Your Share of Stimulus Tax Breaks
by Jeanne Sahadi
http://finance.yahoo.com/taxes/article/106626/Your-Share-of-Stimulus-Tax-Breaks

A study of the recovery plan shows most households will qualify for a tax break. Boost for some could be worth several hundred to several thousand dollars.

Roughly 97% of American households could see tax savings as a result of the American Recovery and Reinvestment Act, according to a new analysis by a nonpartisan research group.
The Tax Policy Center crunched the numbers and concluded that the average savings would be $1,179. But how much a household actually gets depends on income, marital status and whether a filer has children. The savings range from a few hundred dollars to several thousand.

The law, which President Obama signed on Tuesday, contains a range of tax breaks for individuals. Those likely to affect the greatest number of households are the new Making Work Pay credit worth up to $400 ($800 for joint filers); a patch to protect middle- and upper-middle-income families from having to pay the Alternative Minimum Tax; and expansions of the earned income tax credit and the child tax credit for low-income families.

There are also breaks that address specific situations: a new credit for first-time home buyers, a sales tax deduction for car buyers and a new credit to help pay for college tuition. For people receiving unemployment benefits, the first $2,400 will be tax free.

On Saturday, Obama said the government had already taken action on the broadest of the law's cuts -- the Making Work Pay.

The Treasury Department has told employers to reduce the amount of taxes withheld from paychecks by April 1. Treasury estimates that a typical family will begin taking home about $65 more per month, according to Obama.

"Never before in our history has a tax cut taken effect faster or gone to so many hardworking Americans," Obama said in his weekly video and radio address.

In addition, the economic recovery plan contains a host of tax breaks for small businesses.

The Tax Policy Center used a representative sampling of all tax filers and non-filers, including information on their income, their spending and their demographics. And then they applied the various tax provisions for which those in the sample pool qualify.

Some Tax-Saving Scenarios

A single person with no children making between $20,000 and $30,000 would see a 12.5% reduction in his or her tax liability for an annual savings of $453. The same person making between $50,000 and $75,000 would see a 4.6% drop, or $626.

Tax Savings
How households may fare under the economic recovery plan.
Income Avg. Tax Savings Drop in Tax Bite
Under $19K $476 -95%
$19K-$38K $652 -22%
$38K-$66K $781 -9%
$66K-$112K $1,301 -7.5%
$112K-$161K $2,549 -8.3%
$161K-$227K $3,883 -8.3%
$227K-$603K $5,133 -5.7%
$2.8M plus $39,350 -1.4%
Source: The Tax Policy Center

At the upper income ranges, someone with income between $100,000 and $200,000 would see a 2.1% drop, which translates into $706.

With or without kids, a married couple filing jointly making between $50,000 and $75,000 could see a 10.5% drop for a savings of $991. Those making between $75,000 and $100,000 would see their tax liability go down 9.1%, or $1,457.

Couples with very high incomes -- between $200,000 to $500,000 -- could see a 7.5% decline in their tax bill, or $5,645.

Households with children, regardless of the parent's marital status, would see savings on their tax bill averaging 9.7% of their tax liability, or $1,975.

When You'll See Savings
The first tax credit filers will enjoy is the Making Work Pay credit, which will show up in increments in people's paychecks starting in April.
In some instances, such as with the first time home buyer's tax credit, the money can be claimed on one's 2008 tax return if the home purchase occurs between Jan. 1 and before Nov. 30 of this year.
But in many cases, a household won't see some of their stimulus savings until they file their 2009 returns, which they can't do until 2010.

Of course what filers' save on their federal taxes under stimulus may be muted by the fact that their cities and states -- facing steep budget shortfalls that will be lessened but not eliminated by stimulus funding -- may end up raising taxes and fees.

Didn't catch all of it but a nice recap on the financial crisis:

http://www.pbs.org/wgbh/pages/frontline/meltdown/

HIG Cuts Dividend 84%

[The stock has been a rollercoaster ride: it fell more than 90% from Apr 2008 to Nov 2008, then tripled from the Nov 2008 low to yesterday, and then fell sharply in yesterday’s AH session after earnings were released. A bullish article on HIG appeared in last week’s Barron’s (#msg-35245764).]

http://online.wsj.com/article/SB123387444686354267.html

›FEBRUARY 6, 2009
By KATHY SHWIFF

Hartford Financial Services Group Inc. said it intends to cut its quarterly dividend 84% to 5 cents as it swung to a fourth-quarter loss on investment losses.

Shares fell 13% to $13.14 in after-hours trading as the results fell far short of Wall Street's expectations.

"This was clearly the most challenging year in our company's nearly 200-year history," said Chief Executive Ramani Ayer.

He said the company plans to make capital preservation and risk mitigation priorities this year by de-risking the variable annuity product portfolio and cutting the dividend, which is expected to save about $350 million a year.

At the end of 2008, Hartford's life-insurance unit had a preliminary risk-based capital ratio of 385% and the property-and-casualty units were capitalized at levels consistent with AA ratings, the company said.

Hartford, along with other insurance companies, has faced continuing concerns about how its risk-adjusted capital cushion is holding up amid a falling equity market. Last month, it was granted a thrift charter, which would make it eligible for federal funds under the Troubled Asset Relief Program.

The insurance and financial-services company reported a net loss of $806 million, or $2.71 a share, compared with year-earlier net income of $595 million, or $1.88 a share.

The latest results included a $597 million write-down of goodwill in the corporate and annuity segments.

Hartford had a core loss, which excludes net realized capital gains and losses, of 72 cents a share compared with core earnings of $2.66 a year earlier. Analysts estimated per-share core earnings of $1.30, according to a poll by Thomson Reuters.

The net realized capital loss was $610 million, more than double the net realized capital loss a year earlier.

Assets under management fell 19% to $346.9 billion.

Profit fell 8% in the property-and-casualty segment on a decline in investment performance. Total written premiums for the property-and-casualty insurance business totaled $2.5 billion, down 2%, while the combined ratio, the percentage of each dollar the company collects in premiums against what it pays out on losses and expenses, excluding catastrophes, slid to 78% from 88.4%.

In October, Hartford closed on a $2.5 billion investment by German insurer Allianz SE, which gives Allianz a 23.7% stake in Hartford.

Looking ahead, Hartford expects 2009 core earnings of $5.80 to $6.20 a share. Analysts are looking for $6.08 a share.‹

It is called Unmittigated Greed Personified

Op-Ed:The End of the Financial World as We Know It
(& "How to Repair a Broken Financial World.")
By MICHAEL LEWIS and DAVID EINHORN//grandpatb
NYT January 4, 2009

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.

This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?

To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.

In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.

In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.

Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him.
Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses.
What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.

Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired.
Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

The credit-rating agencies, for instance.

Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages.
But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.

Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say,
“If you put one more risky asset on your balance sheet, you will face a serious downgrade.”

The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe.
But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.

These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.

This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.

By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s.
But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.

Yet the rating agencies didn’t so much as blink.
On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)

At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)

The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.

But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C.
Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

IT’S not hard to see why the S.E.C. behaves as it does.
If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.

At the back of the version of Harry Markopolos’s brave paper currently making the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr. Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the commission’s office of risk assessment, a job that had been vacant for more than a year after its previous occupant had left to — you guessed it — take a higher-paying job on Wall Street.

At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear — one that might be receptive to the truth.
He phoned Mr. Sokobin and then sent him his paper.
“Attached is a submission I’ve made to the S.E.C. three times in Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung, branch chief, in New York actually investigated this but with no result that I am aware of.
In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.”

How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them?
Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.

And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.

SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses.
In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money.

Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty.
Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm.

But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans. Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it — again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy.

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.

It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public.
But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.

Mr. Paulson must have had some reason for doing what he did.
No doubt he still believes that without all this frantic activity we’d be far worse off than we are now.
All we know for sure, however, is that the Treasury’s heroic deal-making has had little effect on what it claims is the problem at hand: the collapse of confidence in the companies atop our financial system.

Weeks after receiving its first $25 billion taxpayer investment, Citigroup returned to the Treasury to confess that — lo! — the markets still didn’t trust Citigroup to survive.
In response, on Nov. 24, the Treasury handed Citigroup another $20 billion from the Troubled Assets Relief Program, and then simply guaranteed $306 billion of Citigroup’s assets.
The Treasury didn’t ask for its fair share of the action, or management changes, or for that matter anything much at all beyond a teaspoon of warrants and a sliver of preferred stock. The $306 billion guarantee was an undisguised gift.
The Treasury didn’t even bother to explain what the crisis was, just that the action was taken in response to Citigroup’s “declining stock price.”

Three hundred billion dollars is still a lot of money.
It’s almost 2 percent of gross domestic product, and about what we spend annually on the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development and Transportation combined. Had Mr. Paulson executed his initial plan, and bought Citigroup’s pile of troubled assets at market prices, there would have been a limit to our exposure, as the money would have counted against the $700 billion Mr. Paulson had been given to dispense. Instead, he in effect granted himself the power to dispense unlimited sums of money without Congressional oversight. Now we don’t even know the nature of the assets that the Treasury is standing behind. Under TARP, these would have been disclosed.

THERE are other things the Treasury might do when a major financial firm assumed to be “too big to fail” comes knocking, asking for free money. Here’s one: Let it fail.

Not as chaotically as Lehman Brothers was allowed to fail.
If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system.
Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble.
The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside.

This is more plausible than it may sound. Sweden, of all places, did it successfully in 1992. And remember, the Federal Reserve and the Treasury have already accepted, on behalf of the taxpayer, just about all of the downside risk of owning the bigger financial firms. The Treasury and the Federal Reserve would both no doubt argue that if you don’t prop up these banks you risk an enormous credit contraction — if they aren’t in business who will be left to lend money?
But something like the reverse seems more true: propping up failed banks and extending them huge amounts of credit has made business more difficult for the people and companies that had nothing to do with creating the mess.
Perfectly solvent companies are being squeezed out of business by their creditors precisely because they are not in the Treasury’s fold. With so much lending effectively federally guaranteed, lenders are fleeing anything that is not.

Rather than tackle the source of the problem, the people running the bailout desperately want to reinflate the credit bubble, prop up the stock market and head off a recession. Their efforts are clearly failing: 2008 was a historically bad year for the stock market, and we’ll be in recession for some time to come. Our leaders have framed the problem as a “crisis of confidence” but what they actually seem to mean is “please pay no attention to the problems we are failing to address.”

In its latest push to compel confidence, for instance, the authorities are placing enormous pressure on the Financial Accounting Standards Board to suspend “mark-to-market” accounting. Basically, this means that the banks will not have to account for the actual value of the assets on their books but can claim instead that they are worth whatever they paid for them.

This will have the double effect of reducing transparency and increasing self-delusion (gorge yourself for months, but refuse to step on a scale, and maybe no one will realize you gained weight). And it will fool no one. When you shout at people “be confident,” you shouldn’t expect them to be anything but terrified.

If we are going to spend trillions of dollars of taxpayer money, it makes more sense to focus less on the failed institutions at the top of the financial system and more on the individuals at the bottom. Instead of buying dodgy assets and guaranteeing deals that should never have been made in the first place, we should use our money to A) repair the social safety net, now badly rent in ways that cause perfectly rational people to be terrified; and B) transform the bailout of the banks into a rescue of homeowners.

We should begin by breaking the cycle of deteriorating housing values and resulting foreclosures.
Many homeowners realize that it doesn’t make sense to make payments on a mortgage that exceeds the value of their house. As many as 20 million families face the decision of whether to make the payments or turn in the keys. Congress seems to have understood this problem, which is why last year it created a program under the Federal Housing Authority to issue homeowners new government loans based on the current appraised value of their homes.

And yet the program, called Hope Now, seems to have become one more excellent example of the unhappy political influence of Wall Street. As it now stands, banks must initiate any new loan; and they are loath to do so because it requires them to recognize an immediate loss. They prefer to “work with borrowers” through loan modifications and payment plans that present fewer accounting and earnings problems but fail to resolve and, thereby, prolong the underlying issues.
It appears that the banking lobby also somehow inserted into the law the dubious requirement that troubled homeowners repay all home equity loans before qualifying. The result: very few loans will be issued through this program.

THIS could be fixed.
Congress might grant qualifying homeowners the ability to get new government loans based on the current appraised values without requiring their bank’s consent. When a corporation gets into trouble, its lenders often accept a partial payment in return for some share in any future recovery. Similarly, homeowners should be permitted to satisfy current first mortgages with a combination of the proceeds of the new government loan and a share in any future recovery from the future sale or refinancing of their homes. Lenders who issued second mortgages should be forced to release their claims on property. The important point is that homeowners, not lenders, be granted the right to obtain new government loans.
To work, the program needs to be universal and should not require homeowners to file for bankruptcy.

There are also a handful of other perfectly obvious changes in the financial system to be made, to prevent some version of what has happened from happening all over again. A short list:

Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices. Stock prices go up and down: let them. An absurd number of the official crises have been negotiated and resolved over weekends so that they may be presented as a fait accompli “before the Asian markets open.” The hasty crisis-to-crisis policy decision-making lacks coherence for the obvious reason that it is more or less driven by a desire to please the stock market. The Treasury, the Federal Reserve and the S.E.C. all seem to view propping up stock prices as a critical part of their mission — indeed, the Federal Reserve sometimes seems more concerned than the average Wall Street trader with the market’s day-to-day movements. If the policies are sound, the stock market will eventually learn to take care of itself.

End the official status of the rating agencies. Given their performance it’s hard to believe credit rating agencies are still around. There’s no question that the world is worse off for the existence of companies like Moody’s and Standard & Poor’s. There should be a rule against issuers paying for ratings. Either investors should pay for them privately or, if public ratings are deemed essential, they should be publicly provided.

Regulate credit-default swaps. There are now tens of trillions of dollars in these contracts between big financial firms. An awful lot of the bad stuff that has happened to our financial system has happened because it was never explained in plain, simple language. Financial innovators were able to create new products and markets without anyone thinking too much about their broader financial consequences — and without regulators knowing very much about them at all. It doesn’t matter how transparent financial markets are if no one can understand what’s inside them. Until very recently, companies haven’t had to provide even cursory disclosure of credit-default swaps in their financial statements.

Credit-default swaps may not be Exhibit No. 1 in the case against financial complexity, but they are useful evidence. Whatever credit defaults are in theory, in practice they have become mainly side bets on whether some company, or some subprime mortgage-backed bond, some municipality, or even the United States government will go bust. In the extreme case, subprime mortgage bonds were created so that smart investors, using credit-default swaps, could bet against them. Call it insurance if you like, but it’s not the insurance most people know. It’s more like buying fire insurance on your neighbor’s house, possibly for many times the value of that house — from a company that probably doesn’t have any real ability to pay you if someone sets fire to the whole neighborhood. The most critical role for regulation is to make sure that the sellers of risk have the capital to support their bets.

Impose new capital requirements on banks. The new international standard now being adopted by American banks is known in the trade as Basel II. Basel II is premised on the belief that banks do a better job than regulators of measuring their own risks — because the banks have the greater interest in not failing. Back in 2004, the S.E.C. put in place its own version of this standard for investment banks. We know how that turned out. A better idea would be to require banks to hold less capital in bad times and more capital in good times. Now that we have seen how too-big-to-fail financial institutions behave, it is clear that relieving them of stringent requirements is not the way to go.

Another good solution to the too-big-to-fail problem is to break up any institution that becomes too big to fail.

Close the revolving door between the S.E.C. and Wall Street.
At every turn we keep coming back to an enormous barrier to reform: Wall Street’s political influence. Its influence over the S.E.C. is further compromised by its ability to enrich the people who work for it. Realistically, there is only so much that can be done to fix the problem, but one measure is obvious: forbid regulators, for some meaningful amount of time after they have left the S.E.C., from accepting high-paying jobs with Wall Street firms.

But keep the door open the other way. If the S.E.C. is to restore its credibility as an investor protection agency, it should have some experienced, respected investors (which is not the same thing as investment bankers) as commissioners. President-elect Barack Obama should nominate at least one with a notable career investing capital, and another with experience uncovering corporate misconduct. As it happens, the most critical job, chief of enforcement, now has a perfect candidate, a civic-minded former investor with firsthand experience of the S.E.C.’s ineptitude: Harry Markopolos.

The funny thing is, there’s nothing all that radical about most of these changes. A disinterested person would probably wonder why many of them had not been made long ago. A committee of people whose financial interests are somehow bound up with Wall Street is a different matter.

Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s Poker,” is writing a book about the collapse of Wall Street. David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article.

Copyright 2009 The New York Times Company

4 compelling dividend plays

High-quality dividend-paying stocks are carrying yields above those on government bonds while offering investors a chance for growth once the economy improves.

Investors are always hunting for the next big stock -- the dream stock whose price increases several times over after the market finally discovers it.

In hindsight, it's easy to identify the 10 best stocks of the decade. But I'm more interested in the tools that can not only help me find new stock ideas today but also evaluate tomorrow's greatest companies.

MSN CAPS, a 120,000-member community of investors helping each other beat the market, offers a variety of resources to seek out tomorrow's market leaders. We've enlisted CAPS' nifty stock screener tool to help us find stocks with:

A market value of at least $1 billion.

A long-term debt-to-equity ratio of less than 0.5.

A dividend yield of at least 4%.

A price-to-earnings ratio of less than 25.
Once we've found our candidates, we'll tap the collective intelligence of the CAPS community to evaluate whether these companies present real opportunities -- or if the numbers fail to tell the true story.

The ratings and comments from CAPS members aren't always on the money, but there's value in a system that incorporates the knowledge, information and skills of thousands of participants. As wisdom-of-the-crowd experiments show, collective estimates are often superior to the estimates of most individuals.

Even though President-elect Barack Obama has discussed raising the tax on dividend income for top earners, either to 20% or 25%, dividend-paying stocks have allure in this market. With 10-year Treasurys yielding about 2.2%, companies with the cash flow to continue paying dividends ought to remain in demand.

Let's take a closer look at some of the stocks our screen pulled up one mid-December day.

Dividend-paying dandies Company Sector Dividend yield Market cap Forward price-to-earnings ratio
Manulife Financial
Life insurance
5.3%
$23.8 billion
11.7

Total
Oil and natural gas
5.4%
$118.4 billion
6.6

StatoilHydro
Oil and natural gas
5.4%
$48.5 billion
5.1

Emerson Electric
Industrial equipment
3.9%
$25.8 billion
11.9

Each had five-star ratings -- the highest possible -- at CAPS, signifying that each is considered best-of-breed by the community.

Shares of life insurers have been hammered since American International Group (AIG, news, msgs) imploded shortly after Labor Day. Canadian life insurer Manulife Financial (MFC, news, msgs) is down 55% over that period.

Fear by association isn't sellers' only motivation -- many investors and analysts remain leery of perceived risks associated with long-term-care products.

AP//Wall St. faces record losses in last week of 2008
Sunday December 28, 4:43 pm ET
By Joe Bel Bruno, AP Business Writer
Investors head into final week of the year eyeing economic data, hoping for January rebound.

http://biz.yahoo.com/ap/081228/wall_street_week_ahead.html

NEW YORK (AP) *** Investors are preparing to close out the last three trading days of 2008 with Wall Street's worst performance since Herbert Hoover was president.
The ongoing recession and global economic shock pummeled stocks this year, with the Dow Jones industrial average slumping 36.2 percent. That's the biggest drop since 1931 when the Great Depression sent stocks reeling 40.6 percent.

The Standard & Poor's 500 index is set to record the biggest drop since its creation in 1957. The index of America's biggest companies is down 40.9 percent for the year.

With these statistics ready to play out this week, it is little wonder why investors are all too happy to close the books on 2008. Analysts are already looking toward January as a crucial period for the market as it tries to recover some of the $7.3 trillion wiped from the Dow Jones Wilshire 5000 index, the broadest measure of U.S. stocks.

"It is hard to gauge a recovery because there's so many things out there that are interactive with each other," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. "Nothing is in a vacuum. Anybody who is managing money has to be on the cautious side for at least the first six months of 2009."

He said many analysts are jumping past this week and focusing on next month, especially with Barack Obama set to be sworn in as president on Jan. 20. There is hope that the new administration will deliver another stimulus package, which along with December's interest rate cuts, might help quell the financial crisis.

Trading is expected to remain volatile with many market participants on the sidelines during the holiday-shortened week, but that doesn't mean investors won't be kept busy. With no Santa Claus rally last week, economic data slated for the coming days could sway the market's mood going into 2009.

Investors will be awaiting details about how retailers fared in the post-Christmas sales period, especially since consumer spending drives more than two-thirds of the U.S. economy.
The main question is if bargain prices at the malls will be enough to rescue retailers from a bleak holiday shopping season.

Meanwhile, another gauge of how Americans feel about spending money will be released on Tuesday. The Conference Board will issue its December index of consumer confidence, which is expected to rise to a reading of 45.2 for this month, up slightly from 44.9 in November.

The Labor Department will report on weekly jobless claims Wednesday, after a 26-year high of 586,000 initial filings in the week ended Dec. 20.

But the most anticipated economic data will be delivered Friday when investors get a fresh reading on the manufacturing sector. The Institute for Supply Management releases its December survey of purchasing managers.

The index is expected to show a reading of 35.5, down from November's 36.2, according to economists polled by Thomson Reuters. A reading above 50 points to expansion, while a reading below 50 shows a contraction.

There is little in the way of corporate news slated. Though, the final week of the year -- when volume is slow and many money managers are on vacation -- is often a time when companies slip through lower quarterly forecasts.

Investors were still waiting word if GMAC Financial Services, the financing arm of General Motors Corp., will be eligible for a government bailout. GMAC received the Federal Reserve's approval to become a bank holding company last week, but that was contingent on putting into place a complicated debt-for-equity exchange by 11:59 p.m. EST Friday.

That deadline passed with no word from the company.
Analysts have speculated that if GMAC doesn't obtain financial help it would have to file for bankruptcy protection or shut down, which would be a serious blow to parent GM's own chances for survival.

Both General Motors and Chrysler LLC on Monday will receive the first part of the $13.4 billion in emergency loans from the government. Each will receive about $4 billion, then receive the second payment of $5.4 billion on Jan. 16. GM gets a third installment of $4 billion on Feb. 17.

Ford Motor Co. did not participate in the government rescue plan.

IndyMac Bank, one of the most high-profile financial institutions to fail because of the financial crisis, might be close to getting a new owner. The buyers include private equity firms J.C. Flowers & Co. and Dune Capital Management, according to The New York Times, which cited unidentified people close to the matter.

The proposed sale could be announced by Monday morning, the report said.

Meanwhile, Kuwait's government on Sunday scrapped a $17.4 billion joint venture with U.S. petrochemical giant Dow Chemical Co. after criticism from lawmakers that could have led to a political crisis in this small oil-rich state.

The Cabinet, in a statement carried by the state-owned Kuwait News Agency, said the venture, was "very risky" in light of the global financial crisis and low oil prices. Dow Chemical said it was "extremely disappointed" with the Kuwaiti government's decision and was evaluating its options under the joint-venture agreement.

Financial Firms' Preferred Shares Are Screaming Buys, Says Barron’s

http://online.barrons.com/article/SB123034013125536693.html

›Saturday, December 27, 2008
By ANDREW BARY

The market for preferred stocks has rallied sharply in the past two months in response to the government's investment of more than $150 billion in a wide range of banks and other financial institutions, in the form of preferred shares and equity warrants. Investors such as Bill Gross of Pimco have argued this heightens the appeal of both the bonds and preferred stock of these companies. "With Uncle Sam as your partner," Gross wrote in his November investment letter, "default seems remote."

While preferred stock isn't as secure as debt, both banks and the government seem intent on preserving preferred dividends. As part of the bailout of Citigroup (ticker: C), for instance, the company's quarterly common dividend was cut to a penny per share. But preferred-stock dividends were maintained, as the government made a new $27 billion preferred-stock investment in the troubled bank. Preferred stock is senior to common but ranks below debt in corporate capital structures.
Table: Uncle Sam Is on Your Side

Government preferred usually ranks equally with investor-owned preferred issues, which means many financial companies would have to stiff Uncle Sam before omitting dividends on their publicly traded preferred. Economic conditions -- and credit losses -- would have to get far worse before banks omit preferred dividends.

Most preferred issues from financial companies now yield about 9% or more, and trade well below face value, typically $25 per share. Preferred purchased by the government through the Troubled Asset Relief Program, or TARP, yields just 5%.

The preferred market is down about 30% this year, dividends included, according to Merrill Lynch's preferred-stock index. One especially depressed -- and appealing -- sector is adjustable-rate preferred, which was sold by the likes of Merrill Lynch (MER), Goldman Sachs (GS), Bank of America (BAC) and HSBC Holdings (HCS). It was designed to trade near face value of $25 because dividend rates reset quarterly at a spread above three-month LIBOR, or the London interbank offered rate, the key short-term interest rate. Thus, investors would be protected with higher dividends if rates rise.

The adjustable-rate preferred market has tanked this year because of concerns about the health of financial companies and the sharp drop in short rates, which has reduced dividends. Some bulls argue that dividends can't go lower, and that payouts will rise if the government's massive financial bailout and fiscal stimulus results in a reacceleration of inflation and higher interest rates. That makes adjustable-rate preferreds similar to Treasury inflation-protected securities, but with much higher yields.

Ten- and 20-year TIPS now yield two percentage points above inflation, or 4% to 5%, assuming 2% to 3% long-term inflation. Investors are paying nothing for the inflation-protection feature of adjustable-rate preferreds, as fixed-rate "straight" preferreds currently sport similar yields.

Merrill Lynch has several adjustable-rate issues outstanding. The largest is Series L, which trades near $8.55 a share, or 34% of last year's original offering price of $25, for a current yield of 11.70%. The dividend resets quarterly at half a percentage point above three-month LIBOR, now about 2%. But the minimum annual dividend rate is 4% of face value of $25, or $1 a share.

Other Merrill preferreds with fixed rates carry similar or lower yields. The adjustable-rate issue arguably should yield less than straight preferreds, because its dividend can only go up.

One fan of the adjustable-rate issue says it could double in the next year if the financial crisis abates. The issue traded in June at $15. Indeed, all Merrill preferreds could trade up once the company's scheduled merger with Bank of America goes forward. The deal has been approved by shareholders of both companies and could close by year end.

Bank of America has a large adjustable-rate preferred issue, series E, which trades around $8.82, for a current yield of 11.34%. It, too, is at its dividend-rate floor of 4%. The Bank of America adjustable-rate preferred yields more than some of the bank's fixed-rate preferreds.

Goldman Sachs has issued a series of adjustable-rate preferreds, including the series A, which trades around $10.31 for a 9.09% yield. HSBC also has several series of adjustable-rate preferreds with current yields of around 10%. MetLife 's (MET) series A adjustable-rate trades at $11.55, yields 8.66% and has a dividend floor of 4%.

With yields of around 9% or higher, adjustable-rate preferreds from financial companies offer ample income and increasingly secure dividends -- and a potential kicker in the event of inflation.‹

Treasuries Post Weekly Loss as Auctions Highlight Supply Issue

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiw3cE2FfsLU&refer=home
By Daniel Kruger

Dec. 27 (Bloomberg) ** Treasuries lost for the first week since October after U.S. sales of a record $66 billion of two- and five-year notes focused attention on the nation’s funding requirements amid a deepening recession.

The new securities drew historic low yields as the Treasury faces selling what it has estimated will be up to $2 trillion in debt this fiscal year. The U.S., strapped with a swelling budget deficit, needs to finance a bailout of the banking system and an economic stimulus plan that members of President-elect Barack Obama’s transition team said could cost $850 billion.

“It has to do with the amount of Treasuries that are coming out going forward,” said Andrew Brenner, co-head of structured products and emerging markets in New York at MF Global Inc. “The question is where the demand is going to come from with these kinds of low yield levels.”

The yield on the 30-year bond rose six basis points, or 0.06 percentage point, to 2.61 percent, according to BGCantor Market Data. It was the yield’s first weekly increase since the five days ended Oct. 31. The yield touched 2.5090 percent on Dec. 18, the lowest since regular sales of the security began in 1977. The price of the 4.5 percent bond due in May 2038 tumbled 1 1/2, or $15 per $1,000 face amount, to 138 18/32.

The two-year note’s yield increased 15 basis points to 0.88 percent, its biggest jump since June. It touched 0.6044 percent on Dec. 17, the lowest since regular sales of the security began in 1975. The yield on the five-year note climbed 16 basis points to 1.51 percent. It touched 1.1852 percent on Dec. 17, the lowest since at least 1953, when records began.

‘Supply Overhang’

The difference between the yields of Treasuries maturing in two years and 10 years narrowed 14 basis points on the week to 1.25 percentage points, the least in six months, from 2.62 percentage points on Nov. 13.
The gap has shrunk as the Federal Reserve has said it will buy long-term fixed-income assets, possibly including Treasuries.

The Treasury auctioned $28 billion of five-year notes on Dec. 23 at a yield of 1.539 percent and $38 billion of two- year notes the previous day at a yield of 0.922 percent. Both were record lows.

The rising yields on Treasuries this week stemmed from “a little bit of supply overhang,” said Sean Murphy, a Treasury trader and strategist in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest bank. The two-year Treasury note, with a yield about 65 basis points above the upper end of the Fed’s target rate range of zero to 0.25 percent, “looks pretty cheap, given where funds are and given the problems we’re still facing.”

$2 Trillion

The U.S. said Dec. 10 it expects to sell between $1.5 trillion and $2 trillion in Treasuries in fiscal 2009. With the deepening slump and the “escalating size of the likely fiscal stimulus,” the size of the nation’s budget deficit is headed toward more than $1 trillion, Edward McKelvey, a senior economist in New York at Goldman Sachs Group Inc., wrote in a Dec. 8 report to clients.

Measures of risk to the financial system eased. The TED spread, the difference between what the government and banks pay to borrow for three months, fell for a fourth week. It declined one basis point to 1.48 percentage points, down from a record high of 4.64 percentage points Oct. 10.

Trading volume was lighter than usual during the holiday week. Less than $18 billion in Treasuries changed hands yesterday, according to ICAP Plc, the world’s largest inter- dealer broker. That compares with the 10-day moving average of $135 billion.

‘Bullish for Treasuries’

The U.S. economy shrank in the third quarter at a 0.5 percent annual pace, the worst since 2001, according to revised figures on Dec. 23 from the Commerce Department. Consumer spending fell the most in almost three decades.

Discounts by retailers failed to prevent a spending drop of as much as 4 percent during the final two months of the year, according to data from SpendingPulse. Including fuel, sales tumbled as much as 8 percent. One of the Fed’s preferred gauges showed inflation at the lowest level since 2004.

The SpendingPulse data service calculates its sales estimates based on MasterCard Inc. network transactions and adjusts for cash, checks and other payment forms. Purchase, N.Y.-based MasterCard is the world’s second-biggest credit-card company.

The core PCE index, a gauge of prices tied to consumer spending behavior, fell in November to 1.9 percent per year, a Commerce Department report showed on Dec. 24. That was the lowest since March 2004.

“It’s safe to assume there’s no great shockers in any of the negative data,” said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut, at RBS Greenwich Capital, one of the 17 primary dealers that trade with the Fed. “It’s bullish for Treasuries.”

U.S. government debt returned 14.3 percent in 2008, the most since 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. The Standard & Poor’s 500 Index of stocks fell 41 percent, the worst year since 1931.

Japan’s Recession Deepens as Factory Output Plummets (Update2)

http://www.bloomberg.com/apps/news?pid=20601087&sid=a8HsMxADEi6o&refer=home
By Keiko Ujikane and Toru Fujioka

Dec. 26 (Bloomberg) ** Japan’s recession deepened in November as companies cut production at the fastest pace in 55 years and rising unemployment prompted households to pare spending.

Factory output plunged 8.1 percent from October, the Trade Ministry said today in Tokyo, more than the 6.8 percent estimated by economists. The jobless rate climbed to 3.9 percent from 3.7 percent. Household spending slid 0.5 percent, a ninth drop.

Simultaneous recessions in the U.S. and Europe have weakened demand for Japan’s exports, prompting companies from Toyota Motor Corp. to Sony Corp. to idle plants and fire workers.
The Bank of Japan has little room to spur the economy after cutting interest rates close to zero last week, and Prime Minister Taro Aso has yet to implement two stimulus packages.

“We’re not at the worst yet,” Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo, told Bloomberg Television. “In terms of the stimulation of the real economy, what matters is fiscal policy, not monetary policy.”

The yen traded at 90.43 per dollar as of 1:26 p.m. in Tokyo from 90.46 before the reports. The Nikkei 225 Stock Average rose 0.8 percent. The gauge has lost 43 percent this year, heading for its worst annual decline.
The yield on Japan’s 10-year bond fell 2 basis points to 1.195 percent, matching a three-year low.

The decline in production was the biggest since comparable figures were first made available in February 1953. Shipments also fell the most on record. The ministry downgraded its assessment of output, saying it’s “declining rapidly.”

No End in Sight

There’s no end in sight to the recession that began when the economy shrank in the past two quarters. Companies surveyed by the ministry planned to reduce output a further 8 percent this month and 2.1 percent in January. S
hould December’s forecast be realized, production would slide a record 11.1 percent this quarter.

“The output numbers were just horrible,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Economic conditions are going to deteriorate rapidly.”

Fuji Heavy Industries Ltd. announced additional production cuts today. The maker of Subaru-brand cars will lower output by a further 10,000 vehicles in the year ending March, bringing total reductions to 70,000 worldwide. It will also shed 300 temporary jobs on top of 800 eliminations announced last month.

Japan’s exports plunged 26.7 percent in November, the sharpest drop since at least 1980, a report showed this week.

The Bank of Japan last week lowered its benchmark interest rate to 0.1 percent, increased purchases of government debt and announced plans to buy commercial paper for the first time.

Signs of Deflation

The inflation rate eased the most in a decade in November as prices of oil and other commodities plunged, indicating deflation may be returning to the world’s second-largest economy. Consumer prices excluding fresh food rose 1 percent from a year earlier, the slowest pace since April, the statistics bureau said today.

“Data clearly indicate the problem for Japan is deflation, not inflation,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.

Economic and Fiscal Policy Minister Kaoru Yosano said “the government, companies and politicians need to make an effort to keep the economy from falling apart next year.” Prime Minister Aso has unveiled two stimulus plans since becoming Japan’s leader in September; both await approval by parliament.

The measures “may help to ease the economy’s decline once they’re actually implemented,” Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo, said on Bloomberg Television. “But there’s still little hope that Japan’s economy will show any clear signs of a turnaround in 2009.”

Yen Pain

The yen’s 23 percent gain against the dollar this year is compounding exporters’ woes by eroding their profits.
Japan’s currency surged to a 13-year high of 87.14 on Dec. 17.

Japanese carmakers have been hit by the recession in the U.S., where consumer credit is drying up and households are spending less. Toyota this week forecast its first operating loss in seven decades for the year ending March. Last month the automaker, the world’s second largest, said it would fire 3,000 temporary staff.

Temporary and part-time workers are the hardest hit by the downturn. Companies plan to fire 85,012 such staff by the end of the business year, more than double the 30,067 forecast last month, the Labor Ministry said today.

The ratio of jobs available to each applicant dropped for a 10th month in November to 0.76, extending the longest losing streak since 1998. Wages fell 1.9 percent, the most in four years, underscoring why consumer sentiment slumped to a record low.

Retail sales slid 0.9 percent from a year earlier, the biggest drop in 16 months, the Trade Ministry said today. Weaker personal spending is prompting retailers to reconsider investments.

LVMH Moet Hennessy Louis Vuitton SA last week scrapped plans to open a 12-story Tokyo store. Isetan Mitsukoshi Holdings Ltd., Japan’s largest department store, will delay renovating its two flagship outlets in Tokyo, broadcaster NHK reported last week.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net

Thanks for the info look1

aj

Treasury Yields Fall as Fed Cuts, Pledges to Buy Long-Term Debt

By Daniel Kruger and Dakin Campbell

Dec. 20 (Bloomberg) ** U.S. government debt gained for a seventh week as the Federal Reserve cut its benchmark rate to as low as zero and said it would buy long-term debt, possibly including Treasuries, to lower borrowing costs and spur growth.

