U.S. Details $800 Billion Loan Plans

November 26, 2008

By EDMUND L. ANDREWS

WASHINGTON — The Federal Reserve and the Treasury announced $800 billion in new lending programs on Tuesday, sending a message that they would print as much money as needed to revive the nation’s crippled banking system.

The gargantuan efforts — one to finance loans for consumers, and a bigger one to push down home mortgage rates — were the latest but probably not the last of the federal government’s initiatives to absorb the shocks that began with losses on subprime mortgages and have spread to every corner of the economy.

In the last year, the government has assumed about $7.8 trillion in direct and indirect financial obligations. That is equal to about half the size of the nation’s entire economy and far eclipses the $700 billion that Congress authorized for the Treasury’s financial rescue plan.

Those obligations include about $1.4 trillion that has already been committed to loans, capital infusions to banks and the rescues of firms like Bear Stearns and the American International Group, the troubled insurance conglomerate. But they also include additional trillions in government guarantees on mortgages, bank deposits, commercial loans and money market funds.

The mortgage markets were electrified by the Fed’s announcement that it would swoop in and buy up to $600 billion in debt tied to mortgages guaranteed by Fannie Mae and Freddie Mac. Interest rates on 30-year fixed-rate mortgages fell almost a full percentage point, to 5.5 percent, from 6.3 percent.

But analysts said the program would do little to reduce the tidal wave of foreclosures. That is because most of the foreclosures are on subprime mortgages and other high-risk loans that were not bought or guaranteed by government-sponsored finance companies like Fannie Mae.

Stock investors reacted coolly to the announcements. The major stock indexes initially fell. The Standard & Poor’s 500-stock index later edged up, closing at 857.39, up 0.66 percent. The Nasdaq closed down 0.5 percent, at 1,464.73.

The long-term risks are enormous but difficult to estimate. They begin with the danger of a new surge of inflation, at least after the economy comes out of its current downturn. Beyond that, taxpayers will have to pick up the losses from loans that default or guarantees that have to be made good.

But the most troublesome unknowns are how the maze of protections for investors and consumers will change economic and political behavior in the future.

“The Federal Reserve has a lot of levers of influence with consequences for individual industries,” said Vincent R. Reinhart, a former Fed official and now a senior fellow at the American Enterprise Institute. “Now that it has used those levers, don’t you think Congress will want it to start using them again? The Fed could become the go-to place for bailouts.”

Administration and central bank officials contend that the risk of doing nothing is a full-blown depression in which unemployment climbs above 10 percent and the country needs years to recover. Many private economists agree.

“They are doing whatever it takes,” said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisers, an economic forecasting firm. “The problem is, the more you go in this direction, the harder it is to turn around and the harder your exit strategy is.”

Most economists agree that the United States is in the worst financial crisis since the Great Depression, and that it has already fallen into a severe recession that is likely to be one of the deepest in decades.

“What they are doing is trying to limit the damage to something consistent with a severe postwar recession, but not something worse than that,” Mr. Meyer said.

Indeed, the government reported on Tuesday that the economy contracted by 0.5 percent in the third quarter, slightly worse than previously estimated. But private forecasters predict that economic activity will fall by 4 to 5 percent in the fourth quarter and continue to contract for much of next year.

In the first of two new actions announced on Tuesday, the Treasury and the Fed said they would create a $200 billion program to lend money against securities backed by car loans, student loans, credit card debt and even small-business loans.

The Treasury would contribute $20 billion to the so-called Term Asset-Backed Securities Loan Facility and assume responsibility for any losses up to $20 billion. The Federal Reserve would lend the new entity as much as $180 billion.

The new facility would then lend money at low rates to companies that post collateral based on securities backed by consumer debt or business loans. The new program would be allowed to accept only securities with Triple-A ratings, the highest possible, from at least two rating agencies.

The Treasury secretary, Henry M. Paulson Jr., made it clear that the new lending facility was just a “starting point” and could be expanded to many other kinds of debt, like commercial mortgage-backed securities. “It’s going to take awhile to get this program up and going, and then it could be expanded and increased over time,” he said at a news conference.

Separately, the central bank announced that it would try to force down home mortgage rates by buying up $600 billion in debt tied to home loans guaranteed by Fannie Mae, Freddie Mac and other government-controlled financing companies.

The actions on Tuesday represented two milestones in the government’s expansion into private markets.

It was the first time that the Fed and the Treasury have stepped in to finance consumer debt. The $200 billion program comes close to being a government bank.

But the new programs also represented a new level of commitment by the Federal Reserve. Instead of trying to strengthen the economy by reducing short-term rates, which is the usual policy tool, the Fed is now pumping vast amounts of money directly into specific markets for mortgages — and anything else it believes needs help.

Over the last year, the Fed and the Treasury have bailed out major Wall Street firms, rescued the world’s biggest insurer, taken over Fannie Mae and Freddie Mac, and guaranteed hundreds of billions of dollars in bank transactions.

As big as the two new lending programs are, Mr. Meyer cautioned that they were only going to reduce the pain that lies ahead, not eliminate it. Unemployment, at 6.5 percent in October, is still likely to climb to 7.5 or even 8 percent next year, he predicted. But it may not shoot up to 9 or 10 percent, a level that economists often consider the unofficial dividing line between a recession and a depression.

The new actions are unlikely to be the last. Until the economy begins to turn around, Fed officials have made it clear they are prepared to print as much money as needed to jump-start lending, consumer spending, home buying and investment.

“They are using every tool at their disposal, and they will move from credit market to credit market to reduce disruptions,” said Richard Berner, chief economist at Morgan Stanley.

The Federal Reserve has now moved to a radical new phase of its effort to shore up the economy. Until now, it has carefully distinguished between two goals — reducing the panic and turmoil in financial markets, and propping up the economy itself, which has been battered as the supply of credit has dried up.

To tackle the first goal, the Fed expanded its lending programs to banks and Wall Street firms, and organized the rescue of failing firms like Bear Stearns.

To bolster the general economy, it relied on its traditional tool: reducing the overnight Federal funds rate, the interest rate that banks charge for lending their reserves to one another. Normally, a lower Federal funds rates leads to lower long-term rates, like those for mortgages.

But the central bank has already lowered the rate to 1 percent, and it cannot reduce it below zero. Instead, policy makers are buying up other kinds of debt securities, which has the effect of driving down the rates in those parts of the market.

The move amounts to what economists refer to as “quantitative easing,” which means having the Fed pump staggering amounts of money into the economy by buying up a wide range of debt instruments.

In a conference call with reporters, Fed officials insisted their goal was not to pursue a policy of quantitative easing, but simply to unfreeze the mortgage market.

But for practical purposes, the actions lead to similar results.

The Resurrection of the Socialist Idea

Posted by Justin Raimondo on November 18, 2008

When the Soviet Union’s ramshackle empire imploded, and what Louis Bromfield called the “worldwide psychopathic cult” of Communism fell into an embarrassed quietude, it seemed the socialist dream was over. As it turned out, however, we should only have been so lucky. Socialism, the seizure of the means of production by the State, was by no means dead and buried: Indeed, it was strengthened, as it no longer had to bear the guilt of the gulag and the supposedly deviant doctrine of Leninism. It could return to its democratic and egalitarian roots, and find new life in fresh soil—American soil.

This is precisely what has occurred, and with such suddenness that the impact has yet to hit all concerned. If the crisis of the Leninist project was telescoped into a few months time, with crowds tearing down the Berlin Wall and the Russians rising in the streets, then the West has experienced its own crisis in the form of an economic meltdown of similar proportions. With a single vote of Congress, and a few bureaucratic edicts from the Treasury Department, the commanding heights of the US economy—the banks—have effectively been nationalized. Not only that, but huge swathes of American industry are up for a government takeover; and the Captains of Industry are getting in line for handouts, all described as “rescue” packages. There are serious proposals on the table to seize the entire housing sector, with the government guaranteeing individual mortgages, in effect nationalizing the real estate industry.

