Bloomberg reports:

Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

These are wonderful promises, but we see little substance to back up Geithner’s “targets”.   More concerning was the sell-off in bonds yesterday indicating that foreign central banks may be anticipating a ratings cut in the U.S.A itself and are selling on the rumor.  While concerns over inflation through quantitive-easing have risen over the past weeks, the far greater concern is the threat of a serious bond-market meltdown should Bernanke’s dreams of low interest rates crash against the rocks of inflationary fears  — forcing rates ever higher.

What then of our “green shoots”?   With America’s deficit exploding almost 30% to over $2 trillion in a matter of months, America’s circle of creditors are sure to be casting nervous sideways glances at one another.  Growing international concern that the US may not be a reliable debtor were hightened yesterday, as Britain’s AAA rating was called into question by Standard & Poors, who lowered the nation’s outlook to “negative”.  (It does not take a particularly keen observer to note that the USA may be next in line.)

Also concerning is the “rot within”, as municipal defaults around the USA threaten to place an impossible burden on the shoulders of the Federal government.  One must concede that the concept of “too big to fail” has not yet been truly considered until one grapples with the issue of defaulting state and local governments.    There exists no framework, or precedence for these massive stormclouds forming on the US horizon.  Policy makers everywhere are deeply troubled with the prospective issue of whether the federal government should run to the rescue of state and local budgetary fiascos:  Fiascos brought about by irresponsibility, fraud and the very same ingredients that made up the subprime scandal itself.   To take on these burdens at the federal level would seriously call into question the financial health of the USA itself, and yet allowing local governments collapse under their own financial burdens will have deep and extraordinarily painful repurcussions.

Bloomberg reports:

Also yesterday, Geithner said the U.S.’s $700 billion financial rescue package can’t be used to aid cities and states facing budget crises.

The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington. Among the hurdles: money from the Troubled Asset Relief Program was designed for financial companies, he said.

Geithner said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.

The municipal bond markets are “starting to find some new balance and equilibrium,” he said.

No, Mr. Geithner, they are not.  But while Treasury is correct in not extending TARP support at this time — Geithner’s promise to “work with Congress” hardly sounds like restraint.  The US is sailing swiftly into a scenario which will demand significantly higher interest rates.  While we are fuly cognisant of the pain and hardship that accompany a laissez-faire response to corporate and municipal financial failures — such pain is deeply preferable to the broad systemic collapse that will follow if the federal government tries to backstop our entire bathtub of bursting bubbles.

Brazil’s central bank announced today that transactions between China and the South American nation will increasingly use their own currencies rather than use the US dollar.   Rumors of a Chinese/Brazilian move to break away from USD hegemony first surfaced at the G20 meeting in London last month.  This week, with Brazil’s president Luiz Inaςiao Lula Da Silva involved in high level economic talks in Beijing,  it seems the rumors are swiftly turning into actual policy initiatives.

SKY reports:

The move is significant for two reasons: not only is it a direct challenge to the dollar as the world’s transaction currency of choice but it is coming from two countries with some of the world’s largest foreign-exchange reserves—most of which are held in (yes, you’ve guessed it) dollars.

…

It’s not the first time we’ve heard such posturing. A year ago China – the world’s largest consumer of U.S. government debt – warned it could move those assets into better performing currencies like the euro and as recently as March, the country’s central bank governor pondered replacing those dollar holdings with a standard reserve such as the one used by the IMF. Such words have in the past seemed idle threats but with the prospects of countries like Brazil, Russia, India and China (the so called ‘BRICS’) outpacing shrinking markets in West, a currency agreement between such emerging market titans could challenge the monetary status quo.

We’re still extremely curious as to the specifics of this somewhat “apples and oranges” agreement between the two currencies.  Brazil’s currency floats like any other major currency on world FX markets, while the Chinese renminbi is carefully managed by Beijing at just under 7 per dollar.   It is also interesting that the arrangement is not exclusive and still allows either nation to use USD as a matter of choice — a flexibility which doesn’t exactly ring of confidence in either one of the competing currencies.

