Goodnight Irene

SPIEGEL ONLINE

09/18/2008 12:44 PM

US FINANCIAL CRISIS

'The World As We Know It Is Going Down'

By Marc Pitzke in New York

Panic is the word of the hour on Wall Street. Now even Morgan Stanley is fighting for survival. The commercial bank Wachovia and China's Bank Citic are being discussed as possible rescuers. The crisis has led President Bush to cancel a trip.

REUTERS

For traders, now might just be the worst of times.

The original plan actually called for humor. On Wednesday evening, actress Christy Carlson Romano was supposed to ring the closing bell on the floor of the New York Stock Exchange (NYSE) to mark her debut in the Broadway musical "Avenue Q." She plays two roles on stage -- a romantic kindergarten assistant, and a slutty nightclub singer.

After that day on the floor, the stock traders could have used a bit of comic relief. But it was not to be. Instead of Christy Carlson Romano, a NYSE employee in a joyless gray suit stood on the balcony and silently pressed a button. The bell rang and he disappeared. No waving, no clapping, none of the usual jubilation.

By the end of Wednesday, no one here was in the mood for laughter. The bad news on Wall Street was coming thick and fast. All the US indexes were crashing again after Tuesday's brief and deceptive breather. In its wild, rollercoaster ride, the Dow Jones lost about 450 points, which was almost as much as it lost on Monday, the most catastrophic day on US markets since 2001.

Investors were turning their back to the market in droves and fleeing to safer pastures. The price of gold broke its record for the highest increase in a one-day period.

Panic Is the Word of the Hour

Traders abandoned the NYSE temple visually defeated and immune to the TV crews waiting. The disastrous closing prices were flickering on the ticker above the NYSE entrance: American Express -8.4 percent; Citigroup -10.9 percent; JPMorgan Chase -12.2 percent. American icons, abused like stray dogs. Even Apple took a hit.

"I don't know what else to say," stammered one broker, who was consoling himself with white wine and beer along with some colleagues at an outdoor bar called Beckett's. Ties and jackets were off, but despite the evening breeze, you could still make out the thin film of sweat on his forehead. His words captured the speechlessness of an industry.

Things got worse after the markets closed. Washington Mutual, America's fourth-largest bank, announced that it had started the process of putting itself up for sale. The Wall Street Journal reported that both Wells Fargo and the banking giant Citigroup were interested in taking over the battered American savings bank.

And then came the announcement that would dominate all of Thursday's market activities: Morgan Stanley -- the venerable Wall Street institution and one of the last two US investment banks left standing -- had lost massive amounts and was fighting for survival. Media reports were saying that it was even in talks about a possible bail-out or merger. Rumor had it that possible suitors might include Wachovia or China's Bank Citic.

China?

"Folks," economist Larry Kudlow, a host on the business channel CNBC begged his viewers that evening, "don't give up on this great country!"

End of an Era

In fact, it really does look as if the foundations of US capitalism have shattered. Since 1864, American banking has been split into commercial banks and investment banks. But now that's changing. Bear Stearns, Lehman Brothers, Merrill Lynch -- overnight, some of the biggest names on Wall Street have disappeared into thin air. Goldman Sachs and Morgan Stanley are the only giants left standing. Despite tolerable quarterly results, even they have been hurt by mysterious slumps in prices and -- at least in Morgan Stanley's case -- have prepared themselves for the end.

"Nothing will be like it was before," said James Allroy, a broker who was brooding over his chai latte at a Starbucks on Wall Street. "The world as we know it is going down."

Many are drawing comparisons with the Great Depression, the national trauma that has been the benchmark for everything since. "I think it has the chance to be the worst period of time since 1929," financing legend Donald Trump told CNN. And the Wall Street Journal seconds that opinion, giving one story the title: "Worst Crisis Since '30s, With No End Yet in Sight."

But what's really happening? Experts have so far been unable to agree on any conclusions. Is this the beginning of the end? Or is it just a painful, but normal cycle correcting the excesses of recent years? Does responsibility lie with the ratings agencies, which have been overvaluing financial institutions for a long time? Or did dubious short sellers manipulate stock prices -- after all, they were suspected of having caused the last stock market crisis in July.

The only thing that is certain is that the era of the unbridled free-market economy in the US has passed -- at least for now. The near nationalization of AIG, America's largest insurance company, with an $85 billion cash infusion -- a bill footed by taxpayers -- was a staggering move. The sum is three times as high as the guarantee provided by the Federal Reserve when Bear Stearns was sold to JPMorgan Chase in March.

The most breathtaking aspect about this week's crisis, though, is that the life raft -- which Washington had only previously used to bail out the mortgage giants Fannie Mae and Freddie Mac -- is being handed out by a government whose party usually fights against any form of government intervention. The policy is anchored in its party platform.

"I fear the government has passed the point of no return," financial historian Ron Chernow told the New York Times. "We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams."

Bush Cancels Trip

The situation appears to be so serious that George W. Bush cancelled two domestic trips he had planned for Thursday on short notice. Instead, the president will remain in Washington to discuss the "serious challenges confronting US financial markets." He said the president remained focused on "taking action to stabilize and strengthen the markets." Bush had originally planned to travel to events in Florida and Alabama.

So far, the US presidential candidates have made few helpful remarks about the crisis other than the usual slogans. Both are vaguely calling for "regulation" and "reform" -- bland catchphrases almost universally welcomed with applause.

Republican Party presidential candidate John McCain had the most to say. On Monday, he said "the foundation of our economy" was "strong," adding that he opposed a government-led bailout of US insurer AIG. But now he's promising further government steps "to prevent the kind of wild speculation that can put our markets at risk." McCain's explanation for the current crisis: "unbridled corruption and greed."

But Democratic presidential hopeful Barack Obama didn't move past superficialities, either. "We're Americans. We've met tough challenges before and we can again."

What else are they supposed to say? After all, US presidents have very little influence on stockmarkets. And Wall Street is expecting the status quo for the next president. On Wednesday an almost palpable mix of tension and melancholy filled the air above New York's Financial District. The beloved trader bar Bull Run was half empty, and many tables were free at fine-dining establishments like Cipriani, Mangia and Bobby Van's, which are normally booked days in advance.

At the side entrance to Goldman Sachs on Pearl Street, limo chauffeurs sat waiting for their customers, still above in their office towers cowering over the accounts. "If they go under," said Rashid Amal, who works as a chauffeur for a firm called Excelsior, "then I will soon be out of a job, too."

Atlas Keeps on Shrugging

SoCal train wreck toll rises to 17, with 135 hurt

By RAQUEL MARIA DILLON – 17 hours ago

LOS ANGELES (AP) — Emergency crews found more victims early Saturday in the mangled wreckage of a commuter train that smashed head-on into a freight train, raising the death toll to 17 in the deadliest U.S. passenger train accident in 15 years.

Distraught relatives and friends of passengers awaited word on their loved ones as rescue workers delicately dismantled a crushed Metrolink passenger car in search of victims.

The search was expected to last into Sunday.

"Clearly the injuries are going to mount and so are the fatalities," Mayor Antonio Villaraigosa said.

The cause of the Friday afternoon collision in suburban Chatsworth had not been determined.

A total of 135 people were injured with at least 82 taken to hospitals, many in serious or critical condition, fire officials said.

Worried relatives and friends gathered at nearby Chatsworth High School to wait for news, and the hallways occasionally erupted with sobbing as some learned that loved ones had died.

Debra Nieves was concerned about her sister, Donna Remata, 49, who worked in downtown Los Angeles.

