U.S. money funds seen at risk from Europe's debt storm

(Reuters) - When Lehman Brothers collapsed in 2008 and shattered the belief that U.S. money market funds would never "break the buck," Washington rushed to limit the damage.

But as Europe's debt crisis threatens to put the U.S. financial system under strain again, U.S. policymakers are worried they cannot turn to those same, impromptu tools to shore up the $2.6 trillion money markets industry.

"We've done a lot to prepare the banking sector," Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said on Wednesday. "I'm less confident about the money market funds and their ability to weather major problems at European institutions."

Senior U.S. officials are alarmed by the deepening of the European debt crisis. Its spread to Italy, the euro zone's third-biggest economy, is seen as inevitably leading to spillovers across the Atlantic, in part through the holdings of money market funds of European securities.

Many investors believe money funds are as safe as lower-yielding bank accounts even though it is common knowledge that that they are not backed by the federal insurance that protects bank deposits.

During the chaos of 2008, dozens of money funds struggled to maintain $1 per share, but only one, Reserve Primary Fund, reported a net asset value below that level.

Less well known, and of concern to U.S. officials, is that the money funds cannot count on the protection measures that were pulled together to help them in 2008.

NO EASY OPTIONS

The Treasury Department is barred from reprising a guarantee program under the terms of the 2008 bailout of the U.S. banking system. Congress, which agreed to the bailout only reluctantly, prohibited renewing the program on grounds that it was providing a false sense of security to investors who might expect government protection again in the future.

The Federal Reserve is also unlikely to dust off either of two facilities it set up in 2008 to ensure money market funds had cash to meet redemption requests -- the Asset-Backed Commercial Paper Money Mutual Fund Liquidity Facility and the less-used Money Market Investor Funding Facility.

Today's rock-bottom interest rates and the fact that the government would need to charge fees for such guarantees mean that those types of emergency facilities would likely not be effective as a backstop.

Limitations on the Fed's emergency authority -- it can no longer intervene to protect individual firms as it did in 2008, but must provide aid to an entire asset class -- may further cramp the central bank's nimbleness in responding to a crisis.

Another Fed emergency liquidity facility dating from the U.S. financial meltdown depended on a promise that the Treasury would absorb some of the losses if the collateral financial institutions pledged lost value. U.S. lawmakers are now on a debt-cutting crusade and are unlikely to approve more bailout funds for the Treasury to use in that way any time soon.

NERVOUS INVESTORS

All this has left some investors nervous about their exposure to what they used to see as the safe havens of money funds, managers said.

Such funds "breaking the buck are far and few between, but nowadays, everyone is looking at Europe, and they are seeing things they thought wouldn't happen now happening," said King Lip, chief investment officer at Baker Avenue Asset Management in San Francisco.

The firm manages about $750 million in assets.

He said about 25 percent of the firm's investments are in money markets that had been carefully vetted.

"We've had clients asking us to move to cash," Lip said. "We're getting more and more requests to move to cash entirely rather than invest in money markets."

Top Fed officials have urged putting money funds on a tighter leash, saying they should be required to hold capital buffers to discourage clients from panic withdrawals.

"Given the systemic importance of the money market mutual fund industry, it is critical that one way or another we make the industry less susceptible to credit shocks and liquidity runs," Boston Federal Reserve Bank President Eric Rosengren said in September.

Strains in money funds re-emerged over the summer on concerns about their holdings of commercial paper issued by troubled European banks. Outflows spiked in July as investors worried about the fight in the U.S. Congress over raising the U.S. debt ceiling.

In response, some of the largest funds cut their European bank holdings and shortened the weighted average maturities of the assets they owned. Outflows ultimately stabilized after a debt deal was reached in the U.S. Congress.

Various academics and regulators have backed a shift to a share price that can fluctuate, as opposed to the current money fund practice of guaranteeing a stable $1 per share value. But many companies worry such a change would drive away customers.

