Colin Powell's Bad Advice

Nobody wants the government in their living room.

In good times or bad, there's always someone willing to tell the Republican Party that the road to success is to embrace the liberal agenda. In a speech in Washington Monday, former Secretary of State Colin Powell joined the chorus. We hope for the sake of the country that his party doesn't listen.

Mr. Powell insisted that he doesn't want the Republicans to turn into Democrats or clones of the Democrats. But it's hard to see what other space he hopes the GOP will carve out for itself given his analysis. According to press accounts, Mr. Powell argued that America has changed, and "Americans do want to pay taxes for services" and "Americans are looking for more government in their life, not less."

If the American people want to pay more taxes, nobody seems to have told the Obama Administration. There's a reason that the President ran as a tax cutter and repeats at every opportunity that he's already, in his words, cut taxes for "95% of working families." The appetite for Walter Mondale-style honesty about the consequences of huge spending increases remains low, to judge by the Administration's own rhetoric.

But even if Mr. Powell is right, this supposed newfound appetite for bigger government isn't likely to last. Uncle Sam is like that overbearing relative that you only miss when he's gone. The appeal fades quickly after he's installed himself in your living room and starts pushing you around. If the Obama Administration manages to implement its agenda and grow federal spending to 30% of GDP or more -- taking over the health-care system, the mortgage industry, major banks and the auto industry along the way -- it won't be long before Americans lose their appetite for big government, assuming they ever found it.

At that point, a GOP that had embraced Mr. Powell's advice would find itself with even less credibility than it currently has on restoring government to a manageable size. Mr. Powell says it's bad for the country to have a shrinking GOP, and he's right. But even worse would be an opposition party in name only.

Republicans and ObamaCare

The sound of silence is deafening.

By KIMBERLEY A. STRASSEL

Listen. That sound of silence? That's what's known as the united Republican response to President Barack Obama's drive to socialize health care.

The president has a plan, and he's laid it on the table. The industry groups that once helped Republicans beat HillaryCare are today sitting at that table. Unions are mobilized. A liberal umbrella group, Health Care for American Now, is spending $40 million to get a "public option," a new federal entitlement that would kill off private insurance. Democrats passed a budget blueprint that will allow them to cram through that "public option" with just 51 votes.

Martin Kozlowski

Republicans? They're trying to figure out what they think.

Well, not all of them. Earlier this week I ended up in the office of Oklahoma Sen. Tom Coburn, where the doctor was hosting North Carolina Sen. Richard Burr. The duo is, for the second time, crafting a comprehensive reform that would lower costs, cover the uninsured, and put Americans in control of their health care. And while the senators decline to talk GOP politics, their bill raises the multitrillion-dollar question: Will the party have the nerve or sense to coalesce behind some such conservative alternative to the Democratic product?

They'd better, because the days of Republicans winning these battles solely by spooking Americans are over. Phil Gramm, Harry and Louise might have scored with that approach in the 1990s, but the intervening years have brought spiraling costs and public unrest. Americans want a fix. Democrats promise one. The GOP can't tank the public option simply by complaining it will kill private insurance. The party has to finally elucidate how it plans to allow the private market to work.

Not that the senators don't think Republicans need to make clear to the country that the public option is, in Mr. Burr's words, "a fast track to a single-payer system." But they are also operating on the belief that Republicans must go beyond Band-Aid solutions to embrace, as Mr. Coburn puts it, a "complete transformation" of a system that is "structurally" flawed.

Their own bill overhauls the tax code, currently stacked in favor of corporate employees, to provide a tax credit to every American to purchase insurance. It expands health-savings accounts. It creates state health-insurance exchanges, where private insurers compete to cover Americans, including the uninsured. (This is partly modeled on the Medicare drug program, which has provided seniors with choice and held down costs.)

More broadly, it seeks to reorient financial incentives so that the system is no longer focused, as Mr. Coburn puts it, on "sick care," but on preventing the chronic diseases that eat 75% of health expenditures. These incentives would be used to lower costs and discourage insurers from cherry-picking patients. The bill also dives into Medicare and Medicaid reform.

Yet no small number of Senate Republicans are biding their time in Max Baucus land, waiting to see what the Democratic finance chairman produces as a "bipartisan" product. (Read: A bill the president wants.) This crowd has taken to heart Mr. Obama's accusation that they are the party of "no," and think it might be easier to be the party of Baucus, or the party of Baucus-lite, or the party of nothing whatsoever.

The White House is targeting folks like Chuck Grassley, Orrin Hatch and other Senate Republicans who back in 1997 voted for the State Children's Health Insurance Program, which was pitched by Democrats at the time as a modest program to help poor kids. It has, of course, become exactly what Democrats always intended it to be: a ballooning federal entitlement that is today transferring middle-class children from private insurance onto the federal rolls. This might be thought of as a teachable moment. But now Republican "moderates" are all ears for the administration's soothing suggestions that perhaps the "public option" can be "structured" so as to protect private insurance. Uh-huh.

Another group of Republicans are still going 50 rounds over taxes -- namely, whether a deduction isn't a more principled and cleaner way than credits to equalize the tax treatment of insurance. This is a legitimate debate, but one that should've been had 10 years ago when Republicans were in the majority. While the GOP fiddled, Democrats focused the argument on "uninsureds," which has made a tax deduction (which would only cover those who pay taxes) even less politically palatable.

Over in the House time runs on, as the Republican leadership and a health-care working group continue to noodle over platforms, policies, egos and timing. Democrats intend to be debating their bill by June.

As for Messrs. Coburn and Burr, they spent a good half hour with me enthusiastically explaining why a competitive market would improve health, provide control and choice, lower costs, and tackle entitlements. It's a good pitch. If only the rest of America could hear the party make it.

U.S. to Appoint Top General to Kabul in Afghan Revamp

By PETER SPIEGEL

WASHINGTON -- Defense Secretary Robert M. Gates is expected to bolster the U.S. military leadership in Afghanistan by appointing a three-star general to Kabul, according to senior defense officials. The move underscores growing concern in the military over the course of the conflict and marks the first time since the seven-year war began that the U.S. will have two senior commanders there.

The appointment of Lt. Gen. David M. Rodriguez, who holds the military's second-highest rank, hasn't been announced publicly, and his exact role in Kabul is still being discussed. He was chosen by Mr. Gates last year to be his personal military assistant after a widely praised tour as a division commander in eastern Afghanistan.

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Lt. Gen. David M. Rodriguez, left, will be a senior commander in Afghanistan.

AFP/Getty Images

Stocks Today: Has Unemployment Slowed?

Stocks Rise Despite Jobs Data

Tech Sector a Weak Spot as Early Surge Eases

Stocks retraced some of the previous session's losses as new jobs data buoyed investors' hopes that the U.S. economy's slide has slowed, but tech stocks fell, pulling indexes off their early highs.

Bank stocks were a bright spot after the government said late on Thursday that 10 of 19 banks need a total of $74.6 billion in additional capital following a round of stress tests. That fell short of the worst case that investors had feared.

Market Data Center >

Day Ahead: After the Stress Tests

At 10:56 a.m., the Dow Jones Industrial Average was up 66 points after rising more than 100 points shortly after the opening bell. Tech stocks including Intel and International Business Machines were down more than 2%, pressuring the broader index. Home Depot also fell, dropping by about 2.9%, as the jobs report showed that headwinds remain for consumers.

