Weekend Economist, September 12-14, 2008

And what a week it was! Even on the national stage.

Welcome and have fun watching your economy crumble into dust as we post, debate and throw the bull on Weekend Economist.

Because 5 days are not enough. To REALLY make a mess of it takes 24/7!

Post early and often. I'm working a full day on Saturday, so do help out with the latest seizure and failure and whatever. Thanks!

http://www.reuters.com/article/newsOne/idUSSP21054320080911?sp=true

NEW YORK (Reuters Life!) - Written references could become old hat for hiring managers with one in five saying they use social networking sites to research job candidates -- and a third of them dismissing the candidate after what they discover.

A survey by online job site CareerBuilder.com of 3,169 hiring managers found 22 percent of them screened potential staff via social networking profiles, up from 11 percent in 2006.

An additional nine percent said they don't currently use social networking sites like Facebook or MySpace to screen potential employees but they do plan to start.

The survey found that 34 percent of the managers who do screen candidates on the Internet found content that made them drop the candidate from any short list.

The top area for concern among the hiring managers with 41 percent citing this as a downfall were candidates posting information about drinking or using drugs.

The second area with 40 percent of concern were candidates posting provocative or inappropriate photographs or information.

Other areas of concern to arise from social network sites were poor communication skills, lying about qualifications, candidates using discriminatory remarks related to race, gender or religion, and an unprofessional screen name.

But the survey found hiring managers scouring social network pages was not all bad with 24 percent of these managers saying they found content to help them solidify their decision to hire that candidate.

Top factors that influenced their hiring decision included candidate's backgrounds supporting their qualifications for the job, proving they had good communications skills, and having a site that conveyed a professional image with a wide range of interests.

"Hiring managers are using the Internet to get a more well-rounded view of job candidates in terms of their skills, accomplishments and overall fit within the company," said CareerBuilder.com spokeswoman Rosemary Haefner in a statement.

"As a result, more job seekers are taking action to make their social networking profiles employer-friendly. Sixteen percent of workers who have social networking pages said they modified the content on their profile to convey a more professional image to potential employers."

and put naked photos of yourself, it's going to come back to haunt you.

I know not everyone does this, but you would be amazed at the number of people who do.

http://www.bloomberg.com/apps/news?pid=20601109&sid=adr.czwVm3ws&refer=home

By Dawn Kopecki

Sept. 11 (Bloomberg) -- The Bush administration is considering whether to fold Fannie Mae and Freddie Mac's $5.2 trillion in debt into the federal budget, the White House budget office and the U.S. Treasury Department said.

``We're discussing how to present this in the federal budget with Treasury and stakeholders right now, but a conclusion hasn't been determined,'' said Corinne Hirsch, a spokeswoman for the Office of Management and Budget. The Government Accounting Office and other federal agencies are also weighing in on the issue.

The federal takeover of the government-sponsored enterprises, or GSEs, on Sept. 7 failed to address whether the debt of Fannie and Freddie should be included in the budget, or whether it carries an explicit government guarantee. In an interview this week, Treasury Secretary Henry Paulson cited the ``incongruities'' in the law and said ``we should be clear, is there a government guarantee or isn't there?''

Any decision to add Fannie and Freddie to the budget wouldn't automatically translate into an explicit government backing for the companies' combined $1.7 trillion in unsecured debt and $3.5 trillion of mortgage guarantees. Granting the full faith and credit of the U.S. would require an act of Congress to change the companies' legal status.

``You can't even be a senior debt investor at this point beyond the 15 month period because you really don't know if the federal government will back away from its commitment to support the debt,'' said Christopher Sullivan, who oversees $1.3 billion as chief investment officer at United Nations Federal Credit Union in New York.

Under Control

The Treasury is talking to the budget office about how to treat Fannie and Freddie in the budget, said Jennifer Zuccarelli, a Treasury spokeswoman. She declined to discuss what options are being considered.

``The reason Fannie Mae was originally turned into a GSE was to take it off the budget,'' said Peter Wallison, a fellow at the American Enterprise Institute, a conservative policy think tank in Washington. Wallison was general counsel for the Treasury during the Reagan Administration. ``The U.S. budget is a completely cash flow system, it's like a Mom and Pop candy store. They don't have any reserves or deferred expenses like private corporations do. It's completely cash in, cash out.''

The Treasury and Federal Housing Finance Agency put the beleaguered mortgage-finance companies back under federal control for the first time in about 40 years after their $14.9 billion in net losses threatened to further disrupt the housing market. The Treasury committed to invest as much as $200 billion in preferred stock and extend credit through 2009 to prevent a collapse of Fannie and Freddie, protecting investors owning more than $5 trillion of their debt and mortgage-backed securities.

Treasury Risk

If the companies were given explicit backing, their debt costs would plunge to bring them closer to the U.S. Treasury debt, Wallison said.

Fannie's five-year debt trades at 65 basis points more than Treasuries and has averaged 40 basis points more for the past five years.

Investors in the credit-default swap market for U.S. Treasuries are already concerned a guarantee is coming, demanding record high fees to offer investors protection against losses on Treasuries.

Five-year credit-default swap contracts on U.S. government debt increased 3.5 basis points on Sept. 9 to a record 18, up from 6 basis points in April, according to CMA Datavision in London. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality.

Losses

The U.S. budget deficit will grow next fiscal year to $438 billion from $407 billion, the Congressional Budget Office said Sept. 9, making it harder for President George W. Bush's successor to either cut taxes or increase spending.

The CBO, a provider of independent assessments on U.S. economic and budgetary decisions to Congress, said the Treasury should incorporate Fannie and Freddie's assets and liabilities into the budget. The CBO, which doesn't set budget policy, will include the projections in its own data starting in January.

``What the administration chooses to incorporate in its budget is up to them, but we hope they will agree,'' CBO Director Peter Orszag said in an interview yesterday.

Though much of the companies' unsecured debt will likely be counted as new federal debt, their mortgage securities won't necessarily translate into the same amount of federal debt since loans and other assets back those liabilities, Orszag said.

The degree of government control suggests the companies' expenses, including salaries and electricity bills, should be counted as federal spending and all fee revenue and other income from operations should be reflected as revenue, Orszag said.

CBO will treat Fannie and Freddie's debt similar to that of government-owned electricity producer Tennessee Valley Authority, which Orszag said won't directly affect the federal debt ceiling.

Any cash investments by the Treasury, such as buying mortgage securities or preferred stock, will directly add to the federal debt outstanding. U.S. officials said Treasury plans to buy $5 billion of the companies' mortgage bonds this month. Fannie and Freddie are also issuing $1 billion each this week in senior preferred shares to Treasury without any cost to the U.S. government.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_lewis&sid=aIigA5l8ZMx0

Commentary by Michael Lewis


Sept. 11 (Bloomberg)-- To see the mental state of financial markets at the moment you need only to sit at a computer with an Internet connection and watch investors respond to journalism.

On Tuesday morning Bloomberg News quoted an unidentified person inside Lehman Brothers Holdings Inc. saying his firm had tried and failed to raise capital from the Korean Development Bank. This report came on the heels of an earlier one in which a named person who regulated the Korea Development Bank denied such a thing had happened -- but no matter.