Yields dropped to record lows for all maturities, and rates on bills hovered near or below zero as investors sacrificed returns to ensure the safety of their principal amid the worst financial crisis since the Great Depression.
Treasuries returned 14.7 percent this year, their best performance in 13 years.

“Much of the rally is driven by fear, the Fed, and year- end factors,” said Mark MacQueen, a partner and money manager at Austin, Texas-based Sage Advisory, which oversees $6 billion. “There is a lot of liquidity around, and the only thing it’s doing is going into Treasuries.”

The yield on the benchmark 10-year note fell 44 basis points on the week, or 0.44 percentage point, to 2.13 percent, according to BGCantor Market Data. It touched 2.0352 percent, the lowest on record for data going back to 1953. The price of the 3.75 percent security due in November 2018 gained 4 1/8, or $41.25 per $1,000 face amount, to 114 3/8.

Yields on 30-year bonds tumbled 49 basis points to 2.55 percent after touching 2.5090 percent, the lowest since regular sales of the security began in 1977.

Treasury Returns

Two-year note yields dropped one basis point to 0.76 percent after touching 0.6044 percent, the lowest since regular sales began in 1975. Rates on three-month bills decreased two basis points to minus 0.01 percent after touching a record low of minus 0.05 percent. One-month bill rates increased three basis points to 0.04 percent after reaching a record low of minus 0.04 percent.

Treasuries gained this week as the economy moved into its longest recession in a quarter-century. U.S. government debt has returned 9.8 percent since the end of October, which would be the best two-month performance since October and November 1981, when it returned 13.34 percent, according to Merrill Lynch & Co.’s U.S. Treasury Master Index.

During the 1981 period, the 10-year yield plunged to 13.13 percent by the end of November from the all-time high of 15.84 percent it touched on Sept. 30 as the Fed tried to quell inflation with high interest rates.

The Fed on Dec. 16 dropped its 1 percent target rate for overnight loans between banks to a range of zero to 0.25 percent. That narrowed the difference between the yield on the two-year note and the target rate to about 0.48 percentage point, near its average of 0.399 percentage point over the past decade. The central bank reiterated its commitment to spend up to $600 billion to buy so-called agency debt from government- sponsored entities such as Fannie Mae and Freddie Mac, and mortgage debt.

‘Don’t Fight the Fed’

“One of the main themes we’re talking about is ‘don’t fight the Fed,’” said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 17 primary dealers that trade with the Fed. “They will be buying mortgages; they’ve already started buying agencies. Regardless of what asset class they’re buying, they’re buying fixed-income duration and that should push long Treasury rates.”

Duration is a measure of price sensitivity to interest-rate changes expressed as a number of years. Adding duration to a portfolio is a bet that interest rates will fall.
The 30-year Treasury bond has the most duration among fixed-income securities paying principal and interest, driving demand for the security when investors expect rates to fall.

Treasuries pared gains yesterday as General Motors Corp. and Chrysler LLC received $13.4 billion in short-term loans and investors bet the week’s gains in government securities were exaggerated.

Automaker Bailout

General Motors and Chrysler will get government loans to keep operating in exchange for a restructuring under a rescue plan announced yesterday by President George W. Bush.
The money will be drawn from the Troubled Asset Relief Program for financial firms, and the automakers will get an additional $4 billion from the fund in February, according to the administration. The money will allow GM and Chrysler to keep operating until March.

The Treasury said it will sell $66 billion in notes next week, a record $38 billion of two-year notes on Dec. 22 and an all-time high $28 billion of five-year securities on Dec. 23.

U.S. government debt’s 14.7 percent return in 2008 is the most in a year since 1995, when it provided 18.5 percent, according to Merrill Lynch’s Treasury Master index. Corporate debt fell 12.4 percent for the year, according to another Merrill index. The Standard & Poor’s 500 Index of equities has plunged nearly 40 percent in 2008, poised for its biggest yearly drop since 1931.

The difference in yield, or spread, between two- and 10- year notes narrowed to 1.38 percentage points, the smallest since September, from 1.94 percentage points at the end of last month and a five-year high of 2.62 points reached on Nov. 13.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net.

JPMorgan Adds to $14 Billion CLO Bet Amid Downgrades (Update2)

http://www.bloomberg.com/apps/news?pid=20601103&sid=a2RFCHa4ZsJ4&refer=news

By Pierre Paulden and Neil Unmack

Dec. 19 (Bloomberg) ** JPMorgan Chase & Co. is adding to a $14 billion bet on collateralized loan obligations while other investors flee the market amid plummeting prices.

Within the past month, the largest U.S. bank by assets bought about $1.1 billion of the AAA rated portions of the securities for about 80 cents on the dollar, according to a person familiar with the transactions who declined to be identified because the trades were private. The bonds are typically backed by speculative-grade loans used to finance leveraged buyouts.

JPMorgan, based in New York, is buying even as the worst economy since World War II forces Chicago-based newspaper owner Tribune Co. and other companies to default. Standard & Poor’s said this month that lower-rated portions of scores of CLOs may face downgrades due to the “rapid deterioration in the credit quality” of the corporate loans.

“If everything’s fine and the companies pay back their loans, the AAA is paid back at par,” said David Preston, an analyst at Wachovia Corp. in Charlotte, North Carolina. “If the situation gets worse, the bonds get paid back quicker and the yield rises.”

That’s because downgrades may trigger a clause in CLO contracts forcing managers to pay off top-ranked bonds faster, at the expense of lower-rated debt. Those managers include firms such as New York-based Kohlberg, Kravis Roberts & Co., which may see investments and fees decline as underlying loan prices fall.

In Better Shape

JPMorgan, under Chief Executive Officer Jamie Dimon, wrote down $20.5 billion since the start of the credit crisis, less than a third of Citigroup Inc.’s total.
It also received $25 billion from the U.S. government’s $700 billion bailout fund.

Dimon, 52, is using this financial strength relative to competitors to bulk up on the best pieces of the high-yield loan pools, just as he took advantage of market turmoil by taking over troubled financial companies Bear Stearns Cos. in March and Washington Mutual Inc. in September. Brian Marchiony, a spokesman for JPMorgan in New York, declined to comment.

“There aren’t enough people with the cash to buy these securities,” said Colin Fleury, a portfolio manager at Henderson Global Investors Ltd. in London, which oversees $80 billion of assets including CLOs. “You need to have a medium- term view because if you want to get your cash back you may struggle to find someone to take you out of the position.”

$14 Billion Stake

JPMorgan bought $200 million of top-rated CLOs last week, after purchasing $900 million in the previous month, according to people familiar with the transaction, who declined to be identified because the details are private.
That’s on top of at least $14 billion of such investments the bank already held, according to a third-quarter regulatory filing.

CLOs are a kind of collateralized debt obligation, debt instruments that repackage loans into securities of varying risk that pay investors different yields. The safest AAA notes, as designated by rating companies, yield the lowest returns. The latest purchase by JPMorgan yields between 2.8 percentage points and 4.7 percentage points more than the benchmark London interbank offered rate, or Libor.

The market for the securities ballooned amid the record number of buyouts, with $605.5 billion issued since 2001, according to JPMorgan. The bank has been the biggest arranger of high-risk, high-yield loans from 2001 through 2007, according to Bloomberg data. Money managers, including private equity firms, hedge funds and insurance companies, set up teams to manage the loan pools, growing revenue by charging management fees and earning a return on the stakes of the debt that they kept.

Sales Fell

Then the seizure in credit markets hit and CLO sales fell to $64 billion this year as investors moved to safer government debt. Financial institutions have taken losses and writedowns of about $1 trillion since the start of 2007, according to Bloomberg data.

Yields on top-rated portions of loan pools have climbed to 5 percentage points more than the Libor from 1.85 percentage points in July, JPMorgan data show. Yields rose as loan prices dropped 31 cents this year to a record 63.5 cents on the dollar, according to S&P’s Leveraged Commentary and Data unit.

S&P said Dec. 5 that the lower-rated portions of 127 CLOs managed by firms including KKR and Carlyle Group of Washington may face downgrades.

Even with downgrades rising at a record pace, according to S&P, AAA rated portions of the pools are likely to survive the credit crunch, said James Finkel, chief executive officer of Dynamic Credit Partners, a New York-based investment adviser with $5 billion in assets.

“As the economy worsens, the market may love the CLOs less and the tranches may be downgraded” he said. “But they’re still likely to be paid back.”

Recommending CLOs

More than 90 percent of U.S. companies with ratings below BBB- by S&P and Baa3 by Moody’s Investors Service would need to default before an investor buying top-ranked CLO bonds at 80 cents on the dollar lost money, said Finkel. He said he’s buying AAA rated portions and is recommending the trade to clients.

CLOs can typically hold no more than 7.5 percent of their assets in loans rated CCC or lower without having to book them at market value rather than face value. Falling loan prices and increasing downgrades are causing some loan pools to breach those limits, forcing managers to divert cash or repay senior debt.

Wachovia’s Preston said 14 CLOs are failing tests in this way. The proportion of companies rated lower than CCC+, seven grades below investment grade, nearly doubled to 8.2 percent this month from 4.4 percent in October, according to New York- based S&P. It was 2.7 percent at the end of 2007.

High Default Rates

“It’s not a given that any investors in CLOs will be paid back,” said Preston. “There are extreme scenarios that could produce losses on even the AAA bonds.”

Recent bankruptcies helped send corporate default rates to their highest level since May 2002, according to S&P. The percentage of loans defaulting rose to 4.11 percent this month, from 0.97 percent last December, S&P said.

Loan downgrades to CCC may increase to 15 to 20 percent of the total outstanding, said Jeffrey Kushner, managing director at investment firm BlueMountain Capital Management LP, whose London unit oversees $5 billion of assets, including corporate loans.

“No CLO manager in the world will be unaffected by the CCC issue,” said Kushner. “Most CLO equity right now is probably worth close to zero.”

The equity portion is the unrated piece that loses money first and is typically owned by pension funds, hedge funds and private-equity firms, because it pays more.

‘Historic’ Declines

KKR’s debt-management unit, KKR Financial Holdings LLC, said in a regulatory filing last month that it expects three of five CLOs it issued in 2006 and 2007 to fail valuation tests after declines in loan prices of “historic magnitude.”
The San Francisco-based company sold pools of high-yield loans to fund the purchase of more than $8 billion of leveraged, or speculative grade, loans.

A KKR affiliate invested $525.4 million in the “junior notes,” the company’s November regulatory filing said. Interest payments from the loans the private-equity firm bought will likely be directed to paying down the top-rated slices of the CLOs, according to a KKR Financial conference call with analysts on Dec. 16.

KKR Financial replaced Chief Executive Officer Saturnino Fanlo Dec. 15 after losing 95 percent of its value this year on the New York Stock Exchange. David Lilly, a New York-based spokesman for KKR, declined to comment.

Carlyle “assembled the assets in the CLO portfolios in a way to perform through a recession,” said Michael Zupon, head of the company’s U.S. leveraged finance team in New York. He wouldn’t comment on the performance of the loan pools.

To contact the reporters for this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Neil Unmack in London nunmack@bloomberg.net

Last Updated: December 19, 2008 10:10 ES

Global economy: The age of obligation (A Biblical Jubilee)
By Niall Ferguson/grandpatb
FT December 18 2008 19:10

In the Old Testament Book of Leviticus, God commands the children of Israel to observe a jubilee every 50 years. Nowadays we tend to associate the word with celebrations of royal anniversaries such as Queen Elizabeth’s golden jubilee in 2002. But the biblical conception of a jubilee was more precise: that of a general cancellation of debts.

This point is spelt out in Deuteronomy: “Every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord’s release.”

Such injunctions may strike the modern reader as utopian. How could any sophisticated society function if all debts were cancelled twice a century – much less, as Deuteronomy seems to suggest, every seven years? Yet we know that such general cancellations of debt really did happen in the ancient world. In 1788 BC, for example, about 500 years before the time of Moses, King Rim-Sin of Ur issued a royal edict declaring all loans null and void, wiping out some of history’s earliest known moneylenders.

The idea of a generalised debt cancellation is not wholly unknown in modern times. The late Gerald Feldman, the world’s leading authority on the German hyperinflation of 1923, drew a parallel between the ancient Hebrew yovel and the wiping out of all paper mark-denominated debts as a result of the collapse of the German currency (though, as he was quick to point out, those whose savings were wiped out were far from jubilant).

In the hope of avoiding the mark’s meltdown, the economist John Maynard Keynes had repeatedly called for a general cancellation of the war debts and reparations arising from the first world war. Though no such intergovernmental jubilee was ever proclaimed, debt cancellation was effectively what happened after 1931, beginning with President Herbert Hoover’s one-year moratorium on both war debts and reparations.

As 2008 draws to a close, there are many people on both sides of the Atlantic who yearn for such a simple solution to the problem of excessive indebtedness. Parallels with the interwar period are not inappropriate. It is all but inevitable that we shall see serious political and geopolitical upheavals in 2009, as the recession takes its toll on weak governments (Thailand and Greece are already reeling) and raises the stakes in inter-state rivalries (India-Pakistan). In the words of Hank Paulson, the US Treasury secretary: “We are dealing with a historic situation that happens once or twice in 100 years.” The stakes are high indeed. Has the time arrived for a once-in-50-years biblical jubilee?

Excessive debt is the key to this crisis; it is the reason we are confronting no ordinary recession, curable by a simple downward adjustment of interest rates. It is the reason we still have to fear, if not a second Great Depression, then very likely the biggest recession since the 1930s. We are living through the painful end of an age of leverage which saw total private and public debt in the US rise from about 155 per cent of gross domestic product in the early 1980s to something like 342 per cent by the middle of this year.

With average household debt rising from about 75 per cent of annual disposable income in 1990 to very nearly 130 per cent on the eve of the crisis, a large proportion of American families are submerging under the weight of their accumulated borrowings. British households are in even worse shape.

Looking back, we now see just how big a proportion of US growth since 2001 was financed by mortgage equity withdrawals. Without that as a means of financing consumption, the economy would barely have grown at 1 per cent a year under President George W. Bush. Looking forward, we see just how hard it will be to stabilise property prices and the prices of the securities based on them. Already, at the end of September, one in 10 American home owners with a mortgage was either at least a month in arrears or in foreclosure. One in five mortgages exceeds the value of the home it was used to purchase.

US debt

The financial sector’s debts grew even faster as banks sought to bolster their returns on equity by “levering up”.
According to one recent estimate, the total leverage ratios
(on- and off-book assets and exposure divided by tangible equity) for the two biggest US banks were 88:1 for Citibank and 134:1 for Bank of America. The bursting of the property bubble caused such ratios, which were already too high on the eve of the crisis, to explode as off-balance-sheet commitments and pre-arranged credit lines came home to roost. Only by borrowing from the Federal Reserve on an unprecedented scale have the banks been able to stay in business.

With estimates of total losses on risky assets now ranging from $2,800bn (£1,850bn, €1,960bn) to $6,000bn, a chain reaction is under way that will leave no sector of the world economy untouched. The American economy is contracting at an annualised rate of 5 per cent. Commercial property is following the residential market into freefall. The Standard & Poor’s 500 index is down 43 per cent since its peak in October last year. The market for credit default swaps is pointing to a surge in defaults on corporate bonds. The automotive industry is already (against the will of Congress and the original intention of the Treasury) on life support. The US is at the centre of the crisis but Europe and Japan may suffer even larger aftershocks. As for the much feted emerging market “Brics” – Brazil, Russia, India and China – their stock markets have been dropping like, well, bricks.

What makes this crisis of burning interest to financial historians is the knowledge that we are witnessing a real-time experiment with not one but two theories about the Depression.

On one side, Ben Bernanke, Fed chairman, is applying the lesson of Milton Friedman’s and Anna Schwartz’s A Monetary History of the United States, which argued that the Depression was in large measure the fault of the central bank for failing to inject liquidity into an imploding financial system. Mr Bernanke has not merely slashed the federal funds rate to below 0.25 per cent. He has lent freely to the banks against undisclosed but probably toxic collateral. Now he is buying securities in the open market.

The result has been an explosion of the Fed’s balance sheet and of the monetary base. With assets approaching $2,263bn and capital of less than $40bn, the Fed increasingly resembles a public hedge fund, leveraged at more than 50:1.

How fallow years led to a golden jubilee

Every seven years, God told Moses, the children of Israel should neither sow their fields nor prune their vineyards – a kind of self-imposed recession. After seven such sabbatical years, the trumpet of jubilee should be sounded: “And ye shall hallow the fiftieth year, and proclaim liberty throughout all the land unto all the inhabitants thereof: it shall be a jubilee unto you; and ye shall return every man unto his possession.”

Land that had been sold was to be redeemed or returned to the original seller and the poor were to be relieved: “If thy brother be waxen poor, and hath sold away some of his possession, and if any of his kin come to redeem it, then shall he redeem that which his brother sold ... If thy brother be waxen poor ... then shalt thou relieve him: yea, though he be a stranger ... Take thou no usury of him ...” In addition, Jews who were slaves were to be set free.

To modern eyes, however, the most striking of these divine injunctions was that debts were to be cancelled as part of “the Lord’s release”.

On the other side, Mr Paulson has emerged as an unwitting disciple of Keynes, running a huge government deficit in an effort not merely to bail out the financial sector but also to provide a public sector substitute for sharply falling private sector consumption. Even before President-elect Barack Obama launches his promised infrastructure investment programme, estimates of next year’s deficit run as high as 12.5 per cent.

Once, monetarism and Keynesianism were considered mutually exclusive economic theories. So severe is this crisis that governments all over the world are trying both simultaneously.

Although commentators like to draw parallels with Franklin Roosevelt’s New Deal, in truth the measures taken since the crisis began in August 2007 more closely resemble those taken during the world wars. After 1914, and again after 1939, there was massive government intervention in the financial system. Banks and bond markets were reduced to mere channels for the financing of huge public sector deficits. That is what is happening today, but without the stimulus to manufacturing that the world wars provided. We are having war finance without the war itself.

Yet the effect of these policies is essentially to add a new layer of public debt to the existing debt mountain. Added together, the loans, investments and guarantees made by the Fed and the Treasury in the past year total about $7,800bn, compared with a pre-crisis federal debt of about $10,000bn.
The Treasury may have to issue as much as $2,200bn in new debt in the coming year.

For the time being, the distress-driven demand for dollars and risk-free assets is pushing down the cost of all this borrowing. Treasury yields are at historic lows. But it is not without significance that the cost of insuring against a US government default has risen 25-fold in little over a year. At some point, with most big economies adopting the same fiscal policy, global bond markets are going to start choking.

Is it really plausible that the cure for excessive leverage in the private sector is excessive leverage in the public sector? Might there not be a simpler way forward? When economists talk about “deleveraging” they usually have in mind a rather slow process whereby companies and households increase their savings in order to pay off debt. But the paradox of thrift means that a concerted effort along these lines will drive an economy such as that of the US deeper into recession, raising debt-to-income ratios.

The alternative must surely be a more radical reduction of debt. Historically, such reductions have been done in one of four ways: outright default, restructuring (for instance, bankruptcy), inflation or conversion. At the moment, more and more American households are choosing the first as a way of dealing with the problem of negative equity, while more and more companies are being driven towards bankruptcy. But mass foreclosures and bankruptcies are not a pretty prospect.

Inflation, by contrast, is hard to worry about in the short term, not least because the Fed’s expansion of the monetary base is leading to no commensurate expansion of the broad money supply; the banks would rather shrink than expand their balance sheets.

That leaves conversion, whereby, for example, all existing mortgage debts could be wholly or partly converted into long-term, low and fixed-interest loans, as recently suggested by Harvard’s Martin Feldstein. (In his scheme, the government would offer any homeowner with a mortgage the option to replace 20 per cent of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. The annual interest rate could be as low as 2 per cent and the loan would be amortised over 30 years.

At the very least, this would rescue many homeowners from the nightmare of negative equity. A similar operation might also be contemplated for the debts of those banks that have been partially or wholly recapitalised by the state. This would not add to the federal debt in net terms and would reduce the interest burden, if not the absolute debt burden, of households.

Such radical steps would naturally represent a haircut for creditors, notably the holders of mortgage-backed securities and bank bonds. Yet they would surely be preferable to the alternatives. And they would certainly be a less extreme solution than the general debt cancellation envisaged in the Old Testament.

Financially, 2008 has been an annus horribilis. The answer may be to make 2009 a true jubilee year.[

The writer is a professor at Harvard University and Harvard Business School, a fellow of Jesus College, Oxford, and a senior fellow of the Hoover Institution, Stanford

Copyright The Financial Times Limited 2008

apljack I get my info on closed end funds on www.etfconnect.com/select/findafund.aspx also on www.closed-endfunds.com/ one good thing about closed end non leverage funds they do not have to sell or trade their holding till they want to unlike open end fund if a lot of people want their money back they have to sell some of their holding.Open end funds is what you get at your broker and they get a percent every mo. on the your money note it is real small.Read up on the diferents

apljack be careful on ERH it is a closed End Fund that has leverage notice it payed back some of its loan where did the mnoney come from? I was in it got out because leverage funds has to keep a 200% ratio of what they have to leverage. If under that they have to sell their holding. to pay off their leverage. This is howm I look at it if they bought the stock at $10.00 and now it is worth $5.00. If they haft to sell they have to two stocks to get it back the leverage. If that happens the dividens will be lower. I got out of NRO Waiting for them to tell what the next dividen is wait till the stock goes down then get back in. They money that they can get to leverage back up when the market gets better they say. I am in HIO and CIK non leverage about 16% dividenyou can get what they hold Ihub Quote click on SEC read the head lines at th end is NQ that will give the holdings of that fund at that time. RFI is another Closed End non leverage Fund. www. quantumononline.com/index.cfm is where I get my preferred stock information go to income tables click on all preferreds you get a lis with their rateing from S.P and Moodys I bought some of SFI prefereds 60% dividens but do your own DD.

Fed Cuts Rate to as Low as Zero, Shifts Policy Focus (Update3)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aafQgexzAGXk&refer=home
By Scott Lanman and Craig Torres

Dec. 16 (Bloomberg)** The Federal Reserve cut the main U.S. interest rate to as low as zero for the first time and shifted its focus to the amount and type of debt it buys, seeking to revive credit and end the longest slump in a quarter- century.

The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

Stocks soared, while Treasury notes rallied in anticipation the Fed will buy the securities to reduce borrowing costs for consumers and companies. Nine rate cuts in the prior 14 months and $1.4 trillion in emergency lending had failed to reverse the economic downturn. The Fed said today it will target a federal funds rate of between zero and 0.25 percent, a reduction from the 1 percent level that the Fed failed to hit.

Announcements of new lending programs or asset purchases will now be principal signals of policy, a senior Fed official said in a conference call with reporters. The central bank is considering whether to provide more information about the composition and targeted size of its balance sheet, the official said on condition of anonymity.

Stimulate Economy

“The focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level,” the FOMC said.

The dollar tumbled against the euro and yen. Stocks climbed, pushing the Dow Jones Industrial Average up 359.61 points, or 4.2 percent, to 8924.14.

“The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding,” William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington, said in an interview with Bloomberg Television. Poole is also a contributor to Bloomberg News.

The statement noted that the Fed has already announced it will purchase the debt issued or backed by government-chartered housing finance companies, and said the Fed is ready to expand the program. The central bank said it continues to weigh the potential benefits of buying longer-term Treasury securities.

Deepening Slump

The deepening economic slump pushed unemployment to 6.7 percent last month, the highest level since 1993, while builders broke ground on the fewest new homes since record-keeping began in 1947. Deflation is also emerging as a risk: consumer prices fell the most on record in November, the Labor Department said today.

Today’s vote was unanimous. In a related move, the Fed lowered the rate on direct loans to banks and securities dealers to 0.5 percent. It set the payment on the reserves that commercial banks hold at the Fed at 0.25 percent, down from 1 percent.

Fed policy makers twice pared the federal funds rate, or overnight lending rate, to 1 percent since adopting it as the main tool of monetary policy in the late 1980s. The 1 percent target held from June 2003 to June 2004, and again from the end of October to today.

The Bank of Japan has been the only major central bank in modern times to mix a policy of steep rate reductions with quantitative easing, or the strategy of injecting more reserves into the banking system than needed to keep the target rate at zero.

Spur Growth

Japan’s central bank kept its main rate at zero from 2001 to 2006 while flooding the banking system with extra cash to encourage lending, spur growth and overcome deflation. The abundant funds failed to prompt lending by commercial banks, which expanded their reserves at the central bank almost nine times by early 2004.

The senior central bank official said the Fed’s policy differs from Japan’s approach by focusing on purchases of short- term debt and other assets in constrained markets rather than on adding cash to the banking system.

The FOMC said that inflation pressures “have diminished appreciably.” The senior Fed official said deflation is not a major concern to the central bank.

Bernanke, acting with New York Fed President Timothy Geithner, has set up emergency loan programs aimed at averting a collapse of the nation’s credit markets. Geithner, President- elect Barack Obama’s pick for Treasury secretary, didn’t attend today’s meeting.

Swapping Dollars

The Fed has enlarged bank reserves, supported issuance of commercial paper and provided liquidity to government bond dealers. It is also swapping dollars with the European Central Bank and its other counterparts to supply banks in other countries.

The central bank is trying to lower mortgage rates by purchasing up to $100 billion of debt issued by housing-finance providers Fannie Mae and Freddie Mac and $500 billion of mortgage-backed securities guaranteed by the companies.

The moves have swelled the Fed’s balance sheet to $2.26 trillion from $868 billion in July 2007. That’s in addition to the $700 billion Troubled Asset Relief Program, which the U.S. Treasury has used since October to channel about $335 billion of capital injections into banks and other financial companies.

Still, the economy has crumbled, with employers cutting 533,000 jobs from payrolls in November for a total loss this year of 1.9 million, which more than erases the 2007 gain of 1.1 million.

Scarce Credit

Credit remains scarce in many markets and major financial institutions worldwide continue to report losses and writedowns totaling $994 billion.

The Fed may increase its asset purchases and lend against lower-quality debt should Treasury provide funding, the senior central bank official said.

Macroeconomic Advisers LLC, a St. Louis-based consultant, says the economy is probably shrinking at a 6.5 percent annual pace this quarter, which would be the biggest drop since 1980.

The firm forecasts a 4.2 percent annual contraction rate in the first quarter, returning to no growth in the second quarter and a 2.3 percent expansion rate in the second half of 2009.

Early this month, as a panel of leading U.S. economists declared the recession began in December 2007, Bernanke signaled he was ready to dig deeper into the central bank’s toolkit. He said he may use less conventional policies, such as buying Treasury securities, because his room to lower the main U.S. rate was “obviously limited.”

Flood of Funds

The federal funds target rate has weakened as a monetary policy tool because the Fed’s flood of funds has caused the average daily rate to trade below the policy goal every day since Oct. 10.

The gap between the target and the effective rate, or average daily market rate, has averaged about a half point since Sept. 12. The gap averaged just above zero from the start of this year through Sept. 2.

The Fed’s counterparts around the world have staged their own interest-rate cuts. The ECB has lowered its main rate to 2.5 percent this month from 4.25 percent in July, while the Bank of England reduced its rate to 2 percent this month from 5.75 percent in July.

ECB President Jean-Claude Trichet said yesterday there’s a limit to how far the bank can cut interest rates and signaled policy makers may pause in January. “Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes,” Trichet told journalists in Frankfurt.

While the Fed can’t push interest rates below zero, “the second arrow in the Federal Reserve’s quiver -- the provision of liquidity -- remains effective,” Bernanke said in a Dec. 1 speech.

Been lurking, and now have a question or two. When this board started, I compiled a list of high yield funds to watch and have watched most of the share value crumble (along with the rest of the market). The yileds on some now seem so high that they are "too good to be true" which usually means that they are.

I'm sure that the share value has dropped because there have been problems with valuing the underlying securities that comprise the fund. However, enough time has passed to allow for someone, SOMEWHERE, to do some valuing of these securities/funds. So, I would be grateful if anyone knows who is touting funds that are considered safe and worth investing in.

Examples of some of the funds (and yields) being tracked:

BKCC 19%
ADVDX 28%
BEP 19%
ERH 13%
HTE 32%

regards

aj

Treasury 10-Year Note Yield Falls to Record Low Before Fed

http://www.bloomberg.com/apps/news?pid=20601087&sid=ab53.OQgInOs&refer=home
By Lukanyo Mnyanda and Ron Harui

Dec. 16 (Bloomberg) ** Treasuries rose, pushing the yields on 10- and 30-year securities to record lows, on speculation the Federal Reserve will cut interest rates and announce plans to buy U.S. government debt.

The 10-year note’s yield dropped to 2.465 percent, the lowest level since the beginning of the Fed’s daily data in 1962, as investors sought the highest yields of the safest government securities. The notes yielded 176 basis points more than two-year debt, down from 253 basis points a month ago.

“We expect the Fed to go all the way to zero, and that will surprise the market,” said Axel Botte, a strategist in Paris at AXA Investment Managers, which has $800 billion in assets under management. The market may rally further, according to Botte.

The biggest financial crisis since the Great Depression is driving demand for the protection of government bonds, with yields on the three-month bills falling below zero last week for the first time. Financial institutions reported almost $1 trillion in writedowns and losses since the start of last year, pushing the largest economies into a recession.

The yield on the 10-year note fell three basis points, or 0.03 percent point, to 2.49 percent at 7:26 a.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 increased 7/32, or $2.19 per $1,000 face amount, to 111.

The 30-year bond’s yield was little changed after touching 2.936 percent, the lowest since regular sales of the security began in 1977. The five-year yield dropped one basis point to 1.47 percent. The three-month bill rate was at 0.04 percent.

Longer-Dated Bonds

Investors should buy longer-dated bonds, said Botte, who forecast the difference in yield, or spread, between two- and 10-year notes will narrow to about 140 basis points, without providing a specific time frame.

Government reports today may show consumer prices dropped in November by the most since records began six decades ago and homebuilding declined last month to the lowest level since data started in 1959. Treasury Secretary Henry Paulson said yesterday the U.S. economy is in a “fragile state right now.”

Key measures of market stress showed banks are still balking at lending, 16 months into the credit crunch. The Libor- OIS spread, a gauge of cash scarcity, was more than 19 times its average in the 12 months leading up to the start of the crisis in August 2007.

Treasury Returns

U.S. government bonds returned 12.7 percent this year, the most since they gained 13.4 percent in 2000, according to Merrill Lynch & Co.’s U.S. Treasury Master index. Ten-year yields have fallen from this year’s high of 4.27 percent.

The spread between two- and 10-year notes narrowed after the Fed began a two-day meeting yesterday to consider whether to cut borrowing costs or pursue other measures to stimulate economic growth.

Futures contracts showed a 64 percent chance the central bank will cut its 1 percent target rate for overnight bank loans to 0.25 percent. The rest of the bets are for a half-percentage- point reduction.

“For the time being, we love Treasuries,” said Marc Fovinci, who helps invest $2.8 billion as head of fixed income at Ferguson Wellman Capital Management Inc. in Portland, Oregon. “As the shorter end of the curve yields you nothing, you go further out looking for more yield.”

Paulson on Automakers

The Bush administration is moving with “deliberative speed” in considering possible financing for U.S. automakers, Paulson said yesterday in an interview on Fox News and Fox Business Network. General Motors Corp. and Chrysler LLC may be only weeks from insolvency, the companies said in congressional hearings this month. Paulson said the failure of an American carmaker might deal a severe blow to the U.S. economy.

Fed Chairman Ben S. Bernanke said in a Dec. 1 speech the central bank would consider buying longer-term government debt to prevent yields from rising. One option, Bernanke said, is to buy “longer-term Treasury or agency securities on the open market in substantial quantities.” He said there was limited room to lower rates.

“What everyone is going to watch is what sort of clues they’re going to give for their next step, so-called quantitative easing,” Fovinci said. “Are they going to buy Treasuries? If the Fed expressively states that its next step is going to buy Treasuries in general, that’s obviously bullish.”

Consumer prices probably dropped 1.3 percent last month, the most since records began in 1947, according to a Bloomberg News survey. The Labor Department will release the report at 8:30 a.m. in Washington.

Housing Starts

New-home starts in November slid to a 736,000 annual pace, the lowest level since records began in 1959, a separate Bloomberg survey showed. The Commerce Department will release the data at 8:30 a.m. in Washington.

“Overall demand for the front end remains firm, which is likely to hold on over the coming weeks,” Wilson Chin, a fixed- income strategist in Amsterdam at ING Groep NV, wrote in an investor report today. With ING’s view that Fed funds will reach zero in 2009, “there’s still room for U.S. Treasuries to perform, though movements will remain volatile.”

The 10-year breakeven rate, the difference in yields between 10-year Treasury Inflation Protected Securities and comparable U.S. notes, was little changed at 0.11 percentage point, near the narrowest since Nov. 20.

Money-market rates showed banks’ reluctance to lend may be easing amid a global round of interest-rate reductions and cash injections. The difference between what banks and the U.S. government pay to borrow money for three months, the so-called TED spread, narrowed for a sixth day to 1.83 percentage points, the lowest level since Nov. 11, from 1.86 points yesterday.

Libor-OIS Spread

The Libor-OIS spread widened to 155 basis points today.
The gauge, which former Fed Chairman Alan Greenspan said in June should be used as an indicator of the health of credit markets, averaged 8 basis points in the year before the start of the credit crunch.

Gains in debt may be tempered after the Treasury said the U.S. federal budget deficits are “likely to remain elevated for some time” as costs for financial bailouts and economic stimulus exceeded $1 trillion for the first time, analysts said.

“Measures to boost the economy may spur hopes for a recovery and concerns over inflation,” said Yasutoshi Nagai, chief economist in Tokyo at Daiwa Securities SMBC Co., part of Japan’s second-largest brokerage. “This may lead to higher long-term yields.”

Ten-year yields may rise to 3.3 percent and 30-year yields may increase to 3.8 percent by the end of March, Nagai said.

The Treasury’s annual report yesterday showed government spending exceeded revenue by $1.01 trillion in the 12 months to Sept. 30, compared with $276 billion a year earlier, under stricter accounting methods used to calculate the shortfall.

Citadel Halts Withdrawals From Two Hedge Funds After 50% Drop

http://www.bloomberg.com/apps/news?pid=20601087&sid=afKCOsImdwgU&refer=home
By Saijel Kishan and Katherine Burton

Dec. 13 (Bloomberg) -- Citadel Investment Group LLC, enduring its biggest losses since starting in 1990, halted year- end withdrawals from its two biggest funds after investors sought to take out $1.2 billion, or 12 percent of assets.

Withdrawals may resume as early as March 31 for the Kensington and Wellington funds, the Chicago-based firm said in a letter yesterday to clients. The funds, which together manage about $10 billion, have lost 49.5 percent of their value this year through Dec. 5.

“We have not made this decision lightly,” Citadel founder Kenneth Griffin, 40, wrote. “We recognize how a suspension impacts our investors, especially those with current financial obligations of their own to meet.”

Firms including Fortress Investment Group LLC and Tudor Investment Corp. also have limited redemptions to avoid dumping securities to raise cash. As of October, 18 percent of the industry’s assets, or about $300 billion, were subject to withdrawal restrictions, according to Peter Douglas, principal of Singapore-based hedge-fund consulting firm GFIA Pte. The limits have been imposed by about 5 percent of managers.

Hedge funds declined 18 percent on average through Nov. 30, according to data compiled by Chicago-based Hedge Fund Research Inc. That’s the most in a year since the firm began tracking the data in 1990.

Citadel has among the strictest redemption rules.
It normally allows clients to take out up to 1/16th of their money quarterly. If redemptions in any quarter exceed 3 percent of fund assets, investors incur a fee ranging from 5 percent to 9 percent. Withdrawals have never before surpassed the limit.