The Nasdaq Composite Index was flat, and the S&P 500 was up 0.8%, with its early gains tempered by a 0.8% slide in its technology sector and a 0.2% dip in its consumer-discretionary category.

Investors focused on the Labor Department's release of new data on nonfarm payrolls, which fell 539,000 in April, better than the mean expectation for a 610,000 decline.

Though the headline payrolls number was not as bad as many feared it would be, the report painted a stark picture of an economy that is still shedding jobs at an historic clip, bringing the total number of job losses since the recession started in December 2007 to 5.7 million.

"What's happening on Wall Street these days isn't necessarily lining up with what's going on in the domestic economy," said portfolio manager Matthew Smith, of Smith Affiliated Capital, which for now continues to favor Treasury bonds and other forms of low-risk debt over stocks.

Mr. Smith was skeptical of the stress-test results, which he believes were based upon some faulty assumptions by regulators.

"They started out assuming there are no truly toxic assets at these banks, just misunderstood assets that will gain value as the market gets back to normal," he said. "I don't see why we should believe that."

That view was in the minority on Friday, however, as stocks rallied. The S&P 500's financial sector was up more than 2%.

Wells Fargo and Morgan Stanley, two banks that sold shares to raise capital under the government's orders, slipped Friday. Wells Fargo was up 0.6% and Morgan Stanley was off nearly 5%.

"You had a lot of the institutional investors just waiting for an opportunity like this to buy, and the banks knew that," said Jerry Kallas, managing director at Terra Nova Financial, a Chicago brokerage. "They wouldn't have done the offerings if they didn't already know that appetite was out there."

Elsewhere in the financial sector, Bank of America and Citigroup rose sharply in early trading. Recently, Bank of America was up 1.4%, while Citigroup was up 6%. Bank of America needs to raise $34 billion, the largest amount of any of the banks with a capital hole. Citigroup needs to raise $5.5 billion, less than some analysts had feared.

Many regional banks that were told to raise more capital were also rising. Fifth Third Bancorp, which needs $1.1 billion, surged about 40%, while Regions Financial, which is facing a $2.5 billion capital gap, was up 7.6%. SunTrust Banks, which needs to raise $2.2 billion, was up 2.3%

Crude-oil futures continued to climb along with the stock market, pushing north of $57 a barrel in recent activity.

Day Ahead: Markets Rise After Stress Tests

Pace of Job Losses Moderated in April

Pace of Job Losses Moderated in April; Jobless Rate at 8.9%

BRIAN BLACKSTONE

WASHINGTON -- The pace of U.S. job losses tapered off a bit last month, suggesting that while the economy remains mired in a prolonged recession, it may be finally starting to find its footing.

Still, even though the decline was the smallest in six months, a good deal of the improvement came from temporary government hiring in advance of next year's Census.

And another half-million-plus drop in employment and further increase in the unemployment rate to a 25-year high remains a sober reminder that any road to recovery will be bumpy.

Separately, U.S. wholesale inventories fell for a seventh straight month in March as sales returned to negative territory after posting a small gain in February, a government report released Friday showed.

Nonfarm payrolls fell 539,000 in April, the U.S. Labor Department said Friday, slightly better than Wall Street expectations for a 610,000 decline, according to a Dow Jones Newswires survey. March was revised to show a steeper payroll drop of 699,000.

The data suggest that while labor markets are healing, "the improvement may be more gradual than hoped," said Zach Pandl, economist at Nomura.

The economy has shed 5.7 million jobs since the recession started in December 2007, with almost 2.7 million of those losses occurring in the last four months alone.

"Widespread job losses continued throughout the private sector," said Keith Hall, Commissioner of the Bureau of Labor Statistics. Private-sector employment fell by 611,000 last month, down a bit from the 700,000 average of the past four months, Hall said.

The unemployment rate, which is calculated using a survey of households as opposed to companies, increased 0.4 percentage point to 8.9%, the highest level since September 1983. Employment in the household survey rose 120,000 last month, the first increase in one year. That was offset by a 563,000 increase in unemployment.

Many economists expect unemployment to eventually top 10%. Not only does the economy have to stop losing jobs before the jobless rate stabilizes, it actually has to add payrolls at a modest rate just to keep up with new entrants into the labor force.

In testimony to the Congressional Joint Economic Committee Tuesday, Federal Reserve Chairman Ben Bernanke said, "currently we don't think it's going to get to 10%" though even something in the 9% range is still "way too high."

By broader measures, unemployment -- or at least underemployment -- is already well into double digits. When marginally attached and involuntary part-time workers are included, the rate of unemployed or underemployed workers hit 15.8% last month, up from 15.6% in March and 6.6 percentage points higher than it was one year ago.

Average hourly earnings advanced just $0.01 to $18.51. That was up just 3.2% from one year ago, a sign that inflation isn't a threat.

Should the modest improvement in labor-market conditions continue, as weekly jobless claims figures suggest, then the pace of economy contraction will probably ease somewhat this quarter. After declining over 6%, at annual rates, in each of the last two quarters, gross domestic product is expected to contract at a much slower rate this quarter, setting the stage for a return to growth later this year.

But so far, most of the so-called "green shoots" of recovery that economists and policymakers have latched onto are sentiment-based indicators such as consumer confidence and purchasing manager surveys.

The mix of grim automobile sales for April and ongoing steep job cuts suggest that consumers still face considerable headwinds.

According to Friday's report, hiring last month in goods-producing industries fell by 270,000. Within this group, manufacturing firms cut 149,000 jobs, bringing the total since the recession began to 1.6 million.

Construction employment was down 110,000 last month.

Service-sector employment fell 269,000. Business and professional services companies shed 122,000 jobs, the sixth-straight six-figure loss, and financial-sector payrolls were down another 40,000.

Retail trade cut 46,700 jobs, while leisure and hospitality businesses shed 44,000 as households cut back on nonessential spending. Temporary employment, a leading indicator of future job prospects, fell by more than 62,000 a slight improvement from the previous month's fall.

As has been the case throughout much of the recession, the sole bright spot among private sector industries was health care, which added almost 17,000 new jobs.

The government added 72,000, "mainly due to hiring of temporary workers in preparation for Census 2010," Hall said.

The average workweek was unchanged at 33.2 hours. A separate index of aggregate weekly hours fell 0.6 percentage point to 100.3.

Wholesale Inventories Decline

Wholesale inventories fell 1.6% in March to a seasonally adjusted $411.7 billion, after falling a revised 1.7% during February, the Commerce Department's report said.

The Department in a report released last month had estimated February inventories fell 1.5%. The February drop in inventories is the largest on record.

The March drop in inventories is more than the 1.2% decline analysts had expected and indicates wholesalers are drawing down inventories as shipments to retailers remain weak.

Sales of U.S. wholesalers dropped 2.4% in March to a seasonally adjusted $310.9 billion after a downwardly revised 0.2% increase in February, the data showed. Originally, February sales were estimated to have gained 0.6%.

The inventory-to-sales ratio, a measure of the number of months it would take a business to deplete its current inventory, increased slightly to 1.32 from 1.31 in February. The March 2009 figure is above the March 2008 ratio of 1.12.

On a year-over-year basis, sales were down 18.1% in March, while inventories were down 3.5%.

Wholesalers' inventories of durable goods -- a category that includes cars, appliances and furniture -- fell 2.4% in March, after falling a revised 2.6% in February.

