US Market Outlook: 2009 Will Be the Year of the Bankruptcies

Will 2009 Will Be the Year of the Bankruptcies affect Singapore Market?
This maybe the 2nd Wave of Finanical Crisis after the 1st Wave in Oct. 2008.

Japan to go down zero-rate road again

BOJ expected to cut rate today while it seeks to rein in power of yen

THE Bank of Japan appears set to cut interest rates today, returning in effect to the zero rate policy it pursued from 2000 to 2006 to counter deflation and to stabilise the Japanese financial system.

This time, Japan will join the US, where the Federal Reserve cut rates this week to near zero, and probably Britain where Bank of England deputy governor Charles Bean said yesterday that zero rates were possible.

Official warnings meanwhile grew louder in Japan yesterday of intervention by the BOJ in foreign exchange markets to stem the surge in the value of the yen, which yesterday hit a new 13-year high of near 87 yen to the US dollar. But such intervention could be neutralised by a tsunami of private capital now flowing back into Japan, analysts warned.

'We have conducted currency intervention in the past, and we will take appropriate measures, which includes that (option),' Japan's Chief Cabinet Secretary Takeo Kawamura said yesterday.

Japan's leading motor vehicle and electronics makers have already seen their profits savaged by the strength of the yen and yesterday chairman of the Japan Automobile Manufacturers Association Satoshi Aoki called for measures to restore stability in foreign exchange markets.

Japan has conducted intervention (via the Bank of Japan, acting as agent for the Ministry of Finance) on numerous occasions in the past when the yen was subjected to sudden and sharp appreciation. But some economists say that such a move now by Japan could trigger competitive currency devaluations elsewhere in Asia and beyond.

The BOJ's Policy Board will end its latest two-day meeting around midday today and is expected to announce a cut in the central bank's short-term overnight policy lending rate from its current level of 0.3 per cent to 0.1 per cent. This is in effect a zero interest rate level as dealers say it is difficult to hold the rate at precisely zero.

Such a move is not expected to have any measurable impact on Japan's economy, which is officially in recession and which is expected to continue contracting well into next year. But it would have the symbolic effect of signalling Japan's solidarity with monetary authorities that are pushing rates down to zero to counter deepening economic recession.

What Japanese authorities appear to be hoping for through a combination of cutting rates and launching a unilateral dollar-buying operation in foreign exchange markets is to deter speculation in the yen and to re-ignite the so-called yen carry trades which had pushed the yen down to very low levels until recently.

These carry trades, which involved hordes of Japanese and other speculators selling yen and buying assets denominated in higher yielding currencies and areas - thereby pushing the yen down - have reversed in the face of the story that has swept through global financial markets and some analysts doubt they can be re-ignited in the current climate of fear and volatility.

Recently, Japanese portfolio investors have begun to sell foreign assets and repatriate capital. This appears to be an actor behind the rise of the yen, in spite of the fact that foreign investors have been selling Japanese assets.

The Nikkei 2225 stock average (up some 0.6 per cent yesterday to 8,667.23) appears stable despite selling by foreign investors, indicating that Japanese investors feel safe now with yen assets, analysts say.

Bernanke may not stay in office to see fruits of his labour

Dated on 19-12-2008

(WASHINGTON) The fruits of Federal Reserve chairman Ben Bernanke's aggressive and unprecedented moves to fight off a major US recession may come too late to cement his legacy and ensure him a second term.

Mr Bernanke gets high grades from many analysts for recognising relatively quickly that the credit crunch spreading from defaulting mortgages to banks to businesses could have broader impact, and for taking bold measures in response.

'Once Bernanke realised how serious and severe his problem was, he moved quickly, and he moved aggressively,' said Bernard Baumohl, of the Economic Outlook Group in Princeton Junction, New Jersey.

In a Reuters poll, economists said the US central bank chief was early to acknowledge the scale of the crisis, especially when compared to his counterparts in Europe and Japan, and they gave his performance high marks.

Mr Bernanke looked prescient compared with European Central Bank president Jean-Claude Trichet who in July worried enough about inflation to raise rates, only to reverse direction three months later when the financial crisis intensified.

Perhaps no one has been better equipped to handle the crisis than Mr Bernanke, who studied how central bank complacency in the 1920s set the stage for the Great Depression, and whose speeches in 2002 and 2004 laid out a detailed map for monetary policy when a central bank's interest rate drops to zero.

On Monday, the Fed pushed on into uncharted terrain, dropping its benchmark interest rate to a range at or near zero for the first time and promising to keep rates low for a long time.

The central bank went further, promising to use untested weapons to boost growth as its conventional ammunition was spent. Mr Bernanke opened the door to expand purchases of debt issued and guaranteed by government-sponsored mortgage agencies and to buying longer-dated Treasury securities.

The response in markets was largely positive, with a rally in stocks on Tuesday, albeit followed by a fall on Wednesday, and a tumble in yields on longer- dated Treasury debt.

Mr Bernanke has said the Fed is willing to bypass banks and directly provide funding to specific market areas where activity has stalled, including consumer and small business loans. Commercial real estate may follow.

The Fed's moves are likely to foster private sector risk-taking and lead to appreciation of asset prices, fuelling a recovery, said Zach Pandl, an economist with Barclays Capital.

'Our view is that these policies will gain traction,' he said. 'We've been impressed with the speed and scale, and the Fed has rarely been behind the curve. We think they've been creative, nondogmatic.'

However, there is the possibility that the Fed's actions could backfire since the rate cut has lowered the value of the US dollar, and other countries may try to lower the value of their currencies to make them more stable, said Richard Bove, an analyst for Ladenburg Thalmann.

In addition, the Fed's rate cuts have failed to lower some private sector borrowing costs, Mr Bove said. 'The Fed is not impacting the private sector,' he said in a note to clients.

But most economists don't expect the economy to show signs of rebounding until the second half of next year.

Unemployment rates, which lag an economic recovery, may be peaking next autumn, right around the time the administration of current President-elect Barack Obama needs to announce whether they want Mr Bernanke to stay on for a second four-year term.

'If by fall of 2009 there's no improvement in the economy, and indeed, if it's even worse, I can see case being made for replacing the chairman of the Federal Reserve,' said Campbell Harvey, a professor at Duke University's Fuqua School of Business. 'Politically, you would have to shake the team up.'

Mr Bernanke's detractors also point to the decision in September to let Lehman Brothers fail as a serious error of judgment. Authorities including Mr Bernanke have said they could not find a buyer for the investment bank, but the event was seen as triggering an acceleration of the economic downturn.