Socialism in all its previous forms has notoriously failed, albeit not without exacting a high toll of human misery wherever its been tried. Certainly the Soviet form was remarkably brutal, even by the bloody standards of the twentieth century, rivaled in its bloodthirstiness only by its twin brother, German National Socialism, and actually exceeded in murderousness by the second wave Communist regimes in Asia. The more pacific forms, such as the utopian variety, never really got off the ground, or only achieved small-scale localized hegemony, in out of the way places like Denmarck. In England, the old Labor party has renounced its socialist past, and none of the Social Democratic parties of Europe refer any more to their socialist “principles,” not even on ceremonial occasions. Indeed, the Blairite “modernizing” faction of the British Labor party is in favor of the market, albeit in a form very far from the laissez-faire ideal evoked by libertarians. Theirs’ is a corporate socialism with egalitarian windowdressing, and, in this sense, its ascension to power prefigured the Obama-revolution that has upended the political landscape in America.

What is completely different, however, about this incarnation of the socialist idea is that it has taken on a new and quite unusual form, one that at first appears so counterintuitive as to be virtually impossible—one that seems to negate the very essence of the socialist ideal, which is—or has been—egalitarianism. Everyone will be made more equal: all will be responsible for all. None will go hungry, and production for use and not for profit is the rule law and morality. That ideology, however, seems to have died along with the old Soviet Union, never to rise again. In its place, however, the mutant offspring of Western materialism and social democracy is arising to take its place, which can only be described as plutocratic socialism.

As a political program, socialism for the rich, and capitalism for the middle class would seem to have a strictly limited appeal. This, however, belies the power of fear, and of the catastrophism that has overtaken our thought processes in the course of the economic meltdown. We were told that unless Congress immediately coughed up $700 billion, pronto, the sky would fall, the economy would collapse, and we’d be in for America’s Second Great Depression. Oh, but don’t worry, because we’re going to use the money to buy shares in the banks, and the taxpayers will get their money back – with interest. Think of it as a gigantic financial toxic spill, which can only be cleaned up by government action: We’re going to buy up those bad ol’ “toxic” loans and make them “green” and profitable again. And they all lived happily ever after.

Except that it didn’t work out that way, and the disillusion came in record time. A few weeks later the story switched: Oh, never mind, they said. We aren’t going to buy shares, no one’s getting any money back, we’re just going to give the banks lots of cash and hope they don’t fail – oh, and, this is just the beginning. The auto industry is next: We’re going to let them declare themselves banks, which they practically are as far as the unions are concerned. Except their account is overdrawn, the money spigot is run dry, and so it’s up to the government to guarantee their wages, their standard of living, and the perks and privileges they have retained against all economic pressure and common sense.

This is a socialist revolution from the top down, a revolution led by the bankers, who were the first to throw off their chains and declare they had a world to win. Liberated from the tyranny of the system of profits and losses, and refusing to let their surplus labor be exploited any longer, they rose up, and, as one, seized control of the machinery of government, or specifically the U.S. Treasury, which they proceeded to loot to their heart’s desire. They did this in the midst of a presidential election, with both “major” party candidates signing on to this singular act of grand larceny, and to the loud hosannas of the punditariat. The vanguard party of this socialist revolution wasn’t some Marxist-Leninist outfit, but Goldman Sachs, whose former CEO, Treasury Secretary “Hank” Paulson, handed over some ten billion in bailout money to his corporate alma mater. Along with a brace of Wall Street firms deemed “too big to fail”—including Bear Stearns, AIG, and the country’s major banks—the Money Power secured its interests, even as the financial house of cards they had spent the last decade or so building collapsed around them. The common folks would be dragged under, but the golden parachutes of the ruling elites unfolded without a hitch. Here was a great revolutionary upsurge whose slogans were “Save the rich!” and “Billionaires first!”

How in the name of all that’s holy did they manage to pull it off?

It was a revolution made possible by the post-9/11 mentality that sees the apocalypse as imminent: the “end times” mindset of anticipation and fear that is the spirit of the age. Remember how we were told, in the aftermath of the terrorist attacks on the World Trade Center and the Pentagon, that unless we signed over our liberties and our fate to the federal government, we were all doomed to become victims of an as-yet-unrealized terrorist apocalypse, one that would dwarf 9/11 in its physical and historical consequences. The so-called PATRIOT Act was passed overwhelmingly, without even being read or reviewed by those voting “aye.” The government started examining peoples’ emails, and prying into their financial affairs, under the general rubric of “fighting terrorism.” The president assumed dictatorial powers, claiming the “right” to detain “unlawful combatants”—including American citizens—without charge or trial, indefinitely – and the US embarked on a worldwide crusade, which the President defined as a “generational” struggle, that shows no signs of ending: indeed, under the new Democratic administration, it shows every sign of expanding, spilling into Pakistan and the steppes of Central Asia.

All these disastrous and criminal acts—the suspension of hallowed constitutional rights, the launching of a new world war, the invasion and occupation of Iraq and Afghanistan—were justified on the grounds of necessity: if we didn’t undertake them, horrific consequences would follow. It’s either suspend the Constitution, and invade the Middle East, or else face the looming threat of near certain annihilation.

The bank bailout followed a similar pattern. Unless we immediately handed over some 700 billion bucks, we were told, the entire international financial structure would collapse under the weight of its own hubris. We had no choice: It was either that, or financial annihilation. After riding high for a good decade and more as the Greenspan Bubble expanded, the banksters and their cronies in government and the corporate world went straight to the head of the bread line when it burst. First the big banks, then the insurance company AIG, followed by American Express and various “too big to fail” hedge funds (which received official status as “banks”), and lining up right behind them the three big auto companies, Ford, GM, and Chrysler. As the scent of free money fills the air, the line gets longer. During the late and lamentable presidential campaign, the Republican candidate brought this theory of trickle down socialism to its logical conclusion by demanding that the government buy up individual home mortgages, so that Joe the Plumber could get in on the bailout racket. Bailouts for everyone! And he had the nerve to call Obama a “socialist”! The only proper answer to that was and is: Look who’s talking!

Which brings us to the subject of the opposition to the socialist resurgence, such as it is – and it can hardly be said to exist at all. Even that august bastion of unfettered capitalism, the Cato Institute, expressed support for the bank bailout, with one of their policy analysts declaring that Paulson was “forced” to bail out Fannie Mae and Freddie Mac, because they’re “too big to fail but also too costly to keep.” The Heritage Foundation had even less trouble reconciling this orgy of crony capitalism with their particular brand of “conservatism”—which seems to consist of a burning desire to conserve the ill-gotten gains of Wall Street whiz kids and leverage artists, at taxpayers’ expense.

The only real opposition to the bailout has come from the “extreme” Right, the libertarians and the Austrian school of economists headquartered over at the Ludwig von Mises Institute. As for the financial analyst who saw the meltdown coming, Peter Schiff was in a party of one. Of course, Ron Paul has been predicting just such an economic Armageddon for quite some time now, and the Austrian school—followers of Ludwig von Mises and his theory of the business cycle as the product of bank credit expansion— has gained new prominence and respect on account of its record of anticipating the crisis—and prescribing the cure—well in advance of anyone else.

In the popular mind, however, the market is discredited, and the bromides of the 1930s have come back into fashion. The markets have “failed,” the government must step in, all our problems are due to the lack of regulations: Washington knows best, and will take things in hand. That Washington is the problem, not the solution, is lost in the noise, a fact shouted down by the popular demand for instant relief from a problem that can only be solved through suffering—that is, through deflation.

The economic bubble caused by bank credit expansion of the money supply, and the actions of the Federal Reserve over the past decade or so, has burst, and the only solution is to flush all that malinvestment out of the system. These are the “toxic” investments—concentrated in, but not limited to the housing market—that were undertaken in response to false market signals sent out by all that cash sloshing around during the heyday of the Greenspan Bubble. By bailing out the banks, and then the others, in turn, including the individual homeowner who took out a mortgage on a five-bedroom luxury home he couldn’t really afford, the government is seeking to freeze the economic status quo in the moment before the meltdown hit, to repeal the downturn by legislative fiat—a hopeless quest that can only delay the inevitable correction and prolong the pain of the depression.

