US Medicaid and Medicare Programs

In this era of rapidly rising medical, pharmaceutical and insurance costs, the American people and Congress are talking a lot about Medicare. Medicare is the federally-funded medical plan for Americans age 65 and over that covers medical expenses such as doctor's visits, hospital stays, drugs and other treatment. The need for a medical program for senior citizens became evident in the 1950s, but it was not until 1965 that Congress passed the laws that established Medicare. The law was amended in 1972 to include people with disabilities and end-stage renal disease. Medicaid was established in 1965, at the same time as Medicare, under Title XIX of the Social Security Act. It was designed to assist low-income families in providing health care for themselves and their children. It also covers certain individuals who fall below the federal poverty level. It covers hospital and doctor's visits, prenatal care, emergency room visits, drugs and other treatments.

Lower oil pirce and tight credit hurt Solar firm

Suntech, world's largest photovoltaic (PV) module manufacturer, price dropped all the war downard as oil price did. Two factors: oil price spured teh price of silicon prices; tight credit. "Due to the rapid decline in silicon prices and difficult financing environment, Suntech expects to incur an expense related to the impairment of Suntech's investments in Nitol Solar and Hoku Materials. The total value of the investment impairment is expected to be in the range of approximately $49 million to $52 million." Suntech also offers one of the broadest ranges of building-integrated solar products under the MSK Solar Design Line(TM). Suntech designs and delivers commercial and utility scale solar power systems through its wholly owned subsidiaries Suntech Energy Solutions and Suntech Energy Engineering and will own and operate projects greater than 10 megawatts in the United States through Gemini Solar Development Company, a joint venture with MMA Renewable Ventures. With regional headquarters in China, Switzerland and San Francisco and sales offices worldwide, Suntech is passionate about improving the environment we live in and dedicated to developing advanced solar solutions that enable sustainable development. For more information, please visit http://www.suntech-power.com . In 2007, we generated approximately 50.9% of our revenues from Germany, 34.6% from Spain, 6.4% from the United States and the remaining 8.1% from China and the rest of the world. We believe we were the largest module supplier in Spain and the second largest in Germany in 2007.

