Wednesday, January 30, 2008

Jan. 30 (Bloomberg) -- Merrill Lynch & Co., the world's largest brokerage, will cut back on packaging home loans and consumer debts into securities after the collapse of the subprime mortgage market eroded demand for the products.

``Opportunities in many areas'' of structured finance and so-called collateralized debt obligations ``will be minimal for the foreseeable future and our activities will be reduced accordingly,'' New York-based Merrill said in an e-mailed statement. The firm will continue packaging corporate loans and derivatives into securities.

Merrill issued the statement after Chief Executive Officer John Thain told investors at a conference in New York earlier today that the firm planned to exit its CDO and structured credit businesses. Jessica Oppenheim, a spokeswoman for the company, said the statement was released to clarify Thain's remarks. She declined to elaborate on the statement.

``We are not going to be in the CDO and structured-credit types of businesses,'' which generated 15 percent of the firm's fixed-income revenue, Thain said at the conference.

Merrill posted its largest-ever loss last year after writing down the value of its CDOs and other assets related to subprime mortgages by more than $24 billion. The New York-based bank was the biggest underwriter of CDOs from 2004 through 2006, and got stuck with some of the products as investor demand declined.

League Tables

The market for CDOs, which repackage assets into new securities with varying degrees of risk, has been frozen since last July when two Bear Stearns Cos. funds that invested in them collapsed. Merrill Lynch will focus on improving its rankings on stock and bond underwriting league tables instead, Thain said.

``There's no reason we shouldn't be able to capture a bigger slice of the investment-banking fee pie,'' Thain said. ``We should be top three as opposed to top five.''

Merrill fell 67 cents, or 1.2 percent, to $56.80 at 2:01 p.m. in New York Stock Exchange composite trading. The shares have gained about 6 percent this year.

The company reported a fourth-quarter net loss of $9.83 billion, or $12.01 a share, on Jan. 17, as losses in the fixed- income division wiped out all revenue at the firm's investment bank and retail brokerage.

Thain told investors on a Jan. 17 conference call that the firm's remaining CDOs were valued ``conservatively'' and ``don't have much more downside.'' Merrill plans to liquidate the holdings possibly by selling them to hedge funds and other investors that are pooling money to buy securities at distressed prices, he said.

Fed Cuts Rate by Half-Point; 2nd Reduction in 8 Days

January 30, 2008

WASHINGTON — The Federal Reserve reduced short-term interest rates on Wednesday for the second time in eight days, meeting widespread expectations by investors on Wall Street for a big rate cut.

In lowering its benchmark Federal funds rate by half a point, to 3 percent, the central bank acknowledged that it is now far more worried about an economic slowdown than rising inflation, and it left open the possibility of additional rate reductions.

“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the central bank said in a statement accompanying its decision. In addition, it said, recent data indicated that the housing market is still getting worse and the job market appears to be “softening.”

Taken together, the back-to-back rate cuts totaling 1.25 percent amounted to the Fed’s most aggressive effort in years to head off a recession. By comparison, the Fed under Alan Greenspan reduced the overnight rate by only a half-point after the terrorist attacks on Sept. 11, 2001.

The news on Wednesday sent stocks higher on Wall Street. Within minutes after the announcement, the Dow Jones industrial average, which had been down slightly in early afternoon, was up 100 points.

Hours before the Fed announced its decision, the Commerce Department estimated that the nation’s economic growth slowed markedly in the fourth quarter of 2007 to an annual rate of just 0.6 percent from 4.9 percent in the third quarter.

The slowdown was sharper than the already-gloomy forecasts of most economists on Wall Street, where the consensus estimate called for fourth-quarter growth of 1.2 percent.

The Fed’s move on Wednesday came after it electrified investors on Jan. 22 with an even bigger surprise rate cut — three-quarters of a point — at a rare unscheduled meeting.

The Fed cut dovetailed with efforts by Congress and the White House to pass a fiscal stimulus bill that would inject at least another $160 billion into the economy this year in the form of deficit-financed tax rebates for individuals and tax breaks for businesses.

The House passed a measure earlier this week, after reaching agreement with the Bush administration. The Senate Finance Committee began work Wednesday on a bill that would add more money for unemployment benefits, food stamps and potentially other government spending programs.

Though House and Senate lawmakers are expected to haggle over the precise shape of the fiscal package, there is a broad political agreement between Democratic leaders in Congress, President Bush and the Federal Reserve on the need for a stimulus package of some kind.

Taken together, the fiscal package and the Fed’s own rate reductions would amount to a one-two punch aimed at jolting the economy enough to keep it out a recession — or at least mitigate the effects of any downturn that might develop.

Since the Fed reluctantly began reversing course in August, when credit markets abruptly froze in panic as a result of soaring default rates on subprime mortgages, the central bank has slashed the overnight federal funds rate by almost half in a total of five actions thus far.

But policy makers faced difficult questions about how deep to cut rates, and there was widespread uncertainty about whether they would reduce them by a half-percent or by only a quarter-percent.

On Wall Street, where the clamor about a recession remains at a fever pitch, investors had betting heavily on a bigger cut and were poised to send stock prices sharply lower if the Fed moved more cautiously.

Even with the Commerce Department’s preliminary estimate on Wednesday of extremely slow growth in the fourth quarter of last year, the evidence of an impending recession is mixed.

Indeed, many economists estimate that the economy may have added about 100,000 jobs in January — a big improvement from the nearly stagnant pace in December of 18,000 jobs.

Indeed, the ADP monthly survey of job creation, released on Wednesday, estimated that the nation added 140,000 private-sector jobs in January. Though the ADP survey often clashes with the Labor Department’s monthly employment report, which is due out on Friday, the results prompted many economists to raise their estimates of job growth in January.

The Commerce Department reported on Tuesday that orders for all durable goods — big-ticket items like commercial aircraft and auto parts — jumped 5.2 percent last month. Excluding orders for transportation goods, which are volatile from month to month, orders climbed 2.6 percent, the first increase since September.

Ben S. Bernanke, the chairman of the Federal Reserve, and other Fed officials are already under fire from two directions. Many analysts on Wall Street complain that the central bank has moved too slowly in response to signs of a faltering economy. They point to a plunge in housing that does not seem to have hit bottom, slowing growth in retail sales and tight credit.

But a significant minority of economists argues that policy makers have let themselves be unnecessarily alarmed by panicky swings in the stock market. If the central bank props up the economy with easy money, they warn, the result will be higher inflation in the future.

Richard DeKaser, chief economist at National City Corporation, a Cleveland bank, is skeptical that the economy is headed for a recession, despite the common assumption that it is. “Few seem to take seriously the prospect that we are not going into a recession,” said Mr. DeKaser, who cites the latest labor market data, showing fewer weekly claims for unemployment benefits and encouraging layoff numbers, which suggest to him that the nation has added a hefty number of jobs in January.

And despite the huge losses and write-offs stemming from subprime mortgages, he added, many business borrowers have yet to face a credit squeeze.

Members of the central bank’s Federal Open Market Committee, which decides interest rates, have shown clear signs of disagreement among themselves.

Fed officials acknowledged earlier this month that they had lowered their forecasts for economic growth this year, even though their previous forecast had already assumed a slowdown in the first half of this year.

Mr. Bernanke acknowledged on Jan. 10 that the housing market was still in a free fall and that the turmoil in subprime mortgage markets had shaken the broader credit markets.

When the Fed surprised investors by cutting its overnight rate at an unscheduled meeting on Jan. 22, officials left little doubt that they would lower the rate yet again at their regularly scheduled two-day policy meeting this Tuesday and Wednesday.

Fed officials acknowledge that psychology and expectations are playing an important role in the financial markets. To the extent that investors remain fearful about credit risks, markets for mortgage-backed securities are likely to remain dysfunctional and banks will be forced to write down even more of their loan portfolios.

But analysts say Mr. Bernanke faces a difficult challenge in trying to manage expectations. On the one hand, they say, the Fed wants to act decisively enough to reassure investors and the public that it will prevent the economy from sinking. On the other hand, they say, Mr. Bernanke does not want to be seen as panicking in response to a plunge in the stock market.

Atlantic Station a joke in more ways than one

The Atlanta Journal-Constitution
Published on: 01/29/08

The water problems at Atlantic Station are more complicated than just a failure of expansion joints in concrete, the buildings' general contractor said Tuesday.

The property owner, Atlantic Town Center, said last week that improperly installed joints caused leaks in three buildings in the heart of the development, affecting several businesses. The joints are gaps that allow concrete to expand and contract with temperature changes so cracks don't occur.

After investigating, Atlantic Town Center decided 10 buildings should be repaired, a process that will continue into next year and cost millions of dollars.

But Jeff Johnson of Vratsinas Construction Co., the general contractor, said the problems go beyond expansion joints.

"It's much more complicated and complex than the joints in the walls," Johnson said.

In an earlier e-mail he said: "While VCC has worked closely with Atlantic Town Center on this issue, there has been no agreement on either the cause or the most appropriate solution to resolve the owner's concerns."

Johnson would not elaborate on what the additional issues are but said consultants produced a detailed technical report that shows broader problems.

"In working with Atlantic Town Center, VCC has shared its observations about existing design issues and we agreed with the majority of the owner's consultants' findings," Johnson's e-mail said.

