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A transfer agent that engages in fraud would not be a transfer agent for long. License would be pulled in a heartbeat. Trust the TA as they have no reason to lie and a lot of pain to go thru if they do and are reported to the SEC. I'll take the words of a TA over any CEO, IR or anyone else involved with any company. Believe the company rather than the TA at your own peril.
......al
As far as an investment, I think silver will do much better percentage wise over gold. It is a store of value just like gold and has been used as real money for thousands of years. I don't think the store of value label will ever go away. It is also being consumed industrially in many ways, negating the above ground supply. In fact there are some knowledgeable people that are claiming there is more above ground gold available than there is silver. If and when the fiat systems go into total failure worldwide I would think silver would have it's place in a barter type exchange society. Gold is great but what about for smaller items. I would not want to trade a k- rand for a loaf of bread unless it's a final act of desparation. It's a stretch I know. But I think those old 90% silver US coins would be a hit.
.......al
from John Mauldin- interesting take on the effects on international trade
............al
Posted Oct 10 2008, 10:20 PM
by John Mauldin
Construction Lending: The Next Shoe to Drop
Lehman at the Center
Iceland Guarantees What?
Letters of Credit: Going, Going Gone?
What to Do and Where Do We Go from Here?
I have been writing for almost a year that the next shoe to drop on US banks would be commercial construction lending. Today we look at some hard numbers. We look across the pond to sort out the problems in Europe. We look at the consequences of the losses stemming from Lehman. Then we look at one of the more serious consequences of the banking crisis, one that will bring the crisis home to you. Finally, we look at what the various governments of the world must do in response. It may not be fun, but it should be interesting. And it is important. Feel free to forward this letter to anyone who asks why we not only need the bailout but will need even more coordinated government action.
But first, let me offer a note of optimism before I serve up the not so good news. This is not the end of the world. There are a lot of very positive things happening in the US and the world. Companies are creating new inventions. Much of the economy, including health care, is moving along fine. I have lived through two serious recessions (1973-74 and 1980-82), and the point is that a free-market economy will find a way to eventually get back to solid growth. Recessions are simply part of the business cycle. Congress cannot repeal the business cycle. This will not be the last recession of my life. I hope to live long enough to go through 4 or 5 more.
Depressions are caused by governments making major policy mistakes. And we have made some in the areas of not regulating mortgage lending, allowing the five large investment banks to increase their leverage to 30 or 40 to one in 2004 (what was the SEC thinking?), and failing to oversee the rating agencies. That is behind us. It will make a normal recession deeper and the recovery longer, as I have been forecasting for some time.
But as I argue below, immediate actions must be taken by the government to avoid a much deeper problem. To not take actions to stem the credit crisis would be that major policy mistake which would compound all the other mistakes. I think everyone knows the seriousness of the problem and will act. Let's pray they do.
But whatever happens, there will be plenty of opportunity for investors and entrepreneurs to exploit. The world is on the cusp of a remarkable explosion of new technology of all sorts that will transform our lives. This march of progress went on unchecked last century, through two world wars, major depressions, numerous smaller wars, recessions, financial crises all over the world, famines and natural disasters, not to mention a lot of man-made ones.
The current crisis will pass. None of us will want to go back to the "good old days" in 20 years, for we will be living in the best of times. Just make sure you keep your powder dry so that you can enjoy it. And now, let's look at some less than uplifting news.
Construction Lending: The Next Shoe to Drop
The Bank Credit Analyst is one of the more reliable sources I know for information. They estimate that total losses from the current debt crisis could be anywhere from $1.1 trillion to $1.7 trillion. They estimate roughly half to be in the banking sector, or around $750 billion, and almost $590 billion of that has already been written off. That means that the $700 billion from the TARP (government bailout) program may actually be enough to handle the losses and inject some actual capital into the banks. Maybe.
The losses from subprime and other mortgage-related loans are well known. Most of those losses are in the larger banks, as smaller banks simply could not participate to any great extent. What is less well understood are the potential losses which smaller banks are in fact exposed to in the area of construction lending. Lisa Marquis Jackson, now writing for John Burns Real Estate Consulting (one of the best sources for hard real estate data), gives us some answers to the question of "how much?"
Outside of the large home builders and developers, most of the lending for construction of homes and commercial property comes from regional and local banks. A local home builder may finance 5-10 homes, or a developer a small strip mall or apartment complex, from their local bank. Look at the graph below. Since 2001, delinquencies had been rather small and well-contained. Then starting 18 months ago, the delinquency rates started rising.
Again, note that these are delinquency rates for business loans from banks and not for individual mortgages.
Construction Loan Delinquency by Sector
Over 16% of loans made for condominium construction are now delinquent. Loans made for single-family home construction are only slightly more than 12% overdue. But that masks a much bigger problem. Single-family loans account for 86% of all for-sale residential construction loans outstanding.
The good news is that for the top 100 banks by size, single-family loans make up only 2% of the total. But that small portion totals $245 billion. And condos add another $41 billion. That puts almost $40 billion at risk of default at today's delinquency levels.
For-Sale Residential Construction Loans Outstanding
It will be worse for many smaller banks, as they have larger commercial construction loan portfolios. As noted below, this may require some proactive action on the part of regulators.
Lehman at the Center
Now we know the consequences of allowing Lehman to fail. The severity of the credit crisis was deeply, severely worsened by the failure of Lehman. Based on the results of the credit auction today, sellers of protection will need to make cash payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione said in London. Some funds may be forced to dump assets to meet the payment demands if they haven't hedged.
How much of that debt will eventually have to be absorbed by various government programs or direct capital infusions? It is too soon to say, but you can bet it will be a lot.
If there is any good news to this, it is that much of the write-downs have already been made. It now looks like the Lehman CDS market sorted itself out with no failures, according to the International Swaps and Derivatives Association.
We have dodged a huge bullet. But the anguish this has put the credit markets through the past month was avoidable. The CDS markets MUST be made to migrate to a regulated clearing entity like the Chicago Mercantile Exchange. Next week would be a good time. While there have been serious losses by various players in other exchange-traded markets, there was no systemic risk, as everyone knew the value of their various securities, whether futures or options or other derivatives, and knew they would get their full value when sold.
With Lehman, no one really knew until late today. Thus banks and hedge funds had to sell anything they could in order to meet possible payments or losses, which caused wildly swinging prices in every market.
It is my bet that future memoirs of the various main actors and books on the credit crisis will look back at the failure of Lehman as the proverbial "last straw" for the unregulated CDS markets.
Iceland Guarantees What?
Let's get this straight. Iceland is a country of 300,000 people. I've never met an Icelander I didn't like. They are an extraordinary people. A few decades ago, they made their money on fishing, farming, and trading. Then they discovered banking and started to take deposits from anywhere and everywhere and make loans outside the country. Soon, the various banks' assets were over $140 billion, about 10 times the total GDP of the country, and they had far more foreign depositors than citizens. With foreign reserves of just 2 billion euros, what could the government do if there was a crisis?
Now Iceland has had to take over the banks and guarantee deposits. They also had to turn to Russia for a loan. Does anyone think Putin would hand out a no-strings-attached loan? Russia needs a refueling station for its Navy and will likely get it.
Note that Iceland gave its citizens the ability to withdraw money but did not extend that same privilege to the citizens of other countries. England and the Netherlands have already gone to court.
As noted by good friend Dennis Gartman this morning, "Since then, things have only gotten worse, with the UK government moving to freeze the assets of Icelandic companies in the UK, and Her Majesty's government has said that it will take whatever further actions it deems necessary to protect the assets of British companies and citizens currently held in Iceland, doing 'whatever is necessary to recover [our] money.'
"Thus, not only are banks fearful of lending money to banks; and not only are banks fearful of lending money to individuals and/or companies; and not only are individuals and/or companies fearful of lending money to the banks, but now nations are fearful of lending to other nations. This is Smoot-Hawley writ large, and of all of the circumstances that have prevailed in the course of the past several days, this is the worst; this is the most difficult to deal with. This is madness."
As noted last week, Ireland set off a feeding frenzy when it guaranteed all deposits in its banking institutions. Five billion euros poured in over the last week. One by one, European governments are having to guarantee their loans to keep money from leaving their institutions.
Let's look at the Irish guarantee on the face of it. There are six Irish banks, holding assets of $576 billion. That works out to three times Ireland's gross domestic product, or about $200,000 for every working person in the country. (Bedlam Asset Management) Yet depositors flooded them with money in just a few days.
This is a sign of panic. One goes where one can, trying to protect what one has. On the face of it, how could Ireland really guarantee all the deposits? Yes, there are real assets against the loans, but at what price? Could Ireland borrow enough to make good on even a portion of those assets, should they decide to walk? This is sheer panic.
