The Resourceful Bear Blog

Financial market report for Friday, October 24, 2008

Introduction
Currency traders sold the yen carry trade, EUR/JPY, FXE:FXY, short, causing a massive a massive disinvestment from eastern european, GUR, emerging markets, EEM, the BRICS, EEB, and world shares, EFA. Chart of GUR, EEM, EEB, and EFA ... GUR, EEM, EEB and EFA 5 day ... GUR, EEM, EEB and EFA 12 month ... FXE:FXY

Ye Xie and Agnes Lovasz of Bloomberg report that the yen climbed to a 13-year high against the dollar as a worldwide drop in stocks encouraged investors to dump higher-yielding assets and pay back low-cost loans in Japan.

Amicus provides the monthly chart of the EUR/JPY; it's the chart of the century as it shows the Armageddon Trade unwinding ... Monthly EURJPY

Stocks fell sharply for the day and the week:
South Korea, EWY, -11%, -26%; Martin Fackler of The New York Time in article 'Trouble Without Borders' reports that rating agencies have raised conerns about the health of South Koreas Banks which have relied heavily on foreign borrowing. These are now scrambling to find dollars to repay manufacturing foreign currency loans. Woori Bank, one of Soth Korea's largest lenders, suddenly found itself unable to borrow dollars after last month's collapse of Lehman. Dealers in the bank's trading room made frantic calls to big foreign banks seeking fresh loans only to be told bluntly "no". Worse, Foreign banks refused to roll over many existing loans, forcing Woori to repay them as they came due, also in dollars. Woori has stayed liquid thanks to dollar loans from the government, which has pumped tens of billions into banks.

Former Soviet Union, GUR, -11%, -20%

BRICS, EEB, -10%, -20%
Brazil, EWZ, -9%, -20%
Russia, RSX, -12%, -20%
India, INP, -9%, -15%
China, FXI, -10%, -20%

Emerging Markets, EEM, -10%, -19%

World Shares, EFA, -5%, -11%

US Shares, VTI, -5%, -7%

Coal Producers, KOL -9%, -20%
Steel, SLX, -8%, -19%
Metal Manufacturing, XME, -7%, -13%
World Shipping SEA, -7%, -13%
Energy Sevices, OIH, -7%, -7%

Financial and real estate values fell on exposure to sythetic CDOs and settlement of Lehman Brothers credit default swaps
The Yahoo Finance ongoing five day chart of the debt suretors compared to the financial sector and the banks ABK, RDN, MBI, IYF, and KBE suggests that the marketplace is cutting value based on exposure to Synthetic CDOs and settlement of Lehman Brothers credit default swaps ... ABK, RDN, MBI, IYF, and KBE

The Yahoo Finance ongoing five day chart of the real estate investments DRW, IYR, and RWR suggests the same conclusion as with the suretors and the financial sector and the banks ... DRW, IYR and RWR

Real Estate, IYR, -7%, -17%
Financial, XLF -6%, -12%

International Real Estate, DRW, -7%, -15%
World Financial DRF, -3%, -14%

The unwinding yen carry trade sent commodities lower
The unwinding yen carry trade sent oil, USO, 4% lower on the day and 11% lower for the week.

Currency losses for the week were significant; these induced a loss of value in emerging market debt
Currency traders going short world currencies, DBV, such as Hungary's Forint and long the yen, FXY, and the US Dollar, UUP, $USD, propelled emerging market debt, EMB, PCY, and interntional government inflation protected bonds, WIP, lower. Chart of EMB, PCT and WIP ... EMB, PCY, and WIP

Doug Noland and Stockcharts.com relate world currencies, DBV, fell 12% this week;
New Zealand Dollar, BNZ, -20%,
South Africand Rand, SZR, -14%
British Pound, FXB, -8%
Mexican Peso, FXM, -6%
Caandian Dollar,FXC, -6%
Australian Dollr, FXA, -9%
Indian Rupe, ICN, -5%
Euro, FXE, -6%
Brazilian Real, BZF, -15%
Swiss Franc -3%
South Korean Won -6%,
Norwegian Krone -6%
Polish Zloty -12%
Turkish Lira -12%
Chilean Peso -8.0%
Hungarian Forint -8%,
Iceland Krona -6%.

Interest rate differential investing took a reversal beginning with the May 19, 2008, Bank of Japan meeting; at that time investors started to buy yen and repay their 0.5% carry trade loans as is seen in the six month ongoing Yahoo Finance chart of BZF compared to FXB, FXA, ICN and BNZ which illustrates the great unwind of high yielding currencies. The six month ongoing Yahoo Finance chart of TLT, UUP, and FXY, illustrates the so called "flight to safety" and the demand for US Dollars and Yen.

The euro, FXE, closed down at 125.89; its chart objective is 115.

There has been a run on Hungary's currency: Martin Fackler of The New York Time in article 'Trouble Without Borders' reports the Hungarian forint has lost 31% of its value relative to the US Dollar in the last three months.

Emerging Market bonds and inflation protected bond values fell sharply both today this week and in the last three months
EMB -3%, -10%, -28%
PCY -4%, -20%, -38%
WIP -2%, -6%, -22%

Gold has become significantly more expensive in terms of country currencies
Those who have failed to invest in gold, have been pauperized by their currencies falling in value relative to gold; in other words, their currencies have signifcantly fallen lower relative to gold: it now takes significantly more local currencies to buy true wealth.

The chart of the gold ETF, GLD shows a close up to $72 ... GLD

Gold, $GOLD, closed up at $730 ... $GOLD

Demand for US Treasuries was strong this week
US Treasuries, TLT, although turning lower for the day, stands at its second highest ever weekly close at 96.73 ... Weekly TLT

The interest rate on the 10 Year US Government Note, $TNX, closed up at 37 ... $TNX

The US Dollar closed strongly up at $86.42
The US Dollar, $USD, traded up 1.5% on the day; and 5% for the week to close at $86.42 ... $USD

The dollar bullish ETF, UUP, closed at 26.88 ... UUP

Jesse in article Charts in the Babson Style for the Week Ending 24 October 2008 provides the chart of DX Dollar ... DX Dollar

Lending eased somewhat for corporate high grade debt and worsened some for junk bond debt
The value of corporate debt, LQD, increased as the value of US Treasuries increased this week; but other forms of corporate debt lost value as is seen in the 5 day ongoing Yahoo Finance chart of TLT compared to LQD, HYG, JNK and CVY

Municipal bond debt increased in value with US Treasuries this week
The MSN Finance chart of municipal bond debt for the period of September 11, 2008 to October 24, 2008 for the debt ETFs MUB, CMF, and the mutual bond funds OROHX, ORMIX and FDMMX shows municipal bond debt increased in value with US Treasuries this week

Dollar roars back as debts are called in
Ambrose Evans Pretchard in article Dollar roars back as global debts are called in relates: "For six years the world has been borrowing dollars to bet on property, oil, metals, emerging markets, and every bubble in every corner of the globe. This has been the dollar “carry trade”, conducted on a huge scale with high leverage. Now the process has reversed abruptly as debt deflation - or “deleveraging” - engulfs world markets. The dollars must be repaid. Hedge funds are 75pc dollar-based, regardless of where they come from. Many are now having to repatriate their dollars as margin calls, client withdrawls, and the need to slash risk forces them to cut leverage. The hedge fund industry had assets of $1.9 trillion at the peak of the bubble."

Elaine Meinel Supkis writes: "The swelling of 'world wealth' coincides with this long period of free lending. Most of the money created this way was not in yen but in dollars. So the US lost control of who produces dollars. Since dollars are debt, the cranking out of epic amounts of debts meant this debased US dollars. Since this was done via Japan, this also killed the yen. So we saw, for about 6 years, the dollar and the yen BOTH in free fall vis a vis most currencies on earth".

And that inflation didn't matter. Well, we just got washed over by a tsunami of hyperinflation which has now receded. We are now in the other half of this destruction of all that Japanese/US 0% lending lunacy: equity and asset value destruction. Both the US and Japan desperately want to reinflate all the original items this flood of funny money inflated. Namely, stocks, housing, corporations, etc.

These items are 'wealth producers' because one can dump cheap debts on top of them! Commodities translate directly into inescapable inflation. But when artwork, diamonds, gold jewelry, vacation villas, yachts and custom cars rise in value as everyone eagerly bids higher and higher thanks to tons of free money, this gives the illusion of wealth. Paying more to fuel the yachts, custom cars, etc. feels like losing wealth.

Elaine Meinel Supkis writes: "This is why everything is now unwinding: the US can't take on more debt. And the debt we ARE taking on is not for buying anything. It is all vanishing down this massive Bottomless Pit where the Derivatives Beast eats every penny and belches. Nothing is being bought or created. This is creative destruction with a vengeance. Indeed, this is very much akin to the ancient Chinese practice of burning worthless paper money to bribe Celestial Guardians at the Gates of Death."

And Ms Supkis continues: "The Derivatives Beast doesn't want more Japan carry trade loans. He wants real money. And this means getting the major governments of the world to feed him real meat and potatoes: future taxes, the wealth of empires.

I say that once there is a total worldwide financial system breakdown, and currencies other than gold are totally burned out; then the mark, that is the charagma, of Revelation 13:17 will be introduced by the Seignior: "And that no man might buy or sell, save he that had the mark, or the authority of the beast, or the currency of his name."

Former soviet nations and South Africa currencies suffered huged losses: bankruptcy of eastern european countries is very possible
Laura Cochrane of Bloomberg reports: "The Polish zloty, Hungarian forint and South African rand headed for their biggest weekly declines as the global economic slump fuels concern of a worsening credit crisis in emerging markets.

The zloty fell 2.7 percent against the dollar today, taking its weekly decline to more than 16 percent, the steepest since Bloomberg began tracking the data in 1993. The forint extended its weekly loss to a record 14 percent while the rand fell almost 17 percent in its biggest five-day decline since 1975."

Martin Crutsinger and Mike Eckel of the Associated Press report that the IMF will provide Ukraine with $16.5 billion in loans and announced that emergency assistance had cleared a key hurdle.

Niall Green in GlobalResearch.ca article Eastern European Economies Face Bankruptcy

Rakesh Saxena writes in Seeking Alpha: How Will Hungary Shape Eastern European CDS Prices this Week?

