Pension Debt Overwhelms Bankrupt San Bernardino, California, and It Becomes the Third California City to Seek Bankruptcy Protection; Other Cities in California are Also in Deep Fiscal Trouble

Pension Debt Overwhelms Bankrupt San Bernardino, California

August 2, 2012

Reuters - San Bernardino, the third California city to seek bankruptcy protection since June, is saddled with huge pension debt and will produce details of those unfunded obligations within 15 days, its mayor said on Thursday.

The city filed for bankruptcy protection on Wednesday, citing over $1 billion in estimated liabilities and up to 25,000 creditors, many of whom are the city's own employees.

The city, 65 miles east of Los Angeles, also listed estimated assets as over $1 billion.

Patrick J. Morris, San Bernardino's mayor, said in a telephone interview that the bulk of the city's debt was due to "unfunded liabilities related to pension and benefits" for the city's employees, and "obligations to employee groups in labor contracts."

In the past two months, the cities of Stockton and Mammoth Lakes have also filed for Chapter 9 bankruptcy protection, a special bankruptcy provision for municipalities.

Stockton, which like San Bernardino has suffered from the housing crash that was particularly acute in southern California, filed for bankruptcy in June, becoming the largest U.S. city to do so.

Other cities in California are also in deep fiscal trouble.

Richard Larkin, senior vice president and director of credit analysis at bond underwriting firm HJ Sims and an expert in municipal bonds, concluded in a recent study that "because of the fiscal environment in California ... many of those defaults yet to come this year are likely to be in California."

In late July, San Bernardino reported that it had $56 million in indebtedness payable from its general fund, the main budget, including payments on a $50 million pension bond.

There is an additional $195 million in unfunded pension obligations, $61 million in unfunded retiree healthcare, and $40 million of workers compensation, compensated absences and general liabilities.

The city is not alone in struggling to meet pension obligations, particularly for police and firefighters. In other California cities and in municipalities nationwide, retirement costs promised to city employees in good times are wreaking havoc with budgets in the wake of the housing market crash and high unemployment.

The city of about 210,000 residents declared a fiscal crisis last month after a report that local government had tapped out its reserves and projected that spending would top revenue by $45 million in the fiscal year that began on July 1.

Wednesday's initial filing to place the city under Chapter 9 bankruptcy protection was mainly designed to stop creditors from suing the city for unpaid debt.

The filing of bankruptcy protection halts legal actions against the city until the bankruptcy case is over.

There is no guarantee that a judge will approve the bankruptcy request. Of the roughly 640 Chapter 9 filings since 1937, about a third have been rejected.

Mayor Morris said he was confident that the city would get bankruptcy protection because its finances were in such dire straights.

"We can't make payroll," he said.

The three California bankruptcy cases will be closely watched by investors because they will be test cases of whether cities in financial trouble can be allowed to renege on their bond debt and pension obligations.

Already in Stockton a big creditor is arguing that the city should not be afforded bankruptcy protection.

Assured Guaranty, a Bermuda bond insurer, complained this week that Stockton is reneging on its debt obligations to investors while continuing to make payments to CalPERS, California's state pension system.

Related:

California is Bankrupt and One of the Reasons is Its Taxpayer-funded Education System (Another is Its State Pension System)

Stockton, California, Could Go Bankrupt; Spain is Now the Biggest Worry for Europe

Stockton, Calif., Could Go Bankrupt

June 28, 2012

ABC News - Stockton, Calif., could become the biggest U.S. city to file for bankruptcy as local officials struggle to restructure millions of dollars of debt. Council members met Monday night.

The city had until 11:59 p.m.to reach a deal with its creditors under a new state mediation law designed to help municipalities avoid bankruptcy. Stockton spokeswoman Connie Cochran said those negotiations were confidential, and that nothing would be announced at the deadline.

The pain in Spain is now the biggest worry for Europe as it struggles with debt and financial problems. Spain’s borrowing costs doubled and even tripled at today’s auction of short-term government debt. Investors demanded higher yields as worries grow that Spain will not be able to manage a very expensive rescue of its ailing banks. The rate on three-month Spanish bills was 2.36 percent, compared with 0.85 percent in a similar auction on May 22.

Spain’s battered banks have taken another hit with a sweeping downgrade by Moody’s. The firm is reducing its ratings on debt issued by 28 Spanish banks. Monday Spain formally requested financial aid for its banks for other eurozone nations.

German Chancellor Angela Merkel may be taking an even harder line as European leaders prepare for their summit this Thursday. At a conference in Berlin she said shared euro bonds and European deposit insurance were ”economically wrong and counterproductive,” according to Bloomberg News. But other reports say an important new proposal may be in the works. It would give the European Union broader powers to order changes in national budgets when debt and deficit rules are breached.

Moody's Downgrades 15 Major Global Banks

Credit Suisse Cut 3 Levels as Moody's Downgrades Biggest Banks

June 21, 2012

Bloomberg - Credit Suisse Group AG's credit rating was cut three levels by Moody's Investors Service, Morgan Stanley was reduced two levels and 13 other banks were downgraded in moves that may shake up competition among Wall Street's biggest firms.

Credit Suisse, the second-largest Swiss bank, received the maximum reduction that Moody's said in February it may make during a review of global banks with capital markets operations. Morgan Stanley and UBS AG (UBSN), the other firms singled out for such a steep cut, were lowered two steps instead.

"All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities" Moody's Global Banking Managing Director Greg Bauer said today in a statement.

The downgrades may force banks to post additional collateral to trading partners in derivatives deals while boosting the companies' borrowing costs. Moody's said when it announced the review that it was seeking to reflect the banks' reliance on fragile confidence in funding markets and increased pressures from regulation and a difficult market environment.

The ratings firm said Feb. 15 it was reviewing grades for 17 banks. Moody's cut Macquarie Group Ltd. (MQG) and Nomura Holdings Inc. (8604) one level each in March. It also started a review of lenders in more than a dozen European nations and already has reduced grades in Spain, Germany, Italy, Sweden, Austria and Denmark.

Competitive Changes

The downgrades may affect the competitive landscape in derivatives that aren't centrally cleared, a business that provides about 15 percent of the industry's trading revenue, Kinner Lakhani, a Citigroup Inc. (C) analyst, wrote in an April 30 note. Banks with the largest cuts may lose revenue from such long-term derivatives, Charles Peabody, an analyst with Portales Partners LLC, said in a June 4 interview on the "Bloomberg Surveillance" radio program.

"Right now there are a lot of internal bank policies that if you're doing a longer-term structured derivative, you want the counterparty to be A-rated or above," said David Konrad, an analyst at KBW Inc. in New York. Because Moody's is downgrading the entire banking industry rather than one or two firms, "a lot of those policies may be rewritten over time."

