Banks “We have better things to do with that money you gave us than lend it out”

By: Ian Welsh

Tink by Amy Wong

Reports are surfacing that banks haven't noticeably increased lending because of the bailout money and they bloody well don't intend to, thanks. Gee, what a surprise, the bailout didn't fix what it was supposed to. No one could have predicted.

One reason why?

"Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase," he began. "What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop."

In other words, as long as banks are being allowed to buy up failed competitors for cents on the dollar, they're going to keep their powder dry and not lend. Add to that that they don't much want to lend going into a horrible recession, and that many of them don't look too liquid even after the bailout, and not only aren't they going to lend, they're going to keep contracting credit.

The correct policy responses are simple enough:

First, as discussed before, you give the FDIC a mandate to take over banks which are contracting credit. "Too sick to lend? Too sick to live." That will concentrate CEOs minds on doing what they're being paid to do (by the government) very well.

Second, use the Fed's leverage. It has made a pile of loans to the banks on lousy collateral through various facilities. No specific bank has to keep access. If the Fed says "are you not lending because you don't have enough money?" and they reply "oh no, we're fine" you should then reply "great, then you won't need special access any more!" If they reply "no, we're still low on money" you tell the FDIC to take them over, or you make an explicit deal of "if we buy X dollars you will do Y lending. Sign here."

Third: no more banks must be thrown on the market at cents on the dollar. All future banks must be run by the FDIC and either refloated as their own entities, or shut down. There must be no more "deals" available.

Fourth: no bailouts without effective control. Not only does the public get voting shares, it gets to choose the CEO. If the banks don't like that, they don't have to take the money. But if they don't take the money, and they don't lend, the FDIC takes them over and the government sweeps all the executives out. Their choice.

The US has shoved 5 trillion dollars at this problem since the crisis started last year. Enough is enough. Money alone is clearly not sufficient, and that means more stern measures need to be taken. The financial industry, whose hubris is so great they just announced 70 billion of bonuses for themselves after getting a taxpayer bailout, needs to learn that they exist for the purpose of serving the overall economy, not themselves. This is especially true of banks, whose entire business model relies on the government giving them the right to create money, to borrow money at concessionary rates that no one else receives, and so on. Banks are entirely creatures of the government who exist because the government gives them what amounts to a license to print money under certain circumstances. They are in no way a "naturally free market".

So if they won't do what they have to do, if they won't responsibly execute their duties to the country, then they will have to be made to do so, and it is the government's duty to make that happen.

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Bailout Free-For-All: Companies Line Up For Cash

By AP/MARTIN CRUTSINGER

(WASHINGTON) — The bailout is now the hottest lobbying game in town.

Insurers, automakers and American subsidiaries of foreign banks all want the Treasury Department to cut them a piece of the largest government rescue in U.S. history.

The betting is that many with their hands out will be successful, especially with financial markets in a stomach-churning dive and predictions the economy is about to tumble into a deep recession.

These groups argue that the credit squeeze is so severe and the risks to the economy so dire that their industries need financial support as well.

The Treasury is considering requests from a variety of industries, but has not decided whether to expand the program, officials said Saturday.

Lobbying efforts are intensifying.

The Financial Services Roundtable wrote Treasury officials on Friday requesting that the initiative to buy $250 billion in bank stock grow to cover insurers, auto companies, securities dealers and U.S. subsidiaries of foreign companies, including banks. The Treasury's plan is intended to bolster banks' tattered balance sheets and get them to resume making loans.

As the Treasury now interprets it, these additional groups would not participate in the bank stock program. They could receive help from a separate part of the $700 billion rescue that will buy bad assets from financial institutions.

Steve Bartlett, the president of the Roundtable, urged the Treasury to broaden the definition of those eligible for the stock purchase program.

"The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market," Bartlett wrote Neel Kashkari, the Treasury Department official running the bailout program.

Referring to U.S. subsidiaries of foreign companies, Bartlett said, "This is a global crisis and to not recognize the U.S. firms controlled by foreign banks or companies would create further impediment to the market's recovery."