Mark Scott writes on October 23 that Eastern European country Belarus has asked the International Monetary Fund, IMF, for a reported $2 billion loan to prop up the country’s dwindling capital reserves. The former Soviet satellite already has secured $2 billion in financing from Russia and the country’s finance minister, Alexei Kudrin, says he might ask Western states for additional help.

Current account deficits and high levels of external debt raise the risks of a hard [economic] landing. High dependence on foreign capital amplifies external vulnerability."

With an average current account deficit of 9% of GDP, Central and Eastern Europe definitely will feel the financial squeeze. Morgan Stanley reckons countries in the region hold approximately $1.65 trillion in foreign debt. And in Baltic states like Estonia and Latvia, which already are in recession, foreign currency-denominated debt stands at 30% and 24% respectively of total GDP.

Bulgaria and Hungary, face mounting financial problems as foreign currency loans represent more than half of the countries' entire loan book. Hungary's current account deficit in the second quarter of the year stood at roughly 6%. Bulgaria's was a staggering 24%.

Brad Setser of the Council on Foreign Relations, CFR, relates: "Some emerging market central banks have noticed that they - unlike the Bank of Japan, Bank of England, Swiss National Bank and the European Central Bank - don't have access to unlimited dollar credit through reciprocal swap lines with the Federal Reserve. "Analysts say the unlimited dollar currency swaps set up between the Federal Reserve and central banks have helped bring stability to currencies through alleviating institutions desire to purchase dollars in the spot market to satisfy overnight funding requirements. 'In contrast, the lack of currency swaps put into place between the Federal Reserve and emerging market central banks has likely helped to exacerbate the pick up in emerging market currency volatility' says Derek Halpenny, at the Bank of Tokyo Mitsubishi UFJ"

We now live in a multi-polar world: the days of US Dollar hegemony are over
Richard Russell of Dow Theory Letters relates that No nation can run an empire on borrowed money: "For months I've insisted that no nation can run an empire and fight two wars on borrowed money. Sooner or later something has to give - the nation's credit standing or its currency. Now the dreaded subject is beginning to emerge. The demise of the US's world standing".

"Today, in The Wall Street Journal of all places, we see a featured piece on the op-ed page entitled, 'The Dangers of a Diminished America'. A diminished America? How can that be? It be. The US has been getting away with it all by owning the unique advantage of printing the very money that its huge debt is denominated in. Yes, I'm talking about the reserve status of the US dollar. This is the Achilles Heel of the US. The US dollar will possess its reserve status as long as our creditors continue to accept Federal Reserve Notes, paper with nothing behind it accept the 'full faith and credit' of the United States."

European states likely to be unable to raise money despite the need to do so
David Oakley of the Financial Times reports that "Some European governments are struggling to raise money in the bond markets because of the vast financial pledges that they have made to bail out their battered banking sectors.

"Spain failed to launch a bond last week, while Belgium and Finland were having difficulty attracting investors for debt offerings after governments set aside billions to recapitalise their banks and guarantee their debt.

"Governments face problems raising money, as investors demand higher yields because of the extra credit risk resulting from the bank guarantees and the huge pipeline of sovereign debt expected over the next year, which is hanging over the market.

"The eurozone countries will have to issue an extra $263.3 billion in debt in the next year to pay for bank recapitalisations and guarantees, according to Bank of America."

Argentine bonds, stocks sink as takeover fuels default concerns
James Attwood and Drew Benson, Bloomberg report: "Argentina's bonds and stocks plunged for a second day as a planned government takeover of $29 billion of pension funds heightened concern the South American country is headed for its second default this decade.

"The benchmark Merval stock index tumbled 15.8% on speculation President Cristina Fernandez de Kirchner plans to use the funds to meet financing needs that have swelled as prices on the country's commodity exports tumbled. Argentina hasn't had access to international debt markets since its 2001 default and demand for its local bonds has dried up in the past year on concern the government is underreporting inflation.

"'It's the final of many nails in the coffin from an institutional investor perspective,' said Bill Rudman, who helps manage $3 billion of emerging-market equity at WestLB Mellon Asset Management in London. Argentina is 'disappearing into irrelevance', he said.

"The yield on the government's 8.28% bonds due in 2033 surged 6.25 percentage points to 30.94%, according to JPMorgan Chase & Co. The bonds yielded 12.16% a month ago. The benchmark Merval stock index sank to a four-year low, extending its decline this week to 27%.

"Fernandez, 55, announced her plan to take over 10 private pension funds during a speech in Buenos Aires yesterday, saying the proposal would help protect retirees from the global financial crisis. The last time Argentina sought to tap workers' savings was in 2001, just before it halted payments on $95 billion of bonds. Fernandez denied in the speech that her plan is a bid to 'grab the cash'."

Summary
When the communist union broke up, it was about the time that "free trade", how I hate that term, picked up as factories were closed in the US and production transferred to China, Vietnam, Central and South America. The US started running huge spending and trade defecits, while the former soviet states borrowed to build factories from Japanese families.

In other words, the communist nations, and the BRICS, Brazil, Russia, India and China, got industrialized by paying high interest and good profits to Japanese middle and working class workers, as well as those using carry trades.

In the heyday of interest differential investing, money flowed from 0.5% interest Japan to 5.5% Australia, Hungay, Poland and Romania.

Now as risk is perceived, liquidity evaporates; and the Japanese and those funded with the yen carry trade, and other carry trades, are selling thier developing nation stocks and emerging market bonds for whatever they can get, which is practiclly nothing, and there is no lending so factories are shutting down, as commercial paper is not being cut to fund payrolls, make purchases and roll over debt. Economies are imploding.

The only thing that will be worth anything is gold.

Powerful political elite and investment bankers, ie the Goldmanites, those of Goldman Sachs, are rising to rule mankind through bloodless political and economic coups as well as through innovaive framework agreements.

Soon there will be a global monetary authority, and unified regulation of banking globally, and a Seignior, that is a top dog investment banker to govern mankind.

Investment application
While the US Dollar is strong, and brokerage accounts and money markets insured, there seems to me, to be a risk of investment loss due to an economic seizure that could take place in either the lending market place or the stock market.

If one has wealth, it is best to put it far, far away from the current financial system, safe and sound in a guarded vault, like BullionVault and GoldMoney, with an account personally at streetTracks Gold Trust, and in physical possession of gold coins.

It was a hey day for all, except the yen carry traders, as the US Dollar, US Stocks, world stocks, debt, and gold rose on the massive support of the US Dollar by the Federal Reserve. Joe Bel Bruno of the Associated Press wrote that Wall Street moved higher on hopes of credit recovery. Hope is all that can be expected.

The ongoing five cay Yahoo Finance chart of UUP, HYG, LQD, MUB, CMF, and SPY, shows a "pop" came to debt instruments, as the US Dollar, US stocks and world stocks rose as the US Federal Reserve provided Dollar support ... The rise seen here in the chart of UUP, HYG, LQD, MUB, CMF, and SPY is likely capitalism's finale rally.

Eddy Elfenbein documents today's fall in The Ted Spread to 3.27; it closed down at 2.83.

Mike Mish Sheldon relates: 'Armageddon in Corporate Bonds'; and I say 'Ditto In Municipal Bonds'.

Gold, $GOLD, rose $2 to close at $790.

The gold ETF, GLD, rose to $78.50

Oil, USO, rose to $61.80

The US Dollar, $USD, rose to a new high at 83.07 ... $USD

The chart of the dollar bull ETF, UUP, suggests that a top is being made in the US Dollar ... UUP.

US stocks, VTI, closed up, in a pennant formation, to close at 49; prices usually fall from such patterns ... VTI

World stocks, EFA, closed up in similar fashion to close at 47.35.

US Treasury Bond, TLT, rose to 94.62

World currencies, DBV, rose 2.75% in a pennant pattern to close at 22.

The S&P, SPY, and the Dow, DIA, rose more than the Nasdaq 100, QQQQ, and the Russell 2000, IWM:
SPY 6%
DIA 6%
QQQQ 3%
IWM 4%

The chart of the Russell 2000, IWM, shows the death of capitalism quite well. The Russell 2000 is comprised of small US companies highly dependent on a functional financial, banking and credit system. Unfortunately the lending system had a cardiac arrest on September 11, 2008 when the banks found they could not sell stock to obtain capital; in consequence lending ceased across the board. While the Federal Reserve and world central banks have provided liquidity facilities in the extreme, and even provided full dollar funding to the markets, trust between lender and debtor has expired and cannot be and will not be enjoyed again. The stock and bond markets are going to fall desperately.

Notice the fall off of value in the Russell 2000 beginning on September 11, 2008, that is 9-11-2008, and then a short sell covering rally and a crescendo fall, that is waterfall, lower; and now a rise in a pennant pattern. Prices are usually resolved down from such patterns ... IWM

Risers of the day included:
Metal and mining manufacturing 15%
Energy producers XLE 10%
Utilities VPU 8%
Energy services OIH 11%
Steel SLX 11%
Brazil EWZ 9%
China FXI 8%
Russia 8%
BRICS EEB 7%

A major part of today's rally was simply a rally to get the oil stocks back up to the edge of a massive head and shoulders pattern that goes back to April 2006. Take for example, Exxon Mobil, XOM: it has moved back up to 75 so it can fall once again ... XOM

Despite the central banks moving towards extending 0% interest, the bond markets have declared a defacto interest rate hike. For example, the interest rate on the 10 year US Government note, $TNX, has been rising. It is going up from 38 ... $TNX

The joy on Wall Street and on many investment blogs was simply capitalism's death rattle -- a gurgling or rattle-like noise produced shortly before or after death by the accumulation of excessive respiratory secretions in the throat.

Financial services, IYF, rose 2%, and Real estate, IYR, rose 1% ... Chart of IYR shows the bearish dragonfly candlestick

The yen carry trade, EUR/JPY, FXE:FXY, termed the Armageddon Trade for its recent damage to global wealth and liquidity recently, fell 0.10%; and the yen, FXY, fell 0.25%. The chart of FXE:FXY shows the Armageddon Fall in the Armageddon Trade, the term applied to the ability of the yen carry trade to cause a total wipe out of stock, commodity and currency values. This chart is the chart of the century. The chart of the once lucratively rewarding energy service providers, OIH, shows three black crows as the yen carry trade, better termed, the euro carry trade unwound; the fall is always more dramatic than the rise ... OIH ... FXE:FXY

The Euro, FXE, fell 0.4%.

The British Pound, FBX, fell 0.8%.

