Friday, May 16, 2008

Ex-Army Corps Consultant Indicted in Bribery Case

Ex-Army Corps Consultant Indicted in Bribery Case

By Cain Burdeau

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New Orleans - A former Army Corps of Engineers consultant and a dirt subcontractor were indicted Thursday on bribery charges stemming from an investigation into levee work after Hurricane Katrina.

Durwanda Elizabeth Morgan Heinrich, a dirt, sand and gravel subcontractor, was accused of conspiring with two former corps workers to get confidential bid information for a $16.8 million levee project southwest of New Orleans in September 2006.

In exchange, the indictment said, Heinrich promised to give the workers, Kern Carver Bernard Wilson and Raul Miranda, 25 cents for every cubic yard of material used to build levees near Lake Cataouatche.

The arrangement would have funneled $299,375 each to Wilson and Miranda, the Justice Department said.

Heinrich was charged by a federal grand jury in New Orleans with one count of conspiring to commit bribery and two counts of offering a bribe to a public official.

Wilson, who was working for the corps as a consultant on the levee enlargement project, was charged with one count of conspiring to commit bribery and one count of demanding and agreeing to accept a bribe as a public official.

Each faces a maximum of five years in prison and fines if convicted on the conspiracy charge and a maximum of 15 years in prison and fines on each bribery charge.

The Justice Department did not return calls seeking information on lawyers for those indicted, and phone listings could not be found for the accused.

Maj. Timothy Kurgan, a corps spokesman in New Orleans, declined to comment Thursday but said his agency had turned over information about alleged wrongdoing to the Army's criminal investigation division.

Miranda, who pleaded guilty in September to bribery, was a construction manager for Integrated Logistical Support Inc., a New Orleans civil engineering firm hired to help the corps manage some of its projects.

Miranda, 50, of Spring, Texas, faces up to 15 years in prison and heavy fines at sentencing in October.

The investigation surrounding the Lake Cataouatche project has been the only case of criminal wrongdoing in levee work so far prosecuted by the Justice Department.

After Katrina hit the Louisiana and Mississippi coasts, flooded 80 percent of New Orleans and killed more than 1,600 people, Congress gave the corps billions of dollars to repair damaged levees and upgrade others.

The Lake Cataouatche levees protect an area of suburbs and small towns on the western side of the Mississippi River.

Senate Rejects Media Consolidation

Senate Rejects Media Consolidation

By Christopher Kuttruff

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On Thursday night, the US Senate initiated the process of overturning an FCC ruling made in December to allow for greater media consolidation.

The joint resolution (S.J Res. 28) passed by an overwhelming margin in a voice vote on the Senate floor.

The resolution, originally sponsored by Sen. Byron Dorgan (D-North Dakota), was cosponsored by Sens. Hillary Clinton (D-New York), Barack Obama (D-Illinois), Olympia Snowe (R-Maine), and a long list of others.

"Today, the Senate stood up to Washington special interests by voting to reverse the FCC's disappointing media consolidation rules that I have fought against," said presidential candidate Barack Obama. "It is essential that the FCC promotes the public interest and diversity in ownership."

Senator Dorgan's communications director Justin Kitsch noted to Truthout, "The next step is for the House to take up the resolution. Senator Dorgan certainly hopes it will move quickly."

Congressman Jay Inslee (D-Washington) has introduced a measure similar to Dorgan's in the House.

The vote demonstrated a strong rebuke of the FCC's controversial rule, (FCC 07-216), which eliminated the 1975 ban on a company from owning both a newspaper and broadcast outlet within a single market.

"The FCC is supposed to be a referee for the media industry, but instead they've been cheerleaders in favor of more consolidation," Dorgan said in a statement regarding the Senate resolution. "Diverse, independent and local media sources are essential to ensuring that the public has access to a variety of information."

The FCC's decisions in December, and its policies since early in the Bush administration, have drawn a flood of criticism from individuals angered by what they see as an irresponsible and partisan stance of broad deregulation.

Chairman Kevin Martin has been accused of divisive leadership, lacking in accountability and transparency.

Martin has become the subject of a Congressional investigation headed by Congressmen John Dingell (D-Michigan) and Bart Stupak (D-Michigan).

Staff members of the FCC voiced their discontent with Martin's tenure in a memo to Dingell and Stupak. "The bottom line is that the FCC process appears broken and most of the blame appears to rest with Chairman Martin," the memo said.

The December FCC ruling on media ownership was split 3-2 along party lines and prompted fervent disapproval from citizens and government officials (both Republicans and Democrats). STOPBIGMEDIA.com claimed that the Senate received thousands of calls and around 250,000 letters urging response to the FCC's actions.

"The FCC must not be allowed to relax its media cross-ownership rules," Dorgan said. "More consolidation means fewer choices for consumers, and that is not in the public's best interest. There has been massive public outcry to these new rules, and they must be overturned."

President Bush has threatened to veto any legislation that overturns the FCC's decision.

Danger: Tough Talk & Wishful Thinking

Danger: Tough Talk & Wishful Thinking

By Robert Parry

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If the American people should have learned one lesson from the past seven years, it is that the careless mix of tough talk and wishful thinking gets good people killed – and pushes even powerful nations to the brink of bankruptcy.

Yet, the current and possibly future Republican presidents combined these two dangerous elements on the same day: George W. Bush eschewing “appeasement” in the Middle East and John McCain offering a dreamy image of military victory in Iraq by 2013.

On May 15, in Columbus, Ohio, McCain put his listeners in some imaginary time machine and plopped them down in the happy future at the end of his first term.

“By January 2013, America has welcomed home most of the servicemen and women who have sacrificed terribly so that America might be secure in her freedom,” McCain said.

“The Iraq War has been won. Iraq is a functioning democracy, although still suffering from the lingering effects of decades of tyranny and centuries of sectarian tension. Violence still occurs, but it is spasmodic and much reduced.”

Meanwhile, half a world away speaking to the Israeli Knesset in Jerusalem, Bush showed off his vintage tough guy-ism, mocking Americans, such as Democratic presidential frontrunner Barack Obama, who favor talks with Iran and other Middle East adversaries.

“Some seem to believe that we should negotiate with the terrorists and radicals, as if some ingenious argument will persuade them they have been wrong all along,” Bush said, shaking his head in disgust.

“We have an obligation to call this what it is: the false comfort of appeasement, which has been repeatedly discredited by history.”

