Educate Yourself

Week in Review
For the week 3/17/2008 - 3/21/2008
Brian Trumbore
President/Editor, StocksandNews.com

Note: Friends, this is the longest review in my nine years (so think twice before printing it out) but I think you'd agree it was a titanic week; from bailouts and wipeouts, to Bernanke and Bear, to Fannie and Freddie, and even Obama, it was a week that engendered a ton of discussion on serious issues. As I'm fond of saying this column is also a running history and I'm not into mere sound bites. I have poured over the material and while some of the opinions expressed are lengthy, there should be no mistaking the context.

Economist Irwin Stelzer / London Times?Sunday, March 16, prior to word of JP Morgan Chase's acquisition of Bear Stearns for $2 a share.

"(The) Fed's critics are saying that the enemy is no longer liquidity, but the threat of insolvency. We have already had billions in write-offs, and hundreds of billions more of such 'marking to market' is coming. So steep will these writedowns be that the banks will find they are bust - what they owe to depositors and creditors exceeds the value of their shriveled assets. Unless they can get more capital, say the doom-mongers, they will have to shut their tellers' windows.

"So far, sovereign wealth funds have put up that capital, but even they do not have deep enough pockets to shore up the entire American banking system. Faced with a systemic collapse of the banking system, the government can do one of two things. It can flood the economy with cash, driving up inflation and the nominal value of the assets underlying bank loans. Lenders would get repaid, but in depreciated dollars. Fear of just such a devaluation has driven up gold to $1,000 an ounce, and the dollar to record lows.

"Or the government can nationalize the debt owed to the banks. Taxpayers' funds would be conscripted, and pumped into failing financial institutions to prevent their collapse. Sound like Northern Rock? Or something like what the American government did when Continental Illinois, the nation's seventh- largest bank, hit the rocks in 1984?....

"If it looks like a bailout, and sounds like a bailout, it is a bailout. But 'capitalism without failure is like religion without sin. It doesn't work,' says Carnegie Mellon professor Allan Meltzer. Guarantee lenders against failure and they will lend and lend and lend, diverting resources to ill-conceived ventures, driving down productivity and living standards. Only if the shareholders are first wiped out, or if the taxpayers gain a real opportunity to profit in a recovery, can a government rescue package avoid becoming an invitation to a repeat disaster."

"Bear (Stearns) employees, who hold about one third of its shares, are angry and grousing that they could get more cents on the equity dollar in Chapter 11. Some may even be inclined to vote against the sale, but then they'd have to find a market for that $30 billion in mortgage securities that no one wants to finance.

"The hard capitalist truth is that Bear's most senior managers have mainly themselves to blame. They bought their second or third homes with fabulous bonuses during the good times, and they must now endure the losses from Bear's errant investment bets. Bear took particular pride in its risk management, but it let its standards slide in the hunt for higher returns during the mortgage mania earlier this decade. There's no joy in seeing a venerable firm expire, but it has to happen if financial markets are going to have any discipline going forward.

"As for JP Morgan and CEO Jamie Dimon, remind us to have him negotiate our next contract. He gets Bear's best assets, including a Manhattan building said to be worth $1.4 billion by itself. Meantime, he gets the Fed to backstop Bear's riskiest paper. We don't know the quality of that paper - and we hope the Fed has done its due diligence - but taxpayers are now on the hook for future losses. Some previous Fed officials might have told Mr. Dimon to take all of Bear or nothing at that $2 liquidation price, but Ben Bernanke and Tim Geithner of the New York Fed seem to have been desperate to get a sale announced before markets opened on Monday. Mr. Dimon took them to school.

"The Fed is also opening its discount window even further to non-deposit-taking institutions, and for an open-ended amount of lending and mortgage-based collateral. We endorsed this last week as a way of reviving a frozen market in mortgage-related securities. But with its Sunday move, the Fed is going all in. This raises genuine issues of moral hazard. Commercial banks traditionally have access to the discount window - that is, to public money - because they are regulated and have certain reporting and capital obligations?.

"If this latest effort does help to revive the mortgage credit markets, then the Fed's potential losses may never be realized. On the other hand, no one knows how far housing prices will fall, and steeper declines in home prices will mean steeper losses in mortgage-backed securities. Moreover, if this doesn't work, Wall Street pressure will build for the Fed to buy up mortgage securities wholesale. This could end up ruining the Fed's balance sheet, and ultimately its credibility as the lender of last resort."

"But isn't the central bank the fabled 'lender of last resort'? Yes, and the Fed is performing that role extensively. But central banks are designed to lend money to banks that are illiquid but not insolvent. It is not supposed to spend taxpayer money or even put much of it at risk. Those political decisions are properly made by elected leaders.

"First, everyone should take a deep breath. To those living far from the canyons of Manhattan, the sky is not falling. If you don't want to sell your home, forget about falling house prices. Even on paper, it's unlikely that you've 'lost' anything near what you 'gained' in the run-up. Yes, the economy is limping, but it's not collapsing. And the effects of the Fed's interest rate cuts and the stimulus package that Congress enacted last month are still to come.

"Second, it would be nice to see some patient capital step up to the plate?.patient investors who don't need liquidity and don't have to worry about mark-to-market accounting have a chance to be the JP Morgans of our day.

"Third, our nation's great financial houses need to use the breathing space the Fed is providing to put themselves in order - post haste. They need to come clean, book the losses and, in many cases, raise new capital. If the capital must come from abroad, Americans must set aside their pride and / or xenophobia. [By the way, why are some of these companies still paying large dividends and enormous bonuses to their top executives?]

