FDIC Proposes Banks Prepay Deposit Fees Through 2012

By Alison Vekshin

Sept. 29 (Bloomberg) -- The Federal Deposit Insurance Corp. proposed asking banks to prepay three years of premiums to replenish reserves dented by a rash of bank failures that the agency said will cost $100 billion through 2013.

The insurance fund will run a deficit as of tomorrow after 120 banks failed in the past two years, the agency said today. Half the costs from seized banks have been incurred already and prepaying the fees will raise $45 billion, the FDIC said. The agency rejected options for a second special fee or borrowing from the Treasury Department.

“What we are proposing to do is to tap the ample liquidity of the banking industry to improve our own liquidity position without borrowing from the Treasury,” FDIC Chairman Sheila Bair said at a Washington board meeting. The agency raised its five- year loss estimate by 43 percent.

The agency is required by law to rebuild the fund when the reserve ratio, or the balance divided by insured deposits, falls below 1.15 percent. It was 0.22 percent on June 30. The fund, drained by 95 bank failures this year, had $10.4 billion at the end of the second quarter. The fund will erase its deficit by 2012, the staff said.

The proposal approved by the board requires banks to pay premiums for the fourth quarter and next three years on Dec. 30.

The board backed prepayments over alternatives such as borrowing taxpayer dollars from the Treasury, charging the banking industry a special fee in addition to levies they already pay and borrowing directly from the banks.

John Dugan, the head of the U.S. Office of the Comptroller of the Currency, said he was pleased the agency proposal didn’t impose another special assessment this year and next year.

Assessment Opposition

“For banks that were already feeling the effects of a weak economy, special assessments could only make them weaker,” said Dugan, a member of the five-person FDIC board.

Under the proposal, the FDIC wouldn’t impose another special assessment this year. The agency would raise assessments by 3 basis points in 2011.

The FDIC will seek public comment until Oct. 28 and then make a decision on its approach.

The FDIC raised its projected fund losses, from $70 billion in May, because the assets and number of failed and “problem” banks have increased, said Arthur Murton, director of the FDIC’s division of insurance and research. Bank failures will peak this year and 2010, he said.

The banking industry lobbied against a special fee that would be added to the regular annual premium, telling the FDIC and Congress such a levy would hurt their ability to raise capital. The industry welcomed the FDIC’s proposed approach.

‘Better Solution’

“It’s certainly a better solution than taking a large chunk of money out of banks’ income and capital,” James Chessen, chief economist at the American Bankers Association, said.

The prepayment approach gives “the FDIC the cash that they need, it will be paid for by the industry and it will not have the severe impact that other options would have had on banking,” Chessen said.

Banks paid a special assessment in the second quarter that raised $5.6 billion for the insurance fund, in addition to an estimated $12 billion in annual premiums. The agency also has authority to impose fees in the third and fourth quarters.

Banks backed prepayment because the premiums are classified as an asset when the payment is made, becoming an expense during the quarter in which the obligation is due.

The agency has authority to borrow against a Treasury line of credit that Congress in May increased to $100 billion. This option would have put the FDIC in the position of borrowing from taxpayers in the wake of public anger over the bank bailout.

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FDIC says bank failures to cost around $100B

By MARCY GORDON, AP Business Writer Marcy Gordon, Ap Business Writer – 2 hrs 10 mins ago

WASHINGTON – Regulators expect the cost of bank failures to grow to about $100 billion over the next four years — up from an earlier estimate of $70 billion. Faced with that sobering news, they voted Tuesday to require banks to prepay $45 billion in premiums to replenish an insurance fund that will start running dry on Wednesday.

The proposal by the board of the Federal Deposit Insurance Corp. to require early payments of premiums for 2010-2012 could take effect after a 30-day public comment period.

The FDIC is fully backed by the government, which means depositors' money is guaranteed up to $250,000 per account. But it would be the first time the agency has required prepaid insurance fees.

"I do think this is a good balance," FDIC Chairman Sheila Bair said. The plan requires the banking industry "to step up" while spreading the financial hit to banks over a number of years, she said.

An insurance payment by the industry of $45 billion "is not going to constrain lending," she said.

The insurance fund has been sapped by billions from a rash of bank failures that began in mid-2008. The banking industry prefers the prepaid premiums over a special emergency fee — which would be the second this year.

Without additional special fees or increases in regular premiums, the insurance fund — at $10.4 billion at the end of June — will become "significantly negative" next year and could remain in deficit until 2013, the FDIC is now projecting.

Ninety-five banks have failed so far this year as losses have mounted on commercial real estate and other soured loans amid the most severe financial climate in decades. That has cost the fund about $25 billion, the FDIC said Tuesday. The $10.4 billion already was the fund's lowest point since 1992, at the height of the savings-and-loan crisis. That is equivalent to 0.22 percent of insured deposits, below a congressionally mandated minimum of 1.15 percent.

Most of the $100 billion in costs are expected to come from failures this year and next, the agency said. Some analysts expect hundreds more banks to fail in coming years.

Bair didn't rule out the possibility of the FDIC tapping its $500 billion credit line with the Treasury Department, if the economy unexpectedly worsened. "But today is not that day," she said before the vote.

The deficit partly reflects higher reserves the FDIC has set aside for anticipated bank failures. At the same time, the balance of cash and assets of failed banks that can be sold by the FDIC remain positive, the agency said.

An emergency insurance fee on banks, which took effect June 30, brought in around $5.6 billion. Another one would allow the healthiest banks to keep more capital for investment, but could drive weaker banks toward failure, further depleting the insurance fund.

"The prepaid assessments represent money that the FDIC expects to receive from banks anyway over the next several years, but having the cash on hand sooner ... provides more flexibility for dealing with any contingencies over the foreseeable future," James Chessen, chief economist of the American Bankers Association, said in a statement. "Another special assessment would likely do more harm than good as it would directly reduce bank income, hinder capital growth, and make lending much more difficult."

In addition to the insurance fund, the FDIC has about $21 billion in cash available in reserve to cover losses at failed banks, down from $25 billion at the end of the first quarter.

"There's lots of liquidity; there's lots of cash. Liquidity's not an issue for the banking system right now," Bair told reporters.

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By Gabi Thesing and Christian Vits

Sept. 28 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said a strong dollar is “extremely important” for the world economy and it’s too early for the ECB to unwind emergency stimulus measures.

“In the present situation it is extremely important that we can have in the framework at the level of global finance and the global economy a strong dollar, as the authorities in the U.S. are saying,” Trichet told lawmakers in Brussels today. “The solidity of the dollar is very important.”

Trichet’s comments come after a 15 percent slide in the dollar against the euro since February that’s threatening to hamper Europe’s recovery from the worst recession since World War II. With the Group of 20 nations pledging to rebalance the global economy away from a trade deficit in the U.S., the risk for the ECB is that its economy feels the pain of further dollar adjustment.

The euro fell from $1.4661 to as low as 1.4627 after Trichet’s remarks.

“It would be premature to declare the crisis over,” Trichet said. “Now is not the time” for the ECB to unwind its stimulus measures. “However, at some point in time an exit strategy will have to be implemented. The ECB has an exit strategy and stands ready to put it into action when the time comes.”

Non-Standard Measures

The Frankfurt-based central bank has lowered its benchmark lending rate to a record low of 1 percent to fight Europe’s worst recession since World War II. It is also employing “non- standard measures” to get credit flowing through the economy again, lending banks as much money as they need at the benchmark rate and buying covered bonds.

“The euro-area economy shows signs of stabilization,” Trichet said. “In the period ahead we expect to see a very gradual recovery.”

The ECB this month predicted economic growth in the 16- nation euro region of about 0.2 percent in 2010, revising a June forecast for a 0.3 percent contraction. In 2009, the economy will shrink about 4.1 percent, less than the 4.6 percent contraction predicted three months earlier.

