CLOWING ACHIEVEMENTS - Bill Bonner

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

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.

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.

Antidepressant Studies Unpublished

January 17, 2008

By BENEDICT CAREY

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, clinicalstudyresults.org.

And last year, Congress passed legislation that expanded the type of trials and the depth of information that must be submitted to clinicaltrials.gov, 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.

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."

Vinyl Gets Its Groove Back

Thursday, Jan. 10, 2008

By Kristina Dell

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, Amazon.com 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."

Iran threat was phony....duh.

Last Monday, Pentagon officials issued disturbing information to journalists in Washington about a provocative Iranian threat against U.S. ships in the Gulf. The information made big news, reported by all the major U.S. and international newspapers and television networks. The story was front-page headlines just as President Bush was departing for a 10-day tour of the Middle East, where one of his top priorities would be convincing Arab states to help the Bush administration confront Iran.

According to U.S. officials, who initially provided some of the information off-the-record and not for attribution to an identifiable spokesperson, five Iranian speedboats approached three U.S. navy vessels in the Strait of Hormuz and acted aggressively. Senior U.S. military officials as well as Bush himself variously called Iran's behavior reckless, provocative and dangerous. But the detail that spiced up the story and really grabbed the headlines was at first provided off-the-record to reporters. Officials said that as the speedboats maneuvered, a warning was issued by ship-to-ship radio that the U.S. ships would explode momentarily. "I am coming at you, and you will explode in a few minutes," is the quote the NY Times used, provided by an anonymous American official. A similar version made it into the first paragraph of the Washington Post's account. Soon afterwards, the Pentagon released a video of the incident along with the verbal threat. The Pentagon was effectively accusing Iran of planning, carrying out or at least feigning suicide attacks on U.S. ships, reminiscent of the Al Qaeda attack on the USS Cole in Yemen in 2000. The Post's Robin Wright wrote that "the Pentagon had consistently given the impression that the [radio] threat was linked to the Iranian boats."

Now, the Navy Times newspaper is casting serious doubt on the claim that it was the Iranians who issued the kamikaze warning. It seems that the threat might have been uttered by a local heckler known in Gulf shipping lanes as "Filipino Monkey," who's been famous in the region for 25 years for interrupting Gulf radio communications with insults and epithets. The Navy Times article, by Andrew Scutro and David Brown, quoted several current and former Navy seamen saying the verbal threat may well have been a prank. "It's been a joke out there for years," said a civilian seaman quoted by paper.

Along with other news media over the last few days, Navy Times quotes Navy brass effectively back peddling from the version put out by the Pentagon last week. "We don’t know for sure where they came from,” said Commander Lydia Robertson, spokeswoman for 5th Fleet in Bahrain, according to Navy Times. "It could have been a shore station." Chief of Naval Operations Admiral Gary Roughead told the paper: "Based on my experience operating in that part of the world, where there is a lot of maritime activity, trying to discern [who is speaking on the radio channel] is very hard to do."

There may be a serious problem here. Has the Bush administration's demonization of Iran so pervaded the U.S. government that the judgement of vital decision-makers is becoming dangerously clouded? So when a possible practical joker issues a threat to a warship, you have a Strangelovian military chain of command from Bahrain to Washington racing to insist that the crazy, murderous mullahs in Tehran are at it again. By the Pentagon's own account, one of the warships very nearly took out at least one of the Iranian vessels but the order to fire was prevented at the last minute when the speedboats turned away. It goes without saying that an armed clash like that between two long-time adversaries could have ignited a much larger confrontation. Bush recently warned that Iran's nuclear ambitions have raised the specter of World War III and he has not ruled out a U.S. military strike on Iran to degrade its uranium-enrichment facility.

In due course, I hope that we establish who issued the verbal threat to blow up the U.S. ships. Was it "Filipino Monkey"? An imitator? If the Pentagon had better proof that it was an Iranian, we would have seen it by now. Incidentally, the Iranians always denied making the threat, and accused the U.S. of hyping a routine ship-to-ship interaction in international waters into a fabricated confrontation. “This is an ordinary occurrence, which happens every now and then for both sides,” Iranian Foreign Minister spokesman Mohammed Ali Hosseini said immediately afterwards.

But I'm more interested in knowing if there was any monkey business involved in how the Pentagon originally spun the sensational kamikaze angle to the press and the global public. How seriously did the officers on the three ships take the suicide-attack threat? Were they certain that it had been issued by the Iranians? Did they consider or believe that it could have come from a prankster? How carefully did the Pentagon analyze the verbal threat once it was relayed back to Washington? Were officials there completely convinced that the threat came from Iran? Or did they have doubts yet went ahead anyway and indicated to reporters that Iran did it? Were officers on the scene and Pentagon officials in Washington aware that pranksters are prevalent on the Gulf radio networks? Did they factor that into their risk assessment and into their decision to point a quick finger at Iran?

If "Filipino Monkey" or somebody of that ilk turns out to be the culprit, it means that the Pentagon either can't tell the difference between a prank and a threat, or that it's too busy confronting Iran to bother trying to do so. Either way, it's another reason to worry.

Merrill Lynch Gets $6.6 Billion From Kuwait, Mizuho (Update2)

Back last year when a middle eastern country attempted to purchase an American port howls went up in opposition. So where are those folks now when foreign nations are purchasing large swaths of American banks?

