claiming that the banks had conspired with Apollo and interfered with Huntsman’s previous merger pact with Basell

TO BE NOTED: From the NY Times:

"Huntsman Wins Right to Sue Banks Over Failed Deal

By REUTERS

The chemical maker Huntsman said on Monday that a Texas court cleared the way for it to proceed with a multibillion-dollar lawsuit against Credit Suisse and Deutsche Bank stemming from its failed takeover by Apollo Management’s Hexion Specialty Chemicals unit.

The company said Judge Fred Edwards of the Ninth District Court of Montgomery County, Tex., ruled in its favor on six motions brought by the banks.

Huntsman agreed to end its $6.5 billion agreement to be acquired by Hexion in December after months of litigation. Apollo and its affiliates paid $1 billion to settle the suit.

But the company has proceeded with its lawsuit against Credit Suisse and Deutsche Bank, the banks that had agreed to finance the Hexion deal, claiming that the banks had conspired with Apollo and interfered with Huntsman’s previous merger pact with Basell.

Huntsman said it would go to trial on June 8, claiming that the banks committed common law fraud in connection with its original agreement to merge with Basell, tortious interference with its merger agreement with Hexion, negligent misrepresentation and civil conspiracy.

Credit Suisse and Deutsche Bank could not immediately be reached for comment."

possible abuse of inside information by hedge funds and investment banks that have delicate information about new bond offerings

TO BE NOTED: From the NY Times:

"2 Men Accused by S.E.C. in Insider Trading Case

By ZACHERY KOUWE

The Wall Street salesman sounded cryptic: “You’re listening to my silence, right?”

But those few words, spoken to a valuable client in 2006, over a recorded telephone line, have now led to a landmark case of insider trading.

Winks and nods are common currency on Wall Street, but this case, disclosed Tuesday by the Securities and Exchange Commission, is significant because it is the first to focus on the vast, murky market for credit-default swaps, considered by some to be among the most dangerous instruments of the financial crisis.

The S.E.C. claims Jon-Paul Rorech, a salesman at Deutsche Bank, tipped off a money manager at a prominent hedge fund, Millennium Partners, about a deal involving the company that controls Nielsen Media, the television ratings service. Based on that information, the money manager, Renato Negrin, then bought credit-default swaps that rose in value when the deal was made public, eventually earning him a $1.2 million profit, the S.E.C. claims.

“Rorech and Negrin checked their integrity at the door and schemed to engage in insider trading of C.D.S. to the detriment of investors and our markets,” Scott W. Friestad, the deputy director of the S.E.C.’s Division of Enforcement, said in a statement.

Mr. Rorech, 36, through his lawyer Richard M. Strassberg of the law firm Goodwin Procter, denied violating any securities laws. He has been placed on paid leave pending the results of the investigation, which the S.E.C. said was continuing.

Mr. Negrin, 45, through his lawyer, Lawrence Iason, of the law firm Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, denied receiving insider information and said he would fight the charges.

“We have a zero-tolerance policy toward insider trading and Millennium requires every employee to certify annually that they are aware of and in compliance with our policies,” said Israel Englander, the founder of Millennium, which manages $11 billion. The firm has agreed to put the profits in escrow until the case is resolved.

Deutsche Bank said it would continue to look into the matter in cooperation with the S.E.C.

According to the S.E.C., the trouble began in July 2006, when Mr. Rorech, seeking to curry favor with Mr. Negrin, an important client, alerted the money manager to a coming bond offering. The deal was to finance the leveraged buyout of VNU, the Dutch media conglomerate that controls Nielsen. Many financial companies record the telephone calls of employees, and so the conversations were picked up. The men also spoke via cellphone, the S.E.C. said.

Mr. Negrin then bought credit-default swaps — instruments that serve as insurance policies on the bonds, in the case of default — and profited when the deal was announced a week later, the S.E.C. said.

Regulators also claim that Mr. Rorech was prohibited by Deutsche Bank from soliciting trades for credit-default swaps on VNU and other companies before he called Mr. Negrin. While this is the first time credit-default swaps have been the focus of an S.E.C. insider-trading investigation, regulators have recently called for increased transparency and regulation of the market.

The case also raises questions about the possible abuse of inside information by hedge funds and investment banks that have delicate information about new bond offerings and trade credit-default swap contracts. The contracts are primarily bought and sold through private negotiations between investors instead of on a public exchange, and typically bring in hefty fees for investment banks.

The S.E.C. has been examining trades of credit-default swaps since at least 2007 after Ben S. Bernanke, the Federal Reserve chairman, urged regulators to take action to prevent abuses in the market."

I believe we are disclosing a national network of actors who often acted in concert and did this all across the country

TO BE NOTED: From the NY Times:

---

"May 1, 2009
Fraud Charge in N.Y. Pension Case

By DANNY HAKIM

An inquiry into corruption at the New York State pension fund continued to broaden nationwide on Thursday when a top consultant to pension funds around the country was charged with a fraud-related felony by the office of Attorney General Andrew M. Cuomo.

