naked capitalism

War heroine ‘not classed leader’ BBC

Top 10 April Fools’ Pranks for Nerds Wired. Forewarned is forearmed.

U.K. Banks Predict `Prolonged’ Downturn, CBI Says Bloomberg (hat tip reader Abdul)

Who Will Be Next Bear? Bennet Sedacca, Minyanville

I Find Myself Unable to Disagree… Brad De Long

Some US Homes Worth Less Than Their Copper Huffiington Post

US Dollar: Currency Non Grata in Amsterdam International Political Economy Zone

The Howling Hole in Treasury Secretary Paulson’s Proposals for Regulatory Reform Willem Buiter

A new way to fight cancer: the silver shield PhysOrg, If you know someone about to undergo chemo, read this.

Housing slump comes to the Hamptons Financial Times

Antidote du jour:

Reader Scott passed along this article from the Telegraph. Note that earlier this year, a colleague with high-level connections at the Treasury and Fed said that they were looking at a partial nationalization of US banks. The reasoning was that even if they were technically solvent, they would be sufficiently impaired, between writedowns and carrying less than stellar assets on their balance sheets, to prevent them from extending new loans. Thus, this sighting seems a further development along this line of thinking.

From the Telegraph:

The US Federal Reserve is examining the Nordic bank nationalisations of the 1990s as a possible interim solution to the US financial crisis.

A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region’s economy to its knees.

It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the US crisis and is eyeing the Nordic approach for contingency options.

Scandinavia’s bank rescue proved successful and is now a model for central bankers, unlike Japan’s drawn-out response, where ailing banks were propped up in a half-public limbo for years.

While the responses varied in each Nordic country, there a was major effort to avoid the sort of “moral hazard” that has bedevilled efforts by the Fed and the Bank of England in trying to stabilise their banking systems.

Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country’s top four banks – Christiania Bank and Fokus – were seized by force majeure.

“We were determined not to get caught in the game we’ve seen with Bear Stearns where shareholders make money out of the rescue,” said one Norwegian adviser.

“The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial,” he said.

Stefan Ingves, governor of Sweden’s Riksbank, said his country passed an act so it could seize banks where the capital adequacy ratio had fallen below 2pc. Efforts were also made to protect against “blackmail” by shareholders.

Mr Ingves said there were parallels with the US crisis, citing the use of off-balance sheet vehicles to speculate on property. All the Nordic banks were nursed back to health and refloated or merged.

The tough policies contrast with the Fed’s bail-out of Bear Stearns, where shareholders forced JP Morgan to increase its Fed-led rescue offer from $2 to $10 a share. Christopher Wood, chief strategist at brokers CLSA, says the Fed’s piecemeal approach has led to “appalling moral hazard”.

“Shareholders have been able to lobby for a higher share price only because the Fed took over the credit risk on $30bn of the investment bank’s dubious paper. The whole affair also amounts to a colossal subsidy for JP Morgan,” he said.

Bill Gross argues that tougher regulation of investment banks, particularly regarding leverage, will lower their profits. While his forecast is intuitively correct, it will also increase the propensity of professionals in non-capital-using businesses, like M&A amd fund management, to form boutiques or operate in pure-play firms subject to less oversight.

From Bloomberg:

Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. will earn less and face higher borrowing costs because of increased regulation of investment banks, Pacific Investment Management Co.’s Bill Gross said.

Treasury Secretary Henry Paulson today proposed the broadest overhaul of U.S. financial regulation since the Great Depression and said the Federal Reserve should expand its oversight. The Fed earlier this month engineered New York-based JPMorgan Chase & Co.’s purchase of Bear Stearns Cos. and became the lender of last resort to the biggest bond dealers.

Investment banks’ invitation to borrow at the Fed’s discount window will “come with a price tag,” Gross wrote on Pimco’s Web site today. “There seems no way that current reserve requirements for banks will not in some nearly uniform way be imposed on investment banks. Leverage and gearing ratios of securities firms therefore, will in a few years resemble those of commercial banks themselves resulting in reduced profitability for major houses such as Goldman, Lehman and Merrill Lynch,” said Gross, who is based in Newport Beach, California. The three securities firms are all based in New York.

“These shadow banks will likely be forced to raise expensive capital and/or reduce the bottom line footings of their balance sheets,” Gross said. This “will be costly, and bond spreads as well as stock prices should begin to reflect it.”

Two articles in the Financial Times, one a discussion of the implications of Japan’s crash for US policy, the other the latest in a series of comments on the credit crisis by Larry Summers, take different views of the best remedies for our economic woes. Unfortunately, the Japanese prescription seems likely to be necessary, yet the Summers article (and some online commentary on it) suggests the US is a long way away from embracing realistic solutions.

Note that the analogy to Japan presupposes that our mess is of a similar magnitude to theirs. A lot of experts don’t accept that, since their asset bubbles (stock market and real estate) were on paper much greater relative to the sustainable value of the underlying assets than ours.

But I am not persuaded that anyone has done the right analysis. What matters is not so much how big the market cap of the various inflated assets got to be, but how much credit was extended against them. For instance, in Japan, corporations borrowed heavily against the value of urban land (Japanese banks would lend 100% against the nominal value), but unlike the US, homeowners did not have vehicles for extracting their inflated equity, so the residential real estate bubble did not have the same systemic impact that the commercial one did. Some very simple numbers would shed light on the debate. Moreover, we have far more levearge on leverage than Japan did (geared hedge funds and investment banks owning CDOs, which themselves were sometimes leveraged; hedge funds of fund adding another layer of borrowing on top of the borrowing at the hedge fund level). The debt to GDP ratio in the US is 270%, higher than the level before the crash of 1929, when it was 250%. What was the level in Japan in 1989?

Further, I am not certain a US GDP leverage measure tells the full tale. Per the wonders of our originate-and-distribute model, US mortgage and corporate paper is in a lot of foreign hands. Similarly, some levered players in our markets don’t necessarily borrow from US concerns (think of all those London-based hedge funds, who probably borrow at least in part from foreign entities). And we also have various derivatives exposures which are not captured in any formal computations of leverage (that’s going a bit far, but not by much, since Basel II give the banks considerable latitude in how the compute the equity that needs to be held against derivatives positions).