Easing Expenses

The firm will also absorb “a substantial portion” of the funds’ expenses this year, the letter said. Citadel clients usually pay these charges, which have traditionally amounted to about 3 percent to 4 percent of assets.

The fund is holding between 25 percent and 30 percent of its assets in cash.

Katie Spring, a spokeswoman for Citadel, declined to comment.

Before 2008, Citadel had posted just one losing year, dropping 4 percent in 1994. Three Citadel funds, whose returns are tied to the firm’s market-making business, have climbed about 40 percent this year. Those funds manage about $3 billion.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.

Contango Pays Most in Decade as Shell Stores Crude (Update1)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aL2dc1mwHOdo&refer=home
By Robert Tuttle and Alexander Kwiatkowski

Dec. 8 (Bloomberg) ** In the worst year ever for oil, investors can lock in the biggest profits in a decade by storing crude.

Traders who bought oil at the $40.81 a barrel on Dec. 5 could sell futures contracts for delivery next December at $54.65, a 34 percent gain. After taking into account storage and financing costs investors would earn about 11 percent, according to Andy Lipow, president of Houston consultant Lipow Oil Associates LLC. The premium, known as contango, is the biggest for a 12-month span of futures since 1998, when a glut drove crude down to $10.

Stockpiling crude may provide higher returns than commodities, stocks and Treasuries as the U.S., Japan and Europe endure simultaneous recessions for the first time since World War II. Crude sank 72 percent in New York since peaking at $147.27 in July. The Standard & Poor’s 500 Index fell 40 percent this year and two-year government notes yield 0.9 percent.

“The bottom line is that you buy crude at a low price and lock in a profit by selling it forward,” said Mike Wittner, head of oil market research at Societe Generale SA in London. “It’s low risk. The contango can definitely pay for storage and the cost of capital and leave plenty left over.”

Royal Dutch Shell Plc sees so much potential in the strategy that it anchored a supertanker holding as much as $80 million of oil off the U.K. to take advantage of higher prices for future delivery. The ship is one of as many as 16 booked for potential storage instead of transporting crude, said Johnny Plumbe, chief executive officer of London shipbroker ACM Shipping Group Plc.

Oil Storage

The tankers, if full, hold about 26 million barrels worth about $1 billion, more than the 22.9 million barrels sitting in Cushing, Oklahoma, where oil is stored for delivery against Nymex contracts. U.S. crude inventories rose 11 percent this year to 320.4 million barrels, according to the Energy Department.

“All the market operators keep placing oil in storage,” said Francisco Blanch, head of global commodities research at Merrill Lynch & Co. in London. “Even though the contango is steep, it could get steeper.”

Crude oil for January delivery rose as much as $1.93, or 4.7 percent, to $42.74 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $42.60 at 12:30 p.m. Tokyo time.

Blanch said last week that oil may fall to $25 a barrel should the Chinese economy slip into recession and the Organization of Petroleum Exporting Countries fail to take enough crude off the market.

Shell, Koch

The Hague-based Shell, Europe’s largest oil company, last month chartered the supertanker Leander with an option to store North Sea Forties crude, according to Paris shipbroker Barry Rogliano Salles. The vessel arrived at Scotland’s Hound Point, the loading port for Forties, on Nov. 20, according to tracking data compiled by Bloomberg. Sally Hepton, a London-based spokeswoman at Shell, declined to comment.

Shell and Koch Industries Inc. of Wichita, Kansas, also hired four supertankers to hold oil in the U.S. Gulf Coast to take advantage of rising prices in the months ahead. They took Very Large Crude Carriers, or VLCCs, to move oil from the Middle East, said Bruce Kahler, a broker at Lone Star, R.S. Platou in Houston.

Koch Supply & Trading LP spokeswoman Katie Stavinoha declined to comment.

The cost to store crude at Cushing averages about 35 cents a barrel a month, Lipow said in an interview. The cost of financing the crude would also be about 35 cents a month. A trader would have to take ownership of the oil in January 2009 and deliver it during December, according to Nymex rules.

Supertanker Storage

A supertanker would cost about 90 cents a barrel per month for storage, according to data from shipbroker Galbraith’s Ltd.
The amount varies, depending on the duration of the storage.

“The economics make sense if you can find somewhere to store the oil,” said Tony Quinn, managing director of Lincolnshire, U.K.-based Global Storage Agency Ltd., a bulk liquid storage terminal consultant. With depots in Europe almost full, “companies don’t have anything else they can do, so are chartering commercial tankers for floating storage.”

The reduced availability of credit may make it harder for traders and companies to purchase and store oil, said Merrill’s Blanch and Societe Generale’s Wittner.

“With this sort of contango, we would probably have seen a larger stock build were it not for the credit crunch,” said Olivier Jakob, managing director of consultant PetroMatrix in Zug, Switzerland.

The opportunity to benefit from the storage trade may disappear in weeks should OPEC cut output after its Dec. 17 meeting in Algeria. The group postponed a decision on production at its Nov. 29 gathering in Cairo.

“It’s still quite profitable as long as inventories are ample and OPEC does not remove the barrels from the market,” said Johannes Benigni, chief executive officer at Vienna-based consultancy JBC Energy GmbH.

Treasuries Gain a Fifth Week, Driving Yields to Record Lows

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJQ4qKRZ5OGQ&refer=home
By Daniel Kruger and Dakin Campbell

Dec. 6 (Bloomberg) ** Treasuries gained for a fifth consecutive week, pushing yields to record lows, as companies slashed the most jobs in 34 years last month and the Federal Reserve contemplated buying U.S. debt as the recession deepened.

Yields on two-, 10- and 30-year securities fell to the lowest levels since the Treasury began regular sales of the debt. Three-month bill rates lingered at 0.01 percent, the least since January 1940. The difference between two- and 10-year note yields narrowed to the smallest amount since September after Fed Chairman Ben S. Bernanke said the central bank may buy Treasuries to target long-term interest rates to revive the economy.

“You’ve rallied to points that are unprecedented from T- bills to 30-year bonds,” said Jamie Jackson, who oversees government debt trading at RiverSource Investments in Minneapolis, which manages $90 billion of bonds. “That’s obviously pricing in a pretty dire economic environment.”

The yield on the 10-year note plummeted 22 basis points, or 0.22 percentage point, this week to 2.71 percent, according to BGCantor Market Data. It touched 2.505 percent yesterday, the lowest since at least 1962 when the Fed’s daily records on the note began in 1962, and since 1954 on a monthly basis. The 3.75 percent security due in November 2018 climbed 1 29/32, or $19.06 per $1,000 face amount, to 109.

Two-year note yields dropped to 0.77 percent, the lowest level since regular sales began in 1975. The five-year note yield reached 1.48 percent yesterday. The 30-year Treasury bond yield touched 3.005 percent, the lowest since regular sales of the security began in 1977.

‘Extreme’ Risk Aversion

Non-farm payrolls in the U.S. shrank by 533,000 in November, the 11th month that companies have cut jobs, the Labor Department said yesterday. That was above the 335,000 median estimate of 73 economists in a Bloomberg News survey.

Rates on Treasury bills are near zero as investors sacrifice returns to ensure the safety of their cash. U.S. debt of all maturities has returned 12.3 percent this year while the Standard & Poor’s 500 Index has lost 40 percent.

“People are just flocking to Treasuries,” said Richard Schlanger, a portfolio manager at Pioneer Investments in Boston, which oversees $44 billion in fixed income.
“All you can say is, ‘My God.’ Things are going to get progressively worse.”

The share of mortgages 30 days or more overdue rose to a seasonally adjusted 6.99 percent while loans already in foreclosure rose to 2.97 percent, both record highs in a survey that goes back 29 years, the Mortgage Bankers Association said.

The Fed bought $5 billion of Fannie Mae, Freddie Mac and Federal Home Loan Bank corporate debt yesterday under a new program aimed at reducing mortgage costs.

‘Extreme Duress’

Evidence of a deepening recession has raised speculation lawmakers will help the U.S. auto companies avert bankruptcy and pass a bigger-than-expected fiscal stimulus package in President-elect Barack Obama’s first days in office.
The chief executives of General Motors Corp., Chrysler and Ford Motor Co. addressed House Financial Services committee members yesterday as they renewed calls for government help.

Jared Bernstein, an economist at the Economic Policy Institute in Washington who was named yesterday as chief economist and economic policy director to Vice President-elect Joe Biden, said the job losses mean any economic stimulus to combat the recession likely will have to be larger than originally anticipated.

Economists such as Kenneth Rogoff, a Harvard University professor, and Joseph Stiglitz, a Columbia University professor and Nobel Prize winner, have called for at least $1 trillion in government spending to spur the economy.

‘Clearly A Bubble’

The difference in yield between two- and 10-year notes narrowed 16 basis points to 1.78 percentage points, the third straight weekly decline.

Futures contracts on the Chicago Board of Trade show 84 percent odds that policy makers will lower the 1 percent target rate for overnight lending between banks by 75 basis points on Dec. 16, up from 32 percent a week ago. The rest of the bets are for a 50 basis-point cut.

“Why anyone would give money to the United States government for 30 years at three or four percent is beyond comprehension,” said Jim Rogers, chairman of Rogers Holdings in Singapore, in an interview yesterday on Bloomberg Television. “Everyone is pumping bonds like crazy. It’s clearly a bubble.”

Money-market rates show banks are reluctant to lend to each other. The difference between what lenders and the Treasury pay to borrow money for three months, the so-called TED spread, was little changed 218 basis points yesterday. The spread reached 464 basis points on Oct. 10, the most since Bloomberg began tracking the figure in 1984.

U.S. Job Losses Signal Recession Will Be Long, Deep (Update2)

http://www.bloomberg.com/apps/news?pid=20601103&sid=aniNd2kN.vdI&refer=news
By Rich Miller and Bob Willis

Dec. 6 (Bloomberg) ** The U.S. economy may be headed for its deepest and longest recession since World War II as mounting job losses take their toll on consumer confidence and spending.

Employers cut payrolls last month at the fastest pace in 34 years as the unemployment rate rose to 6.7 percent, the highest level since 1993. The 533,000 drop brought cumulative job losses this year to 1.91 million, the Labor Department said yesterday in Washington.

“Almost all businesses are in survival mode, and they’re slashing payrolls and investments just to conserve cash,” Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania, said in a Bloomberg Television interview yesterday. “We’re in store for some big job losses.”

The plunge may spur incoming President Barack Obama to come up with a fiscal stimulus package larger than the $700 billion plan some economists advocate. Obama today promised to make the “single largest new investment” in roads and public buildings as part of his plan to save or create 2.5 million jobs.

Yesterday’s figures added urgency to negotiations over aid to U.S. automakers. Democrats in Congress reached an agreement in principle with the Bush administration on providing funds to prevent a collapse of General Motors Corp. and Chrysler LLC, a congressional aide said.

U.S. stocks fell for the fourth time in five weeks as the worsening job market added to concern the recession is deepening. The Standard & Poor’s 500 Index lost 2.3 percent to 876.07, trimming its rebound from the 11-year low reached on Nov. 20 to 16 percent.

Fourth-Quarter GDP

John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said the jobs report suggests that the economy shrank at annual rate of 5 percent in the final three months of the year. That would be the biggest contraction since the first quarter of 1982.

“Consumer confidence is going to be bad,” Silvia said. “It is going to be a difficult winter for a lot of people.”

Yelena Grinberg of San Francisco is already feeling the effects of a sluggish labor market. The 26 year old has sent out more than 100 resumes since she lost her job as an administrative assistant, and has only landed one position: doing clerical work for $12 an hour over two days.

“It’s really tough,” she said, standing outside an Employment Development Department office in San Francisco. “I was so sure it wasn’t going to be hard. But no one wants to look at me,” she said, starting to cry. “I’m running out of money and I’m freaking out.”

GM, Citigroup

Job losses are likely to mount next year as the collapse in credit and slump in spending hurt companies from Citigroup Inc. to AT&T Inc. Legg Mason Inc., a Baltimore-based fund manager, said yesterday it will eliminate 8 percent of its workforce.

Payrolls in November were forecast to drop by 335,000, according to the median estimate in a Bloomberg News survey. The jobless rate was projected to rise to 6.8 percent.

Revisions for September and October increased losses by 199,000. November was the 11th consecutive drop in payrolls.

The employment slump was a key factor in determining the start of the recession. The National Bureau of Economic Research, the arbiter of U.S. business cycles, announced this week that a contraction began in December 2007, the month payrolls peaked.

Yearlong Recession

At 12 months, the recession is already the longest since the 16-month slump that ended in November 1982.
The recession is the 11th since a downturn that occurred in 1945, the year that World War II ended.

To fight the downturn, Federal Reserve Chairman Ben S. Bernanke this week outlined unorthodox policy action that officials can take beyond lowering interest rates. One option would be to purchase longer-term Treasuries on the open market to inject more cash into the financial system.

The central bank may also cut its benchmark rate from 1 percent at its meeting Dec. 15-16 in Washington. HSBC Holdings Inc. economists yesterday forecast the Fed will reduce it to zero, emulating the Bank of Japan’s efforts to defeat deflation earlier this decade.

Factory payrolls fell 85,000, the Labor Department said.
The slide would have been even worse without the return of 27,000 striking machinists at Boeing Co.

Also preventing the unemployment rate from climbing even more last month was a surge in part-time workers. The number of Americans saying they worked part-time last month due to economic reasons -- either because their hours were cut or they couldn’t find full-time jobs -- surged to 7.32 million, the most since records began in 1955.

Hit to Carmakers

U.S. automakers have been particularly hard hit as sales last month dropped to the lowest level in 26 years.
The top executives of GM, Ford Motor Co. and Chrysler this week appealed to Congress for as much as $34 billion in government assistance.

Lawmakers who support bailing out U.S. automakers sought to rally support for a scaled-down loan program, citing the grim jobs report as evidence that bankruptcies of any of the Big Three would be disastrous for the economy.

At least some of the acceleration in job losses is the result of the tightening grip of the credit crunch, with loss- ridden banks making it harder to borrow, economists said.
Policy makers’ decision in September to let investment bank Lehman Brothers Holdings Inc. fail, while saving other financial institutions, may have contributed to the crisis.

“It’s the collapse heard around the world,” said Ellen Zentner, a senior economist in New York at Bank of Tokyo- Mitsubishi UFJ Ltd., which had the closest payrolls forecast in the Bloomberg survey. “It’s probably one of the worst decisions the Fed ever made -- to save everybody else but Lehman.”

Housing Slump

Financial firms decreased payrolls by 32,000 last month, after a loss of 31,000 in October. The report also reflected the housing slump, with builders eliminating 82,000 posts after a 64,000 drop the month before.

“We don’t get the job losses stopping until 2010,” Kurt Karl, chief U.S. economist at Swiss Re in New York, said in a Bloomberg Television interview.

Pimco, Franklin, GM Bondholders May Lose 75% for Aid (Update3)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aaAS8yZ86rK8&refer=home
By Jeff Green and Caroline Salas

Nov. 26 (Bloomberg) ** General Motors Corp. may ask unsecured debt holders Franklin Resources Inc. and Pimco Advisors LP to accept as much as two-thirds less than the face value of their bonds as the automaker cuts debt in a bid to win U.S. government aid.

GM bonds trade for 13 to 22 cents on the dollar and the company may only offer a slight premium over that, estimated Pete Hastings, a fixed income analyst at Morgan Keegan & Co. in Memphis. GM needs to pare its debt below the current $43 billion even if it gets the $12 billion in government loans sought, people familiar with the matter said earlier this week.

“It’s not a pretty choice, but beggars cannot be choosers,” Hastings said. “Layering federal debt help on top of the existing debt wouldn’t leave us with a viable entity.
Let’s hope that all constituencies contribute with an equal amount of pain.”

Chief Executive Officer Rick Wagoner is under a Dec. 2 deadline set by House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid to show how he’ll reshape operations as a condition of a $25 billion industry rescue. Congress may vote on the package on Dec. 8.

The largest U.S. automaker also may ask to delay a $7 billion payment to a union retiree health fund, drop more brands and rework an accord with GMAC LLC to prove it can survive and repay the government, the people familiar with the plans said.

Board Meetings

GM’s board will meet Nov. 30 and Dec. 1 to review the plan before it is released to Congress and the public.

Wagoner would have to persuade debt holders, also including Lord Abbett & Co., Northwestern Mutual Life Insurance and Fidelity PPM America according to regulatory filings, to go along with paring the debt, making it likely that any definitive accords won’t be done by the Dec. 2 deadline, the people said.

Julie Gibson, a GM spokeswoman, had no comment on GM’s plans. Lisa Gallegos, Franklin spokeswoman, declined comment.
Mark Hudoff, investment manager at Pimco and Chris Towle, fund manager at Lord Abbett, didn’t return phone calls.

GM’s 8.375 percent bonds due in 2033 rose 5 cents to 19 cents on the dollar to yield 43 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt has fallen from 36.5 cents at the end of October and 81 cents at the end of last year, Trace data show.

GM rose $1.25, or 35 percent, to $4.81 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest gain in the Standard & Poor’s 500 Index and Dow Jones Industrial Average.

Interest Expense

The automaker has interest expense of about $2.9 billion on its $43.3 billion in bonds, JPMorgan Chase & Co. analyst Himanshu Patel wrote in a report yesterday. Without a cut in debt, interest may rise to $3.8 billion on debt of $60 billion, he said.

“We think interest expense reduction is needed immediately for cash flow improvement, but GM simply needs to reduce overall leverage,” Patel wrote. “This suggests principal reduction should be one of the primary drivers of debt restructuring. We think a combination of debt-for-debt and debt-for-equity exchanges could be employed.”

Lawmakers grilled Wagoner during two days of testimony last week before deadlocking over how to let money-losing GM, Ford Motor Co. and Chrysler LLC tap $25 billion in low-interest borrowing amid U.S. sales that may slump next year to the lowest since 1991.

Cash Burn

GM has pared $9 billion in annualized costs since 2005, and is trying to reduce expenses by an additional $15 billion a year by the end of 2009. The automaker said Nov. 7 it still may run out of cash to pay monthly bills by the end of this year.

After burning through $6.9 billion in cash last quarter, GM said it had $16.2 billion as of Sept. 30, raising the prospect of falling short by year’s end of the $11 billion minimum needed to pay monthly bills. GM has said a bankruptcy filing would be a “disaster.”

GMAC LLC, owned 49 percent by GM, began an exchange offer of its own on Nov. 20 for $38 billion of notes issued by the company and its Residential Capital LLC home-lending unit to reduce outstanding debt. GMAC is seeking to become a bank holding company to gain access to part of the $700 billion in a U.S. government bailout fund.

Swapping Debt

GMAC is offering to buy back notes for as little as 55 cents on the dollar in cash. Alternatively, holders can swap their debt for an equivalent amount of senior notes and preferred stock. ResCap holders will tender at a rate of as little as 20 cents on the dollar.

A GM offer would probably be better than Rescap’s for holders but not as good as GMAC’s, Hastings said.

GM sold 51 percent of GMAC to a group led by buyout firm Cerberus Capital Management LP in 2006.

A group of bondholders has hired Andrew Rosenberg, partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP, to represent them in opposing the GMAC debt exchange.

Holders of about $18 billion of the $26 billion of GMAC debt that is eligible for the exchange participated in a conference call yesterday to discuss their plan, Rosenberg said in an interview from his New York office. The group is led by Adam Rubinson of Dodge & Cox, according to people familiar with the discussions. Rubinson didn’t return two phone calls seeking comment.

Many of the same investors are also big holders of GM bonds, but no group has been formed because it’s difficult to react until there is a proposal from GM, the people said.

“The complexities involved in such negotiations are far from immaterial,” Patel wrote. “But at a high level, recoveries for unsecured creditors in bankruptcy seem challenged, especially in light of likely secured government loans, suggesting many could be open to debt restructuring.”

To contact the reporters on this story: Jeff Green in Southfield, Michigan at jgreen16@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net.

GE Revamps Finance Unit—Again

http://online.wsj.com/article/SB122822553884272141.html

›DECEMBER 3, 2008
By PAUL GLADER

General Electric Co. encouraged investors with its latest plan to fund its financial-services unit while shrinking the operation. GE shares rose 14% even though the conglomerate lowered its financial forecast for the third time this year.

GE said Tuesday it would shrink the operation beyond earlier plans by quitting some businesses and further reducing GE Capital's reliance on short-term funding. GE said that by the end of next year, the unit would account for 30% of company profit, down from 50% last year and earlier projections of 40%. The presentation also eased speculation that GE would seek to break up or spin off GE Capital.

"Lots of other firms are losing money in the finance space while GE is talking about still making money," said Eric Schoenstein, an analyst at Jensen Investment Management in Portland, Ore., which owns GE shares.

GE's presentation was the fifth attempt in recent months to assure investors about its GE Capital finance unit, which has been damaged by the credit crisis. GE earlier announced a restructuring of the unit, an investment by Warren Buffett and participation in two government programs to guarantee GE debt.

GE Capital had long been a powerhouse of GE's earnings growth. But the unit ran into trouble this year as more borrowers fell behind on loan payments and GE had trouble attracting investors to its debt. The unit's earnings from continuing operations fell 38% in the third quarter.

"We're going to have a smaller, more focused GE Capital," Keith Sherin, GE's vice chairman and chief financial officer, said in an interview.

Mr. Sherin said GE would exit some financial-services businesses, such as residential mortgages in Europe, while ramping up areas such as midmarket business loans, real estate, aircraft leasing and energy services. "They will be the foundation for GE Capital," he said.

The operation will be restructured into three units, focused on commercial lending, consumer finance and corporate restructuring. GE also is evaluating a $5 billion capital injection into the finance operation. The company also will shed employees and consolidate facilities in its finance unit, as well as in the company's industrial operation.

GE Capital reiterated it would reduce its reliance on commercial paper, or short-term loans, which ran into problems during the credit crunch. GE plans to reduce its commercial paper outstanding to $50 billion by the end of next year from $88 billion at the end of this September -- a bigger reduction than GE earlier planned.

GE Capital also will reduce its long-term debt funding, to $354 billion next year from $391 billion this year, some of which will be guaranteed by the U.S. government. GE is expected to issue its first batch of guaranteed three-year notes this week. GE also plans to double deposits to $81 billion next year by offering certificates of deposit through brokers.

The parent company narrowed its earnings forecast for the fourth quarter to 50 to 52 cents a share from a September forecast of 50 to 65 cents a share. The projection doesn't include anticipated losses and restructuring charges of $1 billion to $1.4 billion.

The company said it is assuming continuing economic pain next year, including a slump in airline traffic and at least one airline bankruptcy, which could hurt GE Capital's aircraft-leasing business. GE also projected an 8.5% U.S. unemployment rate by the end of next year and double-digit delinquency rates in the company's U.K. mortgage division.

"GE sees a rebound in 2010, but we remain cautious," Steve Tusa, an analyst at JP Morgan, said in a note. GE Capital executives predict the unit will see earnings drop to $5 billion next year, from $9 billion this year, but will grow in 2010. Mr. Tusa predicts another decline in GE Capital earnings in 2010 but didn't change his earnings estimates for 2009 and 2010.

"I think it's positive to finally get a commitment and a plan from management on how to reduce the size of that financial-services business," said David Weaver, an analyst at Baltimore-based Adams Express, which owns 1.4 million GE shares. Mr. Weaver said he worries about a short fall in the company's core energy and infrastructure businesses next year, which could threaten GE's dividend.‹

Global stocks resume decline
By Ian Chua
Wed Dec 3, 2008 4:52am EST

LONDON (Reuters) - A tentative rebound in global stocks spluttered on Wednesday while euro zone government bond yields hit a three-year low as gloomy economic news highlighted the case for more aggressive interest rate cuts in Europe this week.

The euro stayed on the backfoot and oil held near a 3-1/2 year low a day before the European Central Bank, Bank of England and Sweden's Riksbank are all widely expected to cut borrowing costs.

Supporting those expectations, economic reports on Wednesday showed the euro zone's services economy fell deeper into recession in November than initially thought and inflationary pressures eased.

"This is a horrible survey across the board, showing that the euro zone service sector is being hit ever harder by the financial crisis, muted consumer spending and markedly weaker activity in key export markets," said Howard Archer, economist at IHS Global Insight.

Australia's economy grew at its slowest pace in eight years in the third quarter as gathering recession abroad and evaporating equity wealth at home curbed spending by consumers and businesses.

Central banks worldwide are cutting rates to fight recession. They are also considering more measures to stabilize financial markets and restore battered consumer and investor confidence, including help for struggling U.S. auto makers.

The FTSEurofirst 300 index of top European shares fell 1.5 percent in early trade with Britain's FTSE 100 index down 0.9 percent and Germany's DAX shedding 1.7 percent.

MSCI world equity index eased 0.4 percent.

"The markets are still looking very tender," said Justin Urquhart Stewart, investment director at Seven Investment Management.

"Markets are not focusing on any of the good news and the good news is rates are being cut, commodity pries are coming down, stimulus packages are being put together and banks are being supported. But the market's feeling very depressed."

Japan's Nikkei managed to eke out a 1.8 percent gain following a rebound on Wall Street on Tuesday, but MSCI's measure of other Asian stock markets put on just 0.2 percent.

EURO PRESSURED AS ECB CUT EYED

Also under pressure, the euro fell 0.7 percent against the dollar on the day to $1.2626 and was also weaker against the yen, while the dollar climbed 0.6 percent against a basket of major currencies.

But demand for less risky assets continued to mount, helping to push government bond yields lower.

The 10-year euro zone government bond yield plumbed a low of 3.004 percent -- a level last seen in September 2005, while the benchmark 10-year yield for U.S. Treasuries was at 2.727 percent, not far off a five-decade low of around 2.651 percent set on Monday.

"Economic indicators are plunging like there is no tomorrow and central banks are gearing up for significant easing," said Elwin de Groot, a strategist at Rabobank, noting 100 basis point rate cuts from Australia and Thailand this week.

The ECB meets on Thursday and most economists expect an interest rate cut of 50 basis points, while the Bank of England is forecast to cut rates by an aggressive 100 basis points.

Sweden's central bank is likely to slash rates by a record 100 basis points, or possibly more, on Thursday when it announces the result of its meeting, which it brought forward by almost two weeks.

Meanwhile, U.S. crude edged up 41 cents to $47.37 but was within striking distance of Tuesday's trough of $46.82 -- a low last seen in May 2005.

Gold slipped to $774.80 an ounce, down $6.70 from New York's notional close on the back of a broadly firmer dollar.

(Additional reporting by Rebekah Curtis and Kirsten Donovan in LONDON, Rafael Nam in HONG KONG)

Yields ‘Next to Nothing’ Lure Funds to Riskier Assets (Update2)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aIKuL6Qk19bU&refer=home
By Dakin Campbell

Dec. 1 (Bloomberg) ~~ In the best year for Treasuries since 2002, fund managers who only buy government bonds are seeking permission to invest in corporate debt they considered toxic just a month ago.

Treasuries “are yielding next to nothing,” said Robert Millikan, who manages $5 billion at BB&T Asset Management in Raleigh, North Carolina, including the $51 million BB&T Short U.S. Government Fund. “Trying to do something for your shareholders, it’s hard to sit there and buy a bond that yields less than any fees you charge.”

While U.S. government debt returned 10.1 percent on average this year, the most since 11.6 percent in all of 2002, Merrill Lynch & Co. index data show, yields dropped so low that fund managers have little chance of offering anything but subpar returns in 2009. Two-year Treasury note yields fell to a record low 0.95 percent on Nov. 20.

That helps explain why BB&T, BlackRock Inc., T. Rowe Price Group Inc. and Sage Advisory Services Ltd. are looking elsewhere for returns, including bonds of the banks that were almost ruined by $967 billion in losses and writedowns since the start of 2007. Treasury funds are receiving permission to buy debt of Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc. after the Federal Deposit Insurance Corp. finalized plans on Nov. 21 to guarantee their debt.

The FDIC program announced on Oct. 14 is part of the more than $1.5 trillion in unprecedented financing from the Treasury and the Federal Reserve to end the worst financial crisis since the Great Depression. The U.S. now guarantees more than $13 trillion of debt.

Goldman First

Goldman, which registered as a bank in September after 139 years as a securities firm, became the first U.S. company to take advantage of the program, selling $5 billion of 3.25 percent FDIC-backed notes on Nov. 25. The debt, which matures June 2012, was priced to yield two percentage points more than Treasuries of similar maturity. Before the government announced the guarantees, New York-based Goldman’s 6.15 percent bonds due 2018 yielded about five percentage points more than government debt.

Morgan Stanley, which also became a bank on Sept. 21, sold $5.75 billion in FDIC-backed debt in three series, including $2.5 billion of three-year, 3.25 percent notes at a spread of 186 basis points. As recently as Oct. 13, the New York-based company’s notes yielded more than six percentage points more than Treasuries.

‘Why Buy?’

“It’s a great substitute,” said Millikan, whose Short U.S. Government Fund returned 4.55 percent the past year, beating 78 percent of its peers. He gained approval from BB&T’s lawyers to purchase FDIC-backed debt and may buy bonds from New York-based Citigroup Inc. and Bank of America Corp. in Charlotte, North Carolina.

Two-year note yields fell 11 basis points last week to 1 percent as reports showed gross domestic product shrunk 0.5 percent in the third quarter and Americans cut spending by 1 percent in October, the biggest drop since the last recession in 2001. The price of the 1.25 percent security due November 2010 rose 6/32, or $1.88 per $1,000 face value, to 100 16/32 since being auctioned on Nov. 24, according to BGCantor Market Data.

The yield fell five basis points to a record low of 0.953 percent by 10:43 a.m. in London today.

“There are plenty of cheap quasi government-guaranteed alternatives to Treasuries,” said Stuart Spodek, co-head of U.S. bonds in New York at BlackRock, which manages $502 billion in debt. “So why buy a two-year note?”

Barely Above Fees

The hunt for alternatives to government debt may become more acute because the Fed is likely to cut interest rates to less than 1 percent this month.

Futures traded on the Chicago Board of Trade show a 68 percent chance Fed policy makers will cut the 1 percent target rate for overnight loans between banks by 50 basis points at their Dec. 16 meeting. All other bets are for a reduction of 75 basis points, or 0.75 percentage point.

If the federal funds rate falls to 0.5 percent and two-year Treasury note yields follow, investors would realize an annualized return of 1.5 percent, according to Bloomberg data. That would barely cover the 0.66 percent expenses charged by Millikan’s fund.

JPMorgan Forecast

Yields will decline in 2009 as the Fed lowers its key rate to zero from 1 percent now, JPMorgan Chase & Co. wrote in a report on Nov. 28. Two-year yields will fall to 0.6 percent by June 30 while 10-year yields tumble to 2 percent, JPMorgan said.

The FDIC guarantees opened credit markets for banks shut out of long-term financing alternatives. Yields on investment- grade financial debt rose more than 5 percentage points this year to a near-record high of 7.28 percentage points above Treasuries, according to Merrill Lynch index data. Investment- grade bonds are debt rated Baa or above by Moody’s Investors Service or BBB or above by Standard & Poor’s.

As much as $600 billion of the FDIC-backed bonds may be issued by the time the program ends in June, according to Barclays Plc. Such sales already total $17.25 billion.

That’s on top of $1.7 trillion of securities sold by government-chartered mortgage finance companies Fannie Mae in Washington and Freddie Mac of McLean, Virginia, $1.3 trillion of bonds from the 12 Federal Home Loan Banks and almost $5 billion in agency mortgage securities.

‘Safe Instrument’

“A lot of Treasury-only funds will be looking at” FDIC- backed notes, said Brian Brennan, who helps oversee $13 billion in fixed-income assets at T. Rowe Price in Baltimore. “For investors who are seeking safety, this is a safe instrument that provides more yield.”

Brennan’s U.S. Treasury Intermediate Fund returned 9.27 percent in the past year, beating 99 percent of its peers, according to data compiled by Bloomberg.

Government debt rose 5.38 percent in November, the most since Ronald Reagan was in the White House in 1981, even as demand for company bonds increased. Investment-grade corporate debt returned 3.6 percent, the best performance since September 2003, after falling 15 percent the previous 10 months.

There’s little chance that demand for Treasuries will slacken as investors seek a haven from riskier assets, said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut, at RBS Greenwich Capital. The firm is one of the 17 primary dealers of U.S. government securities that trade with the Fed and are obligated to bid at the Treasury’s auctions.

‘Marginal Impact’

FDIC-backed bank debt “will have a marginal impact, if any,” said Lyngen, who expects two-year Treasury yields to decline to 0.85 percent in the first quarter. “It’s a bit of a toss up given that the bulk of the move has been a flight to quality.”

The FDIC program follows more than a dozen government programs to unlock credit that will be paid in part with Treasuries. Gross issuance in the $5.7 trillion Treasury market will increase to about $1.2 trillion in fiscal 2009, which started on Oct. 1, from $724 billion last year, according to Credit Suisse Group AG, another primary dealer.

President-elect Barack Obama pledged during a Thanksgiving address to forge a “new beginning” from the moment he takes office and said his economic team is already working on a recovery plan.

Obama said he will name New York Federal Reserve Bank President Timothy Geithner as Treasury secretary and Harvard University Professor Lawrence Summers, a former leader of the Treasury as White House economic adviser. He also appointed former Fed Chairman Paul Volcker as head of an economic recovery advisory board.

The risk for investors now is that the combination of more government bonds and guaranteed debt will make Treasuries less desirable.

“Treasury rates are going higher,” said Mark MacQueen, a partner and money manager at Austin, Texas-based Sage Advisory, which oversees $6 billion. “I plan to invest in the guaranteed debt.”

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net

Last Updated: December 1, 2008 05:47 EST

GMAC Puts Individuals After Institutions in Bond Plan (Update1)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRTpnBYVITAM&refer=home
By Caroline Salas and Ari Levy

Dec. 1 (Bloomberg) ~~ GMAC LLC, the financing unit of General Motors Corp., is placing individual investors who loaned the company $14.6 billion behind institutions should the company file for bankruptcy.

Holders of so-called SmartNotes, which GMAC sold to individuals since 1996, aren’t included in the company’s $38 billion plan to exchange securities for new, discounted debt and preferred shares or cash, said Gina Proia, a spokeswoman for the Detroit-based company. SmartNotes investors “would be subordinated to the new notes, but they’re not being asked to take a principal discount,” she said.

SmartNotes show how perilous the bond market can be for private investors in times of financial stress.
Individuals continued buying the debt as recently as last year, even as the world’s biggest carmaker reported losses. GMAC lost $7.9 billion over the past five quarters, and October was its worst month for sales since 1945. Moody’s Investors Service cut the company’s credit rating to C on Nov. 20, the lowest ranking.

Retail holders “could get virtually nothing if the company files for bankruptcy,” said Kathleen Shanley, an analyst at Chicago research firm Gimme Credit LLC, who recommends investors sell GMAC debt. “If the exchange goes through, they would be subordinate. That would not be a good position to be in.”

GMAC issued $25 billion of SmartNotes in $1,000 denominations during the past decade, using the proceeds to help pay for day-to-day operations. The notes, introduced by Chicago- based LaSalle Bank, allow individuals to be paid interest on an annual, semi-annual, quarterly or monthly basis.
They include a “survivor’s option,” permitting spouses to sell the bonds back to the issuer if the owner dies.

‘Significant Risk’

The offer to swap unsecured notes held by institutions is part of GMAC’s plan to convert into a bank to gain access to the Treasury’s $700 billion rescue fund. The exchange is the second in five months for the company and its Residential Capital LLC mortgage unit, which have reported losses since mid-2007.

GMAC is seeking access to federal funds as a recession grips the U.S. economy. The government has provided more than $8.5 trillion in financing to unlock credit markets after almost $1 trillion in writedowns and credit losses at the world’s biggest banks and financial institutions.

If the debt swap isn’t completed by year-end, there is a “significant risk” GMAC will default, the company said in a Nov. 20 regulatory filing. Private equity firm Cerberus Capital Management LP in New York bought 51 percent of GMAC in November 2006. GM, also based in Detroit, owns the rest.

