Alex’s Notes: Time for another bout of bad news, sorry I am the bearer of the tale. Don’t feel too bad though, as wealth is never destroyed it only changes hands.

Bear Stearns gets saved from the headsmans axe, barely. The Fed and JP Morgan worked out an emergency deal over the weekend so that we would not see the markets come crashing down on Monday at the opening bell. Late Sunday night they came to a deal, the JP Morgan would buy Bear Stearns for $2/share and the Fed would throw in $30 Billion to JP Morgan to sweeten the deal. Talk about a fire sale. To think Bear Stearns was trading for over $150 a share not too long ago.

This of course, was not lost on Asia, as gold catapulted up to $1032 per ounce on their exchanges, only to be pushed down to a ‘less panicked’ level by ‘those who wish to prevent panic’ before our markets opened. These guys are in total damage control mode now, and the scary part really is that Bear Stearns is a relatively small player in the world of financial institutions, if its potential failure could spark such panic, what is going to happen when Lehman Bros, Merril, and other players go through similar issues? We have not seen the rest of this iceberg yet, there is still at least $350 billion of un-disclosed losses to be uncovered from derivative and sub-prime toxic garbage exposure, when the skeletons come out of the closet how will the markets react?

Whats worse is that the Fed has now demonstrated it will not let these institutions fail. We are looking at policies that have caused hyperinflation in other economies throughout history. We are going to see increasing gas, food, and other cost of living price increases with a steady crescendo as the markets absorb the massive liquidity injections we are now seeing. Get ready for Zimbabwe lifestyles people, because it is really hitting the fan.

Global inflation is still humming un-abated, and we will no doubt see competitive currency devaluations in time. Markets overall for equities are going to get pretty ugly, very fast, if you have alot of exposure to them you should serious take a look at your alternatives.

Again, the time is now to move to where you are safe, as this is only the beginning. Gold, silver, commodities and energy are the watchwords for the next decade. My personal portfolio is showing gains of over 258% in 5 months on those asset classes alone.

On to the Market Snapshot:

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Wall Street fears for next Great Depression
By Margareta Pagano, Business Editor
Sunday, 16 March 2008

Wall Street is bracing itself for another week of roller-coaster trading after more than $300bn (£150bn) was wiped off the US equity markets on Friday following the emergency funding package put together by the Federal Reserve and JPMorgan Chase to rescue Bear Stearns.

One UK economist warned that the world is now close to a 1930s-like Great Depression, while New York traders said they had never experienced such fear. The Fed’s emergency funding procedure was first used in the Depression and has rarely been used since.

A Goldman Sachs trader in New York said: “Everyone is in a total state of shock, aghast at what is happening. No one wants to talk, let alone deal; we’re just standing by waiting. Everyone is nervous about what is going to emerge when trading starts tomorrow.”

In the UK, Michael Taylor, a senior market strategist at Lombard, the economics consultancy, said on Friday night: “We have all been talking about a 1970s-style crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it’s a self-feeding disaster.” Mr Taylor, who had been relatively optimistic, has turned bearish: “It really does look as though the UK is now heading for a recession. The credit-crunch means that even if the Bank of England cuts rates again, the banks are in such a bad way they are unlikely to pass cuts on.”

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Weak dollar costs U.S. economy its No. 1 spot
Fri Mar 14, 2008 5:17pm EDT

PARIS (Reuters) – The U.S. economy lost the title of “world’s biggest” to the euro zone this week as the value of the dollar slumped in currency markets.

Taking the gross domestic product of both economies in 2007, the combined GDP of the 15 countries which use the euro overtook that of the United States when the European currency surged to a record high of more than $1.56 per euro.

“The curious outcome of breaching this latest milestone is that the size of the euro zone’s annual output has now exceeded that of the U.S.,” the economics department of Goldman Sachs, the Wall Street investment bank, said in a note to clients.

Taking official estimates of 2007 GDP — $13,843,800 billion for the United States and 8,847,889.1 billion euros for the euro zone — the economy of the latter passed the United States once converted into dollars, shortly after the euro topped $1.56.

The dollar sank to $1.5688 per euro late in European trading hours on Friday, at which rate the euro zone’s 2007 GDP equates to $13,880,568.4 billion.

The 2007 GDP estimates are as published by the U.S. Commerce Department’s Bureau of Economic Analysis and provided to Reuters on request for the euro zone by Eurostat, the European Union’s statistics office.

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Borrowers Find What Citigroup Says Isn’t What It Does
By Bob Ivry

March 14 (Bloomberg) — Real estate developer John Wimmer paid Citigroup Global Markets Realty Corp. almost $1 million last year to lock in a 5.6 percent mortgage rate on the refinancing of six commercial properties.

At the November closings, Citigroup, citing plummeting demand for mortgage bonds, boosted the rate to 7.123 percent.

