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History > 2008 > US > Economy (Xa)





A trader on the floor of the New York Stock Exchange on Monday.


Photograph: Brendan McDermid/Reuters


Stocks Fall Sharply on Credit Concerns


















Economy Will Return

'Better Than Ever'


October 15, 2008
Filed at 2:12 p.m. ET
The New York Times


ADA, Mich. (AP) -- President Bush says the bank rescue plan is limited because federal ownership of businesses is not good for the United States.

After having lunch Wednesday with business owners in Ada, Mich., Bush said that, frankly, he doesn't want the government involved in owning private businesses. But he says the $250 billion cash infusion into the nation's banks is necessary in the short run to unfreeze credit markets and instill confidence in the economy.

He says the deal may actually make money for taxpayers in the long term.

Bush predicts the economy will weather the downturn and come out ''better than ever.''

Bush: Economy Will Return 'Better Than Ever', NYT, 15.10.2008, http://www.nytimes.com/aponline/washington/AP-Meltdown-Bush.html






Fed: Economy Sinks Deeper Into Rut


October 15, 2008
Filed at 2:01 p.m. ET
The New York Times


WASHINGTON (AP) -- The Federal Reserve says the country sank deeper into an economic rut during the early fall.

The Fed's new snapshot of business conditions around the nation shows the economy continued to lose traction, reflecting mounting damage as financial and credit problems took a turn for the worse.

Economic activity weakened across all of the Fed's 12 regional districts, according to the report. Consumer spending slumped in most areas as did manufacturing activity.

Fed: Economy Sinks Deeper Into Rut, NYT, 15.10.2008, http://www.nytimes.com/aponline/business/AP-Fed-Economy.html






Dow Drops 500

as Retail Sales Show Steep Drop


October 15, 2008
Filed at 1:45 p.m. ET
The New York Times


NEW YORK (AP) -- The Dow Jones industrials are down more than 500 points, more than half their huge 936-point advance from Monday, and all the major indexes are down at least 5 percent. Angst over the economy is sending stocks plunging once again. A disappointing retail sales report has investors convinced that the banking crisis has caused cracks in the economy well beyond the financial sector and that a recession, if not already here, is inevitable.

In afternoon trading, the Dow Jones industrial average is down 509.50 to 8,801.40. Broader stock indicators also skidded. The Standard & Poor's 500 index fell 56.81, or 5.69 percent, to 941.20, and the Nasdaq composite index fell 85.61, or 4.81 percent, to 1,693.40.

The government's report that retail sales plunged in September by 1.2 percent -- almost double the 0.7 percent drop analysts expected -- made it clear that consumers are reluctant to spend amid a shaky economy and a punishing stock market. And the economy cannot grow unless consumers are spending.

The Commerce Department report is sobering because consumer spending accounts for more than two-thirds of U.S. economic activity. The reading comes as Wall Street is beginning to refocus its attention on the faltering economy following stepped up government efforts to revive the stagnant credit markets.

''Even though the banking sector may be returning to normal, the economy still isn't. The economy continues to face a host of other problems,'' said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com. ''We're in for a tough ride.''

Federal Reserve Chairman Ben Bernanke offered a similar assessment, warning in a speech Wednesday that patching up the credit markets won't provide an instantaneous jolt to the economy.

''Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,'' he said in prepared remarks to the Economic Club of New York.

Analysts have warned that the market will see continued volatility as it tries to recover from the devastating losses of the last month, including the nearly 2,400-point plunge in the Dow over eight sessions. Such turbulence is typical after a huge decline, but the market's uneasiness about the economy will also be reflected in the gyrations expected in the weeks and months ahead.

Doubts about the economy were already surfacing in Tuesday's session, when investors halted an early rally and began collecting profits from stocks' big Monday advance. Wednesday's data confirmed the market's fears that the economy is likely to remain weak for some time, and that corporate profits are likely to suffer.

Mark Coffelt, portfolio manager at Empiric Funds in Austin, Texas, said moves by European and U.S. government officials to begin investing directly in banks are easing worries about credit. But the steep pullback in stocks that began last month after the credit markets lurched to a near standstill has now created worries that consumers will spend less after seeing the value of their retirement accounts and other investments drop.

''Markets abhor uncertainty and so we got a lot of that resolved this weekend and we got the reward Monday but now people are saying 'OK, now what is the economy going to do?'''

''We're definitely going to get a slowdown from the terror of going through that,'' Coffelt said.

Investors were digesting the first wave of third-quarter earnings reports, including those of two banks caught up in the mortgage mess. JPMorgan Chase & Co. reported an 84 percent slide in its third-quarter profit, offering further evidence of how the financial crisis is slamming the economy.

JPMorgan, which bought the assets of failed bank Washington Mutual Inc. late last month as a result of the mortgage bust, said the profit drop reflected losses on bad mortgage investments, leveraged loans and home loans. The quarter's performance beat expectations, however.

Wells Fargo & Co., meanwhile, reported that its third-quarter profit fell 23 percent after it took hits on investments in troubled finance companies and increased its credit reserves. Still, results topped expectations. Wells Fargo is in the process of acquiring stricken Wachovia Corp.; Wells Fargo and JPMorgan, despite their own troubles, are regarded as among the nation's strongest banks.

If Wednesday's decline holds, the Dow will, after a one-day break, resume a string of triple-digit losses or gains. On Tuesday, after swinging erratically throughout the session, the blue-chip index closed the day down a moderate 76 points.

The stock market is trying to recover from last week's terrible run, which erased about $2.4 trillion in shareholder wealth and brought the Dow to its lowest level since April 2003. The tumble occurred amid a seize-up in lending stemming from a lack of trust among institutions in response to the bankruptcy of investment bank Lehman Brothers Holdings Inc. and the failure of Washington Mutual Inc., which had been the nation's largest thrift.

The credit markets have been showing tentative signs of recovery, though they remain strained, and demand for safe assets remains high. The three-month Treasury bill on Wednesday was yielding 0.33 percent, up from 0.30 percent on Tuesday. Overall yields remain low, showing that demand is so high that investors are willing to earn meager returns as long as their principal is preserved.

In other economic data Wednesday, the Labor Department said the producer price index, which measures inflation pressures before they reach the consumer, fell 0.4 percent in September, driven by lower energy costs. That decline matched analysts' expectations.

Late Tuesday, Intel Corp., the world's largest maker of PC microprocessors, beat analysts' estimates and posted a third-quarter profit increase of 12 percent. Intel rose 16 cents to $15.77.

JPMorgan's results topped forecasts but the problems seen in all types of loans, not just home equity debt but also prime mortgages and credit cards, is worrisome for the banking industry. The stock rose 37 cents to $41.08.

Wells Fargo rose $1.02, or 3 percent, to $34.54 after its report.

Light, sweet crude fell $3.88 to $75.07 a barrel on the New York Mercantile Exchange. The dollar was mixed against other major currencies.

The drop in oil hit energy stocks. Exxon Mobil Corp. fell $6.46, or 8.9 percent, to $66. Chevron Corp. fell $5.87, or 8.6 percent, to $62.67.

Declining issues outnumbered advancers by about 6 to 1 on the New York Stock Exchange, where volume came to 689 million shares.

The Russell 2000 index of smaller companies fell 30.38, or 5.48 percent, to 524.27.

In Asian trading, Hong Kong's Hang Seng Index lost nearly 5 percent after rising more than 13 percent the previous two days. Markets in Australia, South Korea, China, India and Singapore also sank. Japan's Nikkei 225 index, however, ended up 1.1 percent after soaring 14 percent in the previous session.

In Europe, Britain's FTSE 100 fell 7.08 percent, Germany's DAX index fell 6.49 percent, and France's CAC-40 fell 6.82 percent.


On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Dow Drops 500 as Retail Sales Show Steep Drop, NYT, 15.10.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html






Op-Ed Columnist

Why How Matters


October 15, 2008
The New York Times


I have a friend who regularly reminds me that if you jump off the top of an 80-story building, for 79 stories you can actually think you’re flying. It’s the sudden stop at the end that always gets you.

When I think of the financial-services boom, bubble and bust that America has just gone through, I often think about that image. We thought we were flying. Well, we just met the sudden stop at the end. The laws of gravity, it turns out, still apply. You cannot tell tens of thousands of people that they can have the American dream — a home, for no money down and nothing to pay for two years — without that eventually catching up to you. The Puritan ethic of hard work and saving still matters. I just hate the idea that such an ethic is more alive today in China than in America.

Our financial bubble, like all bubbles, has many complex strands feeding into it — called derivatives and credit-default swaps — but at heart, it is really very simple. We got away from the basics — from the fundamentals of prudent lending and borrowing, where the lender and borrower maintain some kind of personal responsibility for, and personal interest in, whether the person receiving the money can actually pay it back. Instead, we fell into what some people call Y.B.G. and I.B.G. lending: “you’ll be gone and I’ll be gone” before the bill comes due.

Yes, this bubble is about us — not all of us, many Americans were way too poor to play. But it is about enough of us to say it is about America. And we will not get out of this without going back to some basics, which is why I find myself re-reading a valuable book that I wrote about once before, called, “How: Why How We Do Anything Means Everything in Business (and in Life).” Its author, Dov Seidman, is the C.E.O. of LRN, which helps companies build ethical corporate cultures.

Seidman basically argues that in our hyperconnected and transparent world, how you do things matters more than ever, because so many more people can now see how you do things, be affected by how you do things and tell others how you do things on the Internet anytime, for no cost and without restraint.

“In a connected world,” Seidman said to me, “countries, governments and companies also have character, and their character — how they do what they do, how they keep promises, how they make decisions, how things really happen inside, how they connect and collaborate, how they engender trust, how they relate to their customers, to the environment and to the communities in which they operate — is now their fate.”

We got away from these hows. We became more connected than ever in recent years, but the connections were actually very loose. That is, we went away from a world in which, if you wanted a mortgage to buy a home, you needed to show real income and a credit record into a world where a banker could sell you a mortgage and make gobs of money upfront and then offload your mortgage to a bundler who put a whole bunch together, chopped them into bonds and sold some to banks as far afield as Iceland.

The bank writing the mortgage got away from how because it was just passing you along to a bundler. And the investment bank bundling these mortgages got away from how because it didn’t know you, but it knew it was lucrative to bundle your mortgage with others. And the credit-rating agency got away from “how” because there was just so much money to be made in giving good ratings to these bonds, why delve too deeply? And the bank in Iceland got away from how because, hey, everyone else was buying the stuff and returns were great — so why not?

“UBS bank’s motto is: ‘You and us.’ But the world we created was actually ‘You and nobody’ — nobody was really connected in value terms,” said Seidman. “Parts of Wall Street got disconnected from investing in human endeavor — helping business to scale and take up new ideas.” Instead, they started to just engineer money from money. “So some of the smartest C.E.O.’s did not know what some of their smartest people were doing.”

Charles Mackay wrote a classic history of financial crises called “Extraordinary Popular Delusions and the Madness of Crowds,” first published in London in 1841. “Money ... has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

And so it must be with us. We need to get back to collaborating the old-fashioned way. That is, people making decisions based on business judgment, experience, prudence, clarity of communications and thinking about how — not just how much.

    Why How Matters, NYT, 15.10.2008, http://www.nytimes.com/2008/10/15/opinion/15friedman.html






Economic Scene

Next Victim of Turmoil: Your Salary


October 15, 2008
The New York Times


It is possible, for the first time in weeks, to imagine that the credit crisis may be about to ease. But one of the big lessons of the last year has been not to underestimate the severity of the economy’s problems. Those problems are not just about housing or Wall Street.

What, then, will the next stage of the downturn be about? It is likely to revolve around the worst slump in worker pay since — you knew this was coming — the Great Depression. This slump won’t be anywhere near as bad as the one during the Depression, but it also won’t be like anything the country has experienced in a long time.

Income for the median household — the one in the dead middle of the income distribution — will probably be lower in 2010 than it was, amazingly enough, a full decade earlier. That hasn’t happened since the 1930s. Already, median pay today is slightly lower than it was in 2000, and by 2010, could end up more than 5 percent lower than its old peak.

If you look back at poll results over the last few decades, you will see that nothing predicts the public mood quite like income growth.

When incomes are growing at a good clip, as they were in the mid-1980s and late ’90s, Americans are upbeat. When incomes stagnate, as they did in the early ’80s, early ’90s and in the last several years, people get worried about the state of the country. In the latest New York Times/CBS News poll, 89 percent of respondents said that the country had “pretty seriously gotten off on the wrong track,” a record high.

So it’s reasonable to expect that the great pay slump of the early 21st century is going to have a big effect on the next several years. Falling pay will weigh on living standards, consumer spending and economic growth and will help set the political atmosphere that awaits the next president.

The events of the last several weeks have removed any serious doubt that the economy is in a recession. In a recession, businesses cut back on their workers’ hours, hand out raises that don’t keep pace with inflation and often skip paying bonuses. These cuts in hours and pay are the main way that a downturn affects families, because only a small share of workers actually lose their jobs.

As the chart next to this column makes clear, every recent recession has brought an effective pay cut of somewhere between 3 and 7 percent for the typical family. The drop typically happens over a period of about three years, lasting longer than the recession officially does, as pay fails to keep up with inflation.

The recent turmoil — the freezing up of credit markets, the fall in stock markets, the acceleration of layoffs — has made it unlikely that the coming recession will be a particularly mild one.

“The biggest hit will be in 2009,” Nariman Behravesh, the chief economist of Global Insight, a research and forecasting firm, told me, “and it probably won’t be until 2011 until we see any kind of pay gains.”

What will make this recession different, no matter how deep or shallow it is, is that it’s following an expansion in which most families received little or no raise. The median household made $50,200 last year, slightly less than the $50,600 that the equivalent household earned in 2000, according to the Census Bureau. That’s the first time on record that income failed to set a new record in an economic expansion.

Why has it happened? There is no single cause.

Medical costs have risen rapidly, which means that health insurance premiums take up a bigger chunk of workers’ paychecks than they used to. Some of this money goes to good use; it pays for treatments that weren’t available even a few years ago. But some of it, the part that disappears into the inefficient American health care system, is clearly wasted.

And in the last couple of years, the value of the typical worker’s benefits package has stopped growing. Since 2005, benefits packages have become slightly smaller, notes Jared Bernstein of the Economic Policy Institute. So health benefits can’t come close to explaining the recent pay stagnation.

The bigger factors are probably some combination of the following: new technologies, global trade, slowing gains in educational attainment, the rise of single-parent families, the continued decline in unionization and the sharp increase in inequality, which has concentrated income gains at the top of the ladder. Your political views will probably determine the relative weights that you assign to those causes. Economic research hasn’t yet definitively answered the question.

Whatever the cause, though, the effects of the pay slump are going to be significant. Households have already begun to cut back their spending, and they will do so even more next year. Mr. Behravesh predicts that inflation-adjusted consumer spending in 2009 will be somewhere between flat and down 1 percent. If he’s right, it would be the first year that consumer spending didn’t grow since 1980, which just happens to be the last time that the country suffered through a deep recession.

The pay slump will also make it harder for people to pay off their loans. Last week, Bank of America reported that its losses on consumer credit had tripled over the last year.

In all, banks around the world have acknowledged $600 billion in losses as part of the financial crisis. The latest International Monetary Fund analysis suggests they still have another $800 billion in losses ahead of them — and a good chunk of them will occur in this country.

It’s always possible, of course, that some bit of good and unexpected economic news is just around the corner. The situation also seemed pretty dire in the mid-1990s, until the Internet boom came along and incomes then started rising at their fastest pace since the 1960s.

But you would have to be a pretty zealous optimist to forecast a repeat of that story. For two decades, consumer spending has been an enormous driver of economic growth, thanks in good measure to a long bull market, a housing bubble and a boom in consumer debt.

The bull market, the housing bubble and the debt boom have all ended — and now paychecks are shrinking, too.

At some point, the next big economic engine will indeed arrive. It always does. This time, however, it’s going to have some stiff head winds to overcome.

    Next Victim of Turmoil: Your Salary, NYT, 15.10.2008, http://www.nytimes.com/2008/10/15/business/economy/15leonhardt.html






Despite Big Rally,

Grim Outlook on Profits and Jobs


October 15, 2008
The New York Times


The euphoria that swept Wall Street on Monday gave way to a sober reality on Tuesday: a recession, perhaps the deepest one in decades, may be unavoidable.

A day after the stock market staged one of its biggest rallies in history, buoyed by the government’s plan to rescue banks, investors retreated once again. Worries about the economy came to the fore. Many people fear that corporations — and by extension their workers and shareholders — will face harder times in the months ahead.

“Everything the government has done is not going to prevent further deterioration in the economy,” said Stuart Hoffman, chief economist at PNC Bank. “At the end of all this, what matters is what the economy does.”

The flow of credit, which has been choked for weeks, began to trickle through the financial system on Tuesday. But the credit markets remained shut to many companies and municipalities. Home mortgage rates, which some had hoped might decline once the government’s plans became clear, rose instead. The fear is that the financial rescue will add to an already-swelling federal budget deficit and force the Treasury to borrow heavily in the capital markets.

Beaten-down financial shares soared, but shares of many big blue-chip corporations sank as the outlook for profits and employment darkened. PepsiCo, the soft drink maker, said it would cut 3,300 jobs and close six plants.

The Dow Jones industrial average fell 76.62 points, or 0.8 percent, to 9,310.99 points. Earlier in the day, the Dow surged 4.3 percent after the Bush administration confirmed that it would invest $250 billion in banks, with about half going to nine large national companies.

In addition, the government said it would insure more bank deposits and debt issued by big financial firms. But worries about profits at technology companies sent the Nasdaq composite index down 3.5 percent, to 1,779.01. The decline, however, came before the Intel Corporation, the world’s largest semiconductor maker, issued a strong earnings report after the market closed, easing some of the concern that an economic slowdown had hurt its sales. The broader Standard & Poor’s 500 stock index fell 0.5 percent, to 998.01.

Asian stocks were down in trading on Wednesday morning. The Nikkei 225 index fell 1.5 percent, while the Hang Seng index in Hong Kong was off 2.3 percent.

Investors said the United States government intervention should help avert a crisis in the financial system by preventing cataclysmic bank failures like the recent bankruptcy of Lehman Brothers. But they added that even if the effort were successful at getting banks to lend more freely than they had in recent months, the initiative would not avert a recession.

“Everybody expects the government to do something and have the economy pick up in a quarter or two,” said Ira Jersey, an interest rate strategist at Credit Suisse. “All of this will stabilize the markets, but the real economic issues remain.”

The questions now are how weak the economy will get and how far corporate profits will fall. Economists estimate that the gross domestic product — the broadest measure of the nation’s economic output — barely grew in the third quarter. The Commerce Department will release that number on Oct. 30, just before the election.

Companies are just starting to report about their performance in the third quarter, and so far, many blue-chip names have delivered bad news.

PepsiCo said on Tuesday that its North American beverage sales fell during the quarter, hurting its profit. Shares of the company fell nearly 12 percent, to $54.40. Shares of other companies that cater to consumers also fell.

Concerns about technology spending hurt stocks like Microsoft, Intel and Dell, the computer maker. On Monday, Bill Gates, the chairman of Microsoft, warned of a “fairly significant recession” that might drive the unemployment rate to 9 percent, from its current 6.1 percent.

But on Tuesday after the market closed, Intel reported quarterly earnings that were higher than analysts had expected. Still, the company said demand was weakening in some places. Shares of Intel recouped much of its 6 percent loss for the day in after-market trading.

Analysts see a long, tough slog for the economy, because credit will remain harder to get and more expensive for businesses and consumers, relative to the recent years of easy money.

Conditions have improved in some parts of the credit market with interbank lending rates and yields on corporate bonds falling from near-record levels.

But in other areas of the market, new concerns surfaced. As investors focused on the prospect of more borrowing by the federal government, they drove down the price of Treasuries and mortgage-backed securities, the biggest source of financing for home loans. On Tuesday, the Treasury said the federal government ran a budget deficit of $454.8 billion in the 2008 fiscal year, up from $161.5 billion in 2007.

The yield on the 10-year Treasury note, which moves in the opposite direction from the price, jumped to 4.08 percent, from 3.87 on Friday. Yields on Fannie Mae mortgage securities increased to 6.09 percent, from 5.92 on Friday. (Bond markets were closed on Monday.) If sustained, that rise in yields could significantly increase the interest rates on home loans.

The average rate 30-year fixed-rate mortgages on Tuesday was 6.6 percent, up from 6.06 percent a week ago, according to HSH Associates, a publisher of data.

Those rates might come down once some new policies kick in. Regulators have said Fannie Mae and Freddie Mac, the mortgage finance giants that the government took over in September, will buy more mortgages and lower fees on loans. And the government investment in banks should prompt them to lend more.

Another corner of the market, municipal finance, was also struggling on Tuesday. Several borrowers like the Metropolitan Transportation Authority in New York and the states of Ohio and Hawaii put off debt sales because they could not lure enough investors. Municipal bonds have struggled since Lehman’s bankruptcy caused a panic among investors and led to forced selling.

California has had difficulty raising the short-term debt that it needs to tide the state government over until tax receipts come in this spring. The state is raising $4 billion and is offering interest rates as high as 4.5 percent. The state’s big offering, which the state plans for Thursday, has made it difficult for other states and cities to raise money.

“Other than that special situation the market is closed,” said John Miller, chief investment officer at Nuveen Asset Management, an investment firm that specializes in municipal debt.

Yields on municipal bonds jumped to 6.74 percent on Tuesday, up from 5.44 percent a month earlier, according to the Bond Buyer. Because interest payments on most municipal debt is tax free, Mr. Miller and others are hoping retail investors will jump into the market to buy state and local debt for the higher returns they can now earn.

On Tuesday afternoon, California officials said they had secured commitments from retail investors for $1.84 billion.

Michael M. Grynbaum contributed reporting.

    Despite Big Rally, Grim Outlook on Profits and Jobs, NYT, 15.10.2008, http://www.nytimes.com/2008/10/15/business/15markets.html?hp






Paulson Defends Government Intervention


October 15, 2008
Filed at 7:31 a.m. ET
The New York Times


WASHINGTON (AP) -- Treasury Secretary Henry Paulson said Wednesday he expects improvement in the condition of the economy over time but that there will be ''a bump in the road'' along the way.

Paulson said the government's decision to buy into the nation's banking system with a $250 billion investment in nine large banks at the outset should stabilize the financial system and loosen the tight credit market.

The secretary acknowledged in an interview on ABC's ''Good Morning America'' that he initially opposed government intervention into the banking industry but that new developments in recent days changed the circumstances.

Paulson said, ''There's no doubt that the way to get the maximum bang for the taxpayers here was to invest in banks.''

Big banks have started getting behind a reconfigured federal bailout plan that will have the government spending as much as $250 billion in exchange for partial ownership of some key banks.

President Bush, in announcing the plan Tuesday, declared that it was ''not intended to take over the free market but to preserve it.''

Paulson cautioned in Wednesday's interview that the process of reinvigorating the struggling economy will take time and that some problems, including rising joblessness, could continue in the short term.

He said that people's jobs and retirement plans have been thrown into jeopardy as a result of the tight credit conditions but also said he was confident that ''as we stabilize this system and as banks begin to lend ... we will make progress.''

''The folks at home should expect that we're going to have some challenges for a number of months here,'' the secretary said.

''What I have said to the banks is, this is about making sure that our healthy banks have plenty of capital,'' he said. ''We have the tools we need, we have the resources we need, and we're going to meet this challenge .. like we have every other one.''

    Paulson Defends Government Intervention, NYT, 15.10.2008, http://www.nytimes.com/aponline/washington/AP-Financial-Meldown-Paulson.html






Drama Behind a $250 Billion Banking Deal


October 15, 2008
The New York Times


WASHINGTON — The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left.

The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard M. Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.

But by 6:30, all nine chief executives had signed — setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Mr. Paulson had fought so hard to get through Congress only two weeks earlier.

What happened during those three and a half hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks — starting with theirs.

Mr. Paulson announced the plan Tuesday, saying “we regret having to take these actions.” Pouring billions in public money into the banks, he said, was “objectionable,” but unavoidable to restore confidence in the markets and persuade the banks to start lending again.

In addition to the capital infusions, which will be made this week, the government said it would temporarily guarantee $1.5 trillion in new senior debt issued by banks, as well as insure $500 billion in deposits in noninterest-bearing accounts, mainly used by businesses.

All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks. The latest show of government firepower is an abrupt about-face for Mr. Paulson, who just days earlier was discouraging the idea of capital injections for banks.

Analysts say the United States was forced to shift policy in part because Britain and other European countries announced plans to recapitalize their banks and backstop bank lending. But unlike in Britain, the Treasury secretary presented his plan as an offer the banks could not refuse.

“It was a take it or take it offer,” said one person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. “Everyone knew there was only one answer.”

Getting to that point, however, necessitated sometimes tense exchanges between Mr. Paulson, a onetime chairman of Goldman Sachs, and his former colleagues and competitors, who sat across a dark wood table from him, sipping coffee and Cokes under a soaring rose and sage green ceiling.

This account is based on interviews with government officials and bank executives who attended the meeting or were briefed on it.

Mr. Paulson began calling the bankers personally Sunday afternoon. Some were already in Washington for a meeting of the International Monetary Fund.

The executives did not have an inkling of Mr. Paulson’s plans. Some speculated that he would brief them about the government’s latest bailout program, or perhaps sound them out about a voluntary initiative. No one expected him to present his plan as an ultimatum.

Mr. Paulson, according to his own account, presented his case in blunt terms. The nation’s largest banks needed to begin lending to each other for the good of the financial system, he said in a telephone interview, recalling his remarks. To do that, they needed to be better capitalized.

“I don’t think there was any banker in that room who was going to look us in the eye and say they had too much capital,” Mr. Paulson said. “In a relatively short period of time, people came on board.”

Indeed, several of the banks represented in the room are in need of capital. And analysts said the terms of the government’s investment are attractive for the banks, certainly compared with the terms that Warren E. Buffett extracted from Goldman Sachs for his $5 billion investment.

The Treasury will receive preferred shares that pay a 5 percent dividend, rising to 9 percent after five years. It will get warrants to purchase common shares, equivalent to 15 percent of its initial investment. But the Treasury said it would not exercise its right to vote those common shares.

The terms, officials said, were devised so as not to be punitive. The rising dividend and the warrants are meant to give banks an incentive to raise private capital and buy out the government after a few years. Still, it took some cajoling.

Mr. Kovacevich of Wells Fargo objected that his bank, based in San Francisco, had avoided the mortgage-related woes of its Wall Street rivals. He said the investment could come at the expense of his shareholders.

Mr. Kovacevich is also said to have expressed concern about restrictions on executive compensation at banks that receive capital injections. If he steps down from Wells Fargo after completing a planned takeover of Wachovia, he would be entitled to retirement benefits worth about $43 million, and $140 million in accumulated stock and options, according to James F. Reda & Associates, a executive pay consulting firm. Pay experts say the new Treasury limits would probably not affect his exit package.

Mr. Kovacevich declined to be interviewed about the meeting.

Kenneth D. Lewis, the chairman of Bank of America, also pushed back, saying his bank had just raised $10 billion on its own. Later, Mr. Lewis urged his colleagues not to quibble with the plan’s restrictions on executive compensation for the top executives. These include a ban on the payment of golden parachutes, repayment of any bonus based on earnings that prove to be inaccurate, and a limit of $500,000 on the tax deductibility of salaries.

If we let executive compensation block this, “we are out of our minds,” he said, according to a person briefed on the meeting.

In an interview on Monday, before the meeting, John J. Mack said his bank, Morgan Stanley, did not need capital from the Treasury. It had just sealed a $9 billion deal with a large Japanese bank. During the meeting, Mr. Mack, Morgan Stanley’s chief executive, said little, according to participants.

Mr. Paulson, however, was peppered with questions about the terms of the investment by other chief executives with experience in deal-making: Lloyd C. Blankfein of Goldman Sachs, Vikram S. Pandit of Citigroup, John A. Thain of Merrill Lynch and Mr. Dimon.

Among their concerns were: How would the government’s stake affect other preferred shareholders? Would the Treasury Department demand some control over management in return for the capital? How would the warrants work?

With the discussion becoming heated, the chairman of the Federal Reserve, Ben S. Bernanke, who was seated next to Mr. Paulson, interceded. He told the bankers that the session need not be combative, since both the banks and the broader economy stood to benefit from the program. Without such measures, he added, the situation of even healthy banks could deteriorate.

The president of the Federal Reserve Bank of New York, Timothy F. Geithner, then proceeded to outline the details of the investment program. When the bankers heard the amount of money the government planned to invest, they were stunned by its size, according to several people.

As they heard more of the details, some of the bankers began to realize how attractive the program was for them.

Even as they insisted that they did not need the money, bankers recognized that the extra capital could be helpful if the economy became shakier. Besides, many of these banks’ biggest businesses are tied to the stock and credit markets; the quicker they improve, the better their results.

Later, Mr. Pandit told colleagues that the investment would give Citigroup more flexibility to borrow and lend. Mr. Dimon told colleagues he believed the relatively cheap capital was a fair deal for his bank. Mr. Lewis said he recognized the prospects of his bank were closely aligned with the American economy.

Mr. Thain was intrigued by the terms of the guarantee by the Federal Deposit Insurance Corporation on new senior debt issued by banks, participants said. He mentally calculated the maturities on debt issued by Merrill Lynch, to determine how the program could benefit his bank.

For Mr. Paulson, selling the bankers on capital injections may not have been as difficult as overhauling a rescue program that had originally focused on asset purchases from banks. In the interview, Mr. Paulson said the worsening conditions made a change in focus imperative.

“I’ve always said to everyone that ever worked for me, if you get too dug in on a position, the facts change, and you don’t change to adapt to the facts, you will never be successful,” he said in the interview.

Mr. Paulson insisted that purchases of distressed assets would remain a big part of the program. But having allocated $250 billion to direct investments, the Treasury has only $100 billion left from its initial allotment of $350 billion from Congress to spend on those purchases.

As the meeting wound down, participants said, the bankers focused more on contacting their boards before signing the agreement with the Treasury Department. With time running short and private space limited, some of the bankers left the Treasury building, heading for their limousines while speaking urgently into cellphones.

“I don’t think we need to be talking about this a whole lot more,” Mr. Lewis said, according to a person briefed on the meeting. “We all know that we are going to sign.”

Mark Landler reported from Washington, and Eric Dash from New York. Louise Story and Ben White contributed reporting from New York.

    Drama Behind a $250 Billion Banking Deal, NYT, 15.10.2008, http://www.nytimes.com/2008/10/15/business/economy/15bailout.html






Thriftiness on Special in Aisle 5


October 14, 2008
The New York Times


Home economics, that lost art in which generations of students learned to keep a household going on a tight budget, is making a comeback. Only this time, lessons in pinching pennies are being taught not in the nation’s classrooms but in its stores.

While it might seem counterintuitive for stores to teach shoppers to cut their spending, several chains have concluded that providing such knowledge can spur loyalty and keep customers from trading down to cheaper competitors.

So the Stop & Shop grocery chain is offering “affordable food summits” where consumers are taught how to lower their grocery bills. Home Depot offers classes on how to cut energy bills. And Wal-Mart Stores hired a “family financial expert” who has used online chats to teach several thousand shoppers how to save money for college, whittle away debt and sell a house.

As the stores see it, they are filling a vacuum. Once upon a time, schools taught survival skills like how to feed a growing family cheaply and run a household on a tight budget. But in an era of prosperity, easy credit and changing social norms, many of those classes were revised to focus on more up-to-date topics.

“There’s an entire generation that’s never really had to know how to stretch the value of a dollar,” said Ellie Kay, who doles out financial advice for Wal-Mart.

Indeed, it has been a quarter-century since the nation suffered a severe recession. During the boom years, few people seemed interested in shopping on a shoestring. Even working-class families dined at restaurants. Many ordinary grocery stores inched their way upscale, aspiring to emulate places like Whole Foods Market and Dean & DeLuca.

Now, with the economy on the decline, families are being squeezed, prompting a return to basics. People are flocking to wholesale clubs and discount stores, trading down to cheaper products, buying store-brand items and making fewer shopping trips.

Some 71 percent of consumers are cooking at home more often and eating less often at restaurants, according to figures from the Food Marketing Institute, which conducted an online survey of more than 2,000 shoppers. The institute also found that 67 percent of consumers were buying fewer luxury foods and 58 percent were eating more leftovers.

As Ms. Kay put it: “Saving money is the new black.”

Unapologetically, retailers are tailoring their money-saving classes to women, saying they base their decision on surveys showing that women control the food budget in most families.

“We have to be interested in what moms are interested in,” said Stephen Quinn, executive vice president and chief marketing officer for Wal-Mart, which recently introduced a television advertising campaign centered on mothers sharing savings advice.

Grocery chains see their role as teaching consumers how to whip up low-cost meals. The stores have long offered recipes and shopping tips, of course, but nowadays they are adopting a relentless focus on value.

On its Web site, Hy-Vee, a supermarket chain in the Midwest, offers ways to feed a family of four for $8 or less. To make pork chop dinner, Hy-Vee recommends four pork chops, one package of apple sauce, some frozen vegetables and “Hy-Vee 5 cheese Texas toast.” Total cost: less than $2 a person.

Stop & Shop has been holding food conferences in New York, New Jersey, Massachusetts and Rhode Island.

Economists, educators and food bank executives are offering advice about surfing the Internet for coupons, sticking to a shopping list, cooking larger portions and freezing leftovers, unplugging appliances when they are not in use and driving more slowly to conserve gas.

“We’re educating people,” said Jim Dwyer, executive vice president of strategy and business development for Stop & Shop. “Even in a tough economic time, there’s an opportunity to still put the right food in front of your family.”

The retailers say their advice is neutral, not specific to any store — but they are always careful to point out money-saving items that their stores carry. The idea is to earn the gratitude of customers and ensure that when they do spend money, some of it will be with the store that sponsored the class.

Many grocery chains are nearly as in the dark as their customers about how to operate in a down economy. Unlike in past downturns, traditional grocers face new competitors that are peeling off some of their customers: dollar stores, huge discount retailers and drugstores that are adding grocery items.

“They are facing a different set of competitive and consumer dynamics,” said Willard Bishop, who runs a supermarket consulting firm that bears his name. “So what they are trying to do is provide value and get credit for the value they are providing.”

Neil Z. Stern, a retail consultant at McMillanDoolittle in Chicago, said smarter grocery stores were finally telling consumers how much cheaper it was to buy groceries than to eat at restaurants. Consumers need to be reminded that $150 in groceries may represent six or seven meals, he said.

“‘You mean I can put chicken cacciatore and potatoes on the table for $3.50 a person? Well, that’s cheaper,’” he said. “Things like that are implicit in going to a supermarket, but it’s never been explicit.”

    Thriftiness on Special in Aisle 5, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/14homeec.html






High-Flying Hedge Fund Falls Back to Earth


October 14, 2008
The New York Times


Only 10 months ago, Remy Trafelet was so flush that he treated about 100 employees at his hedge fund to a getaway in Venice. He and his crew spent a long, luxurious weekend at the five-star Hotel Bauer, which has Murano glass chandeliers, private gondoliers and a splendid view of a 17th-century basilica.

But now, a bit like Venice, Mr. Trafelet’s hedge fund seems to be sinking. His flagship fund has fallen about 26 percent this year, and Mr. Trafelet is struggling to hold on to anxious employees, as well as some investors.

Perhaps the most remarkable thing about Mr. Trafelet is that he is not so remarkable at all. Thousands of hedge fund managers like him — mostly young, mostly male and virtually all unknown outside financial circles — confront a sober reality: for now, the days of easy money are over.

The economics of the hedge fund industry, so lucrative on the way up, are trying even the most seasoned managers on the way down. Hotshots who amassed millions or even billions of dollars from deep-pocketed investors are struggling to persuade those backers to stick with them. For the $2 trillion hedge fund industry, a long-feared shakeout is at hand. Some analysts say one out of every 10 funds could fold.

Mr. Trafelet, who is 38 and first made his name managing money at the mutual fund giant Fidelity, insists his Trafelet & Company will be one of the survivors. He has been through rough patches before and says he is not about to give up now.

“There is an easy way out, but I’m not the one who is going to take it,” Mr. Trafelet said in an investor call on Thursday. “I feel an absolute personal and moral obligation to work as hard as possible especially through a difficult period.”

Still, managers like Mr. Trafelet confront formidable challenges. His fund has dwindled to about $3 billion, from $6 billion at its peak in 2006. It has been three years since he produced the kind of double-digit returns that many funds generated in the industry’s heyday, before thousands of new managers crowded in and made spotting profitable trades far more difficult.

It might be easy to dismiss Mr. Trafelet’s story as a simple tale of a highflier falling back to earth. But the fortunes of the hedge fund industry matter to nearly every investor big or small. In recent years, public and corporate pension funds, endowments and foundations poured money into these private investment vehicles in the hope of reaping market-beating returns.

So far this year, the average hedge fund is down 17 percent, about half as much as the Standard & Poor’s 500-stock index.

As losses mount, hedge fund managers are consulting lawyers to determine whether their fiduciary duty dictates that they should shut their doors, liquidate their holdings and use the proceeds to pay back investors — before the losses get worse — or stay in business and try to trade their way out of the hole.

It was easy to look like a star during the bull market. Mr. Trafelet returned 42 percent in 2005, 17 percent in 2004 and 39 percent in 2003. He made money after the technology bubble burst and others struggled.

Mr. Trafelet says he believes he can survive. He said in an interview on Friday morning that he had shifted half of his Delta Institutional fund’s money into cash and that he thought his bets would turn around.

“We wouldn’t be working this hard and investing in the firm if we didn’t see the massive opportunity,” Mr. Trafelet said.

But Trafelet, founded in New York in 2000, is in a weaker position than other hedge funds because the fund returned only 6 percent last year and 2 percent in 2006, according to an investor. Investors who are evaluating whether to leave Mr. Trafelet’s fund versus other funds may choose to remain with funds that made them more money recently.

Much of Trafelet’s money is Mr. Trafelet’s own, so to an extent, he can choose to keep going regardless of investor flight. In the hedge fund world, traders have remade their fortunes dozens of times over, and Mr. Trafelet may impress again in the coming years.

It has been quite a ride for Mr. Trafelet, who developed his taste for stock-picking while attending the elite boarding school Phillips Exeter Academy. After graduating from Dartmouth College, he took a job at Fidelity. By age 25, he was managing a $500 million mutual fund.

Today, Mr. Trafelet enjoys the trappings of success and is still rich by most standards. He has a home on Park Avenue and takes vacations in places like Fishers Island, the private island in Long Island Sound whose beaches have long attracted old money. In a single good year like 2005, his fund generated hundreds of millions of dollars, which would have been divided between Mr. Trafelet and a few partners after paying expenses.

Unlike some hedge fund traders who use complicated computer models and formulas to spot investments, Mr. Trafelet picks stocks the old-fashioned way: by combing through corporate fundamentals like profits and sales. He makes long-term bets on companies large and small, based on research and meetings with executives at those companies. It has become an urban legend among the stock-picking community that Mr. Trafelet paid college students to count the cars in shopping strips as part of his research.

He is still spending most of his time studying companies, despite the market turbulence, he said, and he says he thinks there is money to be made when the storm passes.

“I don’t know if the market’s going straight up from here or straight down from here,” he said in the investor call. “But I can tell you that there’s massive mispricings all over the place.”

While Mr. Trafelet bets both for and against stocks, he was more long going into September. He lost big on his largest position, the Ultra Petroleum Corporation of Houston, which plunged from $84 three months ago to $40 on Monday, before the broad market rally lifted the stock.

In the middle of September, when regulators temporarily banned short-selling, Mr. Trafelet, like many hedge fund traders, was squeezed. He had to exit some short positions. By the time the month was over, he had lost a stomach-churning 18.5 percent, according to an investor.

Others in the industry started asking questions when Mr. Trafelet laid off a sizable portion of his back-office staff in the middle of the month. He says those cuts were because of a technology upgrade. Last week two more senior employees left. Mr. Trafelet said the departures were not because of the fund’s performance.

Mr. Trafelet’s fund is up 4.5 percent in October, according to an investor, while hedge funds on average are down. But Mr. Trafelet knows the clock is ticking. He has to retain his staff to have any hope of pulling back into the black. At the end of August, he personally guaranteed bonuses for his top traders for this year and told them that, if needed, he would pump more of his own money into his fund in 2009 to safeguard their pay.

    High-Flying Hedge Fund Falls Back to Earth, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/14hedge.html






Commodity Prices Tumble


October 14, 2008
The New York Times


HOUSTON — The global financial panic and the economic slowdown have put at least a temporary end to the commodity bull market of the last seven years, sending prices tumbling for many of the raw ingredients of the world economy.

Since the spring and early summer, when prices for many commodities peaked amid fears of permanent shortage, wheat and corn — two cereals at the base of the human food chain — have dropped more than 40 percent. Oil has dropped 44 percent. Metals like aluminum, copper and nickel have declined by a third or more.

The swift turnaround is the brightest economic news on the horizon for consumers, putting money into their pockets at a time they need it badly. Gasoline prices in the United States are falling precipitously — by about 24 cents over the last five days, to a national average of $3.21 a gallon on Monday — and analysts said they could go below $3 a gallon nationally this fall, down from a high of $4.11 a gallon in July.

Prices for most commodities remain elevated by past standards, and they rose a bit on Monday amid the broad market rally. But the trend seems to be downward as traders weigh the prospect that the global economic crisis will lead to sharp drops in demand. The big question is whether prices will drop all the way to long-term norms or whether Asia’s continuing economic boom has set a floor.

The rapid commodity decline has eased fears of inflation, a reason central banks were able to lower interest rates around the world last week in an effort to salvage economic growth. It also represents a fundamental shift of view that is driving markets these days.

A scant few months ago, Americans were seen as participants in a bidding war with the emerging Chinese, Indian, Russian and Brazilian middle classes for a basket full of products. But that was before an extreme slowdown in demand for things as diverse as gasoline and aluminum and the retreat of investment money from commodity futures into safer havens like government bonds.

The commodity bust began before last week’s broad market declines, though the panic has exacerbated the pressure on commodities. Oil dropped by 10 percent on Friday alone, but then recovered some of that loss Monday to settle at $81.19 a barrel, far below its high in July of $145.29.

“Commodities followed the euphoria cycle that we had along with housing,” said Robert J. Shiller, an economist at Yale who specializes in market bubbles. “We had the idea that the world is growing very fast, people are getting very rich and, by the way, we are running out of everything. That theory doesn’t seem so good when the economy is collapsing.”

Some analysts, while welcoming the recent declines, say they believe that prices are likely to remain above long-term norms. Food, in particular, could be a continuing problem: today’s prices are still too high to allow many people in developing countries to afford adequate diets. Nor have the recent declines been passed along in American grocery stores, at least as of yet. The United Nations has projected that global food prices will remain elevated for years.

The price increases of recent years served their economic function, calling forth additional supplies of many commodities — farmers planted every acre they could, mining companies opened new mines and oil companies went to the far corners of the earth to drill wells. In many cases, the prices also caused demand to decline even as supply started rising.

Americans, the world’s largest fuel consumers, have been cutting back on gasoline all year, and the decline is approaching double digits. Motorists pumped 9.5 percent less gasoline for the week ended Oct. 3 compared with the same week a year earlier, according to MasterCard Advisors, which tracks spending. In a report on Friday, the International Energy Agency cut its forecast for global oil consumption yet again, projecting that 2008 would end with the slowest demand growth in 15 years.

Big increases in world wheat production because of increased acreage in the United States, Canada, Russia and much of Europe have brought wheat prices to less than $6 a bushel today from nearly $13 in March.

Soybean prices have dropped to $9 a bushel from $16 since July, in part because of a record crop in China and a slowdown in Chinese imports. Corn prices are also easing amid expanded supply.

A theory among economists is that commodity prices are still at the beginning of a steep fall as the credit squeeze takes the world economy into a deep recession.

“When you have a seven-year bull run, you are going to have more than a four-month correction, and we are just beginning our fourth month,” said Richard Feltes, senior vice president and director of commodity research at MF Global Research. “We have got more deflation coming in the housing sector, in capital assets, and it’s going to continue in commodities as well.”

But many economists say a lasting price collapse is unlikely because the emerging middle class and growing populations in developing economies will continue to have strong appetites for fuels and metals.

Some say that the other commodity bull markets in modern history — approximately spanning 1906 to 1923, 1933 to 1955 and 1968 to 1982 — lasted more than twice as long as the current run. They included some sharp corrections before they ran their course, suggesting that the current drop, however precipitous, could be temporary.

Though the picture is slightly different for every commodity, prices generally hit a low point for the decade soon after the terrorist attacks of Sept. 11, 2001, then rose as the global economy strengthened in the following years. From late 2001 until mid-2008, the price of oil rose 800 percent, copper rose 700 percent and wheat rose 400 percent.

The decline of recent weeks has taken virtually every major commodity more than halfway back to its late 2001 price, adjusted for inflation. The recent drop has been so rapid that if the pace continued, it would take only a few more weeks to erase the gains of the bull market entirely.

That suggests to some analysts that prices could hit a floor fairly soon. “The underlying fundamentals of strong demand for energy, food and industrial commodities will come back,” said Michael Lewis, global head of commodities research for Deutsche Bank.

Many analysts think oil could fall to $70 a barrel in the next few months, if not sooner. But it is hard for them to believe it will go much lower: oil is not becoming easier to find, as fields in Mexico peter out and suppliers like Iran, Nigeria and Venezuela remain unreliable.

The costs of finding oil in deep waters or mining oil sands in Canada remain high, in the $60 to $70 a barrel range — and since those are now vital sources of supply, they could help put a floor under the oil price. Additionally, the Organization of the Petroleum Exporting Countries could cut production to try to shore up prices, probably at an emergency meeting it will hold Nov. 18. Analysts note that the credit crisis and economic slowdown will inevitably stall new industrial projects, reducing demand for metals. But the falling prices will also discourage new mining and drilling. When economic growth resumes, that could produce metal shortages that would drive prices back up.

The biggest single factor that will decide whether a prolonged bull market in commodities is over, or just in a lull, is the Chinese economy. The industrial development of that country in recent years was responsible for much of the world’s increased consumption of copper, aluminum and zinc, and almost a third of the increase in oil consumption.

Chinese growth has slowed but is still running above 12 percent, and that country is expected to undertake some huge projects in coming months as it repairs damage from earthquakes and storms.

Kevin Norrish, a senior commodities researcher at Barclays Capital, said that in a recent visit to China he found that domestic demand for copper was still strong but that exports were weakening. Chinese copper wire manufacturers, he said, “are very depressed indeed because their export orders have fallen a long way.”

He said that as high as prices for commodities rose in recent years, the bull run in the late 1970s and early 1980s was even more buoyant. Of all the major commodities, only oil at its peak in July traded at a higher price than in the last bull market, adjusted for inflation.

That previous bull run, stimulated by years of high economic growth and inflation, was followed by nearly two decades of weak prices that accompanied the transition in the United States from an industrial to a service economy. Then China and India appeared on the world stage as major economies at the turn of the new century, followed by the oil-driven economy in Russia and greater consumption in the Middle East the last four or five years. Mr. Norrish is one of many commodities analysts who think that the story of China, India and other developing countries’ spurring commodity demand is not over.

“What we are seeing is a pause in what we see as a very, very long bull run,” Mr. Norrish said.

    Commodity Prices Tumble, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/economy/14commodities.html






Both Sides of the Aisle See More Regulation


October 14, 2008
The New York Times


WASHINGTON — For 30 years, the nation’s political system has been tilted in favor of business deregulation and against new rules. But that is about to change, now that the government has been forced to intervene in the once high-flying financial industry to avert an economywide crash.

An expansion of the government’s role in financial markets is certain: on Friday the Treasury Department updated its recommended reforms of the existing regulatory structure, which it will leave to the next president and Congress.

Congressional leaders and both presidential candidates already have their own, more far-reaching ideas, from further restricting executives’ pay to remaking the entire regulatory structure so that it better supervises both traditional activities and newer ones like credit-default swaps that are unregulated.

But the pro-regulation climate will probably spill over into other sectors. That seems especially likely now that the Treasury and the Federal Reserve are pumping money into corporations of all types to shore up their capital and to finance day-to-day operations until credit markets recover, and with the auto industry separately getting billions in government assistance.

That will give impetus to those who seek new emission curbs and energy limits to address climate change; or who want health care mandates to expand insurance coverage and restrain costs; or who are calling for new safeguards for food, prescription drugs and toys from China and other less-regulated trading partners.

“We now have a collective anger, disgust, over our whole financial system and it’s obvious we’re going to get a regulatory backlash,” said Robert E. Litan, an economist at the Brookings Institution who has studied financial and regulatory issues for decades. “And we know it’s going to come in a big way in 2009.”

Mr. Litan predicts a spillover effect to other industries because voters have the perception that “big companies are animals and they need to be put in their cages.”

He added: “The only open question going forward in this new era is, are we going to overdo it? Is the pendulum going to go completely over in the other direction?”

Whatever policies result, the political fallout of this renewed respect for government regulation is evident in the current election campaigns.

Democrats, who typically have been on the defensive in recent decades as the more pro-regulatory party, now are playing offense. Senator Barack Obama, the Democratic presidential nominee, is leading his party’s charge, blaming Republicans and their candidate, Senator John McCain, for the lax oversight that contributed to the financial crisis. Mr. Obama recently charged that Mr. McCain supported an economic theory “that basically says that we can shred regulations and consumer protections.”

Mitch McConnell, the Senate Republican leader, who is unexpectedly fighting for re-election in Kentucky, is the target of a television ad that says, “Wall Street and the big banks gave Mitch McConnell $4.4 million for his campaigns, and he fought for less regulation of Wall Street.”

Yet Republicans, led by Mr. McCain, are promising that they, too, will support toughened government regulations. “I think we’re going to have to see smarter regulation,” Mr. McCain’s chief economic adviser, Douglas Holtz-Eakin, said in an interview.

Others are more cautious about the prospect for a major shift in political attitudes toward regulation. Sam Peltzman, a University of Chicago professor and free-market conservative who is widely considered the intellectual godfather of deregulation, said the outlook did not depend solely on who was elected. “It depends on the economy itself,” he said, adding that the government, under either party’s control, would most likely not impose costly regulations on business in bad times.

For example, Mr. Peltzman noted that Senators McCain and Obama were both committed to action against climate change, through a mix of regulations and market forces. “But I think it will be put off because of a slowdown in the economy,” he said. As for health care, “that depends a lot on how strong the Democrats are in Congress.”

There will be no putting off the action on re-regulating finance. Both of the presidential candidates and Congressional leaders like Christopher J. Dodd of Connecticut, the Senate banking committee chairman, and Barney Frank of Massachusetts, the House Financial Services Committee chairman, would go further than the Bush Treasury. They say they want to overhaul the current system next year to rid it of overlapping regulatory agencies, give other agencies new powers and perhaps create a new overseer for the whole system.

Financial institutions are likely to face tougher rules on maintaining capital and liquidity. Companies and instruments that currently are not regulated could be brought under the government’s thumb; unregulated derivatives, hedge funds, mortgage brokers and credit-rating agencies all have been implicated in the current crisis.

Democrats and Mr. McCain talk of limiting executives’ compensation, while Democrats would also give shareholders more say about who sits on corporate boards. Mr. Obama, if he is elected president, would join with the Congressional Democrats, who are likely to increase their majorities in the House and Senate, to revive their unsuccessful proposals to impose new penalties for predatory lending, including mortgage lending.

There are proposals for a new agency to protect consumers against a variety of financial abuses, involving mortgages, auto and student loans and credit cards. Credit card companies’ marketing, billing and interest rates will very likely be reviewed. The insolvency at the insurance giant American International Group is reviving talk in Congress of federal regulation of the insurance industry, which prefers its current, mostly friendly patchwork system of state oversight.

The financial industry “is not the only area where the deregulation ideology got completely out of hand,” Representative Henry A. Waxman of California, chairman of the House Oversight and Government Reform Committee, said in an interview. While Mr. Waxman is already holding hearings on the financial crisis and possible new regulations, he said, “I’m looking forward to working on” issues like climate change and health care insurance in coming years.

Mr. Waxman, who was first elected from California in 1974, said he did not believe the economic downturn would impede new regulations. “Over the years I’ve heard industry after industry come in and say, ‘We cannot survive economically if we have these regulations,’ ” he said. Instead, he argued, studies showed that their compliance was less costly than predicted, and companies emerged more efficient and competitive.

While political stereotypes portray Democrats as favoring regulation and Republicans as deregulators, recent history is more complicated.

A Republican president, Richard M. Nixon, presided over one of the most active regulatory periods of the last half-century, working with the Democrats who controlled Congress in the early 1970s. His legacy includes the Environmental Protection Agency, the Consumer Product Safety Commission and the Occupational Safety and Health Administration and, for a time, wage and price controls.

Later in that decade, a Democrat, President Jimmy Carter, began the deregulatory era that has continued with notable breaks to the present. While people in both parties associate his Republican successor, Ronald Reagan, with making regulation a dirty word politically, it was the Carter administration that instituted cost-benefit analyses for new regulations and deregulated the airline, railroad and trucking industries.

Mr. Reagan’s record was more antiregulation than deregulatory. He and President George H. W. Bush fought Congressional Democrats’ charges that they were not enforcing environmental regulations, among others.

In political campaigns, the Republicans made gains in part by painting Democrats as the party of big government. Studies showed, however, that the number of federal regulations spiked under the first President Bush, in part because of new rules for banks and thrift institutions after the savings and loan scandals of the late 1980s. Also, Mr. Bush signed into law a new Clean Air Act, a nutrition-labeling law and the landmark Americans With Disabilities Act, among others.

A conservative analyst, Bruce R. Bartlett, a Treasury official at the time, recalled that Mr. Bush was so angered by a 1991 magazine report headlined “The Regulatory President” that he ordered a moratorium on all regulations. Sixteen years later, the same magazine, National Journal, ran a similar article about Mr. Bush’s son, calling George W. Bush “the biggest regulator since the Nixon-Ford years.”

That record, however, mostly reflects the many new homeland-security regulations since the Sept. 11, 2001, terrorist attacks. In other areas, President Bush has moved more aggressively than his father and President Reagan away from enforcing existing regulations, choosing to rely on the financial services industry and manufacturers, among other groups, to regulate themselves.

    Both Sides of the Aisle See More Regulation, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/economy/14regulate.html?hp






Intervention Is Bold, but Has a Basis in History


October 14, 2008
The New York Times


After a week of mounting chaos in financial markets around the globe, the United States took a momentous step that shifts power in the economy toward Washington and away from Wall Street.

The government’s plan to prop up banks large and small — along with recent bailouts as well as guarantees to support business loans, money markets and bank lending — represents the most sweeping government moves into the nation’s financial markets since the Great Depression, and perhaps ever, according to economists and finance experts.

The high-stakes program is intended to halt the worst financial crisis since the 1930s. If successful, it could long be studied by historians as a textbook case of the emergency role that government can play to rescue a teetering economy.

“It is profound, and it is something of a shift back to the state,” said Adam S. Posen, an economist at the Peterson Institute for International Economics. “But is this a recasting of capitalism? I think what we’ll see is that the government acts as a silent partner and gets out as soon as it can.”

Indeed, they say, many questions remain. Is the government picking winners in a plan that initially seems tilted toward the nation’s largest banks? What strings are attached to the investment in matters like executive pay? Will the move presage a more forceful government hand to control financial markets or will it be a brief stint as capitalism’s protector?

The package does call for the government investments to be in three-year securities that the banks can repay at any time, when markets settle and conditions improve. “This is clearly a crisis measure in crisis times, but it’s a good thing there is a sunset provision that limits the length of the government’s investment,” said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University.

The United States is acting in step with Europe, where governments often take a more interventionist stance in economies and the financial systems are in the hands of a comparatively small number of banks.

Britain took the lead last week, declaring its intention to take equity stakes in banks to steady them. In the last two days, France, Italy and Spain have announced rescue packages for their banks that include state shareholdings.

The government’s plan is an exceptional step, but not an unprecedented one.

The United States has a culture that celebrates laissez-faire capitalism as the economic ideal, yet the practice strays at times. Over the last century, the federal government has occasionally taken stakes in railways, coal mines and steel mills, and has even taken a controlling interest in banks when it was deemed to be in the national interest.

The corporate wards of the state typically have been returned to private hands after short, sometimes fleeting, stretches under federal stewardship.

Finance experts say that having Washington take stakes in United States banks now — like government interventions in the past — would be a promising move to address an economic emergency. The plan by the Treasury Department, they say, could supply banks with sorely needed capital and help restore confidence in financial markets.

Elsewhere, government bank-investment programs are routinely called nationalization programs. But that is not likely in the United States, where nationalization is a word to avoid, given the aversion to anything that hints of socialism.

In past times of war and national emergency, Washington has not hesitated. In 1917, the government seized the railroads to make sure goods, armaments and troops moved smoothly in the interests of national defense during World War I. After the war ended, bondholders and stockholders were compensated and railways were returned to private ownership in 1920.

During World War II, Washington seized dozens of companies, including railroads, coal mines and, briefly, the Montgomery Ward department store chain. In 1952, President Harry S. Truman seized 88 steel mills across the country, asserting that unyielding owners were determined to provoke an industrywide strike that would cripple the Korean War effort. That nationalization did not last long, though, because the Supreme Court ruled the move an unconstitutional abuse of presidential power.

In banking, the government took an 80 percent stake in the Continental Illinois Bank and Trust in 1984. Continental Illinois failed in part because of bad oil-patch loans in Oklahoma and Texas. As the nation’s seventh-largest bank, Continental Illinois was deemed “too big to fail” by federal regulators, who feared wider turmoil in the financial markets. In the end, the government lost an estimated $1 billion on the bad loans it bought as part of the takeover of Continental, which eventually became part of Bank of America.

The nearest precedent for the Treasury plan, finance experts say, are the investments made by the Reconstruction Finance Corporation in the 1930s. The agency, established in 1932, not only made loans to distressed banks, but also bought stock in 6,000 banks, at a cost of $1.3 billion, said Mr. Sylla, the N.Y.U. economist. A similar effort these days, in proportion to today’s economy, would be about $200 billion.

When the economy stabilized eventually, the government sold the stock to private investors or the banks themselves — and about broke even, Mr. Sylla estimated. The 1930s program was a good one, experts say, but the government moved too slowly to deal with the financial crisis, which precipitated and lengthened the Great Depression. The lesson of history, it seems, is for Washington to move quickly in times of economic crisis with a forceful government intervention in the marketplace. And Ben S. Bernanke, chairman of the Federal Reserve, has studied the Great Depression and the policy miscues in those years.

“The goal is to get the engine of capitalism going as productively as possible,” said Nancy Koehn, a historian at the Harvard Business School. “Ideology is a luxury good in times of crisis.”

The traditional American reluctance for government ownership is not shared in other countries. After World War II, several European countries nationalized basic industries like coal, steel and even autos, which typically remained in government hands until the 1980s, when most Western economies began paring back the state’s role in the economy.

Europe remains far more comfortable with government having a strong hand in business. So when Sweden, for example, faced a financial crisis in the early 1990s, the nationalization of much of the banking industry was welcomed. The Swedish government quickly bought stakes in banks, and sold most of them off later — a model of swift, forceful intervention in a credit crisis, financial experts say.

“In Europe, the concept of the social contract is much more social — that is, socialist — than we’ve been comfortable with in America,” said Robert F. Bruner, a finance expert at the Darden School of Business at the University of Virginia.

“The obvious danger with anything that really starts to look like the government taking ownership or control of a significant piece of an industry is, Where do you stop?” Mr. Bruner said. “The auto industry is in dire straits and the airline industry is in trouble, for example.”

