Words: Who, What, When

Disturbing Fibonacci chart

2009-06-26T11:09:00.001-07:00

Credit - David Steckler (HGS contributor)

The Experiment with Tyco

2009-06-19T16:33:00.000-07:00

I am publishing this trade virtually because I think this is a good trade but I am on options rookie so I am trying out my playbook here.

Here's what I read on Friday Jun 19th Quadruple Expiration Day.

Tyco has been trading in a reasonably tight range recently, and that has prompted one options trader to step in.The security company is down just $0.04 on the day to trade at $26.85. It broke above $29 on the first day of the month, after a run up from near $17 in early March. TYC shares have gotten back above the 200 day moving average, through which the stock broke down back in August when the price was above $40. The options trade is out in October, with the 26 puts and the 27.50 calls. There were 6,524 contracts traded in each at the same time. This appears to be a short straddle, with the October 26 puts sold for $2.05 and the October 27.5 calls traded for $2 even. If this was in fact a volatility sale, the trade will profit up to $31.50 and down to $22. This trade would go along with the falling volatility levels. Implied and historical volatility are both around 39 percent, continuing to fall over the last four months and now at their lowest levels since last October.

PLAY 1 - Short Straddle on Jul 27.5 TYC
I didnt know how to take advantage of this today but now sitting here at home with my playbook I am wondering what would happen if I were to do a short straddle myself but do it for July instead. Selling TYCSY this evening if it was possible would net me 1.40. Selling TYCGY would net me 0.75 for a total of 2.15 for the trade. Ofcourse a short straddle has unlimited risk on the upside substantial downside risk but given the low volatility of the stock - collecting 2.15 doesnt sound bad does it? We will revisit this trade on Jul expiration and see where we sit.
I can tolerate a fall from current price to 24.87 to a rise upto 28.87

PLAY 2 - Short Strangle on Jul 26 and 27.5 TYC
Sell TYCSK (Jul 26 TYC Put) - 0.7
Sell TYCGY (Jul 27.5 TYC Call) - 0.75
Yielding a net 1.55

Of the two plays - Play 2 Yields a lower amount but I like it better ! With Play 2, I can tolerate a fall in the stock price upto 24.50 and a rise upto 29. As you can see with Play 2 - I have a better tolerance of swings in price. Looking at TYC charts - I see the 50-200 golden cross (bullish) but a parabolic stop and reverse (bearish). Near term I think the bearish trend wins and we should see price gradually migrate downwards with first resistance at the 50 day MA. If it goes through that the very gradually sloping 200 MA is at around 24. As I think out loud here - perhaps it might be better to wait nearer term to see if TYC bounces at the 50 day MA before jumping into the short strangle. Will update as I have time.

Interesting Day in the Markets (OPEX week Jun 17)

2009-06-17T13:22:00.000-07:00

TRADING THOUGHTS (This is intended as a personal blog for me to jot down my daily thoughts and help with the learning process). PLEASE DO NOT COPY ANYTHING I DO ON THIS BLOG - I am not responsible for any trade losses you will incur.

Today was an interesting day in the markets and possibly a turning point in the rally we have seen. The last couple of days had seen some intense selling especially in small caps with large beta. I had a bunch of those in my portfolio. The selling was brutal from the open. It actually seemed to diminish as the day wore on. I sold my entire portfolio today (well almost my entire portfolio - I continue to hold UNG and VTG). Natural gas seems to be holding up really well here and its about that time of the year anyway. UNG is a solid play off of Natural Gas futures. VTG is a driller and will be profitable this year. They have also been able to raise money in private placement.

Towards the end of the day - Tim Knight (http://www.slopeofhope.com/) - went short the ES futures at 911.50 and I in turn bought 400 SDS at 56.30. Then around 3:45 - there was very interesting action in AXL, VTG and TEN. Some huge buys came in especially in AXL. Either these were people short covering or actually buying - I am not sure. Regardless, AXL went positive for a short time but fell back down. VTG went positive and stayed positive. In the markets as well - they started turning +ve briefly. Looking at that action - I immediately sold my SDS for a small profit at 56.65 (I intended to sell SDS before end of day anyway). SDS ended the day at 56.83

The S&P is currently sitting ON its 200 day moving average but its MACD has crossed and turned lower. Saw an interesting video by Adam Hewinson of INO.com and Marketclub on the INX (S&P) where he sees it turning lower with the first fibonacci around 881. From previous resistance levels as well S&P seems to be headed to 880. I am in all cash and will be looking to play the short-side tomorrow. Overshadowing all this is whether or not OPEX (which is this week) is messing with us. My impression looking at optionpain.com was that OPEX week would make the markets trend lower given what optionpain.com was suggesting. I was thinking of buying puts on Friday to protect my gains (on Friday - I was sitting on a much better profit level in my portfolio). I didnt buy them and I paid for that mistake. I am now all cash with some small positions.

I have created portfolios in FINVIZ (because the stocks I had purchased are strong small cap names like - VTG, CENX, AXL, GRO, SEED, FEED, HOGS, CHU, BBY, COT, CPY, CENT, FUQI, APWR etc).

Just got an email from Market Club - BMI went higher to 42 (argghhh) and all healthcare stocks seem to be higher today. RDY is looking quite strong. Within small caps - best healthcare action in the last 3 days has been in MRGE. UBET and MNKD also received strong rankings of 100+

The End of the Long Winter

2009-06-05T18:33:00.000-07:00

Ok so its been a while. A lot of things have changed.

The markets seem to have put in a solid bottom in March. I sent out an email to the rest of my office in mid April entitled "The End of the Long Winter."

I believe Obama created this bottom. Smart man. He knows that the driving force in any economy is confidence. Animal spirits if you will. The play a disproportionate role in this economy. And those of you who followed Obama's call to invest in the market are now doing quite well. The S&P bottomed at 666 with a beautiful double bottom and then carved out a beautiful cup and handle formation and has broken out.

Small caps especially Chinese small caps are going absolutely nuts. So are Russian stocks. All are raging buys and are going up as fast and hard as they fell down. Look at the charts of stocks like: SEED, FEED, GRO, SOL, CHU, YTEC, MTL, IGC etc. Look at the macro ETFs of things like RSX, GUR, FXI and INP. Look at TLT crashing and TBT rocking. They all tell a micro and macro story. I am making solid returns in the past month or two on the long side in both stocks and options.

This is a good time to be in the markets. New stocks are powering higher. Look at stocks of companies like AXL, XTXI etc. American Axle a key automotive supplier is now starting to climb. Yes, can you believe it? An automotive supplier. And it has a long way to go as today its only around 2.6 dollars. It could easily be around 15 in the next year. And as it does, I intend on riding it all the way. As always excercise caution and ALWAYS, ALWAYS use a stop loss.

This blog is for informational purposes only for my entertainment and not intended to be investment advice. Follow anything I can and you can and will incur a loss. DO NOT PUT YOUR MONEY TO WORK ON ANYTHING WRITTEN HERE ON THIS BLOG. DONT MAKE ME HURT YOU!

Gary Schilling's Predictions: 2009

2009-02-06T19:45:00.000-08:00

Gary Shilling's 2009 Predictions: We're Still Screwed
Henry Blodget Jan 6, 09 3:58 PM

Last year, economist Gary Shilling humiliated the rest of the economic forecasting industry by going 13 for 13.

As promised, here are Gary's predictions for this year:

Every one of our 13 investment strategies for 2008 worked last year. Some of them have been fully exploited so we dropped them from this year's list. But others are only partially achieved in view of our dire outlook that the worst global financial crisis and deepest worldwide recession since the 1930s will continue throughout 2009.

So we've retained 10 of our 2008 strategies this year, some in modified form, and added two new ones.

1. Sell homebuilder stocks and bonds.
2. If you plan to sell your house, second home or investment houses anytime soon, do so yesterday.
3. Sell some housing-related stocks.
4. Sell some consumer discretionary spending companies.
5. Sell most commercial real estate.
6. Sell some commodities.
7. Sell emerging market equities.
8. Sell emerging market debt.
9. Buy the dollar.
10. Sell stocks in general. (S&P 500 to 600)
11. Sell consumer lenders’ equities.
12. Buy, carefully, high-grade bonds.

from: clusterstock.alleyinsider.com

Rep. Gary Ackerman takes on the SEC

2009-02-06T19:32:00.001-08:00

This is what I want my congressman to say. You rock Gary.

Moody's to review CMBS

2009-02-06T19:17:00.000-08:00

Moody’s to Review $302.6 Billion in Commercial Debt (Update2)
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By Sarah Mulholland

Feb. 5 (Bloomberg) -- Moody’s Investors Service is reviewing the ratings of $302.6 billion in commercial mortgage-backed securities as real-estate values drop and property owners fall behind on payments.

The review encompasses 52 percent of outstanding U.S. commercial mortgage-backed debt ranked by Moody’s, the New York- based ratings company said today in a statement. The ratings of so-called senior and mezzanine AAA bonds, the top two classes of CMBS accounting for about 72 percent of the securities being reviewed, probably won’t be affected, Moody’s said.

The U.S. recession is crimping consumer spending and hurting business growth, making it harder for commercial property owners to make their payments. Should Moody’s decide to cut the ratings, investors including banks and insurers may need to sell CMBS holdings to maintain required levels of capital.

“Property values declined sharply in 2008, and we anticipate further declines over the next 12 to 24 months,” Moody’s analyst Nick Levidy said in the statement. “Delinquencies on CMBS loans are also on the rise, and we expect the pace to accelerate as macroeconomic pressures take a toll on property cash flows.”

Moody’s said it may downgrade the lowest levels of the securities by an average of four to five levels. Many of the securities are trading at levels that already suggest their ratings were lowered.

The gap, or spread, on commercial mortgage-backed bonds relative to benchmark interest rates has soared in the past year on concern that defaults will rise. Top-rated commercial real estate securities are trading at about 10.3 percentage points more than the swap rate, compared with 1.8 percentage points a year ago, Bank of America Corp. data show. The swap rate is currently 3.154 percent.

Fait Accompli
“This was already a fait accompli in the market,” said David Castillo, a senior trader of structured-finance bonds at Further Lane Securities in San Francisco.

Sales of the securities plummeted to $12.2 billion last year, compared with a record $237 billion in 2007, according to JPMorgan Chase & Co. data.

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net Last Updated: February 5, 2009 16:09 EST

Here we go. Review, Downgrade, Markdown, Bailout. Yee haw! The banks are insolvent dammit. Nationalize them and get this over with. Ofcourse game theory dictates that uncertainty on one hand makes things worse for the economy and on the other hand makes Treasury debt popular. Right now, the Treasury is focused on raising money for the Fed at cheap rates and therefore they'll try to keep certainty from coming back into the market. For now. At some point Obama has to make an executive decision here and say enough with the uncertainty - the damage that is being caused to "animal spirits" in the economy is unacceptable.

2009-02-02T11:43:00.000-08:00

February 2, 2009

Big Risks for U.S. in Trying to Value Bad Bank Assets

By VIKAS BAJAJ and STEPHEN LABATON

As the Obama administration prepares its strategy to rescue the nation’s banks by buying or guaranteeing troubled assets on their books, it confronts one central problem: How should they be valued?

Not just billions, but hundreds of billions of taxpayer dollars are at stake.

The Treasury secretary, Timothy F. Geithner, is expected to announce details of the new plan within weeks. Administration and Congressional officials say it will give the government flexibility to buy some bad assets and guarantee others in an effort to have a broad impact but still tailor the aid for different institutions.

But getting this right will not be easy. The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.

The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

The bond analyzed by S.& P. is just one of thousands that the government might buy or guarantee should it go forward with setting up a “bad bank” that would acquire $1 trillion or more of toxic assets from banks.

The idea is that, free from the burden of carrying these bad assets, banks would start lending again and bolster the faltering economy. The bad bank set up by the government would, over time, sell the assets and recover some or most of what it had paid.

While the government is considering several approaches to helping the banks, including more capital injections, buying or insuring toxic assets is likely to be a centerpiece. Determining the right price for these assets is crucial to success. Placing too low a value would force institutions selling and others holding similar investments to register crushing losses that could deplete their capital and make it harder for them to increase lending.

But inflated values would bail out the companies, their shareholders and executives at the expense of taxpayers, who would swallow the losses if the government could not recoup what it had paid.

Some critics of the plan warn that the government should not buy the assets, because banks will try to get too high a price and leave taxpayers holding the bag.

“To date, the banks have stuck their heads in the sand,” said Lynn E. Turner, a former chief accountant for the Securities and Exchange Commission, “and demanded that they be paid the price of good apples for bad apples.”

But many believe that, given the depth of the problem and the fact that it keeps getting worse, the government has little choice.

Finance experts from Wall Street and academia are advising the administration on other options. To sidestep the thorny valuation problem, some have suggested that the bad bank acquire only assets that have already been marked down significantly and guarantee other assets, but officials would have just as difficult a task in determining how much to charge for insuring risky assets.

Economists predict that the cost of the program will most likely exceed the $350 billion remaining in the $700 billion Troubled Assets Relief Program that Congress approved in October.

They say the Obama administration may need upwards of $1 trillion in additional aid for banks — on top of the more than $800 billion the administration is seeking in an economic stimulus measure moving through Congress.

Many in Washington question whether the rescue has achieved its goal of stabilizing the financial markets. A report by the Government Accountability Office on Friday concluded that whether the bailout program had been effective might never be known.

“While the package helped avoid a financial collapse, many are frustrated by the results — and rightfully so,” President Obama said in hisweekly address on Saturday. “Too often taxpayer dollars have been spent without transparency or accountability. Banks have been extended a hand, but homeowners, students, and small businesses that need loans have been left to fend on their own.”

Mr. Obama and many lawmakers have expressed anger that banks that received the first batch of aid money do not appear to have increased their lending significantly, even as some firms have spent billions on bonuses, corporate jets and other perks. In two weeks the House will hold a hearing to ask chief executives of the eight largest banks about their spending controls.

As early as this week, the Treasury Department may impose new limits on the executive pay of companies receiving financial assistance. The Oversight Panel created by Congress to monitor the program is also expected to publish a report this week looking at whether the government paid too much to the large banks that they have provided with assistance.

A frequent refrain in Washington and on Wall Street is that there are no current market prices for toxic securities. But people who buy and sell these investments say that is a simplistic reading of the problem. They say most kinds of securities can be valued and are being traded, but trading has slowed as sellers and buyers disagree about what that the price should be.

The value of these securities is based on the future cash flow they provide to investors. To determine that, traders have to make assumptions about the housing market and the economy: How high will the unemployment rate go in the coming years? How many borrowers will default? What will homes be worth?

The Standard & Poor’s group, Market, Credit and Risk Strategies, which operates independently from the company’s credit ratings business, has been studying troubled securities for investors and banks. The bond that is trading at 38 cents provides a vivid illustration of the dilemma in valuing these assets.

The bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A.

Michael G. Thompson, a managing director at the S.& P. group, says his computer models can easily calculate what the bond is worth under different situations. “This is not rocket science, this is straight bond math,” he said. But determining what the future holds is much harder. “We are not masters of the universe who can predict the macroeconomic environment,” he added

Some would-be buyers of these assets fear that a deep recession could drive up default rates and push down home prices much further. They also worry that a cataclysm like the failure of a big bank could send prices tumbling again, just as the collapse of Lehman Brothersdid in September. Others see no reason to bid up prices because those who need to sell are desperate.

Big banks and other owners of mortgage investments have argued that the low market prices reflect fire sales. Many have classified such securities as level-three assets, for which accounting rules allow them to determine values using computer models rather than the marketplace. Mr. Thompson estimates that at the end of September financial firms had $600 billion in such hard-to-value assets.

But critics like Mr. Turner say that the banks’ accounting for these assets cannot be trusted because they have an incentive to use optimistic assumptions.

In some instances, the government has guaranteed losses on certain assets for big, systemically important companies like Citigroup andBank of America.

Policy makers have found such arrangements appealing because they do not require upfront payments and they can be customized for each bank, Douglas J. Elliott, a fellow at the Brookings Institution, wrote in a recent paper.

Still, government guarantees need to be based on sound valuations, Mr. Elliott and others say. If the government underestimates the risks of default, taxpayers could eventually lose tens of billions of dollars. The cost of insuring such assets in the private market is often several times greater than the price the government is charging banks.

Whatever approach the Obama administration takes, investors and policy makers say it should provide more and clearer information about the health of banks and the risks that the government is taking.

Many analysts do not trust what they are told about the quality of the securities and loans held by banks and other financial firms. Most banks provide only a very general description of their holdings, because they consider the information privileged.

But the government, using its power as a big investor, could compel the banks to divulge more specific data, without giving away the names of individual bonds or loans, analysts said. The market could then do its own analysis on what the assets are worth.

“At least it would give the government one objective measure of the value of these assets,” said Anthony Lembke, co-head of investments at MKP Capital Management, a hedge fund firm that is a big investor in mortgages. “In the absence of transparency and clarity, investors are going to assume a value that will be conservative and then add a risk premium.”

Putin's speech at Davos: An eye opener!

2009-01-30T07:55:00.000-08:00

NEWS

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AFP Photo / Fabrice Coffrini

January 28, 2009, 21:40

Putin's speech at Davos World Economic Forum

For the first time in the history of the Forum Russian politician Prime Minister Vladimir Putin will deliver the key-note speech.

Esteemed participants of the World Economic Forum,

Ladies and gentlemen,

I am grateful to the organisers of the Forum for this opportunity to share with you my considerations about what is happening in the world economy today, and to tell you about our plans and proposals.

The world today has encountered the first really global economic crisis. Moreover, the speed at which the crisis manifestations are unfolding is breaking all records.

The current situation is often compared to the Great Depression at the end of the ‘20s and beginning of the ‘30s in the last century. To be sure, the parallels are actually visible.

Yet, there are principle differences. In the epoch of globalisation, the crisis has affected everyone – all countries irrespective of their political or economic systems. All of them are in the same boat.

There is, I believe, quite a well-known concept such as “the perfect storm.” That is when the unleashed natural elements focus in one point of the ocean and continue to build up their destructive force manifold. The current crisis looks precisely like “the perfect storm.”

Responsible and well-versed people must prepare for such a storm. But even so, it comes unexpectedly. And that’s what has happened this time. The crisis was actually hanging in midair. However, the majority who were trying to get a bigger piece of the pie – a billion or one dollar – did not wish to notice the rising tidal wave.

During the past several months, practically any statement that was made on the subject of the crisis began with rebukes addressed to the USA. I am not going to do that.

I would only like to remind you that only a year ago, from this rostrum, we heard the words of American representatives about the fundamental stability and cloudless prospects of the US economy. But today, the pride of Wall Street – the investment banks – have practically stopped existing. For the past year, they have had to acknowledge losses far exceeding their profits for the past quarter of a century. This example alone reflects the real state of affairs better than any criticism.

The time has come to see the light. We must calmly, and without gloating, try to look into the deep-lying causes of what has happened and to try to look into the future.

As we see it, the crisis was triggered by a combination of several factors simultaneously.

This is the collapse of the existing financial system. It is the result of poor quality regulation. And as a result of this, huge risks were overlooked.

This has been prompted by colossal imbalances that piled up over the recent years. First of all, this concerns imbalances between financial operations and the fundamental value of assets. This is the result of the increasing burden on international credits and the sources providing them.

There was a serious malfunction in the very system of global economic growth – namely, when one regional center endlessly prints money and reaps the benefits; whereas, another center produces not very costly commodities and saves money that other states have printed.

To this, I can add that in such a system, whole regions of the world, including Europe, found themselves on the periphery of global economic processes. And this means they were outside the framework of the key economic and financial decisions.

What is more, the benefits that were generated were distributed very disproportionately. In fact, such disproportions could be seen between layers of the population in individual countries and even in highly developed countries, as well as between different countries and regions of the world.

For a significant part of mankind, comfortable housing, education and qualitative medical care are still inaccessible. And the world upsurge of recent years has not radically changed this situation.

And last, but not least – this crisis was triggered by elevated expectations. The appetites of corporations in regard to growing demand were unjustifiably encouraged. The race of stock market indices and capitalisation obviously began to dominate over raising productivity and the real efficiency of companies.

Unfortunately, elevated expectations existed not only in the business medium. They prompted a rapid growth of standards of individual consumption – first of all, in the developed countries. And this growth, we must directly admit, was not backed up with real possibilities.

This was a well-being that was not earned. This was a well-being in debts that will have to be paid off by future generations.

Sooner or later, this “pyramid of expectations” had to come crashing down – which is actually something that we have witnessed with our own eyes.

* * *

Dear colleagues,

It is common knowledge that during times of crises there is a strong temptation to seek simple and popular recipes. But if one treats only the symptoms of an illness, then in the final count, one can receive much graver complications.

Understandably, the governments of all countries, the leaders of business must act with maximal resoluteness. Nonetheless, even in these force majeure circumstances, it is important to avoid taking steps for which we may be sorry in the future.

That is why I would like to begin with what in our opinion, should not be done. And what we in Russia intend to refrain from doing.

One must not allow oneself to skid down to isolationism and unbridled economic egoism. At the “Big 20” Summit, the leaders of the foremost economies of the world agreed to refrain form setting up barriers in the way of world trade and movement of capital. Russia shares these principles.

Even if amid crisis a certain strengthening of protectionism becomes inevitable, we will still need to keep the sense of proportion.

The second possible mistake would be excessive interference into the economic life of the country. And the absolute faith into the all-mightiness of the state.

Of course, the role of the state becomes more direct during crises – it is a natural response to the faults of the market. However, instead of improving market mechanisms there is always a temptation to enlarge the sphere of the immediate interference of the state in the economy.

The flip side of the anti-crisis measures in almost every country is the concentration of the excessive assets in the hands of the state.

During the time of the Soviet Union the role of the state in economy was made absolute, which eventually lead to the total non-competitiveness of the economy. That lesson cost us very dearly. I am sure nobody would want history to repeat itself.

We should also be aware that for during the last months, we have been witnessing the washout of the entrepreneurship spirit. That includes the principle of the personal responsibility -- of a businessman, an investor or a share-holder - for his or her own decisions. There are no grounds to suggest that by putting the responsibility over to the state, one can achieve better results.

Another thing – handling crisis must not turn into financial populism, into rejecting a responsible macro-economic policy. Unreasonable expansion of the budget deficit, accumulation of the national debt -- are as destructive as an adventurous stock market game.

* * *

Dear Ladies and Gentlemen,

Unfortunately, we are still far from fully fathoming the real scale of the current crisis. One thing though is obvious: the intensity and the continuance of the recession will largely depend on how precisely we will define the direction of our actions; and how coordinated and professional we shall be.

The first step that we think is essential to take in the nearest future is to literally and figuratively draw the line under our past. It is show-down time. We need to figure out the real state of affairs.

The businesses need to write off their irrecoverable debts and “bad” assets. Yes, it is a very painful and unpleasant process. And not everyone does it willingly, having fears for their capitalisation, bonuses or reputation.

But, avoiding clearing the balance means “preserving” and prolonging the crisis. I think that the writing-off mechanism must be effective and fit the realities of today’s economy.

Secondly, together with clearing the balance, it is time to go free from virtual money, made-up reports and doubtful ratings. The understanding of the health of the world economy and the real state of things with corporations must not be made vague by illusions. Even if the authors of those illusions sit in the world’s largest audit and consulting agencies.

The essence of our suggestion is that the principle of fundamental asset cost would be returned and put as the basis for the reform of audit, accounting and rating system standards. That is, the evaluation of this or that business must be built upon its capacity to generate the added value. We think that the economy of the future must be the economy of real values. How to get there? – That is the question put forward for all of us. Let’s work on it together.

Thirdly, the excessive dependence on what is basically the only reserve currency is dangerous for the world economy. So it would be reasonable to stimulate a process of getting a number of strong reserve currencies in the future. It is time to start a specific dialogue on how to make the transition into a new model - smooth and irreversible.

Fourthly, most countries keep their international reserves in foreign currencies. And they would want to be confident of their security. In their turn, the emitters of the reserve and accounting currencies are objectively interested to see that their money is in demand in other countries.

That is, that mutual interest and mutual dependence are clearly in place.

It is of vital importance that the countries responsible for the world’s reserve currencies offer more transparency for their credit and monetary policies.

These countries should take up a commitment to be guided in those policies by internationally adopted rules of macroeconomic and financial security.

And demand for such committed approach is pressing.

But beyond global finances, there are many other issues that are calling for a solution.

The unipolar pattern of the world economy that is completely outdated by now must be replaced by a new system based on cooperation of several big centres.

But to avoid chaos and unpredictable behaviour in a multipolar world, we need to bolster the network of global regulators – working in full compliance with international law and multilateral agreements. This is why we are calling for a re-think of the role of leading international organisations and institutions.

I am convinced that we are able to build a more fair and effective economic architecture for the whole world. However, due to time restraints it’s impossible to outline all the details of the proposed structure in this short speech.

Still, it’s obvious that in such a system all the countries must have guaranteed access to the resources they need for life, also access to new technologies and resources for further development. The world must work out guarantees that would allow minimising the risks of a new economic crisis.

We need to continue the discussion of all these issues, including debates at such venues as the G 20 meeting in London.

The decisions that we are now making must not only respond to the current situation, but also address the demands of a new, post-crisis world.

While struggling its way out of the crisis, the global economy may face a shortage of energy resources. There will simply be no juice for the future growth.

Three years ago Russia held the G8 summit focused on global energy security. We called for mutual responsibility on the part of suppliers, consumers and transit states. I believe it’s high time for action. We need to launch a system of responsibility that would really work.

The only way to ensure a true energy security for the whole world is to forge an interdependency, including an exchange of assets, – but without discrimination or double standards. Such interdependency is something that is definite to bring about a genuine mutual responsibility.

Unfortunately, the existing energy charter has failed to become a working tool that could be used to solve problems.

I propose to work out a new international legal framework for energy security. If implemented, our initiative could have the same economic impact as the Treaty establishing the European Coal and Steel Community. That is, we will be able to unite consumers and producers in a common energy partnership that would be real and based on clear-cut international rules.

We all realise that sharp and abrupt price fluctuations for energy resources are a strong factor that destabilises the world economy. The current price collapse could lead to the increase in non-expedient consumption of resources.

On the one hand, investment into energy saving projects and alternative energy sources will decline. But on the other hand, oil companies will cut the spending for the oil extraction – inevitably prompting a fall. That, in its turn, will again lead to skyrocketing prices and a new crisis.

We must get back to an averaged price based on the balance of demand and supply. We need to make our market clear of speculations brought about by secondary financial instruments.

One of the key problems is the safe transit of energy. There are two ways to solve the issue and both of them must be used.

The first way is transition to universally recognised market principles of tariffs formation for transit services. They can be fixed in international legal documents.

The second way is development and diversification of transportation routes for energy resources. We have been actively working in this direction for a long time.

Only in recent years we fulfilled such projects as gas pipelines “Yamal-Europe” and “Blue Stream”. Life has proved their urgency and demand.

I am convinced that such projects as “South Stream” and “Nord Stream” are equally vital for the energy security of Europe. Their total capacity is about 85 billion cubic metres of gas a year.

