[ECON] July 8-11 2008

[Fredfredson]

Bernanke Says Fed May Continue Lending Into Next Year (Update3)

By Scott Lanman
Enlarge Image/Details

http://www.bloomberg.com/apps/news?p...dYU&refer=home

July 8 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke, seeking to allay renewed concerns over the health of the nation's financial system, said the central bank may extend its emergency-loan program for investment banks into next year.

``The Federal Reserve is strongly committed'' to financial stability and is ``considering several options, including extending the duration of our facilities for primary dealers beyond year-end,'' Bernanke said in a speech to a conference in Arlington, Virginia.

The Fed chairman's comments come a day after Fannie Mae and Freddie Mac fell to their lowest level since 1992 and the Standard & Poor's 500 Banks Index dropped to a 12-year low. It's the first time Bernanke has indicated how long he'll extend the lending programs that were introduced in March in a provision of Fed credit to nonbanks unprecedented since the Great Depression.

Bernanke also endorsed proposals to set up a federal liquidation process for a failing investment bank. The Treasury should ``take a leading role in any such process'' in consultation with regulators, he said. Such a resolution mechanism may help reduce concern that investors and dealers begin counting on Fed aid in case their bets go wrong.

The Fed started the unprecedented lending programs for investment banks in March under its authority to lend to nonbanks in ``unusual and exigent circumstances.'' Officials said at the time the Primary Dealer Credit Facility, which provides direct loans, would last for ``at least'' six months.

Rate Outlook

Continued lending to investment banks may make it harder for the Fed to raise interest rates this year. Traders estimate 74 percent odds of at least quarter point increase in the 2 percent benchmark rate by year-end.

``There was some speculation that, come September,'' the lending programs ``might be allowed to expire,'' Dominic Konstam, head of interest-rate strategy at Credit Suisse Securities USA LLC in New York, said in a Bloomberg Radio interview. ``A lot of people would have thought that might be a prelude to the Fed beginning a tightening cycle. Now, that is obviously that much more uncertain.''

The S&P 500 Banks Index, a measure of 22 firms including Fannie Mae and Freddie Mac, the largest sources of U.S. home financing, fell to 155.48 yesterday, its lowest level since 1996.

Fannie Mae, based in Washington, and McLean, Virginia-based Freddie Mac have dropped more than 60 percent this year, with declines accelerating in the past two weeks, on concern that the capital the companies have raised since December may not be enough to overcome writedowns.

FDIC Conference

Bernanke didn't comment on the outlook for the economy or monetary policy in his remarks today to a Federal Deposit Insurance Corp. forum on mortgage lending.

The PDCF and the Fed's Term Securities Lending Facility, which auctions as much as $200 billion in Treasuries, are both aimed at the 20 primary dealers in U.S. government debt.

Fed officials are working with the Securities and Exchange Commission and securities dealers ``to increase the firms' capital and liquidity buffers,'' Bernanke said.

The remaining four major investment banks, after Bear Stearns Cos.'s takeover by JPMorgan, are Lehman Brothers Inc., Merrill Lynch & Co., Morgan Stanley and Goldman Sachs Group Inc.

Bernanke said ``it is worth the effort'' for lawmakers to design a resolution ``regime'' for securities firms. Treasury Secretary Henry Paulson and FDIC Chairman Sheila Bair have also advocated such a mechanism, which already exists for commercial banks.

`High Bar'

``By setting a high bar for such actions, the adverse effects on market discipline could be minimized,'' the Fed chief said today. His call for a leading role for the Treasury is in line with Paulson's July 2 remark that ``any commitment of government support should be an extraordinary event that requires the engagement of the executive branch.''

In the case of commercial banks, the use of taxpayer funds in an emergency requires the approval of two-thirds majorities of the FDIC and Fed boards, and of the Treasury secretary in consultation with the president.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told the same conference that he supported Fed and Treasury proposals for ``policies, because of what happened, to take proper action if a large investment bank goes bankrupt.''

Without any liquidation procedure in place, the Fed in March decided to make a bridge loan to keep Bear Stearns out of bankruptcy. The central bank then agreed to take on $30 billion of hard-to-trade Bear Stearns assets to help secure its takeover by JPMorgan.

JPMorgan's Dimon

``The Federal Reserve in essence bought $30 billion of mortgage product from Bear Stearns; I want to remind people we bought $350 billion,'' Dimon said today. ``We don't really think'' the deal will end up costing taxpayers money, he also said.

Securities firms have cut back on their use of the programs in recent weeks. The balance of loans outstanding from the PDCF dropped to zero as of July 2, the first time that's happened since the program began. On March 26, the end of the first full week of operation, the PDCF had a balance of $37 billion.

Bids in the TSLF's weekly auctions, in which dealers swap securities such as mortgage-backed debt for Treasuries from the New York Fed, have declined since the start of the program. In the July 3 operation, firms submitted bids for $26.1 billion out of $50 billion of Treasuries offered.

One gauge of financial stress watched by the Fed has remained elevated. The difference between the overnight indexed swap rate, a measure of what traders expect for the Fed's benchmark rate, and three-month interbank loans in dollars was 0.74 percentage point today, up from 0.64 percentage point a month ago.

`Remained Strained'

``Although short-term funding markets remain strained, they have improved somewhat since March,'' Bernanke said.

Congress should legislate ``consolidated supervision'' of investment banks and other big securities firms, with the unspecified regulator having authority over capital, liquidity holdings and risk management, Bernanke also said today.

The Fed should also get ``explicit oversight authority'' over payment and settlement systems, putting the it on a par with counterparts from around the world, Bernanke said.

U.S. central bankers will already play a part in setting capital cushions at securities firms under an agreement yesterday with the SEC. The two agencies will collaborate in determining ``guidelines or rules concerning the capital, liquidity and funding'' arrangements of investment banks, the accord said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net
Last Updated: July 8, 2008 14:38 EDT

[Fredfredson]

Financials take FTSE back into bear market
By Michael Hunter
Published: July 8 2008 08:35

http://www.ft.com/cms/s/0/d1e0422e-4...nclick_check=1

London equities fell back into bear market territory on Tuesday, with financial stocks suffering after their US peers were hit overnight by a wave of fresh selling.

The FTSE 100 fell 131 points to 5,381.2, just under the 5,384-point level representing a 20 per cent decline from its June 2007 peak, and its lowest level since November 2005.

Only a handful of defensive stocks rose, with renewed worries about the health of the US financial system, and its global implications, at the forefront of traders’ minds.