Responding to Johnson's comments, Brian Leary, vice president with AIG Global Real Estate Investment, an Atlantic Town Center partner, said in an e-mail: "While we've identified some isolated issues related to a few buildings, we've identified no structural or other significant issues that will keep us from expeditiously repairing and upgrading the buildings. We've brought in some of the best consultants in the industry to help us identify the issues and best-practice solutions, which we are now implementing."

He also said: "This situation is not uncommon in developments of this size, and identifying its existence, source and solution takes time. We are working to fix the situation in the buildings in question while proactively inspecting and upgrading adjacent buildings to prevent future issues."

Atlantic Station is a nationally renowned mixed-use development on what used to be a steel plant site in Midtown at the I-75/I-85 junction. It opened in October 2005 and was celebrated for turning unsightly industrial land into a popular place to live, work and shop.

Balconies and building facades have to be repaired and work on each building will take about four months.

The buildings represent a small percentage of the total structures on the 138-acre site, Atlantic Town Center says.

Scaffolding already is up in the entertainment and residential area known as the District. Six of the buildings are a mix of retail and residential that include ATLofts and 17 Street Lofts. The other buildings are businesses.

Doc Green's Salads and Grill, one of Atlantic Station's original restaurants, sits under a concrete balcony that leaks. After a rain, part of the restaurant has to be closed off because of drips, said John Griffin, director of operations and business partner in Doc Green's.

Al Corry, an ATLofts resident and real estate agent, said balconies on his building collect water under the concrete and will have to be fixed. Atlantic Town Center told homeowners at a meeting last week repair costs already have topped $1 million, Corry said. Atlantic Town Center has not publicly disclosed a price.

Johnson was asked if the problems could involve more than 10 buildings. "We are not aware of other buildings within the project that will require repairs," his e-mail said.

Neither Atlantic Town Center nor Johnson would assign blame for the leaks.

"Most of the attention has been focused on fixing the problem as opposed to fixing the blame," Johnson said. "VCC expects that this will be resolved through continued discussions between all of the parties involved."

Monday, January 28, 2008

Master fraud or fall guy?

27 January 2008

A top French economist warns that Societe Generale could use the debacle to cover up bad investments, writes Thomas Hubert in Paris.

Stand back John Rusnak and Nick Leeson, enter Jerome Kerviel. According to Societe Generale, the 31year-old French trader is the sole culprit in the €4.9 billion fraud that will wipe out the equivalent of one year’s profit at France’s number three bank.

Societe Generale announced last Thursday that a single employee, which it later named as Kerviel, had run up losses worth nearly €5 billion. On the same day, the bank announced another €2 billion loss linked to the sub-prime crisis.

He had previously held a middle-office position at the bank, working on the safety procedures used to control traders. According to the bank, he used his knowledge of the procedures and the schedule of routine checks to avoid them.

Kerviel’s job only involved limited futures trading to counterbalance some of the risks taken by his colleagues working on the shares market - so-called plain vanilla trading. Yet the bank admitted that he managed to go far beyond his remit in late 2007 and early 2008,hiding the volume of money involved behind fake transactions.

An embarrassed SocGen executive chairman Daniel Bouton said at a press conference at his group’s headquarters in Paris last Thursday: ‘‘In the official Societe Generale book he registered transactions that went unnoticed, because at the same time he carried out other transactions that nullified earlier ones.

‘‘The transactions used for dissimulation purposes were fictitious, and he had the extraordinary talent of moving them along as checks happened because he knew the controls’ schedule.”

The bank said in a statement that it caught the trader when he made an error that appeared in a routine verification.

‘‘His motivation is totally incomprehensible. He does not seem to have benefited personally from the fraud,” Bouton said.

Since it discovered the scam last Sunday, Societe Generale has been busy cleaning up the mess. It started by secretly dumping the futures contracted by the trader during the first half of the week. Dreadful market conditions at the time explain the staggering volume of the losses incurred. The bank was nursing losses of more than €1 billion when it discovered the fraud, but lost a multiple of this by selling tens of billions of euros of contracts into a falling market.

Bouton handed in his resignation, but the bank’s board refused to accept it. However he said the trader and his chain of command, up to and including the group’s head of share dealing, Luc Francois, had been fired.

The Paris stock exchange suspended trading on Societe Generale shares all Thursday morning, while the bank’s management was holding a press conference.

Bouton and Citerne seemed to convince investors that they could deal with the crisis, as the group’s share fell by only 4.14per cent in the afternoon. However, this comes after 10months of near-continuous fall. After hitting an all-time high of €162.79 last April, Societe Generale shares were worth just €75.81Thursday evening.

The lone fraudster theory did not convince all commentators. Top French economist and equity expert Marc Touati said: ‘‘You can imagine fraud over a few hundred millions, but not €5 billion. If someone could run such a scam, it would mean that there are serious governance problems at Societe Generale, which I do not believe. There have been heavy losses on sub-primes or somewhere else, and the impact of the fraud might have been exaggerated.”

In other words, the bank could be tempted to saddle Kerviel with the burden of some of the bad investments it made in recent months.

The fraud scandal could not have come at a worse time for Societe Generale, France’s second-biggest bank. The company had to announce further write-downs of €2billion linked to the global credit crunch and said it would raise €5.5 billion through a shares issue to strengthen its balance sheet.

The losses cut its 2007 profit to between €600 million and €800 million from €5.2billion in 2006. The bank’s shares have fallen by 50 per cent in the last six months.

There is speculation that it could now be the subject of a takeover bid, having received a number of approaches in the last few years. The most recent came last April when it was linked to a bid from banking giant Unicredit.

Societe Generale is one of France’s biggest companies and is a household name, with a significant retail bank branch network. Founded in 1864, it has €467 billion in assets under management and 22.5 million customers worldwide. It employs 120,000 staff in 77 countries.

Its Irish operations through Societe Generale Finance (Ireland) had retained profits of €22 million at the end of 2006.

Le scapegoat: what the French papers say

The French press has reacted with shock at the massive fraud uncovered at Société Générale, but a number of commentators are sceptical about the bank's version of events.

Le Figaro suggests rogue trader Jerome Kerviel could be a scapegoat. The paper has interviewed Elie Cohen, an economics professor at the famous Sciences Politiques university who says SocGen's explanation is "hard to believe".

It all "seems a bit far fetched that during a whole year, one can hide such a huge loss," he told the paper.

"The feeling in the trading rooms is that it is not possible that just one individual was able to do this. The Société Générale could have emphasised the theme of fraud to help digest several bad trading operations."

Liberation, the leftwing French daily, says senior management at SocGen must be brought to account.

It describes Kerviel as a "fragile man with an extraordinary talent for deceit". He is the French version of a "crazy trader" following in the steps of Nick Leeson, and has blown the equivalent of the annual budget for the minimum wage.

"Apart from that, no need to worry," the paper says in a hard-hitting editorial.

"That's what minister Christine Lagarde said, and also Christian Noyer, the governor of the Bank of France.

"It is an isolated incident, with no relation to the current financial turmoil. As for Daniel Bouton, the chief executive of the Société Générale, he has kept his position, but has made the symbolic move of giving up six months of salary – apparently to calm down his shareholders and employees."

The paper continues: "With this new massive blow in the midst of the sub-prime crisis, it is hard not to ask a few delicate questions.

"Who is responsible for the craze for risk that has spread in the markets, if it is not the banks and their chiefs? Who is responsible for the failure to control a French trader, if it is not the banking commission, presided over by Christian Noyer?

"Of course, calls for new finance regulation by Christine Lagarde are welcome, but they will be of no use if no sanctions will be considered at the top."

Les Echos, the daily financial newspaper, says that "if the numerous questions that have not yet been answered about the fraud are not rapidly answered, it could undermine the credibility of the entire banking system".

The press conference held yesterday by the Bank of France's Noyer, was unprecedented, the paper said, and designed to avoid a Northern Rock-style panic among SocGen's 9 million retail customers.

The paper quotes Noyer telling customers they can be reassured. They have in front of them, he says, "a bank that is even more solid than it was last week".

He added: "There is therefore no problem of confidence, let us not exaggerate this story. One must not mix this up with the sub-prime crisis."

Le Parisien, under an editorial headlined "The Man Who Blew Up The Bank" says that a "monumental computing mess-up" might be behind the fraud and suggests that more employees could be involved.

La Tribune, another financial daily, asks "why was so much time needed to discover the extent of the damages?"

L'Humanité, a leftwing daily newspaper, says there is "something deeply rotten in the realm of global finance".

A number of regional commentators are even more sceptical about the bank's explanation. Le Telegramme noted that "everything has happened as if the six days between the discovery of the internal fraud and Thursday's revelation have been used to put in place a plausible scenario".

Even more direct, Nice-Matin asks if "the bank is not looking to hide its disastrous operations on stock market derivatives which collapsed with the sudden slump of the financial markets in recent months".

L'Alsace asks whether "the bank has found a very convenient minion to hide part of its sub-prime losses".

Others, though, point the finger at politicians. Sud-Ouest describes "politicians that force themselves to look like they are up to the challenge, first by reassuring people, then to call for more transparency, more controls. This fools no-one."

