MARKET ALERT
from The Wall Street Journal.


Sept. 30, 2008

Asian markets tumbled Tuesday, with shares plunging across the board on
fears about the global credit crisis.

In Tokyo, the Nikkei 225 Average ended the morning trading session down
4.6% at 11199.07. Earlier in the day, the benchmark fell as low as 11160.83, a
level it hasn't seen since June 2005. The Topix index skidded 4.6% to 1076.57. 

In Hong Kong, the Hang Seng Index tumbled 5.3% to 16927.75 in the early
minutes.

http://online.wsj.com/article/SB122273331874288373.html?mod=djemalertMARKET

Kyoto, Japan (Platts)--29Sep2008

The Chairman of the London Bullion Market Association, Jeremy Charles,

said that due to chaotic market conditions over the past two weeks, investors

are returning to gold, "in a major way."

     The chairman, who is also Global Head of Metals at HSBC, was addressing

delegates in Kyoto, Japan, at the LBMA/London Platinum and Palladium Market

Precious Metals Conference 2008. The markets have been rocked in recent months

by the ongoing global credit fiasco which has seen big name banks collapse and

unite in a bid to stem the bloodletting born from dire money management in the

USA.

     Charles noted that, "with confidence in the dollar and other investment

classes decidedly shaky," investors are piling back in to the yellow metal.

Gold hit a high of $1,030.70/oz March 17, coinciding with the collapse of

securities firm, and household name in the US, Bear Stearns. Since then gold

has been on a roller coaster journey largely spurred by investor in and out

flows and the US dollar. Generally, and historically, the yellow metal is seen

as a safe haven in times of political and financial instability or

uncertainty.

     SELLOFF PROMPTS RENEWED PHYSICAL DEMAND

     The recent sell off in gold, which the metal has now significantly

bounced back from, was orchestrated by renewed investor sentiment in the green

back. "This sell off, which was primarily due to the improved outlook for the

dollar, coupled with lower oil and commodity prices, created an enormous pick

up in physical demand from across the globe," said Charles. 

     He added, "This demand was in fact so great that the global refining and

manufacturing industry simply could not produce gold bars in sufficient

quantity to satisfy this pent up demand." The demand put upward pressure on

the price of gold as consumers stockpiled the precious metal. Traditionally

physical buyers tend to sit on the sidelines at times of increased price

volatility. After the sell off, which saw gold fall to the mid $700s, physical

purchases managed to lend support and give the metal a base around $800/oz. In

recent weeks fresh money, and some major short-covering, has seen the metal

break the $900/oz barrier, yet not manage to hold that level. Pundits are

mixed on where the market will go next, one analyst told Platts: "It's just

too hard to call." 

     HIGHLY UNUSUAL MOVES NOT ONLY STIMULUS FOR GOLD

     "These highly unusual moves do of course reflect the current woes in the

global financial markets, but it is my opinion that even when this crisis

draws to an end, gold will be looked on in a very different light going

forward," said Charles. He added: "Those who have traditionally shied away

from gold as part of an investment portfolio can no longer afford to ignore

this unique asset."

     The LBMA chairman also predicted that as less money is pumped in to

investment in the production side of gold, and Central Banks ease sales of the

yellow metal, coupled with increasing investor interest, "despite many

comments to the contrary, higher gold prices are likely to be the norm."

--Ben Kilbey 

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Stocks Plunge as Rescue Plan
Fails to Gain House Approval

Stocks plunged Monday as the U.S. House of Representatives voted down a $700 billion rescue plan for Wall Street, leaving the teetering financial industry and perhaps the broader U.S. economy in renewed jeopardy.

The Dow Jones Industrial Average was off more than 700 points immediately following the House's mid-afternoon vote. It recently traded down almost 584 points, off 5.2%, at 10559.31, down 7.6% since since crisis erupted a few weeks ago on Wall Street following the meltdown of Lehman Brothers Holdings.

If the Dow's losses hold through the close – which veteran traders believe could see a particularly heavy flurry of orders – it would mark the biggest one-day point drop since Lehman's bankruptcy. All 30 of the blue-chip indicator's components were lower in recent action.

The bailout's failure throws into limbo the prospects for an unprecendented federal intervention that the White House and many financial-industry veterans believe is necessary to alleviate the burden of soured credit bets lingering on many banks' books. Those instruments have clogged Wall Street's usual financing activities for months and, in a worst case scenario, could lead to an even more intractable freeze-up that would represent a severe blow to the broader economy.

"There is a panic mentality afoot today," said Bruce Bittles, chief investment strategist at Robert W. Baird.

The S&P 500 was recently down 6.7% to 1132.15. All of the broad measure's sectors traded lower, led by a nearly 11% slide in its financial category.

The small-stock Russell 2000 was down 5.5%, trading at 666.20. The technology-focused Nasdaq Composite Index fell 7% to 2031.43.

European Pressphoto Agency

A trader works on the floor of the New York Stock Exchange in New York.

The prospect of a bailout package for Wall Street has dominated trading for more than a week, with proponents of an intervention arguing that government action is necessary to keep banks willing and able to extend credit to an array of businesses in other sectors that drive economic growth.

Of course, whether those companies will feel confident enough about the demand outlook for their goods and services to want to expand their operations is a separate matter. Concerns that many companies, at best, will remain on pause in the months ahead hampered stock indexes across the board early in Monday's session.

The glum realization that the U.S. financial industry and the broader economy were likely to continue struggling even if the bailout bill passed dominated the early going of Monday's session. The lingering risks for investors were underscored as four European institutions sought rescue plans from their local governments and Wachovia became the latest struggling U.S. bank to sell itself off in order to survive.

