Fed's rescue halted a derivatives Chernobyl

When the Federal Reserve stepped in to save Bear Stearns, most people had no idea what was at stake, writes Ambrose Evans-Pritchard

We may never know for sure whether the Federal Reserve's rescue of Bear Stearns averted a seizure of the $516 trillion derivatives system, the ultimate Chernobyl for global finance.

The financial crisis in full Read more by Ambrose Evans Pritchard The rollercoaster week: Click to enlarge "If the Fed had not stepped in, we would have had pandemonium," said James Melcher, president of the New York hedge fund Balestra Capital. "There was the risk of a total meltdown at the beginning of last week. I don't think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system." All through early March the frontline players had watched in horror as Bear Stearns came under assault and then shrivelled into nothing as its $17bn reserve cushion vanished. Melcher was already prepared - true to form for a man who made a fabulous return last year betting on the collapse of US mortgage securities. He is now turning his sights on Eastern Europe, the next shoe to drop. advertisement "We've been worried for a long time there would be nobody to pay on the other side of our contracts, so we took profits early and got out of everything. The Greenspan policies that led to this have been the most irresponsible episode the world has ever seen," he said. News and analysis from the banking sector Fed chairman Ben Bernanke has moved with breathtaking speed to contain the crisis. Last Sunday night, he resorted to the "nuclear option", invoking a Depression-era clause - Article 13 (3) of the Federal Reserve Act - to be used in "unusual and exigent circumstances". The emergency vote by five governors allows the Fed to shoulder $30bn of direct credit risk from the Bear Stearns carcass. By taking this course, the Fed has crossed the Rubicon of central banking. To understand why it has torn up the rule book, take a look at the latest Security and Exchange Commission filing by Bear Stearns. It contains a short table listing the broker's holding of derivatives contracts as of November 30 2007. Bear Stearns had total positions of $13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP - at least in "notional" terms. The contracts were described as "swaps", "swaptions", "caps", "collars" and "floors". This heady edifice of new-fangled instruments was built on an asset base of $80bn at best. On the other side of these contracts are banks, brokers, and hedge funds, linked in destiny by a nexus of interlocking claims. This is counterparty spaghetti. To make matters worse, Lehman Brothers, UBS, and Citigroup were all wobbling on the back foot as the hurricane hit. "Twenty years ago the Fed would have let Bear Stearns go bust," said Willem Sels, a credit specialist at Dresdner Kleinwort. "Now it is too interlinked to fail." The International Swaps and Derivatives Association says the vast headline figures in the contracts are meaningless. Positions are off-setting. The actual risk is magnitudes lower. The Bank for International Settlements uses a concept of "gross market value" to weight the real exposure. This is roughly 2 per cent of the notional level. For Bear Stearns this would be $270bn, or so. "There is no real way to gauge the market risk," said an official "We don't know how much is backed by collateral. We don't know what would happen in a crisis, and if we don't know, nobody does," he said. Under the rescue deal, JP Morgan Chase will take over Bear Stearns' $13.4 trillion contracts - lock, stock, and barrel. Ben Bernanke, the Fed chairman, took decisive action when Bear Stearns began to collapse But JP Morgan is already up to its neck in this soup, with $77 trillion of contracts. It will now have $90 trillion on its books, a sixth of the global market. Risk is being concentrated further. There are echoes of the old reinsurance chains at Lloyd's, but on a vaster scale. The most neuralgic niche is the $45 trillion market for credit default swaps (CDS). These CDS swaps are a way of betting on the credit quality of companies without having to buy the underlying bonds, which are less liquid. They have long been the bête noire of New York Fed chief Timothy Geithner, alarmed that 10 banks make up 89 per cent of the contracts. "The same names show up in multiple types of positions. These create the potential for squeezes in cash markets, magnifying the risk of adverse dynamics," he said. "They could increase systemic risk, by amplifying rather than dampening the movement in asset prices," he said. This is what happened as the banking crisis gathered pace. The CDS spreads measuring default risk on Bear Stearns debt rocketed from 246 to 792 in a single day on March 13 amid - untrue - rumours that the broker was preparing to invoke bankruptcy protection. Was it the spike in spreads that set off the panic run on Bear Stearns by New York insiders? Or are the CDS spreads merely serving as a barometer? In the old days it was hard for speculators to take "short" bets on bonds. Credit derivatives open up a whole new game. "It is now much easier to short credit, " said James Batterman, a derivatives expert at Fitch Ratings in New York. "CDS swaps can be used for speculation, and that can cause skittish markets to overshoot," he said. For now the meltdown panic has subsided. Yet the hottest document flying around the City last week was a paper by Barclays Capital probing what might happen in a counterparty default. It is not for bedtime reading. Direct losses from a CDS breakdown alone could be $80bn, but the potential risks are much greater. In theory, the contracts are matching. One sides loses, the other gains, operating through a neutral counterparty (ie Bear Stearns). But if the system seizes up, the mechanism is not neutral at all. It becomes viciously one-sided. "Upon the default of the counterparty, [traded] derivatives would be immediately repriced, with spreads widening dramatically," said the Barclays report. This is "gap risk", the stuff of trading nightmares. Fortunes can vanish in a moment. One side would suddenly be trapped with staggering losses on their books. Yet the winners would be unable to collect their prize from the insolvent bank in the middle. It would take years to unravel all the claims in court. By then the financial landscape would be a scene of carnage.

Gold hits record at $1,000 an ounce

By Javier Blas and Chris Flood in London

Published: March 13 2008 16:49 | Last updated: March 13 2008 16:49

Gold prices hit a record of $1,000 a troy ounce on Thursday as investors sought refuge from the weakening US dollar.

