Friday, November 14, 2008

Wall Street's Bailout is a Trillion-Dollar Crime Scene

Wall Street's Bailout is a Trillion-Dollar Crime Scene

Why Aren't the Dems Doing Something About It?

By Naomi Klein

The Nation

The more details emerge, the clearer it becomes that Washington's handling of the Wall Street bailout is not merely incompetent. It is borderline criminal.

In a moment of high panic in late September, the U.S. Treasury unilaterally pushed through a radical change in how bank mergers are taxed -- a change long sought by the industry. Despite the fact that this move will deprive the government of as much as $140 billion in tax revenue, lawmakers found out only after the fact. According to the Washington Post, more than a dozen tax attorneys agree that "Treasury had no authority to issue the [tax change] notice."

Of equally dubious legality are the equity deals Treasury has negotiated with many of the country's banks. According to Congressman Barney Frank, one of the architects of the legislation that enables the deals, "Any use of these funds for any purpose other than lending -- for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. -- is a violation of the act." Yet this is exactly how the funds are being used.

Then there is the nearly $2 trillion the Federal Reserve has handed out in emergency loans. Incredibly, the Fed will not reveal which corporations have received these loans or what it has accepted as collateral. Bloomberg News believes that this secrecy violates the law and has filed a federal suit demanding full disclosure.

Despite all of this potential lawlessness, the Democrats are either openly defending the administration or refusing to intervene. "There is only one president at a time," we hear from Barack Obama. That's true. But every sweetheart deal the lame-duck Bush administration makes threatens to hobble Obama's ability to make good on his promise of change. To cite just one example, that $140 billion in missing tax revenue is almost the same sum as Obama's renewable energy program. Obama owes it to the people who elected him to call this what it is: an attempt to undermine the electoral process by stealth.

Yes, there is only one president at a time, but that president needed the support of powerful Democrats, including Obama, to get the bailout passed. Now that it is clear that the Bush administration is violating the terms to which both parties agreed, the Democrats have not just the right but a grave responsibility to intervene forcefully.

I suspect that the real reason the Democrats are so far failing to act has less to do with presidential protocol than with fear: fear that the stock market, which has the temperament of an overindulged 2-year-old, will throw one of its world-shaking tantrums. Disclosing the truth about who is receiving federal loans, we are told, could cause the cranky market to bet against those banks. Question the legality of equity deals and the same thing will happen. Challenge the $140 billion tax giveaway and mergers could fall through. "None of us wants to be blamed for ruining these mergers and creating a new Great Depression," explained one unnamed Congressional aide.

More than that, the Democrats, including Obama, appear to believe that the need to soothe the market should govern all key economic decisions in the transition period. Which is why, just days after a euphoric victory for "change," the mantra abruptly shifted to "smooth transition" and "continuity."

Take Obama's pick for chief of staff. Despite the Republican braying about his partisanship, Rahm Emanuel, the House Democrat who received the most donations from the financial sector, sends an unmistakably reassuring message to Wall Street. When asked on This Week With George Stephanopoulos whether Obama would be moving quickly to increase taxes on the wealthy, as promised, Emanuel pointedly did not answer the question.

This same market-coddling logic should, we are told, guide Obama's selection of treasury secretary. Fox News's Stuart Varney explained that Larry Summers, who held the post under Clinton, and former Fed chair Paul Volcker would both "give great confidence to the market." We learned from MSNBC's Joe Scarborough that Summers is the man "the Street would like the most."

Let's be clear about why. "The Street" would cheer a Summers appointment for exactly the same reason the rest of us should fear it: because traders will assume that Summers, champion of financial deregulation under Clinton, will offer a transition from Henry Paulson so smooth we will barely know it happened. Someone like FDIC chair Sheila Bair, on the other hand, would spark fear on the Street -- for all the right reasons.

One thing we know for certain is that the market will react violently to any signal that there is a new sheriff in town who will impose serious regulation, invest in people and cut off the free money for corporations. In short, the markets can be relied on to vote in precisely the opposite way that Americans have just voted. (A recent USA Today/Gallup poll found that 60 percent of Americans strongly favor "stricter regulations on financial institutions," while just 21 percent support aid to financial companies.)

There is no way to reconcile the public's vote for change with the market's foot-stomping for more of the same. Any and all moves to change course will be met with short-term market shocks. The good news is that once it is clear that the new rules will be applied across the board and with fairness, the market will stabilize and adjust. Furthermore, the timing for this turbulence has never been better. Over the past three months, we've been shocked so frequently that market stability would come as more of a surprise. That gives Obama a window to disregard the calls for a seamless transition and do the hard stuff first. Few will be able to blame him for a crisis that clearly predates him, or fault him for honoring the clearly expressed wishes of the electorate. The longer he waits, however, the more memories fade.

When transferring power from a functional, trustworthy regime, everyone favors a smooth transition. When exiting an era marked by criminality and bankrupt ideology, a little rockiness at the start would be a very good sign.

The Danger of Keeping Robert Gates

The Danger of Keeping Robert Gates

By Robert Parry

Go To Original

Press reports say Barack Obama may retain George W. Bush’s Defense Secretary Robert Gates as a gesture to war-time continuity, bipartisanship and respect for the Washington insider community, which has embraced Gates as something of a new Wise Man.

However, if Obama does keep Gates on, the new President will be employing someone who embodies many of the worst elements of U.S. national security policy over the past three decades, including responsibility for what Obama himself has fingered as a chief concern, “politicized intelligence.”

During a campaign interview with the Washington Post, Obama said, “I have been troubled by … the politicization of intelligence in this administration.” But it was Gates – as a senior CIA official in the 1980s – who broke the back of the CIA analytical division’s commitment to objective intelligence.

In a recent book, Failure of Intelligence: The Decline and Fall of the CIA, former CIA analyst Melvin A. Goodman identifies Gates as the chief action officer for the Reagan administration’s drive to tailor intelligence reporting to White House political desires. A top “Kremlinologist,” Goodman describes how Gates reversed a CIA tradition of delivering tough-minded intelligence reports with “the bark on.”

That ethos began to erode in 1973 – with President Richard Nixon’s appointment of James Schlesinger as CIA director and Gerald Ford’s choice of George H.W. Bush in 1976 – but the principle of objectivity wasn’t swept away until 1981 when Ronald Reagan put in his campaign chief, William Casey, as CIA director.

Casey then chose the young and ambitious Robert Gates to run the analytical division. Rather than respect the old mandate for “bark on” intelligence, “Bob Gates turned that approach on its head in the 1980s and tried hard to anticipate the views of policymakers in order to pander to their needs,” Goodman wrote.

“Gates consistently told his analysts to make sure never to ‘stick your finger in the eye of the policymaker.’”

It didn’t take long for the winds of politicization to blow through the halls of CIA headquarters at Langley, Virginia.

“Bill Casey and Bob Gates guided the first institutionalized ‘cooking of the books’ at the CIA in the 1980s, with a particular emphasis on tailoring intelligence dealing with the Soviet Union, Central America, and Southwest Asia,” Goodman wrote.

“Casey’s first NIE [National Intelligence Estimate] as CIA director, dealing with the Soviet Union and international terrorism, became an exercise in politicization. Casey and Gates pushed this line in order to justify more U.S. covert action in the Third World.

“In 1985, they ordered an intelligence assessment of a supposed Soviet plot against the Pope, hoping to produce a document that would undermine Secretary of State [George] Shultz’s efforts to improve relations with Moscow. The CIA also produced an NIE in 1985 that was designed to produce an intelligence rationale for arms sales to Iran.”