And to what degree do we offset Japan’s very high domestic savings at the time of the crash against its bubble? Consider: even if our credit mess is on paper less bad, we aren’t in a position to resolve it internally. Our continued and not-likely-to-reverse-anytime-soon dependence on foreign capital (we had better hope it doesn’t change in the near future; the alternative is a dollar crash, which would wreak havoc here and abroad). That is a more complicated problem to parse.

Finally, the article mentions that the US does not face the risk of deflation. We are witnessing liquidity hoarding in the interbank markets. I already have economically literate readers who tell me that they are holding large cash balances at home our of fear of a bank holiday and are trying to find a bank they deem to be safe. A couple of bank failures and we could be well on the way enough withdrawals from banks to generate a money supply contraction, no matter what the Fed does with the monetary base.

That is a long-winded way of saying that the powers that be may be deriving false confidence from looking at incomplete measures of the financial service industry’s gearing.

So back to the FT. in “Japan’s ‘lost decade’ offers dire pointers for the Fed,” Gillian Tett and Krishna Guha argue that the big lesson from Japan was in the end, the government had to recapitalize the banking system and delay only made matters worse. Yet rescuing banks was highly contentious in Japan, and keep in mind that unlike here, banks were not highly profitable pre-crash and executives were not paid princely sums. In other words, they lacked the controversy of the financial services industry lining its pockets before it went belly up.

But let’s tease out the Japan hypothesis. Let’s say that, in the end, the banks will have to get a public injection of funds. What might be some implications?

First is that all these measures to shore up markets are a very indirect, inefficient, and therefore costly was to try to finesse the real problem, that a lot of institutions are or shortly will be insolvent. That says we should quit propping up the mortgage market, particularly since letting housing and mortgages find their level will entice cash on the sidelines to come in, and deal with the damage to institutions directly, It similarly suggests that we might deal with the damage to families frontally rather than by trying to prop up home prices (for instance, Dean Baker’s own to rent, which has homeowners stay in their residence as renters, is a government-mediated version of a longstanding banking practice, deed in lieu of foreclosure, where the homeowner would hand over the deed but stay in place as long as they could pay a reasonable rent, at least until the bank found a buyer. The Baker plan would give tenants somewhat stronger rights to remain if they stayed current in their lease payments. Other measures might address job or wage losses).

Second, if these institutions are insolvent, the government has no reason to be shy about nationalizing institutions, and that means wiping out the equity holders before any funds are injected. Yet people like Summers seem remarkably loath to even voice that idea, as if it were somehow anticapitalist. Huh? What is anti-capitalist is privatizing gains and socializing losses. No more free lunches for those who get salvaged by taxpayers.

We also need more serious discussion of new regulator approaches, not charades like the Paulson plan that pretends that reorganization is tantamount to a new supervisory regime. My colleague Columbia professor Amar Bhide sent an elegant recommendation that he presented last November:

Severely circumscribed ‘regulated’ institutions

A very long time ago (roughly 1985), a colleague handed me a short Brooking paper by Robert Vishny, Josef Lakonishok, and Andrei Shleifer. By then it was a couple of years old. I’ve not been able to find it online, but my recollection of it is pretty good.

It was the first time these well-respected economists had looked at the money management business (remember, it was no where near as important then as it is now) and they were mystified. They concluded the industry added no value and by any standards ought not exist (in fact, the paper might have been slightly stronger on this point). I recall it acknowledged in passing that investors might have non-economic objectives.

Other first class minds have come to similar conclusions. Warren Buffett, in 2006 letter to Berkshire Hathaway shareholders, gave a little parable about the Gotrocks, a family that owns all of Corporate America:

But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers– for a fee, of course– obligingly agree to handle these transactions… The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on.

After a while, most of the family members realize that they are not doing so well at this new “beat-my-brother” game. Enter another set of Helpers….The suggested cure: “Hire a manager– yes, us– and get the job done professionally.” These manager-Helpers continue to use the broker-Helpers to execute trades….Overall, a bigger slice of the pie now goes to the two classes of Helpers.

The family’s disappointment grows. The solution? More help, of course.

It arrives in the form of financial planners and institutional consultants, who weigh in to advise the Gotrocks on selecting manager-Helpers….

The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group– we’ll call them the hyper-Helpers– appears….

The new arrivals offer a breathtakingly simple solution: Pay more money…The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY…

And that’s where we are today: A record portion of the earnings that would go in their entirety to owners– if they all just stayed in their rocking chairs– is now going to a swelling army of Helpers.

Now you would think that by now America would have wised up. But people are deeply optimistic and the vast majority overestimates its capabilities. And there are many stories, some of them actually true, of individuals who made a lot of money in the market. Of course, they were all geniuses, as opposed to merely lucky.

Money managers, particularly the big mutual fund complexes, have skillfully preyed on the willingness of the public to believe. They will promote their best-performing funds, encouraging investors to pile in just as mean reversion is about to take place (McKinsey has repeatedly studied mutual fund performance, and has consistently found that top quartile funds don’t stay there very long). At least momentum stocks don’t run ads in the Wall Street Journal.

While the waning enthusiasm may simply be a function of investors having been whipsawed by volatile markets one too many times, this Financial Times piece suggests that they have been sold one too many fads, although they depict the problem differently. Their characterization, which says the author spent a bit too much time with industry sources, is that the fund managers have failed to come up with tantalizing new products. That unwittingly reveals the fundamental problem (if you care about returns, that is). The industry has come to depend on fashion, not fundamentals.

Per Buffet, the FT story reveals that investors are paying a lot of fees to be closet indexers.

I’d like to think this investor skepticism might be a lasting development, but I suspect the industry is clever enough to find a way to repackage its wares once the markets have calmed down (if conditions continue to be adverse it might take some time to get investors back in the deep end of the pool).

From the Financial Times:

The US mutual fund industry’s best attempts at innovation have fallen flat in recent years due to a hairy mix of factors ranging from changes in how funds are distributed to the simple fact that many new products have failed to deliver their promised returns.

Compounding the lacklustre output is the industry’s maturity level. With all the major asset classes already chock full of choices, there is little room for more products on shelves that are stocked with 7,044 mutual funds.

“The level of creativity could use a steroid injection,” says Jeff Keil, principal of mutual fund consultancy Keil Fiduciary Strategies. He says the innovation drought has a lot to do with the changing nature of how funds are sold.

A big factor in the innovation stagnation is the fact that so-called gatekeepers at the broker/dealers whose financial advisers sell funds have gained much greater influence over what those advisers sell. These gatekeepers are paid to sort through the thousands of funds available. And they want predictability in the funds they recommend.