The trades above $1,000 an ounce in the London spot bullion market were confirmed by several banks, although the actual level was the subject of some controversy as it was not reflected on several of the trading systems used by banks in London and New York.

Gold traders at UBS in London said they traded at above $1,000 an ounce. Société Générale in London also confirmed the trades and other bankers said they saw spot prices above $1,000 an ounce.

A spokesman for the London Bullion Market Association, the industry body, confirmed trades above $1,000 an ounce on the EBS electronic platform. The afternoon fix was set at $995.00 an ounce, the LBMA said.

Spot bullion in London, the industry main benchmark, rose to an all-time high of $1,000.45 an ounce, up nearly $17 on the day, on the EBS screens. In New York, the less significant Comex gold future prices hit a record of $1,006.3 an ounce.

The surge came as the dollar fell to a record low against the euro and to a 12-year low against the yen. Precious metal analysts warned that further prices rise were likely if the weakness of the dollar continued.

Dollar: It will only get worse

Greenback likely to stay under pressure in near term but find relied by mid-year, currency experts argue.

By David Ellis, CNNMoney.com staff writer

March 1 2008: 11:15 PM EST

NEW YORK (CNNMoney.com) -- Despite all the pain the U.S. dollar has endured in recent days, the greenback may still have further to fall before seeing any sort of relief, according to currency experts.

Driving much of the dollar's decline this week were tepid remarks about the U.S. economy by Federal Reserve Chairman Ben Bernanke, who hinted that the central bank would cut interest rates once again at the Fed's March meeting.

Those comments, combined with a number of troubling signs about the strength of the U.S. economy, helped send the dollar tumbling to multi-year lows against a host of currencies including the Swiss franc, the Malaysian ringgit and Japanese yen.

"It all points towards a weaker U.S. economy and currency traders don't want to be exposed to that kind of risk," said Gareth Sylvester, senior currency strategist and self-described "dollar bear" at HFIX Plc in San Francisco.

But perhaps the most notable move of the week was the dollar hitting successive all-time lows against the euro, breaking the key psychological barrier of $1.50 for the first time since the 15-nation currency was launched in 1999.

Currency experts, however, argue that the dollar will remain under pressure at least through the next month or longer.

If next Friday's February employment report is as bad as economists are anticipating, argues Joe Francomano, manager of foreign exchange with Erste Bank in New York, the greenback could possibly hit rock bottom at that point.

"You are going to see the momentum of this week carry over as far as dollar weakness goes and culminate next Friday," said Francomano.

How far could it fall?

The prevailing forecast lately is that the dollar will hit a ceiling of $1.55 against the euro in the near term and fall further against the yen, sinking as low as ¥101 or ¥102.

Even the most bearish currency experts agree that the pressure on the dollar should abate some time around the middle of 2008, after the Fed winds down its rate-cutting campaign and as the sluggish U.S. economy starts to perk up.

But where the dollar heads after that is anyone's guess.

Greg Anderson, executive director of forex strategy at ABN AMRO, expects the greenback to move towards $1.56 against the euro as 2008 comes to a close.

Ertse Bank's Francomano, however, argues that the dollar should wind up around $1.46 against the euro by year end as investors are lured back in by a discounted greenback.

"When the bad data has been processed and the Fed has cut rates to 2 percent or so, then expect the dollar to look cheap," said Francomano.

Fiscal Conservative? an oxymoron

A LOOK AT SPENDING DURING THE BUSH PRESIDENCY

This shows the amount of spending and the size of the deficit during President Bush's two terms in office, how the president proposes to allocate the federal budget in his last year in office and the administration's track record in estimating the federal deficit from fiscal year 2002 through fiscal year 2007. The president's spending request to Congress is the first step in a lengthy budget process. Fiscal year 2009 begins Oct. 1, 2008. Bush's proposed 2009 spending: Total $3.1 trillion Discretionary spending $1.2 trillion Defense and Homeland Security: $730 billion Discretionary domestic programs: $482 billion Mandatory spending $1.6 trillion Social Security: $644 billion Medicare $408 billion Medicaid and SCHIP $224 billion Other $360 billion Net interest: $260 billion Federal budgets, deficits during the Bush years 2002 Spending: $2.01 trillion Deficit: $157.8 billion 2003 Spending: $2.16T Deficit: $377.6B 2004 Spending: $2.29T Deficit: $412.7B 2005 Spending: $2.47T Deficit: $318.3B 2006 Spending: $2.66T Deficit: $248.2B 2007 Spending: $2.73T Deficit: $162B 2008 (estimated) Spending: $2.93T Deficit: $410B 2009 (estimated) Spending: $3.11T Deficit: $407.4B Comparing deficit estimates Estimated deficits in Bush's original budget, compared with what the actual deficits turned out to be: (in billions) 2002 Estimated deficit or surplus: $231.2 Actual deficit: -$157.8 2003 Estimated deficit or surplus: -$80.2 Actual deficit: -$377.6 2004 Estimated deficit or surplus: -$307.4 Actual deficit: -$412.7 2005 Estimated deficit or surplus: -$363.6 Actual deficit: -$318.3 2006 Estimated deficit or surplus: -$390.1 Actual deficit: -$248.2 2007 Estimated deficit or surplus: -$354.2 Actual deficit: -$162.0

8 Years of Bush Deficits

$400 billion deficit to greet Bush's successor

By Richard Wolf, USA TODAY

WASHINGTON — President Bush's proposed $3.1 trillion budget may be dead on arrival in Congress, but the impact of that political deadlock will make life difficult for the man or woman who succeeds him.

