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Stock markets, Financial regulation > UK, USA




Patrick Chappatte

Editorial cartoon

Cartoons on World Affairs


7 November 2008































car market








art market








commodity markets








market valuation        UK










rapidly expanding market








value        UK






stock value        USA






buy up stock in N        UK






rally        USA






market research        UK






increase market share





lose market share





wholesale money market





London interbank offered rate        Libor


What is Libor?

Libor is the main setter of interest

in the London wholesale money market






Libor rates


Libor rates are set

by the demand and supply of money

as banks lend to each other

to balance their books on a daily basis.






Libor-rigging scandal        2013


RBS fined £390m

for 'widespread misconduct'

in Libor-rigging scandal


Royal Bank of Scotland bankers

continued to rig Libor rate until November 2010

– two years after it was bailed out by taxpayer




































NASDAQ MarketSite Times Square, New York City




added 18 November 2007


















David Horsey

The Seattle Post-Intelligencer



24 March 2009




















cartoons > Cagle > Capital        USA        2008











































investor > bargain hunting        USA
















investor > fraud > Ponzi Schemes        USA


In a Ponzi scheme,

potential investors are wooed

with promises of unusually large returns,

usually attributed to the investment manager’s

savvy, skill or some other secret sauce.


The returns are repaid,

at least for a time,

out of new investors’ principal,

not from profits.


This can continue as long

as new investors line up with cash,

and old investors don’t try to withdraw

too much of their money at once.

frauds_and_swindling/ponzi_schemes/index.htm - broken link


























Ponzi scam        UK









































stock        USA






































stock market flotation / flotation        UK














stock market offering        UK










flotation on the stock market






































initial public offering    IPO






























go public /

conduct a registered initial public offering of its common stock














take (Google) public








public company        USA












So what is a SPAC?


A "special purpose acquisition company"

is a way for a company to go public

without all the paperwork of a traditional IPO,

or initial public offering.


In an IPO,

a company announces

it wants to go public,

then discloses a lot of details

about its business operations.


After that,

investors put money into the company

in exchange for shares.


A SPAC flips that process around.


Investors pool their money together first,

with no idea what company they're investing in.


The SPAC goes public as a shell company.


The required disclosures

are easier than for a regular IPO,

because a pile of money

doesn't have any business operations

to describe.


Then, generally,

the SPAC goes out

and looks for a real company

that wants to go public,

and they merge together.


The company gets the stock

ticker and the pile of money,

much more quickly

than through a normal IPO.



























steep sell-off        USA










sharp sell-off        USA










panic selling        USA










panicky selling        USA

















stockbrokers > JP Morgan        UK













































technology stocks





gilt-edged stocks / gilts





Facebook's stock        USA






futures / stock futures










gold futures






go for gold        UK
























stock prices





stock broker / stockbroker





look at a terminal





watch information on a computer screen





electronic board showing stock information





electronic sign





stock chart





stock index board





volatile market        USA        2008






stocks        USA



























the course of the stock market








stock market / stockmarket        UK / USA
























































in the stock market        USA












global markets        UK

























panic        USA










stock market panic        UK










stock market panic        USA

























bots        USA



















































bull        USA










The Wall Street bull /

The Charging Bull statue in New York's financial district.        USA











bull market        USA












Merrill's logo - a bull








stock bulls        USA


































Monte Wolverton


The Wolvertoon


1 December 2008

















Dave Brown


The Independent

18 March 2008

















John Darkow


The Columbia Daily Tribune, Missouri


3 July 2008








































bear market


A bear market

is defined as a period

in which the major stock indexes

drop by 20% or more

from a recent high point

and remain that low

for at least a few months.


The two worst

bear markets in history

— during the Great Depression

and the Great Recession —


cumulative losses of 83% and 51%,



Analysts like to say

that the stock market

is not the economy.


But a bear market reflects

concerns and anxieties about the economy,

and at times a bear market is accompanied

by a recession.


A recession

is when the economy experiences

two or more

consecutive quarters of decline.


























































bust        UK

















economy, cycles, business, markets, prices, taxes > down















stock quotes








credit default swaps














































The Wolf of Wall Street Official Trailer

Paramount Pictures    2013





The Wolf of Wall Street Official Trailer

Video        Trailer        Paramount Pictures        2013


From Academy Award winning director Martin Scorsese

comes The Wolf of Wall Street, starring Leonardo DiCaprio.











































USA > Wall Street / Wall St. / financial district of Manhattan        UK / USA

































































































idUSRTR2RO4I#a=1 - October 14, 2011



















































USA > NYC > on Wall Street        UK / USA






























USA > movies > 2013 >

DiCaprio stars in Martin Scorsese’s ‘The Wolf of Wall Street’            UK / USA














Wall Street hucksterism        USA










greed        USA










October 2011 > USA > protest > Occupy Wall Street        UK / USA



















Wall Street professionals        USA





Wall Streeter        USA








Wall St. executive        USA






Wall Street executives        USA        2008


Multimillion-Dollar Men


In the five years from 2003 to 2007,

these Wall Street executives

collectively took home

more than $1 billion in pay.






Wall Street / New York Stock Exchange / NYSE        USA











at the New York Stock Exchange





on Wall Street





gloomy start on Wall Street





Cartoons > Cagle > Wall Street reform        USA        2010






cartoons > Cagle > Wall Street CEO's        USA        2008






Wall Street mogul > Michael R. Bloomberg        USA        2009



















by Garry Trudeau


October 23, 2011















Wall Street Bonuses        USA        2014












bonus        USA

















Financial Services Authority    FSA        UK










financial regulation        USA












NYT > Select Editorials on Financial Regulation        USA










Dodd-Frank financial regulatory law        USA        July 2010




















Christopher J. Dodd        USA











Financial Regulatory Reform        USA












regulator        USA










Securities and Exchange Commission    SEC        USA



















watchdog        USA

















insider        USA










insider dealing








insider dealing / insider trading        USA





































UK > Serious Fraud Office    SFO        UK


























Adam Zyglis


The Buffalo News

Buffalo, NY


14 November 2009




















speculator        USA











the bursting of the dotcom bubble





the dotcom meltdown





meltdown        USA
















equity (-ies)        UK










seek to raise $1bn in equity        UK










global equity markets        UK


ftse-100-tumbles-31-in-worst-year-on-record-1220219.html - 1 July 2009


1220220.html - 1 January 2009








negative equity








private equity        UK










private equity firms - explained        USA


what-is-private-equity - August 3, 2022








finance-driven capitalism > private equity / private equity fund         USA




when-private-equity-becomes-your-landlord - Feb. 7, 2022






















private-equity firms        UK










private equity moguls / buyout Industry        USA










private equity deals > leveraged buyouts        USA










private-equity acquisitions























































hedge funds        UK / USA


Hedge funds, those financial funds

run by extraordinarily rich men,

are going mainstream.


Not content to be investments

for just the super rich

and super connected,

they are starting to offer services

to the average investor.




























































business glossary > hedge funds        UK










hedge fund trader        UK










Bridgewater Associates        USA


















business glossary > zombie funds        UK










life insurance funds








blue chips























Goldman Sachs Group Inc.    USA

















The Week That Shook Wall Street:

Inside the Demise of Bear Stearns


SB120580966534444395 - March 18, 2008
















stock futures





business glossary > futures









business glossary > commodities        UK






business glossary > derivatives        UK






business glossary > option        UK






business glossary > equity, equities        UK






U.S. stock futures





agriculture futures > futures, pork futures





energy futures





oil futures





agricultural Futures





buy up to 28 million shares

of General Motors Corp. common stock for $31 each





in the Euro Dollar Pit

at the Chicago Mercantile Exchange





the blue chip index





blue chip consultant





price fixing        UK






float        UK
























market indicators

the Dow Jones industrial average

and the S&P 500        USA










Standard & Poor's 500 index        S&P        USA












fear index / worry index

Chicago Board Options Exchange Volatility Index    VIX        USA












emerging-market indicator





economic and financial indicators





market watchers




















weak market conditions








drop        USA












intraday point drop        USA










steep drop        USA










major drop        USA










economic doldrums        USA

















New York Mercantile Exchange    NYMEX        USA





oil futures        USA






oil futures pit






agriculture futures





Chicago Board of Trade    CBOT        USA


established in 1848,

the CBOT is a futures and options

on futures exchange





Chicago Mercantile Exchange    CME        USA





American Stock Exchange    Amex        USA 





index, indexes





stock indexes        USA







National Association of Securities Dealers Automated Quotations

Nasdaq composite index        USA










on the Nasdaq exchange        USA






trade under the stock symbol DJT,

short for Donald J. Trump        USA






Reuters > market news        USA

















Financial Times > market news        UK











London's FTSE 100 Index /

FTSE 100 / London's benchmark FTSE 100 Index /

Footsie        UK
























































London Stock Exchange    LSE        UK










UK > The City of London / UK’s financial HQ        FR, UK


culture-idees/men-city-quatre-vies-par-temps-de-crise - 24 September 2022




men-of-the-city - 2009 - UK















Britain's main financial watchdogs        UK










Office of Fair Trading    OFT        UK




























































business glossary > bond        UK










bond yields











or speculative-grade bonds








junk bond market / junk bonds /  junk (or high-yield) bonds        USA














bond markets        USA















Treasury bonds        USA










safe-haven Treasury bond prices








the companies' shares and bonds








shares        UK
























shares        USA












shareholder        UK






















dividend payment / dividend        UK












interim dividend

























light trading






























soar        UK






soar to new high





soar above forecasts





rise to a record high





rally to their highest level in a month










surge / surge





strike new highs





edge higher





shoot higher





bounce back        USA






rebound / rebound        USA











jump        USA








 jump 5 percent





jump        UK






a jump in new orders





break a four-day losing streak





hit a year high





hit a two-year high





push to a new 52-week high





 close up more than 300 points        USA






close above 10,000 points











climb above 4400 barrier





breeze through the key 4500 mark





power ahead on N










climb back





claw back





recover some ground





advance two percent





stage fightback





recover ground





recover some lost ground










rise in interest rates















reach highs





 reach an all-time high        USA






flirt with new record high










surge through the important 4300 mark





maintain early gains























lose ground        USA






open lower





opening bell










turn downward






turn lower
































sagging market share and profits

















fall sharply










free fall        USA






collapse        USA






rout        USA






jitter        USA






tumble        USA








tumble / pummel





tumble into the red





crash into the red





crash        UK








The great stockmarket crash of 2008        UK








plunge        USA



















stay in the red / remain in the red





close back in the red





close sharply lower        USA






lacklustre finish





drag down





report further decline in revenues















falling sales and profits





fall back





fall back below the 4400 mark





stay below the 4400 threshold





go into downward slide





dollar slide










a slide in tech shares















loss        USA






stock market wipeout        USA
















London's close





take the gauge to its highest close





closing price





close higher





close in the red





close down 5.7 points at 5053.2















market turmoil        UK








volatile        UK / USA








volatility        UK / USA










CBOE Volatility Index    VIX











swing up and down        USA






roller coaster        USA






cartoons > Cagle > Roller coaster ride on Wall Street        USA        2011










































cut N to junk status        USA


























advancing stocks








rank as the Nasdaq's top percentage gainer
























end flat / stall















































pension        UK










pension funds















bubble        USA 





2008 financial crisis / credit crisis        USA






causes of the financial crisis        USA














crash / crash        UK














“flash crash”        USA        May 6, 2010










1929 crash / The Great Depression















Corpus of news articles


 Economy > Stock markets, Financial regulation




Wall Street’s Dead End


February 13, 2011

The New York Times



THE stock market has been big news in recent days. Last week’s report that Deutsche Börse, a giant German exchange, intends to buy the New York Stock Exchange, creating a company worth some $24 billion, arrived shortly after the Dow broke the 12,000-point barrier for the first time since before the financial crisis.

These developments drew headlines because they seemed to exemplify significant trends in the American economy. But look at America’s stock exchanges more closely, and there’s less to them than meets the eye. In truth, the stock market is becoming increasingly irrelevant — a trend that threatens the core principles of American capitalism.

These days a healthy stock market doesn’t mean a healthy economy, as a glance at the high unemployment rate or the low labor-market participation rate will show. The Tea Party is right about one thing: What’s good for Wall Street isn’t necessarily good for Main Street. And the Germans aren’t buying the New York Stock Exchange for its commoditized, highly competitive and ultra-low-margin stock business, but rather for its lucrative derivatives operations.

The stock market is still huge, of course: the companies listed on American exchanges are valued at more than $17 trillion, and they’re not going to disappear in the foreseeable future.

But the glory days of publicly traded companies dominating the American business landscape may be over. The number of companies listed on the major domestic exchanges peaked in 1997 at more than 7,000, and it has been falling ever since. It’s now down to about 4,000 companies, and given its steep downward trend will surely continue to shrink.

Nor are the remaining stocks an obvious proxy for the health of the American economy. Innovative American companies like Apple and Google may be worth hundreds of billions of dollars, but most of them don’t pay dividends or employ many Americans, and their shares are essentially speculative investments for people making a bet on how we’re going to live in the future.

Put another way, as the number of initial public offerings steadily declines, the stock market is becoming little more than a place for speculators and algorithms to compete over who can trade his way to the most money.

What the market is not doing so well is its core public function: allocating capital efficiently. Apple, for instance, is hugely profitable and sits on an enormous pile of cash; it is thus very unlikely to use its highly rated stock to pay for any acquisitions. It hasn’t used the stock market to raise money since 1981, and there’s a good bet it never will again.

Meanwhile, the companies in which people most want to invest, technology stars like Facebook and Twitter, are managing to avoid the public markets entirely by raising hundreds of millions or even billions of dollars privately. You and I can’t buy into these companies; only very select institutions and well-connected individuals can. And companies prefer it that way.

A private company’s stock isn’t affected by the unpredictable waves of the stock market as a whole. Its chief executive can concentrate on running the company rather than answering endless questions from investors, analysts and the press.

There’s much less pressure to meet quarterly earnings targets. When the stock does trade, the deals can be negotiated quietly, in private markets, rather than fall victim to short-term speculation from the high-frequency traders who populate public markets. And companies love how private markets allow them to avoid much of the regulatory burden of being public.

That burden comes largely from the Securities and Exchange Commission, which was created in the wake of the 1929 stock-market crash to protect small investors. But if the move to private markets continues, small investors aren’t going to need much protection any more: they’ll be able to invest in only a relative handful of companies anyway.

Only the biggest and oldest companies are happy being listed on public markets today. As a result, the stock market as a whole increasingly fails to reflect the vibrancy and heterogeneity of the broader economy. To invest in younger, smaller companies, you increasingly need to be a member of the ultra-rich elite.

At risk, then, is the shareholder democracy that America forged, slowly, over the past 50 years. Civilians, rather than plutocrats, controlled corporate America, and that relationship improved standards of living and usually kept the worst of corporate abuses in check. With America Inc. owned by its citizens, the success of American business translated into large gains in the stock portfolios of anybody who put his savings in the market over most of the postwar period.

Today, however, stock markets, once the bedrock of American capitalism, are slowly becoming a noisy sideshow that churns out increasingly meager returns. The show still gets lots of attention, but the real business of the global economy is inexorably leaving the stock market — and the vast majority of us — behind.

Felix Salmon is the finance blogger at Reuters.

Wall Street’s Dead End,






Wall Street Whitewash


December 16, 2010

The New York Times



When the financial crisis struck, many people — myself included — considered it a teachable moment. Above all, we expected the crisis to remind everyone why banks need to be effectively regulated.

How naïve we were. We should have realized that the modern Republican Party is utterly dedicated to the Reaganite slogan that government is always the problem, never the solution. And, therefore, we should have realized that party loyalists, confronted with facts that don’t fit the slogan, would adjust the facts.

Which brings me to the case of the collapsing crisis commission.

The bipartisan Financial Crisis Inquiry Commission was established by law to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” The hope was that it would be a modern version of the Pecora investigation of the 1930s, which documented Wall Street abuses and helped pave the way for financial reform.

Instead, however, the commission has broken down along partisan lines, unable to agree on even the most basic points.

It’s not as if the story of the crisis is particularly obscure. First, there was a widely spread housing bubble, not just in the United States, but in Ireland, Spain, and other countries as well. This bubble was inflated by irresponsible lending, made possible both by bank deregulation and the failure to extend regulation to “shadow banks,” which weren’t covered by traditional regulation but nonetheless engaged in banking activities and created bank-type risks.

Then the bubble burst, with hugely disruptive consequences. It turned out that Wall Street had created a web of interconnection nobody understood, so that the failure of Lehman Brothers, a medium-size investment bank, could threaten to take down the whole world financial system.

It’s a straightforward story, but a story that the Republican members of the commission don’t want told. Literally.

Last week, reports Shahien Nasiripour of The Huffington Post, all four Republicans on the commission voted to exclude the following terms from the report: “deregulation,” “shadow banking,” “interconnection,” and, yes, “Wall Street.”

When Democratic members refused to go along with this insistence that the story of Hamlet be told without the prince, the Republicans went ahead and issued their own report, which did, indeed, avoid using any of the banned terms.

That report is all of nine pages long, with few facts and hardly any numbers. Beyond that, it tells a story that has been widely and repeatedly debunked — without responding at all to the debunkers.

In the world according to the G.O.P. commissioners, it’s all the fault of government do-gooders, who used various levers — especially Fannie Mae and Freddie Mac, the government-sponsored loan-guarantee agencies — to promote loans to low-income borrowers. Wall Street — I mean, the private sector — erred only to the extent that it got suckered into going along with this government-created bubble.

It’s hard to overstate how wrongheaded all of this is. For one thing, as I’ve already noted, the housing bubble was international — and Fannie and Freddie weren’t guaranteeing mortgages in Latvia. Nor were they guaranteeing loans in commercial real estate, which also experienced a huge bubble.

Beyond that, the timing shows that private players weren’t suckered into a government-created bubble. It was the other way around. During the peak years of housing inflation, Fannie and Freddie were pushed to the sidelines; they only got into dubious lending late in the game, as they tried to regain market share.

But the G.O.P. commissioners are just doing their job, which is to sustain the conservative narrative. And a narrative that absolves the banks of any wrongdoing, that places all the blame on meddling politicians, is especially important now that Republicans are about to take over the House.

Last week, Spencer Bachus, the incoming G.O.P. chairman of the House Financial Services Committee, told The Birmingham News that “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”

He later tried to walk the remark back, but there’s no question that he and his colleagues will do everything they can to block effective regulation of the people and institutions responsible for the economic nightmare of recent years. So they need a cover story saying that it was all the government’s fault.

In the end, those of us who expected the crisis to provide a teachable moment were right, but not in the way we expected. Never mind relearning the case for bank regulation; what we learned, instead, is what happens when an ideology backed by vast wealth and immense power confronts inconvenient facts. And the answer is, the facts lose.

Wall Street Whitewash,






Ireland bailout

fails to calm nervy markets

• FTSE 100 down 2%; Dow loses 1%
• Euro slides to two-month low against US dollar
• Cost of insuring Spanish and Portuguese debt
   hits record high


Monday 29 November 2010
19.35 GMT
Jill Treanor and Julia Kollewe
This article was published
on guardian.co.uk at 19.35 GMT
on Monday 29 November 2010.
A version appeared
on p28 of the Main section section
of the Guardian on Tuesday 30 November 2010.
It was last modified
at 01.30 GMT on Tuesday 30 November 2010.
It was first published
at 10.40 GMT on Monday 29 November 2010.

Stocks fell on both sides of the Atlantic, the euro tumbled, and the cost of borrowing for Ireland, Spain and Portugal jumped today, as details of the republic's €85bn (£72bn) bailout failed to quell anxiety that the crisis in the eurozone was deepening.

Amid speculation that the European authorities may be left with little option but to embark on large-scale quantitative easing to try to bolster sentiment, Ireland's borrowing costs shot as high as 9.6% as the terms of its bailout by the International Monetary Fund and European Union were digested by investors.

"The bottom line is that the financial markets are unimpressed, and that's the most generous description," Neil MacKinnon, global macro strategist at VTB Capital told Associated Press. "The crisis rumbles on."

Only two shares in the FTSE 100, Barclays and HSBC, ended the day in positive territory as the blue-chip index closed below 5600 for the first time since 1 October, down 2% at 5550.

The Dow Jones industrial average fell 39.51 points to 11,052.49, and the euro slid to a new two-month low against the dollar of $1.3065 amid concerns about the long-term future of the decade-old single currency.

The cost of borrowing for the peripheral eurozone countries stayed stubbornly high, with Portugual above 7% and Spain above 5%, as speculation focused on the next indebted country which might need financial help. Italy endured its biggest one day rise in borrowing costs for a decade.

The cost of insuring Portuguese debt against default rose to a record high after Nouriel Roubini, economics professor and chairman of Roubini Global Economics, urged Lisbon to take international assistance. "Like it or not, Portugal is reaching the critical point," Roubini told the Portuguese newspaper Diário Económico. "Perhaps it could be a good idea to ask for a bailout in a preventative manner."

Ireland's bailout failed to dent fears of contagion across the eurozone despite rallying cries by France's economy minister Christine Lagarde and Germany's finance minister Wolfgang Schäuble, who both insisted Portugal would not need help. Andrew Lim, head of financials research at Matrix investment bank, said: "The Irish bailout doesn't solve the euro problem … We are looking at Portugal, then Spain next."

The fragility in the markets led to speculation that the European Central Bank will delay attempts to begin withdrawing funds for banks at its meeting on Thursday, even though the €35bn earmarked for Ireland's banks was intended to wean them off the ECB's life support.

Analysts said although the Ireland bailout had been accompanied by plans for new ways to rescue troubled eurozone countries after 2013, when the current emergency schemes run out, investors had been left confused. It was still not clear in what circumstances bondholders would be expected to share the losses of countries that were allowed to reschedule their debt after 2013 – in effect defaulting.

"Given the lack of clarity about what constitutes the appearance of insolvency, and what type of restructuring might occur in such a case, markets are likely to remain wary of holding government debt issued by other troubled eurozone countries like Portugal and Spain," said Ben May, European economist at Capital Economics.

"With huge political frictions still clearly in place within the region, fears of a future break-up of the region look set to remain, placing further downward pressure on the euro."

The bailout for Ireland is intended to ensure that neither the country nor its banks will default on their debt. The decision by the authorities to ensure that the possibility of default was reduced was initially welcomed. Gary Jenkins, head of fixed income research at Evolution Securities, said: "This is not the time to inject panic into the banking sector."

Greece, the first eurozone country to be bailed out, was today given until 2021 to repay its €110bn loan from the IMF and EU, rather than 2015.

Greece's finance minister George Papaconstantinou said: "We have a grace period of four years and a repayment period of seven years.

"The decision is very important, it opens the way to return to markets earlier than expected."

    Ireland bailout fails to calm nervy markets, G, 29.12.2010,






Wall Street’s Engines of Profit

Are Slowing Down


September 19, 2010
The New York Times


Inside the great investment houses on Wall Street, business has taken a surprising turn — downward.

Even after taxpayer bailouts restored bankers’ profits and pay, the great Wall Street money machine is decelerating. Big financial institutions, including commercial banks, are still making a lot of money. But given unease in the financial markets and the economy, brokerages and investment banks are not making nearly as much as their executives, employees and investors had hoped.

After an unusually sharp slowdown in trading this summer, analysts are rethinking their profit forecasts for 2010.