Bush then likened these “appeasers” to British Prime Minister Neville Chamberlain and other political leaders in the 1930s who tried to negotiate with Adolf Hitler.

Back in Ohio, asked about Bush’s speech, McCain embraced Bush’s harsh rhetoric.

“Yes, there have been appeasers in the past, and the President is exactly right, and one of them is Neville Chamberlain,” McCain said.

The ‘Cakewalk’

But there might be a more recent historical analogy that comes to the minds of American voters: rather than Chamberlain’s false hope about “peace in our time,” Americans might recall the wishful thinking of pro-Bush neoconservatives promising a flower-strewn “cakewalk” for the U.S. troops invading Iraq in 2003.

The voters also might remember how the Bush administration aimed its tough talk at American skeptics of the Iraq War whose patriotism was questioned and whose judgment was ridiculed. [For details, see the book, Neck Deep: The Disastrous Presidency of George W. Bush.]

Then, in 2004, as the Iraqi insurgency grew and American casualty lists lengthened, President Bush continued to dangle the prospect of “victory” just around the corner to get the American voters to give him a second term.

In 2007, with Americans growing increasingly angry over the war, Bush came up with the “surge” that supposedly would do the trick, finally. Despite favorable press clippings, it’s now clear that the “surge” only bought Bush time to run out his presidency.

So, more than five years into the war – with more than 4,000 American soldiers dead, tens of thousands maimed and hundreds of thousands of Iraqis killed, not to mention total war costs estimated in the trillions of dollars – Sen. McCain is now dusting off the prospect of a glorious outcome if the voters only buy in for another four-plus years.

The Arizona senator seems to be counting on the lingering visceral appeal of Bush’s good-guy-bad-guy dichotomy, combined with patriotic paeans to the can-do capabilities of the U.S. troops.

The residual appeal of this tough-talk-and-wishful-thinking blend is that it plays on both the public’s hatred for an “enemy” depicted as pure evil and America’s characteristic hopefulness about the future.

For Americans brought up with the macho myths of Clint Eastwood and John Wayne, there’s a strong bias in favor of shooting the “bad guys,” not talking to them.

Plus, since the future is unknowable, there’s the added benefit that Bush-McCain glorious predictions can’t be proved wrong, at least until long after the election.

The Bush-McCain approach also continues to paint war critics, who favor using more diplomacy, as effete, naïve and unpatriotic. They’re disdained for viewing the “bad guys” as possibly having at least some legitimate grievances and for doubting the boundless capacity of the U.S. troops to achieve “victory.”

In recent weeks, McCain has sought to link Obama to Hamas, the radical Palestinian organization that governs Gaza, because a Hamas spokesman expressed hope that an Obama presidency might lead to a better day in the Middle East.

Though it’s unclear what an Obama presidency actually might do – since the Illinois senator has denounced Hamas as a “terrorist” organization and his maneuvering room regarding Iran and Syria would be limited – McCain appears to be betting on a willingness of the American voters to approve at least a four-year renewal of Bush’s bellicose approach to the Middle East.

The real test of the Obama campaign – assuming he secures the Democratic nomination – will be whether he can sell a more nuanced approach to foreign policy as hard-headed realism, not soft-hearted idealism.

But the battle lines have now been drawn.

On one side is a commitment from America to fight what the neocons call “the Long War,” “the clash of civilizations,” or simply “World War III.” On the other, there is the belief that reason and negotiations still can work to spare the world an open-ended conflict that could escalate into a global catastrophe.

The Bush-McCain “Long War” position trusts that the old appeals will get American voters to reenlist for four more years, while Obama is counting on a new public attitude that is more willing to seek compromise and less eager to rely on violence.

Obama’s gamble rests on his assessment that the American people have taken to heart a painful lesson about the dangers of mixing tough talk and wishful thinking.

Chalmers Johnson on Our ‘Managed Democracy’

Chalmers Johnson on Our 'Managed Democracy'

By Chalmers Johnson
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US workers paying the price for Wall Street’s debacle

US workers paying the price for Wall Street’s debacle

By Barry Grey

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The Federal Reserve Board, with the full backing of the Bush administration, Congress and both political parties, has carried out a massive and unprecedented intervention to avert an imminent collapse of the US banking system and bolster the major Wall Street finance houses.

The Fed’s decision in March to underwrite with $29 billion of its own funds the takeover of investment bank Bear Stearns by JPMorgan Chase, in order to prevent the collapse of Bear Stearns, and its even more extraordinary move to allow major investment banks to avoid a similar fate by borrowing directly from its coffers, was a signal that the US government would marshal whatever resources were necessary to rescue the banking system from the consequences of the speculative binge that had generated billions in salaries and bonuses for the Wall Street elite.

While the government bailout, ultimately to be financed from public funds, has seemingly averted an immediate banking collapse, it has done nothing to address the underlying crisis. Rather, the Fed and the US corporate-financial establishment hope that it has created the conditions for a more orderly “deleveraging” of the financial system, i.e., a liquidation of trillions in vastly inflated and unmarketable assets, in which the social and economic pain is borne overwhelmingly by working class and middle class families.

The Fed’s actions have restored a measure of confidence to the financial markets, reflected in a stock market rally that has driven the Dow Jones Industrial Average back toward the 13,000 level. At the same time, the Fed and most financial analysts are acknowledging that the US housing collapse and credit crunch have precipitated an economic slowdown that will likely be protracted.

Addressing a conference of the Federal Reserve Bank of Atlanta on Tuesday, Federal Reserve Board Chairman Ben Bernanke said that financial markets were improving but “remain far from normal.” He said the decision in March to allow investment firms to obtain emergency loans from the Fed “seems to have bolstered confidence.”

But, he cautioned, the crisis would not be resolved quickly. “Ultimately,” he said, “market participants themselves must address the fundamental sources of financial strains through deleveraging, raising new capital and improving risk management, and this process is likely to take some time.”

Whatever the technical indices of the slump—not a few experts have taken to denying that the US is in a recession or heading for one—ordinary working people in the United States are suffering a major cut in their living standards. Job losses are mounting, wages are declining, work hours are being reduced and prices for essentials such as food and gasoline are soaring.

In a word, the underlying historical and economic processes that produced the crisis on Wall Street are making the vast majority of Americans poorer. And we are only at the beginning of this process.