The next president will inherit a deficit of about $400 billion, and maybe more. Unless the economy rebounds and revenue pours in, deficits will push the cumulative federal debt past $12 trillion in the next five years.

DEFENSE: Bush seeks $515B to spend on military

AT A GLANCE: Proposals for education, taxes, health, security and more

VIDEO: Bush releases $3.1 trillion budget

He or she will need to spend far more in Iraq and Afghanistan than Bush proposed, because he included only $70 billion — designed to last until Jan. 20, when he leaves office. White House budget director Jim Nussle said Monday that even the cost of drawing down forces is "surprisingly high."

He or she will face the expiration of Bush's tax cuts, passed in 2001 and 2003. While the leading candidates opposed them, allowing any to expire after 2010 will feel like a tax increase and has all its political risks.

He or she will be closer to the projected fiscal crises facing Medicare and Social Security, which lack the tax flow to pay for benefits promised to baby boomers. Bush's call for $208 billion in entitlement savings over five years has no chance in this election-year Congress.

"Congress needs to know that every year they delay, the problem gets harder," Nussle said. "Every year they delay, it becomes closer to the time when this unfunded obligation is actually going to collapse on the country."

CONGRESS: Dems ready for a fight

But delay they will, as they have done every year since 1997, the last time a president and Congress came together to slash the deficit. Helped by a surging economy, the balanced budget measure led to surpluses from 1998 through 2001. Then came a recession, the 9/11 terrorist attacks, wars in Afghanistan and Iraq and hurricanes that devastated the Gulf Coast.

The $407 billion deficit that Bush predicts will greet his successor could be even larger. "Once again, the president has tried to conceal the true fiscal impact of his budget by leaving out large costs," said Senate Budget Committee Chairman Kent Conrad, D-N.D.

The president's budget:

• Counts on a freeze in most domestic spending — an unrealistic proposal for a Democratic-led Congress facing re-election. Proposals such as eliminating the popular COPS street-patrol program or trimming energy assistance for low-income families have little chance of passage.

• Cuts nearly $20 billion in grants to state and local governments for programs other than Medicaid, according to the liberal Center on Budget and Policy Priorities. Members of Congress always come to the defense of their states, particularly when about half of them are projecting budget gaps.

• Counts on imposing the alternative minimum tax on millions of additional taxpayers in future years — something Congress is sure to avoid, at considerable cost. The AMT increases taxes on people with large deductions but has been adjusted every year to prevent being imposed on the middle class. "That is as certain as anything can be in politics," said Stan Collender, a budget expert at Qorvis Communications.

• Relies on a $178 billion reduction in Medicare's projected growth over the next five years, nearly three times the size of his rejected proposal last year. Congress won't go along — yet. Budget experts agree the day of reckoning will come.

"In the long run, the most important part of the budget is the president's challenge to Congress to finally address the unsustainable long-term costs of entitlements," said Brian Riedl of the conservative Heritage Foundation. "The longer lawmakers wait to enact the necessary reforms, the more painful those reforms will be."

All of those policies allow the president to claim that the budget will reach surplus in 2012, lawmakers said. "To think that anyone has the audacity to suggest that the deficit will be gone in five years under the president's plan is almost laughable," said Senate Majority Leader Harry Reid, D-Nev.

Rep. John Spratt, D-S.C., chairman of the House Budget Committee, said a more likely scenario is a deficit that remains in the $200 billion range in 2012. "Far from proposing a plan to fix the budget, the Bush administration proposes policies that worsen it and, with little compunction, leaves the consequences for the next administration and future generations to correct," he said.

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

January 30, 2008

By EDMUND L. ANDREWS

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.

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.

Fed slashes rates to 3.5%

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

January 22 2008: 8:48 AM EST

NEW YORK (CNNMoney.com) -- 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.

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.

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.

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.

Fed lends another $20B to ease crunch

Federal Reserve, in round 2 of new effort to help banks, says it received bids for $58 billion and pledges more.

December 21 2007: 11:25 AM EST

WASHINGTON (AP) -- The Federal Reserve, working to combat the effects of a severe credit crunch, announced Friday it had auctioned another $20 billion in funds to commercial banks at an interest rate of 4.67 percent.

Fed officials pledged to continue with the auctions "for as long as necessary."

The central bank said it had received bids for $57.7 billion worth of loans, nearly three times the amount being offered, indicating continued strong interest in the Fed's new approach to providing money to cash-strapped banks.

It was the second of four scheduled auctions. The first auction, on Monday, of $20 billion resulted in loans being awarded at an interest rate of 4.65 percent. There were 93 bidders seeking $63.6 billion at the first auction and 73 at the second.

Two more auctions will occur in early January. In a statement Friday, the central bank said it would continue with further auctions "for as long as necessary to address elevated pressures in short-term funding markets."

The new auction process was announced by the Fed last week in a coordinated action with central banks around the world trying to address a global credit crunch.

Federal Reserve Chairman Ben Bernanke and his colleagues decided to try the new process because their efforts to inject funds into the banking system through the Fed's discount window, which makes direct loans to banks, had proven less successful than Fed officials had hoped.

Many banks had avoided using the Fed's discount window out of concern that investors would see the move as an indication of underlying problems at their financial institutions.

The auction process was developed as a second way to get money into the banking system with the hopes that it would not carry the stigma of the discount window.

The Fed said Friday that it would announce on Jan. 4 the sizes of the next two auctions which will be held Jan. 14 and Jan. 28. Officials have said the Fed will evaluate the interest in the auctions after the initial four and determine whether more auctions will be scheduled.

The new auction results cover short-term loans for 35 days.

