Thursday, October 30, 2008

American Express to cut 7,000 jobs
Thursday October 30, 1:38 pm ET
By Sara Lepro, AP Business Writer

American Express to cut 7,000 jobs in effort to reduce costs by $1.8 billion next year
NEW YORK (AP) -- In a stark acknowledgment of the tough times ahead in the credit card industry, American Express Co. said Thursday that it plans to cut 7,000 jobs, or about 10 percent of its worldwide work force, in an effort to slash costs by $1.8 billion in 2009.

The New York-based credit card issuer -- which has reported four straight quarters of profit declines as an increasing number of consumers struggle to pay off debt -- said it is also suspending management-level salary increases next year and instituting a hiring freeze.

The job cuts will be across various business units, but will primarily focus on management positions, the company said.

Additionally, American Express said it plans to scale back investments in technology and marketing and business development, and streamline costs associated with some rewards programs. The company also expects to cut expenses for consulting and other professional services, travel and entertainment and general overhead.

As a result, American Express plans to take a restructuring charge of between $240 million and $290 million in the fourth quarter.

The company has been gearing up for a big restructuring for some time, first announcing in July that it planned to reduce overall costs and staffing levels, and take a related charge during the second half of the year.

"We've been engaged for the past few months in an intensive, companywide review of priorities and staffing levels," said Kenneth I. Chenault, chairman and chief executive, in a statement. "The re-engineering program we announced today will help us to manage through one of the most challenging economic environments we've seen in many decades. It will also put us in position to ramp up investment spending as economic conditions improve so that we can take advantage of the substantial opportunities that will be available to us over the medium to long term."

Last week, American Express reported a 24 percent decline in third-quarter profit. The report echoed recent results from JPMorgan Chase & Co., Citigroup Inc. and Capital One Financial Corp. showing that the credit card environment is worsening as cardholders have trouble paying off debt and pull back their spending.

Even a company like American Express, which prides itself on catering to a more well-heeled clientele, is not immune.

The company's customers tend to be more affluent than those of other card companies, but they are more heavily concentrated in California and Florida, where the slumping housing market is taking a toll. American Express also has a higher percentage of small-business customers, and small businesses tend to miss payments more than individuals, executives have said.

"Cardmember spending is likely to remain soft," Chenault said in a statement last week. "Loan growth will be restrained, in part because of the steps we are taking to reduce credit risks, and credit indicators are likely to reflect the continued downturn in the economy and throughout the housing sector."

American Express has been able to finance its operations amid the tight credit markets, but the efforts have been tougher and more costly.

Shares rose 60 cents, or 2.4 percent, to $25.81 in afternoon trading. Shares have traded between $20.50 and $61.55 in the past 12 months.

Sunday, October 26, 2008

Russia is looking like another Default is Imminent
Russia appears to be experiencing a run on it's banks and markets already.

Russian default risk tops Iceland as crisis deepens
Russia's financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default.

By Ambrose Evans-Pritchard
Last Updated: 5:50PM BST 24 Oct 2008

Russia's financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default.

The cost of insuring Russian bonds against bankruptcy rocketed to extreme levels yesterday. Spreads on credit default swaps (CDS) reached 1,123, higher than Iceland's debt before it sought a rescue from the International Monetary Fund.

Moves by Hungary, Ukraine and Belarus to seek emergency loans from the IMF have now set off a dangerous chain reaction across Eastern Europe.

Romania had to raise overnight interest rates to 900pc on Wednesday to stem capital flight, recalling the wild episodes of Europe's ERM crisis in 1992. The CDS spreads on Ukraine's debt have topped 2,800, signalling total revulsion by investors.

Rating agency Standard & Poor's issued a downgrade alert on Russian bonds yesterday, warning that a series of state rescue packages worth $200bn (£124bn) could start to erode the credit-worthiness of the state.

S&P said Russia's budget was likely to slip into deficit in 2009 as result of the dramatic slide in oil and metal prices this autumn, and cautioned that "the ongoing concentration of the financial system in state hands" had become a political risk.

Russian companies must roll over $47bn of foreign loans over the next two months, and a further $150bn or so next year, a task that has become close to impossible as investors flee Eastern Europe.

President Dmitry Medvedev said yesterday that disaster could still be kept at bay. "We can avoid a banking, forex or debt crisis and get through today's difficulties. Russia has not yet got in this difficult situation. It must avoid this," he said.

Hans Redeker, currency chief at BNP Paribas, said markets no longer believe Russia is strong enough to guarantee the estimated $530bn of foreign debts accumulated by its companies during the break-neck expansion of the oil boom. "The surge in Russian CDS spreads is paralysing the whole system. The government can offer very little help to the banks at this point because its own sovereign debt is in question," he said.

"This crisis is starting to look like the Black Wednesady in 1992. Unless we see an extension of central bank swaps in dollars and euros to Eastern Europe within days to stop this uncontrolled process of deleveraging, this could get out of control and do serious damage to Western Europe. We could see the euro fall to parity against the dollar by next year," he said.

Kingsmill Bond, chief strategist at Russian investment bank Troika Dialog, said Russia's Achilles Heel is the lack of a proper rouble bond market. This had forced companies to raise half their money abroad, in foreign currencies.

"The consequence is that foreign debt repayment has had a dramatic impact. It has led to a scramble for assets and forced selling of good assets in order to raise cash to pay debt. The only way for oligarchs to raise money at present is by selling their equity," he said. Russia's "unique fragility" is that over $1 trillion of debt needs to financed from a domestic capital pool of $600bn.

Even so, Mr Bond said Russia is still sitting on over $500bn of foreign reserves – the world's third biggest – despite losses of $67bn since August from capital flight. "The government still has enormous firepower to solve the problem," he said.
Posted for fair use....

Syria: US choppers attacked targets on our soil, near Iraq

Oct. 26, 2008
Associated Press , THE JERUSALEM POST

US military helicopters attacked an area along Syria's border with Iraq Sunday, causing casualties, Syrian state TV and witnesses said.

The television report quoted unnamed Syrian officials and said the area is near the Syrian border town of Abu Kamal. It gave no other details.

Local residents told The Associated Press by telephone that two helicopters carrying US soldiers raided a farm in Hwijeh village, 10 miles (17 kilometers) inside Syria's border, killing seven people and wounding five others. One of the witnesses said five of the dead were from a single family.

The residents refused to allow their names to be given because they feared they would be harassed by authorities.

The US military in Baghdad had no immediate comment.

The area is near the Iraqi border city of Qaim, which had been a major crossing point for fighters, weapons and money coming into Iraq to fuel the Sunni insurgency.

Iraqi insurgents seized Qaim in April 2005, forcing US Marines to recapture the town the following month in heavy fighting. The area became secure only after Sunni tribes in Anbar turned against al-Qaida in late 2006 and joined forces with the Americans.
IMF vultures circle Iceland

Tim Dobson
25 October 2008

Faced with the complete collapse of its financial system, the Icelandic government has accepted a US$6 billion “bailout package”, which would include more than $1 billion input from the International Monetary Fund.

The IMF is infamous for its global “shock therapy” approach to economic problems, where loans are granted on the provision that the receiving governments implement harsh austerity, privatisation and deregulation measures. Such measures have had disastrous effects on many countries.