Sales of durable good fell 3.3% in March, on the heels of a revised 1.7% increase in February.

Auto stocks fell 5.0%, while auto sales declined 0.6%. That compares with a 7.9% drop in auto stocks in February amid a downwardly revised 3.5% increase in sales.

Lumber sales in March fell 3.1%, while furniture sales fell 2.5%.

Non-durable goods inventories fell 0.3% in March, following a 0.2% drop the month before. March non-durable goods sales fell 1.6%, after dropping a revised 0.9% in February.

Petroleum stocks rose 7.9% amid a 5.1% decrease in sales. Farm product inventories rose 4.7%, while sales fell 3.9%.

Thursday, May 7, 2009

It’s All About the Stress Tests

By Chuck Butler

05/07/09 St. Louis, Missouri We’re stuck in a rainy pattern here in St. Louis. I just have to hope the rain stops long enough to get in the day game at Busch Stadium!

Well… The stress tests get their public showing today… The rumors continue to be something strange. Strange in that one day Bank of America (BOA) needs to raise $10 billion, the next day it’s $35 billion, and then later in the same day, BOA doesn’t need to raise any capital! Talk about wild swings of emotion! WOW!

The rumor going around this morning is that the banks are all right on the night, and not in major deep dookie any longer. Hmmmm… Didn’t I tell you over a week ago that this was going to be the case? I said it because… I just don’t believe the government is going to “spook” the markets right now and release the “real results”… Of course, I don’t know that to be a fact, it’s just my hunch. I could be all wet… But at least I got the first part correct, if in fact the results print as rumored.

But then, Bloomberg printed a story last night that showed a handful of banks needing between $34 billion and $2 billion in additional capital… So… Let’s see which set of books the government reveals, eh?

OK… So the currencies all sold off on the news yesterday morning that the banks would need more capital, and then came back overnight on the latest rumor. As I said yesterday, the markets are all about the stress tests right now… Actually, I’m surprised the government didn’t delay them one more day so that the focus would be on the stress tests tomorrow, instead of the Jobs Jamboree!

Speaking of the Jobs Jamboree that will take place tomorrow… The ADP Challenger report printed yesterday and indicated that tomorrow’s Jobs data will show less jobs lost, and a number below 600K for the first time in five months! ADP says the jobs lost were 491K… And believe me now and hear me later on this, the media will eat this up, and be all ecstatic about the fall from 600K to 491K… As if 491K is a “good number”! Well, yes, it’s better than 600K… But the reporting should all be balanced… Like… “Is this the turning point in job losses? Yes, their still almost 500,000 for the month, but that’s a fall of over 100,000. While one monthly report does not make a trend, just like one swallow doesn’t make a summer, this is good news, and we’ll be watching for signs of further improvement in May.”

I’m watching the Big Dog, euro (EUR), rally right now, from an overnight low of 1.3250, to its current level of 1.3330, as German Manufacturing Orders surprised this morning with a rise of 3.3% in March. The European Central Bank (ECB) is meeting right now, and is expected to cut rates 25 BPS to 1.25%. I read a couple of stories yesterday regarding the ECB… The writers were saying how the Eurozone economy is in shambles and needs a larger than 25 BPS rate cut… But, I argue with that. The ECB wants to keep some rate cut arrows in their quiver, in case they need more rate cut stimulus in the coming months… They shouldn’t shoot them all now! That’s what the Fed did, and we know what that led to… Quantitative easing!

But the Big Winner of yesterday and last night is the Aussie dollar (AUD)… It’s on a moon shot, since the Reserve Bank of Australia (RBA) left rates unchanged the night before, and issued a balanced statement afterward, with emphasis on waiting to see the affects of the previous rate cuts. The Aussie dollar got an additional boost this morning when it was reported that the unemployment rate in Australia fell for the first time in eight months! The Aussie dollar is 75-cents and change this morning, heading to 76-cents… A seven-month high!

Some commodities have been rising in price recently… I’ve chronicled the rise in the oil price, but here’s one you don’t hear about every day, except of course if you listen to our friend, Jim Rogers, every day! I can hear Jim Rogers talking about sugar as if he’s sitting right here next to me… Sugar is heading to a 28-year high, as the crop in India fell short of expectations… And wheat had gained three consecutive days now, on low yield estimates for the U.S. crop… I hear you, Jim!

I would think that if the bank stress tests “somehow” show no insolvency risk, that risk taking will be back on the table, BIG TIME! So… I would think that if risk taking is back on the table, gold, currencies and other commodities would be singing a different tune.

Yesterday, I told you about how the Indian currency (INR) was rallying, and how my Currency Capitalist colleague, Ashish Advani, gave the currency the thumbs up in last month’s letter, and how Standard Chartered Plc was now bullish on rupees… Well, now add Society General (SOCGEN) to the list of rupee flag wavers! SOCGEN believes the rate cuts in India are a thing of the past, and it will be all seashells and balloons for the rupee going forward.

And while I’m talking about an Asian currency… I might as well head over to China and talk about how their stimulus continues to hit the nail on the head, and help to bring China’s economy out of their slowdown and doldrums. The Peoples Bank of China (PBOC) issued a report yesterday saying that the economy performed “better than expected” in the first quarter. This improved performance is helping the “managed currency” (renminbi) to gain ground versus the dollar once more.

I had a reporter follow up with me yesterday on my thoughts toward what China had on their minds The reported asked me if I thought the Chinese would be under more pressure to allow the renminbi (CNY) to float, if they are really pursuing a “wider use of the renminbi.” I said… I thought the Chinese would receive pressure to allow the renminbi to float, but no more than what they received in the past from the combo of Paulson, Schumer and Graham… (The United States!)

The Bank of England (BOE) is also meeting this morning to discuss rates… I would think it is almost inevitable that the BOE would leave rates unchanged. This has been the prevalent thought in the markets for a week now, and has led to the pound sterling (GBP) making a very auspicious rally to 1.5170! What I think the BOE needs to do now is to sit down with the markets and tell them what direction their quantitative easing (QE) is going. Will they limit the purchases, or increase them, etc… Not that any QE is good, but to be honest and transparent with the markets would be a step in the right direction for a central bank!

Yesterday, Norway’s Norges Bank lowered their internal rate 50 BPS to and internal rate of 1.5%. I was hoping they would only cut 25 BPS, but… This has all the makings of “the last rate cut”… You know, one big blow out to end the summer… Or… A star burns brightest right before it burns out… But, I now believe this will be the last cut in Norway…

Recall many moons ago I called this a “race to zero” regarding central banks around the world cutting interest rates? Well… It certainly has panned out that way, eh?

Have you ever heard of the book, The Black Swan? The author Nassim Nicholas Taleb describes his theory of “Black Swan” as a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations. Obviously we’ve had a few “Black Swans” in the past two years, eh? Anyway, the thing I’m going for here is that Mr. Taleb was speaking at a conference yesterday, and had this to say about commodities and gold… “The global economy is heading into a big deflation though the risks of inflation are increasing as governments print more money. Gold and copper may rally massively as a result.”

Speaking of gold… It has rallied the past two days, but could be just waiting in the wings for confirmation of two things… 1. The bank stress tests don’t show major problems… And 2. The Jobs Jamboree does show falling job losses. Silver has really gotten on the rally tracks too, outperforming gold the past two days! Silver is back above $14… And that’s good news. That is unless you’ve dilly-dallied your days away, and not taken advantage of the cheaper prices that have been available for some time now!

