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Exploring The Worst-Case Scenario

2008-10-13T01:16:09Z

The global economy is drawing closer to a dangerous downward spiral and time may be running out for world leaders to find a way to stop it before it inflicts lasting damage.

Economists are beginning to warn of a depression-like cycle where an inability to obtain credit stalls growth, triggering more defaults and still tighter lending terms. Governments have unveiled one unprecedented move after another in the past three weeks to boost confidence and get banks back in business, yet so far nothing has been able to arrest the fall.

Howard A. Rodman: Hank and the Swedish Model

2008-10-12T22:23:23Z

When the world was about to cave in; when Hank Paulson assured us that the only way to keep the world from caving in was to do what he said, now; when he told us it had to be unreviewable or else-- What he said to be done was this: for the Treasury (meaning us) to buy up the nonperforming assets of the large banks (meaning Hank's friends and colleagues).

Various members of Congress, for various reasons, balked. (Or, as Sarah would say: blinked.) And in reaction: the market tanked.

In that short interregnum, on either side of the Jewish new year, between the vote failed and the vote successful, some people said, maybe Hank's plan isn't the best plan. Among them was the UK's Prime Minister Gordon Brown. Among them were several Doubting Democrats, q.v., Marcy Kaptur (D-OH). Among them was NYU economist Nouriel Roubini, who, because he had been so damnably prescient about so many things, was disregarded. Said Roubini:

Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system.....

In the Scandinavian banking crises (Sweden, Norway, Finland) that are a model of how a banking crisis should be resolved there was not government purchase of bad assets; most of the recapitalization occurred through various injections of public capital in the banking system. Purchase of toxic assets instead - in most cases in which it was used - made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico).

But Paulson said no--he'd rather spend the money to take the bad assets off the books of his pals. He was adamant about it. As he said to the Senate Banking Committee on September 23:

Some said we should just stick capital in the banks, take preferred stock in the banks. That's what you do when you have failure. This is about success.

So Hank got what he wanted (plus another hundred fifty billion or so of inducements to the members of Congess). He had his bank. And then he... sat there. While the market, in reaction to the rescue, tanked and tanked and tanked some more.

So now, several tanks later, Hank seems to have come to his senses. He seems poised to do what he said shouldn't be done. He seems finally to understand that failure's no success at all. As The New York Times reported:

Two weeks after persuading Congress to let it spend $700 billion to buy distressed securities tied to mortgages, the Bush administration has put that idea aside in favor of a new approach that would have the government inject capital directly into the nation's banks -- in effect, partially nationalizing the industry.

Can Hank have seen the light? Is he going to do what must be done? Is he going to do what Sweden, but now also the UK, and, as of this weekend, France and Germany are doing? Is he going to take his Big Pile of Cash and buy us some banks?

Well, almost. Because Hank's no socialist, no. He's willing, after so much tank, to fill his syringe with cash and do some injecting. He's just not willing to do it in a timely fashion. (He could have announced the details today, when the G7 announced its plans. He pointedly did not.) As Chuck Schumer (D-NY) put it this weekend:

''I am hopeful that tomorrow, the Treasury will announce that they're doing it. And they have to do it quickly ... markets are waiting."

What's Hank's hesitation with the Swedish model? Well, Hank's not willing to let us really own the banks we're now injecting that cash into. He emphasized that he'd use our money only to buy "nonvoting shares," and that the Treasury wouldn't tell "healthy" companies what to pay their CEOs, or how to do their business.

In other words: when Warren Buffet gives Goldman Sachs five billion dollars, he gets ten percent guaranteed return, and the option to buy one tenth of the voting shares. When Hank gives firms like Goldman Sachs billions of our money, we get no interest, we get no votes.

That would be too Swedish.

Hank is clearly worried that if he gives our money to his pals, we'll want something in return. That in this diner, we'll point to Warren's plate and say, "I'll have what he's having."