The cover of the current Time magazine sports a photoshopped version of Obama decked out as FDR, an historical analogy that, like all such analogies, lacks precision, but has some basis in reality. For the resemblance is there, albeit only in a limited sense: Obama’s program mirrors the second phase of FDR’s New Deal—large scale government projects like the WPA, the privileging of Big Labor, and promises to bypass the first altogether. By that time, “the country squire in the White House” had already made his peace with big business and acquiesced to making his New Deal an instrument in their hands. Together with the lords of Wall Street, he and his Brain Trust imposed an unprecedented degree of economic and social regimentation and prepared the nation for war. From that moment on, the nation would be ruled by a triumverate of Big Government, Big Business, and Big Labor. This coalition is being revived, today, in the Obama administration: as I pointed out in a recent piece for Taki’s Magazine, there’s a reason why the big financial players put their money on Obama, bigtime. They’re going to recoup every penny of their investment, of that you can be sure. Indeed, they already have.

So this is the fate of the socialist idea, the old egalitarian anthem of the poor and the oppressed: to become an instrument in the hands of a bunch of avaricious plutocrats, who glory in their status as “masters of the universe” and exemplify the vulgarity and hubris of a civilization that values excess for its own sake, with their gold-plated bathrooms, outsized yachts, and high-priced call-girls. In our Bizarro World, where the old moral codes are not only repealed but seemingly inverted, the irony of this is lost as we march into the glorious socialist future.

Housing not close to bottoming

CNNMoney.com
Home prices post a record decline in Case-Shiller survey
Tuesday November 25, 10:43 am ET
By Les Christie, CNNMoney.com staff writer The home price plunge stayed on a record pace this summer, according to a widely watched gauge of national real estate markets released Tuesday.

The S&P Case-Shiller Home Price national index recorded a 16.6% decline in the third quarter compared with the same period a year ago. That eclipsed the previous record of 15.1% set during the second quarter.

Prices in Case-Shiller's separate index of 10 major cities fell a record 18.6%, while its 20-city index dropped a record 17.4%

With foreclosures soaring at record rates, the economic picture dimming and job losses ramping up, all the elements were in place to push prices lower.

"The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals." says David Blitzer, Standard & Poor's spokesman for the indexes, in a press release. "All three aggregate indices and 13 of the 20 metro areas are reporting new record rates of decline. . . . Prices are back to where they were in early 2004."

The 10-city index is now 23.4% off its peak price, which came in June 2006; the 20-city index is down 21.8% from its July 2006 high and the national index has fallen 21% since the third quarter of 2006.

Home prices in the 10-city index have fallen for 26 consecutive months. The decline has broadened over the past 12 months, with prices dropping in every city of the 20-city index during September.

In the weakest market, Phoenix, the 12-month loss came to 31.9%. Las Vegas prices plummeted 31.3% and San Francisco recorded a 29.5% decline. The best performing markets, Dallas and Charlotte, N.C., still posted drops - 2.7% in Dallas and 3.5% in Charlotte.

With San Francisco and Las Vegas, the other members of the 10-city index are: Miami, down 28.4% year-over-year; Los Angeles, down 27.6%; San Diego, down 26.3%; Washington, down 17%; Chicago, down 10.1%; New York, down 7.3%; Boston, down 5.7%; and Denver, down 5.4%.

In addition to Phoenix, Dallas, Charlotte and the cities in the 10-city index, the 20-city index is made up of: Detroit, down 18.6%); Tampa, Fla., down 18.5%; Minneapolis, down 14%; Seattle, down 9.8%; Atlanta, down 9.5%; Portland, Ore., down 8.6%; and Cleveland, down 6.4%.

Foreclosures continue to take a heavy toll, with sales in some cities dominated by properties repossessed by banks and then put back on the market, often at bargain prices. In Las Vegas and Cleveland, for example, about half of all homes for sale are bank-owned properties, according to the real estate Web site, Trulia.com.

"Foreclosures are clearly a part of the market now," said Blitzer.

He added that the national index price trends tend to be more moderate because they encompass many more exurban and rural areas, where, in many cases, home prices never skyrocketed as they did in some of the hotter, urban markets.

Karl Case, the Wellesley economics professor who is the Case in Case-Shiller, said during a news conference about the latest index report that he would hesitate to put a number on how much further prices could fall, but the increasing job losses will surely worsen the situation.

"There's no cushion against unemployment," he said.

They always revise down

Economy's tumble even worse than expected in 3Q
Tuesday November 25, 11:57 am ET
By Jeannine Aversa, AP Economics Writer Economy's tumble in the summer worse than first thought as consumers slash spending WASHINGTON (AP) -- The economy took a tumble in the summer that was worse than first thought as American consumers throttled back their spending by the most in 28 years, further proof the country is almost certainly in the throes of a painful recession.

The updated reading on the economy's performance, released Tuesday by the Commerce Department, showed the gross domestic product shrank at a 0.5 percent annual rate in the July-September quarter.

That was weaker than the 0.3 percent rate of decline first estimated a month ago, and marked the worst showing since the economy contracted at a 1.4 percent pace in the third quarter of 2001, when the nation was suffering through its last recession.

GDP measures the value of all goods and services produced within the U.S. and is considered the best barometer of the country's economic fitness.

"Consumers and businesses were like deer in the headlights ... frozen," said economist Ken Mayland, president of ClearView Economics.

The new reading on GDP underscores just how quickly the economy deteriorated as housing, credit and financial crises intensified. The economy logged growth of 2.8 percent in the second quarter.

White House press secretary Dana Perino called the lower GDP figure "troubling" and said new government efforts announced Tuesday to boost the availability of auto and student loans, credit cards, home loans and other consumer lending -- at cheaper rates -- should eventually help spur more consumer spending.

On Wall Street, those new government efforts provided an early lift to stocks, but the Dow Jones industrials were down around 35 points in late-morning trading.

Elsewhere, the New York-based Conference Board said its Consumer Confidence Index for November rose to 44.9, from a revised 38.8 in October. Last month's reading was the lowest since the research group started tracking the index in 1967.

Economists surveyed by Thomson Reuters expected the November reading to slip to 37.9. Still, this month's figure hovers around levels not seen since December 1974, with Americans' views on the economy the gloomiest in decades as they grapple with massive layoffs, slumping home prices and dwindling retirement funds.

To revive the economy, President-elect Barack Obama, who takes over on Jan. 20, says a top priority will be working with Congress to enact a massive stimulus package that he says will generate millions of new jobs.

The new, lower third-quarter GDP reading matched economists' forecasts. The downgrade from the initial estimate mostly reflected an even sharper cut back in spending by consumers and less brisk sales growth of U.S. exports.

American consumers -- the lifeblood of the economy -- slashed spending in the third quarter at a 3.7 percent pace. That was deeper than the 3.1 percent cut initially reported and marked the biggest reduction since the second quarter of 1980, when the country was in the grip of recession.

Consumers are hunkering down amid job losses, tanking investment portfolios and sinking home values, which are making them nervous about spending.

Underscoring the strain faced by consumers, the report showed that Americans' disposable income fell at an annual rate of 9.2 percent in the third quarter, the largest quarterly drop on records dating back to 1947. The government's initial estimate had showed a record 8.7 percent decline in disposable income for the quarter.

Sales of U.S. exports grew at a 3.4 percent pace in the third quarter. That was lower than a 5.9 percent growth rate initially estimated and marked a sharp slowdown from the second quarter's blistering 12.3 percent growth rate. The deceleration reflects less demand from overseas buyers coping with their own economic problems.

Home builders slashed spending at a 17.6 percent pace, marking the 11th straight quarterly cut and fresh evidence of the depth of the housing slump.

Meanwhile, a report on home prices released Tuesday and downbeat earnings results from homebuilder D.R. Horton, showed further deterioration in the housing market. The Standard & Poor's/Case-Shiller U.S. National Home Price Index said that home prices tumbled a record 16.6 percent during the third quarter from the same period a year ago. Prices are at levels not seen since the first quarter of 2004.