The Canadian Dollar, FXC, fell 0.3%.

World currencies, DBV, rose in a pennant pattern to close at 22 ... DBV

The ongoing five day Yahoo Finance chart of USD/CHF compared to USD/EUR, USD/JPY, UUP, and GLD, shows all the currency pairs taking the US Dollar higher; surprisingly liquidity flowed into gold, despite the rise in the US Dollar. I attribute gold's rise to the rise in the metal and mining manufacturing stocks, XME, 15% rise ... Chart of currency trades shows gold to be surprisingly up

The chart of gold relative to stocks, GLD:VTI, provides clear, cogent, and convincing evidence of both the value of gold and the investment demand for gold ... GLD:VTI

I hope for those still invested in the stock markets that they went short at the end of the day.

The suretors, that is the debt guarantors, were especially good candidates to go short; these included Ambac, ABK, Radian Group, RDN, and MBIA, MBI as these had hoped to get Federal Reserve funding. They are now set to fall greatly ... ABK ... RDN ... MBI

The risk of loss of investment principle is at the highest level ever, despite assurances from central banks globally that monies in banks is guaranteed; given the fall of stock and bond market value I believe that is coming, their statements of surety are going to be severely tested.

If one has wealth, it is best to put it far, far away from the current financial system, safe and sound in a guarded vault, like BullionVault and GoldMoney, with an account personally at streetTracks Gold Trust, and in physical possession of gold coins.

This especially being the case, as I cite the horrific experience of clients of Lehman Brothers whose accounts were frozen and now have to come up with money to secure their position.

Tom Cahill of Bloomberg on October 15, 2008 reports that "Lehman Brothers ... hedge-fund clients may have to pay more collateral on $65 billion of assets frozen when the investment bank went bankrupt a month ago. Lehman’s London-based prime brokerage has about 3,500 active clients including hedge funds that own about $45 billion in securities, Steven Pearson, the partner at PricewaterhouseCoopers responsible for unraveling the unit, said ... They hold an additional $20 billion in short positions, or bets that prices will fall. While investors are largely unable to access their Lehman accounts, the value of the securities continues to fluctuate along with the markets. The clients may be required to put up more collateral if the value of those securities drops, a process known as a margin cal ... ‘Who is the holder of the risk of the securities? The hedge funds. If the value of the securities fell, they have to meet margin calls.’ Lehman’s bankruptcy, the world’s biggest, has rocked hedge funds that relied on the firm to provide loans, clear trades and handle administrative tasks."

Jesse in chart article is suggesting support for gold will come in at $740 before it soars again to $930 and beyond.

Elaine Meinel Supkis provides appropriate social commentary; "As the US tumbles into a bad, bad recession, we are having an election. And there is virtually no discussion about what is really wrong. Indeed, the main focus in this election isn't war or our trade deficit or yawning budget deficit, it is nearly all about race. To the fury of many who want otherwise. But then, from day one in the US, it has been all about race and slavery which were embedded within our Constitution and excised very painfully and often, extremely violently. I will discuss this history later. First, the economic news. After central banks nationalized the G7 banking systems, they managed to sort of restart the old status quo. This is bad".

Julie Creswell and Ben White of the New York Times in article 'The Guys From Government Sachs' document the bloodless political and economic coup effected by Hank Paulson to overthrow the neoliberal laissez faire capitalism established by University of Chicago professor Milton Friedman.

The Secretary of the US Treasury has appointed Wall Street Goldman Sachs investment bankers as stakeholders in state capitalism, that is state corporatism, to be taskmasters enslaving Americans and the world to debt.

"This summer, when the Treasury secretary, Henry M. Paulson Jr., sought help navigating the Wall Street meltdown, he turned to his old firm, Goldman Sachs, snagging a handful of former bankers and other experts in corporate restructurings.

In September, after the government bailed out the American International Group, the faltering insurance giant, for $85 billion, Mr. Paulson helped select a director from Goldman’s own board to lead A.I.G.

And earlier this month, when Mr. Paulson needed someone to oversee the government’s proposed $700 billion bailout fund, he again recruited someone with a Goldman pedigree, giving the post to a 35-year-old former investment banker who, before coming to the Treasury Department, had little background in housing finance.

Indeed, Goldman’s presence in the department and around the federal response to the financial crisis is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs.

The power and influence that Goldman wields at the nexus of politics and finance is no accident. Long regarded as the savviest and most admired firm among the ranks — now decimated — of Wall Street investment banks, it has a history and culture of encouraging its partners to take leadership roles in public service.

It is a widely held view within the bank that no matter how much money you pile up, you are not a true Goldman star until you make your mark in the political sphere. While Goldman sees this as little more than giving back to the financial world, outside executives and analysts wonder about potential conflicts of interest presented by the firm’s unique perch.

They note that decisions that Mr. Paulson and other Goldman alumni make at Treasury directly affect the firm’s own fortunes. They also question why Goldman, which with other firms may have helped fuel the financial crisis through the use of exotic securities, has such a strong hand in trying to resolve the problem.

The very scale of the financial calamity and the historic government response to it have spawned a host of other questions about Goldman’s role.

Analysts wonder why Mr. Paulson hasn’t hired more individuals from other banks to limit the appearance that the Treasury Department has become a de facto Goldman division. Others ask whose interests Mr. Paulson and his coterie of former Goldman executives have in mind: those overseeing tottering financial services firms, or average homeowners squeezed by the crisis?

Still others question whether Goldman alumni leading the federal bailout have the breadth and depth of experience needed to tackle financial problems of such complexity — and whether Mr. Paulson has cast his net widely enough to ensure that innovative responses are pursued.

“He’s brought on people who have the same life experiences and ideologies as he does,” said William K. Black, an associate professor of law and economics at the University of Missouri and counsel to the Federal Home Loan Bank Board during the savings and loan crisis of the 1980s. “These people were trained by Paulson, evaluated by Paulson so their mind-set is not just shaped in generalized group think — it’s specific Paulson group think

There are people at Goldman Sachs making no money, living at hotels, trying to save the financial world,” said Jes Staley, the head of JPMorgan Chase’s asset management division. “To indict Goldman Sachs for the people helping out Washington is wrong.”

Mr. Paulson himself landed atop Treasury because of a Goldman tie. Joshua B. Bolten, a former Goldman executive and President Bush’s chief of staff, helped recruit him to the post in 2006.

Neel T. Kashkari arrived in Washington in 2006 after spending two years as a low-level technology investment banker for Goldman in San Francisco, where he advised start-up computer security companies.

The A-team includes Dan Jester, a former strategic officer for Goldman who has been involved in most of Treasury’s recent initiatives, especially the government takeover of the mortgage giants Fannie Mae and Freddie Mac. Mr. Jester has also been central to the effort to inject capital into banks, a list that includes Goldman.

Another central player is Steve Shafran, who grew close to Mr. Paulson in the 1990s while working in Goldman’s private equity business in Asia. Initially focused on student loan problems, Mr. Shafran quickly became involved in Treasury’s initiative to guarantee money market funds, among other things.

Other prominent former Goldman executives now at Treasury include Kendrick R. Wilson III, a seasoned adviser to chief executives of the nation’s biggest banks. Mr. Wilson, an unpaid adviser, mainly spends his time working his ample contact list of bank chiefs to apprise them of possible Treasury plans and gauge reaction.

Another Goldman veteran, Edward C. Forst, served briefly as an adviser to Mr. Paulson on setting up the bailout fund but has since left to return to his post as executive vice president of Harvard. Robert K. Steel, a former vice chairman at Goldman, was tapped to look at ways to shore up Fannie Mae and Freddie Mac. Mr. Steel left Treasury to become chief executive of Wachovia this summer before the government took over the entities.

Treasury officials acknowledge that former Goldman executives have played an enormous role in responding to the current crisis. But they also note that many other top Treasury Department officials with no ties to Goldman are doing significant work, often without notice. This group includes David G. Nason, a senior adviser to Mr. Paulson and a former Securities and Exchange Commission official.

Robert F. Hoyt, general counsel at Treasury, has also worked around the clock in recent weeks to make sure the department’s unprecedented moves pass legal muster. Michele Davis is a Capitol Hill veteran and Treasury policy director. None of them are Goldmanites.

Timothy F. Geithner, the president of the Federal Reserve Bank of New York, told him no, according to a former Lehman executive who requested anonymity because of continuing investigations of the firm’s demise. Its options exhausted, Lehman filed for bankruptcy in mid-September.

Mr. Geithner, 47, played a pivotal role in the decision to let Lehman die and to bail out A.I.G. A 20-year public servant, he has never worked in the financial sector. Some analysts say that has left him reliant on Wall Street chiefs to guide his thinking and that Goldman alumni have figured prominently in his ascent.

After working at the New York consulting firm Kissinger Associates, Mr. Geithner landed at the Treasury Department in 1988, eventually catching the eye of Robert E. Rubin, Goldman’s former co-chairman. Mr. Rubin, who became Treasury secretary in 1995, kept Mr. Geithner at his side through several international meltdowns, including the Russian credit crisis in the late 1990s.

Mr. Rubin, now senior counselor at Citigroup, declined to comment.

A few years later, in 2003, Mr. Geithner was named president of the New York Fed. Leading the search committee was Pete G. Peterson, the former head of Lehman Brothers and the senior chairman of the private equity firm Blackstone. Among those on an outside advisory committee were the former Fed chairman Paul A. Volcker; the former A.I.G. chief executive Maurice R. Greenberg; and John C. Whitehead, a former co-chairman of Goldman.

The board of the New York Fed is led by Stephen Friedman, a former chairman of Goldman. He is a “Class C” director, meaning that he was appointed by the board to represent the public.

During his tenure, Mr. Geithner has turned to Goldman in filling important positions or to handle special projects. He hired a former Goldman economist, William C. Dudley, to oversee the New York Fed unit that buys and sells government securities. He also tapped E. Gerald Corrigan, a well-regarded Goldman managing director and former New York Fed president, to reconvene a group to analyze risk on Wall Street.

Some people say that all of these Goldman ties to the New York Fed are simply too close for comfort. “It’s grotesque,” said Christopher Whalen, a managing partner at Institutional Risk Analytics and a critic of the Fed. “And it’s done without apology.”