At the end of the day, Hank may realize that the only way to save the world is for us to buy out his pals. Is to listen to those who were right all along, as opposed to those who were wrong-- Or those who got us into this fine mess in the first place.

But Hank, having told us that the world was coming to an immediate end, now takes his time. When pressed, he said

"We are going to do it as soon as possible. We are not wasting time. People are working around the clock."

But in his world, the clocks seem to have no hands. Perhaps, in the end, he prefers to follow the other Swedish model...

...the one where he sits down, and plays chess with Mr. von Sydow.

Economic Honor Roll (VIDEO)

2008-10-12T21:40:55Z

Now that a full-scale economic crisis is upon us, many are left asking the complicated but necessary question of how did we get here. While there are numerous individuals and institutions who deserve their share of the blame, it is also important to recognize those issued warnings about the fragility of the financial system and sounded the alarm about an impending collapse before it all came crashing down.

Below is the beginning of our look at some of the figures--politicians, economists, pundits--whose observations about our financial situation have come to seem all too prescient. Please check back as more names are added to our list and by all means let us know who else deserves credit for having seen our current meltdown coming.

Nouriel Roubini, NYU professor of economics: from "The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster" (subscription req'd), February 5, 2008

Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt.[...]

Ninth, the "shadow banking system" (as defined by the PIMCO folks) or more precisely
the "shadow financial system" (as it is composed by non-bank financial institutions) will
soon get into serious trouble.[...]

Tenth, stock markets in the US and abroad will start pricing a severe US recession -
rather than a mild recession - and a sharp global economic slowdown.[...]

A near global economic recession will ensue as the financial and credit losses and the
credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will
exacerbate the financial and real economic distress as a number of large and systemically
important financial institutions go bankrupt. A 1987 style stock market crash could occur
leading to further panic and severe financial and economic distress.
In this meltdown scenario US and global financial markets will experience their most
severe crisis in the last quarter of a century.

Watch Roubini discuss the financial crisis on Bloomberg TV:

Watch Roubini discuss Fannie and Freddie on Charlie Rose:

Warren Buffett, BBC News, "Buffett Warns On Investment 'Time Bomb,'" March 4, 2003

[Derivatives are] financial weapons of mass destruction.[...]

Derivatives generate reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years.[...]

Large amounts of risk have becomes concentrated in the hands of relatively few derivatives dealers ... which can trigger serious systematic problems.

Nassim Nicholas Taleb, from his book The Black Swan The Impact of the Highly Improbable, April 2007

Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks - when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ....I shiver at the thought.[...]

The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events 'unlikely'.

Byron Dorgan, Senator (D-ND): New York Times, "Washington's Invisible Hand," September 26, 2008
Dorgan's comment on McCain adviser Phil Gramm's deregulation efforts back in 1999:

I think we will look back in 10 years' time and say we should not have done this, but we did because we forgot the lessons of the past and that that which is true in the 1930s is true in 2010.

Joseph Stiglitz, Nobel Prize-winning economist: Washington Post, "The Iraq War Will Cost Us $3 Trillion, and Much More," March 9, 2008

We face an economic downturn that's likely to be the worst in more than a quarter-century.

Until recently, many marveled at the way the United States could spend hundreds of billions of dollars on oil and blow through hundreds of billions more in Iraq with what seemed to be strikingly little short-run impact on the economy. But there's no great mystery here. The economy's weaknesses were concealed by the Federal Reserve, which pumped in liquidity, and by regulators that looked away as loans were handed out well beyond borrowers' ability to repay them. Meanwhile, banks and credit-rating agencies pretended that financial alchemy could convert bad mortgages into AAA assets, and the Fed looked the other way as the U.S. household-savings rate plummeted to zero.

It's a bleak picture. The total loss from this economic downturn -- measured by the disparity between the economy's actual output and its potential output -- is likely to be the greatest since the Great Depression.