FDIC Poised to Double Fees Charged to Lenders Article

By DAMIAN PALETTA WASHINGTON -- Federal regulators are expected to raise the fees that they charge banks by more than double in an effort to replenish the government's deposit-insurance fund, said people familiar with the matter. The move represents a clash of two competing interests. It would protect consumers by bolstering the fund that insures their deposits in the event of a bank failure. At the same time, some government officials worry that banks are too fragile to shoulder the additional cost. Banking officials have said the Federal Deposit Insurance Corp. should explore other avenues to replenish the fund, something the agency has resisted. Sheila Bair "It's a value and, unfortunately, we're going to have to charge more for it," FDIC Chairman Sheila Bair told reporters Thursday. She declined to comment on the specific level of the fee increase. The FDIC had $18.8 billion in its deposit-insurance fund at the end of the fourth quarter to protect about $4.8 trillion in insured deposits at U.S. banks. This is the lowest insurance level since the savings-and-loan crisis, FDIC officials said. Fourteen banks have failed this year so far, bringing the total to 35 since July. The FDIC is required by law to launch a plan to restore the fund any time it dips below 1.15% of insured deposits. It was at 0.4% of insured deposits at the end of the fourth quarter. The fund is entirely financed by fees levied on banks. Some bankers and analysts have said the FDIC should instead tap an existing credit line it has with the Treasury Department and wait several years before raising fees. "They've got to wait to do it if they have any hope of getting banks' stocks in the right direction," said James Abbott, a senior analyst with FBR Capital Markets. "Banks can't afford to take it in 2009. They can't really afford to take it in 2010." Additional Details Get full details on U.S. bank failures since the start of 2008.Banks and thrifts were hit with big premium increases in the 1990s, but those took place after the savings-and-loan crisis when banks had mostly regained their footing. The FDIC's five-member board is expected to vote Friday to temporarily raise the bank fees, a move that could bring in more than $14 billion a year into its deposit-insurance fund, people familiar with the plans said. This would be on top of the roughly $10 billion the FDIC brings in annually from its regular assessments. Ms. Bair has said for months that she would prefer not to tap the Treasury line, and FDIC officials said there are no plans to take that step now. Banks typically pay the government between 12 cents and 14 cents for every $100 of insured deposits, though unhealthy banks can pay much more. The government is considering an additional 20-cent charge for every $100 insured, people familiar with the matter said. The figure still was being debated late Thursday and could change before Friday's vote. "Clearly it's going to pull capital from banks at a time when they need capital," said Keith Leggett, a senior economist at the American Bankers Association. "I think it really requires the FDIC to have the judgment of Solomon here." The banking industry lost $26.2 billion in the fourth quarter of 2008, the FDIC said, the first quarterly loss in 18 years. At the end of the fourth quarter, there were 252 banks and thrifts on the government's "problem list," a tally of banks that are at a higher risk of failure. That is up from 171 at the end of the third quarter. The FDIC doesn't release the names of the banks on its "problem list." It said the companies had combined assets of $159 billion, up from $116 billion at the end of September. About one in four banks was unprofitable in 2008, the highest level in 25 years. "There is no question that this is one of the most difficult periods we have encountered during the FDIC's 75 years of operations," Ms. Bair said. The slew of recent bank failures has put strains on the deposit-insurance fund, although not all collapsed banks are equally costly. The FDIC estimated that the failure of Silver Falls Bank in Oregon on Feb. 20 cost its fund $50 million, while it said the failure of IndyMac Bank in July cost $10.7 billion. The number of bank failures in the last two years is still much lower than the 534 banks that failed in 1989. Still, some analysts have predicted that as many as 1,000 banks could fail over the next three to five years because of losses on real-estate-related loans. The failure of Washington Mutual Inc. last year was the biggest bank failure in U.S. history. Washington Mutual had $307 billion of assets when it failed Sept. 25. The government has taken a number of steps to protect the banking industry in the past six months, with the FDIC taking on hundreds of billions of dollars in additional risks. The FDIC now backs most accounts up to $250,000. Some business accounts have unlimited deposit insurance. The Obama administration has signaled that it won't let any more large banks fail. The Treasury Department launched a series of tests this week at the country's 19 largest banks to determine if they need more capital to continue lending. Write to Damian Paletta at damian.paletta@wsj.com

Health Care Gets a Shock Treatment

By JOHN JANNARONE Fear of nationalization is a fair rationale for abandoning stocks. But investors appear to have overreacted in dumping health-insurance shares. The likes of Aetna and UnitedHealth Group have fallen over 20% in the past week, with the bulk of that coming Thursday after President Barack Obama's budget was disclosed. The obvious culprit for the wreckage was a move to cut prices for lucrative Medicare Advantage plans administered by health insurers. Those services are easy targets, with fees set by the government. The plan aims to save $177 billion by switching to a competitive bidding process. The program accounts for 10% of Aetna's profit and 15% of UnitedHealth's, according to Citigroup. Even in the unlikely event that the plan destroys all their profits from the program, the share-price reaction is excessive. Most of their business relates to private-sector health plans. Those could even benefit from broad moves to expand coverage. The real fear is creeping nationalization, or at least uncertainty over how rules for private plans will shake out. But while details of Mr. Obama's plan remain a mystery, talk of a free-market bidding process hardly smacks of full government control. Aetna is trading at 6.3 times this year's expected earnings, and UnitedHealth is trading at a multiple of 6.2. Shares of insurers with heavy dependence on Medicare Advantage have suffered the most. HealthSpring's shares are down almost 50% this week, leaving it with a price-to-earnings ratio of 3.6. But while HealthSpring's business might become truly sick, Aetna and UnitedHealth still offer investors some room for recovery. Write to John Jannarone at john.jannarone@wsj.com