No word from the BOE or ECB, so I’ll just head to the Big Finish now… No wait! The BOE’s decision just flashed across the screens… Let’s see here… Oh, the BOE left rates unchanged (as expected, see above), and they announced that they will increase the size of their asset purchase program (quantitative easing) by 50 billion sterling to 125 billion sterling. Well… Let’s see here, the pound sterling is taking on some water after this announcement, as it should! Too bad for the sterling rally… But increasing QE is not healthy for a currency!

The ECB decision will come in about 45 minutes… I’ll be well on my way to figuring out my currency positions and trades needed by then… So, I’ll just go to the Big Finish now, for real this time!

Currencies today 5/7/09: A$ .7565, kiwi .5935, C$ .8575, euro 1.3330, sterling 1.5085, Swiss .88, rand 8.3440, krone 6.4875, SEK 7.8525, forint 208.75, zloty 3.2325, koruna 19.9250, yen 99.20, sing 1.4675, HKD 7.75, INR 49.27, China 6.8215, pesos 13, BRL 2.1130, dollar index 84, Oil $57.91, Silver $14.11, and Gold… $921.30

That’s it for today… How about that! They found that three-year old boy that’s been missing here in Missouri! YAHOO! I see where the Somali pirates have seized another ship… This time it’s a Dutch ship. We’re all fans of “old school pirates” on the desk here, but NOT these new pirates! My little buddy Alex had a late game last night, but the game was suspended in the third inning because of fog. Sometimes living near a river has its good points, as I was able to get to bed at a decent hour! Of course, those “good times” get wiped out when the river floods, as it looks like it’s getting ready to do, after all the rain we’ve received, and will receive in the next week… UGH! I’m glad that we’re not going to do the multi-city FX tour this year. That was just a tad taxing on me. Tomorrow’s the jobs Jamboree, so start getting ready for that! OK… I’ve got to get this out of here, and get to work; I’m going to the day game today! Of course, you didn’t think I would miss a day game would you?

Financial Death by Gold Deficiency

By The Mogambo Guru

05/07/09 Tampa Bay, Florida If you are like me, then you realize the importance of gold and understand the relative unimportance of things like family, friends, coworkers, community and career, none of which are needed when you have a lot of money because you spend all your time having a wonderful, wonderful time, and the only communication you have with any of those vampires sucking the last of your will to live from your dry, drained soul is to say to them, “Tell it to my lawyer!”

And think of the time you will save! Relish all those freed-up hours of not having to ever again scornfully say to them, like you have said thousands of time before, “I told you to buy gold, but did you listen, you moron? No! 4,500 years of history told you to buy gold, but did you listen, you halfwit? No! The Austrian school of economics told you to buy gold, but did you listen, you butthead? No!

“Now you must suffer – yea, perhaps nigh unto financial death! – because that is how Mother Nature and raw Darwinism team up to give mutant stupidity the reward it so richly deserves! Hahaha!”

James Turk of GoldMoney.com is not looking to get into a discussion with me about mutants, probably rising from the dead to eat human brains, and writes instead that the idea of the “carry trade,” namely, borrowing cheaply one place and investing the money in something with a higher yield someplace else in order to profit by pocketing the difference, included playing with gold!

Indeed, “Gold also became a favorite vehicle to borrow because of its low interest rate”, which I notice runs less than a mere, tiny, insignificant fraction of less than a mere, tiny, lousy tenth of one percent per year! Almost nothing!

If you are one of those people who dismiss my loud accusations and condemnations of conspiracies and regulatory malfeasance by asking questions like, “You are an idiot, so why don’t you just shut the hell up?” (Answer: I don’t want to!), or “Are you as creepy and repellent as you seem?” (Answer: Yes), then I note with a smug grin on my face that Kitco.com bears me out by showing that the 1-month lease rate on gold is, and has been for quite a while, less than zero!

I am not sure who pays who, what, when or how when borrowing gold, or anything else, at a cost of less than zero percent, but there it is! Weird, huh?

Anyway, Mr. Turk is apparently not surprised at such blatant manipulations, and seems disappointed in me that I hadn’t noticed anything amiss until now, which I explain is because I am, unfortunately, very stupid, and if I wasn’t too stupid to notice something obvious like this, then I am also too stinking lazy to even make the effort to find out! Hahaha!

Mr. Turk soon realizes his mistake in assuming that I was “normal” in most regards, and continues on without me, saying that the greasy, slimy schemes, scams and manipulations was possibly because, “This gold came from central bank coffers, but they refused to disclose how much gold they were lending, making the gold market opaque and ripe for intervention by central bankers making decisions behind closed doors.”

Well, as a guy who is Just Smart Enough (JME) to be completely cynical, distrustful and paranoid about anything connected to powerful people in, or out of, government, and so this kind of revelation is, I am afraid, old news.

And old, old nightmares!

And these kinds of market-distorting government manipulations are old, old, old reasons to buy gold, silver and oil to protect My Darling Self (MDS) against the sheer bankrupting idiocies of another bizarre economic experiment of huge, growing, permanent governmental deficit-spending to fund massive entitlement programs, financed by an intellectually-corrupt central bank creating the necessary massive excesses of money and credit to loan so that the debt could be bought.

The bad news is, of course, actually much worse, as the ridiculous debt-creates-money monetary system that we have adopted requires that every debtor must pay back more than he borrowed, thus paying back both all the original principal and a lot of interest, whereas he only borrowed the principal.

Ergo, in the aggregate, debt can never be paid off, but instead, debt must always grow bigger and bigger and bigger, or be defaulted upon, which means that the investor loses all his money and (the real crux of the matter) the government gets less in tax revenue, and just when they needed it the most.

The obliging Mr. Turk, despite my constantly interrupting, finally gets us back to gold, which was the original point, and I, for one, was glad that he did, as this is when he reminded us of the astounding fact that “The amount lent by central banks has been reliably estimated in various analyses published by GATA to be 12,000 to 15,000 tonnes, nearly one-half of central banks total holdings and 4-to-6 times annual new mine production of 2500 tonnes.” Wow!

And this is only the part that has been loaned out! One can only speculate with horror and a rising need for revenge when one wonders what OTHER slimy things have been done with America’s gold, like, for instance, how we gave the IMF a few thousand tonnes to get started with their Special Drawing Right currency, for instance, and now they want to sell it. And then there are all those other little whispers of dastardly deeds done.

I was halfway through with quickly downing the rest of my drink and high-tailing it back to the Glorious Mogambo Bunker (GMB) for a little security when I remembered, “Hey! I have gold! I’m protected!”

And what I don’t remember is that I actually said, “Whee! This investing stuff is easy!” but I should have because it is!

The Mogambo Guru

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning , and other fine publications.

The War On Capitalism Continues

By Bill Bonner

05/07/09 London, England The bear rally continues…it is about to enter its 9th week. And the War on Capitalism continues!

The Dow rose again yesterday – up 101 points. Oil went up too – to $56. The dollar held steady. And gold was up again…to $911.

“Emerging market surge…Investors pile in on hopes of improved global economy,” says the Financial Times.

And this from the Telegraph: “Recession ‘over by Christmas,’ says Fed chief Bernanke.”

He did not say “Mission Accomplished.” That phrase was used too recently by another high official. In that event, the mission turned out to be not as accomplished as he thought.

Will the government’s War on Capitalism turn out better than their War on Terrorism? Or their War on Drugs? Or their War on Poverty?