Mr Obama's naming of former Treasury secretary Lawrence Summers, a highly regarded economist, to a senior White House economics coordination post also raises the possibility that the President-elect is grooming him to replace Mr Bernanke. -- Reuters

明年才是真正的“严冬”

Dated on 18-12-2008

《货币战争》作者、提前半年预警美国“两房”灾难和金融海啸爆发的旅美华裔学者宋鸿兵，昨天上午接受本报记者采访时称，明年没有春 天，金融海啸将在明年4至9月间升级为第二波，届时将爆发对冲基金和保险公司的倒闭潮。他同时解释，这不是理论性的推断或凭空的猜测，而是 通过数据分析得出的时间触点。

　　提前半年预测次债危机

　　“《货币战争》一书问世时，美国次债危机未正式发生，而您却作出预测，请问您的依据是什么？”当记者抛出这个提问时，他解释，是通过大 量数据统计分析到的。他同时强调，他都能预测到，相信美国一些大的投行机构以及权威部门，应该知道金融危机的到来。

　　宋鸿兵称，目前情况来看，“危机最严重的时刻还没到来”。也即说，2008年还不是金融海啸危害最大的年头，明年才是真正的“严冬”，2009 年没有春天。明年将是金融海啸的第二波段，美国的商业银行体系会遭受前所未有的冲击，多家商业银行巨头或会在这一波海啸中倒下。

　　他说，这次国际金融危机将有四个波段，现在仅仅是第一波。明年4-9月间，还会有第二波袭来，冲击力将甚于现在。第二波金融海啸的引爆点 ,将从目前的房贷市场转向“企业债和地方政府债券”，尤其是企业债中的垃圾债。因为历史规律是：美国经济一旦步入衰退，首当其冲的就是垃 圾债。

　　他说：“到明年，美国经济正式确认步入衰退，在实体经济下滑的冲击下，垃圾债券的违约率将急速爬升，预计到9月底违约率将急升500%,从目 前的2.68%飙升至12%以上。在 62兆美元的信用掉期市场中，有20兆余美元在对赌垃圾债券，垃圾债违约率大幅飙升的直接后果是这种对赌行为将 大规模失败。”

　　“第二波金融海啸下，将有多至上百家对冲基金、保险公司等金融机构血本无归、最终倒闭；而商业银行资产负债表的问题也将暴露无遗， 直接冲击美国商业银行系统，美国五大商业银行倒掉几家是有可能的。”

　　外向型经济肯定受冲击

　　广东外向型经济占比大，美国经济衰退对我省乃至全国都将受到影响。宋鸿兵认为，明年美国经济会出现比较严重的衰退。在金融海啸的冲 击下，中国经济尤其是广东的外贸企业，当然会受到较大的影响。不过，据他估计，明年上半年实体经济恐怕会出现较大冲击。

　　有何良策规避风险呢？他提出，目前最重要的是按照中央经济工作会议的部署，扩大内需，拉动经济，做足各方面工作，有准备地度“严冬”。 至于如何扩大内需，他认为，目前最大的问题是生产过剩而消费不足。因此，我们提倡扩大内需，还要各级政府拿出切实可行的措施，才能将口号变 为现实行动。特别是要想方设法解决当前农村存在的问题，设法增加农民的收入，让农民敢于消费，消费得起。

　　我们黄金储备太少

　　这次金融危机的爆发，美国债务危机是导火索。宋鸿兵预测，这一危机可能持续3年以上，并可能演化为美元危机，而黄金在这个时候应该得到 我国上至国家下至平民百姓的重视。他认为，目前我国的黄金储备太少了。应该设法储备，越多越好，从战略上考虑，应该做到“藏金于国、藏金 于民、藏金于市、藏金于未来”。

　　他阐述我国储备黄金的必要性后指出，金融危机将引发美元危机，而黄金是美元定价的。美元越发越多，黄金石油这些美元定价的商品就会不 断上涨。美元贬值， 即是让全世界来为美国买单。因为他是最大的债务国，供应货币就等于是在还债。他还称，目前的黄金价格是低估了。以房 子为例，在同样的时间里，房产价格已涨了10倍以上，而黄金价格最多为1倍。

　　对于普通投资者来说，在金融危机来临时，首先是保护财富不要被这种振荡所吞噬，这是首要的。而赚钱是次要的。在危险的情况下，更重要 的是守住自己的钱袋子。至于投资的方向，他认为还是黄金。在目前黄金价格被低估情况下，可以大胆买入。他认为，越是美元疲软，被全世界看 空，黄金的走势就会越好。据他预测，国际黄金价格超过1000美元/盎司只是时间的问题。

　　南方日报记者 朱桂芳

　　金融海啸明夏将更猛烈

　　“危机最严重的时刻还没到来。”因编着畅销书《货币战争》而闻名、并提前预警美国“两房”灾难和金融海啸的经济学者宋鸿兵，再次 预言：金融海啸将在明年4至9月间升级为第二波，届时或将涌现企业倒闭潮，美国商业银行系统更会遭受前所未有的冲击，多家商业银行巨头 或会在此波海啸中倒下……

　　最近，宋鸿兵应邀做客建设银行佛山市分行举办的财富名家讲座。他以《金融海啸下中国经济的发展方向》为主题演讲，并预言“目前仿 佛一切风平浪静——金融市场稳定了，人心安定了，但实际上现在正处于两波金融海啸之间的波底，第二波正在积蓄力量！”

　　危机解读：根源在于资产膨胀依赖型经济增长模式不可持续

　　伴随着《货币战争》长期雄霸各大畅销书榜前三名，该书作者宋鸿兵迅速从一个默默无名的旅美华人变为备受瞩目和争议的经济学者。

　　在书中，他指出有美国政府背景的“两房”机构将因不合理操作而引致灾难，并预言“两房”危机恐将在今年6至8月间爆发。今年6月，宋 鸿兵再次预言次贷危机将演变成金融海啸。一个月后，“两房”股价腰斩、美国政府宣布接管，进而雷曼等投资银行陷入困境，危机，正朝着 他的预言发展。

　　由于他原来在房地美和房利美工作，他有大量的数据。他预言，6、7、8三个月是次贷危机暴发的高峰，美股将会进入快速下跌阶段，A股 难以独善其身。后来发生的一切，证明了他的看法。

　　“这次次贷危机从根本上来说是美元机制长期失衡下的爆发。”宋鸿兵表示，长期以来，美国是过度消费和较低储蓄率，2007年美国储蓄 率仅为1.7%，创下了1933年大萧条时代以来的历史最低记录。然而由于各种金融创新手段如雨后春笋般冒出来，使美国得以吸纳来自其他国家 的储蓄来弥补自身储蓄的不足。

　　在宋鸿兵看来，资本的膨胀在长期失衡累积下必然会有一阵调整。他认为此次金融海啸实质是虚拟经济的财富分配导致实体经济无法持续 有效运作，根源在于资产膨胀依赖型经济增长模式不可持续。

　　危机预测：金融海啸明夏升级第二波

　　“金融海啸远没有结束，2009年夏，它将会开始第二波的冲击，冲击力度也将是第一波的三倍。”宋鸿兵将此次危机分为4个阶段，次贷地 震——违约海啸——利率火山——美元冰河。目前，正处于两波中间的低谷，明年6、7、8三个月危机将会殃及美国五大商业银行。 宋鸿兵表 示，2009年夏，企业债及公债等违约问题，尤其是企业垃圾债，将导致大数额的CDS市场（CDS为信用违约掉期）发生违约危机，金融海啸将开 始第二波的有力冲击。他预计，美国垃圾债券的违约率将急速爬升，而这一切将给美国五大商业银行猛力冲击。

　　“明年信用掉期市场会发生违约危机。从美国商业银行资产负债表上看，其主要投向了表外的SIV资产、按揭抵押债券，两房债券、CDO、 CDS，以及垃圾债券，在信用违约掉期市场违约率飙升过程中，而这些放贷中的大部分将永远无法偿还了，将冲击更多的对冲基金、保险公司等 金融机构，而美国五大商业银行也将遭受前所未有的冲击，可能会在此波海啸中倒下。”