Specifically, gatekeepers do not want to see more than 3 per cent tracking error, or deviation from the relevant benchmark funds are supposed to track. It is an attempt to manage risk and avoid negative surprises. Their job is on the line if the funds they recommend do not deliver as promised. Innovative products, by definition, are not going to be predictable.

“Innovation is dead – or at least severely constrained – in a third-party distribution world,” says Harold Bradley, chief investment officer at the Ewing Marion Kauffman Foundation and former chief investment officer of growth equity at American Century Investments.

The safe bet for portfolio managers is to stay close to their benchmark. The rub for investors is they end up paying a higher fee for active management when what they are essentially getting is an index fund.

While creativity may be at a low level, pressure to come out with new products is high. But so far the response has been to launch “me-too” products that provide access to a thin slice of the market.

“There’s a tremendous urge to differentiate for the sake of differentiating without much thought to whether it is a viable product or not,” says Burt Greenwald of BJ Greenwald Associates. “What ultimately creates and maintains market share is performance.”

Investor flows follow the top-performers, so fund firms are under pressure to have their products stand out amid a sea of mediocre returns. At the same time, as with most consumer products, there are people who constantly need to have “new and improved” cachet, says Adam Bold, chief investment officer at The Mutual Fund Store. “Brokers need a story to tell their clients,” Mr Bold says. “So there’s a constant struggle between pure fad and giving investors what they want.”

Yet, there is a disincentive for fund firms to innovate. It’s expensive to roll out new products and it takes three to five years to incubate a fund and develop a track record. Being a first mover also carries a lot of risk, something most firms are unwilling to roll the dice on.

For fund shops, one of the only ways to differentiate their new products is to offer access to a particular niche. The trouble with rolling out narrowly focused funds is their limited appeal.

Further, recent history has not been kind to many fund shops that have launched “hot dot” products when times are good and ill conceived ones when times are bad — think tech funds in the late 1990s and principal protection funds in 2002.

Principal protection funds were a product of the market crash and promised exposure to stocks without any downside, which turned out to be too good to be true. The funds often sought to protect investors’ principal with insurance or derivatives. And, if investors stuck it out with the fund for the predetermined amount of time, their investment would be protected from dropping in value.

But, these funds have produced dismal returns over their lifespan, a reality that has been reflected in net sales. They have suffered $3.8bn (£1.9bn, €2.5bn) in outflows in the three years ending December 31, 2007, according to Financial Research Corporation.

While still in their infancy, heavily touted 130/30 funds have not delivered either. Long/short equity funds, a proxy for 130/30 funds, have trailed the S&P 500 since the beginning of 2006.

“130/30 funds are not the answer,” says Rob Isbitts, chief investment officer at Emerald Asset Advisors, a registered investment adviser in Weston, Florida. “It’s being sold as the everyman’s hedge fund and it’s got a lot of marketing muscle behind it. But if that’s product innovation, we’ve got to go back to the drawing board.”

Other new funds that have generated a lot of buzz are specialty or sustainable funds that invest in water, energy or infrastructure. While these narrow slices may have some merit for a small group of investors, they do not make for a good core investment.

Of all “new” funds on the scene, lifecycles have been the most heralded, even though some shops, such as Fidelity, have had them in place for 12 years. An estimated 102 new lifecycle funds were launched last year, FRC says.

But much of the set-it-and-forget-it funds’ success may have more to do with changes in legislation than product innovation. The funds have gained prominence with the passage of the Pension Protection Act of 2006 and their subsequent place on the list of qualified default investment options in 401(k) plans.

Citigroup is in the midst of some large-scale organizational changes, so the move to separate the credit card unit from the rest of consumer banking may not seem to be such a big deal.

But this change could be a precursor to a sale or public offering. Citi has a very solid card business and it may be forced to sell some crown jewels if writedowns continue. Like many forced sales, any disposal of the credit card operations would take place at or near the worst point in the cycle, when both earnings and multiples would be low.

From Bloomberg:

Citigroup Inc., battling to restore credibility after a record loss, will set up an independent credit-card unit and overhaul consumer banking along geographical lines, two people with direct knowledge of the plan said.

Steven Freiberg, the current co-head of consumer banking, will run the card unit, the people said, asking not to be identified before an announcement that may come as early as today. The rest of the consumer group, mainly bank branches and non-bank lending, will be led by five regional heads, the people said….

Profit at Citigroup’s consumer unit fell 35 percent last year to $7.87 billion as rising delinquencies on mortgages and auto loans forced the bank to set aside more reserves for losses.

Belying the claim that (until recently) the economy was in good shape, the use of food stamps is rising and will hit an all time high this year. Admittedly, that is absolute numbers with underlying demographic growth. The percentage of people using this income supplement was highest in relative terms in 1994, when the parts of the country had not emerged from a recession. (the . While we may also be in one that has yet to be officially recognized, things certainly aren’t going to get better near term. This may an indicator that economic stress among consumers is markedly worse than is widely recognized.

From the New York Times:

Driven by a painful mix of layoffs and rising food and fuel prices, the number of Americans receiving food stamps is projected to reach 28 million in the coming year, the highest level since the aid program began in the 1960s.

The number of recipients, who must have near-poverty incomes to qualify for benefits averaging $100 a month per family member, has fluctuated over the years along with economic conditions, eligibility rules, enlistment drives and natural disasters like Hurricane Katrina, which led to a spike in the South.

But recent rises in many states appear to be resulting mainly from the economic slowdown, officials and experts say, as well as inflation in prices of basic goods that leave more families feeling pinched. Citing expected growth in unemployment, the Congressional Budget Office this month projected a continued increase in the monthly number of recipients in the next fiscal year, starting Oct. 1 — to 28 million, up from 27.8 million in 2008, and 26.5 million in 2007….

“People sign up for food stamps when they lose their jobs, or their wages go down because their hours are cut,” said Stacy Dean, director of food stamp policy at the Center on Budget and Policy Priorities in Washington, who noted that 14 states saw their rolls reach record numbers by last December.

One example is Michigan, where one in eight residents now receives food stamps. “Our caseload has more than doubled since 2000, and we’re at an all-time record level,” said Maureen Sorbet, spokeswoman for the Michigan Department of Human Services.

The climb in food stamp recipients there has been relentless, through economic upturns and downturns, reflecting a steady loss of industrial jobs that has pushed recipient levels to new highs in Ohio and Illinois as well…..