But when bankruptcy loomed for A.I.G. — a collapse regulators feared would take down the entire financial system — federal officials found themselves once again turning to someone who had a Goldman connection. Once the government decided to grant A.I.G., the largest insurance company, an $85 billion lifeline (which has since grown to about $122 billion) to prevent a collapse, regulators, including Mr. Paulson and Mr. Geithner, wanted new executive blood at the top.

They picked Edward M. Liddy, the former C.E.O. of the insurer Allstate. Mr. Liddy had been a Goldman director since 2003 — he resigned after taking the A.I.G. job — and was chairman of the audit committee. (Another former Goldman executive, Suzanne Nora Johnson, was named to the A.I.G. board this summer.)

Like many Wall Street firms, Goldman also had financial ties to A.I.G. It was the insurer’s largest trading partner, with exposure to $20 billion in credit derivatives, and could have faced losses had A.I.G. collapsed. Goldman has said repeatedly that its exposure to A.I.G. was “immaterial” and that the $20 billion was hedged so completely that it would have insulated the firm from significant losses.

As the financial crisis has taken on a more global cast in recent weeks, Mr. Paulson has sat across the table from former Goldman colleagues, including Robert B. Zoellick, now president of the World Bank; Mario Draghi, president of the international group of regulators called the Financial Stability Forum; and Mark J. Carney, the governor of the Bank of Canada."

I am glad the New York Times is telling us the truth about the ruling elites from Goldman Sachs. But note, that they confuse readers by praising these bankers. This is a prime example of Orwellian disinformation where left is right and down is up, bad becomes good, and error becomes policy. God's Word reassures me greatly that He is Sovereign throughout all of this, and that He has two kinds of vessels, the first vessel is found in Romans 9:20-23 and the second vessel in Isaiah 51:20 and I Thessalonians 5:9.

Elaine Meinel Supkis provides the charts from the Federal Reserve which document how much the insolvent banks are borrowing to stay alive. The FRED GRAPH documents the banks have no reserves, and are borrowing to recapitalize their balance sheets to protect them as long as they can from being wiped out by exposure to settlement on credit default swaps and other derivatives. This chart shows capitalization after the banks discovered they could not sell stock to obtain capital.

Here are the charts of the money center banks, KBE, and regional banks, IAT; the yen carry traders sold out of their interest already, leaving others holding the bag in these toxic walking dead men. Both charts show today's bearish dragonfly candlesticks ... KBE ... IAT

The US Government will be carrying out state corporate rule through the CPFF lending facility at the nine banks it acquired. Lending which use to come from the commercial lending marketplace, will now be coming from the Federal Reserve, that is the Banks of Banks, and flowing to corporations deemed essential for the purposes of the security and prosperity needs of the North American homeland, that is combined Canada, Mexico, and America, that, is CanMexAmerica.

Eddy Elfenbein in article 'October 20, 2008 CEO Pay at the Nine Government-Owned Banks' presents the CEO pay of the nine banks which have been nationalized.

Stocks fell sharply as lending remained frozen
Richard of the Resourceful Bear News Service reports that US stocks, VTI, fell 6% today; world shares, EFA, fell 6%, and emerging market shares, EEM, fell 7% as the lending gridlock remained unresolved with lenders not extending credit

Shares off the most included:
Energy producers, XLE, 14%
Insurance, IAK, 14%
Stock brokers and dealers, IAI, 13%
Private equity, PSP, 13%
Regional banks, IAT, 12%
Mortgage REITS, REM, 11%
Emerging Europe, GUR, 11%
Financial, XLF, 11% ... XLF
Banks, KBE, 9%

General Motors, GM, fell 31%; it's good bye to General Motors.

Ford, F, fell 21%; it will be gone soon too.

Boeing, BA, fell 6%; it will not be selling planes as the spigots of the credit markets have been turned off. Althought the workers and the company have agree to restart negotiations, no timetable has been set. Like the banks, Boeing is a walking dead man. Banks are not lending; and Boeing, I believe will not be selling airplanes.

Morgan Stanley, MS, fell 25%; it's good bye to Morgan Stanley.

Merrill Lynch, MER, fell 25% too; it will be gone soon too.

US Treasury Bonds, TLT fell to 96.63; confirming that Peak US Treasury bonds are in ... TLT

The zero coupon mutual bond fund BTTRX fell to 57.85 ... BTTRX

Exxon Mobil, XOM, has held up better than its peer group, XLE, over the last year: it has only lost about 18%.

The interest rate on the 10 Year US Government note, ^TNX, rose to 38.34. It is important to note that the bond market place has called a defacto interest rate hike despite the US Central Bank having lowered its interest rate. Apparently the market place believes that the US Treasuries have lost their AAA rating. Definitely Government Bonds are no longer a lifeboat of safety ... $TNX

The Yahoo Finance ongoing chart of the gold ETF, GLD, relative to the EUR/JPY and the USD/JPY and UUP, provides fascinating insights into the interplay of gold and the two major currency pairs as well as the US Dollar. Today the gold ETF rose slightly on a lower EURJPY, which took world stocks lower; and on a higher USDJPY which took the dollar higher ... GLD

Gold, $GOLD, traded up to $905 as seen in this Corey Rosenbloom chart article.

The US Dollar, $USD, traded up to $81.25; but below its recent high; confirming that Peak US Dollar has been achieved ... $USD

Trading confirms that Peak US Dollar and Peak US Treasuries occurred Tuesday, October 7, 2008 as the US Federal Reserve announced the Commercial Paper Funding Facility, CPFF, to purchase U.S. commercial debt.

The chart of gold relative to US Stocks, GLD:VTI, and that of gold relative to world stocks, GLD:EFA, and that of gold relative to the Euro, GLD:FXE, shows gold rising not deflating

The evidence is now in; and it is clear, cogent and convincing, that gold has arisen as the means of preserving wealth.

Proshares 200% inverse ETFs are up significantly this week
When these do fall, day traders will make a bundle, provided their brokerage doesn't go bust. I believe that there is coming a day, when day traders and investors will find their brokerage accounts closed and they can't access their funds because of liquidity issues; that day will be just like today, when 300,000 savers can't get their savings out of Icesave and other Iceland banks; the case there is that Iceland's Krona got sold short by the currency traders who wiped out over just a few days the currency's value; there is nothing left to be returned to those who invested at the banks in Iceland. When a person plays with fire, one runs the risk of getting burnt real bad.
QID 30% ... Nasdaq
DUG 43% ... Oil & Gas
TWM 48% ... Russell 2000
SMN 38% ... Basic materials
SCC 36% ... Consumer services
SIJ 30% ... Industrials
SFK 34% ... Russell 1000 Growth
SDK 38% ... Russell Mid Cap Growth
SDP 39% ... Utilities
SKF 53% ... Financials
EEV 53% ... Emerging markets
EWV 32% ... Japan
FXP 50% ... China

The ongoing three month Yahoo Finance Chart of SCC, QID, TWM, SIJ, SFK, SDK

The ongoing three month Yahoo Finance Chart of EEV, FXP, EWV

The ongoing three month MSN Finance Chart of SCC, QID, TWM, SIJ, SFK, SDK.

The ongoing three month MSN Finance Chart of EEV, FXP, EWV.

Stock markets are down about 20% this week
EFA 17% ... World stocks
VTI 17% ... US Stocks
FXI 19% ... China
EEM 21% ... Emerging
EWJ 14% ... Japan

It's been one year now since the Citigroup CDO bust of October 8, 2007; charts by Jesse show the $SPX and the $RUT off 40%.

The Yahoo Finance chart of the stock markets EFA, VTI, FXI, EEM shows the ongoing losses.

The MSN Finance chart of the stock markets EFA, VTI, FXI, EEM shows the ongoing losses as well.

Lending did not take place again today
The Ted Spread was 3.99 today ... Ted Spread; this means a total world wide financial system breakdown is imminent.

Outrage leads AIG to cancel second luxury retreat
Joseph Rhee of ABC reports that Battered by outrage over the $440,000 it spent on a luxury retreat less than a week after the federal government loaned it $85 billion dollars, the giant AIG Insurance Company says it has called off plans to hold a second retreat next week at the exclusive Ritz-Carlton Resort in Half Moon Bay, California.

People made a bundle short selling the financial stocks during the "so called" SEC "ban on short selling of the financial stocks".
ProShares announced today via Press Release that "Tomorrow, October 9, 2008, it will resume its normal process of creating new shares of its ProShares UltraShort Financials, SKF, and ProShares Short Financials, SEF, exchange traded funds. ProShares suspended creating new shares in these two ETFs in response to a September 18 SEC order banning short sales of certain financial stocks. The SEC order was extended on October 2 and is set to expire tonight".

The ban on short selling did not not deter investors from investing in SKF or SEF; people became wealthy by shorting the financial shares during the ban; as can be seen by the fact that during the suspension of creations, average daily trading volume of SKF and SEF exceeded 19 million shares; and as can be seen by an 80% rise in the value of SKF over the last five days of trading ... SKF

Lehman Brothers Credit Default Swaps settle tomorrow Friday September 10, 2008
Alex Dumortier, CFA reports in article The Next $350 Billion Hole: Tomorrow will be a massive test for the credit default swaps market as dealers and investors get together to determine the settlement value of credit default swaps, CDSs, on failed broker Lehman Brothers, LEH.

With approximately $400 billion in notional amount of swaps outstanding, if the swaps settle at 12.5 cents on the dollar (which is where Lehman’s reference bonds are trading), swap sellers (banks, investment bankers, and hedge funds) could face losses totaling $350 billion.

That was no error: The figure is $350 billion -- half the amount of the Paulson bailout plan. For comparison, it’s almost ten times the CDS losses due to the nationalization of mortgage giants Fannie Mae, FNM, and Freddie Mac, FRE.

Mr. Greenspan warned that too many rules would damage Wall Street
Photo of Treasury Secretary Robert Rubin, Treasury Secretary, and Alan Greenspan, the Federal Reserve Chariman, at a House Hearing in 1995 Photo by Stephen Crowley of The New York Times from the article The Reckoning Taking Hard New Look At A Greenspan Legacy by Peter S. Goodman who said of Alan Greenspan: "And his views held the greatest sway in debates about the regulation and use of derivatives, exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street.

“What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.

Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said.

But he called that possibility “extremely remote,” adding that “risk is part of life.”

Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses. Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.