Paul Krugman, New York Times columnist

Krugman has been warning about the dangers of the housing bubble for years, and the terrible toll it could take on the economy when it pops. Here is a Krugman warning from August 29, 2005:

These days Mr. Greenspan expresses concern about the financial risks created by "the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages." But last year he encouraged families to take on those very risks, touting the advantages of adjustable-rate mortgages and declaring that "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.

If Mr. Greenspan had said two years ago what he's saying now, people might have borrowed less and bought more wisely. But he didn't, and now it's too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan's successor to manage the bubble's aftermath.

How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.

One way or another, the economy will eventually eliminate both imbalances.

Nathan Gardels: My Interview with George Soros: End of Financial Crisis Could Be in Sight

2008-10-12T20:54:02Z

George Soros, the financier and philanthropist, is author most recently of The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means. He spoke with me in Washington, D.C., where the IMF and World Bank are meeting, on Sunday.

Nathan Gardels: Let's talk first about the nature of the crisis. Thanks to low interest rates, global liquidity and deregulation, we have had a 25-year, self-reinforcing credit expansion bubble, leading to "irrational exuberance," as it was once said, in financial markets. Now we have the self-reinforcing crash of the stock and credit markets --"irrational despair" -- not justified by the economic fundamentals in the real economy.

How does this pattern fit your theory of reflexivity and your new paradigm for understanding finance?

George Soros: The key to understanding this crisis -- the worst since the 1930s -- is to see that it was generated within the financial system itself. What we are witnessing is not the result of some exogenous shock that knocked things off balance, as the prevailing paradigm, which believes markets are self-correcting, would suggest. The reality is that financial markets are self-destabilizing; occasionally they tend toward disequilibrium, not equilibrium.

The paradigm I'm proposing differs from the conventional wisdom in two respects. First, financial markets don't reflect the actual economic fundamentals. Expectations by traders and investors are always distorting them. Second, these distortions in the financial markets can affect the fundamentals -- as we see in both bubbles and crashes. Euphoria can lift housing and dot.com prices; panic can send sound banks tumbling.

That two-way connection -- that you affect what you reflect -- is what I call "reflexivity." That is how financial markets really work. Their instability is now spreading to the real economy, not the other way around. In short, the boom-bust sequences, the bubbles, are endemic to the financial system.

The current situation is not just about the housing bubble. The housing bubble was merely the trigger that detonated a much larger bubble. That super-bubble, created by the ever-increasing use of credit and debt leverage, combined with the conviction that markets are self-correcting, took more than 25 years to grow. Now it is exploding.

Gardels: What ought to be the "circuit breaker" that short-circuits the distortions that inevitably destabilize financial markets?

Soros: If bubbles are endemic in the system, then government regulators have to intervene to prevent bubbles from getting too big. Governments have to recognize that markets are not self-correcting. It is not enough to pick up the pieces after the crisis.

Gardels: Does the presence of the 24-hour global financial news cycle amplify and exaggerate distortions in the financial markets?

Soros: Without question, they accelerate the process. At the same time, I wouldn't overstate it. At the end of the 19th century, you didn't have 24-hour cable, but nevertheless you had the same kind of bubbles. Throughout the 19th century, when there was a laissez-faire mentality and insufficient regulation, you had one crisis after another. Each crisis brought about some reform. That is how central banking developed.

Gardels: How come all the efforts of the U.S. government so far -- the $700 billion rescue package, low Federal interest rates, backstopping deposits and commercial paper -- have not stemmed the crisis?

Soros: The U.S. authorities bought into market fundamentalist ideology. They thought that the markets would ultimately correct themselves. U.S. Treasury Secretary Henry Paulson epitomized this. He thought that six months after the Bear Stearns crisis the market would have adjusted and, "Well, if Lehman (Brothers) goes bust, the system can take it." Instead, everything fell apart.
Since they did not understand the nature of the problem -- that the market would not correct itself -- they did not see the need for government intervention. They did not prepare a Plan B.
As the shock of the Lehman failure set in, he had to change his mind and rescue AIG. The next day there was a run on the money markets and commercial paper markets, so he turned around again and said we need a $700 billion bailout. But he wanted to put the money in the wrong place -- taking the toxic securities out of the hands of the banks.