A few minutes after Bloomberg News posted the piece, it was the most-read news of the day, and Lehman's shares went into a free fall. Fifteen minutes later they had lost almost half their value.

What's interesting, among other things, is the total lack of reflection in the markets. Who had heard of the Korean Development Bank? Who knew what it did, or whether the people inside it were shrewd assessors of subprime-mortgage portfolios?

Basically no one, I'd guess. And yet a single report from an unnamed person inside Lehman that some Koreans had considered, and then passed on, investing in the firm was enough to cause the shares to crash.

And all that had really happened was that KDB proved it may have finally grasped what should be for Asians a cardinal investment principle: Never buy anything an American investment banker is selling.

Lehman Doomed

What one can see from this event is that Lehman Brothers is doomed. It's doomed, in part, because it still owns all sorts of crappy assets at inflated prices.

It holds tens of billions of dollars in subprime-related assets of the sort Merrill Lynch & Co. in July disgorged at 22 cents on the dollar. But that's probably just the beginning.

There's no happy reason they haven't explained in detail their exposure to credit-default swaps. No one -- not its big investors, not the analysts and journalists who cover it, not even, perhaps, the Korean Development Bank -- has had a clear view of its assets and liabilities.

This opacity was once a huge advantage: the people outside assumed the best. It's now an even bigger disadvantage: people outside assume the worst.

But Lehman is doomed for another reason: People are enjoying its failure. The pleasure and interest the markets now take in seeing it fail now exceeds their pleasure and interest in seeing it survive.

Interest in Failure

This is one of the many unintended little side effects of the government bailout of Bear Stearns Cos.: to greatly reduce the interest of the people who do business with Lehman Brothers in the survival of Lehman Brothers.

All those people whose affairs are intertwined with Lehman might have pressured them to handle their problems more briskly and intelligently -- and might also be trying to keep it afloat. The U.S. government has made it possible for them to instead stand back and watch with some detachment and even pleasure as Lehman collapses.

After all, the Federal Reserve will give them their money back, re-insure their credit defaults, take another pile of these distressed assets out of the market. And when the dust settles they can go in and poach Lehman's business and its smarter employees.

The Bear Stearns bailout was supposed to prevent the crisis from rippling through Wall Street. Obviously it hasn't done that. It's merely thrown the crisis into slow motion and prolonged the agony.

And it's given the Korean Development Bank whole new powers.

(Michael Lewis is a Bloomberg News columnist and the author, most recently, of ``The Blind Side.'' The opinions expressed are his own.)

To contact the writer of this column: Michael Lewis at mlewis1@bloomberg.net

http://www.financialarmageddon.com/2008/09/customers-takin.html


Although much of the focus nowadays is on the financial problems at lenders and brokers, they are not the only ones getting squeezed by the bursting credit bubble and a cratering economy. Companies that aren't necessarily in the money shuffling business are also discovering that the operating environment is suddenly a lot more challenging. Spending is under pressure, and so is liquidity. According to a report in Financial Week, "Customers Taking a Lot Longer to Pay, Squeezing Corporate Cash Flow," a crunch may be looming.

Average DSO now at 41 days and counting; companies may be forced into inhospitable debt market to fill gap

U.S. companies are not getting what’s coming to them as quickly as they once did, a recent study shows. And that suggests that corporate cash flow growth is becoming more difficult to sustain as the economy slows.

Days sales outstanding (DSO), or the amount of time receivables are outstanding, for the top 1,000 U.S.-based public companies, excluding financials and automakers, increased to an average of 41 days in 2007, up from 39.7 days in 2006, according to the survey by consulting firm REL.

Forty-one days outstanding is the highest average since the last economic downturn in 2001, REL said. And looking forward, the trend doesn’t look good.

“We are seeing no improvement” in the second-quarter numbers, Karlo Bustos, an REL financial analyst, said. “You never want to see that number get worse. As companies start to process through their cash conversion cycle, if you are not receiving money quicker than you have to pay your suppliers, you ultimately have to go to the debt markets to cover that.”

And given the state of the credit markets generally, he added, that could be dangerous.

“It’s only going to get worse for companies who look to the banks for credit.” Mr. Bustos said. “You’re going to have to look at your own efforts internally to improve your liquidity.”

Industries which demonstrated a noticeable increase in DSO in 2007, on average, included IT services, which showed an 11% increase; computers and peripherals, up 8%; and electronic equipment and instruments, up 15%.

Though the difficult economy may lead companies to hold on to cash longer, it’s crucial to fight the trend, REL analysts suggested. Some of the specific ways companies can improve DSO, said Mr. Bustos’s colleague Peter Rabjohns: optimize collection efforts by focusing on the highest value customers. And, he said, “Make sure they pay on time. Manage credit terms to the lowest possible terms you can,” not just in the U.S., but globally, he said.

Though days sales outstanding was a noticeable negative in this year’s REL study, overall, days working capital (DWC) showed a small improvement, coming in at 38.2 days on average in 2007, up 0.4% on an annualized basis from 2006. Sixty-one percent of industries improved DWC last year, including consumer services, telecommunications services, health care, and construction and engineering.

http://www.nakedcapitalism.com/2008/09/more-evidence-of-pre-olympic.html


One of the factors we had mentioned that appeared to be contributing to the oil price runup of the first half of this year was China stockpiling gasoline, particularly diesel, in preparation for the Olympics. That notion was not well received.

This article from Reuters says that China is unlikely to return to its pre-Olympics levels of fuel demand for many years to come. Aside from the end of stockpiling, another factor is that China has started to cut its fuel subsidies, realizing that cheap energy allows manufacturers to be energy-inefficient, which in the long run will put China at a competitive disadvantage....

http://www.econbrowser.com/archives/2008/09/palin_on_the_on.html

In response to the largest de facto nationalization in US history, we have this example of Governor Palin's comprehension of this issue (ABC News):

Saturday in Colorado Springs, Colo., Alaska Gov. Sarah Palin said, "The fact is that Fannie Mae and Freddie Mac have gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."

I can't even start to dissect what's wrong with this statement, so I will let the reader assess Palin's understanding of the role of the GSEs in the financial system. From my perspective, I would have hoped to have more comprehension from a candidate at a time when the estimate of a resulting $300 billion taxpayer liability is viewed as plausible.

For some informed discussion, see Calculated Risk, as well as Nouriel Roubini.


Fannie Mae and Freddie Mac participate in the secondary mortgage market: Mortgage originators come to them with pools (bundles) of mortgages and either swap these assets for securities or sell them outright to one of the two companies. Under Fannie Mae's and Freddie Mac's "swap programs," an originator exchanges a mortgage pool for a mortgage-backed security that is issued and guaranteed by one of the two companies and that represents an interest in the same pool. Fannie Mae and Freddie Mac promise the security holders that the latter will receive timely payment of interest and principal on the underlying mortgages, less an annual "guarantee fee" of about 20 basis points (0.20 percent) on the remaining principal. In essence, Fannie Mae and Freddie Mac are providing insurance to holders of mortgage-backed securities against default risk on the underlying mortgages and are thus bearing that risk themselves. This securitization activity illustrates one of their two core businesses: mortgage credit guarantees.