The Financial Times reports:

An official at Brazil’s central bank stressed that talks were at an early stage. He also said that what was under discussion was not a currency swap of the kind China recently agreed with Argentina and which the US had agreed with several countries, including Brazil.

“Currency swaps are not necessarily trade related,” the official said. “The funds can be drawn down for any use. What we are talking about now is Brazil paying for Chinese goods with reals and China paying for Brazilian goods with renminbi.”

An aide to Mr Lula da Silva on his visit to Beijing said the political will to enact a similar deal with China was clearly present. “Something that would have been unthinkable 10 years ago is a real possibility today,” he said. “Strong currencies like the real and the renminbi are perfectly capable of being used as trade currencies, as is the case between Brazil and Argentina.”

While many economists scoff at the relative strength of both the Renminbi and the Real — and point out that a real shift away from USD hegemony would take decades to occur, we must point out the following 3 facts which are inescapably true:

1. The United States has a massive debt which is growing larger.
2. The trade deficit in the United States continues unabated.
3. The Federal Reserve has shown that it is willing to “print” dollars as a response to liquidity issues within the US banking system.

We continue to watch with concern as the Federal Reserve continues to throw money at the weakest parts of the US economy, tarnishing the dollar and preserving those parts of our economy which should be allowed to fail.  If Ben Bernanke believes that such actions won’t ultimately destroy the privileged role of the US dollar — he is seriously mistaken.

The Pension Benefit Guaranty Corp., a government agency that provides insurance for corporate pension funds, recently reported to Congress that its deficit has tripled in the last 6 months to $33.5 billion as it takes on payment responsibilities for underfunded pension plans of companies going bankrupt in the current economic crisis.

Acting director, Vince Snowbarger, commented:  “Long term there is going to have to be some resolution of that deficit. I think at some point in time it’s going to require congressional attention.”

“How soon depends on what happens in the next several years,” he added.

Well, according to the PBGC’s own estimates, pension underfunding in the auto sector alone is $77 billion, so it looks to us like that ‘congressional attention’ may be required sooner rather than later.

AP Reports:

A flurry of pension plans that have either been terminated or probably will end up being taken over by the PBGC is the largest reason for the agency’s rising deficit. Declining interest rates was listed as the second-largest reason for the shortfall. Investment losses from the stock market were only the third contributing factor.

“Despite ongoing deficits, the PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly — spread over the lifetimes of participants and beneficiaries, not as lump sums,” Snowbarger said.

In a televised speech by Thomas Woods,  author of the New York Times bestseller “Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse“, had some gems of concise insight that we thought we’d echo here:

“The recession is just the economy trying to re-adjust after all the mal-investment and misdirected resources caused by the Fed in the first place.”

“When you’re the “Soviet commisar” in charge of money and interest rates, when you’re Alan Greenspan, you can create money out of thin air and now the banks have a ton to lend and can keep the illusion going.  But it’s an illusion all the same.”

“This is not just a matter of “We need a little more regulation”.  That is the most irresponsible, intellectual laziness imaginable.  …  If the institutional structure gives rise to this [boom bust cycle], ecourages excessive risks by making credit artificially cheap — you can have all the regulation you want …

…  It is the institutions that are giving rise to this.  It is the money itself.”

And our favorite summary of where things are today:

“What we have here is a slow-motion train wreck as we watch Washington and the Fed trying to put everything back together.  … Who is being held up to us as the people we should listen to?  First let’s talk about Ben Bernanke…  Why be awed by a man whose investigators examined the mortgage market a couple years ago and found that it was healthy as ever?  Why should we listen to a guy who said the housing bust will be over by December 2008?   Why should we have listened to Hank Paulson, who told us in 2007, the world economy was in the ‘best shape’ he had ever seen it?   These are the people we are supposed to care about?  Seriously, you should want to do the exact opposite of what these people recommend.”