The activities at the heart of what Wall Street does — selling and trading stocks and bonds, and advising on mergers — are running at levels well below where they were at this point last year, said Meredith Whitney, a bank analyst who was among the first to warn of the subprime mortgage disaster and its impact on big banks.

Worldwide, the number of stock offerings is down 15 percent from this time last year, while bond issuance is off 25 percent, according to Capital IQ, a research firm. Based on these trends, Ms. Whitney predicts that annual revenue from Wall Street’s main businesses will drop 25 percent, to around $42 billion in 2010, from $56 billion last year.

While the numbers will not be known until after the third quarter ends and financial companies begin reporting earnings in October, the pace of trading this summer was slow even by normal summer standards. Trading in shares listed on the New York Stock Exchange was down by 11 percent in July from 2009 levels, and August volume was off nearly 30 percent.

“What’s happened in the third quarter is that after a very slow summer, people expected things to come back,” said Ms. Whitney. “But they haven’t, and the inactivity is really squeezing everyone.”

The downward slide on Wall Street parallels a similar shift in the broader economy, which has slowed considerably since showing signs of a nascent recovery this spring. And if banks come under pressure, all but the safest borrowers may struggle to get loans.

With less than two weeks to go in the third quarter, companies will be hard-pressed to fulfill earlier, more optimistic expectations.

“It’s like the marathon: if you’re five miles behind, you can’t make that up in the last 10 minutes of the race,” said David H. Ellison, president of FBR Fund Advisers, a money management firm that specializes in financial companies. Many banks are barely scraping by in traditional Wall Street business.

As a result, executives, portfolio managers and analysts say that even the mighty Goldman Sachs, which posted a profit every day for the first three months of the year, is unlikely to deliver the kind of profit growth that investors have come to expect.

Keith Horowitz, a bank analyst at Citigroup, said he expected Goldman Sachs to earn $7.8 billion in 2010, a 35 percent decline from the $12.1 billion it made last year.

The drop in trading translates into lower commissions for brokerage firms, as well as a weaker environment for underwriting initial public offerings and other stock issues, traditionally a highly lucrative niche.

Banks are also scaling back on making bets with their own money — known as proprietary trading — another huge profit source in recent years that will soon be forbidden under terms of the financial reform legislation passed by Congress this summer.

Indeed, analysts have finally started to bring their forecasts in line with the new reality. On Sept. 12, Mr. Horowitz reduced his estimates for third-quarter profits at Goldman and Morgan Stanley.

Mr. Horowitz had predicted Goldman would make $1.75 billion in the third quarter, or $3 a share; he now expects Goldman’s profit to total $1.34 billion, or $2.30 a share. For Morgan Stanley, his revision was even steeper, with earnings expectations revised downward to $140 million, or 10 cents a share, from $726 million, or 53 cents a share.

Mr. Horowitz’s estimates are considerably lower than the consensus among analysts who track the two companies. If the other analysts revise their estimates closer to his, they would put pressure on the shares.

One of the rare bright spots for Wall Street recently has been the issuance of junk bonds, as ultra-low interest rates encourage investors to seek out riskier debt that carries a higher yield. But that will not be enough to offset the weakness elsewhere, said one top Wall Street executive who insisted on anonymity because he was not authorized to speak publicly for his company, and because final numbers would not be tallied until the end of the month.

To make matters worse, he said, many Wall Street firms increased their work forces in the first half of the year, before the mood shifted and worries of a double-dip recession arose. If activity remains anemic, firms could soon begin cutting jobs again.

“I think the summer was horrible for everyone, and no one expected it to be as bad as it was,” he said. “It’s coming back a little bit in September but nowhere near enough to make up for what happened in July and August.”

The profit picture is brighter for diversified companies like JPMorgan Chase and Bank of America, which have larger commercial and retail banking operations in addition to their Wall Street units, but some analysts say earnings expectations for them could come down as well.

“Estimates still seem a little high, and the revenue story for all the banks is not a good one,” said Ed Najarian, who tracks the banking sector for ISI, a New York research firm.

With interest rates plunging, banks are making less off their interest-earning assets like government bonds and other ultra-safe securities. At the same time, demand for new loans remains weak.

One wild card will be the credit card portfolios at major banks like JPMorgan, Bank of America and Citigroup. As delinquencies ease, Mr. Najarian said, credit losses are likely to decline. That trend helped earnings at JPMorgan in the second quarter, and could be crucial again in the third quarter.

Ms. Whitney says the gloomy short-term predictions foreshadow a series of lean years in the broader financial services industry.

Indeed, she said the Street faced a “resizing” not seen since the cutbacks that followed the bursting of the dot-com bubble a decade ago.

“We expect compensation to be down dramatically this year,” she wrote in a recent report. She predicts the American banking industry will lay off 40,000 to 80,00 employees, or as many as 1 in 10 of its workers.

That may be extreme, but Ms. Whitney argues that the boom years are not coming back anytime soon. As both consumers and companies cut back on debt, and financial reform rules put the brakes on profitable niches like derivatives and proprietary trading, the engines of earnings growth for the last decade will continue to sputter.

    Wall Street’s Engines of Profit Are Slowing Down, NYT, 19.9.2010,






Financial Regulation


June 25, 2010
The New York Times

There is much to applaud in the financial regulatory reform bill announced last Friday by House and Senate negotiators. It would limit some of the riskiest activities of banks and regulate the multitrillion-dollar market in over-the-counter derivatives. It would give federal regulators the tools, if they need them, to shut failing large banks and financial firms instead of bailing them out.

In significant ways, the bill would also protect Americans directly. Consumers would be shielded from many forms of abusive and predatory lending, and investors could be empowered to influence corporate boards that have long been impervious to shareholder concerns.

The bill is a considerable accomplishment. It is the final version. Congress should pass it quickly.

At the same time — and in the months and years ahead — lawmakers must acknowledge the bill’s shortcomings and be prepared to take corrective action. Many of the bill’s provisions come with exceptions or exemptions that could, in practice, swallow the new rules.

The reforms are also vulnerable to being weakened in the painstaking process of translating new law into actual regulations and procedures. Special interests — think Wall Street — have the resources and time to monitor and influence that process. The public does not. Lawmakers have to ensure the carrying out of the rules does not veer widely from what Congress has promised.

Take for example, the so-called Volcker rule, intended to reduce risk and speculation in the financial system. The Obama administration proposed banning banks from using their capital to invest in hedge funds and private equity funds. The final bill would let banks invest up to 3 percent of their high-quality capital in such funds, a big exception. Congress has to be prepared to reduce the percentage to control risks in the system.

Derivatives regulation also bears watching. The bill would require most transactions to occur on regulated exchanges, rather than as private contracts. Regulators and lawmakers must strictly monitor derivatives that trade off-exchange and stop that market from growing ever larger.

For all of the specific reforms, the legislation leaves intact a handful of behemoth, multitasking banks whose size and scope would make them difficult to dismantle in a crisis, even under a new law.

Congress is gambling that the reforms, taken together, will sufficiently reduce the banks’ riskiness. That could happen, but if it does, the banks will make considerably less money and will want relief from what they are sure to call overly burdensome regulation. When that happens — and if the reforms work, it will — lawmakers will have to stand firm, even though it means imposing pain on the banks. Equally important, if the big banks grow larger and riskier despite the new rules, will lawmakers impose stronger restraints? If they do not, it is only a matter of time before the next calamity.

Americans have paid for the financial crisis with their jobs, incomes, savings, investments and home equity, and with their faith in markets and in the government to protect them from harm. The new bill is a step toward redressing those losses and restoring that faith. Congress should pass it, and then do what must be done to ensure that it performs as advertised.

    Financial Regulation, NYT, 25.6.2010,






In Deal, New Authority Over Wall Street


June 25, 2010
The New York Times


WASHINGTON — An overhaul of the nation’s financial regulatory system, reached after an all-night Congressional horse-trading session, will vastly expand the authority of the federal government over Wall Street in a bid to curb the free-wheeling culture that led to the near collapse of the world economy in 2008.

The deal between House and Senate negotiators, sealed just before sunrise on Friday, imposes new rules on some of the riskiest business practices and exotic investment instruments. It also levies hefty fees on the financial services industry, essentially forcing big banks and hedge funds to pay the projected $20 billion, five-year cost of the new oversight that they will face. And it empowers regulators to liquidate failing financial companies, fundamentally altering the balance between government and industry.

But after weeks of intense lobbying and months of debate, Congress in the end stopped short of prohibiting some of the practices that led to the crisis two years ago, betting instead that a newly empowered regulatory regime can rein in the big financial players without shackling the markets and drying up the flow of credit to businesses.

“We are poised to pass the toughest financial reform since the ones we created in the aftermath of the Great Depression,” President Obama said on the South Lawn of the White House, before leaving for the Group of 20 meeting in Toronto, where he was expected to press other nations to tighten their financial rules.

Democrats predicted that the full Congress would approve the legislation next week and that they would meet their goal of sending the bill to Mr. Obama for his signature by the Fourth of July.

The financial industry won some important victories, even if they face significantly heightened regulation. They fought off some of the toughest restrictions on their ability to invest their own funds. Most significantly, they thwarted an attempt to make them give up their highly profitable derivatives trading desks. And big lobbying fights remain in the future, when regulators begin the nitty-gritty task of turning complex, sometimes vague laws into real-world rules for these businesses to follow.

Industry analysts predicted that banks would most likely adapt easily to the new regulatory framework and thrive. As a result, bank stocks were mostly higher Friday, prompting some skeptics to question if the legislation, in fact, would be tough enough to rein in the industry and prevent future shocks to the economy as a result of bad gambling.

Even architects of the bill acknowledged that it might take the next financial crisis to truly determine the effectiveness of the changes.

On Friday morning, after a 20-hour final negotiating session, lawmakers, Congressional aides, lobbyists and the banking industry were still sorting through the legislative rubble of a frantic night of deal-making, edits and adjustments that left even some of those who worked most closely on the bill confused about exactly how some of the final details turned out. At points in the debates, lawmakers seemed to have trouble following their own deliberations.

“Can somebody explain to me what’s in Tier 1 capital?” Representative Melvin L. Watt, Democrat of North Carolina, pleaded, referring to the core measure of a bank’s financial strength. “I just don’t have enough knowledge in this area.”

The White House’s desire to get a bill before the Fourth of July break drove the day. At 11 p.m. Thursday, Representative Barney Frank, Democrat of Massachusetts and chairman of the Financial Services Committee who presided over the conference proceedings, began to show signs of impatience. When the senior Republican on the committee, Representative Spencer Bachus of Alabama, asked for another minute to finish a statement, Mr. Frank cut him off. “I would object to that,” he snapped. “Not at 11 o’clock at night.”

As midnight turned to early morning, lawmakers cast rapid-fire votes on amendments hastily scrawled in the margins of rejected proposals. With C-Span carrying the proceedings live, the last half-hour of the session featured sometimes confused lawmakers repeatedly asking about what happened to various proposed amendments.

While the televised proceedings at times provided a remarkable window into the minutiae of legislating, many of the deals to complete the bill were cut outside the conference room, in private discussions between Democratic lawmakers and the Obama administration, with some of Washington’s most influential lobbyists trying to weigh in as best they could.

One major bank on Friday scrambled to figure out what happened to six words that to its surprise and dismay were apparently cut from an amendment on proprietary trading, potentially posing a threat to its business.

The final bill vastly expands the regulatory powers of the Federal Reserve and establishes a systemic risk council of high-ranking officials, led by the Treasury secretary, to detect potential threats to the overall financial system. It creates a new consumer financial protection bureau, and widens the purview of the Securities and Exchange Commission to broaden regulation of hedge funds and credit rating agencies.

The measure restricts the ability of banks to invest and trade for their own accounts — a provision known as the Volcker Rule, for its chief proponent, Paul A. Volcker, the former Federal Reserve chairman — and creates a tight new regulatory framework for derivatives, the complex financial instruments that were at the heart of the 2008 crisis.

But in a late-hour compromise, the bill does not include the tough restrictions on derivatives trading championed by Senator Blanche L. Lincoln, Democrat of Arkansas, which would have forced banks to jettison their most lucrative dealings in this area.

Instead, in a deal negotiated between Mrs. Lincoln and a bloc of House members called the New Democrat Coalition, banks will be required to segregate their dealings only in the riskiest categories of derivatives, including the highly structured products like credit-default swaps based on bundles of mortgage loans, and in certain types of derivatives that are based on commodities that banks are already prohibited from investing in, like precious metals, agricultural products and energy.

But derivatives that have clear business purposes like helping manufacturing companies to hedge against the cost of raw materials or swings in foreign exchange rates would continue to be allowed. And nonfinancial corporations would be allowed to set up their own financial affiliates to create and trade derivatives related to their businesses.

The derivatives deal also headed off a last-minute rebellion by some New York lawmakers concerned about the effect of Mrs. Lincoln’s proposal on Wall Street businesses.

“We wanted to make sure we didn’t drive all the derivative business out of New York,” said Representative Gregory W. Meeks, a Democrat from Queens, who served on the conference committee.

The bill also does not include some of the more draconian proposals debated in recent months, including re-establishing a firewall between commercial and investment banking. And the nation’s auto dealers won exemption from oversight by the new consumer protection bureau, which will regulate most consumer lending.

Some business groups angrily denounced the final product, saying it was ill-conceived and would have unintended consequences harmful to the economy.

“Far from effective reform, this legislation includes provisions totally unrelated to the financial crisis which may disrupt America’s fragile economic recovery and increase instability and risk,” said John J. Castellani, president of the Business Roundtable, which represents chief executives of top American companies.

The conference report approved Friday is subject to approval by both chambers of Congress, a process that is expected to begin on Tuesday with action by the House and then by the Senate — where 60 votes will be required to end debate.

The vote in the conference committee was on party lines, with Democrats in favor and Republicans opposed. House conferees voted 20 to 11 to approve the bill and Senate conferees voted 7 to 5.

Republicans repeatedly complained that the bill would do nothing to tighten regulation of the government-sponsored mortgage companies, Fannie Mae and Freddie Mac, which were at the heart of much of the housing crisis.

Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee who with Mr. Frank led the negotiations, said the bill would prevent the corporate bailouts required in 2008 and allow the United States to become a global leader in financial regulation, potentially providing decades of stability.

“Never again will we face the kind of bailout situation as we did in the fall of 2008 where a $700 billion check will have to be written,” Mr. Dodd said in an interview. But he acknowledged that the effectiveness of the legislation would be learned only over time.

“I don’t have the kind of ego that would tell you we have absolutely solved these problems,” he said. “We won’t know until we face the next economic crisis.”

Republicans, however, warned that the bill would extend the reach of government too far.

At one point during debate over whether banks should be allowed to trade for their own profit, Representative Jeb Hensarling, Republican of Texas, asked what the issue had to do with the financial crisis. “How much riskier is proprietary trading than investment in certain forms of residential real estate?” Mr. Hensarling asked.

“If we’re not going to bail them out with taxpayer money, what they do with their money is their business.”

He said, adding: “This is one more occasion where we see something in the bill that did not have a causal role in the crisis.”

While regulatory bills often get watered down as they grind through the legislative process and interest groups and industry press for changes, the financial bill mostly gained strength as the debate lengthened and lawmakers seized on public frustration that rich financial institutions, recently bailed out by taxpayers, showed no signs of curtailing their risky practices or their outsize pay packages.

Raymond Hernandez and Binyamin Appelbaum

contributed reporting.

    In Deal, New Authority Over Wall Street, NYT, 25.6.2010,






Obama Signs

Overhaul of Financial System


July 21, 2010
The New York Times


WASHINGTON — President Obama signed a sweeping expansion of federal financial regulation on Wednesday, signaling perhaps the Democrats’ last major legislative victory before the midterm elections in November, which could recast the Congressional landscape.

Within minutes of the bill signing, several Wall Street groups were leveling criticism at the new regulations, reflecting Mr. Obama’s increasingly fractious relations with corporate America.

The Business Roundtable complained in a statement that the law “takes our country in the wrong direction” and may discourage investment and job growth, echoing concerns made by the United States Chamber of Commerce and other business organizations.

In a signal that Wall Street is ready to keep lobbying as regulators work out the details of how to apply the new law, Larry Burton, the roundtable’s executive director, said: “We will work with President Obama and policy makers to ensure this legislation is implemented in a manner that continues to promote sustainable economic growth and job creation.”

Still, Democrats and White House officials were euphoric about passage of the legislation, a response to the 2008 financial crisis that tipped the nation into the worst recession since the Great Depression.

The law subjects more financial companies to federal oversight and regulates many derivatives contracts while creating a consumer protection regulator and a panel to detect risks to the financial system.

A number of the details have been left for regulators to work out, inevitably setting off complicated tangles down the road that could last for years.

But “because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes,” Mr. Obama said before signing the legislation. “There will be no more taxpayer-funded bailouts. Period.”

He was surrounded by a group of mostly Democratic lawmakers and advocates of the overhaul legislation, including the House speaker, Nancy Pelosi of California, and the Senate majority leader, Harry Reid of Nevada, as well as Senator Christopher J. Dodd of Connecticut and Representative Barney Frank of Massachusetts, chairmen of crucial committees involved in developing the legislation.

The White House orchestrated a major signing ceremony at the Ronald Reagan Building across from the Commerce Department to trumpet the new law.

Mr. Obama took pains to try to show how the complex legislation, with its dense pages on derivatives practices, will protect ordinary Americans.

“If you’ve ever applied for a credit card, a student loan or a mortgage, you know the feeling of signing your name to pages of barely understandable fine print,” Mr. Obama said. “But what often happens as a result is that many Americans are caught by hidden fees and penalties, or saddled with loans they can’t afford.”

He said the law would crack down on abusive practices in the mortgage industry, simplifying contracts and ending hidden fees and penalties, “so folks know what they’re signing.”

The law expands federal banking and securities regulation from its focus on banks and public markets, subjecting a wider range of financial companies to government oversight.

It also imposes regulation for the first time on opaque markets like the enormous trade in credit derivatives.

It creates a council of federal regulators, led by the Treasury secretary, to coordinate the detection of risks to the financial system, and it provides new powers to constrain and even dismantle troubled companies.

And it creates a powerful regulator, to be appointed by the president and housed in the Federal Reserve, to protect consumers of financial products.

The first visible result may come in about two years, the deadline for the consumer regulator to create a simplified disclosure form for mortgage loans.

Mr. Obama acknowledged three Republican senators — Susan Collins and Olympia J. Snowe of Maine and Scott P. Brown of Massachusetts — who broke with their party to approve the bill, saying that they “put partisanship aside, judged the bill on the merits and voted for reform.”

    Obama Signs Overhaul of Financial System, ,NYT, 21.7.2010,






A Year After a Cataclysm,

Little Change on Wall St.


September 12, 2009
The New York Times


Wall Street lives on.

One year after the collapse of Lehman Brothers, the surprise is not how much has changed in the financial industry, but how little.

Backstopped by huge federal guarantees, the biggest banks have restructured only around the edges. Employment in the industry has fallen just 8 percent since last September. Only a handful of big hedge funds have closed. Pay is already returning to precrash levels, topped by the 30,000 employees of Goldman Sachs, who are on track to earn an average of $700,000 this year. Nor are major pay cuts likely, according to a report last week from J.P. Morgan Securities. Executives at most big banks have kept their jobs. Financial stocks have soared since their winter lows.

The Obama administration has proposed regulatory changes, but even their backers say they face a difficult road in Congress. For now, banks still sell and trade unregulated derivatives, despite their role in last fall’s chaos. Radical changes like pay caps or restrictions on bank size face overwhelming resistance. Even minor changes, like requiring banks to disclose more about the derivatives they own, are far from certain.

Coming on the same weekend as the 11th-hour bailout of the giant insurer American International Group, and the sale of Merrill Lynch, Lehman’s failure was the climax of a cataclysmic weekend in the financial industry. In the days that followed, nearly everyone seemed to agree that Wall Street was due for fundamental change. Its “heads I win, tails I’m bailed out” model could not continue. Its eight-figure paydays would end.

In fact, though, regulators and lawmakers have spent most of the last year trying to save the financial industry, rather than transform it. In the short run, their efforts have succeeded. Citigroup and other wounded banks have avoided bankruptcy, and the economy has sidestepped a depression. But the same investors and economists who predicted, and in some cases profited from, the collapse last fall say the rescue has come at an extraordinary cost. They warn that if the industry’s systemic risks are not addressed, they could cause an even bigger crisis — in years, not decades. Next time, they say, the credit of the United States government may be at risk.

Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and former chief economist of the International Monetary Fund, said that the seeds of another collapse had already sprouted. If major banks are allowed to keep making bets that are ultimately backed by taxpayer guarantees, they will return to the practices that led them to underwrite trillions of dollars in bad loans, Professor Johnson said.

“They will run up big risks, they will fail again, they will hit us for a big check,” he predicted.

The doomsday view is far from universal.

Wall Street executives say the Lehman bankruptcy opened their eyes to the fragility of their institutions. They note that they have pulled back on risk and reduced leverage, creating a bigger cushion against losses. And they say that regulators were right to support the financial industry over the last year, rather than imposing new rules or allowing weak banks to collapse.

“There is less leverage in the entire financial system,” said David A. Viniar, Goldman’s chief financial officer. At Goldman, $1 in capital now supports about $14 in loans and investments, compared with $24 a year ago.

But even some senior Wall Street executives acknowledge the lack of change surprises them, given how poorly the industry performed last fall and the degree of government support necessary to keep it from collapsing.

“There was a general feeling that an enormous amount of additional regulation should be put in place to prevent what happened that weekend from happening again,” said Byron Wien, vice chairman of Blackstone Advisory Services and the former chief investment strategist for Morgan Stanley and Pequot Capital. “So far, we haven’t seen a lot of action.”

Robert J. Shiller, the Yale University economics professor who predicted the dot-com crash and the housing bust, said the window for change may be closing. “People will accept change at a time of crisis, but we haven’t managed to do much, and maybe complacency is coming back,” Professor Shiller said. “We seem to be losing momentum.”

Kenneth C. Griffin, founder and chief executive of the Citadel Investment Group, a Chicago-based hedge fund that manages $13 billion, said that regulators and lawmakers needed to impose rules so failing banks could be shut, rather than allowed to operate indefinitely with taxpayer support.

“We’ve taken a lot of steps for the worse, and not for the better, in terms of the structural underpinnings of our capital markets,” Mr. Griffin said. “We have to change the rules and correct the fundamental flaws in the financial system.”

To be sure, Wall Street is not exactly as it was before the cataclysm of last year.

Then, a dozen or so big banks formed the top tier. Now Goldman Sachs and JPMorgan Chase are clearly the strongest, with Morgan Stanley struggling to compete. Bank of America and Citigroup are the weakest big banks, heavily reliant on government guarantees to survive.

“We have more separation between the healthiest and the least healthy of the big banks,” said Darrell Duffie, a finance professor at Stanford University.

Banks have collectively raised hundreds of billions in new capital to help cushion losses on bad loans and are taking a more prudent approach to lending and underwriting. The worst excesses of 2006 and 2007, when banks lent hundreds of billions of dollars against all kinds of real estate at terms that even at the time seemed absurd, have ended.

But those changes are not unexpected. Banks typically raise lending standards during recessions. And even if they wanted to keep up underwriting, they would not find much of a market. Many pension and hedge funds have suffered huge losses on mortgage-backed bonds and are hardly rushing to buy more.