Some industry counterproposals involve building up extra capital in some type of "buffer" to backstop money funds that run into trouble. Asset management executives also say that changes put in place by the Securities Exchange Commission at the start of 2010 already have made the funds much more robust than during the crisis, including tightening credit quality standards and imposing liquidity requirements.

Investors are watching the situation closely.

Evensky & Katz, a registered investment adviser in Coral Gables, Florida, with $700 million in assets under management, is considering whether to pull out of money market funds. But for now, it is leaning toward staying in, said Harold Evensky, the firm's president.

"We don't think any of the money market funds we use have significant exposure to Europe and if there was an issue, we have little doubt that they would cover it," he said.

Risks of global recession mount

(Reuters) - Financial contagion from Europe is pushing global economies towards the brink, and the risks of slipping into worldwide recession are rising significantly. China's exports have plunged to half their year-ago levels. Factory orders in Germany, Europe's economic powerhouse, are slumping as China weakens. 

Australia and Indonesia have cut interest rates to ward off damage from Europe, while Japan, Britain and Brazil have slashed their growth forecasts. From Beijing to Washington and Sao Paolo, top financial officials are worried their economies will be sucked into the maelstrom by Europe's inability to unify around a debt strategy. High yields on Italy's and Spain's sovereign debt, hovering around 7 percent, are putting severe funding strains on banks, infecting the global financial system, which in turn undermines confidences and upends growth. "It's a scary situation," said Mike Feroli, chief U.S. economist for JPMorgan Chase. 

"Unless Europe really goes pear-shaped, we should avoid recession. But each passing week without a resolution we are doing more damage, and it's hard to see how this will stop." On top of Europe's woes, add an intractable U.S. Congress fighting over how to cut the U.S. budget deficit, and the risks are mounting of political mishaps that upset a gradual healing of the global economy. "It is stunningly easy to slip into recession," said Tom Porcelli, U.S. chief economist at RBC Capital Markets. U.S. lawmakers face a Wednesday deadline to deliver a plan to slash $1.2 trillion (759.3 billion pounds) to $1.5 trillion from the U.S. budget deficit over the next 10 years. Porcelli is concerned that failure to reach an agreement, which looked increasingly likely, would cause lawmakers to backtrack and attempt to push through a new law to repeal the automatic triggers to impose budget cuts. Such a move would stoke financial volatility and worsen an already vulnerable outlook. Additionally, Congress has not yet decided whether to extend several fiscal stimulus measures next year. JPMorgan Chase estimates an end to measures such as the payroll tax cut, unemployment benefits for the long-term jobless and infrastructure spending would take 1.5-2 percentage points off U.S. growth next year - an expectation that most forecasters have already built into their outlooks. 

A budget debacle would strike a blow after recent economic data from the United States that has been moderately encouraging. New car sales rose a healthy 7 percent last month, industrial output has been climbing and jobless claims have been falling steadily. U.S. consumers, who drive about 70 percent of U.S. economic activity, have been slowly paying down debt, restoring household spending power as inflation ebbs. Personal income data for October, to be released on Wednesday, is expected to show a rise of 0.3 percent up from 0.1 percent the prior month, and jobless claims out the same day are seen holding below the critical 400,000 level -- both of which would support further spending and point to fourth-quarter GDP growth near 3 percent. 

Europe also has some underlying strength. Corporate cash flow is high and inventories low, giving plenty of room to ramp up should demand recover. Likewise, Germany has low unemployment, solid public finances and cheap financing that can support an expansion in German domestic demand. But political uncertainly and financial volatility is casting a huge shadow over the outlook, depressing economic activity both in Europe and the United States and spilling over to export-driven Asia. Flash estimates for PMI purchasing managing indexes on Wednesday will gauge China and Europe's manufacturing and service sectors in October. The euro zone factory index is seen slipping closer to recessionary territory at 46.5, down from 47 in September. 