They have finally now come around -- with the government buying equity in banks -- because they see the financial system is on the verge of collapse.

Gardels: Now that the U.S. authorities are at last on the right track, what are the key components of resolving the crisis?

Soros: The outlines are clear. There are five major elements.
-- First, the government needs to recapitalize the banking system by buying equity stakes in banks.
-- Second, interbank lending needs to be restarted with guarantees and bringing LIBOR (London Interbank Offered Rate) in line with Fed funds. This is in the works. It is going to happen.
-- Third, we must reform the mortgage system in the U.S., minimizing foreclosures and renegotiating loans so that mortgages are not worth more than houses. Stemming foreclosures will cushion the fall of housing prices.
-- Fourth, Europe has to fix a weakness of the Euro by creating a safety net for its banks. While initially resisting this, they have now found religion and done it at their meeting in Paris on Sunday.
-- Fifth, the IMF must deal with the vulnerability of countries at the periphery of the global financial system by providing a financial safety net. This is also in the works. The Japanese have already offered $200 billion for this purpose.
These five steps will start the healing process. If we implement these measures effectively, we will have passed through the worst of the financial crisis.

But then, I'm afraid, there is the fallout in the real economy, which is now gathering momentum. At this point, repairing the financial system will not stop a severe worldwide recession. Since, under this circumstance the U.S. consumer can no longer serve as the motor of the world economy, the U.S. government must stimulate demand. Because we face the menacing challenges of global warming and energy dependence, the next administration should direct any stimulus plan toward energy savings, developing alternative energy sources and building green infrastructure. This stimulus can be the new motor for the world economy.

Gardels: At the end of the day, won't we be looking at a vastly different global financial landscape? The U.S. will decline as the top power. It will have, along with parts of Europe, socialized banks and loads of debt. Communist China will be the new financial power globally, flush with capital and a major investor in the West.

Soros: U.S. influence will wane. It has already declined. For the past 25 years, we have been running a constant current account deficit. The Chinese and the oil-producing countries have been running a surplus. We have consumed more than we produced. While we have run up debt, they have acquired wealth with their savings. Increasingly, the Chinese will own a lot more of the world because they will be converting their dollar reserves and U.S. government bonds into real assets.

That changes the power relations. The powershift toward Asia is a consequence of the sins of the last 25 years on the part of the United States.

European Leaders Agree To Inject Cash Into Banks

2008-10-12T20:29:31Z

European financial and political leaders agreed late Sunday to a plan that would inject billions of euros into their banks in a bid to restore confidence to the teetering financial system.

Taking their cue from a rescue plan announced last week by Britain, the European countries pledged to take equity stakes in distressed banks and vowed to guarantee bank lending for periods up to five years.

Martin Varsavsky: We are Not Going to Party Like it's 1999!

2008-10-12T20:00:51Z

When I was in college Prince used to sing "we are going to party like itÂ´s 1999". Surprisingly thatÂ´s what the markets are singing now. 1999 was almost a decade ago but the value of stocks now is the value of stocks in 1999. If you had kept a 1999 newspaper stock listings, it would do now. The world however has grown around 40% since then. World GDP that is. So what are the markets saying? That we are going to shrink to the levels of 1999? I donÂ´t think so.