“The last successful government program was WWII,” said Jimmy Breslin. Since then, almost all of them have been useless or counterproductive. But year in and year out, they’ve given federal hacks more money and power.

The current War on Capitalism didn’t begin a year ago, by the way. The feds have been conducting a dirty, undercover campaign against the free market for many years. Instead of permitting willing lenders and borrowers to set the price of credit, for example, the Federal Reserve imposed its own short-term rates many times over the last 50 years. Eleven times during that period, capitalism tried to correct the “borrow and spend” economy. Each time, the feds rushed in with more credit on even easier terms. By the recession of 2001-2002, the feds were intervening with such heavy hands that it set off the bubble in housing prices in the 2002-2007 period.

And when the bubble exploded, the fed’s dirty campaign turned into a major war with huge pitched battles…and millions of casualties.

Bloomberg reported yesterday, “nearly a quarter of US homeowners are underwater.” When the Fed flooded the market with so much easy credit, it pushed up housing prices way beyond what people could afford. Capitalism struck back – blowing up the dikes that held all that liquidity in place. But the explosion blew out the cushion of equity that kept homeowners afloat. House prices are still falling at a 14% annual rate. “Less than before,” say the bulls. But still going down.

This has left some communities – such as Salinas, California – with as much as one-third of the housing stock worth less than the money owed against it.

And in Victorville, California, the bank decided it had too many foreclosed houses. An entire new development of 16 houses – some completed, with granite countertops and all…some incomplete – had been foreclosed. Squatters and vandals were making a mess of the place. So the bank demolished the lot of them.

And overstretched homeowners who have an “Alt-A” or “Option ARM” mortgage are in trouble come 2011…when the majority of these loans will reset at a higher rate. You think it was bad when the first wave of defaults hit the United States? This could have even more catastrophic consequences.

Today, the results of the stress test on banks are out. They show some banks in good shape. Others need more capital. Bank of America, for example, is said to need another $34 billion. Wells Fargo needs $15 billion. GMAC and Citi both need more cash.

But investors decided to look at the part of the glass that was full rather than the part that was empty. They pushed up financial sector stocks generally.

If capitalism had its way, it would sort out the banks quickly. Banks that couldn’t raise the money they needed would go out of business. Their assets would be bought up by the solid banks. Life would go on.

But the feds’ war against capitalism prevents this kind of simple resolution. Instead, weak, mismanaged institutions are kept alive with taxpayers’ money.

“Trillions of dollars have been thrown at the system so that we can avoid the natural process of creative destruction,” write Matthew Richardson and Nouriel Roubini in today’s Financial Times.

Our next question: where is all this money going to come from?

“This morning, all we can do is cringe. Miller is setting himself up as the historical proxy for the mainstream disaster of the day.

“The current ‘bull market’, reasons Mr. Miller grasping at straws, is behaving ‘much more like the rally that ended the 1973-1974 bear market or the one that began off the bottom in 1982, or even that which erupted in March 2003 from the last debt deflation scare.’

“Banks, he believes, ‘have the biggest potential to outperform.’ Wells Fargo, Capital One and American Express are his favorite speculations. This guy will chase anything. In response, we’d like to announce our latest addition to the short watch-list: Wells Fargo, Capital One and American Express.”

Back to Bill, with more thoughts:

On page one of the Telegraph is another headline, which is almost sure to be correct.

“Your country needs YOU to work five years longer.” And accept big cuts in health and education spending. And pay more taxes.

There is no mystery to this news item. You don’t have to be a clairvoyant like Ben Bernanke to see that 1) living standards are certain to go down in England and America…and 2) governments will have to raise taxes and/or cut ‘services.’

We have put the word ‘services’ in quotes because we don’t you to get the wrong idea. Most government services are not services at all…but disservices.

Each year since the war, government budgets have gone up. Now, there are more people getting money from the government than there are taxpayers. And what do the taxpayers get for their money? Is the country really a better place than it was in the Eisenhower era? Are we better governed? Are we safer?

We are certainly better off in many ways…but all the ways we are better off are the result of technology and private innovation, usually in spite of government. A couple of inventions have made life much more agreeable. Air conditioning is a major boon to gracious living in the southern states. And the Internet – with free telephone service, via Skype – is another major boon.

And while we’re on the topic of technological innovations, we’d like to alert our dear readers that the DR has entered the social media realm, by way of Twitter. Historians, economists, and contrarian investors alike use Twitter to communicate current information throughout the day that you may not find in our daily columns.

You can sign up for a free account and follow us here.

Of course, there are many innovations that are probably net negative too. Television, for example. It’s brought entertainment and companionship to millions over the years. But it’s also expanded popular, brain dead culture and disseminated propaganda. People seem stupider today than they did when we were young…TV is probably largely to blame.

But returning to the feds…

This year, the U.S. stopped being the United States of America. Yesterday, it was reported that the states now get most of their money from the feds.

“He who pays the piper calls the tune,” is the old expression. The feds are paying the piper; the states have to dance to whatever tune they propose.

That’s the end of the federal system…the end of the system announced in the U.S. Constitution…which was a union of sovereign states. Now, it’s a fully centralized system…a popular democracy of the worse sort…in which celebrity hacks are elected and rule without any real shame or limit. Even Louis 14th, France’s Sun King…an absolute monarch…knew he was subject as well as monarch. He was God’s man on the throne of France. Now, America’s leaders answer to no one…except the mob of TV-addled voters.

The song the feds are singing is a song of higher taxes…more regulation…bigger government budgets…and huge new deficits. The War on Capitalism will cost trillions. The direct costs – and the indirect cost of a battered, shackled, tortured market system – will have to be paid somehow. The good news is that citizens will get fewer services from their government. The bad news is that governments will reduce services in the worst possible way – firing teachers, rather than educational bureaucrats…filling holes in bank balance sheets, but failing to fill the potholes in the roads…and so forth.

And more bad news is that they will raise taxes…

The good news is that you can protect yourself from the feds’ bad decisions. Think of it as your own ‘personal bailout’…since they certainly don’t have your best interests in mind. Get all the resources you need in our financial survival library.

Poor old Ireland. It’s been a terrible year on Erin’s Isle. The country that most benefited from the boom suffers more than others from the bust. That’s just the way it works. Property prices are in free fall. Unemployment is soaring. And now comes Mr. Obama, pulling the bog out from under the bog trotters.

Your editor operates a mini-multinational. Yes, we have offices all over the world – in Paris, London, Madrid, Buenos Aires, Johannesburg, Melbourne, Bombay…and Waterford, Ireland. That is why we spend so much time traveling…just trying to keep up with business.

We moved to Waterford to take advantage of the 12% corporate tax rate. You gotta be somewhere? Why not go somewhere where they don’t tax you so much?

In practice, this has not proven very important, because we never made enough money in Ireland for the tax rate to matter. Still, it was nice to know that if we ever did make any money in Ireland at least we wouldn’t have to give so much of it to the Irish government.

But along comes Obama’s anti-tax haven initiative…and poor old Ireland is even poorer. The American president proposes to do away with Ireland’s tax advantage altogether…at least as it applies to American firms, who are the main beneficiaries. In fact, he’ll penalize U.S. firms abroad. Not only will they pay local taxes…but they’ll pay U.S. taxes too!

Yes, our poor little micro-multinational will have to pay more taxes. And your poor editor too.

