Citi-Wachovia: Another day, another $270 billion

FDIC, Federal Reserve and Treasury Agree to Provide Open Bank Assistance to Protect Depositors

Citigroup Inc. will acquire the bulk of Wachovia's assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. Wachovia Corporation will continue to own Wachovia Securities, AG Edwards and Evergreen. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.

http://www.fdic.gov/news/news/press/2008/pr08088.html

While the members of the House of Representatives argue today over whether Hank Paulson should be given $250 billion to buy stuff with (with the possibility of later upping it to $350 billion, then $700 billion), taxpayers have just acquired $270 billion in, well, stuff.

----------
That's not all bad, especially now that most of the endangered financial institutions are commercial banks. The Federal Government has clearly defined that authorities take them over, merge them out of existence or shut them down — whereas it had to make things up as it went along with investment banks Bear Stearns and Lehman Brothers and insurer AIG. That's why the demise of giant banks Washington Mutual and Wachovia, arranged over the past week by the FDIC, occurred in a far more orderly fashion than the non-bank meltdowns.

But orderly isn't the same as cheap. To get Citigroup to absorb Wachovia, the FDIC agreed to share the risk on a $312 billion portfolio of loans (Citi has to eat the first $42 billion in potential losses; anything above that hits the FDIC fund).

Also, the fact that every big FDIC deal so far in this crisis has been different — IndyMac was allowed to fail, with only insured deposits safe; WaMu was seized, but all depositors were protected; and Wachovia was sold in a deal that protected both depositors and owners of the company's bonds but left shareholders with very little — has left investors guessing about the fate of the rest of the banking world. Hardest hit in today's market sell-off were regional banks like Sovereign Bancorp and National City, perhaps because they seem too small to get special FDIC treatment.

Federal authorities are going to keep doing whatever they can to keep the financial system from collapsing. Taxpayers will bear the risks and the costs of that, whether Congress votes to put them there or not. And it's possible — although nobody can know for sure — that this ad hoc approach will end up costing more than an up-front $700 billion bailout.

Woman goes raw, loses more than half herself

Stokes, who now weighs 138 pounds, has kept the weight off for four years and authored several books on "raw foodism" lifestyle.

What tips does she have for people considering a raw vegan lifestyle? First, start slowly.

"I recommend people start out being at least 50 percent raw and go from there," advises Stokes. "Maybe it ends up at some point you are completely raw, maybe not. As long as the majority of the stuff or at least 50 percent is fresh raw food ... then you're tipping the balance in your favor."
advertisement

Stokes also advises people to start eating things they like such as peaches, plums or spinach and then slowly incorporate more fresh raw foods. She admits the lifestyle can be socially challenging and she encourages people to connect with other "raw foodists."

"It's great to get support. If you look on the Internet and around you, you may find pot lucks," said Stokes. "Read books to inspire you to keep going on this journey.

Ending the Credit Crunch: Four Benchmarks to Watch

BusinessWeek -Friday September 26, 8:08

From a report released Sept. 22 by Standard & Poor's Market, Credit and Risk Strategies

The credit crunch has been with us for more than a year. The Federal Open Market Committee (FOMC) started cutting rates on Sept. 18, 2007, and fiscal stimulus provided a boost to second- and third-quarter gross domestic product, yet there are few signs that the combined efforts of the U.S. Fed and Treasury are making headway at putting the credit crunch to rest.


Financial market participants are still waiting for clear signs that monetary and fiscal policy stimuli have established an environment where the U.S. economy can grow its way out of its housing and credit problems. Furthermore, there are scant signs that the stimuli now in place will enable the economy to avoid a recession that would further complicate the dynamics of credit crunch and contagion.

What handful of key economic and market variables can be tracked over the next 6 to 12 months to best help us gauge whether or not U.S. policymakers are winning the war against the credit crunch?

S&P's recovery checklist

Standard & Poor's Market, Credit and Risk Strategies (MCRS) has created a short checklist of economic and market variables and identified the general developments to track. We will continue to monitor and report on these crucial metrics in the months to come:

1. Real estate values -- must stabilize or edge higher

2. The rate of existing and new home sales -- must rebound

3. Credit conditions -- must ease up substantially

4. Crude oil prices -- must continue to decline, and then stabilize

How are things tracking now?

1. Real estate values: encouraging

2. The rate of existing and new home sales: less encouraging

3. Credit conditions: discouraging

4. Crude oil prices: encouraging

Let's take a closer look at the checklist items:

1. Real estate values

First and foremost, real estate values must at least stabilize and preferably, edge higher. This will relieve anxieties surrounding residential mortgage-backed securities that -- rightly or wrongly -- are widely perceived to be a large collateral stake for the entire U.S. financial system. On this front, there is very good news: The average sales price of an existing single-family home has tentatively bottomed since February. Prices of existing single-family homes are currently holding at levels comparable to prices last seen in fourth-quarter 2007&mdashand before that, first-quarter 2005. The average selling price of a single-family home rebounded to $256,800 in June 2008, according to monthly data from the National Association of Realtors (NAR). That is the highest price recorded since August 2007, just after the start of the credit crunch. Continuation of this trend is vital to the stability and recovery of the credit markets.

2. The rate of existing- and new-home sales

The rate of existing- and new-home sales must rebound to a level that gradually clears away the massive inventory of homes offered for sale in the U.S. The sales-volume trend for existing homes -- seasonally adjusted annual rates (SAAR) -- has been depressed to the 5 million-unit level since October 2007 because of the credit crunch. This is less than encouraging, considering that the current inventory of 3.9 million single-family homes offered for sale is more than double the 1.9 million average level of inventories seen between 1993 and 2004, according to NAR data. A modest rebound in sales, even to as few as 5.5 million units SAAR, would be encouraging.

Since we also want to see home prices remain stable, or preferably edge higher from current levels, upticks in housing affordability will have to come on the mortgage interest rate front. After rising from a low of 5.8% in early May to as high as 6.6% in mid-July, conventional 30-year fixed-mortgage interest rates have been inching lower in recent weeks as fears of FOMC tightening subside. Conventional 30-year fixed interest rates in a range of 6% to 6.25% should support transaction volume and accelerate reductions in the housing overhang.

3. Credit conditions

Credit conditions need to ease up substantially before the liquidity-starved U.S. economy can resume trend-like gross domestic product growth. Considering the drastic repricing of credit risk that has occurred in the last year, it is a wonder that the broad economy has not followed the homebuilding industry into deep recession. The normalization of credit-risk spreads would help prop up the U.S. housing finance market specifically, and the U.S. economy generally. We are looking for signs that global credit markets are reacting to early signs of stability in U.S. housing by compressing risk spreads.

-- Three-month London interbank offered rate (LIBOR) spread over Fed Funds

At minimum, we want to see 3-month LIBOR fall below a spread of 50 basis points (bps) on overnight federal funds versus the current spread of 80+ bps, as shown in chart 3. In a credit-contagion-free world, the fed fund-LIBOR spread would normally fall within a range of 12 bps to 25 bps, but we will take anything below 50 bps as a sign of improving credit conditions.

-- Five-year USD swap spread

We also want to see 5-year USD interest rate swap spreads return to a range of 60 bps to 70 bps, versus the 95 bps spread seen today. The 60-bps-to-70-bps range represents the middle ground between the credit risk apathy range of 30 bps to 55 bps seen between 2003 and mid-year 2007, and the post-credit crunch range of 70 bps to 100 bps witnessed since July 2007.

4. Crude Oil Prices

To round out our credit crunch checklist, it would be very helpful if the price of crude oil were to keep declining and then stabilize in the neighborhood of $100 per barrel. This would help prop up the value of the U.S. dollar in the global currency market, ease commodity-driven inflation concerns within the Federal Reserve, and help underpin the consumer-driven U.S. economy, all of which would help ease credit crunch anxieties in global financial markets.

A premature housing-bottom signal?

The unprecedented decline in recent times of U.S. real estate valuations has dealt a severe blow to the balance sheets of leveraged global financial institutions. This occurred as market mechanisms quickly repriced longstanding assumptions about credit risk spreads, market volatility, and the overall credit quality of asset-backed securities in general. Not only has this prompted a great deal of risk aversion in how financial intermediaries conduct business with their client firms, but it also has precipitated a great deal of suspicion among investment-grade financial institutions in terms of counterparty risk, as reflected in the exceptionally wide fed fund-LIBOR spreads. None of this has been good news for the near-term growth prospects of the U.S. economy.

While the past year's escalating rate of residential mortgage delinquencies and defaults has been priced into the credit markets for many months, along with declining home prices, early signs of housing stability are not yet alleviating stress in the credit markets, thereby narrowing spreads. The credit markets sooner or later will have to take notice if the average selling price of an existing single-family home remains stable, or better yet, continues to rise. When this occurs, we may quickly find ourselves checking off the other items on our credit crunch checklist. If, however, it turns out that the average selling price of an existing single-family home is only prematurely signaling a bottom for housing, keep your powder dry and put this checklist in the file cabinet for the balance of 2008.

This report was prepared by Standard & Poor's Market, Credit and Risk Strategies group, which is analytically and editorially independent from any other analytical group at Standard & Poor's, including Standard & Poor's Ratings Services.

Troubled banks 101

Here is what you need to know.

Essentially, the FDIC insures deposits in several "ownership categories," which means you may actually be insured beyond the $100,000 limit you most often hear about. For example, single accounts in your name are covered up to $100,000 per bank. Joint accounts are a separate category and also get their own $100,000 of coverage per person per bank.

