Wednesday, December 17, 2008

Secrecy Worsens Wall Street Mess

Secrecy Worsens Wall Street Mess

By Brent Budowsky

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Editor’s Note: With multiple scandals sweeping Wall Street, it might seem like an odd time for anyone to say “trust me” when it comes to spending trillions of dollars in bailout money, but that’s basically what the Bush administration and the Federal Reserve are telling the public.

In this guest essay, Brent Budowsky examines how secrecy has contributed to the crisis – and is now threatening a resolution:

The public is angry – and that anger is rising.

The dangers to our economy are escalating while confidence, trust and credibility are collapsing for both government and business institutions.

Whatever else Wednesday's mammoth action by the Fed suggests, we know this: After $8 trillion of support for financial institutions by multiple federal agencies, the Federal Reserve Board has concluded that the program has not worked, and much more is needed.

I emphasize this: I do not oppose bailouts; I oppose bailouts that are poorly managed, poorly structured and, far too often, conducted with secrecy.

I have warned since 2007 about the cascading financial crisis that would spread from sector to sector, bank to bank, and consumer to consumer. I have called, repeatedly, for direct action to benefit real people such as a temporary freeze on foreclosures.

What I continue to most strongly oppose are top-down bailouts, where $8 trillion goes to financial institutions that continue to raise their interest rates and cut credit lines for even their most creditworthy consumer and business customers.

As for disclosure, the banks and investment houses must be far more direct, comprehensive and honest in disclosing information to Congress, to regulators, to the public, and to investors.

In olden days, markets were based on prices applied to entities with ascertained value and trading was done as the value of those very ascertainable assets would rise and fall.

Today we have a new, and in my view vile, phenomenon: the securitization of everything, where clusters of mortgages, credit card accounts, etc. are bunched together and traded like Nasdaq stocks.

This removes the value proposition and makes these securitized instruments impossible to value, and they are traded based on whims, rumors and mindless speculation until some dumb slob is the last guy buying overvalued and bubbled assets.

This last guy is the slob holding the bag at the end, and now the bag is being handed to taxpayers.

Also, this securitization de-links the original buyer from the original seller, which makes rational renegotiation impossible. The guy or gal who took out the mortgage no longer deals with the bank that sold it; that bank has sold it to someone else, who sold it to someone else, who sold it to someone else.

This makes renegotiation of terms impossible in many cases, forcing some preventable foreclosures, which further destroys the housing market in foreclosed communities, and which multiplies ultimate losses, which multiplies ultimate bailouts.

The second problem, in brief, is that financial institutions invented and began trading financial derivative instruments that were not based on the value of the original asset, or even on the value of the securitized basket of assets, but were valued on alleged value in "hedging" the risk.

Yet if we can’t intelligently value the original asset, or the securitized combination of assets, we cannot value the hedge, i.e., the derivative instruments.

In principle, we need to restore the relationship between the actual asset and the value the market determines for that asset.

While I have one of those fancy degrees from one of those great schools that are in vogue today, I am old-fashioned. I believe, simply, that we should emphasize trading what we can value, with full disclosure of what the assets are, and full understanding of what tradable assets such as securitized baskets of assets and derivatives are.

Today, far too many of these instruments remain secret. Far too many financial CEOs don’t even understand the complex assets their firms are trading (and losing money from, and seeking bailouts for).

Regulators such as the Securities and Exchange Commission have failed so dismally they’re almost farcical. Congress can barely understand the complexities of these assets, let alone policy.

And Treasury and the Fed are dumping huge amounts of money, $8 trillion and counting, into the very institutions that caused the problem in ways that neither the public, the Congress, consumers, investors or even regulators understand.

And now we read stories such as the ridiculous $50 billion Ponzi scheme of Mr. Madoff that only proves the failure of financial, regulatory and political institutions to serve the people who are the boss and who pay for the bailouts.

Truth, justice, integrity and common sense begin with disclosure. As Justice Brandeis said, “sunshine is the best disinfectant.”

I would add that secrecy is the enemy of common sense and integrity and the friend of corruption and incompetence. This is why I vehemently oppose the Federal Reserve keeping secret how at least $2 trillion of the bailout has been used and this is why I support the Freedom of Information Act challenge by Bloomberg business news seeking disclosure.

There are surely valid reasons for selective non-disclosure, but these cases should be rare, and keeping secret $2 trillion of spending is ridiculous, absurd and anti-democratic.

This is the public's money, and the public has a right to know. This is one of the most vital and urgent and expensive financial policies in world history, literally, and the leaders in Congress and the banking committees have a need, and right, to know.

Show me $2 trillion of secretly spent money and I will show you trouble, bad news and probably mismanagement.

Show me $2 trillion of secretly spent money and I will show you public outrage, and public backlash, and public rage at a time of national economic hardship that will only increase with time.