“Instead of listening to [Bernanke, Paulson, et al], who have been wrong for years, who have given us the wrong advice, who have contributed to the largest asset bubble in the history of mankind… Instead of listening to them, let’s listen to the people who saw it coming.  … Why don’t we listen to them?  Their phones are not exactly ringing off the hook from the Obama administration.  The Obama administration seems to be of the opinon that the bigger blockhead you were, the more surpised you were by the crisis, the less sensible advice you have — well, the more we want to hear you.   But if you saw this coming?  Forget about it.”

The complete speech (via C-Span) is available here, and is well worth listening to:

http://www.booktv.org/watch.aspx?ProgramId=PC-10285

On Wednesday, Treasury Secretary Timothy Geithner wrote a brief letter outlining proposed regulation of the enormous $600 trillion derivatives market.  In it, he calls “for federal regulators to be given comprehensive authority, for the first time, to police all derivative markets and derivative dealers; for the establishment of clearing, margin, and capital requirements to reduce risk; and for authority to impose position limits on over-the-counter derivatives to prevent market manipulation and excessive speculation. The letter also proposed important derivative reporting and recordkeeping requirements that could be satisfied in part by clearinghouse or regulated trade repository records.”

While most market observers agree that regulation of this market is essential for reducing systemic risk to our economy, many disagree as to the forms these reforms should take and fear that the Geithner proposal will leave dangerous loopholes that will leave us exposed to further danger.

The New York Times reports:

Mr. Geithner suggested that derivatives should be split between standardized instruments, which would be traded on regulated exchanges, and privately negotiated contracts, customized deals (often called “swaps”) that are made between two financial organizations and would not be publicly traded or regulated. Rather, such transactions would be reported privately to a “trade repository,” which apparently would make only limited aggregate data available to the public.

The problem with this, according to critics, is the danger that “today’s exception could become tomorrow’s rule.”  Derivatives have proved an extremely useful tool to investment banks and counterparties seeking shelter in the opacity of lax or non-existing oversight and disclosure requirements.  Should new regulations leave a gaping loophole that would allow these banks to continue pushing risks off their balance sheets or into offshore jurisdictions, the fear is that the banks will exploit it.

This criticism certainly has merit, and we hope that it will find a receptive audience with legislators and the Treasury Department alike.   Still, we are encouraged with this first step down the road to greater accountability and transparency for banks in the operation of this enormous market.  Here is a chance for Timothy Geithner to put his stamp on the future of US financial regulation.  Properly executed, these reforms have the potential of going a long way towards re-establishing trust in our badly shaken banking system.

It’s a rare thing when insiders speak their minds publicly against the powers-that-be.   Today in a global investment conference held in Qatar,  an insider accused the entire US bank bailout of being a “sham”, and said it publicly at a global conference of his peers.   Meet Mark Patterson, chairman of MattlinPatterson advisers, a firm which utilized the TARP program’s ‘matching funds’ to buy Flagstar Bancorp in Michigan.   Patterson certainly didn’t pull any punches in blasting US Treasury Secretary, Tim Geithner’s bailout as being a deeply flawed plan which will not only ultimately fail, but is enriching Wall Street insiders in the process.

The Telegraph UK reports:

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.

“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

Well said indeed, Mr. Patterson.  We’d love to hear Mr. Geithner respond, but he’s off skipping through fields of green shoots, and worse yet, seems blissfully unaware that the US taxpayer is bearing most of the cost while seeing precious little of the upside.  Perhaps when the last $100 billion of TARP funds has been magically transferred into private coffers, Mr. Geithner will make the hard choices we’re hoping for.

More from the Telegraph UK:

“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.

“Alfa hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said.

Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression.

“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.

We couldn’t agree more with Mr. Patterson, and he has our sympathies for exercising good judgment, but bad luck in choosing to short this rally from the start.    As our colleague Tyler Durden at Zero Hedge once said, “Anyone with any common sense is losing money in this market”.   Our only hope is that more insiders speak up like Mark Patterson did before the situation gets any worse than it already is.