There was also heavy selling across European bourses. Frankfurt’s Xetra Dax 30 lost 2.2 per cent to 6,255.4 whilst the CAC 40 in Paris gave up 2.1 per cent to 4,253.3. Overall, the FTSE Eurofirst 300 was 2.4 per cent lower at 1,151.7.

Wall Street was left poised on the brink of bear market territory after analysts warned that government-sponsored mortgage providers Fannie Mae and Freddie Mac could be forced to raise extra capital by an accounting change. The sector took blows across the board as investment banks and regional banks were hit by more analyst downgrades, reminding investors of the origins of the credit crunch within the American subprime lending sector.

The worry proved contagious. London’s banks were led lower by Royal Bank of Scotland, down 3.9 per cent at 193.2p. Lloyds TSB fell 2.9 per cent to 287p and HBOS lost 2.7 per cent to 267½p.

Wider financial stocks also fell, on growing concern about the lingering consequences of the credit crunch. London Stock Exchange fell 7 per cent to 671½p, the biggest single faller of the morning. Interdealer broker Icap was 2.1 per cent weaker at 452.3p and fund manager Schroders fell 2 per cent to 822p.

“Credit woes across the Atlantic remain very much at the heart of traders’ concerns whilst the fact crude prices have refused to push below $140 a barrel is also clearly a worry for some”, said Paul Webb, chief dealer at CMC Markets.

Bradford & Bingley continued to tumble below the 55p price of its pending rights issue, losing a further 26.2 per cent to 31p after losing 16 per cent over the previous session.

Fellow mid-cap Alliance & Leicester was 8.2 per cent weaker at 228.3p, after analysts at Panmure Gordon cut its price target on the stock to 180p from 450p. “We now expect that A&L will report losses in 2008 and 2009. We also think that capital ratios will weaken considerably, “ said the broker.

The FTSE 250 was 2.3 per cent weaker at 8,422.5 with housebuilders once more in focus after Persimmon confirmed plans to cut 1,100 jobs as the sector continued to struggle with the downturn in the housing market. Its shares fell 4.6 per cent to 218p. Taylor Wimpey, which last week failed to raise £400m of fresh capital, was 5.5 per cent weaker at 25.7p.

Miners could not provide support, with worries about the outlook for global growth taking momentum from the sector against a background of easing commodities markets. Anglo American lost 3.3 per cent to £30.49 and ENRC fell 3.3 per cent to £10.69.

Stubborn and intensifying fears about the outlook for consumer spending continued to take a heavy toll. Kingfisher, the owner of the B&Q home improvement chain also sensitive to the sluggish housing market, fell 6.6 per cent to 91.8p, the sector’s biggest faller. Carphone Warehouse lost 3.7 per cent to 182.9p and Enterprise Inns was 4.3 per cent lower at 347.8p.

There was a measure of uncertainty about the likely direction of monetary policy ahead of the Bank of England’s decision on interest rates, due on Thursday, although most observers were expecting it to keep the cost of borrowing steady at 5 per cent.

“The Bank of England is currently facing by far the most challenging economic environment since it was granted operational independence in 1997, said Howard Archer, chief UK and European economist at Global Insight.

“Latest data and survey evidence are now pointing consistently to a deepening economic slowdown, and the risk of recession is now looking very real. At the same time though, inflation is well above-target and still rising, and there are serious risks that this could prove to be more than a temporary state of affairs.”

Copyright The Financial Times Limited 2008

[Fredfredson]

Toxic CDOs Given Up for Dead Coming to Life With Pension Funds
By Jody Shenn
July 8 (Bloomberg) -- CDOs are back.

http://www.bloomberg.com/apps/news?p...PyE&refer=home

Collateralized debt obligations that helped drive banks to $400 billion of writedowns and credit losses are finding buyers under a different name: Re-Remics.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and at least six other firms are repackaging unwanted mortgage bonds as sales of CDOs composed of asset-backed securities fall to less than $1 billion this year from $227 billion in 2007 because of the global credit crunch. Re-Remics contain parts that are structured to guard against higher losses on underlying loans than most CDOs, allowing holders to sell or retain other sections at lower prices that can translate to potential yields of more than 20 percent.

``It's just the reincarnation of the CDO,'' said Paul Colonna, who manages more than $100 billion as chief investment officer for fixed income at GE Asset Management in Stamford, Connecticut. ``The mechanics are the same, but you're getting in at a much different level of valuation.''

GE Asset Management has considered buying the debt, Colonna said. The General Electric Co. unit may also have Re-Remics made out of bonds it owns if disposing of the riskier pieces boosts the securities' overall value.

Re-Remic stands for ``resecuritizations of real estate mortgage investment conduits,'' the formal name of mortgage bonds. Sales of the securities may help revive the market for new home-loan debt, according to Bernard Maas, an analyst in New York at credit-rating firm DBRS Ltd.

`Look to Restart'

``The hope is that by moving illiquid bonds to interested parties, the structured-finance community can look to restart,'' he said.

More than $9.3 billion of Re-Remics were created in the first five months of 2008, almost triple a year ago, according to Inside MBS & ABS. The debt represented 47 percent of mortgage bonds issued in the period, excluding those guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

A record $25 billion of Re-Remics were formed in 2007, the newsletter said. Sales in 2008 may exceed that, according to Sharon Greenberg, a Barclays Capital analyst in New York.

Unlike most CDOS, Re-Remics don't own debt or credit-default swaps based on the lowest-ranking subprime mortgage-bond classes. They are composed of AAA rated bonds backed by so-called Alt-A mortgages, issued to borrowers with higher credit scores who don't prove their incomes, seek higher debt ratios or buy investment properties.

Few Bonds

While CDOs are backed by more than a hundred bonds, Re- Remics typically combine fewer than a dozen, allowing holders to more easily analyze the debt.

Holders of mortgage bonds use Re-Remics to separate better- quality from riskier debt. That increases the chance the higher- ranked debt will retain its AAA rating, enhancing its value enough to boost the total worth of the mortgage pool, said Doug Dachille, chief executive officer of New York-based First Principles Capital Management LLC, which oversees $7 billion in fixed-income investments.

Lower-ranked pieces of the Re-Remics would be the first to record losses from defaults on the underlying mortgages, once lower-ranking bonds from the initial deals are wiped out, Dachille said.

A bond trading at 40 cents on the dollar could be split into a piece worth 80 cents and another piece that could then be sold cheaply enough to offer returns as high as 20 percent, Dachille said. Banks advised by First Principles bought lower-yielding senior pieces and some are also considering buying the bonds for their pension funds, he said. The firm is also starting a fund for pension clients that would invest in the debt, Dachille said.