‘Out the Window’

The exchange is “limited to institutional notes and does not include retail debt instruments,” Proia, the spokeswoman, said in an interview last month. She declined to say why SmartNotes rank behind other debt.

The bonds already reflect investors’ concerns about getting repaid. GMAC’s 7.5 percent SmartNotes due in 2017 fell about 6.7 cents to 15.9 cents on the dollar on Nov. 20 after the exchange offer was announced, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes continued to decline at the beginning of last week, falling to 11 cents on the dollar to yield 70 percent by Nov. 25.

GMAC’s $4 billion of 8 percent senior unsecured debt maturing in 2031 are trading at 26 cents to yield 31 percent, Trace data show.

“If they’re going to offer one group the exchange, shouldn’t they offer it to all groups?” asked John Aronian, a 36-year-old private investor in North Salem, New York, who owns SmartNotes. “Or are they just going to throw one group out the window? The people that really need the most attention here are the retail buyers.”

Potential Benefit

Institutions are also being asked to accept losses. GMAC offered to buy back debt for as little as 55 cents on the dollar. Alternatively, holders can swap their securities for an equivalent amount of new senior guaranteed bonds with the same interest rate and maturity as their existing debt, and new 5 percent perpetual preferred stock.
Those owning the 2031 bonds will also get 8 percent subordinated notes due in 2018.

Holders of SmartNotes with shorter maturities may benefit if the exchange offer buys time for GMAC to repair its finances, because individual investors may get repaid at 100 cents on the dollar, according to Gimme Credit’s Shanley.

GMAC lost its investment-grade ratings in 2005 and its debt is now rated CC by Standard & Poor’s and C by Moody’s, 10 and 11 levels below investment grade.

Since the purchase of a stake by Cerberus group, credit markets froze, leaving GMAC unable to finance itself through bond sales. GMAC, Ford Motor Co. and Chrysler LLC were shut out of the public market for bonds backed by auto loans for the fifth straight month in October, adding pressure on the automakers to consider mergers and seek taxpayer funding.

Sales Slump

Sales of auto bonds slumped to $500 million in the month, compared with $9 billion in October 2007, according to Merrill Lynch & Co. data. The cost to sell the debt surged to record highs over benchmark rates on concern car owners won’t be able to make loan payments amid job losses, higher food and fuel costs and falling property values.

GM, pursuing about $12 billion in federal aid, said Nov. 7 that industrywide sales will be 11.7 million in the U.S. next year, down from a forecast of 14 million, and that its market share will be 21 percent. For GM, that would be 483,000 fewer vehicles sold on an annual basis than projected in July.

Congress has set a Dec. 2 deadline for GM, Dearborn, Michigan-based Ford and Chrysler LLC to present plans that prove they will be able to survive and pay back any federal loans.

‘Patently Unfair’

Subordinating the interests of retail investors is “patently unfair,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. “Those notes never should have been placed in retail hands because the retail investors are totally unequipped to deal with the complexities of a weak and declining credit such as GMAC,” he said.

Companies typically ignore retail investors in a restructuring because they’re difficult to reach, Egan said.

While permitted under GMAC’s bond indentures, the exchange may result in lawsuits, said Andrew Stoltmann, a securities lawyer in Chicago at Stoltmann Law Offices, who has represented clients that lost money in GM-related securities.

“In this environment it’s going to be real problematic for the company even if they’re standing on solid legal grounds,” Stoltmann said. “It certainly looks bad.”

To contact the reporters on this story: Caroline Salas in New York at csalas1@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: December 1, 2008 06:44 EST

Buy Australian 10-Year Bonds as RBA to Slow Cuts, JPMorgan Says.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ai.x774ApGtg&refer=home
By Candice Zachariahs

Dec. 1 (Bloomberg) -- Investors should buy Australian 10- year government bonds and sell three-year notes to benefit as the spread between them narrows when investors pare expectations of aggressive central bank rate cuts, JPMorgan Securities said.

Traders lowered expectations of a 1.25 percentage point cut by the Reserve Bank of Australia at tomorrow’s final meeting for 2008 to a 36 percent chance from 64 percent on Nov. 24, according to a Credit Suisse index based on swaps trading. Governor Glenn Stevens slashed interest rates 2 percentage points since September, the most aggressive round of cuts since 1991, to cushion the economy from the fallout of the global credit crisis.

“The biggest driver of the yield-curve shape is the monetary policy cycle and if you think that the cash rate will reach a trough early in the second quarter, then about now is when you’d probably expect the yield curve to get close to a peak,” said Sally Auld, an interest-rate strategist at JPMorgan Securities Australia Ltd., on Nov. 28.

JPMorgan forecasts the benchmark overnight cash rate will hit a low of 3.5 percent in the second quarter of 2009. Traders are betting on a slump to 3.13 percent in the next 12 months, according to a separate Credit Suisse index.

The yield on the three-year bond was 3.58 percent late last week, while 10-year government debt was at 4.6 percent -- a spread of 102 basis points. The gap was 68 basis points at the end of October. A basis point is 0.01 percentage point.

Investors should build “strategic curve flattening positions” by selling three-year bonds and buying 10 years at a spread of 100 basis points or above, targeting a narrowing to between 75 and 80 points over the next six weeks, said Auld.

To hedge against the risk of the three- and 10-year spread widening on larger-than-expected cuts from the RBA, investors could buy March 2009 bank bill futures, said JPMorgan.

“If the curve steepens further, the bank bill futures will rally further,” Auld said.

Goldman Sachs Wins New York State Approval for Banking License

http://www.bloomberg.com/apps/news?pid=20601087&sid=aQN82Ex2qZtM&refer=home
By Josh Fineman

Nov. 28 (Bloomberg) ~~ Goldman Sachs Group Inc. won approval for a New York State banking license to transform into a bank holding company and take deposits.

Goldman Sachs Bank USA will have its headquarters in New York City, the New York State Banking Department said today in a statement.

Goldman, which was the biggest U.S. securities firm before converting to a bank holding company in September, applied in October to become a full-service, state-chartered bank instead of a national bank like rival Morgan Stanley. Goldman was one of nine major U.S. banks that received a total of $125 billion under the U.S. government’s $700 billion rescue plan for the financial industry.

“The decision to select a New York charter reflects confidence in New York as a financial center and in its Banking Department as an effective regulator,” Richard Neiman, New York’s superintendent of banks, said in the statement.

Goldman Sachs’ current Utah-based industrial loan company will merge into its New York-state chartered trust company, Goldman Sachs Trust Co., which will in turn become a full-service New York bank with trust powers.

Goldman Sachs spokeswoman Melissa Daly declined to comment.

I am applying to become a bank holding company, and seek
$25 Billion, so that I can give away all of it to my IHUB
friends....and I will never decline to comment fyi

Radical Solutions For A Crazy Crisis
Nouriel Roubini
Forbes 11.27.08, 12:00 AM ET

The U.S. economy is confronting a toxic mixture: deflation, a liquidity trap and debt deflation, as well as rising household and corporate defaults. Put plainly, the signs of a "stag-deflation"--a deadly combination of stagnation/recession and deflation--are now clear.

We are in a severe recession, and now the recent readings of both the Producer Price Index and the Consumer Price Index show the beginning of deflation.
The slack in goods markets--with demand falling and supply being excessive (because of years of excessive over-investment in new capacity in China, Asia and emerging market economies)--means firms have lower pricing power and a need to cut prices to sell the burgeoning inventory of unsold goods.

The slack in labor markets means lower wage pressures and lower labor-cost pressures; and the slack in commodity markets--that have already fallen by 30% from their summer peaks and will fall another 20%-30% in a global recession--means lower inflation and actual deflationary forces.

The Risk of a Liquidity Trap

When deflation sets in, central banks need to worry about it--and worry about a liquidity trap. Take the example of the 2001 recession: That was a mild eight-month recession in the U.S. and was over by the end of 2001. But by 2002, the U.S. inflation rate had fallen toward 1%. The Fed was forced to cut the Fed Funds rate to 1% and Ben Bernanke (then a Fed Governor) was writing speeches titled "Deflation: Making Sure "It" Does Not Happen Here."

So if a mild recession that was not even global led to deflation worries, how severe could deflation be in a recession that even the IMF is now forecasting to be global in 2009?

When economies get close to deflation, central banks aggressively cut policy rates, but they are threatened by the liquidity trap that being zero-bound on nominal policy rates implies. The Fed is now effectively already in a liquidity trap: The target Fed Funds rate is still 1% but expected to be cut to 0.5% in December and down to 0% by early 2009. Also, while the target rate is still 1%, the effective Fed Funds rate has been trading close to 0.3% for several weeks now as the Fed has flooded money markets with massive liquidity injections. So we are effectively already close to the 0% constraint for the nominal policy rate.

Why should we worry about a liquidity trap? When policy rates are close to zero, money and interest-bearing short-term government bonds become effectively perfectly substitutable. (What is a zero-interest-rate bond? It is effectively like cash.) Monetary policy becomes ineffective in stimulating consumption, housing investment and capital expenditure by the corporate sector. You get stuck into a liquidity trap and more unorthodox monetary policy actions need to be undertaken.

The Costs and Dangers of Price Deflation

First, if aggregate demand falls sharply below aggregate supply, price deflation sets in. There is already massive price deflation in the U.S. in the sectors--housing, autos/motor vehicles and consumer durables--where the inventory of unsold goods is huge. The fall in prices and the excess inventory forces firms to cut back production and employment; the ensuing fall in incomes leads to further fall in demand--and induces another vicious cycle of falling prices and falling production/employment/income and demand.

Second, when there is deflation, there is no incentive to consume/spend today as prices will be lower tomorrow. Buying goods today is like catching a falling knife and there is an incentive to postpone spending until the future: Why buy a home or a car today if its price will fall another 15% and purchasing today would imply having one's equity in a home or a car wiped out in a matter of months? Better to postpone spending. But this postponing of spending exacerbates the vicious cycle of falling demand and supply/employment/income and prices.

Third, when there is deflation, real interest rates are high and rising in spite of the fact that nominal policy rates are zero. If the policy rate is zero and there is a 2% deflation, the real short-term policy rate is actually a positive 2% that further depresses consumption and investment; and real long-term market rates are even higher with deflation, as market rates at which firms and households borrow are much higher than short-term policy rates.

The Deadly Deeds of Debt Deflation

Deflation also leads to the nightmare of debt deflation, a situation well analyzed by Irving Fisher during the Great Depression. If debt liabilities are in nominal terms and at a fixed long-term interest rate, a reduction in the price level increases the real value of such nominal liabilities.
So debtors who are already distressed in a recession and deflation become even more distressed as the real burden of their liabilities sharply rises.

Things are even worse if the debtor had borrowed to finance the leverage purchase of assets whose prices are now falling. Suppose you are a household who borrowed at a 5% mortgage rate to purchase a home whose price is now falling at an annual rate of 15%. The effective real interest rate that you are facing on your debt is not 5% but a whopping 20% (the sum of the 5% mortgage rate plus the 15% fall in the price of the underlying asset).

In all of its manifestations, debt deflation sharply increases the risk that borrowers will be forced to default on real obligations that they cannot service. Thus, debt deflation is associated with a sharp rise in corporate and household defaults that create a spiral of deflation, debt deflation and defaults.

"Crazy" Monetary Policy to Address the Liquidity Trap and a Severe Liquidity and Credit Crunch

To address the increase in real short-term market rates, the Fed and other central banks have already undertaken quite unorthodox monetary policy moves. To address the even more severe increase in real long-term market rates, the Fed and other central banks will have to undertake even more radical and unorthodox policy actions.

The widening of the real short-term market rates has been addressed by creating a whole series of new liquidity facilities. Indeed, the Fed and other central banks that used to be the "lenders of last resort" have become the "lenders of first and only resort," as banks don't lend to each other, banks don't lend to non-bank financial institutions and financial institutions don't lend to the corporate and household sectors.

However, in spite of the Fed becoming the lender of first and only resort (even the corporate commercial paper market is now being propped by the new Fed facility), there are still major problems that remain seriously unresolved in short-term money markets and short-term credit markets.
Banks and other financial institutions are still not lending to each other in spite of lower spreads as they need the liquidity received by the Fed and they worry about the solvency of their counterparties; only banks and major broker dealers have access to these facilities and thus most of the shadow banking system does not have access to this Fed liquidity; market spreads are still rising and the availability of short-term credit is becoming tighter as banks increase interest rates on credit cards, student loans and auto loans and make such loans scarcer; only rated investment-grade firms have access to the commercial paper facility, leaving millions of speculative grade or non-rated firms in an even bigger liquidity and credit squeeze; and finally, the securitization of credit cards, auto loans and student loans is currently dead.

This is why a desperate Treasury is starting to think about using the remaining TARP funds to directly unclog the unsecured consumer debt market and the securitization of such debt. Desperate times required desperate and extreme actions.

Even "Crazier" Policy Actions are Required to Reduce Long-Term Market Interest Rates

But even more desperate monetary actions are needed to address the increase in real long-term market rates. These actions are needed to prevent deflation from setting in, to reduce the credit spread (the difference between long-term market rates and long-term government bond yields) and to reduce the yield-curve spread (the difference between long-term government bond yields and the policy rate).

There are a number of tools that the Fed could use to reduce the yield-curve spread when the Fed Funds rate is already down to zero. First, the Fed could commit to maintain the Fed Funds rate at zero for a long period of time. Even this, however, may not be sufficient to reduce long yields on safe assets as such long yields also depend on liquidity premiums and risk premiums that will not be affected by an expectation of future short rates. Greenspan discovered the "bond market conundrum," when raising the Fed Funds rate from 1% to 5.25% did not much change long rates; and Bernanke rediscovered this conundrum, when reducing the Fed Funds rate down to 1% failed to significantly reduce long rates.

Such long rates depend in part on the global supply of savings relative to the demand for investment; thus they are not likely to be strongly affected by current and future expected policy rates.

Second, the Fed could do what it last did in the 1950s: directly purchase long-term government bonds as a way of pushing downward their yield and thus reduce the yield-curve spread. But even such action may not be very successful in a world where such long rates depend as much as anything else on the global supply of savings relative to investment. Thus, even radical action such as outright Fed purchases of 10- or 30-year U.S. Treasury bonds may not work as much as desired.

Next, the Fed could try to directly affect the credit spread (the spread between long-term market rates and long-term government bond yields). Radical actions could take the form of: outright purchases of corporate bonds; outright purchases of mortgages and private and agency MBS as well as agency debt; and forcing Fannie and Freddie to vastly expand their portfolios by buying and/or guaranteeing more mortgages and bundles of mortgages. One could also decide to directly subsidize mortgages with fiscal resources. And the Fed (or Treasury) could even go as far as directly intervening in the stock market via direct purchases of equities as a way to boost falling equity prices.

Some of these policy actions seem extreme, but they were in the playbook that Gov. Bernanke described in his 2002 speech on how to avoid deflation. They all imply serious risks for the Fed and concerns about market manipulation. Such risks include the losses that the Fed could incur in purchasing long-term private securities, especially the high-yield junk bonds of distressed corporations. In the commercial paper fund, the Fed refused to purchase non-investment grade securities.

Even high-grade corporate bonds are not without risk as their spreads have massively widened in recent months. Also, pushing the insolvent Fannie and Freddie to take even more credit risk may be a reckless policy choice. And having a government trying to manipulate stock prices could create another whole new can of worms of conflicts and distortions.

Finally, the Fed could try to follow aggressive policies to attempt to prevent deflation from setting in: massive quantitative easing; flooding markets with unlimited unsterilized liquidity; talking down the value of the dollar; direct and massive intervention in the forex sphere to weaken the dollar; vast increases of the swap lines with foreign central banks aimed to prevent a strengthening of the dollar; attempts to target the price level or the inflation rate via aggressive preemptive monetization; or even a money-financed budget deficit (an idea suggested by Bernanke in 2002 that he termed to be the equivalent of a "helicopter drop" of money in the economy).

The problem with many of these "extreme" policy actions is that they were tried in Japan in the 1990s and the last few years, and they failed miserably. Once you are in a liquidity trap and there are fundamental deflationary forces in the economy as the excess aggregate supply of goods faces a falling aggregate demand, it is very hard--even with extreme policy actions--to prevent deflations from emerging.

Some very aggressive policy actions--such as letting the dollar weaken sharply--may do the job, but they may also be beggar-thy-neighbor policies that would export even more deflation to other countries. The world economy has been massively imbalanced for the last decade with the U.S. being the consumer of first and last resort, spending more than its income and running ever larger current account deficits while creating a massive excess productive capacity via over-investment.

All the while, China and other emerging markets have been the producers of first and last resort, spending less than their income and running ever larger current account surpluses. With U.S. spending now faltering, a global glut of unsold goods may lead to persistent and perverse deflationary forces that may last for a longer time unless proper policy actions--mostly non-necessary monetary--are undertaken.

Thus, dealing with this deadly combination of deflation, liquidity traps, debt deflation and defaults that I termed a global stag-deflation may be the biggest challenge that U.S. and global policy makers have to face in 2009.

It will not be easy to prevent this toxic vicious circle unless (1) the process of recapitalizing financial institutions via temporary partial nationalization is accelerated and performed in a consistent and credible way; (2) such actions are combined with massive fiscal stimulus to prop up aggregate demand while private demand is in free fall; (3) the debt burden of insolvent households is sharply reduced via outright large debt reduction (not cosmetic and ineffective "loan modifications"); and (4) even more unorthodox and radical monetary policy actions are undertaken to prevent pervasive deflation from setting in.

Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.

What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup

On Friday, the FDIC closed and facilitated the sale of two CA savings banks, Downey Savings and Loan, the bank unit of Downey Financial Corp (NYSE:DSL) and PFF Bank and Trust, Pomona, CA. All deposit accounts and all loans of both banks have been transferred to U.S. Bank, NA, lead bank unit of US Bancorp (NYSE:USB). All former Downey and PFF Bank branches reopen for business today as branches of U.S. Bank.

Earlier this year we wrote positively about Downey and the funding advantages it had over larger thrifts such as Washington Mutual due to the solid deposit base and strong capital. Indeed, as of Q3 2008, the bank's Tier One leverage ratio was over 7.5%, more than two points over the minimum, and its charge offs had actually fallen compared with the gruesome 400 basis points of default reported in the previous period.

But since the September resolution of WaMu and Wachovia, the FDIC, it seems, is not willing to wait to resolve institutions, even banks that are apparently solvent and not below any of the traditional regulatory triggers for closure. The visible public metrics indicating soundness did not dissuade the Office of Thrift Supervision and FDIC from seizing both banks and selling them to USB.

The purchase of Downey and PFF is good news for the depositors and borrowers, who will all be offered the FDIC's prepackaged IndyMac mortgage modification program as a condition of the USB acquisition. Bad news for the investors and creditors, who now see their already impaired investments wiped out.
The resolution of Downey illustrates both the best and the worst aspects of the government's remediation efforts.
On the one hand, we have argued that the government should be pushing bad banks into the arms of stronger banks to improve the overall condition of the system. The good people at the FDIC do that very well - when politics does not intervene.

In the case of Downey and PFF, it appears that the OTS and FDIC projected forward from the current above-peer loss rates and concluded that a prompt resolution was required. Reasonable people can argue whether this is the right call. But when we see the equity and debt holders of DSL, Washington Mutual or Lehman Brothers taking a total loss, we have to ask a basic question: why is it that the debt holders of Bear Stearns and AIG (NYSE:AIG) are granted salvation by the Federal Reserve Board and the US Treasury, but other investors are not?

If the rule of driving money to the strong banks (see "View from the Top: A Prime Solution to the US Banking Crisis") safety and soundness is to be effective, it must be applied to all. And now you know why we have questions about the nomination of Tim Geithner to be the next Treasury Secretary.

If you look at how the Fed and Treasury have handled the bailouts of Bear Stearns and AIG, a reasonable conclusion might be that the Paulson/Geithner model of political economy is rule by plutocrat. Facilitate a Fed bailout of the speculative elements of the financial world and their sponsors among the larger derivatives dealer banks, but leave the real economy to deal with the crisis via bankruptcy and liquidation. Thus Lehman, WaMu, Wachovia and Downey shareholders and creditors get the axe, but the bondholders and institutional counterparties of Bear and AIG do not.

Few observers outside Wall Street understand that the hundreds of billions of dollars pumped into AIG by the Fed of NY and Treasury, funds used to keep the creditors from a default, has been used to fund the payout at face value of credit default swap contracts or "CDS," insurance written by AIG against senior traunches of collateralized debt obligations or "CDOs." The Paulson/Geithner model for dealing with troubled financial institutions such as AIG with net unfunded obligations to pay CDS contracts seems to be to simply provide the needed liquidity and hope for the best. Fed and AIG officials have even been attempting to purchase the CDOs insured by AIG in an attempt to tear up the CDS contracts. But these efforts only focus on a small part of AIG's CDS book.

The Paulson/Geithner bailout model as manifest by the AIG situation is untenable and illustrates why President-elect Obama badly needs a new face at Treasury. A face with real financial credentials, somebody like Fannie Mae CEO Herb Allison. A banker with real world transactional experience, somebody who will know precisely how to deal with the last bubble that needs to be lanced - CDS.

Last Thursday, we gave a presentation to the New York Chapter of the Risk Management Association regarding the US banking sector and the long-term issues facing same. You can read a copy of the slides by clicking here.

As part of the presentation (Page 17-21), IRA co-founder Chris Whalen argued the case made by a reader of The IRA a week before (see "New Hope for Financial Economics: Interview with Bill Janeway,") that until we rid the markets of CDS, there will be no restoring investor confidence in financial institutions. Here is how we presented the situation to about 200 finance and risk professionals in the auditorium of JPM last week. Of note, nobody in the audience argued.

1) Start with the $50 trillion or so in extant CDS.

2) Assume that as default rates for all types of collateral rise over next 24-36 months, 40% of the $50 trillion in CDS goes into the money. That is $20 trillion gross notional of CDS which must be funded.

3) Now assume a 25% recovery rate against that portion of all CDS that goes into the money.

4) That leaves you with a $15 trillion net amount that must be paid by providers of protection in CDS. And remember, a 40% in the money assumption for CDS is VERY conservative. The rise in loss rates for all type of collateral over the next 24 months could easily make the portion of CDS in the money grow to more like 60-70%. That is $40 plus trillion in notional payments vs. a recovery rate in single digits.

Q: Does anybody really believe that the global central banks and the politicians that stand behind them are going to provide the liquidity to fund $15 trillion or more in CDS payouts? Remember, only a small portion of these positions are actually hedging exposure in the form of the underlying securities. The rest are speculative, in some cases 10, 20 of 30 times the underlying basis. Yet the position taken by Treasury Secretary Paulson and implemented by Tim Geithner (and the Fed Board in Washington, to be fair) is that these leveraged wagers should be paid in full.

Our answer to this cowardly view is that AIG needs to be put into bankruptcy. As we wrote on TheBigPicture over the weekend, we'll take our cue from NY State Insurance Commissioner Eric Dinalo and stipulate that we pay true hedge positions at face value, but the specs get pennies on the dollar of the face of CDS. And the specs should take the pennies gratefully and run before the crowd of angry citizens with the torches and pitchforks catch up to them.

President-elect Obama and the American people have a choice: embrace financial sanity and safety and soundness by deflating the last, biggest speculative bubble using the time-tested mechanism of insolvency. Or we can muddle along for the next decade or more, using the Paulson/Geithner model of financial rescue for the AIG CDS Ponzi scheme and embrace the Japanese model of economic stagnation.

And, yes, we can put AIG and the other providers of protection through a bankruptcy and force the CDS market into a quick and final extinction. Remember, when AIG goes bankrupt the insurance units are taken over by NY, WI and put into statutory receiverships. Only the rancid CDS positions and financial engineering unit of AIG end up in bankruptcy. And fortunately we have a fine example of just how to do it in the bankruptcy of Lehman Brothers.

Our friends at Katten Muchin Rosenman in Chicago wrote last week in their excellent Client Advisory: "On November 13, 2008, Lehman Brothers Holdings Inc. and its U.S. affiliates in bankruptcy, including Lehman Brothers Special Financing and Lehman Brothers Commercial Paper (collectively, "Lehman") filed a motion asking that certain expedited procedures be put in place to allow Lehman to assume, assign or terminate the thousands of executory derivative contracts to which they are a party. If Lehman's motion is granted, counterparties to transactions that have not been terminated will have very little time to react and will likely find themselves with new counterparties and no further recourse to Lehman because, by assigning contracts to third parties, Lehman will effectively receive, by normal operation of the Bankruptcy Code, a novation."

The bankruptcy court process also allows for parties to terminate or "rip up" CDS contracts, something that has also been fully enabled by the DTCC. The bankruptcy can dispose and the DTCC will confirm.

BTW, while you folks in the Big Media churned out hundreds of thousands of words last week waxing euphoric about the prospect for enhanced back office clearing of CDS contracts, the real issue is the festering credit situation in the front office. Truth is that the DTCC and the other dealers, working at the behest of Mr. Geithner, Gerry Corrigan and many others, have largely fixed the operational issues dogging the CDS markets. The danger of CDS is not a systemic blowup - though that will come soon enough. It is the normal operation of the now electronically enabled CDS market wherein lies the threat to the entire global financial system, this via the huge drain in liquidity illustrated above as CDS contracts are triggered by default events.
The only way to deal with this ridiculous Ponzi scheme is bankruptcy. The way to start that healing process, in our view, is by the Fed emulating the FDIC's treatment of DSL, withdrawing financial support for AIG and pushing the company into the arms of the bankruptcy court. The eager buyers for the AIG insurance units, cleansed of liability via a receivership, will stretch around the block.

By embracing Geithner, President-elect Barack Obama is endorsing the ill-advised scheme to support AIG directed by Hank Paulson et al at Goldman Sachs and executed by Tim Geithner and Ben Bernanke. News reports have already documented the ties between GS and AIG, and the backroom machinations by Paulson to get the deal done. This scheme to stay AIG's resolution cannot possibly work and when it does collapse, Barak Obama and his administration will wear the blame due through their endorsement of Tim Geithner.

The bailout of AIG represents the last desperate rearguard action by the CDS dealers and the happy squirrels at ISDA, the keepers of the flame of Wall Street financial engineering. Hopefully somebody will pull President-elect Obama aside and give him the facts on this mess before reality bites us all in the collective arse with, say, a bankruptcy filing by GM (NYSE:GM).

You see, there are trillions of dollars in outstanding CDS contracts for the Big Three automakers, their suppliers and financing vehicles. A filing by GM is not only going to put the real economy into cardiac arrest but will also start a chain reaction meltdown in the CDS markets as other automakers, vendors and finance units like GMAC are also sucked into the quicksand of bankruptcy. You knew when the vendor insurers pulled back from GM a few weeks ago that the jig was up.

And many of these CDS contracts were written two, three and four years ago, at annual spreads and upfront fees far smaller than the 90 plus percent payouts that will likely be required upon a GM default. That's the dirty little secret we peripherally discussed in our interview last week with Bill Janeway, namely that most of these CDS contracts were never priced correctly to reflect the true probability of default. In a true insurance market with capital and reserve requirements, the spreads on CDS would be multiples of those demanded today for such highly correlated risks. Or to put it in fair value accounting terms, pricing CDS vs. the current yield on the underlying basis is a fool's game. Truth is not beauty, price is not value.


If you assume a recovery value of say 20% against all of the CDS tied to the auto industry, directly and indirectly, that is a really big number. The spreads on GM today suggest recovery rates in single digits, making the potential cash payout on the CDS even larger.

As Bloomberg News reported in August: "A default by one of the automakers would trigger writedowns and losses in the $1.2 trillion market for collateralized debt obligations that pool derivatives linked to corporate debt… Credit-default swaps on GM and Ford were included in more than 80 percent of CDOs created before they lost their investment-grade debt rankings in 2005, according to data compiled by Standard & Poor's."
At some point, Washington is going to be forced to accept that bankruptcy and liquidation, the harsh medicine used with other financial insolvencies, are the best ways to deal with the last, greatest bubble, namely the CDS market. When the end comes, it will effect some of the largest financial institutions in the world, chief among them Citigroup (NYSE:C), JPMorganChase (NYSE:JPM), GS and MS, as well as some large Euroland banks.

The impending blowback from a CDS unwind at less than face amount is one of the reasons that the financial markets have been pummeling the equity values of the larger banks last week. Any bank with a large derivatives trading book is likely to be mortally wounded as the CDS markets finally collapse. We don't see problems with interest rate or currency contracts, by the way, only the great CDS Ponzi scheme is at issue - hopefully, if authorities around the world act with purpose on rendering extinct CDS contracts as they exist today. Call it a Christmas present to the entire world.

Indeed, as this issue of The IRA goes to press, news reports indicate that C is in talks with the Treasury for further financial support under the TARP, including a "bad bank" option to offload assets. A bad bank approach may be a good model for applying the principle of receivership to the too-big-too fail mega institutions, but the cost is government control of these banks.

Q: Does a "bad bank" bailout for C by Treasury and FDIC qualify as a default under the ISDA protocols!?

We've been predicting that Treasury will eventually be in charge of C. On the day the government formally takes control, we say that Treasury should and hire FDIC to start selling branches and assets. Thus does the liquidation continue and we get closer to the bottom of the great unwind. Stay tuned.

Questions? Comments? info@institutionalriskanalytics.com


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Pimco, Franklin GM Debt May Lose 75% of Value in U.S. Aid Deal

http://www.bloomberg.com/apps/news?pid=20601087&sid=aaAS8yZ86rK8&refer=home
By Jeff Green and Caroline Salas

Nov. 26 (Bloomberg) -- General Motors Corp. may ask unsecured debt holders Franklin Resources Inc. and Pimco Advisors LP to accept as much as two-third less than the face value of their bonds as the automaker cuts debt in a bid to win U.S. government aid.

GM bonds trade for 13 to 22 cents on the dollar and the company may only offer a slight premium over that, estimated Pete Hastings, a fixed income analyst at Morgan Keegan & Co. in Memphis. GM needs to cut its debt below the current $43 billion even if it gets the $12 billion in government loans sought, people familiar with the matter said earlier this week.

“It’s not a pretty choice but beggars cannot be choosers,” Hastings said. “Layering federal debt help on top of the existing debt wouldn’t leave us with a viable entity. Let’s hope that all constituencies contribute with an equal amount of pain.”

Chief Executive Officer Rick Wagoner is under a Dec. 2 deadline set by House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid to show how he’ll reshape operations as a condition of a $25 billion industry rescue. Congress may vote on the package on Dec. 8.

The largest U.S. automaker also may ask to delay a $7 billion payment to a union retiree health fund, drop more brands and rework an accord with GMAC LLC to prove it can survive and repay the government, the people familiar with the plans said.

Board Meetings

GM’s board will meet Nov. 30 and Dec. 1 to review the plan before it is released to Congress and the public.

Wagoner would have to persuade debt holders, also including Lord Abbett & Co., Northwestern Mutual Life Insurance and Fidelity PPM America according to regulatory filings, to go along with paring the debt, making it likely that any definitive accords won’t be done by the Dec. 2 deadline, the people said.

GM spokeswoman Julie Gibson had no comment on GM’s plans. Mark Hudoff, investment manager at Pimco; Chris Towle, fund manager at Lord Abbett; and Eric Takaha, fund manager at Franklin Resources Inc., didn’t return phone calls.

GM has interest expense of about $2.9 billion on its $43.3 billion in bonds, JPMorgan & Chase Co. analyst Himanshu Patel wrote in a report yesterday. Without a cut in debt, interest may rise to $3.8 billion on debt of $60 billion, he said.

“We think interest expense reduction is needed immediately for cash flow improvement, but GM simply needs to reduce overall leverage,” Patel wrote. “This suggests principal reduction should be one of the primary drivers of debt restructuring. We think a combination of debt-for-debt and debt-for-equity exchanges could be employed.”

Two-Day Grilling

Lawmakers grilled Wagoner during two days of testimony last week before deadlocking over how to let money-losing GM, Ford Motor Co. and Chrysler LLC tap $25 billion in low-interest borrowing amid U.S. sales that may slump next year to the lowest since 1991.

GM has pared $9 billion in annualized costs since 2005, and is trying to reduce expenses by an additional $15 billion a year by the end of 2009. The automaker said Nov. 7 it still may run out of cash to pay monthly bills by the end of this year.

After burning through $6.9 billion in cash last quarter, GM said it had $16.2 billion as of Sept. 30, raising the prospect of falling short by year’s end of the $11 billion minimum needed to pay monthly bills. GM has said a bankruptcy filing would be a “disaster.”

GMAC LLC, owned 49 percent by GM, began an exchange offer of its own on Nov. 20 for $38 billion of notes issued by the company and its Residential Capital LLC home-lending unit to reduce outstanding debt. GMAC is seeking to become a bank holding company to gain access to part of the $700 billion in a U.S. government bailout fund.

GMAC’s Offer

GMAC is offering to buy back notes for as little as 55 cents on the dollar in cash. Alternatively, holders can swap their debt for an equivalent amount of senior notes and preferred stock. ResCap holders will tender at a rate of as little as 20 cents on the dollar.

A GM offer would probably be better than Rescap’s for holders but not as good as GMAC’s, Hastings said.
GM sold 51 percent of GMAC to a group led by buyout firm Cerberus Capital Management LP in 2006.

A group of bondholders has hired Andrew Rosenberg, partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP, to represent them in opposing the GMAC debt exchange.

Conference Call

Holders of about $18 billion of the $26 billion of GMAC debt that is eligible for the exchange participated in a conference call yesterday to discuss their plan, Rosenberg said in an interview from his New York office. The group is led by Adam Rubinson of Dodge & Cox, according to people familiar with the discussions. Rubinson didn’t return two phone calls seeking comment.

Many of the same investors are also big holders of GM bonds, but no group has been formed because it’s difficult to react until there is a proposal from GM, the people said.

“The complexities involved in such negotiations are far from immaterial,” Patel wrote. “But at a high level, recoveries for unsecured creditors in bankruptcy seem challenged, especially in light of likely secured government loans, suggesting many could be open to debt restructuring.”

To contact the reporters on this story: Jeff Green in Southfield, Michigan at jgreen16@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net.

The Psychological Trigger of Hyper-Inflation

In a fiat monetary system, there will always be a balancing act between inflation and deflation since the money must be manipulated by the central banking system. It is however, very rare for a fiat system to suffer from deflation because of the very nature of the monetary system itself and it only occurs when there has been a boom in the business cycle brought about by, once again, central banking manipulation of interest rates.

Of course, in our “collective” memory, the only thing we can associate deflation with is The Great Depression however, that memory when compared to our current deflationary bout is skewed by the differences between the two monetary systems; the one which existed prior to 1934 and then the one that now exist that came about in 1971. It should be obvious, but perhaps not, that a foundational difference in the monetary systems will have profound effects on both inflation and deflation; along with economic movements and behaviors. In a way, the world was turned upside down in the 30s, not because of The Great Depression, but because of the actions taken by our government in concert with the Federal Reserve Banking System.

When FDR debased our currency through the confiscation of gold and the revaluation of the official price of gold some very interesting things had to take place, similarly when Nixon cut the ties of gold completely from the dollar some drastic changes needed to occur. I don’t think many understand just what had to take place and what was involved to completely transform the monetary system of this country during these two periods. Basically, everything involved with all the very complex relationships within the economy and the market dynamics of domestic economy and later the foreign economy were eliminated during these transformations. It is therefore, impossible to adequately compare any economic disruption prior to those events to those we are now experiencing. While superficial comparisons can be made, the comparisons end there. There is a completely different dynamic at work under a total fiat monetary system than was at word during The Great Depression or even prior to 1971. Indeed, that difference was witnessed during the latter part of the 1970s and into the 1980s when the economy began to experience something that, according to the Keynesian/Neo-Classical “Text-Book” Economists, was not expected nor did it fit into their econometric models. Stagflation was simply not possible under their economic ideology.