Many analysts see the region already in recession. As for China's PMI index, it was getter close to stalling in September at a reading of 51, just above the 50-point level that demarcates expansion and contraction. Stephen Roach, non-executive chairman of Morgan Stanley Asia, said the combination of weak consumer demand from the United States and slumping Europe should be setting off alarm bells in export-led Asia. "For the second time in three years, global economic recovery is at risk," Roach said in a note to clients.

Clashes in Cairo again....

Gary Brown: Detroit could run out of cash in December

With Detroit Mayor Dave Bing preparing to explain the city's fiscal crisis tonight in a rare televised address, Council President Pro Tem Gary Brown says the situation is even worse than anyone has let on.

Bing is expected to discuss a confidential Ernst & Young report obtained by the Detroit Free Press that suggests Detroit could run out of cash by April without steep cuts to staff and public services.

That's a grim prognosis, but according to Brown, the city actually could be unable to make payroll "as early as December."

"I know the report says April, but there are certain risk assumptions that when you take those into consideration, worst case scenario you could run out (of cash) in December," Brown said this morning on WJR-AM 760.

In his speech tonight, Bing is expected to propose privatizing the city's public bus system and lighting departments, both of which have have been failing residents but reportedly cost them $100 million a year in subsidies.

Brown supports that long-term plan, but he is hoping the mayor will couple it with a short-term strategy to lay off up to 2,300 city workers if unions fail to agree to long-discussed concessions.

If Bing doesn't, City Council will.

"If the mayor tonight comes out with a plan that does not address the short-term and long-term issues, the Council is going to come out with a plan. We're going to put it in a resolution, send it to the governor and say 'We're willing to make these cuts.'"

Mlive

GE Filed 57,000-Page Tax Return, Paid No Taxes on $14 Billion in Profits!!!!

General Electric, one of the largest corporations in America, filed a whopping 57,000-page federal tax return earlier this year but didn't pay taxes on $14 billion in profits. 

The return, which was filed electronically, would have been 19 feet high if printed out and stacked. The fact that GE paid no taxes in 2010 was widely reported earlier this year, but the size of its tax return first came to light when House budget committee chairman Paul Ryan (R, Wisc.) made the case for corporate tax reform at a recent townhall meeting. "GE was able to utilize all of these various loopholes, all of these various deductions--it's legal," Ryan said. Nine billion dollars of GE's profits came overseas, outside the jurisdiction of U.S. tax law. GE wasn't taxed on $5 billion in U.S. profits because it utilized numerous deductions and tax credits, including tax breaks for investments in low-income housing, green energy, research and development, as well as depreciation of property. 

"I asked the GE tax officer, 'How long was your tax form?'" Ryan said. "He said, 'Well, we file electronically, we don't measure in pages.'" Ryan asked for an estimate, which came back at a stunning 57,000 pages. When Ryan relayed the story at the townhall meeting in Janesville, there were audible gasps from the crowd. Ken Kies, a tax lawyer who represents GE, confirmed to THE WEEKLY STANDARD the tax return would have been 57,000 pages had it been filed on paper. The size of GE's tax return has more than doubled in the last five years.