“But the spillover effects from the crisis in the financial system are so great, pulling down the rest of the economy in a way that no other industry can, so that the potential cost of not doing something like this is immense,” Mr. Bruner said.

    Intervention Is Bold, but Has a Basis in History, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/economy/14nationalize.html?hp






U.S. Investing $250 Billion in Banks


October 14, 2008
The New York Times


WASHINGTON — The Treasury Department, in its boldest move yet, is expected to announce a plan on Tuesday to invest up to $250 billion in banks, according to officials. The United States is also expected to guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers, officials said.

And the Federal Deposit Insurance Corporation will offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees.

The Dow Jones industrial average gained 936 points, or 11 percent, the largest single-day gain in the American stock market since the 1930s. The surge stretched around the globe: in Paris and Frankfurt, stocks had their biggest one-day gains ever, responding to news of similar multibillion-dollar rescue packages by the French and German governments.

Treasury Secretary Henry M. Paulson Jr. outlined the plan to nine of the nation’s leading bankers at an afternoon meeting, officials said. He essentially told the participants that they would have to accept government investment for the good of the American financial system.

Of the $250 billion, which will come from the $700 billion bailout approved by Congress, half is to be injected into nine big banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase, officials said. The other half is to go to smaller banks and thrifts. The investments will be structured so that the government can benefit from a rebound in the banks’ fortunes.

President Bush plans to announce the measures on Tuesday morning after a harrowing week in which confidence vanished in financial markets as the crisis spread worldwide and government leaders engaged in a desperate search for remedies to the spreading contagion. They are desperately seeking to curb the severity of a recession that has come to appear all but inevitable.

Over the weekend, central banks flooded the system with billions of dollars in liquidity, throwing out the traditional financial playbook in favor of a series of moves that officials hoped would get banks lending again.

European countries — including Britain, France, Germany and Spain — announced aggressive plans to guarantee bank debt, take ownership stakes in banks or prop up ailing companies with billions in taxpayer funds.

The Treasury’s plan would help the United States catch up to Europe in what has become a footrace between countries to reassure investors that their banks will not default or that other countries will not one-up their rescue plans and, in so doing, siphon off bank deposits or investment capital.

“The Europeans not only provided a blueprint, but forced our hand,” said Kenneth S. Rogoff, a professor of economics at Harvard and an adviser to John McCain, the Republican presidential candidate. “We’re trying to prevent wholesale carnage in the financial system.”

In the process, Mr. Rogoff and other experts said, the government is remaking the financial landscape in ways that would have been unimaginable a few weeks ago — taking stakes in the industry and making Washington the ultimate guarantor for banking in the United States.

But the pace of the crisis has driven events, and fissures in places as far-flung as Iceland, which suffered a wholesale collapse of its banks, persuaded officials to act far more decisively than they had previously.

“Over the weekend, I thought it could come out very badly,” said Simon Johnson, a former chief economist of the International Monetary Fund. “But we stepped back from the cliff.”

The guarantee on bank debt is similar to one announced by several European countries earlier on Monday, and is meant to unlock the lending market between banks. Banks have curtailed such lending — considered crucial to the smooth running of the financial system and the broader economy — because they fear they will not be repaid if a bank borrower runs into trouble.

But officials said they hoped the guarantee on new senior debt would have an even broader effect than an interbank lending guarantee because it should also stimulate lending to businesses.

Another part of the government’s remedy is to extend the federal deposit insurance to cover all small-business deposits. Federal regulators recently have been noticing that small-business customers, which tend to carry balances over the federal insurance limits, had been withdrawing their money from weaker banks and moving it to bigger, more stable banks.

Congress had already raised the F.D.I.C.’s deposit insurance limit to $250,000 earlier this month, extending coverage to roughly 68 percent of small-business deposits, according to estimates by Oliver Wyman, a financial services consulting firm. The new rules would cover the remaining 32 percent.

“Imposing unlimited deposit insurance doesn’t fix the underlying problem, but it does reduce the threat of overnight failures,” said Jaret Seiberg, a financial services policy analyst at the Stanford Group in Washington.

“If you reduce the threat of overnight failures,” Mr. Seiberg said, “you start to encourage lending to each other overnight, which starts to restore the normal functioning of the credit markets.”

Recapitalizing banks is not without its risks, experts warned, pointing to the example of Britain, which announced its program last week and injected its first capital into three banks on Monday.

Shares of the newly nationalized banks — Royal Bank of Scotland, HBOS and Lloyds — slumped on Monday, despite a surge in banks elsewhere, because shareholder value was diluted by the government.

The move, analysts said, makes the government Britain’s biggest banker. And it creates a two-tier banking system in which the nationalized banks are run like utilities and others are free to pursue profit growth. As part of the plan, the chief executives of the three banks stepped down.

Still, Mr. Paulson’s strategy was backed by lawmakers, including Senator Charles E. Schumer, Democrat of New York, who said he preferred capital injections to buying distressed mortgage-related assets — a proposal that Treasury pushed aggressively before its turnabout.

In a letter to Mr. Paulson on Monday, Mr. Schumer, chairman of the Joint Economic Committee, urged the Treasury to demand that banks receiving capital eliminate their dividends, restrict executive pay and stick to “safe and sustainable, rather than exotic, financial activities.”

“I don’t think making this as easy as possible for the financial institutions is the way to go,” Mr. Schumer said in a call with reporters. “You need some carrots but you also need some sticks.”

But officials said the banks would not be required to eliminate dividends, nor would the chief executives be asked to resign. They will, however, be held to strict restrictions on compensation, including a prohibition on golden parachutes and requirements to return any improper bonuses. Those rules were also part of the $700 billion bailout law passed by Congress.

The nine chief executives met in a conference room outside Mr. Paulson’s ornate office, people briefed on the meeting said. They were seated across the table from Mr. Paulson; Ben S. Bernanke, chairman of the Federal Reserve; Timothy F. Geithner, president of the Federal Reserve Bank of New York; Federal Reserve Governor Kevin M. Warsh; the chairman of the F.D.I.C., Sheila C. Bair; and the comptroller of the currency, John C. Dugan.

Among the bankers attending were Kenneth D. Lewis of Bank of America, Jamie Dimon of JPMorgan Chase, Lloyd C. Blankfein of Goldman Sachs, John J. Mack of Morgan Stanley, Vikram S. Pandit of Citigroup, Robert Kelly of Bank of New York Mellon and John A. Thain of Merrill Lynch.

Bringing together all nine executives and directing them to participate was a way to avoid stigmatizing any one bank that chose to accept the government investment.

The preferred stock that each bank will have to issue will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years. The government will also receive warrants worth 15 percent of the face value of the preferred stock. For instance, if the government makes a $10 billion investment, then the government will receive $1.5 billion in warrants. If the stock goes up, taxpayers will share the benefits. If the stock goes down, the warrants will be worthless.

As Treasury embarked on its recapitalization plan, it offered some details on the nuts-and-bolts of the broader bailout effort. The program’s interim head, Neel T. Kashkari, said Treasury had filled several senior posts and selected the Wall Street firm Simpson Thacher as a legal adviser.

It named an investment management consultant, Ennis Knupp, based in Chicago, to help it select asset management firms to buy distressed bank assets. And it plans to announce the firm that will serve as the program’s prime contractor, running auctions and holding assets, within the next day.

“We are working around the clock to make it happen,” said Mr. Kashkari, a former Goldman Sachs banker who has been entrusted with the job of building this operation within weeks.

As details of the American recapitalization plan emerged, fears grew over the impact on smaller countries. Iceland is discussing an aid package with the International Monetary Fund, a week after Reykjavik seized its three largest banks and shut down its stock market.

The fund also offered “technical and financial” aid to Hungary, which last week suffered a run on its currency. Prime Minister Ferenc Gyurcsany said the country would accept aid only as a last resort.

In a new report on capital flows, the Institute of International Finance projected that net capital in-flows to emerging markets would decline sharply, to $560 billion in 2009, from $900 billion last year.

In Asia, markets continued to rise on Tuesday, lifted further by the announcement that the Japanese government would inject 1 trillion yen ($9.7 billion) into the financial system.

    U.S. Investing $250 Billion in Banks, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/economy/14treasury.html?hp






Obama Details Plan to Aid Victims of Fiscal Crisis


October 14, 2008
The New York Times


TOLEDO, Ohio — Senator Barack Obama proposed new steps on Monday to address the economic crisis, calling for temporary but costly new programs to help employers, automakers, homeowners, the unemployed, and state and local governments.

In an address here, Mr. Obama, the Democratic presidential nominee, proposed giving employers a $3,000 tax credit for each new hire to encourage job creation. He said he would seek to allow Americans of all ages to borrow from retirement savings without a tax penalty; to eliminate income taxes on unemployment benefits; and to double, to $50 billion, the government’s loan guarantees for automakers.

Mr. Obama also called on the Treasury and the Federal Reserve to create a mechanism to lend money to cities and states with fiscal problems, and to expand the government guarantees for financial institutions to encourage a return to more normal lending. He also proposed a 90-day moratorium on most home foreclosures; it would require financial institutions that take government help to agree not to act against homeowners who are trying to make payments, even if not the full amounts.

“We need to give people the breathing room they need to get back on their feet,” Mr. Obama told a crowd of more than 3,000 people at the SeaGate Convention Centre in downtown Toledo.

Mr. Obama’s Republican rival, Senator John McCain, will make new proposals for the economy on Tuesday, advisers said. They did not provide any details.

Late Sunday, after Mr. McCain and his team looked at a variety of policy options over the weekend, a campaign spokesman said Mr. McCain, who has been losing ground to Mr. Obama in the polls, would have no new proposals unless events warranted. Mr. McCain has been emphasizing his plan to help people with financial difficulties get more affordable mortgages, with taxpayers picking up the tab.

In his speech on Monday, Mr. Obama said: “I won’t pretend this will be easy. George Bush has dug a deep hole for us. It’s going to take a while for us to dig our way out. We’re going to have to set priorities as never before.”

The package of new proposals was the most detailed and ambitious offered by Mr. Obama since the financial crisis became acute last month, clouding the economic outlook and transforming the presidential campaign.

This struggling manufacturing city is representative of both the economic crisis and the political battle for industrial-belt swing states that could determine the winner of the election. Mr. Obama is spending three days in northwestern Ohio, just south of the auto-making capital, Detroit, mostly sequestered with advisers to prepare for the third and final presidential debate on Wednesday at Hofstra University in Hempstead, N.Y.

Mr. Obama’s advisers emphasized that many of the new steps he called for could be taken quickly by the Democratic-controlled Congress in a lame-duck session this year, instead of waiting until after the new president is sworn into office in late January. Several steps could be taken by the Treasury and Federal Reserve using their powers under current law, the advisers said.

At the Capitol on Monday, Speaker Nancy Pelosi would not commit to calling Congress back immediately after the elections to consider a stimulus plan, given the potential that Mr. Bush would veto it. House Democratic leaders met with economists and afterward said they would develop a package for increased spending on public works, health care subsidies for states, extended unemployment pay and food stamp assistance.

Obama advisers put the cost of Mr. Obama’s full economic stimulus plan at $175 billion, including $60 billion for the steps announced Monday.

Of the earlier $115 billion, $50 billion would be used to help states and to speed construction of roads and other infrastructure projects that create jobs. About $65 billion of it would be the cost of a second round of rebates to taxpayers this year.

Mr. Obama had initially proposed to offset the rebates’ expense with a new windfall-profits tax on oil companies, but the campaign indicated Monday that he would scrap that plan assuming that oil prices do not rise above about $80 a barrel. The shift was just one sign of how the economic crisis has shoved concerns about budget deficits to the sidelines.

Despite criticism from the McCain camp that increasing taxes would further endanger the economy, Mr. Obama has “no plans to change” his longstanding proposal to repeal the Bush tax cuts next year for households with an annual income of more than $250,000, said Jason Furman, Mr. Obama’s economic adviser. Under Mr. Obama’s plan, most individuals and families would get a tax cut, and in terms of total dollars, he would cut taxes on lower- and middle-income people more than he would raise them on upper-income people.

McCain advisers on Monday reiterated their argument that the higher taxes, together with Mr. Obama’s plan for expanded health care, would hit small businesses with costs they could ill afford. Many small businesses pay taxes as individuals. But the Obama campaign and independent fact-checking groups argue that relatively few would be affected by the tax increase on upper-income levels.

The recent surge of government spending to bail out financial institutions and other corporations are likely to drive projections for the federal deficit this year and beyond far above the $438 billion shortfall recorded for the fiscal year that ended Sept. 30.

Yet the McCain campaign insisted Monday that Mr. McCain would balance the budget by 2013, which would be the end of his first term. Nonpartisan analysts consider that unlikely if not impossible. Mr. Obama is promising to reduce annual deficits from the current level.

The most costly of Mr. Obama’s new proposals is the one giving businesses a $3,000 income tax credit for each new full-time employee they hire above their current work force. The proposal, which would be effective for the next two years and is based on a concept that has been used in past downturns, would account for about $40 billion of the new package’s $60 billion price tag.

About $10 billion of the $60 billion would go to eliminating income taxes on unemployment benefits and extending aid to the long-term unemployed by 13 weeks, on top of the existing 26 weeks.

Mr. Obama’s proposal from last week to allow struggling small businesses to apply for loans from the Small Business Administration’s disaster funds would cost more than $5 billion. The expense of covering additional loan guarantees for the auto industry would mean more than $4 billion more.

While not costly to the Treasury, perhaps more controversial is Mr. Obama’s proposal to allow Americans to withdraw without tax penalty 15 percent of their retirement savings, up to $10,000, from their tax-favored Individual Retirement Accounts and 401(k)s. They would still have to pay income taxes on the withdrawal. Current law requires savers younger than 59 ½ to pay taxes and a 10 percent penalty.

Economists and nonpartisan analysts generally oppose making it easier for Americans to tap into retirement savings, considering that the United States has a net negative savings rate that is the lowest among the world’s industrialized nations. But Obama advisers counter that many Americans need that money to get by and should not be penalized when major financial institutions are getting bailouts.

For savers, the downside to withdrawing money now is that they would get less value given the slide in the stock markets. With that in mind, Mr. McCain last week proposed waiving federal rules that require older Americans to begin withdrawing funds as soon as they reach age 70 ½. On Monday, Mr. Obama praised Mr. McCain’s proposal, telling the Ohioans, “I want to give credit where credit is due.”

To impose the 90-day moratorium on home foreclosures, Mr. Obama would have the government, using its existing authority, require financial institutions that take advantage of the Treasury’s rescue plan to agree not to foreclose on the mortgages of any homeowners who are making “good faith efforts” to pay, even if their payments fall short.

Jackie Calmes reported from Washington, and Jeff Zeleny from Toledo. Carl Hulse contributed reporting from Washington.

    Obama Details Plan to Aid Victims of Fiscal Crisis, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/us/politics/14campaign.html?hp






Obama Expands Economic Plans


October 14, 2008
The New York Times


TOLEDO — Senator Barack Obama on Monday expanded his economic platform, including proposals to spur new jobs, to give Americans penalty-free access to retirement savings to help them through the downturn, to urge a 90-day moratorium on home foreclosures and to lend money to strapped local and state governments.

Mr. Obama also is calling on Congress to double $25 billion the government loan guarantees for automakers and to temporarily eliminate taxes on unemployment benefits.

Campaign advisers said those steps and several others could be taken before January through current laws or by the Democratic-controlled Congress acting in a lame-duck session.

Mr. Obama is outlining his revised plan in Toledo, Ohio, a struggling city that is representative of the economic crisis and the battle for industrial-belt swing states that could determine the winner of the Nov. 4 election.

Senator John McCain, his Republican rival, also gave an economic speech in Virginia Beach, Va., but he had no new policy prescriptions, having rejected his advisers’ options over the weekend as too gimmicky, according to one Republican close to the campaign.

Mr. Obama was not originally scheduled to present new policy proposals in his speech at the Sea Gate Convention Centre in downtown Toledo. But when word spread on Sunday evening that Mr. McCain would not offer new economic proposals, as had been suggested by some aides, the Obama campaign saw an opportunity to expand upon Mr. Obama’s plans to offer relief for the middle-class with ideas on the table.

“We have the advantage of sharing ideas that are consistent with theideas we have shared before,” David Axelrod, the campaign’s chiefstrategist, said in an interview. New polls suggest mounting economic anxieties among voters are fueling Mr. Obama’s growing lead in many polls against Mr. McCain.

The main new proposals would:

— for the next two years, give businesses a $3,000 income-tax credit for each new full-time employee they hire above the number in their current workforce;

— allow savers with tax-favored Individual Retirement Accounts and 401(k)’s to withdraw 15 percent of those retirement savings, up to a maximum of $10,000, without paying a tax penalty as the law currently requires for withdrawals before age 59 and a half;

— bar financial institutions that take advantage of the Treasury’s rescue plan from foreclosing on the mortgages of any homeowners who are making “good-faith efforts” to make payments;

— direct the Treasury and the Federal Reserve to create a temporary facility for loans to state and local governments, similar to the Fed’s new arrangement to loan corporations money by buying their commercial paper, which are the I.O.U.s that help businesses with daily operating expenses like payrolls.

    Obama Expands Economic Plans, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/us/politics/14campaign.html?hp






Stocks Rise Sharply After Vows of New Bank Capital


October 14, 2008
The New York Times


The major exchanges in New York moved sharply higher Monday morning on hopes that the global efforts devised over the weekend to control the financial crisis would work.

Moving swiftly to restore confidence, central banks around the world flooded the financial system with billions of dollars in liquidity. Britain, France, Germany, and several other European nations announced aggressive plans to guarantee loans, take ownership stakes in banks and prop up ailing companies with billions in taxpayer funds.

The moves amount to a drastic reshaping of the world of high finance. While stock markets in New York, Europe and Asia all moved higher on Monday, doubts still lingered that investors would be able to fully shake off the fears unleashed by last week’s enormous sell-off, the worst on Wall Street since 1933.

At noon, the Dow was 537 points higher, a 6.3 percent gain that sent the blue-chip index above 8,900. The broader Standard & Poor’s 500-stock index gained 6.6 percent, and the Nasdaq was up by 7 percent.

Gains were even bigger in European markets, with the German DAX index rising 11.4 percent and the CAC 40 in Paris up 11.18 percent. The FTSE-100 in London rose 8.2 percent.

Shares of Morgan Stanley were 50 percent higher after the embattled investment bank said it had closed on a deal for $9 billion in financing from a Japanese bank, a critical lifeline that had been closely watched by the market ahead of the open on Monday.

The ultimate judgment on this weekend’s developments, however, may have to wait until Tuesday, when credit markets reopen after the Columbus Day holiday. Problems in the flow of credit are at the root of the current crisis; if these markets remained locked on Tuesday, stocks could once again fall.

“It’s going to take actions more than words at this time, given the extreme distress that the money markets are in and the extreme distress that the equity markets were in,” said Douglas M. Peta, a market strategist at J.& W. Seligman & Company.

In additional moves meant to restore confidence, Neel T. Kashkari, an assistant Treasury secretary who was recently put in charge of the government’s plan for tackling the crisis, appeared in Washington on Monday morning to offer investors their first glimpse at the plan’s inner workings. And the Fed said it would make billions of dollars available to banks via swap lines with the Bank of England, the European Central Bank and the Swiss National Bank.

Oil prices moved higher by $3.56 a barrel, to $81.26, in New York trading. The bond market was closed Monday.

Shares of Deutsche Bank rose nearly 25 percent in Frankfurt, while BNP Paribas and other major French banks rose more than 6 percent.

Royal Bank of Scotland, which is raising billions of pounds of equity with British government backing, rose more than 5 percent.

In Hong Kong, the Hang Seng index bounced 9.6 percent higher. The S.&P./ASX 200 index in Sydney closed up 5.6 percent. Tokyo markets, which lost about a quarter of their value last week, were closed Monday for a national holiday.

In Moscow trading, the Micex index rose 4.5 percent.

“We’re extremely cautious,” Philippe Gijsels, senior equity strategist at Fortis Global Markets in Brussels, said. “This looks like the start of a typical bear-market rally.” He said measures Group of 7 countries announced over the weekend had helped banking stocks, but that the market had been due for a rally after major indexes posted some of their worst declines last week.

“To repair the market will take some time,” he said. “The problem is that the financial problem has now become a real economic problem. The damage has been done.”

Meeting in Paris late Sunday, European financial and political leaders agreed to a plan that would inject billions of euros into their banks in a bid to restore confidence to the teetering financial system.

Taking their cue from a rescue plan announced last week by Britain, the European countries led by Germany and France pledged to take equity stakes in distressed banks and vowed to guarantee bank lending for periods up to five years. Spain and Italy also announced bailout plans.

The Bank of Japan, it said, will consider the introduction of similar measures.

Stocks in Sydney rose a day after Australian and New Zealand governments joined the scramble to calm markets, saying they would guarantee all bank deposits and some interbank lending.

David Jolly and Bettina Wassener contributed reporting.

    Stocks Rise Sharply After Vows of New Bank Capital, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/14markets.html?hp






Krugman Wins Economics Nobel


October 14, 2008
The New York Times


Paul Krugman, a professor at Princeton University and an Op-Ed page columnist for The New York Times, was awarded the Nobel Memorial Prize in Economic Sciences on Monday.

“It’s been an extremely weird day, but weird in a positive way,” Mr. Krugman said in an interview on his way to a Washington meeting for the Group of 30, an international body from the public and private sectors that discusses international economics. He said he was mostly “preoccupied with the hassles” of trying to make all his scheduled meetings on Monday and answer a constantly ringing cellphone.

Mr. Krugman received the award for his work on international trade and economic geography. In particular, the prize committee lauded his work for “having shown the effects of economies of scale on trade patterns and on the location of economic activity.”

He has developed models that explain observed patterns of trade between countries, as well as what goods are produced where and why. Traditional trade theory assumes that countries are different and will exchange different kinds of goods; Mr. Krugman’s theories have explained why worldwide trade is dominated by a few countries that are similar to each other, and why some countries might import the same kinds of goods that it exports.

“There was something very beautiful about the old existing trade theory and its ability to capture the world in a surprisingly simple conceptual framework,” Mr. Krugman said. “And then I realized that some of the new insights coming through in industrial organization could be applied to international trade.”

Mr. Krugman wrote his dissertation, however, on international finance, and credits his professor at M.I.T., Rudiger Dornbusch, with pushing him to study international trade.

“I went to visit him one snowy day in early 1978 and described to him what I’d been thinking about,” Mr. Krugman said. “He turned to me and said, ‘You’ve got to write about that.’ ”

Mr. Krugman has been an Op-Ed columnist at The New York Times since 1999.

“For economists, this is a validation but not news. We know what each other have been up to,” Mr. Krugman said. “For readers of the column, maybe they will read a little more carefully when I’m being economistic, or maybe have a little more tolerance when I’m being boring.”

He said that he did not expect his critics to let him off any more easily because of his new accolade, though.

“I think we’ve learned this when we see Joe Stiglitz writing,” Mr. Krugman said, referring to the winner of the economics Nobel in 2001. “I haven’t noticed him getting an easy time. People just say, ‘Sure, he’s a great Nobel laureate and he’s very smart, but he still doesn’t know what he’s talking about in this situation.’ I’m sure I’ll get the same thing.”

In 1991 Mr. Krugman received the John Bates Clark medal, a prize given every two years to “that economist under 40 who is adjudged to have made a significant contribution to economic knowledge.” He follows several Clark medal recipients who have gone on to win a Nobel, including Mr. Stiglitz.

“To be absolutely, totally honest I thought this day might come someday, but I was absolutely convinced it wasn’t going to be this day,” Mr. Krugman said. “I know people who live their lives waiting for this call, and it’s not good for the soul. So I put it out of my mind and stopped thinking about it.”

He said he did not participate in any of the economics Nobel betting pools , and that he did not know which day the winner’s name would be released until a colleague told him last week.

Mr. Krugman continues to teach at Princeton. This semester he is teaching a small graduate-level course on international monetary policy and theory, covering such timely subjects as international liquidity crises. In recent years he has also taught courses on the welfare state and international trade, as well as all-freshman seminars on various economic topics.

Monday’s award, the last of the six prizes, is not one of the original Nobels. It was created in 1968 by the Swedish central bank in Alfred Nobel’s memory. Mr. Krugman was the sole winner of the award this year, which includes a prize of about $1.4 million.

Krugman Wins Economics Nobel, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/economy/14econ.html
















Slowpoke, by Jen Sorensen

Cagle        13.10.2008
















Columnist Paul Krugman

Wins Nobel Economics Prize


October 13, 2008
Filed at 12:43 p.m. ET
The New York Times


STOCKHOLM, Sweden (AP) -- Paul Krugman, the Princeton University scholar, New York Times columnist and unabashed liberal, won the Nobel prize in economics Monday for his analysis of how economies of scale can affect international trade patterns.

Krugman has been a harsh critic of the Bush administration and the Republican Party in The New York Times, where he writes a regular column and has a blog called ''Conscience of a Liberal.''

He has also taken the Bush administration to task over the current financial meltdown, blaming its pursuit of deregulation and unencumbered fiscal policies for the financial crisis that has threatened the global economy with recession.

Perhaps better known as a columnist than an economist to the public, Krugman has also come out forcefully against John McCain during the economic meltdown, saying the Republican presidential candidate is ''more frightening now than he was a few weeks ago.'' Krugman (pronounced KROOG-man) also has derided the Republicans as becoming ''the party of stupid.''

Tore Ellingsen, a member of the prize committee, acknowledged that Krugman was an ''opinion maker'' but added that he was honored on the merits of his economic research, not his political commentary.

''We disregard everything except for the scientific merits,'' Ellingsen told The Associated Press.

The 55-year-old American economist was the lone winner of the 10 million kronor ($1.4 million) award and the latest in a string of American researchers to be honored. It was only the second time since 2000 that a single laureate won the prize, which is typically shared by two or three researchers.

Not one to tone down his opinions, Krugman has compared the current financial crisis to the devastation of the 1930s.

''We are now witnessing a crisis that is as severe as the crisis that hit Asia in the 90's. This crisis bears some resemblance to the Great Depression,'' Krugman told reporters Monday.

But he was optimistic that a global effort aimed at stemming the financial blood loss had taken root.

''I'm slightly less terrified today than I was on Friday,'' he said, referring to the weekend crisis talks among European leaders that led to the nationalization of British banks, unlimited access to U.S. dollars to banks worldwide and efforts to stave off a global recession.

In contrast to his treatment of U.S. officials, Krugman has praised Britain's financial leaders for their nimble response to the credit crisis.

In a column Monday in the New York Times, Krugman wrote that British Prime Minister Gordon Brown and Chancellor Alistair Darling ''defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up.''

Whereas U.S. Treasury Secretary Henry Paulson at first rejected giving financial institutions more money in return for a share of ownership, the British government ''went straight to the heart of the problem ... with stunning speed,'' he wrote.

''And whaddya know,'' Krugman continued, ''Mr. Paulson -- after arguably wasting several precious weeks -- has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities.''

The Bush administration would not comment Monday on whether Krugman would be invited to the White House as is custom with American Nobel laureates.

The Royal Swedish Academy of Sciences praised Krugman for formulating a new theory to answer questions about free trade and said his theory had inspired an enormous field of research.

''What are the effects of free trade and globalization? What are the driving forces behind worldwide urbanization? Paul Krugman has formulated a new theory to answer these questions,'' the academy said in its citation.

''He has thereby integrated the previously disparate research fields of international trade and economic geography,'' it said.

The award, known as the Nobel Memorial Prize in Economic Sciences, is the last of the six Nobel prizes announced this year and is not one of the original Nobels. It was created in 1968 by the Swedish central bank in Alfred Nobel's memory.

In addition to his work as an economist at Princeton University in New Jersey, where he has been since 2000, Krugman has written for Foreign Affairs, the Harvard Business Review and Scientific American, among other publications.

He graduated with a bachelor's degree from Yale in 1974 and received a Ph.D. from MIT in 1977. Besides teaching at Yale and MIT, he also taught at Stanford.

Krugman said winning the Nobel award won't change his approach to research and writing.

''I'm a great believer in continuing to do work,'' he told reporters. ''I hope that two weeks from now I'm back to being pretty much the same person I was before.''

Krugman's work on new trade theory also garnered him the John Bates Clark medal from the American Economic Association in 1991. That prize is given every two years to an economist under the age of 40.

The Nobel citation said Krugman's approach is based on the premise that many goods and services can be produced at less cost in a long series, a concept known as economies of scale. His research showed the effects of that on trade patterns.

''Trade theory, like much of economics, used to be discussed in the context of perfect competition: thousands of farmers and thousands of customers meeting in a market,'' with supply and demand governing prices, said Avinash Dixit, a Princeton professor and economist who specializes in trade theory.

Gradually, people began to realize that conditions in the market were less than perfect, and the small number of companies in some industries had economies of scale that changed the trade equation.

''Krugman was the main person who brought all the theory together, recognized its importance to the real world (and) produced a large expansion of international trade theory,'' Dixit said.

Krugman introduced his trade theory in 1979 in a 10-page article in the Journal of International Economics.

It posited that because consumers want a diversity of products, and because economies of scale make production cheaper, multiple countries can build a product such as cars. A nation like Sweden can build its own car brands for both export and sale at home, while also importing cars from other countries.

The article also outlined a new theory of economic geography. Krugman's idea was that if two countries were alike but one had a larger population, real wages would be somewhat higher in the more populous country because companies there could make better use of economies of scale, creating a greater diversity of goods, lower prices, or both.

Because this enhances the welfare of consumers in that country, its population would increase as more people moved there, which would lead to additional increases in real wages.

Krugman is not the first Nobel economics winner to be a familiar name.

Paul Samuelson, the Massachusetts Institute of Technology professor who won the prize in 1970, and the late Milton Friedman, longtime University of Chicago professor who won in 1976, were both columnists for Newsweek magazine for many years.

Friedman, who died in 2006, also was known for his PBS TV series ''Free to Choose'' in the United States, while Samuelson, 98, wrote an economics textbook used by millions of college students.

The Nobel Prizes in medicine, chemistry, physics, literature and economics will be handed out in Stockholm by Sweden's King Carl XVI on Dec. 10, the anniversary of prize founder Alfred Nobel's death in 1896. The Nobel Peace Prize is handed out in Oslo, Norway, on the same date.


Associated Press writers Malin Rising in Stockholm, Geoff Mulvihill in Mount Laurel, New Jersey, Polly Anderson in New York and AP Business Writer Ellen Simon in New York contributed to this report.

    Columnist Paul Krugman Wins Nobel Economics Prize, NYT, 13.10.2008, http://www.nytimes.com/aponline/business/AP-EU-Sweden-Nobel-Economics.html







Obama’s Speech on Economic Policy


October 13, 2008
The New York Times

The following is the text of a speech given by Senator Barack Obama on his economic policy in Toledo, Ohio, on Monday as prepared for delivery and provided by the Obama campaign.

We meet at a moment of great uncertainty for America. The economic crisis we face is the worst since the Great Depression. Markets across the globe have become increasingly unstable, and millions of Americans will open up their 401(k) statements this week and see that so much of their hard-earned savings have disappeared.

The credit crisis has left businesses large and small unable to get loans, which means they can't buy new equipment, or hire new workers, or even make payroll for the workers they have. You've got auto plants right here in Ohio that have been around for decades closing their doors and laying off workers who've never known another job in their entire life.

760,000 workers have lost their jobs this year. Unemployment here in Ohio is up 85% over the last eight years, which is the highest it's been in sixteen years. You've lost one of every four manufacturing jobs, the typical Ohio family has seen their income fall $2,500, and it's getting harder and harder to make the mortgage, or fill up your gas tank, or even keep the electricity on at the end of the month. At this rate, the question isn't just "are you better off than you were four years ago?", it's "are you better off than you were four weeks ago?"

I know these are difficult times. I know folks are worried. But I also know this – we can steer ourselves out of this crisis. Because we are the United States of America. We are the country that has faced down war and depression; great challenges and great threats. And at each and every moment, we have risen to meet these challenges – not as Democrats, not as Republicans, but as Americans.

We still have the most talented, most productive workers of any country on Earth. We're still home to innovation and technology, colleges and universities that are the envy of the world. Some of the biggest ideas in history have come from our small businesses and our research facilities. It won't be easy, but there's no reason we can't make this century another American century.

But it will take a new direction. It will take new leadership in Washington. It will take a real change in the policies and politics of the last eight years. And that's why I'm running for President of the United States of America.

My opponent has made his choice. Last week, Senator McCain's campaign announced that they were going to "turn the page" on the discussion about our economy so they can spend the final weeks of this election attacking me instead. His campaign actually said, and I quote, "if we keep talking about the economy, we're going to lose." Well Senator McCain may be worried about losing an election, but I'm worried about Americans who are losing their jobs, and their homes, and their life savings. They can't afford four more years of the economic theory that says we should give more and more to millionaires and billionaires and hope that prosperity trickles down to everyone else. We've seen where that's led us and we're not going back. It's time to turn the page.

Over the course of this campaign, I've laid out a set of policies that will grow our middle-class and strengthen our economy in the long-term. I'll reform our tax code so that 95% of workers and their families get a tax cut, and eliminate income taxes for seniors making under $50,000. I'll bring down the cost of health care for families and businesses by investing in preventative care, new technology, and giving every American the chance to get the same kind of health insurance that members of Congress give themselves. We'll ensure every child can compete in the global economy by recruiting an army of new teachers and making college affordable for anyone who wants to go. We'll create five million new, high-wage jobs by investing in the renewable sources of energy that will eliminate the oil we currently import from the Middle East in ten years, and we'll create two million jobs by rebuilding our crumbling roads, schools, and bridges.

But that's a long-term strategy for growth. Right now, we face an immediate economic emergency that requires urgent action. We can't wait to help workers and families and communities who are struggling right now – who don't know if their job or their retirement will be there tomorrow; who don't know if next week's paycheck will cover this month's bills. We need to pass an economic rescue plan for the middle-class and we need to do it now. Today I'm proposing a number of steps that we should take immediately to stabilize our financial system, provide relief to families and communities, and help struggling homeowners. It's a plan that begins with one word that's on everyone's mind, and it's spelled J-O-B-S.

We've already lost three-quarters of a million jobs this year, and some experts say that unemployment may rise to 8% by the end of next year. We can't wait until then to start creating new jobs. That's why I'm proposing to give our businesses a new American jobs tax credit for each new employee they hire here in the United States over the next two years.

To fuel the real engine of job creation in this country, I've also proposed eliminating all capital gains taxes on investments in small businesses and start-up companies, and I've proposed an additional tax incentive through next year to encourage new small business investment. It is time to protect the jobs we have and to create the jobs of tomorrow by unlocking the drive, and ingenuity, and innovation of the American people. And we should fast track the loan guarantees we passed for our auto industry and provide more as needed so that they can build the energy-efficient cars America needs to end our dependence on foreign oil.

We will also save one million jobs by creating a Jobs and Growth Fund that will provide money to states and local communities so that they can move forward with projects to rebuild and repair our roads, our bridges, and our schools. A lot of these projects and these jobs are at risk right now because of budget shortfalls, but this fund will make sure they continue.

The second part of my rescue plan is to provide immediate relief to families who are watching their paycheck shrink and their jobs and life savings disappear. I've already proposed a middle-class tax cut for 95% of workers and their families, but today I'm calling on Congress to pass a plan so that the IRS will mail out the first round of those tax cuts as soon as possible. We should also extend and expand unemployment benefits to those Americans who have lost their jobs and are having a harder time finding new ones in this weak economy. And we should stop making them pay taxes on those unemployment insurance benefits as well.

At a time when the ups and downs of the stock market have rarely been so unpredictable and dramatic, we also need to give families and retirees more flexibility and security when it comes to their retirement savings.

I welcome Senator McCain's proposal to waive the rules that currently force our seniors to withdraw from their 401(k)s even when the market is bad. I think that's a good idea, but I think we need to do even more. Since so many Americans will be struggling to pay the bills over the next year, I propose that we allow every family to withdraw up to 15% from their IRA or 401(k) – up to a maximum of $10,000 – without any fine or penalty throughout 2009. This will help families get through this crisis without being forced to make painful choices like selling their homes or not sending their kids to college.

The third part of my rescue plan is to provide relief for homeowners who are watching their home values decline while their property taxes go up. Earlier this year I pushed for legislation that would help homeowners stay in their homes by working to modify their mortgages. When Secretary Paulson proposed his original financial rescue plan it included nothing for homeowners. When Senator McCain was silent on the issue, I insisted that it include protections for homeowners. Now the Treasury must use the authority its been granted and move aggressively to help people avoid foreclosure and stay in their homes. We don't need a new law or a new $300 billion giveaway to banks like Senator McCain has proposed, we just need to act quickly and decisively.

I've already proposed a mortgage tax credit for struggling homeowners worth 10% of the interest you pay on your mortgage and we should move quickly to pass it. We should also change the unfair bankruptcy laws that allow judges to write down your mortgage if you own six or seven homes, but not if you have only one. And for all those cities and small towns that are facing a choice between cutting services like health care and education or raising property taxes, we will provide the funding to prevent those tax hikes from happening. We cannot allow homeowners and small towns to suffer because of the mess made by Wall Street and Washington.

For those Americans in danger of losing their homes, today I'm also proposing a three-month moratorium on foreclosures. If you are a bank or lender that is getting money from the rescue plan that passed Congress, and your customers are making a good-faith effort to make their mortgage payments and re-negotiate their mortgages, you will not be able to foreclose on their home for three months. We need to give people the breathing room they need to get back on their feet.

Finally, this crisis has taught us that we cannot have a sound economy with a dysfunctional financial system. We passed a financial rescue plan that has the promise to help stabilize the financial system, but only if we act quickly, effectively and aggressively. The Treasury Department must move quickly with their plan to put more money into struggling banks so they have enough to lend, and they should do it in a way that protects taxpayers instead of enriching CEOs. There was a report yesterday that some financial institutions participating in this rescue plan are still trying to avoid restraints on CEO pay. That's not just wrong, it's an outrage to every American whose tax dollars have been put at risk. No major investor would ever make an investment if they didn't think the corporation was being prudent and responsible, and we shouldn't expect taxpayers to think any differently. We should also be prepared to extend broader guarantees if it becomes necessary to stabilize our financial system.

I also believe that Treasury should not limit itself to purchasing mortgage-backed securities – it should help unfreeze markets for individual mortgages, student loans, car loans, and credit card loans.. And I think we need to do even more to make loans available in two very important areas of our economy: small businesses and communities.

On Friday, I proposed Small Business Rescue Plan that would create an emergency lending fund to lend money directly to small businesses that need cash for their payroll or to buy inventory. It's what we did after 9/11, and it allowed us to get low-cost loans out to tens of thousands of small businesses. We'll also make it easier for private lenders to make small business loans by expanding the Small Business Administration's loan guarantee program. By temporarily eliminating fees for borrowers and lenders, we can unlock the credit that small firms need to pay their workers and keep their doors open. And today, I'm also proposing that we maintain the ability of states and local communities that are struggling to maintain basic services without raising taxes to continue to get the credit they need.

Congress should pass this emergency rescue plan as soon as possible. If Washington can move quickly to pass a rescue plan for our financial system, there's no reason we can't move just as quickly to pass a rescue plan for our middle-class that will create jobs, provide relief, and help homeowners. And if Congress does not act in the coming months, it will be one of the first things I do as President of the United States. Because we can't wait any longer to start creating new jobs; to help struggling communities and homeowners, and to provide real and immediate relief to families who are worried not only about this month's bills, but their entire life savings. This plan will help ease those anxieties, and along with the other economic policies I've proposed, it will begin to create new jobs, grow family incomes, and put us back on the path to prosperity.

I won't pretend this will be easy or come without cost. We'll have to set priorities as never before, and stick to them. That means pursuing investments in areas such as energy, education and health care that bear directly on our economic future, while deferring other things we can afford to do without. It means scouring the federal budget, line-by-line, ending programs that we don't need and making the ones we do work more efficiently and cost less.

It also means promoting a new ethic of responsibility. Part of the reason this crisis occurred is that everyone was living beyond their means – from Wall Street to Washington to even some on Main Street. CEOs got greedy. Politicians spent money they didn't have. Lenders tricked people into buying home they couldn't afford and some folks knew they couldn't afford them and bought them anyway.

We've lived through an era of easy money, in which we were allowed and even encouraged to spend without limits; to borrow instead of save.

Now, I know that in an age of declining wages and skyrocketing costs, for many folks this was not a choice but a necessity. People have been forced to turn to credit cards and home equity loans to keep up, just like our government has borrowed from China and other creditors to help pay its bills.

But we now know how dangerous that can be. Once we get past the present emergency, which requires immediate new investments, we have to break that cycle of debt. Our long-term future requires that we do what's necessary to scale down our deficits, grow wages and encourage personal savings again.

It's a serious challenge. But we can do it if we act now, and if we act as one nation. We can bring a new era of responsibility and accountability to Wall Street and to Washington. We can put in place common-sense regulations to prevent a crisis like this from ever happening again. We can make investments in the technology and innovation that will restore prosperity and lead to new jobs and a new economy for the 21st century. We can restore a sense of fairness and balance that will give ever American a fair shot at the American dream. And above all, we can restore confidence – confidence in America, confidence in our economy, and confidence in ourselves.

This country and the dream it represents are being tested in a way that we haven't seen in nearly a century. And future generations will judge ours by how we respond to this test. Will they say that this was a time when America lost its way and its purpose? When we allowed our own petty differences and broken politics to plunge this country into a dark and painful recession?

Or will they say that this was another one of those moments when America overcame? When we battled back from adversity by recognizing that common stake that we have in each other's success?

This is one of those moments. I realize you're cynical and fed up with politics. I understand that you're disappointed and even angry with your leaders. You have every right to be. But despite all of this, I ask of you what's been asked of the American people in times of trial and turmoil throughout our history. I ask you to believe – to believe in yourselves, in each other, and in the future we can build together.

Together, we cannot fail. Not now. Not when we have a crisis to solve and an economy to save. Not when there are so many Americans without jobs and without homes. Not when there are families who can't afford to see a doctor, or send their child to college, or pay their bills at the end of the month. Not when there is a generation that is counting on us to give them the same opportunities and the same chances that we had for ourselves.

We can do this. Americans have done this before. Some of us had grandparents or parents who said maybe I can't go to college but my child can; maybe I can't have my own business but my child can. I may have to rent, but maybe my children will have a home they can call their own. I may not have a lot of money but maybe my child will run for Senate. I might live in a small village but maybe someday my son can be president of the United States of America.

Now it falls to us. Together, we cannot fail. Together, we can overcome the broken policies and divided politics of the last eight years. Together, we can renew an economy that rewards work and rebuilds the middle class. Together, we can create millions of new jobs, and deliver on the promise of health care you can afford and education that helps your kids compete. We can do this if we come together; if we have confidence in ourselves and each other; if we look beyond the darkness of the day to the bright light of hope that lies ahead. Together, we can change this country and change this world. Thank you, God bless you, and may God bless America.

    Obama’s Speech on Economic Policy, NYT, 13.10.2008, http://www.nytimes.com/2008/10/13/us/politics/13obama-text.html?ref=politics






GM to Stop Making SUVs in Wisconsin in December


October 13, 2008
Filed at 12:39 p.m. ET
The New York Times


DETROIT (AP) -- The U.S. automotive sales slump worked its way to Janesville, Wis., Monday when General Motors Corp. told workers that it would stop making sport utility vehicles at a factory there in December.

GM spokesman Chris Lee said SUV production at the plant, with 1,200 workers represented by the United Auto Workers, will end Dec. 23, earlier than GM had expected.

The Janesville plant also has a small- to medium-duty truck production line with 35 to 50 workers. They will keep working until they have filled an order for Isuzu Motors Ltd., which should take the plant through May or June, Lee said. Then the plant ''will cease operations completely,'' he said.

Most of the Janesville factory makes the GMC Yukon and the Chevrolet Tahoe and Suburban large SUVs, and sales of those vehicles have plummeted with an increase in gasoline prices to around $4 per gallon earlier this year. Gas prices have subsided closer to $3 per gallon nationwide, but that has done little to boost sales.

''That segment is really shrinking, so we had to make the difficult decision to have this cessation,'' Lee said.

A state lawmaker held out hope that GM will get a new product line and stay open.

State Rep. Mike Sheridan, a Janesville Democrat and former plant union representative, said in a statement Monday that GM is still considering whether to bring a line of small cars to the facility.

Lee said those discussions continue but have no bearing on the decision to end SUV production.

GM shares soared $1.61, or 33 percent, to $6.50 in midday trading as markets rose on news that the Bush administration and European governments pledged coordinated actions to help the crippled financial system. The shares had lost nearly half their value last week.

GM announced in June that it would close Janesville and three other factories as demand for pickup trucks and SUVs waned, but the only time frame that was given was by 2010. The company announced earlier this month that another of those plants -- the Moraine, Ohio, SUV factory -- will close Dec. 23.

On Friday, a person with knowledge of GM's plans said it could close more factories as early as this week to deal with slumping sales and the collapse in its stock price. The announcement was likely to include acceleration of the assembly plant closures, which also include factories in Oshawa, Ontario, and Toluca, Mexico.

The person, who did not want to be identified because the plans are not finalized, said further cuts would likely hit engine, transmission and stamping operations to correspond with the assembly plant closures.

GM Chairman and CEO Rick Wagoner said last month that the automaker would have to make adjustments, particularly in metal stamping factories.

Lee would not comment Monday when asked if further plant closures or announcements are expected.

The Janesville plant opened in 1919 and is GM's oldest. Its closure comes despite an incentive plan offered to GM last month by Wisconsin political leaders.

Suburban, Tahoe and Yukon sales are down by more than 40 percent so far this year, and sales in the large SUV segment are down 49 percent, according to Autodata Corp. GM also makes those vehicles at its plant in Arlington, Texas, and GM officials have said that plant can crank out enough to meet present demand.

Industry analysts say closing factories or cutting shifts will help GM reduce costs and preserve cash at a critical time with the company losing billions and burning up cash at an alarming rate.

GM had $21 billion in cash and $5 billion available through credit lines at the end of June for total liquidity of $26 billion but has been burning up cash at a pace of more than $1 billion a month.

The company announced a plan in July that calls for cutting $10 billion in costs and raising another $5 billion through asset sales and borrowing through 2009.

GM's shares plunged to the lowest level in 59 years last week. The shares fell 31 percent to $4.76 Thursday and dropped to $4 in the first minutes of trading Friday, the lowest level since Nov. 16, 1949, according to the Center for Research in Security Prices at the University of Chicago. They rebounded to end six straight losing sessions and close at $4.89, up 13 cents, or 2.7 percent.

On Friday night, word leaked that GM had talks with Chrysler LLC owner Cerberus Capital Management LP about GM merging with or acquiring Chrysler. The talks have been shelved during the country's financial crisis.


Associated Press Writer Todd Richmond in Madison, Wis., contributed to this report.

    GM to Stop Making SUVs in Wisconsin in December, NYT, 13.10.2008, http://www.nytimes.com/aponline/business/AP-GM-Factories.html






Oil Prices Rebound After Last Week's Huge Losses


October 13, 2008
Filed at 12:42 p.m. ET
The New York Times


NEW YORK (AP) -- Oil prices clawed back above $80 a barrel Monday, rebounding from a 13-month low as a stepped up global effort to rescue world financial markets lured investors back into equity and commodities markets.

Prices were also supported by a weaker dollar and expectations that OPEC countries may tighten production in a bid to slow crude's precipitous decline; prices have fallen about 45 percent since shooting to a record $147.27 on July 11. Last week, crude tumbled more than $16 to levels not seen since September 2007, with over half the losses coming on Friday alone.

Investors appeared calmer Monday after European leaders agreed overnight to a raft of new measures aimed at strengthening the battered financial sector, including debt guarantees, recapitalizing banks and new oversight measures.

Meanwhile in Washington, Treasury Secretary Henry Paulson said his office would work quickly to implement a $700 billion bank rescue plan, including a new measure to buy equity in struggling banks, rather than just their soured mortgage-related assets.

The Dow Jones industrial average shot up over 500 points in midday trading, snapping back from last weeks' devastating losses.

''The oil market really can't ignore these huge daily price swings in the stock market. When the stock market settles down, we can go back to trading oil on fundamentals rather than just broadbased economic deterioration,'' said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.

Light, sweet crude for November delivery rose $3.69 to $81.39 a barrel on the New York Mercantile Exchange, after earlier rising as high as $82.52. The contract fell Friday $8.89 to $77.70, the lowest price since Sept. 10, 2007.

Falling oil prices have helped drive pump prices down sharply. A gallon of regular sank a whopping 4.1 cents overnight to a new national average of $3.206, according to auto club AAA, the Oil Price Information Service and Wright Express.

Seven states are now seeing average prices below $3 a gallon, including Kansas, Missouri and Ohio. Gas prices should come down even more as U.S. Gulf Coast energy infrastructure continues ramping up operations after closures caused by Hurricane Ike.

Though recovery in oil prices was to be expected after last week's steep decline, analysts doubted Monday's rally had relieved the intense downward pressure on crude.

''In this market, a $4 move in either direction really doesn't signal anything,'' said Stephen Schork, an oil analyst and trader in Villanova, Pa. ''I wouldn't be surprised if we give this rally back later in the day.''

Crude's steep pullback has caught some market observers off guard. Goldman Sachs, which for weeks maintained a bullish outlook on oil even as prices collapsed, on Monday cut its year-end crude price forecast from $115 a barrel to $70, citing the ''extreme dislocation'' in the credit markets.

''We clearly underestimated the depth and duration of the global financial crisis and its implications on economic growth and commodity demand,'' Goldman said.

Investors are watching for signs that the Organization of the Petroleum Exporting Countries may cut production at an extraordinary meeting in Vienna on Nov 18.

Iranian Oil Minister Gholam Hossein Nozari on Saturday called for stability in the oil market, saying the biggest challenge now was a decline in oil demand because of a global economic recession.

''There won't likely be any overt cuts, but there could be an informal tweaking of production that could provide support for prices,'' said Victor Shum, an energy analyst at consultancy Purvin & Gertz in Singapore. ''It's politically unacceptable for OPEC to make cuts in the middle of a global deceleration.''

In other Nymex trading, heating oil futures rose by 10.36 cents to $2.3136 a gallon, while gasoline prices gained 7.26 cents to $1.8796 a gallon. Natural gas for November delivery rose 14.8 cents to $7.337 per 1,000 cubic feet.

In London, November Brent crude rose $2.12 to $76.21 a barrel on the ICE Futures exchange.


Associated Press Writers George Jahn in Vienna, Austria and Alex Kennedy in Singapore contributed to this report.

    Oil Prices Rebound After Last Week's Huge Losses, NYT, 13.10.2008, http://www.nytimes.com/aponline/business/AP-Oil-Prices.html






A Crash Heard Around the World

Financial Danger Zones Emerge in Many Corners as Investors Feed Global Downturn by Trying to Flee It


OCTOBER 13, 2008
The Wall Street Journal


Investors are feeding a dramatic world-wide slowdown by trying to flee it, racing away from many corners of the globe they used to favor. The resulting tumbles in stocks and currencies have helped provoke a broader crisis in places such as Iceland, whose turmoil in turn is hitting bank depositors from London to Amsterdam.

As foreign capital flows out of a host of smaller economies, it's laying bare the excesses built up during five years of strong growth and easy access to borrowing. Concerns are rising that such countries could prove weak links in the world's tightly interwoven financial system.

Even as the world's major economies are forced to move more aggressively to bail out their banks and markets, those danger zones are taking on outsized importance,

In highly indebted countries in eastern Europe, for instance, economic expansion went hand-in-hand with rampant borrowing, and imports far outstrip exports. That makes them dependent on financing from overseas to close the gap -- at a time of maximum fear among global investors. It also means they risk a broader financial crisis that could reverberate back into other parts of Europe, darkening the already grim picture.

Other countries, such as Pakistan, could be forced to seek outside help to stave off a financial emergency. Many developing countries have bright prospects and aren't facing wholesale bank failures. But demand for exports is falling for many, as are commodity prices, a key source of strength.

In places from Brazil to Kazakhstan, pockets of problematic behavior -- such as heavy borrowing by corporations in foreign currencies -- have shown up. Money was pouring into their stock markets and encouraging risky behavior by companies. Now sinking local currencies make it much more difficult to repay any debts issued in dollars.

Few doubt that more pain lies ahead in more places. Already, ininvestors' worst-case scenario "has just been exceeded," says Edwin Gutierrez, who manages a portfolio of emerging-market bonds at Aberdeen Asset Managers in London.

Take a look at developments in some of the less-examined danger zones, amid big stock market drops around the world.

    A Crash Heard Around the World, WSJ, 13.10.2008, http://online.wsj.com/article/SB122385811355227445.html






A Power That May Not Stay So Super


October 12, 2008
The New York Times


AT the turn of the 20th century, toward the end of a brutal and surprisingly difficult victory in the Second Boer War, the people of Britain began to contemplate the possibility that theirs was a nation in decline. They worried that London’s big financial sector was draining resources from the industrial economy and wondered whether Britain’s schools were inadequate. In 1905, a new book — a fictional history, set in the year 2005 — appeared under the title, “The Decline and Fall of the British Empire.”

The crisis of confidence led to a sharp political reaction. In the 1906 election, the Liberals ousted the Conservatives in a landslide and ushered in an era of reform. But it did not stave off a slide from economic or political prominence. Within four decades, a much larger country, across an ocean to the west, would clearly supplant Britain as the world’s dominant power.

The United States of today and Britain of 1905 are certainly more different than they are similar. Yet the financial shocks of the past several weeks — coming on top of an already weak economy and an unpopular war — have created their own crisis of national confidence.

On Friday, as the stock market finished one of its worst weeks by falling yet again, to roughly half of its level just one year ago, the Gallup Poll reported that Americans were substantially more pessimistic about the economy than they have been in more than two decades of polling. Nearly 60 percent say the economy is in poor shape, and 90 percent say it’s still getting worse.

“One thing seems probable to me,” Peer Steinbrück, the German finance minister, said recently. “The U.S. will lose its status as the superpower of the global financial system.” At another time, that remark might have sounded like mere nationalist bluster. Right now, it doesn’t seem so ridiculous to ask whether 2008 will come to be seen as the first year of a distinctly non-American century.

At the heart of the troubles, both short term and long term, is debt. Debt helped create the housing bubble and has now left almost one of every six homeowners with a mortgage larger than the value of their home. Debt built up, and then laid low, modern Wall Street, where firms borrowed $30 for every $1 they owned. And in the coming years, debt will constrain the United States government, as it copes with the combined deficits created by the Bush administration’s policies, the ever-more expensive financial rescue and the biggest item of all, Medicare for the baby boomers.

In essence, households, banks and the government have already spent some of their future earnings. The current crisis marks the point at which the bills begin to get paid. Whereas Britain lumbered under the weight of imperial overreach, as the historian Niall Ferguson has written, the United States will be shackled primarily by its financial overreach.

“Given the burden of debt that has accumulated, it’s hard to see the U.S. economy growing as fast as it did over the past few decades,” Mr. Ferguson said. “There is a profound mood shift occurring.”

But he added two caveats. The political language of both presidential campaigns makes clear that many voters, for all the current pessimism, still believe in the idea of American pre-eminence. So, apparently, do many of the world’s investors.

In recent weeks, the dollar has held its own. Stocks in every other major country are down about as much over the last year as they are in the United States, if not much more. America may not be a safe haven anymore, but it does seem to be safer haven.

Robert Zoellick, the president of the World Bank, said that he was recently speaking to a senior Chinese economist, who said that people in his home country — today’s rising economic power — don’t see the sky falling on the American economy. “They know its ability to turn around problems is really unmatched, historically,” Mr. Zoellick said, quoting the economist about the United States. “At the same time, they ask themselves, Will the United States get at some of the root causes that could determine its real strength over the next 10 or 20 or 30 years?”

This is not the first time in recent history that the economic position of the United States has appeared precarious. At various points between the mid-1970s and early 1990s, Europe and Japan each looked like the next great power. Neither turned out to be.

Japan suffered through its own burst bubble and spent years denying the depth of its problems. Europe proved unable to create engines of growth that could match the software, biotechnology or entertainment industries in the United States.

Taken to its extreme, the American preference for a faster, riskier capitalism led directly to the current crisis. But that preference also helps explain why America is weathering the crisis at least as well as other countries.

Compared with many banks elsewhere, American banks uncovered their problems fairly quickly. Consider the case of Mr. Steinbrück, the German finance minister. Only two weeks ago, around the time that he was predicting the end of American financial dominance, he rejected calls for a Europe-wide bailout. The crisis, he said, was largely American. Last Sunday, Mr. Steinbrück and Chancellor Angela Merkel had to go before television cameras to assure Germans that their government was guaranteeing their savings.

(On Friday, Paul Volcker, the former Federal Reserve chairman, seemed to deliver a message to the Germans in an op-ed article in The Wall Street Journal: “The days of finger pointing and schadenfreude are over.”)

Policy makers in this country have also seemed behind the curve for much of the last year. On Friday, only a week after Ben S. Bernanke, the current Fed chairman, and Henry M. Paulson Jr., the Treasury secretary, dismissed the idea as unwise, Mr. Paulson said the government would buy stock in financial firms. The British government announced a similar plan on Tuesday.

On the whole, though, American officials have been more aggressive than their overseas counterparts, and that has served as a reminder of the American economy’s durable flexibility.

It is possible, then, that the main legacy of the crisis will be some form of corrective to the country’s recent excesses. The economy looks to be heading into a period of more regulated, but still American-style, capitalism, more along the lines of how it operated in the 1950s, 1960s and 1990s. Those three decades happen to have produced the biggest and most widely shared economic gains since World War II.

But if that outcome is possible, it’s not inevitable, and many economists say it isn’t even likely. The debts run up in recent years are particularly unfortunate, because they stole resources from the future without laying the groundwork for future growth. “If you told me we were spending like crazy to build schools and send everyone to college, that would have infinitely different implications than borrowing like crazy to finance current consumption,” said Christina Romer, an economist at the University of California at Berkeley.

Schools, roads, airports and the medical system, as well as the country’s energy policy, all appear to need significant fixing, and yet there will be less money to fix them than there was 5 or 10 years ago. With the coming explosion in Medicare costs, the federal budget deficit could eventually get so large that foreign investors would get spooked. They might then decide that other economies were safer bets and shift more of their lending there. Were that to happen, and the United States struggled to attract financing, the country would face a whole new crisis.

As it is, the Chinese economy has grown so quickly in recent years that it could overtake the American economy as the world’s largest by 2027, according to Goldman Sachs. Just three years ago, Goldman predicted that China was unlikely to become No. 1 until at least 2040.

Some of this catch-up is inevitable. As in the British Empire’s day, poorer countries are able to attract investment thanks to their low wages and also copy the successes of their richer rivals, notes Benjamin Polak, an economic historian at Yale. China still seems considerably less advanced, relative to its rivals, than the United States was in 1905. China remains a politically insecure, deeply unequal country.

But it is indeed making enormous progress, and that progress has consequences. Economic might translates quite directly into political and military might.

Will that prospect be enough to galvanize a serious response to the long-term economic problems in the United States? Or are there still more crises to come?

“The political system does not deal well with gradual, long-term problems,” Peter Orszag, the director of the Congressional Budget Office, said. “It deals with crises, often imperfectly, but it does deal with them. The current experience makes the case.”

    A Power That May Not Stay So Super, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/weekinreview/12leonhardt.html?hp






It Couldn’t Get Worse, but It Did


October 12, 2008
The New York Times


THE third quarter brought investors some of what they hoped for early on and a lot more of what they feared after that.

