OCTOBER 7, 2008

Brazil Expands Bank's Authority

Wall St. Journal

BRASILIA -- Brazil's government will issue a decree granting the country's central bank expanded powers to reinforce local credit supply, Central Bank President Henrique Meirelles said.

The measures, effective Tuesday, aim to give greater agility to the central bank to respond to adverse regional conditions during the global credit crisis.

The measures include authorization for the central bank to purchase credit portfolios from small banks suffering from reduced liquidity in the financial system.

Iceland Scrambles to Shore Up Its Finances

Wall St. Journal

OCTOBER 7, 2008, 8:52 A.M. ET

REYKJAVIK, Iceland -- Iceland nationalized its second-largest bank on Tuesday and negotiated a €4 billion ($5.41 billion) loan from Russia to shore up the nation's finances amid a full-blown financial crisis.

The moves came a day after trading in shares of major banks was suspended, the Icelandic krona lost a quarter of its value against the euro, and the government rushed through emergency legislation giving it new powers to deal with the financial meltdown.

Reuters

A branch of Landsbanki Bank in Reykjavik.

"As declared by the government, all domestic deposits are fully guaranteed," the Financial Supervisory Authority said. "Landsbanki's domestic branches, call centers, cash machines (ATMs) and Internet operations will be open for business as usual."

The Russian loan supports the government's efforts to gain control of an increasingly dire financial situation. Landsbanki is the country's second bank to be nationalized in less than two weeks. Last week, Iceland effectively nationalized the country's third-largest bank, Glitnir Bank hf, taking a 75% stake for €600 million ($811.1 million), while Landsbanki sold the majority of its foreign operations to Icelandic investment bank Straumur-Burdaras hf.

The country's biggest bank, Kaupthing Bank hf, said Tuesday it hadn't been approached by the regulator regarding any intervention in its operations. Kaupthing added that Iceland's central bank has provided it with a €500 million loan to assist operations.

Iceland is paying the price for an economic boom of recent years that saw its newly affluent companies go on an acquisition spree across Europe and its banking sector grow to dwarf the rest of the economy. Bank assets are nine times annual gross domestic product of €14 billion. Investors are now punishing the whole country for the banking sector's heavy exposure to the global credit squeeze -- its currency has gone through the floor, imports have fallen and inflation is soaring.

A person familiar with the situation said that Iceland's central bank will peg its currency to a basket of currencies, which will then give a euro-Icelandic krona exchange rate of 131. Euro/krona exchange rates have been quoted in recent days at around 200, according to unofficial accounts from currency traders, as official trading in the currency has all but broken down with Iceland fighting for financial survival.

Prime Minister Geir H. Haarde warned late Monday that the heavy exposure of the tiny country's banking sector to the global financial turmoil raised the specter of national bankruptcy. "In the perilous situation which exists now on the world's financial markets, providing the banks with a secure life line poses a great risk for the Icelandic nation," Mr. Haarde said in a televised address to the nation. "There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy." (See related article.)

Just hours earlier, Mr. Haarde had said that no special measures were necessary -- but credit lines to banks then seized up on speculation about the solvency of the country's major banks. The new laws gave the Central Bank of Iceland and the Icelandic Financial Supervisory Authority detailed and vast authority to intervene in the control and operation of Icelandic financial institutions, including the ability to take over or create new institutions, call shareholder meetings and limit the authority of boards.

Earlier Monday, the Icelandic Financial Supervisory Authority suspended trading in financial instruments issued by Kaupthing, Landsbanki, Glitnir, Straumur-Burdaras, Exista and Spron. The government also put 100% guarantees on savers' deposits, following in the footsteps of Ireland, Germany, Austria, Greece and Denmark.

Tuesday, Icelandic insurer Exista hf said it was selling its 20% stake in Finnish insurer Sampo Oyj through a bookbuilding process. Exista also holds a 4.7% stake in Norwegian insurer Storebrand as well as a 24.7% stake in Kaupthing. Exista and Kaupthing, in turn, own around 29% in Storebrand directly and indirectly, and analysts say a stake sale in Storebrand could be next. Exista Chairman Lydur Gudmundsson said in a statement that Exista has no plans to sell other assets.

A collapse of the Icelandic financial system could reverberate across Europe, given the heavy investment by Icelandic banks and companies across the continent.

One of the country's biggest companies, retailing investment group Baugur, owns or has stakes in dozens of major European retailers -- including enough to make it the largest private company in Britain, where it owns a handful of well-known stores such as the famous toy store Hamley's.

—The Associated Press and Anna Molin and Joel Sherwood of Dow Jones Newswires contributed to this article.

Write to the Online Journal's editors at newseditors@wsj.com

U.S. Treasury Considers Buying Stakes in Banks

New Tack Comes Amid World-Wide Emergency Rate Cuts

By DEBORAH SOLOMON

Wall St. Journal

October 9, 2008

WASHINGTON—The Treasury Department is considering ways to inject capital directly into banks, possibly by taking equity stakes, as the financial crisis continues to worsen.

Treasury Secretary Henry Paulson, in a marked shift in rhetoric, played up Treasury's newfound authority to "to inject capital into financial institutions" in remarks Wednesday. Mr. Paulson, who won approval from Congress to buy $700 billion worth of distressed assets, had previously focused on Treasury's plan to buy mortgage-related securities from financial institutions that are having trouble getting the assets off their books.

As the financial crisis continues to escalate, Treasury has begun fleshing out ways to use its authority to make direct injections into financial institutions, according to a person familiar with the matter. Treasury is figuring out how to structure such infusions so that banks can recapitalize and begin lending.

No such moves are imminent, but the fact that the department is engaging in such discussions is an indication of how the crisis is constantly morphing. Such a move was not under consideration just a few days ago but has become more of a possibility in recent days as the stock market has plunged and the credit crunch shows no signs of easing.

Treasury wants to design something voluntary that encourages healthy institutions to participate. Treasury is discussing whether to buy preferred stock or find some other way to inject capital into the firms.

In remarks to reporters on Wednesday, Mr. Paulson said its new authority extends beyond just mortgage-related assets to "any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability."

The U.K. government this week announced a plan to take stakes in a range of domestic banks.

Coordinated Rate Cuts

On Wednesday morning, the world's central banks launched a large coordinated attack against the widening global financial crisis, lowering short-term interest rates in unison.

Getty Images

U.S. Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke testify before the House Financial Services Committee on Sept. 24.

The emergency interest-rate action, which involved the Fed, the European Central Bank, the Bank of England and others, is a sign that fears that the financial crisis could cripple the global economy are spreading rapidly.

But the rate move failed to soothe jittery investors. The Dow Jones Industrial Average closed Wednesday at 9258.10, down 189 points, or 2%. The index has fallen 14.6% so far this month. Oil fell $1.11 to $88.95 a barrel, on signs of weakening global demand. Investors continued to flock to safe-haven U.S. Treasury bills, and away from riskier debt such as junk bonds.

One of the chief threats to the global economy is that banks and other financial institutions are hoarding cash, which makes it harder for businesses and households to finance their day-to-day affairs. Lower interest rates reduce the cost of borrowing for banks, businesses and households, and potentially boost confidence. But it's far from clear whether the lower rates will make banks and other lenders, which are gripped by fears of defaults by borrowers, any more willing to lend.

The U.K. government this week announced a plan to take stakes in a range of domestic banks. As recently as a few days ago, the U.S. Treasury was not considering any capital injections. But it has become more of a possibility as the stock market has plunged and the credit crunch shows no signs of easing.

Treasury wants to design something voluntary that encourages healthy institutions to participate. It is discussing whether to buy preferred stock or find some other way to inject capital into the firms.

In remarks to reporters on Wednesday, Mr. Paulson said its new authority extends beyond just mortgage-related assets to "any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability."

On Wednesday, central banks in the U.S., the euro zone, the U.K., Canada, Sweden and Switzerland each cut short-term interest rates by a half percentage point, noting that "the recent intensification of the financial crisis has augmented the downside risks to growth." Acting on its own, the People's Bank of China also cut rates, as did Australia's central bank, a day earlier. Later, central banks in South Korean and Taiwan cut interest rates, too, and Brazil's central bank cut reserve requirements on cash and term deposits.