Remember, prior to that time there had never been a period when there was a downturn in economic growth while there was an inflationary monetary event. The key, of course, was that the Dollar was no longer tied, in any way, to the only anchor of stability it had ever been tied to and that was gold. Historic inflationary charts reveal a great deal about the effects, not only of sound money, but also of partial and total fiat money. Interestingly, the ability to inflate without the restraint of gold commodity is extremely evident from that singular point in our economic history: 1971. Since that time there has been a steady incline in the amount of fiat money that has been created and perhaps more interesting is the steady decline in the overall economic and social health of this country.

The degree at which our Dollar’s purchasing power has been diminished since 1971 is absolutely astounding; actually it should be alarming to all of us. The purpose of money is to act as a means of exchange and when the purchasing power of a currency is drastically debased there is not only an economic consequence, but also a socio-political consequence to such depreciation. When a drastic depreciation takes place over a few decades there is a corresponding decline in both the political and social economy.

When a currency, which is a means of exchange, loses its purchasing power it eventually loses its meaning as a means of exchange, confidence is lost and as that confidence in the money erodes so too does the confidence in the political structure occur.
I have had people say to me that people are making more money today then they ever have in our history; that is true on the surface and it is perhaps one of the greatest deceptions of our time. It is not however, the number of Dollars or the face value of those Dollars that matter, it is the amount of goods and services that those Dollars can be exchanged for that provides the benefit. It is the Quality, not the Quantity of money that provides a social benefit.

Now, it is important to understand that inflation will eventually destroy the fiat monetary system and deflation will prolong the system’s life span. Inflation eats away at the purchase value of fiat money and deflation increases the purchase value of each fiat unit. Thus, as most of us know, inflation has eaten away at approximately 97% of the purchase value of the U.S. Federal Reserve Notes. It has been a type of taxation without any representation whatsoever; that in it would be enough to cause any one of our 18 Century ancestors to rise up in revolution, but we have been effectively duped by a very clever scheme to deprive this nation of our birthright.

Today, this and other countries find themselves in the situation of crisis because that is the belly of the fiat beast; there is a natural inclination toward fiscal abuses, not only on a governmental scale, but on a corporate and individual level as well. Everyone seems to be wondering just how this crisis came about, the answer is extremely easy: the fiat monetary system!

The world has been under the heavy thumb of the central bankers for the last 37 years in particular, prior to that they were restrained by a partial fiat monetary system that would only allow them to play in their cesspool up to their collective ankles. Since 1971 however, they have jumped head-first into the muck and mire of a total fiat system that has allowed them, along with their political comrades, to scrape up the dregs of a monetary system that will ultimately spell disaster, not only for the People of this country, but in the process even the central bankers will suffer as the monetary monster they created and upon which they depend, turns on them with a vengeance and consumes the works of their filthy hands.

Now, in a maddening dash toward the fiat abyss, the central bankers are embarking on a predictable path which will lead to ultimate destruction of the fiat monetary system, the only system they have, the only system they place their faith into and depend upon. Today, although hidden from our view, there is an absolute unprecedented depreciation of our Dollar taking place and few realize the fact that the “precious” fiat Federal Reserve Note, along with just about every other fiat note around the world, is being destroyed.

To give an example of just how skewed our economy is under a fiat system we should look at savings. Normally, under a sound monetary system a decrease in the savings rate will translate into a rise in interest rates, regulating credit accordingly, but not so under a fiat monetary system. Savings have been very low in this country, debt has been high and rates are artificially pressured downward by the FED. Everything in the man-made fiat monetary system is completely contrived and contrary to sound economics; it shows in more ways than we can imagine.

Now, Mises, in his wisdom, stated:
"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

Now, that one statement holds a vast amount of information that is very pertinent for us today, for it maps out the only two routes available to the Federal Reserve and this government. Either the Federal Reserve will allow for the economic exhaustion to run its course, abandoning its easy-money-easy-credit fiat policies, or the currency will be destroyed by hyperinflation. The problem of course is that they fear deflation because it will lay their plans before the world, exposing their inner-workings and fraud for all to see; the other alternative they feel they can control, but the awakening will be rude and cold. They live under a grand illusion and perhaps they are as deluded as the majority of politicians and the people themselves, but they will simply not be able to avoid a reality that is about to destroy their system.

At the moment, the bond markets are draining capital away from the economy, but that will not remain the case for much longer. The FED is churning out liquidity in record amounts, primarily in the form of direct infusions instead of the routine fractional reserve system. The massive debt, both public and private, is proving to be more and more difficult to pay off and as interest rates continue to fall, the actual value of that debt increases. The new fiat world order is saturated with malinvestments, stagnate debt and dwindling profits. All the while, the Bond Market sucks productive capital away from sector after sector, creating its own set of problems for the FED analyticals.

We simply don’t grasp just how distorted our economic world really is; it is difficult to understand just what had to take place in the natural order of things when our economy was completely divorced from gold money. Not only did that distort the economic order, but the resulting monetary policies, along with the regulatory policies of the government itself, have created an economic environment that is surreal and fantastical in its mechanics. There has, through market manipulation and fraudulent monetary contortions, been a massive asset mispricing, not only here in the U.S., but around the world.

On top of all that, there is a looming monstrosity lurking on the books of the Bank of International Settlements, you know the Central Bank of Central Banks, and that monstrosity is a vast quagmire of debt derivatives that will soon begin to function as an enormous black-hole. Since there is little knowledge or transparency about these “debt” assets, no requirements of disclosure about what they are and where they are associated, then there is no possible way to prepare for an eventuality of derivative toxicity streaming into the world’s economic circulatory system. One thing is certain, the Federal Reserve, along with our Treasury, is no longer just the lender of last resort, it appears that they have been forced, by their own past actions, to become the buyer of last resort also. They have the “printing presses” full of paper and ink, ready for what comes their way.

One of the problems, of course, is that under a fiat monetary system there will always be an excess of fiat paper then there is a demand for it. That sounds strange, how can there be an excess of money in an economy? The nature of fiat is to run in excess of demand because it must rely upon quantity since it cannot rely upon quality. The economy we see today is exorbitantly inflated by the fiat system, so much so that few people understand the illusion that the quantity of money creates. That is one reason that so few people can wrap their heads around a return to gold money, they look at today’s economy and are magically hypnotized by the face amount of dollars involved and say there is not enough gold to do the job. However, every dollar of economy value is only valued around 3 Cents or less, it does make a huge difference. Even so, the monetary mechanism of gold money does not act the same as fiat money, nor does it require a constant supply to be effective since each unit operates as a means of exchange throughout the economy and is rarely stagnate.

Under a fiat system inflation is the normal stage of operations; it must be inflated to maintain the illusion of its effectiveness. When there is a contraction, or even a simple stall within the creation and expansion of fiat money there is a direct effect on the economy superstructure, as we are currently witnessing in this and other countries. While there are those who believe the underlying debt is a restraint upon the creation of money, the truth is that it only restrains a certain type of fiat money creation. We have been told, not only by Bernanke, but by other central banking heads that they have an unlimited ability to create as much money as they feel they need to effect economic stimulation. What they don’t say is that an unlimited supply of fiat money has very definite consequences. They rarely admit that such an unlimited ability increasingly makes the purchase value of the currency worth less and less.

Another reason why the fiat monetary system must rely upon a continual increase in supply is that there must be some way for the central planners to compensate for the continual decrease in the purchase power of each monetary unit through inflation. Strange isn’t it? They debase the money through the increase of the money supply, but they have to increase the money supply to combat the effects of increasing the money supply and on and on and on and on they go down their yellow brick road as though they know where they are going. Their dilemma, of course, is that there is no way for them to play catch-up with the loss of purchasing power of the currency, not matter how much money they create the currency will always lose more value quicker than they can “print” it out.

The cows come home when the public begin to loose all confidence in the currency. This is particularly true when interest rates, which have been kept at artificially low levels, begin to bend to market pressures and the FED can no longer keep them down. What triggers the wide-spread lack of confidence in the currency is when the people realize that they money is increasingly worthless even when interest rates are beginning to rise, which would normally indicate a stronger value within the currency, but during a highly inflationary environment, the opposite happens. At that point the people begin to spend their increasingly worthless dollars as soon as they get them in their hands. The wild demand for money stops even though there seemingly an unlimited supply of money available. People and markets suddenly realize that all the money in the world cannot substitute for purchasing power of money. It is a strange occurrence and it happens the same way every time. It is almost an overnight epiphany that occurs.

You see, hyperinflation is not only a monetary event, but it is far more of a psychological event. During boom periods of economic fiat expansion, there a demand for money, the problem comes when a deflationary period enters the economic fiat landscape. At that point, as we have seen, the central bankers push the “presses” into overdrive, full steam ahead to avoid facing the consequences of correction associated with a fiat bust. It is during this period that the danger of hyperinflation evolves because the supply of money is rapidly increasing but the demand for that money is decreasing. Eventually, everyone begins to understand that no amount of fiat money can replace the loss of value associated with the money. At that point everyone suddenly gets a mind, they suddenly come to a realization about just how much of a fraud they have been victimized by over the years and they are no longer willing to play the game.

This great psychological event, as I said, always happens suddenly, so fast in fact that the government must respond by revaluing each monetary unit, seeking to exchange old fiat money with lower denominations with new fiat money complete with ever-increasing numbers of zeros on its face. The system, along with the central bank and government, is effectively destroyed. It is all crippled, stripped of its power to enforce not only legal tender laws, but all laws. The government is effectively neutralized by a hyperinflationary event and the fiat monetary system is dealt a final death blow from which it simply cannot recover because it cannot regain the confidence of either the people or the market.

A deflationary depression can be devastating to a country with massive layoffs, bankruptcies, defaults and business closures, but the money is never destroyed through deflation, that is not the case with hyperinflation. Deflationary will prolong the fiat monetary system, almost cleaning the system of excesses but hyperinflation will absolutely destroy everything that is even remotely associated with the currency. A deflationary depression will simply allow the Federal Reserve to continue its fiat shenanigans; hyperinflation will destroy the Federal Reserve, the fractional reserve banking system and the political machine that supports its criminal activity.

We have already been told, time and again, that the Federal Reserve will not allow a long deep deflationary event to occur; the other side of that coin is that their options will include, as we are now seeing, a drastic inflationary push of fiat economic instruments. Remember, our Dollar has already been debased by 97% or more, it will not take much to tip the scale of inflation where the people’s psychology is triggered and they cease any demand for the massive amounts of fiat money coming into the system.

FED FOCUS-U.S. central bank stares warily at zero bound

By Pedro Nicolaci da Costa

NEW YORK,(Reuters) - It's a dilemma most central banks would rather avoid but the Federal Reserve is being forced to confront: the risky business of pushing interest rates all the way to zero.

The dreaded zero mark lends a scary, skittish quality to the conduct of monetary policy. Ordinarily, policy-makers rely on lowering rates to promote growth. Yet with borrowing costs at a bare-bones 1 percent, a half-point cut would amount to half the U.S. central bank's ammunition.

That is not to say the Fed will run out of tools to influence the economy if it decides it needs to press rates to zero, and if the latest news of declining prices turns into a more pronounced deflationary trend.

Possible further steps include a commitment to keeping rates low for a prolonged period of time, or a broader expansion of the assets the central bank accepts as collateral for loans. [ID:N21468337]

But the Fed would be operating in largely uncharted territory, with much more uncertainty than stability-seeking central bankers are generally comfortable with.

"Some of these alternative policy tools are relatively unfamiliar," said Russell Jones, global head of fixed-income research at RBC Capital Markets. "They may raise practical problems of implementation and calibration of their likely economic effects."

The Fed appears well aware of these pitfalls.
Minutes from its last meeting in October pointed to a policy-setting committee made less concerned with inflation by a worsening economy, but one that also felt some nervousness regarding the potential need to bring official rates down to zero.

"If resource utilization remained weak for some time, inflation could fall below levels consistent with the Federal Reserve's dual mandate for promoting price stability and maximum employment," the minutes said, an allusion to the possibility of mounting deflation risks.

Such a development "would pose important policy challenges in light of the already-low level of the committee's federal funds rate target," the Fed said.

BROKEN BUCK

Still, the central bank signaled it was willing to cut rates further to stop what has become an accelerating raft of bad news, including steep job cuts and a grim outlook for lending, and financial markets expect a half-point cut when the central bank meets in mid-December.

One worry is that money market funds, which already came under pressure when the Fed's abundant liquidity measures pushed the effective fed funds rate to zero in the markets, could see shares once again break below $1.

"I'm of the view that if they cut, it's going to be another 50 basis points and then they'll stop," said Anna Piretti, economist at BNP Paribas. "Otherwise everybody would just start pulling out of money market funds and that would create a lot of systemic issues."

Others, however, believe the Fed would not sacrifice the wider economy to spare money markets, and note the central bank and U.S. Treasury have already taken steps to support the sector.

"We do not think this cost is enough to constrain the Fed, in part because facilities such as the Money Market Investor Funding Facility should help to provide a more orderly transition for this market," said Michael Feroli, an economist at JPMorgan.

Indeed, the Fed has good reason to act aggressively if it sees a deflation threat. When prices fall, inflation-adjusted rates rise even if nominal borrowing costs are held steady -- and that can further undercut growth and worsen the deflation.

THE ROAD TO TOKYO

The challenge of conducting policy with interest rates pegged at the "zero bound" has been keeping Fed Chairman Ben Bernanke up at night since he served as a member of the central bank's Board of Governors earlier in the decade.

Back in 2002-2003, he was a big proponent of keeping rates low for a considerable period to prevent a Japanese-style period of deflation. Bernanke saw this as a way to pull down long-term interest rates by influencing the market's view on the path short-term rates would follow.

With prices already pulling back in an economy where activity seems to have ground to a halt, a deflation battle could be brewing again. U.S. consumer prices fell by 1 percent in October, the biggest drop on record and one that should continue given the sharp reversal in energy and commodities.

What policy-makers would like at all cost to avoid is a pervasive and self-reinforcing decline in costs and price expectations that would likely prolong the recession the economy already appears to have fallen into.

Japan has been battling deflation on and off since the late-1980s, and the U.S. central bank would likely turn to some of the same solutions eventually adopted by the Bank of Japan.

In fact, Fed Vice Chairman Donald Kohn acknowledged for the first time on Wednesday that the U.S. central bank was effectively already engaging in "quantitative easing," the purchase of assets and taking on of collateral aimed at lowering yields and therefore the cost of capital financing.

The Fed could turbocharge existing measures in order to prevent a deflationary spiral. To its benefit, it has recognized the threat much earlier than the BOJ.

This gives policy-makers room to act preemptively, either through an explicit commitment to keeping rates at unusually low levels for some time or through broader purchases of assets, to include both riskier securities and safer, longer-dated ones, such as 10-year Treasury notes.

"The Fed could target long-term interest rates," noted Tony Crescenzi, chief bond market strategist at Miller Tabak. "In his now famous November 2002 speech on deflation, Bernanke said that the Fed could try to stimulate spending by lowering interest rates further out the yield curve."

"The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to the maturity date to which it is targeting," said Crescenzi.

U.S. Producer Prices Probably Fell in October by Most on Record

http://www.bloomberg.com/apps/news?pid=20601103&sid=a.bUl5_wf788&refer=news
By Shobhana Chandra

Nov. 18 (Bloomberg) -- Prices paid to U.S. producers probably fell in October by the most on record as weakening global growth caused demand for commodities to dry up, economists said before a government report today.

The projected 1.9 percent drop in wholesale prices last month, reflecting the median estimate in a Bloomberg News survey, would be the biggest since records began in 1947.
Excluding food and energy, so-called core costs probably rose 0.1 percent, the smallest gain in seven months.

Recessions in the U.S., Europe and Japan, combined with slower growth in China and India, may keep subduing raw-material costs as companies cut back. Deflation, or a prolonged decrease in prices, is displacing inflation as a threat for the Federal Reserve and other policy makers throughout the world.

``There's not much of a battle for inflation hawks to be fighting right now,'' said Maxwell Clarke, chief U.S. economist at IDEAglobal in New York. ``The only real concern for the Fed is the risk to the economy.''

The Labor Department's producer-price index is due at 8:30 a.m. in Washington. Forecasts of the 76 economists surveyed ranged from declines of 0.3 percent to 2.8 percent.

At 1 p.m., the National Association of Home Builders/Wells Fargo index may show homebuilder confidence in November held at a record low of 14, according to the survey median.

Producer prices are one of three monthly inflation gauges reported by Labor. Prices of goods imported into the U.S. fell last month by the most on record, a report last week showed.

Declining Prices

Figures due tomorrow may show consumer prices dropped 0.8 percent in October, the most since 1949, according to the Bloomberg survey.

The government asks producer-price survey participants to report costs for the Tuesday of the week that includes the 13th of the month. On that basis, crude oil fell 24 percent in October from the prior month on the New York Mercantile Exchange. Oil slid another 25 percent a barrel this month.

After contracting at a 0.3 percent annual pace in the third quarter, the U.S. economy may shrink again this quarter and in the first three months of 2009, according to a Bloomberg survey conducted from Nov. 3 to Nov. 11. The slump would be the longest since 1974-75.

Europe and Japan slipped into a recession last quarter, and China's economy, the biggest contributor to global growth in 2007, is slowing.

Dow Chemical Co., the largest U.S. chemical maker, is among producers hurt by a drop in demand. The prices Dow charges for two of the most-used plastics, polyethylene and polypropylene, fell as much as 40 percent since September, giving up gains achieved since June, the company said. Midland, Michigan-based Dow is closing more factories as sales decline.

``This is as bad as we have ever seen it in our lifetimes,'' Chief Executive Officer Andrew Liveris said in a Nov. 13 interview. An increase in prices ``is probably going to be near impossible in the next three to six months.''



Bloomberg Survey

================================================================
PPI Core NAHB
PPI Housing
MOM% MOM% Index
================================================================

Date of Release 11/18 11/18 11/18
Observation Period Oct. Oct. Nov.
----------------------------------------------------------------
Median -1.9% 0.1% 14
Average -1.8% 0.1% 14
High Forecast -0.3% 0.3% 16
Low Forecast -2.8% -0.4% 12
Number of Participants 76 75 40
Previous -0.4% 0.4% 14
----------------------------------------------------------------
4CAST Ltd. -2.3% 0.1% ---
Action Economics -2.5% 0.1% 14
AIG Investments -2.4% 0.2% 15
Aletti Gestielle SGR -1.9% 0.2% ---
Ameriprise Financial Inc -1.7% 0.2% 14
Argus Research Corp. -0.5% 0.1% ---
Banc of America Securitie -1.8% 0.3% ---
Bank of Tokyo- Mitsubishi -2.0% -0.1% 13
Bantleon Bank AG -2.0% --- ---
Barclays Capital -1.5% 0.1% 14
BMO Capital Markets -2.5% 0.0% 13
BNP Paribas -2.1% 0.2% ---
Briefing.com -2.0% 0.0% ---
Calyon -1.4% 0.2% ---
CIBC World Markets -1.8% 0.2% 14
Citi -1.8% 0.1% ---
ClearView Economics -1.5% 0.0% ---
Commerzbank AG -2.5% 0.2% ---
Credit Suisse -2.0% 0.1% ---
Daiwa Securities America -0.9% 0.1% ---
DekaBank -2.0% 0.0% 12
Desjardins Group -1.5% 0.2% ---
Deutsche Bank Securities -2.0% 0.1% 13
Deutsche Postbank AG -1.8% 0.1% ---
Dresdner Kleinwort -1.5% 0.1% 14
DZ Bank -1.2% 0.2% 14
First Trust Advisors -2.7% 0.1% ---
Fortis -1.5% 0.2% 14
FTN Financial -2.0% -0.1% ---
Goldman, Sachs & Co. -1.5% 0.3% ---
Helaba -1.5% 0.1% 14
Herrmann Forecasting -2.2% -0.1% 14
High Frequency Economics -2.5% 0.1% 14
Horizon Investments -2.0% 0.1% 15
HSBC Markets -2.6% -0.2% 14
IDEAglobal -1.9% 0.2% ---
IHS Global Insight -2.0% 0.1% ---
Informa Global Markets -0.6% 0.0% 16
ING Financial Markets -2.1% 0.0% 14
Insight Economics -1.8% 0.0% ---
Intesa-SanPaulo -2.5% 0.2% ---
J.P. Morgan Chase -2.1% 0.1% 14
Janney Montgomery Scott L -1.8% 0.1% 15
JPMorgan's Private Wealth -1.5% 0.1% 13
Landesbank Berlin -0.7% 0.1% ---
Lloyds TSB -1.8% 0.1% 14
Maria Fiorini Ramirez Inc -1.5% 0.1% ---
Merk Investments -2.8% 0.1% ---
Merrill Lynch -2.0% 0.1% 14
MFC Global Investment Man -2.2% -0.2% 14
Moody's Economy.com -1.1% 0.1% 14
Morgan Keegan & Co. -2.1% -0.2% ---
Morgan Stanley & Co. -2.1% -0.2% ---
National Bank Financial -1.8% 0.2% ---
National City Corporation -0.6% 0.1% ---
Newedge -1.9% 0.1% 15
Nomura Securities Intl. -0.7% 0.0% ---
Nord/LB -2.0% 0.0% 13
PNC Bank -1.5% 0.2% ---
RBS Greenwich Capital -2.5% -0.4% ---
Ried, Thunberg & Co. -1.8% 0.3% ---
Schneider Trading Associa -2.2% 0.2% 14
Scotia Capital -2.5% 0.2% 14
Societe Generale -1.7% 0.1% ---
Standard Chartered -1.8% 0.2% 14
Stone & McCarthy Research -1.4% 0.0% 14
TD Securities --- --- 15
Thomson Financial/IFR -0.3% 0.2% 13
Tullett Prebon -2.3% -0.2% 14
UBS Securities LLC -1.6% 0.1% 14
Unicredit MIB -0.8% 0.2% 14
University of Maryland -2.2% 0.1% 14
Wachovia Corp. -1.3% 0.1% ---
Wells Fargo & Co. -2.5% 0.1% 14
WestLB AG -1.5% 0.2% ---
Westpac Banking Co. -2.2% 0.1% 15
Wrightson Associates -1.5% 0.3% ---

The Nasdaq Composite closed today at 1482.05. The last time it was this low was in March 2003.

The index is off an astonishing 48% from its high in Oct 2007.
The 1-year chart:

Rescue Plan Without Taxpayer Money

http://www.nytimes.com/2008/11/16/business/16gret.html?ref=business&pagewanted=print

HELLO, taxpayers. Worried about the fate of the $350 billion that the government has asked you to fork over so far to help rescue financiers from themselves?

Last week, Treasury Secretary Henry M. Paulson Jr. gave you every errant golfer’s favorite response: Oops! Mulligan!

While the government still declines to say exactly how it has spent your funds, or who all the beneficiaries are, Mr. Paulson conceded that his huge capital injection hasn’t persuaded banks to lend more money.

When he first peddled the “troubled asset relief program” in September as a solution to the credit mess, he urged Congress to back the plan posthaste. But on Thursday, he scotched his idea of using even more of your billions to buy rotten mortgage assets from banks.

Looking on the bright side, there is something to be said for flexible responses to a complicated financial crisis.

But now that the original TARP design has been toe-tagged, and because there’s still another $350 billion left for Mr. Paulson to deploy, perhaps it’s time to consider actually attacking the root of the problem: falling home prices and rising delinquencies and defaults.

Since the $700 billion TARP was funded, it has been used solely to shore up banks and other financial institutions. (An irreverent friend calls it The Act Rewarding Plutocrats.)

Treasury officials did move closer to helping consumers with a new plan floated last week aimed at offering $50 billion in loans to companies that issue credit cards, make student loans and finance car purchases.

Kind of interesting, isn’t it, that troubled homeowners are missing from the list of TARP beneficiaries and left to fend for themselves?

To be sure, private efforts to modify mortgages have increased recently; Citigroup, JPMorgan Chase and Bank of America have all announced plans to restructure troubled borrowers’ loans. So have Fannie Mae and Freddie Mac.

But these efforts are limited to loans that these institutions hold. They don’t address the millions of loans sitting in securitization pools, those profitable instruments cobbled together by Wall Street that are collapsing en masse.

Wall Street engineering has created an epic problem: restructuring loans bundled into pools of securities is much thornier than simply changing the terms of individual loans residing inside individual banks.

Not only do such changes require the approval of hard-to-identify investors who essentially control the mortgages, but also many pools were designed with rules that limit the numbers of loans that can be modified.

Securitization trusts hold $1.5 trillion of subprime and alt-A loans. As of late August, according to figures from the Securities Industry and Financial Markets Association, roughly $400 billion of the loans were delinquent and $1.1 trillion were current on interest and principal payments.

But that latter group of loans could become troubled as well if more borrowers become unable to pay (which rising unemployment figures suggest might be the case).

To make matters worse, many borrowers will face severe interest rate resets on their adjustable-rate mortgages next year and beyond. A new report from Demos, a public policy research group in New York, points out that millions of mortgages are ticking toward a possible explosion.

The report, citing data from First American CoreLogic, a real estate research firm, says $250 billion in loans will reset in 2009 and $700 billion in 2010 and after. If left on their own financially, many of these borrowers will be forced into foreclosure.

Still, there are many smart ideas floating around about how to solve the twin problems posed by securitizations and resetting mortgages.

One interesting idea was conceived by two veteran investment managers, Thomas H. Patrick, co-founder of New Vernon Capital, and Mac Taylor, a principal of the Verum Capital Group.

They propose refinancing all $1.1 trillion of the loans in securitization pools that are still performing but that may soon face punishing interest rate resets.
Homeowners whose loans are in these pools would receive newly issued loans with fixed interest rates, currently 6.14 percent, and 30-year terms. Under this plan, Fannie Mae and Freddie Mac would issue debt to pay off the outstanding principal on the loans and then guarantee the new ones.

Voilà: Investors who own the underlying interests in the mortgages would be fully repaid and the securitizations would be closed out.

“Our proposal is based upon the fundamental principle that the only way to ameliorate the problem is to somehow improve the underlying collateral,” says Mr. Patrick. “It rewards those homeowners who have paid their mortgages and have demonstrated financial responsibility.”

Currently, with everyone worried about more losses, the securitizations are trading at rock-bottom levels.

Because big banks and other financial institutions hold most of the securities, refinancing the $1.1 trillion in securitized loans would provide big capital infusions to many of the entities the Treasury is trying to help with TARP, Mr. Patrick said.

But while TARP involves direct payment of taxpayer money to banks, the Patrick-Taylor plan would create losses for taxpayers only if the refinanced loans took a hit later on.

There’s another benefit. Remember all those complicated products like collateralized debt obligations and credit default swaps that have been scaring the pants off people and causing some financial giants to look into the abyss?

Well, the Patrick-Taylor plan would reinflate the value of C.D.O.’s made out of bundled mortgages. And firms that sold C.D.S.’s as insurance against mortgage defaults would also get a boost (the biggest bailout recipient, the American International Group, for example, has been struggling to pay billions of dollars in collateral on weakening C.D.S.’s).

The investment managers reckon that their plan would give the financial system an immediate capital infusion of about $385 billion. That’s their estimate of the difference between the value at which depressed mortgage securities are now valued — 65 cents on the dollar — and par value.

If the assigned value of those assets drops even lower than 65 cents, then the financial benefit to the banks of the Patrick-Taylor plan would be greater.

In return for all of this financial aid tied to the $1.1 trillion of securitized mortgage loans that are still current, the Patrick-Taylor plan would require banks to buy the $400 billion in delinquent securitized loans at full value.

The banks would have to absorb any losses they incur when selling the underlying mortgages. But that’s a small price to pay for getting out from under this albatross.

IT is impossible to predict how much financial institutions might lose on that $400 billion. But it is likely to be less than the losses they will suffer if they sit idly by while defaults and delinquencies accelerate.

Because the program would provide such a boost to the banks, Mr. Patrick said, these institutions should be required to absorb a portion of possible losses on the $1.1 trillion in healthy loans guaranteed by Fannie and Freddie. The Treasury should be able to bludgeon them into eating some of these losses, Mr. Patrick argued.

“This set of securities is what started the fire: it’s what brought down Merrill Lynch, Lehman Brothers and Bear Stearns,” Mr. Patrick said. “You can’t deal with the securities in their current framework, and you can’t solve the problem one mortgage at a time. If we eliminate these securities, strip away the complex structure, we can fix the banking system.”

Under the Patrick-Taylor plan, homeowners would also be helped. Future delinquencies might be reduced, and the downward spiral of home prices could be curbed.

Worth at least a moment of our leaders’ consideration, don’t you think? At the very least, it’s better than a mulligan.

A truly riveting, amazing read on what really happened
in the market prior to this unprecedented meltdown:

THE END

by Michael Lewis Nov 11 2008
www.portfolio.com

The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar's Poker, returns to his old haunt to figure out what went wrong.

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn't the first clue.

I'd never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people's money, would be expelled from finance.

When I sat down to write my account of the experience in 1989—Liar's Poker, it was called—it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future.

Unless some insider got all of this down on paper, I figured, no future human would believe that it happened.

I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they'd be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn't expect was that any future reader would look on my experience and say, "How quaint."

I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, "I hope that college students trying to figure out what to do with their lives will read it and decide that it's silly to phony it up and abandon their passions to become financiers." I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.

Somehow that message failed to come across. Six months after Liar's Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They'd read my book as a how-to manual.

In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents' world when you can buy it, slice it up into tranches, and sell off the pieces?

At some point, I gave up waiting for the end. There was no scandal or reversal, I assumed, that could sink the system.

Then came Meredith Whitney with news. Whitney was an obscure analyst of financial firms for Oppenheimer Securities who, on October 31, 2007, ceased to be obscure. On that day, she predicted that Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust. It's never entirely clear on any given day what causes what in the stock market, but it was pretty obvious that on October 31, Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of had shaved $369 billion off the value of financial firms in the market. Four days later, Citigroup's C.E.O., Chuck Prince, resigned. In January, Citigroup slashed its dividend.

From that moment, Whitney became E.F. Hutton: When she spoke, people listened. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they'd fetch in a fire sale. The vast assemblages of highly paid people inside the firms were essentially worth nothing. For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You're wrong. You're still not facing up to how badly you have mismanaged your business.

Rivals accused Whitney of being overrated; bloggers accused her of being lucky. What she was, mainly, was right. But it's true that she was, in part, guessing. There was no way she could have known what was going to happen to these Wall Street firms. The C.E.O.'s themselves didn't know.

Now, obviously, Meredith Whitney didn't sink Wall Street. She just expressed most clearly and loudly a view that was, in retrospect, far more seditious to the financial order than, say, Eliot Spitzer's campaign against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they'd have vanished long ago. This woman wasn't saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn't even know how to manage their own.

At some point, I could no longer contain myself: I called Whitney. This was back in March, when Wall Street's fate still hung in the balance. I thought, If she's right, then this really could be the end of Wall Street as we've known it. I was curious to see if she made sense but also to know where this young woman who was crashing the stock market with her every utterance had come from.

It turned out that she made a great deal of sense and that she'd arrived on Wall Street in 1993, from the Brown University history department. "I got to New York, and I didn't even know research existed," she says. She'd wound up at Oppenheimer and had the most incredible piece of luck: to be trained by a man who helped her establish not merely a career but a worldview. His name, she says, was Steve Eisman.

Eisman had moved on, but they kept in touch. "After I made the Citi call," she says, "one of the best things that happened was when Steve called and told me how proud he was of me."

Having never heard of Eisman, I didn't think anything of this. But a few months later, I called Whitney again and asked her, as I was asking others, whom she knew who had anticipated the cataclysm and set themselves up to make a fortune from it. There's a long list of people who now say they saw it coming all along but a far shorter one of people who actually did. Of those, even fewer had the nerve to bet on their vision. It's not easy to stand apart from mass hysteria—to believe that most of what's in the financial news is wrong or distorted, to believe that most important financial people are either lying or deluded—without actually being insane. A handful of people had been inside the black box, understood how it worked, and bet on it blowing up. Whitney rattled off a list with a half-dozen names on it. At the top was Steve Eisman.

Steve Eisman entered finance about the time I exited it. He'd grown up in New York City and gone to a Jewish day school, the University of Pennsylvania, and Harvard Law School. In 1991, he was a 30-year-old corporate lawyer. "I hated it," he says. "I hated being a lawyer. My parents worked as brokers at Oppenheimer. They managed to finagle me a job. It's not pretty, but that's what happened."

He was hired as a junior equity analyst, a helpmate who didn't actually offer his opinions. That changed in December 1991, less than a year into his new job, when a subprime mortgage lender called Ames Financial went public and no one at Oppenheimer particularly cared to express an opinion about it. One of Oppenheimer's investment bankers stomped around the research department looking for anyone who knew anything about the mortgage business. Recalls Eisman: "I'm a junior analyst and just trying to figure out which end is up, but I told him that as a lawyer I'd worked on a deal for the Money Store." He was promptly appointed the lead analyst for Ames Financial. "What I didn't tell him was that my job had been to proofread the documents and that I hadn't understood a word of the fucking things."

Ames Financial belonged to a category of firms known as nonbank financial institutions. The category didn't include J.P. Morgan, but it did encompass many little-known companies that one way or another were involved in the early-1990s boom in subprime mortgage lending—the lower class of American finance.

The second company for which Eisman was given sole responsibility was Lomas Financial, which had just emerged from bankruptcy. "I put a sell rating on the thing because it was a piece of shit," Eisman says. "I didn't know that you weren't supposed to put a sell rating on companies. I thought there were three boxes—buy, hold, sell—and you could pick the one you thought you should." He was pressured generally to be a bit more upbeat, but upbeat wasn't Steve Eisman's style. Upbeat and Eisman didn't occupy the same planet. A hedge fund manager who counts Eisman as a friend set out to explain him to me but quit a minute into it. After describing how Eisman exposed various important people as either liars or idiots, the hedge fund manager started to laugh. "He's sort of a prick in a way, but he's smart and honest and fearless."

"A lot of people don't get Steve," Whitney says. "But the people who get him love him." Eisman stuck to his sell rating on Lomas Financial, even after the company announced that investors needn't worry about its financial condition, as it had hedged its market risk. "The single greatest line I ever wrote as an analyst," says Eisman, "was after Lomas said they were hedged." He recited the line from memory: "?'The Lomas Financial Corp. is a perfectly hedged financial institution: It loses money in every conceivable interest-rate environment.' I enjoyed writing that sentence more than any sentence I ever wrote." A few months after he'd delivered that line in his report, Lomas Financial returned to bankruptcy.

Most economists predict a recovery late next year. Don't bet on it.
Eisman wasn't, in short, an analyst with a sunny disposition who expected the best of his fellow financial man and the companies he created. "You have to understand," Eisman says in his defense, "I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn't give a shit what it sold."

Harboring suspicions about people's morals and telling investors that companies don't deserve their capital wasn't, in the 1990s or at any other time, the fast track to success on Wall Street. Eisman quit Oppenheimer in 2001 to work as an analyst at a hedge fund, but what he really wanted to do was run money. FrontPoint Partners, another hedge fund, hired him in 2004 to invest in financial stocks. Eisman's brief was to evaluate Wall Street banks, homebuilders, mortgage originators, and any company (General Electric or General Motors, for instance) with a big financial-services division—anyone who touched American finance. An insurance company backed him with $50 million, a paltry sum. "Basically, we tried to raise money and didn't really do it," Eisman says.

Instead of money, he attracted people whose worldviews were as shaded as his own—Vincent Daniel, for instance, who became a partner and an analyst in charge of the mortgage sector. Now 36, Daniel grew up a lower-middle-class kid in Queens. One of his first jobs, as a junior accountant at Arthur Andersen, was to audit Salomon Brothers' books. "It was shocking," he says. "No one could explain to me what they were doing." He left accounting in the middle of the internet boom to become a research analyst, looking at companies that made subprime loans. "I was the only guy I knew covering companies that were all going to go bust," he says. "I saw how the sausage was made in the economy, and it was really freaky."