Some states have experienced more recent surges. From December 2006 to December 2007, more than 40 states saw recipient numbers rise, and in several — Arizona, Florida, Maryland, Nevada, North Dakota and Rhode Island — the one-year growth was 10 percent or more.

In Rhode Island, the number of recipients climbed by 18 percent over the last two years, to more than 84,000 as of February, or about 8.4 percent of the population. This is the highest total in the last dozen years or more, said Bob McDonough, the state’s administrator of family and adult services, and reflects both a strong enlistment effort and an upward creep in unemployment.

In New York, a program to promote enrollment increased food stamp rolls earlier in the decade, but the current climb in applications appears in part to reflect economic hardship, said Michael Hayes, spokesman for the Office of Temporary and Disability Assistance. The additional 67,000 clients added from July 2007 to January of this year brought total recipients to 1.86 million, about one in 10 New Yorkers.

Nutrition and poverty experts praise food stamps as a vital safety net that helped eliminate the severe malnutrition seen in the country as recently as the 1960s. But they also express concern about what they called the gradual erosion of their value.

Food stamps are an entitlement program, with eligibility guidelines set by Congress and the federal government paying for benefits while states pay most administrative costs….

Because they spend a higher share of their incomes on basic needs like food and fuel, low-income Americans have been hit hard by soaring gasoline and heating costs and jumps in the prices of staples like milk, eggs and bread.

At the same time, average family incomes among the bottom fifth of the population have been stagnant or have declined in recent years at levels around $15,500, said Jared Bernstein, an economist at the Economic Policy Institute in Washington.

The benefit levels, which can amount to many hundreds of dollars for families with several children, are adjusted each June according to the price of a bare-bones “thrifty food plan,” as calculated by the Department of Agriculture. Because food prices have risen by about 5 percent this year, benefit levels will rise similarly in June — months after the increase in costs for consumers.

Advocates worry more about the small but steady decline in real benefits since 1996, when the “standard deduction” for living costs, which is subtracted from family income to determine eligibility and benefit levels, was frozen. If that deduction had continued to rise with inflation, the average mother with two children would be receiving an additional $37 a month, according to the private Center on Budget and Policy Priorities.

Both houses of Congress have passed bills that would index the deduction to the cost of living, but the measures are part of broader agriculture bills that appear unlikely to pass this year because of disagreements with the White House over farm policy.

Maine weather wreaking havoc on deer PhysOrg

Clueless Guys Can’t Read Women LiveScience, In particular, men interpret friendliness as a sexual overture and vice-versa.

Ben Stein Watch: March 30, 2008 Felix Salmon. Thank God someone did the work….

Bagehot, central banking, and the financial crisis Xavier Vives. Vox EU

The Sting of Poverty Drake Bennett, Boston Globe (hat tip Mark Thoma)

Credit Card Fair Fee Act Adam Levitin Credit Slips

Post Subprime: A Bloodbath in Trader Bonuses International Political Economy Zone

The Dilbert Strategy Paul Krugman

Dith Pran, Journalist Portrayed In ‘The Killing Fields,’ Dies at 65 Associated Press

I do not consider it the place of this blog to urge political action. On the other hand, it is just about impossible not to notice that many readers are intensely unhappy about the conduct of the Fed and Treasury of late.

Congressional hearings on the Bear bailout are scheduled for this week, for April 3. This is an opportune time to call or e-mail your Senator and Congressman and express your views (I have a sneaking suspicion that calling has slightly more impact simply because so many organizations orchestrate e-mail petitions. But those with more informed views on how best to proceed are encouraged to speak up).

Antidote du jour:

I came across this terrific post by Tom Engelhardt via Michael Panzner. Englehardt takes a cold, hard look at the Bush Adminsitration’s performance and practices, and argues you don’t need to be an economist to predict that whatever limited efforts they make to address the credit crisis are sure to fail. After all, everything they’ve attempted to accomplish had ended badly.

It’s hard to remember back to 2000, when Bush promised compassionate conservatism (although Paul Krugman reminds us that those who looked at his proposals knew better) and a competent Administration. Bush was an MBA, so we’d have a President who would act like a capable CEO. Even the New York Times talked up that wishful line of thinking, ignoring the fact that Bush’s qualifications were that he had been a part-time Governor (that office is very weak in Texas), had worked in his family’s oil business, and was co-owner of a baseball team. In other words, he had ridden his entire life on his family’s coattails. And my Texas buddies (very successful oilmen and investors) had nothing nice to say about their former Governor even before he proved their low opinion of him to be well founded.

Most Americans look at Bush and see a path of destruction: bullheaded refusal to abandon failed initiatives, extraordinary success in tarnishing America’s image, fiscal irresponsibility, further enrichment of an upper class that didn’t need any more help. Yet undergriding it is an extraordinary degree of incompetence, as Englehardt reminds us.

I try to avoid featuring others’ posts long form, but this piece merits being read in its entirety. If you like it, be sure to go to the Tomdispatch.com site and sign up for its several-times-a-week e-mailing.

From Engelhardt:

No one was prepared for the storm when it hit. The levees meant to protect us had long since been breached and key officials had already left town. The well-to-do were assured of rescue, but for everyone else trapped inside the Superdome in a fast-flooding region, there was no evacuation plan in sight. The Bush administration, of course, claimed that it was in control and the President was already assuring his key officials that they were doing a heck of a job.

No, I’m not talking about post-Katrina New Orleans. That was so then. I’m talking about the housing and credit crunches, as well as the Bear Stearns bailout, that have given the term “bear market” new meaning.

Now, don’t get me wrong — when it comes to the arcane science of economics, like most Americans, I’d benefit from an “Economics for Dummies” course. What I do know something about, though, is history, a subject that hasn’t been on the Bush administration’s course curriculum since the President turned out not to be Winston Churchill and conquered Iraq refused to morph into occupied Germany ‘n Japan 1945….

Just consider the record: Administration officials proved incapable of rebuilding two countries that their military occupied and damaged. In Afghanistan and Iraq, while talking up the President’s “freedom agenda,” they were the equivalent of a natural disaster, a whirlwind of destruction.

In the case of Iraq, in disbanding its military, its government, and even its economy, they were literal nation-wreckers. On taking Baghdad, their first act of omission was to let the capital be looted. (“Stuff happens,” commented Secretary of Defense Donald Rumsfeld at the time.) Soon after, the administration’s new viceroy in Baghdad, L. Paul Bremer III, promptly plunged the country into the equivalent of the Great Depression — without a Bear Stearns bailout in sight.