"That was her train and she's not home," said Nieves, 41, of Long Beach. "But until I find out for sure that they found her, I'm not going to leave."

The impact rammed the Metrolink engine backward into a passenger car, which rested on its side with the engine still inside it early Saturday, and accordioned the freight train cars. Two other Metrolink cars remained upright. Crews had to put out a fire under part of the train.

During the night, the teams used hydraulic jacks to keep the passenger car from falling over and other specialized rescue equipment to gently tear apart the metal.

Bulldozers were used to raise the commuter train's engine and timbers were slid beneath it as firefighters worked to free a body pinned under the engine.

Fire Capt. Steve Ruda said the goal was to eliminate every piece of metal and gradually work into the passenger spaces of the double-decker rail car.

"There's human beings in there and it's going to be painstaking to get them out," Ruda said. "They'll have to surgically remove them."

His firefighters had never seen such carnage, he said.

"It's the worst feeling in the world because you know what you're going to find," said fire Capt. Alex Arriola, who had crawled into the bottom of the smashed passenger car. "You have to put aside the fact that it's someone's husband, daughter or friend."

Officials said there were 222 people on the Metrolink train and three Union Pacific employees aboard the freight train.

Asked how the two trains ended up on the same track, Steven Kulm, a spokesman for the Federal Railroad Administration: "We are nowhere near having any information on that."

Kulm said the federal investigation will be headed by the National Transportation Safety Board, while his agency will conduct a review of whether any federal rail safety regulations were violated.

Union Pacific spokeswoman Zoe Richmond said it is common in California for freight and commuter trains to use one track.

"You see it a lot in California where commuter trains share tracks with freight trains," Richmond said, adding she couldn't speculate about the cause of the crash.

Leslie Burnstein saw the crash from her home and heard screams of agony as she ran through a haze of smoke toward the wreckage. She pulled victims out one by one.

"It was horrendous," said Burnstein, a psychologist. "Blood was everywhere. ... I heard people yelling, screaming in pain, begging for help."

Metrolink spokeswoman Denise Tyrrell said the Metrolink train left Union Station in downtown Los Angeles and was headed northwest to Moorpark in Ventura County. The trains collided at about 4:30 p.m. in the Chatsworth area of the San Fernando Valley, near a 500-foot-long tunnel underneath Stoney Point Park.

On the north side of the tunnel, there is a siding, a length of track where one train can wait for another to pass, Tyrrell said.

"I do not know what caused the wreck," said Tyrrell who broke down crying and was shaking. "Obviously two trains are not supposed to be on the same track at the same time."

Until Friday, the worst disaster in Metrolink's history occurred on Jan. 26, 2005, in suburban Glendale when a man parked a gasoline-soaked SUV on railroad tracks. A Metrolink train struck the SUV and derailed, striking another Metrolink train traveling the other way, killing 11 people and injuring about 180 others. Juan Alvarez was convicted this year of murder for causing the crash.

That was the worst U.S. rail tragedy since March 15, 1999, when an Amtrak train hit a truck and derailed near Bourbonnais, Ill., killing 11 people and injuring more than 100.

The Sunset Limited was involved in the worst accident in Amtrak's 28-year history. On Sept. 22, 1993, 42 passengers and five crew members died when the train plunged off a trestle into a bayou near Mobile, Ala. The trestle had been damaged minutes earlier by a towboat.

One Flew Over the Cuckoo's nest an interview with Sarah Palin

Alaska Gov. Sarah Palin, emerging from media silence for her first serious interview as the GOP vice presidential pick, said today that the United States might have to go to war if Russia were to invade Georgia again.

And on the seventh anniversary of the Sept. 11 attacks, she appeared entirely unfamiliar with the Bush Doctrine, the central foreign policy tenet of the current administration, which asserts the right to wage preventative strikes in the wake of such terrorist attacks.

Palin made her statements during an interview with ABC "World News" anchor Charlie Gibson in which she was pressed on her foreign policy credentials and knowledge. Additional Gisbon interviews with Palin will be broadcast today on ABC.

Palin said she favors admitting Georgia and Ukraine to NATO. Asked if the United States would have to go to war if Russian again invaded Georgia when it was a NATO member, Palin said, "Perhaps so. I mean, that is the agreement when you are a NATO ally, is if another country is attacked, you're going to be expected to be called upon and help."

"And we've got to keep an eye on Russia. For Russia to have exerted such pressure in terms of invading a smaller democratic country, unprovoked, is unacceptable," she told Gibson. Russia invaded Georgia after the ex-Soviet republic invaded the separitist region of South Ossetia.

Palin said she had insights into U.S. relations with Russia because "they're our next-door neighbors, and you can actually see Russia from land here in Alaska ... from an island in Alaska."

During the interview, in Fairbanks, Alaska, Palin acknowledged that she had never met a leader of a foreign country and that she had visited only Canada and Mexico before a trip to Kuwait and Germany to visit U.S. troops last year.

"But, Charlie, again, we've got to remember what the desire is in this nation at this time. It is for no more politics as usual, and somebody's big fat resume that shows decades and decades in that Washington establishment, where, yes, they've had opportunities to meet heads of state."

But she insisted she was ready to be Sen. John McCain's vice president - and, if necessary, president of the United States.

"I answered (McCain) 'yes' because I have the confidence in that readiness and knowing that you can't blink, you have to be wired in a way of being so committed to the mission, the mission that we're on, reform of this country and victory in the war, you can't blink," she said.

Throughout the interview, Palin appeared prepared, though she stuck to carefully constructed talking points. In one segment, asked to explain what the country should do if Israel struck Iranian nuclear facilities, she repeated three times that the United States cannot "second-guess" what Israel must do to defend itself.

But she seemed off balance when asked about the Bush Doctrine - which includes preventive war, spreading democracy to eliminate terrorism and brandishing power to force other countries into line.

Asked if she agreed with the Bush Doctorine, she asked, "In what respect, Charlie?"

Said Gibson: "What do you interpret it to be?"

Palin: "His world view."

Gibson: "No, the Bush Doctrine, enunciated September 2002, before the Iraq War."

Palin answered that she believed the president "has attempted ... to rid this world of Islamic extremisms, terrorists who are hell-bent on destroying our nation."

After Gibson informed her of the doctrine's definition of "anticipatory self-defense" against any country that might attack the United States, she replied: "If there is legitimate and enough intelligence that tells us that a strike is imminent against American people, we have every right to defend our country. In fact, the president has the obligation, the duty to defend."

Asked if that meant a right to go to conduct across-border attacks without the approval of the Pakistani government, Palin said, "We have got to have all options out here on the table."

Palin - who has spoken in her church about U.S. troops being "on a task that is from God," was asked if she believed the United States is fighting a "holy war."

She deflected the question and said she was merely quoting Abraham Lincoln, adding, "I would never presume to know God's will."

The interview was broadcast in three parts over the next two days. ABC's "World News," "Good Morning, America," "Nightline" and "20/20" will all feature the interview.

The broadcasts will include biographical footage of Palin and coverage of her 19-year-old son, Track, who is scheduled to be deployed to Iraq this week.

Prior to today, the GOP governor was virtually inaccessible to reporters on critical issues like national security, terrorism and the economy.

In the week since she accepted the nomination at the Republican National Convention, Palin has stuck mostly to the script reprising her widely praised speech - and has not taken media questions when appearing at the side of her running mate.

The protective cocoon surrounding her has provided a sharp contrast to GOP presidential candidate McCain, who has had a generally warm relationship with media at his events, where he has welcomed their questions.

