Kill The Livestock?

I was watching a news show this weekend where many of the panelists stated that the "unraveling" could go on for ages. I thought they meant the unwinding of all the leverage that had inflated everything from the price of stocks to the price of homes.

But, just to be sure, I asked a friend who was watching with me: "Unraveling of what?"

She paused, before saying, "Almost our way of life."

A friend of hers, she went on, has a horse farm north of New York City. "I told him, for heaven's sake, you have to get rid of your horses. Shoot them if necessary."

That got me thinking. Are we going to be living on horse meat before we get to the bottom of this?

It's now clear that our credit system the world over was rotten all the way through, a giant house of cards maintained by the ingenious connivance of banks, rating agencies and insurance companies in a monumental heist. The only buyers anyone trusts any more are governments.

No wonder Alan Greenspan says he's in a state of "shocked disbelief." He's not the only one.
But as the state intervenes, in what Ed Yardeni, an investment analyst, called "a giant global game of Whac-A-Mole," the moles keep popping out of new black holes in our financial system.

"We've tried rubber mallets, now we're using bazookas, but we're flying blind," Yardeni told me.

It's really a wonder, when you think about it, that there are still two guys in the race to become U.S. president, pulling out all the stops in these last eight days of campaigning to be chosen as the one to face the nightmare.

Let's fast-forward a year to October 2009. The U.S. unemployment rate stands at 10 percent. Crime is up across the country. The economy is shrinking. No arm-twisting from the Treasury has managed to restore the broken confidence between borrowers and lenders. Banks, the few still standing, are holding fast to their cash. Property prices are down more than 25 percent from current levels.

The Dow is still heading south as people get used to the idea of stocks trading at no more than 10 times earnings, rather than the much higher ratios our former leveraged world delivered. New buildings stand empty all over New York because at the end of a boom - that's to say right now - a lot of new construction comes to market. Exports, long a bright spot in the economy, have plummeted because of a rising dollar. The deficit and national debt stand at unprecedented levels.

It's now clear that our credit system the
world over was rotten all the way through,
a giant house of cards maintained by
the ingenious connivance of banks,
rating agencies and insurance companies
in a monumental heist.

The hedge fund industry is decimated - its model of flipping cheap borrowings into leveraged bets around the world has blown up - and one desperate, even contrite, former master of the universe has just sold a Rauschenberg for $9 million less than he paid in 2004.

People still have way too much debt, and the collateral for it keeps evaporating. They are angry. Civil unrest is stirring.

I ask you, Senator McCain, Senator Obama, do you still want the job?

It may not get that bad, of course. On the bright side, gas prices are plunging. There's a lot of money sitting on the sidelines in places like Dubai. And, as I mentioned, the dollar is up - more than 20 percent against sterling and the euro in the last three months.

You can get a plate of pasta in central London now for less than $50. You can even take a short tube ride for less than $6. There must be hope for us all!

In a way, what's going on with the dollar is a measure of the extent of global desperation. Here's a currency backed by debt so massive that it will presumably have to be inflated away some day - and it's rocketing upward.

Every investment position that made sense during a global boom and doesn't make sense during a global bust is being unwound, and the people doing the unwinding want dollars. They are buying U.S. Treasury bills yielding basically zilch because they are too plain scared to buy anything else. Capital preservation is the name of the game if you have any capital left.

Of course, there's the option to try preserving that capital in euros or other currencies. But at some very basic level - and we're down to basics - the full faith and credit of the U.S. taxpayer is still deemed more credible than any other. That's a confidence vote, slim but real, in the United States and its ability to come back.

As Avinash Persaud, the chairman of Intelligence Capital Limited, told me: "Money, in the end, is confidence. It's a check the Federal Reserve has issued."

Perhaps that's why Obama and McCain are still in the race: because they believe confidence can be restored. But both candidates should be clear-eyed about what's looming. They shoot horses, don't they?

Lisa

As Economy Sinks, Officials Fear Violent Solutions

• An out-of-work money manager in California loses a fortune and wipes out his family in a murder-suicide.

• A 90-year-old Ohio widow shoots herself in the chest as authorities arrive to evict her from the modest house she called home for 38 years.

• In Massachusetts, a housewife who had hidden her family's mounting financial crisis from her husband sends a note to the mortgage company warning: "By the time you foreclose on my house, I'll be dead." Then Carlene Balderrama shot herself to death, leaving an insurance policy and a suicide note on a table.

These are only a few stories I've been able to pull up on the wire. There is no telling how many anxious people there are out there, or what they may be driven to.

Across the country, authorities are becoming concerned that the nation's financial woes could turn increasingly violent, and they are urging people to get help. In some places, mental-health hot lines are jammed, counseling services are in high demand and domestic-violence shelters are full.

"I've had a number of people say that this is the thing most reminiscent of 9/11 that's happened here since then," said the Rev. Canon Ann Malonee, vicar at Trinity Church in the heart of New York's financial district. "It's that sense of having the rug pulled out from under them."

With nowhere else to turn, many people are calling suicide-prevention hot lines. The Samaritans of New York have seen calls rise more than 16 percent in the past year, many of them money-related. The Switchboard of Miami has recorded more than 500 foreclosure-related calls this year.

"A lot of people are telling us they are losing everything. They're losing their homes, they're going into foreclosure, they've lost their jobs," said Virginia Cervasio, executive director of a suicide resource enter in southwest Florida's Lee County.