But without a rescue plan in place for Wall Street, the way ahead is even murkier, traders said.

"We're stunned right now, just trying to figure out what comes next," said one broker at the New York Stock Exchange

Members of the House voted 220 to 198 Monday morning to move the bill forward. But around 1:45 p.m. Washington time, it became clear that the bill might not pass a final vote, prompting a marked pickup in stock selling on the NYSE floor.

The bailout bill that failed to win passage in the House on Monday was hammered out over the weekend by the Bush administration and senior congressional leaders. It called for $250 billion upfront to be given to the U.S. Treasury to buy troubled assets, which then, subject to Congressional disapproval, could rise to as high as $700 billion.

Investors flocked to U.S. government debt looking for safety. The yield on the 3-month Treasury bill, considered the safest short-term investment, fell near 0.70% from 0.87% late Friday. The price of the benchmark 10-year note jumped 1-8/32, pushing the yield down to 3.701%, compared to 3.827% late Friday.

The troubles in Europe sent the dollar rallying against the euro and the British pound. The U.S. Dollar Index, which measures the greenback's value against a basket of six overseas denominations, rose 0.7%.

Oil futures dropped slid almost $8, trading under $100 a barrel in New York as fears about slowing demand due to global economic weakness gripped the commodity markets. The broad Dow Jones-AIG Commodity Index slid more than 4%.

Analysts said the flurry of developments around the world is confirming fears that the global financial contagion is likely to spread further before any recovery. "There's an increasing realization that the cleanup and the mending of all that's gone wrong is going to take an extended period to work through, and we're going to see an extended recovery period," said Jamie Spiteri, senior dealer at Shaw Stockbroking in Sydney.

Bailout Bill Fails in House Vote
Amid Defections in Both Parties

WASHINGTON -- The House of Representatives delivered a stunning defeat to legislation designed to rescue the nation's troubled financial system, sweeping aside a call from President Bush to "send a strong signal" of confidence to markets at home and abroad.

Associated Press

House Minority Whip Roy Blunt, R-Mo. speaks to reporters after the House vote on the financial bailout package failed.

The 228-205 vote Monday exposed deep unease among rank-and-file lawmakers in both parties with what would be an unprecedented intervention in the private sector. The vote came as turmoil in financial markets widened, prompting the Federal Reserve to inject new capital into credit markets and forcing the government-arranged sale of Wachovia Corp. to Citigroup.

The Bush-backed package now faces an uncertain future, though party leaders on both sides of the aisle are sure to consider revising the initiative, which Mr. Bush said Monday is needed to "keep the crisis in our financial system from spreading throughout our economy."

After the vote, House Minority Leader John Boehner (R., Ohio) said there would be an effort to bring back another bill, with further changes. "We've got to find a true middle ground," he said. "We need everybody to calm down and relax and get back to work."

Lawmakers on both sides of the aisle suggested the legislation is not dead. House Speaker Nancy Pelosi (D., Calif.) said at a press conference that the "lines of communication" remain open between policymakers and that Congress needs to take another "bite at the apple" on the market rescue plan legislation.

"It is difficult for me to imagine we would leave the market to its own devices and fears until Friday," said Rep. Adam Putnam (R., Fla.), the third-highest ranking Republican in the House. "We're encouraging members to understand the consequences to doing nothing, but I think members have strong convictions about this bill."

Ahead of the vote, Republican and Democratic leaders closed ranks around the White House, in a display of bipartisanship that further underscored the challenges facing the nation.

Mr. Boehner -- who last week quash an agreement between other congressional leaders -- urged lawmakers in advance of the roll call to set aside "what's in the best interest of our party," to instead consider the interest of the nation. "These are the votes that separate the men from the boys, and the girls from the women," said Mr. Boehner, who choked up as he spoke. Mr. Boehner also made clear the vote was going to be close, saying it "is in serious doubt."

Ahead of the vote, Mr. Bush and Vice President Richard Cheney, along with Treasury Secretary Henry Paulson, joined in lobbying for the bill, telephoning wavering rank-and file Republicans. A wide range of business groups, including the National Federation of Independent Businesses and the Business Roundtable, also pressed lawmakers in an effort to shore up support.

The measure would give Treasury a $700 billion line of credit and wide authority to buy the toxic mortgages, securities and financial assets that are undermining market confidence and threatening to tilt the U.S. into recession.

Under the bill, the money would be released in installments, with $250 billion being made available to Treasury immediately, followed shortly by another $100 billion. The final installment would be released after the president submits a plan detailing use of the funds, and lawmakers are given a 15 days to consider a resolution of disapproval. Alongside the basic bailout, the bill would require Treasury to establish an insurance-based program to buy up bad assets, under which participating institutions would be charged a premium and given access to a fund that would also be used to help finance bailout.

The Bush administration is hoping financial markets will stabilize, as bad assets are pulled under the government's wing. Under the legislation, troubled banks and investment firms would qualify for government assistance, as would pension plans, local governments, and small banks.

The measure was brought to the House floor after several days of sometimes testy negotiations, and a marathon series of talks over the weekend. The effort was spurred by Mr. Bush's surprise declaration more than 10 days ago that the financial architectural of the country was faltering, and in need of immediate repair.

For rank and file lawmakers, the vote forced upon them produced anger and soul-searching about the economic and political costs of the bailout, and a difficult choice: whether to safely vote no on an issue unpopular with voters or swing behind a measure the nation's top economic leaders insist is needed to avoid a recession.