By Edward Evans

Jan. 15 (Bloomberg) -- Merrill Lynch & Co. raised $6.6 billion by selling preferred shares to a group including the Kuwait Investment Authority and Japan's Mizuho Financial Group Inc. after being battered by losses from subprime mortgages.

The investors also include the Korea Investment Corp. and clients of U.S. money managers TPG-Axon Capital and T. Rowe Price Associates Inc., Merrill said in a statement today. The group won't have a say in how the firm is run, it said.

Merrill, the third-biggest U.S. brokerage, is raising money after $8.4 billion of writedowns on U.S. mortgage investments led to the biggest loss in its 93-year history in the third quarter. Today's investment comes a month after the New York- based firm raised $6.2 billion from Singapore's Temasek Holdings Pte and Davis Selected Advisors LP.

Investors ``are putting in capital but it's at a cost,'' said Peter Plaut, a senior credit analyst at New York-based Sanno Point Capital Management. ``Now it's up to the CEOs to be able to generate returns that exceed that cost of capital.''

Merrill fell 2.3 percent to $54.70 in New York pre-market trading today. The stock dropped 42 percent in the 12 months through yesterday, making it the third worst performer in the 12-member Amex Broker-Dealer Index.

Overseas Funding

Merrill will pay a 9 percent annual dividend on the securities until they automatically convert into shares in 2 3/4 years' time. The group will get fewer shares if Merrill's stock price climbs above $61.31 and more if it drops below $52.40.

The agreement with Kuwait will give Merrill ``additional opportunities to grow its presence there,'' Merrill Chief Executive Officer John Thain said in today's statement. ``Because of their extensive corporate client base in Japan and their deep network in China, the Pacific Rim and globally, we expect future collaboration with Mizuho to be very productive.''

Merrill spokeswoman Jessica Oppenheim in New York said Thain was unavailable to comment further.

Thain, who took over Dec. 1, joined Citigroup Inc., Morgan Stanley and UBS AG in tapping overseas investors to shore up capital. Before today, U.S. and European banks and securities firms had turned to Asian and Middle Eastern governments and investors for about $34 billion of fresh funds.

The world's biggest financial institutions have announced more than $100 billion in writedowns and loan losses sparked by the U.S. subprime mortgage slump, eroding their balance sheets and sending shares plunging.

Citigroup Loss

Citigroup, the biggest U.S. bank, said today it had a $9.83 billion loss in the fourth quarter and that it will raise $12.5 billion through selling securities to investors including Singapore and Kuwait.

Merrill probably will post a loss of $3.23 billion on Jan. 17, topping the record $2.24 billion shortfall reported in the third quarter, Stan O'Neal's last as CEO, analysts estimate.

The firm may write down $15 billion related to U.S. mortgage losses, almost twice its original forecast, the New York Times reported Jan. 11, citing unidentified people briefed on the plan.

Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.

Tokyo-based Mizuho becomes the first Japanese company in more than two decades to make a major investment in a Wall Street firm. Sumitomo Bank Ltd. a predecessor of Tokyo-based Sumitomo Mitsui Financial Group Inc., paid $500 million for a 12.5 percent stake in Goldman Sachs Group Inc. in 1986, later selling out.

`Restore Confidence'

``The financing could help Merrill restore some of the confidence it has lost,'' said Shinichi Tamura, a banking analyst at UBS Securities Japan Ltd. ``Mizuho would likely be a silent, passive investor and wouldn't make too much noise.''

Kuwait, the Middle East's fourth-biggest oil producer, formed the KIA in the 1980s to manage the nation's wealth.

The KIA is the biggest shareholder in Daimler AG with a 7 percent holding. Other assets include 1.7 percent of BP Plc and a stake in Industrial & Commercial Bank of China Ltd. it bought for $720 million in 2006, data compiled by Bloomberg show. KIA Managing Director Bader al-Saad was in a meeting and couldn't be reached for comment when Bloomberg called today.

A Hand the Clintons Aren't Showing

This issue is comical. For anyone who's been living the United States for any length of time knows that everything here is about race. Every word is parsed, every actioned scrutinized, this country isn't even close to having normalized race relations. Anyone who doubted for an instant that blacks wouldn't vote for the first viable black presidential candidate is a fool. Of course blacks are going to vote for Obama....are you kidding?!

By Eugene Robinson
Tuesday, January 15, 2008; A13

It turns out that Toni Morrison's famous line about Bill Clinton as "our first black president" was just a bon mot. If the Clintons took it as a sign of African Americans' unconditional fealty, they were mistaken.

A new Post-ABC News poll shows that black Democrats nationwide support Barack Obama over Hillary Clinton for the presidential nomination by nearly 2 to 1. This striking reversal -- a month ago, Clinton held a big lead among African Americans -- is perhaps why race has suddenly become such a hot issue in a campaign that previously had dodged the subject.

It was never realistic to think that race -- or gender, for that matter -- would stay out of a contest starring the first woman and the first African American with realistic hopes of becoming president. From the Democrats' perspective, it's probably better to hash all this out now rather than wait until the general election campaign, when the Republican Swift-boat machine would set the parameters and tone for the discussion.