The impact of the economic crisis on the general population was reflected in a Washington Post-ABC News poll released Tuesday, which reported that 68 percent of people surveyed said they were concerned about their ability to maintain their standard of living. The biggest factor cited by respondents was the sharp rise in consumer prices.

A separate poll released by ABC showed economic anxiety to be at its highest point on record since 1981.

In the Post-ABC poll, the nearly 70 percent who said they were worried about maintaining their lifestyles represented a 17 percent jump since December of last year. The growing anxiety reported by respondents cut across party and income lines, “spreading rapidly among Republicans, people from rural areas and those from middle- and upper-income households,” according to the Post.

The newspaper said that nearly six in ten people from households with an annual income of $100,000 or higher said they were worried, up from a third in December. Of those who identified themselves as Republicans, 56 percent expressed concern, up from 32 percent.

Twenty percent cited higher gasoline prices as the single most important economic issue, and about a third pointed more generally to rising prices as the primary cause of their apprehension. Two-thirds called rising gasoline prices a financial hardship, including a third who said higher fuel prices were a severe burden.

There is, of course, a very real basis for these concerns. Just on the question of gasoline, the Energy Department reported that the average cost of gas rose 11 cents in the past week alone, and has gone up 33 cents over the past month on its way to over $4 a gallon.

According to a report issued Wednesday by the Labor Department, food prices shot up 5.1 percent in April over a year earlier, and 0.9 percent from the previous month. Both of these gains are the biggest since 1990. The spike in food prices was propelled by increases in the price of bread, fruit, coffee and other consumer staples.

Health care costs have risen 4.3 percent in the past 12 months.

Prices for imported goods—a direct reflection of the precipitous decline of the US dollar—rose 1.8 percent in April from March. They have soared 15.4 percent from last year, the biggest year-to-year increase since such records began to be kept in 1982.

Meanwhile, real weekly wages have fallen compared to a year earlier in every month since October.

A major component of the “deleveraging” process is an assault on jobs by means of downsizing, restructuring and corporate bankruptcies. The last three months have seen, according to the Labor Department, a net loss of 180,000 jobs in the US. Aside from construction and manufacturing, where job cuts continue to escalate, the financial sector is bearing the brunt of the job-cutting.

It is estimated that so far this year 50,000 financial jobs have been slashed. More than 23,000 financial-related US job cuts were announced in April, according to the outplacement firm Challenger, Gray & Christmas. That increased the total to 49,825 in the first four months of this year—nearly as many job cuts as were announced in all of 2007.

This, however, is only the first stage of what promises to be a far larger job-slashing process. Last week, the Swiss bank UBS announced it will lay off 5,500 employees in the US and Britain. Lehman Brothers is expected to announce that it is eliminating 5 percent of its employees, or about 1,425 positions, on top of a previously announced 5 percent cutback in its work force.

By the end of June, Morgan Stanley plans 1,500 more job cuts. This puts total layoffs at Morgan Stanley at about 4,500, or 10 percent.

Citigroup on May 9 announced a plan to shed up to $500 billion of assets and slash some $15 billion off its cost base. The bank did not say how many jobs would be eliminated, but the figure will likely be in the tens of thousands. The bank has already announced 13,000 job cuts.

The crushing impact of job losses and price rises continues to undermine retail sales. The Commerce Department reported Tuesday that retail sales fell another 0.2 percent in April from the previous month. This smaller-than-expected drop obscures the dramatic slump in consumer spending in key manufacturing sectors. Auto sales fell 2.8 percent in April, after a 0.5 percent drop in March.

The Federal Reserve issued a report on US manufacturing Thursday which showed that the slump in that critical sector is deepening. Industrial production declined 0.7 percent in April, more than twice the drop forecast by economists.

The financial crisis is taking a growing toll in the form of corporate bankruptcies. Corporate bankruptcy filings rose in the US last month more than 50 percent over the previous year’s figure.

In the financial sector itself, losses from failed mortgage-related assets and bad debts continue to mount, reflecting the underlying insolvency of major sections of the financial system. Last week, American International Group, the world’s largest insurance firm, announced a record $7.8 billion loss in the first quarter of 2008. This brought the company’s loss to $13.1 billion over the past two quarters. AIG has written down $20 billion in credit derivative contracts since December.

The deepening financial crisis of Fannie Mae and Freddie Mac, the two major mortgage companies that are sponsored by the US government, is indicative of the way in which the crisis on Wall Street is being offloaded onto the government. Freddie Mac on Wednesday reported a loss of $151 million in the first quarter of 2008. The market responded to this lower-than-expected loss by driving the company’s stock up by 9 percent.

However, the reported figure was achieved by means of accounting gimmicks that concealed an actual loss of $2 billion. The previous week, Fannie Mae reported a first quarter loss of $2.2 billion. Its stock also shot up.

The two companies suffered more than $9 billion in mortgage-related losses last year, and are sitting on as much as $19 billion in additional losses that they have not yet fully acknowledged, analysts say. Their combined cushion of $83 billion underpins a colossal $5 trillion in debt and financial commitments—a level of leverage that is unsustainable.

But in the aftermath of the bursting of the housing bubble, the government has allowed them to expand their loans while lowering their capital cushions. This is because the two government-backed firms are essentially taking over the mortgage financing business that has been dumped by the banks and investment firms.

As the New York Time reported last week, “As Wall Street all but abandons the mortgage business, Fannie Mae and Freddie Mac now overwhelmingly dominate it, handling more than 80 percent of all mortgages bought by investors in the first quarter of this year. That is more than double their market share in 2006.”

In a separate article on Thursday, the Times explained the reason for the stock market’s enthusiasm for the shares of the two companies. “‘Both these companies are clearly going to be insolvent by the end of the year, but everyone knows that Congress will do anything to keep them afloat, because if Fannie and Freddie go under, the entire global financial system will melt down,’ said Christopher Whalen, a founder of Institutional Risk Analytics, an independent research firm. ‘These companies’ earnings don’t matter. Their accounting hardly matters. People buy the stock because they believe the federal government will bail them both out if things get really bad.’”

No such bailout is in the works for the millions of families that are losing their homes as a result of the mortgage crisis.

Foreclosure filings surged 65 percent in April from April 2007, according to a report issued Wednesday by RealtyTrac. One in every 519 households received a foreclosure filing—the highest such figure since the real estate tracking company began issuing foreclosure reports in January 2005. Nationally, 243,353 homes were facing foreclosure last month. That amounts to 2 percent of all homes.