Iceland has been especially hard hit by the global economic crisis, driven to the brink of bankruptcy.

Having nationalised Iceland’s three major banks, Prime Minister Geir Haarde stated: “There [was] a very real danger … that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy.

“The state now owes more than $60 billion, more than 80% of which was held by the banking sector, which is more than six times its annual gross domestic product.”

Iceland’s crisis was greatly worsened by the neoliberal drive led by the right-wing Independence Party (IP), which has dominated Icelandic politics since independence in 1944.

The regime of former IP prime minister from 1991-2004, David Ottison, implemented “a radical (but now familiar) program of privatization, tax cuts, reductions in spending and deficits, inflation targeting, central bank independence, free trade and exchange rate flexibility”, according to an October 21 article by Toby Sanger.

“Corporate taxes were cut from 50 percent down to 18 percent. Privatization and deregulation were driven directly through the prime minister’s office, and the major banks were privatized.”

The potential problems behind such moves were identified by former World Bank chief economist Joseph Stiglitz, who commented in his working paper prepared for the Icelandic government in 2001 on the “problems posed by global financial instability”.

He stated: “Tax and regulatory policies (including financial sector regulation and disclosure regulation) can and should be used both to reduce the likelihood of a crisis and to help manage the economy through the crisis.”

The government chose not to listen to Stiglitz’s advice as its financial and banking sector aggressively expanded overseas, while offering higher interest rates. This resulted in billions of dollars flowing into the Iceland’s finance sector, particularly from Britain.

This fuelled economic growth, which has averaged 4% since 1994, and helped created Icelandic billionaires, such as West Ham Football Club owner Bjorgolfur Guomundsson.

However, with the banks overseas expansion, they raked up debts 10 times the size of Iceland’s GDP. With a meltdown in the financial system, Iceland’s government, unlike other larger nations, could not guarantee the debts of the banks, leading the main three to collapse.

The impact has been severe — the Icelandic economy is expected to contract by 10% in 2009, while 2008 growth is expected to be zero.

Immediate job losses are set to be 7000 in a country of only 350,000 people, while the unemployment rate could rise to as high as 8% in 2009 from around 3% currently.

According to an October 15 Bloomberg report, Danske Bank chief analyst Lars Christensen predicted that inflation could rise to 75%, while Iceland’s currency, the krona, has declined in value by 35% this year.

The government has placed restrictions on foreign currency exchanges, which means Iceland now can only import products such as food, medicine and oil.

The crisis was made worse, however, by Britain’s intervention. Britain used “anti-terrorism laws” on October 8 to freeze all assets of the Icelandic bank Landsbanki, as well as assets belonging to the Central Bank of Iceland.

Britain claimed it carried out the move “because the Treasury believed that action to the detriment of the UK’s economy (or part of it) had been or was likely to be taken by certain persons who are the government of or resident of a country or territory outside the UK”.

The British government also placed the British operations of Iceland’s largest bank, Kaupthing, into administration.

The head of the Left Green parliamentary bloc, Ogmandur Johnson, told the US radio show Behind The News that this action was responsible for the bank’s collapse. Britain has “forgotten nothing from its colonial days”, he stated, and was treating Iceland in an “incomprehensible manner”.

Haarde, meanwhile, described Britain’s the move as an “unfriendly act”.

The October 20 British Financial Times reported on the IMF loan to Iceland, stating: “The IMF sought assurances on the restructuring of the banking sector and has demanded a review of Iceland’s banking legislation to ensure it conforms with international best practice.”

“Crucially, the IMF is not insisting on the privatisation of Iceland’s huge Housing Financing Fund, a state-backed mortgage lender”, the article reported. “The IMF will ask the government to compile a credible plan for fiscal tightening in response to government debt levels.”

This means that, in effect, all decisions about Iceland’s economy will be subject to IMF approval. Such an approach has been a universal disaster wherever it has been implemented.
Europe on the brink of currency crisis meltdown
The crisis in Hungary recalls the heady days of the UK’s expulsion from the ERM.

By Ambrose Evans-Pritchard
Last Updated: 9:17PM BST 25 Oct 2008

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.

“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.

They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn.

Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.

Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.

The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.

The IMF’s experts drafted a report two years ago – Asia 1996 and Eastern Europe 2006 – Déjà vu all over again? – warning that the region exhibited the most dangerous excesses in the world.

Inexplicably, the text was never published, though underground copies circulated. Little was done to cool credit growth, or to halt the fatal reliance on foreign capital. Last week, the silent authors had their moment of vindication as Eastern Europe went haywire.

Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch attempt to defend the forint’s currency peg in the ERM.

It is just blood in the water for hedge funds sharks, eyeing a long line of currency kills. “The economy is not strong enough to take it, so you know it is unsustainable,” said Simon Derrick, currency strategist at the Bank of New York Mellon.

Romania raised its overnight lending to 900pc to stem capital flight, recalling the near-crazed gestures by Scandinavia’s central banks in the final days of the 1992 ERM crisis – political moves that turned the Nordic banking crisis into a disaster.

Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik.

The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.

Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union.

The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.

Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that East Europe’s currency pegs will be smashed unless the EU authorities wake up to the full gravity of the threat, and that in turn will trigger a dangerous crisis for EMU itself.

“The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money supply is about to implode,”he said.

A grain of comfort for British readers: UK banks have almost no exposure to the ex-Communist bloc, except in Poland – one of the less vulnerable states.

The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?
Found in and around the Frankston area...just struck me...

Remember to be good to the little kids on Halloween! Be safe as well!

Wednesday, October 15, 2008

Scenes from Oktoberfest
Have never seen so many folks in downtown!
Great time was had by all!

America Has Died - To Thunderous Applause
by Karl Denninger

America's House and Senate, just a couple of short weeks ago, passed a law that was denounced by The American People, where representatives and senators were receiving calls 50:50 against - 50% "No" and 50% "Hell No".

In response, Wall Street banks employed spam-call-banks to "counter" this outpouring of public opinion and CEOs of Fortune 500 companies broke the law by sending out emails and other communications that essentially threatened their employees with loss of their job if they did not lobby for this horrible bill to be passed.

The bill passed after Henry Paulson and Ben Bernanke threatened Congress with the imposition of Martial Law. Yeah. Tanks in the streets stuff. Literally.

This was disclosed in the well of the house by a few brave representatives, including Representative Sherman.

Were you told this was how Congress was browbeaten into passing this law? Were you told that Congress was essentially threatened that tanks would be deployed into our cities and towns if Congress did not pass this bad law that Paulson and Bernanke demanded?

Well, yes you were. Representative Sherman disclosed this fact in an impassioned speech in the Well of the House.

Did CNBC or CNN report that? No, but CSPAN did carry it.

If you watched.

But the law was in fact to allow the buying of $700 billion of "troubled mortgages" and related assets.

Or was it?

See, buried in that bill was a nasty little catch-all "any other asset the Treasury says promotes financial stability."

One little sentence, with which you surrendered forever the principles of economic capitalism and replaced them with government totalitarianism.