Critics of the industry argue that the pullback in risk will be only temporary without deep regulatory changes. Nassim Nicholas Taleb, a statistician, trader, and author, has argued for years that financial firms chronically underestimate their risks and must be managed much more cautiously. Universa Investments, a $5 billion fund in which he is a principal, made more than 100 percent profit last year betting on the possibility of a collapse.

Mr. Taleb warns that the system has grown riskier since last fall. The extensive government support that began after Lehman collapsed will lead investors to assume that governments will always prevent major banks from collapsing, he said.

So investors will lend money to the financial industry on easy terms. In turn, financial institutions will use that cheap money to make risky loans and trades. The banks will keep the profits when their bets pay off, while taxpayers will swallow the losses when the bets go bad and threaten the system.

Economists call the phenomenon moral hazard. Bankers have a different term: I.B.G. The phrase implies that by the time a deal goes sour, “I’ll be gone,” after having received a sizable bonus.

Despite the predictions last year about pay cuts, those bonuses appear secure. Kian Abouhossein, an analyst at J.P. Morgan in London, predicted this week that eight major American and European banks would pay the 141,000 employees in their investment banking units $77 billion in 2011 — about $543,000 per worker, not far from the 2007 peak — even after minor regulatory changes are adopted.

Because the rewards are so rich, the banks will not change unless regulators and lawmakers force them, Mr. Taleb said.

“I don’t know anyone on Wall Street who goes to work every day thinking of anything but how to increase their bonus,” he said.

To prevent a replay of last year’s crisis, investors in financial institutions, especially bondholders, must believe that they will lose money if banks fail, said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation. “You need to send that very strong, clear signal to restore market discipline,” Ms. Bair said.

But legislation that would allow regulators to close giant institutions in an orderly fashion has been stalled for months. So too have efforts to create a systemic regulator that would focus on the broader risk that might occur from the ripple effects caused by the failure of one major bank.

Another proposed change would require banks to list and trade derivatives through a central clearinghouse, just as stocks and options are traded through exchanges, but it has yet to go anywhere.

The term derivatives encompasses a variety of financial products, including contracts whose value changes as interest rates move and insurance that pays off if a bond defaults. Derivatives drove the boom before 2008 by encouraging banks to make loans without adequate reserves. They also worsened the panic last fall because they inherently tie institutions together. Investors worried that the collapse of one bank would lead to big losses at others.

Requiring that derivatives be traded openly sounds like a relatively small change, but it could have important effects.

Exchange trading would open pricing for derivatives, so banks could not hide money-losing positions. Banks would have to put up money as positions moved against them, since the exchanges would seize and sell derivatives that were not backed by adequate margin. That move would help avoid the situation A.I.G. faced last year, after it wrote hundreds of billions of dollars of credit insurance and had no money to make good on its promises when the bonds defaulted. But critics say that even the proposed changes would not go far enough, because they would exempt some complex derivatives from exchange trading or clearing. Moreover, some banks oppose opening derivatives trading, because it would cut their profits by making pricing more visible and as a consequence competitive. For now, legislation to force derivatives trading onto exchanges has stalled, and banks are still writing contracts with limited regulatory oversight.

“The off-exchange derivatives market is still the Wild West,” Ms. Bair said.

    A Year After a Cataclysm, Little Change on Wall St., NYT, 12.9.2009,






Madoff Is Sentenced

to 150 Years for Ponzi Scheme


June 30, 2009
The New York Times


A criminal saga that began in December with a string of superlatives — the largest, longest and most widespread Ponzi scheme in history — ended the same way on Monday as Bernard L. Madoff was sentenced to 150 years in prison, the maximum for his crimes.

Mr. Madoff, looking thinner and more haggard than when he pleaded guilty in March, stood impassively as Federal District Judge Denny Chin condemned his crimes as “extraordinarily evil” and imposed a sentence that was three times as long as the federal probation office suggested and more than 10 times as long as defense lawyers had requested.

Though many questions still surround the case, the judge’s pronouncement offered a brief sense of resolution, followed by a short burst of applause and one stifled cheer from the victims who filled the soaring Lower Manhattan courtroom.

Only a few moments before, Mr. Madoff had apologized for the harm he inflicted on the clients who had trusted him, his employees and his family. He blamed his pride, which would not allow him to admit his failures as a money manager.

“I am responsible for a great deal of suffering and pain. I understand that,” he said, leaning slightly forward over the polished table, his charcoal suit sagging on his diminished frame.

“I live in a tormented state now, knowing of all the pain and suffering that I have created.”

At the end of his personal statement, Mr. Madoff abruptly turned to face the courtroom crowd. He was no longer the carefully tailored and coiffed financier. His hair was ragged. His eyes were sunken into deep gray shadows. His voice was a little raspy, and he stopped on occasion to sip water.

“I am sorry,” he said, and abruptly added: “I know that doesn’t help you.”

Nine victims, some choked by sobs or swiping at tears, told the court of the damage he had caused, describing him as a psychopath and a monster who had destroyed their lives.

“It feels like a nightmare that we can’t awake from,” said Carla Hirschhorn, a physical therapist who said her daughter was juggling two jobs in her junior year to help pay for college expenses that their lost savings were supposed to cover.

Michael Schwartz, who said Mr. Madoff had stolen money set aside to sustain his disabled brother, expressed the hope that “his jail cell will become his coffin.”

In meting out the maximum sentence, Judge Chin pointed out that no friends, family or other supporters had submitted any letters on Mr. Madoff’s behalf that attested to the strength of his character or good deeds he had done.

Mr. Madoff returned to his cell at the Metropolitan Correctional Center in Lower Manhattan while federal prison officials determine where he will serve his sentence. The defense has 10 days to decide whether to appeal the sentence.

Although Judge Chin suggested that Mr. Madoff be assigned to a prison in the Northeast, at the request of the defense, the judge said the Bureau of Prisons would decide what kind of facility will become his permanent home.

No members of Mr. Madoff’s immediate family were in court.

In his statement, Mr. Madoff acknowledged the “legacy of shame” he has created for his family.

His wife, Ruth, later released a statement — her first since her husband’s arrest — expressing her grief for the victims and her sense of shock and betrayal when she learned of the crime.

Mrs. Madoff has not been charged in the crime and insists that she did not know of it until her husband told her just before his arrest. But she acknowledged that her silence, imposed by lawyers protecting her own interests, “has been interpreted as indifference or lack of sympathy for the victims.” That, she added, “is exactly the opposite of the truth.”

She said she felt “devastated” by the harm her husband had done. “I am embarrassed and ashamed. Like everyone else, I feel betrayed and confused,” said Mrs. Madoff, who has forfeited all but $2.5 million in assets. “The man who committed this horrible fraud is not the man whom I have known for all these years.”

Many victims also accused regulators and lawmakers of betraying them for decades by failing to stop Mr. Madoff, and failing them again by not helping them deal with their financial hardships since they learned their savings had evaporated.

Judge Chin cautioned one speaker that those entities “are not before me,” but, in a larger sense, the Madoff case seemed to put an entire era on trial — a heady time of competitive deregulation and globalized finance that climaxed last fall in a frenzy of fear, panic and loss.

The blame has been spread wide — to arcane credit-default swaps, to lax enforcement of weak regulations, to poorly understood risks and badly managed financial institutions.

But with his arrest on Dec. 11, Mr. Madoff, a senior statesman in the private corridors of Wall Street who was respected for his vision and trusted by tens of thousands of customers, put a human face on those abstractions.

Mr. Madoff’s luxurious lifestyle, including a penthouse, yachts and French villa, all quickly became fuel for public outrage.

Every move in the case was closely watched, including his confession to his sons, Andrew and Mark, who were in his business; his guilty plea to 11 counts of various financial crimes in March; and his wife’s legal efforts to save some family assets from a sweeping government forfeiture.

The fury increased in January with Congressional testimony from a whistle-blower who had repeatedly alerted the Securities and Exchange Commission about his suspicion that Mr. Madoff was operating a gigantic fraud. An internal investigation is now under way at the S.E.C. to determine why the agency did not detect Mr. Madoff’s scheme and shut it down years ago.

The S.E.C. and the Securities Investor Protection Corporation, a government-chartered program to compensate customers of failed brokerage firms, were criticized repeatedly in the courtroom statements by the victims on Monday, and at a rally of victims held near the courthouse afterward.

The litigation already filed in and around the Madoff case will help shape how regulators, the courts and SIPC respond to large-scale Ponzi scheme losses in the future. How the losses of victims will be addressed is just one of many open questions.

The criminal investigation is continuing, as prosecutors try to determine who else bears responsibility for the crime. So far, only Mr. Madoff’s accountant has been arrested on criminal charges, but securities regulators have filed civil suits against several of his long-term investors, accusing them of knowingly steering other investors into the fraud scheme for their own gain.

And the bankruptcy trustee has sued more than a half-dozen hedge funds and large investors, seeking to recover more than $10 billion withdrawn from the fraud in its final months and years. It is uncertain how much money he will be able to recover to share among the victims and how long that effort will take.

And the sentence itself is likely to leave a mark as well, according to legal experts on white-collar crime.

In remarks before announcing his decision, Judge Chin acknowledged that any sentence beyond a dozen years or so would be largely symbolic for Mr. Madoff, who is 71 and has a life expectancy of about 13 years.

But “symbolism is important for at least three reasons,” he said, citing the need for retribution, deterrence and a measure of justice for the victims.

Judge Chin said he did not agree with the suggestion by Ira Lee Sorkin, Mr. Madoff’s lead lawyer, that victims were seeking “mob vengeance” through a maximum sentence.

“They are placing their trust in the system of justice,” he said, adding that he hoped the sentence he imposed would “in some small way” help the victims to heal.

Several former prosecutors called Judge Chin’s decision somewhat surprising but appropriate.

“The judge sent a powerful deterrent message and an ominous signal to possible co-conspirators,” said George Jackson III, a lawyer with Bryan Cave and a former federal prosecutor in Chicago.

Richard L. Scheff, a lawyer with Montgomery, McCracken, Walker & Rhoads and an assistant secretary for law enforcement for the Treasury Department, said the magnitude of the sentence “demonstrates real concern for the harm caused by Madoff to so many victims.”

He added, “Am I surprised? Yes, to a degree — but I strongly suspected that the sentence would be tantamount to a life sentence.”

To Robert S. Wolf, with the law firm Gersten Savage, the sentence “sent a clear and resounding message that Judge Chin felt that Madoff had not come clean and told all about the enormity of his criminal activity and others who participated.”

But James A. Cohen, an associate professor of law at Fordham, said he was troubled by the sentence. “I don’t think symbolism has a very important part in sentencing,” he said. “I certainly agree that a life sentence was appropriate, but this struck me as pandering to the crowd.”

The victims who spoke in the courtroom were unanimous in their demand for a maximum sentence, saying that Mr. Madoff had forfeited his right to live in society. They pointed to the extent of the crime: a fraud that ensnared millionaires, private foundations, a Nobel Prize laureate and hundreds of small investors who lost their life savings to an investment guru they had trusted completely.

Burt Ross, who lost $5 million in the fraud, cited Dante’s “The Divine Comedy,” in which the poet defined fraud as “the worst of sin” and expressed the hope that, when Mr. Madoff dies — “virtually unmourned” — he would find himself in the lowest circle of hell.

Prosecutors said Mr. Madoff deserved the maximum term for carrying out one of the biggest investment frauds in Wall Street history. Mr. Madoff’s lawyers said he should receive only 12 years.

After Mr. Madoff’s victims finished speaking, his lawyer, Mr. Sorkin, said the government’s request for a 150-year sentence bordered on absurd. He called Mr. Madoff a “deeply flawed individual,” but a human being nonetheless. “Vengeance is not the goal of punishment,” Mr. Sorkin said.

Even with a lesser term, Mr. Sorkin added, Mr. Madoff expects to “live out his years in prison.”


Zachery Kouwe and Jack Healy contributed reporting.

    Madoff Is Sentenced to 150 Years for Ponzi Scheme, NYT, 30.6.2009,






Shares Near 6-Year Low,

With More Losses Feared


November 20, 2008
The New York Times


As the stock market tumbled to its lowest level in nearly six years on Wednesday, Wall Street traders and many ordinary Americans were asking the same question: Where, oh where is the bottom?

After a yearlong slide in stocks and a giant bank rescue from Washington, even some pessimists had hoped that the worst might be over. But now, after the Dow Jones industrial average fell below 8,000 on Wednesday, the financial crisis and the bear market it spawned seem to be taking a new, painful turn.

Once again, investors’ confidence in the nation’s financial industry is draining away. And once again, people are rushing for ultra-safe investments like Treasuries. Many analysts agree that the short-term outlook seems grim now that the Dow has fallen below 8,000, a level that had lured buyers again and again in recent weeks.

“When you break through these kinds of levels, it strongly suggests there’s more to go,” said Ed Yardeni, president of Yardeni Research.

But how much more to go? Dow 7,000? Dow 6,000? Many analysts are reluctant to say, having been proved wrong so many times before. The Dow has lost nearly 40 percent this year, and many of its blue chips, from Alcoa to General Electric, are down even more than that.

Much will depend on the course of the economy, but there is little good news on that front. On Wednesday, a new report raised concern that the economy might be beset by a debilitating decline in prices, or deflation.

But another big worry is that the credit markets, where this crisis began, are coming under even more stress than they were before. Junk bonds, for instance, fell to their lowest levels on record on Wednesday, driving the average yield on these high-risk corporate bonds to more than 20 percent. Yields on Treasury bills, meantime, fell to nearly zero. Investors were willing to accept almost no return just to know their money was safe.

The Treasury’s benchmark 10-year bill rose 1 25/32, to 103 20/32, and the yield, which moves in the opposite direction from the price, was at 3.32 percent, down from 3.53 percent late Tuesday.

Another source of concern is a possible new round of forced sales by hedge funds, seeking to raise the cash quickly to meet margin calls and redemptions of assets by investors.

Few stocks escaped unscathed. Shares of small and midsize companies fell, as well as those of Wal-Mart, the retailer. Energy companies plunged, as did airlines, fast-food chains and pharmaceutical companies.

But it was financial stocks that bore the brunt of the selling, and, for many analysts, seem the most worrisome. Financial shares are plunging far below the levels plumbed in October, when panic gripped the markets. On Wednesday, Citigroup, the hobbled financial giant, plunged 23.4 percent to a mere $6.40 in an avalanche of sell orders. Once the most valuable financial company in America, Citigroup is now worth less than U.S. Bancorp.

Big banks like Bank of America, JPMorgan Chase and Wells Fargo & — all of which, like Citigroup, have received billions of dollars from the government — fell more than 10 percent.

Goldman Sachs, the former employer of Henry M. Paulson Jr., the Treasury secretary, sank to its lowest level since it went public in 1999. Analysts predicted that Goldman, the most profitable bank in Wall Street history, would suffer its first loss as a public company.

Even Warren E. Buffett’s Berkshire Hathaway, which owns the Geico Corporation and recently invested in Goldman Sachs, fell 12 percent, its steepest decline in more than two decades. The Dow Jones industrial average closed down 427.47 points or 5.07 percent, at 7,997.28. The broader Standard & Poor’s 500-stock index closed down 6.12 percent or 52.54 points at 806.58 while the technology-heavy Nasdaq ended down 6.53 percent at 1,386.42.

But even as markets tumbled, analysts saw few signs of capitulation, that final burst of panicked selling that typically marks a market bottom. If anything, Wednesday’s new lows are a sign that Wall Street has farther to fall.

“The market is still anticipating that we have not seen the worst,” said Ryan Larson, head equity trader at Voyageur Asset Management.

After precipitous declines this autumn, Wall Street had spent the past weeks testing its yearly lows by dipping sharply, only to rebound late in the day. The testing and retesting prompted some optimists to hope that the markets had finally found a foothold.

But Wednesday’s drop proved them wrong.

A gathering mass of bleak economic conditions seemed to approach the critical point, as fears of deflation and the auto industry’s waning prospects of a federal bailout drove financial markets into an afternoon selling frenzy.

Auto shares fell as the leaders of the three American automakers reprised their appearance on Capitol Hill to discuss an emergency bailout and the threat of bankruptcy. General Motors was down 10 percent, to $2.79 a share, and the Ford Motor Company was down 25 percent, to $1.26.

Crude oil settled at a 22-month low at $53.62 a barrel, and energy stocks followed them lower.

Wednesday’s losses followed news that consumer prices dropped 1 percent in October, a record one-month decline, according to the Labor Department. Energy prices, which tumbled 8.6 percent over the month, led the declines.

Meanwhile, housing starts in October fell 4.5 percent to a seasonally adjusted 791,000 from the prior month, the government reported on Wednesday. For the year, housing starts were down 38 percent and building permits were 40 percent lower, reflecting how the housing industry has slammed to a halt amid tumbling home values, slumping sales and tighter credit markets.

Asian stock markets opened sharply lower on Thursday. Trade data from Japan, Asia’s largest economy, showed big drops in exports compared with a year ago. The Nikkei 225 index in Japan dropped 4.3 percent soon after the opening. Similar falls were seen in South Korea, where the Kospi fell 3.9 percent.

    Shares Near 6-Year Low, With More Losses Feared, NYT, 20.11.2008,






Exxon Mobil Posts

Biggest US Quarterly Profit Ever


October 30, 2008
Filed at 9:01 a.m. ET
The New York Times


HOUSTON (AP) -- Exxon Mobil Corp., the world's largest publicly traded oil company, reported income Thursday that shattered its own record for the biggest profit from operations by a U.S. corporation, earning $14.83 billion in the third quarter.

Bolstered by this summer's record crude prices, the Irving, Texas-based company said net income jumped nearly 58 percent to $2.86 a share in the July-September period. That compares with $9.41 billion, or $1.70 a share, a year ago.

The previous record for U.S. corporate profit was set in the last quarter, when Exxon Mobil earned $11.68 billion.

Revenue rose 35 percent to $137.7 billion.

On average, analysts expected the company to earn $2.39 per share in the latest quarter on revenue of $131.4 billion.

Exxon Mobil's results got a boost of $1.62 billion in the most-recent quarter from the sale of a natural gas transportation business in Germany. It also took a special, after-tax charge of $170 million related to a punitive damages award related to the 1989 Exxon Valdez oil spill.

Excluding those items, third-quarter earnings amounted to $13.38 billion -- nearly 15 percent above its previous profit record from the second quarter.

As expected, Exxon Mobil posted massive earnings at its exploration and production, or upstream, arm, where net income rose 48 percent to $9.35 billion. Higher oil and natural gas prices propelled results, even though production was down from the third quarter a year ago.

Oil producers are coming off a quarter during which crude prices reached an all-time high of $147.27 -- and their profits have reflected it. Crude prices, however, have quickly fallen 50 percent from the summer's highs, and the global economic malaise has raised questions about energy demand at least into 2009.

Some companies, especially smaller producers, are scaling back spending on new exploration and production projects because of the uncertainty, though analysts say that its less likely to happen at the well-heeled giants like Exxon Mobil.

Company shares rose 96 cents to $75.61 in premarket trading.

    Exxon Mobil Posts Biggest US Quarterly Profit Ever, NYT, 30.10.2008,






$700 Billion

Is Sought for Wall Street

in Vast Bailout


September 21, 2008
The New York Times


WASHINGTON — The Bush administration on Saturday formally proposed a vast bailout of financial institutions in the United States, requesting unfettered authority for the Treasury Department to buy up to $700 billion in distressed mortgage-related assets from the private firms.

The proposal, not quite three pages long, was stunning for its stark simplicity. It would raise the national debt ceiling to $11.3 trillion. And it would place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt.

“This is a big package, because it was a big problem,” President Bush said Saturday at a White House news conference, after meeting with President Álvaro Uribe of Colombia. “I will tell our citizens and continue to remind them that the risk of doing nothing far outweighs the risk of the package, and that, over time, we’re going to get a lot of the money back.”

After a week of stomach-flipping turmoil in the financial system, and with officials still on edge about how global markets will respond, the delivery of the administration’s plan set the stage for a four-day brawl in Congress. Democratic leaders have pledged to approve a bill but say it must also include tangible help for ordinary Americans in the form of an economic stimulus package.

Staff members from Treasury and the House Financial Services and Senate banking committees immediately began meeting on Capitol Hill and were expected to work through the weekend. Congressional leaders are hoping to recess at the end of the week for the fall elections, after approving the bailout and a budget measure to keep the government running.

With Congressional Republicans warning that the bailout could be slowed by efforts to tack on additional provisions, Democratic leaders said they would insist on a requirement that the administration use its new role, as the owner of large amounts of mortgage debt, to help hundreds of thousands of troubled borrowers at risk of losing their homes to foreclosure.

“It’s clear that the administration has requested that Congress authorize, in very short order, sweeping and unprecedented powers for the Treasury secretary,” the House speaker, Nancy Pelosi of California, said in a statement. “Democrats will work with the administration to ensure that our response to events in the financial markets is swift, but we must insulate Main Street from Wall Street and keep people in their homes.”

Ms. Pelosi said Democrats would also insist on “enacting an economic recovery package that creates jobs and returns growth to our economy.”

Even as talks got under way, there were signs of how very much in flux the plan remained. The administration suggested that it might adjust its proposal, initially restricted to purchasing assets from financial institutions based in the United States, to enable foreign firms with United States affiliates to make use of it as well.

The ambitious effort to transfer the bad debts of Wall Street, at least temporarily, into the obligations of American taxpayers was first put forward by the administration late last week after a series of bold interventions on behalf of ailing private firms seemed unlikely to prevent a crash of world financial markets.

A $700 billion expenditure on distressed mortgage-related assets would roughly be what the country has spent so far in direct costs on the Iraq war and more than the Pentagon’s total yearly budget appropriation. Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States.

Whatever is spent will add to a budget deficit already projected at more than $500 billion next year. And it comes on top of the $85 billion government rescue of the insurance giant American International Group and a plan to spend up to $200 billion to shore up the mortgage finance giants Fannie Mae and Freddie Mac.

At his news conference, Mr. Bush also sought to portray the plan as helping every American. “The government,” he said, “needed to send a clear signal that we understood the instability could ripple throughout and affect the working people and the average family, and we weren’t going to let that happen.”

A program to help troubled borrowers refinance mortgages — along with an $800 billion increase in the national debt limit — was approved in July. But financing for it depended largely on fees paid by Fannie Mae and Freddie Mac, which have been placed into a government conservatorship.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said in an interview that his staff had already begun working with the Senate banking committee to draft additions to the administration’s proposal.

Mr. Frank said Democrats were particularly intent on limiting the huge pay packages for corporate executives whose firms seek aid under the new plan, raising the prospect of a contentious battle with the White House.

“There are going to be federal tax dollars buying up some of the bad paper,” Mr. Frank said. “They should accept some compensation guidelines, particularly to get rid of the perverse incentives where it’s ‘heads I win, tails I break even.’ ”

Mr. Frank said Democrats were also thinking about tightening the language on the debt limit to make clear that the additional borrowing authority could be used only for the bailout plan. And he said they might seek to revive a proposal that would give bankruptcy judges the authority to modify the terms of primary mortgages, a proposal strongly opposed by the financial industry.

Senator Charles E. Schumer, Democrat of New York, who attended emergency meetings with the Treasury secretary, Henry M. Paulson Jr., and the Federal Reserve chairman, Ben S. Bernanke, on Capitol Hill last week, described the proposal as a good start but said it did little for regular Americans.