The global credit crisis has made banks reluctant to lend to each other even as the Fed has been lowering its federal funds rate, the interest that banks charge each other for overnight loans.

The rate currently stands at 4.25 percent, a full percentage point lower than it was in September when the Fed began slashing rates in the wake of a severe credit squeeze that had roiled global markets in August.

The 4.67 percent rate for the second $20 billion in funds and the 4.65 percent rate for the first auction means that banks who are using the auction process to get needed reserves are getting them at a rate slightly below the 4.75 percent rate they could get in direct loans through the discount window.

The Fed cut the federal funds rate and the discount rate by a quarter-point at its last meeting on Dec. 11, disappointing investors who had hoped for a bigger half-point reduction in the funds rate.

Many economists believe the Fed will keep cutting rates with three more quarter-point reductions expected in the funds rate at the Fed's first three meetings of the new year.

Analysts believe that a serious slowdown in overall economic growth will force the Fed to continue cutting rates even though some Fed officials have expressed worries that the rate cuts could exacerbate inflation pressures, which have flared up again, reflecting a renewed surge in oil prices.

ECB pumps in extra €170bn

By Ralph Atkins in Frankfurt

Published: December 18 2007 11:38 | Last updated: December 18 2007 11:38

Emergency help for financial markets has entered new territory with the European Central Bank pumping-in almost €170bn extra liquidity at below market interest rates in a special operation to head off a year-end liquidity crisis.

The surprise move, which followed last week’s co-ordinated barrage of measures by the world’s central banks to increase market liquidity, suggested the ECB was still frustrated at the failure to ease financial market tensions.

Late on Monday, the ECB announced that it would offer unlimited funds on a two-week basis at an interest rate of 4.21 per cent – significantly below the market rate before its statement. On Tuesday, it confirmed some €348.6bn - the largest ever for an ECB money market - had been allotted, compared with the €180.5bn it had estimated would be needed in normal circumstances.

The ECB move was reminiscent of its operation on August 9, during the earlier stages of the credit squeeze. But that was only for overnight loans.

“This is basically Father Christmas to those who have access,” said Erik Nielsen, economist at Goldman Sachs. “They are bailing out people who have not really adjusted their balance sheets to the new reality.” But Julian Callow, economist at Barclays Capital in London, said the ECB was “simply doing their job at being lender of last resort”.

The ECB had announced that Tuesday’s weekly money market operation would mature on January 4 – covering the year-end when banks will be under pressure to secure a strong liquidity position. Prior to the announcement, the cost of borrowing two-week money hit 4.9 per cent but it fell sharply afterwards as the ECB move in effect put a cap on market interest rate. The ECB said the move was “fully consistent” with its aim of keeping interest rates close to its main policy rate of 4 per cent.

The latest move underlines the limited impact of last week’s co-ordinated central bank intervention and highlights continued operational differences between the ECB and the more incremental Fed and Bank of England. A report by the Bank for International Settlements on Monday revealed the striking variation in money market operations used by central banks.

The helicopters start to drop money

The helicopters start to drop money

Published: December 12 2007 18:01 | Last updated: December 12 2007 18:01

The central bank helicopters are planning a co-ordinated drop of liquidity on troubled market waters. The money to be dropped now is not that large. But if this does not work, more will surely follow. The helicopters will fly again and again and again.

One point is clear: central banks must be pretty worried to take such a joint action. For what is remarkable about Wednesday’s statement is that five central banks – the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve and the Swiss National Bank – are co-ordinating their (different) interventions. Their hope must be that this action will trigger not panic (”what do the central banks know that I do not?”) but confidence (”now that the central banks are prepared to intervene in this way, I can at last stop worrying”).

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It is easy to understand why central banks should have decided to take heroic action. Confidence has fled the markets in a four-month long episode of “revulsion”. As a result, monetary policy is not being transmitted to the ultimate borrowers as central banks wish. Particularly worrying has been the widening of gaps between three-month inter-bank lending rates and policy rates in the dollar, euro and sterling markets. Spreads in the last of these have recently become enormous (at more than 100 basis points).

Yet this is not the only indication of distress: in the US, for example, the spread between the rate of interest on 3-month treasury bills and AA-rated asset-backed commercial paper has widened to 270 basis points from a mere 30 basis points earlier in the year. This is revulsion, indeed.

So why might Wednesday’s co-ordinated interventions succeed where previous actions have not? In a word, the answer is: stigma.

Central banks have become increasingly worried about the unwillingness of banks to borrow from them. These banks reasonably fear that exceptional borrowing is a signal mainly of distress. The hope of the central bankers is that by auctioning funds to a wide group of institutions such anxiety would diminish, if not disappear. That hope is strengthened by the fact that these actions are joint: they are evidently aimed at lifting sentiment rather than saving specific institutions.

Will this work? The answer is that if the fundamental problem in the markets is lack of liquidity (that is, panic), rather than insolvency, and if central banks are believed willing to offer liquidity to solvent institutions without limit at what the latter consider a “reasonable” discount, then symptoms of stress should indeed disappear.

Yet these are both important provisos. In particular, there is good reason to believe that a good part of the stress is caused by worries over solvency, indeed by the reality of threatened insolvency in at least some cases. True, central banks or, more precisely, the treasuries that stand behind them, could eliminate that concern, too, by buying up every piece of paper, good, bad and indifferent. But that would also be an open-ended, possibly very expensive and certainly unpopular bail out.

Moreover, even if today’s stress is indeed a liquidity problem (something that we do not now know), there remains the question of the scale of the intervention required. Assume, for example, that central banks end up buying a vast amount of paper and so providing liquidity to institutions that have deliberately taken on big risks, by lending long and borrowing short. They have then validated those strategies, after the event.