US Strikes militants in Pakistan
Of significant note, the slaughter of investment value did not deter the United States from carrying out two missile strikes in Pakistan as reported by Ishitiaq Mahsud of the Associated Press. One missile strike occurred at a house in Tappi village in North Waziristan tribal region. The second was reported at a house in the village of Dande Darpa Khel; the site was near a seminary of veteran Taliban commander Jalaluddin Haqqani.

Investment application
I recommend that one be invested in gold, because of financial system instability, lack of liquidity and because of possible inability of the US government to make good on its surety promises of insuring bank accounts, brokerages, money markets and now commercial paper. I recommend diversification of investment in gold in four locations immediately, yes immediately: the gold ETF, GLD, directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins purchased from sources like Kitco.com.

In a cultural, political, and economic sea change, the US Central Bank announced sovietization of lending
Today the US abandoned Milton Friedman's neoliberal laissez faire economic policies, that is free marketplaces, where privatization is the operative principle, to embrace sovietization of lending.

In as much as banks are no longer lending in the commerical paper lending marketplace, due to a lack of trust between lender and debtor, the Federal Reserve has announced a framework agreement and facility to become the sole lender in the commercial lending marketplace.

The Federal Reserve has stepped up to the plate to provide liquidity so companies can meet payroll, cut checks, and continue to issue purchase orders of consumables, services and raw materials.

Thus unfreezing a condition of lending gridlock, that is credit gridlock, has existed since September 11, 2008, when banks found they could not sell stock to raise capital, due to the questionable value of their assets, that is the debt, they hold on their books.

The Federal Reserve today has become provider of liquidity and capital to facilitate ongoing economic activity.

The Federal Reserve's role has expanded to become the Bank of Banks, that is, the nation's bank.

The Federal Reserve will become the United States' monetary authority and capital provider.

US Federal Reserve announces Commercial Paper Funding Facility, CPFF, to purchase U.S. commercial paper
Craig Torres of Bloomberg relates in article Fed to Purchase U.S. Commercial Paper to Ease Crunch that the Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened to cut off a key source of funding for corporations.

The Treasury will make a deposit with the Fed's New York district bank to help set up the new unit. The central bank will also lend to the program at policy makers' target rate for overnight loans between banks. The Fed Board invoked emergency powers to set up the unit, the central bank said in a statement released in Washington.

Today's action follows a slide in the commercial-paper market to a three-year low of $1.6 trillion last week as investors fled even companies with few links to the subprime mortgage crisis. Companies from newspaper firm Gannett Co. to electricity producer Southern Co. have been forced to tap credit lines or forego raising debt because of the market's disruption.

The Fed's action is seen to provide liquidity to end the liquidity run in the commercial paper lending marketplace

The Fed's efforts are aimed at ``stemming the bank-run-like panic,'' said Mark Gertler, a New York University economist and research co-author with Fed Chairman Ben S. Bernanke. ``The immediate threat to the real economy is that large corporations are having difficulty obtaining funds via the commercial paper market.''

Fed officials in a conference call with reporters didn't say how much commercial paper, which hundreds of companies use to finance payrolls and meet other cash needs, it plans to purchase. The officials also declined to specify when the purchases would begin.

The central bank's special purpose vehicle will be big enough to backstop the entire market, one official said on condition of anonymity.

Issuers will be able to sell commercial paper to the Fed up to the average amount they had outstanding in August, an official said.

Policy makers began considering buying commercial paper several weeks ago as the market began to seize up, with borrowers increasingly only able to raise funds on a short timeframe, even just overnight, officials said.

The Fed's unit will buy three-month commercial paper, which should help issuers extend the maturity of their borrowing, an official said.

``While we have continued to fund without disruption, the Fed announcement today is an important development that will help restore confidence in the market and facilitate more lending,'' General Electric Co. spokesman Russell Wilkerson said. ``This is a positive move and we applaud the Fed's decisive action.'' The company is the biggest U.S. commercial paper issuer through its GE Capital finance unit.

Yields to fall

Fed officials anticipate that yields will come down significantly as a result of their initiative.

Yields on top-rated overnight U.S. commercial paper dropped 0.74 percentage point today to 2.94 percent, according to data compiled by Bloomberg. Borrowing for seven days increased 1.25 percentage points to 4 percent.

The Treasury's deposit with the Fed's special purpose vehicle will be substantial, officials said. The funds won't come from the $700 billion rescue plan authorized by Congress last week.

Stocks initially climbed and Treasuries sank after the Fed's announcement, while shares later turned lower. The Standard & Poor's 500 Stock Index was down 0.13 percent at 1,055.50 at 11:49 a.m. in New York. Yields on benchmark 10-year notes climbed to 3.51 percent from 3.45 percent late yesterday.

Today's announcement comes only hours before Bernanke gives his Economic Outlook today,

Today's announcement came hours before Fed Chairman Bernanke speaks on the economic outlook at 1:15 p.m. in Washington. He and Treasury Secretary Henry Paulson held discussions yesterday as stock markets slid and money market rates climbed as the crisis deepened.

The Fed's new unit will buy three-month dollar-denominated commercial paper at a spread over the three-month overnight- indexed swap rate, which is a measure of traders' expectations for the Fed's benchmark rate.

Fed officials on the conference call indicated that they would like the facility to be a backstop, which would suggest the special vehicle's rate would be set at a slight penalty to normal market rates. They declined to answer a specific question as to whether the rate would be set above current rates, or below, which would constitute a subsidy for borrowers.

The initiative is seen as a funding backstop

``The Federal Reserve will consult with market participants regarding appropriate spreads that are consistent with the facility serving as a funding backstop under more normal market conditions,'' the Fed said.

The commercial paper facility is heralded as only temporary

Commercial paper purchased by the vehicle must be rated at least A1/P1/F1, the Fed said. Issuers will pay the unit an upfront fee based on the commercial paper initially sold to the vehicle. The vehicle will cease buying commercial paper on April 30, 2009, unless the Board of Governors agrees to extend it.

The Fed will cap the amount of commercial paper each company may sell to the central bank.

The Fed announced yesterday that it will double previous facilities of TAF, TSLF, PDCF and emergency actions to as much as $900 Billion; and is considering announcing other initiatives as well.

The Fed yesterday said it will double its cash auctions to banks to as much as $900 billion, and telegraphed today's announcement by saying it was looking for other ways to alleviate liquidity strains.

The Fed's move is ``very unusual, very aggressive and a very bold step,'' said Chris Varvares, president of St. Louis- based Macroeconomic Advisers LLC, a forecasting firm. Assuring that corporations can fund their short-term cash needs ``is absolutely essential.''

Emerging Market Bonds Fell
There was not a central bank rescue facility announced for the emerging bond market; EMB fell 2%.

Municipal Bonds Fell
The Federal Reserve did not respond with a facility to Governor Arnold Schwarzenegger's plea for assistance. Nor was there a Federal Reserve facility announced to address the closed municipal bond market for other states such as Massachusetts.

The iShares S&P National Municipal Bond ETF, MUB, fell 2%.

Jeremy R. Cooke of Bloomberg in September 30, 2008 article reports: "U.S. state and local government bonds are headed for their worst quarterly performance in as much as 14 years as a wave of Wall Street consolidation undermines support for the municipal market. Tax-exempt bonds have fallen 3.15 percent since the end of June, according to Merrill Lynch & Co.'s total-return Municipal Master Index. The quarter's decline may exceed the 3.18% drop in the second period of 2004, which was the steepest since the 5.75% decline in the first three months of 1994."

Jeremy R. Cooke of Bloomberg in October 3, 2008 article reports: "U.S. states and municipalities were all but shut out of the tax-exempt bond market for a third week, as borrowers managed to sell less than 15% of a typical week's new fixed-rate issues, data compiled by Bloomberg show ... 'This market has run into trouble again,' T.J. Marta, a fixed-income strategist at RBC Capital Markets ... said ... 'The most recent dislocation will exacerbate the negative developments already taking place for state and local government finances.'"

Michael McDonald in October 2, 2008 Bloomberg article repots: "Massachusetts Governor Deval Patrick said he is seeking budget cuts amid financial market turmoil that forced the state this week to cancel plans to borrow money to fund operations. The governor, citing a $223 million shortfall in tax collections, ordered a spending reduction of 7%. The state this week canceled the sale of commercial paper as investors boycotted the markets."

These reports tell me that the municipal bond market has utterly broken down. This is a silent neutron bomb that is going to cause massive layoffs in state and local governments; these governmental units will basically have to go into shut down mode; except for some low level of law enforcement there will be a swift shut off of services.

US Stocks fell
Stockcharts.com reports that the overall US stock market, VTI, fell 6%.

Kate Gibson of MarketWatch reports that "investors offered only a tepid cheer for the Federal Reserve's latest move to ease frozen credit markets."

Peter Bookvar, equity strategist at Miller Tabak said: "How aggressive are you going to be ahead of earnings season?" .... "We have such frayed nerves; people are afraid to jump in no matter what." Bookvar related of the US and other central banks: "It's going to be raining money for the next couple of months."

After those midday remarks, the yen carry traders, who have been the principal investors in the financial sector since July 14, when they sold oil, USO, commodities, RJI, and gold, GLD, have been looking for a reason or several reasons to sell their investment in the financial sector; and today they found three:
1) a realization that the Fed is the sole provider of credit at least to the corporations; and that the banks are now simply walking dead men.
2) a fear of D-Day, that is this Thursday, when the first batch of credit default swaps are to be settled on the bankruptcy of Lehman Brothers
3) the announcement that Bank of America, BAC, fell 26% after reporting a 68% profit fall, slashing its dividend and saying it will attempt to raise up to $10 billion in common stock.

The yen carry traders sold their investments in the financial sector, which produced these loses: XLF -10; which induced homebuilding ITB -10, and real estate ICF -10, IYR -9, KBE -9, IAI -9, IAT -9.

The BRICS, EEB, sold off, producing these loses as well EWZ -10, EEB -10, OIH -10, SLX -10,

Among the financial-sector stocks weighing most heavily on the S&P, General Growth Properties, GGP, which fell 41%. The Chicago-based owner of 200 malls nationwide on Monday suspended its common stock dividend and announced the departure of its chief financial officer.

Also weighing on the S&P, Apartment Investment and Management, AIV, fell 27%. The Denver-based company is among the nation's largest owners of apartment complexes, and recently said it expects to take a $3 million to $6 million hit in the third quarter due to hurricane damage to its properties.