A three-level cut for Morgan Stanley (MS) could cost it $400 million in annual trading revenue from those types of derivative deals, estimated Brad Hintz, an analyst at Sanford C. Bernstein & Co., before Moody's released its decisions.

More Collateral

The downgrades also may hasten obligations to post additional collateral and termination payments. New York-based Morgan Stanley said last month it may face payments of $9.61 billion in the event of a three-level cut from Moody's and two grades by Standard & Poor's, according to a filing based on March 31 data. The total included $7.21 billion in collateral.

Credit Suisse said in its annual report that a three-level downgrade in the bank's long-term debt ratings would result in additional collateral requirements or termination payments under certain derivative instruments of 4.5 billion Swiss francs ($4.7 billion), as of Dec. 31. UBS said it would face 2.1 billion francs of collateral calls from a two-level cut.

Banks' large liquidity buffers will make collateral requirements "manageable," Amit Goel, a Credit Suisse analyst, wrote in a May report.

‘New World'

"Pre-crisis bank ratings used to be clustered together," Lakhani wrote. "In the new world, dispersion has increased. Markets tend to discriminate more between issuers at lower ratings -- in terms of funding costs. Over time, this could provide a competitive edge for higher-rated firms," including HSBC Holdings Plc. (HSBA) and JPMorgan Chase & Co. (JPM)

Morgan Stanley's stock fell on June 4 to what was then its lowest close since December 2008 as investors weighed a potential credit-rating cut. The shares have rallied 15 percent since then through yesterday.

Moody's wrote on Jan. 19 that credit profiles of global lenders are weakening as governments struggle with their finances, and economic uncertainty and higher funding costs persist. When Moody's places a company's ratings on review for a downgrade, it typically decides whether to cut them within three months.

The ratings firm said Feb. 15 it was reviewing grades for 17 banks and securities firms with what it called "global capital-markets operations." That's when it put Morgan Stanley, Bank of America Corp. (BAC), Citigroup, Goldman Sachs Group Inc. (GS), JPMorgan and Royal Bank of Canada (RY) on review for downgrades.

‘Deliberate Approach'

Moody's has said all the reviews will be wrapped up by the end of this month, after it delayed its rating actions on the largest banks, which had previously been scheduled for mid-May.

"Moody's is taking an appropriately deliberate approach during this review process and will conclude when it is confident that all relevant information has been received and analyzed," the firm said in an April 13 statement.

Events that have occurred since the review was announced, including developments in the European debt crisis and JPMorgan's $2 billion trading loss, have forced Moody's to take longer with its decisions, said David Hendler, an analyst at CreditSights Inc. in New York. Morgan Stanley Chief Executive Officer James Gorman said this week that the review has been "a long process to be hanging out there in the wind."

Companies have spoken out against the Moody's review, citing the firm's methodology and approach. UBS Chief Financial Officer Tom Naratil said his firm's financial position is "completely inconsistent" with one that would have its short- term rating cut from P-1.

'Somewhat Stunning'

Gorman said it would be "somewhat stunning" if his firm was cut three levels given the bank's increased capital and liquidity. Goldman Sachs CFO David Viniar has said that he and other executives "strongly disagree" with Moody's approach.

"If you look at every single credit metric there is for Goldman Sachs and frankly for many of our competitors, none of the actions they've talked about are warranted," Viniar said during an April 17 conference call with analysts and investors after the company reported first-quarter results. "We are, as you know, we're quite analytical. And when we do all of the analysis, we cannot figure out why they are where they are."

David Knutson, a Chicago-based credit analyst with Legal & General Investment Management, said Moody's is in a difficult business because it collects fees from the banks.

"When you upgrade someone, I imagine they're happy to sign the check because they earn it back in lower rates," Knutson said. "When you downgrade them, signing that check is a much harder thing to do."

Japan Plans to Double the Country's Sales Tax to 10 Percent by 2015 to Fund Swelling Social Security Costs

Fitch Cuts Japan as Politics Hinders Debt Plan

May 22, 2012

Reuters - Fitch cut Japan's sovereign credit status on Tuesday to the lowest level among global ratings agencies as a political stalemate dims the chance that the country can curb its snowballing debt.

Fitch Ratings cut Japan's long-term foreign currency rating by two levels from AA to A plus, the fifth highest investment grade. It cut the more important local currency rating by one notch from AA minus to A plus. Both were given a negative outlook.

Fitch warned further downgrades were possible unless the government takes new fiscal policy measures to stabilize public finances and its ratio of debt to gross domestic product.

"The downgrades and negative outlooks reflect growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios," Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch said in a statement.

"The country's fiscal consolidation plan looks leisurely, relative even to other fiscally challenged high-income countries, and implementation is subject to political risk."

The downgrade could serve as a chilling reminder to highly indebted countries in Europe that urgent action is needed to trim public debt and prevent concerns about sovereign debt from weighing further on the global economy.

Several euro zone countries have been hit with multiple downgrades as the region struggles to deal with its mounting debt crisis.

The United States is expected to reach a $16.4 trillion government debt ceiling after November presidential elections, laying the ground for another protracted political battle over how to cut the budget, similar to a bitter debate that rattled financial markets last year.

After Japan's ratings cut, the dollar rose against the yen to a session high of 79.85 yen. But analysts said the downgrade is unlikely to have a lasting impact on markets because Japanese government bonds are mostly held by domestic investors.

Fitch's A plus local currency rating for Japan is the one most closely followed by investors because the government's debt is largely funded by domestic investors, who are backed by about $15 trillion in household savings.

Bank of Japan data shows that domestic investors held 93 percent of government debt as of December.

The Fitch rating is one notch below its rival ratings agencies. Moody's Investors Service rates Japan Aa3 with a stable outlook. Standard & Poor's rates Japan at AA minus with a negative outlook.

All the ratings are broadly in the middle of the investment grade range of ratings.

TAX PLAN

Concerns among ratings agencies over Japan's debt and the inability of successive governments to come up with a credible plan to deal with it are not new.

Moody's downgraded Japan by one notch in August last year, blaming a revolving door political leadership, a reference to Japan's six prime ministers in five years.

S&P cut Japan's ratings in January last year, saying Japan lacked a convincing plan to deal with its debt and also citing political risks.

Japan's debt burden, at twice the size of its $5 trillion economy, is by far the worst among industrialized countries. It has been built up as the government tried to stimulate the economy during two decades of sluggish growth and deflation.

Fitch said Japan's gross general government debt is projected to rise to 239 percent of GDP by the end of 2012, the highest of any Fitch-rated sovereign.