Letters of Credit: Going, Going Gone?
Just as the business world is dependent upon commercial paper as its life blood, the world of global trade depends on letters of credit (LOC). Without LOCs, the world of trade quickly freezes up.
If you are a manufacturer of a product and want to sell to someone outside your borders, you typically require a letter of credit from the buyer before you load any cargo at a port. A letter of credit from a prime bank is considered to be proof of your ability to pay. It not only can be a source of ultimate payment, it can be a source of inventory financing while goods are in transit.
And if you are a business which is buying a product, you do not want to release money until you know the product is on the way. There are buyer's and seller's agents who make sure these things happen seamlessly, and world commerce had grown because of it.
Now we are starting to get anecdotal evidence that this extremely vital market is also freezing up. If you think the problems stemming from a meltdown with the commercial paper markets are threatening to the world economy, they are small potatoes when compared to a seizure in the letter of credit markets.
I had been thinking about this for a few weeks. Then an article posted on Naked Capitalist caught my eye. Quoting:
"At the end of the day, if every counterparty is bad then you don't have a market and you don't have an economy. I spoke to another friend of mine this afternoon, whose father has been in the shipping business forever. Pristine credit rating, rock solid balance sheet. He says if he takes his BNP Paribas letter of credit to Citi today for short term funding for his vessels, they won't give it to him. That means he can't ship goods, which means that within the next 2 weeks, physical shortages of commodities begin to show up. THE CENTRAL BANKS CAN'T LET THAT HAPPEN OR WE HAVE NO ECONOMY, LET ALONE A CREDIT SYSTEM."
And they quote the following story from The Financial Post of Canada:
"The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.
"Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don't trust the financial institution named in the buyer's letter of credit, analysts said.
"'There are all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit,' said Bill Gary, president of Commodity Information Systems in Oklahoma City. 'The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy.'
"So far the problem is mostly being felt in U.S. and South American ports, but observers say it is only a matter of time before it hits Canada. 'We've got a nightmare in front of us and a lot of people are concerned it's going to get a lot worse,' said Anthony Temple, a grain marketing expert based in Vancouver.
"Access to credit is key to the survival of maritime trade and insiders now say the supply is being severely restricted. More than 90% of the world's trade by volume goes by ship. 'The credit crisis has made banks nervous and the last thing on their minds is making fresh loans,' Omar Nokta, an analyst at investment bank Dahlman Rose, said in an interview with Reuters.
"While shipping has always been a cyclical industry whose fortunes rise and fall with the global economy, analysts said the current crisis over the drying up of credit is something they have never seen before."
If banks are refusing to go into the LIBOR market and lend to each other, then why would they want to take a letter of credit either? At first, it will be a small trickle, which is how the commercial paper meltdown started. Then it will be a flood.
The one good sector in the US is its export sector. Start slowing that down due to a lack of ability to ship or receive payments and see what happens to an already shrinking economy. If anyone wants to see how the credit crisis can affect Main Street, look no further.
It is hard to overstate the problem and the potential for it to create a true economic meltdown. It must be dealt with, and soon. See more below.
What to Do and Where Do We Go from Here?
The credit markets are frozen. Period. The chart below shows one week LIBOR going back for four years. Notice the gradual rise into 2005? It was a lock-step move with the Fed funds rate. And the less smooth drop was also in concert with the Fed funds rate. The recent spike is not responding to this week's Fed funds cut. The spreads are wider than ever. The problem is not just the price of LIBOR. There is no trading at any price. The LIBOR market is a fiction today. And left unchecked, this lack of dealing with other banks will spread to letters of credit and the international trade markets.
One-Week LIBOR: Daliy Close Since 2004
The G-7 group of nations is holding an emergency meeting this weekend. As I write this, reports are coming in that there are serious disagreements as to what to do. They cannot even agree on a press release.
Former Federal Reserve Chairman Paul Volcker urged that "all of them [the G-7 nations] now admit or all of them own up to the fact their own banks are going to need support," in an interview on PBS Television's Charlie Rose Show yesterday.
The real leadership and innovation in the banking crisis seems to be coming from London. UK Chancellor of the Exchequer Alistair Darling told Bloomberg Television that "It is absolutely essential that the world's largest economies act together, and act together now." Darling wants countries to guarantee lending between banks, either by turning central banks into clearing houses for the loans or having governments back them. (Bloomberg)
Sadly, he is right. It has come to that. We are close to the point of no return. Now, we are not talking about bailing out financial institutions. We are literally talking about saving the world economic system. Failed bank lending and a large decrease in letters of credit would guarantee a deep world recession. The last depression produced severe political backlash and a world war.
Frankly, it is simply not worth the risk to say that we should sit back and let the markets work. They are not working, and there are no signs they will. As with a patient whose heart has stopped, it is time to apply the shock treatment.
What should we do? We must simply guarantee LIBOR (interbank) lending worldwide for some period of time (say 3-6 months) or until banks can trust each other's balance sheets. With the Lehman crisis going on, with more mortgage credit problems being revealed, no one knows what their own exposure is, let alone what the exposures of other banks are. Until that dust settles, the LIBOR market will remain frozen. The longer this is allowed to continue, the worse the problems will be. And it needs to be handled on a coordinated basis.
Banking is truly global. The system cannot just be guaranteed by England or the US. It must be done in concert with all major nations contributing their share. Businesses must be able to trade across borders through banks that will accept one another's letters of credit.
Second, we must consider direct investment in some banks. This should be done as preferred shares, with the view to eventually selling the paper back into the market. To make sure that money is not invested poorly or on bad terms, the various governments should invest alongside private investors, on the same terms. If a bank cannot find private investors willing to invest alongside the government, then they should be quietly assisted into the arms of stronger banks. Banks that are too big to fail must be taken over.
Businesses must have access to credit as well. They cannot get it from banks with impaired balance sheets. This is critical to world trade as well as local commerce.
Third, for a short period of time, all bank deposits in the US must be guaranteed. Weak banks must be absorbed into stronger banks as soon as possible. There are banks with large construction loan books in the hardest-hit parts of the US housing crisis, and they need to be put down as quickly as possible. We are already seeing deposits leave banks, many of them small, due to depositor concerns that small banks will not be seen as too big to fail. This must stop. A blanket guarantee will help.
Fourth, mark-to-market rules must be reconsidered. A blanket one-size-fits-all rule clearly does not work and is part of the problem. As I have documented for the last month, there are numerous assets that have a market price far below their intrinsic value. That is because there are simply no buyers. If everyone is selling in order to raise capital, then that will drive down prices to bargain levels below intrinsic value. That does not mean the asset in question would not have a higher value in a market not in crisis.
These are extraordinary times. I know there will be those who believe the markets should be allowed to work or simply want those who created the crisis to pay. I do understand the anger. I too am angry, and have been for a long time. Those of us who saw this crisis coming are frustrated that no one bothered to pay attention.
But now that we are in it the midst of the crisis, there is no going back. We must look forward and do what we can to avoid an even worse crisis and potential depression. I believe we can do so if governments act promptly.
We are already in what will prove to be one of the longer recessions on record. If we look at the Leading Economic Indicators, which have about a 9-month forward-looking view, it will be late next year before we start to grow once again. Given that everything peaked last October through January (sales, employment, etc.), it is likely that the recession will be dated from the beginning of this year.
Long-time readers know I have been wary of the stock market for several years, suggesting that investors either avoid stocks or have close stop losses. No one taking my advice is long-only this market. Not that I have been perfect, but as it turns out, I was right on this one.
I have been fielding calls all week asking me if I think we are close to a bottom in the stock market. And my answer is, we are close to a short-term bottom, but I think we will trade lower over time due to what I think are going to be poor earnings for the next few quarters. If you are a trader (and that means you have been doing it for some time - not the time to get on the job training!), then maybe you can catch a rebound, which is overdue. But (and here is the big caveat) if there is no global coordination on some or all of the recommendations I made above, this is not going to be pretty. It will end in tears. Let's hope the authorities can get their collective act together.
The next two weeks I'll send a two-part letter on the longer-term investment view and how you should position your portfolios. Stay tuned.
Share structures come from the transfer agent. They are agents of the company that take care of issuance of shares among other duties.
The only dumb question is the one you don't ask.
.......al
Completly egnoring what the company has done to past shareholders is something that future shareholders or investors need to know.