Fort Worth, Tex.-based D.R. Horton Inc. reported a nearly $800 million loss in its fiscal fourth quarter on slower home sales and more than $1 billion in charges amid a battered housing market.

To help revive the economy, the Federal Reserve is expected to lower interest rates when its meets on Dec. 16, its last session of the year. Last month, the Fed dropped its key rate to 1 percent, a level seen only once before in the last half-century.

So far, though, the Fed's rate reductions, a $700 billion financial bailout package and a flurry of other radical actions have been unable to break though a dangerous credit clog, restore stability to financial markets and help the sinking economy.

Banks are failing and storied Wall Street firms been laid low by the crises. Home foreclosures have soared and jobs are vanishing.

The nation's unemployment rate is at 6.5 percent, a 14-year high, and will climb higher. Employers have cut payrolls every month so far this year and more losses are expected in the months ahead. The total of number of unemployed in October was just over 10 million, the most in 25 years.

Given all the stresses, consumers are expected to burrow further, making it likely the economy will continue to shrink through the rest of this year and into 2009, more than fulfilling a classic definition of a recession. That is, two straight quarters of contracting GDP.

The forecast calls for ...DEBT

The problem is that this time Washington was racking up massive deficits even before the current economic downturn.

The government recorded surpluses in the fiscal years 1998 through 2001, ending Sept. 30 each of those calendar years.

But that all changed once President George W. Bush was in office a year. Saddled with costs from the Sept. 11 attacks plus the tax cuts he pushed through Congress, Bush took the $127 billion surplus he inherited from former President Bill Clinton and turned it into a $159 billion deficit the following year. Then wars in Iraq and Afghanistan and more tax cuts swelled it to $413 billion in 2004, a record until $454.8 billion for the fiscal 2008 year that ended Sept. 30.

The White House Office of Management and Budget in July estimated the 2009 deficit at $482 billion, but that doesn't take into account possible losses down the road from loans and investments made under the $700 billion financial rescue plan enacted in October or other efforts to bail out stricken financial institutions.

The Congressional Budget Office put the deficit in October, the first month of fiscal 2009, at a staggering $232 billion. Its figure included $115 billion in bank stock purchases the Treasury Department made as part of the financial bailout.

Also not part of estimates are Obama's plans to push through in the first days of his administration a massive stimulus package, which could cost $500 billion or more.

The deficit, Mark Zandi, chief economist and co-founder of Moody's Economy.com, said at Senate Budget Committee hearings last week, "could easily exceed $1 trillion in fiscal 2009 and go even higher in 2010." He said borrowing by the Treasury could top $2 trillion this year.

Borrowing adds to the national debt, the money the federal government owes to states, corporations, individuals and foreign countries such as China and Japan who buy U.S. Treasury notes, bonds and other debt instruments. The debt, which stood at about $5.7 trillion in 2007, topped the $10 trillion mark in October and now stands at about $10.6 trillion.

Zandi said Obama's stimulus package should be at least $400 billion, equal to more than 2.5 percent of the nation's gross domestic product. That sum would be about equal to the direct economic costs of the financial panic, he said.

James Horney, director for federal fiscal policy at the Center on Budget and Policy Priorities, also said it was "pretty likely" that the deficit this year will approach $1 trillion. Big deficits can't be helped in bad times, he said, as the government is required to spend more to help the needy and stimulate the economy at the same time it is seeing a decline in tax revenues.

The national debt could rise even more than the deficit in the short term, he said, although the debt situation will improve as the government begins selling the assets it is now purchasing to help troubled banks and financial institutes.

"The question, of course, is what's the alternative?" Horney said. If the government doesn't move to stimulate the economy, "the outcome could be much worse."

Senate Budget Committee Chairman Kent Conrad, D-N.D., a leading advocate for fiscal discipline, acknowledged at the hearing last week that "you have to have lift this economy. Only the federal government can do it because credit markets are still debilitated."

But he added that unless the government enters a process "to get us back to fiscal responsibility, we will lose credibility and we will have the danger of even greater long-term damage."

Obama, at his new conference Monday, appeared to hear that message. "Part and parcel" of his efforts to boost the economy, he said "is a plan for a sustainable fiscal situation long-term, and that's going to require some reforms in Washington."

Bill Bonner

Today, in the U.S.A., the Bush Administration has worked hard to make people fearful – with its torture chambers and preposterous “threat levels.” But the terrorists wouldn’t cooperate; they failed to blow up even a trash truck. Alas, now the mob sweats – and for good reason. People are afraid of losing their houses, their jobs, and their retirements. Losses in equities worldwide top $25 trillion. In U.S. housing alone, some $4 trillion has disappeared. That’s why Obama won; it has nothing to do with national redemption or Sarah Palin. When the world was safe and plush...the mob wanted to feel the frisson of danger. What the public wants now is safety: a movie with a happy ending, not a horror flick. Obama appeared the calmer, more intelligent, candidate. Voters could imagine him as the “black Roosevelt” giving soothing fireside chats and telling the lies they most wanted to hear.

And so, in the national narrative, one cockamamie bamboozle takes the place of the one that went before. Americans were supposed to be fearful; now they are supposed to be confident. They were supposed to be racists; now they are supposed to colorblind. They were supposed to defend free market capitalism to their last breath; now they turn to the state and beg it to protect their last dime.

52,000 Citi Group Layoff

One of the largest single job culls of the current downturn was launched yesterday as Citigroup, the American banking group, announced plans to reduce its headcount by 52,000 in the next few months.

Staff at the bank, which employs 11,000 people in Britain, heard the news that 27,000 jobs would be axed from Vikram Pandit, the chief executive, after they were instructed to dial into a conference call. Another 25,000 employees will be transferred when its German company and Indian outsourcing business are sold to new owners.

Citi has already shed 23,000 jobs in the past nine months. However, further job-cutting was needed to meet Mr Pandit’s target of reducing the company’s headcount from its peak at the end of last year of 375,000 to 300,000 within months.

While the biggest casualty is likely to be the United States, where Citi operates one of the biggest retail banking networks, the UK will also suffer. As well as employing thousands of investment bankers in Canary Wharf in London, Citi operates the Egg credit card business employing 1,800 in Derby and also has a large administrative division in Belfast.

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The mood outside Citi’s glass-fronted tower in Canary Wharf after the announcement was surprisingly stoic. “We knew it anyway,” a French worker said with a Gallic shrug.

One investment banker, with a nod towards the building 200 metres away across the dock that houses the remaining skeleton staff of Lehman Brothers, said: “It had been coming for a long time. Most people were resigned to it. Compared with some, we are sitting pretty.”

Another banker said: “Most people were expecting this – if you didn’t, then you probably shouldn’t be in an investment bank to be honest – so there was almost a feeling of relief.”

“Some of the jobs will just be dead wood,” one smoker said, before stubbing out his cigarette and returning to his office.

The financial services industry in Britain is facing up to a devastating round of job cuts as the crunch bites. Tens of thousands of City jobs have gone already, with Goldman Sachs, Royal Bank of Scotland, Morgan Stanley, Dresdner Bank and Merrill Lynch taking a knife to their headcounts.

The bloodletting is about to spread to retail banking, with at least 20,000 jobs expected to disappear when Lloyds TSB takes over HBOS.

The Citigroup job losses are expected to be achieved through a mixture of redundancies and natural leavers who will not be replaced. Last Friday hundreds of Citi staff in London were given their P45s as the result of a previous cost-cutting exercise.

Citi, which before the crunch was the biggest bank in the world, has been poleaxed by sub-prime losses and other difficulties, leading to losses of $20.3 billion (£13.5 billion) in the past year. Last month the US Government injected $25 billion to beef up its weakened balance sheet.

Citigroup’s latest cut is one of the biggest single corporate culls ever. IBM holds the record for the single biggest headcount reduction, when it announced plans to shed 60,000 employees in 1993.

Mr Pandit told employees that the bank has spent the past year “getting fit”, but it expected a “difficult” 2009 for its customers.