For La Charente Libre, the "tragic thing" is that "our politicians might be explaining that they are closely following the case, but nothing happens".

The Dauphiné Libéré, meanwhile, calls for "the competent authorities to prove that this is just a problem for the Société Générale. And not an overall social phenomenon."

'I'm A Patsy', Claims Rogue Trader Jerome Kerviel

THE rogue trader blamed for the biggest bank fraud in history claims he has been made a scapegoat.

Jerome Kerviel, 31, could be jailed for up to 15 years for a £3.6billion share dealing scam.

But police insiders say the Frenchman claims he was a mere "patsy" for wealthy financiers higher up at his bank Societe Generale.

Kerviel, a junior trader, is due to be charged today.

He has promised specialist fraud squad officers in Paris that he will "name names".

Chief investigator Jean Michel Aldebert said: "Mr Kerviel is collaborating and says he is ready to explain everything.

"He says he wants to co-operate fully. He's feeling fine."

Kerviel began his reckless gamble with the European financial markets after a bitter split with a girlfriend and the death of his father.

The trader's 80-year-old aunt Sylviane Le Goff said: "He is carrying the can for other people at the bank.

"They should be questioning other people in high positions at the bank.

"He has told his mother, 'Mum, I have done nothing wrong.' "We had been telling him for over a year to look for another job. The bank asked too much of him."

Kerviel faces charges of forgery and computer misuse.

He is expected to identify traders at other investment banks who he spoke to before the scandal broke. They were able to make lucrative investments based on Kerviel's information about Societe Generale.

The bank say Kerviel did not appear to have profited personally from the fraud and seemingly worked alone.

But Jean-Pierre Mustier, chief executive of the corporate and investment banking arm added: "I cannot guarantee 100 per cent that there was no complicity."

SocGen accused of smokescreen after loss

By Martin Arnold in London and Peggy Hollinger and John O’Doherty in Paris

Published: January 27 2008 22:46 | Last updated: January 28 2008 12:05

Lawyers for Jérôme Kerviel, the French trader accused by Société Générale of massive fraud, hit back at the bank on Sunday, accusing it of creating a “smokescreen” to divert attention from other losses.

Mr Kerviel was charged by French police on Monday with attempted fraud. But earlier his lawyers insisted that Mr Kerviel “did not commit any dishonest act, nor embezzle a single cent, and he in no way benefited from the bank’s funds”.

Elisabeth Meyer and Christian Charrière-Bournazel told Agence France Presse that SocGen wanted to “raise a smokescreen that would distract the public’s attention from far more substantial losses that it had made in recent months, notably in the unbelievable subprime affair”.

They also said that the timing of the bank’s decision to close positions relating to Mr Kerviel’s trading and the manner it executed these trades “itself provoked the losses of €4.5bn”. The lawyers also claimed that Mr Kerviel’s trading was in profit to the tune of €1.5bn ($2.2bn, £1.1bn) at December 31.

SocGen declined to comment on the lawyers’ allegations. However, the bank is standing by its original statement, according to a person close to the bank.

Earlier, SocGen revealed more about how Mr Kerviel concealed trades as it sought to dispel growing scepticism about its initial version of events that the bank said had led to it suffering €4.9bn of losses.

The bank said Mr Kerviel – a 31-year-old junior trader on its European equities arbitrage team who gave himself up to police on Saturday and was still being held for questioning last night – committed an “exceptional fraud”.

It described how the alleged rogue trader created “fictitious operations” that were registered in SocGen’s systems “but did not actually correspond to any economic reality”.

Though he was only supposed to buy futures – bets on the direction of European markets – if they were covered by a hedge, a similar position limiting any loss, he used other people’s access codes and “falsified documents” to create fake hedges, leaving the bank exposed to the full downside.

SocGen said he had evaded detection for almost a year by only choosing “very specific operations with no cash movements or margin call and which did not require immediate confirmation” and by constantly switching between different types of instrument.

By January 18, when he was finally caught, he had positions worth €30bn on the Euro Stoxx, an index of Europe’s biggest companies, €18bn on Germany’s Dax and €2bn on the UK’s FTSE.

SocGen said he seemed to have been acting alone and to not have profited from his actions, but it promised to say more after completing an internal audit.

Nicolas Sarkozy, France’s president, is expected to raise the question of tightening risk controls in the world’s banking system when he meets the UK, German and Italian heads of government in London tomorrow.

The French Banking Commission will this afternoon hold its first meeting to examine the fraud as its own investigation gets under way. The government and the French stock market authority will be present and the discussions will contribute to the contents of a report to be prepared by the finance ministry for François Fillon, prime minister.

Shadow Banking

THE PAST YEAR has been a harrowing one for the world's financial markets, shaken by subprime crises, credit crunches, and other ills. Things have only gotten stranger in the past week, with stock prices swinging wildly in every major market - drastically down, then back up.

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Last week the Federal Reserve announced the biggest cut in overnight lending rates in more than two decades. Congress, not to be outdone, is slapping together a massive deficit spending package aimed at giving the economy an emergency booster shot.

Despite the anxiety, nobody is stockpiling canned goods just yet. The prevailing assumption in today's economy is that recessions and bear markets come and go, and that things will work out in the end, much as they have since the Great Depression. That's because there's a collective confidence that the market is strong enough to correct itself, and that experts in charge of the financial system will understand how to mount a vigorous defense.

Should we be so confident this time? A handful of financial theorists and thinkers are now saying we shouldn't. The drumbeat of bad news over the past year, they say, is only a symptom of something new and unsettling - a deeper change in the financial system that may leave regulators, and even Congress, powerless when they try to wield their usual tools.

That something is the immense shadow economy of novel and poorly understood financial instruments created by hedge funds and investment banks over the past decade - a web of extraordinarily complex securities and wagers that has made the world's financial system so opaque and entangled that even many experts confess that they no longer understand how it works.

Unlike the building blocks of the conventional economy - factories and firms, widgets and workers, stocks and bonds - these new financial arrangements are difficult to value, much less analyze. The money caught up in this web is now many times larger than the world's gross domestic product, and much of it exists outside the purview of regulators.

Some of these new-generation investments have been in the news, such as the securities implicated in the mortgage crisis that is still shaking the housing market. Others, involving auto loans, credit card debt, and corporate debt, are lurking in the shadows.

The scale and complexity of these new investments means that they don't just defy traditional economic rules, they may change the rules. So much of the world's capital is now tied up in this shadow economy that the traditional tools for fixing an economic downturn - moves that have averted serious disasters in the recent past - may not work as expected.

In tell-all books, financial blogs, and small-circulation newsletters, a handful of insiders have begun to sound the alarm, warning that governments and top bankers may simply no longer understand the financial system well enough to do anything about it.

"Central banks have only two tools," says Satyajit Das, author of "Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives," who has emerged as a voice of concern. "They can cut interest rates or they can regulate banks. But these are very old-fashioned tools, and are completely inadequate to the problems now confronting them."

Since the last financial crisis that genuinely threatened the fabric of our society, the Great Depression, the United States has built a system of regulatory checks and balances that has, for the most part, worked. The system has worked because the new regulations enforced some semblance of transparency. Companies abide by an extensive set of rules and file information on their profits, losses, and assets.

Obviously, there are limits to transparency: Without withholding some information from public view, it would be hard for companies to take advantage of opportunities in the marketplace. But a modicum of transparency can go a long way, enabling both regulators and investors to make informed decisions. The advantages of the system are many; the costs of even a single case of nontransparency, as with Enron, can be high.

But when the mortgage crisis broke last summer, it opened a window on something else: The existence of a huge wilderness of investments in the financial sector that are nearly impossible to track or measure, and which operate out of the view of both investors and regulators. It emerged that investment banks, hedge funds, and other financial players had issued, bought, and sold hundreds of billions of dollars' worth of esoteric securities backed in part by other securities, which in turn were backed by payments on high-risk mortgages.

When borrowers began defaulting on their loans, two things happened. One, banks, pension funds, and other institutional investors began revealing that they owned huge quantities of these unusual new securities, called collateralized debt obligations, or CDOs. The banks began writing them off, causing the massive losses that have buffeted the country's best-known financial companies. And two, without a market for these securities, brokers stopped wanting to issue risky mortgages to new home buyers. Home values began their plunge.

In other words, a staggeringly complex financial instrument that most Americans had never heard of, and which many financial writers still don't fully understand, became in a matter of months the most important influence on home values in America. That's not how the economy is supposed to work - or at least that's not what they teach students in Economics 101.

The reason this had been happening totally out of sight is not difficult to understand. Banks of all stripes chafe against the restraints that federal and state regulators place on their ability to make money. By cleverly exploiting regulatory loopholes, investment banks created new types of high-risk investments that did not appear on their balance sheets. Safe from the prying eyes of regulators, they allowed banks to dodge the requirement that they keep a certain amount of money in reserve. These reserves are a crucial safety net, but also began to seem like a drag to financiers, money that was just sitting on the sidelines.

"A lot of financial innovation is designed to get around regulation," says Richard Sylla, professor of economics and financial history at NYU's Stern School of Business. "The goal is to make more money, and you can make more money if you don't have to keep capital to back up your investments."