“I was very upset,” Wimmer said in a phone interview from his office in Hales Corners, Wisconsin. “We had many proposals to lock the rate with other financial institutions and we picked Citigroup because of their reputation and strength.”

Wimmer sued. So did a developer in Kentucky after Prudential Mortgage Capital Co. invoked the “material adverse change” clause in their loan agreement to raise his rate.

Banks have used the clause after calamities such as the terrorist attacks of Sept. 11, 2001, to free themselves from lending obligations. With the spreads between commercial mortgage- backed securities and 10-year U.S. Treasuries at their widest in at least 12 years, banks are applying the concept to avoid lending at money-losing rates, scuttling deals, leaving borrowers at risk and casting doubt on contracts that have already been negotiated.

“We are in an extremely uncertain time and no one should feel sanguine about any agreements that are on the table,” said Scott A. Singer, executive vice president of Singer & Bassuk Organization in New York, which arranges real estate financing. “Lenders with the best intentions find the game changing on them. This is a time to put your head down and execute business as quickly and efficiently as you can.”

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Paulson admits deregulation has failed us all
By MarketWatch
Last update: 1:00 p.m. EDT March 13, 2008

Commentary: Mortgage proposals spell end to decades of looking other way

WASHINGTON (MarketWatch) — You know things are very very bad on Wall Street when a guy like Henry Paulson — Treasury secretary, solid Republican, and former Goldman Sachs CEO — joins the crowd calling for more regulation over the financial markets.

Paulson spared no one in his criticism Thursday of the excesses of deregulation that has now created the worst global financial crisis in a generation, threatening the health of the U.S. economy, the savings of millions of Americans, and the survival of some of the biggest financial institutions in the world. See full story.

Wall Street and Washington both failed big time, he said. Wall Street invented new ways to make money by selling securities so complicated that no one could really follow which shell the pea was under. Fortunes were made on the paper Wall Street sold.

At the same time, Washington’s watchdogs were dozing, tranquilized by the false assurance that Wall Street would police its own.

It’s been obvious for years now that Wall Street could not be trusted, and finally official Washington agrees. The markets need a tougher cop to make sure that money-center banks, investment banks, credit-rating agencies, hedge funds, mortgage brokers and the rest don’t let their own greed and arrogance ruin it for the rest of us.

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Bear $2 share to JPM!! WOW details

JPMorgan Chase To Acquire Bear Stearns

Sunday , March 16, 2008 19:04ET

NEW YORK, Mar 16, 2008 (BUSINESS WIRE) — JPMorgan Chase & Co. (NYSE: JPM) announced it is acquiring The Bear Stearns Companies Inc. (NYSE: BSC). The Boards of Directors of both companies have unanimously approved the transaction.

The transaction will be a stock-for-stock exchange. JPMorgan Chase will exchange 0.05473 shares of JPMorgan Chase common stock per one share of Bear Stearns stock. Based on the closing price of March 15, 2008, the transaction would have a value of approximately $2 per share.

Effective immediately, JPMorgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. Other than shareholder approval, the closing is not subject to any material conditions. The transaction is expected to have an expedited close by the end of the calendar second quarter 2008. The Federal Reserve, the Office of the Comptroller of the Currency (OCC) and other federal agencies have given all necessary approvals.

In addition to the financing the Federal Reserve ordinarily provides through its Discount Window, the Fed will provide special financing in connection with this transaction. The Fed has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.

“JPMorgan Chase stands behind Bear Stearns,” said Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase. “Bear Stearns’ clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.”

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Fed Takes Steps to Ease Crisis, Cuts Lending Rate to Financial Institutions to 3.25 Percent

By JEANNINE AVERSA
AP Economics Writer

WASHINGTON (AP) — The Federal Reserve, in an extraordinarily rare weekend move, took bold action Sunday evening to provide cash to financially squeezed Wall Street investment houses, a fresh effort to prevent a spreading credit crisis from sinking the U.S. economy.

The central bank approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created a lending facility for big investment banks to secure short-term loans. The new lending facility will be available to big Wall Street firms on Monday.

“These steps will provide financial institutions with greater assurance of access to funds,” Federal Reserve Chairman Ben Bernanke told reporters in a brief conference call Sunday evening.

The Fed acted just after JP Morgan Chase & Co. agreed to buy rival Bear Stearns Cos. for $236.2 million in a deal that represents a stunning collapse for one of the world’s largest and most venerable investment banks. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JP Morgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.

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Buy Signals Abound in U.S. Stocks Near Bear Market
By Michael Tsang

March 17 (Bloomberg) — U.S. stocks are on the brink of the broadest bear market in four decades as investors ignore the strongest buy signals in almost 20 years.

The retreat by all 10 industries in the Standard & Poor’s 500 Index pushed the measure down 18 percent since its Oct. 9 record and 12 percent since the start of the decade. The plunge resembles declines in the 1970s and 1930s, the two worst periods for U.S. equities in the past 80 years. The last six times the index has fallen by 20 percent, only once — on Black Monday in 1987 — has the sell-off been so encompassing.

