Thursday, April 29, 2010

Harrisburg, Pennsylvania, Council Told to Consider Bankruptcy

April 27 (Bloomberg) -- Harrisburg, Pennsylvania, which has missed $6 million in debt payments since Jan. 1, should consider seeking Chapter 9 bankruptcy protection, City Controller Dan Miller told a three-hour special committee hearing.

Miller, the first of four people to testify last night in an “informational session” on insolvency convened by Gloria Martin-Roberts, council president, said bankruptcy may offer Harrisburg relief from $68 million in debt-service payments this year tied to a waste-to-energy incinerator project. Martin- Roberts opposes a bankruptcy filing.

Harrisburg, the capital of Pennsylvania, the sixth-most populous U.S. state, has guaranteed payments on $282 million in bonds on the incinerator, run by the Harrisburg Authority. The payments on the bonds and on a working-capital loan this year add up to four times the amount the city collects in property taxes each year, budget documents show.

“It’s not good,” Miller said at the start of the hearing before a silent audience of about 20 that included city officials and union members. “Nobody wants to do it, but it’s there for a reason,” he said. “Maybe for the purpose of helping cities that are in the situation we are in now.”

The city this month skipped a $637,500 payment due on a loan to Fairfield, New Jersey-based Covanta Holding Corp., operator of the incinerator.

Missed Payment

On April 23, the Harrisburg Authority told the city that it won’t make a $425,282 payment due May 1 on a $17 million bond issue the city has guaranteed, said Robert Kroboth, interim finance manager. Kroboth said it isn’t likely that the city will honor its guarantee, meaning the payment will fall to the bond’s insurer, Hamilton, Bermuda-based Assured Guaranty Municipal Corp.

“When the trustee informs us we need to make the payment, we do,” Betsy Castenir, a spokeswoman for Assured, said yesterday. She said the firm hasn’t gotten a notice from the trustee regarding the May 1 payment.

The city has been negotiating with other groups involved in the incinerator project, seeking a 90-day relief period from debt payments. The other groups include Dauphin County, which has guaranteed a portion of the debt, Assured Guaranty, and the Harrisburg Authority. A formal “forbearance agreement” may be presented to the council within two weeks, Martin-Roberts, the council president, said after the hearing.

Alternatives to Consider

Council members should consider asset sales and tax increases before heading to bankruptcy court, said Fred Reddig, the executive director of the state’s office of Local Government Services. He suggested following steps recommended in a recovery plan prepared by Management Partners Inc. of Cincinnati, a consulting firm hired to study the city’s finances as part of a state municipal support program.

Only one community in the state, Westfall Township in northeastern Pennsylvania’s Pike County, has filed for Chapter 9 protection, and the option might not be available to Harrisburg, said Gregg Miller, a partner with the Philadelphia-based Pepper Hamilton law firm. Miller represented Westfall, which entered bankruptcy last year after it was assessed with a $20 million legal judgment. The amount is about 20 times its annual budget.

“It’s difficult to get into Chapter 9,” Miller said. He said Harrisburg would have to present a proposed debt relief plan to its creditors and get an endorsement from the state before it could seek bankruptcy.

“You have to meet with the state Department of Economic and Community Development and convince them you are deserving of Chapter 9 protection,” Miller said.

Opposes Bankruptcy

Martin-Roberts said she is opposed to bankruptcy for the city of 47,000, and convened the hearing to make sure council members have a common base of information to consider.

“There are those of us who feel bankruptcy shouldn’t be considered an option,” Martin-Roberts said in an interview last week. Patty Kim, another member of the seven-member council, also said at the hearing that she opposes bankruptcy.

Susan Brown-Wilson, the head of the council’s Budget and Finance Committee, said she supports a bankruptcy filing because the state oversight process is too time-consuming, and would require a tax increase that Harrisburg can’t afford.

“Bankruptcy might be the best option,” she said. “This city is so indebted there’s really no way out.”

Council member Eugenia Smith said she was relieved to hear several of the witnesses say that the city has time to consider its options. “I don’t want to rush into anything.”

Moody’s Investors Service in February downgraded Harrisburg’s general-obligation bond rating three levels to B2, five steps below investment grade, from Ba2.

--Editors: Ted Bunker, Mark Tannenbaum

Nancy Schaefer “The Unlimited Power of Child Protective Services”

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U.S. Schools Using History Books to Teach The New World Order

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Peter Schiff – April 27, 2010 – Economics 101

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There are those who have been talking about a single global regulator for years and as a result of the 2008 Credit Crisis, there have been calls to protect you and me from future banking crises through new financial reform. However, we had better consider its real impact. It is not about protecting you and me it is about changing the national regulatory laws of America to conform to a world governmental system and globalizing the last barrier separating individual nation-states. It is about a major power grab of America’s financial assets. As a result of the high stakes, we should ask if Republicans are being told they had better vote for financial reform so we don’t have another September/October, 2008? All of a sudden Senators McConnell and Shelby have had a sea change and are willing to work together on changing our banking system. It is a ruse, a con game when they say they are making the system safer. Let us review some necessary points.

As we consider the events of the past 18 months, we are confronted with a great deal of action, uncertainty, negativity, and pillaging of wealth. In order to understand where we are today and where we are going, we need to review the chicanery of the past eleven years.

One of the keynote events was the repeal of the 1933 Glass-Steagall Act in 1999 which we were told was necessary for banking modernization. In June 1999 then Treasury Secretary Robert Rubin said, “Reforming international financial institutions, strengthening the international financial architecture and maintaining open markets are not simply questions of economics but politics.” That same year, after a great deal of media and stock market hype and hysteria, Congress passed the Gramm-Leach-Bliley Act-GLB which tore down all the protections that the Glass-Steagall Act had put in place, including the separation of commercial banking from investment banking to protect the investor. It also allowed for U.S. banks to become “financial conglomerates” meaning they could expand their services to sell insurance, stocks and bonds and perform the once outlawed investment banking services, which opened the doors for derivatives, now at the heart of the problem. It also allowed for American banks, insurance companies and brokerage firms to buy foreign banks, insurance companies and brokerage firms while allowing them to come in and buy ours. Were there any regulatory changes? No. In fact it was known that the SEC was not beefing up their forces to police and monitor the newly expanded financial architecture.

On the international level, that same year, at the Bank for International Settlements-BIS in Basle, Switzerland, set up a new global entity called the Financial Stability Forum-FSF. It was comprised of regulators from the Group of Seven countries with a mandate to police the global level for problems. In an interview with Svein Andressen, its managing director, he told me in response to a question I raised in 2000 that “there was no guarantee” that they would be successful. Today, as a result of the G20 meetings in 2009, it has been reinvented into a larger body comprised of regulators from the G20 countries. It truly is more of a global regulator than it once was with only seven countries.

At the BIS and other think tanks there was a myriad of white papers calling for a consolidation of regulators and to change the national regulatory laws, now that the U.S. had passed GLB. Federal Reserve Board Vice Chairman Donald L. Kohn gave a speech in Sea Island, Georgia in May, 2007 in which he discussed the rise of credit derivatives and their marriage with securitization technologies called collateralized debt obligations-CDOs. While stating that “these developments have made the financial system more resilient to shocks,” he also said,

We need to accept that accidents will happen—that asset prices will fluctuate, often over wide ranges and those fluctuations will be driven in part by trading strategies, by the cycles of greed and fear that have always been with us and by the ebb and flow of competition for market share. The fluctuations will result in redistributions of wealth, and on occasion, will confront us with financial crises.

He then went on to explain some of the changes that needed to be made and commented,

In all of this work, coordination and cooperation among regulators, domestically and internationally are critical because the same firms are the core firms in each of the principal global financial centers.

Lastly, he stated, “In sum, there are good reasons to think that financial innovation over the past few decades, including the emergence and growth of the credit derivatives markets, has made the financial system and the economy more resilient.”

That year saw a number of headlines and articles calling for a “global regulator.” One written by Kenneth Rogoff read, “No grand plans, but the financial system needs fixing.” Another headline read, “Wanted: a guardian of the world’s financial system.”