And a week later half of that money was instead spent on a massive bailout of Wall Street through the injection of perpetual preferred stock, saving every single nickel of executive stock and options. No dilution of existing shareholders, nor any haircut for their bondholders, thereby preventing the capital structure of the firms from absorbing the losses as is intended and required under the law.

In other words, you, The Taxpayer, have been intentionally looted by the puppet-masters at Treasury (Hank Paulson) and The Fed (Bernanke, Geithner, to the tune of $250 billion dollars, while these folks in the so-called "private sector" keep each and every nickel of the money they stole from you while peddling their fraudulently-sold and packaged subprime and Option ARM mortgages.

Law standing for more than 200 years intended to guarantee that the stockholders and bondholders of a firm stand in a carefully-chosen capital structure as the cushion when a firm becomes incapable of providing for itself was destroyed not through the operation of law or statute, but by executive fiat. Instead of being forced to accept the loss that should have come from the imprudent and even felonious acts of these firms and their executives, we, the taxpayer, are instead having our pockets picked, with our children and grandchildren, along with those not yet born, being forced to absorb the bill. Instead of those stockholders being expected to shoulder the loss as a direct consequence of their refusal to hold management accountable for its bad conduct, we the people are handed that loss in the form of foreclosures, higher interest rates and insane inflationary spirals.

Unlike in Sweden, which had a similar banking crisis, no disclosure of balance sheet "asset values" has been required, no executives were fired, compensation was not clawed back and no executive stock or options were voided. Those who "invested" in these firms were "protected" from the just cost of the foibles and even felonies committed by any and all up and down the chain, and the executives have kept their homes and yachts in The Hamptons - not because they earned them, but because our so-called "government" granted to them a monstrous bailout check written on your wallet, your children and your grandchildren.

You, on the other hand, will get exactly nothing out of this. Not one job will be created. House prices will continue to fall and foreclosures will continue to mount. The "bankruptcy reform" law remains, meaning if you can't pay you will be turned into a perpetual debt slave. The real economy will get nothing from this. Bridges, roads and schools will receive not one nickel from this massive transfer of your money to the wealthy bankers who robbed, cheated and stole from you. States will get nothing, even though their budgets are squeezed as well.

In short, none of the money is going to help you, the consumer, the real economy, or the state in which you live. All of it is being spent to bail out the institutions, shareholders and executives in the firms that intentionally created this mess in the first place by screwing people up and down the line for the previous ten years.

What's worse, by guaranteeing interbank lending if a bank goes down now the government will be on the hook for what could be hundreds of billions of dollars overnight - with no means of escape.

The talking heads all speak this morning about "regulation and oversight", but the implementation of this law is nothing of the kind.

This is in fact a looting of the American Public and Treasury by a law passed under fraudulent pretense and then redirected under even more fraudulent pretense to directly benefit those who just extracted hundreds of billions of dollars from your wallet after robbing you, your children, grandchildren, aunts, uncles, grandmother and grandfather of everything.

If we had an honest government in Washington DC this would result in an instantaneous Bill Of Impeachment for both Paulson and Bush in the House of Representatives and we'd have two candidates for President vowing to reverse all of this on Inauguration Day, irrespective of which one of the two clowns wins.

But we do not - we have a government in Washington DC that has been bought and paid for by the same bankers who just looted you to the tune of $350 billion dollars by literally putting a gun to Congress' head, and they said "sure!"

What's even worse is that we have a citzenry - that is, you - who will sit like a lapdog and take this sort of crap from our government as your savings, retirement and wealth are plundered mercilessly.

You've been violated America, and you have not only tolerated it you've cheered while it happened.

I bet, in fact, you cheered the nearly 1000 point rise in the DOW yesterday, even though it came from the expectation that you would be robbed blind to pay for the foibles of these bankers that arose from their felonious and outrageous conduct.

"America dies to thunderous applause" instead of pitchfork-and-torch-style outrage, which is what we should have seen.

But we won't, will we?

You will cheer because your 401k recovered a bit (never mind that its still down by 1/3rd from last October), and by the time the rest of the value in that account is lost, it will be too late for you to act.

And make no mistake, the DOW and S&P 500 are going lower. Much lower. My targets have been revised; 1070 was my "bear target" last December, but given what we've seen, I must now consider that the 2003 Bear Market lows are not going to hold, and DOW 5,000, S&P 500 at 500, are more realistic targets.


As a hint of what is to come, Nancy Pelosi has stated that she wants to tax your 401k with a one-time levy or even a levy on appreciation or contribution, never mind that you already pay tax when you withdraw the money to spend in retirement.

The economy will continue to worsen. With essential government funds redirected to pay off the bankers and make sure they don't suffer, you will instead, along with all of the businesses and industry that make this nation great, never mind providing you with a paycheck.

And the bankers? This is a pair of them leaving the Treasury meeting yesterday:

Do they look upset with the terms of the deal they were "forced" to take? Or do they look like they just screwed you out of $250 billion dollars and are laughing all the way back to Wall Street?

You have given up your right to object America, because you are not objecting now. You are not in the streets. You are not in DC. You are not raising hell with your elected representatives and the un-elected, appointed smiling faces who just looted you once again, this time to the tune of a quarter of a trillion dollars.

LIBOR came in quite a bit - about 12 basis points for three month money. That's significant, and supports the rally you will see this morning. But the IRX, while it rose to 3.7, remains at "oh my God" levels, well below the 15ish that would suggest normal conditions with a Fed Funds target of 1.5%.

The real casualty is American Capitalism and the American Economy, which will get not one nickel of benefit from this. In due time the market will reflect this, although clearly, it will likely take some time, as I have always called equity traders "short bus" riders, and with good reason.

The insane amount of treasury bond issuance necessary to support this will cause the long end of the curve to rocket higher, a move that began today with the TNX now standing proud over 4%. This means higher borrowing costs for you, despite what you're being told, and that in turn means lower values for your house. That's right - your house is going to go down further in value, not "stabilize" or "increase". That's the hidden way they will pay for this - on your back - by forcing the value of your house down via materially higher borrowing costs. This will begin immediately; that 6% rate you've seen recently will soon be history.

So my advice is to use this rally to raise cash.

You're going to need it, as this rally is likely to have less staying power than you would like, and the real economy, which was thrown under the bus this morning to bail out of the rich bankers, will soon reflect reality.

Monday, October 13, 2008

Jr and the Journeymen @ Granada

US summons bankers; stocks surge
Monday October 13, 4:16 pm ET
By Martin Crutsinger, AP Economics Writer

Administration calls major banks to meeting on rescue plan; stocks surge around the world
WASHINGTON (AP) -- Stocks surged on Wall Street and around the world for the first time in days Monday as the U.S. said it plans to swiftly implement a broad financial rescue package and Europe put almost $2 trillion on the line to break the lending logjam threatening the world's economy.

The Bush administration summoned executives from leading banks to a meeting in Washington Monday afternoon to work out details of the $700 billion plan aimed at thawing the credit markets -- the economy's lifeblood.

The Dow Jones industrials gained more than 900 points in a stunning rebound from days of big losses. European markets rallied following Asia's lead in response to the widespread government initiatives.

"These are tough times for our economies yet we can be confident that we can work our way through these challenges and America will continue to work closely with the other nations to coordinate our response to this global financial crisis," President Bush said following a meeting with Italian Premier Silvio Berlusconi.