Hyping Soviet Power

One of the key distortions pushed by Casey and Gates was the notion that the Soviet Union was a military behemoth with a robust economy – rather than a decaying power with a shriveling GNP. The logic of the Casey-Gates position was that exaggerating the Soviet menace justified higher U.S. military spending and U.S. support for bloody brush-fire wars – central elements of Reagan’s foreign policy.

Since the mid-1970s, the CIA’s analytical division had been noting cracks in the Soviet empire as well as signs of its economic-technological decline. But that analysis was unwelcome among Reagan’s true-believers.

So, in 1983 when CIA analysts sought to correct over-estimations of Soviet military spending – to 1 percent a year, down from 4 to 5 percent – Gates blocked the revision, according to Goodman.

From his front-row seat at CIA headquarters, Goodman watched in dismay as Gates used his bureaucratic skills to consolidate the agency’s new role underpinning favored White House policies.

“While serving as deputy director for intelligence from 1982 to 1986, Gates wrote the manual for manipulating and centralizing the intelligence process to get the desired intelligence product,” Goodman stated.

Gates promoted pliable CIA careerists to top positions, while analysts with an independent streak were sidelined or pushed out of the agency.

“In the mid-1980s, the three senior [Soviet division] office managers who actually anticipated the decline of the Soviet Union and Moscow’s interest in closer relations with the United States were demoted,” Goodman wrote, noting that he was one of them.

“The Reagan administration would not accept any sign of Soviet weakness or constraint, and CIA director Casey and deputy director Gates made sure intelligence analysis presented the Russian Bear as threatening and warlike,” Goodman wrote.

These institutional blinders remained in place for the rest of the 1980s.

“As a result, the CIA missed the radical change that Mikhail Gorbachev represented to Soviet politics and Soviet-American relations, and missed the challenges to his rule and his ultimate demise in 1991,” Goodman wrote.

When the Soviet Union – the CIA’s principal intelligence target – collapsed without any timely warning to the U.S. government, the CIA analytical division was derided for “missing” this historic moment. But the CIA didn’t as much “miss” the Soviet collapse as it was blinded by Gates and other ideological taskmasters to the reality playing out in plain sight.

Goodman was not alone in identifying Gates as the chief culprit in the politicization of the CIA’s intelligence product. Indeed, Gates’s 1991 confirmation hearing to be George H.W. Bush’s CIA director marked an extraordinary outpouring of career CIA officers going public with inside stories about how Gates had corrupted the intelligence product.

There also were concerns about Gates’s role in misleading Congress regarding the secret Iran-Contra operations in the mid-1980s, an obstacle that had prevented Gates from getting the top CIA job when Casey died in 1987.

Plus, in 1991, Gates faced accusations that he had greased his rapid bureaucratic rise by participating in illicit or dubious clandestine operations, including helping Republicans sabotage President Jimmy Carter’s Iran hostage negotiations in 1980 (the so-called October Surprise case) and collaborating on a secret plan to aid Iraq’s dictator Saddam Hussein (the Iraqgate scandal).

Despite significant evidence implicating Gates in these scandals, he always managed to slip past relying on his personal charm and Boy Scout looks. For his 1991 confirmation, influential friends like Senate Intelligence Committee Chairman David Boren, D-Oklahoma, and Boren’s chief of staff George Tenet made sure Gates got the votes he needed.

In his memoir, From the Shadows, Gates credited his friend, Boren, with clearing away the obstacles. “David took it as a personal challenge to get me confirmed,” Gates wrote. (Tenet’s help on Gates also earned him some chits with the Bush Family, which paid off in 2001 when Tenet was Bill Clinton’s last CIA director and was kept on by George W. Bush, whom he served loyally, if incompetently.)

After getting confirmed in 1991, Gates remained CIA director until the end of George H.W. Bush’s presidency. However, even after Bill Clinton removed him in 1993, Gates never wandered far from the Bush Family orbit, getting help from George H.W. Bush in landing a job as president of Texas A&M.

Damaging Documents

During the Clinton years, documents surfaced implicating Gates in questionable actions from the 1980s, but the new evidence got little notice.

For instance, the Russian government sent an extraordinary intelligence report to a House investigative task force in early 1993 stating that Gates had participated in secret contacts with Iranian officials in 1980 to delay release of 52 U.S. hostages then held in Iran, a move that undercut President Carter.

“R[obert] Gates, at that time a staffer of the National Security Council in the administration of Jimmy Carter, and former CIA Director George Bush also took part” in a meeting in Paris in October 1980, the classified Russian report said.

In the 1980s, Moscow was very interested in the U.S. dealings with the new Islamic government of Iran, a neighboring country to the Soviet Union.

In July 1981, the Soviets even shot down an Argentine-registered plane that strayed into Soviet airspace while delivering a supply of weapons from Israel to Iran with the Reagan administration’s secret knowledge and blessing.

The Russian allegation about Gates and the Paris meeting in October 1980 also didn’t stand alone. The House task force had other evidence from French and Israeli intelligence officials, as well as witnesses from the arms-trafficking field, corroborating reports of Reagan-Bush contacts with Iranian officials in Europe during Campaign 1980.

However, the House task force never followed up on the Russian report because when it arrived – on Jan. 11, 1993 – the chairman, Rep. Lee Hamilton, D-Indiana, had already decided to get rid of the October Surprise case as part of a sweeping clean of investigations into alleged Reagan-Bush wrongdoing.

Years later, Lawrence Barcella, the task force’s chief counsel, told me that in late 1992 evidence implicating the Republicans in the October Surprise caper had begun pouring in, so much so that he urged Hamilton to extend the investigation several months.

Instead, Hamilton ordered the inquiry wrapped up – and the October Surprise allegations rejected – all the better to start the new Clinton administration with a bipartisan gesture to the Republicans.

Like much of the other incriminating evidence, the Russian report was shoved into a box and stuck in a remote Capitol Hill storage room. I discovered it in late 1994 after gaining access to the task force's documents.

By then, however, there was almost no media interest in the “old” scandals of the Reagan-Bush years. Not only were those stories dated, but many of the central players were either dead or – like Gates – out of government.

[For details on the October Surprise case, see Robert Parry’s Secrecy & Privilege. For the text of the Russian report, click here. To view the actual U.S. embassy cable that includes the Russian report, click here.]

Iraqgate Scandal

Gates also was implicated in a secret operation to funnel military assistance to Iraq in the 1980s, as the Reagan administration played off Iran and Iraq battling each other in the eight-year-long Iran-Iraq War.

Middle Eastern witnesses alleged that Gates worked on the secret Iraqi initiative, which included Saddam Hussein’s procurement of cluster bombs and chemicals used to produce chemical weapons for the war against Iran.

Gates denied all the Iran-Iraq accusations in 1991, and Boren’s Senate Intelligence Committee never pressed too hard to check them out.

However, four years later – in early January 1995 – Howard Teicher, one of Reagan’s National Security Council officials, added more details about Gates’s alleged role in the Iraq shipments.

In a sworn affidavit submitted in a Florida criminal case, Teicher stated that the covert arming of Iraq dated back to spring 1982 when Iran had gained the upper hand in the war, leading President Reagan to authorize a U.S. tilt toward Saddam Hussein’s Iraq.

The effort to arm the Iraqis was “spearheaded” by CIA Director William Casey and involved his deputy, Robert Gates, according to Teicher’s affidavit.

“The CIA, including both CIA Director Casey and Deputy Director Gates, knew of, approved of, and assisted in the sale of non-U.S. origin military weapons, ammunition and vehicles to Iraq,” Teicher wrote.