Show me $2 trillion of secretly spent money and I will show a policy outcome that by definition will probably be irrational in a nation where our very democracy is based on informed public debate, and the checks and balances of a government the Founders deliberately constructed with divided powers.

Finally, for now, I have a warning about, and am increasingly troubled by, practices that are more akin to a banana republic than the world's greatest democracy.

Trillions of dollars are thrown around like monopoly money. Titans of Wall Street trade financial instruments that even they do not understand. Even an incredible, gigantic, $50 billion Ponzi scheme victimizes investors who are supposed to be experts, while the SEC is so incompetent it is the moral equivalent of criminal negligence.

Let’s stop the practices that have taken us into this abyss and start with the honest, full, effective, responsible and comprehensive disclosure that is the precondition to cleaning up this multitrillion-dollar morass.

US Federal Reserve cuts interest rates to near zero

US Federal Reserve cuts interest rates to near zero

By Barry Grey

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The Federal Reserve Board on Tuesday cut its benchmark federal funds interest rate from 1 percent to a record low range of zero to one-quarter percent, a bigger than anticipated reduction that indicates the US central bank views the economic situation with increasing alarm.

The unprecedented action marks the tenth consecutive rate cut since the housing and credit bubbles imploded in August of 2007. The statement issued by the Fed’s policy-making Federal Open Market Committee (FOMC) provides an indication of the depth of the unfolding economic slump and the extraordinary speed with which it is developing.

The FOMC wrote: “Since the Committee’s last meeting [October 28-29], labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.”

In the period between the last meeting of the FOMC and this week’s meeting, US payrolls have shrunk by more than half a million and the official unemployment rate has risen to 6.7 percent. Other government measures of the labor market that provide a more realistic estimate show unemployment to be well over 10 percent.

The Fed’s grim assessment was given added weight by economic data for November released Monday and Tuesday showing an accelerating decline in industrial production, a record fall in homebuilding and a record decline in consumer prices. Taken together, these reports suggest an economy lurching into the deepest and longest recession since the Great Depression of the 1930s.

The federal funds rate is the rate charged for overnight loans between commercial banks. The Fed also announced a 75-basis-point cut in the discount rate, charged for direct loans from the central bank to major commercial banks, to 0.5 percent.

Wall Street reacted enthusiastically to the Fed’s move, driving the Dow Jones Industrial Average up nearly 359 points, or 4.20 percent.

In its statement, the Fed went to great lengths to reassure the markets that it would continue to allocate trillions of dollars in public funds to bolster the banks and major financial institutions. “The Federal Reserve,” it declared, “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” It said this included the maintenance of “exceptionally low levels” of the federal funds rate “for some time.”

Having reduced its target short-term interest rate—its traditional economic tool—virtually to zero, the Fed is discussing new ways to avert a full-scale depression, all of which involve a vast and expanding transfer of cash to banks and other major financial institutions—ultimately at taxpayer expense. “The focus of the Committee’s policy going forward,” the Fed wrote, “will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.”

As a result of lending programs and bailouts already undertaken, including those involving financial giants that either failed or are tottering on the brink such as Bear Stearns, Merrill Lynch, Fannie Mae, Freddie Mac, American International Group and Citigroup, the Fed’s balance sheet has ballooned since September from about $900 billion to more than $2 trillion. New programs to buy mortgage-backed securities from Fannie Mae and Freddie Mac and securities backed by auto loans and other forms of consumer debt will drive the central bank’s balance sheet to about $3 trillion.

The statement issued by the Fed on Tuesday suggested that it is prepared to load its balance sheet with even more massive liabilities. The Fed declared that it “stands ready to expand its purchases of agency [Fannie Mae, Freddie Mac, Federal Home Loan] debt and mortgage-backed securities as conditions warrant.” It added that it is “also evaluating the potential benefits of purchasing longer-term Treasury securities” and that it will “consider ways of using its balance sheet to further support credit markets and economic activity.”

This implies that the Fed may begin buying up “toxic” mortgage-backed securities that remain on the balance sheets of the major banks and continue to generate huge losses for Wall Street. This was the stated purpose of the $700 billion Troubled Assets Relief Program (TARP) when it was pushed by the Bush administration and the congressional Democratic leadership as the supposed cure-all for recession in September and early October.

Soon after the program was passed by Congress, however, Treasury Secretary Henry Paulson reversed course and decided instead to use the fund to directly transfer cash to the banks. The vast handout to the financial establishment was made without imposing any serious conditions or controls, and the banks have refused to use the government money to increase lending, instead using the taxpayer funds to acquire smaller banks or simply hoard the windfalls to bolster their balance sheets.

Meanwhile, the economy continues to plunge into recession, unemployment, home foreclosures and poverty continue to soar, and virtually no social relief is being provided by the government. On Monday, the Federal Reserve reported that total industrial production in the US, including manufacturing and energy output, declined by 0.6 percent in November from a month earlier, and was off 5.5 percent from a year earlier.