So if you and your wife have a joint savings account with $300,000 in it, $200,000 of that account is insured. Retirement accounts - which must be an actual retirement account, such as a IRA, SEP, etc., not just an account you consider part of your retirement savings - are covered for up to $250,000.

These limits apply only to bank deposits, however, which include checking, savings, money-market accounts, CDs and certain trust deposit accounts. It does not apply to other investments you may buy at the bank, such as mutual funds or annuities (which are covered in the Insurance section below).

But just because mutual funds aren't covered by FDIC insurance does not mean you would lose the money you have in mutual fund that you bought through the bank if that bank failed. Mutual fund assets are not part of the bank's assets - they're held in separate accounts - so they don't even come into play when toting up the bank's assets and liabilities.

As for the value of any mutual funds you acquired through a bank, that would be determined by the market value of their underlying securities, the same as any other mutual funds.

One caveat: if you invest in a bank money-market account, that money is covered by FDIC insurance, since that account is a bank deposit. If, on the other hand, you buy a money-market fund at the bank, that's not covered by FDIC insurance since a money-market fund is a type of mutual fund.

The bailout: What's at stake

Americans don't need to worry about another depression. But no matter what happens with the bank bailout, the economy is unlikely to turn around soon.


NEW ORK (CNNMoney.com) -- First, the good news: Even if warnings of economic catastrophe aren't enough to win approval of a controversial $700 billion Wall Street bailout, the economy is not at risk of falling into a depression, most experts agree.

During the Great Depression, unemployment shot up to as much as 25% in 1933. That came after the gross domestic product, the broadest measure of economic activity, plunged 13% the previous year.

Millions of people lost their savings when banks closed without any insurance for its customers' deposits. Few economists are predicting economic pain of that magnitude.

Now the bad news: Even if the plan to buy up bad mortgage debt from troubled banks and Wall Street firm does pass, it probably won't be enough to stop the economy from getting worse than it is today.

And if the battered credit markets fail to restart, either because the bailout fails to win Congressional approval or it doesn't work as planned, the nation could be facing its worst economic downturn since the Great Depression.

The current crisis caused credit markets to seize up earlier this month, almost like a car engine running without oil. And as the debate over the rescue plan's details raged, hours of negotiations among key lawmkers broke down late Thursday.

How we got here. Banks and Wall Street firms, worried about both their own needs for cash and the condition of other institutions, essentially stopped loaning money to one another. That choked off the money being made available on Main Street in the form of mortgage loans, business loans and other consumer borrowing.

Federal Reserve Chairman Ben Bernanke spelled out the implications of this credit crisis earlier this week in front of Congress.

He talked of how small businesses would not be able to get the credit they need to operate, grow and hire workers. Consumers would have trouble getting mortgages to buy homes, further driving down prices. And tighter credit would mean lower sales of cars and other big ticket items, leading to more plant closings and layoffs.

"Credit is the mother's milk of the modern economy. The tighter the credit spigot closes, the worse the economy is going to be," said Mark Zandi, chief economist of Moody's Economy.com. "Businesses operate on credit. If they can't raise money, then very soon they won't be making payroll."

Economic pushback. Economists say that without a restoration of credit, unemployment would likely shoot up to over 10% from 6.1% today. And GDP could fall at an annual rate of between 2% and 4%.

Those unemployment and GDP readings would be the worst in more than 25 years. And many believe it would not be until at least 2010 before the economy starts to recover, which would make the current downturn the longest since the Great Depression.

But other experts say that credit was already tight before this month's Wall Street meltdown and that pumping $700 billion into the banking system isn't going to necessarily spur the economy.

Where does it end? Lakshman Achuthan, managing director of the Economic Cycle Research Institute, said the banks and Wall Street firms that will be the main beneficiaries of the bailout are going to take the money and prepare to deal with growing defaults in Europe and Asia as those economies slow.

He added that smaller banks will be more likely to repair their battered balance sheets than lend more aggressively.

Others point out that the bailout doesn't address the root cause of the problems on Wall Street as well as the broader economy: falling house prices.

That's why the Wall Street bailout won't be the last one pitched to Congress and taxpayers.

Jerry Howard, CEO of the National Association of Home Builders, said the Wall Street bailout is crucial, even though he doesn't believe it will solve the credit crunch that was hitting his members before the crisis started.

For this reason, Howard said as soon as Congress returns to work from its upcoming recess, his trade group will be asking for another package of between $40 billion and $90 billion directed towards the housing market.

And even if the bailout package is passed and banks start lending again, the events of the past few weeks could batter already "abysmal" consumer confidence, said Keith Hembre, chief economist with First American Funds.

Hembre said worries about the economy, falling home and stock prices and the weakening job market will lead consumers to pull back on spending over the next few quarters. If that happens, it would likely cause cutbacks in business and government spending as well.

"I have to believe that the economic activity gets worse before it gets better," he said.

Analysts Say Solar Prices Beginning to Fall

Analysts predict solar-panel prices will falrl next year as the production booms. Meanwhile, public solar companies see their shares fall 5 percent.
by: Jennifer Kho
Bullet Arrow September 15, 2008

As solar stocks fell 5 percent across the board Monday and the Dow Jones industrial average dropped 2.65 percent to 11,119.84, analysts at a Greentech Media conference said solar-panel prices also are on the way down.
Advertisement

"Two weeks ago in Valencia, we saw a complete unwinding of the solar trade," said Jed Dorscheimer, an analyst with Canaccord Adams, at Greentech Media's Thin-Film Revolution conference in New York City, referring to falling share prices. "While companies attracted people to their booths with attractive women and open bars, the party is coming to an end."

Canaccord Adams expects to see more than 10 percent of erosion in average selling prices in the next two years, he said.

Meanwhile, the Prometheus Institute expects average selling prices for solar panels to fall below $3 per watt by the end of the year, said Travis Bradford, president of the institute.

Prices already have fallen to around $3.60 per watt in the first half of the year, from an average of about $3.70 per watt last year, and those prices are being propped up by the strong Spanish incentive, he said.

Some people bristle at the estimate, citing prices of €3 per watt in Spain, but thin-film solar - which comes with lower prices - now make up more than 10 percent of the global market, he said. First Solar, for example, is selling panels for $2.45 per watt.

Prices will continue to fall as more thin-film solar hits the market, as well as a "massive" increase in polysilicon capacity, Bradford said.

Thin film had already helped boost the solar production more than expected given the "deep-seated" limited growth of polysilicon in 2007, and manufacturers' measures to use silicon more efficiently and to recycle it also played a big role, he said.

The bulk of the thin-film growth came from the United States, which accounted for the majority of the world's thin-film production last year, he said. Thin-film solar made up nearly all of the growth of the U.S. solar industry that year.

"U.S. production on the polysilicon side really didn't grow, if you look at the total," he said. "For better or for worse, thin film is largely a U.S.-backed [effort]."

Of 266.2 megawatts of production in 2007, 161 megawatts came from thin film, with most of that - 129 megawatts - coming from First Solar (NSDQ: FSLR), 28 megawatts coming from United Solar Ovonics and 4 megawatts from Global Solar Energy.

Prometheus expects the amount of polysilicon available for solar to grow from 30,070 tons in 2007 to an estimated 46,084 in 2008, 71,019 in 2009 and a whopping 125,302 in 2012, Bradford said.

Meanwhile, contract prices have begun to level out, he said, reaching a projected $60 per kilogram in 2007, up from $55 per kilogram in 2006, $45 per kilogram in 2005 and $24 per kilogram in 2003.

While chatter around spot prices - for silicon bought immediately, not as part of a longer-term contract - has gotten "ridiculous," reaching $400 per kilogram in Taiwan, th e majority of silicon is being sold under long-term contracts, he said. The prices for most of the silicon being bought today was set in contracts signed in 2005 and 2006, he said.

"Certainly nobody's using $400 a kilogram for their inputs," Bradford said. "If you do a little math on that, if you need about 9 kilograms per watt at $400 per kilogram, you would have to have something like $3.64 of polysilicon per watt of module."

That would mean selling prices would have to be much higher than $3.60 per watt, he said.

"There's no way anyone's using 100 percent spot prices at $400 a kilogram," he said. "They are using a mix of spot and contract prices and getting to an average

Of course, the high spot prices mean the average silicon price, when spot and contract prices are combined, is higher than the $60 per kilogram companies are paying via contracts. Bradford estimates the global average price is probably around $90 to $95 per kilogram.

Nonprice terms in contracts also are becoming less onerous, he said, with either prices that drop over time or some ability to adjust to market conditions if silicon prices fall more than expected.

The cost of new silicon plants varies widely from $5 per kilogram anticipated for Timminco's upgraded metallurgical-grade silicon plant, to $52 per kilogram for an expansion of Hemlock's plant, to $152 per kilogram for a new plant from SilPro.

Prometheus expects manufacturing to reach 10.25 gigawatts of capacity in 2008 and 12 to 15 gigawatts of capacity by 2010, Bradford said.

Of course, the market depends on demand.

Demand in the last year has been driven by a hot Spanish market, a stable German market and expectations of growth in Italy, Greece and California, Bradford said.

The industry is concerned about the uncertainty of the subsidy program in Spain, which is set to expire this month (see Spanish Energy Commission Votes to Shrink Solar Incentives, Solar Firms Struggle to Forecast 2009 and Spain Considers Adding a Solar Gigawatt).