The other core business of Fannie Mae and Freddie Mac is their investment portfolios. These portfolios consist largely of mortgage-backed securities that they have purchased in the open market, as well as mortgages that they purchase from originators under their "cash programs." Fannie Mae and Freddie Mac fund these assets largely by issuing debt, as the two companies are highly leveraged with total equity that is less than 4 percent of total assets.

There are no government payments made to these two GSEs; of course, the government did not receive any share of the profits. There was a realization that these entities constituted a set of contingent liabilities. One set of estimates was $288 billion, very close to the $300 billion figure I cited.

(I was going to write about competitive depreciation in a Taylor rule framework, but this item called for immediate discussion.)

g'night all!

:)

:)

9/12/08 from ilargi at the http://theautomaticearth.blogspot.com/

Ilargi: It is clear that after this weekend, as the state of Texas will be hit by a storm the size of ... the state of Texas, -possibly large- parts of it will never recover, nor ever again be the same.

There is a metaphor in there for the Wall Street banking system. After this weekend it will never be the same.

There are pretty desperate negotiations over Lehman going on into this morning, and it looks by no means sure that a deal will be done. For one thing, the Treasury and the Fed seem to want nothing to do with doling out more funds, on the heels of the $5.5 trillion taxpayer tab for Fannie and Freddie. There is an end even to that sort of largesse.

Then again, which private party will be willing to take the risk to buy into the -at least- $52 billion in debt Lehman is exposed to? The reason the talks are so frantic lies hidden in Lehman’s involvement in the global derivatives trade, an involvement that could cause a cascading storm surge throughout the global financial system to the tune of untold trillions of dollars, where one gamble covers the next bet covers the next gamble. Rinse and repeat.

Lehman’s market cap may be a mere $3 billion, its damage potential may be 1000 times bigger.

That leads us face first into the true state of affairs in the world of finance. The US banking system, as a whole, is insolvent. It doesn’t have the money to support its commitments. Plain and simple. And it’s not just the banks; the entire US financial system is insolvent.

On Monday, Lehman’s will be history, one way or another. And the next set of American orphans are lining up in front of our eyes: AIG, Merrill Lynch, Washington Mutual, Wachovia, Ambac and MBIA, none of them can survive unless there is divine intervention.

Really, the whole sytem is insolvent. Not every single part of it, but at least 85% of the parts. And if that many cogs in a machine fail, chances are that the whole apparatus will stop functioning.

But that’s still not the whole picture: the whole global financial system is insolvent too. Europe is sliding fast, Japan has the largest public debt on the planet, China’s production is sputtering for lack of clients, Russia puts large amounts of money into its economy.

The international banks, like their US counterparts, all have large amounts of paper in their vaults that has been creatively valuated using computer models programmed using generous prescriptions of Prozac and LSD.

Going back to the US for a moment: commercial-bank loans from Fed emergency windows rise to a record $19.8 billion, U.S. government debt balloons to $5.3 trillion, home foreclosures climb again in August, retail sales are slumping, the trade deficit is soaring. Is there anyone who believes that an orderly buy-out of Lehman will reverse all that mayhem?

No, we need to add another one to our list of insolvent systems: the US government.

Of course we can have lengthy debates over the very possibility of a federal government going bankrupt; while that can be interesting in theory, the reality remains that US deficits rise ever faster, that interest payments on the debt alone will rise over half a trillion dollars soon, and tax revenues at all levels of government are falling off a steep cliff.

On top of all the shortages and deficits, the situation is worsening fast. And even for a government, it has to stop somewhere. Print money? No, you can't do that, not in a global economy. The more you print the less it’s worth, like a hamster on a treadmill.

What would have to happen for all of this to heal and revert, is a return to prices of homes and other assets to their peak levels of a few years back. And that is simply not going to happen; it is not possible. Banks have no money to lend, or invest, and individuals have no collateral to use against mortgage or car loans. Game over.

That in turn means there is NO way to prevent the financial crisis we see approaching, no more than Galveston can wish or pray for the behemoth hurricane with the little name, Ike, to magically go away. We, like Galveston, will have to live through this. Or die trying.

All that’s left as collateral for the value of the US economy, and the US dollar, is the future capacity of the American worker to cough up taxes. And the US worker, bless her soul, makes her meagre livelihood flipping burgers for other US workers. Which is not even enough to make the payments for her trailer home.

No matter what happens with Lehman, or AIG or Merrill, or with any other bail-out attempt, this will not get better. It will get much worse. The system is broken, and we have spent our future.

read for related articles...
http://theautomaticearth.blogspot.com/2008/09/debt-rattle-september-12-2008we-have.html

Please read the comments too.
https://www.blogger.com/comment.g?blogID=4921988708619968880&postID=3910319182449342718

We hear all of the talking points. (Posted Anonymously, oddly enough.) Most of them are pretty soundly refuted
by other posts though.

And the first day, the number of comments jumped so high. Usually, there are only a couple dozen comments. Clearly, someone is worried.

edit: worried that the crisis is escalating, don't want to panic the masses by people like ilargi & stoneleigh writing about the financial bubble. I've been trying to figure out why, yesterday, this 'anonymous critic' showed up. What is the timing of this, now? Why not 2 weeks ago, or why not wait for 2 weeks?

Very choice!

Must've been quite the fire.

click thru the blog archives on the right side of the page. There are many Dorothea Lange photos, especially in May.


edit: Search for Dorothea Lange in the May archive
http://theautomaticearth.blogspot.com/2008_05_01_archive.html

Also, could you tell me? Is it possible that Bush, Cheney, Cain and unAble, and the whole Neocon cabal will be tarred and feathered and run out of town?

I have not heard of the Adam Smith Institute, but stoneleigh says (in one of her blog postings) she used to live near Stoneleigh in the UK. Interesting.

What Bush, Cheney, Cain and unAble have allowed to happen to our country, they should be tarred and feathered and run out of town!

as their guru, is as if Mother Theresa had claimed Ayne Rand, as hers.

For several months I've been reading their blog, http://theautomaticearth.blogspot.com/

I have never read anything like that from them by Adam Smith.

are spot on.

You do know that Adam Smith was, in fact, the virtual Father of the mixed-economy, Welfare State, don't you?

As Lehman Brothers teetered Friday evening, Federal Reserve officials summoned the heads of major Wall Street firms to a meeting in Lower Manhattan and insisted they rescue the stricken investment bank and develop plans to stabilize the financial markets.

Timothy F. Geithner, the president of the New York Federal Reserve, called a 6 p.m. meeting so that bank officials could review their financial exposures to Lehman Brothers and work out contingency plans over the possibility that the government would need to orchestrate an orderly liquidation of the firm on Monday, according to people briefed on the meeting.

Flanked by Treasury Secretary Henry M. Paulson Jr. and Christopher Cox, the chairman of the Securities and Exchange Commission, he gathered the executives in person to impress on them the need to work together to resolve the current crisis.