Still, it's surprising that the Clinton campaign has been so aggressive in keeping the race issue alive. On "Meet the Press," Clinton didn't just seek to explain her remarks about the Rev. Martin Luther King Jr.'s role in landmark civil rights legislation (she said it took a president to bring about real action) or Bill's "fairy tale" crack about Obama's record on the Iraq war (which some African Americans took as a dismissal of Obama's candidacy as mere fantasy). Instead, she went on the attack, accusing the Obama campaign of "deliberately distorting" her words in a way that was "unfair and unwarranted."

That seemed a curious tactic to employ just two weeks before the South Carolina Democratic primary, in which African Americans are expected to cast about half the total votes. It seemed especially curious after the most powerful black politician in the state, U.S. House Majority Whip James Clyburn, indicated he was so "bothered" by the Clintons' remarks that he might rethink his decision not to endorse any candidate before the primary.

With most polls showing Clinton well behind in South Carolina, it was unclear how this approach would do anything but put her further behind.

The charitable explanation would be that the Clintons are, in their political position, simply disoriented. They are accustomed to Bill Clinton's campaigns, in which African American support was pretty much assumed. Backing for Hillary Clinton from prominent friends and allies such as Andrew Young, Rep. John Lewis (D-Ga.), Vernon Jordan, Magic Johnson, Quincy Jones and others didn't manage to keep Obama out of the race -- and, according to the polls, won't keep black voters from supporting him. It would be understandable if the Clintons were frustrated at seeing such an important Democratic constituency lured away, and if they were doubly frustrated at the difficulty of finding a way to criticize Obama without further alienating African Americans.

This is politics, however, which means that less charitable explanations have to be considered as well.

Race is just one of the fights that the Clinton campaign is pressing with Obama; the other is an attempt to discredit Obama's opposition to the war. It could be that the idea is to engage Obama in so much tit-for-tat combat that his image as a new, post-partisan kind of politician is tarnished.

Or the strategy could be more subtle. I can't help but recall a certain piece of history.

In 1992, when Bill Clinton was running for president, a controversial hip-hop artist named Sister Souljah made an ugly comment about the Los Angeles riots: "If black people kill black people every day, why not have a week and kill white people?" Candidate Clinton highlighted the remark in a speech to the Rev. Jesse Jackson's Rainbow Coalition, comparing Souljah to Ku Klux Klan member David Duke. The episode demonstrated that Clinton was not only tough on lawlessness but also willing to challenge "special interests" -- in this case, black activists.

The Clintons are reading the polls, too; they might well be resigned to the possibility that most black Democrats will vote for Obama. This would mean that South Carolina is probably already lost and that the campaign's focus now has to be on Florida and the many states whose delegates are up for grabs on "Tsunami Tuesday."

Is it possible that accusing Obama and his campaign of playing the race card might create doubt in the minds of the moderate, independent white voters who now seem so enamored of the young, black senator? Might that be the idea?

Yes, that's a cynical view. But history is history.

Big Payday Awaits Chairman After Countrywide Sale

By Frank Ahrens

Washington Post Staff Writer
Saturday, January 12, 2008; D01

Angelo R. Mozilo has pocketed $410 million in salary, bonuses and stock-option gains since he became executive chairman of mortgage lender Countrywide Financial in 1999, according to the executive compensation company Equilar.

Now, the man at the center of the national mortgage crisis stands to collect an additional $112 million in severance when Bank of America buys the company he helped found.

Equilar's numbers are based on Countrywide's most recent proxy statement, which is a year old. According to the statement, if Countrywide is acquired and Mozilo leaves, he is entitled to a cash severance of $88 million. He would also receive a retirement package worth $24 million.

Equilar said that most of Mozilo's compensation since becoming chairman -- $285 million -- has come from stock options. Mozilo has been criticized for selling pieces of his stake in Countrywide, cashing in tens of millions of dollars in options as the housing market dropped.

BofA's awesome Countrywide tax break

January 11 2008: 3:41 PM EST

Brace yourselves, taxpayers of America. You're going to help Bank of America finance its $4 billion buyout of Countrywide.

By Allan Sloan, senior editor at large

NEW YORK (Fortune) -- Guess who's helping Bank of America pay for its $4.1 billion purchase of Countrywide Financial? Answer: The taxpayers of the United States.

That's because Bank of America (BAC, Fortune 500), which is solidly profitable, will be able to use some of Countrywide's losses to offset its own taxable income. The tax break could total about half a billion dollars over the first five years, according to an estimate by tax guru Robert Willens, who left Lehman Brothers Friday after a 20-year run and will be in business as Robert Willens LLC starting next week. The losses could be worth considerably more to Bank of America starting in the sixth year, depending on how big Countrywide's losses are when Bank of America formally acquires it.

At this point, of course, no one knows how much in losses Countrywide has run up since the junk mortgage market began souring and defaults accelerated. Countrywide (CFC, Fortune 500) itself probably doesn't know. But it seems almost certain to ultimately be in the billions.

In tax circles, Bank of America is famous for its 1988 purchase of the failed FirstRepublic Bank of Dallas, which was being auctioned off by federal regulators. Bank of America, then known as NCNB Corp., the parent of North Carolina National Bank, discovered a way to structure the deal to save $1 billion of taxes, using a convoluted strategy that none of the other bidders knew about. That allowed NCNB to outbid its rivals for the bank, and still come out way ahead.

The Countrywide tax break isn't in that league, but it would still be worth a lot of money. Willens estimates that Bank of America will be able to deduct $270 million of Countrywide's losses annually for the first five years it owns the firm.