"The 'don't worry' attitude is no longer the attitude of the day," he said.

As more governments add solar-supportive policies, the diversification is going to create a lot more stability and flexibility in the marketplace, especially as prices for panels drop, he said.

Dorsheimer also said the demand side of the equation is the most difficult to predict.

"The silicon shortage really put the solar market back a couple of years," he said, as they created artificial market conditions. "Hopefully this will ... bring prices to where we won't need subsidies for much longer."

About 80 percent of the new entrants and technologies will fail, but the 20 percent that succeed will capture 100 percent of the opportunity, making solar an alluring market in spite of the approximately 30 percent drop in valuations in the past year, he said.

Dorsheimer said he sees the hot 2007 solar fund raising market as an anomaly.

"We're going from a sellers' market to a buyers' market, and that's going to change the type of valuations you will achieve," he said.

The question, he said, is whether valuations will return to 2007 levels.

"In our conclusion, [2007] was a bit of a bubble, similar to the telecom companies," he said. "However, instead of having one of two companies such as Cisco emerge from the telecom industry, we expect we will see several companies emerging."

Dorsheimer added that companies that took on large debts could be especially vulnerable.

"Some of the companies probably won't make it past 2007," he said.

Companies with low costs, high margins, a technological edge and the ability to grow large and to enter other parts of the value chain will have an advantage, he said.

"We are transitioning from a sellers' to a buyers' market," he said.

That transition could pose a significant risk to some companies looking to go public, he added.

Companies such as Miasole and Nanosolar, for example, have raised so much money that they would need multibillion-dollar valuations to generate profits for their original investors (see Nanosolar Confirms $300M Funding).

Dorsheimer said Miasole has either just raised, or is in the process of raising, $220 million on a valuation of $1.2 billion.

VentureWire in July reported the company was about to close $200 million to $220 million with a $1.2 billion valuation, and Greentech Media's Green Light blog last month noted that Miasole is rumored to be raising $200 million, with a valuation above $1 billion.

The company didn't immediately respond to requests for comment, but has declined to comment on speculation about the funding in the past.

China banks told to halt lending to US banks-SCMP

BEIJING, Sept 25 (Reuters) - Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.

The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.

"The decree appears to be Beijing's first attempt to erect defences against the deepening U.S. financial meltdown after the mainland's major lenders reported billions of U.S. dollars in exposure to the credit crisis," the SCMP said.

Jack Welch says U.S. faces "deep downturn"

NEW YORK (Reuters) - Former General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz) Chairman and Chief Executive Officer Jack Welch said the U.S. economy faces a deep downturn in coming quarters, and he supports a proposed $700 billion government rescue package for the financial sector.

"I now believe we are in for one hell of a deep downturn," Welch told the World Business Forum in New York on Wednesday, adding that the first quarter of 2009 will likely be "brutal."

Until recently, Welch said, he had believed the U.S. economy could avoid recession, but he has changed his mind.

"I am now caving," he said. "Get ready for real tough times. They're coming. There is no credit available."

Welch said mortgage lenders, legislators, investment bankers and others are all to blame for the crisis, which stemmed from easy credit and investors' appetite for yield.

"The problem was money didn't cost anything," Welch said. "People took swings."

He likened the crisis to Agatha Christie's "Murder on the Orient Express," in which all the suspects turn out to be guilty; but he singled out the role of investment banks in the crisis.

"We have to look at the damn investment bankers," he said. "They're playing with other people's money. The only penalty was a cut in their bonus, not their head.

Buffett to Invest $5 Billion in Goldman

--------------------
Buffett is buying $3 billion of General Electric Co. preferred shares. The perpetual preferred stock carries a dividend of 10 percent, similar to the terms Buffett struck with Goldman Sachs.

Berkshire also expects to receive warrants to buy $3 billion worth of GE common shares for $22.25 each, exercisable at any time for a five-year term
------------------
The deal is structured in two parts, giving Berkshire a stream of cash and potential ownership of roughly 10% of Goldman. Berkshire will spend $5 billion on "perpetual" preferred shares of Goldman. These are not convertible into equity but pay a fat 10% dividend.


Berkshire also will get warrants granting it the right to buy $5 billion of Goldman common stock at $115 a share, which is 8% below the 4 p.m. closing share price Tuesday of $125.05. At Goldman's roughly $50 billion market value, based on that closing price, exercising those warrants would give Berkshire about a 10% stake in Goldman.

Goldman also will go to the public to raise at least a further $2.5 billion by selling common shares. Once it does, Berkshire's stake -- if it has exercised the warrants -- would fall to about 7%. Goldman will have the right to repurchase the preferred shares at any time for a 10% premium.
( asr: if Buffet exercises warrents into perferred shared at $115 after that time Glodman can repurchase any time back them with 10% premium of market price of that day
asr note2: see smart Glodman , after Buffet $5B , they sell common shares , so public has confidence to buy common shares . With out Buffet $5B public may not be ready to buy Goldman common shares)

Goldman's plan to raise capital comes just a day after Morgan Stanley announced plans to raise about $8 billion by selling up to a 20% stake to Mitsubishi UFJ Financial Group, a big Japanese commercial bank.

Goldman, Morgan Stanley bet on commodities

By Christine Harper, Bloomberg - Tuesday, June 17, 2008


NEW YORK -- On Wall Street, where just about everyone has lost confidence in financial assets, Goldm

an Sachs Group Inc. and Morgan Stanley are making money the old-fashioned way: Buying and selling commodities.

Goldman and Morgan Stanley are expected by analysts to report the best second-quarter earnings of the world's biggest securities firms this week, having limited their losses from the collapsing credit market. They also lead Wall Street in commodities trading, where crude oil futures doubled in the past year and the price of products from gold to corn soared to record highs.

Surging prices are attracting investors, as well as companies hedging their positions by buying derivatives. That's played to the strength of Goldman and Morgan Stanley, which dominate the market for commodity derivatives. The two New York-based companies accounted for about half of the US$15 billion of revenue that the world's 10 largest investment banks generated from commodities last year, said Ethan Ravage, a financial-services industry consultant in San Francisco.

Commodity trading "is very large for them, and that is even more important now given what's happening with the rest of the businesses," said Frank Feenstra, a consultant at Greenwich Associates, the Greenwich, Connecticut-based research firm whose survey last month found Goldman and Morgan Stanley were the preferred dealers of corporate users of commodity derivatives. "There are more commodities used, more hedging by companies, and the investor population has increased significantly as well." Goldman probably will report a 32 percent drop in second-quarter profit today, and Morgan Stanley may say on June 18 that net income fell 59 percent from a year earlier, according to the average estimate of analysts surveyed by Bloomberg.

Blankfein and Mack

That's relatively good news for Goldman Chief Executive Officer Lloyd Blankfein, 53, and Morgan Stanley CEO John Mack, 63, when compared with the US$2.8 billion second-quarter loss reported last week by Lehman Brothers Holdings Inc. Bear Stearns Cos. was forced to sell itself to New York-based JPMorgan Chase & Co., the third-biggest U.S. bank, after almost going bankrupt in March.

"Fixed-income is really, really tough right now," said Ralph Cole, a senior vice president of research at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which manages US$2.7 billion and holds Goldman shares. "The two names that had so much trouble were big fixed-income shops, whereas Goldman obviously has commodities." Goldman, the only one of the 10 biggest investment banks to show a gain in its stock price last year, fell 17 percent so far in 2008, and Morgan Stanley tumbled 23 percent in New York Stock Exchange composite trading. By contrast, Merrill Lynch & Co. dropped 29 percent and Lehman fell 61 percent.

A few speculators dominate oil trading : They account for 81% of contracts on the NYMEX

Are Oil Prices Rigged?
By Ari J. Officer and Garrett J. Hayes Friday, Aug. 22, 2008 ( standford grads )


Thanks to margin in the futures market, you can trade ten times more oil than you could otherwise afford. For only $9,000, you could control more than $140,000 of oil at recent highs.

We've all read that speculators are driving oil prices artificially high — a claim that gets more interesting in light of oil's recent fall below $115. But maybe we're looking at it from the wrong perspective. Suppose that major suppliers in the oil industry are these manipulative speculators.
Is it possible that oil prices are rigged? You bet. Here's how:


The futures market has become the public driving force in pricing oil. But the vast majority of oil consumed in the world is purchased through private deals, given the massive undertaking of physically delivering millions of barrels. However, a series of private deals cannot establish a market price. Because pricing in the futures market is transparent, in that trade activity is publicly available, it establishes the widely accepted benchmark for the price of oil. In other words, the futures market serves as the price discovery mechanism for the oil the world consumes

All told, about one billion barrels of oil are traded daily through futures contracts at the New York Mercantile Exchange (NYMEX). This volume significantly overshadows the 80 million barrels of oil consumed each day worldwide. Yet this large volume of trading is misleading. Most of the trades are just noise: speculators going for quick profits, taking a position, and closing it out immediately.

The futures market is much smaller than the real oil market. When you consider margin, the amount of money actually invested is even smaller. Indeed, one dollar invested in a long-term position in the futures market carries the leveraged weight of more than $300 in the physical oil market.