Mr. Geithner told the participants that an industry solution was needed, no matter what, and that it was not about any individual bank, according to two people briefed on the meeting but who did not attend. They said he told them that if the industry failed to solve the problem their individual banks might be next.

A spokesman for the New York Federal Reserve Bank in New York confirmed the meeting but declined to provide details on the discussions. The Wall Street executives included the following chief executives: Lloyd Blankfein of the Goldman Sachs Group, James Dimon of JPMorgan Chase, John Mack of Morgan Stanley, Vikram Pandit of Citigroup and John Thain of Merrill Lynch. Representatives from the Royal Bank of Scotland and the Bank of New York Mellon were also present. Lehman Brothers was noticeably absent from the talks.

http://www.nytimes.com/2008/09/13/business/13rescue.html?_r=1&partner=rssnyt&emc=rss&oref=slogin

9/13/08 If Lehman collapses expect a run on all of the other broker dealers and the collapse of the shadow banking system by Nouriel Roubini

It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.

lots more...
http://www.rgemonitor.com/roubini-monitor/253567/if_lehman_collapses_expect_a_run_on_all_of_the_other_broker_dealers_and_the_collapse_of_the_shadow_banking_system

The shadows are where the crooks hide....and since the economy is pretty much a skeleton, there isn't much more to lose for working folk.

http://news.yahoo.com/s/nm/20080913/bs_nm/fannie_freddie_severance_dc_2



Financial regulators have decided how multi-million dollar severance packages for the departing chief executives of mortgage giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) could be limited.

The Federal Housing Finance Agency (FHFA), which has taken over the two government-sponsored enterprises, said it could weigh a variety of factors, including whether the executives had committed fraud or insider abuse, according to a notice posted to the agency's website on Friday.

The notice, which applies to any severed Fannie Mae or Freddie Mac employee, does not say whether FHFA Director James Lockhart would actually take steps to limit the payouts.

Fannie Mae Chief Executive Daniel Mudd and Freddie Mac chief Richard Syron are entitled to combined pay and bonus packages worth about $24 million as part of the government's plan to restructure the troubled companies.

The so-called golden parachute payments have drawn criticism from Democrats, including presidential contender Barack Obama who earlier this week said such a windfall was unacceptable and the government's failure to block the packages violated the public's trust. Democratic Senators Charles Schumer of New York and Jack Reed of Rhode Island have also urged reconsideration.

Republican presidential nominee John McCain also opposes the severance packages, McCain's chief economic adviser Douglas Holtz-Eakin said. "They're inappropriate," he told Reuters.

In its notice, FHFA said its director could weigh whether the executives were "substantially responsible for the insolvency" of the companies or their "troubled condition." Lockhart could also look at whether the executives broke federal or state law as well as how long they were affiliated with the companies, among other criteria, the notice said. While federal regulators usually issue a proposal and take public comment before issuing a final decision, the FHFA said Friday's decision was immediately effective. It added members of the public could still submit comment.

(Additional reporting by Jeff Mason)


What's to decide--for such failure they should be rewarded?

http://www.marketwatch.com/news/story/energy-companies-regroup-ike-passes/story.aspx?guid={E279266F-3CCD-49F4-B1F0-57DB327986FB}&siteid=yahoomy


Last update: 3:28 p.m. EDT Sept. 13, 2008

Hurricane Ike made landfall 2:10 a.m. EDT Saturday in Galveston, Texas as a Category 2 hurricane, bringing it with it sustained winds of 110 miles an hour and a coastal surge, thrashing Houston and the area's extensive infrastructure. These include refineries, ports, pipeline pumping station and crude oil and natural gas production platforms.

POWER OUTAGES WIDESPREAD

Millions are without power Saturday, and power companies are reporting "significant" damage to electricity delivery systems.

EARLY REFINERY ASSESSMENTS POSITIVE

Refineries and chemical plants located along the Houston Ship Channel all the way to Baytown, Texas - home to the largest oil refinery in the nation - are reporting only minimum damage following Hurricane Ike, according to a Harris County official.

Emergency officials had feared that a 20-foot-plus storm surge could swamp the ship channel, but the surge peaked at about 11 feet, below the floods walls that protect most refineries.

PRICE IMPACT

The average U.S. retail gasoline price jumped by 5.8 cents overnight to $3.733 a gallon, according to the AAA's Fuel Gauge Report. Double-digit surges were seen in several Southeastern states.

Although many refineries have escaped major flooding, they remain shut and without power. Getting the plants up to normal rates could take several days if not weeks. This could exacerbate tightness in U.S. supplies of oil products such as gasoline and diesel.

HAH! OUR PRICES ARE UP 50 CENTS FROM FRIDAY

FEDERAL RESPONSE

President George W. Bush suspended restrictions on the import of certain types of gasoline in order to ease imports from abroad. Bush added that authorities will be on the lookout for price gouging. Meanwhile, the U.S. Energy Department has held preliminary talks with the International Energy Agency about a coordinate release from oil product inventories in order to soften Hurricane Ike's impact on the U.S.

http://www.reuters.com/article/newsOne/idUSN1220665620080912

NEW YORK (Reuters) - The crisis of confidence in Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) has led to fallout throughout the financial sector -- especially for larger rival Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz).

The problem for Merrill is that short-sellers regard it as the next weakest investment bank after the crumbling Lehman and the crumbled Bear Stearns, which was sold at a firesale price in March.
...The result in the market was clear. Merrill Lynch shares lost about a third of their value this week, while peers Citigroup Co (C.N: Quote, Profile, Research, Stock Buzz) and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) only lost 2 percent and 4 percent, respectively.

...Like Lehman and Bear, Merrill has holdings of structured debt that are triggering write-downs and calling into question its overall capital position. Merrill Lynch has been one of the hardest hit firms over the course of the year-old credit crisis, posting well over $40 billion in write-downs and credit losses and selling valuable assets to raise capital.

In the second quarter, Chief Executive John Thain sold the bank's prized 20 percent stake in news company Bloomberg LLP and arranged to sell a banking administrator company to balance out $9.4 billion in losses and write-downs.

Investors are bracing for more bad news in the third quarter, after Thain arranged to sell $30 billion in complex debt securities to a private equity firm in July, taking more than $5 billion in write-downs at the same time.

Merrill also provided financing to Dallas-based private equity firm Lone Star Funds and sold those securities at 22 cents on the dollar. While the Lone Star deal removed a large, toxic weight from Thain's shoulders, there are still problem assets on Merrill's books, according to analysts.

"There's concerns they still have commercial mortgage exposure and people feel that's worsening," said Albert Yu, portfolio manager and analyst at Clover Capital Management, which does not have a position in Merrill.

Looming large among investors' worries about Merrill are mortgage-backed securities and other structured debt held at two of its banking subsidiaries -- Merrill Lynch Bank USA and Merrill Lynch Bank & Trust Co.

In the second quarter, structured debt held by these subsidiaries was responsible for losses of $1.7 billion. That could worsen in the third quarter as sales of these securities has set a low market price.

One hedge fund manager who is short Merrill said he sees these banks, which hold loans and deposits made through Merrill's network of financial brokers, needing more capital, which will have to be provided by the parent.

