Big Bump in the Road

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October 1, 2007

Citigroup Warns of 60% Earnings Drop

By ERIC DASH and JULIA WERDIGIER

Citigroup issued a profit warning today, estimating a 60 percent drop in third-quarter earnings because of write-downs for securities backed by subprime mortgages and loans tied to corporate takeovers.

Separately, UBS, Europe’s biggest bank, predicted an unexpected loss in the third quarter because of a $3.42 billion write-down for the value of mortgage-backed securities and announced a management shake-up.

Citigroup said it expects its third-quarter net income to fall to $2.2 billion from $5.51 billion in the period a year earlier as it books losses on loans related to leveraged buyouts, weak fixed-income trading results and the deterioration of complex mortgage-backed securities that contained bad subprime loans. It also said its consumer business would be hurt by higher credit costs.

“Our expected third-quarter results are a clear disappointment,” Charles Prince, the chief executive of Citigroup, said in a statement. “The decline in income was driven primarily by weak performance in fixed-income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs.”

“We expect to return to a normal earnings environment in the fourth quarter,” Mr. Prince added.

Mr. Prince faces mounting pressure from investors because of Citigroup’s sluggish stock price. Today’s announcement, in fact, comes four years since Mr. Prince took over as chief executive from Sanford I. Weill. Its stock price was in the $47 to $49 range in October 2003. This morning it was trading at $46.21 after slumping about 1 percent on the profit warning.

Citigroup took the unusual step of moving its third-quarter earnings release to the morning of Oct. 15 from Oct. 19.

Citigroup’s warning comes as other Wall Street firms have hinted they will face serious profit declines. Last month, Merrill Lynch warned that its third-quarter results would suffer, and Bank of America’s financial chief said the turbulent markets would have a “meaningful impact” on third-quarter results. J. P. Morgan Chase has not publicly commented on its third-quarter results, but executives there have acknowledged tougher market conditions, which will likely have an effect.

So far, Wall Street investment houses that have announced their third-quarter results have run the gamut. Goldman Sachs powered through the turmoil in the credit markets to post a 79 percent increase in profit, its third-best quarter ever. At Bear Stearns, earnings fell 61 percent on sharp losses related to its hedge funds and exposure to subprime investments. Third-quarter profit was down 3 percent at Lehman Brothers and 7 percent at Morgan Stanley, but the performance at both companies was stronger than expected.

Citigroup said it expects to take a $1.9 billion pretax loss related to its fixed-income capital markets activities, which have been a cornerstone of its business ever since it absorbed Salomon Brothers. About $1.3 billion of those losses are related to the deterioration of mortgage-related securities, including collateralized debt obligations and other financial instruments containing bad subprime loans. It will also record a loss of $600 million in trading because of “significant market volatility and the disruption of the historical pricing relationships.”

The company also said it expects to write down about $1.4 billion of funded and unfunded leveraged loans that have fallen in value. These commitments totaled $69 billion at the end of the second quarter and $57 billion at the end of the third quarter.

Citigroup also expects a $2.6 billion pretax rise in credit costs in its consumer businesses. About $1.95 billion, or three-fourths of the increase, is from money set aside to cover future loan losses. The remaining $650 million is from higher net credit losses in the quarter.

Citigroup, which has long championed that its diversity of activities could partly offset poor results, said other parts of its business performed well.

At UBS, the bank said it plans to cut 1,500 jobs and that Clive Standish, its chief financial officer, and Huw Jenkins, the head of its investment bank, are stepping down. The Zurich-based bank said its pretax loss for the three months through September was 600 million to 800 million Swiss francs.

The shares slumped as much as 4.3 percent in early trading on Monday in Zurich after the loss surprised analysts, who had expected the bank to remain profitable. The Credit Suisse Group reported a profit today even though earnings were hurt by the recent credit market slump.

Marcel Rohner, who took over as chief executive of UBS in July after his predecessor was ousted over losses at the bank’s in-house hedge fund, called the loss “unsatisfactory” and in order to “be as transparent as possible” he has taken “decisive action” and made appropriate senior management changes.

As part of the management changes, Mr. Rohner will take on the role of chairman and chief executive of the investment bank and Marco Suter, the bank’s executive vice chairman, will become chief financial officer. Walter Stuerzinger, the bank’s chief risk officer, will become chief operating officer. UBS will report full third-quarter results on Oct. 30.

UBS shares fell 1 franc, or 1.6 percent, to 61.6 francs in early trading in Zurich. The shares have fallen 17 percent this year compared with 10 percent at Credit Suisse.

The loss, UBS’s first in a quarter since 1998 when it had to write down its investment in Long-Term Capital Management, may raise concerns among investors that other lenders with large investment banking operations suffered similar losses on the back of collapsing prices for securities backed by mortgages and other high-risk debt investments following the subprime mortgage crisis in the United States this summer.

Lehman Brothers and Goldman Sachs already reduced the value of some of their fixed-income investments while still reporting better-than-expected quarterly earnings last month. But their reporting period includes June, the month before the market downturn began, and some analysts have warned that earnings of banks whose third quarter excludes the profitable month of June may be hit harder.

Yet, investors may not get to know the full fallout of the market crisis until early next year as finance chiefs and accountants are working through large portfolios with extremely complex and often illiquid investment vehicles that are difficult to value correctly in times of volatile markets.




http://www.nytimes.com/2007/10/01/bu...hp&oref=slogin

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The Alarming Parallels Between 1929 and 2007

By Robert Kuttner
The American Prospect

Tuesday 02 October 2007

Has deregulation left the economy at risk of another 1929-scale crash? Should the Fed keep bailing out speculators? Kuttner testified on these and related questions today before the House Financial Services Committee.

Testimony of Robert Kuttner
Before the Committee on Financial Services
Rep. Barney Frank, Chairman
U.S. House of Representatives
Washington, D.C.

Mr. Chairman and members of the Committee:

Thank you for this opportunity. My name is Robert Kuttner. I am an economics and financial journalist, author of several books about the economy, co-editor of The American Prospect, and former investigator for the Senate Banking Committee. I have a book appearing in a few weeks that addresses the systemic risks of financial innovation coupled with deregulation and the moral hazard of periodic bailouts.

In researching the book, I devoted a lot of effort to reviewing the abuses of the 1920s, the effort in the 1930s to create a financial system that would prevent repetition of those abuses, and the steady dismantling of the safeguards over the last three decades in the name of free markets and financial innovation.

Your predecessors on the Senate Banking Committee, in the celebrated Pecora Hearings of 1933 and 1934, laid the groundwork for the modern edifice of financial regulation. I suspect that they would be appalled at the parallels between the systemic risks of the 1920s and many of the modern practices that have been permitted to seep back in to our financial markets.

Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and enduring. When you strip them down to their essence, they are variations on a few hardy perennials - excessive leveraging, misrepresentation, insider conflicts of interest, non-transparency, and the triumph of engineered euphoria over evidence.

The most basic and alarming parallel is the creation of asset bubbles, in which the purveyors of securities use very high leverage; the securities are sold to the public or to specialized funds with underlying collateral of uncertain value; and financial middlemen extract exorbitant returns at the expense of the real economy. This was the essence of the abuse of public utilities stock pyramids in the 1920s, where multi-layered holding companies allowed securities to be watered down, to the point where the real collateral was worth just a few cents on the dollar, and returns were diverted from operating companies and ratepayers. This only became exposed when the bubble burst. As Warren Buffett famously put it, you never know who is swimming naked until the tide goes out.

There is good evidence - and I will add to the record a paper on this subject by the Federal Reserve staff economists Dean Maki and Michael Palumbo - that even much of the boom of the late 1990s was built substantially on asset bubbles. ["Disentangling the Wealth Effect: a Cohort Analysis of Household Savings in the 1990s"]

A second parallel is what today we would call securitization of credit. Some people think this is a recent innovation, but in fact it was the core technique that made possible the dangerous practices of the 1920. Banks would originate and repackage highly speculative loans, market them as securities through their retail networks, using the prestigious brand name of the bank - e.g. Morgan or Chase - as a proxy for the soundness of the security. It was this practice, and the ensuing collapse when so much of the paper went bad, that led Congress to enact the Glass-Steagall Act, requiring bankers to decide either to be commercial banks - part of the monetary system, closely supervised and subject to reserve requirements, given deposit insurance, and access to the Fed's discount window; or investment banks that were not government guaranteed, but that were soon subjected to an extensive disclosure regime under the SEC.

Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s - lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn't paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction - assuming perpetually rising asset prices - so in a credit crisis they can act as net de-stabilizers.

A third parallel is the excessive use of leverage. In the 1920s, not only were there pervasive stock-watering schemes, but there was no limit on margin. If you thought the market was just going up forever, you could borrow most of the cost of your investment, via loans conveniently provided by your stockbroker. It worked well on the upside. When it didn't work so well on the downside, Congress subsequently imposed margin limits. But anybody who knows anything about derivatives or hedge funds knows that margin limits are for little people. High rollers, with credit derivatives, can use leverage at ratios of ten to one, or a hundred to one, limited only by their self confidence and taste for risk. Private equity, which might be better named private debt, gets its astronomically high rate of return on equity capital, through the use of borrowed money. The equity is fairly small. As in the 1920s, the game continues only as long as asset prices continue to inflate; and all the leverage contributes to the asset inflation, conveniently creating higher priced collateral against which to borrow even more money.

The fourth parallel is the corruption of the gatekeepers. In the 1920s, the corrupted insiders were brokers running stock pools and bankers as purveyors of watered stock. 1990s, it was accountants, auditors and stock analysts, who were supposedly agents of investors, but who turned out to be confederates of corporate executives. You can give this an antiseptic academic term and call it a failure of agency, but a better phrase is conflicts of interest. In this decade, it remains to be seen whether the bond rating agencies were corrupted by conflicts of interest, or merely incompetent. The core structural conflict is that the rating agencies are paid by the firms that issue the bonds. Who gets the business - the rating agencies with tough standards or generous ones? Are ratings for sale? And what, really, is the technical basis for their ratings? All of this is opaque, and unregulated, and only now being investigated by Congress and the SEC.

Yet another parallel is the failure of regulation to keep up with financial innovation that is either far too risky to justify the benefit to the real economy, or just plain corrupt, or both. In the 1920s, many of these securities were utterly opaque. Ferdinand Pecora, in his 1939 memoirs describing the pyramid schemes of public utility holding companies, the most notorious of which was controlled by the Insull family, opined that the pyramid structure was not even fully understood by Mr. Insull. The same could be said of many of today's derivatives on which technical traders make their fortunes.

By contrast, in the traditional banking system a bank examiner could look at a bank's loan portfolio, see that loans were backed by collateral and verify that they were performing. If they were not, the bank was made to increase its reserves. Today's examiner is not able to value a lot of the paper held by banks, and must rely on the banks' own models, which clearly failed to predict what happened in the case of sub-prime. The largest banking conglomerates are subjected to consolidated regulation, but the jurisdiction is fragmented, and at best the regulatory agencies can only make educated guesses about whether balance sheets are strong enough to withstand pressures when novel and exotic instruments create market conditions that cannot be anticipated by models.

A last parallel is ideological - the nearly universal conviction, 80 years ago and today, that markets are so perfectly self-regulating that government's main job is to protect property rights, and otherwise just get out of the way.

We all know the history. The regulatory reforms of the New Deal saved capitalism from its own self-cannibalizing instincts, and a reliable, transparent and regulated financial economy went on to anchor an unprecedented boom in the real economy. Financial markets were restored to their appropriate role as servants of the real economy, rather than masters. Financial regulation was pro-efficiency. I want to repeat that, because it is so utterly unfashionable, but it is well documented by economic history. Financial regulation was pro-efficiency. America's squeaky clean, transparent, reliable financial markets were the envy of the world. They undergirded the entrepreneurship and dynamism in the rest of the economy.

Beginning in the late 1970s, the beneficial effect of financial regulations has either been deliberately weakened by public policy, or has been overwhelmed by innovations not anticipated by the New Deal regulatory schema. New-Deal-era has become a term of abuse. Who needs New Deal protections in an Internet age?

Of course, there are some important differences between the economy of the 1920s, and the one that began in the deregulatory era that dates to the late 1970s. The economy did not crash in 1987 with the stock market, or in 2000-01. Among the reasons are the existence of federal breakwaters such as deposit insurance, and the stabilizing influence of public spending, now nearly one dollar in three counting federal, state, and local public outlay, which limits collapses of private demand.

But I will focus on just one difference - the most important one. In the 1920s and early 1930s, the Federal Reserve had neither the tools, nor the experience, nor the self-confidence to act decisively in a credit crisis. But today, whenever the speculative excesses lead to a crash, the Fed races to the rescue. No, it doesn't bail our every single speculator (though it did a pretty good job in the two Mexican rescues) but it bails out the speculative system, so that the next round of excess can proceed. And somehow, this is scored as trusting free markets, overlooking the plain fact that the Fed is part of the U.S. government.

When big banks lost many tens of billions on third world loans in the 1980s, the Fed and the Treasury collaborated on workouts, and desisted from requiring that the loans be marked to market, lest several money center banks be declared insolvent. When Citibank was under water in 1990, the president of the Federal Reserve Bank of New York personally undertook a secret mission to Riyadh to persuade a Saudi prince to pump in billions in capital and to agree to be a passive investor.

In 1998, the Fed convened a meeting of the big banks and all but ordered a bailout of Long Term Capital Management, an uninsured and unregulated hedge fund whose collapse was nonetheless putting the broad capital markets at risk. And even though Chairman Greenspan had expressed worry two years (and several thousand points) earlier that "irrational exuberance" was creating a stock market bubble, big losses in currency speculation in East Asia and Russia led Greenspan to keep cutting rates, despite his foreboding that cheaper money would just pump up markets and invite still more speculation.

And finally in the dot-com crash of 2000-01, the speculative abuses and insider conflicts of interest that fueled the stock bubble were very reminiscent of 1929. But a general depression was not triggered by the market collapse, because the Fed again came to the rescue with very cheap money.

So when things are booming, the financial engineers can advise government not to spoil the party. But when things go bust, they can count on the Fed to rescue them with emergency infusions of cash and cheaper interest rates.

I just read Chairman Greenspan's fascinating memoir, which confirms this rescue role. His memoir also confirms Mr. Greenspan's strong support for free markets and his deep antipathy to regulation. But I don't see how you can have it both ways. If you are a complete believer in the proposition that free markets are self-regulating and self- correcting, then you logically should let markets live with the consequences. On the other hand, if you are going to rescue markets from their excesses, on the very reasonable ground that a crash threatens the entire system, then you have an obligation to act pre-emptively, prophylactically, to head off highly risky speculative behavior. Otherwise, the Fed just invites moral hazards and more rounds of wildly irresponsible actions.

While the Fed and the European Central Bank were flooding markets with liquidity to prevent a deeper crash in August and September, the Bank of England decided on a sterner course. It would not reward speculators. The result was an old fashioned run on a large bank, and the Bank of England changed its tune.

So the point is not that the Fed should let the whole economy collapse in order to teach speculators a lesson. The point is that the Fed needs to remember its other role - as regulator.