Ironically, this same pro-Iraq initiative involved Donald Rumsfeld, then Reagan’s special emissary to the Middle East. An infamous photograph from 1983 shows a smiling Rumsfeld shaking hands with Saddam Hussein.

Teicher described Gates’s role as far more substantive than Rumsfeld’s. "Under CIA Director [William] Casey and Deputy Director Gates, the CIA authorized, approved and assisted [Chilean arms dealer Carlos] Cardoen in the manufacture and sale of cluster bombs and other munitions to Iraq,” Teicher wrote.

However, like the Russian report, the Teicher affidavit was never seriously examined or explained.

After Teicher submitted it to a federal court in Miami, the affidavit was classified and then attacked by Clinton administration prosecutors. They saw Teicher’s account as disruptive to their prosecution of a private company, Teledyne Industries, and one of its salesmen, Ed Johnson.

Gates benefited, too, from Official Washington’s boredom with – and even hostility toward – Reagan-Bush-I-era scandals.

Instead, the polite and personable Gates continued to enjoy influential protectors on both sides of the aisle, from Republicans around George H.W. Bush to Democrats like David Boren and Lee Hamilton.

Plus, some of Gates's CIA protégés, such as former Deputy Director John McLaughlin, were liked by Democrats as well as Republicans. (McLaughlin was a member of Obama’s intelligence advisory group during Campaign 2008.)

Great Timing

Gates’s connections – and his timing – served him well when he was placed on the Iraq Study Group in 2006 along with its co-chairs, Lee Hamilton and Bush Family lawyer James Baker. By fall 2006, the ISG was moving toward recommending a drawdown of U.S. forces in Iraq.

Meanwhile, President George W. Bush found himself in need of a new Defense Secretary to replace Donald Rumsfeld, who had grown disillusioned with the Iraq War.

Though Rumsfeld was viewed publicly as a hardliner, privately he sided with his field commanders, Generals George Casey and John Abizaid, in favoring a smaller U.S. “footprint” in Iraq and a phased withdrawal. Rumsfeld put his views in writing on Nov. 6, 2006, the day before congressional elections.

With Rumsfeld going wobbly, Bush turned to Gates and – after getting Gates’s assurance that he would support Bush’s intent to escalate the war, not wind it down – Bush offered him the job.

Rumsfeld’s firing and Gates’s hiring were announced the day after the Nov. 7 elections and were widely misinterpreted as signs that Bush was throwing in the towel on Iraq.

Rumsfeld’s memo was disclosed by the New York Times on Dec. 3, 2006, two days before Gates was scheduled for his confirmation hearing. [See’s "Gates Hearing Has New Urgency."]

But Democrats on the Senate Armed Services Committee were so enthralled by the false narrative of Bush tossing over the ideologue (Rumsfeld) in favor of the realist (Gates) that they took no note of what the real sequence of events suggested, that Bush was determined to send more troops.

Gates was whisked through to confirmation with no questions about the Rumsfeld memo and with unanimous Democratic support. Sen. Hillary Clinton and other senior Democrats praised Gates for his “candor.”

Within a few weeks, however, it became clear that Bush – with Gates’s help – had bamboozled the Democrats.

Not only did Bush dash the Democrats’ hopes for a bipartisan strategy on Iraq by junking the ISG recommendations, but he chose to escalate by adding 30,000 new troops. Instead of negotiating with Iran and Syria as the ISG wanted, Bush sent aircraft carrier strike groups to the region.

For his part, Gates joined in pummeling the Democrats by suggesting that their legislation opposing the "surge" was aiding and abetting the enemy.

“Any indication of flagging will in the United States gives encouragement to those folks,” Gates told reporters at the Pentagon on Jan. 26, 2007. “I’m sure that that’s not the intent behind the resolutions, but I think it may be the effect.”

During Campaign 2008, Gates also opposed Obama’s plan to set a 16-month timetable for withdrawing U.S. combat forces from Iraq.

Nevertheless, Gates remains a favorite of the Washington insiders, many of whom – like Lee Hamilton – have expressed warm support for the idea of keeping him on at least for the early part of the Obama presidency.

If the President-elect is serious about taking that advice, he first might want to review the extensive evidence of Gates’s devious behavior and consider whether Gates deserves the trust of the American people – and their newly elected government.

While Paulson Waffles, the White House Dawdles, and Congress Dithers, the Economy Continues to Burn.

While Paulson Waffles, the White House Dawdles, and Congress Dithers, the Economy Continues to Burn

Go To Original

So, $290 billion into his bailout plan, Hank Paulson is calling for a do-over. Now there is a confidence booster.

Providing "I-told-you-so" talking points to the what's-the-rush crowd, the Secretary of the Treasury announced yesterday that the government is no longer going to use any of the $700 billion Congress allocated to the Troubled Asset Relief Program (TARP) to buy, well, Troubled Assets from financial institutions -- the original centerpiece of the plan.

Instead, Paulson is looking to fortify the financial industry by continuing to buy premium stock in banks (aka the Warren Buffett approach). Unfortunately, instead of sending Paulson a thank you note in the form of increased consumer lending, the banks are depositing the government checks and taking a wait and see approach. (Among the things they've seen: another $40 billion handed over to AIG.)

This is not to say that Paulson's midstream direction change is a bad thing -- indeed, the lip service he's now paying to putting the focus on consumers is encouraging -- but it shows just how uncertain official Washington is about how to keep the economy from imploding.

In the meantime, oversight of the massive bailout plan remains a mirage -- undermined by White House inaction and Congressional turf wars.

Remember all the promises that the $700 billion in taxpayer money would be closely supervised? No blank checks here, we were told. A special inspector general was going to be picked by the White House and Congress was going to hand-select an oversight panel.

But despite over a quarter of a trillion dollars having already been doled out by Paulson, so far both the inspector general position and the five Congressional Oversight Panel slots remain unfilled.

The White House appears ready to nominate New York prosecutor Neil Barofky as inspector general, though it's up in the air how quickly Congress would confirm him (if they confirm him at all). Among the looming issues, a squabble between the Senate Banking Committee and the Senate Finance Committee over which would have control of the confirmation process.

"It's a mess," said Eric Thorson, the Treasury Department's inspector general, who has been doing fill-in oversight duty until the special inspector general is confirmed. "I don't think anyone understands right now how we're going to do proper oversight of this thing."

Bartender, another round of lack of confidence for everyone.

Unfortunately, while Paulson waffles, the White House dawdles, and Congress dithers, the economy continues to burn.

The number of Americans filing new claims for unemployment last week -- 516,000 -- was the most since September 2001, in the wake of 9/11. And the number of people continuing to collect unemployment -- 3,897,000 -- was the highest it's been in 25 years.

"The labor market is deteriorating more rapidly than previously thought," Andrew Gledhill, economist at Moody's, told CNNMoney.

In the past week, Ford said it would cut salaried employment costs by 10 percent, global delivery company DHL said it was cutting 9,500 jobs1,300 job cuts. The list goes on and on: Circuit City, Pizza Hut, Morgan Stanley, Condé Nast, Yahoo, US Steel, Cesna, and QVC. and financial service provider Fidelity Investment announced

According to the Department of Labor, 240,000 jobs were lost in October, bringing the total of 2008 pink slips to 1.2 million. The unemployment rate is 6.5 percent, the highest it's been in 14 years.

