The Worst Is Yet to Come

One of the favorite retail analysts in the Cafe is Howard Davidowitz, and he is probably in the top ten overall. The accomplished shoppers in our crowd (predominantly the ladies for some reason, who have a canny sense of price and demand and store quality, whereas yours truly becomes overwhelmed by a numbing dread upon entering most retail establishments of the non-Home Depot or non-electronics persuasion) all tend to shake their heads in agreement when David speaks to the ups and downs of specific store chains and trends. I can think of no higher recommendation, for these are for the most part the front line consumers and they take their duties seriously.

Last night in speaking with a youngish acquaintance just completing law school (another one, alas) who was looking for advice on long term investments we observed that now is the time to remain liquid because 'the worst is yet to come.'

In 1999 I began an intense study of market bubbles and crashes as mentioned before. This included buying contemporary magazines and newspapers and reading them to see what was going through people's minds.

Today reminds me of the briefly sunny period in 1930-1 when most economists and public officials agreed that the Depression was already over and the economy was back on track. President Hoover dismissed a delegation of businessmen who came to Washington with ideas on stabilizing the economy with "Too late gentlemen, the slump is over."

There are few things from my childhood that I remember more vividly than grandmother's comments regarding this false recovery. "If we knew what was coming, we would have killed ourselves." This from as strong a person as I have ever encountered, with a faith that would break rocks. The Great Depression left an indelible mark, or more accurately scar, on her entire family, and my father's as well.

And I never heard the name "Franklin Roosevelt" from her lips without it being preceded by "God bless" followed by "he saved my family." Not all of her children unfortunately. She said she cried so much and so often that she was never able to cry again. And she did not, even at the end.

Of course it was the second half of the great stock decline after the 1929 Crash that did the most damage, because this is when the carnage moved from financial assets and the banks into the real economy, with unemployment rising to 25% into the trough of the Depression in 1930.

Roosevelt came into office and began spending and innovating with programs to attempt to mitigate the impact of the economic collapse on America's families. Other countries, such as Italy, German and Japan, made their own political choices. We need to bear in mind that America itself came perilously close to a genuine brand fascism, and not the cartoon caricature presidential overreach cited by the corporate elites of the day. Hitler and Mussolini were the solutions proposed by the industrialists, they were their men, and they bankrolled them heavily.

And so here we are. What comes next is anyone's guess. But by now you should be accepting and internalizing the general themes, including the devaluation of the dollar down to levels that are probably still not believable, an activist central government nationalizing key industries, civil unrest and agitation, and a confusing cacophony of hysterical mumbo jumbo coming from media whores and corrupt officials.

The crisis is not over. We have just finished the beginning, the easy part, the initial collapse of the bubble. The worst is yet to come.

Watch the video of this commentary from Howard Davidowitz linked below if you get an opportunity. His delivery is priceless New York style.


"The Worst Is Yet to Come": If You're Not Petrified, You're Not Paying Attention
Aaron Task
May 15, 2009 09:31am EDT

The green shoots story took a bit of hit this week between data on April retail sales, weekly jobless claims and foreclosures. But the whole concept of the economy finding its footing was "preposterous" to begin with, says Howard Davidowitz, chairman of Davidowitz & Associates.

"We're in a complete mess and the consumer is smart enough to know it," says Davidowitz, whose firm does consulting for the retail industry. "If the consumer isn't petrified, he or she is a damn fool."

Davidowitz, who is nothing if not opinionated (and colorful), paints a very grim picture: "The worst is yet to come with consumers and banks," he says. "This country is going into a 10-year decline. Living standards will never be the same."

This outlook is based on the following main points:

With the unemployment rate rising into double digits - and that's not counting the millions of "underemployed" Americans - consumers are hitting the breaks, which is having a huge impact, given consumer spending accounts for about 70% of economic activity.

Rising unemployment and the $8 trillion negative wealth effect of housing mean more Americans will default on not just mortgages but student loans and auto loans and credit card debt.

More consumer loan defaults will hit banks, which are also threatened by what Davidowitz calls a "depression" in commercial real estate, noting the recent bankruptcy of General Growth Properties and distressed sales by Developers Diversified and other REITs.

As for all the hullabaloo about the stress tests, he says they were a sham and part of a "con game to get private money to finance these institutions because [Treasury] can't get more money from Congress. It's the ‘greater fool' theory."

"We're now in Barack Obama's world where money goes into the most inefficient parts of the economy and we're bailing everyone out," says Daviowitz, who opposes bailouts for financials and automakers alike. "The bailout money is in the sewer and gone."

The Worst Is Yet To Come (Video) - Howard Davidowitz

Fiscal Meltdown Will Test the Bond and the Dollar to the Breaking Point

Don't blame the Democrats alone for this. Instead blame a political system that is corrupted by Wall Street and lobbyist money, and a mainstream media dominated by four corporations feeding a stream of managed news and perception spin to gullible US households.

The day of reckoning is nearly at hand, in which the currency crisis in the US will shake the financial foundations of the global economy.

"Outlays are rising at 17% YOY the fastest nominal pace since late 1981. With receipts falling 14.6% YOY their fastest drop in at least 40 years the gap between their growth rates is also the widest in the record.

All these rates are accelerating and are threatening to push the deficit to more than 50% of receipts and - at $1.1 trillion and rising - to more than 10% of private GDP."

Thanks to Sean Corrigan at Diapason Trading for this chart.

A Crisis of the Fed's Making

After many years of credit binging and monetary mismanagement, the sorcerer's apprentices at the Fed are having to bail hard as the credit tsunami crashes.



Thanks to Sean Corrigan of Diapason Commodities Management for this chart.

Break The Big Banks Up, and Let the Insolvent Parts Fail

This advice from Simon Johnson, Joe Stiglitz, and Thomas Hoenig can almost be characterized as common sense, apparent to almost any objective and informed observer.

So why is it not happening? It is not happening because it is not in the narrow interest of a few Wall Street Banks who are dominating the discussion in this country and in our Congress.

This is the kind of betrayal by an oligarchy that we saw in the USSR after their financial crisis and breakup.

With all the conflicts of interests and million dollar payments how can we not assume that the decision makers in the Obama administration have been bought, and that we are being betrayed?



Bloomberg
Fed's Hoenig: Let insolvent financial firms fail
By Alister Bull
Tue Apr 21, 2009 4:31pm BST


WASHINGTON (Reuters) - Insolvent financial firms must be allowed to fail regardless of size, a top Federal Reserve official said on Tuesday, as two prominent economists urged Congress to break up the biggest U.S. banks.

In blunt criticism of the government Federal Reserve Bank of Kansas City President Thomas Hoenig told Congress' Joint Economic Committee that the design of a $700 billion bank bailout last year sowed uncertainty and slowed recovery.

Citing the costs of the economic crisis, Nobel economic laureate Joseph Stiglitz and former IMF chief economist Simon Johnson also told the panel that it was in the interest of taxpayers to dissolve the largest U.S. financial institutions.

"The United States currently faces economic turmoil related directly to a loss of confidence in our largest financial institutions because policymakers accepted the idea that some firms are just 'too big to fail.' I do not," Hoenig said.

"Yes, these institutions are systemically important, but we all know that in a market system, insolvent firms must be allowed to fail regardless of their size, market position or the complexity of operations," said Hoenig, who will be a voter on the Fed's policy-setting committee next year.

U.S. anti-trust rules should be used to break up the biggest banks to safeguard the economy, said Johnson, a professor at the Massachusetts Institute of Technology. He added the costs of the financial crisis already dwarf the damage done by industrial monopolies in the last century.