In 2007, there was what was considered at first a minor problem in the subprime mortgage market—nothing to worry about. The market dropped from a high in July, 2007 of 14,022 to 12,518 that August before recovering that same year in October to the 14,198 level, an all time high. The Dow had risen 94% or 6,878 points since the low point of October 9, 2002. By August, 2008 the market had dropped to 11,483.

Hank Paulson, our second treasury secretary from Wall Street, had issued his “Blueprint for a Modernized Financial Regulatory System” in March, 2008. It called for a total revamping of all of America’s assets that were not under control of the Federal Reserve: the entire mortgage industry, banks that were not regulated by the Fed, credit unions, state chartered thrifts, and the insurance industry. The Fed was at the center of all the newly proposed commissions. In other words, a total take over of financial assets not under their control was at stake.

Is anyone putting two plus two together? The Federal Reserve is a private corporation so they do not issue an annual report and no one knows who their shareholders are. This company controls the entire monetary system of the United States which means they create the ups and the downs in the stock market and business cycle. They control credit. If they want to destroy the small businessman, they just stop issuing credit—like they are doing now. The Paulson Blueprint was blatant about them seizing control over all the other major financial assets they don’t control.

September 2008 found Congress in a heap of distress. When you consider the bombardment that we all went through, we have never seen or experienced anything like this since the British bombed the Baltimore Harbor in 1814 which is where the term “shock and awe” first came from. In September, we saw: the U.S. government seize Fannie Mae and Freddie Mac, Lehman Brothers collapsed and Merrill Lynch was purchased by Bank of America, AIG was bailed out with government money, Morgan Stanley and Goldman Sachs converted to bank holding companies, the government seized Washington Mutual which became the largest banking failure in the U.S., and Wachovia was taken over by Wells Fargo.

In the midst of shock and awe, the front page of the September 18, 2008 Washington Post read “Stocks Plummet as Lending Freezes Up.” It said that “Lawmakers left on the sidelines as Fed, Treasury take Swift action.” The text read,

The frenetic pace of the financial crisis has forced the Treasury Department and Federal Reserve to make rapid-fire decisions in recent days, leaving Capitol Hill lawmakers effectively impotent—and frustrated. Lawmakers on both sides have expressed concern yesterday that have had had no control over when and how federal money has been used to curb the panic on Wall Street. Congressional leaders learned of the rescue late Tuesday during a hastily called meeting. Paulson and Bernanke have taken the lead, not only from lawmakers but from President Bush.

In order to get Congress to pass the TARP monies and the additional powers for the Treasury Secretary, the stock market began to drop. On September 29 when the House rejected the bailout plan, it dropped more than 700 points. By October 10, the Dow had dropped to 7773.71. The week of October 11, 2008 saw the Dow drop by 22% or $8.4T from 2007 market highs. This was its worst week ever in its 112 year history. Who was boss? Those who control the monetary system including the stock market of the United States. Could this happen again? I have maintained that it could given the fact that the biggest change would be to pass the Paulson Blueprint which has been reinvented as the Obama “New Foundation.” I am amazed that nineteen/twenty months after September/October, 2008, the stock market is at a high: 11,125 which may mean if Congress does not pass financial regulation, it could drop back to the March 9, 2009 low. So how did we get in this position again?

On early October, Hank Paulson told and gave his word to senators that he would only use his additional powers in an extreme emergency. Eleven days later on October 14, he nationalized America’s banking system by giving $250B to Bank of America, Citigroup, Goldman Sachs, Bank of New York Mellon, JP Morgan, Morgan Stanley, State Street Bank and Wells Fargo. The Dow had dropped a total of 41% from the year earlier. Talk about warfare. No guns, no bullets but trillions of dollars transferred out of investors pockets, causing major destruction to America’s middle class. Throughout all of the various congressional sessions, both the Treasury Secretary and the Federal Reserve Chairman Ben Bernanke called for regulatory reform. This has been the mantra for a long time.

President Obama came into office in January, 2009. The stock market reached a severe low of 6,547 on March 9. From this point, the market started to rise. To date it is around 11,000, a rise of 4,453 points. Obama rolled out his version of Paulson’s Blueprint on June 17. It did not call for the Federal Reserve to chair all of the proposed committees like Paulson’s, but it did call for the Treasury Secretary to chair key committees and, in Section V, it called for very strong international regulatory standards and improved international cooperation. It stated that the,

United States is playing a very strong leadership role in efforts to coordinate International financial policy through the G20, the Financial Stability Board, and the Basel Committee on Banking Supervision.

The Obama Financial Regulatory Reform called for the Financial Stability Board to be restructured and institutionalized on the international level and for national authorities to implement the G20 commitments made in London in 2009 which included “supervisory colleges” that would be able to assess danger.

For the first part of 2010, financial reform took a back seat to health reform and on March 15, Senator Dodd rolled out his version of regulatory reform, leaving behind any kind of bi-partisanship that junior Senator Bob Corker had given earlier. A day after the passage of the healthcare bill on March 21, Senator Dodd pushed through the Senate Banking Committee a vote for the bill he authored six days earlier. This basically was a coup d’état over the Republican Party.

Sadly, most Americans are not aware of the marketing savvy that has gone into changing their minds and covering up the fraud perpetrated on them. Regulatory reform has gone from a “Bailout of Wall Street” to a “Bailout of Main Street.” There is now a movement by Republicans after the Security and Exchange Commissions first indictment in ten years of the biggest bank on Wall Street, Goldman Sachs, to move Congress into bi-partisanship. It has worked.

Sadly in light of the fact that Goldman Sachs has given untold millions to our currently seated politicians in Congress and $1M to Obama for his election campaign, the Republicans have decided to play “nice” at the wrong time. Or is it the wrong time? Are they being vigilant and protecting us against another 40% drop in the stock market or are they part of the con game?

Recently, in commenting on how Wall Street makes its money, Jim Santelli from CNBC said, “Where does Wall Street make its money? In murky deals. The more murkier, the more money they make.” In the April 23, 2010 Financial Times, their editorial commented on Obama’s legislation,

Prospects are good that the eventual reform will be a big step forward. But one should not expect too much even of a significantly improved system. As the economy recovers and financial markets’ appetite for risk revives, the chief danger may lie in placing too much confidence in the new arrangements. Financial regulation is, and always will be, a work in progress.

The truth is the stakes were very high for regulatory reform or else we would not have had all the activities of September/October 2008. The bottom line is the consolidation of power by the central banks all over the world. Through the enlarged structure of the Bank for International Settlements and the newly restructured and empowered global regulatory agency, the Financial Stability Board, all of the world’s assets are being shifted to a place where they are fair game for central bankers. All you have to do is study the arrangements on the national and global level. This is the con game of all the centuries--it is a colossal robbery of our nation and people.

Keiser Report with very special Hollywood guest

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China is considering taxing property

Ironies abound in the story of how China is considering a “U.S. style annual tax” based on home values. The driving motivation: raise revenue for local government and dampen the growing real estate bubble arising from speculative demand. Yes, taxes do that. But property taxes didn’t prevent the U.S. bubble, and the dependence of local government on the the revenue stream has led to a draining away from government revenue since the bubble popped.

What will these commies think of next? U.S.-style regulation on toilet-tank size? U.S-style limits on using cash? U.S.-style bailouts of failing industries?

ECB may have to turn to 'nuclear option' to prevent Southern European debt collapse

The European Central Bank may soon have to invoke emergency powers to prevent the disintegration of southern European bond markets, with ominous signs of investor flight from Spain and Italy.

Pigeons swirl in front of the National Bank of Greece headquarters' building in central Athens
Pigeons swirl in front of the National Bank of Greece headquarters' building in central Athens

Greece’s fortunes were dealt yet another blow as Standard & Poor’s slashed its credit rating to junk status - BB+ - the first time that has happened to a euro member since the single currency was created, pushing yields on 10-year Greek bonds up to a record 9.73pc.