The consultant, Saul Meyer of Aldus Equity, a Dallas-based firm, was also charged with violations of securities laws by the Securities and Exchange Commission as part of what the agency called “a multimillion-dollar kickback scheme involving New York’s largest pension fund.” The commission also charged Aldus Equity with multiple securities violations.

Mr. Meyer, 38, is a co-founder of Aldus, which has advised several of the nation’s largest pension funds, including those overseen by the states of New York and Oklahoma as well as the cities of Los Angeles, San Antonio and Fort Worth. Aldus is also among more than a dozen private equity consultants approved by the board of Calpers, the giant California pension fund, though its staff has not used Aldus’s services.

Mr. Meyer surrendered to the authorities in New York and pleaded not guilty to the fraud-related felony, a violation of the Martin Act, a sweeping state securities statute, on Thursday in Manhattan Criminal Court. A judge ordered him released on $200,000 bail.

In a teleconference on Thursday, Mr. Cuomo said his investigation, which is continuing, had uncovered what amounts to a conspiracy involving politicians, professional investors and consultants to defraud public pension funds in New York and other states by paying millions of dollars in kickbacks in exchange for access to the funds. Investment firms reap lucrative fees by managing portions of the funds.

“I believe we are disclosing a national network of actors who often acted in concert and did this all across the country,” Mr. Cuomo said.

James Clarkson, director of the S.E.C.’s New York regional office, said: “Aldus was chosen by the pension plan because of Aldus’s willingness to illegally line the pockets of others. When another investment manager refused to pay kickbacks, that firm was rejected and Aldus cashed in.”

In the wake of the charges, many Aldus clients were scrambling to sever their ties with the firm. Gov. Bill Richardson of New Mexico, caught up in a public investment scandal in his state, ordered the New Mexico State Investment Council, which manages the state’s trusts, to fire Aldus on Wednesday; the comptrollers of New York State and New York City took similar actions on Thursday.

“I learned years ago that it’s far easier for a prosecutor to file a complaint than to prevail at a trial,” said Paul L. Shechtman, Mr. Meyer’s lawyer. “Time and the evidence will show that Saul Meyer did nothing wrong.”

In a statement, a lawyer for Aldus, Matthew D. Orwig, accused the S.E.C. of conducting a “trial by news release” and called its action “appalling and careless.”

Mr. Cuomo’s office and the commission have been investigating Alan G. Hevesi, the former New York State comptroller, since 2007, and the S.E.C. recently began scrutinizing pension transactions in California. Federal investigators have also been looking into public investment funds in New Mexico. The tentacles of the various investigations increasingly appear to lead back to one another.

Aldus is accused of helping Daniel Hevesi, Mr. Hevesi’s son, profit from a deal in New Mexico at the same time that the New York comptroller’s office, then run by his father, agreed to increase by $200 million the amount of pension money overseen by Aldus.

Laura A. Brevetti, a lawyer for Daniel Hevesi, said on Thursday that her client did not have “any knowledge of a so-called quid pro quo arrangement for his benefit.” Bradley D. Simon, a lawyer for Alan Hevesi, said his client did not engage “in a quid pro quo to benefit his son.”

Hank Morris, a former political consultant to Alan Hevesi, also received money as part of deals in New Mexico and California. Mr. Morris was accused last month in an indictment of demanding millions of dollars from investment firms in exchange for access to the New York State pension fund.

He has pleaded not guilty.

“We are purposefully and aggressively looking to cooperate with other enforcement agencies across the country,” Mr. Cuomo said. “This is sort of like when you pull a thread on the sweater and that one thread starts to unravel the entire fabric.”

“We’re pulling threads and it turns out the other end of the thread is in New Mexico or Connecticut or Illinois or in California,” he said.

In court filings, the S.E.C. has described a range of improper transactions undertaken in connection with an investment pool run by Aldus for the New York State pension fund. Among other things, Aldus agreed to split fees with Mr. Morris as part of its advisory deal with the pension fund, the filings said.

Deutsche Bank, which had owned a significant minority interest in Aldus, said on Thursday that it had exercised an option to terminate its stake.

According to the complaint from Mr. Cuomo’s office, Mr. Meyer sought to sever his deal with Mr. Morris in 2006 when Deutsche Bank was considering buying a stake in Aldus. He asked a hedge fund manager to intercede on his behalf and sound out Mr. Morris about ending their arrangement.

The complaint said that Mr. Morris told the hedge fund manager: “Tell that little peanut of a man that I can take the business away as easily as I provided it.”

Mr. Cuomo said on Thursday there was more to come. “It’s an ongoing investigation,” he said, “and I would say, ‘Stay tuned.’ ”

Berlin's plans include a complete takeover -- by expropriation, if necessary.