In the case of Afghanistan, only a staggering boom in opiate growing — the country now supplies an estimated 93% of the global market in illegal opiates, bringing about four billion dollars into the country — has slightly offset the disaster of “liberation.” By just about any other measure, Afghanistan is a wreck.

In the case of New Orleans, the Bush administration not only couldn’t rebuild an American city that nature (and the Army Corps of Engineers) damaged, but turned a natural disaster into a man-made catastrophe that has yet to end.

Despite a reputation for being the most disciplined, tough, and focused administration in memory, Bush’s men and women couldn’t even secure their fondest inside-the-Beltway dream: constructing a generation-long Pax Republicana in Washington….

And now, with a mere ten “lame duck” months to go, comes the American economy…

You don’t faintly need to understand economics to grasp the immediate danger. The people overseeing the handling of this crisis have done little these last years but hand money over to the rich, while running American power into the dirt.

Let me review our history lesson for a moment: No to nation-rebuilding, no to city-rebuilding, no to Congressional majority-building…

Who dares imagine that the people who brought you Iraq, the war, could begin the rebuilding of an economy, or even successfully caulk the cracks in the levees of a system that, in its complexity, puts Iraq’s feeble economy to shame?

In some ways, an administration — whatever its periodic changes of personnel — can be compared to an individual. At a certain age, its urges become predictable, its habits set, its limits largely known. While change may be possible, you wouldn’t want to bet your house on it.

So what exactly has the Bush administration proven itself good at? The twin skills of destruction and looting would stand at the top of any list. Perhaps that’s because it chose to put its “eggs” in only two baskets — those of the U.S. military and crony corporations.

Awed by the shock-and-awe force of forces that fell into their hands, administration officials moved to transfer as many powers of civil governance as possible to the Pentagon. From diplomacy to disaster relief, nation-building to intelligence gathering, an organization built only to destroy was designated as the go-to outfit for activities normally associated with those who have building in mind.

At the same time, the government was being staffed, top-to-bottom, with ill-prepared political pals, while a small set of crony corporations, of which Halliburton is certainly the best known, was given the nod in every rebuilding situation. It really didn’t matter where you looked, they were the ones camped out, making money, on the landscape of destruction. With their no-bid, cost-plus contracts, these companies ran up the hours and then tended to jump ship when the going got bad. The same corporations that had essentially looted Iraq — it was labeled “reconstruction” — were the first ones called in when New Orleans went down….

Unsurprisingly, the Bush administration has proved serially incapable of building anything, even — in the long run — their own machine. And, from the Enron moment to the Bear Stearns one, whenever it looked like the Titanic might have hit an iceberg, it was a lock that those passengers assigned to the limited places in the lifeboats wouldn’t be from steerage (or be weighed down with subprime mortgages).

So rebuilding. No. Saving people who aren’t already friends. No. Doing a heck of a job in a crisis. No. Now, our latest and greatest crisis is upon us, the sort that, in a matter of weeks, has sent media commentators and pundits from reluctant discussions of whether we might be heading into a recession straight to references to the “d” word, “1929,” and the Great Depression. And they’re not alone. A recent USA Today/Gallup poll indicates that a startling 59% of Americans already believe we’re heading for a long-term depression, not a recession (and 79% are worried about the possibility). Leave the definitional details to the experts. Most Americans have undoubtedly assessed the Bush administration’s proven incapacity in perilous times and drawn the logical conclusions.

Ten months is a long, long time when only their hands are near the pilot’s wheel of the ship of state and water’s already seeping through the hull. It’s an eon for an administration capable of sinking New Orleans in a matter of days, and Iraq in little more than months. Or, thought of another way, it’s plenty of time if your expertise happens to lie in deconstruction. After all, barring a miracle, you’re talking about the little administration that couldn’t, no matter how hard Ben Bernanke may try.

So, even if you, like me, know next to nothing about economics, you already know enough to be afraid, very afraid.

Snake bursts after gobbling gator BBC. Eeew.

Hackers Assault Epilepsy Patients via Computer Wired

If You Can’t Sell, Good Luck Gretchen Morgenson, New York Times

Yosemite Park Blocked From Doing Repairs PhysOrg

The Five Ways of Proving Santa Claus Thomistic Philosophy Page (hat tip Brad De Long)

Holy evaluation Chris Blattman (hat tip Dani Rodrik)

How to Get Your Comments Deleted and Yourself Banned The Big Picture

The Smart Way Out of a Foolish War PGL, Angry Bear

Antidote du jour. From Evil Parallel Universe:

Yes, I know we are not even done with the first quarter, but I am highly confident this whopper will withstand the test of time.

From the New York Times:

Mr. Paulson is clearly taking a stand against critics who support even stricter regulations, while rejecting any notion that the crisis in financial markets or the collapse of Bear Stearns can be laid at the administration’s doorstep. In a draft of a speech to be delivered Monday, he declares: “I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil.”

So what does Paulson think caused the credit crisis? Martians? Challenging astrological transits? Society-wide overuse of antidepressants dulling normal risk aversion? Osama bin Laden? Short sellers?

Narrowly, Paulson isn’t wrong. Former Fed chairman William McChesney Martin said the Fed’s job was to take the punchbowl away when the party started getting good. The Fed’s job description hasn’t changed since his day, and if the Fed had thrown a little cold water on the markets a few years ago, we wouldn’t be in this mess.

That means that regulatory structure isn’t the problem; the real culprit is dereliction of duty by the regulators. And fish rot from the head. If you aren’t willing to hold the regulatory framework responsible, Mr. Paulson, that means you need to take a hard look in the mirror.

The article quotes a kindred spirit:

“The Fed oversaw this meltdown,” said Michael Greenberger, a law professor at the University of Maryland who was a senior official of the Commodity Futures Trading Commission during the Clinton administration. “This is the equivalent of the builders of the Maginot line giving lessons on defense.”

We gave our assessment of the misnamed reform plan yesterday in “Paulson’s Cosmetic, Cynical Financial Regulation ‘Reform’.”

A colorful story in the Telegraph, “Hedge fund legends hit by financial crisis,” tells of the fall from grace of many former hedge fund stars. And the worst is yet to come.