And across the Capitol, there was an overwhelming sense that decisions made on the plan would be career defining. There is no extra courage to go around," said Rep. Jim Cooper (D., Tenn.).

Many lawmakers said they weren't willing to go out on a limb. Rep. Lynn Woolsey (D., Calif.) said there still were "major questions unanswered" about the need for bailout. She said Wall Street isn't being asked to pony up enough to fund the rescue, and voiced doubts about whether the Bush administration—which engineered a series of earlier market interventions, including the takeover of Fannie Mae and Freddie Mac – should be trusted this go-around.

"President Bush and Secretary Paulson have been wrong from the start about just about everything," she said.

Concern about the package was deepest among House Republicans, especially conservatives troubled with the cost and scope of the powers that would be granted Treasury. Negotiators tried to accommodate those concerns, adding in the insurance proposal, as a way to bring a more free-market patina to the bill.

But many Republicans still found the measure difficult to support. Rep. Jeb Hensarling (R., Texas) said he understands the "grave situation that every American will face should our credit markets freeze," but warned the bailout would fundamentally change the role of government in the economy. "I cannot in good conscience support this legislation," he said.

BEIJING (Reuters) - Threatened by a "financial tsunami," the world must consider building a financial order no longer dependent on the United States, a leading Chinese state newspaper said on Wednesday.

The commentary in the overseas edition of the People's Daily said the collapse of Lehman Brothers Holdings Inc  "may augur an even larger impending global 'financial tsunami'."

The People's Daily is the official newspaper of China's ruling Communist Party, and the overseas edition is a smaller circulation offshoot of the main paper.

Its pronouncements do not necessarily directly reflect leadership views, but this commentary by a professor at Shanghai's Tongji University suggested considerable official alarm at the strains buckling world financial markets.

China's central bank earlier this week cut its lending rate for the first time in six years, a move analysts said was aimed at bolstering the economy and the battered stock market.

"The eruption of the U.S. sub-prime crisis has exposed massive loopholes in the United States' financial oversight and supervision," writes the commentator, Shi Jianxun.

"The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States."

But Vice Premier Wang Qishan, on a visit to the United States, told U.S. trade officials in a meeting on Tuesday that China and the United States needed to maintain close economic ties with global markets going through such turbulence.

"The Chinese government is well aware of the fact that the United States, which is the world's largest developed country, and China, which is the world's largest developing country, should have constructive and cooperative economic and trade relations," he said.

China is a major buyer of U.S. Treasury bonds, and through its sovereign wealth fund it has taken stakes in two large U.S. financial institutions.

In July 2005, China revalued the yuan and freed it from a dollar peg to float within managed bands. But the yuan and China's trade remains tightly linked to the fortunes of the dollar.

The commentary suggested China must brace for grave economic fallout and look to alternatives, saying the crisis brings to mind the Great Depression of the 1930s.

"Lehman Brothers announced bankruptcy will not only have a domino effect on the global financial world, it will bring a shock to the world economy," the front-page comment stated.

(Reporting by Chris Buckley; Editing by Ken Wills)

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NASDAQ.COM

9/26/08

Gold Prices Back Off Highs But Remain Sharply Higher

(RTTNews) - Gold prices surged higher again as the government continues to discuss a rescue plan for struggling financials. December gold climbed to $893.20, up $11.00 on the session. Gold touched as high as $920.10 as traders turned to the precious metal as a safety outlet.

Trading took place as lawmakers and the president wrangled over a $700-billion financial relief bill that is aimed at averting what some have described as an economic "catastrophe." Leading lawmakers and the Bush administration seemed close to an agreement on a bill designed to unclog the financial system and stabilize financial markets. However, talks broke down later in the day, and negotiations are scheduled to begin again Friday.

Washington Mutual (WM) became the latest U.S. banker to plunge after JPMorgan Chase (JPM) acquired the company's assets for $1.9 billion after a FDIC seizure. . . .

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J.P. Morgan to Take Over Faltering WaMu

U.S. Government Helps Broker a Deal to Dispose of Huge Thrift; Banking Giant Expected to Get Deposits, Branches

By ROBIN SIDEL, DAVID ENRICH and DAMIAN PALETTA

J.P. Morgan Chase & Co. was expected to announce as early as Thursday night a deal to acquire the bulk of Washington Mutual Inc.'s operations in a deal that would mark the end of independence for what once was the largest U.S. thrift.

Associated Press

Pedestrians walk past a Washington Mutual branch in downtown Seattle.

Federal regulators have been heavily involved in orchestrating the transaction, which comes as WaMu was besieged by a mountain of bad mortgage loans. Seattle-based WaMu has been scrambling to find a solution and put itself on the auction block last week. A number of interested parties have been poring over WaMu's books, but the bank didn't receive any offers.

While the exact structure of the transaction wasn't immediately known, J.P. Morgan is expected to acquire Washington Mutual's deposits and branches, as well as other operations. The deal isn't expected to result in any hit to the bank-insurance fund, according to a person familiar with the arrangement. But it's likely that another arm of government would have to pick up the tab. Some analysts have worried that a WaMu failure could cost more than $20 billion.

Federal regulators have been heavily involved in orchestrating the transaction, which comes as WaMu grapples with its bad mortgage loans. Regulators were hoping to fend off a collapse of WaMu, which, with more than $300 billion in assets, would mark by far the largest banking failure in U.S. history.

The exact structure of J.P. Morgan's acquisition of WaMu's deposits wasn't immediately known, except that the New York bank, which has long coveted WaMu as a way to secure a footprint on the West Coast, will assume most of the thrift's deposits and branches, as well as some other operations.