“I tend to agree with the fellow who says, `Hey, this is the greatest financial crisis since World War II,”’ said Jean- Marie Eveillard, 68, who runs the $21.3 billion First Eagle Global Fund in New York. The fund, which has returned an average 15.2 percent each year this decade compared with a less than 0.1 percent annualized gain for the S&P 500, has about 25 percent in cash and gold, more than its holdings in U.S. stocks. “Investors who take the attitude that the economy will be slow in the first half and then it will turn around, they’re probably dreaming.”

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Debt Reckoning: U.S. Receives a Margin Call
By LIZ RAPPAPORT and JUSTIN LAHART
March 15, 2008

The U.S. is at the receiving end of a massive margin call: Across the economy, wary lenders are demanding that borrowers put up more collateral or sell assets to reduce debts.

The unfolding financial crisis — one that began with bad bets on securities backed by subprime mortgages, then sparked a tightening of credit between big banks — appears to be broadening further. For years, the U.S. economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets. No longer.

Recent days’ cascade of bad news, culminating in yesterday’s bailout of Bear Stearns Cos., is accelerating the erosion of trust in the longevity of some brand-name U.S. financial institutions. The growing crisis of confidence now extends to the credit-worthiness of borrowers across the spectrum — touching American homeowners, who are seeing the value of their bedrock asset decline, and raising questions about the capacity of the Federal Reserve and U.S. government to rapidly repair the problems.

Global investors are pulling money from the U.S., steepening the decline of the U.S. dollar and sending it below 100 yen for the first time in a dozen years. Against a trade-weighted basket of major currencies, the dollar has fallen 14.3% over the past year, according to the Federal Reserve. Yesterday it hit another record low against the euro, falling 2.1% this week to close at 1.567 dollars per euro.

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More in foreclosure choose to walk away
Carolyn Said
SF Chronicle Staff Writer
Sunday, March 16, 2008

Foreclosure used to be a last resort, something that hard-pressed homeowners would scrimp and plead to avoid. But as the subprime lending crisis sweeps up millions of borrowers nationwide, some are deliberately choosing foreclosure as an early option.

As their home values tumble and their mortgages rise, these “walk away homeowners” decide to cede their houses to their lenders.

“It’s throwing good money away after bad” to pay an escalating mortgage on a home that’s plunging in value, said Army Sgt. 1st Class Nicklaus Skaggs of Vacaville. He and his wife, Tishara, stopped paying their mortgage in February. They signed up with a new company called You Walk Away to help guide them through the multi-month foreclosure process.

The couple paid $455,000 for their Vacaville home almost three years ago, shortly after Nicklaus Skaggs returned from a year in Iraq. Now the home’s value has dropped to $290,000. Their adjustable-rate mortgage, which started at about $3,000 a month, has reset twice, climbing to about $4,000.

They have no regrets about their decision.

“I feel like the pressure has lifted off my shoulders; before I was trapped,” said Nicklaus Skaggs, 40, an earnest man who plans to retire from the Army in two years, after completing 20 years of service.

“If we keep paying the mortgage, we would really sink ourselves,” added Tishara Skaggs, 35, who was an Army specialist driving heavy-wheel trucks until her lupus led to a medical discharge in 2002. The Skaggses have two daughters, Tabitha, 7, and Madisyn, 6 months.

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Wall Street waits for the next domino to fall
By Francesco Guerrera and Michael Mackenzie in New York
Last updated: March 17 2008 02:43

A big Bear Stearns-shaped cloud will be hanging over Wall Street this week.

As investment banks including Goldman Sachs, Lehman Brothers and Morgan Stanley kick off the first quarter reporting season, investors’ already-frayed nerves have been strained to breaking point by the crisis surrounding Bear.

Bankers say last week’s near-collapse of one of the most feared and influential US brokerage firms could not have come at a worse time for a sector battered by bad news and huge losses.

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Gulf Arab States Should Scrap Dollar Currency Pegs, Faber Says
By Arif Sharif

March 16 (Bloomberg) — Marc Faber, managing director of Marc Faber Ltd. and publisher of the Gloom, Boom & Doom report, said Persian Gulf economies should revalue their currencies after the dollar slumped to record lows.

Saudi Arabia, the United Arab Emirates and three other Gulf states should link their currencies “to a basket, and not the weakest currency in the world,” Faber told a Middle East investment conference in Abu Dhabi today. “They should have de- pegged their currencies a long time ago,” he said.

Faber, who advised investors to buy gold at the start of its six-year rally, this month said Federal Reserve moves to cut interest rates to avert a U.S. economic slowdown will “destroy the U.S. dollar.”

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A Wall Street Domino Theory
By JENNY ANDERSON and VIKAS BAJAJ
Published: March 15, 2008

The Federal Reserve’s unusual decision to provide emergency assistance to Bear Stearns underscores a long-building concern that one failure could spread across the financial system.