　　不仅如此，宋鸿兵认为金融海啸的冲击波远远未止，将会迎来第三波、第四波。第三波的利率火山危机，即信贷全面紧缩造成长期贷款利 率飙升，触发利率掉期市场危机，以及第四波的“美元冰河”危机。全球美元资产将出现信心危机，从而动摇美元世界储备货币的地位。

　　危机应对：游戏规则或将有新调整

　　然而，在最近美元走强形势下，有专家开始对美国经济形势看好，他们认为美元走强是由于美国经济处于复苏之中，美国与欧洲其它国家 相比，目前经济状况有所好转，已经过了最艰难时期。

　　对此，宋鸿兵另有看法，他认为目前的金融衍生品等资产是以美元计价的，市场在大量抛售这些美元资产，从而引起美元稀缺，导致美元 走强。他认为，美国的形势依然不看好，一旦每年创造的GDP全部增加值还偿还不了债务利息，美元体系可能最后会崩溃。

　　“不过，美国是游戏规则的定义者，所以并无法肯定美元体系最终一定会崩溃。但可以说的是目前这种美元体系面临着游戏规则的改变。 会有新的调整。”宋鸿兵认为。

　　问及如何评价我国对金融海啸的应对措施时，宋鸿兵承认，全球金融海啸对我国会产生不利影响，但他认为我国的金融体系仍是安全的。 对于中国政府的4万亿救市方案，他表示很有帮助，但至于力度和效果如何，还有待实际情况验证。

　　一旦关于第二波海啸袭来的预言不幸被验证，中国将如何应对？宋鸿兵坦言，目前国家出台的救市政策对稳定经济发展能产生有利的影响 ，但届时我国金融市场将遭遇一系列更新的问题，大家应提前有心理预期，着手思考新的应对之策。

　　佛山日报记者 李琳、罗超

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Invest in Gold and KISS US Dollar bye bye

There is a few ways to invest your money in Gold:-

1) Buy physical Gold coin.

2) Invest in SGX ETF Gold (GLD 10US$).

3) invest in US market on those Gold ETF:-

a) PowerShares DB US Dollar Bearish Fund (UDN)

b) PowerShares DB Gold Double Long (DGP)

c) Market Vectors Gold Miners ETF (GDX)

Once the gold price hit ever high it will have a gold Rush effect on the Gold price as a result of world currency printed more and more that may lead to hyperinflation that are in the long term future. We cannot stop Govt. from printing Dollar notes but we can bought some gold for hedging the loss of the currency value due to dilution of dollar notes in all part of the world.

Invest in SGX ETF Gold (GLD 10US$).

For invest in SGX ETF Gold, you can used your CPF Gold investment account to invest on SGX ETF GOLD 10US$ or you used your own saving that are in Singapore Dollar (that come without CPF check)

Please click the picture to to learn to know how to fill the order for purchase the Gold ETF in SGX.

Reference:-

http://en.wikipedia.org/wiki/Reserve_Currency

http://en.wikipedia.org/wiki/Foreign_exchange_reserves

Falling of US Dollar may have a short term effect this will have to watch Bank of Japan (BOJ) action on Japanese YEN as they are the one of the major US Dollar reserves Holder and their economy is getting hit very badly due to ever highest high Japanese Yen.

There are few thing to watch out in the investment of GOLD:-

1) China's interest rate, China currency, China's money supply.

2) Japanese Yen exchange rate, BOJ intervention of US Dollar and rate cut etc.

3) Gold supply in this market, central banks that are going to sell more Gold in the market.

4) Singapore MAS further devalue Singapore dollar. (coming April 2009)

Those Govt. have their own reason to devalue their own currency, they have to walk out of the crisis as the jobless rate in their country is getting ever high and there will be a social unrest threat to those Govt. if they don't anything at all or do too little.

Next year 2009 will be the year of currencies turbulence. we shall watch it the news for update.

Fed Cuts Rates to Near 0%, Vows to Bolster Economy

The Federal Reserve slashed its target for overnight interest rates to a record low of zero to 0.25 percent, and said it would employ "all available tools" to battle a year-long recession.

The surprise move to lower its target for the benchmark federal funds rate from one percent puts the Fed in uncharted territory. Financial markets had expected the Fed to lower rates by no more than three-quarters of a point, to 0.25 percent.

AP

In its statement, the Fed underscored its committment to use extraordinary measures, including using its balance sheet to support the credit markets.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said.

The cut in the federal funds rate pushes it to its lowest level on records dating to July 1954, and the central bank said it would likely keep it at "exceptionally low levels for some time."

"There is no more room to cut rates, as the target cannot go negative," said economist Chris Rupkey of Bank of Tokyo-Mitsubishi.  "Quantitative easing will be the new way for the Fed to stimulate the economy going forward."

In addition to the rate cut, the Fed said it was prepared to expand already announced large purchases of debt issued by government-sponsored mortgage agencies to support the battered US housing market.

The program to buy $600 billion in debt and mortgage-backed securities from mortgage giants Fannie Mae and Freddie Mac already has helped pushed mortgage rates down.

The Fed, however, remained cautious about another unusual measure, which Fed Chairman Ben Bernanke first floated two weeks ago. The statement said the central bank was still "considering" buying long-term Treasury securities, which is also thought to be aimed at lowering borrowing costs by going around commercial banks.

By boosting the quantity of money in the financial system, the Fed has engaged in so-called "quantitative easing" to provide economic relief. The Fed's balance sheet has ballooned to $2.2 trillion, from close to $900 billion in September, reflecting efforts to mend the financial system.

"With this statement the Fed embarks on a no-holds barred posture to help the economy." said Robert Brusca, chief economist at Fact & Opinion Economics. "The rate cut is the least of what the Fed is doing."

Mickey Levy, chief economist at Bank of America, said the Fed emphasized its intention to focus on "open market purchases of agency mortgages and debt, which will involve allowing the federal funds rate go toward 0%."

Prices for US stocks and government debt shot higher, while the dollar slipped, on the Fed's announcement.

"It's a highly unorthodox and creative step," said Michael Woolfolk, senior currency strategist, at the Bank of New York-Mellon in New York. "We think it's the best possible move for the U.S. consumer and for the financial market."

The Fed's unusual decision to establish a target range for the federal funds rate rather than a set level is a clear response to recent market conditions, where the rate has actually traded well below the one percent target.

The Fed is "acknowledging that", Bob Doll of BlackRock told CNBC. In recent days, the rate has been solidly below 0.25 percent.

In its statement, the Fed signaled its intentions by saying circumstances "warrant" keeping interest rates low for "some time." The Fed empoyed a similar telegraphing approach during the 2003 period when there were worries about inflation. That successfully managed the market's expectations.

"He [Bernanke] took the conventional funds rate out of play," says David Jones, of DMJ Advisors. "He's saying I'm going to use everything in my power."

Doll says the Fed is trying to get investors to buy a broader range of debt products than Treasuries, which have benefitted from an enormous flight to safety in recent months.

If successful, investors will move to government agency securities and then corporate bonds, which market strategists say is a necessary precondition to any sustainable improvement in stock prices.

Though economists and money managers welcomed the Fed's latest innovation, it did raise some concen about the state of the economy.