Unlike many of the 12 bank failures that the Federal Deposit Insurance Corp. has overseen this year, the J.P. Morgan-WaMu transaction isn't expected to impact the agency's national deposit-insurance fund. It wasn't immediately clear how the transaction would be structured to avoid the insurance fund taking a hit.

With mortgage losses mounting, and its stock price plunging, WaMu has been scrambling over the past month to find a solution; last week it put itself on the auction block. A number of banks -- including Citigroup Inc., Wells Fargo & Co. and Banco Santander SA -- pored over WaMu's books, but the bank didn't receive any offers. This week, WaMu's outside bankers approached a group of private-equity funds to gauge their interest in a deal.

Also this week, the FDIC took the step of reaching out to banks, asking them to express interest in taking over some or all of WaMu, according to people familiar with the matter. Those bids were due at 6 p.m. Wednesday. J.P. Morgan's takeover of WaMu's deposits represents a huge blow for private-equity firm TPG, which injected $7 billion into the thrift this spring. The transaction is expected to wipe out WaMu stockholders and holders of the company's senior debt, one person said. A key unknown: the fate of WaMu's bad assets, which include mortgage loans that have soured as housing markets tanked.

Arranging the deal in a way that doesn't cost the FDIC's deposit insurance fund any money would be an achievement for Chairman Sheila Bair, who has had a hawkish view about the state of many financial institutions. Federal regulators faced criticism from many after the July failure of IndyMac Bank, which the FDIC estimated might have cost the deposit insurance fund close to $9 billion.

This is the second time the government has gone to J.P. Morgan as a buyer of last resort. In March, the government agreed to backstop J.P. Morgan's takeover of Bear Stearns. This will likely prompt criticism from rivals about preferential treatment. BofA, for instance, didn't receive government assistance in its recently announced purchase of Merrill Lynch. Of course, in the case of WaMu, there were presumably other bidders who simply wouldn't offer that much for the deposits and branches. Before the deal, J.P. Morgan ranked as the fourth-largest bank as measured by branches, ranking below Bank of America Corp., Wachovia Corp. and Wells Fargo & Co. Its network of more than 3,100 branches stretches across 17 states with deep penetration in New York, Illinois, Texas, Michigan and Ohio.

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By James Rowley and Alison Vekshin

Sept. 25 (Bloomberg) -- Congressional negotiators said they reached a bipartisan agreement on a ``set of principles'' for a $700 billion financial-rescue package to inject fresh capital into the paralyzed credit markets.

Lawmakers agreed that legislation should include provisions on oversight of the Treasury-run program, limits on executive pay and a section on homeownership preservation, Senate Banking Committee Chairman Christopher Dodd said.

Still unresolved is whether the bill will include a provision allowing bankruptcy judges to change mortgage terms. The Treasury would have $250 billion available immediately, said a Senate aide, who requested anonymity.

``We believe that we're prepared to act expeditiously on a package'' that will ``send a message to the markets,'' Dodd said after emerging from a negotiating session.

The agreement must still be passed by the House and Senate, and signed into law by the president. House Financial Services Committee Chairman Barney Frank said it wasn't clear how many House Republicans would support the measure. Senator Robert Bennett, a Utah Republican, predicted it would pass both chambers.

Approval of a measure would address what President George W. Bush warned was a crisis that could cause widespread economic turmoil. In an address to the nation last night Bush said that ``without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold.''

Bill By Day's End

Bennett said lawmakers would have legislative language by the end of the day.

``I now expect we will indeed have a plan that can pass the House, pass the Senate, be signed by the president and bring a sense of certainty to this crisis that is still roiling in the markets,'' Bennett said. ``That is our primary responsibility and I think we are now prepared to meet it.''

Bush will meet this afternoon with congressional leaders as well as Republican presidential candidate John McCain and his Democratic rival, Barack Obama on the rescue plan.

In addition to the first $250 billion allocated to Treasury, another $100 billion would also be available for the bailout program, the Senate aide said. The remaining $350 billion could be used unless Congress prohibits it, the aide said.

Frank said a Democratic provision to let judges rewrite mortgage terms for homeowners in bankruptcy proceedings is the ``most controversial'' and remains an ``outstanding issue.''

``We pushed very strongly for it,'' Frank said. ``We haven't resolved it yet.''

``Bankruptcy is the one issue where our Republican colleagues told us they thought that would blow up the whole thing,'' Frank told reporters. ``So it hasn't been finally resolved, but that's on the table.''

Spencer Bachus, the top Republican on the House Financial Services Committee, said he was urged to ``see that the taxpayer and that the Treasury is reimbursed for their expenditures. I think that was an important step that we all took and we're committed to the taxpayer being protected.''

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By Roger Runningen and Catherine Dodge

Sept. 24 (Bloomberg) -- President George W. Bush, in a prime time address to the nation, said the unprecedented intervention his administration has proposed to stabilize U.S. financial markets is urgently needed to avoid the prospect of a ``long and painful recession.''

``We're in the midst of a serious financial crisis,'' Bush said in a speech from the White House. ``Our entire economy is in danger.''

Bush addressed the nation after he invited presidential candidates John McCain and Barack Obama and a bipartisan group of House and Senate leaders to the White House tomorrow to hasten an agreement on the bailout package.

The invitation came after Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson faced another day of questioning on the plan from skeptical lawmakers.

Bush explained the crisis, recounting how easier credit brought on ``negative consequences'' in the economy, including people getting home mortgages they couldn't afford. The decline in the housing market ``set off a domino effect'' throughout the economy, he said.