G-20 leaders concluded a summit in Pittsburgh on Sept. 25 promising to pursue policies that bring the world economy into greater balance. That initiative may require the dollar to fall further so as to narrow the U.S. trade deficit, according to economists at Morgan Stanley.

Dollar’s Dominance

Trichet’s comments came the same day that World Bank President Robert Zoellick said the U.S. dollar’s dominance as the world’s main reserve currency will be challenged as the financial crisis reshapes the global economy.

“There is every reason to believe that the euro’s acceptability could grow,” Zoellick said. “Of course, the U.S. dollar is and will remain a major currency. But the greenback’s fortunes will depend heavily on U.S. choices” on inflation, the budget deficit and financial oversight, he said.

U.S. Treasury Secretary Timothy Geithner last week defended the dollar’s role as the world’s reserve currency. The U.S. has a “special responsibility” to preserve confidence in its financial system and “sustain the dollar’s role as the principal reserve currency in the international financial system,” he said Sept. 24 in Pittsburgh.

Trichet also urged banks to accelerate lending to their economies. The global recession has made banks reluctant to lend and also eroded demand for debt. In Europe, loans to the private sector rose 0.1 percent in August from a year earlier, the slowest growth since records began in 1991, the ECB said last week.

There’s a “gradual improvement in financing conditions which is expected to support demand for credit in the period ahead,” Trichet said. “It is for this reason that the Governing Council continues to regard ECB interest rates as appropriate.”

“Our message to banks is clear: do your job,” he added.

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WASHINGTON – Regulators on Friday shut down Atlanta-based Georgian Bank, the 95th U.S. bank to fail this year as loan defaults rise in the worst financial climate in decades.

In coming months, more banks are expected to buckle under the weight of commercial real estate and other loans that go sour. Those failures could imperil the insurance fund for deposits, already at the lowest point in nearly 20 years.

The Federal Deposit Insurance Corp. took over Georgian Bank, with about $2 billion in assets and $2 billion in deposits as of July 24. First Citizens Bank and Trust Co., based in Columbia, S.C., agreed to assume the assets and deposits of the failed bank. Georgian Bank's five branches will reopen Monday as offices of First Citizens Bank.

In addition, the FDIC and First Citizens Bank agreed to share losses on Georgian Bank's roughly $2 billion in loans and other assets.

The failure of Georgian Bank is expected to cost the federal deposit insurance fund an estimated $892 million. The fund has been so diminished by the wave of collapsing banks that some analysts have warned it could sink into the red by year's end.

The fund fell 20 percent to $10.4 billion at the end of June. That's its lowest point since 1992, at the height of the savings-and-loan crisis. The FDIC estimates bank failures will cost the fund around $70 billion through 2013.

FDIC Chairman Sheila Bair said last week she is "considering all options, including borrowing from Treasury," to replenish the insurance fund. The FDIC is weighing several costly, and never before used, options for shoring up the fund: borrowing billions of dollars from healthy banks, imposing a special fee on the banking industry or tapping the agency's $500 billion credit line with the Treasury.

Another option would be for banks to pay their normal insurance fees in advance. But U.S. Comptroller of the Currency John Dugan said Thursday he was "very concerned" about the effect of such an upfront levy on the strained banking industry.

The FDIC is fully backed by the government. That means depositors' money is guaranteed up to $250,000 per account. And the agency still has billions in loss reserves — including $21.6 billion in cash — apart from the insurance fund.

Meanwhile, Treasury Department officials and federal bank regulators are weighing a fresh round of bailouts for banks that were deemed too small or too risky to qualify for earlier aid under the government's $700 billion financial rescue program. Representatives from Treasury, the FDIC and the House Financial Services Committee discussed the plan by phone Thursday, officials said.

Bank failures have spread nationwide, but the 19 in Georgia this year are the most of any state. That's a reflection of the depressed real estate market and of a glut of small community banks in the state.

Hundreds more banks are expected to fail nationwide in the next few years largely because of souring loans for commercial real estate. The number of banks on the FDIC's confidential "problem list" jumped to 416 at the end of June from 305 in the first quarter. That's the highest number since June 1994, during the savings-and-loan crisis.

On Aug. 21, Guaranty Bank became the second-largest U.S. bank to fail this year after the big Texas lender was shut down and most of its operations sold at a loss of billions of dollars for the government to a major Spanish bank. The failure, the 10th-largest in U.S. history, is expected to cost the insurance fund an estimated $3 billion.

The sale of most of Austin-based Guaranty's operations to the U.S. division of Banco Bilbao Vizcaya Argentaria SA, Spain's No. 2 bank, marked the first time a foreign bank has bought a failed American bank during the current financial crisis.

And on Aug. 14, Colonial Bank, a big lender in real estate development, was shuttered and became the biggest U.S. bank to fail this year and the sixth-largest in U.S. history, with about $25 billion in assets. The government approved the sale of Montgomery, Ala.-based Colonial's $20 billion in deposits and about $22 billion of its assets to BB&T Corp. Colonial was a major lender to developers in Florida and Nevada and was hit hard by the collapse of the real estate market in those states.

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By Brian Swint

Sept. 24 (Bloomberg) -- Bank of England Governor Mervyn King said two British banks got within hours of a liquidity shortfall on Oct. 6, 2008, and the day after as the U.K. financial system came to the brink of collapse.

“Two of our major banks which had had difficulty in obtaining funding could raise money only for one week then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks really to be confident they could get to the end of the day,” the BBC cited King as saying in an interview to be broadcast later today.

King was referring to Royal Bank of Scotland Group Plc and HBOS Plc, the BBC said. Prime Minister Gordon Brown's government pledged to invest about 50 billion ($82 billion) pounds in the banking system on Oct. 8, 2008, to save it from meltdown in the aftermath of Lehman Brothers Holdings Inc.'s bankruptcy declared that September.

“It was, it is, probably the worst situation, as I say, we faced in peacetime,” Chancellor of the Exchequer Alistair Darling said, according to a press release from the BBC. . .

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 NEW YORK, Sept 22 (Reuters) - U.S. gold futures rose toward
$1,020 an ounce on Tuesday, gaining 1 percent as a sharp
deterioration of the dollar's value triggered investment buying
in gold as a currency hedge.

 For the latest detailed report, click on [GOL/].

 GOLD

 * December gold GCZ9 settled up $10.60, or 1.1 percent,
at $1,015.50 an ounce on the COMEX division of New York
Mercantile Exchange.

 * Ranged from $1,004.20 to $1,021.50.

 * Gold boosted by a tumbling dollar. Deteriorating
sentiment toward the U.S. currency pushed FX dealers to sell it
ahead of a Federal Reserve meeting and Group of 20 summit this
week. U.S. dollar index .DXY fell almost 1 percent against a
basket of major currencies. [USD/]

 * Gold's rally primarily was driven by its inverse
relationship with the U.S. dollar - Frank Holmes, chief
executive officer and chief investment officer of U.S. Global
Investors, a commodities-focused fund manager.

 * Gold could still go higher in deflationary economy
because of currency devaluation as a result of deficit spending
and a strong resolve to keep interest rates negative - Holmes.

 * Gold, which is priced in the U.S. currency, usually goes
up with a falling greenback. Gold is also seen as an
alternative to holding dollar-denominated assets and other
major currencies.

 * Gold's status as an investment continues to rise. The
world's largest gold-backed exchange-traded fund, the SPDR Gold
Trust GLD, said its holdings stood at 1,101.735 tonnes as of
Sept. 21, up from 1,086.479 tonnes the previous day.

 * Lack of gold jewelry demand, however, could limit further
gains - traders.

 * India's gold imports in 2009 may fall to their lowest
level since trade was liberalized 12 years ago as high prices
have put off buyers in the world's biggest market for the metal
- top Indian importer. [ID:nBOM512227]

 * Worries about imminent shorter-term traders also dragged
prices lower, as trade data showed that speculators held a
record net long position in U.S. gold futures.