`Credit Support'

``A lot of the stuff they wouldn't buy without the additional credit support,'' he said. ``They're happy with the 7.5 percent return. They just wanted greater certainty that they're going to get that 7.5 percent return.''

Transamerica Life Insurance Co., a unit of the Hague-based Aegon NV, is among holders of Re-Remics created this year by Lehman Brothers Holdings Inc., according to data compiled by Bloomberg. Reliance Standard Life Insurance Co., a unit of Wilmington, Delaware-based Delphi Financial Group Inc., owns a Re-Remic created by Countrywide Financial Corp., the data show. Cindy Nodorft, an Aegon spokeswoman, declined to comment. Bernard Kilkelly, a spokesman at Delphi, didn't return a message.

``It's one of the few cases where re-securitization actually increases, rather than destroys, value,'' said Scott Simon, head of mortgage-backed bonds at Pacific Investment Management Co. He wouldn't disclose whether the Newport Beach, California-based firm, the world's largest fixed-income manager, has bought the debt or used Re-Remics to repackage debt held by its funds.

$370 Billion

Commercial banks and savings-and-loans held more than $370 billion of non-agency mortgage bonds on March 31, according to Federal Deposit Insurance Corp. data. Much of that can only be sold at fire-sale prices after record subprime-mortgage defaults and home-price declines sparked losses on the underlying loans.

``This is an attempt to shake things up,'' said Scott Kirby, who manages about $20 billion of structured-finance securities at Ameriprise Financial Inc.'s RiverSource Investments LLC in Minneapolis. ``There's a lot of paper floating around that's having difficulty finding a home.''

CDOs, once the fastest-growing part of the debt markets, tumbled to zero cents on the dollar and credit ratings on some AAA pieces were cut to junk levels.

Goldman Sachs, based in New York, had about $15 billion of residential-mortgage securities on its books as of May 30, Chief Financial Officer David Viniar said on a conference call last month. New York-based JPMorgan's investment bank had $12.8 billion of prime and Alt-A securities as of March 31, according to an investor presentation in April. Lehman had $15 billion of home-loan assets as of May 30, CFO Ian Lowitt said on a conference call last month.

Restructuring Needed

``There are ample bonds that would fit the description of needing restructuring,'' Greenberg, the Barclays analyst, said.

Banks can increase the total credit quality of their assets by selling off lower-rated pieces and keeping the better part, Matthew Jozoff, an analyst at JPMorgan said. Avoiding downgrades also would prevent the banks from having to hold more capital to protect against losses on the debt.

Goldman spokesman Michael Duvally, JPMorgan spokeswoman Tasha Pelio and Lehman spokesman Mark Lane declined to comment.

Riskier Re-Remic mortgage securities are ``natural fit'' for hedge funds, according to a June 27 report by JPMorgan's Jozoff and John Sim. The debt offers higher potential yields at a time when it's difficult to borrow to boost returns, they wrote.

Re-Remics have repackaged so-called non-agency mortgage securities, which lack explicit or implied government guarantees, for at least 15 years. Re-securitizations of agency mortgage bonds date to the mid-1980s under First Boston's Laurence Fink, now chief executive officer of BlackRock Inc., and Lewis Ranieri of Salomon Brothers, now chairman of Ranieri & Co., Franklin Bank Corp. and Root Markets Inc.

Today's Re-Remics are ``an opportunity for dealers to find liquidity and to move bonds out of their inventory,'' said DBRS's Maas.

[Fredfredson]

The Difference Between Recession and Depression
Roger Schlesinger
Wednesday, July 09, 2008

http://tinyurl.com/6j58ln

The difference is easy: when your neighbor is out of work it is a
recession; but when you are out of work it is a depression. I would
like to say that I made that up but I didn't. I would also like to
say this discussion isn't very important today, but unfortunately it
is very important. Furthermore, your financial future can be greatly
affected by your understanding or lack of understanding of what I am
trying to say. We are heading straight toward a very serious
financial calamity in this country and are nearing the point of no
return. A couple of days ago a major bank, Indymac Bank, quit doing
residential loans in both their retail and wholesale divisions. One
year ago I was negotiating with this institution to bring my Company
into their fold. They were at that time a $2 billion bank. Now they
have a market cap of about $50 million. How can a bank lose $1.95
billion in less than a year? Measured against what bigger and more
prominent banks have written off it is peanuts. Is that why we don't
care? Thirty four hundred people are losing their jobs in an industry
that has shed over 500,000 jobs in the last 12 months. Unless you are
one of these workers is it just a recession?

Now we hear that a major bank, very near to calling it quits, is
being carved up in the board rooms of several other financial
institutions. This will rock Wall Street and Main Street alike, but
unless you are part of it it's just another aspect of the impending
recession. Washington politicos are trying to show their hearts and
souls are in the right place by passing some litigation that most
likely won't work. The government will help to rewrite about 400,000
loans for borrowers that haven't any equity in their respective
houses , but only if the banks are willing to take a loss. The banks
are turning losing into an Olympic event with totals beyond any ones
wildest dreams. But stop and consider this if you will. Who are the
banks? Aren't they the institutions that are holding yours and my
money. Is it okay with you if they lose your money, because it isn't
okay with me?. But then again if it is your money it is only a
recession to me; if it is mine, then we are beginning to talk
depression.

I certainly don't want anyone to think that the banks are the entire
problem, because they are just a small part. I watched a television
commercial the other day that was from an automotive manufacturer. It
went something like this: "We heard you didn't want to pay interest
on your car loan so we created a loan without interest and the
response was overwhelming". Overwhelming? The parent of the company
that ran the advertisement had sales that were down over 20% for the
month and now have announced the beginning of layoffs of their
executive workers, not just the usual workers on the assembly line..
The advertisement lacked credibility, as so many advertisements do in
light of what was happening. It was obviously geared to those who
don't read the news, listen to the news or care about the financial
condition of this nation. The stockholders should care, and I am sure
do care, as this once giant has now fallen in market capitalization
to about half of the capitalization of a door to door perfume and
fragrance company. Is it now time to ask "What's going on in this
country"?

What is going on is the possibility of the two largest buyers of
mortgages in the United States, Fannie Mae and Freddie Mac, might
need to be bailed out to the tune of $75 billion. That would take the
brass ring for losses and would be akin to losing a mid sized state.
While Rome was burning Nero was playing the fiddle, or so it was
said. While we are creating a financial nightmare I find that there
is a contest by the media to assess the blame for all of these
problems. Now that will really help! It is time for everyone, not
politicians, not the head of lending companies, brokerage companies
or banks, but everyone who owns or plans to own a home to seek real
answers.