Foreclosure filings rose in all but eight states. The hardest hit states included Arizona, California, Florida and Nevada. Analysts expect the foreclosure rate to continue to rise, spiking in the third and fourth quarters of this year.

Fed's Direct Loans to Banks Climb to Record Level

Fed's Direct Loans to Banks Climb to Record Level

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The Federal Reserve's direct loans of cash to commercial banks climbed to the highest level on record in the past week as money-losing lenders increasingly turn to the central bank for funds.

Funds provided through the so-called discount window for banks rose by $2.8 billion to a daily average of $14.4 billion in the week to May 14, the central bank said today in Washington. Separately, the Fed's loans to Wall Street bond dealers rose by $75 million to $16.6 billion.

Policy makers have increased the attractiveness of direct loans as they seek to alleviate the impact of the credit crunch. Fed Chairman Ben S. Bernanke said two days ago that while markets have improved, they remain ‘‘far from normal,'' adding that the central bank is prepared to increase its twice monthly auctions of funds to banks.

‘‘The Fed is providing an extraordinary amount of liquidity through various mechanisms,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. While ‘‘credit markets are showing signs of improvement'' there is ‘‘a long way to go,'' he said.

Fed officials have reduced the cost of direct loans to a quarter-point above the benchmark overnight lending rate between banks. In March, they extended the term of the loans to commercial banks to 90 days. The discount rate is now 2.25 percent, compared with the three-month London Interbank Offered Rate for the dollar of 2.72 percent.

‘Good Sign'

‘‘The fact that banks are willing to take advantage of it may be a good sign for the market,'' said Louis Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. ‘‘They're willing to take advantage of cheap money and'' lend it on to customers, he said.

Bernanke today urged banks to raise more capital to help limit damage to the economy. Banks and securities companies have raised about $244 billion of capital since July, after writedowns and credit losses in excess of $333 billion.

Fed policy makers in March created the Primary Dealer Credit Facility to offer direct loans to the 20 brokers that trade Treasury securities directly with the New York Fed. The resource allows Wall Street banks to borrow money at the discount rate overnight.

As of May 14, there was $14.5 billion of loans outstanding in the primary-dealer program, while commercial banks had $13.4 billion of discount-window loans, the Fed reported.

Bear Stearns

The central bank doesn't disclose who is borrowing from the discount window or other facilities. Bear Stearns Cos. had borrowed $32.5 billion from the Fed as of March 21, according to a JPMorgan Chase & Co. regulatory filing on April 11. The Fed provided $29 billion of financing to secure JPMorgan's takeover of the investment bank in March.

Bank of America Corp. Chief Executive Officer Kenneth Lewis urged policy makers today to choose between bailing out Wall Street investment banks or letting the ‘‘hotbeds of risky financial innovation'' fail as the market dictates.

‘‘I understand the argument for opening up the Fed's discount window to investment banks in this environment,'' Lewis said in a speech today at New York University's Stern School of Business. ‘‘But I'd also say that providing a public backstop to an inherently risky business that is not required to backstop itself is a tough sell for taxpayers.''

Fed holdings of U.S. Treasury securities fell $22.3 billion for a daily average of $520.1 billion. The central bank had about $713 billion of Treasuries two months ago.

Net Miss

There was one net miss, on May 14, the Fed said. A net miss occurs when the actual reserve level in the banking system diverges from the Fed's projections for a day by $2 billion or more. If the level is outside expectations, the federal funds rate can deviate from target.

The central bank also reported that the M2 measure of money supply rose by $1.1 billion in the week ended May 5. That left M2 growing at an annual rate of 6.7 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.

During the latest reporting week, M1 fell by $7 billion. Over the past 52 weeks, M1 declined 0.1 percent. The Fed no longer publishes figures for M3.

Oil Rises to Record Above $127

Oil Rises to Record Above $127 on Goldman Report, China Demand

By Mark Shenk

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Crude oil rose above $127 a barrel for the first time, leading commodities higher, after Goldman Sachs Group Inc. raised its forecast and on speculation Chinese diesel purchases will strain supplies.

Goldman boosted its price estimate for the second half of this year to $141 a barrel, from $107, citing supply constraints. China may increase fuel imports to generate power after the most powerful earthquake in 58 years killed more than 22,000 and damaged hydroelectric plants. Oil and commodities, including gold and platinum, also advanced on the falling dollar.

‘‘We can blame Goldman again,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. ‘‘In March 2005 they predicted that prices would rise dramatically, and they did. Prices jumped to the $125 level after another Goldman report less than two weeks ago. At this point nobody wants to bet against Goldman.''

Crude oil for June delivery rose $2.80, or 2.3 percent, to $126.92 a barrel at 10:11 a.m. on the New York Mercantile Exchange. The contract climbed to $127.82 today, the highest since trading began in 1983. Prices have doubled in the past year.

Brent crude oil for July settlement rose $2.69, or 2.2 percent, to $125.32 a barrel on London's ICE Futures Europe exchange. The contract touched a record $126.34 today.

$148 Oil

West Texas Intermediate, the benchmark crude-oil grade traded in New York, will rise to $135.30 in the third quarter and $145.60 in the fourth quarter, Goldman said in the report. Prices will increase further in 2009, averaging $148 a barrel, according to the report written by analysts including Peter Oppenheimer and Jeffrey Currie.

Goldman analyst Arjun N. Murti wrote in a report on May 6 that ‘‘the possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months.'' Murti first wrote of a ‘‘super spike'' in March 2005, predicting crude may trade between $50 and $105 a barrel through 2009.

‘‘The Goldman report gives fund managers an excuse to push prices higher,'' said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York.

Confidence among U.S. consumers fell in May to the lowest level in almost 28 years as record-high fuel prices, lower home values and fewer jobs rattled Americans. The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 59.5, the weakest since June 1980, from 62.6 in April.

The dollar fell against the euro amid speculation the U.S. economy will remain weaker than in the 15 nations that use the European currency. The dollar decreased 0.3 percent to $1.5495 per euro at 9:59 a.m. in New York, from $1.5448 yesterday.

Commodity Records

The falling dollar and higher world demand for raw materials led to records in commodities including gold, corn, soybeans and rice this year. The UBS Bloomberg Constant Maturity Commodity IND' ))">Index, which tracks 26 raw materials, rose 1.6 percent to 1567.44 today. The index is up 39 percent from a year ago.