 * U.S. crude futures rebounded above $71 per barrel on
improved sentiment for demand and a weaker dollar. [O/R]

 * Gold-to-oil ratio at 14.21, down from the previous
session's 14.41.

 * COMEX estimated final volume at 96,316 lots.

 * Spot gold XAU= at $1,013.25 at 2:32 p.m. EDT (1832 GMT)
versus $1,002.55, which was the previous session's late New
York quote.

 * London afternoon gold fix XAUFIX= was at $1,014 an
ounce.

 SILVER

 * December silver SIZ9 finished up 23.5 cents, or 1.4
percent, at $17.115 an ounce, up with gold.

 * Range from $16.830 to $17.345.

 * COMEX estimated final volume at 21,997 lots.

 * Spot silver XAG= was at $17.07 versus its previous
finish of 16.80 an ounce.

 * London silver fix XAGFIX= at $17.24 an ounce.

 PLATINUM

 * October platinum PLV9 ended up $17, or 1.3 percent, at
$1,339.20 an ounce on the back of stronger global equities
markets.

 * Spot platinum XPT= was at $1,329 compared with its
previous finish of $1,315.50.

 PALLADIUM

 * December palladium PAZ9 closed up $3.25, or 1.1
percent, at $302.40 an ounce.

 * Spot palladium XPD= was at $300 against its previous
close of $294.50.



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gold

By Lisa Lambert

Thu Sep 17, 2009 7:49pm EDT

WASHINGTON (Reuters) - The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset.

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.

"That's the next round of potential foreclosures in our country," he said.

Option-ARMs are now considered among the riskiest offered during the recent housing boom and have left many borrowers owing more than their homes are worth. These "underwater" mortgages have been a driving force behind rising defaults and mounting foreclosures.

In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state's attorney general, Terry Goddard, told Reuters after the meeting.

"It's the other shoe," he said. "I can't say it's waiting to drop. It's dropping now."

The mortgages differ from other ARMs by offering an option to pay only the interest each month or a low minimum payment that leads to a rising balance in the loan's principal.

When the balance of the loan reaches a certain level or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan's interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but then reset to a higher level.

Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, they "threaten a much greater hit to the consumer than the subprimes," Goddard said, referring to the mortgages often extended to less credit-worthy

borrowers that fed the first wave of the financial crisis.

Miller said option-ARMs were discussed at Tuesday's meeting on mortgage scams, which brought state attorneys general from across the country together with U.S. Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Housing and Urban Development Secretary Shaun Donovan, and Federal Trade Commission Chairman Jon Leibowitz.

The mortgages tend to be "jumbo," or for significantly large amounts, Goddard said, making it even harder for borrowers to sidestep foreclosure. He said he expected to see an increase in scams as distressed homeowners become more desperate to refinance big debts.

Goddard said his office is investigating hundreds of cases where companies have made fraudulent promises, and charged large fees, to mortgage defaulters.

The U.S. housing market has suffered the worst downturn since the Great Depression, and its impact has rippled through the recession-hit economy.

Some signs of stabilization emerged recently, with sales rising and home price declines moderating in many regions of the country. Home prices in some regions have risen.

However, many economists say there is still a huge supply of unsold homes lingering on the market and that, coupled with a frenzy of more foreclosures ahead, should depress home prices for the rest of 2009.

Real estate data firm RealtyTrac, in its August 2009 U.S. Foreclosure Market Report, said foreclosure filings -- default notices, scheduled auctions and bank repossessions -- were reported on 358,471 U.S. properties during the month, a decrease of less than 1 percent from the previous month, but an increase of nearly 18 percent from the same month a year ago.

The report said one in every 357 U.S. housing units received a foreclosure filing last month.

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By David Wilson

Sept. 17 (Bloomberg) -- As an economic power, the U.S. may go the way of the British Empire because of the government’s increasing debt burden, according to Richard A. Posner, an economist and federal judge.

The CHART OF THE DAY shows how the public debt, or the national debt aside from liabilities for entitlement programs, has climbed in the past year. The chart goes back to March 2005, when the U.S. Treasury started giving daily updates on the debt.

Public debt will keep growing rapidly, Posner wrote earlier this week on a blog he shares with Gary Becker, an economics and sociology professor at the University of Chicago.

Declining tax revenue, rising Medicare costs, congressional reluctance to cut spending or raise levies, and the likely cost of efforts to overhaul health care and promote climate control will push the debt higher, in Posner’s view.

“At some point the wheels may start coming off the chassis,” he wrote. “The United States may find itself in the kind of downward economic spiral in which ‘developing’ countries often find themselves.” He drew the comparison with the British Empire, whose economic position in the early 20th century was similar to the U.S. role today.

The threat may emerge as the Treasury borrows more and more money, fear of inflation worsens as the Federal Reserve avoids raising interest rates, and government social programs cause unfunded spending to increase, the posting said.

Posner's most recent book is “A Failure of Capitalism,” published in May. He is a U.S. Court of Appeals judge for the Seventh Circuit as well as a senior lecturer at the University of Chicago Law School.

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By Jan Harvey

LONDON (Reuters) - Gold hit 18-month highs on Wednesday as the dollar's slide to 2009 lows against the euro sparked buying of the metal as an alternative asset, helping lift silver and platinum to multi-month peaks.

The precious metal could be building up for an assault on its previous all-time high above $1,030 an ounce, set in March 2008, traders said.

Spot gold rose to a high of $1,020.50 an ounce and was at $1,015.10 an ounce at 1340 GMT against $1,005.90 late in New York on Tuesday.

Barclays Capital analyst Suki Cooper said given the extent of net speculative buy positions in COMEX-traded gold futures, conditions for gold are not as favorable as they were at the time of last year's record high.

Nonetheless, if the dollar keeps falling, gold could continue to climb, she said. "If we see currency movements becoming much more favorable -- if we see the dollar weakening substantially -- that is going to be a key support for prices."

U.S. gold futures for December delivery on the COMEX division of the New York Mercantile Exchange rose $10.20 to $1,016.50 an ounce.

The dollar slipped against the euro and the yen on Wednesday after U.S. Treasury data showed a sharp increase in net capital outflow from the United States in July.

The U.S. currency hit its weakest this year versus the euro earlier, with the single currency breaking $1.47 for the first time since December. The dollar came under pressure as investors moved to notionally higher-risk currencies.

Better-than-expected U.S. retail sales data and a statement from Federal Reserve chairman Ben Bernanke that the U.S. recession was most likely over on Tuesday have boosted interest in assets seen as higher risk.

World stocks hit 11-month highs on the news, while European shares also rose.

PHYSICAL DEMAND PICKS UP

Physical demand for gold picked up in Asia, home to some of the world's largest bullion markets, despite high prices having discouraged consumers throughout the year.

"India is still buying despite the high prices. Maybe they are afraid that prices will go up again," said a dealer in Singapore.

Gold's rally helped lift other precious metals, with silver and platinum -- both of which are largely industrial in use -- also hitting multi-month highs as base metals rose on the more positive economic outlook.

Silver prices rose to a 12-month high of $17.37 an ounce, and were later at $17.25, against $16.97 late on Tuesday. Its ratio to gold -- which measures its value compared to the yellow metal -- fell to 58.8 from around 64.5 a month ago.

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Sep 15 2009 3:29PM

Gold cracked the $1,000-an-ounce barrier for a second time last week, and the New York spot price is now hovering right around that four-digit mark. The first time this happened, in March 2008, the price plummeted to the low $900s within a couple of days.

No one knows what gold will do this time around, but there are some plausible reasons why the price could stay higher longer.