I once had the privilege of playing golf with a congressman who told
me that no one in congress is an expert in anything. They just get
together and try to use their abilities to come up with the right
answers as a group and move forward. There are several congressman
and senators who are seeking to find out what has happened but when
they have uncovered some of the problems they seemed to have come up
with, from my perspective, the wrong conclusions. I have been in the
mortgage industry for almost two decades, working on the front lines,
and have never been asked or know anyone who has been asked by a
politician to explain how the industry works and how it could have
gotten in such a mess. That certainly is part of the problem because
day to day operations can be much different than the instruction
book. In my last column " Fixing the Economy is equal to Fixing Real
Estate" I stated that to save the economy from dire straights you
need to fix real estate. It is time to make the extra effort before
it won't really matter.

If Fannie Mae and Freddi Mac cease to function I dare say we will
have lost the bedrock of the mortgage market and will have no choice
but to turn to foreign nations to help bail us out. Perish the
thought! The fact that it is even remotely possible that this could
happen is extremely worrisome to those who understand how the
financial markets work.

Now before the warmth of summer turns to the chill of fall and the
freezing associated with winter, just about six months away, we need
to begin a counter attack on the falling financial markets. We must
realize that the injuries that are being taken by the financial
markets can leave the country paralyzed or worse. Don't think in
terms of your neighbors problems (recession) but instead make these
problems yours and by fearing depression get everyone demanding
answers and being part of the solution and not the problem. In the
coming weeks I will lay out what I think must be done and if you have
the desire and the ability you should also do the same. That way we
can have a national dialogue that might put an end to the nonsense
that we feel helpless to do anything about.

Let me leave you with the thought that when this all began, the sub
prime crisis, the natural reaction was to lower interest rates to
help the mortgage market. I believed then, and still believe that it
was the right move by the Federal Reserve, however it was a bit late
and too timid. If they had moved faster and with more boldness it
just might have stopped the problem before it got worse. Not only did
it get worse, but the dollar weakened and consequently oil started
increasing. Oil, which affects our life in so many ways, started the
economy in a downward spin which hasn't stopped because of all the
sectors oil touches. The various parts of our economy are all inter
connected and my recession can easily become your depression if we
don't realize what is going on and what we need to change the
direction. No one is free to look the other way.

Copyright © 2008 Salem Web Network. All Rights Reserved.

[potter]

Is this some of the whining McCain was speaking of?

[Gilles de Rais]

Re. the first article, I claim "I told you so". Although the maths genius got their numbers wrong and significantly underestimated the risks, the truth is that 'tranching' (CDOs are divided in tranches with different 'rights' to the cash flows from a common pool of underlyings/collaterals) is just an awesome idea that was always going to survive.

But i suspect structures will be simpler in the future... and assumptions about risks will be more conservative

[Tom Joad]

Originally Posted by potter

Is this some of the whining McCain was speaking of?

Quit your whining.

[Fredfredson]

Via Email

The End of the Boomland Economy
Ouzilly, France
Thursday, July 10, 20008

---------------------

*** Some financial advice from General Sherman...a razor-thin margin
of safety in U.S. Treasuries...

*** A quote for future historians...an old man can't become a young
man just by acting like one...

*** Why a good cook is indispensable...a suggestion as to how to
combat rising food prices...and more!

The Dow resumed its downward slide yesterday. It lost 237 points as
the deflation commandos continued their counterattack.

It's war. And war is hell, as General Sherman said, before burning
Atlanta to the ground.

Oil was unchanged in yesterday's trading. Gold gained $5.

Most of yesterday's hard fighting took place in the financial sector.

"Fed Sees Turmoil Persisting Deep Into Next Year," saith the New York
Times .

The New York press tells us that Steve & Barry's, a clothing retailer
with 200 stores, has filed for Chapter 11. And Fannie Mae and Freddie
Mac got walloped again. The two Mississippi Companies [a reference to
the government-chartered company in 18th century France that
dominated a huge bubble, went broke and practically bankrupted the
nation] desperately need to raise money. But even though the two are
backed by the U.S. government and clearly "too big to fail,"
investors are being a lot more grudging with their money these days.
Fannie had to pay 74 basis points over the Treasury rate to get cash,
much more than in the past. Freddie's stock dropped to $10. Fannie's
hit $15. Both traded as high as $60, if we recall correctly.

IndyMac is in the news too. The big mortgage lender specialized in
Alt-A loans – a step up from subprime, but apparently not a very big
step. The shares traded at $50 in 2006. Yesterday, they were marked
down to 44 cents.

Bloomberg tells us that Wall Street debt is being "downgraded by
derivative traders." They know the stuff better than anyone, of
course.

What is surprising – to us, anyway – is that they aren't downgrading
government debt. We believe the credit cycle has turned. After a
quarter century of falling yields, it looks to us as though yields
have formed a major, triple-bottom. Which is to say, bond prices,
(remember, they go up as yields go down) have hit three successive
peaks, more or less at the same altitude, in 2003, 2005 and again in
2007.

But if we're on the downward slope, so far it's a gentle one. We
looked yesterday and found the 10-year T-note yielding all of 3.88%.

We have to pause a minute and draw breath. What are bond buyers
thinking? Of safety, surely. They see this latest assault of
deflation – with falling stock prices all over the world...with Wall
Street collapsing...the Fed nervously holding the key rate at
2%...oil slipping, possibly topping out – and they look for a hole to
jump in. What better hole than U.S. Treasuries...dug deep by the full
faith and credit of the U.S. government and denominated in the
almighty dollar?

Well, ahem...that there is the problem. The hole may be deeper than
they think.

Conventional wisdom holds that inflation will not be a lasting
threat. The experience of the last quarter century is that short
bursts of rising prices are soon replaced by another longish period
of stable ones. But this was the period when the Chinese and Wal-Mart
were lowering prices on manufactured goods...when labor rates were
held down by the influx of millions of people into the modern
economy...and before the cycle of commodity prices turned up. This
was also the period in which interest rates were falling...and almost
infinite amounts of money were available to increase consumer
spending and production. That period is over.

Nevertheless, millions of investors expect it to continue. They
believe that a cooling world economy will bring the forces of
inflation back to their barracks and that they can go on collecting
3.88% coupons without feeling like chumps.