PetroChina International Co., the trading unit of PetroChina Co., the country's biggest oil producer, has already purchased 400,000 tons, or 2.9 million barrels, of diesel for June. That's in addition to the 200,000 tons that China International United Petroleum & Chemicals Corp., the nation's largest trader, bought for the month.

‘‘People are really focused on China right now,'' said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta. ‘‘When a market moves on such minute data points, it is usually near some sort of inflection point. I think once we move from the June to July contact and we get evidence of weak Memorial Day demand, the market will become more rational.''

The June contract on the Nymex expires May 20.

Driving Season

U.S. gasoline demand increases during the summer, when Americans take to the highways for vacations. The peak- consumption period lasts from the Memorial Day weekend in late May to Labor Day in early September.

Gasoline futures for June delivery rose 5.82 cents, or 1.8 percent, to $3.224 a gallon in New York. Prices touched a record $3.2438 a gallon today.

U.S. pump prices are following futures higher. Regular gasoline, averaged nationwide, rose 1.1 cents to a record $3.787 a gallon, AAA, the nation's largest motorist organization, said today on its Web site.

President George W. Bush will ask Saudi Arabia to increase oil production to help lower prices during a visit to Riyadh this weekend, White House spokeswoman Dana Perino told reporters traveling on Air Force One. Saudi Arabia is the world's largest oil exporter and the most influential member of the Organization of Petroleum Exporting Countries.

U.S. Consumer Sentiment Decreases to 28-Year Low

U.S. Consumer Sentiment Decreases to 28-Year Low

By Shobhana Chandra

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Confidence among U.S. consumers fell in May to the lowest level in almost 28 years as record-high fuel prices, lower home values and fewer jobs rattled Americans.

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 59.5, the weakest level since June 1980, from 62.6 in April. The measure averaged 85.6 in 2007.

Consumer spending, the biggest part of the economy, is cooling as surging food and fuel costs erode Americans' buying power and job losses mount. Declining home prices and stricter lending rules are also preventing owners from tapping real- estate equity to buy expensive items like cars and furniture, raising the risk that growth will stall in coming months.

‘‘The consumer is getting extremely grumpy,'' said Brian Bethune, director of financial economics at Global Insight Inc. in Lexington, Massachusetts, who forecast confidence would drop to 59.6. ‘‘The economy is flirting with a recession. The only thing keeping it out is this huge amount of pump-priming going on,'' including Federal Reserve interest-rate reductions, the government's stimulus package and discounts by retailers.

The confidence index was forecast to fall to 62, according to the median of 65 economists surveyed by Bloomberg News. Estimates ranged from 58.5 to 66.4.

Housing Starts

Earlier today, a Commerce Department report showed construction of single-family houses in April dropped to the lowest level in 17 years, even as building of condominiums and townhouses rebounded. Builders broke ground on 692,000 single units at an annual rate, the fewest since January 1991.

Total housing starts jumped 8.2 percent to a 1.032 million rate as construction of multifamily units rose 36 percent following a 35 percent drop in March.

The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, dropped to 51.7 from 53.3.

A gauge of current conditions, which reflects Americans' perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, decreased to 71.7, the lowest level since December 1980, from 77.

Consumers said they expect an inflation rate of 5.2 percent over the next 12 months, compared with 4.8 percent in the April survey. Longer-term, Americans projected prices would increase 3.3 percent, up from a 3.2 percent estimate last month.

The preliminary Reuters/University of Michigan consumer confidence report reflects about 300 responses, compared with 500 households for the final survey.

Record Gasoline

Regular unleaded gasoline prices reached a record $3.79 a gallon at the pump yesterday, and have jumped 24 percent since the start of the year, according to AAA.

Credit also is getting harder to obtain, subduing demand for items with bigger price tags. Industry figures showed cars and light trucks sold at an annual pace of 14.4 million in April, the fewest in almost a decade.

Still, reports indicate spending was holding up heading into the second quarter. Retail sales excluding vehicles rose 0.5 percent in April, according to the Commerce Department. Including cars, purchases dropped 0.2 percent last month.

Some companies are faring better. Macy's Inc., the second- biggest department-store chain, reported a first-quarter profit excluding one-time costs, and beat analysts' estimates for a loss. Macy's kept inventories lean ‘‘given the weakened level of consumer confidence,'' Chief Executive Office Terry Lundgren said in a statement on May 14.

‘Challenging' Environment

Sales in May are off to ‘‘a very good start,'' Macy's Chief Financial Officer Karen Hoguet said on a conference call. Still, the retail environment will be ‘‘challenging'' until at least the third quarter, she predicted.

Economic growth will drop to a 0.1 percent annual rate in the second quarter, while consumer spending is projected to slow to a 0.5 percent rate, the smallest gain in almost 17 years, according to the median estimate in a monthly Bloomberg survey.

The $117 billion in tax-rebate checks included in the Bush administration's stimulus plan will lead to a rebound in spending in the third quarter, followed by a deceleration by year-end, the Bloomberg poll showed.

In the two weeks since the payments started, the government sent out $27.2 billion in rebates, the Treasury Department said on May 9.

Single-Family Construction Hits 17-Year Low

U.S. Builders Broke Ground on Fewest Houses Since '91

By Courtney Schlisserman

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Construction of U.S. single-family houses in April dropped to the lowest level in 17 years, even as building of condominiums and townhouses rebounded.

Builders broke ground on 692,000 single-family homes at an annual rate, the fewest since January 1991, the Commerce Department said today in Washington. Total IND' ))">housing starts jumped 8.2 percent to 1.032 million as construction of multifamily units rose 36 percent following a 35 percent drop in March.

‘‘There may be signs that we are getting close to a bottom but we don't think we're there yet,'' said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. ‘‘The housing market still has a ways to go towards working off its problems.''

Lower prices and other incentives have yet to revive demand for houses, indicating builders will need to come up with even more discounts to attract buyers. Stricter lending rules, job losses and growing pessimism about the economy signal sales will not rebound quickly.

Treasuries dropped in the minute after the release, before retracing some of the losses later. Yields on benchmark 10-year notes rose to 3.85 percent at 9:56 a.m. in New York, from 3.82 percent late yesterday.

Building permits, a sign of future construction, rose 4.9 percent to a 978,000 pace, reflecting gains in both single- and multifamily units.