Moody's Raises Estimate for Subprime Losses

Moody's Investors Service on Thursday raised its loss estimates for $680 billion in U.S. subprime residential mortgage-backed securities issued from 2005 to 2007 and put them on risk for possible downgrade, the latest hit to the ailing financial system. Moody's put 7,942 tranches of subprime RMBS on review for possible downgrade. It said the revised loss projection for 2006-vintage RMBS will be 28% to 32% of the original balance of the securities, up from its prior estimate of 22%. For 2005 RMBS Moody's expects losses from 12% to 14% of the original balance, and for 2007 it sees losses of 33% to 37%. The company didn't note what its prior estimates for those years were. Moody's said Thursday 42% of outstanding 2006-vintage subprime loans are at least 60 days delinquent, in foreclosure or held for sale. Without intervention, it said, nearly all of those loans will eventually default. It said an additional 22% of current nondelinquent loans would default after this year. When added to the defaults expected from existing delinquencies and those expected by year's end, Moody's expects a total default rate on existing subprime loans to reach 72% for 2006-vintage loans. —Kerry E. Grace

A credible budget?

ON THURSDAY Barack Obama unveiled a draft budget that promises to cut the deficit from a vast $1.75 trillion in fiscal 2009 (which ends this September) to $533 billion in 2013, when his first term ends. As a share of GDP, the draft has the deficit falling from this year’s post-war high of 12% to just 3%. Is that promise credible? At a minimum, Mr Obama seems more fiscally honest than George Bush, whose accounting gimmicks vied with Enron’s. Mr Bush’s budgets routinely excluded unavoidable outlays, such as those for wars and natural disasters, incorporated tax increases and spending trims that he knew would never occur, and masked his policies’ impact on the deficit by shortening the forecast horizon to five years from ten. Mr Obama puts most of the missing items back in the budget, and restores its horizon to ten years. However, he undoes some of this laudable clarity with a rosy economic forecast. To boost revenue, Mr Obama will let Mr Bush’s 2001 tax cuts for the 2% of richest Americans (typically those earning more than $250,000) expire as scheduled at the end of 2010. Many popular tax deductions, such as those for local taxes, mortgage interest and charitable gifts, will be limited for the rich. A yet-to-be-designed cap-and-trade programme for carbon emissions will raise additional revenue starting in 2012. To curb spending, Mr Obama promises to remove most American troops from Iraq before the end of 2010, reduce payments to privately managed Medicare plans and farmers and find other savings. Mr Obama told Congress in will have to sacrifice some worthyhis address on the 24th that “everyone priorities for which there are no dollars. And that includes me.” Yet the evidence of such sacrifice remains scarce. He appears to earmark his tax increases and spending cuts mostly to pay for his long-standing priorities: making permanent the worker tax credit in the fiscal-stimulus plan; expanding public subsidies to reduce the number of those without health insurance (though no details have been provided) more money for parents, students, the disabled and the unemployed; investment in alternative energy; and extra deployments to Afghanistan. And he suggested that he will need more money to bail out banks than the $700 billion already authorised. A $250 billion facility is being set aside for this, one reason why this year’s deficit is so huge. Most of Mr Obama’s targeted deficit-reduction comes not from his own actions, but from the expiry of the stimulus, a halt to bail-outs, and the natural restoration of tax revenue as the economy pulls out of recession, growing by a robust 4% on average from 2010 through to 2013. And therein lies the biggest threat to the president’s plans. Mr Obama’s forecast is already more optimistic than the private sector consensus was in January, and that consensus has since become more pessimistic. Ben Bernanke, the Federal Reserve chairman, said this week that the recession would end this year only if the financial system stabilises, which so far it has not. A longer recession or long-term stagnation pose two distinct fiscal risks. First, Mr Obama will be (rightly) reluctant to raise taxes, and tempted to extend parts of the stimulus package if unemployment is not dropping by 2010. Premature fiscal tightening, after all, could lengthen the recession, as Japan learned in the 1990s. Second, a longer recession makes it harder for America to grow out burden as it, and other countries, have done at previous debtof its debt peaks. Because of stagnating output and declining prices, Japan’s nominal GDP in 2005 was smaller than in 1996, contributing mightily to a climb in that country’s net debt from 29% of GDP to 85% (it will reach 98% this year). One worrying parallel for America is that its nominal GDP will probably decline this year for the first time since 1949 (the administration optimistically sees it creeping up by 0.1%) So Mr Obama’s 3% deficit target may be much harder to reach than he thinks; and it may not be tough enough anyway. Using reasonable policy assumptions, Alan Auerbach of the University of California at Berkeley, and William Gale of the Brookings Institution, think the deficit will bottom out near 5% of GDP in 2013 then climb to almost 6% by 2019, while debt continues to rise as a share of GDP. That is before the government has to deal with the full impact of the surge in health and pension entitlement costs. The academics reckon higher taxes or lower spending equal to a staggering 8% of GDP a year are necessary to contain those costs and stabilise the long-run debt. Despite his inspiring rhetoric, Mr Obama’s plans for dealing with those long-term obligations have been frustratingly vague. He called on Americans to “address the crushing cost of health care” but proposes to spend many billions more, not less. He reportedly abandoned support for a commission to restore solvency to Social Security, the public-pension system, because congressional Democrats objected to this loss of their authority. He had a golden opportunity to introduce the idea of the rich and carbon-emitters paying higher taxes as part of a broad reform of a monstrously inefficient tax system, and so make the economy more productive. He passed it up. In fairness, these are early days in his presidency, and stabilising the economy needs to be his priority. The summit and the speech to Congress were just part of the essential process of softening up the public for the long, contentious chore of fixing entitlements and the tax system. It was also an opportunity for Mr Obama to counter the pervasive economic gloom that he himself engendered with his warnings of “catastrophe” if his stimulus plan was not passed. With the rhetorical flair for which he is famous, he asserted that Americans would triumph because “amid the most difficult circumstances”—his voice briefly descending to a warm and coaxing growl—“there is a generosity, a resilience, a decency”. As if to prove his point, legislators gave one of their longest ovations to Leonard Abess, a Miami banker in attendance who sold most of his bank for $927 million and gave $60 million of the proceeds to 471 current and past employees. Even amid the gloom, there are occasional flashes of light.