The credit-rating agency also cut Portugal’s sovereign debt ratings by two notches to A-, as the swirling storm hit the country with full-force.

“We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.

“The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”

Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds.

This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities.

Mr Cailloux added: “This feels like the banking crisis in late 2008 post-Lehman, though it has not yet spread to other asset classes. The ECB will have to act it if does.”

Yields on 10-year Portuguese bonds spiked 48 basis points to 5.67pc, replicating the pattern seen as the Greek crisis started.

Portugal’s public debt will be just 84pc of GDP by the end of this year, far lower than that of Greece, at 124pc. However, its private debt is much higher and data from the IMF shows that its external debt position is worse.

Interest payments on foreign debt will be 8pc of GDP this year. Portugal’s net international investment position is minus 100pc of GDP, the worst in the eurozone.

The interest rate on a €9.5bn (£8.2bn) issue of Italian notes jumped to 0.814pc, up from 0.568pc in March. The bid-to-cover ratio was wafer-thin, falling to 1.02. Italy has the world’s third biggest debt in absolute terms.

The issue of the ECB buying bonds is a political minefield. Any such action would inevitably be viewed in Germany as a form of printing money to bail out Club Med debtors, and the start of a slippery slope towards in an “inflation union”.

But the ECB may no longer have any choice. There is a growing view that nothing short of a monetary blitz — or “shock and awe” on the bonds markets — can halt the spiral under way.

The markets are already looking beyond the €40bn to €45bn joint rescue for Greece by the IMF and the EU, questioning whether some form of debt restructuring or managed default can be avoided over the next year or two, or even whether the rescue plan can work at all in a country trapped in debt deflation with no way out through devaluation.

Professor Willem Buiter, a former member of Britain’s Monetary Policy Committee and now global economist for Citigroup, said there may need to be a “voluntary restructuring” of debt.

“It is quite likely that a haircut of, say, 20pc to 25pc will be imposed on creditors as parts of the deal,” he said.

The bond markets are already “pricing in” a default of some kind in Greece, where rates on 2-year debt spiked close to 15pc in panic trading yesterday. The European Commission and the International Monetary Fund both insist that restructuring is out of the question but investors have become cynical after months of EU rhetoric and foot-dragging by Berlin.

The ECB cannot lightly risk a second sovereign crisis erupting, with dangers of a spillover into Spain.

The exposure of Spanish-based banks to Portuguese debt exceeds $80bn, according to the Bank for International Settlements. There were early signs of strain in the Spanish banking system yesterday.

Banks were forced to pay a premium in the domestic “repo” market on fears of counterparty risk, although the Bank of Spain has so far won plaudits for ensuring that banks have large safety buffers.

It is unclear why the markets are becoming skittish over Italian bonds. Public debt is 115pc of GDP but this is offset by very low household debt.

Italian citizens are among the most frugal savers in the OECD club of rich states. Moreover, the government has weathered the financial crisis with a budget deficit in remarkable good health.

The Interrogation of Lloyd Blankfein

Tuesday's hearings of the Permanent Subcommittee on Investigations laid the groundwork for future criminal prosecutions of Goldman Sachs Chief Executive Lloyd Blankfein and his chief lieutenants whose reckless and self-serving actions helped to precipitate the financial crisis. Committee chairman Senator Carl Levin (a former prosecutor) adroitly managed the proceedings in a way that narrowed their scope and focused on four main areas of concern. Through persistent questioning, which bordered on hectoring, Levin was able to prove his central thesis:

1. That Goldman puts its own interests before those of its clients.

2. That Goldman knowingly misled it clients and sold them "crap" that it was betting against.

3. That Goldman made billions trading securities that pumped up the housing bubble.

4. That Goldman made money trading securities that triggered a market crash and led to the deepest recession in 80 years.

The hearings lasted for 8 hours and included interviews with seven Goldman executives. Every senator had the opportunity to make a statement and question the Goldman employees. But the day belonged to Carl Levin. Levin was well-prepared, articulate and relentless. He had a game-plan and he stuck to it. He peppered Goldman's Blankfein with question after question like a prosecuting attorney cross-examining a witness. He never let up and never veered off topic. He knew what he wanted to achieve and he succeeded. Here's a clip from his opening statement:

"The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients and our communities.....It profited by taking advantage of its clients' reasonable expectation that it would not sell products that it didn't want to succeed....

Goldman's actions demonstrate that it often saw its clients not as valuable customers, but as objects for its own profit....Goldman documents make clear that in 2007 it was betting heavily against the housing market while it was selling investments in that market to its clients. It sold those clients high-risk mortgage-backed securities and CDOs that it wanted to get off its books in transactions that created a conflict of interest between Goldman's bottom line and its clients' interests." (Senator Carl Levin's opening statement for the Permanent Subcommittee on Investigations)

Levin's entire statement is worth reading, but these two paragraphs distill his plan for exposing Goldman. He was determined to "go small" and repeat the same points over and over again. And it worked. From a purely strategic point of view, Levin's battleplan was flawless. The Goldman execs never knew what hit them. They swaggered into the chamber thinking they'd breeze through the hearings and have a few laughs over cocktails afterwards, and left with their heads in their hands. They were outmatched and outmaneuvered.

Senator Carl Levin:

"These findings are deeply troubling. They show a Wall Street culture that, while it may once have focused on serving clients and promoting commerce, is now all too often simply self-serving. The ultimate harm here is not just to clients poorly served by their investment bank. It's to all of us. The toxic mortgages and related instruments that these firms injected into our financial system have done incalculable harm to people who had never heard of a mortgage-backed security or a CDO, and who have no defenses against the harm such exotic Wall Street creations can cause....

These facts end the pretense that Goldman's actions were part of its efforts to operate as a mere "market-maker," bringing buyers and sellers together. These short positions didn't represent customer service or necessary hedges against risks that Goldman incurred as it made a market for customers. They represented major bets that the mortgage securities market - a market Goldman helped create - was in for a major decline. Goldman continues to deny that it shorted the mortgage market for profit, despite the evidence...

The firm cannot successfully continue to portray itself as working on behalf of its clients if it was selling mortgage related products to those clients while it was betting its own money against those same products or the mortgage market as a whole. The scope of this conflict is reflected in an internal company email sent on May 17, 2007, discussing the collapse of two mortgage-related instruments, tied to WaMu-issued mortgages, that Goldman helped assemble and sell. The "bad news," a Goldman employee says, is that the firm lost $2.5 million on the collapse. But the "good news," he reports, is that the company had bet that the securities would collapse, and made $5 million on that bet. They lost money on the mortgage related products they still held, and of course the clients they sold these products to lost big time. But Goldman Sachs also made out big time in its bet against its own products and its own clients." (Sen. Carl Levin)

Levin had all the facts at his fingertips and put them to good use. Goldman's execs were on their heels from the start and never really regained their footing. Even worse, the hearings showed that Goldman cannot be trusted. Their reputation is in ruins. Levin proved that if Goldman has junk in its portfolio, it won't hesitate to dump it on its clients and then pass around high-fives at the prop-desk. Here's a typical exchange between Levin and the former head of Goldman's mortgage department, Dan Sparks:

SEN. CARL LEVIN: June 22 is the date of this e-mail. "Boy, that Timberwolf was one shitty deal." How much of that "shitty deal" did you sell to your clients after June 22, 2007?

DAN SPARKS: Mr. Chairman, I don't know the answer to that. But the price would have reflected levels that they wanted to invest...

SEN. CARL LEVIN: Oh, of course.

DAN SPARKS: ... at that time.

SEN. CARL LEVIN: But you didn't tell them you thought it was a shitty deal.

DAN SPARKS: Well, I didn't say that.

SEN. CARL LEVIN: Who did? Your people, internally. You knew it was a shitty deal, and that's what your...

DAN SPARKS: I think the context, the message that I took from the e-mail from Mr. Montag, was that my performance on that deal wasn't good.