“This is a good foundation of a plan that can stabilize markets quickly,” Mr. Schumer said in a statement. “But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas.”

Ms. Pelosi’s statement made clear that she would push for an economic stimulus initiative either as part of the bailout legislation or, more likely, as part of the budget resolution Congress must adopt before adjourning for the fall elections. Such a plan could include an increase in unemployment benefits and spending on infrastructure projects to help create jobs.

Some Congressional Republicans warned Democrats not to overreach.

“The administration has put forward a plan to help the American people, and it is now incumbent on Congress to work together to solve this crisis,” said Representative John A. Boehner of Ohio, the Republican leader.

Mr. Boehner added, “Efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors and small businesses deserve.”

Aides to Senator Barack Obama of Illinois, the Democratic presidential nominee, said he was reviewing the proposal. In Florida, Mr. Obama told voters he would press for a broader economic stimulus.

“We have to make sure that whatever plan our government comes up with works not just for Wall Street, but for Main Street,” Mr. Obama said. “We have to make sure it helps folks cope with rising prices, and sparks job creation, and helps homeowners stay in their homes.”

Senator John McCain of Arizona, the Republican nominee, issued a statement saying he, too, was reviewing the plan.

“This financial crisis,” Mr. McCain said, “requires leadership and action in order to restore a sound foundation to financial markets, get our economy on its feet, and eliminate this burden on hardworking middle-class Americans.”

If adopted, the bailout plan would sharply raise the stakes for the new administration on the appointment of a new Treasury secretary.

The administration’s plan would allow the Treasury to hire staff members and engage outside firms to help manage its purchases. And officials said that the administration envisioned enlisting several outside firms to help run the effort to buy up mortgage-related assets.

Officials said that details were still being worked out but that one idea was for the Treasury to hold reverse auctions, in which the government would offer to buy certain classes of distressed assets at a particular price and firms would then decide if they were willing to sell at that price, or could bid the price lower.

Mindful of a potential political fight, Mr. Paulson and Mr. Bernanke held a series of conference calls with members of Congress on Friday to begin convincing them that action was needed not just to help Wall Street but everyday Americans as well.

Republicans typically supportive of the administration said they were in favor of approving the plan as swiftly as possible.

Senator Mitch McConnell of Kentucky, the Republican leader, said in a statement, “This proposal is, and should be kept, simple and clear.” The majority leader, Senator Harry Reid, Democrat of Nevada, said that the bailout was needed but that Mr. Bush owed the public a fuller explanation.

Some lawmakers were more critical or even adamantly opposed to the plan. “The free market for all intents and purposes is dead in America,” Senator Jim Bunning, Republican of Kentucky, declared on Friday.

It is far from clear how much distressed debt the government will end up purchasing, though it seemed likely that the $700 billion figure was large enough to send a reassuring message to the jittery markets. There are estimates that firms are carrying $1 trillion or more in bad mortgage-related assets.

The ultimate price tag of the bailout is virtually impossible to know, in part because of the possibility that taxpayers could profit from the effort, especially if the market stabilizes and real estate prices rise.


Lehman Can Sell to Barclays

A federal bankruptcy judge decided early Saturday that Lehman Brothers could sell its investment banking and trading businesses to Barclays, the big British bank, the first major step to wind down the nation’s fourth-largest investment bank.

The judge, James Peck, gave his decision at the end of an eight-hour hearing, which capped a week of financial turmoil.

The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman’s office tower in Midtown Manhattan.

Lehman Brothers Holdings Inc. on Monday filed the biggest bankruptcy in United States history, after Barclays PLC declined to buy the investment bank in its entirety.

Reporting was contributed by Jeff Zeleny from Daytona Beach, Fla.,

and Michael Cooper, Carl Hulse, Stephen Labaton

and David Stout from Washington.

    $700 Billion Is Sought for Wall Street in Vast Bailout, NYT, 21.9.2008,





Cost of crash: $2,800,000,000,000

• Bank of England calls for reform
• Markets jittery after Asian losses
• Brown defends borrowing


Tuesday October 28 2008
The Guardian
Larry Elliott, Phillip Inman and Nicholas Watt
This article appeared in the Guardian
on Tuesday October 28 2008 on p1 of the Top stories section.
It was last updated at 08.17 on October 28 2008.


A worker walks past a screen displaying stock market movements at a window of the London Stock Exchange in the City of London, October 27, 2008. Photograph: Alessia Pierdomenico/Reuters

Autumn's market mayhem has left the world's financial institutions nursing losses of $2.8tn, the Bank of England said today, as it called for fundamental reform of the global banking system to prevent a repeat of turmoil "arguably" unprecedented since the outbreak of the first world war.

In its half-yearly health check of the City, the Bank said tougher regulation and constraints on lending would be needed as policymakers sought to learn lessons from the mistakes that have led to a systemic crisis unfolding over the past 15 months.

The Bank's Financial Stability Report, which will be sent to every bank director in Britain, more than doubled the previous estimate of the potential losses faced by all financial institutions since the spring, but said that given time the actual losses could be pared by between a third and a half.

The £50bn pledged by the government had helped underpin the system, the Bank said, and would provide a breathing space for UK banks so that they did not have to sell assets at cut-price values immediately. The report also expressed cautious optimism about the effectiveness of the recent global bail-out plan.

The Bank's estimate exceeds that made by the International Monetary Fund recently. The IMF concentrated on US institutions and did not include losses from the turmoil of recent weeks. Estimated paper losses from UK banks on mortgage-backed securities and corporate bonds are currently £122.6bn, the Bank report said.

Gordon Brown insisted yesterday that it was right for the government to increase borrowing in order to fund investment to help the economy through tough times. But he moved to reassure markets that he would not preside over a reckless increase in borrowing during the recession and said he would reduce it as a proportion of GDP once the economy picks up.

Paving the way for an expected abandonment of the tight fiscal rules he established as chancellor, Brown said: "The responsible course of government is to invest at this time to speed up the economic activity. As economic activity rises, as tax revenues recover, then you would want borrowing to be a lower share of your national income. But the responsible course at the moment is to use the investments that are necessary, and to continue them, and to help people through very difficult times.

"I think that's a very fundamental part of what we are doing."

In another turbulent day yesterday on global markets, there were hefty falls in Asian stockmarkets and a fresh fall in the pound. Japan's Nikkei index closed down more than 6% at a 26-year-low of 7162.9. London's FTSE 100 recovered from an early fall of more than 200 points to close 30 points lower at 3852.6, while the Dow Jones closed down 2.42% at 8,175.77.

Brown and Peter Mandelson, the business secretary, served notice that Britain should brace itself for a downturn when they both warned about rising unemployment. Brown said: "I can't promise people that we will keep them in their last job if it becomes economically redundant. But we can promise people that we will help them into their next job."

Mandelson was more blunt as he warned of the impact of the recession. "We are facing an unparalleled financial crisis," he said during a visit to Moscow. "I don't think yet people have realised what the impact is going to be on our real economy."

The Tories intensified their attacks on the government by depicting Brown as not a man with a plan but a man with an overdraft.

Responding to Brown's remarks, George Osborne, shadow chancellor, said: "What they are talking about is borrowing out of necessity, not out of virtue. Gordon Brown is a man with an overdraft, not a man with a plan. He is being forced into this borrowing. He presents it as a strategy but it is actually a consequence of his great failure that borrowing is already out of control before we even get into the worst of the economic circumstances that we are in."

Brown was speaking as the Treasury finalised plans to rewrite the fiscal rules which have governed his approach to the economy over the past decade. Alistair Darling will use his pre-budget report next month to say that it is time for a more flexible approach in the new economic cycle, which started in 2006-07.

The previous FSR in April envisaged a gradual recovery in global markets and the Bank was careful today not to sound the all-clear despite the coordinated action in Britain, the US and the eurozone this month to recapitalise banks and provide extra liquidity to markets. "In recent weeks, the global banking system has arguably undergone its biggest episode of instability since the start of the first world war," it said.

Sir John Gieve, the Bank's deputy governor for financial stability, added: "With a global economic downturn under way, the financial system remains under strain. But it is better placed as a result of the exceptional package of capital, guaranteed funding and liquidity support. That is helping to underpin the banking system both directly and by demonstrating the authorities' determination to do whatever is needed to restore confidence.

"Looking further ahead, we need a fundamental rethink of how to manage systemic risk internationally. We need to establish stronger restraints on the build-up of risks in the financial system over the cycle with the dangers they bring to the wider economy.

"That means not just increasing capital and liquidity requirements for individual institutions but relating them to the cyclical growth of risk in the system more broadly. Counter-cyclical policy of that sort should complement regulation of companies and broader macroeconomic policy."

The Bank believes that the capital injection from the taxpayer will also prevent banks from slashing their lending too aggressively over the coming months, relieving the recessionary pressure on the economy.

Figures released yesterday, however, from financial data provider Moneyfacts showed banks were failing to pass on interest rate cuts to mortgage borrowers despite making severe cuts in savings rates. It said most institutions had already passed on the last half-point base rate cut to savers while holding back on cuts in home loan interest rates.

"Some providers are using the base rate cut as a way of increasing their margin for risk, by not passing on the full cut to mortgage customers but passing the cut on in full to savings customers," it said.

A separate study last week marked a new low in the number of mortgage products available.

Concerns at widespread job losses across the finance sector prompted unions to demand a "social contract" to protect jobs. Derek Simpson, Unite's joint general secretary, said: "Workers in the financial services are facing insecurity as the world is gripped by economic turmoil. The Unite 'social contract' sets out the principles which employees expect the government and finance companies to now sign up to.

"Unite is calling for the protection of jobs, pensions, the end to short-term remuneration policies and an overhaul of the regulatory structures in the financial services sector. There must be a recognition of the importance of employment in the financial services sector, as many communities now depend on the sector since being decimated by the collapse of the manufacturing industry.

"Workers in the financial services industry are not the culprits of the credit crunch and we are not prepared to allow them to become the victims. The taxpayer must now get firm assurances that the financial lifeline extended to these large organisations will be used to protect jobs and the public. It is not acceptable for the government to socialise the risk without allowing the wider society to capitalise on the rewards in the finance industry."


How much is that?

The Bank of England may have put the paper cost of the global crisis at a staggering $2.8 trillion, but how does one come to grips with such a sum? Think of it like this: it could pay for 46 bail-outs of the kind the Treasury handed to the banks RBS, HBOS group and Lloyds TSB; or pay off the last quarter's public debt 45 times. It is more than three times the sum of UK annual public spending, and also equivalent to the wealth of 100 Oleg Deripaskas - before the credit crunch anyway. It's equal to 138m bottles of 1947 Petrus Pomerol, the bankers' favourite vintage; or, if it's your turn in the coffee round, 773bn lattes - nearly 13,000 each for every UK citizen.

    Cost of crash: $2,800,000,000,000, G, 28.10.2008,






Hedge Funds’ Steep Fall

Sends Investors Fleeing


October 23, 2008
The New York Times


The gilded age of hedge funds is losing its luster. The funds, pools of fast money that defined the era of Wall Street hyper-wealth, are in the throes of an unprecedented shakeout. Even some industry stars are falling back to earth.

This unregulated, at times volatile corner of finance — which is supposed to make money in bull and bear markets — lost $180 billion during the last three months. Investors, particularly wealthy individuals, are heading for the exits.

As the stock market plunged again on Wednesday, with the Dow Jones industrial average sinking 514 points, or 5.7 percent, the travails of the $1.7 trillion hedge fund industry loomed large. Some funds dumped stocks in September as their investors fled, and other funds could follow suit, contributing to the market plummet.

No one knows how much more hedge funds might have to sell to meet a rush of redemptions. But as the industry’s woes deepen, money managers fear hundreds or even thousands of funds could be driven out of business.

The implications stretch far beyond Manhattan and Greenwich, Conn., those moneyed redoubts of hedge-fund lords. That is because hedge funds are not just for the rich anymore. In recent years, public pension funds, foundations and endowments poured billions of dollars into these private partnerships. Now, in the midst of one of the deepest bear markets in generations, many of those investments are souring.

Granted, hedge funds are not going to disappear. In fact, some are still thriving. Even many of the ones that have stumbled this year are doing better than the mutual fund industry, which has also been hit with withdrawals that have forced their managers to sell.

But the reversal for the hedge fund industry represents a sea change for Wall Street and its money culture. Since hedge funds burst onto the scene in the 1990s, they have recast not only the rules of finance but also notions of wealth and status. Hedge-fund riches helped inflate the price of everything from modern art to Manhattan real estate. Top managers raked in billions of dollars a year, and managing a fund became the running dream on Wall Street.

Now, for lesser lights, at least, that dream is fading.

“For the past five or six years, it seemed anybody could go to their computer and print up a business card and say they were in the hedge fund business, and raise a pot of money,” said Richard H. Moore, the treasurer of North Carolina, which invests workers’ pension money in hedge funds. “That’s going to be gone forever.”

As are some hedge funds. For the first time, the industry is shrinking. Worldwide, the number of these funds dropped by 217 during the last three months, to 10,016, according to Hedge Fund Research.

Even some of the industry’s most well-regarded managers are starting to retrench. Richard Perry, who until now had not had a down year for his flagship fund in more than a decade, has laid off some employees. Mr. Perry, who began his career at Goldman Sachs, is moving away from stock-picking to focus on the troubled credit markets.

Three other hedge fund highfliers — Kenneth C. Griffin, Daniel S. Loeb and Philip Falcone — have suffered double-digit losses through the end of September.

Steven A. Cohen, the secretive chief of a fund called SAC Capital, has put much of the money in his funds into cash, reducing trading by some of his workers.

Many hedge fund investors, particularly the wealthy individuals, are flabbergasted by their losses this year. The average fund was down 17.6 percent through Tuesday, according to Hedge Fund Research.

“You’re seeing a lot of shock, a lot of inaction, a lot of reassessment of where their allocations are and what to do going forward,” said Patrick Welton, chief executive of the Welton Investment Corporation, whose fund is up double-digits this year.

Many investors, Mr. Welton said, had hoped hedge funds would protect them from a steep decline in the broader market. But in many cases, that has not happened.

Now Wall Street is buzzing about how much money could be pulled out of hedge funds — and which funds might bear the brunt of the redemptions.

Funds have set aside billions of dollars in cash to prepare for withdrawals, and many prominent funds require their investors to leave their money in the funds for years. That could help relieve some of the pressure.

But because hedge funds are largely unregulated, they do not publicly disclose the identity of their investors or whether they have received requests for withdrawals. While it might make sense to pull money out of poorly performing funds, investors might also exit funds that are doing well to offset losses elsewhere.

Institutions — pension funds, endowments and the like — pushed into hedge funds after the Nasdaq stock market bust at the turn of the century. Many hedge funds had prospered as technology stocks crashed, leading these investors to believe they would in the future.

In Massachusetts, for instance, Norfolk County broached the issue with the state’s pension oversight commission, said Robert A. Dennis, the investment director of the commission. Mr. Dennis was impressed that hedge funds had fared so much better than the broader stock market.

Though Mr. Dennis says he recognizes the risks that come with selecting hedge funds, he thinks they remain a good investment. Next week, the state commission will vote on whether to allow some towns with pension funds below $250 million to invest in hedge funds, a move Mr. Dennis supports.

“Hedge funds are having a bad year, absolutely, but they’re still holding up better than stocks,” Mr. Dennis said. “Losing less money than another investment is, while not great, it’s still something to be at least satisfied with.”

But now that the days of easy money are over, some fund managers are throwing in the towel.

One manager, Andrew Lahde, was blunt about his decision.

“I was in this game for the money,” Mr. Lahde wrote to his investors recently. He made a fortune betting against the mortgage markets, calling those on the other side of his trades “idiots.”

“I have enough of my own wealth to manage,” Mr. Lahde wrote. He did not return telephone calls seeking comment.

And what wealth there has been. More than anything else, hedge funds are vehicles for their managers to take a big cut of profits. The lucrative economics of the industry is known as “two and 20.” Managers typically collect annual management fees equal to 2 percent of the assets in their funds, and, on top of that, take a 20 percent cut of any profits. Last year, one manager, John Paulson, reportedly took home $3 billion.

But with the industry under pressure, those fat fees are being questioned. Mr. Moore and other investors are starting to ask whether hedge funds deserve all that money. Mr. Griffin, who runs Citadel Investment Group in Chicago, plans to offer funds with lower fees.

More changes could be coming, including increased regulation. The House Committee on Oversight and Government Reform is scheduled to hold a hearing about regulation next month with five hedge fund managers who reportedly made more than $1 billion last year: Mr. Griffin, Mr. Falcone and Mr. Paulson, as well as George Soros and James Simons.

    Hedge Funds’ Steep Fall Sends Investors Fleeing, NYT, 23.10.2008,






Eyes Turn to the Fear Index


October 20, 2008
The New York Times


Fear is running high on Wall Street. Just look at the Fear Index.

With all those stomach-churning free falls and sharp reversals in the stock market recently, traders are keeping a nervous eye on an obscure index known as the VIX.

The VIX (officially the Chicago Board Options Exchange Volatility Index) measures volatility, the technical term for those wrenching market swings. A rising VIX is usually regarded as a sign that fear, rather than greed, is ruling the market. The higher the VIX goes, the more unhinged the market looks.

So how scared are investors? On Friday, the VIX rose to 70.33, its highest close since its introduction in 1993. To some experts, that suggests that the wild ride is far from over.

“Right now, it’s an extremely important part of the puzzle,” Steve Sachs, a trader at Rydex Investments, said of the VIX. “It’s showing a huge amount of fear in the marketplace.”

The VIX is hardly a household name like the Dow. But lately, it has become a fixture on CNBC and other financial news outlets, with commentators often invoking an index that most of the general public was blissfully unaware of only a few weeks ago.

Some traders think all the publicity has only added to the anxieties that the VIX is intended to reflect. “The VIX is a self-fulfilling prophecy,” said Ryan Larson, head equity trader at Voyageur Asset Management. “It’s almost adding to the problems.”

Speaking on Thursday, when the VIX hit an intraday high of 81.17 before closing lower, he said:

“You see the VIX trade north of 80, and of course the media starts to pick it up.” Mr. Larson continued, “It’s blasted on the TV, and for the average investor sitting at home, they think, oh, my gosh, the VIX just broke 80 — I’ve got to go sell my stocks.”

Put simply, the VIX measures the degree to which investors think stocks will swing violently in the next 30 days. It is calculated in real time throughout the trading day, fluctuating minute to minute.

The higher the VIX, the bigger the expected swings — and the index has a good track record. It spiked in 1998 when a big hedge fund, Long-Term Capital Management, collapsed, and after the 9/11 terrorist attacks.

Mr. Sachs, with some incredulity, said that the swings in the stock market have reflected the volatility implied by the VIX.

“We had a 17 percent peak-to-trough trading range this week,” he said. “It should take two years under normal circumstances for the S.& P. 500 to have that type of trading range.”

The VIX had its origin in 1993, when the Chicago Board Options Exchange approached Robert E. Whaley, then a professor at Duke, with a dual proposal.

“The first purpose was the one that is being served right now — find a barometer of market anxiety or investor fear,” Professor Whaley, who now teaches at the Owen Graduate School of Management at Vanderbilt University, recalled in an interview. But, he said, the board also wanted to create an index that investors could bet on using futures and options, providing a new revenue stream for the exchange.

Professor Whaley spent a sabbatical in France toying with formulas. He returned to the United States with the VIX, which gauges anxiety by calculating the premiums paid in a specific options market run by the Chicago Board Options Exchange.

An option is a contract that permits an investor to buy or sell a security at a certain date at a certain price. These contracts often amount to insurance policies in case big moves in the market cause trouble in a portfolio. A contract, like insurance, costs money — specifically, a premium, whose price can fluctuate.

The VIX, in its current form, measures premiums paid by investors who buy options tied to the price of the Standard & Poor’s 500-stock index.

In times of confusion or anxiety on Wall Street, investors are more eager to buy this insurance, and thus agree to pay higher premiums to get them. This pushes up the level of the VIX.

“It’s analogous to buying fire insurance,” Professor Whaley said. “If there’s some reason to believe there’s an arsonist in your neighborhood, you’re going to be willing to pay more for insurance.”

The index is not an arbitrary number: it offers guidance for the expected percentage change of the S.& P. 500. Based on a formula, Friday’s close of around 70 suggests that investors think the S. & P. 500 could move up or down about 20 percent in the next 30 days — an almost unheard-of swing.

So the higher the number, the bigger the swing investors think the market will take. Put another way, the higher the VIX, the less investors know about where the stock market is headed.

The current level shows that “investors are still very uncertain about where things will go,” said Meg Browne of Brown Brothers Harriman, a currency strategist who was keeping a close eye on the VIX as the stock market soared last Monday.

Since 2004, investors have been able to buy futures contracts on the VIX itself, providing a way to hedge against volatility in the market. Options on the VIX have been available since 2006.

“You have seen more and more investors using it as an avenue toward hedging their portfolios,” said Chris Jacobson, chief options strategist at the Susquehanna Financial Group. In times of crisis, “while you’re losing your portfolio, you could make some money on the increase in volatility,” he said.

Some investors are skeptical about the utility of the index. “If you’re trading the markets, you pretty much know the fear, you know the volatility. I don’t need an index to tell me there’s volatility out there,” Mr. Larson said.

    Eyes Turn to the Fear Index, NYT, 20.10.2008,






FTSE 100 hits five-year low

as world stockmarkets slump again

• US manufacturing spark selling
• Oil price slips
• Japan's Nikkei down 11%
in worst performance since 1987


Thursday October 16 2008
17.15 BST
Graeme Wearden and Dan Milmo


The FTSE hit its lowest point in more than five years today as fears of a global recession sent world stockmarkets falling across Asia, Europe and the US.

Shares in the UK's leading companies closed down 5.35% at 3861, the FTSE 100's lowest point since April 2003, following another wave of selling by investors.

A batch of poor manufacturing figures from the US saw the Dow Jones index fall 2% this evening, as the Federal Reserve reported US industrial production in September suffered its biggest drop since 1974.

The Dow Jones had fallen by 172 points to 8405 by 5pm BST, giving up modest early gains.

An influential regional factory output survey, from the Philadelphia Federal Reserve Bank, compounded the gloom by reporting an 18-year low in factory activity.

"The Philly Fed data provides the first reliable lead into the October numbers and confirms that the meltdown in financial markets is being closely followed by a dramatic slide in real economic activity," said Alan Ruskin, the chief international strategist at RBS Global Banking.

Earlier today, the panic selling that began on Wall Street yesterday evening spread around the globe as investors lost faith that Europe and America's bank rescue packages would stave off an economic downturn.

In London, the FTSE 100 fell by almost 6% in the first few minutes of trading to just 3840.6, its lowest level during the recent crisis. Although it later bounced back, attempts at a more solid rally faltered after the Dow Jones maintained its downward trajectory this afternoon.

The FTSE's performance followed an 11% plunge on Japan's Nikkei, its worst daily fall since 1987.

There was little sign of optimism in the City this morning.

Antonio Borges, a former vice-president of Goldman Sachs, warned that investors are panicking, selling shares in favour of cash. "The markets are very, very volatile because we do have a crisis of confidence, so the slightest piece of bad news throws the markets into disarray," he said.

One analyst warned that shares may have much further to fall. "Unless something remarkable happens, it looks like the FTSE 100 will test the low of 3287 that it hit in March 2003," warned David Buik of BGC Partners.