A long-expected decline in commodity prices initially supported stocks. But a jerky, fitful rally soon evaporated as it became clear that the financial system, so shaken that it seemed as though it could only get better, actually got worse.

The Standard & Poor’s 500-stock index ended the quarter down 8.4 percent, including reinvested dividends. That was a very low hurdle for managers of stock portfolios to clear, but they couldn’t do it; the average domestic equity fund in Morningstar’s database declined 10.2 percent.

Foreign stocks had long displayed resilience, underpinned by stronger economies and currencies overseas, but they provided no sanctuary this time. Mounting evidence of global weakness produced bigger losses abroad than at home. The average international stock fund fell 19.8 percent.

Bonds are often a refuge, but their performance was uneven in such testing times. While funds that concentrated on government instruments did well, the crisis that led investors to shun almost any credit risk resulted in a 4.1 percent decline in the average taxable bond fund.

It may seem a distant memory, but the S.& P. 500 eked out a thin gain for July and August, 0.2 percent, as prices of oil and other commodities tumbled. What was significant about the gain was that it was so insignificant.

P. Brett Hammond, chief investment strategist at TIAA-CREF, explained that cheaper commodities gave Wall Street one less thing to worry about — but only one. The otherwise welcome development allowed investors to focus on myriad other worrisome conditions.

“Commodities fell and people got more optimistic,” he said, “but there is still inflation, the outlook for G.D.P. growth is not great, and there is continuing bad news for the credit markets and financial firms. People began to realize that that hadn’t changed and that the fundamentals just weren’t there for a sustained rally.”

Just how absent they were soon became clear. First, the Treasury took control of Fannie Mae and Freddie Mac, which hold or guarantee half of the nation’s $10 trillion in mortgage debt between them.

Investors were relieved at first, as they reasoned that the seizure would ensure that adequate money would be available for new mortgages, supporting a wobbly housing market. A sharp rally in stocks quickly faltered, however, as the mood shifted to one of concern that the move would be insufficient to arrest the threat to the credit system.

Good call. Within days, Lehman Brothers collapsed; Bank of America announced that it was buying Merrill Lynch, the investment bank; and authorities announced an $85 billion rescue of the American International Group. Before the quarter was out, Goldman Sachs and Morgan Stanley received approval to become conventional, deposit-taking institutions. That left no major independent investment bank on Wall Street in its precrisis form.

Perhaps of more interest in the rest of the country, Washington Mutual, the largest savings and loan, was seized by regulators and sold to JPMorgan Chase, which has become a home this year for some down-and-out financial institutions.

Stock prices accelerated their decline as news worsened, and the financial system became imperiled enough to affect some investors who thought they had chosen ultrasafe assets. The Reserve Primary Fund, a large money-market portfolio, announced in mid-September that its share price would fall to 97 cents, below the $1 that is customary for money funds. By “breaking the buck,” as the extremely rare event is known, the fund was telling investors that they had lost a small portion of their capital.

The impact was immediate and great. Shareholders withdrew tens of billions of dollars from so-called prime funds, which own commercial paper and other very short-term debt whose quality, in less frantic conditions, is not much below government debt.

That drove the authorities to extend the guarantee on bank deposits to money-market funds, one of several steps to try to avert a collapse of the financial system. The biggest was the creation of a government program, capitalized at up to $700 billion, to buy, hold and eventually sell toxic paper on the books of banks and other financial-service companies.

The unexpected initial defeat of the rescue bill in the House of Representatives sent the S.& P. 500 down nearly 9 percent on Sept. 29. The index recouped most of that in the next session as the quarter ended, then fell much further in the following days

THE third quarter had so many developments that required investors to make major shifts that their thinking spilled over from the cogitating part of the brain to the more emotional regions.

“I don’t think I’ve seen a period like this,” said Michael L. Avery, chief investment officer of Waddell & Reed. “It’s unbelievable the extent to which people have allowed sentiment to whip them around from one moment to the next.”

The whipping has continued into the fourth quarter, and professionals warn that the bruising is likely to spread throughout the economy in the coming weeks and months. Gary B. Gorton, a professor of finance at the Yale School of Management, predicted broader repercussions from the credit crisis.

“This thing is so far from over,” he said. “The perception is that this is a Wall Street problem and doesn’t affect the rest of the economy, but the rest of the economy will be dramatically affected. It’s just going to take some time to get there. The worst of this may be yet to come.”

The financial rescue package may help limit the damage, said Mr. Hammond at TIAA-CREF, but he does not see it as a cure-all because the authorities will be unsure how to deliver the medicine, and in what doses.

“Even with this bailout bill, we’re not going to have complete clarity on how to fix” the financial system, he said. “No matter how precise the bill is, they’re going to need to experiment to fix the problem.”

Komal Sri-Kumar, chief global strategist at the TCW Group, expects economic conditions to deteriorate as the tinkering proceeds. He sees “a recession just commencing,” he said. “It was delayed, but now it’s taking place with a vengeance.”

One sign of that is the report showing that the economy lost 159,000 net jobs in September, the latest and worst in a string of monthly reports recording a contraction in employment.

Tobias Levkovich, chief United States equity strategist at Citigroup, expects “three to six months of tough economic news.” He does not expect the stock market to take it all that badly, however.

In his view, investors have factored the impact of the financial crisis into share prices. One indication is the resilience of some financial stocks. The collapse of Lehman and A.I.G. grabbed the limelight as shares of heavyweights like Bank of America and JPMorgan Chase soared almost unnoticed.

The average fund specializing in the sector actually rose 1.1 percent in the third quarter, according to Morningstar. By contrast, funds concentrating on natural resources, a darling of investors for so long, lost 35 percent.

“Risk is not where you are worried about finding it,” Mr. Levkovich said. “Risk is where you’re not worried about finding it. Financials and consumer stocks have done far better than areas where people felt comfortable.”

The last few months have been so brutal that investors might feel relieved just to feel uncomfortable. The market panic suggests to him that a recovery is approaching for stocks and the financial system. “I take a bit of a skeptical view that this has to end up being disastrous, although everyone thinks it’s going to be,” he said. “We’re going to look back at some time and be surprised at how quickly conditions improved.”

Mr. Avery at Waddell & Reed advised investors to “buy stocks with good dividend yields so you get paid to wait” for the market to recover. But he, too, thinks that the wait may not be long.

“Things seem so black that I have a feeling we’re at the bottom,” he said. “That doesn’t mean stocks will go up dramatically, but after a while we may look back and realize that they have gone up. There are too many people giving up for me to think that there is a long way down to go.”

    It Couldn’t Get Worse, but It Did, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/business/mutfund/12lede.html






Amid the Gloom, an E-Commerce War


October 12, 2008
The New York Times


WHEN the e-commerce giant eBay emerged from the last recession seven years ago with an aura of invincibility, its chief executive, Meg Whitman, boasted that “eBay is to some extent recession-proof.”

As the online auctioneer’s revenues and stock price kept climbing, one of its primary rivals, Amazon.com, just limped along.

How times have changed.

Ms. Whitman, now co-chair of Senator John McCain’s presidential campaign, retired from eBay earlier this year as the company struggled with stagnation. Amazon, meanwhile, has emerged as one of the most vibrant and reliable retailers in the country.

And in an unmistakable sign that Internet companies are indeed exposed to the gathering economic storm stemming from the credit crisis, Ms. Whitman’s successor, John J. Donahoe, laid off 10 percent of eBay’s 16,000 employees last Monday.

Mr. Donahoe noted that eBay was already feeling the effects of the downturn. “This looks like it is going to be a more typical economic cycle that impacts consumer spending,” he said. “We are not immune.”

That the economic crisis is washing up on Silicon Valley’s shores shouldn’t, perhaps, come as a surprise. Most tech companies are defenseless against waning advertising, business spending and consumer interest in big-ticket items like computers. Over the last three months, investors have punished tech companies like Google, Microsoft and Apple, extracting a fifth to a half of their market value.

E-commerce, though, was once thought to be a refuge from economic storms. People who stay away from the mall might actually be more tempted to shop online and hunt for deals, or so the thinking went.

But analysts are now revisiting that assumption. Many consumers, citing an uncertain economy, say they will clutch their wallets tightly this holiday season regardless of where they shop: 48 percent surveyed recently by eBillme, an online payment service, said they planned to delay purchases.

Traditional, brick-and-mortar stores had wrenching, double-digit declines in September sales and are bracing for a bleak holiday season. No one is certain to what degree online retailers will feel that same pain, because digital vendors have never endured a deep, protracted economic slump before.

“We still feel pretty good about this year, but I worry about next year and beyond,” said Brian J. Pitz, an analyst at Banc of America Securities. “Are people going to spend when they can’t get home equity lines of credit, a student loan or a car loan?”

For eBay and Amazon, the twin giants of e-commerce, the financial meltdown has arrived at a particularly crucial time. After years of claiming that their businesses were complementary, not competitive, the companies are now on a collision course.

Amazon has accelerated its courtship of small online vendors, allowing them to sell on its site — becoming more like eBay. And eBay, desperate to revive itself, has decided to emphasize traditional, fixed-price sales of both new and old merchandise — becoming more like Amazon.

AT stake is more than e-commerce bragging rights. On the Internet, size matters. Larger companies can collect more information about consumers, negotiate better deals with partners and use that leverage to expand their dominance (for example, Google versus Yahoo in search).

“This is a pivotal holiday season for eBay,” said Jeffrey Lindsay, a senior analyst at Bernstein Research who has covered the Internet for a decade. “What people fear is that Amazon is basically building a bigger sales base than eBay and will use that knowledge to sell people more and more of the things they want to buy online.”

Indeed, the balance of power in e-commerce seems to be shifting faster than anyone expected. Just three years ago, eBay had 30 percent more traffic than Amazon. Today, its total of 84.5 million active users is barely ahead of the 81 million active customer accounts that Amazon reported in June.

Amazon has exceeded eBay in other measures as well.

EBay’s market capitalization was three times Amazon’s in 2005, back when Wall Street loved the fact that it carried no inventory and generated huge profits. This year, eBay’s stock has lost over half its value and, in July, Amazon’s valuation surpassed eBay’s for the first time.

In a series of interviews, Mr. Donahoe acknowledged that eBay, based in San Jose, Calif., didn’t adapt fast enough to shifting e-commerce winds. He now embraces a “turnaround mind-set” and is refocusing its Web marketplace toward shoppers who don’t want to waste time in online auctions.

“There are times when I wish we can close this store and just open a new store, but we can’t,” he said. “We need to make bolder, more aggressive changes to the eBay ecosystem even if they are unpopular.”

Up in Seattle, meanwhile, Amazon’s chief executive, Jeffrey P. Bezos, says that after years of failed experimentation, third-party vendors — the foundation on which eBay was built — now account for about 29 percent of sales on Amazon. The company has endured and outlasted critics who long complained about its high fixed costs.

Last year, it impressed investors with accelerating growth, and its stock price revisited the highs of the dot-com boom, before waning euphoria and market pessimism erased more than half of those gains this year. Mr. Bezos credits Amazon’s tolerance for risky, expensive bets like the Kindle electronic reading device.

“Our willingness to be misunderstood, our long-term orientation and our willingness to repeatedly fail are the three parts of our culture that make doing this kind of thing possible,” he said.

EBay’s recent problems have made Mr. Bezos and his team look like shrewd and patient stewards of the Amazon franchise. And Amazon’s second wind is making eBay look as if it has missed one of the greatest opportunities in the Internet’s short history.

“EBay could have closed the door to Amazon back when Amazon was mostly just a platform to sell books and music,” said Scott Devitt, an analyst at Stifel, Nicolaus & Company, the investment bank. “But what eBay did in those days was to take a very hands-off approach and let the marketplace control itself. And that ended up being the downfall of the business relative to others that have succeeded.”

OVER the summer of 2004, at the annual executive retreat that eBay insiders call “Telluride,” a product strategy team argued that eBay needed to break into the promising world of digital media. Pointing to the popularity of services like Napster and the new iTunes music store from Apple, the group predicted that media like books, music and movies would inevitably be distributed digitally, over the Web.

EBay, they argued, needed to ride that wave.

That insight — which did catch on at Amazon and is now responsible for high-profile efforts like the Kindle and Amazon’s MP3 store and video-on-demand service — went nowhere at eBay.

“Nobody really shut it down. The process shut it down,” says a former eBay executive who was on the product strategy team but requested anonymity to avoid alienating former colleagues. “The company was obsessed with making quarterly numbers.”

Whether passing on digital media was a mistake at eBay is still an open question. But the anecdote illustrates larger problems. More than a dozen current and former eBay executives, from all levels of management, say eBay routinely failed to reorient its core business.

They say eBay avoided fiddling with its auction model because it was wary of disrupting a long-profitable equilibrium between buyers and sellers.

EBay has known for years that some Web buyers were looking for a different experience. Surveys suggested that auction participants were alienated by untrustworthy sellers and hidden shipping fees, and increasingly preferred the certainty of instantly buying items at a fixed price.

Although eBay executives recognized and routinely acknowledged the problem, they never took bold, direct steps to address it.

In 2005, the company acquired Shopping.com, a comparative shopping site that catalogs products for sale elsewhere on the Web. But for years eBay did not promote the company’s listings, primarily because its vocal community of sellers — the ones paying fees to eBay — protested whenever eBay sent buyers to other retailers.

Josh Koppelman, who founded the e-commerce site Half.com and sold it to eBay in 2001, says that there was an understandable cultural reluctance inside eBay to alienate sellers. “We got paid a fee to provide a service to a community,” he said. “Hurting members of that community was difficult.”

Instead of imposing critical fixes to its slowing model, eBay searched for high-growth businesses elsewhere, acquiring Skype, the online calling service; StubHub, the ticketing site; and a series of classified-advertising Web sites.

The company did create a whole new site, called eBay Express, where it tried to satisfy buyer interest in a simpler shopping experience. EBay Express automatically amassed all the fixed-price, non-auction listings on eBay properties and presented them in an organized way with only one payment system, PayPal — also owned by eBay.

But in the two-year life of eBay Express, eBay never directed any meaningful traffic to it, fearing that it would interfere with the more profitable and popular auction-oriented site. The company shuttered eBay Express this year and has said it will move some of its innovative features to eBay.com.

Contributing to intransigence, according to several former executives, were deep divisions and constant hand-wringing among its managers over the most fundamental question: What is eBay?

One camp believed that eBay was a discount palace and that it had to continually offer deals to buyers in whatever shopping format they wanted.

But another group, resistant to change even as late as last year when eBay was clearly losing ground, believed that the brand was tied up in the excitement of auctions. Emphasizing traditional shopping destroyed what made eBay special, they argued.

“Today online shopping is mainstream, but it’s also becoming boring,” Bill Cobb, then the president of eBay North America, wrote in a June 2007 blog entry that typified this thinking. “We’re investing in the quintessential eBay experience of buying and selling — person to person — in an auction format.”

Ms. Whitman seemed to moderate this constant debate while never actually settling it. At times, she also seemed unwilling to leave auctions behind.

In an interview last week, while on a break from traveling with the Republican vice-presidential candidate Sarah Palin, Ms. Whitman said it was hard for her to reflect on these kinds of divisions within the company, or on missed opportunities.

“There was no shortage of realistic looks in the mirror, where we asked ourselves if we were doing the best job that we could do,” she said.

She also addressed another notion raised by former eBayers, who say executives were dismissive of Amazon but focused obsessively on Google, the search leader whose tentative moves into e-commerce were viewed inside eBay as acts of aggression.

“Google is a disruptive competitor. It’s not a marketplace and it’s not a retailer but has a different way of marrying buyers and sellers,” she said. “I don’t think you can overstate any competitive threats.”

But paranoia about Google, these former executives say, fueled strategic missteps like the Skype acquisition, which Google had also pursued. Ms. Whitman and other eBay managers spent considerable energy trying to integrate Skype, and last year eBay wrote down $1.4 billion of the $3.1 billion acquisition.

As eBay obsessed about Google, the online retailer from Seattle was encroaching on its turf.

CONVERSATIONS with Jeff Bezos of Amazon inevitably provoke two kinds of outbursts. One is that famous, barking laugh that punctuates even seemingly mundane sentences. The other is his paean to the wisdom of long-term thinking.

“We are willing to plant seeds that take five to seven years to grow into reasonable things,” he said in an interview. “You can’t do big, clean-sheet invention unless you are willing to invest for long periods of time.”

Mr. Bezos has delivered these kinds of odes to patience and risk tolerance for nearly a decade. The company’s appetite for enduring short-term pain for long-term gain is clearest when comparing it with its rival, eBay.

While eBay was buying into classified advertising, online payments and Internet telephony, Amazon spent hundreds of millions of dollars building its brand as a trusted retailer — hiring customer service representatives and returning money to customers when transactions went awry.

As eBay took a pass on digital media, Amazon dove in and frustrated investors for years with margins that were diminished by a bulky R.& D. budget — but produced promising businesses like the MP3 store.

Compensation at the two companies also reflects core differences. Amazon evaluates its executives annually and gives performance-based stock grants. Until this year, when Mr. Donahoe became chief executive, eBay gave cash and stock bonuses based on quarterly performance, rewarding managers for meeting Wall Street’s short-term expectations.

Similarly, Amazon’s push to recruit the small sellers who orbited eBay was marked, at first, by patience and often-embarrassing experimentation.

In 1999, five years after Mr. Bezos first plunged his stake into the ground as an online bookseller, Amazon invaded eBay’s territory, introducing Amazon Auctions and a way for retailers to set up stores on the site, called zShops. The efforts tanked.

The problem then “was that nobody came,” Mr. Bezos said. “Actually, sellers came, but the customers didn’t care and didn’t shop there.”

Amazon tried to promote this siloed merchandise on its site by linking to it on its more popular product pages. These so-called “smart links” were hotly controversial inside Amazon and became the subject of a rivalry between its retail and technology groups.

Fearful that sending visitors to other pages would cut into their sales, retailing executives at Amazon took to removing them from the page at every opportunity, according to one senior Amazon executive who was there at the time.

SEVERAL years ago, the company introduced Amazon Marketplace, laying the groundwork for its current path by listing new and used items from third-party sellers alongside its own merchandise.

If Amazon didn’t stock a particular item, or if independent sellers could offer better prices, they would become the featured retailer on the page.

Amazon settled internal tensions by giving its retail managers credit for any products sold on their pages, even by third-party sellers. But Mr. Bezos says the arrangement still produces anxiety.

“Put yourself in place of our retail buyers,” he said. “You just purchased 10,000 units of a particular digital camera and you are told, if any third party anywhere in the world can offer a better price, we are going to give them the buy box and you are going to get stuck with the inventory. That causes some angst.”

Over the last five years, Amazon has lowered hurdles for independent vendors to sell on its site and recruited new groups of merchants as it has expanded into other countries and product categories — automotive parts in 2006 and office supplies this year, for example.

Amazon executives say they don’t specifically pursue top eBay sellers, but some merchants suggest otherwise.

David Duong, founder of Shoe Metro, a Web retailer based in San Diego, says Amazon representatives called him shortly after Amazon.com introduced a shoe category in 2005 and asked him to begin selling on the site.

“I guess they found us on eBay,” he said. “We were actually going to talk to them, but they beat us to the punch.”

Lately, small merchants and their trade organizations say, the outreach has become even more direct. The Professional EBay Sellers Alliance said that Amazon recently offered to waive some fees for the 800 members of the group, an organization of eBay power sellers, to woo them to its platform.

Because Amazon also sells many of the same products as its merchants, executives at eBay predict that competitive tensions will emerge as the Amazon Marketplace grows. Maybe so. It’s happened before.

Amazon once ran the Web operations of large traditional retailers like Borders, Circuit City and Toys “R” Us. One by one, those retailers concluded that outsourcing such a crucial feature of 21st-century retailing to a competitor was a bad idea.

But some of its newer deals with sellers indicate that Amazon is finding ways around those tensions, at least with small merchants.

Andrew and Deb Mowery of Fort Collins, Colo., who started selling home, garden and pet supplies on eBay in 1999, now make 60 percent of their sales on Amazon and about 20 percent on eBay. In addition to listing items for sale on the Amazon Marketplace, they are also a wholesale supplier to Amazon, providing it with products like heated pet beds.

Mr. Mowery is essentially competing with himself, but the arrangement works. “If they run out, I’ve got their back,” he said. “If I run out, they’ve got my back.”

Amazon wants to forge these kinds of close ties with other small sellers. A program called Fulfillment by Amazon, introduced in 2006, allows retailers to store their inventory in Amazon’s warehouses. When someone buys an item from that seller, Amazon ships it out of its warehouse in an Amazon box.

Integrating small merchants into its operations also allows Amazon to learn more about whom it can trust to sell on its site. Compared with eBay, the company says it exerts a far greater measure of control over its marketplace, calling certain vendors “featured sellers” and vetting others in product categories that are sensitive to fraud.

“At the end of the day, we believe it’s good for all of our sellers to make sure we are protecting the consumer experience first,” Mr. Bezos said. “Our first and foremost goal is to earn trust with consumers. If there are no consumers buying, nothing else matters.”

DESPITE Amazon’s success in courting independent sellers, its selection is still just a fraction of what eBay offers, and in some cases its prices are higher.

For example, there are hundreds of new, used and refurbished Trek racing bikes on eBay; as of last week, Amazon had three for sale. Acquisitive parents can buy a $90 Deux Par Deux baby sweater dress on eBay for under $30. But only a few of this French designer’s items are listed on Amazon, and for close to full price.

And that Lehman Brothers 150th-anniversary collectible tote bag, which every irony-obsessed stock market fan wants under the Christmas tree? It is available for purchase only on eBay, in auctions.

This is where Mr. Donahoe talks about a vision to fix eBay, and to create a Web discount store that offers a wide variety of new and old merchandise in auction and fixed-price formats. To get there, he must administer the sweeping, painful fixes that eBay has previously shunned.

“It was increasingly clear to me in 2007 that what felt like bold changes, and to the community felt like bold changes, were not bold enough,” he said.

His attempted fixes have started internally. In addition to making executive bonuses annual instead of quarterly, to keep employees from leaving and reward longer-term thinking, he moved the company’s focus to buyers instead of sellers.

He canceled the annual eBay Live conference next year with merchants — this year, it turned into an unwieldy complaint session — and began making eBay executives read weekly surveys that ask shoppers whether they would recommend eBay to a friend.

THE eBay facade is also undergoing its most significant renovation in its 14-year history as Mr. Donahoe tries to adjust eBay fees to tempt sellers to list more of their products at fixed prices.

EBay has also added a new 30-day listing at a fixed price that is more economical to many sellers than auctions. It has also disabled the feedback mechanism that allowed sellers to rank buyers and introduced a new “best match” search engine that promotes trusted sellers and good deals.

In another controversial change, eBay has struck special deals with large merchants like Buy.com, which pays no listing fees and offers more than half a million products on eBay.com.

The point of the arrangement is to ensure that eBay stays fully stocked in basics like batteries and printer cartridges. Other eBay sellers are enraged, though, arguing that the deal violates the sacred eBay tenet of the “level playing field.”

These sellers have vented their frustrations online about eBay’s changes. It’s hard to gauge whether the vitriol represents the majority view, but some less vocal, larger sellers on eBay say they have actually benefited.

“EBay has told all bad sellers to shape up,” said Jordan Insley, an electronics merchant who lives near Seattle. “I’ve seen a lot of sellers that used to sell a lot of product fall off the charts.”

Although he worries that buyer traffic on eBay is slowing, Mr. Insley says he will sell $13 million in gadgets this year on eBay alone. “I think eBay is moving in the right direction. We are sticking around.”

Still, Mr. Donahoe can’t count on that sentiment to carry the day. Few of his changes are expected to deliver any immediate results, other than alienating certain sellers.

Yet for eBay, the changes may be a matter of survival. The company need only look across Silicon Valley at Yahoo to see what can happen to wounded Internet companies with depressed stock prices.

In the meantime, he faces tough choices. He is weighing a possible sale of Skype by next year, and analysts think he will almost certainly make that move, since the company now acknowledges that Skype has little synergy with eBay’s other businesses.

That would free eBay to focus on its core marketplace, on getting through the torrential economic downpour, and on combating a challenger that is making greater incursions every day.

“I respect Jeff Bezos a lot as a leader and Amazon and what they’ve done,” Mr. Donahoe said. “But it is still early days in this industry. E-commerce is 7 percent of retail. I don’t think anyone thinks it’s going to end there. We think there is plenty of room for both Amazon and eBay to be successful.”

    Amid the Gloom, an E-Commerce War, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/business/12giants.html






Those With Sense of History May Find It’s Time to Invest


October 12, 2008
The New York Times


The four most dangerous words for investors are: This time is different.

In 1999, technology companies with no earnings or sales were valued at billions of dollars. But this time was different, investors told themselves. The Internet could not be missed at any price.

They were wrong. In 2000 and 2001 technology stocks plunged, erasing trillions of dollars in wealth.

Now investors have again convinced themselves that this time is different, that the credit crisis will push economies worldwide into the deepest recession since the Depression. Fear runs even deeper today than greed did a decade ago.

But in their panic, investors are ignoring 60 years of history. Since the Depression, governments have become far more aggressive about intervening when credit markets seize up or economies struggle. And those interventions have generally succeeded. The recessions since World War II, while hardly easy, have been far less painful than the Depression.

Now some veteran investors, including G. Kenneth Heebner, a mutual fund manager who has one of the best long-term track records on Wall Street, say that the sell-off has gone much too far and stocks are poised to rally powerfully if the downturn is less severe than investors fear.

“The fact is, there are a lot of tremendous bargains out there,” said Mr. Heebner, who manages about $10 billion in several mutual funds. Indeed, by many measures stocks are as cheap as they have been in the last 25 years.

He pointed to Chesapeake Energy, a natural gas producer that he owns in his CGM Focus mutual fund. In July, Chesapeake traded for $63 a share. On Friday, it fell as low as $11.99.

He says that investors with a stomach for risk and a long time horizon should consider following Warren E. Buffett, who in the last three weeks has invested $8 billion in Goldman Sachs and General Electric.

Mr. Heebner expects world economies to contract over the next year. But he said the market plunge in the last week was no longer being driven by rational analysis. Stocks are probably falling because of a combination of panic and forced selling by hedge funds that must meet margin calls from their lenders, he said.

Mr. Heebner’s funds have not avoided the carnage this year. The CGM Focus fund is down about 42 percent so far in 2008. But his long-term track record is impressive. In the decade that ended Dec. 31, 2007, CGM Focus rose 26 percent a year, including reinvested dividends, making it among the best-performing mutual funds.

Mr. Heebner is not alone in his optimism.

“I think in years to come — I wouldn’t say months to come — we will perceive this as being a great value-buying opportunity,” said David P. Stowell, a finance professor at Northwestern and a former managing director at JPMorgan Chase. “Two and three years from now, it will seem very smart.”

Even before their jaw-dropping plunge of the last month, stocks were not expensive by historical standards, based on fundamentals like earnings and cash flow. Now, after falling 30 percent or more since early September, stocks in stalwart, profitable corporations like Nokia, Exxon Mobil and Boeing are trading at nine times their annual profits per share or less. Many smaller companies are even cheaper. Some of those stocks are trading at five times earnings or less.

Those ratios are historically low. Over all, the Standard & Poor’s 500-stock index is trading at about 13 times its expected profits for 2009, its lowest level in decades. In contrast, at the height of the technology bubble in early 2000, the stocks in the S.& P. traded at about 30 times earnings, the highest level ever. At the same time, the 10-year Treasury bond paid about 6 percent interest, compared with less than 4 percent today.

Investors have fled stocks in favor of government bonds, insured bank deposits and other low-risk investments because they are deeply afraid of the worldwide economic crisis, said Stephen Haber, an economic historian and senior fellow at the Hoover Institution. But he said he believed that fear might have gone too far.

“If there is good and wise policy, and government moves effectively, this need not play itself out in ways like the Great Depression, which is the image that is playing itself out in people’s mind,” Mr. Haber said. Government action typically does not work immediately, and banking crises around the world often require multiple interventions, he said.

Still, optimists remain in the minority on Wall Street. Most investors seem to believe that the credit crisis will do substantial damage to stocks and overall economic activity.

“We have never before seen for such sustained periods of time such a sustained turn away from risk taking,” said Steven Wieting, the chief United States economist for Citigroup. “This has broken out of the boundaries we’ve seen.” Economic activity appears to have slowed sharply in September, Mr. Wieting said.

The panic last week took the biggest toll on financial companies, as well as companies that are highly leveraged. But stocks fell 10 to 30 percent even for companies typically thought to be resistant to economic downturns, like the manufacturers of consumer staples.

For example, Newell Rubbermaid fell to $12.82 on Friday from $17.34 on Oct. 1, a 26 percent decline in 10 days. Newell Rubbermaid now trades at its lowest levels since 1990, and just eight times its expected earnings for next year.

Yet Newell Rubbermaid, whose brands include Calphalon, is profitable and insulated from the credit crisis, said William G. Schmitz Jr., who follows household products companies for Deutsche Bank. “There’s really no balance sheet risk,” Mr. Schmitz said. The company also pays a 6 percent dividend.

Newell Rubbermaid said in July that it would earn $1.40 to $1.60 a share for 2008, excluding restructuring charges. For 2009, stock analysts predict it will make $1.53 a share. And while a slowing economy may mean that people will be buying fewer products from Newell Rubbermaid, the recent plunge in oil prices will reduce its costs, Mr. Schmitz said.

“The way the stock’s reacted, you’d think they were going out of business,” he said.

Martin J. Whitman, a professional investor for more than 50 years, said that as long as economies worldwide could avoid an outright depression, stocks were amazingly cheap. Mr. Whitman manages the $6 billion Third Avenue Value fund, which returned 10.2 percent annually for the 15 years that ended Sept. 30, almost two percentage points a year better than the S.& P. 500 index. The fund is down 46 percent this year.

“This is the opportunity of a lifetime,” Mr. Whitman said. “The most important securities are being given away.”

    Those With Sense of History May Find It’s Time to Invest, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/business/12stox.html?hp






White House Overhauling Rescue Plan


October 12, 2008
The New York Times


WASHINGTON — As international leaders gathered here on Saturday to grapple with the global financial crisis, the Bush administration embarked on an overhaul of its own strategy for rescuing the foundering financial system.

Two weeks after persuading Congress to let it spend $700 billion to buy distressed securities tied to mortgages, the Bush administration has put that idea aside in favor of a new approach that would have the government inject capital directly into the nation’s banks — in effect, partially nationalizing the industry.

As recently as Sept. 23, senior officials had publicly derided proposals by Democrats to have the government take ownership stakes in banks.

The Treasury Department’s surprising turnaround on the issue of buying stock in banks, which has now become its primary focus, has raised questions about whether the administration squandered valuable time in trying to sell Congress on a plan that officials had failed to think through in advance.

It has also raised questions about whether the administration’s deep philosophical aversion to government ownership in private companies hindered its ability to look at all options for stabilizing the markets.

Some experts also contend that Treasury’s decision last month to not use taxpayer money to save Lehman Brothers worsened the panic that quickly metastasized into an international crisis.

The administration’s new focus was announced late Friday as part of a rescue plan in coordination with six of the world’s richest nations. It came during a week when the Dow Jones industrial average plummeted 18 percent, one of the worst weeks in stock market history.

While the Treasury says it still plans to buy distressed assets, the scope of that plan is unclear. Treasury Secretary Henry M. Paulson Jr. has refused to say whether the capital infusion program for banks would be bigger than the original plan to buy troubled assets.

Still, Treasury has directed Fannie Mae and Freddie Mac, the government-controlled mortgage giants, to ramp up their purchases of hard-to-sell mortgage bonds, in what could be a speedier and less formal process than the auctions proposed by the Treasury.

Underscoring the gravity of the situation, President Bush convened an early morning meeting at the White House on Saturday with finance ministers from the Group of 7 industrialized countries.

“All of us recognize that this is a serious global crisis, and therefore requires a serious global response, for the good of our people,” Mr. Bush said afterward in the Rose Garden, flanked by the ministers, who are in Washington for the annual meetings of the International Monetary Fund and the World Bank.

Mr. Bush said the countries had agreed to general principles to respond to the crisis, including working to prevent the collapse of important financial institutions and protecting the deposits of savers. But he offered no details on other measures, suggesting that there were still differences among countries about which steps to take to shore up their respective financial systems.

To some extent, the effort to agree on a coordinated plan is being driven less by the hope that such measures will carry more punch than by the fear that nations acting alone could destabilize the system.

Those worries grew in recent days when Iceland seized its three major banks, which were failing, and appeared to guarantee the deposits of Icelanders over those of foreigners. That provoked a fierce reaction from Britain, which is now in talks with Iceland to get back the deposits of British citizens.

With the United States and Europe working together on ways to secure their banking systems, economists are concerned that money may flow out of other countries, particularly emerging markets, to Western countries if investors decide that those markets are not as safe.

The United States sought to reassure these countries in a meeting on Saturday evening of the Group of 20, which includes countries with large emerging markets, like China and Russia.

“We want to reaffirm, reinforce our commitment that we’re going to take these actions in a way that doesn’t undermine the economies of other countries,” said David H. McCormick, the under secretary of the Treasury for international affairs.

Like the United States, Britain plans to provide capital directly to banks. But the United States and other countries have not adopted Britain’s proposal to guarantee lending between banks as a way to unlock the credit market.

Germany has been reluctant to put state capital directly into banks, though officials said there were signs of movement in that position on Saturday. Europeans leaders were scheduled to meet in Paris on Sunday, amid reports that Germany may announce a large rescue plan of its own.

Some experts said the delay in carrying out the Bush administration’s $700 billion bailout plan had only hurt its prospects for success.

“Even if it was adequate before, it’s not adequate now,” said Frederic Mishkin, a professor of economics at Columbia University’s business school who stepped down as a Federal Reserve governor at the end of August. “If you delay and create uncertainty, the amount of money you have to put up goes up.”

As recently as late September, the idea of letting the government buy part of the banking system had been unthinkable in the Bush administration. To many officials, such intervention seemed like a European-style government intrusion in the markets.

“Some said we should just stick capital in the banks, take preferred stock in the banks. That’s what you do when you have failure,” Mr. Paulson told the Senate Banking Committee on Sept. 23. “This is about success.”

Mr. Paulson told lawmakers it made more sense to jumpstart the frozen credit markets with “market measures,” by which he meant buying up assets rather than institutions. He staunchly resisted Democratic proposals to require that the government receive an equity stake in the companies it was helping.

But on Friday, Mr. Paulson not only confirmed his intention to buy stakes in banks but gave the idea central billing. “We can use the taxpayer’s money more effectively and efficiently, get more for the taxpayer’s dollar, if we develop a standardized program to buy equity in financial institutions,” Mr. Paulson said.

Treasury officials said they hoped to make the first capital investments within the next two weeks. That would be earlier than any government purchases of unwanted mortgage-backed securities. One reason for Mr. Paulson’s rapid reconsideration was that global financial markets have been going downhill faster than anyone had seen before.

Credit markets seized up and all but stopped functioning, making it impossible for most companies to borrow money on more than an overnight basis. Bank stocks plummeted, making it much more difficult to shore up their balance sheets by raising more capital from investors.

Investors panicked as the House initially rejected the bailout bill on Sept. 29. They panicked even more after Congress passed a bill on Oct. 3 that was packed with sweeteners that added $110 billion to the price tag.

By the closing bell last Friday, the Standard & Poor’s 500-stock index had suffered its worst week since 1933. A growing number of analysts argue that Mr. Paulson’s original plan, called the Troubled Assets Relief Program, would have been unhelpful and possibly unworkable. Some noted that Mr. Paulson presented Congress a proposal that was only three pages long and that Treasury officials have yet to provide details how the auctions will work.

As envisioned, the Treasury or its agents would hold so-called “reverse auctions” in which financial institutions are invited to compete against each other in offering to sell their mortgage-backed securities at a low price.

Though auctions are common for all sorts of products, including electricity that utilities sell one another, experts said that mortgage-backed securities would pose difficult headaches because they are extraordinarily complex, difficult to value and come in almost limitless varieties.

The bonds for a single pool of mortgages are divided into more than a dozen “tranches,” or slices, which have different seniority, different credit ratings and different rules for being paid off. The performance of the underlying mortgages varies greatly from one pool to another, even if both pools are made up of seemingly similar loans.

“I am not aware that the Treasury Department presented any evidence on auctions that have been successful when they are used for assets that are so heterogeneous,” said William Poole, who retired in August as president of the Federal Reserve Bank of St. Louis.

Because Fannie Mae and Freddie Mac, the mortgage giants, buy and sell mortgage securities every day, they could absorb some of the hard-to-sell securities without going through the untested auction process.

The Federal Housing Finance Agency, which last month seized the companies and placed them into a conservatorship, lifted capital restrictions on them last week and effectively gave them a green light to buy more mortgage securities of all types, including those backed by subprime loans, given to borrowers with weak credit.

The companies have a lot of money; Congress authorized Treasury to lend them as much as $100 billion each as part of the rescue plan created for them. That could free up money in the separate $700 billion bailout plan for injecting capital directly into the banks. People familiar with the early planning efforts for a systemic bailout said the chairman of the Federal Reserve, Ben S. Bernanke, argued that it would be easier and more efficient to inject capital directly into banks. But Treasury officials balked, in part because they were ideologically opposed to direct government involvement in business.

But as the financial markets spiraled further downward during the last 10 days, a growing number of top-tier institutions, including Goldman Sachs and Morgan Stanley, became worried about their survival.

“The crisis in confidence goes way beyond the actual losses that will be incurred from debt securities,” Mickey Levy, chief economist for Bank of America, said in an interview on Friday. “It’s truly incumbent on policy makers to address that crisis.”

Treasury officials began canvassing banks and investment firms about the possibility of having the government buy stakes in them. The new bailout law gave the Treasury the authority to buy up almost any kind of asset it wanted, including stock or preferred shares in banks.

Industry executives quickly told Mr. Paulson that they liked the idea, though they warned that the Treasury should not try to squeeze out existing shareholders. They also begged Mr. Paulson not to impose tough restrictions on executive pay and golden-parachute deals for executives who are fired.

Mr. Paulson heeded those pleas. In his remarks on Friday, he carefully noted that the government would acquire only “nonvoting” shares in companies. And officials said the law lets the Treasury write most of its own restrictions on executive pay, and those restrictions can be lenient if they are applied to a set of fairly healthy companies.

Mark Landler contributed reporting.

    White House Overhauling Rescue Plan, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/business/12imf.html?hp






Commodities’ Slump Took a Toll on Funds


October 12, 2008
The New York Times


COMMODITY prices stumbled badly in the third quarter, harpooning investors in natural resources mutual funds. This category was by far the biggest loser among all the domestic stock fund categories tracked by Morningstar, down 36 percent, on average, in the three months through September.

Few funds escaped the scourge that struck this diverse category, which is as varied as pure-play energy stock funds to portfolios tracking broad-based commodity indexes. The recent steep decline in oil prices left the typical natural resources fund far behind many funds that invest in other troubled sectors of the economy, like the financial industry.

Indeed, the turmoil in the financial industry may be exacerbating the jitters in commodity markets, said Michael Herbst, the lead natural-resources fund analyst at Morningstar.

“What we are hearing from fund managers is that some of the banks and hedge funds are curbing their exposure to commodities,” Mr. Herbst said. “Commodities have historically been very volatile, but this may be an added source of volatility.”

The recent swoon in prices notwithstanding, he recommended keeping a modest amount of a total portfolio, say, around 5 percent, in this sector. But he said that many individual investors might not need a natural resources fund to accomplish this goal, because so many diversified stock funds already have a hefty dose of energy stocks.

Mr. Herbst said that there were essentially two good reasons for individual investors to consider a specialized natural resources fund: for portfolio diversification, or as a potential hedge against long-term inflation.

Investors who are more concerned about blunting the impact of inflation, he said, may be best served by funds that track broad-based commodity indexes. But if investors want to spice up their portfolios, and have cast-iron stomachs, then Mr. Herbst recommends the BlackRock Global Resources fund because of the manager’s long-term track record investing in natural resources stocks. The fund focuses almost exclusively on small-cap stocks in the oil, coal and natural gas industries.

Most natural resources funds emphasize energy stocks, but this one puts even more weight than usual on coal stocks, according to Morningstar. Thirty percent of it is dedicated to coal companies, while oil and natural gas stocks make up an additional 60 percent. The remaining 10 percent is in gold, basic materials and cash.

Daniel Rice, the manager of BlackRock Global Resources, said the outlook for energy companies was brighter than it was for many other commodity producers, because energy prices were more likely to remain elevated in a slowing economy. He predicted that over the next five years, annual global economic growth would be around 3 percent, on average, down from around 5 percent in recent years. “That’s a pretty negative outlook,” he said, because it is based on his assumption that growth will be flat to negative in developed countries and slower than its recent pace in developing ones.

“Everyone does well in 5 percent G.D.P. growth, because there’s not enough commodities to satisfy that kind of growth,” Mr. Rice said. “But when you get down to 3 percent, you have to select sectors well.”

Mr. Rice said energy stocks were reflecting an overly gloomy outlook for the underlying commodity prices. For example, he said oil companies were trading at the end of the third quarter as if the average oil price over the next five years would be around $65 a barrel, while he predicted it would be about $90 to $95. Oil closed below $78 a barrel on Friday.

He said natural gas stocks reflected an average price around $6.50 per million cubic feet, while he estimated the actual cost at about $7.50. And coal stocks have priced in an average commodity cost of around $60 a ton, he said, though he thought it would be closer to $90 to $100.

BlackRock Global Resources fell 44.7 percent in the third quarter, though it has had an average annual return of 25.9 percent over the last five years. By way of comparison, the Morningstar category of natural resources funds has had a five-year return of 20 percent a year, on average.

The fund has a share class that waives the front-end load, or sales charge, of 5.25 percent. Both the load and no-load classes charge 1.29 percent in annual expenses.

For investors who are more worried about inflation, Mr. Herbst recommended the Harbor Commodity Real Return Strategy fund, which is a clone of the Pimco Commodity Real Return Strategy fund, but with a lower cost structure. The Pimco fund has a 5.5 percent front-end load, and charges 1.24 percent in annual expenses. But the Harbor fund — which started trading in September and has the same portfolio and fund manager — is a no-load fund that charges 0.94 percent in annual expenses.

Both funds track the Dow Jones A.I.G. Commodity Index. (Dow Jones, now a unit of the News Corporation, recently announced that the government takeover of the American International Group would have no effect on the calculation of this index, and neither company has any direct involvement with the operation of either mutual fund.)

This index of 19 commodities is rebalanced at the beginning of each year so that no sector accounts for more than one-third of the total. “We think this makes it a more diverse index,” than some other commodity indexes that have a bigger slice of energy, said Mihir Worah, the manager of both the Pimco and Harbor versions of the funds.

Mr. Worah uses a combination of swaps, structured notes and commodity futures to track the index. But this requires only a small amount of the fund’s cash, so the rest of the portfolio is invested in Treasury inflation-protected securities, known as TIPS. These government securities pay bondholders a fixed rate of return with regular adjustments for changes in the Consumer Price Index.

The TIPS portfolio has given the fund a yield of around 8 percent over the 12 months through September, because inflation has been relatively high. But Mr. Worah noted that in periods of low inflation, the C.P.I. adjustments would give the TIPS portfolio a relatively low yield.

On balance, he said, the average yield over the long run should be similar to that on a Treasury bond fund.

“This fund gives you inflation protection on two levels,” he said. “Commodities protect you from inflation at the wholesale level, and TIPS protect you from inflation at the retail level.”

Pimco Commodity Real Return Strategy fell 32.7 percent in the third quarter. It has had average annual returns of about 8 percent over the five years through September.

GARY SCHATSKY, a fee-only financial planner in New York, said that while commodities were a volatile asset class, many investors might want to keep 1 to 5 percent of their portfolios in natural resources. But he advised holding these assets in taxable accounts, so that they could be sold for a tax loss if they fell further.

If investors chose to do some tax-loss selling, he advised them to put the money back to work right away in similar investments, to avoid trying to time the market. Because the tax loss can’t be reaped if you reinvest the money in what the Internal Revenue Service deems as “substantially identical” investments within 30 days, it is a good idea to consult with a financial adviser.

Mr. Herbst of Morningstar pointed out that even after the recent decline in commodity prices, some investors might still be overcommitted to this sector if they haven’t pared back their holdings in recent years.

“The recent volatility,” he said, “should be a wake-up call to anyone who thought that commodity prices could only go in one direction.”

    Commodities’ Slump Took a Toll on Funds, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/business/mutfund/12comm.html






Across the Country,

Fear About Savings,

the Job Market and Retirement


October 12, 2008
The New York Times


A year ago, Robert Paynter was comfortably retired and looking forward to years of refurbishing old cars and boating from his dock on Lake Norman in North Carolina. Over a 17-year career at Wachovia, he amassed a pile of stock and options from the bank that he had assumed would be worth more than $600,000.

But now the options are worthless, and he watched the value of his Wachovia shares shrink to about $15,000 before he sold all of them this week after the bank succumbed to the financial crisis and its stock fell to fire-sale prices. The rest of his investments are in free fall.

“It’s like having an out-of-body experience,” said Mr. Paynter, 61. “It’s like being in a hospital bed and watching yourself dying. Whatever the bottom is going to be, I wish it would just get there. It’s the every day, watching the blood drain out of it, that’s hard to take.”

To be sure, he has enough savings to not worry about missing any meals. But Mr. Paynter is resetting his plans for retirement, and has already canceled a trip with friends to Europe next year. “Today I’m O.K.,” he said. “But a year ago I felt like I was in great shape.”

Across the country, Americans are tallying their many losses from the relentless rout in the markets. Financial message boards on the Internet are filled with confessions of fear — about hits to savings, job security and scuttled retirement plans.

“My plan was to never work again,” wrote one person who posted a comment on Bogleheads.org, a Web site for investors who follow the long-term investing advice of John Bogle, founder of the Vanguard funds. “But somebody called me yesterday to see if I was interested in a job, and I am thinking maybe I will go back to work.”

It is not just the declines in savings that people are feeling, reflected in the shrinking balances on quarterly banking statements now arriving in mailboxes.

Based on interviews around the country last week as the market continued its steep slide, many people say they are sensing losses beyond the short-term hits to their portfolios. Some feel a loss of faith in the United States and its government. Others are lowering their sights for the kinds of lives they expect to lead in coming years.

“Maybe we have to readjust our expectations,” said Nicholas Gaffney, a partner in a San Francisco public relations firm. “No one is entitled to anything.”

Mr. Gaffney describes himself as a buy-and-hold investor, and he has been sensing good opportunities of late. He has plowed more than $10,000 into his funds. The value of his portfolio, now at several hundred thousand dollars, has dropped more than a quarter.

He confesses he has been fighting with himself over how closely he should follow the market’s gyrations. One day, he checked the market on his Treo cellphone about 200 times. “I thought to myself, ‘What am I doing?’ ” he said. “I had to stop because I was driving myself crazy. I think everything is going to be fine if people don’t panic.”

That is wishful thinking at this point. Investors have withdrawn more than $81 billion from stock mutual funds since the beginning of the year, with nearly 40 percent of that coming in the last six weeks, according to AMG Data Services, an industry research firm.

Not everyone is panicking, of course. Some are able to see the big picture or find ways to distance themselves from the crush of news about the market.

“Maybe a shrink would have a field day with me,” said Beth Sparks, 40, a self-employed lawyer in Colorado Springs. “But I have an ability to not think about it.”

A week ago, Ms. Sparks reviewed her investments for the first time since January. All are down roughly 30 percent. But Ms. Sparks said she was not concerned because she and her husband did not have a lot of debt. When her husband inherited $50,000 last year, they used it to pay off their mortgage. Vacations typically mean drives to Arizona to spend time with her parents. “I’m just happy me and my family are healthy,” she said.

Peter Schade, 49, who runs his own ad design firm in Farmington Hills, Mich., said each day of bad news was a blow to the idea that he would ever be able to retire.

“I’ve kind of resigned myself to the fact that I’m going to be working for the rest of my life,” he said.

For the last few weeks, Mr. Schade said, he has been closely monitoring the news on the CNN satellite radio network in his car. “I just feel numb,” he said. “The news is changing every half hour.”

Mr. Schade said he and others in the Detroit area were accustomed to weathering downturns in the economy.

“It doesn’t make it any easier, but we’ve sort of fortified ourselves,” he said. In many ways, he said, the rest of the county is just now starting to feel what Detroit has been going through for years, giving people here a head start in coping. “Detroit was the canary in the mine for this. We started this at least three years ago.”

Tom Drooger, 56, of Grand Haven, Mich., is president of a chapter of BetterInvesting, an investment club affiliated with the National Association of Investors Corporation.

Usually, Mr. Drooger is the type to study stocks closely and track the market’s movement throughout the day. By Friday, he was no longer even paying attention. He has decided to stop watching the market news on CNBC for now and instead puts on easy-listening music.

“There’s nothing you can do about it after a while,” he said.

He compared the financial crisis to a house on fire and said he was merely waiting until the flames die down.

“Once the fire’s out, you go in and do the repairs,” he explained. “To start to try to move things around until the market wrings itself out is pointless. I’m just sitting on the sidelines, leaving everything where it’s at.”

College students are watching from the sidelines, too, since they typically are more concerned about jobs at this stage of their lives than the nest eggs.

Matthew Ehrlich, 23, a second-year law student at Wayne State University in Detroit, is worried about whether the economy will improve before he graduates in 2010.

“If things don’t get better in the next two years, I’m going to have a real tough time,” he said. “My hope is that I can just ride it out until the financial markets get back on track.”

Mr. Ehrlich is still debating what type of law to specialize in and said this crisis might ultimately influence his decision.

“The way things are going, bankruptcy law seems to be pretty hot,” he said.

Beyond the personal toll to their savings, some people said they were concerned about what the financial crisis said about the United States.

“All I can tell you is it is a lack of faith in America,” said Pat Emard, 65, of Aptos, Calif., who now worries she may have to go back to work. “People have lost faith in our government. I don’t know what happens now.”

That sense of uncertainty is also troubling to Renee Snow, 73, a retired teacher who taught in the Chicago public schools for 38 years.

Born during the Depression, Ms. Snow said it was in her DNA to save, save, save. Over her career as a teacher, she did just that, and Ms. Snow, now a widow, lives off her teachers’ pension and income from her tax-exempt savings plan. She says she has always put her money in insured products when she could.

“I never watch the stock market, and now I’m watching it every day,” she said.

She has money socked away in savings accounts in different banks but recently began researching whether her banks were solid.

The economy is a frequent topic of conversation among friends at the Jane Addams Senior Caucus, an organization in Chicago where she volunteers as a board member.

Over the last couple of weeks, a general malaise has taken over, Ms. Snow said. “It’s very hard to have much faith in what the government is doing when they change it every day,” she said. “As you read more and more about how we got into this situation, you have less and less faith of how we’re going to get out of it.”

She has an ominous feeling about the future, she said. “You don’t go through life thinking the bank I do business with could go belly up tomorrow,” she said. “This is a new feeling people are living with.”

Nick Bunkley and Crystal Yednak contributed reporting.

    Across the Country, Fear About Savings, the Job Market and Retirement, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/business/economy/12voices.html

















The Harder They Fall, the More I Smile        NYT        12.10.2008
















The Harder They Fall, the More I Smile


October 12, 2008
The New York Times


THINGS are bad. Very, very bad. The markets are still seesawing crazily, and financial institutions are folding and being taken over so quickly they’ll have to replace their signs with Jumbotrons to keep up with the name changes. Our own president noted last month that “If money isn’t loosened up, this sucker could go down,” meaning — I think — the economy. But nobody seems to know if the huge bailout plan will work.

How does all of this compounded badness make me feel?

Not so bad, surprisingly.

You see, I was never able to make much money in the markets. I agree with Daniel Waterhouse, a character from the 17th century in “Quicksilver,” Neal Stephenson’s brilliant novel, who says that even though he is a knowledgeable “natural philosopher,” or scientist, he has given up on understanding money. “If money is a science,” he states, “then it is a dark science, darker than Alchemy.”

I couldn’t agree more. My own 401(k) plan has already slipped so far that I might have invested more productively over the last few years by burning the cash for heat. Meanwhile, to hear the financial press and the cable channels describe it, everybody but me — especially in the financial industry — was getting rich.

Now we’re even.

There is, of course, an element of schadenfreude at play, but it’s not simply that I’m happy because others are sad. That’s sick; I would never rejoice at the suffering of my poor and middle-class countrymen who have fallen on hard times, or of the retirees looking at dwindling investments at the moment they need them most. True joy, my friends, is the feeling that comes from knowing that the right people are sad.

If you became obscenely rich riding this bubble, I’m taking pleasure in your fall. Of course, you are still undoubtedly richer than I will ever be. But it’s also clear that being rich means much more to you than it has ever meant to me, so I know you’re in pain. Which is good.

I’m not the only one who feels this way. I recently received a note from Dr. Michael Stone, a psychiatrist in Manhattan who is a professor of clinical psychiatry at Columbia University. “In America it’s every boy’s dream to one day become a millionaire,” he wrote, adding that the subprime mortgage craze and debacle have “made that dream come true for more people than we could ever have imagined before.” He continued: “Only yesterday, it seems, Maurice R. Greenberg, ex-C.E.O. of A.I.G., saw the value of his holdings in his former company change — in one day — from $15.8 billion to $911 million. Where else but in America can even a billionaire become a millionaire?”

The upside of this financial crisis, then, is that everybody and his uncle are beginning to investigate what went wrong. Some of them even have subpoena power. Delicious.

ANOTHER group that I don’t mind seeing break out in a sweat are the stock market analysts who claim that the news industry is dying because the corporate leaders were too stupid to meet the challenge of the Internet. Admittedly, I have a personal bias here. But guess what, guys? Change comes to every industry; it’s how you react over time that makes the difference.

The story of newspapers is undoubtedly grim. Now that many of the analysts’ own shops are being put in a blender, though, would it be unkind to point out that those at the helm of the newspapers didn’t play in the subprime securities market and thus drive their companies off a cliff? Hope you like dealing with change, baby!

Then there are the people whose judgment is so horrifyingly bad that those of us who have honed our sense of schadenfreude must stand back in awe, as if we have been presented with a kind of once-in-a-lifetime performance art. That artist, that visionary, is Gabriel Nathan Schwartz, a lawyer from Denver who had a bit of trouble in August at the Republican National Convention. Mr. Schwartz — no relation — seems to have met a nice lady at a bar during the convention and taken her back to his hotel room.

Here’s what happened next, according to The St. Paul Pioneer Press, in a report that reads like blank verse:

“Once there, the woman fixed the drinks and told him to get undressed.

“And that, the delegate to the Republican National Convention told police, was the last thing he remembered.”

According to the initial police report, when Mr. Schwartz, who is 29, woke up, he was $120,000 poorer. He had been relieved of a great deal of cash plus a $30,000 watch, a $20,000 ring, a $5,000 necklace and a belt worth $1,000. Prada.

In a statement he released once the story of his misadventure started making the rounds of the Internet, Mr. Schwartz said, “I used poor judgment.” A spokeswoman for Mr. Schwartz said that his losses actually amounted to $63,050, and that he has worked with the police to correct the misunderstanding.

In his statement, he said he was “joking around” when he proclaimed during an interview earlier in the convention that he wanted “less taxes and more war,” and that the United States should “bomb the hell” out of Iran.

I might not have the kind of money that gives me expertise in this area, and I don’t own any Prada. But I feel I know a thing or two about wealth. And let me tell you that anybody who wears a $30,000 watch can afford to lose $30,000. Prada goeth before a fall.

Still, let’s not be small about this. It’s easy to joke about a guy who gets himself into a mess, but Mr. Schwartz has ascended to the level of a metaphor. Look at it this way: perhaps he was actually visited by Fortuna, the goddess whose bailiwick includes the realm of investing.

The Romans saw Fortuna as the goddess of luck, but she was also the goddess of fate. Maybe she was giving Mr. Schwartz a preview of the economy to come. Maybe what she put in his drink was a little dose of irrational exuberance — the thought that meeting a woman in a bar and taking her back to a hotel room is a perfectly reasonable thing to do. What could possibly go wrong?

AS a nation, haven’t we been on a somewhat similar misadventure? The nation’s financial institutions smiled at the nice lady in the bar and invited her up to their collective hotel room, hoping for the best. And they got rolled. And, by extension, so did we.

The difference between Mr. Schwartz and the financial institutions is that he didn’t expect the government to bail him out.

The rest of us, clearly, just need to get too big to fail.

    The Harder They Fall, the More I Smile, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/business/mutfund/12essay.html?ref=mutfund






Op-Ed Contributor

The Rise of the Machines


October 12, 2008
The New York Times



“BEWARE of geeks bearing formulas.” So saith Warren Buffett, the Wizard of Omaha. Words to bear in mind as we bail out banks and buy up mortgages and tweak interest rates and nothing, nothing seems to make any difference on Wall Street or Main Street. Years ago, Mr. Buffett called derivatives “weapons of financial mass destruction” — an apt metaphor considering that the Manhattan Project’s math and physics geeks bearing formulas brought us the original weapon of mass destruction, at Trinity in New Mexico on July 16, 1945.

In a 1981 documentary called “The Day After Trinity,” Freeman Dyson, a reigning gray eminence of math and theoretical physics, as well as an ardent proponent of nuclear disarmament, described the seductive power that brought us the ability to create atomic energy out of nothing.

“I have felt it myself,” he warned. “The glitter of nuclear weapons. It is irresistible if you come to them as a scientist. To feel it’s there in your hands, to release this energy that fuels the stars, to let it do your bidding. To perform these miracles, to lift a million tons of rock into the sky. It is something that gives people an illusion of illimitable power, and it is, in some ways, responsible for all our troubles — this, what you might call technical arrogance, that overcomes people when they see what they can do with their minds.”

The Wall Street geeks, the quantitative analysts (“quants”) and masters of “algo trading” probably felt the same irresistible lure of “illimitable power” when they discovered “evolutionary algorithms” that allowed them to create vast empires of wealth by deriving the dependence structures of portfolio credit derivatives.

What does that mean? You’ll never know. Over and over again, financial experts and wonkish talking heads endeavor to explain these mysterious, “toxic” financial instruments to us lay folk. Over and over, they ignobly fail, because we all know that no one understands credit default obligations and derivatives, except perhaps Mr. Buffett and the computers who created them.

Somehow the genius quants — the best and brightest geeks Wall Street firms could buy — fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and — poof! — created $62 trillion in imaginary wealth. It’s not much of a stretch to imagine that all of that imaginary wealth is locked up somewhere inside the computers, and that we humans, led by the silverback males of the financial world, Ben Bernanke and Henry Paulson, are frantically beseeching the monolith for answers. Or maybe we are lost in space, with Dave the astronaut pleading, “Open the bank vault doors, Hal.”

As the current financial crisis spreads (like a computer virus) on the earth’s nervous system (the Internet), it’s worth asking if we have somehow managed to colossally outsmart ourselves using computers. After all, the Wall Street titans loved swaps and derivatives because they were totally unregulated by humans. That left nobody but the machines in charge.

How fitting then, that almost 30 years after Freeman Dyson described the almost unspeakable urges of the nuclear geeks creating illimitable energy out of equations, his son, George Dyson, has written an essay (published at Edge.org) warning about a different strain of technical arrogance that has brought the entire planet to the brink of financial destruction. George Dyson is an historian of technology and the author of “Darwin Among the Machines,” a book that warned us a decade ago that it was only a matter of time before technology out-evolves us and takes over.