One of the odd things about the press commentary about what the Fed should do is that it has been entirely along one dimension: a Hobson's choice: - either loosen money and invite more risky behavior, or refuse to enable asset bubbles and risk a more serious credit crunch - as if these were the only options and monetary policy were the only policy lever. But the other lever, one that has fallen into disrepair and disrepute, is preventive regulation.

Mr. Chairman, you have had a series of hearings on the sub-prime collapse, which has now been revealed as a textbook case of regulatory failure. About half of these loans were originated by non-federally regulated mortgage companies. However even those sub-prime loans should have had their underwriting standards policed by the Federal Reserve or its designee under the authority of the 1994 Home Equity and Ownership Protection Act. And by the same token, the SEC should have more closely monitored the so called counterparties - the investment and commercial banks - that were supplying the credit. However, the Fed and the SEC essentially concluded that since the paper was being sold off to investors who presumably were cognizant of the risks, they did not need to pay attention to the deplorable underwriting standards.

In the 1994 legislation, Congress not only gave the Fed the authority, but directed the Fed to clamp down on dangerous and predatory lending practices, including on otherwise unregulated entities such as sub-prime mortgage originators. However, for 13 years the Fed stonewalled and declined to use the authority that Congress gave it to police sub-prime lending. Even as recently as last spring, when you could not pick up a newspaper's financial pages without reading about the worsening sub-prime disaster, the Fed did not act - until this Committee made an issue of it.

Financial markets have responded to the 50 basis-point rate-cut, by bidding up stock prices, as if this crisis were over. Indeed, the financial pages have reported that as the softness in housing markets is expected to worsen, traders on Wall Street have inferred that the Fed will need to cut rates again, which has to be good for stock prices.

Mr. Chairman, we are living on borrowed time. And the vulnerability goes far beyond the spillover effects of the sub-prime debacle.

We need to step back and consider the purpose of regulation. Financial regulation is too often understood as merely protecting consumers and investors. The New Deal model is actually a relatively indirect one, since it relies more on mandated disclosures, and less on prohibited practices. The enormous loopholes in financial regulation - the hedge fund loophole, the private equity loophole, are justified on the premise that consenting adults of substantial means do not need the help of the nanny state, thank you very much. But of course investor protection is only one purpose of regulation. The other purpose is to protect the system from moral hazard and catastrophic risk of financial collapse. It is this latter function that has been seriously compromised.

HOEPA was understood mainly as consumer protection legislation, but it was also systemic risk legislation.

Sarbanes-Oxley has been attacked in some quarters as harmful to the efficiency of financial markets. One good thing about the sub-prime calamity is that we haven't heard a lot of that argument lately. Yet there is still a general bias in the administration and the financial community against regulation.

Mr. Chairman, I commend you and this committee for looking beyond the immediate problem of the sub-prime collapse. I would urge every member of the committee to spend some time reading the Pecora hearings, and you will be startled by the sense of déjà vu.

I'd like to close with an observation and a recommendation.

My perception as a financial journalist is that regulation is so out of fashion these days that it narrows the legislative imagination, since politics necessarily is the art of the possible and your immediate task is to find remedies that actually stand a chance of enactment. There is a vicious circle - a self-fulfilling prophecy - in which remedies that currently are legislatively unthinkable are not given serious thought. Mr. Chairman, you are performing an immense public service by broadening the scope of inquiry beyond the immediate crisis and immediate legislation.

Three decades ago, a group of economists inspired by the work of the late Milton Friedman created a shadow Federal Open Market Committee, to develop and recommend contrarian policies in the spirit of Professor Friedman's recommendation that monetary policy essentially be put on automatic pilot. The committee had great intellectual and political influence, and its very existence helped people think through dissenting ideas. In the same way, the national security agencies often create Team B exercises to challenge the dominant thinking on a defense issue.

In the coming months, I hope the committee hears from a wide circle of experts - academics, former state and federal regulators, financial historians, people who spent time on Wall Street - who are willing to look beyond today's intellectual premises and legislative limitations, and have ideas about what needs to be re-regulated. Here are some of the questions that require further exploration:

First, which kinds innovations of financial engineering actually enhance economic efficiency, and which ones mainly enrich middlemen, strip assets, appropriate wealth, and increase systemic risk? It no longer works to assert that all innovations, by definition, are good for markets or markets wouldn't invent them. We just tested that proposition in the sub-prime crisis, and it failed. But which forms of credit derivatives, for example, truly make markets more liquid and better able to withstand shocks, and which add to the system's vulnerability. We can't just settle that question by the all purpose assumption that market forces invariably enhance efficiency. We have to get down to cases.

The story of the economic growth in the 1990s and in this decade is mainly a story of technology, increased productivity growth, macro-economic stimulation, and occasionally of asset bubbles. There is little evidence that the growth rates of the past decade and a half - better than the 1970s and ‘80s, worse than the 40's, 50's and ‘60s - required or benefited from new techniques of financial engineering.

I once did some calculations on what benefits securitization of mortgage credit had actually had. By the time you net out the fee income taken out by all of the middlemen - the mortgage broker, the mortgage banker, the investment banker, the bond-rating agency - it's not clear that the borrower benefits at all. What does increase, however, are the fees and the systemic risks. More research on this question would be useful. What would be the result of the secondary mortgage market were far more tightly subjected to standards? It is telling that the mortgages that best survived the meltdown were those that met the underwriting criteria of the GSE's.

Second, what techniques and strategies of regulation are appropriate to damp down the systemic risks produced by the financial innovation? As I observed, when you strip it all down, at the heart of the recent financial crises are three basic abuses: lack of transparency; excessive leverage; and conflicts of interest. Those in turn suggest remedies: greater disclosure either to regulators or to the public. Requirement of increased reserves in direct proportion to how opaque and difficult to value are the assets held by banks. Some restoration of the walls against conflicts of interest once provided by Glass Steagall. Tax policies to discourage dangerously high leverage ratios, in whatever form.

Maybe we should just close the loophole in the 1940 Act and require of hedge funds and private equity firms the same kinds of disclosures required of others who sell shares to the public, which in effect is what hedge funds and private equity increasingly do. The industry will say that this kind of disclosure impinges on trade secrets. To the extent that this concern is valid, the disclosure of positions and strategies can be to the SEC. This is what is required of large hedge funds by the Financial Services Authority in the UK, not a nation noted for hostility to hedge funds. Indeed, Warren Buffet's Berkshire Hathaway, which might have chosen to operate as private equity, makes the same disclosures as any other publicly listed firm. It doesn't seem to hurt Buffett at all.

To the extent that some private equity firms and strategies strip assets, while others add capital and improve management, maybe we need a windfall profits tax on short term extraction of assets and on excess transaction fees. If private equity has a constructive role to play - and I think it can - we need public policies to reward good practices and discourage bad ones. Industry codes, of the sort being organized by the administration and the industry itself, are far too weak.

Why not have tighter regulation both of derivatives that are publicly traded and those that are currently regulated - rather weakly - by the CFTC: more disclosure, limits on leverage and on positions. And why not make OTC and special purpose derivatives that are not ordinarily traded (and that are black holes in terms of asset valuation), also subject to the CFTC?

A third big question to be addressed is the relationship of financial engineering to problems of corporate governance. Ever since the classic insight of A.A. Berle and Gardiner Means in 1933, it has been conventional to point out that corporate management is not adequately responsible to shareholders, and by extension to society, because of the separation of ownership from effective control. The problem, if anything, is more serious today than when Berle and Means wrote in 1933, because of the increased access of insiders to financial engineering. We have seen the fruits of that access in management buyouts, at the expense of both other shareholders, workers, and other stakeholders. This is pure conflict of interest.

Since the first leveraged buyout boom, advocates of hostile takeovers have proposed a radically libertarian solution to the Berle-Means problem. Let a market for corporate control hold managers accountable by buying, selling, and recombining entire companies via LBOs that tax deductible money collateralized by the target's own assets. It is astonishing that this is even legal, let alone rewarded by tax preferences, even more so when managers with a fiduciary responsibility to shareholders are on both sides of the bargain.

The first boom in hostile takeovers crashed and burned. The second boom ended with the stock market collapse of 2000-01. The latest one is rife with conflicts of interest, it depends heavily on the perception that stock prices are going to continue to rise at multiples that far outstrip the rate of economic growth, and on the borrowed money to finance these deals that puts banks increasingly at risk.

So we need a careful examination of better ways of holding managers accountable - through more power for shareholders and other stakeholders such as employees, proxy rules not tilted to incumbent management, and rules that reward mutual funds for serving as the agents of shareholders, and not just of the profit maximization of the fund sponsor. John Bogle, a pioneer in the modern mutual fund industry, has written eloquently on this.

Interestingly, the intellectual fathers of the leveraged buyout movement as a supposed source of better corporate governance, have lately been having serious second thoughts.

Michael Jensen, one of the original theorists of efficient market theory and the so called market for corporate control and an advocate of compensation incentives for corporate CEOs has now written a book calling for greater control of CEOs and less cronyism on corporate boards. That cronyism, however, is in part a reflection of Jensen's earlier conception of the ideal corporation.

I don't have all the answers on regulatory remedies, but people smarter than I need to systematically ask these questions, even if they are beyond the pale legislatively for now. And there are scholars of financial markets, former state and federal regulators, economic historians, and even people who did time on Wall Street, who all have the same concerns that I do as well as more technical expertise, and who I am sure would be happy to find company and to serve.

One last parallel: I am chilled, as I'm sure you are, every time I hear a high public official or a Wall Street eminence utter the reassuring words, "The economic fundamentals are sound." Those same words were used by President Hoover and the captains of finance, in the deepening chill of the winter of 1929-1930. They didn't restore confidence, or revive the asset bubbles.

The fact is that the economic fundamentals are sound - if you look at the real economy of factories and farms, and internet entrepreneurs, and retailing innovation and scientific research laboratories. It is the financial economy that is dangerously unsound. And as every student of economic history knows, depressions, ever since the South Sea bubble, originate in excesses in the financial economy, and go on to ruin the real economy.

It remains to be seen whether we have dodged the bullet for now. If markets do calm down, and lower interest bail out excesses once again, then we have bought precious time. The worst thing of all would be to conclude that markets self corrected once again, and let the bubble economy continue to fester. Congress has a window in which restore prudential regulation, and we should use that window before the next crisis turns out to be a mortal one.



http://www.truthout.org/docs_2006/100307H.shtml

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Another example of a business operating since 1940, but was bought out in 2003 by Strategic Investment and Holdings, an investment firm.

October 5, 2007

Meat Company Going Out of Business After Recall

By KEN BELSON and KAREEM FAHIM

Topps Meat Company, one of the country’s largest manufacturers of frozen hamburgers, said today it was going out of business after it recalled more than 21.7 million pounds of ground beef products last month.

The company, based in Elizabeth, N.J., said a few of its 87 employees will remain at the plant to help the United States Department of Agriculture investigate how the E. coli bacteria tainted frozen hamburger patties made there.

Anthony D’Urso, the chief operating officer at Topps, said the company was unable to withstand the financial burden of the recall.

“This is tragic for all concerned,” Mr. D’Urso said in a statement. “In one week we have gone from the largest U.S. manufacturer of frozen hamburgers to a company that cannot overcome the economic reality of a recall this large.”

A handful of workers trickled out of the company’s plant after being told that its doors would close. Vivian Quinones, who worked in the customer service department for two years, said employees were told this morning that Topps was going out of business.

“It was very emotional,” said Ms. Quinones, who has a 7-year old daughter. The news came “out of the blue. Everyone was somber.”

The company opened its doors in 1940 and was bought in 2003 by Strategic Investment and Holdings, an investment firm in Buffalo. Topps made branded frozen hamburgers and other meat products for supermarkets and mass merchandisers.

On Sept. 25, the United States Department of Agriculture announced a recall of frozen hamburger patties from Topps, saying that the meat was potentially tainted by E. coli bacteria. Officials at the agency conceded that they knew that meat from Topps was contaminated on Sept. 7, when the first positive test results for E. coli came back.

Health officials say the first reported case of sickness linked to the 0157:H7 strain of E. coli found in the Topps meat occurred on July 5, when an 18-year-old girl in central Pennsylvania fell ill. Three days later, another case was reported in New Jersey.

Other cases have been reported in Connecticut, Maine, Florida, Indiana, Ohio and New York.

Anthony DePalma and Nate Schweber in Elizabeth, N.J. contributed reporting.

http://www.nytimes.com/2007/10/05/us...gewanted=print

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October 6, 2007

Send in the Clowns

By BOB HERBERT

It’s embarrassing.

The U.S. is going through a transitional period at least as important as the early post-World War II years. New worlds in energy, technology, the economy and global interdependence are either upon us or coming fast.

Yet much of the nation’s top leadership is either wasting its time on complete nonsense or trying with great determination to push us back to the era of top hat and tails.

Among other things, Republicans are trying to figure out what to do about Larry Craig, the loony senator from Idaho who got caught in a public toilet behaving as if he thought the promised land was just one stall away.

Democrats, unable to do anything about George W. Bush’s policy of eternal war in Iraq, found themselves reduced to fulminating in official Congressional proceedings about the latest wackiness from Rush Limbaugh.

Meanwhile, the president and his priceless band of can’t-get-it-right-wingers, are busy vetoing health insurance for children, dreaming up secret torture protocols, funneling lucrative federal contracts to friends and cronies and fulfilling their paramount mission — making the very rich richer.

So much for leadership.

The nation’s failure to deal constructively with the new realities of employment, education, health care, retirement and so on has taken a toll.

The Times’s David Leonhardt, in a column that ran in September, noted that when Americans think about their lives in relation to the past, they are very upbeat. Life for most Americans is better than it was for their parents and grandparents.

“But,” wrote Mr. Leonhardt, “when the discussion is about the future, the national mood darkens. In one typical poll from last year, only 34 percent of people said they expected today’s children to be better off than people are now, down from 55 percent when a similar question was asked in 1999.”

Americans have every reason to be concerned. A study released last spring showed that men who are now in their 30s earn less than their fathers’ generation did at the same age. The median income for men in their 30s in 1974, in today’s inflation-adjusted dollars, was $40,210. According to the study, which used Census figures compiled for 2004, those annual earnings had dropped to $35,010.

President Bush’s unconscionable veto of the State Children’s Health Insurance Program comes at a time when the number of uninsured children is rising and employer-based health insurance is going the way of rotary phones and carbon paper. That’s not neglect. That’s willfully doing harm to children.

In the first two or three decades after World War II, there was a broad sense of optimism, a strongly held belief, despite many crises, that Americans could achieve great things. Men and women of talent and vision gave us the Marshall Plan, the G.I. Bill, the interstate highway program, the Peace Corps, the space program, the civil rights movement and much more.

Where is the comparable vision for the early-21st century? Who is rallying America with the clarion call that we can do great things?

From the Republicans, we get the message that the most important thing to hold on to is fear itself. The terrorists are out to get us. From the Democrats, heavily armed with thermometers, barometers and windmills, comes the usual timidity. They behave as if their hearts would stop if they actually took a tough stand.

