Hey OJ

Perhaps Ben Bernanke will lend him a few bucks- LOL

Published on zero hedge (http://www.zerohedge.com)

Home > Barney Frank Demands Bernanke Probe Fed Involvement In Watergate Scandal And Iraq Arms Sales Following Ron Paul Questioning
Barney Frank Demands Bernanke Probe Fed Involvement In Watergate Scandal And Iraq Arms Sales Following Ron Paul Questioning
By Tyler Durden
Created 03/03/2010 - 19:03

A week ago Ron Paul asked Ben Bernanke a series of questions, which the Chairman and pundits immediately dismissed as "bizarre" and an indication that the potential presidential candidate has finally lost it (among these was a very nuanced question whether or not the Fed is buying sovereign debt [1], something which Bernanke disclosed in 2002 is a distinct possibility and an action the Fed is permitted to do). Chief among these were queries arising from the work of U of T professor Robert Auerbach, and specifically his book "Deception and Abuse at the Fed [2]" (not available on Kindle), which seek information on whether the Fed was involved in the Watergate scandal and, subsequently, in Iraqi weapons purchases.

Well, Paul may not be as kooky as people are trying to make him out to be. None other than "consumer protection advocate" Barney Frank has demanded that Bernanke do a full probe based on these allegations.

Bloomberg reports [3]:

Representative Ron Paul asked questions about “inappropriate political interference” and “hidden transfers of resources” during a Feb. 24 hearing with Bernanke, and the allegations “must be fully investigated,” Frank said in a letter today to Bernanke and obtained by Bloomberg News.

Frank, 69, said the Fed must address the charges because “continued concern about political interference” with the Fed and “allegations about a lack of transparency.” Bernanke and other Fed officials are trying to fend off a measure offered by Paul, which passed the House in December, that would open the Fed to audits of interest-rate decisions.

“These specific allegations you’ve made I think are absolutely bizarre, and I have absolutely no knowledge of anything remotely like what you just described,” Bernanke told Paul, a Texas Republican who wrote the 2009 book “End the Fed,” during last week’s hearing.

Some more on Professor Auerbach's background, which lends substantial credibility to his allegations:

Auerbach worked for Henry Gonzalez, a former chairman of the House committee who died in 2000 and investigated the sale of U.S. arms to Iraq in the 1980s, before the Gulf War. Gonzalez said the Fed and other agencies initially tried to block his probe, according to a 1992 New York Times article.

Fed bank examiners in Atlanta failed to note $5.5 billion being funneled to Iraq from a local branch of an Italian bank, Auerbach, a critic of the central bank and former congressional economist, said in his book.

“The Federal Reserve’s ability to manage monetary policy in an effective manner depends, in large part, on its reputation for independence and integrity,” Frank, a Massachusetts Democrat, said in the letter. “A complete investigation of these charges is necessary to maintain both.”

We can't wait just how deep this particular rabbit hole ends up going, although we will be extremely shocked if the Fed ends up finding absolutely nothing implicating it in any new illegal (and treasonous) activity. Luckily, the Fed is perfectly transparent, so the general population can do a parallel query on its own. Oh wait...

Hi Newly

I agree with your thinking.However,what about wall street and the banks? They're not on food stamps.

Don't know if you read this article,but here's an example of people who are not accounted for in the numbers

The Safety Net
Living on Nothing but Food Stamps
By JASON DEPARLE and ROBERT M. GEBELOFF

CAPE CORAL, Fla. — After an improbable rise from the Bronx projects to a job selling Gulf Coast homes, Isabel Bermudez lost it all to an epic housing bust — the six-figure income, the house with the pool and the investment property.

Now, as she papers the county with résumés and girds herself for rejection, she is supporting two daughters on an income that inspires a double take: zero dollars in monthly cash and a few hundred dollars in food stamps.

With food-stamp use at a record high and surging by the day, Ms. Bermudez belongs to an overlooked subgroup that is growing especially fast: recipients with no cash income.

About six million Americans receiving food stamps report they have no other income, according to an analysis of state data collected by The New York Times. In declarations that states verify and the federal government audits, they described themselves as unemployed and receiving no cash aid — no welfare, no unemployment insurance, and no pensions, child support or disability pay.

Their numbers were rising before the recession as tougher welfare laws made it harder for poor people to get cash aid, but they have soared by about 50 percent over the past two years. About one in 50 Americans now lives in a household with a reported income that consists of nothing but a food-stamp card.

“It’s the one thing I can count on every month — I know the children are going to have food,” Ms. Bermudez, 42, said with the forced good cheer she mastered selling rows of new stucco homes.

Members of this straitened group range from displaced strivers like Ms. Bermudez to weathered men who sleep in shelters and barter cigarettes. Some draw on savings or sporadic under-the-table jobs. Some move in with relatives. Some get noncash help, like subsidized apartments. While some go without cash incomes only briefly before securing jobs or aid, others rely on food stamps alone for many months.

The surge in this precarious way of life has been so swift that few policy makers have noticed. But it attests to the growing role of food stamps within the safety net. One in eight Americans now receives food stamps, including one in four children.

Here in Florida, the number of people with no income beyond food stamps has doubled in two years and has more than tripled along once-thriving parts of the southwest coast. The building frenzy that lured Ms. Bermudez to Fort Myers and neighboring Cape Coral has left a wasteland of foreclosed homes and written new tales of descent into star-crossed indigence.

A skinny fellow in saggy clothes who spent his childhood in foster care, Rex Britton, 22, hopped a bus from Syracuse two years ago for a job painting parking lots. Now, with unemployment at nearly 14 percent and paving work scarce, he receives $200 a month in food stamps and stays with a girlfriend who survives on a rent subsidy and a government check to help her care for her disabled toddler.

“Without food stamps we’d probably be starving,” Mr. Britton said.

A strapping man who once made a living throwing fastballs, William Trapani, 53, left his dreams on the minor league mound and his front teeth in prison, where he spent nine years for selling cocaine. Now he sleeps at a rescue mission, repairs bicycles for small change, and counts $200 in food stamps as his only secure support.

“I’ve been out looking for work every day — there’s absolutely nothing,” he said.

A grandmother whose voice mail message urges callers to “have a blessed good day,” Wanda Debnam, 53, once drove 18-wheelers and dreamed of selling real estate. But she lost her job at Starbucks this year and moved in with her son in nearby Lehigh Acres. Now she sleeps with her 8-year-old granddaughter under a poster of the Jonas Brothers and uses her food stamps to avoid her daughter-in-law’s cooking.

“I’m climbing the walls,” Ms. Debnam said.

Florida officials have done a better job than most in monitoring the rise of people with no cash income. They say the access to food stamps shows the safety net is working.

“The program is doing what it was designed to do: help very needy people get through a very difficult time,” said Don Winstead, deputy secretary for the Department of Children and Families. “But for this program they would be in even more dire straits.”

But others say the lack of cash support shows the safety net is torn. The main cash welfare program, Temporary Assistance for Needy Families, has scarcely expanded during the recession; the rolls are still down about 75 percent from their 1990s peak. A different program, unemployment insurance, has rapidly grown, but still omits nearly half the unemployed. Food stamps, easier to get, have become the safety net of last resort.

“The food-stamp program is being asked to do too much,” said James Weill, president of the Food Research and Action Center, a Washington advocacy group. “People need income support.”

Food stamps, officially the called Supplemental Nutrition Assistance Program, have taken on a greater role in the safety net for several reasons. Since the benefit buys only food, it draws less suspicion of abuse than cash aid and more political support. And the federal government pays for the whole benefit, giving states reason to maximize enrollment. States typically share in other programs’ costs.

The Times collected income data on food-stamp recipients in 31 states, which account for about 60 percent of the national caseload. On average, 18 percent listed cash income of zero in their most recent monthly filings. Projected over the entire caseload, that suggests six million people in households with no income. About 1.2 million are children.

The numbers have nearly tripled in Nevada over the past two years, doubled in Florida and New York, and grown nearly 90 percent in Minnesota and Utah. In Wayne County, Mich., which includes Detroit, one of every 25 residents reports an income of only food stamps. In Yakima County, Wash., the figure is about one of every 17.

Experts caution that these numbers are estimates. Recipients typically report a small rise in earnings just once every six months, so some people listed as jobless may have recently found some work. New York officials say their numbers include some households with earnings from illegal immigrants, who cannot get food stamps but sometimes live with relatives who do.

Still, there is little doubt that millions of people are relying on incomes of food stamps alone, and their numbers are rapidly growing. “This is a reflection of the hardship that a lot of people in our state are facing; I think that is without question,” said Mr. Winstead, the Florida official.

With their condition mostly overlooked, there is little data on how long these households go without cash incomes or what other resources they have. But they appear an eclectic lot. Florida data shows the population about evenly split between families with children and households with just adults, with the latter group growing fastest during the recession. They are racially mixed as well — about 42 percent white, 32 percent black, and 22 percent Latino — with the growth fastest among whites during the recession.

The expansion of the food-stamp program, which will spend more than $60 billion this year, has so far enjoyed bipartisan support. But it does have conservative critics who worry about the costs and the rise in dependency.

“This is craziness,” said Representative John Linder, a Georgia Republican who is the ranking minority member of a House panel on welfare policy. “We’re at risk of creating an entire class of people, a subset of people, just comfortable getting by living off the government.”

Mr. Linder added: “You don’t improve the economy by paying people to sit around and not work. You improve the economy by lowering taxes” so small businesses will create more jobs.

With nearly 15,000 people in Lee County, Fla., reporting no income but food stamps, the Fort Myers area is a laboratory of inventive survival. When Rhonda Navarro, a cancer patient with a young son, lost running water, she ran a hose from an outdoor spigot that was still working into the shower stall. Mr. Britton, the jobless parking lot painter, sold his blood.

Kevin Zirulo and Diane Marshall, brother and sister, have more unlikely stories than a reality television show. With a third sibling paying their rent, they are living on a food-stamp benefit of $300 a month. A gun collector covered in patriotic tattoos, Mr. Zirulo, 31, has sold off two semiautomatic rifles and a revolver. Ms. Marshall, who has a 7-year-old daughter, scavenges discarded furniture to sell on the Internet.

They said they dropped out of community college and diverted student aid to household expenses. They received $150 from the Nielsen Company, which monitors their television. They grew so desperate this month, they put the breeding services of the family Chihuahua up for bid on Craigslist.

“We look at each other all the time and say we don’t know how we get through,” Ms. Marshall said.

Ms. Bermudez, by contrast, tells what until the recession seemed a storybook tale. Raised in the Bronx by a drug-addicted mother, she landed a clerical job at a Manhattan real estate firm and heard that Fort Myers was booming. On a quick scouting trip in 2002, she got a mortgage on easy terms for a $120,000 home with three bedrooms and a two-car garage. The developer called the floor plan Camelot.

“I screamed, I cried,” she said. “I took so much pride in that house.”

Jobs were as plentiful as credit. Working for two large builders, she quickly moved from clerical jobs to sales and bought an investment home. Her income soared to $180,000, and she kept the pay stubs to prove it. By the time the glut set in and she lost her job, the teaser rates on her mortgages had expired and her monthly payments soared.

She landed a few short-lived jobs as the industry imploded, exhausted her unemployment insurance and spent all her savings. But without steady work in nearly three years, she could not stay afloat. In January, the bank foreclosed on Camelot.

One morning as the eviction deadline approached, Ms. Bermudez woke up without enough food to get through the day. She got emergency supplies at a food pantry for her daughters, Tiffany, now 17, and Ashley, 4, and signed up for food stamps. “My mother lived off the government,” she said. “It wasn’t something as a proud working woman I wanted to do.”

For most of the year, she did have a $600 government check to help her care for Ashley, who has a developmental disability. But she lost it after she was hospitalized and missed an appointment to verify the child’s continued eligibility. While she is trying to get it restored, her sole income now is $320 in food stamps.

Ms. Bermudez recently answered the door in her best business clothes and handed a reporter her résumé, which she distributes by the ream. It notes she was once a “million-dollar producer” and “deals well with the unexpected.”

“I went from making $180,000 to relying on food stamps,” she said. “Without that government program, I wouldn’t be able to feed my children.”

Matthew Ericson contributed research.