Economists Forecasts

Economists forecast starts would fall to an annual pace of 939,000, according to the median 73 projections in a Bloomberg News survey. Estimates ranged from 875,000 to 1 million. Building permits were projected to fall to a 915,000 annual rate, according to the Bloomberg survey.

Builders' confidence continues to flag. The National Association of Home Builders/Wells Fargo sentiment index fell one point to 19 this month, the group said yesterday. All three components of the gauge fell, with the reading on current sales of single-family homes reaching a record low.

‘‘The trends are horrific,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, who had the closest housing-starts estimate in Bloomberg's survey. ‘‘There's just no reason things are getting any better. Why would you buy a house? Why would you spend money to buy a depreciating asset?''

Regional Pattern

Starts increased in three of four regions, led by a 24 percent jump in the Midwest. Construction rose 19 percent in the West and 3.6 percent in the South. Starts dropped 13 percent in the Northeast.

Residential construction has subtracted from economic growth since the first three months of 2006, culminating in a 27 percent drop at an annual rate in the first quarter. That was the biggest decline since 1981.

Home construction and property values ‘‘seem likely to decline well into 2009,'' Federal Reserve Bank of San Francisco President Janet Yellen said May 13. She also said the risks around her forecasts are ‘‘unusually large because of uncertainty'' about financial markets, housing and commodity prices.

The economy expanded at a 0.6 percent annual pace in the first quarter, according to Commerce Department data. Economists surveyed by Bloomberg forecast growth from April through June would slow to a 0.1 percent pace and consumer spending would advance at a 0.5 percent rate, the smallest increase in 17 years.

Toll Brothers

Toll Brothers Inc., the largest U.S. luxury-home builder, said May 13 that revenue declined for an eighth straight quarter and that most housing markets remain depressed.

The number of potential buyers at its developments was the ‘‘worst we've ever seen,'' Chief Executive Officer Robert Toll said on a conference call.

A jump in foreclosures, as values fall and adjustable-rate mortgage costs rise, is adding to concern. Foreclosure filings climbed 65 percent and bank seizures more than doubled in April compared with a year earlier, according to figures issued this week by RealtyTrac Inc.

Scholes, Nobel Laureate, Says Credit Crisis May Not Be Over

Scholes, Nobel Laureate, Says Credit Crisis May Not Be Over

By Vivien Lou Chen and Thomas R. Keene

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Myron Scholes, chairman of Platinum Grove Asset Management LP and 1997 winner of the Nobel Prize in economics, said the worst of the crisis in credit markets may not be over.

‘‘From my perspective, I think that we don't know if the storm has passed or if we are still in the eye of the storm,'' Scholes said in an interview with Bloomberg Radio yesterday. ‘‘Are there other shoes to drop and new events or new shocks that will come to the fore?''

Scholes's warning reflects financial markets that Federal Reserve Chairman Ben S. Bernanke this week said remain ‘‘far from normal.'' Financial institutions have been reluctant to lend to each other, driving up bank borrowing costs, since a flight from risk in August sparked by defaults on subprime mortgages.

‘‘In my view, this is probably as bad or worse than the 1989-1990 crisis and may even rival the worst crisis we've seen since the end of the Second World War,'' Scholes said. Former Fed Chairman Alan Greenspan has also said the turmoil is the most ‘‘wrenching'' since the war.

Scholes, 66, and Robert Merton won the Nobel Prize for economics in 1997 for their work in valuing options. His firm, Platinum Grove, is based in Rye Brook, New York.

Auction-Rate Market Loses $1.7 Billion for Taxpayers Misled by Governments

Auction-Rate Collapse Costs Taxpayers $1.65 Billion

By Michael Quint and Darrell Preston

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In 2003, the Culinary Institute of America outgrew a former Jesuit seminary building on its Hyde Park, New York, campus. So it asked Edward Shapoff, a Goldman Sachs Group Inc. banker on its finance committee, for advice on borrowing to pay for new housing and parking.

Shapoff recommended auction-rate bonds, securities that pay short-term interest rates yet don't come due for as long as 40 years.

‘‘The advice seemed quite reasonable,'' said Charles O'Mara, the institute's chief financial officer, who arranged three auction-rate bond sales totaling $56.8 million.

For about three years, the school's weekly auctions cost the institute as little as 0.7 percent. Then, in September 2007, rates began to rise when investors saw auctions of other debt fail to attract buyers and they grew concerned that bond insurers might be laid low by the subprime-mortgage contagion. By Feb. 19, after dealers halted a two-decade practice of buying bonds that didn't sell at auctions, the institute's rate peaked at 14 percent. Over the next 12 weeks, it paid $561,000 more in interest than it had in the previous 12.

‘‘Auction bonds had been around in the municipal market for 10 or 12 years and had worked well,'' O'Mara said. ‘‘Nobody knew then that bond insurers would plunge into subprime mortgages or banks would stop their support.''

$1.65 Billion

The Culinary Institute is among hundreds of borrowers facing an unexpected rise in financing costs. Across the country, local governments and operators of hospitals and schools that issued about $166 billion of auction-rate bonds -- about half of all such securities -- have paid an estimated $1.65 billion in additional interest since the market soured in September, according to data compiled by Bloomberg.

That money comes right out of the pockets of taxpayers, from New York to California, and organizations such as the Culinary Institute that are allowed to borrow in the municipal market.

Auction-rate securities, which increased to $330 billion over 24 years, are marked by a history of secrecy and dealer manipulation of borrowers and investors, according to U.S. Securities and Exchange Commission documents.

‘‘Proponents of auction bonds downplayed the risks for issuers and buyers, first by not talking about earlier problems, and then managing auctions to keep rates at levels that pleased everybody, at least for a while,'' said Joseph Fichera, chief executive officer of New York-based Saber Partners, which advises governments in their negotiations with banks.

Billions in Fees

Rates on the bonds are determined by bidding typically every 7, 28 or 35 days. If buyers are scarce, the auction fails and some bondholders who wanted to sell are left holding the securities. The issuer gets stuck with a penalty rate.

For investment banks, the bonds generated more than $1 billion in fees at the initial sale. They also received annual payments for handling the auctions of a quarter percentage point, or about $825 million a year based on the $330 billion outstanding before the collapse.

Bankers earned additional, undisclosed profit from arranging swaps intended to convert the variable interest rate on an auction bond to a fixed one. Culinary Institute, for example, expected the combination of auction-rate bonds and swaps to result in fixed borrowing costs of 3.36 percent to 3.68 percent on its three sales, less than O'Mara says it would have paid for ordinary fixed-rate bonds.