``The gears in the financial system began grinding to a halt,'' Bush said.

Resistance in Congress has led the administration to retreat on its opposition to limits on executive compensation for companies taking part in the rescue plan and for more oversight of the plan's implementation.

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By Stanley White and Ron Harui

Sept. 24 (Bloomberg) -- The dollar fell against the euro as the U.S. Congress studies the government's $700 billion rescue proposal, with Federal Reserve Chairman Ben S. Bernanke saying a delay in passing the plan would hurt the economy.

The greenback also approached a one-month low versus the British pound before a report that economists forecast will show U.S. home sales dropped, bolstering the case for a Fed interest- rate cut. The Australian and New Zealand dollars weakened as prices for commodities the countries export declined.

``The dollar will face a lot of pressure to go lower,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``Uncertainty about when the U.S. rescue package will pass and how much of a burden it will place on future generations is damaging confidence in the dollar.''

The currency dropped to $1.4684 per euro at 12:38 p.m. in Tokyo from $1.4648 late yesterday in New York. It was at 105.66 yen from 105.56 yen. Against the pound, the dollar traded at $1.8544 from $1.8522. It reached a one-month low of $1.8642 on Sept. 22. The euro bought 155.16 yen from 154.63 yen. The dollar may decline to $1.4710 per euro today, Soma forecast.

The Australian dollar fell to 83.43 U.S. cents from 84.40 cents late in Asia yesterday. New Zealand's dollar weakened 1.4 percent to 68.06 U.S. cents.

Gold, Australia's third most-valuable raw material export, fell $3.80 to $887.40 an ounce. Crude oil, its fourth most- valuable export, was little changed at $107.07 a barrel after falling for the first time in a week. Raw materials account for 60 percent of Australia's exports and sales of commodities such as lumber make up 70 percent of New Zealand's overseas shipments.

Illiquid Assets

U.S. lawmakers have balked at rubber-stamping the Treasury's plan to remove illiquid assets from the banking system, with Democrats demanding it include support for homeowners and limits on executive pay. Republicans are also resisting the plan, which economists predict would push the budget deficit to an all-time high next year.

Bernanke gives congressional testimony on the U.S. economy at 10 a.m. in Washington today. He and Treasury Secretary Henry Paulson said yesterday the bailout is needed to avert a recession in the world's biggest economy.

Gains in the euro may be limited by speculation weakening German business confidence will add to evidence that growth is slowing in the 15 countries that share the currency.

The Ifo institute's business climate index declined to 94.3 in September from 94.8 in August, according to the median of 41 forecasts in a Bloomberg News survey. That would be the weakest reading since June 2005. Ifo will release the report, based on a survey of 7,000 executives, at 10 a.m. in Munich today.

European Recession?

``The Ifo may be an ugly number, showing there are still concerns whether the euro zone will fall into a recession,'' said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. ``You will see some euro selling again.''

The euro may fall to $1.4580 and 154.00 yen today, he said.

The U.S. currency has lost about 5.5 percent versus the euro since touching a one-year high of $1.3882 on Sept. 11. The dollar reached $1.6038 on July 15, the weakest level since the European currency made its 1999 debut.

The U.S. National Association of Realtors will say today that house purchases declined to a 4.94 million annual pace from 5 million in July, according to a Bloomberg survey. The report is due at 10 a.m. New York time. Sales reached a 4.85 million pace in June, the fewest since comparable records began in 1999.

Home Sales Slide

The Commerce Department is forecast to report that sales of new houses dropped to an annual pace of 510,000 from 515,000 in July, according to a separate survey before tomorrow's data. Sales of existing and new homes are down 35 percent from their July 2005 peak.

``A large amount of wealth has truly been lost, and these are losses that have not been offset by gains,'' Robert Merton, the Nobel Prize-winning economist and co-founder of Long-Term Capital Management, said yesterday during a panel discussion at Harvard Business School in Boston. ``Like it or not, those losses have to be borne by house-owners, by those who financed them and by the general population.''

The chance of the Fed cutting its 2 percent benchmark rate by a quarter-percentage point at its Oct. 29 policy meeting was 58 percent yesterday, compared with zero a month ago, futures contracts on the Chicago Board of Trade showed.

Weaker Dollar

The U.S. Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six major trading partners, reached 75.890 on Sept. 22, the lowest since Aug. 13. It was at 76.618 from 76.468 yesterday.

``The housing market is still slowing and the poor state of the economy is likely to continue,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest bank by assets. ``Sentiment is bad toward the dollar,'' which may weaken to 105 yen today, he said.

The U.S. dollar may extend its decline to parity with the Canadian dollar, according to charts that predict price movements, said Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London. The greenback last traded at C$1.0347 from C$1.0384.

Daily and weekly momentum indicators such as the stochastic oscillator and Goldman's ``Trend Strength'' charts are both ``bearish,'' Edgeley wrote in a research note yesterday. ``There is scope for further extension toward the potential trend line support from February around C$1.0000.''

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By Craig Torres

Sept. 24 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the U.S. is facing ``grave threats'' to financial stability and warned that the credit crisis has started to damage household and business spending.

``Economic activity appears to have decelerated broadly,'' Bernanke said today to a congressional Joint Economic Committee hearing, downgrading the assessment of Fed officials when they met on Sept. 16. ``Stabilization of our financial system is an essential precondition for economic recovery.''

Bernanke's comments, his most dire about the economy since he became central bank chief in 2006, may stoke investors' expectations the Fed will lower interest rates by year-end to alleviate the credit crisis. He reiterated his call for Congress to pass Treasury Secretary Henry Paulson's plan for a $700 billion fund to remove devalued assets from the banking system.