That's based on a $6 billion purchase price - $4 billion to Countrywide's common stockholders, plus the $2 billion of preferred stock that Countrywide sold to Bank of America in August. Willens says that you multiply that $6 billion by 4.49 percent - the so-called "long-term tax-exempt rate" - to calculate how much of Countrywide's losses Bank of America can deduct annually for five years after the purchase.

A $270 million annual deduction would save Bank of America something more than $100 million a year in federal and state income taxes. The long-term tax-exempt rate, which is based on Treasury rates and other things so complicated that they make my teeth hurt. The rate changes each year, Willens says, but not by much. When I asked how it's calculated, Willens, a master of tax arcana, threw up his hands. (Metaphorically, of course.) "It's like the formula for Coca-Cola," he said, "no one outside the circle knows it" and it's so complicated that, "no one else wants to find out."

So over the first five years, Bank of America can use a total of $1.35 billion of Countrywide's losses to shelter its income. (That's five years of $270 million annual losses.) If Countrywide's embedded losses when Bank of America buys it exceed $1.35 billion, Willens says, the bank will be able to deduct the rest of the losses, without limit, starting in the sixth year.

Isn't life fun?

Judge Sentences Jones to 6 Months in Prison

I know that I will be resting a lot easier tonight knowing that the menace Marion Jones will not be sprinting by my house at a high rate of speed. Thankfully the ever vigilant federal government is on the case making sure there will not be any enhanced performances within our borders. What a relief!


January 12, 2008

By LYNN ZINSER

WHITE PLAINS — The former track star Marion Jones’s tearful courtroom plea to avoid jail was denied Friday by a federal judge who said her sentence should serve as a deterrent for others who may lie to federal agents, and Jones was sentenced to six months in prison for pleading guilty to two counts of perjury.

Judge Kenneth M. Karas of the United States District Court said he took into account Jones’s wish not to be separated from her two small sons, but he said he did not fully believe Jones’s limited admission that she used performance-enhancing drugs and wanted to send the message that lying to government investigators carries a stiff penalty.

“I want people to think twice before lying,” Karas said. “I want to make them realize no one is above the law.”

Jones pleaded guilty in October to lying to federal agents in two separate investigations, a bank-fraud case being prosecuted out of New York and the Bay Area Laboratory Co-operative case in Northern California involving performance-enhancing drugs. Prosecutors recommended a sentence of zero to six months. Jones’s lawyers asked Karas to limit the sentence to probation.

Jones asked Karas for leniency before he announced his decision. “I pray that you will be as merciful as a human being can be,” she said.

She was given six months for the first count of perjury, stemming from the Balco case, and two months for the second, to be served concurrently. That will be followed by two years of probation, and she was ordered to perform 800 hours of community service working with young athletes to spread an anti-drug message. She is to report to a facility near her home in Austin, Tex., on March 11.

After the sentence, Jones hugged her husband, the former sprinter Obadele Thompson, and cried as she buried her face in his shoulder.

Jones, whose sons are 4 years old and 7 months old, huddled with a dozen or so friends and family members in the courtroom. She then ventured outside to say a few words.

“As I’m sure everyone can imagine, I’m extremely disappointed today,” Jones, 32, said, with Thompson standing next to her with an arm around her waist. “I will respect the judge’s orders. I truly hope that people will learn from my mistakes.”

Later Friday, Karas sentenced one of Jones’s former coaches, Steve Riddick, to five years and three months in jail for his involvement in the bank-fraud scheme that ensnared Jones. Riddick also received three years’ probation and must pay back $375,000.

Jones’s lawyers tried to persuade Karas that Jones had already suffered from her guilty plea and that her acceptance of responsibility warranted a more lenient sentence.

A few days after admitting to using performance-enhancing drugs in her guilty plea, Jones returned the five Olympic medals she won in 2000. The International Olympic Committee and track and field’s federation have wiped her results from the books starting from the summer of 2000, when she said she started using steroids.

“We were very disappointed in the sentence,” George Hulse, Jones’s cousin, said outside the courtroom. “No consideration was taken for the fact that she has been shamed, that she has lost her medals, that she has been brought to financial ruin. She has paid a terrible human price already.”

But Karas said those consequences had followed from Jones’s decision to break the rules of international competition, not the law, and would not affect his sentence. He said he did not believe Jones had been completely forthcoming in her admission that she used drugs.

In her guilty plea, Jones said she had been given a substance by her coach, Trevor Graham, starting in the summer of 2000, but he told her it was flaxseed oil. She said she did not realize it had been the steroid THG, known as the clear, until she left Graham and stopped taking it. Karas said he doubted a high-level athlete would be unaware of a drug’s effects on performance.

“I am troubled, quite frankly, by the statement,” he said.

In a pre-sentencing memo, the lead Balco investigator, Jeff Novitzky, provided Karas with evidence that Jones’s drug use went further than THG. The evidence included doping calendars and testimony from a doctor that indicated Jones had used the blood-boosting drug EPO and human growth hormone.

Karas did not specifically mention that evidence, but he said he took the matter of performance-enhancing drugs seriously. He said he wanted Jones to use her experiences to help young athletes avoid the choices she made.

“Athletes in society have an elevated status,” he said. “They entertain, they inspire and perhaps most importantly, they serve as role models for kids around the world. When there is this widespread level of cheating, it sends all the wrong messages to those who follow these athletes’ every move.”