Wrong-Way Swaps

Most borrowers also entered into swaps where they agreed to make a fixed payment in exchange for variable payments from the banks arranging the transaction, according to Jeff Pearsall, a managing director at Philadelphia-based Public Financial Management, the largest adviser to U.S. municipalities.

For issuers, the variable rates they received, based on the London interbank offered IND' ))">rate, or Libor, roughly matched the cost of the bonds for more than five years. The relationship broke down this year as the bond rates soared and Libor fell.

‘‘We're spending the bulk of our time fixing broken, insured auction bonds, many of which have swaps attached,'' Pearsall said. ‘‘It tends to raise their cost of capital.''

After the market collapsed in February, the interest cost on New Jersey's $3.4 billion of auction-rate debt increased by $2 million a week, forcing the state to spend $17 million to convert it to other kinds of debt. Hospitals, athletic stadiums and other state and local borrowers saw monthly debt service rise.

Ignoring Risk

The combination of short-term borrowing costs and long-term debt also appealed to other issuers, such as student-loan agencies and closed-end mutual funds.

Investors ranging from Fortune 500 companies to individuals collected higher yields than they would have received from money-market funds or Treasuries, and ignored or were ignorant of the risk that they couldn't easily sell their investments if auctions failed. Many, like William Kannall, got caught with securities they couldn't unload when the market broke down.

Kannall, 64, who invested $500,000 in auction-rate securities in December 2007, learned in February that he couldn't get access to his money, which he needs for living expenses and to treat a disease that suppresses his immune system. The Spokane, Washington, resident said he has filed a complaint with the Financial Industry Regulatory Authority against the dealer who sold him the securities, A.G. Edwards Inc., now part of Wachovia Corp. Justin Gioia, a Wachovia spokesman, declined to comment on the case.

‘‘The brokers created and manipulated this market,'' Kannall said. ‘‘My broker told me A.G. Edwards always buys these and that they're safe.''

Failed Auctions

With auction-rate bonds, Wall Street firms had a product they could sell to corporate cash managers for a fee as much as four times greater than what they collected for alternatives. They also offered investors more yield than Treasury bills or money-market mutual funds.

Everyone was happy until the market collapsed when credit- market losses raised concerns that MBIA Inc. and Ambac Financial Group Inc., the two largest insurers in the auction-rate market, might lose their AAA ratings. Banks stopped bidding at auctions for their own accounts while they were absorbing more than $320 billion of losses on subprime mortgages.

By mid-February, Citigroup Inc., the largest underwriter of auction-rate bonds, held $11 billion of them, up from $8.1 billion at the end of 2007, the bank said when it reported a $5.1 billion loss for the quarter ended March 31.

Thousands of auctions failed, forcing issuers such as the Port Authority of New York & New Jersey to pay interest rates as high as 20 percent. The investors were left with securities they couldn't sell, though the bonds continued to pay interest.

‘Unsuspecting Public'

Investors bought the bonds seeking higher yields for money they wanted invested short-term, said Eduard Korsinsky, an attorney with the New York law firm of Levi & Korsinsky, which represents investors in lawsuits. They thought they would have quick access to the money because the securities were highly rated and often insured, he said.

‘‘This is something Wall Street foisted on an unsuspecting public,'' Korsinsky said.

Now, hundreds of individuals have filed lawsuits with Finra, saying they were misled about the safety of auction-rate securities. Some have seen the value of their investments decline as dealers who sold the bonds then wrote them down.

The Securities Industry and Financial Markets Association, which represents 650 securities dealers, defends the sellers' actions.

‘‘For 20 years the auction-rate market has met the needs of issuers and investors,'' said Leslie Norwood, managing director and associate general counsel for the group. The failure of the market ‘‘was completely unexpected, like a dam break,'' she said.

Father of the Bond

American Express Co. sold the first auction-rate securities in 1984, with a $350 million issue of money-market preferred shares with dividends reset at auction every 49 days. At that time, ‘‘the minimum purchase was $500,000, and buyers were treasurers of very large companies,'' said Ronald Gallatin, the former Lehman Brothers Holdings Inc. managing director who invented the securities.

Other banks copied Gallatin's idea, leading to sales by companies ranging from Citicorp, then the largest U.S. bank, to MCorp, a Dallas bank holding company that later collapsed.

The first unsuccessful auction occurred in 1987, when investors avoided auctions of MCorp's $62.5 million issue. Many corporate borrowers and banks, including Citicorp, now Citigroup, and Chase Manhattan Corp., now JPMorgan Chase & Co., turned their backs on the concept in the 1990s and retired the securities after interest rates exceeded 13 percent.

Manipulating the Market

From the beginning, banks were manipulating the market. In 1995, investors learned that Lehman settled allegations by the SEC that it improperly bid at some American Express auctions. Lehman, which the SEC said manipulated bids 13 times and prevented two auctions from failing, paid an $850,000 fine without admitting or denying wrongdoing.

The first tax-exempt auction-rate security was sold by Arizona-based Tucson Electric Power Co., now part of Unisource Energy Corp., in 1988. The utility's $121 million of bonds qualified for tax-free financing because they funded pollution- control equipment.

The deal worked because Goldman was expected to buy securities to ensure the auctions' success, said Susan Wallach, Tucson Electric's treasurer.

‘‘No one ever questioned the banks' liquidity,'' she said. ‘‘People were willing to take the credit risk.''

Municipal Explosion

In 1990, when Tucson Electric began losing money and its credit rating plunged, rates on the auction bonds rose to 12.6 percent. Investors soon found funds frozen because there weren't enough bidders. Bear Stearns & Co. was brought in to manage the auctions and convert the debt to bonds with a fixed rate of 7.25 percent.

The market took off after 2000, with sales of municipal auction-rate bonds exploding from $9.56 billion a year to more than $40 billion in 2003 and 2004, according to Thomson Reuters.

To avert failed auctions, bankers encouraged municipal issuers to insure bonds, bringing top ratings and investor confidence. Insurance promised investors they would receive principal and interest, not that they would be able to sell when they wanted, said Robert Fuller, principal at Capital Markets Management, a Hopewell, New Jersey-based financial adviser.

‘‘There was a misconception in the municipal market that the AAA ratings of bond insurers would create liquidity,'' Fuller said.