"Merrill's in a box, but people don't realize it," he said.

According to the most recent data from the New York Stock Exchange, short interest in Merrill Lynch increased 5.31 percent, to 44.5 million on August 29, compared with 42.3 million on August 15. Over the same period, short interest on average across the NYSE slipped 0.5 percent.

Merrill has a free float of 1.49 billion shares.

THE SHORT MENTALITY

The difficulty for Merrill Lynch is that it has valuable assets that aren't reflected in its share price.

According to a research report from Citigroup on Friday, Merrill's stake in investment manager BlackRock is worth about $9 a share and its wealth management franchise -- the largest by number of brokers and by assets -- is worth $16 per share. Citi analysts attributed an additional $15 per share to the bank's institutional business.

"Merrill Lynch has some very valuable assets, but the same is true of most Wall Street companies," said John Stein, co-founder of FSI Group in Cincinnati, which doesn't own Merrill Lynch shares.

"Shorts have made a lot of money of late, and one thing about Wall Street is when something works, they tend to keep doing it," he added.

As Merrill shares decline, it makes raising any further equity more expensive, noted Stein.

"It may force a strategic decision on to Merrill," he said, noting Lehman was prompted to raise capital following Bear Stearns' takeover, but it came too late to the idea of a strategic partnership.

"I think what's going on with Lehman will likely force Merrill to look for partners sooner rather than later."

(Reporting by Elinor Comlay, additional reporting by Dan Wilchins; Editing by Gary Hill)

http://link.ft.com/r/QM42II/XZUMH/7ZY85/X09Z9/VHWFP/4O/t

Bank of America, JC Flowers & Co, the financial investor, and China Investment Co., the Chinese sovereign wealth fund, are considering a possible joint bid for Lehman Brothers, the embattled Wall Street bank.

According to people familiar with the matter, the BofA-led group is among those examining a rescue of Lehman, which is racing to find a buyer after shareholders, creditors and counterparties gave a thumbs-down to its efforts to survive as an independent entity.

Barclays, the UK bank, is also interested...

From Maked Capitalist:

http://www.nakedcapitalism.com/2008/09/financial-times-bofa-jc-flowers-cic.html

At least on paper, this makes far more sense than a solo BofA bid. The bank already has a garbage barge on its hands in the form of Countrywide, (yes, this is allegedly a zero cost deal due to the tax losses, but paying zero for something with negative net present value overall, admittedly held in a bankruptcy-remote sub, is still not a great deal. The management distraction s likely to offset whatever value they might extract from it). Sharing the risks, and getting a second set of eyes (Flowers is a savvy deal-doer) is of considerable benefit to BofA.

But the gorilla is still in the room: if this deals does have negative net worth, any buyer is going to want support from the government for preventing damage to the financial system. However, the article alludes to a new angle: making the creditors take a haircut instead. How such a resturcturing could be effected in absence of a bankruptcy filing is unclear (recall that the trigger for the Bear deal was the desire to avoid a bankruptcy filing, which was seen at the time as having nasty consequences). But the view, according to the FT, is that mechanisms are now in place to prevent a "disorderly liquidation". The article states a prepackaged bankruptcy is a possible, but hopefully unlikely, outcome.

http://www.nakedcapitalism.com/2008/09/emergency-fed-meeting-paulson-and-fed.html

Not surprisingly, it appears increasingly unlikely that private parties are wiling to take on a company that is pretty certain to have negative net worth, particularly when the point of a deal is to have someone, anyone take on the liabilities. But the Fed and Treasury are equally unwilling (at least as of now) to provide financial support to any rescuer of Lehman.

The Treasury and Fed are trying to surmount this impasse with brute force and according to the Wall Street Journal have convened a meeting to knock heads together and force a private-sector solution. Although the Wall Street Journal is comparing this effort to the rescue of Long Term Capital Management, that was a comparatively genteel affair. As told by Roger Lowenstein in his account, When Genius Failed, the mere act of convening the heads of 24 financial firms in the Fed's board room had considerable shock value. The Fed simply pointed out that letting LTCM fail was a Bad Idea and told the attendees the would be well served to prevent that from happening.

There is no element of surprise here, and the firms that are being prevailed upon to rescue Lehman are themselves battered. Given Lehman's long-standing denial about the precarious state of its finances, it isn't clear whether either Lehman or those who have looked at its books can make a solid estimate of how much would be required to recapitalize the firm (even if it is dismembered, somewhere there will need to be sufficient equity to absorb the expected losses)....

http://money.cnn.com/2008/09/12/news/companies/sloan_lehman.fortune/index.htm?postversion=2008091313

The Weekend Economist needs a really flashy LOGO!

With like... lightning bolts, flashing laser beams, chiseled rock and maybe some vicious rabbits! That'd be so cool!

and maybe some sort of theme music midi file that'd play when the thread is opened!

and... and... a mascot!

:woohoo:

And I find the actual news we collect sufficiently terrifying that adding lightning bolts, flashing laser beams, chiseled rock and maybe some vicious rabbits would be redundant.

As for theme music, I'm thinking the soundtrack to The Sting, especially Scott Joplin's "Entertainer", might be ironically appropriate.

showing his baddest I'll kick your ass look with laser beam eyes

Almost exactly what I had in mind! :D

http://www.nakedcapitalism.com/2008/09/aig-stock-falls-30-bonds-and-credit.html


Even though all eyes have been on Lehman, the potentially more troubling slow-motion train wreck is AIG. The insurer is a large credit default swaps protection writer and provides a host of financing products.

Not only is AIG a larger firm than Lehman and could trigger a systemic event in the CDS market alone, but it isn't clear how it could be bailed out if it continues to unravel.

Insurers are state regulated; the Fed and Treasury have no relevant expertise and no regulatory authority. While insurers are not vulnerable to runs, how can investors who have CDS positions that are hedged by CDS written by AIG manage their exposures? While they are hedged on paper, in practice they might not be, or more relevant, might be perceived by counterparties not to be....

Peoples Community Bank agrees to be sold
By John Nolan

Staff Writer

Saturday, September 13, 2008

Peoples Community Bank, which has struggled for months under the weight of millions of dollars in loan losses, said it is selling itself to another southwest Ohio bank.

Peoples identified the buyer as CenterBank, which began operating in 2000 and is headquartered in Milford, just east of Cincinnati in Clermont County. Peoples didn't announce the transaction until after 10 p.m. Friday, Sept. 12, hours after the market had closed.

A telephone message requesting comment was left Saturday at the office of Thomas J. Noe, chief financial officer of Peoples Community Bank.

Shares of Peoples' parent company, Peoples Community Bancorp Inc. (NasdaqGM: PCBI), closed Friday at $1.35, down 20 cents for the day and sharply declined from the past-year high of $18.38.

Peoples said the deal calls for CenterBank to buy all of Peoples' branch offices and all the deposits it holds, along with investment securities and specified commercial, residential and consumer loans.

Peoples said the sale price of its deposits and assets will be calculated when the deal is closed, and will be offset against the to-be-determined amount that Peoples will owe CenterBank for assuming financial liabilities under the agreement. Peoples said that if it lacks sufficient funds at the closing, it has plans to sell some loans or obtain an outside loan to make up any difference needed to close the deal.