The first reason is one that we’ve discussed before—we are now in what has historically been gold’s strongest season of the year. September is gold’s best month of the year in terms of month-over-month price appreciation, the key driver being jewelry makers stocking up for holiday buying in Asia, the Middle East and North America. This strength historically lasts until February.

A second reason relates to the weak dollar due to prolonged rock-bottom interest rates and massive deficits being piled up in the U.S. Gold and the dollar typically move in opposite directions, so a weak dollar tends to be good for gold. That inverse relationship is intact so far in September—the DXY dollar index had lost 2 percent of its value through Friday, hitting a 12-month low, and over the same period spot gold has risen about 6 percent.

A third reason is rebounding interest in commodities overall. Prices for copper, zinc and other metals have seen strength recently. This isn’t surprising, given the growing signs of economic recovery and the dollar weakness.

In addition to these factors, Barrick Gold has reportedly purchased more than 2 million ounces of gold and is expected to buy another 3 million ounces to cut its hedge position by more than half.

Many are afraid that a global economic recovery will unleash inflation. Stimulus spending by the Federal Reserve and central banks around the world has added several trillion dollars to the global money supply. This will eventually erode the value of the dollar and other currencies.

There is an opposing fear that all of the stimulus spending won’t be enough to get the global economy out of its sickbed. What happens then? The Fed and others have made it clear that their medicine will be more stimulus spending, which will further devalue paper currencies.

Either way, gold has appeal.

As long as the global economy is transmitting mixed signals, gold stands to benefit as an uncertainty hedge and a store of value. How long the price is in the $1,000 range or higher remains to be seen, but this unusual convergence of factors creates favorable conditions for gold investors.

 

by Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors, Inc.

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By Halia Pavliva and Nicholas Larkin

Sept. 15 (Bloomberg) -- Gold rose, closing above $1,000 an ounce for the third straight session, as commodities climbed on demand for a hedge against inflation. Silver also gained.

Federal Reserve Chairman Ben S. Bernanke said the worst U.S. recession since the 1930s has probably ended, while warning that growth may not be strong enough to reduce unemployment quickly. The Fed has kept its benchmark lending rate as low as zero since December. It authorized $1.45 trillion in purchases of mortgage-backed securities and other housing debt this year.

“The market believes that the Fed is not going to be able to withdraw the funds fast enough and that would cause inflation,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “I don’t believe that for a minute, but this is what the market believes.”

Gold futures for December delivery gained $5.20, or 0.5 percent, to $1,006.30 an ounce on the Comex division of the New York Mercantile Exchange. On Sept. 11, the metal reached a record closing price of $1,006.40.

The price for immediate delivery gained $6.63, or 0.7 percent, to $1,006.93 at 2:54 p.m. New York time. Eighteen of 19 raw materials in the Reuters/Jefferies CRB Index rose today, led by a record surge in corn.

“The debate on gold’s price prospects remains alive and well among both fundamentals-followers and technicians poring over charts,” Jon Nadler, a Kitco Inc. senior analyst in Montreal, said in a note.

The dollar fell against a basket of six major currencies, extending a slide to the lowest in 11 months. Gold futures have rallied 28 percent since the demise of Lehman Brothers Holdings Inc. a year ago as investors bought precious metals to protect their wealth amid the first global recession since World War II.

Possible ‘Reversal’

“Charts indicate that if the $1,050 level is not attained during the current ‘break-out’ or if a double or triple top is confirmed under that same level, then gold could signal a reversal such as the ones that occur on average about every six years,” Nadler said.

Futures reached an 18-month high of $1,013.70 on Sept. 11. Gold may climb to as high as $1,100 in the next six months, researcher GFMS Ltd. said yesterday.

Sales at U.S. retailers in August surged 2.7 percent, the most in three years, from July, government data showed today.

“Gold is continuing to knock on the $1,000 door without making a concerted effort either way to test resistance or support,” GoldBore Ltd., a brokerage in Dublin, said in a note. “Gold needs to push above $1,012 in the short term and $1,020 in the longer term for the upward momentum to be regained.”

Net Longs

Hedge-fund managers and other large speculators increased their bets on rising New York gold futures to a record in the week ended Sept. 8, the U.S. Commodity Futures Trading Commission said last week. Net-long positions jumped 22 percent to a 224,676 contracts, the biggest increase this year.

Silver futures for December delivery in New York rose 37.7 cents, or 2.3 percent, to $17 an ounce. The price has gained 51 percent this year.

Platinum futures for October delivery was little changed at $1,320.30 an ounce on the Nymex. Palladium futures for December delivery gained 0.2 percent to $296.25 an ounce.

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Tue Sep 15, 2009 11:39am EDT

DENVER, Sept 15 (Reuters) - The price of gold could rise above $1,110 an ounce in 2010 as central banks diversify their reserves into gold due to a faltering dollar, economist Martin Murenbeeld told the Denver Gold Forum on Tuesday.

Murenbeeld, president of Canada-based consultant Dundee Wealth Economics, forecast gold could rise to an average of $1,116 an ounce in 2010.

Spot gold XAU= was trading at around $1,002 an ounce on Tuesday. Bullion closed above $1,000 for the first time last Friday on the back of dollar weakness.

In a keynote speech at the Gold Forum, an annual industry get-together, Murenbeeld said that there was a positive change in central banks' attitudes toward gold as an investment and a key part of their reserves.

"The central banks and the G20 (countries) have complained more precipitously about the U.S. dollar and the U.S. monetary and fiscal policies, which leads them to think more and more about shifting their reserves," he said.

"They don't have a lot of options for shifting their reserves, and gold is being mentioned more frequently as an important asset."

Recently, China and other emerging economic powers have signaled growing interest in gold rather than stockpiling their currency reserves in U.S. dollar-denominated assets.

In addition, Murenbeeld, who is also an adjunct professor for the MBA program at the University of Victoria, said that gold is becoming increasingly used in investment portfolios for performance and lowering overall risks.

"More and more portfolio managers are starting to think gold and commodities as an asset class," he said.

Murenbeeld also said it was possible that a geopolitical event or crisis could drive gold prices sharply higher.

"Slowly but surely, gold is going back to its days where it was being held in a precautionary form by people worry about currency debasement, inflation, whatever you worry about," he said. (Reporting by Frank Tang; Editing by Christian Wiessner)

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CORUS IS THE SECOND LARGEST BANK TO FAIL THIS YEAR

September 14, 2009

Federal regulators seized Chicago-based Corus Bank, marking the first major bank to be undone by deteriorating construction and commercial real-estate loans during the current downturn.

The branches and deposits of Corus will be assumed by MB Financial, which has more than $8 billion in assets and over 70 branches in Chicago and its suburbs. MB Financial earlier this month took over the assets, branches and assets of InBank, a small bank based in Oak Forest, Ill.

Corus is the second largest bank to fail this year. It will cost the government between $1.5 billion and $2.4 billion in losses, depending on the performance of the bank's outstanding loans. [The FDIC Insurance Fund currently stands at $10.4 billion.]

In addition to Corus Bank, Venture Bank of Lacey, WA, and Brickwell Community Bank of Woodbury, MN, also failed, bring the total bank failures for 2009 to 92.



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Corporate officers and directors were buying stock when the market hit bottom. What does it say that they're selling now?

NEW YORK (Fortune) -- Can hundreds of stock-selling insiders be wrong?

The stock market has mounted an historic rally since it hit a low in March. The S&P 500 is up 55%, as U.S. job losses have slowed and credit markets have stabilized.

But against that improving backdrop, one indicator has turned distinctly bearish: Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago.

While a wave of insider selling doesn't necessarily foretell a stock market downturn, it suggests that those with the first read on business trends don't believe current stock prices are justified by economic fundamentals.

"It's not a very complicated story," said Charles Biderman, who runs market research firm Trim Tabs. "Insiders know better than you and me. If prices are too high, they sell."