So does the action by the central banks give us good reason to stop worrying? Only if you like huge rescue operations of incompetent bankers, would be my answer. They may well get the markets back into order. They may, in this way, rescue economies from the threat of recessions. But that is not the end of the story. The bigger the rescue has to be today, the more stringent regulation of financial institutons will have to be in future.

Copyright The Financial Times Limited 2007

S.S. Paulson Rick Ackerman

S.S. Paulson
Iceberg-Bound

For edition of December 04, 2007

We always expected the Fed to pull out all the stops when the U.S. economy began to slip into the void, but we never could have imagined the spinmeisters would invent “mortgage welfare” even before recession had been officially declared. Treasury’s latest plan is designed to make it easier for certain ARMs borrowers to temporarily freeze their starter rates to avoid foreclosure. We know the situation is dire because the big lenders are signing on without even having their arms twisted.

It is of course inconceivable that loosening their grip on their least creditworthy borrowers is going to be a big money maker for companies like Countrywide and Washington Mutual. But profit it most surely not the point. It is appearances that count, and if the inevitable collapse of the U.S. mortgage market can appear to have been pushed back to a later date, that is reason enough for Uncle Sam to waive the daunting regulatory hurdles that might otherwise have impeded this salvage job for years. Paulson’s plan is not merely being fast-tracked, it is being shot out of a legislative cannon.

$100 Billion Pisher Fund

It is so urgent, in fact, that another jerry-rigged relief package, Citigroup’s $100 billion superfund, seems to have been relegated to the back burner. However, we expect that that measure too will be fast-tracked once the ARMs Chanukah present has been bestowed on beleaguered home-“owners.” Morgan Chase and Bank of America are co-sponsors of the superfund, which, like mortgage welfare, is at best a cynical ploy designed to forestall the inevitable. But whereas the ARMs giveaway may buy lenders an extra month or two to rearrange the deck chairs on the S.S. Paulson, the $100 billion superfund is going to get vaporized in, oh, maybe eight minutes.

You can consider that a prediction -- one that follows the old trader’s axiom that “opportunity moves to size.” What this implies is that when you dangle $100 billion of real money in front of securities traders, they will arbitrage it down to nothing faster than you can say “piranha.” Once enacted in to law, that is $100 billion they can count on to be there, and as long the $100 billion offer remains on the tote board, the hedgers will find something to sell short against it.

You can be certain the banks pulled that number out of thin air as an answer to the question, “What kind of figure would impress the public as a ‘serious’ reserve?” A hundred billion dollars may sound like an awful lot of money, but relative to a financial shell game that has put into play more than $500 trillion worth of leveraged financial instruments, it is probably not enough, even, to survive the eight-minute strafing we predicted above.

Model won't accept dollars

With earnings of more than $30 million a year, she rarely wakes up for much less than $100,000 a day. Now Gisele Bundchen has decided to stay in bed unless she's paid in euros.

In a dispatch to dismay loyal fans of the greenback, Bloomberg news agency reported today that the Brazilian supermodel is telling prospective employers that she no longer accepts American dollars.

Ms Bundchen reportedly asked Proctor & Gamble to pay her in euros when she signed a deal to represent Pantene hair products back in August. The Brazilian weekly Vega reported that she will also get euros for a recent deal with Dolce & Gabbana to promote the designers' new perfume.

"Contracts starting now are more attractive in euros because we don't know what will happen to the dollar," Patricia Bundchen, the model's manager and twin sister, told Bloomberg.

Ms Bundchen is in good company. The US dollar has lost around one-third of its value since 2001 and is trading at record lows against the euro, Canadian dollar and Chinese yuan. It is at its cheapest for 26 years against the pound sterling.

Bloomberg put Ms Bundchen alongside the billionaire investors Warren Buffett and Bill Gross "at the top of a growing list of rich people who have concluded that the currency can only depreciate because Americans led by President George W. Bush are living beyond their means".

Citigroup's day of reckoning

Prince out as chairman and CEO as nation's largest bank discloses possible additional subprime mortgage writedowns of up to $11 billion.

November 4 2007: 8:55 PM EST

NEW YORK (CNNMoney.com) -- The meltdown in the housing market hit Citigroup, the nation's No. 1 financial services company, Sunday as it announced the departure of chairman and chief executive Charles Prince and a possible $11 billion in additional subprime writedowns.

"It is my judgment that given the size of the recent losses in our mortgage- backed securities business, the only honorable course for me to take as chief executive officer is to step down," Prince said in a statement issued by Citigroup. "This is what I advised the board."

Former Treasury Secretary Robert Rubin, a board member and chairman of the executive committee for the nation's largest financial services firm, was named chairman of the board. Sir Win Bischoff, who heads Citigroup (Charts, Fortune 500)'s European unit, will serve as interim CEO until a permanent successor is named.

Citigroup also said it expects a reduction of between $8 billion and $11 billion in the fair value of its exposure to the subprime mortgage market. It said it expects to take a fourth-quarter writedown on the reduction, although the size of the writedown will depend on future market conditions.

The company said the decline in its subprime portfolio, which totals about $55 billion, came as the result of rating agency downgrades and other market developments since the end of September.

Citigroup said it will not cut its dividend and expects to regain its financial balance - meeting its capital ratio targets - by the second quarter of 2008.

The company also said that because of the uncertain nature of market conditions, it doesn't plan to issue any updates about its mortgage situation until fourth-quarter figures are released in January, and that it doesn't plan to issue forecasts for any future reporting periods.

Citigroup said Prince retired from the top positions. The weekend has been rife with talk of his departure as Citigroup's board met to consider his fate.