"The economy must be in pretty bad shape if the Fed needs to jump market expectations and push rates just a hair above the zero line," said Rupkey.
One veteran economist—among those who thought the Fed had already eased more than enough—said the central bank may have created an interesting predictament for itself and the markets going forward.

"What will the statement at the end of January say other than offer a litany of all the risky assets they are buying," asked Ram Bhagavatula of Combinatorics Capital. "How does that indicate whether monetary policy is more or less easy?"

—AP and Reuters contributed to this story.

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US Dollar is expected to drop over the long term, Fed have cut the Fed fund rate to the lowest ever seem in US history. you have to buy Gold for hedging against Dollar falling. The reason to buy Gold is simple because Gold in this earth is limited as the US Dollar is unlimited, Fed needed to print as much Dollar note to bail out those Banks and companies that needed the money to finance their business operation.

Next year 2009 Singapore Dollar may will depreciate by printing more Singapore dollar, this is to invite more direct investment to Singapore, to simulate the export for income. In this method the depreciate of Singapore Dollar will maintain the US strong Dollar policy. There may have a side effect in the future economy growth that is inflation. The inflation actually come from US but all over the world central banks will print more their currency notes, in another word, this wil import US inflation to their own country so inflation in future cannot be avoided if MAS want to depreciate Singapore Dollar by printing more notes the amount of monies to be print in order to maintain that strong US Dollar policy to a standard will be huge. So what do you think about the gold price in the future will be?

Sell These Assets Before The Ground Gives Way Beneath Them.

Publish Post

Bill Bonner - Mon 15 Dec, 2008

The ground is giving way beneath our feet: Sell the dollar... Sell Treasuries...

Sell these assets before the ground gives way beneath them Sell the Dollar and Sell Treasuries London, England

The ground is giving way beneath our feet: Sell the dollar...Sell Treasuries.

People still stand their ground...they do not panic. They do the right thing. But then, they go into work – but find they have no jobs. They look at their pension account – wisely invested in a diversified portfolio – and find that it has lost half its value. And their houses lose 20% of their value. In places such as San Diego, Las Vegas and Miami, the losses are more like 30%- 40%.

The ground gives way...and they find themselves in Hell.

Friday, the Dow registered a 61 point improvement, after much disappointment the day before. Is the rally on or off? We don’t know...

But what MUST happen, WILL happen. Fish gotta swim. Birds gotta fly. And bubbles gotta pop. The bubble in private debt has popped already. And now, the bubble in public debt has to pop too. And the dollar’s got to go down. That’s when the ground will really give way... For many people, the collapse of the dollar will wipe out what is left of their assets. Pension funds and insurance companies will be devastated. Savers will be unsaved.

Investors have rushed from risky investments of all sorts – emerging markets, mature markets, real estate, commodities – into the strong, welcoming arms of the US Treasury market. “Give me your tired, your poor huddled masses of dollars...yearning for protection from capitalism,” says Uncle Sam. “And I’ll give you 2.58% return over 10 years. Give me your money for 91 days, and I’ll give you nothing.”

Is that a good deal, dear reader? It depends on how solid the ground is under the US Treasury market. So far, as the ground gives way under other asset classes, the Treasury market has held solid.

But here is why the word “must” was invented. When something’s gotta happen, it’s gotta happen. The US Federal government already has an official national debt over $10 trillion. The deficit for next year will likely exceed $1 trillion...and could reach up to $2 trillion by 2010 – or more than 4 times the biggest deficit the country has ever run...and more than the entire US budget only 7 years ago. At this rate, in a couple of years, US debt will exceed US GDP.

Is it likely that the feds can so greatly increase the quantity of US debt without reducing the quality of it? Is it likely that the last IOU issued by the federal government will be as valuable as the first? No, it’s not likely. Something’s gotta give.

And we are talking about big money. A business or a small government can sometimes borrow more than its annual revenues. It’s borrowing can be funded by a small percentage of the world’s reckless savers. Lending to US government on such a scale is another matter. It takes up a large percentage of the world’s total savings, effectively shouldering other borrowers out of the way, and actually reducing the world’s capacity for economic growth.

Everybody, except bankers of course, knows that lending large amounts to a small country is extremely speculative. But lending to the US for ten years at 2.58% has a nasty stink of certainty about it. You can’t borrow that kind of money without some consequences...and the consequences of that much debt are bound to be bad.

To us, it seems almost inevitable that it will turn out to be a bad place to put your money. Because the ground is almost sure to give way beneath the feet of Treasury-market investors. How so? Ben Bernanke has already told us. When the borrowing gets tough, the Fed will turn to other forms of liquidity – buying US treasury bonds itself. In other words, instead of borrowing from savers – thus leaving the net money supply unchanged – the Treasury will borrow from the Fed. Where will the Fed get trillions of extra dollars? It will create them out of thin air.

That’s why the dollar has turned down.

“Greenback’s haven status thrown into doubt,” reported the Financial Times.

Last week, the euro jumped to $1.33 – a level it hasn’t seen in many months. And gold keeps edging up. It’s up to $820 an ounce as of last week.

The dollar is Hell-bound, dear reader. Sell it. And sell Treasuries too. We might be early with this advice. But we won’t be wrong.

*** If you want to own gold coins, you’ll pay $870 - $890 an ounce. Coins are scarce. People are looking for something solid to hold onto. Coins are solid. They are portable. They have no hidden liabilities.

And you won’t pick up the paper and find that a crook like Bernard Madoff has stolen away the value of your gold coins. The latest Wall Street desperado took investors for some $50 billion. And now the FBI, SEC and all the gumshoes and hacks are making a big deal of it.

Of course, in purely financial terms it is a big deal. The press has labeled it a “ponzi scheme.” But Charles Ponzi took in only $10 million. Peanuts compared Madoff’s scheme.

Another important difference. Ponzi took money from ordinary investors, widows and orphans. But Madoff went for bigger game – hedge funds, banks, and professionals. Today’s news tells us that the world’s largest bank – HSBC – was a victim. Banks in Geneva said they were out $4 billion. The Fairfield Greenwich Group said it had invested $7.5 billion with Madoff.

Of course, we don’t like to see widows and orphans get scammed. But hedge funds? Banks? Who can honestly say that they don’t enjoy seeing these mighty moneymen tripping over their own greedy delusions? Here at the Daily Reckoning...the news of Wall Street’s losses cheers us up...like reading the obituaries and finding no mention of our own name.

But when you own a gold coin you won’t have to wonder if the balance sheet is made up...or if the trades were fictitious...or why the SEC was asleep at the switch. A gold coin is what it is...no more, no less.

When the ground gives way...gold coins stay right where they were – or go up in value.

Not that we’re urging you to buy gold coins. We did that for the last 8 years. Now, you’re on your own.

*** Word from the Washington Post is that autoworkers are “angry.” Why should they be angry? They’ve been paid far too much (compared to autoworkers in, say, India) for far too long. Now their gravy train seems to be stalled on a sidling and they want the government to “do something” to get it going again.

It isn’t fair for the feds to bail out Wall Street but not Detroit, they say.

Elsewhere in the news, Bloomberg has asked the Fed to reveal what it did with the $2 trillion in emergency loans it passed out. Surely, the money went to the Fed’s clients – banks, and financial institutions generally. How? To whom? What were the terms? The Fed wouldn’t say. It refused the Freedom of Information Act petition on several grounds.