Without the bailout, ``credit will be restricted further for homeownership, for small business, for individual consumers and so on, but that is not just an inconvenience,'' Bernanke said. ``What that is going to do is affect spending and economic activity and it will cause the economy as a whole to decline and be much weaker than it otherwise would be.''

The Federal Open Market Committee left its benchmark rate unchanged at 2 percent this month for a third straight meeting after seven cuts since September 2007. Policy makers next gather Oct. 28-29, when traders see a 78 percent chance of a reduction, futures prices show.

`Downside Risks'

``The downside risks'' to economic growth ``remain a significant concern,'' Bernanke said.

Lawmakers including Representative Paul Kanjorski, the second highest-ranking Democrat on the House Financial Services Committee, said taxpayers don't want to rescue mortgage lenders and other financial institutions viewed as responsible for the credit crisis.

Taxpayer interests ``must trump those of corporate fat cats and cowboy capitalists,'' Kanjorski of Pennsylvania told Bernanke at an afternoon hearing by the House panel. ``Americans are tired of enabling corporate excess.''

The Fed chairman's testimony today signaled that restrictive credit has now slowed the economy from its 3.3 percent annualized pace in the second quarter to a pace ``appreciably below its potential rate.'

Bernanke is ``very much leaning to seeing downside risks to growth as much greater,'' said James o'Sullivan, senior economist at UBS Securities LLC in Stamford, Connecticut. ``If we don't get credit market relief, the risks tilt overwhelmingly to growth rather than inflation.''

Waning Credit

Tumbling housing prices and waning mortgage credit have pushed up borrowing costs for both banks and consumers, and will probably slow the expansion to a 1.7 percent annual rate in 2008, according to the median forecast of 80 economists in a Bloomberg News survey.

Unemployment rose in August to a five-year high of 6.1 percent and payrolls have fallen for eight straight months.

``The weakness in fundamentals underlying consumer spending suggest that household expenditures will be sluggish, at best, in the near term,'' the Fed chairman said. ``The continuing decline in house prices reduces homeowners' equity and puts continuing pressure on balance sheets of financial institutions.''

Bernanke said construction of commercial office buildings and business spending on equipment and software are likely to slow. Declining growth abroad could reduce the lift the U.S. economy received from exports in the first half, he said.

`Quite Adverse'

``If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse,'' Bernanke said.

Bernanke also said slowing growth should help moderate inflation pressures. The consumer price index rose 5.4 percent for the year ending in August.

``The inflation outlook remains highly uncertain,'' he said. ``The upside risks to inflation remain a significant concern.''

Responding to questions from lawmakers, Bernanke said that should the rescue succeed and spur an economic recovery, the Fed may raise interest rates sooner than it otherwise would. For the plan itself, ``I don't expect any effect on inflation,'' he said.

Bernanke yesterday told the Senate Banking Committee in a joint appearance with Paulson that lawmakers should pass the rescue plan quickly.

Worsening Crisis

In a worsening credit crisis, ``people cannot borrow to buy a car, to send a student to college, to buy a house,'' Bernanke told the House committee today. Scant lending harms ``people at the lunch bucket level.''

Fed officials have so far failed to stem the credit crisis even after the steepest rate cuts in two decades and interventions in Bear Stears Cos. and American International Group Inc. this year.

The Fed has also pumped billions of dollars into banks to try to restore liquidity, while invoking extraordinary powers to loan to securities firms.

The Treasury this month took over Fannie Mae and Freddie Mac as the turmoil engulfed the two largest mortgage finance companies.

Lawmakers have balked at approving the Treasury's proposal to buy illiquid assets from financial institutions without changes. Republicans resisted the plan's size and scope and Democrats demanded support for homeowners and limits on executive pay.

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By Stewart Bailey

Sept. 23 (Bloomberg) -- Jean-Marie Eveillard says he has stashed $1 billion in gold in a vault near Times Square as insurance against ``extreme outcomes,'' like a market collapse or unintended consequences of the U.S. plan to avert one.

Eveillard keeps as much as 8 percent of his $22 billion First Eagle Global Fund in bullion or gold-mining stocks. He occasionally visits the vault in a building about 12 blocks from his Midtown Manhattan office, he said.

``Gold is insurance,'' Eveillard said in an interview yesterday. ``In most of those instances where things would get bad enough so you would get into equity bear markets, where economic and financial circumstances would be bad for a year or two or three,'' gold prices will rise.

Gold futures traded on the Comex division of the New York Mercantile Exchange have surged 19 percent since Sept. 12, the last trading day before Lehman Brothers Holdings Inc. filed for bankruptcy protection. The metal has gained for seven straight years, more than tripling in price, as the dollar declined.

Bullion rose $44.30, or 5.1 percent, to $909 an ounce yesterday.

Eveillard, a 68-year-old Frenchman, came out of retirement in March 2007 to resume managing the First Eagle fund after his successor, Charles de Vaulx, abruptly resigned. With Wall Street's turmoil forcing the U.S. toward a $700 billion plan to prop up the financial system, the dollar may plunge and inflation accelerate, Eveillard said.

The First Eagle Global Fund, which he managed for 24 years before his first retirement, has returned 13 percent annually in the past five years, placing it in the 95th percentile of similar funds, according to Bloomberg data. The fund has dropped 8.2 percent this year.

U.S. officials led by Treasury Secretary Henry Paulson offered proposals during the weekend to avoid a credit freeze that could cripple the financial system and halt economic growth. The plan follows last week's bankruptcy of Lehman Brothers and the government's takeover of insurer American International Group Inc.