SEN. CARL LEVIN: How about the fact that you sold hundreds of millions of that deal after your people knew it was a shitty deal? Does that bother you at all; you sold the customers something?

DAN SPARKS: I don't recall selling hundreds of millions of that deal after that.

Levin was just as tough on Blankfein, reiterating the same question over and over again: "Is there not a conflict when you sell something to somebody, and then you bet against that same security, and you don't disclose that to the person you're selling it to? Do you see a problem?"

At first, Blankfein acted like he'd never considered the question before, as if "putting himself in his client's shoes" was something that never even entered his mind. His look of utter bewilderment was revealing. Then he launched into the excuses, the evasions, and the elaborate, long-winded ruminations that one expects from schoolboys and hucksters. But Levin never gave and inch. He kept pushing until Blankfein finally gave up and responded.

"No," he stammered, "In the context of market-making that's not a conflict."

Blankfein's answer was a triumph for Levin, and he knew it. To the millions of people watching the sequence on TV, Blankfein's denial was as good as an admission of guilt. It showed that Wall Street kingpins don't share the same morals as everyone else. In fact, Blankfein seemed genuinely confused that morality would even be an issue. After all, it wasn't for him.

Levin covered some old ground, pointing to Goldman's dealings with Washington Mutual's Long Beach unit which was a "conveyor belt" for garbage subprimes which frequently blew up just months after they were issued. It's clear that Goldman knew the mortgages were junk that were “polluting the financial system”, but that made no difference. Goldman feels that it's responsible to its shareholders alone, not the people who bailed it out.

All in all, it was a bad day for the holding company that's come to embody everything that's wrong with Wall Street. Goldman entered the hearings as the most successful financial institution in the country, and left with its reputation in tatters and its future uncertain. Its CEO came across as shifty and jesuitical while his executives seemed arrogant and uncooperative. At no point during the hearings did any of the Goldman throng look at ease with themselves or their answers. They remained rigid and sullen throughout. On top of that, they were unable to defend themselves against the main charge, that they don't mind sticking it to their clients if it means a bigger slice of the pie for themselves.

The truth is, the Golden boys were handled quite capably by an elderly statesman who took them to the woodshed and gave them a good hiding. Levin's stunning performance is likely to draw attention to the upcoming SEC proceedings and, hopefully, build momentum for more subpoenas, indictments, arrests, and long prison sentences.

Carnivores’ Dilemma Widens as Pork Signals Meat Surge (Update1)

April 26 (Bloomberg) -- U.S. meat prices may rise to records this summer after farmers reduced hog and cattle herds to the smallest sizes in decades, the result of surging feed costs linked to demands for more ethanol.

Wholesale pork jumped as much as 25 percent this month to 90.68 cents a pound last week, the highest since August 2008, U.S. Department of Agriculture data show. Beef climbed 22 percent this year to $1.6896 a pound on April 23, the most expensive since July 2008. Chicken’s gain in March was the most in 20 months.

Demand for pork chops, steaks and chicken breasts is rising as the economy improves, backyard barbecues resume and China and Russia allow more U.S. imports. Domestic supplies may drop to a 13-year low because of culls to stem losses caused by corn prices that doubled after former President George W. Bush set targets to increase ethanol use.

“Ethanol-induced prices in meat are just now getting to the marketplace,” said Steve Meyer, the president of Paragon Economics, a meat industry consultant in Des Moines, Iowa. “Consumers are going to see the highest prices they’ve ever paid in meat and poultry because of the decisions made to make corn into ethanol.”

Hog futures have almost doubled from a low in August to 85.175 cents a pound on the Chicago Mercantile Exchange on April 23. The price may reach $1 by June, said Tom Cawthorne, director of hog marketing at broker R.J. O’Brien & Associates in Chicago. CME cattle jumped 14 percent in the past year.

Meat-Price Outlook

Retail prices may hit records in the next 90 days as U.S. demand peaks during summer grilling season, said John Nalivka, a former USDA economist and the president of meat consultant Sterling Marketing Inc. in Vale, Oregon. The previous records were in 2008 for pork at $3.026 a pound in September, based on monthly averages tracked by the USDA since 1970, and for beef at $4.526 a pound in August. Chicken’s peak was $1.857 a pound in May 2009.

More expensive pork and beef may revive food inflation that dropped last year for the first time since 1961. Meat prices tracked by the United Nations Food and Agriculture Organization are up 5 percent this year, even as food costs fell 5.8 percent.

The rally also means a boost for livestock producers including Smithfield Foods Inc., the world’s largest pork processor. The Smithfield, Virginia-based company said April 21 that its hog-rearing unit will be profitable in the fiscal year that begins in May, its first period without a loss since 2007.

Consumers May Balk

Prices may be peaking, if futures markets are a guide. Hogs for settlement in May through August are trading between 85 cents and 87.4 cents a pound, a narrow range that may signal prices are near their top, said Ron Plain, a livestock economist at the University of Missouri in Columbia.

Consumers may choose cheaper food with the unemployment rate in March at 9.7 percent, near a 26-year high.

“The key question is if the U.S. economy is strong enough to sustain higher grocery store prices for meat,” Plain said. “We had been expecting a late summer peak, but I’m afraid we may end up with a late spring peak.”

Supermarkets have been “holding the line” on consumer costs, Paragon’s Meyer said. In March, retail beef on average was little changed from a year earlier, 4.8 percent below its record high, USDA data show. Pork was 1 percent lower than the same month in 2009 and 3.7 percent from its peak, while chicken was 9.6 percent below the record high set last year.

‘Cycle Has Turned’

Producers are optimistic for the first time in more than two years because output is falling as demand accelerates.

“The cycle in hog production has turned,” Smithfield Chief Executive Officer C. Larry Pope said on a March 26 conference call with analysts. “We have been through a long period of prolonged losses in the live-production side of the business. We’ve been talking about that for a long, long time. We are seeing a period in which our costs are going down and our hog prices are moving up.”

Smithfield cut its hog-breeding herd by 13 percent since early 2008. As of March 1, the total U.S. sow herd shrank by 7.1 percent in two years to 5.76 million animals, the fewest in at least 47 years, USDA data show. Cattle farmers slashed herds in January to the smallest in 51 years, and the government estimates that supplies may not rebound until 2013.

Elaine Johnson, an analyst at LLC in Westminster, Colorado, estimates that U.S. per-capita supplies of beef, pork and poultry will be the smallest since 1997. It takes 10 or 11 months to raise a hog from conception to slaughter weight and about three years for cattle.

‘Mighty Good’ Price

“Pork prices will continue to gradually creep up,” said Zack McCullen III, the vice president of swine production at Prestage Farms Inc., the fifth-largest U.S. hog farm. “If you look at futures this week, they look mighty good. I think they’ll definitely hold up for a while.”

Clinton, North Carolina-based Prestage, which produces about 650 million pounds of pork annually, cut its sows 10 percent last year, McCullen said. “Ethanol was the main driver in corn prices going up to historical levels,” he said. “Ethanol was the pork producers’ biggest problem.”

The hog industry lost about $6.2 billion from October 2007 until last month on rising feed costs and lower export demand caused by swine flu, Missouri’s Plain said. Profits returned as corn futures on the Chicago Board of Trade dropped from a record $7.9925 a bushel in June 2008 to $3.61 on April 22.

Ethanol refiners are using more of the U.S. harvest than ever. An estimated 4.3 billion bushels, or 33 percent, of last year’s crop will be used for fuel, compared with 3.049 billion bushels, or 23 percent, in 2008, USDA data show.

Ethanol Mandate

Bush signed the Energy Independence and Security Act in 2007, increasing the ethanol mandate to 15 billion gallons a year by 2015 from about 10.5 billion in 2009, in a bid to cut dependence on foreign fuel and curb emissions.

Ethanol producers say their industry is unfairly blamed for the record feed costs of 2008. The surge reflected “wild speculation in the markets and the surge of index funds” rather than the jump in corn use for fuel, said Chris Thorne, a spokesman for Growth Energy, a Washington-based ethanol trade group. “Grain producers in this country will more than meet all expected demand for export, for food, for livestock feed and certainly for fuel.”