“Gazprom” together with its partners, the companies “Shell”, “Mitsui”, “Mitsubishi” will soon start operating facilities for liquefying and transportation of natural gas produced in the area of Sakhalin Island. It is also Russia’s contribution to the global system of energy security.

We have been developing the infrastructure of our oil pipelines. The first phase of constructing the Baltic pipeline system has already been completed.

BPS-1 provides produces up to 75 million tonnes of oil a year. Moreover, it directly delivers it to consumers through our ports in the Baltic Sea. In this way, transit risks are absolutely eliminated.

At present the work for designing and construction of BPS-2 is under way. Its oil carrying capacity is 50 million tonnes a year.

We intend to develop transport infrastructure in all directions. The first stage of the Eastern Siberia – Pacific Ocean” oil pipeline is nearing completion. Its final point will be a new oil port in the Kozmin Bay and a refinery in the Vladivostok area. In the future, in parallel to the pipeline, a gas pipeline will be laid towards the Pacific Ocean and China.

* * *

I would also like to mention the effect the global crisis had on the Russian economy. It has affected us in a most serious way.

But nevertheless, but unlike many countries, we have accumulated substantial resources.

And they expand our possibilities to assertively pass through the period of global instability.

The crisis has exposed the challenges we have. These are excessive orientation of export and the economy, in general, on raw materials and a weak financial market. There is a greater demand for the development of basic market structures, first of all, the entire competitive environment.

We were aware of these problems and have worked for their consistent solutions. The crisis just forces us to more actively move ahead according to the declared priorities without changing the strategy itself, whose essence is the qualitative renewal of Russia within the next 10-12 years.

Our anti-crisis policy is directed to internal demand support, social security of citizens and creation of new working places. Like many other countries, we are reducing taxes on production, investing money in the economy. We are optimising state expenses.

I’d like to reiterate that along with the measures of first response, we are elaborating a platform for post-crisis development.

We are confident that the leaders of world economy rehabilitation will become those who will create attractive conditions for investments already today as well as those who will manage to preserve and strengthen the sources of strategically important resources.

Therefore, the creation of a favourable entrepreneur ambience and development of competition, creation of a sustainable credit system based on internal resources and realisation of transport and other infrastructural projects are among our priorities.

At present, Russia is already one of the biggest exporters of several food products. And our input to provision of global food security will only increase.

We will also actively develop innovative sectors of the economy, first of all, those where Russia has competitive advantages in outer space, nuclear energy and aviation. In these directions, we have already been actively developing technological cooperation with other countries. The field of energy saving can also become a prospective subject for mutual cooperation. The increase of energy efficiency is just considered to be a key factor of energy security and future development.

We will continue reforms in Russia’s energy sector. We are implementing a new system of pricing for domestic consumers which is based on economically justified tariffs. This is important, among other things, to promote energy conservation. We will continue with our policy of being open to foreign investment.

I think that the 21st-century economy is an economy of people, not of factories. The intellectual aspect in the global economic development has grown immensely. That’s why we plan to concentrate on creating additional opportunities for our people to realise their potential.

Even today, we are a well-educated nation. But we need Russian people to get the best and the most modern education, to obtain professional skills which will be in great demand in the world today. Thus, we will develop educational programs for key professions in Russia with utmost vigour.

We will expand the practice of student exchange and organise internships for our students in leading universities and most advanced companies. We will create conditions for the best scientists, professors and teachers—regardless of their ethnic background and nationality—to desire to work in Russia.

History gives our country a unique chance. The way events unfold requires that we reform our economy and modernise our social sphere. And we are not going to miss this chance. Russia should come out of this crisis renewed, more powerful and more competitive.

* * *

Now I’d like to say a few words about problems that are not specifically economic—and yet, they are quite urgent under current conditions.

Unfortunately, more and more often we hear that increasing military spending will help solve today’s social and economic problems. The logic here is quite simple. Additional allocations for military needs create new jobs.

For reference:
The growth of military spending:
USA—$529 billion in 2006, $555 billion in 2007, and $583 billion in 2008. Experts expect $606 billion in 2009.
Great Britain—£27 billion in 2006, £31 billion in 2007, £34 billion in 2008, and £35.2 billion planned for 2009.
Germany—€23 billion in 2006, €24 billion in 2007, and €25 billion in 2008.
China—$38 billion in 2006, $44 billion in 2007, $58 billion in 2008, and a 17% increase in 2009 (around $66 billion).
Georgia (according to the Stockholm International Peace Research Institute)—$49 million in 2002, $80 million in 2004, $362 million in 2006, $592 million in 2007, and $1.104 billion in 2008.

At a glance, it seems to be merely a method to fight the crisis and unemployment. Perhaps, in the short run, such a measure may yield some results. But in reality, instead of solving the problem, militarisation pushes it to a deeper level. It draws away from the economy immense financial and material resources, which could have been used much more efficiently elsewhere.

I am confident that if we limit our military spending, at the same time strengthening global stability and security, this will definitely produce serious economic dividends as well.

I hope this point of view will prevail in the world. On our side, we are ready to work actively in the sphere of disarmament.

I would also like to draw your attention to the fact that the economic crisis may aggravate the negative tendencies that are present in global politics. The world has recently been confronted with an unparalleled growth of aggressive manifestations—Georgia’s adventure in the Caucasus, terrorist acts in India and the escalation of violence in the Gaza Strip. On the face of it, these events are not directly related, but their development reveals some common aspects.

It is above all the inability of existing international structures to offer constructive resolutions to regional conflicts and work towards achieving positive results in settling inter-ethnic and interstate contradictions. Essentially, multilateral political mechanisms have yielded as little effect as the institutions of financial and economic regulation.

Let us be frank: provoking military-political instability and other regional conflicts is also a convenient way of deflecting people’s attention from mounting social and economic problems. Regrettably, further attempts of this kind cannot be ruled out.

We will have to make the system of international relations much more effective, more secure and stable if we are to prevent this course of events.

There are quite a few pressing issues on the global agenda where the interests of the majority of countries objectively concur. These include the need to overcome the world economic crisis, joint efforts to reform international financial institutions, improve mechanisms of regulation and achieve reliable security in the sphere of energy and diffuse the world’s food crisis, something that has not yet receded into the background.

Russia is ready to make its contribution to the solution of top-priority tasks confronting the international community. We hope that all of our partners in Europe, Asia, America and elsewhere - I also have in mind the new US Administration, and we wish it success - will display an interest in joint and constructive work.

Ladies and gentlemen,

The set of problems facing the international community is exceptionally complicated. It sometimes seems that it is simply impossible to cope with them. But as the saying goes, a journey of a thousand miles begins with a single step.

We must seek support in the moral values that have ensured the progress of our civilisation. Honesty and hard work, responsibility and faith in our strength are bound to bring us success.

There should be no place for despondency. The crisis can and must be fought by uniting our intellectual, spiritual ad material resources.

This kind of consolidation of efforts is inconceivable without mutual trust. This does not only concern participants in business life. Primarily this concerns states.

Achieving mutual trust is a key task that all of us will have to pursue.

It is trust and solidarity that will help us overcome existing difficulties, avoid numerous upheavals and achieve prosperity and well-being in the current century.

Thank you for your attention.

Brilliant speech-craft from a master statesman. He lays out the groundwork for a Basel III, Energy Security, alludes briefly to Food Security, Russia's economy and the creation of complex mutual inter-dependencies for Security in this century. He also alludes to the disproportionate dollars spent on military spending by various counties. Quite a speech. Worth reading several times.

2009-01-28T08:51:00.000-08:00

January 29, 2009

Report on Russia Missiles Suggests Gesture to U.S.

By CLIFFORD J. LEVY

MOSCOW — A Russian news report on Wednesday that Russia is putting off its plan to deploy missiles near the Polish border raised speculation that the Kremlin is seeking ways to lower tensions with the United States now that a new administration has taken office.

The report, on the Interfax news agency, was attributed to an unidentified Russian defense official, and when contacted later in the day, other Russian foreign and defense officials in Moscow would not confirm or comment on it.

Interfax quoted the unnamed defense official as saying that, “These plans have been suspended,” referring to the Kremlin’s proposal to base Iskander missiles in the western region of Kaliningrad and direct them toward Europe.

The unnamed official was quoted as saying the Russian government had taken the step because Washington is not “pushing ahead” with the Bush administration’s proposal to deploy an anti-missile system in Poland and the Czech republic to defend against what the administration had said was a threat from countries like Iran.

Asked about the Interfax report, NATO said through a spokesman that if confirmed, “It would be a positive step.”

The Kremlin has sharply criticized the Bush anti-missile system, contending that it was aimed at Russia. Bush officials had sought to soothe Russian concerns, but ´the issue had damaged relations between the two countries.

While the official quoted by Interfax said the United States was not going forward with the antimissile plan, the Obama administration is in fact only reviewing the plan, and has not publicly rejected it.

And it would seem unlikely that the Kremlin would offer the concession of shelving the missile plan without first obtaining a promise from the Obama administration that the American plan had been canceled.

While the Kremlin remained silent about the issue on Wednesday, Itar-Tass, the government-run news agency, quoted an unnamed senior defense official as saying that any such reports in the Russian media about the Kremlin pulling back were “pure fiction, total nonsense.”

The unnamed official suggested it would be a mistake for the Russians to withdraw their threat unilaterally while the issue was still playing out.

In an interview with Bloomberg News on Monday, Prime Minister Vladimir V. Putin indicated that he was hopeful that the Obama administration would reject the Bush plan.

“We have heard signals concerning anti-missile defense, and we know that people close to Mr. Obama say they should not hurry and the issue demands further analyses,” Mr. Putin said. “We are glad to hear such statements. Beyond that, our proposal on developing those systems is still on the agenda.”

President Obama and Russia’s president, Dmitri A. Medvedev, spoke on the phone on Monday. The Kremlin said in a statement that the two leaders discussed “their intention to focus their efforts on renewing the potential of Russian-American relations, and on resolving issues in a constructive way.”

Wow - what is this world coming to? :) Gestures to the Greater Middle East and now peaceful gestures between US and Russia? This must piss-off the military industrial complex no-doubt. But I guess with one of the greatest financial crises ever facing the country - we can only show that much machismo towards the world, eh?

Roubini: Nowhere to Hide and Nationalize

2009-01-27T13:31:00.000-08:00

Roubini Sees ‘Nowhere to Hide’ From Global Slowdown (Update2)

Email | Print | A A A

By Betty Liu and Eric Martin

Jan. 27 (Bloomberg) -- Global stock market declines are increasingly correlated and emerging economies will follow developed nations into a “severe recession,” according to New York University Professor Nouriel Roubini.

Roubini said economic growth in China will slow to less than 5 percent and the U.S. will lose 6 million jobs. The American economy will expand 1 percent at most in 2010 as private spending falls and unemployment climbs to at least 9 percent, he added.

“There is nowhere to hide,” Roubini, an economics professor at NYU’s Stern School of Business who predicted the financial crisis, said from Zurich in an interview with Bloomberg Television. “We have for the first time in decades a global synchronized recession. Markets have become perfectly correlated and economies are also becoming perfectly correlated. This is not your kind of traditional minor recession.”

Roubini said the U.S. government should nationalize the biggest banks because losses will exceed assets, threatening to push them into bankruptcy. The banks could be privatized again in two or three years, Roubini said. The professor reiterated his prediction that U.S. financial losses will more than triple to $3.6 trillion and that global equities will fall 20 percent this year from current levels.

‘Zombie Banks’

“Nobody’s in favor of long-term ownership of the U.S. banking system by the government, but if you don’t do it this way, you end up like Japan where you kept alive for a decade zombie banks that were never restructured,” he said. “That’s going to be much worse. It’s better to clean it up, nationalize it and sell it to the private sector.”

Japanese policy makers hesitated in addressing a banking crisis in the 1990s and then struggled to revive growth and fight deflation in what is known as the “Lost Decade.”

Roubini recommended holding cash or short-term government debt and said high-yield bonds are cheap relative to U.S. stocks.

In July 2006, Roubini predicted the financial crisis. In February of last year, he forecast a “catastrophic” meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks with mortgage holdings and a “sharp drop” in equities. Since then, Bear Stearns Cos. was forced into a sale and Lehman Brothers Holdings Inc. went bankrupt, prompting banks to hoard cash and depriving businesses and households of access to capital.

Deeper Into Recession

The world’s biggest economies are sliding deeper into recession as the fall-out from the global financial crisis hobbles manufacturing output and punctures consumer spending from New York to Beijing. The U.S. economy probably contracted at 5.5 percent pace in the fourth quarter, the fastest in 26 years, a survey of economists showed.

Caterpillar Inc., Sprint Nextel Corp., Home Depot Inc. and ING Groep NV led companies announcing at least 77,000 job cuts yesterday as sales withered while U.S. jobless claims touched a 26-year high of 589,000 in the week ended Jan. 17. President Barack Obama is pushing congress to approve an $825 billion stimulus package to create 3 million to 4 million new jobs.

In China, the urban unemployment rate, which doesn’t include millions of migrant workers, rose for the first time since 2003 in the fourth quarter. The government is targeting a rate of 4.6 percent for the year, which would be the highest since 1980. The slowdown may destabilize the country’s communist government, Albert Edwards, a strategist at Societe Generale in London, said in a Jan. 15 research note.

To contact the reporters on this story: Betty Liu in New York atbliu17@bloomberg.net; Eric Martin in New York atemartin21@bloomberg.net.

Last Updated: January 27, 2009 14:00 EST

Geithner on Bailout Lobbying: NO

2009-01-27T13:17:00.000-08:00

January 28, 2009

Geithner Sets Limits on Lobbying for Bailout Money

By CHARLIE SAVAGE and DAVID D. KIRKPATRICK

WASHINGTON — The Treasury secretary, Timothy F. Geithner, announced on Tuesday that he would crack down on lobbying to influence the $700 billion financial bailout program by the companies that are receiving billions in taxpayer funds.

Mr. Geithner, who was confirmed and sworn in on Monday, said that he would also set new limits intended to prevent political interference with the decisions about which firms receive bailout money.

The announcement followed several reports about efforts by corporate lobbyists and Congressional lawmakers to influence the program, including decisions about which banks should receive taxpayer money.

“American taxpayers deserve to know that their money is spent in the most effective way to stabilize the financial system,” Mr. Geithner said in a statement. “Today’s actions reaffirm our commitment toward that goal.”

The details of the rules — the text has not been completed — were not released. But in a news release, the Treasury Department outlined the Obama administration’s intent to prevent corporate and political lobbying to influence spending of the bailout program.

Among the changes will be rules to “combat lobbyist influence” over the bailout program, including restricting officials from “contacts with lobbyists in connection with applications for, or disbursements of” bailout funds, the department said.

The New York Times reported on Saturday that at least a dozen firms that received billions from the bailout program lobbied the government about the program in the final three months of 2008, according to a review of disclosure forms.

The new rules announced Tuesday will also “ensure that political influence does not interfere” with bailout decisions, “using as a model for these protections the limits on political influence over tax matters,” the Treasury Department said.

A Treasury Department spokeswoman said the tax safeguards that would form the basis of the new bailout policy include a federal statute prohibiting high-ranking executive branch officials from intervening in individual tax disputes, like ordering the Internal Revenue Service to conduct or terminate an audit of a particular taxpayer.

The safeguards include the agency’s refusal “to accept any political interference whatsoever in individual tax matters,” the spokeswoman said.

While such a policy would block high-ranking executive branch officials from steering bailout money to a particular bank, it was not immediately clear whether the rule would also prohibit Treasury officials from talking with lawmakers who are seeking help for banks in their districts.

The Wall Street Journal reported last Thursday that several lawmakers had tried to ensure that bailout funds would go to banks in their districts, although it said there was no way to prove that such efforts were linked to a later decision to give money to a particular bank.

Also on Tuesday, Mr. Geithner said that the Treasury Department’s Office of Financial Stability, in making reports to Congress about how it was disbursing the funds, would certify that each decision was based only on objective “investment criteria and the facts of the case.”

In addition, the department said that it would publish soon a detailed description of its investment review process and that only banks recommended by their primary bank regulator would be eligible for bailout funds.

The announcement on Tuesday represented the latest step by the Obama administration to make the bailout program more open and accountable as it moves to disburse the second $350 billion, following bipartisan criticism over the Bush administration’s handling of the first $350 billion of the bailout program.

The Obama administration has said it will step up monitoring of lending patterns by financial institutions that receive bailout money to make sure the money is being used to ease the credit squeeze. It also said it would seek to limit executive compensation at banks that receive future taxpayer help.

During his Senate confirmation hearings last week, Mr. Geithner said that the bailout program needed “serious reform” and pledged that the Obama administration would impose “tough conditions to protect the taxpayer and the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering.”

He added: “And we are going to do that. This is an important program and we need to make it work.”

Geithner sworn in as Treasury Secretary

2009-01-27T08:56:00.000-08:00

Timothy Geithner takes on the mantle of Treasury Secretary for the Obama Administration

Obama: New Tone with the Islamic World

2009-01-27T08:02:00.000-08:00

January 28, 2009

Obama Signals New Tone in Relations With Islamic World

By ALAN COWELL

PARIS — In one of his first interviews since taking office, President Barack Obama struck a conciliatory tone toward the Islamic world, saying he wanted to persuade Muslims that “the Americans are not your enemy” and adding that “the moment is ripe for both sides” to negotiate in the Middle East.

His remarks, recorded in Washington on Monday night, signaled a shift — in style and manner at least — from the Bush administration, offering a dialogue with Iran and what he depicted as a new readiness to listen rather than dictate.

Mr. Obama spoke as his special Middle East envoy, George J. Mitchell, arrived in Egypt to begin an eight-day tour that will include Israel, Jordan, Saudi Arabia, France and Britain. Mr. Mitchell planned to meet President Hosni Mubarak.

In a transcript published on Al Arabiya’s English language Web site, Mr. Obama said he believed “the most important thing is for the United States to get engaged right away” and that he had told his envoy to “start by listening, because all too often the United States starts by dictating.”

“Ultimately, we cannot tell either the Israelis or the Palestinians what’s best for them. They’re going to have to make some decisions,” Mr. Obama said. “But I do believe that the moment is ripe for both sides to realize that the path that they are on is not going to result in prosperity and security for their people. And that, instead, it’s time to return to the negotiating table.”

Shortly after the interview was broadcast, an explosion on the Israel-Gaza border on Tuesday killed an Israeli soldier. A Palestinian farmer was shot dead, according to Palestinian witnesses, in retaliatory gunfire. The incidents were the first known fatal incidents since the Gaza fighting ended 10 days ago.

Mr. Obama said Israel “will not stop being a strong ally of the United States and I will continue to believe that Israel’s security is paramount. But I also believe that there are Israelis who recognize that it is important to achieve peace. They will be willing to make sacrifices if the time is appropriate and if there is serious partnership on the other side.”

He also said he believed it was “possible for us to see a Palestinian state — I’m not going to put a time frame on it — that is contiguous, that allows freedom of movement for its people, that allows for trade with other countries, that allows the creation of businesses and commerce so that people have a better life.”

But he also said the Israel-Palestine conflict should not be seen in isolation. “I do think it is impossible for us to think only in terms of the Palestinian-Israeli conflict and not think in terms of what’s happening with Syria or Iran or Lebanon or Afghanistan and Pakistan,” Mr. Obama said.

He spoke at length about America’s future relationship with the Muslim world, saying his “job is to communicate to the American people that the Muslim world is filled with extraordinary people who simply want to live their lives and see their children live better lives.”

“My job to the Muslim world is to communicate that the Americans are not your enemy. We sometimes make mistakes. We have not been perfect. But if you look at the track record, as you say, America was not born as a colonial power, and that the same respect and partnership that America had with the Muslim world as recently as 20 or 30 years ago, there’s no reason why we can’t restore that. And that I think is going to be an important task,” he said.

He drew a distinction between “extremist organizations” committed to violence and “people who may disagree with my administration and certain actions, or may have a particular viewpoint in terms of how their countries should develop.”

“We can have legitimate disagreements but still be respectful. I cannot respect terrorist organizations that would kill innocent civilians and we will hunt them down,” he said. “But to the broader Muslim world what we are going to be offering is a hand of friendship.”

He also said it was “important for us to be willing to talk to Iran, to express very clearly where our differences are, but where there are potential avenues for progress.”

He echoed his inaugural address last week when he said, “If countries like Iran are willing to unclench their fist, they will find an extended hand from us.”

He was not asked whether he would continue the policy of former President George Bush in refusing to exclude military action in the dispute over Iran’s nuclear ambitions.

This is nuanced and smart. The war with terrorists was not going to be won without a strong PR campaign and with actions to backup the PR. The terrorists have to be isolated and their support cut off.

"Nationalization" now in the mainstream press

2009-01-26T08:28:00.000-08:00

January 26, 2009
News Analysis
Nationalization Gets a New, Serious Look
By DAVID E. SANGER

WASHINGTON — Only five days into the Obama presidency, members of the new administration and Democratic leaders in Congress are already dancing around one of the most politically delicate questions about the financial bailout: Is the president prepared to nationalize a huge swath of the nation’s banking system?

Privately, most members of the Obama economic team concede that the rapid deterioration of the country’s biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.

But if hundreds of billions of dollars of new investment is needed to shore up those banks, and perhaps their competitors, what do taxpayers get in return? And how do the risks escalate as government’s role expands from a few bailouts to control over a vast portion of the financial sector of the world’s largest economy?

The Obama administration is making only glancing references to those questions. In an interview Sunday on “This Week” on ABC, the House speaker, Nancy Pelosi, alluded to internal debate when she was asked whether nationalization, or partial nationalization, of the largest banks was a good idea.

“Well, whatever you want to call it,” said Ms. Pelosi, Democrat of California. “If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.

“I’m not talking about total ownership,” she quickly cautioned — stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?’ ”

So far, President Obama’s top aides have steered clear of the word entirely, and they are still actively discussing other alternatives, including creating a “bad bank” that would nationalize the worst nonperforming loans by taking them off the hands of financial institutions without actually taking ownership of the banks. Others talk of de facto nationalization, in which the government owns a sizeable chunk of the banks but not a majority, with all that connotes.

That has already happened; taxpayers are now the biggest shareholders in Bank of America, with about 6 percent of the stock, and in Citigroup, with 7.8 percent. But the government’s influence is far larger than those numbers suggest, because it has guaranteed to absorb the losses of some of the two banks’ most toxic assets, a figure that could run into the hundreds of billions of dollars.

Many believe this form of hybrid ownership — part government, part private, with the responsibilities of ownership unclear — will not prove workable.

“The case for full nationalization is far stronger now than it was a few months ago,” said Adam S. Posen, the deputy director of the Peterson Institute for International Economics. “If you don’t own the majority, you don’t get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It’s the mistake the Japanese made in the ’90s.”

“I would guess that sometime in the next few weeks, President Obama and Tim Geithner,” he said, referring to the nominee for Treasury secretary, “will have to come out and say, ‘It’s much worse than we thought,’ and just bite the bullet.”

So far the Obama administration has signaled that it is trying to avoid that day, and members of its economic team — among them Mr. Geithner and the president’s top economic adviser, Lawrence H. Summers — made the case during the Asian financial crisis in the 1990s that governments make lousy bank managers.

Indeed, the risks of nationalization they warned about then apply equally to the United States now. The first is that nationalization can prove contagious. If the Obama administration took over Bank of America and Citigroup, two of the largest banks in the United States, private investors could decide to flee from the likes of JPMorgan Chase and Wells Fargo, or other major banks, fearing they could be next.

Moreover, Mr. Obama’s advisers say they are acutely aware that if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies, which could imperil the effort to steer the banks away from the cliff.

“The nightmare scenarios are endless,” one of the administration’s senior officials said.

The argument in favor of nationalization, even a brief nationalization of a few months or years, is straightforward: It might be the only way to pull America’s largest financial institutions out of the downward spiral that makes it enormously difficult to raise the capital they need to keep operating.

Right now, many banks are reluctant to write off their bad debts, and absorb huge losses, unless they can first raise enough capital to cushion the blow. But they cannot attract that capital without first purging their balance sheets of the toxic assets. Japan’s experience proved the dangers of that downward swirl; the economy stagnated, new lending ground to a halt and the country’s diplomatic clout shrank with its balance sheets.

Nationalization could pull the banks out of that dive, at least temporarily, as the government injected capital, hired new managers and ordered a restart to lending. But some Republicans who bit their tongues when President George W. Bush ordered huge interventions in the market would charge that Mr. Obama was steering America toward socialism.

Nationalization, said Charles Geisst, a financial historian at Manhattan College “is just not a term in the American vocabulary.”

“We think of it,” he continued, “as something foreigners do to us, not something we do.”
It is also something foreigners do to themselves: the British have recently taken a majority stake in the Royal Bank of Scotland.

Some of Mr. Obama’s advisers have asked who the government would get to run the banks. Many of the most experienced executives are tainted by the decisions they made during the age of excess. And how would the government attract the best talent if it demanded that they take minimal pay — a political reality in the current environment?

Another option is for the government to buy the banks’ most toxic assets either through a giant fund, or, more likely, a federally supported bad bank designed to buy up troubled investments. But in that case, taxpayers might well be the losers: They would have all of the banks’ worst assets and none of their performing loans. And unless a deal is worked out to take a larger share of the banks whose bad loans are shuffled off to the government, the taxpayers would not have the chance to benefit by selling the shares back to private investors.

Moreover, cleaning up the banks’ bad assets, without extracting a heavy price for the bank managers, shareholders and their lenders, is exactly what Mr. Summers and Mr. Geithner warned against during the Asian financial crisis.

“We told the Asians that they had to be willing to let banks and companies fail,” said Jeffrey Garten, a professor at the Yale School of Management and a top official in the Clinton administration. “We warned that there was great moral hazard if governments just bailed them out.”

“And now,” he said, “we are doing the polar opposite of our advice.”

Eric Dash contributed reporting from New York.

I have been calling for a Nationalization since the middle of last year. It is obvious to everyone why banks have NO CAPITAL available. Where is all the private money - its on the sidelines (a lot of it is probably in Zurich) because everyone knows the king has no clothes. But here we are - hemming and hawing our way to a Global Depression because we dont have the balls to say yes we need to Nationalize these insolvent institutions. Even at this late hour - it is not too late. Declare a Bank Holiday and Nationalize these insolvent institutions. Wipe out the shareholders and their lenders. NOW. The Global Depression clock is now ticking. Tick, Tock.

Geithner on Yuan: More Analysis

2009-01-23T11:59:00.000-08:00

drezner.foreignpolicy.com

Bond markets react wildly to blinding glimpse of the obvious
Thu, 01/22/2009 - 4:35pm

Felix Salmon reviews Tim Geithner's written testimony and concludes that, "Geithner's answers are highly diplomatic and content-free,"

The bond market, however, appears to disagree:
Mr. Geithner’s strong words on China have resulted in a sharp selloff in Treasurys. In testimony to Congress, Geithner wrote, in response to a question from Sen. Olympia Snowe, (R-Maine), that President Obama’s administration “backed by the conclusions of a broad range of economists - believes that China is manipulating its currency.”

“He came right out and said Obama believes China is manipulating their currency,” says Maryann Hurley, bond market strategist at D.A. Davidson, who notes that China’s economy is slowing as well. “It’s very easy to pick another country to be your whipping boy. In an era where we’re looking at deficits as far as the eye can see all we don’t need is somebody starting to dump our debt.”