And there's more - the tragedies keep mounting:

In Los Angeles, California, last week, a former money manager fatally shot his wife, three sons and his mother-in-law before killing himself.

Karthik Rajaram, 45, left a suicide note saying he was in financial trouble and contemplated killing just himself. But he said he decided to kill his entire family because that was more honorable, police said.

After the murder-suicide, police and mental-health officials in Los Angeles took the unusual step of urging people to seek help for themselves or loved ones if they feel overwhelmed by grim financial news. They said they were specifically afraid of the "copycat phenomenon."

"This is a perfect American family behind me that has absolutely been destroyed, apparently because of a man who just got stuck in a rabbit hole, if you will, of absolute despair," Deputy Police Chief Michel Moore said. "It is critical to step up and recognize we are in some pretty troubled times."

In Tennessee, a woman fatally shot herself last week as sheriff's deputies went to evict her from her foreclosed home.

Pamela Ross, 57, and her husband were fighting foreclosure on their home when sheriff's deputies in Sevierville came to serve an eviction notice. They were across the street when they heard a gunshot and found Ross dead from a wound to the chest. The case was even more tragic because the couple had recently been granted an extra 10 days to appeal.

In Akron, Ohio, the 90-year-old widow who shot herself on Oct. 1 is recovering. A congressman told Addie Polk's story on the House floor before lawmakers voted to approve a $700 billion financial rescue package. Mortgage finance company Fannie Mae dropped the foreclosure, forgave her mortgage and said she could remain in the home.

In Ocala, Florida, Roland Gore shot his wife and dog in March and then set fire to the couple's home, which had been in foreclosure, before killing himself. His case was one of several in which people killed spouses or pets, destroyed property or attacked police before taking their own lives.

"The financial stress builds up to the point the person feels they can't go on, and the person believes their family is better off dead than left without a financial support," said Kristen Rand, legislative director of the Washington D.C.-based Violence Policy Center.

Dr. Edward Charlesworth, a clinical psychologist in Houston, Texas, said the current crisis is breeding a sense of chronic anxiety among people who feel helpless and panic-stricken, as well as angry that their government has let them down.

"They feel like in this great society that we live in we should have more protection for the individuals rather than just the corporation," he said.

It's not yet clear there is a statistical link between suicides and the financial downturn since there is generally a two-year lag in national suicide figures. But historically, suicides increase in times of economic hardship. And the current financial crisis is already being called the worst since the Great Depression.

Counselors at Catholic Charities USA report seeing a "significant increase" in the need for housing counseling.

One mental health counselor said half of her clients were on some form of antidepressant or anti-anxiety medication. The agency has seen a decrease in overall funding, but it has expanded foreclosure counseling and received nearly $2 million for such services in late 2007.

Adding to financially tense households is an air of secrecy. Experts said it's common for one spouse to blame the other for their financial mess or to hide it entirely, as Balderrama did.

After falling 31/2 years behind in payments, the Taunton, Massachusetts, housewife had been intercepting letters from the mortgage company and shredding them before her husband saw them. She tried to refinance but was declined.

In July, on the day the house was to be auctioned, she faxed the note to the mortgage company. Then the 52-year-old walked outside, shot her three beloved cats and then herself with her husband's rifle.

Notes left on the table revealed months of planning. She'd picked out her funeral home, laid out the insurance policy and left a note saying, "pay off the house with the insurance money."

"She put in her suicide note that it got overwhelming for her," said her husband, John Balderrama. "Apparently she didn't have anyone to talk to. She didn't come to me. I don't know why. There's gotta be some help out there for people that are hurting, (something better) than to see somebody lose a life over a stupid house."

Walter

Sources: AP and Reuters Wire Services

Wednesday's Hot Story: Global Economic Meltdown

Forecasters see U.S. leading global downturn

IMF Predicts credit crisis will cut world economic output sharply

WASHINGTON (Associated Press Wire Service)- The world economy will slow sharply this year and next, with the United States likely sliding into recession reflecting mounting damage from the most dangerous financial jolt in more than a half-century.

The International Monetary Fund, in a World Economic Outlook released today, slashed growth projections for the global economy and predicted the United States — the epicenter of the financial meltdown — will continue to lose traction.

"The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s," the IMF said in its report.

The IMF now projects that the global economy, which grew by a hardy 5 percent last year, will lose considerable speed, slowing to 3.9 percent this year. It is forecast to weaken even more — to just 3 percent — next year, marking the worst showing since 2002. In the past, the IMF has called global growth of 3 percent or less the equivalent to a global recession.

The IMF's projection was made before the Federal Reserve and six other major central banks from around the world slashed interest rates today in an attempt to prevent a financial crisis from becoming a global economic meltdown.

The Fed reduced its key rate from 2 percent to 1.5 percent. In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent, while the European Central Bank sliced its rate to 3.75 percent.

Also taking part were the central banks of China, Canada, Sweden, and Switzerland. The Bank of Japan said it strongly supported the actions.

The financial crisis, which erupted in the United States in August 2007 and has quickly spread around the globe, entered a tumultuous new phase last month, badly shaking confidence in global financial institutions and markets, the IMF said. It has triggered a cascading series of bankruptcies, forced mergers and radical government interventions — such as the United States' unprecedented $700 billion financial bailout — to stem the fallout.

The new projections come before a gathering of the world's top economic powers on Friday and the weekend meetings of the IMF and the World Bank. The jarring financial crisis is likely to figure prominently in those discussions.