TO BE NOTED: From Spiegel Online:

"THE STATE'S SILENT TAKEOVER

Germany's Big Banking Bailout

By Christian Reiermann and Wolfgang Reuter

The German government wants to buy up large segments of the domestic banking sector. In addition to the partial nationalization of many ailing financial institutions, Berlin's plans include a complete takeover -- by expropriation, if necessary.

Josef Ackermann, the CEO of Deutsche Bank, likes to come across as generous. A few days ago in Berlin, he said that he is by no means too proud to take advantage of the government bailout program for banks, and that all he wants is to see it benefit those banks that truly need it. "We are a long way from that," he said.

But the competition is skeptical, especially when the industry leader is having trouble hiding the fact that it lost about €4 billion ($5.2 billion) in 2008. In addition, both competitors and politicians have noted with interest Ackermann's behind-the-scenes involvement in the development of a "bad bank," that is, a sort of government dumping ground for unmarketable, high-risk securities.

DDP

Storm clouds gather over Frankfurt, Germany's banking center.

Industry insiders suspect that Deutsche Bank hopes to shift its own toxic waste into this new entity -- saving face in the process because, after all, everyone else will be doing the same thing.

Ackermann is receiving support for the project from the Association of German Banks, in which Deutsche Bank exerts substantial influence. Last Monday Hugo Bänziger, the chief risk officer at Deutsche Bank, appeared before members of the conservative Christian Democratic Union's (CDU's) finance committee to promote the potential benefits of a "bad bank."

FROM THE MAGAZINE

Find out how you can reprint this DER SPIEGEL article in your publication.

But all of Ackermann's and Bänziger's efforts proved to be in vain. On Friday, a fundamentally different approach to solving the problems of German banks emerged at a meeting of the two members of the coalition government, the CDU and the Social Democratic Party (SPD). Instead of a single, government-run landfill for the banks' toxic securities, the new plan calls for a large number of privately held "bad banks." Contrary to the arrangement Ackermann and his allies comrades-in-arms envisioned, this would see the banks' shareholders being the ones who would primarily vouch for risks in the future rather than the government and taxpayers.

Nevertheless, the government is not abandoning all responsibility. Should the healthy parts of the banks lack equity, the government will provide the necessary funds. This would make it a major shareholder in the German banking sector, turning the federal government into a silent power in the skyscrapers of Frankfurt's banking district.

The bailout program will be costly. The government will have to more than double the €80 billion ($104 billion) capital injection included in its first bank rescue package. Experts at the Finance Ministry anticipate that the stripped-down banks will require up to €200 billion in additional capital.

Making the Bailout More Appealing

It is a development that would have been unthinkable only a few months ago, but is now being surpassed by another of the government's rescue projects, as it discreetly prepares to nationalize the stricken lender Hypo Real Estate.

Both programs may seem disconcerting for a market economy. And yet, in the state of the emergency brought on by the continuing financial crisis, they may be unavoidable.

The German government is more likely to face criticism from economists for considering bailouts for individual companies, like ball-bearing maker Schaeffler-Conti or Airbus. But the bank bailout plan involving many small "bad banks" has received widespread support.

Unlike the Ackermann concept, under the new plan the government would not simply take on the banks' risks. Instead, that would be left up to shareholders. Chancellor Angela Merkel and Finance Minister Peer Steinbrück hope that this approach will generate more support with the public for the government's second bid to use taxpayer's money to rescue the banks.

Most important, the federal government would not be acquiring the worthless parts of a bank, but instead would invest in its promising aspects. This also makes the proposal politically appealing.

After the first bank bailout package, this is the government's second major attempt to stabilize the center of the ongoing economic and financial crisis, the banking world. It is still deeply shaken by the collapse of the US real estate market in 2007, when millions of mortgage loans lost their value. Since then, these toxic assets have crippled banks' ability to do business virtually everywhere in the world.

Because the banks do not know how much of their old risk they can even write off anymore, they prefer not to assume any new risk. The consequences have been fatal. As the banks issue too few loans, companies lack the necessary funds for investment, causing the economy to slow down.

The amounts of money involved are already largely beyond the scope of human imagination. In Germany alone, the biggest 18 banks are carrying a volume of €305 billion ($397 billion) in toxic assets on their balance sheets, less than a quarter of which has already been written off.

Further value adjustments seem unavoidable. The International Monetary Fund (IMF) estimates that worldwide losses could total $2.2 trillion (€1.7 trillion). No one has a formula for how best to recapitalize the banks and get credit flowing again.

RELATED SPIEGEL ONLINE LINKS

• The World from Berlin: 'German Banks Are on the Edge of the Abyss' (01/23/2009)

• The State as Über-Entrepreneur: Berlin Sees No Limits to Economic Intervention (01/21/2009)

• 300 Billion Euros in Toxic Securities: German Banks Face Further Big Losses (01/19/2009)

• Germany's Faltering Bank Bailout Program: The Bottomless Pit (12/23/2008)

Great Britain, for example, is placing its hopes on a government insurance system under which the banks, in return for a fee, could insure themselves against further losses. The new US administration under President Barack Obama is doing what Ackermann would have liked to see happen in Germany: It plans to establish a giant, government-owned "bad back" for toxic loans.