The USDA estimates farmers harvested a record 13.131 billion bushels of corn last year.

Bullish Speculators

Speculators remain bullish. Hedge funds and commodity index funds held record positions in cattle futures on April 20, while reducing net-long positions in hogs by 0.6 percent from a record on April 13, government data show. In September, speculators had a record bet against hogs, after prices reached a six-year low in August.

Even with lower feed costs in 2010, hog farmers may not expand herds for another two years, partly because banks tightened lending requirements during the recession, said Neil Strother, whose farm in Wilson, North Carolina, owns about 5,000 sows. Strother said he liquidated 15 percent of his herd last year.

“From the largest producer to the smallest producer, none of us want to see production ramp up right now,” he said.

Dwindling Inventories

Rising overseas demand may erode inventories for pork that in March were the lowest for that month since 2007, the government said on April 22. Beef stockpiles in March were the lowest for any month since July 2005, and the USDA forecasts exports will jump 9.7 percent this year.

Brett Stuart, managing partner at Global AgriTrends, a consulting company in Denver, expects pork exports to China, including Hong Kong, to climb 22 percent this year from 2009. The government predicts total U.S. pork exports will increase 5.7 percent this year. In March, China lifted a ban on U.S. pork put in place after the swine-flu outbreak last year.

“We’ve been living a little on borrowed time as consumers,” said Bill Lapp, a former chief economist for ConAgra Foods Inc. who is the president of consultant Advanced Economic Solutions in Omaha, Nebraska. “The confluence of reduced production and improving export markets are supporting wholesale prices and eventually that’s going to turn into higher consumer prices.”

--Editors: Steve Stroth, Michael Arndt.

Hawaii suspends tech tax credits; bill would delay payments till 2013

HONOLULU — Tax credits that lured investors into supporting high-tech businesses wouldn't be paid out over the next three years under a bill approved by Hawaii lawmakers.

The state Senate passed the measure 14-11 Tuesday, sending it to Gov. Linda Lingle after it had previously passed the House.

The proposal aims to raise $93 million for the government next year by delaying payment of the tax credits until 2013.

But supporters of the tax credit say the state won't see that money anytime soon because they will likely sue the state.

They claim the state is violating the U.S. Constitution by going back on its promise to pay these tax credits.

The Legislature also approved a related bill repealing some of the high-tech tax credits this year. That measure would raise an estimated $13 million.

The bills are SB2401 and SB2001.

GlaxoSmithKline profits climb on healthy sales of swine flu vaccine

GlaxoSmithKline profits increased 16pc in the first quarter, driven by better-than expected swine flu vaccine sales.

Pre-tax profits climbed to £1.93bn in the first three months of the year as turnover jumped 13pc to £7.36bn, the pharmaceuticals group said on Wednesday.

Sales of its H1N1 vaccine amounted to £698m on the back of last year's swine flu crisis. Glaxo forecast another £200m in related sales in the remaining nine months of the year, with the threat of a pandemic having receded.

Andrew Witty, chief executive, said he was encouraged by underlying revenue growth of 4pc – excluding pandemic flu products – which reflected success in diversifying into emerging markets and consumer health.

Sales from conventional "white pills" in Western markets accounted for just 27pc of first-quarter sales, down from 32pc a year ago.

Mr Witty also reassured investors that Glaxo would be able absorb the cost of Barack Obama's US healthcare reforms through an ongoing efficiency drive.

GSK shares rose 15p to £12.29 in afternoon trading.

Glaxo's strong performance follows better-than-expected quarterly results and resilient outlooks from rival European drugmakers Roche, Novartis and Novo Nordisk.

Experts call for hike in global water price

World Bank and OECD say water is a finite resource that must be valued at a higher price in order to repair old supply systems and build new ones

Global Water shortage :  California's third year of drought

Water drips from an irrigation pipe on fallow fields on a farm in Firebaugh, California. Photograph: Robyn Beck/AFP/Getty Images

Major economies are pushing for substantial increases in the price of water around the world as concern mounts about dwindling supplies and rising population.

With official UN figures showing that 1 billion people lack access to clean drinking water and more than double that number do not have proper sanitation, increases in prices will be – and in some countries are already proving to be – hugely controversial.

However experts argue that as long as most countries provide huge subsidies for water it will not be possible to change the wasteful habits of consumers, farmers and industry, nor to raise the investment needed to repair old supply systems and build new ones. And price rises can be managed so that they do not penalise the poorest.

Last Friday, the World Bank held a high-level private meeting about water in New York, at which higher prices were discussed. Days before that the OECD, which represents the world's major economies, issued three water reports calling for prices to rise. "Putting a price on water will make us aware of the scarcity and make us take better care of it," said Angel Gurría, the OECD secretary-general. It has also been a key theme at this week's meeting of industry leaders in Paris, hosted by Global Water Intelligence.

The discussion at the World Bank was raised by Lars Thunell, chief executive officer of the International Finance Corporation. "Everyone said water must be somehow valued: whether you call it cost, or price, or cost recover," said Usha Rao-Monari, senior manager of the IFC's infrastructure department. "It's not an infinite resource, and anything that's not an infinite resource must be valued."

Concern about dwindling water supplies has been rising with growing populations and economies. And with climate change altering rainfall patterns, experts warn that unless changes are made, up to half the world's population could live in areas without sustainable clean water to meet their daily needs.

Global Water Intelligence's 2010 market report estimated the industry needs to spend $571bn (£373bn) a year to maintain and improve its networks and treatment plants to meet rising demand - more than three times this year's projected spending.

At the same time, a major report last year by consultants McKinsey, paid for by a group of water-dependent global brands including SABMiller and Nestlé, said that most of the estimated "gap" in water in 2030 could be met from efficiency savings such as better irrigation and new showerheads.

However, highly subsidised prices are hampering both investment and efficiency, because private and public companies cannot collect enough water, nor persuade farmers, homeowners and businesses to make - and sometimes pay for - changes to reduce their water use, say the experts.

"We were in a vicious cycle," says Virgilio Rivera, a director of Manila Water, which took over water and sewage services in the city when the Philippines government passed a National Water Crisis Act in 1997. "Lack of investment; poor service; government can't increase the water rates because customers are dissatisfied; they are not paying, so low cash flows; so the government can't improve the service."

Huge opposition to price rises is expected however, especially as so many prices are set by elected politicians.

Even in Washington DC there has been an outcry over calls for prices to double over the next five years to help the city raise money to spend on its 76-year-old network of leaking lead pipes.

Obstacles include a long term "legitimacy" from providing free or very cheap water; and vested interests, says Rao-Monari, who cites the example of water vendors in India making big profits from desperate households.

The biggest concern though is the impact on the poorest households. There is evidence that they suffer most from the bad services of poorly funded water companies, because often they are not connected at all or have such bad services they are forced to rely on even more expensive water vendors.

In Manila, Manila Water increased bills from 4.5 to 30 pesos per cubic metre. At first there was resistance but by 2003 the company doubled connections from 3m to 6m, including 1.6m of the poorest squatters, leakage had been cut drastically, and pressure and quality had improved, said Rivera, one of the company's directors visiting Paris. Bills for the poorest households are now less than one-tenth of when they relied on vendors, and payment in the slum areas is 100%, said Rivera.

Some say step pricing can be used to protect a basic water allowance for drinking, cooking and washing – either for very low prices or for free, as it is in South Africa.

"I fully agree the water we need of hydration and minimal hygiene are part of the Human Rights declaration, but this is 25 litres of water [a day], which is the smallest part," said Peter Brabeck-Letmathe, chairman of food giant Nestlé and one of the most prominent global business leaders campaigning on water. More than 95% of water is used to grow food, for other household needs and for industry, he added.

Food prices should not have to rise as higher water bills could be offset by efficiency improvements, from irrigation, to new seeds, or even a changing pattern of what is eaten to favour less water-intensive ingredients, said Brabeck-Letmathe.