I couldn't agree with you more. It's all part of due diligence. I'm sure all long term holders already know these things. Has it been a deterance? For some, maybe. For the short term swing trader I'm sure it is. While the company has done some things in the past which in no one's opinion has been shareholder friendly, they have been moving forward. I really don't think they are sitting around doing nothing while the uplisting process is ongoing. I can't speak for anyone else but my vision on the future of this company is long term and very positive. I would also hope that anyone coming to this board would not buy stock in this company based on what I may post. I would hope that they check around first and make their own decision based on what they find. The info is out there, both bad and good, for anyone willing to look.
Gators still looking good-
.........al
Joe, great advice. Gov't printing presses are working full blast on overtime. PPT is working hard. They can't seem to prop up the stock market, so they are sneaking in the back door suppressing the gold price and trying to strengthen the dollar. It will fail and gold will skyrocket. Turning incresingly useless dollars into hard assets is the only way to protect yourself from what is coming, and it ain't pretty. There are still hundreds of $trillions in derivatives that have to unwind.
......al
It is a sad thing to behold. In the world of securities trading it basically comes down to us vs. them. Us being investors trying to make a few bucks and them being dealers, hedge funds, brokers, market makers, and sometimes even company managements(read diluting into BS PRs) trying to separate investors from what they have. Why would anyone want ETNL or any other company for that matter to fail and see all investors lose money? To deliberately take yourself out of the "us" category and join "them" just doesn't make sense. Them have worlds of info flows that us can't access to stack the odds against the individual investor. Them don't need help. Us can usually use all the help we can get. Facts are neutral and are always subject to the interpretation of the reader. Twisting facts out of context suggests an agenda be it positive or negative. Trying to warn new potential investors of the bad is as laudable as accentuating the positives. Wishing and hoping a public company will fail and investors lose their investment? A very sad thing indeed. It becomes very difficult to then respect someone's views. Just MHO
........al
Financial Crisis: Who is going to bail out the euro?
Europe must pull together if it is to avoid further financial disaster, argues Ambrose Evans- Pritchard.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3161588/Financial-Crisis-Who-is-going-to-bail-out-the-euro.html
By Ambrose Evans-Pritchard
Last Updated: 10:56PM BST 08 Oct 2008
Comments 11 | Comment on this article
Europe must pull together if it is to avoid further financial disaster
Frankfurt's Eurotower, home to the ECB Photo: AFP
Better late than never. A half-point cut in global interest rates may not halt the slide into a debt deflation, but at least we can hope to avoid the errors of the Great Depression. The slump – remember – had little to do with the 1929 crash. What turned the mild recession of 1930 into the sweeping devastation of the early 1930s was an entirely avoidable collapse of the banking system in both the US and Europe.
The culprit was tight money, made worse by beggar-thy-neighbour policies. The key levers of power in Western finance were held by the sorts of people who now think it is a good idea to drive our banks over a cliff.
Thankfully, wiser heads are in charge this time. Yesterday's move by the US Federal Reserve, the Bank of England, the European Central Bank (ECB), the Canadians, Swiss and Swedes – with Chinese help – is the first time in this sorry saga that the big guns have joined forces in monetary policy to arrest the disintegration of the credit system. The Fed and the ECB are no longer fighting. That alone is a massive change for the better.
However, the failure to offer a lifeline to distressed banks across the world earlier by cutting rates is unforgivable. The G7 bloc of economic powers is in recession or on the cusp, including Japan – where the Nikkei index fell by 10 per cent yesterday. American consumer credit is contracting at an annual rate of 7.9 per cent, the most violent squeeze on record.
The Baltic Dry Index measuring freight rates for shipping has fallen 70 per cent since May. The whole nexus of commodities except gold, now a super currency, is in freefall. Oil has fallen by 41 per cent from its peak, copper by 38 per cent, wheat by 50 per cent. Few with their finger on the pulse of global commerce now think the threat of inflation is remotely credible. Tesco's Sir Terry Leahy says food prices are now deflating at two per cent in his stores.
My view is that Washington has done what is needed to prevent the collapse of the US economy. It has taken over the entire credit system, after all, surpassing Roosevelt's New Deal.
The US has guaranteed the $3.5 trillion money market funds. It has nationalised the $5.3 trillion pillars of the mortgage market, Fannie and Freddie. The Fed is accepting any junk as collateral at its lending window. This week it went the whole hog after panic hit the $1.6 trillion market for commercial paper. It is now offering loans without any security at all. The US government has become a bank. Yes, this is US socialism. What is the alternative?
The $700 billion Paulson rescue plan should put a floor under the colossal dung heap known as "structured credit". It is a bad plan, since it does not target the money on the recapitalisation of the core banking system. But it will help refloat lenders by raising the price of beaten-down securities somewhere nearer their true "hold-to-maturity" worth.
An ugly recession is coming, as debt leverage kicks into reverse. The purge will be slow and punishing. Some 12 million Americans are already trapped in negative equity, but at least they can see where this might end. After much drama, the US institutions have risen to the challenge. The Fed, the Treasury, and Congress have managed to take some sort of coherent action. The jury is out on Europe, where the hurricane is now smashing the banking system.
Those such as German finance minister Peer Steinbruck – who thought the sub‑prime crisis was just an "American problem" – have had a rude shock. The collapse of Hypo Real with €400 billion of liabilities has made him face the unsettling truth that German banks have played a big part in this $10 trillion speculative venture undertaken by the whole global banking industry.
Europeans borrowed vast sums in dollars in the offshore money markets when dollar credit was cheap. This was leveraged by multiples of 50 or 60 to fund whatever craze was in fashion – Russia, Brazil, infrastructure. The credit crunch has left these banks floundering. They have to pay back a lot of dollars, yet the underlying assets are crumbling. They are caught in a self-feeding spiral of "deleveraging". Even those European banks that stuck to stodgy investments are caught in a vice, since many rely to some degree on three-month loans for funds. That market is jammed shut. They cannot roll-over their loan books. This way lies sudden death, as Hypo discovered.
Who in the eurozone can do what Alistair Darling has just done in extremis to save Britain's banks, as this $10 trillion house of cards falls down? There is no EU treasury or debt union to back up the single currency. The ECB is not allowed to launch bail-outs by EU law. Each country must save its own skin, yet none has full control of the policy instruments.
Germany has vetoed French and Italian ideas for an EU lifeboat fund. The former knows exactly where that leads. It is a Trojan horse that will be used one day to co-opt German taxpayers into rescues for less Teutonic EMU kin. One can sympathise with Berlin. But sharing debts with Italy and Spain was implicit when they agreed to launch the euro. A shared currency entails obligations. We have reached the watershed moment when Germany has to decide whether to put its full sovereign weight behind the EMU project or reveal that it is not prepared to do so in a crisis.
This is a very dangerous set of circumstances for monetary union. Will we still have a 15-member euro by
The paper markets for gold and silver have been skewed by intervention and manipulation. When the comex fails to deliver on the contracts they have sold, it will probably right itself. It is near impossible to buy the physical at spot prices. There are lots of buyers and few sellers.
........al
JMHO, but I think a better analogy is a coiled spring.
.......al
And the companies become thrifty and spend our money wisely-
AIG Draws Fire for Executives' $440,000 Post-Bailout Retreat at Posh California Resort
Tuesday, October 07, 2008
o
WASHINGTON — Less than a week after the federal government had to bail out American International Group Inc., the company sent executives on a $440,000 retreat to a posh California resort, lawmakers investigating the company's meltdown said Tuesday.
The tab included $23,380 worth of spa treatments for AIG employees at the coastal St. Regis resort south of Los Angeles even as the company tapped into an $85 billion loan from the government it needed to stave off bankruptcy.
The retreat didn't include anyone from the financial products division that nearly drove AIG under, but lawmakers were still enraged over thousands of dollars spent on catered banquets, golf outings and visits to the resort's spa and salon for executives of AIG's main U.S. life insurance subsidiary.
"Average Americans are suffering economically. They're losing their jobs, their homes and their health insurance," House Oversight Committee Chairman Henry Waxman, D-Calif., scolded the company during a lengthy opening statement. "Yet less than one week after the taxpayers rescued AIG, company executives could be found wining and dining at one of the most exclusive resorts in the nation."
The hearing disclosed that AIG executives hid the full range of its risky financial products from auditors as losses mounted, according to documents released Tuesday by a congressional panel examining the chain of events that forced the government to bail out the conglomerate.
The panel sharply criticized AIG's former top executives, who cast blame on each other for the company's financial woes.
"You have cost my constituents and the taxpayers of this country $85 billion and run into the ground one of the most respected insurance companies in the history of our country," said Rep. Carolyn Maloney, D-N.Y. "You were just gambling billions, possibly trillions of dollars."
AIG, crippled by huge losses linked to mortgage defaults, was forced last month to accept the $85 billion government loan that gives the U.S. the right to an 80 percent stake in the company.