This American deposit fund would spend an additional $2 trillion (€1.54 trillion) to buy high-risk securities from lenders. The hope is that the banks, provided with fresh capital and freed of their toxic assets, could then devote themselves to their actual business: lending money to citizens and companies.

The government in Berlin does not consider either of the two Anglo-Saxon approaches to be suitable. The Germans see the British model as too costly and the American approach as inequitable.

Why should the government buy up billions in worthless securities and take all risk off the hands of those responsible for the crisis in the first place, ask those behind the new bailout plan? They characterize the US and British plans as gifts for shareholders at the expense of taxpayers. For this reason, the German government prefers a different concept, which it hopes to implement within the next four weeks. The plan, conceived by staff at the Finance Ministry, amounts to a radical modification of the German banking industry. Hardly any of the ailing lenders will likely manage without government investment in the future.

There are two possibilities for the disposal of bad loans. Either the securities are depreciated before being deposited into the special funds, or the "bad banks" receive large portions of the remaining equity to offset losses. Either way, the newly streamlined banks will lack capital to conduct their transactions.

Following Sweden's Example

This is where the government comes in. It provides the healthy banks with capital via its Special Fund for Financial Market Stabilization (Soffin). As a result, the government becomes a shareholder in many banks, initially through silent deposits. But if it comes to the aid of publicly traded banks, it soon finds itself forced, as in the case of Commerzbank, to acquire a blocking minority consisting of 25 percent plus one share. This is the only way it can prevent a buyer from simply clearing out the government's money.

The concept makes sense for both the government and taxpayers. The government can hope that its investment will eventually pay off. Once the banking crisis has been weathered, its deposits are returned and it can resell its shares, possibly even at a profit. This, at least, was the Swedes' experience during their banking crisis in the 1990s. German government experts were inspired by the Swedish experiences when developing their own rescue plan.

The establishment of "bad banks" within existing institutions also has a psychological effect, for employees and customers alike. Separating out the bad assets into a "bad bank" has a liberating effect on the healthy part of a bank. From then one, it can operate without the constant threat of further write-offs.

But the removal of their troubled assets also creates new challenges for banks. The risks are not decreased simply because they have been separated from the actual bank. The management of so-called troubled loans requires skills beyond those needed to issue ordinary loans, which merely require routine monitoring.

Hardly anyone is more aware of this than Jan Kvarnström. A Swedish national, Kvarnström headed the Institutional Restructuring Unit, the "bad bank" with which Dresdner Bank overcame its troubles, from 2002 to 2005. The job description of a chief liquidator ranges from tough negotiations with delinquent borrowers to the receivership and subsequent forced sale of the securities. He handles a wide assortment of large and small assets.

DER SPIEGEL

German Banks' Write Downs.

During the course of his career as a liquidator, Kvarnström has sold a bank in Chile, many forms of financial holdings in companies, real estate and a collection of guitars once owned by the Beatles.

"All of this has nothing to do with the normal work of a banker," Kvarnström recalls. For this reason, he says, it makes sense "to concentrate the bad investments, together with the corresponding personnel, in a bad bank."

The drawback of the plan is that the money made available in the bank rescue package, €80 billion ($104 billion) will not be sufficient for government equity capital injections. Soffin's authority to issue credit must be augmented by about €120 billion ($169 billion). This would make it the largest shadow budget in the history of postwar Germany.

Commerzbank, under CEO Martin Blessing, has already received €18 billion ($23.4 billion). The nationalization debate over ailing Hypo Real Estate is already burdening the Soffin budget. The bank needs at least €10 billion ($13 billion) in additional funds.

But that isn't the extent of it, because the government will also be called upon to spend even more money to buy up at least 95 percent of the Munich-based lender. This is the second front in the government rescue concept: The takeover of Hypo Real Estate is intended to prevent a possible bankruptcy from leading to other bank failures, thereby bringing down large segments of the German financial market.

Nationalization and Expropriation

This scenario could materialize, as a result of Hypo Real Estate having gambled away funds for the purchase of long-term government bonds. To be able to afford the transactions, the bank took out short-term loans. As long as the interest rates on those loans were low enough, the business was profitable. But then loan terms deteriorated as a result of the financial market crisis. Since then, the bank has accumulated an uninterrupted series of losses, which could only be offset with a constant stream of new government loan guarantees.

The government believes that it has only one option left to stop the downward spiral: to essentially nationalize Hypo Real Estate. This would allow the lender to take up new loans under the favorable terms of publicly owned financial institutions and turn a profit with most of its transactions. Only then would the previous liquidity injections of more than €90 billion ($117 billion) not be lost.