Industrial output is on track to register its worst quarter since 1980, and all indications are that it will decline further in the coming months.

The Commerce Department reported Tuesday that housing starts fell 18.9 percent in November to an annual rate of 625,000, the lowest figure since the government began compiling statistics in 1959. They were down 47 percent from the rate in November 2007, and were considerably lower than economic forecasts. Building permits, an indicator of future residential construction, declined 15.6 percent to a 616,000 pace, also the lowest on record. They were down more than 48 percent from the previous year.

In an ominous sign that the economy is on the brink of a downward deflationary spiral, the Labor Department reported Tuesday that the consumer price index fell 1.7 percent last month, also worse than expected and a record decline.

Also on Tuesday, Goldman Sachs reported a quarterly loss of $2.29 billion, its first quarterly loss since the bank went public in 1999. Up to now Goldman has suffered less damage from the credit and housing crisis than other banks. Its plunge into the red makes clear that the financial system remains highly fragile.

Economists at Macroeconomic Advisers LLC reported that the US gross domestic product is on track to shrink by 6.5 percent in the current quarter, which would make it the worse quarter since 1980.

More people on S.F. streets newly homeless

More people on S.F. streets newly homeless

Salvation Army Capt. Martin Cooper (center) talks with Po... Vinetta Boice has a cup of coffee from the Salvation Army... Ladoris Perkins (right) and Poncho (left) eat soup from t... Volunteers Anna and Julio Perez of the Salvation Army han...

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Capt. Martin Cooper of the Salvation Army has been handing out free sandwiches and soup near the Civic Center in San Francisco for the last year and a half. Lately he's noticed some troubling changes.

First, he's been running out of food. He used to take 50 sandwiches. Now he takes 500 and it isn't enough. Second, Cooper has been surprised at the folks who are asking for a meal. They're often clean-shaven, well dressed and utterly desperate.

"I guess you could say the face of homelessness has had a face-lift," Cooper said. "I see people coming up to me that I probably would have walked past and not even offered a meal."

Cooper's firsthand experience reinforces new national data. Across the country, the nose-diving economy isn't just causing home foreclosures and stock market dips, it is squeezing people, particularly families, out of their homes. The number of hungry people has also jumped.

There are homeless people who test the sympathies of city residents - the aggressive panhandlers who rack up more than 50 police citations, the severely mentally ill who wander the streets without any help or consequences of their actions.

But as the cold, wet winter weather hits the Bay Area, the city is obligated to reach out to those most in need. Unfortunately, that request comes in the midst of the worst city budget shortage in 70 years.

While it is true that major, hurtful cuts will have to be made, some way must be found to protect these families. The cold logic of a ledger sheet is a poor reply to what Cooper sees in the city's alleys and side streets.

"We were over by the Civic Auditorium," Cooper said, "and there was a guy lying on the sidewalk with a blanket pulled over his head. I leaned down and asked him if he wanted something to eat. He pulled the blanket down and there was a 5-year-old little boy lying with him."

Homeless families

It would be nice to say that is an isolated incident, but it is not. Twenty of 21 cities surveyed for a new report from U.S. Conference of Mayors reported an increase in requests for food, and 59 percent of those requests came from families. In addition, 16 of 25 cities reported a significant increase in homeless families, with San Francisco among the leaders.

"Monday we had 136 families on the waiting list for a shelter," said Dariush Kayhan, the city's homeless policy director. "That's 50 percent more than we had on the list one year ago."

What's more concerning is that, according to the city's Human Services Agency, 62 percent of those on the waiting list are new to the system. They haven't been homeless in San Francisco before.

Philip Mangano, who was appointed executive director of the Interagency Council on Homelessness by President Bush, said San Francisco has been especially hard hit by what he calls "double trouble:" the loss of 1 million jobs across the country in the last 10 months and the foreclosures from the mortgage crisis.

Tenants in trouble

"It is not so much people who are homeowners," Mangano said. "It is people in a rental situation who were literally oblivious to the fact that their landlord was going to be foreclosed upon. They suddenly get notice that they have 30 days to quit the property. And you know they are not getting their security deposit or last month's rent back."

No wonder the Bay Area, hammered by both job loss and foreclosures, has seen such a jump in homeless families.

"I think a lot of people think (being homeless) is going to be temporary," Cooper said. "They think: I'll be out for a week at most. But you lose your means of communication and your address."

The good news - if you can call it that - is that most of the families are not on the street. Kayhan said his data shows that 41 percent are temporarily living with family or friends and most of the rest are in some kind of a stopgap situation like a short-term shelter, hotel or even the family car.

Indications are that we are only seeing the beginning of what the faltering economy will do to those living on the edge of homelessness. While the family shelter waiting list is longest for families in San Francisco, single men, particularly returning veterans, continue to be most likely to end up on the street.