While the broad outlines of the story are well known – many formerly successful strategies are doing badly, with highly levered funds suffering the most – the Telegraph story gives it a great deal of color via lively anecdotes and quotes. Most US readers do not realize that London is the world’s hedge fund center and the excesses make Steve Schwartzman’s 60th birthday party look tame.

From the Telegraph:

Even for the affluent residents of London’s Holland Park, the arrival in the area last year of Gerard Griffin, head of Tisbury Capital, was big news. Curtains twitched as a multi-million-pound refurbishment of his house began…

To the neighbours, the house had been “hedged” – snapped up and spruced up by a rich hedge fund manager. These flash Wunderkinder are branching out, and surpassing toffs, lawyers and even footballers’ wives with their reputation for ostentatious opulence.

As head of Tisbury, a $2.7bn (£1.35bn) event-driven fund founded in 2003, Griffin was the archetypal hedge fund manager: aggressive, arrogant and nearly always right. He audaciously took large positions in big public companies including ICI, J Sainsbury, EMI and Alliance Boots, and was listened to by their managements despite being smaller than other shareholders.

But just a year on from the refurbishment of his Holland Park house, this pillar of London’s hedge fund industry is on shaky ground. The latest bite of the credit crunch has caught Griffin offguard….The fund was down 8 per cent in the first two months of the year, according to Tisbury’s monthly letter – and losses are getting worse.

…. Griffin has had to negotiate new terms with his prime brokers, beg for patience from investors and offered his business for sale to bigger rivals, including GLG Partners.

One insider said: “Tisbury has gone from darling to disaster is a short space of time. Griffin is losing staff and probably won’t get much for the sale. It’s been amazing turn of fortunes.”

Griffin is not alone. Some of the most successful players in the industry also have serious problems. The past month has been littered with high-profile calamities.

At the end of February, Peloton Partners, the award-winning fund run by ex-Goldman Sachs star Ron Beller, imploded. Focus Capital, another EuroHedge fund of the year, wound up days later. Then came the biggest casualty so far: the spectacular collapse of Carlyle Capital Corportation after a $16bn debt default.

Last week, it was the turn of John Meriwether, the man behind the collapse a decade ago of Long Term Capital Market. His bond fund at JWM Partners is struggling with losses of 28 per cent this month.

One industry expert told The Sunday Telegraph: “This is just beginning. Somewhere been 40 and 100 hedge funds will liquidate shortly. It’s a bloodbath and it will get worse.”

Already investors are showing their fury. One said: “I thought volatility was what hedge funds lived for? Making money, or at least preserving cash, during volatile times is certainly what we pay them for. They have been poncing around during the good times and are now found wanting at the first sign of trouble. It’s a debacle out there.”….

Suddenly, there’s a new fear surrounding the sector. Just a few months ago these were the best brains in finance. Now they are being exposed as average fund managers at best, and potential market manipulators at worse. How many more pretenders are there out there and how much more chaos will their demise bring to the rest of the markets?….

Hedge funds morphed from being American, secretive and peripheral to becoming one of the most important influences on global markets. Assets grew from about $200m in 1998 to an estimated $1.5 trillion at the end of last year. Mayfair became the new hedge fund capital….

At the same time, hedge funds shed their pariah image and developed cult status. With legendary brains – and pay packets to match – they started attracting celebrities and politicians….

With their dominance came increasingly displays of hubris and extravagance. Two years ago Albourne Partners, a hedge fund adviser, hired Knebworth and staged Hedgestock – the “alternative conference for the alternative investment industry” – one of the most extravagant and bizarre business meetings ever organised.

There were talks and meetings like any normal business conference, except the grounds were decked out as if it were a 1960s music festival, with the additions of a polo field, laser clay pigeon shooting range, hot-air balloon station and remote-controlled duck racing, while 4,000 delegates were dressed as hippies and danced to a live performance by rock giants The Who.

Meanwhile, London’s annual Ark dinner, the industry charity night, became the biggest fund-raising night in the world. Organised by Arpad “Arki” Busson, the multi-millionaire French financier and former boyfriend of supermodel Elle Macpherson, more than 1,000 hedge fund managers and celebrities, including Jemima Khan, Bob Geldof and Liz Hurley, paid up to £50,000 for a table. Last year, a speech by Bill Clinton, a private concert by Prince and an appeal from Madonna helped raise a record of £28m.

Even when the markets turned last year, the hedge funds’ high jinks continued. Stephen Partridge-Hicks, the former Citibank debt guru and head of Gordian Knot, one of the big credit hedge funds and so hit first, tackled the crisis by splurging thousands of pounds on a show-stopping party. In October, as his fund tanked, he chartered a plane to fly 150 mates to Morocco where he had hired Marrakech’s upmarket Amanjena hotel for a James Bond-themed party. On top of the usual champagne and haute cuisine, Patridge-Hicks staged a James Bond scene – complete with actors, stunts, a real submarine and a fly-by from two Mig jets – starring himself as 007.

At the start of this year, hedge funds had been protected from the full impact of the credit crunch. While private equity houses experienced a sudden severance from lending, investment banks largely kept open for the hedge funds….In recent weeks, this has changed….bank bosses ordered their prime brokerage and repo departments to comb through their books again and slash risk exposure.

Lending lines have been cut, just as the funds needed them most to cope with the volatility….

A new view of hedge funds has been revealed, particularly with regards to borrowing levels. In recent years, leverage in the funds has spiralled. While hedge funds have traditionally used two or three times leverage in their funds, this figure has been multiplied to eight or nine times in many cases – and even more in some.

One prime broker said: “Hedge funds have had it easy. Every man in a pink Cadilac has been able to raise money, start a fund and do really well. Frankly, those who have taken the biggest risks have come off best because markets have been so extraordinarily kind.”

The leverage that magnified gains in the rising markets has had the same impact on the way down. Weaker funds were the first victims. But now the squeezing by the lenders has meant that a far bigger number have had no cushion or protection against short-term swings.

[Ron] Beller [of failed hedge fund manager Peloton] wrote to his investors: “Because of their own well-publicised issues, credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms, which has . . . made it impossible to meet margin calls.”

In the aftermath, others have a different view. One observer says: “The only way to generate 90 per cent returns off AAA-rated bonds is if you are taking too much risk. Simple as that.”

Another friend says that he often boasted that Peloton was sailing close to the wind. “I once asked Beller how he would cope if the market suddenly turned and he was forced to mark to market. He said he’d be in trouble but that would never happen.”