Treasury Department spokeswoman Brookly McLaughlin said officials from the Treasury Department and the Federal Reserve would participate in the meeting at the Treasury Department. The discussions are aimed at finalizing details on the rescue package Congress passed on Oct. 3.

The package has quickly expanded from purchasing financial firms' bad debt to include the government taking partial ownership in banks, among other possible steps.

Over the weekend, Paulson called the heads of the five biggest U.S. banks to come to Washington for face-to-face talks about the rescue plan, according to people briefed on the matter. They were not authorized to speak publicly because of the sensitivity of the negotiations.

Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, JPMorgan Chase & Co. CEO Jamie Dimon, and Bank of America Corp. CEO Kenneth Lewis were all asked to attend. There was some speculation that Paulson might have expanded the invitation to at least three other CEOs from various regional banks, the people said.

It was expected that whatever comes out of the meeting will be used to put the finishing touches on the plan, the people said.

The discussions take place against the backdrop of a presidential election, with about three weeks left before Americans go to the polls.

The administration's interim bailout package chief, Neel Kashkari, said early Monday the government is moving quickly to implement the rescue program, including consulting with private law firms on how to buy stakes in banks to boost their cash reserves.

He spoke as The Bank of England, the European Central Bank and the Swiss National Bank jointly announced they would work together to provide unlimited short-term funds to make money available to ease the credit freeze. The Bank of Japan said it was considering a similar move.

To assist the European banks, the Fed said it was taking actions to assure enough U.S. dollar funds were available to meet demand.

"The government cannot just leave people on their own to be buffeted about," said British Prime Minister Gordon Brown.

European governments said they are putting nearly $2 trillion on the line to protect the continent's banks through guarantees and other emergency measures. Pledges by Britain, Germany, France, Spain, Austria and Portugal in recent days have reached a total of $1.96 trillion. The sums are considered a maximum, and might not all be spent if the financial crisis eases.

The administration on Monday also announced the selection of a team of interim managers, picked an outside firm to help run the program and tapped Federal Reserve Chairman Ben Bernanke to head up the oversight board guarding against conflicts of interest.

Kashkari, the assistant Treasury secretary who is interim head of the program, said officials were developing the guidelines that will govern the purchase of bad assets and had consulted with six specialist law firms on how the government will take partial ownership of banks.

After those consultations, Kashkari said Treasury had chosen Simpson Thatcher & Bartlett LLP to move forward to help the government structure the stock purchase program.

"We are moving quickly -- but methodically -- and I am confident we are building the foundation for a strong, decisive and effective program," Kashkari said in a speech Monday to the Institute of International Bankers.

Kashkari, however, provided few details about how the program will actually buy bad assets and partial ownership in banks. He focused mainly on the nuts and bolts of getting the program running.

He said five veteran government officials had been chosen as interim heads of key components of the program including Tom Bloom, currently the chief financial officer at the Office of the Comptroller of the Currency, to serve as the chief financial officer for the rescue program.

Kashkari said seven policy teams at Treasury had been created to focus on the different aspects of the program including buying bad assets such as mortgage-backed securities.

Kashkari announced that investment consultancy Ennis Knupp & Associates had been chosen as the private firm that will help Treasury review proposals from asset management companies. He said that 70 companies had made bids to become the master custodian firm and that a final selection of the winning firm would be announced by Tuesday.

He said more than 100 companies had submitted bids to become one of the five to 10 firms that will operate the program to buy and manage the bad assets from financial firms.

Kashkari's speech Monday marked his first public appearance since being selected a week ago to run the program.

Paulson said during weekend meetings with global financial powers that his department was working around the clock to carry out the plan. His comments were meant to convince investors that the world's largest economy is moving quickly to get lending restarted and avert what could be a deep and painful global recession.

Those dire concerns sent markets around the world reeling last week, giving the Dow Jones industrial average it worst week on record. U.S. stocks have lost $8.4 trillion in value over the past year.

The Bush administration over the past six weeks has taken over the nation's two biggest mortgage finance firms, Fannie Mae and Freddie Mac, and rescued American International Group, the world's biggest insurance company.

As the bailout bill rushed through Congress, Paulson stressed that the major aim was to buy bad assets, primarily mortgage-backed securities, from financial institutions. The hope was that taking those bad loans off the books would encourage banks to return to more normal lending operations and unclog credit flows -- the economy's lifeblood.

Paulson said Friday that the government also would use some of the money to buy stakes in banks. The goal is to give banks the resources to resume lending at more normal levels.

That about-face has left the administration trying to decide how much to devote to buying bad assets and how much to use for stock purchases.

Lawmakers who pushed to include the stock purchase program in the rescue bill over initial administration objections say the stock purchases can start much faster than the effort to buy bad assets and help restore market confidence sooner.

While the administration is rushing to put the finishing touches on the rescue plan, House Republicans and Democrats pushed dueling economic stimulus measures.

House Republicans announced -- but then backed down on -- plans to demand that majority Democrats call Congress back into session before the elections to pass a stimulus bill.

Democrats, who are considering calling Congress back into session after the Nov. 4 election to pass their package, were meeting with economic experts Monday on the crisis and potential solutions.

AP reporters Emily Flynn Vencat in London, Tim Paradis in New York and Julie Hirschfeld Davis in Washington contributed to this story.

Friday, October 10, 2008

The Beginning of the End
Peter Schiff, President and Chief Global Strategist

While I have warned for years that the United States was headed into the eye of an economic hurricane, nearly every other "expert" from Washington, Wall Street, the press and academia saw nothing ahead but sunny skies. Now, suddenly, there is an overwhelming consensus that absent the Federal mortgage bailout, my dire forecast would have come to pass. While I'm glad that rose colored glasses have finally been removed from so many eyes, the vast majority of these observers are still blind. In truth, the bailout plan substantially increases the threats to the U.S. economy.

When I wrote my book "Crash Proof", I not only predicted that our consumer/mortgage credit-based economy would fall apart, but that the government would ineptly try to repair it. The magnitude of those potential policies formed the basis of my worst case scenario. My fears have now been confirmed, and the U.S. Government is now set to destroy all hope of economic recovery.

Make no mistake; had the government resisted the political pressure to interfere with the markets, we would now be experiencing a very deep recession. But by refusing to let the markets work, policy makers are resisting the only medicine capable of curing the economic disease that afflicts us. The same mistakes were made in the early 1930's, causing a severe financial crisis to morph into the decade-long Great Depression.

The government will now attempt to keep bad loans from failing and real estate prices from falling. Rather then allowing market forces to rein in excess borrowing and replenish savings, it will encourage even more borrowing and drain what is left of our savings pool. Rather than allowing our economy to return to one based on legitimate production, it will continue to encourage reckless consumption.

In the end, by refusing to allow market forces to work their cure, our economy will inevitably die from the disease. Our economy will now face death by hyperinflation, which will cause a complete loss of confidence in the dollar and result in prices and interest rates skyrocketing out of sight. The evaporation of our national wealth will lead to civil unrest, food and energy shortages, and the possible imposition of martial law. If such a scenario unfolds, what is left of our Constitution will surely be completely shredded.