A financial industry official said Treasury Secretary Henry Paulson met over the past week with various groups, including hedge fund managers, that were petitioning for assistance. The official spoke on condition of anonymity because the Treasury has not made a decision.

Some insurers technically would be eligible for stock purchases now if they own subsidiaries that are savings and loan institutions regulated by the Office of Thrift Supervision.

Last month, American International Group, the country's largest insurance company, received an $85 billion loan from the Federal Reserve. Since then, it has gotten further support in an effort to withstand the biggest upheavals on Wall Street since the Great Depression.

Complicating the government's decision-making is that the Bush administration will not be in charge after Jan. 20. Paulson, who has said he has no intention of staying on the job, has pledged to consult with both campaigns on his bailout actions.

Democrat Barack Obama's presidential campaign said Friday it supported the effort by the auto industry to get money from the $250 billion made available for stock purchases. That would be in addition to $25 billion recently approved by Congress for low-interest loans to help the struggling industry retool and build fuel efficient vehicles.

The debate over expanding the bailout comes as the Treasury is rushing to get money out the door to the primary recipients: banks that sharply curtailed lending after suffering billions of dollars of losses on mortgage-related assets as home foreclosures soared in the housing slump.

Lawmakers are pressuring the Treasury to do more in the foreclosure area, as well.

Sheila Bair, head of the Federal Deposit Insurance Corp., told Congress about efforts to provide government-backed loan guarantees for mortgages that are reworked to help homeowners in danger of default. That would give banks an incentive to speed up refinancing efforts because the government would back part of the reworked loan.

The Treasury also is moving ahead to get bank stock purchases approved. It announced on Oct. 14 that it was spending $125 billion to buy stock in nine of the largest financial institutions. An announcement was expected Friday about a second round involving 20 to 22 other banks.

But it was decided each bank would announce its own agreements with the Treasury, out of concern that excluded banks could suffer a stock sell-off from disappointed investors.

PNC Financial Services Group Inc. announced Friday it was acquiring National City Corp. for $5.58 billion, in what was the first instance of a bank using fresh investments from the bailout program to make an acquisition. PNC said it had received $7.7 billion in cash through selling stock to the government under the program.

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40 men gang-raped me, says nun

By Matthias Williams in New Delhi

A NUN in eastern India has spoken out for the first time on live television about allegations she was gang-raped by more than 40 men in August, accusing police of complicity in Hindu attacks on Christians.

A string of attacks on Christians by Hindus over the controversial issue of conversions in poor tribal areas has killed at least 37 people in the past two months, mainly in Orissa state where most of the violence is concentrated.

"State police failed to stop the crimes, failed to protect me from the attackers, they were friendly with the attackers," Sister Meena told a news conference on Friday.

The nun's case became part of the wider controversy surrounding the violence, which sparked an international outcry and drew strong condemnation from Pope Benedict.

Her face covered by a black scarf, and scarcely looking at the cameras, she gave a blow-by-blow account of a case that has become emblematic of the religious violence that has rocked three states.

The nun's statement came two days after the Supreme Court denied her appeal to order a federal police probe into the case.

Nine people have been arrested so far, and an identity parade is ready to be set up, but the nun has refused to cooperate with Orissa police, saying she does not have faith in them.

One officer has already been suspended in the case for dereliction of duty.

In her statement, Sister Meena said she was dragged out of the house where she was sheltering by armed men who first threatened to decapitate her or burn her alive. She was then taken to a deserted building nearby.

"They pulled out my saree and one of them stepped on my right hand and another on my left hand and then a third person raped me on the verandah," she said.

After she was paraded to a nearby market she pleaded the police to help, but "they did not move", and later tried to stop her writing a full police complaint, asking her if she knew "what will be the consequence" of filing it.

Both India's central government and Christian leaders have accused the Orissa state government of turning a blind eye.

Orissa police came under fire for ignoring a medical report into the case that authorities said confirmed a rape took place.