Who knows? Maybe they're right. Still, we think they are morons. Even
if they turn out to be right, the margin of safety on U.S. Treasuries
is so razor thin they're bound to cut a vein.

The real issue for us here at The Daily Reckoning is how the world
ends. The world as we know it...Boomland...the world of constantly
expanding credit and rising asset prices...is finished, we think.
Does it end with a bang or a whimper? Does it end with the bang of
inflation? Or the whimper of dying prices?

"Both" is still our best guess.

*** "People come to believe what they must believe when they must
believe it," we said today at breakfast.

"Where does that quote come from?" Elizabeth asked.

"It comes from me...from The Daily Reckoning . Many years from now,
as historians search through the ruins of our civilization, someone
will come across that line. Then, they'll wonder what it meant.
Finally, they'll realize how profound it is...and probably
misattribute it to some great thinker, like Thomas L. Friedman."

"Oh stop picking on Tom Friedman..."

"Okay...but seriously, you can't understand our era without
understanding how intelligent people can come to believe such absurd
things."

"What do you mean?"

"Well, for instance, there's a report in today's news. The SEC did a
study of the rating industry – you know, the people who decide how
creditworthy various investments are. Institutional investors rely on
them in placing money for pension funds and insurance and so forth.
Well, they found that the rating industries engaged in what they
called `flawed practices,' meaning that instead of telling investors
that subprime debt was trash, for example, they gave it Triple A
ratings. Any dope could see that when you lend money to people who
can't pay it back you're going to have trouble. But the rating
agencies made a lot of money by rating the subprime debt. If they
said it was trash, they wouldn't get the business.

"That's just a relatively small example. More broadly, history...and
life itself...follows certain inevitable patterns. When you're a
teenager you have to think like a teenager, in other words. When
you're an old man, you have to think like an old man. If you live in
Switzerland you have to think like a Swiss person. If you live in
America in 2008...for good or for evil, I don't know...but you have
to think like a card-carrying member of the reigning imperial
elite...that it's your duty to police the world. If you live in an
economy that is really growing and booming, you save your money and
invest, in order to profit from it. But if you live in an economy
that is peaking out or in decline, you just make the most of it,
spending and borrowing as much as you can...and then, you gradually
adjust your thinking to the new reality."

"Yes, but how do you know thought follows action...rather than the
other way around? If Americans had saved and invested...rather than
borrowed and spent...wouldn't the economy be growing, rather than
declining?"

"Well, Americans would be in much better shape, financially, of
course. But relative to the rest of the world, the United States
would still be in decline. An old man can't become a young man just
by acting like one. All he can do is accept old age with grace and
dignity."

"You may be reaching too far with this idea...it's a very fatalistic
view of things. But why do you bring this up?"

"Oh...because I just read in the paper about poor Obama."

"Poor Obama? I thought he was way ahead..."

"He is. But according to the report, he's worried that he can't
attract the old Hilary stalwarts...the white, lower-middle class
democrats. So, he's modifying his views on things like Iraq, abortion
and child rape. He's coming to think what he needs to think to win
the election. And what he needs to think is what appeals to the yahoo
voters – the mob of electors in a late imperial period. They want to
kick butt all over the world...and they want to worry about abortion
and child rape, rather than bother to think about the real challenges
the country faces – bankruptcy and declining living standards, for
example."

"Well, child rape and abortion are important moral issues."

"Yes, exactly, they're moral issues. They are the sort of thing that
get a man sent to Hell. But they're not important for the state.
Whether a child rapist gets life in jail or the scaffold doesn't
matter to the health of the empire. We don't even know which
punishment is worse for the offender. But rather than bother to think
about how the feds are going to close their $57 trillion dollar
financing gap, or how to bring the Pentagon back under control, Obama
is talking about frying child rapists. Don't get me wrong. As far as
I'm concerned the electric chair is too good for them. But these
issues are like terrorism...they're distractions, they're bugaboos;
they're not serious challenges to a great nation. But the mob wants
bread and circuses. They want Medicare, victory in Iraq...and public
hangings. Obama – like every other candidate except Ron Paul – is
ready to give them what they want."

*** We have come back to Ouzilly for the summer. You editor will
still be at work. He will travel to Spain, Canada, and America in the
next few weeks. But he will return to rural France each time – to
spend a few days of holiday.

We arrived on Tuesday night...dragging a horse van behind us. It was
10:30 at night.

"Hi, I'm Jean," said a pleasant woman with a Midwest accent, bright
red cheeks and yellow hair.

"I'm going to cook for you this summer."

You don't need much to be happy. But a good cook is indispensable.

Elizabeth had placed an ad on the Internet – on Craig's List. With so
many people coming and going, we need household help in the summer.
Jean, from Oregon, by way of Iowa, responded. She was already in the
kitchen when we arrived and had prepared a dinner for us.

"Everything is from the garden or the farm," she announced. "The
salad, the green beans, the peas, the onions, the eggs...well, not
the noodles.

"It's so nice to have a garden to work with. And Damien (the
gardener) is so nice. But I think he overdoes it..."

On the floor were huge buckets overflowing with green beans, peas,
onions and other vegetables we couldn't recognize.

"I'm going to can it...or freeze it. But there's no more room in the
freezer. He overdoes it, but it's so nice to have fresh food directly
from your own garden."

And here's a report from USA Today : "Americans are planting gardens
to cope with high food prices."

Yes, dear reader, it doesn't take much to be happy...or to beat
rising food prices. Just begin with a good gardener ...and hire a
good cook.

Until tomorrow,

Bill Bonner
The Daily Reckoning

[ninjalooter1701]

the yahoo
voters – the mob of electors in a late imperial period. They want to
kick butt all over the world...and they want to worry about abortion
and child rape, rather than bother to think about the real challenges
the country faces – bankruptcy and declining living standards, for
example."

That being said, the author claims that child rape is a moral issue. Sure, it is, but it's also a legal issue. He seems to gloss that over. He does make a good point, that the mob wants "bread and circuses." They want to see someone fry.

Speaking of which, where's Osama bin Laden?

[Francois Cellier]

From Reuters

U.S. seizes IndyMac as financial troubles spread

By John Poirier and Rachelle Younglai
Fri Jul 11, 2008 11:11pm EDT


WASHINGTON (Reuters) - U.S. banking regulators swooped in to seize mortgage lender IndyMac Bancorp Inc on Friday after withdrawals by panicked depositors led to the third-largest banking failure in U.S. history.