On the housing front, another 84,868 homes were lost to foreclosure in October; there have been 936,439 home foreclosures since August 2007. And the housing future continues to look bleak: in October, 279,561 borrowers received at least one foreclosure-related notice, including default notices, notices of auction sales and bank repossessions, according to RealtyTrac. One in every 452 housing units received one of these. Nevada, Arizona, and Florida had the country's top three foreclosure rates.

Despite the carnage in the housing market, the White House continues to offer what the New York Times labeled "pathetic responses" and inadequate "half measures." And much-discussed legislation allowing bankrupt homeowners to rework their mortgages in court remains in a holding pattern, awaiting action from the lame duck Congress. I wouldn't hold my breath.

January 20th cannot arrive fast enough for the American people.

World Bank forecasts falling trade, global recession and rising poverty

World Bank forecasts falling trade, global recession and rising poverty

By Peter Symonds

Go To Original

In the lead-up to tomorrow’s G-20 summit in Washington, the World Bank released figures this week confirming that the global economy is rapidly heading into recession. Its global outlook predicted a growth rate of just 1 percent for the world as a whole in 2009 and a contraction of 0.1 percent for the high-income countries.

As if to confirm the forecast, Germany officially entered recession yesterday for the first time in five years, after announcing its second consecutive quarterly contraction—0.5 percent in the third quarter. EU figures to be published soon are expected to show the entire eurozone is already in recession after a 0.2 per cent drop in GDP from April to June. Japan’s third quarter figures to be released next week are also likely to show a second successive contraction.

The Organisation for Economic Cooperation and Development (OECD), which covers the world’s major industrialised economies, issued similar gloomy forecasts yesterday. The OECD predicted contractions in 2009 of 0.9 percent, 0.1 percent and 0.5 percent for the US, Japan and the eurozone, respectively. OECD economist Jorgen Elmeskov told the Financial Times that the “mess” stemmed from a financial crisis that was engulfing rich and poor countries alike.

World Bank President Robert Zoellick said on Tuesday that developing countries were increasingly seeking financial assistance. He said that his organisation expected that lending would more than double from $13.5 billion last year up to $35 billion this year. He noted that “countries that had very good, sound macro-economic programs [like] Mexico, Indonesia” were worried about getting financing and seeking World Bank assistance.

The World Bank revised its 2009 growth figures for developing countries sharply downwards from its June estimate of 6.4 percent to 4.6 percent. Excluding the world’s largest cheap labour platforms India and China, the forecast for developing countries in 2009 is just 5.2 percent. The forecast for Latin America and the Caribbean was just 2.2 percent, followed by 3.5 percent for two other regions—developing countries in Europe and Central Asia, and the Middle East and North Africa.

The global financial crisis has already witnessed large withdrawals by foreign investors from developing economies—fuelled both by fears of growing risk and to shore up balance sheets at home. The World Bank expects private capital flows into developing countries to almost halve, from $1 trillion last year to around $530 billion in 2009. Even this investment will not be evenly spread, with countries like China and India absorbing the largest share.

The World Bank also highlighted the rapid decline in international trade—a key indicator of a global slump—forecasting a large contraction of 2.5 percent in world trade volumes for 2009. This is a precipitous fall from an expected growth of 5.8 percent this year and of nearly 10 percent just two years ago in 2006. Alongside plunging oil prices, the World Bank predicts that prices for non-oil commodities will fall by 23.2 percent in 2009.

World Bank president Zoellick told the press on Tuesday: “It is our estimate that trade could actually fall, not grow more slowly or have growth fall, but actually fall next year, for the first time since 1982… What we are seeing is that the falloff is not just due to slip in demand, although that will happen, but our rough estimate is that some 80 percent of the decline is due to problems of credit.”

The slump in world trade is underlined by statistics released this week for major exporters. Preliminary official figures in India showed a 15 percent decline in exports last month compared to a year earlier—the first such fall in five years. The Financial Times estimated that Indian exports could drop by another 25 percent this month as a result of falling international demand and a weakening currency that has pushed up the cost of imported raw materials.

The picture was similar in Japan where finance ministry figures for the first 20 days of last month showed a 9.9 percent decline in exports from a year earlier. South Korean exports in the first 10 days of this month fell 26 percent compared to the same period last year. The latest US trade figures released yesterday showed a slump in exports of 6 percent in September and in imports by a record 5.6 percent, mainly due to falling oil prices.

The Financial Times on Wednesday highlighted another record increase in China’s trade surplus month of 20 percent. However, the figure was not driven by increased growth in exports, which declined slightly, but by a large drop in imports, reflecting declining commodity prices and falling orders from companies in China in expectation of slowing export demand. Around half of China’s imports of commodities and parts are re-exported as finished products. Yesterday, government figures for October showed industrial output grew by just 8.2 percent—the lowest in seven years.

Another sharp indicator of slowing world trade is a dramatic fall in freight prices and volumes. The Baltic Dry Index (BDI)—a composite of shipping prices for various dry bulk products such as iron ore, grain, coal and bauxite/alumina—has crashed more than 11-fold from 11,793 points in May to 891 in early November. According to Bloomberg, the largest cargo ships, known as capesize ships, are now unable to charge much more than their daily operating costs and have been forced to cut ship speeds to economise on fuel.

International Air Transport Association figures show air freight traffic dropped by 7.7 percent in September—the steepest fall since the body began compiling data in January 2003. Piers Global Intelligence Solutions forecast this week that the number of full shipping containers entering the US this year would fall by 7.6 percent compared to last year. In the third quarter, Volvo AB, the world’s second largest truck manufacturer, had just 155 European orders for new rigs as compared to 41,970 in the third quarter of 2007—an indication of an expected plunge in road transport volumes.

Falling demand, collapsing commodity prices and the international credit crunch are all impacting most heavily on the world’s poorest countries and thus on hundreds of millions of people who are already poverty stricken. The World Bank estimates that every one percent decline in the growth rate of developing countries pushes an additional 20 million people into poverty. On the basis of the World Bank forecasts, that means an additional 40 million people will join the world’s poor next year.

During his press conference on Tuesday, World Bank President Zoellick pleaded for G-20 leaders not to lose sight of the human crisis being created by the global economic turmoil. “As always, it is the poorest and most vulnerable who are the hardest hit,” he said, adding that it would be “an error of historic proportions” if the developed countries ignored the interests of developing countries.

Brookings Institute analyst Eswar Prasad told the Financial Times: “Many of these lower and middle-income countries don’t have much fiscal space: much of it has been used up trying to buffer the effects of the food price crisis. It’s a question of whether the financial crisis is going to make life desperate or just difficult.” He pointed to the Philippines, Vietnam and sub-Saharan countries as being on the brink of serious financial crisis.

A World Bank report last month concluded that 100 million people have already been added to the world’s poor as a result of high fuel and food prices. While oil prices have dropped, food prices have only moderated and the food crisis continues. The study found that poverty was not only spreading but deepening. “Eighty-eight percent of the increase in urban poverty depth in the wake of rising food prices is from poor households becoming poorer and only 12 percent from households falling into poverty,” it stated.

Malnourishment is expected to afflict nearly 1 billion people by the end of the year. “The FAO estimates that in 2007, 923 million people were undernourished compared with 848 million in 2004. We estimate that by the end of 2008 up to 967 million people (or an additional 44 million people) will be undernourished largely due to the rise in global food prices,” the report commented. The worst affected countries such as Burundi, Madagascar, Niger, Timor Leste and Yemen are those which already have the highest indices of stunting and wasting.