"Fourth, we need leadership from political Washington. Forget the president. We need the Treasury secretary to take charge, not just to 'support the Fed.' While Paulson repeats his 'strong dollar' mantra, confidence in the dollar ebbs. How about doing something about it - such as a dramatic currency market intervention in concert with other nations?....

"In 1933, Franklin Roosevelt famously told Americans that 'the only thing we have to fear is fear itself.' Unbridled fear is gripping today's financial markets. We need some soothing words right now - followed by actions, as FDR's words were. Who will step forward?"

"This has been a week of astonishing brinksmanship - one that, I cannot help thinking, has shown what giants the guardians of America's financial system are compared with the pygmies running Britain.

"On Friday the rumors that an American bank was about to collapse sowed panic in stock markets that had hitherto seemed almost immune to the credit crunch. The dollar went into freefall. By Tuesday the gunslingers of the U.S. Federal Reserve had engineered a takeover of Bear Stearns by JP Morgan, with the help of a $30 billion subsidy. In doing so, the Fed ripped up the rulebook of central banking. America has not offered emergency funds to brokers, as opposed to banks, since the Great Depression.

"Why should the taxpayer bail out banks that have no depositors? Aren't these the same idiots who convinced Americans in trailer parks to buy houses they couldn't afford? Who packaged up dodgy loans into elegant parcels and passed them around the world? Yes. Abetted by complacent rating agencies, who stuck triple-A quality labels on junk, banks such as Bear Stearns have created a new kind of financial crisis, because there were so many players playing pass-the-parcel, and because no one knows where all the parcels ended up. They now sit like unexploded bombs on the balance sheet of almost every financial institution.

"But that is precisely why Bear Stearns had to be saved. The company was a financial intermediary at the heart of many complicated global transactions. Had it collapsed, no one knew how many more dominoes would have fallen. The Fed's bold bailout avoided the much bigger bailout that a collapse would have necessitated, because so many of the counterparties to Bear Stearns' agreements were banks that do have depositors.

"Bankers may live in a different world to most of us, but our fortunes are horribly aligned. Old-fashioned banks were not built with marble halls for nothing. They were meant to exude solidity, because to doubt a bank's creditworthiness is to undermine every commercial transaction. If lenders stop lending, economies stall. The living standards of millions of people hang in the balance?.

"By rescuing Bear Stearns, the U.S. Fed has put out a clear message that it will not let a big firm go down. It has backed up that message by offering emergency loans in exchange for a broad range of collateral. The Bank of England is still offering emergency funding on much narrower terms. So U.K. banks face significantly higher costs of borrowing than their American and continental competitors. This is dangerous, because Britain is particularly vulnerable to a liquidity crunch. Our banks currently hold about $1.1 trillion more in loans than deposits. Fears about imbalances lead to companies such as Scottish Widows withdrawing mortgage offers at ten minutes notice. That spooks consumers?.

"Uncertainty is lethal. Confidence is priceless. That is a point that our rulers seem unable to grasp. God save America. And God help Britain."

"Like spoiled children who have grown fat eating too much candy, the major investment houses over the past few years have benefited from the easy credit that has boosted their bottom lines. Unfortunately, the good times also bred arrogant investors with a Midas syndrome - the belief that anything they touched would turn to gold. That led to the poor risk management and reckless regard for shareholder value that has resulted in the subprime debacle.

"Now with their investments soured and their credit lines barren, these very same investors are crying out for a financial lifeline from the Fed. So far, Mr. Bernanke has proved to be extremely accommodating, doling out more free sweeties in the form of a series of interest rate cuts and acceptance of their mortgage- backed securities as collateral. The problem is that this indulgent approach has failed; the credit crisis is deepening, and the spoiled investors are crying out for more free candy. Bailouts and financial lifelines may simply encourage the same lax attitude that led to this crisis.

"The approach that the Fed appears determined to follow on its home ground contrasts with the tough line the U.S. and other industrialized nations took when Asian countries faced a similar crisis of confidence in 1997. During the Asian financial crisis, nations such as South Korea, Indonesia and Thailand were asked by the west to tighten their belts by raising interest rates, cutting expenditure and improving transparency. The Fed has lowered its benchmark overnight rate five times and the discount rate seven times since the middle of August, when subprime started to rattle investors. It is no wonder that economists such as Nobel laureate Joseph Stiglitz have accused the west of hypocrisy and double standards?.

"The precarious state of the global financial system requires some fancy policy footwork from the Fed and other central banks if confidence is to be restored. However, the approach so far has been more to treat the symptoms than the disease itself. It may be time for some more bitter medicine for the people who played fast and loose with the rules of economics."

If the above sounds familiar, I referenced a similar editorial from the same paper back on 12/15/07.

"[On President Bush's and Treasury Secretary Paulson's rescue package for mortgage holders], it is ironic that the plan has been introduced by Mr. Bush, who came to office espousing the principles of free markets, free trade and small government. But his administration has repeatedly caved in to political and economic pressure to help industries such as airlines and steel. And Mr. Bush is not the first U.S. president to have done so. During Bill Clinton's administration, the U.S. Federal Reserve supported a multibillion-dollar bailout of the hedge fund Long- Term Capital Management to prevent a 'fire sale' of assets and disruption to financial markets.

"Such intervention contrasts with advice given to Asian countries during the Asian financial crisis from the International Monetary Fund and the U.S. Treasury: raise interest rates, bear the cost of massive defaults and improve transparency and regulation. For some of the countries obliged to adopt such advice, notably Indonesia, the social and political consequences were highly damaging. But as Joseph Stiglitz, former World Bank economist and Nobel laureate in economics, recently pointed out, a lack of transparency is central to the subprime crisis?.

