The Securities and Exchange Commission has reached a $550 million settlement with Goldman Sachs Group Inc. that will resolve its lawsuit against the firm alleging that it misled investors in a subprime mortgage product, the agency announced Thursday.

The SEC sued Goldman in April, charging it with fraud in marketing of a complex financial product called Abacus 2007-AC1 that was based on mortgage-backed securities. The suit is the highest profile of a number of inquiries regulators are making into synthetic collateralized debt obligations.

In agreeing to the SEC’s largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information, the SEC said.

Goldman denied any wrong doing in the SEC lawsuit but has been under pressure from shareholders to reach a settlement on the fraud lawsuit and other SEC probes.

Read it all.

Farmer Jim Kreutz uses derivatives to soften the blow should the price of feed corn drop before harvest. His brother-in-law, feedlot owner Jon Reeson, turns to them to hedge the price of his steer. The local farmers’ co-op uses derivatives to finance fixed-price diesel for truckers who carry cattle to slaughter. And the packing plant employs derivatives to stabilize costs from natural gas to foreign currencies.

Far from Wall Street, President Barack Obama’s financial regulatory overhaul, which may pass Congress as early as Thursday, will leave tracks across the wide-open landscape of American industry.

Designed to fix problems that helped cause the financial crisis, the bill will touch storefront check cashiers, city governments, small manufacturers, home buyers and credit bureaus, attesting to the sweeping nature of the legislation, the broadest revamp of finance rules since the 1930s.

Read it all.

That’s why the best booster shot for this recovery and the next would be to allow states to borrow from the Treasury during recessions. We did this for Wall Street and Detroit, fending off disaster. It’s even more important for states.

Here’s how this would work. States already receive regular federal matching grants to help pay for Medicaid, welfare, highway construction programs and more. For instance, the federal government pays a share of state Medicaid costs, from 50 percent to more than 75 percent, depending on a state’s wealth. The matching rates were temporarily sweetened by last year’s stimulus.

But Congress should pass legislation that would allow a state to simply get an “advance” on these future federal dollars expected from entitlement programs. The advance could then be used for regional stimulus, to continue state services and to hasten our recovery.

Read it all

Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth.

With Congress tied in political knots over whether to take further action to boost the economy, Fed leaders are weighing modest steps that could offer more support for economic activity at a time when their target for short-term interest rates is already near zero. They are still resistant to calls to pull out their big guns — massive infusions of cash, such as those undertaken during the depths of the financial crisis — but would reconsider if conditions worsen.

Top Fed officials still say that the economic recovery is likely to continue into next year and that the policy moves being discussed are not imminent. But weak economic reports, the debt crisis in Europe and faltering financial markets have led them to conclude that the risks of the recovery losing steam have increased. After months of focusing on how to exit from extreme efforts to support the economy, they are looking at tools that might strengthen growth.

Read it all.

Since we’re coming up on the Fourth of July, and towns everywhere are preparing their better-than-ever fireworks spectaculars, we would like to offer this humbling bit of history. Back in the summer of 1962, the U.S. blew up a hydrogen bomb in outer space, some 250 miles above the Pacific Ocean. It was a weapons test, but one that created a man-made light show that has never been equaled ”” and hopefully never will. Here it is:

(Some of the images in this video were until recently top secret. Peter Kuran of Visual Concept Entertainment collected them for his documentary Nukes In Space.)

If you are wondering why anybody would deliberately detonate an H-bomb in space, the answer comes from a conversation we had with science historian James Fleming of Colby College:

Listen to it all and most importantly take the time to watch the amazing video pictures.

….as the nation struggles to emerge from the most severe downturn since the Great Depression, such cuts are the last thing we need. There is no conflict ”” absolutely none ”” between our twin goals of putting the economy back on its feet and reducing long-term deficits. On the contrary, government could take many steps that would serve both goals simultaneously.

For example, it could create a program to restructure consumer debt. Although rates on 10-year Treasury bonds are only about 3 percent, many consumers still carry tens of thousands of dollars of credit card debt at 20 percent or more. This burden has been a continuing drag on spending. The federal government could reduce it by borrowing at 3 percent and lending to consumers at 8 percent under a one-time debt-restructuring plan….

Another useful measure would be a carbon tax ”” or its approximate equivalent, a cap-and-trade system ”” scheduled for a gradual phase-in after the economy has again reached full employment. This would stimulate an immediate, huge jump in private investment without the government having to spend a penny.