Biderman, who says there were $31 worth of insider stock sales in August for every $1 of insider buys, isn't the only one who has taken note. Ben Silverman, director of research at the InsiderScore.com web site that tracks trading action, said insiders are selling at their most aggressive clip since the summer of 2007.

Silverman said the "orgy of selling" is noteworthy because corporate insiders were aggressive buyers of the market's spring dip. The S&P 500 dropped as low as 666 in early March before the recent rally took it back above 1,000.

"That was a great call," Silverman said. "They were buying when prices were low, so it makes sense to look at what they're doing now that prices are higher."

In the case of firms such as discount broker TD Ameritrade (AMTD), they are selling with abandon. Chairman Joe Moglia has netted more than $10 million in profits from stock sales since April, by selling shares on each of the last 106 business days, according to Securities and Exchange Commission filings.

A TD Ameritrade spokeswoman said Moglia's sales are being made under a pre-arranged selling plan he filed with the SEC last August. Under that plan, his brokers exercise some options he got eight years ago and sell the underlying shares every day the company's stock price is above a certain level.

Moglia's not the only insider selling at TD Ameritrade. The company's founder and former chairman, Joe Ricketts, and his wife Marlene last month sold 5.7 million shares to help fund the family's purchase of the Chicago Cubs baseball team. They owned 16% of the company's stock at last count.

Silverman said the TD Ameritrade insider sales don't particularly raise concerns about the company's health, because "special circumstances" -- the Cubs deal and the pending expiration of Moglia's options -- are evident.

He said it's potentially more worrisome when insiders suddenly make big sales without obvious motivating factors.

Fossil (FOSL) CEO Tom Kartsotis has sold $25 million of the watchmaker's stock over the past month. Shares of Fossil have more than doubled since early March. Fossil didn't immediately return a call seeking comment.

At video game maker Activision Blizzard (ATVI), CEO Robert Kotick and director Brian Kelly each made more than $10 million last month by selling shares after exercising stock options.

While some of Kotick's options were due to expire next year, others weren't due to expire until 2014 in his case and 2012 in Kelly's. The stock sales took place at prices that were about 50% above their 52-week low. Activision didn't respond to a request for comment.

Adding to the flurry of stock sales, companies are selling stock to the public at a brisk clip while buybacks have tailed off. All told, U.S. corporations have been net sellers of $105 billion of stock over the past four months, Biderman said.

Insiders have managed to cash in on some of those offerings. Healthcare payment administrator Emdeon (EM), for instance, last month raised $155 million in an initial public offering. At the same time, selling shareholders led by private equity investor General Atlantic Partners raised $188 million.

Though the wave of selling by insiders doesn't necessarily predict a pullback in their stocks or the market as a whole, it's hard to put a happy spin on the recent trends.

"The disparity between buyers and sellers right now is vast," said Silverman. "That's the beauty of following insider trading -- these guys are talking with their checkbooks." 

Fri Sep 11, 2009 10:36am EDT 

 


















 NEW YORK, Sept 11 (Reuters) - U.S. gold futures broke above
$1,010 an ounce on Friday, reaching their highest level since
February, as a steadily weakening dollar increased the status
of bullion as an alternative investment.

 GOLD

 * December gold up $13.80, or 1.4 percent, at
$1,010.60 an ounce at 10:26 a.m. EDT (1426 GMT) on the COMEX
division of the New York Mercantile Exchange.

 * Ranged from $996.30 to $1,013.70, which marked the
highest level since Feb. 20.

 * The U.S. dollar fell to a one-year low against major
currencies as optimism about the outlook for the global economy
encouraged investors to favor higher yielding currencies and
stocks instead of the safety of the greenback. [USD/]

 * Gold continues its steady upward move, helped by
technical buying, stronger euro and crude oil rally - George
Gero, vice president of RBC Capital Markets Global Futures.

 * COMEX gold open interest continues to expand, signaling
 strong investment demand from funds - Gero.

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There seems little doubt that China's economic strength can lead to it dominating gold price movement for the foreseeable future.

Author: Lawrence Williams
Posted:  Friday , 11 Sep 2009

LONDON - 

There is little doubt that China nowadays has the financial muscle to effectively control the global gold price.  The mere sniff of a report that it is taking gold into its official reserves to counteract dollar decline is sufficient to, at the least, stabilise the gold price - and there seems to be little doubt that it is so doing, but at the moment in a manner that is not designed to de-stabilise the dollar or, on the other hand, not to contribute to a quantum leap in the yellow metal's valuation - yet.

But - should China wish to de-stabilise the dollar by announcing big gold purchases into its reserves to replace a good proportion of its trillions of dollars, there is also little doubt that it could do so.  It is an economic weapon which perhaps has more power than a nuclear one if it wished to bring America, and the West, to its collective economic knees through currency war.  But again that is not seen as an option - or at least not until the country's domestic market is big enough to soak up all the manufactured goods China can still sell to the West. 

Thus China is still very dependent on export markets, so revaluation of the renminbi is not seen as helpful and dollar decline has to be worrying.  So the country has to move cautiously to retain some kind of global economic equilibrium.

But noticeably, China is already exerting its financial dominance.  It has said its mostly state-owned financial organisations will have the right to default on some of the more dubious commodity and financial related derivative trades that they may have entered into.  This has only raised a muted response from those financial institutions which could be affected because it is China's financial muscle which is beginning to call the tune in world financial circles - not the mighty U.S.A. any longer.  But it could lead to more grief in western financial circles and the already stressed banking system.

Its state-owned enterprises are on a massive buying spree of western assets, both as an investment and, in the case of the mining sector, to tie down future strategic resource supplies.  In perhaps a conscious effort to allay suspicions of Chinese motives in many countries, much of this is via significant minority stakes in western companies tied to long term supply deals.

But back to gold.  We reported here that a top Chinese official virtually admitted China was buying gold, but in a way which was designed to maintain at least a reasonable degree of stability in the markets and not rock the gold boat.  If this is true, and there is little reason why it should not be so then this will effectively mean there is little or no serious downside risk in buying gold.  But China can also control the upside, as it may not wish to precipitate a big dollar collapse which would be the likely outcome of a big gold price rise.

We reported also, in an article which virtually went viral on the internet and has been picked up by many other commentators (China pushes silver and gold investment to the masses), that Chinese state organisations are selling, like soap powder, the advice to buy gold and silver to the general populace - which already has a gold purchasing psyche.  As a result China is likely to surpass India as the world's biggest precious metals purchaser this year or next.  It also lends support to the country's domestic gold mining industry - China is currently the world's largest gold producer and is a country where output is continuing to rise.  Chinese domestic gold purchases rose 14% year on year in the first half of the year to 446.6 tonnes and industry analysts expect double digit growth to continue in the current half year, even with gold at over $1,000.

This too provides a massive underpinning of the gold price at, at least, around current levels.  It is apparent that buying has been coming in every time gold dips and the suspicion is that this is by the Chinese, but it is well enough hidden that it is difficult, if not impossible, to clearly define the source.

At the moment gold seems to be holding up well close to the $1,000 level despite the huge degree of profit taking which comes in at psychological levels like this.  The suspicion is that China may wish to see $1,000 gold, or thereabouts, as a new floor, but there is unlikely to be any official recognition of this and we will have to wait and see whether the supposed Chinese underpinning of the market is reality - or yet another gold bug's dream.

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By Millie Munshi and Veronica Navarro Espinosa

Sept. 9 (Bloomberg) -- Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.

The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said.

The price of gold has jumped 13 percent this year as rising government debt coupled with declines in the dollar spurred demand for the metal as a haven. Silver, platinum and palladium also gained.

“What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.

Yesterday, gold futures for December delivery touched $1,009.70 an ounce on the Comex division of the New York Mercantile Exchange, the highest for a most-active contract since March 18, 2008. The metal touched a record $1,033.90 an ounce on March 17, 2008. As of 9:42 a.m., gold traded at $988.