His new essay — “Economic Dis-Equilibrium: Can You Have Your House and Spend It Too?” — begins with a history of “stock,” originally a stick of hazel, willow or alder wood, inscribed with notches indicating monetary amounts and dates. When funds were transferred, the stick was split into identical halves — with one side going to the depositor and the other to the party safeguarding the money — and represented proof positive that gold had been deposited somewhere to back it up. That was good enough for 600 years, until we decided that we needed more speed and efficiency.

Making money, it seems, is all about the velocity of moving it around, so that it can exist in Hong Kong one moment and Wall Street a split second later. “The unlimited replication of information is generally a public good,” George Dyson writes. “The problem starts, as the current crisis demonstrates, when unregulated replication is applied to money itself. Highly complex computer-generated financial instruments (known as derivatives) are being produced, not from natural factors of production or other goods, but purely from other financial instruments.”

It was easy enough for us humans to understand a stick or a dollar bill when it was backed by something tangible somewhere, but only computers can understand and derive a correlation structure from observed collateralized debt obligation tranche spreads. Which leads us to the next question: Just how much of the world’s financial stability now lies in the “hands” of computerized trading algorithms?

Here’s a frightening party trick that I learned from the futurist Ray Kurzweil. Read this excerpt and then I’ll tell you who wrote it:

But we are suggesting neither that the human race would voluntarily turn power over to the machines nor that the machines would willfully seize power. What we do suggest is that the human race might easily permit itself to drift into a position of such dependence on the machines that it would have no practical choice but to accept all of the machines’ decisions. ... Eventually a stage may be reached at which the decisions necessary to keep the system running will be so complex that human beings will be incapable of making them intelligently. At that stage the machines will be in effective control. People won’t be able to just turn the machines off, because they will be so dependent on them that turning them off would amount to suicide.

Brace yourself. It comes from the Unabomber’s manifesto.

Yes, Theodore Kaczinski was a homicidal psychopath and a paranoid kook, but he was also a bloodhound when it came to scenting all of the horrors technology holds in store for us. Hence his mission to kill technologists before machines commenced what he believed would be their inevitable reign of terror.

We are living, we have long been told, in the Information Age. Yet now we are faced with the sickening suspicion that technology has run ahead of us. Man is a fire-stealing animal, and we can’t help building machines and machine intelligences, even if, from time to time, we use them not only to outsmart ourselves but to bring us right up to the doorstep of Doom.

We are still fearful, superstitious and all-too-human creatures. At times, we forget the magnitude of the havoc we can wreak by off-loading our minds onto super-intelligent machines, that is, until they run away from us, like mad sorcerers’ apprentices, and drag us up to the precipice for a look down into the abyss.

As the financial experts all over the world use machines to unwind Gordian knots of financial arrangements so complex that only machines can make — “derive” — and trade them, we have to wonder: Are we living in a bad sci-fi movie? Is the Matrix made of credit default swaps?

When Treasury Secretary Paulson (looking very much like a frightened primate) came to Congress seeking an emergency loan, Senator Jon Tester of Montana, a Democrat still living on his family homestead, asked him: “I’m a dirt farmer. Why do we have one week to determine that $700 billion has to be appropriated or this country’s financial system goes down the pipes?”

“Well, sir,” Mr. Paulson could well have responded, “the computers have demanded it.”

Richard Dooling is the author of “Rapture for the Geeks: When A.I. Outsmarts I.Q.”

    The Rise of the Machines, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/opinion/12dooling.html?ref=opinion






Op-Ed Contributor

Out of Panic, Self-Reliance


October 12, 2008
The New York Times


New Haven

IN the spring of 1837, a great depression afflicted the northeastern United States. All the banks in New York City, Philadelphia and Baltimore suspended cash payments, as did many in Boston. Of the 850 banks in the United States, nearly half closed or partly failed. If the crisis of 2008 was caused by poor lending, the Panic of 1837, too, featured speculation and inflation.

The bank failures of 1837 were followed by high unemployment that lasted into 1843. Foreign over-investment (chiefly British) had augmented the bubble, which burst when the wily English pulled their money out. President Martin Van Buren, a Jacksonian Democrat, refused any government involvement in a bailout, and so was widely blamed for the panic. Van Buren was defeated in his re-election bid in 1840 by his Whig opponent, William Henry Harrison.

The similarities between the crashes of 1837 and 1929 are evident again today. I am not an economist or a political scientist, but having been born in 1930, I retain poignant early memories of the impact of the Great Depression upon my father, a working man who struggled to maintain a family with five children in a very hard time. I am a scholar of literature and religion, and would advise whoever becomes president to turn to Ralph Waldo Emerson, whose influential vision of America was deeply informed by the crisis of 1837:

I see a good in such emphatic and universal calamity as the times bring, that they dissatisfy me with society. Under common burdens we say there is much virtue in the world, and what evil co-exists is inevitable. I am not aroused to say, “I have sinned: I am in a gall of bitterness, and a bond of iniquity”; but when these full measures come, it then stands confessed — society has played out its last stake; it is checkmated. Young men have no hope. Adults stand like day laborers, idle on the streets. None calleth us to labor. The old wear no crown of warm life on their gray hairs. The present generation is bankrupt of principles and hope, as of property. I see man is not what man should be. He is the treadle of a wheel. He is a tassel at the apron string of society. He is a money chest. He is the servant of his belly. This is the causal bankruptcy, this is the cruel oppression, that the ideal should serve the actual, that the head should serve the feet. Then first, I am forced to inquire if the ideal might not also be tried. Is it to be taken for granted that it is impracticable? Behold the boasted world has come to nothing. Prudence itself is at her wits’ end.

Pride, and Thrift, and Expediency, who jeered and chirped and were so well pleased with themselves, and made merry with the dream, as they termed it, of Philosophy and Love, — behold they are all flat, and here is the Soul erect and unconquered still. What answer is it now to say, “It has always been so?” I acknowledge that, as far back as I can see the widening procession of humanity, the marchers are lame and blind and deaf; but to the soul that whole past is but one finite series in its infinite scope. Deteriorating ever and now desperate. Let me begin anew. Let me teach the finite to know its master. Let me ascend above my fate and work down upon my world.

It may shock that the Sage of Concord should react to catastrophe with such idealistic glee. Most Americans — the governor of Alaska, who never blinks, doubtless among them — would be startled by the admonition to begin anew and ascend above our fate.

There is little disagreement that Emerson was the most influential writer of 19th-century America, though these days he is largely the concern of scholars. Walt Whitman, Henry David Thoreau and William James were all positive Emersonians, while Herman Melville, Nathaniel Hawthorne and Henry James were Emersonians in denial — while they set themselves in opposition to the sage, there was no escaping his influence. To T. S. Eliot, Emerson’s essays were an “encumbrance.” Waldo the Sage was eclipsed from 1914 until 1965, when he returned to shine, after surviving in the work of major American poets like Robert Frost, Wallace Stevens and Hart Crane.

Beyond literary tradition, Emerson has maintained an effect upon American politics and sociology. The oddity of Emerson in the public sphere is that he has the power to foster fresh versions of the two camps he termed the Party of Memory and the Party of Hope. The political right appropriates his values of remembering private interests as part of the public good, while the left follows his exaltation of the American Adam, a New Man in a New World of hope. The rivalry between these polarized camps is very much apparent in this election.

Emerson was electrified by financial storms. The depression beginning in 1837 spurred his famous oration at Harvard, “The American Scholar”:

The literature of the poor, the feelings of the child, the philosophy of the street, the meaning of the household life, are the topics of the time. It is a great stride. It is a sign — is it not? — of new vigor, when the extremities are made active, when currents of warm life run into the hands and feet .... Let me see every trifle bristling with the polarity that ranges it instantly on an eternal law; and the shop, the plow and the ledger referred to the like cause by which light undulates and poets sing.

Emerson would have understood our current raging polarities. That American cultural nationalism should have been stimulated by a banking disaster is a wholly Emersonian paradox. Another enigma is the direct link between the lingering financial crisis and Emerson’s formulation of his mature religious stance, crucially in his essay, “Self-Reliance,” of 1839-40:

Life only avails, not the having lived. Power ceases in the instant of repose; it resides in the moment of transition from a past to a new state, in the shooting of the gulf, in the darting to an aim .... Why then do we prate of self-reliance? Inasmuch as the soul is present there will be power not confident but agent. To talk of reliance is a poor external way of speaking. Speak rather of that which relies because it works and it is. Who has more obedience than I masters me, though he should not raise his finger. Round him I must revolve by the gravitation of spirits. We fancy it rhetoric when we speak of eminent value. We do not yet see that virtue is height, and that a man or a company of men, plastic and permeable to principles, by the law of nature must overpower and ride all cities, nations, kings, rich men, poets, who are not.

By “self-reliance” Emerson meant the recognition of the god within us, rather than the worship of the Christian godhead (a deity that some Americans cannot always distinguish from themselves). Whether they know it or not, John McCain and Barack Obama seek power in just this ultimately serious sense, although that marvelous passage means one thing to Emersonians of the right and something very different to Emersonians of the left. Senator Obama’s mantra of “change” celebrates the shooting of the gulf, the darting to an aim, setting aside “the having lived.” Senator McCain’s “change” reflects what remains most authentic about him, the nostalgia of the Party of Memory.

Barack Obama emanates from the tradition of the black church, where “the little me within the big me” is part or particle of God, just as the Emersonian self was. But he is a subtle intellectual and will not mistake himself for the Divine, and he has the curbing influence of Senator Joseph Biden, a conventional Roman Catholic, at his side. John McCain’s religiosity is at one with the Party of Memory, but he has aligned himself with Gov. Sarah Palin, who, as an Assemblies of God Pentecostalist, presumably enjoys closer encounters with the comforting Holy Spirit.

Regardless of these differences, whoever is elected will have to forge a solution to today’s panic through his own understanding of self-reliance. As Emerson knew in his glory and sorrow, both of himself and all Americans: “The wealth of the universe is for me. Every thing is explicable and practical for me .... I am defeated all the time; yet to victory I am born.”

Harold Bloom teaches at Yale.

    Out of Panic, Self-Reliance, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/opinion/12bloom.html?ref=opinion






Counseling, Consoling, and Staying Calm


October 11, 2008
The New York Times


Scott Rodabaugh, a financial planner, was painstakingly trying to exude calm when outright hysteria was working a lot better with people.

Here it was, the day after the merciless market plunged 679 points and was down, oh, a few zillion points in a week’s span, and he didn’t even come into the office Friday until 10 a.m., a half-hour after the Dow had shed another 700 points.

An appointment with his chiropractor.

Once he had settled behind his desk, the first e-mail message he opened as he settled in was from a 48-year-old musician: “All right, so it was just a matter of time before I wrote to see if you’re still working or you ran away to Belize.”

It went on to delve into severe bleeding in the man’s account — now what?

Mr. Rodabaugh had been hearing that — again and again and again.

“People are confused and they’re angry,” he said. “We’re a rules-based society in many ways. If someone had everything in Lehman stock when every financial planner who opens his mouth will tell you ‘Don’t have more than 5 percent in your company’s stock,’ well, it’s sad when Lehman folded. But come on, we told you.

“But if they read their Suze Orman, they read about financial allocation, they did all the right things, well, this wasn’t supposed to happen to them.”

Mr. Rodabaugh, 48, who owns Premier Tax and Financial Services, juggles 477 clients out of his Manhattan office on West 27th Street. He prepares their taxes and for 280 of them also does financial planning. Financial planning in the last few weeks, of course, is like flying upside-down through impenetrable fog wearing a blindfold and nursing a serious toothache.

Plan what? How? Where’s the reset button?

Mr. Rodabaugh has considered posting a sign outside his office: “Hard hats only.”

Naturally, numerous clients in dismantled states of mind have been calling their planners as the world rocks unsteadily, seeking advice, words of comfort, the best place to get Ambien. Scott Rodabaugh knows all about it. He’s on the other end of the line.

Repeatedly, Mr. Rodabaugh has been telling his callers: “It’s gut-check time. You have to do what you believe and I believe.”

That means the planner mantra during corroding markets: Sit tight, pray if it helps. This will end and get better. The market is now cheap. If you have cash you don’t need for the next few years, think about venturing in. “It’s like Filene’s Basement,” he said. “You can get a jacket for $70.”

Not all of his suffocating clients accept this counsel. A couple of days ago, a man in his late 50s called. He had been in the publishing business and was between jobs. His account stood at $160,000 in November. It had condensed to $100,000. Psychologically, this evaporation was wrecking him. On Thursday morning, he said he wanted to bail — sell everything.

Mr. Rodabaugh offered the familiar script, trying to persuade him otherwise: “This is a temporary thing and it will turn around.”

He wasn’t having any of it. Mr. Rodabaugh yielded. “I’m not the nun,” he said. “I’m here to serve my clients. So I told him that I don’t agree, but O.K.” Everything came out.

Mr. Rodabaugh is a soft-spoken man with longish hair and chiseled features. After getting a degree in scenic design and lighting, he worked as a stage manager for a time before drifting into tax preparation and financial planning in the early 1990s. The woman he lives with is a tax professional who works with him.

He hasn’t done a thing with his own money, continuing automatic monthly contributions to a portfolio carved up with 65 percent in domestic stocks, 25 percent in international stocks and 10 percent in bonds.

He got the man who had sent the e-mail message on the phone. Some small talk, then the brutal I.R.A. balance: $20,000.

The client: “I looked the other day and it was $24,000.”

Mr. Rodabaugh: “The other portfolio is worth about $34,900.”

“Oh, jeez. Should I ask the silly question about whether I should sell my portfolio?”

“Well, there’s nowhere to go. Stocks are down. Bonds are down.”

“I know.”

“Remember, it’s not lost until you sell it.”

Many clients are, in a word, numb. “They’re in a coma state,” Mr. Rodabaugh said. “They’re almost in survival mode.”

Thus he was putting in some missionary calls, making sure they were keeping the faith.

He dialed and got voice mail. He left a message: “Don’t really worry about it too much. What’s happening in the market is more about panic than sense, so don’t get involved in the panic. How’s your tennis, by the way?”

Another call gobbled up by voice mail: “Just calling folks. It’s kind of a goofy time in the market. I just want you to know things are going to be O.K. Kind of the company line.”

The phone chirped. Someone from the theater business, having problems with his foot as well as the market.

The man said, “I figure, to be honest, we’re talking two years intensive care, a year hospitalization, a year physical therapy.”

“With your foot?”

“No, the economy.”

“You know, things turn around pretty fast.”

Mr. Rodabaugh keeps a small book on his desk, “Wall Street Wit and Wisdom,” and he’s been reading vanquished clients a statistic-laden paragraph from it detailing how if you try to time the market by retreating periodically your returns shrivel.

“I believe my clients’ money is better served in the market rather than out of it for the long term,” he said. “What happens in the day-to-day market is not what I’m doing here. If they don’t agree with me, they don’t have to be my client. What are there, eight million people in New York? I think seven million of them are financial planners. You can find someone else.”

As it does every day, 4 o’clock came. The market closed after one of its woolliest excursions yet. The Dow had surrendered another 128 points.

“All I can say is the inmates are running the asylum,” Mr. Rodabaugh said. “We’re on to next week.”

    Counseling, Consoling, and Staying Calm, NYT, 11.10.2008, http://www.nytimes.com/2008/10/11/nyregion/11planner.html?ref=us






This Land

In a Home Like Many Others, Uncertainty in Every Check of the Market


October 11, 2008
The New York Times


SOUTH ORANGE, N.J. — In another charming suburban house, with another old Subaru Outback in the driveway and another pair of squirrel-nibbled pumpkins on the steps, another of us reaches for his laptop computer to check. If a piece of machinery can feel pain, then this laptop winces as it opens.

With less than an hour before the stock market closes at 4 on Friday afternoon, Tyler Pappas is once again searching the dull glow of his computer’s monitor for something, anything, that can reassure him about this country’s troubled financial state, which includes his own. A crumb of hope. Is that too much to ask?

The minutes tick by. To think that Mr. Pappas’s day had begun so nicely, with time off from work to take the kids to a pumpkin patch in Westfield. Now Sebastian, 4, is watching “Pinky Dinky Doo” on a flat-screen television in the family room, Theo, 10 months, is napping upstairs — and their father is reading up-to-the minute reports of a rollicking Wall Street joy ride that lacks the central ingredient of joy.

The market’s closing bell tolls for Mr. Pappas and thee. A last-minute rally by people looking to capitalize on the bust cannot stem the bad news. The Dow ends the week by posting its eighth consecutive decline, and now here comes the weekend, with plenty of free time to panic.

“This is insane,” says Mr. Pappas, staring into the pixilated abyss.

In many ways he is the American Everyman. Forty-three years old. Neither rich nor poor. With a wife, Holly; the two boys; a small business of his own in Manhattan; this three-bedroom house on Coudert Place, with black-and-white photos of the family in the living room and a chalkboard in the kitchen bearing messages like “Check the sump pump!”

In the sweet times of long ago — say, last year — he envisioned his future this way: “You work, you save, you retire, you play golf.”

But in the bitter times of today, this is how it is: On Thursday, another oversize Wachovia Securities envelope arrived in the mail, bearing that you-are-SO-important-to-us CONFIDENTIAL stamp and containing Mr. Pappas’s 401(k) statement. He did not want to open it. He was actually afraid to open it, as if it contained the results of some particularly invasive medical test.

Finally, Mr. Pappas summoned the nerve. Bam: $8,000 lost.

And here is the thing. Mr. Pappas is intelligent, well informed, in good standing with society and, like so many of us, not quite sure what to do as his family’s life savings shrink by the day. What does $8,000 mean? Was that a secondhand car he just lost? Will that $8,000 come back? Should he pull all his money and bury it near the swings in the backyard?

“I don’t know what to do,” he says. “And it’s frightening.”

Mr. Pappas is a creative services consultant who manages advertising campaigns and produces videos for clients. Ms. Pappas is an administrative assistant for Credit Suisse. He used to sing in a heavy-metal band called Executioner; she is an opera singer, a gifted mezzo-soprano, her husband says. They met through mutual friends 11 years ago and before long were mapping out a shared future, voices united.

They bought a $505,000 house in South Orange two years ago, moving from Manhattan in part because their rent for a two-bedroom apartment had risen to $3,300. They had $100,000 sitting in a retirement fund, another $100,000 or so in her 401(k) and about $45,000 in his 401(k). They also had enough to hire an au pair. Things seemed fine.

Mr. Pappas says those statements from Wachovia would arrive in the mail and then sit in his briefcase for a month before he opened them, so removed was he from his personal finances. His thought: “As long as I’m putting something away, I’m O.K.”

A year ago, though, while doing research on nursing homes for a relative — someone who, by the way, remembers the Great Depression — the couple realized they were not saving nearly enough money at this point to support the retirement lifestyle they desired. The retirement fund, the 401(k)’s and the Social Security would not be enough.

For the first time, the couple began paying attention to the stock market, which, Mr. Pappas says, had always been “this thing over there,” with little or no relevance to their daily lives. But paying attention to the stock market is not the same as completely grasping what it is and what it means.

“I feel like I missed something,” he says. “Like I was absent the day they taught Dow 101.”

What was it they were feeling? Ignorance? Paralysis? Vulnerability? Whatever the emotion, it was underscored recently when an envelope arrived with the quarterly statement for Ms. Pappas’s 401(k). Losses this year now totaling $40,000.

What is that? A half-year’s college tuition in 2022? A new roof on some retirement home in Boca Raton or Sullivan County? Will it ever come back?

They quickly discovered their fears were shared by just about every other Everyman and Everywoman they encountered. Where matters of finance were once considered so private that to discuss them was considered boorish, people are now sharing intimate financial details. Obama who? McCain who?

Mr. Pappas says typical e-mail exchanges now go something like this:

“What are you doing?”

“Watching my money evaporate.”

And a typical telephone conversation with his wife now begins with a market update. For example, she called Thursday afternoon to say, “The market’s in free fall.” And she called Friday morning to say, “The market’s tanking all over the world.”

Mr. Pappas is angry. Angry that A.I.G., the insurance giant, spent more than $400,000 on an event at a California resort, including $23,000 on spa services, just days after receiving a government loan of $85 billion. That the federal government’s $700 billion bailout includes billions in pork barrel spending. That average people minding their own business, people like Tyler and Holly Pappas, pay the consequences for the audacious blunders of others.

“We’re in a controlled chaos in my house,” he says. “We’re watching our money evaporate, and we’re debating whether to take it out and take a hit, or just leave it and gamble. And I don’t have any confidence in what I’m being told. I have zero confidence.”

The “Pinky Dinky Doo” show is over, the baby upstairs needs a bottle, and this day takes precedent over tomorrow. Mr. Pappas closes his laptop, returning its wince.

    In a Home Like Many Others, Uncertainty in Every Check of the Market, NYT, 11.10.2008, http://www.nytimes.com/2008/10/11/us/11land.html






G.M. and Chrysler Explore Merger


October 11, 2008
The New York Times


DETROIT — General Motors is in preliminary talks about a possible merger with Chrysler, a deal that could drastically remake the landscape of the auto industry by reducing the Big Three of Detroit automakers to the Big Two.

The talks between G.M. and Cerberus Capital Management, the private equity firm that owns Chrysler, began more than a month ago, and the negotiations are not certain to produce a deal. Two people close to the process said the chances of a merger were “50-50” as of Friday and would most likely still take weeks to work out.

A merger would be a historic event, with two of the most iconic names in American industry coming together to survive in an increasingly difficult environment. Both have roots dating back decades in Detroit and, with Ford, long dominated the auto industry — until Japanese and other foreign car makers began making inroads into the American market.

The auto industry is being pummeled from all sides — by high gas prices that have soured consumers on profitable S.U.V.’s, by a softening economy that has scared shoppers away from showrooms, and by tight credit that is making it difficult for willing buyers to obtain loans. Both G.M. and Chrysler have been struggling with product lineups that are out of sync with consumer demand for smaller, more fuel-efficient cars.

General Motors’ stock has fallen from more than $43 a share last year to less than $5, and it is burning through its cash hoard at a rapid rate. Chrysler, as a private company, no longer needs to report its finances.

The meetings between General Motors and Cerberus began more than a month ago, said people familiar with the discussions, and the companies have held several talks involving their most senior executives. Given that both G.M. and Chrysler are struggling, the two sides may determine a merger may not be in their best interests.

The exploratory talks have included debates over various calculations of the savings that would result from a merger, these people said, but neither side has yet to dig into each others’ private financial books and records.

At the same time, Cerberus is continuing to hold talks with other automakers including Nissan and Renault, said people familiar with the discussions. It is unclear at what stage those discussions have reached.

Speculation about a possible bankruptcy filing by G.M. has mounted in recent weeks because of the automaker’s dwindling cash reserves. The automaker had $21 billion in cash on hand at the end of the second quarter, but it was burning through more than $1 billion a month.

The credit rating firm Standard & Poor’s put G.M. on negative credit watch on Thursday.

But G.M. has said it is confident that it can increase its liquidity, and emphasized in a statement released Thursday that it was not considering a bankruptcy filing.

G.M. once commanded about 50 percent of the American vehicle market, but its share so far this year has fallen to 22 percent, according to the research firm Autodata. Chrysler had a market share of about 15 percent before its acquisition in 1998 by Daimler, but its share this year has dwindled to 11 percent.

How government and labor might react to a potential merger of G.M. and Chrysler is unclear. Antitrust questions could be raised, but political issues could be overshadowed by the precarious financial prospects of both automakers.

If G.M., the nation’s largest automaker, combined operations with Chrysler, the smallest of Detroit’s Big Three, they would create an auto giant that would surpass Japan’s Toyota Motor Company, which recently has been battling G.M. for bragging rights as the world’s largest automaker.

A G.M. spokesman declined to comment on any specific talks with Chrysler. “Without referencing this specific rumor, as we’ve often said G.M. officials routinely discuss issues of mutual interest with other automakers,” said the spokesman, Tony Cervone.

There was no immediate comment from Cerberus.

People briefed on the deal said the talks started as an exploration of possible joint venture opportunities between G.M. and Chrysler.

Cerberus acquired an 80.1 percent stake in Chrysler in August 2007 for $7.4 billion from the German automaker Daimler AG.

Under the terms of the deal being discussed, Cerberus would end up owning an unspecified equity stake in G.M.-Chrysler, people briefed on the talks said.

The ramifications of the merger would be enormous in the global auto industry. G.M. and Chrysler together would control more than 35 percent of the United States vehicle market, and be by far the dominant producer of pickup trucks, sport utility vehicles and minivans.

It would also marry such iconic American brands as G.M.’s Chevrolet and Cadillac with Chrysler’s Jeep and Dodge divisions.

However, the potential merger carries enormous risks. Both G.M. and Chrysler are struggling mightily in what is the worst market for vehicle sales in the United States in 15 years.

People close to the discussions said that if the prospective deal did not happen, Cerberus would probably look to Nissan and Renault.

But the marriage of G.M. and Chrysler has far more potential than hitching Chrysler to a foreign automaker. While G.M. and Chrysler may be hamstrung by labor contracts from cutting jobs, the two companies could combine dealers, product lines and advanced vehicle technology.

Bill Vlasic reported from Detroit and Andrew Ross Sorkin from New York. Michael J. de la Merced contributed reporting.

    G.M. and Chrysler Explore Merger, NYT, 11.10.2008, http://www.nytimes.com/2008/10/11/business/11auto.html?hp






Bush Statement on Financial Crisis


October 11, 2008
9:30 am
The Wall Street Journal

The following is President Bush’s statement Saturday on the financial crisis, as released by the White House. He spoke in the Rose Garden after meeting with financial ministers from the G-7 nations:

Thank you all very much. Good morning. [Treasury] Secretary [Henry] Paulson, Secretary [of State Condoleezza] Rice and I just had a productive discussion with finance ministers of America’s partners in the G7 — Canada, France, Germany, Great Britain, Italy, and Japan. I’m pleased to be with Prime Minister [Jean-Claude] Juncker of Luxembourg, who is the president of the Eurogroup of countries, Managing Director [Dominique] Strauss-Kahn of the International Monetary Fund, President [Robert] Zoellick of the World Bank, Chairman [Mario] Draghi of the Financial Stability Forum. Thank you all for coming.

I appreciate the spirit and common purpose that these leaders have brought to Washington. We recognize that the turmoil in the financial markets is affecting all our citizens. Citizens are rightly concerned about the crisis. And we understand that in dealing with the financial crisis, we’re really helping people be able to have a better future themselves.

In my country, it is important for our citizens to have understood that which affects Wall Street affects Main Street as well. And all of us recognize that this is a serious global crisis and, therefore, requires a serious global response for the good of our people. We resolve to continue our strong efforts to return our economies to the path of stability and long-term growth.

The United States has a special role to play in leading the response to this crisis. That is why I convened this morning’s meeting here at the White House, and that is why our government will continue using all the tools at our disposal to resolve this crisis. At our meeting, Secretary Paulson and I described the bold actions the United States has taken over the past few weeks.

To help thaw frozen markets, the Federal Reserve has taken unprecedented measures to boost liquidity. The Securities and Exchange Commission has cracked down on abusive practices in the markets. Federal agencies have significantly expanded the amount of money insured in bank and credit union accounts. My administration worked with the Congress to pass legislation authorizing the government to recapitalize banks by purchasing troubled assets or providing insurance or purchasing equity in financial institutions.

These extraordinary efforts are being implemented as quickly and as effectively as possible. The benefits will not be realized overnight. But as these actions take effect, they will help restore stability to our markets and confidence to our financial institutions.

I’m pleased that other G-7 countries are taking strong measures. Finance ministers and central bankers have acted to provide new liquidity to markets, strengthen financial institutions, protect citizens’ savings, and ensure fairness and integrity in the financial markets.

As our nations confront challenges unique to our individual financial systems, we must continue to work collaboratively and ensure that our actions are coordinated. The joint interest rate cut earlier this week was a good example of effective cooperation. Yesterday, G-7 finance ministers and central bankers agreed to a plan of action.

The G-7 nations have pledged to take decisive action to support systemically important financial institutions and prevent their failure, provide robust protection for retail bank deposits, and ensure financial institutions are able to raise needed capital. We’ve agreed to implement strong measures to unfreeze credit, ensure access to liquidity, and help to restart the secondary markets for mortgages and other assets. We’ve all agreed that the actions we take should protect our taxpayers. And we agreed that we ought to work with other nations such as those that will be represented this afternoon in the G-20 forum.

As our nations carry out this plan, we must ensure the actions of one country do not contradict or undermine the actions of another. In our interconnected world, no nation will gain by driving down the fortunes of another. We’re in this together. We will come through it together.

I’m confident that the world’s major economies can overcome the challenges we face. There have been moments of crisis in the past when powerful nations turned their energies against each other, or sought to wall themselves off from the world. This time is different. The leaders gathered in Washington this weekend are all working toward the same goals. We will stand together in addressing this threat to our prosperity. We will do what it takes to resolve this crisis. And the world’s economy will emerge stronger as a result.

Thank you very much.

    Bush Statement on Financial Crisis, WSJ, 11.10.2008, http://blogs.wsj.com/washwire/2008/10/11/bush-statement-on-financial-crisis/






What History Tells Us About the Market

The breathtakingly volatile week has left investors numb. A close study of the Great Crash, and the decades that followed, offers some unnerving context, and some reasons for optimism.


OCTOBER 11, 2008
The Wall Street Journal


July 9, 1932 was a day Wall Street would never wish to relive. The Dow Jones Industrial Average closed at 41.63, down 91% from its level exactly three years earlier. Total trading volume that day was a meager 235,000 shares. "Brother, Can You Spare a Dime," was one of the top songs of the year. Investors everywhere winced with the pain of recognition at the patter of comedian Eddie Cantor, who sneered that his broker had told him "to buy this stock for my old age. It worked wonderfully. Within a week I was an old man!"

The nation was in the grip of what U.S. Treasury Secretary Ogden Mills called "the psychology of fear." Industrial production was down 52% in three years; corporate profits had fallen 49%. "Many businesses are better off than ever," Mr. Cantor wisecracked. "Take red ink, for instance: Who doesn't use it?"

Banks had become so illiquid, and depositors so terrified of losing their money, that check-writing ground to a halt. Most transactions that did occur were carried out in cash. Alexander Dana Noyes, financial columnist at the New York Times, had invested in a pool of residential mortgages. He was repeatedly accosted by the ringing of his doorbell; those homeowners who could still keep their mortgages current came to Mr. Noyes to service their debts with payments of cold hard cash.

Just eight days before the Dow hit rock-bottom, the brilliant investor Benjamin Graham -- who many years later would become Warren Buffett's personal mentor -- published "Should Rich but Losing Corporations Be Liquidated?" It was the last of a series of three incendiary articles in Forbes magazine in which Graham documented in stark detail the fact that many of America's great corporations were now worth more dead than alive.

More than one out of every 12 companies on the New York Stock Exchange, Graham calculated, were selling for less than the value of the cash and marketable securities on their balance sheets. "Banks no longer lend directly to big corporations," he reported, but operating companies were still flush with cash -- many of them so flush that a wealthy investor could theoretically take over, empty out the cash registers and the bank accounts, and own the remaining business for free.

Graham summarized it this way: "...stocks always sell at unduly low prices after a boom collapses. As the president of the New York Stock Exchange testified, 'in times like these frightened people give the United States of ours away.' Or stated differently, it happens because those with enterprise haven't the money, and those with money haven't the enterprise, to buy stocks when they are cheap."

After the epic bashing that stocks have taken in the past few weeks, investors can be forgiven for wondering whether they fell asleep only to emerge in the waking nightmare of July 1932 all over again. The only question worth asking seems to be: How low can it go?

Make no mistake about it; the worst-case scenario could indeed take us back to 1932 territory. But the likelihood of that scenario is very much in doubt.

Robert Shiller, professor of finance at Yale University and chief economist for MacroMarkets LLC, tracks what he calls the "Graham P/E," a measure of market valuation he adapted from an observation Graham made many years ago. The Graham P/E divides the price of major U.S. stocks by their net earnings averaged over the past 10 years, adjusted for inflation. After this week's bloodbath, the Standard & Poor's 500-stock index is priced at 15 times earnings by the Graham-Shiller measure. That is a 25% decline since Sept. 30 alone.

The Graham P/E has not been this low since January 1989; the long-term average in Prof. Shiller's database, which goes back to 1881, is 16.3 times earnings.

But when the stock market moves away from historical norms, it tends to overshoot. The modern low on the Graham P/E was 6.6 in July and August of 1982, and it has sunk below 10 for several long stretches since World War II -- most recently, from 1977 through 1984. It would take a bottom of about 600 on the S&P 500 to take the current Graham P/E down to 10. That's roughly a 30% drop from last week's levels; an equivalent drop would take the Dow below 6000.

Could the market really overshoot that far on the downside? "That's a serious possibility, because it's done it before," says Prof. Shiller. "It strikes me that it might go down a lot more" from current levels.

In order to trade at a Graham P/E as bad as the 1982 low, the S&P 500 would have to fall to roughly 400, more than a 50% slide from where it is today. A similar drop in the Dow would hit bottom somewhere around 4000.

Prof. Shiller is not actually predicting any such thing, of course. "We're dealing with fundamental and profound uncertainties," he says. "We can't quantify anything. I really don't want to make predictions, so this is nothing but an intuition." But Prof. Shiller is hardly a crank. In his book "Irrational Exuberance," published at the very crest of the Internet bubble in early 2000, he forecast the crash of Nasdaq. The second edition of the book, in 2005, insisted (at a time when few other pundits took such a view) that residential real estate was wildly overvalued.

The professor's reluctance to make a formal forecast should steer us all away from what we cannot possibly know for certain -- the future -- and toward the few things investors can be confident about at this very moment.

Strikingly, today's conditions bear quite a close resemblance to what Graham described in the abyss of the Great Depression. Regardless of how much further it might (or might not) drop, the stock market now abounds with so many bargains it's hard to avoid stepping on them. Out of 9,194 stocks tracked by Standard & Poor's Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year -- or at levels less than half the long-term average valuation of the stock market as a whole. Nearly one in 10, or 876 stocks, trade below the value of their per-share holdings of cash -- an even greater proportion than Graham found in 1932. Charles Schwab Corp., to name one example, holds $27.8 billion in cash and has a total stock-market value of $21 billion.

Those numbers testify to the wholesale destruction of the stock market's faith in the future. And, as Graham wrote in 1932, "In all probability [the stock market] is wrong, as it always has been wrong in its major judgments of the future."

In fact, the market is probably wrong again in its obsession over whether this decline will turn into a cataclysmic collapse. Eugene White, an economics professor at Rutgers University who is an expert on the crash of 1929 and its aftermath, thinks that the only real similarity between today's climate and the Great Depression is that, once again, "the market is moving on fear, not facts." As bumbling as its response so far may seem, the government's actions in 2008 are "way different" from the hands-off mentality of the Hoover administration and the rigid detachment of the Federal Reserve in 1929 through 1932. "Policymakers are making much wiser decisions," says Prof. White, "and we are moving in the right direction."

Investors seem, above all, to be in a state of shock, bludgeoned into paralysis by the market's astonishing volatility. How is Theodore Aronson, partner at Aronson + Johnson + Ortiz LP, a Philadelphia money manager overseeing some $15 billion, holding up in the bear market? "We have 101 clients and almost as many consultants representing them," he says, "and we've had virtually no calls, only a handful." Most of the financial planners I have spoken with around the country have told me much the same thing: Their phones are not ringing, and very few of their clients have even asked for reassurance. The entire nation, it seems, is in the grip of what psychologists call "the disposition effect," or an inability to confront financial losses. The natural way to palliate the pain of losing money is by refusing to recognize exactly how badly your portfolio has been damaged. A few weeks ago, investors were gasping; now, en masse, they seem to have gone numb.

The market's latest frame of mind seems reminiscent of a passage from Emily Dickinson's poem "After Great Pain a Formal Feeling Comes":

This is the Hour of Lead --
Remembered, if outlived,
As Freezing persons recollect the Snow --
First -- Chill -- then Stupor -- then the letting go.

This collective stupor may very likely be the last stage before many investors finally let go -- the phase of market psychology that veteran traders call "capitulation." Stupor prevents rash action, keeping many long-term investors from bailing out near the bottom. When, however, it breaks and many investors finally do let go, the market will finally be ready to rise again. No one can spot capitulation before it sets in. But it may not be far off now. Investors who have, as Graham put it, either the enterprise or the money to invest now, somewhere near the bottom, are likely to prevail over those who wait for the bottom and miss it.

    What History Tells Us About the Market, NYT, 11.10.2008, http://online.wsj.com/article/SB122368241652024977.html






Wild Day Caps Worst Week Ever for Stocks

Dow Swings 1019 Points in the Index's Most-Volatile Session Ever;
Despite 'Fire-Sale Prices,' Buyers Mostly Stand Back


OCTOBER 11, 2008
The Wall Street Journal


The Dow Jones Industrial Average capped the worst week in its 112-year history with its most volatile day ever, as hopes for a major international bank-rescue plan were overwhelmed at day's end by another wave of selling.

Some investors who normally would be jumping to buy beaten-down stocks after a 22% drop over eight trading days said the relentless declines have left them shell-shocked and unwilling to take new risks. Some spent the day trying to protect themselves from further declines.

The Dow fell 697 points shortly after the opening bell, and remained down most of the day. It surged to a 322-point advance less than half an hour before the close. Investors stampeded into bank stocks as reports circulated that the Group of Seven leading industrial countries was going to agree on a plan to rescue major banks, and that Morgan Stanley had been assured that it would receive funding from a Japanese bank. Hopes briefly blossomed that the worst might finally be over.

But investors weren't willing to enter the weekend that exposed to stocks, and in the waning minutes, amid brutal up-and-down swings, stocks gave back all the late gains. The Dow industrials finished down 128 points, or 1.49%, at 8451.19, the lowest finish since April 25, 2003. Many bank stocks, however, finished higher.

After regular stock trading ended, the G-7 nations agreed on guidelines to address the crisis, but stopped short of the kind of concrete action plan investors had sought, raising the risk of further market chaos. Treasury Secretary Henry Paulson later provided more details about the U.S. government's plan to take equity stakes in banks.

This week's 18% decline, and Friday's 1018.77-point swing from low to high, were the biggest since the Dow was created in 1896. Until now, the Dow's worst week was in 1933. Total trading volume of stocks listed on the New York Stock Exchange also hit a record, 11.16 billion shares.

The damage has been devastating both to households and to major investment institutions. Investors' paper losses on U.S. stocks now total $8.4 trillion since the market peak one year ago, based on the value of the Dow Jones Wilshire 5000 index, which includes almost all U.S.-based companies.

The blue-chip average is down 40% from last October's record, its biggest decline since 1974.

Investors who normally would be buying stocks after such heavy declines are standing back, says Henry Herrmann, chief executive of money-management group Waddell & Reed in Overland Park, Kan.

"You make a decision and you look dumb the next day," Mr. Herrmann says. "So you go to gold, and then gold is down. You go to Treasurys, they rally, then they get their noses punched in." His firm overall is holding 22% to 23% of its assets in cash, one of the highest levels ever.

The firm is holding cash to avoid getting hammered by market sell-offs, he says. Another reason is to protect clients and the firm, so the firm won't have to make forced sales if clients start cashing in their mutual funds -- something Mr. Herrmann says is just starting to happen.

"I have been doing this since 1963. There has never been anything close to what we are experiencing now," he says, referring to the market pandemonium. "Maybe one day in 1987 was close, in terms of absolute riot. But this is happening every day."

"Some stocks are selling at fire-sale prices," adds Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "But the way this market has broken down, it needs to rally by 15% or 20% to get enough momentum for us to get back in."

Alan Haft, chief executive of Haft Financial in Newport Beach, Calif., was helping clients place big bets against the Dow Jones Industrial Average on Friday morning, using the ProShares UltraShort Dow 30 fund. The fund is structured to move in the opposite direction of the Dow, and at twice the speed. If the Dow falls 1%, the highly risky fund rises 2%, and vice versa. Mr. Haft has made similar moves every day this week, he says. Clients who invested in a basket of such funds on Monday were up 25% for the week, he says.

Even some pension funds, which often take a longer-term view, were breaking with normal practice.

"We're caught by the immensity of the whole thing," says Jim Meynard, executive director for the Georgia Firefighters Pension Fund. The fund has been raising its cash position over the past two weeks by selling foreign stocks. "Some of our [outside] money managers have also raised cash," he says.

Traders said the morning selling appeared to be driven in part by margin calls -- brokers' demands for additional collateral from clients who had bought stocks with borrowed money. When stocks that serve as collateral fall sharply, they may no longer cover the value of the loans. If investors can't quickly provide new collateral, brokers sell the stocks to pay off the loans.

Executives Hit

The margin calls hit some chief executives who had borrowed to buy company stock. These included Chesapeake Energy Corp. Chief Executive Aubrey K. McClendon, who was forced to sell nearly his entire stake in the company, which he had accumulated in recent years, including a $43 million purchase in July. "These involuntary and unexpected sales were precipitated by the extraordinary circumstances of the world-wide financial crisis," Mr. McClendon said in a statement. "In no way do these sales reflect my view of the company's financial position or my view of Chesapeake's future performance potential."

Other forced sellers included Coca-Cola Enterprises Inc. director Marvin J. Herb, who said J.P. Morgan Chase & Co. had seized 18.6 million of his shares in the bottler, and had already sold nearly 1.4 million of them for $17.7 million "pursuant to a credit arrangement." J.P. Morgan has indicated it plans to sell the remaining shares, Mr. Herb said in a regulatory filing.

The Vix, a measure of market fear based on options trading and tracked by the Chicago Board Options Exchange, rose to 69.95, by far its highest level since it was introduced more than 15 years ago.

Lending markets remained heavily impaired. The continuing reluctance of banks to lend, even to some other banks, added to investor fears that more unsettling financial news could be on the way. Investors continued to flock to the relative safety of short-term Treasury bills, and away from corporate bonds, mortgages and other nongovernmental bonds.

Returns in the $745 billion junk-bond market -- debt issued by companies with weak balance sheets and cash flows -- are down more than 17% in the past five weeks, according to Merrill Lynch. The $2.5 trillion debt market for companies with high credit ratings, the investment-grade market, has fallen 11% since the start of September, and 11.5% since the beginning of the year.

A Dow Jones index of bank stocks rose 9% on Friday, reflecting the hopes for some kind of government bailout. Reports that Morgan Stanley was still on track to receive a capital injection from Mitsubishi UFJ Financial Group Inc. helped it rally off its lows, but the stock still fell 22% on the day.

    Wild Day Caps Worst Week Ever for Stocks, WSJ, 11.10.2008, http://online.wsj.com/article/SB122368071064524779.html?mod=article-outset-box






Whiplash Ends a Roller Coaster Week


October 11, 2008
The New York Times


For three straight days, the stock market collapsed in the last hour of trading. On Friday, it merely swooned.

Until 3 p.m., things looked awful as investors drove the Dow Jones industrial average down nearly 700 points at one point, to below 8,000 for the first time in five years. Then the market made a U-turn, surging higher with the Dow climbing nearly 900 points in less than 40 minutes. The rally fizzled in the last 20 minutes of trading and the Dow closed down 1.5 percent — but it was a far cry from its 8 percent decline at the start of the trading day just six and a half hours earlier.

“We just don’t see turnarounds like this,” Howard Silverblatt, chief index analyst for Standard & Poor’s, said about the late afternoon rally. “These swings are enormous.”

It was one of the wildest moves in stock market history, and perhaps a fitting conclusion to the worst week in at least 75 years. The Dow and the broader Standard & Poor’s 500-stock index both closed down 18 percent for the week. The Dow has never had a week that bad in its 133-year history. The S.& P. has fallen slightly more only twice before — in 1929 and 1933. This month was the first time that the S.& P. had fallen by more than 1 percent for seven days in a row.

In the credit markets, conditions went from bad to worse. Borrowing costs for banks and companies jumped once again as investors sought safety in Treasury bills despite earlier signs that the government might take equity stakes in troubled companies to try to halt the credit crisis. It was the worst single day for junk bonds ever, and the cost of borrowing shot up for even blue-chip companies: I.B.M. agreed to pay 8 percent interest on $4 billion of 30-year bonds, about twice the rate at which the federal government borrows money.

On Friday evening, after a meeting of finance ministers and central bankers from the Group of 7 countries, the Treasury secretary, Henry M. Paulson Jr., confirmed that the government would move quickly to buy stakes in financial institutions. But the details he provided fell far short of what investors were seeking.

Indeed, while policy makers have taken a stab at many extraordinary efforts to restore confidence, none have alleviated panic in global markets so far. Because the $700 billion financial stabilization plan will take several weeks to have an impact, investors say officials must present significant details on the more fast-track effort to recapitalize banks to get them to lend money to each other and other businesses again.

“We have to do something,” said Robert C. Doll, vice chairman of BlackRock, the big investment firm. “At the end of the weekend, before the markets open up on Monday, these guys have to have something to say. And it can’t be, ‘Everything is O.K., just calm down.’ ”

Investors will be watching for any new developments in Washington this weekend after Mr. Paulson signaled that countries stopped short of agreeing to a globally coordinated approach to stem the crisis. In addition to the G-7 meetings, which go through Sunday, the International Monetary Fund and the World Bank are also holding annual meetings.

Politicians were busy in Washington, and on Wall Street, things were anything but calm. Friday in New York began with a now-familiar feeling: dire expectations of what the opening bell would bring after stocks in Asia and Europe plummeted by as much as 10 percent.

Scott Black, president of Delphi Management in Boston, said he had taken to waking up at 3 a.m. to check on foreign markets. When he arose before dawn on Friday, he was distressed. “I am worried,” he said. “I have a fiduciary responsibility to my clients.”

At the open, the Dow Jones industrial average quickly sank nearly 700 points. But suddenly, shares of struggling financial companies surged, the Dow regained all of its losses in less than half an hour, and a cheer went up on the trading floor of the New York Stock Exchange.

By about 10:20, stocks had started to slide again, and President Bush tried to soothe frayed nerves with an appearance at the White House. “This is an anxious time,” he said. “But the American people can be confident in our economic future. We know what the problems are. We have the tools to fix them. And we’re working swiftly to do so.”

If traders were paying attention to the president, it did not show. Over the course of several hours, stocks ground down, with the Dow losing more than 600 points and again falling below the 8,000 mark.

In the afternoon, an investor walked into a Kansas office of the mutual fund company American Century Investments. The woman, who is two years from retirement, was worried about her small business account. She brought her unopened statement to John Leis, a director of personal financial solutions at the company.

“She didn’t have the guts to open it even though she had conservative investments,” Mr. Leis said. “She asked me, ‘How bad is it going to be?’ ” The client was fortunate: her investments, in mostly government-backed bonds, were up 6 percent for the year. But Mr. Leis said the concern about her investments symbolized the fear among many everyday Americans who are watching the financial markets with trepidation.

Back in New York, stocks were about to stage one of their most impressive rallies ever. Shortly after 3 p.m., the Dow surged by nearly 900 points, with companies like Exxon Mobil, Chevron and Boeing leading the way. While those companies have posted decent results this year, their shares have fallen significantly in recent months.

Why stocks surged late in the day is the subject of much discussion and speculation among analysts and investors. Many said it was only a matter of time before stocks bounced back from the unrelenting decline of recent days. Many investors have been waiting on the sidelines either because they feared what would come next or because they expected prices to fall further.

Barry Ritholtz, chief executive of Fusion IQ and author of a popular financial blog, The Big Picture, pointed out that investors were holding more cash than at any time since 2002, when the last bear market ended. Some of that cash appears to have come into the market later in the day when it looked like stock prices would not fall much further.

Some analysts said the late-hour surge reflected bargain hunting by money managers who have watched stocks of premier companies like General Electric, Google and Exxon Mobil fall to their cheapest levels in years or decades. Google, for instance, opened trading at about $315 a share, about $100 below where it was just a week and a half ago. Shares of the company closed up modestly, at $332.

“What I saw was people starting to buy at the really distressed prices and, when the market got better, they kept buying,” said Laszlo Birinyi Jr., president of Birinyi Associates, an investment firm in New York.

Still, many investors said that although they were excited about buying beaten up stocks and bonds, they were worried that the sell-off was far from over. The recent spate of forced selling of stocks by hedge funds and other investors who had used lots of borrowed money to make big bets during the recent credit boom may not yet be over, they fear.

“The problem is that in order to invest in this you have to make sure your base of capital is stable,” said Whitney Tilson, founder and managing director of T2 Partners, a hedge fund firm in New York. “Who knows when the dumping is going to end. Who knows how many hedge funds are going to go under.”

Still, Mr. Tilson, describing current prices as “prosperously cheap,” said he recently allowed his investors to put more money into his funds — and a handful took him up on the offer.

The benchmark 10-year Treasury bill fell 22/38, to 101 1/32, and the yield, which moves in the opposite direction from the price, was at 3.87 percent, up from 3.79 percent late Thursday.

Ian Austen, Vikas Bajaj, David Stout and Bettina Wassener contributed reporting.

    Whiplash Ends a Roller Coaster Week, NYT, 11.10.2008, http://www.nytimes.com/2008/10/11/business/11markets.html






Rich Nations Pushing for Coordination in Rescue


October 11, 2008
The New York Times


WASHINGTON — The United States and six other nations that are among the world’s richest agreed on Friday to a coordinated plan to rescue the financial industry, but fell short of offering concrete steps to backstop bank lending on a day when fear tightened its grip on investors from Wall Street to Hong Kong.

Treasury Secretary Henry M. Paulson Jr. said the United States would move aggressively on one part of the plan by infusing American banks directly with cash and taking ownership stakes in return.

In the five-point plan, issued after finance ministers met at the Treasury Department, the Group of 7 countries broadly endorsed the idea of taking ownership positions in banks — a strategy first adopted by Britain and now emerging as a major part of the rescue effort in the United States.

But the nations were vague on how or when that will happen, and did not endorse a proposal by Britain to provide coordinated guarantees of lending between banks, as a way to shake loose credit markets.

The attempt at coordination came at the end of one of the worst weeks in the history of Wall Street. The Dow Jones industrial average plunged 18 percent for the week, and wildly swung more than 1,000 points on Friday alone before settling down 128 points, or 1.5 percent.

Many investors had hoped the meeting of the finance ministers from the world’s leading economies would result in more concrete steps to restore the paralyzed credit markets, and lay out a blueprint for recapitalizing banks.

“This fell short,” said Adam Posen, the deputy director of the Peterson Institute for International Economics. “It all seems to be moving toward direct injection of capital, but why aren’t they just saying it?”

Mr. Paulson said the seven countries — the United States, Britain, Germany, France, Italy, Canada and Japan — had committed themselves to five principles, ranging from preventing the failure of important banks to protecting the bank deposits of savers.

“People came together,” Mr. Paulson said at a news conference, noting that the diplomatic language of such communiqués had been replaced by a plan “that’s different, that’s to the point, that’s powerful.”

Treasury officials said the United States may embark on direct injections of capital into banks within the next two weeks, even earlier than the government plans to begin buying distressed assets from banks under the bailout plan that President Bush signed just over a week ago.

Mr. Paulson said hopes for a grand global solution were naïve, given the differences among countries. Indeed, other finance ministers had tried to reduce expectations for the meeting.

“Don’t imagine that we’ll have a harmonized response that will be the same for everybody because you can’t apply the same method to different market situations,” the French finance minister, Christine Lagarde, said earlier in the day.

The Group of 7 session was one of a flurry of meetings in conference rooms from the Federal Reserve to the International Monetary Fund at which officials discussed potential remedies for the financial system. The timing was fortuitous: the world’s financial elite had gathered in Washington for the annual meetings of the monetary fund and the World Bank.

But the pageantry and parties that normally characterize this gathering have been replaced by an atmosphere of high drama and deep gravity — a 21st century echo of Bretton Woods, the 1944 conference in New Hampshire at which the Allies fashioned the financial institutions of the postwar era.

The discussions on Friday focused on the growing likelihood that the United States and several major European countries would have to partially nationalize their banking systems.

Germany remains deeply reluctant about such a course, according to people with knowledge of the German position, because of fears that it would end up bailing out the banks of its neighbors.

Such a step would have been unlikely here a week ago, too, but the swiftness of events is forcing officials to throw out decades of conventional wisdom about how free markets should operate.

Events also seem to have upended the Treasury’s plan to stabilize the financial system by buying billions of dollars of troubled assets from the banks — a plan that Mr. Paulson and his Treasury Department colleagues expended enormous energy designing and selling to a skeptical Congress.

“The original Paulson plan didn’t hit the nail on the head,” said Kenneth S. Rogoff, an economist at Harvard and an adviser to the Republican presidential candidate, John McCain. “It’s one thing to go back to Congress six months later and say ‘I didn’t ask for enough.’ It’s another to go back after six days and say ‘I didn’t ask for enough.’ ”

The Treasury has been soliciting feedback about capital injections from Wall Street chief executives, top hedge fund managers, and other big investors, according to a senior banker briefed on the proposal.

One message the industry has given officials is that their plan should help strong banks, rather than save deeply troubled ones. They have suggested tying the eligibility for a government investment to a bank’s so-called Camel rating — a measure used by regulators to grade an institution’s financial strength. Only banks in the highest-rated categories would qualify for support.

Another suggestion is for regulators to effectively halt dividend payments for all banks in which the government injects capital, this banker said. This would help remove the stigma of lowering the dividend, and keep about $55 billion a year from leaking out of the banking system.

The United States and Germany appear to be the pivotal players in determining whether recapitalizing banks becomes a global standard, given that Britain has already adopted such a plan, and France, Italy and Japan generally support it. Japan recapitalized its banks after a financial crisis in the 1990s.

Before the meeting, Italy’s finance minister, Giulio Tremonti, criticized a draft of the communiqué, saying it was too weak, and threatened not to sign it. The final text was very different, he said.

Prime Minister Silvio Berlusconi of Italy raised eyebrows earlier in the day, with a call for countries to shut their financial markets while the authorities drafted new rules for the financial system — a suggestion that was rebuffed by the White House and later disavowed by Mr. Berlusconi himself.

While the leaders managed to paper over any rifts by the time they emerged from their meeting, their lack of agreement on a British-style guarantee of loans made between banks worried economists.

If other countries do not follow the same course as Britain, they said, it could destabilize the financial system, because money may flow to Britain from countries without those same guarantees.

“You now have the full faith and credit of the British government standing behind the banking system,” said Barry Eichengreen, a professor of economics at the University of California, Berkeley. “The British could suck deposits from continental Europe and even the United States.”

Edmund L. Andrews and Carl Hulse contributed reporting from Washington, and Eric Dash from New York.

    Rich Nations Pushing for Coordination in Rescue, NYT, 11.10.2008, http://www.nytimes.com/2008/10/11/business/11global.html?hp






Nations Weigh Global Action to Crisis


October 10, 2008
The New York Times


WASHINGTON — The United States and Britain appear to be converging on a similar blueprint for stemming the financial chaos sweeping the world, one day before a crucial meeting of leaders begins in Washington that the White House hopes will result in a more coordinated response.

The British and American plans, though far from identical, have two common elements according to officials: injection of government money into banks in return for ownership stakes and guarantees of repayment for various types of loans.

Both remedies will be center stage on Saturday, when President Bush meets with finance ministers from the world’s richest countries at an unusual White House meeting to swap ideas.

Mr. Bush’s invitation to finance ministers from Britain, Italy, Germany, France, Canada and Japan came on a day of phone calls and letters between European leaders and with Washington.

Adding to the urgency, the Japanese stock market plunged more than 10 percent Friday morning, after having dropped 9 percent on Wednesday.

Government officials struggled to fashion a coordinated response to the ailing global banking system before going to Washington for annual meetings of the International Monetary Fund and World Bank.

“As this thing has spread, the opportunities for cooperation have risen,” David H. McCormick, the under secretary of the Treasury for international affairs, said. “We need to promote and highlight these common areas.”

With credit markets still frozen and stock markets around the world in a deep swoon, there is a growing consensus that the crisis is now so fast-moving and harmful to the global economy that it demands an unprecedented degree of worldwide coordination.

The Treasury’s openness to direct infusions of cash is a remarkable change in tone from a few weeks ago, when the Treasury secretary, Henry M. Paulson Jr., and the Federal Reserve chairman, Ben S. Bernanke, discouraged such actions in testimony before Congress. “Putting capital in institutions is about failure,” Mr. Paulson declared on Sept. 23. “This is about success.”

Treasury officials, however, said the emphasis changed in the last week, largely because stock markets kept spiraling down.

Prime Minister Gordon Brown of Britain made the case, in a letter to President Nicolas Sarkozy of France, for another option gaining favor among economists — guaranteeing short- and medium-term loans between banks. By persuading banks to resume lending to each other, the plan aims to shake loose the paralyzed credit market. “This is an area where a concerted international approach could have a very powerful effect,” Mr. Brown said Thursday in the two-page letter.

Administration officials are discussing aspects of the British proposal but said different economies have different rules that complicate a single joint action.

One senior administration official argued that expecting an agreement on proposals like Mr. Brown’s would be “irrationally raising expectations.”

Still, recapitalizing the banks and jump-starting their lending are at the top of the list of remedies that many economists are now suggesting. By acting in concert, countries can maximize the punch of their actions, these experts said, while avoiding distortions that occur when countries go different ways.

“At a minimum, you want to curtail damage,” said Carmen M. Reinhart, a professor of economics at the University of Maryland. “You don’t want the beggar-thy-neighbor policies that characterized the Great Depression.”

“At a maximum,” she continued, “you can get general principles — the need for a swift recapitalization of the banks, the need for liquidity — so we don’t get an even bigger credit crunch.”

Dominique Strauss-Kahn, managing director of the International Monetary Fund, warned countries against taking actions that could destabilize the financial systems of their neighbors. Unilateral acts, he said, “have to be avoided, if not condemned.”

Mr. Strauss-Kahn announced that the fund had activated an emergency financing mechanism, which would allow it to lend money more quickly to countries facing financial problems, as a result of the crisis.

The White House confirmed that the Treasury Department was considering taking ownership positions in banks as part of its $700 billion rescue package. But officials said the idea was less developed than the plan to buy distressed assets from banks through “reverse auctions.”

The goal, Treasury officials said, is a plan that would be broadly available to all banks, rather than through specific rescue packages negotiated on a case-by-case basis. That makes it likely that the government could afford to take only a small stake in any single institution.

The direct injections of cash would be for comparatively healthy banks. If a bank is failing and needs to be rescued or shut down, the Federal Deposit Insurance Corporation would handle it through its own procedures.

The Treasury proposal to recapitalize banks stems from the realization that as the stock market keeps tumbling, and as mortgage-related securities on banks’ balance sheets also plummet, it has become harder for banks to raise fresh capital from investors.

The government concluded it would be able to deliver capital faster and with greater assurance if it did so directly.

The switch may also reflect growing doubts about the Treasury’s plan to purchase mortgage-related assets. Through reverse auctions, aspiring sellers of the hard-to-sell securities would compete to offer the securities to the government. The auctions are supposed to jump-start the market for these securities and allow investors to value them on balance sheets. Once banks’ balance sheets were cleansed of toxic assets, the theory went, they would be able to tap fresh capital.

But the concept is untested, experts said, and the deteriorating market conditions had further dimmed its prospects.

“I don’t think the plan is getting off the ground,” said Martin N. Baily, an economist at the Brookings Institution. “I’m not sure you’ll get price discovery, but even if you did, how many Warren Buffetts or Middle Eastern sheiks are out there who want to invest in banks?”

Another advantage of the recapitalization plan is more subtle: the Treasury would get more bang for the buck. Because banks have debt-to-equity ratios of 10 to one or higher, a dollar spent buying an equity stake would support 10 times as many assets as a dollar spent buying up individual securities.