"The use of anti-trust (laws) to break up the largest banks will be essential," he said. "This is a very serious, imminent danger that needs to be addressed."

Stiglitz made a similar point, arguing that the American people had not received anything like sufficient benefits from allowing such large financial firms to grow, versus with the costs of the crisis.

"They should be broken up unless a compelling case can be made not to that," Stiglitz, a Columbia University professor, told the committee.

The biggest 19 U.S. banks are being subjected to a battery of so-called stress tests to restore confidence in their soundness, with guidelines on the process due on Friday and the results on May 4.

Stocks fell sharply on Monday amid fear that some of them still face massive losses, as the severe U.S. recession forces loan default rates to continue rising.

U.S. Treasury Secretary Timothy Geithner has signaled that no firms will 'fail' the stress tests, but Hoenig said this would be a mistake.

"Actions that strive to protect our largest institutions from failure risk prolonging the crisis and increasing its cost," Hoenig said.

"Of particular concern to me is the fact that the financial support provided to firms considered "too big to fail" provides them a competitive advantage over other firms and subsidizes their growth and profit with taxpayer funds," he said.

Nodding to anger among ordinary Americans over multi-billion dollar bailouts for rich bankers, Hoenig said some of these firms were simply too complicated, and too well-connected in Washington, for the good of the country.

"These "too big to fail" institutions are not only too big, they are too complex and too politically influential to supervise on a sustained basis without a clear set of rules constraining their actions. When the recession ends, old habits will reemerge," he said.

Hoenig also criticized the government's Troubled Asset Relief Program, or TARP, which was also separately chided on Tuesday by the Treasury's watchdog.

"In the rush to find stability, no clear process was used to allocate TARP funds among the largest firms. This created further uncertainty and is impeding recovery," Hoenig said.

Geithner: "Vast Majority" of US Banks Have More Capital Than Needed

This morning before Congress Treasury Secretary Turbo Tax Tim said that the stress test results show that the 'vast majority' of US banks have more capital than they need.

Right. Most real banks, who do banking, have sufficient capital and have been well managed.

Its only the five or six largest money center banks that have trillions in bad debt and toxic derivatives that threaten to soak up all the available capital in the real economy.

Its the vast majority of banks who have been sound in their credit expansion and risk management who are paying the price through higher FDIC fees, along with the taxpayers, as Tim and Larry support the Wall Street oligarchs.

The action in the equity markets ahead of Tim's remarks was about as blatant as it gets. This is getting to be disgusting.

Market manipulation and rampant financial speculation with public funds will continue until we are confident that the economy has improved. When the electricity fails because of malinvestment in the real world economy, the Obama people can have public service community organizers deliver pamphlets door to door telling us how good things are becoming.


April 21 (Bloomberg) -- Treasury Secretary Timothy Geithner told a congressional panel that the “vast majority” of U.S. banks have more capital than needed.

He also said there are signs of thawing in credit markets and some indication that confidence is beginning to return.

“Indicators on interbank lending, corporate issuance and credit spreads generally suggest improvements in confidence in the stability of the system and some thawing in credit markets,” Geithner said in prepared testimony to the committee overseeing the Troubled Asset Relief Program.

Earlier today, Geithner said the program has enough money for bank rescues even under “conservative” estimates.

Geithner reiterated the Treasury’s view that about $135 billion is still available for bank rescues, out of $700 billion originally authorized by Congress.

The total includes about $590 billion that has been allocated so far for various TARP activities, leaving $110 billion remaining. Also, the Treasury expects $25 billion in repayments this year, leading to the total projection of $135 billion available.

“We believe that even under the conservative estimate of available funds described here, we have the resources to move forward implementing all aspects of our Financial Stability Plan,” Geithner said in a letter to Elizabeth Warren, the chair of the Congressional Oversight Panel.

May Have More

The Treasury first put forward these estimates in late March. In the letter, Geithner said it’s possible the Treasury may have even more money remaining, depending on how many banks repay TARP and whether the housing program uses its full allocation.

“Our projections anticipate only $25 billion will be repaid” over the next year, Geithner said. This figure is “lower than many private analysts expect,” he said.

Geithner’s letter comes on the same day as a separate report on the rescue program prepared by Neil Barofsky, the special inspector general for TARP. Barofsky said his office has six audits underway about various elements of the program.

One of these inquiries is looking into federal assistance to Bank of America, which has benefited from three different bank rescue programs, and Treasury’s decision to extend aid in connection with Bank of America’s acquisition of Merrill Lynch. The audit was expanded to include the other eight large banks that received TARP funding in October 2008, the report said.

The reporters on this story: Rebecca Christie in Washington

Crony Capitalism and Incompetence Doom Obama Economic Plans Says Nobel Laureate

Nothing you have not heard here before, and frequently.

But this is a Nobel Prize winner in Economics saying it, and a Democratic appointee to boot.

"The people who designed the plans are either in the pocket of the banks or they’re incompetent."

That sounds like Larry Summers and Tim Geithner in a nutshell to us.

Joe Stiglitz is assuming that Crew Obama really WANT to fix the economy and serve their nation. It seems possible that, being out of power for so many years, the Democratic leaders are handing out favors to their campaign contributors and feathering their nests for the future.

Then they'll worry about the public welfare. Political reform, Chicago-style.

The banks must be restrained, and the financial system must be reformed, before there can be any meaningful recovery in the real economy.


Bloomberg
Stiglitz Says Ties to Wall Street Doom Bank Rescue
By Michael McKee and Matthew Benjamin

April 17 (Bloomberg) -- The Obama administration’s bank rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.” (That pretty much covers Larry Summers and Tim Geithner, respectively - Jesse)

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.

“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”

Rather than continually buying small stakes in banks, the government should put weaker banks through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said. (Personally I'd give the bondholders a very high and tight haircut - Jesse)

Nobel Prize

Stiglitz, 66, won the Nobel in 2001 for showing that markets are inefficient when all parties in a transaction don’t have equal access to critical information, which is most of the time. His work is cited in more economic papers than that of any of his peers, according to a February ranking by Research Papers in Economics, an international database....

Bailing Out Investors

“You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders,” he said, referring to Pacific Investment Management Co., a bond investment firm in Newport Beach, California.

Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses.

“The statement from Sheila Bair that there’s no risk is absurd,” he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks.

Andrew Gray, an FDIC spokesman, said Bair never said there would be no risk, only that the agency had “zero expected cost” from the program.

Redistribution

“We’re going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks,” Stiglitz said. “It’s a real redistribution and a tax on all American savers.”

Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank.

“America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”
Stiglitz was head of the White House’s Council of Economic Advisers under President Bill Clinton before serving from 1997 to 2000 as chief economist at the World Bank. He resigned from that post in 2000 after repeatedly clashing with the White House over economic policies it supported at the International Monetary Fund. He is now a professor at Columbia University.

Critical of Stimulus

Stiglitz was also critical of Obama’s other economic rescue programs.

He called the $787 billion stimulus program necessary but “flawed” because too much spending comes after 2009, and because it devotes too much of the money to tax cuts “which aren’t likely to work very effectively.”

“It’s really a peculiar policy, I think,” he said. (Peculiar? Perhaps he meant the odor. - Jesse)

The $75 billion mortgage relief program, meanwhile, doesn’t do enough to help Americans who can’t afford to make their monthly payments, he said. It doesn’t reduce principal, doesn’t make changes in bankruptcy law that would help people work out debts, and doesn’t change the incentive to simply stop making payments once a mortgage is greater than the value of a house.