Human rights groups and government ministers suspect militant Hindu groups were responsible for stoking the religious violence to shore up their vote base ahead of elections in 2009.

Hindu groups denied this, and blamed the clashes on the murder of a prominent Hindu missionary and vocal opponent of Christian proselytising.

On Tuesday, hundreds of women from the Rashtriya Sevika Samiti - a group that forms part of the hardline Hindu Sangh Parivar - staged a protest in Orissa's capital Bhubaneswar, demanding the nun be arrested for lying about her rape.

Orissa police say the situation is slowly returning to normal in the state.

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So When Will Banks Give Loans?

By JOE NOCERA

“Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?”

It was Oct. 17, just four days after JPMorgan Chase’s chief executive, Jamie Dimon, agreed to take a $25 billion capital injection courtesy of the United States government, when a JPMorgan employee asked that question. It came toward the end of an employee-only conference call that had been largely devoted to meshing certain divisions of JPMorgan with its new acquisition, Washington Mutual.

Which, of course, it also got thanks to the federal government. Christmas came early at JPMorgan Chase.

The JPMorgan executive who was moderating the employee conference call didn’t hesitate to answer a question that was pretty politically sensitive given the events of the previous few weeks.

Given the way, that is, that Treasury Secretary Henry M. Paulson Jr. had decided to use the first installment of the $700 billion bailout money to recapitalize banks instead of buying up their toxic securities, which he had then sold to Congress and the American people as the best and fastest way to get the banks to start making loans again, and help prevent this recession from getting much, much worse.

In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.

(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)

“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”

Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.

It is starting to appear as if one of Treasury’s key rationales for the recapitalization program — namely, that it will cause banks to start lending again — is a fig leaf, Treasury’s version of the weapons of mass destruction.

In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation. As Mark Landler reported in The New York Times earlier this week, “the government wants not only to stabilize the industry, but also to reshape it.” Now they tell us.

Indeed, Mr. Landler’s story noted that Treasury would even funnel some of the bailout money to help banks buy other banks. And, in an almost unnoticed move, it recently put in place a new tax break, worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: “It couldn’t be clearer if they had taken out an ad.”

Friday delivered the first piece of evidence that this is, indeed, the plan. PNC announced that it was purchasing National City, an acquisition that will be greatly aided by the new tax break, which will allow it to immediately deduct any losses on National City’s books.

As part of the deal, it is also tapping the bailout fund for $7.7 billion, giving the government preferred stock in return. At least some of that $7.7 billion would have gone to NatCity if the government had deemed it worth saving. In other words, the government is giving PNC money that might otherwise have gone to NatCity as a reward for taking over NatCity.

I don’t know about you, but I’m starting to feel as if we’ve been sold a bill of goods.

•

The markets had another brutal day Friday. The Asian markets got crushed. Germany and England were down more than 5 percent. In the hours before the United States markets opened, all the signals suggested it was going to be the worst day yet in the crisis. The Dow dropped more than 400 points at the opening, but thankfully it never got any worse.

There are lots of reasons the markets remain unstable — fears of a global recession, companies offering poor profit projections for the rest of the year, and the continuing uncertainties brought on by the credit crisis. But another reason, I now believe, is that investors no longer trust Treasury. First it says it has to have $700 billion to buy back toxic mortgage-backed securities. Then, as Mr. Paulson divulged to The Times this week, it turns out that even before the bill passed the House, he told his staff to start drawing up a plan for capital injections. Fearing Congress’s reaction, he didn’t tell the Hill about his change of heart.

Now, he’s shifted gears again, and is directing Treasury to use the money to force bank acquisitions. Sneaking in the tax break isn’t exactly confidence-inspiring, either. (And let’s not even get into the less-than-credible, after-the-fact rationalizations for letting Lehman default, which stands as the single worst mistake the government has made in the crisis.)