As the FT's Krishna Guha and Alan Beattie write, "experts said the declaration could fuel trade tensions at a time of global recession and fast-rising unemployment."

I'm as concerned about this as the next guy, but let's be careful here and parse things out.
The bond market is conflating two issues here. The first is that Geithner said out loud what everyone knows to be true. And, to be sure, before the U.S. responds to currency manipulation, it has to say that it's happening. So Geithner's statement is a quasi-first step.

The second issue, however, is what kind of action Obama and Geithner are planning. Beattie and Guha suggest options like, "punitive import tariffs on Chinese goods."

This is where a closer look at Geithner's written testimony would be a good idea. Here are the two relevant passsages:

[W]e look forward to a productive economic dialogue with the Chinese government on a number of short- and long-tem issues. The Yuan is certainly an important piece of that discussion, but given the crisis the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the US. The latest figures show that China's growth in 2008 was 9%, a full 4 percentage points lower than in the previous year. Because China accounts for such a large fraction of the world economy, a further slowdown in China would lead to a substantial fall in world growth (and demand for US exports) and delay recovery from the crisis. Therefore, the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home....

[T]he best approach to ensure that countries do not engage in manipulating their currencies is to demonstrate that the disadvantages of doing so outweigh the benefits. If confirmed, I look forward to a constructive dialogue with our trading partners around the world in which Treasury makes the fact-based case that market exchange rates are a central ingredient to healthy and sustained growth.

Two signals here. First, Geithner seems more concerned about China expanding its domestidc growth than with any manipulation of the yuan right now -- a conviction shared by Brad Setser, incidentally.

Second, it seems pretty clear that Geithner's first option on the currency issue is jaw-jaw rather than protect-protect. In other words, the bond market should have reacted more like Felix Salmon.

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( filed under:
Bretton Woods II Chimerica financial meltdown Geithner globalization)

Warren Buffets interview on PBS tonight - Full Transcript

2009-01-23T08:37:00.000-08:00

from richard-wilson.blogspot.com

Warren Buffett Interview
Warren Buffett Interview Transcript

Below is a short interview with Warren Buffett who was featured on the the PBS Nightly Business Report tonight.
PBS’ Nightly Business Report & Warren Buffett
Full Transcript of NBR Anchor Susie Gharib’s interview with Warren Bufffett
Airs January 22, 2009,

Nightly Business Report’s 30th Anniversary

SUSIE GHARIB, ANCHOR, NIGHTLY BUSINESS REPORT: Are we overly optimistic about what President Obama can do?
WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Well I think if you think that he can turn things around in a month or three months or six months and there’s going to be some magical transformation since he took office on the 20th that can’t happen and wouldn’t happen. So you don’t want to get into Superman-type expectations. On the other hand, I don’t think there’s anybody better than you could have had; have in the presidency than Barack Obama at this time. He understands economics. He’s a very smart guy. He’s a cool rational-type thinker. He will work with the right kind of people. So you’ve got the right person in the operating room, but it doesn’t mean the patient is going to leave the hospital tomorrow.

SG: Mr. Buffett, I know that you’re close to President Obama, what are you advising him?
WB: Well I’m not advising him really, but if I were I wouldn’t be able to talk about it. I am available any time. But he’s got all kinds of talent right back there with him in Washington. Plus he’s a talent himself so if I never contributed anything for him, fine.

SG: But I know that during the election that you were one of his economic advisors, what were you telling him?
WB: I was telling him business was going to be awful during the election period and that we were coming up in November to a terrible economic scene which would be even worse probably when he got inaugurated. So far I’ve been either lucky or right on that. But he’s got the right ideas. He believes in the same things I believe in. America’s best days are ahead and that we’ve got a great economic machine, its sputtering now. And he believes there could be a more equitable job done in distributing the rewards of this great machine. But he doesn’t need my advice on anything.

SG: How often do you talk to him?
WB: Not often, not often... no no and it will be less often now that he’s in the office. He’s got a lot of talent around him.

SG: What’s the most important thing you think he needs to fix?
WB: Well the most important thing to fix right now is the economy. We have a business slowdown particularly after October 1st it was sort of on a glide path downward up til roughly October 1st and then it went into a real nosedive. In fact in September I said we were in an economic Pearl Harbor and I’ve never used that phrase before. So he really has a tough economic situation and that’s his number one job. Now his number one job always is to keep America safe that goes without saying.

SG: But when you look at the economy, what do you think is the most important thing he needs to fix in the economy?
WB: Well we’ve had to get the credit system partially fixed in order for the economy to have a chance of starting to turn around. But there’s no magic bullet on this. They’re going to throw everything from the government they can in. As I said, the Treasury is going all in, the Fed and they have to and that isn’t necessarily going to produce anything dramatic in the short term at all. Over time the American economy is going to work fine.

SG: There is considerable debate as you know about whether President Obama is taking the right steps so we don’t get in this kind of economic mess again, where do you stand on that debate?
WB: Well I don’t think the worry right now should be about the next one, the worry should be about the present one. Let’s get this fire out and then we’ll figure out fire prevention for the future. But really the important thing to do now is to figure out how we get the American economy restarted and that’s not going to be easy and its not going to be soon, but its going to get done.

SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?
WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.

SG: But are we creating new problems?
WB: Always

SG: How worried are you about these multi-trillion dollar deficits?
WB: You can’t just do one thing in economics. Anytime somebody says they’re going to do this and then what? And there is no free lunch so if you pour money at this problem you do have after effects. You create certain problems. I mean you are giving a medicine dosage to the patient on a scale that we haven’t seen in this country. And there will be after effects and they can’t be predicted exactly. But certainly the potential is there for inflationary consequences that would be significant.

SG: We all know that in the long run everything is going to work out, but as you analyze President Obama’s economic plan, what do you think are the trade-offs? What are the consequences?
WB: Well the trade-off… the trade-off basically is that you risk setting in motion forces that will be very hard to stop in terms of inflation down the road and you are creating an imbalance between revenues and expenses in the government that is a lot easier to create than it will be to correct later on, but those are problems worth taking on, but you don’t get a free lunch.

SG: What about the regulatory system, is it a matter of making new rules or simply doing a better job at enforcing the rules we already have?
WB: Well there are probably some new rules needed, but the regulatory system I don’t think could have stopped this. Once you get the bubble going... once the American public, the U.S. Congress, all the commentators, the media, everybody else started thinking house prices could go nothing up, you were creating a bubble that would have huge consequences because the asset class was so big. I mean you had 22 trillion dollars probably worth of homes. It was the biggest asset of most American families and you let them borrow 100% in many cases of the price of those and you let them refi up to where they kept taking out more and more and treating it as an ATM machine.. the bubble was going to happen.

SG: But everybody is saying we need more rules, we have to enforce them, we need to go after every institution, every financial market. Do you think that new rules will do the trick or do we have enough rules that we just need to enforce them?
WB: Well you can have a rule for example to prevent another real estate bubble; you just require that anybody bought a house to put 20% down and make sure that the payments were not more than a third of their income. Now we would not have a big bust ever in real estate again, but we would also have people screaming that you’re denying home ownership to all these people that you got a home yourself and now you’re saying a guy with a 5% down payment shouldn’t get one. So I think it’s very tough to put rules out... I mean I can design rules that will prevent it but it will have other consequences. It’s like I say in economics you can’t just do one thing and where the balance is struck on that will be a political question. My guess is that it won’t be struck particularly well, but that’s just the nature of politics.

SG: You’ve said that we’re in an economic Pearl Harbor, so how bad are things really?
WB: They’re bad, they’re bad. The credit situation is getting a little better now. Things have loosened up from a month ago in the corporate debt market. But the rate of business descent is at a pretty alarming pace, I mean there is no question things have really slowed down.Peoples’ buying habits have changed. Fear has taken over and fear is a tough thing to fight because you can’t go on television and say don’t be afraid, that doesn’t work. People will get over it, they got greedy and they got over being greedy. But it took a while to get over being greedy and now the pendulum has swung way over to the fear side. They’ll get over that and we just hope that they don’t go too far back to the greed side.

SG: What’s your view on the recession? How much longer is it going to last?
WB: I don’t know. I don’t know. I don’t know the answer to these things. The only thing is I know that I don’t know. Maybe other people think they know, but I have no idea.

SG: The last time we talked, you said back in the Spring, you said the recession is not going to be a short-haul thing. What is your feel for it right now?
WB: It isn’t going to be short, but I just don’t know Susie. There’s no way of knowing.

SG: Berkshire Hathaway is in a lot of businesses that are economically sensitive, like furniture, paint, bricks. Do you see any signs of a pick up?
WB: No. No. The businesses that are either construction or housing related, or that are just plain consumer businesses, they’re doing very, very poorly. The American consumer has stepped back big time and it’s contagious and there’s a feedback mechanism because once you hear about this then you get fearful and then don’t do things at all. And that will end at a point, but it hasn’t ended at this point. Now fortunately our two biggest businesses are not really tied that way- in insurance and in our utility business we don’t feel that, but everything that’s consumer related feels it big time.

SG: Do you think that the psyche of the American consumer has changed, becoming more savers than spenders?
WB: Well it certainly has at this point and my guess is that continues for quite a while. What it will be five years from now, I have no idea. I mean the American consumer when they’re confident they spend and they’re not confident now and they’ve cut it back but who knows whether.. I doubt that that’s a permanent reset of behavior, but I think it’s more than a one day or one week or one month wonder in that case.

SG: Is that a bad thing?
WB: Well it just depends who the consumer is. I mean consumer debt within reason makes sense. It makes sense to take out a mortgage on a home particularly if you aren’t buying during a bubble. You are normally going to see house price appreciation if you don’t buy during a time when people are all excited about it. So I don’t have any moral feelings about debt as to how people should.. I think people should only take on what they can handle though and that gets to their income level…

SG: Let me ask it this way, with Americans saving more may be good for consumers, but is that bad for business?
WB: Well it’s certainly bad for business in the short term. Now whether it’s better for business over a 10 or 20 year period... if the American public gets itself in better shape financially that presumably is good for business down the road, but while they’re getting themselves in better shape, its not much fun for the merchant on Main street.

SG: One thing that Americans aren’t buying these days is stocks. Should they be buying?
WB: Well just as many people buy a stock everyday as sell one so there are people buying stocks everyday and we’re buying stocks as we go along. If they’re buying into a business that they understand at a sensible price they should be buying them. That’s true at any time. There are a lot more things selling at sensible prices now than they were two years ago. So clearly it’s a better time to buying stocks than a couple of years ago. Is it better than tomorrow? I have no idea.

SG: This financial crisis has been extraordinary in so many ways, how has it changed your approach to investing?
WB: Doesn’t change my approach at all. My approach to investing I learned in 1949 or ‘50 from a book by Ben Graham and it’s never changed.

SG: So many people I have talked to this past year say this was unprecedented… the unthinkable happened. And that hasn’t at all impacted your philosophy on this?
WB: No and if I were buying a farm, I wouldn’t change my ideas about how to buy a farm or an apartment house or a business and that’s all a stock is. It’s part of a business so if I were going to buy stock in a private business here in Omaha, I’d look at it just like I would have looked at it two years ago and I’ll look at it the same way two years from now. I look at how much I am getting for my money, how good the management is, how the competitive position of that business compares to others, how durable it is and just fundamental questions. The stock market is... you can forget about that. Any stock I buy I will be happy owning it if they close the stock market for five years tomorrow. In other words I am buying a business. I’m not buying a stock. I’m buying a little piece of a business, just like I buy a farm. And that doesn’t change. And all the newspapers headlines of the world don’t change that. It doesn’t mean you can’t buy it cheaper tomorrow. It may turn out that way. But the real question is did I get my money’s worth when I bought it?

SG: One of your famous investing principals is, “be fearful when others are greedy and greedy when others are fearful.” So is this the time to be greedy, right?
WB: Yeah. My greed quotient has risen as stocks have gone down. There’s no question about that. The cheaper something gets that you’re going to buy, the happier you feel, right? You’re going to buy groceries the rest of your life; you want grocery prices to go up or down? You want them to go down. And if they go down you don’t think gee I got all those groceries sitting in my cabinet at home and I’ve lost money on those. You think I am buying my groceries cheaper, I am going to keep buying groceries. Now if you’re a seller, obviously prices are higher. But most people listening to this program, certainly I, myself, and Berkshire Hathaway, we’re going to be buying businesses over time. We like the idea of businesses getting cheaper.

SG: So where do you see the opportunities in the stock market right now?
WB: That one I wouldn’t tell you about.

SG: Let me throw out some sectors and you just tell me quickly how you feel about these sectors.
WB: Susie, I am not going to recommend anything…

SG: Even in general, for example a lot of people now are looking at infrastructure companies, is that a sector that you find attractive?
WB: I wouldn’t have any comment. What they ought to do is look at businesses they understand. They‘d be happy owning for years if there was never a quote on the stock. Just like they buy in privately into a business in their hometown... They ought to forget all about what somebody says is going to be hot next year or the year after, whatever… because what’s going to be hot you may be paying twice as much for as something that’s not going to be hot. You don’t want to think in terms of what’s going to be good next year, you want to think of what’s a good business to be in and then buy it at an attractive price. And then you can’t lose.

SG: Do you see more opportunities in the U.S. compared to overseas?
WB: Well I am more familiar with the U.S. We have such a big market. I see lots of opportunities here and I see lots of opportunities around the world.

SG: Investor confidence was so shattered last year, what do you think its going to take to restore confidence?
WB: If people were dependent on the stock market going up to be confident they’re in the wrong business. They ought to be confident because they look at a business and think I got my money’s worth. They ought to be confident if they buy a farm, not on whether they get a quote the next day on the farm, but they ought to look at what the farm produces, how many bushels an acre do they get out of their corn or soybeans and what prices do they bring. So they ought to look to-the business as to whether to be confident compared to the price that they paid and they ought to forget about what anybody is saying, including me on television, or what they’re reading in the paper. That’s got nothing to do with whether they made a good decision or not. What’s got to do with whether they made a good decision, what kind of business they bought and what they paid for it.

SG: People are reeling from this whole Bernie Madoff scandal. What would you say to people who have lost trust in the financial system?
WB: They shouldn’t have lost... you don’t need to lose trust in the American system. If you decide to buy a farm and you pay the right price for it, you don’t need to lose faith in American agriculture you know because the prices of farms go down…

SG: But you know what I’m saying. People lost money last year in companies that they thought were rock solid. As I said the unthinkable happened and then on top of it, this whole Bernie Madoff scandal. It has undermined people’s sense of well being about our system. So what do you say to people who have lost trust?
WB: Well they may be better off not being in equities. If they’re really depending on somebody else and they don’t know anything about the somebody else, they’ve got a problem. They shouldn’t do that. I mean there are going to be crooks out there and this guy was a crook on a scale that we’ve never seen before. But you ought to know who you’re dealing with. But if you’re going to buy a stock in some business that’s been around for a 100 years and will be around for 100 more years and it’s not a leveraged company and it sells some important product and it’s got a strong competitive position and you buy it at a reasonable multiple of earnings, you don’t have to worry about crooks, you’re going to do fine.

SG: Is there any take away lessons from the Bernie Madoff story?
WB: Well he was a special case. I mean here is a guy who had a good reputation for 30 years or something, and the trust of a lot of people around him. So it’s very easy to draw assurances from the fact that if fifty other people that are prominent and intelligent trust the guy, that maybe you should trust him too. But I wouldn’t put my trust in a single individual like that. I would put my trust in a very good business. I would want a business that was so good that if a social guy was running it, it would still certainly do well and there are plenty of businesses that are like that.

SG: So are you saying that investing has gotten so complicated that investors should stick to what they know? Is that the take-away lesson?
WB: You should always stick to what you know. I say the “know-nothing investor” and there’s nothing wrong with being a “know-nothing investor”. I spend 60 hours a week, thinking about investments and most people have got jobs and other things to do. They can buy index funds. And they’re not going to do better then an index fund if they go around and trust some guy who’s promising them very high returns. If you buy a cross section of American business and you don’t buy it during a period when everybody is all enthused about stock, you’re going to do fine over 10 or 20 years. If you buy something with the idea that you’re going to do fine over 10 months, you may or may not. I do not know what stock is going be up 10 months from now, and I never will.

SG: What about Berkshire Hathaway stock? Were you surprised that it took such a hit last year, given that Berkshire shareholders are such buy and hold investors?
WB: Well most of them are. But in the end our price is figured relative to everything else so the whole stock market goes down 50 percent we ought to go down a lot because you can buy other things cheaper. I‘ve had three times in my lifetime since I took over Berkshire when Berkshire stock’s gone down 50 percent. In 1974 it went from $90 to $40. Did I feel badly? No I loved it! I bought more stock. So I don’t judge how Berkshire is doing by its market price, I judge it by how our businesses are doing.

SG: Is there a price at which you would buy back shares of Berkshire? $85,000? $80,000?
WB: I wouldn’t name a number. If I ever name a number I’ll name it publicly. I mean if we ever get to the point where we’re contemplating doing it, I would make a public announcement.

SG: But would you ever be interested in buying back shares?
WB: I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity. That used to be the way people bought back stocks, but in recent years, companies have bought back stocks at high prices. They’ve done it because they like supporting the stock…

SG: What are your feelings with Berkshire. The stock is down a lot. It was up to $147 thousand last year. Would you ever be opposed to buying back stock?
WB: I’m not opposed to buying back stock.

SG: Everyone wants to know your plans. What you’re going to do with all of Berkshire Hathaway’s cash, some 30 billion dollars? Is this now the right time to do a big acquisition?
WB: Well we’ve spent a lot of money in the last 4 months. We spent $5 billion on Goldman Sachs, $3 billion on GE, $6.6 billion on Wrigley, we’ve got $3 billion committed on Dow. We’ve spent a lot of money. We’ve got money left, but I love spending money. Cash makes me very unhappy. I like to always have enough and never way more than enough, but I always want to have enough. So we would never go below $10 billion of cash at Berkshire. We’re in the insurance business - we got a lot of things. We’re never going to depend on the kindness of strangers. But anything excess in that, I love the idea of buying things and the cheaper they get the better I like it.

SG: You’ve been talking about doing a big acquisition for a while now, what are you waiting for?
WB: Well we’ve spent $20 billion dollars... that might not be.

SG: I mean in terms of a company…
WB: Well we’ll wait for the right deal. We had a deal to buy Constellation for roughly $5 billion and then events with the French coming in meant we didn’t do it. But I was delighted to commit to that $5 billion dollars for Constellation Energy. And it could happen tomorrow. That one happened on a Tuesday afternoon I mean it happened like that. Constellation was in big trouble and we flew back that day, talked to the people at MidAmerican that Tuesday and made them an offer that night.

SG: It seems that you’re pretty optimistic about the long term future of the American economy and stock market, but a little pessimistic about the short term... is that a fair assessment of where your head is right now?
WB: I am unquestionably optimistic about the long term. I’m more than a little pessimistic about the short term, but that doesn’t mean I am pessimistic about the stock market. We bought stocks today. If you tell me the economy is going to be terrible for 12 months, pick a number, and then if I find something that is attractive today, I am going to buy it today. I am not going to wait and hope that it sells cheaper 6 months from now. Because who knows when stocks will hit a low or a high? Nobody knows that. All you know is whether you’re getting enough for your money or not.

SG: As you know it’s the 30th anniversary of Nightly Business Report. As you look back on the past three decades, what would you say is the most important lesson that you’ve learned about investing?
WB: Well I’ve learned my lessons before that. I read a book what is it, almost 60 years ago roughly, called The Intelligent Investor and I really learned all I needed to know about investing from that book, in particular chapters 8 and 20 so I haven’t changed anything since.

SG: Graham and Dodd?
WB: Well that was Ben Grahams’ book The Intelligent Investor. Graham and Dodd goes back even before that which was important, very important. But you know you don’t change your philosophy assuming you think have a sound one and I picked up I didn’t figure it out myself, I learned it from Ben Graham, but I got a framework for investing that I put in place back in 1950 roughly and that framework is the framework I use now. I see different ways to apply it from time to time but that is the framework.

SG: Can you describe what it is? I mean what is your most important investment lesson?
WB: The most important investment lesson is to look at a stock as a piece of business not just some thing that jiggles up and down or that people recommend or people talk about earnings being up next quarter, something like that, but to look at it as a business and evaluate it as a business. If you don’t know enough to evaluate it as a business you don’t know enough to buy it. And if you do know enough to evaluate it as a business and its selling cheap, you buy it and don’t worry about what its doing next week, next month or next year.

SG: So if we asked for your investment advice back in 1979 back when Nightly Business Report first got started, would it be any different than what you would say today?
WB: Not at all. If you’d ask the same questions, you’ve gotten the same answers.

SG: Thank you so much Mr. Buffett … Thank you so much, always a pleasure talking to you.
WB: Thank you, been a real pleasure.

More on Obama - Geithner China comments

2009-01-23T08:18:00.001-08:00

January 23, 2009
Geithner Hints at Harder Line on China Trade
By JACKIE CALMES

WASHINGTON — Timothy F. Geithner, who moved closer to confirmation as Treasury secretary on Thursday, told senators that President Obama believed China was “manipulating” its currency, suggesting a more confrontational stance toward that country than under the Bush administration.

Mr. Geithner’s comment was made in writing to the Senate Finance Committee hours before it voted 18 to 5 to recommend that the full Senate confirm him. The statement, which is certain to anger the Chinese government, comes at a particularly sensitive time, with economies in both the United States and China weakening and tensions already rising around the globe over trade.

The United States, moreover, is increasingly dependent on China to finance its ballooning deficit.
An administration official said that Mr. Geithner was only repeating what Mr. Obama had said during the campaign, and pointed out that his statement also emphasized that the president intended to use “all the diplomatic avenues available to him” to address the currency question.

It remained unclear whether Mr. Geithner was signaling that Mr. Obama would officially declare later this spring that China was engaging in currency manipulation, when the administration is required by a 20-year-old trade law to report to Congress on exchange rate issues. Such a finding would begin a legal process that starts with diplomacy and could end with the imposition of trade barriers like tariffs. The objective would be to persuade China to let the value of its currency, the yuan, freely float — a move that would let its value rise and would increase the cost of its exports.

“President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency,” Mr. Geithner wrote. He stopped short of charging that China is manipulating its currency intentionally to gain an unfair trade advantage, as the 1988 law requires for an official citation of currency “manipulation.”

Even so, the Obama administration’s restatement of that position in writing on its second day was immediately seen as significant. The Bush administration purposely did not use the term “currency manipulator” to avoid antagonizing the Chinese, even when it was criticizing China’s trade policies.

The more aggressive position will be popular with organized labor in the United States, a major supporter of Mr. Obama’s presidential campaign, and with many manufacturers who say China is purposely keeping its currency devalued against the dollar and leaving American exports at a competitive disadvantage against lower-priced Chinese goods.

“It’s huge,” said Simon Johnson, a former chief economist at the International Monetary Fund who is now a professor of economics at the Massachusetts Institute of Technology. “I’m very supportive in general and I think China needs to be called to account and the I.M.F. has not done it,” he said.

But, he added, “I have to say this is really a bit of an issue for Mr. Obama’s internationalist sort of theme for his foreign policy because this is going to be at least a spat with China, and if we don’t back down it’s then a row, and you know how that goes.”

Prices of Treasury debt fell modestly after news of Mr. Geithner’s comments, reflecting worry among investors that China might be less willing to buy United States debt if the new administration pushed the country to further revalue its currency. The yield on the 30-year bond, which moves in the opposite direction from its price, climbed to 3.247 percent from 3.159 percent on Wednesday afternoon.

Even before, yields on long-term government debt had been moving up in the last three weeks, as investors anticipated a significant increase in government borrowing.

The Obama official, who did not want to be identified because of the sensitivity of Mr. Geithner’s confirmation process, cited the Treasury nominee’s earlier oral testimony to the Finance Committee. “As Tim Geithner said, it is important for the United States and the world economy that our major trading partners operate with a flexible exchange rate system,” the official said, “in which market forces determine the value of exchange rates. The new administration is committed to using a fully integrated approach to bring this about in the current economic environment.”

As a senator, Mr. Obama supported legislation as recently as last year that would open the door to trade sanctions against China for currency manipulation.

Mr. Geithner’s statement was in response to a written question about the new administration’s stance that was submitted by Senator Charles E. Schumer, Democrat of New York, a vocal critic of China’s currency policies.

On Thursday, Mr. Schumer welcomed Mr. Geithner’s reply. “For the first two days, this is a big step” from the Obama administration, he said in an interview. “And I think it’s an indication: They are not going to be anti-free trade; they are not going to be for putting artificial barriers in the way. But when other countries do, they’re going to be much tougher on them.”

The National Association of Manufacturers, whose members have pushed previous administrations to get tougher with China, was pleased, but also cautious given the potential for a confrontation that could exacerbate global woes.

“You know the world has changed a lot with the financial crisis and China has a lot in U.S. Treasuries,” said Frank Vargo, vice president for international economic affairs at the manufacturers’ association. “This needs to be done in a cooperative, not a confrontational, way.”

Some market strategists said Mr. Geithner’s statement inflamed a contentious issue unnecessarily given that China’s exports and economy were slowing significantly.

“Things have changed quite a bit since Hank Paulson made an issue of this,” said one, Edward Yardeni, an independent analyst, referring to Henry M. Paulson Jr., the just-departed Treasury secretary. “The Chinese trade surplus is shrinking dramatically and China’s economy is falling into recession. I think it really wasn’t necessary. It doesn’t accomplish anything.”

Mr. Paulson initiated a round of strategic talks with the Chinese and, on his watch, the Chinese allowed the yuan to appreciate nearly 20 percent.

Mr. Geithner would be as aware of China’s sensitivity as anyone, and no one has suggested that he made his statement in error. Before taking his current post as president of the Federal Reserve Bank of New York, Mr. Geithner was a policy director at the I.M.F. Before that, he was the under secretary of the Treasury for international affairs in the Clinton administration, a crisis manager during the Asian financial crisis of the 1990s and a Treasury attaché to Japan. By his own description, Mr. Geithner’s expertise is in matters of currency exchange rates and monetary policy.

In his written statement to the Senate panel, Mr. Geithner further noted Mr. Obama’s support as a senator for “tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles.”

“The question is how and when to broach the subject in order to do more good than harm,” he added. “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”

The full Senate is expected to confirm Mr. Geithner, 47, as Treasury secretary on Monday. Some Republican senators blocked a vote for this week, given lingering objections about Mr. Geithner’s failure until recently to pay about $34,000 in payroll taxes on his income at the I.M.F. from 2001 to 2004.

He was roundly criticized in his Finance Committee hearing on Wednesday, but its bipartisan vote reflected members’ opinion that Mr. Geithner’s expertise outweighed his personal tax lapses. Those were “completely unacceptable,” said Senator Kent Conrad, Democrat of North Dakota. “In normal times that alone would lead me to oppose his nomination. These are not normal times.”

All the panel’s Democrats and five of the 10 Republicans voted for Mr. Geithner.
“I’m convinced he’s a person of great integrity even though he’s made these mistakes,” said Senator Orrin G. Hatch, Republican of Utah. But another Republican, Senator Michael B. Enzi of Wyoming, said, “I’m really disappointed that we’re even voting on this,” given that other nominees had been disqualified for less.