I think we will have a bad recession, negative growth, a rise in unemployment. But I donÂ´t think we are going back to 1999. ThatÂ´s why I started buying stocks last month. I was all cash. Now I have around 20% of my portfolio in stocks and I am down 24% in that 20%. I started with 5% of my portfolio in stocks and I kept buying as stocks went down. Initially I experimented with buying banks and I did poorly. Banks may eventually turn around but buying them is for government watchers. They are at the epicenter of this hurricane and all subject to the whim of some ex GS employees. Why did Lehman go under and Bear Stearns was helped? I think what Paulson is doing has no logic and I was wrong in thinking that I could understand him or the markets as they relate to government intervention. Instead last week I sold banks in spite of the bailout and I bought utilities, pharmaceutical companies like Merck or Lilly, and big tech stocks like Dell, Microsoft, Apple, Nokia. And if this week they go down I will buy more and go more into stocks. My rule now is that for every 10% stocks go down I put another 10% of my portfolio away from cash in top stocks. My objective is to keep those stocks for a long time. LetÂ´s say I think of my 4 children when I think of those stocks. I think of the buying opportunity of their lifetime. Looking back a month ago when I started buying some stocks, of course I wish that I had resisted hunting for bargains and waited. I would be 24% better off today. Still I am sure that we are now or in the next months in the buying opportunity of their generation and will keep buying. And hopefully we will party, buying in 2008 at prices of 1999.

Added later: I just found an article in the New York Times that makes the same point I make with more examples.

Amazon And eBay On A Collision Course

2008-10-12T16:10:00Z

When the e-commerce giant eBay emerged from the last recession seven years ago with an aura of invincibility, its chief executive, Meg Whitman, boasted that "eBay is to some extent recession-proof."

As the online auctioneer's revenues and stock price kept climbing, one of its primary rivals, Amazon.com, just limped alo

Max Keiser: Huffpost Bloggers Team up to Bring "The Oracle" Prediction Markets Show to BBC World News

2008-10-12T15:33:53Z

The economic and finance predictions I've made over the past few years featured in the films I made for Al Jazeera caught the attention of BBC World News. Yes, "The Oracle" is coming to TV. Fellow HuffPost blogger Alec Baldwin is partnering with me on this project. If you have any ideas for guests, send them to info@maxkeiser.com

Contact: Stacy Herbert FOR IMMEDIATE RELEASE Cellphone: +33 6 23 00 28 23 Email: stacy@maxkeiser.com

CAUGHT OFF GUARD BY GLOBAL FINANCIAL MELTDOWN? NOT IF YOU HAD WATCHED THE ORACLE!

Max Keiser looks into the future every Friday on BBC World

BBC World News is working with Max Keiser, the creator of the Hollywood Stock Exchange, to produce "The Oracle," a weekly entertaining look into the future with the help of today's headlines and prediction market charts.

The Oracle's partners include Eldorado Pictures, the production company of Emmy award winning star, Alec Baldwin.

BBC World News Head of Programmes, Paul Gibbs, says: 'If Max had been on our screens a year ago the current global financial crisis would not have been a surprise. It might not even have happened.'

Alec Baldwin, who has enjoyed a relationship, both personal and professional, with Keiser for nearly 30 years says, "I'm excited to be working with Keiser on The Oracle. Keiser combines blazing intellect, total irreverence and searing honesty to put forth news and commentary like no one else can."

â¨The Oracle is planned to air every weekend from January 2009 on BBC World News. Celebrity and expert guests join Max to pore over the prediction market charts to see where people are predicting today's news might lead. â¨â¨Max Keiser, has a long and amazingly accurate history of looking at market prices in order to predict the future.

As the creator of the world's first prediction market, the Hollywood Stock Exchange, Max presented "Rumble at the Box Office" for NBC's Access Hollywood accurately predicting box office.

Max went on to predict the present economic turmoil in a series of ten films for the Aljazeera English magazine series, People and Power.

As early as 2006, Max predicted in these films -

* the crisis in the global banking system to be triggered by subprime debts,â¨ * the rescue of the financial system by wholesale government intervention,â¨ * the rise in the price of gold,â¨ * the Russian invasion of Georgia,â¨ *the collapse of fannie mae and freddie mac * economic meltdown in Iceland,â¨ * and more.â¨â¨Max continues to stay one step ahead of the game with his weekly radio show in London on Resonance 104.4 FM and in his writing for the Huffington Post and Intrade, the prediction market site.

The producers of the program will be in Mipcom and available for meetings.