The World Bank finances available to provide loans and aid are pitifully inadequate and pale into insignificance compared to the trillions of dollars being poured by the US, Europe and Japan into bailing out banks and financial institutions, and into stimulus packages to slow the plunge into recession. On top of $100 billion over three years broadly available for developing countries, the World Bank has just $42 billion to allocate in grants and low-interest loans to the poorest countries.

In appealing to the G-20 to pay attention to developing nations, World Bank President Zoellick—US President Bush’s former trade representative—pointed to the institution’s overriding concern which is the potential for the economic crisis to provoke social and political upheaval. Asked if social stability was at risk, he told the press conference: “Yes, I’ve been concerned since I identified this almost a year ago that, first with the food and fuel crisis, we pointed out that you were seeing riots and social upheavals in some 20 or 30 countries. There were some governments that were, you know, toppled.”

Even this guarded warning will have little impact on the G-20 leaders as they haggle in Washington tomorrow to defend the economic interests of their own wealthy elites at the expense of their competitors. Given that all of them are intent on offloading the burden of the economic crisis onto the backs of working people, their very last concern is for the plight of nearly a billion people around the world who do not have enough to eat each day.

Chicago mayor warns of “huge layoffs” in a “frightening” economy

Chicago mayor warns of “huge layoffs” in a “frightening” economy

By Barry Grey

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Chicago Mayor Richard Daley warned Wednesday of “huge” layoffs during the remainder of this year and into 2009. The chief executive of the third largest city in the US provided a stark indication of the scale of the developing slump not only in the Chicago region, but across the country.

Daley said that corporate leaders had told him, “This is going to be all year, so it’s going to be a very frightening economy.” He continued, “Each one tells me what they’re laying off, and they’re going to double that next year. We’re talking huge numbers of permanent layoffs for people in the economy. It’s going to have a huge effect on all businesses.”

Comparing the situation to the Depression years of the 1930s, he said, “We never experienced anything like this except [those] people who came from the Depression. When you have that many layoffs early—and they’re telling me this is only the beginning of their layoffs—that is very frightening.”

Daley also warned that local governments would face bankruptcy and might not be able to meet their payrolls, although he said he was not worried about paying City of Chicago employees.

The Chicago mayor’s remarks coincided with new data and corporate reports that show the US economy is sharply contracting. The Labor Department on Thursday reported that initial claims for unemployment benefits for the week ended November 8 jumped 32,000 to a seasonally adjusted 516,000—a seven-year high and a greater increase than analysts had expected. It was the first time initial jobless claims topped 500,000 during the current slowdown.

The number of individuals continuing to seek unemployment benefits rose to 3.9 million, above analysts’ estimates of 3.85 million and the highest total since January 1983, the period of the previous worst recession since the Great Depression. The increase in continuing claims indicates that laid-off workers are taking longer to find a new job.

The number of new jobless claims was the highest since late September 2001, during the last recession and in the aftermath of the 9/11 terrorist attacks. The Labor Department also revised upward its figure for the previous week by 3,000 to 484,000.

Last week the Labor Department reported that the official jobless rate in October had jumped to 6.5 percent. It said the ranks of the unemployed had swollen to 10.1 million.

Scott Brown, chief economists at Raymond James & Associates, said: “This is obviously very, very serious deterioration in the labor market, more than a lot of people had expected even a couple of months ago. We are looking at the biggest financial crisis since the Great Depression and the biggest economic crisis we have had in the United States since the early 1980s.”

Confirming that assessment, Challenger, Gray & Christmas, a Chicago-based outplacement consultancy, reported last week that job cuts in the US reached a five-year high in October. It said that downsizing had eliminated 876,000 jobs for the year, 14 percent higher than the total announced job cuts for all of 2007.

In October, job cuts reached 112,884, a 19 percent increase over September and 79 percent higher than October 2007.

Chief Executive Officer John Challenger said, “Job cuts are now rising across the board.”

In a separate report, the Bureau of Labor Statistics said Thursday that in the third quarter employers had initiated 1,330 mass layoff events that resulted in the separation of 218,158 workers from their jobs for at least 31 days. The total number of layoff events was 312 times higher in the third quarter of 2008 than the same period a year earlier and the number of associated separations increased by 58,134.

Permanent closure of worksites occurred in 15 percent of all extended mass layoff events and affected 50,025 workers during the third quarter of 2008.

Top executives of US private equity companies gathered for an international conference in Hong Kong issued dire warnings of the depth of the crisis. Co-founder of the private equity firm Carlyle Group, David Rubinstein, said, “The recession this time will be far deeper than what we’ve seen for quite some time.” He predicted the US unemployment rate would rise to 10 percent.

The managing director of Bain Capital, Paul Edgerley, predicted that US home prices would drop another 15 to 20 percent and forecast a “very deep recession, I think the worst we’ve seen in my lifetime.”

The past several days have seen new announcements of major layoffs across a range of economic sectors.

* US Steel said it is laying off 677 workers in the US and Canada because of weakening customer demand. The layoffs are effective immediately for 500 employees in the US and 177 in Canada. They affect the Pittsburgh area; northwest Indiana; Fairfield, Alabama; Ecorse and River Rouge, Michigan and Granite City, Illinois in the US. In Canada, the layoffs affect Hamilton and Erie.

* Applied Materials Inc., the number one chip equipment maker, said on Wednesday it will slash 1,800 jobs, or 12 percent of its workforce. The company warned that profit in the current quarter would fall far short of Wall Street expectations due to the weakening global economy. The Santa Clara, California-based firm forecast a 45 percent drop in fourth quarter profit.

“We view this downturn as deep and extended,” said Michael Splinter, Applied’s chief executive officer.

* Morgan Stanley outlined plans on Wednesday to cut 10 percent of the staff, some 2,000 employees, in its biggest business, the institutional securities group. The layoffs follow a 10 percent cut made earlier this year to the same group. The Wall Street firm also plans to cut 9 percent of the staff in its money management unit.

* Dow Jones & Co., the news and information provider, is cutting jobs and reducing costs in its enterprise media group. Officials of the firm, which was bought last year by Rupert Murdoch’s News Corp. and publishes the Wall Street Journal, did not specify the number of job cuts.

Retailers issued quarterly reports reflecting a drastic decline in consumer spending and pointing to a disastrous holiday shopping season. The consumer electronics giant Best Buy said comparable store sales fell 7.6 percent in October, after a smaller decline in September. It said sales at its stores open at least a year could decline 5 to 15 percent during the four months remaining in its fiscal year from the comparable period in 2007.

“Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we’ve ever seen,” Best Buy CEO Brad Anderson said in a statement.

Macy’s, the department store chain, said Wednesday that it had swung to a loss in the third quarter as sales fell more than 7 percent. It lost $44 million in the quarter.

Kohl’s reported that its third quarter profit fell 17 percent, and cut its fourth quarter and full-year profit outlook. Nordstrom Inc. reported even worse results, saying its profit fell more than 57 percent.

Ken Perkins, president of research company RetailMetrics LLC, said that of the 50 retailers he tracks that have reported third quarter earnings, 75 percent have reported lower profits from a year ago, while the remainder have reported a loss.

Wal-Mart, one of the few major retailers to report better-than-expected quarterly results, nevertheless cut its full-year profit forecast.

Reflecting the broad scope of the economic downturn, Intel, the world’s largest producer of computer chips, warned on Wednesday that its sales could fall as much as 19 percent in the fourth quarter. “There was a very rapid decline in business across all segments and geographies,” said Tom Beermann, a spokesman for the company.