Vikas Bajaj contributed reporting from New York.

Princeton in the news!

2009-01-23T07:13:00.001-08:00

From the Conscience of a Liberal - Paul Krugman
krugman.blogs.nytimes.com

January 22, 2009, 7:40 pm — Updated: 7:40 pm -->
Invasion of the DC body-snatchers

So, for the second time since I arrived at Princeton in 2000, my “boss” — people who know academic life will know why I put quotes around that — has been abducted by Washington. First, a terrific economics department head named Ben Bernanke went off to do something or other in the monetary field.

Now, Anne-Marie Slaughter, the equally terrific dean of the Woodrow Wilson School, has gone off to become the director of policy planning at the State Department. I assume that means we’ll now actually have planned policy — what an innovation!

Anyway, congrats to Anne-Marie — and kudos to Secretary Clinton for making such a great hire.

Smart is the new cool. Living in Princeton, I feel a justified sense of pride

The Global "Adverse Feedback Loop"

2009-01-23T06:57:00.001-08:00

from www.bloomberg.com

Roubini, Edwards Predict Slump in S&P 500 on China (Update3)
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By Michael Patterson and Adam Haigh

Jan. 23 (Bloomberg) -- Stocks will retreat around the world because of shrinking demand from China as growth in the third- biggest economy slows, said Nouriel Roubini, the New York University professor who predicted last year’s financial crisis.

Global equities will fall 20 percent from current levels as China, which contributed 19.5 percent to total growth in 2007, contends with its slowest expansion in seven years, he said. Wall Street strategists predict the Standard & Poor’s 500 Index will rise 29 percent this year from the closing level yesterday.

Roubini, an economics professor at NYU’s Stern School of Business, said China already is in a “recession” despite government data showing a 6.8 percent fourth-quarter growth rate, as power output drops and manufacturing shrinks.

“Demand is falling in China, they’re over-invested in capacity and there’s a global supply glut,” Roubini, 50, said in a telephone interview. “It has very, very important implications.”
Roubini’s view is shared by Societe Generale SA global strategist Albert Edwards, who was correct in forecasting in March 2007 that a U.S. contraction would spur a bear market in equities. Edwards says the China slowdown will reduce earnings at industrial, energy and raw-materials companies, worsening a selloff in emerging and developed-market stocks that may send the S&P 500 down 40 percent to 500.

Emperor’s Clothes
“People should be thinking really hard about this rather than sticking their heads in the sand,” said Edwards, a London- based strategist and member of the top-ranked global investment strategy team in Thomson Extel’s surveys the past three years. “We’re just pointing out when the emperor doesn’t have any clothes on.”

The consensus among eight strategists surveyed by Bloomberg this week is for the index to end the year at 1,066. The S&P 500 fell 1.5 percent yesterday to 827.50, and futures on the index dropped 2.2 percent as of 4:32 a.m. in New York.

Data at China’s National Bureau of Statistics is gathered in a “scientific and realistic method,” Ma Jiantang, the agency’s director, said at a briefing in Beijing yesterday in response to a question about the accuracy of government figures. Zhang Yingxiang, a spokeswoman for the statistics bureau, declined further comment when contacted by phone today.

China Stocks Fall
China’s economy grew 9 percent for all of 2008 after a 13 percent expansion in the previous year, the fastest in the world. China’s CSI 300 Index fell 0.6 percent at the close in Shanghai, the biggest drop in eight days. Commodity producers led declines after Aluminum Corp. of China Ltd. and Yunnan Copper Industry Co. reported lower profit.

Economists at JPMorgan Chase & Co., Citigroup Inc., the World Bank and the International Monetary Fund all predict China will grow at least 7 percent this year, while investors Jim Rogers and Mark Mobius are buying Chinese shares on expectations the government will bolster economic growth with interest-rate cuts and fiscal stimulus. The IMF said China’s contribution to global growth increased to 19.5 percent in 2007 from 17.2 percent in the previous year.

China, which has $1.9 trillion set aside in the world’s largest reserves, plans to spend at least 4 trillion yuan on bridges, housing and tax breaks to boost the economy. Chinese President Hu Jintao has pledged further measures to maintain stable growth in the face of “serious challenges and difficulties.”

China Recession?
Rogers, who predicted the start of the commodities rally in 1999, recommends investors buy China’s agriculture, water treatment, power generation and infrastructure stocks because the companies won’t be hurt by the nation’s slowing economy.

“China could be in recession, I have no idea and it’s not relevant to me because I’m using my judgment as to what will happen six months from now,” said Rogers, who authored books on investing including “A Bull in China: Investing Profitably in the World’s Greatest Market.”

“There is a lot happening in China and there will be those that will hold up well.”

China’s economy will grow 6.3 percent this quarter from a year earlier, according to the median estimate of nine economists surveyed by Bloomberg after yesterday’s GDP report.

China’s electricity output declined 7.8 percent in November from a year earlier and fell 3 percent in October, the first declines since February 2002, according to China Economic Information Net data compiled by Bloomberg. Manufacturing shrank for a third month as the deepening global recession cut demand for the nation’s toys, clothes and electronics.

‘Manipulating’ the Yuan
Edwards said rising unemployment among factory workers will fuel social unrest, threatening the Communist Party’s survival and increasing the risk authorities will devalue the yuan to boost exports.

The yuan appreciated about 19 percent against the dollar between 2005 and July 2008 as China redressed what U.S. officials saw as an unfair price advantage for exports. The yuan has since stabilized at about 6.85 per dollar. Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said yesterday that China is “manipulating” its currency.

The yuan fell the most in a month today as the nation’s banks refuted the new U.S. administration’s accusation.

“If you amble your way through the analysis, you realize if push comes to shove they will devalue” the yuan, Edwards said. That may spur lawmakers in the U.S. and China to increase trade barriers, he said.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net. Last Updated: January 23, 2009 05:50 EST

Obama's Geithner: China manipulates Yuan

2009-01-22T08:26:00.001-08:00

from http://www.bloomberg.com/
Obama Deems China ‘Manipulating’ Yuan, Geithner Says (Update2)
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By Rebecca Christie

Jan. 22 (Bloomberg) -- Timothy Geithner, PresidentBarack Obama’s nominee for Treasury secretary, said the new U.S. administration believes China is “manipulating” its currency.

Geithner also said, in written responses to questions from Senate Finance Committee members, that there are “no current plans” to request more financial bailout funds. He played down any need to nationalize U.S. banks, without specifically ruling out the option.

The remarks on China’s exchange rate policy may presage a tougher American line with the nation that is the biggest foreign investor in U.S. government debt. Former Treasury Secretary Henry Paulson preferred diplomacy over confrontation with China to resolve trade disputes and, in semiannual reports, refrained from labeling the country an illegal “manipulator” of its currency.

“President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency,” Geithner said in the remarks, which were posted on the Senate Finance Committee Web site today. “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”

Characterizing China’s policy as manipulation is “a very substantial change” by the Obama administration, said Nicholas Lardy, an economist who specializes in China at the Peterson Institute for International Economics in Washington.

‘Bent Over Backwards’
“It’s certainly something the Bush administration bent over backwards to avoid,” Lardy said. “It sounds also like he’s giving himself a little bit of wiggle room, saying we’ll take it up when we think it’ll be most effective” and not necessarily as an immediate issue.

Geithner said that in the short term, China should pursue “more aggressive” efforts to boost economic growth, in concert with a similar U.S. economic stimulus package.

The finance panel is expected to vote on Geithner’s nomination today.

The Obama administration is continuing to weigh a proposal to spur home buying by driving down mortgage rates, he said.

“The primary objective of the proposal to provide 4.5 percent mortgages is to assure that affordable mortgages are available to qualified borrowers,” Geithner said. “We share the objective and will continue examining proposals aimed at increasing the flow of credit to qualified borrowers.”

One version of the proposal would use Fannie Mae and Freddie Mac, the federal-chartered mortgage finance companies seized by the government in September, to reduce 30-year fixed home-loan rates to around 4.5 percent, from a current average of about 4.96 percent.

To contact the reporter on this story: Rebecca Christie in Washington atRchristie4@bloomberg.net;Last Updated: January 22, 2009 11:05 EST

Toyota: World's Largest Automaker (2008)

2009-01-21T07:51:00.000-08:00

from nytimes.com

January 22, 2009
Toyota Ahead of G.M. in 2008 Sales
By NICK BUNKLEY

DETROIT — For the first time since the Great Depression, General Motors cannot call itself the world’s largest automaker. Its sales fell behind Toyota in 2008, a year when G.M. celebrated its 100th anniversary and narrowly avoided a bankruptcy filing amid a downturn in the economy.

G.M. said Wednesday that it sold 8.35 million vehicles in 2008, about 620,000 less than Toyota’s 8.97 million. G.M.’s sales were down 11 percent from 2007, while Toyota’s declined 4 percent.

Toyota, which was founded in Japan two years after G.M. became the dominant carmaker, had been closing in on G.M. for years.

Its sales surged around the world while G.M.’s global expansion was tempered by decades of falling market share in the United States. The two had traded places from one quarter to the next in recent years, and G.M. had been widely expected to slip into second place in 2007 but held off Toyota by 3,000 vehicles.

Both companies struggled in 2008, as vehicle demand slumped, but G.M. was hurt more, to the point that executives said the company would run out of money without billions in loans from the United States government. G.M.’s global sales fell 26 percent in the fourth quarter, and the company received a $4 billion loan in December.

“The challenges in the global financial markets, including credit tightening, the drop in commodity prices, and economic uncertainty continue to negatively impact overall demand for new vehicles,” Jonathan Browning, G.M.’s vice president for global sales, service and marketing, said Wednesday in a statement. “For the total global industry, we saw about 3.5 million fewer vehicles sold in 2008 than the previous year.”

In 2008, 64 percent of G.M.’s sales occurred outside the United States, up from 59 percent the previous year. The company still outsells Toyota in the United States by a wide margin — nearly 800,000 vehicles in 2008, or 33 percent more than Toyota — but the Japanese company is a bigger player in the rest of the world.

G.M., which has lost money every year since 2004, has said it is more concerned with restructuring to become a smaller but profitable company than remaining the world leader in sales.

What a colossal failure of Leadership. The American Auto Industry desperately needs a Steve Jobs. Detroit still doesnt get it. It is firmly mired in the past. The world has moved on.

President Barack Hussein Obama 1/20/09: Inaugural Address

2009-01-20T15:43:00.000-08:00

My fellow citizens:

I stand here today humbled by the task before us, grateful for the trust you have bestowed, mindful of the sacrifices borne by our ancestors. I thank President Bush for his service to our nation, as well as the generosity and cooperation he has shown throughout this transition.
Forty-four Americans have now taken the presidential oath. The words have been spoken during rising tides of prosperity and the still waters of peace. Yet, every so often the oath is taken amidst gathering clouds and raging storms. At these moments, America has carried on not simply because of the skill or vision of those in high office, but because we the people have remained faithful to the ideals of our forebears, and true to our founding documents. So it has been. So it must be with this generation of Americans.

That we are in the midst of crisis is now well understood. Our nation is at war, against a far-reaching network of violence and hatred. Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered. Our health care is too costly; our schools fail too many; and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet.

These are the indicators of crisis, subject to data and statistics. Less measurable but no less profound is a sapping of confidence across our land — a nagging fear that America's decline is inevitable, and that the next generation must lower its sights.

Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America — they will be met.

On this day, we gather because we have chosen hope over fear, unity of purpose over conflict and discord.

On this day, we come to proclaim an end to the petty grievances and false promises, the recriminations and worn out dogmas, that for far too long have strangled our politics.
We remain a young nation, but in the words of Scripture, the time has come to set aside childish things. The time has come to reaffirm our enduring spirit; to choose our better history; to carry forward that precious gift, that noble idea, passed on from generation to generation: the God-given promise that all are equal, all are free and all deserve a chance to pursue their full measure of happiness.

In reaffirming the greatness of our nation, we understand that greatness is never a given. It must be earned. Our journey has never been one of shortcuts or settling for less. It has not been the path for the faint-hearted — for those who prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk-takers, the doers, the makers of things — some celebrated but more often men and women obscure in their labor, who have carried us up the long, rugged path towards prosperity and freedom.

For us, they packed up their few worldly possessions and traveled across oceans in search of a new life.

For us, they toiled in sweatshops and settled the West; endured the lash of the whip and plowed the hard earth.

For us, they fought and died, in places like Concord and Gettysburg; Normandy and Khe Sanh.

Time and again these men and women struggled and sacrificed and worked till their hands were raw so that we might live a better life. They saw America as bigger than the sum of our individual ambitions; greater than all the differences of birth or wealth or faction.

This is the journey we continue today. We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed. Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America.
For everywhere we look, there is work to be done. The state of the economy calls for action, bold and swift, and we will act — not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology's wonders to raise health care's quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. All this we will do.

Now, there are some who question the scale of our ambitions — who suggest that our system cannot tolerate too many big plans. Their memories are short. For they have forgotten what this country has already done; what free men and women can achieve when imagination is joined to common purpose, and necessity to courage.

What the cynics fail to understand is that the ground has shifted beneath them — that the stale political arguments that have consumed us for so long no longer apply. The question we ask today is not whether our government is too big or too small, but whether it works — whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is yes, we intend to move forward. Where the answer is no, programs will end. Those of us who manage the public's dollars will be held to account — to spend wisely, reform bad habits, and do our business in the light of day — because only then can we restore the vital trust between a people and their government.

Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control — and that a nation cannot prosper long when it favors only the prosperous. The success of our economy has always depended not just on the size of our gross domestic product, but on the reach of our prosperity; on our ability to extend opportunity to every willing heart — not out of charity, but because it is the surest route to our common good.

As for our common defense, we reject as false the choice between our safety and our ideals. Our founding fathers ... our found fathers, faced with perils we can scarcely imagine, drafted a charter to assure the rule of law and the rights of man, a charter expanded by the blood of generations. Those ideals still light the world, and we will not give them up for expedience's sake. And so to all the other peoples and governments who are watching today, from the grandest capitals to the small village where my father was born: know that America is a friend of each nation and every man, woman, and child who seeks a future of peace and dignity, and that we are ready to lead once more.

Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions. They understood that our power alone cannot protect us, nor does it entitle us to do as we please. Instead, they knew that our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint.

We are the keepers of this legacy. Guided by these principles once more, we can meet those new threats that demand even greater effort — even greater cooperation and understanding between nations. We will begin to responsibly leave Iraq to its people, and forge a hard-earned peace in Afghanistan. With old friends and former foes, we will work tirelessly to lessen the nuclear threat, and roll back the specter of a warming planet. We will not apologize for our way of life, nor will we waver in its defense, and for those who seek to advance their aims by inducing terror and slaughtering innocents, we say to you now that our spirit is stronger and cannot be broken; you cannot outlast us, and we will defeat you.

For we know that our patchwork heritage is a strength, not a weakness. We are a nation of Christians and Muslims, Jews and Hindus — and non-believers. We are shaped by every language and culture, drawn from every end of this Earth; and because we have tasted the bitter swill of civil war and segregation, and emerged from that dark chapter stronger and more united, we cannot help but believe that the old hatreds shall someday pass; that the lines of tribe shall soon dissolve; that as the world grows smaller, our common humanity shall reveal itself; and that America must play its role in ushering in a new era of peace.

To the Muslim world, we seek a new way forward, based on mutual interest and mutual respect. To those leaders around the globe who seek to sow conflict, or blame their society's ills on the West — know that your people will judge you on what you can build, not what you destroy. To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history; but that we will extend a hand if you are willing to unclench your fist.

To the people of poor nations, we pledge to work alongside you to make your farms flourish and let clean waters flow; to nourish starved bodies and feed hungry minds. And to those nations like ours that enjoy relative plenty, we say we can no longer afford indifference to the suffering outside our borders; nor can we consume the world's resources without regard to effect. For the world has changed, and we must change with it.

As we consider the road that unfolds before us, we remember with humble gratitude those brave Americans who, at this very hour, patrol far-off deserts and distant mountains. They have something to tell us, just as the fallen heroes who lie in Arlington whisper through the ages. We honor them not only because they are guardians of our liberty, but because they embody the spirit of service; a willingness to find meaning in something greater than themselves. And yet, at this moment — a moment that will define a generation — it is precisely this spirit that must inhabit us all.

For as much as government can do and must do, it is ultimately the faith and determination of the American people upon which this nation relies. It is the kindness to take in a stranger when the levees break, the selflessness of workers who would rather cut their hours than see a friend lose their job which sees us through our darkest hours. It is the firefighter's courage to storm a stairway filled with smoke, but also a parent's willingness to nurture a child, that finally decides our fate.

Our challenges may be new. The instruments with which we meet them may be new. But those values upon which our success depends — hard work and honesty, courage and fair play, tolerance and curiosity, loyalty and patriotism — these things are old. These things are true. They have been the quiet force of progress throughout our history. What is demanded then is a return to these truths. What is required of us now is a new era of responsibility — a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.

This is the price and the promise of citizenship.

This is the source of our confidence — the knowledge that God calls on us to shape an uncertain destiny.

This is the meaning of our liberty and our creed — why men and women and children of every race and every faith can join in celebration across this magnificent Mall, and why a man whose father less than sixty years ago might not have been served at a local restaurant can now stand before you to take a most sacred oath.

So let us mark this day with remembrance, of who we are and how far we have traveled. In the year of America's birth, in the coldest of months, a small band of patriots huddled by dying campfires on the shores of an icy river. The capital was abandoned. The enemy was advancing. The snow was stained with blood. At a moment when the outcome of our revolution was most in doubt, the father of our nation ordered these words be read to the people:
"Let it be told to the future world ... that in the depth of winter, when nothing but hope and virtue could survive...that the city and the country, alarmed at one common danger, came forth to meet (it)."

America, in the face of our common dangers, in this winter of our hardship, let us remember these timeless words. With hope and virtue, let us brave once more the icy currents, and endure what storms may come. Let it be said by our children's children that when we were tested we refused to let this journey end, that we did not turn back nor did we falter; and with eyes fixed on the horizon and God's grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations.

Thank you. God bless you. And God bless the United States of America.

Brilliant speechcraft, a truly heartfelt speech. Inspiring and Historic. And you start to understand how the man truly thinks. His thoughts are complex and he is a seeker of truth and peace. He recognizes the false choices and calls us to rise above our childishness.

He continues to inspire me....

2009-01-19T13:49:00.001-08:00

January 19, 2009
Obama Celebrates Holiday With Service
By BRIAN KNOWLTON

WASHINGTON — Barack Obama rolled up his sleeves on Monday and helped out at a homeless center, devoting much of his last full day as president-elect to paying tribute to Martin Luther King Jr. and to the spirit of volunteerism and public service he said Mr. King represented.
Mr. Obama began the day visiting wounded troops at Walter Reed Army Medical Center, his second homage to the military in two days, after a somber visit Sunday to Arlington National Cemetery. Mr. Obama was accompanied at Walter Reed by Martin Luther King III.

Monday is the federal holiday commemorating the birth of Martin Luther King Jr., the civil rights icon, who for some people foreshadowed the ascendance of someone like Obama with his “I Have a Dream” speech delivered in 1963 from the Lincoln Memorial.

“Today, we celebrate the life of a preacher who, more than forty-five years ago, stood on our national mall in the shadow of Lincoln and shared his dream for our nation,” Obama said in a statement. “His was a vision that all Americans might share the freedom to make of our lives what we will; that our children might climb higher than we would.

“Dr. Martin Luther King’s was a life lived in loving service to others. As we honor that legacy, it’s not a day just to pause and reflect — it’s a day to act.” He called on ordinary Americans to take part Monday in public service projects across the country and then to make “an ongoing commitment to enriching the lives of others in their communities, their cities and their country.”

It was a call to service not unlike that issued by another young American leader, President John F. Kennedy, though perhaps with added resonance because of Obama’s experience as a community organizer working with the jobless and needy on the South Side of Chicago.

In late morning, Obama arrived at the Sasha Bruce House, said to be the only emergency shelter for homeless teens in Washington. Television showed him doffing his overcoat and rolling up the sleeves of his white shirt — which he wore tieless, and with an open collar — before helping paint a wall shades of blue, using a roller with an extension handle. He chatted easily with the young people, and at one point appeared to bend over to tie a shoe.

The house, situated about 10 blocks northeast of the Capitol Building, seeks to provide homeless teens with a sense of comfort and community; residents stay in furnished apartments, and the center trains them in cooking, cleaning and computer use, and counsels them in finding work and medical help, with an emphasis on cultivating self-reliance.

Separately, Michelle Obama and Vice president-elect Joseph Biden Jr. arrived, amid considerable excitement, to take part in other service projects.

On Tuesday, as the inauguration and inaugural parade occupy much of the heart of the day, workers will be moving the Bushes out of the White House and the Obamas in within a six-hour period.

President George W. Bush, during his last full day in office, spoke by phone to several world leaders. The White House said that he chatted with the leaders of Russia, Georgia, France, Germany, Italy, Denmark, South Korea, Israel, Brazil, Japan and Britain. He also spoke to Vicente Fox, the former Mexican president. It was not clear whether he would make other calls.
A White House spokesman, Gordon Johndroe, said that the president had thanked the leaders for their cooperation and hospitality over the years.

Obama visits the Roberts Supreme Court

2009-01-19T06:38:00.000-08:00

from www.nytimes.com

January 18, 2009
Two Stars, Meeting Across a Bible
By LINDA GREENHOUSE

WASHINGTON — A few pairings stand out in the history of chief justices swearing in presidents.
Roger B. Taney swore in Abraham Lincoln four years after writing the Supreme Court’s opinion in the Dred Scott case, the pro-slavery ruling that Lincoln denounced and that inflamed the passions that were leading to civil war.

William H. Rehnquist swore in Bill Clinton for a second term a week after the Supreme Court heard arguments on whether Paula Jones could pursue her sexual harassment suit against the president. (“Good luck,” Chief Justice Rehnquist murmured audibly. Is it fanciful to suppose that he had to bite his tongue to keep from adding, “You’ll need it”?)

Chief Justice Rehnquist also swore in George W. Bush — six weeks after the court’s decision in Bush v. Gore effectively handed Mr. Bush the presidency.

When Chief Justice John G. Roberts Jr. administers the oath on Tuesday to Barack Obama, the fleeting personal intersection between these two late-baby-boom superstars may not appear equally fraught. But there will be electricity in the encounter nonetheless.

For a start, Mr. Obama was one of 22 Democratic senators to vote against the confirmation of Judge Roberts to the Supreme Court in 2005. In his remarks at the time, Senator Obama said his decision had not been an easy one. Judge Roberts had a stellar record and ample qualifications, he said. But the nominee’s “overarching political philosophy” troubled him, Mr. Obama continued, adding, “It is my personal estimation that he has far more often used his formidable skills on behalf of the strong in opposition to the weak.”

Tough words, but that is not where the real drama on the inaugural platform lies. After all, Chief Justice Roberts had the last laugh in that first encounter, and at 53 can look forward to a tenure that could easily far outlast the Obama presidency.

What is most striking about the two men who will meet at arm’s length, the Lincoln Bible between them, is the difference in the paths that brought them to this moment. In this tableau, they represent two faces of a generation that grew to adulthood after Vietnam, after the fantasies and tragedies of the 1960s, after the civil rights marches were over, when the cities were still smoldering but no longer burning.

Those who set out on their adult journeys in the 1980s, as both John Roberts and Barack Obama did, inherited an ambiguous legacy that required them to assign their own meaning to the unfulfilled promises of the era that faded with their adolescence.

Their early years had little in common: John Roberts was raised in suburban Indiana and sent to a small Catholic boys’ boarding school that was started five years earlier by Chicago and Indiana businessmen much like his own father, a steel company executive; Barack Obama, fatherless, struggled to construct a personal identity at a famous school in Hawaii founded in 1841 to educate the children of white missionaries and where no one looked quite like him.

Still, their intelligence and drive took these two, from such different beginnings, to the same place, Harvard Law School. They did not overlap there, but their shared experience was one of achievement and recognition: both were named to the law review, where John Roberts served as managing editor and Barack Obama was elected president, and both graduated magna cum laude.

Having gone directly from college to law school, John Roberts continued on what could be seen as the conventional path to success in the law: a clerkship for an esteemed federal appeals court judge, Henry J. Friendly; followed by a Supreme Court clerkship for William Rehnquist, then an associate justice; followed by responsible staff positions in the Justice Department and White House counsel’s office as well as partnership in a large law firm. For the government and private clients, he argued 39 Supreme Court cases and was considered by both justices and competitors to be one of the very best.

Doing well in all the right places — a huge achievement but in some ways a career path without risk to a sense of identity — offered great rewards and appears to have left him with few doubts about how the world works, or should work, if his legal writings are the measure. “The way to stop discrimination on the basis of race is to stop discriminating on the basis of race,” was his uncomplicated explanation in a 2007 opinion on why Louisville and Seattle could not constitutionally use student assignments to keep their public schools from resegregating after finally having achieved a measure of integration.

Mr. Obama’s path, more circuitous, led him to spend five years between college and law school working as a community organizer, and to return to community development work, along with part-time law teaching, after he left Harvard and before he finally migrated to electoral politics. It was an unconventional path full of risk, driven in no small part by the search for “a workable meaning for his life,” as “Dreams From My Father,” the memoir he published at 34, describes his journey.

With the economic wreckage of the last year, with major law firms shrinking or disappearing and business institutions that once seemed destined to last forever lying in ruins, a number of the old conventional paths can no longer be considered particularly safe for talented young graduates. An unconventional path, on the other hand, might offer something of a template for those half a generation behind the chief justice and the president-elect: a new Democratic member of Congress from Virginia, Tom Perriello, 34, a Yale Law School graduate, spent a career in community service before going into politics and winning improbably against a longtime Republican incumbent. In a recent interview, he described himself and a growing number of young politicians with similar biographies as “the service generation.”

Inaugurations are about the future, not the past, of course, and after they leave the inaugural platform, John Roberts and Barack Obama will be very much entwined with each other’s future. The Obama administration has some immediate decisions to make about cases pending in or on their way to the Supreme Court, and the court itself has hardly been reticent in recent years about speaking back to both Congress and the president. And Chief Justice Roberts must know that Mr. Obama’s choices to fill any Supreme Court vacancies in the next four years are most unlikely to bolster the fragile conservative majority that the chief justice can most often — although not always — call upon. For Chief Justice Roberts, the current alignment may be as good as it gets for the foreseeable future.

Perhaps the chief justice and the new president can wish each other good luck, until their paths cross again. When the two met Wednesday in the Supreme Court’s west conference room at Chief Justice Roberts’s invitation, they were dwarfed by a huge portrait of Chief Justice William Howard Taft — the only president ever to become a Supreme Court justice.

Even if President-elect Obama were to serve two terms, he would be only 55 when he left the White House. Is it completely implausible to suppose that the Roberts Court lies in this one-time constitutional law teacher’s future in more ways than one?

Linda Greenhouse, former Supreme Court correspondent for The Times, is a senior fellow at Yale Law School and author of “Becoming Justice Blackmun.”