To minimize conflicts with owners during the takeover, the government will pursue an escalation strategy. Its preferred method would be to acquire the bank with the consent of previous shareholders, through a simple takeover bid.

But the shareholders are not biting, leading government representatives to believe that they are holding out for a better offer. The shareholders know that the government has a strong interest in a takeover, and they want to be handsomely compensated in return, which the government wants to avoid. When the negotiations ended on Friday evening, no results had been achieved.

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As a next step, the government plans to amend the law on stock corporations and strengthen the rights of shareholders' meetings so that refractory minority shareholders can be booted out. It is also unlikely to shy away from expropriation of the lender's shareholders.

A proposed expropriation law to be debated by the cabinet in the coming weeks reveals how serious the government is. The nine paragraphs of draft legislation would define the conditions for the government's compulsory takeover of a company.

Because the German constitution bans nationalization without compensation, the draft legislation also contains compensation rules for the former owners of a nationalized company.

The compulsory nature of these measures has left a sour taste in the mouths of federal government experts. Because the constitution expressly protects private property, the German government hopes never to have to apply its emergency legislation. According to ministry officials, the purpose of the plan is to provide a credible threat of nationalization to encourage shareholders to negotiate. Members of the Grand Coalition already joke that the bank rescue program now apparently follows the logic of the Cold War: "You have to threaten with a nuclear bomb so that you will never have to use it."

Translated from the German by Christopher Sultan"

"We are not taking the post down, but this disclaimer stands: viewer beware."

A controversial but revealing post on Alphaville:

"Bank picture du jour( DOESN'T KEDROSKY HAVE THIS PATENTED? ) Posted by Neil Hume on Jan 21 12:36.

A caveat - We have received a slew of complaints in the comments and more than one email about this picture. One reader notes, for instance, that the graphic “just happens to make JPM look like the best bank by far. Represented correctly by area, things are not quite so clear cut between JPM and santander/HSBC.”

Points well taken. We are not taking the post down, but this disclaimer stands: viewer beware.Hat Tip JP Morgan (Click to enlarge).

This entry was posted by Neil Hume on Wednesday, January 21st, 2009 at 12:36 and is filed under Capital markets. Tagged with JP morgan."

Any graph can be misread or misleading.

“In the end, either banks will have to be nationalized or have their bad loans split off into another institution."

From the NY Times:

"In Europe, New Efforts to Bolster Lending

By DAVID JOLLY

PARIS — After a first round of costly bank bailouts and stimulus programs came up short, governments in Europe and the United States are moving more forcefully to assure that bailed-out banks lend more money( MORE LIKE DON'T NEED TO HOARD MONEY ) to offset the recession that has engulfed both continents.

On Monday, a day after officials of the incoming Obama administration promised to take steps to force banks to lend, Britain outlined details of a new £100 billion, or $147.5 billion, plan to limit banks’ losses from troubled assets in exchange for their pledge to increase the flow of credit.

“In return for access to any government support, there will have to be an increase in lending, and that will be legally binding,” Gordon Brown, the British prime minister, said.

As if to illustrate the depths of the problem, the Royal Bank of Scotland warned on Monday that it faced losses of up to £28 billion or $41 billion for 2008, a record for any British company. The bank’s already depressed shares fell nearly 67 percent, touching off a rout in European financial stocks that could extend to United States markets when they reopen on Tuesday.

The second round of efforts in Britain and Europe to jump-start lending comes as the region girds for a more painful recession than expected. The European Commission warned on Monday that the 27-nation European Union faced a “deep and protracted recession” that would shrink the economy by 1.8 percent in 2009 and cut 3.5 million jobs across the bloc.

Adding to the sense of urgency, Standard and Poor’s ratings agency downgraded Spain’s sovereign debt from its AAA rating. Greece’s sovereign debt was cut on Wednesday, rekindling worries about what might happen to the euro zone as a whole if a member were to default on its public debt.

The bleak prospects have prompted leaders to try other ways of urging banks to lend as it becomes more clear that the bailout measures pledged by governments at the height of the financial crisis in autumn have not flushed away the bad loans that still clog the system( THEY ARE STILL BEING CALLED ). If anything, the problems are set to worsen as the downturn accelerates( YES ).

President Nicolas Sarkozy of France is to meet on Tuesday evening with French bankers to press them to lend more money to French businesses. “The banks must understand that the times have changed,” Christine Lagarde, the finance minister, told a business daily, Les Échos, on Monday. The French plan would require banks receiving new capital injections to make “precise commitments,” including giving up bonuses this year, she said.

Late Sunday, Denmark announced an $18 billion aid plan for its banks, saying it would inject the funds on the condition that the recipients increase lending.

In Germany, Deutsche Bank’s chief executive, Josef Ackermann, who is also chairman of the Institute of International Finance, an organization of the world’s largest financial institutions, suggested last week that the creation of so-called bad banks might be the way forward( A POOR WAY, BUT IT IS A WAY. ).