On Thursday, at a hearing of the Senate Banking Committee, the chairman, Christopher J. Dodd, a Connecticut Democrat, pushed Neel Kashkari, the young Treasury official who is Mr. Paulson’s point man on the bailout plan, on the subject of banks’ continuing reluctance to make loans. How, Senator Dodd asked, was Treasury going to ensure that banks used their new government capital to make loans — “besides rhetorically begging them?”

“We share your view,” Mr. Kashkari replied. “We want our banks to be lending in our communities.”

Senator Dodd: “Are you insisting upon it?”

Mr. Kashkari: “We are insisting upon it in all our actions.”

But they are doing no such thing. Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead. And those pleas, in this environment, are falling on deaf ears.

Yes, there are times when a troubled bank needs to be acquired by a stronger bank. Given that the federal government insures deposits, it has an abiding interest in seeing that such mergers take place as smoothly as possible. Nobody is saying those kinds of deals shouldn’t take place.

But Citigroup, at this point, probably falls into the category of troubled bank, and nobody seems to be arguing that it should be taken over. It is in the “too big to fail” category, and the government will ensure that it gets back on its feet, no matter how much money it takes. One reason Mr. Paulson forced all of the nine biggest banks to take government money was to mask the fact that some of them are much weaker than others.

We have long been a country that has treasured its diversity of banks; up until the 1980s, in fact, there were no national banks at all. If Treasury is using the bailout bill to turn the banking system into the oligopoly of giant national institutions, it is hard to see how that will help anybody. Except, of course, the giant banks that are declared the winners by Treasury.

JPMorgan is going to be one of the winners — and deservedly so.

Mr. Dimon managed the company so well during the housing bubble that it is saddled with very few of the problems that have crippled competitors like Citi. The government handed it Bear Stearns and Washington Mutual because it was strong enough to swallow both institutions without so much as a burp.

Of all the banking executives in that room with Mr. Paulson a few weeks ago, none needed the government’s money less than Mr. Dimon. A company spokesman told me, “We accepted the money for the good of the entire financial system.” He added that JP Morgan would use the money “to do good for customers and shareholders. We are disciplined to try to make loans that people can repay.”

Nobody is saying it should make loans that people can’t repay. What I am saying is that Mr. Dimon took the $25 billion on the condition that his institution would start making loans. There are plenty of small and medium-size businesses that are choking because they have no access to capital — and are perfectly capable of repaying the money. How about a loan program for them, Mr. Dimon?

Late Thursday afternoon, I caught up with Senator Dodd, and asked him what he was going to do if the loan situation didn’t improve. “All I can tell you is that we are going to have the bankers up here, probably in another couple of weeks and we are going to have a very blunt conversation,” he replied.

He continued: “If it turns out that they are hoarding, you’ll have a revolution on your hands. People will be so livid and furious that their tax money is going to line their pockets instead of doing the right thing. There will be hell to pay.”

Let’s hope so.

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China to invest $445bn in rail system

CHINA will invest nearly $A445 billion in its overburdened rail system as a stimulus measure aimed at blunting the impact of the global financial crisis.

The investment is part of plans to extend the country's railway network from the current roughly 125,502km to nearly 160,900km by 2010, Shanghai's Oriental Morning Post reported.

The Beijing News quoted a rail official as saying that, while the network needed extending, the massive investment was also intended to help lift the nation's economy as it suffers amid the global woes.

"New rail investment will become a shining light in efforts to push forward economic growth," railway ministry spokesman Wang Yongping said.

China's economy recorded its slowest growth in five years at 9.0 per cent in the third quarter of 2008.

The situation has looked increasingly dire in recent days with export-dependent factories closing and laying off thousands of workers, with warnings from industry heads of much worse to come.

The China Daily newspaper said the rail investment plan had been approved by the State Council. About 1.2 trillion yuan ($A252 billion) had already been allocated, it said.

The paper quoted a government policy adviser saying the plan was similar to China's successful strategy for warding off the Asian financial crisis of the late 1990s.