``I'm not expecting a disaster, and I acknowledge that the steps they took are probably helpful,'' Eveillard said. ``What I'm saying is, to the extent a price has to be paid, there will be unintended consequences, including the dollar looking shaky or inflation related to the ballooning budget deficit.''

`Creative Destruction'

The U.S. is unwilling to endure ``creative destruction'' that would rectify the market excesses caused by its debt-fueled boom, Eveillard said. Asian economies were forced by the U.S. and the International Monetary Fund to take their ``medicine'' after their market crises in the late 1990s, he said. The Japanese endured a decade of economic stagnation after the country's 1980s asset bubble burst, he said.

``The Asian solution would mean you correct the excesses and it's very painful for a year or two or three, or the Japanese solution is stagnation '' Eveillard said. ``They don't want the South Korean solution or the Japanese solution, so they come up with their own reflation.''

Financing the larger deficit by ``printing more money'' will drive inflation higher, increasing gold's appeal as a safe-haven asset and an alternative currency, Eveillard said.

Investors are buying treasuries as a haven in the debt crisis, he said. The Fed is likely to succeed in keeping companies able to borrow, which will prompt investors to switch from bonds to gold, he said.

Central banks and large investors would need to move a small portion of their money into gold to drastically boost the price because the bullion market is smaller than those for derivatives and currencies. He gave no exact target for gold's price.

``It's a small market, the market for gold bullion, so it could go very high, I presume,'' Eveillard said.

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By Ye Xie and Daniel Kruger

Sept. 22 (Bloomberg) -- The dollar fell the most against the euro since January 2001, while U.S. stocks and bonds tumbled, on concern the U.S. proposal to rescue banks from the subprime-mortgage crisis will inflate the budget deficit.

The greenback dropped 2.1 percent against the euro. The Standard & Poor's 500 Index decreased 2.3 percent, retreating after the biggest two-day rally since 1987. Yields on 10-year Treasuries rose 0.6 percentage point to 3.87 percent, and oil prices jumped 10 percent.

``Selling is feeding on itself,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``There's just a growing appreciation that the scale of obligations the U.S. government is taking on board is stretching the limit of what's credible and is badly damaging to U.S. debt and the U.S. dollar.''

The dollar fell to $1.4789 per euro at 1:33 p.m. in New York, from $1.4466 on Sept. 19. It touched $1.4797, the weakest level since Aug. 28.

The S&P 500 retreated 22.36, or 1.8 percent, to 1,232.72, led by regional banks that may get hurt by the bailout. The price of the 4 percent Treasury note due in August 2018 fell 11/32, or $3.44 per $1,000 face amount, to 100 30/32, according to BGCantor Market data. Crude oil for October delivery rose $10.70, or 10 percent, to $115.25 a barrel on the New York Mercantile Exchange. Futures climbed as much as $11.12 to $115.67 a barrel, the highest since Sept. 2.

The dollar has lost more than 5 percent versus the euro since touching a one-year high of $1.3882 on Sept. 11. The dollar reached $1.6038 on July 15, the weakest level since the European currency's 1999 debut.

No Dollar `Support'

``Fundamentally speaking, nothing is supporting the dollar,'' Tom Sowanick, who helps manage $10 billion as chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey. ``Why should foreign investors continue to support the U.S. financial system?''

The bailout plan, sent to Congress Sept. 20, would mark unprecedented government participation in markets and increase the nation's debt ceiling by 6.6 percent to $11.315 trillion. Officials may also provide $400 billion of guarantees for money- market funds.

The dollar will get ``crushed,'' as the extra spending reduces the allure of U.S. assets to foreign investors, said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world's biggest currency hedge-fund firm, which manages about $15 billion.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke began plotting the rescue last week after New York-based Lehman Brothers Holdings Inc. filed for bankruptcy, the government seized control of American International Group Inc., and Merrill Lynch & Co. was forced into the arms of Bank of America Corp. Paulson and Bernanke are due to testify before the Senate tomorrow on the banking crisis.

Stronger Yen

The yen rose 1 percent to 73.30 versus the New Zealand dollar and 59.31 against the Brazilian real on reduced demand for carry trades, in which traders get funds in a country with low borrowing costs and invest where returns are higher. The Bank of Japan's target lending rate of 0.5 percent compares with 4.25 percent in Europe, 7.5 percent in New Zealand and 13.75 percent in Brazil.

``Even with a plan, the likelihood there will be a very severe slowdown in the U.S. and elsewhere has increased,'' said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. ``I don't think people will return to the same old risk-taking world.''

The rand weakened 0.8 percent to 8.0233 per dollar as South African President Thabo Mbeki's resignation increased speculation foreign investors will sell the country's assets on extended global financial turmoil. The currency dropped 2 percent to 11.6860 against the euro.

The chance of the Fed cutting its benchmark 2 percent rate by a quarter-percentage point at an Oct. 29 policy meeting was 38 percent, compared with zero a month ago, futures contracts on the Chicago Board of Trade showed. The European Central Bank's main refinancing rate is 4.25 percent.

Economic Data

Home resales declined to 4.94 million last month from 5 million in July, according to the median forecast of 70 economists surveyed by Bloomberg News. The National Association of Realtors' report is scheduled for release Sept. 24. The Commerce Department is forecast to report the next day that sales of new houses dropped to 510,000 from 515,000 and that durable goods orders fell 1.8 percent.

``We look for the dollar to reflect the weakness in the U.S. economy,'' said David Powell, a currency strategist at Bank of America in London. ``The dollar is not yet receiving the yield support that would normally be acquired in order to support a sustained rally.''