In a bad-bank arrangement, governments would buy up scorched( ANOTHER NEW TERM? ) assets, said George Magnus, senior economic adviser at UBS Investment Bank in London. That contrasts with the method now being used in the United States and Britain, where troubled assets remain on the balance sheet, but losses beyond some limit are insured by the government.( COULD ALSO WORK. THE GUARANTEE IS THE IMPORTANT THING TO ENDING THE CALLING RUN. )

“There is no ‘right’ way and both schemes have their merits and drawbacks( A FAIR POINT ) under given and local circumstances,” Mr. Magnus wrote in a research note. He said the bad-bank plan might be more suited to the United States, while Britain might be able to manage with its plan for an insurance program because it has far fewer banks.

Members of the incoming Obama administration are considering proposals that include buying up bad assets, a return to the original vision of the $700 billion Troubled Asset Relief Program.

“The focus isn’t going to be on the needs of banks,” Mr. Obama’s chief economic adviser, Lawrence H. Summers, said on the CBS program “Face the Nation.” “It’s going to be on the needs of the economy for credit.”

Simon Adamson, a banking analyst at CreditSights, an independent research firm in London, said he thought that Europe was also “edging toward the creation of bad banks.”

Under Britain’s latest bank bailout, its Treasury will “protect financial institutions against exposure to exceptional future credit losses on certain portfolios of assets” in return for a fee. Participating institutions will take the initial losses, with the Treasury bearing about 90 percent of the rest( YIKES ).

Britain’s central bank could buy up to £50 billion worth of “high-quality assets” from banks, giving it more monetary policy tools after it cut its benchmark interest rate to a record of 1.5 percent this month. The government is also extending measures to increase liquidity, including a £250 billion program to let banks to issue government-backed( THE GUARANTEE IS THE IMPORTANT THING ) bonds. The latest steps would cost taxpayers an additional £100 billion on top of the £37 billion plan announced in October and a £20 billion stimulus plan announced in November.

Mr. Brown said he was angry at Royal Bank, whose losses include as much as £20 billion of good-will write-downs from the acquisition of a portion of another bank. “Almost all their losses are in the subprime markets in America and related to the acquisition of the bank ABN Amro,” he said. “And these are irresponsible( NEGLIGENT ) risks, which were taken by a bank with people’s money in the United Kingdom.”

European bank stocks fell sharply on Monday on fears that more pain, including the wiping out of some shareholders, might lie ahead( TRUE ). Last week, the Irish government nationalized the Anglo Irish Bank, rendering equity stakes worthless.

Peter Dixon, a global equities economist in London for Commerzbank, said the latest British rescue plans were “a step in the right direction.” But, he added, “In the end, either banks will have to be nationalized or have their bad loans split off into another institution. That’s the only way they will be clear( GUARANTEED. ONLY THE GOVERNMENT CAN DO THIS. ) about their capital positions( YEP ).”

Carter Dougherty contributed reporting from Frankfurt."

"As the crisis has worsened, the institutions have come to rely almost entirely on government help. "

Can you say "predictable"? This is why we should have adopted the Swedish Plan. We're basically buying the banks, and allowing them to continue showing us how incompetent they are. From the Washington Post:

"Bank Losses Complicate U.S. Rescue
Pressure Grows on Obama to Allocate More Money for Distressed Financial Firms

By David Cho, Binyamin Appelbaum and Lori Montgomery
Washington Post Staff Writers
Thursday, January 15, 2009; A01

A new wave of bank losses is overwhelming the federal government's emergency response, as financial firms struggle with the souring U.S. economy, the rapid deterioration of global markets and the unexpectedly high costs of shotgun mergers arranged by federal officials last year.

The problems are intensifying the pressure on the incoming Obama administration to allocate more of the $700 billion rescue program to financial firms even as Democratic leaders have urged more help for distressed homeowners, small businesses and municipalities. Senior Federal Reserve officials said this week that the bulk of the money should go to banks.( GOOD JOB )

Some Fed officials suggested that even more than $700 billion may be required, and financial analysts at Goldman Sachs and elsewhere say banks will have to raise hundreds of billions of dollars from public or private sources( IT WILL MAINLY BE PUBLIC ).

This year is expected to be worse for banks than last year, senior government officials and analysts say. The money from the first half of the rescue program helped banks replace most of the money they lost during the first nine months of 2008. But the firms are beginning to report fourth-quarter losses that are larger than analysts expected, and the economic environment continues to worsen quickly.( THE CALLING RUN COULD GET WORSE. GREAT. )

The markets got a taste yesterday of just how badly the year ended. European giant Deutsche Bank revealed an unexpected estimated loss of about $6.3 billion for the fourth quarter. HSBC, which has not yet raised capital during the financial crisis, may need $30 billion from investors, according to Morgan Stanley analysts.

Global stock markets reacted by plummeting, with financial shares falling the hardest. The Dow Jones industrial average dropped nearly 3 percent.