Three Times Leveraged ETF from Direxion

2009-01-16T13:07:00.000-08:00

I love these new offerings. You can take advantage of inter-day volatility.

BGU, BGZ, ERX, ERY, FAS, FAZ, TNA, TZA

Please - this is NOT a recommendation to buy or sell any of these equities. Do your own research!!!

Citigroup Splits in 2 - Citicorp (Good?) and Citi Holdings (Bad?)

2009-01-16T12:16:00.000-08:00

from www.bloomberg.com
Citigroup Reports $8.3 Billion Loss, Splits Into Two (Update5)
By Bradley Keoun and Josh Fineman

Jan. 16 (Bloomberg) -- Citigroup Inc. posted an $8.29 billion loss, twice as much as analysts estimated, and said it will split in two under Chief Executive Officer Vikram Pandit’s plan to rebuild a capital base eroded by the credit crisis.

Citigroup fell 3.3 percent in New York trading after tumbling 43 percent this year through yesterday. Pandit will undo the legacy of former CEO Sanford “Sandy” Weill by creating Citicorp to house the New York-based company’s global bank, and Citi Holdings, for “non-core” assets, including $301 billion of mortgages, bonds, corporate loans and other assets that the government agreed in November to guarantee.

“The financial supermarket was buried today,” said Bill Smith, founder of Citigroup shareholder Smith Asset Management Inc. in New York, who has repeatedly called for a breakup.

A dwindling capital cushion and sinking stock price forced the 52-year-old Pandit to abandon Citigroup’s decade-old strategy of providing investment advice and insurance alongside branch banking, stock underwriting and corporate lending. He’s shedding units to free up capital and save the bank from insolvency.

“They are going to try to home in on what’s worth something, and try and sell the pieces that they really can’t value,” Todd Colvin, vice president of MF Global Inc., said in a Bloomberg TV interview.

Shares of Citigroup fell 13 cents to $3.70 as of 3:06 p.m.

Head Count
Pandit said on a conference call with analysts that the bank plans to cut head count to about 300,000, from 323,000 at the end of December and 352,000 in September.

Citigroup’s lead independent director, Richard Parsons, said today in a statement that the bank also plans to shake up its board of directors. He didn’t provide details. Robert Rubin, the former Treasury secretary who was a consultant to Citigroup’s board, resigned earlier this month after being criticized by investors for failing to help steer the bank clear of the subprime mortgage market’s collapse.

Also unclear is the future of Win Bischoff, a Citigroup executive who took over as chairman in December 2007, when Pandit was named CEO.

Pandit, who took over 13 months ago from ousted predecessor Charles O. “Chuck” Prince, earlier this week announced plans to sell control of the Smith Barney brokerage. The bank said today it has tagged for disposal the CitiFinancial consumer- lending business and Primerica Financial Services life-insurance unit, both building blocks of the financial colossus assembled by Weill.

‘Legacy Assets’
“We can better contain the impact of our legacy assets through dedicated management,” Pandit said on the conference call. “In fact, we hope to make announcement regarding the CEO for this unit shortly.”

Pandit said Citi Holdings will have about $850 billion in assets and the new Citicorp will have about $1.1 trillion.

The bank’s net loss of $1.72 a share compared with a loss of $9.8 billion, or $1.99, a year earlier. Excluding a $3.9 billion gain from the sale of a German consumer bank and other results from discontinued operations, the bank’s loss was $2.44 a share. On that basis, the loss was more than twice as wide as the $1.08 average estimate of analysts in a Bloomberg survey.

As Citigroup plunged 77 percent last year in New York trading, the bank was forced to accept $45 billion of U.S. government rescue funds.

“It looks like a kitchen-sink quarter,” said Peter Sorrentino, who helps manage $16 billion at Huntington Asset Advisors Inc. in Cincinnati, including Citigroup shares. “Sweep it all in there and get this behind us.”

Default Protection
The cost of protecting Citigroup from default dropped 49 basis points to 276, according to CMA Datavision prices for credit-default swaps.

Citigroup’s announcement came as Bank of America Corp., the biggest U.S. bank by assets, received emergency funds from the government to support its acquisition of Merrill Lynch & Co. The Charlotte, North Carolina-based company reported a loss of $1.79 billion and cut its dividend to 1 cent a share.

Weill solidified the strategy of serving corporate and individual clients around the world with a range of financial services in 1998, when his Travelers Group Inc. merged with John Reed’s Citicorp to form Citigroup Inc.

Assigning the name Citicorp for the businesses Pandit wants to keep harks back to the pre-Weill era. The old Citicorp traces its roots to the City Bank of New York,
Joint Venture

Citigroup plans to put Smith Barney into a $21 billion joint venture and relinquish majority control to Morgan Stanley. The deal, which bolsters Citigroup’s capital base with a $5.8 billion pretax gain, came less than two months after Pandit told employees he didn’t want to sell the business.

The plan to cut off “non-core” businesses in a deteriorating economy may put the bank into a deeper hole, Sanford C. Bernstein & Co. analyst John McDonald wrote in a Jan. 14 report.
“It will likely be difficult for Citi to effectively dispose of assets and businesses in the current environment,” McDonald wrote. “Any new solution is likely to need an incremental infusion of common equity, either from the government, private investors or the public markets, any of which is likely to be dilutive to existing Citi shareholders.”

The company’s fourth-quarter loss included $4.58 billion of writedowns on subprime mortgages and related bonds called collateralized debt obligations; $991 million on commercial real-estate loans and investments, and $594 million on loans to companies with low credit ratings.
Asset Writedowns

It also included $1.06 billion of writedowns on structured investment vehicles that had to be assumed after they collapsed in late 2007, and $307 million on auction-rate preferred securities that Citigroup agreed to buy back from customers under a settlement with state regulators.
Mitigating the writedowns was a $2 billion gain related to an accounting rule that lets companies mark their liabilities to market value. On the conference call today, Chief Financial Officer Gary Crittenden said that the value of the liabilities fell during the fourth quarter as Citigroup’s bond prices fell.

Ladenburg Thalmann & Co. analyst Richard Bove has criticized the accounting rule as providing an artificial benefit to companies when their own creditworthiness is declining.

Costs for reserves to cover loan losses totaled $12.2 billion, compared with $7.3 billion a year earlier, Citigroup said. In North America, the percentage of credit-card loans more than 90 days past due climbed to 2.87 percent, from 2.19 percent in the third quarter and 1.88 percent in the fourth quarter of 2007.

Revenue in the wealth-management division, which includes Smith Barney, fell 94 percent to $29 million.

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net. Last Updated: January 16, 2009 15:09 EST

from www.nytimes.com

January 14, 2009
Citigroup Plans to Split Itself Up, Taking Apart the Financial Supermarket
By ERIC DASH

Staggered by losses despite two federal rescues, Citigroup is accelerating moves to dismantle parts of its troubled financial empire in an effort to placate regulators and its anxious investors.

Under pressure from Washington and Wall Street, the financial giant plans to split itself in two, people with knowledge of the plan said on Tuesday, heralding the end of the landmark merger that created the bank a decade ago.

Citigroup, which originally planned to sell in coming years the businesses it no longer deemed central, is speeding up the process to mitigate potentially billions of new losses as the economy worsens, these people said. The government, which has twice supplied it with taxpayer support during the financial crisis, wants to avoid a repeat, said another person with knowledge of the situation.

But some Wall Street analysts and investors questioned whether the plan, which included the announcement on Tuesday that it would split off its prized Smith Barney brokerage, goes far enough to address Citigroup’s immediate troubles.

“They have moved the chips around, but it’s the same game,” said Meredith A. Whitney, an Oppenheimer banking analyst who has been critical of the company. “They still have the same capital needs.”

Citigroup faces a devastating fourth quarter, with expectations of a $10 billion operating loss, and potentially billions more this year. Federal regulators have been pressing Citigroup to clarify its strategy, shore up its finances and shake up its board, according to two people briefed on the situation. Government officials want the bank to close what they see as a credibility gap with investors.

The bank’s plan to accelerate a dismantling of its financial supermarket comes after a stern regulatory warning it received in late November, when its rapidly deteriorating share price prompted the government to give it a second cash infusion, of $27 billion.

That warning, according to one of the people briefed on the discussions, was delivered by Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, who told Citigroup that any further requests for cash would result in a breakup of its operations dictated by regulators.

A spokesman for Ms. Bair said that the F.D.I.C. did not as a matter of course discuss confidential supervisory matters.

But by devising the breakup plan, Citigroup appears to be acknowledging the regulatory admonition, though on its own terms. The moves may also set the stage for a spinoff of a stronger company or eventual merger. A spokeswoman for Citigroup declined to comment.

Citigroup’s first cash infusion from the government came in October in a $25 billion capital injection from the Troubled Asset Relief Program, or TARP. Eight other banks also received capital infusions to stabilize them as the global financial crisis deepened.

With its receipt of a second lifeline from the government in November, Citigroup began operating under what is known as open-bank assistance, which involves a loss-sharing arrangement devised by the F.D.I.C. and an investment by the Treasury typically reserved for deeply troubled institutions. Some analysts say they believe the arrangement could result in the bank selling more divisions.

Citigroup has “a new C.E.O.,” William B. Smith, a Citigroup investor who has long sought a breakup of the company, said on Tuesday. “His name is Uncle Sam, he is an activist, and he wants the company monetized.”

Mr. Smith said Citigroup was embarking on the correct strategy at the wrong time, saying that the bank missed an opportunity to whittle its unwieldy operations two years ago, when it was trading at $50 a share. On Tuesday, Citigroup’s stock closed up 5.4 percent, at $5.90.

Defining the “core” and “noncore” businesses, with separate names and management teams, may set the stage for later spinning off Citigroup’s stronger operations over time. By reporting the two sets of businesses separately, Citigroup will make it easier for its investors to focus on its underlying results. Citigroup will still have to find buyers for the troubled businesses and assets it hopes to unload — a difficult task in this market environment.

The joint venture between the Smith Barney brokerage and Morgan Stanley should help fill some of Citigroup’s capital needs by providing an immediate cash injection and a big accounting gain at a time when it is difficult to raise capital. Morgan Stanley paid $2.7 billion to own 51 percent of the new entity and can buy the rest of the business in three years for a price to be set then. The combined brokerage will include some 20,000 brokers and 1,000 retail offices.

The spinoff was the first step in a strategy that now includes whittling Citigroup’s financial supermarket into a core operation — including its global investment and consumer banking franchises as well as its private bank — and a group of noncore, loss-inducing business, according to the people close to the situation.

Those include its consumer finance operations, private-label credit card businesses and the $306 billion of illiquid assets, largely guaranteed by the government. The bank also plans to slim down its trading activities and sell off its overseas brokerage and asset management units, which no longer fit with the bank’s plans.

The formal plans will be announced Jan. 22, when Citigroup reports its fourth-quarter results.

For Citigroup, the changes draw a somber curtain over the one-stop shop created in 1998 when the company’s architect and former chief, Sanford I. Weill, merged the insurance giant Travelers Group and Citicorp, then the nation’s largest bank. The deal rewrote the rules of American finance by bringing traditional banking, insurance and Wall Street businesses, like stock underwriting, under one roof. It also ushered in a period of unprecedented deregulation, vast deal-making and high-octane growth on Wall Street.

Citigroup fell far short of those lofty goals. Over time, it found itself repeatedly beset by behind-the-scenes problems in the boardroom and executive suites.

It came under repeated fire from shareholders for lackluster results; its stock price has fallen more than 75 percent since it was formed. More recently, Citigroup has been hobbled by more than $65 billion in losses, write-downs for troubled assets and charges for future losses largely linked to a huge mortgage-related stake that the bank’s own internal risk management team and other executives failed to understand.

These problems fed criticism of lax oversight and lapses in internal controls within the bank. It became subject to investigation by numerous regulators into its various business dealings. Wall Street seemed to conclude the company was too big to manage, if not too big to fail.

Vikram S. Pandit took over Citigroup in December 2007 after the tumultuous tenure of Charles O. Prince III, the handpicked successor of Mr. Weill. Under Mr. Prince, Citigroup began a partial deconstruction of the company, selling off its Travelers insurance business and shedding its Legg Mason asset management units.

But after a four-month “dispassionate review” of Citigroup’s businesses, Mr. Pandit pledged to continue with those plans to keep the company intact and promised better management. He planned to shed more than $400 billion of assets over several years, not a matter of months. These long-range plans also included shedding noncore businesses like Primerica insurance, offloading toxic mortgage assets and focusing on a business strategy that would make the bank look increasingly like the old Citicorp bank, with less emphasis on trading.

Even so, Mr. Pandit considered Smith Barney, the bank’s retail brokerage unit, a crown jewel that the bank was unlikely to sell.

But federal regulators pushed Mr. Pandit to move faster. Since at least last fall, regulators had been urging Citigroup to replace several directors and rethink its strategy. Officials were concerned with the investor reaction to the company’s plans and asked the bank to clarify its business model, according to the people familiar with the discussions.

Mr. Pandit, a cerebral but sometimes indecisive manager, huddled with a handful of close confidants to develop new plans during the fall. Most of his own senior business managers were kept out of the loop.

But Citigroup’s troubles kept getting worse. By late December, Mr. Pandit grew concerned about the bank’s depleted capital levels as he prepared to report another devastating quarterly loss to a fractured board.

Under pressure from regulators, Mr. Pandit made the tough decision that the bank’s beloved Smith Barney unit would have to be spun off, touching off the beginning of a final dismantling of the firm.

Gretchen Morgenson, Louise Story and Julie Creswell contributed reporting.

"Ring Fencing" Bank of America

2009-01-16T09:36:00.001-08:00

from www.federalreserve.gov

January 15, 2009

Summary of Terms

Eligible Asset Guarantee

Eligible Assets: A pool of financial instruments consisting of securities
backed by residential and commercial real estate loans and
corporate debt, derivative transactions that reference such
securities, loans, and associated hedges, as agreed, and
such other financial instruments as the U.S. government
(USG) has agreed to guarantee or lend against (the Pool).
Each specific financial instrument in the Pool must be
identified on signing of the guarantee agreement. Financial
instruments in the Pool will remain on the books of
institution but will be appropriately “ring‐fenced.”

The following financial instruments will be excluded from
the Pool: (i) foreign assets (definition to be provided by
USG); (ii) assets originated or issued on or after March 14,
2008; (iii) equity securities; and (iv) any other assets that
USG deems necessary to exclude.

Size: The Pool contains up to $118 billion of financial
instruments. More specifically, the Pool includes cash
assets with a current book (i.e., carrying) value of up to
$37 billion and a derivatives portfolio with maximum
potential future losses of up to $81 billion (based on
valuations agreed between institution and USG).

Term and Coverage of Guarantee:

Guarantee is in place for 10 years for residential assets and
5 years for non‐residential assets. Residential assets will
include loans secured solely by 1‐4 family residential real
estate, securities predominately collateralized by such
loans, and derivatives that predominately reference such
securities. Institution has the right to terminate the
guarantee at any time (with the consent of USG), and the
parties will negotiate in good faith as to an appropriate fee
or rebate in connection with any permitted termination. If
institution terminates the guarantee, it must prepay any
January 15, 2009 outstanding Federal Reserve loan (described below) in full.

Guarantee covers Eligible Losses on the Pool. Eligible
Losses are the aggregate incurred credit losses (net of any
gains and recoveries) on the Pool during the term of the
guarantee, beyond the January 15, 2009, marks and credit
valuation adjustments for the Pool (as agreed between
institution and USG). Eligible Losses do not include
unrealized mark‐to‐market losses but do include realized
losses from a sale permitted under the asset management
template (described below).
Deductible: Institution absorbs all Eligible Losses in the Pool up to
$10 billion.

USG (UST/FDIC) will share Eligible Losses in the Pool in
excess of that amount, up to $10 billion. All Eligible Losses
beyond the institution’s deductible will be shared USG
(90%) and institution (10%).

Financing: Federal Reserve will provide a non‐recourse loan facility to
institution, subject to institution’s 10% loss sharing.
Federal Reserve loan commitment will terminate (and any
loans thereunder will mature) on the termination dates of
USG guarantee. Institution has the right to terminate the
Federal Reserve loan commitment and prepay any Federal
Reserve loans at any time (with consent of Federal
Reserve).

Federal Reserve will charge a fee on undrawn amounts of
20 bp per annum and a floating interest rate on drawn
amounts of OIS plus 300 bp per annum. Interest and fee
payments will be with recourse to the institution.

Institution may draw on Federal Reserve loan facility if and
when additional mark‐to‐market and incurred credit losses
on the Pool reach $18 billion.

January 15, 2009
Fee for Guarantee – Preferred Stock and Warrants:

Institution will issue to USG (UST/FDIC) (i) $4 billion of
preferred stock with an 8% dividend rate (under terms
described below); and (ii) warrants with an aggregate
exercise value of 10% of the total amount of preferred
issued. The fee may be adjusted, as necessary, based on
the results of an actuarial analysis of the final composition
of the Pool, as required under section 102(c) of the
Emergency Economic Stabilization Act of 2008.

Management of Assets:
Institution generally will manage the financial instruments
in the Pool in accordance with its ordinary business
practices, but will be required to comply with an asset
management template provided by USG. This template will
require institution, among other things, to obtain USG
approval (not to be unreasonably withheld) before any
Material Disposition. A Material Disposition is a disposition
of financial instruments in the Pool that creates an Eligible
Loss that, combined with other dispositions of Pool
instruments in the same year, exceeds 1% of the Pool size
at the beginning of the year. This template also will
include, among other things, a foreclosure mitigation policy
acceptable to USG.

Revenues and Risk Weighting:
Institution will retain the income stream from the Pool.
Risk weighting for the financial instruments in the Pool will
be 20%.

Dividends: Institution is prohibited from paying common stock
dividends in excess of $.01 per share per quarter for three
years without USG consent. A factor taken into account for
consideration of USG consent is the ability to complete a
common stock offering of appropriate size.

Executive Compensation:
An executive compensation plan, including bonuses, that
rewards long‐term performance and profitability, with
appropriate limitations, must be submitted to, and
January 15, 2009
approved by, USG. Executive compensation requirements
will be consistent with the terms of the preferred stock
purchase agreement between USG and institution.

Corporate Governance:
Other matters as specified, consistent with the terms of the
preferred stock purchase agreement between USG and
institution.

The foregoing is accepted and agreed
by and among the following as of
January 15, 2009:

DEPARTMENT OF THE TREASURY
FEDERAL RESERVE BOARD
BANK OF AMERICA CORPORATION
FEDERAL DEPOSIT INSURANCE CORP

So we now have the playbook on how the government will ring-fence (nationalize? I guess its a matter of semantics at this point) the big banks. None of the systematically important big banks will be allowed to fail. The government will provide guarantees on bad assets. It might be better to actually remove these assets from the balance sheets and create a bad bank. This will provide the banks will more confidence to lend. But this shouldnt be done without mechanisms for appropriate oversight. This move is important and is a good move. It begins to restore confidence in the financials. Transparency is still missing but hopefully the new administration will be able to provide that in the future. The tackling of insolvency has begun in the first quarter and overall this is very positive news. There are still other institutions out there. We need to get those under control asap as well. This slow bleed - Countrywide, Merill, Wachovia, Freddie / Fannie, AIG, Bank of America is unfortunate. There are others with bad assets - those should all be dealt with speedily and in this quarter!

The Stimulus Plan - Draft 1

2009-01-15T11:56:00.000-08:00

from Calculated Risk (http://www.calculatedriskblog.com/)

Thursday, January 15, 2009
Preliminary Plan: American Recovery and Reinvestment
by CalculatedRisk on 1/15/2009 02:00:00 PM
Here is the plan (PDF file)

See PDF for details ...

Here is an overview:

Clean, Efficient, American Energy: To put people back to work today and reduce our dependence on foreign oil tomorrow, we will strengthen efforts directed at doubling renewable energy production and renovate public buildings to make them more energy efficient.

• $32 billion to transform the nation’s energy transmission, distribution, and production systems by allowing for a smarter and better grid and focusing investment in renewable technology.

• $16 billion to repair public housing and make key energy efficiency retrofits.

• $6 billion to weatherize modest-income homes.

[CR Note: $54 Billion]

Transform our Economy with Science and Technology: We need to put scientists to work looking for the next great discovery, creating jobs in cutting-edge-technologies, and making smart investments that will help businesses in every community succeed in a global economy. For every dollar invested in broadband the economy sees a ten-fold return on that investment.

• $10 billion for science facilities, research, and instrumentation.

• $6 billion to expand broadband internet access so businesses in rural and other underserved areas can link up to the global economy.

[CR Note: $16 Billion: $70 billion total]

Modernize Roads, Bridges, Transit and Waterways: To build a 21st century economy, we must engage contractors across the nation to create jobs rebuilding our crumbling roads, and bridges, modernize public buildings, and put people to work cleaning our air, water and land.

• $30 billion for highway construction;

• $31 billion to modernize federal and other public infrastructure with investments that lead to long term energy cost savings;

• $19 billion for clean water, flood control, and environmental restoration investments;

• $10 billion for transit and rail to reduce traffic congestion and gas consumption.

[CR Note: $90 Billion: $160 billion total]

Education for the 21st Century: To enable more children to learn in 21st century classrooms, labs, and libraries to help our kids compete with any worker in the world, this package provides:

• $41 billion to local school districts through Title I ($13 billion), IDEA ($13 billion), a new School Modernization and Repair Program ($14 billion), and the Education Technology program ($1 billion).

• $79 billion in state fiscal relief to prevent cutbacks to key services, including $39 billion to local school districts and public colleges and universities distributed through existing state and federal formulas, $15 billion to states as bonus grants as a reward for meeting key performance measures, and $25 billion to states for other high priority needs such as public safety and other critical services, which may include education.

• $15.6 billion to increase the Pell grant by $500.

• $6 billion for higher education modernization.

[CR Note: $141.6 Billion: $301.6 billion total]

Tax Cuts to Make Work Pay and Create Jobs: We will provide direct tax relief to 95 percent of American workers, and spur investment and job growth for American Businesses. [marked up by the Ways and Means Committee]

[CR Note: Unknown amount - probably $300 billion]

Lower Healthcare Costs: To save not only jobs, but money and lives, we will update and computerize our healthcare system to cut red tape, prevent medical mistakes, and help reduce healthcare costs by billions of dollars each year.

• $20 billion for health information technology to prevent medical mistakes, provide better care to patients and introduce cost-saving efficiencies.

• $4.1 billion to provide for preventative care and to evaluate the most effective
healthcare treatments.

[CR Note: $24.1 Billion: $325.7 billion total]

Help Workers Hurt by the Economy: High unemployment and rising costs have outpaced Americans’ paychecks. We will help workers train and find jobs, and help struggling families make ends meet.

• $43 billion for increased unemployment benefits and job training.

• $39 billion to support those who lose their jobs by helping them to pay the cost of keeping their employer provided healthcare under COBRA and providing short-term options to be covered by Medicaid.

• $20 billion to increase the food stamp benefit by over 13% in order to help defray
rising food costs.

[CR Note: $102 Billion: $427.7 billion total]

Save Public Sector Jobs and Protect Vital Services: We will provide relief to states, so they can continue to employ teachers, firefighters and police officers and provide vital services without having to unnecessarily raise middle class taxes.

• $87 billion for a temporary increase in the Medicaid matching rate.

• $4 billion for state and local law enforcement funding.

[CR Note: $91 Billion: $518.7 billion total]

Plus add in about $300 billion for various tax cuts, and that give $818.7 billion (by my count).

John Stewart on the Bush Presidency

2009-01-15T09:47:00.001-08:00

John Stewart of Comedy Central's take on the Bush Years and President George W. Bush's legacy

The Daily Show With Jon StewartM - Th 11p / 10c

Six Days Seven Nights

Barack Obama Interview
John McCain Interview

Sarah Palin Video
Funny Election Video

Bernanke update: Jan 13th (London School of Business)

2009-01-13T07:39:00.000-08:00

Speech
Chairman Ben S. Bernanke
At the Stamp Lecture, London School of Economics, London, England
January 13, 2009

The Crisis and the Policy Response

For almost a year and a half the global financial system has been under extraordinary stress--stress that has now decisively spilled over to the global economy more broadly. The proximate cause of the crisis was the turn of the housing cycle in the United States and the associated rise in delinquencies on subprime mortgages, which imposed substantial losses on many financial institutions and shook investor confidence in credit markets. However, although the subprime debacle triggered the crisis, the developments in the U.S. mortgage market were only one aspect of a much larger and more encompassing credit boom whose impact transcended the mortgage market to affect many other forms of credit. Aspects of this broader credit boom included widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on complex and opaque credit instruments that proved fragile under stress, and unusually low compensation for risk-taking.

The abrupt end of the credit boom has had widespread financial and economic ramifications. Financial institutions have seen their capital depleted by losses and writedowns and their balance sheets clogged by complex credit products and other illiquid assets of uncertain value. Rising credit risks and intense risk aversion have pushed credit spreads to unprecedented levels, and markets for securitized assets, except for mortgage securities with government guarantees, have shut down. Heightened systemic risks, falling asset values, and tightening credit have in turn taken a heavy toll on business and consumer confidence and precipitated a sharp slowing in global economic activity. The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial.

The global economy will recover, but the timing and strength of the recovery are highly uncertain. Government policy responses around the world will be critical determinants of the speed and vigor of the recovery. Today I will offer some thoughts on current and prospective policy responses to the crisis in the United States, with a particular emphasis on actions by the Federal Reserve. In doing so, I will outline the framework that has guided the Federal Reserve's responses to date. I will also explain why I believe that the Fed still has powerful tools at its disposal to fight the financial crisis and the economic downturn, even though the overnight federal funds rate cannot be reduced meaningfully further.

The Federal Reserve's Response to the Crisis

The Federal Reserve has responded aggressively to the crisis since its emergence in the summer of 2007. Following a cut in the discount rate (the rate at which the Federal Reserve lends to depository institutions) in August of that year, the Federal Open Market Committee began to ease monetary policy in September 2007, reducing the target for the federal funds rate by 50 basis points.1 As indications of economic weakness proliferated, the Committee continued to respond, bringing down its target for the federal funds rate by a cumulative 325 basis points by the spring of 2008. In historical comparison, this policy response stands out as exceptionally rapid and proactive. In taking these actions, we aimed both to cushion the direct effects of the financial turbulence on the economy and to reduce the virulence of the so-called adverse feedback loop, in which economic weakness and financial stress become mutually reinforcing.

These policy actions helped to support employment and incomes during the first year of the crisis. Unfortunately, the intensification of the financial turbulence last fall led to further deterioration in the economic outlook. The Committee responded by cutting the target for the federal funds rate an additional 100 basis points last October, with half of that reduction coming as part of an unprecedented coordinated interest rate cut by six major central banks on October 8. In December the Committee reduced its target further, setting a range of 0 to 25 basis points for the target federal funds rate.