The global scope of the move was unprecedented, and the cuts marked the first time central banks across the Atlantic have moved in tandem on interest-rate policy since just after the Sept. 11, 2001, terrorist attacks in the U.S. The Fed has not moved rates since April, when it lowered them to 2%.

The moves likely mark just the beginning of broadened government efforts to keep the world-wide credit freeze from strangling the global economy. "For all central banks, this is not the end of the story," says Laurence Meyer, vice chairman of Macroeconomic Advisers, a forecasting firm, and a former Federal Reserve governor. "We're facing a potentially severe recession."

—Jon Hilsenrath, Joellen Perry and Sudeep Reddy contributed to this article.

Write to Deborah Solomon at deborah.solomon@wsj.com

I mentioned yesterday that we would begin seeing comments relating to how this financial crisis would need to be solved 'globally'.  It's already starting.  This is an article by Chris Martenson posted this morning. 

John

Berlusconi Says Leaders May Close World's Markets

Friday, October 10, 2008, 12:15 pm, by cmartenson

An interesting bit of news:

Quote:

Oct. 10 (Bloomberg) -- Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they ``rewrite the rules of international finance.''

``The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,'' Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis ``can't just be for one country, or even just for Europe, but global.''

The really interesting part is here where he hints that a second aim is to revisit the Bretton Woods agreement.

Translation:  The US dollar's role as the world's reserve currency is up for debate.

Quote:

Berlusconi didn't give any details about what kind of rules leaders were looking to change, except to say that leaders are ``talking about a new Bretton Woods.''

The Bretton Woods Agreements were adopted to rebuild the international economic system after World War II in a hotel in Bretton Woods, New Hampshire. The aim of the agreements was to establish a monetary management system, initially by pegging currencies to gold. The IMF was set up later to help manage the international financial system.

Handouts to Wall Street Announced

By: Dr. Chris Martenson                     

Monday, October 13, 2008, 9:00 pm, by cmartenson

Once again, the "will of the people" was overridden by Congress in their haste to respond to an "emergency," and, once again, it turns out the people's instincts were right.

Remember the initial $250 billion that was going to be used to buy troubled assets which "we had to do right away!" because otherwise there would have been untold misery and millions of jobs lost?

Turns out we don't need to buy any of those assets right away after all.

Who knew?

Quote:

WASHINGTON — The Treasury Department, in its boldest move yet, is expected to announce a plan Tuesday to invest up to $250 billion in large and small banks, according to officials. The United States is also expected to guarantee new debt issued by banks for a period of three years, officials said.

Link (NYT)

Instead, the money will be used to buy bank stock, which is a great deal if you are a bank, because you get cash equity and probably a nice boost to your stock price (I am cynically assuming that the government is not going to get the best price here....).  And these purchases will be non-dilutive to existing shareholders.  I was okay with the notion of capital infusions, but I am astounded to hear that they will be done in this manner to save existing shareholders.

Even more startling to me is that, instead of slapping the banks firmly on the wrist for being reckless, the government is also "expected to guarantee new debt issued by banks for a period of three years."  To put it bluntly, that is just not the way to combat the moral hazard that is clearly endemic to our current banking system. I think the banks should be kept fully on the hook for any loans they make from here on out....mess up again, and your institution goes under.

Next, if you read the list of handouts below, things get even more troublesome (if your measure is "enormous rewards for Wall Street for misbehaving bother me").

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.

A few of those companies are not even in trouble, at all, and yet they are about to receive billions and billions of dollars.  Apparently there is a $5 billion reward for acquiring a competitor....I wonder how many knew about that when they were at the bargaining table?  I would bet quite a few of them.

Wait, it get's better:

The goal is to inject massive liquidity into the banking system. The government will purchase perpetual preferred shares in all the largest U.S. banking companies. The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.

First, this is NOT a liquidity injection, this is a capital injection, and there's a big difference.  Second, this deal could not possibly be any sweeter for any of the bankers or their shareholders.  It amounts to a gigantic reward for playing risky and getting caught.  Executive positions and shareholders are to be spared.

I am now squinting anew at the market sell-off last week, because it served to inject a lot of fear into the government and G7 negotiations at a critical moment that paved the way for the largest and most massive bailout ever in history. Strangely good timing, for the banks.

I called this a looting operation at the outset, and my suspicions are now largely confirmed.

After these trillions of dollars have been spent and distributed to the least worthy institutions on the planet, you will discover a few oddities along the way:

·                                 Government debts will balloon enormously.

·                                 No new jobs will be created.

·                                 House prices will continue to fall and foreclosures will continue to mount.

·                                 The real economy will have received practically zero benefit.

·                                 Bridges, roads, and schools will still be in poor repair.

·                                 States will still be hurting for revenues.

·                                 We will still have no national energy plan.

In short, none of this money is directed at the real economy.  All of it is directed at the institutions that created this mess in the first place, and which, honestly, feast on the productive economy. 

This was, quite simply, the largest-ever transfer of public monies to private parties with the least amount of public gain.

We're going to be paying for this for a long, long time.

Oh, well, I suppose it is all history now.  Time to sit back and see how the bond markets respond to all this new borrowing.

OCTOBER 14, 2008, 10:31 A.M. ET

U.S. Announces Plan to Buy Stakes in Largest Banks

Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort

By DEBORAH SOLOMON, DAMIAN PALETTA, JON HILSENRATH and AARON LUCCHETTI

WASHINGTON -- President George W. Bush announced Tuesday morning that the U.S. government is taking stakes in the nation's top financial institutions as part of a new plan to restore confidence to the battered U.S. banking system, a far-reaching effort that puts the government's guarantee behind the basic plumbing of financial markets.

Reuters

FDIC Chairperson Sheila Bair speaks at a news conference as U.S. Treasury Secretary Henry Paulson (center) and Federal Reserve Chairman Ben Bernanke (right) look on.

"The efforts are designed to directly benefit the American people by stabilizing the financial system and helping the economy recover,'' President Bush said.

Mr. Bush said the government will purchase equity shares in banks to help institutions unfreeze lending and spur economic growth. Funds for the purchases, which may amount to $250 billion, will come from the recently passed $700 billion bank rescue bill.

"This is an essential short-term measure to ensure the viability of America's banking system," Bush said. "And the program is carefully designed to encourage banks to buy these shares back from the government when the markets stabilize and they can raise capital from private investors."

Mr. Bush also said the Federal Deposit Insurance Corp. will temporarily guarantee most new debt issued by insured banks. He said that will make it easier for banks to borrow money, which can then be lent to consumers. The FDIC also will "immediately and temporarily" expand its insurance to cover every dollar in all noninterest-bearing transaction accounts, which are widely used by small businesses to cover day-to-day operations.

Under the last step announced by Mr. Bush, the Federal Reserve will finalize a program to serve as a buyer of last resort for commercial paper, an important source of short-term financing for businesses banks.

Paulson, Bair, Bernanke Announce Moves

Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben Bernanke, and FDIC Chairman Sheila Bair also made comments Tuesday.

Mr. Bernanke said the U.S. will not "stand down" until financial system and prosperity restored. Mr. Paulson, in his own remarks, said financial institutions in the new program will limit executive compensation. He said that "government owning a stake in any private U.S. company is objectionable to most Americans," but said the alternative "of leaving businesses and consumers without access to financing is totally unacceptable."

The government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. -- including the soon-to-be acquired Merrill Lynch -- Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp., according to people familiar with the matter.

Getting a Grip on the Financial Crisis

·                                 Real Time Economics: The Evolution of Henry Paulson

·                                 Economists React: A Thumbs Up From Ivory Tower

·                                 Treasury's stock-purchase plan

·                                 FDIC's liquidity plan

·                                 Paulson, Bernanke, Bair joint and individual remarks

·                                 Bush remarks Tuesday morning

·                                 Detail of commercial paper facility

·                                 Commercial paper FAQs

·                                 Treasury's Executive Compensation Rules

Related Articles

·                                 Wash Wire: Bush Embraces Multilateral Intervention

·                                 Real Time Econ: The Evolution of Henry Paulson

·                                 Europe's Rescue Carries Huge Price Tag

·                                 How the U.K. Rescue Plan Became a Banking Model

·                                 Sumner Redstone Squeezed by Loan and Stock Price

Some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure from Mr. Paulson in a meeting Monday. During the financial crisis, the government has steadily increased its involvement in financial markets, culminating with a move that rivals the breadth of the government's response to the Great Depression. It intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.