Meanwhile, Bank of America was on the verge of receiving billions more in federal aid to help it absorb( WE SHOULD HAVE DONE THIS ) troubled investment bank Merrill Lynch, whose losses had outpaced expectations, according to people familiar with the matter. That money would come on top of the $25 billion the government has already invested in Bank of America, including $10 billion specifically in connection with the Merrill Lynch deal.

Senior economic advisers to President-elect Barack Obama have said that restoring health to financial markets and the slumping economy requires the second half of the $700 billion rescue program as well as a massive stimulus package with a price tag approaching $850 billion.

On Tuesday, Federal Reserve chairman Ben S. Bernanke, suggested that more help for banks could be needed. "History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively," he said, adding that both the stimulus and the rescue package were essential to restoring health to financial firms.( HE'S CORRECT )

Yet it remained unclear yesterday whether Congress would approve the release of the last $350 billion in the program known as the Troubled Asset Relief Program, or TARP. Obama's transition team asked lawmakers to do so Monday, saying it was urgently needed. But Democrats are growing increasingly concerned about their ability to quickly deliver the money to Obama.

In the Senate, Republican support for release of the funds has evaporated in the face of public anger over the Bush administration's management of the program. With more than a handful of Democrats also opposed, Senate leaders scrambled yesterday to rally support.

The Senate is set to vote today on a resolution to block the release of the money.

Late yesterday, Lawrence H. Summers, Obama's top economic adviser, and Rahm Emanuel, Obama's incoming chief of staff, met with Senate Republicans to try to persuade them to come aboard. But even many Republicans who voted to create the bailout program in October now say they are unlikely to back the release of the money.

If Congress votes to block the cash, Obama has the power to veto the resolution, all but ensuring the money would be in place early in his administration. Some Republicans said they see no point in casting an unpopular vote simply to spare Obama the discomfort of issuing a veto against the Democratic Congress as one of his first acts as president.

"The Republican base hates this. So a lot of people are saying why anger the base in the name of good policy( TRY DOING WHAT'S BEST FOR THE COUNTRY CINCINNATUS ) when it's going to happen anyway?" said Sen. Robert F. Bennett (R-Utah), a senior member of the Senate Banking Committee, which was at the center of negotiations during the TARP's creation.

Republicans -- and many Democrats -- also say they are dissatisfied with Obama's pledges to dramatically reshape the rescue package to more directly assist distressed homeowners, small business and other consumers in search of credit, as well as to bolster oversight.

Republicans, in particular, want assurances that the money would be reserved to help ease the credit crisis in the financial system. They do not want the funds to go to other sectors, such as the faltering auto industry, which last month won a small share of the money from the Bush administration. That decision, said Sen. Bob Corker (R-Tenn.) turned the program into a "$350 billion slush fund."( IF THE MONEY IS JUST SPENT ON THE FINANCIAL SECTOR, IT WILL BE SEEN AS FAVORITISM AND CRONYISM, WHICH YOU SHOULD UNDERSTAND, SINCE YOU'RE AN EXPERT IN IT. )

After an hour-long meeting with Summers and Emanuel, many Republicans, even those who supported the TARP last fall, said they remained skeptical.

"They probably haven't said quite enough yet for most Republicans," said Minority Leader Mitch McConnell (R-Ky.).

Lawmakers were initially swayed to vote for the bailout program in October because of evidence that some banks were in extreme trouble. At that time, the government pushed healthier banks to acquire faltering rivals.

Now the buyers, which included Bank of America, J.P. Morgan Chase and other major banks, are struggling to make the mergers work. The prices they paid seemed like bargains at the time, but losses have been greater than the banks expected.( GEE. THEY'RE SUCH EXPERT FORECASTERS. )

J.P. Morgan Chase will be the first of several major U.S. institutions to report earnings in coming days. Last year, it acquired two troubled firms, Bear Stearns and Washington Mutual. Analysts expect J.P. Morgan to report a narrow profit after a very tough year-end quarter.

Citigroup, which has received $45 billion in government aid, is expected to report a loss of more than $3 billion on Friday. The company also plans to announce that it will sell several major units to raise capital.

Bank of America, which reports earnings next week, has had enough capital to support its own operations but not enough to absorb Merrill Lynch's losses, according to two people familiar with the situation. Losses at Merrill Lynch have outpaced expectations since the merger was announced in September.

The banks closed the deal Jan. 1 after the Treasury Department committed( GUARANTEED ) in principle to making an additional investment, the sources said.

Bank of America and the Treasury declined to comment.

In total, banks raised about $456 billion in 2008, of which 41 percent came from the U.S. government, according to investment bank Keefe, Bruyette & Woods. But most of the money from private sources was raised in the first half of the year. As the crisis has worsened, the institutions have come to rely almost entirely( YOU THINK? ) on government help.

Staff writer Paul Kane contributed to this report."