Unemployment claims continue to drive ever higher in the United States, hitting the 15th straight week of records for the week ending May 9.   Last week’s new jobless claims came in at an alarming 637,000 according to the US Department of Labor — bringing the continuing claims total to 6.56 Million. (Continuing claims data lags new jobless claims data by one week).   The unemployment rate reached 8.9% in April and judging from the new claims, is apparently continuing to rise.

The Department of Labor reports:

UNEMPLOYMENT INSURANCE WEEKLY CLAIMS REPORT

SEASONALLY ADJUSTED DATA

In the week ending May 9, the advance figure for seasonally adjusted initial claims was 637,000, an increase of 32,000 from the previous week’s revised figure of 605,000. The 4-week moving average was 630,500, an increase of 6,000 from the previous week’s revised average of 624,500.

The advance seasonally adjusted insured unemployment rate was 4.9 percent for the week ending May 2, an increase of 0.1 percentage point from the prior week’s unrevised rate of 4.8 percent.

The advance number for seasonally adjusted insured unemployment during the week ending May 2 was 6,560,000, an increase of 202,000 from the preceding week’s revised level of 6,358,000. The 4-week moving average was 6,337,250, an increase of 128,750 from the preceding week’s revised average of 6,208,500.

The fiscal year-to-date average for seasonally adjusted insured unemployment for all programs is 5.011 million.

UNEMPLOYMENT INSURANCE DATA FOR REGULAR STATE PROGRAMS

---

	Advance				Prior1
WEEK ENDING	May 9	May 2	Change	April 25	Year

---

Initial Claims (SA)	637,000	605,000	+32,000	635,000	375,000
Initial Claims (NSA)	565,395	537,539	+27,856	580,377	325,480
4-Wk Moving Average (SA)	630,500	624,500	+6,000	638,250	369,500

	Advance				Prior1
WEEK ENDING	May 2	April 25	Change	April 18	Year

---

Ins. Unemployment (SA)	6,560,000	6,358,000	+202,000	6,293,000	3,063,000
Ins. Unemployment (NSA)	6,166,785	6,262,622	-95,837	6,299,278	2,845,952
4-Wk Moving Average (SA)	6,337,250	6,208,500	+128,750	6,081,500	3,006,750

While most of the increase in claims is due to auto-worker layoffs,  (Chrysler laid off an estimated 27,000 workers after declaring bankruptcy on April 30th. )  we should expect an additional bout of layoffs next month when General Motors slashes jobs.

Even with such dismal employment figures, the mainstream media is awash with reports of “improvement”.  Again, we’re forced to point out that a slowing rate of decline is a far cry from actual improvement.  As we’ve noted before, pointing to the second derivative as a sign of “improvement” is akin to watching a parachutist open his chute — and as his descent begins to slow, concluding that he is about to start gaining altitude.

In an interesting precedent, which could have significant ramifications for the future, the Judge in the Yellowstone Club bankruptcy proceedings ruled that Credit Suisse engaged in predatory lending practices in its $375 million first-lien debt to the super-luxury country club.  Apparently, Credit Suisse didn’t even request audited financials prior to approving the loan and was solely interested in the $7.5 million origination fee.

The remedy in this case is even more surprising:  CS’s first-lien debt is to be subordinated to even unsecured debt to the bankrupt super luxury club.

“Credit Suisse and the development owners would benefit, while their developments — and especially the creditors of their developments — bore all the risk of loss,” wrote judge Kirscher.

“The only plausible explanation for Credit Suisse’s actions is that it was simply driven by the fees it was extracting from the loans it was selling, and letting the chips fall where they may.”

“The only equitable remedy to compensate for Credit Suisse’s overreaching and predatory lending practices in this instance is to subordinate Credit Suisse’s first lien position to that of CrossHarbor’s super-priority debtor-in-possession financing and to subordinate such lien to that of the allowed claims of unsecured creditors,” wrote Judge Kirscher.

