FREE MARKET FREE FALL

Phil Mattera, Dirt Diggers Digest - It was only about week ago that the Treasury Department, the Federal Reserve and the FDIC rushed to put together an emergency rescue package for Citigroup consisting of a $20 billion capital infusion and protection against up to $306 billion in losses on the financial giant's portfolio of mortgage-backed securities. This was in addition to an earlier $25 billion investment in Citi as part of the effort to prop up the country's largest banks.

Now comes the news that an arm of Citigroup agreed to pay $10 billion to buy a Spanish toll road operator . . . Funny, I don't recall Treasury Secretary Henry Paulson mentioning that the taxpayers were bailing out Citi so that it could speculate in the foreign infrastructure privatization market.

This caused me to wonder what else major financial institutions have been doing with their federal infusions other than expanding credit for U.S. consumers and businesses. . . To answer this question I started with the tally of bailout recipients maintained by Pro Publica and searched for recent announcements by those companies. I found, for example:

- Bank of America ($25 billion received) gave notice of its plan to exercise the remainder of its option to purchase shares in China Construction Bank Corporation from China SAFE Investments Limited (Huijin). The purchase will increase B of A's holdings in CCB from 10.8 percent to 19.1 percent. The cost was not reported.

- JP Morgan Chase ($25 billion) announced an enhancement of its cash management and trade services in India, which represented part of a $1 billion plan to expand the bank's worldwide cash management and treasury business.

- Bank of New York Mellon ($3 billion) announced that it had received a license to initiate banking operations in Mexico.

Under normal circumstances, such announcements would merit no comment. But at a time when these institutions are receiving massive amounts of taxpayer funds, they take on a new significance. While the infusions of federal money were designed to expand the flow of credit in the United States, banks are using some of the funds to expand their foreign operations and investments. They are taking our money and running overseas.

Reuters - California is on track to run out of cash in February or March and faces a $15 billion cash shortage by the end of its fiscal year in June unless officials plug an $11.2 billion budget gap, according to the state's budget director. Additionally, if Gov. Arnold Schwarzenegger and lawmakers fail to close the current fiscal year's budget shortfall soon, California, the most populous U.S. state, may in March delay payments to its vendors or hand them notes promising payment, according to a December 1 letter to top lawmakers from the director of the Department of Finance, Michael Genest.

Sharona Coutts, Pro Publica - The Internal Revenue Service is debating how best to collect potentially billions of dollars in unpaid taxes that wealthy Americans have squirreled away in offshore bank accounts, according to the New York Times. One of the options being discussed is a "global settlement," which provides a kind of amnesty. The Times describes it as "a take-it-or-leave-it deal that allows clients to settle their tax debts in exchange for reduced penalties and possibly reduced tax payments." The debate comes as the Justice Department investigates several top-tier banks for providing the private tax shelters for their clients. If prosecuted, those clients could face steep fines - sometimes worth much more than what's left in their offshore accounts - and other penalties, including jail. . . The Justice Department is investigating banks UBS, Credit Suisse and HSBC. There is a separate investigation involving Deutsche Bank, which got wrapped up in a tax shelter scheme orchestrated by a then-employee of Bank One, which was later acquired by JP Morgan Chase. That scheme was called Homer and is estimated to have cost taxpayers about $100 million.

CNN - A record 1.35 million homes were in foreclosure in the third quarter, driving the foreclosure rate up to 3%, the Mortgage Bankers Association said. That's a 76% increase from a year ago, according to the group's National Delinquency Survey. At the same time, the number of homeowners falling behind on their mortgages rose to a record 7%, up from 6% a year ago, the association said.
This means that one in 10 borrowers in America are either delinquent or in foreclosure.

Financial Times - Chinese bargain hunters are preparing to descend on American cities such as Los Angeles and San Francisco, where homeowners have suffered some of the steepest price falls in the US. Sou Fun, the biggest real estate website in China, is organizing a trip next month to look at properties in California and possibly Nevada. Liu Jian, the company's chief operating officer, said about 300 people had expressed interest in the idea in the three days since it was advertised, though the company would take only a small group on the first trip. . . . "Given the problems in the Chinese market now, many people have been asking us about taking a look at overseas markets, especially the US," he said.
. . . "The US market absolutely terrifies me," said one Shanghai-based real estate executive. "However, there are plenty of people here who think this a great time for bottom-fishing."

Michael Lewis, Portfolio - To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital-to decide who should get it and who should not. Believe me when I tell you that I hadn't the first clue.

I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous-which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a great reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people's money, would be expelled from finance.

When I sat down to write my account of the experience in 1989-Liar's Poker, it was called-it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future. . .

I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they'd be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn't expect was that any future reader would look on my experience and say, "How quaint.". . .

Agence France Presse - The hedge fund dealers partied at a New York nightclub like there was no tomorrow -- which for some was probably true.
Swilling martinis and vodkas, they filled Manhattan's white, tent-themed Nikki Beach to bursting. Waiters, trays of tapas held high in the air, became stranded, wedged into crowds swaying to music under pink lights.

About 650 guests attended the event late Wednesday, a third more than organizers expected. . . The evening was billed as a networking session. Sometimes that meant angling for a particularly special deal.

"A lot of people are looking for a job," said Nicole Alexander from Ovation Group, a corporate travel company. "There is no stigma now because so many people have lost jobs," she said. "The joke is that the new status symbol, instead of a Porsche or Ferrari, is having health insurance and a desk."

Job losses across Wall Street are forecast by New York state accountants to hit 48,000 by the end of next year. . .

A new study by Morgan Stanley predicts assets under hedge fund management globally will drop to 900 billion dollars by the end of 2009, half the peak valuation earlier this year.

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