China, the world’s fastest-growing major economy, will continue to be a “large consumer” of commodities, including energy and metals, Greenspan said.

“China is turning out to be the 900-pound gorilla in the energy and commodity market,” Greenspan said. “The increase in oil consumption in China has been quite extraordinary.”

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By Bob Ivry, Christine Harper and Mark Pittman

Sept. 8 (Bloomberg) -- The warning was ominous: “Massive global wealth destruction.”

That’s what Lehman Brothers Holdings Inc. executives predicted before they filed the biggest bankruptcy in U.S. history. “Impacts all financial institutions,” read one bullet point in a confidential memo prepared for government officials obtained by Bloomberg News. “Retail investors/retirees assets are devastated.”

The message didn’t get through. Two dozen of the world’s most powerful bankers, brought together by Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Bank of New York President Timothy F. Geithner the weekend of Sept. 13, 2008, to devise a rescue plan for Lehman, were too busy saving themselves to see the larger threat.

“The discussion among the CEOs was ‘How do we prevent the next firm from going under?’” former Merrill Lynch & Co. Chief Executive Officer John A. Thain, who cut a deal to sell his company that weekend, said in an interview. “There should have been much more discussion about the impact directly on the markets if Lehman went bankrupt.”

While everyone assembled at the New York Fed was aware that unbridled subprime-mortgage lending and the packaging of such inferior loans into investment vehicles such as collateralized- debt obligations had pushed the financial system to the breaking point, what the bankers missed almost destroyed them -- and the rest of the global economy.

Blankfein, Dimon

Lehman’s downfall on Monday, Sept. 15, sparked a run on the $3.6 trillion money market industry, which provides short-term loans called commercial paper used by businesses worldwide to cover everyday expenses, including payroll and utilities. The panic left companies such as Goodyear Tire & Rubber Co. stranded with insufficient cash and ravaged the accounts of millions of people.

For Goldman Sachs Group Inc. CEO Lloyd C. Blankfein, JPMorgan Chase & Co.’s Jamie Dimon and the rest of the financial chieftains who spent a weekend trying to unwind derivatives trades and keep bank-to-bank loans flowing, ignoring the commercial-paper market, the lifeblood of the economy, proved a catastrophic oversight. Within a week, the U.S. stepped in to halt withdrawals from money market funds, leading to a $1.6 trillion industry backstop, part of $13.2 trillion it has committed to beating back the worst financial crisis since the Great Depression.

‘System at Risk’

Of all the quakes of 2008 -- the fall of Bear Stearns Cos. in March, the takeover of mortgage buyers Fannie Mae and Freddie Mac and the salvaging of American International Group Inc. in September -- the failure to account for the effects of Lehman’s demise was the most critical because its aftershocks came closest to wrecking the world economy.

“They put the entire financial system at risk, and they didn’t have to,” said Harvey R. Miller, a partner at Weil Gotshal & Manges LLP in New York who represented Lehman in the bankruptcy, referring to government officials. “They were warned. I told them, ‘Armageddon is coming. You don’t know what the consequences will be.’ Their response was, ‘We have it covered.’”

Paulson and Geithner, who succeeded him as Treasury secretary, both declined to comment.

Inviting ‘Catastrophe’

One year later, policymakers haven’t learned the lesson of the bankruptcy, said Richard Bernstein, CEO of Richard Bernstein Capital Management LLC in New York and former chief investment strategist for Merrill Lynch.

Rather than break up institutions such as Bank of America Corp. and Citigroup Inc. or limit their expansion, the U.S. has given them billions of dollars in tax incentives and loan guarantees that enabled them to grow even bigger. To protect against a bank collapse touching off another freefall, President Barack Obama has proposed regulatory changes that rely on the wisdom of bankers and government overseers -- the same people who created the conditions that led to Lehman’s bankruptcy and were unable to foresee its consequences.

“Designating certain institutions as too big to fail, and not having a thorough regulatory process to match, practically invites another catastrophe,” Bernstein said.

Rescue efforts exposed a financial system with so many moving parts that U.S. regulators and the world’s top bankers couldn’t keep track of them all. A reconstruction of the meetings at the New York Fed that preceded Lehman’s bankruptcy, drawn from more than a dozen interviews with participants, reveals a failure to understand the importance of commercial paper and how that market would be affected by the collapse of the New York investment bank.

Ice-Nine

It turned out to be a $3.6 trillion blind spot.

Like the fictitious substance ice-nine in Kurt Vonnegut Jr.’s 1963 novel “Cat’s Cradle,” a seed of which set off a chain reaction that transformed all the world’s water into ice, Lehman’s failure froze credit markets, said Simon H. Johnson, a former chief economist at the International Monetary Fund.

“Ice-nine was invented by a crackpot scientist, and it was unleashed by mistake,” said Johnson, now a professor of finance at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge. “How did the financial system get so fragile that this could happen? What were the guys overseeing it doing?”

The bankers and regulators who met at the New York Fed unwittingly dropped the first seed.

‘Take Cash Out’

Within days, Mohamed El-Erian, CEO of Pacific Investment Management Co., the world’s largest bond-fund manager, was fearful of a banking breakdown.

“I remember at the end of the week calling up my wife and saying, ‘Jamie, go to the ATM, go to the cash machine, and take cash out,’” said El-Erian, who spent the prior weekend at the firm’s Newport Beach, California, headquarters trying to anticipate what might happen to Lehman. “She said, ‘Why?’ I said, ‘I don’t know whether the banks are going to open tomorrow.’ The system was freezing in front of our eyes.”

The crisis shattered household and business confidence around the world, Fed Chairman Ben S. Bernanke said in an Aug. 21 speech in Jackson Hole, Wyoming.

“The role played by panic helps to explain the remarkably sharp and sudden intensification of the financial crisis last fall, its rapid global spread, and the fact that the abrupt deterioration in financial conditions was largely unforecasted by standard market indicators,” Bernanke said.

Bernanke, Paulson

Subsequent actions by Bernanke, Paulson and Geithner helped stabilize equity and credit markets and may have prevented a deeper recession. As the lender of last resort, the Fed doubled its balance sheet, providing twice as much lending in dollars worldwide, an unprecedented bulwark of the banking system. The Treasury’s Troubled Asset Relief Program, or TARP, pumped almost $300 billion into the U.S. banking system; no major banks have failed since its October inception.

It’s what happened, or didn’t happen, before the Lehman bankruptcy that ended up pushing the system to the brink, said Peter J. Solomon, a vice chairman at Lehman before founding his New York-based investment bank, Peter J. Solomon Co., in 1989.

“How could Geithner and the Fed generally, and Paulson and the Treasury generally, not have seen the buildup during the summer?” Solomon said. “The fault with these guys lies not in their action and not in their inaction on that day in September. It lies in the summer.”

Money Market Panic

Like other financial institutions, Lehman’s problems stemmed from borrowing too much to finance too many hard-to-sell investments, such as mortgage-backed securities, that were declining in value as a result of the deteriorating real estate market. Lehman was different because the government let it declare bankruptcy, meaning the company’s creditors were wiped out as well as its stockholders.

The ensuing panic doomed the oldest U.S. money market fund, the $62.5 billion Reserve Primary Fund, started in 1971 by Bruce R. Bent, founder and CEO of New York-based Reserve Management Co.

In the fund’s 2008 annual report, Bent promised to bore investors to sleep. Those same investors woke with alarm on Sept. 15. Reserve Primary had lent Lehman $785 million, about 1.3 percent of its assets, some of it in short-term loans that Lehman was now unable to repay. In a two-day run on the fund, more than 60 percent of its money was withdrawn. Its net asset value fell below $1 a share, or “broke the buck,” on Sept. 16, making investors vulnerable to losses and triggering withdrawals at other funds.