The yield curve has exploded higher
The yield curve had been steeping it exploded higher as is seen in interest rates, $TNX:$UST2Y, and in ETFs, TLT:BIL

Peak US Treasuries may be in, as the US Treasuries fell, they should have risen on today's lower stock values.
Today may be the end of the "so called" flight to safety in US Treasuries even if the Fed announces a surprise rate cut or announces even further facilities to provide liquidity.
Stockcharts.com reports SHY at 83.95 ... SHY

Stockcharts.com reports TLT at 99.28 ... TLT

The interest rate on the 30 Year US Government Bond ... $TYX

The interest rate on the 2 Year Treasury bill ... $UST2Y

The interest rate on the 10 Year US Government Note ... $TNX

Those invested in DXKSX found they were invested the wrong way.

We have the 'mother of all lending spreads'.
Unfortunately the US is going to a zero US central bank rate; now stealthily, soon overtly.

Scott Lanman of Bloomberg in article Fed Sets Floor Below Rate Target, Engineering `Stealth' Cut reports that the Federal Reserve may have trimmed borrowing costs yesterday without actually saying so.

The central bank used power granted under last week's financial-rescue legislation to effectively set a floor under its main interest rate that's lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent.

``Absolutely, it's a stealth easing,'' said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed researcher".

As the US Government official rate is moving to zero, the world's interest rate as defined by the Ted Spread remained high today at 3.4; and not only that, there was no lending again today, that is, the markets remain frozen until the Fed's CPFF facility kicks in, so thus the market place interest rate is infinitely high, that is beyond measure.

A Ted Spread's above 2.0 for any extended period of time relates to me that economic heart of society, that is lending, has suffered a cardiac arrest. The failure of the Ted Spread to fall below 2.0 tells me that capitalism and investing is dead and cannot be revived. With a Ted Spread above 2.0, trust between lender and debtor has been destroyed.

The only thing that remains is for authoritarian government to arise, and to enforce framework agreements that have already been declared such as the Security and Prosperity Partnership of North America, the SPP. And to engage in greater collectivization as we see today, with the announcement of CRFF, where through working groups and councils, such as the NACC, and stakeholders appointed by government and industry, the factors of production are overseen, and capital and natural resources expropriated, for the benefit of what might be termed "the homeland."

I find the following suggestion for a lower central bank interest rate "terrifying", as I believe interest rates should be going higher not lower; yes I abhor low interest rates.

John Fraher in Bloomberg reports: "In the U.S., prices manufacturers paid for materials last month plunged the most since at least 1948, with the Institute for Supply Management's index dropping 23.5 points to 53.5 points.

The breakeven rate on U.S. 10-year Treasuries, a measure of price expectations, dropped to 1.4 percent from 2.6 percent in July. Japan is the only country whose bond market implies a lower inflation rate than the U.S. The rate represents the pace of inflation investors expect over the life of the securities.

All this is likely to make the Fed resume rate cuts, says Robert Dye, a senior economist at PNC Financial Services Group in Pittsburgh, Pennsylvania.

``If we're going over a cliff, we're not going to go over a cliff with a 2 percent federal funds rate,'' he says. ``What's the point of holding back?"

My observation is that the spread between the US government central bank interest rate, and the world market interest rate is 'the mother of all lending and interest rate spreads'.

The Fed's action must succeed to prevent a catastrophic 'financial system black out' that is a 'complete financial system shut down'.
Factors why banks are unwilling to lend include:
an awareness of rising unemployment raises the risk the debtor will not repay.
an awareness of the explosive danger that derivative counterparty risk provides to debtors.
an awareness of the risk of their own exposure to default events on credit default swaps.
an awareness of that their own stock value is going to fall rapidly, threatening their capital position, whereby they will have to close.

The hope is that the Fed's actions of being the insurer and provider of commercial paper will be broad enough and implemented quickly enough to prevent an economic shutdown from occurring at a rate faster than it did in the 1929 to 1932 Depression.

Today, the Fed is boldly going where no Fed has gone before. I do have to question, does the Federal Reserve have the legal and constitutional authority to do what it is doing?

I do not favor the US government being the lender of only and last resort. The provision of CPFF is a cultural shift of epic proportion to state corporatism, that is state corporate rule, and it is the nail in the coffin for the AAA rating of US Treasuries as well as the US Dollar.

The government printing presses will simply be printing money, which means that when unemployment increases beyond a certain future level, hyperinflation for food and clothes and shelter will result.

And a catastrophic 'financial system black out' that is a 'complete financial system shut down' may occur anyway, as panic unfolds over today's significant stock market sell off and a growing realization of the failure of the municipal bond lending market.

Gold rose to strong resistance
The chart of the gold ETF, GLD, shows a dragonfly candlestick, after a 3.5% rise to $87.25 ... GLD

Gold rose to close at $884 ... $gold

Peak US Dollar may be in given the nationalization of the commercial paper market
The dollar bullish ETF, UUP, is manifesting bearish at 24.95 ... UUP

The US Dollar, $USD, closed down at $81 ... $USD

Investment application
Because of financial system instability and lack of liquidity, I recommend diversification of investment in gold in four locations immediately: the gold ETF, GLD, directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins.

Concluding Observation
It was the repeal of the Glass Steagall Act by Phil Gram and Bill Clinton that got us into this embroglio. And the neoliberal fairy tale economic policies of Milton Friedman encouaged capitalism to have a hedonistic party of greed, which has resulted in a collapse of trust between lender and debtor, resulting in the TARP and CPFF rescues. The result is a fast fall into state corporatism, that is state corporate rule where Americans have been enslaved unto debt.


Major symbols used in this report
MUB, TLT, GLD, UUP, SHY

Charts show that gold rose and stocks fell when Bush took his pen to sign EESA; perhaps this week saw Peak US Dollar and Peak Treasuries and a bottoming in gold providing a safe entry point for buyers of the safe haven metal.
The Russell 2000, IWM, fell 2.87% for the day to close at 619 ... IWM

The ongoing Yahoo Finance one year chart of gold, GLD, compared to IAT, IWM, IWN, and IWO, shows a rise of 18% for gold ... Gold is up eighteen percent since the Citigroup CDO Bust started October 8, 2007.

The ongoing Yahoo Finance dive day chart of gold, GLD comapred to ITA, IWM, IWN, and IWO, shows gold's stunning rise in value as stocks fell when Bush took his pen out ... Five day chart of gold shows gold's rise and stocks fall at Bush's command

The ongoing MSN Finance one month chart of gold, GLD, compared to ITA, IWM, IWN, and IWO shows the breakout of gold on September 11, 2008 ... One Month chart of gold shows the breakout of gold since the banks were unable to sell assets or raise capital beginning on 9-11-2008

The Stockcharts.com chart of the gold ETF, GLD shows a close at $82.59.

The Yahoo Finance ongoing chart of GLD relative to the EUR/JPY and the USD/JPY, provides fascinating insights into the interplay of gold and the two major currency pairs. A rising USDJPY and a falling EURJPY took the US Dollar up and gold down as the market took the bailout to be dollar friendly ... GLD down for the week.

One supporting factor for gold is the James Chen USD/JPY update which shows the chart of USDJPY at the brink of resistance.

Valeria Bednarik confirms in article USD/JPY For Today suggesting that the USDJPY is down from today's 105.35.

James Chen's USD/CHF made chart of the day; it suggests that the USDCHF has hit resistance and is headed down.

The Elliott Wave Analysis Of EUR/USD, USD/JPY and GOLD by TheLFB News for Oct 03 08 provides the EUR/USD chart suggesting that it will be going up; and the GOLD chart suggesting it will soon be fininishing an Elliott Wave 2 down and also heading up with a floor of $770 to $800 ... EURUSD soon to be going up ... GOLD bottoming from and Elliott Wave 2 down

US Government Bonds, TLT, closed for the week at $97.40 ... TLT

The Ten Year US Government Note, $TNX shows a close at 36.44.

The US Dollar, $USD, closed the week at $80.47 ... $USD Weekly and $USD Daily

Jesse in Committment of Trader report for the US Dollar provides this chart of DX Dollar at resistance.

The dollar bull ETF, UUP, courtesy of Jack Chan from JC's Buy and Sell Signals shows a bearish lollipop hanging man candlestick ... UUP manifests a lollipop

Gold, $GOLD, closed the week at $835 ... $GOLD

S&P 500, $SPX, closed down 9.4% for the week at 1099.23; this is the first time in four years Eddy Elfenbein relates.

Fertilizer manufacturer, Agrium, AGU fell 36% this week; this chart more than any shows how the Euro drove commodity stocks up and it relates took that the Euro as part of an unwinding yen carry trade lives up to its name the Armageddon Trade ... AGU

At the beginning of the week, I asked blog readers, Which Way For SFK And SDK?

Well, charts show SFK rose 21% and SDK rose 27% ... SFK and SDK

Debt ETFs were stable today; these include LQD, HYG, CFT and EMB which will likely continue to loose value; and the principal value of the tax free municipal bond mutual funds like USSTX, will likely continue to fall, as interest rates rise. And the municipal bond ETFs such as MUB and TFI will likely continually go lower as well.

The Ted Spread closed at 3.85; this is the code red alarm relating that a total financial system breakdown can come at any time!

Here are various helpful charts for your examination.
The on going monthly MSN Finance chart of the gold ETF, compared to world stocks, EFA, and US Stocks, VTI, and US Treasuries, TLT

The ongoing five day Yahoo Finance chart of gold, GLD, relative to the US Dollar ETF, UUP, and the Euro, FXE, and oil, USO

The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to FXE, EFA, and EEB

The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to IWM, and SPY

The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to FXE, USO, and RJI

The ongoing ten day MSN Finance chart of EUM, compared to TWM, SDK, and SFK

The the ongoing five day Yahoo Finance chart of EUM, compared to TWM, SDK, and SFK

The ongoing five day Yahoo Finance chart of the yen, compared to gold and the world's major currencies

Gold relative to world stocks: GLD:EFA

Gold relative to US Stocks: GLD:VTI

Gold relative to the euro: GLD:FXE

Gold relative to world currencies: GLD:DBV

Gold relative to oil: GLD:USO

Here is the news report at 4:30 PM announcing that President Bush had signed EESA.
At approximately 4:30 PM ET on Friday, October 3, 2008, Julie Hirschfeld Davis and David Espo of the Assoicated Press reported:

With the economy on the brink and elections looming, Congress approved an unprecedented $700 billion government bailout of the battered financial industry on Friday and sent it to President Bush who quickly signed it. (Here is the roll call vote courtesy of MyWay showing how the House members voted).