They are forming the new group that Cooper sees during his food rounds. Recently he reached down to a man on the sidewalk and asked him if he wanted something to eat. The man asked if he had to pay for the food. Told that it was free, he admitted that he hadn't eaten in three days. Then he began to weep.

"You see people now and you wonder where they came from, how they got here," Cooper said. "People say to me this work must be gratifying. But I never go home gratified. I go home feeling guilty."

Unemployment: Worse Than it Looks

Unemployment: Worse Than it Looks

The most publicized measure of U.S. unemployment tells only part of the story

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As U.S. jobs disappear at a rapid clip, the official unemployment figure seems understated. While November's 6.7% rate is a full 2% higher than the same time last year, the rate remains well below the 10.8% postwar peak, reached in November 1982. One issue is that the official unemployment number captures only a slice of the total joblessness in the U.S. To be counted as unemployed in this statistic, a worker must not have a job, be currently available for work, and have actively sought employment within the last four weeks. In other words, a lot of the jobless are left out of the government's tally.

Rajeev Dhawan, director of Georgia State University's Robinson College of Business, says the official unemployment rate is "not a good measure of what is happening in the economy. It's drawn from a sample too small and filled with too many assumptions. Absolute job losses and retail sales give a better idea of what's really happening in the economy."

Fortunately, digging deeper into the labyrinth of the U.S. Bureau of Labor Statistics' (BLS) Web site can offer a more complete, if imperfect, picture of joblessness. Since 1993, the BLS has tracked a category of unemployed called U-6, which captures the total unemployed, plus what the agency calls "marginally attached" workers and those employed part-time "for economic reasons." For November 2008, that rate was 12.5%, nearly double the official unemployment rate and the highest since the government started tracking this category.

Outside Looking In

Marginally attached workers are those with no job and who aren't hunting for one but who are interested in working—people who have left the workforce because the employment situation seems so bleak that they've stopped trying. This measure covers anyone who has looked for work in the past 12 months, not just the past four weeks. In November, 1.9 million workers were marginally attached, up 637,000 from a month prior. This category includes long-term unemployed, such as factory workers who can't find a job paying close to what they'd been earning before. Unemployment rates in construction and extraction jobs such as mining hit 12.1% in November, followed by 9.4% in production jobs. That means the ranks of the marginally attached will increase.

Those employed part-time for economic reasons, who are counted as employed in the official statistic, want and are available for full-time work but have had to settle for a part-time schedule. As of November, the number of workers in this category rose by 621,000. There are now 7.3 million involuntary part-time workers, up 2.8 million over the past 12 months.

Contract workers, sometimes known as freelancers or independent contractors, face a special set of problems when it comes to being counted by the government. First, employers aren't required to report layoffs of contract workers to the government, so when companies say they're cutting their contractor workforce—as Google (GOOG) did in October—no one knows by how much. These job cuts are also not recorded in the official job-cut statistics tracked by the government. In other words, the 533,000 jobs lost in the November count don't include any of the tens of thousands of contract workers being slashed from company payrolls as the recession deepens.

Falling Between the Cracks

Some self-employed workers are incorporated into other BLS statistics, but not all of them are counted. Those traditionally considered self-employed, such as independent real estate agents or accountants, are included in the government's household survey of the unemployed. But those working as long-term freelancers for one particular company without the benefits of being staff members—often dubbed "permalancers"—are not. That means a good portion of this group, which the Government Accountability Office says makes up 10% of the workforce, isn't properly tracked. "We really don't know what is happening with the [contractor employment] numbers," says Sara Horowitz, founder of the Freelancers Union, a 93,000-member organization of contract workers. Horowitz says the government should develop better measures of contract workers, perhaps by identifying the number of contractor tax filings with the IRS each year. "An increasing part of the economy is driven by this new workforce, but government agencies haven't updated their methods for counting them," she says.

The BLS does capture other pieces of the unemployment puzzle. It breaks out such demographic categories as education levels. As of November the unemployment rate for college graduates increased less than a percentage point, to 3.1%, while the unemployment rate for high school dropouts rose from 7.6% to 10.5%. The BLS also tracks such categories as age and ethnicity; the unemployment rate in November was 32% for black teenagers, for example. Other data offer state-by-state comparisons of unemployment rates. In the most recent data, which cover the first 10 months of 2008, Rhode Island and Michigan were tied with the highest unemployment rate, at 9.3%, with California next at 8.2%. Though not officially a state, Puerto Rico's rate stands at 12%.

Still, calls for improving the BLS metrics continue. While Horowitz presses for better accounting of contract workers, Georgia State's Dhawan says the surveys need to account for population growth. "Fifty years ago, the [official unemployment] number had some validity," he says. "Now I have little faith in it."