Lung Transplant

Willard Scolnik, a 78-year-old retired architect in Palm Harbor, Florida, who said he had $400,000 in Reserve Primary that he needed to help pay for a lung transplant for his son, was one of the unlucky ones. He couldn’t get his money out. Neither could Akron, Ohio-based Goodyear, the largest U.S. tiremaker by revenue, which had $360 million stuck in the fund.

Another loser was Colorado Diversified Trust. Municipalities park their cash in the trust before shelling out for projects such as a new road or sewer improvements. Boulder County was forced to write off $687,000, its share of the trust’s losses, according to Bob Hullinghorst, the county treasurer. That would have paid for 20 new health-care employees, he said.

“It makes me mad,” Hullinghorst said. “We thought our money was safe.”

Commercial Paper

The run on money market funds, considered the safest investments after bank deposits and the major buyers of commercial paper, sent shivers through the global economy. World stock markets lost $2.85 trillion, or more than 6 percent of their value, in three days. Banks’ cost of borrowing overnight from other banks, as measured by the London Interbank Offered Rate, or Libor, jumped 4.29 percentage points between Friday, Sept. 12, and Tuesday, Sept. 16.

“We did not expect how the Lehman Brothers bankruptcy would transmit through the commerical-paper market and cause all the stress in the money funds,” said David Nason, a former assistant Treasury secretary for financial institutions under Paulson and now a managing director at Washington-based Promontory Financial Group.

The disintegration of the commercial-paper market came around to bite banks such as Morgan Stanley and Citigroup, whose CEOs, John J. Mack and Vikram S. Pandit, were at the weekend meetings. It sapped them of the capital they needed to extend credit, even to one another.

Foam on Tarmac

One bank CEO, assigned to a group of executives asked by Geithner to consider what would happen in the event of a Lehman bankruptcy, said he couldn’t recall any conversations that weekend about commercial paper or money markets. The banker declined to be identified.

That may have had something to do with who was in the room, said Joshua H. Rosner, managing director at New York investment research company Graham Fisher & Co. They were all bankers. There were no corporate treasurers, academics, consumer advocates or labor representatives.

“It wasn’t a mistake to let Lehman fail; it was a mistake to let them go without putting foam on the tarmac,” Rosner said. “If they had a variety of stakeholders in the room, those stakeholders would’ve told the regulators they needed to do something about commercial paper.”

For some participants, such as Merrill’s Thain and Paul Calello, CEO of Credit Suisse Group AG's investment bank, the gathering resembled a similar meeting at the New York Fed a decade earlier in which executives from 16 banks bailed out hedge fund Long-Term Capital Management LP. The key difference: That rescue, coordinated by then-New York Fed President William J.N. McDonough, required $3.5 billion from the banks, an eighth of what Lehman needed.

Blind Spot

Steven Shafran, a senior adviser to Paulson at the Treasury and a former Goldman Sachs partner, said the bankers and regulators were limited in what they could accomplish this time.

“We knew we’d never be smart enough to think of everything, so we picked the big problems and reacted to the rest,” said Shafran, who attended the meetings.

The blind spot led to borrowing rates on 30-day commercial paper issued by investment-grade companies without the highest rating doubling to 6.02 percent in the four days after Lehman’s bankruptcy, according to a presentation made by Brad Fox, chairman of the National Association of Corporate Treasurers, at the group’s annual meeting in May.

Fox, who is also treasurer of Pleasanton, California-based Safeway Inc., the third-largest U.S. supermarket chain, said in an interview that nervous CEOs and boards ordered some members of his association to restrict purchases to money market funds that bought only government securities. Corporate treasurers use money market funds to set aside cash in the same way individuals might use a bank account.

Hong Kong Minibonds

“The fear factor that went through the markets was pretty amazing” as credit concerns caused banks to stop lending to each other, Fox said. “The ripple effect was huge.”

The ripples reached as far as Hong Kong, where Lehman’s default on commercial-paper debt paralyzed payments on so-called minibonds, structured notes sold in $5,000 denominations and guaranteed by Lehman.

Sun Kwan, 58, a retired parks worker, said he invested $285,000, most of his life savings, in Lehman minibonds. He was among an estimated 43,000 in the city who bought $1.8 billion of the notes, according to the Hong Kong Monetary Authority. Sun lost it all and has taken part in protests since October, rain or shine, trying to get his money back.

Molasses Reef

Real estate projects whose funding relied on Lehman’s ability to sell commercial paper came to a halt.

On the otherwise uninhabited Atlantic Ocean island of West Caicos, work stopped in October on the Molasses Reef Ritz- Carlton Hotel and Residences, where cottages were priced at $6.5 million. About 400 Chinese employees of an Israeli construction firm, Ashtrom Propertoes Ltd., didn’t get paid, according to Jonathan Siegel, New York-based managing director of the project for Logwood Hotel Development Co. Some of them protested, surrounding the temporary housing occupied by their supervisors, preventing them from leaving until they received their money.

The bankers who gathered at the New York Fed last September anticipated little of this. Instead, their meetings were filled with confusion, false starts and dust-ups.

Discussions began Friday evening during a pelting rain with a statement by Paulson, 63, who sat opposite Geithner, 48, at a rectangular table in a first-floor conference room and informed the bankers in a raspy voice that the Bush administration wasn’t about to commit one dime of taxpayer money to salvage Lehman.

‘Not Another Bailout’

A week earlier, the Treasury had engineered the rescue of government-sponsored mortgage-finance companies Fannie Mae and Freddie Mac. Six months before that, Paulson had arranged for the Fed to guarantee $29 billion of Bear Stearns toxic assets to facilitate the firm’s sale to JPMorgan Chase.

“If you look back at what was being said on TV and in Congress, the constant refrain was, ‘No, not another Bear Stearns, not another bailout,’” said Michele Davis, assistant Treasury secretary for public affairs under Paulson.

If Lehman was going to be saved, Paulson said, it would have to be by those sitting around the table, all of whom knew that without a buyer or a bailout in place by the time markets opened Monday morning the 158-year-old firm would be history.

Some participants said the bankruptcy filing took them by surprise because they were betting Paulson and Geithner would pull off a last-minute rescue.

“There was always a tiny thought in my mind that the government would flinch at the last minute,” said Gary D. Cohn, president and chief operating officer of New York-based Goldman Sachs, who attended the meetings.

Geithner ‘Homework’

Geithner divided the bankers on Friday evening into three teams to do what one participant called “homework.”

The first group, which included Cohn of Goldman Sachs and Credit Suisse’s Calello, was assigned to evaluate Lehman’s real estate and private equity holdings to determine how much of a capital deficiency the firm faced. The second team, with Mack and Thain, tried to cobble together a funding mechanism for the company’s bad assets in the event Lehman could woo a white knight, participants said.

“The No. 1 priority was to find a buyer,” said Davis, now a partner at Brunswick Group LLP, a public relations firm based in Washington.

Lehman executives, who had watched the share price tumble 94 percent since the beginning of the year, were talking to two: Bank of America and Barclays Plc.

Selling Merrill

The third team of bankers -- including Robert P. Kelly, CEO of Bank of New York Mellon Corp., the world’s biggest custody bank, which keeps records, tracks performance and lends securities to institutional investors -- was asked to look at the risks of a possible bankruptcy.

Every few hours, the teams would regroup at the conference table and report back. The bankers discussed which firms might follow Lehman down the drain, according to Thain, 54. There was little doubt Merrill would be next, he said.

By Saturday, Thain had snatched one of Lehman’s suitors and was in talks to sell Merrill, the third-biggest U.S. investment bank, to Charlotte, North Carolina-based Bank of America for about $50 billion. At one point, Paulson looked at the Merrill Lynch chief and said, “John, you know what to do,” according to another executive who attended the meetings.