He suggested that Jones contact the United States Olympic Committee, the United States Anti-Doping Agency and the United States Track and Field Association after her release from prison as part of her community service.

The prosecutors in the Balco case have not yet indicated to what extent Jones may be used in Graham’s trial for perjury charges, which is scheduled to begin in March. Jones’s statements in October about Graham’s providing her with drugs will certainly be evidence, but Jones could also be called as a witness. With her guilty plea, she forfeited her Fifth Amendment right not to testify.

Cleveland Sues Big Banks

Cleveland Mayor Frank Jackson took aim at Wall Street on Thursday with a lawsuit against 21 major investment banks that he said have enabled the subprime lending and foreclosure crisis here.

The one-of-a-kind suit, filed in Cuyahoga County Common Pleas Court, accuses venerable institutions such as Deutsche Bank, Goldman Sachs, Merrill Lynch and Wells Fargo of creating a public nuisance.

Jackson contends the companies irresponsibly bought and sold high-interest home loans. The result: widespread defaults that depleted the city's tax base and left entire neighborhoods in ruins.

City officials hope to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses.

"To me, this is no different than organized crime or drugs," Jackson said in an interview with Plain Dealer reporters and editors. "It has the same effect as drug activity in neighborhoods. It's a form of organized crime that happens to be legal in many respects."

A city spokeswoman said the companies, which are based across the country, were not given advance notice of the suit, which was submitted late Thursday and assigned to Judge Peter Corrigan.

Cleveland is the second major U.S. city this week to sue over the ills of subprime loans.

On Tuesday, Baltimore sued Wells Fargo, alleging the bank intentionally sold high-interest mortgages more to blacks than to whites - a violation of federal law.

The Baltimore and Cleveland efforts are believed to be the first attempts by large cities to recover losses blamed on the foreclosure epidemic, which has particularly plagued Ohio.

But Cleveland's suit is even more unique because the city has based its complaints on a state law that relates to public nuisances. The suit also is far more wide-reaching than Baltimore's in that it targets the investment banking side of the industry, which feeds off the mortgage market.

Investment bankers at these companies buy subprime mortgages from lenders, then sell mortgage-backed securities to investors. It is a legal practice, known as securitization, that became increasingly popular during the housing boom earlier this decade.

Jackson and city Law Director Robert Triozzi said Cleveland should have been excluded from the frenzy. They pointed to housing prices that remained relatively flat as real estate values jumped elsewhere, as well as a manufacturing downturn and widespread poverty.

The suit claims that even though these issues were well documented, investment bankers continued to feed loans to hungry investors at the expense of borrowers buried in interest.

"Ultimately, they're responsible," Triozzi said of the investment banks. "They knew the economic conditions in which they were operating here. They decided that didn't matter."

Joshua Cohen, a partner with Cohen Rosenthal & Kramer LLP, will lead a team of outside lawyers assisting the city.

Cohen is perhaps known best for representing Cleveland Browns season ticketholders in a class-action lawsuit that brought a $3 million settlement after Art Modell moved the football team to Baltimore. His Cleveland law firm has five attorneys, setting the stage for a David-versus-Goliath court battle.

"There is no doubt, in terms of the resources, there is going to be somewhat of a disparity - a big disparity," Cohen said. "We're confident in our theory and what we have alleged. We knew exactly what we were taking on."

Maureen Harper, a spokeswoman for the mayor, said the city won't pay outside attorney fees unless a settlement or favorable verdict is reached.

Triozzi acknowledged the lawsuit, with its unique nature and 21 large defendants, could move slowly. He also expects the banks will request the case be moved to federal court.

"I understand fully what we are up against here," the law director said. "We would not be doing this if we did not believe we had a sound legal argument to stand on."

Jackson, asked if long litigation would be worth the city's time and money, replied: "We're in this for the long haul. I trust Director Triozzi will tell me when to hold them or fold them."

Judge Corrigan will have to decide "how far up the food chain" to go in determining responsibility, said Cleveland State University Law professor Kathleen Engel, an expert on mortgage-backed securities. She believes the city can make a case against the investment bankers.

"These loans were defective products," said Engel, co-author of "Turning a Blind Eye: Wall Street Finance of Predatory Lending," an article that appeared last year in the Fordham Law Review. "They were continuing to finance products that they knew were defective and could have devastating consequences for the city of Cleveland."

The suit accuses some companies without pinning them specifically to Cleveland loans. Engel said making the link will be easy because most, if not all, investment banks had some stake in the market.

The suit may draw the interest of national law firms willing to help Cohen, Engel said.

Ohio Attorney General Marc[hgo: cq: ] Dann also is considering a state lawsuit against investment banks. Dann said he is investigating "some of the very same people" identified in the city's suit.

Dann said a state filing is months away and probably wouldn't be submitted as a public-nuisance case. But he commended Jackson and Triozzi's "creative" approach.

"There's clearly been a wrong done, and the source is Wall Street," Dann said in a phone interview. "I'm glad to have some company on my hunt."

Chuck Schumer circa 1987

August 26, 1987

Don't Let Banks Become Casinos

By CHARLES E. SCHUMER; CHARLES E. SCHUMER, DEMOCRAT OF NEW YORK, IS A MEMBER OF THE HOUSE BANKING, FINANCE AND URBAN AFFAIRS COMMITTEE.