Best Buy 3Q profit sinks, company offers buyouts

Best Buy 3Q profit sinks, company offers buyouts

Best Buy's 3rd-quarter profit sinks, company offers buyouts to most corporate staff

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Best Buy Co. Inc. offered voluntary severance packages to virtually all its 4,000 corporate employees Tuesday as the nation's largest consumer electronics chain announced its third-quarter profit skidded 77 percent.

The results -- which beat Wall Street's lowered expectations -- came in what the company called the "most challenging consumer environment" in its history, an environment so rough Best Buy hasn't been able to take full advantage of its largest rival's bankruptcy.

"We believe that the environment for consumer spending is likely to get worse before it gets better," said Chief Executive Brad Anderson. "In fact, we can foresee a period in which consumers may significantly shift their spending behaviors, which could have a dramatic impact on retailing."

Tuesday's news comes about a month after Circuit City Stores Inc. filed for Chapter 11 bankruptcy protection because of slowing sales and mounting debt.

"(Best Buy) may be a bellwether here," Stifel Nicolaus & Co. analyst David Schick told investors in a research note Tuesday. "We want to hear retailers talk about the consumer slowdown in a historic sense and match the slowdown with historic changes to the model."

But he added some of his concerns were alleviated by the company's "bold management moves" and weak competitors.

Best Buy shares climbed $4.21, or 17.9 percent, to close at $27.68.

Data released by MasterCard SpendingPulse said total consumer electronic spending declined approximately 25 percent last month. And, as wary shoppers tamped down discretionary spending, retailers boosted discounts to keep merchandise moving, often at the expense of profits.

Best Buy's same store sales -- an important retail industry metric -- fell 5.3 percent from 2007 for the quarter ending Nov. 29. Same-store sales, which worsened every month in the period, are considered a key indicator of a retailer's health because they measure sales at existing stores rather than newly opened ones.

The company earned $52 million, or 13 cents per share, down from last year's profit of $228 million, or 53 cents per share.

Excluding a charge related to a decline in market value of its 2.9 percent stake in U.K. company Carphone Warehouse Group PLC, the company's net income came to 35 cents per share.

Revenue climbed 16 percent to $11.5 billion, from $9.93 billion last year.

Wall Street analysts expected worse -- earnings per share of 24 cents on revenue of $11.09 billion, excluding one-time items.

The results were boosted by strong Thanksgiving weekend sales of electronics.

The company's stock regained much of the ground it lost in recent months, on news of the severance offers, not available to top executives, and the announcement that Best Buy plans to cut capital spending 50 percent in 2009.

The chain also plans to open "significantly" fewer stores in the U.S., Canada and China next year and said it may have to lay off workers if not enough corporate employees accept the severance offers. The company had about 150,000 full-time, part-time and seasonal workers as of April, according to a regulatory filing. A spokeswoman said the company was unsure how many workers would accept the company's buyout offer.

Also Tuesday, Best Buy reiterated its full-year guidance for earnings of $2.30 to $2.90 per share, excluding the investment charge, and expects same-store sales will fall 1 percent to 5 percent for the year. Analysts expect earnings of $2.51 per share.

Consumer data shows record slump

Consumer data shows record slump

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US consumer prices fell a record 1.7 per cent in November, the government has disclosed, in the latest poor economic news to hit the US.

The news comes as the US Federal Reserve is expected to make a further cut in interest rates on Tuesday.

The fall was the second straight month of record declines in the consumer price index (CPI) and the biggest since 1947, when the Labour Department began recording the figures, it said on Tuesday.

Analysts said the sharp fall has essentially wiped out any inflation threat and instead increased fears of deflation, where prices, earnings and economic activity slump with ensuing enonomic hardship.

The drop was largely attributed to a slump in oil prices, with energy prices falling by a record 17 per cent in November, almost double the 8.6 per cent decline in October.

'Crucial statement'

Al Jazeera's John Terrett in New York said that whether the US Federal Reserve cuts rates by a quarter or a half a per cent from the current one per cent, as is expected, will make little difference as US banks have already passed on to consumers all the rate cuts they are likely to.

"Much more important will be what the Fed says it thinks will happen in the economy in its accompanying statement and that is what will move the markets up or down," he says.

Despite the news US stocks rose in early trading on Tuesday on expectations of a rate cut, with the Dow Jones Industrial Index up 62.68 points, or 0.73 per cent, to 8,627.21 on Tuesday, rebounding from Monday's losses.

A private research group said earlier this month the US had entered a recession in December 2007, much earlier than anticipated, and George Bush, the US president, acknowledged a few days later that was the case.

Further losses

In other economic news the US commerce department said construction of new homes fell in November by 18.9 per cent, the biggest drop in a quarter of a century.

The decline put the number of new homes constructed at an annual rate of 625,000 homes, the slowest pace on records dating back to 1959.