The latest round of economic indicators of can’t be reassuring to market bulls.  Significant improvements in housing affordability and mortgage rates below 5 percent are not yet helping home prices in the face of continuing foreclosures and job losses.  Retail sales data from the US Dept. of Commerce also disappointed.  Not only were April numbers down by .4%, but March numbers were also revised lower to -1.3% from a previous estimate of -1.1%

Bloomberg reports on the latest housing market data:

May 12 (Bloomberg) — Home prices in the U.S. dropped the most on record in the first quarter from a year earlier, led by California and Florida, as banks sold foreclosed properties.

The median price fell 14 percent to $169,000, the National Association of Realtors said today. Prices dropped in 134 of 152 metropolitan areas, with the deepest declines in Cape Coral and Ft. Myers, Florida, followed by San Francisco and San Jose.

Distressed sales increased transactions in 17 states from the fourth quarter as speculators and first-time buyers purchased bank-owned properties. Such homes typically sold for 20 percent less than others, the NAR said today. The inventory of previously owned homes on the market dropped to 3.7 million in March from 3.8 million a month earlier, according to NAR data. The number of new homes for sale fell to 311,000, the lowest since January 2002, according to the Commerce Department.

“There are a lot of forces pushing the market in different directions,” said Brian Bethune, economist at IHS Global Insight in Lexington, Massachusetts. “We’ve seen huge improvements in affordability, not only in prices but also in terms of mortgage rates below 5 percent, but what’s pushing down those prices is foreclosures and job losses.”

Total existing home sales fell 6.8 percent from a year earlier to a seasonally adjusted annual rate of 4.59 million units, the NAR said today. Sales were down 3.2 percent from the fourth quarter. The figures include single-family homes, condominiums and co-ops.

‘Bifurcated Market’

“We are very much in a bifurcated market with sharp differences between foreclosures and short sales on one hand, and traditional homes on the other,” Lawrence Yun, the NAR’s chief economist, said in a statement.

Some areas showed “dramatic” drops in home prices, Yun said.

“In areas with the biggest price declines, we also see much higher levels of distressed sales which are distorting the data,” he said.

The steepest price decline was in Cape Coral-Fort Myers, down 59 percent from a year ago, followed by Saginaw, Michigan, with a 54 percent drop. The next biggest decreases were Akron, Ohio, with a 48 percent decline; San Francisco, down 43 percent; and San Jose, California, with a 42 percent drop.

The largest sales gain from a year ago was in Nevada, up 117 percent; followed by California which rose 81 percent; Arizona up 50 percent; and Florida with a 25 percent increase.

Those four states accounted for the 26 highest foreclosure rates in the first quarter among U.S. cities with a population of 200,000 or more, according to RealtyTrac Inc., an Irvine, California-based seller of real estate data.

Slowing Declines

While the quarterly drop in prices set a record, the declines slowed in each of the three months. The U.S. median home price dropped 12 percent in March compared with a year earlier, according to NAR. That was slower than the 14 percent decline in February and the 18 percent slide in January.

“I do think we have some early signs that the market overall is stabilizing,” Housing and Urban Development Secretary Shaun Donovan said today in a speech at an NAR conference in Washington. “Since January we’ve seen both home sales moving up and down around a relatively stable number and we are seeing the first signs that the rapid decline in home prices is starting to abate.”

Bank-Owned Homes

Donovan said the government will allow first-time homebuyers to use the $8,000 tax credit approved by Congress in February as a down payment on mortgages guaranteed by the Federal Housing Administration. To qualify for the credit, purchases must be completed before Dec. 1.

U.S. banks held $26.6 billion of repossessed real estate at the end of 2008, more than double than a year earlier, according to the Federal Deposit Insurance Corp. in Washington. The banking industry lost $26.2 billion in the fourth quarter, the largest loss in FDIC records.

The average U.S. rate for a 30-year fixed mortgage was 4.84 percent last week, down from 6.05 percent a year earlier, according to mortgage buyer Freddie Mac. The rate fell to a record low of 4.78 percent last month.