In the United States, the economy, which grew by 2 percent last year, is projected to slow to 1.6 percent this year. Growth would screech to a virtual halt in 2009, barely budging at just 0.1 percent. That would mark the worst showing since 1991, when the country was pulling out of a recession.

"With a recession now looking increasingly likely, the key questions are, how deep will the downturn be, when will a recovery get under way and how strong will it be?" the IMF asked. Much will hinge on how effective the United States' steps to stabilize financial markets and get credit flowing more freely again turn out to be. Another important factor is whether these and other actions turn around U.S. consumers, whose retrenchment is hurting the economy.

Economic leaders battling weak growth, inflation
The IMF — and many private economists — believe the U.S. economy will probably contract in the final three months of this year and the first three months of next year, meeting a classic definition of a recession. The economy's last recession was in 2001.

The government's bailout package is aimed at thawing lending by buying bad mortgage-related debt from troubled financial institutions. The idea is that the banks' books would then be cleaner, putting them in a better position to lend and get the economy moving.

The IMF said this effort should help to stabilize markets but even so "the process of balance-sheet repair will be long and arduous." Credit availability is likely to remain constrained throughout 2009, the IMF said.

Fed Chairman Ben Bernanke warned in a speech Tuesday that the economy's outlook for this year has darkened and the pain could last for some time. His remarks were seen as heralding the rate cut Tuesday.

Looking at other countries, Germany's growth will slow to 1.8 percent this year, down from 2.5 percent last year. France's growth will weaken to just 0.8 percent, compared with 2.2 percent in 2007. Britain's economy will see growth taper to 1 percent, down from 3 percent last year. Canada's growth will tail off to 0.7 percent this year, from 2.7 percent last year.

In Japan, growth will cool to just 0.7 percent, from 2.1 percent last year.

Global powerhouses China and India will see growth clock in this year at a robust 9.7 percent and 7.9 percent, respectively. Even if those projections prove correct, they would still mark downgrades from their blistering performances last year. Russia's economy should grow by a brisk 7 percent this year, down from 8.1 percent last year.

Inflation around the world remains high, driven up by surging energy and food prices through much of this year.

It will be tricky for Bernanke and his counterparts in other countries to navigate weak growth and inflation pressures, the IMF said.

* * * * *

Also today:

A new, more powerful Fed emerges in crisis

Central bank is increasingly aggressive in attempting to stabilize economy

Dusting off Depression-era emergency powers, the Federal Reserve is extending its reach over the economy as never before, pushing the limits of its authority, if not exceeding them.

Now the nation's central bank is even becoming a source of loans for companies other than banks. Radical steps by the Fed under chairman Ben Bernanke — all in the name of seeking to halt the panic sweeping financial markets — are turning it into a financial colossus. They're also putting the government deeper in debt and taxpayers further at risk if the various moves fail.

And it's being done with little direct interaction with Capitol Hill. The Fed does not depend on Congress for its budget, including its payroll, and is as much a creature of the nation's banking system as part of the federal government.

On Tuesday, the Fed announced it will buy vast amounts of corporate debt, some of it unsecured, in hopes of renewing the flow of money in so-called commercial paper markets. That is where many companies turn for short-term loans to finance their most basic day-to-day operations, such as purchasing supplies or making payrolls.

That action came just a day after the Fed increased a short-term loan program to as much as $900 billion by the end of the year — exceeding even the government's $700 billion bailout plan enacted on Friday.

* * * * *

Iceland teeters on the brink of bankruptcy

Struggling nation takes $5.4 billion loan from Russia, nationalizes bank

REYKJAVIK, Iceland - This volcanic island near the Arctic Circle is on the brink of becoming the first “national bankruptcy” of the global financial meltdown.

Home to just 320,000 people on a territory the size of Kentucky, Iceland has formidable international reach because of an outsized banking sector that set out with Viking confidence to conquer swaths of the British economy — from fashion retailers to top soccer teams.

The strategy gave Icelanders one of the world’s highest per capita incomes. But now they are watching helplessly as their economy implodes — their currency losing almost half its value, and their heavily exposed banks collapsing under the weight of debts incurred by lending in the boom times.

* * * * *

World struggles with unified response to crisis

Stocks plunge as U.S. officials urge for a ‘forceful and coordinated’ move

NEW YORK - Governments and central banks around the world grasped at measures to contain the fast-spreading financial crisis on Monday, but global stocks still plummeted as investors bet the $700 billion bailout could not avert a recession.

The response in Europe was fragmented, leading top U.S. officials to call for a “forceful and coordinated” global reaction as the Dow industrials fell below 10,000 for the first time since October 2004.

Like the Dow, the S&P 500 and the Nasdaq dropped more than 4 percent, and European stocks buckled even more with FTSE 100 and the FTSEurofirst indexes down more than 6 percent each.

Emerging markets, which had gained most from the boom in commodities demand and surging global expansion in the last three years, were also sucked into the vortex. Trading was halted in markets as far afield as Brazil and Russia when indexes in there nose-dived 15 percent.

“This is a stampede,” said Valerie Plagnol, chief strategist at CM-CIC Securities in Paris.

French President Nicolas Sarkozy issued a statement from the 27 member states of the European Union saying individual countries would do all they could to safeguard the financial system.

The EU pledged to protect people’s savings and maintain financial stability while euro zone finance ministers gathered in Luxembourg in an attempt to attack the crisis in unison. But some analysts were pessimistic that European powers could stop the rot.