Investment giant Goldman Sachs reported a $2.12bn loss in the fiscal fourth quarter to November, the first loss since the investment firm went public in 1999.

Goldman Sachs was the last of two major independent investment banks which became bank holding companies earlier this year, in a bid to have easier access to credit to survive the current financial crisis.

Judge signs order to protect Madoff investors

Judge signs order to protect Madoff investors

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A federal judge on Monday threw a lifesaver to investors who may have been duped in one of Wall Street's biggest alleged frauds, saying they need the protection of a special government reserve fund set up to help investors at failed brokerage firms.

U.S. District Judge Louis L. Stanton ordered that clients of Bernard Madoff's private investment business seek relief under a federal statute created to rescue cheated investors. Stanton also ordered that business be liquidated under the jurisdiction of a bankruptcy court and named attorney Irvin H. Picard as trustee to oversee that process.

Stanton signed the order after the Securities Investor Protection Corporation asked that steps be taken to protect investors in the scheme, which has ensnared several major banks and prominent figures as victims and could result in as much as $50 billion in losses.

Congress created the SIPC in 1970 to protect investors when a brokerage firm fails and cash and securities are missing from accounts. Funds can be used to satisfy the remaining claims of each customer up to a maximum of $500,000. The figure includes a maximum of up to $100,000 on claims for cash.

The order came just days after federal prosecutors charged Madoff with securities fraud, saying he had admitted to orchestrating a massive Ponzi scheme. Madoff is free on $10 million bail after he was charged with securities fraud last week.

Ira Lee Sorkin, Madoff's lawyer, declined to comment.

SIPC President Stephen Harbeck said in a statement that the fund's task will be harder than in other bankruptcies because of the size of the misappropriation and the condition of the defunct firm's records.

Harbeck said it would be unlikely that the trustee can transfer the firm's customer accounts to a solvent brokerage firm. He added that it was impossible at this point to determine what share each investor might hold in any remaining assets.

From its inception through December 2007, the SIPC has advanced $507 million and made possible the recovery of $15.7 billion in assets for an estimated 626,000 investors, the fund said on its web site.

Several major banks including Spain's Grupo Santander SA, Britain's HSBC Holdings PLC, Royal Bank of Scotland Group PLC and Man Group PLC, France's BNP Paribas and Japan's Nomura Holdings reported falling victim to Madoff's alleged Ponzi scheme.

Other major investors also lost out in the scam, including former Philadelphia Eagles owner Norman Braman, New York Mets ownerFred Wilpon and J. Ezra Merkin and the chairman of GMAC Financial Services.

First the Chinese accumulated dollars, now everyone is joining the stampede

First the Chinese accumulated dollars, now everyone is joining the stampede

Stephen King

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What caused the crisis? For some, the story is simple. It’s all about global imbalances.

The US borrowed too much and the Chinese lent too much. In an arithmetical sense, this assertion contains some truth. The US has lived with a whopping deficit on the current account of its balance of payments for countless years. The Chinese, in turn, have experienced an ever-widening surplus.

According to this thesis, China’s surplus results from the pursuit of a mercantilist exchange rate policy designed to promote Chinese exports at the expense of manufacturing jobs elsewhere in the world. China deliberately prevented its exchange rate from rising by using its trade surplus to buy dollars in the open market.

This led to a massive increase in China’s foreign exchange reserves, most ofwhich were invested in US Treasuries. US interest rates ended up lower as a result, leading to the housing boom and sub-prime crisis.

Based on this view of the world, the US economy would eventually collapse when Chinese and other foreign investors in US assets reached a point of saturation where they simply had too much exposure to the US economy. At that moment, the US would discover the folly associated with its constant borrowing from abroad. Capital inflows would dry up, domestic financial markets would tumble and the dollar would collapse.

Thatwas the theory. There is, though, one big problem. The dollar may have been weak at the beginning of the crisis but it isn’t any longer.

Through much of this year, the dollar has been in the ascendant. China’s currency, the renminbi, is struggling to keep up. Other currencies, including the euro and, most obviously, sterling, have fallen on hard times. If, then, this is a story about the unwinding of global imbalances, it’s a story that appears to have lost the plot.

I have no doubt that China’s trade surplus and its associated purchase ofUSTreasuries have played some sort of role in the crisis. But they’re not the only factors, and nor are they the most important. While it’s true that Treasury yields in the US were lower as a result of China’s behaviour, that doesn’t explain the huge boom in demand for mortgage-backed securities and their various derivatives over recent years. Everyone wanted a piece of the action. American investors bought these pieces of paper but so, increasingly, did European and emerging market investors.

Why was there such a huge demand for products which, today, are no longer trusted? One simple answer relates to our own, collective, desire to retire early with a decent nest egg of savings, a desire which required a high return on our financial investments.