Based on that projection, the ratio would have risen 61 percentage points since the global financial crisis, compared with a median of 39 percentage points for countries in the Organisation for Economic Co-operation and Development and 8 percentage points for 'A' range sovereigns.

The government's own plan to reduce its debt burden doesn't foresee the debt/GDP ratio coming down until 2020/21.

"Fitch regards this as a slow pace of consolidation given the scale of Japan's debt," it said.

Prime Minister Yoshihiko Noda has staked his political career on plans to boost the country's sales tax, currently 5 percent, to fund swelling social security costs in the world's fastest aging population.

At the end of March, Japan's government submitted laws to double the sales tax by 2015, setting up a showdown that could split the ruling party, force early elections and deepen policy paralysis.

Opposition parties are unwilling to cooperate with Noda's plan and the government lacks the numbers to force legislation through parliament.

"Given the political inaction and relatively weaker growth, and no development in regard to sales tax and the fiscal outlook, the downgrade is not a surprise," said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi in London.

"The yen has sold off a little bit, but the history of downgrades of sovereign debt in Japan is that yen selling is not sustained."

After Fitch's downgrade, Japanese Finance Minister Jun Azumi said that the government will try to implement social welfare and tax reforms.

The OECD said earlier on Tuesday that a credible fiscal consolidation plan must be a top priority for Japan.

Swift action was needed, it said in an economic outlook report, because budget deficits projected at about 10 percent of GDP for 2012 and 2013 would further push Japan's debt into unchartered territory.

Ratings agencies have repeatedly warned Japan that its pace of fiscal consolidation is too slow to lower its debt burden and budget deficit.

Keep Watching Greece Because What's Going on There is Coming to America

A Greek Crisis is Coming to America

February 11, 2010

Financial Times - It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.

There is of course a distinctive feature to the eurozone crisis. Because of the way the European Monetary Union was designed, there is in fact no mechanism for a bail-out of the Greek government by the European Union, other member states or the European Central Bank (articles 123 and 125 of the Lisbon treaty). True, Article 122 may be invoked by the European Council to assist a member state that is “seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”, but at this point nobody wants to pretend that Greece’s yawning deficit was an act of God. Nor is there a way for Greece to devalue its currency, as it would have done in the pre-EMU days of the drachma. There is not even a mechanism for Greece to leave the eurozone.

That leaves just three possibilities:

1. one of the most excruciating fiscal squeezes in modern European history – reducing the deficit from 13 per cent to 3 per cent of gross domestic product within just three years;
   
2. outright default on all or part of the Greek government’s debt; or
   
3. (most likely, as signaled by German officials on Wednesday) some kind of bail-out led by Berlin.

Because none of these options is very appealing, and because any decision about Greece will have implications for Portugal, Spain and possibly others, it may take much horse-trading before one can be reached.

Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did.

1. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped.
   
2. Second, there is a good deal of “leakage” from open economies in a globalised world.
3. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect.

For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Even according to the White House’s new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.

The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). Then came Ireland, Spain and Greece (9 per cent). And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF.

Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted – as is the case in most western economies, not least the US.

Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.

But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $1,500bn, that implies up to $300bn of extra interest payments – and you get up there pretty quickly with the average maturity of the debt now below 50 months.

The Obama administration’s new budget blithely assumes real GDP growth of 3.6 per cent over the next five years, with inflation averaging 1.4 per cent. But with rising real rates, growth might well be lower. Under those circumstances, interest payments could soar as a share of federal revenue – from a tenth to a fifth to a quarter.

Last week Moody’s Investors Service warned that the triple A credit rating of the US should not be taken for granted. That warning recalls Larry Summers’ killer question (posed before he returned to government):

“How long can the world’s biggest borrower remain the world’s biggest power?”

On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic.

Greek Debt Crisis is a Warning Sign to the World

Greek Debt Crisis Is A Warning Sign To Us

February 17, 2012

GoldenVisionForYou.com - Greek debt crisis has been dragged for a long time.

The Greek parliament has finally approved new harsh austerity legislature required to secure a 130-billion-euro bailout from the EU as well as the IMF in efforts to avoid devastating default. This comes amid violent riots against the vote in Athens. ­The lawmakers voted early Monday (Feb 13th) in favor of the bill which will cut 15,000 public-sector jobs and lower the minimum wage by 20 per cent. Patrick Young, from investment consultants, DV Advisors, says whatever happens in Greece, there is no saving it from a collapse that will be felt across Europe.

And the financial crisis in Europe is going to continue to spread well beyond Greece. Moody’s Investors Service just downgraded the credit ratings of six European nations. Spain was downgraded to A3 from A1 with a negative outlook, Italy was downgraded to A3 from A2 with a negative outlook and Portugal was downgraded to Ba3 from Ba2 with a negative outlook. It also lowered the ratings of Slovakia, Slovenia and Malta.

Countries such as Italy, Spain, Portugal, Ireland and Hungary are heading down the exact same road that Greece has gone. Greece was the first one to experience a full-blown depression, but soon Greece will have many followers.

Greek debt crisis is definitely a warning sign to the world. Economist Don Drummond delivers his report at a news conference in Toronto on Wednesday February 15 2012. The 700 page report outlines suggestions for ways the Ontario government can cut back spending to avoid Greek like debt crisis.

To get out of its fiscal hole, the government must cut program spending more deeply than former Tory premier Mike Harris and maintain that restraint longer than Alberta’s Ralph Klein or Saskatchewan’s Roy Romanow in the 1990s, the report said.

“I think the challenge and the solution will have to be pretty much unprecedented in Canadian post-war history,” Drummond told reporters.

Greek debt crisis is also a warning sign to each one of us. There is no free lunch. You can not count on the government to take care of you any more. Because the government is in big trouble itself. Are you prepared for tough economic times? Do you have a plan B for your income? It is time to be financial educated and explore home business opportunities.

Europe's Economic Woes Dominate G8 Gathering

May 18, 2012

Reuters - U.S. President Barack Obama pledged at a summit on Saturday to work with Europe on a package that balances growth with debt reduction as world leaders try to prevent the worsening euro zone crisis from destabilizing the global economy.

At the wooded Camp David retreat in Maryland's Catoctin Mountains, Obama and leaders from other major economic powers are seeking ways to soothe financial markets after worries about Spain's banking problems and the risk of a Greek exit from the euro zone sent world stocks to their lowest levels this year.

A shirt-sleeved Obama opened the morning session on the global economy at a rustic lodge, promising to seek ways to restore healthy growth and jobs and address concerns in Europe.