Walter

Sources: Associated Press, Bloomberg, Leer Financial, IMF, REUTERS, NY Times, Wall Street Journal

The Next Crisis In The 'Cards'

The subprime mortgage mess may be grabbing the headlines, but the rapid growth of personal debt from mortgages, credit cards and other loans is part of a far larger problem facing millions of Americans.

Get ready for the next great financial uncertainty: credit cards.

That, at least, is what Washington is now worried about (in addition to all the other stuff). The logic is simple: If people are having trouble paying for the house they bought, then they might not be able to afford all the stuff they purchased - on credit - to put into that house. That's one reason why Washington is suddenly getting so inquisitive about credit-card defaults.

According to a well-informed source, the government's Office of the Comptroller of the Currency is now trying to fast-track a monitoring system for credit cards that will give the nation's bank regulator a monthly look at how well people are doing paying their bills. Right now, banks provide that information only on a quarterly basis. And the data for the last quarter wasn't very encouraging.

The American Bankers Association says that in the first quarter of this year, 4.51 percent of people who had bank credit cards were late by 30 days or more in paying their bills. That was up from 4.38 percent during the latest Christmas shopping season.

Moody's, the rating service, thinks the situation is getting worrisome. It says banks had to charge off 6.27 percent of their credit-card billings in April - meaning they don't expect payment. And Moody's thinks that rate will eventually be higher than the 7 percent charge-offs seen during the 1991 and 2001 recessions. That's why the OCC is riding to the rescue - a little late, but better than never.

"Regulators are finally trying to get better data on banks," says a person who has a copy of the OCC's credit-card proposal. "There's an effort to get some insight into what's going on."

Specifically, the OCC was rushing to set up a system by the end of September of shared national data on the default rate on credit cards and the rate banks collect on that debt, but obviously that has yet to come to fruition.

Walter

Sources: OCC, Moody's, WSJ, Bloomberg

Citigroup Rescues Wachovia's Bank Unit as Stock Spirals Down

Is Bank of America Next with Billions in Careless ARMs, Bad Loans Hanging Over It? Citigroup Inc., the biggest U.S. bank by assets, will pay about $2.16 billion for banking operations of Wachovia Corp. after shares of the North Carolina lender collapsed under the weight of overdue mortgages.

While regulators said the Charlotte-based bank hadn't failed, Wachovia will lose its biggest unit and investors will get only about $1 a share for the bank, whose stock topped $59 in April 2006. All depositors will be protected, according to the Federal Deposit Insurance Corp., which helped broker the takeover by Citigroup.

Wachovia agreed to the stock-swap transaction just hours before the U.S. House of Representatives planned to vote on a $700 billion bank industry bailout. The package - which lawmakers rejected in an afternoon vote - was aimed at stopping the credit crunch that drove Lehman Brothers Holdings Inc. and Washington Mutual Inc. into bankruptcy and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos.

"The problem must have occurred last week with their ability to continue to attract and hold deposits after the failure of Washington Mutual,'' Gary Townsend of Hill-Townsend Capital in Chevy Chase, Maryland, said of Wachovia. "On Thursday and Friday they must have had a large run on the bank.''

Wachovia's stock, which finished last week at $10 on the New York Stock Exchange, traded for $1.84 in 4:15 p.m. transactions, a loss of 82 percent for the day. It plummeted 83 percent in the past two years through last week. Citigroup fell 12 percent to $17.75 today.

Insiders say: Don't believe the BS on the Wachovia website
about a seamless transition and transfer of assets or
that the Wachovia-Citi deal is a sale and not a bank failure.
NOT SO - It is a rescue before an impending failure.
Additionally, "there are thousands and thousands of
operations personnel working around the clock and
mistakes are happening as we speak."

Citigroup's Role

Wachovia will continue to own its securities brokerage unit, the Evergreen mutual-fund family and insurance and retirement businesses. The brokerage has about 14,600 financial advisers and more than $1 trillion under management, making it third in the U.S. behind Merrill Lynch and Citigroup's Smith Barney unit.

The purchase gives New York-based Citigroup about 3,300 more branches and offices in 21 states. The combined company will have about 4,300 U.S. bank offices and more than $600 billion in deposits for a 9.8 percent share of the U.S. banking market. Citigroup's total deposits globally will be $1.3 trillion, the bank said, or about $350 billion more than JPMorgan Chase & Co.

Citigroup plans to cut its own dividend in half and raise $10 billion in capital as it takes on Wachovia's senior and subordinated debt. Citigroup will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the FDIC said in a statement. The regulator will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants.

Steel's Tenure

The transaction is a blow to Wachovia Chief Executive Officer Robert Steel, 57, who was recruited from the Treasury department in July to rebuild the lender's credibility with investors. He bought 1 million shares of Wachovia stock for about $16 million two weeks after arriving at the company.

Steel wasn't available for comment beyond a prepared statement in which he called Citigroup "a strong partner to preserve the stability and quality of our banking franchise.'' Calls to Lanty Smith, chairman of Wachovia's board of directors, wasn't immediately returned.

"This is a compelling deal,'' said Citigroup CEO Vikram Pandit, 51, on a conference call with analysts and investors. "This is one of those rare high-return acquisitions in which we have contained the risks.

'' Wells Fargo & Co. had also bid for Wachovia, according to the Wall Street Journal.

'Citi Needed It'

"Citi needed it more than anybody,'' said Nancy Bush, an independent bank analyst. "It would have been nice for Wells, but I couldn't see them taking on that chunk of bad debt.