“Blank check for banks, pink slips for Detroit,” is how Gretchen Morgenson explains it in the New York Times.

The UAW (United Auto Workers) has a point, of course. Neither industry should be bailed out. But if you’re going to throw money around in Manhattan, why not toss some to Detroit?

But the autoworkers can stop kvetching. Detroit will get its bailout too. Just wait.

*** “What Hell Really is...” said the sign in front of a church in Arizona. “Choir practice at 4 PM!” was the next line.

Angry Citi investors to unveil new court complaint

NEW YORK - After Citigroup shares tumbled last year on the bank's subprime mortgage woes, angry investors sued for fraud.

Now, stockholders are due to file a new version of their lawsuit as their losses have become much more stark.

A lot has changed for the worse for Citigroup stockholders since the lawsuit about its subprime debt exposure was first brought in November 2007. The bank's shares are trading at around US$6 apiece compared with US$31 a year ago - even after two government bailouts in the last two months.

The US government this week agreed to inject US$20 billion of capital and shoulder nearly US$250 billion in potential losses on about US$306 billion of the bank's risky assets - after injecting US$25 billion of taxpayer money in October.

A consolidated shareholder complaint in the case is scheduled to be filed in US District Court in Manhattan by Monday. An earlier version accused Citigroup and several individuals, including former CEO Charles Prince, of violating securities law by artificially boosting the bank's stock price by concealing its exposure to subprime-linked debt.

Citigroup believes the lawsuit 'is without merit, and will defend against it vigorously,' company spokesman Mike Hanretta said on Tuesday.

The lawsuit, which seeks class-action status on behalf of a large group of stockholders, could be among the biggest subprime-related cases moving through US courts, given Citigroup's huge stock market declines.

The company was once the biggest US financial institution based on stock market value, but shares have plummeted and are down 54 per cent this month alone. Shareholder lawsuits can take years to litigate, and many are ultimately thrown out by courts or settled.

The lead plaintiff is a group of former employees and directors at closely held Automated Trading Desk (ATD) who received Citigroup stock in exchange for selling their electronic trading firm to the bank in a US$680 million deal announced in July 2007.

Through that deal, group members acquired more than 3.9 million Citigroup shares, which were valued at about US$52 a piece at the time the buyout was being negotiated, according to a January court filing from the ATD plaintiffs.

The group said its members had suffered losses of about US$76.8 million as of January, a figure that is much higher now given Citigroup's stock declines this year.

A lawyer for the shareholders, Ira Press of law firm Kirby McInerney LLP in New York, declined to comment about the specifics of the new court complaint, saying it is still being drafted.
'If last week is any indication, the story may still be unfolding,' he said. 'We are obviously continuously monitoring the unfolding events.'

The original lawsuit was filed by an individual investor. Other shareholders have competed to become lead plaintiff, a role that allows investors to help set strategy in litigation and play a role in any possible settlement talks.

US District Judge Sidney Stein, who is overseeing the case, appointed the ATD Group as the lead plaintiff in August.

The End--

Recession’s Grip Forces U.S. to Flood World With More Dollars

news retrieve from Bloomberg (date: 25 Nov. 2008)

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The world needs more dollars. The United States is preparing to provide them.

In an all-out assault on capitalism’s worst crisis since the Great Depression, the U.S. is taking on the role of both lender and borrower of last resort for the global economy.

The Federal Reserve, which has already pumped out hundreds of billions of dollars, might formally adopt a policy of flooding the world financial system with even more money. The Treasury, on course to borrow some $1.5 trillion this fiscal year, may tap global capital markets for even more to finance a fiscal stimulus package of as much as $700 billion and provide additional bailout money for banks.

“You want to do everything you can when you’re facing the threat of a deflationary breakdown of the economy,” says Michael Feroli, a former Fed official who is now an economist at JPMorgan Chase & Co. in New York. He sees the central bank cutting the overnight lending rate to zero in January and holding it there throughout the year.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are being forced to pull out the stops because the extraordinary actions they’ve taken so far have failed to gain much traction. Credit markets are collapsing, stock prices are plunging and the world economy is sinking into a recession.

As the economy deteriorates, deflation -- a sustained decline in wages and prices -- is emerging as a new threat. U.S. government figures last week showed that consumer prices excluding food and fuel costs fell in October for the first time since 1982.

Shell-Shocked

Investors, shell-shocked by the turmoil, are piling into super-safe Treasury securities, even as the U.S. government ships more supply out the door. Three-month bill rates dropped last week to 0.01 percent, the lowest since at least January 1940, and yields on Treasuries maturing in two through 30 years all fell to the least since the government began regular sales of the securities.

And the dollar has risen as loss-ridden banks worldwide husband their resources, even after receiving generous dollops of liquidity from the Fed. The U.S. currency has surged about 17 percent against the euro -- signaling demand for still more dollars -- in the two months since the crisis deepened after the failure of Lehman Brothers Holdings Inc. Meanwhile, gold is down almost 25 percent from its peak in March.

Swap Lines

To help fight the worldwide dollar squeeze, the Fed has set up currency swap lines with more than a dozen other central banks. Some arrangements, including those with Europe, Britain and Japan, are open-ended, allowing the Fed’s counterparts to draw as many dollars as they need. The U.S. has also established individual $30 billion swap lines with Brazil, Mexico, South Korea and Singapore.

In a speech to a banking conference on Nov. 14, Bernanke characterized these efforts as an “internationally coordinated approach” among central banks to fulfill their function as lenders of last resort.

As the Fed has stepped up its efforts to combat the credit crisis, its balance sheet has mushroomed. Assets rose to $2.2 trillion on Nov. 19 from $924 billion on Sept. 10, just before the bankruptcy of Lehman Brothers shook the global financial system.

The central bank’s holdings are likely to increase further. “I would not be surprised to see them aggregate to $3 trillion -- roughly 20 percent of GDP -- by the time we ring in the new year,” Dallas Fed President Richard Fisher told the Texas Cattle Feeders Association on Nov. 4.

Only the Start

That may be only the start if the Fed cuts its benchmark rate, now at 1 percent, to zero and adopts what economists call a policy of “quantitative easing.” Under such a strategy, it would concentrate on expanding the amount of reserves in the banking system because it could no longer reduce the cost of that money.

The Bank of Japan followed this policy in the early part of the decade as it struggled to rescue the world’s second-largest economy from the grip of deflation. Its balance sheet eventually rose to the equivalent of about 30 percent of gross domestic product, says Tom Gallagher, head of policy research for International Strategy and Investment Group in Washington.

“The Fed could blow through the BOJ’s ceiling,” he adds - - ballooning the central bank’s holdings to more than $4 trillion.

The Treasury is also heading into uncharted territory as it taps capital markets for cash to help finance its bailout fund for the banking system and plug holes in the federal budget caused by the weak economy.

Money From Abroad

Much of that money will come from abroad. “Foreigners don’t seem to be interested in any kind of risky U.S. asset,” says Brad Setser, a former Treasury official now at the Council on Foreign Relations in New York. So, “instead, they are buying Treasuries.” That includes China, which recently passed Japan as the biggest holder of Treasuries.