The McCain team - which had used women surrogates like former Hewlett Packard CEO Carly Fiorina to fight back against what it described unfair news coverage of Palin, has created a "Truth Squad" to protect her from charges in the media. And it has surrounded her with seasoned Bush operatives and media handlers to prepare her for Gibson and the coming debate with Democratic vice presidential candidate Sen. Joe Biden.

Rick Warren, pastor of the Saddleback Church - the evangelical mega-church that recently hosted McCain and Democratic candidate Sen. Barack Obama - said this week that Palin had called him to ask advice related to that scrutiny, the Hill newspaper reported.

Warren, speaking to a Los Angeles radio station, said that "the question I asked her was, 'How can I pray for you?' " The pastor said Palin "asked me to send her some Bible verses on how do you deal with the unfair, unjust attacks and the mean-spirited criticism that comes in."

E-mail Carla Marinucci at cmarinucci@sfchronicle.com.

Bail-out hands Pimco $1.7bn payday

By Deborah Brewster in New York

Published: September 9 2008 19:49 | Last updated: September 9 2008 19:49

The Bill Gross-managed Pimco Total Return fund reaped a $1.7bn payday following the US government takeover of home loan giants Fannie Mae and Freddie Mac.

While shareholders in Fannie and Freddie suffered deep losses, the world’s biggest bond fund saw its highest ever one-day rise against its benchmark index on Monday, benefiting from the bet made by Mr Gross on mortgage bonds issued by the agencies.

Mr Gross had made a big shift out of US Treasuries and corporate bonds over the past year and into agency bonds, betting that the government would support Fannie and Freddie Mac. By May this year, more than 60 per cent of his $132bn fund was in mortgage debt.

Mortgage-backed bond prices rose after the US government seized control of the agencies.

Mr Gross’s fund, which side-stepped the housing market slide, had risen strongly before Sunday’s government bail-out. In the 12 months to August 1, the fund returned 9.2 per cent, beating all of its peers, according to fund tracker Morningstar.

On Monday, the fund rose by 1.3 per cent, or $1.7bn, its biggest one-day rise ever against the Lehman Aggregate Bond index.

Mr Gross, who co-founded Pimco and has managed the Total Return fund since 1987, was one of the first to call for a bail-out of Fannie and Freddie.

In his latest monthly commentary, he also said that the government needed to use more of its own money to support financial markets, or risk a “financial tsunami”.

Mr Gross’ style is to take a macro-economic view and make tactical changes based on short-term movements in the economy.

The recent success of the Total Return fund has helped Pimco to be the only one of the 25 largest mutual fund managers to lift its assets under management in the year to date, according to Financial Research Corporation data to the end of July.

By contrast, several well-respected equity fund managers are suffering in the wake of the government move, which leaves Fannie and Freddie stock almost worthless. Legg Mason’s Bill Miller, Fidelity, Dodge & Cox and Wellington are among the fund managers that had heavy exposure to Fannie and Freddie – and had lifted that further this year, according to Bloomberg data.

Copyright The Financial Times Limited 2008

US Is "More Communist than China": Jim Rogers

US Is "More Communist than China": Jim Rogers

NORTH AMERICA, MORTGAGES, FANNIE MAE, FREDDIE MAC, DEBT, CREDIT, TREASURY, POLITICS AND GOVERNMENT, STOCK MARKET, CHINA, WALL STREET, BANKING, FINANCIALS

By CNBC.com

CNBC.com

| 08 Sep 2008 | 05:28 AM ET

The nationalization of Fannie Mae and Freddie Mac shows that the U.S. is "more communist than China right now" but its brand of socialism is meant only for the rich, investor Jim Rogers, CEO of Rogers Holdings, told CNBC Europe on Monday.

"America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it's just bailing out financial institutions," Rogers said.

Stock markets jumped after the U.S. government's decision to launch what could be its biggest federal bailout ever, in a bid to support the housing market and ward off more global financial market turbulence.

But Rogers said in the long term the move spelled trouble.

"This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I'm not quite sure why I or anybody else should be paying for this," Rogers told "Squawk Box Europe."

European stocks soared on Monday, led by banks. UBS was up 11 percent, BNP Paribas up 8 percent, Credit Agricole up 11.1 percent and HBOS up 13.8 percent.

"You certainly gonna see a huge jump in any financial institutions which owned a lot of Fannie or Freddie … because they don't have to worry about going bankrupt all of a sudden," Rogers said. (Watch the video on the left for the full interview)

"Bank stocks around the world are going through the roof, that's 'cause they've all been bailed out. You don't see the homeowners in Kansas going through the roof 'cause they're not being bailed out," he added.

"A Huge Mess"

However, despite the rally in Asian and European markets, the decision to take over Fannie and Freddie is likely to cause more volatility and needs careful consideration by investors, according to Rogers.

It's rarely good to jump in a moving bus and right now you got a lot of buses moving. I might short some more investment banks in the US, depending on how they rally over the next week, but other than that, I'll just sit and watch," he said.

Rogers, who is short on U.S. bonds, said these are likely to fall while commodities may rally. The two government-sponsored enterprises don't have good loans on their books, because "everybody else took the good stuff and dumped the bad stuff onto Fannie and Freddie," he said.

From 2010, Fannie and Freddie will have to shrink their portfolios by 10 percent a year until they reach $250 billion, to reduce the risk to the taxpayer, according to the Treasury plan. But this may put additional pressure on the housing market, Rogers said.

"That's going to also ensure that house prices continue to go down. It's going to be harder and harder to get a mortgage."

Investors should not pin their hopes on this year's presidential election for a solution to the problems, as none of the candidates is likely to find one, Rogers said.

"This is a big huge mess and neither one of them has a clue what to do next year. It's going to be a mess."

© 2008 CNBC.com

URL: http://www.cnbc.com/id/26603489/

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One Politicians Get's It

Senator Bunning Says Paulson Acts Like Socialist, Should Resign

By Matthew Benjamin

Sept. 9 (Bloomberg) -- Senator Jim Bunning said Treasury Secretary Henry Paulson, by rescuing Fannie Mae and Freddie Mac, is acting like China's finance minister and both Paulson and Federal Reserve Chairman Ben S. Bernanke should step down.

``I sincerely believe that Henry Paulson and Ben Bernanke should resign,'' said Bunning, a Republican from Kentucky on the Senate Banking Committee. ``They have taken the free market out of the free market.''

Paulson and the federal regulator for Fannie and Freddie placed the two largest U.S. mortgage-finance companies in a government-operated conservatorship on Sept. 7, ousting their chief executives and eliminating their dividends. Treasury also may purchase up to $200 billion of stock in the firms to keep them solvent.

``We no longer have a free market in the United States, we have a government controlled free market,'' Bunning said in an interview. Paulson, a former chief executive officer of Goldman Sachs Group Inc., ``is acting like the minister of finance in China.''

Bunning, 76, criticized Paulson's successful effort in July to obtain congressional authority to pump unlimited amounts of money into Fannie and Freddie to keep them afloat.

``When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turned out it was socialism here in the United States,'' he told Paulson at a July 15 Senate Banking Committee hearing.

Following Paulson's Sept. 7 announcement of the takeover of Fannie and Freddie, Bunning said he now feels like a citizen of China.

Former Phillies Pitcher

``No company fails in communist China, because they're all partly owned by the government,'' said the former pitcher for the Philadelphia Phillies.

Bunning accused Paulson of deception when he told Congress in July that the Treasury's plan would instill such confidence among investors that it would never have to be used.

Paulson ``saw and knew what was happening, and didn't tell the truth to the banking committee,'' Bunning said yesterday.