Waxman unveiled documents showing AIG executives hid the full extent of the firm's risky financial products from auditors, both outside and inside the firm, as losses mounted.
For instance, federal regulators at the Office of Thrift Supervision warned in March that "corporate oversight of AIG Financial Products ... lack critical elements of independence." At the same time, Pricewaterhouse Cooper confidentially warned the company that the "root cause" of its mounting problems was denying internal overseers in charge of limiting AIG's exposure access to what was going on in its highly leveraged financial products branch.
Waxman also released testimony from former AIG auditor Joseph St. Denis, who resigned after being blocked from giving his input on how the firm estimated its liabilities.
Three former AIG executives were summoned to appear before the hearing. One of them, Maurice "Hank" Greenberg — who ran AIG for 38 years until 2005 — canceled his appearance citing illness but submitted prepared testimony. In it, he blamed the company's financial woes on his successors, former CEOs Martin Sullivan and Robert Willumstad.
"When I left AIG, the company operated in 130 countries and employed approximately 92,000 people," Greenberg said. "Today, the company we built up over almost four decades has been virtually destroyed."
Sullivan and Willumstad, in turn, cast much of the blame on accounting rules that forced AIG to take tens of billions of dollars in losses stemming from exposure to toxic mortgage-related securities.
Lawmakers also upbraided Sullivan, who ran the firm from 2005 until June of this year, for urging AIG's board of directors to waive pay guidelines to win a $5 million bonus for 2007 — even as the company lost $5 billion in the 4th quarter of that year. Sullivan countered that he was mainly concerned with helping other senior executives.
Sullivan also came under fire for reassuring shareholders about the health of the company last December, just days after its auditor, Pricewaterhouse Cooper, warned of him that AIG was displaying "material weakness" in its huge exposure to potential losses from insuring mortgage-related securities.
AIG's problems did not come from its traditional insurance subsidiaries, which remain healthy, but instead from its financial services operations, primarily its insurance of mortgage-backed securities and other risky debt against default. Government officials feared a panic might occur if AIG couldn't make good on its promise to cover losses on the securities; investors feared the consequences would pose a threat to the U.S. financial system, which led to the government bailout.
AIG suffered huge losses when its credit rating was cut, thanks largely to complex financial transactions known as "credit default swaps." AIG was a major seller of the swaps, which are a form of insurance, though they are not regulated that way.
The swap contracts promise payment to investors in mortgage bonds in the event of a default. AIG has been forced to raise billions of dollars in collateral to back up those guarantees.
Sullivan said many of the firm's problems stemmed from "mark to market" accounting rules mandating that its positions guaranteeing troubled mortgage securities be carried as tens of billions of dollars in losses on its balance sheet.
This in turn, said former AIG chief executive Willumstad, who ran the company for just three months after Sullivan left, forced the firm to raise billions of dollars in capital. The federal rescue came after AIG suffered disastrous liquidity problems after its credit rating was lowered, forcing the company to come up with even more capital.
"AIG was caught in a vicious cycle," Willumstad said in the testimony.
Greenberg said that AIG "wrote as many credit default swaps ... in the nine months following my departure as it had written in the entire previous seven years combined. Moreover, "unlike what had been true during my tenure, the majority of the credit default swaps that AIGFP wrote in the nine months after I retired were reportedly exposed to subprime mortgages."
But Sullivan said the complex swaps had underlying value, even as the market for them froze, sending their book value plummeting and forcing AIG to scramble for collateral.
"When the credit markets seized up, like many other financial institutions, we were forced to mark our swap positions at fire-sale prices as if we owned the underlying bonds, even though we believed that our swap positions had value if held to maturity," Sullivan said.
The hearing is the second in two days into financial excesses and regulatory mistakes that have spooked stock and credit markets and heightened fears about a global recession.
TAKI- I've been advocating no margin for years to anyone willing to listen. It fell mostly on deaf ears. No margin, no debt, and holding gold and silver will help you survive if not beat the coming meltdown. And be prepared to defend it. All the dollars in the world being thrown at the "problem" will not help if there is no confidence in the dollar anymore. This is only the beginning. Over $500 trillion in derivatives to unwind.
........al
US Mint halts some American Eagle coin production
Tue 7 Oct 2008, 12:02 GMT
[-] Text [+]
NEW YORK, Oct 7 (Reuters) - Unprecedented demand for precious metals and volatile markets forced the U.S. Mint to cease production for the half-ounce and quarter-ounce popular American Eagle gold coins for the rest of this year and to supply other bullion coins on an allocation basis.
"Due to the extreme fluctuating market conditions for 2008, as well as current market conditions, gold and silver demand is unprecedented and the demand for platinum is unusually high," the U.S. Mint said in a Monday memorandum to its authorized coin dealers.
"The U.S. Mint has worked diligently to attempt to meet demand, however, blank supplies are very limited and it is necessary for the U.S. Mint to focus remaining bullion production primarily on American Eagle Gold One Ounce and Silver One Ounce Coins," the Mint said.
The Mint said it would continue to supply one-ounce American Eagle gold coins and one-ounce American Eagle silver coins on an allocation basis to coin dealers.
For half-ounce and quarter-ounce American Eagles, the Mint said that inventory was depleted last week and no more coins would be produced for 2008.
Produced from gold mined in the United States, the American Eagles have been novel items among collectors and investors since their introduction in 1986. Each coin has a face value of $50 but it is sold by authorized dealers at a premium to the price of gold.
Coin dealers from the United States to Canada have recently reported a surge in buying of bullion coins and other gold products as a worsening crisis in the financial markets prompted people to seek a safe haven in precious metals. (Reporting by Frank Tang; Editing by John Picinich)
http://africa.reuters.com/wire/news/usnN07435260.html
If you like monthly income, Canroyals are looking mighty good right now.
.......al
I think you're a lot safer in Canada than in the US.eom
Fed Sets Floor Below Rate Target, Engineering 'Stealth' Cut
By Scott Lanman
Bloomberg News
Monday, October 6, 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aSiAeDH_QZtk&refer=h...
NEW YORK -- The Federal Reserve may have cut borrowing costs today without actually saying so.
The central bank used authority granted under last week's financial-rescue legislation to effectively set a floor under its main interest rate that's lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent.
"Absolutely, it's a stealth easing," said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed researcher.
The announcement, and a Fed decision to double the auction of cash to banks to as much as $900 billion, failed to avert a 3.9 percent decline today in the Standard & Poor's 500 Index. The index has tumbled 28 percent this year even as the central bank has expanded credit more than at any time in seven decades, including a 3.25 percentage-point cut in the main rate during the past 13 months.
"The problem is it's an easing that's trying to offset a massive tightening in the market. Net-net, are we easier in policy? In some sense the answer is no," Ryding said.
By paying interest on reserves, the Fed can pump more cash into the financial system without worrying that the overnight lending rate will drop to zero at the end of each day as banks withdraw excess reserves. The move doesn't preclude a further reduction in the target rate by the Federal Open Market Committee (FOMC).
... Biggest Surprise
The 0.75-point spread, announced today, was the biggest surprise in the Fed's moves to implement its authority under the financial-rescue legislation, economists said. The Fed set the new rate Oct. 3, the same day the House approved the bill and President George W. Bush signed it into law.
The FOMC, composed of the Washington-based governors and 12 Fed regional-bank presidents, meets about every six weeks to set a target for the overnight lending rate, which the New York Fed tries to achieve by buying and selling Treasury securities from bond dealers.
The Fed requires banks to keep a level of reserves at the central bank. On those funds, the Fed will pay a higher rate equal to the average target rate over a one- or two-week period less 0.10 percentage point. For excess reserves, the rate is the lowest FOMC target over a period less 0.75 percentage point.
The Fed said it would raise or lower the spread so the New York Fed trading desk can keep the federal funds rate near policy makers' target "based on experience and in response to evolving market conditions."
The central bank didn't set a meeting schedule for discussing the reserve-interest rate.
... Channeling Cash
The federal funds rate will probably trade below the FOMC's target as long as the Fed is channeling cash into the banking system, thereby prompting financial institutions to park their funds with the central bank each day. The rate may trade closer to the policy target when the credit crisis eases and the Fed begins to withdraw its emergency lending.
Still, a "soft federal funds rate does not provide a perfect substitute for a cut in the target," former Fed Governor Laurence Meyer and former Fed researcher Brian Sack, now with Macroeconomic Advisers LLC in Washington, said in a research note to clients.