Stiglitz said the Fed, while it’s done almost all it can to bring the country back from the worst recession since 1982, can’t revive the economy on its own.

Relying on low interest rates to help put a floor under housing prices is a variation on the policies that created the housing bubble in the first place, Stiglitz said. (You got that right Joe - Jesse)

Recreating Bubble

“This is a strategy trying to recreate that bubble,” he said. “That’s not likely to provide a long-run solution. It’s a solution that says let’s kick the can down the road a little bit.” (They have been kicking this cow pie down the road for so long we're almost at the edge of the world - Jesse)

While the strategy might put a floor under housing prices, it won’t do anything to speed the recovery, he said. “It’s a recipe for Japanese-style malaise.”

Even with rates low, banks may not lend because they remain wary of market or borrower risk, and in the current environment “there’s still a lot of risk.” That’s why even with all of the programs the Fed and the administration have opened, lending is still very limited, Stiglitz said.

“They haven’t thought enough about the determinants of the flow of credit and lending.”

The Crisis of Our Democracy: Corruption in the Financial Markets and Obama's Failure to Reform

This interview with William Black in Barron's is an articulate and reasonably detailed summary of our own view of the current crisis from an exceptionally well-informed and experienced source.

The big question in our own mind is the depth of complicity and the motivations of the government, the media and major institutions in continuing to support this financial corruption through silence or participation.

Is Obama really merely listening to the wrong advice from highly placed sources in the Democratic Party? And how sincere are they? The record of corruption in the Obama Administration in the form of conflicts of interest and tax evasion is already the smoke that warns of fire.

All good questions, more relating to the length of time to a cure rather than its essential character.

The banks must be restrained, the financial system must be reformed, before there can be a sustained economic recovery.


Barron's
The Lessons of the Savings-and-Loan Crisis
By Jack Willoughby
11 April 2009

AN INTERVIEW WITH WILLIAM BLACK: The current bank scandal dwarfs the 1980s savings-and-loan crisis -- and could destroy the Obama presidency.

WILLIAM BLACK CALLS THEM AS HE SEES THEM, which is why we enjoy talking with him. Black, 57 years old, was a deputy director at the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s, and now serves as an associate professor, teaching economics and law at the University of Missouri, Kansas City. At FSLIC, a government agency that insured S&L deposits, Black prevailed in showdowns with the powerful Democratic Speaker of the House, Jim Wright, and helped identify the infamous Keating Five, a group of U.S. senators (including Sen. John McCain, the Arizona Republican who lost his bid for the presidency in 2008) who tried to quash his attempt to close Charles Keating's Lincoln Savings & Loan. Wright eventually resigned amid unrelated ethics charges, and the senators were reprimanded for poor judgment. Keating went to jail for securities fraud.

For Black's provocative thoughts on the current financial crisis, read on.


Barron's: Just how serious is this credit crisis? What is at stake here for the American taxpayer?

Black: Mopping up the savings-and-loan crisis cost $150 billion; this current crisis will probably cost a multiple of that. The scale of fraud is immense. This whole bank scandal makes Teapot Dome [of the 1920s] look like some kid's doll set. Unless the current administration changes course pretty drastically, the scandal will destroy Barack Obama's presidency. The Bush administration was even worse. But they are out of town. This will destroy Obama's administration, both economically and in terms of integrity.

So you are saying Democrats as well as Republicans share the blame? No one can claim the high ground?

We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure? If they are going to get any truthful investigation, the Democrats picked the wrong financial team. Tim Geithner, the current Secretary of the Treasury, and Larry Summers, chairman of the National Economic Council, were important architects of the problems. Geithner especially represents a failed regulator, having presided over the bailouts of major New York banks.

So you aren't a fan of the recently announced plan for the government to back private purchases of the toxic assets?

It is worse than a lie. Geithner has appropriated the language of his critics and of the forthright to support dishonesty. That is what's so appalling -- numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians.

The current law mandates prompt corrective action, which means speedy resolution of insolvencies. He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent. He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything. He chose this path because he knew Congress would never authorize a bailout based on crony capitalism.

Geithner is mistaken when he talks about making deeply unpopular moves. Such stiff resolve to put the major banks in receivership would be appreciated in every state but Connecticut and New York. His use of language like "legacy assets" -- and channeling the worst aspects of Milton Friedman -- is positively Orwellian. Extreme conservatives wrongly assume that the government can't do anything right. And they wrongly assume that the market will ultimately lead to correct actions. If cheaters prosper, cheaters will dominate. It is like Gresham's law: Bad money drives out the good. Well, bad behavior drives out good behavior, without good enforcement.

His plan essentially perpetuates zombie banks by mispricing toxic assets that were mispriced to the borrower and mispriced by the lender, and which only served the unfaithful lending agent.

We already know from the real costs -- through the cleanups of IndyMac, Bear Stearns, and Lehman -- that the losses will be roughly 50 to 80 cents on the dollar. The last thing we need is a further drain on our resources and subsidies by promoting this toxic-asset market. By promoting this notion of too-big-to-fail, we are allowing a pernicious influence to remain in Washington. The truth has a resonance to it. The folks know they are being lied to.

I keep asking myself, what would we do in other avenues of life? What if every time we had a plane crash we said: 'It might be divisive to investigate. We want to be forward-looking.' Nobody would fly. It would be a disaster.

We know that with planes, every time there is an accident, we look intensively, without the interference of politics. That is why we have such a safe industry.

Summarize the problem as best you can for Barron's readers.

With most of America's biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale.

These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation. First there needs to be a clearing of the air -- a Pecora-style fact-finding mission conducted without fear or favor. [Ferdinand Pecora was an assistant district attorney from New York who investigated Wall Street practices in the 1930s.] Then, we need to gear up to pursue criminal cases. Two years after the market collapsed, the Federal Bureau of Investigation has one-fourth of the resources that the agency used during the savings-and-loan crisis. And the current crisis is 10 times as large.

There need to be major task forces set up, like there were in the thrift crisis. Right now, things don't look good. We are using taxpayer money via AIG to secretly bail out European banks like Société Générale, Deutsche Bank, and UBS -- and even our own Goldman Sachs. To me, the single most obscene act of this scandal has been providing billions in taxpayer money via AIG to secretly bail out UBS in Switzerland, while we were simultaneously prosecuting the bank for tax fraud. The second most obscene: Goldman receiving almost $13 billion in AIG counterparty payments after advising Geithner, president of the New York Fed, and then-Treasury Secretary Henry Paulson, former Goldman Sachs honcho, on the AIG government takeover -- and also receiving government bailout loans.

What, then, is staying the federal government's hand? Have the banks become too difficult or complex to regulate?

The government is reluctant to admit the depth of the problem, because to do so would force it to put some of America's biggest financial institutions into receivership. The people running these banks are some of the most well-connected in Washington, with easy access to legislators. Prompt corrective action is what is needed, and mandated in the law. And that is precisely what isn't happening.

The savings-and-loan crisis showed that, too often, the regulators became too close to the industry, and run interference for friends by hiding the problems.

Can you explain your idea of control fraud, and how it applies to the current banking and the earlier thrift crisis?

Control fraud is when a seemingly legitimate corporation uses its power as a weapon to defraud or take something of value through deceit.

In the savings-and-loan crisis, thrifts engaged in control frauds in order to survive. Accounting trickery proved to be the weapon of choice. It is at work today with the banks, and it is their Achilles heel. You report that you are highly profitable when you engage in accounting-control fraud, not only meeting but exceeding capital requirements. These accounting frauds create huge bubbles, which in turn create large bonuses, which in turn lead to huge losses.