Read it all.

Take a careful look.

I hope the White House is paying attention to the latest annual Congressional Budget Office Long-Term Budget Outlook, which offers a truly frightening picture of the scale of America’s national debt, with huge implications for the country’s future prosperity. According to the non-partisan CBO, “the federal government has been recording the largest budget deficits, as a share of the economy, since the end of World War II”….

Read it all and follow the link to the important CBO report.

Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner told senators on April 3, 2008, that the tens of billions of dollars in “assets” the government agreed to purchase in the rescue of Bear Stearns Cos. were “investment-grade.” They didn’t share everything the Fed knew about the money.

The so-called assets included collateralized debt obligations and mortgage-backed bonds with names like HG-Coll Ltd. 2007-1A that were so distressed, more than $40 million already had been reduced to less than investment-grade by the time the central bankers testified. The government also became the owner of $16 billion of credit-default swaps, and taxpayers wound up guaranteeing high-yield, high-risk junk bonds.

By using its balance sheet to protect an investment bank against failure, the Fed took on the most credit risk in its 96- year history and increased the chance that Americans would be on the hook for billions of dollars as the central bank began insuring Wall Street firms against collapse. The Fed’s secrecy spurred legislation that will require government audits of the Fed bailouts and force the central bank to reveal recipients of emergency credit.

“Either the Fed did not understand the distressed state of some of the assets that it was purchasing from banks and is only now discovering their true value, or it understood that it was buying weak assets and attempted to obscure that fact,” Senator Sherrod Brown, an Ohio Democrat and member of the Senate Banking Committee, said in an e-mail when informed about the credit quality of holdings in the Maiden Lane LLC portfolio. The committee held the April 3 hearing.

Read it all.

The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s ”” starting to cut spending and raise taxes before a recovery is assured ”” and hoping today’s situation is different enough to assure a different outcome.

In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.

On Tuesday, pessimism seemed the better bet. Stocks fell around the world, over worries about economic growth.

Longer term, though, it’s still impossible to know which prediction will turn out to be right. You can find good evidence to support either one.

Read it all.

The national debt will reach 62 percent of gross domestic product (GDP) by the end of this year, the nonpartisan Congressional Budget Office (CBO) said Wednesday.

The budget office said the debt will reach its highest percentage of GDP since the end of World War II. The jump is driven by lower tax revenues and higher federal spending in the recent recession.

Read it all.

Kevin Rudd may be happy about at least one thing: he can avoid Toronto this weekend.

Nothing against Canada’s business capital, but by stepping down suddenly as Australia’s premier, Rudd got himself out of a much-hyped gathering with virtually no chance of putting the world economy on a more even keel.

Why is that? We are suffering from a chronic leadership vacuum, one starkly underlined by Rudd’s untimely departure. The Group of 20 will go through the motions and consider the burning issues of our day. Yet the list of pressing problems is a daunting one….

Read it all.

After more than a year of work and two weeks of negotiations, lawmakers early Friday finished melding different versions of Wall Street reform.

The final bill won’t be ready for a few days, but here’s CNNMoney.com’s breakdown of key provisions that aim to protect consumers, prevent firms from getting too big to fail and crack down on risky bets that leave taxpayers on the hook.

Read it all.

“It’s a great moment. I’m proud to have been here,” said a teary-eyed Sen. Christopher J. Dodd (D-Conn.), who as chairman of the Senate Banking Committee led the effort in the Senate. “No one will know until this is actually in place how it works. But we believe we’ve done something that has been needed for a long time. It took a crisis to bring us to the point where we could actually get this job done.”

Read it all.

This raises an intriguing question: To what extent should we view the future versions of ourselves as different people from ourselves today?

To be sure, most parents have no trouble restricting a child’s decisions on the grounds that doing so is in the young person’s best interest. Few teenagers are farsighted enough to fully incorporate the interests of their future selves when making decisions. As parents, we hope that someday our grown-up children will be grateful for our current restrictions on their behavior.

But people do not suddenly mature at the age of 18, when society deems us “adults.” There is always an adolescent lurking inside us, feeling the pull of instant gratification and too easily ignoring the long-run effects of our decisions. Taxes on items with short-run benefits and long-run costs tell our current selves to take into account the welfare of our future selves.

IF this is indeed the best argument for “sin” taxes, as I believe it is, we are led to vexing questions of political philosophy: To what extent should we use the power of the state to protect us from ourselves? If we go down that route, where do we stop?