The point is, it would only take about $9 billion to control the entire long position in oil. That sounds like an enormous amount of money, but some of the major individual players in oil are bigger than the market itself: Sultan Hassanal Bolkiah Muizzaddin, of Brunei Shell Petroleum, is worth about $23 billion; Saudi Prince Alwaleed Bin Talal Alsaud is worth about $21 billion; Russian Vagit Alekperov of LUKoil is worth about $13 billion. No, we're not implicating any of these guys in market rigging; in fact the list of billionaires with that kind of swag is long. The point is that anyone in that category could clearly handle the risks of the oil futures market, and they might even be willing to take delivery on oil. With suppliers holding back their large stakes in oil before delivery, those speculators and hedgers on the other side (those who have sold oil) will need to pay higher prices to get out of their positions. Oil suppliers' ties to the oil market itself give them a unique advantage in cornering the market.

The futures markets is a closed book that needs to be opened beyond price transparency to participant transparency. After each contract has expired, NYMEX and other exchanges should reveal the participants in each trade. Tear down the wall of anonymity, and long positions will, we believe, connect back to oil suppliers, who should theoretically be sellers of oil, not buyers.

Is this vulnerability a reality? Is economics so wrong in applying its supply-demand theory that we might confuse corrupt manipulation with fair pricing? There's motive, opportunity, and greed at play. Why would we expect anything else?

Ari J. Officer studies financial mathematics at Stanford University. Garrett J. Hayes studies materials science and engineering at Stanford University

-----------------------
By David Cho - WASHINGTON POST -Updated: 08/24/08

WASHINGTON — Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.

But when the Commodity Futures Trading Commission examined Vitol’s books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel.

Even more surprising to the commodities markets was the massive size of Vitol’s portfolio — at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.

The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators.

Other CFTC data showed that a significant amount of trading activity was concentrated in the hands of just a few speculators.

The CFTC, which learned about the nature of Vitol’s activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders.

Some lawmakers have blamed these firms for the volatility of oil prices, including the tremendous run-up that peaked earlier in the summer.

“It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency’s laughable assertion that excessive speculation has not contributed to rising energy prices,” said Rep. John Dingell, D-Mich.

He added that it was “difficult to comprehend how the CFTC would allow a trader” to acquire such a large oil inventory “and not scrutinize this position any sooner.”

The CFTC, which refrains from naming specific traders in its reports, did not publicly identify Vitol.

The agency’s report showed only the size of the holdings of an unnamed trader. Vitol’s identity as that trader was confirmed by two industry sources with direct knowledge of the matter.

CFTC documents show Vitol was one of the most active traders of oil on NYMEX as prices reached record levels. By June 6, for instance, Vitol had acquired a huge holding in oil contracts, betting prices would rise. The contracts were equal to 57.7 million barrels of oil — about three times the amount the United States consumes daily. That day, the price of oil spiked $11 to settle at $138.54. Oil prices even-tually peaked at $147.27 a barrel on July 11.

The biggest players on the commodity exchanges often operate as “swap dealers” who primarily invest on behalf of hedge funds, wealthy individuals and pension funds, allowing these investors to enjoy returns without having to buy an actual contract for oil or other goods. Some dealers also manage commodity trading for commercial firms.

To build up the vast holdings this practice entails, some swap dealers have maneuvered behind the scenes, exploiting their political influence and gaps in oversight to gain exemptions from regulatory limits and permission to set up new, unregulated markets.

Many big traders are active not only on NYMEX but also on private and overseas markets beyond the CFTC’s purview. These openings have given the firms nearly unfettered access to the trading of vital goods, including oil, cotton and corn.

Using swap dealers as middlemen, investment funds have poured into the commodity markets, raising their holdings to $260 billion this year from $13 billion in 2003. During that same period, the price of crude oil rose unabated every year.

CFTC data show that at the end of July, just four swap dealers held one-third of all NYMEX oil contracts that bet prices would increase. (Dealers make trades that forecast prices will either rise or fall.) Energy analysts say these data are evidence of the concentration of power in the markets.

CFTC leaders have argued that speculators are not influencing commodities’ prices. If any new information arises during the agency’s examination of swap dealer activity, officials said they would report it to Congress.

“To date, the CFTC has found that supply and demand fundamentals offer the best explanation for the systematic rise in oil prices,” CFTC spokesman R. David Gary said, reading a statement that had been crafted by agency officials. “Regardless of their classification . . . the CFTC’s market surveillance group scrutinizes daily the positions of all large traders, both commercial and non-commercial, to guard against market manipulation.”

Victoria Dix, a spokeswoman for Vitol, declined to answer questions.

In the coming years, commodity investments by funds could grow to $1 trillion, veteran hedge fund manager Michael Masters said in testimony before the Senate earlier this year. In an interview, he said this trend could raise commodity prices for everyone in the coming years and “have catastrophic economic effects on millions of already stressed U. S. consumers.”

Meanwhile, commodities have been good business for big Wall Street brokerages.

Goldman Sachs’ commodity trades helped keep it profitable during the credit crisis, said Richard Bove, a banking analyst at Ladenburg Thalmann.

“Business is lousy right now,” Bowie said of Goldman Sachs. “Commodities and currencies are clearly the strongest business they have right now.”

In the coming months, swap dealers expect to have yet another venue for oil speculation. The CFTC has stated it would not stand in the way of trading in U. S. oil contracts overseas in Dubai. Goldman Sachs and Vitol are among the major investors in this new exchange.

Another devil in the financial crisis

You may not understand derivatives, but you could eventually feel the effects of these arcane investment tools: slower growth, higher interest rates and a weaker dollar.

By Jim Jubak

Bet you haven't seen this on a bumper sticker lately: "Save the derivatives market."

Hardly catchy. Especially since almost no one actually knows what a derivative is. And it sure goes against the emotions of the crowd right now.

Along with Christopher Cox, the head of the Securities and Exchange Commission and of a Wall Street culture of greed, derivatives are the villains in the current collapse of the global financial system.

The Credit Crunch Will Go On

The events of Black Sunday (the bankruptcy of Lehman Brothers) and Terrible Tuesday (the forced takeover of AIG) are seen by most observers as either cataclysmic or cathartic; an angry sun setting on decades of "credit" capitalism or the final cleansing of the financial system of its excesses, resulting in swift recovery.

Neither image is accurate. The events of this week are a logical progression in the elimination of credit excesses, marking neither Armageddon nor the beginning of renewal. Unfortunately, this is just another stage in the lengthy adaptation of the market system to a less-than brave new world. But it does allow us to get a glimpse of where we are ultimately heading.

Here are the key events: Two investment banks, categorized as non deposit-taking financial institutions (NDFIs), were in difficulty. One fire-sold itself to a bank (Merrill). The other went bust (Lehman). In the case of AIG, another NDFI, the government has imposed a controlled bankruptcy through nationalization.

The collapse of these NDFIs ought to have been expected. Why? They have much less capital than banks to support losses and far riskier assets. They borrow and lend money using securities (often pledged by their clients) as collateral. As financial markets fall their gearing ratios (i.e., the value of their debt relative to their assets) rise. To maintain a constant gearing ratio, the NDFI has to liquidate assets and pay down loans. This causes financial asset-prices to fall and the NDFI gearing ratio to rise again.

So, the outcome will be a long gray, global recession -- not unlike what Japan experienced after the bursting of its "bubble economy" -- in which policy measures (low interest rates, huge liquidity injections and fiscal spending) will attempt to keep it from developing into a deflationary collapse while the credit system adjusts.

Global recession will also mean further losses in the credit system. This time the losses will be smaller as a percentage of higher quality assets, but will affect much bigger pools of debt (e.g., prime mortgage markets are seven times bigger than subprime, and other consumer debt markets are four times as big). This means that, even with lower loss ratios, potential losses could be as big as subprime losses and destroy as much bank capital, causing further credit contraction.

But all is not gloom. There will be an end, as there is to all things. When we emerge from this it will be to a world in which thrift has replaced leverage and scarce capital is invested more productively.

India has over 550 million people below the age of 25 years

------------
asr: see the potential if you can tap and train this huge youth, skilled work force and at world cheaper prices
---------------
According to the Federation of Indian Chamber of Commerce and Industry
(FICCI), India's demographic profile, with over 550 million people below the
age of 25 years, offers a sharp contrast to the labour constraint already
being faced by developed countries.

Member States like India and Iran (with 70% of its population under the age
of 30 years) are considered young countries, with a youthful population and
an attractive pool of skilled labour. There exists a huge potential for this
young and skilled labour to power the industry in more well developed member
States like Singapore and Australia.

Tremendous opportunities therefore exist for companies from Australia,
Singapore and Malaysia to invest in the tourism, infrastructure, and
engineering sectors in our least developed, as well as developing Member
States.
---------------
- this article by SamPitroda
I see hope in India mainly because 550 million are below the age of 25. In most places the population is ageing or decreasing. India is going to be a source of major global workforce.

The history of mankind is at a major transitional point. Everything we are doing today is a paradigm of the 19th or early 20th century. Take education or transportation. Who decided that it should take four years to get a degree? Somebody decided 200 years back and we are continuing it. Today, when you think of education you think of duster, chalk, blackboard, teacher, grades, exams or classroom. Technology has changed the learning models.

Today ask anybody how to open a bank account and you will know these kinds of processes were based on a 19th century mindset. What is the role of money, the role of World Bank, the role of IMF? All these decisions that were made after World War don't make any sense anymore.

Internet has changed everything, business models, access... everything in our lives is changing and different. Any local event becomes global instantly. All these have a far-reaching impact and we will have to restructure our institutions.