Formulated jointly by the Treasury, the Fed and the FDIC, these moves announced Tuesday are designed to keep money flowing through the financial system, ensuring that banks continue lending to companies, consumers and each other. A freeze in these markets rippled through the economy and helped cause stocks to crater last week.

Along with the government's involvement come certain restrictions, such as caps on executive pay. For example, firms can't write new employment contracts containing golden parachutes and their ability to use certain executive salaries as a tax deduction is capped. These restrictions are relatively weak compared with what congressional Democrats had wanted when they approved this spending, a potential flash point.

Some critics also say Treasury should have formulated a comprehensive plan earlier in the crisis. Even if this move helps mend credit markets, the economy is likely to suffer in the months ahead from the aftershocks of the recent turmoil.

Reuters

Paulson and Bernanke

A central plank of these new efforts is a plan for the Treasury to take about $250 billion in equity stakes in potentially thousands of banks, using funds approved by Congress through the recently approved $700 billion bailout plan.

Treasury will buy $25 billion in preferred stock in Bank of America -- including Merrill Lynch -- as well as J.P. Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman and Morgan Stanley; $3 billion in Bank of New York Mellon; and about $2 billion in State Street.

The government will purchase preferred stock, an equity investment designed to avoid hurting existing shareholders and deterring new ones. Such shares typically don't come with voting rights. They will carry a 5% annual dividend that rises to 9% after five years, according to a person familiar with the matter. By investing in several big firms at once, the government hopes to avoid placing a stigma on any one firm for getting government help.

The plan will be structured to encourage firms to bring in private capital. For instance, firms returning capital to the government by 2009 may get better terms for the government's stake, a person familiar with the discussions said.

FDIC Moves

Among the other key components of the plan is the FDIC temporarily guarantee, for a fee, certain types of new debt called senior unsecured debt issued by banks and thrifts. This would apply to debt issued by June 30 with maturities up to three years. One problem plaguing credit markets has been a fear among financial institutions that it is unsafe to lend to each other even for periods of a few days. U.S. officials hope this guarantee removes that fear, which could bring down short-term lending rates, such as the London interbank offered rate, or Libor, a benchmark for consumer and business loans.

The FDIC is also temporarily offering banks unlimited deposit insurance for non-interest bearing bank accounts typically used by small businesses, through 2009. This would be voluntary for banks, and would extend the $250,000 per depositor limit lawmakers agreed on two weeks ago. To use these new powers, the FDIC is invoking a "systemic risk" clause in federal banking law that allows it to take extreme steps to prevent shocks to the economy.

The FDIC's central role in the plan is consistent with its presence during past banking crises, the Great Depression and the savings and loan crisis. Each crisis sparked a major boost in the agency's power.

The shift brings U.S. policy more in line with that of other countries. Monday, the U.K., Germany, France, Spain and Italy provided further details of measures to buy stakes in struggling banks and offer lending guarantees. The U.K., which first formulated such a plan, is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three big banks.

“These are tough times for our economies. Yet we can be confident that we can work our way through these challenges.” President Bush in a joint statement with Prime Minister Berlusconi of Italy

The U.S. plan to inject capital into banks is expected to be open to almost all such institutions, with a focus on getting the participation of the firms most important to the financial system, according to people familiar with the matter. Treasury's main goal is to attract private capital. To make sure private investors aren't scared away, it is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants, these people said.

The government's new focus is raising questions about why it didn't adopt such an approach sooner. Mr. Paulson actively opposed the idea of investing in banks because he worried about picking winners and losers, though Fed Chairman Ben Bernanke was an early advocate. Mr. Paulson was also concerned banks wouldn't participate because of the perceived stigma and the potential for the government to meddle in their affairs, according to people familiar with the matter.

Senior executives and advisers to some of the nation's leading banks pitched such a plan at various points earlier this summer but were rebuffed by officials at Treasury and the Fed, according to people familiar with the matter. Instead, Treasury initially marched ahead with a plan to buy distressed assets directly from banks.

House Democratic leaders, including Speaker Nancy Pelosi and House Financial Services Committee Chairman Barney Frank, held a closed-door session Monday with 11 economists and other advisers. The group threw its weight behind Treasury's decision to inject capital into the banking system.

"The consensus was so strong towards direct equity injections that there was literally no dissension on the point," said one of the invited economists, Jared Bernstein of the liberal Economic Policy Institute. "The only head-scratching is why did it take us so long to get here?"

Officials at the Treasury and Federal Reserve have been looking for a comprehensive approach to the credit crisis after a series of ad hoc interventions and say they didn't have the authority to make such a comprehensive move until Congress passed the bailout bill. The government's various moves, from saving mortgage giants Fannie Mae and Freddie Mac to letting Lehman Brothers Holdings Inc. fail, have confused investors and frozen many in place at a time when the banking system was desperate for fresh capital. That contributed to what in essence was a high-level run on Wall Street banks, with funding drying up overnight.

The government's hope is that the new plan will more thoroughly address the problems of ailing financial institutions and persuade private investors that government involvement won't come at their expense.

For troubled assets there is the Troubled Asset Relief Program, created by the $700 billion bailout bill, which gives the Treasury Department authority to acquire bad assets from banks and other financial institutions. TARP will also be used by Treasury when it puts new equity into banks.

The other steps, including the FDIC's role in guaranteeing new funds raised by banks and thrifts, are designed to address the way banks fund themselves, freeing them to start lending again. The Fed is expected to announce Tuesday that a separate plan to lend directly to companies and banks through instruments called commercial paper will start in about two weeks.

William Poole, former president of the Federal Reserve Bank of St. Louis, was a fierce critic of Treasury's initial plan to buy up distressed mortgage-backed securities. Such a scheme, he said, would lead banks to dump their worst assets on the taxpayers.

But Treasury's new tack may well do the trick, said Mr. Poole, now a senior fellow at the free-market-oriented Cato Institute.

"Investors need to be confident that the banks they're dealing with are unquestionably solvent, and it's in the interest of banks to assure investors that that's the case," he said. "One way banks can provide that assurance is to raise additional capital, in some combination of private and government capital."

Dean Baker, co-director of the left-of-center Center for Economic and Policy Research, argues the country may have turned a corner on the financial panic -- the fear that has kept banks and investors from making even the most prudent loans. "I think we're through the worst on that," he said. "Maybe I'll be proven wrong, but it really was at an extreme last week."

Blanket guarantees, however, might inspire banks to take unnecessary risks, warned Frederic Mishkin, a Columbia University economist who stepped down as Fed governor in August. "You don't want to give a guarantee to banks that are in trouble" that might try to gamble their way out of problems, he said. He says offering broad guarantees will require that U.S. officials more aggressively act to sort out good banks from bad banks.

One sticking point could come from Congress, which wrote into the original bailout bill requirements that Treasury tamp down executive pay. Rep. Frank said Monday he wants the government to set tough conditions for any company that receives a capital injection. If Mr. Paulson didn't enforce such rules, Mr. Frank said the Treasury secretary could be "making a big mistake."

—Michael M. Phillips, David Enrich, Daniel Fitzpatrick, Susanne Craig and Robin Sidel contributed to this article.

Write to Deborah Solomon at deborah.solomon@wsj.com, Damian Paletta at damian.paletta@wsj.com, Jon Hilsenrath at jon.hilsenrath@wsj.com and Aaron Lucchetti at aaron.lucchetti@wsj.com

OCTOBER 14, 2008

Next Move in European Bailouts: Paying for Them

Governments' Bets on Banking Systems Begin to Lift Markets and Ease Lending, but Expose State Finances to Risk

Wall St. Journal

By MARCUS WALKER in Berlin, SARA SCHAEFER MUñOZ in London and DAVID GAUTHIER-VILLARS in Paris

Now that governments across Europe have stepped in with bold plans to bail out their banking systems, they are facing a new challenge: How to pay for it all.