Meanwhile, there are many millions of Americans who are not doing well, and the nation is not addressing their plight. Thirty-seven million Americans, many of them children, are officially classified as poor. What is not widely known is that another 57 million are struggling just one notch above the poverty line. This is spelled out in a new book, “The Missing Class: Portraits of the Near Poor in America,” by Katherine Newman and Victor Tan Chen.

Near-poor Americans live in households with annual incomes of $20,000 to $40,000 for a family of four. They work at jobs that are highly unstable and offer few if any benefits. Many of their children would qualify for insurance coverage under the S-chip program that the president so coldly vetoed on Wednesday.

No wonder so many Americans are turned off to politics.

One of the paramount challenges of the new era is the task of getting a legitimate four-year college degree into the hands of as many American young people as possible. A four-year degree has become a virtual prerequisite for a middle-class quality of life. The overall benefits to the country of such an explosive improvement in educational achievement are incalculable.

But at the moment, the geniuses running the country can’t even figure out how to cover the cost of keeping American children healthy. So we’ve got a way to go.




http://www.nytimes.com/2007/10/06/op...hp&oref=slogin

[sidecross]

October 14, 2007

Banks to Set Up $80 Bln Fund to Limit Credit Crunch

By REUTERS
Filed at 9:29 a.m. ET

NEW YORK/WASHINGTON (Reuters) - Major banks including Citigroup Inc are looking at setting up a roughly $80 billion fund to buy ailing mortgage securities and other assets, in a bid to prevent the credit crunch from further hurting the global economy, sources familiar with the matter said.

Representatives from the U.S. Treasury have organized conversations among top global banks, sources said, as financial institutions grow increasingly concerned that a certain type of investment fund linked to banks may have to dump billions of dollars of repackaged loans onto financial markets.

A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and in the worst-case scenario tip the U.S. or Europe into recession.

The fund is the latest response to a global credit hangover after at least three years of easy credit that fueled massive mortgage lending in the United States and spurred record levels of leveraged buyouts.

"Banks made unwise business decisions, and now they're scrambling to save themselves," said Steve Persky, chief executive at Dalton Investments in Los Angeles, which has $1.2 billion under management.

Citigroup, JPMorgan Chase & Co. and Bank of America Corp. are involved in the discussions, according to people familiar with the situation. The three banks declined to comment.

The U.S. Treasury is involved in the discussions, but taxpayer money is not expected to be used.

The Financial Services Authority, the U.K. market regulator, has suggested U.K. banks consider participating in the fund, the Wall Street Journal reported on Saturday, citing a person familiar with the situation.

A spokesman for the FSA declined to comment on Sunday. Swiss financial services regulator EBK also declined comment.

Spokesmen for British bank HSBC and Swiss bank UBS had no comment when asked about their involvement.

Details concerning the fund the banks are setting up, including its size, are still being hammered out and may change as other banks and investors become involved, sources said.

The fund that is being contemplated would bail out funds known as "structured investment vehicles," or SIVs.

SIVs bought assets like mortgage securities from banks, and financed their purchases using short-term debt known as commercial paper. They make money by earning more from their investments than they have to pay to fund them.

But if SIVs cannot sell commercial paper, they must sell their assets, and many of the assets do not trade often and would be hard to sell.

The idea for a fund was first broached at a meeting at the U.S. Treasury on a Sunday in mid-September in Washington, D.C., according to a person familiar with the details of the meeting.

That meeting was led by Robert Steel, U.S. undersecretary for domestic finance, and Anthony Ryan, U.S. assistant secretary for financial markets. The informal meeting lasted four and a half hours as banks came up with ideas to jump-start the short-term lending markets.

Outstanding commercial paper has dropped since the summer. According to the U.S. Federal Reserve, there was $1.865 trillion in commercial paper outstanding in the week ended October 10, down from $2.187 trillion outstanding in July.

The government-led discussions are similar to conversations the Federal Reserve Bank of New York conducted in 1998 to help organize the bail-out of hedge fund Long-Term Capital Management. Taxpayer funds were not used to bail out Long-Term, either.

Banks including Citigroup, Merrill Lynch & Co, and UBS have in recent weeks announced billions of dollars in asset write-offs and are still struggling to sell off billions of dollars in loans that financed acquisitions globally.

"We are coming off the greatest lending bubble ... in U.S. history. We will feel its impact for a very long time," said Robert Arnott, Chairman of Research Affiliates LLC in Pasadena, California, earlier this month.

(Additional reporting by Steve Slater in London and Tom Atkins in Zurich)



http://www.nytimes.com/reuters/busin...gewanted=print

[sidecross]

Bernanke: Housing Woes to Slow Growth

By THE ASSOCIATED PRESS
Published: October 15, 2007
Filed at 7:22 p.m. ET

WASHINGTON (AP) -- A deepening housing slump probably will be a ''significant drag'' on economic growth into next year and it will take time for Wall Street to fully recover from a painful credit crisis, Federal Reserve Chairman Ben Bernanke warned Monday.

Bernanke once again pledged to ''act as needed'' to help financial markets -- which have suffered through several months of turbulence -- function smoothly and to keep the economy and inflation on an even keel.

''Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks,'' Bernanke said in a speech to the New York Economic Club. A copy of his remarks were made available in Washington.

It was Bernanke's most extensive assessment of the country's current economic situation since the August turmoil unhinged Wall Street.

The ultimate implications of the credit crunch on the broader economy remain uncertain, the Fed chief said.

Against that backdrop, Bernanke said the central bank will be closely watching the economy's vital signs. He didn't specifically commit to cutting rates again.

Economists have mixed opinions on whether the Fed will lower interest rates at their next meeting, Oct. 30-31.

To help cushion the economy from the ill effects of the credit crunch and housing slump, the Fed on Sept. 18 slashed a key short-term interest rate by one-half percentage point to 4.75 percent. It marked the first rate cut in more than four years. It also reflected the most aggressive action taken by the Fed to curb fallout from the credit crisis, which intensified in August.

Since that September meeting, the housing slump -- the worst in 16 years -- has gotten deeper, Bernanke said.

''The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year,'' he said.

''However, it remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions,'' he added.

Spending by businesses and individuals is an important ingredient to keeping the economic expansion -- which began in late 2001 -- from fizzling out.

Developments affecting the job market and income growth also will be watched closely. ''The labor market has shown some signs of cooling, but these are quite tentative so far, and real income is still growing at a solid pace,'' Bernanke observed.

The benefits of a mostly sturdy employment climate have helped cushion some of the negative effects that the housing slump, weaker home values and a credit crunch have had on consumers.

Job creation rebounded in September, with employers boosting payrolls by 110,000, the most in four months. Wages grew solidly. The unemployment rate did creep up to 4.7 percent last month but that rate is still considered low by historical standards.

On the inflation front, Bernanke noted that the prices of crude oil and other commodities have been rising and that the value of the dollar has weakened. Oil prices galloped to a record high of $86.13 a barrel on Monday.

Bernanke said the Fed will continue to monitor inflation developments carefully. Yet, with the limited information seen since the central bank's September meeting, the inflation barometers ''are consistent with continued moderate increases in consumer prices,'' he said.

The Fed's September rate reduction, Bernanke said, has helped ease ''some of the pressure in financial markets, although considerable strains remain.''

Still, the Fed's next move will be determined by what is best for the economy, Bernanke suggested. As he has said previously, it is not the Fed's job to shield investors from the consequences of bad financial decisions.

''The truth is that it (the Fed) can hardly insulate investors from risk, even if it wished to do so,'' Bernanke said. ''Developments over the past few months reinforce this point. Those who made bad investment decisions lost money.''

The worst carnage has affected investors in ''subprime'' mortgages -- those made to people with spotty credit or low incomes. Some lenders have been forced out of business and some investors in those and related mortgage-backed securities have taken a huge financial hit.

Overstretched homeowners with subprime loans got clobbered by the mortgage meltdown, too. Foreclosures and late payments have soared.

Weaker home prices seen during the housing bust have made it more difficult for some subprime borrowers to refinance out of loans that offered low ''teaser'' rates but jumped to much higher rates, resulting in payment shocks. Deliquencies on these mortgages are expected to rise further, Bernanke predicted.


http://www.nytimes.com/aponline/us/AP-Bernanke.html

[sidecross]

October 19, 2007

high and low finance

Making a Loan Only After It Goes Bad

By FLOYD NORRIS

“The banking system is healthy.”

Ben S. Bernanke, Federal Reserve chairman, Oct. 15

“Our bank regulators must evaluate regulatory capital requirements applicable to bank exposures to off-balance-sheet vehicles.”

Treasury Secretary Henry M. Paulson Jr., Oct. 16



Out of sight, out of mind.

As America’s big banks reported poor quarterly results this week, it was hard to know what was more distressing: the news, or the fact many bankers were clearly surprised.

They were surprised because banking has evolved to the point where a large part of the revenue comes from things invisible to readers of financial statements, either commitments to make loans, or through vehicles carefully engineered to stay off the balance sheet.

A notable illustration came from Citigroup. Its write-offs were half a billion dollars more than the bank had forecast only two weeks earlier, and its optimism about the fourth quarter was toned down considerably.

But the most impressive fact was the bank’s explanation of why its nonperforming corporate loan total had doubled, to $1.2 billion, in just three months.

Citi explained that the bulk of that came from just one loan — and it was a loan that had not even been made a few months earlier. Citi had taken a fee to provide a backup line of credit to a structured investment vehicle — a line that would be called on only if the S.I.V. could not borrow and a German bank could not meet its promise to make the loan.

That happened, so Citi forked over the cash and immediately put the loan on nonperforming status.

That’s a neat trick. You don’t make the loan until you know it will be a bad loan.

Henry M. Paulson Jr., the Treasury secretary and former chief executive of Goldman Sachs, says many banks “appear not to have fully appreciated all of the risks associated with the securitized assets on their balance sheets or the many risks associated with commitments to provide liquidity to off-balance-sheet vehicles, such as conduits and structured investment vehicles.”

What you don’t know really can hurt you.

Mr. Paulson mobilized the big banks to find a way to rescue S.I.V.’s by purchasing assets from them. The idea is that the new super-S.I.V., called a Master Liquidity Enhancement Conduit, would be able to borrow in the commercial paper market — something the S.I.V.’s cannot now do — because the banks would provide backup lines of credit to reassure investors.

The convoluted structure speaks volumes about how banking has changed. The banks considered and rejected a suggestion that they just lend money to the S.I.V.’s directly. Nor did they want to buy the S.I.V.’s assets — supposedly safe securitization products — for their own balance sheets.

Even if it works, the new conduit — promptly dubbed a FrankenFund by some — just buys time. The securitization model, in which risky loans were largely financed by investors who thought they were making safe investments, has not recovered from the shock of learning that financial alchemy had not turned junk into gold.

Until — or unless — it recovers, the majority of new mortgage loans will be made only because the government, or an enterprise with government backing, is willing to guarantee them. Investors will still buy securities backed by those loans.

But if a loan does not meet the government’s standards — perhaps because it is too large — most borrowers must find a bank willing to make the loan and keep it on its balance sheet.

How old-fashioned is that? Banks do not want to tie up their capital for 30 years. They long for the go-go years when they got fees without having to actually put out the cash for very long.

Mr. Bernanke, the Fed’s chairman, voiced the conventional wisdom when he said the banks were in good shape. He is in a better position than the rest of us to know that is true, but so were the bank managements who were surprised.

Gary L. Crittenden, Citigroup’s chief financial officer, told my colleague, Eric Dash, that Citi, in manufacturing products to sell into the securitization market, had focused on the wrong thing. “We had a market risk lens looking at those products, not the credit risk lens,” he said.

Now Citi, and its competitors, are learning just how much credit risk they took on. Mr. Paulson wants to make sure that regulators force them to have adequate capital for those risks, and that accounting standards force disclosure of the risks.

Those are good ideas, although they may be a little late.

With the securitization market in trouble, we need the banks to be able, and willing, to revive their traditional roles as financial intermediaries. Their decision to avoid that in setting up the complicated “Master Liquidity Enhancement Conduit” is not an encouraging development.

E-mail: norris@nytimes.com




http://www.nytimes.com/2007/10/19/bu...l?ref=business

[Isaiah Mpski]

It is one of the reasons America is going down the same path as many great nations in history,
Sell all that ye have and follow me.
My plan Sidecross is to take back the lands that the government controls of Lake Eufaula.The only thing they need to concern themselves with would be the hydroelectric plant and the campgrounds.

We can accomplish this by a non-profit private collective organizations and then develop-with a conservative approach-the fields and forests that have rested now for many many years.Drill our own gas well on our farm so we can have an independent energy source as well as wind power.I get a fairly good fee-not a living- from a major oil company as a lease to drill which is up for renewal in Feb.Apparently they think there is gas here or they wouldn't pay me much to lease it.
We're going to need a heavy machinery mechanic,a lawyer,an a honest investor advisor and as many part time workers as possible so we can effect the voting numbers.Fishing season is peaking right now.
Next we will buy a place in New and Old Mexico because if you're like me you need a place (besides jail) to vacation and get away from it all.Particularily for our health as we are not getting much younger and hospitals and the healthcare system can be real money drainers.A change in environment for a few weeks works wonders.

[sidecross]

Steep decline in oil production brings risk of war and unrest, says new study


· Output peaked in 2006 and will fall 7% a year
· Decline in gas, coal and uranium also predicted

Ashley Seager

Monday October 22, 2007
The Guardian


World oil production has already peaked and will fall by half as soon as 2030, according to a report which also warns that extreme shortages of fossil fuels will lead to wars and social breakdown.

The German-based Energy Watch Group will release its study in London today saying that global oil production peaked in 2006 - much earlier than most experts had expected. The report, which predicts that production will now fall by 7% a year, comes after oil prices set new records almost every day last week, on Friday hitting more than $90 (£44) a barrel.

"The world soon will not be able to produce all the oil it needs as demand is rising while supply is falling. This is a huge problem for the world economy," said Hans-Josef Fell, EWG's founder and the German MP behind the country's successful support system for renewable energy.

The report's author, Joerg Schindler, said its most alarming finding was the steep decline in oil production after its peak, which he says is now behind us.

The results are in contrast to projections from the International Energy Agency, which says there is little reason to worry about oil supplies at the moment.

However, the EWG study relies more on actual oil production data which, it says, are more reliable than estimates of reserves still in the ground. The group says official industry estimates put global reserves at about 1.255 gigabarrels - equivalent to 42 years' supply at current consumption rates. But it thinks the figure is only about two thirds of that.

Global oil production is currently about 81m barrels a day - EWG expects that to fall to 39m by 2030. It also predicts significant falls in gas, coal and uranium production as those energy sources are used up.

Britain's oil production peaked in 1999 and has already dropped by half to about 1.6 million barrels a day.

The report presents a bleak view of the future unless a radically different approach is adopted. It quotes the British energy economist David Fleming as saying: "Anticipated supply shortages could lead easily to disturbing scenes of mass unrest as witnessed in Burma this month. For government, industry and the wider public, just muddling through is not an option any more as this situation could spin out of control and turn into a complete meltdown of society."