California-based IndyMac, which specialized in a type of mortgage that often required minimal documents from borrowers, became the fifth U.S. bank to fail this year as a housing bust and credit crunch strain financial institutions.

The federal takeover of IndyMac capped a tumultuous day for U.S. markets that saw stocks slide on a surging oil price and renewed fears about the stability of the top two home financing providers, Fannie Mae and Freddie Mac.

IndyMac will reopen fully on Monday as IndyMac Federal Bank under Federal Deposit Insurance Corp supervision, but tensions ran high as customers at a branch at its Los Angeles-area headquarters read a notice in the window saying it was closed.

At another branch down the road, a man who said he had more than $200,000 in an account -- twice what is normally FDIC guaranteed -- argued with a security guard who was closing up.

The FDIC, which will seek a buyer for IndyMac, estimated the cost of the bank's failure to its $53 billion insurance fund at between $4 billion and $8 billion.

"IndyMac is a company that was pretty much 100 percent invested in mortgage assets, and we're in a bad mortgage market, and it had no capital. It's not complicated," said Adam Compton, co-head of global financial stock research at RCM in San Francisco, which manages about $150 billion.

IndyMac joins top bank failures headed by the 1984 collapse of Continental Illinois National Bank & Trust Co.

The Office of Thrift Supervision (OTS) insisted IndyMac's failure was the second-largest bank failure based on FDIC figures. But the FDIC said its data showed it was third behind the collapse of First RepublicBank Corp in 1988.


RUN ON THE BANK

The OTS, IndyMac's primary regulator, blamed comments by New York Democratic Sen. Charles Schumer for causing a run on deposits at the largest independent publicly traded U.S. mortgage lender.

Schumer responded quickly on Friday, blaming the OTS for not doing its job and allowing IndyMac's loose lending practices. "OTS should start doing its job to prevent future IndyMacs," he said in a statement.

Schumer questioned IndyMac's ability to survive the housing crisis in late June, and over the next 11 business days, depositors withdrew more than $1.3 billion, the OTS said.

"This institution failed today due to a liquidity crisis," OTS Director John Reich said. "Although this institution was already in distress, I am troubled by any interference in the regulatory process."

IndyMac was founded in 1985 by David Loeb and Angelo Mozilo, who also founded Countrywide, another big mortgage lender whose loans helped fuel the housing boom. Countrywide was taken over last week by Bank of America Corp.

FDIC spokesman David Barr said agency officials arrived at IndyMac's headquarters in Pasadena at 3 p.m. (2200 GMT).

The successor FDIC-run bank opens for business on Monday. Over the weekend, depositors will have access to their funds by ATM, other debit card transactions, or by writing checks, but no access via online banking and phone services until Monday.

Yet many customers were in the dark as branches shut on Friday. "I'm pissed. They should have let me know," said Elizabeth Ortega, a 29-year-old hairdresser who has a checking account with IndyMac.

IndyMac had said earlier in the week it was unable to raise new capital, would slash staff by 60 percent and had stopped making home loans. Its stock then tumbled, last trading at 28 cents on the New York Stock Exchange, down 95 percent in 2008.

The FDIC insures up to $100,000 per deposit and up to $250,000 per retirement account at insured banks.

At the time of closing, IndyMac had about $1 billion of potentially uninsured deposits held by about 10,000 depositors. The FDIC said it would pay those depositors an advance dividend equal to 50 percent of the uninsured amount.

The OTS told a conference call with reporters that it did not expect significant market impact from IndyMac's closure as the firm is not a systemic institution and does not have numerous counterparties. Reich also said he did not expect a larger thrift to fail.


MORE FAILURES SEEN

Four small banks have already been closed this year and the FDIC is hiring more staff in preparation for more failures. The agency has boosted its list of troubled banks to 90 and has said an increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending. Last year, just three banks failed.

"IndyMac's takeover by the FDIC is one of many to come," predicted Daniel Alpert, an investment banker at Westwood Capital in New York.

Former FDIC official Ann Graham said it was not unprecedented for the FDIC to start running a bank after it fails. "It happens when they need to move more swiftly with the closing than they can move with a potential sale," said Graham, a law professor at Texas Tech University.

"They don't have to sell the institution over the weekend," she said. "They have the time to shop around."

Graham said the FDIC has the authority to operate an institution for two years but expected the agency would dispose of it much sooner than that.

[P & CA News Bot]

One of the largest mortgage lenders in the US, the California-based IndyMac Bank, collapses amid a growing credit crisis.

More...

[ninjalooter1701]

Without any liquidation procedure in place, the Fed in March decided to make a bridge loan to keep Bear Stearns out of bankruptcy. The central bank then agreed to take on $30 billion of hard-to-trade Bear Stearns assets to help secure its takeover by JPMorgan.

JPMorgan's Dimon

``The Federal Reserve in essence bought $30 billion of mortgage product from Bear Stearns; I want to remind people we bought $350 billion,'' Dimon said today. ``We don't really think'' the deal will end up costing taxpayers money, he also said.

Anyone want to put a wager on this one?

[Fredfredson]

Paulson Backs Fannie, Freddie in Their `Current Form' (Update8)

By Brendan Murray
Enlarge Image/Details

http://www.bloomberg.com/apps/news?p...efer=worldwide

July 11 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson signaled that a government takeover of Fannie Mae and Freddie Mac won't be necessary, saying they should continue as shareholder- owned companies with federal charters.

``Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,'' Paulson said in a statement in Washington. President George W. Bush told reporters separately that the two firms are ``very important institutions'' and that he discussed market ``concerns'' with Paulson earlier today.

Paulson's remarks indicate he wants to reassure shareholders they won't be wiped out by any government efforts to ensure the stability of the firms that own or guarantee almost half the $12 trillion in U.S. mortgages.

The companies' shares initially fell after the statement, before paring their losses. Fannie Mae declined $2.95, or 22 percent, to $10.25 in New York Stock Exchange trading, after reaching as low as $6.68 earlier today. Freddie Mac fell 25 cents, or 3.1 percent, at $7.75 after reaching a low of $3.89. Bonds and credit-default swaps on the companies rallied.

Paulson released the remarks after the companies' shares slid to their lowest levels in more than 17 years. Washington- based Fannie Mae and McLean, Virginia-based Freddie Mac fell more than 75 percent this year on concern they don't have enough capital to offset losses from the mortgage meltdown.

`Number of Options'

The Federal Reserve and Treasury are considering a ``number of options'' for aid to Fannie Mae and Freddie Mac, including lending through the central bank's discount window, Senator Christopher Dodd, a Connecticut Democrat and chairman of the Senate Banking Committee, said at a news conference.