Dear reader…please do us a favor. Please write your congressman. Tell him to drop dead.

Until tomorrow,

The FDIC Needs More Good Hands

Bank failures won't wait on the bureaucracy.

L. WILLIAM SEIDMAN

Is the FDIC ready to handle the many critical new assignments handed to it by President Barack Obama?

To help rescue the financial system from its current mess, the FDIC's duties now include running the auction of toxic real-estate assets held by financial institutions, setting up a bigger guaranty program to leverage asset purchases, and operating a loan guaranty plan for banks.

Each of these activities requires intense negotiation with the private sector. Extensive information must be provided to buyers of assets, but such information is sometimes difficult to obtain (this is particularly true when complicated securitizations are to be sold). Further, the FDIC must negotiate with the banks to obtain assets, like mortgage-backed securities, to sell. An in-depth, internal control system must be in place since the potential for fraud is substantial. And a large number of private-sector service organizations must be hired since almost all the actual operations will be outsourced.

The Resolution Trust Corporation had to handle the assets from failed institutions when I ran it in the aftermath of the savings and loan crisis of 1985-92. The RTC experience provides a useful guide for what the FDIC has do to now.

The RTC had to hire several thousand new employees to handle a little over half the value of the legacy assets the FDIC is now handling. It also had to obtain exemption from normal government-hiring requirements to be able to put together a team on a timely basis. Since several hundreds of bank and S&L failures left so many unemployed, we had a large pool of qualified financial people from which to hire. Still, it took almost a year for the RTC to be staffed up.

The FDIC's very confident and competent Chairman Sheila Bair says the FDIC will be ready to handle its new duties. It's not there yet. Fortunately, it has Mitchell Glassman (currently head of FDIC resolutions), who was an important part of the RTC operation. His experience will be of great benefit.

While there is no doubt that the FDIC is going all out to prepare for its new duties, I believe the requirement for new personnel may be much larger than planned. The job requires many highly qualified people and, like the RTC, it needed them yesterday.

In January 2008 (around the time this financial crisis began), the FDIC had 4,810 employees, of which 223 were in property dispositions (the department which resolves distressed properties). It now has 5,381 employees, of which 636 work in resolutions. It is currently authorized to increase that to 800. So far, it has achieved this increase without getting a special exemption to the government-hiring rule. But the RTC needed several thousand people to dispose of assets with less property than the current financial crisis presents. Even if it is much more efficient than the RTC, it seems the FDIC is going to be substantially understaffed for a while.

What's more, the FDIC has to handle its regular duty of resolving bank failures. Most FDIC experts estimate that there will be a large increase in bank failures this year: between 100 and 500 additional failures, up from 25 failures last year. Bank failures, like the tides, wait for no man. When they happen the agency has to be ready.

With the right business plan and perhaps with government exemptions on hiring rules, the FDIC should be able to staff up to meet the challenge. But take it from someone whose been at least partially there: It isn't going to be easy. And it has to be done fast.

Mr. Seidman, former FDIC chairman and Resolution Trust Corporation chairman, is chief commentator at CNBC.

Obama and the 9/11 Families

The president isn't sincere about 'swift and certain' justice for terrorists.

DEBRA BURLINGAME

In February I was among a group of USS Cole and 9/11 victims' families who met with the president at the White House to discuss his policies regarding Guantanamo detainees. Although many of us strongly opposed Barack Obama's decision to close the detention center and suspend all military commissions, the families of the 17 sailors killed in the 2000 attack in Yemen were particularly outraged.

Getty Images

Barack Obama addresses CIA employees, April 20.

Over the years, the Cole families have seen justice abandoned by the Clinton administration and overshadowed by the need of the Bush administration to gather intelligence after 9/11. They have watched in frustration as the president of Yemen refused extradition for the Cole bombers.

Now, after more than eight years of waiting, Mr. Obama was stopping the trial of Abu Rahim al-Nashiri, the only individual to be held accountable for the bombing in a U.S. court. Patience finally gave out. The families were giving angry interviews, slamming the new president just days after he was sworn in.

The Obama team quickly put together a meeting at the White House to get the situation under control. Individuals representing "a diversity of views" were invited to attend and express their concerns.

On Feb. 6, the president arrived in the Roosevelt Room to a standing though subdued ovation from some 40 family members. With a White House photographer in his wake, Mr. Obama greeted family members one at a time and offered brief remarks that were full of platitudes ("you are the conscience of the country," "my highest duty as president is to protect the American people," "we will seek swift and certain justice"). Glossing over the legal complexities, he gave a vague summary of the detainee cases and why he chose to suspend them, focusing mostly on the need for speed and finality.

Many family members pressed for Guantanamo to remain open and for the military commissions to go forward. Mr. Obama allowed that the detention center had been unfairly confused with Abu Ghraib, but when asked why he wouldn't rehabilitate its image rather than shut it down, he silently shrugged. Next question.

Mr. Obama was urged to consult with prosecutors who have actually tried terrorism cases and warned that bringing unlawful combatants into the federal courts would mean giving our enemies classified intelligence -- as occurred in the cases of the al Qaeda cell that carried out the 1993 World Trade Center bombing and conspired to bomb New York City landmarks with ringleader Omar Abdel Rahman, the "Blind Sheikh." In the Rahman case, a list of 200 unindicted co-conspirators given to the defense -- they were entitled to information material to their defense -- was in Osama bin Laden's hands within hours. It told al Qaeda who among them was known to us, and who wasn't.

Mr. Obama responded flatly, "I'm the one who sees that intelligence. I don't want them to have it, either. We don't have to give it to them."

How could anyone be unhappy with such an answer? Or so churlish as to ask follow-up questions in such a forum? I and others were reassured, if cautiously so.

News reports described the meeting as a touching and powerful coming together of the president and these long-suffering families. Mr. Obama had won over even those who opposed his decision to close Gitmo by assuaging their fears that the review of some 245 current detainees would result in dangerous jihadists being set free. "I did not vote for the man, but the way he talks to you, you can't help but believe in him," said John Clodfelter to the New York Times. His son, Kenneth, was killed in the Cole bombing. "[Mr. Obama] left me with a very positive feeling that he's going to get this done right."

"This isn't goodbye," said the president, signing autographs and posing for pictures before leaving for his next appointment, "this is hello." His national security staff would have an open-door policy.

Believe . . . feel . . . hope.

We'd been had.

Binyam Mohamed -- the al Qaeda operative selected by Khalid Sheikh Mohammed (KSM) for a catastrophic post-9/11 attack with co-conspirator Jose Padilla -- was released 17 days later. In a follow-up conference call, the White House liaison to 9/11 and Cole families refused to answer questions about the circumstances surrounding the decision to repatriate Mohamed, including whether he would be freed in Great Britain.

The phrase "swift and certain justice" had been used by top presidential adviser David Axelrod in an interview prior to our meeting with the president. "Swift and certain justice" figured prominently in the White House press release issued before we had time to surrender our White House security passes. "At best, he manipulated the families," Kirk Lippold, commanding officer of the USS Cole at the time of the attack and the leader of the Cole families group, told me recently. "At worst, he misrepresented his true intentions."