Wall Street firms like Bear Stearns conduct business with many individuals, corporations, financial companies, pension funds and hedge funds. They also do billions of dollars of business with each other every day, borrowing and lending securities at a dizzying pace and fueling the wheels of capitalism.

The sudden collapse of a major player could not only shake client confidence in the entire system, but also make it difficult for sound institutions to conduct business as usual. Hedge funds that rely on Bear to finance their trading and hold their securities would be stranded; investors who wrote financial contracts with Bear would be at risk; markets that depended on Bear to buy and sell securities would screech to a halt, if they were not already halted.

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Goldman Sees `Explosive’ Commodity Rallies, $175 Oil (Update1)

By Claudia Carpenter and Alexander Kwiatkowski

March 14 (Bloomberg) — Commodities may have “explosive rallies” in the next couple of years, with crude oil rising to $175 a barrel, according to Goldman Sachs Group Inc.

Political decisions on money flows, labor and technology are “substantially constraining supply growth” of commodities, Goldman analysts including Jeffrey Currie in London wrote in a report today. “This will likely support the ongoing structural bull market in commodities until these policy-driven investment constraints are removed and/or demand is adjusted.”

Commodities are in their seventh year of gains as underinvestment in refineries, mines and land sent prices for oil, gold, platinum and wheat to records. More natural resources are controlled by political entities than at any time since the 17th century, according to the Goldman report.

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AMSTERDAM (Reuters) – The U.S. dollar’s value is dropping so fast against the euro that small currency outlets in Amsterdam are turning away tourists seeking to sell their dollars for local money while on vacation in the Netherlands.

“Our dollar is worth maybe zero over here,” said Mary Kelly, an American tourist from Indianapolis, Indiana, in front of the Anne Frank house. “It’s hard to find a place to exchange. We have to go downtown, to the central station or post office.”

That’s because the smaller currency exchanges — despite buy/sell spreads that make it easier for them to make money by exchanging small amounts of currency — don’t want to be caught holding dollars that could be worth less by the time they can sell them.

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$2,000 an ounce gold is in the cards

By MarketWatch
Last update: 8:10 a.m. EDT March 18, 2008

BOSTON (MarketWatch) — Frank Holmes, chief executive officer at U.S. Global Investors, says that gold will hit $2,000 an ounce and that while the move won’t be straight there from current levels investors should not be surprised by it.

Holmes noted that virtually all commodities have gone through their “inflation-adjusted 1980 price levels,” with the notable exception of gold, and that to get to that range the price of gold would have to top $2,000 an ounce. Holmes said he expects a short-term pull-back in gold — based on a correction he sees coming in oil and a short rally in the dollar, both of which will impact gold prices — but that the long-term trend will be strongly upward.

In a radio interview with Chuck Jaffe, MarketWatch senior columnist, Holmes noted that gold correlates to the price of oil 90% of the time — meaning it moves with oil prices almost all the time — and has an inverse relation to the dollar 70% of the time. With oil prices on the rise and the dollar weakening, it’s a market condition that bodes well for gold, especially because gold is “not at astronomical levels yet, when compared to other commodities … There’s a lot more room.”

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Derivatives the new ‘ticking bomb’
By Paul B. Farrell, MarketWatch
Last update: 7:31 p.m. EDT March 10, 2008

Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen

ARROYO GRANDE, Calif. (MarketWatch) — “Charlie and I believe Berkshire should be a fortress of financial strength” wrote Warren Buffett. That was five years before the subprime-credit meltdown.

“We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

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The Fed’s Wall Street Dilemma
By PAM MARTENS
March 17, 2008

Too Big to Bail

Americans learned two new truths last week from the Bush Administration’s version of Life’s Little Instruction Book: if you’re a Wall Street miscreant you’re thrown a lifeline; if you’re a Wall Street crime fighter you’re thrown a land mine.

In the first effort, the Feds effectively handed a Federal Reserve ATM card to JPMorgan to funnel your tax dollars to the teetering Bear Stearns brokerage firm to address counterparty risks that have been building for at least 4 years as the Feds snoozed. Counterparty risk is the trillions of dollars of insurance contracts (credit default swaps and other derivatives) taken out by Wall Street firms on each others (counterparty) bonds, bundled mortgage and commercial debt (collateralized debt obligations). The firms have used unregulated over-the-counter contracts to perform this risk transfer alchemy and funded their own company, Markit Group Ltd., to take the place of a regulated exchange for price discovery.

In the second effort, the Feds tapped the Department of Justice, Internal Revenue Service, U.S. Attorney’s office in New York, FBI, five federal judges and a busy federal court to root out that Code Red threat to our national security: consensual sex. The sex involved a prostitution ring and Democratic New York State Governor, Eliot Spitzer, who was savaged and forced to step down by an avenging media mob abundantly fed with well placed leaks from a suspiciously homogenous group called “anonymous law enforcement officials.” Governor Spitzer, in his former role as New York State Attorney General, had taken the lead in rooting out Wall Street crimes against small investors because the Federal Reserve was preoccupied with lobbying to remove regulations on Wall Street’s crime factory.