The agreement also provides that CenterBank, another entity, Community Bank Strategic Equity Fund LLC, and other investors will organize a savings and loan holding company to assume what Peoples described as its liabilities from trust-preferred obligations.

The deal is subject to approval by federal and state banking regulators, and by Peoples' shareholders. Peoples said that when the deal is closed during the final three months of 2008, it will stop accepting deposits and will cease banking operations.

In late July, Peoples said it had negotiated an agreement for more time to repay a $17.5 million line of credit which had come due June 30. Peoples said then that it was in talks with other parties for a deal that would allow full repayment of that debt.

Peoples, based in West Chester, operates a total of 19 offices in Butler, Warren and Hamilton counties in Ohio and Dearborn and Ohio counties in southeastern Indiana.

The bank reported a loss of $13.6 million for the three months ended June 30. The company said then that its books showed a $32.9 million allowance for loan losses, and that its total assets had declined by 13 percent to $769.5 million. Peoples has said the loan losses were primarily due to real estate investors and developers experiencing financial problems.

Contact this reporter at (937) 225-2242 or jnolan@DaytonDailyNews.com.

http://www.daytondailynews.com/n/content/oh/story/news/local/2008/09/13/ddn091308peoplesweb.html

http://www.independent.co.uk/travel/news-and-advice/warning-30-airlines-will-go-bust-this-year-928774.html

By David Prosser, Deputy Business Editor, and Martin Hickman
Saturday, 13 September 2008


Up to 30 more airlines will go bankrupt before Christmas, the chief executive of British Airways warned yesterday, as the biggest rescue of stranded passengers in travel industry history began.


Willie Walsh said the scenes of chaos in which 85,000 passengers have been stranded at locations around the world after the collapse of XL, Britain's third largest holiday company, would become a familiar sight as the travel industry struggled with soaring fuel costs and the effects of a global economic downturn.

"We are in the worst trading environment the industry has ever seen", said Mr Walsh. "We have already seen 30 or so airlines go bust this year and it would be fair to expect a similar number of casualties worldwide over the next three to four months."

Mr Walsh also announced up to 1,400 redundancies at his own airline yesterday....

http://www.nytimes.com/2008/09/13/business/13fannie.html?ref=business


For much of the last year, Washington officials have been pressing the mortgage industry to modify home loans and avoid foreclosures. Now, the extraordinary government intervention in Fannie Mae, Freddie Mac and a growing number of banks puts federal agencies in the powerful, and awkward, position of deciding which borrowers will receive help and who will lose their home.

And while the Bush administration is leaving it to the next president to decide how the mortgage finance companies will operate further out, the actions taken by their conservators now will have an immediate influence on the cost to taxpayers — and to the economy — of stabilizing the nation’s fragile housing market.

Regulators are walking a fine line between protecting the government from losses and helping struggling homeowners and the broader economy, according to financial and political analysts. If officials modify too many home loans or the companies suffer high defaults on modified loans, taxpayers will be stuck with an inflated bill. But doing too little might prolong housing market problems.

“You are trying to strike the balance between the duty to protect the assets of the organization,” said Alex J. Pollock, a senior fellow at the American Enterprise Institute, “and the sensible policy of trying to control the downward momentum of the housing bust.”

Politics will also play a role as the November presidential election draws closer, not least because the rescue plan engineered by Treasury Secretary Henry M. Paulson Jr. defers important decisions about the companies’ missions for the next president and Congress. Both presidential campaigns have supported the takeover of the companies, but they differ significantly on what should be done with them in the future.

For now, the federal budget will not include Fannie’s and Freddie’s liabilities, the Office of Management and Budget said on Friday. Including the debts on the government’s books would have doubled the national debt.

On Thursday, four Democratic senators called on the Federal Housing Finance Agency, the regulator now in charge of Fannie Mae and Freddie Mac, to give some breathing room to defaulting borrowers by imposing a three-month moratorium on new foreclosures for loans owned by the companies. The Bush administration opposed calls for a similar moratorium by Senator Hillary Rodham Clinton earlier this year.

Mr. Paulson later persuaded some big lenders to give delinquent borrowers an extra month to negotiate modification or repayment plans before seeking foreclosure. As they prepare to go large-scale, regulators have been keeping an eye on how the Federal Deposit Insurance Corporation, which oversees failed banks, does things. The agency has taken several steps to make it easier for struggling borrowers to repay their mortgages and stay in their homes.

Last month, it began offering 25,000 customers of IndyMac Bank — which became one of the largest failed financial institutions in American history — lower-priced, fixed-rate loans if the borrower could afford to make payments. It offered to trim interest rates on loans to as little as 3 percent in some cases, and gave a number of borrowers up to 40 years for repayment.

Sheila C. Bair, the chairman, has been one of the most vocal proponents of wide-scale loan modifications since last year, when defaults on mortgages started rising sharply. A spokesman for Ms. Bair, Andrew Gray, said the efforts were still in the early stages, but the F.D.I.C. had been pleased with the results so far.

....
The government has, of course, overseen large programs for delinquent mortgages before. In the banking crisis that struck the economy in 1980, the F.D.I.C. and later the Resolution Trust Corporation took over many failed banks and savings and loans. But that is where the comparison ends: most of the problems then were concentrated among a relatively small number of commercial mortgages. It will be harder to deal with millions of home loans, said William M. Isaac, a former chairman of the F.D.I.C....To make matters worse, a large number of mortgages made during the recent housing boom are unsalvageable because borrowers cannot afford even the terms of modified loans. Many of these will default yet again after they are altered, said Bert Ely, a financial consultant who has been critical of the F.D.I.C. modification plan...

http://money.cnn.com/2008/09/12/news/economy/spiers_pig.fortune/index.htm?postversion=2008091406

Unable to find a savior, the troubled investment bank Lehman Brothers appeared headed toward liquidation on Sunday, in what would be one of the biggest failures in Wall Street history.

The fate of Lehman hung in the balance as Federal Reserve officials and the leaders of major financial institutions continued to gather in emergency meetings on Sunday trying to complete a plan to rescue the stricken bank.

But Barclays, considered the leading contender to buy all or part of Lehman, said Sunday that it could not reach a deal without financial support from the federal government or other banks, making a liquidation more likely.

The leading proposal had been to divide Lehman into two entities, a “good bank” and a “bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank’s troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.

But that plan fell apart on Sunday, making it likely that Lehman would be forced to liquidate.

http://www.nytimes.com/2008/09/15/business/15lehman.html?_r=1&partner=rssnyt&emc=rss&oref=slogin

From Roubini:


So... is that it? :scared:

Fantasy island - Blair's "devastating legacy"

In his powerful new book, Mail on Sunday economics editor Dan Atkinson offers a devastating new analysis of Blair's Britain - a hollow kingdom where we make nothing, but believe anything...
We all know what the Germans are good at. They do precision engineering: all those quietly humming washing machines and sleek cars.