"All of us are absolutely committed to making sure that both growth and stability, and fiscal consolidation, are part of an overall package in order to achieve the kind of prosperity for our citizens we all are looking for," Obama said.

After an early morning meeting with Obama, British Prime Minister David Cameron said he detected a "growing sense of urgency that action needs to be taken" on the euro zone crisis.

"Contingency plans need to be put in place and the strengthening of banks, governance, firewalls - all of those things need to take place very fast," he told reporters.

European Union leaders seemed keen to stress on Friday that they would stand firm in protecting their banks, after news of escalating bad loans raised the specter that rescuing Spain's banks would crash the euro zone's fourth largest economy.

"We will do whatever is needed to guarantee the financial stability of the euro zone," EU President Herman Van Rompuy said.

Earlier French President Francois Hollande suggested using European funds to inject capital into Spain's banks, which would mark a significant acceleration of EU rescue efforts.

Balancing a growth agenda with efforts to lower government debt through fiscal belt tightening is a crucial part of the G8 discussions. Obama has aligned himself with Italy's Prime Minister Mario Monti and the new French president in putting more emphasis on growth.

That places pressure on German Chancellor Angela Merkel, who has pushed fiscal austerity as a the prime means of bringing down huge debt levels that are burdening European economies.

Voters in euro zone countries have shown frustration with that approach, ejecting the Greek government and in France the conservative Nicolas Sarkozy was defeated by Hollande, a socialist, in the May 6 elections.

A draft of the summit communiqué shown to Reuters will stress an "imperative to create growth and jobs."

There are signs of softening in Germany's austerity stance.

Its largest industrial union IG Metall struck its biggest pay deal in 20 years early on Saturday. The 4.3-percent pay increase, more than double Germany's inflation rate, will boost worker buying power in the euro zone's richest nation and lift consumption - something the United States long has urged as a means to bolster overall growth throughout the world's second largest economic region.

GLOBAL SECURITY

Also on the summit agenda are concerns about oil and food prices as well as Afghanistan, Iran, Syria and North Korea.

Speculation has grown that Obama will use an energy session at the G8 to seek support to tap emergency oil reserves before a European Union embargo of Iranian crude takes effect in July.

But with oil prices already sliding, a move by Obama to tap the Strategic Petroleum Reserve - alone or along with other countries - could expose him to criticism that the emergency supply should only be touched in a supply crisis.

The Camp David summit kicked off four days of intensive diplomacy that will test leaders' ability to quell unease over the threat of another financial meltdown as well as plans to wind down the unpopular war in Afghanistan.

After the Camp David talks wrap up late on Saturday afternoon, Obama will fly to his home town of Chicago where he will host a two-day NATO meeting at which the Afghanistan war will be the central topic.

Greece Bridles at Merkel Referendum Suggestion

May 18, 2012

AFP - Greek political leaders reacted angrily on Saturday to a suggestion, attributed to German Chancellor Angela Merkel, that the country hold a referendum on euro membership alongside an election next month.

The chancellor's move -- despite a denial by Berlin -- went down badly with leaders sensitive to any comments from Germany, which has insisted that Athens stick to tough austerity measures agreed in return for a massive EU-IMF bailout.

"The Greek people have no need for a referendum to demonstrate their choice for the euro, they have already made enough costly sacrifices to show that," said Antonis Samaras, leader of the conservative New Democracy party which won inconclusive May 6 polls.

Merkel's suggestion, "above all coming in the run-up to the election, is regrettable and unacceptable," Samaras said in a statement.

"The Greek people has the right to respect from its (European) partners."

The office of the caretaker prime minister said on Friday that Merkel "conveyed thoughts (to the president) on holding a referendum alongside the election, on the question of whether Greek citizens wish to remain in the eurozone."

The suggestion was turned down, a statement said, because the caretaker government only has the authority to organise the new polls, expected June 17.

Berlin bluntly denied any such move.

"The information reported that the chancellor had suggested a referendum to the Greek President Carolos Papoulias is wrong," a Merkel spokeswoman said.

Alexis Tsipras, leader of the radical left Syriza party which came second in the May 6 vote on a campaign against the austerity policies, alluded to Germany's wartime record in Greece, a hugely sensitive and controversial period.

"Madame Merkel is used to talking to Greek political leaders as if she was addressing a protectorate," Tsipras said.

"Greeks are going to give a definitive answer (in the upcoming polls) and are going to put an end to the policies of austerity and submission, they will open the way for progressive forces across Europe," he added.

The leader of the socialist Pasok party, which along with New Democracy backed the EU-IMF accord and suffered accordingly on May 6, said only the Greek parliament and government had the authority to call a referendum.

"The question for Greece is not whether it stays in the euro or not, but whether it can get out of the crisis," Evangelos Venizelos said.

Greek newspapers were even more critical -- "Merkel Ultimatum," was the pro-Socialist Ta Nea front page headline.

"It's a Merkel Bomb for a euro referendum, an unprecedented political intervention which makes things worse," wrote Eleftheros Typos on the right, while financial daily Naftemporiki also spoke of a "political bomb."

The Merkel imbroglio comes at a bad time, with the chancellor in Washington for G8 talks hosted by US President Barack Obama who has shown himself more sympathetic to the need for growth than austerity as Greece tops the agenda.

Obama said Friday he supported Greece staying in the eurozone, a region of "extraordinary importance" not only for Europe but also for the global economy.

Up to now, Merkel has insisted that Greece must stick to the austerity terms in the bailout deal or risk losing access to debt funding -- effectively forcing it out of the eurozone.

But in recent months, calls for the focus to be rebalanced towards growth have increased, with new French President Francois Hollande winning office earlier this month on a pledge for change.

Despite the brickbats, it is also clear that in effect the June 17 polls are fast becoming a straight vote on Greek acceptance of the bailout deal and its continued place in the eurozone.

After recent polls put Syriza in the lead, a survey Friday showed the race narrowing, giving New Democracy 23.1 percent of the vote, up from the 18.85 percent it won on May 6, with Syriza on 21 percent, up from 16.8 percent.

Fears that the new poll might not be able to produce a viable government committed to the bailout have roiled global markets and snared Spain where the government is struggling to stabilise its stricken banking system.

"Time is clearly running out," London-based analysts Capital Economics warned in a note over Greece's continued political paralysis.

"If the government does not meet the conditions required to receive the next tranche of the bailout, it could run out of money before the end of the summer."

Mexico's Ortiz says Greece Exit Could Be Worse than Lehman

May 18, 2012

Reuters - If Greece leaves the euro zone it could detonate a global financial crisis even worse than the 2008 credit crunch, dry up global trade financing and spur another U.S. recession, former Mexican central bank governor Guillermo Ortiz said on Friday.