The yield advantage of two-year German bund over the comparable-maturity U.S. notes widened to 1.81 percentage points, from 1.66 at the beginning of the month, making the U.S. assets less attractive.

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By Christine Harper and Craig Torres

Sept. 22 (Bloomberg) -- The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.

The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.

``The decision marks the end of Wall Street as we have known it,'' said William Isaac, a former chairman of the Federal Deposit Insurance Corp. ``It's too bad.''

Goldman, whose alumni include Henry Paulson, the Treasury secretary presiding over a $700 billion bank bailout, and Morgan Stanley, a product of the 1933 Glass-Steagall Act that cleaved investment and commercial banks, insisted they didn't need to change course, even as their shares plunged and their borrowing costs soared last week.

By then, it was too late. As financial markets gyrated -- the Dow Jones Industrial Average whipsawed 1,000 points in the week's last two days -- and clients defected, executives at the two firms concluded they had no choice. The Federal Reserve Board met at 9 p.m. yesterday and considered applications delivered that day, said Michelle Smith, a spokeswoman for the central bank. The decision was unanimous, she said.

`Blood in Water'

``There's blood in the water in the industry and the sharks are circling,'' Peter Kovalski, who helps oversee about $10 billion at Alpine Woods Capital Investors LLC, said at the end of last week. ``It all comes down to perception and the current trust within the community.''

Morgan Stanley rose $2.58, or 9.5 percent, to $29.79 as of 12:25 p.m. in New York Stock Exchange composite trading. Goldman advanced 10 cents to $129.90.

Wall Street hasn't had such a shakeup since the 1980s, when firms including Morgan Stanley and Bear Stearns Cos. went public and London's financial markets were altered forever with the so- called Big Bang reforms implemented in 1986. Bear Stearns disappeared in March, when it was bought by JPMorgan Chase & Co.

The announcement paves the way for the two New York-based firms, both of which will now be regulated by the Fed, to build their deposit base, potentially through acquisitions. That will allow them to rely more heavily on deposits from retail customers instead of using money borrowed in the bond market -- the leverage that led to the undoing of Bear Stearns and Lehman.

Depositors Rule

Morgan Stanley has taken $15.7 billion of writedowns and losses on mortgage-related securities and other types of loans since the credit crunch started last year. Goldman's tally stands at about $4.9 billion. While both companies have remained profitable and avoided money-losing quarters suffered by Lehman and Merrill Lynch, their revenue from sales and trading and investment banking has been declining this year.

``Deposit-banking is king right now,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``It's the only meaningful critical-mass way to make money.''

Mitsubishi UFJ Financial Group Inc., Japan's largest bank, said today it will pay up to 900 billion yen ($8.4 billion) for as much as a fifth of Morgan Stanley. The deal would mark the biggest overseas acquisition by a Japanese financial company, according to data compiled by Bloomberg.

Building Deposit Base

The Japanese bank will become ``a valuable partner as we transition to a bank holding company and build our bank services and deposit base,'' Morgan Stanley Chief Executive Officer John Mack said in a statement today.

The deal announced today came after Morgan Stanley held talks last week to pursue a merger with Wachovia Corp. That deal became less likely now that Morgan Stanley is becoming a bank holding company, said Tony Plath, a finance professor at the University of North Carolina at Charlotte.

Morgan Stanley, the second-biggest securities firm until this week, had $36 billion of deposits and 3 million retail accounts at the end of August. The company plans to convert its Utah-based industrial bank into a national bank.

``This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position,'' Chairman and CEO Mack, 63, said in a statement last night. ``It also offers the marketplace certainty about the strength of our financial position and our access to funding.''

Citigroup, JPMorgan

Goldman, the largest and most profitable of the U.S. securities firms, will become the fourth-largest bank holding company. The firm already has more than $20 billion in customer deposits in two subsidiaries and is creating a new one, GS Bank USA, that will have more than $150 billion of assets, making it one of the 10 largest banks in the U.S., the firm said in a statement last night. The firm will increase its deposit base ``through acquisitions and organically,'' Goldman said.

``Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,'' Lloyd Blankfein, 54, Goldman's chairman and CEO, said in the statement.

The Washington-based Fed is the primary regulator of bank- holding companies, which are firms that own or control banks. Citigroup Inc., Bank of America Corp. and JPMorgan are bank- holding companies regulated by the Fed. Goldman and Morgan Stanley will be able to become bank holding companies immediately, without submitting to a five-day antitrust waiting period, the Fed said today, after consulting with the Department of Justice.

Less Risky

Securities firms, by contrast, had been regulated by the Securities and Exchange Commission. The SEC's future becomes dimmer with the change in Goldman and Morgan Stanley's structures.

``You can't kiss goodbye to the last two important investment banks without noting that the house is empty,'' said David Becker, a former SEC general counsel who is now a partner at Cleary Gottlieb Steen & Hamilton in Washington. ``It's a downward spiral where the less significant the population you regulate, the less your available resources.''

The change is also likely to lead to less risk-taking by the companies and possibly lower pay for their employees. Both Goldman and Morgan Stanley held more than $20 of assets for every $1 of shareholder equity, making them dependent on market funding to operate.

Goldman, in particular, has been remarkable for the high bonuses it pays to its employees. Goldman's CEO and two co- presidents were each paid more than $67 million last year.

``They're going to have to protect their deposit bases by law, and the days of high leverage are gone,'' said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, who wrote ``Wall Street: A History.'' ``The days of the big bonuses are gone.''

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Last Big Investment Banks Change Status