###

â¨For further information, contact Stacy Herbert on cellphone +33 (0)6 23 00 28 23 or by email stacy@maxkeiser.com

Paulson: Emerging Markets Not Immune From Turmoil

2008-10-12T15:27:32Z

Treasury Secretary Henry Paulson said on Saturday that emerging market countries are not immune to the most serious global economic risks in recent memory and must be careful in their policy choices.

In prepared remarks before the International Monetary Fund's steering committee, Paulson also urged the IMF to stay focused on its core missions, including currency surveillance and helping low-income countries avoid a return to debt distress.

U.S. Transport Outlook Darkens

2008-10-12T14:58:54Z

The good news for U.S. transport companies is that declining oil prices should give them a nice lift in their upcoming third-quarter earnings.

But the bad news is that the outlook for just about everything in the U.S. economy is also declining.

Europe's Leaders Race To Find Financial Solution

2008-10-12T14:53:36Z

European leaders meet today to forge a new set of measures to combat the credit freeze after their failure to act a week ago contributed to the worst sell-off in the region's stocks in two decades.

French Finance Minister Christine Lagarde said leaders will aim to put ``meat and muscles'' on a commitment to safeguard key banks. German Chancellor Angela Merkel, whose government earlier this month rejected French suggestions to form a joint bank- rescue fund, said yesterday the euro region will implement ``the same toolbox of instruments.''

The Rise Of The Financial Machines

2008-10-12T14:43:28Z

"BEWARE of geeks bearing formulas." So saith Warren Buffett, the Wizard of Omaha. Words to bear in mind as we bail out banks and buy up mortgages and tweak interest rates and nothing, nothing seems to make any difference on Wall Street or Main Street. Years ago, Mr. Buffett called derivatives "weapons of financial mass destruction" -- an apt metaphor considering that the Manhattan Project's math and physics geeks bearing formulas brought us the original weapon of mass destruction, at Trinity in New Mexico on July 16, 1945.

In a 1981 documentary called "The Day After Trinity," Freeman Dyson, a reigning gray eminence of math and theoretical physics, as well as an ardent proponent of nuclear disarmament, described the seductive power that brought us the ability to create atomic energy out of nothing.

Gov't eyes plan to take ownership stakes in banks

2008-10-12T14:10:10Z

WASHINGTON — Treasury Secretary Henry Paulson told international leaders on Sunday that isolationism and protectionism could worsen the spreading financial crisis. With a new trading week dawning, U.S. lawmakers urged quick action by the Bush administration on measures to make direct purchases of bank stock to help unlock lending.

Sen. Chuck Schumer, chairman of the Joint Economic Committee, said an administration proposal to inject federal money directly into certain banks, in effect partially nationalizing the banking system, "is gaining steam."

"I am hopeful that tomorrow, the Treasury will announce that they're doing it. And they have to do it quickly ... markets are waiting," Schumer, D-N.Y., said.

The administration has not indicated when it would announce its next steps.

Democrats also are lining up behind House Speaker Nancy Pelosi's plan to bring lawmakers back to Capitol Hill after the Nov. 4 election to work on a second economic relief plan. The idea is "give the middle class and the average citizen the same kind of relief that we try to give the financial sector," said Democratic Rep. Barney Frank of Massachusetts, chairman of the House Financial Services Committee.

Top Democrats are suggesting a $150 billion measure that would extend jobless benefits, provide more money for food stamps and finance some construction projects, such as rebuilding bridges and roads. It would also include either a tax rebate or tax cut.

Rep. Roy Blunt of Missouri, the second-ranking House Republican, said he would help on a plan "that makes sense" but is not laden with huge public works projects or bailouts for states that overspent on social programs.

In another step aimed at easing the financial crisis, the Federal Reserve on Sunday approved the $12.2 billion acquisition of troubled Wachovia Corp. by Wells Fargo & Co. Wachovia is the latest in a string of major banks and financial institutions that have been felled by the financial crisis. The Fed action was expected.

As the International Monetary Fund and World Bank held their annual meetings over the weekend, Paulson warned the bank's policy-setting committee of the dangers of "inward-looking policies."