The Weekly Standard

THE WEDDING SUPPER

MAURICE SKLAR MINISTRIES Sep 22 2006 09:07AM   About two weeks ago, early on Sunday morning as I was preparing to go to church, I had a vision. I was caught up into heaven and I saw angels all around me. They were working and making preparations for what looked like a banquet. Everything was white ­ white canopies, white pavilions, white gazebos, what looked like white silk instead of canvas covering massive outdoor tents with elegant plumes and sashes hanging from white poles. It was clear as I looked around that there remained much more work to do.   The Lord then spoke to me and He said, "Do you know what this is?" I replied, "No Sir, but it looks like some kind of big garden party you are getting ready for." He said, "My son, this is preparations for My Wedding Supper. All of heaven has been waiting for this day. It is almost time for Me to come for My Bride. There is great joy and celebration here in anticipation for the moment when I shall call her out of the earth."   I was too amazed to say anything. It was so beautiful! The grass was so perfect. The flowers were blooming and the flower arrangements were being gathered from the nearby rose gardens by the angels. I had never seen such bright colors as those that were in those flowers! Everything was perfect wherever I looked. There were white doves that were flying with streamers that they were wrapping around the tent poles. They were in perfect symmetry as they would circle and wrap them. It reminded me of a May Day celebration that I saw once as a child, where there was a pole that was being wrapped in geometric designs by children as they circled it with their streamers. It ended up looking like a candy cane. But these were all in pastel colors of every hue of the rainbow. They were breathtaking to watch!   Then I saw the tables being brought in and placed next to each other. They stretched out under these outdoor tent pavilions as far as the eye could see. As I looked closer, I could see at each place setting there was a golden rectangular nameplate. As I looked, some were intricately engraved with the names of those that were to be seated there. Some of these name plates were encrusted with jewels that sparkled and glowed like there was a bright light shining behind them. Others were just with a plain name. The tables were not fully set, but I saw that it was the most elegant party preparation that I had ever seen. It could not be compared to anything on this earth. There was great joy and excitement in the air. The angels were singing in the most awesome songs as they worked. As I listened a little closer, I thought that I could hear the words as they sang about the righteous deeds of those that were to be seated where they were working.   Then the Lord said to me, "Tell My Bride that I am coming soon! Everything is being prepared. In a little while, all sorrow, pain, sickness, poverty, and every teardrop will be wiped away. There is only a little longer that you must labor. You must work now while it is still time, for the darkness is soon coming upon the earth when all will be in tribulation. Stay ready and remain alert in watching and praying. I will surely come for you, just as I promised in My Word."     Then I was back in my room again, and I got in the shower to get ready for church.   This is the account of the vision I received earlier this month.   Maurice Sklar

Top Russian general: NATO expansion raises danger of nuclear conflict

Russia is facing a heightened risk of being drawn into conflicts at its borders that have the potential of turning nuclear, the nation's top military officer said Thursday.

Gen. Nikolai Makarov, chief of the General Staff of the Russian armed forces, cautioned over NATO's expansion eastward and warned that the risks of Russia being pulled into local conflicts have "risen sharply."

Makarov added, according to Russian news agencies, that "under certain conditions local and regional conflicts may develop into a full-scale war involving nuclear weapons."

A steady decline in Russia's conventional forces has prompted the Kremlin to rely increasingly on its nuclear deterrent. The nation's military doctrine says it may use nuclear weapons to counter a nuclear attack on Russia or an ally, or a large-scale conventional attack that threatens Russia's existence.

Russia sees NATO's expansion to include former Soviet republics and ex-members of the Soviet bloc in eastern and central Europe as a key threat to Russia's security.

Makarov specifically referred to NATO's plans to offer membership to Georgia and Ukraine as potentially threatening Russia's security. Russia routed Georgian forces in a brief August 2008 war over a separatist province of South Ossetia. Moscow later recognized South Ossettia and another breakaway Georgian province of Abkhazia as independent states and increased its military presence there.

Makarov warned that the planned pullout of NATO forces from Afghanistan could trigger conflicts in neighboring ex-Soviet Central Asian nations that could "grow into a large-scale war."

In its military doctrine, Russia has also described U.S. missile defense plans as another major security challenge, saying it could threaten its nuclear forces and undermine their deterrence potential.

Moscow has agreed to consider NATO's proposal last fall to cooperate on the missile shield, but the talks have been deadlocked over how the system should operate. Russia has insisted that the system should be run jointly, which NATO has rejected.

Makarov also said Russia is struggling to get enough recruits for the 1-million military, as the number of draftees has shrunk dramatically because of demographic changes.

He said that the military is aiming to gradually increase the number of contract soldiers and eventually form an all-volunteer army. He didn't mention a specific time frame.

The statement marked a sharp change of course for the top military brass who previously insisted that Russia needs to maintain the highly unpopular draft because an all-volunteer military would be too costly.

Haaretz