Others favour separating water supply from government's duty to take care of the most vulnerable. "Ideally utilities should not make any distinction between rich and poor," said Prof Asit Biswas, president of the Third World Centre for Water Management. "The moment you subsidise [someone's bill] people don't use water prudently."

Eurozone edges closer to endgame as Greek contagion hits Portugal

Parallels with Lehman's collapse in 2008 as markets predict that Greece will default on debt

The eurozone "lurched towards the endgame" yesterday as Standard & Poor's finally relegated Greece's sovereign credit rating to "junk" status, downgraded Portugal by two steps to A-, and the yields on Greek debt climbed beyond 15 per cent, a signal that the market regards a default as virtually certain.

The contagion that many feared is threatening to overwhelm the entire single currency area in a remarkably short time. The course of events has parallels with the banking crises of the autumn of 2008, when successive institutions came under attack and their interrelationships and size devastated confidence in the financial system, famously so after the failure of Lehman's.

For many observers yesterday, it was a matter of "for Lehman's, read Greece", as sovereign debt became the new sub-prime. Again there was classic domino effect: bond yields also rose in the other so-called PIIGS group of highly indebted nations – Ireland, Spain and even Italy, as investors demanded higher risk premia to take on these governments' debts. It raises fears of a sovereign debt crisis on a pan-eurozone scale, and beyond even the resources of Germany and France to resolve, and could leave the very future of the euro in doubt, a little past its tenth birthday celebrations.

Should that happen, or appear remotely likely, then it could plunge the world economy into a further crisis of confidence, jeopardising shaky growth prospects. Investor nervousness was signalled by the fall in the FTSE 100 index – down 2.6 per cent to close at 5603.5 – its biggest one-day fall since last November.

UK and European banks, with varying exposure to Greece, slid and the euro fell a further 1 per cent against the dollar. German Bund futures hit a session high as institutions caught the flight to safety, also driving up US Treasury bills and gold. European equities suffered their biggest losses in two months. British banks have a near-£100bn exposure to the struggling European economies, of which £8bn is to Greece, including public and private entities.

There will also be a capital loss for the European Central Bank, which has taken an undisclosed sum in Greek government bonds as collateral for loans.

A more substantial worry would be if there was an indiscriminate dumping of PIIGS paper, freezing the market in much the same way the interbank market closed down in 2008. Banks, insurance companies and fund managers that hold vast quantities of these bonds would find them effectively unmarketable and valueless – hence "the new subprime" label.

The turmoil prompted officials in Berlin to step up their efforts to get the €45bn IMF/eurozone rescue package ready by the time the next instalment payment on Greek sovereign debt falls due, 19 May. Eurozone leaders are discussing the possibility of a special summit in Brussels on 10 May to activate the aid package.

Colin Ellis, economist at Daiwa Securities, said; "The euro area crisis lurches towards the end game. Portugal's situation illustrates that, quite apart from the tragedy unfolding in the Hellenic Republic, European leaders need to move swiftly to bolster the credibility of the whole economic governance structure in the euro area."

Is The Foolproof Law Degree Becoming An Endangered Species?

What if law school is no longer as lucrative as it used to be? And what if procuring funding to obtain a juris doctorate is akin to taking out a subprime loan?

Law firms are cutting salaries and hiring fewer graduates, reports Ameet Sachdev in the Chicago Tribune, which means that a law degree may not be a foolproof way to get a high-paying job after graduation. In addition, ongoing tuition hikes on already-overpriced law school degrees make the prospect of unemployment (and loan repayment) after graduation even more dire. Sachdev writes:

With large numbers of unemployed or underemployed lawyers who borrowed heavily to pay for their educations, legal educators face growing skepticism about the value of a law degree.

Law schools are seeing more applicants than ever before, which only exacerbates the situation. Northwestern Law, for example, only sent 55.9 percent of its graduating class to the largest firms in 2009. As its dean David Van Zandt tells Sachdev, "big law firms will never go back to hiring graduates in droves."

What do you think? If you have gone to/are in law school, what has your experience been?

College Graduates’ Debt Load May Outstrip Ability to Repay

April 26 (Bloomberg) -- Students, especially at for-profit universities, are leaving college in the U.S. with a debt load large enough to raise questions about the ability of many to repay loans, a study found.

At for-profit colleges, 53 percent of the degree recipients in 2008 had education-related debt of $30,500 or more, compared with 24 percent at private nonprofit colleges and 12 percent at public schools, the New York-based College Board said in a report released today.

Students graduating in 2008 faced jobs prospects reduced by the financial crisis and subsequent recession, the worst since the 1930s. Whether the students can earn enough to repay their loans is unclear, according to the study.

“Too many students are borrowing more than they are likely to be able to manage,” wrote Sandy Baum and Patricia Steele, the study authors, who are policy analysts for the nonprofit College Board.

About a third of all bachelor’s degree recipients didn’t borrow any money for college, according to the study. The report was based on the 2007-2008 academic year, which is the latest available government data.

Seventeen percent of bachelor’s degree recipients had loans of at least $30,500, enough to put them in the upper quarter of borrowers in terms of debt load.

Of black bachelor-degree recipients, 27 percent had debt of $30,500 or more, the researchers said. That compared with 16 percent of whites, 14 percent of Hispanics and 9 percent for Asians.

“There is an urgent need for strengthening postsecondary financing policies and for better guidance and improved financial literacy for students before they borrow to finance their postsecondary education,” the study authors wrote.

Repayment Terms

While new repayment options on federal loans promise to help students cope with their debt, these choices don’t apply to private loans “taken by many students with high debt levels,” according to the report.

The U.S. Department of Education’s income-based repayment plan limits the amount students are required to pay to no more than 15 percent of discretionary income, Baum said.

The monthly payment is capped at an amount “intended to be affordable based on income and family size,” according to the department’s Web site. The payment will be lowered to no more than 10 percent in 2014 for new borrowers.

Democrats Deny Buffett on a Key Provision

[0426buffet] Getty Images

Warren Buffett's Berkshire Hathaway pushed a provision that would have allowed the company to avoid a significant financial hit.

Senate Democrats agreed Monday to kill a provision from their derivatives bill pushed by Warren Buffett's Berkshire Hathaway Inc., a change one analyst predicted could force the Nebraska company to set aside up to $8 billion.

The Senate Agriculture Committee inserted language into its derivatives bill last week at the request of Sen. Ben Nelson (D., Neb.) that would have exempted any existing derivatives contracts from new collateral requirements—the money set aside to cover potential losses.

Berkshire has $63 billion in derivatives contracts, and Mr. Buffett has boasted he holds very little collateral against these products.

Mr. Buffett's push was notable because he has warned of the potential dangers of derivatives, famously branding them "financial weapons of mass destruction."

The inclusion of the provision could have been a problem for Democrats, who saw their health-care overhaul stagger under the weight of similar home-state favors, including one for Mr. Nelson.

The provision wasn't included in the financial overhaul bill passed by the Senate Banking Committee in March, and lawmakers had to reconcile differences in the banking and agriculture bills. The Wall Street Journal ran a page-one article about the provision Monday, and the panels agreed Monday morning to strip out the provision.

The provision would have helped all companies with existing contracts. Senate aides on Capitol Hill said, however, that Berkshire pushed forcefully for the change because of its large book of derivatives.

Barclays Capital said Monday the Senate bill now "could result in a drain on the company's excess cash" and force Berkshire to set aside between $6 billion and $8 billion in collateral. The company has about $20 billion in cash on hand.

Treasury Department officials worked to kill the provision, arguing that regulators should have the flexibility to require companies post more collateral if they could pose a threat to the broader financial system, like that created by American International Group Inc. in 2008. Berkshire officials argued existing derivatives should be exempt because they are legal contracts that can't be retroactively amended.

The provision was inserted into the agriculture committee bill after Mr. Nelson pushed to have it included, a Democratic Senate aide said.