Heavily-indebted Greece is heading toward a snap election next month and global financial markets have swooned on fears the country could reject terms of an international bailout and pull out of the euro.

"There is no legal exit clause for a country that wants to leave the euro zone, so if it occurs, it is going to be necessarily traumatic, and have global repercussions," Ortiz told Reuters at a banking conference in the Mexican resort of Acapulco.

"Of course this will affect us as the consequences of Lehman's bankruptcy affected the world, only this will probably have an even bigger impact," he said.

The collapse of U.S. investment bank Lehman Brothers in late 2008 sparked Mexico's deepest recession since the 1995 Tequila Crisis.

Ortiz said Mexico's was most vulnerable to a potential freeze in financing for international trade shipments.

"In the case of Mexico, fortunately we do not depend on cross border flows for the operation of the banking system," said Ortiz, who led Mexico's central bank from 1998 to 2009 and is now chairman of the board of Mexican bank Banorte.

"The cross border flows on which we depend have to do with the financing of international trade. If this halts, obviously there are real repercussions."

Euro area banks as a whole provide 36 percent of global trade finance loans, and French and Spanish banks together account for more than two-fifths of trade finance loans in Asia.

Mexico's banking system is dominated by units of major global banks, including Spain's BBVA, but local subsidiaries are well capitalized by local deposits and are not dependent on financing from their parent companies.

Ortiz, who is also a former chairman of the Bank for International Settlements (BIS), said a collapse in trade financing could end up dragging the United States into recession.

"A double dip (recession) would obviously hit the whole world," he said.

Mexico sends nearly 80 percent of its exports to its northern neighbor.

BIS figures show new trade finance loans fell 4.6 percent in the fourth quarter of 2011 from the previous quarter.

Trade finance, which is highly short-term - usually 30 or 90 days - is often one of the first forms of lending to be cut back in difficult times. Trade finance fell about 10 percent between October 2008 and January 2009, according to IMF calculations.

World Stock Markets Sink on US, Europe Worries

May 18, 2012

AP - World stocks fell Friday after credit downgrades slapped on Spanish banks unnerved investors already worried about the stability of the 17-country euro currency union.

The fall in European shares followed a sharp downturn in Asia where markets were also rattled by weak U.S. manufacturing figures.

The nervousness about Spain's banks comes as the European financial crisis intensifies.

Political turmoil in Greece has increased the likelihood that it could leave the 17-country monetary union, a move that could have ripple effects throughout Europe and the world's financial markets.

Britain's FTSE 100 fell 0.8 percent to 5,295.30 and Germany's DAX was 0.5 percent lower at 6,279.36. France's CAC-40 lost 0.7 percent to 2,991.85.

But Wall Street looked set for a higher opening on Friday when shares of social media giant Facebook will start trading. Buyer demand is expected to be very strong. Dow Jones industrial futures rose 0.2 percent to 12,439 and S&P 500 futures added 0.2 percent to 1,304.40.

Markets were jolted by Moody's downgrade Thursday of 16 Spanish banks, said Jackson Wong, vice president at Tanrich Securities in Hong Kong.

Moody's said it took the action because the banks face a rising tide of bad loans linked to Spain's recession, a gloomy real estate market and high unemployment.

"It's very hard to predict how the euro crisis will evolve. All the news is bad, so investors like to stay on the sidelines even though stocks are very attractive right now," Wong said.

Japan's Nikkei 225 tumbled 3 percent to close at 8,611.31, its lowest finish in four months as signs of weakness in the U.S., a critical export market for Japanese companies, battered some of the country's behemoth manufacturers.

Hong Kong's Hang Seng dropped 1.3 percent to 18,951.85 and Australia's S&P/ASX 200 slid 2.7 percent to 4,046.50. South Korea's Kospi tumbled 3.4 percent to 1,782.46. Benchmarks in Singapore, Taiwan and New Zealand also fell.

Mainland Chinese shares lost ground, with the benchmark Shanghai Composite Index losing 1.4 percent to 2,344.52. The Shenzhen Composite Index fell 1.5 percent to 940.91. Shares in ports and trading related companies led the gains, while shares in banks, shipping and defense industry companies weakened.

"The investors are pessimistic over China's economic outlook, on top of the problems in Europe. It is more like a panic selling," said Guo Yanhong, an analyst at Huachuang Securities, based in Beijing.

In the U.S., meanwhile, the Federal Reserve Bank of Philadelphia said Thursday that its index of factory activity fell to minus 5.8 from 8.5 in April. Any reading below zero indicates contraction. Measures of new orders and employment also fell in May, the bank said. That suggests manufacturers in the region are cutting jobs.

Among individual stocks, Japanese vehicle makers were hit hard. Yamaha Motor Co. tumbled 5 percent and Mitsubishi Motors Corp. was down 5.1 percent. Toyota Motor Corp. lost 3.7 percent.

Asiana Airlines Inc., South Korea's second-largest carrier, plunged 5.1 percent after reporting that its earnings slid in the first quarter of 2012 from a year earlier, mainly due to soaring fuel prices, Yonhap News Agency said.

Gold miners were among the gainers. Australia's Newcrest Mining rose 3.8 percent on rising prices for the precious metal. Hong Kong-listed Zijin Mining Group Co., China's largest gold miner, rose 3.4 percent.

Benchmark oil for June delivery was down 1 cent to $92.55 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 25 cents to settle at $92.56 in New York on Thursday.

In currencies, the euro fell to $1.2686 from $1.2714 late Thursday in New York. The dollar rose slightly to 79.30 yen from 79.28 yen.

Austrians Face Austerity Package and Tax Hikes Just Like Greece

Austrians Face Austerity Package and Tax Hikes

February 10, 2012

Deutsche Presse-Agentur - Austria's government on Friday announced budget cuts and higher taxes totalling nearly 27 billion euros (36 billion dollars) over the next five years to balance the budget until 2016.

The budget deficit had risen over the past year as the government spent money to cushion the effects of the global financial and economic crises.

'These costs have to be paid back,' Social Democratic Chancellor Werner Faymann said.

Recent months had shown that it was necessary 'not to wait like Greece, Spain, Portugal, even Italy, until interest rises so high that you are no longer the master of your own budget and have to negotiate with international funds,' he added.

Pensioners and public servants are to bear the brunt of the savings, through lower or deferred pay raises.

The government coalition of Social Democrats (SPOe) and the centre-right People's Party (OeVP) also aims to raise the average retirement age from 58 to 62 by paying early retirees less.

As a symbolic measure with little impact on the budget, the government would like to reduce the number of legislators and ministers by around 10 per cent - but downsizing parliament would need the agreement of the opposition.