An new era of responsibility - 2009 Budget

http://www.whitehouse.gov/omb/assets/fy2010_new_era/A_New_Era_of_Responsibility2.pdf

Recovery Rates Sink for Loans Tied to Defaults

By KATE HAYWOOD Loan investors are waking up to the harsh reality that they could end up with much less than they had bargained for. Recovery rates on leveraged loans, a type of debt used by many companies during the credit boom to fund buyouts, indicated in recent bankruptcies have been less than 25%, well below the historical average of more than 80%. The reason: The expected rapid-fire failure of companies with high debt loads and shrinking revenues, and a significant shift in borrowing behavior during the credit boom this decade. When a company defaults, creditors that hold loans secured with assets are at the front of the line of those clamoring to be paid back. Their claims on assets are stronger than those of unsecured bondholders and equity investors, who often are wiped out. During the past 20 years, this top-ranking position has enabled loan investors to recover an average of 81%, or 81 cents on the dollar, in default situations, compared with 29% for the lowest tiers of debt, according to Moody's Investors Service. But accelerating ratings downgrades and corporate defaults spell much lower recovery rates for what had been considered the safer debt in this $2.4 trillion market. "There is a growing awareness that the default rate will go up much quicker than expected," said Mark Pibl, managing director at NewOak Capital in New York. Rather than defaults rising progressively over a two- or three-year period, Mr. Pibl said, many market participants now believe the increase will be "front loaded." "We are now in a tail-risk scenario looking at a cluster of defaults occurring at the same time," Mr. Pibl said. The problem is that the majority of leveraged financings relied disproportionately on loans, rather than unsecured bonds, to fund acquisitions. This has reduced (and in some cases eliminated) the traditional cushion of subordinated debt such as junk bonds that would absorb losses first. Indeed, according to Moody's, about 60% of all U.S. issuers that have rated loans, and one-third of all U.S. speculative-grade issuers, have a loan-only capital structure. Things could be far worse for holders of some second-lien loans, which are junior to senior secured first-lien loans. As such, holders of these securities stand behind more-senior lenders in terms of their rights to collect proceeds from the debt's underlying collateral.