Last week, Attorney General Eric Holder told German reporters that 30 detainees had been cleared for release. This includes 17 Chinese fundamentalist Muslims, the Uighurs, some of whom admit to having been trained in al Qaeda and Taliban camps and being associated with the East Turkistan Islamic Party. This party is led by Abdul Haq, who threatened attacks on the 2008 Olympics Games in Beijing and was recently added to the Treasury Department's terrorist list. The Obama administration is considering releasing the Uighurs on U.S. soil, and it has suggested that taxpayers may have to provide them with welfare support. In a Senate hearing yesterday, Mr. Holder sidestepped lawmakers' questions about releasing detainees into the U.S. who have received terrorist training.

What about the terrorists who may actually be tried? The Justice Department's recent plea agreement with Ali Saleh al-Marri should be of grave concern to those who believe the Obama administration will vigorously prosecute terrorists in the federal court system.

Al-Marri was sent to the U.S. on Sept. 10, 2001, by KSM to carry out cyanide bomb attacks. He pled guilty to one count of "material support," a charge reserved for facilitators rather than hard-core terrorists. He faces up to a 15-year sentence, but will be allowed to argue that the sentence should be satisfied by the seven years he has been in custody. This is the kind of thin "rule of law" victory that will invigorate rather than deter our enemies.

Given all the developments since our meeting with the president, it is now evident that his words to us bore no relation to his intended actions on national security policy and detainee issues. But the narrative about Mr. Obama's successful meeting with 9/11 and Cole families has been written, and the press has moved on.

The Obama team has established a pattern that should be plain for all to see. When controversy erupts or legitimate policy differences are presented by well-meaning people, send out the celebrity president to flatter and charm.

Most recently, Mr. Obama appeared at the CIA after demoralizing the agency with the declassification and release of memos containing sensitive information on CIA interrogations. He appealed to moral vanity by saying that fighting a war against fanatic barbarians "with one hand tied behind your back" is being on "the better side of history," even though innocent lives are put at risk. He promised the assembled staff and analysts that if they keep applying themselves, they won't be personally marked for career-destroying sanctions or criminal prosecutions, even as disbelieving counterterrorism professionals -- the field operatives and their foreign partners -- shut down critical operations for fear of public disclosure and political retribution in the never-ending Beltway soap opera called Capitol Hill.

It worked: On television, his speech looked like a campaign rally, with people jumping up and down, cheering. Meanwhile, the media have moved on, even as they continue to recklessly and irresponsibly use the word "torture" in their stories.

I asked Cmdr. Kirk Lippold why some of the Cole families declined the invitation to meet with Barack Obama at the White House.

"They saw it for what it was."

Ms. Burlingame, a former attorney and a director of the National September 11 Memorial Foundation, is the sister of Charles F. "Chic" Burlingame III, the pilot of American Airlines flight 77, which was crashed into the Pentagon on Sept. 11, 2001.

Stressed for Success?

At the Hotel Geithner, you can check in, but . . .

The Treasury released its bank "stress test" results late yesterday, and the good news is that the financial system has survived this very public undressing better than most analysts figured three months ago. We'd attribute the results much more to Adam Smith's continuing workout than to this public strip-tease, but we'll take relief wherever we can get it.

Stress-testing is what banks and their regulators are supposed to do as a matter of course, albeit more quietly. The current very loud and public effort was advertised to provide an extraordinary measure of transparency at a time when no one trusted bank books. Do markets trust them any better now? Judging by the run-up in bank stock prices from their oversold levels in January, they do. This is progress.

On the other hand, all we really have to go on is the word of the federal employees who looked at the banks and estimated their losses against certain economic assumptions. Did they go easier than they might have, and how much did they bend when the banks fought back? The Fed's overview yesterday claimed they ran a "deliberately stringent test" and pegged potential "adverse"-case losses at the 19 largest banks at $600 billion this year and next.

Yet markets are also full of reports that regulators showed more than a little forbearance, especially after it became clear that President Obama had no desire to go back to Congress to ask for more public money. With only $110 billion or so in Troubled Asset Relief Program (TARP) funds left uncommitted, it's probably no coincidence that Treasury now sees new net bank capital needs as a manageable $75 billion.

And maybe that optimism will prove correct. Most banks are earning healthy profits again, thanks to a low cost of funds and steep yield curve. They're also taking steps to burn bad debt and clean up their balance sheets. Some banks that got too big during the boom are looking to sell some of their operations in order to raise cash. This is how a financial system shapes itself up under the market pressure of recession, with or without stress tests.

Not that there still aren't plenty of financial risks out there. On the credit side, commercial real estate is ugly and both home mortgage and credit card losses are a long way from receding. While the economy seems to be bottoming out at last, unemployment will keep rising for several months, which will mean more bank losses.

But our biggest question concerns interest-rate risk. Thanks to the Federal Reserve's emergency easing, short-term rates are close to zero. That can't last forever, and the longer the Fed keeps rates this low the more likely it is that rates will have to climb higher down the road to prevent inflation. Remember how the Fed's 1% rate of 2003-2004 rose to 5.25% by 2006 and what that did to housing prices and the cost of bank funds? Yet the Fed didn't disclose the interest-rate projections for 2010 and beyond that it built into its stress test models.

On the interest-rate point, by the way, one omen was yesterday's terrible 30-year Treasury bond auction. Treasury sold $14 billion of the securities, but investors demanded yields in mid-auction that were higher than forecast and bond prices fell the most since February. The 30-year yield hit 4.3%. With trillions of dollars in budget deficits still in the pipeline -- even before health care -- Treasury may find the world keeps demanding higher yields to offset the fear of potential inflation. Fed Chairman Ben Bernanke didn't help on that score this week when he told Congress that it was too early to take liquidity out of the financial system because the economy was still too weak. By the time the economy is growing, it will be too late. Think 2004, again.

In the wake of the stress tests, the weaker banks will now have six months to raise private capital to fill the hole identified by Treasury. They'll be desperate to do so, because the alternative is that Treasury will force them to accept more public capital. This will include the conversion of Treasury's preferred stock, bought last year via the TARP, into common shares.

Under accounting rules, this gives the banks more "tangible common equity," the measure of capital favored by Treasury. Yet it provides not a penny more in actual capital to absorb losses. Meantime, the feds would suddenly own big chunks of those banks via common stock, the way they now are the largest shareholder in once-proud Citigroup. We've called this a back-door nationalization, and it means Congress looking over banker shoulders. The silver lining is that bank executives are now so appalled by this idea that they'll sell anything that moves to avoid such a fate.

As for the "stronger" banks, a major goal will be to flee as fast as possible from the TARP, also known as the Hotel Geithner. Banks can check in but it's a lot harder to check out. Treasury has set up major hurdles before a bank can escape, even if it wants to. Clearly banks at risk of failing can't be allowed to endanger the larger financial system, but banks that have adequate capital shouldn't be held hostage to the political worries of regulators.

The best that can be said about the stress tests is that they're over. Now the most urgent task is to get back to a financial system free of government guarantees, public capital and political control.

No Need to Stress Over Bank Stress Tests

Fed Sees Up to $599 Billion in Bank Losses

Ten Firms Must Boost Capital by $75 Billion to Cope With Worst-Case Scenario; Some Shares Up on Hopes Worst Is Past

DAVID ENRICH ROBIN SIDEL DEBORAH SOLOMON

The federal government projected that 19 of the nation's biggest banks could suffer losses of up to $599 billion through the end of next year if the economy does worse than expected and ordered 10 of them to raise a combined $74.6 billion in capital to cushion themselves.

The government's much-anticipated stress-test results unleashed a scramble by the weakest banks to find money and a push by the strongest ones to escape the government shadow of taxpayer-funded rescues.