"Regarding a recession – we are in it."

Earlier today, Jaguar Land Rover cut almost 200 jobs, and Corus slashed steel production for the rest of the year by 20%.

This follows a raft of evidence on Wednesday that the wider economy has been damaged by the financial crisis.

In the UK, the jobless total hit 1.79 million, and is expected to break through 2 million by Christmas.

Across the Atlantic, yesterday's 733 point plunge on the Dow Jones index was prompted by a shock drop in retail sales and a grim warning from Ben Bernanke. The Federal Reserve chairman said that the frozen credit markets posed a big risk to the wider economy.

"By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth," Bernanke told the Economic Club of New York.

The price of oil slipped again today, with a barrel of US crude oil falling another $3 to $71.73 on expectations of lower demand.

Markets had rallied on Monday as the world's governments began taking action to pump capital into their struggling banks.

But in Japan, where the Nikkei fell 11.4% to 8458, the prime minister, Taro Aso, said America's $250bn (£145bn) injection into the banks did not go far enough. "It was insufficient, and so the market is falling rapidly again," Aso said.

Borges agreed that the optimism over the bail-out may have been misplaced. "After the government guarantees, it is fair to expect that the banking sector will go back to a more normal state. The problem is, however, that this may have come a bit too late and, meanwhile, the consequences of the credit crunch are beginning to be felt across the economy," Borges told BBC Radio 4's Today programme.

Hong Kong's Hang Seng index fell by 8.5%, with China's Shanghai Composite down almost 4% in late trading.

    FTSE 100 hits five-year low as world stockmarkets slump again,
    G, 17.10.2008,






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,






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,






FTSE 100 in biggest fall

since Black Monday


Published: October 6 2008 08:35
Last updated: October 6 2008 19:54
The Financial Times
By Neil Hume and Bryce Elder

The London market was routed on Monday with the FTSE 100 suffering its biggest one day percentage fall since Black Monday in 1987, and biggest points fall ever.

The blue-chip index dropped 391.1 points, or 7.9 per cent, to finish at a four year low of 4,589.2 as investors threw in the towel amid fears that a deep global economic slow down was taking hold in spite of measures to bail out the banking system.

This was reflected by the performance of the mining sector, which led the FTSE 100 lower. Kazakhmys slumped 26.6 per cent to 417¾p, while ENRC, which listed at 540p in December, lost 23.4 per cent to 425p, Fresnillo shed 19.9 per cent to 225p and Xstrata ended 19.2 per cent lower at £13.57.

UBS said it now expected global GDP growth of just 2.2 per cent in 2009, down from 2.8 per cent previously. “This suggests a global recession,” the bank said. “As a result we have cut UK mining sector earnings forecasts for 2009/10 by 38 per cent and 41 per cent,” it continued.

On top of that, traders noted that four Chinese steel companies were considering reducing output by 20 per cent, or 20m tonnes, and benchmark ferrochrome prices for the fourth quarter had been set 10 per cent below the previous quarter.

However, Ferrexpo, the Ukrainian producer of iron ore pellets, managed to outperform, falling just 2.1 per cent to 115p after Czech coal producer New World Resources, down 23.1 per cent to 500p, picked up a 20 per cent stake at just 86p a share from Ferrexpo founder Kostyantin Zhevago.

The Ukrainian billionaire, who retains a 51 per cent holding in Ferrexpo, was forced to sell to meet a margin call on a loan, for which the shares were held as collateral.

Banking stocks also slumped. With money markets still gummed up, HBOS dropped 19.8 per cent to 160.8p while Lloyds TSB fell 10.8 per cent to 259p. Based on last night’s closing price, HBOS is trading at a 25 per cent discount to the implied value of Lloyds’ all stock offer. On Friday, the discount was 17 per cent.

Sandy Chen, banks analyst at Panmure Gordon, advised clients to sell Barclays, off 14.7 per cent to 314p, and Royal Bank of Scotland, down 20.5 per cent at 148.1p, citing their potential exposure to defaults on credit default swaps.

“We broadly estimate there could be $50bn of payouts related to Fannie Mae and Freddie Mac CDS, and $400bn of payouts related to Lehman CDS. We think it highly likely that many counterparties, particularly hedge funds, will not be able to raise the cash to meet their ends of these bargains,” Mr Chen warned.

Land Securities fared rather better, closing just 5.1 per cent lower at £12.25 – after John Whittaker’s Peel Holdings announced a raised holding of 5.5 per cent.

Taylor Wimpey was among the biggest fallers in the FTSE 250, which closed 520.8 points, or 6.5 per cent, lower at 7,474.8. Its shares fell 20.1 per cent to 27¾p as investors reacted to Friday’s late news that Fitch had downgraded its rating on the housebuilder’s senior unsecured debt rating to B from BB-. The move followed Friday’s announcement that Taylor Wimpey’s eurobond creditors would be part of its covenant renegotiation process, in addition to bank and US private placement creditors “This process is progressively moving towards a work-out scenario,” Fitch warned.

Rentokil Initial dipped 3.7 per cent to 65¼p on concerns the support services group might need to raise capital from shareholders to pay back a £250m bond which matures next month.

“If it [Rentokil] is unable to refinance at rates it deems acceptable or it is unwilling to draw down further on its banking facilities it could look to raise cash in the equity markets,” Goldman Sachs warned in a recent note.

In the pub sector, JD Wetherspoon fell 10.3 per cent to 225¾p while Mitchells & Butlers, in which financier Robert Tchenguiz has a 26 per cent stake, slipped 11.1 per cent to 187p.

Traders said pub stocks had been hit by investors being forced to close positions after an Icelandic investment bank increased margin requirements on derivative contracts. This was also a factor in the poor performance of J Sainsbury, down 5 per cent at 313p.

    FTSE 100 in biggest fall since Black Monday, FT, 6.10.2008,






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,






For Stocks,

Worst Single-Day Drop in Two Decades


September 30, 2008
The New York Times


Even before the opening bell, Monday looked ugly.

But by the time that bell sounded again on the New York Stock Exchange, seven and a half frantic hours later, $1.2 trillion had vanished from the United States stock market.

What had started 24 hours earlier, with a modest sell-off in stock markets in Asia, had turned into Wall Street’s blackest day since the 1987 crash. The broad market, as measured by the Standard & Poor’s 500-stock index, plunged almost 9 percent, its third-biggest decline since World War II. The Dow Jones industrial average fell nearly 778 points, or 6.98 percent, to 10,365.45.

Across Wall Street, no one could quite believe what was happening on the floor — the floor of the House of Representatives, not the New York Exchange.

As lawmakers began to vote on a $700 billion rescue for financial institutions, the Voyageur Asset Management trading desk in Chicago went silent. Money managers gaped at a television screen carrying news that seemed unthinkable: the bill was not going to pass. Shortly after 1:30 p.m., the rescue was rejected.

“You just felt like the world was unraveling,” Ryan Larson, the firm’s senior equity trader, said. “People started to sell and they sold hard. It didn’t matter what you had — you sold.”

Frustration, and then panic, coursed through the markets. Investors feared the decision in Washington would imperil the financial industry, as well as the broader economy.

At the Federal Reserve and other central banks, policy makers were also anxious. Even before the vote on Capitol Hill, central bankers tried to jump-start the credit markets. They offered hundreds of billions of dollars in loans to banks around the world because banks and investors were unwilling to lend to each other. But neither the stock market nor the credit markets appeared to respond.

Just 24 hours earlier, few imagined Monday would play out this way. Treasury Secretary Henry M. Paulson Jr. and the House speaker, Nancy Pelosi, announced Sunday afternoon they had agreed on terms of a bailout.

But while Congressional aides and lawmakers worked on the details, the credit crisis that began more than a year ago in the American mortgage market was setting off new alarms in Europe.

Shortly before 6 p.m. New York time on Sunday, Belgium, the Netherlands and Luxembourg agreed to invest $16.2 billion to rescue a big bank, Fortis. A few hours later, the German government and a group of banks pledged $43 billion to save Hypo Real Estate, a commercial property lender. At 2:50 a.m., news came that the British Treasury had seized the lender Bradford & Bingley and sold the bulk of it to Banco Santander of Spain.

“We will continue to do what is necessary,” a somber Gordon Brown, the British prime minister, told reporters at 10 Downing Street in London.

In Tokyo, where stocks had opened higher in early trading on Monday, worries quickly set in. Traders returned from lunch to reports suggesting the financial crisis was taking a toll on the global economy. Markets across Asia began to sell off.

In Tokyo, the Nikkei 225 sank 1.5 percent. In India, stocks fell nearly 4 percent. In Hong Kong, where a big bank, HSBC, raised key lending rates because of the credit market turmoil, the Hang Seng tumbled nearly 4.3 percent.

As events unfolded in Asia, a major American bank was in trouble. Regulators in Washington were rushing to broker the sale of the Wachovia Corporation to Citigroup or Wells Fargo.

At about 4 a.m., Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, called Citigroup executives to say Wachovia’s banking business was theirs.

On Monday morning, before financial markets in the United States had opened, Federal Reserve officials were alarmed that credit markets in Europe and Asia had spiraled even deeper into crisis on Monday.

Fed officials could see that money markets were freezing up in every part of the world, even though the Fed and other central banks had expanded their emergency lending programs last Thursday. This time, Fed officials felt compelled to provide a true show of force by expanding their existing loan arrangements by an unprecedented $330 billion.

As investors in New York were getting up, the credit markets were again flashing red as banks reported higher borrowing costs. Investors continued to seek safety in Treasuries. The yield on one-year Treasury bills, for instance, fell to almost zero, meaning investors were willing to accept no return just for the assurance that they would get their money back.

When trading opened on the New York Exchange at 9:30 a.m., stocks immediately fell 1 percent.

Worried officials at the Fed announced at 10 a.m. that the central bank would increase to $620 billion its program to lend money through foreign central banks, up from $290 billion, to keep credit flowing. The central bank also said it would double the money it lends out domestically through an auction program to $300 billion.

Many eyes on Wall Street turned to National City, the Cleveland-based bank, which has a $20 billion portfolio of troubled loans it is trying to sell. National City’s shares plummeted 50 percent to $1.50 in early trading, prompting Peter E. Raskind, the bank’s chief executive, to assert that the bank was sound.

“It’s not overly dramatic to say that investors are panicking. You can see it in the market and we can feel it,” Mr. Raskind said in an interview.

In New York, 10 executives at an investment firm, Bessemer Trust, huddled to discuss the markets. A question arose: What would it take to restore confidence to the credit markets? There were few upbeat answers, though one said Citigroup’s takeover of Wachovia could pave the way for more consolidation in banking. “It is the type of solution that makes good sense in these challenging times,” Marc D. Stern, Bessemer Trust ’s chief investment officer, said as he recounted the meeting.

But Mr. Stern and his group would soon be dismayed by what was happening in Washington.

At 1:30 p.m. the House began to vote on the rescue package that Mr. Paulson and Congressional leaders negotiated over the weekend. About 10 minutes later, when it became clear that the legislation was in trouble, the stock market went into a free fall, with the Dow plunging about 400 points in five minutes.

At his home office in Great Neck, N.Y., Edward Yardeni, the investment strategist, received terse e-mail messages from clients and friends. “Is this the end of the world?” one asked. Another sent a simple plea: “Stop the world, I want to get off.”

Mr. Yardeni and other analysts said the action in Washington left many investors discouraged and feeling powerless. “You can come into the office and spend a lot of time researching companies, trying to understand them. You’ve got a portfolio that you think should do well,” he said. “And none of that matters.”

Marc Groz, chief executive of Topos Partners, a hedge fund in Stamford, Conn., put it this way: “It’s frustrating for someone like me because I don’t have a pipeline to what is happening in Washington, D.C.”

The stock market briefly rallied, then slowly lost ground in the afternoon. A flurry of sales minutes before the close sent the Dow down another 200 points, to its lowest level for the day.

Shortly after the closing bell rang on the floor of the Big Board, Mr. Paulson, looking exhausted, spoke to reporters at the White House. He lamented the vote, but vowed to keep pressing Congress for a broad rescue plan to help ease stress in the credit markets.

Following are the results of Monday’s auction of three- and six-month Treasury bills.

Eric Dash and Ben White contributed reporting.

    For Stocks, Worst Single-Day Drop in Two Decades, NYT, 30.9.2008,






Dow Falls More Than 500 Points


September 30, 2008
The New York Times


The stunning rejection of the administration's $700 billion financial bailout plan sent stocks plunging on Monday even before the House of Representatives finished voting.

The Dow, which had been trading down about 300 points for most of the afternoon, fell to a 600-point deficit before recovering slightly. The index was down more than 550 points as lawmakers scrambled, but failed, to round up votes to pass the package.

The House on Monday defeated the bill by a vote of 228-205.

At 3 p.m., less than an hour after the voting ended, the Dow was at 10,609.09, down 534.04, or 4.8 percent. But the broader market was down even more sharply. The Standard & Poor’s 500-stock index was down 6.3 percent after dropping as far as 7 percent.

The drop reinforced the fear coursing through Wall Street as investors wondered whether the bailout plan would eventually pass Congress. Before the vote, supporters of the bill said they thought the legislation would squeak through with a slim majority. But as the initial period of voting ended, the bill appeared to be in danger of not passing the House.

Shares had fallen earlier in the day despite what lawmakers had described as an agreement on the bailout plan. Citigroup also snatched up the core business of Wachovia, the ailing banking giant, which had been in danger of collapse.

The Wachovia move, which was spearheaded by federal regulators, could have been taken as a sign that the government was eager to restore stability to the financial system. But the near-collapse of Wachovia, which was the nation’s fourth-largest bank, may have underscored the troubling sense among investors that any bank is vulnerable in the current crisis.

The world’s credit markets also remained under pressure. Yields on Treasuries dropped and lending rates stayed high, signs that investors remained deeply ill at ease about the health of the financial system.

Responding to the strain, the Federal Reserve moved to vastly increase the amount of liquidity it makes available to major players in the world financial system. The Fed will triple the size of its regular auctions for banks and work with nine other central banks to increase the flow of credit.

The Fed is hoping to combat a hoarding mentality that has arisen among banks, whose reluctance to lend — even to healthy institutions — has jammed up critical financial arteries that many small businesses depend on.

On Monday, the cost of borrowing euros for a three-month period rose to the highest price on record. Banks are charging enormous premiums for short-term financing. And money continued to flow into the safe space of Treasury bills and traditional hedges like gold, the price of which rose 2.2 percent.

Shares of Wachovia lost 90 percent of their value in electronic overnight, but the stock never opened on Monday morning as officials halted trading before the opening bell.

Citigroup shares fell, and shares of financial stocks traded lower. Morgan Stanley fell 11 percent and Goldman Sachs was off 8 percent.

European stocks, already sharply down at the New York open, fell further after the declines on Wall Street. Stocks in London and Paris were down more than 5 percent, and Frankfurt was down about 4 percent. In Asia, the benchmark Hong Kong index plummeted 4.3 percent overnight; Tokyo’s Nikkei 225 lost 1.2 percent.

President Bush appeared outside the White House at 7:30 a.m. on Monday, before the markets opened, to endorse the bailout legislation that was agreed upon over the weekend.

“A vote for this bill is a vote to prevent economic damage to you and your community,” the president said in a brief statement. “The impact of the credit crisis and housing correction will continue to affect our financial system and growth of our economy over time. But I am confident that in the long run, America will overcome these challenges.”

The problems in Europe came after government bailouts of several banks, including the British lender Bradford & Bingley and the Belgian-Dutch financial group, Fortis.

If anything, the moves created uncertainty about which institution would be next, said Jean Bruneau, a trader at Société Générale in Paris.

Shares of the Brussels-based lender Dexia fell 22.7 percent as investors worried that it might be the next bank to need government help. The company may soon announce a plan to raise capital, the French newspaper Le Figaro said, without citing a source.

The agreement on Capitol Hill on the terms of the bailout package failed to lift the mood in Europe.

“The U.S. bailout doesn’t change some negative short-term factors — that the economic outlook is weak and that the earnings outlook is weak,” said Tammo Greetfeld, a strategist at UniCredit Markets & Investment Banking in Munich. “The key question is can the bailout create enough optimism among investors that they focus on the medium-term improvement and ignore short-term weakness. We’re not there yet, the benefits look to be too far down the road.”

The dollar gained against the euro and the pound, and was stable against the yen.

Stock markets in Asia fell on renewed fears of a global credit crunch, erasing earlier gains that came after the weekend agreement on Capitol Hill.

The Standard and Poor’s/Australian Stock Exchange 200 Index fell 2 percent after rising slightly on Monday morning. The Kospi Index was down 1.3 percent after an early 1.2 percent surge in Seoul.

Bradford & Bingley, the British lender, was seized by the government after the credit crisis shut off financing and competitors refused to buy mortgage loans that customers were struggling to repay.

Banco Santander, the Spanish lender, will pay $1.1 billion to buy Bradford & Bingley branches and deposits, the Treasury said. Santander shares declined 2.8 percent, to 10.61 euros. Shares in UBS, the Swiss bank, fell 7.7 percent.

The stock market in Taiwan was closed on Monday as Typhoon Jangmi passed directly over Taipei. Mainland China’s stock markets in Shanghai and Shenzhen are closed this week as part of a national holiday marking the establishment of China as a Communist country in 1949.

Vikas Bajaj, Keith Bradsher and Matthew Saltmarsh

contributed reporting.

    Dow Falls More Than 500 Points, NYT, 30.9.2008,






House Rejects Bailout Package, 228-205,

But New Vote Is Planned; Stocks Plunge


September 30, 2008
The New York Times


WASHINGTON — In a moment of historic drama in the Capitol and on Wall Street, the House of Representatives voted on Monday to reject a $700 billion rescue of the financial industry.

The vote against the measure was 228 to 205. Supporters vowed to try to bring the rescue package up for consideration against as soon as possible.

Stock markets plunged sharply at midday as it appeared that the measure was go down.

House leaders pushing for the package kept the voting period open for some 40 minutes past the allotted time, trying to convert “no” votes by pointing to damage being done to the markets, but to no avail.

Supporters of the bill had argued that it was necessary to avoid a collapse of the economic system, a calamity that would drag down not just Wall Street investment houses but possibly the savings and portfolios of millions of Americans. Opponents said the bill was cobbled together in too much haste and might amount to throwing good money from taxpayers after bad investments from Wall Street gamblers.

Should the measure somehow clear the House on a second try, the Senate is expected to vote later in the week. The Jewish holidays and potential procedural obstacles made a vote before Wednesday virtually impossible, but Senate vote-counters predicted that there was enough support in the chamber for the measure to pass. President Bush has urged passage and spent much of the morning telephoning wavering Republicans to plead for their support.

Many House members who voted for the bill held their noses, figuratively speaking, as they did so. Representative John A. Boehner of Ohio, the Republican minority leader, said there was too much at stake not to support it. He urged members to reflect on the damage that a defeat of the measure could mean “to your friends, your neighbors, your constituents” as they might watch their retirement savings “shrivel up to zero.”

And Representative Steny Hoyer of Maryland, who as Democratic majority leader often clashes with Mr. Boehner, said that on this “day of consequence for America” he and Mr. Boehner “speak with one voice” in pleading for passage.

When it comes to America’s economy, Mr. Hoyer said, “none of us is an island.”

The House debate was heated and, occasionally, emotional up to the last minute, as illustrated by the remarks of two California lawmakers.

Representative Darrell Issa, a Republican, said he was “resolute” in his opposition to the measure because it would betray party principles and amount to “a coffin on top of Ronald Reagan’s coffin.”

But Representative Maxine Waters, a Democrat, said the measure was vital to help financial institutions survive and keep people in their homes. “There’s plenty of blame to go around,” she said, and attaching blame should come later.

The House vote came after a weekend of tense negotiations produced a rescue plan that Congressional leaders said was greatly strengthened by new taxpayer safeguards. “If we defeat this bill today, it will be a very bad day for the financial sector of the economy,” Representative Barney Frank, Democrat of Massachusetts and the chairman of the Financial Services Committee, said as the debate began and the stock market opened sharply lower. The Standard & Poor’s 500 index was down almost 3.4 percent at midmorning.

Earlier Monday, President Bush urged Congress to act quickly. Calling the rescue bill “bold,” Mr. Bush praised lawmakers “from both sides of the aisle” for reaching agreement, and said it would “help keep the crisis in our financial system from spreading throughout our economy.”

He said the vote would be difficult, but he urged lawmakers to pass the bill promptly. “A vote for this bill is a vote to prevent economic damage to you and your community,” he said.

“We will make clear that the United States is serious about restoring stability and confidence in our system,” he said, speaking at a lectern set up on a path on the White House grounds.

He addressed concerns about the high cost of the legislation to taxpayers, but he said he expected that “much if not all of the tax dollars will be paid back.”

Despite Mr. Bush’s urgings, investors around the world continued to demonstrate doubts that the bill would fully address the financial crisis. European and Asian stock markets declined sharply on Monday, especially in countries where major banks have had significant problems with mortgage investments, like Britain and Ireland. In the credit markets, investors once again bid up prices of Treasury securities and shunned more risky debt.

The 110-page rescue bill, intended to ease a growing credit crisis, was shaped by a frenzied week of political twists and turns that culminated in an agreement between the Bush administration and Congressional leaders early Sunday morning.

The measure faced stiff resistance from Republican and Democratic lawmakers who portrayed it as a rush to economic judgment and an undeserved aid package for high-flying financiers who chased big profits through reckless investments.

Early in the House debate, Jeb Hensarling, Republican of Texas, said he intended to vote against the package, which he said would put the nation on “the slippery slope to socialism.” He said that he was afraid that it ultimately would not work, leaving the taxpayers responsible for “the mother of all debt.”

Another Texas Republican, John Culberson, spoke scathingly about the unbridled power he said the bill would hand over to the Treasury secretary, Henry M. Paulson Jr., whom he called “King Henry.”

A third Texan, Lloyd Doggett, a Democrat, said the negotiators had “never seriously considered any alternative” to the administration’s plan, and had only barely modified what they were given. He criticized the plan for handing over sweeping new powers to an administration that he said was to blame for allowing the crisis to develop in the first place.

With the financial package looming as a final piece of business before lawmakers leave to campaign for the November elections, leaders of both parties in the House and Senate intensified their efforts to sell reluctant members of Congress on the legislation.

All sides had to surrender something. The administration had to accept limits on executive pay and tougher oversight; Democrats had to sacrifice a push to allow bankruptcy judges to rewrite mortgages; and Republicans fell short in their effort to require that the federal government insure, rather than buy, the bad debt.

Even so, lawmakers on all sides said the bill had been significantly improved from the Bush administration’s original proposal.

The final version of the bill included a deal-sealing plan for eventually recouping losses; if the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry. Presumably that plan would involve new fees or taxes, perhaps on securities transactions.

“This is a major, major change,” Speaker Nancy Pelosi said on Sunday evening as she declared that negotiations were over and that a House vote was planned for Monday, with Senate action to follow.

The deal would also restrict gold-plated farewells for executives of companies that sell devalued assets to the Treasury Department.

House Republicans had threatened to scuttle the deal, and proposed a vastly different approach that would have focused on insuring troubled debt rather than buying it. In the end, the insurance proposal was included on top of the purchasing power, but there is no requirement that the Treasury secretary use it, leaving them short of that goal.