Prince's is the second high-profile Wall Street departure in the last week. Stanley O'Neal resigned as chairman and CEO of Merrill Lynch (Charts, Fortune 500), the nation's largest brokerage firm, last Tuesday.

The company said a committee will search for a successor as CEO. That committee will consist of Rubin and three other board members: Alcoa Inc. (Charts, Fortune 500) chairman and CEO Alain Belda, TFF Study Group consultant Franklin Thomas and Time Warner Inc. (Charts, Fortune 500) chairman and CEO Richard Parsons. Time Warner is the parent of CNNMoney.com.

"We intend to complete our search for a new CEO as expeditiously as possible, reviewing qualified CEO candidates from outside as well as within our organization," Rubin said in a statement.

Among Rubin's first acts as the new chairman is the creation of a new unit aimed at managing the subprime situation.

"A new unit, the sole focus of which will be on managing the assets related to sub-prime mortgage securities and their resultant exposures, has been established," Rubin said in the Citigroup statement. "This unit will be separate from the other parts of our capital markets and banking business."

Rubin began his career with Goldman Sachs, rising to the position of co-chairman before leaving to join the administration of President Bill Clinton in 1992. After serving two years as the head of Clinton's National Economic Council, Rubin succeeded Lloyd Bentsen as Treasury Secretary in 1995.

He was given much of the credit for the economic growth of the Clinton years, and worked closely with then Federal Reserve Chairman Alan Greenspan.

Rubin left the White House in 1999, and joined Citigroup soon thereafter.

According to Citigroup, Bischoff rose through the ranks of the investment firm Schroders PLC. When it was taken over by Citi's Salomon Smith Barney unit in 2000, Bischoff became head of Citi Europe.

Citi reported a sharp drop in earnings on Oct. 15 that Prince at the time termed "disappointing." The firm had already announced $3 billion in writedowns because of bad investments in securities backed by subprime mortgages, as well as tighter credit market conditions. To date, Citi has reported subprime and trading losses totaling just under $6 billion.

The same day it reported results it joined with rivals JP Morgan Chase (Charts, Fortune 500) and Bank of America (Charts, Fortune 500) to set up a rescue fund to try to buy up to $100 billion in debt in an effort to prevent a fire sale of subprime assets. The U.S. Treasury Department helped facilitate the creation of the fund, popularly referred to as the Wall Street "superfund" after the EPA trust fund designed to clean up toxic waste sites. Citi was seen as leading the effort.

But the fund has been criticized by a wide range of economists, including former Federal Reserve Chairman Alan Greenspan, as a market-distorting structure that could add to, rather than answer, investors' doubts about the securities and end up making the problems worse.

Prince had seemed to have the support of the Citigroup board throughout the market turmoil. But investors were less confident in the firm. Shares have lost nearly one third of their value since the end of May, almost twice the drop seen in the KBW Bank Stock index over that time. The Dow Jones industrial average, of which Citigroup is a component, is down less than 1 percent during the same period.

Prince, 57, was paid just under $26 million in salary, bonus, stock and other benefits, according to Citi's filings. Information about any payments he may receive due to his departure was not immediately available.

He had 1.6 million shares of Citi stock as of Feb. 28, according to company filings, and options for another 1 million shares. If those options were all exercised, his holdings would be worth nearly $100 million based on Friday's closing price.

He had been named CEO of Citi in 2003 and assumed the chairman post in 2006 with the retirement of Sandy Weill, who created Citigroup when the financial services firm he created, Travelers, bought Citibank in 1998.

Prince came to Citi from the Travelers side of the merger. He had joined a predecessor of that firm in 1979 known as Commercial Credit Company, working his way up to executive vice president of the firm by 1996. In 2000, he was named chief administrative officer and by 2001 the chief operating officer of the financial services conglomerate.

He began his business career as an attorney at U.S. Steel (Charts, Fortune 500) in 1975.

How we are fleeced

Social Security Checks to Rise 2.3%
Cost-of-Living Adjustment Is Smallest Since '03

By Howard Schneider and Neil Irwin
Washington Post Staff Writers
Thursday, October 18, 2007; D01

Payments to Social Security recipients and most federal retirees will increase 2.3 percent in January. It is the smallest cost-of-living adjustment since 2003, reflecting a lower rate of inflation.

editor: ANYONE WHO BUYS GROCERIES OR GAS KNOWS INFLATION IS GETTING BAD! BUT AS LONG AS THE ARE ABLE TO EXTRACT THESE TWO ITEMS THEY GET TO KEEP THE INCREASE TO A MINIMUM...

The adjustment will increase the average monthly Social Security retirement benefit by $24, to $1,079. It is based on the rise in the consumer price index in the third quarter, a figure the Labor Department released yesterday.

It is also a significant number to the more than 4 million federal government and military retirees, about 500,000 of whom live in the Washington region. The pensions of most civil service, foreign service and military retirees will match Social Security's 2.3 percent increase. Government workers covered by the newer Federal Employees Retirement System who are age 62 or older will receive an adjustment of 2 percent under the rules of that program.

The Social Security Administration announced another closely watched figure yesterday, raising to $102,000 from $97,500 the figure below which earnings are subject to Social Security taxes. By law, the cutoff is set using a formula based on the change in average wages. Yesterday's recalculation will increase taxes for about 12 million of the 164 million workers expected to pay into the Social Security system in 2008, the agency said.

editor: SO WHILE THEY DOLE OUT AN EXTRA $288 PER YEAR, THEY GRAB AN EXTRA $4500 PER YEAR....GREAT SYSTEM HUH?!