Focus Capital, the fund that liquidated two weeks ago, was managed by Tim O’Brien and Philippe Bubb, who formerly worked at Pictet & Cie in Geneva. Focus won a EuroHedge industry award after returning more than 100 per cent in 2006. O’Brien and Bubb told investors that they had been the victims of the credit crunch and short selling. But observers disagree: “Focus took large stakes in very small, illiquid companies. In these markets that’s a dangerous position to be in.”….

Meanwhile, Platinum Grove, the $5.5bn New York-based hedge fund set up by former Long Term Capital Management co-founder Myron Scholes, fell 7 per cent when Japanese prices moved suddenly….

Prime brokers say that the survivors are big funds with diversified portfolios and are not overleveraged. One said: “Over the next few months, there will be a shake-up of hedge funds and the ones that survive will be stronger and more robust – essentially, the new breed of hedge funds that take the sector to the next stage of development.”….

One said: “Hedge funds got carried away. Benevolent markets meant that anyone could be a superstar which couldn’t be true. The current crisis will quickly show the pretenders and leave behind those that are genuine hedge funds – that can make money whatever the weather.”

Anyone who has paid even a wee bit of attention to the business press no doubt has gotten the message that there is a world of hurt in the debt markets. But both optimists and skeptics might wonder: is there an element of reporting fallacy? Are there sectors that are OK but have gone unnoticed because reporters focus on train wrecks?

An article by Paul Davies in the Financial Times describes how widespread the pullback has been:

Global debt issuance collapsed in the first quarter as the credit crunch took its toll on new deals in all sectors from structured finance and riskier high-yield bonds and loans right up to sturdy investment-grade corporate debt, according to new data.

Total debt market volumes were $1,030bn in the first quarter, a 48 per cent drop compared with the same quarter a year ago, while total syndicated loan market volumes were $599.bn, a 47 per cent drop versus the same period last year, according to Dealogic, the data provider.

The numbers illustrate how the withdrawal of liquidity from the world’s debt markets in the wake of the turmoil that began in the US mortgage markets has affected everything from the safest corporate borrower to the most risky private equity backed leveraged buy-out deal.

Structured finance markets, which cover mortgage-backed bonds and complex products such as collateralised debt obligations, unsurprisingly suffered the worst contractions.

Globally, new deal volumes of just $81.5bn were 89 per cent less than the first quarter of 2007. This volume was the lowest since the first quarter of 1996.

The outlook for bankers’ jobs in this sector was also put under a cloud with news that revenues generated by structured finance were the lowest since the third quarter of 1995, when a fraction of today’s armies of professionals worked in the field.

Bankers and analysts said the outlook for most areas of the debt markets remained fairly bleak for the next quarter and probably the rest of the year.

Suki Mann, credit strategist at SG CIB, said that the investment grade companies in Europe, which have been least immediately harmed by the credit crisis so far, would continue to shy away from issuing new debt while markets remained so rocky.

“We think corporates can continue to hang on,” he said. “Their liquidity position remains quite strong and banks in Europe continue to lend on a bilateral basis.”

Within the loan markets, the leveraged loans that fund private equity buy-outs saw the biggest declines with volumes down 84 per cent to just $46.9bn worldwide compared to the first quarter of 2007.

Why is it that the media feels compelled to take pronouncements from government officials more or less at face value? By now, they ought to know that if someone from the Bush Administration is moving his lips, odds are it’s a lie.

Today’s object lesson is the so-called financial services regulatory reform plan announced by Treasury Secretary Hank Paulson. Both the Journal and Times treat his proposals as significant. Their headlines, respectively: “Sweeping Changes in Paulson Plan,” and “Treasury’s Plan Would Give Fed Wide New Power.”

There is less here than meets the eye, and what is here is guaranteed not to be implemented during the remaining months of the Bush presidency. And that of course is precisely the point of this exercise. Appear to be doing something and dump the mess in the lap of your successor.

To the details. Remember where we are: we’ve had years of misguided confidence that investment banks could be left to their own devices, that the wonders of the originate-and-distribute model meant Things Were Different This Time. Specifically, the powers that be believed that risks were so widely spread and diversified that the financial system was now much more resistant to systemic shocks. We’ve seen what a crock that idea was.

So although no one has come up with a detailed reform plan, it’s clear that the old model is badly tarnished. Since we have demonstrated that losses from investment banking risk-taking will be socialized, curbs need to be put on them. Otherwise, the very presence of a put to the government will guarantee untoward speculation and poor allocation of capital. In addition, continued taxpayer funded rescues of institutions with egregiously well-paid staff would eventually result in bankers’ heads on pikes.

A number of ideas have been proposed: tougher capital requirements; restrictions on the use of off-balance sheet entities; driving more trading on to exchanges; limiting the risk-taking of institutions that are big enough to be systemically important (say allowing them to risk only a certain portion of capital in hard-to-value, volatile, or illiquid products); pro-cyclical capital charges; addressing poor incentives; improving transparency and disclosure.

But would any of the measures proposed by Paulson have prevented our crisis-in-motion? No.

What Paulson offered up instead what a plan for some consolidation of financial services industry regulatory oversight. This isn’t useless; it would help prevent regulatory/supervisory arbitrage and allow for more consistent implementation of any new regulation. But to pretend that bureaucratic consolidation is tantamount to reform is dishonest. But the New York Times parrots the Administration’s story line:

The proposal is part of a sweeping blueprint to overhaul the nation’s hodgepodge of financial regulatory agencies, which many experts say failed to recognize rampant excesses in mortgage lending until after they set off what is now the worst financial calamity in decades.

In reality, the biggest single culprit was a lack of willingness of major regulators, in particular the Fed, to intervene in a securitization process that, as long as it beefed up housing prices, was seen to be virtuous. A secondary factor was that the Federal government, largely through favorable court rulings, has for the most part stripped states of the power to regulate financial services firms. Yet many states have been far more aggressively pro-consumer than the Feds; usury laws, now gutted, existed only at the state level, as did the tougher versions of predatory lending laws. Ironically, had the states been more in the driver’s seat (which is a less rather than more consolidated regulatory approach), the mortgage crisis might have been severely blunted (it might not have been attractive to design and market the more aggressive subprime products if they would have been permissible only in certain states). But the Federal government has long had a regulatory bias that favors industry profits over consumer protection.

Yes, as we’ll detail, Paulson did add a couple of bells and whistles that were a slight nod to the need to reform. But some had already been served up (and we had deemed them wanting); one is severely misguided.