Top earners, real estate investors and Austrian companies operating abroad are facing higher taxes.

Opposition parties said that the austerity measures did not contain structural reforms of public administration and the health sector, and that the financial industry and rich people were not taxed enough.

However, there were no calls for strikes or protests, as the state employees union and pensioner representatives were involved in the government negotiations.

The austerity package also includes a plan to scale down construction of the Brenner rail tunnel connecting Austria and Italy along a key trade route through the Alps.

Austria's current budget for 2012 is nearly 74 billion euros for 2012, with an expected deficit of 9 billion euros.

The government has said it aims to lower the deficit to below 3 per cent of gross domestic product this year, in line with eurozone requirements. Last year's rate was 3.4 per cent.

The austerity measures came after rating agency Standard & Poor's stripped Austria of its top ranking last month and the government responded by vowing to reclaim its AAA status.

Greece's Troubles with Debt Go Back to the 1980s When Successive Governments Began Increasing the Size of Government and the Number of Public Employees, Just Like the U.S.

Greek Deal to Cut Spending Does Mot End Debt Drama

Greece agrees to slash spending to put bailout within reach, yet economic pain is not over

February 9, 2012

AP - More than two years after it came clean about its addiction to debt, Greece may finally have begun its long and painful road to recovery.

Greece's fractious political leaders struck a deal Thursday to make deep cuts in government jobs and spending to help save the country from a default that could shock the world financial system.

The deal, under negotiation since July, is one of two critical steps Greece must take to receive a €130 billion ($170 billion) bailout from other countries in Europe and around the globe.

European ministers said the deal needs to go further and gave Greece until the middle of next week to find an extra €325 million ($430 million) in savings, pass the cuts through a divided parliament, and get written guarantees that they will be implemented even after elections set for April. Greece is expected to rush the new austerity measures through parliament by late Sunday.

In addition to the fiscal austerity mandated by the European Union, the European Central Bank and the International Monetary Fund, Greece is close to an agreement with private investors who hold nearly two-thirds of its debt to sharply reduce the country's borrowing costs.

Greece needs the bailout by March 20 so it will have enough money to redeem €14.5 billion worth of bonds coming due. If it doesn't make that payment, it will be in default. Financial analysts fear that could set off a chain reaction similar to the financial meltdown triggered by the collapse of investment bank Lehman Brothers in the fall of 2008.

The bailout will ease some of the uncertainty that has unsettled Europe and the world financial system for more than two years, but it will not bring down the curtain on Greece's debt drama.

Greece remains in a deep recession. Unemployment is 20.9 percent after the economy's fifth straight year of decline. Its government finances and its economy are being dragged down by costly political patronage, tax evasion and special protections for some favored trades.

Greece will be struggling to pay its debts for years, says Domenico Lombardi, senior fellow at the Brookings Institution.

"The scope of the problems that have to be tackled in Greece are so huge and so entrenched," he says.

Efforts to fix those fundamental problems, at the behest of Greece's increasingly exasperated creditors — including prosperous Germany — are moving slowly, if at all. If they are not solved, Greece may find itself back at the edge of default.

The deal Greek political leaders struck Thursday includes a 22 percent cut in the monthly minimum wage to €586 ($780), layoffs for 15,000 civil servants and an end to dozens of job guarantee provisions.

Greece is also close to a vital debt-relief deal with banks, hedge funds, pension funds and other private investors. Under the tentative deal, the private investors would exchange €206 billion in Greek government bonds for €30 billion in cash, plus €70 billion in new bonds. The cash would come from the €130 billion package from Europe and the IMF. The new bonds also would have a lower average interest rate and a longer term of maturity.

The combination of less principal to repay when the bonds mature and less interest to pay every year until then means Greece would spend about 70 percent less than it would have without a deal.

The debt held by the European Central Bank and other public institutions accounts for one-third of Greece's national debt and is not part of this tentative deal. However, ECB President Mario Draghi said Thursday that the bank could distribute to member countries the profits it stands to make on Greek bonds, leaving open the possibility of additional debt relief for Greece.

If Greece were to default, investors would become reluctant to lend to other heavily indebted European countries for fear they would not get their money back, pushing their borrowing costs even higher than they are now.

Those other countries include Italy, which has an economy six times the size of Greece's. Most analysts say Italy is too big to bail out.

The specter of default has hung over world financial markets for more than two years. Whenever there has been progress — and, indeed, U.S. stock indexes have doubled from the lows they reached in March 2009 — Greece has always stood in the way of more.

And while the immediate danger appears to have passed, it is far from clear whether Greece has won enough debt relief to fix its finances for good.

Its economy — ultimately the key to handling debt — remains in a deep recession. It shrank at an annual rate of 5 percent in the third quarter of 2011. Earlier in the year, it was shrinking at an 8.3 percent rate, about as fast as the United States economy was shrinking during the worst of the Great Recession. Thousands of shops and small businesses, vital to the Greek economy, have gone bankrupt. And protesters have taken to the streets of Athens regularly to denounce the government and its austerity measures.

Greece's troubles with debt go back to the 1980s, when successive governments began increasing the size of government and the number of public employees. By 2010, the total had reached 750,000 full-time employees — including 10,000 Greek Orthodox priests and 81,000 military officers — and 150,000 on part-time contracts. That was almost one in five people in the Greek labor force.

Government jobs became a way of rewarding supporters of Greece's two main political parties. The parties made matters worse by raising the wages of government employees to unsustainable levels. At the same time, the government was lax about collecting taxes. It had to issue ever more debt to cover its spiraling wage bills.

At first, bond investors lent freely, at interest rates slightly higher than for economic powerhouse Germany. After all, Greece was one of the 17 countries that use the euro. All had promised to observe strict budget and deficit limits. And while on paper the treaty that created the 27-country European Union forbade bailouts, there was a vague sense that Europe could not let a country go bust.

Then came Oct. 21, 2009. A newly elected government in Athens told its European partners that its finances were far worse than the previous government had disclosed.

The national deficit, the difference between what a government takes in and what it spends, was not 3.7 percent of annual economic output, as had been believed. It was 12.5 percent, and that was later revised higher to 15.4 percent. One condition of being in the eurozone was that countries were required to keep deficits to a manageable level of no more than 3 percent of economic output.

Investors around the world, still reeling from the collapse of Lehman Brothers and the worldwide financial crisis just a year earlier, began looking hard at risk. They demanded higher interest rates to loan Greece money by buying its bonds, and Greece's borrowing costs soared.

On April 27, 2010, ratings agency Standard & Poor's downgraded Greek bonds to junk status — the first time a eurozone country was given a non-investment grade rating.