Why then is there so much smoke and so little action?

First, they are inundated by the problem. They are trying to investigate the major problems with severely depleted staffs. Honestly. We have lost the ability to be blunt. Now we have a situation where Treasury Secretary Geithner can speak of a $2 trillion hole in the banking system, at the same time all the major banks report they are well-capitalized. And you have seen no regulatory action against what amounts to a $2 trillion accounting fraud. The reason we don't see it -- aren't told about it -- is that if they were honest, prompt corrective action would kick in, and they would have to deal with the problem banks.

Are there any parallels between the current crisis and the savings-and-loan crisis that give you hope?

Of course. Objectively, our case was even more hopeless in the S&L debacle than in the current crisis. If we were able to do it in such an impossible circumstance back then, we have reason for hope in the current crisis. I know how easily things can get off course and how quickly things can turn back again. The thrift crisis went through several lengthy courses and distortions before it finally was resolved under the leadership of Edwin Gray, the chairman of the Federal Home Loan Bank Board, which oversaw FSLIC.

We went through almost a decade of cover-ups by a Washington establishment intent on helping thrift owners. Back then, we had the Justice Department threatening to indict Gray, the head of a federal agency, for closing too many thrifts. Next, there were those so-called resolutions, where the regulators worked day and night -- to create even bigger problems for the FSLIC. Years later, these so-called resolution deals had to be unwound at great expense by closing down even larger failures. Or how about the bill to replenish the depleted thrift-insurance fund that was blocked and delayed by then-Speaker of the House, Texas congressman Jim Wright?

You say the evidence of a breakdown in the regulatory structure comes from the fact that America avoided an earlier subprime crisis in the 1990s.

Exactly. Why had no one heard of the subprime crisis back in 1991? Because America's regulators also faced down the crisis early. The same thing happened with bad credits being securitized in the secondary market. Remember the low-doc or no-doc mortgages done by Citibank? Well, the problem didn't spread -- because regulators intervened.

Obama, who is doing so well in so many other arenas, appears to be slipping because he trusts Democrats high in the party structure too much.

These Democrats want to maintain America's pre-eminence in global financial capitalism at any cost. They remain wedded to the bad idea of bigness, the so-called financial supermarket -- one-stop shopping for all customers -- that has allowed the American financial system to paper the world with subprime debt. Even the managers of these worldwide financial conglomerates testify that they have become so sprawling as to be unmanageable.

What needs to be done?

Well, these international behemoths need to be broken down into smaller units that can be managed effectively. Maybe they can be broken up the way that the Standard Oil split up back in the early 1900s, through a simple share spinoff.

The big problem for the last decade is that we have had too much capacity in the finance sector -- too many banks have represented a drain on our talent and resources. All these mergers haven't taken capacity out of the system. They have created even bigger banks that concentrate risk to the taxpayer, and put off dealing with problems.

And a new seriousness must be put into regulation. We don't necessarily need new rules. We just need folks who can enforce the ones already on the books.

The bank-compensation system also creates an environment that leads to mismanagement and fraud. No one has to tell someone they have to stretch the numbers. It is all around them. It is in the rank-or-yank performance and retention systems advocated by top business executives. Here, the top 20% get the bulk of the benefits and the bottom 10% get fired. You don't directly tell your employees you want them to lie and cheat. You set up an atmosphere of results at any cost. Rank or yank. Sooner rather than later, someone comes up with the bright idea of fudging the numbers. That's big bonuses for the folks who make the best numbers. It sends the message -- making the numbers is what is most important. There is a reason that the average tenure of a chief financial officer is three years.

Compensation systems like I have just described discourage whistleblowing -- the most common way that frauds are found in America -- because the system draws upon the cooperation of everyone.

The basis for all regulation and white-collar crime is to take the competitive advantage away from the cheats, so the good guys can prevail. We need to get back to that.

Thanks, Bill.

G7 Industrial Production Crashing

The production of real goods in the developed nations is plummeting. Even the mighty export driven economy of Japan appears to be heading lower as though it had fallen off a cliff.

Countries must begin to encourage consumption in their own economies. To do this, they ought not to be stimulating the old credit/speculation machine called the neo-liberal financial system.

Real economic growth is to be found in a broad employment and consumption, and an increase of the median wage.

This is the deep flaws in much of the third world economies, especially in Asia and Latin America. Economic health can be measured by the size and well being of the middle class in a relatively free society.

The reason is simple. Individuals can only borrow so much before they are unable to service the debt. And the greedy few can only spend so much on consumption using the wealth which the tax and financial system has delivered to them from the many.

Gaming the system so that it overtaxes the income of the many for theincreasing benefit of a few has natural limitations, unless one can enforce a type of involuntary servitude. This model has its roots far back in history, in empires like Rome, Egypt, and Sparta.

As the elite few accumulate real assets using their surplus, they will find that holding on to their wealth as the rest of society deteriorates in a downward spiral of privation can be a bit of a challenge.

Until the financial system is reformed and the economy is brought back into a balance, there will be no recovery, and the fabric of order will remain fragile.

If things continue on as they are, despite all the stimulus and fine rhetoric, the madness will once again be unleashed on the earth, and the people will wonder from whence it came, as they do each time it rises from the same sources and ravages civilization: unbridled greed, malinvestment, and corruption.




Thanks to Diapason Trading for this chart.

Derivatives: the Heart of Financial Darkness

The heart of our financial crisis is reckless speculation with "too big to fail" funds by a relatively small group of US based money center banks.

There is sufficient circumstantial evidence from their concerted lobbying efforts to undo and resist regulation to show planning and forethought in what is an almost amazingly straightforward case of fiduciary and financial fraud. Many a blind eye was turned to the decline of the nation as it occurred, as the media and politicians and financial regulators were caught up in a seductive web of corruption.

The perpetrators are still in place, relatively unrestrained, and certainly not facing anything that might be called 'justice.'

Before there is any recovery, the banks must be once again restrained and balance restored to the economy and the financial system. The efforts of the Obama Administration are hopelessly ineffective, conflicted, and supportive of continuing losses.


The Prime Suspects



The Killing Field



The Wagers on Failure



The Wages of Speculation

Here Comes Turbo Timmy's Troubled Toxic Asset Clearance Sale

Wall Street Journal
U.S. Sets Plan for Toxic Assets
By Deborah Solomon
March 21, 2009

WASHINGTON -- The federal government will announce as soon as Monday a three-pronged plan to rid the financial system of toxic assets, betting that investors will be attracted to the combination of discount prices and government assistance.

But the framework, designed to expand existing programs and create new ones, relies heavily on participation from private-sector investors. They've been the target of a virulent anti-Wall Street backlash from Washington in the wake of the American International Group Inc. bonus furor. As a result, many investors have expressed concern about doing business with the government in this climate -- potentially casting a cloud over the program's prospects.

The administration plans to contribute between $75 billion and $100 billion in new capital to the effort, although that amount could expand down the road.

The plan, which has been eagerly awaited by jittery investors, includes creating an entity, backed by the Federal Deposit Insurance Corp., to purchase and hold loans. In addition, the Treasury Department intends to expand a Federal Reserve facility to include older, so-called "legacy" assets. Currently, the program, known as the Term Asset-Backed Securities Loan Facility, or TALF, was set up to buy newly issued securities backing all manner of consumer and small-business loans. But some of the most toxic assets are securities created in 2005 and 2006, which the TALF will now be able to absorb.