Berkshire employees have given Mr. Nelson $75,550 over his political career, according to the Center for Responsive Politics. Mr. Nelson owned between $500,000 and $1 million in Berkshire stock at the end of 2008, according to the most recent financial disclosure forms.

A spokesman for Mr. Nelson said Friday that money had no influence in Mr. Nelson's role in the matter and that Mr. Nelson has long felt that new laws shouldn't apply retroactively to existing contracts. The spokesman didn't return phone or email messages left Monday.

Berkshire officials didn't return calls seeking comment Monday.

Mr. Nelson broke with other Democrats on Monday and voted with Republicans to prevent the Senate from beginning debate on the financial overhaul bill. He said his opposition was because of concerns about the bill's impact on auto dealers and dentists, among other things.

"It's groundhog day here," said Sen. Christopher Dodd (D., Conn.), laughing, when asked about Mr. Nelson's opposition vote, a likely reference Mr. Nelson's role in the health-care debate.

Mr. Dodd said he was prepared to grandfather existing derivatives that have not been cleared, but he could not support waiving margin requirements for those derivatives.

"There are trillions of dollars in play that would raise risks again," Mr. Dodd told reporters after the vote.

He said Treasury is working on language to see if there's a fix "without exposing the economy to the kind of problems that you'd have with derivatives out there without margin requirements and position limits."

Asked if Mr. Nelson's "no" vote was because the Berkshire amendment was stripped out, Mr. Dodd told reporters to ask Mr. Nelson. But he did indicate it was the only issue he and Sen. Harry Reid (D., Nev.) discussed with Nelson during a tense-looking huddle at the start of the vote. "Dentists and auto-dealers did not come up," Mr. Dodd said.

The change was part of a broader agreement on derivatives regulation, which could also force Wall Street banks to spin off their derivatives desks and force many derivatives contracts to be cleared and traded through exchanges. The derivatives portion is a major plank in the Democrats financial overhaul package, which lawmakers could vote on soon. At least two Republicans have expressed support for the Democrats' derivatives proposal, but no Republicans have said they would vote for the broader bill.

—Victoria McGrane contributed to this article.

Seize and Liquidate Goldman Sachs

Today’s Senate hearings, carried on CNBC, Bloomberg, and C-SPAN, represent the first major exposure of the American people to the scandalous frauds of the derivatives casino, including synthetic collateralized debt obligations (synthetic CDOs or CDO²). These are things most people have heard very little about. They begin to open up the shocking reality behind such shopworn euphemisms like “toxic assets,” “exotic instruments,” and “troubled assets.” Reactionaries in general and Republicans in particular have done everything possible to hide the role of derivatives, which must be considered the main cause of the financial panic of September 2008 which brought down Lehman Brothers, Merrill Lynch, and AIG, after felling Bear Stearns in March of the same year. The reactionary legend, repeated yesterday on the Senate floor by financier minion GOP Sen. Gregg of New Hampshire, is that the crisis was caused by poor people taking out subprime mortgages and then defaulting, bringing down the entire Anglo-American banking system and triggering the bailouts. Either that, or too much government spending was too blame.

A mass of kited derivatives blew up in September 2008

This Big Lie has come from such propaganda sources as the Limbaugh Institute of Retarded Reactionary Ranting. But the $1.5 trillion in subprime mortgages were dwarfed by the $15 trillion US residential real estate market, to say nothing of the $1.5 thousand trillion world derivatives bubble. But, starting with Bush-Goldman Sachs Treasury Secretary Henry Paulson, the talk has been of a “housing correction,” not a derivatives panic. It must be pointed out that derivatives are nothing but wagers, bets placed from a distance on securities which themselves are often not mortgages, but rather other derivatives. The bettor buying a synthetic CDO or CDO² does not own the underlying mortgages or mortgage-backed securities, any more than someone who bets on a racehorse owns part of the horse. Blankfein and others tried to portray derivatives as a service to hedgers and end-users, but it’s clear that the vast majority of derivatives involve neither hedgers nor users, but only bettors on both side of the transaction. It is in any case this mass of kited derivatives which blew up in 2008, bringing on the present world economic depression.

Goldman Sachs executives are babbling cretins

The mystique of Goldman Sachs is based in large part on their reputation as the smartest financiers on Wall Street. After today’s hearings, this mystique has permanently dissipated. The Goldman executives babbled. They sounded dumb. They stalled and stammered and went into contortions to avoid giving straight answers to simple questions. They were mendacious and evasive when they did speak. Financial powers around the world will note carefully the refusal of three out of four Goldman executives on one panel to state that they had a duty to defend the interests of their clients. Who will want to do business with such a gang? Goldman Sachs got $10 billion of taxpayer money in low-interest loans under the Bush-Paulson TARP. Part of that money went to pay for obscene bonuses for Goldman executives like the ones on display today. The argument for bonuses is that they must be paid to retain the highly talented personnel, virtual geniuses, who are indispensable for Wall Street speculative success. But these are no geniuses, they are imbeciles. No more bonuses should be paid by banks saved through public money.

Don’t buy any used cars from Lloyd Blankfein

Sleaziest of all was Goldman’s risk-monger in chief, Lloyd Blankfein, who pretended not to know that derivatives are often kept hidden off balance sheet. The morally insane Blankfein testified that his role was to provide the firm’s clients with “the risk they wanted.” Other GS witnesses represented the firm’s role as “distributing risk.” But it turned out that they were manufacturing risk through the very existence and activities of Goldman Sachs, which had the result of pyramiding the total risk of the US financial system into intergalactic space. It is time to regulate much of that unbearable risk out of existence with appropriate regulatory legislation. In the meantime, no sane person would buy a used car from Blankfein. Nor should they believe his assurance that the “recession” has ended.

But when at the end of the day Blankfein finally suggested to Sen. Tester that synthetic CDOs might be outlawed, we should accept his proposal immediately.

Today’s hearings reveal the Goldman Sachs gunslingers and whiz kids as ignorant gangsters and con artists, notable only for their ability to practice massive fraud with impudence. These sleazy mediocrities do not deserve bonuses paid for by taxpayers. Rather, it is time to shut them down and put them in the dock.

If Goldman Sachs had cared about is clients, it would have urgently warned them to unload their subprime risk by late 2006 or thereabouts. Instead, Goldman was busily increasing its clients’ risk by selling them more toxic CDOs out of its own inventory warehouse.

Goldman Sachs: bookies who stack the deck and fix the games

As the philandering Sen. Ensign pointed out, comparing Wall Street to Las Vegas is a slander on the croupiers of Las Vegas, where everyone knows or should know that the game is rigged so that the house always wins. To use the comparison introduced by Sen. McCaskill, Goldman Sachs was operating as the gambling house, or the bookie. At the same time, Goldman was betting for their own account. But much worse was the fact that Goldman was stacking the decks, loading the dice, fixing the games on which the bets were placed, and bribing the umpires.

As Ensign put it in a rare moment of lucidity, the subprime mortgage was bad. But the collapse of subprime would not have had anything like its actual destructive effect on the US economy if it had not been compounded by the mass of synthetic derivatives that were piled on top of subprime.

No national or social purpose served by Goldman Sachs and toxic derivatives bets

The broader issue raised by today’s hearing is: what human purpose is served by the existence of Goldman Sachs, which concocts toxic synthetic CDOs for the purpose of allowing speculators, who are often lied to and duped, to bet for or against them. Goldman Sachs can only be described as a speculative parasite which promotes the activities of other speculative parasites, such as the John Paulson hedge fund at the expense of the public and of its other clients. It was a crime to inject $10 billion of Treasury money into Goldman Sachs. It was another crime for the Fed to lend Goldman untold billions (just how many billions Bernanke still refuses to disclose) to keep them afloat and enable more predatory profits. These crimes must stop, and the public money must be clawed back. Most important, it is time to shut down the derivatives rackets.