Our hopes of meeting those desires were dealt a savage blow in 2000 and 2001 when equity prices collapsed.

We needed another “get rich quick” scheme. Investors looked elsewhere for assets that might have a chance of generating the returns that would keep us happy in our dotage.

For a while, mortgage-backed securities seemed to do the trick. They were safer than equities but offered a higher yield than Treasuries.

The odd thing about these investments, though, is the idea that building or buying houses will add to national wealth in the years to come.

Wealth ultimately comes from productivity gains. Those gains, in turn, hinge on advances in technology and on a more efficient allocation of global capital. While it’s true that modern houses have more advanced technologies than older houses (double glazing, for example), the big gains are, of course, seen in other areas, most obviously in computers, transportation and communications. Ultimately, house prices will tend to rise only as a consequence of these technology gains and their impact on our incomes. Over the very long term, house prices won’t rise of their own accord (as, indeed, the Japanese, with their feeble economy, have discovered over the last 16 years, a period of persistently falling land prices).

The huge investments in paper assets in recent years were ultimately used to fund investments in parts of the economy which were never likely to boost long-term growth. Even worse, to the degree that investments in housing diverted funds from other, more rewarding, areas of economic endeavour, the investments were ultimately used only to bring forward future consumption to the present. All that extra consumption required someone else to do all the producing.

It’s no surprise that children’s toys this Christmas will be mostly labelled “Made in China”.

When, at the end of 2006, the US housing market began to soften, alarm bells should have been ringing.

Afalling US housing market suggested that, perhaps, mortgage-backed securities and other, more esoteric, pieces of paper were perhaps not quite as safe as investors had previously assumed. It took a while for investors to recognise the problem.

Late last summer, though, the penny dropped. Any piece of paper linked to housing was suddenly of little worth.

Banks, though, had been dependent on the sale of these pieces of paper to raise the necessary funds to sustain high volumes of lending. If the demand for these pieces of paper collapsed, it followed that bank lending would also collapse. Everything else stems from this: shortages of credit, worries about bankruptcy, monetary hoarding, and recessionary fears. We are witnessing a catastrophic breakdown of trust within the financial system.

In fact, the only stuff that is trusted these days is cash. One of the more remarkable developments last week was a fall in the rate of interest rate on 3-month Treasury bills to below 0 per cent. In other words, people are prepared to pay the US government to look after their money, such is their anxiety about savings held in the private sector.

This kind of behaviour has long been seen in Japan, but it’s a new experience in theUSand elsewhere in the world. It also helps to explain why the dollar is so strong. In a world of tremendous uncertainty, the only cash investors want to hold is cash which has the best international liquidity. Almost anywhere in the world, dollars are acceptable as a means of exchange. It’s no surprise, then, that dollars are very popular all of a sudden.

In this new dollar stampede, there are plenty of casualties. It won’t be long before US exporters are complaining about unfair competition from abroad. Flows of private capital to emerging markets will dry up, because the desire for dollars creates a “home bias” for US banks. Emerging market currencies, in turn, will come under pressure, reducing the nest egg of dollar foreign exchange reserves which had been built up in earlier years.

Funnily enough, then, the world as awhole has decided to behave as the Chinese have been doing for the last decade or so. The Chinese have been accumulating dollars. Suddenly, everyone else also wants dollars.

In hindsight, rather than demanding the Chinese should have allowed the renminbi to appreciate, perhaps the Americans should, instead, have encouraged the Chinese to diversify their foreign assets. Rather than holding Treasuries, the Chinese might have been encouraged to buy US companies in need of a bit of tender loving care. But the opportunity to sell General Motors at a reasonable price is no longer there.

Report: Bush masked cost of wars that could top $1.7 trillion

Report: Bush masked cost of wars that could top $1.7 trillion

Nick Juliano

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Even if Barack Obama draws down troops in Iraq like he's promised, a new report finds the US is on pace to have spent nearly $2 trillion on military operations including Iraq and Afghanistan over the next decade.

The nonpartisan Center for Strategic and Budgetary Assessments found that the $687 billion spent so far on Iraq has cost the US more than every conflict aside from World War II. With the $184 billion in Afghanistan, the two main conflicts of the war on terror have proved to be 50 percent more expensive than Vietnam.

An author of the report said President Bush's decision to circumvent the traditional budget process is to blame for the exceedingly high costs.

The reliance on supplemental funding creates a misleading picture of overall requirements, said Steven Kosiak, vice president of budget studies at CSBA and author of the report, during a briefing on Monday. "A sound budgeting process forces policymakers to recognize the true costs of their policy choices," he said.
The CSBA's assessment comes in below some of the highest estimates for the wars' costs. Nobel laureate Joseph Stiglitz and Harvard economist Laura Bilmes estimated Iraq alone would cost $3 trillion when factoring costs beyond the battlefield, such as veterans health benefits and disability pay.