It is virtually impossible to know the ultimate cost of the rescue plan to taxpayers, but Congressional leaders stressed that it would likely be far less than $700 billion. Because the Treasury will buy assets with the potential to resell them at a higher price, the government might even turn a profit.

That provision, pushed by House Democrats, was the last to be agreed to in a high-level series of talks that had top lawmakers and White House economic advisers hustling between offices just off the Capitol Rotunda until midnight on Saturday, scrambling to strike an agreement before Asian markets opened Sunday night.

The bill calls for disbursing the money in parts, starting with $250 billion followed by $100 billion at the discretion of the president. The Treasury can request the remaining $350 billion at any time, and Congress must act to deny it if it disapproves.

Ms. Pelosi, Mr. Paulson and others taking part in the talks announced that they had clinched a tentative deal at 12:30 a.m. Sunday, exhausted and a little giddy after more than seven hours of sparring. There were several tense moments, none more so than when Mr. Paulson, a critical player, suddenly seemed short of breath and possibly ill. He was tired, but fine.

Trying to bring around colleagues who remained uncertain of the plan, its architects sounded the alarm about the potential consequences of doing nothing. Senator Judd Gregg of New Hampshire, the senior Republican on the Budget Committee and the lead Senate negotiator, raised the prospect of an economic catastrophe.

“If we don’t pass it, we shouldn’t be a Congress,” Mr. Gregg said.

Both major presidential candidates, Senator John McCain of Arizona, the Republican nominee, and Senator Barack Obama of Illinois, the Democratic candidate, gave guarded endorsements of the bailout plan. Both Mr. McCain and Mr. Obama had dipped into the negotiations during a contentious White House meeting on Thursday.

On Sunday evening, both parties convened closed-door sessions in the House to review the plan, and conservative House Republicans remained a potential impediment.

But the party leadership was circulating information aimed at refuting some of the main criticisms of the bailout, indicating they were poised to support it. “I am encouraging every member of our conference whose conscience will allow them to support this bill,” said Representative John A. Boehner of Ohio, the Republican leader.

A series of business-oriented trade associations with influence with Republicans also began weighing in on behalf of the plan.

The United States Chamber of Commerce issued a statement on Sunday night that said it “believes the legislation contains the necessary elements to successfully remove the uncertainty and stem the turmoil that has plagued financial markets in recent weeks.”

Members of the conservative rank and file remained unconvinced.

“While it creates a gimmicky $700 billion installment plan, attempts to improve transparency, and has new provisions cloaked as taxpayer protections, its net effect is still a huge bailout of the financial sector that will snuff out the free market system,” said Representative Connie Mack, Republican of Florida.

Some Democrats bristled that they were now being called on to do the financial bidding of an administration they had viewed as previously uncooperative in dealing with executives who had performed irresponsibly or worse.

“Financial crimes have been committed,” said Representative Marcy Kaptur, Democrat of Ohio. “Now Congress is being asked to bail out the culprits.”

Throughout Sunday, small groups of lawmakers could be found around the Capitol exchanging their views on the plan. Some said they were willing to take a political risk and back it.

One, Representative Jim Marshall, a Georgia Democrat facing a re-election contest, told colleagues in a private meeting that he would vote for the measure to bolster the economy. “I am willing to give up my seat over this,” Mr. Marshall said, according to another person who was there.

The architects of the plan said they realized they were calling on Congress to cast a tough vote since lawmakers might not get credit for averting a financial crisis since some constituents will not believe one was looming.

“Avoiding a catastrophe won’t be recognized,” said Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate banking committee. “This economy is not going to have a blossoming on Wednesday.”

But he and others said the support from the two presidential contenders should provide some comfort to nervous lawmakers.

One of the more contentious issues was how to limit the pay of executives whose firms seek government aid, a top priority for Democrats and even some Republican lawmakers. But it was a concern for Mr. Paulson, who worried about discouraging firms from participating in the rescue plan, which seeks to convince companies to sell potentially valuable assets to the government at relatively bargain prices.

In the end, they settled on different rules for different companies depending on how they participate in the bailout. Firms that sell distressed debt directly to the government will be subject to tougher pay limits, including a mechanism to recover any bonuses or other pay based on corporate earnings that turn out to be inaccurate or fraudulent, and a ban on so-called “golden parachute” severance packages as long as the government has a stake in the firm.

Companies that participate in auctions, or other market-making mechanisms, and sell more than $300 million in troubled financial instruments to the government, will be barred from making any new employment contract with a senior executive that provides a golden parachute in the event of “involuntary termination, bankruptcy filing, insolvency or receivership.”

While some critics said the limits did not go far enough, lawmakers described the provision as a historic first step by Congress to limit exorbitant pay of corporate titans. “I think we wrote it as tight as we can get it in here,” Mr. Dodd said.

Reporting was contributed by Keith Bradsher from Hong Kong,

Robert Pear from Washington and Graham Bowley from New York.

    House Rejects Bailout Package, 228-205, But New Vote Is Planned; Stocks Plunge,
    NYT, 30.9.2008,






Wall Street, R.I.P.:

The End of an Era, Even at Goldman


September 28, 2008
The New York Times


WALL STREET. Two simple words that — like Hollywood and Washington — conjure a world.

A world of big egos. A world where people love to roll the dice with borrowed money. A world of tightwire trading, propelled by computers.

In search of ever-higher returns — and larger yachts, faster cars and pricier art collections for their top executives — Wall Street firms bulked up their trading desks and hired pointy-headed quantum physicists to develop foolproof programs.

Hedge funds placed markers on red (the Danish krone goes up) or black (the G.D.P. of Thailand falls). And private equity firms amassed giant funds and went on a shopping spree, snapping up companies as if they were second wives buying Jimmy Choo shoes on sale.

That world is largely coming to an end.

The huge bailout package being debated in Congress may succeed in stabilizing the financial markets. But it is too late to help firms like Bear Stearns and Lehman Brothers, which have already disappeared. Merrill Lynch, whose trademark bull symbolized Wall Street to many Americans, is being folded into Bank of America, located hundreds of miles from New York, in Charlotte, N.C.

For most of the financiers who remain, with the exception of a few superstars, the days of easy money and supersized bonuses are behind them. The credit boom that drove Wall Street’s explosive growth has dried up. Regulators who sat on the sidelines for too long are now eager to rein in Wall Street’s bad boys and the practices that proliferated in recent years.

“The swashbuckling days of Wall Street firms’ trading, essentially turning themselves into giant hedge funds, are over. Turns out they weren’t that good,” said Andrew Kessler, a former hedge fund manager. “You’re no longer going to see middle-level folks pulling in seven- and multiple-seven-dollar figures that no one can figure out exactly what they did for that.”

The beginning of the end is felt even in the halls of the white-shoe firm Goldman Sachs, which, among its Wall Street peers, epitomized and defined a high-risk, high-return culture.

Goldman is the firm that other Wall Street firms love to hate. It houses some of the world’s biggest private equity and hedge funds. Its investment bankers are the smartest. Its traders, the best. They make the most money on Wall Street, earning the firm the nickname Goldmine Sachs. (Its 30,522 employees earned an average of $600,000 last year — an average that considers secretaries as well as traders.)

Although executives at other firms secretly hoped that Goldman would once — just once — make a big mistake, at the same time, they tried their darnedest to emulate it.

While Goldman remains top-notch in providing merger advice and underwriting public offerings, what it does better than any other firm on Wall Street is proprietary trading. That involves using its own funds, as well as a heap of borrowed money, to make big, smart global bets.

Other firms tried to follow its lead, heaping risk on top of risk, all trying to capture just a touch of Goldman’s magic dust and its stellar quarter-after-quarter returns.

Not one ever came close.

While the credit crisis swamped Wall Street over the last year, causing Merrill, Citigroup and Lehman Brothers to sustain heavy losses on big bets in mortgage-related securities, Goldman sailed through with relatively minor bumps.

In 2007, the same year that Citigroup and Merrill cast out their chief executives, Goldman booked record revenue and earnings and paid its chief, Lloyd C. Blankfein, $68.7 million — the most ever for a Wall Street C.E.O.

Even Wall Street’s golden child, Goldman, however, could not withstand the turmoil that rocked the financial system in recent weeks. After Lehman and the American International Group were upended, and Merrill jumped into its hastily arranged engagement with Bank of America two weeks ago, Goldman’s stock hit a wall.

The A.I.G. debacle was particularly troubling. Goldman was A.I.G.’s largest trading partner, according to several people close to A.I.G. who requested anonymity because of confidentiality agreements. Goldman assured investors that its exposure to A.I.G. was immaterial, but jittery investors and clients pulled out of the firm, nervous that stand-alone investment banks — even one as esteemed as Goldman — might not survive.

“What happened confirmed my feeling that Goldman Sachs, no matter how good it was, was not impervious to the fortunes of fate,” said John H. Gutfreund, the former chief executive of Salomon Brothers.

So, last weekend, with few choices left, Goldman Sachs swallowed a bitter pill and turned itself into, of all things, something rather plain and pedestrian: a deposit-taking bank.

The move doesn’t mean that Goldman is going to give away free toasters for opening a checking account at a branch in Wichita anytime soon. But the shift is an assault on Goldman’s culture and the core of its astounding returns of recent years.

Not everyone thinks that the Goldman money machine is going to be entirely constrained. Last week, the Oracle of Omaha, Warren E. Buffett, made a $5 billion investment in the firm, and Goldman raised another $5 billion in a separate stock offering.

Still, many people say, with such sweeping changes before it, Goldman Sachs could well be losing what made it so special. But, then again, few things on Wall Street will be the same.

GOLDMAN’S latest golden era can be traced to the rise of Mr. Blankfein, the Brooklyn-born trading genius who took the helm in June 2006, when Henry M. Paulson Jr., a veteran investment banker and adviser to many of the world’s biggest companies, left the bank to become the nation’s Treasury secretary.

Mr. Blankfein’s ascent was a significant changing of the guard at Goldman, with the vaunted investment banking division giving way to traders who had become increasingly responsible for driving a run of eye-popping profits.

Before taking over as chief executive, Mr. Blankfein led Goldman’s securities division, pushing a strategy that increasingly put the bank’s own capital on the line to make big trading bets and investments in businesses as varied as power plants and Japanese banks.

The shift in Goldman’s revenue shows the transformation of the bank.

From 1996 to 1998, investment banking generated up to 40 percent of the money Goldman brought in the door. In 2007, Goldman’s best year, that figure was less than 16 percent, while revenue from trading and principal investing was 68 percent.

Goldman’s ability to sidestep the worst of the credit crisis came mainly because of its roots as a private partnership in which senior executives stood to lose their shirts if the bank faltered. Founded in 1869, Goldman officially went public in 1999 but never lost the flat structure that kept lines of communication open among different divisions.

In late 2006, when losses began showing in one of Goldman’s mortgage trading accounts, the bank held a top-level meeting where executives including David Viniar, the chief financial officer, concluded that the housing market was headed for a significant downturn.

Hedging strategies were put in place that essentially amounted to a bet that housing prices would fall. When they did, Goldman limited its losses while rivals posted ever-bigger write-downs on mortgages and complex securities tied to them.

In 2007, Goldman generated $11.6 billion in profit, the most money an investment bank has ever made in a year, and avoided most of the big mortgage-related losses that began slamming other banks late in that year. Goldman’s share price soared to a record of $247.92 on Oct. 31.

Goldman continued to outpace its rivals into this year, though profits declined significantly as the credit crisis worsened and trading conditions became treacherous. Still, even as Bear Stearns collapsed in March over bad mortgage bets and Lehman was battered, few thought that the untouchable Goldman could ever falter.

Mr. Blankfein, an inveterate worrier, beefed up his books in part by stashing more than $100 billion in cash and short-term, highly liquid securities in an account at the Bank of New York. The Bony Box, as Mr. Blankfein calls it, was created to make sure that Goldman could keep doing business even in the face of market eruptions.

That strong balance sheet, and Goldman’s ability to avoid losses during the crisis, appeared to leave the bank in a strong position to move through the industry upheaval with its trading-heavy business model intact, if temporarily dormant.

Even as some analysts suggested that Goldman should consider buying a commercial bank to diversify, executives including Mr. Blankfein remained cool to the notion. Becoming a deposit-taking bank would just invite more regulation and lessen its ability to shift capital quickly in volatile markets, the thinking went.

All of that changed two weeks ago when shares of Goldman and its chief rival, Morgan Stanley, went into free fall. A national panic over the mortgage crisis deepened and investors became increasingly convinced that no stand-alone investment bank would survive, even with the government’s plan to buy up toxic assets.

Nervous hedge funds, some burned by losing big money when Lehman went bust, began moving some of their balances away from Goldman to bigger banks, like JPMorgan Chase and Deutsche Bank.

By the weekend, it was clear that Goldman’s options were to either merge with another company or transform itself into a deposit-taking bank holding company. So Goldman did what it has always done in the face of rapidly changing events: it turned on a dime.

“They change to fit their environment. When it was good to go public, they went public,” said Michael Mayo, banking analyst at Deutsche Bank. “When it was good to get big in fixed income, they got big in fixed income. When it was good to get into emerging markets, they got into emerging markets. Now that it’s good to be a bank, they became a bank.”

The moment it changed its status, Goldman became the fourth-largest bank holding company in the United States, with $20 billion in customer deposits spread between a bank subsidiary it already owned in Utah and its European bank. Goldman said it would quickly move more assets, including its existing loan business, to give the bank $150 billion in deposits.

Even as Goldman was preparing to radically alter its structure, it was also negotiating with Mr. Buffett, a longtime client, on the terms of his $5 billion cash infusion.

Mr. Buffett, as he always does, drove a relentless bargain, securing a guaranteed annual dividend of $500 million and the right to buy $5 billion more in Goldman shares at a below-market price.

While the price tag for his blessing was steep, the impact was priceless.

“Buffett got a very good deal, which means the guy on the other side did not get as good a deal,” said Jonathan Vyorst, a portfolio manager at the Paradigm Value Fund. “But from Goldman’s perspective, it is reputational capital that is unparalleled.”

EVEN if the bailout stabilizes the markets, Wall Street won’t go back to its freewheeling, profit-spinning ways of old. After years of lax regulation, Wall Street firms will face much stronger oversight by regulators who are looking to tighten the reins on many practices that allowed the Street to flourish.

For Goldman and Morgan Stanley, which are converting themselves into bank holding companies, that means their primary regulators become the Federal Reserve and the Office of the Comptroller of the Currency, which oversee banking institutions.

Rather than periodic audits by the Securities and Exchange Commission, Goldman will have regulators on site and looking over their shoulders all the time.

The banking giant JPMorgan Chase, for instance, has 70 regulators from the Federal Reserve and the comptroller’s agency in its offices every day. Those regulators have open access to its books, trading floors and back-office operations. (That’s not to say stronger regulators would prevent losses. Citigroup, which on paper is highly regulated, suffered huge write-downs on risky mortgage securities bets.)

As a bank, Goldman will also face tougher requirements about the size of the financial cushion it maintains. While Goldman and Morgan Stanley both meet current guidelines, many analysts argue that regulators, as part of the fallout from the credit crisis, may increase the amount of capital banks must have on hand.

More important, a stiffer regulatory regime across Wall Street is likely to reduce the use and abuse of its favorite addictive drug: leverage.

The low-interest-rate environment of the last decade offered buckets of cheap credit. Just as consumers maxed out their credit cards to live beyond their means, Wall Street firms bolstered their returns by pumping that cheap credit into their own trading operations and lending money to hedge funds and private equity firms so they could do the same.

By using leverage, or borrowed funds, firms like Goldman Sachs easily increased the size of the bets they were making in their own trading portfolios. If they were right — and Goldman typically was — the returns were huge.

When things went wrong, however, all of that debt turned into a nightmare. When Bear Stearns was on the verge of collapse, it had borrowed $33 for every $1 of equity it held. When trading partners that had lent Bear the money began demanding it back, the firm’s coffers ran dangerously low.

Earlier this year, Goldman had borrowed about $28 for every $1 in equity. In the ensuing credit crisis, Wall Street firms have reined in their borrowing significantly and have lent less money to hedge funds and private equity firms.

Today, Goldman’s borrowings stand at about $20 to $1, but even that is likely to come down. Banks like JPMorgan and Citigroup typically borrow about $10 to $1, analysts say.

As leverage dries up across Wall Street, so will the outsize returns at many private equity firms and hedge funds.

Returns at many hedge funds are expected to be awful this year because of a combination of bad bets and an inability to borrow. One result could be a landslide of hedge funds’ closing shop.

At Goldman, the reduced use of borrowed money for its own trading operations means that its earnings will also decrease, analysts warn.

Brad Hintz, an analyst at Sanford C. Bernstein & Company, predicts that Goldman’s return on equity, a common measure of how efficiently capital is invested, will fall to 13 percent this year, from 33 percent in 2007, and hover around 14 percent or 15 percent for the next few years.

Goldman says its returns are primarily driven by economic growth, its market share and pricing power, not by leverage. It adds that it does not expect changes in its business strategies and expects a 20 percent return on equity in the future.

IF Mr. Hintz is right, and Goldman’s legendary returns decline, so will its paychecks. Without those multimillion-dollar paydays, those top-notch investment bankers, elite traders and private-equity superstars may well stroll out the door and try their luck at starting small, boutique investment-banking firms or hedge funds — if they can.

“Over time, the smart people will migrate out of the firm because commercial banks don’t pay out 50 percent of their revenues as compensation,” said Christopher Whalen, a managing partner at Institutional Risk Analytics. “Banks simply aren’t that profitable.”

As the game of musical chairs continues on Wall Street, with banks like JPMorgan scooping up troubled competitors like Washington Mutual, some analysts are wondering what Goldman’s next move will be.

Goldman is unlikely to join with a commercial bank with a broad retail network, because a plain-vanilla consumer business is costly to operate and is the polar opposite of Goldman’s rarefied culture.

“If they go too far afield or get too large in terms of personnel, then they become Citigroup, with the corporate bureaucracy and slowness and the inability to make consensus-type decisions that come with that,” Mr. Hintz said.

A better fit for Goldman would be a bank that caters to corporations and other institutions, like Northern Trust or State Street Bank, he said.

“I don’t think they’re going to move too fast, no matter what the environment on Wall Street is,” Mr. Hintz said. “They’re going to take some time and consider what exactly the new Goldman Sachs is going to be.”

    Wall Street, R.I.P.: The End of an Era, Even at Goldman, NYT, 28.9.2008,






$700 Billion Is Sought for Wall Street

in Vast Bailout


September 21, 2008
The New York Times


WASHINGTON — The Bush administration on Saturday formally proposed a vast bailout of financial institutions in the United States, requesting unfettered authority for the Treasury Department to buy up to $700 billion in distressed mortgage-related assets from the private firms.

The proposal, not quite three pages long, was stunning for its stark simplicity. It would raise the national debt ceiling to $11.3 trillion. And it would place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt.

“This is a big package, because it was a big problem,” President Bush said Saturday at a White House news conference, after meeting with President Álvaro Uribe of Colombia. “I will tell our citizens and continue to remind them that the risk of doing nothing far outweighs the risk of the package, and that, over time, we’re going to get a lot of the money back.”

After a week of stomach-flipping turmoil in the financial system, and with officials still on edge about how global markets will respond, the delivery of the administration’s plan set the stage for a four-day brawl in Congress. Democratic leaders have pledged to approve a bill but say it must also include tangible help for ordinary Americans in the form of an economic stimulus package.

Staff members from Treasury and the House Financial Services and Senate banking committees immediately began meeting on Capitol Hill and were expected to work through the weekend. Congressional leaders are hoping to recess at the end of the week for the fall elections, after approving the bailout and a budget measure to keep the government running.

With Congressional Republicans warning that the bailout could be slowed by efforts to tack on additional provisions, Democratic leaders said they would insist on a requirement that the administration use its new role, as the owner of large amounts of mortgage debt, to help hundreds of thousands of troubled borrowers at risk of losing their homes to foreclosure.

“It’s clear that the administration has requested that Congress authorize, in very short order, sweeping and unprecedented powers for the Treasury secretary,” the House speaker, Nancy Pelosi of California, said in a statement. “Democrats will work with the administration to ensure that our response to events in the financial markets is swift, but we must insulate Main Street from Wall Street and keep people in their homes.”

Ms. Pelosi said Democrats would also insist on “enacting an economic recovery package that creates jobs and returns growth to our economy.”

Even as talks got under way, there were signs of how very much in flux the plan remained. The administration suggested that it might adjust its proposal, initially restricted to purchasing assets from financial institutions based in the United States, to enable foreign firms with United States affiliates to make use of it as well.

The ambitious effort to transfer the bad debts of Wall Street, at least temporarily, into the obligations of American taxpayers was first put forward by the administration late last week after a series of bold interventions on behalf of ailing private firms seemed unlikely to prevent a crash of world financial markets.

A $700 billion expenditure on distressed mortgage-related assets would roughly be what the country has spent so far in direct costs on the Iraq war and more than the Pentagon’s total yearly budget appropriation. Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States.

Whatever is spent will add to a budget deficit already projected at more than $500 billion next year. And it comes on top of the $85 billion government rescue of the insurance giant American International Group and a plan to spend up to $200 billion to shore up the mortgage finance giants Fannie Mae and Freddie Mac.

At his news conference, Mr. Bush also sought to portray the plan as helping every American. “The government,” he said, “needed to send a clear signal that we understood the instability could ripple throughout and affect the working people and the average family, and we weren’t going to let that happen.”

A program to help troubled borrowers refinance mortgages — along with an $800 billion increase in the national debt limit — was approved in July. But financing for it depended largely on fees paid by Fannie Mae and Freddie Mac, which have been placed into a government conservatorship.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said in an interview that his staff had already begun working with the Senate banking committee to draft additions to the administration’s proposal.

Mr. Frank said Democrats were particularly intent on limiting the huge pay packages for corporate executives whose firms seek aid under the new plan, raising the prospect of a contentious battle with the White House.

“There are going to be federal tax dollars buying up some of the bad paper,” Mr. Frank said. “They should accept some compensation guidelines, particularly to get rid of the perverse incentives where it’s ‘heads I win, tails I break even.’ ”

Mr. Frank said Democrats were also thinking about tightening the language on the debt limit to make clear that the additional borrowing authority could be used only for the bailout plan. And he said they might seek to revive a proposal that would give bankruptcy judges the authority to modify the terms of primary mortgages, a proposal strongly opposed by the financial industry.

Senator Charles E. Schumer, Democrat of New York, who attended emergency meetings with the Treasury secretary, Henry M. Paulson Jr., and the Federal Reserve chairman, Ben S. Bernanke, on Capitol Hill last week, described the proposal as a good start but said it did little for regular Americans.

“This is a good foundation of a plan that can stabilize markets quickly,” Mr. Schumer said in a statement. “But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas.”

Ms. Pelosi’s statement made clear that she would push for an economic stimulus initiative either as part of the bailout legislation or, more likely, as part of the budget resolution Congress must adopt before adjourning for the fall elections. Such a plan could include an increase in unemployment benefits and spending on infrastructure projects to help create jobs.

Some Congressional Republicans warned Democrats not to overreach.

“The administration has put forward a plan to help the American people, and it is now incumbent on Congress to work together to solve this crisis,” said Representative John A. Boehner of Ohio, the Republican leader.

Mr. Boehner added, “Efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors and small businesses deserve.”

Aides to Senator Barack Obama of Illinois, the Democratic presidential nominee, said he was reviewing the proposal. In Florida, Mr. Obama told voters he would press for a broader economic stimulus.

