Signs of the Economic Apocalypse, 3-24-08

From SOTT.net:

Gold closed at 920.00 dollars an ounce Thursday (markets were closed Friday for Good Friday), down 8.6% from $999.50 for the week. The dollar closed at 0.6480 euros last week, up 1.5% from 0.6382 at the close of the previous Friday. That put the euro at 1.5432 dollars compared to 1.5670 the Friday before. Gold in euros would be 596.16 euros an ounce, down 7.0% from 637.84 at the close of the previous week. Oil closed at 101.84 dollars a barrel Thursday, down 8.1% from $110.06 for the week. Oil in euros would be 65.99 euros a barrel, down 6.4% from 70.24 at the close of the week before. The gold/oil ratio closed at 9.03, down 0.6% from 9.08 for the week. In U.S. stocks, the Dow Jones Industrial Index closed at 12,361.32 Thursday, up 3.4% from 11,951.09 at the close of the previous week. The NASDAQ closed at 2,258.11 last week, up 2.1% from 2,212.49 at last week’s close. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.33 Thursday, down 11 basis points from 3.44% for the week.

Looking back on last week, it is safe to say that the Fed’s odd rescue of Bear Stearns was a success. The price of gold fell the most it has in any week since 1990, almost 9%. The dollar gained on the euro. Oil was down 8%. The Dow rose 3.4%. Not to say there isn’t a whole lot to criticize in the Bear Stearns action. Don Harrold does a great job of that here if you haven’t seen it yet. But it did what it was supposed to do: stop the bleeding.

Now what? Were the recent run-ups in the prices of commodities (gold, other metals, oil, wheat, corn, etc.) just another bubble or were they part of a longer term trend? Will commodity prices go down as the world enters a recession, or will we suffer stagflation (higher prices and low growth)? By “just another bubble” I mean that it could be that the higher prices for commodities represent the lower value of all world currencies, that currencies were inflated by easy credit and there are more dollars, euros, yen, etc. chasing the same amount of commodities and that when a crash comes, we will see a deflationary reduction in commodity prices. Or, it could be that we are reaching limits in the production of commodities, that there is a limited amount of gold, oil, arable land, etc. and that economic growth in Asia means higher prices.

Deflation or Inflation? Money for Nothing

Kenneth Couesbouc

March 21, 2008

The harder they come, the harder they fall one and all.
-- Jimmy Cliff.

There are currently two contradictory forecasts for the times to come, deflation and inflation. Are rising commodity prices mere speculation, a bubble amongst bubbles that will burst as bubbles do? Will the credit crunch lead to a liquidity crisis that must push prices down? Or is legal tender losing its face-value? Is OPEC to blame for the rising price of crude oil, or should the major central banks be held responsible for flooding the market with "money for nothing"?

Trading in commodities is always a speculative business, as it demands a continual anticipation of future prices. But this also applies to stocks and real estate. And these, as shown by recent events, can inflate without inflating currency. However, the price of stocks and real estate only affects the price of stocks and real estate, whereas the price of commodities affects the price of just about everything else. It is also true that company shares and land are practically eternal, whereas commodities are destined to enter the production/consumption process. A barrel of oil is not continuously coming back on the market to be bought and sold. At some stage its value is determined once and for all (without, of course, prejudicing the price of future barrels of oil). Commodities and their value are destined to be consumed and must be produced again. Company shares (as long as the company exists) and land (a part of the Earth's surface) cannot be consumed. Their market value may fluctuate but their material existence persists unchanged. The persistence of stocks and real estate allows the formation of speculative bubbles that drain money from other employment, but do not otherwise affect the prices on the market. Whereas inflated commodity prices inflate all other prices.

The direct effect of a liquidity crisis is that banks hesitate in lending to each other and to the world at large. This means that the biggest banks will take control of the smaller fry, probably after substantial government bail-outs (vis. Bear Stearns). The next to suffer are the market operators on the stock exchange and in real estate, who need regular injections of extra credit to keep their buoyancy. Then come home-buyers, car-buyers, buyers of sofas and TVs, right down to the ordinary overdraft. Less liquidity means less buying power all round. Will this bring prices down generally, or will it reduce spending to the essentials of life, at whatever price? A shrinking demand for non-essential goods and services will push the weak to the wall, and the big companies will swallow the small.