The hiding places for these financial instruments are called conduits. They go by various names - the SIV, or structured investment vehicle, is one that's been in the news a great deal the past few months. These conduits and the various esoteric investments they harbor constitute what Bill Gross, manager of the world's largest bond mutual fund, called a "Frankensteinian levered body of shadow banks" in his January newsletter.

"Our modern shadow banking system," Gross writes, "craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever."

The mortgage-driven securities that have been making headlines are but the tip of a much larger iceberg. Far larger categories of investment have sprung up, with just as much secrecy, and even less clarity into who holds them and how much they are truly worth.

Many of these began as conventional instruments of finance. For instance, derivatives - the broad category of investments whose value is somehow based on other assets, whether a stock, commodity, debt, or currency - have been traded for more than a century as a form of insurance, helping stabilize otherwise volatile markets.

But today, increasingly, a new generation of derivatives doesn't trade on markets at all. These so-called over-the-counter derivatives are highly customized agreements struck in private between two parties. No one else necessarily knows about such investments because they exist off the books, and don't show up in the reports or balance sheets of the parties who signed them.

As the derivatives business has grown more complex, it has also ballooned in scale. Broadly speaking, Das - author of a leading textbook on derivatives and complex securities - estimates that investors worldwide hold more than $500 trillion worth of derivatives. This number now dwarfs the global GDP, which tops out around $60 trillion.

Essentially unregulated and all but invisible, over-the-counter derivatives comprise a huge web of bets, touching every sector of the world economy, that entangles a massive amount of money. If they start to look shaky - or if investors need to start selling them to cover other losses - that value could vanish, with catastrophic results to the owner and unpredictable effects on financial markets.

Derivatives can ripple through the market and link players that might not otherwise be connected. With some types of new investments, that fusion takes place within the security itself.

For instance, some financial instruments are built of two or more different types of assets, linking together sectors of the economy that aren't supposed to move in tandem. In the name of transferring risk - and in the interest of creating an appealing new product to sell to aggressive investors seeking higher returns - a bank could create a CDO, for instance, that packaged subprime mortgages together with corporate bonds. An economist would expect those to move independently, but thanks to a large - and unseen - investment in such a linked package, problems with one could drive down the other. A bad apple can ruin an entire barrel of fruit.

Again, it's not as though anyone necessarily knows the composition of these structured securities. Nor do they know who has invested in them, thanks to the fact that they have not, until recently, counted as conventional assets subject to the normal rules of accounting. And because they don't trade on open markets, their values are essentially guesses, calculated by computer algorithms.

Das disparages much of this as the product of bankers creating "complexity for the sake of complexity," trying to wow their clients by inventing more sophisticated-seeming investments. "Financial innovation is a magical catch phrase," he explains. "It's very sophisticated and chi-chi."

"Investment bankers want to make them more complex, so that they won't be copied, and so that their clients won't understand them," he says. "When they ask whether they're paying the right amount, they won't know."

But when reality comes home to roost, things can get ugly pretty quickly: If an investor is forced to sell a CDO, the onetime price realized on the open market may bear no relationship to the theoretical value generated by a computer formula. That means that everyone holding CDOs can no longer sleep well at night: the same thing can happen to them.


hese risks are magnified, as they were during the stock bubble of the 1920s, by the fact that many of these assets are owned by investors who borrowed money to make the investments in the first place. When a market shock like the subprime crisis hits, it can send tremors through the system with incredible speed.

If the contagion spreads, the conventional wisdom holds that the Federal Reserve and other central banks around the world can step into the breach caused when consumers and investors start to lose their confidence. But what happens when all these complicated financial arrangements and instruments start to unravel? The market for one product alone - the credit default swap, or CDS - dwarfs this country's economy. The Fed has an uphill battle, made harder by the fact that it is grappling, to a large extent, with unseen forces.

In theory, additional regulation may help with this. The Financial Accounting Standards Board, which establishes corporate accounting procedures and guidelines, took a first step in that direction this past November, ordering investment banks and anyone else holding complicated securities to assign market values to so-called Level 3 assets - a fancy name for assets for which there is no prevailing market price. This meant assigning a market value to all those CDOs.

Banks promptly began writing down tens of billions of dollars of assets, and their investors are still trying to sort through the results. It's still too early to tell whether or not the effort will work, or whether the "market prices" that get reported are anything more than figments of in-house accountants' imaginations. For his part, Das is skeptical. "It will help that people will know the poison they're drinking," he says. "Whether it will help stabilize the system is another question."

It would be ideal if the financial markets became a bit less opaque and intelligible before that happens. That would be the job of regulators, but Das isn't sure that regulators have the intellectual horsepower to figure out what they need to do. "If you're bright and you can make $5 million a year on Wall Street," he asks, "why would you settle for making 50K as a regulator?"

And in any case, transparency isn't really what the denizens of Wall Street want, Das observes. "The regulators keep espousing things like clarity and transparency, but it's in the investment bankers' interest to keep things opaque." Das pauses for a moment.

"It's like a butcher. He doesn't want the buyer to know what goes into making the sausage." He chuckles, noting that it's the same with financiers. "That's what they're all about and always have been."

Thursday, January 24, 2008

National Median Realestate Drops first in 40 yrs

Existing Single-Family Home Sales Drop
Thursday January 24, 10:22 am ET
By Martin Crutsinger, AP Economics Writer

Sales of Existing Single-Family Homes Drop in 2007 by Largest Amount in 25 Years WASHINGTON (AP) -- Sales of existing homes fell in December, closing out a horrible year for housing in which sales of single-family homes plunged by the largest amount in 25 years. The median home price dropped for the entire year, the first time that has occurred in four decades.

The National Association of Realtors reported that sales of single-family homes and condominiums dropped by 2.2 percent in December to a seasonally adjusted annual rate of 4.89 million units.

For the year, sales of single-family homes were down by 13 percent, the biggest drop since a 17.7 percent plunge in 1982. The median price for a single-family home dropped 1.8 percent to $217,000.

That was the first annual price decline on records going back to 1968. Lawrence Yun, the Realtors' chief economist, said it was likely that the country has not experienced a decline in housing prices for an entire year since the Great Depression of the 1930s.

The new figures underscored the severity of the slump in housing, which has been battered for the past two years after enjoying a boom in which sales set records for five consecutive years.

The housing bust has sent shock waves through the entire economy as defaults have risen, resulting in multibillion-dollar loses for big financial firms whose investments in subprime mortgages have gone sour.

There is a concern that the housing and credit troubles could be enough to push the country into a full-blown recession. After global stock markets experienced a sharp sell-off earlier this week, the Federal Reserve announced a bold three-quarter point cut in a key interest rate and held out the promise of more rate cuts to follow.

The Bush administration and congressional leaders are trying to quickly wrap up negotiations on a stimulus package in an effort to boost consumer and business confidence.

For December, sales were down in all regions of the country. Sales fell by 4.6 percent in the Northeast, 1.7 percent in the Midwest, 1 percent in the South and 2.1 percent in the West.

The inventory of unsold homes dropped by 7.4 percent, raising hopes that backlogs that had hit record levels were starting to be reduced, a key factor necessary to prompt a rebound in the market.

While Yun said he expected sales to start to rebound this spring, other analysts said housing is likely to remain in the doldrums throughout most of 2008, reflecting in part the credit crunch, which has caused lenders to tighten their standards, making it harder for prospective buyers to qualify for loans.

In other economic news, the Labor Department said Thursday that the number of laid off workers filing claims for unemployment benefits fell for a fourth straight week, dropping by 1,000 to 301,000.

Many economists cautioned that they still expected layoffs to start rising in coming weeks, reflecting the sharp economic slowdown that has taken place.

The economy, after racing ahead at an annual rate of 4.9 percent in the July-September quarter, probably slowed to a weak 1 percent rate in the final three months of 2007 and may even fall into negative territory in the current January-March quarter.

A recession is often defined as two consecutive quarters of falling economic output. Many economists believe the risks of a full-blown downturn are roughly 50-50.

The growing worries about the economy in an election year have captured the attention of President Bush and congressional leaders who are working to put together a $150 billion economic stimulus package that will include tax relief for households and businesses in an effort to bolster economic activity.

The drop in unemployment applications to 301,000 for the week ending Jan. 19 left total claims at the lowest level since 300,000 were recorded during the week of Sept. 22.

For the week of Jan. 19, 36 states and territories had increases in claims while 17 had declines.

The biggest increase occurred in California, up 27,194, an upsurge blamed on higher layoffs in construction and service industries, and Florida, with an increase in layoffs of 8,496, which was attributed in part to higher layoffs in construction. California and Florida have been particularly hard hit by the housing slump.

Texas: UFO sightings were military jets

Jan. 23, 2008 (Thomson Financial delivered by Newstex) --

FORT WORTH, Texas (AP) - U.S. military officials said Wednesday that fighter jets were training in a rural area the night of Jan. 8 when dozens of people reported seeing a UFO.

Although officials at the Naval Air Station Reserve Base in Fort Worth initially said none of their planes were in the area of the UFO reports, they changed their story Wednesday, saying that 10 F-16 fighter jets built by Lockheed Martin Corp. (NYSE:LMT) were training near Stephenville, about 70 miles (112 kilometers) southwest of Fort Worth, about the time of the sightings.