"Supporters of Mr. Bush's rescue package argue that the adverse consequences of not bailing out U.S. subprime mortgage borrowers outweigh those of allowing a financial meltdown to take its course. That might be the case. But the international community is entitled to take the world's most sophisticated economy to task for failing to manage its financial industries, with all the implications this has for the health of the global economy.

"Experience shows that troubled borrowers have a very high rate of default, even after generous renegotiation of their mortgages. The bailout might only delay the day of reckoning for people struggling under a heavy debt burden and may lead to bigger losses. Moreover, if investors in these mortgages are forced to accept a smaller return they can be expected to demand a higher risk premium in the future, making mortgages more expensive. Moral hazard can therefore come at a heavy cost. It does nothing for the efficient operation of free markets and the image of U.S. financial professionals proferring their services all over the world."

And so it was that last December I caught some heat from readers for the following comment of mine tied to the above editorial.

"We hold ourselves out to be the model? Of what, fraud? That's what lack of transparency really is, fraud. We have a dirty system. Not capitalism itself. Nothing wrong there. But capitalism is built on playing by some pretty simple rules. I've been asking for weeks now, just what do we stand for, both in economics and foreign policy? The United States today is a throbbing blob of hypocrisy in so many respects. That comment above on how we treated Indonesia? That should be ingrained in every American college student taking economics or political science, for starters, and every presidential candidate should be asked to comment on it. Maybe we'd finally learn something about their true character in the process."

Continuing, this week you also had the issue of government- chartered mortgage lenders Fannie and Freddie, who got approval to pump as much as $200 billion of liquidity into the housing market.

"Yesterday, Fannie and Freddie announced?that they would be leveraging up their businesses in the name of riding to the rescue of the mortgage-backed securities market. Here's how the wizardry works: Mr. Lockhart, the Director of the Office of Federal Housing Enterprise Oversight, agreed to cut the amount of capital Fannie and Freddie are required to maintain by a combined $5.9 billion and to allow them to increase their leverage to 33-1 from about 30-1. That means Fan and Fred can borrow up to $33 for every dollar in freed-up capital, and presto - the two mortgage giants get $200 billion or so to spend buying up mortgages or mortgage-backed securities.

"There is a catch. In exchange for this freedom, Fan and Fred have promised to raise 'significant' new capital over the next year. We're told it's on the order of $10 billion each. That's the good news. The bad news is that the companies can leverage any new capital right alongside the old, meaning that the total increase in business - and risk - could be well above the $200 billion set by Mr. Lockhart.

"Let's put some of these numbers into context. JP Morgan Chase is leveraged about 12-1 against its Tier 1 capital base. Investment banks are usually more highly leveraged than commercial banks, and Bear Stearns, formerly the industry leader in this category, was leveraged at 34-1 at the end of 2007. You know how that turned out.

"The oddest argument is that Fan and Fred need to be unleashed to help the mortgage market. That's what they were supposed to be doing all along, yet so far in this crisis they have themselves become sources of systemic financial fear. After taking big losses in last year's fourth quarter, investors and counterparties have become nervous that Fan and Fred might face solvency problems similar to those of other mortgage players?.

"As it stands now, Fannie and Freddie get to gear back up, and if they get into deeper trouble because housing prices keep falling, the taxpayers pick up the tab. If the crisis ends, Fan and Fred's private shareholders get all the upside and their executives get even richer than they are. If Washington wants to socialize the housing market - as it seems eager to do - let's do it in the open and put Fannie's debt on the federal budget so taxpayers can see what they're buying.

"Of course, the last thing Congress wants is all of this to be transparent. The Members benefit from the current private- public confidence game because the two companies ladle them with campaign contributions to protect their privileged status. That's why Congress continues to dither over reforms that might actually provide a regulator capable of staring down Fan and Fred.

"With a couple of brave exceptions?Fannie and Freddie own Washington. It'd be better for the housing markets and taxpayers if Washington finally admitted it and bought Fannie and Freddie."

The above was but some of the debate taking place this week. In the end it's all about how the markets react, though, and stocks registered their best gains in seven weeks, while bonds largely rallied as mortgage rates fell and worrisome spreads narrowed, all positives. At week's end, the majority on the Street clearly thought the worst was behind us, that despite some of the criticisms expressed above, the Fed and Ben Bernanke had accomplished the seemingly impossible, they calmed the markets.

Of course this is a gross generalization and there was little evidence this had been accomplished in just a few days, but that's the opinion of the bulls for now.

What is clear is that the deleveraging of America, and other parts of the world, continues apace, as spelled out further below. It's time to clean up the balance sheet, sports fans, whether you are Joe Six-pack or Merrill Lynch and Lehman Brothers. Funny how the only ones who don't seem to be following the rules are the federal government and its children, Fannie and Freddie.

What's also clear, as even Treasury Secretary Paulson had to admit, finally, is that the "economy has turned down sharply," though he once again had to play administration hack with a further pronouncement that the "long-term fundamentals compared with other major countries are strong." Someone please tell me once and for all, just what "fundamentals" are Paulson and President George W. Bush looking at? The largest levels of debt since the invention of the wheel? That's good? And if so, how is it that no one wants to lend you and I a nickel these days? And as local municipalities are forced to reassess home values downward and tax receipts dry up, how is this good for the towns (and employees) where we live?