Read it all.

Debt is as powerful a drug as alcohol and nicotine. In boom times Western consumers used it to enhance their lifestyles, companies borrowed to expand their businesses and investors employed debt to enhance their returns. For as long as the boom lasted, Mr Micawber’s famous injunction appeared to be wrong: when annual expenditure exceeded income, the result was happiness, not misery.

For a long time debt in the rich world has grown faster than incomes. As our special report this week spells out, it is not just government deficits that have swelled. In America private-sector debt alone rose from around 50% of GDP in 1950 to nearly 300% at its recent peak. The origins of the boom go even further back, reflecting huge changes in social attitudes. In the 19th century defaulting borrowers were sent to prison. The generation that lived through the Great Depression learned to scrimp and save. But the wider take-up of credit cards in the 1960s created a “buy now, pay later” society. Default became just a lifestyle choice. The reckless lender, rather than the imprudent debtor, was likely to get the blame….

Rich-world countries now face two sets of problems. The most pressing is how to pay off their debts. Many people who have cut back their credit-card spending and firms which have seen their credit lines slashed would be horrified to see how little the rich world’s overall burden has fallen. Much of the debt has merely moved from the private to the public sector as governments have correctly stepped in to support banks and save the economy from falling into depression. And in the future, even more money will have to be raised, because of governments’ lavish promises of pensions and health care for the retiring baby-boom generation.

Read it all.

[Paul] Krugman also told Handelsblatt he wouldn’t rule out sanctions against Germany if it continued to rely on its export-driven model. “If the euro falls to parity with the dollar, the Europeans are going to be surprised by the demands that will come out of the U.S. Congress, and I would support that,” he said.

That fiscal and economic policy critique probably won’t gain any more traction in Germany than his monetary policy one. Germans see their government finances and trade competitiveness as an example to be followed by Greece, Portugal and other troubled countries in Europe. And they clearly don’t see the U.S. model as one worth chasing.

Wolfgang Franz, who heads the German government’s economic advisory panel known as the Wise Men, tore into Krugman ”” and the US ”” in an op-ed in the German business daily Wednesday, titled “How about some facts, Mr. Krugman?”

“Where did the financial crisis begin? Which central bank conducted monetary policy that was too loose? Which country went down the wrong path of social policy by encouraging low income households to take on mortgage loans that they can never pay back? Who in the year 2000 weakened regulations limiting investment bank leverage ratios, let Lehman Brothers collapse in 2008 and thereby tipped world financial markets into chaos?” he wrote.

Read it all (emphasis mine).

The Obama administration’s flagship effort to help people in danger of losing their homes is falling flat.

More than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. That exceeds the number of people who have managed to have their loan payments reduced to help them keep their homes.

Last month alone,155,000 borrowers left the program — bringing the total to 436,000 who have dropped out since it began in March 2009.

Read it all.

If you pop into a toilet on the Seattle waterfront this summer, you might see over-flowing bins. The reason? A polite notice explains that “because of 2010 budget reductions”, the Seattle government can no longer afford to “service this comfort station” each day. Hence the dirt.

Investors would do well to take note. In recent months, America’s fiscal mess has assumed a rather surreal air. On paper, the country’s federal-level deficit and debt numbers certainly look very scary. But in practical terms, the impact of those ever-swelling zeroes still seems distinctly abstract.

After all, so far the federal government has not been slashing spending; on the contrary, there was a stimulus bill last year. And, as my colleague John Plender pointed out this week, Treasury bond yields have been falling as investors flee the eurozone woes. As a result, those scary numbers still seem to be a problem primarily concocted in the world of cyber finance.

But there is one place where reality is already starting to bite in America and that is in terms of state finances. Just look at the statistics. A report from the US Center on Budget and Policy Priorities issued last month estimates that in fiscal 2010 the US states collectively posted a $200bn-odd budget shortfall, equivalent to 30 per cent of all state budgets.

Read it all.

That said, the most worrisome long-term economic impact of the Gulf spill lies elsewhere: The catastrophe is adding to the gradual erosion in trust in U.S. professional elites and major institutions, from government to business. It has hardly inspired confidence to watch the White House scramble to prove that President Barack Obama wasn’t as detached from the crisis as he often seemed, or to witness the inability of the world’s best oil engineers to stop the underwater gusher.