Finally, the government is moving ahead with plans, sketched out by Treasury Secretary Timothy Geithner last month, to establish public-private investment funds to purchase mortgage-backed and other securities. These funds would be run by private investment managers but be financed with a combination of private money and capital from the government, which would share in any profit or loss....

The AIG Scandal Is Merely a Symptom of Our National Agony

The AIG bonuses are a calculated distraction.

This is the heart of the problem:

We will have no recovery until the system is reformed and brought back into a sustainable balance. To achieve this end, the banks must be returned to business of banking again, with the reinstatement of Glass-Steagall. The hedge funds must be restrained through fundamental regulatory reform.

A private agency like the Fed is not capable of performing these tasks. The Fed, for all the rhetoric that surrounds it, is a private enterprise owned by the banks. The effectiveness of self-regulation and the rational efficiency of markets are the great myths that have led us to our current crisis.

The Fed as the great regulator for multiple markets is an attractive choice for the government, because when it fails the government may point the finger of blame, and absolve itself of all responsibility for our ruin as they are attempting to do now.

Slate
The Real AIG Scandal
By Eliot Spitzer
March 17, 2009, at 10:41 AM ET

It's not the bonuses. It's that AIG's counterparties are getting paid back in full.

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall.

Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes.

So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure...

The Decline of the Dollar as the World's Reserve Currency

The arrogant belief that you are the 'only game in town,' and indispensable, provokes reckless behaviour that takes advantage of such a belief with abusive excess.

The time for the dollar to fall from its reserve currency status is coming precisely because of the years of reckless deficit spending beginning with the Reagan Administration.

This is also a model for the Wall Street moneycenter banks, who have abused their position in the financial system egregiously since the repeal of Glass-Steagall.

The likely result of this long cycle of reckless speculation and arrogance was forecast here in 2005.

Forecast 2005: The Humpty Dumpty Economy
Jesse's Café Américain

The current trend in the United States economy is not sustainable. This is a
realization that will penetrate the national consciousness slowly and unevenly.
Most economists agree on how this cycle will end (even if it is only privately), but
the great debate is in the details of how, and most importantly, when.

If one does not accept that the situation is unsustainable, and believes that things
can continue on endlessly just as they are, with the United States consuming the
bulk of the world’s savings and production because of who we are, then perhaps
this is symptomatic of the national epidemic we now suffer which the ancient
Greeks called hubris.

"Where else will they put their surplus if not our debt? To whom will they sell their
goods if not to us? Who will teach them how to live, and govern them?" History
shows that even if such trends last far beyond most expectations, eventually a
day of reckoning arrives, in some frequently repeated patterns of systemic
failure....

Things rarely reach a turning point when we expect it. A true sea change is
slow to permeate the mentality of most people, because our experience is that
what happened yesterday will happen again tomorrow, and a long cyclical turn occurs
gradually and incrementally. We forget what happened even a few years ago.
Predictions of a continuance of recent trends are the common currency of most pundits...

However, and this is a common sense notion that has been nearly forgotten
by our generation, we have the ability to act in such a way so as to make the
improbable more likely to occur, to tempt fate by our actions. For example, there
is a certain probability of sustaining an automobile accident in the normal course of
our daily activities. High risk behaviors, such as speeding excessively or
drinking while driving, increase the chance of an accident. If one engages in high risk
activity, and nothing unusual happens, we become emboldened and think that
since we were able to drink moderately and drive last month, so we can drink
and drive this month and thereafter. Perhaps next month we drink a little more for
an indulgence, and again nothing happens. This cycle continues until something
changes our behavior, or simply ends when we literally hit the wall.

It would be our contention that the US is like such a driver, and we have been
economically tempting fate with increasingly risky behaviors. We are persuaded
that there is almost nothing we cannot do, almost nothing that can happen, that is
beyond our control. It is the propensity for people to increase and
repeat what they have been doing over time, to tempt fate through repeated and
increasingly risky behavior, and to forget the possibility of a sequence of
unfortunate events if you will, that gives rise to memorable events in history...

Predicting the failure of a complex system is not easy. One can examine it as a
whole, and determine that it will fail, and often calculate what must change in
order to allow the system to function more reliably. But it is often beyond our power to
calculate exactly how it will fail, and consequently when it will fail. This does not
invalidate the observation that the system will ultimately fail. It merely
underscores the unpredictability of timing a failure with the degrees of freedom
inherent in a calculation with a large number of exogenous variables. It is not
easy to predict exactly when a chronic DWI will demolish their automobile, but it
remains relatively predictable to say that they will do so as long as they maintain
their current mode of behavior....

There are four major types of tipping points:

o Demand: a break in the level of consumption in the US caused by the
unwillingness or ability of households to incur further debt to support
consumption beyond real wage growth

o Supply: a major disruption in the supply of an essential commodity like
energy, food, or raw materials, or even the realization that a major
commodity is in shorter supply than expected, such as silver or oil.

o Monetary: an inability of foreign central banks to continue to
monetize the US trade deficit and budget deficit through the recycling of
their trade surplus into US debt securities.

o Systemic failure: the failure of a major counter party that threatens the
US financial system, particularly in the hugely leveraged derivatives
market.

Two of the seals, Demand and Systemic Failure, have been broken, and the horsemen unleashed. Next comes Monetary, and then Supply, which is a Pale Horse.

There is still time to end this spiral of decline.


Reuters
U.N. panel says world should ditch dollar
By Jeremy Gaunt, European Investment Correspondent
Wed Mar 18, 2009 11:16am EDT

LUXEMBOURG (Reuters) - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

"It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.

"Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar's slide between 2002 and mid-2008," CMC Markets said in a note.

Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.

It has significantly reduced the dollar's share in its own reserves in recent years....

Reuters
China backs talks on dollar as reserve -Russian source
By Gleb Bryanski
Thu Mar 19, 2009 11:24am

MOSCOW, March 19 (Reuters) - China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decisionmaking globally. Their first ever joint communique did not mention a new currency but the source said the issue was discussed.

"They (China) did not formally put forward their position for the G20 summit but unofficially they had distributed their paper regarding the same ideas (the need for the new currency)," the source told Reuters, speaking on condition of anonymity.

The source said the Chinese paper envisaged the International Monetary Fund's Special Drawing Rights (SDRs) being first assigned a role of a clearing currency on some transactions and then gradually becoming the main global reserve currency. "They said that the role of reserve currency should be given to SDR," the source said.

A U.N. panel of experts is also looking at using expanded SDRs, originally created by the International Monetary Fund in 1969, but now used mainly as an accounting unit within similar organisations as a new reserve currency instead of the dollar.

Currency specialist Avinash Persaud, a member of the U.N. panel, told a Reuters Funds Summit on Wednesday that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and against those inside the basket....

The Hypocrisy of Barack Obama, Tim Geithner, Henry Paulson, and Christopher Dodd

This issue of the AIG bonuses raises concerns about conflicts of interest since the Financial Products Division of AIG was a large contributor to both President Obama and Senator Dodd.

It also gives fuel to the speculation that the retnention bonuses being paid to the AIG executives, some of whom have already left, are 'hush money' over the details of the payments of enormous sums of bailout money to politically connected businesses such as Goldman Sachs, who are also substantial contributors to both parties.

True or not, the failure of the Treasury Department to execute in this matter is alarming, and the lack of transparency by the Obama administration and the Democratic leadership is discouraging, if not appalling.