Fed spokeswoman Michelle Smith said the central bank has held no discussions with Fannie Mae and Freddie Mac about access to the discount window. She declined to comment about which options are under consideration.

Late today, the companies defended their finances and said they have enough capital to weather the housing slump and help bolster the home loan market.

Fannie Mae ``has access to ample sources of liquidity, including access to the debt markets,'' spokesman Chuck Greener said in a statement. In a separate release, Freddie Mac said it's ``adequately capitalized, highly liquid and an essential part of the nation's housing system.''

Legislation Coming

Dodd said he expects the Senate and House of Representatives will next week ask Bush to sign into law a bill creating a stronger regulator for Fannie Mae and Freddie Mac and a federal program to insure as much as $300 billion in refinanced mortgages.

``This is not time to be panicking'' about Fannie Mae and Freddie Mac, said Dodd, whose panel oversees federal regulation of the firms.

The two companies will probably need a government lifeline, Senator John McCain of Arizona, the presumptive Republican presidential candidate, said to reporters on his campaign bus in Wisconsin. ``There's no doubt that there is a real significant, far-reaching problem that is going to have to very likely require some kind of government assistance.''

The federal government should soon channel capital to Fannie Mae and Freddie Mac, Robert Napoli, an analyst at Piper Jaffray Cos. in Chicago, said in an interview with Bloomberg Television. ``The more capital they add now, probably the less they'll have to add over the long run.''

Citibank Says Buy

Citigroup Inc. today kept a ``buy'' rating on the two stocks, saying the sell-off wasn't based on fundamentals. New York-based Citigroup analyst Bradley Ball said in a note to clients he doesn't expect ``nationalization'' of the companies.

The declines spurred officials to consider options including having regulators take over one or both companies, said Joshua Rosner, an analyst with Graham Fisher & Co. Inc., who met with officials in Washington yesterday.

``Although there is some danger here that Fannie and Freddie may become insolvent, I think it's very, very remote unless for some reason the credit markets lose confidence in the willingness of the U.S. government to stand behind them,'' said Peter Wallison, a former general counsel at the U.S. Treasury.

``It's impossible to imagine such a thing happening,'' Wallison, now a fellow at the American Enterprise Institute in Washington, said in an interview with Bloomberg Radio.

Credit Swaps

Credit-default swaps linked to the debt of Fannie Mae dropped 21 basis points to 56 basis points, according to broker Phoenix Partners Group in New York. Contracts on Freddie Mac declined about 19 basis points to 58 basis points. Before today, both contracts had more than doubled in the past two months.

``Nationalization should not be an option,'' former Treasury Secretary John Snow said in a telephone interview. ``They shouldn't be allowed to have their paper trade as if it's government paper.''

Officials said this week that the two government-sponsored enterprises have ``adequate'' capital, while Federal Reserve Chairman Ben S. Bernanke told lawmakers yesterday that they should, like all financial firms, raise more funds.

``They are adequately capitalized, holding capital well in excess of'' the requirements, James Lockhart, the director of the Office of Federal Housing Enterprise Oversight, said in a statement yesterday. ``They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets.''

$77 Billion

Fannie Mae and Freddie Mac would have to post pretax losses and writedowns of about $77 billion before the U.S. would be compelled to start a rescue, according to estimates by Fox-Pitt Kelton and Friedman, Billings, Ramsey & Co. analysts. The companies have already raised $20 billion to cover losses amid the highest delinquency rates in at least 29 years.

``Ofheo will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission,'' Paulson said today. ``We are maintaining a dialogue with regulators and with the companies.''

He and Bernanke yesterday said at a House Financial Services Committee hearing that Congress should pass legislation creating a new, stronger regulator for the two companies to help bolster investor confidence.

`Escalating' Signals

``The federal government will not only need to stand behind the GSEs but will need to encourage them to continue growing their book of business,'' Jan Hatzius, an economist at Goldman Sachs Group Inc. in New York, wrote in a note today. ``Should the market turmoil continue, the administration is therefore likely to continue escalating its signals of support'' to include ``outright credit support if needed,'' he wrote.

A federal rescue of Fannie Mae and Freddie Mac wouldn't compromise the Aaa credit rating for U.S. debt, according to Moody's Investors Service Inc.

``Even under a real stress scenario, the amount of money the government would have to come up with is not that large,'' said Steven Hess, vice president and senior credit officer at Moody's in New York. ``The amount of money required would not be so large that it would make us worry about the U.S. credit rating.''

``We must not overreact to the recent drops'' in the companies' shares, said Representative Paul Kanjorski, a Pennsylvania Democrat on the House Financial Services Committee. Ofheo ``has assured me that it is working to ensure the safety and soundness'' of Fannie Mae and Freddie Mac, which ``continue to have sufficient capital and liquidity.''

To contact the reporter on this story: Brendan Murray at brmurray@bloomberg.net
Last Updated: July 11, 2008 17:51 EDT

[Fredfredson]

IndyMac Seized by U.S. Regulators; Schumer Blamed for Failure

By Ari Levy and David Mildenberg
Enlarge Image/Details

http://www.bloomberg.com/apps/news?p...d=aAYLeK3YAie4

July 12 (Bloomberg) -- IndyMac Bancorp Inc. became the second- biggest federally insured financial company to be seized by U.S. regulators after a run by depositors left the California mortgage lender short on cash.

The Federal Deposit Insurance Corp. will run a successor institution, IndyMac Federal Bank FSB, starting next week, the Office of Thrift Supervision said in an e-mail yesterday. The regulator blamed U.S. Senator Charles Schumer for creating a ``liquidity crisis'' after a letter on June 26, in which he expressed concern that the bank may fail.

The Pasadena, California-based lender specialized in so-called Alt-A mortgages, which didn't require borrowers to provide documentation on their incomes. The demise adds to the crisis caused by the subprime collapse and may mean regulators will have to raise more money to support the federal deposit insurance program that repays customers when a bank fails.

``IndyMac is the vanguard, the precursor of more stuff coming,'' said Christopher Whalen, managing director of Institutional Risk Analytics, a market research company in Torrance, California. ``It's not surprising to see IndyMac resolved. What you have to ask is what's coming next. It's going to be a wave of medium to bigger-than-medium institutions.''

IndyMac's home state, where Countrywide Financial Corp. was also located before it was bought last week, has been among the hardest hit by foreclosures. California ranked second among U.S. states, with one foreclosure filing for every 192 households in June, 2.6 times the national average.