As usual, the Feds handed the bill to the governed with no thought to the will of the governed.

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Secretary of Treasury Henry Paulson admits U.S. economy in sharp decline
March 18, 2008
David Lawder and Andy Sulliva

WASHINGTON (Reuters) – U.S. Treasury Secretary Henry Paulson on Tuesday described the economy as being in “sharp decline,” the closest he has come yet to conceding an election-year recession has set in.

Appearing tired after a weekend of helping to broker a fire sale takeover of Wall Street investment bank Bear Stearns to keep it from outright collapse, Paulson pushed back against efforts to have him admit a recession was under way.

“There’s no doubt that the American people know that the economy has turned down sharply. So to me much less important is the label that’s placed on it today. Much more important is what we do about it,” he told NBC’s Today Show.

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Welcome to the Future
by M.A. Nystrom
March 18, 2008

Last Friday we got a taste of what the future is likely to be like as we make our way further into the belly of the second great depression. The Fed rushed to bail out a venerable Wall Street institution, which was rumored to be insolvent. Sunday evening, that rumor was confirmed to be true, as Bear Stearns agreed to sell itself to JP Morgan for a paltry $2 per share. Two dollars! This for a firm that was trading at $170 just over a year ago, and was as high as $54 just Friday! If Bear Stearns is only worth $2 per share, how can we possibly say with any confidence what other “investment banks” are worth?

While this bankruptcy comes as a shock to nearly everyone, it should be a surprise to no one. The global financial system has been teetering on a precipice for years if not decades, pumped up by unsustainable amounts of debt at every level of the economy, and is primed for a crash. That the crash has been postponed countless times by even easier money lent to yet poorer credit risks has served only to instill a false sense of confidence in markets and to magnify the impending calamity that seems finally to be at hand. Warnings that have been sounded on websites such as this one appear finally to be coming true, as confirmed by none-other than the venerable Wall Street Journal in a front page article titled, “Debt Reckoning: US Receives a Margin Call.”

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WE ARE WATCHING THE BIGGEST PANIC
by Monty Guild & Tony Danaher
Guild Investment Management, Inc.
March 17, 2008

WE ARE WATCHING THE BIGGEST PANIC IN GLOBAL FINANCIAL MARKETS THAT HAS OCCURRED IN MY 65 YEARS OF LIFE AND 50 YEARS OF STOCK, BOND, AND COMMODITIES INVESTING.

It’s Saint Patrick’s Day weekend…old Saint Patrick would probably be fascinated to see all the rich and worldly people running around in a panic.

Yesterday, J.P. Morgan and the U.S. Federal Reserve began a credit lifeline to Bear Stearns. This is a long and complicated story, but we will attempt to summarize. Bear Stearns had a run, much like the bank runs of the late 19th and early 20th centuries. It had something to do with Bear Stearns itself, but not as much as you would think if you were an average fairly sophisticated citizen with some understanding of how the financial markets work. I believe that most financial professionals may not completely understand what is happening. The lifeline and financing was done not to protect Bear Stearns alone but to protect the entire global banking system.

Bear Stearns is a PRIMARY DEALER IN U.S. GOVERNMENT BONDS. THIS IS A VERY SMALL AND VERY IMPORTANT CLUB. They also have been a leader in the business of prime brokerage, and in the field of trade settlement and clearing; two very profitable, mostly fee based businesses that have been the envy of many other financial institutions. These have been their cash cows and very attractive businesses that have long been sought by other buyers.

Although quite large, Bear Stearns is the smallest of the top U.S. government bond dealers, so if someone wants to attack the system they will attack the smallest of the truly powerful bond houses. Bear Stearns, like all major bond dealers and traders, also trades in mortgage bonds and derivatives and this is where the problems arose. Bear Stearns CEO said on Wednesday March 12, 2008 that the company is well capitalized and that the balance sheet is strong. I believe he was telling the truth. However, they are not immune to a run on the bank, and neither is any other major bank or investment bank in the world.

BEAR STEARNS, AS A PRIMARY DEALER, CANNOT BE ALLOWED TO FAIL WITHOUT UNDERMINING THE CONFIDENCE IN THE U.S. AND THE WORLD FINANCIAL SYSTEM.

Yesterday, Bear Stearns was protected from failing to meet its commitments to counterparties because, to let a primary dealer fail, would mean a run on every major banking and investment banking institution in the developed world…and would almost certainly lead to a massive global depression in our considered and firm opinion.