Like the Roman god Janus, money is two-faced. It can be the intermediary of exchange and it can be the finality of exchange. As K. Marx explained long ago, the perpetual chain of exchanges, commodity - money - commodity - money - C - M - C - M - etc., is made up of two separate series of events. One is C - M - C, and the other is M - C - M. The first series concerns the exchange of goods and services, with money as their intermediary. The second series concerns the exchange of money, with goods and services as its intermediary. Selling the produce of labour to buy the produce of different labour is a consequence of the division of labour. Buying the produce of labour to sell it again at a profit is a consequence of the monetary system. Through the intermediary of money, goods and services are exchanged for consumption (productive or not). Use and exchange value changes hands, and the intervening money is a simple formality. Whereas buying to sell at a profit means that the object of the exchange between money and more money is of secondary importance and that, ultimately, everything is bought and sold.

Buying to sell instead of selling to buy means available credit instead of available goods and services, capital instead of labour. It is no longer the product of labour that is sold to buy the product of other labours. It is labour that is bought, and its product is sold at a profit. And the question arises of the nature of profit. Is labour bought at less than its value, or is the product of labour sold at more than its value? This is a moot-point. But the value of a product is the sum of the values that go into its production, and its market price must cover this plus profit. Profit is the difference between the market price and the production costs. This means that profit depends on a market price that is superior to the value of the product. And profit increases as the gap between price and value widens. If the market price of a product is unchanged (if supply matches demand), and its value is reduced by productivity gains (new technology), or by reducing the price of labour (outsourcing), then profit will increase accordingly. But the exchanges on the market are exchanges of value that do not take into account the difference between an excessive and an insufficient price of labour. The value of labour is the price paid for it. Profit means that the market price is in excess of value, and that the currency measuring the price is devalued. And the larger the profit margin, the more currency is devalued.

…The price of non-renewable commodities is entering a new phase. So far, abundance has been the rule, and this may still be true. But the growth curve of supply has been crossed by the growth curve of demand, which is much steeper. Market prices are but a reflection of this new relation, where the planet's resources are pushed to the limit. However, demand must be solvent, and increasing demand depends on increasing amounts of liquidity. And that seems to be in contradiction with the present situation. Unless liquidity is being drained onto the commodity market, thereby accentuating the lack of liquidity elsewhere. Either demand for commodities slackens and the world economy stagnates or recedes, or this demand is sustained by credit and banks will fall like dominoes. Or, and this is the case so far, central banks change their status of ultimate lenders to that of primary lenders. Instead of backing short term discounting and inter-bank lending, central banks are doing the lending themselves at a bargain rate. This is not quite the same as printing larger and larger denomination bank-notes, because credit returns to the creditor, whereas bank-notes stay in circulation. But the principle is the same. The loans granted by central banks will have to be renewed and increased. Renewed to keep the banks afloat, and increased to compensate the liquidity drawn on to the commodities market. And also to compensate the liquidity that is withdrawn to be consumed. As rising commodity prices are passed on to the consumer, the credit squeeze forces him to fall back on his savings. He too needs cash and must sell his stocks and bonds, maybe even his life insurance or his home. This also must be compensated by central bank loans.

It seems that 2008 will be an up and down year, as central banks regularly intervene on a weekly, monthly and quarterly basis with increasing amounts of credit. The real test will come when governments try to fill their abysmal budget deficits by borrowing on the money market. With banks on the verge of asphyxiation and savings being spent on consumption, this will be difficult and costly and will depend on more central bank lending. Handing out swaths of money at close to zero interest, backed by little or no collateral, may be different from printing bank-notes but the result will be just as inflationary. So inflation wipes out debts and borrowing can increase again, drawing growth along with it. Inflation will greatly alleviate government, corporate and all fixed interest debts. But the holders of these debts will loose out. So will wage earners and fixed incomes in general. And the consequence of these recurrent inflationary peaks is always proportionate to the size of the debt. With inflation, the amount of value destroyed is necessarily a percentage of the total sum of all values.

What does Couesbouc mean when he says that central banks are becoming primary lenders? It means the Fed now is lending money directly to to investment firms, rather than what they traditionally did as ultimate lenders, lend money to banks and their own national governments.

Investment firms tap Fed for billions

Jeannine Aversa

March 20, 2008

WASHINGTON (AP) - Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported Thursday.

The lending is part of a major effort by the Fed to help a financial system in danger of freezing.

Those large firms averaged $13.4 billion in daily borrowing over the past week from the new lending facility. The report does not identify the borrowers.

The Fed, in a bold move Sunday, agreed for the first time to let big investment houses get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, got under way Monday and will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.

Goldman Sachs, Lehman Brothers and Morgan Stanley said Wednesday they had begun to test the new lending mechanism.

On Wednesday alone, lending reached $28.8 billion, according to the Fed report.