"We have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country," Bush said shortly after the vote, although he conceded, "our economy continues to face serious challenges."

Underscoring that somber warning, the Dow Jones industrials, up more than 200 points at the time of the House vote, ended the day down 157.

The final vote, 263-171 in the House, capped two weeks of tumult in Congress and on Wall Street, punctuated by daily warnings that the country confronted the gravest economic crisis since the Great Depression if lawmakers failed to act. There were 58 more votes for the measure than an earlier version that failed on Monday.

"We all know that we are in the midst of a financial crisis," House Republican leader John Boehner of Ohio said shortly before casting his vote for a massive government intervention in private capital markets that was unthinkable only a month ago.

"And we know that if we do nothing, this crisis is likely to worsen and to put us into an economic slump like most of us have never seen," he said.

House Speaker Nancy Pelosi, D-Calif., said the bill was needed to "begin to shape the financial stability of our country and the economic security of our people."

Treasury Secretary Henry Paulson pledged to begin using his new authority quickly, and Federal Reserve Chairman Ben Bernanke said the central bank would work closely with the administration.

At its core, the bill gives the Treasury Department $700 billion to purchase bad mortage-related securities that are weighing down the balance sheets of institutions that hold them. The flow of credit in the U.S. economy has slowed, in some cases drying up, threatening the ability of businesses to conduct routine operations or expand, and adversely affecting consumers seeking financing for mortgages, cars and student loans. Some state governments have also experienced difficulty borrowing money.

The House vote marked a sharp change from Monday, when an earlier measure was sent down to defeat, largely at the hands of angry conservative Republicans.

On Friday, 91 Republicans joined 172 Democrats to support the bill, while 108 Republicans and 68 Democrats opposed it. Twenty-five Republicans and 33 Democrats switched their votes from "no" to "yes." One Democrat who supported Monday's version, Rep. Jim McDermott of Washington, opposed the bill Friday. One Republican who didn't vote Monday, Rep. Jerry Weller of Illinois, voted "yes" on Friday.

Several of the Democrats who switched were members of the Congressional Black Caucus who said presidential candidate Barack Obama had pledged to support legislation easing the burden on consumers if he wins the White House.

Republican presidential candidate John McCain also lobbied for the measure, according to aides who declined to release a list of lawmakers he called.

Following Monday's vote, Senate leaders quickly took custody of the measure, adding on $110 billion in tax and spending provisions designed to attract additional support, then grafting on legislation mandating broader mental health coverage in the insurance industry. The revised measure won Senate approval Wednesday night, 74-25, setting up a furious round of lobbying in the House as the administration, congressional leaders, the major party presidential candidates and outside groups joined forces behind the measure.

In addition, the measure was changed to broaden the federal government's deposit insurance program, and the Securities and Exchange Commission loosened a regulation to ease the impact of the distressed assets on the balance sheet of financial institutions.

Despite occasionally strong criticism of the added spending and tax measures, the maneuvers worked — augmented by a sudden switch in public opinion that occurred after the stock market took its largest-ever one-day dive on Monday.

"No matter what we do or what we pass, there are still tough times out there. People are mad — I'm mad," said Republican Rep. J. Gresham Barrett of South Carolina, who opposed the measure the first time it came to a vote. Now, he said, "We have to act. We have to act now."

Rep. John Lewis, D-Ga., another convert, said, "I have decided that the cost of doing nothing is greater than the cost of doing something."

Critics were unrelenting.

"How can we have capitalism on the way up and socialism on the way down," said Rep. Jeb Hensarling of Texas, a leader among conservative Republicans who oppose the central thrust of the legislation — an unprecedented federal intervention into the private capital markets.

It was little more than two weeks ago that Paulson and Bernanke concluded that the economy was in such danger that a massive government intervention in the private markets was essential.

White the main thrust of their initial proposal was unchanged, lawmakers insisting on greater congressional supervision over the $700 billion, measures to protect taxpayers and steps to crack down on so-called "golden parachutes" that go to corporate executives whose companies fail.

Earlier in the week, the legislation was altered to expand the federal insurance program for individual bank deposits, and the Securities and Exchange Commission took steps to ease the impact of the questionable mortgage-backed securities on financial institutions.

In the moments before the vote, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, pledged "serious surgery" next year to address the underlying causes of the crisis.

If anything, the economic news added to the sense of urgency.

The Labor Department said initial claims for jobless benefits had increased last week to the highest level since the gloomy days after the 2001 terror attacks. The news of the payroll cuts came on top of Thursday's Commerce Department report that factory orders in August plunged by 4 percent.

Typifying arguments the problem no longer is just a Wall Street issue but also one for Main Street, lawmakers from California and Florida said their state governments were beginning to experience trouble borrowing funds for their own operations.

Pelosi said, "We must win it for Mr. and Mrs. Jones on Main Street."

One month before Election Day, the drama unfolded in an intensely political atmosphere.

Members of the Congressional Black Caucus credited Obama with changing their minds.

Reps. Elijah Cummings and Donna Edwards, both Maryland Democrats, were among them. They said Obama had pledged if he wins the White House that he would help homeowners facing foreclosure on their mortgages. He also pledged to support changes in the bankruptcy law to make it less burdensome on consumers.

Obama's rival, Republican Sen. McCain, announced a brief suspension in his campaign more than a week ago to try and help solve the financial crisis.

Republican Rep. Sue Myrick of North Carolina, who switched her vote to favor the measure, said, "I may lose this race over this vote, but that's OK with me. This is the right vote for the country."

Myrick said she hadn't heard from McCain as she made up her mind about how to vote. "They told me he was going to call me. He didn't," she said.

The vote on Monday had staggered the congressional leadership and contributed to the largest one-day stock market drop in history, 778 points as measured by the Dow Jones Industrials.

Associated Press writers Jim Abrams, Charles Babington, Alan Fram, Suzanne Gamboa, Kimberly Hefling, Andrew Miga, Andrew Taylor, and Erica Werner contributed to this story.

The Emergency Economic Stabilization Act, EESA, doesn't make the credit crisis go away; it makes the credit crisis worse, much worse -- Here are 4 problems with EESA.

Problem #1: EESA helps only a few select banks and not banks as a whole.
... I relate that while Regional Banks, IAT, are currently up 22% since the US Dollar stock rally began, July 14, 2008, when the yen carry traders, sold oil, USO, and commodities, RJI, to go long the banks, the facility of TARP provided under the Emergency Economic Stabilization Act of 2008, that is EESA, is unlikely to be of much help to most regional banks.

The authority and facilities given to the Federal Reserve Chairman by the Paulson-Bush-Pelosi bailout legislation provide a rescue of derivative laden and threatend JPMorgan, Citigroup, Bank of America and Morgan Stanley, and not of the community and smaller banks.

The President said: "We have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country."

That is understatement, they acted unconstitutionally, to provide frightening auhority and facilities to the Chairman of the Federal Reserve. The legislation does nothing to resolve the crisis; it assures that it will quickly escalate.

The reporter relates: "The Securities and Exchange Commission loosened a regulation to ease the impact of the distressed assets on the balance sheet of financial institutions."

Yes I know, that was unconscionable; the action is a denial and abandonment of The Truth. And as I write the Suspension Of The Fair Value Accounting Rule By SEC And Congress Is Causing Credit Gridlock And Places One's Investments At Risk .

Problem #2: EESA doesn't resolve the current crisis of confidence, that is a lack of trust, it exasperates risks stemming from unknown and unrevealed counterparty risk on derivaties and from a suspension of fair value accounting by ruling of SEC and by mandate of Congress.
... Blair Lee in October 3, 2008, Gazette.NET article Who Killed The House Bailout? wrote:

Predictably, the media gave congressional Republicans the full discredit for the $700 billion bailout plan's 228-205 defeat on Monday. But the voting patterns show a different story. A once-in-a-lifetime, unholy and inadvertent coalition of disparate congressional voting blocs sank the measure.

First, a bipartisan combination of conservative Republicans and Blue Dog Democrats balked at such a risky and expensive taxpayer-financed free market intervention.

Second, 78 percent of the 41 incumbents in tight re-election contests voted "no," responding to angry constituent e-mails. Political self-preservation knows no party lines: 17 of the "no" votes were Republicans, 15 were Democrats. Lesson: Don't propose sweeping, highly controversial legislation five weeks before a national election.

Third, the Congressional Black Caucus broke ranks with the Democratic House leadership and overwhelmingly voted against bailing out white, wealthy Wall Street.

House Democratic leaders, in one of those inexplicable Capitol Hill double standards, excoriated the Republicans but excused the Black Caucus because its members were casting "a vote of conscience."

Maryland's Congressional delegation offers a good example of what happened. The four white Democratic liberals (Hoyer, Van Hollen, Sarbanes and Ruppersberger) all voted "yes." Meanwhile, "no" votes were cast by Roscoe Bartlett, the Western Maryland conservative Republican, and by Maryland's two liberal Democratic blacks, Elijah Cummings (Baltimore City) and Donna Edwards (Prince George's and part of Montgomery). This has to be the first and last time in history that the 4th, 6th and 7th districts band together against the rest of Maryland's congressional delegation.

Missing from Maryland's voting pattern was a "no" vote by a closely contested incumbent. Wayne Gilchrest, the Eastern Store moderate Republican, might have played that role, but he was defeated in the primary, so he voted "yes." Likewise, in a fit of lame duck spite, he's backing Obama for president.

Congressman Bartlett and congresspersons Cummings and Edwards voted "no" together, but for completely different reasons. Bartlett, a free market conservative, wants to let the financial institutions solve their problems by themselves. In his view, the extent of permissible government intervention is taking the current $100,000 ceiling off FDIC deposit insurance and making it unlimited.

Meanwhile, Cummings and Edwards want to bypass Wall Street and spend the $700 billion directly on home foreclosure aid, unemployment payments, food stamps, home heating assistance and Medicaid. It's no coincidence that, together, Cummings' and Edwards' districts contain 58 percent of the state's recent home foreclosures. But neither their plan nor Bartlett's has a prayer of becoming law. Nor is doing nothing an option. Without a comprehensive approach, the government is left limping along, dealing with one bank failure after another.