If we had simply nationalized these banks, we would have saved ourselves money and aggravation. A hybrid plan pits the banks against the government, even as the money is handed over to the banks, who will continue to lobby for favors. Here's another obvious mess that people can't seem to see. Does anybody who favors the free market really believe that these banks believe in it, or would even be competent to do business in it? Please.

"a sense that unhealthy things were going on in the U.S. housing market": And It's Not Mold

Michael Lewis with a post that got a lot of attention on Portfolio:

"At the end of 2004, Eisman, Moses, and Daniel shared a sense that unhealthy things were going on in the U.S. housing market: Lots of firms were lending money to people who shouldn’t have been borrowing it. They thought Alan Greenspan’s decision after the internet bust to lower interest rates to 1 percent was a travesty that would lead to some terrible day of reckoning. Neither of these insights was entirely original. Ivy Zelman, at the time the housing-market analyst at Credit Suisse, had seen the bubble forming very early on. There’s a simple measure of sanity in housing prices: the ratio of median home price to income."

Poor loans. Spigot Theory, useless.

"By the spring of 2005, FrontPoint was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market.

"Unhealthy things". "Screwed up". Don't blind me with science.

"But the scarcity of truly crappy subprime-mortgage bonds no longer mattered. The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.

The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L. Eisman was perplexed in particular about why Wall Street firms would be coming to him and asking him to sell short. “What Lippman did, to his credit, was he came around several times to me and said, ‘Short this market,’ ” Eisman says. “In my entire life, I never saw a sell-side guy come in and say, ‘Short my market.’ ”

I've already used the football and betting analysis in my losing debate with Derivative Dribble.

"More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population."

Poor loans. Over and over.

"In retrospect, pretty much all of the riskiest subprime-backed bonds were worth betting against; they would all one day be worth zero. But at the time Eisman began to do it, in the fall of 2006, that wasn’t clear."

This is called regret. It doesn't occur only in finance.

"The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. "

Highly comical. If someone predicts something but not for the right reasons, it's called a lucky guess. It certainly doesn't qualify as prescience.

"But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says."

It's called alchemy. Even Newton believed in it.

"Eisman, Daniel, and Moses then flew out to Las Vegas for an even bigger subprime conference."

Next time fly to Bakersfield. You'll get more done.

“Would you say that 5 percent is a probability or a possibility?” Eisman asked.

A probability, said the C.E.O., and he continued his speech. "

Pardon me? This is just a confusion of words.

"That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them."

Poor loans.

"The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs."

Sorry, if done right, these can be useful for determining the likelihood of default. It's not the product. I wouldn't do it, but I'll use the info.

“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.”

Is this a priori or what?

"There was only one thing that bothered Eisman, and it continued to trouble him as late as May 2007."

He's a hell of a lucky guy. I'm troubled but hundreds of things daily.

“The thing we couldn’t figure out is: It’s so obvious. Why hasn’t everyone else figured out that the machine is done?”

Strangely, he's Heideggarian.

“When I read it, I thought, Oh my God. This is like owning a gold mine. When I read that, I was the only guy in the equity world who almost had an orgasm.”

I wouldn't brag about almost. It's not terribly satisfying.

"Outside it was gorgeous, the blue sky reaching down through the tall buildings and warming the soul. "

This sounds like my Fuld parody.

Let's end it here. Too much pathos, not enough satire.

"Credit card companies were shut out of the market for bonds backed by customer payments"

Bloomberg on Credit Card Bonds:

"Credit Card Bond Sales at Zero, First Time Since 1993 (Update1)

By Sarah Mulholland

Nov. 5 (Bloomberg) -- Credit card companies were shut out of the market for bonds backed by customer payments in October for the first time in more than 15 years, as investors shunned the debt amid the global credit freeze.

A weakening job market and a looming recession are making it harder for consumers to make monthly payments, eroding confidence among investors about the safety of credit-card-backed bonds. It's the first month since April 1993 that there have been no sales, according to Wachovia Corp. data. Issuers sold $17.1 billion of the debt in October 2007, the data show.

``Nobody is eager to put money to work given the uncertainty in the market,'' said James Grady, a managing director at Deutsche Bank AG's asset management unit. ``When you think it can't get worse, it continues to get worse. There is not a demand'' for these bonds.

Top-rated credit card-backed securities maturing in three years traded at a gap, or spread, of 475 basis points over the London interbank offered rate, or Libor, during the week ended Oct. 30, JPMorgan Chase & Co. data show, 25 basis points higher than the previous week. The debt was trading at 50 basis points more than Libor in January.

The higher cost to sell the bonds makes it more expensive for banks and credit card companies to fund loans to customers. New York-based American Express Co. paid 160 basis points more than Libor at a Sept. 11 sale of the securities compared with 30 basis points over the benchmark at a similar sale in October 2007, Bloomberg data show."

This interests me. I'd like to know what investors are afraid of. Credit Card companies defaulting? In America? Wow. That would be revolutionary. Maybe Yves Smith was correct.