'' The FDIC said it won't have to tap its insurance fund, something the agency also avoided in the WaMu failure last week. Keeping the FDIC's fund healthy has been a priority for U.S. regulators because its $100,000 insurance on deposits keeps depositors from panicking when a bank's health is questioned.

Oppenheimer & Co. analyst Meredith Whitney said in an interview on CNBC there was ``no doubt'' in her mind that there had been a run on Wachovia. Steel sent a memo to the staff last week affirming that the company was sound and more diversified than Washington Mutual after that lender failed. The memo, according to a copy obtained by Bloomberg, included a set of questions and answers for employees who might have to answer queries from worried customers, such as "Does all the recent news put Wachovia at risk?'' and "How is Wachovia different'' from Lehman, Bear Stearns and WaMu.

'Silent' Run

Louise Pitt, a credit analyst at Goldman Sachs Group Inc., wrote Friday that Wachovia may have been facing the possibility of a "silent'' run on deposits, in which customers fearful of a bank failure withdraw their money in unusually large numbers. WaMu became "unsound'' after customers withdrew $16.7 billion since Sept. 16, the Office of Thrift Supervision said when it seized WaMu on Sept. 25. The FDIC and Wachovia didn't say today whether the bank suffered similar withdrawals. Wachovia reported $9.7 billion of losses in the first half of 2008. The slide toward collapse began when the bank paid more than $24 billion in October 2006 for Golden West Financial Corp., the California lender that specialized in option-ARM home mortgages. The bank holds about $122 billion of the adjustable- rate home loans. Kennedy Thompson, the chief executive officer at the time, later admitted that the purchase at the height of the real estate boom was ill-timed.

Option ARMS

Wachovia was the largest holder of option ARMs, ahead of Seattle-based Washington Mutual until it collapsed. The loans are prone to default because they allow borrowers to skip some interest payments and add them to the principal. The terms backfired when housing markets weakened, leaving borrowers with loans bigger than the value of their home. Prices in California during August fell 41 percent from year-earlier levels. Pressure on the bank to make a deal grew last week when JPMorgan Chief Executive Officer Jamie Dimon bought WaMu and then announced writedowns on loans similar to those held by Wachovia. "Jamie Dimon threw gas on the fire when JPMorgan built in losses of 25 percent on the Washington Mutual option ARMs,'' Bush said yesterday. Steel "has put his losses at 12 percent, but that was a couple of weeks ago and the situation has gotten more dire since then.'' Analysts at Fitch Ratings predict default rates on such loans packaged as securities may reach 45 percent. "Bob Steel missed the opportunity to raise more equity,'' Townsend said. "What we heard from him from the beginning is that they didn't need to raise more equity. That clearly wasn't the case.'

Walter

Wachovia's `Great Success' Became $122 Billion Burden

Sources: WSJ, Flower, Leer Financial

Truth & Common Sense: Fannie Mae/Freddie Mac collapse Democrats' fault

I'd like to call your attention to an excellent blog post pointing to a 2003 NY Times article.

According to the NY Times article, the Bush administration proposed new regulation of Fannie Mae and Freddie Mac, which would have tightened up loose lending, but Democrats opposed it because it would make it harder for poor people to own homes:

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac - are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

That's rich. Liberal Democrat Barney Frank said that Fannie and Freddie "are not facing any kind of financial crisis." Had Democrats voted for this legislation, a financial crisis and expensive government bailout might have been averted.

Something to think about. Not only could this situation been averted if the Democrats in Congress had not been playing the race card, but now we the taxpayer have to foot the bill for their socialism. Dems argued that the poor trying to prove their income is "an invasion of privacy." Fannie Mae and Freddy Mac were ordered to instruct the banks to accept this new policy or face legal reprisals. This is more than just greed on the part of the markets, it is pure fascist-socialism on the part of Nazi-like Democrats.

Walter

JPMorgan Buys WaMu Deposits as Regulators Seize Failed Thrift

If you remember on Monday, I posted that there will be more to come....

JPMorgan Chase & Co. became the biggest U.S. bank by deposits, acquiring Washington Mutual Inc.'s branch network for $1.9 billion after the thrift was seized in the largest U.S. bank failure in history.

Customers of WaMu withdrew $16.7 billion from accounts since Sept. 16, leaving the Seattle-based bank "unsound,'' the Office of Thrift Supervision said late yesterday. WaMu's branches will open today and depositors will have full access to all their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on a conference call.

WaMu is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and I out of business and led to the hastily arranged rescues of IndyMac Bancorp, Merrill Lynch & Co. and Bear Stearns Cos., which was itself absorbed by JPMorgan. WaMu in March rejected a takeover offer from JPMorgan Chief Executive Officer Jamie Dimon that the savings and loan valued at $4 a share.

"This is a fabulous franchise,'' Dimon, 52, said in an interview. "We think we got this at a price that protects us, where if we were wrong, it still protects us.''

WaMu collapsed as its credit rating was slashed to junk and its stock price tumbled. Facing $19 billion of losses on soured mortgage loans, the lender put itself up for sale last week. WaMu fired CEO Kerry Killinger on Sept. 8 and replaced him with Alan Fishman, who was awarded a $7.5 million signing bonus and $1 million salary.

WaMu's Decline

In most bank seizures, little or nothing is left for shareholders. WaMu, down 95 percent in the past year, dropped to 45 cents in extended trading following the announcement, which came after the close of regular trading.

