Watch it all–you need to understand it because of its huge implications going forward.

Let me be specific: If you didn’t like reading about A.I.G. brokers getting millions in bonuses after their company ”” 80 percent of which is owned by U.S. taxpayers ”” racked up the biggest quarterly loss in the history of the Milky Way Galaxy, you’re really not going to like the bank bailout plan to be rolled out soon by the Obama team. That plan will begin by using up the $250 billion or so left in TARP funds to start removing the toxic assets from the banks. But ultimately, to get the scale of bank repair we need, it will likely require some $750 billion more.

The plan makes sense, and, if done right, it might even make profits for U.S. taxpayers. But in this climate of anger, it will take every bit of political capital in Barack Obama’s piggy bank ”” as well as Michelle’s, Sasha’s and Malia’s ”” to sell it to Congress and the public.

The job can’t be his alone. Everyone who has a stake in stabilizing and reforming the system is going to have to suck it up. And that starts with the brokers at A.I.G. who got the $165 million in bonuses. They need to voluntarily return them. Everyone today is taking a haircut of some kind or another, and A.I.G. brokers surely can be no exception. We do not want the U.S. government abrogating contracts ”” the rule of law is why everyone around the world wants to invest in our economy. But taxpayers should not sit quietly as bonuses are paid to people who were running an insurance scheme that would have made Bernie Madoff smile. The best way out is for the A.I.G. bankers to take one for the country and give up their bonuses.

I live in Montgomery County, Md. The schoolteachers here, who make on average $67,000 a year, recently voted to voluntarily give up their 5 percent pay raise that was contractually agreed to for next year, saving our school system $89 million ”” so programs and teachers would not have to be terminated. If public schoolteachers can take one for schoolchildren and fellow teachers, A.I.G. brokers can take one for the country.

Read it all.

Saying that the recession continues to deepen, the Federal Reserve announced Wednesday that it would pump an extra $1 trillion into the mortgage market and longer-term Treasury securities in order to revive the economy.

“Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending,” the Fed said, adding that it would “employ all available tools to promote economic recovery and to preserve price stability.”

As expected, the Fed kept its benchmark interest rate at virtually zero. But in a surprise, it dramatically increased the amount of money it will create out of thin air to thaw out the still-frozen credit markets that have cramped lending to consumers and businesses alike.

Read it all.

Aside from the president he’s the most powerful man working to save the economy, but you have never seen an interview with Ben Bernanke.

Bernanke is the chairman of the Board of Governors of the Federal Reserve System, better known as the Fed. The words of any Fed chairman cause fortunes to rise and fall and so, by tradition, chairmen of the Fed do not do interviews – that is until now.

The Federal Reserve controls the economy by setting interest rates. But after the crash of 2008, Bernanke invoked emergency powers, and with unprecedented aggressiveness has thrown a trillion dollars at the crisis.

Ben Bernanke may be the most important Fed chairman in history. The question is, can he help lead America out of this deep recession and when?

Read it all. If you have the time, I highly recommend watching the video version. I thought the chairman did well–KSH.

Update: Barry Ritholtz has comments on the interview here.

Metropolitan Baptist Church was bursting out of its home.

From a group of freed slaves in Civil War-era Washington, Metropolitan Baptist had grown into a modern-day megachurch and community service powerhouse. In 2006, construction began on the congregation’s dream complex in Largo, Md. ”” a $30 million campus with a 3,000-seat church, an education center and an 1,100-car parking lot.

Last year, the congregation sold its church in Washington. Preparations began for the move to what leaders had taken to calling “God’s land in Largo.”

But on Oct. 20, their plans were abruptly put on hold.

The Rev. H. Beecher Hicks learned that financing for the project had dried up. Construction stopped. And the congregation found that it was homeless ”” reduced to renting space and struggling to find new financing.

Read it all.

Watch it all from Charlie Rose.

The 1931 collapse of the Austrian bank Creditanstalt provoked financial panic across Europe and almost single-handedly turned a bad downturn into the Great Depression.

Last week, when I read about the brewing European banking crisis, I suddenly began to dread that history might be repeating itself.

You might think that my worries are a bit late. After all, losses on subprime mortgages in the United States have already caused a Depression-like banking collapse.

Well, believe it or not, Europe’s current crisis is scarier.

Read it all.

An entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, “We can do that.” For a brief moment it appeared that they could. In 2003, Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for. It was, as one economist put it to me, “the most rapid expansion of a banking system in the history of mankind.”