The Committee's aggressive monetary easing was not without risks. During the early phase of rate reductions, some observers expressed concern that these policy actions would stoke inflation. These concerns intensified as inflation reached high levels in mid-2008, mostly reflecting a surge in the prices of oil and other commodities. The Committee takes its responsibility to ensure price stability extremely seriously, and throughout this period it remained closely attuned to developments in inflation and inflation expectations. However, the Committee also maintained the view that the rapid rise in commodity prices in 2008 primarily reflected sharply increased demand for raw materials in emerging market economies, in combination with constraints on the supply of these materials, rather than general inflationary pressures. Committee members expected that, at some point, global economic growth would moderate, resulting in slower increases in the demand for commodities and a leveling out in their prices--as reflected, for example, in the pattern of futures market prices. As you know, commodity prices peaked during the summer and, rather than leveling out, have actually fallen dramatically with the weakening in global economic activity. As a consequence, overall inflation has already declined significantly and appears likely to moderate further.

The Fed's monetary easing has been reflected in significant declines in a number of lending rates, especially shorter-term rates, thus offsetting to some degree the effects of the financial turmoil on financial conditions. However, that offset has been incomplete, as widening credit spreads, more restrictive lending standards, and credit market dysfunction have worked against the monetary easing and led to tighter financial conditions overall. In particular, many traditional funding sources for financial institutions and markets have dried up, and banks and other lenders have found their ability to securitize mortgages, auto loans, credit card receivables, student loans, and other forms of credit greatly curtailed. Thus, in addition to easing monetary policy, the Federal Reserve has worked to support the functioning of credit markets and to reduce financial strains by providing liquidity to the private sector. In doing so, as I will discuss shortly, the Fed has deployed a number of additional policy tools, some of which were previously in our toolkit and some of which have been created as the need arose.

Beyond the Federal Funds Rate: The Fed's Policy Toolkit

Although the federal funds rate is now close to zero, the Federal Reserve retains a number of policy tools that can be deployed against the crisis.

One important tool is policy communication. Even if the overnight rate is close to zero, the Committee should be able to influence longer-term interest rates by informing the public's expectations about the future course of monetary policy. To illustrate, in its statement after its December meeting, the Committee expressed the view that economic conditions are likely to warrant an unusually low federal funds rate for some time.2 To the extent that such statements cause the public to lengthen the horizon over which they expect short-term rates to be held at very low levels, they will exert downward pressure on longer-term rates, stimulating aggregate demand. It is important, however, that statements of this sort be expressed in conditional fashion--that is, that they link policy expectations to the evolving economic outlook. If the public were to perceive a statement about future policy to be unconditional, then long-term rates might fail to respond in the desired fashion should the economic outlook change materially.

Other than policies tied to current and expected future values of the overnight interest rate, the Federal Reserve has--and indeed, has been actively using--a range of policy tools to provide direct support to credit markets and thus to the broader economy. As I will elaborate, I find it useful to divide these tools into three groups. Although these sets of tools differ in important respects, they have one aspect in common: They all make use of the asset side of the Federal Reserve's balance sheet. That is, each involves the Fed's authorities to extend credit or purchase securities.

The first set of tools, which are closely tied to the central bank's traditional role as the lender of last resort, involve the provision of short-term liquidity to sound financial institutions. Over the course of the crisis, the Fed has taken a number of extraordinary actions to ensure that financial institutions have adequate access to short-term credit. These actions include creating new facilities for auctioning credit and making primary securities dealers, as well as banks, eligible to borrow at the Fed's discount window.3 For example, since August 2007 we have lowered the spread between the discount rate and the federal funds rate target from 100 basis points to 25 basis points; increased the term of discount window loans from overnight to 90 days; created the Term Auction Facility, which auctions credit to depository institutions for terms up to three months; put into place the Term Securities Lending Facility, which allows primary dealers to borrow Treasury securities from the Fed against less-liquid collateral; and initiated the Primary Dealer Credit Facility as a source of liquidity for those firms, among other actions.

Because interbank markets are global in scope, the Federal Reserve has also approved bilateral currency swap agreements with 14 foreign central banks. The swap facilities have allowed these central banks to acquire dollars from the Federal Reserve to lend to banks in their jurisdictions, which has served to ease conditions in dollar funding markets globally. In most cases, the provision of this dollar liquidity abroad was conducted in tight coordination with the Federal Reserve's own funding auctions.

Importantly, the provision of credit to financial institutions exposes the Federal Reserve to only minimal credit risk; the loans that we make to banks and primary dealers through our various facilities are generally overcollateralized and made with recourse to the borrowing firm. The Federal Reserve has never suffered any losses in the course of its normal lending to banks and, now, to primary dealers. In the case of currency swaps, the foreign central banks are responsible for repayment, not the financial institutions that ultimately receive the funds; moreover, as further security, the Federal Reserve receives an equivalent amount of foreign currency in exchange for the dollars it provides to foreign central banks.

Liquidity provision by the central bank reduces systemic risk by assuring market participants that, should short-term investors begin to lose confidence, financial institutions will be able to meet the resulting demands for cash without resorting to potentially destabilizing fire sales of assets. Moreover, backstopping the liquidity needs of financial institutions reduces funding stresses and, all else equal, should increase the willingness of those institutions to lend and make markets.

On the other hand, the provision of ample liquidity to banks and primary dealers is no panacea. Today, concerns about capital, asset quality, and credit risk continue to limit the willingness of many intermediaries to extend credit, even when liquidity is ample. Moreover, providing liquidity to financial institutions does not address directly instability or declining credit availability in critical nonbank markets, such as the commercial paper market or the market for asset-backed securities, both of which normally play major roles in the extension of credit in the United States.

To address these issues, the Federal Reserve has developed a second set of policy tools, which involve the provision of liquidity directly to borrowers and investors in key credit markets. Notably, we have introduced facilities to purchase highly rated commercial paper at a term of three months and to provide backup liquidity for money market mutual funds. In addition, the Federal Reserve and the Treasury have jointly announced a facility that will lend against AAA-rated asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The Federal Reserve's credit risk exposure in the latter facility will be minimal, because the collateral will be subject to a "haircut" and the Treasury is providing $20 billion of capital as supplementary loss protection. We expect this facility to be operational next month.

The rationales and objectives of our various facilities differ, according to the nature of the problem being addressed. In some cases, as in our programs to backstop money market mutual funds, the purpose of the facility is to serve, once again in classic central bank fashion, as liquidity provider of last resort. Following a prominent fund's "breaking of the buck"--that is, a decline in its net asset value below par--in September, investors began to withdraw funds in large amounts from money market mutual funds that invest in private instruments such as commercial paper and certificates of deposit. Fund managers responded by liquidating assets and investing at only the shortest of maturities. As the pace of withdrawals increased, both the stability of the money market mutual fund industry and the functioning of the commercial paper market were threatened. The Federal Reserve responded with several programs, including a facility to finance bank purchases of high-quality asset-backed commercial paper from money market mutual funds. This facility effectively channeled liquidity to the funds, helping them to meet redemption demands without having to sell assets indiscriminately. Together with a Treasury program that provided partial insurance to investors in money market mutual funds, these efforts helped stanch the cash outflows from those funds and stabilize the industry.

The Federal Reserve's facility to buy high-quality (A1-P1) commercial paper at a term of three months was likewise designed to provide a liquidity backstop, in this case for investors and borrowers in the commercial paper market. As I mentioned, the functioning of that market deteriorated significantly in September, with borrowers finding financing difficult to obtain, and then only at high rates and very short (usually overnight) maturities. By serving as a backup source of liquidity for borrowers, the Fed's commercial paper facility was aimed at reducing investor and borrower concerns about "rollover risk," the risk that a borrower could not raise new funds to repay maturing commercial paper. The reduction of rollover risk, in turn, should increase the willingness of private investors to lend, particularly for terms longer than overnight. These various actions appear to have improved the functioning of the commercial paper market, as rates and risk spreads have come down and the average maturities of issuance have increased.

In contrast, our forthcoming asset-backed securities program, a joint effort with the Treasury, is not purely for liquidity provision. This facility will provide three-year term loans to investors against AAA-rated securities backed by recently originated consumer and small-business loans. Unlike our other lending programs, this facility combines Federal Reserve liquidity with capital provided by the Treasury, which allows it to accept some credit risk. By providing a combination of capital and liquidity, this facility will effectively substitute public for private balance sheet capacity, in a period of sharp deleveraging and risk aversion in which such capacity appears very short. If the program works as planned, it should lead to lower rates and greater availability of consumer and small business credit. Over time, by increasing market liquidity and stimulating market activity, this facility should also help to revive private lending. Importantly, if the facility for asset-backed securities proves successful, its basic framework can be expanded to accommodate higher volumes or additional classes of securities as circumstances warrant.

The Federal Reserve's third set of policy tools for supporting the functioning of credit markets involves the purchase of longer-term securities for the Fed's portfolio. For example, we recently announced plans to purchase up to $100 billion in government-sponsored enterprise (GSE) debt and up to $500 billion in GSE mortgage-backed securities over the next few quarters. Notably, mortgage rates dropped significantly on the announcement of this program and have fallen further since it went into operation. Lower mortgage rates should support the housing sector. The Committee is also evaluating the possibility of purchasing longer-term Treasury securities. In determining whether to proceed with such purchases, the Committee will focus on their potential to improve conditions in private credit markets, such as mortgage markets.

These three sets of policy tools--lending to financial institutions, providing liquidity directly to key credit markets, and buying longer-term securities--have the common feature that each represents a use of the asset side of the Fed's balance sheet, that is, they all involve lending or the purchase of securities. The virtue of these policies in the current context is that they allow the Federal Reserve to continue to push down interest rates and ease credit conditions in a range of markets, despite the fact that the federal funds rate is close to its zero lower bound.

Credit Easing versus Quantitative Easing

The Federal Reserve's approach to supporting credit markets is conceptually distinct from quantitative easing (QE), the policy approach used by the Bank of Japan from 2001 to 2006. Our approach--which could be described as "credit easing"--resembles quantitative easing in one respect: It involves an expansion of the central bank's balance sheet. However, in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank's balance sheet is incidental. Indeed, although the Bank of Japan's policy approach during the QE period was quite multifaceted, the overall stance of its policy was gauged primarily in terms of its target for bank reserves. In contrast, the Federal Reserve's credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses. This difference does not reflect any doctrinal disagreement with the Japanese approach, but rather the differences in financial and economic conditions between the two episodes. In particular, credit spreads are much wider and credit markets more dysfunctional in the United States today than was the case during the Japanese experiment with quantitative easing. To stimulate aggregate demand in the current environment, the Federal Reserve must focus its policies on reducing those spreads and improving the functioning of private credit markets more generally.

The stimulative effect of the Federal Reserve's credit easing policies depends sensitively on the particular mix of lending programs and securities purchases that it undertakes. When markets are illiquid and private arbitrage is impaired by balance sheet constraints and other factors, as at present, one dollar of longer-term securities purchases is unlikely to have the same impact on financial markets and the economy as a dollar of lending to banks, which has in turn a different effect than a dollar of lending to support the commercial paper market. Because various types of lending have heterogeneous effects, the stance of Fed policy in the current regime--in contrast to a QE regime--is not easily summarized by a single number, such as the quantity of excess reserves or the size of the monetary base. In addition, the usage of Federal Reserve credit is determined in large part by borrower needs and thus will tend to increase when market conditions worsen and decline when market conditions improve. Setting a target for the size of the Federal Reserve's balance sheet, as in a QE regime, could thus have the perverse effect of forcing the Fed to tighten the terms and availability of its lending at times when market conditions were worsening, and vice versa.

The lack of a simple summary measure or policy target poses an important communications challenge. To minimize market uncertainty and achieve the maximum effect of its policies, the Federal Reserve is committed to providing the public as much information as possible about the uses of its balance sheet, plans regarding future uses of its balance sheet, and the criteria on which the relevant decisions are based.4

Exit Strategy

Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve is effectively printing money, an action that will ultimately be inflationary. The Fed's lending activities have indeed resulted in a large increase in the excess reserves held by banks. Bank reserves, together with currency, make up the narrowest definition of money, the monetary base; as you would expect, this measure of money has risen significantly as the Fed's balance sheet has expanded. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base. At this point, with global economic activity weak and commodity prices at low levels, we see little risk of inflation in the near term; indeed, we expect inflation to continue to moderate.

However, at some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to unwind its various lending programs. To some extent, this unwinding will happen automatically, as improvements in credit markets should reduce the need to use Fed facilities. Indeed, where possible we have tried to set lending rates and margins at levels that are likely to be increasingly unattractive to borrowers as financial conditions normalize. In addition, some programs--those authorized under the Federal Reserve's so-called 13(3) authority, which requires a finding that conditions in financial markets are "unusual and exigent"--will by law have to be eliminated once credit market conditions substantially normalize. However, as the unwinding of the Fed's various programs effectively constitutes a tightening of policy, the principal factor determining the timing and pace of that process will be the Committee's assessment of the condition of credit markets and the prospects for the economy.

As lending programs are scaled back, the size of the Federal Reserve's balance sheet will decline, implying a reduction in excess reserves and the monetary base. A significant shrinking of the balance sheet can be accomplished relatively quickly, as a substantial portion of the assets that the Federal Reserve holds--including loans to financial institutions, currency swaps, and purchases of commercial paper--are short-term in nature and can simply be allowed to run off as the various programs and facilities are scaled back or shut down. As the size of the balance sheet and the quantity of excess reserves in the system decline, the Federal Reserve will be able to return to its traditional means of making monetary policy--namely, by setting a target for the federal funds rate.

Although a large portion of Federal Reserve assets are short-term in nature, we do hold or expect to hold significant quantities of longer-term assets, such as the mortgage-backed securities that we will buy over the next two quarters. Although longer-term securities can also be sold, of course, we would not anticipate disposing of more than a small portion of these assets in the near term, which will slow the rate at which our balance sheet can shrink. We are monitoring the maturity composition of our balance sheet closely and do not expect a significant problem in reducing our balance sheet to the extent necessary at the appropriate time.

Importantly, the management of the Federal Reserve's balance sheet and the conduct of monetary policy in the future will be made easier by the recent congressional action to give the Fed the authority to pay interest on bank reserves. In principle, the interest rate the Fed pays on bank reserves should set a floor on the overnight interest rate, as banks should be unwilling to lend reserves at a rate lower than they can receive from the Fed. In practice, the federal funds rate has fallen somewhat below the interest rate on reserves in recent months, reflecting the very high volume of excess reserves, the inexperience of banks with the new regime, and other factors. However, as excess reserves decline, financial conditions normalize, and banks adapt to the new regime, we expect the interest rate paid on reserves to become an effective instrument for controlling the federal funds rate.

Moreover, other tools are available or can be developed to improve control of the federal funds rate during the exit stage. For example, the Treasury could resume its recent practice of issuing supplementary financing bills and placing the funds with the Federal Reserve; the issuance of these bills effectively drains reserves from the banking system, improving monetary control. Longer-term assets can be financed through repurchase agreements and other methods, which also drain reserves from the system. In considering whether to create or expand its programs, the Federal Reserve will carefully weigh the implications for the exit strategy. And we will take all necessary actions to ensure that the unwinding of our programs is accomplished smoothly and in a timely way, consistent with meeting our obligation to foster full employment and price stability.

Stabilizing the Financial System

The Federal Reserve will do its part to promote economic recovery, but other policy measures will be needed as well. The incoming Administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity. In my view, however, fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system. History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively.

In the United States, a number of important steps have already been taken to promote financial stability, including the Treasury's injection of about $250 billion of capital into banking organizations, a substantial expansion of guarantees for bank liabilities by the Federal Deposit Insurance Corporation, and the Fed's various liquidity programs. Those measures, together with analogous actions in many other countries, likely prevented a global financial meltdown in the fall that, had it occurred, would have left the global economy in far worse condition than it is in today.

However, with the worsening of the economy's growth prospects, continued credit losses and asset markdowns may maintain for a time the pressure on the capital and balance sheet capacities of financial institutions. Consequently, more capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets. A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions' balance sheets. The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending. Should the Treasury decide to supplement injections of capital by removing troubled assets from institutions' balance sheets, as was initially proposed for the U.S. financial rescue plan, several approaches might be considered. Public purchases of troubled assets are one possibility. Another is to provide asset guarantees, under which the government would agree to absorb, presumably in exchange for warrants or some other form of compensation, part of the prospective losses on specified portfolios of troubled assets held by banks. Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank. These methods are similar from an economic perspective, though they would have somewhat different operational and accounting implications. In addition, efforts to reduce preventable foreclosures, among other benefits, could strengthen the housing market and reduce mortgage losses, thereby increasing financial stability.

The public in many countries is understandably concerned by the commitment of substantial government resources to aid the financial industry when other industries receive little or no assistance. This disparate treatment, unappealing as it is, appears unavoidable. Our economic system is critically dependent on the free flow of credit, and the consequences for the broader economy of financial instability are thus powerful and quickly felt. Indeed, the destructive effects of financial instability on jobs and growth are already evident worldwide. Responsible policymakers must therefore do what they can to communicate to their constituencies why financial stabilization is essential for economic recovery and is therefore in the broader public interest.

Even as we strive to stabilize financial markets and institutions worldwide, however, we also owe the public near-term, concrete actions to limit the probability and severity of future crises. We need stronger supervisory and regulatory systems under which gaps and unnecessary duplication in coverage are eliminated, lines of supervisory authority and responsibility are clarified, and oversight powers are adequate to curb excessive leverage and risk-taking. In light of the multinational character of the largest financial firms and the globalization of financial markets more generally, regulatory oversight should be coordinated internationally to the greatest extent possible. We must continue our ongoing work to strengthen the financial infrastructure--for example, by encouraging the migration of trading in credit default swaps and other derivatives to central counterparties and exchanges. The supervisory authorities should develop the capacity for increased surveillance of the financial system as a whole, rather than focusing excessively on the condition of individual firms in isolation; and we should revisit capital regulations, accounting rules, and other aspects of the regulatory regime to ensure that they do not induce excessive procyclicality in the financial system and the economy. As we proceed with regulatory reform, however, we must take care not to take actions that forfeit the economic benefits of financial innovation and market discipline.

Particularly pressing is the need to address the problem of financial institutions that are deemed "too big to fail." It is unacceptable that large firms that the government is now compelled to support to preserve financial stability were among the greatest risk-takers during the boom period. The existence of too-big-to-fail firms also violates the presumption of a level playing field among financial institutions. In the future, financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk-taking. Also urgently needed in the United States is a new set of procedures for resolving failing nonbank institutions deemed systemically critical, analogous to the rules and powers that currently exist for resolving banks under the so-called systemic risk exception.

Conclusion

The world today faces both short-term and long-term challenges. In the near term, the highest priority is to promote a global economic recovery. The Federal Reserve retains powerful policy tools and will use them aggressively to help achieve this objective. Fiscal policy can stimulate economic activity, but a sustained recovery will also require a comprehensive plan to stabilize the financial system and restore normal flows of credit.

Despite the understandable focus on the near term, we do not have the luxury of postponing work on longer-term issues. High on the list, in light of recent events, are strengthening regulatory oversight and improving the capacity of both the private sector and regulators to detect and manage risk.

Finally, a clear lesson of the recent period is that the world is too interconnected for nations to go it alone in their economic, financial, and regulatory policies. International cooperation is thus essential if we are to address the crisis successfully and provide the basis for a healthy, sustained recovery.

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

Footnotes

1. A basis point is one-hundredth of a percentage point. Return to text

2. Board of Governors of the Federal Reserve (2008), "FOMC Statement and Board Approval of Discount Rate Requests of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco," press release, December 16. Return to text

3. Primary dealers are broker-dealers that trade in U.S. government securities with the Federal Reserve Bank of New York. The New York Fed's Open Market Desk engages in trades on behalf of the Federal Reserve System to implement monetary policy. Return to text

4. Detailed information about the Federal Reserve's balance sheet is published weekly as part of the H.4.1 release. For a summary of Fed lending programs, see Forms of Federal Reserve Lending to Financial Institutions (229 KB PDF). Return to text

Jason Mraz - I'm yours - Song of the Year? 51st Grammy

2009-01-12T11:58:00.000-08:00

Here's Jason in Sweden

This song is my pick in the best song category at the 51st Grammys. The nominations are:

Song Of The Year
(A Songwriter(s) Award. A song is eligible if it was first released or if it first achieved prominence during the Eligibility Year. (Artist names appear in parentheses.) Singles or Tracks only.)

American Boy
William Adams, Keith Harris, Josh Lopez, Caleb Speir, John Stephens, Estelle Swaray & Kanye West, songwriters (Estelle Featuring Kanye West)
Track from: Shine
[Atlantic/Homeschool; Publishers: Will.I.Am Music/Cherry River Music/Chrysalis Publishing/John Legend Publishing/Cherry River Music/Please Gimme My Publishing/EMI Blackwood Music/Larry Leron Music/Speir Music/Broke, Spoke and Gone Publishing]

Chasing Pavements
Adele Adkins & Eg White, songwriters (Adele)
Track from: 19
[XL Recordings/Columbia; Publishers: Universal-Songs of Polygram Int.]

I'm Yours
Jason Mraz, songwriter (Jason Mraz)
Track from: We Sing. We Dance. We Steal Things.
[Atlantic; Publisher: Goo Eyed Music]

Love Song
Sara Bareilles, songwriter (Sara Bareilles)
Track from: Little Voice
[Epic; Publisher: Tiny Bear Music]

Viva La Vida
Guy Berryman, Jonny Buckland, Will Champion & Chris Martin, songwriters (Coldplay)
Track from: Viva La Vida Or Death And All His Friends
[Capitol Records; Publishers: Universal Music-MGB Songs]

Here are the lyrics (and they're amazing).

Well you done done me and you bet I felt it
I tried to be chill but you're so hot that I melted
I fell right through the cracks, now I'm trying to get back

Before the cool done run out, I'll be giving it my bestest
And nothing's going to stop me but divine intervention
I reckon it's again my turn to win some or learn some

But I won't hesitate no more, no more
It cannot wait, I'm yours

Well open up your mind and see like me
Open up your plans and damn you're free
Look into your heart and you'll find love love love love

Listen to the music of the moment people, dance and sing
We're just one big family
And it's our God-forsaken right to be loved loved loved loved loved

So I won't hesitate no more, no more
It cannot wait, I'm sure
There's no need to complicate, our time is short
This is our fate, I'm yours

D-d-do do you, but do you, d-d-do
But do you want to come on
Scooch on over closer dear
And I will nibble your ear

I've been spending way too long checking my tongue in the mirror
And bending over backwards just to try to see it clearer
But my breath fogged up the glass
And so I drew a new face and I laughed

I guess what I be saying is there ain't no better reason
To rid yourself of vanities and just go with the seasons
It's what we aim to do, our name is our virtue

But I won't hesitate no more, no more
It cannot wait, I'm yours

Come on and open up your mind and see like me
(I won't hesitate)
Open up your plans and damn you're free
(No more, no more)
Look into your heart and you'll find that the sky is yours
(It cannot wait, I'm sure)

So please don't, there's no need
(There's no need to complicate)
There's no need to complicate
(Our time is short)
'Cause our time is short
(This is our fate)
This is, this is, this is our fate
I'm yours

Oh, I'm yours
Oh, I'm yours
Oh, whoa, baby you believe I'm yours
You best believe, best believe I'm yours

Calculated Risk on Employment Numbers and Part time Employed

2009-01-09T09:58:00.000-08:00

Employment Declines Sharply, Unemployment Rises to 7.2 Percent

by CalculatedRisk on 1/09/2009 08:30:00 AM

From the BLS:

Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 524,00 in December, and November payrolls were revised down to a loss of 584,000 jobs. The economy has lost over 1.5 million jobs over the last 3 months alone!

The unemployment rate rose to 7.2 percent; the highest level since January 1993.

Year over year employment is now strongly negative (there were 2.6 million fewer Americans employed in Dec 2008 than in Dec 2007). This is another extremely weak employment report ...

Posted by
CalculatedRisk

on 1/09/2009 08:30:00 AM

Over 8 Million Part Time Workers

by CalculatedRisk on 1/09/2009 09:01:00 AM

From the BLS report:

In December, the number of persons who worked part time for economic reasons (some-times referred to as involuntary part-time workers) continued to increase, reaching 8.0 million. The number of such workers rose by 3.4 million over the past 12 months. This category includes persons who would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs.

Click on graph for larger image.

Not only has the unemployment rate risen sharply to 7.2%, but the number of workers only able to find part time jobs (or have had their hours cut for economic reasons) is now over 8 million.

Of course the U.S. population is significantly larger today (about 305 million) than in the early '80s (about 228 million) when the number of part time workers almost reached 7 million, but the rapid increase in part time workers is pretty stunning.

Posted by
CalculatedRisk

on 1/09/2009 09:01:00 AM

Calculated Risk: On Roubini's 2 yr recession

2009-01-09T09:45:00.000-08:00

Thursday, January 08, 2009

Roubini: Two Year Recession
by CalculatedRisk on 1/08/2009 04:30:00 PM

From Rex Nutting at MarketWatch: Roubini forecasts recession will last 2 years

The U.S. recession will last two full years, with gross domestic product falling a cumulative 5%, said Nouriel Roubini, ... For 2009, Roubini predicts GDP will fall 3.4%, with declines in every quarter of the year. The unemployment rate should peak at about 9% in early 2010 ...
Roubini is forecasting a pretty serious recession, but far short of a "depression" which is usually defined as a 10% decline in real GDP.

The concensus (and the Fed forecast) is that the economy will bottom in Q2 2009 with a sluggish recovery in the 2nd half of this year.

The recession started officially around Dec 06 - Jan 07. Roubini is prediciting that the recession will last through Jan ' 09 ish. This is exactly my prediction as well (read earlier posts) and I believe Calculated Risk has come up with similar projections himself. Its worth bearing in mind that my projection is based on the following "givens": Obama's Stimulus plan being over 800B and that the US will nationalize major banks QUICKLY. Both of these are policy responses and may not happen in Q1 of 2008 and if there is a substantial delay by the Obama Administration - the recession may drag out further into 2010. I am making my business plans on the assumption that Q1 of 2010 will see the end of the recession.

Whitney on the 300B TARP Funds

2009-01-07T08:51:00.000-08:00

via FT

Whitney: TARP funds go down the downgrade drainPosted by Sam Jones on Jan 07 14:43.

La lutte continue.

Forget the short-lived buzz of $300bn in TARP stimulus, pain for the banks is far from over. Real deleveraging is only just beginning to gather speed; the world economy has yet to enter its worst months, and there are certainly more writedowns to come.

Oppenheimer’s Meredith Whitney is - when it comes to banks’ capital positions - the analyst to turn to. And fortunately, she has a note out today:We now believe that, at a minimum, capital ratios will be meaningfully lower in the fourth quarter versus post TARP pro forma levels. Aside from the greater than $40 billion in writedowns and provisions we expect for the group of bank stocks under our coverage, and earnings pressure related to chronic negative operating leverage, we also expect capital strains to become apparent from ratings change pressures. Accordingly, we maintain our cautious stance on our group.

The thrust of Whitney’s note is nothing new: she reiterates her “ring of fire” position, whereby ratings downgrades on securities owned by the banks punch huge holes in banks’ balance sheets thanks to onerous regulatory capital requirements. Lower rated securities require larger amounts of regulatory capital in reserve.