Shares of Citigroup slipped 19 cents, or 2 per cent, to $9.33 in afternoon trading. Last week shares in the company that Sandy Weill created in 1998 from the merger of Travelers Group and Citicorp fell to dollar single digits.

Andrew Cuomo, the New York attorney-general, criticised Citi for delaying its announcement on executive bonuses this year. The bank has said that it will make any decision after December 31; Mr Cuomo argues it should institute a bonus ban at once.

— Angry institutional investors have wrested one concession from Barclays as the price for reluctantly approving its controversial £6 billion capital-raising. The bank has privately agreed to put up its entire 17-member board for reelection next April. Normally, only one third of the board comes up for election each year.

Existing shareholders were furious that Barclays had snubbed them in favour of Gulf investors; however, they were reluctant to vote against the deal for fear of sparking a crisis.

Last night Barclays declined to comment on the plan to submit the entire board to a vote – a move that may be frowned upon by the Financial Services Authority because of the instability that such an election could precipitate. Pirc, the corporate governance campaign group, urged shareholders to vote down the capital-raising plan.

'Rescue' Is Now Out of Control

For edition of November 13, 2008

by Rick Ackerman

At the rate Goldman Sachs shares have been falling lately, they could reach our $29 “hula target” by Thanksgiving. Barely a week ago, we predicted a plunge to $29 when GS was trading above $90; yesterday the stock hit $64. At the time, we vowed that if the forecast did not pan out, we’d don a grass skirt and dance the hula in Times Square in the middle of Feburary. So far, and unfortunately for Goldman’s shareholders and partners, we haven’t had much cause for worry.

The $29 projection was purely technical, based on Hidden Pivot analysis. But you don’t have to be a chartist to see that Goldman’s survival issues will only grow more challenging. If you merely ponder what the firm was doing to make profits by the tankerful a year ago, you’d have to wonder how they will make their money now; for the firm was operating at the very center of a smoke-and-mirrors business that no longer exists. We don’t doubt Goldman can survive and make a profit. However, in the deleveraged financial environment that now exists, and which will probably continue to exist for at least a generation, we’d be surprised if they can make even a hundredth of what they made in their halycon days as a global wheeler-dealer.

Meanwhile, there can be little doubt that Paulson’s latest ditherings contributed to the whack that financial stocks took yesterday. We should come right out and say it, since the mainstream media probably will not: Paulson, Bernanke and Friends have lost control. Yes, they have. As much should have been obvious to anyone tuned to Paulson’s speech yesterday. Turns out he’s no longer keen on buying up bad mortgages; instead, he now wants to pump credit money into the consumer economy. Just what we need: more consumption with more borrowed dollars. And this time with no housing as collateral. What a complete idiot! Can anyone in America �' other than homebuilders and Kudlow, perhaps -- be fooled into thinking that cajoling consumers into taking on more debt is somehow the answer to our problems?

And how about the banks’ new go-easy policy on mortgage deliquents? That’s about as effective a way as you could devise to bring the housing disaster to a quick and catastrophic end, since it gives the waning majority who are current on their mortgages an incentive to skip a payment or two in order to qualify for whatever aid might be coming down the pike. We won’t even get into the tragicomic drama occurring on the legislative side, as Pelosi et al. duel with a lame-duck President over “saving” the automakers. Would $100 billion more in loans produce, even in ten years, Chevys and Fords that the whole world would want to buy? Maybe. But we surely wouldn’t bet on it, especially since the competition will not exactly be standing still.

The bailout process has become too dispiriting if not to say too horrifying to watch.

The thing has gone out of control, and everyone knows it.

FAIL: One Word For Them All

Karl Denninger
Market Ticker
Nov 12, 2008

Paulson, Bernanke, Geithner, Congress...

President Bush...

And if he doesn't get on top of this, President-Elect Obama.

Let us begin by noting that President-Elect Obama voted for the $700 billion bailout - The "No Banker Left Hungry Act" - while the rest of America literally was losing their jobs and homes.

Yesterday we learned that Fannie Mae lost $29 billion in the third quarter, most of it by admitting to what they knew back in the first quarter - that a huge tax credit they had would be worthless.

Of course they didn't admit this at the time, even though I and others pointed it out.

Why aren't the former executives in prison for that bit of book-cooking?

American Express had a petition approved to become a bank holding company. Why? How about a bit of truth here Amex? Do you intend to toss bad credit-card debt on the taxpayer's back and cover it with a TARP?

AIG had its bailout package nearly double in cost, and worse, they now have a huge bolus of CDOs that are being "sold" to Treasury for 50 cents on the dollar - when market prices are closer to a nickel. That's a direct gift, and our exposure is now $150 billion - when the original bailout, which included taxpayer exposure, never got a vote in Congress.

Even better, AIG apparently hasn't stopped its high-priced junkets for executives - with one taking place as recently as this last week:

"Even as the company was pleading the federal government for another $40 billion dollars in loans, AIG sent top executives to a secret gathering at a luxury resort in Phoenix last week.

Nice. $343,000 worth of nice, if this report is correct.

Treasury says:

"In return," said Kashkari in a speech today, "AIG must comply with stringent limitations on executive compensation for its top executives, gold parachutes, its bonus pool, corporate expenses and lobbying."

Hmmmm... will we see enforcement Cash-And-Carry or will you live up to your name?

Out of the roughly $2 trillion committed thus far only about $450 billion of this money was actually passed through Congress - $100 billion in initial backstop for Fannie and Freddie, along with $350 billion for the first half of the TARP. Nearly all of the rest was committed literally by fiat in The Federal Reserve and Treasury without a bill in Congress, Congressional debate, or a vote.

We have discovered that Treasury, on its own initiative, changed tax policy in a fashion that will cost taxpayers another $150 billion, this beyond the TARP as well, without Congressional approval - this time as an "incentive" for banks buying up other banks.

Under The Constitution all revenue bills must originate in The House.

Congress is "afraid" to call this what it sure looks like to both me and many of them - illegal - for fear of scuttling deals that were done under the "TARP" of darkness.

General Motors got a "going concern" statement in its 10Q, which is for all intents and purposes Last Rites in the corporate sphere. Absent some sort of intervention (more than the $50 billion already authorized for the automakers in the "Housing Bill" this spring), again under the TARP of darkness and obfuscation, GM is likely toast.

Treasury has committed all but $60 billion of its first $350 billion, and is expected to issue one half trillion dollars in funding this quarter - on top of another half-trillion last. That's over one trillion dollars in debt, most of it new - and we're just getting warmed up.

How does Congress - and Treasury - think they're going to be able to sell this debt?

You don't think that The Fed would monetize it by just printing up some money, do you?

Do you think they might have already done that, perchance?

Well Bloomberg (among many others, myself included) would like to try to figure it out, but The Fed doesn't seem to want to disclose what it has taken in, from whom, and how it valued those alleged assets.

Why not Ben?

Are you afraid that you might wind up disclosing that you in fact have been printing money, after you told Congress there was no inflationary impact of your actions, and that such a disclosure might not only result in a contempt citation from Congress (or worse) but might also trigger mass capital flight by foreign governments and investors who suddenly come to realize that you've screwed them?

The only beneficiary of secrecy is the scoundrel who intends to lie, cheat and steal - or all three.

You wouldn't be guilty of any of that would you Ben?

How about you Tim (Geithner, at the NY Fed)? Is everything on the up-and-up over there in NY? If so, why don't you "bare all" and let us have a look-see?

Since it's our money you're playing with, in that we the taxpayer are the source of the wealth you shuffle around, we have every right to know what the hell you're doing with it and so does Congress.

If you refuse then I believe Congress should revoke your charter and subpoena everyone involved, including the Treasury Secretary's and both Bernanke's and Geithner's notes, phone records and meeting minutes, along with the details of every transaction taken by any of the above since August of 2007. Publish it all in The Federal Register and online via the web.

Congress bleats that it is "surprised" that Treasury has given money to banks to make acquisitions and fund bonus pools, but the Treasury Secretary threatened a Presidential Veto of the bill if there were constraints put on the funds' use when the measure was first handed to Congress, if you believe the statements made in in the media by the Congresspeople who were there.