In a sign of things to come, Eclipse Aviation, an Albuquerque, New Mexico manufacturer of small airplanes, told its employees on Thursday that they would not receive paychecks for the last two-week pay period because the company had been unable to obtain financing.

Growing tensions in lead-up to G20 summit in Washington

Growing tensions in lead-up to G20 summit in Washington

By Peter Schwarz

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Government leaders from the G20 nations are meeting in Washington this weekend for a special summit on the global financial and economic crisis.

The Group of Twenty—from the 20 largest industrialised and so-called emerging-market countries—account for 85 percent of worldwide economic production and two thirds of global population. It is unlikely, however, that the summit beginning Friday will come to any concrete agreement; the dissension and tensions between those present are simply too large.

French Foreign Minister Bernard Kouchner, who also represents the European Union at the meeting, has already warned that this summit is only “the beginning of a long process.” The “hard work,” to begin this weekend, must be consistently pursued, he said. Kouchner explicitly mentioned the outgoing US president and summit host, George W. Bush, as one of the possible problems.

Despite the low expectations for any concrete result, the summit is not without political significance. It will focus not on Bush, but on his successor Barack Obama—who will not be present at the event.

Obama has said that he will not attend the summit so as to avoid blurring the line of responsibility between him and the outgoing president. However, he is sending some of his closest advisers, including former US Secretary of State Madeleine Albright. Moreover, he will remain informed of the proceedings by the current administration, according to Bush adviser Dan Price.

The participants—and in particular those from Europe—view the summit as an opportunity to place their demands on the new president and test what concessions he may be willing to make. The EU has proposed another summit in 100 days—one month after Obama’s inauguration—in order to arrive at concrete decisions.

After the eight-year Bush presidency, marked by an aggressive and unilateral pursuit of US interests, the summit participants are hoping a change in the White House will allow them to assert their own interests more strongly. They are demanding more or less openly that the US cede political influence to them and relinquish the mantle of world’s only superpower.

They believe the US to be so crippled by the financial crisis and the military quagmires in Iraq and Afghanistan that concessions must unavoidably be made. They are counting on Obama to keep his campaign promises and work more closely with other world leaders, especially in Europe.

Behind the summit’s official façade—the photo-ops, banquets and empty statements—there will be heated conflicts over these issues. Tensions that have been simmering for years are intensifying as the financial crisis and recession worsen.

In the financial markets, billions of dollars are being destroyed on a daily basis as the recession bankrupts entire branches of industry. Under these conditions, no capitalist government is prepared—and certainly not in the US—to sacrifice its national financial and economic interests to the principle of international cooperation. This goes as well for Obama, who has close ties to Wall Street.

Behind the debates about bank bailouts, new regulations for global financial markets, and international control of financial institutions—which are at the heart of the Washington summit—is a bitter struggle for economic advantage over influence and profits.

Two articles from the German press are revealing in this regard. Their antagonistic tone toward the US is even more remarkable given that the partnership between the United States and Germany has long occupied the place of an official state doctrine in Germany.

In its latest issue, Der Spiegel openly accuses the American government of blocking European efforts for more regulation of banks and stock markets because: “In order to defend Wall Street’s supremacy, the United States wants to remain the dominant force on the capital markets.”

The first priority of the US government was defending the large profits of “its global financial industry,” Der Spiegel writes. The financial industry contributed about 30 percent of total US corporate earnings in 2007. The paper adds: “None of the current political leaders wants to jeopardise this profitability, normally reached only in illicit sectors of the economy such as drug smuggling and prostitution—despite a disaster that has cost billions, despite the nationalisation of entire financial institutions and despite the millions in bad mortgage loans and an imploding Wall Street. If the Germans had their way, high profit margins would become a thing of the past.”

On November 13, the Süddeutsche Zeitung published a similar opinion piece on the conflicts over new international financial regulations. It wrote: “A larger obstacle on the path to a new financial architecture is the role of the USA and Great Britain: they will lose power and income. If the state would control more and the managers of the financial houses were forced to behave more responsibly…profits would melt away.”

The demands by France and Germany for new rules governing financial markets are anything but selfless. They are not designed to protect workers, savers and individual homeowners from the predations of speculators and the impact of the financial crisis. Instead, they promote German and French economic interests against those of Wall Street and the City of London—the world’s two most important financial centers.

Closely connected to this are European attempts to break free of political dependence on the US and assume the role of an imperialist great power in its own right.

A November 12 commentary from the Süddeutschen Zeitung openly states as much. It demands the European governments utilise the presidential changeover in Washington to implement a “modified transatlantic strategy.” It continues: “The world has changed. New powers are developing in Asia and South America. Russia is returning as a great power. And the European Union is playing an important role on the world stage in the meantime. There is no longer one single superpower.”

The US remains important for Europe, “but it should no longer be the Americans alone who decide what it means to be a ‘partner,’ ” the paper demands. “Whoever waits to see what the new man in the White House will demand from the Europeans will again find himself, in the end, in a relationship between a lord and a servant.” Europe must lay down the following conditions for a new partnership, Süddeutsche Zeitung writes: “No more misuse of NATO as a ‘toolbox’ for American interests, no more splitting Europe into ‘old’ and ‘new’ and no disregard for the United Nations and international law.”

The newspaper doubts, though, whether Europe is “politically unified enough to stand eye to eye with the US.” It lays the blame for this on eastern Europe. The new EU members want the US to remain “the leading power in the traditional mold.” But this demand from the past “is useless to master the challenges of the present.… The time is advantageous, if Europe will seize the opportunity.”

In the last century, the struggle for economic and political influence, for markets, raw materials and strategic advantage produced two world wars. Today, the growing conflicts between great powers are leading in the same direction. The crisis of the capitalist system not only threatens millions with poverty, unemployment and the loss of homes, savings and pensions, but new imperialist wars as well.

Soros says deep recession inevitable, depression possible

Soros says deep recession inevitable, depression possible

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George Soros, chairman of Soros Fund Management, testified at a House Oversight and Government Reform Committee hearing on Thursday. Highlights:

* Said "a deep recession is now inevitable and the possibility of a depression cannot be ruled out."

* Said hedge funds were an integral part of the financial market bubble which now has burst.

* Said hedge funds will be "decimated" by the current financial crisis and forced to shrink their portfolios by 50-75 percent.

* Said Fed, Treasury Department and the SEC must accept responsibility to prevent market bubbles from growing too big in future.

Said impossible to prevent market bubbles from forming, but they can be kept within "tolerable bounds."

* Said financial engineering should be regulated and new products approved by regulators, and that such regulation should be a high priority of the new Obama administration.

* Said a recent IMF credit facility not large enough to stabilize markets.

85,000 homes lost in October

85,000 homes lost in October

As government and industry scramble to reverse the tide of foreclosures, filings jumped 25% in October.

By Catherine Clifford

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As government and industry scrambled to stem the housing crisis, another 84,868 homes were lost to foreclosure in October, according to a report released Thursday.

Last month 279,561 struggling borrowers received foreclosure filings, including default notices, notices of auction sales and bank repossessions, according to RealtyTrac, an online marketplace for foreclosures. That's a 5% increase from September, and up 25% from October 2007.

"October marks the 34th consecutive month where U.S. foreclosure activity has increased compared to the prior year," said James J. Saccacio, chief executive officer of RealtyTrac, in a statement.

A total of 936,439 homes have been lost to foreclosure since the housing crisis hit in August, 2007.

Foreclosures hit a record high in August when 304,000 homes were in default and 91,000 families lost their houses. Since then, a number of states have adopted legislation to freeze foreclosures and give homeowners a chance to modify their mortgages. These laws have helped slowed the rate of foreclosures.