On an annual basis, the fixed rate will probably average 5 percent this year and 5.3 percent in 2010, according to a forecast posted on NAR’s Web site. Last year, the rate was 6.1 percent.

Sales of existing homes likely will reach 4.97 million in 2009, up from 4.91 million last year, according to the Realtors’ forecast.

This article via the NYT shows retail sales dropped more than analyst expectations in April:

By THE ASSOCIATED PRESS

Published: May 13, 2009

Wall Street is down sharply in early trading after the government reported weaker-than-expected retail sales in April.

The market has put on hold a two-month rally amid concern that an economic recovery won’t be as fast as once hoped. The disappointing retail sales report has added to the week’s drop.

The Commerce Department said retail sales fell 0.4 percent in April. Economists had forecast sales would be flat for the month.

March sales figures were revised lower as well, to a decline of 1.3 percent from a previous estimate of a decline of 1.1 percent.

In the opening minutes, the Dow Jones industrial average is down 154 points or 1.8 percent. The Standard & Poor’s 500 index is down 1.8 percent, while the Nasdaq composite index is down 1.4 percnet.

In Europe, the FTSE 100 index in London was down 1.4 percent and Germany’s DAX fell 2 percent. The CAC-40 in France was 1.4 percent.

Europe’s main markets had opened higher in the wake of solid gains earlier in Asia and a late rally on Wall Street on Tuesday, which helped the Dow Jones industrial average end 50 points higher at 8,469.11.

The markets had expected retail sales to drop a modest 0.1 percent in April from the previous month, compared with the big 1.2 percent decline reported in March. Excluding auto sales, retail sales are expected to be flat.

Investors are looking to see if the retail sales news will help provide some direction after relatively flat trading through the early part of the week.

The main talking point in the markets though is whether the two-month rally seen in stocks around the world represents a bear market rally or whether it is something more.

Advocates of the bear market hypothesis point to historical precedents, such as false dawns in the stock markets during the Great Depression of the 1930s. While acknowledging some improved economic signals around the world, they think the optimism has been overdone — especially as banks could still encounter more problems.

Those arguing that the recent hefty stock market gains represent a turning point in the global economic crisis reckon that the forward-looking indicators have pointed to a resumption of growth possibly by the end of this year — stock markets usually start rallying between 6-9 months before an actual economic recovery emerges.

“We have greater sympathy with the bear market line of attack, but while we are dubious about the ability of this bull market in equities to continue we also do not believe that we are likely to see a rerun of that 1930s dramatic leg lower.” an analyst at Calyon Credit Agricole, Daragh Maher, said. “Our hesitancy simply reflects the fact that the optimism has swung so far so quickly,” Mr. Maher added.

Stocks have rallied strongly over the last few weeks — with some major indexes now in positive territory for the year — prompting some investors to claim the markets are over the worst. Many markets ended last week more than 5 percent higher.

The trigger for the gains has been better than expected economic news, particularly in the United States, the world’s largest economy. Mounting hopes that the global economy may recover before the year’s end has fueled an increased appetite for risk. Stock markets usually start recovering between 6-9 months before an actual economic recovery emerges.

Markets have also been buoyed by indications that the banks are now in much better health to deal with any potential losses associated with the recession after raising significant amounts of cash.

Earlier, in Asia, Japan’s Nikkei 225 stock average rose 41.88 points, or 0.5 percent, to 9,340.49, while Hong Kong’s Hang Seng dipped 94.02, or 0.6 percent, to 17059.62.

In the oil markets, an unexpected drop in American crude inventories propelled oil prices to near $60 Wednesday on indications that demand may be picking up.

Still, forecasts were less than rosy. OPEC, in its monthly report, said it expected oil demand for next year to grow less than in its previous estimate because of continued clouds over the world economy.

Benchmark crude for June delivery was up 87 cents to $59.72 a barrel in electronic trading on the New York Mercantile Exchange. On Tuesday, the contract rose to a six-month high of $60.08 a barrel before settling at $58.85, up 35 cents.