Danny Moses, who became Eisman's head trader, was another who shared his perspective. Raised in Georgia, Moses, the son of a finance professor, was a bit less fatalistic than Daniel or Eisman, but he nevertheless shared a general sense that bad things can and do happen. When a Wall Street firm helped him get into a trade that seemed perfect in every way, he said to the salesman, "I appreciate this, but I just want to know one thing: How are you going to screw me?"

Heh heh heh, c'mon. We'd never do that, the trader started to say, but Moses was politely insistent: We both know that unadulterated good things like this trade don't just happen between little hedge funds and big Wall Street firms. I'll do it, but only after you explain to me how you are going to screw me. And the salesman explained how he was going to screw him. And Moses did the trade.

Both Daniel and Moses enjoyed, immensely, working with Steve Eisman. He put a fine point on the absurdity they saw everywhere around them. "Steve's fun to take to any Wall Street meeting," Daniel says. "Because he'll say 'Explain that to me' 30 different times. Or 'Could you explain that more, in English?' Because once you do that, there's a few things you learn. For a start, you figure out if they even know what they're talking about. And a lot of times, they don't!"

At the end of 2004, Eisman, Moses, and Daniel shared a sense that unhealthy things were going on in the U.S. housing market: Lots of firms were lending money to people who shouldn't have been borrowing it. They thought Alan Greenspan's decision after the internet bust to lower interest rates to 1 percent was a travesty that would lead to some terrible day of reckoning. Neither of these insights was entirely original. Ivy Zelman, at the time the housing-market analyst at Credit Suisse, had seen the bubble forming very early on. There's a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. "All these people were saying it was nearly as high in some other countries," Zelman says. "But the problem wasn't just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren't real buyers. They were speculators." Zelman alienated clients with her pessimism, but she couldn't pretend everything was good. "It wasn't that hard in hindsight to see it," she says. "It was very hard to know when it would stop." Zelman spoke occasionally with Eisman and always left these conversations feeling better about her views and worse about the world. "You needed the occasional assurance that you weren't nuts," she says. She wasn't nuts. The world was.

By the spring of 2005, FrontPoint was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market. In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Eisman couldn't understand who was making all these loans or why. He had a from-the-ground-up understanding of both the U.S. housing market and Wall Street. But he'd spent his life in the stock market, and it was clear that the stock market was, in this story, largely irrelevant. "What most people don't realize is that the fixed-income world dwarfs the equity world," he says. "The equity world is like a fucking zit compared with the bond market." He shorted companies that originated subprime loans, like New Century and Indy Mac, and companies that built the houses bought with the loans, such as Toll Brothers. Smart as these trades proved to be, they weren't entirely satisfying. These companies paid high dividends, and their shares were often expensive to borrow; selling them short was a costly proposition.

Enter Greg Lippman, a mortgage-bond trader at Deutsche Bank. He arrived at FrontPoint bearing a 66-page presentation that described a better way for the fund to put its view of both Wall Street and the U.S. housing market into action. The smart trade, Lippman argued, was to sell short not New Century's stock but its bonds that were backed by the subprime loans it had made. Eisman hadn't known this was even possible—because until recently, it hadn't been. But Lippman, along with traders at other Wall Street investment banks, had created a way to short the subprime bond market with precision.

Here's where financial technology became suddenly, urgently relevant. The typical mortgage bond was still structured in much the same way it had been when I worked at Salomon Brothers. The loans went into a trust that was designed to pay off its investors not all at once but according to their rankings. The investors in the top tranche, rated AAA, received the first payment from the trust and, because their investment was the least risky, received the lowest interest rate on their money. The investors who held the trusts' BBB tranche got the last payments—and bore the brunt of the first defaults. Because they were taking the most risk, they received the highest return. Eisman wanted to bet that some subprime borrowers would default, causing the trust to suffer losses. The way to express this view was to short the BBB tranche. The trouble was that the BBB tranche was only a tiny slice of the deal.

But the scarcity of truly crappy subprime-mortgage bonds no longer mattered. The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.

The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L. Eisman was perplexed in particular about why Wall Street firms would be coming to him and asking him to sell short. "What Lippman did, to his credit, was he came around several times to me and said, 'Short this market,'?" Eisman says. "In my entire life, I never saw a sell-side guy come in and say, 'Short my market.'?"

And short Eisman did—then he tried to get his mind around what he'd just done so he could do it better. He'd call over to a big firm and ask for a list of mortgage bonds from all over the country. The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They'd be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking home­owners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. "The price was absurd, and they were giving her a low-down-payment option-ARM," says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he'd hired back in 1997 to take care of his newborn twin daughters phoned him. "She was this lovely woman from Jamaica," he says. "One day she calls me and says she and her sister own five townhouses in Queens. I said, 'How did that happen?'?" It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. "By the time they were done," Eisman says, "they owned five of them, the market was falling, and they couldn't make any of the payments."

In retrospect, pretty much all of the riskiest subprime-backed bonds were worth betting against; they would all one day be worth zero. But at the time Eisman began to do it, in the fall of 2006, that wasn't clear. He and his team set out to find the smelliest pile of loans they could so that they could make side bets against them with Goldman Sachs or Deutsche Bank. What they were doing, oddly enough, was the analysis of subprime lending that should have been done before the loans were made: Which poor Americans were likely to jump which way with their finances? How much did home prices need to fall for these loans to blow up? (It turned out they didn't have to fall; they merely needed to stay flat.) The default rate in Georgia was five times higher than that in Florida even though the two states had the same unemployment rate. Why? Indiana had a 25 percent default rate; California's was only 5 percent. Why?

Moses actually flew down to Miami and wandered around neighborhoods built with subprime loans to see how bad things were. "He'd call me and say, 'Oh my God, this is a calamity here,'?" recalls Eisman. All that was required for the BBB bonds to go to zero was for the default rate on the underlying loans to reach 14 percent. Eisman thought that, in certain sections of the country, it would go far, far higher.

The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done. Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.

But he couldn't figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. "I didn't understand how they were turning all this garbage into gold," he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. "We always asked the same question," says Eisman. "Where are the rating agencies in all of this? And I'd always get the same reaction. It was a smirk." He called Standard & Poor's and asked what would happen to default rates if real estate prices fell. The man at S&P couldn't say; its model for home prices had no ability to accept a negative number. "They were just assuming home prices would keep going up," Eisman says.

As an investor, Eisman was allowed on the quarterly conference calls held by Moody's but not allowed to ask questions. The people at Moody's were polite about their brush-off, however. The C.E.O. even invited Eisman and his team to his office for a visit in June 2007. By then, Eisman was so certain that the world had been turned upside down that he just assumed this guy must know it too. "But we're sitting there," Daniel recalls, "and he says to us, like he actually means it, 'I truly believe that our rating will prove accurate.' And Steve shoots up in his chair and asks, 'What did you just say?' as if the guy had just uttered the most preposterous statement in the history of finance. He repeated it. And Eisman just laughed at him."

"With all due respect, sir," Daniel told the C.E.O. deferentially as they left the meeting, "you're delusional."
This wasn't Fitch or even S&P. This was Moody's, the aristocrats of the rating business, 20 percent owned by Warren Buffett. And the company's C.E.O. was being told he was either a fool or a crook by one Vincent Daniel, from Queens.

A full nine months earlier, Daniel and Moses had flown to Orlando for an industry conference. It had a grand title—the American Securitization Forum—but it was essentially a trade show for the subprime-mortgage business: the people who originated subprime mortgages, the Wall Street firms that packaged and sold subprime mortgages, the fund managers who invested in nothing but subprime-mortgage-backed bonds, the agencies that rated subprime- mortgage bonds, the lawyers who did whatever the lawyers did. Daniel and Moses thought they were paying a courtesy call on a cottage industry, but the cottage had become a castle. "There were like 6,000 people there," Daniel says. "There were so many people being fed by this industry. The entire fixed-income department of each brokerage firm is built on this. Everyone there was the long side of the trade. The wrong side of the trade. And then there was us. That's when the picture really started to become clearer, and we started to get more cynical, if that was possible. We went back home and said to Steve, 'You gotta see this.'?"

Eisman, Daniel, and Moses then flew out to Las Vegas for an even bigger subprime conference. By now, Eisman knew everything he needed to know about the quality of the loans being made. He still didn't fully understand how the apparatus worked, but he knew that Wall Street had built a doomsday machine. He was at once opportunistic and outraged.

Their first stop was a speech given by the C.E.O. of Option One, the mortgage originator owned by H&R Block. When the guy got to the part of his speech about Option One's subprime-loan portfolio, he claimed to be expecting a modest default rate of 5 percent. Eisman raised his hand. Moses and Daniel sank into their chairs. "It wasn't a Q&A," says Moses. "The guy was giving a speech. He sees Steve's hand and says, 'Yes?'"

"Would you say that 5 percent is a probability or a possibility?" Eisman asked.

A probability, said the C.E.O., and he continued his speech.

Eisman had his hand up in the air again, waving it around. Oh, no, Moses thought. "The one thing Steve always says," Daniel explains, "is you must assume they are lying to you. They will always lie to you." Moses and Daniel both knew what Eisman thought of these subprime lenders but didn't see the need for him to express it here in this manner. For Eisman wasn't raising his hand to ask a question. He had his thumb and index finger in a big circle. He was using his fingers to speak on his behalf. Zero! they said.

"Yes?" the C.E.O. said, obviously irritated. "Is that another question?"

"No," said Eisman. "It's a zero. There is zero probability that your default rate will be 5 percent." The losses on subprime loans would be much, much greater. Before the guy could reply, Eisman's cell phone rang. Instead of shutting it off, Eisman reached into his pocket and answered it. "Excuse me," he said, standing up. "But I need to take this call." And with that, he walked out.

Eisman's willingness to be abrasive in order to get to the heart of the matter was obvious to all; what was harder to see was his credulity: He actually wanted to believe in the system. As quick as he was to cry bullshit when he saw it, he was still shocked by bad behavior. That night in Vegas, he was seated at dinner beside a really nice guy who invested in mortgage C.D.O.'s—collateralized debt obligations. By then, Eisman thought he knew what he needed to know about C.D.O.'s. He didn't, it turned out.

Later, when I sit down with Eisman, the very first thing he wants to explain is the importance of the mezzanine C.D.O. What you notice first about Eisman is his lips. He holds them pursed, waiting to speak. The second thing you notice is his short, light hair, cropped in a manner that suggests he cut it himself while thinking about something else. "You have to understand this," he says. "This was the engine of doom." Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a "particularly egregious" C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. "I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years," Eisman says.

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.'s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, "the equivalent of three levels of dog shit lower than the original bonds."

FrontPoint had spent a lot of time digging around in the dog shit and knew that the default rates were already sufficient to wipe out this guy's entire portfolio. "God, you must be having a hard time," Eisman told his dinner companion.

"No," the guy said, "I've sold everything out."

After taking a fee, he passed them on to other investors. His job was to be the C.D.O. "expert," but he actually didn't spend any time at all thinking about what was in the C.D.O.'s. "He managed the C.D.O.'s," says Eisman, "but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.'s—as if this moron was helping you. I thought, You prick, you don't give a fuck about the investors in this thing."

Whatever rising anger Eisman felt was offset by the man's genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.'s; he saw it as a basis for friendship. "Then he said something that blew my mind," Eisman tells me. "He says, 'I love guys like you who short my market. Without you, I don't have anything to buy.'?"

That's when Eisman finally got it. Here he'd been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren't enough Americans with shitty credit taking out loans to satisfy investors' appetite for the end product. The firms used Eisman's bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn't create a second Peyton Manning to inflate the league's stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. "They weren't satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn't afford," Eisman says. "They were creating them out of whole cloth. One hundred times over! That's why the losses are so much greater than the loans. But that's when I realized they needed us to keep the machine running. I was like, This is allowed?"

This particular dinner was hosted by Deutsche Bank, whose head trader, Greg Lippman, was the fellow who had introduced Eisman to the subprime bond market. Eisman went and found Lippman, pointed back to his own dinner companion, and said, "I want to short him." Lippman thought he was joking; he wasn't. "Greg, I want to short his paper," Eisman repeated. "Sight unseen."

Eisman started out running a $60 million equity fund but was now short around $600 million of various subprime-related securities. In the spring of 2007, the market strengthened. But, says Eisman, "credit quality always gets better in March and April. And the reason it always gets better in March and April is that people get their tax refunds. You would think people in the securitization world would know this. We just thought that was moronic."

He was already short the stocks of mortgage originators and the homebuilders. Now he took short positions in the rating agencies—"they were making 10 times more rating C.D.O.'s than they were rating G.M. bonds, and it was all going to end"—and, finally, the biggest Wall Street firms because of their exposure to C.D.O.'s. He wasn't allowed to short Morgan Stanley because it owned a stake in his fund. But he shorted UBS, Lehman Brothers, and a few others. Not long after that, FrontPoint had a visit from Sanford C. Bernstein's Brad Hintz, a prominent analyst who covered Wall Street firms. Hintz wanted to know what Eisman was up to. "We just shorted Merrill Lynch," Eisman told him.

"Why?" asked Hintz.

"We have a simple thesis," Eisman explained. "There is going to be a calamity, and whenever there is a calamity, Merrill is there." When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman's logic—the logic of Wall Street's pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.

There was only one thing that bothered Eisman, and it continued to trouble him as late as May 2007. "The thing we couldn't figure out is: It's so obvious. Why hasn't everyone else figured out that the machine is done?" Eisman had long subscribed to Grant's Interest Rate Observer, a newsletter famous in Wall Street circles and obscure outside them. Jim Grant, its editor, had been prophesying doom ever since the great debt cycle began, in the mid-1980s. In late 2006, he decided to investigate these things called C.D.O.'s. Or rather, he had asked his young assistant, Dan Gertner, a chemical engineer with an M.B.A., to see if he could understand them. Gertner went off with the documents that purported to explain C.D.O.'s to potential investors and for several days sweated and groaned and heaved and suffered. "Then he came back," says Grant, "and said, 'I can't figure this thing out.' And I said, 'I think we have our story.'?"

Eisman read Grant's piece as independent confirmation of what he knew in his bones about the C.D.O.'s he had shorted. "When I read it, I thought, Oh my God. This is like owning a gold mine. When I read that, I was the only guy in the equity world who almost had an orgasm."

On July 19, 2007, the same day that Federal Reserve Chairman Ben Bernanke told the U.S. Senate that he anticipated as much as $100 billion in losses in the subprime-mortgage market, FrontPoint did something unusual: It hosted its own conference call. It had had calls with its tiny population of investors, but this time FrontPoint opened it up. Steve Eisman had become a poorly kept secret. Five hundred people called in to hear what he had to say, and another 500 logged on afterward to listen to a recording of it. He explained the strange alchemy of the C.D.O. and said that he expected losses of up to $300 billion from this sliver of the market alone. To evaluate the situation, he urged his audience to "just throw your model in the garbage can. The models are all backward-looking.

The models don't have any idea of what this world has become…. For the first time in their lives, people in the asset-backed-securitization world are actually having to think." He explained that the rating agencies were morally bankrupt and living in fear of becoming actually bankrupt. "The rating agencies are scared to death," he said. "They're scared to death about doing nothing because they'll look like fools if they do nothing."

On September 18, 2008, Danny Moses came to work as usual at 6:30 a.m. Earlier that week, Lehman Brothers had filed for bankruptcy. The day before, the Dow had fallen 449 points to its lowest level in four years. Overnight, European governments announced a ban on short-selling, but that served as faint warning for what happened next.

At the market opening in the U.S., everything—every financial asset—went into free fall. "All hell was breaking loose in a way I had never seen in my career," Moses says. FrontPoint was net short the market, so this total collapse should have given Moses pleasure. He might have been forgiven if he stood up and cheered. After all, he'd been betting for two years that this sort of thing could happen, and now it was, more dramatically than he had ever imagined. Instead, he felt this terrifying shudder run through him. He had maybe 100 trades on, and he worked hard to keep a handle on them all. "I spent my morning trying to control all this energy and all this information," he says, "and I lost control. I looked at the screens. I was staring into the abyss. The end. I felt this shooting pain in my head. I don't get headaches. At first, I thought I was having an aneurysm."

Moses stood up, wobbled, then turned to Daniel and said, "I gotta leave. Get out of here. Now." Daniel thought about calling an ambulance but instead took Moses out for a walk.

Outside it was gorgeous, the blue sky reaching down through the tall buildings and warming the soul. Eisman was at a Goldman Sachs conference for hedge fund managers, raising capital. Moses and Daniel got him on the phone, and he left the conference and met them on the steps of St. Patrick's Cathedral. "We just sat there," Moses says. "Watching the people pass."

This was what they had been waiting for: total collapse. "The investment-banking industry is fucked," Eisman had told me a few weeks earlier. "These guys are only beginning to understand how fucked they are. It's like being a Scholastic, prior to Newton. Newton comes along, and one morning you wake up: 'Holy shit, I'm wrong!'?" Now Lehman Brothers had vanished, Merrill had surrendered, and Goldman Sachs and Morgan Stanley were just a week away from ceasing to be investment banks. The investment banks were not just fucked; they were extinct.

Not so for hedge fund managers who had seen it coming. "As we sat there, we were weirdly calm," Moses says. "We felt insulated from the whole market reality. It was an out-of-body experience. We just sat and watched the people pass and talked about what might happen next. How many of these people were going to lose their jobs. Who was going to rent these buildings after all the Wall Street firms collapsed." Eisman was appalled. "Look," he said. "I'm short. I don't want the country to go into a depression. I just want it to fucking deleverage." He had tried a thousand times in a thousand ways to explain how screwed up the business was, and no one wanted to hear it. "That Wall Street has gone down because of this is justice," he says. "They fucked people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience."

Truth to tell, there wasn't a whole lot of hand-wringing inside FrontPoint either. The only one among them who wrestled a bit with his conscience was Daniel. "Vinny, being from Queens, needs to see the dark side of everything," Eisman says. To which Daniel replies, "The way we thought about it was, 'By shorting this market we're creating the liquidity to keep the market going.'?"

"It was like feeding the monster," Eisman says of the market for subprime bonds. "We fed the monster until it blew up."

About the time they were sitting on the steps of the midtown cathedral, I sat in a booth in a restaurant on the East Side, waiting for John Gutfreund to arrive for lunch, and wondered, among other things, why any restaurant would seat side by side two men without the slightest interest in touching each other.

There was an umbilical cord running from the belly of the exploded beast back to the financial 1980s. A friend of mine created the first mortgage derivative in 1986, a year after we left the Salomon Brothers trading program. ("The problem isn't the tools," he likes to say. "It's who is using the tools. Derivatives are like guns.")

When I published my book, the 1980s were supposed to be ending. I received a lot of undeserved credit for my timing. The social disruption caused by the collapse of the savings-and-loan industry and the rise of hostile takeovers and leveraged buyouts had given way to a brief period of recriminations. Just as most students at Ohio State read Liar's Poker as a manual, most TV and radio interviewers regarded me as a whistleblower. (The big exception was Geraldo Rivera. He put me on a show called "People Who Succeed Too Early in Life" along with some child actors who'd gone on to become drug addicts.) Anti-Wall Street feeling ran high—high enough for Rudy Giuliani to float a political career on it—but the result felt more like a witch hunt than an honest reappraisal of the financial order. The public lynchings of Gutfreund and junk-bond king Michael Milken were excuses not to deal with the disturbing forces underpinning their rise. Ditto the cleaning up of Wall Street's trading culture. The surface rippled, but down below, in the depths, the bonus pool remained undisturbed. Wall Street firms would soon be frowning upon profanity, firing traders for so much as glancing at a stripper, and forcing male employees to treat women almost as equals. Lehman Brothers circa 2008 more closely resembled a normal corporation with solid American values than did any Wall Street firm circa 1985.

The changes were camouflage. They helped distract outsiders from the truly profane event: the growing misalignment of interests between the people who trafficked in financial risk and the wider culture.

I'd not seen Gutfreund since I quit Wall Street. I'd met him, nervously, a couple of times on the trading floor. A few months before I left, my bosses asked me to explain to Gutfreund what at the time seemed like exotic trades in derivatives I'd done with a European hedge fund. I tried. He claimed not to be smart enough to understand any of it, and I assumed that was how a Wall Street C.E.O. showed he was the boss, by rising above the details. There was no reason for him to remember any of these encounters, and he didn't: When my book came out and became a public-relations nuisance to him, he told reporters we'd never met.

Over the years, I'd heard bits and pieces about Gutfreund. I knew that after he'd been forced to resign from Salomon Brothers he'd fallen on harder times. I heard later that a few years ago he'd sat on a panel about Wall Street at Columbia Business School. When his turn came to speak, he advised students to find something more meaningful to do with their lives. As he began to describe his career, he broke down and wept.

When I emailed him to invite him to lunch, he could not have been more polite or more gracious. That attitude persisted as he was escorted to the table, made chitchat with the owner, and ordered his food. He'd lost a half-step and was more deliberate in his movements, but otherwise he was completely recognizable. The same veneer of denatured courtliness masked the same animal need to see the world as it was, rather than as it should be.

We spent 20 minutes or so determining that our presence at the same lunch table was not going to cause the earth to explode. We discovered we had a mutual acquaintance in New Orleans. We agreed that the Wall Street C.E.O. had no real ability to keep track of the frantic innovation occurring inside his firm. ("I didn't understand all the product lines, and they don't either," he said.) We agreed, further, that the chief of the Wall Street investment bank had little control over his subordinates. ("They're buttering you up and then doing whatever the fuck they want to do.") He thought the cause of the financial crisis was "simple. Greed on both sides—greed of investors and the greed of the bankers." I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.

But I didn't argue with him. For just as you revert to being about nine years old when you visit your parents, you revert to total subordination when you are in the presence of your former C.E.O. John Gutfreund was still the King of Wall Street, and I was still a geek. He spoke in declarative statements; I spoke in questions.

But as he spoke, my eyes kept drifting to his hands. His alarmingly thick and meaty hands. They weren't the hands of a soft Wall Street banker but of a boxer. I looked up. The boxer was smiling—though it was less a smile than a placeholder expression. And he was saying, very deliberately, "Your…fucking…book."

I smiled back, though it wasn't quite a smile.

"Your fucking book destroyed my career, and it made yours," he said.

I didn't think of it that way and said so, sort of.

"Why did you ask me to lunch?" he asked, though pleasantly. He was genuinely curious.

You can't really tell someone that you asked him to lunch to let him know that you don't think of him as evil. Nor can you tell him that you asked him to lunch because you thought that you could trace the biggest financial crisis in the history of the world back to a decision he had made. John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street's first public corporation. He ignored the outrage of Salomon's retired partners. ("I was disgusted by his materialism," William Salomon, the son of the firm's founder, who had made Gutfreund C.E.O. only after he'd promised never to sell the firm, had told me.) He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.'s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn't, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.'s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.'s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk?

Now I asked Gutfreund about his biggest decision. "Yes," he said. "They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it." He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. "When things go wrong, it's their problem," he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. "It's laissez-faire until you get in deep shit," he said, with a half chuckle. He was out of the game.

It was now all someone else's fault.

He watched me curiously as I scribbled down his words. "What's this for?" he asked.

I told him I thought it might be worth revisiting the world I'd described in Liar's Poker, now that it was finally dying. Maybe bring out a 20th-anniversary edition.

"That's nauseating," he said.

Hard as it was for him to enjoy my company, it was harder for me not to enjoy his. He was still tough, as straight and blunt as a butcher. He'd helped create a monster, but he still had in him a lot of the old Wall Street, where people said things like "A man's word is his bond." On that Wall Street, people didn't walk out of their firms and cause trouble for their former bosses by writing books about them. "No," he said, "I think we can agree about this: Your fucking book destroyed my career, and it made yours." With that, the former king of a former Wall Street lifted the plate that held his appetizer and asked sweetly, "Would you like a deviled egg?"

Until that moment, I hadn't paid much attention to what he'd been eating. Now I saw he'd ordered the best thing in the house, this gorgeous frothy confection of an earlier age. Who ever dreamed up the deviled egg? Who knew that a simple egg could be made so complicated and yet so appealing? I reached over and took one. Something for nothing. It never loses its charm.

US Stocks at a Glance//US STOCKS-Losses at Alcoa, GM cloud global outlook

NEW YORK - U.S. stocks tumbled as production cuts at aluminum maker Alcoa, fears of a cash drain at automaker General Motors and signs the Chinese economy is faltering heightened fears of a global economic slump.

The diminishing appetite for risky assets, including stocks, roiled markets across Asia overnight and pushed European shares down 4 percent or more. Selling was widespread. Commodity-related shares and technology bellwethers took the brunt losses, including Google Inc down nearly 5 percent.

Alcoa, a Dow component, slid 8 percent to $10.79 after the company slashed a further 350,000 tonnes of aluminum-making capacity worldwide, blaming faltering global demand.

General Motors slid for fifth straight day, falling more than 16 percent to $2.80, as investors fretted about prospects for the U.S. auto sector to secure a desperately needed cash infusion from the government.

"The credit problems and the lack of lending has led to a lack of stimulus for a lot of different companies," said Stephen Carl, principal and head of U.S. equity trading at The Williams Capital Group LP in New York. "More news is going to come out in the negative vein. You don't know where the bottom is."

The Dow Jones industrial average slid 274.31 points, or 3.09 percent, to 8,596.23. The Standard & Poor's 500 Index dropped 30.76 points, or 3.35 percent, to 888.45. The Nasdaq Composite Index plummeted 48.34 points, or 2.99 percent, to 1,568.40.

In the latest sign of the fallout from the economic upheaval, Chinese import growth slowed in October and inflation fell to a 17-month low as demand cooled.

The market's slide puts the market in a precarious position as investors had hoped the start of November would mark a start of sustained recovery after a disastrous October sent stocks to their lowest levels in more than five years.

Other decliners included oil companies Chevron dropped 2.9 percent to $72.09, while Exxon Mobil declined 2.7 percent to $72.10. Shares of Google fell almost 5 percent to $303.27, making the Web search leader the second top drag on Nasdaq, behind Apple , off 3 percent at $93.03.

Goldman Sachs slashed its price target on Google, as well as its fourth-quarter revenue view for the Internet company. Technology services giant International Business Machines Corp weighed on the Dow, with a drop of almost 4 percent to $80.75.

Starbucks Corp shares fell 3.4 percent to $9.85 on Nasdaq after the coffee chain operator cut its plans for new international coffee shops and effectively slashed its outlook following a steeper-than-expected slide in fourth-quarter profit.

Trading volumes were thin, with other market participants away and the bond market closed for the Veterans Day holiday.

Forex
FOREX-Dollar, yen supported on weak tone in equities

LONDON - The dollar and yen were broadly supported on Tuesday on a weak tone in equity prices, which prompted investors to shun riskier assets.

The euro was flat against the dollar, its gains from a better-than-expected reading in a key German indicator survey ECON erased as the single currency was weighed down by weakness in European share prices.

"There is still the risk aversion factor which is supporting the dollar and yen but it is not quite as much as before, as currencies are settling into ranges," said Daragh Maher, currency strategist at Calyon in London.

Shares in European markets fell after tumbles in Asian shares and on Wall Street overnight. European shares were down 2.5 percent.

The euro briefly rose after the ZEW Institute's index of German economic sentiment came in at -53.5 in November, improving from -63.0 in October. It also beat market expectations for a reading of -62.0.

"The ZEW survey was a little better than expected, which has taken some pressure off the euro," Calyon's Maher said.

At 1133 GMT, the euro was largely flat at $1.2732 after hitting a low of $1.2677 in Asian trade. But the outlook for the euro was not bright. "We expect growth conditions in the euro zone to keep on weakening, with further easing in rates to come, and under such conditions the euro will likely remain under pressure," UBS analysts said in a research note.

Meanwhile, sterling was battered as it fell to its lowest in 12 years on a trade-weighted basis and hit a record low against the euro on concerns that the UK economy will suffer even more than the euro zone economy.

Benchmark UK interest rates at 3.0 percent are also now lower than key euro zone rates at 3.25 percent, and some speculate the Bank of England will continue to make more aggressive rate cuts compared with the European Central Bank, widening the interest rate gap further.

The euro hit a record high against sterling of 82.14 pence, according to Reuters data while the pound fell 0.5 percent against the dollar at $1.5527.

Trade-weighted sterling fell to 84.6, its weakest level since September 1996. Against the yen, the euro edged lower by 0.2 percent to 124.55 yen.

The Japanese currency also rose against sterling and the Australian dollar as global economic worries kept up the pressure to reverse carry trade positions, where low-yielding currencies like the yen are used to buy assets in higher-yielding ones.

The Japanese currency was down 0.1 percent against the dollar at 97.88 yen.

The dollar and yen are perceived as less risky currencies during times of market stress, and market participants said they may also be supported by the fallout on developing and emerging markets from the global financial crisis.

Russia's central bank on Tuesday let the rouble weaken against a euro/dollar basket beyond the 30.41 level it has defended in recent months, spurring speculation of further gradual depreciation.

Europe share..European shares fall, led by banks and oils

European shares fell 2.5 percent by midday on Tuesday, led by banks and oil stocks as optimism from China's near-$600 billion stimulus package announced on Monday faded.

At 1155 GMT, the FTSEurofirst 300 index of top European shares was down 2.5 percent at 899.44 points, after rising 0.9 percent in the previous session on news of China's plans.

The index has lost 40 percent this year, hammered by the credit crisis and resulting economic slowdown. Worries about the health of global economy were again evident, with U.S. and Asian stocks pulling back after shares of General Motors sank to a 62-year low on downgrades from analysts who cited cash levels that may fall below the minimum the company will need in the first quarter of 2009.

Brokerages forecast that Goldman Sachs will post its first-ever quarterly loss, also hitting global equities.
"There's disappointment over the likes of GM. We're still in a volatile period," said Edmund Shing, strategist at BNP Paribas, in Paris.

"The question is whether things are really as bad as the market would suggest, and the answer is probably no, but no-one is prepared to put their neck on the line and put big bucks on it."

Across Europe, Britain's FTSE 100, Germany's DAX and France's CAC-40 were down between 2 and 2.4 percent. Banks took most points off the Eurofirst index, with the DJ Stoxx banking index down 4.9 percent.

Spain's Banco Santander was down 5.3 percent, extending its decline from Monday, when it announced a $9 billion rights issue. WestLB cut the bank's rating on Tuesday to "hold" from "buy", while other brokers cut price targets.

Deutsche Bank, HSBC, Lloyds, and UBS were down between 3.8 and 7.9 percent. Among insurers, Allianz, Axa Aegon and Swiss LIfe were down between 5.1 and 8.2 percent.

Bucking the downward trend, mobile group Vodafone was the standout gainer, up 9.8 percent after reporting first half results slightly ahead of expectations and saying it would focus on cost cuts to maintain profits as it lowered its guidance on full-year revenue..

But most sectors on the Eurofirst 300 declined, with 275 out of 313 stocks lower. Crude prices struggled to stay above $60 as the economic slowdown again dominated investor concerns. "With oil still falling lower, a hope for stronger demand after China's actions seems to be fading," said Ian Griffiths, a dealer at CMC Markets, in a note.

Total, ENI, BP, Repsol, Statoil, and BG were down between 2.2 and 7.3 percent. With copper and gold prices lower, miners fell, with Anglo American, BHP Billiton, Rio Tinto, Lonmin and Xstrata 3.1-7.2 percent lower.

Analysts said that Tuesday's decline for shares was not that sharp in view of recent volatility, and European equities seemed to be in a bottoming-out phase.

Recession fears were fuelled by gloomy economic data from Britain in particular, with house sales reaching their lowest level in at least 30 years and retail sales falling by the biggest amount in three years in October.

InterContinental Hotels, the world's largest hotelier, fell 5.5 percent after warning of a sharp fall in October trading as the global economic slowdown hit the industry, overshadowing a forecast-beating 14 percent rise in third-quarter profits.

Spain's Telefonica edged up 0.3 percent, BT, which reports on Thursday, was up 0.4 percent. Telekom Austria was up 9.2 percent after announcing job cuts late on Monday. Shares of coffee chain Starbucks Corp fell 3.1 percent after the closing bell on Monday following fourth-quarter results that fell short of expectations.

Asia at a Glance
HONG KONG - Hong Kong shares slid 4.8 percent on Tuesday, weighed down by banks on concerns the global economic downturn will increase bad loans, while local developers dropped as the outlook for the property sector dimmed.

Hong Kong developers Cheung Kong (Holdings), controlled by billionaire Li Ka shing, plunged 9.2 percent, while Sun Hung Kai Properties shed 5 percent. "The market is pricing in the likelihood of a continued drop in property prices. The potential rise in the unemployment rate will depress demand further," said D. Gorton, analyst at Louis Capital Markets.

Hong Kong's home prices are expected to fall 15 percent in 2009, while rents may decline 10 percent, Nomura International (HK) said in a research report on Tuesday.

In light trade, the benchmark Nikkei ended down 272.13 points at 8,809.30, after falling more than 4 percent earlier. The broader Topix declined 3 percent to 889.36.

Indian shares fell 6.61 percent on Tuesday, their biggest fall in more than two weeks reversing most of the 8 percent-plus rise of the previous two days as fears of a protracted global recession saw investors pare risk again.

HSBC shed 4.7 percent to HK$88 after it said on Monday that it took a $4.3 billion hit for bad debts in the United States, up $700 million from the previous quarter.

JP Morgan cut HSBC's price target 25 percent to HK$82. "The results of HSBC were discouraging. The big worry is that its U.S. operations will continue to deteriorate and they will have to set aside more funds to cover bad loans in the future," said Y.K. Lee, an analyst at Core-Pacific Yamaichi.

Shares of Semiconductor Manufacturing International Corp (SMIC), China's top contract chip maker, soared 29 percent. The stock earlier rose as much as 61 percent in its biggest one-percentage gain ever after it said it planned to sell a $172 million stake to Beijing-based Datang Telecom Technology & Industry Holdings Co Ltd.

The benchmark Hang Seng Index .HSI closed down 703.73 points at 14,040.90, snapping a two-day 7 percent rally.

A total of HK$54.4 billion ($7 billion) changed hands, down from HK$60.7 billion on Monday. Standard Chartered Bank fell 6.5 percent after it said on Monday its local subsidiary in Brazil had agreed to acquire some fixed assets from Lehman Brothers Brazil.

The China Enterprise Index of top locally listed mainland Chinese companies fell 3.7 percent to 7,136.92, led by a 5.8 percent slide in the nation's top insurer, China Life Insurance.

Chinese banks and construction-related stocks gave up earlier gains as investors were sceptical about their earnings prospects with the slowing mainland economy.

Top lender ICBC lost 2.3 percent, while smaller rival China Construction Bank fell 3.7 percent. The world's No. 3 alumina producer Chalco fell 2.6 percent, while cement maker Anhui Conch lost 8 percent. Chalco on Tuesday said it had lowered its spot alumina prices by 10.3 percent, the fourth reduction since June.

Shares of Lenovo, the world's No. 4 PC maker, fell 7.8 percent after Credit Suisse cut its earnings forecast for the company by 58 percent and 48 percent for 2009 and 2010, respectively, due mainly to slow corporate demand. The stock hit a nine-year low on Monday after Morgan Stanely downgraded the company.

Hong Kong-based consumer goods exporter Li & Fung slid 12.5 percent after it said at the weekend it had imposed a hiring freeze and would lay off some employees, among other cost-cutting measures.

Shanghai Electric Group rose 9.4 percent. The company said late on Monday it had received official approval from regulators for its planned A share sale and merger proposal.

Metals ..Gold dips as commodities turn negative

LONDON - Gold dipped in Europe on Tuesday, as a downturn in the stock markets and commodities such as oil and industrial metals weighed on prices.

However, the softer dollar helped to limit losses. Prices are likely to consolidate in the short-term, analysts said, with the market eyeing the outcome of this weekend's G20 summit in Washington, where world leaders will discuss the financial crisis.

Spot gold was at $739.50/741.50 an ounce at 1053 GMT, little changed from $745.75 late in New York on Monday, when it rose as much as 3 percent.

"Gold (climbed) yesterday on the back of everything else, but those supportive factors have turned negative," said Simon Weeks, head of precious metals at the Bank of Nova Scotia.