Mr Schindler comes to a similar conclusion. "The world is at the beginning of a structural change of its economic system. This change will be triggered by declining fossil fuel supplies and will influence almost all aspects of our daily life."

Jeremy Leggett, one of Britain's leading environmentalists and the author of Half Gone, a book about "peak oil" - defined as the moment when maximum production is reached, said that both the UK government and the energy industry were in "institutionalised denial" and that action should have been taken sooner.

"When I was an adviser to government, I proposed that we set up a taskforce to look at how fast the UK could mobilise alternative energy technologies in extremis, come the peak," he said. "Other industry advisers supported that. But the government prefers to sleep on without even doing a contingency study. For those of us who know that premature peak oil is a clear and present danger, it is impossible to understand such complacency."

Mr Fell said that the world had to move quickly towards the massive deployment of renewable energy and to a dramatic increase in energy efficiency, both as a way to combat climate change and to ensure that the lights stayed on. "If we did all this we may not have an energy crisis."

He accused the British government of hypocrisy. "Tony Blair and Gordon Brown have talked a lot about climate change but have not brought in proper policies to drive up the use of renewables," he said. "This is why they are left talking about nuclear and carbon capture and storage. "

Yesterday, a spokesman for the Department of Business and Enterprise said: "Over the next few years global oil production and refining capacity is expected to increase faster than demand. The world's oil resources are sufficient to sustain economic growth for the foreseeable future. The challenge will be to bring these resources to market in a way that ensures sustainable, timely, reliable and affordable supplies of energy."

The German policy, which guarantees above-market payments to producers of renewable power, is being adopted in many countries - but not Britain, where renewables generate about 4% of the country's electricity and 2% of its overall energy needs.



http://www.guardian.co.uk/oil/story/0,,2196435,00.html

[sidecross]

IMF warns of decline in global economy


· Markets braced for falls after Wall Street slump
· Period of slower growth sparks fears of trade war

Larry Elliott in Washington and Mark Milner

Monday October 22, 2007
The Guardian


Stock markets around the world were braced for fresh falls today despite attempts by the G7 leading industrial nations and the International Monetary Fund to boost confidence after Friday's plunge in share prices on Wall Street.

The IMF's key policy-making committee said at the weekend that the recent turmoil in financial markets would lead to slower growth and that "downside risks to the outlook have increased".

On Friday, the 20th anniversary of the 1987 Black Monday market crash, Wall Street fell 367 points. Other exchanges that closed before the full extent of the New York slump are expected to open sharply weaker today.

Friday's selling was triggered by a profits warning from the earth-moving equipment group Caterpillar and lower-than-expected earnings from Wachovia, the fourth largest bank in the US. Analysts said the combination served to remind investors that the problems of the crunch in credit markets and the slowdown in the US housing market have not gone away.

Nick Parsons, head of markets strategy at nabCapital in London, said yesterday: "I have the feeling this is going to be a very, very tricky week. The surprise is not that [the market] is going to fall now. The surprise is that it has risen as much as it has over the last four or five weeks."

Behind the scenes at the annual meetings of the Fund and the World Bank, some policy makers admitted that they were concerned about a disorderly unwinding of the global imbalances triggered by a rapid fall in the value of the dollar.

The outgoing managing director of the IMF, Rodrigo de Rato, added to pressure on the greenback when he said that "in the medium term, the dollar is overvalued", adding: "The markets are also betting right now that the dollar is overvalued."

Some decline in the dollar is seen by the IMF as necessary for an orderly solution to the problem at the heart of the global imbalances - the trade surpluses built up by China and other Asian exporters and the trade deficit run by the United States.

Markets fear, however, that a too rapid decline in the dollar could set off a chain reaction through the global economy of rising inflation and slower growth and were looking for some signs at the weekend that policy makers had a plan for smooth adjustments on the foreign exchanges.

Yet the communiqué from the IMF's international monetary and financial committee released on Saturday provided no explicit support for the dollar and exchange rates were not discussed at Friday's meeting of G7 finance ministers and central bank governors.

The Fund and the G7 both kept up the pressure on China to re-value its currency, with the IMF communiqué noting that "an orderly unwinding of global imbalances, while sustaining global growth, is a shared responsibility". It also urged the US to use tougher tax and spending policies to cut its trade deficit, and Europe and Japan to implement structural reforms of their economies.

Amid growing concern that a period of slower growth could fan protectionist pressures in the west, the IMF called for a "prompt and ambitious" conclusion to the stalled Doha round of trade talks.

Pascal Lamy, the director general of the World Trade Organisation, told the IMFC on Saturday that "the hour of trade is very rapidly approaching" for negotiators.

A fresh attempt will be made to break the deadlock in the next month but Mr Lamy said that after six years of talks it was "probably our last chance to move this round to a successful conclusion".

Dark days

Black Monday, October 19 1987
Wall Street falls 23%, the biggest drop in its history, while £50bn is wiped off share values in London, five times more than the previous biggest one day collapse

Black Tuesday, October 29 1929
Seen as the day marking the transition in the US from the roaring twenties to the great depression. Wall Street falls almost 13% with (by the standards of the day) huge volumes of shares changing hands as investors' faith in the stock market collapses

Black Wednesday, September 16 1992
Norman Lamont, then chancellor, uses vast amounts of reserves to prop up the pound. But traders such as George Soros know better and bet against the pound, making a huge profit when Britain crashes out of the ERM. Mr Lamont reportedly finishes the day singing in the bath

Black Thursday, October 24 1929
The initial crash that sends the markets into freefall, culminating in widespread panic and long-term consequences the following Tuesday



http://www.guardian.co.uk/imf/story/0,,2196604,00.html

[craazyman]

this will bore most people but it is very good . . .

* * *


CAPITOL REPORT

Roots of credit crisis laid at Fed's door

Regulatory minimalism allowed risky practices to flourish, expert says

By Greg Robb, MarketWatch

Last Update: 3:36 PM ET Oct 24, 2007

WASHINGTON (MarketWatch) -- In the wake of the financial market turmoil that arose over the summer and even now threatens to push the U.S. into recession, there has been a remarkable lack of finger-pointing so far over the cause of the crisis.

But one observer, Tom Schlesinger, the founder and executive director of the Financial Markets Center, a think tank that has followed the Federal Reserve closely for the past decade, believes the blame for the crisis falls squarely on the Fed and accuses the central bank of "regulatory foot-dragging" that has harmed the public.

Schlesinger maintains the Fed's prevailing regulatory philosophy has shifted from that of 20 or 25 years ago, which in essence was "here is the line between right and wrong, don't cross it," to a current underlying policy that "anything and everything that might be called financial innovation ought to be embraced."

"This is a very faulty premise that deserves debate and reflection and ultimately, in my opinion, a changed perspective," Schlesinger said in an interview with MarketWatch.

He points specifically to the opposition to government regulation that flourished at the U.S. central bank under former Fed chief Alan Greenspan and has continued unabated under his successor Ben Bernanke.
At the time Bernanke was preparing to succeed Greenspan, Schlesinger predicted his biggest challenge would be the aftermath of Greenspan's laissez-faire approach to regulation.

Willing to go only so far

The current credit crisis began early in 2007 with rising delinquencies in the subprime mortgage sector. Like a slow fuse, these difficulties spread throughout the global financial system as investors realized that these bad mortgages had been securitized, pooled together and sold to financial institutions around the world.

By early August, parts of the financial system were close to frozen and central banks were forced to inject billions of dollars to add liquidity to maintain the workings of the credit markets.

Over the last two months, some markets have recovered, but problem areas remain, particularly in the London market for structured investment vehicles, or SIVs. There is concern in financial markets about bank exposure to these investment pools and concern that possible forced sales of their assets might shock already jittery credit markets.

Separately, Bank of America, JPMorgan and Citigroup are leading a plan to raise $80 to $100 billion to help buy some of the assets held by SIVs facing collapse.

But these same international bankers spent last weekend in the corridors of the International Monetary Fund's annual meeting urging government officials not to rush to adopt new rules to get the financial market turmoil under control.

Schlesinger calls this reaction by bankers "misguided, predictable and familiar."

"It is sort of stunning that as the biggest banks prepare to conduct a bailout of unprecedented scope, they are at the same time warning for excessive caution on the regulatory side, which is exactly the type of approach that might have spared some of them the consequence of their own worst excesses," he said.

Early warnings went unheeded

In his recent autobiography, Greenspan said when he accepted the top Fed job, he worried that his Ayn Randian brand of libertarianism would make it difficult to be a bank regulator and said he planned to allow others at the Fed to take the lead.

Upon joining the Fed, Greenspan said he had a "pleasant surprise" when he found the Fed staff was not so keen on regulation either. Together, they interpreted congressional legislation with a view to "letting markets work," he wrote.

Schlesinger says this practice was actually "regulatory foot-dragging" where the Fed had a clear obligation under law to police markets but went about it "with such reluctance that in some cases the supervision is difficult to detect."

A perfect illustration of how this "regulatory minimalism" impacted the current market crisis is the Fed's lack of regulation of SIVs that have been under pressure.

In January 2003, after a review of the collapse of Enron Corp., a Senate investigation found that some major U.S. financial institutions had "deliberately misused structured finance techniques" to help Enron engage in deceptive accounting or tax strategies in return for millions of dollars in fees. Read Senate report.

The staff report recommended that the Fed and the Securities and Exchange Commission review how banks use complex structured financial products and issue guidance on acceptable and unacceptable practices by the end of 2003.

But the Fed and the SEC opted against coming out with a list of new guidelines, stating that they favored a principles-based approach rather than a more prescriptive approach to regulation. Schlesinger contends this resulted in the agencies issuing final guidance in 2006 "that in essence said do whatever you want -- anything goes."

"This is a perfect example of the unwillingness of the Fed to take a strict approach to policing structured finance products has come back to haunt the entire system," he said.

Could frenzy have been prevented?

In addition, the Fed also could have dampened the Wild West market conditions for subprime mortgages that resulted in so many poor loans due to fraud, says Schlesinger.

In an interview on the CBS News' program "60 Minutes," Greenspan said the Fed couldn't stop subprime mortgage originators.

Schlesinger disagrees. Although the abuses came from independent originators and not banks, Schlesinger said the Fed had "all or most" of the authority it needed to police the market under two laws passed by Congress.
"The Fed's unwillingness to flex the muscle that those statues granted is a real black mark on the central bank," he said.

Schlesinger detects no change in the Fed's regulatory stance in the 20 months since Bernanke took the reigns at the Fed, saying if there is any re-examination of policy underway the Fed isn't talking about it in public.
Bernanke will have a chance to put his own stamp on regulation in coming months as congressional democrats take an interest in consumer protection in the wake of the debt crisit. See full story. The Fed has already promised to craft rules to address deceptive mortgage lending practices.

Schlesinger said he has some hope the regulatory pendulum will eventually move in the other direction, but cautions it won't be an easy shift.

"It will require some real assertiveness in Congress that has been by-and-large pretty passive on these issues. I think it will also take some real dissent, debate and new thinking in academia and the economics profession as well," he said.

[sidecross]

Thanks craazyman for posting the article.

I am sure there are more people than me who are following how we got into this mess.

It all reminds me of being a young child sitting in the back of a car counting lamp posts....'WorldCom, Enron,...'

[sidecross]

Billionaires Up, America Down

By Holly Sklar
McClatchy-Tribune News Service

Sunday 21 October 2007

When it comes to producing billionaires, America is doing great.

Until 2005, multimillionaires could still make the Forbes list of the 400 richest Americans. In 2006, the Forbes 400 went billionaires only.

This year, you'd need a Forbes 482 to fit all the billionaires.

A billion dollars is a lot of dough. Queen Elizabeth II, British monarch for five decades, would have to add $400 million to her $600 million fortune to reach $1 billion. And she'd need another $300 million to reach the Forbes 400 minimum of $1.3 billion. The average Forbes 400 member has $3.8 billion.

When the Forbes 400 began in 1982, it was dominated by oil and manufacturing fortunes. Today, says Forbes, "Wall Street is king."

Nearly half the 45 new members, says Forbes, "made their fortunes in hedge funds and private equity. Money manager John Paulson joins the list after pocketing more than $1 billion short-selling subprime credit this summer."

The 25th anniversary of the Forbes 400 isn't party time for America.

We have a record 482 billionaires - and record foreclosures.

We have a record 482 billionaires - and a record 47 million people without any health insurance.

Since 2000, we have added 184 billionaires - and 5 million more people living below the poverty line.

The official poverty threshold for one person was a ridiculously low $10,294 in 2006. That won't get you two pounds of caviar ($9,800) and 25 cigars ($730) on the Forbes Cost of Living Extremely Well Index. The $20,614 family-of-four poverty threshold is lower than the cost of three months of home flower arrangements ($24,525).

Wealth is being redistributed from poorer to richer.

Between 1983 and 2004, the average wealth of the top 1 percent of households grew by 78 percent, reports Edward Wolff, professor of economics at New York University. The bottom 40 percent lost 59 percent.

In 2004, one out of six households had zero or negative net worth. Nearly one out of three households had less than $10,000 in net worth, including home equity. That's before the mortgage crisis hit.

In 1982, when the Forbes 400 had just 13 billionaires, the highest paid CEO made $108 million and the average full-time worker made $34,199, adjusted for inflation in $2006. Last year, the highest paid hedge fund manager hauled in $1.7 billion, the highest paid CEO made $647 million, and the average worker made $34,861, with vanishing health and pension coverage.

The Forbes 400 is even more of a rich men's club than when it began. The number of women has dropped from 75 in 1982 to 39 today.

The 400 richest Americans have a conservatively estimated $1.54 trillion in combined wealth. That amount is more than 11 percent of our $13.8 trillion Gross Domestic Product (GDP) - the total annual value of goods and services produced by our nation of 303 million people. In 1982, Forbes 400 wealth measured less than 3 percent of U.S. GDP.

And the rich, notes Fortune magazine, "give away a smaller share of their income than the rest of us."

Thanks to mega-tax cuts, the rich can afford more mega-yachts, accessorized with helicopters and mini-submarines. Meanwhile, the infrastructure of bridges, levees, mass transit, parks and other public assets inherited from earlier generations of taxpayers crumbles from neglect, and the holes in the safety net are growing.

The top 1 percent of households - average income $1.5 million - will save a collective $79.5 billion on their 2008 taxes, reports Citizens for Tax Justice. That's more than the combined budgets of the Transportation Department, Small Business Administration, Environmental Protection Agency and Consumer Product Safety Commission.

Tax cuts will save the top 1 percent a projected $715 billion between 2001 and 2010. And cost us $715 billion in mounting national debt plus interest.

The children and grandchildren of today's underpaid workers will pay for the partying of today's plutocrats and their retinue of lobbyists.

It's time for Congress to roll back tax cuts for the wealthy and close the loophole letting billionaire hedge fund speculators pay taxes at a lower rate than their secretaries.

Inequality has roared back to 1920s levels. It was bad for our nation then. It's bad for our nation now.