Our financial system runs on credit and confidence. People must borrow money to make money. But banks won't lend to businesses and depositors won't lend to banks (or governments) without the reasonable expectation of being repaid, with interest. When that confidence disappears, so does our economy. The bailout stabilizes lenders and investors by having the government take $700 billion of devalued mortgage-backed securities off the balance sheets. In other words, in order to jump-start the nation's financial system, Uncle Sam becomes this toxic paper's buyer of last resort.

Maybe this is a bad idea. Maybe Roosevelt's New Deal was, too. But what's the alternative? Or put it this way: Isn't it wiser and cheaper to try something before, instead of after, the train wreck? How much would our parents and grandparents have paid to avoid the 1930s Great Depression and its aftermath, World War II?

Apparently, public opinion against the bailout is shifting somewhat: 45 percent now support it, while 44 percent say do nothing. Meanwhile, a revised $700 billion bailout bill passed the Senate on Wednesday night and heads to the House.

Senate passage was less difficult, because only one-third of that body is up for re-election, as opposed to all 435 House members, so only three senators in tight re-elections felt compelled to vote "no." Also, the Senate's Black Caucus is a group of one, Barack Obama, and he's now playing to a national constituency.

To gain House passage, the Senate's bill is loaded with billions and billions of new tax cuts and new spending to win the votes of naysayers like Bartlett, Cummings and Edwards. It will probably work at the expense of ballooning, even further, our national debt and national interest payment. Yes, folks, we're addressing the national crisis brought on by fiscal recklessness by being even more reckless. God help us.

Blair Lee is CEO of the Lee Development Group in Silver Spring.

Presented below are my related comments to Blair Lee.

He related "Congressman Bartlett and congresspersons Cummings and Edwards voted "no" together, but for completely different reasons. Bartlett, a free market conservative, wants to let the financial institutions solve their problems by themselves. In his view, the extent of permissible government intervention is taking the current $100,000 ceiling off FDIC deposit insurance and making it unlimited."

"Meanwhile, Cummings and Edwards want to bypass Wall Street and spend the $700 billion directly on home foreclosure aid, unemployment payments, food stamps, home heating assistance and Medicaid. It's no coincidence that, together, Cummings' and Edwards' districts contain 58 percent of the state's recent home foreclosures. But neither their plan nor Bartlett's has a prayer of becoming law."

"Nor is doing nothing an option. Without a comprehensive approach, the government is left limping along, dealing with one bank failure after another."

I say one option could have been to convene a Congressional investigation to completely investigate events of late, especially after September 11, 2008 when banks were unable to sell assets and raise capital. And of course to thoroughly investigate credit default swaps and their destabilizing ways as well as the destabilizing ways of yen carry traders who borrow at 0.5% interest fromt the bank of Japan to go short the EUR/JPY for great personal gain and the destruction of the world's economy.

Mr. Lee continues: "Our financial system runs on credit and confidence. People must borrow money to make money. But banks won't lend to businesses and depositors won't lend to banks (or governments) without the reasonable expectation of being repaid, with interest. When that confidence disappears, so does our economy."

I say there is indeed a crisis of confidence and a complete lack of trust, and it comes in large part from countyparty risk on default event settlement of derivatives of existing, and future financial organizations. Our nation and the world needed to address these risks but failed to do so.

Jesse in article Waves of Credit Default Swaps Incoming relates that its "time to start settling those Credit Default Swaps for Fannie and Freddie (Oct. 6), Lehman Brothers (Oct. 10) and Lehman Brothers (Oct 23)".

A lack of trust is that which is going to cause the destruction of the US Dollar, $USD, and send interest rates higher, such as the interest rate on the 10 Year US Government Note, $TNX, and send the value of US Government bonds, traded by the ETF, TLT down.

The legislation will accelerate an exit from municipal bond mutual funds and ETFS as well as money market funds, MMFs, owned by the wealthy.

"The bailout stabilizes lenders and investors by having the government take $700 billion of devalued mortgage-backed securities off the balance sheets. In other words, in order to jump-start the nation's financial system, Uncle Sam becomes this toxic paper's buyer of last resort."

I say the bailout stabilizes only a few select financial organizations JP Morgan and possibly Morgan Stanley, and actually destabilizes the rest as these two organizations and other crony bankers are likely going to be given preferential treatment. The debt will indeed be coming off the the publically approved SEC and FASB 157 balance sheets and income statements; but the assets are marked to fantasy and not to market, thus the securitized CDOs, mortgage backed securities, and other debt creates even more of a greater risk now becuase no one knows the true value as fair value rules, that is fair value accounting, has been thrown out the window.

We indeed are entering a new era, Uncle Sam is now the world's investment banker. The Federal Reserve becomes the Bank of Banks, and goes into the business of securitization of CDOs. The legislation nationalizes US Banks, and privatizes profits to a select group of elites, while it socializes risk and losses unto the US taxpayers.

Yes Uncle Sam is indeed the purchaser of the toxic paper, and becomes the buyer of last resort; and in so doing enslaves Americans, and really the whole world unto debt of the worst kind. The debt should have been liquidated, that is done away with, but it now remains and is the world's heritage and inheritance of a bygone era of credit liquidty, that started with the fairy tale neoliberal laissez fair economic policies of Milton Friedman, and continued through with the easy credit of The Purveyor of Credit Liquidity, Alan Greenspan, and culminated with the neocon helicpter drops of Ben Bernake lowering of the central bank rate, and provisions of TAF, TSLF, and PDCF facilities.

The econonomy will not be jump started, only a small portion of crony capitalists, that is those who participate in state corporate rule, that is state corporatism get a boost through public private partnerships to be signed by the government. Here stakeholders from business and government will become overlords and taskmasters of Ameican citizens.

"Senate passage was less difficult, because only one-third of that body is up for re-election, as opposed to all 435 House members, so only three senators in tight re-elections felt compelled to vote "no." Also, the Senate's Black Caucus is a group of one, Barack Obama, and he's now playing to a national constituency."

I wonder how many of the Black Caucus caved in. Those who did so, forgot their ancestor's history of slavery: their vote enslaved Americans and the world unto debt, and established bankers and government officials as the beast's task masters and overlords.

Problem #3: EESA's increased FDIC limits: these are going to take gullible leming investors up a hill, and then off a cliff to their destruction -- that is sad but true.

The smart investor anticipates what's gona happen to his money in banks and appreciates the value of gold.

Whereas, the gullible investor simply gets led off a cliff like a leming .... click here for image of gullible investor

... The reporter relates that "Earlier in the week, the legislation was altered to expand the federal insurance program for individual bank deposits." The raising of the limit of FDIC insurance accelerates the process of liquidity evacuation as investors flee stocks, and unfortunately municipal bonds which are especially liquidity stressed; the legislation herds investors into banks and away from the physical asset which will protect their wealth.

Problem #4: All liquidity supplied by EESA gets trapped and instantly vaporized.
... The facility of TARP provided under the Emergency Economic Stabilization Act of 2008, that is EESA, is designed to provide liquidity. Yet, all liquidity that has been provided by the Federal Reserve under currency swaps with other central banks, facilities of TAF, TSLF, PDCF, acquisitions of companies such as AIG and Bear Stearns, and emergency grants has literally disappeared as soon as it went into the system. The $700 billion to be provided will meet the same doom: instant vaporization.

The liquidity goes only to banks and major broker-dealers, the rest of the financial system has no access to it; the credit transmission mechanisms will not see even a dime of it, so thus corporations, educational institutions, municipalities desperately in need will be frozen out.

Peter Schiff in Safehaven.com article Liquidity Is In The Eye Of The Holder writes: The government is seeking to "create liquidity" by overpaying.

The government's assumptions about the "held to maturity" value of these mortgages completely understate the likelihood of widespread default. Some of the "illiquid" assets represent tranches of mortgage-backed securities that will be completely wiped out. Even the higher quality tranches will suffer severe losses due to mortgages that will inevitably go bad.

For example, take a $500,000 adjustable rate mortgage on a condo in Las Vegas that has a current value of only $250,000. To assume that this asset can be safely held to maturity is absurd, when in all likelihood the borrower will default shortly after the rate re-sets, even if the borrower has not yet shown signs of distress. Of course such a mortgage would be completely illiquid if one tried to sell it anywhere near par, but would be extremely liquid if priced to reflect a more realistic value; say 35 cents on the dollar. But if the government pays prices that fairly factors in likely defaults, it will bankrupt the very institutions it is trying to bail out.

Also missing in the discussion is the concept of the time value of money. Even if a substantial percentage of the $700 billion is eventually recovered, it will still represent a huge loss for taxpayers who theoretically have to come up with the cash today to buy the mortgages. Further, the inflationary nature of the bailout ensures a substantial rise in long term interest rates. This will further suppress the present values of the low coupon mortgages the government will be restructuring.

In addition to the government bailout, distressed lenders are looking to the suspension of "mark to market" accounting rules as a means of salvation. These rules require institutions to value their mortgage assets according to the most recently traded price. However, suspending these rules will not make the losses go away. Rather it will simply allow lenders to pretend that the losses do not exist.

Armed with such fantasies, banks could pretend that their mortgage assets had more value, and that their balance sheets were well capitalized. They would not need to raise more capital in order to fund new loans. But, just as a person with no sensitivity to pain runs the risk of catastrophic injury, such a move would encourage financial institutions to take greater risks which, in the end, will produce more bankruptcies and greater losses.

In fact, the Senate version of the bailout bill, which authorizes a suspension of mark-to-market, also increases the dollar limit on FDIC insured deposits from $100,000 to $250,000 (with no extra money budgeted to fund the increased taxpayer liability). Only in Washington would a bill pass which simultaneous makes banks more likely to fail while increasing taxpayer exposure when they do!

Gold is the timely safe haven.
I believe a run on stock brokerages is coming soon; and I suggest that one take one's money out of brokerage accounts, and that one buy gold, even though gold can easily fall from its current $835 to $825, $800 or $775, with a falling EURJPY.

And the gold ETF, GLD, could very easily fall to $77.50.

While bank accounts will have higher FDIC limits, I want something that is tangible, that I can secure, that I can personally own and have a large degee of personal control over.

I recommend diversification of investment in gold in four locations immediately because of financial system instability and lack of liquidity: the gold ETF, GLD, directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins.

I am simply a blogger who communicates what I see as an investment demand for gold; I suggest that one consult with a licensed investment professional before making any investment decisions.