The U.K., Germany, France, Spain and Italy on Monday provided further details of measures that will see their governments spend tens of billions of pounds and euros on stakes in struggling banks and offer hundreds of billions more in guarantees aimed at helping banks borrow the money they need to do business. The U.S. followed suit late Monday, telling the nation's top financial institutions in a meeting in Washington that it would buy preferred equity stakes in those banks, and lift the insurance limits for non-interest bearing bank deposit accounts, among other measures.

But even as markets rose sharply on news of the concerted efforts, economists were fretting about the potential effect on taxpayers and government finances.

In essence, governments are making massive bets on the futures of their banking systems. If the plans work and banks do well, taxpayers could profit as the value of the government stakes rises. But if banks suffer further losses, governments could see their national debts grow and credit ratings fall as they are forced to pay up on guarantees. That, in turn, could boost governments' cost of borrowing, discourage private investment and put the brakes on economic growth.

"It's incredibly risky," said Simon Johnson, a professor at MIT and former chief economist of the International Monetary Fund. "You don't really know the losses that these [banks] are going to have."

So far, the U.K. and Germany have put forth the most ambitious bailout plans. The U.K. is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three banks: Royal Bank of Scotland Group PLC and the soon-to-be-merged Lloyds TSB Group and HBOS PLC.

If private investors don't take part in the banks' share issues, the government will likely end up with a 60% stake in RBS for £20 billion and a 40% stake in the combined Lloyds-HBOS for £17 billion. The U.K. will also guarantee some £250 billion in bank debts with maturities of up to three years. The guarantees extend to the vast and frozen market for interbank lending, or short-term loans among banks, a Treasury spokeswoman said.

Left to Right: Reuters, Getty Images and Reuters

Left to Right: British Prime Minister Gordon Brown, German Chancellor Angela Merkel, French President Nicolas Sarkozy.

Germany plans to borrow as much as €80 billion ($107.3 billion) to buy stakes in banks and provide an additional €400 billion in debt guarantees. The government didn't identify any targets for capital injections, but people familiar with the matter said officials have concerns about several of the country's state-sector Landesbanken, or regional lenders. Several of these, such as Westdeutsche Landesbank and Bayerische Landesbank, have suffered heavy writedowns on U.S. subprime-related securities since mid-2007. A spokeswoman for BayernLB said the bank needs capital but would have to study the details of Germany's plan. A spokesman for WestLB declined to comment.

The French government said it would inject as much as €40 billion into its banks and guarantee a total of €320 billion in bank debt. The government's first move will be to inject €1 billion into Dexia SA, the municipal lender that the French and Belgian governments have agreed to bail out.

Meanwhile, the Spanish government approved plans to guarantee as much as €100 billion in bank debt in 2008 and set up a mechanism to inject fresh capital into Spanish banks, though it said none needed the facility at present. Italy also announced an unlimited plan to guarantee bank debt, but a finance ministry spokeswoman said the government doesn't expect any banks to tap it in the near future.

Global investors issued a vote of confidence in the plans Monday, pushing European stocks sharply upward. The Dow Jones Stoxx 600 index, which tracks European shares, closed up 9.9%, before the U.S. Dow Jones Industrial Average closed up by more than 10%.

In one early sign that the measures might be working, short-term interest rates fell slightly as banks became a bit more comfortable about lending to one another. The three-month dollar London interbank offered rate, a benchmark that is meant to reflect banks' borrowing costs, fell to 4.7525% Monday from 4.81875% Friday. The three-month Sterling rate fell to 5.60% from 5.8125% Friday.

But the cost of insuring against debt defaults rose for a number of European countries, reflecting rising concerns about how the plans will affect governments' finances. The cost of insuring against a default on £10 million in U.K. government debt for five years, for example, rose Monday to £47,000 annually, from £41,000 Friday. The cost of five-year default insurance on €10 million in German debt jumped to €27,000 Monday from €23,000 Friday. A higher cost of default insurance translates into higher borrowing costs for governments, and more budget money spent on paying interest.

"You cannot issue this amount of debt in a short amount of time without having to" pay more for it, said Stuart Thomson, a fixed-income-fund manager and economist at Resolution Asset Management in Glasgow.

For the most part, Europe's larger governments are in a position to absorb even extreme bank losses. In Germany, a theoretical loss of all of the €480 billion in capital injections and guarantees would raise the country's net national debt to around 75% of gross domestic product, from around 56% now.

Banks that participate in the plans won't get a free ride. Governments intend to charge participating banks for the guarantees, and will also have a say in dividend policies and executive pay. Germany, for example, will charge a fee of at least 2% annually of the amount guaranteed. The U.K. will charge 0.50% plus the cost of default insurance on a bank's debt.

Executive heads are also likely to roll. On Monday, RBS confirmed that Fred Goodwin, the bank's chief executive for the past eight years, would be succeeded by Stephen Hester, most recently chief executive of real-estate trust British Land Company PLC. (See related article.)

—Neil Shah, Alistair MacDonald, Davide Berretta, Stacy Meichtry and Thomas Catan contributed to this article.

We’re now beginning to see all of these ‘unintended’ consequences of the recent bailouts.  Here’s a question you should be asking yourself – what if they’re not ‘unintended’?  What if the ‘problems’ (mentioned in the article below) developing daily are part of a plan?  Let’s summarize some of these unintended consequences.

1. Investors are selling Fannie and Freddie bonds and buying bonds issued by large U.S. banks since the banks are now backed by the U.S. government.  No one should be surprised that investors would take higher yields with implied government guarantees in this chaotic environment.  So – we see investors flocking to big bank bonds and out of the bonds that are not backed by the government.  No Surprise.  What long term effects will this have on Fannie and Freddie?  Will the government continue to back them and how will they back them?  What happens to the housing market if it doesn’t?
2. The U.S. government will be forced to issue new debt (Treasuries) to pay for these bailouts.  This will drive up interest rates – including mortgages.  What will happen to the crippled housing market when you throw in much higher interest rates?  Nothing good.  As the article below mentions – we’re already starting to see this.  Last week the 30 yr mortgage rate increased to 6.75% from 6.05%.
3. Last month the Federal Reserve moved to support short-term commercial paper since this market was frozen.  What happened? Investors are not dumb.  Not surprisingly, they invested in the commercial paper backed by the Fed and pulled away from short-term debt not backed by the Fed.  Who is getting hurt by this?  Corporations and European Banks.
4. The Fed’s efforts to unfreeze the short-term debt markets coupled with the FDIC’s efforts to stop bank withdrawals (increased insured amount to $250K from $100K) has led many money market fund managers to stay out of the short term debt markets – especially commercial paper.  They are worried that Americans and corporations will favor simple bank accounts over their funds.  Money market funds have historically contributed vast amounts of money to the commercial paper market – without them, the commercial paper market will remain largely frozen – where many companies and banks finance short-term obligations.  Soon after these efforts, you’ll notice the Fed began offering money directly to corporations (they have not done this since the Great Depression). 

So, if we again strip away all of the government/Federal Reserve rhetoric we see what is really happening.  On the surface, it appears that our leaders are doing whatever they can to help the situation.  If we take a close look at what is really happening, we see something else.  We see these ‘bailouts’ increasing the U.S. debt by enormous amounts, we see interest rates rising significantly and we see normal short-term funding drying up.  Do these efforts actually help or hurt the housing market?  Higher interest rates will certainly hurt the housing market.  Can the U.S. support trillions more debt?  As you’ve seen me explain before – the answer is no.  Sooner or later this is going to get very, very bad.  Is it good for corporations and banks to borrow directly from the Fed?  They are providing ‘solutions’ that are causing our government, corporations and banks to borrow even more from them.  Do we really need to be even more indebted to a cartel of international bankers?  As I’ve said before, we will not be able to get out of their grip until our monetary system changes. 

The truth is that central banks the world over are negatively impacting the world’s economy.  Their ‘solutions’ are simply accelerating the problems.  As I’ve said before, I believe that a plan is at work here – and it certainly doesn’t benefit us.

jg – October 16, 2008

October 16, 2008

Crisis Reverberates in Credit, Stock Markets

U.S. Efforts to Aid Debt Arena Cause Unintended Upshots

By LIZ RAPPAPORT and SERENA NG

Wall St. Journal

Government efforts to heal the credit markets are having unintended consequences that are roiling different sectors of the market and adding to anxiety among investors, who already are worried about the impact of a possible recession on U.S. companies.