"Although we in the United States are taking many extraordinary measures to ease the crisis, we are not pursuing policies that would limit the flow of goods, services or capital, as such measures would only intensify the risks of a prolonged crisis," Paulson said.

Meanwhile, the World Bank pledged to protect poor and vulnerable countries and nations with rapidly developing economies. Mexican Finance Minister Agustin Carstens, who heads the bank's policy-setting committee, said the bank and the IMF will draw on the full range of their resources to help these countries.

Bank President Robert Zoellick told reporters the financial crisis "has been a manmade catastrophe. The actions and responses to overcome it lie in our hands."

Jittery investors awaited the reopening of stock markets _ the Dow Jones industrial average just completed its worst week ever, plummeting more than 18 percent _ and hoped for bold, coordinated international steps to address the crisis.

At a Paris meeting of European leaders Sunday, countries that use the euro agreed to temporarily guarantee bank refinancing to ease the credit crunch. French President Nicolas Sarkozy it would apply in 15 countries through the end of 2009 and was "not a gift to banks."

The United States has not yet gone that far. But President Bush met at the White House with top global financial leaders on Saturday in a display of unity and said afterward that they had agreed to general principles to combat the crisis. Bush, who had spoken about the crisis for 22 of the past 27 days, went biking at a state park in Maryland on Sunday morning and then kept to a private schedule the rest of the day.

Paulson has indicated the administration will use part of the recent $700 billion bailout Bush signed Oct. 3 to have the government take ownership stakes in banks. The plan has wide support on Capitol Hill, although Democrats pressed for quicker action in spelling out specifics.

Sen. Arlen Specter, R-Pa., sounded a cautionary note. "That has to be very, very carefully done," he said. "We are a capitalistic system and we don't want to move away with nationalizing the banking system. So that anything that's done has to be done on a temporary basis."

This plan and other Paulson moves were supported by three former treasury secretaries.

"This is bigger than the private sector can fix by itself," said James A. Baker III, who served under President Reagan. Robert Rubin, treasury secretary under President Clinton and now an adviser to Barack Obama, said it was important "to be highly, highly proactive."

Lawrence Summers, also a Clinton treasury secretary, said, "Any time you have a problem with trust, you've got to deal with it in a very aggressive way."

The lawmakers and ex-Cabinet officers made the rounds of the Sunday talk shows.

___

On the Net:

White House: http://www.whitehouse.gov/infocus/economy/

Treasury Department: http://www.ustreas.gov/

World Bank : http://www.worldbank.org/

International Monetary Fund: http://www.imf.org/

Steve Parker: One American carmaker - Our best solution?

2008-10-12T11:56:57Z

Over a week ago, we posted on this blog about the possibility of two, or even all three of the Detroit Three, GM, Ford and Chrysler, merging in some fashion.

Now our prediction is coming to life, a prediction based on our analysis of the realities of the world's economy and the auto industry. And one more, newer reality: That no company is, as the Los Angeles Times was still calling GM and Chrysler on Friday, "too big to fail."

GM and Chrysler are talking merger. Ford is publicly denying any merger interest, but the Times of London website reported late Saturday night that Ford has also quietly approached GM.

If the Detroit Three were to merge into one company, ownership shared with the American people, it could benefit everyone; the carmakers, their dealers and their customers. A single company could be in a better credit position to borrow needed cash, and - crucially - it would be able to take advantage of the entire $25 billion taxpayer bailout which has already begun to "trickle down" into Detroit Three bank accounts.

(Daimler still owns almost 20% of Chrysler; that could change any minute now).

What might a merged Detroit Three look like?

GM, Chrysler and Ford employ about 400,000 people in the US, with over 150 plants and more than 14,000 dealerships in North America.

Ford also owns 33% of Mazda and is said to be shopping around for buyers for all or part of their stake. Ford has taken little if any advantage of the great engineering minds at Mazda. For all the good Ford has gotten, they might as well sell.