IndyMac's Losses

The lender racked up almost $900 million in losses as home prices tumbled and foreclosures climbed to a record. IndyMac becomes the largest OTS-regulated savings and loan to fail, according to the FDIC.

Mortgages serviced by IndyMac will be turned over to the FDIC and the regulator will be reaching out to customers immediately, Chairman Sheila Bair said on a conference call yesterday. Customers will have access to funds this weekend via automated teller machines and electronically and by phone starting next week.

The FDIC intends to sell IndyMac within 90 days, preferably as a single entity, Bair said. If that doesn't work, the lender will be sold off in pieces, she said.

After peaking at $50.11 on May 8, 2006, IndyMac shares lost 87 percent of their value in 2007 and another 95 percent this year. The stock fell 3 cents to 28 cents yesterday.

Schumer's Comments

IndyMac came under fire last month from Schumer, the Democrat from New York, who said lax lending standards and deposits purchased from third parties left it on the brink of failure. During the 11 business days after Schumer explained his concerns in a June 26 letter, depositors withdrew more than $1.3 billion, the OTS said.

``This institution failed due to a liquidity crisis,'' OTS Director John Reich said in the statement. ``Although this institution was already in distress, I am troubled by any interference in the regulatory process.''

Schumer blamed IndyMac's own actions and regulatory failures for the bank's seizure.

``If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today,'' Schumer, a New York Democrat, said in an e-mail yesterday. ``Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.''

The failure will cost the federal deposit insurance program about $4 billion to $8 billion, the FDIC said. Some $1 billion of uninsured deposits are held by about 10,000 customers, the FDIC said. Those depositors will get an ``advance dividend'' equal to half the uninsured amount, according to the statement.

Firing Workers

The FDIC insures $100,000 per depositor per insured bank, according to the agency's Web site. Customers may qualify for more coverage depending on the type of accounts they own, and some retirement accounts have a $250,000 limit.

IndyMac announced on July 7 that it was firing half its employees. The lender agreed to sell most of its retail mortgage branches to Prospect Mortgage, giving the Northbrook, Illinois based-company more than 60 branch offices with 750 employees. IndyMac also has a retail bank network with 33 branches and $18 billion in deposits, mostly insured by the FDIC.

The company was started in 1985 by Countrywide founders Angelo Mozilo and David Loeb under the name Countrywide Mortgage Investments. In 1999, it converted into a bank from a real estate investment trust. That year, Michael Perry replaced Mozilo as chief executive officer.

Under Perry's leadership, profit more than doubled from $118 million in 2000 to $343 million in 2006 amid the housing boom. The stock more than tripled over that stretch.

Perry will not be continuing with the new FDIC-controlled institution, while other executives will be retained, Bair said. The FDIC's John Bovenzi will assume the CEO role.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net.
Last Updated: July 12, 2008 00:23 EDT

[ninjalooter1701]

The Federal Deposit Insurance Corp. will run a successor institution, IndyMac Federal Bank FSB, starting next week, the Office of Thrift Supervision said in an e-mail yesterday. The regulator blamed U.S. Senator Charles Schumer for creating a ``liquidity crisis'' after a letter on June 26, in which he expressed concern that the bank may fail.

One man, saying, "The bank may fail," causing the bank to fail.

MY FRIENDS, THAT IS POWER!

[Fredfredson]

Ten Investing Rules to Throw Away
July 10, 2008 10:15 a.m.

http://online.wsj.com/article/SB1215...googlenews_wsj

The market slump isn't just shredding millions of college funds and retirement accounts.

It's also shredding the financial playbook that many American families had come to rely on to protect and grow their savings.

Think of all the rules and beliefs that worked reliably for decades, and which have been trashed in the last year.

Rule #1: You can safely trust the stock market to outperform over a decade.

Reality: Anyone who invested in Wall Street in the summer of 1998 and held on has earned just 9%. That's the total return on the Standard & Poor's 500 index, and includes reinvested dividends. And that's before inflation. Bonds, and savings accounts, did far better. If you held your cash in an account earning an average of just 3%, for example, today you'd be up 34%.

Rule #2: Don't try to "time" the market.

Reality: OK, you may not be able to "time" the market perfectly, but you can often value it – especially when it goes to extremes. Last year it should have been obvious to everyone that European stock markets had become overheated – while those in Asia, especially China, were in a huge bubble. Yet too many investors kept on buying (in the name of diversification, of course; see Rule #5 below).

Rule #3: Wall Street bankers know what they are doing.

Reality: Almost none of them saw this coming. The people running Bear Stearns didn't even know how much their own bank was worth at the end, let alone their loan book. The head of Citigroup was still betting on subprime loans last July, months after the industry had hit the iceberg. How many Harvard MBAs and Chartered Financial Analysts does it take to lose a trillion dollars on subprime mortgages? We'll let you know when this is all over.

Rule #4: The Fed, and the world's other central bankers, are steering the ship.

Reality: Five words: Alan Greenspan…and Ben Bernanke.

Rule #5: International equities give you a lot of diversification.

Reality: In a global market, no one is spared. The U.S. subprime crisis has hit many European markets much worse than Wall Street (among the early casualties was Northern Rock plc, a mortgage bank in England). And those booming Asian markets? They've done worse than the U.S. China's economy is still growing quickly, but the stock market is still down 50% from its peak.

Rule #6: Value and equity income funds will protect you in a downturn.

Reality: Many of these funds have done very badly. That's because a lot of "value" stocks started out overpriced. And many of these funds were loaded up to the gunwales with high-yielding banking stocks.

Rule #7: Financial markets are rational.

Reality: Throughout this crisis they've been all over the place – once again. Among the many examples: Banks were refusing to lend to perfectly sound municipalities last winter, and buying inflation-protected government bonds instead - at a zero percent real yield.

Rule #8: The U.S. housing market never goes down.

Reality: The U.S. housing market didn't go down between 1945 and 2005. But so what? Investment strategies based entirely on history are useless without a time machine.

Rule #9: Mortgage debt doesn't matter because the value of your house will keep going up.

Reality: See above.

Rule #10: Real estate and mortgage brokers can successfully advise you about economic trends and the direction of interest rates.

Reality: This is how so many people ended up in adjustable rate mortgages. After all, how bad could the resets be?

Many Americans are going to need to learn some new rules if they want to reach their financial goals. Those with long memories suspect those "new" rules will look a lot like the "old" rules that were around before the big bull market got going in the 1980s.

Write to Brett Arends at brett.arends@wsj.com