McCauley's World

Senator Christopher Dodd’s office recently announced that, “Democratic Sen. Chris Dodd, chairman of the Senate banking committee, demanded a full briefing from the Federal Reserve and the Treasury on why clauses weren’t attached to the four various AIG bailouts to halt bonuses.”

Yet the Senator well knows that while the Senate was constructing the $787 billion stimulus last month, Dodd added an executive-compensation restriction to that very bill. The provision, now called “the Dodd Amendment” by the Obama Administration, provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009” — which exempts the very AIG bonuses Dodd and others are now seeking to tax.
http://www.foxbusiness.com/story/markets/industries/finance/dodd-cracks-aig—time/

Obama & Dodd Were Friend’s Of AIG Before AIG Was Their Enemy

Obama may be grandstanding about AIG’s bonuses now, but it’s worth noting that Obama himself is the second biggest benefactor of AIG political contributions. Second only to Senator Chris Dodd, who is quietly trying to tip-toe away from legislation he inserted into Obama’s “stimulus” spending spree that protected AIG’s bonuses.
http://www.kxmb.com/News/Nation/346030.asp

Key Congressman tried to alert Treasury about the AIG bonus issue "six or seven times" in the past weeks.

Kanjorski: Treasury and Administration Knew of AIG Bonuses for Weeks

Edward Liddy is the government appointed Chairman of AIG during its bailout phase.

Edward M. Liddy is currently the chief executive officer of American International Group (AIG), where he succeeded Robert B. Willumstad in September, 2008. Upon taking the position of CEO at American International Group, Mr. Liddy had to resign his board position at Goldman Sachs.

This September meeting was the key decision point on bailing out AIG. As we have reported earlier, the ONLY non-official present was Lloyd Blankfein, the Chairman of Goldman Sachs, a major counterparty at risk with the AIG Financial Products Division.

And lastly, we ought not to overlook The Real AIG Scandal - Slate

The Obama Team's Economic Performance Is Pathetic

Wouldn't it be nice if one day the Obama Administration came up with a change, an innovative reform for the financial system that made us sit back and say, "Wow, that's great! That's exactly what we have been looking for."

So far it has been one misstep, one fumble, one tired old Henny Youngman routine after another. The Clinton Administration retread meets the road, and falls apart.

Things went badly beginning with the appointment of Larry Summers as key economic advisor.

Larry was one of the three man miracle team of Greenspan, Rubin and Summers that turned the Asian monetary crisis into the tech bubble after a smoke and mirrors economic recovery while the industrial base of the US continued to slide into the Pacific.

We have seen nothing that speaks of the promise that we felt when America said "enough" and voted for a change in the fall of 2008.

And after the Summers disappointment we received the the Rubin protege, Tim Geithner, with the thinnest of financial backgrounds, who while at the NY Fed helped to help transform the housing bubble collapse into the bailout bust.

His position at Treasury is such an obvious, glaring mismatch that he cannot even staff key jobs in his own department. Who would want to work under such an obvious, embarrassing failure?

This is not a poor performance. This is an abject, incompetent inability to address the most critical issue facing this country.

This is Obama's Iraq: a morass of crippling failure brought on by horrible advice from key advisors with their own agendas.

President Obama throws rhetoric at the problem from a distance, like he is still campaigning against something. He leaves the impression of a more articulate Bush, inspiring no lasting confidence, giving no impression that he is in charge, on top of the situation, in control with a well thought out plan. He can make you feel good while he is speaking, then reality sets in and you realize that there is nothing there. Where are the management skills to back up the rhetoric?

Don't get us wrong. This is still early in the game. But the Democrats are losing the early rounds, as the situation grows more dire.

Well, Mr. Obama, you are President now, and even though you have only a short time in the office, so far you have shown us nothing. Your shepherding of a stimulus bill through the Congress was a nightmare, made worse by Nancy Pelosi who is a mediocre House Speaker at best, but appears a dynamo in comparison to Majority Leader Harry Reid.

Tired old solutions, inbred beltway thinking, old boy insider dealing.

Embarrassing. Unworthy. Amateurish. Pathetic.

You are failing, and we see it, and the anger, and sense of quiet panic, is building.

Time to get serious, to get it together. Time to step up to the job and take command. Time to show us your best stuff, find the levers, roll up your sleeves, and step down from the pulpit.

AIG: A Scandal of Epic Proportion

"Goldman Sachs had said in the past that its exposure to A.I.G.’s financial trouble was 'immaterial'."

It appears that it was immaterial because Goldman Sachs, through their ex-CEO Hank Paulso, had set things up so they could not lose on their counterparty risk.

This story from last September documents Goldman Sachs involvement, at the highest levels, in the AIG bailout with then Treasury Secretary Hank Paulson.

AIG: A Blind Eye to Risk - NYT Sept 28, 2008

It seems fairly obviously that a relatively small department within AIG, the Financial Products division, was operating under the regulatory radar and was used as a patsy by a number of the Wall Street banks, who had no worries about losses because of their power to obtain the US government as a backstop to losses.

This is a scandal of epic proportion. 'Outrage' barely manages to express the appropriate reaction.

Obama is an educated, intelligent President, and can hardly retreat behind the clueless buffoon defense in vogue with so many CEO's and public officials. He has a directly responsible for this outcome now along with the Bush Administration and the Republicans.

Geithner and Summers should resign over their handling of AIG.

The Fed has no business regulating anything more complex than a checking account.

The difficulty with which we are faced is that despite their mugging for the camera and emotional words the Democrats and Republicans are owned by Wall Street and Big Business because of the existing system of lobbying and campaign funding.

Getting behind a third party for president is symbolic but ineffective. Giving a significant number of congressional seats to a third party will send a chilling and practical message to both the President and the Congress that enough is enough.

And in the meantime--

Contact Your Elected Officials


NY Times
A.I.G. Lists the Banks to Which It Paid Rescue Funds
By MARY WILLIAMS WALSH
March 16, 2009

Amid rising pressure from Congress and taxpayers, the American International Group on Sunday released the names of dozens of financial institutions that benefited from the Federal Reserve’s decision last fall to save the giant insurer from collapse with a huge rescue loan.

Financial companies that received multibillion-dollar payments owed by A.I.G. include

Goldman Sachs ($12.9 billion),
Merrill Lynch ($6.8 billion),
Bank of America ($5.2 billion),
Citigroup ($2.3 billion) and
Wachovia ($1.5 billion).

Big foreign banks also received large sums from the rescue, including

Société Générale of France and
Deutsche Bank of Germany, which each received nearly $12 billion;

Barclays of Britain ($8.5 billion); and
UBS of Switzerland ($5 billion).

A.I.G. also named the 20 largest states, starting with California, that stood to lose billions last fall because A.I.G. was holding money they had raised with bond sales.

In total, A.I.G. named nearly 80 companies and municipalities that benefited most from the Fed rescue, though many more that received smaller payments were left out.

The list, long sought by lawmakers, was released a day after the disclosure that A.I.G. was paying out hundreds of millions of dollars in bonuses to executives at the A.I.G. division where the company’s crisis originated. That drew anger from Democratic and Republican lawmakers alike on Sunday and left the Obama administration scrambling to distance itself from A.I.G.

“There are a lot of terrible things that have happened in the last 18 months, but what’s happened at A.I.G. is the most outrageous,” Lawrence H. Summers, an economic adviser to President Obama who was Treasury secretary in the Clinton administration, said Sunday on “This Week” on ABC. He said the administration had determined that it could not stop the bonuses.