Treasury spokeswoman Michele Davis didn't respond to requests for comment.

Bunning, a critic of former Fed Chairman Alan Greenspan, faults Bernanke for lax supervision of the mortgage market.

The Fed chief waited too long to require lenders to change how they write mortgages, Bunning said. ``I mean he just did it two months ago. Come on.''

When asked if he expects more multibillion dollar rescues by Treasury, Bunning said, ``You bet I do.''

He said Paulson on Sept. 7 should have detailed an overhaul in the business model of Fannie and Freddie.

Bunning predicted in July that, contrary to statements by the Treasury, Paulson would provide capital to Fannie and Freddie.

``Every time we propose and do something, it always gets used,'' he told Paulson at the July banking committee hearing.

To contact the reporters on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net.

Paulson's Quick Draw

Peter Schiff
Sep 9, 2008

Treasury Secretary Henry Paulson, the man who said that subprime was contained and that the Bazooka in his pocket would never be used, now assures us that the bailout of Fannie Mae and Freddie Mac will be costless to taxpayers. Despite the near euphoria that the plan has sparked on Wall Street, the move will go down in history as the biggest policy blunder of all time, and will be credited as a pivotal point in the financial collapse of the American economy. The ultimate cost to Unites States citizens will be in the range of hundreds of billions of dollars, perhaps more.

The original idea that gave birth to Freddie and Fannie, which is to make housing more affordable to average Americans, should now be seen as farcical. Their new goal is to keep housing prices high. Absent Freddie and Fannie, housing prices would fall sharply and the mortgage market would stabilize. Americans would once again be able to buy affordable houses with mortgages they could actually repay - just like their grandparents did. Instead they will keep overpaying for houses, burdening themselves with excessive payments in the process, and ultimately sticking taxpayers with the bill when they default.


There is absolutely no substance to Paulson's insistence that based on the government's first claim on the future profits of Fannie and Freddie, the plan offers protection for taxpayers. There will be no future profits, just more heavy losses. Americans will now have unlimited ability to continue to overpay for houses and commit to mortgages they can't afford. In fact, the plan ensures that eventual public sector losses will vastly exceed those that would have befallen the private sector in a free-market resolution.

Paulson claims that his goal is to stabilize the mortgage market. But the best way to do so would be to allow housing prices to fall to a market clearing level. As long as home prices remain artificially high, the risks of mortgage lending will keep credit tight, and the high costs of mortgage payments will keep potential buyers on the side-lines. With private lenders justly cautious, the government intends to hold open the lending spigots, without the pesky concerns over losses or financial risk. The hope is that the new lending will prevent home prices from falling further. It won't work. The government "solution" will simply delay the fall of artificially high home valuations and temporarily preserve the illusion of prosperity.

In order to preserve current home prices, the government will be forced to maintain the lax lending standards that got us into this mess in the first place. Since all the losses will now be borne by taxpayers, those lax standards will be much more problematic. The moral hazard that existed prior to this bailout has become that much more hazardous. Every mortgage now insured by Fannie and Freddie is the equivalent of a U.S. Treasury bond. This allows anyone to borrow on the full faith and credit of the U.S. government so long has the money is used to buy a house. In addition, mortgage lending will now be a government function, run with Post Office-like efficiency.

Of course the biggest collateral damage caused by Paulson's bazooka is the large hole ripped through the already tattered U.S. Constitution. If the government can do this, does anyone believe there is anything it can't do? In effect the Federal government now has absolute power to corrupt absolutely.

We All Know What Happens on Friday

FDIC shutters Silver State Bank of Nevada

Son of presidential nominee John McCain was reportedly former board member; closing marks the 11th bank failure this year.

Last Updated: September 5, 2008: 10:43 PM EDT

WASHINGTON (AP) -- Nevada regulators have shut down Silver State Bank. It was the 11th failure this year of a federally insured bank.

Andrew McCain, son of Republican presidential nominee John McCain was a member of the bank's board, but recently stepped down for "personal reasons," according to The Wall Street Journal. The younger McCain, 46, had also served on Silver State's audit committee, and was only with the bank for five months before leaving on July 26, the Journal reported.

The Federal Deposit Insurance Corp. was appointed receiver of the bank, located in Henderson, Nev. It had $2 billion in assets and $1.7 billion in deposits as of June 30.

The FDIC said Friday the bank's insured deposits will be assumed by Nevada State Bank of Las Vegas. Its branches will reopen Monday as offices of Nevada State Bank in Nevada and National Bank of Arizona in Arizona.

The agency said depositors of Silver State Bank will continue to have full access to their deposits.

The 11 failures so far this year compare with three for all of 2007, and federal banking officials have said that more banks are in danger of collapse.

Silver State Bank has operated 12 branches in Nevada and Arizona as well as loan offices in Nevada, Utah, Colorado, Washington, Oregon, California and Florida.

The FDIC estimated its resolution will cost the deposit insurance fund between $450 million and $550 million.

Regular deposit accounts are insured up to $100,000; for some individual retirement accounts, the limit is $250,000.

There were about $20 million in uninsured deposits held in roughly 500 accounts at Silver State that potentially exceeded the insurance limit, the FDIC said.

Concern has been growing over the solvency of some banks amid the housing slump and the steep slide in the mortgage market. The pressures of tighter credit, tumbling home prices and rising foreclosures have been battering many banks, large and small, across the nation.

The largest bank failure by far this year has been that of savings and loan IndyMac Bank, which was seized by regulators on July 11 with about $32 billion in assets and deposits of $19 billion.

The seizure of Pasadena, Calif.-based IndyMac, which was the largest regulated thrift to fail in the United States, prompted hundreds of angry customers to line up for hours in Southern California to demand their money. IndyMac also was the second-largest financial institution to close in U.S. history, after Continental Illinois National Bank in 1984.

The FDIC has been operating the bank, now called IndyMac Federal Bank, under a conservatorship.

The FDIC plans to raise insurance premiums paid by banks and thrifts to replenish its reserve fund after paying out billions of dollars to depositors at IndyMac. The fund, currently at $45 billion, is expected to take a hit from IndyMac of $4 billion to $8 billion.

Federal officials expect turbulence in the banking industry to continue well into next year, and more banks to appear on the FDIC's internal list of troubled institutions.

Of the 8,500 or so FDIC-insured banks in the country, 117 were considered to be in trouble in the second quarter - the highest level in about five years and up from 90 in the first quarter. The agency doesn't disclose the banks' names.

Only 13 percent of banks that make the list fail, on average, and most are nursed back to health or acquired by stronger institutions, according to the FDIC.

Federally insured banks and thrifts set aside a record $50.2 billion to cover losses from soured mortgages and other loans in the April-June quarter, when profits plunged 86 percent from a year earlier.

Fannie and Freddie going down like Titanic

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hola America!

U.S. to Grow Grayer, More Diverse
Minorities Will Be Majority by 2042, Census Bureau Says

By N.C. Aizenman
Washington Post Staff Writer
Thursday, August 14, 2008; A06

The nation's population will look dramatically different by mid-century, becoming more racially and ethnically diverse and a good deal older as it increases from about 302 million to 439 million by 2050, according to projections released today by the U.S. Census Bureau.

The findings are in line with recent analyses published by independent demographers, but they are the first such official Census Bureau projections in years.

Minorities, about one-third of the U.S. population, are expected to become a majority by 2042 and be 54 percent of U.S. residents by 2050.

The shift will happen sooner among children, 44 percent of whom are minority. By 2023, more than half are expected to be minority, and by 2050, the proportion will be 62 percent.