David Bonderman's TPG Inc., which led a $7 billion capital infusion for WaMu earlier this year, lost most of its initial $2 billion investment. TPG, based in Forth Worth, Texas, said in a statement yesterday it was "dissatisfied with the loss'' and that the WaMu investment was a "small part of assets.''

New York-based JPMorgan, which separately announced plans to raise $8 billion by selling common stock, had its outlook lowered to negative by Moody's Investors Service. Moody's left its Aa2 rating on JPMorgan unchanged.

JPMorgan won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. JPMorgan paid $10 a share for Bear Stearns in March as the New York-based securities firm teetered on the brink of bankruptcy.

'They're Going to Win'

"This is one of the reasons I own JPMorgan: They're going to win from all this,'' said Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York. "They're taking on credit risk, but they're not taking on any debt obligations.''

JPMorgan will add branches in California, Washington and Florida, among other states, and will have 5,400 offices with about $900 billion in deposits, the most of any U.S. bank. The branches and credit cards will carry the Chase brand and will be integrated by 2010, JPMorgan said.

JPMorgan had 75 people involved in the transaction and "bid to win'' because it wanted WaMu's assets, Dimon said on a conference call yesterday. JPMorgan used its own investment bank to value the mortgages, he said.

"We don't know and we don't care'' about rival bids for WaMu, he said.

Dimon also said on the conference call that he's in favor of the government's proposed $700 billion plan to prop up the banking industry, but didn't rely on it to complete the deal. The plan was jeopardized yesterday as congressional Republicans failed to agree on its details.

Write-Offs

JPMorgan is taking on $176 billion in mortgage-related assets and writing down the value of it and other portfolios by about $31 billion, the company said. The bank will make a one- time payment of $1.9 billion to the FDIC as part of the deal.

Citigroup Inc., which had been among five potential acquirers, elected not to bid for WaMu because presumed loan losses outweighed benefits from the deposits, said a person familiar with the situation. Wells Fargo & Co., Banco Santander SA and Toronto-Dominion bank had expressed interest in buying all or parts of WaMu, said a person with knowledge of the process.

The acquisition may add 50 cents a share to earnings in 2009, JPMorgan said in a statement yesterday. The firm said it may save $1.5 billion in pretax costs by 2010, offsetting the $1.5 billion it will take in merger-related charges. JPMorgan will close less than 10 percent of the combined retail shops.

Customer Deposits

WaMu had about 2,300 branches and $182 billion of customer deposits at the end of June. Its $310 billion of assets dwarf those of Continental Illinois National Bank and Trust, previously the largest failed bank, which had $40 billion ($83 billion in 2008 dollars) when it was taken over in 1984.

JPMorgan rose $2.96, or 7.3 percent, to $43.46 yesterday in New York Stock Exchange composite trading before the deal was announced. It is little changed for the year.

WaMu has $28.4 billion in outstanding bonds, with Capital Research and Management the largest debtholder, Bloomberg data show. All three major credit agencies rate WaMu junk, the only company in the 24-member KBW Bank Index that's below investment grade.

During the past three quarters, WaMu lost $6.3 billion. It kept skidding even after joining a list of financial companies the U.S. Securities and Exchange Commission protected from short selling in an effort to stabilize stock markets.

'No Mystery'

"It's no mystery to depositors that WaMu shares have collapsed over the past couple months,'' said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. "The FDIC is primarily concerned about the deposit base and that's been safely transferred.''

WaMu was the second-biggest provider of option ARMs, behind Wachovia Corp., with $54 billion held in its portfolio in the first quarter, according to Inside Mortgage Finance. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were subprime mortgages. WaMu, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest subprime lender in 2006, according to Inside Mortgage Finance.

WaMu estimated losses of as much as $19 billion in the next 2-1/2 years. Standard & Poor's cut the bank's credit rating twice in nine days, leaving it at CCC. Fitch Ratings and Moody's Investors Service cut WaMu to junk this month and have BBB- and Ba2 ratings, respectively.

"There were extreme liquidity pressures on this institution exacerbated by some ratings downgrades,'' FDIC's Bair said.

Rise of WaMu

Killinger, WaMu's ousted CEO, joined Washington Mutual in 1982 when the company bought a securities firm. He was promoted to president in 1988 and CEO two years later, assuming control of a company with about $7 billion in assets.

Beginning in 1995, Killinger went on a shopping spree, making at least 14 acquisitions in the next seven years and boosting assets to more than $300 billion.

Between 1990 and the end of 2006, Washington Mutual shares jumped almost 20-fold, while the Standard & Poor's 500 Index quadrupled. Then the subprime rout started and defaults hit a record, as falling home prices and rising mortgage rates left borrowers with the weakest credit unable to repay their loans.

"There's a lot of sadness and a lot of people are hurt,'' Lee Lannoye, 71, who was chief credit officer at WaMu from 1988 to 1998, said yesterday. ``Having worked with Kerry Killinger for 10 years, I still absolutely cannot fathom where or why he went wrong, and what caused him to lead the company into taking the kinds of risks that they did.''

Walter

Sources: Wachovia Securities, Leer Financial

BB&T Chief Takes Issue With Bailout

For John Allison, the high-risk rollers on Wall Street are getting too much of the ear of Congress and having too much say in resolving the financial nightmare that they created. That's why Allison, the chairman and chief executive of BB&T Corp., submitted a 14-point letter Tuesday to all 535 members of Congress with a simple message regarding the proposed $700 billion bailout.

"There is no panic on Main Street and in sound financial institutions," he wrote. "The problems are in high-risk financial institutions and on Wall Street."