"Oil came down, stock markets came down, commodities came down, and gold came with them," he added. "But overall, we expect it to outperform everything else in the longer term."

Oil and industrial metals prices slipped, with U.S. crude futures falling over $2 a barrel to erase the previous session's gains.

The softer dollar is lending some support to gold, which is often bought as an alternative investment to the U.S. currency and tends to move in the opposite direction to it.

Platinum prices slipped a touch after climbing on Monday as traders hoped the Chinese stimulus package could lead to a recovery in demand for the more industrial precious metals.

Platinum and palladium prices have tumbled in recent months as traders fretted over the outlook for demand from carmakers, who consume around half of the world's platinum group metals.

Stillwater Mining said on Monday its full-year 2008 production is likely to be still lower than its most recent forecast of 515,000-525,000 ounces, which it had already cut from an initial estimate of 550,000-565,000.

The company said due to falling metals prices it recognises it needs to adjust its operations to conserve cash. Stillwater, a unit of Russia's Norilsk Nickel, is the only significant producer of PGMs outside South Africa and Russia.

Spot platinum was quoted at $831/851 an ounce, down from $847 late in New York on Monday. Palladium was at $218/226 an ounce from $. Among other precious metals, silver slipped to $9.98/10.06 an ounce from $10.18.

Citi Will Halt Some Foreclosures, Rework Mortgages (Update2)
http://www.bloomberg.com/apps/news?pid=20601087&sid=a0fgsmm5MTXI&refer=home
By Elizabeth Hester

Nov. 11 (Bloomberg) -- Citigroup Inc., the fourth-biggest U.S. bank by market value, plans to stem foreclosures as the firm modifies about $20 billion in mortgages, following similar moves by its largest rivals.

Citigroup will reach out to 500,000 homeowners in the next six months who may be at risk of falling behind on mortgage payments, the New York-based company said in a statement today. The bank has helped about 370,000 people, or $35 billion in mortgages, avoid foreclosure since 2007.

Congress has been urging financial-services companies to work with borrowers after foreclosures rose to the highest on record in the third quarter. JPMorgan Chase & Co. said Oct. 31 it will stop foreclosure on some loans as it works to make payments easier on $110 billion of problem mortgages, while Bank of America Corp. said it has modified 226,000 loans this year, including those from Countrywide Financial Corp.

Citigroup is trying to help customers stay in their homes, Sanjiv Das, chief executive officer of the bank's mortgage unit, said in the statement. The company's stock rose 2 cents to $11.23 in German trading.

The bank said on an Oct. 16 conference call that it was suffering a sixth consecutive quarter of deepening losses in the mortgage portfolio. The bank had restructured more than 120,000 loans, including granting extensions, during the first half of 2008, Chief Financial Officer Gary Crittenden said on the call.

Default Notices

A total of 765,558 U.S. properties got a default notice, were warned of a pending auction or were foreclosed on during the third quarter, the most since records began in January 2005, data compiled by RealtyTrac Inc. in Irvine, California, show.

Citigroup said yesterday it is ``focusing particularly on borrowers in areas that are likely to face extreme economic distress.''

Home prices in 20 metropolitan areas fell in July at the fastest pace on record, and sales of previously owned homes in August were 32 percent below the peak of September 2005.

Citigroup plans to reach out to loan holders who live in their homes and have ``sufficient income for affordable mortgage payments,'' the statement said. The bank will extend a moratorium on foreclosures to those who meet these criteria.

Federal Deposit Insurance Corp. Chairman Sheila Bair has proposed a plan to guarantee mortgages to help stem foreclosures, according to two congressional aides briefed on the matter. Her idea is to use as much as $50 billion of the $700 billion financial-services industry bailout package approved by lawmakers.

JPMorgan's Program

The JPMorgan program is designed to assist 400,000 families with $70 billion in loans in the next two years, the bank said. Another 250,000 families with $40 billion in mortgages have already been helped under existing loan-modification programs.

The bank's program extends to customers of Washington Mutual Inc., the savings and loan JPMorgan agreed to buy in September, and to clients of EMC, the loan-servicing company the bank acquired in its takeover of Bear Stearns Cos.

JPMorgan will hire 300 loan counselors to help delinquent homeowners and employ about 150 people to review each mortgage before it's sent to the foreclosure process.
Other employees will be added to staff 24 new regional counseling centers.

Bank of America announced two plans this year to help reduce customers' payments by as much as $11 billion, including Countrywide borrowers. In total, they will cover more than $120 billion in unpaid balances.

Countrywide, the mortgage lender acquired by Bank of America, agreed in October to help about 400,000 customers facing foreclosure or having problems paying their loans as part of settlement with 14 states over fraud complaints.

Citigroup will also give 14 communities as much as $100,000 each to help restore abandoned homes and those in low-income neighborhoods.

To contact the reporter on this story: Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: November 11, 2008 04:20 EST

JPMorgan sees consumer loan defaults rising

By Elinor Comlay

NEW YORK (Reuters) - JPMorgan Chase & Co (JPM.N:) said on Friday it expects consumer loan defaults to increase in the current quarter and sees higher loan loss provisions.

The bank has more than $395 billion in consumer loans, with the largest chunk in home equity. Mortgages, credit cards and auto loans are also in the portfolio, according to a filing with regulators on Friday.

"Given the potential stress on the consumer from rising unemployment, the continued downward pressure on housing prices and the elevated national inventory of unsold homes, management remains extremely cautious," the bank said in the filing.

It warned that home equity loans and more risky mortgages made since 2006 make up a large chunk of its portfolio, and defaults are rising as home prices continue to fall.

JPMorgan expects charge-offs of bad loans in its home lending portfolio to increase in the current quarter and into 2009, the filing said.

The bank's mortgage portfolio has performed better than those of some of its rivals because JPMorgan did not made as many of the more risky types of loans that caused massive writedowns at other banks such as Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz).

JPMorgan has $18.2 billion of risky mortgages known as subprime, including $4.7 billion of subprime loans acquired when it bought Washington Mutual in September.

The bank said the charge-off rate for its credit card business may rise above 5 percent in the fourth quarter and increase further next year.

The net charge-off rate for its managed credit cards climbed to 5 percent in the third quarter, up from 3.64 percent in the same period last year.

Separately, the bank said it expects an after-tax gain of $600 million in the fourth quarter from the dissolution of Chase Paymentech Solutions, a joint venture with payments processor First Data Corp FDC.BA.

JPMorgan's shares were down 15 cents to $38.11 in early trading on the New York Stock Exchange.

(Reporting by Elinor Comlay; editing by Jeffrey Benkoe and John Wallace)

Emerson Boosts Its Dividend

[This makes 52 consecutive years of increasing dividends!]

http://online.barrons.com/article/SB122610206300710077.html

›By SHIRLEY A. LAZO DIGG
8-Nov-2008

Despite a gloomy economic assessment by its chief executive, Emerson Electric posted record fiscal 2008 results Tuesday, and boosted its dividend 10%.

The new quarterly will be 33 cents a share, up from 30 cents, giving the stock (ticker: EMR) a 4.21% yield. Disbursement is scheduled for Dec. 10 to holders of record Nov. 14, and the ex-dividend date is Nov. 12. This is the 118-year-old St. Louis industrial conglomerate's 52nd consecutive year of enhanced payouts [!] Dividends have been ongoing since 1947.

In fiscal 2008, ended Sept. 30, Emerson returned 63% of its operating cash flow to investors via $940 million in dividends and $1.1 billion in stock buybacks.

Emerson's fiscal 2008 earnings per share from continuing operations grew 17% from the 2007 level, to $3.11, while net advanced 15%, to $3.06. Sales climbed 12%, to $24.8 billion. Operating cash flow rose 9%, to $3.3 billion, and Emerson achieved a 21.8% return on total capital. The company's record performance in 2008 "demonstrates again just how well-positioned we are...to deliver high levels of profit margin and returns over the long term," said CEO David N. Farr.

In a post-earnings conference call with analysts, Farr said that Emerson is leaving fiscal 2008 "very strong" and "going into 2009 ready for a very uncertain and challenging year." He added that the U.S. is already "at or near a recession," while Europe and Japan are "right there coming behind us." However, Farr thinks emerging economies, although slowing like everywhere else, will hold up relatively well.

For fiscal 2009, Farr expects Emerson's underlying sales to rise or fall by up to 4%. In 2008, they climbed 8%. Underlying sales exclude the impact of currency fluctuations and acquisitions. He forecast earnings from continuing operations of $2.80 to $3.20 a share, on sales of $23.5 billion to $25.5 billion.

Traded on the Big Board, Emerson's shares recently were quoted at 31 and change. Their 52-week range is 59.05-29.44. Standard & Poor's rates Emerson a Buy. Merrill Lynch, however, last week downgraded it to Neutral from Buy. New Constructs gives Emerson a risk/reward rating of Very Attractive "because the stock offers much more upside potential than downside risk, in our opinion."

Emerson is one of S&P's Dividend Aristocrats. These are concerns (including predecessors) that have hiked their payouts for at least 25 consecutive years and are in the S&P 500. There are currently 59 Dividend Aristocrats (the list is available at www.dividendaristocrats.standardandpoors.com).

The stock-market and economic turmoil, however, has forced some companies that previously belonged to the Dividend Aristocrats to pare their payouts. So Howard Silverblatt, S&P's senior index analyst, decided to screen for those in the group that have a STARS (Stock Appreciation Ranking System) ranking of four or five, meaning that S&P expects them to achieve superior returns over the next 12 months and rates them Strong Buy or Buy.

Besides Emerson, there are 28 more: Abbott Labs (ABT), Aflac (AFL), Air Products & Chemicals (APD), Archer Daniels Midland (ADM), Automatic Data Processing (ADP), C.R. Bard (BCR), BB&T (BBT), Becton Dickinson (BDX), Century Telephone (CTL), Chubb (CB), Coca-Cola (KO), ExxonMobi l (XOM) and Family Dollar (FDO).

Also, W.W. Grainger (GWW), Johnson & Johnson (JNJ), Johnson Controls (JCI), Kimberly-Clark (KMB), McDonald's (MDC), Nucor (NUE), PepsiCo (PEP), PPG (PPG), Procter & Gamble (PG), Questar (STR), Sigma-Aldrich (SIAL), Stanley Works (SWK), 3M (MMM), VF (VFC) and Wal-Mart (WMT).

As for the broader S&P 500, Silverblatt observes that the average yield for its dividend-paying members is 4.01%. "I don't recall exactly when it's been that high, but it's been decades," he declares. At this time last year, only 19 S&P issues yielded at least 5%. But with so many stocks depressed, 97 of them -- 32 financial and 65 nonfinancial -- now yield more than 5%.‹

Why JPMorgan Could Jump 50%

http://online.barrons.com/article/SB122549308113489425.html#SECOND

›3-Nov-2008

After helping clean up america's banking mess, JPMorgan Chase is getting ready to deliver tidy returns to investors. The financial giant, which has scooped up both Bear Stearns and Washington Mutual, could see its stock climb by 50% once the economy improves.

"When you look at who's got the best earnings power in 2010 or 2011, relative to the share price, JPMorgan stacks up very well," says Jason Polun, an equity analyst at asset manager T. Rowe Price.

Recently about 42, the shares (ticker: JPM) have lost 10% since our upbeat profile last year. But that's far better than the 40% loss notched by the KBW Bank Index.

Yes, JPMorgan has taken some lumps as the credit environment has deteriorated, especially in consumer businesses like credit cards. The bank earned 11 cents a share in the third quarter, down sharply from 97 cents a year earlier, on revenues of $14.7 billion. Credit costs, which include charge-offs and additions to loan-loss reserves, totaled nearly $4.7 billion, versus $2.3 billion 12 months earlier.

"If the economic environment worsens, we'll add further to reserves but we are well reserved for" the current conditions, the bank's chief financial officer, Michael Cavanagh, tells Barron's.

Indeed, JPMorgan could well emerge as a more formidable competitor than ever.

Helped by a strong balance sheet, CEO Jamie Dimon acquired Bear Stearns in March for a cheap $10 a share. Though not considered a home run, the deal did give the bank an instant presence in equity prime-brokerage, serving hedge funds.

Dimon then earned plaudits for acquiring WaMu, which regulators seized after it failed under the weight of bad mortgages. The deal, in which JPMorgan paid the FDIC $1.9 billion, gets the bank into California and Florida, big markets it long coveted.

"They are busy capturing market share," says Anton Schutz, portfolio manager of the Burnham Financial Services Fund (BURKX), a stockholder. "People view them as the safest of the safe."

That perception also has helped the bank grow its deposits, which are crucial because they provide more stable funding costs than other sources. In fact, the WaMu deal made JPMorgan the No. 1 bank in deposits, with accounts totaling $969.8 billion as of Sept. 30. That was up from $678 billion a year earlier.

Earnings per share, expected at $3 next year, could climb to $5 when the economy firms up -- perhaps within two years, Schutz says. The shares now fetch less than eight times that estimate. If the multiple can rise to its historic norm of 12, the price would go $60. Meantime, the stock has a nice dividend yield of 3.68%.

JPMorgan, which already holds more capital than most peers, will soon get even stronger. The Troubled Asset Relief Program approved by Congress is pumping liquidity into nine large financial firms, including $25 billion of preferred shares into JPMorgan. The bank can use that to boost lending or make another acquisition.

"The WaMu deal gave them a tremendous footprint, particularly on the West Coast," says Schutz, "but if something came up in the Southeast, they'd be very happy to add that to their portfolio."‹

IWA’s Q3 CC of Nov 5, 2008...

Abreis, I hope this update finds you well...

In summary, IWA remains a solid income stock but not very attractive from a growth standpoint.

Issues raised in the Nov 5 CC include:

1. The loss in telephone lines continues. Access line loss was about 1.8% for the quarter, largely due to wireless substitution and cable competition. This loss was offset by the acquisition of Bishop Communications this quarter, but a net downward trend will probably continue for the foreseeable future... Of most concern is the possible loss of commercial lines (CLECs) should the general economic malaise lead to widespread dislocations. IWA minimizes this concern by pointing out that most of their CLEC customers are school districts, local governments, and small businesses, so a single event will not wipe out a major number of lines... Never the less, I remain watchful.

2. IWA was adversely impacted by Lehman’s demise since Lehman was a counterparty of an interest rate swap designed to fix the interest rate on a portion of IWA’s debt. As a result, approximately $1M net credit was added to the Other Income line of the balance statement. This credit is non-cash and is not included in adjusted EBITDA; an additional $0.76M expense will be recorded as a consequence of Lehman’s bankruptcy spread over the next 3 yrs. A new swap has been negotiated to fix $175M of IWA’s Term Loan B debt at 4.13% vs the 4.115% of the prior swap agreement.

3. IWA’s status with respect to dividend payments has not materially changed. I do not see any threat of a dividend cut.

-----------
Issues that might affect the stock price during the next few quarters include:

1. The FCC may be coming close to a decision regarding revisions to the intercarrier compensation program for rural telecoms... see: http://www.rcrwireless.com/article/20081103/WIRELESS/811049968/1103/rural-providers-likely-losers-after-fcc-meeting

IWA does not get much benefit from these programs as they stand, so I think any movements in the stock price due to this item would be somewhat irrational. However, it is common for stocks to move in sympathy with industry trends.

2. CenturyTel is acquiring Embarq leading to speculation that there will be additional consolidation in the rural telecom market (purchase of Frontier Communications by Windstream is high on the list) ... see: http://www.moneymorning.com/2008/10/28/century-tel-inc/

Perhaps IWA will become embroiled in the consolidation wave... however, I have not seen any credible scenario other the possibility of a Morris Reverse Trust arrangement with Verizon’s midwest properties (see #msg-29791035).

Planned job cuts highest in 5 years
Wednesday November 5, 9:56 am ET
By David Goldman, CNNMoney.com staff writer

http://biz.yahoo.com/cnnm/081105/110508_challenger_adp.html

October was another awful month for jobs. Two key employment reports released Wednesday showed the largest number of planned job cuts in nearly five years, with private sector jobs falling by the largest amount in nearly seven years.

Job cut announcements by U.S. employers soared to 112,884 in October, up 19% from September's 95,094 cuts, according to outplacement firm Challenger, Gray & Christmas Inc. That was the highest number of pink slips handed out since January 2004. Layoffs last month were up 79% from October 2007, when 63,114 job cuts were announced.

Separately, payroll manager ADP said Wednesday that the private sector lost a seasonally adjusted 157,000 jobs last month - more than six times September's decrease and the largest drop since December 2001.

The dour reports were ominous signs for the jobs market ahead of the Department of Labor's monthly unemployment report on Friday. That report is expected to show that 200,000 jobs were lost in October and that the unemployment rate grew to 6.3% from 6.1% a month earlier.

"The economy has taken a marked turn for the worse, so it's hard to envision a scenario where we don't see steep job losses in the next few months," said Dean Baker, co-director of the Center for Economic and Policy Research. "In the best-case scenario, jobs will stabilize by the middle of 2009."

October's numbers bring the total number of planned job cuts to 875,974 in 2008, 14% higher than all of 2007 and the largest 10-month total since 2003.

The embattled financial and automaking industries were hit the hardest, as they have been all year.
The struggling industries have seen a combined 239,760 layoffs so far this year, representing 27% of all layoffs in 2008.

With a Wall Street credit crisis leading the economy into a likely recession, 17,949 financial sector jobs were lost in October. The automotive industry cut 15,692 jobs last month. Low consumer confidence and high gas prices during the spring and summer have led to historically low sales of automobiles around the globe, especially for trucks and SUVs.

On Monday, the Institute for Supply Management's manufacturing index fell to its lowest reading since October 2001. Tuesday, auto sales tracker Autodata reported that the seasonally-adjusted annual auto sales rate plunged to its worst reading since February 1983.

"The weakness in this week's manufacturing and auto sales reports was amazing," said Baker. "That could push Friday's unemployment number as high as 250,000 [lost jobs]."

Of the 25 industry categories that the Challenger report tracks, 18 reported higher job cuts in October. The manufacturing, consumer products, pharmaceutical, food and electronics industries all reported that October yielded the highest level of job cuts so far in 2008.

"The fact that nearly three out of four industry categories are cutting more jobs is proof of how widely the impact of this downturn has spread," said John Challenger, chief executive of Challenger, in a statement. "Even if the economy begins to rebound in the spring or summer, it could be months before we start to see net gains in employment and a decline in the unemployment rate."

Private sector jobs tumble

The ADP report showed that private sector jobs fell by the largest number in nearly seven years, dragged down by the weak manufacturing and goods-producing sectors.

The decline of 157,000 jobs was worse than the consensus view of economists, surveyed by Briefing.com, who had expected a loss of 100,000 jobs. Unemployment has been trending higher since January, and ADP reported the lowest total nonfarm private payroll level since October 2007. The company said it does not expect job losses to let up anytime soon.

"It would not surprise me at all to see many more declines in employment in the near-future," said ADP spokesman Joel Prakken in a conference call with reporters.

Prakken said he didn't anticipate a turnaround for these numbers until the second half of next year, and added that it was "highly likely" that unemployment numbers will be in excess of 200,000 job losses per month for the next several months.

Last month's decline was led by a drop of 126,000 goods-producing jobs, 85,000 fewer manufacturing jobs and 45,000 fewer construction jobs. Service sector jobs declined by 31,000, the first reported drop in the traditionally strong industry since November 2002.

Companies with 500 or more workers shed 41,000 jobs in October, and companies with between 50 and 499 employees reported a net loss of 91,000 jobs. Businesses with fewer than 50 employees lost 25,000 positions, marking the first reported decline in small business employment since November 2002.

The data used in the ADP National Employment Report was taken from ADP payroll data which averaged 500,000 payrolls for 24 million U.S. employees.

UPDATE: Oil rises above $65 after Saudi cuts supplies
Tue Nov 4, 2008 8:35am EST

http://www.reuters.com/article/hotStocksNews/idUSTRE49B3Y620081104

LONDON (Reuters) - Oil rose above $65 on Tuesday, after industry sources said Saudi Arabia had already made substantial cuts in crude supplies and helped the market recoup earlier losses.

Saudi Arabia, the world's biggest oil exporter, has reduced exports by around 900,000 barrels per day from a peak in August, one source said.

U.S. light crude for December delivery was up $1.16 at $65.07 a barrel by 8:27 a.m. EDT. It had touched a session low earlier of $62.25. Oil suffered its biggest monthly drop ever in October.

London Brent crude was up 91 cents at $61.39 a barrel. Earlier Brent had touched a 20-month low of $58.38.

"Saudi Arabia cutting supplies could be supportive," said Christopher Bellew at Bache Commodities, "But it could also be bearish, pointing to reduced demand from customers."

Earlier, the market had fallen more than a dollar, pressured partly by expectations that oil refiners will have to cut output because of weak demand for fuel.

All markets were awaiting the outcome of the U.S. presidential election.

A weak U.S. dollar and gains in European shares lent support to oil, which is sensitive to moves in stock markets and the U.S. currency.

Saudi Arabia's supply cut eases doubts about whether the world's top exporter would comply quickly with a 1.5 million barrel per day output cut agreed by the Organization of the Petroleum Exporting Countries in Vienna last month.

Other OPEC members have also cut back.

The United Arab Emirates has reduced its production to around 2.3 million barrels per day (bpd) from around 2.5 million bpd, a top state oil company official said on Tuesday.

Algeria is reducing its oil output by 71,000 bpd in line with OPEC's supply cut decision, the Algerian official news agency APS said on Tuesday, quoting the country's Energy and Mining Ministry.

Qatar has cut exports to Asia by about 40,000 barrels per day (bpd) from this month, Energy Minister Abdullah al-Attiyah told Reuters.

Crude oil has plummeted from a record above $147 a barrel in July as the credit crisis in the global banking sector has started to hit the wider economy. This has already dampened fuel consumption in the United States, the world's top oil consumer, and other major consumer nations.

U.S. auto sales plunged 32 percent in October to lows unseen in a quarter century, while U.S. factory activity -- a barometer for future oil demand -- fell to its lowest in 26 years.

AP///Oil prices fall as US economic woes mount
Tuesday November 4, 6:50 am ET
By George Jahn, Associated Press Writer
Oil prices fall on new evidence of US recession

http://biz.yahoo.com/ap/081104/oil_prices.html

VIENNA, Austria (AP) -- Mounting evidence of a U.S recession and waning Chinese demand sent crude oil prices drifting Tuesday below the previous day's closing.
Monday's rally in oil futures proved short-lived after U.S. manufacturers reported lethargic activity numbers for October. The Institute for Supply Management said its manufacturing index fell to 38.9, the worst reading in more than a quarter century. Any reading below 50 signals contraction.

Light, sweet crude for December delivery slid 31 cents to $63.60 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe. After rising above $69 per barrel Monday, light, sweet crude for December delivery tumbled $3.87 to settle at $63.91 overnight.

The manufacturing data along with weak U.S. auto sales "poured cold water" on the oil market, said Victor Shum, energy analyst at consultancy Purvin & Gertz in Singapore.

"The overriding concern is the economy in the U.S.," Shum said. "For 2008 there is unlikely to be any demand growth for oil and in 2009 there may be some modest growth but much less than we would have seen otherwise."

Adding to the gloomy outlook for the oil market, Credit Suisse cut its forecast for growth in China's oil demand next year to nearly zero from 4 percent on the back of lower economic growth forecasts.

"The latest set of economic data out of China suggests a much more severe economic slowdown is under way there. Hopes of even a slightly decoupled China in 2009 are fading fast," the investment bank said in a report.

Oil industry analysts had believed he booming economies of India and China would pick up any slackening of demand if Western nations went into recession. That view has weakened in recent months, as the economic crisis in the United States spread across the globe.

Stock markets, often a barometer of the economy for oil traders, were mixed in Asia. Japan's Nikkei 225 stock average jumped 6.3 percent as investors played catchup to Asia's rally Monday following a long weekend. Hong Kong's stocks edged up 0.3 percent, but markets in China and Singapore fell.

Shum said he expects oil to continue trading within its recent $60 to $70 band. Prices have tumbled since spiking to nearly $150 a barrel in July.

The recent output cut by the Organization of Petroleum Exporting Countries is likely to achieve a "fairly good level" of compliance from member nations, creating a floor for the oil price, he said.

But a second cut at OPEC's next meeting in December seems unlikely and would be difficult to implement, Shum said.

To keep prices from falling further, Venezuela's Oil Minister Rafael Ramirez has said OPEC, which controls about 40 percent of world crude oil production, will need to cut production by at least 1 million barrels daily on top of the already announced cut of 1.5 million barrels a day.

One quick benefit of falling oil prices has been less pricey gasoline in the U.S. and elsewhere.

Gasoline futures fell more than a penny to $1.35 a gallon, adding to a steep fall overnight on the Nymex. In his Schork Report, trader and analyst Stephen Schork noted that prices at the pump now are "47.2 cents ... below the corresponding level from a year ago" -- a 16 percentage point decline.

Heating oil was essentially flat at $1.98 a gallon while natural gas for December delivery fell just over 3 cents to fetch $6.87 per 1,000 cubic feet.

In London, December Brent crude fell 51 cents to $60.50 on the ICE Futures exchange after plummeting $4.84 overnight.

United States Heading for Economic Depression and Dollar Collapse
Economics / Economic Depression Nov 03, 2008
Posted by bozzo
By: Eric_deCarbonnel

The US headed for a depression AND a currency collapse. Americans will see their wealth wiped out as stocks and home values plunge, their cost of living soar as food and oil prices spike up, and their taxes increase as the government struggles to fund itself. To understand where the US is heading, we need to step back and take a look at the deep problems afflicting the US economy:

Problem #1: Dependence on Foreign Debt
Over the last few decades, foreigners have been buying up an increasingly large amount of US debt, propping up the dollar. The dollar enhanced buying power has allowed America to consume a disproportionate amount of the world's resources (i.e.: 50% of the world's oil). The inflows of foreign money into the dollar has been due to its status as the world's reserve currency and the desire of exporting nations to maintain a weak currencies. Unfortunately, the dollar has lost the attributes that established it as the world's reserve currency more than 60 years ago (we are no longer a creditor nation), and exporting nations incentive to subsidize the dollar is disappearing along with consumer spending. A collapse of the dollar is imminent as foreigners stop funding America's consumption binge.

Problem #2: Massive derivative bubble
With large amounts of money flowing into dollars and looking for investments, the US financial sector took on the role of selling debt to foreign investors. In the beginning, this involved making loans to Americans and then bundling those loans into complex financial instruments (CDOs, SIVs, ABSs, etc). However, as time went on and the inflows of foreign money into dollars increased, financial institutions became reckless in their efforts to manufacture AAA products. They made loans to subprime borrowers (subprime CDOs) and used financial wizardry to create securities out of thin air (synthetic CDOs). Towards the peak of this financial greed and insanity, banks added large amounts of leverage to their exotic investment products (subprime CDOs squared and CPDOs), and built complex, highly leveraged, off-balance sheet vehicles which funded themselves with short term debt (SPVs, VIEs and SiVs). Through financial engineering and the mispricing of risk, the value of derivatives now far, FAR exceeds the amount of real assets and economic resources in the US .

Problem #3: 55 trillion CDS market
In addition to the derivative bubble, financial institutions used leverage to sell insurance on an enormous amount of debt, creating today's 55 trillion CDS (credit default swaps) market. In order to deleverage and close out their positions, CDS issuers are being forced to buy back huge quantities of insurance, driving up the cost of insuring corporate debt. The higher premiums for CDS translate as higher loan rates for companies and governments.

Problem #4: Structurally unbalance economy
The strong dollar and easy credit conditions over the last two decades have warped US economy, making it structurally unbalance. Here are a few examples of how the US economy has become unsound:

a) Oversized financial sector
While packaging US debt into exotic vehicles for foreign investors, the financial sectors grew until it earned 27% of corporate America's total profits. As credit crisis causes our oversized financial sector disintegrates , it leaves a gapping whole in the economy.
b) Automakers dependent on cheap gas.
Automakers are heavily invested in producing fuel guzzling cars and SUVs. When the dollar's collapse pushes oil back up over $100, a large part of America's automobile industry will shut down and cease to exists.
c) Leveraged Stock Buybacks
Taking advantage of low interest rates, companies like GE issued large amounts of debt (commercial paper or corporate bonds) to fund share buybacks to juice profits and prop up stock prices. These companies are now having to roll over all that debt in a tightening credit market while consumer spending goes off a cliff, and their odds of long term survival are not good.
d) Outsourced manufacturing
In order to cut costs, companies have outsourced large parts of their manufacturing operations to lower cost labor markets overseas. Unfortunately, as the dollar collapses, the cost of oversea labor will increase in dollar terms, dealing a crushing blow to companies whose primary market is in the US.

Without a continuously increasing inflow of foreign money to keep the dollar strong and interest rates low, the US economy will disintegrate.

Problem #5: Bankrupt consumer
The "resilient consumer" is dead. His wealth has been wiped out by deflating home and stock prices. Outsourcing and competition with cheap oversea labor have prevented his salary from keeping up with the cost of living. Tightening credit is limiting his ability to borrow, and his liability as a taxpayer has reached $516,348 per household. With hundreds of thousands in job cuts in the pipeline and America's middle class already sinking into poverty, consumer spending is heading over a cliff.

The Financial Apocalypse
As it becomes obvious that consumer spending will not to pick up and that US will never be able to repay its mountain of debts, investors will begin dumping dollars. The selling of dollar holdings to transfer the money to gold or other currencies will accelerate the collapse of US assets prices. With the deflationary/dollar collapse worsening, a large part of corporate America will become insolvent. Automakers are bankrupt at +5 dollar gas. Companies who outsourced their manufacturing and whose primary market is the US will face bankruptcy. Companies who used excessive amounts of debt for stock buybacks will go bankrupt. Financial institutions will be wiped out by the crashing value of the assets in their balance sheets. As a result of the massive economic dislocation, unemployment will soar. With the falling dollar, oil and food prices will move higher in US dollars despite slowing worldwide demand. I am not sure how the government will react to all these problems, but it will be hugely inflationary and it will accelerate the dollar's collapse…

I believe the US is on the verge of a downward spiral that will rapidly intensify into an economic collapse the likes of which has not been seen in modern economic history . I advise buying gold and keeping a close eye on the yield of long term treasuries. If the yield on the 10-year note goes up while stocks fall, it will be a sign that confidence in government debt and the dollar is failing.

By Eric deCarbonnel

US Stocks at a Glance//US STOCKS-Biotechs lift Nasdaq; Dow and S&P 500 flat

NEW YORK - The Nasdaq rose on Monday as investors snapped up biotechnology shares following broker upgrades on Biogen's (BIIB.O: Quote, Profile, Research) stock, but the Dow and the S&P 500 were little changed on concerns that the economic downturn might be deepening.

A report showing U.S. manufacturing shrank further in October heightened fears of a deeper recession, a day before the U.S. presidential election. The Institute for Supply Management said its index of national factory activity fell to 38.9 in October, a 26-year low, from 43.5 in September.

The level of 50 separates contraction from expansion. "Pretty grim. It means we're in a recession, it's as simple as that ... a pretty solid manufacturing recession," said Robert Macintosh, chief economist at Eaton Vance Corp in Boston.

"I don't think the data adds anything that already wasn't in the thought process of investors. We are in a recession, the question is how long or deep is it going to be?"

The Dow Jones industrial average shed 9.48 points, or 0.10 percent, to 9,315.53. The Standard & Poor's 500 Index slipped 2.91 points, or 0.30 percent, to 965.84. The Nasdaq Composite Index edged up 5.68 points, or 0.33 percent, to 1,726.63.

Shares of energy companies weighed on both the Dow and the S&P 500, with Chevron Corp declining 2.1 percent to $73. The drop in energy shares coincided with a decline in oil prices as investors worried an economic downturn would translate into less energy demand.

Shares of Exxon Mobil Corp shed 1.5 percent to $73.03 as U.S. crude for November delivery CLc1 lost $1.94, or nearly 3 percent, to $65.87 a barrel.

Shares of plane maker Boeing dropped 1.7 percent to $51.42 on the New York Stock Exchange after Goldman Sachs added the stock to a "conviction sell" list, according to theflyonthewall.com.

The broker action overshadowed news of a deal ending a strike that crippled Boeing's Seattle area plants for 57 days. But shares of Biogen, among stocks seen positioned to fare better in a slumping economy, jumped 8 percent, putting the stock among the Nasdaq's standouts.

Deutsche Bank recommended a "buy" on Biogen, while Robert W. Baird, a research firm, raised its view on the company to "outperform" from "neutral."

Shares of Gilead Sciences, another biotech company, climbed 2.6 percent to $47.05, as those of Amgen climbed 2.4 percent to $61.31.

Elsewhere, shares of Wal-Mart Stores rose 2 percent to $56.97 after a brokerage raised its rating on the retailer.

Citigroup raised its rating on chipmakers, including Nvidia Corp, whose stock jumped 2.4 percent to $8.96, and Integrated Device Technology, up 3.8 percent to $6.60 on Nasdaq. Investors are bracing for Friday's report on October U.S. nonfarm payrolls.

Democratic contender Barack Obama heads into Tuesday's voting in a comfortable position, with Republican opponent John McCain struggling to overtake his lead in every national opinion poll and to hold off his challenge in about a dozen states won by President George W. Bush in 2004.

Obama leads McCain in six of eight key battleground states, including the big prizes of Florida and Ohio, according to a series of Reuters/Zogby polls released on Monday.

Forex
FOREX-Easing risk aversion cools dollar, yen rally

LONDON - The euro and high-yielding currencies rose against the dollar on Monday, while the yen retreated broadly as abating risk aversion lifted stocks.

The scale of investors' deleveraging was highlighted in October, when the dollar index posted its biggest monthly percentage gain in 17 years and the euro suffered its largest monthly fall against the dollar and yen since its 1999 launch.

Concern about the prospect of a global recession was expected to limit gains in riskier assets and offer support to the low-yielding dollar and yen.

"The problem for the market is that all the trades that worked well for the past 5 years went badly very quickly," said Michael Rosborough, senior global FX strategist at Citigroup in London. "On bounces like this you would expect to see people still liquidating and using them as an opportunity to lighten up on positions," he added.

By 1200 GMT, the euro was up 0.9 percent on the day at $1.2845 and rose 1.6 percent to 127.34 yen. Sterling rose around 0.7 percent against the dollar to $1.6190, while the dollar gained 0.7 percent to 99.14 yen. The high-yielding Australian and New Zealand dollars also rose around 1.4 percent versus the U.S. currency.

World stocks, as measured by MSCI's all-country index, rose 0.9 percent on the day. Major events this week include the U.S. presidential election on Tuesday, with a win by Democrat Barack Obama generally seen as more favourable for financial markets.

Also, the European Central Bank, the Bank of England and the Reserve Bank of Australia are all expected to lower interest rates to protect their struggling economies from the threat of a looming global recession.

Each of them is expected to cut rates by at least half a percentage point. The U.S. Federal Reserve last week cut its key rate by half a point to 1.0 percent and the Bank of Japan (BoJ) cut its rate to 0.30 percent from 0.50 percent.

Analysts said Britain's central bank could cut rates by more than the half percentage point that is expected. "The risks are tilted toward an even larger move, as the upside risks to inflation have diminished significantly, according to resident BoE hawk (Tim) Besley," RBC strategists said in a note to clients.

Emerging giants China and India also cut rates last week. Economic weakness was underscored by a report on euro zone manufacturing activity, which sank in October below record low levels initially estimated.

The Markit Eurozone Purchasing Managers Index for the manufacturing sector fell to 41.1 -- the lowest in the survey's 11-year history -- from September's 45.0. That was below the flash estimate and economists' forecasts of 41.3.

The release marks the fifth consecutive month the PMI index has been below the 50 mark that divides growth from contraction. The U.S. Institute of Supply Management's factory activity index, due out at 1500 GMT, is also expected to show further weakness. Economists expect a reading of 41.5 versus 43.5 in September.