“We have to make sure that whatever plan our government comes up with works not just for Wall Street, but for Main Street,” Mr. Obama said. “We have to make sure it helps folks cope with rising prices, and sparks job creation, and helps homeowners stay in their homes.”

Senator John McCain of Arizona, the Republican nominee, issued a statement saying he, too, was reviewing the plan.

“This financial crisis,” Mr. McCain said, “requires leadership and action in order to restore a sound foundation to financial markets, get our economy on its feet, and eliminate this burden on hardworking middle-class Americans.”

If adopted, the bailout plan would sharply raise the stakes for the new administration on the appointment of a new Treasury secretary.

The administration’s plan would allow the Treasury to hire staff members and engage outside firms to help manage its purchases. And officials said that the administration envisioned enlisting several outside firms to help run the effort to buy up mortgage-related assets.

Officials said that details were still being worked out but that one idea was for the Treasury to hold reverse auctions, in which the government would offer to buy certain classes of distressed assets at a particular price and firms would then decide if they were willing to sell at that price, or could bid the price lower.

Mindful of a potential political fight, Mr. Paulson and Mr. Bernanke held a series of conference calls with members of Congress on Friday to begin convincing them that action was needed not just to help Wall Street but everyday Americans as well.

Republicans typically supportive of the administration said they were in favor of approving the plan as swiftly as possible.

Senator Mitch McConnell of Kentucky, the Republican leader, said in a statement, “This proposal is, and should be kept, simple and clear.” The majority leader, Senator Harry Reid, Democrat of Nevada, said that the bailout was needed but that Mr. Bush owed the public a fuller explanation.

Some lawmakers were more critical or even adamantly opposed to the plan. “The free market for all intents and purposes is dead in America,” Senator Jim Bunning, Republican of Kentucky, declared on Friday.

It is far from clear how much distressed debt the government will end up purchasing, though it seemed likely that the $700 billion figure was large enough to send a reassuring message to the jittery markets. There are estimates that firms are carrying $1 trillion or more in bad mortgage-related assets.

The ultimate price tag of the bailout is virtually impossible to know, in part because of the possibility that taxpayers could profit from the effort, especially if the market stabilizes and real estate prices rise.


Lehman Can Sell to Barclays

A federal bankruptcy judge decided early Saturday that Lehman Brothers could sell its investment banking and trading businesses to Barclays, the big British bank, the first major step to wind down the nation’s fourth-largest investment bank.

The judge, James Peck, gave his decision at the end of an eight-hour hearing, which capped a week of financial turmoil.

The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman’s office tower in Midtown Manhattan.

Lehman Brothers Holdings Inc. on Monday filed the biggest bankruptcy in United States history, after Barclays PLC declined to buy the investment bank in its entirety.

Reporting was contributed by Jeff Zeleny from Daytona Beach, Fla.,

and Michael Cooper, Carl Hulse, Stephen Labaton

and David Stout from Washington.

    $700 Billion Is Sought for Wall Street in Vast Bailout, NYT, 21.9.2008,









How to Control Your Fears

In a Fearsome Market

Scientists Are Showing How to Erase Your Fright
So Your Portfolio Survives


July 19, 2008
The Wall Street Journal
Page B1


What goes on inside your head when your portfolio implodes?

One of the fear centers in your brain, the amygdala, can respond to upsetting stimuli in 12 milliseconds, or one-25th the time it takes to blink your eye. These brain cells fire when an attack dog snarls at you, a spider drops down your shirt or the Dow Jones Industrial Average takes a dive.

Merely reading the words "market crash" in this sentence can instantaneously jack up your pulse and your blood pressure, the output of your sweat glands and the tension in your muscles. Stress hormones will flood your bloodstream. Your eyes will widen and your nostrils flare, making you hypersensitive to any further danger. All this occurs automatically, involuntarily and unconsciously. You can't be an intelligent investor if, without even knowing it, you are thinking with the panic button in your brain.

The countless people who bailed out of the market in the horrifying plunge of October 2002 missed out on the generous returns of 2003 through 2007, when stocks returned 12.8% annually. The same is likely to be true of those who cut and run in today's turbulent market.

Fortunately, you can train your brain to stay calm when the markets are gripped by panic. Last week, I spent an afternoon in Kevin Ochsner's neuroscience lab at Columbia University in New York, practicing what he calls "cognitive reappraisal."

I sat at a computer and viewed a series of photographs, each preceded by one of two words: look or reappraise. look was my cue to respond naturally without trying to change my feelings. reappraise told me I should "actively reinterpret" the photo, using my imagination to spin another, less emotional scenario that could have resulted in the same image.

Dr. Ochsner had warned me to eat an early, light lunch, and I immediately realized why: I gasped at the sight of a man's hand from which most of the fingers had been freshly hacked off. But my instruction had been to reappraise, so I forced myself to ask whether this image might actually be a still from a horror movie. Magically, the moment I imagined it was a film prop, the raw flesh seemed to look a bit like plastic, and I felt myself exhale.

If I can think away blood, you can calmly face the red arrows on a market Web site. "Emotions are malleable," Dr. Ochsner said, "but people often don't realize how much [of what you feel] is under your own control."




Here are some ways you can control your fears.

Reappraise. Forget what you paid for that stock or fund; instead, imagine it was a gift. Now that it is priced, say, 20% more cheaply than in December, should you want to return the gift? Or should you buy more while it is on sale? (If rethinking a fallen price this way doesn't make you feel better, maybe you should sell.)

Step outside yourself. Imagine that someone else has suffered these losses. Think of questions you might ask to give that person advice: Other than the price, what else has changed? Is your original rationale for this investment still valid?

Control your cues. Even witnessing someone else's pain, or glancing into another person's frightened eyes, can fire up your amygdala. Because fear is as contagious as the flu, quarantine yourself from anyone who obsesses over the momentary twitching of the Dow. Tear yourself away from the computer or television; better yet, while the market is closed, make an advance date with friends or family to get your mind off stocks during market hours.

Track your feelings. Fill in the blanks in this sentence: "Today the Dow closed down [or up] ___ points, and that made me feel __________." Your emotions shouldn't be hostage to the actions of the roughly 100 million other people who compose the collective beast that Benjamin Graham called "Mr. Market." You need not be miserable just because Mr. Market is.

Finally, if the market is open, your portfolio should be closed. Sleep on any sell decision until the next day, when your fears may have faded. Intelligent investors act out of patience and courage, not panic.

    How to Control Your Fears In a Fearsome Market, WSJ, 19.7.2008,






Why No Outrage?

Through history, outrageous financial behavior
has been met with outrage.
But today Wall Street's damaging recklessness
has been met with near-silence,
from a too-tolerant populace, argues James Grant


July 19, 2008
The New York Times
Page W1

"Raise less corn and more hell," Mary Elizabeth Lease harangued Kansas farmers during America's Populist era, but no such voice cries out today. America's 21st-century financial victims make no protest against the Federal Reserve's policy of showering dollars on the people who would seem to need them least.

Long ago and far away, a brilliant man of letters floated an idea. To stop a financial panic cold, he proposed, a central bank should lend freely, though at a high rate of interest. Nonsense, countered a certain hard-headed commercial banker. Such a policy would only instigate more crises by egging on lenders and borrowers to take more risks. The commercial banker wrote clumsily, the man of letters fluently. It was no contest.

The doctrine of activist central banking owes much to its progenitor, the Victorian genius Walter Bagehot. But Bagehot might not recognize his own idea in practice today. Late in the spring of 2007, American banks paid an average of 4.35% on three-month certificates of deposit. Then came the mortgage mess, and the Fed's crash program of interest-rate therapy. Today, a three-month CD yields just 2.65%, or little more than half the measured rate of inflation. It wasn't the nation's small savers who brought down Bear Stearns, or tried to fob off subprime mortgages as "triple-A." Yet it's the savers who took a pay cut -- and the savers who, today, in the heat of a presidential election year, are holding their tongues.

Possibly, there aren't enough thrifty voters in the 50 states to constitute a respectable quorum. But what about the rest of us, the uncounted improvident? Have we, too, not suffered at the hands of what used to be called The Interests? Have the stewards of other people's money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust? Where is the people's wrath?

The American people are famously slow to anger, but they are outdoing themselves in long suffering today. In the wake of the "greatest failure of ratings and risk management ever," to quote the considered judgment of the mortgage-research department of UBS, Wall Street wears a political bullseye. Yet the politicians take no pot shots.

Barack Obama, the silver-tongued herald of change, forgettably told a crowd in Madison, Wis., some months back, that he will "listen to Main Street, not just to Wall Street." John McCain, the angrier of the two presumptive presidential contenders, has staked out a principled position against greed and obscene profits but has gone no further to call the errant bankers and brokers to account.

The most blistering attack on the ancient target of American populism was served up last October by the then president of the Federal Reserve Bank of St. Louis, William Poole. "We are going to take it out of the hides of Wall Street," muttered Mr. Poole into an open microphone, apparently much to his own chagrin.

If by "we," Mr. Poole meant his employer, he was off the mark, for the Fed has burnished Wall Street's hide more than skinned it. The shareholders of Bear Stearns were ruined, it's true, but Wall Street called the loss a bargain in view of the risks that an insolvent Bear would have presented to the derivatives-laced financial system. To facilitate the rescue of that system, the Fed has sacrificed the quality of its own balance sheet. In June 2007, Treasury securities constituted 92% of the Fed's earning assets. Nowadays, they amount to just 54%. In their place are, among other things, loans to the nation's banks and brokerage firms, the very institutions whose share prices have been in a tailspin. Such lending has risen from no part of the Fed's assets on the eve of the crisis to 22% today. Once upon a time, economists taught that a currency draws its strength from the balance sheet of the central bank that issues it. I expect that this doctrine, which went out with the gold standard, will have its day again.

Wall Street is off the political agenda in 2008 for reasons we may only guess about. Possibly, in this time of widespread public participation in the stock market, "Wall Street" is really "Main Street." Or maybe Wall Street, its old self, owns both major political parties and their candidates. Or, possibly, the $4.50 gasoline price has absorbed every available erg of populist anger, or -- yet another possibility -- today's financial failures are too complex to stick in everyman's craw.

I have another theory, and that is that the old populists actually won. This is their financial system. They had demanded paper money, federally insured bank deposits and a heavy governmental hand in the distribution of credit, and now they have them. The Populist Party might have lost the elections in the hard times of the 1890s. But it won the future.

Before the Great Depression of the 1930s, there was the Great Depression of the 1880s and 1890s. Then the price level sagged and the value of the gold-backed dollar increased. Debts denominated in dollars likewise appreciated. Historians still debate the source of deflation of that era, but human progress seems the likeliest culprit. Advances in communication, transportation and productive technology had made the world a cornucopia. Abundance drove down prices, hurting some but helping many others.

The winners and losers conducted a spirited debate about the character of the dollar and the nature of the monetary system. "We want the abolition of the national banks, and we want the power to make loans direct from the government," Mary Lease -- "Mary Yellin" to her fans -- said. "We want the accursed foreclosure system wiped out.... We will stand by our homes and stay by our firesides by force if necessary, and we will not pay our debts to the loan-shark companies until the government pays its debts to us."

By and by, the lefties carried the day. They got their government-controlled money (the Federal Reserve opened for business in 1914), and their government-directed credit (Fannie Mae and the Federal Home Loan Banks were creatures of Great Depression No. 2; Freddie Mac came along in 1970). In 1971, they got their pure paper dollar. So today, the Fed can print all the dollars it deems expedient and the unwell federal mortgage giants, Fannie Mae and Freddie Mac, combine for $1.5 trillion in on-balance sheet mortgage assets and dominate the business of mortgage origination (in the fourth quarter of last year, private lenders garnered all of a 19% market share).

Thus, the Wall Street of the Morgans and the Astors and the bloated bondholders is today an institution of the mixed economy. It is hand-in-glove with the government, while the government is, of course -- in theory -- by and for the people. But that does not quite explain the lack of popular anger at the well-paid people who seem not to be very good at their jobs.

Since the credit crisis burst out into the open in June 2007, inflation has risen and economic growth has faltered. The dollar exchange rate has weakened, the unemployment rate has increased and commodity prices have soared. The gold price, that running straw poll of the world's confidence in paper money, has jumped. House prices have dropped, mortgage foreclosures spiked and share prices of America's biggest financial institutions tumbled.

One might infer from the lack of popular anger that the credit crisis was God's fault rather than the doing of the bankers and the rating agencies and the government's snoozing watchdogs. And though greed and error bear much of the blame, so, once more, does human progress. At the turn of the 21st century, just as at the close of the 19th, the global supply curve prosperously shifted. Hundreds of millions of new hands and minds made the world a cornucopia again. And, once again, prices tended to weaken. This time around, however, the Fed intervened to prop them up. In 2002 and 2003, Ben S. Bernanke, then a Fed governor under Chairman Alan Greenspan, led a campaign to make dollars more plentiful. The object, he said, was to forestall any tendency toward what Wal-Mart shoppers call everyday low prices. Rather, the Fed would engineer a decent minimum of inflation.

In that vein, the central bank pushed the interest rate it controls, the so-called federal funds rate, all the way down to 1% and held it there for the 12 months ended June 2004. House prices levitated as mortgage underwriting standards collapsed. The credit markets went into speculative orbit, and an idea took hold. Risk, the bankers and brokers and professional investors decided, was yesteryear's problem.

Now began one of the wildest chapters in the history of lending and borrowing. In flush times, our financiers seemingly compete to do the craziest deal. They borrow to the eyes and pay themselves lordly bonuses. Naturally -- eventually -- they drive themselves, and the economy, into a crisis. And to the scene of this inevitable accident rush the government's first responders -- the Fed, the Treasury or the government-sponsored enterprises -- bearing the people's money. One might suppose that such a recurrent chain of blunders would gall a politically potent segment of the population. That it has evidently failed to do so in 2008 may be the only important unreported fact of this otherwise compulsively documented election season.

Mary Yellin would spit blood at the catalogue of the misdeeds of 21st-century Wall Street: the willful pretended ignorance over the triple-A ratings lavished on the flimsy contraptions of structured mortgage finance; the subsequent foreclosure blight; the refusal of Wall Street to honor its implied obligations to the holders of hundreds of billions of dollars worth of auction-rate securities, the auctions of which have stopped in their tracks; the government's attempt to prohibit short sales of the guilty institutions; and -- not least -- Wall Street's reckless love affair with heavy borrowing.

For every dollar of equity capital, a well-financed regional bank holds perhaps $10 in loans or securities. Wall Street's biggest broker-dealers could hardly bear to look themselves in the mirror if they didn't extend themselves three times further. At the end of 2007, Goldman Sachs had $26 of assets for every dollar of equity. Merrill Lynch had $32, Bear Stearns $34, Morgan Stanley $33 and Lehman Brothers $31. On average, then, about $3 in equity capital per $100 of assets. "Leverage," as the laying-on of debt is known in the trade, is the Hamburger Helper of finance. It makes a little capital go a long way, often much farther than it safely should. Managing balance sheets as highly leveraged as Wall Street's requires a keen eye and superb judgment. The rub is that human beings err.

Wall Street is usually described as an industry, but it shares precious few characteristics with the metal-fasteners business or the auto-parts trade. The big brokerage firms are not in business so much to make a product or even to earn a competitive return for their stockholders. Rather, they open their doors to pay their employees -- specifically, to maximize employee compensation in the short run. How best to do that? Why, to bear more risk by taking on more leverage.

"Wall Street is our bad example because it is so successful," charged the president of Notre Dame University, the Rev. John Cavanaugh, in the time of Mary Lease. He meant that young people, emulating J.P. Morgan or E.H. Harriman, would worship the wrong god. The more immediate risk today is that Wall Street, sweating to fill out this year's bonus pool, runs itself and the rest of the American financial system right over a cliff.

It's just happened, in fact, under the studiously averted gaze of the Street's risk managers. Today's bear market in financial assets is as nothing compared to the preceding crash in human judgment. Never was a disaster better advertised than the one now washing over us. House prices stopped going up in 2005, and cracks in mortgage credit started appearing in 2006. Yet the big, ostensibly sophisticated banks only pushed harder.

Bear Stearns is kaput and Lehman Brothers is reeling, but Morgan Stanley perhaps best illustrates the gluttonous ways of Wall Street. Having lost its competitive edge on account of an intramural political struggle, the firm, under Chief Executive John Mack, set out to catch up to the rest of the pack. In the spring of 2006, it unveiled a trillion-dollar balance sheet, Wall Street's first. It expanded in every faddish business line, not excluding, in August 2006, subprime-mortgage origination (the transaction, intoned a Morgan Stanley press release, "provides us with new origination capabilities in the non-prime market, which we can build upon to provide access to high-quality product flows across all market cycles"). Nor did it pull in its horns as the boom wore on but rather protruded them all the more, raising its ratio of assets to equity to the aforementioned 33 times at year-end 2007 from 26.5 times at the close of 2004. Naturally, it did not forget the help. Last year, Morgan Stanley paid out 59% of its revenues in employee compensation, up from 46% in 2004.

Huey Long, who rhetorically picked up where Lease left off, once compared John D. Rockefeller to the fat guy who ruins a good barbecue by taking too much. Wall Street habitually takes too much. It would not be so bad if the inevitable bout of indigestion were its alone to bear. The trouble is that, in a world so heavily leveraged as this one, we all get a stomach ache. Not that anyone seems to be complaining this election season.





There's a gripping story behind every financial scandal. Here's a roundup of movies that examine the money-making industry's dark side:

'Clancy in Wall Street' (1930)
Starring: Charles Murray, Lucien Littlefield, Aggie Herring and Eddie Nugent
An Irish-American plumber, Clancy (Murray), happens on some good stock-market bets , eventually making millions and elevating him in society. But once the market crashes and he's left with nothing, he returns to his roots in hopes that old friends will take him back.

'It's a Wonderful Life' (1946)
Starring: James Stewart, Donna Reed and Lionel Barrymore
Generally filed away in the holiday-favorite category, this film's run-on-the-bank scene and its fallout is a classic example of financial duress on the silver screen.

'Wall Street' (1987)
Starring: Michael Douglas, Charlie Sheen, Daryl Hannah and Martin Sheen
Oliver Stone's classic film centers on Gordon Gekko (Douglas, pictured right), a ruthless Wall Street corporate raider who takes an ambitious young stockbroker (Charlie Sheen) under his wing and exposes him to the perks and pitfalls that come with the high-stakes territory.

'Glengarry Glen Ross' (1992)
Starring: Al Pacino, Jack Lemmon, Alec Baldwin and Alan Arkin
In this film based on David Mamet's Pulitzer Prize-winning play, a group of tough real-estate salesmen struggle to deal with a downturning housing market -- or face the ax.

'Rogue Trader' (1999)
Starring: Ewan McGregor, Anna Friel, Yves Beneyton and Betsy Brantley
In this film, based on a true story, Ewan McGregor plays a trader working in Singapore who makes illegal trades to cover up his losses. He ends up in jail.





Some classic nonfiction and fiction on financial troubles.

'L'Argent' by Émile Zola (1891)
First published as a newspaper serial, Zola's "L'Argent" ("Money") tells of Aristide Saccard, a down-and-out financier who founds a bank. As speculation flourishes, Saccard goes to great lengths to keep the stock rising, lying to investors and covering up schemes.

'Little Dorrit' by Charles Dickens (1855-57)
The novel features Mr. Merdle, a banker whose schemes lead to financial ruin for many.

'Extraordinary Popular Delusions & The Madness of Crowds' (1841)
Scottish writer Charles Mackay's classic examines the psychology of crowds, touching on everything from the popularity of beards to witch hunts. The last three chapters look at financial manias, such as the Dutch tulip bubble of the 17th century.

'The Great Crash 1929,' by John Kenneth Galbraith (1954)
A best seller when it was first published in 1954, this book by the noted Harvard economist details the U.S.'s most famous crash and the events that precipitated it.

James Grant is the editor of Grant's Interest Rate Observer.

    Why No Outrage?, WSJ, 19.7.2008,






A Bull Market

Sees the Worst in Speculators


June 13, 2008
The New York Times


In Washington, financial speculators have fat targets on their backs.

They are being blamed for high gas prices, soaring grocery bills and volatile commodity markets, and lawmakers are lashing out at market regulators for not cracking down on them more vigorously.

“You study it, but you don’t act against this incredible increase in speculation,” Senator Carl Levin, Democrat of Michigan, complained to a senior official of the Commodity Futures Trading Commission at a recent Senate hearing. “Unless the C.F.T.C. is going to act against speculation, we don’t have a cop on the beat.”

Just this week, Senator Joseph I. Lieberman, the Connecticut independent, said he was working on a proposal to ban large institutional investors from the commodity markets entirely. The same day, the Bush administration endorsed another Senate proposal to create a new federal interagency task force to investigate commodity speculation. At least four public hearings have explored the topic in just the last two months, and Senator Lieberman will hold another session on June 24.

Although it is common in tough financial times to blame the speculators, this escalating hostility toward them is starting to worry people with years of knowledge about how commodity markets work. Because without speculators, they say, these markets do not work at all.

Speculators, people willing to risk their capital in search of high profits, are central to healthy commodity markets, they say, and broad-brush restrictions on them could damage markets that are already under pressure from rising global demand for food and fuel.

Even in Washington, there is widespread agreement that no single factor is responsible for rising food and energy prices. The hungry, high-growth economies of India and China are fundamentally affecting worldwide demand, while uncooperative weather and government policies on trade and ethanol are among the many factors affecting supply.

Commodities, priced in American dollars, tend to rise in price as the dollar weakens, making commodities a popular haven for investors fearful of inflation.

But beneath all these external factors is the simple seesaw of the marketplace: For every person who buys oil at $130 a barrel, there must be another person willing to sell at that price — and, odds are, at least one of them will be a speculator.

Before it was a Beltway epithet, “speculator” was simply a type of trader in the commodity futures markets. Unlike hedgers — the farmers, miners, refineries and other commercial interests that actually make or use the commodities themselves — the speculators, like day traders in the stock market, are simply trying to profit from changing prices.

Some speculators follow market trends, buying as prices rise and driving them higher. But others buy when they think prices have fallen too low, sell when they see prices as too high or place bets that pay off only when prices fall.

The more money that speculators are willing to put to work in the market, the more liquid it is and the easier it is to buy and sell without causing big ripples in prices.

Any trader, speculator or hedger can try to manipulate markets, of course. But with tempers rising along with food and fuel prices, some market scholars are concerned that speculation, the legal pursuit of market profits, is becoming a synonym for manipulation — secret and collusive trading activity aimed at deliberately moving prices to produce illegal profits.

As political pressure has grown, regulators have stepped up their demands for more detailed trading information from commodity exchanges, to improve their ability to monitor trading.

In a statement this week, Walter Lukken, the C.F.T.C. chairman, said the commission was determined to see that commodity prices were set “by the fundamental forces of supply and demand, rather than by abusive or manipulative practices.”

The commodity market has seen its share of manipulation scandals — allegations that executives at J. R. Simplot had tried to fix the Maine potato market in 1976, allegations that the Hunt family of Texas had manipulated the silver market in 1979 and, just last year, BP’s settlement of federal charges that it had manipulated propane prices.

Certainly, there have been unusual price spikes in commodity markets, like the short, sharp roller-coaster ride that hit the cotton market in early March and the more recent gyrations in the oil markets that have alarmed some market participants.