Today, health and education are expensive and not easily accessible.
--------------------

Second, Larger Wave of Mortgage Defaults Coming

Calls of a bottom in either housing or financials have been premature. Those perennial optimists who keep incorrectly making those erroneous bottom tick attempts need to consider the following:
http://bigpicture.typepad.com/comments/2008/08/second-larger-w.html
-------------------

Housing Lenders Fear Bigger Wave of Loan Defaults

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

More losses, failures expectedhttp://money.cnn.com/2008/09/19/news/economy/will_it_work/index.htm?postversion=2008091914

"What the government is doing now is not suddenly going to make institutions profitable," he said. "What we're talking about is trying to make them stable. That means removing the risk from their balance sheet and putting it on the taxpayer. The government has a much better ability to hold onto that risk for an extended period of time."

Still, Seiberg is optimistic that the bailout will help home prices finally start to recover since it should lead to lower mortgage rates and improve consumer confidence.

But others say that there are still enough fundamental problems in housing, including a huge glut of homes for sale and the likelihood of more foreclosures in the pipeline.

"It should help housing prices find a bottom but I still think it will be about a year from now -- and after prices decline another 10%," said Stuart Hoffman, chief economist for PNC Financial Services Group.

Nonetheless, even if home prices don't stabilize soon, one expert said the bailout could be a success if it allows bank to stop hoarding cash and once again begin lending to each other, consumers and businesses.

"The one thing you don't want is to have the economy grind to a halt because people can't get credit," said Dean Baker, co-director of the Center for Economic and Policy Research.

Baker predicts home prices will fall another 20% even with the bailout but said the decline could become even more severe without passage of the rescue plan.

"Housing prices were a bubble and you can't stop them from deflating," Baker said. "But [the bailout] might stop an uncontrolled plunge."
----------------


FORECLOSURE ACTIVITY INCREASES 12 PERCENT IN AUGUST 2008
By RealtyTrac Staff

Nevada, California, Arizona post top state foreclosure rates
With one in every 91 households receiving a foreclosure filing in August, Nevada continued to document the nation’s highest state foreclosure rate for the 20th consecutive month. Foreclosure filings were reported on 11,706 Nevada properties, a 16 percent increase from the previous month and an 89 percent increase from August 2007.

California continued to document the nation’s second highest state foreclosure rate, with one in every 130 households receiving a foreclosure filing in August, and Arizona registered the third highest state foreclosure rate, with one in every 182 households receiving a foreclosure filing during the month.

Other states with foreclosure rates ranking among the top 10 were Florida, Michigan, Georgia, Ohio, Colorado, Illinois and Indiana. Michigan, Georgia, Ohio and Colorado all reported annual decreases in foreclosure activity.


California accounts for one-third of U.S. foreclosure activity:
Foreclosure filings were reported on 101,724 California properties in August, one-third of the national total and the most of any state. The state’s foreclosure activity increased more than 40 percent from the previous month and more than 75 percent from August 2007.

------------------
http://www.foreclosurepulse.com/

Foreclosure Responsibilities And Obligations

Nevertheless, in an illiquid real estate market or following a significant drop in real estate prices, it may happen that the property being foreclosed is sold for less than the remaining balance on the primary mortgage loan, and there may be no insurance to cover the loss. In this case, the court overseeing the foreclosure process may enter a deficiency judgment against the mortgagor. Deficiency judgments can be used to place a lien on the borrower's other property that obligates the mortgagor to repay the difference. It gives lender a legal right to collect the remainder of debt out of mortgagor's other assets (if any).

There are exceptions to this rule, however. If the mortgage is a non-recourse debt (which is often the case with residential mortgages), lender may not go after borrower's assets to recoup his losses. Lender's ability to pursue deficiency judgment may be restricted by state laws. In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't.
-----------------

What are the Options of Homeowners in Foreclosure?

The Second Great Depression

brussee’s Weblog -- look at housing recovery 2.5 yeras

Wareen says: My prediction for the S&P 500 is 1085 by the end of this year, and I still feel that this is likely.
( as of 9/25 s&P is 1200 so he expects another 10% down )

The Second Great Depression

Author credits:
About the Author
Warren Brussee spent 33 years at GE as an engineer, plant manager, and engineering manager. He earned his engineering degree at Cleveland State University and attended Kent State towards his EMBA. The author has written two other books, Statistics for SIX SIGMA Made Easy and All About Six Sigma.
Statistics for Six Sigma Made Easy - see great reviews on this book

Credit Swaps / derivative nightmare

In one notorious case, a small hedge fund agreed to insure UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz), the Swiss banking giant, from losses related to defaults on $1.3 billion of subprime mortgages for an annual premium of about $2 million.

The trouble was, the hedge fund set up a subsidiary to stand behind the guarantee -- and capitalized it with just $4.6 million. As long as the loans performed, the fund made a killing, raking in an annualized return of nearly 44 percent.

But in the summer of 2007, as home owners began to default, things got ugly. UBS demanded the hedge fund put up additional collateral. The fund balked. UBS sued.

The dispute is hardly unique. Both Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) and Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) are involved in similar litigation with firms that promised to step up and act like insurers -- but were not actually insurers.

"Insurance companies have armies of actuaries and deep pools of policyholders and the financial wherewithal to pay claims," says Mike Barry, a spokesman at the Insurance Information Institute.

"SLOPPY"

Another problem: As hedge funds and others bought and sold these protection policies, they did not always get prior written consent from the people they were supposed to be insuring. Patrick Parkinson, the deputy director of the Fed's research and statistic arm, calls the practice "sloppy."

As a result, some protection buyers had trouble figuring out who was standing behind the insurance they bought. And it put investors into webs of relationships they did not understand.

"This is the derivative nightmare that everyone has been warning about," says Peter Schiff, the president of Euro Pacific Capital at the author of "Crash Proof: How to Profit From the Coming Economic Collapse.

They booked all these derivatives assuming bad things would never happen. It was like writing fire insurance, assuming no one is ever going to have a fire, only now they're turning around and watching as the whole town burns down."

Worst Crisis Since '30s, With No End Yet in Sight

The financial crisis that began 13 months ago has entered a new, far more serious phase.

Lingering hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated. New fault lines are emerging beyond the original problem -- troubled subprime mortgages -- in areas like credit-default swaps, the credit insurance contracts sold by American International Group Inc. and others firms. There's also a growing sense of wariness about the health of trading partners.

Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt.
- During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth.
- Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can't pay back the loans, a problem that is exacerbated by the collapse in housing prices.
- They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.


At least three things need to happen to bring the deleveraging process to an end, and they're hard to do at once.
- Financial institutions and others need to fess up to their mistakes by selling or writing down the value of distressed assets they bought with borrowed money.
- They need to pay off debt.
- Finally, they need to rebuild their capital cushions, which have been eroded by losses on those distressed assets.

But many of the distressed assets are hard to value and there are few if any buyers. Deleveraging also feeds on itself in a way that can create a downward spiral:
- Trying to sell assets pushes down the assets' prices, which makes them harder to sell and leads firms to try to sell more assets. That, in turn, suppresses these firms' share prices and makes it harder for them to sell new shares to raise capital. Mr. Bernanke, as an academic, dubbed this self-feeding loop a "financial accelerator."

"Many of the CEO types weren't willing...to take these losses, and say, 'I accept the fact that I'm selling these way below fundamental value,'" says Anil Kashyap, a University of Chicago Business School economics professor. "The ones that had the biggest exposure, they've all died."

Commodities / GOLD / OIL

8 Things Everyone Should Know About Gold

asr: I am trying to find relationship between price of Commodities / GOLD / OIL

Gold Charts
Gold and Silver Futures Trading

As this 9/15/2008 financial crisis ( wall steet firms failure ) hits here is what I am getting.

Oil : is dropping
explantion: due to world stock markets decline , many econonists suggest global growth slow down , with slow down people need less oil.

Commodities: Copper , Led, Nikel (etc..) are dropping due to less industrical demand ( business slow down )

GOLD: stable as commodity for now, but seems this will rise as world 'Stock Markets decline' and 'US $' seen as risky investment , people/funds try to buy some gold holding.


But noting has changed Roubini's baseline forecast for another 20% drop in the stock market. The economist, who has been eerily prescient in predicting the ongoing crisis, recommends
- investors avoid risky assets, including commodities as fears of a global slowdown take hold.
- he is asking to buy puts to protect big 1987 like crash

asr: I think buying gold future Calls ( betting ny 9/2009 goes up ) will create good cushion.
- it will shield if there is a stock market crash and also satisfies put options buy as Robini said

Dow Down 500: It Could Have Been Worse, But 'Crash' Risk Remains, Roubini says

As shares of Wall Street titans Lehman Brothers, Bank of America and AIG plummeted, the Dow tumbled over 500 points Monday while the S&P suffered its worst decline since 9/11.

The decline was certainly dramatic and painful for those long, but it was not as bad as the "Black Monday" many market participants expected heading into the session. Still, a 1987-like crash cannot be ruled out and investors should take steps such as buying puts to protect themselves against such a "fat-tail event," says Nouriel Roubini, economic professor at NYU's Stern School and chairman of RGE Monitor.

Roubini says Monday's decline could have been worse if not for a series of "new dams" created this weekend and Monday, including:

The Fed's expansion of its lending facilities for financial firms.
Raised expectations for a Fed rate cut at Tuesday's previously scheduled policy meeting.
The Bank of America deal to acquire Merrill Lynch, discussed in detail here.
The $70 billion "liquidity fund" created by a consortium of banks.
Discussion of a separate fund to aid AIG, whose shares fell 61% Monday.