"In 1997, we dealt with the Asian financial crisis by stimulating domestic economic growth through investment in the construction of highways," Zheng Xinli said.

"This time the money will go to improving the rail network."

China's railway network is one of the most extensive in the world, but has come under pressure as the nation's economy has boomed, giving millions more the opportunity to travel.

Among them, more than 200 million migrant workers are estimated to have left their homes in the countryside for work in urban or coastal areas.

The vulnerability of the rail network was laid bare last winter when fierce snowstorms crippled

China's transport systems, stranding millions of passengers trying to return to their homes during the peak Chinese New Year travel period.

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As Yard Sales Boom in Hard Times, Sentiment Is First Thing to Go

Heidi Schumann for The New York Times In Manteca, Calif., a center of the foreclosure crisis, garage sales help raise much-needed cash.

By PATRICIA LEIGH BROWN

MANTECA, Calif. — As the classified ads put it, everything must go. Socks. Christmas ornaments. Microwave ovens. Three-year-old Marita Duarte’s tricycle was sold by her mother, Beatriz, to a stranger for $3 even as her daughter was riding it.

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Heidi Schumann for The New York Times

Three-year-old Marita Duarte watched as her family sold possessions, including her tricycle, at a recent garage sale in Manteca, Calif.

On Mission Ridge Drive and other avenues, lanes and ways in this formerly booming community, even birthday celebrations must go. “It was no money, no birthday,” said Ms. Duarte, who lost her job as a floral designer two months ago. The family commemorated Marita’s third birthday without presents last week, the occasion marked by a small cake with Cinderella on the vanilla frosting. They will move into a rental apartment next month.

An eternity ago, people in this city in northern San Joaquin County braved four-hour round-trip commutes to the San Francisco Bay Area for a toehold on the dream. Today, Manteca’s lawns and driveways are storefronts of the new garage-sale economy — the telltale yellow signs plastered in the rear windows of parked cars Friday through Sunday directing traffic to yet another sale, yet another family.

“You can get great deals,” said Sharrell Johnson, 32, who was scouting for toys in the Indian summer heat last Friday amid boxes of tools and DVDs and forests of little skirts and shirts dangling from plastic hangers on suspended rope. “Sad to say, you’re finding really good things. Because everybody’s losing their homes.”

The garage-sale economy is flourishing here and in many other regions of the country, so much so that some cities have begun cracking down. With more residents trying to increase their income, the city of Weymouth, Mass., limited yard sales to just three a year per address. Detective Sgt. Richard Fuller said it was now common to see 15 cars parked in front of a house.

Richmond, Ind., has had such an onslaught of garage sale signs posted in the right of way that the city has placed stickers on prominent light poles warning of violations and fines.

But it is a Sisyphean task: Manteca’s ordinance, restricting residents to two sales a year, is widely ignored.

The sales are part of the once-underground “thrift economy,” as a team of Brigham Young University sociologists have called it, which includes thrift stores, pawn shops and so-called recessionistas name-brand shopping at Goodwill.

“This is the perfect storm for garage sales,” said Gregg Kettles, a visiting professor at Loyola Law School in Los Angeles who studies outdoor commerce. “We’re coming off a 20-year boom in which consumers filled ever-bigger houses. Now people need cash because of the bust.”

And so the garages and yards of Manteca, some tinder-dry from neglect, offer a crash course in kitchen-table economics each weekend. On Klondike Way: “Tools, various household items, & much more!” On Virginia Street: “Moving Sale! Fridge, washer & dryer, men’s clothing, bike, BBQ, dinette, dresser, fans, microwaves, recliner, DVD player. Everything must go!”

When life’s daily trappings and keepsakes are laid out for sale on a collapsible table, sentiment is the first thing to go. “The cash helps a lot,” Constantino Gonzalez, Ms. Duarte’s neighbor, said of the family’s second sale in two weeks, in which he and his wife, Julia, were reluctantly selling their children’s inflatable bounce house for $650, with pump.