New York Study

Auction-rate bonds proved popular enough that they usually sold at yields lower than variable-rate demand bonds, or municipal debt that allows investors to seek repayment from a designated bank even if the dealer handling the bonds can't find buyers.

A study by the state of New York for the two years ended in September 2007 found that the average interest rate on its $4 billion of auction-rate bonds was 3.16 percent, or 0.27 percentage point below the 3.43 percent for its $4.2 billion of variable-rate demand bonds.

Because there is no bank guarantee of repayment, auction- rate issuers should pay more, not less, Saber's Fichera said.

The SEC began investigating alleged manipulation in the market in 2004. It asked dealers to review and report on how they conducted auctions. In the following years, auction-rate municipal bond sales fell to about $30 billion.

SEC Fines

In May 2006, the commission fined 15 dealers $13 million for manipulating the market, though the dealers didn't admit or deny wrongdoing. Rather than forcing them to abandon practices that had become standard, the SEC said the practices could continue as long as they were disclosed.

Norwood of the dealers' association denied that the market was manipulated. The 2006 SEC action was an example of market regulation and led to even more disclosure, she said.

The SEC action didn't appease Wisconsin's debt director, Frank Hoadley, who warned securities dealers in July 2006 to stop manipulating auctions. He said the term ‘‘auction'' was inaccurate because dealers controlled all information and influenced bids. The association didn't heed his call for greater disclosure.

‘‘There were a whole bunch of things that just didn't happen,'' Hoadley said.

The SEC was so unconcerned about possible failures that its list of material events requiring disclosure never included unsuccessful auctions.

‘Collapse and Fail'

‘‘I don't think the SEC ever envisioned that a market would just collapse and fail,'' said Daniel Johnson, managing partner at Chicago-based law firm Chapman & Cutler LLP and former head of its public finance group. ‘‘The focus in the past was on events that related to the underlying borrower,'' not the market in which the bonds are traded, he said.

Now, the commission is preparing rule changes to require additional disclosure, including information on the number and size of bids, Martha Haines, head of the SEC's municipal division, said at a meeting of government finance officials in Albany in April.

‘‘Investors and issuers need to know where the liquidity is coming from,'' Fichera said. ‘‘Is the auction one where there are only five bids and the bank is always buying for its own account? Or are there 175 bidders, and the bank rarely helps?''

If those disclosures had been in place sooner, ‘‘it might have limited the size of the auction-rate market to one that was sustainable,'' Haines said.

The lead-up to February's meltdown began in July, when MBIA and Ambac reported lower profits because of losses on securities backed by subprime mortgages. In August, insurers' subprime losses led to $1.8 billion of failed auctions for their own securities, according to Fitch Ratings.

‘Guilt by Association'

By September, as word of those auctions spread, IND' ))">yields of auction-rate securities for municipal borrowers rose above those of variable-rate bonds. George Friedlander, a Citigroup analyst, blamed higher rates on ‘‘guilt by association'' with unsuccessful auctions in the taxable market, where securities issued by subprime-tainted collateralized debt obligations had gone bust.

‘‘Investors are nervous that if there aren't enough buyers at the auctions, they have to rely on bids by dealers and might have to hold the bonds,'' said Richard Davis, assistant commissioner at the Utah Board of Regents, which began issuing the bonds in 1998.

Corporate investors started unloading auction-rate investments in the last half of 2007. By Jan. 1, they had sold off $70 billion, cutting holdings to $100 billion in six months, according to Treasury Strategies, a Chicago-based adviser to corporate treasurers.

Synoptics Stuck

Not everyone could sell. In October, Synoptics Communications Inc., a Santa Clara, California-based maker of local area network systems, was the first to reveal holdings of auction-rate bonds it couldn't dispose of. It was followed by other companies, from Silicon Valley startups to industry giants such as New York-based Bristol-Myers Squibb Co., which reported a $275 million loss on $811 million in investments in auction- rate securities, according to its earnings report for the last quarter of 2007.

At the same time, yields climbed. In November, the seven- day average rate for municipal auction-rate bonds reached 4.03 percent, almost half a percentage point higher than variable- rate demand bonds.

The market broke down the week of Feb. 13, as banks let dozens of auctions fall through. More than 60 percent of the thousands of auctions conducted each month have failed since then, Bloomberg data show. Interest rates on municipal bonds that come up for auction weekly rose to an average of 6.89 percent the week of Feb. 20, up from the average of 3.65 percent for 2007.

‘We Are Not Happy'

The banks' decision to stop supporting auctions reminded investors and issuers ‘‘that when push comes to shove, the banks will do what's best for their shareholders,'' the SEC's Haines said.

New York Attorney General Andrew Cuomo has issued subpoenas to at least 18 banks, including Merrill Lynch & Co., UBS AG and JPMorgan, seeking information about how they persuaded issuers to sell the bonds and how they decided to curb their bidding at auctions, a person familiar with the investigation said. Cuomo, along with a Massachusetts-led task force of nine other states, the SEC and Finra, which oversees brokerages, are examining dealer disclosures.

‘‘We are not happy with the way investment banks have performed,'' said David Brown, former executive director of the New York State Dormitory Authority, which issued $1.3 billion of auction-rate bonds for hospitals and private colleges, including the Culinary Institute, and $1.2 billion for the state. ‘‘This was a product sold to a lot of borrowers as being appropriate.''

The Market's Future

Many issuers are getting out of auction-rate debt and say they will never use it again. State and local governments have already replaced or announced plans to replace at least $66 billion of the securities, according to Bloomberg data. Many are switching to variable-rate demand bonds, whose 2.25 percent average in the past month is about half the 4.56 percent for auction-rate bonds. Others are stuck, unable to issue new debt. Some investment banks, including Citigroup, say the market will never come back.

‘‘It's a damaged product, and I can't imagine issuers using it again,'' said Wisconsin's Hoadley. ‘‘A lot of people will have to die and institutional memory go away before people will come back to it.''

The Municipal Securities Rulemaking Board and Sifma have put together proposals to address some of the complaints Hoadley and others made about the lack of transparency. The MSRB advised creating a Web site to disclose more information on auction results.

‘‘I hope it's not too late,'' the SEC's Haines said.

Gallatin, the father of auction-rate securities, doesn't hold out much hope. He expects auction-rate bonds will be replaced by other debt because too many investors and issuers lack confidence.

‘‘The back of the market is broken,'' he said. ‘‘I think the market's problem started with credit, but now credit isn't the problem.''