The largest share of children, 39 percent, is projected to be Hispanic, followed by non-Hispanic whites (38 percent), African Americans (11 percent) and Asians (6 percent).

Hispanics, including immigrants and their descendants as well as U.S.-born residents whose American roots stretch back generations, are expected to account for the most growth among minorities. That population is expected to nearly triple by 2050, growing from about one in six residents to one in three.

The black and Asian populations are each expected to increase about 60 percent, with the black share rising from 14 to 15 percent by 2050 and the Asian share jumping from 5 to 9 percent.

The number of people who identify themselves as being from two or more races is also expected to grow, more than tripling to 16.2 million, or 4 percent of the population.

By contrast, the non-Hispanic, single-race white population is expected to grow by less than 2 percent, reducing its share of the overall population from 66 to 46 percent. That group is projected to decline in the 2030s and 2040s, as more members die than are born in or move to the United States.

However, the 65-and-older population is expected to remain mostly white because of the number of whites born during the post-World War II baby boom. By 2030, all boomers will be 65 or older; by 2050, that age group will have more than doubled and will account for more than one in five residents, compared with one in eight today.

Similarly, the 85-and-older population is expected to more than triple, accounting for about 4 percent of U.S. residents in 2050, compared with fewer than 2 percent today.

The percentage of the population that is of working age will drop from 63 to 57 percent. As is the case with children, the working-age population is projected to become majority-minority before 2050. By mid-century, it is expected to be 30 percent Hispanic, 15 percent black and nearly 10 percent Asian.

William H. Frey, a researcher with the Brookings Institution, said the demographic changes could presage equally profound political cleavages.

"Politically, whites will be much more interested in issues like health care and pensions," he said. "At the same time, the growing minority population -- Hispanics, especially -- will be concerned about more youthful issues, like schools."

Other analysts focused on the potential environmental and quality-of-life effects of the projected population increases and the degree to which immigration might affect them.

"What this population rise means to me is anywhere from 40 to 80 million more cars on the road, 35 to 40 million more houses built," said Steven Camarota, a researcher at the Center for Immigration Studies, which favors stricter limits on immigration.

"As a consequence of federal immigration policy, we're going to be a significantly more densely settled country," Camarota said, "and it's important to recognize that this is a choice we're making. This is not the weather that we have no control over. This is something we can change, so it's worth asking ourselves if this is something we want."

Dropping like flies

We all can start getting used to this: Friday is going to be Bank Failure Day in the U.S.A.

The Federal Deposit Insurance Corp. said late today that it took control of First Priority Bank of Bradenton, Fla., marking the eighth bank failure this year -- and the fourth just since July 11, when the feds seized IndyMac Bank of Pasadena.

First Priority had assets of $259 million and deposits of $227 million. And in a sign that the high-profile failure of IndyMac still hasn’t persuaded all bank depositors to keep their accounts within FDIC insurance limits, the agency estimated that First Priority had about $13 million in uninsured deposits.

SunTrust Banks Inc. of Atlanta agreed to buy First Priority’s insured deposits and to take over the bank’s six branches. But the uninsured depositors, as in IndyMac’s case, will be paid 50% of those balances upfront and then will have to wait to see what the FDIC gets as it liquidates First Priority’s assets.

The FDIC prefers to close or sell insolvent banks on Fridays and reopen them on Mondays under government control or under a new owner.

FDIC Chairwoman Sheila Bair has been upfront in preparing the public -- and Congress -- for a surge in bank failures ahead, as real estate loan losses wipe out more lenders’ capital.

One week ago the agency took control of First Heritage Bank of Newport Beach and First National Bank of Nevada in Reno and turned them both over to Mutual of Omaha Bank. In those moves the uninsured depositors didn’t lose money because Mutual of Omaha agreed to assume all $3.2 billion of the banks’ deposits.

The FDIC is required by law to resolve bank failures in whatever way costs its insurance fund the least amount of money. That can depend on how much an acquiring bank is willing to pay for all or part of a failed institution.

THE NEW NUCLEAR RACE

Georgia Power vying for tax credits on nuclear reactors

By MARGARET NEWKIRK
The Atlanta Journal-Constitution
Published on: 07/31/08

Georgia Power is expected to file for Georgia Public Service Commission approval of two new nuclear reactors Friday, beginning an eight-month approval process.

The company and its parent, Southern Co., are among nine utilities with construction and operation licenses for 15 reactors pending at the U.S. Nuclear Regulatory Commission. That number will likely grow.

The companies are competing for a limited number of tax credits that could net – in Southern's case – up to $125 million per year for eight years.

The credits will be divvied among companies that meet several requirements: file a license application by the Dec. 31 deadline, pour concrete by 2014 and begin operating by 2021.

Also, the first two new reactors will each get $500 million of insurance against regulatory delay.

Pro

Georgia Power says new reactors will help diversify power supply options at a time when others – like coal-fired and gas-fired plants – are being battered by soaring fuel costs. They also point out reactors do not emit carbon. Growth in Georgia will demand new plants that can run 24-7, year-round, the company says. Nuclear fits the bill.

Con

Environmental groups and others say new reactors are a bad idea, especially since there's no permanent place to store nuclear waste. The first generation of U.S. reactors came with a staggering price tag and huge cost overruns, they say. Conservation and renewable energy should be Georgia's first priority.

Foreclosure filings up 120%

There were 220,000 homes lost to bank repossessions in the second quarter, and the annual forecast for 2008 will have to be revised upward.

By Les Christie, CNNMoney.com staff writer

July 25, 2008: 5:09 AM EDT

NEW YORK (CNNMoney.com) -- Foreclosures continue to soar, with 220,000 homes lost to bank repossessions in the second quarter of this year, according to the latest statistics from RealtyTrac, an online marketer of foreclosed homes. That's nearly triple the number from the same period in 2007.

There were a total of 739,714 foreclosure filings recorded during that three month period, up 14% from the first quarter, and up a whopping 121% from the same period in 2007. That means that out of every 171 U.S. households received a filing, which include notices of default, auction sale notices and bank repossessions.

"Most areas of the country are seeing at least some increase in foreclosure activity," said RealtyTrac CEO James Saccadic. "Forty-eight of 50 states and 95 out of the nation's 100 largest metro areas experienced year-over-year increases in foreclosure activity."

Because foreclosure filings are growing so quickly, RealtyTrac will have to reevaluate its foreclosure forecast for the year, according to spokesman Rick Sharga.

"We've been saying foreclosures will total 1.9 million to 2 million this year," he said. "But midway through the year, we're already at 1.4 million so we're going to be raising our projections."

And there is more bad news: Bank repossessions are up as a proportion of total filings, representing 30% of the notices issued during the quarter, up from 24% a year ago.

"I don't think that's a surprise if you look at the general conditions out there," said Brian Bethune, chief financial economist for Global Insight. "There have been six straight moves of weaker employment this year. The ongoing problems in the housing market are compounded by a generally weaker economy. Foreclosures won't go down until we start to see employment move up again."

Sun Belt front and center

California's Central Valley remains ground zero for foreclosure filings. Stockton, which is just east of San Francisco, had the highest rate of foreclosure filings of any metro area, one for every 25 homes. That's seven times the national average.

Riverside/San Bernardino, which is east of Los Angeles, had the second highest rate in the nation with one filing for every 32 households. Las Vegas, Bakersfield and Sacramento rounded out the top five.

Detroit continued to suffer more than any other non-Sun Belt area, with one filing for every 66 households. And several Ohio cities were also hard hit, led by Toledo (one in 92 households), Akron (one in 93) and Cleveland (one in 108).