In addition, Treasury said there would be an immediate banking system collapse and a Depression if they did not immediately buy "distressed mortgage-backed securities", and yet not one single dollar of said distressed assets have been purchased to date, while $310 billion has been spent or committed so banks can make acquisitions and fund bonus pools, with said acquisitions happening at 60% discounts to claimed balance sheet values just days prior.

Has the banking system collapsed?

Has your ATM card stopped working?

No, but Goldman and Morgan, along with others, have $70 billion in bonus pool money to pay to their employees, compliments of the US Taxpayer.

Has Congress reconvened (now that the election is over) to strip King Henry of power that he has clearly used in a fashion he said he wouldn't, and in at least one case in a fashion that many Congresspeople say is outright unlawful?

Nope.

Now our fine President-Elect is browbeating Bush to put forward a stimulus bill before he takes office. Why not introduce one Senator? After all, The Democrats currently have a majority in both houses of Congress, do they not? Get together with some House Members in your party, pen it, and have them send it up. Get a nice veto-proof majority together (you know, that "deliberative and across the aisle" stuff?) and pass it.

I'll tell you why - further stimulus bills will do nothing just as the last one did nothing, and President-Elect Obama knows it.

Stimulus Bills make good political theater and Americans who are long on sound bites but short on economic knowledge love the idea of "free money" but we are now flirting with a bond market dislocation and potential exposure of The Fed's machinations, which will bring the curtain down on all the games at once.

In my opinion the evidence is incontrovertible that we are literally teetering on the precipice; as evidence I cite the fact that credit-worthy firms continue to have to pay outrageous coupons to get their debt offerings to go (Verizon being among the most recent) and now The Fed has announced that it intends to delay one of the cornerstone pieces of "stabilizing" short-term funding markets - its money-market liquidity facility, which was slated to cover some $500+ billion in commercial paper.

Here's a WAG on the delay, and is nothing more than a theory that happens to fit the facts - The Fed is aware (perhaps because they've been told?) of an impending "problem" with rolling some of Treasury's short-term debt (and its excessive issue.) They are thus gambling on being able to "scare" some cash into those instruments from money-market funds, where it is currently hiding, to prevent "fails" (or a precipitous coupon jack-up) on those Treasury sales. In short, they're willing to risk melting money markets once again in order to avoid a potential Treasury Market problem.

How do 'ya like all them spinning plates Ben? Do 'ya think you can keep 'em all in the air, or will the first one fall and take out the rest?

President-Elect Obama is no dummy, and if we're going to have that sort of dislocation I'm quite certain he wants George Bush to be the one who has his hands all over it - as well he should, given that this is his administration and Treasury Department, along with his Fed Chairman, that has created the mess in the first place.

I put the odds of the plates falling within the next two months - and possibly within the next couple of weeks - at one chance in three.

If the plates fall we are going to have a very serious "event" in this country in the markets and in the economy - much worse than what we've seen to date. As in 10 million jobs lost almost all at once. A depression. And a new leg down in the market - 30-50% - essentially straight down.

As I said, I only give the odds of this event here and now at one in three - but if Ben and Hank have been playing games, that outcome has become inevitable - we are arguing about timing, not result.

If any of the above is the case the sooner we force the bs and lies in Treasury and The Fed out into the open and deal with it the better, although if any of this has happened a Depression has been assured.

If we discover that in fact Bernanke has attempted to monetize or simply has run out of credit in the "global money system" the Depression we will experience is the direct responsibility of Henry Paulson, Ben Bernanke and George W. Bush, with secondary responsibility resting with Congress through its refusal to put a stop to the stupidity in time and The Press, including and most especially CNBC, Larry Kudlow and Jim Cramer who have been cheerleading policies since last summer that have in fact shoved us right down the hole.

Buckle up.

Nov 11, 2008
Karl Denninger

Another AIG Resort 'Junket'

Another AIG Resort 'Junket': Top Execs Caught on Tape
KNXV Discovers $343,000 Secret Gathering, AIG Signs and Logos Hidden
By BRIAN ROSS and JOSEPH RHEE

November 10, 2008—

Even as the company was pleading the federal government for another $40 billion dollars in loans, AIG sent top executives to a secret gathering at a luxury resort in Phoenix last week.

Reporters for abc15.com (KNXV) caught the AIG executives on hidden cameras poolside and leaving the spa at the Pointe Hilton Squaw Peak Resort, despite apparent efforts by the company to disguise its involvement.

"AIG made significant efforts to disguise the conference, making sure there were no AIG logos or signs anywhere on the property," KNXV reported.

(click here to see the full KNXV report)

A hotel employee told KNXV reporter Josh Bernstein, "We can't even say the word [AIG]."

A company spokesperson, Nick Ashooh, confirmed AIG instructed the hotel to make sure there were no AIG signs or mention of the company by staff.

"We're trying to avoid confrontation, keep our profile low," said Ashooh. "Some of our employees have been harassed."

Click here to read AIG's full response.

"What do they have to hide," asked Congressman Elijah Cummings (D-MD) who said he had been promised by AIG CEO Edward Liddy that the company would stop such "junkets."

"They came to us and said they were drowning and needed help. A person who is drowning doesn't jump up and start partying," said Congressman Cummings.

Cummings said Liddy should resign as AIG CEO.

The AIG spokesman said Cummings "was mistaken" about the nature of the Phoenix event.

"It's terrible," said former AIG chairman Hank Greenberg. "I don't think the left hand knows what the right hand is doing there."

AIG came under fire last month when Congressional investigators revealed its executives attended a seminar for independent insurance agents at another luxury resort, in Southern California.

The AIG spokesman said the meeting in Phoenix was for independent financial advisors and "was the kind of thing we have to do to run our business."

Company officials confirmed the company spent an estimated $343,000 to sponsor the 2008 Asset Management Conference. A spokesperson said much of the cost would be recouped from product sponsors at the conference.

KNXV said the president of AIG unit Royal Alliance Associates, Art Tambaro, stayed in a two-story Casita suite and worked out at the spa while others participated in seminars.

Tambaro and other AIG executives declined to comment when approached by KNXV.

The AIG spokesman said the Casita suite was provided for free by the hotel because it had booked so many rooms.

AIG confirmed that former football quarterback Terry Bradshaw had been scheduled to appear and sign autographs. The company said it canceled Bradshaw's appearance which was to have been paid for by another company that was a sponsor of the event.

AIG said it conducted a "top to bottom review" of expenses "to validate that only expenses required to ensure the meeting's success are incurred."

The president of the AIG Advisor Group, CEO Larry Roth declined to speak to KNXV.

In a written statement, he said "We take very seriously our commitment to aggressively manage meeting costs." He said financial planners were charged a registration fee and for their travel.

A spokesman said the rooms at the luxury resort were made available at a discount rate of $189 a night.

The reports of the resort gathering came on the same day the U.S. Treasury announced it would invest $40 billion in AIG to bring the amount the federal government has put up to prevent the troubled insurance company from declaring bankruptcy to $150 billion.

"This action was necessary to maintain the stability of our financial system," said Neel Kashkari, who heads the government's bailout program.

"In return," said Kashkari in a speech today, "AIG must comply with stringent limitations on executive compensation for its top executives, gold parachutes, its bonus pool, corporate expenses and lobbying."

In addition to Roth and Tambaro, the AIG executives who spent last week at the Phoenix resort, according to KNXV, were Mark Schlafly, president and CEO, FSC Securities' Gary Bender, senior vice president, Investment Advisory Services; and Stuart Rogers, senior vice president.

Click Here for the Blotter Homepage.

Copyright © 2008 ABC News Internet Ventures

Forget what we said last month

Hank Paulson said today that hell no he won't apologize and by the way we douchebags should be apologizing to him, in one of the most brazen statements by a Bush appointee since Rumsfeld.

Yeah, the plan that didn't pass the house, because constituents were calling in to their representatives at 9 to 1 against. The plan that only got passed by scaring the bejeesus out of Congress by saying martial law would be institued otherwise, well forget about it. We're not going with that plan.