Here's what we do know. You can talk all you want about unfreezing the capital markets and getting credit flowing again, but it still all comes down to housing, and whether it's Dem. Sen. Charles Schumer saying "housing has been the bull's eye of the crisis" or PIMCO's Paul McCulley offering it's the "cancer at the core," there will be no sustained recovery in the economy until housing bottoms and as I've maintained, once we do bottom we'll just sit there for awhile, further delaying recovery, though it would be disingenuous not to acknowledge that the Fed's actions, particularly in lowering interest rates, will at least lessen the pain of homeowners stretching to meet their mortgage payments come reset time.

Regardless, the American consumer has finally seen the light. We all know the next shoe to drop is in the reporting of spiking defaults on home equity and car loans, and that big ticket industries, such as autos, will continue to feel the pain, and with increasing layoffs.

One thing that was hammered home while I was at PIMCO was an appreciation for the Big Picture. I haven't changed my opinion in 15 months, for example. I said end of '06 that recession would hit in 2008 and you'd be hard-pressed to find many economists who don't concede this is indeed the case, with 76% of the American people, according to a USA Today/Gallup survey, believing this to be true as well.

But I did say back on 12/29/07 that the recession would be a shallow one. I'll explore that further next week at quarter end, as well as look at my prediction for the stock market.

--The Dow Jones rallied 3.4% to 12361, including a second 400- point Tuesday, while the S&P 500 picked up 3.2% and Nasdaq, 2.1%. Investors were heartened not only by the Fed action, but also by earnings that beat expectations from Goldman Sachs, Lehman Brothers and Morgan Stanley. Forget that in all three cases the profits were well below year ago levels, at least there didn't appear to be any fresh negative surprises.

The markets were also helped on Friday by influential financial services analyst Richard Bove who said "The financial crisis is over" and that we are in the midst of a "once in a generation opportunity to buy." I hope he's right, but I'll hold onto my cash for now, thank you.

As part of its reliquification program, the Fed dropped its short- term funds rate a whopping 75 basis points to 2.25%. In the accompanying statement:

"Recent information indicates the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."

But then the Fed talked of inflation being "elevated," but that it would moderate in coming quarters. However, "Still, uncertainty about the inflation outlook has increased." These are the best and brightest? Make up your freakin' minds, guys.

Personally, I'm in the Bill Gross camp. Inflation is going to moderate as the economy weakens. More importantly, it's a global slowdown and commodity prices will fall with slackening demand.

--A study by S&P said the stock market is the most volatile it's been in 70 years. Thus far in 2008, 52% of the trading sessions have seen an advance or decline of 1%, which is the highest proportion since 1938. Back in 2002, as stocks were bottoming, the percentage of similar moves was 50%. By 2006, that had declined to 12%, but had increased back up to 39% by the second half of 2007.

--In what experts are calling a classic deleveraging trade, commodities took a big hit on Wednesday and Thursday as investors, particularly hedge funds, were hit with margin calls on other trades they have on such as mortgage securities. Gold plummeted from its high of $1,003 on Tuesday (it traded above $1,020 intraday) to $920 at week's end. Oil closed at $101 after its closing high of $110.33. Overall, the Commodity Research Bureau index declined 8.3% for the four-day week, its steepest one-week decline since the index came into being in 1956. A slightly higher dollar is one reason for the slide, though also a general fear that recession will cause a drop in demand for all raw materials.

Commenting on the commodities bubble in an interview with Maria Bartiromo, BlackRock CEO Larry Fink offered:

"I would say the biggest bubble is in U.S. Treasuries. I think U.S. Treasuries represent one of the worst investments in the world. If the global economies do slow down, commodity prices should slow down, too. The run-up in commodity prices is because so much of our markets are being driven by hedge funds, and most hedge fund managers are momentum traders. So they're buying long positions in commodities because the momentum is for higher prices. I don't believe the economic activity we're seeing in the world justifies these commodity prices."

[Fink made his statement right before this week's slide, but focus on the Treasury comment.]

--Back to the Bear Stearns bailout, the Fed can choose to sell the $30 billion in hard to value assets it's inheriting or hold them to maturity. So the Fed could realize a gain if the market has proved to be too pessimistic. Or if we see Armageddon, the American taxpayer is hit.

--Goldman's Abby Joseph Cohen was replaced as chief forecaster for the U.S. stock market by David Kostin, who said he expects the S&P 500 to fall 10% to 1,160 in the 'near term' before rebounding to 1,380 by year's end. [It closed Friday at 1329.] Cohen, on the other hand, had predicted an S&P close of 1675 by 12/08, as she is shunted aside to 'develop public policy ideas' after being interminably bullish.

--George W. Bush, at a housing conference in October 2002. "We want everybody in America to own their own home." This goes down as one of the dumber comments of his presidency, one that is replete with them.

--As expected, layoff notices are beginning to surge on Wall Street, with Citigroup announcing 2,000 additional cuts on top of 4,200 previously announced, with most of the carnage slated for offices in London and New York. UBS is talking about 8,000 potential layoffs and Goldman Sachs, despite its still humongous profits, is planning on cutting up to 15% in its capital markets area, according to the New York Post, though Goldman said it was still going to expand outside the U.S. in 2008. About 30,000 have been laid off thus far in the industry.

--For those of you looking for a job, how about watch repairer? BusinessWeek reports that whereas there were 44,000 skilled workers in the U.S. in the 1950s, today there are only about 4,400 (average age, 62) - not enough to meet demand as sales of luxury watches have skyrocketed. Rolex is pledging $1 million for scholarships to the two-year watchmaking program at Oklahoma State University, for starters. Nice hours, but you become very narrow minded.

--In another sign of the credit crunch, CIT Group, the largest independent commercial financing company in the U.S., was forced to draw on $7.3 billion in emergency credit lines to meet short-term funding requirements. The funds will be used to pay off debt maturing this year, but then the issue becomes, where will they find the funds to operate beyond that?