Read it all.

Ruthie Christy firmly believes that God will take care of her in life. But right now, she could use a little help from the government as well.

Christy and her husband have been scrambling to keep themselves afloat since January, when a local paper mill cut his work schedule to as little as six days a month. They’ve put off paying bills, asked creditors for extensions and used whatever money they could to pay the mortgage on their North Charleston home.

Christy, 57, is still trying to come up with the cash to cover last month’s mortgage payment, with another round soon coming due. She’s tried to refinance her Ranger Drive home but can’t find any institution willing to write the loan.

Read it all.

The Federal Reserve Board of Governors receives daily reports on loans to banks and securities firms, the institution said in response to a Freedom of Information Act lawsuit filed by Bloomberg News.

The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast “a stigma” on recipients of more than $1.9 trillion of emergency credit from U.S. taxpayers and the assets the central bank is accepting as collateral.

Read it all.

I’m worried. We’ve just elected a talented young president with many good instincts about how to propel our country forward, extend health care to more people, make our tax code fairer and launch a green industrial revolution. But do you know what I fear? I fear that his whole first term could be eaten by Citigroup, A.I.G., Bank of America, Merrill Lynch, and the whole housing/subprime credit bubble we inflated these past 20 years.

I hope my fears are exaggerated. But ask yourself this: Why couldn’t former Treasury Secretary Hank Paulson solve this problem? And why does it seem as though his successor, Tim Geithner, won’t even look us in the eye and spell out his strategy? Is it because they don’t get it? No. It is because they know ”” like Roy Scheider in the movie “Jaws,” when he first saw the great white shark ”” that “we’re gonna need a bigger boat,” and they’re too afraid to tell us just how big.

This problem is more complicated than anything you can imagine. We are coming off a 20-year credit binge. As a country, too many of us stopped making money by making “stuff” and started making money from money ”” consumers making money out of rising home prices and using the profits to buy flat-screen TVs from China on their credit cards, and bankers making money by creating complex securities and leverage so more and more consumers could get in on the credit game.

Read it all.

I mentioned this program earlier but I wanted to make sure people were aware it can be viewed online here. Very much worth the time.

Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would “blow up,” and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful.

I asked Mr. Arvanitis, the former A.I.G. executive, if the company viewed what it had done during the bubble as a form of gaming the system. “Oh no,” he said, “they never thought of it as abuse. They thought of themselves as satisfying their customers.”

That’s either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up.

That would be us, the taxpayers.

Simply infuriating. Read it all.

“Our view is the economy will continue to deteriorate sharply this quarter and next quarter and be pretty weak second quarter and maybe sort of see stability fourth quarter, and then I think you will have a pretty, and a weak 2010 although I don’t think it will keep declining”¦I think 2011 will show some growth but still be well below the levels of 2006 and 2007. My own view is you may not get back to 2006 and 2007 a long time because we have sort of an emotional and psychic shift going on in America which is back to basics don’t live on leverage, live within your means, more humble life styles, less extravagant consumption, savings and all of that sort of stuff.

I believe that a lot of people in America are legitimately scared and have seen their life savings or what they perceived as their net worth largely either wiped out or cut in half. That’s going to forge fundamental behavioral differences and that will retard the growth.”

—Stephen Allen Schwarzman, Co-Founder and CEO of The Blackstone Group during the Company’s Fourth Quarter and 2008 Year End Earnings Conference Call yesterday

Devoting nearly 20% of his speech to the topic, …[President Obama] acknowledged the public loathing of bank rescue efforts. He explained the role of credit in creating and preserving jobs. And he took some requisite, and wholly justified, swipes at executives for their outrageous pay and perks. But most important, he stated unequivocally what no one in the chamber wanted to hear and what he did not want to have to say ”” that even more money might be necessary to restore the banking system to its former self.

He was right on all scores. Nothing is more important to the livelihood of Americans than getting the credit spigot flowing again. Without it, all other efforts to revive the economy will fail.

And yet, if Congress were asked today for more funds for banks, the likeliest response would be a resounding no….

But there is no valid rationale for opposing a round three if it becomes necessary.

Read it all and there is a different view here.

These are difficult times for economic policy makers, especially given what the new Administration inherited. But after five weeks of watching the repeated muffs of the Obama financial team, we’re inclined to recall Casey Stengel’s famous crack about the 1962 New York Mets: “Can’t anyone here play this game?”