(Among the outrages was the appointment of that sly old fox Larry Summers and his sidekick Tim Geithner by President Obama, and their continued tenure in any so-called reform government. - Jesse)

But some members of Congress expressed outrage over the bonuses. Representative Elijah E. Cummings, a Democrat of Maryland who had demanded more information about the bonuses last December, accused the company’s chief executive, Edward M. Liddy, of rewarding reckless business practices. (Well duh, that was and is the modus operandi of Wall Street Congressman - Jesse)

“A.I.G. has been trying to play the American people for fools by giving nearly $1 billion in bonuses by the name of retention payments,” Mr. Cummings said on Sunday. “These payments are nothing but a reward for obvious failure, and it is an egregious offense to have the American taxpayers foot the bill.” (Hey I have a good idea, lets elect some officials to make the laws and prevent these outrages through regulation. Oh yeah we did. Its you Congress! Its you Obama - Jesse)

An A.I.G. spokeswoman said Sunday that the company would not identify the recipients of these bonuses, citing privacy obligations.

Ever since the insurer’s rescue began, with the Fed’s $85 billion emergency loan last fall, there have been demands for a full public accounting of how the money was used. The taxpayer assistance has now grown to $170 billion, and the government owns nearly 80 percent of the company.

But the insurance giant has refused until now to disclose the names of its trading partners, or the amounts they received, citing business confidentiality.

A.I.G. finally relented after consulting with the companies that received the government support. The company’s chief executive, Edward M. Liddy, said in a statement on Sunday: “Our decision to disclose these transactions was made following conversations with the counterparties and the recognition of the extraordinary nature of these transactions.” (How about the threat of subpoena from the Attorney General? - Jesse)

Still, the disclosure is not likely to calm the ire aimed at the company and its trading partners.

The Fed chairman, Ben S. Bernanke, appearing on “60 Minutes” on CBS on Sunday night, said: “Of all the events and all of the things we’ve done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with A.I.G.” (Considering you are presiding over the looting of the middle class, Ben my man, that speaks volumes - Jesse)

He went on: “Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, they had a — we had a situation where the failure of that company would have brought down the financial system.” (AIG was a setup with the very banks, Goldman Sachs and crew, that you are bending our economy over backwards to save, Ben - Jesse)

In deciding to rescue A.I.G., the government worried that if it did not bail out the company, its collapse could lead to a cascading chain reaction of losses, jeopardizing the stability of the worldwide financial system.

The list released by A.I.G. on Sunday, detailing payments made between September and December of last year, could bolster that justification by illustrating the breadth of losses that might have occurred had A.I.G. been allowed to fail.

Some of the companies, like Goldman Sachs and Société Générale, had exposure mainly through A.I.G.’s derivatives program. Others, though, like Barclays and Citigroup, stood to lose mainly because they were customers of A.I.G.’s securities-lending program, which does not involve derivatives. (There ought to have been the managed unwinding and default on those derivatives - Jesse)

But taxpayers may have a hard time accepting that so many marquee financial companies — including some American banks that received separate government help and others based overseas — benefiting from government money.

The outrage that has been aimed at A.I.G. could complicate the Obama administration’s ability to persuade Congress to authorize future bailouts. (I would hope so. Obama has lost all credibility compliments of Geithner, Summers and Bernanke - Jesse)

Patience with the company’s silence began to run out this month after it disclosed the largest loss in United States history and had to get a new round of government support. Members of Congress demanded in two hearings to know who was benefiting from the bailout and threatened to vote against future bailouts for anybody if they did not get the information.

“A.I.G.’s trading partners were not innocent victims here,” said Senator Christopher J. Dodd, the Connecticut Democrat who presided over one recent hearing. “They were sophisticated investors who took enormous, irresponsible risks.” (Do something about it then you windbag - Jesse)

The anger peaked over the weekend when correspondence surfaced showing that A.I.G. was on the brink of paying rich bonuses to executives who had dealt in the derivative contracts at the center of A.I.G.’s troubles.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, implicitly questioned the Treasury Department’s judgment about the whether the bonuses were binding. (I would question if Barney Frank is competent to hold office since he has also been a key player - Jesse)

“We need to find out whether these bonuses are legally recoverable,” Mr. Frank said in an interview Sunday on Fox News.

Many of the institutions that received the Fed payments were owed money by A.I.G. because they had bought its credit derivatives — in essence, a type of insurance intended to protect buyers should their investments turn sour.

As it turned out, many of their investments did sour, because they were linked to subprime mortgages and other shaky loans. But A.I.G. was suddenly unable to honor its promises last fall, leaving its trading partners exposed to potentially big losses.

When A.I.G. received its first rescue loan of $85 billion from the Fed, in September, it forwarded about $22 billion to the companies holding its shakiest derivatives contracts. Those contracts required large collateral payments if A.I.G.’s credit was downgraded, as it was that month.

Among the beneficiaries of the government rescue were Wall Street firms, like Goldman Sachs, JPMorgan and Merrill Lynch that had argued in the past that derivatives were valuable risk-management tools that skilled investors could use wisely without any intervention from federal regulators. Initiatives to regulate financial derivatives were beaten back during the administrations of Presidents Bill Clinton and George W. Bush.

Goldman Sachs had said in the past that its exposure to A.I.G.’s financial trouble was “immaterial.” A Goldman Sachs representative was not reachable on Sunday to address whether that characterization still held. When asked about its exposure to A.I.G. in the past, Goldman Sachs has said that it used hedging strategies with other investments to reduce its exposure.

Until last fall’s liquidity squeeze, A.I.G. officials also dismissed those who questioned its derivatives operation, saying losses were out of the question.

Edmund L. Andrews and Jackie Calmes contributed reporting.

Berkshire Hathaway's Credit Rating Downgraded by Fitch

"Weep over Saul, Who clothed you luxuriously in scarlet, who put ornaments of gold on your apparel." 2 Samuel 1:24


Berkshire has sustained heavy losses in US equities as the value investing approach which Warren Buffett follows has fallen prey to this most vicious of bear markets.

The company still retains exposure to derivatives contracts that concerns Fitch.

Forbes
Buffett Loses Sterling Credit Rating
Peter C. Beller
03.12.09, 08:30 PM EDT

Fitch downgrades billionaire's Berkshire Hathaway to lowly AA because of possible stock and credit market losses.

For decades, one of the brightest banners to fly above Warren Buffett's castle was his company's AAA credit rating, one of a handful in the United States. In his annual letter to shareholders he bragged that Berkshire Hathaway's credit was "pristine." But the financial crisis is laying siege to even the mightiest balance sheets.

In the past year, shares of Berkshire Hathaway the insurance and electricity conglomerate that Buffett controls, have lost 35%. Buffett saw his personal wealth decline by $25 billion. Now Fitch Ratings has snatched away his top-notch rating, downgrading Berkshire to AA.

The full extent of the damage to Berkshire won't be clear until the other two ratings agencies--Standard and Poor's and Moody's (of which Berkshire owns more than 20%)--decide whether to follow with their own downgrades. But conservative lenders often consider the lower of a company's split ratings as the one that counts. A lower rating could hurt Berkshire's business if lenders demand higher interest rates from the company to compensate for increased risk.

Fitch said it downgraded Berkshire because of its large stakes in publicly traded companies, such as Coca-Cola and American Express, as well as huge derivatives contracts that expose it to possible losses in the credit and stock markets. Berkshire's bondholders are also behind insurance policyholders to get paid back if the company runs into trouble. Nothing about that is new; Berkshire has long had major insurance interests. But Fitch said that the financial crisis had led it to reassess the risks to financial firms across the board.