Administration officials said the government could acquire stakes in the form of common stock, preferred shares paying a specific dividend or some other form of equity. But officials said the government’s offer of additional capital should be made in a uniform way to all banks.

It is far from clear that other countries will accept the need for wholesale recapitalization of the banks. Even if they did, neither the British nor the American plan would necessarily be a template.

“You have lots of people skinning the cat in lots of different ways,” Mr. McCormick, the Treasury’s point person in organizing the meetings of finance ministers, said in an interview. “It’s clear that one size does not fit all.”

For their part, American officials questioned how the British government and the banks would value the capital injected into the banks, for purposes of taking equity stakes. They also said the proposal was vague about how the government would treat executive compensation.

In the rescue law passed a week ago, Congress stipulated that the Treasury must strictly limit the pay of executives in banks to which it adds capital — including provisions that ban golden parachutes and that direct the government to recover bonuses based on stated earnings that prove inaccurate.

Britain’s plan also hinged on the willingness of several of the largest banks — Royal Bank of Scotland, Barclays and HSBC Holdings, among them — to sell preferred shares to the government. It is not clear, administration officials said, that the largest American banks would agree to this, particularly given the restrictions on executive pay.

Another concern banks are likely to have is that any government ownership stake would dilute the holdings of existing shareholders.

For Europeans, common ground has been elusive. Mr. Sarkozy tried without success to unite leaders behind a rescue effort. Germany, in particular, has resisted a Europe-wide effort, in part because it believes it would end up bailing out its neighbors.

“Only coordinated action by central banks and governments is able to stop the systemic risk and ensure the financing of economies,” Mr. Sarkozy said. He suggested a special meeting of the leaders of the Group of 8 industrialized nations before year-end.

On Thursday, Nancy Pelosi, the House speaker, and Harry Reid, the Senate majority leader, took up that call, saying Mr. Bush should convene an emergency meeting of the Group of 8, which also includes Russia. The White House said earlier that Mr. Bush was open to such a meeting.

The White House announced that Mr. Bush would appear in the Rose Garden Friday morning to make a statement on the economy. A senior administration official said that his remarks would again seek to calm nerves.

Steven Lee Myers contributed reporting.

    Nations Weigh Global Action to Crisis, NYT, 10.10.2008, http://www.nytimes.com/2008/10/10/business/worldbusiness/10global.html?hp






Stocks Plunge Again; Dow Under 8,600


October 10, 2008
The New York Times


Until 3 p.m. on Thursday, it seemed as if the stock market might escape another dark day.

Then the selling hit — and hit and hit again, mimicking trading on Tuesday and Wednesday. What had been a moderately down day ended in a rout, with the Dow Jones industrial average closing down 679 points, or 7.3 percent, leaving it below 9,000 for the first time in five years.

In the busiest day in New York Stock Exchange history, panicky investors dumped stocks en masse. Almost no corner of the market was spared, with 1,754 stocks falling and just 87 rising on the Big Board.

Despite unprecedented steps by policy makers around the world to defuse the financial crisis, fear is spreading that a deep global recession is at hand. The credit markets, the heart of the financial system, remained in near paralysis.

“There is a downward spiral of fear,” said Richard Sparks, senior equities analyst at Schaeffer’s Investment Research.

The plunge came in a stomach-churning 90 minutes. The Dow was down just 140 points at 2:30 p.m., and 200 points at 3. But then, wave after wave of selling began to roll through the market. By 3:20, the index was down 380 points. Ten minutes later, it was down 390 points. By 3:45, it was down 660. After staging a brief rally, it fell again.

In the last six trading days — starting last Thursday — the Dow has plummeted 2,251.8 points, or 20.8 percent, a decline big enough, on its own, to mark the start of a bear market. It also is similar to the drop in the Dow on Black Monday, Oct. 19, 1987, when it fell 22.6 percent.

Big oil companies like Exxon Mobil and Chevron pulled the Dow lower, falling by roughly 12 percent each.

General Motors, the embattled automaker, fell $2.15, to $4.76. As a group, financial shares were hit the hardest, falling nearly 12 percent.

At current prices, analysts say, the market is suggesting that investors fear the kind of severe and long recession the country has not had since at least the early 1970s.

Reflecting concerns about the economy, crude oil prices fell 2.7 percent, to $86.59 a barrel. OPEC, the oil-producing cartel, on Thursday called an emergency meeting for Nov. 18 to consider cutting an output in an attempt to arrest the 41 percent drop in oil prices in the last three months.

Asian markets also reacted strongly to the turmoil. In Japan, the Nikkei 225 index was down 10 percent on Friday morning, after having plunged 9 percent on Wednesday. The Hang Seng index in Hong Kong fell 7 percent and the market in Singapore was down 6.8 percent.

What has prompted the late-day sell-offs recently is a subject of intense debate and conjecture, even among market professionals, who also have been unnerved by the free fall of the week.

Some attribute it to mutual funds’ waiting until midafternoon to execute sell orders from a growing number of investors who are cutting their exposure or bailing out of the market altogether. Others say that hedge funds, which have leveraged returns in recent years by using borrowed money, are having to sell holdings to raise collateral against their borrowings.

Still others say computerized trading, which has grown significantly in recent years, often kicks in later in the day, when certain thresholds are breached.

But whatever the reasons for the late-day plunges, what is driving the market down is a lack of confidence by investors, who are skeptical that the many measures taken by the government to rescue the financial system will work. Moreover, they worry that the government’s trotting out a new initiative every day or two is a sign that maybe the situation is worse than many thought.

Some who have held on until now are starting to sell. Since the start of the year, investors have removed more than $81 billion from stock mutual funds, with nearly 40 percent of that coming in the last six weeks, according to AMG Data Services.

Trevor Callan, a financial planner in La Jolla, Calif., said he has been bombarded by calls since Wednesday from nearly every one of his clients.

“The bottom line here is we’re witnessing complete panic,” Mr. Callan said. “There are certainly periods of time where rationality is thrown out the window, and this is one of them.”

The staggering decline in stocks has some investors questioning when the markets will stabilize. In fact, some pros believe that stocks bottom when many average investors pull out on a day of heavy selling — also known as capitulation.

Michael Cerenzie, a film producer, said he had been selling out of his million-dollar position in banking stocks and was looking to invest in companies specializing in natural gas and energy.

“This isn’t going to come back,” he said of the recent stock market losses. “This is going to be a long one. We are not going to see returns like we did in the past.”

Individuals are not the only ones bailing out. Market professionals are also selling, often even when they do not want to.

Many hedge funds have been forced to sell stocks and bonds this week because their lenders, big banks like Goldman Sachs and Morgan Stanley, demanded that they put up more capital against their positions and pay down margin loans.

Those demands are determined by a variety of factors like rising volatility and falling prices — all of which have been true in the last few days. In addition, because the banks are paying more to borrow money themselves, they are charging hedge funds more for loans, several bankers said.

Hedge funds, which cater to pension plans, endowments and wealthy individuals, have also had to sell to meet redemption requests from their clients.

With hedge funds selling and banks, including several in Iceland, in trouble, the market is experiencing “really big liquidations,” said Kingman Penniman, president of KDP Advisors, a bond research firm.

Those sales have driven down prices to such an extent that bank loans, which are considered much safer than bonds, are trading at levels implying that nearly a third of them will go into default. As of the end of September, defaults have climbed to just 3.3 percent.

“We are flushing out the system,” Mr. Penniman said. Referring to bankers and investors, he said, “They have decided that there is little they can do. We wanted to de-lever the whole financial system, and the hope was that it would be done in a orderly fashion. And they have given up all hope of that.”

Jane Caron, chief economic strategist at Dwight Asset Management, a bond trading firm, said professional investors were increasingly reluctant to buy because the computer models they used in the past had failed them. Like many everyday investors, the professionals fear that even though prices have fallen significantly, they could sustain further losses.

“Nobody is willing to transact,” Ms. Caron said, “and behind that, there are a lot of concerns about solvency.”

What happened on Thursday partly reflects the unintended consequences of regulators’ attempts to bolster stock prices several weeks ago, when the Securities and Exchange Commission temporarily banned short-selling in nearly 1,000 stocks.

That restriction was lifted at midnight on Wednesday. Short-selling is a practice in which investors sell shares they do not own in the hopes of buying them back later at a lower price. Many money managers use it to hedge their investments against future losses.

Analysts said those investors were probably forced to sell shares short on Thursday to protect themselves.

Those explanations not withstanding, many money managers said they had not seen stocks beaten up quite this much in a long time. The Standard & Poor’s 500-stock index is now down nearly 42 percent from its peak a year to the day from Thursday.

That decline makes this the third-worst bear market since World War II and the sixth-worst since 1929, according to Standard & Poor’s Equity Research. It would also qualify as one of the speediest declines in stock prices in history. The S.& P. 500 closed down 7.6 percent, to 909.92. The Dow closed at 8,579.19. Nearly 8.3 million stocks were traded on the New York exchange.

John Dorfman, manager of the Dorfman Value Fund, a mutual fund based in Boston, said he thought a bottom was near. While the economy is most likely in a recession, he said, he does not expect a depression. “A crisis always feels bottomless, and it usually isn’t,” he said.

Robert M. Solow, who won the Nobel Prize in 1987 for his work on economic growth, said that “potential for instability was always there,” but he was caught by surprise at the magnitude of the problems in the economy and financial system.

“I’m as puzzled as anyone else,” he said. “I don’t have any particular wisdom to sell.”

The benchmark 10-year Treasury bill fell 1 9/32, to 101 23/32, and the yield, which moves in the opposite direction from the price, was at 3.79 percent, up from 3.64 percent late Wednesday.

Following are the results of Thursday’s Treasury auction of the 7-year note, 10-year note and 97-day cash management bills:

Reporting was contributed by Laura M. Holson, Louise Story, Graham Bowley and Diana B. Henriques.

    Stocks Plunge Again; Dow Under 8,600, NYT, 10.10.2008, http://www.nytimes.com/2008/10/10/business/10markets.html?hp






Op-Ed Contributor

An Economy You Can Bank On


October 10, 2008
The New York Times



THE Treasury Department is now thinking about using some of the $700 billion it has been given to rescue Wall Street to buy ownership stakes in American banks. The idea is that banking is so central to the American economy that the government is justified in virtually nationalizing much of the industry in order to save us from a potential depression.

There are two faulty assumptions here. First, saving America’s banks won’t save the economy. And second, the economy doesn’t really need saving. It’s stronger than we think.

Bear with me. I know that most everyone has been saying for a couple of weeks that something has to be done; a banking crisis could quickly become a wider crisis, pulling the rest of us down. For this reason, the Wall Street bailout is supposed to be better than no plan at all.

Too bad this line of thinking is seriously flawed. The non-financial sectors of our economy will not suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated.

Although banks perform an essential economic function — bringing together investors and savers — they are not the only institutions that can do this. Pension funds, university endowments, venture capitalists and corporations all bring money to new investment projects without banks playing any essential role. The average corporation gets about a quarter of its investment funds from the profits it has after paying dividends — and could double or even triple that amount by cutting its dividend, if necessary.

What’s more, it’s not as if banking services are about to vanish. When a bank or a group of banks go under, the economywide demand for their services creates a strong profit motive for new banks to enter the marketplace and for existing banks to expand their operations. (Bank of America and J. P. Morgan Chase are already doing this.)

It’s important to keep in mind, too, that the financial sector has had a long history of fluctuating without any correlated fluctuations in the rest of the economy. The stock market crashed in 1987 — in 1929 proportions — but there was no decade-long Depression that followed. Economic research has repeatedly demonstrated that financial-sector gyrations like these are hardly connected to non-financial sector performance. Studies have shown that economic growth cannot be forecast by the expected rates of return on government bonds, stocks or savings deposits.

It turns out that John McCain, who was widely mocked for saying that “the fundamentals of our economy are strong,” was actually right. We’re in a financial crisis, not an economic crisis. We’re not entering a second Great Depression.

How do we know? Well, the economy outside the financial sector is healthier than it seems.

One important indicator is the profitability of non-financial capital, what economists call the marginal product of capital. It’s a measure of how much profit that each dollar of capital invested in the economy is producing during, say, a year. Some investments earn more than others, of course, but the marginal product of capital is a composite of all of them — a macroeconomic version of the price-to-earnings ratio followed in the financial markets.

When the profit per dollar of capital invested in the economy is higher than average, future rates of economic growth also tend to be above average. The same cannot be said about rates of return on the S.& P. 500, or any another measurement that commands attention on Wall Street.

Since World War II, the marginal product of capital, after taxes, has averaged 7 percent to 8 percent per year. (In other words, each dollar of capital invested in the economy earns, on average, 7 cents to 8 cents annually.) And what happened during 2007 and the first half of 2008, when the financial markets were already spooked by oil price spikes and housing price crashes? The marginal product was more than 10 percent per year, far above the historical average. The third-quarter earnings reports from some companies already suggest that America’s non-financial companies are still making plenty of money.

The marginal product has accurately reflected hard economic times in the past. From 1930 to 1933, for instance, the marginal product of capital averaged 0.5 percentage points per year less than the postwar average. The profit per dollar of capital was also below average in the year before the 1982 recession and the year before the 2001 recession. Sure, the financial industry has taken a hit, and so have cities like New York that depend on that industry. But the financial system is more resilient today than it has been in the past, because it’s a much easier industry for companies to enter than it was in the 1930s.

When banks failed during the Great Depression, there were not so many foreign investors that were cash-rich (or these days, oil-rich) and appreciative of how some of the bank assets, personnel and brand names in the United States could be used to earn profits in the future. And don’t worry about foreign ownership: Americans would benefit if foreigners brought money into our economy to enable banks to continue to lend.

And if it takes a while for banks and lenders to get up and running again, what’s the big deal? Saving and investment are themselves not essential to the economy in the short term. Businesses could postpone their investments for a few quarters with a fairly small effect on Americans’ living standards. How harmful would it be to wait nine more months for a new car or an addition to your house?

We can largely make up for this delay by extra investment when the banking sector reorganizes itself. Americans waited years during World War II to begin private-sector investment projects (when wartime production displaced private investment), and quickly brought the capital stock (housing and big-ticket consumer items) back to normal levels when the war ended.

So, if you are not employed by the financial industry (94 percent of you are not), don’t worry. The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent.

Casey B. Mulligan is a professor of economics

at the University of Chicago.

    An Economy You Can Bank On, NYT, 10.10.2008, http://www.nytimes.com/2008/10/10/opinion/10mulligan.html

















Adam Zyglis

Buffalo, NY, The Buffalo News        Cagle        9.11.2008

Fidel Castro
















U.S. May Take Ownership Stake in Banks


October 9, 2008
The New York Times


WASHINGTON — 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 was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.

The proposal 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.

This new interest in direct investment in banks comes after yet another tumultuous day in which the Federal Reserve and five other central banks marshaled their combined firepower to cut interest rates but failed to stanch the global financial panic.

In a coordinated action, the central banks reduced their benchmark interest rates by one-half percentage point. On top of that, the Bank of England announced its plan to nationalize part of the British banking system and devote almost $500 billion to guarantee financial transactions between banks.

The coordinated rate cut was unprecedented and surprising. Never before has the Fed issued an announcement on interest rates jointly with another central bank, let alone five other central banks, including the People’s Bank of China.

Yet the world’s markets hardly seemed comforted. Credit markets on Wednesday remained almost as stalled as the day before. Stock prices, which had plunged in Europe and Asia before the announcement, continued to plummet afterward. And stock prices in the United States went on a roller-coaster ride, at the end of which the Dow Jones industrial average was down 189 points, or 2 percent.

The gloomy market response sent policy makers and outside experts on a scramble for additional remedies to stabilize the banks and reassure investors.

There is no shortage of ideas, ranging from the partial nationalization proposal to a guarantee by the Fed of all lending between banks.

Senator John McCain, the Republican presidential candidate, on Wednesday refined his proposal — revealed in a debate with the Democratic nominee, Senator Barack Obama, the night before — to allow millions of Americans to refinance their mortgages with government assistance.

As Washington casts about for Plan B, investors are clamoring for the Fed to lower interest rates to nearly zero. Some are also calling for governments worldwide to provide another round of economic stimulus through expensive public works projects.

Yet behind the scramble for solutions lies a hard reality: the financial crisis has mutated into a global downturn that economists warn will be painful and protracted, and for which there is no quick cure.

“Everyone is conditioned to getting instant relief from the medicine, and that is unrealistic,” said Allen Sinai, president of Decision Economics, a forecasting firm in Lexington, Mass. “As hard as it is for investors and jobholders and politicians in an election year, this crisis will not end without a lot more pain.”

One concern about the Treasury’s bailout plan is that it calls for limits on executive pay when capital is directly injected into a bank. The law directs Treasury officials to write compensation standards that would discourage executives from taking “unnecessary and excessive risks” and that would allow the government to recover any bonus pay that is based on stated earnings that turn out to be inaccurate. In addition, any bank in which the Treasury holds a stake would be barred from paying its chief executive a “golden parachute” package.

Treasury officials worry that aggressive government purchases, if not done properly, could alarm bank shareholders by appearing to be punitive or could be interpreted by the market as a sign that target banks were failing.

At a news conference on Wednesday, the Treasury secretary, Henry M. Paulson Jr., pointedly named the Treasury’s new authority to inject capital into institutions as the first in a list of new powers included in the bailout law.

“We will use all the tools we’ve been given to maximum effectiveness,” Mr. Paulson said, “including strengthening the capitalization of financial institutions of every size.”

The idea is gaining support even among longtime Republican policy makers who have spent most of their careers defending laissez-faire economic policies.

“The problem is the uncertainty that people have about doing business with banks, and banks have about doing business with each other,” said William Poole, a staunchly free-market Republican who stepped down as president of the Federal Reserve Bank of St. Louis on Aug. 31. “We need to eliminate that uncertainty as fast as we can, and one way to do that is by injecting capital directly into banks. I think it could be done very quickly.”

Mr. Paulson acknowledged that the flurry of emergency steps had done little to break the cycle of fear and mistrust, and he pleaded for patience.

“The turmoil will not end quickly,” Mr. Paulson told reporters on Wednesday. “Neither the passage of this law nor the implementation of these initiatives will bring an immediate end to the current difficulties.”

Mr. Paulson will play host to finance ministers and central bankers from the Group of 7 countries this Friday. But he cautioned against expecting a grand plan to emerge from the gathering.

More likely, the participants will compare notes about the measures they are adopting in their own countries. David H. McCormick, Treasury’s under secretary for international affairs, said there was no “one size fits all” remedy for the crisis, though countries were cooperating through the coordinated cuts in interest rates, with guarantees on bank deposits and in regulations.

At the Federal Reserve in Washington, officials insisted they had not run out of options and made it clear they were willing to do whatever it took to shore up the economy.

Fed officials increasingly talk about the challenge they face with a phrase that President Bush used in another context: “regime change.”

This regime change refers to a change in the economic environment so radical that, at least for a while, economic policy makers will need to suspend what are usually sacred principles: minimal interference in free markets, gradualism and predictability.

In the last month, both the Treasury and the Fed took extraordinary steps toward nationalizing three of the biggest financial companies in the country. Last month, the Treasury took over Fannie Mae and Freddie Mac, the giant government-sponsored mortgage-finance companies that were on the brink of collapse. A week later, the Fed took control of the American International Group, the failing insurance conglomerate, in exchange for agreeing to lend it $85 billion.

On Wednesday, the Federal Reserve announced that it would lend A.I.G. an additional $37.8 billion.

But neither the individual corporate bailouts nor the Fed’s enormous emergency lending programs — including up to $900 billion through its Term Auction Facility for banks — have succeeded in jump-starting the credit markets.

“The core problem is that the smart people are realizing that the banking system is broken,” said Carl B. Weinberg, chief economist at High Frequency Economics. “Nobody knows who is holding the tainted assets, how much they have and how it affects their balance sheets. So nobody is willing to believe that anybody else isn’t insolvent, until it’s proven otherwise.”

    U.S. May Take Ownership Stake in Banks, NYT, 9.10.2008, http://www.nytimes.com/2008/10/09/business/economy/09econ.html?hp






U.S. Markets Plunge Despite Hint of Rate Cut


October 8, 2008
The New York Times


WASHINGTON — The promise of lower interest rates and new federal efforts to stem the financial crisis failed to dispel the fear gripping Wall Street on Tuesday.

Stocks rose at the session’s opening but soon began to fall, and the selling intensified during the afternoon, even after Ben S. Bernanke, the chairman of the Federal Reserve, all but pledged to cut interest rates by the end of the month. The Dow Jones industrial average plunged 508 points, or 5.1 percent, extending a slide of months that has erased a third of its value in a year. In the last five trading days alone, the Dow has lost 1,400 points.

With the flow of credit still tight, investors have fixated on the threat of a serious recession despite the increasingly urgent attempts by policy makers to buttress the markets. Deepening problems in the European banking industry have compounded fears of a worldwide downturn.

“The Fed is just plugging holes in the dam and the water keeps rushing over,” said Michael T. Darda, chief economist at the research firm MKM Partners.

In a somber speech, Mr. Bernanke acknowledged that the financial turmoil of the last several weeks had forced the Fed to downgrade its already gloomy economic forecast for the remainder of this year and reconsider holding its benchmark rate steady.

“Over all, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased,” Mr. Bernanke told members of the National Association for Business Economics.

“In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate,” he added — his strongest indication to date that the Fed will cut rates.

Fed policy makers are scheduled to meet on Oct. 28 and 29, and investors had already been betting that the central bank would reduce the overnight federal funds rate by as much as one-half of a percent, to 1.5 percent. But many analysts predict the Fed may act before the next meeting, given the sprawling nature of the credit crisis.

In its latest tactic, the Fed announced on Tuesday morning a new program to buy up parts of the short-term financing market to unlock the flow of credit to businesses. The program, which is expected to begin soon, was the latest and potentially biggest in a series of unprecedented efforts by the Fed to combat the worst turmoil that financial markets in the United States have endured since the Great Depression.

“These are momentous steps,” Mr. Bernanke said, “but they are being taken to address a problem of historic dimensions.”

Only a few weeks ago, the Fed’s official posture was that the risk of rising inflation was almost as big a concern as the risk of slowing growth and rising unemployment.

But on Tuesday, Mr. Bernanke said the outlook for inflation had “improved somewhat” and made it clear that worries about a recession had now trumped worries about rising prices.

While he noted that energy and commodity prices, a significant burden on American consumers, had declined from their recent peaks, he painted a bleak picture of an economy stalling on multiple fronts. The housing collapse has yet to abate, and the slowdown has now spread to other parts of the economy. Unemployment has been rising, household purchasing power has been eroded by inflation and consumer spending, adjusted for inflation, has been falling since May.

Mr. Bernanke made it clear that the latest round of market turmoil would depress growth for the rest of the year. He said he hoped for a gradual recovery in 2009.

President Bush, trying to sound a note of reassurance, said on Tuesday that the $700 billion financial rescue passed by Congress last week was “bold and necessary” and would eventually work to ease the credit crunch. But he warned that the plan would “take time.”

“We’ll work through this,” Mr. Bush said. “We’re taking aggressive steps. And it’s not an easy problem, no question about it. But I am — I am confident in the long term for this country. I’m confident that the steps we’ve taken are bold and necessary.”

Earlier in the day, Mr. Bush spoke by phone with European leaders, including Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, who has proposed an emergency meeting of the so-called Group of 8 leaders of industrialized nations. The White House said Mr. Bush was open to Mr. Sarkozy’s idea.

But the question for Wall Street is why none of these extraordinary, precedent-shattering efforts have stanched the selling that has infected the market for five straight days.

“You are getting all the things that you would think the equity markets would respond very favorably to,” said Steve Sachs, director of trading at Rydex Investments. “But at this point it just doesn’t seem to be doing it. It’s the attitude of ‘sell’ — regardless of what the news is.”

Although investors fled stocks, there were signs on Tuesday that the Fed’s latest plan did have a positive impact on the troubles in the credit market. The cost to borrow commercial paper overnight fell significantly, and yields on Treasury bills rose, a sign that investors were more willing to leave the safe haven of government notes.

But the Dow, which had lumbered downward from early in the session, accelerated its losses in the final hour and ended down 508.39 points, breaking below the 9,500 mark to close at 9,447.11. The broader Standard & Poor’s 500-stock index fell by 5.7 percent, ending below 1,000 for the first time in five years.

The benchmark 10-year Treasury bill fell 14/32, to 104 3/32, and the yield, which moves in the opposite direction from the price, rose to 3.50 percent, up from 3.45 percent late Monday.

Shares of banks and financial firms shouldered the biggest losses by far, with Bank of America, Merrill Lynch and Morgan Stanley all losing about 25 percent.

Fears about the health of the banking industry were stoked by a disappointing earnings report from Bank of America, which had been perceived as one of the few winners in the current crisis. The bank cut its dividend on Monday and said profits fell sharply.

Late in the afternoon, rumors flew across trading desks that a financing deal between Morgan Stanley and a Japanese bank had fallen through. Shares of Morgan fell more than 30 percent before officials at the bank reassured investors that the deal was, in fact, still on track.

In a sign of how the credit crisis is affecting ordinary Americans, the amount of credit provided to consumers in August dropped for the first time since 1998. Consumer credit declined by $7.9 billion, the biggest monthly drop in more than half a century, according to the Fed.

“Nobody trusts anybody right now,” said Ryan Detrick, an analyst at Schaeffer’s Investment Research.

Others said the market could start to recover when credit starts to flow again. But as long as businesses are forced to scramble for cash — and even states like California and Massachusetts have approached the federal government for billions in loans — the economy will only worsen. That brings the prospect of a deep recession.

“There’s a realization that this problem is much bigger than anyone had thought,” said T. J. Marta, a strategist at Royal Bank of Canada. “There’s a fear that the Fed can’t get its arms around it.”

Asian stock markets were moving sharply lower in early trading on Wednesday in response to Wall Street’s losses. The Nikkei 225 index fell in Tokyo soon after the opening of trading, after the Bank of Japan added nearly $15 billion to the financial system.

The Standard and Poor’s/Australian Stock Exchange 200 Index dropped 4.3 percent in early trading on Wednesday morning, more than erasing a gain of 1.7 percent on Tuesday, when Australia’s central bank unexpectedly cut interest rates by a full percentage point.

James Chirnside, who manages $65 million at Asia Pacific Asset Management in Sydney, said that investors feared corporate profits would fall and many companies would fail if banks did not resume lending soon. He recommended a coordinated round of interest rate cuts by central banks to unfreeze interbank lending markets.

“Without that sort of global coordination, we’ll still be hostage to these violent moves in the market,” Mr. Chirnside said.

Following are the results of Tuesday’s Treasury auction of 79-day cash management bills and 4-week bills:

Mr. Andrews reported from Washington and Mr. Grynbaum from New York.

    U.S. Markets Plunge Despite Hint of Rate Cut, NYT, 8.10.2008, http://www.nytimes.com/2008/10/08/business/08markets.html






Op-Ed Columnist

The Testing Time


October 7, 2008
The New York Time


Every few years, the world seems to face a new testing time. After Sept. 11, leaders had to figure out how to respond to Islamic extremism. Now we face another test. Today, leaders around the world have to figure out how to stabilize economies amid volatile global capital flows.

This test is rooted in a global shift in economic power. The rise of China, the vast wealth of the petro-powers and easy monetary policies created an ocean of excess savings that had no obvious place to go.

This money was entrusted to a few thousand traders who sloshed it around the world in search of the highest returns. These traders live in a high-tech version of Plato’s cave. They do not see reality directly. Instead they see the shadow of reality as it dances around in numbers on their computer screens. They form perceptions about other people’s perceptions of where the smart money is going next, so they’re three or four psychological levels removed from normal economic activity.

These traders are driven to take big risks because the glory goes to the biggest stars. And because they are human, they assuage their ensuing uncertainty with self-deceptions. They develop an excessive faith in “value at risk” computer models, which seem to calculate their exposure in soothingly rigorous terms. They adopt accounting techniques that tell them they’re on firm footing. They go in for complicated financial instruments that promise “riskless risk” by dispersing risk into a million small pieces and casting them into the ether.

The economists talk about “mispriced risk” and “illiquidity” in the system. But many economists are trained to downplay emotion, social psychology and moral norms, and so produce bloodless and incomplete descriptions of what’s going on. The truth is, decision-making is an inherently emotional process, and the traders in charge of these trillions become bipolar as a result of their uncertainty.

When things are going well, they don’t think they’re just lucky and riding a wave. They’re infused with a sense that they have it all figured out. When these traders are in their manic phase, they flood countries and economic sectors with capital. Without meaning to, they dissolve the moral fabric and spoil their own profit zones.

Easy money severs actions from their consequences. National leaders find they can run up huge deficits with no negative effects. Congressmen lean on Fannie Mae and Freddie Mac to acquire more and more risk. Highly regulated banks find they have money to lend far and wide, and everyone else finds credit is easy. Families decide they can afford homes and lifestyles beyond their means.

It all feels great until it doesn’t. Then when things go bad, the social contagion sweeps the other way (the computer risk models never quite get this). One minute there’s an ocean of credit, the next minute there’s barely a drop. Once ebullient traders become paranoid, realizing how little they know about their trading partners. They refuse to acknowledge the true value of their portfolios. Everything stops.

At these moments, central bankers and Treasury officials leap in to try to make the traders feel better. Officials pretend they’re coming up with policy responses, but much of what they do is political theater. In reality, they’re trying to cajole, bluff and calm their audience of global money-sloshers.

This is more than a mortgage problem. We live in a world in which trillions of dollars can move instantly, but they are in the hands of human beings who are, by nature, limited in knowledge, and subject to self-deceptions and social contagions. By one count, financial crises are twice as prevalent now as they were 100 years ago.

In his astonishingly prescient book, “The World Is Curved: Hidden Dangers to the Global Economy,” David M. Smick argues that we have inherited an impressive global economic system. It, with the U.S. as the hub, has produced unprecedented levels of global prosperity. But it has now spun wildly out of control. It can’t be fixed with the shock and awe of a $700 billion rescue package, Smick says. The fundamental architecture needs to be reformed.

It will take, he suggests, a global leadership class that can answer essential questions: How much leverage should be allowed? Can we preserve the development model in which certain nations pile up giant reserves and park them in the U.S.?

Until these and other issues are addressed, the global markets will lack confidence in asset values. Bankers will cower, afraid to lend. America’s role as the global hub will be threatened. Europeans will drift toward nationalization. Neomercantilists will fill the vacuum.

This is the test. This is the problem that will consume the next president. Meanwhile, the two candidates for that office are talking about Bill Ayers and Charles Keating.

    The Testing Time, NYT, 7.10.2008, http://www.nytimes.com/2008/10/07/opinion/07brooks.html






Financial Crisis Takes a Toll on Already-Squeezed Cities


October 7, 2008
The New York Times


CHICAGO — After the layoff of 160 full-time and part-time city workers, the slashing of recreation programs and a call for volunteers to shelve books at the branch libraries (open two days a week now instead of six), the people of Duluth, Minn., thought they had seen the worst of a bad year for the municipal budget.

To help close a gap of more than $6 million that yawned open over the summer, the artsy shipping city on Lake Superior had considered selling its prized Tiffany stained-glass window depicting Longfellow’s American Indian character Minnehaha, a one-of-a-kind work donated by a civic group more than 100 years ago. And some even pushed forward with plans to sell valuable beachfront property along the lake. The city had options, things were looking up.

But then Wall Street struck. With tax receipts from retail sales and property values plummeting as unemployment rises along with fuel costs, city officials in Duluth and across the country say they are feeling increasingly squeezed and helpless as the national economic crisis eats away at the core sources of municipal revenue.

Add to that the abrupt and unexpected loss over the last several weeks of usually sound investments and credit in the municipal bond markets — the place to which local governments turn for relatively cheap, fast money — and it becomes clear that cities are facing their own financial crisis, arguably the worst in decades.

In Duluth, for instance, a $3 million investment the city made last summer through Merrill Lynch, which was sold to Bank of America last month, was liquidated and came back last week $2.25 million short — a devastating setback for a city.

“We are getting close,” said Don Ness, the mayor of Duluth, population 88,000, with 800 full-time city workers. “But it seems there is new bad news every week that puts us further behind. We have no cushion available to us. And we now lack the finance tools that could have assisted us getting through our current financial crisis.”

While some of the nation’s largest cities have had perennial budget trouble and others have a history of suffering since the demise of major manufacturing, some of the cities that are facing economic hardship this time around were used to balancing their budgets without too much trouble.

And the largest are struggling even more than usual: Los Angeles and Chicago are each facing shortfalls in the $400 million range. In New York, Mayor Michael R. Bloomberg last month ordered $1.5 billion in cuts over two fiscal years, and the financial situation is worsening by the day as Wall Street continues to struggle.

“If they do their cuts and lay back on services and are still in the red and have to issue a bond or a note, the climate is not the best,” said Steve McLaughlin, a director of Municipal Market Advisers, an independent advisory firm. “If they need money quickly through a bond issuance, it’s going to be hard to get. There are a whole host of new challenges.”

Cities as varied as Duluth, Phoenix and Atchison, Kan., have had to cut back and, in some cases, make drastic reductions that affect the quality of life for their residents.

All over the country, parks are being sold, fees for routine services are going up and city workers are being laid off.

Even prosperous Tempe, Ariz., is facing a loss of 75 to 100 city positions — 5 percent to 8 percent of its municipal work force — to help close a budget gap.

“We are very well-positioned, but that is a relative statement,” said Mayor Hugh Hallman of Tempe. “We are obviously in the same boat that the whole U.S. and, frankly, global economy is in. A city like Tempe is hard-pressed to control everything about its own destiny.”

In a survey of more than 300 municipalities released last month, the National League of Cities reported that four out of five finance officers said their cities would be less able to meet needs in 2009 than this year. The group called the findings troubling, with no sign of getting better.

“This is the first time for at least two decades that all three major general tax sources — property, income and sales — have all declined at the same time,” said Michael A. Pagano, a co-author of the report and dean of the College of Urban Planning and Public Affairs at the University of Illinois, Chicago. “That’s the real frightening thing for cities.”

“It’s not like the 2000 or 1991 recessions; those hit the coasts first and flowed to the middle,” Dr. Pagano continued. “This one doesn’t differentiate between high-tech and low-tech cities, manufacturing towns or new exurbs.”

“We’re watching housing prices decline still,” Dr. Pagano added. “The property tax receipts on that property today won’t be collected for at least 18 months. That puts us in fiscal 2010. So, for at least the next two fiscal years, we’re going to be feeling the lingering effects of the real estate decline.”

Cities typically begin to look for cost savings in areas like the arts and recreation, then move, when pressed, to services like police and fire protection, or trash pickups. Many cities have already arrived at the latter stage.

“We try to cut programs and services that impact the public the least,” said Toni Maccarone, a spokeswoman for the City of Phoenix. “Unfortunately, this time around, there’s going to be direct service cuts. That’s what makes it so hard. It’s police and fire, and parks and senior services, libraries.”

Some cities, like Duluth, are constantly juggling ideas to stay afloat, even if they do not come to fruition. The city decided this week, for instance, that it will not part with its Minnehaha window despite the financial crisis. But the plan to sell the beachfront property is going forward, and, Mayor Ness said, it could bring in as much as $2 million — a big step toward a balanced budget.

Atchison, a city in northeast Kansas with a population of just over 10,000, had begun what it considered a risky pattern of spending down its reserves to make ends meet. This year, however, to stem the bleeding it is consolidating several departments, enacting a 23 percent property tax increase, and asking employees to pick up a larger part of their health care costs.

It will also be losing one of its 22 police officers and its only construction management position. Atchison relies on sales taxes for more than a quarter of its almost $6 million general fund budget.

“When you already have a really trim work force, then any cuts hurt even more,” said Justin Der, the city manager.

Phoenix, with its population of 1.5 million, has a much larger budget than Atchison but it, too, is largely reliant on sales taxes. In the last fiscal year, the city adopted a budget that included $89 million in cuts.

“Unfortunately, the economy hasn’t improved; it’s gotten worse so all departments are currently working on another 30 percent cut,” Ms. Maccarone said. “When people aren’t shopping — buying new cars and refrigerators and other big-ticket items — we’re not getting the revenue.”

“We are trying to be as creative as we can,” she said. “It’s been challenging. We’re just started our new fiscal year, and our forecast is just terrible.”

    Financial Crisis Takes a Toll on Already-Squeezed Cities, NYT, 7.10.2008, http://www.nytimes.com/2008/10/07/us/07citybudgets.html






Wall Street’s Tremors Leave Harlem Shaken


October 8, 2008
The New York Times


Before its economic turnaround in recent years, Harlem was a case study in disinvestment.

Banks were unwilling to make mortgage loans or to open branches, national chain stores could not be lured uptown, city services lagged and the neighborhood became economically isolated from the rest of Manhattan. This has given way in the past decade to a resurgence, as national chains like Starbucks and American Apparel have moved to 125th Street and housing prices have steadily risen.

But the collapse of century-old financial institutions like Washington Mutual Savings Bank, Bear Stearns and Lehman Brothers has left Harlem facing a double loss: The disappearance of companies that helped propel the resurgence will not only make it immediately more difficult to get loans and mortgages or for large commercial projects to be built, but will also lead to the loss of millions of dollars in charitable contributions from those same companies. That will affect everything from children’s health and adult literacy to the Apollo Theater’s famed amateur night.

The effect in Harlem of these companies’ failure is an example of the long — and in some cases, unexpected — reach of Wall Street across the city, even in neighborhoods with high poverty rates, and where relatively few people work as stockbrokers or investment bankers.

“People talk about Wall Street greed, but one of the things many people don’t understand is that there are a lot of organizations that have been the recipient of largess from the same Wall Street,” said Geoffrey Canada, president and chief executive of Harlem Children’s Zone, one of the neighborhood’s largest private, nonprofit groups. “Their absence leaves us scrambling to replace what has been a significant amount of support.”

The relationships between Harlem and the companies ranged from the personal — 240 Lehman Brothers employees helped build a six-unit apartment and tutored children in mathematics each Saturday — to the symbolic: Washington Mutual had its name on the marquee of the Apollo as the primary sponsor of amateur night.

Then there is the strictly financial: Bear Stearns provided critical funds for the $85 million Harlem Center, a retail and office complex on 125th Street that includes, among other businesses, a Washington Mutual branch.

The tight credit market will very likely have other consequences in Harlem as well, observers said, most significantly a slowdown in economic development, which could moderate the neighborhood’s rapid gentrification.

“One of the factors that led to the changes was high housing prices in the rest of the city, which pushed people who would not have otherwise moved to Harlem into Harlem,” said Lance Freeman, an urban planning professor at Columbia University and the author of “There Goes the ’Hood,” a book on gentrification in Harlem and Clinton Hill in Brooklyn. “So if housing prices in other parts of the city stop rising, that could reverse or stall some aspects of the cycle of change.”

Much of that change during the past five years has been the result of millions of dollars in private investment, some by Wall Street companies. In recent years, so many banks sprouted up along 125th Street — more than 15 — that the city approved a zoning law this year that limits banks there. That legislation will also allow for high-rise office towers and some 2,100 new market-rate condominiums to be built along Harlem’s main artery, effectively transforming the predominately low-rise avenue.

Last week, representatives from Lehman Brothers, Bear Stearns, Washington Mutual, Merrill Lynch and A.I.G. — institutions that have foundered in various ways in recent months — did not return calls seeking comment or said it was too early to determine their investment and philanthropic strategies in Harlem.

Business owners in the neighborhood, however, are worried.

Lloyd Williams, president and chief executive of the Greater Harlem Chamber of Commerce, listed several troubling signs: an already high local unemployment rate is climbing, seasonal jobs with the Postal Service and department stores have not materialized, credit for small businesses has all but dried up, and construction and rehab work on brownstones has slowed considerably.

“There’s an old saying, ‘When New York City sneezes, Harlem has pneumonia,’ ” Mr. Williams said.

The other major concern is the loss of millions of dollars each year in charitable giving from the financial industry to community organizations, including schools and hospitals.

W. Franc Perry, chairman of Community Board 10, which covers central Harlem, said many of the grants came only after years of putting pressure on the companies.

“We have held these companies’ feet to the fire, told them, ‘If you want our dollars, you’ve got to help us out,’ and they’ve been helping,” Mr. Perry said. “Now, this is all so new. There are so many unanswered questions, including whether they will continue to invest in Harlem.”

Among the organizations that have benefited the most in recent years is Harlem Children’s Zone, which runs a variety of programs focused on improving the lives of children in the neighborhood.

Among its contributors have been A.I.G. and Lehman Brothers, which had pledged $3 million before its collapse last month. Lehman also helped the organization with its telephone and security systems and sent volunteers to teach children math and finance each week. The status of the Lehman aid is unclear, but Mr. Canada, the nonprofit group’s president, said he might need to cut back.

“There’s not another entity ready and able to fill in, especially in this financial climate,” he said.

The Apollo has been another favored recipient of Wall Street aid. Merrill Lynch underwrote tours for schoolchildren. Nadja Fidelia, a managing director at Lehman Brothers, became a member of Apollo’s board of directors. Lehman had pledged $1 million to the Apollo’s education and outreach initiative.

This year, Washington Mutual became the primary sponsor of the theater’s 74-year old talent contest when it was renamed WaMu’s Apollo Amateur Night. An Apollo spokeswoman declined comment on the bank’s sponsorship or the future of the theater’s educational programs, which include literacy training and free nights out for poor families.

JPMorgan Chase, which bought Washington Mutual and Bear Stearns recently, has been active in Harlem philanthropy, particularly since the 1990s, when the bank embarked on a series of mergers with other financial companies.

It now inherits a portfolio that includes, among other things, an after-school squash and tutoring program started by Bear Stearns; a pledge by Washington Mutual to establish home loan centers in underserved communities like Harlem; and Washington Mutual’s sponsorships of several neighborhood cultural institutions, including the annual Harlem Week celebration and the Dance Theater of Harlem.

A spokeswoman for JPMorgan Chase would not comment about the bank’s plans for the future.

The unusual confluence of Harlem and Wall Street might best be represented by a nonprofit lacrosse organization called CityLAX, whose board includes members of Lehman Brothers, Merrill Lynch and Bear Stearns.

Since 2005, the group, heavily supported by financial industry employees who grew up playing the game, has persuaded the city’s Department of Education to start lacrosse teams around the city, including in two Harlem public high schools. In Harlem, most students had never heard of the sport, and when participants board city buses on their way to practice, their lacrosse sticks in hand, they draw confused stares from almost everyone who looks their way.

The project is jointly financed: funds for equipment, transportation and playing fields comes from the group, and the coaches are paid by the school system. But since the failures of Lehman, Merrill and Bear, the future of the programs, at A. Philip Randolph Campus High School and Frederick Douglass Academy, are uncertain.

“Our work is vulnerable,” said Mathew J. Levine, president and chief executive of CityLAX. “A lot of our kids are not the elite athletes in the school, but this is a chance for them to play, so we’re pulling kids from the margins who would not necessarily be involved in an organized athletic activity. And we think that’s good.”

    Wall Street’s Tremors Leave Harlem Shaken, NYT, 8.10.2008, http://www.nytimes.com/2008/10/08/nyregion/08harlem.html






Fed will fund short-term business loans


7 October 2008
USA Today
By Jeannine Aversa, AP Economics Writer


WASHINGTON — The Federal Reserve announced Tuesday a radical plan to buy short-term debt in an effort to break through the credit clog that threatens the economy.

The Federal Reserve, invoking Depression-era power under "unusual and exigent circumstances," will buy commercial paper, a short-term I.O.U. that companies issue to finance day-to-day operations, such as purchasing supplies or making payrolls.

The $99.4 billion daily market for this crucial short-term financing has virtually dried up. Most investors have become too jittery to buy commercial paper for longer than a couple days.

That has made it increasingly difficult and expensive for companies to raise money.

Up to $1.3 trillion in commercial paper will be eligible to be bought in the program. But Federal Reserve staff members say they do not think they will need to buy nearly that much in order to significantly thaw the commercial paper market. They anticipate the program, which has been in the works for several weeks, will lead to much lower rates and credit availability in the key market.

Details, including when the Fed will first make purchases, are still being worked out, staff said in a call with reporters.

The unstable situation has left many companies vulnerable. The notion under the plan is for the government to provide a "backstop" that would give companies a new place to get cash, the Fed said. The action makes the Fed a source of credit for nonfinancial businesses in addition to commercial banks and investment firms.

The Fed says it is creating a new entity to buy three-month unsecured and asset-backed commercial paper directly from eligible companies.

"The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors have become increasingly reluctant to buy commercial paper, especially longer-dated maturities.

As the market for commercial paper shrank, the Fed said rates on the longer-term debt "increased significantly," making it more expensive for companies to borrow.

The Treasury Department, which worked with the Fed on the program, says Tuesday's action is "necessary to prevent substantial disruptions to the financial markets and the economy."

The Treasury will provide money to the Federal Reserve Bank of New York to support the program, the Fed said. It did not say how much.

If a company's commercial paper is not backed by assets or other forms of security acceptable to the Fed, the company could pay an upfront fee, the central bank said.

The Fed says it hopes this effort will jolt the commercial paper market back to life.

"This facility should encourage investors to once again engage in term lending in the commercial paper market," the Fed said. That should eventually spur financial companies to lend to each other and to their customers, including consumers, the Fed said.

The Fed said it plans to stop buying commercial paper on April 30, 2009, unless the Federal Reserve board agrees to extend the program.

There was $1.61 trillion in outstanding commercial paper, seasonally adjusted, on the market as of last Wednesday, according to the most recent data from the Fed. That was down from $1.70 trillion in the previous week. Since the summer of 2007, the market has shrunk from more than $2.2 trillion.

Contributing: Barbara Hagenbaugh

    Fed will fund short-term business loans, UT, 7.10.2008, http://www.usatoday.com/money/markets/2008-10-07-commercial-paper_N.htm






Talking Business

A Day (Gasp) Like Any Other


October 7, 2008
The New York Times


Is it ever going to end?

We woke up Monday morning, all of us, hoping for the best but bracing for the worst. The federal government’s $700 billion bailout package had been passed into law, which offered hope of a respite from this unrelenting crisis — or at least a chance to catch our breath.

We all needed a break. But we didn’t get one. Instead, we got yet another horrible weekend. In Europe, the credit contagion raged like a wildfire. The Dutch government seized Fortis, the Belgian-Dutch bank. The German government bailed out a huge lender, Hypo Real Estate. European governments raced to follow Ireland’s lead and guarantee all bank deposits, fearing that if they didn’t, depositors would move their money to “safer” countries with guarantees. The euro and the British pound sank against the dollar.

In America, meanwhile, Citigroup, Wachovia and Wells Fargo spent the weekend in a circus of court hearings, as Citigroup tried to get a state judge to enforce its F.D.I.C.-approved merger agreement with Wachovia — while Wells Fargo and Wachovia sought out other judges, both state and federal, to overrule him, and allow the Wells Fargo offer to proceed. Not exactly confidence-inspiring.

And by the time we got in the shower Monday morning, we knew what the day foretold: bailout law or not, the Asian markets had been hammered. European markets were falling. Russia shut down trading. So did Brazil. In the United States, the Dow dropped a frightening 800 points by midafternoon. It rallied in the last hour of trading, closing down “only” 370 points. That wasn’t confidence-inspiring either.

But the situation on Monday was far worse in the credit markets — as has consistently been the case during the crisis. “There is no liquidity anywhere,” one hedge fund manager told me. “No lending available. No interbank lending available. The fixed-income market is completely shut down. There is no activity going on anywhere.” (He asked me not to use his name because he didn’t want to spook his investors.)

The Federal Reserve announced yet another enormous injection of liquidity into the system Monday morning, saying it would make as much as $900 billion available. “What the Fed said was that it wasn’t just opening the window,” said Daniel Alpert, managing partner at Westwood Capital. “It is taking out the window sill and chipping out the bricks around it.”

The Fed’s move was barely noticed. Now there’s talk of another intervention by the Federal Reserve to help thaw the frozen credit markets by buying up short-term commercial debt.

“What I am worried about with all these bailouts,” said the great Wall Street historian Ron Chernow, “is whether they are going to eventually tax the resources of the federal government. The numbers are already getting very, very large. What is especially scary and unsettling is that even actions of this magnitude have not seemed to restore confidence. Each time, you thought that would be the one to stop the contagion. It hasn’t happened.”

This panic is taking place in such a compressed time frame that it is just astonishing. Mr. Chernow pointed out that while the stock market crash of 1929 took place over three brutal trading days in October 1929, it took nearly three years to reach bottom. By then, stocks had lost a shocking 89 percent of their value.

This crisis, by contrast, seems to be moving at hyper-speed — one day it is Lehman Brothers, the next A.I.G., the day after that Washington Mutual. This crisis doesn’t wear you down over time. It hits you over the head with a two-by-four. On a daily basis.

Of course the crisis is also playing out in Washington, and that is where the spotlight shifted Monday afternoon. Richard S. Fuld Jr., the longtime chief executive of Lehman Brothers, was testifying before the House Committee on Oversight and Government Reform. The committee’s chairman is Henry Waxman, the Democrat of California who loves nothing more than raking C.E.O.’s over the coals. The blame game was starting in earnest.

To give him his due, Mr. Waxman has conducted hearings that have been truly important. In one of the most memorable scenes in modern Congressional history, Mr. Waxman pushed the chief executives of the country’s biggest tobacco companies to deny under oath in 1994 that cigarettes were addictive and caused cancer. He was also the congressman who gave the country its first up-close look in 2002 at the combative, delusional personality of Jeffrey Skilling, the former Enron chief executive.

But Monday’s hearing was illuminating only in what it showed about Congress’s sorry willingness to use a national emergency to score political points. Representative Carolyn Maloney, Democrat of New York, pressed a panel of experts who appeared before Mr. Fuld to say whether the crisis had been caused by the abolition of Glass-Steagall, the Depression-era law that had separated commercial banks from investment banks. (“Yes or no!” she demanded.)

She was implying that Republicans were the villains by tearing down financial regulation — which may well be true, though the example she picked was a poor one. The companies that have best withstood the crisis are those that took advantage of the end of Glass-Steagall to form one-stop-shopping banks: Citigroup, JPMorgan and Bank of America. The companies that have fallen are the stand-alone investment banks: Bear Stearns, Lehman Brothers and Merrill Lynch.

Representative John Mica, Republican of Florida, railed about the lack of witnesses from Fannie Mae and Freddie Mac — “Any hearing that does not start with Fannie is a sham,” he complained. He was trying to pin the crisis on Democrats, for pushing Fannie and Freddie to offer more mortgages to low-income home buyers. That has become the Republican rallying cry. It too has a grain of truth but it is hardly the whole truth.

For his part, Mr. Waxman seemed to care only about one thing: the tens of millions of dollars Mr. Fuld pocketed as Lehman’s chief executive. “Is it fair?” he kept asking — a question Mr. Fuld was never going to answer, as Mr. Waxman well knew. But he wasn’t looking for a real answer. This was theater.

Which is a shame. This hearing was billed as an effort to get to the bottom of the Lehman collapse. That would be genuinely useful for the country to understand. Flogging Mr. Fuld on his compensation — enjoyable though it must have been for Mr. Waxman — was a sideshow.

Mr. Fuld, in typical C.E.O. fashion, claimed to take “full responsibility” for his actions — but spent the entire time blaming others for Lehman’s downfall. Early in his testimony, he even blamed “naked short-sellers” who passed along “false rumors” that started a run on his bank. As both The New York Times and The Wall Street Journal pointed out in lengthy stories on Monday, Mr. Fuld had assets on his books that were wildly overvalued.

It may well be that failing to save Lehman was the single worst mistake the government has made in this crisis — the event that set off this latest, scariest stage. But Lehman’s own mistakes put it in a position where only a government bailout could save it. This, however, is not something Mr. Fuld was prepared to admit.

Sad to say, the crisis does not appear to be winding down. One reason the market acted so skittishly Monday is that it simply can’t wait six weeks or so before the government is ready to start buying the first $250 billion worth of toxic securities from troubled firms. In normal times, this would seem blazingly fast. In these compressed times, it seems terribly slow. The markets want to know — right now — whether the bailout plan will work.

Another reason is that certain ominous dates are fast approaching. One is Oct. 23, when the auction will take place to settle the credit-default swaps relating to the Lehman bankruptcy. I saw one estimate that the amount of money firms will owe each other could be as much as $400 billion. Why? Firms that insured against the risk of a Lehman default are going to owe billions to other firms — but they’ll want to collect from the firms with whom they laid off the risk. And so on down the line. The upshot is that many firms are not going to have the money to pay off the insurance claims they owe, and they are likely to be ruined.

A third problem, though, is that confidence keeps eroding. The latest wrinkle is that many hedge fund investors, fearing big losses, no longer have confidence in their hedge fund managers. Thus, hedge fund managers are preparing for huge withdrawals at the end of the year, and so they are selling billions of dollars worth of stock preparing to pay redemptions. That is one reason the stock market is under pressure.

“It becomes a self-fulfilling prophecy,” said one hedge fund manager. Firms fearing redemptions sell off stocks, which hurts their performance. Which undermines their investors’ confidence. Which means there are likely to be even more redemptions. Around and around it goes.

Twelve years ago, Alan Greenspan invented the term “irrational exuberance.” That era seems tame compared with this one. What is going on in the markets is anything but exuberant — at this point, though, it is undeniably irrational.

    A Day (Gasp) Like Any Other, NYT, 7.10.2008, http://www.nytimes.com/2008/10/07/business/07nocera.html?hp






Global Fears of a Recession Grow Stronger


October 7, 2008
The New York Times


WASHINGTON — When the White House brought out its $700 billion rescue plan two weeks ago, its sheer size was meant to soothe the global financial system, restoring trust and confidence. Three days after the plan was approved, it looks like a pebble tossed into a churning sea.

The crisis that began as a made-in-America subprime lending problem and radiated across the world is now circling back home, where it pummeled stock and credit markets on Monday.

While the Bush administration’s bailout package offers help to foreign banks, it seems to have done little to reassure investors, particularly in Europe, where banks are failing and countries are racing to stave off panicky withdrawals after first playing down the depth of the crisis.

Far from being the cure for the world’s ills, economists said, the rescue plan might end up being a stopgap for the United States alone. With Europe showing few signs of developing a coordinated response to the crisis, there is very little on the horizon to calm rattled investors.

The vertiginous drop in stock markets on both sides of the Atlantic on Monday reflected not only those fears, experts said, but also a growing belief that the crisis could tip the world into a global recession.

Indeed, the ripple effects from Europe and the United States were amplified as they spread to stock markets in Russia, Brazil, Indonesia and the Middle East.

These countries had little to do with the subprime crisis but were vulnerable to a sudden halt in the flow of money. They lack even the veneer of national or regional cooperation that protects Europe and the United States. Stock markets in emerging economies recorded their worst one-day decline in 21 years on Monday, with trading in Russia and Brazil halted to stem an investor panic.

“It looks pretty ugly down the road,” said Simon Johnson, an economist at the Massachusetts Institute of Technology and a former chief economist of the International Monetary Fund who specializes in financial crises. “Everybody is going to get caught up in this.”

The global nature of the crisis and its growing collateral damage ought to galvanize countries to work together to fashion a concerted response, Mr. Johnson said. There is a chance to do that this week, with dozens of finance ministers and central bankers converging on Washington for the annual meetings of the I.M.F. and the World Bank.

The trouble is, these institutions no longer have the resources or authority to lead such an effort. The I.M.F., which played a central role in the Asian crisis, has been relegated to the sidelines this time — its credibility tarnished by that episode and its skills ill-suited to a crisis in advanced economies. These days, it mainly issues lonely warnings about the impact on developing countries.

The Group of 7, which once functioned as a sort of command center for the global economy, is similarly depleted, according to critics. It no longer represents the world’s economic drivers, they said, and badly needs to be expanded to include rising powers like China and India.

“The globalization of the crisis means we need a globalization of responses,” said C. Fred Bergsten, the director of the Peterson Institute for International Economics. “But most of the responses will be national. For all the institutions we have, we don’t have the right institutions to do this.”

That is particularly true in Europe, which has an effective central bank but lacks a unified legislature or treasury to coordinate or finance a rescue of the banking system. So far, economists say, Europe’s response to the crisis in its banks has been mostly marked by denial and dissension.

From London to Berlin, governments are clinging to a piecemeal approach. The British and the Germans have resisted a broader solution, because they fear they will end up rescuing their neighbors.

A weekend meeting of European leaders in Paris, called by President Nicolas Sarkozy, ended with a pledge that Europe would not countenance a bank failure like that of Lehman Brothers, but little else.

Part of the problem, experts said, is the nature of this crisis: bailouts of banks are costly and unpopular with taxpayers — even more so, as in Europe, where burden sharing is a perennial sore point.

“Taxpayers won’t agree to bail out the banking system of other countries,” said Thomas Mayer, the chief European economist at Deutsche Bank in London. “Not even in Europe, where you have a neutral framework, could you get people to cooperate on a joint effort.”

As the problems in Europe have worsened, the crisis has taken on an “every country for itself” quality. When Ireland placed a guarantee on all bank deposits and debt last week, it angered neighbors, who feared capital would flee their banks to the safer haven of Dublin. Now, Germany, Sweden, Denmark and Austria have all pledged to guarantee deposits.

“If you do this one by one, it destabilizes people’s deposits in other countries,” Mr. Johnson said. “It’s mind-boggling that the Europeans have coordinated so little up until this point.”

With Europe and the United States deep in crisis, economists said, the rest of the world could not help but suffer. Robert B. Zoellick, the president of the World Bank, warned that the crisis could be a “tipping point” for the developing world.

“A drop in exports, as well as capital inflow, will trigger a falloff in investments,” Mr. Zoellick said in a speech on Monday. “Deceleration of growth and deteriorating financial conditions, combined with monetary tightening, will trigger business failures and possibly banking emergencies.”

The immediate danger, economists say, are countries in Eastern and Central Europe, like Bulgaria and Estonia, which run steep trade deficits and are vulnerable to a sudden flight of foreign capital.

Iceland, with an overheated economy and suffocating foreign debt, may prove to be the first national casualty of the crisis. On Monday, threatened by a wholesale financial collapse, the government in Reykjavik assumed sweeping powers to intervene in its banking industry.

“We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy,” Prime Minister Geir H. Haarde said on Monday.

But with global growth slowing sharply, the problems could spread to larger emerging markets, even China, which has a hefty current account surplus and immense foreign reserves.

“Where is China going to sell its exports?” Mr. Johnson of M.I.T. said. “Everyone is going into recession at the same time.”

This week, the focus will be on the Group of 7, whose finance ministers and central bankers are scheduled to meet on Friday at the Treasury Department. The group issued a perfunctory statement of support for the United States, after the Treasury secretary, Henry M. Paulson Jr., briefed members about the rescue plan in a conference call two weeks ago.

But European finance ministers, notably Peer Steinbrück of Germany, noted that the crisis began in the United States, and played down the need for a systemic European response.

Mr. Zoellick, in his speech, said flatly that the Group of 7 “is not working.” He advocates expanding the group — which includes the United States, Canada, Britain, Italy, France, Germany and Japan — to include emerging economies like Brazil, China, India and Saudi Arabia.

The urgency of the moment, experts said, demands a bolder response from the Group of 7. Mr. Bergsten said the group should commit to a coordinated stimulus plan to stave off a recession.

“Just as the U.S. rescue plan may not be enough,” he said, “a U.S. stimulus plan by itself will not be enough.”

    Global Fears of a Recession Grow Stronger, NYT, 7.10.2008, http://www.nytimes.com/2008/10/07/business/worldbusiness/07global.html?hp






Dow Drops Under 10000 as Bank Woes Persist


OCTOBER 6, 2008
2:28 P.M. ET
The Wall Street Journal


Deepening fear that the global economy is ailing beyond the capacity of policy makers to cure it sent stocks sharply lower on Monday.