--In an example of counterparty risk, Merrill Lynch was forced to sue XL Capital Assurance to stop the bond insurer from canceling $3.1 billion of contracts on collateralized debt obligations (CDOs). "We filed suit to make clear that XL Capital is required to meet its contractual obligations for credit default swaps it agreed to," said a Merrill spokesman.

--Congressman Barney Frank, head of the House financial services committee, at first blush appears to have a good proposal for broadening the Federal Reserve's powers to include "financial services risk regulator."

"To the extent that anybody is creating credit, they ought to be subject to the same type of prudential supervision that now applies only to banks," Frank proposed.

Currently, investment banks are regulated by the SEC, but Congressman Frank is saying that if investment banks have access to the Fed's emergency cash, they should accept the supervision of a regulator that "could have enhanced tools to receive timely market information from market players, inspect institutions, report to Congress on the health of the entire financial sector and act when necessary to limit risky practices or protect the integrity of the financial system."

The SEC has limited powers, with a mandate to protect investors vs. preventing the investment banks from taking on risky positions. The Fed, on the other hand, has the authority to tackle systemic risk, as it did in the case of Bear Stearns.

--Delinquencies on loans to build single-family homes hit 7.5% of the value of all such loans in the fourth quarter, up from 2.1% a year earlier.

--Shares in Fannie Mae closed at $19.80 on March 10. Following the relaxation in its capital requirements, the stock closed the week at $34.30. Sibling Freddie Mac saw its shares rise from a 3/10 close of $17.40 to $32.60. Congratulations if you saw this coming, but remember both have to raise a ton of new capital that should be highly dilutive.

--Among the brokerage winners, Lehman Brothers' stock hit a low of $20.25 on Monday morning, closing the same day at $31.75, and then finishing the week at $48.65. Unreal. There are some huge winners, and losers, out there in the hedge fund community one must assume.

--Steve D. passed along a research report from UBS concerning Bear Stearns, after Bear was slain by JP Morgan, one in which the investment bank reduced its rating to 'hold' and lowered its price range from $27-$35 to $2-$3. As Steve noted, "Is that value added or what?!"

--Us savers are really taking it on the chin as money market yields, about 4.70% a year ago, plummet through 3% over the coming weeks. Remember, my elderly friends, your president and Federal Reserve want you spending every last penny you have, including your stimulus check, to the point where you're eating gruel upon realizing an alligator has made a nest where you buried your coffee cans of coins and safe deposit box key.

--Despite the market turmoil, Visa Inc. was able to successfully come to market with the largest initial public offering in U.S. history, raising $19.7 billion on higher than expected demand for the shares, which finished the first day up over 30%. The IPO represented a windfall for JP Morgan Chase in particular as it scarfed up investment banking fees and shareholder proceeds in excess of $1.25 billion, or five times what JPM is paying for Bear Stearns. For its part, Visa is depositing $3 billion in an escrow account to settle potential claims on its long-running antitrust suit. [I hope you filed your return in this matter. I'm thinking I pick up a check for $25 in about ten years, which might be enough for a six-pack of premium at that point.]

--Bear Stearns chairman Jimmy Cayne, who was playing in a bridge tournament in Detroit while his firm was going under, saw his holdings in Bear drop from about $1.2 billion to around $15 million, not that we are crying for the man.

Of course then you have Bear investor Joe Lewis, who we learned not only bought a massive chunk around $107 as previously reported, but on March 13 purchased 569,000 more shares at $55.13. Lewis, whose stake is said to be about 8.4%, is attempting to lead a charge among employees, who own a collective 30%, to vote down the deal with JP Morgan, but JPM is offering bonuses to managing directors to stay and approve the acquisition, MDs obviously holding a lion's share of the 30%.

Tears are reserved for some legitimately sad stories, the kind that don't get the notice when brokerage firms go under. Back office types, for example, saw their meager savings wiped out. I'll never forget my own experience at Thomson McKinnon Securities when it went kerplunk in 1989. I was young and didn't have much in our ESOP plan after about six years there, but I still think about some of the older folks I knew, who did so many favors for me, and were totally wiped out. It sucks.

--More problems for Las Vegas real estate as the developer of the $3.9 billion Cosmopolitan Resort Casino condo-hotel complex is being foreclosed on by prime lender Deutsche Bank. Earlier, Ian Bruce Eichner had defaulted on some loans with junior lenders. The 3,000 room complex is next to the Bellagio.

And then you have two massive residential projects (Inspirada and Kyle Canyon Gateway) going under in Vegas involving builders such as Toll Brothers, KB Home and Lennar in joint ventures.

As reported by the Journal, Inspirada was supposed to eventually be as many as 13,500 homes. But as one developer said, only about 162 homes have been sold so far. What was once thought to be a seven-year build-out is now looking like 10-15, if they're lucky. This is a classic example of what is taking place out this way, as I saw firsthand last month.

--The Federal Reserve has a long list of collateral eligible for its auction of Treasuries as part of its announcement it was expanding its lending facilities in order to ease credit-market pressures. I'm wondering if I can slip in some Mark McGwire and Roger Clemens baseball cards that have been devalued with the steroid revelations in exchange for Treasuries. I'm sure holders of Barry Bonds cards are thinking the same thing.

--Starbucks continues to struggle as CEO Howard Schultz said the U.S. economy is in a "tailspin?and many would say the consumer is in a recession. We are dealing with things that we haven't seen before in terms of how people are responding to how tough it is." Oh, stop whining, mused the Dunkin' Donuts fan.