But, some residents say the military's revelation actually bolsters their claims because several reported seeing at least two fighter jets chasing an object.

'This supports our story that there was UFO activity in that area,' said Kenneth Cherry, the Texas director of the Mutual UFO Network, which took more than 50 reports from locals at a meeting last weekend. 'I find it curious that it took them two weeks to 'fess up. I think they're feeling the heat from the publicity.'
Several dozen people swear that what they saw was larger, quieter, faster and lower to the ground than an airplane. They also said the object's lights changed configuration, unlike those of a plane.

'I guarantee that what we saw was not a civilian aircraft,' Steve Allen, a pilot and freight company owner, said Wednesday.

Allen said that the fighter jets' training area in the Brownwood Military Operating Area, which includes Stephenville's Erath County, is not in the airspace where he saw the object. Also, Jan. 8 was not the only day sightings were reported.

Anne Frazor, who owns a fabric store in Stephenville said many in town have seen military aircraft zoom overhead from time to time as part of training operations. But she said that is different than what she saw Jan. 8.

'I couldn't begin to say what it was, but to me it wasn't planes,' Frazor said.

Since the reported sightings two weeks ago, the 17,000-resident town has had some fun with the international publicity. Some high-schoolers made T-shirts that read 'Stephenville: the new Roswell' on the front and 'They're here for the milk!' on the back. A picture features flying saucer beaming up a cow.

The U.S. Air Force says it has not investigated UFO sightings since 1969 when it ended Project Blue Book, which examined more than 12,600 reported UFO sightings -- including 700 that were never explained. That program started a few months after a 1947 crash near Roswell, New Mexico, which the government said involved a top-secret weather balloon but others involved later said was an alien spacecraft.

'What we want is the government to admit there are UFOs and what they know about them,' Cherry said.

Wednesday, January 23, 2008

Monty Guilds Predictions

As we have written for months now, inflation is becoming a worldwide problem. We do not believe in the traditional U.S. centric wisdom that as the U.S. economy slows, U.S. and world inflation will moderate. In our opinion (and based upon a great deal of research by ourselves and others), inflation will rise for several reasons.

They are:

  1. The money supply globally has been growing very rapidly for at least the last 2 years.
  2. Inflation has been held in check in the developed world by lower cost imports from the developing world replacing high priced manufactured goods. This cycle has now ended. Manufactured goods are rising in price, especially in the developed countries due to a rise in costs in the manufacturing countries and the lower U.S. dollar.
  3. Every solution currently being employed and/or contemplated to solve the current world’s financial woes (especially, the so called subprime crisis) will breed inflation in the longer term, and cause the rate of inflation to accelerate. I could waste a lot of your time going into this in detail, but I realize that I may already wearing out my welcome by mentioning these points so frequently.
  4. Historically, inflation has continued to rise for at least a year after the economy turns and begins experiencing a recession. Does this mean inflation combined with economic recession, or stagflation, is in our future for at least a year? I am afraid that it does.
  5. The question of will the U.S. dollar’s decline continue to feed inflation remains to be seen. I certainly hope that the powers that be in the U.S. have realized the unwise nature of the weak dollar policy. Soon the U.S. should start to do more to strengthen the dollar. Of course, this will have to wait until the Fed stops lowering rates to solve the financial crisis, but taking a strong dollar policy is essential.

Tuesday, January 22, 2008

Fed slashes rates to 3.5%

Citing weakening economic outlook, Federal Reserve cuts key interest rates by three-quarters of a percentage point

NEW YORK ( -- The Federal Reserve slashed two key interest rates by three-quarters of a percentage point Tuesday following an unscheduled meeting, citing continued concerns about a weakening economy and turmoil in the financial markets.

The Fed lowered its federal funds rate, which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, from 4.25 percent to 3.5 percent. The Fed also lowered its discount rate, which is what it costs banks to borrow directly from the central bank, by three-quarters of a point, to 4 percent.

"Broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets," the Fed said in a statement.

Treasury Secretary Henry Paulson, speaking at the U.S. Chamber of Commerce in Washington Tuesday morning, said that he hoped the rate cut would restore some confidence in the financial markets and U.S. economy.

"I think it's very constructive and what I think it shows to this country and to the rest of the world [is] that our central bank is nimble and able to move quickly to respond to market conditions and that should be a confidence builder," he said.

Stock futures, which have been pointing to a gloomy start on Wall Street after market sell-offs abroad Monday, moved off their lows following the rate cut but were still sharply lower.

Wall Street had been betting that the central bank would need to initiate an emergency rate cut before its next scheduled meeting, which concludes on Jan. 30, in an attempt to help keep the economy from tipping into a recession.

Since September, the Fed has cut the fed funds rate from 5.25 percent to 4.25 percent. Investors have been clamoring for more, and bigger, rate cuts in the hopes that it will kick start a moribund economy and encourage businesses and consumers to spend.

The Fed has also loaned $70 billion to banks through a series of three auctions since December to help mitigate the effects of the credit crunch on Wall Street. That appears to be working as the Fed said Tuesday that "strains in short-term funding markets have eased somewhat."

President Bush and Congress are also working on an economic stimulus package in order to help beleaguered consumers. Federal Reserve chairman Ben Bernanke endorsed this plan during a speech to the House Budget Committee last week and urged Congress to act "quickly."

But markets have plunged so far in 2008 despite this as investors continue to fret that the Fed may be doing too little too late to keep the economy from recession.

Still, others think the Fed needs to proceed cautiously, especially since it's fair to argue that aggressive rate cuts during 2001 may be the reason why banks are in the subprime mortgage mess they are in now.


Every bit of America’s presidential campaign is a lie, even the punctuation...

One nice thing about writing about America’s presidential race is that the writer runs no risk of libeling the candidates; he can say that Mrs. Clinton is a scalawag or that Mr. Giuliani is a scoundrel. No jury in the world – given a fair hearing of the evidence – would ever find him guilty. No National Secrets Act prevents him from revealing that Mr. Huckabee is a moron. Nor will he be brought up on libel charges when he says that Mr. Obama’s entire campaign premise is nothing but a bold-faced fib.

On the Democratic side, Madame Clinton, like Kristina Kirschner in Argentina, and Evita Peron before her, aims to replace her husband as head of state – after giving the nation eight years to recover. She is probably the least amusing of all the candidates, in that she has been in a mote in the public eye for so long we assume we are stuck with her forever.

Her main opponent, Barack Obama, is a fresh face. So far, his clowning achievement is that he has managed to make himself the campaign’s greatest mountebank. This month’s issue of The New Statesman has a photo of the man in his office. On the wall behind him are photos of the men who “inspired him” – Martin Luther King, John Kennedy, Abraham Lincoln and Mahatma Gandhi. More honest would be a photo of Tony Rezko, one of his key Chicago supporters, who is now awaiting trial for extortion, money laundering and fraud. But honesty is not a part of this election; the voters won’t stand for it.

It is all a “fairy tale,” said Bill Clinton. Of course it’s a fairy tale. The whole campaign is a fairy tale – lies told by delusional desperadoes...earnestly reported by hacks...and taken up by a public eager for make-believe.

American politics, like the empire itself, suffers from some wasting disease. But even from its hospital bed, it still puts on a good show. The whole baroque fandango is one part Dada theatre, one part religious revival...and one part low-budget circus. Nothing that is said is reliable; most is absurd or incomprehensible...and there are clowns everywhere. The important thing from the spectator’s point of view is to suspend disbelief...and enjoy it.

Lining up for an election in the United States is like lining up at a security point before getting on an airplane. The old lady in front of you knows perfectly well she is not going to hijack the plane. The fellow giving her the once-over knows it too. So does everyone waiting in line. Still, the woman gets such a thorough pat-down that she doesn’t know whether to lodge a complaint or get back in line. And the Republic is spared!

“Change” is the word that appears most often in the candidates’ guff. Google “presidential candidates” and “change” and you get 4,560,000 examples. Barack Obama promises “change you can believe in.” The democrats suggest that you can “vote for change” by choosing one of them. John Edwards website says, “if you’re ready to change our country, please join us.”

Change is the only thing that all of the candidates agree on – they’re all opposed to it; each one pledges to do his level best to stop it. If there is going to be any change at all, it is going to be over their dead bodies. Which would probably be the best way. Voltaire once remarked that the best form of government was democracy, “with an occasional assassination.” But it would be a waste of time. For not only are the candidates are opposed to change; it’s the last thing voters want, too.

Mr. Market has begun a worldwide credit crunch; shares and houses are headed down. America’s money is losing its value; its stock is in decline. If Mr. Market has his way, a recession will follow. The only disagreement between the major candidates is how to stop him. One promises tax hikes – on the rich, of course. Another promises tax rebates. Still another calls for tax credits to help one group of voters or another. Each and every candidate puts his hand over his heart and pledges to do all he can to keep the boom alive.

Mitt Romney, appearing in Michigan – one of the slumpiest states in the union – says the recession could be “diverted,” whatever that means. Mike Huckabee, too, pledges to set things right in Michigan. The former Arkansas governor has an understanding of economics at least as good as a smart German shepherd. “Michigan is in trouble,” he said. “We owe it to Michigan to help it, just like we had to do for the people of the Gulf Coast” after Hurricane Katrina.