He said that it is important that "Congress hear from the well-run financial institutions, as most of the concerns have been focused on the problem companies. It is extremely important that the bailout not damage well-run companies." Allison's opinion is seconded by local community-bank officials and community-bank trade groups.

"Community bankers did not create this financial crisis, but our banks and communities are clearly feeling the impact," the Independent Community Bankers of America said in a statement. "As the fundamental drivers of local economies -- we could be in a strong position to help resolve this crisis."

BB&T, the nation's 14th-largest financial institution with $136 billion in assets, hasn't strayed far from its beginnings as an Eastern North Carolina community bank. BB&T and Allison also hold fast to a value system that extols such virtues as trust, respect, integrity, pride, reason and justice.

And compared with some of its rivals, such as Wachovia Corp., which was aggressive with alternative-mortgage products, BB&T kept its bottom line fairly immune from the recent roller-coaster ride of many major banks. BB&T posted net income of $428 million in the second quarter despite having to take a $330 million provision for credit losses in the quarter.

"Community bankers did not create this financial crisis,

but our banks and communities are clearly feeling the impact,"

- Independent Community Bankers of America

Among the points that Allison made in his letter were:

□ Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis.

□ The market-correction process eliminates irrational competitors, such as Countrywide Financial Corp., a subprime-mortgage lender that's been bought by Bank of America Corp.

□ A significant and immediate tax credit for buying homes "would be a far less expensive, and more effective, cure for the mortgage market and financial system than the proposed rescue plan" that Allison said would primarily benefit Goldman Sachs and Morgan Stanley.

□ "This is a housing-value crisis. It does not make economic sense to purchase credit-card and automobile loans as part of the bailout."

□ Protecting the banking system is an established government function. "It is completely unclear why the government needs to, or should, bail out insurance companies, investment banks, hedge funds and foreign companies," he wrote.

Allison said that he disagreed with efforts to limit executive compensation. This is not the first time that Allison and BB&T have taken a stand on a controversial economic plan. In January 2006, BB&T said that it would not make loans to commercial developers planning private projects on land seized from private homeowners by local governments.

Buddy Howard, an analyst with Equity Research Services, said that Allison is "dead right on some points, wrong on others." He particularly agreed with Allison's position on the housing-value crisis. Howard did disagree with Allison on Freddie Mac and Fannie Mae being the source of the financial crisis.

"They are convenient scapegoats, and certainly they had many problems," Howard said. "But the real culprit that led to the underpinning of the real-estate market was the huge inroads made by investment banks and other nongovernment-sponsored enterprises into the subprime market."

Edward Zajicek, an associate economics professor at Winston-Salem State University, said that many of Allison's points "are well taken."

"The government is trying to prop up two to three large investment banks at a cost to taxpayers and significant weakening of healthy commercial banks who are almost forced to take over those doubtful assets," Zajicek said.

"The role of the Federal Reserve System is to protect the soundness of the banking system, and not to bail out investment bankers."

Walter

Sources: Wall Street Journal, LEER Financial Wealth Management, Flower

Morgan, Goldman Seek Deposits; Eat Banks for `Lunch'

Morgan Stanley and Goldman Sachs Inc., the two largest remaining independent U.S. securities firms, may add to the $81 billion of financial services deals unveiled during the past week as they morph into banks.

Morgan Stanley plans to sell as much as a 20 percent stake for $8.4 billion to Mitsubishi UFJ Financial Group Inc., Japan's largest bank, to shore up capital. Goldman Sachs said that its new status as a bank will help it purchase assets.

Stock market declines of the past 10 days helped push Lehman Brothers Holdings Inc. into bankruptcy and Merrill Lynch & Co. into a takeover by Bank of America Corp. That's helped financial services leapfrog the mining industry to become the most active for mergers and acquisitions this year, data compiled by Bloomberg show. Regional banks probably will become ``lunch'' for larger institutions, JPMorgan Chase & Co. analyst Steven Alexopoulos told clients yesterday.

``We are seeing deals that are highly opportunistic and speedily arranged, where targets are distressed,'' said Marco Boschetti, co-head of global mergers and acquisitions at the Towers Perrin consulting firm in London.

Eyeing `Attractive' Assets

Goldman Sachs, granted permission Sept. 21 to transform into a bank holding company, may raise capital to buy assets assuming it finds the right opportunities, said company spokesman Lucas van Praag in New York.

``If we see assets that are attractive, we might raise capital in order to be able to acquire them,'' he said yesterday, adding that Goldman has ``no immediate plans to raise capital.''

Goldman, now the sixth-largest U.S. bank by market value, is more interested in buying deposits than in buying entire banks, according to a person familiar with the firm's thinking. The firm sees opportunities to buy deposits in the wholesale market and also to buy deposits of failed institutions, such as IndyMac Bancorp Inc., that are under the control of the Federal Deposit Insurance Corp., the person said.

Morgan Stanley, which already has more than 3 million retail brokerage accounts, said yesterday it plans to ``pursue initiatives to expand the retail banking services it offers its retail clients and build a stable base of core deposits.''

Reluctant Bidders?

Morgan Stanley's deposits amounted to about 4 percent of the firm's liabilities at the end of August, while Goldman's amounted to 2 percent of liabilities, CreditSights Inc. analyst David Hendler wrote in a note to investors yesterday. At larger banks, deposits typically account for between 40 percent and 60 percent of liabilities, he wrote.