The Dow Jones Industrial Average tumbled below the 10000 mark for the first time since October of 2004, recently falling by more than 700 points to roughly 9615. All 30 of the measure's components were in the red, with financial names like Citigroup and American Express tumbling by more than 10% each.

Markets were rattled overnight after German regulators were forced to step in and save Hypo Real Estate Holding, in the latest in a series of bailout for banks in Europe. The move kept concern about further bank failures around the world high and sent European stock markets sliding, setting a bleak tone for trading in the U.S.

Government officials have been scrambling to stanch the bleeding in financial markets. Last week, President George W. Bush signed the $700 billion rescue package for ailing banks into law. And on Monday, the Federal Reserve said it would begin paying interest on commercial banks' reserves and expand its loan program for squeezed financial institutions. But the notion that there will be no quick fix for the problems besetting Wall Street -- and the economy -- appeared to be setting in with investors Monday.

"People are looking at the [stock] market's fundamentals and realizing how long it's going to take to see some real relief," said Doreen Mogavero, president and chief executive of the New York floor brokerage Mogavero Lee & Co. Ms. Mogavero said that Monday's session didn't seem like a round of capitulation, or last-ditch selling to mark a market bottom.

"Yes, it's a big move, but there hasn't been the sort of volume behind it that we'd like to see," in order to confirm that there isn't another wave of sellers still waiting on the sidelines, she said.

Credit markets also continued to show signs of stress. The cost of borrowing overnight U.S. dollar funds in the interbank market had risen to 2.36875%, up from Friday's fixing of 1.99625%. Yields also fell sharply as investors again flocked to U.S. government debt. The yield on three-month Treasury bill fell to near 0.4%, showing that investors are willing to accept almost no returns in exchange for the certainty that they'll get their cash back in hand after marking a short-term loan to the government.

The benchmark 10-year note gained 1-10/32 to yield 3.442% as investors rushed to move money into Treasurys and away from riskier assets like shares.

"This is just about fear right now, and whether stocks are going to close down 200 or 900 points," said Rick Klingman, managing director o fTreasury trading at BNP Paribas.

The S&P 500 was recently down 6.1%, trading at 1032.23. All its sectors fell, led by economically sensitive categories like energy, down 8.9% amid a steep drop in oil prices; basic materials, which slid 7.3%; and industrials, down 5.1%. Bank shares continued to fall, pushing the S&P financial sector down 6.8%.

The Nasdaq Composite Index dropped lost 7.2% to trade at 139.56. The small-stock Russell 2000 was down 6.4%, trading at 579.68.

Oil futures tumbled $5.15 to $88.73 a barrel due to traders' concerns that fuel demand will suffer as the global economy slows in the months ahead. Other raw materials suffered from similar concerns. The broad Dow Jones-AIG Commodity Index was off almost 5% in recent action.

Gold, which is traditionally viewed as an investor haven rather than an industrial resource, was a notable exception to the commodity selloff. Futures on the yellow metal were recently up $33.60 trading at $866.80 per ounce in New York.

In economic news, the Conference Board said its employment trends index, an aggregate of eight labor-market indicators, fell 0.8% to 108.4 in September, down from a revised 109.3 in August. The index is down almost 10% from a year ago, suggesting that the U.S. labor market is likely to deteriorate sharply in the months ahead.

"The deterioration in the Employment Trends Index has become very pronounced, suggesting that the unemployment rate may very well exceed 7% as early as the second quarter of 2009," said Gad Levanon, senior economist at the Conference Board. "The persistent slackening in labor market conditions, worsened by the financial crisis, has reached a level that in the past led to significantly slower wage growth across most industries."

Charles Evans, president of the Fed's Chicago branch, said in a speech at an event sponsored by the Association for Technology in Lost Pines, Texas, that U.S. economic growth is "likely to be quite sluggish" into 2009, with the timeline for any recovery quite uncertain.

The dollar was mixed against major rivals. One euro recently cost $1.3477, down from $1.3806 late Friday. A dollar fetched 100.67 yen, down from 105.14 yen.

—Emily Barrett, Madeleine Lim, and Stephen Wisnefski contributed to this article.

    Dow Drops Under 10000 as Bank Woes Persist, WSJ, 6.10.2008, http://online.wsj.com/article/SB122328868571207285.html






Stocks Fall Sharply on Credit Concerns


October 7, 2008
The New York Times


The selling on Wall Street began at the opening bell on Monday and only intensified as the morning went on. Shares moved sharply lower as the banking crisis tightened its grip on the global economy.

The Dow Jones industrial average fell below 10,000 for the first time since 2004 after losing more than 500 points in the first hour. The index has lost more than 1,100 points — or about 10 percent — in slightly more than a week.

At 11:15 a.m., the Dow was down 404 points or 3.9 percent.

The broader American stock market was down more than 4.4 percent, as measured by the Standard & Poor’s 500-stock index, its worst decline since last Monday’s 8.8 percent drop. At the same time, oil dropped below $90 a barrel.

The precipitous declines, which accelerated as the morning wore on, came a day after European governments were forced to scramble to save several major banks and lenders from collapse. The moves reinforced the global reach of the current crisis and alarmed depositors and regulators in the United States and abroad.

European stocks fell even further, with the major indexes in London, Paris, and Frankfurt down nearly 7 percent.

The sharp slides came despite a morning announcement from the Federal Reserve, which said it would significantly expand the amount of money it makes available to major banks. The Fed will now lend up to $900 billion in credit, an enormous sum that officials hope will reassure banks that the government will provide them with adequate capital.

The moves were aimed at resolving a problem at the center of the current credit crisis: the reluctance of banks to lend. The healthy functioning of the world’s economy is dependent on the easy flow of short-term loans among banks, businesses and consumers, a stream that has been cut off as banks become more fearful of giving out cash.

Borrowing rates remained very high on Monday despite the passage of the American bailout plan, although proponents of that package argue that its longer-term benefits will take time to carry out. Still, some gauges of anxiety in the market again reached record highs as the week began, and a benchmark overnight borrowing rate, the Libor rate, moved higher. A measure of volatility, the VIX index, jumped to its highest intraday level ever.

“It’s not just a question clearing problem assets,” said Bob McKee, chief economist for Independent Strategy, a research consultancy. “If banks don’t have enough capital they will be paralyzed.”

Oil prices tumbled nearly $4 a barrel to below $90, the first time it has fallen that low since February, before recovering slightly to $90.90 around 10 a.m. The euro continued to fall against the dollar.

Falling oil prices provoked a decline of just over 1,000 points, or nearly 9.9 percent, on the Toronto Stock Market. The drop brought the S&P/TSX index below 10,000 points for the first time since May 2004.

Energy stocks drove the decline, falling 13 percent. Financial industry shares were down 7 percent in mid-morning trading with the Royal Bank of Canada, the country’s largest bank, down 8.43 percent. That drop came despite the fact that the Royal Bank, like most of Canada’s major banks, has relatively little expose to troubled debt in the United States.

Strong prices for oil and gas as well as commodities like metals, have allowed most of Canada to escape the economic downturn in the United States. But the Bank of Nova Scotia report released on Monday said that weakness in the manufacturing sector, which relies heavily on exports to the United States, will push likely Canada into a recession.

In Europe, governments worked over the weekend to prevent the collapse of two lenders, Hypo Real Estate in Germany and the Belgian operations of Fortis. The German government also said it would guarantee all private bank deposits as it sought to avert the spread of the financial contagion.

The FTSE 100 index in London fell 5.6 percent; the Frankfurt DAX was down 5.2 percent and the CAC-40 in Paris lost 5.9 percent.

A similar sell-off occurred in Asia, the Nikkei 225 stock average in Tokyo fell 4.3 percent, while the Kospi index in Seoul fell 4.3 percent. The Standard and Poor’s/ASX 200 index in Sydney fell 3.3 percent, while the Hang Seng index in Hong Kong was down 5 percent.

“People are really disappointed by the inability of Europe to react on a concerted basis,” said Andrew Popper, a fund manager at SG Hambros in London. “It’s still very much a country by country approach. There is also a realization that we haven’t seen any effects on economic growth so far but that now is starting and that’s having an effect on non-financial shares.”

Steps by some European governments over the weekend to guarantee deposits may avoid a panic among consumers but will not help banks cope with their financing problems, said Adrian Darley, a fund manager at Resolution Asset Management in London.

“There are still a lot of issues out there,” Mr. Darley said. “Deposit guarantees are just a short-term solution. It does not necessarily help with interbank loans or if you have bad loans on your books. It will take a lot more than that.”

In Iceland and Russia, trading on banking shares was halted after indexes fell more than 14 percent.

Shares of industrial companies were hammered in Europe with EADS, the parent of Airbus, falling 7.5 percent, ArcelorMittal, the world’s biggest steel maker, falling 8.6 percent, and the German automaker Daimler down 5.8 percent. British Airways slid 10.3 percent.

BNP Paribas, which acquired a majority stake in Fortis for about $20 billion in an emergency deal late Sunday, was unchanged, while shares of Fortis were suspended. Trading in Unicredit, the big Italian bank, was delayed for an hour after the bank said late Sunday that it would seek about $9.1 billion in new funding and cut its earnings outlook. And Hypo Real Estate, the second-biggest German mortgage lender, fell 28 percent in Frankfurt after it received a new $68 billion bailout Sunday from German banks and the national government in Berlin.

Shares also dropped because many clients are pulling their money out of hedge funds and other investment funds with disappointing returns. “We’re seeing forced sales from redemptions,” Mr. Darley said.

Shares in HBOS, the British mortgage lender that agreed to be bought by Lloyds in a government-brokered deal, opened 20 percent lower on Monday.

Nicholas Bibby, an economist in the Singapore office of Barclays Capital, said that falling share prices showed that many investors were still worried that banking difficulties might spread even after the passage of the financial bailout plan in Washington. “It’s a fear of contagion,” he said, while adding that Asian banks were better positioned than most to withstand the current problems because the region’s high savings rate tends to mean that Asian banks are net lenders in international money markets.

Concerns about Asian exports have also been rising for months, as the region’s high savings rate means that it also has weak spending on consumption and remains heavily dependent on overseas demand.

CFC Seymour, a Hong Kong securities firm, pointed out in an investment newsletter on Monday that even before recent problems in financial markets, the combined trade balance of Japan, South Korea, Taiwan, Thailand, Indonesia and the Philippines had gone from a surplus of $19 billion as recently as last October to a deficit of $2 billion in July. Only China is still running consistently large trade surpluses.

The realignment in the currency markets that has lifted the dollar and yen against the euro continued, as investors worried about Europe’s banks and economic health and continued their flight to the apparent stability of Japan’s financial system.

The euro fell to $1.3609 in Paris morning trading, from $1.3772 in New York late Friday. The dollar fell to 103.42 yen from 105.32, and the euro declined to 140.74 yen from 145.07.

The Shanghai stock exchange, closed for the last week for China’s National Day holiday, reopened on Monday with the Shanghai A-share market down 3.5 percent. The China Securities Regulatory Commission announced on Sunday that it would experiment with the introduction of short-selling and trading on margin on a limited basis, but did not say when the trial would begin.

Keith Bradsher, Ian Austen, David Jolly and Julia Werdigier contributed reporting.

    Stocks Fall Sharply on Credit Concerns, NYT, 7.10.2008, http://www.nytimes.com/2008/10/07/business/07markets.html?hp






EBay Cuts 10% of Work Force


October 7, 2008
The New York Times


The Internet company, eBay, announced Monday that it was laying off 10 percent of its work force, or about 1,000 permanent employees and several hundred temporary workers.

The announcement was largely unrelated to the potential economic impact of a slowdown in ecommerce. Rather, it represented an attempt by eBay to improve the performance of its core marketplace division, which has experienced declining, single-digit growth in the last few years while the rest of e-commerce grows at a double-digit clip. The company said it would take a pretax restructuring charge of $70 million to $80 million, largely in the fourth quarter.

“While never an easy decision to make, these reductions will help improve our operations and strengthen our ability to continue investing in growth,” John J. Donahoe, eBay’s chief executive, said in a statement.

The company also announced on Monday that it was acquiring Bill Me Later, an online payments firm based in Timonium, Md., for $945 million in cash and stock. eBay will combine the company, which enables payments online for companies like Wal-Mart Stores and Continental Airlines, with its rapidly growing PayPal division.

“We are making aggressive moves to strengthen our leadership positions in e-commerce and payments to competitively position our company for long-term growth,” Mr. Donahoe said. “Bill Me Later is a perfect complement to our portfolio, a company that belongs with PayPal. Together, PayPal and Bill Me Later will make online payments safer, easier and more convenient than ever.”

The company also announced that it was acquiring the popular Danish classified advertising sites DBA.dk and BilBasen for $390 million. EBay has been building a portfolio of European classified Web sites and already owns properties like Kijiji, Gumtree, Marktplaats, LoQuo and mobile.de in Germany. EBay also owns a minority stake in the American online classifieds leader Craigslist, but its interest in buying the firm outright lead the companies to sue each other earlier this year.

EBay’s interest in creating a global network of classified advertising business is partly designed to create a complementary alternative to its sagging traditional auctions business. Classified advertising sites are cheaper to build, have few of the shipping hassles as global e-commerce sites, and do not have the kind of volatile seller community that have reacted so vociferously to recent changes in the core eBay marketplace. They also take relatively few employees to operate.

The company said Monday that it expected to hit the low end of its third quarterly earnings guidance. Earnings are scheduled to be released Oct. 15.

    EBay Cuts 10% of Work Force, NYT, 7.10.2008, http://www.nytimes.com/2008/10/07/technology/07ebay.html?hp






Bailout Provides More Mental Health Coverage


October 6, 2008
The New York Times


WASHINGTON — More than one-third of all Americans will soon receive better insurance coverage for mental health treatments because of a new law that, for the first time, requires equal coverage of mental and physical illnesses.

The requirement, included in the economic bailout bill that President Bush signed on Friday, is the result of 12 years of passionate advocacy by friends and relatives of people with mental illness and addiction disorders. They described the new law as a milestone in the quest for civil rights, an effort to end insurance discrimination and to reduce the stigma of mental illness.

Most employers and group health plans provide less coverage for mental health care than for the treatment of physical conditions like cancer, heart disease or broken bones. They will need to adjust their benefits to comply with the new law, which requires equivalence, or parity, in the coverage.

For decades, insurers have set higher co-payments and deductibles and stricter limits on treatment for addiction and mental illnesses.

By wiping away such restrictions, doctors said, the new law will make it easier for people to obtain treatment for a wide range of conditions, including depression, autism, schizophrenia, eating disorders and alcohol and drug abuse.

Frank B. McArdle, a health policy expert at Hewitt Associates, a benefits consulting firm, said the law would force sweeping changes in the workplace.

“A large majority of health plans currently have limits on hospital inpatient days and outpatient visits for mental health treatments, but not for other treatments,” Mr. McArdle said. “They will have to change their plan design.”

Federal officials said the law would improve coverage for 113 million people, including 82 million in employer-sponsored plans that are not subject to state regulation. The effective date, for most health plans, will be Jan. 1, 2010.

The Congressional Budget Office estimates that the new requirement will increase premiums by an average of about two-tenths of 1 percent. Businesses with 50 or fewer employees are exempt.

The goal of mental health parity once seemed politically unrealistic but gained widespread support for several reasons:

¶Researchers have found biological causes and effective treatments for numerous mental illnesses.

¶A number of companies now specialize in managing mental health benefits, making the costs to insurers and employers more affordable. The law allows these companies to continue managing benefits.

¶Employers have found that productivity tends to increase after workers are treated for mental illnesses and drug or alcohol dependence. Such treatments can reduce the number of lost work days.

¶The stigma of mental illness may have faded as people see members of the armed forces returning from Iraq and Afghanistan with serious mental problems.

¶Parity has proved workable when tried at the state level and in the health insurance program for federal employees, including members of Congress.

Dr. Steven E. Hyman, a former director of the National Institute of Mental Health, said it was impossible to justify insurance discrimination when an overwhelming body of scientific evidence showed that “mental illnesses represent real diseases of the brain.”

“Genetic mutations and unlucky combinations of normal genes contribute to the risk of autism and schizophrenia,” Dr. Hyman said. “There is also strong evidence that people with schizophrenia have thinning of the gray matter in parts of the brain that permit us to control our thoughts and behavior.”

The drive for mental health parity was led by Senator Pete V. Domenici, Republican of New Mexico, who has a daughter with schizophrenia, and Senator Paul Wellstone, the Minnesota Democrat who was killed in a plane crash in 2002. Mr. Wellstone had a brother with severe mental illness.

Prominent members of both parties, including Betty Ford, Rosalynn Carter and Tipper Gore, pleaded with Congress to pass the legislation.

Representatives Patrick J. Kennedy, Democrat of Rhode Island, and Jim Ramstad, Republican of Minnesota, led the fight in the House. Mr. Kennedy has been treated for depression and, by his own account, became “the public face of alcoholism and addiction” after a car crash on Capitol Hill in 2006. Mr. Ramstad traces his zeal to the day in 1981 when he woke up in a jail cell in South Dakota after an alcoholic blackout.

The Senate passed a mental health parity bill in September 2007. The House passed a different version in March of this year.

A breakthrough occurred when sponsors of the House bill agreed to drop a provision that required insurers to cover treatment for any condition listed in the Diagnostic and Statistical Manual of Mental Disorders, published by the American Psychiatric Association.

Employers objected to such a requirement, saying it would have severely limited their discretion over what benefits to provide. Among the conditions in the manual, critics noted, are caffeine intoxication and sleep disorders resulting from jet lag.

Doctors often complain that insurers, especially managed care companies, interfere in their treatment decisions. But doctors and mental health advocates cited the work of such companies in arguing that mental health parity would be affordable, because the benefits could be managed.

Pamela B. Greenberg, president of the Association for Behavioral Health and Wellness, a trade group, said providers of mental health care typically drafted a treatment plan for each person. In complex cases, she said, a case manager or care coordinator monitors the patient’s progress.

A managed care company can refuse to pay for care, on the grounds that it is not medically necessary or “clinically appropriate.” But under the new law, insurers must disclose their criteria for determining medical necessity, as well as the reason for denying any particular claim for mental health services.

Andrew Sperling, a lobbyist at the National Alliance on Mental Illness, an advocacy group, said, “Under the new law, we will probably see more aggressive management of mental health benefits because insurers can no longer impose arbitrary limits.”

The law will also encourage insurers to integrate coverage for mental health care with medical and surgical benefits. Under the law, insurers cannot have separate cost-sharing requirements or treatment limits that apply only to mental illness and addiction disorders.

The law comes just three months after Congress eliminated discriminatory co-payments in Medicare, the program for people who are 65 and older or disabled.

Medicare beneficiaries pay 20 percent of the government-approved amount for most doctors’ services but 50 percent for outpatient mental health services. The co-payment for mental health care will be gradually reduced to 20 percent over six years.

The mental health parity law was forged in a highly unusual consensus-building process. For years, mental health advocates had been lobbying on the issue.

Insurers and employers, which had resisted earlier versions of the legislation, came to the table in 2004 at the request of Mr. Domenici and Senators Edward M. Kennedy, Democrat of Massachusetts, and Michael B. Enzi, Republican of Wyoming.

Each side had, in effect, a veto over the language of any bill. Insurers and employers, seeing broad bipartisan support for the goal in both houses of Congress, decided to work with mental health advocates. Each side gained the other’s trust.

“It was an incredible process,” said E. Neil Trautwein, a vice president of the National Retail Federation, a trade group. “We built the bill piece by piece from the ground up. It’s a good harbinger for future efforts on health care reform.”

    Bailout Provides More Mental Health Coverage, NYT, 6.10.2008, http://www.nytimes.com/2008/10/06/washington/06mental.html






Full of Doubts, U.S. Shoppers Cut Spending


October 6, 2008
The New York Times


Cowed by the financial crisis, American consumers are pulling back on their spending, all but guaranteeing that the economic situation will get worse before it gets better.

In response to the falling value of their homes and high gasoline prices, Americans have become more frugal all year. But in recent weeks, as the financial crisis reverberated from Wall Street to Washington, consumers appear to have cut back sharply. Even with the government beginning a giant bailout of the financial system, their confidence may have been too shaken for them to resume their free-spending ways any time soon.

Recent figures from companies, and interviews across the country, show that automobile sales are plummeting, airline traffic is dropping, restaurant chains are struggling to fill tables, customers are sparse in stores.

When the final tally is in, consumer spending for the quarter just ended will almost certainly shrink, the first quarterly decline in nearly two decades. Many economists, who began the third quarter expecting modest growth, now believe the cutbacks are so severe that the overall economy did not expand either, and they warn that a consumer-led recession could be more severe than the relatively mild one earlier this decade.

“The last few days have devastated the American consumer,” said Walter Loeb, president of Loeb Associates, a consultancy, who said he worried that the constant drumbeat of negative news about the economy was becoming a self-fulfilling prophecy. “They all feel poor.”

For some Americans, the pain is already acute: jobs disappeared at a faster clip in September. For many others, day-to-day finances are fine for now, but the financial outlook is uncertain: 401(k) accounts are dwindling, loans are hard to get and house prices continue to fall.

Claudia Prindiville, a 41-year-old mother of three, is among those feeling anxious. Shopping at a Talbots store in Chicago’s northwest suburbs, she said her own family’s finances had not yet suffered. Still, she pulled out a coupon to buy a two-piece sweatsuit, and at The Children’s Place she bought pants and shirts from the sale rack.

“All the talk about how bad it is out there has started getting in my head,” she said. “I still need to shop for my kids’ school clothes, but I am definitely buying less for myself.”

Consumer spending, which accounts for nearly two-thirds of the economy, grew modestly earlier in the year but fell in July and August on an annualized rate. When the government releases quarterly numbers this month, they are expected to show that consumer spending shrank 3 percent or more. That would be the first quarterly decline since 1990, ahead of the 1991 recession, and the steepest since 1981.

According to interviews with shoppers, analysts and company executives, the impact of the financial news of the last two weeks has been palpable in many corners of the country, from car dealerships, which endured the worst month for sales in 15 years, to the flashy casinos of Las Vegas, where spending at luxury restaurants and stores and at gambling tables has gone from bad to worse.

“In the last few days, there has been a huge drop-off in foot traffic and almost zero sales,” said Gil Colon, sales manager at Villa Reale, a high-end art and furniture store in Las Vegas, who has laid off five sales people in the last five months, leaving three.

“People have lost their confidence. They have no buying power. They are losing their retirements, their vacation funds, and they are scared to commit to buying anything,” he said.

The picture is just as grim at suburban malls and city boutiques, where traffic is disappearing as retailers brace for what many predict will be a dismal holiday shopping season. Some have responded by reducing the number of sales people or their hours.

Taking a break outside an Office Depot store in suburban Chicago, Dave Cargerman, a 25-year-old sales clerk, said his hours had been cut back. “We got killed during the back-to-school sales,” Mr. Cargerman said. “And that time of year is usually our bread and butter.”

Nearby, employees at Lattof Chevrolet were preparing to close the doors this month on a business that opened in 1936. It may not be the last dealership to go: the percentage of people saying they expect to buy a car in the next six months, on a three-month moving average, has fallen to 5 percent, the lowest figure since the Conference Board started asking about such plans in its consumer confidence survey, in 1967.

“We’re not selling S.U.V.’s and trucks at all,” said Raul Trejo, 24, a mechanic. “We saw it coming.”

The situation is so uncertain that some retailers are simply not even trying to estimate their sales. Pier 1 Imports and Circuit City stores recently withdrew their guidance to Wall Street about earnings and said they would not offer any more predictions this year.

At a retail conference in New York on Thursday, Michael W. Rayden, chairman and chief executive of Tween Brands, which owns the Limited Too and Justice chains, spoke about consumer fears. “As I travel around the country and listen to moms and little girls, it is amazing how much even these 10-year-old girls are aware that something is going on,” he said. “Mom is saying, ‘I can’t afford that.’ ”

Even Apple, maker of the iPhone, is not immune as concerns mount about consumer electronics. The stock of Apple ended the week down 19 percent after two stock analysts suggested that the rapid cooldown in consumer spending would put an end to the company’s hot sales streak.

Casual dining restaurants, which have struggled in recent years because of a glut of restaurants and higher-quality fare at fast-food chains, have taken a beating already this year, forcing the Bennigan’s chain to close and leaving several others struggling. “I think September could be the worst month of the year, and we’ve had a lot of bad months,” said Lynne Collier, an analyst at KeyBanc Capital Markets who covers the restaurant industry.

At a Chili’s Grill & Bar in the Arlington Heights suburb of Chicago, Nichol Bedsole, a 23-year-old salon manager, said she used to eat at places like Chili’s at least once a week but no longer does.

“Now it’s more like twice a month, and it’s somewhere cheap, like Subway,” she said. “I have a lot of bills to pay.”

Consumers are cutting back on air travel, whether for business or pleasure. Passenger volume is dwindling even faster than airlines can sideline planes and cut poorly performing routes. At American Airlines, domestic passengers flew 11.7 percent fewer miles in September, while the airline cut 9.4 percent of domestic seats.

The consumer slowdown in recent weeks comes after spending drops in July and August, when tax rebates came to an end. The financial shocks on Wall Street accelerated the decline, along with limits on consumer credit imposed by some banks.

“Consumers have become quite concerned that the recession, which they think is already under way, will last longer than they anticipated and will be deeper,” said Richard Curtin, director of the Reuters-University of Michigan Surveys of Consumers, describing the most recent poll. “They see their worst fears coming true.”

In addition, household net worth, which greases spending, fell $6 trillion over the last year, with $1 trillion of that in just the last four weeks, said Mark Zandi, chief economist at Moody’s Economy.com.

Less than a month ago, Nigel Gault, chief domestic economist at Global Insight, a forecasting service, predicted that domestic economic output would rise 1.2 percent in the third quarter. “At the moment I’m running close to zero,” he said, “and maybe a negative.”

Of course, the economic malaise has not yet hurt all businesses. It has even been good for some.

Entertainment and media executives remain optimistic about sales of movie tickets, DVDs and games. At Nintendo of America, the popular Wii video game consoles are still selling briskly at about $300.

“My view is that when consumers get concerned about their nest egg, or their country, they need entertainment,” said Bo Andersen, president and chief executive of the Entertainment Merchants Association, which represents distributors and retailers of home entertainment products.

And as fewer people eat at restaurants, food is flying off the shelves at grocery stores. David Driscoll, a stock analyst for Citigroup, said the shares of big food companies have risen about 17 percent this year. By contrast, he said, the restaurant sector is down 4 percent.

“The alternative of restaurants is buying groceries and eating at home,” he said, “and right now, that’s an attractive alternative.”

Daniel Kimble, 31, was putting Mr. Driscoll’s theory into practice on Friday. An independent trucker from Oklahoma, he stopped his rig outside a Wal-Mart in Cleveland on his way to a nearby factory.

Mr. Kimble ticked off a long list of his money-saving steps, from driving his pickup truck less to using less laundry detergent to buying fewer clothes. And he has stopped eating at restaurants on the road, which is why he was parked at Wal-Mart.

“I’m going in to buy some lunch meat and some bread, whatever’s cheap,” he said. “I’ve got to save money, you know?”

Tim Arango, Karen Ann Cullotta, Laurie J. Flynn, Clifford Krauss, Christopher Maag, John Markoff, Joe Sharkey and Bill Vlasic contributed reporting.

    Full of Doubts, U.S. Shoppers Cut Spending, NYT, 6.10.2008, http://www.nytimes.com/2008/10/06/business/06econ.html

















1 - Richard S. Fuld Jr., the longtime chief executive of Lehman Brothers.

Henny Ray Abrams/Pool, via Reuters

Lehman Chief Says Turmoil Overwhelmed Bank        NYT        7.10.2008


2 - When Lehman failed,

employees expressed themselves

on a portrait of the chief executive, Richard S. Fuld Jr.

Joshua Lott/Reuters

The Road to Lehman’s Failure Was Littered With Lost Chances        NYT        6.10.2008















Lehman Chief Says

Turmoil Overwhelmed Bank


October 7, 2008
The New York Times


Richard A. Fuld, chief executive of the bankrupt Lehman Brothers Holdings Inc., plans to tell Congress on Monday that he failed to anticipate the severity of the credit crisis and never thought it would crush the investment bank he helped build into a global power.

“With the benefit of hindsight, I can now say that I and many others were wrong,” Mr. Fuld said in testimony prepared for the House Committee on Oversight and Government Reform, which is holding hearings to examine the causes of the current financial crisis.

Mr. Fuld, whose desperate efforts to save Lehman Brothers failed last month, said the turmoil in the markets was “unprecedented” and became impossible to overcome.

“The problems that most believed would be contained to the mortgage markets have spread to our credit markets, our banking system, and every area of our financial system,” he said. “As incredibly painful as this is for all those connected to or affected by Lehman Brothers — this financial tsunami is much bigger than any one firm or industry.”

Mr. Fuld and other Lehman executives are facing preliminary investigations into whether they made public statements about Lehman that did not match underlying economic reality. He is expected to face questions on that topic when he appears before the House panel.

Lehman filed for bankruptcy protection last month after the government declined to assist in a rescue. Parts of Lehman that were not included in the bankruptcy filing have now been sold to Barclays, Nomura and private equity groups. The bankrupt entity, which Mr. Fuld still leads, is besieged by creditors who believe they are owed billions and former employees who are not receiving severance packages they were promised.

Perhaps with an eye on questions about his public statements, Mr. Fuld stated in prepared testimony that he said “what I absolutely believed to be true” when he remarked in 2007 that the worst of the credit crisis was behind Lehman.

He attributed some blame to the media in his testimony, saying some coverage “has been sensationalized — based on rumors, speculation, misunderstandings and factual errors.”

Mr. Fuld also noted that the same day Lehman filed for bankruptcy protection, the Federal Reserve eased lending requirements for other investment banks, something executives at Lehman believe could have saved the bank had it been done earlier. He also described his efforts to save the company, including by becoming a deposit-taking bank holding company. That effort by Lehman, later executed by Goldman Sachs and Morgan Stanley, was rebuffed by federal officials.

    Lehman Chief Says Turmoil Overwhelmed Bank, NYT, 7.10.2008, http://www.nytimes.com/2008/10/07/business/economy/07lehman.html






The Road to Lehman’s Failure Was Littered With Lost Chances


October 6, 2008
The New York Times


Richard S. Fuld Jr. was under siege in mid-July. His renowned investment bank, Lehman Brothers, was barraged with questions about whether the expanding credit crisis would engulf the bank and wipe out investors.

Signs of worry abounded. The company’s shares had plummeted, its debt had been downgraded, and investors were increasingly worried about a Lehman default. It was a downward spiral that mirrored the demise of Bear Stearns four months earlier.

Then Mr. Fuld, the chief executive, had an idea to silence the rumors that seemed to crop up every day. He would repaint the face of company as a commercial bank and ask to be regulated by the Federal Reserve, thinking that might give Lehman a more stable way to finance its operations.

But in an hourlong conference call with government officials, Mr. Fuld’s hope was dashed when the president of the Federal Reserve Bank of New York, Timothy F. Geithner, refused to change rules to enable quick benefit from the change Mr. Fuld had sought.

In the months leading up to Lehman’s downfall, the proposal was just one of many floated by Mr. Fuld as he embarked on a frenetic and increasingly desperate attempt to keep his 158-year-old investment bank alive, according to interviews with five former senior Lehman executives and one outsider who was intimately involved in its business dealings, who spoke on the condition that they not be named.

Looking for ways to save Lehman, Mr. Fuld called blue-chip companies and discussed mergers with a competitor. He sent emissaries to Asia and the Middle East looking for money. And he tried to find a commercial bank to buy the entire company. But none worked.

Now, Mr. Fuld is likely to face some tough questions about the final months and days of Lehman. He will discuss these lost opportunities in a Congressional hearing on Monday, in his first public appearance since the company collapsed last month and was sold off in pieces to buyers including Barclays and Nomura.

Mr. Fuld still works for the bankrupt entity, which has come under fierce criticism by customers who lost money, former employees whose severance checks have stopped showing up and investors who think he failed to stop the disaster. Among other things, he may be pressed in Washington to explain why Lehman was publicly presenting a rosy outlook about its future while it privately was scrambling for a solution to its deepening problems stemming from its exposure to toxic subprime mortgages. Mr. Fuld declined to comment on Sunday.

Lehman is already facing preliminary inquires from federal prosecutors in the Eastern and Southern districts of New York who are looking at statements the company made about its own financial condition as well as whether it overstated the value of its commercial real estate holdings, a person familiar with the matter said.

Though Lehman was the smallest investment bank when it failed — and regulators decided it was not too big to fail — its demise set off tremors throughout the financial system that reverberate to this day. The uncertainty surrounding its billions of dollars of transactions with banks and hedge funds exacerbated a crisis of confidence. That contributed to the freezing of credit markets that has forced governments around the globe to take steps to try to calm panicked markets, including guaranteeing bank deposits.

“This is a humongous mess, and I think that is one of the reasons that the storm came back so soon, and the mad dogs came chasing Goldman and Morgan Stanley,” said Roy Smith, a professor of finance at New York University. “It wasn’t obvious to me that Lehman should fail, but the control of whether it failed was in the hands of the government.” Mr. Fuld was an institution inside the Lehman institution. He had worked at the bank nearly 40 years, after starting as a clerk straight out of college. He rose to the top seat while Lehman was owned by American Express, and he triumphantly took the company public in 1994.

Lehman executives complain bitterly that any chance of keeping the firm alive began to dissipate rapidly just after Labor Day when JPMorgan Chase, which handled Lehman’s trades, came calling for more money. Lehman had put down securities it believed were worth $6 billion during the summer to assuage the bank’s concerns that its trades were risky. But JPMorgan thought those securities had deteriorated in value, and asked for $5 billion in cash or liquid assets on Sept. 4.

Over the course of the next week, JPMorgan requested more money from Lehman. However, executives at the two companies disagree over how much money was requested and whether the requests were reasonable. The dispute has become part of a legal claim filed by creditors of Lehman.

By the weekend of Sept. 14-15, most Lehman workers knew the firm’s days as an independent bank were over. Mr. Fuld continued fevered deal talks with Bank of America and Barclays, but both banks dropped out by the end of the weekend. Meanwhile, Wall Street executives at the Federal Reserve Bank of New York quickly shifted conversations from preventing a bankruptcy of Lehman to dealing with its consequences.

At the urging of federal officials, a group of remaining banks set up a $70 billion private-sector fund designed to assist any contributor to the fund that ran into trouble. And the Federal Reserve eased its restrictions on what investment banks could pledge as collateral to borrow from the Fed. The programs were not open to Lehman because the government reportedly deemed it too troubled, and Lehman immediately filed for bankruptcy.

Lehman executives were furious, because the government had denied their request in July to ease restrictions on collateral. That step might have paved the way for Lehman to more easily become a bank holding company. And, worsening the sting, Goldman Sachs and Morgan Stanley turned themselves into deposit-taking commercial banks with the blessing of the Federal Reserve just one week after Lehman collapsed.

“What they did to save Morgan Stanley and Goldman Sachs, they could have done that for us, and in fact, we showed them the path,” one former Lehman executive said Saturday.

A spokesman for the Federal Reserve declined to comment Sunday.

Mr. Fuld’s attempts to attract investors actually had begun well before its problems appeared. He had been trying since at least early 2006, seeking out foreign investors in places where Lehman wanted to grow. He wanted each of them to purchase a 5 to 10 percent stake in the company on the open market.

Lehman executives had lengthy discussions with the Citic Group, a large Chinese bank; the Ping An Insurance Company of China; and Kuwait’s sovereign wealth arm, but no one signed up. Ping An declined to comment this past weekend, and Citic and the Kuwait officials could not be reached.

Around the same time, Mr. Fuld talked with Martin J. Sullivan, the then chief executive of American International Group about selling all of Lehman to the insurance giant. A.I.G., which itself would eventually would find itself in deep financial trouble, declined to comment on Sunday.

The latest round of talks by Lehman to seek partners started in early 2007, in the early stages of the subprime mortgage debacle. Those discussions went nowhere. In early March of this year, Mr. Fuld stepped up the efforts to seek partners, dispatching emissaries to China, where Lehman was considering purchasing two banks, including Shanghai Aijian.

But things took a turn for the worse then Bear Stearns collapsed in mid-March, leaving Lehman as the smallest and most vulnerable independent investment bank. Mr. Fuld immediately raised $3 billion in capital, mostly from large public companies. Days later, he held an intensive planning session. At that time, he reviewed their options, including building or acquiring a deposit base, merging with a large bank, or acquiring a smaller bank.

In May, Lehman began discussing a merger or sale to Barclays Capital, the British bank that ended up purchasing the bulk of Lehman last month after Lehman’s bankruptcy filing. Lehman was also in talks with Korea Development Bank, the state bank of South Korea, for a strategic investment.

Those talks hit the newsstands in June, and investors, worried that Lehman needed capital, battered its share price.

A hedge fund manager named David Einhorn also took to the news media with criticism of Lehman, accusing company executives of playing down their problems.

“Now it is clear that Lehman’s problems were their own doing,” Mr. Einhorn, president of Greenlight Capital, said Sunday night.

Days before second-quarter earnings, Mr. Fuld called on the billionaire investor Warren E. Buffett, who would eventually purchase a stake in Goldman Sachs, but Mr. Buffett was demanding terms that Lehman considered too onerous.

Mr. Fuld had better luck with others, raising a total of $6 billion from a group including C. V. Starr & Company, the investment fund led by Maurice R. Greenberg, the former head of A.I.G., and the state pension fund of New Jersey.

The stock kept falling, bringing its four-week loss to 47 percent by mid-June. At that time, Mr. Fuld came up with about a dozen possible solutions for his company, which included a conversion into a bank holding company, the sale of commercial or residential mortgage assets, and spinning off parts of the investment management division.

Meanwhile, Mr. Fuld kept looking for an investor that would quiet the skeptics, focusing on those who might be interested in purchasing stakes of 15 to 25 percent of Lehman. He called General Electric, but talks went nowhere. About the time that he was seeking government approval to form a bank holding company, he also tried to woo Bank of America beginning in July. And he met with John Mack, the chief executive of Morgan Stanley, in the following weeks to discuss a merger. Mr. Mack decided he was not interested.

Mr. Fuld also approached HSBC — a British bank that had been on his list since the April meeting. Also at the end of August, Mr. Fuld courted two sovereign wealth funds in the Middle East.

But Lehman received no formal bids before its bankruptcy filing. It is unclear what kept potential partners at bay.

In the wake of Lehman’s downfall, many of its former employees are left with their lives in pieces. Mr. Fuld, for his part, has lost $800 million in company stock as it fell from its peak just over a year ago. He and his wife have put some of their art collection, worth millions of dollars, up for sale. but he still owns several homes and his net worth is estimated to be around $100 million now.

Ordinary employees are not as well off. Among them are some 1,000 workers who were laid off in the days before Lehman filed for bankruptcy. Last week, they received letters from Lehman Holdings, the bankrupt entity, saying their promised severance payments and health benefits would cease immediately.

Michael Petrucelli, who worked on commission as a salesman for Lehman’s investment management division, said it was bad enough to lose his savings in Lehman stock and his job, but the letter last week was the last straw. The decision about their benefits rests with the bankruptcy judge.

“Life’s not fair. You pick yourself up and move on,” said Mr. Petrucelli, 45, in an interview at his home in Riverside, Conn. “But this is wrong, and this I can’t stand for. They need to just do the right thing.”

Vikas Bajaj, Michael J. de la Merced and Andrew Ross Sorkin contributed reporting.

    The Road to Lehman’s Failure Was Littered With Lost Chances, NYT, 6.10.2008, http://www.nytimes.com/2008/10/06/business/06lehman.html?ref=economy







Financial mayhem strikes global markets


Mon Oct 6, 2008
5:28am EDT


(Reuters) - Here is a chronology of a month of global market turmoil which has claimed some of the world's best known financial institutions as victims.

September 14/15 - Investment bank Lehman Brothers Holdings Inc files for bankruptcy protection; Merrill Lynch & Co Inc to be taken over by Bank of America Corp

September 16 - Fed announces plan for $85 billion loan to American International Group Inc in return for 80 percent stake in the insurer; Britain's Barclays buys parts of Lehman's North American assets for $1.75 billion.

September 17 - British bank Lloyds TSB Group Plc agrees to rescue rival HBOS Plc, scooping up Britain's biggest home loan lender in an all-share deal.

September 18 - The UK Financial Services Authority imposes a temporary ban on short-selling financial stocks, a move echoed in other centers.

September 19 - U.S. Treasury Secretary Henry Paulson calls for the government to spend billions of dollars to take toxic mortgage assets off financial companies to restore financial stability. News of the plan helps world stock markets soar.

September 20 - Details emerge of the $700 billion plan.

September 21 - Goldman Sachs Group Inc and Morgan Stanley become bank holding companies regulated by the Fed.

September 22 - Nomura Holdings Inc says it will buy Lehman's franchise in Asia Pacific and acquires Lehman's business in Europe. Mitsubishi UFJ Financial agrees to buy up to 20 percent of Morgan Stanley for $8.5 billion.

September 23 - AIG signs "definitive" agreement for up to $85 billion in borrowings from the Fed, the main part of a rescue plan that will see it take a 79.9 percent stake in the insurer.

September 24 - Warren Buffett's Berkshire Hathaway Inc says it will buy up to 9 percent of Goldman, which also announced plans to sell $2.5 billion in common stock.

-- The FBI says it is expanding its probe of possible corporate fraud related to the U.S. mortgage market collapse. The probe will include Fannie Mae and Freddie Mac which were effectively nationalized on July 13.

September 25 - Washington Mutual is closed by the U.S. government in the largest failure of a U.S. bank. Its banking assets are sold to JPMorgan Chase & Co for $1.9 billion.

September 29 - Britain announces the nationalization of mortgage lender Bradford & Bingley Plc. Spain's Banco Santander SA will buy its retail deposits and branch network. Banking and insurance company Fortis NV is bailed out by Belgian, Dutch and Luxembourg governments.

-- U.S. House of Representatives rejects the $700 billion rescue plan. Dow Jones posts its largest point decline ever while the S&P 500 has its worst day since 1987 with an 8.8 percent drop.

September 30 - World stocks fall but fears of a major meltdown ease as European losses are muted.

-- EU regulators endorse a 6.4 billion euro public bailout of Dexia SA, the Belgian-French financial services group.

October 1 - U.S. Senate passes the bailout plan.

October 2 - Irish lawmakers vote to enact radical legislation guaranteeing Irish bank deposits and debts up to a total of 400 billion euros ($554 billion).

October 3 - The U.S. House of Representatives passes a revised bail-out plan.

-- Wells Fargo & Co says it has agreed to buy Wachovia Corp for about $16 billion, thwarting a planned Citigroup Inc deal announced on September 29. However Citigroup wins a court order on October 4 blocking Wells Fargo from buying the U.S. bank until the court rules otherwise.

-- The Dutch government buys Fortis for 16.8 billion euros ($23.28 billion). Belgium and Luxembourg scramble the next day to find a buyer for the remainder of the company.

October 4 - European leaders, meeting in Paris, commit to ensure the soundness and stability of banking and financial systems.

October 5 - Germany struggles to rescue lender Hypo Real Estate after German banks and insurers pulled out of a state-led 35 billion euro ($48.5 billion) rescue programme. (Writing by David Cutler and Gill Murdoch, Editorial Reference Units in London and Beijing;)

    TIMELINE: Financial mayhem strikes global markets, R, 6.10.2008, ,http://www.reuters.com/article/idUKTRE4941SM20081006?virtualBrandChannel=10341






1 hurdle down, many more to go for the economy


5 October 2008
USA Today
By David J. Lynch


The extraordinary $700 billion financial rescue plan that President Bush signed into law Friday will begin the process of healing a battered financial system. But it's only the start of a journey that grows longer and more difficult with every turn in the road.

"This measure is an important step, but there is a possibility it may not be enough," says Frederic Mishkin, a former Federal Reserve Board governor.

The Emergency Economic Stabilization Act makes the Treasury Department the buyer of last resort for unwanted assets sullying financial institution balance sheets. The aim is to take the investment debris off the banks' hands, thereby freeing them to resume normal lending.

To free-market purists, it's an unpalatable step. But the need for action is unmistakable. Last week, credit channels were so impaired that even blue-chip companies such as General Electric found it difficult or unusually costly to raise short-term cash. Even the legislation's supporters acknowledge it isn't a cure-all for what ails the American economy. Too much damage has been done, and growth is likely to be either non-existent or anemic until 2010.

Despite widespread unease over the use of taxpayer money to salve Wall Street's wounds, it also seems virtually certain that lawmakers will in coming months confront anew demands for even greater government activism. Critics say the new federal legislation just won't do enough to resolve the banks' chief problem: a crippling shortage of capital.

Already, prominent economists across the political spectrum are floating proposals that envision mammoth government spending beyond the $700 billion bailout. Among them: shuttering insolvent banks and providing taxpayer cash to those that can be saved; a temporary unlimited government guarantee of all bank deposits; or even direct financial aid to individual homeowners to ward off foreclosure.

"This act alone is not really going to resolve anything. Eventually, the government is going to have to do more," says George Magnus, senior economic adviser to UBS in London.

As the Treasury Department prepares for its first purchases of troubled assets, the economic outlook is darkening appreciably. Employers cut 159,000 jobs in September, the ninth consecutive month of payroll shrinkage, the Bureau of Labor Statistics said Friday. So far this year, the economy has shed 760,000 jobs — more than the population of El Paso.

That news came one day after the Commerce Department said factory orders fell by an unexpectedly large 4% in August. And that, in turn, followed word that consumer spending had flatlined. The drumbeat of bad news persuaded Morgan Stanley to lower its estimate of third-quarter gross domestic product and predict the economy had shrunk by 0.6% for the three months just ended.

"We're in a recession," said Kenneth Rogoff, former chief economist for the International Monetary Fund. He is among those predicting that the economy won't resume even mild growth until 2010.

More expect Fed rate cut

All that negative news made it clear the economy was in distress even before the credit markets seized up two weeks ago. The accelerating decline is stoking expectations that the Federal Reserve will cut interest rates, perhaps by half a percentage point, this month. The Fed next meets Oct. 28, but it doesn't have to wait that long to act.

If a new IMF study can be believed, the U.S. has a long way to go before it puts the current episode behind it. Researchers examined 113 periods of "financial stress" in 17 advanced economies over the past three decades, comparing those that involved widespread banking-sector problems — like the current U.S. crisis — with those involving only financial markets dips.

Unsustainable housing price increases, massive expansion of credit, and heavy borrowing by consumers and businesses tend to exacerbate subsequent downturns. "Episodes of financial turmoil characterized by banking distress are more often associated with severe and protracted downturns," the study concluded. Compared with earlier crises — such as the collapse of Japan's 1980s bubble economy — "the current episode seems to have the widest impact," the IMF said.

The malady that the Treasury plan is aimed at alleviating was illustrated by word that frozen credit markets may drive the state of California to request a short-term federal loan of $7 billion.

Getting ready to buy

Officials from the Fed and Treasury already are mapping out plans to hire asset managers and begin making deals in four to six weeks. While the focus has been on mortgage-backed securities, the legislation gives Treasury broad power to purchase an array of financial assets.

Indeed, even as the House debated the $700 billion rescue Friday, Rep. John Dingell, D-Mich., urged the Fed to lend money to auto financing companies such as Detroit-based General Motors Acceptance Corp. Slowing car sales and credit market disruptions have battered GMAC for much of this year. In July, it blamed a $2.5 billion second-quarter loss in part on "continued volatility in the mortgage and credit markets."

Brian Bethune, a Global Insight economist, says prices for mortgage-backed securities that have been languishing without buyers "should rise immediately in secondary markets in anticipation of these purchases."

The good news is that a vast majority of mortgages are being paid on time and the owners of the related securities are collecting the interest payments, says James Sarni of investment firm Payden & Rygel. These securities have value, but buyers have been reluctant to bid on them because they're afraid another troubled financial institution may try to raise cash by dumping similar securities on the market. That would depress values for all.

Now, knowing that the government has the resources to hold the securities and sell in an orderly way, buyers will be more willing to buy. "It's like oil has been injected into a motor that's rusted," he says.

Tentative signs of progress could be seen Friday in the bond market. One measure of how worried bond investors are about getting their money back from U.S. companies with the highest credit ratings fell nearly 2% as investors grew more sanguine. Still, Credit Derivatives Research's CDR Investment Grade index remains elevated; it's up 7% the past week and up a staggering 289% this year.

Showing how reluctant investors are to lend, debt securities of the most highly rated U.S. companies Friday set a record yield at 4.91 percentage points more than Treasury securities with similar maturities, according to the Merrill Lynch U.S. Corporate index. A year ago, it was 1.48 percentage points.

Just a beginning

So even with the rescue plan, the U.S. has a long road to travel before it reaches financial normalcy. House Democratic leaders plan hearings in coming weeks to examine how the markets got into this mess. House Financial Services Committee Chairman Barney Frank, D-Mass., says Congress next year will have to write some of the most important financial legislation since the Depression.

Until then, shell-shocked investors will be left to ponder an essential truth, says Marc Chandler, senior vice president at Brown Bros. Harriman. "The power of the U.S. government either can resolve this crisis," he says, "or it can't."

    1 hurdle down, many more to go for the economy, UT, 5.10.2008, http://www.usatoday.com/money/economy/2008-10-05-rescue-bailout_N.htm






End of an Era on Wall Street: Goodbye to All That


October 5, 2008
The New York Times


JUST before midnight 10 days ago, as a financial whirlwind tore through Wall Street, someone filched a 75-pound bronze bust of Harry Poulakakos from the vestibule of his landmark saloon on Hanover Square in Manhattan.

Digging into a bowl of beef stroganoff the day after the bust disappeared — it was eventually returned anonymously — Mr. Poulakakos recalled some of the customers who had passed through his doors since he opened his bar, Harry’s, 36 years ago.

Ivan Boesky once had a Christmas party there. Michael Milken worked over at 60 Broad. Tom Wolfe immortalized the joint in “The Bonfire of the Vanities.” Mr. Poulakakos says he even got to know Henry M. Paulson Jr., the former Goldman Sachs chief executive and now the Treasury secretary.

Mr. Poulakakos, 70, has also seen his share of ups and downs on the Street, including the 1987 stock market crash, when Harry’s filled up at 4 p.m. and stayed open all night. But the upheaval he’s witnessing now — much of Wall Street evaporating in a swift and brutal reordering — is, he said, the worst in decades.

“I hope this is going to be over,” he said. “If Wall Street is not active, nothing is active.”

Mr. Poulakakos, rest assured, isn’t planning to disappear. But the cultural tableau and the social swirl that once surrounded Harry’s are certainly fading.

“It’s the beginning of the end of the era of infatuation with the free market,” said Steve Fraser, author of “Wall Street: America’s Dream Palace,” and a historian. “It’s the end of the era where Wall Street carries high degrees of power and prestige. And it’s the end of the era of conspicuous displays of wealth. We are entering a new chapter in our history.”

To be sure, living large and flaunting it are unlikely to exit the American stage, infused as they are in the country’s mojo. But with Congress having approved a $700 billion banking bailout, historians, economists and pundits are also busily debating the ways in which Wall Street’s demise will filter into the popular culture.

It’s an era that traces its roots back more than two decades, when suspendered titans first became fodder for books and movies. It’s an era when eager young traders wearing khakis and toting laptops became dot-com millionaires overnight. And it is an era that roared into hyperdrive during the credit boom of the last decade, when M.B.A.’s and mathematicians raked in millions by trading and betting on ever more exotic securities.

Over all, the past quarter-century has redefined the notion of wealth. In 1982, the first year of the Forbes 400 list, it took about $159 million in today’s dollars to make the list; this year, the minimum price of entry was $1.3 billion.

As finance jockeyed with technology as economic bellwethers, job hunters, fortune seekers and the news media hopped along for the ride. CNBC became must-see TV on trading floors and in hair salons, while people gobbled up stories about private yachts, pricey jets and lavish parties, each one bigger and grander than the last.

Finance made enormous and important strides in these years — new ways to parse risk, more opportunities for businesses and individuals to bankroll dreams — but for the average onlooker the industry seemed to be one endless party.

In 1989, tongues wagged when the 50th birthday celebration for the financier Saul Steinberg featured live models posing as Old Masters paintings. That bash was outdone last year, when Stephen A. Schwarzman, head of the private equity firm Blackstone, feted guests at a 60th birthday party boasting an estimated price tag of $5 million, video tributes and the singer Rod Stewart.

“The money was big in the ’80s, compared to the ’50s, ’60s and ’70s. Now it’s stunning,” said Oliver Stone, who directed the 1987 film “Wall Street” and is the son of a stockbroker. “I thought the ’80s would have been an end to a cycle. I thought there would be a bust. But that’s not what happened.”

Now, with jobs, fortunes and investment banks lost, a cultural linchpin seems to be slipping away.

“This feels very similar, historically, to 1929 and the emotions that filled the air in the months and years that followed the crash,” Mr. Fraser said. “There is a sense of extraordinary shock and astonishment, which is followed by a sense of rage, outrage and anger directed at the centers of finance.”

A WALL STREET hotshot was in a real-estate quandary, and he wanted Barbara Corcoran to help him sort things out.

“This is a finance guy making a ton of money and he was trying to decide whether he should sell the country home in Connecticut, the apartment here in the city or the 8,000-square-foot dream home in Oregon that he just finished,” recalled Ms. Corcoran, who has spent years selling high-end luxury properties to New York’s elite.

Daintily pulling the shell off a soft-boiled egg at a busy restaurant, she said she had fielded call after call from anxious Wall Streeters trying to decide between signing contracts on multimillion-dollar properties or renegotiating because of the downturn. (Renegotiate, she advises.)

But this particular financier, whom Ms. Corcoran declined to identify, was interested in unloading property so he could time the absolute tippy-top of the real-estate market, not because his wallet had thinned.

“He decided to list the country home in Connecticut,” Ms. Corcoran said, shrugging as she bit into her egg.

If there has been one thing that has kept pace with the outsize personas on Wall Street, it’s the gigantic paychecks they’ve hauled in. Since the mid-1980s, top traders, bankers, hedge fund managers and private equity gurus have reeled in millions of dollars in rotten years and tens and hundreds of millions — a handful even making billions — while the good times rolled.

For instance, Steven A. Cohen, a high-profile hedge fund manager who leads SAC Capital Advisors, spent more than $14 million in 1998 for his 30-room mansion in Greenwich, Conn. Then he spiffed up the place with a basketball court, an indoor pool, an outdoor skating rink — with its own Zamboni — a movie theater and showpieces from the art collection on which he has spent hundreds of millions in recent years.

So it’s unlikely that hedge fund stars like Mr. Cohen are headed for the bread lines.

Two weeks ago, as Lehman Brothers filed for bankruptcy, Bank of America rescued Merrill Lynch, and regulators and bankers anxiously tried to figure out how to save the Street from itself, the world’s affluent plunked down more than $200 million in a two-day auction in London, snapping up the latest works by the British artist Damien Hirst.

Still, some will inevitably downsize.

“The yacht is probably the first thing to go,” said Jonathan Beckett, in a telephone interview from Monte Carlo as he attended the annual Monaco Yacht Show last month. Mr. Beckett, the chief executive of Burgess, a yacht broker, said that for the past eight years there have been few sellers in the market.

That is starting to change, said Mr. Beckett, who noted that a handful of yachts had been put up for sale, ranging in price from $10 million to $150 million.

Even party time has shortened.

“In the last couple of weeks, since the bottom fell out of the market, we’ve seen people become more reticent to sign commitments for some expensive venues,” said Joseph Todd St. Cyr, director of Joseph Todd Events, which plans weddings and bar and bat mitzvahs for clients whom he describes as nonshowy, sophisticated Park Avenue types.

“I had one client who was ready to book the Plaza for a wedding, but now he wants to know what are his other options and whether the Plaza will back down on its minimum spending requirement, which runs about $80,000 to $100,000 for a prime Saturday night date,” Mr. St. Cyr said.

“Bar and bat mitzvahs in this town had become a little bit of a show. There’s a little bit of outdoing the Joneses and the Cohens,” he added, noting that typical parties, if devoid of appearances by N.F.L. superstars or the Black Eyed Peas, range from $150,000 to $400,000.

Even though some clients may not have been hurt in the downturn, they simply don’t want to have an overly ostentatious party in this environment, he said.

SHOWY homes are also on the block.

Joseph M. Gregory, Lehman’s president and chief operating officer who was replaced in June, a couple of months before the firm filed for bankruptcy, listed his oceanfront, 2.5-acre, eight-bedroom Bridgehampton home for $32.5 million this summer.

Mr. Gregory could not be reached for comment.

While brokers say they have yet to see an avalanche of high-end sales, they do say that upheaval is present in the minds of buyers.

Once a hamlet for the moneyed old guard, Greenwich has found itself in recent years overrun by flashy hedge fund and private equity managers. But with the markets in flux, some high-end homes with price tags as high as $3 million to $8 million that sat unsold for six months or longer are now being offered as rentals, said Barbara Wells, a local Realtor.

“I had a rental on the market for $11,500 a month. On Monday, we got an offer for $8,500, which we countered with $9,500. They came back with $8,000,” she said. “I told them they were going the wrong way but they said, because of what was happening in the financial markets, this is our new offer. And guess what? The owner accepted it.”

Also shocking, she said, is the fact that some of the new homes offered for rent were houses built on spec.

In all likelihood, the real estate market could be frozen for the next 6 to 18 months or so as buyers and sellers struggle to reach agreement on prices, Ms. Corcoran said.

“The buyers have jumped to the sidelines and the sellers refuse to budge on their prices, completely in a state of disbelief that anything has changed,” she said.

Job losses and lower bonuses are likely to hurt sales of apartments in New York, particularly starter abodes like studios, one bedrooms and basic two bedrooms.

“The lowest-priced properties are always hit hardest first and recover last,” said Ms. Corcoran, who estimates that 20 to 25 percent of apartment buyers in the city work on Wall Street. “The rich have more wiggle room.”

Despite the malaise, she says she sees some hope.

“This feels like 1987,” after the stock market crashed, she declared. “It’s not even close to ’73 or ’74, when people used to feel sorry for you if you told them you lived in New York City.”

That said, Ms. Corcoran said that data she once compiled showed that apartment prices in New York had peaked in 1988, one year after the ’87 crash, and taken 11 years to recover.

Of course, there’s another much-watched barometer of Wall Street buoyancy: traffic at some of the city’s high-end strip clubs.

During the heyday of the Wall Street boom in the 1990s, Lincoln Town Cars, Rolls-Royces and Bentleys were often found idling outside places like Scores. Inside, according to people who were present at the time, groups of brokers routinely dropped $50,000 and even $100,000 in a single night.

In the “presidential suite” at Scores, with its own wine steward who delivered $3,200 bottles of Champagne, the tabs grew quickly.

While dancers may not receive gifts like the ones once lavished upon them — say, a $10,000 line of credit at Bloomingdale’s or a pair of $125,000 earrings — the clubs still appear to be filled with brokers, bankers and foreign businessmen.

On a recent night at Rick’s Cabaret in New York, men in suits and ties were in full force. At around 10 p.m. — early for a strip club — 10 of the club’s 11 private rooms on the second floor were booked.

“Men will never grow tired of the high-class strip-club experience,” said Lonnie Hanover, a spokesman for Rick’s Cabaret International in New York. Rick’s, which is publicly traded on the Nasdaq and has 19 clubs across the country, even plans to expand.

“When times are tough, there is no better form of escapism than a night at a gentlemen’s club,” he added.