And for anyone sceptical as to the significance of that relationship…
The interesting part of the latest note comes in quantifying the scale of the rating agency downgrades so far - and more importantly, demonstrating that the worst of them have only just worked through:

Clearly, Q4 of 2008 was the worst period so far in terms of security downgrades by a country mile:

The effect of those Q4 downgrades, estimates Whitney, will be to more or less drain all TARP money pumped into the system so far. Expressed below as Opco analysts on upcoming writedowns for Wall Steet’s finest:

(Click on the image for a larger version)

Calculated Risk on FOMC Statement

2009-01-07T08:28:00.000-08:00

Fed Fears Long Recession
by CalculatedRisk on 1/06/2009 02:17:00 PM

The Fed projects GDP to decline in 2009 "as a whole", and unemployment to "rise significantly into 2010". The Fed also expects disinflationary pressures to continue into 2010.

From the FOMC Minutes:

In the forecast prepared for the meeting, the staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010. Real GDP appeared likely to decline substantially in the fourth quarter of 2008 as conditions in the labor market deteriorated more steeply than previously anticipated; the decline in industrial production intensified; consumer and business spending appeared to weaken; and financial conditions, on balance, continued to tighten. Rising unemployment, the declines in stock market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to continue to hinder household spending over the near term.

Homebuilding was expected to contract further. Business expenditures were also likely to be held back by a weaker sales outlook and tighter credit conditions. Oil prices, which dropped significantly during the intermeeting period, were assumed to rise over the next two years in line with the path indicated by futures market prices, but to remain below the levels of October 2008. All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting. The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate reductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010.

emphasis added

Record of the Year - 2008

2009-01-06T19:13:00.000-08:00

The Grammy nominations are for

Record Of The Year (Award to the Artist and to the Producer(s), Recording Engineer(s) and/or Mixer(s), if other than the artist.)

Chasing Pavements Adele Eg White, producer; Tom Elmhirst & Steve Price, engineers/mixersTrack from: 19[XL Recordings/Columbia]

Viva La Vida ColdplayMarkus Dravs, Brian Eno & Rik Simpson, producers; Michael Brauer & Rik Simpson, engineers/mixersTrack from: Viva La Vida Or Death And All His Friends[Capitol Records]

Bleeding Love Leona Lewis Simon Cowell, Clive Davis & Ryan "Alias" Tedder, producers; Craig Durrance, Phil Tan & Ryan "Alias" Tedder, engineers/mixers[J Records/SYCO Music]

Paper Planes M.I.A Diplo, producer; Switch, engineer/mixerTrack from: Kala[Interscope]

Please Read The Letter Robert Plant & Alison KraussT Bone Burnett, producer; Mike Piersante, engineer/mixerTrack from: Raising Sand [Rounder]

My favorites are down to two: Viva La Vida and Please Read the Letter

Here's Coldplay - if you dont love it - you're nuts.

I have seen Robert Plant and Alison Krauss in concert - therefore - they are my personal favorites. Both are incredibly talented. Good album and phenomenal song.
And yes they performed Stairway to Heaven live at that concert. Unreal.

Here are the lyrics...

Caught out running
With just a little too much to hide
Maybe baby
Everything's gonna turn out fine
Please read the letter
I mailed it to your door
It's crazy how it all turned out
We needed so much more

Too late, too late
A fool could read the signs
Maybe baby
You'd better check between the lines
Please read the letter, I
Wrote it in my sleep
With help and consultation from
The angels of the deep

Ahhhhhhh.... Ahhhhh... Ahhhhhhaaa....

Please read the letter that I wrote
Please read the letter that I wrote

Once I stood beside a well of many words
My house was full of rings and
Charms and pretty birds
Please understand me, my
Walls come falling down
There's nothing here that's left for you
So check with lost and found

Ahhhhhhh.... Ahhhhh... Ahhhhhhaaa....

Please read the letter that I wrote
Please read the letter that I wrote

One more song just before we go
Remember baby
You got to reap just what you sow
Please read my letter
And promise me you'll keep
The secrets and the memories we
Cherish in the deep
Please read the letter
I mailed it to your door
Its crazy how it all turned out
We needed so much more....

Please read the letter that I wrote
Please read the letter that I wrote
Please read the letter that I wrote

Please read the letter that I wrote
Please read the letter that I wrote
Please read the letter that I wrote

Obama's America 2009

2009-01-06T13:02:00.000-08:00

from www.nytimes.com

January 6, 2009
Transcript
Obama’s Media Availability

The following is a rush transcript of President-Elect Barack Obama’s media availability as provided by the Obama team.

Obama: When the American people spoke last November, they were demanding change, change in policies that helped deliver the worst economic crisis that we've seen since the Great Depression, but they're also looking for a change in the way that Washington does business. They were demanding that we restore a sense of responsibility and prudence to how we'd run our government.

One of the measures of irresponsibility that we've seen is the enormous federal debt that has accumulated, a number that has doubled in recent years. As we just discussed, my budget team filled me in on - Peter Orszag now forecasts that, at the current course and speed, a trillion-dollar deficit will be here before we even start the next budget, that we've already looked - we're already looking at a trillion-dollar budget deficit or close to a trillion-dollar budget deficit, and that potentially we've got trillion-dollar deficits for years to come, even with the economic recovery that we are working on at this point.

So the reason I raise this is that we're going to have to stop talking about budget reform. We're going to have to totally embrace it. It's an absolute necessity.

And it has to begin with the economic recovery and reinvestment plan that Congress will soon be considering, that we're going to be investing an extraordinary amount of money to jump-start our economy, save or create 3 million new jobs, mostly in the private sector, and lay a solid foundation for future growth.

But we're not going to be able to expect the American people to support this critical effort unless we take extraordinary steps to ensure that the investments are made wisely and managed well. And that's why my recovery and reinvestment plan will have - will set a new higher standard of accountability, transparency, and oversight.

We are going to ban all earmarks, the process by which individual members insert pet projects without review. We will create an economic recovery oversight board made up of key administration officials and independent advisers to identify problems early and make sure we're doing all that we can to solve it. We will put information about where money is being spent online so that the American people know exactly where their precious tax dollars are going and whether we are hitting our marks.

But we're not going to be able to stop there. We're going to have to bring significant reform not just to our recovery and reinvestment plan, but to the overall budget process, to address both the deficit of dollars and the deficit of trust. We'll have to make tough choices, and we're going to have to break old habits. We're going to have to eliminate outmoded programs and make the ones that we do need work better.

That's the challenge that I've handed to Peter, and Rob Nabors, and the rest of my budget team. That's the challenge that the American people have handed me. They know that we're at a perilous crossroad and that tinkering in the margins will not do.

I'm going to have more to say about this subject tomorrow, but today I wanted to lay out an early marker with those that I've entrusted to help bring the changes that the American people voted for. We are going to bring a long-overdue sense of responsibility and accountability to Washington. We are going to stop talking about government reform, and we're actually going to start executing.

That's the charge that I've given the members of the administration. That's the charge that was given to me by the American people. And we are ready for the challenge.
So with that, I'm going to take some questions. And let's start with you.

Question: Thank you, Mr. President-elect. Do you think that you'll be submitting a budget larger than the $3.1 trillion that President Bush submitted for fiscal '09? And, also, what are you doing to address concerns from other Democrats about deficit spending and increasing the deficit with the stimulus package?

Obama: Well, you know, I don't want to get into particular budget numbers, because we're obviously still in the process of reviewing what the existing budget looks like, where we can obtain some savings, what programs we can potentially eliminate. We will be submitting that budget later, after we've submitted the recovery and reinvestment plan.

I can give you a set of general principles, though. We know that we're going to have to spend money to jump-start the economy. I spoke about that yesterday.

We know that even if we did nothing that we have close to a trillion-dollar deficit, even if we were on the current path that we're on. And we know that we have to then implement a set of fiscal measures that deal with the medium and long term so that we have a sustainable path of economic growth.

So what I've assigned Peter to do is - and Rob and others - is to work with my economic team. They are part of the team that is putting together the accountability and oversight measures into the recovery act, but they also have this broader charge, which is, how do we get a fix on this budget so that, as the economy recovers, we start stabilizing the economy and - and getting our budget under control?

It's not just Democrat or Republican colleagues on the Hill that are concerned about this. I'm concerned about this. And so what I've said is, I'm going to be willing to make some very difficult choices in how we get a handle on this deficit. That's what the American people are looking for.
And, you know, what we intend to do this year, next year, and all the years that I'm in office is to demonstrate our seriousness, not by gimmicks, not by punting to future administrations the tough choices, but by making some of those tough choices while I'm in office.

Question: ... Earmarks, you said there will be none that get in there without review. Some people would argue even the so-called bridge to nowhere got review, some level of review ...
Obama: No, no, no. What I'm saying is - let me repeat what I said about that ... We will ban all earmarks in the recovery package. And I describe earmarks as the process by which individual members insert pet projects without review. So what I'm saying is, we're not having earmarks in the recovery package, period. I was describing what earmarks are.

Question: So there's - you're not suggesting there's some level of review that might ...
Obama: I'm saying there are no earmarks in the recovery package. That, that is the position that I'm taking.

Question: Well, if I may, I was just wondering if $200,000 sounds like about the right level at which the tax credits would be phased out. I know that's been thrown out there ...

Obama: You know, look, I think you can get some guidance from what I said during the campaign, but I don't want to be locked in to a particular number, Chuck, just because we're still formulating the details of the plan. OK ...

Question: Some are - some are questioning Leon Panetta's lack of intelligence - lack of experience on intelligence matters. Sorry about that. I know this is tricky for you since you haven't announced it yet, but what does he bring to the table for you?

Obama: Well, as you noted, I haven't made - haven't made a formal announcement about my intelligence team.
(cell phone rings)
Obama: That may be him calling now... finding out where it's at.
Obama: I have the utmost respect for Leon Panetta. I think that he is one of the finest public servants that we have. He brings extraordinary management skills, great political savvy, an impeccable record of integrity.

As chief of staff, he is somebody who - to the president - he's somebody who obviously was fully versed in international affairs, crisis management, and had to evaluate intelligence consistently on a day-to-day basis.

Having said all that, I have not made an announcement. When we make the announcement, I think what people will see is, is that we are putting together a top-notch intelligence team that is not only going to assure that I get the best possible intelligence unvarnished, that the intelligence community is no longer geared towards telling the president what they think the president wants to hear, but instead are going to be delivering the information that the president needs to make critical decisions to keep the American people safe.

I think what you're also going to see is a team that is committed to breaking with some of the past practices and concerns that have, I think, tarnished the image of the agencies, the intelligence agencies, as well as U.S. foreign policy.

Last point I will make, though, on this is that there are outstanding intelligence professionals in the CIA, in DNI, and others, and I have the utmost regard for the work that they've done, and we are committed to making sure that this is a team effort that's not looking backwards, but is looking forward to figure out how we're going to serve the American people best, OK?
Question: Thank you, Mr. President-elect. You're being put under a lot of pressure internationally to get more involved in the situation in Gaza. I understand you think there should only be one president at a time, but what do you have to say to the Israelis and the Palestinians who are fighting and dying in Gaza?

Obama: As I've said before, when it comes to foreign policy, I think the need to adhere to one president at a time is particularly important. In domestic policy, Democrats, Republicans, we can have arguments back and forth about what tax policies are going to be. When it comes to international affairs, other countries are looking to see who speaks for America. Right now, President George Bush, as president of the United States, speaks on behalf of the U.S. government and the American people when it comes to international affairs.
Obviously, I am deeply concerned about the conflict that's taking place there. I'm being fully briefed and monitored - monitoring the situation on a day-to-day basis. The loss of civilian life in Gaza and in Israel is a source of deep concern for me.

And after January 20th, I am going to have plenty to say about the issue. And I am not backing away at all from what I said during the campaign, that I - starting at the beginning of our administration, we are going to engage effectively and consistently in trying to resolve the conflicts that exist in the Middle East.

That's something that I'm committed to. I think it's not only right for the people in that region; most importantly, it's right for the national security of the American people and the stability that is so important to this country. So on January 20th, you will be hearing directly from me and my opinions on this issue. Until then, my job is to monitor the situation and put together the best possible national security team so that we hit the ground running once we are responsible for national security issues.

Indian Dossier on the Mumbai Attacks

2009-01-06T11:30:00.000-08:00

January 7, 2009
Dossier From India Gives New Details of Mumbai Attacks
By SOMINI SENGUPTA
From www.nytimes.com

NEW DELHI — In the beginning, they were 32. A squad of suicide bombers raised in Pakistan, they were taught how to make bombs, withstand interrogation, and fight to their death.

They were whittled down to 10, and on a Saturday morning in November, they set sail from Karachi with coordinates plotted on a global positioning set. Once in Mumbai, they went on a killing spree, leaving 163 dead, all the while receiving detailed instructions and pep talks from their handlers across the border. Details of their gory mission have been compiled by Indian authorities and officially shared Monday with the Pakistani government. The New York Times has seen a copy of the dossier.

The information seems designed to achieve at least two Indian objectives. First, it seeks to demonstrate that the attackers were sent from Pakistan. It contains photographs of materials found on the fishing trawler, from a bottle of Mountain Dew soda packaged in Karachi to pistols that bore the markings of a gun manufacturer in Peshawar to a Pakistani-made matchbox, detergent powder, and shaving cream, called “Touchme.”

Second, it seeks to rally international support for the Indian effort to squeeze Pakistan. It contains a list of 26 foreigners killed in the attacks, chronicles India’s efforts in recent years to persuade Pakistan to investigate suspects involved in terror attacks inside India and shut down terror training camps inside Pakistani territory. In its final pages, it demands that Pakistan hand over “conspirators” to face trial in India and comply with its promise to stop terrorist groups from functioning inside its territory. It was shared this week with diplomats from friendly nations; one described it as “comprehensive,” another as “convincing.”

Although the dossier takes pains not to blame serving or former officials in Pakistan’s army or spy agency, Indian officials have consistently hinted at their complicity, at least in training the commando-style fighters who carried it out. On Tuesday, the Indian Prime Minister, Manmohan Singh, upped the ante but stopped short of making a direct accusation. “There is enough evidence to show that, given the sophistication and military precision of the attack, it must have had the support of some official agencies in Pakistan,” he said.

Pakistan on Tuesday rejected the Indian allegation. “Scoring points like this will only move us further away from focusing on the very real and present danger of regional and global terrorism,” Sherry Rehman, Pakistan’s Information Minister, said in a statement, according to the Associated Press. “It is our fond resolve to insure that non-state actors to do not use Pakistan’s soil to launch terrorist attack any where in the world.”

Pakistan has said it is examining the information dispatched by India.

The dossier, along with a power-point presentation made to diplomats here, narrates a journey of zeal, foibles and careful planning, one whose blow-by-blow media coverage was followed by handlers, believed to be in Pakistan, and used in turn to caution the gunmen on the ground about the movement of Indian security forces and motivate them to keep fighting.

“Everything is being recorded by the media. Inflict the maximum damage. Keep fighting. Don’t be taken alive,” says a caller to a gunman inside the Oberoi Hotel close to 4 a.m. on the first day of the three-day siege.

“Throw one of two grenades at the Navy and police teams, which are outside,” came one instruction to the gunmen inside the Taj Mahal hotel.

“Keep two magazines and three grenades aside and expend the rest of your ammunition,” went another set of instructions to the attackers inside Nariman House, which housed an Orthodox Jewish center, on the second evening, with a directive to “conclude” the operation the next morning.

The telephone conversations, selected transcripts of which have been compiled in the dossier, chronicle a steady exchange between the attackers in Mumbai and their counselors.

At the Taj, they are asked whether they have set the hotel on fire; one of the attackers says he is preparing a mattress for that purpose. At the Oberoi, one of them asks whether to spare women (“kill them,” comes the terse reply) and Muslims (he is told to release them and kill the rest, all the while keeping the phone line open so their interlocutors can hear the gunfire). At Nariman House, a residential building which housed a Jewish community center, they are told how to damage India’s standing with a key ally, Israel.

“Keep in mind that the hostages are of use only as long as you do not come under fire because of their safety,” a handler, identified only as Wassi, exhorts. “If you are still threatened, then don’t saddle yourself with the burden of the hostages. Immediately kill them.”

“Yes, we shall do accordingly,” the gunman inside Nariman House replies. “God willing.”

“If the hostages are killed, it will spoil relations between India and Israel,” Wassi continues.

According to the investigation, the 10 men boarded a small boat in Karachi at 8 a.m. on Nov. 22, sailed a short distance before boarding a bigger carrier called the Al-Husseini, believed to be owned by Zaki-ur-Rehman Lakhvi, a key operative of a banned Pakistan-based terrorist group called Lashkar-e-Taiba. The following day, the 10 men took over an Indian fishing trawler, called the MV Kuber, killed four of its crew members, spared its captain, Amar Singh Solanki, and sailed 550 nautical miles across the Arabian Sea.

Each man had two-hour watch duties on board. Each carried individual weapon packs: a Kalashnikov, a 9-millimeter pistol, ammunition, hand grenades and a bomb, weighing 8 kilograms and containing a military-grade explosive called RDX, steel ball bearings and a timer with instructions inscribed in Urdu.

By 4 p.m. on Nov. 26, the trawler approached the shores of Mumbai. The leader of the crew, identified by Indian investigators as Ismail Khan, 25, from a town called Dera Ismail Khan in the Northwest Frontier Province, contacted their handlers and received instructions. When darkness set in, they killed the captain of the trawler, Mr. Solanki. Then they boarded a motorized dinghy, the engine of which, Indian investigators say, bore marks from a Lahore-based importing company. They reached Mumbai at about 8:30 p.m., and in five teams of two, set upon their targets: the city’s busiest railway station known as Victoria Terminus, a tourist haunt called Café Leopold, the Jewish center in Nariman House, and two luxury hotels, the Taj and Oberoi.

They made one mistake. As they were leaving the fishing trawler, they told their handlers later on the phone, the waves were high and another boat was approaching, which they feared was an Indian Navy ship. They left behind Ismail Khan’s satellite phone; it was recovered by Indian investigators and its photograph included in the dossier. A GPS, also recovered from the trawler suggests they kept a safe distance of at least 60 kilometers from Indian shore until they got closer to Mumbai.

The gunmen seemed to use Indian mobile phones during the course of the attacks. Their counselors, 6 in all, used Voice-Over-Internet-Protocol numbers, including one from an American company called “Callphonex.”

The telephone calls stop, inexplicably, about 24 hours into the attacks.

The last call transcript in the dossier is at 10:26 p.m. on Nov. 27, between a gunman inside Nariman House and his interlocutor. “Brother you have to fight,” says the caller. “This is a matter of the prestige of Islam.”

By the morning of Nov. 29, Indian forces had killed 9 of the fighters.

And then, there was one: the sole survivor, Mohammed Ajmal Kasab, is in the custody of the Mumbai police. His interrogation turned up the most frightening detail. He was part of a cadre of 32 would-be suicide bombers, that was later joined by an additional three men. A team of six went to Indian-administered Kashmir, Mr. Kasab told his interrogators.

Ten were kept in isolation for more than three months, in a house near Karachi, until they were instructed to go to Mumbai.

The dossier says nothing about what happened to the remaining trainees. Whether or where they will strike next remains a mystery.

Richard A. Oppel Jr. contributed reporting from Islamabad, Pakistan.

Hillary Hahn: Classical Artist of the Year 2008

2009-01-05T17:50:00.001-08:00

Hillary is phenomenal: subtle, rich, complex, nuanced

Here she is performing Paganini

For comparison - here's Milstein with the same Paganiniana

Milstein - brilliant, virtuoso, mathematical, precise

Hillary Hahn deserves Artist of the Year

Eric Lewis 2009 Comic

2009-01-05T14:24:00.000-08:00

This really says it all doesnt it? From the Calculated Risk blog - this is a comic by Eric G Lewis (who's website will be up soon at http://www.ericglewis.com/)

Schilling forecasts S&P to reach 600 this year

2009-01-04T09:53:00.000-08:00

Gary Schilling - one of the best forecasters of 2008 - all of his 2008 predictions (13 of them came true). Here's a preview of what he is thinking.

http://finance.yahoo.com/tech-ticker/article/149147/S&P-600:-Thats-Gary-Shillings-Forecast-for-2009,-Not-an-Index&comment_start=21

S&P 600: That's Gary Shilling's Forecast for 2009, Not an Index
Posted Dec 19, 2008 12:33pm EST by Aaron Task in Investing, Commodities, Recession
Related: ^dji, ^gspc, FXI, TLT, EEM, UDN, SPY

The S&P 500 could fall to as low as 600 in 2009 and "alternative assets" like commodities and currencies will provide no shelter for investors, says Gary Shilling, president of A. Gary Shilling & Co.

Having been appropriately bearish heading into this year, Shilling sees "few good places to hide" in 2009. Currently, Shilling is long Treasuries and the dollar, but notes the bond market's rally is getting long in the tooth.

Other than defensive plays like utilities and consumer staples, Shilling is short stocks. His "S&P 600" prediction, a 33% drop from current levels, is based on a view that S&P earnings will be $40 per share next year (vs. the consensus of $83) and the index will trade with a P/E multiple of 15. (Here's the math: $40 EPS x 15 P/E = 600.)

Shilling is also short commodities and remains bearish on emerging markets, most notably China. The theory China, most notably, could "decouple" from the U.S. doesn't hold up to scrutiny, Shilling says, as evinced by the slowdown of China's economy and the fact their middle class isn't large enough to sustain growth internally.

Against that backdrop, Shilling isn't only bearish on China as an investment, he sees the potential for major social upheaval in the world's most populous nation.

Yeah... this is definitely THE bear case. I happen to be in the bear camp along with Schilling and Roubini. Be careful out there.

Explaining 2008 with music

2009-01-03T21:12:00.000-08:00

Funny stuff from Uncle Jay Explains

Wheeeee..... YEAH BABY, YEAH

2009-01-03T16:49:00.000-08:00

Wing Suit Base Jumping.... This is a BLAST to even just watch - holy macarena!!!!!

wingsuit base jumping from Ali on Vimeo.

Would you love to do this? WINGSUIT JUMPING! Lets go.

ECB Papademos: Don't see recovery in 2009

2009-01-03T15:54:00.000-08:00

Papademos Says ECB to ‘Act Appropriately’ in Slowdown (Update2)
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By Simon Kennedy

Jan. 3 (Bloomberg) -- European Central Bank Vice President Lucas Papademos said an economic recovery may not begin until next year and that policy makers have the scope to cut interest rates if inflation slows further.

“The economic outlook is unusually uncertain,” Papademos said in an interview with Germany’s WirtschaftsWoche magazine published today. “It is quite possible that the recovery will not start until the beginning of 2010.”

Having reduced their key interest rate by 175 basis points since early October to 2.5 percent, ECB policy makers enter the new year under pressure to cut more deeply amid Europe’s first recession in 15 years. Retail sales fell for a seventh month in December, manufacturing shrank at a record pace and lending to the private sector stagnated, reports showed this past week.

The economy may be even weaker in 2009 than the ECB’s prediction of last month for a contraction of about 0.5 percent, Papademos said. The Frankfurt-based central bank will “act appropriately” and has room to do so if the slowdown threatens price stability, which the ECB defines as inflation just below 2 percent in the medium term, he said.

“If, in our assessment, the risks to price stability change further in the coming months, monetary policy could be eased further and we will act appropriately,” Papademos said.

Inflation to Fall

The ECB’s current view is that the 16-nation economy will remain weak and contract for two to three more quarters with a “gradual recovery” in the second half of the year at the earliest, he said. While it is premature for the bank to revise its projections it “cannot rule out that economic activity in 2009 may turn out to be weaker than suggested,” he said.

Although deflation, a sustained period of falling prices, isn’t likely in the euro-area, inflation may “fall considerably” in the middle of 2009 before accelerating toward levels consistent with price stability by the end of the year, Papademos said.

The inflation rate fell to 1.8 percent last month, beneath the ECB’s target for the first time since July 2007, according to the median of 20 forecasts given by economists before a report scheduled for release in the coming week.

The fall in the price of oil from its peak of $147 a barrel last July as well as lower interest rates and taxes should support expansion, Papademos said.

Rate Expectations

Economists at Bank of America Corp. are among those anticipating the economy will be weaker than the ECB projects this year with a forecast for a 2.5 percent contraction. They expect the ECB to cut its benchmark to 1.5 percent this quarter even as officials such as President Jean-Claude Trichet signal a reluctance to pursue aggressive rate cuts.

The ECB’s governing council next meets Jan. 15 with investors indicating they expect a cut of at least 25 basis points, according to Eonia forward contracts.

Papademos said the ECB had “absolutely not” lagged behind counterparts such as the Federal Reserve in combating the economic fallout from the financial crisis. The Fed last month cut its main interest rate to as low as zero for the first time.

The economies and mandates of central banks differ and interest rates were higher elsewhere than in Europe when the turmoil began, Papademos said. “The fact that some central banks have lowered their key rates more quickly than us does not mean they are ahead of us,” he said.

‘More Time’

The difficulty facing the ECB is that the crisis means markets are not passing on interest rate cuts to the ECB as fast as they would traditionally, Papademos said. “In the current environment, it will take more time for interest rate cuts to affect economic activity and their impact may be weaker than is usually the case,” he said.

The ECB official urged banks to take advantage of government funding and better disclose the losses and risk they face. A proposal for a clearing house to guarantee loans between banks is a “concept worth exploring,” he said.

The ECB provided a transcript of Papademos interview to news media.

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net.

Last Updated: January 3, 2009 08:01 EST

A central banker will never come right out and say that there wont be a recovery in 2009. But we have to interpret that Papademos is essentially saying that there wont be a recovery in 2009. The ECB is signaling a change of their optimisitic forecast and will cut interest rates this quarter.

Stimulus: Buy American

2009-01-02T19:52:00.000-08:00

Obama Team Reviewing ‘Buy American’ Plank in Stimulus (Update1)
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By Edwin Chen

Jan. 2 (Bloomberg) -- President-elect Barack Obama’s advisers are looking at including a “buy American” provision in the economic-stimulus legislation that the incoming administration has made its first priority.

“We are reviewing the buy American proposal and we are committed to a plan that will save or create 3 million jobs, including jobs in manufacturing,” said Jen Psaki, a spokeswoman for Obama’s transition team.

With the U.S. amid its worst economic slump since World War II, Obama is working on a package combining tax cuts and spending on infrastructure, such as roads, bridges and transit systems, to boost growth.

The stimulus package must pass Congress, and Representative Chris Van Hollen, the Maryland Democrat who is a liaison between Congress and Obama’s transition team, said “we obviously want to focus our investments in areas where American industry will benefit.”

Still, Van Hollen, speaking in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” said the aim of the legislation wasn’t to “set up walls” and that the stimulus would be aimed at “generating American jobs,” not triggering a “trade war.”

Obama will meet privately with Democratic congressional leaders on Jan. 5 in the Capitol and will hold discussions later with leaders in both parties, said Brendan Daly, a spokesman for House Speaker Nancy Pelosi. The president-elect and lawmakers will discuss the stimulus measure and other legislation slated to move in the first weeks of the congressional session, Daly said.

Manufacturing Council

Nucor Corp. Chief Executive Officer Dan DiMicco said he will use his position as a member of the U.S. Department of Commerce’s manufacturing council to push for the use of domestically produced steel in such projects. Current requirements that American-made material be used in government projects are unevenly enforced, he said.