The whole art of politics is coming up with the right lie at the right moment. We don’t know what went through the candidate’s mind at that moment. But we can imagine what went through the voters’ minds – images of bloated bodies floating through the streets of New Orleans; desperate, frightened refugees huddled in the convention center; and acres of boarded up, washed out shacks still vacant two years after the storm. Mr. Huckabee is known to have a sense of humor; perhaps he was joking. Or worse, perhaps he was not.

Until next week,

Bill Bonner
The Daily Reckoning

Monday, January 21, 2008

Zealous Deflationist Sheds Gold Doubts

For edition of January 22, 2008

Gold at $10,000 an ounce? Gurus and hard-money advocates have been predicting it for decades, ever since currencies began to seriously decouple from bullion in the 1930s. I’ve been skeptical of such forecasts myself, mainly because my deflationist imagination has always envisioned a world in which public and private bankruptcy had become pervasive. With credit unavailable, cash in extremely limited supply, and asset values wiped out by forced liquidations, who, I asked, would supply the bidding power to push bullion quotes into the stratosphere? Arab oil producers? Think again, for they would be energy-rich but cash poor, their financial wealth turned to confetti like everyone else’s. Even their ability to accumulate new stores of real wealth in the form of gold would be in doubt, since, if they were to demand ingots in exchange for crude, global consumption of oil would collapse to subsistence levels.

Nor will the sovereign governments of the West have the wherewithal to replenish their bullion vaults, since the fiat reserves they would trade for gold – overwhelmingly in dollars and dollar-denominated assets now -- would have become worthless. And while the U.S., Europe et al. could in theory make official purchases of gold with tax dollars, that would only serve to entrench deflation by institutionalizing the worst Keynesian nightmare imaginable.

Fiat Still Not Outed

No, there doesn’t seem to be an obvious buyer for gold at $10,000 an ounce once you have acknowledged that the impending global economic collapse will reduce paper assets to worthlessness. But that doesn’t mean an ounce of gold cannot get bid up in the meantime to $10,000, however fleetingly, before the fiat money that is still accepted in exchange for gold has been exposed as a fraud.

How ironic, then, that even as this day of reckoning has become almost palpable, gold bugs continue to fret and gnash their teeth every time the price of bullion corrects $50 or more. Take it from a deflationist who once scoffed at the notion of $10,000 gold: This rally is the real deal, and the $1,000 supposed “barrier” is looking more and more to me like a launching pad. Deflation might eventually knock gold back down to earth, so that bullion will have “merely” retained its purchasing power in spades, but there is a lot of inflating to be attempted (futilely) by the central banks before that is likely to occur.

Remodel 50 Million Kitchens

Meanwhile, that this attempt cannot possibly succeed is at the heart of any deflationist’s argument. We can see the reasons for this already. For one, the chicken-in-every-pot that the U.S. government is about to offer Americans via a tax rebate is so puny and belated a “solution” as to be laughable. Even if such Keynesian quackery could work, and even if the government were to enact a big enough giveaway to thwart deflation for perhaps a year or two – say, by offering every household a new Chevy Tahoe or a kitchen-remodel – it would only put us that much deeper in debt, since Congress would be spending money created from thin air rather than raised through taxes. Make no mistake, this fiscal stimulus package is a cynical political hoax, and the fact that the stock market got almost no lift from it shows that investors understand this implicitly.

What they do not fully understand, at least not yet, is that providing effectively unlimited credit to the banking system is not the same as hyperinflating. Allowing the banks to re-jigger their books so that they can at least appear solvent for a little while longer will delay the day when one of them fails so hard it takes others down with it. But this will have almost no effect on the consumer economy, which accounts for about 70 percent of GDP; nor will the mere, short-lived illusion that the banking system has stabilized engender the kind of hubris it would take to get home prices moving in the other direction.

Sell Gold, Buy Chrysler?

Another reason the U.S. government's attempt to pump up the economy must fail is that we are the only country that appears both eager and willing to promote all-out inflation. Europe has rejected an easing smackdown; instead, fearing global systemic risks, they have arranged effectively unlimited lines of credit to European banks, as well as bottomless drawing rights for a U.S Treasury that at some point will need to borrow vast quantities of euros to mop up dollars that the rest of the world has ceased to want.

With that day almost surely in prospect, any selling of gold by investors at these supposedly loft levels is premature, just as any decline of $50, or $100, or even $200 in bullion’s price is fundamentally unwarranted. If you think the stimulus measures being promoted by the government will help restore the U.S. economy to health, then by all means, sell your gold assets and buy shares in Chrysler. For our part, we will reiterate our belief that gold has been, and will continue to be – at least for the foreseeable future -- the no-brainer investment of our lifetime.

Global Melt Down

Jan. 21 (Bloomberg) -- Stocks plunged in Germany, Hong Kong, India and Brazil, and U.S. index futures dropped on mounting speculation that the global economy is slowing and company defaults will rise.

Europe's Dow Jones Stoxx 600 Index fell the most since the Sept. 11 terrorist attacks and sank into a bear market, as Allianz SE and BNP Paribas SA slid. Hong Kong's Hang Seng Index had its biggest drop in six years after BNP Paribas said Bank of China Ltd. may write down overseas securities by $4.8 billion because of losses from U.S. subprime mortgages. Citigroup Inc. retreated in Frankfurt.

The MSCI World Index slipped 2.4 percent to 1,402.75 at 2:44 p.m. in London, extending its decline from an Oct. 31 record to 17 percent. India's Sensitive Index lost the most since 2004, while Germany's DAX slid the most since March 2003. Futures on the Standard & Poor's 500 Index sank 3.4 percent. Trading in the U.S. is closed today for Martin Luther King Day.

``It's the worst I've ever seen,'' said Johan Stein, who helps manage the equivalent of about $14 billion at Nordea Asset Management in Stockholm. ``The financial system is in terrible shape, and no one knows where this will end.''

Today's declines follow the worst week for U.S. stocks in five years after President George W. Bush's $150 billion plan to revive the economy and expectations of interest-rate cuts failed to allay recession concerns.

The risk of European companies defaulting soared to a record today on speculation credit-rating cuts at bond insurers including Ambac Financial Group Inc. may trigger forced asset sales. European Central Bank council member Nout Wellink said economic growth in the region may slow more than policy makers had expected.

Market Crisis

``This is a stock-market crisis,'' said Alberto Roldan, head of research at Inverseguros SVB in Madrid. ``Investors believe that neither a government package nor a huge rate cut is going to help evade a recession in the U.S.''

White House spokesman Tony Fratto said in Washington today the government doesn't comment on daily market moves.

``We're confident that the global economy will continue to grow, and that the U.S. economy will return to stronger growth,'' Fratto said in an e-mailed message.

The Stoxx 600 slid 4.1 percent, extending its drop from a 6 1/2-year high on June 1 to 22 percent. A decline of more than 20 percent is the common definition of a bear market. The gauge earlier fell as much as 5.8 percent, which would have been the biggest drop in six years. France's CAC 40 lost 4.9 percent. The U.K.'s FTSE 100 sank 3.6 percent, and Germany's DAX slid 6 percent.

Volatility Climbs

The VDAX-New Index, a benchmark gauge of European stock- market volatility, surged as much as 39 percent, the most since 2001. The measure of expected price swings for stocks is derived from prices paid for options on Germany's DAX.

The MSCI Asia Pacific Index lost 3.7 percent. Australia's S&P/ASX 200 Index slumped for an 11th day. Hong Kong's Hang Seng Index lost 5.5 percent. Japan's Nikkei 225 Stock Average dropped 3.9 percent as the Finance Ministry cut its evaluation of five of 11 regional economies as housing investment fell and employment worsened.

The MSCI Emerging Markets Index, a global benchmark, sank 5.4 percent, extending its retreat from an October record to 19.7 percent.

Brazil's Bovespa index slid 5.2 percent, the most since February 2007. Russia's Micex Index declined 7.5 percent, the biggest drop since June 2006.

Canada's Standard & Poor's/TSX Composite Index fell 4.1 percent.

Allianz, Europe's biggest insurer, tumbled 8.4 percent to 122.01 euros. BNP Paribas, France's second-biggest bank, sank 6.1 percent to 65.15 euros. ING Groep NV, the biggest Dutch investment bank, declined 7.6 percent to 21.66 euros.

`Sharp Contraction'

``The market is finally catching on to the fact that a recession will lead to a sharp contraction in earnings,'' said Jane Coffey, head of equities at Royal London Asset Management, where she helps oversee about $11 billion. ``We need to see more aggressive changes to forecasts before investors become more positive about looking through the downturn.''

Swiss Reinsurance Co. decreased 8.5 percent to 69.9 Swiss francs. UBS AG cut its share-price estimate for the world's largest reinsurer to 80 francs from 88, citing the probability of more investment losses related to credit-market problems.

``We see on-going downside risk to earnings and stock performance until we have better visibility,'' London-based analysts including Ben Cohen wrote in a report to investors.