But noting has changed Roubini's baseline forecast for another 20% drop in the stock market. The economist, who has been eerily prescient in predicting the ongoing crisis, recommends
- investors avoid risky assets, including commodities as fears of a global slowdown take hold.
On Monday, gold benefited from a "flight to safety" trade in the wake of Lehman's bankruptcy,
but oil fell to its lowest level since mid-February ( asr: oil is on global economic slow down)

Crisis on Wall Street: Roubini Predicts Another 20 Percent Stock Drop, Sale of Goldman, Morgan

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

RGE Monitor : see all his past predictionshttp://www.rgemonitor.com/roubini-monitor/253598/the_demise_of_the_shadow_banking_system_and_of_the_broker_dealers_some_media_appearances
-------------------
Posted Sep 15, 2008

After failing to find a buyer this weekend, Lehman Brothers filed for the largest bankruptcy in U.S. history while Merrill Lynch agreed to be acquired by Bank of America for $50 billion. Such extraordinary events set the stage for a wild Monday on Wall Street, and most likely beyond.

These incredible, once unthinkable developments have caught a lot of people off guard, but not Nouriel Roubini, of NYU's Stern School and RGE Monitor, whose alarming predictions about the housing market and finanical system have been coming to pass with alarming frequqency.

This morning, Roubini forecast another 20% drop in stock prices, and reiterated a prior view that there will be no major independent broker/dealers standing before this crisis ends. In other words, Goldman Sachs and Morgan Stanley should be seeking suitors today, or face a similar fate as Lehman later.

Roubini and NY Post Wall Street reporter Mark DeCambre joined Henry and me this morning to discuss this weekend's dramatic events. The accompanying video focuses on the big question of "What's Next?" Stay tuned for subsequent segments where we will drill down on related issues, including:

What is the economic impact of Wall Street's unwinding?
The response of policy makers: Good, Bad, Insufficient?
What happens when the Fed meets Tuesday?
Why Bank of America may regret buying Merrill Lynch.
What's the fate of AIG, Washington Mutual, Citigroup, Goldman, Morgan, and other financial firms?

They're All Toast': Roubini Says Brokers, Even Goldman, Can't Stay Independent

Posted Jul 22, 2008

The broker/dealer business model is "inherently unstable" and the four remaining major firms will not be independent in a few years, says Nouriel Roubini, economics professor at NYU's Stern School and chairman of RGE Monitor.

Embattled Lehman Brothers is likely to seek a buyer "within months," Roubini says. Lehman Brothers ceasing to be independent is not such a shocking outcome, but Roubini ultimately sees a similar outcome for Goldman, Merrill Lynch, and Morgan Stanley.

The problem, he says, is that broker/dealers use the same model as banks -- borrow short and lend long -- only they borrow on even shorter timeframes, use more leverage, and don't have the kind of government backstop banks enjoy.

In the wake of Bear Stearns' demise, which showed how brokers are vulnerable to a "run on the bank" if they can't get overnight funding, the Fed temporarily opened its discount window to brokerage firms. But making that option permanent means submitting to the same kind of regulation and capital requirements as banks; that, in turn, means a very different business model -- and much lower profitability -- for Wall Street firms, whose current business model is "not viable," he says.

With U.S. financial giants like JPMorgan, Citigroup, and Bank of America dealing with internal issues, the most likely buyers are international financial firms or sovereign wealth funds, Roubini says. But unlike in 2007, foreigners are not going to settle for preferred shares, and non-voting rights next time around.

That raises the questions: Is America ready for (true) foreign ownership of major financial institutions? And do we have a choice?

The end of Wall Street

-------------------
Should Merrill shareholders move to break up the deal, BofA would have the option to buy up to 19.9 percent of the brokerage at $17.05 per share, UBS' Schorr said. Merrill shares rose $7.44, or 33.7 percent, to close at $29.50 Friday.
--------------

The end of Wall Street
As Lehman's demise and Merrill's acquisition make clear, a business model built on ramping up risk and leverage simply doesn't work.
By Shawn Tully, editor at large
Last Updated: September 15, 2008:

NEW YORK (Fortune) -- Rumor has it that Lehman Brothers CEO Dick Fuld recently wanted to turn off the firm's signature Jumbotron, the giant panels that flash the Lehman name day and night at its headquarters in New York's theater district.

Running the lights, the story goes, was costing Lehman (LEH, Fortune 500) $500,000 a year. But New York City rejected Fuld's plea, since buildings in the Times Square area are required to keep their facades aglow to create the arcade effect that dazzles the tourists.

The lights are still on at Lehman HQ, but they're going out both for the 158-year old firm and for the Wall Street business model that it represents.

Now that Lehman has declared bankruptcy, and Bank of America is buying Merrill Lynch for $50 billion, the ranks of Wall Street survivors have shrunk in the space of six months from five to two, Goldman Sachs and Morgan Stanley.

With Merrill, and Bear Stearns before it, being acquired by giant commercial banks, we're witnessing the triumph of the diversified, universal banking model over the Wall Street one that focused on trading securities and advising corporate clients.

Eventually, the trend will probably capture Morgan Stanley and Goldman as well. Even if they skirt the fate of their former peers, their time is past.

The demise of old Wall Street isn't just about bad bets on mortgages or the hubris of Dick Fuld. It's the failure of an antiquated, risky strategy that depended on macroeconomic luck and that grossly overcompensated employees for being in the right place at the right time.

Debt and more debt

The game Wall Street played relied on leveraging up the cash provided by shareholders to enormous levels and using all the debt to accumulate a giant portfolio of securities.

As long as interest rates trend downward, the value of that portfolio swells, yielding gigantic returns on a slim equity base. And, with the exception of a few scary blips caused by the Asian currency crisis and the tech meltdown, that's what happened for most of Lehman's existence since it was spun off by American Express (AXP, Fortune 500) in 1994.

Based on a huge surge in profits, the employees arrange to take compensation in amounts unheard of outside of sports and Hollywood.

This model has an obvious, and fatal, flaw. Earnings on Wall Street no longer come chiefly from recurring businesses but rather from a combination of huge leverage and huge risk. When good luck turns, as it did in the credit crisis that began just over a year ago, the shareholder wealth supporting all that leverage gets wiped out.

That's precisely what happened at Lehman. Its shares are trading today at around 20 cents, meaning that outside of the dividend that the firm slashed last week, Lehman managed to destroy wealth for shareholders. The employees, though, took out tens of billions in excess pay that's parked in mansions, yachts and stock portfolios.

How did such a scenario come to pass? There are four key reasons:

Too much leverage

Between 2004 and 2007, Lehman swelled its balance sheet by almost $300 billion through the purchase of securities often backed by residential and commercial real estate loans. But in the same period, the firm added a miniscule $6 billion in equity.

As a result, assets jumped from an already high level of 24 times capital, to 31 times. So if the total value of the portfolio declined by 3% or so, shareholders' equity would be erased.


Ever riskier products

Over the years, once-lucrative businesses on Wall Street have become commoditized, including trading and underwriting bonds for clients.

So Lehman, along with Merrill Lynch (MER, Fortune 500) and other firms, pushed into higher-margin products, notably the packaging and trading of ever more exotic types of mortgage-backed securities. This allowed Lehman and others to keep profits humming. But the shift radically changed their businesses.

Wall Street became far more dependent on proprietary trading and far less reliant on clients. Before the collapse of Bear Stearns, it along with Lehman, Merrill, Morgan Stanley (MS, Fortune 500) and Goldman Sachs (GS, Fortune 500) derived over 60% of revenues from trading, most of it for their own accounts, versus around 40% in the late 1990s.

Wall Street firms evolved into giant hedge funds. Now they're suffering the same fate as a lot of over-leveraged hedgies.


Big bets, short-term debts

Unlike Bank of America (BAC, Fortune 500) or JPMorgan Chase (JPM, Fortune 500), Lehman and the other independent investment banks don't have a stable base of retail deposits to use for buying securities.

Instead, they rely on short-term debt that needs to be constantly refinanced. That's fine as long as the mortgages and other securities they hold are stable or rising in value and thus easy to sell. But when real estate started to slump, Lehman and its brethren couldn't sell securities they owned except at a big loss.

In the case of Bear, creditors got so nervous about lending money for securities that couldn't be sold that they refused to roll over Bear's commercial paper.

Lehman did have access to a newly created Federal Reserve window for short-term financing. But that couldn't save the firm because the basic problem remains: When markets turn nervous, creditors will stop lending, forcing Wall Street to dump holdings at distressed prices.

Big commercial banks, on the other hand, can hold securities until markets rebound. That gives them a big edge and explains why their model will prevail.


Exorbitant pay

The Wall Street playbook calls for taking home the highest pay possible when times are good and giving none of it back when times are tough.

Since the securities business is cyclical, it would make sense for firms to bank their bonuses forward so that if profits are plentiful one year but disappear the next, part of the compensation is returned to shareholders.

But that's not how the Street works. The pay practices at Lehman are highly instructive. When it came to granting stock to employees, Lehman was incredibly extravagant.

Before Lehman raised equity capital this year, grants of options and restricted stock left 30% of shares in employees' hands. To be sure, employees have lost billions in recent months. But they took out plenty over the years.

Fuld, for example, has cashed out almost $500 million worth of stock in his 14 years as CEO, according to Fortune's Allan Sloan; that's four times Lehman's stock market capitalization as of Monday morning.