On Nov. 3, the department tripled its estimate of planned debt sales in the final three months of the year to a record $550 billion. Paulson told a conference in Washington Nov. 17 that the U.S. will issue some $1.5 trillion worth of Treasury securities in the fiscal year that began Oct. 1.

That number, too, could grow. Lawrence Summers, Treasury secretary under President Bill Clinton and an adviser to President-elect Barack Obama, told the same conference that the U.S. needs a “speedy, substantial and sustained” stimulus package to aid the economy.

More Government Spending

“Government may have to spend $600 billion to $700 billion next year to reverse the downward cycle,” Robert Reich, another Obama adviser and a professor at the University of California at Berkeley, wrote in his personal blog Nov. 9.

Kenneth Rogoff, a professor at Harvard University in Cambridge, Massachusetts, and former chief economist at the International Monetary Fund, says the new administration will also have to ask Congress for more money to repair the financial system, over and above the $700 billion already authorized for Paulson’s Troubled Asset Relief Program.

“By the time all this ends, the TARP is going to be closer to $2 trillion than $1 trillion,” ISI’s Gallagher says.

Paulson has already committed $290 billion from the program to buy preferred shares in banks and troubled insurer American International Group Inc.

There’s always a danger the Fed and Treasury may go too far, setting the stage for a big rise in inflation or another asset bubble down the road as the economy revs up and investors get back their nerve. That’s what happened in the early part of the decade as ultra-easy Fed policy and Treasury tax cuts helped fuel a credit boom since gone bust.

Bernanke and Paulson might welcome a bit of that exuberance right now -- even at the risk of higher inflation later -- as they try to prevent the biggest credit catastrophe in decades from sending the economy into a deflationary nosedive.

“It’s true that, over the long run, too much money creates inflation,” says Lyle Gramley, a former Fed governor now at the Stanford Group Co. in Washington. “But they’re trying to keep the economy from going over the precipice and into the abyss.” 

Geithner Struggled to Get Movement on Swap Dangers

news retrieve from Bloomberg (Date: 25 Nov. 2008)

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Timothy Geithner was among the first policy makers to shine a light on the unregulated $47 trillion credit-default swap market back in 2005. The New York Federal Reserve president has struggled since then to get dealers to carry out reforms.

The industry has yet to launch a structure to safeguard against market-wide losses in case a dealer fails, though its leaders expect to get one off the ground by the end of the year. Geithner, selected yesterday by President-elect Barack Obama to be his Treasury secretary, has made clear that such a step is crucial to help contain the mushrooming credit crisis.

“In classic Tim and New York Fed style, the work has been done behind the scenes, among technocrats, largely by consensus,” said Adam Posen, a former Fed official who is now at the Peterson Institute for International Economics in Washington. “The downside is that it takes awhile to get consensus.”

Geithner may not have the luxury of time in his new job as he faces a credit crisis that has morphed into a global recession. As Obama’s chief economic spokesman, it will be up to Geithner to take the lead in quelling the turmoil in financial markets and turning the economy around.

A protégé of former Treasury Secretary and Citigroup Inc. director Robert E. Rubin, Geithner worked on the Asian financial crisis of 1997-1998 and helped stave off a Mexican default earlier that decade.

Bank Capital

In the current crisis, Geithner, 47, was the Fed’s point man in the rescues of Bear Stearns Cos. and American International Group Inc., and tried to stem market turmoil after the decision to allow Lehman Brothers Holdings Inc. to fail. In August, he put his staff to work figuring out how much capital major banks would need if the economy worsened, foreshadowing the steps Treasury Secretary Henry Paulson later took to invest some $125 billion in the country’s largest banks.

Geithner’s skills and limitations as a consensus-builder perhaps show up most clearly, though, in his handling of credit- default swaps, where he played a leading role in trying to make the market safer and more stable.

Trading in credit-default swaps, which were conceived to protect bondholders against default, exploded 100-fold the past decade as investors increasingly used them to speculate on creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrowers fail to adhere to their debt agreements.

Unregulated Market

The big problem Geithner faced in trying to get a handle on the market: It was unregulated, so he lacked authority to make changes on his own and had to depend on his powers of persuasion.

The New York Fed chief began pressing banks in September 2005 to reduce trading backlogs that could prove dangerous should a crisis hit. An average 17 days’ worth of unsigned trades had piled up on dealers’ books, threatening to undermine the market if a wave of defaults hit. A lax system for unwinding and reassigning trades left dealers at times unsure of who was on the other side of their trade.

It took dealers a while to respond. A year later, they had cut the backlog of unsigned trades by 70 percent and doubled the number of deals that were electronically processed.

“It was like herding cats,” said Brad Bailey, director of business development at Jersey City, New Jersey-based brokerage Knight Capital Group and a former derivatives trader, who praised Geithner for making the effort and getting results.

Absorb Losses

The New York Fed chief has run into similar problems in trying to get the industry to set up a central counterparty that would absorb losses on trades in the event a dealer went bust.

After the collapse of Lehman Brothers in September sent market participants scrambling to cover an estimated $2 trillion of trades, the New York Fed chief stepped up pressure on the dealers to act.

On Oct. 7, he summoned the dealers and fellow regulators to the New York Fed. This time, he included futures exchanges at the meeting -- Chicago-based CME Group Inc., Intercontinental Exchange Inc., NYSE Euronext and Frankfurt-based futures exchange Eurex -- in a bid to put competitive pressure on the dealers to come up with a satisfactory plan.

The strategy worked. After three meetings in two weeks, the dealer-owned Clearing Corp. agreed to be acquired by Intercontinental Exchange, one of the exchanges vying for a piece of the market. That paved the way for the launch of at least one clearinghouse by the end of the year.

‘Ahead of Game’

“The Fed can only be commended for being ahead of the game among regulators globally,” said Mark Yallop, chief operating officer of London-based ICAP Plc, the world’s biggest broker of trades between banks and a minority owner in Clearing Corp.

Not everyone agrees. Julian Mann, a mortgage- and asset- backed bond manager at First Pacific Advisors LLC in Los Angeles, criticized Geithner for not doing enough.

“He oversaw the massive expansion in the credit-default swaps market, which arguably is what is behind much of the crisis today,” said Mann, whose firm manages about $9 billion.

Vincent Reinhart, a former senior Fed official now at the American Enterprise Institute in Washington, said that Geithner was quick to recognize some of the problems with the swaps market, though it was tough for him to persuade the industry to carry out reforms while business was booming.

“It shows the limits of what he could do,” Reinhart said, referring to the fact that the market is unregulated. “He had to try to induce good behavior rather than command it.” 

U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit.

news retrieved from Bloomberg (Date: 24 Nov. 2008)

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The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”

Too Big to Fail

Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.

The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.

William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as “too big to fail,” he said.

‘Credit Risk’

The government committed $29 billion to help engineer the takeover in March of Bear Stearns Cos. by New York-based JPMorgan Chase & Co. and $122.8 billion in addition to TARP allocations to bail out New York-based American International Group Inc., once the world’s largest insurer.

Citigroup received $306 billion of government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject $20 billion into the bank after its stock fell 60 percent last week.

“No question there is some credit risk there,” Poole said.

Congressman Darrell Issa, a California Republican on the Oversight and Government Reform Committee, said risk is lurking in the programs that Poole thinks are safe.