We've got another plan.

Well that's bullshit! You based the amount of money you asked for on a plan that would perform a certain function. If you scrap that plan, that legislation, you forfeit the money.

You bring forth a new plan, layout the features and you go back to Congress to show a need and an amount.

FAT CHANCE!

Bend over, your screwed!

China's New Deal

Want to make some money? Get your ass to China!


(11-10) 13:43 PST BEIJING, China (AP) --China's $586 billion stimulus package is its "biggest contribution to the world," Premier Wen Jiabao said Monday, as hopes rose that heavy spending on construction and other projects would help support global growth by fueling demand for imported machinery and raw materials. The massive Chinese spending plan — the largest ever undertaken by the communist leadership — was motivated by growing alarm at an unexpectedly sharp downturn in the country's fast-growing economy that raised the threat of job losses and social unrest. Sunday's announcement staked out a bold position as President Hu Jintao prepares for next weekend's meeting in Washington of leaders of 20 major economies to discuss a response to the global financial crisis.

Fed Covers Up Financial Crisis

The China connection to Goldman Sachs figures prominently in the current crisis.

By Cliff Kincaid Tuesday, November 11, 2008

Our “adversary” media have been extremely deferential toward those promoting the looting of the American taxpayers during the ongoing economic and financial crisis. However, Bloomberg News should be congratulated for filing suit against the Federal Reserve in an effort to disclose the securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks such as Goldman Sachs.

“The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,” said Matthew Winkler, the editor-in-chief of Bloomberg News.

Another way that the media can begin to fix the blame for the financial meltdown is to cover the views of those who predicted the crisis and understand how it happened.

Consider watching this video of a debate that financial analyst Peter Schiff had with Arthur Laffer on CNBC back on August 29, 2006. Schiff predicted the deep recession that is now underway and made mention of China’s role in our unfolding economic troubles. Laffer’s talk about our economic policies “working beautifully” makes him look utterly ridiculous in today’s climate. “The United States economy has never been in better shape,” he declared.

The China connection to Goldman Sachs figures prominently in the current crisis. Because China owned $376 billion of Freddie Mac and Fannie Mae paper, it played a big role in the financial crisis, and Treasury Secretary Henry Paulson, with his own personal and financial ties to China, admittedly tried to reassure the Chinese through this process that their investments would be protected. They are being “protected” in the sense that the American taxpayers are now on the hook for these government mortgage companies, which have been nationalized.

On top of this, Paulson, a former CEO of Goldman Sachs, made sure, as part of the bailout legislation, that he could bail out Chinese banks holding other troubled U.S. assets.

Schiff, who blows the whistle on these schemes, is not very popular in the media, which have been telling us consistently that things would get better after Wall Street was bailed out. But Schiff was on Bloomberg on October 28 talking about how the problems will get worse if we continue to follow the current tax, spend and bailout policies. His basic message is that the U.S. is broke and that the situation will get worse under an Obama Administration because of its commitment to more federal interference and involvement in the economy.

Nevertheless, during this discussion, a week before the election, Schiff predicted an Obama victory because “nobody is going to vote for four more years of this” and voters “are going to grasp at straws and vote for anybody who promises change.” But the change is phony, he warned. Obama “will put several nails in the coffin,” he said. “We’re going to get more of the same, only worse.”

Leaving aside the $1.8 trillion cost of the bailout and other socialist-style schemes that have been undertaken in the current crisis, the Peter G. Peterson Foundation reports that the total federal burden on U.S. taxpayers is now approaching $54 trillion―a cost of $175,000 per person. The Peterson Foundation seeks to educate the public and the press about the U.S. financial situation. It’s fine to educate people. But what about prosecuting those federal officials who brought the U.S. to the brink of financial apocalypse?

During an October 13 Fox News discussion of the mismanaged companies now going bankrupt or seeking federal bailouts, the subject of prosecuting somebody actually came up. Host Jaime Colby asked, “Where are the criminal prosecutions because I think their pictures should be hanging up in the post office?” Schiff, a guest on the show, went beyond the corporate executives and urged the prosecution of former Federal Reserve Board chairman Alan Greenspan, the husband of NBC News correspondent Andrea Mitchell, who told the House Committee on Oversight and Government Reform on October 23 that he had “made a mistake” in his stewardship of the economy. This is after he received an $8.5 million advance on his 2007 memoir, The Age of Turbulence: Adventures in a New World.

This is quite an adventure.

In March, as the mortgage crisis was beginning to build, Newsbusters.org noted that Mitchell had done a story conveniently ignoring her husband’s role in the unfolding debacle. Greenspan and Mitchell are a Washington “power couple,” which means they have plenty of social contacts who help protect them from criticism or even scrutiny. This is how Washington works.

This crisis has conflict of interest written all over it, not only in regard to media coverage but the role of current and former Goldman Sachs executives, including the Treasury Secretary Henry Paulson, who sparked the panic and has since authorized $10 billion in bailout money to his old firm. Neel Kashkari, a former Goldman Sachs banker, now runs the Troubled Asset Relief Program (TARP) authorized under the bailout plan.

As bad as it is, the situation could get far worse. At the House hearing, Rep. Jim Cooper, a more conservative Democrat from Tennessee, brandished a copy of the official Financial Report of the United States Government, which outlines the $54 trillion fiscal gap, primarily unfunded liabilities, that America faces if the government doesn’t change course. “Why is this document so hidden? Because it contains such bad news,” Cooper said. “On your watch,” he said to Greenspan and the other witnesses, “did you do anything to publicize this report, to make sure that everybody in America knew the real story about the real numbers for America?”

The answers were pathetic. Greenspan replied that he had tried to get the information inserted into the government’s “forecasting structure,” whatever that is. The “solutions,” of course, included much higher taxes, massive benefit cuts, the printing of more Federal Reserve paper money, or national bankruptcy.

Why Don't We Bail Out Circuit City?

Circuit City has finally blacked out after years of brownouts.

Circuit City, along with 17 affiliates, filed for bankruptcy protection on Monday in Richmond, Va., where the company is based. Its Canadian operations filed in Ontario courts.

Monday's announcement comes one week after Circuit City (nyse: CC - news - people ) said it was closing 155 of its more than 700 stores in 55 markets by the end of the year and firing about 17.0% of its U.S. work force. It also said it was considering all options to restructure.

http://www.forbes.com/equities/2008/11/11/circuit-city-closer-markets-equity-cx_cg_lal_1110markets38.html

A Quiet Windfall for US Banks

A Quiet Windfall for US Banks

Monday 10 November 2008



by: Amit R. Paley, The Washington Post


The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.

"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."

The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.

The change to Section 382 of the tax code - a provision that limited a kind of tax shelter arising in corporate mergers - came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.

Andrew C. DeSouza, a Treasury spokesman, said the administration had the legal authority to issue the notice as part of its power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis. "This is part of our overall effort to provide relief," he said.

The Treasury itself did not estimate how much the tax change would cost, DeSouza said.

A Tax Law "Shock"

The guidance issued from the IRS caught even some of the closest followers of tax law off guard because it seemed to come out of the blue when Treasury's work seemed focused almost exclusively on the bailout.

"It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops," said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. "I've been in tax law for 20 years, and I've never seen anything like this."

More than a dozen tax lawyers interviewed for this story - including several representing banks that stand to reap billions from the change - said the Treasury had no authority to issue the notice.

Several other tax lawyers, all of whom represent banks, said the change was legal. Like DeSouza, they said the legal authority came from Section 382 itself, which says the secretary can write regulations to "carry out the purposes of this section."

Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.

Lawmakers decried the tax shelters as a scam and created a formula to strictly limit the use of those purchased losses for tax purposes.

But from the beginning, some conservative economists and Republican administration officials criticized the new law as unwieldy and unnecessary meddling by the government in the business world.

"This has never been a good economic policy," said Kenneth W. Gideon, an assistant Treasury secretary for tax policy under President George H.W. Bush and now a partner at Skadden, Arps, Slate, Meagher & Flom, a law firm that represents banks.