Citing the pressures of rigorous worldwide competition in financial services, large American banks are pleading for the repeal of the Glass-Steagall Act, a law that keeps banks out of the more volatile and risky world of securities transactions. Their entreaties should be resisted. The reasons the act was passed are still valid, and it has not interfered with our ability to compete internationally.

The Glass-Steagall Act of 1933 evolved from the bitter experience of the Depression, when American banking was in shambles. Left free to speculate in the 1920's, banks naturally looked where profits seemed highest, and were inevitably drawn into risky propositions. When a few banks failed, depositors nationwide panicked. Runs on banks pushed this country over the brink of financial disaster.

Stability was restored only years later, after the Federal Government insured depositors' money and imposed tough limits on the kind of risks a bank can undertake.

Today's bankers promise they will be more careful. But to accept their assurances runs counter to the simple principles of fairness and common sense. Banks want to keep the Federal insurance that attracts depositors and then use that capital to compete against traditional, unsubsidized securities firms.

No one could complain if banks renounced their Federal insurance and then competed evenly against securities firms. But the banks simply should not be allowed to gamble with taxpayer insured dollars.

The banks' proposals also defy common sense. Given the chance to speculate, some institutions are going to gamble poorly. This in turn will undermine confidence in the whole banking system. The recent experience of the thrift industry reinforces this lesson. Congress stepped in with $10.8 billion to bail out the thrift industry. A bailout of the much larger commercial banking sector, if it got into a similar problem, would make the recapitalization for thrifts seem insignificant.

Critics of the Glass-Steagall Act prefer to downplay the risks to the Federal Government and instead focus on the internationalization of the marketplace. They argue that they are unable to compete because foreign banks are free to violate the principles of Glass-Steagall. It is true that seven of the 10 largest banks are Japanese, but this has nothing to do with the Glass-Steagall Act.

Indeed, the Japanese operate under a law imposed after World War II by Gen. Douglas MacArthur that is, if anything, more restrictive than Glass-Steagall. Japanese banks are bigger because of the decline of the dollar, the healthy rate of Japanese savings and the absence of full-throttled competition within Japan.

The Japanese version of the Glass-Steagall law has not inhibited Japanese banks from successful competition abroad. Very few American consumers or businesses refuse to patronize a Japanese bank with more competitive interest rates simply because a type of Glass-Steagall law exists in Japan.

Moreover, the tremendous size of the Japanese banks is misleading. American banks complain that Glass-Steagall inhibits profitability, yet from 1983 through 1986 American banks enjoyed greater profitability than their Japanese competitors. While American banks have emphasized profits at the expense of growth, the Japanese have pursued a policy that has favored size over profits.

Japanese banks have been able to grow so large not because of a freedom to speculate but because of barriers that protect them from foreign competition. With a protected profit base at home, Japanese banks can engage in sharp competition abroad.

To help our banking and financial system, we should insist that the Japanese open their banking markets to foreigners, just as we have done in the United States. A level playing field is the best assistance we can give our banks in the world of international competition.

To understand what our financial industry would be like without the Glass-Steagall Act, we need only look to West Germany, where no such restrictions exist. The West German financial system is dominated by a few large banks. Like most large corporations, they are risk-averse. Capital for any risky venture is scarce.

As a result, West German banks are superb at lending to established institutions. But entrepreneurs with new ideas often have to come to the United States to find financing. The Glass-Steagall legislation is therefore a competitive advantage in a world where entrepreneurs require ready access to capital.

The solution to the problem of internationalization is not the abolition of the Glass-Steagall Act but an approach that would protect the integrity of the federally insured program, continue to guarantee and separate stable pools of both high- and low-risk capital and open foreign markets to American banks. How do banks respond when the need for these important protections are cited? They suggest that walls be built within their organizations that would keep their risky activities separate from traditional banking activities. Numerous experts have noted the difficulty of separating such operations, particularly when decisions about whether to buy a subsidiary's securities - decisions that are theoretically objective -can mean a profit of millions of dollars.

Even if these decisions are made objectively, one must wonder why it is the duty of the Federal Government to insure banks that provide capital to risk-takers when that can already be handled by an increasingly competitive worldwide securities industry.

The answer, of course, is that banks see big profits in securities. But if a bank thinks it can make more money as a securities firm, let it become one. Let's not destroy a stable structure that, since the Depression, has provided capital for entrepreneurs, confidence for depositors and healthy profits for America's financial service companies.

Oil hits record $100 a barrel

• Wednesday January 2 2008

(Updates prices, adds details, paragraphs 2, 5-7)

By Richard Valdmanis

NEW YORK, Jan 2 (Reuters) - Oil vaulted to a record $100 a barrel on Wednesday as geopolitical turmoil, tight energy stockpiles in consumer countries and a weak dollar triggered a surge of speculative buying, dealers said.

Oil's climb to the psychological triple-digit price sent stocks tumbling on Wall Street and darkened an already gloomy economic outlook in the United States, battered by a housing crisis and credit crunch.

"Oil hitting $100 a barrel has sparked some concerns about the consumer and inflation," said Todd Salamone, vice president of research at Schaeffer's Investment Research.

U.S. crude traded once at $100 a barrel, up $4.02, then eased back to $99.32 by 1:52 EST (1830 GMT). London Brent crude rose $3.78 to $97.63.