“The thing that people don’t understand is it’s not how likely that the exposure becomes a reality, but what if it does?” Issa said. “There’s no transparency to it so who’s to say they’re right?”

The worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies and brought down three of the biggest Wall Street firms.

Markets Down

The Dow Jones Industrial Average through Friday is down 38 percent since the beginning of the year and 43 percent from its peak on Oct. 9, 2007. The S&P 500 fell 45 percent from the beginning of the year through Friday and 49 percent from its peak on Oct. 9, 2007. The Nikkei 225 Index has fallen 46 percent from the beginning of the year through Friday and 57 percent from its most recent peak of 18,261.98 on July 9, 2007. Goldman Sachs Group Inc. is down 78 percent, to $53.31, on Friday from its peak of $247.92 on Oct. 31, 2007, and 75 percent this year.

Regulators hope the rescue will contain the damage and keep banks providing the credit that is the lifeblood of the U.S. economy.

Most of the spending programs are run out of the New York Fed, whose president, Timothy Geithner, is said to be President- elect Barack Obama’s choice to be Treasury Secretary.

‘They Got Snookered’

The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.

“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer.”

President Franklin D. Roosevelt’s New Deal of the 1930s, when almost 10,000 banks failed and there was no mechanism to bolster them with cash, is the only rival to the government’s current response. The savings and loan bailout of the 1990s cost $209.5 billion in inflation-adjusted numbers, of which $173 billion came from taxpayers, according to a July 1996 report by the U.S. General Accounting Office, now called the Government Accountability Office.

‘Worst Crisis’

The 1979 U.S. government bailout of Chrysler consisted of bond guarantees, adjusted for inflation, of $4.2 billion, according to a Heritage Foundation report.

The commitment of public money is appropriate to the peril, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. and a former economist at the New York Fed. U.S. financial firms have taken writedowns and losses of $666.1 billion since the beginning of 2007, according to Bloomberg data.

“This is the worst capital markets crisis in modern history,” Harris said. “So you have the biggest intervention in modern history.”

Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral.

Collateral is an asset pledged to a lender in the event a loan payment isn’t made.

‘That’s Counterproductive’

“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,” Bernanke said Nov. 18 to the House Financial Services Committee. “We think that’s counterproductive.”

The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Corp. and a former research economist at the Federal Reserve Bank of Chicago.

“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.

Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61 percent of the total commitment of $7.76 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.

“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”

Fed Rescue Efforts

The Fed’s rescue attempts began last December with the creation of the Term Auction Facility to allow lending to dealers for collateral. After Bear Stearns’s collapse in March, the central bank started making direct loans to securities firms at the same discount rate it charges commercial banks, which take customer deposits.

In the three years before the crisis, such average weekly borrowing by banks was $48 million, according to the central bank. Last week it was $91.5 billion.

The failure of a second securities firm, Lehman Brothers Holdings Inc., in September, led to the creation of the Commercial Paper Funding Facility and the Money Market Investor Funding Facility, or MMIFF. The two programs, which have pledged $2.3 trillion, are designed to restore calm in the money markets, which deal in certificates of deposit, commercial paper and Treasury bills.

Lehman Failure

“Money markets seized up after Lehman failed,” said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker. “Lehman failing made a lot of subsequent actions necessary.”

The FDIC, chaired by Sheila Bair, is contributing 20 percent of total rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount to a bank subsidy of as much as $54 billion over three years, or $18 billion a year, because borrowers will pay a lower interest rate than they would on the open market, according to Raghu Sundurum and Viral Acharya of New York University and the London Business School.

Congress and the Treasury have ponied up $892 billion in TARP and other funding, or 11.5 percent.

The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee $300 billion of mortgages, or about 4 percent of the total commitment, with its Hope for Homeowners program, designed to keep distressed borrowers from foreclosure.

Federal Guarantees

Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least $6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.

Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on $444 billion in mortgages at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC spokesman David Barr. The Treasury Department hasn’t approved the program.

Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac, a pledge that hasn’t been allocated to any agency. The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit.

Automakers Struggle

The tally doesn’t include money to General Motors Corp., Ford Motor Co. and Chrysler LLC. Obama has said he favors financial assistance to keep them from collapse.

Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.

“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said.

In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.

“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said.

A haircut refers to the practice of lending less money than the collateral’s current market value.

Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.

‘Mark to Market’

“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”

“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices.

Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.

Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.

“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.

The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.

House Financial Services Committee Chairman Barney Frank said he was angry that banks used the money for acquisitions.

“The only purpose for this money is to lend,” said Frank, a Massachusetts Democrat. “It’s not for dividends, it’s not for purchases of new banks, it’s not for bonuses. There better be a showing of increased lending roughly in the amount of the capital infusions” or Congress may not approve the second half of the TARP money. 

George Soros and other hegde fund billionaires finally forced to answer some questions.

Geroge Soros the money behind the purchase of California law, such as Prop 215, the medical marijuana scam, and 36, the get out of jail free card, was forced to testify before the house oversight committee. Soros lost his most recent bid to legalize drugs in California, as Prop 5 went down in flames!

George Soros, Jim Simons, John Paulson, Philip Falcone, and Kenneth Griffin are sworn in. Photograph: Tim Sloane/AFP/Getty

America's top hedge fund managers staunchly defended the conduct of their secretive, high-risk industry yesterday and warned Congress that knee-jerk regulation could push financial jobs across the Atlantic to London.

In a rare day of public scrutiny, the billionaire bosses of five leading hedge funds appeared before the house oversight committee to answer charges that their unregulated bets on financial markets have destabilised the global economy.

George Soros, Kenneth Griffin, Philip Falcone, Jim Simons and John Paulson - who have an estimated combined wealth of $29bn (£20bn) - faced grilling over their low rate of tax and their funds' minimal level of transparency.

They expressed a willingness to disclose more information about their investments to the securities and exchange commission but insisted that any such data must remain shielded from the public gaze.

Griffin, whose Chicago-based Citadel Group manages more than $20bn, told lawmakers that public transparency would be "parallel to asking Coca-Cola to disclose their secret formula to the world".

The 40-year-old added that periods of regulatory uncertainty had undermined the US's competitiveness with Britain: "It breaks my heart when I go to Canary Wharf and I look at thousands and thousands of jobs in London in the derivatives market which belong in America."

The hearing, part of an investigation into oversight of hedge funds, became tense at times when the billionaires were quizzed about their personal wealth. Elijah Cummings, a Democratic congressman, said a neighbour had accosted him to ask: "How does it feel to go before five folks who've got more money than God?"

Cummings called on the witnesses to explain why their income is often taxed as capital gains at 15% - below the rate paid by a "schoolteacher or a plumber".

More here:

http://www.guardian.co.uk/business/2008/nov/14/useconomy-investmentfunds

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America's top hedge fund managers staunchly defended the conduct of their secretive, high-risk industry yesterday and warned Congress that knee-jerk regulation could push financial jobs across the Atlantic to London.

In a rare day of public scrutiny, the billionaire bosses of five leading hedge funds appeared before the house oversight committee to answer charges that their unregulated bets on financial markets have destabilised the global economy.

George Soros, Kenneth Griffin, Philip Falcone, Jim Simons and John Paulson - who have an estimated combined wealth of $29bn (£20bn) - faced grilling over their low rate of tax and their funds' minimal level of transparency.