Buffett himself seems to have played a role. Fitch said that the company's success is so dependent on the Oracle of Omaha's ability to choose wise investments that it constitutes a credit risk not "consistent with an AAA rating." The agency also complained that Berkshire management has declined to meet regularly with Fitch analysts in contrast to General Reinsurance, a Berkshire subsidiary. Fitch threatened to drop the AA rating further if stock market declines and earnings shortfalls hurt the firm's capitalization.

Despite the crisis, Buffett has pursued a number of big deals designed to take advantage of lower stock prices and a lack of available capital for struggling firms. Berskhire has plowed billions into Goldman Sachs (nyse: GS - news - people ), General Electric and Swiss Re and opened a municipal bond insurance company.

While Berkshire's net profit last year fell 62.1% to $5.0 billion, Buffett has said that Berkshire will make money in the long run. (See "Buffett Bloodied But Not Bowed") "Our economic system has worked extraordinarily well over time" he wrote in his annual letter to shareholders. "It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead."

GE Loses Its 'AAA' Credit Rating as S&P Downgrades

How are the mighty fallen in the midst of the deleveraging!
O Jeff, thou wast downgraded from thine high places. 2 Samuel 1:25

GE, Finance Arm Lose Coveted AAA Long-Term Rating From SP

General Electric Co. (GE) and its finance arm have lost their coveted AAA long-term credit rating from Standard Poor's Ratings Service, which said its view of GE Capital on a stand-alone basis had fallen.

GE had been one of only six non-financial companies with the AAA rating from the agency. The long-term rating of GE and GE Capital was cut one notch each to AA+. Analysts and observers have wondered for months about the company's ability to keep the top rating amid woes at GE Capital, which have driven the company's stock tumbling in recent months.

The stock, down 75% the past year and 48% in 2009 alone, was down 3 cents at $8.46 in recent trading, after rising as much as 4% in the opening minutes of Thursday's session.

Singapore: Three Years of 'Vicious Downturn" - Buys Gold, Loon, Renminbi and Yen - Sells Dollar and Pound

The projection that the Government of Singapore Investment Corp (GIC)has calculated for $3.8 Trillion in financial market writedowns over three years is interesting, considering we are only a third of the way there.

Remarkably, the selection for investment safety that Mr. Yeoh Lam Keong puts forward is very close to items served at the private table of Le Café Américain.

Interesting nonetheless, in particular because of their holding in Citigroup and UBS, and any insight they may have gained therein.

Reuters
Singapore's GIC sees more distress in markets
By Kevin Lim and Saeed Azhar
Tue Mar 10, 2009 2:35am EDT

Fancies gold; to avoid dollar, sterling currencies

SINGAPORE, March 10 (Reuters) - An official from the Government of Singapore Investment Corp (GIC) said he expects more weakness in financial markets in the next 12-18 months, and recommended investors hold gold and other safe assets such as government bonds.

GIC, one of the world's largest sovereign funds with an estimated $200 billion-plus in assets, has invested aggressively in troubled global lenders, picking up multi-billion dollar stakes in Citigroup and UBS in late 2007 and early 2008.

There is "systemic capital inadequacy globally", and the world will probably see "three years of a very vicious downcycle," GIC's director of economics and strategy, Yeoh Lam Keong, told the Investment Management Association of Singapore conference on Tuesday

"This is a very destructive process for assets."

Yeoh, who said he was speaking in his personal capacity, showed a slide prepared by GIC that indicated global writedowns in the financial sector could reach $3.8 trillion by 2013 and that only about 30 percent of the losses had been booked so far.

Yeoh suggested investors hold gold, sovereign bonds and currencies such as the Japanese yen, Chinese yuan and Canadian dollar.

He said he liked gold because governments were under pressure to cheapen their currencies to compensate for falling demand, and that some countries such as the United States and Britain would eventually be forced to monetise their debt by printing money.

"I would avoid these currencies like the plague," he said in reference to the dollar and sterling.

Warren Buffett: "Economy Has Fallen Off a Cliff"

Warren Buffett is 'talking his book' for a portion of this interview, but he does have some unique insights into the real time economic conditions because of the position of his conglomerate in a number of key businesses that measure the pulse of economic activity.

He sees inflation ahead, and rightly so. The question however is, as always, when?

Adding debt capacity to the system now is useless. Yes, stabilizing the financial system is important. But the demand for debt is so lagging, and the prospects for profit so poor, that one wonders if only the desparate will cry for more credit while they drown.

The solution will be an improvement in the median wage, systemic reforms, and the orderly writedown of debt held by effectively insolvent banks. 'Saving the banking system' as it is constituted now is more than a fool's errand.

It is the path to a test of the fabric of our government not seen since the 1860's.

Bloomberg
Warren Buffett Says Economy Has ‘Fallen Off a Cliff’
By Erik Holm
March 9, 2009 09:29 EDT

March 9 (Bloomberg) -- Billionaire Warren Buffett, whose Berkshire Hathaway Inc. posted its worst results ever in 2008, said the economy “has fallen off a cliff” and that efforts to stimulate recovery may lead to inflation higher than the 1970s.

The American public is fearful, confused and changing their buying habits, which is showing up at Berkshire’s operating units, Buffett said during an appearance on the CNBC television network today. While the recession will end and future generations will live better than their parents, the economy “can’t turn around on a dime,” Buffett said, adding that some inflation is appropriate right now.

“We are doing things now that are potentially very inflationary,” he said. Buffett called on Congress to unite behind President Barack Obama, comparing the economic crisis to a military conflict that needs a commander-in-chief. “Patriotic Americans will realize this is a war,” he said....

Finacial Crisis Racks Up $50 Trillion in Worldwide Losses in 2008

This is the price we pay for chronic malinvestment, unsustainable imbalances, a bubble in the world's reserve currency, and a blind eye to protracted fraud and misrepresentation of the economic reality by the financiers and their partners in government.

Staggering losses to be sure, and more to come. But what is most discouraging is that so far we have made little or no progress towards systemic reform and a return balanced global trade with organic growth, savings, and an efficient world financial flow of goods, services, and wealth.


Economic Times (India)
$50 trillion wiped off world financial assets: ADB
9 Mar 2009, 1022 hrs IST,
ET Bureau

MANILA: The global crisis wiped a staggering $50 trillion off the value of financial assets last year including $9.6 trillion of losses in developing Asia alone, the Asian Development Bank said Monday.

``This is by far the most serious crisis to hit the world economy since the Great Depression,'' said ADB President Haruhiko Kuroda. But he predicted Asia would be ``one of the first regions to emerge from it.''

In a study commissioned by the Manila-based lender on the impact of the financial crisis on emerging economies, it estimated the value of financial assets worldwide, currency, equity and bond markets, to have dropped by $50 trillion in 2008.

It said developing Asia was hit harder, losing the equivalent of just over one year's worth of gross domestic product, than other emerging economies because the region has expanded much more rapidly.

In Latin America, losses were estimated at $2.1 trillion. According to the study, the figures provide clear proof of the close connections between markets and economies around the world, leaving few, if any, countries immune to financial or economic fallout. A recovery can only now be envisaged for late 2009 or early 2010, it said.

A sprawling region, developing Asia includes 44 economies from the central Asian republics to China to the Pacific islands. The bank had earlier projected the region's growth to slow to 5.8 percent this year from an estimated 6.9 percent last year.

The worldwide downturn has hit export-driven economies particularly hard. From South Korea to Taiwan to Singapore, exports have plunged by double digits in recent months as American and European consumers spent less on cars and gadgets....