Barely two days after the Treasury announced plans to buy stakes in U.S. banks and the Federal Deposit Insurance Corp. said it would provide guarantees on bank debt for three years, investors are making unexpected shifts.

Wednesday, bonds issued by mortgage providers Fannie Mae and Freddie Mac sold off sharply, even though these companies have government backing behind their debt. Traders said hedge funds were forced to sell as they deleverage, and investors were selling some Fannie and Freddie bonds -- known as agency debt -- and shifting money into bonds issued by large U.S. banks. These bank bonds boast higher yields and also would benefit from implied government guarantees, making them appear relatively safe in the eyes of risk-averse investors, for now.

The difference between yields on two-year Fannie Mae bonds and Treasury notes rose 0.25 percentage point Wednesday to 1.5 percentage points. That gap was less than a single percentage point when the government said in early September that it would place Fannie and Freddie under conservatorship.

The bonds issued by Citigroup Inc., Goldman Sachs Group Inc. and Bank of America Corp. gained over the last two days.

Investors have begun "to realize how potent the new FDIC-backed bank paper could be," said Jim Vogel, an analyst at FTN Financial, who recently noted that there is some debate over how explicit the government's guarantee of Fannie Mae- and Freddie Mac-backed debt is.

The agency debt's selloff is the latest unexpected market response to Federal Reserve and Treasury attempts over the past few weeks to plug the financial system's holes. The bailout plans may force the U.S. to issue new government debt that could drive up interest rates on mortgages, undermining efforts to rescue the housing market, the very problem that started it all.

Also, last month, the Fed moved to backstop short-term debt called asset-backed commercial paper, which led investors to pull away from the other half of the short-term debt market because it had no government guarantee. This debt was issued largely by corporations and European banks.

Not long after, the government's move to provide more insurance for bank deposits caused some money managers to change the way they allocate their funds.

"Things are moving so fast, it's hard for anyone to know what is going on," said Jim Goulding, manager at Chicago trading firm GH Traders LLC.

While Treasurys remain popular now, because of a flight-to-quality trend that feeds off their safety, another unintended impact may be in the wings. The bailout plans will result in massive new issuance of U.S. Treasurys, sold to pay for it all. This likely would dilute the Treasury bond market, drive down prices, push up yields and cause mortgage rates to rise.

A miniature version of this happened this week. The average 30-year mortgage rate, which is based off of the 10-year Treasury rate, rose to 6.75% Wednesday from 6.05% Oct. 6, as the 10-year Treasury yield rose, according to HSH Associates.

"You have unintended consequences that spark government actions, that create other unintended consequences," said David Kotok, chairman at money managers Cumberland Advisors.

The Fed's efforts to unlock the short-term markets also have had meddlesome effects. The FDIC may have stopped the flood of withdrawals from banks when it agreed to insure deposits in accounts up to $250,000, up from $100,000, but this has led many money-market fund managers to stay out of the short-term debt markets, particularly for commercial paper. They worry that cash-strapped Americans and corporate treasurers will favor simple bank accounts over their funds even though they pay slightly higher returns.

Money-market fund managers are traditionally large participants in the commercial-paper market, where companies and banks finance near-term obligations.

The managers remain uncomfortable investing in debt that matures in more than a day. They still are holding on to large cash positions in case they are hit with redemption requests from investors.

The government's plan isn't a "panacea for money markets," said Alex Roever, fixed-income strategist at J.P. Morgan Chase & Co.

In mid-September, when the Fed agreed to lend to U.S. banks with asset-backed commercial paper as collateral, the move was intended to unlock the market and help mutual funds sell the debt to banks in order to meet investor redemptions.

In the weeks following the Fed move, some commercial-paper brokers lamented that the Fed's implied backstop for the asset-backed commercial-paper market caused investors to favor the higher yielding asset-backed debt over unsecured commercial paper issued by many corporations and European banks.

The imbalance squeezed European banks already having trouble funding themselves, and the Fed ultimately had to step in again to offer short-term loans directly to companies and banks.

Write to Liz Rappaport at liz.rappaport@wsj.com and Serena Ng at serena.ng@wsj.com

I am amazed at how easily our leaders lie to cover up what is happening to our economy. It is ridiculous for Alan Greenspan to say he is ‘shocked’ by the current credit/financial crisis.  There is absolutely no doubt that the Federal Reserve setup the world system for a final, systemic failure during Greenspan’s watch.  Let’s take a look at a couple of his comments and compare them to reality.

“no one could have predicted the collapse of the housing boom and the financial disaster that followed” – Alan Greenspan

Really?  Let’s take a look at housing data and U.S. income from the 1970’s until now.

Home Prices vs Income

House Pricing Chart

We can see that housing prices began to diverge from income in the mid-1990’s.  By the year 2000, it was clear to anyone paying attention that a housing bubble was forming – housing prices cannot outpace income forever – people must be able to pay their mortgages.  This was certainly known by the Federal Reserve – it’s easy to see there was a problem.  Again, it’s doesn’t take a legion of Economists to understand this.  So, you can see that it’s ridiculous for Greenspan to say that no one could have predicted the housing market collapse.  There’s only one explanation for his comments – he’s lying.  Not only did the Federal Reserve know about this housing bubble – they contributed to the magnitude of the bubble!

In order to sustain this bubble for a longer period than the previous two recent housing bubbles (late 70’s and mid 80’s), something different had to happen.  What happened?  If you remember, we began to see a massive amount of liquidity flowing throughout the world.  Where did this liquidity come from?  Central Banks throughout the world were creating massive amounts of money through our monetary system (once again – exponential money growth) and reducing interest rates to almost nothing.  As a result, there was massive amounts of capital available for banks to lend – at low interest rates.  This fueled all types of ‘exotic’ mortgages – subprime, interest only, no down payments, option-ARMs, etc.  Banks had money to lend and created all kinds of ways to make loans.  Wall Street began providing massive amounts of funding – contributing to the problem.  Greenspan even told us that ARMs and variable interest rate loans were good options for mortgages.  This environment allowed the housing market to continue on its unsustainable ride – a ride that would end with a massive collapse.  This was not a surprise to Greenspan, Bernanke, Paulson, Bush or anyone else at the top echelons of power in our country.  If only Hollywood had actors as good as our leaders.  This would be entertaining if it was a fictional movie and they weren’t destroying the financial stability of our nation.

Let’s continue with a few more comments by Greenspan.

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."

“Former Fed Chairman Alan Greenspan said he was "shocked" by the breakdown in the credit system and told Congress the crisis was once in a century.”

Is this a once in a century crisis?  Currencies, commodities, stocks and banks the world over are collapsing.  I don’t think the world has seen what we’re experiencing.

Lawmakers read back quotations from recent years in which Mr. Greenspan said there's "no evidence" home prices would collapse and "the worst may well be over."

More lies.  As we’ve seen – it was obvious that housing prices would collapse.  He knew very well that the worst was not over.

“Amid the barrage of questions, Mr. Greenspan dodged and weaved. He would begin meandering responses in the elaborate phraseology that once served him so well, only to be cut off as lawmakers sought to use their brief question time for sharper attacks.”

I can only imagine what it must be like to continue lying in this environment.  This is a grand show – and everyone’s watching.

“Mr. Greenspan's confidence in the resilience of home prices -- shared by most in the industry at the time -- became a critical forecasting error. The belief spurred more mortgage underwriting because lenders assumed that borrowers living on the edge could always refinance or sell their homes for a profit if they ran into trouble. Instead, with home prices now falling, hundreds of thousands of homeowners are facing foreclosure.”

I know that millions of people expected to be able to refinance before interest rates increased or balloon payments came due.  Guess who slammed the door shut before people could escape from this nightmare?  I’ve said it before - we are dealing with some very evil people here.

“In an echo of the Watergate hearings 35 years ago, Mr. Greenspan was asked when he knew there was a housing bubble and when he told the public about it. He answered that he never anticipated home prices could fall so much. "I did not forecast a significant decline because we had never had a significant decline in prices," he said.”