Confidence in the economy’s commanding heights has taken a beating following a long run of scandals and malfeasance. The list includes everything from the Enron and Worldcom failures, Bernie Madoff’s massive fraud, the subprime loan mess, the government rescues of Fannie Mae, Freddie Mac, and AIG (AIG), the controversy surrounding Goldman Sachs’ (GS) collateralized debt obligations, and so on. The Tea Party movement may grab all the attention with its antigovernment rhetoric, but surveys have repeatedly shown that its sentiment is widely shared. For instance, a series of long-run surveys by the Pew Research Center find that only 22 percent of those surveyed say they can trust government. That’s about the lowest measure in half a century. The ratings are similarly abysmal for large corporations and banks and other financial institutions: respectively 25 percent and 22 percent.

Trust isn’t as easy to measure as land, labor, and capital. It’s more like a recipe or a software protocol that allows for economic exchange and all kinds of innovation. Nobel Prize Laureate Kenneth Arrow famously remarked that “virtually every commercial transaction has within itself an element of trust.” Societies with high levels of trust are fertile ground for developing large corporations and innovative enterprises. Low-trust societies feature people who don’t like to do business with folks outside their family or community; smaller, family-run companies are the norm.

Read it all.

To believe Christopher Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee, the end of government bailouts is near. In truth, the financial-overhaul legislation now before Congress would do little to arrest the bailouts already in progress.

When the U.S. government rescued American International Group Inc. in 2008, it reasoned that a disorderly failure of the financial-services giant would lead to an economic catastrophe. What the Treasury and Federal Reserve said they needed was a way to wind down systemically important institutions without sending them into bankruptcy courts, to keep the companies from triggering defaults on their obligations that would cascade throughout the broader financial system.

Congressional leaders say their final bill will deliver the resolution authority regulators have been seeking. “It will end bailouts, ensuring that failing firms can be shut down without relying on taxpayer bailouts or threatening the stability of our economy,” Dodd said June 10 at the House-Senate conference committee where the differences between the two chambers’ bills are being negotiated.

It wouldn’t end AIG’s rescue, though. The reason AIG hasn’t failed is that the Fed and the Treasury continue to stand behind it. There’s no sign this will change anytime soon. Nor would the legislation force the government to do otherwise.

Read the whole thing.

The Prime Minister called for the company to be protected from excessive compensation claims as President Barack Obama made it agree to potentially unlimited damages.

BP provisionally agreed the biggest compensation payment in corporate history, setting up a fund worth at least £13.5 billion to cover the damage caused by its leaking oil pipe in the Gulf of Mexico.

But the US president last night made it clear that BP’s payments could be just the start, warning that the company could still face lawsuits from individuals and American states.

Read it all.

As cash runs low in government coffers around the country, politicians are ratcheting up the intensity of their search for revenue and new areas to regulate. Small businesses are in their cross-hairs in a mammoth, nationwide shakedown. They are the nation’s critical engine for growth, innovation and job creation, yet they are being starved for credit and slammed with more taxes, government directives and litigation exposure. This spells weaker profits and fewer jobs, risking a fundamental deterioration in America’s private sector.

The federal government’s response to the crisis is to build up Washington’s small-business dependency apparatus. Of the $3.6 trillion in federal spending planned in 2010 (overruns likely), many crumbs will find their way to small businesses through government loan programs and complicated tax credits. Politicians are addicted to spending and can trumpet their ability to bring home the pork while ignoring the devastating net outflow from small businesses to Washington.

Washington’s expansion does nothing to create a robust small-business environment. Businesses with fewer than 250 employees provided most of the net job growth in the 2002–07 expansion yet are still in the starting blocks in the current recovery. The 2,300-page health care bill will take months and years to decode and will weigh heavily on small-business decisions. New regulations are mushrooming from the constant string of thick “stimulus” bills, the coming law on new financial regulations and the sure-to-be-bad tax bill toward year’s end.

Read it all.

There are many adjectives one can use to describe legendary investor Robert Arnott, but “bullish” is not one of them. Arnott, who is chairman of Research Affiliates and manager of several successful Pimco portfolios, was a Cassandra of the subprime crisis. He correctly predicted in early 2008 that the housing market along with consumer spending would crumble.

Now Arnott, 55, is bearish once again. He said in a telephone interview with Reuters that the global markets are in “the very early stages” of a sovereign debt crisis which could lead to another recession in the fourth quarter of 2010. “People should not worry about is not the Greeces and Hungarys of the world, but contagion to the Italys and Spains and, heaven forefend us, the United States,” Arnott says.