On the other hand, there were a handful of metro areas that remained relatively unscathed. Honolulu, at one filing for every 1,331 households had the lowest rate of all, followed by Allentown, Penn. (one for every 972) and Syracuse, NY (one for every 880).

At the state level, Nevada had the highest rate with one filing for every 43 households, while California had the highest total number of filings - 202,599.

The report came as more negative news for the housing market this week. On Thursday, a report form the National Association of Realtors revealed that existing home sales had declined again as the number of homes for sale continued to rise. On Tuesday, a government agency reported home prices registered another drop in May.

All this is happening as Congress struggles to pass a housing rescue bill that will make FHA-insured loans available to many at-risk borrowers. That bill, even if signed this week, will not take effect until October.

One of the sponsors of the bill, Barney Frank (D -- Mass.), released a statement on Thursday in which he encourages lenders and mortgage servicers to delay taking action against delinquent borrowers before the new law takes effect.

"I am urging the mortgage servicers to hold off on foreclosures in applicable cases," he said, "so borrowers can take advantage of the program."

Bank Run, USA

LOS ANGELES -

Like dozens of others waiting in line with her, Joan Rubin said she was drawn to IndyMac Bank by the high interest rates it paid and the friendly service her local branch provided.

All that was a memory on Tuesday, however, as Rubin and about 200 other anxious, embittered and sometimes angry customers swarmed an IndyMac bank branch in the San Fernando Valley, creating a Depression Era-like scene as they demanded their money just four days after the failing bank was seized by federal regulators.

"I've already lost three nights of sleep and three days of eating; now I'm done," Rubin, 52, said as she sat in a beach chair on the sidewalk in stifling heat. She planned to empty her account following the failure of the Pasadena-based bank, which has 33 branches, all in Southern California.

"It's a very sad day in America," Rubin said.

At one point police had to be called to the branch in the city's normally quiet Encino neighborhood. Tempers grew short when customers who had arrived before dawn accused others of cutting in line.

Some of the line jumpers had been turned away the day before but were given vouchers granting priority by bank employees.

Police quickly restored order without arrests, and as the day progressed people were divided into two lines that each stretched for an entire block. People wanting to close accounts were let in, in groups of five.

Customer Ann Collier, 67, a retired secretary, also chose IndyMac as her bank because of its high interest rates.

Initially, she was careful to deposit less than $100,000 in her account so it would be fully insured by the Federal Deposit Insurance Corp. But over time, her money grew beyond the limit.

She declined to say how much she now might lose.

"I have to live off this money for a long time," she said while waiting in line late Monday outside the Pasadena office.

Lillian Krasn said she had a strange feeling something was wrong when she arrived at the Encino branch a week ago to renew her certificate of deposit, but she went ahead anyway. She came back Tuesday to cash it in and take the money elsewhere - although exactly where, she hadn't decided.

"Where do you go from here?" the 78-year-old retiree asked. "Under your mattress?"

Shortly before noon, two employees of rival Comerica (nyse: CMA - news - people ) bank arrived to hand out water bottles with their business cards taped to them. They said they hoped to scoop up some former IndyMac customers like Krasn.

"One man's loss is another man's treasure - or something like that," said Comerica banker Danny Sobrino.

Meanwhile, as the wait stretched into hours, people donned baseball caps or carried umbrellas to shield themselves from the sun. Some fanned themselves with their bank documents as they sweated in temperatures that were already in the 80s by midmorning.

The Office of Thrift Supervision transferred control of the bank to the FDIC on Friday because it didn't think IndyMac could meet depositor demand. Over the weekend, it became IndyMac Federal Bank, FSB, and by Monday morning the scramble by bank customers to recover their money was on.

Shortly before noon Tuesday, the bank provided folding chairs for those who hadn't brought their own, and the line decreased to about 100 as some people were persuaded to schedule appointments and return later.

A few people, such as Aliki Deffam, visited the bank to make deposits. For them, there was no waiting to get inside.

Deffam, a real estate agent, said she believed the FDIC, which is now operating the bank, when it announced that all IndyMac deposits were fully insured up to $100,000.

"I feel very safe," said Deffam, 42. "I don't think that my money is going to disappear."

Many others, however, weren't willing to take that chance - or to leave until they had their money in hand.

"I just can't take their word for it," said Ismelda Quintos, an accountant. "I want to get my money out so I can sleep at night. It's hard-earned money, and I'm not rich, so it's a big deal for me."

Bad Move, says Jim Rogers

July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Rogers is betting that Fannie Mae shares will keep tumbling.

Goldman Sachs Group Inc. analyst Daniel Zimmerman said the mortgage finance companies' shares may fall another 35 percent and lowered his share-price estimate for Fannie Mae to $7 from $18 and for Freddie Mac to $5 from $17. Freddie Mac fell 64 cents, or 8.3 percent, to $7.11 in New York Stock Exchange trading, while Fannie Mae fell 52 cents, or 5.1 percent, to $9.73.

``I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. ``So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''

The chairman of Rogers Holdings, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a ``long way to go'' and advised buying agricultural commodities.

`Solvency Crisis'

Billionaire investor Soros said today that Fannie Mae and Freddie Mac face a ``solvency crisis,'' not a liquidity one, and that their troubles won't be the last financial disruption, Reuters reported.

``This is a very serious financial crisis and it is the most serious financial crisis of our lifetime,'' Soros told Reuters in a telephone interview. ``It is an idle dream to think that you could have this kind of crisis without the real economy being affected.''

`Going Bankrupt'

Fannie Mae's market value is now about $10 billion, down from $38.9 billion at the end of 2007. Freddie Mac's market value has shrunk to about $5 billion from $22 billion at the end of last year.

``These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made,'' Rogers said. ``What's going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?''

Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt.

The Federal Reserve separately authorized the firms to borrow directly from the central bank.

Washington-based Fannie Mae slid 45 percent last week, while McLean, Virginia-based Freddie Mac sank 47 percent on concern they may require a bailout that would wipe out shareholders.

Former St. Louis Federal Reserve President William Poole last week said in an interview that Freddie Mac is technically insolvent under fair value accounting, which measure a company's net worth if it had to liquidate all its assets to repay liabilities. Poole said Fannie Mae may also become insolvent this quarter.

Rogers said he had not covered his so-called short positions in Fannie Mae and would increase his bet if it were to rally.

The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.

``They're ruining what has been one of the greatest economies in the world,'' Rogers said. Bernanke and Paulson ``are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.''

Fannie and Freddie, R.I.P.

July 14, 2008

Bush Offers Plan to Save Fannie, Freddie

By STEPHEN LABATON

WASHINGTON — Alarmed about the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration will ask Congress to approve a rescue package that would give the government the authority to buy billions of dollars in stock in Fannie Mae and Freddie Mac and also lend to the companies to meet their short-term funding needs, people briefed about the plan said on Sunday.

Separately, the Federal Reserve voted on Sunday to also open a lending facility for Fannie Mae and Freddie Mac, if they need emergency capital. The two companies would be able to post their own securities as collateral.

The plan calls on Congress to give the government the authority over the next two years to buy an unspecified amount of stock in the two companies. Over the same period of time, it would permit the companies to have greater access to the Treasury, by expanding the credit line that each company has from the Treasury. Each company now has a $2.25 billion credit line, set nearly 40 years ago by Congress. At the time, Fannie had only about $15 billion in outstanding debt. It now has total debt of about $800 billion, while Freddie has about $740 billion.

Today the two companies also hold or guarantee mortgages valued at more than $5 trillion.