"The really sobering reality for us is that despite these various state programs that are artificially keeping the numbers down, we are still up 25% from a year ago," said Rick Sharga, senior vice president of RealtyTrac.

Making matters worse is the rapidly deteriorating economy, says Global Insight economist Pat Newport.

"It seems almost every day you hear about another company planning further layoffs," said Newport. When people lose their jobs, they can't make mortgage payments.

And while some homeowners are defaulting because they've fallen on hard times, Newport says that others have simply stopped paying their mortgages. "Falling home prices are providing an incentive for them to walk away from their homes simply because it just isn't worth it," he said.

Home prices have been on a steep decline, with 20 major markets plunging a record 16.6% year-over-year in August according to the most recent data from Case-Shiller. That index has recorded declines for 25 consecutive months.

State laws slow foreclosures

A new law in California, one of the hardest-hit states in the housing crisis, requires banks to contact struggling homeowners 30 days before delivering a notice of default in order to give them time to restructure their plans.

Thanks to that legislation, foreclosures in the state fell 18% from September. But California still had the highest number of foreclosures in the country for October, logging 56,954 filings. That total was down from a peak of more than 100,000 filings in August, but up 13% from October 2007.

Clearly the housing crisis is not relenting. "While the intention behind this legislation - to prevent more foreclosures - is admirable," said Saccacio, "without a more integrated approach that includes significant loan modifications, the net effect may be merely delaying inevitable foreclosures."

The delays may also be masking the problem, said Saccacio. "The apparent slowing of foreclosure activity understates the severity of the foreclosure problem in these states," he said.

Nevada had the highest rate of foreclosures of any state for the 22nd consecutive month in October, with one in every 74 housing homes receiving a foreclosure filing. Arizona had the second highest rate in October, with one in every 149 housing units in default. Florida was third, with one in every 157 homes there in default.

Banks and government step up

Both government agencies and a handful of major lenders have recently introduced new foreclosure prevention programs, but it will take a while before they have an impact.

"It took us the first half of the decade to get into this problem," said Sharga, "so it is probably going to take a couple of years to get out."

On Tuesday the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), unveiled a new program to help eligible borrowers stay in their homes by lowering their monthly payments to 38% of gross household income.

And on Monday Citigroup (C, Fortune 500) announced the Citi Homeownership Assistance Program, which it says will modify $20 billion worth of loans for 130,000 borrowers. Similar housing rescue initiatives were unveiled recently by FDIC-controlled IndyMac Bank, which says it will help as many as 40,000 homeowners, as well as Bank of America (BAC, Fortune 500), which estimates it can rescue 630,000 homes and JPMorgan Chase (JPM, Fortune 500), which expects to help another 400,000 families.

The moves are promising. "This is finally a step in the right direction," said Sharga. "Those are the kind of programs we need to see executed to see the number of foreclosures slow down."

Hurdles remain, including home loans that will be much harder to modify because they've been packaged and securitized into investments.

And Sharga notes that fixing existing loans is only part of the equation; banks must resume lending to new borrowers. "Just freeing up some funds for qualified home buyers would make a huge difference in getting the housing market back on its feet," he said.

Mike Larson, a real estate analyst with Weiss Research, added that falling home prices and the slowing economy will also create strong headwinds for any government relief program.

"You can certainly fix some of these mortgages, you can certainly try to slow the foreclosures," said Larson, "but until home prices stabilize and the economy gets back on its feet, it is going to be a tough slog."

Who Got Bailout Money So Far?

Who Got Bailout Money So Far?

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The Treasury Department's $700 billion bailout plan, also known as the Troubled Asset Relief Program (TARP), is one of the main U.S. tools to address the financial crisis.

The Treasury Department on October 14 set aside $250 billion of the program to buy senior preferred shares and warrants in banks, thrifts and other financial institutions. Half that money was allocated to nine big banks, the Treasury Department has said. Another $38 billion has since been earmarked for regional or small banks, according to statements from individual banks.

On Monday, the department announced its single-biggest TARP investment -- $40 billion in American International Group -- which the government said would not come from the $250 billion bank capital program.

The TARP has so far committed the following funding:

AIG $40 billion

JPMorgan $25 billion

Citigroup $25 billion

Wells Fargo $25 billion

Bank of America $15 billion

Merrill Lynch $10 billion

Goldman Sachs $10 billion

Morgan Stanley $10 billion

PNC Financial Services $7.7 billion

Bank of New York Mellon $3 billion

State Street Corp $2 billion

Capital One Financial $3.55 billion

Fifth Third Bancorp $3.45 billion

Regions Financial $3.5 billion

SunTrust Banks $3.5 billion

BB&T Corp $3.1 billion

KeyCorp $2.5 billion

Comerica $2.25 billion

Marshall & Ilsley Corp $1.7 billion

Northern Trust Corp $1.5 billion

Huntington Bancshares $1.4 billion

Zions Bancorp $1.4 billion

First Horizon National $866 million

City National Corp $395 million

Valley National Bancorp $330 million

UCBH Holdings Inc $298 million

Umpqua Holdings Corp $214 million

Washington Federal $200 million

First Niagara Financial $186 million

HF Financial Corp $25 million

Bank of Commerce $17 million

TOTAL: $203.08 billion


In addition to the TARP program's $40 billion capital injection into AIG, the Federal Reserve is providing the company with up to $112.5 billion in separate loans and funds for asset purchases. Aid to the huge insurance company came after counterparties and rating downgrades forced AIG to post large amounts of collateral for its credit derivatives positions.

Some other insurers are interested in cash infusions, but must own a thrift or bank in order to qualify under the terms of Treasury's current capital injection program.


The TARP program set a November 14 deadline for smaller banks to apply for capital injection funds remaining in the pool of $250 billion. The deadline will be extended for non-publicly traded banks.

The government's preferred shares will pay dividends of 5 percent annually for the first five years and 9 percent after that until the institution repurchases them. Participating banks must comply with Treasury restrictions on executive compensation, which limit tax deductibility of senior executive pay to $500,000. They require bonuses to be "clawed back" if earnings statements or gains are later proven to be materially inaccurate and prohibit "golden parachute" payments to senior executives.


Struggling automakers General Motors Corp, Ford Motor Co and Chrysler LLC have requested tens of billions of dollars in Treasury aid under TARP. However, the Bush administration says the TARP program was designed by Congress to help the financial service sector, not the auto industry.


The remaining $350 billion in TARP funding can be accessed only after the White House formally notifies Congress. U.S. House Financial Services Chairman Barney Frank has said that if the initial banks participating in the program do not use the money for lending, Congress could block authorization of the final funding.

Crisis Is Beyond The Reach of Traditional Solutions

Crisis Is Beyond The Reach of Traditional Solutions

By Paul Craig Roberts

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By most accounts the US economy is in serious trouble. Robert Reich, an adviser to President-elect Obama, calls it a “mini-depression,” and that designation might be optimistic. The Russian economist, Mikhail Khazin says that the “U.S. will soon face a second ‘Great Depression.’” It is possible that even Khazin is optimistic.

I cannot predict the future. However, I can explain what the problems are, how they differ from past times of troubles, and why traditional remedies, such as the public works programs that Reich proposes, are unlikely to succeed in reviving the U.S. economy.

Khazin points out, as have others such as University of Maryland economist Herman Daly and myself, that consumer debt expansion is the fuel that kept the U.S. economy alive. The growth of debt has outstripped the growth of income to such an extent that an increase in consumer credit and bank lending is not possible. Consumers are overburdened with debt. This fact takes monetary policy out of the picture. Americans can no longer afford to borrow more in order to consume more.