Although this reality looms as large as anything I have ever seen, investors still do not see the forest for the trees. Convinced that the bailout will actually work, and that foreign governments are derelict for not launching similar plans, global investors are fleeing other currencies in favor of the dollar. Soon investors will discover that foreign politicians and central bankers have acted responsibly. When they do, the current gains seen by the dollar will reverse violently.

Investors seem to be bracing themselves for a global depression that will not occur. Foreign stocks, particularly those exposed to China or natural resources, are trading at the lowest valuations I have seen in my entire career. Fears of a global meltdown are based on the misconception that the U.S. economy is the tent pole for economic activity around the world. The premise of my entire argument is that the U.S. economy, by consuming so much of the world's resources and manufactured goods, and borrowing so much of the world's savings, has in fact been a drag on the global economy.

The enormous global vendor financing scheme is finally coming to an end as the vendors discover that their biggest customer is flat broke. In the short run, our creditors are experiencing some pain because they finally realize that they will never get their money back.

Once the foreign stock markets take this hit, they will be far better poised to grow than their American counterpart. Foreigners will reclaim their productivity and savings for themselves, and will subsequently experience the biggest global economic boom in history. America on the other hand will fare much worse, as we will be left with a hollowed out manufacturing base, dilapidated infrastructure, no savings, and a gigantic Federal Government that will regulate, spend, borrow and print our economy into ruin.

For an updated look at my investment strategy, order a copy of my just released book, "The Little Book of Bull Moves in Bear Markets." Click here to order your copy now. While the "bull moves" I forecast have yet to materialize, I am confident that given time they will. The good news is that now you actually have some time to put my strategy in place at favorable prices and exchange rates!

Peter Schiff is the President, Founder and Chief Global Strategist for Euro Pacific Capital. He is widely acknowledged as a expert in international markets, and in global economic strategy. He is a speaker at all the major investment conferences. He is regularly featured on CNBC and Bloomerg TV , and often quoted in the Wall Street Journal, Barron's, New York Times, the Financial Times, Investors Business Daily, and many others.

Thursday, October 09, 2008

From, October 8, 2008:

The Treasury finally seems to have seen the light on its crappy trash-asset bailout plan and may now actually inject capital into banks instead. This is a far better idea, one that we and others have been shouting down a rainbarrel about for weeks.

Under the original plan, unless the government vastly overpaid for the trash assets it bought, the banks still would have been undercapitalized--and, thus, unable to start lending. Having the government take an equity stake, on the other hand, not only gives taxpayers much more potential upside, it strengthens the banks' capital ratios.

The Paulson Plan should have taken this form in the first place. But better late than never.

NYT: Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The Treasury plan, still preliminary, resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

Wednesday, October 08, 2008

Retailers report weak September sales
Wednesday October 8, 9:35 am ET
By Anne D'Innocenzio, AP Business Writer

Retailers report weak September sales as financial meltdown takes toll on shoppers
NEW YORK (AP) -- American shoppers went into hiding in September, sticking to buying the bare-bone essentials and leading many retailers to report dismal sales for the month as skittish consumers grappled with the global financial meltdown.

The weak reports -- an alarming gauge of consumer behavior since the meltdown began midway through last month -- are fueling more worries about the holiday season and the overall economy, since consumer spending accounts for two-thirds of all economic activity.

As retailers reported their sales figures Wednesday, even discounters weren't immune to shoppers' mounting worries about their financial security.

Wal-Mart Stores Inc., the world's largest retailer, and wholesale club operator Costco Wholesale Corp. both reported solid sales but results were a bit shy of Wall Street estimates. Target Corp. reported a bigger-than-expected sales drop and cut its earnings outlook as it grapples with a surge of customers defaulting on the company's store credit card payments.

Luxury stores such as Saks Inc., which operates Saks Fifth Avenue, suffered big sales drops, while many mall-based apparel stores and department stores including J.C. Penney Co. and American Eagle Outfitters Inc. found themselves mired in a deep sales slump.

"This is not a significant comfort going into the holiday season," said Ken Perkins, president of research company RetailMetrics LLC. "Everybody across the board is feeling it. Even discounters are going to have a tough go. Consumers are going to tighten their purse strings even more."

A preliminary tally by Thomson Reuters said 10 retailers missed estimates, while three beat projections. One met expectations. The tally is based on same-store sales, or sales at stores opened at least a year, which are considered a key indicator of a retailer's health.

Perkins and other analysts are worried that spending could deteriorate even more as the problems on Wall Street further filter through the economy, with layoffs expected to rise in the coming months and the credit markets remaining frozen. That means that consumers are having a hard time getting loans and credit lines. That's adding to more stress for shoppers, who were already contending with high gas and food prices and a slumping home market.

And even with a massive government bailout package, the stock market has kept dropping -- underscoring fears among investors that the rescue plan will not avert a deep recession. In the last five trading days, the Dow Jones Industrials have lost 1,400 points, wreaking havoc on Americans' retirement funds.

On Thursday, The Federal Reserve ordered an emergency interest rate cut of a half percentage point to cope with the worst financial crisis since the 1929 stock market crash.

Wal-Mart offered a tepid sales outlook as it reported a 2.4 percent gain in same-store sales for September. Analysts had expected a 2.5 percent gain. The company blamed the modest size of the increase on the impact from hurricanes Ike, Gustav and Hanna, which forced the company to temporarily close 341 stores, as well as on overall economic challenges. It noted that the impact from the hurricanes depressed same-store sales by 0.4 percentage point.

Wal-Mart said it expects same-store sales at its U.S. stores to be up from 1 to 2 percent for October.

The company said same-store sales in September were strong in both grocery and health and wellness and that customers continue to look for basics. It added that children's clothing sales were positive but sales of discretionary items were soft.

Wal-Mart, like many U.S. retailers that operate overseas, is now also contending with an international economic slowdown. The retailer said it had solid sales figures in many of its international markets, despite tough economic conditions. But it did cite a 3.8 percent dip in same-store sales at Wal-Mart Mexico amid a slowdown in the Mexican economy.

Despite the overall economic uncertainty, Wal-Mart said it's sticking with its current earnings estimate for the third quarter ending Oct. 31.

Rival Target Corp., which has struggled because of its heavy emphasis on nonessentials like fashions and home furnishings, reported a 3 percent drop in same-store sales. That's worse than the 1.3 percent decline that Wall Street analysts had expected. It reduced its third-quarter estimates as the weak economy has led to mounting defaults on credit card payments and meant higher net write-offs rates in its credit card segments.

The company's subdued earnings outlook assumes essentially flat year-over-year same-store sales in the fourth quarter and a continuation of recent write-off rate trends through the remainder of this year.

Costco announced a 7 percent gain in same-store sales for September, a bit below the 7.5 percent estimate that Wall Street expected. Excluding gasoline price inflation, same-store sales would have been up 6 percent.

But mall-based apparel and department stores continued to see their fortunes unravel as customers focused on basics.

Penney reported a 12.4 percent drop in same-store sales, even worse than the 9.9 percent decline that analysts had expected. The company cut its earnings and sales outlook for the third quarter.

Saks reported a 10.9 percent drop in same-store sales, worse than the 6.8 percent decline expected.