The opposition to Section 382 is part of a broader ideological battle over how the tax code deals with a company's losses. Some conservative economists argue that not only should a firm be able to use losses to offset gains, but that in a year when a company only loses money, it should be entitled to a cash refund from the government.

During the current Bush administration, senior officials considered ways to implement some version of the policy. A Treasury paper in December 2007 - issued under the names of Eric Solomon, the top tax policy official in the department, and his deputy, Robert Carroll - criticized limits on the use of losses and suggested that they be relaxed. A logical extension of that argument would be an overhaul of 382, according to Carroll, who left his position as deputy assistant secretary in the Treasury's office of tax policy earlier this year.

Yet lobbyists trying to modify the obscure section found that they could get no traction in Congress or with the Treasury.

"It's really been the third rail of tax policy to touch 382," said Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute.

"The Wells Fargo Ruling"

As turmoil swept financial markets, banking officials stepped up their efforts to change the law.

Senior executives from the banking industry told top Treasury officials at the beginning of the year that Section 382 was bad for businesses because it was preventing mergers, according to Scott E. Talbott, senior vice president for the Financial Services Roundtable, which lobbies for some of the country's largest financial institutions. He declined to identify the executives and said the discussions were not a concerted lobbying effort. Lobbyists for the biotechnology industry also raised concerns about the provision at an April meeting with Solomon, the assistant secretary for tax policy, according to talking points prepared for the session.

DeSouza, the Treasury spokesman, said department officials in August began internal discussions about the tax change. "We received absolutely no requests from any bank or financial institution to do this," he said.

Although the department's action was prompted by spreading troubles in the financial markets, Carroll said, it was consistent with what the Treasury had deemed in the December report to be good tax policy.

The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.

The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

The Jones Day law firm said the tax change, which some analysts soon dubbed "the Wells Fargo Ruling," could be worth about $25 billion for Wells Fargo. Wells Fargo declined to comment for this article.

The tax world, meanwhile, was rushing to figure out the full impact of the notice and who was responsible for the change.

Jones Day released a widely circulated commentary that concluded that the change could cost taxpayers about $140 billion. Robert L. Willens, a prominent corporate tax expert in New York City, said the price is more likely to be $105 billion to $110 billion.

Over the next month, two more bank mergers took place with the benefit of the new tax guidance. PNC, which took over National City, saved about $5.1 billion from the modification, about the total amount that it spent to acquire the bank, Willens said. Banco Santander, which took over Sovereign Bancorp, netted an extra $2 billion because of the change, he said. A spokesman for PNC said Willens's estimate was too high but declined to provide an alternate one; Santander declined to comment.

Attorneys representing banks celebrated the notice. The week after it was issued, former Treasury officials now in private practice met with Solomon, the department's top tax policy official. They asked him to relax the limitations on banks even further, so that foreign banks could benefit from the tax break, too.

Congress Looks for Answers

No one in the Treasury informed the tax-writing committees of Congress about this move, which could reduce revenue by tens of billions of dollars. Legislators learned about the notice only days later.

DeSouza, the Treasury spokesman, said Congress is not normally consulted about administrative guidance.

Sen. Charles E. Grassley (R-Iowa), ranking member on the Finance Committee, was particularly outraged and had his staff push for an explanation from the Bush administration, according to congressional aides.

In an off-the-record conference call on Oct. 7, nearly a dozen Capitol Hill staffers demanded answers from Solomon for about an hour. Several of the participants left the call even more convinced that the administration had overstepped its authority, according to people familiar with the conversation.

But lawmakers worried about discussing their concerns publicly. The staff of Sen. Max Baucus (D-Mont.), chairman of the Finance Committee, had asked that the entire conference call be kept secret, according to a person with knowledge of the call.

"We're all nervous about saying that this was illegal because of our fears about the marketplace," said one congressional aide, who like others spoke on condition of anonymity because of the sensitivity of the matter. "To the extent we want to try to publicly stop this, we're going to be gumming up some important deals."

Grassley and Sen. Charles E. Schumer (D-N.Y.) have publicly expressed concerns about the notice but have so far avoided saying that it is illegal. "Congress wants to help," Grassley said. "We also have a responsibility to make sure power isn't abused and that the sensibilities of Main Street aren't left in the dust as Treasury works to inject remedies into the financial system."

Carol Guthrie, spokeswoman for the Democrats on the Finance Committee, said it is in frequent contact with the Treasury about the financial rescue efforts, including how it exercises authority over tax policy.

Lawmakers are considering legislation to undo the change. According to tax attorneys, no one would have legal standing to file a lawsuit challenging the Treasury notice, so only Congress or Treasury could reverse it. Such action could undo the notice going forward or make it clear that it was never legal, a move that experts say would be unlikely.

But several aides said they were still torn between their belief that the change is illegal and fear of further destabilizing the economy.

"None of us wants to be blamed for ruining these mergers and creating a new Great Depression," one said.

Some legal experts said these under-the-radar objections mirror the objections to the congressional resolution authorizing the war in Iraq.

"It's just like after September 11. Back then no one wanted to be seen as not patriotic, and now no one wants to be seen as not doing all they can to save the financial system," said Lee A. Sheppard, a tax attorney who is a contributing editor at the trade publication Tax Analysts. "We're left now with congressional Democrats that have spines like overcooked spaghetti. So who is going to stop the Treasury secretary from doing whatever he wants?"

Where'd the money go?

Nov. 10 (Bloomberg) -- The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

``The collateral is not being adequately disclosed, and that's a big problem,'' said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. ``In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.''



The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.





Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds.

Sept. 14 Decision

Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans.

The plan to purchase distressed securities through TARP called for buying at the ``lowest price that the secretary (of the Treasury) determines to be consistent with the purposes of this Act,'' according to the Emergency Economic Stabilization Act of 2008, the law that covers TARP.

The legislation didn't require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used ``when appropriate.'' In a reverse auction, bidders offer to sell securities at successively lower prices, helping to ensure that the Fed would pay less. The measure also included a five-member oversight board that includes Paulson and Bernanke.

At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

`We Need Transparency'

``We need oversight,'' Paulson told lawmakers. ``We need protection. We need transparency. I want it. We all want it.''

At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. ``Transparency is a big issue,'' he said.

The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed Web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

Frank Backs Fed

``You have to balance the need for transparency with protecting the public interest,'' Talbott said. ``Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.''

The nation's biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed's disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

``I talk to Geithner and he was pretty sure that they're OK,'' said Frank, a Massachusetts Democrat. ``If the risk is that the Fed takes a little bit of a haircut, well that's regrettable.'' Such losses would be acceptable, he said, if the program helps revive the economy.

`Unclog the Market'

Frank said the Fed shouldn't reveal the assets it holds or how it values them because of ``delicacy with respect to pricing.'' He said such disclosure would ``give people clues to what your pricing is and what they might be able to sell us and what your estimates are.'' He wouldn't say why he thought that information would be problematic.

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D'Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

``I'd love to hear the methodology, how the Fed priced the assets,'' D'Vari said. ``That would unclog the market very quickly.''

TARP's $700 billion so far is being used to buy preferred shares in banks to shore up their capital. The program was originally intended to hold banks' troubled assets while markets were frozen.

AIG Lending

The Bloomberg lawsuit argues that the collateral lists ``are central to understanding and assessing the government's response to the most cataclysmic financial crisis in America since the Great Depression.''

The Fed has lent at least $81 billion to American International Group Inc., the world's largest insurer, so that it can pay obligations to banks. AIG today said it received an expanded government rescue package valued at more than $150 billion.

The central bank is also responsible for losses on a $26.8 billion portfolio guaranteed after Bear Stearns Cos. was bought by JPMorgan.

``As a taxpayer, it is absolutely important that we know how they're lending money and who they're lending it to,'' said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

Ratings Cuts

Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank's rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.

Moody's Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.

The Fed's collateral ``absolutely should be made public,'' said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site BailoutSleuth.com, which focuses on the secrecy shrouding the Fed's moves.

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).