Arnott isn’t sure how long the recession will last. “I would not expect it to be as deep,” he predicts. “But if it’s even a modest recession from this starting point, it will feel deeper.”

Read it all.

The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

Read it all.

I think [Mark ] Mykleby’s letter gets at something very important: We cannot fix what ails America unless we look honestly at our own roles in creating our own problems. We ”” both parties ”” created an awful set of incentives that encouraged our best students to go to Wall Street to create crazy financial instruments instead of to Silicon Valley to create new products that improve people’s lives. We ”” both parties ”” created massive tax incentives and cheap money to make home mortgages available to people who really didn’t have the means to sustain them. And we ”” both parties ”” sent BP out in the gulf to get us as much oil as possible at the cheapest price. (Of course, we expected them to take care, but when you’re drilling for oil beneath 5,000 feet of water, stuff happens.)

As Pogo would say, we have met the enemy and he is us.

But that means we’re also the solution ”” if we’re serious. Look, we managed to survive 9/11 without letting it destroy our open society or rule of law. We managed to survive the Wall Street crash without letting it destroy our economy. Hopefully, we will survive the BP oil spill without it destroying our coastal ecosystems. But we dare not press our luck.

We have to use this window of opportunity to insulate ourselves as much as possible against all the bad things we cannot control and get serious about fixing the problems that we can control. We need to make our whole country more sustainable. So let’s pass an energy-climate bill that really reduces our dependence on Middle East oil. Let’s pass a financial regulatory reform bill that really reduces the odds of another banking crisis. Let’s get our fiscal house in order, as the economy recovers. And let’s pass an immigration bill that will enable us to attract the world’s top talent and remain the world’s leader in innovation.

Read it all.

The popular tax break for mortgage interest, once considered untouchable, is falling under the scrutiny of policymakers and economic experts seeking ways to close huge deficits.

Although Congress last year rejected the White House’s proposed cut to the amount wealthier taxpayers can deduct for home mortgage interest payments, the administration included it again in its 2010 budget ”” saying it could save $208 billion over the next decade.

Read it all.

The National Religious Campaign Against Torture wants the government to investigate claims that doctors and medical professionals performed unethical experiments on detainees in CIA custody during the Bush administration.

On Tuesday (June 8), members of NRCAT voiced their concerns over a report from the Physicians for Human Rights called “Experiments in Torture: Evidence of Human Subject Research and Experimentation in the `Enhanced’ Interrogation Program.”

According to the report, following the 9/11 terrorist attacks, doctors were asked to analyze and improve enhanced interrogation techniques like waterboarding, forced nudity, sleep deprivation and prolonged isolation.

Read it all.

“My best guess is that we’ll have a continued recovery, but it won’t feel terrific,” Ben S. Bernanke, the Fed chairman, said at a dinner at the Woodrow Wilson International Center for Scholars on Monday night. “And the reason it won’t feel terrific is that it’s not going to be fast enough to put back eight million people who lost their jobs within a few years.”

One could almost envision the winces in the White House as Mr. Bernanke observed that the unemployment rate “will stay high for some time.” He went on to note that even if the economy grew at 3 percent, which would be considered a healthy pace, it would do little more than keep pace with the normal rate of growth of the work force.

Virtually every day of late, White House officials have struggled to explain how their strategies to provide economic stimulus to bring down the unemployment rate square with Mr. Obama’s oft-expressed commitment to tackle a record budget deficit. They talk about spending this year ”” in modest amounts ”” while waiting for the prescriptions of the president’s commission on debt reduction, which reports, conveniently, a few weeks after the midterm elections.

Read it all.

Among the primary forces putting upward pressure on the deficit is the aging of the U.S. population, as the number of persons expected to be working and paying taxes into various programs is rising more slowly than the number of persons projected to receive benefits. Notably, this year about 5 individuals are between the ages of 20 and 64 for each person aged 65 or older. By the time most of the baby boomers have retired in 2030, this ratio is projected to have declined to around 3. In addition, government expenditures on health care for both retirees and non-retirees have continued to rise rapidly as increases in the costs of care have exceeded increases in incomes. To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.

—Federal Reserve Chairman Ben S. Bernanke in his testimony before the Committee on the Budget in the U.S. House of Representatives today