Reuters detailed the CSBA report on Tuesday.

The latest report blamed President Bush for keeping the costs so high through his practice of funding the wars via "emergency" supplemental budget requests, which fall outside the bounds of the normal budgetary process. Such requests, CSBA found, virtually eliminate Congressional oversight and hurt the Pentagon's ability to plan for the long term.

That Bush insisted on delivering massive tax cuts to the wealthiest Americans during wartime also drove up the long-term price tag, according to the report.

Wartime costs are expected to balloon by an additional $416 billion to $817 billion by 2018, according to the report, even if troop deployments fall below 75,000. Currently, 143,000 US troops are deployed to Iraq and another 31,000 are in Afghanistan.

President-elect Obama has promised to begin withdrawing combat troops from Iraq, but he plans to increase deployments to Afghanistan. An agreement with the Iraqi government signed recently would see all US troops gone from that country by 2011.

The United States: A Country Without Mercy

The United States: A Country Without Mercy

By Paul Craig Roberts

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The Christmas season is a time to remember the unfortunate, among whom are those who have been wrongly convicted.

In the United States, the country with the largest prison population in the world, the number of wrongly convicted is very large. Hardly any felony charges are resolved with trials. The vast majority of defendants, both innocent and guilty, are coerced into plea bargains. Not only are the innocent framed, but the guilty as well. It is quicker and less expensive to frame the guilty than to convict them on the evidence.

Many Americans are wrongfully convicted, because they trust the justice system. They naively believe that police and prosecutors are moved by evidence and have a sense of justice. The trust they have in authorities makes them easy victims of a system that has no moral conscience and is untroubled by the injustice it perpetrates.

Lt. William Strong, son of a military family, tired of his wife’s unfaithfulness and filed for divorce. The unfaithful wife retaliated by accusing Strong of rape. There was no evidence of rape, but Strong was deceived into a plea bargain. Once Strong entered a plea, he was double-crossed and given 60 years.

Christophe Gaynor took an adolescent skate board team to New York City for a competition. One of the kids attempted to buy illicit drugs. Gaynor threatened to tell the boy’s parents, and the boy preempted Gaynor by accusing him of sexual molestation.

Gaynor was openly framed in the Arlington, Virginia, court system.

Americans, or perhaps more accurately some Americans, were horrified by the photographs showing the torture of Iraqi detainees in Abu Ghraib by the US military. The Senate Armed Services Committee has issued a report which concludes that the torture policy originated at the highest level of the Bush administration. Those Americans with a moral conscience have reeled under further revelations--the torture of Guantanamo detainees, the transport of people seized by US authorities to third world countries to be tortured.

We have to ask ourselves why American service men and women and CIA operatives delight in torturing people about whom they know nothing? It has been well known since the Stalin era that torture never produces accurate information. Yet, US soldiers and CIA personnel jumped at the green light given to torture by President George W. Bush, Vice President Dick Cheney, Secretary of Defense Rumsfeld, and the US Department of Justice. Why weren’t our soldiers shocked instead at the immorality of their leaders?

One answer is that the US military no longer operates according to a code of honor. Military discipline in the traditional sense does not exist. The ethos of the US military has degenerated into kick-ass macho. Major General Taguba, who, instead of covering up the Abu Ghraib scandal, attempted in his report to hold the US military to its traditional principles, was forced to resign from the US Army.

Another answer is that the work of torture, like police work and prosecutorial work, attracts brutal people who enjoy inflicting harm on others. The two Republican female US Attorneys in Alabama who framed Democratic Governor Seligman enjoyed ruining Seligman and bringing grief to his family.

Deborah Davies of the BBC’s Channel 4 undertook a four-month investigation of the torture of American prisoners inside American prisons. Videos taken by sadistic prison guards and videos recovered from surveillance cameras reveal horrible acts of torture and even of murder of prisoners by prison guards.

An American prison reformer told Deborah Davies, “We’ve become immune to the abuse. The brutality has become customary.”

Few Americans seem to be disturbed as these inhumane and illegal practices continue unabated. Americans continue to see themselves as the salt of the earth, the “indispensable people.”

“Law and order conservatives” have a great responsibility for this evil. Just as “law and order conservatives” created hysteria among the people about crime, they created hysteria about terrorists. Hysterical people condone great evils and arm government with power in the mistaken belief that it will protect them.

What kind of people have we become when we exercise no oversight over a criminal justice (sic) system that destroys the lives of innocent people and locks them away in prisons to be tortured by sadistic guards?

Blundering U.S. Should Spare the World Any More Nation Building

Blundering U.S. Should Spare the World Any More Nation Building

Crippling the Auto Union Is Just a Warm-Up

Crippling the Auto Union Is Just a Warm-Up

Senate Panel’s Report on U.S. Torture Abuse

Senate Panel’s Report on U.S. Torture Abuse

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