The Fed said today "the rate on excess balances should be set sufficiently low to provide an incentive for eligible institutions to trade funds in excess of required reserve balances and clearing balances in the federal funds market." The rate should also discourage banks from trading funds "far below" the federal funds rate.
The interest payments begin Oct. 9.
... Start Lending
A higher rate on payments may give banks too much of an incentive to keep funds at the central bank, said Peter Hooper, chief U.S. economist at Deutsche Bank Securities Inc. in New York and a former Fed official. "The whole objective here is to get banks to start lending again, and the more you pay them to hold on to their reserves, the less likely they'll be willing to lend."
Even if the funds rate trades below the 2 percent target, it doesn't mean the FOMC is deploying a new policy tool by paying interest on reserves, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "I doubt the FOMC will want to give up their Fed funds rate target as the key indicator of monetary policy."
More and more pros and cons about the possible confiscation of gold by central governments are being bandied about. Whether or not you believe it may happen, the possibility is something you should always keep close in mind. Holding physical is safe from confiscation. Paper gold would be the first to go. Just FYI and FWIW.
...........al
Financial Crisis: Rush for gold as savers queue for bullion
Savers have been queuing in the street to buy gold bars and coins, as they search for a safe place to invest their money.
By Harry Wallop, Consumer Affairs Editor
Last Updated: 6:26PM BST 02 Oct 2008
Gold nuggets and bars
Traditionally, gold has been one of the safest investments during times of financial turmoil Photo: AP
London's two leading bullion dealers, ATS Bullion and Baird & Co, have reported a rush of interest from savers, many of whom have hundreds of thousands of pounds worth of savings they want to convert into the precious metal.
At least two customers have invested the entire proceeds from selling their houses into gold, each buying up more than £500,000-worth of gold bars, according to one dealer.
Savers have been queuing in the street at ATS Bullion, whose offices are just off the Strand in London's west end.
Sandra Conway, the company's managing director, said: "We've had to turn people away. The queues have been right out of the door and it's been really hectic at times.
"Ever since Lehman Brothers went bankrupt, the phones have been going off the hook."
Traditionally, gold has been one of the safest investments during times of financial turmoil. In 1973 gold cost just $60 an ounce and hit $650 in 1981.
However, since the summer the price of gold has fallen as the dollar has strengthened – the two are linked quite closely.
But the fact that gold has not performed well in recent months has not deterred thousands of investors.
"They don't think of gold as a way of making money. They think of it as a safeguard in these turbulent times. You can move gold quickly, in a way that you can not with shares or cash in a bank account," Ms Conway said.
The average investor is buying up between £10,000 and £50,000 in bars on each visit, but it is possible to buy as little as a half sovereign coin, which costs about £70.
Some analysts say that while it may be romantic to buy bars of gold, there is a far more practical way to investing in gold. Investors can buy Exchange Traded Funds, which are like shares – they trade on the stock market – and they are directly linked to the price of gold.
Mick Gilligan, at stockbrokers Killik & Co, said that his clients had been asking about investing in gold in far greater numbers in recent weeks.
"It's lot easier to sell than the gold you keep in your sock drawe
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3123775/Financial-Crisis-Rush-for-gold-as-savers-queue-for-bullion.html
superbee- I know why you took the time to research and post all that. But really, anyone with just half a brain would know that already. If not they should not only stay away from ETNL and all other stocks no matter what the exchange, they shouldn't be investing in anything but mutuals and bonds. If this stock is so bad, why is it holding it's own thru one of the county's worst financial crisis in history? I'll bet all those trillions in non regulated derivatives didn't come with full disclosure of risks involved. Yet financial "experts" a lot smarter that me were gobbling them up. I think I'll stick with my little funeral company here. It seems to be a lot safer than what wall street is peddling.
.........al
Who owns the federal reserve bank?-
http://www.save-a-patriot.org/files/view/whofed.html
........al
Just some thoughts and I wish I knew the conclusion. I have been watching the trading pattern here for several weeks now. There is definately accumulation going on, by whom is a mystery. It's not steady but is done in spurts at various times during trading hours. Yet the volume involved adds up to quite a few million shares and a lot of $$$. I don't know the why or the who but it definately got my attention. I've watched the same thing happen before on other issues and it almost always prefaced a big run. I know this stirs up a lot more questions than answers. Time will tell.
........al
TA- Stalt, 1 650 321 7111 eom
Jim- the derivatives market is over 500 trillion and counting. As Washington tries to fix the mess caused by wall street, the banks are still bundling and packaging and selling more derivatives.
......al
I don't know how many here follow level 2 and trades, but over the past week I have seen many large blocs going at the ask at various times during the day. Someone(s) accumulating on a fairly large scale. JMHO, but this could easily run like TSHL has done the past 2 days. Someone just may know of a pending PR that will really cause this to run. Again, JMHO
............al
The 60's were turbulant times. Returning from my first tour in RVN I ended up in VA (1968). We all had to take riot control training. Never used it but it was mandatory for all non trainees. But no combat brigade was ever trained to function as a combat brigade in riot control. I know it may not seem like apples and oranges, but believe me it is. Extreme civil unrest will start in the inner cities(I always predict it will start in Detroit first) and spread from there. 45 years ago we had to deal with rioters that threw rocks and bottles, a few gasoline bombs, a few handguns and rifles or shotguns. Today they'll be facing well armed and organized gangs with automatic weapons. It took police departments years of complaining to get better weapons as they were being outgunned in confrontations. I also think the aftermath from Katrina was a lesson learned in societal breakdown and was the basis for this planning. JMHO
.......al
MH- welcome to Ihub and the board. I don't think you will find a stock board anywhere where there is any positive posting about this company. I'm sure a few more answers to your post will be forthcoming so I'll just say this. A very smart trader can make $$ trading this stock. Some have made a lot in the past and some will make more in the future. I'm not that good so I don't touch it. I will give you just two facts. Since Alex started this company in 1995 he has sold billions and billions of shares. Not one long term investor has ever made any money in this company's stock. They have all been reversed out of their positions. If some answers to your query seem a little strong, don't be offended as they mean you no harm. They are just trying to warn you and save you from losing your hard earned money investing in this company. I keep the OS counts updated in the iBox about every 2 weeks. You can see the constant dilution for yourself and make your own decisions. GL2U
..........al
Don't think the planners haven't thought about possible unrest:
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=32491574
......al
TAKI- check out the last 5 -10 minutes trading on CJGH today.
........al
The bailout has not failed IMHO. It has had a setback, but will continue forward. It will be tinkered with again and again to satisfy members that voted no but are not hardcore in their belief. A tweek here and there is all it may take. I believe something like allowing bankruptcy judges to change mortgage terms, or increased intervention in forclosure proceedings could be what tips the scales. The main objections, other than ideology, seems to be not enough protections for the average homebuyer about to lose his home. So action in that area could sway enough votes to pass it. This bailout will eventually pass. Too much political capital has been expended for it to fail altogether. I believe the biggest fear of the GOP is that they have been in charge for over a decade and have pushed for free unregulated markets and it has now come home to bite them in the rear. That is a common voter perception and we are VERY close to that time. I think Obama is now a shoe in and the republicans will take more hits in Congress over all this. But again, a bailout will occur eventually. IMHO
..........al
not necessarily after hours-
'T' If reporting a single protected transaction. A protected transaction occurs when a large order is going through the market. The buyer (or seller) may wish to keep the order anonymous from the rest of the market as the size of the order could greatly alter the price of the stock. With a protected transaction, the dealer will put the trade through in small quantities rather than knock the whole order out in one hit. The entire transaction is reported once the deal is completed. The LSE is notified at the start and at the end of the transaction. However, the market as a whole isn't told until the end, thus the order is protected.
huge buying last 5 minutes eom.
According to what I've been reading 90+% of voters writing in to their representatives are against the bailout. It's a tough decision to vote for it and go back and try and get re elected in Nov. It's too close for people to forget.
........al
PPT out in full force. eom
The TA doesn't have the new numbers as of yet. IMHO the sell off is coming because most traders that have been involved with penny stocks for any decent length of time know that when a pinkie raises the A/S, that usually means there will be additions to the O/S in a short time. I got in last week and am now out again at .002. That filing just killed the momemtum. Best of luck to all here.
.........al
Just confirmed with TA, A/S and O/S shares counts are accurate in iBox as of last Friday COB. FWIW
.......al
With all this squabbling going on over 700 billion, has anyone realized the FED has already doled out over 1 trillion since this mess first started a few months ago? I think the FED window did almost that much this past week in loans. Just FYI and FWIW
.........al
US steps up Pakistan raids to thwart al-Qaeda 'October surprise' plot
US secret forces are intensifying their cross-border raids into Pakistani tribal areas because of fears of a high-profile al-Qaeda attack during the American election campaign, The Sunday Telegraph has learned.