This leaves economists with fiscal policy, which, as Reich realizes, also has problems. Reich is correct that neither a reduction in marginal tax rates nor a tax rebate is likely to be very effective. Reich, a Keynesian, has an uncertain grasp of supply-side economics, but as one who has a firm grasp, I can attest that marginal tax rates today are not the stifling influence they were prior to John F. Kennedy and Ronald Reagan. As Art Laffer said, there are two tax rates, high and low, that will produce the same tax revenues by expanding or contracting economic activity. Marginal tax rates are no longer in the higher ranges. As for a tax rebate, Reich is correct that in the present situation a tax rebate would be dissipated in paying off creditors.

Reich sees the problem as a lack of aggregate demand sufficient to maintain full employment. His solution is for the government to spend “a lot” more on infrastructure projects on top of a trillion dollar budget deficit --”repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy.” This spending would boost employment, wages, and aggregate demand.

I have no opposition to infrastructure projects, but who will finance the baseline trillion dollar US budget deficit plus the additional red ink spending on infrastructure? Not Americans. The US savings rate is zero or negative. Home mortgage foreclosures are in the millions. Officially, US unemployment is 10 million, but if measured by pre-Clinton era standards unemployment is much higher. Statistician John Williams, who measures the unemployment rate by the pre-Clinton standards concludes that the rate of US unemployment is about 15 percent. President Clinton “reformed” the unemployment statistics by ceasing to count discouraged workers as unemployed.

For years, the US government’s budget has been dependent on foreigners financing the red ink. Countries such as Japan and China and OPEC suppliers of oil to the US have huge export surpluses with the US. They recycle the dollars by buying US Treasury bonds, thus financing the US government’s red ink budgets.

The open question is: how much longer will they do so?

Foreign portfolios are overweighed in dollar assets. Currently the dollar’s value is benefitting from the financial crisis, as investors flee to the reserve currency. However, sooner or later the huge outpourings of dollar debts will cause foreign creditors to draw back. Already China, America’s largest creditor, has sent a signal that that time might be drawing near. Recently the Chinese government asked, as they do indirectly through third parties, “Why should China help the US to issue debt without end in the belief that the national credit of the US can expand without limit?”

Is the rest of the world, which has demanded a financial summit to work toward a new financial order, going to permanently allocate the world’s supply of capital to covering American mistakes?

If not, the bailout and the stimulus package will have to be financed by printing money.

And the bailout needs are growing. Car loans and credit card debt were also securitized and sold. As the economy worsens, credit card and car loan defaults are rising. Moreover, AIG needs more money from the government. Fannie Mae’s loss has widened to $29 billion despite the $200 billion bailout. General Motors and Ford need taxpayer money to survive. General Motors says that its GMAÇ mortgage unit “may not survive.” Deutsche Bank sees General Motors shares “as likely worthless.”

Shades of the Weimar Republic.

What Reich and the American economic establishment do not understand is that the recession paradigm does not apply. There are no jobs waiting at US manufacturers for a demand stimulus to pull Americans back into work. The problem is not a liquidity problem. To the contrary, there have been many years of too much liquidity. Credit has grown far more than production. Indeed, US production has been moved offshore. Jobs that used to support the growth of American incomes and the tax bases of cities and states have moved, along with US GDP, to China and elsewhere.

The work is gone. All that are left are credit card and mortgage debts.

Anyone who thinks that America still has a vibrant economy needs to log onto and face the facts.

Economists associate economic depression with price deflation. However, traditionally, debts that are beyond an economy’s ability to service are inflated away. This suggests that the coming depression will be an inflationary depression. Instead of falling prices mitigating the effects of falling employment, higher prices will go hand in hand with rising unemployment--a situation worse than the Great Depression.

The incompetent Clinton and Dubya administrations, unregulated banksters and Wall St criminals, greedy CEOs, and a no-think economics profession have destroyed America’s economy.

What is the remedy for simultaneous inflation and unemployment?

Three decades ago the solution was supply-side economics. Easy monetary policy had pushed up consumer demand, but high tax rates had curtailed output. It was more profitable for firms to allow prices to rise than for them to invest and increase output.

Supply-side economics changed the policy mix. Monetary policy was tightened and marginal tax rates were reduced, thus stimulating output instead of inflation.

Today the problem is different. The US has abused the reserve currency role, thus endangering its credit worthiness and the exchange value of the dollar. Jobs have moved offshore. The budget deficit is huge and growing. If foreigners will not finance the widening gap, the printing presses will be employed or the government will not be able to pay its bills.

The bailout funds have been wasted. The expensive bailout does not address the problem of falling employment and rising mortgage defaults. Treasury Secretary Hank Paulson could not see beyond saving Goldman Sachs and his bankster friends. The Paulson bailout does nothing except take troubled assets off banks’ books and put them on the overburdened taxpayers’ books, thus endangering the US Treasury’s credit rating.

What the Bush Regime has done is to stick the taxpayers with the banks’ mistakes. An intelligent government would have used the money to refinance the troubled mortgages and stop the defaults. By saving the mortgages from default, the banks’ balance sheets would have been made secure. By failing to deal with the subprime crisis, Bush and Congress have added a financial crisis to the exhaustion of consumer demand and the problems of financing huge trade and budget deficits.

Belatedly, Paulson has realized his mistake. On November 12, Paulson announced, “We have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use [bailout] funds.”

The financial crisis has cost taxpayers far more than the amount of the bailout. Americans’ savings and pension funds have been devastated. Americans in investment partnerships, who have been required by IRS rules to pay income taxes on gains in the partnerships’ portfolios, have had the accumulated multi-year gains wiped out. They have paid taxes on years of “capital gains” that have disappeared, thus doubling their losses.

America’s economic troubles will rapidly accumulate if the dollar loses its reserve currency role. To protect the dollar and the Treasury’s credit standing, the US needs to curtail its foreign borrowing by reducing its budget deficit. It can do this by halting its gratuitous wars and slashing its unnecessary military spending which exceeds that of the rest of the world combined. The empire has run out of resources, and the 700 overseas bases must be closed.

Can Americans afford massive infrastructure spending when they cannot afford health care? In Florida a Blue Cross Blue Shield group policy for a 60-year old woman costs $14,100 annually, and this is a policy with deductibles and co-payments. Supplementary policies from AARP to fill some of the gaps in Medicare can cost retirees $3,300 annually. When one looks at the economic situation of the vast majority of Americans, it is astonishing that the Bush regime regards wars in the Middle East and taxpayer bailouts of Wall Street criminals as a good use of scarce resources.

US corporations, which have moved their production for US markets offshore in order to drive up their share prices and provide their CEOs with multi-million dollar bonuses, can be provided with a different set of incentives that encourage the corporations to bring employment back to the US. For example, the corporate income tax can be restructured to tax corporations according to the value-added in the US. The higher the value-added in the US, the lower the tax rate; the lower the value-added, the higher the tax rate.

Cutting the budget deficit by halting pointless wars and unnecessary military spending and reducing the trade deficit by bringing jobs back to America are simple tasks compared to confronting inflationary depression.

The world has had enough of American irresponsibility and is taking away the reins. At the November 15 economic summit, the world will begin the process of imposing a new financial order on the US in exchange for continued lending to the bankrupt “superpower.” With bailouts eating up the world’s supply of capital, continued foreign financing for Washington’s wars of aggression is out of the picture.