We also know that Germany is a country in serious trouble, failing to embrace the need for flexibility in the tough new global environment.

We know this because Gordon Brown has told us many times over the past ten years that the European model is washed up.

Germany was so abysmally competitive last year that it ran a record trade surplus and was the biggest exporter of any country in the world."

... But it just gets better and better:

http://www.dailymail.co.uk/news/article-457858/Fantasy-Island--Blairs-devastating-legacy.html

I'm just a little surprised he didn't go right back to its original source, Blair's avowed inspiration: La Thatcher.

P.S. Having read the full article, I noticed he contradicts himself on the subject of workers' rights, etc, satirising our repudiation of them in relation to the so-called "rsut-bucket2 ecoomies of Germany and France, for example; then later moaning that workers here are given too many rights. Well, blue collar or white collar, British workers have to spend longer hours at work, for no extra pay. Managers, I believe, often have to take "voluntary" work home with them on evenings and weekends.

and they've earned the pleasure!

http://financialweek.com/apps/pbcs.dll/article?AID=/20080914/REG/809129952

I just got an e-mail from a friend in Houston. His power came back on about 2 hours ago.

Maybe tomorrow.

Reuters) - Bank of America Corp and Merrill Lynch & Co are in merger talks, the Wall Street Journal reported Sunday, citing people familiar with the matter.

The Merrill talks come amid a scramble to sort out the potential liquidation of Lehman Brothers Holdings Inc, according to the report.

Bank of America turned its attention to Merrill after considering the acquisition of Lehman, but talks failed to result in a deal, the report said.

http://www.reuters.com/article/newsOne/idUSPAR47323220080914

Has anyone ever seen anything like what we've seen in the past 48 hours??

article in today's Mail on Sunday, which I couldn't find on their website. After musing on possible government bail-outs for failed Internet chain-letter schemes of vast scope, and explaining the meaning and origin of your term, "Ponzi" racket, Atkinson writes:

.....
"After recent events, there would be plenty of precedents. Both Britain and America have been labelled "Ponzi economies" after the investment fraud pioneered by American conman Charles Ponzi. Under this, abnormally high returns are paid out to investors, but only from the subscriptions paid by new investors. In Britain, this fraud is called "teeming and lading".

Thus both economies have depended to a large extent on consumer borrowing, such borrowing being underpinned by high house-prices, which allow householders to borrow against the equity in their homes. In other words, economic "stability" relies on a number of highly unstable factors propping each other up. When it all goes wrong, the US government's response is to nationalise two key institutions, Fannie Mae and Freddie Mac, in the apparent hope that everyone will carry on as before. True that will leave £3 trillion of liabilities on the government's books, but who's counting?

Now the heat is on our government to do something similar, perhaps "guaranteeing" flaky mortgages, worth billions.

After the Northern Rock nationalisation, a new public sector is taking shape, one made up of worthless securities and at least one failed mortgage lender. By comparison, the uneconomic coal mines of the Eighties look like the Crown jewels. Is it too late to turn back?"

Methinks the world as we know it is coming to an end--not with a bang, but with a whimper.

Derivatives market trades on Sunday to cut Lehman risk
Source: Reuters

NEW YORK (Reuters) - A rare emergency trading session opened Sunday afternoon to allow Wall Street dealers in the $455 trillion derivatives market reduce their exposure to a potential bankruptcy filing by Lehman Brothers.

U.S. regulators and bankers were making last-ditch efforts on Sunday to prevent toxic assets from ailing Lehman Brothers (LEH.N) spilling into global markets and rupturing investor faith in the international financial system.

"This is an extremely, and I stress extremely, rare event. It also speaks to the more general notion that, in today's highly disrupted financial markets, the unthinkable is thinkable," said Mohamed El-Erian, the chief executive of Pimco, the world's biggest bond fund, based in Newport Beach, California.

The session opened at 2 p.m. and was due to run until 4 p.m. New York time (1800 to 2000 GMT), according to the International Swaps and Derivatives Association. See text . ISDA later extended it for another two hours.



Read more: http://news.yahoo.com/s/nm/20080914/bs_nm/lehman_specia...


--------------------------------------------------------------------------------

Rich people getting an exclusive chance to dump bad debts.

http://www.ft.com/cms/s/0/fc552bf8-8282-11dd-a019-000077b07658.html

http://www.dailyreckoning.com/Issues/2008/DR091008.html


But if smart investors are selling stocks, what do they do with the money? Our advice has been to buy gold. From the looks of it, the smart money is not following that part of our advice. Yesterday, the price of gold fell $26 to $781.

The smart money is looking for safety. But it seems to think that it is better off in US Treasuries than in gold. Yesterday, while gold and stocks both dropped, Treasury bonds went up. The yield on the 10-year T-note fell below 3.6% (yields go down as prices go up). This makes us think the smart money is not as smart as it thinks. Our guess is that the credit of the world’s biggest debtor will prove less sure than they believe. The debts and financial obligations of the U.S. government continue to rise many times faster than the growth of the economy. Under the Bush administration, they’ve gone up faster than ever before in the history of the nation. We doubt that they will go up any more slowly if Obama is elected. Eventually, the United States will be recognized for what it is – a subprime borrower. And eventually, U.S. Treasury bonds will be looked upon as though they were Fannie Mae shares.

*** The U.S. government has just seized the mortgage lenders – Fannie and Freddie. How much that will add to the nation’s debts, we don’t know. No one knows. When the question was put to the man who should know – Hank Paulson – he replied: “We didn’t sit there and figure this out with a calculator.”

Apparently, taking control of Mac and Mae was matter of national financial security, something you couldn’t put a price tag on. But the cost will be enormous. Sooner or later, someone is bound to get out a calculator.

As USA Today figured it, taxpayers are on the hook for trillions. You’d think you’d hear them squawking, with that kind of burden hoisted on their backs. But nobody really thinks he is going to pay for the housing bailout. Instead, the costs are expected to disappear – like the smell of cigarette smoke in a teenager’s room. Too bad, but the smell of debt lingers long after the money has been spent. Eventually, his mother opens the door.

“How will this end?” says Chris Mayer. “I suspect we are on a path similar to that of Argentina. One day, we’ll have some major Argentine-style financial crisis. We’ll have Argentine inflation and a similar loss of faith in the banking system and the currency. The government will chew away and destroy a lot of wealth in the process.

“Hopefully, I won’t quote myself on that someday soon. In the meantime, though, I think one of the best things an investor can do is focus on buying useful and tangible assets that ought to hold their value against a depreciating paper currency. These assets include oil and gas, metals and minerals and land and water rights. The shares of the companies that own or find these assets ought to do well. Commodities will have their day in the sun once again.”

http://www.dailyreckoning.com/Issues/2008/DR091008.html

Why do the big deals always happen over the weekends? So the big boyz in government and finance can take off their neckties when they bargain with each other? So the markets will be closed and unable to register a response one way or another? So the shrinking fraction of the U.S. public that pays attention to anything besides NASCAR and pornography won’t catch the news Saturday evening?