$318 Billion Tax Hit Proposed

By LAURA MECKLER WASHINGTON -- President Barack Obama on Thursday will propose $634 billion in new taxes on upper-income Americans and cuts in government spending over the next decade to pay for his promised health-care expansion. The tax increases and spending cuts will be included Thursday in Mr. Obama's comprehensive budget blueprint, and signal his ambition to overhaul the health-care system, one of the main planks of his presidential campaign. The tax increases would raise an estimated $318 billion over 10 years by reducing the value of such longstanding deductions as mortgage interest and charitable contributions for people in the highest tax brackets. Households paying income taxes at the 33% and 35% rates can currently claim deductions at those rates. Under the Obama proposal, they could deduct only 28% of the value of those payments. The changes would be phased in gradually over the next few years. For the 2009 tax year, the 33% tax bracket starts with couples with taxable earnings of $208,850, when adjusted for personal exemptions and various deductible expenses. A taxpayer in the top bracket paying $1,000 of mortgage interest, for example, would see a tax break worth $350 reduced to $280. During his presidential campaign, Mr. Obama promised not to raise taxes on families earning under $250,000 a year, and the administration said that this plan would roughly line up with that limit. The plan targets high-earning families in other ways. Wealthier Medicare beneficiaries would have to pay higher premiums to participate in the prescription-drug plan, much like they pay higher premiums to participate in Medicare's doctor plan. Aiding the other end of the income scale, the president's budget plan would extend his tax cuts for the middle class and working poor with some of the billions of dollars raised by the sale of new carbon-emission permits for renewable energy projects. The "cap and trade" program to battle global warming would force companies to buy permits if they wish to emit heat-trapping pollutants, and they would be auctioned to businesses beginning in 2012. The cuts in health-care spending would affect managed-care companies, prescription-drug manufacturers and hospitals, according to a senior administration official. Lobbyists representing these industries reacted mildly Wednesday, emphasizing their interest in seeing health-care reform succeed -- a sign of the momentum already built behind the effort. "We will be a constructive participant in efforts to reform all parts of Medicare," said Robert Zirkelbach, spokesman for America's Health Insurance Plans, a lobby group. The administration acknowledges $634 billion is not enough to pay the full cost of health-care reform that Mr. Obama and many congressional Democrats envision; the final price tag is estimated at more than $1 trillion over 10 years. The senior official who previewed the health plan Wednesday said the budget proposal is intended as a down payment and said the administration would work with Congress to find the rest. The budget will contain few details about how Mr. Obama wants to spend the money. He campaigned on a plan to set up a government-organized marketplace where people and businesses could buy coverage from private insurers and a new government-run health plan. The administration will release only general guidelines Thursday. Among them: Americans should have a choice of health plans and be allowed to keep their employer-sponsored plan if they wish to. It also says the plan should "put the United States on a clear path to cover all Americans." More details are expected next week at a White House summit on health care. The budget blueprint focuses on where the money will come from to pay for it all -- half from savings to the health-care system and half from the tax increase. One concern certain to get attention in Congress: whether a change to the deductions formula would discourage charitable giving among the wealthy, or further depress the housing market given that the interest deduction would fall for some. The biggest chunk of savings in the budget proposal, estimated at $177 billion over 10 years, would come from changing the pay structure for private managed-care plans that participate in Medicare. Under current law, payments for Medicare Advantage plans are set by a formula, and the result is that private companies are paid, on average, 14% more to care for a Medicare patient than the government would normally spend through the traditional Medicare plan. The Obama plan would have private plans bid to offer coverage in geographic areas; they would be paid based on an average of the bids. The administration estimates the result would be lower average costs. Budget Stepping Stones See the steps by which the federal budget will be finalized in the coming months. Many of the initiatives are also aimed at improving quality, by linking the payments to hospitals and doctors with the quality of care they provide. The changes being proposed for hospitals would create one bundled Medicare payment to cover both a hospital stay and care for the patient for 30 days after release, a change estimated to save $17 billion over 10 years. The administration is also proposing to cut payments for hospitals that routinely readmit patients after they have been discharged, a sign that the original care was substandard. That change would save $8.4 billion over 10 years. Mr. Obama's budget proposal signals he is serious about fulfilling his pledge to enact comprehensive health-care legislation this year, a promise he repeated Tuesday during his address to Congress. It is also a sign he plans to turn aggressively to the ambitious domestic policy agenda he laid out during the presidential campaign -- an agenda curtailed during his first weeks in office by the financial crisis. Mr. Obama and his aides spent Wednesday putting the finishing touches on the budget blueprint, kicking off the process of rewriting the rules for financial regulation and initiating so-called stress tests to gauge the viability of the country's tottering banks. The budget plan will go through a rigorous congressional review before it becomes law. But, particularly in the first year of a presidency, the budget document is significant as a broad statement about the new administration's agenda. The budget document will also include an energy plan aimed at controlling carbon emissions, new funding for preschool and higher education, as well as an outline for narrowing a federal deficit that now tops $1 trillion. Mr. Obama's 10-year blueprint is also expected to contain a large number of tax increases, in addition to the one proposed to cover health care. It will mark a sharp shift from the budgets proposed by President George W. Bush, with sharply reduced tax rates across the board. Mr. Obama will propose letting Mr. Bush's tax cuts on upper-income families expire in 2011, and will propose blocking the estate tax from disappearing as scheduled under current law. He'll also propose a number of taxes on companies, one aimed at blocking companies from moving jobs overseas and others that the administration will portray as "closing loopholes." Write to Laura Meckler at laura.meckler@wsj.com