Among teen retailers, Pacific Sunwear of California Inc. had a 5 percent decline in same-store sales, worse than the 7.3 percent drop Wall Street expected. American Eagle Outfitters Inc. had a 6 percent drop in same-store sales, worse than the 5 percent decline projected.

AP Business Writer Mae Anderson contributed to this report.

Monday, October 06, 2008

Dow plunges as much as 800 before closing down 350
Monday October 6, 4:07 pm ET
By Joe Bel Bruno and Tim Paradis, AP Business Writers

Dow plunges as much as 800 before closing with a loss of about 350 amid global sell-off

NEW YORK (AP) -- It has been another extraordinary and traumatic day on Wall Street, with the Dow Jones industrials plunging as much as 800 points before closing with a loss of about 350.

The catalyst for the frantic selling was investors' growing realization that the credit crisis is likely to take a heavy toll around the world. And while the Bush administration is starting to implement its $700 billion financial rescue plan, that and steps taken by other governments won't be enough to stop the global spread of credit troubles.

The Dow set a new record for a one-day point drop and also fell below 10,000 for the first time since 2004. But it recovered somewhat in erratic trading as bargain hunting set in. The blue chips closed with a loss of about 350 at the 9,971 level.

Friday, October 03, 2008

Libor Mystifies Americans as Mayor Reads `Doomsday'

Libor Mystifies Americans as Mayor Reads `Doomsday' (Update2)

By Peter Robison

Oct. 3 (Bloomberg) -- Anisha Gupta, returning clothes to a Hugo Boss store on Rodeo Drive in Beverly Hills, shrugged when asked about Libor. She had heard the term. She wasn't sure she could define it.

``I thought it was a pill,'' said Gupta, an unemployed 27- year-old who lives in downtown Los Angeles.

Americans are getting a crash course as a once obscure acronym weighs on the economy. In interviews across the country, oil workers, ministers, bank managers and politicians said they were baffled by the London interbank offered rate or fearful of its surge this week. They agreed Libor was important, even if they couldn't put their finger on why.

``Without getting real specific, I think I'm probably not competent to be talking about what is happening overseas,'' said Senator Jon Kyl, an Arizona Republican who helped shepherd passage of a $700 billion bank bailout as his party's No. 2 official. ``It's all happening very rapidly.''

Libor, set every morning in London, is what banks pay to borrow money from each other. That in turn determines prices for financial contracts valued at $393 trillion as of Dec. 31, 2007, or $60,000 for every person in the world, and helps set consumer interest rates on everything from home loans to credit cards.

In the past week, as governments in Europe rescued five banks and the U.S. debated a bailout, the cost of one-month bank loans in euros and overnight dollar loans soared to records. In practice, that means banks are hoarding cash, raising borrowing costs and slowing economies worldwide. Today's three-month Libor for loans in dollars jumped to 4.33 percent.

Still, explaining Libor can be a challenge.

`Very Destructive'

``What you have been seeing in the destruction of Libor in the last months, I cannot really point to that point and say this has impact on car sales,'' said Fritz Henderson, the chief operating officer of General Motors Corp., in a TV interview. ``But certainly it is very destructive.''

The complexities showed during the bailout debate in Congress.

``Very few Americans have ever heard of something called the Libor,'' said Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, on Oct. 1. He defined the term, then said, ``Libor jumped over 400 percent in just one day.''

Actually, overnight dollar loans rose 168 percent on Sept. 30, to a record 6.8 percent from 2.6 percent. Dodd was probably referring to the increase in basis points, or hundredths of a percent, which was 431. A spokesman at Dodd's office in Washington who didn't identify himself said when asked about that: ``I'm sorry. Libor?''

Christ Church Pastor

In New York, parishioners at Christ Church on Park Avenue are on a ``fast learning curve'' about Libor and the economy, said Stephen Bauman, 56, the senior minister.

``I think many people have never questioned certain fundamental aspects of our institutional existence,'' he said.

Hits on the Internet search engine Google show interest is increasing. In 2007, the U.S. wasn't in the top 10 countries where people searched for the term. Over the past 7 days, the U.S. has surged to No. 2, behind the Czech Republic, where Libor is a common first name. Worldwide, the number of hits rose tenfold from Sept. 7 to Sept. 30. Google Inc., based in Mountain View, California, won't disclose the total.

White House spokesman Tony Fratto said at a press briefing this week that officials closely watch Libor, then paused.

``Raise your hand if you're familiar with the Libor rate,'' he said to two dozen reporters. Only one did, drawing nervous chuckles.

Seattle Bank Branch

Asked about Libor in Houston, Mike Heider, a 28-year-old drilling engineer, took a long drag on his cigarette, closed his eyes and after 10 seconds said he wasn't exactly sure. As for Libor's effect on the economy, he said, ``Couldn't tell you right now.''

An assistant bank branch manager in Seattle was equally mystified.

``I won't know the answer directly to that,'' said Clayton Larsen, 30, in a Wells Fargo & Co. branch.

Libor is actually a set of rates, calculated for several currencies on periods ranging from overnight to 12 months. The British Bankers' Association compiles the dollar rate every day from data submitted by 16 banks, including Deutsche Bank AG and Royal Bank of Scotland Group Plc. There are also rates for the euro, Japanese yen, British pound, Swiss franc, and Australian and Canadian dollars.

Michigan Mayor

``I confess I've never heard banks charge interest to each other,'' said James Fouts, the mayor of Warren, Michigan, a Detroit suburb of 130,000 that is home to several General Motors Corp. and Chrysler LLC plants. ``I'm frightened by the financial situation. Wall Street is exacerbating and accelerating a doomsday scenario.''

Corporate bank loans are often linked to three-month Libor rates. Libor also affects interest costs on credit cards, student loans and adjustable-rate mortgages. From 2004 to 2006, more than half of the U.S. subprime mortgages at the root of the financial crisis, or those issued to the least creditworthy borrowers, had adjustable rates linked to Libor, said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Maryland.

Americans' lack of financial sophistication is a cause, not just a symptom, of the credit crunch, said James Bowers, managing director of the Center for Economic and Entrepreneurial Literacy, a nonprofit group in Washington. It may be a reason people are willing to take out loans for homes they can't afford or add to credit card debt at adjustable rates.

``When we go to a mechanic, we trust them to fix our problems,'' he said. ``But right now, the mechanics on Wall Street can't get their own cars to start.''
Financial and Corporate System is in Cardiac Arrest: The Risk of the Mother of All Bank Runs

Nouriel Roubini | Oct 3, 2008

It is now clear that the US financial system - and now even the system of financing of the corporate sector - is now in cardiac arrest and at a risk of a systemic financial meltdown. I don’t use these words lightly but at this point we have reached the final 12th step of my February paper on “The Risk of a Systemic Financial Meltdown: 12 Steps to a Financial Disaster” (Step 9 or the collapse of the major broker dealers has already widely occurred).
Yesterday Thursday a senior market practitioner in a major financial institution wrote to me the following:

Situation Report: So far as I can tell by working the telephones this morning:

LIBOR bid only, no offer.
Commercial paper market shut down, little trading and no issuance.
Corporations have no access to long or short term credit markets -- hence they face massive rollover problems.
Brokers are increasingly not dealing with each other.
Even the inter-bank market is ceasing up.
This cannot continue for more than a few days. This is the economic equivalent to cardiac arrest. Then we debated what is necessary to restart the system.