We never had a massive decline in housing prices because we’ve never experienced a housing bubble as large as this one.  Factor in the effects of our monetary system (massive debt growing exponentially) and you’ve got a perfect financial storm.  It’s hard to even listen to the lies anymore.  Will anyone ever tell us the truth?

OCTOBER 24, 2008

Greenspan Admits Errors to Hostile House Panel

By KARA SCANNELL and SUDEEP REDDY

Alan Greenspan, lauded in Congress while the economy boomed, conceded under harsh questioning from lawmakers that he had made mistakes during his long tenure as Federal Reserve chairman that may have worsened the current slump.

In a four-hour appearance before the House Oversight Committee Thursday, Mr. Greenspan encountered legislators who interrupted his answers, caustically read back his own words from years ago, and forced him to admit that, at least in some ways, his predictions and policies had been wrong.

Former Fed Chairman Alan Greenspan said he was "shocked" by the breakdown in the credit system and told Congress the crisis was once in a century. Video courtesy of Reuters. (Oct. 23)

Former Federal Reserve Chairman Alan Greenspan testifies during a House Oversight and Government Reform Committee hearing on Capitol Hill Thursday.

Returning to Capitol Hill amid a financial crisis rooted in mortgage lending, Mr. Greenspan said he had been wrong to think banks' ability to assess risk and their self-interest would protect them from excesses. But the former Fed chairman, who kept short-term interest rates at 1% for a year earlier this decade, said no one could have predicted the collapse of the housing boom and the financial disaster that followed.

Lawmakers weren't buying his explanations. "You had the authority to prevent irresponsible lending practices that led to the subprime-mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price," said Rep. Henry Waxman (D., Calif.), chairman of the House committee.

Lawmakers read back quotations from recent years in which Mr. Greenspan said there's "no evidence" home prices would collapse and "the worst may well be over."

The 82-year-old Mr. Greenspan said he made "a mistake" in his hands-off regulatory philosophy, which many now blame in part for sparking the global economic troubles. He quoted something he had written in March: "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."

He conceded that he has "found a flaw" in his ideology and said he was "distressed by that." Yet Mr. Greenspan maintained that no regulator was smart enough to foresee the "once-in-a-century credit tsunami."

The hearing made clear how far the 18-year central banker's reputation had fallen from the days when he was hailed for his stewardship in keeping inflation low, holding growth up and helping pull the world through financial crises, including the Asian crisis and other turmoil a decade ago.

Greenspan: From the Archives

When Alan Greenspan retired in 2006 after 18½ years as chairman of the Federal Reserve, his economic legacy seemed secure: Inflation and unemployment were lower than when he took office, and during his tenure, the U.S. experienced just two mild recessions and its longest expansion on record. But today, that legacy is under fire amid the housing slump and financial crisis. Here is a look back at Greenspan as covered in the Journal:

Two and a half years after Mr. Greenspan left office, Congress is drawing plans to remake global financial regulation with the kind of tight government hand that he long opposed. At the same House hearing, Securities and Exchange Commission Chairman Christopher Cox, himself a longtime free-market Republican, said he supported merging his agency with the Commodity Futures Trading Commission, creating a beefed-up supercop to police certain previously unregulated financial products.

Amid the barrage of questions, Mr. Greenspan dodged and weaved. He would begin meandering responses in the elaborate phraseology that once served him so well, only to be cut off as lawmakers sought to use their brief question time for sharper attacks.

In an echo of the Watergate hearings 35 years ago, Mr. Greenspan was asked when he knew there was a housing bubble and when he told the public about it. He answered that he never anticipated home prices could fall so much. "I did not forecast a significant decline because we had never had a significant decline in prices," he said.

Mr. Greenspan's confidence in the resilience of home prices -- shared by most in the industry at the time -- became a critical forecasting error. The belief spurred more mortgage underwriting because lenders assumed that borrowers living on the edge could always refinance or sell their homes for a profit if they ran into trouble. Instead, with home prices now falling, hundreds of thousands of homeowners are facing foreclosure. Prices nationwide have fallen nearly 20% since their 2006 peak, and many economists foresee a further decline of 10% or more in the next year.

The difficulties of forecasting served as a key defense for Mr. Greenspan. The Federal Reserve, with its legions of Ph.D. economists, has a better forecasting record than the private sector, he said, but that's still not enough to prevent every problem. "We were wrong quite a good deal of the time," he said. Forecasting "never gets to the point where it's 100% accurate."

Subprime mortgages led to a global economic crisis in considerable part because of securitization, in which the home loans were sliced up, packaged into securities and sold off to investors all around the world. Anticipating such a crisis is "more than anybody is capable of judging," Mr. Greenspan said.

If the best experts were not able to foresee the development, "I think we have to ask ourselves, 'Why is that?'" Mr. Greenspan said. "And the answer is that we're not smart enough as people. We just cannot see events that far in advance."

He continued, "There are always a lot of people raising issues, and half the time they're wrong. The question is what do you do?"

Lawmakers, stung by having to put $700 billion of taxpayer money on the line to rescue the financial system, were unmoved throughout the hearing, and eager to make their own points about the situation.

Rep. John Yarmuth, Democrat of Kentucky, hit Greenspan close to home, calling the avid baseball fan one of "three Bill Buckners." That was a reference to the Boston Red Sox first baseman whose flubbed handling of a routine grounder cost his team the 1986 World Series. Former Treasury Secretary John Snow and Mr. Cox, who sat alongside Mr. Greenspan, also got tagged with that comparison.

Lawmakers homed in on a warning the late Fed governor Edward Gramlich gave Mr. Greenspan in 2000 about potential problems in lending practices. Mr. Greenspan said he agreed but added that if the matter was of such high concern, a Federal Reserve subcommittee would have presented it to the full board. He said that never occurred.

The former Fed chief also said he was often following the "will of Congress" during his long tenure and did "what I am supposed to do, not what I'd like to do."

Mr. Greenspan has spent much of this year defending his record at the Fed, trying to take apart arguments to show how his decisions were far less significant than outside forces in causing the crisis.

The central bank is blamed for too vigorously spurring home buying through its low short-term interest-rate targets, which were initially set to fight the economic slump after the dot-com bubble burst in 2000-01. Mr. Greenspan maintains that the development of China and other factors fostered low rates -- around the globe and not just in the U.S. -- contributing to a housing boom that was world-wide.

Lawmakers took Mr. Greenspan to task for his advocacy of credit-default swaps, an unregulated kind of insurance contract that can help investors protect themselves against another party's bankruptcy. Credit-default swaps were also used as a way of taking risks and are widely blamed for adding to financial-market instability. Rep. Waxman asked pointedly, "Were you wrong?"

Mr. Greenspan said, "Partially." While he cautioned the lawmakers against excessive regulation, he said credit-default swaps "have serious problems" and, after some pointed questions, agreed they should be subject to oversight.

The treatment was a striking contrast with one of Mr. Greenspan's last appearances before Congress as Fed chairman, on Nov. 3, 2005. "You have guided monetary policy through stock-market crashes, wars, terrorist attacks and natural disasters," Rep. Jim Saxton (R., N.J.) told him then. "You have made a great contribution to the prosperity of the U.S. and the nation is in your debt."

—Brian Blackstone contributed to this article.

Write to Kara Scannell at kara.scannell@wsj.com and Sudeep Reddy at sudeep.reddy@wsj.com

October 24, 2008

There is so much bad news right now it’s impossible to keep track of it all.  If you are still debating whether this is a crisis and whether the stock market can go any lower – I assure you – it is a crisis and world markets will go lower.  We haven’t yet seen the stampede – but there are many, many people around the world who are inching closer to the door.  The same problems exist throughout the world. We are watching a slow motion train wreck – that is rapidly picking up speed.

The following excerpts were taken from Articles in the Wall St. Journal over the past 2 days:

“A new wave of fear seized investors and trading floors around the world Friday, resulting in an across-the-board drop in stocks.  The Dow Jones Industrial Average was recently down 352.26 points, or 4.1%, at 8338.89, hurt by declines in all 30 of its blue-chip components. The S&P 500 tumbled 4% to 871.64. All its sectors traded lower, led by energy, off 6.3%, and technology, off 7%. Health care, a traditional investor haven, saw more modest losses and was down 2.1%.  The selling was prompted in part by signs that economies around the world are beginning to crack.”