By Philip Sherwell in New York and Massoud Ansari in Islamabad
Last Updated: 12:20AM BST 28 Sep 2008
The Pentagon has ordered that raids on suspected terrorist targets within Pakistan be stepped up to pressurise al-Qaeda leaders and distract them from preparing attacks on American targets elsewhere.
"The aim is to disrupt their scope for planning and keep their leaders on the move so that it is more difficult for them to co-ordinate complicated plots," a senior US intelligence official told The Sunday Telegraph.
The operations launched from neighbouring Afghanistan have led to sharply increased tensions with Pakistan's armed forces since President George W.Bush recently authorised assaults involving "boots on the ground" without prior approval by Pakistan's government, a supposed US ally.
Those hostilities almost turned lethal last week when Pakistani troops shot at two clearly marked US helicopters, and the two sides then traded fire. The Pentagon said the aircraft were just inside Afghan air space but Pakistani officials insisted they had crossed the volatile border.
There were no injuries in the clash but US and Pakistani officers have arranged meetings this week to discuss the tensions. While new Pakistani president Asif Zardari praised US support for his country as a "blessing" on Friday in New York, senior officials in Islamabad angrily warned US troops not to intrude on its territory.
The US has been increasingly alarmed about the growth of attacks on Nato forces in Afghanistan launched from safe havens established by Islamic terror groups in the lawless mountainous tribal districts just inside Afghanistan.
Robert Gates, the defence secretary, told lawmakers last week that an estimated 30 to 40 per cent of attacks in Afghanistan were staged by fighters based in, or commanded from, Pakistan - a significant rise on previous years.
The approach of the US election has fuelled fears that al Qaeda or its allies, including the increasingly active Haqqani network, will seek a headline-grabbing strike against a symbolic American target such as an overseas embassy.
Last week's devastating truck bomb attack on Islamabad's Marriott Hotel further highlighted security concerns in Pakistan. The blast claimed the lives of 53 people, including two US military personnel, the Czech ambassador and a Danish intelligence officer.
"The level of sophistication and destruction was a message to the international community and the Pakistanis that we can pretty much hit you any place, any time," said Seth Jones, a senior regional analyst with the Rand Corporation, a leading security think-tank.
Kamran Bokhari, Middle East director at Stratfor, an intelligence analysis company, said that the scale of the attack - involving up to 1,000 kilogrammes of explosives - was a clear indication that al Qaeda or its allies were involved.
"The target and modus operandi have the signature of a sophisticated jihadi operation," he said. "The hotel is in a very sensitive area. If they can hit the Marriott, why can't they hit courts or ministries or the prime minister's house?"
Against this backdrop, a senior US intelligence official said that al Qaeda was seeking to stafe a major attack on an American target close to the election, to test the new president-elect.
"Their goal would not be to influence the election but merely to send a message that they are still a force to be reckoned with," the official said. "They know that a successful attack in the election season will have maximum impact, and they want to give the new president the jitters."
Any attack in the weeks before the Nov 4 election - what is known in American political circles as an "October surprise" - would almost certainly give a decisive boost to John McCain, the Republican candidate who already holds a commanding lead on questions of national security.
The US has for several years attacked suspected militant bases inside Pakistan with missiles fired from Predator drones. Tribesmen regularly shoot at the unmanned aircraft, although both the US and Pakistan rejected claims that a drone that crashed near the border last week was broight down by gunfire.
But in July, Mr Bush approved classified orders authorising special operations forces to conduct ground assaults inside Pakistan without seeking Islamabad's approval after his commanders presented him with evidence about the militants' increasingly secure bases in the tribal areas. Small commando units are flown in and out by helicopter for precisions raids.
"To tackle the insurgency in Afghanistan, you have to deal with what's happening in Pakistan," said Mr Bokhari. "It's not just the border now.
Pakistan increasingly feels like a state under siege."
Mr Jones said: "The US has been increasingly aware that the command and control networks for groups such as Al Qaeda and its allies in the Haqqani network conducting attacks in Afghanistan are based in Pakistan."
The new US approach has infuriated senior Pakistani commanders who feel freer to express their anger since President Pervez Musharraf was forced from office. New army chief General Ashfaq Pervez Kiyani has told his US counterparts that US incursions without prior approval are "unacceptable".
Pakistan is also mounting a major ground offensive against militants in the Bagaur region and claims to have killed 1,000 fighters in an operation that may have prompted the Marriott attack in retaliation.
But Gen Kiyani's combative approach has taken the US aback. "He is trying to assert himself more than they (US) expected and sooner than they expected," a Western diplomat said.
Relations plummeted after US commandos landed by helicopter on a raid in early September in Pakistan and killed seven innocent civilians, according to the Pakistanis. The mood was already raw after a US missile fired from Afghanistan killed several Pakistani soldiers at a border post in June.
Pakistani army officials said that the Americans do not understand that Gen Kiyani is already facing major obstacles in deploying his soldiers against the militants.
"It is just adding to the problem for him to engage these soldiers against the militants when they are being taunted by their fellow Muslims that they are working for the US against the Muslims," said a senior army official.
Scores of soldiers have deserted in the past few years especially when they were stationed in the tribal areas after refusing to fight. Nearly 1200 Pakistani soldiers have died since in the tribal region since 2001.
"There is a limit to what one could cooperate and army chief alone knows how difficult it is for his to keep the morale of his soldiers," the same official said.
Additonal reporting: William Lowther, Washingto
http://www.telegraph.co.uk/news/worldnews/asia/pakistan/3092548/US-steps-up-Pakistan-raids-to-thwart-al-Qaeda-October-surprise-plot.html
This is John Mauldin's letter to his congressman. Very good read.
Use this link to see the graphs.
http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2008/09/27/who-s-afraid-of-a-big-bad-bailout.aspx
......al
Posted Sep 27 2008, 12:52 AM
by John Mauldin
"A tournament, a tournament, a tournament of lies.
Offer me solutions, offer me alternatives and I decline.
It's the end of the world as we know it and I feel fine.
(It's time I had some time alone.)"
- Lyrics from R.E.M., 1987
Flying last Tuesday, overnight from Cape Town in South Africa to London, I read in the Financial Times that Republican Congressman Joe Barton of Texas was quoted as saying (this is from memory, so it is not exact) that he had difficulty voting for a bailout plan when none of his constituents could understand the need to bail out Wall Street, didn't understand the problem, and were against spending $700 billion of taxpayer money to solve a crisis for a bunch of (rich) people who took a lot of risk and created the crisis. That is a sentiment that many of the Republican members of the House share.
As it happens, I know Joe. My office is in his congressional district. I sat on the Executive Committee for the Texas Republican Party representing much of the same district for eight years. This week, Thoughts from the Frontline will be an open letter to Joe, and through him to Congress, telling him what the real financial problem is and how it affects his district, helping explain the problem to his constituents , and explaining why he has to hold his nose with one hand and vote for a bailout with the other.
Just for the record, Joe has been in Congress for 24 years. He is the ranking Republican on the Energy and Commerce Committee, which is one of the three most important committees and is usually considered in the top five of Republican House leadership. He is quite conservative and has been a very good and effective congressman. I have known Joe for a long time and consider him a friend. He has been my Congressman at times, depending on where they draw the line. I called his senior aide and asked him how the phone calls were going. It is at least ten to one against supporting this bill, and that is probably typical of the phones all across this country. People are angry, and with real justification. And watching the debates, it reminds us that one should never look at how sausages and laws are made. It is a very messy process.
I think what follows is as good a way as any to explain the crisis we are facing this weekend. This letter will print out a little longer, because there are a lot of charts, but the word length is about the same. Let's jump right in.
It's the End of the World As We Know It
Dear Joe,
I understand your reluctance to vote for a bill that 90% of the people who voted for you are against. That is generally not good politics. They don't understand why taxpayers should spend $700 billion to bail out rich guys on Wall Street who are now in trouble. And if I only got my information from local papers and news sources, I would probably agree. But the media (apart from CNBC) has simply not gotten this story right. It is not just a crisis on Wall Street. Left unchecked, this will morph within a few weeks to a crisis on Main Street. What I want to do is describe the nature of the crisis, how this problem will come home to your district, and what has to be done to avert a true, full-blown depression, where the ultimate cost will be far higher to the taxpayers than $700 billion. And let me say that my mail is not running at 10 to 1 against, but it is really high. I am probably going to make a lot of my regular readers mad, but they need to hear what is really happening on the front lines of the financial world.