--I was just informed that for a variety of reasons, I can't go to the Fed window to exchange baseball cards for Treasuries. An official did tell me, though, "maybe in another few weeks."

--Since it's "Web Sweeps Week," I can't help but note a New York Post story by Lukas Alpert and Samuel Goldsmith concerning billionaire hedge fund manager James Chanos, 50, and his association with 'Kristen,' Ashley Dupre - Eliot Spitzer's hooker. It seems Chanos has had his own dealings with Dupre, who calls him "Uncle Jim." Ironically, Chanos pumped in $100,000 to Spitzer's campaigns over the past five years.

Chanos is well known for his parties at his Long Island estate, beach blowouts "to which he invites scores of sultry young women."

"During a clambake last summer, Chanos?introduced Dupre to other partygoers as his house-sitter?.

" 'This was a very formal, fine dining event,' said Varshini Soobiah, who attended the party. 'There were limos, sit down dinners, chefs, and fancy rooms for all guests. The girls were staying together. We were always together - changing together, going out together?.it never occurred to us at all' that Dupre was a hooker."

"She was wearing a silk shirt as a dress. You could see every body part. She looked like a hooker there."

--My portfolio: Live by the volatility in small caps, die by the volatility. What a year it's been already for moi. The first week in January, as the market was taking its first dive, was my best ever, but the last two have probably been the worst, even though my stock holdings are minimal. Every day I come in thinking 'what has changed,' when looking at the Big Picture and, say, 12-18 months out, and I can't see selling my biodiesel or solar plays, which are my major positions. In the case of solar, though, I'll admit I'm basing my faith on the government extending the tax credit by year end (let alone there is a proposal that would make the credit even more valuable). To me it's a layup, because number one it's a jobs program for the housing industry. But bottom line, I'm drinking domestic these days with no signs of cracking open a premium beer for some time to come. [OK, maybe a Harp at Easter?though calling this a 'premium' brew is admittedly a stretch.]

Iraq: It's been five long years since the war began and as the death toll approaches 4,000, it's a good time to assess the effort.

Back when the war started, Bush adviser Larry Lindsey soon found himself out of a job when he projected the conflict would cost $200 billion. Then-Secretary of Defense Donald Rumsfeld said it would only cost $50 billion to $60 billion. The real cost is now over $600 billion, with the monthly tab at about $12 billion.

Regarding reconstruction, $47 billion has been spent thus far, with U.S. allies sharing in few of the costs, and with only minor tangible results.

Commemorating the anniversary, President Bush said "removing Saddam Hussein from power was the right decision" and that the surge has brought about "a major strategic victory in the broader war on terror." Bush added "The costs are necessary when we consider the cost of a strategic victory for our enemies in Iraq." For his part, Vice President Cheney, in Iraq this week, said the war was a "successful endeavor" and "well worth the effort."

As for Republican presidential nominee John McCain, Professor Peter Feaver commented in The Weekly Standard:

"McCain cannot stake his entire candidacy on trying to persuade people to support the original war decision. After several years of one-sided propaganda, American attitudes on this are fairly entrenched and unlikely to move much. But he shouldn't cede the ground without a fight.

"In his victory speech, McCain showed that he understood this because he went on to say, 'I will defend the decision to destroy Saddam Hussein's regime as I criticized the failed tactics that were employed for too long to establish the conditions that will allow us to leave that country with our country's interests secure and our honor intact.'

"Avoiding the historical case won't trick Obama or Clinton into relaxing their relentless Iraq-oriented attacks on McCain. For Obama, his one speech opposing the Iraq invasion is the solitary piece of evidence that he has the foreign policy experience worthy of a commander in chief. Obama and Clinton will deliver their Iraq talking points no matter what. The real question is whether Americans can hear from McCain a more persuasive historical case on Iraq than we have heard in years."

"Five years after U.S. and coalition forces began rolling into Iraq on their way to Baghdad, it's easy to lament the war's mistakes.

"The Bush administration underestimated the war's cost - in treasure, and most painfully in lives. The CIA and every other Western intelligence agency was wrong about Saddam's weapons of mass destruction. The U.S. failed to anticipate the insurgency and was almost fatally late in implementing a counterinsurgency. It allowed the U.N. to design a system of proportional representation that has encouraged its sectarian political divisions. And so on.

"These columns have often discussed these and other blunders. But we have always done so while supporting the larger war effort and with a goal of victory that would be worthy of the sacrifice. Five years on, and thanks to the troop 'surge' and strategy change of the last year, many of the goals that motivated the original invasion are once again within reach if we see the effort through?.

"(Our) view has always been that nations shouldn't begin wars only to walk away when the fighting gets difficult. The U.S. soldiers have fought superbly, and the best way - the only way - to honor both is to leave Iraq in victory."

"On the fifth anniversary of our campaign to remove Saddam Hussein's monstrous regime from power, it's hard not to despair - not because of the situation in Iraq, which has improved remarkably, but because so few American politicians in either party appear to have drawn the right lessons from our experience.

"For the record, I still believe that deposing Saddam was justified and useful. He was a Hitler, and he was our enemy. But I'm still reeling from the snotty incompetence with which the Bush administration acted. Above all, I'm ashamed that I trusted President Bush and his circle to have a plan for the day after Baghdad fell.

"All of our failures in Iraq stemmed from this fundamental neglect of a basic requirement: Our soldiers and marines reached Baghdad without orders or strategic guidance. We became the dog that caught the fire truck. The tragedy is that it didn't have to be that way: One thing our military knows how to do is plan.