The next month, other euro countries and the IMF intervened. They promised €110 billion in loans — to be paid out in stages — so that Greece could pay its debts as they came due.

The terms of the bailout were harsh: higher taxes and deep cuts in public spending and wages at least through 2020, a package of fiscal belt-tightening known as austerity. As it took hold, the Greek economy sagged further, and it's expected to remain weak for years.

The second €130 billion bailout package would come as loans plus €30 billion in cash that would go to the private creditors who agree to swap their bonds. Greece would use an additional €40 billion of the bailout money to invest in the country's banks, which stand to take massive losses as part of the debt-relief deal.

Even with the debt relief and the bailout money, it will be difficult for Greece to ensure that its new, lower level of debt is manageable, or that it will be able to sell bonds at favorable interest rates over the next decade. Greece will have to continue borrowing money to repay holders of bonds that mature, as well as to finance budget deficits that will continue, even though they'll be smaller.

"I do not think the plan will work," says Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace. Dadush says Greece needs even more debt relief.

But a responsible budget and sound economic policies are supposed to convince investors that the country will be able to pay its debts, and thus should be able to borrow at affordable rates.

In recent weeks, other countries in the European Union have made progress doing just that. In the final months of last year, countries such as Italy and Spain watched helplessly as yields on their debt spiraled ever higher. Governments fell in Rome and Madrid.

The new governments moved swiftly to cut spending. The result has been an easier time raising money in the bond markets and much lower rates. On Nov. 25, the interest rate on Italy's two-year bonds was 7.40 percent. On Friday, it was 2.96 percent, the lowest since June 2010.

Much of the improvement, though, is credited to the European Central Bank, which announced a program in December designed to help stabilize shaky banks in the eurozone. The ECB said it would loan the banks unlimited amounts of money at 1 percent interest and for three years instead of the normal one. The banks responded by borrowing €489 billion ($632.6 billion). They've used at least some of that money to buy government bonds — extra demand that has helped bring down governments' borrowing costs.

But Greece's problems are so severe it has remained locked out of the bond market.

Greece's outstanding government debt is about €350 billion, an amount equal to more than 160 percent of its annual economic output. The budget reforms and debt-relief deals aim to get that figure down to 120 percent by 2020. The United States has a debt-to-gross domestic product ratio of 100 percent. But because it is seen by investors as one of the safest countries to lend to, its borrowing costs have stayed low.

For Greece, the target of 120 percent is still a relatively high figure. According to the IMF, it is at the limit of what is manageable. And the figure assumes that Greece's economy will meet expectations for economic growth — no sure thing after years of ever deeper recession.

Also in question is whether Greek voters, who will choose a new government in an election tentatively set for April, will put up with eight more years of austerity.

Two future U.S. presidents, Ronald Reagan and Richard Nixon, are pictured with Harvey Hancock (standing) and others at Bohemian Grove in the summer of 1967. (Ernest Orlando Lawrence Berkeley National Laboratory.)

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JPMorgan's Slow Delivery of Funds Worsened MF Global's Distress

In MF Global, JPMorgan Again at Center of a Financial Failure

January 18, 2012

Reuters - In late October, as MF Global Holdings Ltd teetered toward bankruptcy, Jon Corzine phoned his close-knit circle of Wall Street friends for help.

His firm, facing demands from customers and other firms for cash, needed to sell billions of dollars in securities to raise the money. As the week progressed, MF Global executives came to believe that JPMorgan Chase & Co., one of MF Global's primary bankers and a middleman moving that cash, was dragging its feet in forwarding the funds.

Corzine phoned Barry Zubrow, then JPMorgan's chief risk officer, to question the slow payments. Corzine also called William Dudley, president of the Federal Reserve Bank of New York, to update him on MF Global's status and told him that payments were slow to arrive from JPMorgan and others. Dudley said he'd monitor the situation.

The delays contributed to a serious cash shortage at MF Global, according to people familiar with the matter. These people say the firm started trading one day in late October with $600 million in cash and spent the whole day selling securities, only to end with just $200 million in cash.

By adhering to procedure and not cutting MF Global any slack, these people say, JPMorgan was able to slow the delivery of funds, worsening MF Global's distress. As a result, they note, hundreds of millions of dollars of MF Global money may be still stuck in accounts at JPMorgan.

The details of MF Global's trading, based on court documents and multiple interviews with people familiar with the situation, shed light on what could have happened to more than $600 million in customer funds at MF Global, which are still being sought by regulators nearly three months after the firm filed for bankruptcy protection on October 31.

An early sign that money was missing came as auditors from the CME Group Inc., which audited MF Global, combed through the company's books in Chicago and New York, according to congressional testimony by CME executive chairman Terrence Duffy. After MF Global reported a quarterly loss on October 25, the CME had dispatched two auditors to the Chicago office to review customer accounts on October 27 - the first of several confusing days as auditors and regulators, working in Chicago and New York, tried to understand whether funds were intact.

In a statement last week , a JPMorgan spokeswoman said,

"Our firm lost money because of MFG's failure, and we are cooperating with the regulators with full transparency to assist their investigation."

Through a spokesman, Corzine declined to comment.

To be sure, regulators have made no allegation of wrongdoing against JPMorgan, and there is no evidence that JPMorgan did anything improper. Indeed, it seems to have been simply following banking procedure, according to people familiar with the matter.

Futures trading firms and brokers like MF Global are heavily dependent on borrowing, which then exposes the big banks that lend to them was well as their trades. That gives banks like JPMorgan the ability to protect themselves in a crisis.

The transactions that JPMorgan handled are drawing increased scrutiny from regulators, a bankruptcy trustee and MF Global because understanding MF Global's money flow could aid in identifying customer money flows, according to people familiar with the situation.

"They made things that are in normal times quite plain vanilla, easy things to do very difficult to do," said a person involved in MF Global's struggle, referring to JPMorgan. "What normally works well was taking forever because JPMorgan was dotting every 'i' and crossing every 't,' and they were holding on to as much money as they possibly could under the law."

JPMORGAN'S DUAL ROLE

The role that JPMorgan played as both a lender and middleman to MF Global illustrates the procedures banks can deploy to protect their own interests when dealing with weaker counterparties.

On one side of its ledger, JPMorgan and a syndicate of banks had lent MF Global $1.3 billion in its final week through a loan commitment the firm could draw down at any time. JPMorgan also was a primary banker for MF Global, a role that gave it significant insight into, and control over, MF Global's accounts.

On the other side, JPMorgan was clearing some of the asset sales MF Global was making. In this role, its job was to take the securities from MF Global and the cash from the buyer and pass them along to the other party when the deal was complete. Normally such trades can settle within a day or two, if the back-office mechanics function smoothly. But that week, the money didn't arrive when MF Global executives expected, according to people familiar with the situation.