----------

Holly Sklar is co-author of "A Just Minimum Wage: Good for Workers, Business and Our Future" and "Raise the Floor: Wages and Policies That Work for All of Us."


http://www.truthout.org/docs_2006/102507M.shtml

[sidecross]

October 25, 2007

Reports Suggest Broader Losses From Mortgages

By VIKAS BAJAJ and EDMUND L. ANDREWS

Every time economists and Wall Street executives think they have acknowledged the full extent of the losses from the meltdown in real estate mortgages, more bad news turns up.

Merrill Lynch said yesterday that it would take a charge for mortgage-related securities on its books that is $3 billion more than the $5 billion it expected just two weeks ago. And a report from the National Association of Realtors showed that sales of existing homes in September fell twice as much as economists had expected, to their lowest level in nearly 10 years.

Stocks fell sharply early yesterday on the news, with the Standard & Poor’s 500-stock index falling 1.8 percent before recovering in the afternoon. Investors also bid up Treasuries as they sought the safety of government-backed debt.

At this juncture, economists say the troubles in the mortgage market could, all told, cost financial firms and investors up to $400 billion.

That is far more than the roughly $240 billion cost, adjusted for inflation, of the savings and loan crisis of the early 1990s, according to estimates of the combined financial toll of that crisis on both the federal government and private sector. The loss in total real estate wealth is expected to range from $2 trillion to $4 trillion, depending on how far home prices fall, according to several economists.

That would be significantly less than the losses suffered by investors in the stock market collapse earlier this decade, which erased more than $7 trillion, or about 40 percent, of market value.

Experts caution that these estimates are preliminary and the total costs could get bigger still. They also note that the loss of real estate wealth could prove more damaging for the general public than falling stock values because more American families own homes than own stock.

In recent years, the rise in real estate values has helped propel consumer spending, as homeowners refinanced mortgages and took out home equity loans.

“There weren’t a lot of people living off their capital gains from stocks,” said Jane Caron, chief economic strategist at Dwight Asset Management. “There were a lot people using their home as a piggy bank.”

Of course, many people who bought their houses several years ago are still ahead financially, because the sharp run-up in home values is still far greater than the expected decline. Those who bought close to the peak stand to lose the most if they have to sell in the near future.

In a new report to be issued today, the Joint Economic Committee of Congress predicts about two million foreclosures by the end of next year on homes purchased with subprime mortgages. That estimate is far higher than the Bush administration’s prediction in September of 500,000 foreclosures, which in itself would be a tidal wave compared with recent years. Congressional aides provided details of the report yesterday to The New York Times.

The Joint Economic Committee estimates that the lost of real estate wealth just from foreclosures on subprime loans will be about $71 billion. An additional $32 billion would be lost because foreclosed homes tend to drive down the prices of other houses in the neighborhood.

Those figures would cause a decline of $917 million in lost property tax revenue to state and local governments, which will also have to spend more on policing neighborhoods with vacant homes. The states most likely to be hard hit fall into two categories: those where prices had been rising fastest, like California and Florida, and Midwest states with weak economies, like Michigan and Ohio, where people with low or moderate incomes made heavy use of subprime loans to become homeowners and consolidate debts.

“State by state, the economic costs from the subprime debacle are shockingly high,” said Senator Charles E. Schumer, Democrat of New York and the chairman of the Joint Economic Committee. “From New York to California, we are headed for billions in lost wealth, property values and tax revenues.”

Still, subprime mortgages make up a relatively small share of the total housing market — about $1 trillion of the $10 trillion in outstanding mortgages.

The much bigger losses will be in declining real estate prices. Household real estate currently totals about $21 trillion, according to the Federal Reserve.

Global Insight, a research firm, predicts that the national average for housing prices will drop 5 percent over the next year and 10 percent before mid-2009, for a total of about $2 trillion. Economists at Goldman Sachs have predicted prices will drop by 15 percent, meaning an overall decline of more than $3 trillion; other forecasters have said the decline could be 20 percent or more.

House prices decline slowly, because many potential sellers simply stay in their current homes when they think prices are too low. But that becomes more difficult as people have to move either because of job changes or, increasingly, because their monthly payments are rising sharply. In the next 18 months, interest rates on more than two million homes loans will reset to higher adjustable rates.

Inventories of unsold existing homes rose last month to their highest level in almost 20 years.

Economists continue to update their predictions on how the loss of housing wealth might affect the overall economy. Nigel Gault, chief domestic economist at Global Insight, said he assumes that consumers reduce their spending by about 6 cents for every dollar of lost wealth.

If prices drop 5 percent next year, that would mean a decline of $60 billion in spending, all else being equal. That would be a noticeable slowdown, but not enough to cause a recession.

In the last several years, Americans have increased spending faster than their incomes by borrowing against the rising value of their homes. Economists estimate that such mortgage-equity withdrawals may have added one-quarter of a percentage point to consumer spending growth — a boost that could now disappear.

Thus far, spending has climbed more than 3 percent over the last year, and the most recent data on chain-store sales suggests sluggish growth but nothing near levels consistent with a recession.

The housing bust has also led to job losses. From the start of 2003 to March 2006, housing-related businesses like mortgage companies, home builders and contractors added 1.3 million jobs, or about 23 percent of all new jobs created in that period, according to an analysis by Mark Zandi, chief economist at Moody’s Economy.com.

Since then, the housing business has shed 383,000 jobs, while the rest of the economy has added nearly three million jobs.

Jan Hatzius, chief United States economist at Goldman Sachs, said the small decline in housing employment thus far is surprising and suggests more layoffs are ahead.

“You still have a million jobs that aren’t really needed anymore due to the downturn in housing,” he said.

D. Ritch Workman, president of the Florida Mortgage Brokers Association, believes he has an explanation. Many of the brokers and loan officers he knows are still working in the industry, even though they have taken on second jobs to make ends meet.

The home-loan company he owns with his brother in Melbourne, Fla., has seen revenue fall by half, to $500,000, and he has laid off two of its three salaried employees. But the firm has added several loan officers, who are paid on commission only, and it now has 18 people making loans.

“I am surprised they have hung in there,” Mr. Workman said. “But it’s a scary thing when that’s all you know. If for 15 years you have been a relatively successful broker and you have lived through the highs and lows, what are you going to do? Most of them are holding on for dear life and hoping things get better.”

On Wall Street, which fueled the housing boom by lending to mortgage companies and packaging and selling home loans, banks are writing off billions of dollars in bad loans and are setting aside billions more for the expected surge in defaults. Late yesterday afternoon, Bank of America said it would lay off 3,000 people across the company and has replaced the head of its investment banking division.

Eric Dash contributed reporting.




http://www.nytimes.com/2007/10/25/bu...hp&oref=slogin

[sidecross]

October 26, 2007

A Catastrophe Foretold

By PAUL KRUGMAN

“Increased subprime lending has been associated with higher levels of delinquency, foreclosure and, in some cases, abusive lending practices.” So declared Edward M. Gramlich, a Federal Reserve official.

These days a lot of people are saying things like that about subprime loans — mortgages issued to buyers who don’t meet the normal financial criteria for a home loan. But here’s the thing: Mr. Gramlich said those words in May 2004.

And it wasn’t his first warning. In his last book, Mr. Gramlich, who recently died of cancer, revealed that he tried to get Alan Greenspan to increase oversight of subprime lending as early as 2000, but got nowhere.

So why was nothing done to avert the subprime fiasco?

Before I try to answer that question, there are a few things you should know.

First, the situation for both borrowers and investors looks increasingly dire.

A new report from Congress’s Joint Economic Committee predicts that there will be two million foreclosures on subprime mortgages by the end of next year. That’s two million American families facing the humiliation and financial pain of losing their homes.

At the same time, investors who bought assets backed by subprime loans are continuing to suffer severe losses. Everything suggests that there will be many more stories like that of Merrill Lynch, which has just announced an $8.4 billion write-down because of bad loans — $3 billion more than it had announced just a few weeks earlier.

Second, much if not most of the subprime lending that is now going so catastrophically bad took place after it was clear to many of us that there was a serious housing bubble, and after people like Mr. Gramlich had issued public warnings about the subprime situation. As late as 2003, subprime loans accounted for only 8.5 percent of the value of mortgages issued in this country. In 2005 and 2006, the peak years of the housing bubble, subprime was 20 percent of the total — and the delinquency rates on recent subprime loans are much higher than those on older loans.

So, once again, why was nothing done to head off this disaster? The answer is ideology.

In a paper presented just before his death, Mr. Gramlich wrote that “the subprime market was the Wild West. Over half the mortgage loans were made by independent lenders without any federal supervision.” What he didn’t mention was that this was the way the laissez-faire ideologues ruling Washington — a group that very much included Mr. Greenspan — wanted it. They were and are men who believe that government is always the problem, never the solution, that regulation is always a bad thing.

Unfortunately, assertions that unregulated financial markets would take care of themselves have proved as wrong as claims that deregulation would reduce electricity prices.

As Barney Frank, the chairman of the House Financial Services Committee, put it in a recent op-ed article in The Boston Globe, the surge of subprime lending was a sort of “natural experiment” testing the theories of those who favor radical deregulation of financial markets. And the lessons, as Mr. Frank said, are clear: “To the extent that the system did work, it is because of prudential regulation and oversight. Where it was absent, the result was tragedy.”

In fact, both borrowers and investors got scammed.

I’ve written before about the way investors in securities backed by subprime loans were assured that they were buying AAA assets, only to suddenly find that what they really owned were junk bonds. This shock has produced a crisis of confidence in financial markets, which poses a serious threat to the economy.

But the greater tragedy is the one facing borrowers who were offered what they were told were good deals, only to find themselves in a debt trap.

In his final paper, Mr. Gramlich stressed the extent to which unregulated lending is prone to the “abusive lending practices” he mentioned in his 2004 warning. The fact is that many borrowers are ill-equipped to make judgments about “exotic” loans, like subprime loans that offer a low initial “teaser” rate that suddenly jumps after two years, and that include prepayment penalties preventing the borrowers from undoing their mistakes.

Yet such loans were primarily offered to those least able to evaluate them. “Why are the most risky loan products sold to the least sophisticated borrowers?” Mr. Gramlich asked. “The question answers itself — the least sophisticated borrowers are probably duped into taking these products.” And “the predictable result was carnage.”

Mr. Frank is now trying to push through legislation that extends moderate regulation to the subprime market. Despite the scale of the disaster, he’s facing an uphill fight: money still talks in Washington, and the mortgage industry is a huge source of campaign finance. But maybe the subprime catastrophe will be enough to remind us why financial regulation was introduced in the first place.


http://www.nytimes.com/2007/10/26/op...gewanted=print

[Somantics]

it's a mass looting - revolt

[sidecross]

October 26, 2007

Who’s Going to Take the Financial Weight?

By FLOYD NORRIS

The transfer of risk was supposed to be the great advance brought to the world by financial engineers. They developed exotic derivative products that enabled risks to be sliced and diced in all manner of ways.

Central banks and bank regulators cheered on the process. The transfers of risk meant that those who were comfortable with a given risk would wind up with it.

The apparent triumph of that process came after the technology stock bubble burst and the American economy went into recession in 2001. A lot of money was lost because of huge overinvestment in things like fiber optic cable, but the losses were dispersed. No significant banks failed or even got into trouble.

The system worked, the regulators told themselves as they praised the financial advances brought on by the derivative revolution.

Sometimes those regulators did wonder just where the risk was. If it was no longer the banks that would suffer when a financial crisis came around, who would? Could it be the insurance companies? Perhaps pension plans? Would hedge funds that gambled and lost be unable to meet their obligations and bring on a systemic failure?

In this financial crisis, the one that started with subprime loans, we are learning the answer to that question. The risks that banks would have taken on under the old system — when banks made loans and profited only as they were paid back — had been transferred through a bewildering wilderness of options, swaps, swaptions, specialized investment vehicles, collateralized debt obligations, variable interest entities and who knows how many other instruments.

And when the whole daisy chain was through, a lot of the risk seems to have ended just where it used to end. With the banks.

There were differences, of course. For one, the banks are ending up taking losses from loans that others made.

A suit filed this week in Federal Bankruptcy Court in Manhattan sheds light on one way this happened. American Home Mortgage Holdings, a subprime lender that went broke in August, sued Bank of America, saying it reneged on a deal to bear losses if mortgages were sold for less than face value. The bank asserts that some of the loans shouldn’t have been made at all, but American Home says that is irrelevant.

Here’s how it worked, in a simplified explanation that does not come close to capturing all the complexities that the financial engineers inserted:

American made subprime loans and sold them to special purpose entities it set up. Those entities, in turn, financed themselves by borrowing, mostly through the short-term commercial paper market.

To reassure investors, the special purpose entities entered into swap agreements with Bank of America and other big banks, in which the banks promised to make up the difference if the entities could not retain financing and therefore had to sell loans for less than par value. The chances of such a sale presumably seemed slight when the deal was made in 2004, but lots of unexpected things are cropping up these days.

In late September, American auctioned off the loans. Note that these appear to be loans made in 2004 or earlier, before lending standards are supposed to have crumbled.

We now have a market value for such loans. Packages of mortgages that were classified as performing — meaning the homeowner is mailing in a check every month — sold for as little as 80 percent of face value, and none went for more than 92 percent. The nonperforming loans sold in a range of 54 to 59 percent.

American Home says it sent out bills to its swap partners, and all but Bank of America agreed to pay.

The amount in dispute is just $25 million, an insignificant amount for the bank. But its refusal to pay may indicate an effort to find ways to shed what now seem to be foolish risks. The man in charge of that area of the bank was pushed out this week in a reorganization. The bank would not comment on the lawsuit.

There are other ways that banks may come to lose a lot of money. Jonathan Weil of Bloomberg News points out that Citigroup has no legal obligation to make up losses in the specialized investment vehicles — SIVs — it set up, but some analysts think it will do so to avoid a hit to its reputation. If it does put up cash, that will call into question the accuracy of Citi’s financial statements. If not, some of Citi’s customers will be very upset.

Not all the losses will end up with banks. Some will go to mutual funds and hedge funds and pension funds. Some will go to those who insured the value of securities, like Ambac Financial, which surprised Wall Street by posting its first quarterly loss this week.

Still, it is remarkable that the financial engineers generated large commissions and fees by selling risk-transfer products that, in the end, moved a lot of the risk back to where it started.

E-mail: norris@nytimes.com.



http://www.nytimes.com/2007/10/26/bu.../26norris.html

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How Bad Will the Next Recession Be?

By Scott Thill, AlterNet

"My rant was the rant heard around the world," CNBC personality and ex-hedge funder James Cramer told viewers of his cable show Mad Money, a talk-radio spectacle involving its host's over-the-top antics like hitting sound-effects buttons and giving stock advice at breakneck speed. The setting was 2007's fiscal third quarter, a highly volatile period in which the market nosedived on the heels of a subprime housing and credit meltdown.

In the rant, broadcast on the show Stop Trading! before becoming an online hit, Cramer aggressively screamed for a rate cut from the Fed for his "people [who] have been in this business for 25 years!" -- by which he meant, of course, the hedge funders whose deceptive bundling of mortgage-backed securities built on subprime loans and no oversight from the SEC whatsoever are finally getting their comeuppance.