As part of the plan, the administration will also call on Congress to raise the national debt limit, people briefed on the plan said. And it will ask Congress to give the Federal Reserve a role in setting the rules for how big a capital cushion each company must hold. Giving the Fed a consulting role in the companies’ oversight is seen as yet another way to reassure nervous markets.

Treasury officials declined to comment on the plan but indicated that a statement would be issued later on Sunday. It was described by lawmakers and officials at other agencies that have been briefed on it.

They said that the Bush administration was hoping that Congress would adopt it quickly as part of a measure intended to help the housing markets and overhaul the regulation of Fannie and Freddie. Last Friday, the Senate approved the measure, and the House is hoping to take it up this week.

Announcement of the plan on Sunday evening was intended to send a sharp signal to both stock markets and debt markets that the government was standing behind the beleaguered companies.

Throughout the weekend, senior officials from the Treasury and the Federal Reserve closely monitored preparations by Freddie Mac to raise money help meet its short-term funding needs. Top officials spent Saturday and Sunday being briefed on Wall Street’s appetite for a $3 billion debt offering by Freddie Mac that was set for Monday. Officials said they were watching to see if the steep declines last week of Freddie and Fannie stock would spill into the debt market and undermine the confidence of lenders.

Fannie and Freddie have grown to become central to the nation’s housing markets. They buy mortgages from banks and other lenders, hold some of them, and sell others in the form of mortgage backed securities. Together, they own or guarantee nearly half the nation’s mortgages. In recent months, the stocks of the two companies have plunged as a wave of foreclosures has eroded confidence in the companies.

The credit line provided by the Treasury to the companies has always been seen by the market place as evidence that the two companies would be rescued by the government if they ever encountered severe financial problems. Yet for many years, a steady of stream of leaders from the Federal Reserve and to officials from Republican and Democratic administrations has denied the existence of a so-called “implicit guarantee.” Those who denied the existence of the guarantee included Treasury secretaries Robert Rubin, Lawrence Summers and Henry M. Paulson Jr., and Federal Reserve Chairmen Alan Greenspan and Ben S. Bernanke.

The implicit guarantee was a useful device both for the companies and the federal government. It has enabled the companies to get money in the debt markets at rates far lower than other companies and close to the same as treasury securities. At the same time, the Federal government did not have to record on its budget any significant liabilities for the large subsidy it was, in effecting, providing to the companies. Yet it also raised concerns among critics, who said it was unfair to rival companies and that it promoted a management laxity since executives knew that the companies could always count on a hand from the government if they began to falter.

Now, in the face of market turmoil in recent days, a quiet yet dramatic policy shift has occurred. Government officials no longer deny the existence of a guarantee. Instead, senior officials at both the Fed and the Treasury have been talking in recent days of possibly taking steps to “harden the guarantee.”

Motivating the change was the central role of the two institutions and the depth of ownership in the paper they have issued. Every major bank, and many mutual funds and pension funds and foreign governments, hold significant amounts of securities issued by Fannie and Freddie, which have been viewed over the years as being almost as safe as treasury securities. A default by either one of the companies could be catastrophic for the financial system.

Thanks a lot

July 11, 2008

U.S. Weighs Takeover of Two Mortgage Giants

By STEPHEN LABATON and STEVEN R. WEISMAN

WASHINGTON — Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.

The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.

Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

The officials also said that such a step would be ineffective because the markets already widely accept that the government stands behind the companies.

The officials involved in the discussions stressed that no action by the administration was imminent, and that Fannie and Freddie are not considered to be in a crisis situation. But in recent days, enough concern has built among senior government officials over the health of the giant mortgage finance companies for them to hold a series of meetings and conference calls to discuss contingency plans.

A conservatorship or other rescue operation would be the second time in four months that the Bush administration has stepped in to engineer a rescue to prevent the financial system from collapsing. Last March, it forced the sale of Bear Stearns to JPMorgan Chase to avert a bankruptcy of that venerable investment house.

Officials have also been concerned that the difficulties of the two companies, if not fixed, could damage economies worldwide. The securities of Fannie and Freddie are held by numerous overseas financial institutions, central banks and investors.

Under a 1992 law, Fannie or Freddie could be put into conservatorship if their top regulator found that either one is “critically undercapitalized.” A conservator would have sweeping powers to overhaul them, but would not have the authority to close them.

The markets showed fresh signs on Thursday of being nervous about the future of the companies. Their stock prices continued a weeklong slide, hitting their lowest level in 17 years. The debt markets, meanwhile, pushed up the two companies’ cost of borrowing — their lifeblood for buying mortgages.

The companies are by far the biggest providers of financing for domestic home loans. If they are unable to borrow, they will not be able to buy mortgages from commercial lenders. In turn, that would make it more expensive and difficult, if not impossible, for home buyers to obtain credit, freezing the United States housing market. Even healthy banks are reluctant to tie up scarce capital by offering mortgages to low-risk home buyers without Fannie and Freddie taking the loans off their books.

Together the two companies touch more than half of the nation’s $12 trillion in mortgages by either owning them or backing them. They hold more than $1.5 trillion of the mortgages as securities. Others are sold to investors in the form of mortgage-backed bonds.

In recent weeks, the companies have spiraled downward, undermined by declining confidence in their future and shaken by sharp declines in their assets as the housing markets have continued to slide and foreclosures have risen.

In the last week alone, Freddie has lost 45 percent of its value, and Fannie is off 30 percent. Expectations of default at the companies have also risen; it costs three times as much today to buy insurance on a two-year Fannie bond as it did three years ago.

Analysts expect the companies to announce a new round of write-downs and possibly be forced to raise capital by issuing additional shares, which would dilute their value for current shareholders.

Despite repeated assurances from regulators about the financial soundness of the two institutions, financial markets have concluded that by some measures they are deeply troubled.

Freddie, for instance, is technically insolvent under fair value accounting rules, in which the company puts a market value on assets as if it had to sell them now.

Although Treasury Secretary Henry M. Paulson Jr. and Ben S. Bernanke, the chairman of the Federal Reserve, passed up invitations by lawmakers on Thursday to seek legislation to deal with the crisis, officials said that the administration had been privately considering a government takeover should the markets continue to turn against the companies.

At a hearing of the House Financial Services Committee on Thursday, both Mr. Paulson and Mr. Bernanke were guarded, carefully trying not to say anything that could further erode confidence in Fannie and Freddie. They both said that the regulator of Fannie and Freddie had found that they were, in the words of Mr. Paulson, “adequately capitalized,” meaning that they had sufficient cash and other assets to withstand the turbulence in the markets.

“Fannie Mae and Freddie Mac are also working through this challenging period,” Mr. Paulson said.

Neither official would address a question posed by Representative Dennis Moore, Democrat of Kansas, who asked whether the failure of either institution would pose a risk to the financial system.

“In today’s world I don’t think it is helpful to speculate about any financial institution and systemic risk,” Mr. Paulson said. “I’m dealing with the here and now, and the important role that they’re playing and other financial institutions are playing.”

Mr. Bernanke said that Fannie and Freddie “are well-capitalized in the regulatory sense” but added that they, and other major financial institutions, needed to raise their capital levels further.

Despite repeated denials by officials in the Bush and prior administrations, financial markets have long assumed the government would stand behind Fannie Mae and Freddie Mac in times of difficulty, both because they are integral to the housing and financial markets and because the companies have a line of credit to the Treasury.

But Congress set that credit more than 38 years ago, long before the companies rose to such size and prominence, and its limit, $2.25 billion for each, has become a tiny fraction of the companies’ overall debt.