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An Excerpt From Doug Noland

NOLAND: Wishing for Another Z.1
by Doug Noland
March 14, 2008

March 14 – Financial Times (Michael Mackenzie, Aline van Duyn, and Peter Thal Larsen): “Bear Stearns is hardly Wall Street’s biggest investment bank but its travails have far-reaching consequences for the global financial system because of its crucial behind-the-scenes role in some of the world’s most troubled markets. Bear is a significant underwriter of mortgage securities, an active trader of derivatives and leading financier of hedge funds. Analysts said it was almost impossible to know what impact Bear’s problems would have on its clients, its counterparties and on other investors holding securities or derivatives that Bear is trying to liquidate. ‘The ripples could be widely felt because Bear Stearns has so many points of contact with everyone else in the financial industry,’ said Matt D’Amico, partner in the banking business at law firm Bryan Cave. Evidence of bubbling contagion in the financial markets can be seen in the dramatic surge in the cost of credit insurance for global banks. Many banks have double-A credit ratings, but the price charged to insure their debt is more typical of lower-rated companies.”

March 12 – Financial Times (James Mackintosh): “Another three big hedge funds have been forced to close down or to suspend investor withdrawals as the credit squeeze persists. Drake Management, a $12bn New York manager, wrote to investors in its three hedge funds on Wednesday offering them the choice of winding up the funds after about half asked for their money back. Global Opportunities Capital, $870m Amsterdam hedge fund, said it would block withdrawals until the end of the year to prevent firesales of shares… It also emerged that Blue River Asset Management, a Colorado-based hedge fund manager specialising in municipal bonds, was to shut its main fund after nearly 80% losses, even after raising $110m for a fresh fund. ‘These are very tough times,’ said Angelos Metaxa, a director of CM Advisors, a Geneva-based fund of hedge funds. ‘Anyone with significant amounts of leverage is going to be in trouble.’”

March 14 – Financial Times (Joanna Chung and Peter Garnham): “The collapse of the dollar, which suffered another sharp fall on Thursday, is causing growing difficulties for economies whose currencies are tied to the greenback. A sliding dollar, whose decline has been accelerated by a series of interest rate cuts in the US, is feeding growing inflationary pressures in countries as varied as China, Saudi Arabia and Russia. These pressures, which could lead to significant economic and social problems, may get worse if, as expected, the US Federal Reserve slashes its main interest rate by 75 basis points…next week. Indeed, some analysts believe that the Fed’s aggressive policy-easing to stabilise the US economy may end up destabilising those emerging-market economies with fixed or quasi-fixed dollar pegs…”

March 12 – The Wall Street Journal (Robin Sidel): “Here comes another headache for banks suffering from the mortgage downturn: Losses on home-equity loans are soaring, even at some lenders that avoided big blunders on subprime loans. When times were good, banks raked in billions of dollars in profit from home-equity loans, which allow borrowers to tap the accumulated value in their property with either a loan for a specific amount or a line of credit. As long as home prices were rising, lenders had little to worry about. But falling home values are leaving banks with little or nothing to collect on many home-equity loans in case of default. Some stretched borrowers are keeping up with their mortgage and credit cards — but not their home-equity loan.”

March 14 – Bloomberg (Erik Holm and Josh P. Hamilton): “The collapse of the subprime mortgage market will lead to record losses for insurance companies, overtaking Hurricane Katrina, the worst natural disaster in U.S. history. The amount of asset writedowns and credit losses reported by the industry has reached at least $38 billion, just short of the $41.1 billion in claims from Katrina…”

China Watch:

March 11 – Bloomberg (William Bi): “China’s northern provinces, the country’s biggest grain-growing region, may suffer an extended drought this month as winter wheat crops start to need rain, the China Meteorological Administration said. Heilongjiang, Jilin and eastern Inner Mongolia have had 1.8 millimeters of precipitation this year, the lowest since 1951, while other regions received as little as 80% of average rain or snow… Drought is afflicting northern China after the worst snowstorms in 50 years lashed its southern provinces, killing livestock and damaging crops there.”

March 12 – Bloomberg (Kevin Hamlin): “China’s money-supply growth slowed in February. M2…rose 17.5% to 42.1 trillion yuan ($5.9 trillion) from a year earlier…”

March 11 – Bloomberg (Kevin Hamlin and Li Yanping): “China’s inflation accelerated to the fastest pace in 11 years as the worst snowstorms in half a century disrupted food supplies, adding pressure on the central bank to raise interest rates. Consumer prices climbed 8.7% in February from a year earlier after gaining 7.1% in January… Food costs soared 23% after blizzards destroyed crops and snarled transport links…”

Unbalanced Global Economy Watch:

March 13 – Bloomberg (Brian Swint and Jennifer Ryan): “Britons’ inflation expectations rose to the highest in at least eight years in a Bank of England survey last month… Consumers predict prices will increase 3.3% in the next 12 months, up from 3% in November…”

March 11 – Bloomberg (Jennifer Ryan): “The U.K. housing slump deepened in February, becoming the worst since the eve of the nation’s last recession in 1990, a survey of real-estate professionals showed.”