Cramer, who ignored repeated requests for participation in this story and its predecessor, viewable on AlterNet here, made it pretty clear that his friends in the hedge fund industry manipulate the credit and housing markets for fat-ass paydays. But there he was a few days later, backtracking hard. He was even lucky enough to get on The Colbert Report to do some much-needed damage control, asserting that he was really defending the millions of suckered Americans about to lose their homes, thanks to highly leveraged loans manipulated by investment banks and private equity groups like Blackstone, KKR and Bear Stearns (now the target of a criminal investigation) into Kafkaesque packages called CDOs (collateralized debt obligations). Those labyrinthine Ponzi schemes allowed hedge fund managers and private equity groups to not only buy out big names like Sallie Mae, Hilton, Chrysler and more, but also skim huge percentages off the top for themselves, their wives, mistresses and mansions.

And here we are, after the subprime collapse and Cramer's rant hear 'round the world, teetering on a fourth quarter that is screwed without some help from the Federal Reserve Bank. In fact, we could be headed to the type of economic recession that the Los Angeles Times recently reported may swallow us all -- at least until 2009, if we're lucky. Others aren't so optimistic: Paul Krugman, a noted economist and caller of bullshit on fantasies financial and military, like the occupation of Iraq, wrote in an aptly titled New York Times op-ed called "Very Scary Things" that "what's been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up ... This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults ... Let's hope, then, that this crisis blows over as quickly as that of 1998. But I wouldn't count on it."

That was Krugman's take on Aug. 10. The 1998 crisis he's referring to? That would be total implosion of Long-Term Capital Management, a hedge fund made up of bond traders and Nobel Prize-winning economists that tanked billions and needed to be bailed out in order to avert an American recession under President Clinton. Hedge funds have the Midas touch, it seems, for making gold only for their shareholders, and few else, before needing a federal lifeboat.

Sure enough, in the days since Krugman's very scary thoughts, the situation has worsened. "Signs of progress have appeared," said Federal Reserve Chairman Ben Bernanke to a German conference on Sept. 11, "but ... most countries have only just begun to undertake the policy changes that will ultimately be needed ... in part because of the greater recent volatility in financial markets and investors' demands for increased compensation for risk-taking." Henry Paulson, current secretary of the treasury and former CEO and chairman of investment bank Goldman Sachs, a major beneficiary of the CDO bonanza and one bank that helped bail out Long-Term Capital Management, added that our current economic crisis will take longer to fix than the other major depressions of the last two decades, including the Russian default of the '90s and the Latin American debt nightmare of the '80s.

"The reason it is going to take longer today is that we are more globalized," Paulson said. In today's internetworked global economy, mortgage loans built out of the imaginations of American businessmen were being, as Paulson explained, "sliced and diced" into international bundles and turning up as far away as state-run regional banks in Germany, fragmentation -- or diversification, as some bean counters call it -- so complex that Paulson claims to have met daily with bankers who still couldn't decode its labyrinthine mechanisms. Throw in the fact that 97 percent of stock transactions are electronically conducted at the speed of light, more and more of them by companies that employ math and computer science Ph.D.s using quantitative strategies executed by proprietary computer programs, and you have a new definition of complexity. The more complex the mechanisms, the more money rolls in. As Cramer once argued of such inscrutable designs, "The SEC doesn't understand" them. And you can't police what you can't understand.

Ask Senate Majority Leader Harry Reid, who at last report was declining to raise taxes on hedge funds and private equity groups, who are drowning in money, for fear of "unintended consequences" to an American economy already reeling from the crisis. But he's a fool to wait: American home foreclosures and delinquencies are at record highs, and the dollar is at record lows. Meanwhile, oil is at a record high, even amidst drastic drops in inventory and a doomed occupation of Iraq that even ex-Federal Reserve Chairman Alan Greenspan admits was motivated by the aptly named crude. The houses that were hastily erected and packaged in the post 9/11 boom? They're festering on the market or being auctioned off for next to nothing in impacted cities like Detroit and scores more.

In other words, Reid has got it backwards. The consequences of giving hedge funds and private equity groups free rein, low taxes and zero oversight are already here. And they're severe.

Federal Reserve Governor Frederic Mishkin all but promised the United Kingdom's Financial Times that the hedge funds' manipulation of mortgage-backed securities will smack down the American economy: "Consumer and business spending also could be damped as a consequence of the recent financial turmoil ... economic activity could be affected more severely in other sectors should heightened uncertainty lead to a broader pullback in household and business spending." His colleague and San Francisco Federal Reserve Bank President Janet Yellen was less delicate, arguing that falling home sales and rising unemployment would put a last nail in the coffin of American economic growth going forward.

And last but not least, there is Paul Saffo, fellow for the World Economic Forum and Institute for the Future, professor at Stanford University, and consultant to companies like Samsung as well as Silicon Valley venture capitalists. He's predicting an end to the American economic model altogether. But he takes his thesis a frightening step beyond economic dissolution into the total dissolution of the country itself: "My forecast is that there's less than a 50 percent chance that the United States will exist as a nation by the middle of the century. And that is actually good news."

Saffo's idea is simple: The United States has become too large to function as an overlord to its city-states like Silicon Valley and Los Angeles, and in fact, has no real power to compel them to do anything, whether that's sending troops to the borders or demanding regional agencies adhere to national mandates on climate change. But the implications are much deeper: If Saffo is correct, what matters is not what we will become. What matters is what we will have lost, and that is an identity based on nationhood altogether.

In our days of hyperpatriotism, it is hyperreal to entertain the idea that you're not an American at all. Or that your vote doesn't count towards an American election -- or an Iraqi one, for that matter. Or that your country can't cite you as a reason it went to occupy Iraq in the first place. Because, the logic goes, if you're not an American, then what are you?

The answer? Globalized.

Long before 9/11, resource wars and the industries that support them -- private equity pools, hedge funds, investment banks, the mainstream media -- existed outside of geography. With offices across the world, trading across currencies and deals across borders, business has always been globalized to an extent. But after 9/11, the thought of Dubai handling security for American ports somehow skewed strange. Perhaps it had something to do with those planes flying not into the White House or Washington Monument but into global economic nerve centers like the World Trade Center.

In other words, America has only awakened to a process already underway: From a depressed currency and outsourced industries to the loss of its manufacturing base and educational standards, America is no longer the smartest or wealthiest superpower on the block. And as the means of production promised by globalization spread to nations like India, China and many more, the concept of nationhood is demolished further each day. But the United States, adrift in narcissistic simulations like American Idol and Survivor and distracted by reductive militarism, hasn't much longer to sleep, according to economists, think-tankers and other credentialed professionals that people with money pay attention to. The real nightmare is that it may have laid the foundation for the end of its economic system, the one U.S. comptroller general David Walker called "a broken business model," back in 2005 when "subprime collapse" was a punk band no one had heard yet.

"The mortgage problem is a manifestation of very serious imbalances and distortions," argues James Kunstler, entertaining doom prophet for the Clusterfuck Nation blog as well as the author of The Geography of Nowhere and The Long Emergency, "not just in our economy, but in our current social values. To put it somewhat simplistically, it represents the dangerous idea that it's possible to get something for nothing. When that idea becomes established as normal in a society, as it has in the United States, you're in big trouble. An ethos so inconsistent with reality must inevitably lead to a painful workout as reality reasserts itself."

That workout is going to hurt. From Bernanke and Paulson's mild worries to Krugman and Kunstler's more severe predictions, no one is going into 2008 thinking everything is going to come up yachts and roses. It's now only a question of how bad it is going to get. Some say it's going to be worse than you think.

"The credit bubble has burst and the entire U.S. economy will deflate with it," promises Peter Schiff, founder of Euro Pacific Capital fund and sometimes guest on Bloomberg, CNBC and Fox News. "Asset prices will fall sharply, as will consumer spending, as the world will no longer finance it. After the initial shock, the world will breathe a collective sigh of relief, as it will no longer bear the burden of supporting the U.S. economy." If you ask Reagan economist and Hoover fellow Paul Craig Roberts, one of those countries breathing a massive sigh of relief could be China, especially if we keep fucking with them. The more that happens, the more the Chinese, who are currently shouldering America's deficit trillions, might decide to dump dollars for euros, a move that would send our already tanking greenbacks into the currency basement. For his part, Roberts thinks they aren't out to destroy the dollar, just draw the line on America's influence. "China has no desire to destabilize the current financial system," Roberts reassured me via email. "But they are tired of the United States trying to dictate their economic policy. They hold powerful cards. [But] they would not dump the dollar unless seriously provoked."

Even if they don't, the dollar is sucking wind, and so is American nationhood. And regardless of Jim Cramer's rants or China's warnings, there isn't much that the Federal Reserve Bank, whose every word can determine the dramatic rise and fall of stocks and bonds, can do about it.

"They can only make it worse," Schiff continues. "Rate cuts will only bring about higher long-term interest rates, higher consumer prices, more unemployment, lower real estate prices, more defaults and bankruptcy. The Fed has reached the end of its rope. Greenspan made this bed and now Bernanke and the American people will be sleeping in it for years."

The timing couldn't be worse, so what happens to you when this worsens? What happens when the Ponzi scheme is complicated by a possible attack on Iran? And what do you think the American government will do when climate change -- whose ravages according to the International Institute for Strategic Studies will be "on the level of a nuclear war" -- stops by your town and tries to wipe it out?

Let's put it this way. If our government really is a corporation and Bush is really its CEO, we're all likely to be self-employed contractors out of a job. Throw in the skyrocketing cost of our fuel, food and freedom, and the future is looking more expensive by the day.

Whatever comes, we would best prepare for it by doing away with some fictions forever, including the one envisioning America as a gated community on an unreachable hill, populated by Hummers and patriots who just want to party without participating in the environment that sustains them. Because economic recessions and military occupations are heavy for sure, but there is no terror like terra scorned. American or Iranian, Christian or Muslim, Democrat or Republican, we are all bound by one truth: We're tied to a singular rock spinning through space by a tether called gravity. And if we don't treat that rock like our best friend in the coming century, it will easily turn into the worst enemy we've ever faced.

We'll be praying to be screwed by subprime mortgages and Iranian mullahs by then. That might be the best vacation from reality we could ask for.

Scott Thill runs the online mag Morphizm.com. His writing has appeared on Salon, XLR8R, All Music Guide, Wired and others.


http://www.alternet.org/module/printversion/65037

[suebee]

another afternoon of light reading. thanks artemis.

[craazyman]

Another good one . . .


Is Bailing Out Reckless Investors Wise? Don't Bank on It.

By William R. Bonner and Lila Rajiva
Sunday, October 28, 2007; B04



Last summer, the bill started to come due on our debt-fueled economy. We should have let it -- and let reckless speculators, subprime lenders and banks finally get what they had coming. But instead, the financial authorities let them off the hook. Rather than simply letting markets be markets, they bailed out both the fools and the knaves. We'll all live to regret it.

At the moment of truth, the Federal Reserve cut the overnight cost of money in the United States (known as the Fed funds rate) by 0.5 percent. Meanwhile, the governor of the Bank of England also succumbed to temptation, infusing ¿10 billion into the British banking system. Next, the Fed let Citigroup and Bank of America increase the quantity of funds that federally insured banks could lend to their affiliates, many of which held risky mortgage debts. When investors, spooked by the subprime lending crisis, stampeded out, the affiliates ran short of cash. Then, just this month, Treasury Secretary Henry M. Paulson Jr. announced the creation of yet another fund, guaranteed by three major banks -- a piece of folly that was no more than a bailout of the cash-strapped affiliates.

But bad investments do not become good ones just because a central bank lends more money to the investors who made the rash choices. Problems caused by too much credit do not disappear when you hand out even more credit. And the syndrome that such moves create only makes our economic woes worse.

Mervyn King, the head of the Bank of England, told Parliament that he had been initially reluctant to intervene in Britain's credit market because he feared the " moral hazard" that might ensue. Moral hazard is the idea that eliminating all potential risks from an action encourages people to take excessive risks. King worried that when speculators think that they'll be bailed out, they tend to take bigger chances. After all, why not go for broke when you've got the central bank behind you?

The same thought should have troubled Fed chief Ben S. Bernanke, but somehow America's central bankers didn't seem to share even the nascent qualms of the governor of the British bank. Instead, they blithely reversed four years of policy by lowering the Fed funds rate to 4.75 percent. Just a few weeks earlier, Bernanke had called inflation Public Enemy No. 1. Now, by cutting the cost of money (something he looks set to do again next week), he was inviting it to dinner. And by encouraging risky behavior, he was asking for trouble -- and he'll probably get it.

If people always behaved sensibly, they would borrow only what they could pay back. The economy would boom only when it was producing jobs, and not because it was awash in easy money. Industries would not glut their markets, and investors would not make daft decisions out of greed.

But people do make bad calls. They foul up. When the price of money rises and the economy contracts, their errors get corrected. That's the good news. The bad news is that there are always enough people to argue that it's the Fed's job to ease the pain of such contractions. Those arguments have usually carried the day. Since World War II, the practice has been to use monetary policy to smooth the downside of the business cycle -- lowering interest rates to make money easier to borrow.

What the economy faces now, however, is a far cry from what it has faced in the past. In the first 25 years after World War II, the average ratio in the U.S. economy of periods of growth to periods of recession was only about 5 to 1. Over the next 25 years, the downturns got softer and even less frequent. And now, we seem to have rollicked our way through an expansion longer than any in the preceding era. Either we are suddenly moving toward the perfection of mankind, or there's a large batch of errors we've yet to clean up.

And the batch grows by the day. Never before have so many people owed so much money in so many different ways.

When you make a mistake with your own money, you may go broke, you may despair, you may even kill yourself. Not to sound callous, but the damage rarely goes much further than that. Make a mistake with borrowed money, on the other hand, and it sets off a chain reaction of losses. You lose money, the lender loses money, savers lose money and the investors who bought shaky financial instruments tied up with the original debt lose money.

This is where central banks are supposed to come in. At first, Mervyn King judged that adding a few more straws might break the British economy's back. Then, under pressure, he decided to load on a whole other bale. He had called it right the first time.

In theory, a central bank is set up to keep economic order. But in practice, when central bankers intervene in the economy, it is a bit like intervening in a street brawl: Results can vary. Central banking is a pretty imprecise science. At best, it is marginally and occasionally effective; at worst, it is a disastrous fraud.

It's easier to yield to temptation than to resist it. Paul Volcker, the Fed chief from 1979 to 1987, was the last one who could stomach a recession. Determined to correct the macroeconomic blunders of the 1970s, he jacked nominal interest rates up to 20 percent. Politicians were outraged, and the public was horrified. Volcker's effigy was burned on the steps of the Capitol. But his forced correction worked: Inflation fell from 12 percent to 4 percent. After the smoke cleared, the U.S. economy was ready for its biggest boom ever.

But since Volcker left the Fed, interest rates have generally gone down, and American consumers have taken advantage of it to borrow and spend. In the process, they have become addicted to cheap money. Now total credit has grown from 150 percent of gross domestic product to 340 percent. In fact, Americans carry so much debt that if Bernanke were to raise interest rates even to 10 percent, as he clearly should, they'd probably scorch him for real.