“Disappointing corporate earnings and intensifying recession worries slammed Asian stock markets Friday, leading to drops of 10.6% in South Korea and 9.6% in Japan and capping a tough week for the region's investors.  Asian markets slumped across the board, with Mumbai down 9.4% intraday and Hong Kong ending 8.3% lower. Singapore was down 8.7% near the end of the trading day.”

“European shares tumbled Friday as fears of a long and deep recession grew, with the auto sector slumping after profit warnings from Renault and Peugeot-Citroen as well as weak results from Swedish truck maker Volvo.  The pan-European Dow Jones Stoxx 600 Index dropped below 200 for the first time since mid-2003, falling 8.4% to 191.21. Among regional markets, the U.K. FTSE 100 Index dove 8.4% to 3746 and the German DAX Xetra Index dropped 9.1% to 4109.48. The French CAC 40 index was down 8.8% at 3021.26.”

“Tempting as it is to ascribe the heavy sell-off in blue-chip European stocks Friday to fear and panic, there is one good fundamental reason why the stock market rout continues. Recent robust revenue growth for Europe's biggest companies has come largely from emerging markets, after years of heavy investment in new capacity and purchases of local rivals.  Macroeconomic data tell the story of corporate Europe's emerging-market push. EU exports to China, India and Southeast Asia rose 56% to 228 billion euros between 2000 and 2007, with China and India accounting for 44% of that total.  But now emerging-market bets are off. The credit crunch has caught up with developing economies with big current deficits and open financial markets with sickening speed. It's created a widespread crisis, from Argentina and Hungary to the Persian Gulf and South Korea. Suddenly, the engine of double-digit topline growth for many European companies seems to be about to stall.  That's why investors Friday wiped out nearly a fifth of the value of banks such as HSBC, Barclays, Societe Generale and UniCredit, all of whose emerging-market business has helped them do relatively well through the credit crunch. That business now looks like an extra liability.”

“Russia's currency fell to a new two-year low despite billions being spent by Moscow to prop it up, and the country's fast-shrinking mountains of reserves and oil revenues threatened to reduce its credit rating, a key marker of its recent resurgence. The new wave of problems -- coming on top of a stock market fall of 70% from its May peak -- highlights how quickly the global financial crisis has reversed Russia's fortunes. Worried about the turmoil, Russians have hurriedly taken to converting their ruble savings into dollars and euros, driving street exchange rates even lower than the official one.”

“Underscoring the growing impact of the global financial crisis on Latin America, central banks in Mexico and Brazil deployed billions of dollars of reserves on Thursday to stem steep currency declines that are testing the region's hard-won economic stability.  The simultaneous moves provided a snapshot of a region caught off-guard by the swiftness and depth of currency plunges prompted by the U.S. financial crisis. Now, policy makers are scrambling to reduce the potential for economic wreckage, seeking to reduce volatility as their currencies lurch toward new postcrisis levels. "These are exceptional times, and they call for exceptional measures," says Paulo Leme, a senior Goldman Sachs economist who follows Latin America.”

“South Korea's stock market and currency took another beating Friday amid mounting global fears at the toll that recession will take even in countries like this one, which is unlikely to tumble into negative growth. The benchmark Kospi Index fell 10.6% to below 938.75, its lowest level since July 2005. The close also marked the Kospi's first dip below 1,000 since then and its worst week on record, in which it finished down 20.5% for the week and is off 35.2% so far this month.  Meanwhile, the South Korean won plunged to 1,424 per U.S. dollar, its lowest level since June 1998 and down 33.8% against the dollar this year. And the Bank of Korea reported that South Korea's third-quarter gross domestic product expanded at a seasonally adjusted 0.6%, the weakest level in four years.”

“On Wednesday, it was Hungary's turn to take desperate measures. As the financial shock that began in the U.S. reached deeper into emerging markets, Hungary's central bank took the dramatic step of raising interest rates by a steep three percentage points in order to prevent a run on its currency.  Its move came as Belarus and Pakistan said Wednesday they are seeking large infusions of aid from the International Monetary Fund, while Ukraine suggested it is close to getting one. The Brazilian and Argentine stock markets each fell about 10% Wednesday, outpacing a steep drop in U.S. stocks. The growing rout in emerging markets is dashing hopes that developing nations would prop up world economic growth at a time when the U.S. and Western Europe are experiencing the worst financial instability in decades. Instead, many emerging markets are the world economy's new problem children.”

“German banks have bled billions of euros in the U.S. subprime-mortgage debacle. Now they face another potentially big bill from a costly misadventure in Iceland. The Icelandic bet is the latest illustration of how German banks -- including once-sleepy regional lenders -- ranged far and wide in recent years in search of yield to escape stiff competition and low profit margins on their home soil. By June of this year, before Iceland's spectacular financial meltdown, German financial institutions had lent $21.3 billion to Icelandic borrowers, according to the Bank for International Settlements. That was well over a quarter of all foreign lending in Iceland, and roughly five times as much as Britain, the next-largest creditor country. Iceland's three largest banks -- and the country's main debtors -- collapsed this month, plunging the country into crisis. Kaupthing Bank, Iceland's biggest, missed a coupon payment this week on 50 billion yen ($512 million) of bonds in Japan, heightening default concerns.”

“The Icelandic government is likely to ask the International Monetary Fund for financial help over the weekend, as the country's foreign-exchange market remains dysfunctional and questions mount over Iceland's near-term debt obligations, a key government official told Dow Jones Newswires Friday. Financial markets worry about the government's ability to meet debt obligations as Iceland drastically shakes up its financial system. The Icelandic Financial Supervisory Authority, or FME, confirmed that the principal of a $750 million corporate bond from nationalized Glitnir Banki Hf. that matured Wednesday went completely unpaid. FME spokeswoman Kate Hill said the FME, the government and advisers are in the process of sorting out Icelandic bank assets and liabilities.”

“China's government is racing to make sure one of the world's biggest housing booms doesn't turn into a bust. How the swoon in housing plays out in coming months may largely determine how severe the nation's economic slowdown during the global financial crisis will be -- and how acute the world-wide repercussions of the slump will be, as China's demand for construction materials declines. While housing bubbles around the world have burst, China's market has been seen as different because its surge in home building has been driven less by financial leverage than by real demand from a rapidly urbanizing population. Anywhere from 15 million to 20 million people move to Chinese cities each year. But sales of new housing in China have plummeted in recent months as buyers have been spooked by a deteriorating economy and weakening prices.”

“The U.K. economy slumped in the third quarter amid the global financial crisis, becoming the latest developed nation to experience an economic contraction.  The Office for National Statistics said Friday that the economy contracted a far-bigger-than-expected 0.5% in the third quarter, compared with zero growth in the second quarter. It is the first time the economy has contracted since the second quarter of 1992 and the biggest drop since the fourth quarter of 1990.”

“Transportation companies are reporting sharply lower freight volumes, a sign that the pipelines of global commerce have begun to slow.  Goods shipped by truck, train and ship have all fallen off in volume, and freight companies are now forecasting a slump as the credit crisis slows manufacturing and puts the brakes on consumer spending. Shipping companies are considered a barometer of economic health, which makes the current downturn particularly worrisome.”

“At the same time, the median U.S. home price was $191,600 in September, down 9.0% from $210,500 one year ago. That $191,600 median price is the lowest since April 2004. The median price in August this year was $203,100.”

“Employers grappling with the financial crisis and a slowing economy are accelerating and broadening job cuts in multiple industries, potentially deepening the economic downturn.  Xerox Corp., General Motors Corp. and bottler Coca-Cola Enterprises Inc. disclosed new job cuts Thursday, following layoff announcements earlier in the week by Chrysler LLC, Merck & Co. and Yahoo Inc., among others. The economic slowdown, previously concentrated among housing- and finance-related employers, is spreading to once-sheltered sectors like health care and technology.”