Curse of the Zombie Banks Haunts Fed

The Federal Reserve's lending programs have saved the financial system's life. They also could be making its life miserable. That is one takeaway from a research paper by Douglas Diamond and Raghuram Rajan of the University of Chicago, published online this week by the National Bureau of Economic Research. As fresh data from the Fed will show Thursday, the central bank's balance sheet has more than doubled since August 2007. Some Fed programs have helped loosen the credit logjam, including the Term Securities Lending Facility, which lets banks borrow money using mortgage-backed securities and other hard-to-sell assets as collateral. Bloomberg News Ben Bernanke, chairman of the U.S. Federal Reserve, speaks to the House Financial Services Committee in Washington, D.C., U.S., on Wednesday, Feb. 25, 2009. Bernanke spurned outright federal control of U.S. banks in favor of a public-private partnership that the government would eventually exit. But the Fed also might have kept alive weak banks and other institutions having balance sheets stuffed with toxic assets, the two professors suggest. The weak are afraid to sell such assets because doing so would wipe them out, while strong institutions don't want to buy because they are holding out for a fire sale. Without a lifeline from the Fed, the weaklings could have died, putting the assets in stronger hands at cheaper prices. "Central bank intervention to lend against all manner of collateral may not be an unmitigated blessing," Messrs. Diamond and Rajan wrote. The consumer-loan-focused Term Asset-Backed Securities Loan Facility, which will roll out "very soon," Fed Chairman Ben Bernanke said Wednesday, could raise similar problems if consumer credit quality keeps withering. Of course, doing nothing to help credit would have been catastrophic. But "zombie" banks are a reminder that clearing one logjam can make another one even worse.

A brighter future, but who pays?