Published on zero hedge (http://www.zerohedge.com)

Home > The Next Shoes To Drop In Commerial Real Estate - Part 1
The Next Shoes To Drop In Commerial Real Estate - Part 1
By Tyler Durden
Created 12/06/2009 - 15:04

Everyone is now well aware of the plight of Stuy Town, which has become a set fixture on the front page of the daily press, and is expected to default on its underlying borrowings within a few months at the most. What will happen to the controlling equity, and the tenants at the multiapartment complex, is unknown. It is no surprise that this will be yet another epic failure for the existing owner, Tishman Speyer, which after gobbling up property after property at the peak of the housing market, is all too aware that it is only a matter of time before control is wrested from it not only in the case of Stuy Town but many of its other properties.

And even though everyone "knows" the state of commercial real estate is in free fall, few have been able to pin it down to specific buildings, as property-level data is still very expensive and more often than not, proprietary. In order to bring the full degree of CRE collapse closer to home, and to provide some leads to our MSM-originating readers, we present a detailed analysis of some of the most impacted CRE properties that have yet to make headline news. For that purpose we combed through BarCap's CMBS remittance data for CMBX 4 (2007 vintage), which is broadly considered the peak year for commercial real estate deals and also the very peak of the housing bubble. We expected to find some of the juiciest CRE failures to be in this loan set. We were not disappointed.

* 200
* 666 Fifth
* ADD
* America
* analysis
* Bank of America
* California
* CapEx
* Capture
* Cash
* Citigroup
* CMBS
* CMBX
* Collapse
* Commercial Mortgage-Backed Securities
* Commercial Real Estate
* CRE
* Debt
* Decrease
* default
* Dubai
* Energy
* Factors
* Failures
* funding
* Housing
* Housing Bubble
* Housing Market
* ING
* internet
* Key
* Las Vegas
* Lehman
* Lehman Brothers
* loans
* Market Conditions
* Millennium
* Millennium Partners
* mortgage
* NRA
* OCC
* Remittance
* research
* Reserves
* Revenue
* REVPAR
* SPA
* Special Servicing
* taxes
* TIC
* Tishman Speyer
* US
* valuation
* Wachovia
* Wall Street

Source URL: http://www.zerohedge.com/article/next-shoes-drop-commerial-real-estate-part-1

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Bodylastics Newsletter November 2009

Company News

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Thanks To Geithner, AIG Was Forced To Pay 100% To Creditors - With OUR Money.
By Susie Madrak

timmeh_65a6d.jpg

Matt Taibbi says we should run Elizabeth Warren for president in 2012, and the more I read about how the since-appointed members of the Obama administration handled the financial crisis, the more I like the idea:

Oct. 27 (Bloomberg) -- In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb.

Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter.

[...] Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations.

CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks.

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.

The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.

[...] A spokeswoman for Geithner, now secretary of the Treasury Department, declined to comment. Jack Gutt, a spokesman for the New York Fed, also had no comment.

One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.

In other words, Geithner used taxpayer money from one big disaster to paper over the fact that all the other parties were bankrupt, too - and probably still are, no matter what you read in the papers. Wait until the commercial market crashes.

Huge commercial real estate lender may file bankruptcy, heightens meltdown fears
Douglas McIntyreDouglas McIntyre RSS Feed
Oct 25th 2009 at 12:00PM
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Filed under: Company News, Earnings, Goldman Sachs , Bank of America
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Analysts have been warning for months that commercial real estate would be the next financial tsunami. Vacancy rates have hurt landlord receipts. Tenants are able to force lower rents in negotiations due to the rising vacancies. Some tenants are filing bankruptcy or walking away from leases completely.

Commercial real estate losses have already started to show up in the financial statements of the largest banks. Some of the 106 banks closed this year under the supervision of the FDIC had tremendous losses on their commercial real estate portfolios.

In the midst of rapidly falling commercial real estate values, one of the country's largest real estate lenders, Capmark, will probably file for bankruptcy in the next few days according to The Wall Street Journal. The paper writes: "In 2006, a group led by KKR & Co., Goldman Sachs Capital Partners and Five Mile Capital Partners acquired the lender GMAC LLC's commercial-real estate business and renamed it Capmark."

The news of Capmark's demise could heighten fears that commercial real estate losses among banks will cause another significant wave of writedowns at major financial firms that have already had to take one round of government aid. GE (GE) and Bank of America (BAC) posted large commercial real estate losses in their third-quarter earnings.

Mounting commercial real estate losses also mean that the FDIC's ability to cover deposits at failing banks will be stretched more than it already is. The agency recently suggested that it may bring in $45 billion by implementing an advance collection of fees that banks would pay to the FDIC between now and 2012.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Why Did U.S. SDR Holdings Increase Five Fold In The Last Week Of August?
By Tyler Durden
Created 10/12/2009 - 15:30

With everyone lately focused on China's foreign reserve position, analysts have forgotten that America also has an International Reserve account consisting of foreign currency positions, as well as gold reserves and equivalents. And while the total combined holdings as of the most recently reported period are a joke compared to China's $2+ trillion, the most recent number of $133.6 billion [1] does raise red flags, particularly when one traces this number's level throughout the year.

We present a graphic representation of the US International Reserve Position over the past year:

[2]

The big question mark at the end of August is when the U.S. International Reserve Position increased by almost 50%. The reason for this: a near quintupling of S.D.R. holdings on the U.S. balance sheet in the span of one week - from August 21 to August 28.

Note the SDR position as disclosed on August 21 [3]:

[4]

And here is the comparable reserve asset balance on August 28 [5]:

[6]

The SDR balance increased by 500% practically overnight and has stayed that way ever since.

Now as many readers are aware SDRs have been the IMF's [7]way to provide a super-reserve currency, formed in the post-Bretton Woods world. As the IMF itself discloses, the SDR value is determined based on a basket of currencies:

The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-value [8] of the SDR is posted daily on the IMF’s website. It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

The basket composition is reviewed every five years by the Executive Board to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems. In the most recent review [9] (in November 2005), the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies which were held by other members of the IMF. These changes became effective on January 1, 2006. The next review will take place in late 2010.

By purchasing $40 billion in SDRs virtually overnight, what the Fed has done is to increase the value of the entire basket pro-rata, while in the process reducing the actual value of the dollar (which is a weighted constituent of the SDR basket). This was an operation to reduce the dollar's value: pure and simple. In many ways it explains why the DXY has continued its straight one way decline since the beginning of September, when many pundits assumed the market was finally going to tank on profit taking after Labor day. By performing this dollar adverse transaction, the Fed sent a loud and clear signal what the Fed was going to do going forward vis-a-vis the i) dollar and ii) its derivative, the stock market.

And what is worse, this is not a roundabout or circuitous way of devaluing the dollar: this is head on intervention. It is one thing to print trillions of MBS and Agencies and to monetize Treasuries, where one could say Tim Geithner's claim that the U.S. is for a strong dollar, and the dollar is only weak as a function of supporting housing prices. That could potentially fly as an explanation. However, when the Fed is actively and purposefully destroying the dollar's worth via transactions such as material SDR purchases, then it truly demonstrates Geithner's statement as a bold faced lie to the American public. When will Mr. Geithner be finally taken to task for his repeated fabrications of reality and intent?

Update:

The action seems to have been a portion of a global reallocation of SDR's by the IMF which made the SDR outstandings to increase by a massive amount: "With a general SDR allocation taking effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs will increase from SDR 21.4 billion to SDR 204.1 billion (currently equivalent to about $317 billion)."

And here is the explanation for the justification of the SDR expansion [10]:

Q. Why was the 2009 general SDR allocation necessary?

A. The general allocation of US$250 billion implemented on August 28, 2009 was the response to the call by the G-20 Heads of State and the IMF's International Monetary and Financial Committee (IMFC) at their respective meetings in April 2009.

• It is a prime example of a cooperative monetary response to the global financial crisis: by providing significant unconditional financial resources to liquidity constrained countries, it will smooth the need for adjustment and add to the scope for expansionary policies, where needed in the face of deflation risks.

• This is particularly important for emerging market and low-income countries that have been hit hard by the current global economic crisis. Over the longer term, the allocation could also reduce the need for pursuing destabilizing and costly reserve accumulation policies that could contribute to global imbalances.

And some speculation on what this action will do to the global economy:

Q. Will the SDR allocation be inflationary?

A. Not likely.

• The size of the allocation is small relative to global GDP (? of 1 percent), trade (less than 1 percent), and reserves (3 percent).

• With a global output gap projected to persist through 2014—by which point any expansionary impact of early spending of the SDR allocation should have dissipated—the allocation is unlikely to generate significant inflationary pressure.

Last but not least, the US was of course expected to bear the brunt of this reallocation, responsible for purchasing three times as much [11](SDR30 billion) as the second largest quota allocated country: Japan (SDR11 billion). China is far in the distance at SDR 6 billion. In essence: the monetary community increased its global liquidity position, by assuming that the U.S. is still the defacto reserve currency, and forcing it to take the majority of the devaluation hit relative to all other IMF constituents.

Well done, Ben.