While commodity market regulators regularly look for manipulative behavior, the C.F.T.C. took the unusual step in recent weeks of publicly confirming that it was conducting investigations looking for illegal activity in both the energy and agricultural markets.

“Concern about manipulation is not misplaced,” said Patrick Westhoff, an economist at the University of Missouri’s Food and Agricultural Policy Research Institute. “But speculation doesn’t equal manipulation, and I am concerned that there’s been a confusion between the two concepts.”

The stage of the speculation that is alarming Washington is the commodity futures market, which trades a financial derivative called a futures contract, an agreement for the future delivery of a fixed amount of a commodity at a certain price. The prices at which these futures contracts change hands are the benchmark for pricing commodities around the world.

In essence, speculators are the only voluntary players in the commodity futures markets. They could use their billions to dabble in currency markets or buy distressed real estate or pile up Treasury bonds.

But farmers, miners, oil producers and all the other players engaged in commodity production and consumption — the so-called commercial players — pretty much have to be there. There just are not many other places they can hedge the price risks that arise in their commodity-based businesses.

So speculators become the ballast in the market, making the contrary trades, taking on the risks the hedgers want to shed, reacting quickly when news jolts the markets and, most important, creating liquidity by pouring in enough money to allow everyone to make very large trades quickly without causing wild price swings.

Liquidity is, in effect, the hostess gift that speculators bring to every market party, and without the capital poured into energy markets by institutional investors, prices may well be far higher and more volatile than they are, said Philip K. Verleger Jr., an economist and energy policy consultant who testifies frequently before Congress on energy issues.

In the last five years, hundreds of billions of dollars have flowed into the commodity futures markets, both from traditional institutions — hedge funds, pension funds and investment bank trading desks, for example — and from the newer commodity-linked index funds and exchange traded funds, which track various commodity market indexes.

Mr. Verleger said he strongly disagrees with the view that these new speculators are pushing up the price of oil and other commodities. “In fact, they have at a minimum reduced price volatility and quite possibly contributed to a lower price level than would have been obtained had they been barred from the commodity markets,” he said.

Paul Horsnell, a managing director and head of commodity research at Barclays Capital in London, said he believes that Washington’s hostility reflects, in part, a misunderstanding of the strategy used by many of the new investors.

Critics — including Michael W. Masters, a portfolio manager whose testimony last month in Washington was praised by Senator Lieberman — complain that these new investors are piling in only on the buy side, thereby tilting the market toward higher prices.

The actual picture is more complex, Mr. Horsnell said. Many institutional investors constantly adjust their positions to maintain a fixed percentage of their portfolio in commodities, he said.

Thus, a pension fund that wants to put no more than 2 percent of its assets in commodities will have to sell some of its stake when its value rises above that percentage limit.

So, as in other markets, these investors “are stabilizing forces because when the asset goes up in value, they sell some to put their portfolios back into balance,” he said.

But the sheer size of the money flowing into commodity futures has become the most important fact about it.

According to Barclays research, about $200 billion in managed assets was invested in commodities at the end of 2007 — up from barely measurable levels just seven years ago. Latest estimates suggest that figure rose to $230 billion in the first four months of this year, but at least half of that growth came from rising commodity prices, not new money flowing in, Mr. Horsnell said.

He said that this entire investment stake is dwarfed by the amount of money invested in, say, ExxonMobil. But the commodity markets are much smaller than the equities markets, and this flood of new capital is a once-in-a-lifetime occurrence.

“Speculators have seized control of these markets,” Senator Levin said.

Lawmakers know that markets need speculators, the senator said, but are using “speculation” simply as shorthand for their real target of concern, which is “excessive speculation.”

But while federal law orders commodity market regulators to prevent “excessive speculation,” the law does not define the term — and neither has Congress. “That’s what regulators are for,” Senator Levin said. “It’s up to them to put some flesh on that term.”

Senator Lieberman disagreed, saying Congress must clarify the standard for regulators to enforce. America must not hang a sign on its commodity markets saying, “no speculators allowed,” he said. “There is a difference between speculation and excessive speculation.”

But Congress has to “define and legislate that definition better,” he added. “We can’t just say, as Justice Potter Stewart once said of pornography, that we know it when we see it.”

    A Bull Market Sees the Worst in Speculators, NYT, 13.6.2008,






Stocks & Bonds

Oil Prices and Joblessness

Punish Shares


June 7, 2008
The New York Times


Wall Street suffered its worst losses in more than two months on Friday after crude oil prices spiked over $138, an increase of nearly $11, and the unemployment rate rose more than expected.

All 30 of the stocks that make up the Dow Jones industrial average took a hit as the index dropped nearly 400 points on fears that high energy prices will extend and deepen an economic slowdown.

“The market is meeting its worst fears right now,” said Quincy Krosby, chief investment strategist at the Hartford, a financial services firm.

The Dow fell 3.13 percent, or 394.64 points, to close at 12,209.81. The broader Standard & Poor’s 500-stock index lost 43.37 points, or 3.09 percent, to 1,360.68, its lowest point in four months. The technology-laden Nasdaq composite index declined 75.38 points, or 2.96 percent, to 2,474.56.

Shares opened lower after the government reported that the unemployment rate in May increased the most in one month in 22 years. The market decline accelerated as crude oil rose steadily, closing $10.75 higher in its biggest one-day climb ever.

“Oil prices have reached the tipping point,” said Richard Sparks, an analyst at Schaeffer’s Investment Research. “Prices have rallied for a good two months, but now it’s really weighing on the market.”

Friday’s session wiped out the gains the markets had Thursday, and left all three major indexes down for the week. The Dow fell 3.39 percent for the week, the S.& P. 500 was off 2.83 percent and the Nasdaq had a loss of 1.91 percent.

Wall Street has run into choppy waters over the last two weeks after a period of relative calm. Friday’s decline was a return to the triple-digit collapses of February and March, when the market was rocked by the Bear Stearns bailout and significant interest rate cuts from the Federal Reserve.

The last time the Dow fell this much was at the beginning of the subprime mortgage crisis in February 2007.

On Friday, the blue-chip index was dragged down by shares of American International Group, the big insurer, which stumbled after accusations that the company may have overstated the value of contracts tied to subprime mortgages.

A.I.G.’s shares fell $2.48, or nearly 7 percent, to close at an 11-year low of $33.93.

Shares of financial firms and companies that depend on discretionary spending were the hardest hit, as investors worried that the weak labor market was likely to raise anxieties among some Americans and put a pall on spending habits.

Friday’s report from the Labor Department said that the economy lost jobs for the fifth consecutive month and the unemployment rate surged to 5.5 percent in May, from 5 percent in April, the sharpest monthly rise in 22 years.

Investors are also worried that high energy prices will further slow the economy.

“If oil prices stay this high, you’re going to have to re-examine your estimates for G.D.P., inflation and consumers’ ability to spend outside of nondiscretionary items,” Ms. Krosby said. “This has all of the elements of an investor’s worst-case scenario.”

Oil prices surged almost 8 percent, to $138.54 a barrel after a senior Israeli politician raised the specter of an attack on Iran and the dollar fell against the euro.

“As soon as that news hit the tape, oil spiked about $6,” said David Kovacs, an investment strategist at Turner Investment Partners.

Prices were buoyed further by a report from Morgan Stanley that predicted oil would reach $150 a barrel by July 4 because of higher demand in Asia.

Shares of General Motors, whose fortunes can depend on oil prices, fell more than 4 percent, to $16.22.

Mr. Sparks added that the market was also taking a hit from a string of bad news that came out earlier this week, including Standard & Poor’s downgrading of Lehman Brothers, Merrill Lynch and Morgan Stanley and the ousting of Wachovia’s chairman.

“All of this has culminated and it’s bringing the boogeyman back out of the closet,” he said.

Bond prices jumped on Friday as investors sought the safety of Treasuries in the volatile market.

The benchmark 10-year Treasury note rose 1 2/32, to 99 23/32. Its yield, which moves in the opposite direction, fell to 3.91 percent, from 4.04 percent.

    Oil Prices and Joblessness Punish Shares, NYT, 7.6.2008,






Slump Moves From Wall St. to Main St.


March 21, 2008
The New York Times


In Seattle, sales at a long-established hardware store, Pacific Supply, are suddenly dipping. In Oklahoma City, couples planning their weddings are demonstrating uncustomary thrift, forgoing Dungeness crab and special linens. And in many cities, the registers at department stores like Nordstrom on the higher end and J. C. Penney in the middle are ringing less often.

With Wall Street caught in a credit crisis that has captured headlines, the forces assailing the economy are now spreading beyond areas hit hardest by the boom-turned-bust in real estate like California, Florida and Nevada. Now, the downturn is seeping into new parts of the country, to communities that seemed insulated only months ago.

The broadening of the slowdown, the plunge in home prices and near-paralysis in the financial system are fueling worries that what most economists now see as an inevitable recession could end up being especially painful.

Indeed, some economists fear it will last longer and inflict more bite on workers and businesses than the last two recessions, which gripped the economy in 2001 and for eight months straddling 1990 and 1991. This time, these experts say, a recession in which economic activity falls over a sustained period and joblessness rises across the board could even persist into next year.

“It’s not hard to construct very dark scenarios, primarily because the financial system is in disarray, and it’s not clear how to get it all back together again,” said Mark Zandi, chief economist at Moody’s Economy.com.

To be sure, there are many places where talk of recession still seems as out of place as a diner trying to score a table at a trendy Los Angeles restaurant without reservations on a Saturday night. First-class cabins of airplanes are jammed. So are spas, cigar bars and children’s clothing boutiques selling upscale dresses.

Unemployment, meanwhile, still remains at a relatively low 4.8 percent.

But even after the Federal Reserve’s extraordinary efforts to prevent the collapse of Bear Stearns from spreading to other financial institutions, the danger still lurks that banks will grow even tighter with their funds and will starve the economy of capital.

“If lenders and debtors don’t trust each other, that causes a power outage,” said Michael T. Darda, chief economist at MKM Partners. “And that’s where we are now.” Until recently, Mr. Darda was among those still holding to the notion that the economy could generate enough jobs to keep the economy rolling. But the private sector has shed jobs for three consecutive months. Mr. Darda is now worried.

“We’ll be lucky to make it out of this without something that looks like a recession,” he said.

On Thursday, FedEx , whose global courier business tends to rise and fall with swings in the economy, reported that its earnings actually dropped in the United States and warned that in future months it expected to fall well short of its customary double-digit annualized profit gains.

“We just aren’t going to be able to do that,” Alan Graf, FedEx’s chief financial officer, said in a call with Wall Street analysts. “The crystal ball for everybody is very cloudy here.”

For now, there are still pockets of prosperity across the country. Farmers are enjoying record crop prices as the adoption of ethanol makes corn a way to fill gas tanks, and as rising incomes in China, India and elsewhere spell growing demand for meat. The weak dollar is helping exporters and retailers that cater to foreign tourists.

Eastern Mountain Sports, the outdoor clothing dealer, says sales increased by one-third this month compared with the year before at its store in SoHo. “A lot of that is Europeans coming over,” said Will Manzer, the company’s president.

With oil selling at approximately $100 a barrel, the Taste of Texas Steakhouse in Houston — a popular spot for events held by BP, Shell and Exxon Mobil — is reveling in days of plenty.

Even those areas suffering the downturn can bank on considerable help on the way, economists say, as the impact of lowered interest rates kicks in later this year, encouraging businesses to expand and hire. Tax rebate checks to be mailed out by the government this spring may lubricate spending as well.

Despite fears that the odds for a particularly severe recession have now increased, Mr. Zandi still subscribes to the consensus that the economy will shrink only modestly during the first half of 2008, then resume expanding as more money washes through the system. That would limit the damage to the type of relatively modest recession that hit the economy earlier this decade.

For the country as a whole, recent data shows that the economy is deteriorating at an accelerating rate. From September to January, average home prices fell 6 percent compared with a year earlier. Consumer confidence has been plummeting. The private sector shed 26,000 jobs in January and 101,000 in February, while those out of work have stayed jobless longer, according to the Labor Department.

Now, the broader discomfort is filtering into cities and towns that only recently seemed beyond reach.

Seattle’s real estate market has slowed, but prices have held relatively steady. Even so, sales at the Pacific Supply Company, a hardware store in the Capitol Hill neighborhood, have fallen by 5 to 10 percent in the last few months.

“There’s a general sense of caution,” Michael Go, the store’s general manager, said.

Ritz Sisters sells gift items like soaps and chocolates to shops and catalogs throughout the Pacific Northwest. In recent months, orders have fallen by one-fifth, said Tim Creveling, a co-owner of the business.

“People are just hunkering down,” he said.

In Oklahoma City, Aunt Pittypat’s Catering has lost one-fifth of its business in the last two months, as $25,000 weddings are scaled down to smaller affairs.

“People are just being a lot more conservative,” said Maggie Howell, a co-owner. “They want crab and seafood, but they’re settling for cheese displays.”

In Cleveland, Lincoln Electric, which makes welding gear, has also experienced a slowdown. “Our growth is relatively anemic in North America,” said Vincent Petrella, its chief financial officer.

The slowdown has proved severe enough to poke a hole in the idea that sales abroad can carry the economy even if they dip at home.

In North Carolina, Power Curbers, which makes equipment that turns concrete into curbs, has been sending more gear abroad. But domestic sales plummeted by one-fourth during the first two months of the year, Dyke Messinger, the company’s president, said. In mid-February, Power Curbers laid off 6 of the 80 workers at its factory near Charlotte.

Many economists forecast that overall consumer spending will slip 1 percent for the first three months of the year.

“That’s a wow,” said Robert Barbera, chief economist for the trading and research firm ITG. “Outright declines for real consumer purchases are unusual.”

What is shaping up as the second recession of the 2000s is the product of declines in home values, which play a far bigger role in most Americans’ personal finances than the stock market. Households have borrowed against the increased value of their property to buy cars, send their children to college and add home theater systems.

“This is the bedrock asset for the lion’s share of the population of the United States,” Mr. Barbera said. “It’s not like dot-com stocks, where I bought Webvan for 1,000 times the imaginary earnings, and now it’s worth nothing but I go and have a beer. You’re talking about the value of people’s houses.”

As economists try to assess the likely contours of the unfolding downturn, many see parallels in the recession of 1990 and 1991.

Then, as now, the dollar was weak, oil prices were high and trouble started with a sharp slide in housing prices, followed by major losses for mortgage lenders. The resulting savings and loan crisis spurred a buyout that cost taxpayers $240 billion in inflation-adjusted terms, and it brought a severe tightness of credit.

That recession lasted eight months, slightly less than the average for downturns going back to 1946, according to the National Bureau of Economic Research. This one, though, could drag on longer, some economists say, because the underlying forces are more difficult to attack, even though Washington has been much more active, much earlier in lowering interest rates, sending out tax rebates and taking other measures to arrest an economic decline.

Back in the late 1980s, lending was concentrated in fewer hands. Once the government calculated the size of the problem in the saving and loan industry and assented to the bailout, confidence was restored and the wheels of finance turned anew.

This time, the size of the bad debts remains a mystery, with estimates reaching $400 billion. Markets fret that the next Bear Stearns could pop up anywhere.

The first signs of what became the mortgage crisis emerged back in August.

“Yet we’re still fighting it,” Mr. Darda said. “We’re still dealing with this paralysis.”

    Slump Moves From Wall St. to Main St., NYT, 21.3.2008,






Stocks Rally on Robust IBM Results


January 14, 2008
Filed at 11:18 a.m. ET
The New York Times


NEW YORK (AP) -- Wall Street advanced sharply Monday, with solid preliminary results from IBM encouraging investors to buy back into the stock market after last week's rout.

International Business Machines Corp., one of the 30 Dow Jones industrials, released preliminary earnings estimates for the fourth quarter that were 24 percent above year-earlier levels. The results also beat the forecast of analysts surveyed by Thomson Financial.

After falling nearly 250 points on Friday, the Dow rose more than 100 points Monday.

''The market was pretty oversold,'' said Richard E. Cripps, chief market strategist for Stifel Nicolaus. ''We were due to bounce back, and the IBM news didn't hurt.''

The badly beaten financial sector will remain under a microscope, however, after reports over the past week that Citigroup Inc. may have to take a larger-than-feared writedown; the bank's earnings report is due Tuesday.

Elsewhere in the sector, Merrill Lynch & Co. Inc. is seeking $4 billion, in a second capital raising to stanch the losses on its balance sheet, according to the Financial Times. The Kuwait Investment Authority could invest as much as $3 billion in the deal, which could be announced by the middle of the week.

In late morning trading, the Dow gained 116.98, or 0.93 percent, to 12,695.80. IBM was the biggest gainer in the Dow, rising $5.85, or 6 percent, to $103.52.

Broader stock indicators also rose. The Standard & Poor's 500 index added 8.65, or 0.62 percent, to 1,409.67 and the Nasdaq composite index shot up 24.83, or 1.02 percent, to 2,464.77.

With no major economic data on the calendar, investors focused on corporate and commodities news. Overnight in overseas trading, gold futures hit a record, venturing above $913 an ounce as the dollar tumbled against other major currencies. The euro reached a new high above $1.49.

Other commodities were higher, too. Crude oil futures rose 95 cents to $93.62 a barrel on the New York Mercantile Exchange.

Treasurys were trending slightly higher in early dealings. The yield on the benchmark 10-year Treasury note was 3.79 percent, down from 3.81 percent on Friday. Prices and yields trade in opposite directions.

In corporate news, General Motors Corp. Chief Financial Officer Fritz Henderson said that although the GMAC finance wing's auto loan delinquencies were up slightly in the third quarter from year-before levels, the problems for auto loans were not nearly as severe as the credit troubles in the real estate sector. GM sold control of GMAC in 2006 but still owns a large minority stake. GM rose 28 cents to $23.78.

Sears Holdings Corp. warned that its upcoming fourth-quarter report could show a decline as high as 51 percent from year-earlier levels, adding to concerns that economic weakness is slowing the retail sector. The company Monday forecast a result of $2.59 to $3.48 a share, which would be down from $5.33 a year before and a Thomson Financial forecast of $4.43 a share. Sears fell $6.25, or 6.5 percent, to $89.92.

Stocks sold off sharply last week after a chorus of Wall Street economists predicted the U.S. is about to slide into a recession. The Dow lost 1.51 percent during the week, the S&P 500 index dropped 0.75 percent and the Nasdaq gave up 2.58 percent. However, a recession cannot be declared until there are two quarters in a row of economic shrinkage as measured by gross domestic product data, and that has not occurred yet.

At the same time, the talk of economic weakness and recent pointed remarks by Federal Reserve Chairman Ben Bernanke have convinced investors the central bank will cut rates later this month. The expectation of cheaper money also bolstered sentiment Monday. The Fed's monetary policy committee will meet Jan. 29-30.

Advancing issues outnumbered decliners by about 9 to 5 on the New York Stock Exchange, where volume came to 324.9 million shares.

The Russell 2000 index of smaller companies rose 4.76, or 0.68 percent, to 709.41.

Overseas, the Tokyo stock market was closed for a holiday Monday. In Europe London's FTSE 100 rose 0.70 percent, Germany's DAX advanced 0.41 percent and Paris' CAC 40 gained 0.78 percent.


On the Net:

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

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

Stocks Rally on Robust IBM Results, NYT, 14.1.2008,






Treasurys Drop

As Funds Flow to Stocks


January 14, 2008
Filed at 11:31 a.m. ET
The New York Times


NEW YORK (AP) -- Treasury prices generally fell Monday as investors turned their attention back to stocks and bonds gave up their safe-haven allure.

Worries about a possible recession have stoked strong demand for Treasurys and other assets that carry a safety premium in the year to date. The fear is that the contagion from subprime mortgages and a deteriorating housing sector will infect the rest of the economy.

But Monday, investors' attention shifted to developments in other markets, including the rally in stocks, a historic rise in gold futures above $900 an ounce and a new high for the euro at $1.49.

''The Treasury market is trading lower this morning as traders are likely just taking a little money off the table after last week's fear-laden price rally,'' said Kevin Giddis, managing director of fixed income trading at Morgan Keegan.

The benchmark 10-year Treasury note fell 2/32 to 103 21/32 with a yield of 3.80 percent, up from 3.79 percent late Friday. Prices and yields move in opposite directions.

The 30-year long bond was flat at 110 1/32 with a yield of 4.38 percent, unchanged from late Friday.

The 2-year note fell 1/32 to 101 9/32 with a yield of 2.57 percent, matching its Friday close.

The worries about economic weakness and recent pointed remarks by Federal Reserve Chairman Ben Bernanke have left many investors convinced that the Federal Reserve will reduce the overnight Federal funds target at its next meeting Jan. 29-30.

On Monday there was speculation that the sharp rise in gold prices and the new low for the dollar could even compel the Fed to cut rates before the scheduled meeting, according to Ashraf Laidi, chief foreign exchange analyst at CMC Markets.

The recent Treasury rallies have featured very strong demand for 2-year notes, which are the most rate-sensitive. These rallies have pushed the yield on 2-year notes to its lowest level in almost three years.

The difference between the yields of 2- and 10-year notes, popularly known as the yield curve, on Monday was 1.23 percentage points, its greatest gap in three years, according to Laidi's calculations. This is a classic signal that investors expect the Fed to cut rates as they often push short-term yields in the direction that they believe official rates will take.

Treasurys Drop As Funds Flow to Stocks,
aponline/business/AP-Bonds.html - broken link






October 26, 1929


The Wall Street bubble is pricked


From the Guardian archive


Saturday October 26, 1929



This leader is from the first day of the Wall Street crash when, as the paper reported, £1bn was wiped off share values.

We have known many financial crises in this country, but never a gambling crisis of the magnitude witnessed in the past few days in America.

There is nothing the matter with American trade; there has been no setback in industrial prosperity; nothing has happened to cause the collapse except the pricking of a bubble.

The bubble was the belief, widely acted upon if not consciously realised, that it is possible to buy a security for a certain sum of money, to sell it again later at a higher price, and to continue the process indefinitely. The astonishing thing was that the process had been going on for several years almost without interruption. This was partly due to the fact that American industry progressed steadily and that its increasing profits did justify increasing security values.

But this basis of good reason served mainly to stimulate the public expectation of quick capital appreciation. It is very easy to secure by capital appreciation in a month a return greater than a full year's dividend.

And as this was what many people actually succeeded in doing, month by month and even year by year, it is perhaps not surprising that some of them almost came to believe that they could go on doing it for ever. The greater the number of people who were persuaded to act upon this belief the truer it seemed to be. Until at last a large part of the nation seems to have gone security mad and to have thought of little else but how to raise money to put into some Stock Exchange security.

To what extent the purchases were financed on credit it is impossible to say, but clearly the amount of borrowing was so considerable as to cause grave concern to the authorities of the Federal Reserve banking system.

They resorted to the traditional method of curbing Stock Exchange speculation by a restriction of credit; but with little or no effect, owing, apparently, to the growth of the investment trust and the accumulation of resources outside the control of the federal reserve system

So at last the dawn of a speculator's paradise seemed to have broken. Up to a few weeks ago there was nothing to indicate how soon the illusion was to be shattered.

The process of disillusionment has been unusual. A purely financial and gambling crisis has in the past generally come to a head without warning. But in this case there have been warnings.

From the Guardian archive,
October 26, 1929,
The Wall Street bubble is pricked,
Republished 26.10.2006,










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