The Fed created a way for financially strapped investment firms to have regular access to a source of short-term cash. This lending facility is seen as similar to the Fed's "discount window" for banks. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed.

Investment houses can put up a range of collateral, including investment-grade mortgage backed securities.

The Fed, in another rare move last Friday, agreed to let JP Morgan Chase secure emergency financing from the central bank to rescue the venerable Wall Street firm Bear Stearns from collapse. Two days later, the Fed back a deal for JP Morgan to take over Bear Stearns.

Thursday's report offered insight on how much credit was extended to Bear Stearns via JP Morgan through the transaction the Fed approved last Friday. Average daily borrowing came to $5.5 billion for the week ending Wednesday.

Separately, the Fed said it will make $75 billion of Treasury securities available to big investment firms next week. Investment houses can bid on a slice of the securities at a Fed auction next Thursday; a second is set for April 3.

The Fed will allow investment firms to borrow up to $200 billion in safe Treasury securities by using some of their more risky investments as collateral.

By allowing this, the Fed is hoping to take pressure off financial companies and make them more inclined to lend to people and businesses.

The housing collapse and credit crunch have led to record-high home foreclosures and forced financial companies to rack up multibillion losses in complex mortgage investments that turned sour.

In the past day and weeks, the Fed has taken extraordinary moves aimed at making sure that problems in credit and financial markets do not sink the economy.

One of the things this new lending means is that the Fed will begin to regulate investment firms like they have regulated banking. This is generally a good thing and long overdue. The repeal of the Glass-Steagall Act in 1999, which separated commercial banking from investment banking, opened up a whole world of unregulated credit. That will always lead to a speculative bubble then a crash.

Partying Like It’s 1929

Paul Krugman

March 21, 2008

If Ben Bernanke manages to save the financial system from collapse, he will — rightly — be praised for his heroic efforts.

But what we should be asking is: How did we get here?

Why does the financial system need salvation?

Why do mild-mannered economists have to become superheroes?

The answer, at a fundamental level, is that we’re paying the price for willful amnesia. We chose to forget what happened in the 1930s — and having refused to learn from history, we’re repeating it.

Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931.

This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.

As the decades passed, however, that lesson was forgotten — and now we’re relearning it, the hard way.

To grasp the problem, you need to understand what banks do.

Banks exist because they help reconcile the conflicting desires of savers and borrowers. Savers want freedom — access to their money on short notice. Borrowers want commitment: they don’t want to risk facing sudden demands for repayment.

Normally, banks satisfy both desires: depositors have access to their funds whenever they want, yet most of the money placed in a bank’s care is used to make long-term loans. The reason this works is that withdrawals are usually more or less matched by new deposits, so that a bank only needs a modest cash reserve to make good on its promises.

But sometimes — often based on nothing more than a rumor — banks face runs, in which many people try to withdraw their money at the same time. And a bank that faces a run by depositors, lacking the cash to meet their demands, may go bust even if the rumor was false.

Worse yet, bank runs can be contagious. If depositors at one bank lose their money, depositors at other banks are likely to get nervous, too, setting off a chain reaction. And there can be wider economic effects: as the surviving banks try to raise cash by calling in loans, there can be a vicious circle in which bank runs cause a credit crunch, which leads to more business failures, which leads to more financial troubles at banks, and so on.

That, in brief, is what happened in 1930-1931, making the Great Depression the disaster it was. So Congress tried to make sure it would never happen again by creating a system of regulations and guarantees that provided a safety net for the financial system.

And we all lived happily for a while — but not for ever after.

Wall Street chafed at regulations that limited risk, but also limited potential profits. And little by little it wriggled free — partly by persuading politicians to relax the rules, but mainly by creating a “shadow banking system” that relied on complex financial arrangements to bypass regulations designed to ensure that banking was safe.

For example, in the old system, savers had federally insured deposits in tightly regulated savings banks, and banks used that money to make home loans. Over time, however, this was partly replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages — with nary a regulator in sight.

As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players in this system seemed to offer better deals than conventional banks. Meanwhile, those who worried about the fact that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.

In fact, however, we were partying like it was 1929 — and now it’s 1930.

The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.

Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle. We can only hope that they succeed. Otherwise, the next few years will be very unpleasant — not another Great Depression, hopefully, but surely the worst slump we’ve seen in decades.

Even if Mr. Bernanke pulls it off, however, this is no way to run an economy. It’s time to relearn the lessons of the 1930s, and get the financial system back under control.

It is clear that the game has changed in the financial capitals of the world. To one degree or another we will see closer regulation of financial markets, if only because there was hardly any regulation at all in the last decade.