Exclusive – Wells Fargo’s Commercial Portfolio is a ticking time bomb
September 17, 2009 – 11:12 am
Wells Fargo’s Commercial Portfolio is a ticking time bomb
By Teri Buhl
In order to sort through the disaster that is Wells Fargo’s commercial loan portfolio, the bank has hired help from outside experts to pour over the books… and they are shocked with what they are seeing. Not only do the bank’s outstanding commercial loans collectively exceed the property values to which they are attached, but derivative trades leftover from its acquisition of Wachovia are creating another set of problems for the already beleaguered San Francisco-based megabank,
Wachovia, which Wells purchased last fall as it teetered on the brink of collapse, was so desperate to increase revenue in the last few years of its existence that it underwrote loans with shoddy standards and paid off traders to take them off their books.
According to sources currently working out these loans at Wells Fargo and confirmed by Dan Alpert of Westwood Capital, when selling tranches of commercial mortgage-backed securities below the super senior tranche, Wachovia promised to pay the buyer’s risk premium by writing credit default swap contracts against these subordinate bonds. Should the junior tranches eventually default, then the bank is on the hook.
Alpert says in reference to how he saw CMBS trades get done, “The Wachovia guys would say ‘We’ll just take back that silly credit risk you’re worried about.’ Of course that was a nice increase to earnings when they got the security sold. The bank made money at the time.”
When asked if Wells Fargo was prepared to pay out those credit default swaps if these securities default, a spokeswoman told Bank-Impode.com,” In keeping with our strong risk discipline, we continually monitor all of our outstanding derivative positions. We have provided extensive transparent disclosures on our derivatives in our 2008 annual report beginning on page 132.” The real question is, however, was enough disclosed to investors about this practice when Wells purchased Wachovia?
One top hedge fund manager who has experience in outing accounting fraud told Bank-Implode “They needed to estimate that CDS liability upon the purchase of Wachovia. If they didn’t, they’ve committed fraud.”
Since there is no way to track the amount of contracts Wachovia wrote due to the lack of a central clearinghouse for credit default swaps , the next best option for analysts is to examine how the loans that backed the mortgage securities are performing. An in-depth review by Bank-Implode shows significant weakness regardless of Wells Fargo’s recent claim to the Wall Street Journal that the merger integration is on track. [ http://online.wsj.com/article/SB125304082083513011.html ]
According to the New York Post, Harry Markopolos, the whistleblower on Bernie Madoff, gave a speech this summer at the Greek Orthodox Church in Southampton predicting more major scandals will soon be revealed about the unregulated, $600 trillion, credit default swap market. Ouch!
One senior member of Wells Fargo’s commercial loan group who deals directly with the quandary, who spoke on the condition of anonymity, says, “One third of this commercial portfolio we took on from Wachovia is impaired and needs to be completely rewritten. I’ve just hired five more guys and we can’t keep up with the volume of defaults. Southeast Florida and Tampa are serious trouble spots.”
Wachovia’s third quarter 2008 filings, which reflect their assets three days before Wells Fargo agreed to the acquisition, shows the bank held a whopping $230 billion in its commercial loan portfolio. Current figures show Wells’ 90-day defaults on its commercial portfolio are rapidly growing. According to data from WLMlab.com which tracks financial numbers that Wells files with its regulators, the bank’s Construction and Development portfolio, with $38.2 billion in loans, is defaulting at a level eight times greater than the rest of the nation’s banks, as of June 30th. [Link: http://www.wlmlab.com/bkLP.asp?inst=HC1120754&loan=lnrecons&met=loan]. Alarming right?
Wachovia commercial loan officers who spoke to Bank Implode say that the bank specialized in underwriting short-term loans up to five years during the credit boom of 2005-2007. The standard terms for such loans included interest-only payments on a floating rate with a huge balloon payment in the final year of the loan. If these loans cannot be refinanced, more waves of defaults are inevitable.
According to Susan Smith, author of a recent PriceWaterhouseCoopers investor survey about the state of the CMBS market, more trouble is brewing. “It’s going to be very difficult for these loans to get refinancing when the market value is going down and fundamentals are deteriorating,” says Smith. According to data from her report, problems in the South Florida region, to which Wachovia had large exposure, are amplified by an increasing overall cap rate, up 80 basis points from last year, and declining rent prices. The OCR is the perception of risk investors see. The overall cap rate goes up when the overall risk in the market is up.
Given the warning signs on the horizon, it’s plausible that Wells Fargo would try to unload some of these troubled loans on the secondary market. But according to multiple private investment shops set up to invest in distressed debt, Wells isn’t selling them. If Wells were to sell the loans, not only would the bank have to book a loss, but would also have to pay out those pesky credit default swaps.
Instead of selling the loans, sources inside Wells commercial group told Bank Implode that they have been instructed to modify loans for customers in default by adjusting the interest rate, but not change the maturity date. Why? According to Meredith Whitney, founder and CEO of Meredith Whiney Advisory Group, Wells is working an accounting game of “extend and pretend.”
“If the bank doesn’t change a maturity date, then it does not have to take an impairment charge on its books, which would affect earnings,” says Whitney. If the loans don’t look like they are impaired, the rating agencies then do not have to downgrade the billions of CMBS that Wachovia sold to other banks and investors. Moody’s backed out of such a downgrade last month, after it previously warned downgrades were coming on $4.1 billion of Wachovia Bank commercial mortgage securities because it now expects principal and interest payments to continue [link: http://online.wsj.com/article/SB125172997776872671.html ].
Adds Whitney “We’ve seen Wells Fargo play modification games with its own loans. Why wouldn’t they do it with the loans they took on from Wachovia?” On Tuesday on CNBC, Whitney said again “I don’t know if those commercial modifications are going to work.” [link: http://www.cnbc.com/id/15840232?video=1254430805&play=1 ]
In response to analyst expressing doubts that the near $40 billion structured into the purchase of Wachovia for losses in its total portfolio will be enough CEO John Stumpf spoke out. Stumpf told investors at the Barclays conference this week, Wells Fargo has used $2.2 billion in credits for losses from Wachoiva’s commercial mortgages, or one-fifth of the $10.4 billion in total losses it expects from those loans. http://online.wsj.com/article/SB125312018580716543.html)
Unfortunately for investors, banks hold CDS liabilities off balance sheet and do not recognize them as a loss until they actually have to pay it. Wachovia at least disclosed in its third quarter 2008 10-K on note 15, that credit derivatives are a regular part of how they finance commercial activities, and add that such instruments ‘don’t meet the criteria for designation as an accounting hedge’.
Given that a specific number for CDS exposure is not yet tenable, it’s hard to say how many billions are at risk. Yet most market players who follow this bank said when those CMBS de-lever and the derivatives come due, it will be a problem for which Wells is absolutely not adequately capitalized.
To give Wells Fargo credit, it might not even know the size of the problem. Bank Implode could not find an analyst who covers the stock to say Wells actually has enough loss reserves built in for it, but regardless the analysts are very concerned about the bank’s health based on the data that they do see. Both Whitney and Paul Miller of FBR Capital Markets both have gone on-air and written in notes [http://bankimplode.com/blog/2009/08/07/is-it-time-to-short-well/] to clients that Wells’ loan loss reserves are not enough to handle coming impairments to residential loans. Miller has a recommended stock price of $15 while WFC is currently trading around $29.
So how can Wells really have enough capital to handle the liability of credit derivatives that will likely come due within the year? As we watch more and more of the junior tranches of commercial mortgage back securities Wachovia sold become worthless how will Wells Fargo afford to pay for the risk premiums Wachovia promised they’d take care of if the loans blew up? From all indications, the bank cannot meet these obligations unless it raises more capital, sells good assets for a loss, or put more of that TARP money to use that CEO John Stumpf says is coming back to the taxpayer. So much for “earning our way out” of the financial crisis.
[Additional reporting by Chris Gillick]
Editors Note: This report holds no relevant stock positions

By Teri Buhl for BankImplode.com

In order to sort through the disaster that is Wells Fargo’s (quote: WFC) commercial loan portfolio, the bank has hired help from outside experts to pour over the books… and they are shocked with what they are seeing. Not only do the bank’s outstanding commercial loans collectively exceed the property values to which they are attached, but derivative trades leftover from its acquisition of Wachovia are creating another set of problems for the already beleaguered San Francisco-based megabank.

Wachovia, which Wells purchased last fall as it teetered on the brink of collapse, was so desperate to increase revenue in the last few years of its existence that it underwrote loans with extremely shoddy standards and paid traders to take them off their books.

According to sources currently working out these loans at Wells Fargo, when selling tranches of commercial mortgage-backed securities below the super senior tranche, Wachovia promised to pay the buyer’s risk premium by writing credit default swap contracts against these subordinate bonds. Dan Alpert of Westwood Capital says these were practices that he saw going on in the market at large.

Keep in mind, should the junior tranches eventually default, then the bank is on the hook.

Alpert says in reference to how he saw CMBS trades get done, “These guys would say ‘We’ll just take back that silly credit risk you’re worried about.’ Of course that was a nice increase to earnings when they got the security sold. The bank made money at the time.”

When asked if Wells Fargo was prepared to pay out those credit default swaps if these securities default, a spokeswoman told Bank-Impode.com,” In keeping with our strong risk discipline, we continually monitor all of our outstanding derivative positions. We have provided extensive transparent disclosures on our derivatives in our 2008 annual report beginning on page 132.” The real question is, however, was enough disclosed to investors about this practice when Wells purchased Wachovia?

One top hedge fund manager who has experience in outing accounting fraud told Bank-Implode “They needed to estimate that CDS liability upon the purchase of Wachovia. If they didn’t, they’ve committed fraud.”

Since there is no way to track the amount of contracts Wachovia wrote due to the lack of a central clearinghouse for credit default swaps , the next best option for analysts is to examine how the loans that backed the mortgage securities are performing. An in-depth review by Bank-Implode shows significant weakness regardless of Wells Fargo’s recent claim to the Wall Street Journal that the merger integration is on track.

According to the New York Post, Harry Markopolos, the most prominent whistleblower on Bernie Madoff, gave a speech this summer at the Greek Orthodox Church in Southampton predicting more major scandals will soon be revealed about the unregulated, $600 trillion, credit default swap market that Wachovia/Wells is playing in.

One senior member of Wells Fargo’s commercial loan group who deals directly with the quandary, who spoke on the condition of anonymity, said, “One third of this commercial portfolio we took on from Wachovia is impaired and needs to be completely rewritten. I’ve just hired five more guys and we can’t keep up with the volume of defaults. Southeast Florida and Tampa are serious trouble spots.”

Wachovia’s third quarter 2008 filings, which reflect their assets three days before Wells Fargo agreed to the acquisition, shows the bank held a whopping $230 billion in its commercial loan portfolio. Current figures show Wells’ 90-day defaults on its commercial portfolio are rapidly growing. According to data from WLMlab.com which tracks financial numbers that Wells files with its regulators, the bank’s Construction and Development portfolio, with $38.2 billion in loans, is defaulting at a level eight times greater than the rest of the nation’s banks, as of June 30th. Alarming, right?

Wachovia commercial loan officers who spoke to BankImplode say that the bank specialized in underwriting short-term loans up to five years during the credit boom of 2005-2007. The standard terms for such loans included interest-only payments on a floating rate with a huge balloon payment in the final year of the loan. If these loans cannot be refinanced, more waves of defaults are inevitable.

According to Susan Smith, author of a recent PriceWaterhouseCoopers investor survey about the state of the CMBS market, more trouble is brewing. “It’s going to be very difficult for these loans to get refinancing when the market value is going down and fundamentals are deteriorating,” says Smith. According to data from her report, problems in the South Florida region, to which Wachovia had large exposure, are amplified by an increasing overall cap rate (OCR), up 80 basis points from last year, and declining rent prices. (The OCR is the perception of risk investors see. The overall cap rate goes up when the overall risk in the market is up.)

Given the warning signs on the horizon, it’s plausible that Wells Fargo would try to unload some of these troubled loans on the secondary market. But according to multiple private investment shops set up to invest in distressed debt, Wells isn’t selling them. If Wells were to sell the loans, not only would the bank have to book a loss, but would also have to pay out on those pesky credit default swaps.

Instead of selling the loans, sources inside Wells commercial group told BankImplode that they have been instructed to modify loans for customers in default by adjusting the interest rate, but not change the maturity date. Why? According to Meredith Whitney, founder and CEO of Meredith Whiney Advisory Group, Wells is working an accounting game of “extend and pretend.”

“If the bank doesn’t change a maturity date, then it does not have to take an impairment charge on its books, which would affect earnings,” says Whitney. If the loans don’t look like they are impaired, the rating agencies then do not have to downgrade the billions of CMBS that Wachovia sold to other banks and investors. Moody’s backed out of such a downgrade last month, after it previously warned downgrades were coming on $4.1 billion of Wachovia Bank commercial mortgage securities because it now expects principal and interest payments to continue.

Adds Whitney “We’ve seen Wells Fargo play modification games with its own loans. Why wouldn’t they do it with the loans they took on from Wachovia?” On Tuesday on CNBC, Whitney said again “I don’t know if those commercial modifications are going to work.”

In response to analyst expressing doubts that the near $40 billion structured into the purchase of Wachovia for losses in its total portfolio will be enough, CEO John Stumpf spoke out. Stumpf told investors at the Barclays conference this week, Wells Fargo has used $2.2 billion in credits for losses from Wachoiva’s commercial mortgages, or one-fifth of the $10.4 billion in total losses it expects from those loans.

Unfortunately for investors, banks hold CDS liabilities off balance sheet and do not recognize them as a loss until they actually have to pay it. Wachovia at least disclosed in its third quarter 2008 10-K (on note 15) that credit derivatives are a regular part of how they finance commercial activities, and add that such instruments ‘don’t meet the criteria for designation as an accounting hedge’.

Given that a specific number for CDS exposure is not yet tenable, it’s hard to say how many billions are at risk. Yet most market players who follow this bank said when those CMBS de-lever and the derivatives come due, it will be a problem for which Wells is absolutely not adequately capitalized.

To give Wells Fargo credit, it might not even know the size of the problem. BankImplode could not find an analyst who covers the stock to say Wells actually has enough loss reserves built in for it, but regardless the analysts are very concerned about the bank’s health based on the data that they do see. Both Whitney and Paul Miller of FBR Capital Markets both have gone on-air and written in notes to clients that Wells’ loan loss reserves are not enough to handle coming impairments to residential loans. Miller has a recommended stock price of $15 while WFC is currently trading around $29.

So could Wells really have enough capital to handle the liability of credit derivatives that will likely come due within the year? As we watch more and more of the junior tranches of commercial mortgage back securities Wachovia sold become worthless, how will Wells Fargo afford to pay for the risk premiums Wachovia promised they’d cover of if the loans blew up? From all indications, the bank cannot meet these obligations unless it raises more capital, sells good assets for a loss, or puts more of that TARP money to use instead of sending it back to taxpayers, as CEO John Stumpf has promised. So much for “earning our way out” of the financial crisis.

[

REITs' Rise Sets Back Day Traders
Wall Street Journal




By ANTON TROIANOVSKI

For months, "day traders" and hedge funds have locked onto real-estate companies' stocks to make short-term market bets, causing volatility and adding to turmoil in the industry. But after several large stock offerings, the conditions that made such trades profitable may be shifting.

A year ago, the day-trading of real-estate stocks might have seemed like an oxymoron. Real-estate investment trusts posted slow and steady growth, paying out most of their rental income as dividends. The stocks rarely made major moves.