The marriage, approved by the banks’ boards before Lehman declared bankruptcy, took less than two days to consummate.

Barclays Talks

That left only Barclays. While the London-based bank was interested in Lehman, it didn’t want to touch the firm’s real estate holdings, especially after the team responsible for scrutinizing the books estimated that Lehman had overvalued them by as much as $30 billion, three participants said. One said Barclays kept coming back with less attractive offers, leaving more of the business’s worst assets behind.

By Saturday evening, the bankers -- many of whom stood to gain business after Lehman’s demise -- were still discussing how to come up with the $30 billion needed for a rescue. Barclays sought a temporary guarantee from the U.K. government to cover Lehman’s commitments until its shareholders could approve the deal. When Paulson phoned Chancellor of the Exchequer Alistair Darling, his counterpart in London, Darling told him he didn’t want to import the U.S. cancer, according to two people who said Paulson mentioned the remark later.

Darling, through a spokesman, denied using the word “cancer.”

“At no point were the British authorities asked to approve or reject a deal for the purchase of Lehman Brothers,” said Jason Knauf, senior press officer for the U.K. Treasury.

1 Million Bets

On Sunday morning, shortly before noon, Paulson announced that Barclays wouldn’t be buying Lehman on any terms, participants said. By then, the bankers had turned their attention to their own survival. Cohn of Goldman Sachs said he led the charge to make sure the banks didn’t lose money on derivatives trades either with Lehman or on Lehman.

Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies, commodities or linked to specific events such as changes in interest rates. Lehman had made about 1 million such bets in the over-the-counter market, according to a person with access to that information.

The unregulated $592 trillion market for over-the-counter derivatives, 41 times the size of the U.S. economy, contributed more than half of some banks’ trading revenue and had never been tested by the bankruptcy of a major Wall Street firm.

Unwinding Trades

The Fed had already begun trying to untangle Lehman’s credit-default swaps on Saturday morning, calling in a group of experts in derivatives operations from Wall Street firms and asset-management companies. They were given one hour to show up at the New York Fed.

Swaps are a way for investors to gamble on whether companies will continue making debt payments or for lenders to buy insurance against borrowers who stop paying. If the company defaults, one side in the bet pays the buyer face value of the debt in exchange for the underlying securities or the cash equivalent.

In order to unwind the trades, the team would need to do so-called portfolio compression, reducing the number of outstanding swaps by eliminating duplication and combining similar bets made by the same counterparties. The process involves sending the trades to an outside vendor, running them through a software program, reviewing the results and deciding which ones to settle.

It couldn’t be done, at least not before trading began in Asia on Monday morning, the person said.

Repo Market

On Sunday, the banks called in their own traders to see if they could minimize any losses from dealings with Lehman. That also proved impossible. One snag was that some corporations involved in the trades couldn’t get their representatives to the New York Fed in time, said one participant. Another was that many of the banks couldn’t determine what bets they’d made on or with Lehman.

A last-ditch attempt on Sunday to try to resolve some outstanding derivatives contracts between Lehman and the other banks at the Fed had little success, according to two people who were in the room. One reason: The banks were only interested in resolving the contracts in which Lehman owed them money and not those where the banks owed Lehman money, said one of the people at the meeting.

The bankers acknowledged that one of their favorite avenues for borrowing would be disrupted by Lehman’s collapse. Making sure the market wouldn’t freeze for short-term loans called bank repurchase agreements, or repos, was where the participants had their biggest success -- and their bitterest disagreements.

‘Default Scenario’

In a repo arrangement, a lender sends cash to a borrower in return for collateral, often Treasury bills or notes, which the borrower agrees to repurchase as soon as the next day for the face value of the securities plus interest. When lenders perceived that Lehman might not pay repo loans or be able to post adequate collateral, they required more and higher quality assets from the firm.

The presentation prepared by Lehman employees, titled “Default Scenario: Liquidation Framework,” predicted, among other things, that a bankruptcy would trigger a freeze in the broader repo market.

“Repos default,” they wrote. “Financial institutions liquidate Lehman repo collateral. Repo defaults trigger default of a significant amount of holding company debt and cause the liquidation of hundreds of billions of dollars of securities.”

Repo collateral caused what might have been the tensest moment of the weekend, according to two participants.

Rule 23(a)

While poring over Lehman’s mortgage portfolio on Saturday, former Goldman Sachs partner Peter S. Kraus, a Merrill Lynch vice president and now CEO of New York-based AllianceBernstein Holding LP, accused JPMorgan’s Dimon of being too aggressive in demanding more collateral and margin from other banks to cover declining values, according to two people who were there.

JPMorgan, as a so-called clearing bank, holds collateral for other banks in what are known as tri-party repo transactions. When the value of the collateral declines, JPMorgan can require a borrower bank to post more or higher quality assets so the lending bank is protected.

Dimon didn’t respond to Kraus, the participants said, and the confrontation died down. Both declined to comment.

The Fed was sufficiently anxious about a standstill in repo funding that on Sunday, Sept. 14, it temporarily modified Rule 23(a) of the Federal Reserve Act to allow banks to use customer deposits to fund securities they couldn’t finance in the repo market. That change, scheduled to expire in January, has since been extended through Oct. 30.

Monday Morning Calm

Also that day, the Fed announced that in exchange for loans it would take the same collateral that private repo counterparties accepted. Instead of demanding only investment- grade securities, the central bank would take the mortgage- backed bonds that had sparked the financial crisis.

The Fed arranged for Lehman’s broker-dealer unit to remain open after the bankruptcy filing to allow for repo deals to be resolved in an orderly way.

Monday morning dawned breezy and warm on Wall Street. It was already 79 degrees Fahrenheit when Thomas G. Wipf, Morgan Stanley’s white-bearded head of secured financing, arrived before 6 a.m. at his office in Times Square, four blocks from where the ball drops on New Year’s Eve and around the corner from Lehman’s headquarters. Wipf, who participated in the weekend meetings, had worked for three decades in the short-term financing market and was used to busy mornings as client companies renewed their loans. Instead, he said there was an eerie hush.

The phones were quiet.

No one was calling.

No one was lending.

The ice-nine was silently spreading. 

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Sept. 7 (Bloomberg) -- The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.

UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.

China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.

“There’s a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management,” Heiner Flassbeck, co-author of the report and a UNCTAD director, said in an interview from Geneva. “An initiative equivalent to Bretton Woods or the European Monetary System is needed.”

The 1944 Bretton Woods agreement created the modern global economic system and institutions including the IMF and World Bank.

Enhanced SDRs

While it would be desirable to strengthen SDRs, a unit of account based on a basket of currencies, it wouldn’t be enough to aid emerging markets most in need of liquidity, said Flassbeck, a former German deputy finance minister who worked in 1997-1998 with then U.S. Deputy Treasury Secretary Lawrence Summers to contain the Asian financial crisis.

Emerging-market countries are underrepresented at the IMF, hindering the effectiveness of enhanced SDR allocations, the UN said. An organization should be created to manage real exchange rates between countries measured by purchasing power and adjusted to inflation differentials and development levels, it said.

“The most important lesson of the global crisis is that financial markets don’t get prices right,” Flassbeck said. “Governments are being tempted by the resulting confidence game catering to financial-market participants who have shown they’re inept at assessing risk.”

The 45-year-old UN group, run by former World Trade Organization chief Supachai Panitchpakdi, “promotes integration of developing countries in the world economy,” according to its Web site. Emerging-market nations should consider restricting capital mobility until a new system is in place, the group said.

The world body began issuing warnings in 2006 about financial imbalances leading to a global recession.

The UN Trade and Development report is being held for release via print media until 6 p.m. London time.

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LONDON - Gold rode a wave of technical momentum to top the psychologically significant $1 000/oz mark on Tuesday, with suppor