There was a time not so long ago when it looked as though central planning might actually work. The figures coming out of the Soviet Union showed remarkable -- almost unbelievable -- progress. Later, it became clear that the numbers were rigged.

Looking at how cheap money is these days, one wonders: Are we following in the Russians' footsteps? For although almost all economists now admit that markets do better than government bureaucrats at setting prices and allocating resources, central banks continue to rig the most important price of all: the price of money.

In the real world, you can't create something out of nothing, and debts must always be paid -- although not necessarily by the people who incurred them.

When the Bernankes of the world set the price of money too low, they set off an explosion of error. People build houses for buyers who can't afford them, they add capacity for customers who don't exist, they speculate on trends that are sure to end.

Don't take our word for it; just open your eyes. What we see in the U.S. economy today is largely the consequence of the Fed's wimpy decision to keep rates low after the micro-correction of 2000-01. The economy had walked backward for only a single quarter -- not even enough to qualify as an official recession. Still, the Fed panicked, yanking rates down to an emergency low of 1 percent for more than a year. The result? The biggest housing boom in U.S. history, accompanied by more bad decisions than a joint session of Congress. Lenders over-lent. Consumers over-borrowed. Builders over-built. And the dollar crashed to its lowest level ever.

Instead of wiping out bad decisions, the Fed's rate cuts keep the cheap money flowing, letting errors compound and spread. Instead of sticking the losses to the people who deserve them, it redistributes even bigger losses to bystanders: innocent savers, hapless householders and dollar-holding, dollar-earning chumps everywhere. That's the problem with meddling in markets: Once you get started, it's hard to stop.

* * *

William Bonner and Lila Rajiva are the co-authors of "Mobs, Messiahs, and Markets."

[sidecross]

Today oil closed at $94.53, the U.S dollar was rated at $1.44 for one Euro and $1.05 for a Canadian dollar.

All this happened as the Fed lowered the key interest rate to 4.5% or .25% lower.

[Isaiah Mpski]

And I'll bet you CM 's not bitching about the money he made in the stock market today.
This year every man,woman,and child in the US will spend 20 k for the wars and other military investments.If that money was spent-say send 1 k to everybody over 18 that would leave the government with plenty for things for necessities like medical care,roads and bridges etc.and there would be a more equitable disbursment because believ it or not I think most people would pay their bills if they had a little of extra money.I do not think most would regard such a windfall as being anything less than a blessing from God.
Israel out of the Middle East.United States out of Europe and Asia.
Rebuild our hemisphere.

[sidecross]

November 6, 2007

Borrowers Face Dubious Charges in Foreclosures

By GRETCHEN MORGENSON

As record numbers of homeowners default on their mortgages, questionable practices among lenders are coming to light in bankruptcy courts, leading some legal specialists to contend that companies instigating foreclosures may be taking advantage of imperiled borrowers.

Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures.

Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question.

“Regulators need to look beyond their current, myopic focus on loan origination and consider how servicers’ calculation and collection practices leave families vulnerable to foreclosure,” said Katherine M. Porter, associate professor of law at the University of Iowa.

In an analysis of foreclosures in Chapter 13 bankruptcy, the program intended to help troubled borrowers save their homes, Ms. Porter found that questionable fees had been added to almost half of the loans she examined, and many of the charges were identified only vaguely. Most of the fees were less than $200 each, but collectively they could raise millions of dollars for loan servicers at a time when the other side of the business, mortgage origination, has faltered.

In one example, Ms. Porter found that a lender had filed a claim stating that the borrower owed more than $1 million. But after the loan history was scrutinized, the balance turned out to be $60,000. And a judge in Louisiana is considering an award for sanctions against Wells Fargo in a case in which the bank assessed improper fees and charges that added more than $24,000 to a borrower’s loan.

Ms. Porter’s analysis comes as more homeowners face foreclosure. Testifying before Congress on Tuesday, Mark Zandi, the chief economist at Moody’s Economy.com, estimated that two million families would lose their homes by the end of the current mortgage crisis.

Questionable practices by loan servicers appear to be enough of a problem that the Office of the United States Trustee, a division of the Justice Department that monitors the bankruptcy system, is getting involved. Last month, It announced plans to move against mortgage servicing companies that file false or inaccurate claims, assess unreasonable fees or fail to account properly for loan payments after a bankruptcy has been discharged.

On Oct. 9, the Chapter 13 trustee in Pittsburgh asked the court to sanction Countrywide, the nation’s largest loan servicer, saying that the company had lost or destroyed more than $500,000 in checks paid by homeowners in foreclosure from December 2005 to April 2007.

The trustee, Ronda J. Winnecour, said in court filings that she was concerned that even as Countrywide misplaced or destroyed the checks, it levied charges on the borrowers, including late fees and legal costs.

“The integrity of the bankruptcy process is threatened when a single creditor dishonors its obligation to provide a truthful and accurate account of the funds it has received,” Ms. Winnecour said in requesting sanctions.

A Countrywide spokesman disputed the accusations about the lost checks, saying the company had no record of having received the payments the trustee said had been sent. It is Countrywide’s practice not to charge late fees to borrowers in bankruptcy, he said, adding that the company also does not charge fees or costs relating to its own mistakes.

Loan servicing is extremely lucrative. Servicers, which collect payments from borrowers and pass them on to investors who own the loans, generally receive a percentage of income from a loan, often 0.25 percent on a prime mortgage and 0.50 percent on a subprime loan. Servicers typically generate profit margins of about 20 percent.

Now that big lenders are originating fewer mortgages, servicing revenues make up a greater percentage of earnings. Because servicers typically keep late fees and certain other charges assessed on delinquent or defaulted loans, “a borrower’s default can present a servicer with an opportunity for additional profit,” Ms. Porter said.

The amounts can be significant. Late fees accounted for 11.5 percent of servicing revenues in 2006 at Ocwen Financial, a big servicing company. At Countrywide, $285 million came from late fees last year, up 20 percent from 2005. Late fees accounted for 7.5 percent of Countrywide’s servicing revenue last year.

But these are not the only charges borrowers face. Others include $145 in something called “demand fees,” $137 in overnight delivery fees, fax fees of $50 and payoff statement charges of $60. Property inspection fees can be levied every month or so, and fees can be imposed every two months to cover assessments of a home’s worth.

“We’re talking about millions and millions of dollars that mortgage servicers are extracting from debtors that I think are totally unlawful and illegal,” said O. Max Gardner III, a lawyer in Shelby, N.C., specializing in consumer bankruptcies. “Somebody files a Chapter 13 bankruptcy, they make all their payments, get their discharge and then three months later, they get a statement from their servicer for $7,000 in fees and charges incurred in bankruptcy but that were never applied for in court and never approved.”

Some fees levied by loan servicers in foreclosure run afoul of state laws. In 2003, for example, a New York appeals court disallowed a $100 payoff statement fee sought by North Fork Bank.

Fees for legal services in foreclosure are also under scrutiny.

A class-action lawsuit filed in September in Federal District Court in Delaware accused the Mortgage Electronic Registration System, a home loan registration system owned by Fannie Mae, Countrywide Financial and other large lenders, of overcharging borrowers for legal services in foreclosures. The system, known as MERS, oversees more than 20 million mortgage loans.

The complaint was filed on behalf of Jose Trevino and Lorry S. Trevino of University City, Mo., whose Washington Mutual loan went into foreclosure in 2006 after the couple became ill and fell behind on payments.

Jeffrey M. Norton, a lawyer who represents the Trevinos, said that although MERS pays a flat rate of $400 or $500 to its lawyers during a foreclosure, the legal fees that it demands from borrowers are three or four times that.

A spokeswoman for MERS declined to comment.

Typically, consumers who are behind on their mortgages but hoping to stay in their homes invoke Chapter 13 bankruptcy because it puts creditors on hold, giving borrowers time to put together a repayment plan.

Given that a Chapter 13 bankruptcy involves the oversight of a court, the findings in Ms. Porter’s study are especially troubling. In July, she presented her paper to the United States trustee, and on Oct. 12 she outlined her data for the National Conference of Bankruptcy Judges in Orlando, Fla.

With Tara Twomey, who is a lecturer at Stanford Law School and a consultant for the National Association of Consumer Bankruptcy Attorneys, Ms. Porter analyzed 1,733 Chapter 13 filings made in April 2006. The data were drawn from public court records and include schedules filed under penalty of perjury by borrowers listing debts, assets and income.

Though bankruptcy laws require documentation that a creditor has a claim on the property, 4 out of 10 claims in Ms. Porter’s study did not attach such a promissory note. And one in six claims was not supported by the itemization of charges required by law.

Without proper documentation, families must choose between the costs of filing an objection or the risk of overpayment, Ms. Porter concluded.

She also found that some creditors ask for fees, like fax charges and payoff statement fees, that would probably be considered “unreasonable” by the courts.

Not surprisingly, these fees may contribute to the other problem identified by her study: a discrepancy between what debtors think they owe and what creditors say they are owed.

In 96 percent of the claims Ms. Porter studied, the borrower and the lender disagreed on the amount of the mortgage debt. In about a quarter of the cases, borrowers thought they owed more than the creditors claimed, but in about 70 percent, the creditors asserted that the debt owed was greater than the amounts specified by borrowers.

The median difference between the amounts the creditor and the borrower submitted was $1,366; the average was $3,533, Ms. Porter said. In 30 percent of the cases in which creditors’ claims were higher, the discrepancy was greater than 5 percent of the homeowners’ figure.

Based on the study, mortgage creditors in the 1,733 cases put in claims for almost $6 million more than the loan debts listed by borrowers in the bankruptcy filings. The discrepancies are too big, Ms. Porter said, to be simple record-keeping errors.

Michael L. Jones, a homeowner going through a Chapter 13 bankruptcy in Louisiana, experienced such a discrepancy with Wells Fargo Home Mortgage. After being told that he owed $231,463.97 on his mortgage, he disputed the amount and ultimately sued Wells Fargo.

In April, Elizabeth W. Magner, a federal bankruptcy judge in Louisiana, ruled that Wells Fargo overcharged Mr. Jones by $24,450.65, or 12 percent more than what the court said he actually owed. The court attributed some of that to arithmetic errors but found that Wells Fargo had improperly added charges, including $6,741.67 in commissions to the sheriff’s office that were not owed, almost $13,000 in additional interest and fees for 16 unnecessary inspections of the borrowers’ property in the 29 months the case was pending.

“Incredibly, Wells Fargo also argues that it was debtor’s burden to verify that its accounting was correct,” the judge wrote, “even though Wells Fargo failed to disclose the details of that accounting until it was sued.”

A Wells Fargo spokesman, Kevin Waetke, said the bank would not comment on the details of the case as the bank is appealing a motion by Mr. Jones for sanctions. “All of our practices and procedures in the handling of bankruptcy cases follow applicable laws, and we stand behind our actions in this case,” he said.

In Texas, a United States trustee has asked for sanctions against Barrett Burke Wilson Castle Daffin & Frappier, a Houston law firm that sues borrowers on behalf of the lenders, for providing inaccurate information to the court about mortgage payments made by homeowners who sought refuge in Chapter 13.

Michael C. Barrett, a partner at the firm, said he did not expect the firm to be sanctioned.

“We certainly believe we have not misbehaved in any way,” he said, saying the trustee’s office became involved because it is trying to persuade Congress to increase its budget. “It is trying to portray itself as an organ to pursue mortgage bankers.”

Closing arguments in the case are scheduled for Dec. 12.


http://www.nytimes.com/2007/11/06/bu...gewanted=print

[craazyman]

Wall Street just can't afford profitable CEOs

Commentary: Prince exit package reflects economic theories of (Chico) Marx
By MarketWatch

Last Update: 7:31 AM ET Nov 9, 2007

LONDON (MarketWatch) -- Former Citigroup CEO Chuck Prince will walk away with a relatively modest $29.5 million plus perhaps another $10-$12 million in "incentive" pay for steering the financial giant into the eye of the subprime hurricane.

Prince was forced out of the top spot at Citigroup (C:Citigroup, Inc: C 32.90, -0.51, -1.5%) last weekend amid mounting billion dollar losses.

The exit package, which pointedly includes no severance pay, is far smaller than the $160 million or so given to Merrill Lynch's (MER:Merrill Lynch & Co., Inc, MER 53.79, -0.20, -0.4%) Stan O'Neal days before after his ouster for much the same reasons.

But it will doubtless be enough to renew the periodic hue and cry over Wall Street pay, since the alignment of shareholder interests with executive compensation in both cases is tenuous at best.

Actually, executive compensation committees at banks and brokerages seem to have adopted the economic approach seen in an ancient Marx Brothers routine:

Spaulding (Groucho): What do you fellas get an hour?
Ravelli (Chico): For playing, we get-a ten dollars an hour.
Spaulding: I see. What do you get for not playing?
Ravelli: Twelve dollars an hour.

The fee for rehearsing is then quoted at $15 an hour. But when Groucho asks what they get for not rehearsing, he's bluntly told "you couldn't afford it."

Basically, it's the same on Wall Street these days. After all, if a guy can blow $10 billion holes in the world's biggest bank and walk away with $40 million, imagine what you'd have to pay someone not to do that.

To be fair to Prince, the estimated value of his package does assume a share price for Citigroup of $37.73 and he only gets a couple of years to exercise the options.

So, like the shareholders, he at least has plenty of incentive to help find someone to turn the place around, fast.

[sidecross]

The Price of Oil

by Ralph Nader

Published on Saturday, November 10, 2007 by CommonDreams.org

Question of the day- who and what is determining the price of oil and your gasoline and home heating bills? Don’t ask Uncle Sam, because George W. Bush and Dick Cheney are running a regime marinated in oil that does not issue reports which explain the real determinants of petroleum pricing beyond the conventional supply-demand curves.

First, let us create a historical framework to provide some background. In the good ‘ole oil days, before the producer-countries’ cartel in the Third World gained pricing power, there were seven giant oil companies called the ‘seven sisters’ led by Standard Oil (now Exxon) and Shell. As chronicled in Robert Engler’s classic book, The Brotherhood of Oil, they were able to affect pricing through extra-market means. Economists called them a tight oligopoly.

OPEC later took their place at the table in the mid to late Seventies and set the price of crude oil at highly publicized meetings of the various member countries representatives from the Middle East, South America and Africa. Adjusting, ‘seven sisters’ concentrated their pricing and supply power downstream at the refining, pipeline and marketing levels.

Pricing power was never total but it was always complex, occurring in the interstices of an industry few outsiders understood, and fewer regulators could affect. Besides, natural gas was de-regulated between 1978 and 1993, after which its prices really took off.

Today, a third party has moved to the table-the New York Mercantile Exchange, a similar operates in London and a new one in Dubai. There, boisterous traders buy and sell futures contracts on the delivery of oil. But as Ben Mezrich, the author of the new book Rigged said recently, the dollar amounts of these futures contracts are far far larger than the actual oil deliveries they represent as they turn over and over at the Mercantile Exchange.