That changed in September, when the credit crunch turned into a crisis, commercial real-estate values began to plunge and some once-strong REITs were unable to refinance debt. It was an environment ripe for some hedge funds, which were becoming big participants in the REIT market, taking short positions on the belief that many REITs would fail. That caused volatility in the sector, attracting day traders who popped in and out of a stock based on short-term trends and news.

One measure of the volatility: The Dow Jones All Equity REIT Total Return Index swung up or down by 5% or more in a single day 35 times in the fourth quarter of last year, 29 times in the first quarter of this year, and 10 times in April. In the index's first 18 years, from January 1990 to December 2007, there were just three days in which the index swung by more than 5%.

Trading volume has also been uncommonly heavy. The daily volume for the ProShares UltraShort Real Estate exchange-traded fund, an investment vehicle that lets traders double down on the bet that real-estate stocks are headed lower, jumped from an average of four million shares in August to nine million in September, and then soared to 32 million shares in April.

"It's not your father's REIT industry right now," said Matthew Gilman, head of Starwood Real Estate Securities LLC in Greenwich, Conn. "It's really quite breathtaking."

Steve Buller, who runs the country's longest-operating real-estate mutual fund for Fidelity Investments, calls the volatility "unbelievably disturbing." He adds, "This is not a biotech or technology company. This is ownership of buildings, collecting the rents -- dull, boring type stuff."

Investors betting against real estate are starting to experience some setbacks as stock prices rise after several stock offerings. In recent weeks, REITs have successfully sold more than $6 billion in new shares and will use much of the proceeds to pay down billions of dollars in loans.

Simon Property Group Inc., one of the healthiest REITs, raised $540 million, while ProLogis, one of the most indebted, raised $1.2 billion.

While shareholders in a company typically frown on new issues because they dilute their holdings, recent REIT stock issues have boosted share prices. Shares of highly levered REITs on average rose 6% the day after they sold stock and were up 24% two weeks later, according to Macquarie Capital.

REIT indexes also are up, though below their 2009 start. The Dow Jones Equity All REIT Index is up 45% since March 6.

Participants in recent REIT stock sales say short sellers were prevented from buying stock, forcing them to settle bets in the open market at higher prices.

Money for Nothing
By PAUL KRUGMAN

On July 15, 2007, The New York Times published an article with the headline “The Richest of the Rich, Proud of a New Gilded Age.” The most prominently featured of the “new titans” was Sanford Weill, the former chairman of Citigroup, who insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.

Soon after that article was printed, the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. Even if we manage to avoid a repeat of the Great Depression, the world economy will take years to recover from this crisis.

All of which explains why we should be disturbed by an article in Sunday’s Times reporting that pay at investment banks, after dipping last year, is soaring again — right back up to 2007 levels.

Why is this disturbing? Let me count the ways.

First, there’s no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.

Remember that the gilded Wall Street of 2007 was a fairly new phenomenon. From the 1930s until around 1980 banking was a staid, rather boring business that paid no better, on average, than other industries, yet kept the economy’s wheels turning.

So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.

Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of “good” financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?

Still, you might argue that we have a free-market economy, and it’s up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”

I’m not just talking about the $600 billion or so already committed under the TARP. There are also the huge credit lines extended by the Federal Reserve; large-scale lending by Federal Home Loan Banks; the taxpayer-financed payoffs of A.I.G. contracts; the vast expansion of F.D.I.C. guarantees; and, more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.

One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it’s dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we’re seeing similar rewards offered to people who can play their risky games with federal backing.

So what’s going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?

No, the real reason financial firms are paying big again is simply because they can. They’re making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it’s eat, drink and be merry, for tomorrow you may be regulated.

Or maybe not. There’s a palpable sense in the financial press that the storm has passed: stocks are up, the economy’s nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.

We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.

April 21, 2009, 8:13 am
Bank Profits Appear Out of Thin Air

In the latest round of earnings, Wall Street banks all trotted out better-than-expected results. But in each case, a sleight of hand was masking the real numbers and investors weren’t fooled, Andrew Ross Sorkin writes in his latest DealBook column.

Why, Mr. Sorkin wonders, can’t they give the public what it wants: simple math?

And investor skepticism, he says, is only likely to deepen when Washington’s releases the results of its latest idea to help shore up the troubled financial system: the banking stress-test.

Read the whole column here, or after the jump.

Bank Profits Appear Out of Thin Air
By ANDREW ROSS SORKIN

This is starting to feel like amateur hour for aspiring magicians.

Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.

But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.

“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

Investors reacted by throwing tomatoes. Bank of America’s stock plunged 24 percent, as did other bank stocks. They’ve had enough.

Why can’t anybody read the room here? After all the financial wizardry that got the country — actually, the world — into trouble, why don’t these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.

What’s particularly puzzling is why the banks don’t just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That’s the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates.

“If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit,” said Professor Finkelstein of the Tuck School. “And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.’s that populate corner offices?”

But maybe now the banks are simply following the lead of Washington, which keeps trotting out the latest idea for shoring up the financial system.

The latest big idea is the so-called stress test that is being applied to the banks, with results expected at the end of this month.

This is playing to a tough crowd that long ago decided to stop suspending disbelief. If the stress test is done honestly, it is impossible to believe that some banks won’t fail. If no bank fails, then what’s the value of the stress test? To tell us everything is fine, when people know it’s not?

“I can’t think of a single, positive thing to say about the stress test concept — the process by which it will be carried out, or outcome it will produce, no matter what the outcome is,” Thomas K. Brown, an analyst at

Bankstocks.com, wrote. “Nothing good can come of this and, under certain, non-far-fetched scenarios, it might end up making the banking system’s problems worse.”

The results of the stress test could lead to calls for capital for some of the banks. Citi is mentioned most often as a candidate for more help, but there could be others.

The expectation, before Monday at least, was that the government would pump new money into the banks that needed it most.

But that was before the government reached into its bag of tricks again. Now Treasury, instead of putting up new money, is considering swapping its preferred shares in these banks for common shares.

The benefit to the bank is that it will have more capital to meet its ratio requirements, and therefore won’t have to pay a 5 percent dividend to the government. In the case of Citi, that would save the bank hundreds of millions of dollars a year.

And — ta da! — it will miraculously stretch taxpayer dollars without spending a penny more.

Green Shoots and Glimmers
By PAUL KRUGMAN

Ben Bernanke, the Federal Reserve chairman, sees “green shoots.” President Obama sees “glimmers of hope.” And the stock market has been on a tear.

So is it time to sound the all clear? Here are four reasons to be cautious about the economic outlook.

1. Things are still getting worse. Industrial production just hit a 10-year low. Housing starts remain incredibly weak. Foreclosures, which dipped as mortgage companies waited for details of the Obama administration’s housing plans, are surging again.

The most you can say is that there are scattered signs that things are getting worse more slowly — that the economy isn’t plunging quite as fast as it was. And I do mean scattered: the latest edition of the Beige Book, the Fed’s periodic survey of business conditions, reports that “five of the twelve Districts noted a moderation in the pace of decline.” Whoopee.

2. Some of the good news isn’t convincing. The biggest positive news in recent days has come from banks, which have been announcing surprisingly good earnings. But some of those earnings reports look a little ... funny.

Wells Fargo, for example, announced its best quarterly earnings ever. But a bank’s reported earnings aren’t a hard number, like sales; for example, they depend a lot on the amount the bank sets aside to cover expected future losses on its loans. And some analysts expressed considerable doubt about Wells Fargo’s assumptions, as well as other accounting issues.

Meanwhile, Goldman Sachs announced a huge jump in profits from fourth-quarter 2008 to first-quarter 2009. But as analysts quickly noticed, Goldman changed its definition of “quarter” (in response to a change in its legal status), so that — I kid you not — the month of December, which happened to be a bad one for the bank, disappeared from this comparison.

I don’t want to go overboard here. Maybe the banks really have swung from deep losses to hefty profits in record time. But skepticism comes naturally in this age of Madoff.

Oh, and for those expecting the Treasury Department’s “stress tests” to make everything clear: the White House spokesman, Robert Gibbs, says that “you will see in a systematic and coordinated way the transparency of determining and showing to all involved some of the results of these stress tests.” No, I don’t know what that means, either.

3. There may be other shoes yet to drop. Even in the Great Depression, things didn’t head straight down. There was, in particular, a pause in the plunge about a year and a half in — roughly where we are now. But then came a series of bank failures on both sides of the Atlantic, combined with some disastrous policy moves as countries tried to defend the dying gold standard, and the world economy fell off another cliff.

Can this happen again? Well, commercial real estate is coming apart at the seams, credit card losses are surging and nobody knows yet just how bad things will get in Japan or Eastern Europe. We probably won’t repeat the disaster of 1931, but it’s far from certain that the worst is over.

4. Even when it’s over, it won’t be over. The 2001 recession officially lasted only eight months, ending in November of that year. But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there’s every reason to believe that it will happen this time too. Don’t be surprised if unemployment keeps rising right through 2010.

Why? “V-shaped” recoveries, in which employment comes roaring back, take place only when there’s a lot of pent-up demand. In 1982, for example, housing was crushed by high interest rates, so when the Fed eased up, home sales surged. That’s not what’s going on this time: today, the economy is depressed, loosely speaking, because we ran up too much debt and built too many shopping malls, and nobody is in the mood for a new burst of spending.

Employment will eventually recover — it always does. But it probably won’t happen fast.

So now that I’ve got everyone depressed, what’s the answer? Persistence.

History shows that one of the great policy dangers, in the face of a severe economic slump, is premature optimism. F.D.R. responded to signs of recovery by cutting the Works Progress Administration in half and raising taxes; the Great Depression promptly returned in full force. Japan slackened its efforts halfway through its lost decade, ensuring another five years of stagnation.

The Obama administration’s economists understand this. They say all the right things about staying the course. But there’s a real risk that all the talk of green shoots and glimmers will breed a dangerous complacency.

So here’s my advice, to the public and policy makers alike: Don’t count your recoveries before they’re hatched.

Good luck with SRS Joe.Currently I'm attempting to ride SRS to zero so it can put me out of my misery.The way it's going I expect some time next week would be realistic.I will be accepting condolences at that time

Big Profits, Big Questions
By WILLIAM D. COHAN

AT its nadir last November, Goldman Sachs’s share price closed at $52, nearly 80 percent below its high of around $250. By then, many of its chief competitors — Bear Stearns, Lehman Brothers, Merrill Lynch and UBS — were dead or shadows of their former selves. Even Morgan Stanley, long considered Goldman’s archrival, had nearly died. But somehow, less than five months later, on the heels of a surprisingly profitable first quarter of fiscal 2009, Goldman Sachs is once again riding high, with its stock closing Tuesday at $115 a share.

The question many Wall Streeters are asking is just how Goldman once again snatched victory from the jaws of defeat. Many point to Goldman’s expert manipulation of the levers of power in Washington. Since Robert Rubin, its former chairman, joined the Clinton administration in 1993, first as the director of the National Economic Council and then as Treasury secretary, the firm has come to be known, as a headline in this newspaper last October put it, as “Government Sachs.”

How can one ignore, the conspiracy-minded say, the crucial role that Henry Paulson, who followed Mr. Rubin to the top at both Goldman and Treasury, played in the decisions to shutter Bear Stearns, to force Lehman Brothers to file for bankruptcy and to insist that Bank of America buy Merrill Lynch at an inflated price? David Viniar, Goldman’s chief financial officer, acknowledged in a conference call yesterday the important role the changed competitive landscape had on Goldman’s unexpected first-quarter profit of $1.8 billion: “Many of our traditional competitors have retreated from the marketplace, either due to financial distress, mergers or shift in strategic priorities.”

But he was largely mum on American International Group, which, Goldman’s critics insist, is the canvas upon which the bank and its alumni have painted their great masterpiece of self-interest. A few days after Mr. Paulson refused to save Lehman Brothers last September — at a cost of a mere $45 billion or so — he came to A.I.G.’s rescue, to the tune of $170 billion and rising. Then he decided to install Edward Liddy — a former Goldman Sachs board member — as A.I.G.’s chief executive. Goldman has since received some $13 billion in cash, collateral and other payouts from A.I.G. — that is, from taxpayers.