Europe share
FTSE rises at midday as miners offset bank losses

LONDON - Britain's leading share index had edged up by midday on Monday, sustained by gains in commodity stocks, while concern about Barclays' fundraising dented banking stocks.

Miners were among the top performers on the FTSE 100 as improved risk appetite boosted metal prices, while energy shares rallied as the price of crude oil rose modestly.

By 12:05 p.m. British time, the benchmark index rose 25.79 points to 4,402.66, on track for a fifth day of gains, its longest since December 2007.

The index gained 12.7 percent last week, its strongest week on record, fed by anticipation of a widely-expected interest rate cut from the Bank of England later this week, although it was down 10.7 percent in October.

Mike Lenhoff, chief strategist at Brewin Dolphin said the market has reacted positively to a spate of interest rate cuts in the United States, China, India and Japan, turning the spotlight to the BoE on Thursday. "The underlying tone of the market has improved. There is an encouraging feel to what is going on," he said.

However, he said the outlook for the banking sector remained unfavourable as potential recession in Britain has prompted fears of further write-downs and bad debts.

Banks tempered gains on the broader market, as Barclays dropped 4.9 percent on concern that its $12 billion (7.4 billion pounds) capital fundraising is too expensive. Analysts at Merril Lynch estimated the fundraising may cost investors 3.2 billion pounds.

Lloyds TSB, the British bank in the process of buying rival HBOS, lost 0.7 percent after it said its profits for the first nine months of the year fell sharply as a result of financial market turmoil and rising bad debts.

HBOS climbed 4.3 percent after the Sunday Times newspaper said Lloyds TSB could face competition for its bid from HBOS's Internet banking unit.

HBSC and Royal Bank of Scotland fell 2.9 and 1.4 percent respectively, while Standard Chartered advanced 3.2 percent.

Among other decliners were index-heavyweights Vodafone and supermarket group Tesco fell 3.7 percent, while Vodafone shed 4.3 percent.

Helping keep the FTSE 100 in positive territory were the commodity stocks as a weaker dollar supported base and precious metal prices, while crude oil futures turned positive.

Kazakhmys surged 13.3 percent, lifted by rising copper prices. Xstrata, Vedanta Resources, Lonmin and Eurasian added between 6.5 and 7.9 percent. Rio Tinto added 1.9 percent, after the company said its new ilmenite project is on track to produce and the company sees most of its projects in a strong position to weather any economic scenario.

Energy firms also recorded gains, with BP and Royal Dutch Shell up between 0.8 and 1.6 percent, while Cairn Energy gained 7 percent.

Asia at a Glance
Asian Market Summary

The benchmark Nikkei lost 452.78 points to close at the day's low of 8,576.98. So far this year, it is down 44 percent, though it has gained 12 percent on the week.

The broader Topix shed 3.6 percent to 867.12.

Seoul shares ended 1.44 percent higher on Monday after volatile trade that saw them swing in and out of positive territory, with banks bouncing back from extended losses but some exporters trimming earlier gains to end lower.

Banks including Shinhan Financial Group staged a rebound, helped by South Korea's economic stimulus plan, which is aimed helping the troubled real estate and construction sectors.

The main index had risen as much as 4 percent to 1,158.87 points earlier in the session, but briefly fell into negative territory at the low of 1,109.32 points.

The Korea Composite Stock Price Index ended up 1.44 percent at 1,129.08 points on the first trading day in November after a 23 percent loss in October.

Taiwan stocks closed 2.55 percent higher on Monday, their third consecutive rise, as investors bought into PC companies on their strong outlook, and the financial and tourism industries on prospects of warmer cross-strait ties.

The main TAIEX share index closed 124.40 points higher at 4,995.06, pushed up by the broader computer sub-index and the banking and insurance sub-index, both of which rose more than 4 percent.

The benchmark Shanghai Composite Index closed down 9.01 points or 0.52 pct at 1,719.77, the lowest level in 25 months, after moving between a high of 1,750.32 and a low of 1,702.98.

Turnover fell further to 23.13 bln yuan from 25.16 bln on Friday.

The Hang Seng index closed up 375.70 points or 2.69 pct at 14,344.37, off a low of 14,272.17 and high of 14,889.13.

Turnover was 52.11 bln hkd.k

The 30-share benchmark index rose 549.62 points to 10,337.68, its highest close since Oct 21, with 28 stocks rising. The index is up more than 34 percent from a three-year low of 7,697.39 hit last Monday.

In the broader market gainers led losers 1,977 to 639 on volume of 299 million shares.

Metals
Gold rises 1 pct as dollar weakens, equities firm

LONDON - Gold rose more than 1 percent in Europe on Monday as the dollar softened against the euro, boosting interest in bullion as a currency hedge, with firmer equity markets also cheering investors.

Spot gold climbed to $733.45/735.45 an ounce at 1005 GMT from $723.05 late in New York on Friday. The yellow metal posted its biggest monthly decline in 25 years in October as the firmer dollar pressured prices.

"The reason gold is rising is because the dollar is weaker and equity markets are stronger," said Deutsche Bank trader Michael Blumenroth. "The daily ranges are becoming smaller and the market is becoming a little more relaxed now."

Gold usually moves in the opposite direction to the U.S. currency, as it is often bought as an alternative investment to the dollar.

Traders will be keeping a close eye on a raft of interest rate decisions due later in the week for clues to the direction of the gold market.

The platinum metals were firmer as the market awaited U.S. auto sales figures later in the session. Both platinum and palladium have shed more than half their value in the last three months as investors fretted about the outlook for demand from carmakers, the main consumers of the precious metals.

Soft auto sales numbers in recent months have sparked heavy selling of the PGMs, more than half of which are consumed by the car industry each year.

"We expect another decline in sales which could put downward pressure on PGM prices," said Standard Bank's de Wet.

Spot platinum edged up to $821.50/851.50 an ounce from $813 an ounce late in New York on Friday, while spot palladium firmed to $197/202 from $193.50. Among other precious metals, spot silver was at $10.05/10.15 against $9.81 an ounce.

40 Stocks for the Long Haul

http://finance.yahoo.com/special-edition/stocks-for-the-long-haul/not-so-average-bear

10 Large-Cap Stocks

You can rest easy knowing these companies will deliver consistent returns over the long haul.

When it comes to stocks, big isn't always better. But if you choose well, big companies are more likely than small ones to deliver consistent returns over the long haul. And they're far more likely to withstand the economic, political and technological shocks that can derail small companies.

Big-company stocks have hardly been immunized from the market's current turmoil. As of October 27, Standard & Poor's 500-stock index is down 46% from its record high, set on October 9, 2007. But lower prices today makes it more likely that stocks will match its historical long-term return of 10% year.

We here at Kiplinger's Personal Finance put our heads together in search of ten giants (which we defined as companies with a market value of at least $10 billion) that we think can better the market's long-term results over the next decade. We came up with an eclectic list that contains a number of names you'd expect to see and some that may surprise you. Below are our ten picks for the next ten years.

Procter & Gamble (PG). If you're a Procter & Gamble shareholder, it must feel nice when you to go to bed knowing that hundreds of millions of consumers around the world will use Gillette razors, Crest toothpaste and Head & Shoulders shampoo the next morning. People need to shave, bathe and brush their teeth in any economy, and P&G's brands are so powerful that it can pass on price increases in raw materials to its loyal customers.

This consistency has allowed P&G to compound earnings by 10% a year over the past ten years; Wall Street projects a like result over at least the next five years. Factor in a 3% yield and a rising dividend stream and it equals an attractive ten-year holding.

Electronic Arts (ERTS). Spore, the latest game from Electronic Arts, is a metaphor for the company itself. In the game, a single-celled organism evolves by eating other animals and eventually masters the universe. Electronic Arts has grown mainly by acquisition to become the biggest video-game software company; sales for the fiscal year that ends next March should top $5 billion.

Electronic Arts dominates a rapidly expanding universe. Sales from consoles and software together hit $18.8 billion in 2007, a 43% increase from 2006, says the NPD Group. Not even the torpid economy is likely to dent the industry's -- or EA's-rapid growth. Analysts see the company's earnings rising 21% annually over the next three to five years.

First Solar (FSLR). As the price of oil has retreated, investors have lost interest in alternative-energy stocks. But once global economies right themselves, demand for oil will rise and so will its price. The need for cheaper and cleaner fuel sources will once again become plain, and alternative-energy stocks will revive. One of the biggest beneficiaries is sure to be First Solar. Based in Tempe, Ariz., First Solar produces solar modules using a proprietary thin-film semiconductor technology that uses far less silicon than other production processes. The company sells the majority of its modules in Germany, which subsidizes solar energy, but First Solar has deals with utilities to build photovoltaic generating plants in California, Florida and Nevada.

Its growth has been breathtaking. In 2006, when First Solar went public, it earned 7 cents a share on $135 million in revenues. In 2008, analysts estimate, the company will earn $3.67 per share on sales of $1.2 billion. And analysts see earnings growing 56% annually over the next few years. The stock, which is up six-fold from the IPO, is risky, but it will deliver big rewards as long as oil prices recover and governments continue to subsidize solar power.

Gildead Sciences (GILD). Gilead Sciences has built a formidable franchise in drugs that treat HIV. They provide about 75% of the firm's revenue, which is expected to exceed $5 billion this year. Those drugs should provide the Foster City, Cal.-based biotech company with robust growth in the coming decade, even as it diversifies into other promising areas, such as medicines that treat hepatitis, hypertension and influenza. Gilead's portfolio of drugs faces little threat from generics, and the company can use its ample cash reserves ($3 billion as of midyear) to supplement its development pipeline via acquisitions and partnerships.

Google (GOOG). Google is the single most visited Web site in the U.S., a cultural phenomenon and a verb. And in just four years as a publicly traded company, it has achieved the status of Internet behemoth, with a market value in the neighborhood of $105 billion.

But as a business Google is an advertising firm; pay-per-click search-engine advertising represents 90% of revenues, and all advertising taken together brings in 97%. Enormous profits over the past five years have endowed Google with the cash to pursue such lofty goals as projecting interactive satellite images of the cosmos onto your computer screen and digitizing all books ever written.

Yet Google's strength in its basic ad business is reason enough to love it. As more ad dollars shift from old media to new media, Google's scale and formidable brain trust give it the strength to remain the market leader. And despite the company's immensity, analysts expect earnings to grow at a hefty 22% annual pace over the next few years. Ten years? Sure.

Monsanto (MON). Monsanto has emerged as one of the great growth stocks of this decade, returning an annualized 44% over the past five years. The world is hungry for grain, meat and ethanol. Monsanto's high-tech seeds, genomics and herbicides boost the productivity of corn, soybean, cotton and wheat farms. Monsanto's seed technology is years ahead of competitors', and its market penetration is expanding worldwide, to cropland in places such as Brazil and Argentina.

Yes, it has its critics, who complain of Monsanto's business practices. But earnings have compounded by 41% annually over the past five years. Wall Street thinks this rate of profit growth will exceed 30% annualized over the next three to five years. Its 10-year horizon looks bright.

Norfolk Southern (NSC). North American railroads are sitting in the sweet spot -- you'd hardly know a recession set in, and they can raise prices freely for the first time in many decades. Norfolk Southern occupies the sweetest spot of them all. Its forward-looking management has initiatives under way to greatly increase capacity and gain new customers -- particularly truckers operating between the Northeast and the South and between the mid-Atlantic ports and the Midwest.

Balancing Norfolk Southern's many partnerships with truckers is its thriving business hauling coal to power plants and to ships at the ports. And the company's network of routes that honeycomb the U.S. east of the Mississippi is run more efficiently than that of chief rival CSX. Put it all together, and it's hard to see how a long-term investment in this railroad could go wrong.

T. Rowe Price (TROW). The stock market's awful performance this year has shaken the faith of the investor class. But once the bear market ends and investors regain confidence in capitalism, they’re likely to resume saving like mad for retirements that look less and less secure. Fund manager T. Rowe Price, with some $345 billion in assets at last report, should benefit enormously from this trend. Its target-date retirement funds are already big hits with investors. By preaching a conservative, long-term investment approach and keeping costs low, Price has delivered above-average results at a majority of its funds. And the company has avoided scandals.

Asset management is a lucrative business -- Price's net profit margins are about 30%. The company has no debt and has raised its dividend every year since going public in 1986. Earnings are likely to be down in both 2008 and 2009 because of the weak stock market, which holds down asset growth. But analysts see profits growing 15% a year long term.

Schlumberger (SLB). Schlumberger is the ultimate global growth company. The world is desperate to renew depleted oil and gas reserves and find new sources, so producers are spending frenetically to discover oil and gas both on land and beneath the seas. This requires the wide technology of Schlumberger, the world's biggest provider of energy exploration and engineering services. Chief executive Andrew Gould says the big hunt for new sources—and work to extend the lives of known fields in the U.S., the North Sea and the Middle East—will go on for years, regardless of price fluctuations for oil and gas. Schlumberger shares have taken gas as oil prices and the stock market in general have cratered, but this is a case of the herd dumping anything it can sell.

Despite the Houston-based company's immensity (revenues should approach $28 billion this year), analysts expect earnings growth of 12% annually over the next few years.

Visa (V). Many companies are poised to benefit from globalization, but few do so as directly as Visa. After all, your Visa card is good everywhere from the supermarket down the street to a mom-and-pop shop in Nepal. When Visa went public in March 2008, it raised $17.9 billion, making it the largest initial public offering in U.S. history. The stock's market value now exceeds $50 billion.

Visa has the world's largest payment network, in which banks and businesses are eager to participate. And because Visa just processes payments, rather than act as a lender in transactions, it's nicely insulated from the credit crunch. Paperless payments are projected to surge from a bit more than 40% now to 70% of total payments in 2010. Visa is riding the crest of that wave.

10 Mid-Cap Stocks

There's no doubt that stocks in general and mid-caps in particular are feeling the pinch this fall after frozen credit markets and the slowing economy sent investors running to safety. The S&P MidCap 400 is off more than 44 percent this year, a bit more than its small- or large-cap partners.

That said, they should still be in your portfolio.
It may be tough to believe right now, but mid-caps occupy the often lucrative ground between multinational stalwarts and volatile small-cap upstarts. If you've got a long-term horizon, it's here that you'll catch fast-growing companies with newly established track records before they become tomorrow's household names.

The list below includes mid-cap companies with solid histories, room to grow, and (hopefully) the sort of business models that can keep them from stumbling under the worst excesses of the market's current malaise. They're focused on long-term trends--globalization, healthcare spending, defense, and energy demand--that should keep profits rising in the years to come.

Stericycle (SRCL). Stericycle cleans up after the medical industry, disposing of hazardous or infectious medical waste for doctors, dentists, and drug makers. Its expertise navigating the complex web of public safety rules, paperwork, and other services makes it vital to customers no matter how the rest of the economy is doing. Its already sizable 10 percent chunk of a fragmented $10 billion market is expected to grow as the firm expands overseas as it has in the United Kingdom and South America and through acquisitions (it has made 140 since 1993). Earnings look steady, growing at a 17 percent annual rate over the past five years, and analysts predict similar gains for at least the next two. Oppenheimer analysts note the firm "has perpetually grown its core med-waste business in the high single digits organically" and expects more of the same despite the "daunting economic outlook."

FTI Consulting (FCN). Want a company that prospers when times are tough? The mortgage and credit crunch sent troubled corporations scurrying for cover, and that means even faster growth for FTI Consulting. The Baltimore-based firm handles everything from restructuring to forensic accounting, but rising bankruptcies are what will keep revenue flowing over the next few years. Deutsche Bank sees that business speeding up in '09, with revenue growth peaking in 2010 or 2011. Wall Street predicts FTI's earnings will climb from a 10 percent five-year annual rate to 19 percent over the next several years. Plus, the consultant continues to snap up smaller rivals, and a recently announced spinoff of its technology business could net an extra $600 million to $700 million to pay down debt and fund new buys.

Waters Corp. (WAT). Waters Corp. makes liquid chromatography, mass spectrometers, and thermal analysis tools used in drug development and quality control, analyzing compounds for their chemical or molecular characteristics. Drug makers, its primary customers, may be having a tough year, but the firm is pushing into fast-growth markets like food and beverage and wastewater testing. Plus, Waters boasts a large base of installed equipment with its existing customers, and 40 percent of its revenue is recurring. "It's a pretty good, defensible moat," says Bob Millen, comanager of the Jensen portfolio, which owns Waters shares. Against that backstop, emerging market sales to India and China are still showing little sign of a slowdown despite the weakening economy.

Ecolab (ECL). Ecolab helps hotels, restaurants, and hospitals stay spick-and-span to the tune of more than $5.5 billion in annual sales. Analysts like its global reach (now 160 countries) and its predictable business for steady growth and highly stable earnings. The model is simple: When Ecolab installs soap dispensers in a chain of eateries, for example, it also supplies and services the equipment. Customers need the service, and are loath to switch suppliers. That makes it highly defensive. "People just can't cut back on their sanitation," Millen says. Return on equity has averaged 23 percent for the past decade. Earnings have grown a steady 13 percent over the past five years, and should remain in that range for at least the next two.

Northeast Utilities (NU). Infrastructure plays are heating up. As New England's largest utility, this Connecticut-based firm is another name profiting from more than three decades of underinvestment in the power grid. (Remember those blackouts?) Its transmission assets in Connecticut, New Hampshire, and Massachusetts are expected to drive earnings, with that part of the business forecast to grow 22 percent annually between 2006 and 2012. "It's a safe, secure return in an uncertain world," says Kevin Shacknofsky, coportfolio manager of the Alpine Dynamic Dividend Fund, which owns NU shares. Long-term dividend growth of around 3 percent coupled with earnings forecast to expand 8 to 12 percent from 2008-2012 make NU among the safer bets in the utility space today.

Flir Systems (FLIR). When military conflicts flare up, this Oregon-based infrared system maker can tell you exactly the sort of heat they're generating. As the industry's largest player, Flir continues to pull in sizable military contracts (most notably two recent deals with the Navy worth a combined $75 million, plus orders from the Coast Guard and Colombian military). Investors get good visibility thanks to a $650 million order backlog. Outside of military orders, the firm has fast-growing businesses in everything from systems used on luxury yachts to heat sensors used to detect gas leaks. Its five-year EPS growth rate is a solid 27 percent.

Jacobs Engineering Group (JEC). Shares of Jacobs, a sprawling engineering and construction firm with big business (about 40 percent) in the energy sector, are down almost 70 percent this year as oil prices moved off record highs and the economy global economy slows. If you don't think cheaper crude is here to stay, Jacob's backlog of work (up 66 percent from a year ago in the latest quarter) make the stock worth a look, especially at its current valuation. Uncertain timing of the sort of megaprojects that are Jacobs's specialty mean patient investors who can wait out a few up-and-down quarters might be rewarded if they're willing to buy and hold, as they've been for the past five years of 27 percent average annual earnings growth.

W.W. Grainger (GWW). Essentially the Sears, Roebuck of the facility maintenance business, Lake Forest, Ill.-based Grainger gets some relief from the slowing economy because its more than 870,000 products are bare-bones necessities at businesses ranging from lumber mills to your local post office. The company's catalog business and national network of 600 branches and 47 distribution centers can get most products to customers overnight. Healthy cash flow (including $364 million in cash on the balance sheet as of September 30) and relatively low debt will help the company weather this recession. Also, the North America-centric firm is branching out into Mexico, Panama, and China.

Lab Corp. (LH). Demographics are still solidly behind growth in the medical testing market, and Lab Corp. remains one of the industry's giants with 47 labs and 1,600 patient service centers across the United States. That part of the business is modestly recession-resistant, while its specialty testing business is also becoming an expanding source of revenue as higher-margin genetic screening becomes a larger part of the medical landscape. Plus, with an estimated $800 million in operating cash flow for 2008 and modest debt, the firm is poised to snap up smaller, less-capitalized rivals in the future. While earnings growth is set to slow a bit, Thomson Reuters sees earnings growing at 14 percent a year long term.

Church and Dwight Inc. (CHD). Analysts tout safe-haven consumer stocks like Procter & Gamble or Kraft, but where are mid-cap investors supposed to find their consumer staples fix? Think Arm & Hammer or its owner, Church and Dwight. The owner of the iconic baking soda has managed to keep its share price almost flat this year--even as the bear market sent nearly everything else crashing. It recently bought the Orajel analgesic line for $380 million, owns Trojan condoms (and, on the flip side, several lines of pregnancy kits), plus late-night infomercial stalwart OxiClean. Ten-year returns average 19.6 percent, CEO James Craigie said on a recent call. He also noted that nearly a third of the firm's revenue comes from value-conscious consumers and called the company a "great place to be in recessionary times."

10 Small-Cap Stocks

Finding small cap stocks with the potential to blossom into some of tomorrow’s household names has been a passion of mine for the last twenty years, and there are many different themes that have me believing the time to invest in smaller cap names is upon us.

One theme I have my eye on is the strong desire to clean up our planet and “go green.” Congress’ recent $700 billion economic rescue package has many earmarks in it, providing tax incentives to clean energy firms, which should help these companies compete with traditional forms of energy. Many investors have this trend on their radar screen, focusing on everything from ethanol to wind and solar energy companies. However, while I believe there are opportunities in wind and solar, my favorite being Energy Conversion (ENER), I prefer to focus on an often overlooked segment, the pollution control industry. Below are some ideas targeting that sector:

Calgon Carbon (CCC). Calgon Carbon is a global manufacturer and supplier of activated carbon and innovative treatment systems that provide value-added technologies and services for optimizing production processes and safely purifying the environment. Calgon Carbon has pioneered cutting-edge purification systems for drinking water, wastewater, odor control, pollution abatement, and a variety of industrial and commercial manufacturing processes.

Clean Harbors (CLHB). Clean Harbors is North America’s leading provider of environmental and hazardous waste management services servicing over 45,000 customers, including more than 325 Fortune 500 companies, thousands of smaller entities and numerous federal, state and local governmental agencies. With earnings expected to increase 22% this year and another 15% in 2009 to $3.00 a share, I expect to see this stock trade above $80 shortly.

American Ecology (ECOL). American Ecology has been providing radioactive, hazardous and industrial waste management services to commercial and government entities since 1968 and the company continues to average 15% earnings growth into the foreseeable future.

Team Inc. (TISI). When you and I have a leak in a pipe at home, our first call is most certainly to the local plumber, but imagine if that leak is in an underground oil pipeline or a hydro-electric power plant with temperatures ranging from cryogenic to 1700 degrees Fahrenheight and pressures from vacuum to 6000 psig. Those calls go to Team Inc, which provides field heat treatment, non-destructive testing, leak repair, hot tapping and other industrial repair services. What this company lacks in panache, it makes up for fundamentally, as revenues continue to rise in excess of 50% a year and earnings are expected to grow 30% in 2009 and another 20% in 2010 to $1.89 a share.

Tetra Tech (TTEK). One last company I want to highlight in this industry is Tetra Tech. They provide consulting, engineering, construction and technical services for resource management and infrastructure. Whether you need to build a nuclear power plant, install a tsunami warning system in the Indian Ocean or do a study on the contamination of groundwater, Tetra Tech is up to the task. As more and more companies look to explore ways to be more environmentally friendly, Tetra Tech stands to benefit.

If pollution control isn’t your cup of tea, and you would prefer to look at the alternative energy plays like nuclear, geothermal or natural gas, here are a couple of names I like and have invested in.

Nuclear power continues to be one of the cleanest, most efficient alternative energy plays. Unfortunately, we still have some headway to make in easing this nation’s concerns about its safety before we can adopt it completely and start building more facilities. I have my eye on two companies in this sector. EnergySolutions (ES) provides specialized, technology-based nuclear services to both government and commercial customers and continues to attempt to address global warming and energy dependence. USEC (USU) is a leading supplier of enriched Uranium fuel for commercial nuclear power plants. Operating the only Uranium enrichment facility in the United States, they are a provider to more than half of the U.S. market and more than a quarter of the world’s market. As more and more countries realize nuclear power’s benefits, I think USEC has a bright future.

Clean Energy Fuels (CLNE). Clean Energy Fuels provides natural gas as an alternative fuel to over 275 fleet customers in the United States and Canada. T. Boone Pickens is CLNE’s largest shareholder and he is joined by House Speaker Nancy Pelosi. In addition to natural gas, CLNE is also pioneering options in wind power, which could be an interesting play as T. Boone Pickens passionately attempts to blaze a trail in this sector. After three years of losing money, Clean Energy is expected to post a profit in 2009 of 0.28 cents a share.

Energy Recovery (ERII). Energy Recovery manufactures energy recovery devices for the sea water reverse osmosis segment of the water desalination industry. Leading the way in making desalination affordable worldwide, Energy Recovery focuses on reducing energy costs related to the desalination process with its PX Pressure Exchanger. They recently came public at $9 and after gapping up almost 50% higher on their first day of trading has slowly drifted lower, to an attractive entry level. Solid revenue growth along with earnings that are expected to rise 25% this year and another 67% in 2009 have us excited about this company's potential.

Darling International (DAR). Last but not least, consider a company like Darling International which combines two of the themes I’ve discussed, alternative energy and pollution control. Darling collects used cooking oil from restaurants and repurposes that oil to create everything from animal protein meals to biofuels. Darling is expected to increase revenues to over a BILLION this year and with a market cap of less than half a billion, it has become a favorite for mutual funds. This is evident by the number of mutual funds that have a position in DAR, which has tripled over the last year.

Although oil prices have fallen over 50% from their recent highs near $150 a barrel this summer and the global growth story has waned, countries like China and India continue to need fossil fuels in order to grow. This increase in demand should mean explosive growth for stocks in both the alternative energy and pollution control industries.

Dave Dispennette is the founder of The Stock Playbook, a do-it-yourself investment advisory service that boasts a 53% average gain for its annual portfolio. Dave’s professional career represents over 20 years of experience with some of the biggest firms on Wall Street. To see his latest stock recommendations visit http://www.thestockplaybook.com/.

10 International Stocks

If it’s good enough for Warren Buffett, it should be good enough for you. Or at least it should be if you are looking for an international stock that you can buy and hold for the long term, say from the time you get out of college till you retire.

"If you look at who really gets rich in the world it is usually people who purchase the right businesses and hold those businesses for many years," David Winters, manager of the three-year old Wintergreen Fund (WGRNX), told MorningstarAdvisor in June.

At $14 trillion, the U.S. market represented about 44% of the world's $32 trillion in stock-market value at the end of August, according to Russell Indexes. But that means the rest of the world's markets combined eclipse the U.S. stock market. And Winters -- whose fund does own stock in Buffett's Berkshire Hathaway Inc. (BRKA) -- is of the mind that the best investment opportunities are outside the U.S.

Indeed, after several years of standout performance, international stocks have taken a much tougher drubbing this year so far than their U.S. counterparts. The average world-stock mutual fund lost almost 19% through August, versus a 10% decline for diversified U.S. funds, according to fund researcher Lipper Inc. The downturn abroad, particularly in Europe, may have been one reason that Buffett -- the quintessential bargain buyer -- took a European "shopping tour" in May.

Most experts do not recommend that you invest more than half of your assets in non-U.S. stocks. But they do recommend investing a portion in such stocks. Alec Young, international equity strategist at Standard & Poor's, for instance, recommends investing 15 percentage points of a standard 60% stocks/40% bonds portfolio in international stocks. But which ones?

In talking with money managers and other experts, and in searching the Internet, here are 10 international stocks that trade on U.S. exchanges that hold promise for those with a long time horizon looking to invest in different parts of the world, in different industries:

Jardine Matheson Holdings (JMHLY). Jardine Matheson Holdings, which is based in Hong Kong, is among Wintergreen Fund’s largest holdings. Founded as a trading company in China in 1832, Jardine is a Fortune Global 500 company focused principally on Asia. According to the company, its businesses comprise a combination of “cash-generating activities and long-term property assets,” including Jardine Pacific, Jardine Motors Group, Jardine Lloyd Thompson, Mandarin Oriental, Jardine Cycle & Carriage and Astra International.

According to a gurufocus.com report, “Jardine is a good way to participate in the demographics boom of China and Asia. As the U.S., European, and Japanese workforce ages, the Chinese workforce is going to be in its peak producing years… Jardine offers a way to invest in China by a company that has been doing business there for about 170, run by British management.”

By the way, check out Wintergreen’s other holdings -- many of which are international but don’t trade on U.S. exchanges.

Sanofi-Aventis (SNY). Justin Fuller, manager of Morningstar's Ultimate Stock-Picker's Portfolio, recently examined which stocks held by Berkshire Hathaway are also highly rated by the Chicago rating firm. That parsing turned up 13 stocks, the only international stock being Sanofi-Aventis, which develops and markets pharmaceuticals for cancer, heart disease, central nervous system disorders and diabetes and makes vaccines. The company derives two-thirds of its revenues from outside the U.S. and its biggest revenue generator is Lovenox, which represents about 9% of total sales.

According to Morningstar analyst Damien Conover, Sanofi-Aventis has a strong lineup of new drugs in the pipeline that should offset weakness from its drugs that are losing patents. Most recently, the company reported that sales grew 5% year over year, led by growth in long-acting insulin Lantus. The company is in the midst of a restructuring initiative and is trading about $15 below what Morningstar views as its fair market value.

Nestle (NSRGY). John Dessauer, editor of Investor's World for more than three decades, knows a thing or two about long-term holdings. His top pick is Nestle SA, the world's largest food and drink company. Famous for its Nescafe instant coffee, Purina cat food, and KitKat candy bars, the company has about $100 billion in sales.

"This is one stock that you can buy now and hold till you retire or keep forever," he said. Long a Dessauer favorite, it's even more so now, he said.

The company recently discovered, quite by accident he says, a way to process food that would be permissible for Muslims, which number 1.4 billion worldwide. Members of the world's second largest religion have strict dietary laws that prohibit the use of lard and gelatin, for instance. "This could be a huge business for the company," he said.

Nestle recently reported a 3.4% increase in nine-month revenue and a strong rise in organic sales, and gave an upbeat full-year growth outlook. That upbeat report gives Dessauer even more reason to be fond of the company.

Philips Electronics (PHG). Another Dessauer favorite is riding the green wave. Based in Amsterdam, Philips Electronics N.V. is best known for selling electronics such as coffee machines and magnetic-resonance imaging systems.

Now, however, Dessauer says the company has designs on becoming the world's leading maker of energy efficient light bulbs. According to a Morningstar report, with its recent acquisition of The Genlyte Group, a provider of light-emitting diodes (LED), Philips became the biggest lighting firm in the United States. The firm aims to use Genlyte's relationship with U.S.-based distributors and retailers to increase sales of LED lighting, which use far less power than incandescent lights and last as long as 10 years, Morningstar says.

Dessauer also says Philips stands to benefit as the world's emerging middle class buys consumer electronics and personal-care products.

To be fair, the company has been hard hit since this report was first published. For instance, Morgan Stanley downgraded on Oct. 1 the firm to underweight from equal-weight, saying it expects it to report disappointing second-half and 2009 operating results. The broker told clients that while it believes management is pursuing the right long-term strategy, its analysis suggests the consumer lifestyle and lighting divisions will see their sales' growth slow and margins compress.

Dessauer agrees that the company will face strong headwinds in the short-term. Indeed, its stock is down about 45% since the original report, but as with Nokia, now might be the time to double down for the long haul. “People have stopped ordering its consumer products, but its basic business is sound,” he said.

Total SA (TOT). Brad Durham, managing director of Emerging Portfolio Fund Research, said one of his favorite international stocks to hold for the long-term is France-based oil giant Total SA .

"Though now is not the time to buy energy, over the longer term I suspect that upward pressure on oil will resume when global growth kicks back into gear," he said in an email. "Total is as good a long-term hold among international stocks as any."

The company's forecasting earnings per share growth of 9% this year, 10% next year and recently traded at a price-earnings ratio of 6.55. "It's also a core holding in many of the better regarded global/international equity funds that we track," Durham said.

Standard & Poor's has a "buy" recommendation on Total. According to S&P, Total is favored for its low-cost exploration and production capabilities, and for restructuring of its refining and distribution business. Total also recently entered a joint-venture with Russia's Gazprom to develop a major Russian gas field, and is investing substantially in new petrochemical plants in Qatar and South Korea.

Anglo American Plc (AAUK). S&P also has a “strong buy” recommendation on London-based mining giant Anglo American Plc. Anglo American is poised to benefit from consolidation in the mining industry and rising global demand for industrial metals, according to a recent S&P research report. “Economic growth in China and India will raise demand for durable goods and the metals used to manufacture them,” S&P said.

Anglo American intends to increase investment in iron ore, nickel, copper and metallurgical coal, which should boost sales and profits, S&P noted. The research firm in mid-August set a $41-a-share price target for the stock over the next 12 months, which hinges on the prices of coal and copper gaining in 2009. DeBeers, the world’s largest producers of rough diamonds, is 45% owned by Anglo American. That company stands to benefit as China’s middle class grows, Winters was recently quoted as saying.

Teva Pharmaceutical Industries Ltd. (TEVA). Another S&P “strong buy” recommendation is Teva Pharmaceutical, which manufactures generic drugs, an area of health care that S&P expects will boom as countries attempt to hold the line on drug spending. Teva has the largest generic lineup of its peers, with 149 generic drug applications awaiting U.S. Food and Drug Administration approval as of late July. S&P analysts also praise Teva’s “strengthening presence” in the U.S. and Eastern and Central Europe.

Nokia Corp. (NOK). Dessauer gives a strong buy rating to Nokia Corp., the world's largest maker of mobile phones. Plus he notes that a number of firms have upgraded their recommendation of Nokia in the weeks since this report was first published.

According to Dessauer, the Finland-based company is a "no brainer" investment. He says the company's share of the mobile phone market in countries such as China and India is growing rapidly, plus it's paying around a 3.5% dividend at the moment. “Nokia sells 50 times as many phones as Apple,” he said yesterday, noting that amounts to a half-billion phones worldwide.

What’s more he said Nokia is well-positioned to sell its phones to people who need internet access in countries, regions and continents where there won’t be hard-wire access to the internet through personal computers, such as remote parts of China and Africa. “A lot of people will use their cell phone to connect to the Internet,” he said.

Nokia does face headwinds from slow growth for handset telephone units and competition for high-end devices, according to an S&P research report published in mid-July research. But S&P also noted that the company had a "strong market share, a diverse portfolio and broad geographical exposure represent key strengths."

Pressures on the company's business are mounting in the short-term, however. Nokia reported earlier this month that its third-quarter profit fell 30%, though the margins on its devices held steady. And its stock is down about 40% since early September. Still, Dessauer says if you like the stock at $22, you’ll like it even more at $15. In fact, he says you might even want to double down.

GlaxoSmithKline PLC (GSK). Dessauer considers GlaxoSmithKline Plc, which recently appointed Andrew Witty as its chief executive, on the verge of a major turnaround. Witty, who maintains an office by the employee cafeteria, has set a new direction for the firm, focusing less on blockbuster drugs and more on developing an array of products that are "collectively more reliable than blockbusters," Dessauer said.

Equally important, he says Glaxo, which sells its products in 140 countries already, should benefit from selling its vaccines in emerging markets.

Dessauer says this company is attractive even though it posted a 21.5% decline in third-quarter profit this month. He expects Glaxo to begin acquiring biotech firms, which he believes could greatly improve its prospects over the long-term.

Potash Corp. of Saskatchewan Inc. (POT). Potash Corp., which is the world’s largest producer of the fertilizer potash, has been on a roller coaster ride of late what with the recent and dramatic rise and fall in crop prices. But Potash, which controls 22% of the world’s global capacity, stands to benefit handsomely over the long term as current trends play out.

Population growth in rapidly developing economies such as Asia, India and South America combined with the growing use of agricultural products for energy suggest increased demand for potash. “Proper fertilizer use will be critical to produce enough food for a growing global population from a finite land base,” Morningstar wrote in a recent report. What’s more, Morningstar suggested that Potash -- given its market leadership -- has the enviable ability to match supply to demand, in effect eliminating new competitors from entering the market.

Whew, that was a long one huh!