"But the relevant staffs were prevented from doing so. Ideologues and avaricious friends of the administration wanted the war for their own reasons and they didn't intend to alarm Congress with high cost estimates. So they trusted the perfumed tales of a convicted criminal, Ahmad Chalabi, rather than the professional views of the last honorable generals then-Secretary of Defense Donald Rumsfeld had not yet removed?.

"Iraq just didn't have to be this hard. We made it immeasurably more difficult by trying to make war on the cheap, then turning the war's aftermath into a looting orgy for well-connected contractors?.

"(But) while the Bush administration deserves every lash it gets, domestic opponents of the war have been hypocritical, dishonest and destructive. As this column long has maintained, had President Bill Clinton sent our troops to depose Saddam Hussein, Democrats would have celebrated him as the greatest liberator since Abraham Lincoln.

"The problem for the left wasn't really what was done, but who did it. And hatred of Bush actually empowered him - the administration had no incentive to reach out to those who wouldn't reach back, so it just did as it pleased. Today's 'antiwar' left also contains plenty of politicians who backed interventions in the Balkans and Somalia, who would be glad to send American troops to Darfur today and who voted for war in Iraq.

"Both parties are quick to employ our military. It's the only foreign-policy tool we have that works. Neither party is a peace party - each just wants to pick its own wars. The hypocrisy in Washington is as astonishing as the dishonesty about security needs?.

"Given all our mistakes and partisan agendas, it's amazing Iraq is going as well as it is today. The improved conditions in Baghdad and most of the provinces verge on the miraculous, given the situation a year ago. But we've paid a needlessly high price.

"As for President Bush, let's face it: He's been our most-inept wartime leader since James Madison fled the White House, leaving his wife behind to save what she could before the British troops arrived with torches.

"That said, Bush has displayed one single worthy characteristic: He won't surrender?.

"As horribly as Bush performed for our first four years in Iraq, it's still possible to do worse. Both of the Democratic Party's presidential aspirants believe that the answer is to flee, handing the terrorists we've defeated a strategic victory, inviting a genocidal civil war, further destabilizing the Middle East, and sending the message to the world that Americans lack the courage and staying power of our enemies.

"Declaring failure isn't the correct response to failure narrowly avoided. Both Senators Barack Obama and Hillary Clinton would kill a struggling convalescent. Bush's shambles would become the next administration's catastrophe. As president, Obama or Clinton would finish with far more blood on his or her hands than President Bush has on his.

"Was deposing Saddam Hussein a good idea? Yes. I still believe that. It was an act of vision and virtue. It's only a shame we didn't do it competently."

I agree with everything stated above in both the Journal editorial and Ret. Lt. Col. Peters' piece. I stated in these pages my concerns by late summer of 2003, correctly called Rumsfeld a liar, and spelled out what a disaster Tommy Franks and other generals proved to be after the initial successes.

Yet all the while I have continued to support the mission, though I readily conceded a year ago that if the surge didn't work, we should consider pulling out.

Well, Gen. David Petraeus proved to be the leader we've been screaming for and Bush deserves credit for finally seeing the light in elevating the general as he did.

But I'll tell you something you won't find anywhere else. Petraeus could be the man to say 'it's not working' if over the next 6-9 months the Iraqi people can't get their act together. I trust the general more than any other man in America today and he's clearly getting frustrated himself with the lack of progress on reconciliation. Watch what he says during his testimony to Congress in April. There could be a surprise or two.

Of course every single American should hope the mission yet succeeds and there have been tentative signs Iraqi leaders understand time is running short.

But I have to close on an equally exasperating note, a further example of the incredible incompetence displayed in the conduct of this war.

In Thursday's Wall Street Journal, there is an op-ed by Dan Senor and Roman Martinez, who were foreign policy advisers to the administration and based in Baghdad in 2003 and 2004. You'll recall Senor was L. Paul Bremer's spokesman.

The piece is titled "Whatever Happened to Moqtada?" and is about Sadr's "rise, and fall." No doubt Moqtada has been less visible, but the authors write this:

"While he has not appeared in public in close to a year, he still has his family name and a base of support among the Shiite underclass, particularly in Baghdad. He may be biding his time, hoping U.S. withdrawal will leave him with a weaker opponent in the fledgling Iraqi security services...etc. etc."

Not one mention of why he hasn't been seen. I told you in this space last Dec. 15, from Germany, what the situation was. Sadr is holed up with clerics in Najaf, taking a crash course to become Ayatollah! What is normally a multi-year process, he's attempting to reduce to 12-18 months. And what does that mean, Mr. Senor and Mr. Martinez? If and when he gains the title, his pronouncements will carry even more weight than before.

You'd think these 'experts' would know enough to mention this rather important fact, assuming they are indeed aware of it. But it's so emblematic of much of the administration these days, and it's no wonder why more than a few of us await the day when the president hops on Air Force One for the last flight to Texas.

Iran: While there are a slew of runoffs still to be held, hardliners appear to have captured about 70% of the seats in the parliamentary elections, a victory for President Ahmadinejad, though a heavily tainted one as some 1,700 candidates, mostly reformers, were barred from the process. With the outcome, Ahmadinejad said nuclear talks were over as Iran continues to defy the UN and enrich uranium. Rival Hashemi Rafsanjani called for "unconditional negotiations" with the West.

[The election is one prediction I already botched for '08. I did not calculate how many reformers would be excluded from the vote and thought Ahmadinejad's supporters would flame out.]