Why kill Lehman and save A.I.G.? The theory, we now know, was that the government felt it needed to save the firms, including Goldman Sachs, that had insured many of their risky ventures through the insurer. Indeed, had Mr. Paulson decided not to save A.I.G., its counterparties would have suffered serious losses. Lehman’s creditors will be lucky to get back pennies on the dollar.

In a conference call he held last month, Mr. Viniar made the shocking claim that Goldman “had no material exposure to A.I.G.” because the firm had “collateral and market hedges in order to protect ourselves.” If so, then why did Goldman need the government’s help in the first place? During yesterday’s conference call, Guy Moszkowski, an analyst from Merrill Lynch, asked Mr. Viniar what role the $13 billion Goldman has collected from A.I.G. had on its first-quarter showing. But Mr. Viniar would have none of it: Profits “related to A.I.G. in the first quarter rounded to zero.” Hmm, how then did Goldman make so much money if that multibillion-dollar gift from you and me had nothing to do with it?

Part of the answer lies in a little sleight of hand. One consequence of Goldman’s becoming a bank holding company last year was that it had to switch its fiscal year to the calendar year. Previously, Goldman’s fiscal year had ended on Nov. 30. Now it ends Dec. 31.

As a result, December 2008 was not included in Goldman’s rosy first-quarter 2009 numbers. In that month, Goldman lost a little more than $1 billion, after a $1 billion writedown related to “non-investment-grade credit origination activities” and a further $625 million related to commercial real estate loans and securities. All told, in the last seven months, Goldman has lost $1.5 billion. But that number didn’t come up on Monday. How convenient.

Which leaves us with the real reason Goldman has cleaned up this year: the huge misfortunes of its major competitors. Those other firms have disappeared or have become severely wounded, and as a result have more or less been sitting on their collective hands since the collapse of Lehman last September.

As part of its busy day on Monday, Goldman also announced it was raising $5 billion of equity capital and that it intended to pay back the $10 billion from the Treasury’s Troubled Asset Relief Program that Mr. Paulson forced on the bank last October. Being free of the TARP yoke will give Goldman yet another competitive advantage: the ability to pay its own top talent and new recruits whatever it wants without government scrutiny.

This is significant, since it is unlikely any of Goldman’s remaining competitors will be able to make a similar move anytime soon. There is a reason Bill Gates once said Microsoft’s biggest competitor was Goldman Sachs. “It’s all about I.Q.,” Mr. Gates said. “You win with I.Q. Our only competition for I.Q. is the top investment banks.” And then there was one.

William D. Cohan, a contributing editor at Fortune, is the author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.”

Dances

In my opinion,as an older and educated person,whether it was Jon Stewart, Meet The Press or anyone you would choose to do the interview,he did a good job in attempting to expose the nonsense we're so constantly exposed to.What's wrong with that?

jerry

DryShips (DRYS) Disclosed of Covenant Breach, In Talks With Lenders





DryShips (Nasdaq: DRYS) discloses that two of their leading banks notified them that they are in breach of certain financial covenants. The company it is in discussions with the lenders for waivers and amendment of certain financial and other covenants.

From the Filing:

"Two of our leading banks, which collectively held $751.8 million of our indebtedness as of December 31, 2008, have notified us that we are in breach of certain financial covenants contained in our loan agreements, and we have been in communication with another lender that currently holds $650 million of our outstanding indebtedness regarding breach of loan covenants. Currently, we are in discussions with these and other lenders for waivers and amendment of certain financial and other covenants contained in our loan agreements. There can be no assurance that we will be successful in obtaining such waivers and amendments. In addition, in connection with any waivers and/or amendments to our loan agreements, our lenders may impose additional operating and financial restrictions on us and/or modify the terms of our existing loan agreements. These restrictions may limit our ability to, among other things, pay dividends, make capital expenditures and/or incur additional indebtedness, including through the issuance of guarantees. In addition, our lenders may require the payment of additional fees, require prepayment of a portion of our indebtedness to them, accelerate the amortization schedule for our indebtedness and increase the interest rates they charge us on our outstanding indebtedness. We may be required to use a significant portion of the proceeds from future equity offerings to repay a portion of our outstanding indebtedness. If our lenders declare an event of default, our lenders have the right to accelerate our outstanding indebtedness under the relevant agreement and foreclose the liens on the vessels mortgaged thereunder."

I have a macbook pro and I am trying to download internet explorer.I am using open source Darwine which can utilize IE on a mac.I have downloaded it but can't get it to open.Any help would be appreciated.

TIA
Jerry

Actually it was beautiful a few days last week.Then Saturday a foot of snow and snowing again today.Beaver Creek and Vail frequently exceeded their daily allowable numbers last week,11000 and 22000 respectively.

Happy holidays to everyone. 160 inches of snow here since Thanksgiving

OT Great News CC Sabathia signs contract for 160 million and Yankee fans are rejoicing.I hope this news will bring some happiness into all your lives for the holiday season.Personally I can't wait to tell my wife.I believe all those without jobs will also share in this great moment

Excellent Peter Schiff video-His analysis vs other incompetents.Not to be missed

http://crooksandliars.com/john-amato/peter-schiff-was-right

My Ameritrade must be messed up.It shows green.

The New York Times

November 10, 2008
Giant Insurer Stands to Get Billions More
By ANDREW ROSS SORKIN and MARY WILLIAMS WALSH

The Bush administration was overhauling its rescue of American International Group on Sunday night, according to people involved in the transaction, amid signs that its initial credit line of more than $100 billion and the interest that came with it were putting too much strain on the ailing insurance giant.

The Treasury Department and the Federal Reserve were near a deal to invest another $40 billion into the insurance giant, these people said. The new cash, which would be part of a huge restructuring of A.I.G.’s debt, comes after the government made an $85 billion emergency line of credit available in September to keep it from toppling and another $38 billion line when it became clear that the original amount was not enough.

The restructuring of the deal was just one sign of the intense debate in Washington over how and when the government should be bailing out private companies. The money would come from the $700 billion that Congress authorized the Treasury to use to shore up financial companies. Just this weekend, Democratic leaders in Congress called on the Bush administration to use some of that money to rescue Detroit automakers.

When the restructured deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise. It is a stark reversal of the government’s pledge that its previous moves had stemmed the bleeding at A.I.G.

The deal is likely to cause even more consternation among some lawmakers in Congress who have raised questions about the government’s role in bailing out Wall Street firms and are now under pressure to help the ailing automotive industry.

The government’s original emergency line of credit, while saving A.I.G. from bankruptcy for a time, now appears to have accelerated the company’s problems. The government’s original short-term loan came with an expensive interest rate — about 14 percent — which forced the company into a fire-sale of its assets and reduced its ability to pay back the loan, putting the company’s future in jeopardy.

The new deal would make the government a long-term investor in the future of A.I.G., something that Treasury Secretary Henry M. Paulson Jr. had previously said he hoped to avoid. As part of the restructuring, the government would lower the loan amount to $60 billion from $85 billion, but lengthen the duration of the payment schedule to five years from two years and also lower the interest rate.

At the same time, the government, using part of the $700 billion fund, would buy $40 billion in preferred shares in A.I.G. In return, A.I.G. would pay a 10 percent interest rate on those shares, similar to the interest rate that banks agreed to pay last month when they received cash injections.

The government is also planning to spend an additional $30 billion to help A.I.G. buy “collateralized debt obligations” that it had agreed to insure and put them into a new entity, effectively removing them from A.I.G.’s balance sheet. A.I.G. would contribute $5 billion to the new entity, which would buy $70 billion of C.D.O.’s at 50 cents on the dollar. Finally, the government would invest another $20 billion to help A.I.G. buy residential mortgage-backed securities and similarly place them into another entity.

The goal of both programs is to create separate entities to buy and hold A.I.G.’s most toxic assets and is aimed at shoring up the company’s balance sheet so it can continue operating and keep it from rushing to sell assets at depressed prices.

A spokeswoman for the Fed declined to comment. A spokeswoman for the Treasury did not return a call for comment. A spokesman for A.I.G. declined to comment.

A.I.G. negotiated the original $85 billion revolving credit facility from the Federal Reserve after its efforts to raise money from private lenders failed in the panic of mid-September. The amount needed ballooned in just a few days, as counterparties to A.I.G.’s big book of credit-default swaps laid claim to whatever collateral they were entitled to.

People briefed on the negotiations said the $85 billion was thought at the time to be the maximum amount that A.I.G. would need, including a little extra for a cushion. The interest rate was set at the three-month Libor plus 8.5 percent, which currently works out to around 14 percent. (Libor is a commonly used index that tracks the rates banks charge when they lend to each other.) In exchange for making the loan, the Fed was promised a 79.9 percent stake in A.I.G.

Edward Liddy, the insurance executive brought in to lead the company out of the crisis, initially said he believed the Fed money would be like water pouring into a bathtub — a lot might be needed at first, but eventually the tub would be filled and the faucet could be turned off.

Since then, A.I.G. turned out to need more than expected.

In addition to the $85 billion Fed loan and the $38 billion special lending facility, A.I.G. recently said it had been granted access to the Fed’s commercial-paper program, which is available to all companies that issued commercial paper before the credit markets seized up. A.I.G. can borrow up to $20.9 billion under the program.

Even as the government works to solidify A.I.G.’s finances, elected officials have been demanding a fuller accounting of the company’s business practices and executive pay structure. In October, the New York attorney general, Andrew M. Cuomo, reached an agreement forcing A.I.G. to freeze payments to former executives. The move followed the revelation, in a hearing convened by Representative Henry Waxman, Democrat of California, that the former head of A.I.G.’s troubled Financial Products unit had been kept on as a well-paid consultant after he left the company earlier this year.

Mr. Waxman, as well as Senator Charles E. Grassley, Republican of Iowa, have demanded that A.I.G. provide a more detailed accounting of its credit derivatives business.

Can we please move on and focus on the issues that this board was intended for.Please be respectful.
Thank you

Jerry

funny cartoon

http://www.bartcop.com/rock-stock.jpg

I don't believe his posting is a gutsy move but rather a narrow minded,racist statement.That kind of thinking is scary and one dimensional.I'm offended by his intolerance.

My apologies for responding on this thread

Jerry

As a political coup what if the Republicans use McCain as the catalyst for a change of heart on the bailout plan?

Goldman, Morgan to Become Bank Holding Companies
September 21, 2008, 9:35 pm



In one of the biggest changes to Wall Street in decades, Goldman Sachs and Morgan Stanley, the last two independent investment banks, will become bank holding companies, the Federal Reserve said Sunday night.

The move fundamentally changes one of the mainstay models of modern Wall Street, the independent investment bank. It heralds new regulations and supervisions of previously lightly regulated investment banks. It is also the latest signal by the Federal Reserve that it will not let Goldman or Morgan fail.

The move comes after the bankruptcy of Lehman Brothers and the near-collapses of Bear Stearns and Merrill Lynch.

Now, Goldman and Morgan Stanley, which have been the subject of merger speculation in recent weeks, can become direct competitors to larger firms like Citigroup, JPMorgan Chase and Bank of America. Those firms combine investment-banking operations with the larger capital cushions that come with retail deposits, giving them a stability that pure investment banks lack.

By becoming bank holding companies, Goldman Sachs and Morgan Stanley gained some breathing room in the immediate term. But it likely lays the groundwork for additional deal making. Given the expected bank failures this year, it is possible Goldman and Morgan Stanley could seek to buy them cheaply in a “roll-up” strategy.

Prior to the move, federal regulations prohibited the two investment banks from pursuing such deals. Indeed, Morgan Stanley’s recent talks with Wachovia revolved around Wachovia buying Morgan Stanley.

Being a bank holding company would also give the two access to the discount window of the Federal Reserve. While they have had access to Fed lending facilities in recent months, regulators had planned to take away discount window access in January.

The regulation by the Federal Reserve brings a host of accounting rule changes that should benefit the two banks in the current environment.

In return, they will submit themselves to greater regulation, including limits on the amount of leverage they can take on. When it collapsed, Lehman had about a 30:1 debt-to-equity ratio, meaning it had borrowed $30 for every dollar in capital it held. Bank of America, on the other hand, currently has about an 11.7:1 leverage ratio.