"Oil could rise further from here. It's simple supply and demand fundamentals," said Kris Voorspools, energy analyst at Fortis in Brussels.

The White House said it would not open up the emergency crude oil reserve to lower prices, while an OPEC member said the cartel was powerless to bring the market down from its lofty height.

Crude oil prices jumped 58 percent in 2007, the biggest annual gain this decade, driven by rising demand in China and other developing countries, tight stockpile levels and increased economic turmoil.

Weakness in the dollar has added to gains across the commodity sector as investors supported the underlying value of products denominated in the softening currency.

Tuesday's more than 4 percent climb came after suspected militant attacks in Nigeria's oil city Port Harcourt heightened concern over the potential for further disruptions in shipments from the eighth largest world oil exporter.

"With the military and the militant warlords engaged in a violent tit-for-tat, the risk for oil disruptions in Nigeria remains higher than in the past few months," said Olivier Jakob of Petromatrix.

Frequent attacks by militant groups since February 2006 have driven thousands of foreign oil workers from the oil-rich Niger Delta and cut oil exports by about 20 percent.

Investors are also particularly sensitive to signs of further fund investment in commodities at the start of the year. The broad Reuters/Jefferies CRB Index rose nearly 17 percent in 2007 as the sector rebounded from a loss in 2006.

A further decline in U.S. crude stockpiles -- already running at a three-year low -- was also expected. Weekly government data will be released Thursday, a day later than usual due to the New Year holiday.

Stocks of crude in the United States were expected to have fallen 1.8 million barrels last week, the seventh straight week of decline, as refiners processed more crude, according to a Reuters poll.

Distillate stocks, which include heating oil and diesel, were forecast to have increased by 300,000 barrels after three weeks of decline, the survey showed. (Additional reporting by Peg Mackey in London and Fayen Wong in Sydney; Editing by David Gregorio)

Gold Prices Hit 28-Year High

Wednesday, Jan. 2 2008

NEW YORK -- Gold prices topped $860 an ounce Wednesday as a weak U.S. dollar coupled with a record-setting push to $100 oil spurred demand for the precious metal.

Other commodities also climbed, further boosted by an influx of money into the market at the start of the new year.

An ounce of gold for February delivery jumped $23.50 to $861.50 an ounce on the New York Mercantile Exchange after hitting $864.90 earlier in the session. The spike surpassed gold's recent high of $850, but still fell short of its all-time high of $875 an ounce set in 1980.

The surge in oil prices helped boost the price of gold as investors shifted resources to the precious metal, often seen as a safe haven against inflation and political uncertainty.

"I think there's a chance it could hit $890 in the next two weeks," said Tom Pawlicki, a precious metal analyst and energy analyst at Man Financial Inc. "Oil's definitely playing a part."

Before Wednesday's jump, gold ended the year up almost 32 percent.

March silver rose 40 cents to $15.320 an ounce, while copper gained 2.2 cents to $3.0630 a pound.

Oil prices hit $100 a barrel Wednesday for the first time amid perceptions that worldwide demand for oil and petroleum products will outstrip supplies.

The booming economies of China and India have sent energy prices soaring over the past year, while tensions in oil-producing nations such as Nigeria and Iran have worried investors and encouraged speculators to drive prices even higher.

Violence in Nigeria helped nudge crude over the $100 level Wednesday.

Light, sweet crude for January delivery rose $4.02 to $100 a barrel on the New York Mercantile Exchange before retreating to $99.15.

A major driver behind gold's advance from less than $650 an ounce in January has been the dollar's steep drop against the euro. A cheap dollar can make commodities more attractive as an alternative investment, and can also raise demand from foreign buyers as their currencies gain strength.

The U.S. currency fell against the euro Wednesday after a key measure of the U.S. economy's manufacturing strength showed the sector contracted last month after 10 straight months of growth.

The Institute for Supply Management, a private research group, said its manufacturing index registered 47.7 last month, down nearly 3 percentage points from 50.8 in November. A reading above 50 indicates growth; below that indicates contraction.

The euro rose to $1.4730 against the dollar in afternoon New York trading.

Coupled with a weak dollar, new-year index buying further boosted oil and agricultural futures, according to Thomas Willis of Mesirow Financial.

"I would suggest that there has been anticipatory buying prior to today," he said.

Wheat for March delivery on the Chicago Board of Trade rose 29 cents to $9.14 a bushel, while March corn gained 7.75 cents to $4.6325. Oats for March delivery rose 8 cents to $3.1475 a bushel, and March soybeans climbed 34.75 cents to $12.49 a bushel.

Traders were awaiting the afternoon release of minutes from the Federal Reserve's Dec. 11 meeting, when the central bank lowered key interest rates by a quarter point. The minutes could upset investors if they signal the Fed is struggling to balance worries about inflation and slowing growth.

Dawgs crush Hawaii

Dawgs' impressive finish won't deliver BCS title, but wait 'til next year

Jan. 2, 2008 By Dennis Dodd CBSSports.com Senior Writer Tell Dennis your opinion!