March 10 – Bloomberg (Jennifer Ryan): “U.K. producer-price increases matched the fastest annual pace since 1991 last month as factories passed on record raw-material cost gains to their customers, adding to inflation. Manufacturing output prices climbed 5.7% from a year earlier… Raw material costs rose an annual 19.4% in February, the most since records began in 1986…”

March 14 – Dow Jones: “The annual rate of euro-zone consumer price inflation was revised up to a fresh all-time high… Higher food and energy prices pushed the annual measure up to 3.3% in February from an estimate of 3.2%…”

March 12 – Bloomberg (Sandrine Rastello): “France’s inflation rate remained at a 12-year high in February as energy and food costs reached records. Consumer prices climbed by an annual 3.2%…”

March 10 – Bloomberg (Simone Meier): “German exports increased the most in 16 months in January, led by demand from outside Europe.”

March 13 – Associated Press: “Inflation in Spain has reached its highest level since 1995 with the National Statistics Institute reporting an annual 4.4% rate in February.”

March 10 – Bloomberg (Tasneem Brogger): “Denmark’s inflation rate unexpectedly rose in February, reaching the highest since July 2000 and indicating a shortage of workers is pushing the economy closer to overheating. Inflation accelerated to 3.1% from 2.9% in January…”

March 10 – Bloomberg (Robin Wigglesworth): “Norway’s inflation rate unexpectedly rose to 2.2% in February, the highest since September 2002, adding to pressure on the central bank to raise interest rates even as global economic growth slows.”

March 12 – Bloomberg (Jacob Greber): “Australian consumer confidence plunged to the lowest level in almost 15 years after the central bank raised interest rates and the share market tumbled on concern global economic growth is slowing.”

March 12 – Bloomberg (Tracy Withers): “New Zealand house sales slumped and prices fell to a 12-month low in February, adding to signs record-high interest rates are cooling the property market and will slow economic growth. House sales dropped 32%…”

Bursting Bubble Economy Watch:

March 9 – United Press International: “Food prices in the United States have increased at the fastest rate since 1990… Citing U.S. Department of Labor figures, The Boston Globe reported that prices for such staples as bread, milk, eggs and flour are rising sharply. Milk prices, for example, increased 26% during the past year, while egg prices climbed 40%…”

Real Estate Bubble Watch:

March 13 – Dow Jones: “Foreclosure filings for February soared 60% from a year earlier but dropped 4% from January… RealtyTrac said there were 223,651 foreclosure filings in February, or one for every 557 U.S. households. Chief Executive James J. Saccacio said February’s decline was similar to a 6% sequential decline in February 2007. But the year-over-year increase was triple last February’s growth rate, indicating ‘we have still not reached the peak of foreclosure activity in this cycle.’ The nation’s highest foreclosure total again belonged to the most populous state – California – with 53,629 filings, more than double a year earlier but down 6% from January. It was followed by Florida, Texas, Michigan and Ohio.”

Wishing for Another Z.1:

This week offered further disconcerting confirmation that the 20 Year Experiment in “Wall Street finance” is failing miserably. Tuesday, the Federal Reserve was compelled to announce the implementation of an extraordinary $200bn liquidity facility for the Wall Street “primary dealer” community. Despite this action, it was necessary this morning for our central bank to orchestrate emergency funding for troubled Bear Stearns. We’re now clearly in the midst of a precarious systemic crisis. I concur with the characterization made this morning by former Treasury Secretary Robert Rubin: We’re in “uncharted waters.”

To be sure, the Credit Crisis has accelerated to a ferocious clip. Last week it was a “white shoe” hedge fund leveraged in “AAA” securities that imploded. Earlier this week, a “white shoe” firm listed (in Europe) fund that had been leveraging in “AAA” Fannie and Freddie securities imploded. Today, one of Wall Street’s white shoe firms required a Fed-assisted “bailout” to at least temporarily ward off implosion. It is neither hyperbole nor fear mongering to warn that scores of players throughout the expansive U.S. financial sector are now in jeopardy of finding themselves engulfed in a liquidity crisis.

I found the opening question from this afternoon’s Bear Stearns conference call quite telling: “What is your current gross notional non-exchange traded derivative exposure?” The executive’s response – “To be honest with you, I don’t know this number off the top of my head…” – was not comforting. But to be fair, the company’s derivative obligations are not today the most pressing issue facing management. It is, however, a deep concern for an increasingly panicked marketplace. The Bear Stearns funding crisis certainly brings somewhat to a head the market’s festering worries with regard to the daisy-chain of derivative and counter-party exposures, liquidity risk, and a complete lack of transparency. Bear Stearns’ management was quick to blame “false rumors and innuendo” for the funding crisis. Yet, how sound are the underpinnings for Bear Stearns, the U.S. Credit system, or the markets overall when market chatter can have such destabilizing effects?