IN the early 1980s, Mr. Stone (who gave the world Gordon Gekko and the “Greed is good” mantra in “Wall Street”) spent time in Miami doing research for his movie “Scarface” (with its cocaine-snorting gangster Tony Montana).

When he returned to New York he noticed a shift in the city’s culture of high finance, a world he was familiar with from his childhood. While Wall Streeters weren’t packing guns, other similarities startled him. “What shocked me was I met all these guys who at a young age were making millions and they were acting like these guys in Miami,” Mr. Stone recalled. “There’s not much difference between Gordon Gekko and Tony Montana.”

“Money was worshiped and continues to be worshiped,” Mr. Stone added. “Maybe that will change now.”

Adoration of riches is hardly new, however. In the mid- to late 19th century, the Gilded Age — a term Mark Twain coined in 1873 — offered equally ostentatious displays of wealth and a broadening gulf between rich and poor.

“In the Gilded Age, they built great, enormous palazzos in Newport that they lived in for six weeks a year,” said the historian John Steele Gordon, whose book, “An Empire of Wealth,” chronicles that era. “During the last 25 years, it’s certainly been a gilded age in the sense that enormous fortunes have been built up in an unprecedented way.”

Part of Wall Street’s allure for the young and ambitious was that anyone — regardless of education or breeding — could hit it big and live like a kingpin.

Consider, for instance, Jordan Belfort.

In 1987, Mr. Belfort, then a down-on-his-luck former meat-and-seafood distributor, was standing outside an apartment building in Bayside, Queens, when a childhood acquaintance who worked on Wall Street pulled up in a Ferrari.

“This was a guy who you never would have expected would be making this kind of money,” Mr. Belfort recalled in a recent telephone interview. “I was broke, broke, broke, down to my last $100.”

Mr. Belfort hit the Street in the late 1980s, and he recounted his adventure last year in a book called “The Wolf of Wall Street,” which he published after serving almost two years in prison for securities fraud and stock manipulation. He recently finished a second installment, “Catching the Wolf of Wall Street,” to be released in February.

When he first struck it rich, he followed a well-trodden path for Wall Street upstarts.

“First thing I did was go out and buy a Jaguar,” he said. “Step One is you get the car. Step Two, you get a great watch. Then great restaurants, and then maybe a place in the Hamptons — a summer share with another broker.”

Whatever the Street’s excesses, it did offer individuals and institutions reliable, sophisticated and often efficient ways to trade and invest, helping to spread some of the wealth.

Markets were democratized as individuals who had never before bought a stock or bond dabbled in investing, even if that meant simply plunking down money in a mutual fund, or participating in their company 401(k) plans.

New technologies and the ability to trade stocks cheaply opened the financial doors to more people. As home prices rose, meanwhile, homeowners were enticed to tap into their new wealth through home equity loans and then used that money to pay for their own version of a lavish lifestyle.

DESPITE these gains in the middle class, though, the truly wealthy have pulled away from the pack. Not since the late 1920s, just before the 1929 market crash, has there been such a concentration of income among individuals and families in very upper reaches of the income spectrum, according to researchers at the University of California, Berkeley, and the Paris School of Economics.

Some say that anger over the yawning wealth divide found traction in the highly charged and polarizing debate in Congress over the bailout bill.

Mr. Fraser, the historian, says that anger is informed by the de-industrialization of the American economy in recent decades. Factory closings and the loss of manufacturing jobs that paid decent, middle-class wages coincided with the heady expansion of the financial sector, where compensation soared.

“That means that people in Ohio and Pennsylvania have not been living as high on the hog as those on Wall Street,” Mr. Fraser said. “There’s a real sense of anger at that unfairness.”

Even if the current crisis leads to a prolonged slowdown, people may still flock to finance jobs. But they may have to recalibrate their expectations.

“There’s no question that people on Wall Street are going to make less money,” said Jonathan A. Knee, a Columbia Business School professor and author of “The Accidental Investment Banker.”

Like any cultural force concerned about its legacy, the financial world has a custodian of its past. On Wall Street, it can be found at the Museum of American Financial History, just a block from the New York Stock Exchange.

Located in a grand space once occupied by the Bank of New York, it features a long timeline charting major market events. The last event it notes is the popping of the dot-com bubble earlier this decade.

Robert E. Wright, a financial historian at New York University who is a curator of the museum, said that there were still many unknowns about how recent events would be recalled.

“If the economic system shuts down and we go in for a deep recession, it probably is the end of an era,” he said.

Hedging its bets, the museum has already started collecting mementos from the current crisis to post on its wall.

    End of an Era on Wall Street: Goodbye to All That, NYT, 5.10.2008, http://www.nytimes.com/2008/10/05/business/05era.html







Meanwhile, in the Economy


October 5, 2008
The New York Times

After the Senate approved the $700 billion bank bailout, the majority leader, Harry Reid, tried to persuade his colleagues to address another economic calamity before they left town for the long election recess. He urged them to extend unemployment benefits for 800,000 jobless Americans.

In the face of Republican opposition, the measure failed. Benefits start expiring this week. So much for Main Street.

If it works as promised, the bailout will thaw the credit freeze and keep more banks from going under. But it is unlikely to save even more Americans from losing their jobs and homes.

The Labor Department reported on Friday that 159,000 jobs were lost in September. That is the biggest monthly drop in five years and the ninth straight month of job contraction. It brings total job losses for this year to 760,000.

Of the 9.5 million Americans now out of work, two million have been jobless for more than six months. Nearly 6.1 million people are working part time because they cannot find full-time work or because slack business conditions have led to fewer hours — and less pay.

Cutbacks in hours and pay are especially pernicious because for most of the Bush years, wage growth has lagged behind worker productivity and prices. As Americans have worked harder they have fallen further behind. The only good news — if you can call it that — was that credit was easy.

As a result, many Americans today have no savings and are deep in debt. That means they are even less prepared to take care of themselves and their families when they lose their jobs.

Conditions are only getting worse. Personal spending stagnated in August, the latest month with government data. Auto sales plunged in September. Factory orders are off. New home sales fell to a 17-year low in August, according to the Census Bureau. And home prices continued to fall sharply in July, for a decline of 16.3 percent over 12 months, according to the Standard & Poor’s/Case-Shiller index of prices in 20 major cities. There is no sign that prices have hit their bottom.

Exports, the one bright spot, are also set to fall, because many other nations took part in America’s financial follies and are now faltering as well.

All that weakness means that more Americans will lose their jobs in the months to come. Extending unemployment benefits is the least that Congress can do to help. The House overwhelmingly passed a bill to do that before it left Washington last week. The Senate must take the bill up as soon as it returns for its lame duck session.

There is a lot more work to do to fill in the gaps of the bailout bill. It does virtually nothing to prevent foreclosures and keep Americans in their homes. Congress must finally change the code to allow a bankruptcy court to reduce the size of bankrupt borrowers’ mortgages.

A new stimulus bill must also be crafted. It must include bolstered food stamps and aid to states and cities, so that they can continue to provide health care and keep paying for construction and other projects that provide desperately needed jobs.

The meltdown on Wall Street is only part of a larger meltdown, and the bailout bill is only one attempt at a fix.

    Meanwhile, in the Economy, NYT, 5.10.2008, http://www.nytimes.com/2008/10/05/opinion/05sun1.html






Bailout Plan Wins Approval; Democrats Vow Tighter Rules


October 4, 2008
The New York Times


WASHINGTON — After the House reversed course and gave final approval to the $700 billion economic bailout package, President Bush quickly signed it into law on Friday, authorizing the Treasury to undertake what could become the most expensive government intervention in history.

But even as Mr. Bush declared that the measure would “help prevent the crisis on Wall Street from becoming a crisis in communities across our country,” Congressional Democrats said that it was only a first step and pledged to carry out a sweeping overhaul of the nation’s financial regulatory system.

The final tally in the House was 263 to 171, with 91 Republicans joining 172 Democrats in favor. That was a wider bipartisan majority than vote-counters in both parties had expected, completing a remarkable turnabout from Monday, when the House defeated an earlier version of the bill by 228 to 205.

The financial markets, however, were not enthusiastic. Already weighed down by another round of bleak economic data, including a report showing that 159,000 jobs were lost in September, the Dow fell 157 points to close at 10,325, or nearly 818 points lower than when the week began, before the House’s initial rejection of the bailout.

Some measures of the credit markets improved after the bill was approved, but only modestly. Analysts said it was too soon to tell whether borrowing rates — the interest rates banks charge each other for loans, and a key indicator of the flow of credit — would fall.

The change in course by the House was prompted by fears of a global economic meltdown, and by old-fashioned political inducements added by the Senate: a portfolio of $150 billion in popular tax provisions, including credits for the production of solar, wind and other renewable energy, and an adjustment to spare middle-class families from paying the alternative minimum tax.

In the end, 33 Democrats and 24 Republicans who had voted no on Monday switched sides on Friday to support the plan. Both Mr. Obama and his Republican rival, Senator John McCain, voted for the measure when the Senate approved it on Wednesday, and both hailed Friday’s outcome.

Mr. McCain said that lawmakers had acted “in the best interests of the nation,” while Mr. Obama warned that “a long and difficult road to recovery” might still lie ahead.

In a sign of the urgency surrounding the economic rescue effort, Congressional staff rushed the newly printed legislation into a news conference where Democratic leaders gathered after the vote. Speaker Nancy Pelosi, of California, signed it at 2 p.m., and it was sent to the White House for Mr. Bush’s signature.

Appearing in the Rose Garden, Mr. Bush praised Congress for acting just two weeks after the Treasury secretary, Henry M. Paulson Jr., requested the emergency bailout legislation with a warning that the American economy was at risk of the worst economic collapse since the Depression.

“We have shown the world that the United States will stabilize our financial markets and maintain a leading role in the global economy,” Mr. Bush said.

But it was a hollow victory for the administration, which after long favoring a hands-off approach toward the financial industry has found itself interceding repeatedly this year to avert one calamity after another.

Ms. Pelosi and other Democrats, who expect to widen their majority in Congress in the November elections, said they intended to tighten controls.

“High-fliers on Wall Street will no longer be able to jeopardize that personal economic security of Americans,” Ms. Pelosi said, “because of the bright light of scrutiny, accountability and the attention given under regulatory reform.”

Representative Barney Frank, Democrat of Massachusetts and chairman of the Financial Services Committee, said: “We will be back next year to do some serious surgery on the financial structure.”

The Republican leader, Representative John A. Boehner of Ohio, had urged his colleagues to vote yes. “We know if we do nothing this crisis is likely to worsen and put us in an economic slump the likes of which we have never seen,” he said. “I am going to vote for this bill because I think it’s in the best interests of the American people.”

Opponents of the bailout called it a costly Band-Aid that did not address the core problems in the financial system. “Some things have changed in this bill but taxpayers will still be picking up the tab for Wall Street’s party,” said Representative Marilyn Musgrave, Republican of Colorado. “I am voting against this today because it’s not the best bill. It’s the quickest bill. Taxpayers for generations will pay for our haste and there is no guarantee that they will ever see the benefits.”

Among House Democrats as well as Republicans, many lawmakers facing the toughest challenges for re-election remained in the no column. Those with easier races were more likely to switch.

Many said they agonized over the decision amid a torrent of calls from constituents. Several who switched to yes cited a provision added by the Senate increasing the amount of savings insured by the Federal government to $250,000 per account, from $100,000.

Fears about the economy also motivated support. “Nobody in East Tennessee hates the fact more than me that I am going to vote yes today after voting no on Monday,” Representative Zach Wamp, a Republican, said.

“Monday I cast a blue-collar vote for the American people,” he continued. “Today I am going to cast a red, white and blue-collar vote with my hand over my heart for this country, because things are really bad and we don’t have any choice.”

Several Democrats in the Congressional Black Caucus said they were persuaded to support the bill by Mr. Obama.

Representatives Elijah E. Cummings and Donna F. Edwards, both of Maryland, said they had each spoken to Mr. Obama who helped persuade them to support the bill, in part by assuring them that he would work to achieve a goal that Democrats gave up during negotiations: a change in bankruptcy laws to let judges modify first mortgages.

Mr. Obama, speaking in Abington, Pa., said he had urged lawmakers from both parties to “not make the same mistake twice.” But he warned that passage of the measure should be just “the beginning of a long-term rescue plan for our middle class.”

Mr. McCain, speaking in Flagstaff, Ariz., warned that the bill was not perfect and there was more to be done. “It is an outrage that it’s even necessary,” Mr. McCain said. “But we must stop the damage to our economy done by corrupt and incompetent practices on Wall Street and in Washington.” Mr. McCain said he spoke to House Republicans before Friday’s vote and urged them to approve the bill.

Friday’s vote capped an extraordinary two-week final stretch for the 110th Congress. Lawmakers, eager to get home for the fall campaign season, had intended to wrap up by adopting a budget bill to finance government operations through early March.

Instead, after dealing with the budget, they found themselves still in Washington, just five weeks before Election Day, facing the most important vote of the year — the most important vote of their lives, many lawmakers said — and under extreme pressure by the White House, the presidential nominees, and Congressional leaders of both parties to make a quick decision.

Supporters said the bailout was needed to prevent economic collapse; opponents said it was hasty, ill conceived and risked too much taxpayer money to help Wall Street tycoons, while providing no guarantees of success. The rescue plan allows the Treasury to buy troubled securities from financial firms in an effort to ease a deepening credit crisis that is choking off business and consumer loans, the lifeblood of the economy, and contributing to a string of bank failures.

Officials say the final cost of the bailout will be far less than $700 billion because the government will resell the assets that it buys.

The final agreement disburses the money in parts, with Congress able to block the second $350 billion. It also provides for tighter oversight of the program by two boards, and requires the government to do more to prevent home foreclosures. Lawmakers also included efforts to restrict so-called golden parachute retirement plans for some executives whose firms seek help, and a provision allowing the government to recoup any losses after five years by assessing the financial industry.

Reporting was contributed by Robert Pear and Carl Hulse in Washington; Steven Lee Myers in Abington, Pa.; and Michael Cooper in Flagstaff, Ariz.

    Bailout Plan Wins Approval; Democrats Vow Tighter Rules, NYT, 4.10.2008, http://www.nytimes.com/2008/10/04/business/economy/04bailout.html






159,000 Jobs Lost in September, the Worst Month in Five Years


October 4, 2008
The New York Times


The American economy lost 159,000 jobs in September, the worst month of retrenchment in five years, the government reported on Friday, amplifying fears that an already painful downturn had entered a more severe stage that could persist well into next year.

Employment has diminished for nine consecutive months, eliminating 760,000 jobs, according to the Labor Department’s report. And that does not count the traumatic events of recent weeks, as a string of Wall Street institutions collapsed, prompting the $700 billion emergency rescue package approved by Congress on Friday.

“It’s a dismal report, and the worst thing about it is that it does not reflect the recent seizure that we’ve seen in the credit markets,” said Michael T. Darda, chief economist at MKM Partners, a research and trading firm in Greenwich, Conn. “There’s really nothing good about this report at all. We’ve lost jobs in nearly every area of the economy, and this is going to get worse before it gets better because the credit markets have deteriorated basically on a daily basis for the last few weeks.”

Though the bailout may restore order to the financial system and eventually filter through the economy by making it easier for businesses to secure capital, few analysts expect it to swiftly reverse the nation’s fortunes. Housing prices continue to fall, eroding household wealth just as millions suffer the weight of unmanageable debt. The deteriorating job market has taken paychecks out of the economy, reinforcing a predilection for thrift that has cut sales from car showrooms to hair salons.

Banks should see their balance sheets improve as the government relieves them of disastrous investments, yet they may remain skittish and reluctant to lend.

“At best, the bailout stops a much deeper decline in activity,” Mr. Darda said, “but it’s not like they’re going to do this and all of the sudden the clouds part and the skies are clear.”

Only a few weeks ago, many economists still held hopes that the economy might recover late this year or early next. But with the job market now contracting faster, and fear dogging the financial system, the broad assumption has taken hold that 2008 is a lost cause.

Most economists have concluded that the economy will struggle well into next year. More pessimistic forecasts envision the economy remaining weak through most or all of next year.

“This is an economy in recession, and every dimension of the report confirms that,” said Ethan S. Harris, an economist at Barclays Capital. “This has been preceded by a slow-motion recession. Now we’re going into the full-speed recession that will last somewhere between three and five quarters.”

For the first eight months of the year, the economy lost an average of 75,000 jobs each month. September’s report more than doubled the pace.

“A lot of companies came to the realization that there was no momentum in the economy to pick them up in the second half of 2008,” said Steve Drexel, chief executive of Corestaff Services, a staffing company in Houston. “They had been hanging on to people and hoping things would improve, but now a lot companies are just sort of retrenching.”

The unemployment rate remained steady at 6.1 percent in September, but economists said that reflected how people who had given up looking for work were not counted. Over the last year, the unemployment rolls have swelled by 2.2 million, to 9.5 million. On Friday, Goldman Sachs forecast that the jobless rate would reach 8 percent by the end of next year, which would be the highest in 25 years.

In Charlotte, Mich., Sean Schwartz, 26, has been out of a job for nearly two months since his last stint as a construction worker. His $750-a-week paycheck has been replaced by a $620.10 unemployment check every other week.

Mr. Schwartz and his wife — who works at Wal-Mart — have a 2-year-old daughter and are expecting a baby in December. His job search has turned up little beyond fast-food jobs at a fraction of his previous earnings. Mr. Schwartz is becoming anxious.

“We’re not getting the bills paid,” he said, estimating that his family is behind $5,000 on medical bills for his daughter and his wife’s prenatal care. “It’s rough. There’s nothing really out there.”

As the impact of Wall Street’s distress ripples out, economists expect opportunities to grow leaner still. On Friday morning, banks needing to borrow from other banks were paying nearly 4 percent more in interest than the Treasury offers on savings bonds — a spread reflecting a general unwillingness to part with cash. That spread was wider than after the 1987 stock market crash.

“It sets us up for some really grim news in the immediate future,” said Robert Barbera, chief economist at the research and trading firm ITG. “Credit was already hard to get in early September. But it’s really impossible to get now.”

The report amounted to a catalog of woes afflicting Americans who depend on paychecks.

Manufacturing lost 51,000 jobs in September, bringing the decline so far this year to 442,000. Retailers lost 35,000 jobs, and construction shed 35,000. Employment in transportation and warehousing slid by 16,000.

Jobs in financial services dropped by 17,000, and have slipped by 172,000 since employment peaked in that part of the economy in December 2006. Health care remained a bright spot, adding 17,000 jobs in September. Mining added 8,000 jobs.

Government payrolls grew by 9,000 jobs — a trend with a limited shelf life as the economic slowdown shrinks tax revenue.

Doug Fleming has been out of work since last fall, when he lost his job as a quality inspector for a home builder in Anderson, Ind. Nearly 800 résumés later, he has received no offers. “Maybe it’s my age,” said Mr. Fleming, 41.

His wife has emphysema but has visited the doctor only once in the last year because his family lacks health insurance, he said. His daughter, 15, was hoping to talk her way into her high school’s homecoming football game on Friday evening, unable to afford a ticket.

Unemployment rose to 11.4 percent among African-Americans in September, and to 19.1 percent among teenagers.

More than 21 percent of those receiving unemployment checks have been without work for more than six months, up from 17.6 percent a year ago, the report said.

In the suburbs of Richmond, Va., Ginny Hoover, a single mother, has been out of a job since November, when she lost her clerical position at a pharmaceutical company. Her $500-a-week take-home pay became a $285-a-week unemployment check. Barring an extension of those benefits by Congress — something blessed by the House of Representatives on Friday — Ms. Hoover, 48, received her last check this week.

“I’ve completely exhausted my savings, which was supposed to be a down payment for a house,” she said.

Initially, Ms. Hoover sought another office position. “Now, I’ll apply for anything that has a paycheck attached to it,” she said. Her current focus: a job selling cellphone service at a kiosk at a Costco store for $7 an hour — less than half of what she earned in her last position. “It won’t even cover my rent,” she said.

The number of Americans working part time because their hours were cut or they could not find a full-time job increased by 337,000 in September, to 6.1 million — a jump of 1.6 million over the last year, and the highest number since 1993.

Average weekly wages for some 80 percent of the American work force have risen by a meager 2.8 percent over the last year, with the gains more than reversed by increases in the prices of food and fuel.

“This economy is just not creating near enough economic activity to generate wage or income growth,” said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington. “That has serious living standards implications.”

    159,000 Jobs Lost in September, the Worst Month in Five Years, NYT, 4.10.2008, http://www.nytimes.com/2008/10/04/business/economy/04jobs.html






Obama Turns Bad Job News on McCain


October 3, 2008
Filed at 11:40 a.m. ET
The New York Times


ABINGTON, Pa. (AP) -- Democrat Barack Obama is trying to turn bad news about new job losses against presidential rival John McCain.

The government's jobs report released Friday showed employers cut 159,000 jobs last month, the most in more than five years and the ninth straight month of jobs loss.

Obama has told an audience in Abington, Pa., that the policies McCain and running mate Sarah Palin are promoting ''are killing jobs in America every single day.''

He criticized McCain for recently saying the economy is fundamentally strong and has made great progress under President Bush. He encouraged voters to change the direction from Republican leadership in the White House that he said hasn't worked.

    Obama Turns Bad Job News on McCain, NYT, 3.10.2008, http://www.nytimes.com/aponline/washington/AP-Candidates-Economy.html






Jobs Report Underlines Economic Decline


October 3, 2008, 8:48 am
Updated 10:34 a.m.
The New York Times > Economix
By David Leonhardt


The government is out with more bad economic news this morning: The job market began to deteriorate even before the financial crisis reached a more serious stage two weeks ago.

Employers cut 159,000 jobs in September, more than twice as many as in August or July, the Labor Department reported. It was the biggest monthly decline since 2003, when the economy was still losing jobs in the wake of the 2001 recession.

Forecasters had been expecting a loss of about 100,000 jobs in September.

The new number was especially worrisome because the government conducted its survey during the week of Sept. 8, before the credit crisis took a new turn for the worse on Sept. 17.

“The U.S. consumer is in major trouble, with wage and salary income growth evaporating, credit extremely tight or unavailable, home prices continuing to decline, and food and energy costs consuming a large share of household budgets,” said Joshua Shapiro, an economist at MFR, a research firm in New York. “Whatever the government might or might not do to try to bail out the financial system, a consumer-led recession is upon us, and it promises to be a serious one.” (More analyst reaction is here.)

Any single jobs report should be taken with a grain of salt, because the numbers can sometimes reverse themselves in the following month. But today’s report raises the possibility that the job market — and the broader economy — is also entering a new stage.

Until last month, job losses in the current economic slowdown had been relatively mild. Employers added relatively few jobs over the past five years, compared with past economic expansions, and it seemed that job losses might remain mild as a result. But a monthly loss of 159,000 isn’t mild; it was typical of the kind of decline during the job market’s slump between 2001 and 2003.

The unemployment rate held steady, at 6.1 percent, last month, but that was in part a reflection of the fact that more unemployed people stopped looking for work. To be counted as unemployed in the statistics, a person must be out of work and actively looking for a new job.

According to the new data, 375,000 people dropped out of the labor force last month. That number comes from a smaller, more volatile survey than overall employment and probably shouldn’t be taken literally. But it is also the reason the unemployment rate did not rise last month – and goes to show that the job market clearly is getting worse.

There was also a big spike in the number of people working part-time because they couldn’t find full-time work. More than 1.5 million people fell into this category in September, up from 400,000 a year earlier.

The job losses continued to be heaviest in industries tied to the housing market, like construction and real estate. But retailers, manufacturers, restaurants and hotels also shed jobs.

Government agencies and health-care employers – like hospitals and doctors’ offices – added jobs, as has been typical in recent years.

There was hardly any good news in this report. And the jobs numbers are especially important for two chief reasons. They are the first broad measure of economic activity during the previous month; and – unlike some other indicators, like gross domestic product – the jobs statistics describe the tangible effect that the economy is having on households.

Over the last year, the average hourly pay of rank-and-file workers – roughly 80 percent of the work force – has risen only 3.4 percent, according to the new numbers. The average workweek has also become shorter, so the increase in weekly pay has been even smaller: only 2.8 percent.

Inflation has been running at about 5 percent a year, which means that the most workers have taken an effective pay cut over the last year.

Over the course of the day, Economix will post reaction from economists and the presidential campaigns. Catherine Rampell will also be live-blogging the debate in the House of Representatives over the Wall Street bailout bill.

    Jobs Report Underlines Economic Decline, NYT, 3.10.2008, http://economix.blogs.nytimes.com/2008/10/03/jobs-report-underlines-economic-decline/?hp






Falling Oil Price Is a Positive Note Amid Turmoil


October 3, 2008
The New York Times


For the last year, rising oil prices have taken a toll on the economy, driving up gasoline and food costs, punishing airlines and automakers, and ripping a large hole in people’s pockets.

But lately, nearly lost amid the chaos in the markets, oil prices have been dropping sharply from July’s triple-digit peak. If that trend continues, as many analysts expect, it will put billions of dollars back into consumers’ wallets and provide badly needed support for a battered economy.

Ben S. Bernanke, the chairman of the Federal Reserve, pointed to the drop in energy prices as “a positive note” in recent testimony to Congress, even as he warned of the many other stresses facing the economy.

Oil has been volatile in recent weeks, bobbing from $91 to $120 a barrel amid wild swings in the markets.

But with oil demand falling in most Western countries and growth weakening in some of Asia’s booming economies, the trend is down. Crude oil futures closed at $93.97 a barrel, down $4.56, on Thursday and have lost 13 percent in the last week alone.

While consumers welcome the decline, which will reduce the nation’s $1.3 billion daily oil import bill, oil producers are wary. Mexico said it might have to cut its budget next year as petroleum revenue dropped. Countries like Russia and Venezuela, which have been riding a wave of energy-fueled nationalism, could be forced to scale back their ambitions and energy projects that require enormous financing could be delayed.

These difficulties could prompt the Organization of the Petroleum Exporting Countries to step in forcefully to stem the slide in prices, analysts said. Saudi Arabia, the oil cartel’s most powerful member, has signaled it wants to see oil fall below $100 to bolster the world economy, but it is unclear how low the Saudis and other producers will let prices fall.

Whatever OPEC tries to do, a growing number of experts say that a combination of weaker global growth and slumping demand is likely to keep pushing oil prices down in coming months.

“The fall in oil prices is equivalent to a new stimulus package for consumers,” said Lawrence J. Goldstein, an energy analyst at the Energy Policy Research Foundation. He calculated that each drop of $10 a barrel in the price of oil lowered the nation’s annual bill by about $70 billion. That is $230 for every American.

Gasoline now sells at $3.60 a gallon on average nationwide, according to AAA, down from its record of $4.11 a gallon in July, although prices are higher in some states because of lingering problems from Hurricane Ike. Experts say that if oil prices stayed from $75 to $100 a barrel for a while, that would likely push gasoline under $3.50 a gallon.

A result of record energy costs is that Americans have drastically cut back on their driving this year, reducing their gasoline usage at the fastest pace since 1983.

As prices peaked, oil consumption fell by 6 percent in July to its lowest level in five years, while the number of miles driven dropped the most since 1979, according the latest statistics from the Federal Highway Administration. For industrialized countries, which account for about 60 percent of global oil demand, consumption could fall by 1.3 million barrels a day this year, the steepest decline since 1982, according to analysts at Bernstein Research. That would more than offset the growth in consumption from developing nations like China, the analysts said.

“A study of the 1980s reaffirms our pessimism about oil demand in 2008 and 2009,” the Bernstein analysts said in a recent research note. “Recent data suggests we may finally be reaching the point of negative demand.”

Many analysts agree. Merrill Lynch said on Thursday that oil prices could fall as low as $50 a barrel in a global recession. Lawrence Eagles, an oil analyst for JPMorgan Chase, said: “This is the weakest fundamental situation we’ve had since 2002.”

Oil prices are still high by historical standards. Many businesses had not managed to raise their prices enough to compensate for this summer’s oil spike to more than $145 a barrel, and they say the high prices are still causing problems.

“We get excited when prices break below $100 a barrel, but we are still in a high feedstock and hydrocarbon environment,” said Rich Wells, the vice president for energy at Dow Chemical.

Automakers have appealed for government aid as consumers shun their gas guzzlers, a problem worsened lately by a credit squeeze for potential car buyers. The Ford Motor Company said this week that its United States sales had dropped 34 percent in September. Automakers like General Motors and Toyota, also reported sharp sales declines.

Oil costs are a big reason the global airline industry has lost money in all but one year since 2000. Fuel costs amounted to 14 percent of airlines’ expenses in 2000 but are forecast to reach 40 percent next year, the International Air Transport Association says.

“Our industry is like Sisyphus,” Giovanni Bisignani, IATA’s chairman, told an industry conference in Istanbul this summer. “After a long uphill journey, a giant boulder of bad news is driving us back down.”

A sustained drop in oil prices could lead to a new wave of mergers in the energy industry. Given the sharp increase in prices in recent years for everything from drill rigs to steel pipes, costs in the industry have risen sharply. The cost of adding production is now $70 to $90 a barrel, according to JPMorgan and other analysts.

Any drop below that range may curb investment in new oil supplies. Already, some producers are feeling the pinch. Petro-Canada, for example, signaled recently that the cost of developing oil sands in Canada would not be economical below $100 a barrel.

“Prices are still searching for true value and no one is quite sure what that is,” said Tom Bentz, an energy analyst at BNP Paribas in New York. “A lot will depend on how the global economic picture will shape up. We still have a world that is a scary place to live in.”

    Falling Oil Price Is a Positive Note Amid Turmoil, NYT, 3.10.2008, http://www.nytimes.com/2008/10/03/business/03oil.html






Credit Crisis Spreads a Pall Over Silicon Valley


October 3, 2008
The New York Times


SAN FRANCISCO — Since the credit crisis began gripping the financial world, Silicon Valley has watched from the sidelines, secure in the faith that it was insulated from the coming storm.

That faith is now being seriously undermined. High-tech entrepreneurs, investors and executives now believe the question is when, not if, the financial chaos will hurt the country’s cradle of innovation.

From San Francisco to San Jose, the effects are already palpable. This week, Apple, one of the Valley’s highfliers, lost 16.3 percent of its value as investors reasonably concluded that consumers would shun expensive gadgets over the holidays in favor of lower-ticket items — or paying down their credit cards. Shares in Yahoo and eBay are at their lowest levels in years.

Traveling in Europe on Monday, Steven A. Ballmer, Microsoft’s chief executive, conceded that financial problems would drag down business and consumer spending in the United States — and that many technology companies, including Microsoft, were vulnerable.

Other ominous signs abound. Semiconductor makers, many of which finance their capital-intensive operations with debt, have been hit hard. Advanced Micro Devices, a dimming rival to Intel, was expected to spin off its chip manufacturing operations this year to focus on processor design. Analysts say they believe the company has had trouble raising the hundreds of millions of dollars needed to make the move.

An A.M.D. spokesman, Drew Prairie, declined to comment on the status of the spinoff, saying that the company was in a mandatory quiet period ahead of an earnings release later this month.

The main drivers of Silicon Valley’s growth are start-up companies and the venture capitalists who back them. Many say that these engines of innovation are still chugging along, thanks in part to lessons learned and wisdom gained in the dot-com crash.

Nevertheless, a pall of anxiety seems to be spreading over the land.

“Funding will tighten up. We are certainly going to see some ripple effects,” said Ron Conway, a prominent venture capitalist who has invested in hundreds of Web start-ups over the last decade.

Start-ups that have less than six months of cash in the bank “better reduce costs,” Mr. Conway said. “I will certainly be advising my companies to do that.”

Silicon Valley has recited several calming mantras to itself during the prolonged economic turbulence. People are spending more and more time on the Internet — and advertising will inevitably follow. Blue-chip tech firms like Google, eBay and Cisco have balance sheets loaded with cash, not debt.

Yet nonstop economic gloom in other parts of the economy seems to have frayed the nerves of even the Valley’s most sublimely confident. Discussions of the economic crisis dominate conversations. Technology blogs offer prescriptions for riding out the crisis and intense debates over what percentage of start-ups are destined to fail.

According to a quarterly survey by Mark V. Cannice, director of the University of San Francisco Entrepreneurship Program, the confidence of venture capitalists has plummeted to the lowest level since the survey began in 2004.

“Everyone is worried about their budgets and everyone is worried about the economy,” said Jayant Kadambi, founder of Yume, a three-year-old online video advertising firm. “These are the conversations we have these days.”

Though companies like Yume claim that their business is not slowing, Internet advertising — the revenue model for an entire generation of Web start-ups — is perhaps one of the industry’s greatest vulnerabilities. In August, eMarketer, a digital marketing research firm, cited economic turbulence when it cut its projection for Internet ad dollars this year for a second time, to $24.9 billion, a 9 percent drop from its original projection.

In the hardest-hit sectors of the overall economy, companies appear to be putting the brakes on their Internet spending. General Motors said last month that it was cutting its digital ad spending, after saying earlier this year that it would dedicate $1.5 billion, half its annual budget, to online advertising.

Jeff Lanctot, chief strategy officer at Avenue A Razorfish, an interactive advertising agency, said financial services and auto firms in particular were pulling back. He worries that if the economic woes continue, online advertising will be severely hurt in 2009. “The digital ad industry is clearly not immune from macroeconomic conditions,” he said.

One lingering problem in the Valley is a dearth of successful public offerings. Only six venture-backed technology and health care start-ups have gone public this year; only two are trading above their offering price. Last year, 86 such companies went public, according to the National Venture Capital Association.

That has plenty of people in the Valley worrying that venture capital — the fuel for new start-ups — might disappear as investors find themselves without a way to cash out.

“Investment in venture firms could dry up if the drought continues and venture firms cannot show returns,” said Ken Wilcox, chief executive of SVB Financial Group, the parent of Silicon Valley Bank. Mr. Wilcox said he was concerned that the investors, or limited partners, in venture funds might begin to pull back.

“I’m getting more and more concerned about the next two years for the V.C. industry,” said Tom Crotty, a partner at Battery Ventures, who has noticed investors becoming increasingly wary of risky assets.

Many Valley start-ups have still been reporting successful fund-raising. But an increasing number of those that have raised money say they feel as if they slipped through a rapidly closing door. In early September, Skydeck, a 10-employee start-up that allows people to use the Web to organize their mobile phone calls and text messages, raised $3 million in venture capital. The very next weekend, the government took over Fannie Mae and Freddie Mac, and Lehman Brothers filed for bankruptcy protection.

“When I woke up on Monday morning I was pretty happy to have our fund-raising behind us,” said Jason Devitt, the company’s founder. “This week, I received a slew of e-mail congratulating us on raising money in this economy. Clearly there’s a real awareness of the impact.”

Like other entrepreneurs, Mr. Devitt says the recent turmoil has changed his plans. Skydeck is now focusing on building features that it can charge for, instead of free services that attract users but not revenue. He also said he would not hire new people until the company hit “certain revenue milestones.”

But not everyone is confident that the Valley is doing enough to adjust to the fast-changing economic situation. Jonathan Abrams, who founded the social networking pioneer Friendster, now runs a party-planning start-up called Socializr, which has only six employees and is prepared to “hunker down if things go bad,” Mr. Abrams said.

Mr. Abrams is unimpressed with the Valley’s readiness in general, saying numerous uninspired, copy-cat entrepreneurs are obsessed with the internal gossip and minutiae of the industry.

“The economy is tanking and people are arguing about whether they should go to Demo or TechCrunch,” two technology conferences that coincided last month, Mr. Abrams said. “Few companies sound like they are breaking new ground. It’s like, ‘Here is Twitter for dogs.’ And people still think they are going to get rich by being a blogger.”

“It seems to me like the industry is still in denial,” he said.

Ashlee Vance contributed reporting.

    Credit Crisis Spreads a Pall Over Silicon Valley, NYT, 3.10.2008, http://www.nytimes.com/2008/10/03/business/03valley.html






Op-Ed Contributor

The Borrowers


October 3, 2008
The New York Times



ON Monday, in a vote that will go down in history, the House of Representatives said no to a $700 billion plan to bail out the teetering financial system. Members of Congress chalked the rejection up to populist rage over the idea of rescuing Wall Street while helpless homeowners flail, and some representatives who voted no say they’ll vote no again when the version of the bailout passed by the Senate on Wednesday comes up in the House.

I’ll say this upfront: I hope the titans of finance who expect us little people to save them are ashamed of themselves. But at the same time, in painting Main Street solely as a victim of a rapacious Wall Street, we are being hypocritical.

We are all to blame.

Step back. The securities that are poisoning the financial system are made up of mortgages and home equity lines that are going sour. They may soon consist of sick credit card and automobile debt as well. “Innovation” on Wall Street meant that the institution that made the loans could sell them off, and bankers could carve up those loans into new instruments, which they in turn sold to investors around the globe, with the result being that no one felt responsible for ensuring that the person who got the mortgage or the credit card or the home equity loan could actually pay for it.

But who made the decision to take on that mortgage she couldn’t really afford? Who lied about her income or assets in order to qualify for a mortgage? Who used the proceeds of a home equity line to pay for an elaborate vacation? Who used credit cards to live a lifestyle that was well beyond her means? Well, you and I did. (Or at least, our neighbors did.)

In other words, without the complicity of Main Street, Wall Street’s scheme never would have flowered. Some would argue that the modern sales machinery — remember those ads telling you to let your home take you on vacation? — is to blame. And it is.

But we’re supposed to be adults, not children who can’t keep our hands out of the cookie jar. (Those who were lied to by brokers about the reset rates on adjustable-rate mortgages and other elements of their loans are in a different category.)

Just as many of us deserve a share of the blame, many of us also got a share of the profits. No, not the kind of profits that Wall Streeters got, at least individually. But if you sold your house over, say, the last five years, you got an inflated price because of the proliferation of credit made possible by the Street’s practices.

If you bought a house, then you got a lower mortgage rate than you would have if it weren’t for Wall Street.

If you made money on the shares of Merrill Lynch or Lehman Brothers or another participant in this mess, then you shared in the profits. One could even argue that the overall stock market wouldn’t have achieved the heights it did were it not for our housing and debt-fueled economy. So if you cashed out at all, then you got some of the profits.

This isn’t an argument in favor of the bailout plan. There are big questions that need to be answered. When Treasury Secretary Henry Paulson argues that the plan can’t impose onerous requirements on financial institutions because otherwise they won’t participate, I think, “Well, if they are in good enough shape that they actually have a choice, then why are we offering them a costly lifeline?”

This also isn’t an argument that a bailout would be fair to ordinary Americans. We are to blame, but we don’t deserve all the blame. We profited, but we didn’t get anywhere near the lion’s share of the profits — and from the sound of things, a bailout would stick us with a disproportionate amount of the bill.

But it’s also true that if the experts are right, a failure to act will stick us with most of the pain as the economy seizes up. The Wall Streeters who pocketed million-dollar bonuses can handle a layoff. Most Americans can’t.

Didn’t your parents teach you that life isn’t fair?

Bethany McLean, a contributing editor for Vanity Fair, is the co-author of “The Smartest Guys in the Room: The Amazing Rise and the Scandalous Fall of Enron.”

    The Borrowers, NYT, 3.10.2008, http://www.nytimes.com/2008/10/03/opinion/03mclean.html






Op-Ed Columnist

Edge of the Abyss


October 3, 2008
The New York Times


As recently as three weeks ago it was still possible to argue that the state of the U.S. economy, while clearly not good, wasn’t disastrous — that the financial system, while under stress, wasn’t in full meltdown and that Wall Street’s troubles weren’t having that much impact on Main Street.

But that was then.

The financial and economic news since the middle of last month has been really, really bad. And what’s truly scary is that we’re entering a period of severe crisis with weak, confused leadership.

The wave of bad news began on Sept. 14. Henry Paulson, the Treasury secretary, thought he could get away with letting Lehman Brothers, the investment bank, fail; he was wrong. The plight of investors trapped by Lehman’s collapse — as an article in The Times put it, Lehman became “the Roach Motel of Wall Street: They checked in, but they can’t check out” — created panic in the financial markets, which has only grown worse as the days go by. Indicators of financial stress have soared to the equivalent of a 107-degree fever, and large parts of the financial system have simply shut down.

There’s growing evidence that the financial crunch is spreading to Main Street, with small businesses having trouble raising money and seeing their credit lines cut. And leading indicators for both employment and industrial production have turned sharply worse, suggesting that even before Lehman’s fall, the economy, which has been sagging since last year, was falling off a cliff.

How bad is it? Normally sober people are sounding apocalyptic. On Thursday, the bond trader and blogger John Jansen declared that current conditions are “the financial equivalent of the Reign of Terror during the French Revolution,” while Joel Prakken of Macroeconomic Advisers says that the economy seems to be on “the edge of the abyss.”

And the people who should be steering us away from that abyss are out to lunch.

The House will probably vote on Friday on the latest version of the $700 billion bailout plan — originally the Paulson plan, then the Paulson-Dodd-Frank plan, and now, I guess, the Paulson-Dodd-Frank-Pork plan (it’s been larded up since the House rejected it on Monday). I hope that it passes, simply because we’re in the middle of a financial panic, and another no vote would make the panic even worse. But that’s just another way of saying that the economy is now hostage to the Treasury Department’s blunders.

For the fact is that the plan on offer is a stinker — and inexcusably so. The financial system has been under severe stress for more than a year, and there should have been carefully thought-out contingency plans ready to roll out in case the markets melted down. Obviously, there weren’t: the Paulson plan was clearly drawn up in haste and confusion. And Treasury officials have yet to offer any clear explanation of how the plan is supposed to work, probably because they themselves have no idea what they’re doing.

Despite this, as I said, I hope the plan passes, because otherwise we’ll probably see even worse panic in the markets. But at best, the plan will buy some time to seek a real solution to the crisis.

And that raises the question: Do we have that time?

A solution to our economic woes will have to start with a much better-conceived rescue of the financial system — one that will almost surely involve the U.S. government taking partial, temporary ownership of that system, the way Sweden’s government did in the early 1990s. Yet it’s hard to imagine the Bush administration taking that step.

We also desperately need an economic stimulus plan to push back against the slump in spending and employment. And this time it had better be a serious plan that doesn’t rely on the magic of tax cuts, but instead spends money where it’s needed. (Aid to cash-strapped state and local governments, which are slashing spending at precisely the worst moment, is also a priority.) Yet it’s hard to imagine the Bush administration, in its final months, overseeing the creation of a new Works Progress Administration.

So we probably have to wait for the next administration, which should be much more inclined to do the right thing — although even that’s by no means a sure thing, given the uncertainty of the election outcome. (I’m not a fan of Mr. Paulson’s, but I’d rather have him at the Treasury than, say, Phil “nation of whiners” Gramm.)

And while the election is only 32 days away, it will be almost four months until the next administration takes office. A lot can — and probably will — go wrong in those four months.

One thing’s for sure: The next administration’s economic team had better be ready to hit the ground running, because from day one it will find itself dealing with the worst financial and economic crisis since the Great Depression.

    Edge of the Abyss, NYT, 3.10.2008, http://www.nytimes.com/2008/10/03/opinion/03krugman.html






Bank Limits Fund Access by Colleges, Inciting Fears


October 2, 2008
The New York Times


In a move suggesting how the credit crisis could disrupt American higher education, Wachovia Bank has limited the access of nearly 1,000 colleges to $9.3 billion the bank has held for them in a short-term investment fund, raising worries on some campuses about meeting payrolls and other obligations.

Wachovia, the North Carolina bank that agreed this week to sell its banking operations to Citigroup, has held the money in its role as trustee for a fund used by colleges and universities and managed by a Connecticut nonprofit, Commonfund.

On Monday, Wachovia announced that it would resign its role as trustee of the fund, and would limit access to the fund to 10 percent of each college’s account value. On Tuesday, Commonfund said that by selling some government bonds and other assets held in the fund, it had succeeded in raising its liquidity to 26 percent.

Still, Wachovia’s announcement sent shock waves through higher education, sending hundreds of college presidents rushing to check their financial vulnerability on every front.

Some smaller colleges that had not previously arranged lines of credit were feverishly seeking to negotiate those on Wednesday. And some large institutions said they were facing, at the least, a major financial inconvenience as a result of Wachovia’s action.

The University of Vermont, for instance, said that about half of its liquid operating assets — $79 million — were invested in the fund.

“It appears that the asset is secure,” said Richard H. Cate, vice president for finance and administration at the University of Vermont, because, he said, much of the $9.3 billion is held in securities that will become available when they mature. “But we’re not real thrilled with the fact that we can’t access all of our money when we want it.”

Wachovia’s action was perhaps the most tangible signal yet that the credit crisis could have a powerful impact on higher education. Another sign came on Tuesday as Boston University, saying it needed to respond to the financial crisis with cautionary steps, announced an immediate hiring freeze and a moratorium on new construction projects. That decision was unrelated to the action by Wachovia, where Boston University was not an investor.

On Tuesday, officers of Commonfund held a lengthy conference call to provide details of Wachovia’s action to representatives of more than 900 colleges and universities, many of whom were upset, said W. Judson Koss, a spokesman for Commonfund.

“The whole issue is liquidity,” Mr. Koss said. “This is a fund that has been in operation for over 35 years, and is invested in nothing but Triple-A government and corporate paper, all top-notch equities.

“We’ve been going along just fine, but Wachovia had a liquidity concern. They asked, ‘What if there’s a run on the bank and we can’t redeem these securities?’ So they were the ones who pulled the pin on the grenade.”

Colleges have used the fund, formally called the Commonfund Short Term Fund, almost like a checking account, depositing revenues including tuition payments and withdrawing funds daily to finance payrolls, maintenance expenses, small construction projects and other short-term needs, college officials said.

Nearly 60 percent of the securities in the fund are scheduled to mature by Dec. 31, and thereafter would be available to investors, Commonfund said in a statement. When the remaining funds would become available was unclear. The fund said it was seeking a trustee to succeed Wachovia.

To date, none of the securities have defaulted, and all were continuing to pay timely principal and interest, the statement said.

But for the time being, some institutions that have relied on the fund were scrambling to secure money for operating expenses.

Augsburg College in Minneapolis is one of more than a dozen Minnesota colleges with investments in the fund. Augsburg was fortunate, its president, Paul C. Pribbenow, said, because its holdings were just $13,392.

“But this certainly raises the specter that we can no longer take anything for granted,” Dr. Pribbenow said. “It shows just how vigilant we need to become about every financial relation we have.”

The University of Akron had $800,000 invested in the fund, a small part of the university’s total portfolio of operating funds, which typically range from $100 million to $150 million in a semester, said John Case, the university’s chief financial officer. Shortly before Wachovia’s announcement, the university withdrew $80,000, but has since been unable to withdraw any of its remaining money, Mr. Case said.

Matthew Hamill, senior vice president of the National Association of College and University Business Officers, said, “This is a pretty significant event, in the short run, because it’s going to cause dislocation and uncertainty.” Mr. Hamill added: “My estimate is that in the long run, investors will wind up with their money back. But they don’t have access to cash in the short run, so it’s going to cause significant financial and operational changes.”

Molly Broad, president of the American Council on Education, which represents 1,600 colleges and universities, said: “A widespread credit crisis will affect a large number of our institutions very quickly. Those folks who’ve been saying that the economy could be seized by a liquidity crisis, well, it’s unfolding before our eyes, and it’s having an impact on colleges and nonprofits.”

At Boston University, President Robert A. Brown sent an e-mail message to faculty and staff members on Tuesday saying that the university would temporarily freeze hiring, with the exception of public safety employees and professors whose hiring process was under way, and that it would postpone all capital projects that had not begun.

Joseph Mercurio, the university’s executive vice president who oversees its budget, called the steps pre-emptive.

“We have a lot of economic uncertainties that have to do with the national economy,” Mr. Mercurio said, “and in light of those conditions we’re going to take some prudent steps right now.”

    Bank Limits Fund Access by Colleges, Inciting Fears, NYT, 2.10.2008, http://www.nytimes.com/2008/10/02/education/02college.html






As Credit Crisis Spiraled, Alarm Led to Action


October 2, 2008
The New York Times


This article was reported by Andrew Ross Sorkin, Diana B. Henriques, Edmund L. Andrews and Joe Nocera. It was written by Mr. Nocera.

“Panic can cause a prudent person to do rational things that can contribute to the failure of an institution.” — William A. Ackman of the hedge fund Pershing Square Capital Management.

It was early on Wednesday, Sept. 17, when executives at Pershing Square, Bill Ackman’s hedge fund, began getting nervous calls and e-mail messages from investors. Mr. Ackman, 42, has been a top Wall Street player for 15 years, making his clients — and himself — billions of dollars.

But now, Mr. Ackman and his colleagues were taken aback by what they were hearing. His big investors were worried about all of the Pershing assets held by Goldman Sachs, the blue-chip investment bank, whose stock had come under siege.

Never mind that Goldman kept Pershing’s assets in a segregated account, and that the money was safe. And never mind that Mr. Ackman believed Goldman was the world’s best-run investment bank and would come through the credit crisis unscathed.

Pershing investors still feared their money might be exposed. Mr. Ackman advised Goldman executives to do something to restore confidence — such as getting an infusion of capital from Warren E. Buffett, the billionaire investor. And while Mr. Ackman kept his assets at Goldman, he hurriedly set up accounts at three other institutions — just in case things got much worse.

Pershing had more faith than most. Up and down Wall Street, hedge funds with billions of dollars at Goldman and Morgan Stanley, another storied investment bank, were frantically pulling money out and looking for safer havens.

Panic was spreading on two of the scariest days ever in financial markets, and the biggest investors — not small investors — were panicking the most. Nobody was sure how much damage it would cause before it ended.

This is what a credit crisis looks like. It’s not like a stock market crisis, where the scary plunge of stocks is obvious to all. The credit crisis has played out in places most people can’t see. It’s banks refusing to lend to other banks — even though that is one of the most essential functions of the banking system. It’s a loss of confidence in seemingly healthy institutions like Morgan Stanley and Goldman — both of which reported profits even as the pressure was mounting. It is panicked hedge funds pulling out cash. It is frightened investors protecting themselves by buying credit-default swaps — a financial insurance policy against potential bankruptcy — at prices 30 times what they normally would pay.

It was this 36-hour period two weeks ago — from the morning of Wednesday, Sept. 17, to the afternoon of Thursday, Sept. 18 — that spooked policy makers by opening fissures in the worldwide financial system.

In their rush to do something, and do it fast, the Federal Reserve chairman, Ben S. Bernanke, and Treasury Secretary Henry M. Paulson Jr. concluded the time had come to use the “break the glass” rescue plan they had been developing. But in their urgency, they bypassed a crucial step in Washington and fashioned their $700 billion bailout without political spadework, which led to a resounding rejection this past Monday in the House of Representatives.

That Thursday evening, however, time was of the essence. In a hastily convened meeting in the conference room of the House speaker, Nancy Pelosi, the two men presented, in the starkest terms imaginable, the outline of the $700 billion plan to Congressional leaders. “If we don’t do this,” Mr. Bernanke said, according to several participants, “we may not have an economy on Monday.”

Setting the Stage

Wall Street executives and federal officials had known since the previous weekend that it was likely to be a difficult week.

With the government refusing to offer the same financial guarantees that helped save Bear Stearns, Fannie Mae and Freddie Mac, efforts on Saturday to find a buyer for Lehman Brothers had failed.

Sunday was spent preparing to deal with Lehman’s bankruptcy, which was announced Monday morning. Merrill Lynch, fearing it would be next, had agreed to be bought by Bank of America. The American International Group was near collapse. (It would be rescued with an $85 billion loan from the Federal Reserve on Tuesday evening.)

With government policy makers appearing to careen from crisis to crisis, the Dow Jones industrial average plunged 504 points on Monday, Sept. 15. Panic was in the air.

At those weekend meetings, Wall Street executives and federal officials talked about the possibility of contagion — that the Lehman bankruptcy might set off so much fear among investors that the market “would pivot to the next weakest firm in the herd,” as one federal official put it.

That firm, everyone knew, was likely to be Morgan Stanley, whose stock had been dropping since the previous Monday, Sept. 8. Within three hours on Tuesday, Sept. 16, Morgan Stanley shares fell another 28 percent, and the rising cost of its credit-default swaps suggested investors were predicting bankruptcy.

To allay the panic, the firm decided to report earnings a day early — after the market closed Tuesday afternoon instead of Wednesday morning. The profit was terrific — $1.425 billion, just a 3 percent decline from 2007 — and the thinking was that would give investors the night to absorb the good news.

“I am hoping that this will generally help calm the market,” Morgan Stanley’s chief financial officer, Colm A. Kelleher, said in an interview late that afternoon. “These markets are behaving irrationally. There’s a lot of fear.”

The Spreading Contagion

But contagion was already spreading. The problem posed by the Lehman bankruptcy was not the losses suffered by hedge funds and other investors who traded stocks or bonds with the firms. As federal officials had predicted, that turned out to be manageable. (That was one reason the government did not step in to save the firm.)

The real problem was that a handful of hedge funds that used the firm’s London office to handle their trades had billions of dollars in balances frozen in the bankruptcy.

Diamondback Capital Management, for instance, a $3 billion hedge fund, told its investors that 14.9 percent of its assets were locked up in the Lehman bankruptcy — money it could not extract. A number of other hedge funds were in the same predicament. (When called for comment, Diamondback officials did not respond.)

As this news spread, every other hedge fund manager had to worry about whether the balances they had at other Wall Street firms might suffer a similar fate. And Morgan Stanley and Goldman Sachs were the two biggest firms left that served this back-office role. That is why Mr. Ackman’s investors were calling him. And that is what caused hedge funds to pull money out of Morgan Stanley and Goldman Sachs, hedge their exposure by buying credit-default swaps that would cover losses if either firm couldn’t pay money they owed — or do both.

It was fear, not greed, that was driving everyone’s actions.

Breaking the Buck

There was another piece of bad news spooking investors — and government officials. On Tuesday, the Reserve Primary Fund, a $64 billion money market fund, and two smaller, related funds, revealed that they had “broken the buck” and would pay investors no more than 97 cents on the dollar.

Money market funds serve a critical role in greasing the wheels of commerce. They use investors’ money to make short-term loans, known as commercial paper, to big corporations like General Motors, I.B.M. and Microsoft. Commercial paper is attractive to money market funds because it pays them a higher interest rate than, say, United States Treasury bills, but is still considered relatively safe.

A run on money funds could force fund managers to shy away from commercial paper, fearing the loans were no longer safe. One reason given by the Reserve Primary Fund for breaking the buck was that it had bought Lehman commercial paper with a face value of $785 million that was now worth little because of its bankruptcy. If money market funds became fearful of buying commercial paper, that would make it far more difficult for companies to raise the cash needed to pay employees, for instance. At that point, it would not just be the credit markets that were frozen, but commerce itself.

Just as important, in the eyes of federal officials, was that money market funds had long been viewed by investors as akin to bank accounts — a safe place to store cash and earn interest on that money. Despite lacking federal deposit insurance, these funds held $3.4 trillion in assets.

“Breaking the buck was the Rubicon,” said a federal official. “This was the first time in the crisis that you could see stories talking about how it was affecting real people.”

Since that Monday, big institutional investors — like pension funds and college endowments — had been pulling money out of money funds. On Tuesday, individual investors joined the stampede.

At the Investment Company Institute, the trade group for the mutual fund industry, executives had organized a conference call that week with top-level fund executives and government officials.

“We were saying to Treasury and the Fed, at a very high level: Pay attention to this issue. This will have an impact,” recalled Greg Ahern, the group’s chief communication officer.

But government officials monitoring the crisis did not need the warning. They were already watching money fund outflows with alarm.

Surprisingly, stock investors — feeling better because of the government’s A.I.G. rescue plan — either did not comprehend or ignored the growing chaos in credit markets; the Dow actually rose 141.51 points on Tuesday.

A Dark Day

The respite was brief. Wednesday, Sept. 17, was one of those dark, ugly market days that offers not even a glimmer of hope.

Fearing the worst, Alex Ehrlich, the global head of prime services at the Swiss bank UBS, arrived at work in New York at 5 a.m. and immediately started putting out fires. Because he ran the firm’s prime brokerage unit, clients were calling to see whether their money was safe.

“We were being flooded with client requests to move positions, and the funding markets, which are critically important to prime brokers, were extremely volatile,” he said.

Within seconds of the market opening, the Dow was down 160 points. Among the big losers was Morgan Stanley. Despite the strong earnings it had disclosed late Tuesday, its stock continued to plummet. By noon, the Dow was down 330 points. It rallied in the afternoon, but went into free fall in the last 45 minutes, closing down 449 points.

And that was just what investors could see. Behind the scenes, the credit markets had almost completely frozen up. Banks were refusing to lend to other banks, and spreads on credit default swaps on financial stocks — the price of insuring against bankruptcy — veered into uncharted waters.

Moreover, the drain on money funds continued. By the end of business on Wednesday, institutional investors had withdrawn more than $290 billion from money market funds. In what experts call a “flight to safety,” investors were taking money out of stocks and bonds and even money market funds and buying the safest investments in the world: Treasury bills. As a result, yields on short-term Treasury bills dropped close to zero. That was almost unheard of.

In the stock market, Mr. Ehrlich of UBS was horrified by the plunge of Morgan Stanley’s shares, given the stellar earnings. “It felt like there was no ground beneath your feet,” he said. “I didn’t know where it was going to end.”

A Chief Executive’s Anger

Neither did Morgan Stanley’s chief executive, John J. Mack. A week before, his firm’s stock was trading in the mid-40s. On Wednesday, it fell from $28.70 a share to $21.75 — down about 50 percent over a week.

“There is no rational basis for the movements in our stock or credit default spreads,” Mr. Mack wrote in a companywide memo on Wednesday. Mr. Mack lashed out at the people he felt were responsible for Morgan Stanley’s woes: the short-sellers, who profit by betting that a stock will fall.

Like most Wall Street firms, Morgan Stanley over the years had handled transactions for short-sellers, despite complaints by other companies that short-sellers unfairly ganged up on their stock. Nevertheless, Mr. Mack called Senator Charles E. Schumer, Democrat of New York, and Christopher Cox, the chairman of the Securities and Exchange Commission, pressing them to ban short-selling.

He raged about what he viewed as a concerted effort to drive down the firm’s stock. “He got emotional,” says one person who knows him well.

Meeting with staff members Thursday morning as the stock plunged further — hitting a low of $11.70 midday — Mr. Mack said: “Listen. I know everybody is anxious about the stock price. I’m not selling any shares, and neither is my team. But I understand if you’re nervous and want to sell some shares.” Some did. (The company said fewer than one-third of employees sold stock that day.)

At the same time, Mr. Mack began talks to merge with Wachovia, and called other banks about possible combinations. He also called Mr. Buffett for advice, while aides in Tokyo contacted Mitsubishi UFJ, Japan’s biggest lender, hoping to raise additional capital.

Run on a Fund

Even as stocks tanked, turmoil was worsening in money markets. On Wednesday evening, Paul Schott Stevens, the head of the Investment Company Institute, learned about a problem with another money fund. “This time it was Putnam,” recalled Mr. Stevens, referring to the Boston-based mutual fund company Putnam Investments.

Out of the blue, it seemed, there was a run on the $12.3 billion Putnam Prime Money Market Fund. That meant the money fund contagion was spreading. Because of huge withdrawals, Putnam decided it had to shut the fund, and distribute the cash to shareholders. If it did not, the first ones out the door would get a better deal than the laggards.

Executives of the Investment Company Institute and fund officials scrambled to find a solution that would keep Putnam from having to take that step, but they failed. On Thursday, Putnam shuttered the fund. (After the government rescue plan was announced, it sold the fund, intact, to another company, and investors did not lose a penny.)