This weekend’s big deal was the U.S. government taking over the “government sponsored enterprises” (GSEs) Fannie Mae and Freddie Mac that guarantee trillions of dollars in mortgages. The “guarantee” is supposedly accomplished by converting bundles of mortgages from the banks and loan companies that originate them (that make the contracts with the buyers of houses) into bonds that can be sold downstream. Risk was theoretically dispersed among the holders of these bonds. This all seemed to work during the long stable period when our cheap oil economy was chugging along, and house prices maintained a consistent relationship with incomes, and people paid their mortgages dependably. The whole system ran like a reliable machine – like a Chrysler slant-six engine!

Until the cheap oil age came to an end. Then, all parts of the system shook apart. It was the end of cheap oil that catalyzed the housing collapse and, by extension, the current huge financial crisis. But the run up to it was like a bounce off a high diving board into an empty pool. The bounce came around 2001 when it became apparent that the U.S. standard-of-living could not be maintained on incomes in a post-cheap-oil economy. The trauma of 9/11 prompted a new and utterly insane consensus to form that the US standard of living could be switched over from income to massive debt. All the normal brakes against irresponsible lending and borrowing came off – embodied in Alan Greenspan’s absurd statement that it was a good time to assume an adjustable rate mortgage when interest rates were at a historic low – meaning they could only be adjusted upwards. Why hold Greenspan responsible? Because he was at the apex of the authority vested with establishing norms, and he shoved our behavior into the realm of the recklessly abnormal, and he should have known better.

The public went along with it because “free money” and high living are fun. Their behavior was reinforced by other authorities – for instance, President Bush, who told Americans to go shopping after the 9/11 attacks. (They went shopping with credit cards.) Things really wobbled in 2005 – which was, coincidentally, the year of all-time world-wide peak conventional oil production – with hurricanes Katrina and Rita ripping through the Gulf of Mexico oil rigs as a dramatic highlight. (It was also the year that The Long Emergency was published.)

Since then, the U.S. economy and the financial part of it that became a nine hundred pound tail wagging a thirty-pound dog, has been held together with baling wire, duct tape, and band-aids. All the debt run up by all parties – home-owners, credit-card holders, business, banks, hedge funds, government – is not being paid back reliably, and all the leveraged arrangements that depend on it being paid back are coming apart. Thus, capital disappears. The wealth of a nation disappears. All that remains is the pretense that we are still a wealthy society

Fannie and Freddie are near the center of this black hole of debt. So far, the black hole has been “papered over” by the old stage magician’s trick of diverting the audience’s attention. The systemic wound that Bear Stearns represented, was covered up with a band-aid applied by the Federal Reserve’s exchange of loans for worthless securities. In fact, the capital of Bear Stearns actually did disappear – a mere residue of it, a few cents on the dollar, was shifted to JP Morgan as payment for taking the wrapper off the band-aid. But, basically, the money is gone.

Now, the same thing has happened with Fannie and Freddie, except that the scale is an order of magnitude greater. This time, the U.S. Treasury Department is assuming worthless paper and paying out much larger loans to enterprises that are functionally bankrupt. The exact nature of the government’s chartered “sponsorship” has always been ambiguous. Professional opinion has generally held that government backing was implied rather than explicit – but that’s a ridiculous internal contradiction that went unchallenged for decades as Fannie and Freddie’s Ponzi-style operation lumbered on (and their executives made off with obscene payouts). Now the government’s role has suddenly been made explicit. It will probably only make things worse, since the enterprises are too big and over-scaled to work under any circumstances, let alone insolvency.

One thing this points to is a truth that is uniformly overlooked by kibitzers: that what we developed over the past decade in America was not an “information economy” or a “consumer economy” but a suburban sprawl building economy, meaning an economy dedicated to building a living arrangement with no future. The climax of the sprawl building economy occurred in absolute lockstep with the climax of peak oil. You can date it virtually to the month – May, 2005. After that, the future asserted itself and all the financial expectations bound up with sprawl-building went up in a vapor – including the value of mortgages on suburban houses. Everything that followed has been an attempt to cover up this basic reality: that the way we live in America can’t continue.

The reason our energy debate is so hollow and idiotic is because we can’t face this basic reality. The fantasy-du-jour among both political parties is that we can become “energy independent.” By this they mean we can keep on living the way we do by means other than oil. This is just not true. We have to make profound changes in everything we do from the way we inhabit the landscape to the way we produce our food. Lately, the only change we’ve shown any interest in is changing what our cars run on. But that is not going to rescue us, not even a little. Our inability to talk about anything else except the cars will drag us down into poverty and turmoil.

The housing market is not coming back. Ever. In the form that we knew it. The suburban project is over. That version of the American Dream is over. We’ll be a lot better off if we put aside dreaming altogether for a while and start focusing on reality instead – that part of the day when we’re awake and capable of actually doing things. We’ve got a lot to face and a lot to do.

The government takeover of Fannie and Freddie is just another papering-over of our fundamental problem – that until we embark on new ways of being a nation, of living differently and working differently on different things, the other nations of the world will not have confidence in us, or the paper we issue, and we will not really have confidence in ourselves.

I have believed all along – and said as much in The Long Emergency – that we would not get through this crisis without passing through a period of hardship. We’re entering it now. Even if the stock markets shoot up five hundred points today on the basis of the Fannie-Freddie deal (and the mistaken belief that our troubles are over), we are only at the beginning of a very painful workout. Personally, I think we’re in for financial carnage before the election. The Fannie-Freddie deal may be the place where the wheels really come off.

Regards,

James Howard Kunstler
for The Daily Reckoning

James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine . In 1975, he dropped out to write books on a full-time basis.

His latest nonfiction book, The Long Emergency describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.

http://online.wsj.com/article/SB122142278543033525.html?mod=special_coverage

Just setting it up for a bigger, better collapse later, IMO.

http://online.wsj.com/article/SB122143874240834469.html?mod=hpp_us_whats_news


I'm still betting this ends up in court...

It was with an entity that no longer exists....

And I mean that in all sincerity.

I have some exposure, through a small 401K, but many people don't have any direct exposure or believe their indirect exposure is limited. What's the real impact? What can we do about it, if anything? And "investing" in precious metals really isn't an option for most people.

What about the cost of living? What will happen to the everyday necessities, like household utilities? What's this going to do to the average electric bill, gas bill, heating oil bill, water bill? What can we do about it?

Since we likely aren't going to be able to look to the government(s) to help, what can we as individuals do to weather this perfect storm? Are we seriously talking about growing our own food as a virtual necessity?

What will this do to the current "luxury" status of things like health care and education?

What about jobs? Will a global economic collapse prove, in the long run, a stimulus for smaller-scale, non-corporate manufacturing ventures as we attempt to maintain "essential" consumer conveniences such as appliances, cars, equipment, etc.?

What about infrastructure?

It seems as if all the focus is STILL on the collapse of the banks, but little attention is paid to how it really will impact the lives of the hundreds of millions who don't work on Wall Street, don't live in Greenwich, CT. Right now it's an abstraction, and if the campaign (I don't think I need to tell you which one) wants to use this, they'll need to make it concrete and relevant.



Tansy Gold, who still wants to know what's going to happen to that $517T in derivatives. . . . .