Read it all.

ince the fall of the Berlin Wall, the countries of Eastern Europe have emerged as critical allies of the United States in the region, embracing American-style capitalism and borrowing heavily from Western European banks to finance their rise.

Now the bill is coming due.

The development boom that turned Poland, Hungary and other former Soviet satellites into some of Europe’s hottest markets is on the verge of going bust, raising worrisome new risks for the global financial system that may ricochet back to the United States.

Last week, Wall Street plunged after Moody’s Investors Service warned that Western banks that had recently beat a path to Eastern Europe’s doorstep now faced “hard landings,” spooking investors with new fears that the exposure could spread beyond Europe’s shores.

“There’s a domino effect,” said Kenneth S. Rogoff, a professor at Harvard and former chief economist of the International Monetary Fund. “International credit markets are linked, and so a snowballing credit crisis in Eastern Europe and the Baltic countries could cause New York municipal bonds to fall.”

Read the whole article.

“‘This is much worse than the East Asia crisis in the 1990s,’ said Lars Christensen, at Danske Bank. ‘There are accidents waiting to happen across the region, but the EU institutions don’t have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.’ Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.

“The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU “union bonds” should the debt markets take fright at the rocketing trajectory of Italy’s public debt (hitting 112pc of GDP next year, just revised up from 101pc — big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?”….

This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?

We are going to find out this year whether the European Union is like the Three Musketeers. Are they “all for one and one for all?” or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don’t think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.

However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point.

Read it carefully and read it all.

When Robert Allen Stanford arrived here in the early 1990s, few locals had ever heard of the Texas financier. Today, he dominates so many aspects of life on this sun-drenched Caribbean island that some have taken to calling it “Stanford Land.”

At one point or another, he has owned an airline that many locals and visitors fly on. A local newspaper that covers their goings-on. A vast residential complex where many live. Two restaurants where they eat. And the national stadium where they go to watch cricket, the island’s favorite sport.

But the crown jewel of his domain has long been Stanford International Bank, an offshore institution that attracted billions of dollars of cash from clients around the world ”” and especially from Latin America ”” seeking a haven for their wealth.

All the while, he cultivated a comfortable relationship with Antiguan officials. The bank made loans to the Antiguan government, which often used the money to award his companies lucrative construction contracts. To clean up the nation’s image as a dodgy tax haven, the authorities installed him on a new regulatory authority to oversee its banks ”” including his own.

To some, it felt too cozy.

Read it all from the front page of yesterday’s New York Times.

Rick Santelli, the CNBC reporter who went into a certifiable rant against the Obama housing plan Thursday, found himself in the White House bullseye 24-hours later: the object of scorn and humorous derision from the president’s press secretary Robert Gibbs.

“I’m not entirely sure where Mr. Santelli lives or in what house he lives,” Gibbs said during the daily briefing. “But the American people are struggling every day to meet their mortgage, stay in their jobs, pay their bills to send their kids to school, and to hope that they don’t get sick or somebody they care for gets sick that sends them into bankruptcy. I think we left a few months ago the adage that if it was good for a derivatives trader, that it was good for main street. I think the verdict is in on that.”

Read or watch it all. Put this down on a growing list (Tim Geithner’s first appearance announcing his ‘plan,’ Tom Daschle’s nomination collapsing etc.) of rookie mistakes by members of the Obama administration. Whether you agree with Santelli or not, it is just plain poor judgment to go after him in detail by name in this manner. Of course, it is a dream set up for CNBC abd NBC (which of course had the Santelli story on again last night). It also ensures that the story will have even more legs than it already does–KSH.

The holding companies seem to have invested most of their TARP money in their other businesses or else retained the option to do so by keeping it in deposit accounts, even as the capital of their banks decreased. At the same time the banks, which provide the majority of loans to large corporate borrowers, drastically reduced lending to new borrowers.

It’s easy to see why holding companies would withhold capital from their troubled banks. If a bank is insolvent – as many are now believed to be – and the government has to take it over, the holding company loses any capital it gave to the bank. Rather than take that risk, the holding company can opt to spend its money elsewhere, perhaps on trading of its own.

But this is not a good use of scarce capital. We might end up with too much of this proprietary trading and too little lending. It also means that when it comes time to recapitalize banks there is a bigger hole to fill, and when banks fail there is less capital available to meet the government’s obligations to insured depositors and other creditors.