The four ‘new sheriffs’ of Wall Street

Francesco Guerrera, Krishna Guha and Gillian Tett

March 21 2008

The Federal Reserve and Treasury are playing a dominant day-to-day role in overseeing Wall Street following this week’s rescue of Bear Stearns, raising the prospect that the central bank might be given more permanent authority over securities firms.

Bankers say the greater authority is a direct consequence of the Fed’s extraordinary decisions to extend a $30bn credit line to help JPMorgan Chase’s takeover of Bear and to lend emergency funds to securities houses for the first time in more than 70 years.

“There is a new sheriff in town,” said a senior banker. “The Bear situation changed everything: people saw death before their eyes. The Fed and Treasury are in charge now and are not going to let go”.

Under a regulatory regime dating back to the 1930s, the Fed oversees commercial banks, but investment banks are primarily regulated by the Securities and Exchange Commission.

But as the credit crunch deepened, Ben Bernanke, Fed chairman, Tim Geithner, president of the New York Fed, Hank Paulson, Treasury secretary, and Robert Steel, his number two, have been in unusually close contact with Wall Street executives.

People close to the situation said the Fed and Treasury feared further problems among securities firms could destabilise the financial system and expose US taxpayers to sizeable losses on the new Fed loans.

Their stance has triggered talk of new financial services legislation, with bankers and politicians, including Barney Frank, House financial services committee chairman, asking whether investment banks should be regulated by the SEC or the Fed.

An extension of the Fed’s powers to investment banks might force them to reduce risk and leverage in order to comply with the tougher requirements faced by deposit-taking banks.

However, any change would require legislative action, which looks increasingly difficult ahead of the November presidential election, and could be even more problematic under a new Administration.

The SEC said different agencies were functioning as “equal partners at the regulatory forefront”.

Whatever happens it is clear that we have reached the end of an era. The end of both the neoliberal era and the era of U.S. hegemony.

Signs of the Economic Apocalypse, 3-17-08

From SOTT.net:

Gold closed at 999.50 dollars an ounce Friday, up 2.6% from $974.20 for the week. The dollar closed at 0.6382 euros Friday, down 2.0% from 0.6512 at the close of the previous Friday. That put the euro at 1.5670 dollars compared to 1.5356 the Friday before. Gold in euros would be 637.84 euros an ounce, up 0.5% from 634.41 at the close of the previous week. Oil closed at 110.06 dollars a barrel Friday, up 4.4% from $105.47 for the week. Oil in euros would be 70.24 euros a barrel, up 2.3% from 68.68 at the close of the Friday before. The gold/oil ratio closed at 9.08 Friday, down 1.8% from 9.24 for the week. In U.S. stocks, the Dow closed at 11,951.09 Friday, up 0.5% from 11,893.69 at the close of the previous week. The NASDAQ closed at 2,212.49 Friday, unchanged from the end of last week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.44%, down ten basis points from 3.54 for the week.

The big news, amid a lot of big news, last week was the collapse of the Carlyle Fund and Bear Stearns. The Carlyle Fund, a hedge fund affiliated with the notorious Carlyle Group, a private equity firm run by the Anglo-American power elite, collapsed on Wednesday. Bear Stearns, one of the older and larger Wall Street brokerage firms, only avoided collapse by a massive bailout using the Fed’s own money. These events, particularly the Bear Stearns bailout had insiders in a deep panic, since there may simply not be enough money to bail out all the essentially bankrupt financial institutions.

This big rescue may be just the beginning

Tom Petruno

Los Angeles Times

March 15, 2008

Throughout Wall Street's history, major financial system upheavals often have culminated with the spectacular failure of a marquee name.

That was the case in December 1994, when Orange County filed for bankruptcy protection after getting caught on the wrong side of a sharp jump in interest rates.

In September 1998, the Federal Reserve helped arrange a bailout of the giant investment fund Long-Term Capital Management after it neared collapse from bad bets in wildly swinging markets.

In those and similar instances the big-name debacles marked the peak of the financial system crises, not the start of something worse.

But this time around, with Friday's surprise announcement that the Fed would temporarily inject its own money into tottering brokerage giant Bear Stearns Cos., many Wall Street pros say they have little confidence that the move is a prelude to better times for beleaguered markets and the economy.

Indeed, some experts say Bear Stearns' woes warn of potentially larger calamities that will severely test the Fed, the economy and, ultimately, taxpayers as the government gets more deeply involved in fixing the markets' troubles."

We will lose, in some form, several major financial institutions before this is over," said veteran economist Allen Sinai of Decision Economics Inc. in New York.