–Vikas Bajaj, Andrew Ross Sorkin and Michael J. de la Merced

Sunday, September 21, 2008- Don Harrold

Hello,

If you know me, you know I am not a "marketer". I am not a "salesman". I'm a guy who wants to help you make as much as you can, as quickly as you can.

And, I'm good at that.

When I ran the numbers for September, I was stunned. The average trade I called in my Gold Level Service (http://www.donharrold.net/gold) is up 12% or more. That's since September 1. That's while the market are essentially flat.

If your portfolio is not up like that, I urge you to join me tonight on the 2nd live call I'll do this week. You can aske me whatever you want about my services. You can hear other members discuss their success.

Join me tonight at 9 PM CST. The number to call is 1-712-580-1100. Your access code is, 213636.

Don Harrold

Thursday, September 18, 2008

Hello,

I get so many questions about my Gold, Platinum, and, ScanWinners
services that sometimes I do a free call to answer those questions.

Tonight, I will do a live call where I answer questions you
have about my services. If you are not a member and want to
learn what I do and how I can help you, join me at:

TIME: 9PM EST
NUMBER: 1-712-580-1100
ACCESS CODE: 213636

Choad

Money Market Fund Says Customers Could Lose Money
By DIANA B. HENRIQUES

In a new sign of market turbulence, managers of a multibillion-dollar money market fund said on Tuesday that customers might lose money in the fund, a type of investment that has long been considered as safe and risk-free as a bank savings account.

The announcement was made by the Primary Fund, which had almost $65 billion in assets at the end of May. It is part of the Reserve Fund, a group whose founder helped invent the money market fund more than 30 years ago.

The fund said that because the value of some investments had fallen, customers now have only 97 cents for each dollar they had invested.

This is only the second time in history that a money market fund has “broken the buck” — that is, reported a share’s value was less than a dollar.

This year alone, big banks and fund management companies have pledged more than $10 billion to rescue affiliated money funds that were caught holding mortgage market securities that were deteriorating rapidly in value. As a result, consumers have felt confident in the safety of money funds, and have been moving assets into such funds as markets have grown more turbulent.

The Investment Company Institute, the mutual fund industry’s trade group, issued a statement Tuesday assuring investors that “the fundamental structure of money market funds remains sound.” It noted, too, that in the only previous case of a fund breaking the buck, investors nevertheless were paid 96 cents on the dollar.

But the Reserve Fund’s announcement may shake investors’ confidence. Moreover, institutional markets that are already under severe stress could be further shaken if this giant fund, and others like it, are forced to sell some less-liquid holdings to meet redemption demands from nervous customers in coming weeks.

The Primary Fund allowed its share price to fall below a dollar “after reviewing the unprecedented market events of the past several days and their impact” on the fund, the company said in a statement.

Specifically, the fund’s management, which boasted as recently as July about its cautious approach to the current crisis, determined that its stake in debt securities issued by Lehman Brothers Holdings, with a face value of $785 million, was essentially worthless, given the investment bank’s filing for bankruptcy protection. As a result, the fund said, its per-share value fell to 97 cents a share.

The fund’s financial records also show that more than half of its portfolio on May 31 consisted of asset-backed commercial paper and notes from a host of issuers besides Lehman, few of them names likely to be familiar to the financial markets.

If these arcane investments had to be sold or cashed out quickly to meet redemptions, it is unclear what prices they would fetch or whether the issuers would be able to return the fund’s money promptly, said Keith Long, of Otter Creek Management, a hedge fund based in Palm Beach, Fla.

The Primary Fund reported that, until further notice, it would delay paying redemptions to customers for up to seven days, as permitted under mutual fund law. That delay will not apply to debit card transactions, automated clearinghouse transactions or checks written against the assets of the Primary Fund, provided that the transactions do not exceed $10,000 from single or affiliated investors.

The fund is part of the complex run by Bruce R. Bent, who invented the money market fund concept with Henry B. R. Brown in 1970.

Since their inception, money market funds increasingly have been seen by individual investors as a safe harbor in turbulent times. According to industry statistics, the assets of money funds have grown sharply since the credit crisis began to intensify last summer.

But, as prospectuses and regulators make clear, money funds are not legally required to keep their share prices at or above a dollar, or to redeem investors’ shares immediately. Like all regulated mutual funds, their share prices are determined solely by dividing total portfolio assets by the number of shares outstanding, and they have seven days to meet redemption demands.

Those facts would probably surprise most money fund investors, who have come to think of money funds as being “just like cash, just like a checking account,” a fund industry lawyer, Jay Baris, said.

Whenever money funds have run into trouble, they have been propped up by parent banks and investment managers that provided the necessary cash. The single exception was in 1994, when one small regional money fund reported a share price below a dollar, according to the Investment Company Institute.

The continuation of this informal bailout policy “is much discussed in the fund industry, because funds are so much bigger today,” said Barry P. Barbash, a fund industry lawyer with Willkie Farr & Gallagher and a former senior mutual fund regulator at the Securities and Exchange Commission.

In the past, regulators tended to focus on banning money funds from buying inappropriate investments in the first place, he said. “But now,” he added, “we’re talking about instruments that were completely appropriate for a money fund when they were purchased. That’s what makes this so much harder.”

Not only are funds bigger, markets are more turbulent. Many mutual funds have found their portfolios battered by investments in commercial and investments banks that were long considered close to bedrock on Wall Street. Money funds, too, suddenly found that some of their blue chips were tarnishing.

But with individual mutual fund investors showing little sign of panic, most funds have simply ridden out the current turbulence.

Several industry analysts said on Tuesday, however, that the Reserve Fund’s action came after its Primary Fund was hit by heavy redemption demands that intensified the impact of the Lehman losses.

“We’re really in uncharted territory here,” said Peter Crane, the president of Crane Data, a fund industry newsletter.

Some Seek Agency to Buy Bad Debt as Long-Term Answer
By STEPHEN LABATON

WASHINGTON — As the Bush administration has lurched from pillar to post in the financial crisis, some lawmakers and experts were considering a longer-term legislative solution that would create a new agency to dispose of the mortgage-related assets at the core of Wall Street’s woes.

Proponents of a more systematic government role to help relieve financial institutions of their toxic securities range from Lawrence H. Summers, the former Treasury secretary under President Clinton, to former Federal Reserve chairmen Paul A. Volcker and Alan Greenspan.

In Congress, the idea that is gaining traction centers on the creation of a new agency that would buy troubled assets from hobbled companies. The idea was floated on Tuesday by Barney Frank, Democrat of Massachusetts, who heads the House Financial Services Committee. Among those signaling that it merited serious consideration were Senate Majority Leader Harry Reid and the House speaker, Nancy Pelosi.

With seven weeks until the presidential elections, no one expects Congress or the White House to move quickly to create a new federal agency that puts taxpayers at risk for hundreds of billions of dollars in bad assets. Steny H. Hoyer, the House majority leader, said there was no time to consider any new proposals in the two weeks before Congress adjourns.

But in its ad hoc approach to the crisis, the Treasury Department and the Federal Reserve have, in effect, already embarked on a course similar to the proposals in Congress.

In the case of Bear Stearns, the Fed took $29 billion of the investment bank’s mortgage-related assets as collateral for a Fed loan to JPMorgan Chase, which then agreed to acquire Bear Stearns.

In the case of Fannie Mae and Freddie Mac, the Treasury Department placed the companies in a conservatorship and explicitly backed the $5.3 trillion of mortgages they own or guarantee.

Treasury also agreed to buy an unspecified amount of Fannie’s and Freddie’s mortgage-backed securities on the open market, starting with a $5 billion purchase this month. Those securities are to be managed and ultimately sold for the government by an investment house on Wall Street.

But federal officials remain concerned about the plight of other institutions, including Washington Mutual, the nation’s largest savings association. Experts estimate that a government bailout of Washington Mutual could cut in half the size of the federal deposit insurance fund, which protects bank depositors at thousands of banks and savings and loan institutions.

Mr. Frank was among the House and Senate leaders who were hastily called to a meeting Tuesday with the Federal Reserve chairman, Ben S. Bernanke, and Treasury Secretary Henry M. Paulson Jr. to hear about the Fed’s latest rescue plan, this time of the American International Group.

Mr. Frank said that one of the issues discussed in the meeting was a potential need for broader, longer-term federal action in the marketplace.

“We have had a series of ad hoc interventions; this is one more ad hoc intervention,” he said. “I do think, because you can’t be sure this is the last one, the question of a broader more systemic action in which the government tries to help resolve these things is very important.”

In concept, the proposal would resemble the Resolution Trust Corporation, which disposed of bad assets held by hundreds of crippled savings institutions. Created in 1989, Resolution Trust closed or reorganized 747 institutions holding assets of nearly $400 billion. It did so by seizing the assets of troubled savings and loans and then reselling them to bargain-seeking investors.

By 1995, the S.& L. crisis abated and the agency was folded into the Federal Deposit Insurance Corporation, which Congress created during the Great Depression to regulate banks and protect the accounts of customers when they fail.

But the parallels to Resolution Trust are inexact. The federal government, unlike now, had no choice but to acquire the assets from savings associations because they were backed by federal deposit insurance. The mortgages now at the heart of Wall Street’s woes are not backed by federally insured deposits.

Moreover, the mission of the corporation was to dispose of the assets as quickly as possible for maximum value. Its goal was to reduce taxpayer exposure.

In the current crisis, the goal is more debatable. Should the government be helping homeowners, housing or financial markets, or large companies in trouble? Moreover, policy makers already have been seeking ways to reduce the impact of hard-to-sell assets on the books of companies by encouraging healthier institutions to acquire troubled ones.

The issue is whether Congress, after the election, should create a more formal and accountable mechanism, such as a federal agency, that would provide a relief valve for the troubled assets now causing havoc on Wall Street.

“The question is, and it’s just a question, is, ‘Are we at the point where the private market has made so many bad decisions and is so depressed that it can’t get out from under?’ “ said Mr. Frank, who is planning to hold a hearing next week to explore whether Congress should create an agency to help the markets dispose of hard-to-sell assets.

“The question we have to address is, ‘Is it the case that market psychology has so depressed assets that no entity has capacity to buy and hold these assets except for the government?’ “

Mr. Frank said it would be more appropriate for a new agency, rather than the central bank, to be relieving the markets of the troubled assets.

“It is not appropriate for the Federal Reserve either in a financial sense or in a democratic sense to take on this role,” Mr. Frank said in an interview.

But Senator Christopher J. Dodd of Connecticut, the chairman of the Senate banking committee, said at a news conference announcing hearings later this week on the crisis that he wondered whether such an agency was necessary if Treasury and the Fed were already performing such a function and had the authority to continue to do it.

“I’m not opposed to it,” he said of Mr. Frank’s proposal. “I’m anxious to hear what the administration would have to say about this.”

Administration officials said they had no plans to make such a proposal, and that they would leave it to the next administration.

Mr. Frank emphasized that any legislation creating a new agency would have to be accompanied by “tough new regulations” to discourage companies from making more risky investments. He acknowledged that the decision about such an agency would be in the hands of the next Congress and the next president.

In recent days, aides to the presidential campaigns of John McCain and Barack Obama have said it would be premature to consider creating a new agency. But after the election, the political imperatives could significantly change, particularly if the housing markets remain depressed and Wall Street continues to choke on the billions of dollars in mortgage-backed assets.

Basserdan Assist-Ted Butler


September 16, 2008

Welcome To The Jungle

(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

Financial developments are occurring so quickly that last week’s "warp speed" comment seems slow. These are truly unprecedented times. I think it’s safe to say that no one alive has any experience with the ramifications of the unfolding events. The financial turmoil is radically altering how everyone looks at his or her assets. In a real sense, we seem to be in a fight for financial survival. One misstep and a lifetime of asset accumulation can vanish.

Never before has it been more critical to make the right financial decisions. Despite the relentless pounding of the price (or maybe because of it), silver never looked better as the premier preserver and enhancer of wealth. Of course, I am referring to real silver in the right form, bought on a non-margined basis.

The Clean Out

There has been a dramatic cumulative improvement in the market structure in COMEX gold and silver futures, as defined by the Commitment of Traders Report (COT). In other words, the commercials have largely succeeded in their attempt to buy all the paper gold and silver they could by driving the markets lower.

As of the most recent COT, the commercials bought from liquidating long traders 150,000 COMEX gold futures contracts net, since July. That’s the equivalent of 15 million ounces of gold and compares to the roughly 3 million ounces liquidated in the big gold ETF, GLD. Since the liquidation in COMEX gold futures was five times the amount of liquidation in GLD (as is usually the case), it’s hard not to conclude COMEX is the main price driver.

In silver, the total long trader liquidation and commercial buying comes to close to 34,000 contracts, or 170 million ounces, since July. In contrast to gold, there has been a net increase in the metal holdings in SLV, the silver ETF. The gold and silver paper contract liquidation, combined, is among the largest on record. This was the intent of the manipulators. On the one hand, it troubles me that they were successful in washing out so many margined longs. On the other hand, that wash-out has set the stage for a rally, perhaps an explosive rally.

It took much pain and a near 50% drop in the price of silver to accomplish the washout in leveraged long positions. Now that the clean out has occurred, the damage to the downside is largely, if not completely, behind us. This also applies to the relative weakness in silver compared to gold. Gold-heavy investors should take advantage of silver’s gross undervaluation to gold.

In addition, a new bullish factor has emerged in a detailed analysis of recent COT data. Not only have the raptors (the commercials other than the eight largest traders) built up a record or near record net long position in both gold and silver futures, they have established a record long position in call options for the first time in memory. My conclusion is, not only are the near-always-correct raptors positioned for an upside move in gold and silver, they are positioned for it to occur soon.

One final thought. While it may be unfortunate to see so much stress on all big financial institutions for many reasons, there may be one positive effect for silver and gold investors. If my allegations of manipulation by one or two big U.S. banks are correct, the stress currently being felt may work to weaken their manipulative grip on prices.

Miners Subsidize Users

The dramatic price decline in silver (and gold) has brought the price to levels well below the true cost of production for most producers. I’m not talking about the silly cash cost of production many miners trumpet, but the cost that must be reported in audited public earnings reports. The average price of silver was around $17.20 per ounce in Q2. At below $11 recently, the price miners receive is 30% lower, wiping out all earnings for the lowest cost producers (like Pan American Silver) and creating sure losses for those basically breaking even in the last quarter (like Coeur d‘Alene and Hecla).

In essence, at current prices the miners are subsidizing the industrial silver users. They are selling their production at less than it costs them to produce. This is wasteful and cheats shareholders. If silver prices don’t rise sharply, it is only a matter of time before miners shut down or go out of business. Perhaps it might take a good deal of time, but selling one’s production below the cost of that production is a sure path to failure. It is not something that can continue indefinitely. Either a company must decrease its cost of production dramatically, or the price of its product must rise above its cost.

This is a topic I have written about frequently, starting some six years ago -

http://www.investmentrarities.com/10-09-02.html I know I may have been harsh on the silver miners, and I apologize for that past harshness. But that was then and this in now. What makes it different this time is that clear evidence exists that manipulation may be involved in the price drop. Thanks to the Bank Participation Report, it is clear that one or two U.S. banks may be behind the big price drop in silver and gold. Hundreds of you have written to the regulators about this issue. Now it is time for the miners to do the same.

While there are several things the miners can do about the unnatural price drop, such as withholding production or buying some silver below the cost of production, at a minimum they should ask the regulators to answer questions about the one or two U.S. banks and the severe price drop. A request coming from a producer carries more weight than a complaint from investors.

I know the miners in the past have denied that the price of silver has been manipulated, but there was never compelling evidence like exists today. It has become real simple. The miners (and their shareholders) have a clear choice. If they think the current price of silver is free and fair, they should shut down, instead of producing at a loss. If they think silver should climb sharply in price (as I do), then they should try to explain why it fell so sharply and why it should then rise. If that explanation does not include price manipulation on the paper COMEX market, then let’s hear the alternate explanations. If the explanation does include paper trading schemes, then they should go to the regulators. Shareholders must insist on hearing from management on this issue. Going silently down the tubes is irresponsible.

The CFTC’s Response

All who wrote to the CFTC should have received a response by now. To be precise, you should have received a response from one Commissioner, Bart Chilton. To his credit, Commissioner Chilton appears to have responded to everyone who wrote in, as is his custom. That he is the only one to respond is a poor reflection on those who never respond to legitimate inquiries. I’m going to comment on Chilton’s response, but I’m not going to reprint here in its entirety. (If you want to see the actual response, e-mail the regulators. I’m sure you’ll get a copy.)

Many expressed surprise to me that they had received a personal response from a high official. In my opinion, the response came because the issue is so important. The issue of concentration and manipulation goes to the very heart of commodity law and the role of the CFTC. While I commend Commissioner Chilton for responding, the contents of his reply were not substantive. He danced around the issue, hinting at change in the future. Instead, I was amazed and heartened by the quality of your back and forth communications with Commissioner Chilton. That so many of you "get it," is a source of great encouragement to me.

Please remember, this issue of concentration and manipulation in silver (and gold) has a very simple remedy. As I have written previously, the solution lies in legitimate speculative position limits. Ironically, this is precisely the intent of commodity law. All that needs to be done by the CFTC is to set and enforce legitimate speculative position limits on longs and shorts alike. They can and should do that in a heartbeat. No speculator should hold, long or short, more that 1500 silver contracts (7.5 million ounces). Hedgers can hold more, but it has to be legitimate, not make-believe off-sets to phony OTC derivatives.

I try to keep things simple. At the heart of the current financial crises we are experiencing lies the simple problem that too many financial firms made too many derivatives bets that can’t be honored. This is the same problem in silver. The solution is to limit those bets. It’s too late in the financial world to limit credit derivatives. That horse is already out of the barn. It may not be too late in silver. The CFTC must enforce legitimate position limits. Immediately.

All Roads Lead To The COMEX

I’d like to update another theme I wrote about almost six years ago -

http://www.investmentrarities.com/01-13-03.html. The premise of that article was that any wholesale shortage must eventually find its way to the COMEX, the world center for silver trading. (Although I must now include the silver ETFs in the equation.) While the theme is the same, I’d like to add a new twist.

As most are aware, there is pronounced tightness in the retail silver investment market. It started, more than eight months ago, with U.S. Silver Eagles (thanks, Izzy), and has spread to almost all forms of retail investment silver. Delivery delays and growing premiums are the core definition of shortage. This is the first time in history we have witnessed such shortages in retail silver. Many are concerned with the disconnect between the retail shortage and the sharply lower price of silver, as well they should be. To date, there has been no clear evidence of the retail shortage developing into a wholesale shortage. That may be about to change.

Being hurricane-sensitive, let me give you an example of what I see coming in silver. When a hurricane approaches, one of the first things everyone in its path attempts is to fill up their vehicles, as an extended power outage will knock out gas stations. Naturally, if your car or truck runs on regular-octane gasoline, you seek to fill up with regular gas. But if regular or middle grade gas is sold-out, but premium is still available, you will fill up with premium. And be glad you got it.

Likewise, as more and more investors seek to buy silver in retail forms and that silver is sold out and unavailable, they will buy what is available, even if it is the premium grade and not what they wanted originally. In silver, the premium grade is 1000-ounce bars. This is the wholesale grade. It is the grade that COMEX and the silver ETFs deal in. If enough investors start buying these bars, it is reasonable to assume the retail shortage can translate into a wholesale shortage. Then, it’s game-over for the silver manipulation.

Low prices discourage supply and stimulate demand. That is the key economic principle of our free market economy. With so many reasons to buy real silver at its artificially depressed price, and few, if any, legitimate reasons to suggest selling, how long before the retail shortage jumps the firebreak and turns into a wholesale shortage?

Finally, there has been a marked increase in public commentary on silver. That’s because of the dramatic price volatility and the recent revelations in the Bank Participation Report. Some of this commentary has been supportive of my conclusions, some not. The increased commentary is good for readers, particularly as it helps them to weigh differing opinions. What’s not so good is the personally insulting tone some of this commentary has involved. There is never a reason to be unprofessional and rude in such matters.

In Frantic Day, Wall Street Banks Teeter- 50 billion for MER
By ANDREW ROSS SORKIN

This article was reported by Jenny Anderson, Edmund L. Andrews, Eric Dash, Michael J. de la Merced, Andrew Ross Sorkin, Louise Story and Ben White. It was written by Mr. Sorkin.

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself to Bank of America for roughly $50 billion to avert a deepening financial crisis while another prominent securities firm, Lehman Brothers, hurtled toward liquidation after it failed to find a buyer, people briefed on the deals said.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of tens of billions of dollars in losses because of bad mortgage finance and real estate investments.

They culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to avoid a downward spiral in the markets stemming from a crisis of confidence.

“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I‘ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street. Questions remain about how the market will react Monday, particularly to Lehman’s plan to wind down its trading operations, and whether other companies may still falter, like the American International Group, the large insurer, and Washington Mutual, the nation’s largest savings and loan. Both companies’ stocks fell precipitously last week.

Though the government only a week ago took control of the troubled mortgage finance companies Fannie Mae and Freddie Mac, investors have become increasingly nervous about the difficulties of major financial institutions to recover from their losses.

How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation’s growth rate has slowed.

What will happen to Merrill’s 60,000 employees or Lehman’s 25,000 employees remains unclear. Worried about the unfolding crisis and its potential impact on New York City’s economy, Mayor Michael R. Bloomberg canceled a trip to California to meet with Gov. Arnold Schwarzenegger. Instead, aides said, Mr. Bloomberg spent much of the weekend working the phones, talking to federal officials and bank executives in an effort to gauge the severity of the crisis.

A weekend that was humbling for Lehman and Merrill Lynch and triumphant for Bank of America, based in Charlotte, N.C., began at 6 p.m. Friday in the first of a series of emergency meetings at the Federal Reserve building in Downtown Manhattan.

The meeting was called by Fed officials, with Treasury Secretary Henry M. Paulson Jr. in attendance, and it included top bankers. The Treasury and Federal Reserve had already stepped in on several occasions to rescue the financial system, forcing a shotgun marriage between Bear Stearns and JPMorgan Chase this year and backstopping $29 billion worth of troubled assets — and then agreeing to bail out Fannie Mae and Freddie Mac.

The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman’s stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.

Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their own precarious situation. The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation’s largest brokerage force and its name is known in towns across America, while Lehman’s main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.

Knowing that investors were worried about Merrill, John A. Thain, its chief executive and an alumnus of Goldman Sachs and the New York Stock Exchange, and Kenneth D. Lewis, Bank of America’s chief executive, began negotiations. One person briefed on the negotiations said Bank of America had approached Merrill earlier in the summer but Mr. Thain had rebuffed the offer. Now, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, the two parties proceeded with discussions.

On Sunday morning, Mr. Thain and Mr. Lewis cemented the deal. It could not be determined if Mr. Thain will play a role in the new company, but two people briefed on the negotiations said they did not expect him to stay. Merrill’s “thundering herd” of 17,000 brokers will be combined with Bank of America’s smaller group of wealth advisers and called Merrill Lynch Wealth Management.

For Bank of America, which this year bought Countrywide Financial, the troubled mortgage lender, the purchase of Merrill puts it at the pinnacle of American finance, making it the biggest brokerage house and consumer banking franchise.

Bank of America, meanwhile, eventually walked away from its talks with Lehman after the government refused to take responsibility for losses on some of Lehman’s most troubled real-estate assets, something it agreed to do when JP Morgan Chase bought Bear Stearns to save it from a bankruptcy filing in March.

A leading proposal to rescue Lehman would have divided the bank into two entities, a “good bank” and a “bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would have agreed to absorb losses from the bank’s troubled assets, to two people briefed on the proposal said. Taxpayer money would not have been included in such a deal, they said.

Other Wall Street banks also balked at the deal, unhappy at facing potential losses while Bank of America or Barclays walked away with the potentially profitable part of Lehman at a cheap price.

For Lehman, the end essentially came Sunday morning when its last potential suitor, Barclays, walked away from a deal, saying it could not obtain a shareholder vote to approve a transaction before Monday morning, something required under London Stock Exchange listing rules, one person close to the matter said. Other people involved in the talks said the Financial Services Authority, the British securities regulator, had discouraged Barclays from pursuing a deal. Peter Truell, a spokesman for Barclays, declined to comment.

Lehman was expected to seek bankruptcy protection for its holding company by late Sunday evening, representing the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago, people close to the matter said. Lehman’s subsidiaries were expected to remain solvent while the firm liquidates its holdings, these people said. Under this scenario, a group of banks have tentatively agreed to provide a financial backstop to assist in an orderly winding down of the 158-year-old investment bank. Such an agreement could expose those banks to losses on Lehman’s assets.

Bart McDade, Lehman’s president, was at the Federal Reserve Bank in New York late Sunday discussing terms of Lehman’s dissolution with government officials. The Fed was expect to play a supporting role in the process by temporarily accepting lower-quality assets from banks in return for loans from the government.

Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firm, Lehman cannot hope to reorganize and survive. It was not clear whether the government would appoint a trustee to supervise Lehman’s liquidation or how big the financial backstop would be.

Lehman has retained the law firm Weil, Gotshal & Manges as its bankruptcy counsel.

The collapse of Lehman is a devastating end for Richard Fuld Jr., the chief executive who has led the bank since it emerged from American Express as a public company in 1994. Mr. Fuld, who steered Lehman through near- death experiences in the past, spent the last several days in his 31st floor office in Lehman’s midtown headquarters on the phone from 6 a.m. until well past midnight trying to find save the firm, a person close to the matter said.

The weekend’s events indicate that top officials at the Federal Reserve and the Treasury will take a harder line on providing government support of troubled financial institutions.

While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed chairman, Ben S. Bernanke, and Mr. Paulson had warned that they would not put taxpayer money at risk simply to prevent a Lehman collapse.

The tough-love message was a major change in strategy, but it remained unclear until at least Friday whether the approach was real or just posturing. If the Fed was faced with the genuine risk of another market meltdown, analysts said, it would be almost duty-bound to ride to a rescue of one kind or another.

What few people anticipated was that the Treasury and Fed officials might reach for an even broader strategy.

“They were faced after Bear Stearns with the problem of where to draw the line,” said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisors, a forecasting firm. “It became clear that this piecemeal, patchwork, case-by-case approach might not get the job done.”

At first glance, the new strategy by Mr. Paulson and Mr. Bernanke represents a much purer and tougher insistence that Wall Street work out its own problems without government help.

But that is only the first glance. If Bank of America acquires Merrill Lynch, its capital reserves would immediately fall below the minimum requirements for bank holding companies. Federal regulators, including the Federal Reserve, would have to show lenience for as long as it takes the capital markets to regain their confidence — which could be quite a while.

And Merrill Lynch is hardly the only troubled financial institution on the horizon. Administration officials acknowledged this week that more bank failures are inevitable, and the main protection for depositors — the Federal Deposit Insurance Corporation — is likely to exhaust the reserves it has built over the years from bank insurance premiums.

“What we need now is a systemic solution and to admit that this is an extraordinary situation,” Mr. Meyer said. Mr. Meyer said the government should go to the heart of the crisis — the mortgage market — and start buying up mortgage-backed securities in a broad rescue.

That is similar to an approach urged by Alan Greenspan, Mr. Bernanke’s predecessor as chairman of the Federal Reserve. Mr. Greenspan, who long been a staunch opponent of government interference in the economy, said on Sunday that the Federal government might have to shore up some financial institutions.

“This is a once-in- a-half-century, probably once-in-a-century type of event,” Mr. Greenspan said in an interview on ABC. “I think the argument has got to be that there are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investment in an economy that on very rare occasions -- and this is one of them -- it’s desirable to prevent them from liquidating in a sharply disruptive manner.”

Most economists contend that bailouts are often bad economic policy, because each rescue tends to encourage “moral hazard” – the tendency of institutions and investors to take even bigger risks because they assume the government will rescue them too.

Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger bailout one week ago of Fannie Mae and Freddie Mac, the giant mortgage finance companies.

Officials noted that Lehman’s downfall posed a lower systemic threat because it had been a very visible and growing risk for months, which meant that its customers and trading partners had had months to prepare themselves.

Outside the public eye, Fed officials had acquired much more information than they had in March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives.

But James Leach, a former Republican congressman from Iowa and chairman of the House Banking committee, said the Fed and Treasury may not be able to avoid a broader rescue.

“The Fed’s historic position is to object philosophically to a rescue role but in the end to do everything in its power to avoid anything that poses systemic risk,” said Mr. Leach, now a lecturer at Harvard.

“My sense is that the systemic question will be the only question on the table if Lehman falters,” he continued. “If systemic risk is considered grave, the Fed, perhaps with Treasury playing at least an advisory role, will intervene.

Michael Barbaro contributed reporting.

Long-term Gold Outlook: Positive

By Charlotte Mathews
10 Sep 2008 at 08:03 AM GMT-04:00

Gold is likely to consolidate between $750 and $1,000/oz in the short term, but in the longer term it could gain strength from intensifying financial stresses in the US, says Investec Asset Management portfolio manager Daniel Sacks.
JOHANNESBURG (Business Day) -- Stresses in the U.S. were now spreading to Europe and emerging markets, which meant investors were likely to seek gold as a safe-haven investment.

In the short term, gold should not drop below $750/oz because below that level mines would begin to close, Sacks said yesterday.

Precious metals trader Hereaus said in its latest Precious Metals Weekly that downside in the gold price was limited by booming physical demand from western Asia and investors in gold exchange traded funds (ETFs) holding their positions.

Supply of gold from gold mines and central bank sales was diminishing.

Sacks said gold miners that could show consistent cost savings and improved production targets should outperform ETFs, although that was not the case recently.

ETFs tracked the price of the underlying commodity.

In the past two years, gold measured by the London morning fix had risen 32% to $806.50/oz, with a spike to $1,000/oz in March, while the JSE/FTSE Africa gold mining index, reflecting the share prices of gold miners listed in South Africa, had dropped 47% to 1689.

South African miners struggled to gain from the high gold price because of rising input costs and production disruptions caused by safety issues and power failures.

Gold fell below $800/oz yesterday as the dollar strengthened, and oil fell after Saudi Arabian Oil Minister Ali Al-Naimi said there were sufficient stocks to meet demand. Gold was trading at $799.74/oz in early trade while oil was at $105.51 a barrel.

Sacks said gold was failing to hold above $800/oz because the dollar was strengthening against other currencies, including the euro and yen.

Economic data in developing economies had turned marginally weaker at the same time as U.S. data was a little better than expected.

The dollar was also benefiting from softer oil prices.

If the dollar kept strengthening it could hit the positive gold outlook, he said.

But Investec believed it would continue to weaken against the emerging currencies that were important for gold buying, mainly the Indian rupee and Chinese renminbi , and the currencies that were important for gold supply, mainly the Australian and Canadian dollars and the rand.

Gold had also failed to hold above $800/oz because as the oil price fell, investors became less risk-averse, equities moved higher, the dollar strengthened and commodities prices plunged, all undermining the short-term argument for buying gold as a safe haven.

New York Times

September 6, 2008
U.S. Rescue Seen at Hand for 2 Mortgage Giants
By STEPHEN LABATON and ANDREW ROSS SORKIN

WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.

The drastic effort follows the bailout this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy. With Bear Stearns, the government provided guarantees and the bulk of its assets were transferred to JPMorgan Chase, leaving shareholders with a nominal amount.

Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers.

A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets.

The executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen, the officials said.

For months, administration officials have grappled with the steady erosion of the books of the two mortgage finance giants. A fierce behind-the-scenes debate among policy makers has been waged over whether to seize the companies or let them work out their problems. Even after the companies are put under government control, debates will continue over how they should look and operate over the long term.

But the declining housing and financial markets have apparently now forced the administration’s hand. With foreign governments growing increasingly skittish about holding billions of dollars in securities issued by the companies, no sign that their losses will abate any time soon, and the inability of the companies to raise new capital, the administration apparently decided it would be better to act now rather than closer to the presidential election in two months.

Just five weeks ago, President Bush signed a law to give the administration the authority to inject billions of dollars into the companies through investments or loans. In proposing the legislation, Treasury Secretary Henry M. Paulson Jr. said that he had no plan to provide loans or investments, and that merely giving the government the authority to backstop the companies would provide a strong shot of confidence to the markets. But the thin capital reserves that have kept the two companies afloat have continued to erode as the housing market has steadily declined and the number of foreclosures has soared.

As their problems have deepened — and the marketplace has come to expect some sort of government rescue — both companies have found it difficult to raise new capital to absorb future losses. In recent weeks, Mr. Paulson has been reaching out to foreign governments that hold billions of dollars of Fannie and Freddie securities to reassure them that the United States stands behind the companies.

In issuing their quarterly financial statements last month, the two companies reported huge losses and predicted that home prices would fall more than previously projected.

The debt securities the companies issue to finance their operations are widely owned by mutual funds, pension funds, foreign governments and big companies.

Officials said the participants at the meetings included Mr. Paulson, Ben S. Bernanke, the chairman of the Fed, and James Lockhart, the head of both the old and new agency that regulates the companies. The companies were represented by Daniel H. Mudd, the chief executive of Fannie Mae, and Richard F. Syron, chief executive of Freddie Mac. Also participating was H. Rodgin Cohen, the chairman of the law firm, Sullivan & Cromwell, who was representing Fannie.

Officials and executives briefed on the meetings said that Mr. Mudd and Mr. Syron were told that they would have to leave the companies.

Spokesmen at the two companies did not return telephone calls seeking comment.

The meetings reflected the reality that senior administration officials did not believe they could wait for some kind of financial tipping point, as happened with Bear Stearns, which was saved from insolvency in March by government intervention after its stock plummeted and lenders withheld their capital.

Instead, Mr. Paulson has struggled to navigate through potentially conflicting goals — stabilizing the financial markets, making mortgages more widely available in a tightening credit environment, and protecting taxpayers from possibly enormous losses.

Publicly, administration officials have tried to bolster the companies because the nation’s mortgage system relies on their continued ability to purchase mortgages from commercial lenders and pull the housing markets out of their slump.

But privately, senior officials have been critical of top executives at the companies, particularly Freddie Mac. They have raised concerns about major risks to taxpayers of a bailout of companies whose executives have received huge compensation packages. Mr. Syron, for instance, collected more than $38 million in compensation since he joined the company in 2003.

Although Mr. Syron promised regulators earlier this year that he would raise $5.5 billion from investors, he has repeatedly failed to make good on that promise — even as Fannie Mae raised more than $7 billion. Mr. Syron was slated to step down from the chief executive position last year, but that was delayed when his appointed successor, Eugene McQuade, chose to leave the company.

With the possible removal of the top management and the board, it is no longer clear who would appoint new management.

Mr. Paulson had hoped that merely having the authority to bail out the two companies, which Congress provided in its recent housing bill, would be enough to calm the markets, but if anything anxiety has been increasing. The clearest measure of that anxiety has been the gradually widening spread between interest rates on Fannie- or Freddie-backed mortgage securities and rates for Treasury securities, making home mortgages more expensive. The stock price of the companies has also plunged over the last year.

After stock markets closed on Friday, the shares of Fannie and Freddie plummeted. Fannie was trading around $5.50, down from $70 a year ago. Freddie was trading at about $4, down from about $65 a year ago.

With Fannie and Freddie guaranteeing about $5 trillion in mortgage-backed securities, and a big share of those securities held by central banks and investors around the world, Mr. Paulson appears to have decided that the stakes are too high to take any chances.

The Treasury Department is required by the new law to obtain agreement from the boards of Fannie and Freddie for a capital infusion. The exception is if the companies’ regulator, Mr. Lockhart, determines that the companies are insolvent or deeply undercapitalized it could take the companies over anyway.

Experts said that the longer the administration waited, the greater the potential risks and costs. Charles Calomiris, a professor of economics at Columbia University’s School of Business, said delaying a government rescue would only increase the risks and costs.


“The last thing you want to do is give a distressed borrower more time, because when people are in distress they tend to take a lot of risks,” he said. “You don’t want zombie institutions floating around with time on their hands.”

Stephen Labaton reported from Washington and Andrew Ross Sorkin from New York. Edmund L. Andrews contributed reporting from Washington, and Eric Dash and Charles Duhigg from New York

Good one from Don Harrold

1) Goldilocks Off Her Knees, Standing Tall!
WATCH:

It looks like it can fly too