In fiscal 2006 and 2007, Fuld earned a total of more than $80 million, an astounding sum for a company Lehman's size. Lehman's general counsel Thomas Russo made more than $12 million in each of those years. Top lawyers for much larger U.S. companies make a fraction of that amount.

Given all of this excess, there's no way this business model can last. The best bet is that Morgan Stanley will eventually be absorbed by a big bank that will reduce leverage, shrink pay scales, fund assets with deposits and impose strict risk controls. That's what JPMorgan CEO Jamie Dimon is doing with the old Bear Stearns and what Bank of America CEO Ken Lewis will no doubt do with Merrill.

Goldman, on the other hand, has the financial strength to move in the other direction and buy a bank. Even so, the Wall Street follies will soon end. They were great while they lasted - though mainly for the hired hands.
----------------------------------
Dow Lost 500 points
NEW YORK (CNNMoney.com) -- Stocks tanked Monday, as investors reeled amid the fallout from the largest financial crisis in years after Lehman Brothers filed for the biggest bankruptcy in history and Bank of America said it would buy Merrill Lynch in a $50 billion deal.

Treasury prices rallied as investors sought the comparative safety of government debt, sending the corresponding yields lower. Oil prices tumbled, falling well below $100 a barrel on slowing global economic growth. The dollar rallied versus other major currencies and gold prices spiked.

The Dow Jones industrial average (INDU) lost 500 points, or 4.4%, according to early tallies. It was the biggest one-day point decline for the Dow since Sept. 17, 2001, when the market reopened for trading after having been closed in the aftermath of 9/11 terrorist attacks.

The Standard & Poor's 500 (SPX) index lost 4.5% and the Nasdaq composite (COMP) lost 3.6%.

Global markets tumbled as investors reeled after Lehman Brothers filed for bankruptcy, Merrill Lynch was forced to sell itself to Bank of America and investors awaited AIG's restructuring announcement.

Worries in the afternoon focused around Dow-component insurer AIG, which has been scrambling to raise enough cash to fend off ratings agency downgrades and stay afloat.

In the afternoon, N.Y. Gov. David Paterson said AIG will be allowed to use $20 billion in assets through its subsidiaries to stay afloat, basically providing itself with a bridge loan. AIG has also reportedly asked the Federal Reserve for a roughly $40 billion bridge loan over the weekend.

Meanwhile, Reuters reported that sources say talks with Warren Buffett's Berkshire Hathaway about investing in AIG have ended.

Shares of AIG (AIG, Fortune 500) were down 52%, near where they stood before the announcement.

Still, some analysts said that the stock selloff could have been worse, considering the depth of the problems.

"You have to throw out the history books because there's really nothing to compare this to," said Jim Dunigan, chief investment officer at PNC Advisors.

Art Hogan, chief market strategist for Jefferies & Co., said the magnitude of the financial industry fallout is unprecedented, and could only be compared to the Great Depression of the 1930s or the railroad bankruptcies of the 1800s.

"We've never witnessed this before," said Hogan. "There's no road map for this."

The developments for the three companies cemented for investors that the credit crisis is far from over, six months after the near-collapse and government rescue of Bear Stearns.

"The landscape has changed and a lot of the major players who were are no more, so of course people are panicked," said Stephen Leeb, president at Leeb Capital Management.

"But it's not the end of capitalism," he said. "This may usher in something worse than what we've seen in terms of the economy, but the companies left standing at the end of this will be OK."

Merrill Lynch's buyout was perhaps providing some reassurance to investors, said Dunigan, in that it shows there is still value in the market.

Losses were also tempered by the Federal Reserve's decisions to loosen up its lending restrictions. The central bank could end up cutting the fed funds rate, its key overnight bank lending rate, when it meets Tuesday, analysts said. The fed funds rate currently stands at 2.0%.

Also helping Tuesday: news that a group of 10 banks including Morgan Stanley, Goldman Sachs and Barclays had given up to $7 billion each to create a $70 billion lending pool to help smaller institutions.

Lehman bankruptcy: Lehman Brothers (LEH, Fortune 500) announced it was filing for bankruptcy, after weekend talks aimed at saving the 158-year old firm failed.

The filing came shortly after midnight Monday, after Bank of America and Barclays pulled out of negotiations to acquire Lehman, which has lost $60 billion in bad real estate bets and the credit market's collapse.

Unlike with Bear Stearns back in March, the government was reportedly not willing to help finance a takeover, bailout or restructuring of Lehman Brothers. This reportedly contributed to the reluctance of other firms to strike a deal with the troubled company.

Speaking in the afternoon, Treasury Secretary Henry Paulson said that he hasn't ruled out additional government bailouts for the future. He also said that the banking system is sound. (Full story).

Lehman shares plunged 94%. (Full story)

Merrill Lynch buyout: After pulling out of the Lehman negotiations, Bank of America (BAC, Fortune 500) announced that it will buy Merrill Lynch (MER, Fortune 500) for $50 billion in stock. The price values the company at more than $29 a share, a more than 70% premium from Merrill's closing price on Friday of $17.05.

The company has posted losses of more than $17 billion over the last four quarters and saw its stock plunge 27% last week.

Shares gained 14% Monday afternoon, while Bank of America tumbled 20%. A variety of other financial shares plunged, including Washington Mutual (WM, Fortune 500), Citigroup (C, Fortune 500), Morgan Stanley (MS, Fortune 500), Goldman Sachs (GS, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).

AIG: Insurer AIG (AIG, Fortune 500) plunged 55% as Wall Street awaited the details of its restructuring plan, expected to be announced Monday.

The company has lost more than $18 billion in the wake of the subprime mortgage crisis and is in desperate need of cash to maintain its credit ratings and investor faith.

Should the company fail to raise cash and see its credit rating cut by the ratings agencies, it may have only two to three days to survive, according to a source close to the firm. (Full story).

AIG stock fell 50%.

Market breadth was negative, with losers beating winners by almost 7 to 1 on volume of 1 billion shares. On the Nasdaq, decliners topped advancers by over three to one on volume of 1.81 billion shares.

10-bank emergency fund: In a bid to calm the markets, the Federal Reserve announced plans Sunday to loosen its lending restrictions to the banking industry. A consortium of 10 leading domestic and foreign banks, including Goldman Sachs (GS, Fortune 500), Citigroup (C, Fortune 500), Barclays (BCS) and Morgan Stanley (MS, Fortune 500), agreed to create a $70 billion fund to lend to troubled financial firms.

The Federal Reserve, meeting Tuesday, could cut the fed funds rate, a key short-term interest rate, from the current level of 2%, analysts said.

Oil: Oil prices plunged as investors continued to bet on a global economic slowdown. Additionally, early reports showed Hurricane Ike didn't do as much damage to oil rigs and refineries in the Texas Gulf region as expected.

Oil prices were down $5.50 a barrel to $95.68. Oil dipped below $100 a barrel on Friday for the first time in five months.

Other markets: In global trade, European and Asian stocks ended lower. Many major Asian markets, including Tokyo and Hong Kong, were closed for holidays.

Treasury prices soared as investors poured money into the relatively safe-haven. The rally sent the benchmark 10-year note tumbling to 3.52% from 3.72% late Friday.

In currency trading, the dollar rallied versus the yen and euro.

COMEX gold for December delivery gained $19.20 to $783.70 an ounce. To top of page


--------------
With thousands of Lehman workers preparing to pack their bags, experts say other Wall Street firms probably aren't done with layoffs either.

Most people are assuming that they're out of a job at Lehman Brothers," said David Schwartz, head of executive search firm DN Schwartz & Co in New York. Schwartz said he wouldn't be surprised if upwards of 20,000 Lehman workers lose their jobs. That would amount to more than 75% of the company's total workforce.

When Bear Stearns was acquired by JPMorgan Chase (JPM, Fortune 500) earlier this year, about 9,000 workers, or more than half of Bear Stearns' employees, lost their jobs - many of whom are still looking for full-time employment.

Through August, financial firms have already eliminated an estimated 65,400 jobs over the past year, according to the latest employment figures from the Department of Labor.

Only 20% to 25% of Lehman employees will eventually land Wall Street jobs," Bernard said. "There are just not that many jobs."

"It's like a game of musical chairs with too many people chasing the jobs that are left," Challenger added. To top of page
------------------------------------

AIG shares plummet as investors await rescue plan

NEW YORK (Reuters) - Shares of American International Group Inc plunged 53 percent on Monday as investors grew increasingly nervous after the insurer, once the world's most valuable insurer by market value, failed to deliver a rescue plan.

AIG, hit by $18 billion in losses over the past three quarters from guarantees it wrote on mortgage derivatives,

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

GoingGreen Top 100 Private companies 2008

Co-Presented by AlwaysOn, KPMG & Morgan Stanley

Investment and public interest in cleantech continues to grow in the face of record gas prices and increased concern for the environment and global warming. With that backdrop, AlwaysOn presents the second annual GoingGreen 100 Top Private Companies list, featuring leading private companies in cleantech.

The fact that there are 17 solar companies on the list highlights the continued importance of that sector to the industry. Solar companies continue to lead the race for investment dollars, with all areas of the solar industry—PVs, solar cells, concentrated solar plants—actively receiving investments this year.

This year the Clean Energy category was added to the mix. The category includes companies that do not fall into the Solar Energy or Biofuels categories. Wind and coal companies feature highly in this sector. Clean coal has significant potential as it is an abundant energy resource; companies such as CoalTek and GreatPoint Energy are prevailing in this area. Converting coal to natural gas by using microbial engineering is also driving the possibilities in this industry.