The heart of the problem is that the nation is living through an unwinding of a 25-year-long, consumer-led borrowing binge. Bear Stearns was a key player in financing that binge, most notably in high-risk mortgages.

Wall Street in recent years designed ever more creative ways to transform loans into bonds and sell them to investors who were hungry for interest income. That alchemy reached its zenith with sub-prime mortgages -- loans to people with dubious credit.

Even as investors poured hundreds of billions of dollars into sub-prime-mortgage bonds from 2003 to 2006, there were ample warnings that many borrowers were vastly overstretched.

But it wasn't until housing prices began to implode last year, and mortgage defaults rocketed, that banks, brokerages and investors came to realize they had gone too far.

Now, with the U.S. financial system already overburdened with debt, many investors simply don't want to take a chance on owning more of it -- unless it's the direct obligation of the U.S. Treasury.

In market parlance, debt is leverage."

We have far too much leverage in the system, and we're now in the process of de-leveraging," said Tom Atteberry, a money manager at investment firm First Pacific Advisors in Los Angeles. "We think there's a lot more to go."

That mentality is widespread, and it is feeding on itself: Investors don't want to pay current market prices for mortgage-backed bonds and other debt because they worry that more borrowers will have trouble making payments. That further shuts down lending, making credit tighter and squeezing more borrowers.

Banks and brokerages already have written down the value of many of the mortgage securities they hold, to account for rising delinquencies. But there still is no sense that the housing market has reached a bottom, so there is no way for investors to know how much worse delinquencies will get."

The only true solution would be to get home prices up," said Jeffrey Gundlach, chief investment officer of Los Angeles-based money manager TCW Group. "

But the fundamentals are moving in the opposite direction."

At times like this the focus for Wall Street firms primarily is on surviving. No bank or brokerage will lend to a peer, even in routine daily transactions, if there is any doubt at all that the borrower can repay. Failure then can become assured once rumors start about a firm.

In January, after rumors swirled that it was running out of capital, Countrywide Financial Corp., the largest U.S. mortgage lender, quickly struck a deal to sell itself to Bank of America Corp.Wall Street's propensity to abandon its own has sunk all sorts of financial institutions over the last century. In 1984 the government had to rescue Continental Illinois, then the seventh-largest bank, once creditors pulled the plug. Brokerage Drexel Burnham Lambert Inc. failed in 1990 after its funding lines were cut.

But the current crisis is far larger in scope than those. Because so many banks, brokerages and investors were involved in financing the recent real estate boom -- the biggest housing bubble ever, by many accounts -- the growing problem of mortgage defaults infects nearly every corner of the financial system.

By shaking markets' confidence to the core, the housing bust also has made investors skittish about debt securities that have no direct connection to housing. In recent weeks, for example, demand has evaporated for certain kinds of municipal bonds.

What's more, financial institutions are tied to one another in ways that didn't exist 20 years ago. Using so-called derivative securities, banks, brokerages and investors in effect make bets with one another about each other's solvency. Those particular contracts, known as credit-default swaps, often are used as insurance policies against market turmoil."

These institutions all are linked by a derivatives market that none of us could map out on a piece of paper," said Charles Geisst, a finance professor at Manhattan College and a Wall Street historian.

One ever-present risk is that the inability of one party in a credit-default swap to pay another could trigger a domino effect throughout the financial system.

Still, the primary concern at the moment remains the withering value of mortgage-backed bonds.

Gundlach, whose firm manages tens of billions of dollars in mortgage securities, estimates that losses on mortgage bonds across the economy might total $1 trillion by the time the delinquency wave has crested and lenders write down loans to levels borrowers can afford.

Although the Fed is almost certain to continue cutting short-term interest rates, that won't fix the markets' problems, Gundlach asserts. It might even make things worse: As the Fed's cuts lower rates on adjustable-rate mortgages, he says, investors become less interested in buying bonds backed by those loans."

So the bonds' prices drop more," Gundlach says, "because investors analyze the risk to be even higher."

To be sure, some investors believe the extreme level of fear on Wall Street means there is tremendous long-term potential in lower-valued bonds and stocks."

There are plenty of attractively priced opportunities" in markets, said Russell Read, chief investment officer at the $235-billion-asset California Public Employees' Retirement System. "We're not on the sidelines at all. We're buying."

But many other investors clearly are in no hurry to step up. And that raises the potential for more declines in markets and deeper troubles for financial institutions.

Across Wall Street, there is a widespread belief that the Fed's use of its own capital to shore up Bear Stearns is just the first step toward an eventual government bailout of the housing market."