Retirees are generally better off with low inflation, even if it means a smaller increase in their Social Security benefits, said David Certner, legislative policy director of AARP.

editor: THIS SHOULD ACTUALLY READ, THE GOVERNMENT IS BETTER OFF WITH FRAUDULENTLY MISREPRESENTED LOW INFLATION SINCE THEN THEY ARE ABLE TO SCREW YOU ON THE FRONT END BY INFLATING THE CURRENCY LOWERING YOUR PURCHASE POWER AND THEN SCREW YOU ON THE BACK END BY MINIMIZING YOUR BENEFITS...THEY GET TO HAVE THEIR CAKE AND EAT IT TOO!

That is because Social Security is the only source of many retirees' income that automatically rises with inflation. During periods of high inflation, they might get a higher Social Security adjustment, but if their savings and other sources of income stay the same, they are harder hit by increases in what they have to spend.

Moreover, the price increases that retirees routinely face are frequently higher than the Social Security cost-of-living adjustment because older families spend more of their incomes on health care and energy than the overall U.S. population. Those costs have been rising faster than prices in general.

"Energy and health care are just far outstripping these COLA numbers," Certner said.

HILARIOUS! SINCE THE COLA LEAVES OUT ENERGY!

After two years of relatively steep cost-of-living adjustments, this year's increase was modest because of easing energy costs and lower prices for clothing and some other goods. The COLA was 2.7 percent in 2004, 4.1 percent in 2005 and 3.3 percent in 2006.

HA!, HA!, HA!, HA! EASING ENERGY COSTS?! OIL IS AT ALMOST $90 A BARREL AND BESIDES THAT, ENERGY COSTS ARE SUBTRACTED FROM THE GOVERNMENT INFLATION NUMBER ANYWAY SO THE POINT IS MOOT....

The cost-of-living calculation was based on a report from the Bureau of Labor Statistics that indicated inflation over the past year was contained but jumped significantly from August because of rising energy prices. Food costs continued to rise steadily, as did prices for medical care and housing.

ONCE AGAIN THE MORON WHO WROTE THIS PAP CONTINUALLY REFERENCES ENERGY AND FOOD, TWO ITEMS NOT CALCULATED IN THE COST-OF-LIVING-ADJUSTMENT!!

Overall prices rose 0.3 percent in September from August on a seasonally adjusted basis. Excluding food and energy prices, a measure more closely watched by the Federal Reserve as it guides the nation's economy, the consumer price index rose 0.2 percent in September and 2.1 percent over the previous 12 months.

Economists said that level of consumer inflation, while a bit higher than Fed leaders prefer, is not high enough to tie the central bank's hands as it heads into its next policymaking meeting Oct. 31.

WHAT A LOAD OF HORSE SHIT!! WHAT BUREAU OF LABOR AND STATISTICS ASS CLOWN WROTE THIS "NEWS ITEM"?!

Ambrose Evans-Pritchard

Start to take profits right now. Trim any American, British, and European equity that is highly geared to the credit cycle. Layer out of high-risk plays over the next ten days or so, until you reach a defensive level of exposure.

This is no time for bullish behaviour

Do not ride this deranged speculative bull into late October. The balance of risk and reward are just too far out of kilter. Do not under any circumstances join the mad scramble for emerging market stocks. Cut positions in Latin America, Eastern Europe, Asia, and China.

As Alan Greenspan said this week about the Shanghai market, “If you ever wanted to get a definition of a bubble in the works, that’s it.” He also said that US house prices were going to fall “a lot further than people think”. Bet against him if you dare. The relief rally since the Federal Reserve slashed rates half a point to 4.75pc is a moral hazard bet, based entirely on assumptions that Ben Bernanke will debauch the monetary system to boost asset prices.

This is a fatal misreading of the intentions of the Fed, and of Ben Bernanke’s austere moral character and economic ideology. It ignores the nature of the crisis that has ripped through the credit system over the last two months.

The belief in perpetual rate cuts assumes that Bernanke – and the monetary hawks in Dallas, Richmond, and St Louis – can possibly countenance the moral hazard of further stimulus when the Dow is rocketing to all time-highs. This rally is inherently self-defeating. It must short-circuit.

“The equity markets are pricing in a 'Bernanke Put’,” said Rob McAdie, head of credit at Barclays Capital and a man with a front row seat at the credit crunch.

“They are betting that the Fed will cut again and again, but they are not factoring in the effect that this credit squeeze is having on the financial system. Cheap money is now history. There are not going to be any more of the big leveraged buy-out deals for a long time because the CLO market that financed them is effectively closed,” he said.

“Banks are not willing to lend to each other beyond a week. The current situation is more systemic than the crisis in 1998. It effects far more institutions and will have a much greater impact on the global economy.”

Yet the markets are indeed betting on a 1998 replay, a reliquified surge into the stratosphere for two more years. Beware. There was no US property collapse then, and the world was still in a benign cycle of falling inflation.

Today feels more like January 2001, when the S&P 500 rallied for two weeks on the Fed’s emergency cut, only to tank by 19pc over the next two months as it became clear why the Fed had taken drastic action – and what this meant for profits. Wall Street fell a lot further thereafter, taking two years to stabilize. The S&P 500 halved in the end.

Or if you like parallels, try October 1987, when the US dollar was falling in the same disorderly fashion we have seen since August this year.

It is fundamentally worse this time: the global dollar index has hit record lows; and the US is no longer a net creditor. It now has external liabilities reaching 35pc of GDP, putting it within a few percentage points of a compound debt crisis.

We will find out from the TICs data in November whether China’s central bank was responsible for the $48bn fall in official foreign holdings of US Treasuries in July. But if China wasn't, somebody was. Who? Why?