NEW ORLEANS -- UGA or just ugh? Depends on which side of the gutter you were stumbling down late Tuesday night. Will Knowshon Moreno and Georgia do to the rest of the nation in 2008 what it did to Hawaii on Tuesday? (AP) Those plucky Hawaiians who took out second mortgages just to get within puke-smelling distance of Bourbon Street were probably cursing their travel agents. Georgia fans hoping they just saw a kickoff to a 2008 BCS championship in the Superdome had every right to be screaming up at the Bourbon balconies something that rhymes with, "Show us your grits." All those things you thought, read and predicted about No. 4 Georgia? True, after a 41-10 victory in the Sugar Bowl that foreshadows '08 more than wraps up '07. A seven-game, season-ending winning streak sets up the Dawgs for a top-five debut next season. Freshman tailback Knowshon Moreno set himself as an early 2008 Heisman candidate with two rushing touchdowns. The defense had more sacks of Colt Brennan (a school-record eight) than the Georgia offense had touchdowns (five). The Bulldogs treated the Warriors like the wide-eyed out-of-towners they were trying not to be. Georgia mugged 'em, thugged 'em, lei'd 'em out, sent them back to that rock in the South Pacific with enough stories about cajun food and voodoo to last until their next BCS bowl. For the non-BCS Warriors, that could be a loooong time. "For me," said Brennan, leader of the nation's most statistically potent offense, "it's a gigantic disappointment." "We felt like we were the best team in the country," Georgia corner Asher Allen said. "If we would have played anybody today, we would have won." In the end, the season of the upset did not extend to the Superdome. If you haven't noticed, we're two-fifths of the way through the BCS matchups and the games stink. Georgia and USC have won by a combined 63 points against opponents who were -- how to say it delicately? -- sub-standard. Georgia and USC squaring off in Pasadena would have been better than the slop we were subjected to on Tuesday. But the Sugar Bowl never would have released the Bulldogs, so we were subjected to BCS jail. This is just a bad year for matchups in the questionable system. Questionable and overwrought. Those worried about getting back to their hotel rooms before sunup after the four-hour, five-minute Sugar Bowl had commercial-happy Fox more to blame than the pass-happy Warriors. The hype factor had better pick up quick, then, in Glendale and South Florida before the title game Monday back here. Hawaii's loyal fans spent thousands of dollars to find out that not only weren't their Warriors a match for Georgia, they didn't even resemble Boise State. The heart-warming story of an undefeated WAC champion cracking the BCS code and upsetting a traditional power lasted exactly one game. The 2007 Fiesta Bowl, to be exact, when Boise State seemingly was at the front of a revolution. The 2007 regular season carried on the revolution, except that Hawaii wasn't doing any of the upsetting. Playing the weakest schedule in the country, Hawaii largely took advantage of those other upsets (and BCS fuzzy math) to get here. That's what beating Northern Colorado and Charleston Southern will get you. "You know what, I took one right in the mouth today," Brennan said after being knocked out in the fourth quarter of the final game of his career. "The SEC is probably the fastest conference in all of college football, and we got a first-hand taste of that tonight." Brennan got extremely familiar with MVP Marcus Howard, a senior defensive end, who had a Sugar Bowl hat trick (three sacks, one that produced a fumble that he recovered for a touchdown). "I don't think they were ready for our speed, our size, our emotion," freshman linebacker Rennie Curran said. "We just came out full blast. It sends a message that Georgia is not any joke. We're not to be played around with. It shows everybody we can hang with anybody, no matter what conference." Hawaii brought an incredibly loud and loyal contingent of about 15,000 in the otherwise red and black Superdome. Their beloved Warriors did their pregame ha'a dance to get fired up. It was great theater until the ball was kicked. Clash of cultures? More like an attack of vultures. The nation's lone unbeaten team was out of it by halftime. The nation-leading 13-game winning streak was ended, too. BYU is now at the top with a 10-game streak, followed by -- guess who? -- Georgia with seven. The SEC's sack leaders (42 total for the season) were so unrelenting they finally succeeded in revealing a closely guarded secret. His name is Tyler Graunke, Hawaii's backup quarterback who replaced an injured and battered Brennan. What was worse for Hawaii, Georgia coach Mark Richt had been playing his second-team defense since midway through the third quarter. Hey, there were those valuable young bodies and a ranking to protect. Based on this result, if Georgia doesn't start next season in the top five with 18 returning starters, they ought to shut down the polls. The Dawgs (11-2) can't wait around a week and play the winner of LSU-Ohio State, so toned-down redemption will have to do. Two years ago, West Virginia beat favored Georgia in this same game. The Bulldogs hadn't been the same until Tuesday night. "Everybody in the media wanted me to say we talked about (Boise State)," Richt said. "We really didn't talk about that. We talked about West Virginia because it happened to us. We started out 3-2, we had barely a pulse when we played Tennessee (an Oct. 6 loss). We didn't show a lot of spirit. We had to change the course of the season." After sneaking past Vanderbilt in mid-October, Georgia beat Florida to set it on that course. Moreno ran for 188 yards and scored three touchdowns against the Gators. Richt quickly found he had something special: the first Georgia freshman to run for 1,000 yards since Herschel Walker. Perhaps the only reason Moreno wasn't more spectacular (nine carries, 61 yards) was a tweaked ankle he suffered last month against Georgia Tech. Does any of it matter with kickoff only nine months away? "In the SEC, it doesn't matter how good you are," Richt said. "There are going to be six, seven teams that are as good as you are. We are going to have a more veteran team than we've had in awhile. I think we'll have a chance to make a run at it, but so do six or seven others."