The history of major financial crises is that the government is going to come in at some point," said Richard Sylla, a professor of financial history at New York University.

The next several days should be crucial.

Banks, Fed to take stocks on rocky ride

Kristina Cooke

Mar 14, 6:50 PM ET

NEW YORK (Reuters) - The rocky ride in U.S. stocks looks set to intensify next week with the survival of one of the biggest investment banks in doubt and regulators rapidly burning through options to limit more damage to the financial system.

All eyes will again be on Bear Stearns come Monday for any further word about the condition of the fifth-largest U.S. investment bank, which on Friday had to get emergency funding as fallout from the global credit crisis took its toll.

Bear Stearns is among four major Wall Street firms reporting earnings next week.

But the Federal Reserve's policy-setting meeting on Tuesday will be the focus of the holiday-shortened week. The U.S. stock market will be closed for Good Friday on March 21.

U.S. interest-rate futures on Friday showed more than a 50 percent chance that the central bank will cut its benchmark fed funds rate target by 100 basis points -- or 1 percent -- to revive an economy that many say is already in recession.

"Most of the focus will be on the Federal Reserve next week. Will the Fed cut rates? And if so, how much? And most importantly, what will the statement that accompanies the decision say?" said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York. "Frankly, the Fed said it all in their bailout of Bear Stearns."

Market participants have questioned the effectiveness of the U.S. central bank's efforts. On Tuesday, March 11, the Fed teamed up with other central banks to get up to $200 billion in fresh funds to cash-starved markets. The market rallied sharply for its best day in five years, but most of those gains were erased by the end of the week.

Then on Friday, Bear Stearns said a cash crunch forced it to turn to the Federal Reserve and JPMorgan Chase for emergency funds. That revived investors' fears about the depth and breadth of the credit crunch. Bear's stock tumbled as much as 50 percent on Friday to a session low at $28.42, its lowest since October 1998.
The 28-day emergency line of funding for Bear Stearns came just days after Bear, which has been hard hit by its heavy exposure to the faltering U.S. mortgage market, had dismissed market rumors of a cash crunch and said it was still a healthy player in the global web of trading and finance.

That heightened concerns that there may be other banks facing liquidity issues.

Moment Of Truth For Banks

More clarity about the extent of write-downs could come when four big U.S. investment banks report earnings next week.

Bear Stearns is first out of the block on Monday, which also happens to be St. Patrick's Day. Bear moved up its earnings release, which was initially scheduled for Thursday. The change in schedule may indicate that Bear plans to make a significant disclosure, said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.

"Speculation is rising that Bear Stearns could be the subject of a takeover or 'takeunder' over the weekend -- possibly with JPMorgan Chase," she added.

Lehman Brothers and Goldman Sachs will report earnings on Tuesday, followed by Morgan Stanley on Wednesday.

On Friday, Lehman's stock was the second-biggest decliner among investment banks, falling 14.6 percent, or $6.73, to close at $39.26 on the New York Stock Exchange.

Forecasts and stock prices have come down sharply for all the big banks, as the credit crunch spreads across almost every market -- the contagion effect that Wall Street executives last year assured analysts was not happening.

S&P 500 Feels Bear's Breath

With Friday's slide, the S&P 500 was close to falling into a bear market. If it drops further next week, it could cross a threshold that normally indicates a bear market, which would be a drop of 20 percent off its October closing high. The Nasdaq turned bearish last month.

It was a wild week, starting with Monday's revelations that a federal probe showed New York Gov. Eliot Spitzer was "Client 9" who patronized a call girl working for a prostitution ring that charged rates of $1,000 an hour and up. That triggered a "schadenfreude festival" on Wall Street, where Spitzer had ferociously prosecuted wrongdoing during his years as New York attorney general. On Wednesday, the TVs on most trading desks were tuned in to watch live broadcasts of Spitzer's resignation as governor.

By Friday, the governor's scandal seemed like a faded memory when news broke about Bear Stearns' liquidity crisis. At the closing bell, the Dow Jones industrial average was down 194.65 points, or 1.60 percent, to end at 11,951.09, while the Standard & Poor's 500 index was down 27.34 points, or 2.08 percent, at 1,288.14, and the Nasdaq composite index was down 51.12 points, or 2.26 percent, at 2,212.49.

For the week, the Dow Jones industrial average managed to finish with a gain of 0.48 percent, thanks to Tuesday's huge rally. But the Standard & Poor's 500 index slipped 0.40 percent for the week and the Nasdaq was unchanged -- right to the penny.

Since the end of February, the Dow has fallen 2.57 percent and the S&P 500 has dropped 3.19 percent, while the Nasdaq has declined 2.60 percent.