Some analysts have begun to propose that the Fed also permit the two companies to borrow from it, as Wall Street investment banks began doing after the rescue of Bear Stearns. But there is no indication that the Fed is contemplating such a move.

On Thursday, the rapid sell-off of shares of Fannie Mae and Freddie Mac came after a former central banker made comments that the companies might not be solvent, and an analyst at UBS issued a report critical of Freddie Mac.

The turmoil also shook the debt of the companies, with one main measure indicating that their cost of borrowing has risen to the highest level since mid-March, when the government rescued Bear Stearns. Throughout the day, senior officials sought to reassure the markets about the financial health of Fannie and Freddie.

Later in the afternoon, James B. Lockhart, the regulator who oversees the two companies, issued a statement that his agency was carefully watching the companies’ “credit and capital positions” and said that they were adequate to get through the current turmoil.

Fannie Mae issued a statement saying that it remained financially strong.

“Our company has raised more than $14 billion in capital since November 2007, including $7.4 billion most recently in May,” the company said. “As our regulator has stated, and has reiterated in public statements this week, we are adequately capitalized.”

Sharon McHale, vice president for public relations at Freddie Mac, said: “Our regulator has emphasized that we have continued to maintain the highest capital rating, and we are in the market every day. We’ll continue to do so.”

Shares of Freddie Mac plunged more than 30 percent and Fannie Mae’s more than 20 percent in the first hour of trading on Thursday. By the close of trading, Fannie shares had fallen nearly 14 percent, and Freddie shares had dropped 22 percent. It was the second straight day of declines for the companies.

While their stocks trade on the New York Stock Exchange, Congress created the two companies to promote housing, and the marketplace has long come to believe that they would be bailed out should they become insolvent. They hold a far lower level of capital than banks do. In recent years, they have both suffered from accounting scandals and management shake-ups.

Neither Mr. Paulson nor Mr. Bernanke, at the hearing on Thursday, would answer a question about whether Congress needs to give the regulators more tools to deal with the possible insolvency at either company.

“I don’t think we should be speculating or talking about what-if’s with any particular institutions, and so with Fannie or Freddie, what I’m emphasizing is that the tool that I want is the reform and the reform legislation that would inject confidence into the marketplace,” Mr. Paulson said, referring to a measure that would revamp the oversight of the companies.

The problems of the two companies spilled onto the campaign trail on Thursday when Senator John McCain, the presumptive Republican nominee for president, said he supported federal intervention to save Fannie or Freddie from collapsing.

“Those institutions, Fannie and Freddie, have been responsible for millions of Americans to be able to own their own homes, and they will not fail, we will not allow them to fail,” Mr. McCain said during a stop at the Senate Coney Island Restaurant in Livonia, Mich. “They are vital to Americans’ ability to own their own homes. And we will do what’s necessary to make sure that they continue that function.”

Jason Furman, the economic policy director for the Democratic presidential campaign of Senator Barack Obama of Illinois, said that Mr. Obama “believes the Bush administration’s willful neglect of warning signs in housing, in financial markets and in the job market, have compromised the nation’s housing finance system.”

“The challenges facing Fannie and Freddie are part of the broader weakness in our economy,” Mr. Furman said.

Senator Charles E. Schumer, Democrat of New York and chairman of the Joint Economic Committee, said that the markets should rest assured that the mortgage giants have a “federal lifeline” and would not be allowed to fail — though he said he thought a government rescue would not be needed and should be a last resort.

The Fat Lady is warming up

July 10 (Bloomberg) -- U.S. foreclosure filings rose 53 percent in June from a year earlier and bank repossessions almost tripled as deteriorating property values and higher payments on adjustable mortgages forced more people to give up their homes.

More than 252,000 properties, or one in every 501 U.S. households, were in some stage of foreclosure, RealtyTrac Inc., an Irvine, California-based seller of default data, said today in a statement. Nevada, California and Arizona had the highest foreclosure rates.

``The foreclosure problem is getting worse and will stay with us well into the next decade,'' Mark Zandi, chief economist for Moody's Economy.com in West Chester, Pennsylvania, said in an interview. ``The job market is eroding and homeowners have less equity. Lenders are much less willing to work with you if you've got negative equity, and you're more likely to give up your house if you're deeply underwater.''

About $3.5 trillion in homeowner equity has been wiped out since the spring of 2006, when housing prices were at their peak, Zandi said. Home prices fell the most on record in April, according to the S&P/Case-Shiller index of 20 U.S. metropolitan areas. June was the second straight month in which more than a quarter million properties received foreclosure filings, RealtyTrac said. Filings fell 3 percent from May.

`Faster Pace'

``The year-over-year increase of more than 50 percent indicates we have not yet reached the top of this foreclosure cycle,'' James Saccacio, chief executive officer of RealtyTrac, said in the statement. Bank repossessions, which increased 171 percent in June, are rising at a ``much faster pace'' than default notices and auction notices, he said.

About 53 percent of borrowers with subprime loans, those with poor or incomplete credit histories, will have negative equity in their homes at the end of the year, and the number will rise to 63 percent in 2009, New York-based analysts at Credit Suisse led by Rod Dubitsky said in an April 23 report.

Rising mortgage defaults and auctions of foreclosed properties are adding to a glut of unsold homes and prolonging the deepest housing slump since the 1930s. Efforts by the U.S. Congress to insure as much as $300 billion in refinanced mortgages and save up to 2 million borrowers from foreclosure can work only by ``slowing down or reversing home price declines and equity deterioration,'' Credit Suisse said.

Nevada had the highest foreclosure rate for the 18th consecutive month. One in every 122 households was in some stage of foreclosure, more than four times the national average, and 3,133 properties in the state were seized by lenders, said RealtyTrac. The company has a database of more than 1.5 million properties and monitors foreclosure filings including default notices, auction notices and bank seizures.

California, Arizona

California ranked second, with one filing for every 192 households, 2.6 times the national average, and had 20,624 properties seized by banks. Arizona ranked third at one in 201 households, almost 2.5 times the national average, and had 4,297 bank seizures.

Florida, Michigan, Ohio, Colorado, Georgia, Indiana and Utah also ranked among the 10 states with the highest foreclosure rates.

California had seven of the 10 U.S. metro areas with the highest rates, including the top three. Stockton, in the state's central valley, was first with one in every 72 households in a stage of foreclosure, followed by Merced, about 110 miles east of San Francisco, with one in 77 households, and Modesto, near the Sierra Nevada mountains, with one in 86 households. Riverside-San Bernardino ranked fifth, Vallejo-Fairfield was seventh, Bakersfield was eighth and Salinas-Monterey was tenth.

`Beyond the Sprawl'

``The housing beyond the sprawl is going to suffer another serious leg down because of high oil prices,'' Peter Navarro, professor of economics and public policy at the University of California at Irvine, said in an interview. ``A lot of people went out there to get cheaper homes, but this is going to take a big bite out of their mortgage.''

Cape Coral-Fort Myers and Fort Lauderdale, Florida, ranked fourth and ninth, respectively, and Las Vegas was sixth among metro areas with the 10 highest foreclosure rates.

California had the most total filings for the 18th consecutive month, increasing 77 percent in June from a year earlier to 68,666. Florida was second at 40,351 filings, an increase of 92 percent, and Ohio was third at 13,194, an increase of 11 percent.

New York filings increased 22 percent from a year earlier to 5,367, with one in every 1,473 households in a stage of foreclosure, the 32nd highest rate.

New Jersey filings rose 5 percent. The state had one in every 695 households in a stage of foreclosure, the 14th highest rate.