First, let's stop calling this a bailout plan. It is not. It is an economic stabilization plan. Run properly, it might even make the taxpayers some money. If it is not enacted very soon (Monday would be fine), the losses to businesses and investors and homeowners all over the US (and the world) will be enormous. Unemployment will jump to rates approaching 10%, at a minimum. How did all this come to pass? Why is it so dire? Let's rewind the tape a bit.
We all know about the subprime crisis. That's part of the problem, as banks and institutions are now having to write off a lot of bad loans. The second part of the problem is a little more complex. Because we were running a huge trade deficit, countries all over the world were selling us goods and taking our dollars. They in turn invested those excess dollars in US bonds, helping to drive down interest rates. It became easy to borrow money at low rates. Banks, and what Paul McCulley properly called the Shadow Banking System, used that ability to borrow and dramatically leverage up those bad loans (when everyone thought they were good), as it seemed like easy money. They created off-balance-sheet vehicles called Structured Investment Vehicles (SIVs) and put loans and other debt into them. They then borrowed money on the short-term commercial paper market to fund the SIVs and made as profit the difference between the low short-term rates of commercial paper and the higher long-term rates on the loans in the SIV. And if a little leverage was good, why not use a lot of leverage and make even more money? Everyone knew these were AAA-rated securities.
And then the music stopped. It became evident that some of these SIVs contained subprime debt and other risky loans. Investors stopped buying the commercial paper of these SIVs. Large banks were basically forced to take the loans and other debt in the SIVs back onto their balance sheets last summer as the credit crisis started. Because of a new accounting rule (called FASB 157), banks had to mark their illiquid investments to the most recent market price of a similar security that actually had a trade. Over $500 billion has been written off so far, with credible estimates that there might be another $500 billion to go. That means these large banks have to get more capital, and it also means they have less to lend. (More on the nature of these investments in a few paragraphs.)
Banks can lend to consumers and investors about 12 times their capital base. If they have to write off 20% of their capital because of losses, that means they either have to sell more equity or reduce their loan portfolios. As an example, for every $1,000 of capital, a bank can loan $12,000 (more or less). If they have to write off 20% ($200), they either have to sell stock to raise their capital back to $1,000 or reduce their loan portfolio by $2,400. Add some zeroes to that number and it gets to be huge.
And that is what is happening. At first, banks were able to raise new capital. But now, many banks are finding it very difficult to raise money, and that means they have to reduce their loan portfolios. We'll come back to this later. But now, let's look at what is happening today. Basically, the credit markets have stopped functioning. Because banks and investors and institutions are having to deleverage, that means they need to sell assets at whatever prices they can get in order to create capital to keep their loan-to-capital ratios within the regulatory limits.
Remember, part of this started when banks and investors and funds used leverage (borrowed money) to buy more assets. Now, the opposite is happening. They are having to sell assets into a market that does not have the ability to borrow money to buy them. And because the regulators require them to sell whatever they can, the prices for some of these assets are ridiculously low. Let me offer a few examples.
Today, there are many municipal bonds that were originally sold to expire 10-15 years from now. But projects finished early and the issuers wanted to pay them off. However, the bonds often have a minimum time before they can be called. So, issuers simply buy US Treasuries and put them into the bond, to be used when the bond can be called. Now, for all intents and purposes this is a US government bond which has the added value of being tax-free. I had a friend, John Woolway, send me some of the bid and ask prices for these type of bonds. One is paying two times what a normal US Treasury would pay. Another is paying 291% of a normal US Treasury. And it is tax-free! Why would anyone sell what is essentially a US treasury bond for a discount? Because they are being forced to sell, and no one is buying! The credit markets are frozen.
Last week, I wrote about a formerly AAA-rated residential mortgage-backed security (RMBS) composed of Alt-A loans, better than subprime but less than prime. About 5% of the loans were delinquent, and there are no high-risk option ARMs in the security. It is offered at 70 cents on the dollar. If you bought that security, you would be making well over 12% on your money, and 76% of the loans in the portfolio of that security would have to default and lose over 50% of their value before you would risk even one penny. Yet the bank which is being forced to sell that loan has had to write down its value. As I wrote then, that is pricing in financial Armageddon. (You can read the full details here.)
Let's look at the following graph. It is an index of AAA-rated mortgage bonds, created by www.markit.com. It is composed of RMBSs similar to the one I described above. Institutions buy and sell this index as a way to hedge their portfolios. It is also a convenient way for an accounting firm to get a price for a mortgage-backed security in a client bank's portfolio. With the introduction of the new FASB 157 accounting rule, accountants are very aggressive about making banks mark their debt down, as they do not want to be sued if there is a problem. Notice this index shows that bonds that were initially AAA are now trading at 53 cents on the dollar, which is up from 42.5 cents two months ago.
Accountants might look at the bond I described above, look at this index, and decide to tell their clients to mark the bonds down to $.53 on the dollar. The bank is offering the bond at $.70 because it knows there is quality in the security. They are being forced to sell. And guess what? There are no buyers. An almost slam-dunk 12% total-return security with loss-coverage provisions that suggest 40% of the loans could default and lose 50% before your interest rate yields even suffered, let alone risk to your principal – and it can't find a buyer.
One of the real reasons these and thousands of other good bonds are not selling now is that there is real panic in the markets. The oldest money market fund "broke the buck" last week, because they had exposure to Lehman Brothers bonds. We are seeing massive flights of capital from money market funds, including by large institutions concerned about their capital. What are they buying? Short-term Treasury bills. Three-month Treasury bills are down to 0.84%.
It gets worse. Last week one-month Treasury bills were paying a negative 1%!!! That means some buyers were so panicked that they were willing to buy a bond for $1 that promised to pay them back only $.99 in just one month. The rate is at 0.16% today. If something is not done this weekend, it could go a lot lower over the next few days. That is panic, Joe.
I don't want to name names, as this letter goes to about 1.5 million people and I don't want to make problems for some fine banking names; but there is a silent bank run going on. There are no lines in the street, but it is a run nevertheless. It is large investment funds and corporations quietly pulling their money from some of the best banks in the country. They can do this simply by pushing a button. We are watching deposit bases fall. It does not take long. Lehman saw $400 billion go in just a few months this summer. Think about that number. Any whiff of a problem and an institution that is otherwise sound could be brought low in a matter of weeks. And the FDIC could end up with a large loss that seemed to have come from out of nowhere.
The TED Spread Flashes Trouble
There is something called the TED spread, which is the difference between three-month LIBOR (the London Inter Bank Offered Rate which is in euro dollars, also called The Euro Dollar Spread, thus TED) and three-month US Treasury bills. Three-month LIBOR is basically what banks charge each other to borrow money. Many mortgages and investments are based on various periods of LIBOR. Look at the chart below. Typically the TED spread is 50 basis points (0.50%) or less. When it spikes up, it is evidence of distress in the financial markets. The last time the TED spread was as high as it is now was right before the market crash of 1987. This is a weekly chart, which does not capture tonight's (Friday) change, which would make it look even worse. Quite literally, the TED spread is screaming panic.
The Fed has lowered rates to 2%. Typically, three-month LIBOR tracks pretty close to whatever the Fed funds rate is. Starting with the credit crisis last year, that began to change. Look at the chart below.
Remember, LIBOR is what banks charge to each other to make loans. Lower rates are supposed to help banks improve their capital and their ability to make loans at lower interest rates to businesses and consumers. Look at what has happened in the past few weeks, in the chart above. The spread between three-month LIBOR and the Fed funds rate is almost 200 basis points, or 2%! That is something that defies imagination to market observers. On the chart above, it looks like it has not moved that much, but in the trading desks of banks all over the world it is a heart-pounding, scare-you-to-death move. The chart below reflects what traders have seen in the past two weeks, and it moved up more today.
Now let's look at the next chart. This is the amount of Tier 1 commercial paper issued. This is the life blood of the business world. This is how many large and medium-sized businesses finance their day-to-day operations. The total amount of commercial paper issued is down about 15% from a year ago, with half of that drop coming in the last few weeks. Quite literally, the economic body is hemorrhaging. Unless something is done, businesses all over the US are going to wake up in a few weeks and find they simply cannot transact business as usual. This is going to put a real crimp in all sorts of business we think of as being very far from Wall Street.
I could go on. Credit spreads on high-yield bonds that many of our best high-growth businesses use to finance their growth are blowing out to levels which make it impossible for the companies to come to the market for new funds. And that is even if they could find investors in this market! There are lots of other examples (solid corporate loans selling at big discounts, asset-backed securities at discounts, etc.), but you get the idea. Suffice it to say that the current climate in the financial market is the worst since the 1930s. But how does a crisis in the financial markets affect businesses and families in Arlington, Texas, where my office and half of your district is?