Candidly, I wish I had another of the Fed’s Z.1 “flow of fund” reports to grind through this evening – conveniently providing the opportunity to keep most of my thoughts and fears to myself. Most unfortunately, we’ve been witnessing the worst-case scenario unfold before our very eyes – and it all imparts a bad feeling deep in my gut. Marketplace liquidity is all about confidence. Confidence that held sway for years can turn so fleeting, while once Revulsion takes hold, it tends to linger. That Tuesday’s Fed announcement did not forestall a run on Bear Stearns suggests to me that this unfolding crisis has attained alarming momentum. At this point, confidence in leveraged securities finance appears to have been irreparably damaged.

I’ll assume that two of the Critical Fault Lines for the Rapidly Escalating Crisis reside in the securities financing “repo” market and the Credit default swap (CDS) marketplace. Leading the list of companies that saw the prices of their CDS (default protection) surge significantly this week were GMAC, Bear Stearns, Ford, Sallie Mae, Countrywide, and Lehman Brothers. These six companies combine for (as of their most recent financial statements) Total Assets almost $2.0 TN, supported by Shareholders Equity of about $75bn. Or, stated differently, these six companies are leveraged (mostly in financial assets) to “capital” at a ratio in the neighborhood of 25 to 1.

In the context of the current backdrop, fear of default for such highly leveraged companies is more than justified. Expectations for contagion effects throughout the securities lending arena are similarly rational. We can safely assume that the marketplace has accumulated enormous CDS positions protecting against default for all six of these companies (and many others). I’ll also presume that a default by any one of these companies (or a number of others) would pose a severe problem for the CDS market and for systemic stability overall. It is also likely that heightened counterparty fears will add a problematic dimension to those managing large “books” of offsetting Credit exposures. Evidence mounts by the day supporting the view of a problematic unfolding dislocation in the Acutely Fragile and Untested CDS Marketplace.

The Fed is in a real quagmire here. Because of the “daisy-chain” nature of contemporary risk intermediation (specifically in the derivatives and securities financing marketplaces), a failure these days in one of any number of institutions would quickly reverberate throughout the entire (frail) system. As such, today virtually any player of significant presence in the derivatives and “repos” markets is likely to be perceived by the Fed as “too big to fail.”

The dollar sank to a record low against the Euro and to the weakest level against the Japanese yen since 1995. As far as I’m concerned, the currency markets this week “officially” attained the status “disorderly.” Not surprisingly, the dollar responded quite poorly to the Fed’s plan to accept $200bn of risky collateral from the “primary dealer” community, as it did to today’s financing arrangement for Bear Stearns. The $200 billion is certainly only an opening “ante” and Bear the first of many bailouts.

Undoubtedly, currency markets have begun to increasingly discount the “nationalization” of U.S. Credit risk – both by the Federal Reserve and the federal government. The Fed may plan on 28-day terms for its exchange of Treasuries for other “street” collateral. Yet, the way things are developing, I see little prospect anytime soon for an environment conducive to the Fed reversing course and transferring such risk back to Wall Street. Indeed, this week likely marks a key inflection point for what will soon evolve into a huge expansion of Fed holdings (and various guarantees) of U.S. risk assets. And, at some point, the federal government will be similarly forced into accepting Trillions of “financial guarantee” obligations – for mortgages, municipal debt, student loans, various “deposits” and who knows what.

In past analyses, I have differentiated between the Financial Sphere and the Economic Sphere. At the Fed and throughout the markets, the current focus is on Financial Sphere developments and possible policy responses. Even assuming that the funding crisis at Bear Stearns and elsewhere is resolved in short order (a huge assumption at this point), I doubt even this would restrain the head winds now buffeting the Economic Sphere. Understandably, the focus now will be on inter-”bank” and securities financing markets. Meanwhile, recent developments will ensure a further tightening in already taut mortgage, municipal, and corporate lending markets. The economy will suffer mightily.

The release this week of Dataquick’s California housing data (see “California Watch” above) provided strong support for our view that the Golden State housing market is crashing. Anecdotal accounts have markets throughout the state basically shut-down because of the inability to obtain mortgage Credit. And with liquidity quickly drying up for various endeavors including student loans, auto finance, small business lending, and business finance more generally, our dire economic prognosis is regrettably coming to fruition.

There are now forecasts for a 100 basis point cut in the Fed funds rate for next Tuesday. Many are arguing that financial and economic developments support more aggressive Fed rate slashing. I am reminded of the joke of the entrepreneur that loses money on every sale but is determined to make it up on volume. At this point, it should be apparent that rate cuts are destabilizing the system. They not only damage Federal Reserve credibility, they are battering confidence in the dollar and U.S. financial assets more generally. With the financial crisis having reached the “core” of the U.S. Credit system and the currency markets having turned “disorderly,” we’re now on Dollar Crisis Watch. One of my greatest fears has always been an unwieldy dislocation in the currency derivatives market.

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