So now the critical resource of oil is driven by speculation at ever higher abstract electronic levels of futures trading. Increasingly, the distance becomes greater and greater between this abstract trading (fueled by rumors of storms in the Gulf of Mexico, or some possible political turmoil in a region of the world, or some other frightful excuse for bidding up) and the physical supply and demand for oil and its refined products.

These oil gamblers in New York and London try to justify their frenetic daily bidding by saying that these futures markets provide liquidity, and a clear price for oil. Alright, but who benefits when, how and where?

Certainly, the strain between physical supply and demand in recent years does not explain such extreme volatility. With OPEC countries down to supplying only 40 percent of the world production, Chinese demand for oil growing fast, and the expansion of production by Saudi Arabia and others to meet this demand, crude oil supplies are not tight enough to explain such pricing behavior.

Old factors like inadequate oil company investment in refinery capacity, longer down times for repairs than some observers believe necessary, and the slumping dollar are factors that western governments, especially the Bush regime, have not wanted to investigate. After all, with consumers paying sky-high prices for these fuels, free market theorists are supposed to expect expanded supplies from recoverable reserves to grow. But, of course, the global market for oil is anything but a free market from the producers- both corporate and governmental- toward the downstream companies to the consumers.

In recent days, the price of crude oil escalated to over $90 a barrel, fluctuating up to a high of $96 a barrel. Yet the average price of gasoline in the United States-around $3.00 per gallon-is about what it was earlier this year when the price of crude oil was around $60 a barrel. Why the disconnect?

“It’s a big gambling hall,” The Washington Post quotes Fadel Gheit, an oil analyst at Oppenheimer. “This time it’s just speculation,” Peter C. Fusaro, chairman of Global Change Associates, told the Post, adding, “There’s a large bet out there that prices will continue to trend higher. But it’s detached from fundamentals because there’s no shortage of oil.”

Meanwhile, the government of Big Oil runs Washington, D.C. It thumbed its nose at pleas from then Chairman of the powerful Finance Committee, Senator Charles Grassley (R-Iowa) who asked the major companies, swimming in massive profits, to contribute some charitable dollars to help the poor pay for their winter home heating bills, and has smugly watched the major Presidential candidates avoid the subject in their debates and declarations.

Oil companies seem to spend more executive effort looking for oil by merging with other companies (note the unchallenged merger of Exxon and Mobil under the Clinton administration) than with developing efficient oil-producing and consuming technology or expanding their solar energy subsidiaries.

So long as the price of crude oil is set by speculators on trading floors, so long as the oil-indentured politicians are not challenged by new candidates standing tall for people and environments, so long as we do not protest for change and press ourselves to prevent wasteful habits and uses, get ready for higher oil prices.

Ralph Nader is a consumer advocate, lawyer, and author. His most recent book is The Seventeen Traditions.


http://www.commondreams.org/archive/2007/11/10/5134/

[suebee]

if higher oil prices were the only fallout from this criminal idiocy.

[sidecross]

"...But deceptive loans were just part of the problem. The bigger problem was that millions of moderate-income families purchased homes at bubble-inflated prices. There was an unprecedented run-up in house prices in the years from 1995 to 2006, with house prices rising by 80 percent after adjusting for inflation. This increase is truly striking because house prices in the United States have typically just moved in step with the overall inflation rate. Over the hundred-year period from 1895 to 1995 there was no increase in inflation adjusted house prices."




Homeownership: The Fast Path to Poverty

By Dean Baker
t r u t h o u t | Perspective

Monday 12 November 2007

The Commerce Department reported last month that homeownership among African Americans had dropped to 46.7 percent in the third quarter, three full percentage points below its peak level in 2004. This is a remarkably fast decline. In the last three years, the decline in homeownership among African Americans has destroyed almost half the gains in the decade from 1994 to 2004.

The situation is sure to get much worse. The foreclosure rate in the third quarter of 2007 was double the rate of 2006. At the third quarter foreclosure rate, more than 1.5 million families are on a path to lose their home over the course of the year. African Americans will be a disproportionate share of the home losers.

In looking for scapegoats many people have focused on the mortgage and banking industry. Millions of loans were sold to moderate income borrowers with low teaser rates that reset to unaffordable fixed rates after two or three years. Undoubtedly many of the borrowers failed to appreciate the structure of these loans, which virtually guaranteed they would have trouble meeting their mortgage payments.

But deceptive loans were just part of the problem. The bigger problem was that millions of moderate-income families purchased homes at bubble-inflated prices. There was an unprecedented run-up in house prices in the years from 1995 to 2006, with house prices rising by 80 percent after adjusting for inflation. This increase is truly striking because house prices in the United States have typically just moved in step with the overall inflation rate. Over the hundred-year period from 1895 to 1995 there was no increase in inflation adjusted house prices.

No economist has been able to identify any changes in the fundamentals of supply or demand in the housing market in the mid-nineties that could explain such a huge run-up in prices. The one obvious explanation for this jump in prices is that the United States was experiencing a speculative bubble in its housing market that coincided with a speculative bubble in the stock market, just as had been the case in Japan a decade earlier. Of course the defining characteristic of a speculative bubble is that it cannot be sustained: bubbles burst, bubble inflated house prices fall.

The housing bubble was the underlying problem that created the current subprime mess. Lenders didn't care whether borrowers could make their mortgage payments because in a bubble market, every loan is a good loan. Homeowners who face problems making their payments can always borrow against the new equity created by rising house prices or simply sell their home and pocket the gain. The story is different once the bubble stops growing and prices start falling back to earth. That is when foreclosure rates soar and people get thrown out of their home.

There are no good solutions in this story. Proposals by politicians to use Fannie Mae and Freddie Mac to buy up hundreds of billions of dollars of bad mortgages are a great way to transfer tax dollars to stupid investors, but will do little to help subprime homeowners. One policy that would at least allow homeowners to stay in their home is my "own to rent" proposal which would change foreclosure rules to give homeowners facing foreclosure the right to stay in their home as renters paying the fair market rent. This policy would also give lenders a strong incentive to renegotiate mortgages to allow homeowners to keep their homes.

While we should look to try to make the best of a really bad situation we should not forget the people who got us here. The housing bubble itself was attributable to a colossal failure of policy by the Greenspan Fed. However, the social engineering of politicians and ideologues is largely responsible for the fact that millions of moderate-income families got ensnared in the bubble. They promoted homeownership as an end in itself, regardless of whether it made sense at a particular point in time.

Housing policy at all levels of government pushed people into homeownership even as it should have been evident that people were buying homes at bubble-inflated prices. The housing "experts," who should have known better, gave disastrous advice and designed wrongheaded policy that is now having devastating consequences for millions of moderate-income families. These people should be held accountable for the pain their policies have promulgated - at the least they should not be invited back into positions of responsibility in government and elsewhere.

When there is a serious failure of public policy, the standard line in Washington is that "mistakes were made." When millions of moderate-income families were pushed into buying homes in the middle of a housing bubble, really big mistakes were made. And the experts who made these mistakes should suffer consequences.



--------------------------------------------------------------------------------
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.


http://www.truthout.org/docs_2006/111207J.shtml

[sidecross]

U.S. Falls to No. 15 in Average Worker Income

By David Francis, Christian Science Monitor

"Comparisons are odious," that is, hateful, according to a popular phrase about seven centuries old. Comparison, however, is one of the tasks assigned to the Organization for Economic Cooperation and Development in Paris, an international body of 30 of the richest countries. It tries to compare its members' economic and social data, a difficult, perhaps even odious, job.

Sometime back it broadened statistically (for comparison purposes) the definition of the average workers in its member nations while trying to examine relative tax burdens. The result was "monumental," reckons Jacob Kirkegaard, an economist at the Peterson Institute for International Economics. The OECD ranked the after-tax income of the average worker in the United States as 15th among its member nations. The richest middle class, if measured in terms of the purchasing power of their income, was Britain.

That ranking would surprise most Americans, who likely consider their nation the most prosperous in the world.

In one fell swoop, OECD statisticians lowered the estimated income of the average American worker by more than 10 percent and raised average incomes of other rich nations by as much as 30 percent, notes Mr. Kirkegaard.

It may well be that the comparative US standard of living is slipping. The price of oil has risen more dramatically in the United States than in other nations because of the dollar's large devaluation.

The reason for the drop is also statistical. In the past, the OECD had been using a proxy for the middle class based on the "average production worker." This concept focused on full-time workers in the relatively declining manufacturing sector, which tends to be unionized in the US and better paid on average. The OECD's new measure is based on the "average worker," which captures all sorts of private-sector jobs including mining, utilities, construction, retail, hotel/restaurants, financial services, real estate, and other areas.

So this new system ought to provide a fairer comparison.

But 15th place?

Not likely, figures David Grubb, an OECD economist in Paris. He points out that the US and Canada included in the statistics that it sent to Paris the wages of nonsupervisory workers, and not those of higher paid supervisory workers and salaried professionals. When that statistical difference is corrected, the rank of the American middle class would move up from 15th. How far is uncertain.

In the newest OECD Economic Outlook, the average annual wage in the total economy of the US was $45,563 for 2005. That's exceeded only by Luxembourg, a wealthy banking duchy, with $50,634. Britain, Ireland, and Australia, are not far behind the US with incomes above $40,000.

The problem is that this is a measure of total wages, not just the middle class, and it includes the richest Americans whose incomes have risen enormously in recent years. Outside of Hungary, the US has the most extreme income inequality in the OECD.

Kirkegaard figures middle- and lower-income Americans are being squeezed by the flood of money going to the superwealthy. Democrats in Congress have the same view, and their tax proposals would shift the tax burden up the income ladder.

After the early 1990s, the incomes of "very well-off Americans increased much faster than those of both the middle class and the poor," figures Gary Burtless, an expert at the Brookings Institution in Washington. For example, top corporate officers got pay increases of 9.5 percent a year in the 1990s, on top of high levels to start with.

This doesn't mean that Middle America incomes have been entirely flat. An analysis by Terry Fitzgerald, an economist at the Federal Reserve Bank of Minneapolis, concludes that a "broad swath of Middle America experienced notable hourly wage gains" since 1975. In other words, children can still assume they have a better living standard, on average, than their parents did. [Editor's note: The original version misidentified the Federal Reserve Bank of Minneapolis economist.]

To reach that conclusion, Mr. Fitzgerald had to disentangle a "confusing web of data." Two data series on individual hourly wage rates showed little, or even negative, growth over the past 30 years. But labor income for the entire national economy was shown to have grown 39 percent in that time span.

To square this apparent contradiction, Fitzgerald applied to the two wage series a broader price index (personal consumption expenditures), which covers the basket of final goods and services that people consume each year. The new result: Average hourly earnings rose 10 percent, rather than declining 4 percent, from 1975 to 2005. Median hourly wages also rose 20 percent rather than 12 percent. Then he factored fringe benefits into the wage calculation, since they have become increasingly expensive and "contribute to workers' well-being."

That combination accounted for 28 percent of the 39 percent growth of total labor income. "This does not contradict the claim that wage inequality increased over this period - it did," writes Fitzgerald in a bank publication. In other words, the rich are still getting proportionately richer.


http://www.alternet.org/module/printversion/67723

[suebee]

boring personal antecdote....i sold a house in feb 1997 for 275K having purchased it for 249K in 1990. six months later (no joke) it was worth 550K. today it is worth about 875K. oh well.

[sidecross]

November 20, 2007

A Swarm of Swindlers

By BOB HERBERT
Chicago

Like vultures, the mortgage lenders began circling the single-family house with the tiny front lawn on Merrill Avenue.

They knew that the woman who owned the house was old and sick and that her two aging daughters were struggling with illness and poverty as well. That was all to the good as far as the lenders were concerned. The predator’s mission is to home in on the vulnerable.

“The people that wanted to put through the loan called me about a hundred times,” said Rosa Dailey, who is 65 and going blind and needs an oxygen tank at times to help her breathe. “I kept telling them no, because I didn’t think we could afford it. But they kept saying how it was to our advantage. So I finally said: ‘All right, let’s see what we can do.’ ”

That was the beginning of a tragic spiral, with one unaffordable loan following another. As Ms. Dailey put it: “I feel like they led me down a dark alley.”

Ms. Dailey told me her story in the freezing living room of the house on Merrill Avenue, which no longer has a working furnace and is growing shabbier by the day. It’s all she has left. Her mother and her older sister are dead now. Her only income is about $1,300 a month from Social Security — less than the monthly note on the house, which is in foreclosure proceedings.

One aspect of the so-called mortgage crisis that hasn’t been adequately explored is the extent to which predatory lenders have committed fraud against vulnerable homeowners. They have pushed overpriced loans and outlandish fees on hapless victims who didn’t understand — and could not possibly have met — the terms of the contracts they signed.

In some cases, corporate con artists have deliberately targeted and seized the equity of financially strapped and unsophisticated owners. In some cases, homes have been stolen outright.

This is an issue crying out for a thorough federal investigation.

Ms. Dailey and her sister, Betty Jones, agreed to refinance the mortgage on their ailing mother’s home in 2000. Neither understood how deeply into debt they were slipping. They struggled to make the payments and hang on to the house after their mother died, although neither was working and their only income was from Social Security. Then Ms. Jones was hospitalized with a heart condition.

As illogical as it may sound, the two women were pressed to refinance yet again in 2005. There was no way they could legitimately qualify for such a loan, and the lenders had to know it. But they persisted.

On Aug. 8, 2005, a representative of the Argent Mortgage Company took Ms. Dailey from the Merrill Avenue house to her sister’s bedside at Kindred Hospital. There the women signed papers for a loan that they were told would bring their monthly payments down to a manageable level.

Betty Jones was dying. Ms. Dailey’s eyesight was too poor to read the papers shoved in front of her. Both women were frightened and confused.

“I was told that was the only way I could save the house,” Ms. Dailey said.

Thousands of dollars in additional fees were heaped upon them. And the required monthly payment was more than they could possibly have afforded.

Betty Jones died the following December. Rosa Dailey was left with the sick realization that she had been had, that in her confusion and desperation she had agreed to terms that were impossible.

“I’m terrified,” Ms. Dailey told me as she wrapped a sweater tightly around her to ward off the cold. “I can’t sleep anymore. They’re trying to take the house away from me, and I wanted to stay here until I died. That was what I was really trying to do.”

A lawyer, William Spielberger, has taken up Ms. Dailey’s case. He said she and her sister were clear victims of fraud, that the companies pushing loans on them had deliberately inflated their meager incomes on the loan applications, had inflated the value of their property, had imposed unconscionable terms and fees and were fully aware that the two women did not know what they were getting into.

He has filed a federal lawsuit on Ms. Dailey’s behalf against a number of companies, including Citi Residential Lending, a subsidiary of Citigroup that acquired Argent Mortgage this past summer.

A spokeswoman for Citi Residential said she could not comment on the case because of the pending litigation.

I asked Rosa Dailey yesterday how she’d be spending her Thanksgiving. She said her money for the month had run out, so she wouldn’t be doing anything special.

“I’ll be right here,” she said. “I’ve got some corn flakes and canned vegetables. That’ll be my Thanksgiving.”


http://www.nytimes.com/2007/11/20/op...gewanted=print