The Fed Takes Action

Ben Bernanke had spent his career studying financial crises. His first important work as an economist had been a study of the events that led to the Great Depression. Along with several economists, he came up with a phrase, “the financial accelerator,” which described how deteriorating market conditions could speed until they became unmanageable.

To an alarming degree, the credit crisis had played out as his academic work predicted. But his research also led Mr. Bernanke to the view that “situations where crises have really spiraled out of control are where the central bank has been on the sideline,” according to Mark Gertler, a New York University economist who has collaborated with Mr. Bernanke on some papers.

Mr. Bernanke had no intention of keeping the Fed on the sidelines. As the crisis deepened, it took more aggressive steps. It added liquidity to the system. It opened the discount window — the emergency lending facility that had been reserved for troubled banks — to investment banks. It also agreed to absorb up to $29 billion in Bear Stearns losses and made an $85 billion loan to keep A.I.G. afloat.

Representative Barney Frank, the Massachusetts Democrat who leads the House Financial Services Committee, asked Mr. Bernanke if the Fed had $85 billion to spare. “We have $800 billion,” Mr. Bernanke replied, according to Mr. Frank.

Since the Bear Stearns bailout, Treasury and Fed officials had discussed what a broad government intervention might look like. Although there were suggestions for a “bank holiday” — a temporary, nationwide closing of banks, which had not been done since 1933, to stem panicky withdrawals — Mr. Bernanke and Mr. Paulson dismissed the idea, fearing it would do far more harm than good by scaring people needlessly. They had both assembled teams to map out drastic rescue plans — the “break the glass” plans.

Almost from the start, they concluded the best systemic solution was to buy hard-to-sell mortgage-backed securities.

On Wednesday morning, during a conference call with other top officials, including Jean-Claude Trichet, the president of the European Central Bank, Mr. Bernanke sounded them out on a big government bailout. The other officials sounded relieved; their main questions were about whether Congress could act quickly.

That evening, Mr. Bernanke told Mr. Paulson during a conference call: “You have to go to Congress. This is pervasive.” Mr. Paulson agreed.

A Sense of Urgency

By Thursday morning, the need for dramatic action had grown even more urgent.

In Asia, stocks had already closed lower. To quell fears before the opening of European markets, the Fed and other central banks announced they would make $180 billion available, in an effort to get banks to start lending to each other again. The Fed had agreed to open its discount window to make loans available to money market funds to prevent further runs.

But it was to little avail.

At 8:30 Thursday morning in the United States, when Mr. Paulson and Mr. Bernanke reviewed the state of affairs, markets remained roiled. The crisis was not easing up.

One Bank’s Solution

Lloyd C. Blankfein, Goldman Sachs’s chief executive, had arrived at the firm’s office on 85 Broad Street just before 7 a.m. Thursday, anticipating another bad day. The investment bank’s stock had already been pummeled. From nearly $250 a share last October, it had fallen to $114.50 on Wednesday — after hitting a low of $97.78 that day.

One idea he had been exploring was to transform Goldman into a bank holding company. Mr. Mack, meantime, was also considering such a move for Morgan Stanley, and both were in separate discussions with the Fed. There was safety in that notion — they would become depository institutions regulated by the Fed and others — though it also meant they would not be able to pile on as much debt as they had as investment banks. That would hurt profits. But now profits were less pressing than survival. Mr. Blankfein accelerated the planning.

By 1 p.m., the Dow had fallen another 150 points — meaning that in a day and a half it was down nearly 600 points. Goldman’s stock dropped to $85.88, its lowest in nearly six years.

Just then, a prankster piped “The Star-Spangled Banner” over the firm’s loudspeaker system on the 50th floor. Fixed-income traders stopped and stood at attention, some with hands on their hearts. Oddly, it was at precisely that moment that the market — and Goldman’s shares — started to rise.

The traders began to cheer.

Curbing Short-Selling

What happened? At 1 p.m. New York time, the Financial Services Authority in Britain, which regulates that nation’s financial institutions, announced a ban on short-selling of 29 financial stocks that would last at least 30 days.

“When I saw that, I knew we were about to have the mother of all short squeezes,” said one hedge fund manager. Realizing that the S.E.C. was likely to follow suit, hedge funds began “covering their shorts” — that is, buying the stocks they had borrowed to short, even if it meant taking a loss.

That caused all kinds of stocks to begin rising. Sure enough, the S.E.C. followed suit the next day, placing a temporary short-selling ban on 799 financial stocks.

A few hours later came the second event. At 3:01 CNBC reported the Treasury and the Fed were planning a giant fund to buy toxic mortgage-backed assets from financial institutions. Though there had been hints of this earlier in the afternoon, and stocks had started rising around 2:30, the wide dissemination set off a huge rally. In a 45-minute burst, the Dow gained another 300 points, closing the day up 410 points.

Meeting on Capitol Hill

Two hours later, Mr. Paulson and Mr. Bernanke trooped up to Capitol Hill for a somber session with Congressional leaders. “That meeting was one of the most astounding experiences I’ve had in my 34 years in politics,” Senator Schumer recalled.

As the members of Congress and their aides listened, the two laid out their plan. They would begin offering federal insurance to money market funds immediately, in order to stop the run on money funds.

In addition, the S.E.C. would institute a ban on short-selling of financial stocks. Although Treasury officials concede that the move was mostly symbolic — investors can still buy put options that have the same effect as shorting stocks — they did it mainly “to scare the hell out of everybody,” as one official put it.

After Mr. Bernanke made his remark about the possibility that there might not be an economy on Monday without this plan, you could hear a pin drop.

“I gulped,” Mr. Schumer said.

Congressional leaders were nearly unanimous in saying that it needed to be done for the good of the country. Representative John A. Boehner of Ohio — the Republican House leader who a week later would lead the revolt against the plan — said it was time to put politics aside and move quickly, according to several participants. (An aide to Mr. Boehner denied that he voiced support for the plan, only that he made a plea for cooperation.)

Hearing that Mr. Bernanke and Mr. Paulson wanted legislation passed in a matter of days, the Senate majority leader, Harry Reid, expressed astonishment. “This is the United States Senate,” he said. “We can’t do it in that time frame.” His Republican counterpart, Senator Mitch McConnell, replied, “This time we can.”

He was wrong. After a week of wrangling, political infighting and compromise, the House on Monday voted down the legislation. The Dow plunged nearly 778 points, and credit markets had worsened, with interest rates rising and loans becoming harder to obtain.

Two weeks after Mr. Paulson and Mr. Bernanke made their appeal, the House is likely to try again.

Additional reporting was by Jenny Anderson, Nelson D. Schwartz, Eric Dash, Louise Story, Michael M. Grynbaum, Carter Dougherty and Vikas Bajaj.

    As Credit Crisis Spiraled, Alarm Led to Action, NYT, 2.10.2008, http://www.nytimes.com/2008/10/02/business/02crisis.html?hp






Senate Passes Bailout Plan; House May Vote by Friday


October 2, 2008
The New York Times


WASHINGTON — The Senate strongly endorsed the $700 billion economic bailout plan on Wednesday, leaving backers optimistic that the easy approval, coupled with an array of popular additions, would lead to House acceptance by Friday and end the legislative uncertainty that has rocked the markets.

In stark contrast to the House rejection of the plan on Monday, a bipartisan coalition of senators — including both presidential candidates — showed no hesitation in backing a proposal that had drawn public scorn, though the outpouring eased somewhat after a market plunge followed the House defeat. The Senate margin was 74 to 25 in favor of the White House initiative to buy troubled securities in an effort to avoid an economic catastrophe.

Only Senator Edward M. Kennedy, who is being treated for brain cancer, did not vote.

The two Senate leaders, Senators Harry Reid, Democrat of Nevada and the majority leader, and Mitch McConnell of Kentucky, the Republican leader, strongly urged their colleagues to approve the plan despite the political risk given public resentment.

“Supporting this legislation is the only way to make the best of a crisis and return our country to a path of economic stability, prosperity and growth,” said Mr. Reid, who asked that senators vote formally from their desks. The presence in the Senate of both presidential candidates in the final weeks of the campaign also gave weight to the moment. The political tension was clear as Senator Barack Obama walked to the Republican side of the aisle to greet Senator John McCain, who offered a chilly look and a brief return handshake.

Mr. McCain did not make remarks on the legislation. Mr. Obama, in his speech, said the bailout plan was regrettable but necessary and he referred to the stock market drop after the House vote. “While that decline was devastating, the consequences of the credit crisis that caused it will be even worse if we do not act now,” he said.

President Bush issued a statement applauding the Senate for its vote in favor of a bill he called “essential to the financial security of every American.” He urged the House to follow suit.

In the House, officials of both parties said they were increasingly confident that politically enticing provisions bootstrapped to the original bill — including $150 billion in tax breaks for individuals and businesses — would win over at least the dozen or so votes needed to reverse Monday’s outcome and send the measure to President Bush.

The stock market reflected nervous jitters over a vote that was to occur after it closed but that could affect the future of many Wall Street workers. The Dow Jones industrial average was off almost 220 points during the day, but recovered to close down just 19.6 points, or 0.2 percent, at 10,831.07.

Besides the tax breaks, senators also made a change that had drawn widespread support in recent days — a temporary increase in the amount of bank deposits covered by the Federal Deposit Insurance Corporation, to $250,000 from $100,000. And the entire package was attached to legislation requiring insurers to treat mental health conditions more like general health problems, a long-sought goal of many lawmakers who demanded such parity.

As the shape of the new bill became more clear Wednesday, some House Republicans and Democrats indicated that the changes were enough to get them to take another look at the measure and perhaps change their minds — even though the new items being added would substantially increase the burden on taxpayers.

Representative John Yarmuth, a Kentucky Democrat who on Monday voted no, said he found the new proposal more acceptable, as did Representative Jim Ramstad, a retiring Republican from Minnesota who voted in opposition as well.

“The inclusion of parity, tax extenders and the F.D.I.C. increases has caused me to reconsider my position,” Mr. Ramstad said. “All three additions have greatly improved the bill.”

Leaders of both parties in the House, who spent much of Wednesday on the phone taking the temperature of lawmakers not scheduled to return until Thursday, said they were identifying other potential converts as well, and were finding a more receptive audience for the revised measure because of the tax package and other changes.

Some conservative House Republicans and liberal Democrats remained adamantly opposed. “The bailout legislation that the Senate is sending back to the House is a fraternal twin to the one I voted against on Monday — meet the new bill, same as the old bill,” said Representative Joe Barton, Republican of Texas.

While popular, the tax breaks, which had been the center of a bitter dispute between House and Senate Democrats, caused problems as well.

A coalition of centrist Democrats led by Representative Steny H. Hoyer of Maryland, the majority leader, had refused to back the tax benefits unless they were deficit neutral — offset by tax increases or spending cuts elsewhere. The bill now includes the Senate version of the tax plan, which adds most of the cost to the deficit over the next decade.

But the Senate leaders decided to present the House with a take-it-or-leave-it choice, and it is possible some Democrats could desert the bill over the tactic. Mr. Reid said the Senate would remain in session this week to see how House members react and whether they might attempt to change the bill, forcing another Senate review.

Mr. Hoyer said he was disappointed in the Senate’s decision on the tax breaks and worried it could cost Democratic votes. “Certainly there are people who are upset we are making the deficit worse as we are trying to stabilize the economy,” Mr. Hoyer told reporters. But in a telephone conference call among the Democratic leadership Wednesday morning, he told his colleagues he would back the measure because the economic rescue needed to take priority, according to participants.

In the end, Senate leaders decided to overcome some of the ideological and political resistance that doomed the measure in the House with the tried-and-true Congressional approach of stuffing the bill with provisions that would make it hard for many lawmakers to resist.

“All I’m trying to do is get this thing passed,” said Mr. Reid, denying he was trying to jam the House by giving members no choice but to accept the tax proposal he favored or again reject the bailout.

The multiple tax breaks, called extenders in the Capitol because they renew or extend expiring tax benefits, appeal to many lawmakers and could provide a political argument for backing a bill that has otherwise been very unpopular.

Instead of siding with a $700 billion bailout, lawmakers could now say they voted for increased protection for deposits at the neighborhood bank, income tax relief for middle-class taxpayers and aid for schools in rural areas where the federal government owns much of the land.

“This bill has been packaged with a lot of very popular things to give it even more momentum,” said Senator Jeff Sessions, a Republican from Alabama, who is an opponent.

The approximately $150 billion in new tax breaks, which offer incentives for the use of renewable energy and relieve 24 million households from an estimated $65 billion alternative-minimum tax scheduled to take effect this year, would be offset by only about $40 billion in spending cuts or tax increases elsewhere.

Moreover, the increase in federal deposit insurance will not be financed over the short term, as the insurance program now is, by assessing premiums on banks that benefit. Instead, banks will get an open-ended line of credit directly to the Treasury Department. But the Congressional Budget Office noted that federal law requires the banks to eventually make up any shortfall and any loans to be repaid, though not until at least 2010.

The changes in the bill were measurable by volume. The initial proposal from the Treasury Department ran just three pages; the latest version exceeds 450.

After receiving the proposal from Treasury Secretary Henry M. Paulson Jr. almost two weeks ago, Congress instituted a series of changes, including additional oversight, steps to limit home foreclosures and restrictions on the compensation of executives of institutions that take part in the Treasury program.

Under pressure to tighten the plan even more, Congressional and administration negotiators decided to parcel out the $700 billion in installments, starting with a first tranche of $350 billion. And during a weekend of negotiations, they added as a final backstop a requirement that in five years the president must present Congress with a plan to make up any losses of tax funds by looking to the financial community to make up the difference.

Robert Pear contributed reporting.

    Senate Passes Bailout Plan; House May Vote by Friday, NYT,  2.10.2008, http://www.nytimes.com/2008/10/02/business/02bailout.html?hp






Manufacturing Slowed in September


October 2, 2008
The New York Times


A measure of American manufacturing activity contracted more than expected in September as new orders slowed sharply.

The reading of 43.5 from the Institute for Supply Management was down from 49.9 in August. It also was worse than economists’ prediction of 49.5, according to the consensus estimate of Wall Street economists surveyed by Thomson/IFR.

A reading above 50 signals growth.

“The headline I.S.M. has plunged into recession territory,” Ian Shepherdson, chief United States economist at High Frequency Economics, said Wednesday.

The index has been hovering on what economists call “the boom-bust” line for most of the year, but this is the first time it has dropped significantly. One component of the reading, the purchasing managers’ index, fell to its lowest level since October 2001, immediately after the Sept. 11 attacks.

The survey of purchasing managers found that new orders fell to 38.8 in September from a reading of 48.3 in August. Employment, deliveries, inventories and manufacturers’ order backlogs also fell.

Industries reporting contraction include apparel, furniture, machinery, transportation equipment and electrical appliances. High prices for commodities, along with tight credit conditions, have begun to squeeze companies.

In another economic report released Wednesday, the Commerce Department said that construction activity was unchanged in August even though spending for residential projects posted the first increase in 17 months, a rare bit of good news in the midst of the worst housing downturn in decades.

The report said that construction activity was flat in August, a better-than-expected outcome than the 0.5 percent fall that economists expected.

The big surprise was a 0.3 percent rise in residential activity, the first increase in housing activity since March 2007.

It was only the second monthly rise for housing in the last 29 months, a prolonged period of distress when the industry has been battered by slumping sales, falling prices and soaring mortgage defaults.

The performance in August for overall construction was better than the decline analysts expected. However, the government revised July activity to show a much bigger drop of 1.4 percent, in contrast to the 0.6 percent decline initially reported.

The 0.3 percent increase in housing left spending in this area at a seasonally adjusted annual rate of $343.6 billion. The gain was offset by a 0.8 percent drop in spending on nonresidential projects, which fell to $415.95 billion.

Spending on government projects rose 0.8 percent to a record $312.5 billion at a seasonally adjusted annual rate, with both state and local governments and federal projects at record highs.

    Manufacturing Slowed in September, NYT, 2.10.2008, http://www.nytimes.com/2008/10/02/business/economy/02econ.html






Ford’s U.S. Sales Fell 34% in Sept.


October 2, 2008
The New York Times


DETROIT — The Ford Motor Company said Wednesday that sales in the United States dropped 34 percent in September, as volatility in the financial markets added to the auto industry’s misery.

“Consumers and businesses are in a very fragile place,” James D. Farley, Ford’s marketing chief, said in a statement. “An already weak economy compounded by very tight credit conditions has created an atmosphere of caution.”

Other automakers will report September sales later Wednesday. A forecast by Edmunds.com predicted that sales would be down at the six largest carmakers, led by a 37 percent decline at Chrysler. General Motors is expected to report a 24 percent drop, while Toyota will probably say its sales fell 18 percent, Edmunds said.

Total sales were expected to be about 19 percent lower than September 2007, not adjusted for one fewer selling day this year.

Car dealers have been struggling to draw customers into their showrooms. Through August, vehicle sales nationwide were down 11.2 percent.

The three Detroit automakers have suffered most as high gasoline prices decimated demand for pickup trucks and sport utility vehicles. Sales of light truck are down more than 20 percent so far this year at G.M., Ford and Chrysler.

The companies have increased discounts on slow-selling models, with limited success. G.M. offered all shoppers an “employee pricing” discount on most models throughout September.

Michael Futrell, the general manager of the Champion Chevrolet dealership in Tallahassee, Fla., said he was able to offer deals like a Chevrolet Silverado pickup truck at $6,500 below cost, yet few people were interested.

He said car shoppers were typically hesitant in the months before a presidential election, but the weak economy had made this fall much worse.

“People want to buy but they just don’t want to pull the trigger until they know who’s going to be in office and what this economy’s going to do,” Mr. Futrell said. “What the consumer doesn’t understand is that there’s probably not a better time to buy a car. The deals are out there, but I think everybody’s so skeptical that they’re trying to hold off.”

Mr. Futrell said the first half of September was actually better than expected but that sales dried up after the extent of Wall Street’s troubles became apparent.

“It was like somebody just turned the spigot off,” he said.

Automakers hope the new models they are introducing this fall will help attract more shoppers. Chrysler is in the midst of introducing a redesigned version of its pickup, the Dodge Ram, and Ford will start selling its revamped pickup, the F-series, next month. G.M. has just started production of a crossover vehicle, the Chevrolet Traverse.

    Ford’s U.S. Sales Fell 34% in Sept., NYT, 2.10.2008, http://www.nytimes.com/2008/10/02/business/02sales.html?hp






Tighter Credit Only Adds to Auto Industry’s Troubles


October 1, 2008
The New York Times


DETROIT — After enduring a brutal sales slump caused by high gas prices and a faltering economy, the last thing the American auto industry needed was a credit crisis.

But with banks tightening up their lending, any hope for a recovery in vehicle sales this year has been dashed.

The virtual lockdown on credit is hurting Detroit’s Big Three and other automakers at every level. More consumers cannot get auto loans. Dealers are hard-pressed to secure financing for new inventories. The auto companies themselves are running short of cash and can hardly afford to borrow more at interest rates as high as 20 percent.

It all adds up to an increasingly dismal forecast for the industry. Vehicle sales fell 11 percent in the first eight months of the year compared with 2007. But September sales, which automakers will report Wednesday, are expected to be down as much as 19 percent, according to the auto research Web site Edmunds.com.

“We thought we had hit bottom, but it doesn’t look that way,” said David Healy, an analyst with Burnham Securities. “Unfortunately, October could be even worse.”

The biggest problem for the industry is the difficulties prospective car buyers are having in securing loans.

In 2007, nearly 83 percent of applications for auto loans in the United States were approved, according to CNW Marketing Research of Bandon, Ore. But so far this year, the approval rate has plunged to 63 percent.

“It frankly has become a nightmare for dealers and consumers who need a vehicle,” said Art Spinella, CNW’s president. “This is the worst we have seen it since we’ve been tracking it since 1984.”

Many shoppers — some with blue-chip credit histories — are able to get loans only at high rates.

“Instead of paying 7 percent like they should pay, they might have to pay 9 or 10 percent, and they’re just passing,” said Larry Kelly, general manager of Ritchey Cadillac-Buick-Pontiac-GMC in Daytona Beach, Fla.

The squeeze is particularly severe for customers with less-than-stellar credit scores who need subprime loans at higher interest rates.

While 67 percent of those consumers were approved for loans in 2007, only 22 percent are getting them this year, according to CNW.

“The subprime market has, for all intents and purposes, dried up,” said Mr. Spinella.

Automakers have already experienced a drastic drop in sales of larger vehicles like pickups and sport utility vehicles because of gas prices that hit $4 a gallon this spring.

But Mark LaNeve, head of North American sales for General Motors, estimates that G.M. is losing 10,000 to 12,000 sales a month because of tighter lending practices.

“It’s a bigger problem than $4-a-gallon gas,” said James Press, a Chrysler vice chairman. “We have buyers coming in, but they can’t get a loan.”

Detroit is bracing for particularly bad sales numbers for September. According to estimates from Edmunds.com, Chrysler sales may be down as much as 36 percent, G.M.’s may drop 23 percent, and Ford Motor Company sales could be down 25 percent.

Even Japanese automakers, which specialize in fuel-efficient smaller cars, are expected to record a rough month, with Toyota projected to be down by 17 percent and Nissan by 11 percent.

One Pennsylvania auto dealer said the credit squeeze was only adding to problems caused by a weak economy that many fear could turn into a recession.

“I think it’s just that people don’t have any money and the last thing they’re thinking about is buying a new car,” said Frank Davin, general manager of Woltz & Wind Ford outside Pittsburgh.

Auto dealers are also struggling to get financing for their vehicle inventories from banks and the finance companies, like Ford Motor Credit, that are controlled by automakers.

Many dealers are choking on the costs of keeping unsold S.U.V.’s on their lots, and can’t get loans to fill their showrooms with better-selling models.

Financial institutions are leery of financing any new vehicles because they cannot bundle the loans into securities to sell to investors — primarily because of the damage wrought by the failure of similar mortgage-backed securities.

The lack of available credit is accelerating the demise of many dealers. Nearly 600 of the nation’s 20,770 franchised new-car dealerships have closed their doors this year, according to the National Automobile Dealers Association.

The casualty list includes Bill Heard Enterprises, the top-selling Chevrolet dealership group in the United States, which filed for bankruptcy protection this week.

“We’re losing the number of dealerships we would typically see in a recessionary year,” said Paul C. Taylor, chief economist at the dealers’ association.

The credit squeeze is affecting the Detroit automakers’ own finances, too. G.M., for example, is burning through more than $1 billion in cash a month, but cannot go to the credit markets to raise additional capital. The company recently drew down $3.4 billion from its revolving credit line, and is in the process of cutting $10 billion in costs to improve its liquidity.

Ford’s credit arm recently decided to cease providing vehicle loans to Mazda, its Japanese affiliate, so it could concentrate on financing sales of Ford’s domestic brands.

Ford also is dipping into its corporate cash reserves to repay $1.5 billion in debt coming due Wednesday on previous bond sales. In a more stable economic environment, Ford would most likely refinance the debt rather than pay it off.

    Tighter Credit Only Adds to Auto Industry’s Troubles, NYT, 1.10.2008, http://www.nytimes.com/2008/10/01/business/01auto.html






Gov't Launches Mortgage Aid Program


October 1, 2008
Filed at 1:28 p.m. ET
The New York Times


WASHINGTON (AP) -- The government kicked off a program Wednesday that aims to prevent foreclosures by letting an estimated 400,000 troubled homeowners swap their mortgages for more affordable loans.

Lenders, rather than borrowers, will decide whether to participate in the program, which requires them to take a loss on the initial loan. The $300 billion, three-year program launched Wednesday is designed to help borrowers who owe more on their loans than their homes are worth.

To qualify, borrowers must be spending more than 31 percent of their income on mortgage payments. Loans made this year are excluded, except for those completed on Jan 1. Borrowers must have made six months of payments on their loans.

''For homeowners in trouble, this may be the help that they need,'' Housing and Urban Development Secretary Steve Preston said Wednesday. Officials did not have an updated estimate of how many homeowners were likely to qualify, beyond the Congressional Budget Office's estimate from earlier this year that 400,000 borrowers would participate.

The program, dubbed 'Hope for Homeowners,' was passed by Congress this summer as part of a massive housing bill. It is one of several government efforts to stem the mortgage crisis.

Critics, however, call the government's actions sluggish and inadequate. Earlier action to modify loans, they say, might have prevented a $700 billion financial industry bailout now being debated in Washington.

On Monday, a group of state banking and law enforcement officials released a report that said nearly 80 percent of borrowers with subprime loans as were not on track for assistance to avoid foreclosure as of May.

The report by the State Foreclosure Prevention Working Group criticized the lending industry for making only small changes to loan terms and noted that about one in five loans that were modified over the past year became delinquent again.

''While banks and Wall Street firms continue to report record write-downs of mortgage loan portfolios and securities, the losses do not appear to be flowing down to homeowners in the form of sustainable loan modifications,'' Iowa Attorney General Tom Miller, a founder of the state effort, said in a statement.

    Gov't Launches Mortgage Aid Program, NYT, 1.10.2008, http://www.nytimes.com/aponline/business/AP-Mortgage-Aid.html






Failed Deals Replace Boom in New York Real Estate


October 1, 2008
The New York Times


After seven years of nonstop construction, skyrocketing rents and sales prices, and a seemingly endless appetite for luxury housing that transformed gritty and glamorous neighborhoods alike, the credit crisis and the turmoil on Wall Street are bringing New York’s real estate boom to an end.

Developers are complaining that lenders are now refusing to finance projects that were all but certain months or even weeks ago. Landlords bewail their inability to refinance skyscrapers with blue-chip tenants. And corporations are afraid to relocate within Manhattan for fear of making the wrong move if rents fall or a flagging economy forces layoffs.

“Lenders are now taking a very hard look at each particular project to assess its viability in the context of a softening of demand,” said Scott A. Singer, executive vice president of Singer & Bassuk, a real estate finance and brokerage firm. “There’s no question that there’ll be a significant slowdown in new construction starts, immediately.”

Examples of aborted deals and troubled developments abound. Last Friday, HSBC, the big Hong Kong-based bank, quietly tore up an agreement to move its American headquarters to 7 World Trade Center after bids for its existing home at 452 Fifth Avenue, between 39th and 40th Streets, came in 30 percent lower than the $600 million it wanted for the property.

A 40-story office tower under construction by SJP Properties at 42nd Street and Eighth Avenue for the past 18 months still does not have a tenant.

And the law firm of Orrick, Herrington & Sutcliffe last week suddenly pulled out of what had been an all-but-certain lease of 300,000 square feet of space at Citigroup Center, deciding instead to extend its lease at 666 Fifth Avenue for five years, in part because they hope rents will fall.

“Everything’s frozen in place,” said Steven Spinola, president of the Real Estate Board of New York, the industry’s lobbying association, shortly after the stock market closed on Monday.

Barry M. Gosin, chief executive of Newmark Knight Frank, a national real estate firm based in New York, said: “Today, the entire financial system needs a lubricant. It’s kind of like driving your car after running out of oil and the engine seizes up. If there’s no liquidity and no financing, everything seizes up.”

It is hard to say exactly what the long-term impact will be, but real estate experts, economists and city and state officials say it is likely there will be far fewer new construction projects in the future, as well as tens of thousands of layoffs on Wall Street, fewer construction jobs and a huge loss of tax revenue for both the state and the city.

Few trends have defined the city more than the development boom, from the omnipresent tower cranes to the explosion of high-priced condominiums in neighborhoods outside Manhattan, from Bedford-Stuyvesant and Fort Greene to Williamsburg and Long Island City. Some developers who are currently erecting condominiums are trying to convert to rentals, while others are looking to sell the projects.

After imposing double-digit rent increases in recent years, landlords say rents are falling somewhat, which could hurt highly leveraged projects, but also slow gentrification in what real estate brokers like to call “emerging neighborhoods” like Harlem, the Lower East Side and Fort Greene.

At the same time, some of Mayor Michael R. Bloomberg’s most ambitious large-scale projects — the West Side railyards, Pennsylvania Station, ground zero, Coney Island and Willets Point — are going to take longer than expected to start and to complete, real estate experts say.

“Most transactions in commercial real estate are on hold,” said Mary Ann Tighe, regional chief executive for CB Richard Ellis, the real estate brokerage firm, “because nobody can be sure what the economy will look like, not only in the near term, but in the long term.”

Although the real estate market in New York is in better shape than in most other major cities, a recent report by Newmark Knight Frank shows that there are “clear signs of weakness,” with the overall vacancy rate at 9 percent, up from 8.2 percent a year ago. Rents are also falling when landlord concessions are taken into account.

The real estate boom has been fueled by a robust economy, a steady demand for housing and an abundance of foreign and domestic investors willing to spend tens of billions of dollars on New York real estate. It helped that lenders were only too happy to finance as much as 90 percent of the cost on the assumption that the mortgages could be resold to investors as securities.

But that ended with the subprime mortgage crisis, which has since spilled over to all the credit markets, which have come to a standstill. As a result, real estate executives estimate that the value of commercial buildings has fallen by at least 20 percent, though the decline is hard to gauge when there is little mortgage money available to buy the buildings and therefore few sales.

Long after the crisis began in 2007, many investors and real estate executives expected a “correction” to the rapid escalation in property values. But after Lehman Brothers, the venerable firm that had provided billions of dollars of loans for New York real estate deals, collapsed two weeks ago, it was clear that something more profound was afoot.

And there was an immediate reaction in the real estate world: Tishman Speyer Properties, which controls Rockefeller Center, the Chrysler Building and scores of other properties, abruptly pulled out of a deal to buy the former Mobil Building, a 1.6 million-square-foot tower on 42nd Street, near Grand Central Terminal, for $400 million, two executives involved in the transaction said.

Commercial properties are not the only ones facing problems. On Friday, Standard & Poor’s dropped its rating on the bonds used in Tishman’s $5.4 billion purchase of the Stuyvesant Town and Peter Cooper Village apartment complexes in 2006, the biggest real estate deal in modern history. Standard & Poor’s said it cut the rating, in part, because of an estimated 10 percent decline in the properties’ value and the rapid depletion of reserve funds.

The rating reduction shows the growing nervousness of lenders and investors about such deals, which have often involved aggressive — critics say unrealistic — projections of future income.

“Any continued impediment to the credit markets is awful for the national economy, but it’s more awful for New York,” said Richard Lefrak, patriarch of a fourth-generation real estate family that owns office buildings and apartment houses in New York and New Jersey.

“This is the company town for money,” he said. “If there’s no liquidity in the system, it exacerbates the problems. It’s going to have a serious effect on the local economy and real estate values.”

    Failed Deals Replace Boom in New York Real Estate, NYT, 1.10.2008, http://www.nytimes.com/2008/10/01/nyregion/01develop.html?hp






Economic Scene

Lesson From a Crisis: When Trust Vanishes, Worry


October 1, 2008
The New York Times


In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.

A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.

Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.

All of which may be true. But there is good reason for the public’s skepticism. The experts and policy makers who so desperately want to take action have failed to tell a compelling story about why they’re so afraid.

It’s not enough to say that markets could freeze up, loans could become impossible to get and the economy could slide into its worst downturn since the Great Depression. For now, the crisis has had little effect on most Americans, beyond their 401(k) statements. So to them, the specter of a depression can sound alarmist, and the $700 billion bill that Congress voted down this week can seem like a bailout for rich scoundrels.

Mr. Bernanke and his fellow worriers need to connect the dots. They need to use their bully pulpits to teach a little lesson on the economics of a credit crisis — how A can lead to B, B to C and C to Depression.

Let’s give it a shot, then.

Why are we talking about the Depression, anyway?

Almost no economist thinks that even a terrible downturn would look like the Depression. The government has already responded more aggressively than it did in Herbert Hoover’s day. So a Depression-like contraction — a 30 percent drop in economic activity — is highly unlikely. The country is also far richer today, which means that a much smaller portion of the population is living on the edge of despair. No matter what happens, you’re not likely to see shantytowns.

But the Depression is still relevant, because the basic mechanics of how the economy might fall into a severe recession look quite similar to those that caused the Depression. In both cases, a credit crisis is at the center of the story.

At the start of the 1930s, despite everything that had happened on Wall Street, the American economy had not yet collapsed. Consumer spending and business investment were down, but not horribly so.

In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad — or, in some cases, were rumored to be going bad — and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed.

Once a bank in a given town shut its doors, all the knowledge accumulated by the bank officers there effectively disappeared. Other banks weren’t nearly as willing to lend money to local businesses and residents because the loan officers at those banks didn’t know which borrowers were less reliable than they looked. Credit dried up.

“If a guy has a good investment opportunity and he can’t get the funding, he won’t do it,” Mr. Mishkin, who’s now an economics professor at Columbia, notes. “And that’s when the economy collapses.” Or, as Adam Posen, another economist, puts it, “That’s when the Depression became the Great Depression.” By 1932, consumption and investment had both collapsed, and stocks had fallen more than 80 percent from their peak.

As a young academic economist in the 1980s, Mr. Bernanke largely developed the theory that the loan officers’ lost knowledge was a crucial cause of the Depression. He referred to this lost knowledge as “informational capital.” In plain English, it means that trust vanished from the banking sector.

The same thing is happening now. Financial markets are global, not local, today, so the problem isn’t that the failure of any single bank locks individuals or businesses out of the credit markets. Instead, the nasty surprises of the last 13 months — the sort of turmoil that once would have been unthinkable — have caused an effective breakdown in informational capital. Bankers now look at longtime customers and think of that old refrain from a failed marriage: I feel like I don’t even know you.

Bear Stearns, for example, was supposed to have solid, tangible collateral standing behind some of its debts, so that certain lenders would be paid off no matter what. It didn’t, and they weren’t.

The current, more serious stage of the crisis began two weeks ago today, after the collapse of Lehman Brothers and the Fed’s takeover of the American International Group. Those events created a new level of fear. Banks cut back on making loans and instead poured money into Treasury bills, which paid almost no interest but also came with almost no risk. On the loans they did make, banks demanded higher interest rates. Over the past two weeks, rates have generally continued to rise — and these rates, not the stock market, are really what you should be watching.

The current fears can certainly seem irrational. Most households and businesses are still in fine shape, after all. So why aren’t some banks stepping into the void and taking advantage of the newly high interest rates to earn some profit?

There are two chief reasons. One is fairly basic: bankers are nervous that borrowers who look solid today may not turn out to be so solid. Think back to 1930, when the American economy seemed to be weathering the storm.

The second reason is a bit more complex. Banks own a lot of long-term assets (like your mortgage) and hold a lot of short-term debt (which is cheaper than long-term debt). To pay off this debt, they need to take out short-term loans.

In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending that short-term credit. This, in a nutshell, brought about Monday’s collapse of Wachovia and Glitnir Bank in Iceland. To avoid their fate, other banks are hoarding capital, instead of making seemingly profitable loans. And when capital is hoarded, further bank failures become all the more likely.

The crucial point is that a modern economy can’t function when people can’t easily get credit. It takes a while for this to become obvious, since most companies and households don’t take out big new loans every day. But it will eventually become obvious, and painfully so. Already, a lack of car loans has caused vehicle sales to fall further.

Could the current crisis lift — could banks decide they really are missing out on profitable investing opportunities — without a $700 billion government fund to relieve Wall Street of its scariest holdings? Sure. And is Congress right to fight for a workable program that’s as inexpensive and as tough on Wall Street as possible? Absolutely.

But in the end, this really isn’t about Wall Street. It’s about reducing the risk that something really bad happens. It’s about limiting the damage from the past decade’s financial excesses. Unfortunately, there is no way to accomplish that without also extending a helping hand to Wall Street. That is where our credit markets are, and we need them to start working again.

“We are facing a major national crisis,” as Meyer Mishkin’s grandson says. “To do nothing right now is to do what was done during the Great Depression.”

    Lesson From a Crisis: When Trust Vanishes, Worry, NYT, 1.10.2008, http://www.nytimes.com/2008/10/01/business/economy/01leonhardt.html?hp






Op-Ed Contributor

This Economy Does Not Compute


October 1, 2008
The New York Times


Notre-Dame-de-Courson, France

A FEW weeks ago, it seemed the financial crisis wouldn’t spin completely out of control. The government knew what it was doing — at least the economic experts were saying so — and the Treasury had taken a stand against saving failing firms, letting Lehman Brothers file for bankruptcy. But since then we’ve had the rescue of the insurance giant A.I.G., the arranged sale of failing banks and we’ll soon see, in one form or another, the biggest taxpayer bailout of Wall Street in history. It seems clear that no one really knows what is coming next. Why?

Well, part of the reason is that economists still try to understand markets by using ideas from traditional economics, especially so-called equilibrium theory. This theory views markets as reflecting a balance of forces, and says that market values change only in response to new information — the sudden revelation of problems about a company, for example, or a real change in the housing supply. Markets are otherwise supposed to have no real internal dynamics of their own. Too bad for the theory, things don’t seem to work that way.

Nearly two decades ago, a classic economic study found that of the 50 largest single-day price movements since World War II, most happened on days when there was no significant news, and that news in general seemed to account for only about a third of the overall variance in stock returns. A recent study by some physicists found much the same thing — financial news lacked any clear link with the larger movements of stock values.

Certainly, markets have internal dynamics. They’re self-propelling systems driven in large part by what investors believe other investors believe; participants trade on rumors and gossip, on fears and expectations, and traders speak for good reason of the market’s optimism or pessimism. It’s these internal dynamics that make it possible for billions to evaporate from portfolios in a few short months just because people suddenly begin remembering that housing values do not always go up.

Really understanding what’s going on means going beyond equilibrium thinking and getting some insight into the underlying ecology of beliefs and expectations, perceptions and misperceptions, that drive market swings.

Surprisingly, very few economists have actually tried to do this, although that’s now changing — if slowly — through the efforts of pioneers who are building computer models able to mimic market dynamics by simulating their workings from the bottom up.

The idea is to populate virtual markets with artificially intelligent agents who trade and interact and compete with one another much like real people. These “agent based” models do not simply proclaim the truth of market equilibrium, as the standard theory complacently does, but let market behavior emerge naturally from the actions of the interacting participants, which may include individuals, banks, hedge funds and other players, even regulators. What comes out may be a quiet equilibrium, or it may be something else.

For example, an agent model being developed by the Yale economist John Geanakoplos, along with two physicists, Doyne Farmer and Stephan Thurner, looks at how the level of credit in a market can influence its overall stability.

Obviously, credit can be a good thing as it aids all kinds of creative economic activity, from building houses to starting businesses. But too much easy credit can be dangerous.

In the model, market participants, especially hedge funds, do what they do in real life — seeking profits by aiming for ever higher leverage, borrowing money to amplify the potential gains from their investments. More leverage tends to tie market actors into tight chains of financial interdependence, and the simulations show how this effect can push the market toward instability by making it more likely that trouble in one place — the failure of one investor to cover a position — will spread more easily elsewhere.

That’s not really surprising, of course. But the model also shows something that is not at all obvious. The instability doesn’t grow in the market gradually, but arrives suddenly. Beyond a certain threshold the virtual market abruptly loses its stability in a “phase transition” akin to the way ice abruptly melts into liquid water. Beyond this point, collective financial meltdown becomes effectively certain. This is the kind of possibility that equilibrium thinking cannot even entertain.

It’s important to stress that this work remains speculative. Yet it is not meant to be realistic in full detail, only to illustrate in a simple setting the kinds of things that may indeed affect real markets. It suggests that the narrative stories we tell in the aftermath of every crisis, about how it started and spread, and about who’s to blame, may lead us to miss the deeper cause entirely.

Financial crises may emerge naturally from the very makeup of markets, as competition between investment enterprises sets up a race for higher leverage, driving markets toward a precipice that we cannot recognize even as we approach it. The model offers a potential explanation of why we have another crisis narrative every few years, with only the names and details changed. And why we’re not likely to avoid future crises with a little fiddling of the regulations, but only by exerting broader control over the leverage that we allow to develop.

Another example is a model explored by the German economist Frank Westerhoff. A contentious idea in economics is that levying very small taxes on transactions in foreign exchange markets, might help to reduce market volatility. (Such volatility has proved disastrous to countries dependent on foreign investment, as huge volumes of outside investment can flow out almost overnight.) A tax of 0.1 percent of the transaction volume, for example, would deter rapid-fire speculation, while preserving currency exchange linked more directly to productive economic purposes.

Economists have argued over this idea for decades, the debate usually driven by ideology. In contrast, Professor Westerhoff and colleagues have used agent models to build realistic markets on which they impose taxes of various kinds to see what happens.

So far they’ve found tentative evidence that a transaction tax may stabilize currency markets, but also that the outcome has a surprising sensitivity to seemingly small details of market mechanics — on precisely how, for example, the market matches buyers and sellers. The model is helping to bring some solid evidence to a debate of extreme importance.

A third example is a model developed by Charles Macal and colleagues at Argonne National Laboratory in Illinois and aimed at providing a realistic simulation of the interacting entities in that state’s electricity market, as well as the electrical power grid. They were hired by Illinois several years ago to use the model in helping the state plan electricity deregulation, and the model simulations were instrumental in exposing several loopholes in early market designs that companies could have exploited to manipulate prices.

Similar models of deregulated electricity markets are being developed by a handful of researchers around the world, who see them as the only way of reckoning intelligently with the design of extremely complex deregulated electricity markets, where faith in the reliability of equilibrium reasoning has already led to several disasters, in California, notoriously, and more recently in Texas.

Sadly, the academic economics profession remains reluctant to embrace this new computational approach (and stubbornly wedded to the traditional equilibrium picture). This seems decidedly peculiar given that every other branch of science from physics to molecular biology has embraced computational modeling as an invaluable tool for gaining insight into complex systems of many interacting parts, where the links between causes and effect can be tortuously convoluted.

Something of the attitude of economic traditionalists spilled out a number of years ago at a conference where economists and physicists met to discuss new approaches to economics. As one physicist who was there tells me, a prominent economist objected that the use of computational models amounted to “cheating” or “peeping behind the curtain,” and that respectable economics, by contrast, had to be pursued through the proof of infallible mathematical theorems.

If we’re really going to avoid crises, we’re going to need something more imaginative, starting with a more open-minded attitude to how science can help us understand how markets really work. Done properly, computer simulation represents a kind of “telescope for the mind,” multiplying human powers of analysis and insight just as a telescope does our powers of vision. With simulations, we can discover relationships that the unaided human mind, or even the human mind aided with the best mathematical analysis, would never grasp.

Better market models alone will not prevent crises, but they may give regulators better ways for assessing market dynamics, and more important, techniques for detecting early signs of trouble. Economic tradition, of all things, shouldn’t be allowed to inhibit economic progress.

Mark Buchanan, a theoretical physicist, is the author, most recently, of “The Social Atom: Why the Rich Get Richer, Cheaters Get Caught and Your Neighbor Usually Looks Like You.”

    This Economy Does Not Compute, NYT, 1.10.2008, http://www.nytimes.com/2008/10/01/opinion/01buchanan.html






Stop Treating Wall Streeters Like Villains and Resolve This Crisis


October 1, 2008
9:20 am
The New York Times
By Bob McTeer

Bob McTeer is the former president of the Federal Reserve Bank of Dallas, and is currently a distinguished fellow at the National Center for Policy Analysis in Texas.


UPDATE: The GAO stands for the Government Accountability Office, not the General Accountability Office, as it was previously called in this post. The name is corrected below.

Maybe it’s a good thing the “consensus” rescue plan failed on Monday. That gives Congress a chance to pass a plan that helps resolve the current crisis rather than just demonizing Wall Street.

The numerous add-ons to the Treasury bailout plan to protect the taxpayer were not only unnecessary, but actually harmful because they were punitive in nature and made participation in the program less attractive for holders of illiquid assets. In fact, all the focus on C.E.O. salary caps, golden parachutes, warrants and so forth, implied that the holders of illiquid mortgage-backed securities were the villains in this drama rather than victims. They didn’t package the securities, or sell them; they bought them as an investment. I’m sure negative Congressional rhetoric on these punitive taxpayer protections contributed to the feeling in the public that money was being given to the undeserving.

While I don’t claim that it played a decisive role, the government had encouraged the purchase of mortgage-backed securities by giving banks C.R.A. (Community Reinvestment Act) credit for securities that contained mortgages made in certain ZIP codes. Those that complied with Congressional wishes in that regard are now being threatened by the same Congress. Plus, all the speechifying about Main Street bailing out Wall Street, and about teaching Wall Street a lesson, surely contributed to the widespread misunderstanding of the purpose behind the rescue package, a misunderstanding that was the ultimate cause of its defeat.

Every “ordinary American” I talked to about the plan, including family and neighbors, misunderstood the plan and hated it. They viewed it as using their tax dollars to bail out rich corrupt Wall Street types. Despite repetition over and over on TV and in the press that the bailout did not involve ordinary government expenditures but involved a purchase of assets that would be resold, most likely at a profit, that message never sank in. The legislators faced almost unanimous negative feedback from their constituents. We needed some profiles in courage. We probably had some, but not enough.

For months, I’ve advocated a simple measure that would make a big difference — the suspension or alteration of mark-to-market accounting rules. My latest effort was an article in Forbes.com reproduced on my blog.

The Securities and Exchange Commission’s authority to suspend mark-to-market accounting was reaffirmed in the draft legislation, but apparently only after a study by the Government Accountability Office. No further study is needed.

Simply put, mark-to-market accounting means banks have to value their assets according to what they’re worth on the open market. Right now many troubled assets like mortgage-backed securities aren’t trading, though, which means they’re being valued at unrealistically low levels. This in turn means banks are marking down their asset values, and thus their capital, resulting not only from actual losses, but from lower values of securities not trading — even though those same banks may have the capacity to hold those securities to maturity. Mark-to-market was never intended for use in a declining market. I have no standing in this area, but suspension has also been advocated strongly by William Isaac, former chairman of the Federal Deposit Insurance Corporation, who is very experienced in this area.

(Late Tuesday, the S.E.C. announced that further study of the mark to market issue would take place in the days to come. In the meantime, in a Q&A format, they clarified the application of the existing rule under present conditions when little or no trading is taking place. The intention was to provide the clarification in time for the preparation of third quarter reports. The clarification was applauded by the American Bankers Association as helpful flexibility in the application of the rules. Hopefully, a further, more formal liberalization will be forthcoming soon, and, perhaps, be included in an improved “bailout” bill. My expectation is that relaxation of mark to market rules will turn out to be the most helpful provision of the whole package.)

Mr. Isaac has also been pushing “net-worth certificates” similar to the ones he used during the savings and loan crisis in the 1980s as another major approach that doesn’t require the government to put up up-front money. The idea is that the F.D.I.C. gives banks it feels have a good chance of recovering a certificate that can count temporarily as capital in exchange for a note from the bank. Call it synthetic capital. I think both these ideas should be considered because of their zero up-front price tag.

I don’t have any idea how this will be resolved, but we need a fast fix before our 401(k)’s evaporate completely — well, mine anyway. I need some relief. The decline in the stock market on Monday gave us a taste of how the markets feel about inaction. As of Tuesday afternoon it looked as if there might finally be some movement on the issue.

Needing relief reminds me of a story from the country comedian Jerry Clower several years ago. Two hunters were hunting for raccoons at night. One thought he had one treed and went up into the tree after him, but it turned out to be a wildcat. He and the wildcat went round and round. Blood and fur flew, and the hunter begged his friend to “shoot this thing, shoot this thing!” The friend said, “I can’t shoot; I might hit you.” Our hunter’s response was, “Well, shoot up in here amongst us; one of us needs some relief.”


    Stop Treating Wall Streeters Like Villains and Resolve This Crisis, NYT, 1.10.2008, http://economix.blogs.nytimes.com/2008/10/01/stop-treating-wall-streeters-as-villains-and-resolve-this-crisis/






Your Money

Navigating Troubled Times:

Answers for Readers


October 1, 2008
[Updated 7:41 p.m.]
The New York Times


With the cloud of uncertainty still looming over financial markets, hundreds of readers responded to an invitation to submit questions about the effect on their personal finances. And several recurring themes emerged. Many individuals are still concerned about the safety of their money market mutual funds, as well as the specifics behind the alphabet soup of insurance, from F.D.I.C. to S.I.P.C. Some are worried that they will not be able to get student loans for college, while others have questions about their retirement funds. Answers to many of these questions appear below.

Getting a Student Loan

I am a recent college grad and have been planning on going to law school next fall. How will the crisis affect my ability to get loans? — Adam Sinton

Getting a federal loan should not be a problem. Congress passed legislation that essentially guarantees the availability of federal loans for both the next two academic years: 2008-9, and 2009-10. Colleges can also fall back on the Direct Loan program, where students can borrow directly from the government.

But the amount on federal loans — which include Perkins, Stafford and PLUS loans — is capped, so a lot of borrowers must rely on private loans, too. Securing a private loan will probably be more difficult than it has been in the past because providers will suspend their programs as they run out of liquidity. And the loans that are offered will almost certainly become more expensive.

Mark Kantrowitz, who runs the comprehensive college planning site finaid.org, said he would not be surprised if interest rates on these loans jumped by 2 percent in October. “Interest rates on these loans will increase as the lenders pass on their increased cost of funds,” Mr. Kantrowitz said.

Making College Savings Secure

My daughter goes to college in less than one year. — We had almost $30,000 in mutual funds for her. I haven’t even looked at the balance now — I am too nervous. What should I do to protect the money in there for her college costs? Thank you for any advice! (The money is invested with TIAA-CREF.) — Randi Millman-Brown, Ithaca, N.Y.

With college just a year away, your daughter’s college savings should have been allocated to more conservative investments by now. But if you still have a lot of exposure to stocks, it is probably wise to start selling the riskiest pieces of that portfolio — gradually and systematically — and to reinvest that money into one of the most conservative investment options on your investment menu. If your mutual funds are in a 529 college savings plan, it probably offers a money market mutual fund option, or another investment suitable for such a short horizon. It’s probably best to check in with a financial adviser if you are still unclear on how to proceed with a strategy to reduce exposure to stocks.

Safety of Bonds

I’m 75 — are my bonds safe? Everybody in my senior complex is panic-stricken. What should we be doing? — Anonymous

First, keep in mind that as long as you hold your bond until maturity, it doesn’t matter how much the price swings. As long as the company remains healthy, and you hold the bond until maturity, you will get all of your money back. So you want to be comfortable with the fundamentals of the company issuing your bond. If you are confident your bond is not issued by the next Lehman Brothers, stick with it. If you own a bond mutual fund — say, in your 401(k) account — the value is most likely down. But it should recover over time.

Some readers were also wondering whether it made sense to deploy new money into bonds. At the moment, the only bulletproof bonds are Treasuries, which are issued and backed by the U.S. government (so you had better have faith in Uncle Sam). But since a flood of investors has rushed into these investments, it has pushed their yields down significantly. Some Treasuries — with maturities in the one week to three-month range — are yielding anywhere from 0.10 percent to 0.50 percent. Right now, investors aren’t concerned about earning money; they just want to know their money is safe.

In fact, some investors have paid a premium — meaning they’re paying more than the face value of the bond — to purchase a Treasury bill with an extremely low or negative yield. (Negative yield means you’re paying more for the bond than you will get back at maturity.) “That is unheard-of,” said James Grady, director of fixed-income trading at TD Ameritrade. “That has never happened before.”

If you are thinking about parking your cash in Treasuries, think about it how long you want to tie your money up. A lot of investors have been pouring their money into these securities, and then selling at a loss so that they can get back into the stock market, Mr. Grady said. As we have seen today, the market has already recovered a portion of Monday’s losses.

Corporate bonds are really illiquid right now, as are many municipals. But Marilyn Cohen, of Envision Capital Management, said there are some safer municipal bonds, like those that are issued by transit authorities. They tend to do well during economic downturns because more people rely on mass transit, she said. “Escrowed-to-maturity municipals” are also pretty solid, she said, because the payments that must be paid to investors over the life of the bond are held in an escrow fund, usually comprised of United States government securities. A prefunded municipal would also fall in this category, Ms. Cohen said.

Money Market Funds

In your opinion how safe are money market funds with the volatile market? — Charles Ziga

I recently pulled out of the mutual fund I had invested in and put everything into a money market account. I have no background in finance, so I’m trying to get a grasp on this situation solely on what I’m reading in the papers. Is my money safe in a money market account? — Lara Maurino

Last week on the Oprah show, Suzi Orman said (and I paraphrase): If your money is in a brokerage that is not F.D.I.C.-insured, you’d better get it out now; this is serious. My question is, how safe is one’s money in a cash reserve account that is S.I.P.C.-insured? — Marion Roberts

There is still a lot of confusion about money market mutual funds. The Treasury Department has said it will insure the shares of all money market investors held as of Sept. 19, as long as the fund company takes part in the program. You should contact your money market fund directly and ask whether it is taking part. The insurance program will last for three months, at which time the Treasury will review the need for continued coverage. If the markets are still nervous, the program will probably be renewed through next September.

When it comes to money market funds, it is probably wise to stick with larger companies. Many investors use the funds offered by their brokerage firm because it’s convenient to transfer money between accounts. But you should make sure your money market account is with a large, diversified money management company that would have the resources to make you whole, even if its funds ran into trouble. Companies like Fidelity and Vanguard fit into this category. And many other companies have come out with statements assuring investors that their money market mutual funds are safe.

A money market deposit account, on the other hand, is something entirely different. It is an interest-bearing bank account that is insured — up to $100,000 per account and up to $250,000 for some retirement accounts — by the Federal Deposit Insurance Corporation. Joint accounts are insured for $100,000 per account holder.

The Securities Investor Protection Corporation, on the other hand, protects assets if there is a problem at your brokerage firm. For instance, if your brokerage firm went bankrupt or was acquired by another firm — and assets went missing — the corporation would insure an account up to $500,000. Of that amount, it can insure up to $100,000 in cash. But the maximum amount covered can be much higher. For instance, if you have a brokerage account, a joint brokerage account with a spouse, an I.R.A. and a 401(k), each account would receive up to $500,000, totaling $2 million in protection.

Keep in mind that the S.I.P.C. does not cover investment losses, nor does it cover investment fraud.

Limits on Money Market Guarantees

I would like to know if there is a cap on the insurance on money market funds held by Vanguard. I know the F.D.I.C. insures bank accounts to $100,000 per person, but I have not heard if there is a dollar amount for the insurance on money market funds. — Ruthann Norrick

There are no dollar limits on any money market mutual funds taking part in the Treasury’s program. But remember, only the money you had in your account as of Sept. 19 is covered. So if you had 50 shares in a money market fund as of that date, all 50 shares will be covered. If you purchased another 50 shares the next day, only your original 50 shares would be covered. If you buy or sell shares after that day, you will be covered for either the number of shares held at the close of business on Sept. 19, or the current amount, whichever is less. For a full discussion of the rules, read the Treasury’s list of most frequently asked questions here.

Is It Time to Buy a Home?

I have $158,000 in three high-interest saving accounts (ING Orange, Capital One and Emigrant Savings) that I plan to use to purchase a house. All of the accounts are F.D.I.C.-insured and under the $100,000 limit. When the heck is it going to be a good time to buy a property? I’ve been watching house prices come down, but how much farther do they have to go? Do I buy now and hope that the economy doesn’t implode? — Kris A., Connecticut

Only a clairvoyant could call the bottom of the housing market. We can probably safely assume that the housing market has not reached its bottom given the high number of projected foreclosures. That could pressure prices further. But an additional 5 percent decline or so shouldn’t influence your decision anyway. Only one factor should: can you really afford it? Do you have a recession-proof job?

In times like these, it is wise to stay practical. Since it’s unclear where the job market might be headed, it’s a good time to keep several months of cash in the bank to keep yourself afloat in an emergency. After that is covered, make sure you have enough for a 20 percent down payment and closing costs. Right now, the average rate on 30-year fixed mortgage is 6.12 percent, according to HSH Associates, which is still very favorable. Finally, do not stretch yourself too thin when you do decide to buy, and stick with a traditional fixed-rate mortgage. That’s part of the reason we are in this mess. Nobody wants to get stuck having to unload a property in a down market.

Ten Years Before Retirement

In light of the current market problems, so much of the advice these days is for people with 30 years till retirement. What about those of us who are in our 50s (with perhaps 10 years to go), who have money in retirement accounts that we have tried to balance between stocks and nonstock investments, but which are still taking a major hit? Should we just continue with our previous plans and wait it out, or are there things we should reassess given that we have a shorter window? Can you give us a checklist of items to reconsider? — Annette Gourgey, New York

This is the perfect time to take stock (no pun intended) of your portfolio. There are several things you should keep in mind. First, check your asset allocation, or the mix between your stock, bond, cash and other investments. It has probably strayed a bit from your original plan, and perhaps you can no longer tolerate as much risk and volatility as you once thought.

If your risk tolerance has changed, perhaps it is time to reduce your more volatile investments and add some elements — like cash — that will help steady your returns.

Some advisers recommend making small changes around the margins of our portfolio. Are financial stocks making you queasy? Consider lightening up on those positions and adding funds that invest in sectors that do well during downturns, like health care and consumer staples, or funds that invest in companies with a proven ability to increase their dividends. “Maybe the something to do is not to make a radical departure to where you are, but to make minor changes,” said John Nersesian, a managing director of Wealth Management Services at Nuveen.

Check in on the fixed-income side of your portfolio. Normally, investors look to bonds to help steady their overall portfolio. But we’ve had several heretofore “safe” fixed-income investments run into trouble. So make sure this side of your portfolio is just as diversified as the stock side.

Before you make any changes, take a step back. Don’t focus on the pieces of the portfolio that are doing the worst, but look at the performance of your portfolio as a whole.

Meanwhile, consider the statistics. Yes, this market feels — well, it feels pretty awful. It feels different. But financial professionals have reminded me in recent days that the downturn after 9/11 felt terrible in its own way. So while history is no guarantee, it can serve as a tool to help inform decision-making.

Mr. Nersesian provided some numbers for individuals who have about a decade before they retire. Even a portfolio consisting of all equities (and we are not suggesting this, by any means) produced an average return of 11.2 percent for all rolling 10-year periods from February 1926 to August 2008.

“The odds are 2-to-1 if you have 10 years to go you’ll earn a positive return just by being in equities,” he said. “By adding fixed income to that, we can significantly reduce the probability of loss.”

Finally, talk to a professional. If you are really uncertain about how to proceed, find a certified financial planner that charges by the hour. You can find one through the Garrett Planning Network or the National Association of Personal Financial Advisors. It’ll be worth the money if it helps you avoid a costly mistake.

Security at Credit Unions

I am a member of a credit union, specifically the Telco Credit Union of Florida, where I have saving and checking accounts as well as a $5,000 credit card limit. Now, here is my question: Is my money safe? Is F.D.I.C. backing me up? — Joe Yazbec

I have used credit unions for my banking for years, both because I like the small-town feel of them and because they fit my political philosophy better than commercial banks. How safe are my credit-union holdings (shares, share drafts and CDs) in the current financial climate? — Ditte G. Phillips

The National Credit Union Administration, known as the N.C.U.A., is the government agency that supervises federal credit unions. The N.C.U.A. runs an insurance fund — the National Credit Union Share Insurance Fund — that is backed by the United States government, much like the Federal Deposit Insurance Corporation. The fund provides all members of federally insured credit unions — and most state-chartered credit unions — with $100,000 in coverage for individual accounts, while a two-person joint account would receive $200,000 in insurance. You can obtain even greater coverage depending on how you title your accounts. For more information, read the brochure here. Retirement accounts, meanwhile, are insured for an additional $250,000. If you aren’t sure if your credit union is covered under this program, simply call and ask.

Navigating Troubled Times: Answers for Readers, NYT, 1.10.2008, http://www.nytimes.com/2008/10/01/business/yourmoney/01answers.html



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