“Chrysler LLC told employees Friday it will cut 25% of its white-collar jobs next month.  In a letter to employees, Chief Executive Robert Nardelli said the cuts are necessary because of the deep downturn in the economy and the tightening credit situation, which are choking off auto sales.  Mr. Nardelli said the company is facing the "most difficult economic period any of us can remember."

“Despite the darkening outlook for the U.S. economy, few banks have taken extra precautions to protect against sharply higher bad-loan losses…. Additions to loan-loss reserves are an expense on the income statement. As a result, moves to beef them up could crush banks' earnings power.”

“Denmark's central bank Friday raised its key policy rate for the second time this month to prop up the country's struggling currency as the global financial crisis continues to wreak havoc. Danmarks Nationalbank said it increased its key lending rate and the interest rate for certificates and deposits to 5.5% from 5% "as a result of continued intervention to support the Danish krone."

“In a matter of weeks, the tempest in global markets has undone years of hard-won gains by emerging economies. Over the past month, borrowing costs for governments in emerging markets have ballooned to levels that haven't been seen in six years, and they continued to rise Thursday. Investors are especially frightened of countries with financing needs and weakening economic fundamentals that could tip into a deeper crisis, like some in Eastern Europe. But even countries with comparatively solid balance sheets are seeing their outlook darken as access to credit tightens and global economic growth slows sharply.”

“European central bankers signaled interest rates are likely to head lower as the financial crisis nudges Western Europe closer to recession.”

“Eager to rein in a dramatic slide in oil prices, OPEC decided Friday to make a deep cut in oil production, taking 1.5 million barrels a day off global markets as it embarks on the challenging task of managing prices amid a potential global recession.”

“Driven by once insatiable demand from China and other developing countries, service center owners and metal dealers built vast stockpiles of scrap steel, aluminum, copper and nickel, expecting prices to continue rising.  But in the last six weeks, scrap steel prices have fallen nearly 60% to about $400 a ton. Prices for aluminum scrap has dropped 33%, copper 25% and nickel about 15%. Peter Marcus, metals analyst for World Steel Dynamics, says, "We aren't near the bottom yet."

“Liz Claiborne Inc. slashed its 2008 earnings view and said it is curtailing capital spending amid slumping sales. The apparel retailer also said it will post a third-quarter loss due to restructuring charges.  Liz Claiborne, like other retailers, is struggling as consumers cut back on discretionary spending due to the weakening economy. The company warned that it may cut its outlook further if the deterioration in demand continues.”

“Samsung Electronics Co. said its third-quarter net profit fell 44% as its major divisions recorded smaller operating profits simultaneously for the first time since mid-2005.  Samsung's semiconductor business, for years its biggest profit contributor, experienced the sharpest decline and was barely profitable because of a prolonged cycle of tight pricing for memory chips used in computers and other gadgets. Profits in its cellphone and flat-panel-display units also tightened. Samsung expects the fourth quarter, usually the best for electronics makers, to be "an even more challenging period," said Chu Woo-sik, the company's investor-relations chief. He cited rising component costs and the effect that the global economic slowdown would have on consumer purchases of electronics.”

“Microsoft Corp. reported a 2% increase in fiscal first-quarter net income on a 9% rise in revenue, and lowered its financial forecasts for the rest of the year because of the gloomy economy.”

“Citing the global economic turmoil and a strengthening yen, Sony Corp. sharply lowered its outlook for its fiscal year ending March 2009, a blow to the company whose nascent recovery was already looking fragile. The Tokyo-based electronics giant warned that the deteriorating business climate could force the company to scale back capital spending, close plants and cut jobs to shore up profit.”

“Amazon.com Inc. reported a 48% increase in profit and a 31% revenue jump for the third quarter, but issued a cautious projection ahead of the key holiday season.  The revised sales outlook comes just three months after the Seattle-based Internet retailer had raised its revenue forecast for the year, showing how quickly the consumer spending environment has declined. Amazon shares fell more than 13% after hours on the news.”

“Gannett Co.'s third-quarter net income slid 32% as the media company grappled with slumping advertising sales and higher newsprint prices. Gannett, which publishes 85 daily newspapers and operates 23 television stations, posted net income of $158 million, or 69 cents a share, down from $234 million, or $1.01 a share, a year earlier.”

“Credit Suisse Group, one of the few banks to skirt massive credit losses, said in-house bets contributed to a third-quarter loss, signaling the challenges banks face in navigating volatile markets. The bank said 2.43 billion Swiss francs ($2.09 billion) in write-downs on mortgage securities and unsold buyout loans, as well as a 1.7 billion franc trading loss, left it with a 1.3 billion franc net loss for the quarter. The results sting CEO Brady Dougan, who has been steering pretty successfully through the credit crunch. Mr. Dougan called the results "clearly disappointing."

“The shift is being echoed across Silicon Valley, where executives at startups—which form the foundation of the tech economy—are now deferring expansion projects, taking voluntary pay cuts, delaying hiring plans and slashing expenses. The shift is a turnabout for the region's young companies, which have traditionally focused on go-go growth by grabbing customers early and being first to market with new technologies.  The change is being spurred by the souring economy and market gyrations, which have hit startups' main source of funding: venture capital.”

“College seniors may have more trouble landing a job next spring than recent graduates, as employers trim their hiring outlooks in response to the slowing economy and financial-sector turmoil. Employers plan to hire just 1.3% more graduates in 2009 than they hired this year, according to a survey by the National Association of Colleges and Employers. That's the weakest outlook in six years and reflects a sharp recent downturn. Just two months ago, a survey by the same group projected a 6.1% increase in hiring.”

jg

Another country lining up to support additional oversight of financial markets.  We’ve seen the U.S., Latin America, Europe (Italy, Britain, France, Germany) and now China support a move for more regulation – all within the past 2 weeks.  We’re going to see more and more articles like this in the coming months as the global elite continue to push their agenda forward.

OCTOBER 27, 2008

China Backs Europe's Push for Oversight

By IAN JOHNSON

Wall St. Journal

BEIJING -- After several days of talks between European and Asian leaders, China apparently has allied itself with Europe in calling for a vigorous system of international regulation.

AFP/Getty Images

Chinese Premier Wen Jiabao answers questions in Beijing on Oct. 25.

In closed-door talks with European leaders Friday and Saturday, senior Chinese officials said they would back Europe's effort to overhaul international regulatory systems, European diplomats present at the meetings said. China most strongly stated its position Friday in a talk between Chinese President Hu Jintao and José Manuel Barroso, president of the European Commission.

Mr. Hu, according to diplomats at the meeting, said China would "actively cooperate" with the EU, which has been pushing an ambitious new system of global oversight. Formal talks on the new overhauls would begin in mid-November in Washington.

"The Chinese said they'd back more vigorous reforms," a senior European diplomat said in an interview. "They rely on the global economy and are afraid it's become very unstable."

Chinese officials had no comment on the closed-door meeting. In public statements, Chinese leaders issued milder endorsements of reforms. At the close of the seventh Asia-Europe Meeting on Saturday, for example, Chinese leaders backed the 45 nations' statement, which expressed "the need to improve the supervision and regulation of all financial actors, particularly their accountability."

Foreign diplomats have been keen to see how China would come down on the issue of regulation. On one hand, China values stability and thus would seem naturally to support regulation. On the other, it likely doesn't want international institutions that curb its sovereignty or constrain its financial flows.

In Brussels, EU officials said they weren't surprised China agreed to side with the EU in pushing for new rules for financial markets. "They want a seat at the table in whatever is going to happen," said an EU official who attended an Oct. 15-16 summit that drafted the EU's plan.

U.S. officials said that the Beijing meetings underscore the importance of President Bush's global economic summit, scheduled for Nov. 15 in Washington after the presidential election. The White House hopes to use the summit to discuss the crisis's underlying causes, analyze responses and develop principles to reform the global financial architecture.

Bush administration officials acknowledged their concerns that some countries could seek to use the financial crisis to move against free trade and promote more centralized economic models. "Whatever else we do, the summit needs to enhance our commitment to free markets and free trade -- the fundamental policies that have increased standards of living," said a U.S. Treasury Department official.

—John W. Miller in Brussels and Jay Solomon in Washington contributed to this article.

Write to Ian Johnson at ian.johnson@wsj.com