I believe that the government will do another Hail Mary pass, with massive guarantees to the short-term commercial credit system and wide open short-term lending by the Fed (2 or 3 times expansion of the Fed balance sheet). If done on a sufficient scale this action will probably work for a while. But none of these financial measures affects the accelerating recession -- which will in turn place more pressure on the financial sector.

Another senior professional in a major global financial institution wrote to me:

Today, in our trading room, I could see the manifestations of a lending freeze, and the funding hiatus for banks and companies, with libor bid only, the commercial paper market closed in effect, and a scramble for cash - really really scary.

Do you think this is treatable without a) a massive coordinated liquidity boost and easing of monetary policy and b) widespread nationalisation of some banks, gtess to others AND a good bank/bad bank policy where some get wiped along with their investors? The Treasury Tarp plan is an irrelevance if we are at a major funding crisis.

And to confirm the near systemic collapse of the system of financing of both financial firms and corporate firms Warren Buffet declared yesterday, as reported by Bloomberg:

the U.S. economy is ``flat on the floor'' after a cardiac arrest as companies struggle to secure funding and unemployment increases.

``In my adult lifetime I don't think I've ever seen people as fearful, economically, as they are now,'' Buffett said today in an interview with Charlie Rose to be broadcast tonight on PBS. ``The economy is going to be getting worse for a while.' …The credit freeze is ``sucking blood'' from the U.S. economy, Buffett said.

We are indeed at the cardiac arrest stage and at risk of the mother of all bank and non-ban runs as:

- The run on the shadow banking system is accelerating as: even the surviving major broker dealers (Morgan Stanley and Goldman Sachs) are under severe pressure (Morgan losing over a third of its hedge funds clients); the run on hedge funds is accelerating via massive redemptions and a roll-off of their overnight repo lines; the money market funds are experiencing further withdrawals in spite of government blanket guarantee.

- A silent run on the commercial banks is underway. In Q2 of 2008 the FDIC reported $4462bn insured domestic deposits out of $7036bn total domestic deposits; thus, only 63% of domestic deposits are insured. Thus $ 2574bn of deposits were not insured. Given the risk that many banks – small, regional and national – may go bust (as even large ones such as WaMu and Wachovia went recently bust) there is now a silent run on parts of the banking system. Deposit insurance formally covers only deposits up to $100000.

Thus any individual, small or large business and/or foreign investor or financial institution with more than $100000 in a FDIC insured bank is now legitimately concerned about the safety of its deposits. Even if as likely the deposit insurance limit will be temporarily raised to $250000 by Congress there will still be a whopping $1.9 trillion of uninsured deposits (or 73% of total deposits); thus, a huge mass of uninsured deposits will remain at risk as even small businesses have usually more than $250K of cash while medium sized and large firms as well as any domestic and foreign financial institution or investor with exposure to US banks has average exposure in the millions of dollars. Particularly at risk are the cross border mostly short term interbank lines of US banks with their foreign counterparties that are estimated to be close to $800 billion.

- A run on the short term liabilities of the corporate sector is also underway as the commercial paper market has effectively shut down with little trading and no issuance or rollover of such debt while corporations have no access to long or short term credit markets and they are therefore facing massive rollover problems (over $500 billion of rollover of maturing debts in the next 12 months). Indeed, the market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 (and down over $200 billion in the last three weeks). Especially banks and insurers were unable to find buyers for the short-term debt: financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent in the last week; but now even non-financial corporations are also experiencing severe roll-off in the CP market. Discount rates for investment-grade non-financial commercial paper spike to 599bp for 60 day maturities.

More companies are borrowing against or tapping their revolving credit lines. This is largely due to the dislocation caused in the money markets by the failure of Lehman and the subsequent withdrawals from money market funds, which are some of the biggest providers of liquidity in the short term funding/commercial paper. Even the largest corporations are at severe stress: AT&T last week was forced to rely on overnight funding for its treasury operations, as lenders were unwilling to provide more long term financing due to fears in money market funds over investor redemption. The CEO said “It’s loosened up a bit, but it’s day-to-day right now. I mean literally it’s day-to-day in terms of what our access to the capital markets looks like,’’ Things are much worse for non-investment grade corporations and for small and medium sized businesses.

As reported today by Bloomberg: Almost 100 U.S. corporate treasurers gathered for an emergency conference call yesterday to warn each other that banks are using any excuse to charge more to renew lines of credit. ``Capital is fleeing to safety,'' said Edward E. Liebert, treasurer of Rohm & Haas Co., who took part in the 90-minute call organized by the National Association of Corporate Treasurers. ``Interbank lending is not free-flowing any more,'' said Liebert, 56, chairman of the Reston, Virginia-based trade group. One bank charged a participant in the call 80 basis points to renew a routine $25 million credit line, according to Liebert, who wouldn't identify the speaker or the company. Rohm & Haas, based in Philadelphia and rated BBB by Standard & Poor's, is paying 8 basis points for a $750 million revolving line of credit provided by 13 banks, the treasurer said. A basis point is 0.01 percentage point. As the U.S. House of Representatives prepares to vote on a $700 billion bailout bill passed by the Senate, global credit markets are being squeezed by banks afraid to lend to each other and to even some investment-grade corporate clients. Treasurers are struggling to keep credit lines open so they can pay employees, fund pension benefits and purchase raw materials. ``The banks are really starting to play hardball,'' said Jeff Wallace, managing partner at Greenwich Treasury Advisors, a financial consultant in Boulder, Colorado. ``They don't want to give out any more money to people because they don't have enough capital”. Banks are demanding renegotiation of interest charges or lending terms when ``routine'' amendments are requested on lines of credit, said Thomas C. Deas Jr., treasurer of Philadelphia- based FMC Corp. and an association board member.

- The money markets and interbank markets have shut down as - despite the Senate passing the bail-out bill - yesterday USD Overnight Libor was still at 268bp after reaching an all-time high of 6.88%; the USD 3m Libor-OIS spread widened to record 270 basis points; EUR 3m LIBOR-OIS spread is at record 130bp; the TED spread is at record 360bps (TED was 11bps one month ago); Money and credit markets are dysfunctional also in emerging markets ; and agency bond spreads are also at highs again.

So we are now facing:

- a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;

- a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);

- a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;

- a total seizure of the interbank and money markets.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely.

So what needs to be done? Even several hundreds of billion dollars in emergency liquidity support to the financial system by the Fed and other central banks in the last week alone have not been enough to stop the seizure of liquidity in interbank markets and the shut down of financing for the corporate sector as counterparty risk is now extreme (no one trusts any more in this crisis of confidence even the most reputable and trustworthy financial and corporate counterparties).

Thus, emergency times where we are at risk of a systemic meltdown require emergency measures. These include:

- A temporary six-month blanket guarantee on all US deposits (not just those below $250k) combined with a rapid triage between insolvent banks that should be quickly closed and distressed but solvent – conditional on liquidity and capital injections – banks that should be rescued. To stop the silent run on the banking system you do need now such blanket guarantee on all (insured and uninsured) deposit regardless of their size.