Interactives: Compare Banks Tested

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Bank by Bank Findings

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More interactive graphics and photos

Thursday's announcement by the Federal Reserve offered a gloomy, worst-case-scenario projection of $599.2 billion in losses through the end of next year. Included in the tally are mortgages, commercial loans, securities and other assets held by the stress-tested banks, ranging from giants Bank of America Corp. and Citigroup Inc. to regional institutions such as SunTrust Banks Inc. and Fifth Third Bancorp. That estimate is based on economic assumptions that are worse than anticipated by many economists.

Treasury Secretary Timothy Geithner said Thursday that he is "reasonably confident" that banks will be able to plug the capital holes through private infusions, alleviating the need for Washington to further enmesh itself in the banking system.

The information provided by the stress tests will "make it easier for banks to raise new equity from private sources," Mr. Geithner said.

Some of the banks told to add capital immediately raced to accomplish that by tapping public markets. On Thursday, Wells Fargo & Co., which the Fed said needed to raise $13.7 billion, laid plans for a $6 billion common-stock offering. Morgan Stanley, facing a $1.8 billion deficit, said it will sell $2 billion of stock and $3 billion of debt that isn't guaranteed by the U.S. government.

If successful, the offerings "should be a meaningful step in restoring a modicum of confidence to the banks," said David A. Havens, a managing director at Hexagon Securities. "It indicates that even the big messy banks are able to attract private capital."

Shares of more than a dozen stress-tested banks rose in after-hours trading as the government's announcement soothed jitters about the industry's immediate capital needs. Bank of America shares climbed 3.6% to $13.99, while Citigroup was up 6.3% to $4.05. Fifth Third jumped 19% to $6.35. SunTrust fell 2.5% to $18.05, and Wells Fargo slipped 0.9% to $24.54.

About half of the stress-tested banks -- ranging from giants like J.P. Morgan Chase & Co. to Wall Street's Goldman Sachs Group Inc. to regional lender BB&T Corp. -- have adequate capital. That finding essentially represents a seal of approval from the Fed.

The other half need to raise anywhere from about $600 million for PNC Financial Services Group Inc. to $33.9 billion for Bank of America. In between are several other regional lenders: Fifth Third, which needs to raise $1.1 billion; KeyCorp, $1.8 billion; Regions Financial Corp., $2.5 billion; and SunTrust, $2.2 billion.

Stress Test: Complete Coverage

Question of the Day

Do the stress test results paint an accurate picture of the financial industry? Weigh in at WSJ.com/Community

Experts warn that the tests could have a serious unintended consequence: Loans could be harder to come by for consumers and businesses. That's because the government's intense focus on thicker capital cushions might prompt banks to hoard cash and further curtail lending, said Jim Eckenrode, banking research executive at TowerGroup. He said banks will have less room to offer consumers low interest rates, while corporate customers may have a tougher time getting financing for commercial real-estate and property development.

That would undercut a key goal of the Obama administration, which has been pushing banks to lend more in order to jump-start the economy.

The test results were vigorously contested by some banks, which argued they were superficial and didn't reflect significant differences in the health of various banks' loan portfolios.

In a news release Thursday, Regions publicly criticized the testing process. The Birmingham, Ala., bank said the Fed's loss assumptions were "unrealistically high." Regions said it "questions whether it should be required to raise additional capital now to provide for a two-year adverse economic scenario," given recent hints that the economy may have hit bottom.

With the tests complete, Washington's effort to clean up the banking system now shifts into a new, potentially messy phase.

While most of the banks that need capital are likely to be able to find it, analysts and bankers say a few others are likely to end up being largely owned by the U.S. government due to their inability to raise capital from private investors.

Meanwhile, the tests don't address a sea of problems confronting many midsized and smaller banks.

Federal officials have repeatedly vowed to support the 19 banks, which essentially have been labeled too big to fail. Those reassurances have propelled the companies' shares to their highest levels in months. The White House, Treasury Department and Fed hope that by restoring confidence in the industry, private investors will help troubled banks shore up their finances, eliminating the need for taxpayer-financed rescues.

There are some encouraging signs. In recent weeks, a handful of healthy banks -- ranging from giants like Goldman Sachs to Denver's 34-branch Guaranty Bancorp -- recently have raised money by selling stock in public offerings. That represents a seismic shift from earlier this year, when many investors refused to touch any bank stocks.

Some Fed-blessed banks are likely to pursue public equity or debt offerings to flex their financial muscles and help pay back the funds that the government invested in them.

State Street Corp. Chairman and Chief Executive Ronald E. Logue said the government's conclusion that the Boston company needs no additional capital puts it "in a position to consider repayment of the TARP preferred stock and warrants under the appropriate circumstances."

State Street, one of the largest managers of index funds, got a $2 billion taxpayer-funded infusion under the Troubled Asset Relief Program, or TARP. On Wednesday, The Wall Street Journal incorrectly reported that State Street had been told to come up with more capital.

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Treasury Secretary Timothy Geithner, center, flanked by Comptroller of the Currency John Dugan, left, and Federal Reserve Chairman Ben Bernanke, gather in Geithner's office at the Treasury Department in Washington, Thursday, May 7, 2009, prior to meeting with reporters to discuss ongoing repairs to the economy. (AP Photo/J. Scott Applewhite)

Associated Press

Comptroller of the Currency John Dugan, left, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke gathered in Geithner's office at Treasury on Thursday.

"What we're starting to hear from investors is a view that these companies were oversold and, although things are bad, they're not as bad as was baked into the assumptions," said Brian Sterling, co-head of investment banking at Sandler O'Neill & Partners in New York.

But bankers acknowledge that investors' appetites are limited. Investors say not enough private funds are available to fill the big banks' financial holes.

"I think there is some demand in the market to raise a certain amount, but whether you could find $60 billion of capital in the next couple of months is highly unlikely," said Joshua Siegel, managing principal at StoneCastle Partners LLC, a New York firm that invests in small banks. One reason, Mr. Siegel said, is that investors continue to harbor doubts about whether the stress tests reliably measured the industry's problems. A Deutsche Bank survey of investors week found that most think banks such as Fifth Third and Regions won't be able to raise money from private investors. The same sentiment holds for slightly smaller banks, like Huntington Banschares Inc. and Marshall & Ilsley Corp., which weren't subjected to the stress tests.

Banks that can't coax private investors have some other options. They can sell assets or business lines, a strategy already underway at Bank of America and Citigroup, among others. They can push investors to swap so-called preferred shares for common stock, padding a key measure of capital known as tangible common equity.

But bankers and analysts say that at least a few lenders are in a vise. Too weak to lure investors, and lacking a large pool of privately-held preferred stock, these banks likely will have to turn to Washington for help. Fifth Third and Regions both said in statements Thursday that they hope to raise private funds.

The 19 tested banks, which all have at least $100 billion in assets, accounted for most of the industry's total loans. But the companies represent a sliver of the roughly 8,000 banks nationwide.

Among that vast field, many banks -- ranging from large regional institutions to tiny community lenders -- are holding huge portfolios of rapidly souring loans. Unlike their larger rivals, these banks lack the diverse income streams to overcome the brutal operating environment.

Analysts at RBC Capital Markets estimate that 60% of the top 100 U.S. banks that weren't included in the stress tests would need to raise new capital based on the Fed's loss assumptions.

Friday, May 8, 2009