Keeping money at the holding company may benefit its shareholders, but it is costly for taxpayers.

Bailouts, at the very least, should reach their target.

Read it all.

A warning from a major credit rating agency Tuesday sent European stocks and the euro tumbling, serving as a stark reminder to investors that the financial situation in Central and Eastern Europe was deteriorating and that the region faced a protracted slump.

Moody’s Investors Service, in a report highlighting the dangers of West European ownership of East European banks, warned of “hard landings” for most countries in the region and negative rating pressure on banks operating there. Those with the highest vulnerability are the Baltic countries, Hungary, Croatia, Romania and Bulgaria, Moody’s said.

European shares fell to their lowest close in three weeks, with declines led by the already battered shares of financial institutions from Vienna to Wall Street.

The euro fell to $1.2589 in late trading in London, from $1.2801 late Monday.

Read it all.

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Read it all in the FT (subscription required).

It seems like politicians for months have been throwing around numbers in the billions and saying that unless the government acts right now everything will get worse. What is going on?

The economic system was hit was a flurry of crises at roughly the same time, and there isn’t a single solution to all of the problems, even though they are connected.

What is the housing crisis?

Both political parties have supported the idea that individuals should own their own homes. But in pursuing that goal, some financial institutions lent money to people who could not afford the long-term commitment, which often included rising interest rates after an initial period of low payments. Critics complain that a variety of financing vehicles snared people into impossible situations, especially as prices of homes fell and the monthly mortgage payment rose.

Read it all.

I recommend the video report, but if you do not have the capacity to view it read it all. I also recommend CNBC’s House of Cards which I managed to get to over the weekend.

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria’s finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria’s GDP.

“A failure rate of 10pc would lead to the collapse of the Austrian financial sector,” reported Der Standard in Vienna. Unfortunately, that is about to happen.

Read it all.

The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is nationalization.

As free-market economists teaching at a business school in the heart of the world’s financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner’s recent plan to save it has many of the right elements, it’s basically too late.

The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion — including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans — is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.

Read it all.

Yesterday’s announcement ducked the central question of how to value the toxic assets. It is an issue that confounded Mr Geithner’s predecessor Hank Paulson, who ditched a plan for the government to buy assets directly, instead focusing on direct capital injections for the banks.

The Treasury said its programme would be “designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital”. The involvement of private-sector money would mean the government was not setting the price, it added. The exact mechanism, though, could take weeks to decide. Joseph Lavorgna, an economist at Deutsche Bank, said: “It is not big enough. There are few details. The administration is trying to buy time and they don’t get the fact that we need to get something yesterday.”

Tony Crescenzi, an analyst at Miller Tabak & Co, said: “It remains extremely uncertain how the Treasury will entice investors to do something they have been avoiding since the start of the crisis.”

The dilemma is that pricing the assets too low could make many big banks insolvent, while pricing them above market value means taxpayers handing a no-strings-attached subsidy to lenders.

Read it all.

A: Basically what happens is that after a period of time, economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.

Q: As goes GM, so goes the nation?
A: The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again.

This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes — the cash flows that are being produced to service them — or we are going to have to raise incomes by printing a lot of money.

It isn’t complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue.

Q: Isn’t the process of restructuring under way in households and at corporations?

A: They are cutting costs to service the debt. But they haven’t yet done much restructuring. Last year, 2008, was the year of price declines; 2009 and 2010 will be the years of bankruptcies and restructurings. Loans will be written down and assets will be sold. It will be a very difficult time. It is going to surprise a lot of people because many people figure it is bad but still expect, as in all past post-World War II periods, we will come out of it OK. A lot of difficult questions will be asked of policy makers. The government decision-making mechanism is going to be tested, because different people will have different points of view about what should be done.

—Ray Dalio, Chief Investment Officer, Bridgewater Associates in this weekend’s Barrons (full content limited to subscribers)

The federal government overpaid for stocks and other assets in attempting to help financial institutions last year, a government watchdog said Thursday, taking further issue with the beleaguered $700 billion rescue program.

Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the bailout funds, told the Senate Banking Committee on Thursday that Treasury in 2008 paid $254 billion and received assets worth about $176 billion.

The figures were reached by extrapolating the results of a study of 10 government transactions, comparing the price paid by Treasury and the value of the asset at the time of purchase. Warren did not present details of the transactions the panel analyzed. A full report will be released Friday.

Read it all.