Since losing his construction job, Mr. Gonzalez, 43, has been economizing, disconnecting the family’s Internet and long-distance telephone service, and barely using his truck and the Jeep, strewn with leaves in the driveway. He has taken to picking up his children from school on his bicycle, with 6-year-old Daniel on the handlebars, cushioned by a terry-cloth towel.

The inflatable bounce house is the children’s favorite toy, but the family’s $1,800 mortgage payment is coming. So it sits propped up in its bright blue case, awaiting customers, many of them desperate themselves. Customers are searching for bargains on necessities so they might chip away at the rent, the truck payment, the remodeling bill on the credit card.

“We need to eat,” Mr. Gonzalez tells his children about selling off their toys. “I can’t cover the sun with my finger. So why lie?”

As he spoke, he watched his neighbor across the street pull out of her driveway with her family for the last time, their pickup truck piled high with chairs, firewood and other belongings, like modern Joads from Steinbeck’s “Grapes of Wrath.” “Bad loan,” explained the neighbor, Alex Martinez, who works nights at an automobile assembly plant in faraway Fremont. The garage sale she had held the week earlier barely made a dent.

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As the family drove off, a woman with frosted hair wearing high heels got out of a parked car and placed a sign in the window of the former Martinez place: “Coming Soon: Innovative Realty.”

This is McCain-Palin placard country, where signs for the anti-gay-marriage state ballot measure, “Yes on 8,” pepper the landscape and billboards advertising “Buy Now/Low Rates" seem like grim fossils of a bygone age. Manteca lies at an epicenter of the foreclosure crisis, with median home values having fallen by nearly half since 2006, from $440,000 to the current $225,000. In San Joaquin County, Moody’s has estimated that more than 1 in 10 houses with mortgages have a payment that is more than 30 days late. Unemployment rates have increased by a third, from 7.6 percent in September 2007 to 10.2 percent this fall, said Hans Johnson, a demographer at the Public Policy Institute of California.

Before the downturn, Manteca, population 67,700, and other towns in the northern San Joaquin Valley were on the leading edge of growth, with stucco subdivisions carved out of almond orchards. Today some 1,500 to 2,000 homes in Manteca, which is 32.7 percent Hispanic, are in various stages of foreclosure.

Paul Farnsworth’s garage on Widgeon Way was a latter-day five and dime, his driveway an eclectic assortment of artificial flowers, cookie jars, decanters, spotlights, radar detectors, Hot Wheels miniature cars, a Dirt Devil. Mr. Farnsworth’s recent garage sales supplement his income as a manager for a beverage distributor, which pays about half of what he made as an apricot and cherry farmer in nearby Tracy. (He was laid off when the farm was sold.) Neither he nor his wife Ann, a beautician, can afford to retire.

“People want things for half, and I don’t blame them,” observed Mr. Farnsworth, 65, adding that only one couple that morning had not dickered on the price. His own house, appraised at $375,000 three years ago, is worth $200,000 today. He has resorted to holding garage sales “to help make payments on a house that’s worth less than what I owe,” he said, the irony not lost on him.

Ebi Yeri’s yard held big-ticket items: beds, a smoked-glass and black lacquer dinette set and — the pièce de résistance — a 51-inch Hitachi projection television that he had replaced with a plasma flat screen. Still, it pained Mr. Yeri to sell. He had it set thematically to the HGTV channel, figuring that “a judge show might offend somebody.”

Mr. Yeri, 35, was decluttering to offset losses in his 401(k), which he described as “in the tank.” He said he also cut costs by being “lighter on the foot,” driving 10 miles an hour slower than the speed limit on his 156-mile commute to and from his software job in San Jose.

On Chenin Blanc Drive, Robert Dadey, a car salesman, was holding his 20th garage sale. “I need money,” he said simply about selling the Oakland Raiders memorabilia, teddy bears and $40 brown ultrasuede recliner in his midst on the lawn. “It’s bad times.”