JPMorgan, a major lender to rival firms as well as one of Wall Street's biggest middlemen in settling trades, has previously drawn scrutiny for protecting its own interests when rival firms ran aground. In 2008, a week before Lehman Brothers Holdings Inc. sought bankruptcy protection, JPMorgan demanded collateral to protect its role as counterparty to Lehman. While the request was not improper, Lehman's bankruptcy estate later claimed Lehman posted the collateral because JPMorgan had threatened to withhold funding.

A Congressional panel that looked at the 2008 crisis, the Financial Crisis Inquiry Commission, investigated the events surrounding Lehman's fall in a 2011 report. A JPMorgan official told the FCIC that the bank didn't believe "the request put undue pressure on Lehman," the report said. The FCIC didn't draw a conclusion about the incident.

SLOW ON THE TRADE

When Corzine took the helm in 2010, MF Global was a little-known boutique futures trading firm. Corzine, who joined Goldman Sachs as a bond trader in 1975 and ultimately became chairman, also was a former U.S. Senator and former governor of New Jersey. He brought star power to the CEO role, and sought to increase MF Global's profits. Among his trades was a series of purchases of deeply discounted European government debt. European Union leaders, he reasoned, would never allow the countries to default.

In September, MF Global said the Financial Industry Regulatory Authority had required the firm to bolster its capital.

On Monday, October 24, things took a turn for the worse when Moody's Investors Service downgraded MF Global's credit rating to one level above junk. A day later, MF Global reported its largest-ever quarterly loss.

By Wednesday, October 26, customers were demanding millions of dollars from accounts held at MF Global. To meet the sudden outflow, MF Global during the week of October 24 tapped the $1.3 billion loan commitment from a syndicate of banks led by JPMorgan.

MF Global also decided to sell $1.3 billion of IOUs known as commercial paper. The short-term debt was part of some $7 billion of securities the firm sold that week. But this sale was critical, people familiar with the situation said, because MF Global had used customer funds to invest in the short-term debt and now badly needed to liquidate the IOUs and move cash into the customer accounts to meet their demands. The investments in the IOUs were allowed by industry regulations, these people said.

For help, Corzine turned to his old employer, Goldman Sachs, which specializes in trading the short-term paper. Corzine phoned Goldman President Gary Cohn to ask him to buy the IOUs, offering a slight discount, according to people familiar with the situation.

Cohn agreed, and Goldman traders made the purchases, these people said. Because it needed the cash immediately, MF Global sought to settle the deal that day, according to Corzine's testimony in Congress.

JPMorgan, in its role as middleman, was able to control the speed with which MF Global's asset sales were processed, according to people familiar with the situation.

Two people familiar with the transaction say that JPMorgan was slow to process the trade. A spokeswoman for JPMorgan said the bank was not able to confirm the information about that specific trade. It remains unclear exactly whether cash from the sale was ultimately routed to MF Global.

On Thursday October 27, Moody's downgraded MF Global again, this time to junk.

At that point, "we were finished," said a former employee in MF Global's New York office.

While MF Global waited for the funds from JPMorgan, it frenetically tried to avoid a second cash demand generated by the second Moody's downgrade. The downgrade sparked margin calls from trading partners. The New York Fed at one point issued its own margin calls.

To meet those demands, MF Global on October 28 undertook yet another set of asset sales totaling $4.5 billion. It sold the securities to JPMorgan, yet the bank was slow to settle this trade as well, according to people familiar with the situation. JPMorgan declined to confirm whether it bought the securities.

LOST CONFIDENCE

One thread regulators are now examining is how MF Global got hold of enough funds to cover an overdrawn account at JPMorgan. Corzine told a congressional panel that during the morning of October 28,

"I was trying to sell billions of dollars of securities to JPMorgan Chase in order to reduce our balance sheet and generate liquidity. JPMorgan Chase told me that they would not engage in those transactions until overdrafts in London were cleaned up."

To clear that hurdle, Corzine contacted MF Global's back office in Chicago and told them to resolve the problem-ostensibly by routing money to JPMorgan. JPMorgan then asked whether a transfer of funds violated industry regulations. Corzine said that the Chicago office "explicitly confirmed to me that the funds were properly transferred." Corzine said he assumed JPMorgan signed off because the bank then executed billions of dollars in trades.

People familiar with JPMorgan say that the bank had to contend with numerous issues in assisting MF Global with the asset sales, including the fact that some MF Global assets couldn't immediately be sold.

As MF Global tried to complete the sales, MF Global officials and regulators, who were trying to untangle customer accounts in Chicago and New York, discovered a shortfall of cash in the customer accounts -- including those that had once held MF Global's commercial paper holdings.

"Despite our best efforts to sell assets and generate liquidity, the marketplace lost confidence in the firm," Corzine said at a congressional hearing.

While it may appear that records for the trades would be clear, regulators say they have been stymied in tracing the money flowing to and from MF Global.

"They are circuitous money trails," said Bart Chilton, a commissioner at the Commodity Futures Trading Commission, one of the agencies probing MF Global. "They are not simple linear transactions."

"There were an extraordinary number of transactions during MF Global's last few days and I do not know, for example, whether there were operational errors at MF Globalor whether banks and counterparties have held onto funds that should rightfully have been returned to MF Global," Corzine told a congressional panel in December.

The concern for a clearing bank like JPMorgan is over exposure when it is extending a lot of credit, according to Craig Pirrong, a finance professor at the University of Houston.

JPMorgan, as a clearing bank, has the ability to take some actions to protect itself, but the bank "is going to undergo a lot of scrutiny," Pirrong said. "Any action it takes to reduce its exposure comes into question when a bankruptcy is involved."

"STOCK WAS TOAST"

MF Global, during the weekend before it filed bankruptcy proceedings, made one final push to sell more assets. In London, it tried to sell off short-term European bonds, according to one trader at a London bank.

But by then, MF Global had run out of time, this trader said. Tagged with a junk credit rating and unable to meet margin calls, the firm could no longer effectively function in the markets.

The firm's stock, which hit $7.74 at the end of June, fell from $3.87 at the beginning of October to $1.20 on October 28, its final day of trading before it filed for bankruptcy protection.

"Their stock was toast," the trader said.

What remains unclear is whether JPMorgan held on to the funds, and where the funds are now. People familiar with the situation suggest that the funds are still at JPMorgan.

Regulators and the bankruptcy trustee have not said. They say they are still trying to verify which customer accounts may have been tapped for funds during MF Global's final hours.