An increased number of companies on the list are moving out of beta testing and into product development. This trend is particularly evident in the Biofuels category, where the growth in next-generation biofuels is beginning to drive to the commercialization stage. From a funding perspective, large rounds of VC funding are narrowing the gap between project financers looking for proven technology and emerging companies wanting to build plants.

The Energy Efficiency and Management category is a very active investment area. The category winner, Silver Spring Networks, provides intelligent utility networking using open standards. Naverus, who is redefining the airspace navigation systems, is another company that is a significant player in this segment of the industry.

An interesting development in the Green Automobiles and Transportation category is the changing attitude of investors. Over the past year, investors have shifted their focus from building car companies and brands to improving engines. Increased public interest in energy efficient “clean” cars may be driving this shift.

The Energy Storage Systems category is commonly identified as a major opportunity of cleantech, with investors actively seeking the solution for energy storage. The category winner, Premium Power, manufactures regenerative fuel-cell power systems based on the company’s proprietary Zinc-Flow advanced energy storage technology.

In the 2008 GoingGreen list, the categories of nanotech and materials were separated—we now have a Green Nanotech and Synthetic Genomics category and a Green Materials, Green Buildings category. The companies in the Green Nanotech and Synthetic Genomics category are expected to have some of the most profound effects on the petrochemical and fuels industries. Our overall list winner, Synthetic Genomics, falls into this category. Serious Materials, our Green Materials, Green Buildings category winner, leads the industry with green replacement products for the built environment. Integrity Block is also an emerging player in this industry with its concrete block replacement.

The spotlight continues to be directed on cleantech and will remain in place until the quest for a “greener” world is realized. The companies featured on the GoingGreen list will help move us closer to achieving this goal.

The winners will be honored at GoingGreen, September 15th-17th at Cavallo Point, San Francisco, CA. They’ll also be featured in AO’s quarterly print “blogozine” and on the AlwaysOn website.To reserve your ticket to GoingGreen and take advantage of the AO-Insider discount, click here.

***Overall Winner***

Synthetic Genomics

Biofuels

Amyris Biotechnologies***Category Winner***Biofuel Box
Bionavitas
Ceres
Coskata
Greenfuel Technologies
LS9
Mascoma
Mendel Biotechnology
Range Fuels
Sapphire Energy
Solazyme

Clean Energy

CoalTek***Category Winner***
AltaRock Energy
Bloom Energy
General Compression
GreatPoint Energy
Luca Technologies
Mariah Power
Nordic Windpower
Oorja
SpaceX
Sway

Clean Manufacturing and Clean Products

GlycosBio***Category Winner***
Artificial Muscle
EoPlex Technologies

Energy Efficiency and Energy Management

Silver Spring Networks***Category Winner***
Albeo Technologies
BPL Global
BridgeLux
Carina Technology
d.light design
Eka Systems
eMeter
Greenbox Technology
Ice Energy
Naverus
SmartSynch
SuperBulbs
SynapSense
Verdiem

Energy Storage Systems

Premium Power***Category Winner***
Angstrom Power
Boston-Power
Deeya Energy
GridPoint
Mobius Power
Pentadyne
PowerGenix
ReVolt Technology

Green Automobiles and Transportation

EcoMotors***Category Winner***
Aptera
Better Place
Fisker Automotive
PML Flightlink
Tesla Motors
Transonic Combustion
Venture Vehicles

Green Materials, Green Buildings

Serious Materials***Category Winner***
ARXX Building Products
Hycrete
Integrity Block
Perform Wall

Green Nanotech and Synthetic Genomics

Genomatica***Category Winner***
Codon Devices
Nanogram
Novomer

Resource Recovery and Waste Management

Ze-Gen***Category Winner***
Earthanol
EnerTech Environmental
Lehigh Technologies
TechTurn

Solar Energy

BrightSource Energy***Category Winner***
Ausra
Energy Innovations
eSolar
GreenVolts
HelioVolt
Infinia
Konarka Technologies
Plextronics
Quantasol
Signet Solar
SolarCity
Solar Systems
Solaria
Solel
Solexel
SolFocus
Stion

Water Technology and Water Management

AbTech Industries***Category Winner***
Agua Via
Bio Pure Technology
HydroPoint Data Systems
Microvi Biotech
Miox
NanoH2O
Purfresh
Windesal

Oil Investors Pulled $39 Billion in Futures Contracts (Update2)

Last Updated: September 10, 2008
By Daniel Whitten

Sept. 10 (Bloomberg) -- Commodity index investors, blamed for record oil prices, sold $39 billion worth of oil futures between a July record and Sept. 2, causing crude to plunge, according to a report released today.

The work by Michael Masters, president of the Masters Capital Management hedge fund, blames investors who buy and hold an index of commodities for driving prices to records and for their subsequent drop. It comes a day before the U.S. Commodity Futures Trading Commission is set to discuss its own study of energy trading with a congressional committee.

Masters testified three times before Congress this year, arguing that limits on traders would cut oil prices to $65 to $70 a barrel. He has been cited by lawmakers who introduced at least 20 measures to curb speculation. Congressional pressure on the CFTC to step up enforcement and restrict anonymous trades has pushed index traders out of their positions, Masters said.

``I don't think it's just coincidence that the money came out after the pressure was put on these folks,'' Masters, who wants legislation that would set limits on index commodity holdings, said in an interview.

Crude oil futures surged to a record $147.27 on July 11, an increase of 53 percent for the year, on the New York Mercantile Exchange, then fell 26 percent to $109.71 on Sept. 2. Oil fell $1.24, or 1.2 percent, to $102.02 today on the Nymex.

``The speculators that drove prices up basically deflated the bubble,'' said Fadel Gheit, director of oil and gas research at Oppenheimer & Co. in New York. ``They said, `That's it, the game is over. We are going to bet on another horse.'''

`Buying Pressure'

Crude oil prices increased almost $33 a barrel from January through May due to ``buying pressure,'' then decreased by about $29 a barrel starting July 15 because of ``selling pressure,'' according to Masters's report.

Senator Byron Dorgan, a member of the Committee on Energy and Natural Resources, said today that there was ``no apparent reason'' for such fluctuations.

The study ``finally destroys the myth that there is some supply and demand relationship to what has happened to the run- up in oil prices,'' Dorgan, a North Dakota Democrat, told reporters today in Washington. ``This is pure, unbridled, relentless speculation.''

The CFTC is expected to release a report tomorrow that will lay out its findings on the impact of index investors and over- the-counter trading on commodities. Regulators may require Wall Street banks to regularly disclose their energy futures positions connected to the unregulated swaps market, according to people familiar with the discussions.

Investment Banks

JPMorgan Chase and Co., Goldman Sachs Group Inc., Barclays Plc and Morgan Stanley control 70 percent of the commodities swaps positions, and swaps dealers are the largest holders of Nymex crude oil futures contracts, Masters said.

Representatives for all four banks declined to comment. Banks enter into swaps with airlines and hedge funds to profit from moves in crude prices and then offset some of that risk in futures markets such as the Nymex.



``These large financial players have become the primary source of the recent dramatic and damaging price volatility,'' Masters said in the report.

The commission has put out special requests for information from traders and imposed limits on the number of U.S. oil futures contracts a trader can hold on Intercontinental Exchange Inc.'s London-based ICE Futures Europe market.

Masters's Critics

Critics of Masters's earlier work said he lacks access to the data needed to draw his conclusions. His hedge fund is based in the U.S. Virgin Islands.

Walter Lukken, the acting chairman of the commission, is among those who question the validity of Masters's data.

``Just as weather forecasters have no effect on the weather, energy speculators have no effect on the price of oil,'' said Scott Talbott, a lobbyist for the Financial Services Roundtable, which represents investors. ``His fallacy is that he ignores the laws of supply and demand, which determine the price of oil.''

Masters earlier this year reported that index speculators such as those that trade on Standard & Poor's GSCI accounted for $260 billion of assets, up from $13 billion in 2003. As of Sept. 2 that number was down to $223 billion, Masters said.

``For the supply and demand people, what I would like for them to explain is how from the supply-and-demand rationale you could have oil at $95 in January, at $150 in June and back to $100 in September,'' Masters said.

Hedge Fund Holdings

Masters's hedge fund held shares in the four major U.S. airlines, AMR Corp., Delta Air Lines Inc., US Airways Group Inc. and UAL Corp, according to a June 30 regulatory filing. Airlines hedge oil and have been hurt by commodity price fluctuations.

He said he extrapolates his numbers from agricultural data, which is publicly available, to arrive at overall numbers that include oil futures investments.

In arguing for legislation, lawmakers, primarily Democrats, will point to the Masters report and a Massachusetts Institute of Technology report released in June alleging that speculation caused the rise in energy prices.

``Why did so much money come into these markets and why is it leaving?'' asked Senator Maria Cantwell, a Washington Democrat, in an interview. If Congress reduces scrutiny, ``do we see the run-ups happening again?''

Scott Defife, with the Smart Energy Policy Coalition, said Masters's findings ``run counter to the analysis and judgment of the vast majority of economists'' as well as Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson.

Those and others have ``concluded that volatile energy prices are the result of global economic conditions, the changing strength of the dollar and supply-demand fundamentals,'' Defife said in a statement.

To contact the reporter on this story: Daniel Whitten in Washington at dwhitten2@bloomberg.net