Israel: According to new reports, back in February, Israel warned Syria that if Hizbullah attacked Israel, the Israelis would hold Syria accountable. While in the Palestinian territories, a respected poll has Hamas leader Haniyeh favored 47-46 over Mahmoud Abbas, a large slip in support for the latter, as 84% approve of the Yeshiva attack and 75% of Palestinians say negotiations with Israel should be terminated. 64% also support the rocket attacks. Very troubling, to say the least, and one would think President Bush is being apprised of these sentiments before he talks of a comprehensive peace agreement by the time he leaves office.

German Chancellor Angela Merkel, in addressing the Knesset on Tuesday, said Germany will never forget its "historic responsibility" toward the Jewish state and that the German government would continue to press for tighter sanctions on Iran to halt its nuclear program. Iranian possession of nuclear weapons, she added, would have "disastrous consequences. Above all for the security and existence of Israel, then for the entire region and finally for everyone in Europe and the world who subscribes to the values of freedom, democracy and human rights."

China: The government has had to admit violence has spread from Tibet to the western provinces, as well as Nepal. Said one police officer in Sichuan, "They've gone crazy," referring to those protesting Chinese rule and influence. In essence it's devolved into a race riot as in the case of Tibet, Chinese businesses have been torched and owners directly targeted. The Dalai Lama, exiled spiritual leader, said Tibet was facing "cultural genocide," but urged a stop to the violence. Beijing said the Dalai Lama was directly responsible for the uprising and that he and his followers were attempting to "sabotage" the Olympics.

So, as expected, there is now a growing call in the international community to show up China at the Games, with many in Europe talking of a boycott of the opening ceremonies.

One key impact of the violence has been a reassessment on Taiwan, just as voters go to the polls today, Saturday, to select a new president and vote on a referendum for declaring independence. Just a week ago, the Nationalist / Kuomintang leader Ma Ying-jeou was supposed to have an easy time of it, but now the Democratic Progressive Party (currently in power) and its candidate Frank Hsieh are gaining the support of those who see how China is repressing Tibet and rethinking just how closely they want to be aligned with the mainland; though both parties have espoused a more open dialogue than that which exists today between the Communists and President Chen Shui- bian. Nonetheless, China has totally underestimated the impact its action in Tibet has had on the Taiwanese and their future.

Lastly, back to the Olympics, China had promised that foreign journalists would have free rein to roam the country prior to the Games. That promise has already been broken as few, if any, are allowed to cover the violence in Tibet and in the western provinces.

Russia: The story has emerged that on March 2, security forces squelched an assassination attempt on the lives of Vladimir Putin and Dmitry Medvedev as the two walked to a post-election celebration in front of St. Basil's Cathedral in Red Square. Having just been there, I've been trying to picture the apartment, across the Moscow River, where the sniper supposedly was holed up and it's a long ways off but authorities say he had a clear shot. Mysteriously, it took two weeks for the story to emerge.

Separately, in another worrisome development for the international oil industry, the Kremlin's goons detained an employee of BP's Russian joint venture with TNK and are accusing the man and his brother of industrial espionage. Both are Russians who hold U.S. citizenship. They were also graduates of Oxford. The move came a day after raids on the offices of BP in Moscow, as the operation is the only one in the country with partial foreign control, other than Exxon Mobil's production sharing agreement on Sakhalin Island. The joint venture has been under pressure to sell a large natural gas field to Gazprom. Ya think this will now happen?

This is yet another move that hurts Russian-British relations in particular, as some experts say there are groups within the Russian government seeking to acquire valuable oil and gas assets from foreign investors as part of a power struggle during President Putin's final days.

Meanwhile, Secretary of State Condoleezza Rice and Defense Secretary Robert Gates were in Moscow to discuss the missile defense proposal and supposedly talks went reasonably well as Gates said Russia would be allowed a physical presence (though not continuous) at the sites in Poland and the Czech Republic. Additionally, the U.S. has proposed that interceptors not be placed in their silos until an Iranian ballistic missile threat becomes real, an offer meant to alleviate concerns the facilities could be reconfigured to target missile launches from Russia.

Serbia: It's playing out just as I expected here as violence hit the divided northern Kosovo town of Mitrovica, where 40,000 Serbs confront 80,000 Kosovo Albanians. Serbs attacked a UN court building and 150 were injured in rioting. Again, it's not the casualties, it's about sapping NATO's resources which are needed at the same time in Afghanistan.

Zimbabwe: The presidential election is March 29 and what was once thought to be an easy time for President Robert Mugabe is suddenly looking less so as long-time opposition leader Morgan Tsvangirai is surging in the polls. Tsvangirai, by the way, is calling for "chinja," 'change,' as he has an 8-point lead in the latest survey. So how will Mugabe rig it?

Saudi Arabia: Story out of the BBC that the Saudi monarchy is retraining 40,000 imams in an effort to counter militant Islam. But ultraconservatives still hold sway here, witness a case just last week where a prominent cleric called for the beheading of two liberal writers who had questioned the orthodox view that Muslims can not change their religion. [Memo to self: Reconsider plans to visit here some day.]

Britain: Support for Gordon Brown's Labour Party has hit a low not seen since 1983, 27% and 16 points behind the Conservatives, currently headed by David Cameron. Brown doesn't have to call an election anytime soon, however. The same survey, though, says 83% now believe the economy will either grow more slowly over the next 12 months or slip into recession.

Dow Jones +3.4% [12361]
S&P 500 +3.2% [1329]
S&P MidCap +1.2%
Russell 2000 +2.8%
Nasdaq +2.1% [2258]

Dow Jones -6.8%
S&P 500 -9.5%
S&P MidCap -10.3%
Russell 2000 -11.0%
Nasdaq -14.9%

*Remember what I said last week, contrarians. This is a bull/bear ratio not seen since the Oct. 2002 lows.

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