Bank of China

Bank of China, which has the largest holdings among Asian banks of U.S. subprime mortgages, slid 4.7 percent to HK$3.43. The bank may write down 17.5 billion yuan ($2.4 billion) for the fourth quarter of 2007, and an equal amount for this year, Dorris Chen, a Shanghai-based analyst at BNP Paribas wrote in a note on Jan. 18.

Commonwealth Bank of Australia, the country's second largest, dropped 2.5 percent to A$51.89. National Australia Bank Ltd., the nation's largest, declined 2 percent to A$35.55.

Morgan Stanley raised its 2008 forecast for loan-loss charges at the country's major banks by 26 percent, analyst Richard Wiles wrote in a note today, citing a deteriorating global economy and ``the difficulty faced by some companies in refinancing maturing debt.''

Citigroup, the biggest U.S. bank by assets, dropped 3.6 percent to $23.56 in Frankfurt. JPMorgan Chase & Co., the second- largest U.S. bank by market value, slid 3.2 percent to $38.30 also in Frankfurt trading.

The slump has made stocks cheap by historical standards. Europe's Stoxx 600 is valued at 11.1 times its companies' profits, the lowest since at least 2002, according to data compiled by Bloomberg. The 1,953-member MSCI World has a price- earnings ratio of 14.3, the cheapest since at least 1998.

Rio Tinto

Rio Tinto Group, the world's third-biggest mining company, dropped after BHP Billiton Ltd. failed to make a new offer. Rio, defending a hostile $108 billion takeover bid from rival mining company BHP, fell 6.6 percent to 4,392 pence.

BHP may not make a new offer before the Feb. 6 deadline set by the U.K.'s Takeover Panel, the London-based Times newspaper reported. The BHP board has not met to discuss a new bid, the newspaper said, after its initial three-for-one all share offer in November was rejected.

Samantha Evans, a BHP spokeswoman in Melbourne, declined to comment. Rio spokeswoman Amanda Buckley also declined to comment.

Dozens see UFO in Stephanville, Texas

(AP) In this farming community where nightfall usually brings clear, starry skies, residents are abuzz over reported sightings of what many believe is a UFO.

Several dozen people - including a pilot, county constable and business owners - insist they have seen a large silent object with bright lights flying low and fast. Some reported seeing fighter jets chasing it.

"People wonder what in the world it is because this is the Bible Belt, and everyone is afraid it's the end of times," said Steve Allen, a freight company owner and pilot who said the object he saw last week was a mile long and half a mile wide. "It was positively, absolutely nothing from these parts."

While federal officials insist there's a logical explanation, locals swear that it was larger, quieter, faster and lower to the ground than an airplane. They also said the object's lights changed configuration, unlike those of a plane. People in several towns who reported seeing it over several weeks have offered similar descriptions of the object.

Machinist Ricky Sorrells said friends made fun of him when he told them he saw a flat, metallic object hovering about 300 feet over a pasture behind his Dublin home. But he decided to come forward after reading similar accounts in the Stephenville Empire-Tribune.

"You hear about big bass or big buck in the area, but this is a different deal," Sorrells said. "It feels good to hear that other people saw something, because that means I'm not crazy."

Sorrells said he's seen the object several times. He said he watched it through his rifle's telescopic lens and described it as very large and without seams, nuts or bolts.

Maj. Karl Lewis, a spokesman for the 301st Fighter Wing at the Joint Reserve Base Naval Air Station in Fort Worth, said no F-16s or other aircraft from his base were in the area the night of Jan. 8, when many sightings were reported.

Friday, January 18, 2008

FDA Approves Cloned Meat for Consumption

Someone tell me, why do we need this?

Critics Worry About Secondary Effects of Genetically Modified Foods

Jan. 16, 2008 —

It could be years before meat from cloned animals hits store shelves now that the Food and Drug Administration has given producers permission to sell it, but the milk from cloned offspring could hit the markets sooner.

"The milk and meat for cattle, swine and goat clones are as safe to eat as the food we eat every day," said Randall Lutter of the FDA.

Currently, only a few hundred clones exist, and they'll likely be used for just breeding.

Some genetically modified food already is available in American groceries. In fact, the food industry says that if a product has corn or soybean in it, it probably has been genetically modified.

"We would not be using those ingredients unless the authorities had evaluated them and determined them to be, to be safe," said Mark Nelson of the Grocery Manufacturers' Association.

Other countries have moved more slowly and been more cautious in giving the green light to cloned food. In Europe, where a more activist consumer culture exists, recent reports said it "is very unlikely" there's any difference in the safety of cloned or genetically modified products and natural products.

But Europe remains divided about food that contains genetically modified plants and grains, while in the United States genetically modified food is so common most people don't even realize they're eating it.

In the United States, determining which foods have been genetically modified can be difficult because they don't have to be labeled as such. The FDA also doesn't plan to require the labels for cloned animal products.

Critics worry the cloned and genetically modified foods still may be unsafe for consumption.

"It is really a huge, uncontrolled experiment on the American people," said Andrew Kimbrell of the Center for Food Safety.

They also worry about secondary health effects of eating cloned meat, such as a circumstance in which clones develop health problems later on and need more antibiotics and drugs.

"We think there are consequent effects the FDA has not yet looked at that could impact human health," said Joseph Mendelson of the Center for Food Safety.

What the FDA may do in the future is allow producers of regular meats and milks to put a label on their products saying they are not from cloned animals.

Meanwhile, the government has asked food producers to honor a voluntary moratorium on selling cloned meat animal products while marketing plans are worked out.

Shoppers who want to avoid genetically modified food should search for labels that say "100 percent organic," because by law those cannot contain biotech ingredients.

Thursday, January 17, 2008

Antidepressant Studies Unpublished

January 17, 2008

The makers of antidepressants like Prozac and Paxil never published the results of about a third of the drug trials that they conducted to win government approval, misleading doctors and consumers about the drugs’ true effectiveness, a new analysis has found.

In published trials, about 60 percent of people taking the drugs report significant relief from depression, compared with roughly 40 percent of those on placebo pills. But when the less positive, unpublished trials are included, the advantage shrinks: the drugs outperform placebos, but by a modest margin, concludes the new report, which appears Thursday in The New England Journal of Medicine.

Previous research had found a similar bias toward reporting positive results for a variety of medications; and many researchers have questioned the reported effectiveness of antidepressants. But the new analysis, reviewing data from 74 trials involving 12 drugs, is the most thorough to date. And it documents a large difference: while 94 percent of the positive studies found their way into print, just 14 percent of those with disappointing or uncertain results did.

The finding is likely to inflame a continuing debate about how drug trial data is reported. In 2004, after revelations that negative findings from antidepressant trials had not been published, a group of leading journals agreed to stop publishing clinical trials that were not registered in a public database. Trade groups representing the world’s largest drug makers announced that members’ companies would begin to release more data from trials more quickly, on their own database,

And last year, Congress passed legislation that expanded the type of trials and the depth of information that must be submitted to, a public database operated by the National Library of Medicine. The Food and Drug Administration’s Web site provides limited access to recent reviews of drug trials, but critics say it is very hard to navigate.

“This is a very important study for two reasons,” said Dr. Jeffrey M. Drazen, editor in chief of The New England Journal. “One is that when you prescribe drugs, you want to make sure you’re working with best data possible; you wouldn’t buy a stock if you only knew a third of the truth about it.”

Second, Dr. Drazen continued, “we need to show respect for the people who enter a trial.”

“They take some risk to be in the trial, and then the drug company hides the data?” he asked. “That kind of thing gets us pretty passionate about this issue.”

Alan Goldhammer, deputy vice president for regulatory affairs at the Pharmaceutical Research and Manufacturers of America, said the new study neglected to mention that industry and government had already taken steps to make clinical trial information more transparent. “This is all based on data from before 2004, and since then we’ve put to rest the myth that companies have anything to hide,” he said.

In the study, a team of researchers identified all antidepressant trials submitted to the Food and Drug Administration to win approval from 1987 to 2004. The studies involved 12,564 adult patients testing drugs like Prozac from Eli Lilly, Zoloft from Pfizer and Effexor from Wyeth.

The researchers obtained unpublished data on the more recently approved drugs from the F.D.A.’s Web site. For older drugs, they tracked down hard copies of unpublished studies through colleagues, or using the Freedom of Information Act. They checked all of these studies against databases of published research, and also wrote to the companies that conducted the studies to ask if specific trials had been published.

They found that 37 of 38 trials that the F.D.A. viewed as having positive results were published in journals. The agency viewed as failed or unconvincing 36 other trials, of which 14 made it into journals.

But 11 of those 14 journal articles “conveyed a positive outcome” that was not justified by the underlying F.D.A. review, said the new study’s lead author, Dr. Erick H. Turner, a psychiatrist and former F.D.A. reviewer who now works at Oregon Health and Sciences University and the Portland Veterans Affairs Medical Center. His co-authors included researchers at Kent State University and the University of California, Riverside.

Dr. Turner said the selective reporting of favorable studies sets up patients for disappointment. “The bottom line for people considering an antidepressant, I think, is that they should be more circumspect about taking it,” he said, “and not be so shocked if it doesn’t work the first time and think something’s wrong with them.”

For doctors, he said, “They end up asking, ‘How come these drugs seem to work so well in all these studies, and I’m not getting that response?’ ”

Dr. Thomas P. Laughren, director of the division of psychiatry products at the F.D.A., said the agency had long been aware that favorable studies of drugs were more likely to be published.