The New York Times reported yesterday that U.S. steelmakers are counting on government spending to make up for sagging demand from automakers and other industries.

U.S. steel demand fell to an estimated 104 million metric tons last year from 120.5 million in 2007, said Purchasing magazine, an industry publication.

Democrats are seeking to have legislation ready soon after Obama’s Jan. 20 inauguration, though Senate Republican leader Mitch McConnell has threatened to slow that timetable.

Obama advisers and congressional Democrats estimate the stimulus plan may total $850 billion. Some economists are recommending as much as $1 trillion to spur the economy.

To contact the reporter on this story: Edwin Chen in Washington at Echen32@bloomberg.net.

Last Updated: January 2, 2009 18:42 EST

I had commented previously on Will Rahal's blog about how the stimulus needed to have such a Buy American provision. This is absolutely the right thinking. America's manufacturing base needs a big lift and this is the smartest way to do it. Why would you outsource your stimulus?

So its 2009....

2009-01-01T18:51:00.000-08:00

My thoughts:

And so it begins. Quietly. Like a thief. It has all the makings of being a year that most people would like to forget when it does end. The financial crisis is getting close to the mid point mark. The gangrene though has spread into the real economy. Large masses of people are starting to get laid off - not just the bottom 10% as sales slow. Consumers and Business are deleveraging simultaneously and as they do - they are feeding what is a classic deflationary downward spiral with demand destruction in all economic activities. In such a scenario the velocity of money slows dramatically and one of the ways to combat this is to create more money and hope that the additional money will compensate for the reduced velocity. The second and surer way to combat this is by Keynsian government spending. We've now heard of a proposed 800B Stimulus package from Obama's financial team. By the time this makes it way into Congress and Senate this should be close to 900B if not 1T. This spending if done wisely (giving it to the 50 States, green infrastructure etc) will help create demand (which is being destroyed in the private sectors). Robert Shiller (of Case Shiller) has called for Obama to create full employment (or what full employment would be in a typical recession). Obama is 100% right when he pinpoints the fact that it will be JOB CREATION that will renew confidence. Right now that is the most vital commodity that we're in a sore lack of. CONFIDENCE. Without it - nothing much matters.

Speaking of confidence, restoring that in the financial markets is another ballgame completely. Ofcourse one of the first things on Tim Geithner's agenda will be Insolvency at the heart of the US Banking system. If we were to assume 2T of total losses (I have even heard 3T worldwide if you factor in credit cards, student loans, CRE etc) - then only 550B or so has been recognized. Even if I were to believe some other estimates and say 800B has been recognized - that still means there is 1.2 to 1.4 T dollars of looses that have not been recognized. Even cutting this estimate into half - we're still left with 600B - 700B of looses that need to be recognized before the end of 2009.

Folks - this means that the Fed is going to print money. It also means that the Treasury will likely have to come up to the Congress one more time for another 700B or so and this money will be solely to re-capitalize the banks (dare I say nationalize the banks?). But assuming that this happens in the early part of 2009 - and the stimulus passes - and we start creating jobs again - we should see the end to this immediate nightmare by end 2009 or early 2010. But then we will have a ton of printed money worldwide sloshing around. At that point, inflation will make a huge comeback. I wouldn't be surprised to see oil take off to the races once again along with the other commodities in 2010. The Fed as usual is likely to be behind the curve and will tighten only when it is sure that inflation has taken hold and the economy will not die. So expect some tightening of interest rates in mid 2010 (and expect inflation to run rampant here...). Eventually Volcker will be able to talk some sense into the responsible people and liquidity will be drained severely in 2011. But don't be surprised if ice-cream ends up costing you five dollars a cone before this is done and things return to "normal."

Expect to be robbed and take steps to protect yourself.

Good luck to all.

2009: Artificial Life? Keep your eye on Craig Venter

2008-12-31T11:41:00.000-08:00

This is mind blowing stuff. Read the entire presentation as well as the Q&A afterward. Keep your eye on Craig Venter. 2009 might be notable for the first creation of artificial life.

2009 - In the land of the blind a one eyed man is king WINK

2008-12-30T14:17:00.000-08:00

from www.ft.com (Financial Times)

An imaginary retrospective of 2009

By Niall Ferguson
Published: December 27 2008 00:23 | Last updated: December 27 2008 00:23

It was the year when people finally gave up trying to predict the year ahead. It was the year when every forecast had to be revised – usually downwards – at least three times. It was the year when the paradox of globalisation was laid bare for all to see, if their eyes weren’t tightly shut.

On the one hand, the increasing integration of markets for commodities, manufactures, labour and capital had led to great gains. As Adam Smith had foreseen in The Wealth of Nations, economic liberalisation had allowed the division of labour and comparative advantage to operate on a global scale. From the 1980s until 2007, the world economy had enjoyed higher, more widespread growth and fewer, less severe crises – hence Federal Reserve chairman Ben Bernanke’s hubristic celebration of a “great moderation” in 2004.

On the other hand, the more the world came to resemble an intricate, multi-nodal network operating at maximum efficiency – with minimal inventories and just-in-time delivery – the more vulnerable it became to a massive systemic crash.

That was the true significance of the Great Repression which began in August 2007 and reached its nadir in 2009. It was clearly not a Great Depression on the scale of the 1930s, when output in the US declined by as much as a third and unemployment reached 25 per cent. Nor was it merely a Big Recession. As output in the developed world continued to decline throughout 2009 – despite the best efforts of central banks and finance ministries – the tag “Great Repression” seemed more and more apt: although this was the worst economic crisis in 70 years, many people remained in deep denial about it.

“We assumed that we economists had learned how to combat this kind of crisis,” admitted one of President Barack Obama’s “dream team” of economic advisers, shortly after his return to academic life in September 2009. “We thought that if the Fed injected enough liquidity into the financial system, we could avoid deflation. We thought if the government ran a big enough deficit, we could end a recession. It turned out we were wrong. So much for [John Maynard] Keynes. So much for [Milton] Friedman.”

The root of the problem remained the US’s property bubble, which continued to deflate throughout the year. Many people had assumed that by the end of 2008 the worst must be over. It was not. Economist Robert Shiller’s real home price index in 2006 had stood at just under 206, nearly double its level just six years earlier. To return to its pre-bubble level, it therefore had to fall by 50 per cent. Barely half that decline had taken place by the end of 2008. So house prices continued to slide in the US. As they did, more and more families found themselves in negative equity, with debts exceeding the value of their homes. In turn, rising foreclosures translated into bigger losses on mortgage-backed securities and yet more red ink on banks’ balance sheets.

With total debt above 350 per cent of US gross domestic product, the excesses of the age of leverage proved difficult to purge. Households reined in their consumption. Banks sought to restrict new lending. The recession deepened. Unemployment rose towards 10 per cent, and then higher. The economic downward spiral seemed unstoppable. No matter how hard they saved, Americans simply could not stabilise the ratio of their debts to their disposable incomes. The paradox of thrift meant that rising savings translated into falling consumer demand, which led to rising unemployment, falling incomes and so on, ever downwards.

“Necessity will be the mother of invention,” Obama declared in his inaugural address on January 20. “By investing in innovation, we can restore our faith in American creativity. We need to build new schools, not new shopping malls. We need to produce clean energy, not dirty derivatives.” Commentators agreed that the speech was on a par with Franklin Roosevelt’s on his inauguration in 1933. Yet Roosevelt had spoken after the worst of the Depression was over, Obama in mid-tailspin. The rhetoric flew high. But the markets sank lower. The contagion spread inexorably from subprime to prime mortgages, to commercial real estate, to corporate bonds and back to the financial sector. By the end of June, Standard & Poor’s 500 Index had sunk to 624, its lowest monthly close since January 1996, and about 60 per cent below its October 2007 peak.

The crux of the problem was the fundamental insolvency of the major banks, another reality that policymakers sought to repress. In 2008, the Bank of England had estimated total losses on toxic assets at about $2.8 trillion. Yet total bank writedowns by the end of 2008 were little more than $583bn, while total capital raised was just $435bn. Losses, in other words, were either being massively understated, or they had been incurred outside the banking system. Either way, the system of credit creation had broken down. The banks could not contract their balance sheets because of a host of pre-arranged credit lines, which their clients were now desperately drawing on, while their only source of new capital was the US Treasury, which had to contend with an increasingly sceptical Congress. The other credit-creating institutions – especially the markets for asset-backed securities – were all but paralysed.

There was uproar when Timothy Geithner, US Treasury secretary, requested an additional $300bn to provide further equity injections for Citigroup, Bank of America and the seven other big banks, just a week after imposing an agonising “mega-merger” on the automobile industry. In Detroit, the Big Three had become just a Big One, on the formation of CGF (Chrysler-General Motors-Ford; inevitably, the press soon re-christened it “Can’t Get Funding”). The banks, by contrast, seemed to enjoy an infinite claim on public funds. Yet no amount of money seemed enough to persuade them to make new loans at lower rates. As one indignant Michigan law-maker put it: “Nobody wants to face the fact that these institutions [the banks] are bust. Not only have they lost all of their capital. If we genuinely marked their assets to market, they would have lost it twice over. The Big Three were never so badly managed as these bankrupt banks.”

In the first quarter, the Fed continued to do everything in its power to avert the slide into deflation. The effective federal funds rate had already hit zero by the end of 2008. In all but name, quantitative easing had begun in November 2008, with large-scale purchases of the debt and mortgage-backed securities of government-sponsored agencies (the renationalised mortgage giants Fannie Mae and Freddie Mac) and the promise of future purchases of government bonds. Yet the expansion of the monetary base was negated by the contraction of broader monetary measures such as M2 (the measurement of money and its “close substitutes”, such as savings deposits, that is a key indicator of inflation). The ailing banks were eating liquidity almost as fast as the Fed could create it. The Fed increasingly resembled a government-owned hedge fund, leveraged at more than 75 to 1, its balance sheet composed of assets everyone else wanted to be rid of.

. . .

The position of the US federal government was scarcely better. By the end of 2008, the total value of loans, investments and guarantees given by the Fed and the Treasury since the beginning of the financial crisis had already reached $7.8 trillion. In the year to November 30 2008, the total federal debt had increased by more than $1.5 trillion. Morgan Stanley estimated that the total federal deficit for the fiscal year 2009 could equal 12.5 per cent of GDP. The figure would have been even higher had President Obama not been persuaded by his chief economic adviser, Lawrence Summers, to postpone his planned healthcare reform and promised spending increases in education, research and foreign aid.

Obama had set out to construct an administration in which his rivals and allies were equally represented. But his rivals were a good deal more experienced than his allies. The result was an administration that talked like Barack Obama but thought like Bill Clinton. The Clinton-era veterans, not least Secretary of State Hillary Clinton, had vivid memories of the bond-market volatility that had plagued them in 1993 (prompting campaign manager James Carville to say that, if there was such a thing as reincarnation, he wanted to come back as the bond market). Terrified at the swelling size of the deficit, they urged Obama to defer any expenditure that was not specifically targeted on ending the financial crisis.

Yet the world had changed since the early 1990s. Despite the fears of the still-influential former Treasury secretary Robert Rubin, investors around the world were more than happy to buy new issues of US Treasuries, no matter how voluminous. Contrary to conventional wisdom, the quadrupling of the deficit did not lead to falling bond prices and rising yields. Instead, the flight to quality and the deflationary pressures unleashed by the crisis around the world drove long-term yields downwards. They remained at close to 3 per cent all year.

Nor was there a dollar rout, as many had feared. The foreign appetite for the US currency withstood the Fed’s money-printing antics, and the trade weighted exchange rate actually appreciated during 2009.

Here was the irony at the heart of the crisis. In all kinds of ways, the Great Repression had “Made in America” stamped all over it. Yet its effects were more severe in the rest of the world than in the US. And, as a consequence, the US managed to retain its “safe haven” status. The worse things got in Europe, in Japan and in emerging markets, the more readily investors bought Treasuries and held dollars.

. . .

For the rest of the world, 2009 proved to be an annus horribilis. Japan was plunged back into the deflationary nightmare of the 1990s by yen appreciation and a collapse of consumer confidence. Things were little better in Europe. There had been much anti-American finger-pointing by European leaders in 2008. The French president Nicolas Sarkozy had talked at the G-20 summit in Washington as if he alone could save the world economy. The British prime minister Gordon Brown had sought to give a similar impression, claiming authorship of the policy of bank recapitalisation. The German chancellor Angela Merkel, meanwhile, voiced stern disapproval of the excessively large American deficit.

By the first quarter of 2009, however, the mood in Europe had darkened. It became apparent that the problems of the European banks were just as serious as those of their American counterparts. Indeed, the short-term liabilities of the Belgian, Swiss, British and Italian banks were far larger in relation to those countries’ economies, while the German, French and Danish banks were much more dangerously leveraged. Moreover, in the absence of a European-wide finance ministry, all talk of a European stimulus package was just that – mere talk. In practice, fiscal policy became a matter of sauve qui peut, with each European country improvising its own bailout and its own stimulus package. The result was a mess. Currencies outside the Euro area were afflicted by severe volatility. Inside the Euro area, the volatility was in the bond market, with spreads on Greek and Italian bonds exploding relative to German bunds.

The picture was even worse in most emerging markets. Especially hard hit in eastern Europe were Bulgaria, Romania, Ukraine and Hungary. Of the Brics (Brazil, Russia, India and China), Brazil had the best year, Russia the worst. It was a terrible year for oil and gas exporters, as prices plunged, taking currencies such as the rouble down with them. The Indian stock market, meanwhile, was battered by escalating tensions between New Delhi and Islamabad in the wake of the Mumbai terrorist attacks.

Political instability also struck China, where riots by newly redundant workers in Shenzhen and other export centres provoked a heavy-handed clampdown by the government, but also a renewed effort by the People’s Bank of China to prevent the appreciation of the yuan by buying up yet more hundreds of billions of dollars of US Treasuries. “Chimerica” – the symbiotic relationship between China and America – not only survived the crisis, but gained from it. Although Obama’s decision to attend the first G-2 summit in Beijing in April dismayed some liberals, most recognised that trade trumped Tibet at such a time of economic crisis.

This asymmetric character of the global crisis – the fact that the shocks were even bigger on the periphery than at the epicentre – had its disadvantages for the US, to be sure. Any hope that America could depreciate its way out from under its external debt burden faded as 10-year yields and the dollar held firm. Nor did American manufacturers get a second wind from reviving exports, as they would have done had the dollar sagged. The Fed’s achievement was to keep inflation in positive territory – just. Those who had feared galloping inflation and the end of the dollar as a reserve currency were confounded.

On the other hand, the troubles of the rest of the world meant that in relative terms the US gained, politically as well as economically. Many commentators had warned in 2008 that the financial crisis would be the final nail in the coffin of American credibility around the world. First, neo-conservatism had been discredited in Iraq. Now the “Washington consensus” on free markets had collapsed. Yet this was to overlook two things. The first was that most other economic systems fared even worse than America’s when the crisis struck: the country’s fiercest critics – Russia, Venezuela – fell flattest. The second was the enormous boost to America’s international reputation that followed Obama’s inauguration.

. . .

If proof were needed that the US constitution still worked, here it was. If proof were needed that America had expunged its original sin of racial discrimination, here it was. And if proof were needed that Americans were pragmatists, not ideologues, here it was. It was not that Obama’s New New Deal – announced after the Labor Day purge of the Clintonites – produced an economic miracle. Nobody had expected it to do so. It was more that the federal takeover of the big banks and the conversion of all private mortgage debt into new 50-year Obamabonds signalled an impressive boldness on the part of the new president.

The same was true of Obama’s decision to fly to Tehran in June – a decision that did more than anything else to sour relations with Hillary Clinton, whose supporters never quite recovered from the sight of the former presidential candidate shrouded in a veil. Not that the so-called “opening to Iran” produced a dramatic improvement in the Middle East region. Nobody had expected that either. It was more that, like Richard Nixon’s visit to China in 1972, it symbolised a readiness on Obama’s part to rethink the very fundamentals of American grand strategy. And the downfall of the Iranian president Mahmoud Ahmedinejad – followed soon after by the abandonment of the country’s nuclear weapons programme – was a significant prize in its own right. With their economy prostrate, the pragmatists in Tehran were finally ready to make their peace with “the Great Satan”, in return for desperately needed investment.

Meanwhile, al-Qaeda’s bungled attempt to assassinate Obama – on the eve of Thanksgiving – only served to discredit radical Islamism and to reinforce Obama’s public image as “The One”. Another of the many ironies of 2009 was that the mood of religious reawakening triggered by the economic crisis benefited the Democrats rather than the deeply divided Republicans.

By year end, it was possible for the first time to detect – rather than just to hope for – the beginning of the end of the Great Repression. The downward spiral in America’s real estate market and the banking system had finally been halted by radical steps that the administration had initially hesitated to take. At the same time, the far larger economic problems in the rest of the world had given Obama a unique opportunity to reassert American leadership, particularly in Asia and the Middle East.

The “unipolar moment” was over, no question. But power is a relative concept, as the president pointed out in his last press conference of the year: “They warned us that America was doomed to decline. And we certainly all got poorer this year. But they forgot that if everyone else declined even further, then America would still be out in front. After all, in the land of the blind, the one-eyed man is king.”

And, with a wink, President Barack Obama wished the world a happy new year.

Niall Ferguson is a contributing editor of the FT and the author of ‘The Ascent of Money: A Financial History of the World’ (Penguin)

The Anti Greenspan - Indian Central Banking

2008-12-22T13:31:00.000-08:00

from www.nytimes.com

December 20, 2008
How India Avoided a Crisis
By JOE NOCERA
MUMBAI

“What has taken a number of us by surprise is the lack of adequate supervision and regulation,” Rana Kapoor was saying the other day. “This was despite the fact that Enron had happened and you passed Sarbanes-Oxley. We don’t understand it. Maybe it’s because we sit in a more controlled economy but ....” He smiled sweetly as his voice trailed off, as if to take the sting off his comments. But they stung nonetheless.

Mr. Kapoor is an Indian banker, a former longtime Bank of America executive with a Rutgers M.B.A. who, along with his business partner and brother-in-law, Ashok Kapur, was granted government permission four years ago to start a private bank, which they called Yes Bank. In the United States, Yes Bank is the kind of name a go-go banker might give to, say, a high-flying mortgage lender in the middle of a bubble. (You can even imagine the slogan: “Yes is part of our name!”) But Yes Bank is not exactly the Washington Mutual of India. One news release it hands out to reporters who come calling is an excerpt from a 2007 survey by The Financial Express: “#1 on Credit Quality amongst 56 Banks in India,” reads the headline.

I arrived in Mumbai three weeks after the terrorist attacks that killed 200 people — including, tragically, Yes Bank’s co-founder Mr. Kapur, who had served as the company’s nonexecutive chairman and was gunned down while having dinner at the Oberoi Hotel. (His wife and two dinner companions miraculously escaped.)

My hope in traveling to Mumbai was to learn about the current state of Indian business in the wake of both the credit crisis and the attacks. But in my first few days in this grand, sprawling, chaotic city, what I mainly heard, especially talking to bankers, was about America, not India. How could we have brought so much trouble on ourselves, and the rest of the world, by acting in such an obviously foolhardy manner? Didn’t we understand that you can’t lend money to people who lack the means to pay it back? The questions were asked with a sense of bewilderment — and an occasional hint of scorn. Like most Americans, I didn’t have any good answers. It was a bubble, I would respond with a sheepish shrug, as if that were an adequate explanation. It isn’t, of course.

“In India, we never had anything close to the subprime loan,” said Chandra Kochhar, the chief financial officer of India’s largest private bank, Icici. (A few days after I spoke to her, Ms. Kochhar was named the bank’s new chief executive, in a move that had long been anticipated.) “All lending to individuals is based on their income. That is a big difference between your banking system and ours.” She continued: “Indian banks are not levered like American banks. Capital ratios are 12 and 13 percent, instead of 7 or 8 percent. All those exotic structures like C.D.O. and securitizations are a very tiny part of our banking system. So a lot of the temptations didn’t exist.”

And when I went to see Deepak Parekh, the chief executive of HDFC, which was founded in 1977 as the country’s first specialized mortgage bank, practically the first words out of his mouth were these: “We don’t do interest-only or subprime loans. When the bubble was going on, we did not change any of our policies. We did not change any of our systems. We did not change our thought process. We never gave more money to a borrower because the value of the house had gone up. Citibank has a few home equity loans, but most banks in India don’t make those kinds of loans. Our nonperforming loans are less than 1 percent.”

Yet two years ago, the Indian real estate market — commercial and residential alike — was every bit as frothy as the American market. High-rises were being slapped up on spec. Housing developments were sprouting up everywhere. And there was plenty of money flowing into India, mainly from private equity and hedge funds, to fuel the commercial real estate bubble in particular. Goldman Sachs, Carlyle, Blackstone, Citibank — they were all here, throwing money at developers. So why did the Indian banks stay on the sidelines and avoid most of the pain that has been suffered by the big American banks?

Part of the reason is cultural. Indians are simply not as comfortable with credit as Americans. “A lot of Indians, when you push them, will say that if you spend more than you earn you will get in trouble,” an Indian consultant told me. “Americans spent more than they earned.”

Mr. Parekh said, “Savings are important. Joint families exist. When one son moves out, the family helps them. So you don’t borrow so much from the bank.” Even mortgage loans tend to have down payments in India that are a third of the purchase price, a far cry from the United States, where 20 percent is the new norm. (Let’s not even think about what they used to be.)
But there was also another factor, perhaps the most important of all. India had a bank regulator who was the anti-Greenspan. His name was Dr. V. Y. Reddy, and he was the governor of the Reserve Bank of India. Seventy percent of the banking system in India is nationalized, so a strong regulator is critical, since any banking scandal amounts to a national political scandal as well. And in the irascible Mr. Reddy, who took office in 2003 and stepped down this past September, it had exactly the right man in the right job at the right time.

“He basically believed that if bankers were given the opportunity to sin, they would sin,” said one banker who asked not to be named because, well, there’s not much percentage in getting on the wrong side of the Reserve Bank of India. For all the bankers’ talk about their higher lending standards, the truth is that Mr. Reddy made them even more stringent during the bubble.

Unlike Alan Greenspan, who didn’t believe it was his job to even point out bubbles, much less try to deflate them, Mr. Reddy saw his job as making sure Indian banks did not get too caught up in the bubble mentality. About two years ago, he started sensing that real estate, in particular, had entered bubble territory. One of the first moves he made was to ban the use of bank loans for the purchase of raw land, which was skyrocketing. Only when the developer was about to commence building could the bank get involved — and then only to make construction loans. (Guess who wound up financing the land purchases? United States private equity and hedge funds, of course!)

Then, as securitizations and derivatives gained increasing prominence in the world’s financial system, the Reserve Bank of India sharply curtailed their use in the country. When Mr. Reddy saw American banks setting up off-balance-sheet vehicles to hide debt, he essentially banned them in India. As a result, banks in India wound up holding onto the loans they made to customers. On the one hand, this meant they made fewer loans than their American counterparts because they couldn’t sell off the loans to Wall Street in securitizations. On the other hand, it meant they still had the incentive — as American banks did not — to see those loans paid back.

Seeing inflation on the horizon, Mr. Reddy pushed interest rates up to more than 20 percent, which of course dampened the housing frenzy. He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry. He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis.

Did India’s bankers stand up to applaud Mr. Reddy as he was making these moves? Of course not. They were naturally furious, just as American bankers would have been if Mr. Greenspan had been more active. Their regulator was holding them back, constraining their growth! Mr. Parekh told me that while he had been saying for some time that Indian real estate was in bubble territory, he was still unhappy with the rules imposed by Mr. Reddy. “We were critical of the central bank,” he said. “We thought these were harsh measures.”

“For a while we were wondering if we were missing out on something,” said Ms. Kochhar of Icici. Banks in the United States seemed to have come up with some magical new formula for making money: make loans that required no down payment and little in the way of verification — and post instant, short-term, profits.

As Luis Miranda, who runs a private equity firm devoted to developing India’s infrastructure, put it: “We kept wondering if they had figured out something that we were too dense to figure out. It looked like they were smart and we were stupid.” Instead, India was the smart one, and we were the stupid ones.

Ms. Kochhar said that the underlying risks of having “a majority of loans not owned by the people who originated them” was not apparent during the bubble. Now that those risks have been made painfully clear, every banker in India realizes that Mr. Reddy did the right thing by limiting securitizations. “At times like this, you tend to appreciate what he did more than we did at the time,” said Mr. Kapoor. “He saved us,” added Mr. Parekh.

As the credit crisis has spread these past months, no Indian bank has come close to failing the way so many United States and European financial institutions have. None have required the kind of emergency injections of capital that Western banks have needed. None have had the huge write-downs that were par for the course in the West. As the bubble has burst, which lenders have taken the hit? Why, the private equity and hedge fund lenders who had been so eager to finance land development. Us, in others words, rather than them. Why is that not a surprise?

When I asked Mr. Kapoor for his take on what had happened in the United States, he replied: “We recognize it as a problem of plenty. It was perpetuated by greedy bankers, whether investment bankers or commercial bankers. The greed to make money is the impression it has made here. Anytime they wanted a loan, people just dipped into their home A.T.M. It was like money was on call.”

So it was. And our regulators, unlike theirs, just stood by and let it happen. The next time we’re moving into bubble territory, perhaps we can take a page from Mr. Reddy’s book — sometimes it’s better to apply the brakes too early than too late. Or, as was the case with Mr. Greenspan, not at all.

•
None of this is to say that the global credit crisis hasn’t affected India. It certainly has. I’ll be back after the holidays with more columns from India, including how Sept. 15 — the day Lehman Brothers defaulted — changed everything, even here, on the other side of the world.

This article speaks for itself. Its seems like Mr. Reddy did his job. Greenspan on the other hand....

We're all ZIRP! now

2008-12-16T19:52:00.001-08:00

ZIRP - Zero Interest Rate Policy

FOMC Statement from http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm

Release Date: December 16, 2008
For immediate release

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

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. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.

Ok so I havent posted in a long time. I was caught up in the post election euphoria that we actually elected Barack Obama. Well I'm back - shocked into writing again - by what else - a historic decision by the US Federal Reserve under Ben "Helicopter" Bernanke. Clearly, and I mean clearly, we're in uncharted waters now. Since the white house is not taking the proper policy actions - the Fed is throwing everything and the kitchen sink into play here. I knew that we might end up here about a year ago when I read and commented on the Calculated Risk blog - about Fed members speculating about zero bound. But to actually be here... holy crapsheet. I think the banks at some point will have no choice but to start lending again. But some of them are still insolvent. The market may bounce for now, but until the insolvency issue gets resolved - I dont think you will have a sustainable rally. But it does seem that the Fed is trying very, very hard to ring fence that issue and let the rest of the economy recover. There are still structural issues in the economy - such as the fact that manufacturing accounts for a much smaller pie in GDP and that US consumers are becoming savers - that we will need to surmount - but ring fencing the problems on Wall Street is certainly welcome. That combined with the Obama Stimulus Plan in Jan 2009 will mitigate the seriousness of this recession. With these actions, I still continue with my prior prediction of an end to this recession late 2009 / early 2010 and a possible HUGE expansion worldwide later in 2010. Time will tell.