The American Petroleum Institute said oil stocks fell 3.13 million barrels to 370.7 million last week. Analysts had expected a gain of 1.4 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Companies.

Although the Senate already passed an earlier version of the Fraud Enforcement and Recovery Act, on May 6 the U.S. House of Representatives passed its own (and in our opinion, far more complete) version of the bill.

As it stands now, the Senate has to take up the House version of the bill and either accept their changes or elect to appoint a conference committee to work out differences between the two bills. However, the Senate does not have this bill on their calendar yet, nor have they appointed a conference committee.  It is still unclear if or when the Senate might take up the House-amended version of the measure.

Both versions of the bills would increase funding by over $500 million in aggregate over a two year period for certain law enforcement agencies, including U.S. Attorneys Offices, DOJ, FBI, U.S. Postal Inspectors, HUD and the Secret Service.

Currently, only the House bill also includes additional funding for the SEC.

Perhaps most significantly, the bill would provide for the creation of a Financial Crisis Inquiry Commission.

According to the House version of the bill, The FCIC would be charged with:

“examin[ing] the causes of the current financial and economic crisis in the United States, specifically the role of–
(A) fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector;
(B) Federal and State financial regulators, including the extent to which they enforced, or failed to enforce statutory, regulatory, or supervisory requirements;
(C) the global imbalance of savings, international capital flows, and fiscal imbalances of various governments;
(D) monetary policy and the availability and terms of credit;
(E) accounting practices, including, mark-to-market and fair value rules, and treatment of off-balance sheet vehicles;
(F) tax treatment of financial products and investments;
(G) capital requirements and regulations on leverage and liquidity, including the capital structures of regulated and non-regulated financial entities;
(H) credit rating agencies in the financial system, including, reliance on credit ratings by financial institutions and Federal financial regulators, the use of credit ratings in financial regulation, and the use of credit ratings in the securitization markets;
(I) lending practices and securitization, including the originate-to-distribute model for extending credit and transferring risk;
(J) affiliations between insured depository institutions and securities, insurance, and other types of nonbanking companies;
(K) the concept that certain institutions are `too-big-to-fail’ and its impact on market expectations;
(L) corporate governance, including the impact of company conversions from partnerships to corporations;
(M) compensation structures;
(N) changes in compensation for employees of financial companies, as compared to compensation for others with similar skill sets in the labor market;
(O) the legal and regulatory structure of the United States housing market;
(P) derivatives and unregulated financial products and practices, including credit default swaps;
(Q) short-selling;
(R) financial institution reliance on numerical models, including risk models and credit ratings;
(S) the legal and regulatory structure governing financial institutions, including the extent to which the structure creates the opportunity for financial institutions to engage in regulatory arbitrage;
(T) the legal and regulatory structure governing investor and mortrgagor protection;
(U) financial institutions and government-sponsored enterprises; and
(V) the quality of due diligence undertaken by financial institutions;

Additionally, the bill specifies the FCIC would be required to:
- examine the causes of the collapse of each major financial institution that failed
- submit a report,
- refer potential violations of the law to the U.S. Attorney General and State attorney generals, and
- build upon (but not duplicate)the work of other entities (such as congressional committees, GAO, other agencies) to avoid duplication in conducting its examination of these matters.

The commission would have 10 members, six chosen by congressional Democrats and four by Republicans. No elected officials could serve on the panel, which would have subpoena power.

We can only hope that the Commission is not made up of banking industry insiders.  We at the Analytic certainly have a number of questions regarding banking policies and activities that led us into this crisis as well as the Fed’s policies in reaction to it.

As William K. Black pointed out in The Huffington Post:

Whatever happened to the law (Title 12, Sec. 1831o) mandating that banking regulators take “prompt corrective action” to resolve any troubled bank? The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks.

US law also states that “no bank may make a capital distribution (pay a dividend) or pay a management bonus if before or after doing so it would be undercapitalized.”

Clearly, there are questions that need to be answered.  We at The Analytic sincerely hope that our legislative branch finds the time in its schedule to pass this important bill.