The Transmission Mechanism
The transmission in a car takes energy from the engine and transfers it to the wheels. Let's talk about how the transmission mechanism of the economy works.
Let's start with our friend Dave Moritz down the street. He needs financing to be able to sell an automobile. To get those loans at good prices, an auto maker has to be able to borrow money and make the loans to Dave's customers. But if something does not stop the bleeding, it is going to get very expensive for GM to get money to make loans. That will make his cars more expensive to consumers. Cheap loans with small down payments are the life blood of the auto selling business. That is going to change dramatically unless something is done to stabilize the markets.
Credit card debt is typically packaged and sold to investors like pension funds and insurance companies. But in today's environment, that credit card debt is going to have to pay a much higher price in order to find a buyer. That means higher interest rates. Further, because most of the large issuers of credit cards are struggling with their leverage, they are reducing the amount of credit card debt they will give their card holders. If they continue to have to write down mortgages on their books because of mark-to-market rules which price assets at the last fire-sale price, it will mean even more shrinkage in available credit.
Try and sell a home above the loan limits of Fannie and Freddie today with a nonconforming jumbo loan. Try and find one that does not have very high rates, because many lenders who normally do them simply cannot afford to keep them on their balance sheets. And a subprime mortgage? Forget about it. This is going to get even worse if the financial markets melt down.
We are in a recession. Unemployment is going to rise to well over 6%. Consumer spending is going to slow. This is an environment which normally means it is tougher for small businesses and consumers to get financing in any event. Congress or the Fed cannot repeal the business cycle. There are always going to be recessions. And we always get through them, because we have a dynamic economy that figures out how to get things moving again.
Recessions are part of the normal business cycle. But it takes a major policy mistake by Congress or the Fed to create a depression. Allowing the credit markets to freeze would count as a major policy mistake.
I have been on record for some time that the economy will go through a normal recession and a slow recovery, what I call a Muddle Through Economy. This week I met with executives of one of the larger hedge funds in the world. They challenged me on my Muddle Through stance. And I had to admit that my Muddle Through scenario is at risk if Congress does not act to stabilize the credit markets.
Let's Make a Deal
Why do we need this Stabilization Plan? Why can't the regular capital markets handle it? The reason is that the problem is simply too big for the market to deal with. It requires massive amounts of patient, long-term money to solve the problem. And the only source for that would be the US government.
There is no reason for the taxpayer to lose money. Warren Buffett, Bill Gross of PIMCO, and my friend Andy Kessler have all said this could be done without the taxpayer losing money, and perhaps could even make a profit. As noted above, these bonds could be bought at market prices that would actually make a long-term buyer a profit. Put someone like Bill Gross in charge and let him make sure the taxpayers are buying value. This would re-liquefy the banks and help get their capital ratios back in line.
Why are banks not lending to each other? Because they don't know what kind of assets are on each other's books. There is simply no trust. The Fed has had to step in and loan out hundreds of billions of dollars in order to keep the financial markets from collapsing. If you allow the banks to sell their impaired assets at a market-clearing fair price (not at the original price), then once the landscape is cleared, banks will decide they can start trusting each other. The commercial paper market will come back. Credit spreads will come down. Banks will be able to stabilize their loan portfolios and start lending again.
Again, the US government is the only entity with enough size and patience to act. We do not have to bail out Wall Street. They will still take large losses on their securities, just not as large a loss as they are now facing in a credit market that is frozen. As noted above, there are many securities that are being marked down and sold far below a rational price.
If we act now, we will start to see securitization of mortgages, credit cards, auto loans, and business loans so that the economy can begin to function properly.
What happens if we walk away? Within a few weeks at most, financial markets will freeze even more. We will see electronic runs on major banks, and the FDIC will have more problems than you can possibly imagine. The TED spread and LIBOR will get much worse. Businesses which use the short-term commercial paper markets will start having problems rolling over their paper, forcing them to make difficult cuts in spending and employment. Larger businesses will find it more difficult to get loans and credit. That will have effects on down the economic food chain. Jim Cramer estimated today that without a plan of some type, we could see the Dow drop to 8300. That is as good a guess as any. It could be worse. Home valuations and sales will drop even further.
The average voter? They will see stock market investments off another 25% at the least. Home prices will go down even more. Consumer spending will drop. What should be a run-of-the-mill recession becomes a deep recession or soft depression. Yes, that may be worst-case scenario. But that is the risk I think we take with inaction.
A properly constructed Stabilization Plan hopefully avoids the worst-case scenario. It should ultimately not cost the taxpayer much, and maybe even return a profit. The AIG rescue that Paulson arranged is an example of how to do it right. My bet is that the taxpayer is going to make a real profit on this deal. We got 80% of AIG, with what is now a loan paying the taxpayer over 12%, plus almost $2 billion in upfront fees for doing the loan. That is not a bailout. That is a business deal that sounds like it was done by Mack the Knife.
This deal needs to be done by Monday. Every day we wait will see more and more money fly out the doors of the banks, putting the FDIC at ever greater risk. Panic will start to set in, moving to ever smaller banks. Frankly, we are at the point where we need to consider raising the FDIC limits for all deposits for a period of time, until the Stabilization Plan quells the panic.
I understand that this is a really, really bad idea according classical free-market economic theory. You know me; I am as free market as it comes. But I also know that without immediate action a lot of people are really going to be hurt. Unemployment is not a good thing. Losses on your home and investments hurt. It is all nice and well to talk about theories and contend the market should be allowed to sort itself out; and if we have a deep recession, then that is what is needed. But the risk we take is not a deep recession but a soft depression. The consequences of inaction are simply unthinkable.
Joe, I am telling you that the markets are screaming panic. Yes, Senator Richard Shelby has his 200 economists saying this is a bad deal. But they are ivory tower kibitzers who have never sat at a trading desk. They have never tried to put a loan deal together or had to worry about commercial paper markets collapsing. I am talking daily with the people on the desks who are seeing what is really happening. Shelby's economists are armchair generals far from the front lines. I am talking to the foot soldiers who are on the front lines.
Every sign of potential disaster is there. You and the rest of the House have to act. It has to be bipartisan. This should not be about politics (even though Barney Frank keeps talking bipartisan and then taking partisan shots, but I guess he just can't help himself). It should be about doing the right thing for our country and the world. I know it will not be fun coming back to the district. Talking about TED spreads and LIBOR will not do much to assuage voters who are angry. But it is the right thing to do. And I will be glad to come to the town hall meeting with you and help if you like.
With your help, we will get through this. In a few years, things will be back to normal and we can all have stories to tell to our grandkids about how we lived through interesting times. But right now we have to act.
My big question is where is the accountability for all this mess we're in? Where is my pound of flesh? Closure for the taxpayer is necessary and I fear we will never see it. Wall street is too intwined with both major political parties. There may be some sacrificial lambs but the real culprits are already long gone, with millions to boot. I keep thinking back to Jefferson - about every 50 years clean out the whole system and start from scratch otherwise the corruption will overcome what started with the best of intentions. The future looks bleak and even the government knows it. Why else would a combat brigade be trained in civil disobedience and stationed stateside for use in an emergency. The first time in our history.
.........al
Bailout- Brits want their share-
Bush appeals for quick approval of $700bn bailout plan. UK demands share
September 26, 2008, 6:28 PM (GMT+02:00)
Economists warned Friday afternoon, Sept. 26, that if Congress fails to act in time, there will be “bloodbath” on world markets. The warning followed a rebellion in President George W. Bush’s own Republican party which disrupted negotiations on the verge of approving the $700 billion package approved by the White House to save foundering financial institutions by buying bad debts.
It was led by presidential candidate John McCain, who said the plan “will not protect the taxpayers and will sacrifice Main Street in favor of Wall Street.”
On Wall Street, nerves were stretched tighter after Washington Mutual Inc. became the largest U.S. bank to fail. British prime minister Gordon Brown arrived in Washington to hand in a bill of up to $95 bn for to rescue faltering British banks to be included in the American bail-out plan.
After McCain and his Democratic rival Barack Obama interrupted their campaigns to be in Washington for the financial crisis, Democratic leaders said the insertion of presidential politics had torpedoed seven days of negotiations. Majority leader Harold Reid pledged work would go forward without pause until the bail-out bill is adjusted so that the American taxpayer benefits - not just the banks, full oversight over its implementation is assured and failing executives are not rewarded with bonuses.
The Democrats appealed to the Republicans to “put their house in order” and work together to rescue the rescue plan without delay.
John McCain has announced the resumption of his presidential campaign and his decision to will face Barack Obama in their scheduled debate at Mississippi University.