Goldman got $12.5 billion from taxpayers for AIG credit default swaps

Useful questions from GOP Sen. Coburn pointed to another kind of derivative: the infamous credit default swap (CDS). These CDS are what brought down AIG, whose London hedge fund had issues $3 trillion in derivatives. When the government bailed out AIG, part of that $180 billion of taxpayer money was used for payouts to the CDS counterparties of AIG, biggest among them Goldman, which got $12.5 billion from the US taxpayer. That was 100 cents on the dollar on a mass of toxic CDS. Coburn wanted to know why Goldman got all their money back, while GM bondholders took a bath as GM went bankrupt. That was, of course, a matter of Goldman’s political clout through GS alum Henry Paulson and Obama Car Czar Steve “The Rat” Rattner, backed up by the historic preponderance of finance capital over industrial capital in this country since Andrew Carnegie sold out to JP Morgan over a century ago.

Derivatives and zombie banks: the toll

Thanks to Goldman Sachs, the other Wall Street zombie banks, and their derivatives, the financial panic of 2008 has turned into a world economic depression of unimaginable proportions. The unemployed and underemployed in the US alone are surely in excess of 20 million. Five to six million home foreclosures are already done or in the pipeline, throwing tens of millions of Americans out of their homes. World trade has been seriously impacted. The budgets of California, New York, Illinois, and many other states are in crisis, with massive layoffs of teachers and other state employees. An entire generation is being destroyed. Now, Greek bonds are trading at junk levels under the attack of speculative predators including Soros, Greenlight Capital, SAC, and the protagonists of today’s hearings – Paulson and Co and Goldman Sachs itself. The attack on Greece and the euro represents the leading edge of the second wave of the depression, which is now arriving in much the same way that the second wave of the 1930s depression was unleashed by the Vienna Kreditanstalt bankruptcy in May of 1931, about 79 years ago and just a year and a half into that depression.

The goal of the Republicans is to portray themselves as stern judges of Wall Street, even as they line up in a unanimous phalanx to protect the finance jackals from any meaningful regulation whatsoever — as seen in yesterday’s vote to block cloture on derivatives re-regulation and reform. The goal of the Democrats is to expose the sociopathic evil of Goldman Sachs and the rest of Wall Street while preening themselves as defenders of the public interest, without however banning credit default swaps, banning synthetic CDOs, and imposing a Wall Street sales tax on all remaining derivatives and asset transactions.

To this degree, today’s hearings are being conducted in bad faith by both major parties. However, the dynamic of the resulting spectacle has the result of educating and mobilizing public opinion against the predatory practices which are the essence of Wall Street, even a year and a half after the banking panic of September 2008 and the monster bailout of zombie banks which soon followed. What is required is a new edition of the anti-banker sentiment set off by the Senate Banking Committee hearings conducted from January 1933 to May 1934 by committee counsel Ferdinand Pecora, which unmasked the corruption of Wall Street. Persons of good will need to get active now to push this process as far as possible while these social dynamics are working. It is time to hit the zombie banks, the hedge funds, and their derivatives as hard as possible, before the second wave of the depression hits. The program necessary to fight the depression and break the strangle-hold of Wall Street on the US economy and political system is given on my web site.

Mitch McConnell on the bailout: “Harry, I think we need to do this, we should try to do this, and we can do this.”

During a break the senators filed out, and the GOP reactionary lockstep once again blocked cloture for a final debate on the Wall Street reform bill, weak as it is. Many activists of the Tea Party naively believe that they have been fighting for a year and a half that they have been fighting to take back the Republican Party. If that is what they believe, today’s second cloture vote proves that they have gotten nowhere in their efforts. Despite their charades, the GOP are the bodyguards of the Wall Street predators. Tea baggers who think they can break the Wall Street grip on the Republicans are pathetic dupes, and they need to wake up, pronto.

When Paulson went to the leaders of Congress to demand a $700 billion bailout for Goldman and his Wall Street cronies, GOP Senate majority leader Mitch McConnell was “deeply frightened” by the apocalyptic briefing delivered by Paulson and Bernanke. When Democratic Majority Leader Harry Reid started talking about how difficult it would be to get so much money in a hurry, McConnell urged an immediate bailout, saying: “Harry, I think we need to do this, we should try to do this, and we can do this.” (Andrew Ross Sorkin, Too Big to Fail [New York: Viking, 2009], p. 442) The GOP was the original party of the bailout, and they have not repented, as best seen through the continuance of McConnell, one of the key midwives of the bailout, as Republican Senate Majority Leader. This is the same McConnell who went to Wall Street recently to meet with zombie bankers and hedge fund hyenas, pledging to block derivatives reforms in exchange for big bucks contributed to the GOP’s campaign coffers. Tea baggers who think the GOP has changed or is moving to their side are sadly deluded.

Today, the market fetishism of the crackpot Austrian school has taken a severe blow. Now that Blankfein‘s public image has been soiled by Goldman’s scurrilous and scatological emails, the time is ripe for the radical reform of derivatives and the zombie banks. This is a matter of national survival.

Now that Goldman Sachs is masquerading as a bank holding company, it is subject to FDIC rules. If Goldman’s derivative hoard is marked to market, it is bankrupt. The FDIC should therefore seize Goldman and liquidate it under chapter 7 of the US Code. Sheila Bair should not wait for Friday.

A Clear Warning Sign: Global Liquidity Is Drying Up!

In last week’s Money and Markets column I told you the majority of my indicators are signaling that the stock market has probably entered the last phase of its medium-term uptrend, which began in March 2009.

I went over price-to-earnings ratios (based on twelve-months trailing GAAP earnings) and dividend yields. Both metrics are showing a heavily overvalued market.

Today I want to add that “normalized earnings,” which try to even out the impact of the ups and downs in the business cycle, are strongly supporting this message.

Plus, I’d like to give you updates on what I discussed last week and tell you about one more important signal …

Sentiment Indicators Still Euphoric

I reported that mutual fund cash level was an excessively low 3.5 percent in February. Now the March figure is in, and it’s the same as February’s! The only other time we’ve seen fund managers holding such a low level of cash was in the summer of 2007, a short three months before a major stock market high.

The percentage of bullish advisors is dangerously high, and it’s still rising!
The percentage of bullish advisors is dangerously high, and it’s still rising!

Next, I want to give you the latest readings of Investors Intelligence Advisory Sentiment …

The bullish contingent stands at 53.3 percent, up from 51.1 percent just a week ago. Whereas bearish advisors are down to a very low 17.4 percent, well below the 20 percent threshold typically indicating at least short-term danger for the stock market.

Even more bothersome is the most recent ratio of bullish to bearish financial newsletters, currently at 3.06, as shown in the second panel of the chart below. Last week it was 2.7.

This tells us that the short-to medium-term upside potential is very limited.

S & P Chart

Then I discussed how equity put-call ratios had fallen to levels not seen since 2000, the year of the famous NASDAQ top, when the dot com bubble burst.

Well, as you can see in the second panel of the following chart this ratio is still hovering around that extremely low level. The 10-day average is currently at 0.46, up a meager 0.01 from last week.

And the 10-day average of the total CBOE put-call ratio, the third panel of the chart, is still a very low 0.77. Last week’s small market correction did nothing to dampen option speculators’ willingness to bet on further rising stock prices.

S & P Chart

What’s more …

Liquidity Has Dried Up Globally

There still seems to be a lot of talking about the huge liquidity driving this market higher. And yes, the Fed’s answer to the housing and banking crisis was a historical wave of liquidity with M-2 money supply growth rates of more than 10 percent. But take a look at the chart below to see what has happened since.

Year over year M-2 growth has stalled … growing by a mere 2 percent. That’s a far cry from a huge wave of liquidity. It’s better described as a trickle.

S & P Chart

And if you take a global view, the picture is even getting worse!

The so called excess liquidity of the G7 nations, measured as M-1 minus industrial production minus consumer price inflation, has actually declined by 5 percent during the first quarter of the year.

If this global stock market rally was driven by liquidity — and I really think it was — the drying up of global liquidity should be seen as a clear warning sign.

The bull move, which in my opinion was a huge bear market rally that started in March 2009, is already on borrowed time. And I expect the market to top out during the coming months.

Best wishes,



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