For the year so far, the Dow has lost 9.90 percent, the S&P 500 has dropped 12.27 percent and the Nasdaq has tumbled 16.58 percent.

Recession Now?

Among the week's key economic data will be the U.S. Producer Price Index on Tuesday, which will get plenty of attention due to concerns about rising inflation even as the economy slows. Economists polled by Reuters expect February core PPI to rise 0.2 percent.

On Friday, a government report unexpectedly showed February's Consumer Price Index, another top inflation gauge, was unchanged. While that leaves more room for the Federal Reserve to cut interest rates, analysts were skeptical about the tame inflation picture painted by the data because prices of oil, gold and other commodities are at record highs.

Wall Street will get some other economic data next week that could give more clues about the U.S. economy's health, with industrial production and capacity utilization due Monday and February housing starts set for Tuesday.

Weekly jobless claims and the Federal Reserve Bank of Philadelphia survey of regional business activity for March will round out the economic week on Thursday.

As the numbers pour in, Wall Street will have one question on its mind, said Johnson of Johnson Illington Advisors.

"The question is: Did the economy enter a recession in February? We will get an answer to that question when we see the industrial production and housing numbers," he said.

News just came in that Bear Stearns will be bought by JPMorgan Chase for $2 a share:

JPMorgan to buy Bear for $2 a share

Joe Bel Bruno and Madlen Read

March 16, 2008

NEW YORK (AP) - Just four days after Bear Stearns Chief Executive Alan Schwartz assured Wall Street that his company was not in trouble, he was forced on Sunday to sell the investment bank to competitor JPMorgan Chase for a bargain-basement price of $2 a share, or $236.2 million.

The stunning last-minute buyout was aimed at averting a Bear Stearns bankruptcy and a spreading crisis of confidence in the global financial system sparked by the collapse in the subprime mortgage market. Bear Stearns was the most exposed to risky bets on the loans; it is now the first major bank to be undone by that market's collapse.

The Federal Reserve and the U.S. government swiftly approved the all-stock buyout, showing the urgency of completing the deal before world markets opened. The Fed also essentially made the takeover risk-free by saying it would guarantee up to $30 billion of the troubled mortgage and other assets that got the nation's fifth-largest investment bank into trouble.

"This is going to go down in very historic terms," said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners. "This is about credit being overextended, and how bad it is for major financial institutions and for individuals. This is why we're probably heading into a recession."

JPMorgan Chase & Co. said it will guarantee all business — such as trading and investment banking — until Bear Stearns' shareholders approve the deal, which is expected to be completed during the second quarter. The acquisition includes Bear Stearns' midtown Manhattan headquarters.

JPMorgan Chief Financial Officer Michael Cavanagh did not say what would happen to Bear Stearns' 14,000 employees worldwide or whether the 85-year-old Bear Stearns name would live on after surviving the Great Depression, two World Wars and a slew of recessions. He told analysts and investors on a conference call that JPMorgan was most interested in buying Bear Stearns' prime brokerage business, which completes trades for big investors such as hedge funds.

At almost the same time as the deal for control of Bear Stearns was announced, the Federal Reserve said it approved a cut in its lending rate to banks to 3.25 percent from 3.50 percent and created another lending facility for big investment banks. The central bank's official meeting is on Tuesday. Before the emergency move to lower the discount rate, which is the rate at which banks lend each other money, the Fed was widely expected to again cut its headline rate by as much as a full point to 2 percent.

"Having taking Bear Stearns out of the problem category, and the strong action by the Federal Reserve, we would anticipate the market will behave quite differently on Monday than it was Thursday or Friday," Cavanagh said.

Some analysts expected it to be a brutal day for global stocks, nevertheless. Shortly after the news broke, Japan's benchmark Nikkei stock index plunged more than 3 percent in morning trading.

A bankruptcy protection filing of Bear Stearns could have heightened anxiety in world financial markets amid a deepening credit crunch. So far, global banks have written down some $200 billion worth of securities slammed amid the credit crisis — more write-downs could come. Last week, a bond fund controlled by private equity firm Carlyle Group faltered near collapse because of investments linked to mortgage-backed securities.

JPMorgan's acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago. It marked a 93.3 percent discount to Bear Stearns' market capitalization as of Friday, and roughly a 98.8 percent discount to its book value as of Feb. 29.

"The past week has been an incredibly difficult time for Bear Stearns," Schwartz said in a statement. "This represents the best outcome for all of our constituencies based upon the current circumstances."