To minimize lender moral hazard from such action the blanket guarantee needs to be followed by a very rapid triage and shut-down of insolvent institutions to prevent such institutions from gambling for redemption, i.e. acquiring more deposits and making even more risky loans. To limit such moral hazard distortions one can also limit the extended guarantee only to current deposits: i.e. any new deposit above a $100k limit will not be insured. Of course all the currently uninsured deposits of such insolvent institutions will need to be made whole once such banks are shut down (otherwise the run on uninsured deposits would continue and accelerate). Once the rotten apples (insolvent banks) that are infecting the good apples (the solvent banks) are eliminated the blanket guarantee will be lifted as the uninsured depositors of surviving banks can be assured that the remaining banks (the good apples) will not go bust. Currently the silent run is triggered by investors and depositors not knowing which banks will go bust and which will survive as the bad apples are mixed in the same dark basket together with the good apples.

The extra fiscal cost of bailing out the uninsured depositors of failed banks can be addressed with FDIC recapitalization or an increase in deposit insurance premia or by whacking further unsecured creditors of failed banks (as the government should have first claim on the remaining assets of failed banks if uninsured depositors are made whole in such banks). Anything short of this blanket guarantee cum triage will not be enough as the silent run on the banks will soon become a roaring tsunami of an open run.

Solution a la Korea 1997 - where the cross border interbank run was solved via a bail-in rather than a bailout of the foreign cross border interbank creditors of Korean banks via an effectively forced conversion of short term interbank lines into one to three years claims guaranteed by the Korean government – would be too risky as such effective capital controls and coercive stretching of maturities of cross border interbank lines would dramatically scare foreign investors placing funds in US banks.

- Extension of the emergency liquidity support of the Fed (both TSLF and PDCF) to a broader range of institutions in the shadow banking system, especially those directly providing credit to the corporate sector. The TSLF and PDCF are already available to some non banks (the broker dealers that are primary dealers of the Fed). But two of such broker dealers are gone (Bear and Lehman) and the other three are under stress. Goldman Sachs, Morgan Stanley, the other primary dealers and the banks that have access to the TSLF and PDCF (and discount window) have massively used these facilities in the last few weeks; but they are hoarding such liquidity and not relending it to other banks, to the thousands of the other members of the shadow banking system and to the corporate sector as they need such liquidity and don’t trust any counterparty. Thus the transmission mechanism of credit policy (the non-traditional Fed liquidity lines) is completely shut down now. Thus, on an emergency basis the TSLF and PDCF need to be extended to other non-bank financial institutions, especially those directly providing credit to the corporate sector such as non-bank finance companies and leasing companies.

To ensure that this liquidity support is effective the Fed may require the borrowing institutions to maintain their level of exposure to the corporate sector (avoid the roll off of commercial paper, of short term credits to corporate and alike). A similar requirement may need to be imposed on all other financial institutions (banks and non bank primary dealers) that are now shutting down or rolling off their exposure to the corporate sector. Of course a crucial triage of the corporate sector is also necessary: those firms that would have ended up into Chapter 11 or 7 even under less extreme financial conditions should not be rescued and thus allowed to go into bankruptcy court.

- Some members of the shadow banking system will not receive such liquidity support of the Fed (hedge funds and private equity funds) as – fairly or unfairly - there is no political sympathy for such institutions. This means that the demise of hundreds – and possibly thousands – of hedge funds will occur as redemptions and roll off of overnight repo financing for leveraged investments will cause a massive liquidity – and thus solvency – crisis for such institutions. If hundreds of smaller hedge funds collapse the systemic consequences would be limited (even if in the aggregate hedge funds provide significant financing to the corporate sector).

If larger and systemically important hedge funds were at risk of failing the Fed will have to engineer a massive private sector bail-in of such hedge funds (a larger scale rescue a la LTCM) where the prime brokers of such funds are forced to maintain repo exposure to such funds rather than be allowed to shut off such exposure. This is a radical suggestion but the alternative of a Fed liquidity bailout of systemically important hedge fund is not politically feasible given the little sympathy that such funds enjoy in Congress.

The refinancing crisis of private equity firms and their LBOs is a longer fuse run as covenant-lite clause and PIK toggles will postpone such financing crisis but make the harder the fall as zombie corporations that postpone restructuring will have a bigger collapse once the financing crisis eventually occurs. But since many of these LBOs should have never occurred in the first place any financing crisis for such buy-outs should be dealt with in bankruptcy court; no public funds should be used to rescue such LBOs and the reckless private equity firms that designed such schemes.

- Direct lending to the business sector from the Fed via extension of the PDCF and TSLF to the non financial corporate sector. This could include Fed purchases of commercial paper from corporations and other forms of financing of the short term liabilities of the Administration to small businesses secured in appropriate ways.

Given the collapse of the corporate CP market and the banking system reluctance to provide loans to the corporate sector (credits lines are being shut down) the only alternative to the Fed becoming directly the biggest emergency bank for the corporate sector would be to force the banking system to maintain its exposure to the corporate sector, possibly in exchange for further Fed provision of liquidity to the banking system. The former option may be better than the latter to deal with the looming illiquidity of the corporate sector.

- Have a coordinated 100bps reduction in policy rates by all major advanced economies central bank and, possibly, even some emerging market economies central banks. While this policy rates may not directly resolve the insolvency issues in financial markets and in the corporate sector it may ease liquidity pressures and it would signal that global policy makers are serious about addressing together this most extreme liquidity and financial crisis. Also, some of the radical policy actions that have been suggested here for the US will most likely need to be undertaken also by European policy makers as the liquidity and credit crisis is now becoming global.

- Radically redesign the Treasury TARP rescue plan – possibly after its necessary approval today - to make it effective, efficient and fair. This implies that in addition to a more limited government purchase of toxic assets, you need: a) an emergency triage between insolvent and illiquid and undercapitalized but solvent banks should be made; b) a sharp reduction of the mortgage debt burden of the insolvent household sector; c) and a recapitalization of solvent banks to be done via public injection of preferred shares and matching contributions by current shareholders of the banks. Financial markets have already voted no to this plan (that is flawed in its current form) yesterday when after its passage in the Senate US and global equity markets plunged another 4% while money markets and credit markets seized up even further.

The suggested policy actions are extreme and radical but the times and conditions in financial markets and the corporate sector are also extreme. Thus, to avoid another Great Depression radical and unorthodox policy action needs to be taken now both in the US and in other advanced economies as the credit crisis and liquidity crisis is now becoming virulent even in Europe and other advanced economies. This credit crisis is both a crisis of confidence and illiquidity and a crisis of credit and solvency. But while the insolvent institutions should go bust we have now reached a point where many financial institutions and now non financial firms may become insolvent because of pure illiquidity; and this would lead to an extremely severe economic contraction similar to an economic depression rather than a mild recession.

At this point the US, the advanced economies (and now likely even some emerging market economies) will experience an ugly recession and an ugly financial and banking crisis regardless of what we do from now on. What radical policy action can only do is preventing what will now be an ugly and nasty two-year recession and financial crisis from turning into a systemic meltdown and a decade long economic depression. The financial and economic conditions are extreme; thus extreme policy action is needed now to save the global economy from an ugly depression.