They expressed a willingness to disclose more information about their investments to the securities and exchange commission but insisted that any such data must remain shielded from the public gaze.

Griffin, whose Chicago-based Citadel Group manages more than $20bn, told lawmakers that public transparency would be "parallel to asking Coca-Cola to disclose their secret formula to the world".

The 40-year-old added that periods of regulatory uncertainty had undermined the US's competitiveness with Britain: "It breaks my heart when I go to Canary Wharf and I look at thousands and thousands of jobs in London in the derivatives market which belong in America."

The hearing, part of an investigation into oversight of hedge funds, became tense at times when the billionaires were quizzed about their personal wealth. Elijah Cummings, a Democratic congressman, said a neighbour had accosted him to ask: "How does it feel to go before five folks who've got more money than God?"

Cummings called on the witnesses to explain why their income is often taxed as capital gains at 15% - below the rate paid by a "schoolteacher or a plumber".

Paulson, who personally scooped more than $3bn last year when his fund bet against sub-prime mortgages, said the comparison was unfair. "If one of your constituents, whether they're a plumber or a teacher, bought a stock and held that stock for more than a year, they would pay a long-term rate of capital gains tax."

Several times Soros broke ranks with his colleagues to adopt a more accommodating line. The Hungarian-born financier, who proposed the establishment of a not-for-profit credit-rating agency to scrutinise derivatives, said he would have no objection to paying a standard rate of tax on all his income: "I agree to it. I've no problem with it."

The 78-year-old, who is famed for betting against sterling on Black Wednesday in 1992, said he was open to greater oversight to ensure that banks and hedge funds do not use excessive leverage by borrowing too heavily on their assets.

Soros said the financial crisis had exposed flaws in the present regulatory approach: "The fact that Lehman Brothers was allowed to declare bankruptcy in a disorderly way really caused a genuine meltdown in the financial system - a cardiac arrest."

The hedge fund managers told Congress that they owed their profits during a downturn to hard work and detailed research that turned up evidence that US mortgages were overvalued. Simons said credit-rating agencies were the most culpable financial players in failing adequately to scrutinise mortgage-backed securities: "They allowed sows' ears to be sold as silk purses."

The witnesses remained unapologetic about the scale of their personal earnings, insisting that the hedge fund industry provides liquidity and "outside-the-box thinking" to the financial markets.

Falcone, who made millions by taking short positions in banks, said he was the youngest of nine children in a working-class Minnesota town, with a father who never earned more than $14,000 a year.

"I take great pride in my upbringing," said Falcone. "Not everyone who runs a hedge fund was born on Fifth Avenue - that is the beauty of America."

The men with "more money than God"

THEY are the five best paid hedge fund managers in the world. Between them, they earned US$12.6 billion ($19.10b) last year. This, at a time when the financial world was beginning to melt down.

r George Soros, Mr Kenneth Griffin, Mr Philip Falcone, Mr Jim Simons and Mr John Paulson were hauled before the US Congress yesterday and assailed over their huge salaries, their tax perks and their contribution to the credit crisis that has engulfed the globe.

The men, however, declared themselves innocent of causing the market meltdown, The Independent reported.

One Congressman, Democrat Elijah Cummings disagreed. He said: 'These five citizens have more money than God.'

Here are their stories...


George Soros, 78
Soros Fund Management
Paid last year: US$2.9 billion

Famed as 'the man who broke the Bank of England', after netting more than US$1 billion by betting the pound would fall out of the Exchange Rate Mechanism in 1992, Mr Soros has attacked unfettered free market capitalism as being at the root of today's crisis.

With an estimated current net worth of around US$9 billion, he isranked by Forbes as the 99th-richest person in the world.

In 1997, during the Asian financial crisis, then-Malaysian Prime Minister Mahathir Mohamad blamed Mr Soros for undermining South East Asian economies by destabilising their currencies, and famously called him a 'moron'.

But in 2006, Mr Mahathir Mohamad met Mr Soros and said he accepted the latter was not responsible for the 1997-98 Asian financial crisis.


Jim Simons, 70
Renaissance Technologies
Paid last year: US$2.9 billion

The world's most expensive hedge fund manager, he is considered a mathematical genius. He charges clients 5 per cent a year, plus a whopping 44 per cent of returns beyond a certain level. His fund runs 'black box' programmes that harvest tiny profits from millions of automated trades.

Renaissance's Medallion Fund - which uses computers and trading algorithms to invest in world markets - returned more than 50per cent in the first three quarters of last year.

For all of his achievement and material success, Mr Simons' life has been beset by the kind of tragedy that few parents can fathom - the death of not one but two of his five children in separate accidents.

In 1996, his son Paul, 34, was struck by a car and killed while riding a bicycle near Mr Simons' home in Long Island, New York.

In 2003, 24-year-old son Nick drowned while on a trip to Bali.


John Paulson, 52
Paulson & Company
Paid last year: US$3.7 billion

Having run an obscure fund for 14years, he last year made what rivals called 'the greatest hedge fund trade of all time'.

As a result, Mr Paulson traded up in the Hamptons, the upstate playground for New Yorkers, and bought a lakeside compound for US$41million.

The Financial Times says he is the one figure who correctly identified the growing bubble in the US housing market.

His best-performing credit fund was up almost 600 per cent last year. That, in turn, made him the highest-earning hedge fund manager, with pay of US$3.7 billion, according to Alpha magazine.

A sharp-suited New Yorker with a taste for luxurious homes and a penchant for quoting Winston Churchill, he lives in a 2,600 sq m five-storey townhouse on New York's Upper East Side built in 1916.


Philip Falcone, 47
Harbinger Capital Partners
Paid last year: US$1.7 billion

Born in Minnesota, he was the youngest of nine kids who grew up in a three-bedroom home in a working-class neighbourhood.

His father is a utility superintendent who never made more that US$14,000 a year, while his mother worked in the local shirt factory.

Mr Falcone went to Harvard where he received an AB in Economics in 1984. After college, he went on to pursue his first love, hockey, although an injury cut short a professional hockey career abroad.

He made his fortune trading junk bonds in the '80s. His firm was founded in 2001 and made another fortune last year betting against sub-prime mortgages. His two funds boasted 114 and 176 per cent returns in 2007.

Dubbed the Midas of Misery by BusinessWeek, he made tens of millions of dollars on an earlier wager that Bear Stearns and other financial stocks would collapse.



Ken Griffin, 40
Citadel Investment Group
Paid last year: US$1.5 billion

Last year, it looked as if he would become one of the world's biggest financial players after buying up many distressed funds, banks and brokers. Now he is fighting to save his fund after losing 35 per cent of it this year.

Mr Griffin began in 1987 by trading convertible bonds as a sophomore from his Cabot House dorm room at Harvard University with US$265,000 from his mother, grandmother and two other investors.

He lives in a penthouse in Chicago that he bought for US$6.9million in 2000.

In 1999, he bought Paul Cezanne's 'Curtain, Jug and Fruit Bowl' for US$60.5 million, the most ever paid for one of the French Impressionist artist's paintings.

He keeps a row of management- theory books on a credenza behind his desk, and he says he tries to emulate one of America's most celebrated business leaders, former General Electric Co. CEO Jack Welch.

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