Wall Street analysts say the bid to rescue Bear Stearns was more than just saving one of the world's largest investments banks — it was a prop for the U.S. economy and the global financial system. An outright failure would cause huge losses for banks, hedge funds and other investors to which Bear Stearns is connected.

After days of denials that it had liquidity problems, Bear was forced into a JPMorgan-led, government-backed bailout on Friday. The arrangement, the first of its kind since the 1930s, resulted in Bear getting a 28-day loan from JPMorgan with the government's guarantee that JPMorgan would not suffer any losses on the deal…

So what did the U.S. president say during this time of crisis? Let’s just say he’s no Franklin Roosevelt.

George Speaks, Badly

Gail Collins

March 15, 2008

Watching George W. Bush address the New York financial community Friday brought back many memories. Unfortunately, they were about his speech right after Hurricane Katrina, the one when he said: “America will be a stronger place for it.”

“You’ve helped make our country really in many ways the economic envy of the world,” he told the Economic Club of New York.

You could almost see the thought-bubble forming over the audience: Not this week, kiddo.

The president squinched his face and bit his lip and seemed too antsy to stand still. As he searched for the name of King Abdullah of Saudi Arabia (“the king, uh, the king of Saudi”) and made guy-fun of one of the questioners (“Who picked Gigot?”), you had to wonder what the international financial community makes of a country whose president could show up to talk economics in the middle of a liquidity crisis and kind of flop around the stage as if he was emcee at the Iowa Republican Pig Roast.

We’re really past expecting anything much, but in times of crisis you would like to at least believe your leader has the capacity to pretend he’s in control. Suddenly, I recalled a day long ago when my husband worked for a struggling paper full of worried employees and the publisher walked into the newsroom wearing a gorilla suit.

The country that elected George Bush — sort of — because he seemed like he’d be more fun to have a beer with than Al Gore or John Kerry is really getting its comeuppance. Our credit markets are foundering, and all we’ve got is a guy who looks like he’s ready to kick back and start the weekend.

This is not the first time Bush’s attempts to calm our fears redoubled our nightmares. His first speech after 9/11 — that two-minute job on the Air Force base — was so stilted that the entire country felt like heading for the nearest fallout shelter. After Katrina, of course, it took forever to pry him out of Crawford, and then he more or less read a laundry list of Goods Being Shipped to the Flood Zone and delivered some brief assurances that things would work out.

O.K., so he’s not good at first-day response. Or second. Third can be a problem, too. But this economic crisis has been going on for months, and all the president could come up with sounded as if it had been composed for a Rotary Club and then delivered by a guy who had never read it before. “One thing is certain that Congress will do is waste some of your money,” he said. “So I’ve challenged members of Congress to cut the number of cost of earmarks in half.”

Besides being incoherent, this is a perfect sign of an utterly phony speech. Earmarks are one of those easy-to-attack Congressional weaknesses, and in a perfect world, they would not exist. But they cost approximately two cents in the grand budgetary scheme of things. Saying you’re going to fix the economy or balance the budget by cutting out earmarks is like saying you’re going to end global warming by banning bathroom nightlights.

Bush pointed out — as if the entire economic world didn’t already know — that Congress has already passed an economic incentive package that will send tax rebate checks to more than 130 million households. “A lot of them are a little skeptical about this ‘checks in the mail’ stuff,” he jibed. Jokejoke. Winkwink.

Then, after a run through of “ideas I strongly reject,” Bush finally got around to announcing that he was going to “talk about what we’re for. We’re obviously for sending out over $150 billion into the marketplace in the form of checks that will be reaching the mailboxes by the second week of May.

“We’re for that,” he added.

Once the markets had that really, really clear, Bush felt free to go on to the other things he was for, which very much resembled that laundry list for Katrina (“400 trucks containing 5.4 million Meals Ready to Eat — or M.R.E.’s ... 3.4 million pounds of ice ...”) This time the rundown included a six-month-old F.H.A. refinancing program, and an industry group called Hope Now that offers advice to people with mortgage problems.

And then, finally, the nub of the housing crisis: “Problem we have is, a lot of folks aren’t responding to over a million letters sent out to offer them assistance and mortgage counseling,” the president of the United States told the world.

But wait — more positive news! The secretary of Housing and Urban Development is proposing that lenders supply an easy-to-read summary with mortgage agreements. “You know, these mortgages can be pretty frightening to people. I mean, there’s a lot of tiny print,” the president said.

Really, if he can’t fix the economy, the least he could do is rehearse the speech.

Here is how the audience reacted, caption courtesy of Watertiger of the Dependable Renegade blog:

"What? The? F***?"