“It’s a problem we’ve been struggling with for years,” he said in an interview. “I have no problem with full access to all trial data; the question for us is how do you fit it all on a package insert,” the information that accompanies many drugs.

Dr. Donald F. Klein, an emeritus professor of psychiatry at Columbia, said drug makers were not the only ones who can be reluctant to publish unconvincing results. Journals, and study authors, too, may drop studies that are underwhelming.

“If it’s your private data, and you don’t like how it came out, well, we shouldn’t be surprised that some doctors don’t submit those studies,” he said.

Wednesday, January 16, 2008

Americans Pay for Housing Boom's Excess

Wednesday January 16, 4:37 pm ET
By Madlen Read and Joe Bel Bruno, AP Business Writers

U.S. Banks Seeing Higher Delinquencies on More Than Just Mortgage Payments
NEW YORK (AP) -- The bill for America's excessive borrowing during the housing boom has arrived, and more people are having trouble paying it.

JPMorgan Chase & Co. and Wells Fargo & Co., two of the nation's biggest banks, on Wednesday joined a growing chorus warning that the subprime mortgage mess is just the start of a sweeping lending crisis. And some fear that consumers falling behind on all kinds of loan payments could tip the economy's scale toward recession.

Strapped consumers are having a tough time making payments on credit cards, home-equity loans, and even for their cars. This has caused three of the top five U.S. commercial banks that have already reported damaging fourth-quarter results to set aside some $12.5 billion to cover future loan losses -- and that number will likely grow as the year wears on.

Problems in the subprime mortgage market are rapidly spilling over into other areas of the economy. No matter what the experts call it -- a recession, slowdown or even the makings of a depression -- it's clear banks are under mounting pressure to be more cautious about lending.

"If consumption growth stagnates, the odds of a recession are incredibly high," said Andrew Bernard, director of the Center for International Business at the Tuck School of Business at Dartmouth. "All the pieces of household financial health are starting to be shakier, especially at the low end."

He and others are paying close attention to what top U.S. banks say about their customers' payment habits. Many view this as an early indicator about where the overall economy is headed, but there are other signs that are troublesome.

The stock market has had its worst start to the year in three decades, with investors rattled by signs from the Labor Department that unemployment is on the rise and retail sales are on the decline. Further, the Commerce Department reported Wednesday that higher costs for energy and food in 2007 pushed inflation for the year up by the largest amount in 17 years.

There was no sign of a turnaround in the last few months of the year. The Federal Reserve reported that the economy grew at a slower pace in late November and December as credit problems intensified and consumers tightened their spending.

To some, it appears that the Fed came to its rate-cutting decision in August a bit too late. Others point to the falling dollar and surging oil prices, factors that usually prevent the central bank from easing its monetary policy.

While debate persists about the Fed's timing and the extent of the slowdown, bank executives -- who have scrambled to prepare for another tumble in home prices and higher unemployment in 2008, feel academic definitions are beside the point.

"We're not predicting a recession -- it's not our job -- but we're prepared," JPMorgan Chase CEO Jamie Dimon told analysts after the nation's third-largest bank wrote down $1.3 billion and said profit dropped 34 percent.

His financial institution didn't do all that bad. Rival Citigroup Inc. fared the worst during the fourth quarter, losing $9.83 billion after writing down the value of its portfolio of mortgage and mortgage-backed products by $18.1 billion.

Wells Fargo, a more traditional bank that avoided last year's trading woes, saw its profit fall 38 percent due to troubles with home equity loan and mortgage defaults.

JPMorgan is girding for home prices to decline further in 2008 by 5 percent to 10 percent; Citigroup's estimate of 7 percent falls within that range, too.

"The banks are the infrastructure for everything, the heartbeat of the market," said Chris Johnson, president of Johnson Research Group. "They need to be fixed before the market, and economy, can move forward with confidence. They need to get all their dirty laundry out there."

Banks and card companies like American Express Co. -- which warned last week that it would add $440 million to loan loss provisions -- said in the regions where home prices are declining, card default rates are rising faster. The same goes for auto loans, subprime mortgages and home equity loans in these areas, which include Florida, Michigan and California.

A big reason for the rise in credit card default rates is that they are returning to more usual levels following a change in bankruptcy law that sent rates lower for a time. But the fact that more losses are being seen in the weaker parts of the country shows the increase is economically driven as well.

Analysts believe this means one thing: Consumers will be the ones paying for years of lax lending standards by U.S. financial institutions. Many will become more restrictive about who gets credit in a bid to stem future losses -- and that could curb consumer spending, which accounts for more than two-thirds of the economy.

"We've pushed the envelope," Johnson said. "Along with the joy of a market that goes as high as ours is the agony of when it starts to correct itself."

Tuesday, January 15, 2008

Vinyl Gets Its Groove Back

Thursday, Jan. 10, 2008

From college dorm rooms to high school sleepovers, an all-but-extinct music medium has been showing up lately. And we don't mean CDs. Vinyl records, especially the full-length LPs that helped define the golden era of rock in the 1960s and '70s, are suddenly cool again. Some of the new fans are baby boomers nostalgic for their youth. But to the surprise and delight of music executives, increasing numbers of the iPod generation are also purchasing turntables (or dusting off Dad's), buying long-playing vinyl records and giving them a spin.

Like the comeback of Puma sneakers or vintage T shirts, vinyl's resurgence has benefited from its retro-rock aura. Many young listeners discovered LPs after they rifled through their parents' collections looking for oldies and found that they liked the warmer sound quality of records, the more elaborate album covers and liner notes that come with them, and the experience of putting one on and sharing it with friends, as opposed to plugging in some earbuds and listening alone. "Bad sound on an iPod has had an impact on a lot of people going back to vinyl," says David MacRunnel, a 15-year-old high school sophomore from Creve Coeur, Mo., who owns more than 1,000 records.

The music industry, hoping to find another revenue source that doesn't easily lend itself to illegal downloads, has happily jumped on the bandwagon. Contemporary artists like the Killers and Ryan Adams have begun issuing their new releases on vinyl in addition to the CD and MP3 formats. As an extra lure, many labels are including coupons for free audio downloads with their vinyl albums so that Generation Y music fans can get the best of both worlds: high-quality sound at home and iPod portability for the road. Also, vinyl's different shapes (hearts, triangles) and eye-catching designs (bright colors, sparkles) are created to appeal to a younger audience. While new records sell for about $14, used LPs go for as little as a penny--perfect for a teenager's budget--or as much as $2,400 for a collectible, autographed copy of Beck's Steve Threw Up.

Vinyl records are just a small scratch on the surface when it comes to total album sales--only about 0.2%, compared to 10% for digital downloads and 89.7% for CDs, according to Nielsen SoundScan--but these numbers may underrepresent the vinyl trend since they don't always include sales at smaller indie shops where vinyl does best. Still, 990,000 vinyl albums were sold in 2007, up 15.4% from the 858,000 units bought in 2006. Mike Dreese, CEO of Newbury Comics, a New England chain of independent music retailers that sells LPs and CDs, says his vinyl sales were up 37% last year, and Patrick Amory, general manager of indie label Matador Records, whose artists include Cat Power and the New Pornographers, claims, "We can't keep up with the demand."

Big players are starting to take notice too. "It's not a significant part of our business, but there is enough there for me to take someone and have half their time devoted to making vinyl a real business," says John Esposito, president and CEO of WEA Corp., the U.S. distribution company of Warner Music Group, which posted a 30% increase in LP sales last year. In October, introduced a vinyl-only store and increased its selection to 150,000 titles across 20 genres. Its biggest sellers? Alternative rock, followed by classic rock albums. "I'm not saying vinyl will become a mainstream format, just like gourmet eating is not going to take over from McDonald's," says Michael Fremer, senior contributing editor at Stereophile. "But there is a growing group of people who are going back to a high-resolution format." Here are some of the reasons they're doing it and why you might want to consider it:

Sound quality LPs generally exhibit a warmer, more nuanced sound than CDs and digital downloads. MP3 files tend to produce tinnier notes, especially if compressed into a lower-resolution format that pares down the sonic information. "Most things sound better on vinyl, even with the crackles and pops and hisses," says MacRunnel, the young Missouri record collector.

Album extras Large album covers with imaginative graphics, pullout photos (some even have full-size posters tucked in the sleeve) and liner notes are a big draw for young fans. "Alternative rock used to have 16-page booklets and album sleeves, but with iTunes there isn't anything collectible to show I own a piece of this artist," says Dreese of Newbury Comics. In a nod to modern technology, albums known as picture discs come with an image of the band or artist printed on the vinyl. "People who are used to CDs see the artwork and the colored vinyl, and they think it's really cool," says Jordan Yates, 15, a Nashville-based vinyl enthusiast. Some LP releases even come with bonus tracks not on the CD version, giving customers added value.

Social experience Crowding around a record player to listen to a new album with friends, discussing the foldout photos, even getting up to flip over a record makes vinyl a more socially interactive way to enjoy music. "As far as a communal experience, like with family and friends, it feels better to listen to vinyl," says Jason Bini, 24, a recent graduate of Fordham University. "It's definitely more social."