Ford offers buyers exactly one gas-electric hybrid: Their old, truck-based Escape SUV. Well, two, if you count Mercury's Escape twin, the Mariner hybrid (used by President and Mrs. Clinton, with Secret Service approval).

Any merger will result in many job losses, and scores of facilities would close. We need to make certain that Washington is ready, willing and able to provide whatever assistance these laid-off workers need. If they can bailout Wall Street, well, you know the rest ...

(Mazda is displaying this "Kiyora" concept car at the Paris Car Show this week; Ford owns over 30% of the company, but has not used Mazda as an engineering resource).

I'm tending towards the optimistic about everything our world is going through now. As it becomes clear a huge change in Washington is coming, it offers this rare possibility for all of us: Being able to start over, and doing it right this time.

Given that, there could certainly be established, in the next two or three years, a new American auto industry, streamlined, smart and "world class" in every way, especially in its product quality and development and use of new technologies.

There would be a period, perhaps a year or more, to sort the three companies into one. Cultural differences would be tough to overcome, but at least all the parties would speak a common language (just one of the problems which doomed the Daimler and Chrysler "merger" from the start).

Imagine the possibilities of Detroit Three automotive brain-power under just one roof. Many European and Asian carmakers receive financial support from their respective governments for research and development projects of all kinds, so this new merged company could offer Washington "one-stop shopping."

With a single carmaker, we taxpayers would know where our money was going, for what, and we will eventually enjoy driving new, snazzy, fun, high-tech and clean American-made cars. And if other carmakers want to borrow some of our new automotive technology (as Nissan does with their Altima hybrid, paying for Toyota-developed tech), then we taxpayers might even see some return on our investment.

(This 2005 Chrysler Crossfire was a re-badged Mercedes SLK, and the US version didn't even come with the automatic retractable hardtop, the SLK's coolest feature; the Daimler-Chrysler merger was a loser almost from day one).

Cerberus Capital Management owns 80% of Chrysler, while Daimler still owns about 20%. If GM buys that 20%, and the 80% from Cerberus, all parties could ultimately benefit. I'm certain that someone could figure out a way to bring Ford into this new company.

Cerberus also owns a 51% stake in GMAC, General Motors' huge finance, insurance and home mortgage business (Cerberus paid $14 billion for it two years ago). Cerberus could also swap GM Chrysler's automotive operations for the remaining 49% of GMAC. Cerberus will also talk with off-shore carmakers for some sort of Chrysler deal.

Cerberus has as much concern for this country and its workers and taxpayers as - well, as AIG, Countrywide and all the rest of those highly-vaunted investment outfits, now mostly DOA. Just look at all the problems caused by their buying Chrysler. Placing the failed-and-fired ex-CEO of Home Depot in the top position at Chrysler was just one mistake, albeit an enormous one.

(Chevrolet's 2010 Camaro concept wow'ed 'em at the 2006 Los Angeles Auto Show, but belongs to an age of cheap gas and outlandish, even cartoonish, styling; there's a place for cars like these, but not on mass-production assembly lines - Steve Parker photo).

A single American carmaker would enjoy great support in its home market. Car-buyers know there is no such thing as a real "American-made" car or truck, and would gladly overlook where some parts come from and where some of the vehicles are assembled for a car or truck in which they have an ownership - and pride - stake.

But Detroit has to make the first move. They have to apologize for past transgressions (there's a load of them), and convince all of us they are finally willing to make the leaps into the future which they've avoided the past 30 years and more. The public will never again fall for those, "We only made gigantic SUVs because the public demanded them" explanations/excuses.

Whatever this new American car-making industry may look like, product will still be king; if it's not right, then all the help in the world won't save Detroit.

Wall Street's Old Hands Suggest It May Be Time To Invest

2008-10-12T04:45:52Z

The four most dangerous words for investors are: This time is different.

In 1999, technology companies with no earnings or sales were valued at billions of dollars. But this time was different, investors told themselves. The Internet could not be missed at any price.