To the guts of the Paulson program. From the Journal:

Mr. Paulson’s plan will include merging some agencies, such as the Securities and Exchange Commission with the Commodity Futures Trading Commission, while broadening the authority of others, such as the Federal Reserve, which appears to be a winner under the proposal. Mr. Paulson is expected to recommend that the central bank play a greater role as a “market stability regulator,” with broader authority over all financial market participants.

Mr. Paulson is also expected to call for the Office of Thrift Supervision, which regulates federal thrifts, to be phased out within two years and merged with the Office of the Comptroller of the Currency, which regulates national banks. One reason is that there is very little difference these days between federal thrifts and national banks…..

In addition to some of the short- and medium-term changes, Treasury officials have also designed what they believe to be an “optimal structure” of financial oversight. It would create a single class for federally insured banks and thrifts, rather than the multiple versions that now exist. It would also create a single class of federally regulated insurance companies and a federal financial-services provider for other types of financial institutions.

A market stability regulator, which would likely be the Fed, would have broad powers over all three types of companies. A new regulator, called the Prudential Financial Regulatory Agency, would oversee the financial regulation of the insurance and federally insured banks. Another regulator, the Business Regulatory Agency, would oversee business conduct at all the companies.

Note also that the SEC would be merged with the Commodity Futures Trading Commission.

“Market stability regulator” is a dangerous bit of Newspeak. This is code for the fact that the Fed’s role as chief bailout agency will be formalized. And when Japanese regulators there spoke about promoting market stability, that meant protecting industry incumbents, usually by somehow limiting competition and therefore improving profits.

And this program sounds as if it is replacing a hodgepodge now fractured by type of institution (thrifts vs. national banks vs. securities firms) with a smaller number of regulators that will be fragmented functionally. The idea of the Business Regulatory Agency is utter hogwash. How do you oversee business conduct separate and apart from supervisor audits? This agency is bound to be toothless, which is probably the point. And if I read this correctly, we will have the new Prudential Financial Regulatory Agency and the Fed (n the cases of banks with significant trading operations)regulating the same institution, which can lead to either overlapping mandates (which generates conflicts) or supervisory gaps.

Now to the elements that involve some bona fide regulation. Again from the Journal:

A key part of the blueprint is aimed at fixing lapses in mortgage oversight. Mr. Paulson plans to call for the creation of a new entity, called the Mortgage Origination Commission, according to an outline of the Treasury Department’s plan, which was first reported by the New York Times. This new entity would create licensing standards for state mortgage companies. This commission, which would include representatives from the Fed and other agencies, would scrutinize the way states oversee mortgage origination.

Also related to mortgages, Mr. Paulson is expected to call for federal laws to be “clarified and enhanced,” resolving any jurisdictional issues that exist between state or federal supervisors. Many of the problems in the housing market stemmed from loans offered by state-licensed companies. Federal regulators, too, were slow to create safeguards that could have banned some of these practices.

We had noted before that the merit of mortgage licensing idea depended not on the licensing standards itself (do you really think making brokers take courses and sit an exam is going to lead to better behavior?) but on the standards for conduct, monitoring procedures, and enforcement. Paulson hasn’t mentioned any of those. Similarly, it isn’t clear how deeply the federal authoriites can get into interfering with, um, overseeing the states on mortgage origination. Since deeds are recorded locally, and contracts are a state law matter, Washington’s influence may be limited.

In keeping with notion that the Fed is underwriting the financial system, the Paulson plan gives lip service to the idea the the central bank should have enhanced regulatory powers. However, the proposals are remarkably vague. From the executive summary:

First, the current temporary liquidity provisioning process during those rare circumstances when market stability is threatened should be enhanced to ensure that: the process is calibrated and transparent; appropriate conditions are attached to lending; and information flows to the Federal Reserve through on-site examination or other means as determined by the Federal Reserve are adequate. Key to this information flow is a focus on liquidity and funding issues. Second, the PWG should consider broader regulatory issues associated with providing discount window access to non-depository institutions.

This says the Fed should be able to send inspectors into an institution once it has started propping it up. That is tantamount to shutting the barn gate after the horse is in the next county. The Fed should be supervising any institution that it might have to bail out, period. And the idea that the Fed can effectively examine an organization that it hasn’t previously overseen is utter bullshit. Do you think the Fed has any ability to monitor Bear?

Despite its overly generous warm-up, the New York Times does point out the many shortcomings of this plan:

While the plan could expose Wall Street investment banks and hedge funds to greater scrutiny, it carefully avoids a call for tighter regulation.

The plan would not rein in practices that have been linked to the housing and mortgage crisis, like packaging risky subprime mortgages into securities carrying the highest ratings.

The plan would give the Fed some authority over Wall Street firms, but only when an investment bank’s practices threatened the entire financial system.

And the plan does not recommend tighter rules over the vast and largely unregulated markets for risk sharing and hedging, like credit default swaps, which are supposed to insure lenders against loss but became a speculative instrument themselves and gave many institutions a false sense of security.

Congress would have to approve almost every element of the proposal….Mr. Paulson’s proposal is likely to provoke bruising turf battles in Congress among agencies and rival industry groups that benefit from the current regulations.

And the real kicker:

The bulk of the proposal, however, was developed before soaring mortgage defaults set off a much broader credit crisis, and most of the proposals are geared to streamlining regulation.

In other words, this isn’t even rearranging the deck chairs on the Titanic; it’s keeping the ship on full throttle with a only slight change in course.

Oregon man stripped by Craigslist looter The Register

My Very Own Risk-Based Repricing Experience Adam Levittin, Credit Slips. A law professor who studies the credit card industry has his own mini-horror story and recounts several ways the bank’s procedures violate applicable laws.

Study sees Microsoft brand in sharp decline IDG News Service

Nationwide predicts first annual fall in house prices since 1990s property crash Guardian

Valuation, Frayed Nerves and Liquidity Roger Ehrenberg

Lehman May Be Victim of Fraud Wall Street Journal

Stop the Mortgage Bailout NationalBubble. As readers know, your humble blogger is of the view that trying to shore up asset prices that are not supported by cash flow is bound to fail and will divert resources from better ways to deal with the fallout of the credit crisis. This site does a good job of making the economic considerations accessible to non-economists and is orchestrating measures to oppose bailouts. Hat tip Cactus at Angry Bear.

High prices spark fresh gold rush in California Financial Times

Antidote du jour: