and former Senate Majority Leader Joseph L. Bruno, dissolved in the wake of the scandal.

Strevell currently runs a small automotive repair shop in Rensselaer with his brother Chauncey, who also had worked for the institute.

Strevell had strong ties to former state GOP Party Chairman William Powers, who had gone to Strevell for haircuts more than two decades ago when Strevell was a Rensselaer County barber.

Fanciullo wrote in a sentencing memorandum, which was unsealed last week on a motion by the Times Union, that Strevell turned his back on his politically connected friends after pleading guilty two years ago to a single count of honest services wire fraud.

He agreed to cooperate with the government as part of the plea deal.

Strevell was indicted on federal charges in 2005 related to his work for the Institute for Entrepreneurship, Inc., a quasi-public outfit developed by the State University of New York to support small business efforts in the state.

He admitted using his position as executive director to enrich himself and his relatives at the expense of state taxpayers, effectively depriving the public of its inherent right to his honest services.

Fanciullo requested no prison time for Strevell, arguing, among other things, that Strevell's cooperation with federal agents and prosecutors was extensive and should be rewarded with a lenient sentence.

The government characterized Strevell's information as not very useful, in part, because he provided it some six years after leaving his government job.

FBI agents in Albany have remarked privately in recent years that defendants in white-collar crime and public corruption cases routinely receive what they perceive as lenient sentences from judges in New York's Northern District.

Strevell, 47, of Castleton-on-Hudson, made a brief statement to the court and told Sharpe that he was ''sorry.''

''I made a bad judgment ... and I'll live with that the rest of my life,'' Strevell said.

He removed his eyeglasses and wiped his eyes several minutes later as Sharpe indicated he would not be sending Strevell to prison.

The sentence also includes a provision that Strevell must repay the state of New York $111,500.

Strevell must pay a minimum of $100 per month or 10 percent of his income, whichever is greater, Sharpe said.

Brendan J. Lyons can be reached at 454-5547 or by e-mail at blyons@timesunion.com.

"Gov't stimulus projects include wage requirements - Rules tucked in federal stimulus law set minimum salaries for bricklayers, welders and others"

By SCOTT BAUER, Associated Press

Last updated: 2:25 p.m., Thursday, March 26, 2009

MADISON, Wis. -- Welders, bricklayers and other construction workers under the U.S. government's $787 billion stimulus law would earn significantly higher wages in some areas than crews on private, non-stimulus projects.

Wage rules in the law are a potential bonus to workers' wallets but they're upsetting contractors who say it will increase their costs and reduce the numbers of projects that can be funded.

Tucked within the 407-page law is a requirement that laborers and mechanics employed on government stimulus projects be paid "prevailing wages," which is defined as the salary and fringe benefits for corresponding work on similar projects in the area.

The prevailing wage is usually on par with union wages and higher than the average wages for the same category of employees in the same county.

For bricklayers in Madison, for example, the "prevailing wage" is $30.61 per hour but the average bricklayer there earns $25.77 per hour, according to the U.S. Labor Department.

Working 40 hours per week over one year, a bricklayer under the prevailing wage would earn $10,000 more.

The prevailing wage for cement workers is $29.78 per hour in Madison, compared to the average cement worker wages there of just $20.80 per hour -- an annual difference of $18,678.

Major U.S. government construction projects have required contractors to pay prevailing wages since 1931, but the Labor Department has acknowledged that the stimulus law will apply the same wage standard to certain projects that previously weren't covered.

It plans to release new instructions but hasn't said when that might happen.

"The point of the stimulus was to turn our economy around by creating jobs," said Jacob Hay, a spokesman for the Laborers International Union of North America, the construction workers union.

"That will only happen if the jobs created are good jobs with fair wages that spread paychecks throughout local communities."

Labor groups -- which have overwhelmingly supported President Barack Obama and Democrats in Congress who voted for the stimulus law -- are pleased.

But contractors and home builders said they were worried about rising costs on stimulus projects, including plans to improve the energy efficiency of homes owned by low-income people.

"It's not clear the full extent to which it will be applied into areas in which it (the prevailing wage) has never been utilized," said Josh Ulman, a consultant for Associated Builders and Contractors, a trade group.

Another trade group, the National Association of Homebuilders, said it will jack up costs, reducing the number of homes that will benefit from $5 billion in weatherization upgrades.

Only a small number of its 200,000 residential homebuilders pay the prevailing wage, spokeswoman Jenna Hamilton said.

Most homebuilders aren't unionized and have never dealt with the prevailing wage requirements, she said.

"It's hard to tell right now how it's all going to work," she said.

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On the Net:

Find your job's prevailing wage: http://www.gpo.gov/davisbacon/allstates.html

Find your job's average wage: http://www.bls.gov/bls/blswage.htm

"China challenges US global financial leadership - China speaks up, challenging US domination of global financial rules"

By ELAINE KURTENBACH, Associated Press

Last updated: 12:05 p.m., Friday, March 27, 2009

SHANGHAI -- The only major economy still growing at a fast clip, China is being unusually forthright in challenging the U.S.-led global order ahead of an April 2 summit on the financial crisis.

In his second rebuke of U.S. leadership this past week, the central bank governor, Zhou Xiaochuan, said China's rapid response to the downturn -- including a 4 trillion yuan ($586 billion) stimulus package -- proved the superiority of its authoritarian, one-party political system.

"Facts speak volumes, and demonstrate that compared with other major economies, the Chinese government has taken prompt, decisive and effective policy measures, demonstrating its superior system advantage when it comes to making vital policy decisions," Zhou said in remarks posted on the People's Bank of China's Web site.

In the approach to the London summit of 20 leading economies, Zhou called on foreign governments to give their finance ministers and central bankers broad authority so that they can "act boldly and expeditiously without having to go through a lengthy or even painful approval process."

China has made its agenda clear: It wants a stable U.S. dollar, and has even advocated the creation of another global currency altogether.

It is leery of protectionism.

And it is demanding a larger say in how financial systems are regulated and rescued, while holding back on any promises for new rescue or stimulus measures of its own.

"So far, China has been playing a game set up by other powers."

"Now China wants to be part of the agenda or rules-setting," said Ding Xueliang, a China expert at Hong Kong's University of Science and Technology.

Whether Beijing has a workable alternative vision for the future of world finance remains to be seen.

But China's growing assertiveness also suggests a sharpening urgency over its vulnerability to the global financial meltdown.

Fearful of any moves that might weaken the dollar and imperil China's estimated $1 trillion in Treasuries and other U.S. government debt, Chinese Premier Wen Jiabao has urged the United States to remain "a credible nation."

In other words, Beijing wants Washington to avoid spurring inflation with excessive government spending on bailouts and stimulus packages.

To keep the value of its own currency steady -- some say undervalued -- the Chinese government must recycle its huge trade surpluses.

The biggest, most liquid option is U.S. Treasuries.

But a weakening dollar saps the value of those investments.

The Chinese "are being hurt more than anyone else by the mismanagement of the dollar," said William Overholt, an expert with Harvard University's Kennedy School of Government.

Underscoring that grievance, earlier this week Zhou, the central bank governor, called for a new global currency to end the dollar's dominance in trade, foreign reserves and commodity pricing.

Echoing proposals that have been debated for years, he urged the International Monetary Fund to create a "reserve currency" based on shares in the organization held by its 185 member nations, known as special drawing rights, or SDRs.

Such a move would "achieve the objective of safeguarding global economic and financial stability," Zhou said in an essay released by the central bank both in English and Chinese.

Given the wariness of most governments toward relinquishing any sovereign control over their currencies, few even in China view Zhou's proposal as likely to catch on anytime soon.

"Nobody believes the current global monetary system will be changed soon."

"It's more like a warning or signal to America to let them know how important it is to keep the dollar stable," said Ding Xinghao, president of the Shanghai Association of American Studies, a private academic think-tank.

China's stolid and somber president, Hu Jintao, will likely focus on cooperation rather than table pounding when he meets President Barack Obama for the first time at next week's London summit on the financial crisis.

"There is no strong consensus between the U.S. and Europe."

"They have different policy priorities."

"The EU is quite weak."

"There are too many states with different opinions and different policy priorities," said Zheng Yongnian, director of the East Asia Institute at the National University of Singapore.

"So it would be easier for the U.S. and China to work together, despite their huge differences."

Still, China is committed to leading a push by the developing world for a greater say in how global finance is regulated and managed.

G-20 members already have agreed that developing countries need a bigger voice in the IMF.

But under a system devised 63 years ago, each country's vote is tied to its financial commitments to the institution, which are determined by economic size, currency reserves and openness to trade and capital flows.

Wang Qishan, a top Chinese financial official and vice premier, said Friday in a commentary in The Times of London that Beijing was ready to contribute more, but wants changes in the IMF's governance structure.

"China is ready to play an active part in exploring ways to raise resources and will contribute to this effort within its ability," Wang wrote.

But he reiterated China's rejection of calls for it to provide part of its $2 trillion in foreign reserves to an IMF bailout fund.

China's leaders have problems at home that they need to spend on, and they insist that their country's greatest contribution to a global recovery is keeping its own house in order and following through on its stimulus package.

Wen said fresh stimulus measures were possible, but only if necessary.

"They've barely spent half of the money."

"Why should they be spending more now?" said Jing Ulrich, chairwoman for China equities at J.P. Morgan.

"They are pacing themselves."

Despite its massive foreign reserves and an economy that many analysts believe is on the brink of recovery, China's leaders face stunning challenges in finding ways to create jobs for millions of migrant workers left newly unemployed.

Social welfare and health systems are inadequate and its environment wrecked by decades of rampant industrialization.

"On the top, national level, yes, China has lots of money," says Ding Xueliang, a former Communist Party official.

"But if you look at the troubles, all the economic and social challenges the leadership faces, China may hold so much money but it's not enough."

"It's not enough," he said.

Still, he says, China's leaders do recognize the need to make a bigger contribution if they want a larger say in reshaping the world financial order.

"More and more of the leadership see there is an opportunity for China," Ding said.

"I don't expect a big contribution is possible in the short-term, but a gradual increase in support is possible."

"THE INFLUENCE GAME: 7 big banks seek monopoly - 7 bailed-out banks seek monopoly over derivatives market they bet badly on"

By DANIEL WAGNER, Associated Press

Last updated: 6:36 p.m., Friday, March 27, 2009

WASHINGTON -- A handful of banks that needed government bailouts after making disastrous bets on over-the-counter derivatives are now seeking monopoly control over dealing in that market.

The banks already control a big part of the multitrillion-dollar derivatives market, but they have to compete with broker-dealers, hedge funds and other players.

Many industries use derivatives contracts to reduce risk.

For the banks, exclusive access would mean billions of dollars in revenue from derivatives, such as bets on currency or interest-rate changes.

They argue that only federally regulated banks should get to deal in these derivatives.

But if the banks get their way, the change could ripple through the economy, opponents warn.

It could raise costs for other types of companies that use these financial contracts to reduce their risks.

"You'd think these people (at the banks) would be humbled and just hope they don't end up in jail," said Dean Baker of the left-leaning Center for Economic and Policy Research.

"They don't have any qualms about going to Congress and saying what they want ... and they're still in a position to get a lot of things."

Democrats are crafting legislation designed to avert another financial crisis.

The seven banks pushing for a monopoly have proposed language for parts of that legislation and are circulating it in Washington.

Remarks by Treasury Secretary Timothy Geithner at a hearing Thursday suggested that Treasury agrees with at least the broad outlines of the banks' proposal.

A Treasury spokesman would not elaborate on Geithner's comments.

The seven banks making the play for control are Deutsche Bank AG, Barclays, JPMorgan Chase & Co., Goldman Sachs Group Inc., Credit Suisse Group, Morgan Stanley and Citigroup Inc.

Together, they've received more than $125 billion in bailout money.

Some of that money came to them from the bailout given to failed insurance giant American International Group Inc.

The value of over-the-counter derivatives hinges on the value of an underlying figure or commodity -- ranging from currency rate swaps to oil futures and inflation bets.

The derivative reduces the risk of loss from the underlying asset.

The global business world holds a staggering $600 trillion of these contracts.

If the big banks succeed in their quest, small- and mid-sized derivatives players -- who on their own are unlikely to affect the financial system -- will be cut out.

The big banks whose derivatives bets helped unleash a global recession would be the sole dealers.

Stifling competition could "reduce investor confidence or inhibit the stability of the markets and the stability of the economy," said Richard H. Baker, chief executive of the Managed Funds Association, which represent investors who rely on derivatives trades.

The banks referred questions to a public relations firm, Prism Public Affairs, they have hired to help with the derivatives campaign.

The banks' representative at Prism said he was unaware of any proposed legislation, saying his role was educational.

He said the lobbying was taking place among banks' own lobbyists and at the Securities Industry and Financial Markets Association.

Banks are motivated "exclusively by a shared desire to ensure appropriate oversight," said Cory Strupp, managing director of SIFMA, which lobbies for the big banks and other financial firms.

But this month, SIFMA arranged a briefing for staffers on the House Financial Services Committee that included a presentation from the lawyer who drafted the banks' proposal to exclude non-banks from dealing derivatives.

The lawyer, Ed Rosen of Cleary Gottlieb Steen & Hamilton, wouldn't comment, citing client confidentiality.

One species of derivative, the credit-default swap, all but destroyed AIG.

Banks that bought those loss-protection contracts faced huge losses -- until the government stepped in with bailouts that now top $180 billion.

The Federal Reserve said this was necessary because leaving the banks on the hook for failed derivatives bets could have toppled the financial system.

The same argument has justified bailouts for other "too-big-to-fail" firms, from automakers to housing lenders.

While winding down its derivatives contracts, AIG gave $37.5 billion to the seven banks that are now seeking a monopoly in the field.

That was on top of the $90 billion in taxpayer bailout money the banks had already received.

Nonbank dealers got no bailout money.

And since most of them lack the cash to qualify for bank charters, the banks' move could cost the nonbank dealers access to the lucrative derivatives dealing business.

Limiting competition this way could harm the broader economy, some say.

"Less participation has always been bad and always will be bad," because big commercial companies often stabilize speculator-driven price swings by selling derivatives, said James Cordier, president of the derivatives seller Liberty Trading group.

The change "is going to cause prices to fluctuate at levels that are not justified by supply and demand," he said.

Former Comptroller of the Currency Eugene A. Ludwig warned against cutting out nonbank dealers because "a lot of innovation comes from smaller enterprises, and there's a place for everybody" under effective regulation.

Geithner did allow that there must be some mechanism for getting more specialized, innovative products into the markets.

Those crafting the new regulatory rules should take care not to "tilt the playing field so that one group -- whether it's the larger institutions or the smaller institutions or the shadow banking system -- is unduly regulated at the cost of the others," said Ludwig, who's now chief executive of Promontory Financial Group.

"GOP says Obama budget threatens future prosperity"

By WILL LESTER, Associated Press Writer

28 MARCH 2009

WASHINGTON – Attacking President Barack Obama's grand spending plans, a GOP lawmaker who almost joined the Democrat's Cabinet said Saturday the U.S. must live within its means or risk its tradition of passing a more prosperous country from one generation to the next.

"We believe you create prosperity by having an affordable government that pursues its responsibilities without excessive costs, taxes or debt," Sen. Judd Gregg said in the Republican radio and Internet address.

Gregg, who accepted the job as commerce secretary but then withdrew his nomination because of "irresolvable conflicts" with Obama's policies, has become one of the toughest critics of Obama's handling of the economy.

"In the next five years, President Obama's budget will double the national debt."

"In the next 10 years, it will triple the national debt," said Gregg, R-N.H.

"His budget assumes the deficit will average $1 trillion every year for the next 10 years and will add well over $9 trillion in new debts to our children's backs," said Gregg, the top Republican on the Senate Budget Committee.

"He also is proposing the largest tax increase in history, much of it aimed at taxing small business people who have been, over the years, the best job creators in our economy."

Gregg said Obama's proposals "represent an extraordinary move of our government to the left."

He acknowledged that Obama "is very forthright in stating that he believes that by greatly expanding the spending, the taxing and the borrowing of our government, this will lead us to prosperity."

In seeking to make the GOP case, Gregg said:

_ "It is the individual American who creates prosperity and good jobs, not the government."

_"We believe that you create energy independence not by sticking Americans with a brand new national sales tax on everyone's electric bill, but by expanding the production of American energy ... while also conserving more."

_"We also believe you improve everyone's health care not by nationalizing the health care system and putting the government between you and your doctor, but by assuring that every American has access to quality health insurance and choices in health care."

He said the U.S. "has an exceptional history of one generation passing on to the next generation a more prosperous and stronger country, but that tradition is being put at risk."

"'Give us a chance,' Biden tells G20 protesters"

28 MARCH 2009

VINA DEL MAR, Chile (AFP) – US Vice President Joe Biden on Saturday called for tens of thousands of protesters already on the streets of Europe ahead of a G20 summit next week to give governments a chance to tackle the economic crisis.

"I would hope that the protesters give us a chance, listen to what we have to say and hopefully we can make it clear to them that we're going to walk away from this G20 meeting with some concrete proposals," Biden said at a news conference after a meeting of center-left politicians in Chile.

Tens of thousands frustrated by the deepest global recession since the 1930s took to the streets of London Saturday, as well as thousands more in Paris, Berlin and Frankfurt, ahead of Thursday's summit of the Group of 20 industrialized and developing economies.

"The action that is happening in London today I understand, and we will respond to it at the G20," said British Prime Minister Gordon Brown, who will host the London meeting.

Biden added: "I would say to the protesters that unless we talk, unless we attempt to deal with this changed circumstance we find ourselves in, there is no solution."

"Things will only get worse."

Protesters in London plan a series of mass demos ahead of the G20 and have rejected police claims that they could be hijacked by anarchists bent on violence.

A university professor has been suspended from his job after warning that bankers would be "hanging from lampposts" during the protests, and finance workers have been advised to dress down to avoid attracting attention.

"Obama asserts gov't control over the auto industry - Obama sets tough deadline to force overhaul of ailing US automakers, seeks to reassure buyers"

By DAVID ESPO, Associated Press

Last updated: 7:15 p.m., Monday, March 30, 2009

WASHINGTON -- President Barack Obama asserted unprecedented government control over the auto industry Monday, bluntly rejecting turnaround plans by General Motors Corp. and Chrysler LLC, demanding fresh concessions for long-term federal aid and raising the possibility of quick bankruptcy for either ailing auto giant.

Obama took the extraordinary step of announcing the government will back new car warranties issued by both GM and Chrysler, an attempt to reassure consumers their U.S.-made purchases will be protected even if the companies don't survive.

"I am absolutely committed to working with Congress and the auto companies to meet one goal: The United States of America will lead the world in building the next generation of clean cars," Obama said in his first extended remarks on the industry since taking office nearly 10 weeks ago.

And yet, he added, "our auto industry is not moving in the right direction fast enough to succeed."

Obama, flanked by several administration officials at the White House, announced a short-term infusion of cash for the firms, and said it could be the last for one or both.

Chrysler, judged by the administration as too small to survive, got 30 days' worth of funds to complete a partnership with Fiat SpA, the Italian manufacturer, or some other automaker.

GM got assurances of 60 days' worth of federal financing to try and revise its turnaround plan under new management with heavy government participation.

That would involve concessions from its union workers and bondholders.

The administration engineered the ouster of longtime CEO Rick Wagoner over the weekend, an indication of its deep involvement in an industry that once stood as a symbol of American capitalism.

Obama's announcement underscored the extent to which automakers have been added to the list of large corporations now operating under a level of government control that seemed unthinkable less than a year ago.

Since last fall, the Bush and Obama administrations, often acting in concert with the Federal Reserve, have engineered the takeover of housing titans Fannie Mae and Freddie Mac, seized a large stake in several banks and installed a new CEO at bailed-out insurance giant American International Group.

The latest addition to the list, the once-proud auto industry, has struggled with foreign competition for more than a generation, then was further battered by the recession and credit crisis gripping the economy.

Obama said 400,000 industry jobs have been lost in the past year alone, many in Michigan.

Under Fritz Henderson, newly named as CEO, General Motors issued a statement saying it hopes to avoid bankruptcy, but will "take whatever steps are necessary to successfully restructure the company, which could include a court-supervised process."

Chrysler Chairman Bob Nardelli sought to assure customers, dealers, suppliers and employees that the automaker "will operate 'business as usual' over the next 30 days" while working closely with the government and Fiat to secure the support of stakeholders.

Sergio Marchionne, CEO of Fiat, issued a statement calling the Obama administration's involvement "tough but fair, and we believe we will arrive at a result that will establish a credible future for this crucial industrial sector and that assigns the right priority to the repayment of U.S. taxpayers' funds."

Fiat executives have talked to administration officials about a proposal to acquire a 35 percent stake in Chrysler in exchange for small car technology, transmissions and other items that Chrysler has valued at $8-$10 billion.

There was no immediate response from the United AutoWorkers Union.

One worker, Don Thompson, 56, of Chesterfield Township in Michigan, said automakers were being punished because of public anger over the banking bailout.

"They're using us for the mistakes they've made in Washington," he said.

Other workers alleged a double standard in how Washington dealt with Wagoner, as opposed to CEOs of bailed-out banks.

"They're using him as a fall guy," said Frank Rowser, financial secretary for UAW Local 909.

When Wagoner leaves the automaker, he will take a financial package worth an estimated $23 million.

Ford Motor Co., the third member of the Big Three, has not requested federal bailout funds.

Obama said bankruptcy would be a way for either GM or Chrysler to "quickly clear away old debts that are weighing them down so they can get back on their feet," and stressed that either firm would remain open.

"What I am not talking about is a process where a company is broken up, sold off and no longer exists."

"And what I am not talking about is having a company stuck in court for years, unable to get out," he said.

Still, fears about the industry's future sent stocks plummeting, with the Dow Jones industrial average losing about 254 points.

GM plunged 92 cents, or 25.4 percent, to $2.70.

Chrysler is not publicly traded.

Obama's remarks were prompted by the expiration of a temporary bailout approved by the Bush administration last winter, with $17 billion in federal funds to help GM and Chrysler survive.

Under its terms, the two automakers had until March 31 to submit restructuring plans as it searched for additional federal funds.

At the time, it appeared Bush had avoided an industry collapse on his watch yet had deferred the most difficult decisions for his successor.

By his comments, Obama bought himself a little more time, but made it clear it was fast running out.

"Now is the time to confront our problems head-on and do what's necessary to solve them," he said.

The administration issued papers detailing the prospects for survival of both GM and Chrysler, credited them with making difficult choices, yet also stressing the difficulties that remain.

It said that while GM's new car of the future, the Volt, "holds promise, it will likely be too expensive to be commercially successful in the short run."

The government has said it's willing to provide another $6 billion in financing for Chrysler if it is able to finalize an alliance with Italy's Fiat Group SpA.

But to get the money, Chrysler must rid its balance sheet of most of its debt, including any investment by its private owners.

That means Chrysler's majority owner, Cerberus Capital Management LP, would have to give up the $1 billion interest it has in the automaker, according to a person briefed on the deal.

The person asked not to be identified because terms are still being negotiated.

Cerberus would retain ownership in Chrysler's financial arm, but it has pledged to the government the first $2 billion in profits to repay a federal cash infusion, the person said.

--------

Associated Press writers Jim Kuhnhenn and Ken Thomas in Washington and Ben Leubsdorf in Warren, Mich., contributed to this report.

"GM CEO Wagoner forced out as part of gov't plan - After holding tight to GM's helm, CEO Wagoner forced out as part of government turnaround plan"

By TOM KRISHER and DAN STRUMPF, Associated Press

Last updated: 5:35 p.m., Monday, March 30, 2009

DETROIT -- Time and time again, General Motors Corp.'s board of directors reaffirmed its support for Chairman and CEO Rick Wagoner, even as the company piled up billions of dollars in losses and begged for government loans to stay alive.

But Wagoner is now a high-profile casualty of government intervention, forced out as part of the Obama administration's sweeping last-ditch effort to save the century-old auto giant.

Wagoner, 56, who spent 32 years with GM working all over the world, stepped down effective immediately, the company said in a statement early Monday.

He was replaced as CEO by Fritz Henderson, the company's vice chairman and chief operating officer.

GM board member Kent Kresa, a former chairman and CEO of Northrop Grumman Corp., was named interim chairman and said new directors will make up the majority of GM's board when a new slate is nominated for election at the company's annual meeting in August.

"The board has recognized for some time that the company's restructuring will likely cause a significant change in the stockholders of the company and create the need for new directors with additional skills and experience," Kresa said in a written statement.

GM shares tumbled 92 cents, or 25.4 percent, to $2.70 Monday.

That is down 89 percent from their 52-week high of $24.24 on April 30, 2008.

The management shake-up, according to several industry analysts, shows that the administration is serious about forcing GM to change more quickly and dramatically than it did during Wagoner's nearly nine-year tenure as CEO.

Jeremy Anwyl, chief executive of the automotive Web site Edmunds.com, called the move "political theater" to appease an increasingly bailout-weary public.

"American taxpayers are not happy," Anwyl said.

"But this way you're able to point to Rick and say he's gone, and that creates an environment where the loans become politically palatable."

By all accounts, Wagoner made progress in fixing GM.

While CEO, he cut its U.S. work force from 177,000 to roughly 92,000 today.

Wagoner also closed factories; shed the unprofitable Oldsmobile brand; globalized GM's engineering, manufacturing and design to save billions; and led a resurgence in quality and performance of its long-neglected cars.

In 2007, the company reached a landmark agreement with the United Auto Workers that shifted massive retiree health care costs to a union-run trust and ushered in a $14-per-hour wage for new hires, about half that of a current laborer.

But critics, including many members of Congress, say Wagoner moved too slowly, failing to cut enough of the company's huge health care and pension costs, and relying too long on high-profit pickup trucks and SUVs as gas prices rose and the market shifted toward smaller vehicles.

In the past four years, GM has piled up $82 billion in losses.

Still, Wagoner had the company moving in the right direction, Anwyl said.

"Was he moving fast enough or bold enough?"

"Obviously, in light of what we know today," Anwyl said, "the answer would be no."

While ousting Wagoner, the Obama administration made no management changes at Chrysler LLC, which also is getting government loans.

Chairman and CEO Robert Nardelli has only been in charge there since August 2007.

David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., said Wagoner's departure probably will have little impact on GM's restructuring efforts because Henderson was the heir-apparent in GM's succession plans.

"I don't think you would see any shift or significant change at all with Rick's leaving."

"I think the course that they're on, they're on," he said.

Wagoner became GM's face to the public during a disastrous November appearance before Congress to request assistance.

He was lampooned on NBC's Saturday Night Live after being torn apart by lawmakers for flying to Washington in a corporate jet and offering vague, rambling answers to their questions.

"Given the history, a change in management could hardly hurt and might do some good," Sen. Charles Schumer, D-N.Y., said Sunday.

Wagoner's ouster came just before President Barack Obama planned to announce what Chrysler and GM must do to get government loans beyond the $17.4 billion they have already received.

Several senior administration officials said GM will get enough government aid to restructure over the next 60 days, while Chrysler will get up to $6 billion and 30 days to complete an alliance with Italian automaker Fiat SpA.

If Chrysler fails to reach a deal with Fiat or another partner, the government won't provide any further financing, likely sending the company into liquidation.

The officials spoke on condition of anonymity because they were not authorized to make the details public.

Wagoner, a former Duke University basketball player, joined GM in 1977, serving in several capacities in the U.S., Brazil and Europe.

He became president and chief executive in 2000 and has served as chairman and CEO since May 2003.

In a December interview with The Associated Press, he declined to speculate on suggestions that he step down.

"I'm doing what I do because it adds a lot of value to the company," Wagoner said.

"It's not clear to me that experience in this industry should be viewed as a negative, but I'm going to do what's right for the company and I'll do it in consultation with the (GM) board (of directors)."

Wagoner isn't the first CEO to lose his job as part of a government bailout.

The CEOs of mortgage giants Fannie Mae and Freddie Mac were forced out after the government took over the companies in the fall.

Robert Willumstad, the former CEO of American International Group Inc., left the company in September.

GM cannot make severance payments to Wagoner or other senior executives under the terms of its governments loans.

The company said in its annual report this month that Wagoner is eligible to retire under GM's salaried employee and executive retirement plans, but the amount he would receive was unclear.

GM and Chrysler were required by the Bush administration to get major concessions from debtholders and the United Auto Workers, with a deadline of March 31 for signed contracts.

But very little headway was made in the negotiations this weekend as the parties awaited Obama's announcement.

Wagoner said in a statement early Monday that he was asked to "step aside" during a meeting with Obama administration officials on Friday, and he consented.

He called Henderson an excellent choice to lead the company and thanked employees around the world.

"GM is a great company with a storied history," he said.

"Ignore the doubters because I know it is also a company with a great future."

------

AP Auto Writer Dan Strumpf reported from New York. Associated Press Writer Ken Thomas in Washington contributed to this report.

"Analysis: Dems punt hard choices on Obama budget"

By ANDREW TAYLOR, Associated Press Writer

1 APRIL 2009

WASHINGTON – President Barack Obama's Democratic allies in Congress are taking only baby steps with his budget, putting off crucial decisions on his ambitious plans to expand health care, curb global warming and raise taxes on the wealthy.

Presidents Ronald Reagan, Bill Clinton and both Bushes all got far stronger assists from Congress on their first budgets.

Nonetheless, Obama, is counting on votes approving budget outlines this week to give him some semblance of momentum.

"If we don't pass the budget, it will empower those critics who don't want to see anything getting done," Obama told House Democrats Monday, according to a House aide who required anonymity to reveal what was said at the closed-door meeting.

Risk-averse Democrats, however, are merely kicking the can down the road rather than using the budget to give a real push to the president's agenda.

On health care, global warming and even Obama's signature "Making Work Pay" tax cut, the pending House and Senate budget plans offer no clues as to how those big ideas might advance.

The House and Senate are expected to pass separate versions of the budget resolution by week's end, then reconcile differences after their spring break.

Budget resolutions are not law.

They don't have to be signed by the president.

They are nonbinding outlines paving the way for future legislation.

Often, they only determine the amount of money that can be spent on departments' operating budgets that Congress must pass each year.

But they are an early measure of political strength.

And especially in the first year of a presidency — when most of the heavy lifting is done on a president's agenda — they have far more importance.

Votes taken during budget resolution debates can put members on record in favor of particular policies — tax cuts or increases, cost curbs on federal health care programs, or welfare reform, for example.

Presidents use political capital in winning such votes, and the lawmakers casting them tend to buy into the ideas involved.

At a comparable stage in 1981, Ronald Reagan broke the back of the Democratic House leadership in winning a key budget vote in favor of his tax cut agenda.

And in 1993, debate on Bill Clinton's deficit-cutting plan put his Democratic allies on record in support of higher taxes.

That made subsequent votes to actually impose those tax hikes easier.

Budget resolutions also ratified a key 1990 budget pact between President George H.W. Bush and Democrats in which Bush broke his "read my lips" pledge not to raise taxes.

Key Senate budget votes in 2001 and 2003 limited the size of George W. Bush's tax cuts — but made sure they advanced.

To be sure, Obama's plans for global warming and health care are still so fuzzy that it's difficult to translate them into numbers in a congressional budget plan.

And rather than overload Republicans now, it could make sense for Democrats to hold off on detailed assumptions in hopes of building bipartisan consensus later.

Still, the budget proposal that Obama sent to Congress in February did present some difficult choices:

_Fewer itemized tax deductions for the wealthy, providing money to help buy health care insurance for tens of millions of Americans who don't have it.

_Cuts in government payments to insurance companies and health care providers.

_An expensive and highly controversial plan to combat global warming through a "cap-and-trade" scheme that calls for auctioning off pollution permits for nearly $650 billion.

The Senate, during budget debate Tuesday, voted to instead devote any revenues from the scheme to help consumers pay higher gasoline and electric bills that energy companies will pass on to them.

Both the House and Senate budget writers, for the most part, ignored all of Obama's big ideas when crafting their fiscal plans, sapping his agenda of momentum.

Indeed, key lawmakers are already playing "taps" over his proposals to chip away at wealthy people's ability to deduct charitable donations and mortgage interest at higher rates.

Instead, they designed a host of so-called reserve funds that give some modest procedural help to Obama initiatives but do nothing concrete to really advance them.

As a result, lawmakers can cast symbolic votes in favor of Obama's agenda — even if those votes don't say anything about the depth of that commitment.

In fact, they can at the same time say they are voting for Obama's agenda even as they distance themselves from key elements of it, like his tax increases or the higher energy bills that would result from his global warming curbs.

The detail-free approach protects lawmakers from difficult votes.

Its defenders also say it provides lawmakers with leeway when writing follow-up legislation.

"The strength of reserve funds, from my perspective, is you give the committees full flexibility to write the best legislation they can," Senate Budget Committee Chairman Kent Conrad told reporters.

But flexibility can also indicate a lack of direction.

How will Democrats find $1 trillion or more over the next decade to pay for health care reforms?

Is Obama's cap-and-trade initiative too unpopular to advance?

For now, there are only guesses.

"They're not putting their cards on the table," said GOP lobbyist Rich Meade.

He knows how this works; he's a former staff director of the House Budget Committee.
___

EDITOR'S NOTE — Andrew Taylor has covered Congress since 1990.

We will be able to tell very soon whether President Obama is serious about delivering on his campaign promises by how strenously he goes to the people for support for passing the budget
he submitted...He is either serious about turning the ship of state in a new direction or he is just another front-man for the international gang-banksters...

Time indeed is going to tell, rla ....

In the meantime, these are damn fine seats that we have here in the mezzanine ....

And so ...

"Jobless rates rise in all US metro areas in Feb. - Jobless rates rise in all 372 metro areas in February; parts of Ind., NC post biggest gains"

By JEANNINE AVERSA, Associated Press

Last updated: 5:25 p.m., Wednesday, April 1, 2009

WASHINGTON -- Unemployment rates rose in all of the nation's largest metropolitan areas for the second straight month in February.

The U.S. Labor Department reported Wednesday all 372 metropolitan areas tracked saw their jobless rates rise in February from a year earlier.

Indiana's Elkhart-Goshen and North Carolina's Hickory-Lenoir-Morganton, both hammered by manufacturing layoffs, registered the biggest annual increases.

The U.S. unemployment rate rose to 8.1 percent in February, the highest in more than 25 years.

Economists predict the national jobless rate will climb to 8.5 percent in March.

The government releases that report on Friday.

It will probably hit 10 percent by year-end even if the recession were to end later this year, they said.

Eklhart-Goshen's jobless rate soared to 18 percent in February, up 12.5 percentage points.

The area has been battered by layoffs in the recreational vehicle industry.

RV makers Monaco Coach Corp., Keystone RV Co. and Pilgrim International have cut hundreds of jobs.

The jobless rate in Hickory-Lenoir-Morganton jumped to 15.7 percent, a 9.3 percentage point increase in the area located about 60 miles northwest of Charlotte.

About one-third of all jobs in Hickory are at manufacturing plants, said Scott Millar, director of the Catawba County Economic Development Corp., which recruits new businesses.

"I think part of the issue we're dealing with is pure math as the nation changes into a services oriented economy," Millar said.

The local layoffs accelerated at furniture makers and textile producers that have been shifting work to low-cost overseas producers for a decade, and at auto suppliers battered by slumping car sales.

Even the fiber-optic cable manufacturers that once seemed to be the region's hope are suffering from a lack of orders.

Corning Cable Systems in February said it would eliminate about 200 jobs as it shut an optical assembly plant in Hickory.

El-Centro, Calif., continued to lay claim to the highest unemployment rate -- 24.5 percent.

The jobless rate is notoriously high in the area, where many unemployed are seasonal agriculture workers.

Following close behind were Merced, Calif., with a jobless rate of 19.9 percent, and Yuba City, Calif., at 18.9 percent.

Elkhart-Goshen rounded out the top four.

Louisiana's Houma-Bayou Cane-Thibodaux region had the lowest unemployment rate at 3.5 percent.

The area, with about 200,000 residents, is located on the coast and serves as a vital support area for the offshore petroleum industry in the Gulf of Mexico.

Because of deepwater drilling in the Gulf, where projects take years to complete and bring to production, there has been little short-term effect from low energy prices.

There are several large shipbuilders in the region, including Bollinger Shipyards and Edison Chouest Offshore, along with several companies that construct the huge production platforms used on deepwater projects.

Offshore service companies that maintain production units and companies that transport personnel and supplies to and from the units, which Edison Chouest does as well, also use the area as a staging point.

"The problem is they can't find enough people," said Louisiana State University economist Loren Scott, who studies the state's employment picture.

"They'd love to find more."

Fallout from housing, credit and financial crises -- the worst since the 1930s -- is forcing companies to lay off workers and resort to other cost-saving measures to survive the recession.

A separate report, released Wednesday, said that private employers cut 742,000 jobs in March.

Employment at medium- and small-sized companies fell the sharpest -- by a combined 614,000.

The rest of the job cuts came from big firms -- those with 500 or more workers-- according to the report produced by Automatic Data Processing Inc. and Macroeconomic Advisers LLC.

"The sharp employment declines among medium- and small-sized businesses indicate that the recession continues to spread aggressively beyond manufacturing and housing-related activities to almost every area of the economy," said economist Joel Prakken, chairman of Macroeconomic Advisers.

Federal Reserve Chairman Ben Bernanke said the recession, which began in December 2007, could end this year, setting the stage for a recovery next year only if shaky financial markets are stabilized.

To brace the economy, the Fed has slashed a key bank lending rate to an all-time low and has embarked on a series of radical programs to inject billions of dollars into the financial system.

The Obama administration's $787 billion stimulus package includes money that will flow to states for public works projects, help them defray budget cuts, extend unemployment benefits and boost food stamp benefits.

The administration also is counting on programs to prop up financial companies and reduce home foreclosures to help turn the economy around.

Companies are cutting jobs and other costs to survive the recession.

Sales and profits have been hurt as consumers have hunkered down.

That's caused the economy to shrink.

Analysts believe the economy will keep on shrinking through the first six months of this year.

--------------

Associated Press writers Alan Sayre in New Orleans and Emery Dalesio in Raleigh, N.C., contributed to this report.

"House passes new, weaker bill in AIG bonus flap - House passes new, weaker bill in AIG bonus flap after voting earlier to retrieve money via IRS"

By ANNE FLAHERTY, Associated Press

Last updated: 7:15 p.m., Wednesday, April 1, 2009

WASHINGTON -- The House is taking another, albeit weaker, stab at trying to keep bailed-out financial institutions from paying their employees hefty bonuses after lawmakers had second thoughts about their vote two weeks ago to tax the bonuses away.

A new bill, which passed 247-171 on Wednesday, would allow the bonuses if the Treasury Department and financial regulators determine they are not "unreasonable or excessive."

"No one has the right to get rich off taxpayer money" and "no one should get rich off abject failure," said Rep. Alan Grayson, D-Fla., a co-sponsor of the bill.

While other lawmakers agreed, they struggled to find consensus on an issue that has roiled voters.

Earlier in the day, Democrats failed to ram through a separate, more punitive measure.

That bill, championed by Rep. John Conyers, D-Mich., would have let the attorney general sue employees to return excessive compensation, even if the money was promised in a contract.

The daylong debate was markedly cooler than last month after AIG shelled out $165 million in bonuses to employees, including traders in the financial products unit that nearly brought about insurance company's collapse.

The company has accepted $182 billion in federal aid.

Denouncing a "squandering of the people's money," the House agreed 328-93 last month to tax away the bonuses.

But that bill, along with the latest measure, remains stalled in the Senate, where Democratic leaders said they planned to wait to act on bonus legislation until after Congress returns on April 20 from its two-week spring break.

Senate Majority Leader Harry Reid, D-Nev., will be "looking at this idea and others over the next few weeks," his spokesman, Jim Manley, said.

Initially after the AIG flap, President Barack Obama had said he would "do everything we can to get those bonuses back."

But later, he warned the public against vilifying investors as he unveiled a new government-sponsored program encouraging private investors to buy up the billions of dollars of sour mortgage securities.

The latest House bill, sponsored by Grayson and Rep. Jim Himes of Connecticut, heeded Obama's message and took a softer tack.

Under the bill, Treasury Secretary Timothy Geithner and financial regulators would set standards for employee compensation at companies that accept bailout money, taking into account an employee's performance, as well as the stability of a financial institution.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said the bill would apply only to institutions that receive money through the government's $700 billion Troubled Asset Relief Program and would not apply to those participate in other TARP-related programs, including Obama's new public-private investment program.

The House agreed to an amendment by Rep. Melissa Bean, D-Ill., that exempts companies that enter into a payment schedule with Treasury to repay federal aid.

The 223-196 vote on the bill by Conyers, who chairs the House Judiciary Committee, was short of the two-thirds support needed to suspend the rules and limit debate on the bill.

Ultimately, 31 Democrats sided with Republicans to block it.

Several aides said Democrats worried the measure went too far to try to punish the financial industry and could deter investors from partnering with the government to try to salvage the economy.

------

The bill is HR 1664.

------

On the Net:

Congress: http://thomas.loc.gov

"Economy contracting at slower pace, no bottom yet - Manufacturing, construction, housing data show economy contracting more slowly, no bottom yet"

By MARTIN CRUTSINGER, Associated Press

Last updated: 5:25 p.m., Wednesday, April 1, 2009

WASHINGTON -- New economic reports on construction spending, manufacturing and pending home sales suggest the recession may be moving closer to a bottom.

But most analysts think the low point is still months away, with more bad news likely before the economy stabilizes and begins to rebound.

"I think the best that can be said right now is that the pace of decline has slowed, but we are still heading down," said David Wyss, chief economist at Standard & Poor's in New York.

"Any recovery is still a work in progress."

Wyss predicted that the recession, already the longest in a quarter-century, will last until September.

But he said the decline in the gross domestic product in the current April-June quarter will probably be just half the 6.3 percent drop that was recorded in the final three months of last year.

The Commerce Department reported Wednesday that construction spending dropped 0.9 percent in February, the fifth straight monthly decline but less than the expected 1.5 percent decrease.

Meanwhile, a trade group's measure of the health of manufacturing in March showed that key sector of the economy shrank for the 14th straight month.

The Institute for Supply Management said its manufacturing index rose to 36.3 last month from 35.8 in February.

Even with the small increase, the index is stuck well below the reading of 50 that is the dividing line between growth and recession.

The index hit a 28-year low of 32.9 in December.

"Manufacturing is still totally in the dumps, but it doesn't seem to be sinking further," said Joel Naroff, chief economist at Naroff Economic Advisors.

March proved to be another dismal month for U.S. automakers as low consumer confidence kept buyers away.

General Motors Corp. led the slide, with a 45 percent drop in sales compared with March 2008.

Ford Motor Co. reported a 41 percent decline, and Chrysler LLC said sales plunged 39 percent.

But on Wall Street, stocks rose after the construction and manufacturing reports were better than expected, and the National Association of Realtors said pending home sales rebounded in February from a record low.

The Dow Jones industrial average added more than 152 points, or 2 percent, to 7761.60.

Broader indicators also rose on the first trading day of the second quarter.

The 0.9 percent fall in construction spending was led by a 4.3 percent drop in housing.

That pushed housing construction to the lowest level in 11 years.

Home builders have cut back sharply, but they face a rising glut of unsold homes as record mortgage foreclosures dump more properties on the market.

The manufacturing report, based on a poll of the Tempe, Ariz.-based trade group of purchasing executives, covers indicators including new orders,
production, employment, inventories and prices.

None of the 18 manufacturing industries grew in March, and new jobs are unlikely before next year.

Inventories will need at least three more months to fall to healthy levels.

When that happens, new orders could rebound "and then it's a number of months before you see any improvement in employment," said Norbert Ore, chair of the ISM manufacturing survey committee.

"It's going to be long, and it's going to be slow," Ore said.

The Commerce Department report showed nonresidential construction rose 0.3 percent in February.

That was a slight rebound after a 4.3 percent drop in January that had been the biggest decline in 15 years.

With the financial sector facing its worst crisis in seven decades, banks have tightened their loan standards, making it harder to get financing for shopping centers and other commercial projects.

Analysts are forecasting that the commercial real estate industry is poised to fall into the worst crisis since the last great property bust of the early 1990s.

Delinquency rates on loans for hotels, offices, retail and industrial buildings have risen sharply in recent months and are likely to soar through the end of 2010 as companies lay off workers, downsize or close.

Construction spending by the government showed a 0.8 percent increase in February after two months of declines.

All the changes left total construction spending at a seasonally adjusted annual rate of $967.5 billion in February, the slowest pace since March 2004.

----------

AP Business Writer Tali Arbel in New York contributed to this report.

"Summiteers OK big loans, no econ rescue stimulus - Global crisis summit OKs $1.1 trillion in new loans, no quick stimulus to prod recovery"

By TOM RAUM, Associated Press

Last updated: 6:45 p.m., Thursday, April 2, 2009

LONDON -- Anxiously assembled at the most perilous moment for the global economy since the Great Depression, the world's financial powers pledged more than $1 trillion Thursday for emergency loans to contain the contagion.

But they rebuffed President Barack Obama's bid for new stimulus spending and made no guarantees of success.

"This was the day the world came together to fight back against global recession," declared British Prime Minister Gordon Brown, the summit host, as he led a choreographed show of unity designed to boost confidence in homes and boardrooms everywhere.

"This is just the beginning," added Obama.

No one promised an immediate impact, and all agreed much remained to be done.

Besides promising $1.1 trillion for lending to less-well-off countries -- an effort to erect an economic firewall and prop up remaining markets for bigger nations' exports -- the Group of 20 industrial and developing countries vowed major efforts to clean up banks' tattered balance sheets and get credit flowing again, to shut down global tax havens and to tighten regulation over hedge funds and other financial high-flyers in the U.S. and elsewhere.

But French President Nicolas Sarkozy and German Chancellor Angela Merkel failed to get the powerful "global regulator" they sought with authority across borders, an idea opposed by the United States.

The leaders did agree to some expanded international oversight, including cracking down on hedge funds and tax havens.

Collectively, the measures were an attempt to free the clogged pipes of capitalism, so spending, lending, borrowing and manufacturing can expand instead of continuing to retreat.

European and U.S. markets surged ahead of the concluding summit communique, and Wall Street held most of its gains after the results were announced late Thursday.

Unlike previous Western-dominated summits, this gathering included China, India and other economic giants as well as rising powers.

Said Brown:

"I think the new world order is emerging, and with it the foundations of a new and progressive era of international cooperation."

Obama, in his first major venture into international diplomacy, failed to get U.S. trading partners to spend more money on job-creating stimulus programs, as the U.S. and Britain have done.

The proposal was opposed strongly by France and Germany.

"I think we did OK," Obama told reporters afterward.

"When I came here, it was with the intention of listening and learning, but also providing American leadership."

"And I think the document that has been produced as well as concrete actions reflect a range of our priorities."

"In life there are no guarantees; in economics there are no guarantees," he said.

Both Brown and Obama were asked directly, "What happened today to help the world economy," and they both sidestepped the question.

Sarkozy, who at one point had threatened to walk out if he didn't get his way on international regulation, said he was happy with the outcome.

Obama "helped me on tax havens," Sarkozy told reporters.

"He's a very open man."

"It was completely in line with what we wanted."

Police were out in force, swarming the east London riverside meeting site Thursday as demonstrators protested world poverty and climate change.

A French daredevil scaled a London insurance building to unfurl a banner, entertaining people on the ground.

He was led away by police.

It was a high wire act inside the ExCel center, too, where summit partners gathered.

In an effort to offset their inability to agree on the more divisive proposals, the G-20 leaders outlined a raft of policies to rebuild trust in the financial system, including guidelines for new openness.

"The era of banking secrecy is over," said a statement issued by the G-20.

The meeting was a follow-up to one last Nov. 15 in Washington, when the group vowed to resist national protectionism that hampers world trade and to take steps to overhaul the global financial system.

The economy is considerably worse now than it was then -- and expectations for breakthroughs had been limited.

Participants sought to trumpet the achievements and not dwell on what they couldn't accomplish.

Obama called the summit "a turning point in our pursuit of global economic recovery."

The summit partners renewed vows not to turn inward or pass protectionist policies, even though since the November meeting 17 of the 20 core members, including the United States, have acted to protect domestic industries.

In the U.S. those actions have included bailouts for Detroit automakers and a "buy American" provision in the $787 billion stimulus package passed by Congress.

The U.S., which has committed nearly $2 trillion to bailing out failed financial companies and trying to prod consumer spending and job creation, had urged other wealthy countries to do likewise.

But European countries, fearful that such deficit spending would rekindle the kind of runaway inflation that marked the 1920s, resisted, suggesting that the stimulus steps they had already taken were sufficient.

Brown, the host, said the communique put out by the group "reflects a very high degree of consensus and agreement."

In the boldest moves of the summit, G-20 participants announced a tripling of loans available to the International Monetary Fund, to $750 billion, a $250 billion expansion in a special IMF fund to help members' foreign exchange reserves, and $250 billion to the IMF to support trade.

They also agreed to sell IMF-held gold to poor countries.

The G-20 leaders also said that developing nations -- hard-hit and long complaining of marginalization -- should have a greater say in world economic affairs.

Steven Schrage, a former U.S. trade official who is now an international business analyst with the Washington-based Center for Strategic and International Studies, gave the G-20 credit for bolstering the IMF, but said much more needs to be done.

"Given the circumstances, they handled it well."

"But when you look at this global fire that continued to spread over the last five months, there's still not a clear way forward on a lot of the critical challenges," he said.

"There's still no real agreement on stimulus going forward."

AND THE NEW AMERICAN SCAM BEGINS ...

And so ...

"FASB relaxes accounting rules for banks on assets - FASB relaxes accounting rules on asset values; could help banks but may undercut federal plan"

By MARCY GORDON, Associated Press

Last updated: 5:27 p.m., Thursday, April 2, 2009

WASHINGTON -- The board that sets U.S. accounting standards on Thursday gave companies more leeway in valuing assets and reporting losses.

The changes should help boost battered banks' balance sheets and financial stocks rallied on Wall Street, but the rules may undercut a new financial rescue program.

Some experts and industry officials said the move will help resuscitate banks, allowing them to increase earnings and carry less capital as a buffer against potential losses.

That should lead to more lending and help get the economy pumping again.

But others said the changes by the Financial Accounting Standards Board could undermine a crucial new rescue program mounted by the Obama administration, in which the government is joining with private investors to buy from banks hundreds of billions of dollars in toxic assets -- especially the securities tied to high-risk subprime mortgages at the heart of the financial crisis.

In the short run, banks would benefit by raising the value of the assets.

But higher values could drive away prospective private investors -- who don't like to overpay, even though the government will absorb most of the risk.

"I do think the timing is terrible," said Sue Allon, the CEO of Allonhill in Denver, who works with hedge funds and investment banks to price assets.

Ideally it would have been better for the government-backed program to have been started up and producing "some lift" to prices before FASB made its move, Allon said.

Joshua Shapiro, chief U.S. economist at MFR Inc., was more blunt, saying the FASB decision "allows financial institutions to use fictional valuations on many of their toxic assets" and further obscures their "true position."

But Marc Chandler, an analyst at investment firm Brown Brothers Harriman, said the move was "consistent with easing the strain on the banks."

"The net impact could help boost bank earnings, reduce the need for capital injections (into banks by the government) and may help encourage participation" by private investors in government programs for selling toxic assets, he said.

The FASB board's action helped fuel a buying surge on Wall Street, lifting the Dow Jones industrial average about 300 points in a rally led by financial company stocks.

But stocks finished below their highs of the day, and as the initial ebullience sparked by the accounting move wanes, investors may be less optimistic over its long-term implications.

At one point the Dow indicator broke through the 8,000 level for the first time since early February.

It finished more than 216 points higher at 7,978.08.

The FASB issued new guidelines under the so-called mark-to-market accounting rules, which require companies to value assets at prices reflecting current market conditions.

The changes, which apply to the second quarter that began this month, will allow the assets to be valued at what the banks project they might sell for in the future, rather than in the current, distressed environment.

Still, investor advocates and other critics assailed the FASB, which took the action -- with some dissension -- at a public meeting of its five-member board at its headquarters in Norwalk, Conn.

The critics said the board had sacrificed its independence and buckled to pressure from lawmakers carrying water for banking industry interests.

The FASB received hundreds of comment letters opposing the moves in the two weeks since it proposed them from mutual funds, accounting firms and others contending they would damage honest financial reckoning by masking the deficiencies and risks lurking within the system.

A House panel last month wrung a pledge from FASB Chairman Robert Herz to try to issue guidelines in three weeks that would relax the mark-to-market rules to bring relief to the nation's banks in the financial emergency.

The head of the House Financial Services subcommittee, Rep. Paul Kanjorski, D-Pa., had held out the threat of legislation to pressure the standard-setting board to take the steps.

The normally low-profile organization was put on the defensive.

"These are extraordinary times and the FASB has responded swiftly to the critical needs of the capital markets," Neal McGarity, a FASB spokesman, told reporters after the votes.

He said the changes "were already in our plans and thinking well ahead of" congressional calls for action.

An estimated $2 trillion in soured assets is weighing on banks' balance sheets.

The mark-to-market rules have forced banks to take steep write-downs on subprime mortgage securities and other toxic assets, as the industry has reeled from the housing market slump and banks have foundered and failed.

The new guidelines remove the presumption that if there isn't a current active market for assets, they must automatically be considered distressed.

They also will allow banks to avoid reporting some losses on securities by splitting them among factors like anemic markets or fluctuating interest rates that won't have to be counted toward net income or loss.

Two of the five FASB board members, Thomas Linsmeier and Marc Siegel, voted against the change in reporting of such impaired assets.

Siegel said "the pressure keeps on coming back to us."

They argued it was the sort of decision federal bank regulators should make, because it could affect how much capital banks would need to hold, and that the FASB had been pressured by Congress to take it.

"This is a huge mulligan for banks with junky securities," said Jack Ciesielski, an accounting expert who writes the financial newsletter The Analyst's Accounting Observer.

A key concern is the impact of the changes on the government's new program in which it is joining with private investors to buy up about $500 billion in toxic assets from banks.

With the banks now able to keep assets impaired by market factors from affecting their bottom line, they'll be more likely to hold onto them.

"Buyers will be willing to buy them," possibly at less than 30 or 40 cents on the dollar, Allon said.

Some investors prefer a mix of higher- and lower-quality assets, she noted.

If the assets remain on banks' books, they may continue to be reluctant to lend as they fret over the assets' future performance.

That could work against the purpose of the government's program: to break the logjam in lending and get the economy pumping again, which would hurt consumers and small businesses caught in the credit squeeze.

IF THE FED IS POLITICALLY INDEPENDENT .....

WHAT HAS IT GOT TO FEEL "EXTREMELY UNCOMFORTABLE" ABOUT?

IF IT IS POLITICALLY INDEPENDENT .....

WHO HAS THE POWER TO MAKE IT FEEL "EXTREMELY UNCOMFORTABLE"?

IF THE FED IS POLITICALLY INDEPENDENT .....

HOW CAN THE POWER TO MAKE IT FEEL "EXTREMELY UNCOMFORTABLE" BE BROUGHT TO BEAR?

BY EXTORTION?

BY THREATS?

BY BLACKMAIL?

AND BY WHOM?

WHAT IS NOT WASHING, HERE?

AND WHY?

IT SOUNDS TO ME LIKE WE ARE BEING FED A FULL LOAD OF PURE BULL**** HERE BY "BENNY BOY" BERNANKE ....

And so ...

"Fed 'extremely uncomfortable' about bailouts"

By JEANNINE AVERSA, AP Economics Writer

3 APRIL 2009

While acknowledging that the Federal Reserve was "extremely uncomfortable" about last year's bailouts of big financial companies, Fed Chairman Ben Bernanke said Friday the central bank's strategy to ease the financial crisis is working.

Bernanke was referring to the Fed's unprecedented decisions last year to step in and financially back JPMorgan Chase's takeover of then-troubled investment house Bear Stearns and throw its first of four financial lifelines to insurance giant American International Group.

In remarks prepared for a Fed conference in Charlotte, N.C., Bernanke said the central bank was forced to take action because the collapse of those companies would have dealt a serious blow to the financial system and the national economy.

The situation underscores the need for new powers to allow the government to safely wind down such huge firms, he said.

Bernanke and Treasury Secretary Timothy Geithner recently asked Congress for such powers.

Credit provided under those company bailout accounts for only 5 percent of the Fed's $2 trillion balance sheet.

Still, "these operations have been extremely uncomfortable for the Federal Reserve to undertake and were carried out only because no reasonable alternative was available," Bernanke said.

The Fed's radical programs to bust through the financial crisis and spur bank lending to consumers and businesses are helping.

Its program to provide financial companies with loans, buy mounds of debt that companies rely on for short-terming financing of payrolls and supplies, and efforts to bolster consumer lending and the mutual funds have eased some credit stresses, he said.

Such efforts by the Fed, along with central banks in other countries, have "significantly reduced funding pressures for financial institutions, helped to reduce rates in bank funding markets and increase overall financial stability," Bernanke said.

Getting banks to boost lending to customers is a key ingredient to any economic turnaround.

The Fed chief said he expects to see a "gradual resumption of sustainable economic growth."

However, he didn't say when.

Bernanke also defended the Fed's decisions to revive the economy by plowing trillions of dollars into efforts to stabilize the banking system and to lower interest rates.

Its program to buy mortgage-backed securities of Fannie Mae and Freddie Mac has helped drive down the rate on 30-year mortgages to record lows.

"These are extraordinary challenging times for our financial system and our economy," Bernanke said.

"I am confident that we can meet these challenges, not least because I have great confidence in the underlying strengths of the American economy."

To brace the economy, the Fed has slashed a key interest rate to an all-time low of near zero.

The central bank has turned to unconventional tools — such as its recent decision to start buying government debt — to pull down interest rates on a range of consumer loans.

The goal: entice Americans to go out and spend again, which would help lift the economy out of recession.

"Obama: US cannot shoulder Afghan burden alone"

By SLOBODAN LEKIC, Associated Press Writer

3 APRIL 2009

STRASBOURG, France – On the eve of the NATO summit, President Barack Obama didn't get what he wanted most from U.S. allies: significant new commitments of combat troops for Afghanistan.

Faced with stiff public opposition to war, reluctant European leaders on Friday offered only limited aid for civilians and some troops to help train Afghan police and soldiers.

Afghanistan was the theme to which a frustrated Obama returned over and over throughout the day.

"This is a joint problem, and it requires a joint effort," he said.

The summit's co-hosts, French President Nicolas Sarkozy and German Chancellor Angela Merkel, both were quick to offer support for Obama's new Afghan strategy of sending American reinforcements and bolstering Afghan forces.

But they went no further.

"We totally endorse and support America's new strategy in Afghanistan," Sarkozy said a joint news conference with Obama after they met.

After her own talks with the president later in the afternoon, Merkel said:

"We have a great responsibility here."

"We want to carry our share of the responsibility militarily — in the area of civil reconstruction and in police training."

Afghanistan was a key issue at a working dinner of all NATO leaders.

"This is our No. 1 operational priority," NATO spokesman James Appathurai said.

As the leaders talked, protesters clashed for a second day with French police, injuring two officers.

With more protests to come, the efforts to disrupt the summit signaled the unhappiness of many Europeans for the faraway war, especially at a time of global economic crisis.

Backing from Sarkozy and Merkel is vital for Obama, as he seeks to convince NATO that a greater effort by all is the only way to defeat the escalating Taliban insurgency.

U.S. diplomats said the administration was aware of the domestic pressures on their allies and would not press the issue.

What the Europeans had to offer concretely fell short of Obama's expectations, in part because many of their citizens believe that what is needed is a political solution and civilian aid to rebuild Afghanistan — not more combat troops.

Obama plans to add 21,000 U.S. soldiers and Marines to the 38,000 Americans already fighting militants.

His strategy also calls for increased focus on boosting the capabilities of Afghanistan's police and army and improving the effectiveness of the government in Kabul.

The president was to brief his fellow leaders about the new strategy at a formal dinner Friday in the German spa resort of Baden-Baden.

NATO officials said they expected the Europeans to pledge four more infantry battalions to provide security in the run-up to Afghanistan's general elections in August.

NATO has a force of about 58,000 soldiers in Afghanistan, of which about 26,000 are Americans.

The other 12,000 U.S. troops operate under a separate command.

British officials traveling to the summit with Prime Minister Gordon Brown told reporters he would offer to send more troops to Afghanistan — but the offer depended upon other NATO members sending additional forces, Britain's Press Association said.

Officials said the number would likely be in the "mid- to high hundreds."

Britain now has 8,000 soldiers in Afghanistan.

Spain, too, said it would increase the force it has in Afghanistan — currently numbering about 770 soldiers — with a small contingent to help train Afghan army officers.

Belgium said it would add some 65 soldiers to the 500 it has in Afghanistan and send two more F-16 jet fighters.

It also plans to double its financial aid to an annual euro12 million ($14.5 million).

In addition to Afghanistan, the summit will look at repairing the alliance's relations with Russia, which were frozen after last year's Russo-Georgian war.

Russia has become increasingly important as an alternate supply route for NATO forces in Afghanistan since insurgents stepped up attacks on the main logistics route through Pakistan.

Moscow has offered NATO the use of its railways and roads to move supplies from Europe to Central Asia.

NATO also wants Russia to provide the Afghan government with airlift support as well as equipment and spare parts for its Soviet-era weaponry.

There was agreement among NATO leaders "that Russia is a great European power, a partner with which NATO must cooperate and wants to cooperate," Appathurai, the alliance spokesman, said.

He said that the NATO-Russia Council — a joint body whose work was suspended after the war in Georgia — would hold its first meeting in coming weeks and that a meeting between NATO's and Russia's foreign ministers was expected in May.

In internal matters, the alliance planned discussions on a major leadership change, with Dutch diplomat Jaap de Hoop Scheffer's term as NATO secretary-general running out Aug. 1.

Danish Prime Minister Anders Fogh Rasmussen has emerged as the top candidate despite opposition from Turkey.

Fogh Rasmussen infuriated many Muslims by speaking out in favor of freedom of speech during an uproar over Danish newspapers' publication of cartoons of the Prophet Muhammad in 2006.

Appathurai said the leaders discussed the succession issue, but made no decision.
___

Associated Press writer Deborah Seward contributed to this report.

AND WHAT DON'T WASH IN THIS ARTICLE IS OBAMA APPARENTLY REFUSING TO TAKE BACK TARP MONEY FROM JP MORGAN ....

OBAMA SAID IT WOULD SEND A "BAD SIGNAL" ....

BUT TO WHOM?

WHAT IS UP WITH THAT, I MUST WONDER .....

WHAT FLIM-FLAM IS REALLY GOING ON HERE?

And so ...

"Inside Obama's bank CEOs meeting"

Eamon Javers

Fri Apr 3, 2:00 pm ET

The bankers struggled to make themselves clear to the president of the United States.

Arrayed around a long mahogany table in the White House state dining room last week, the CEOs of the most powerful financial institutions in the world offered several explanations for paying high salaries to their employees — and, by extension, to themselves.

“These are complicated companies,” one CEO said.

Offered another: “We’re competing for talent on an international market.”

But President Barack Obama wasn’t in a mood to hear them out.

He stopped the conversation and offered a blunt reminder of the public’s reaction to such explanations.

“Be careful how you make those statements, gentlemen."

"The public isn’t buying that.”

“My administration,” the president added, “is the only thing between you and the pitchforks.”

The fresh details of the meeting — some never before revealed — come from an account provided to POLITICO by one of the participants.

A second source inside the meeting confirmed the details, and two other sources familiar with the meeting offered additional information.

The accounts demonstrate that despite the public comments on both sides that the meeting was cordial, the tone in the room was in fact one of mutual wariness.

The titans of finance -- men used to being the most powerful man in almost any room -- sized up a new president who made clear in ways big and small that he expected them to change their ways.

There were signs from the outset that this was a business event, not a social gathering.

At each place around the table sat a single glass of water.

No ice.

For those who finished their glass, no refills were offered.

There was no group photograph taken of the CEOs with the president, which typically happens at ceremonial White House gatherings but not at serious strategy sessions.

“The only way they could have sent a more Spartan message is if they had served bread along with the water,” says a person who attended the meeting.

“The signal from Obama’s body language and demeanor was, ‘I’m the president, and you’re not.’”

According to the accounts of sources inside the room, President Obama told the CEOs exactly what he expects from them, and pushed back forcefully when they attempted to defend Wall Street’s legendarily high-paying ways.

From the White House, there were five principal attendees: chief of staff Rahm Emanuel, who arrived a few minutes late, Treasury Secretary Timothy Geithner, Council of Economic Advisers chairwoman Christina Romer, senior adviser Valerie Jarrett and director of the National Economic Council Larry Summers.

Uncharacteristically, Summers said almost nothing, and it appeared to one participant as if he had been told to remain silent.

To break the ice, JPMorgan Chase CEO Jamie Dimon offered Geithner a fake check for $25 billion, the amount of Troubled Asset Relief Program money that the company has accepted.

Although many of those in the room laughed, Geithner didn’t keep the check.

The president entered the room a few minutes later and made a lap of the table, shaking hands and saying hello to the CEOs, several of whom he called by name.

Taking his seat at the table, the president said, "So let's get to it."

He spoke for several minutes without notes, giving an overview of the economic situation as he saw it.

But the first comment that made an impression on several attendees was on Wall Street salaries and bonuses.

The president spoke of public outrage over the high-flying executive lifestyle.

"The anger gentlemen, is real," Obama said.

He urged pay reform and said rewards must be proportional, balanced, and tied to the health and success of the company.

The president described the financial system as still “fragile” and asked for cooperation from the CEOs.

But he also told them he wouldn’t shy away from regulatory reform.

Obama wrapped up his remarks and threw the conversation open to the table, saying, “So, who’d like to talk?”

JPMorgan’s Dimon spoke first.

He began by complimenting the president on the economic team he’d assembled.

And he said his industry needs to explain more directly to the American people that the economic recovery plans are already working.

Dimon also insisted that he’d like to give the government’s TARP money back as soon as practical, and asked the president to “streamline” that process.

But Obama didn’t like that idea — arguing that the system still needs government capital.

The president offered an analogy:

“This is like a patient who’s on antibiotics,” he said.

“Maybe the patient starts feeling better after a couple of days, but you don’t stop taking the medicine until you’ve finished the bottle.”

Returning the money too early, the president argued could send a bad signal.

Several CEOs disagreed, arguing instead that returning TARP money was their patriotic duty, that they didn’t need it anymore, and that publicity surrounding the return would send a positive signal of confidence to the markets.

Bank of America CEO Ken Lewis cracked a joke at the expense of his peers who’d lavished praise on the administration:

“Mr. President,” he said, “I’m not going to suck up to Geithner and Summers like the other CEOs here have.”

Lewis also urged the president not to paint all the banks with the same broad brush.

The president argued that’s not what the White House was doing.

Indeed, earlier the same week, Obama said at a nationally televised news conference, “The rest of us can’t afford to demonize every investor or entrepreneur who seeks to make a profit.”

As the meeting wound down after nearly an hour and a half, the CEOs hustled out to live television positions on the White House grounds, where many gave interviews to CNBC.

It had been a landmark day in the history of American capitalism.

Unbeknownst to the financial executives, General Motors CEO Rick Wagoner was also on Pennsylvania Avenue that day, meeting with Obama’s auto bailout task force.

Although the finance CEOs got a meeting with the president, Wagoner saw only Obama’s senior advisor Steven Rattner at the Treasury Department.

During the meeting, Rattner demanded Wagoner’s resignation.

It had been a tough day for CEOs in the nation’s capital.

"Fannie, Freddie worker bonuses total $210M - Bonuses for Fannie, Freddie workers total $210 million; regulator defends payouts"

By FNM,FRE, Associated Press

Last updated: 2:05 p.m., Friday, April 3, 2009

WASHINGTON -- Mortgage finance giants Fannie Mae and Freddie Mac plan to pay more than $210 million in bonuses through next year to give workers the incentive to stay in their jobs at the government-controlled companies.

The retention awards for more than 7,600 employees were disclosed in a letter from the companies' regulator released Friday by Sen. Charles Grassley of Iowa, the senior Republican on the Senate Finance Committee.

The companies paid out nearly $51 million last year, are scheduled to make $146 million in payments this year and $13 million in 2010.

"It's hard to see any common sense in management decisions that award hundreds of millions in bonuses when their organizations lost more than $100 billion in a year," Grassley said in a statement.

"It's an insult that the bonuses were made with an infusion of cash from taxpayers."

Fannie and Freddie declined to comment on Friday.

Fannie had disclosed that it plans to pay four top executives at least $1 million each in retention payments that run through February.

Freddie has yet to report on which executives are in line for the awards.

The two companies, hobbled by skyrocketing loan defaults, were seized by regulators last fall and operate under close federal oversight with new chief executives installed by the government.

Since the takeover, Fannie Mae has received $15 billion in federal aid, while Freddie Mac has received nearly $45 billion.

The companies' federal regulator, James Lockhart of the Federal Housing Finance Agency, defended the bonuses in a March 27 letter to Grassley, noting that the collapse of the company's stock prices "destroyed years of savings for many" workers.

The companies' stocks now trade below $1, down from more than $60 in fall 2007.

Lockhart denied a request Grassley made last month to release names of employees receiving at least $100,000 in bonuses, citing "personal privacy and safety reasons."

More than 70 percent of new loans in recent months have been backed by Fannie and Freddie.

They own or guarantee almost 31 million mortgages worth about $5.5 trillion, more than half of all U.S home loans.

Keeping the companies "operating at full speed was best for the housing markets and best for the economy," Lockhart wrote.

"That would only be possible is we retained the Fannie and Freddie teams."

But many lawmakers have little sympathy for that argument amid a public outcry over roughly $165 million in bonuses paid out last month by bailed-out insurance giant American International Group.

Earlier this week, the House passed a bill that aims to keep bailed-out financial institutions from paying their employees hefty bonuses after lawmakers had second thoughts about their vote two weeks ago to tax the bonuses away.

The bill would allow the bonuses if the Treasury Department and financial regulators determine they are not "unreasonable or excessive."

Initially after the AIG flap, President Barack Obama had said he would "do everything we can to get those bonuses back."

But the White House later backed down as it worked to ensure any restrictions on bonuses didn't alienate the banks and investors needed to help clean up the financial mess.

"Loan modifications rise; many don't pare payments - Foreclosure prevention efforts grow, but fewer than half of loan modifications reduce payments"

By ALAN ZIBEL, Associated Press

Last updated: 2:05 p.m., Friday, April 3, 2009

WASHINGTON -- Though lenders are boosting their attempts to curb record-high home foreclosures, fewer than half of loan modifications made at the end of last year actually reduced borrowers' payments by more than 10 percent, data released Friday show.

The report, based on an analysis of nearly 35 million loans worth more than $6 trillion, was published by the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision.

It provides the most detailed and broad analysis to date of efforts to stem the foreclosure crisis, which President Barack Obama is trying to combat with a $75 billion plan to promote loan modifications.

The report helps explain why many loans are falling back into default after being modified.

Many borrowers and consumer groups contend that the modifications offered by the lending industry aren't very generous, despite more than a year of public prodding from regulators.

For instance, nearly one in four loan modifications in the fourth quarter actually resulted in increased monthly payments.

That situation can happen when lenders add fees or past-due interest to a loan and spread those payments out over the 30- or 40-year period.

Perhaps unsurprisingly, the report found that loans were far less likely to fall back into default if a borrower's monthly payment is reduced by a healthy amount.

Nine months after modification, about 26 percent of loans in which payments had dropped by 10 percent or more had fallen back into default.

That compares with about half of loans in which the payment was unchanged or increased.

"This new data shows that, in the current stressful environment, modification strategies that result in unchanged or increased mortgage payments run the risk of unacceptably high re-default rates," Comptroller of the Currency John Dugan said in a statement.

But regulators said they saw a positive trend in the data, collected from mortgage companies including Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc.

Traditionally, lenders have seen loan workouts as a way to get a borrower back on track after a temporary disruption in income.

Now, with the economy sinking fast and foreclosures soaring, they are increasingly coming around to the idea to that more permanent changes are needed.

Among loan modifications made in the October-December quarter, about 37 percent resulted in a drop in payments of more than 10 percent, compared with about one-fourth in the first nine months of the year.

Regulators saw that growth as a positive sign.

"The trend toward lowering payments to make home mortgages more affordable is moving in the right direction," John Bowman, acting director of the Office of Thrift Supervision, said in a prepared statement.

The Obama administration is aiming to help up to 9 million borrowers stay in their homes through refinanced mortgages or modified loans.

Still, the faltering economy, driven down by the collapse of the housing bubble, is causing the housing crisis to spread.

Among the loans surveyed in the report, just over 10 percent were delinquent or in foreclosure, compared with 7 percent at the end of September, the report said.

Delinquencies are increasing the most among prime loans made to borrowers with strong credit, it said.

A broader study of the mortgage market last month found a higher percentage of problem loans.

The Mortgage Bankers Association reported that nearly 12 percent of all Americans with a mortgage -- a record 5.4 million homeowners -- were at least one month late or in foreclosure at the end of last year.

That's up from 10 percent at the end of the third quarter, and from 8 percent at the end of 2007.

The trade group's study includes more than 45 million loans, 10 million more than the government report.

I WONDER WHY TIMMY GEITHNER COMES ACROSS AS A LYING LITTLE WEASAL .....

"Geithner denies White House sidestepping CEO pay limits"

By Doina Chiacu

4 APRIL 2009

WASHINGTON (Reuters) – U.S. Treasury Secretary Timothy Geithner denied on Sunday the Obama administration was crafting bailout initiatives to allow companies to evade limits on executive pay and other restrictions imposed by Congress.

"No, that's not true," Geithner said when asked about a report in Saturday's Washington Post that the White House was trying to allow some exceptions.

"Now, our obligation is to apply the laws that Congress just passed on executive compensation and we're going to do that," he told the CBS program "Face the Nation."

"We're also going to make sure that these programs are as effective as possible in making credit more available to businesses and families across the country."

The Post said President Barack Obama's administration believes it can sidestep the rules because it has in many cases decided not to provide federal aid directly to the financial institutions, instead setting up special entities that act as middlemen to channel the funds.

Executive pay restrictions are among efforts by Congress to claw back bonuses and curb pay amid public anger over executive bonuses at insurer American International Group, which has received a bailout worth up to $180 billion.

The "Pay for Performance Act of 2009" was passed by the House of Representatives last week and now goes to the Senate.

Some financial firms have said the prospect of compensation limits make them reluctant to join in the Treasury's financial rescue package, which could diminish its power to cleanse toxic assets from banks' books and jump-start lending.

Obama senior adviser David Axelrod told "Fox News Sunday" the president does not want to discourage companies from participating in the Treasury programs but has a tough set of standards on executive pay.

"On some of these programs, we're asking financial companies to come in and help solve this problem by providing more lending, by buying up toxic assets and so on," he said.

"We don't want to create disincentives and undermine the program," Axelrod said.

"So we have to look very closely at this, making sure that we're not rewarding people for irresponsibility, that people -- that firms that get extraordinary help -- aren't getting, aren't giving out huge bonuses."

Geithner said the White House was committed to enforcing the restrictions approved by Congress.

"Absolutely, because we want the American taxpayers' assistance going to generate greater lending -- not providing excess compensation," he told CBS.

"It is very important to us that every dollar of assistance to provide goes to expand lending."

(Editing by John O'Callaghan)

Early payback of TARP monies right now is not wanted because of the signal it sends regarding the banks which cannot pay it back yet. It could encourage some banks to pay back the funds before they are really stable and those that don't appear weaker.

That's what is not wanted right now.

They want the liquidity to remain in the system and also want the system as a whole to improve together and not have a game of one upsmanship being played by some banks to disadvantage others.

Thanks for your thoughtful input, as always, NiteOwl ....

However, it still really does not wash ...

Although I can see what you are saying here, from your perspective .....

I think that if you subject your last sentence to some more analysis, you will discern that it is a FLAWED PREMISE, since they want banks competing with each other, and the original premise included strong banks buying up weak banks ....

And what you are saying implies that the banks in fact have been NATIONALIZED, appearances to the contrary notwithstanding ...

If that is so, then that should be made public ....

And so ....

I find myslf more in synch with this statement, NiteOwl .....

The ILLUSION of strength is not strength ....

The ILLUSION of strength is an ILLUSION ....

ILLUSIONS are what CON MEN and SCAMMERS use to lure in their marks ....

And so ....

"Treasurys fall as stocks post 4th weekly gain - Treasurys decline as stocks extend rally despite big jump in unemployment rate"

Associated Press

Last updated: 5:35 p.m., Friday, April 3, 2009

NEW YORK -- Treasury prices sank Friday after a report showing massive job losses couldn't hamper gains in the stock market.

"I suspect that we're approaching that inflection point where the trading community can no longer be counted on to continue buying Treasuries in response to each incremental sign of economic weakness, and is starting to center its focus on some of the more inflationary aspects of current policy initiatives," Morgan Keegan fixed income analyst Kevin Giddis wrote in a note Friday, referring to the government's stimulus and financial bailout programs.

"Stocks fall after 4-week rally; Dow below 8,000 - Wall Street falls ahead of 1st-quarter earnings; banks lead decline amid worries about loans"

By SARA LEPRO, Associated Press

Last updated: 6:05 p.m., Monday, April 6, 2009

NEW YORK -- Wall Street pulled back for the first time in five days Monday as investors worried about balance sheets at banks and the quarterly results that businesses will start releasing this week.

Financial shares sold off after a prominent analyst predicted more losses at banks and said the government's efforts to prop up the ailing industry might not be as effective as hoped.

Michael Mayo issued "sell" ratings on several banks and said in his report that loan losses could exceed levels seen in the Great Depression.

A jump in stocks of defense contractors helped the market pull off its lows.

Some traders were also unnerved by a two-week delay in a government program to help banks unload troubled loans from their books, which relies on hedge funds and other private investors buying loans and other assets from banks.

On Monday the Treasury Department extended the application deadline for the program to April 24 and relaxed some of the participation criteria to attract a wider pool of investors.

The delay was a worrisome signal that the program could be running into problems.

Financial stocks largely carried the market's recent rally, as unprecedented government intervention and reassurances from bank CEOs that business is better than expected fed optimism that the economy could be turning around.

"Conn. AG questions credit-rating companies - Conn. attorney general questions $400 million of bailout money going to credit-rating agencies"

By DAVE COLLINS, Associated Press

Last updated: 5:05 p.m., Monday, April 6, 2009

HARTFORD, Conn. -- Connecticut Attorney General Richard Blumenthal is questioning why up to $400 million in federal bailout money is going to the big three credit-rating agencies that he says helped create the economic meltdown.

Blumenthal said Monday that he is investigating why a $1 trillion government bailout program designed to unfreeze the credit markets steers money to Moody's, Fitch and Standard & Poor's and shuts out their six smaller competitors.

He said the companies may have violated antitrust laws, and he alleged they overrated toxic assets before the meltdown.

"The net result here is that up to $400 million in fees will be showered on the same ratings agencies whose mistaken ratings and inflated ratings led to the economic crisis," Blumenthal said.

"It is another reward for failure."

Blumenthal said he subpoenaed the companies for documents last week and asked Federal Reserve Chairman Ben Bernanke in a letter Monday to revise the bailout program to stop favoring the three rating agencies.

The program, created by the Federal Reserve and the Treasury Department, is called the Term Asset-Backed Securities Loan Facility, or TALF.

It provides loans to big investors and companies to buy newly issued securities backed by consumer debt, stimulating lending for auto, education, credit card and other loans.

The program starts by providing up to $200 billion in financing to investors, such as hedge funds, private equity funds and mutual funds, to buy up the debt.

It has the potential to generate up to $1 trillion in lending.

Blumenthal said the program requires financial institutions to have new securities rated by two or more "major nationally recognized statistical rating agencies."

He said Moody's, Fitch and Standard & Poor's are the only raters that meet the criteria.

Fitch took issue with Blumenthal's allegations in a statement Monday, calling his announcement "an unfortunate development stemming from incomplete or inaccurate information."

Fitch said the three credit-rating agencies stand to gain "significantly less" from the program than what has been reported in the media, and its fees are capped at certain amounts.

Standard & Poor's said in a statement that Blumenthal's investigation is "without merit."

Both Standard and Poor's and Fitch noted the Federal Reserve is responsible for the criteria for participating in TALF, and rejected Blumenthal's allegation that the companies possibly exerted influence on the program's rules.

Messages left for Moody's and the Federal Reserve on Monday weren't immediately returned.

Blumenthal's new actions expand his existing antitrust investigation of the three rating agencies.

He sued the firms last July, alleging they gave artificially low credit ratings to cities and towns that ultimately cost taxpayers millions of dollars in unnecessary insurance and higher interest payments.

The three firms have denied those allegations and said the lawsuit is without merit.

Blumenthal said the three agencies have become an "old boys' club" on Wall Street and their monopoly must be broken up.

Securities and Exchange Commission Chairman Mary Schapiro said last month that the SEC may need to ask Congress for broader authority to supervise the Wall Street credit-rating agencies.

Schapiro has suggested the SEC should explore ways to diminish the market's dependence on ratings by the big agencies.

The three firms dominate the $5 billion-a-year industry.

The SEC was given new authority over them in 2006 legislation, but Schapiro has said she isn't sure whether it's enough.