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AIG Has Used Much of Its $123 Billion Bailout Loan

By Carol D. Leonnig

Washington Post Staff Writer

AIG chief executive Edward M. Liddy said Wednesday there's no guarantee the $123 billion bailout will be enough. (By Mark Lennihan -- Associated Press)

The troubled insurance giant American International Group already has consumed three-quarters of a federal $123 billion rescue loan, a little more than a month after the government stepped in to save the company from bankruptcy.

AIG has borrowed $90.3 billion from the Federal Reserve's credit line as of yesterday, the bulk of it to pay off bad bets the company made in guaranteeing other firms' risky mortgage investments. That's up from roughly $83 billion AIG had borrowed a week ago, and the $68 billion level it reached a week before that. The news comes as the company's new chief executive warned Wednesday that the government's financial lifeline may not be enough to keep AIG afloat.

The high volume of taxpayer funds that the trillion-dollar corporation tapped within five weeks also has others fretting that the largest government bailout in history may still not be adequate. AIG began reporting unusual multimillion-dollar losses this spring as a result of its heavy exposure to risky mortgages, and the U.S. Treasury decided that its failure would probably bring down several other major investment firms and banks whose fortunes were tied to AIG.

But Wall Street analysts said this is a vulnerable juncture for the insurance giant. It's now in a deep trough -- from which it may either emerge leaner and meaner or never return.

"It can't be good that they have to pay out so much more money, " said insurance analyst David Schiff of Schiff's Insurance Observer. "They're obviously in a lousy spot."

In exchange for control of the company, the Federal Reserve Bank of New York gave AIG an $85 billion loan Sept. 16 to keep it from bankruptcy. Earlier this month, the Fed reluctantly gave AIG $38 billion more in credit that was intended to keep the firm from drawing down the first Fed loan too quickly.

Five weeks in, AIG is paying out money but has yet to make much. Its plans to sell major assets to pay off the government's loan have been frustrated by the lowered prices that interested parties are now willing to pay for its business divisions and the difficulty some have in getting financing for deals.

New York Fed and AIG officials declined to comment on the situation. But sources close to the arrangement provided an illuminating breakdown: AIG has tapped $72 billion from the original $85 billion bailout. It has drawn down $18 billion of the additional $38 billion the Fed offered in credit liquidity for losses the company was suffering in securities lending.

In an interview on "The NewsHour with Jim Lehrer" on Wednesday night, chief executive Edward M. Liddy was asked by senior correspondent Ray Suarez whether the government's loan would suffice.

"I think so and I sure hope so," Liddy said. But Liddy added that there's no guarantee unless there's an improvement in the capital markets and companies regain their ability to raise money.

AIG yesterday named Paula Rosput Reynolds, the former chief executive of property and casualty insurer Safeco, as its vice chairman and chief restructuring officer. Reynolds, who led Safeco's sale to Liberty Mutual six months ago, will oversee the sale of AIG's assets, the company said in a statement.

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`We blew it' on global food, says Bill Clinton

By CHARLES J. HANLEY, AP Special Correspondent

Former President Clinton told a U.N. gathering Thursday that the global food crisis shows "we all blew it, including me," by treating food crops "like color TVs" instead of as a vital commodity for the world's poor.

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Addressing a high-level event marking Oct. 16's World Food Day, Clinton also saluted President Bush — "one thing he got right" — for pushing to change U.S. food aid policy. He scolded the bipartisan coalition in Congress that killed the idea of making some aid donations in cash rather than in food.

Clinton criticized decades of policymaking by the World Bank, the International Monetary Fund and others, encouraged by the U.S., that pressured Africans in particular into dropping government subsidies for fertilizer, improved seed and other farm inputs as a requirement to get aid. Africa's food self-sufficiency declined and food imports rose.

Now skyrocketing prices in the international grain trade — on average more than doubling between 2006 and early 2008 — have pushed many in poor countries deeper into poverty.

U.N. Secretary-General Ban Ki-moon told the gathering that prices on some food items are "500 percent higher than normal" in Haiti and Ethiopia, for example. The U.N. Food and Agriculture Organization estimates the number of undernourished people worldwide rose to 923 million last year.