``We cannot rule out that these companies could pursue bank acquisitions in order to increase their deposit funding more in- line with a typical bank,'' Hendler wrote. Yet their depressed stock prices may make Goldman and Morgan Stanley reluctant to enter deals ``until some premium has been restored.''

Goldman fell $6.41, or 5.3 percent, to $114.37 at 1:21 p.m. in New York Stock Exchange composite trading. Morgan Stanley dropped 41 cents to $26.68.

Washington Mutual Inc., the Seattle savings and loan that put itself up for sale this month, has at least five companies mulling takeover bids, said a person familiar with the matter yesterday. They include Toronto-Dominion Bank, JPMorgan in New York, Well Fargo & Co. of San Francisco and New York-based Citigroup Inc., the second-, third- and fourth-biggest banks.

Window Opening

The next several weeks present a ``window'' for financial firms to issue new capital or merge, said Michael Mayo, a New York-based analyst at Deutsche Bank AG. The U.S. Treasury's plan to buy troubled assets, disclosed Sept. 18, and a temporary ban on short-selling make it easier to shore up capital, he said.

Morgan Stanley and Goldman probably will increase deposits by targeting retail and corporate banking customers by selling products such as certificates of deposits, said Richard Bove, an analyst at Ladenberg Thalmann & Co. in Lutz, Florida.

``There's a whole bunch of small banks in the United States that might be willing to sell out to them, but not big banks,'' Bove said. ``Why would they want to link up with a company which is struggling to stay alive?''

Lloyds TSB Group Plc, the London-based bank that's acquiring HBOS Plc, Britain's biggest mortgage lender, may put about 9 billion pounds ($16.6 billion) of assets up for sale, including the Scottish Widows money management unit, analysts said. Lloyds TSB agreed to buy Edinburgh-based HBOS for 12.5 billion pounds last week after the bank lost almost half its market value on concern it was cut off from funds for loans.

Danish Bank Mergers

``Whilst we anticipate higher levels of M&A activity in financial services than many other sectors, we expect a return to the fundamentals of how good deals get done,'' Towers Perrin's Boschetti said.

In Denmark, Ebh Bank A/S put itself up for sale yesterday as it cut its full-year pretax profit forecast to zero and removed Chief Executive Officer Finn Strier Poulsen after bad real-estate related loans were larger than expected. Two regional Danish lenders, Forstaedernes Bank A/S and Lokalbanken i Nordsjaelland A/S, also received bids last week from rival Scandinavian banks.

Russian billionaire Mikhail Prokhorov agreed yesterday to buy half of Renaissance Capital to inject funds into the Moscow- based investment bank. Prokhorov's Onexim Group holding company will pay $500 million for 50 percent minus one share of Renaissance Capital, he told reporters in Moscow.

Flowers, Lone Star

Edward Eyerman, head of leveraged finance at Fitch Ratings in London, said J.C. Flowers & Co. and Lone Star Funds are among leveraged buyout firms that will scour the market for distressed financial services companies.

``We may see the private equity guys coming into the market,'' said Frederick Lane, a former co-head of mergers at Donaldson, Lufkin & Jenrette, who now runs Boston-based Lane Berry & Co. in an interview.

CVC Capital Partners Ltd., Europe's biggest private equity firm by assets, started a team this month to scour for financial-services investments. Dallas-based Lone Star agreed last month to buy IKB Deutsche Industriebank AG, Germany's first casualty of the subprime mortgage crisis, for about 150 million euros ($220 million). In the U.S., Bain Capital LLC and Hellman & Friedman LLC are jointly negotiating to acquire Lehman's asset-management unit, according to people familiar with the discussions.

Walter

Sources: CNBC, WSTR, AP

Freddy Mac, Fannie Mae to be Seized

Breaking news to Watch....

The Treasury Department is putting the finishing touches on a plan to help shore up mortgage giants Fannie Mae and Freddie Mac, according to people familiar with the matter. Such a move would essentially amount to a government takeover of the mortgage giants.

The plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency, said several people familiar with the matter. That would mean the government would take the reins of the companies, at least temporarily.

It is also expected to involve the government injecting capital into Fannie and Freddie.That could happen gradually on a quarter-by-quarter basis, rather than in a single move, one person familiar with the matter said. In addition, the Treasury's plan includes a top-level management shake-up at both companies, according to people familiar with the plans. Daniel H. Mudd, chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, are expected to step down from their posts. An announcement could come as early as this weekend. Some details are still being worked out.

Any move by the Treasury would be one of the most significant interventions by the government in the financial industry since the housing bust touched off turmoil in the credit markets a little more than a year ago. From the $168 billion economic-stimulus package in February through the bailout of investment bank Bear Stearns Cos., the Bush administration and the Federal Reserve have taken an aggressive stance in attempting to respond to what has become one of the worst financial crises in decades. Fannie and Freddie are vital cogs in the U.S. housing market. A Treasury intervention could help borrowers by keeping interest rates on mortgages lower than they would be in the event of continued instability.

Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.

Supporters, however, argue the Bush administration had little choice but to support Fannie and Freddie, which together hold or guarantee $5 trillion in mortgages – almost half the nation's total.

Fannie Mae shares jumped 62 cents to $7.04 in regular trading but plunged 21 percent to $4.59 after hours on worries that a government rescue might wipe out equity holders. Freddie Mac shares rose 15 cents to $5.10 in regular trading but fell 18 percent to $4.18 after hours.

Walter

Sources: Federal Home Loan Bank Board, Federal Housing Finance Agency, The Wall Street Journal