The pattern leaves the US reliant on short-term funding to cover its trade deficit. This is a well-trodden path to crisis, as Latin America can attest.

The Fed is boxed in by the dollar, and by lingering inflation. Oil has jumped back up to $82. Copper is over $8,000 a tonne again. Wheat has risen 70pc in a year. Gold has kissed $750, the ultimate reproach.

In the first eight months of 2007, the US consumer price index rose at an annual rate of 3.7pc. It may nudge higher in November and December as base effects kick in. A headline rate of 4pc is not impossible. Does Bernanke want that on his resume? He believes in inflation targeting, after all.

The 10-year “break even inflation rate” as reflected by the US bond markets jumped from 2.27pc to 2.37pc after the rate cut. The yield on 10-year Treasuries has risen from 4.48pc to 4.56pc. Watch those bond vigilantes.

The `China effect’ of falling manufactured prices has gone into reverse. China’s inflation is now 5.6pc, thanks to their dollar-peg policy.

My own view is that inflation will subside as the global economy tips over, but with a lag. It will set off a few alarms first, enough to seriously crimp the Fed.

By the way, while I did not expect the Fed to cut a half point in September, I don’t not share the view that this was a reckless bail-out. It was entirely necessary, given the heart attack in the commercial paper markets – which have contracted $368bn in seven weeks, and are still contracting; and above all, given the speed with which the US housing market is collapsing.

Robert Schiller is now warning that prices call fall 50pc in some areas. It is already well under way. (Interestingly, auctions of foreclosed buy-to-let properties in the UK are selling at 40pc discounts already – buy-to-let is Britain’s subprime)

Yes, the Fed made a grievous error of keeping rates at 1pc until June 2004 – unforgivable in hindsight. It then fell asleep, claiming the subprime crunch was “contained” when it had in reality become systemic. But given the mess we now face, the September rate cut was fully justified.

So batten down the hatches until the storm passes. By all means keep very long-term investments or isolated `rifle-shot’ plays that buck the market.

Will it take a 25pc correction in New York, Frankfurt, and London to flush out the excesses? Or more? Japan’s Nikkei fell 81pc over fourteen years from a peak of 39,000 in December 1989 to a nadir of 7,600 in May 2003. Land prices in Tokyo fell by four fifths. House prices fell by over half.

True, Tokyo delayed recovery with a bad mix of policies in the 1990s. But are the bubbles in America, Britain, Australia, Canada, Ireland, Spain, Greece, Latvia, Romania, Kazakhstan, the Gulf, Argentina, and above all China, really that different from Japan’s errors in the late 1980s?

FDIC Shuts Down NetBank Due to Defaults

by ALAN ZIBEL
AP Business Writer

WASHINGTON — NetBank Inc., an online bank with $2.5 billion in assets, was shut down by the government on Friday because of an excessive level of mortgage defaults.

It was the largest savings and loan failure since the tail end of the industry's crisis more than 14 years ago. Federal regulators appointed the Federal Deposit Insurance Corp. as a receiver for Alpharetta, Ga.-based NetBank.

Customers with less than $100,000 deposited with NetBank will be protected by FDIC insurance.

While dozens of mortgage companies have closed due to soaring defaults of home loans made to borrowers with weak, or subprime, credit, those problems previously had occurred among non-bank lenders such as New Century Financial Corp. NetBank, in contrast, is federally regulated.

Loose mortgage standards in recent years — especially among lenders catering to subprime borrowers — have resulted in a spike in home loan defaults.

Bert Ely, a banking consultant based in Alexandria, Va., said NetBank was in "deep trouble" before the subprime mortgage market's woes accelerated this year. Regulators, he said, "should have closed it a long time ago."

While some Internet-only banks are successful, he said, operating one without retail branches can be a difficult strategy to maintain.

The FDIC said Friday that $1.5 billion of NetBank's insured deposits will be assumed by ING Bank, also a major online bank that is part of Dutch financial giant ING Groep NV. ING will pay $14 million for the deposits and receive 104,000 new customers.

NetBank, which had no physical branches, sustained significant losses last year "primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls, and failed business strategies," the Office of Thrift Supervision said in a statement.

The FDIC said NetBank had $2.5 billion in total assets and $2.3 billion in deposits as of June 30.

The OTS oversees about 830 savings and loan institutions, or thrifts, ranging in size from giants like Seattle-based Washington Mutual Inc. to small community banks. By law, thrifts must have at least 65 percent of their lending in mortgages and other consumer loans.

The last major thrift to be closed by regulators was Superior Bank of Hinsdale, Ill. It had total assets of $1.9 billion and was shut down in July 2001. Its failure has so far cost the FDIC's insurance fund an estimated $273 million.

In June 1993, regulators shut down Western Federal Savings and Loan Association, which had total assets of $3.8 billion. That thrift's owners included former Treasury Secretary William Simon and former Federal Reserve Board Vice Chairman Preston Martin.

NetBank had reached a deal to sell its deposit accounts and other assets to privately held EverBank of Jacksonville, Fla., but EverBank announced this month that the deal fell through.

EverBank in July completed its acquisition of NetBank's mortgage servicing business, and the FDIC said Friday that EverBank will purchase about $700 million in mortgage loans.

"Customers of NetBank should have confidence and security knowing that they will have access to their insured funds in a timely and orderly manner," FDIC Chairman Sheila Bair said in a prepared statement.

The FDIC insures bank deposits of up to $100,000.

NetBank had $109 million in deposit accounts that exceeded the FDIC limit. Those customers will become creditors in NetBank's receivership, the FDIC said.

The FDIC has a toll-free number for customers affected by the failure:1-888-256-6932.