"Food is not a commodity like others," Clinton said. "We should go back to a policy of maximum food self-sufficiency. It is crazy for us to think we can develop countries around the world without increasing their ability to feed themselves."

He noted that food aid from wealthy nations could itself be a tool for bolstering agriculture in poor countries. Canada, for example, requires that 50 percent of its aid go as cash — not as Canadian grain — to buy crops grown locally in Africa and other recipient countries.

U.S. law, however, requires that almost all U.S. aid be American-grown food, which benefits U.S. farmers but undercuts local food crops. Bush proposed earlier this year that 25 percent of future U.S. aid be given in cash.

"A bipartisan coalition (in Congress) defeated him," Clinton said. "He was right and both parties that defeated him were wrong."

Clinton also criticized the heavy U.S. reliance on corn to produce ethanol, which increased demand for the crop and helped drive up grain prices worldwide.

"If we're going to do biofuels, we ought to look at the more efficient kind," he said, referring, for example, to the jatropha shrub, a nonfood source that grows on land not suitable for grain.

The U.N. General Assembly president, Miguel d'Escoto Brockmann of Nicaragua, agreed, speaking of the "madness of converting crops into fuel" for cars.

D'Escoto also expressed disappointment that of $22 billion pledged by wealthy nations to help poor nations' agriculture in this year of food crisis, only $2.2 billion has been made available.

In opening the meeting, Ban expressed dismay at the potential impact of the global financial crisis on world hunger.

"While the international community is focused on turmoil in the global economy, I am extremely concerned that not enough is being done to help those who are suffering most: the poorest of the poor," he said.

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U.S. pilot was ordered to shoot down UFO

By Peter Griffiths

LONDON (Reuters) - Two U.S. fighter planes were scrambled and ordered to shoot down an unidentified flying object (UFO) over the English countryside during the Cold War, according to secret files made public on Monday.

One pilot said he was seconds away from firing 24 rockets at the object, which moved erratically and gave a radar reading like "a flying aircraft carrier."

The pilot, Milton Torres, now 77 and living in Miami, said it spent periods motionless in the sky before reaching estimated speeds of more than 7,600 mph.

After the alert, a shadowy figure told Torres he must never talk about the incident and he duly kept silent for more than 30 years.

His story was among dozens of UFO sightings in defense ministry files released at the National Archives in London.

In a written account, Torres described how he scrambled his F-86 D Sabre jet in calm weather from the Royal Air Force base at Manston, Kent in May 1957.

"I was only a lieutenant and very much aware of the gravity of the situation. I felt very much like a one-legged man in an ass-kicking contest," he said.

"The order came to fire a salvo of rockets at the UFO. The authentication was valid and I selected 24 rockets.

"I had a lock-on that had the proportions of a flying aircraft carrier," he added. "The larger the airplane, the easier the lock-on. This blip almost locked itself."

At the last moment, the object disappeared from the radar screen and the high-speed chase was called off.

He returned to base and was debriefed the next day by an unnamed man who "looked like a well-dressed IBM salesman."

"He threatened me with a national security breach if I breathed a word about it to anyone," he said.

The documents contain no official explanation for the incident, which came at a time of heightened tension between the West and the Soviet Union. Planes were on constant stand-by at British bases for a possible Soviet attack.

The files blame other UFO sightings on weather balloons, clouds or normal aircraft. Torres said he had been waiting 50 years for an explanation.

"I shall never forget it," he told the Times. "On that night I was ordered to open fire even before I had taken off. That had never happened before."

UFO expert David Clarke said the sighting may have been part of a secret U.S. project to create phantom aircraft on radar screens to test Soviet air defenses.

"Perhaps what this pilot had seen was some kind of experiment in electronic warfare or maybe it was a UFO," he said. "Something very unusual happened."

The files are online at: www.nationalarchives.gov.uk/ufos

(Editing by Steve Addison)

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