Feb 25th 2009 WASHINGTON, DC From Economist.com Barack Obama, in his address to Congress, asks for sacrifice but skips the details AP AS A new president, Barack Obama’s first speech to Congress was not, officially, a state-of-the-union address. That was just as well: its current state is awfully precarious. On Tuesday February 24th, a few hours before he spoke to the Senate and House of Representatives, a survey reported that consumers’ confidence in the future was at its lowest in 40 years of polling. Mr Obama did not sugar-coat matters. The economic crisis “is the source of sleepless nights,” he said. His budget, to be delivered on Thursday, “reflects the stark reality of what we’ve inherited—a trillion dollar deficit, a financial crisis and a costly recession.” He promised that beyond this grim present lies a brighter future of plug-in hybrid-energy cars, wind- and solar-powered cities, digital health records, vanquished disease, and the world’s highest college-graduation rates. And, with the inspirational flourish for which he is famous, he insisted that Americans would triumph because there exist “amid the most difficult circumstances”—his voice descending to a throaty growl—“a generosity, a resilience, a decency”. Such speeches are typically meant to sketch a president’s broad agenda rather than deliver specifics. This one at times felt like an economics class with simple explanations of how credit markets work, and at others like a late-night cable TV commercial: “The average family who refinances today can save nearly $2,000 per year on their mortgage.” Still, he did give clues to his priorities. Congress, he said, had to act soon to overhaul America’s multiplicity of financial regulators, which struggled to anticipate and cope with the financial crisis. He called for a cap-and-trade system to reduce the growth of greenhouse-gas emissions. He gave warning that the Treasury would probably need more than the $700 billion that Congress has already authorised for propping up the banking system (while studiously avoiding the debate over whether banks should be nationalised in the process). He strongly indicated that there would be more aid for General Motors and Chrysler, which are now contemplating whether to file for bankruptcy to shrink themselves more rapidly. “The nation that invented the automobile cannot walk away from it,” he said. A theme that permeated the speech was rapidly rising national debt, following the budget-busting $787 billion stimulus that Mr Obama just signed. “Everyone in this chamber—Democrats and Republicans—will have to sacrifice some worthy priorities for which there are no dollars. And that includes me,” Mr Obama said. But he has yet to say what he is prepared to sacrifice. He still plans to expand publicly financed health care, make permanent tax credits to the majority of workers, expand college assistance and invest in alternative energy. The budget on Thursday is expected to show that Mr Obama inherited a deficit of $1.3 trillion this fiscal year, and raised it to $1.5 trillion with the fiscal stimulus (a post-war high of some 10% of gross domestic product). Mr Obama will promise to get it down to $533 billion or 3% of GDP by fiscal year 2013. Most of that drop will come from the expiration of temporary stimulus measures, the cessation of capital injections and the hoped-for start of economic recovery. The rest will come from withdrawing troops from Iraq, trimming payments to privately-managed Medicare plans, letting George Bush’s tax cuts expire as scheduled in 2010 for the richest 2% of Americans, the taxation of foreign corporate income and the sale of permits for carbon-emissions trading. He promised, as every previous president has, to vet the budget “line by line” for waste; he will find it just as hard as his predecessors to kill programmes with powerful congressional backers. At a Monday budget summit with congressional leaders and again on Tuesday Mr Obama rightly noted that the cost of old people’s health care and pensions are the country’s biggest long-term fiscal threats, but on neither occasion did he propose how to deal with them. In fairness it is early and stabilising the economy should be Mr Obama’s priority, not long-term fiscal discipline. Premature fiscal tightening could abort a recovery. The summit on Monday and the speech on Tuesday were part of the process of softening up the public for future pain. Both events also demonstrated that despite being jilted on his quest for some Republican support during the debate on the fiscal stimulus, he is not giving up on his pursuit of bipartisanship. On Tuesday night, at least, Republicans were co-operative, rising in applause almost as often as Democrats.

Obama Seeks to Snap Gloom

President Says Economy Will Emerge Stronger; Push on Health, Energy, Education President Obama waves in the House Chamber on Capitol Hill in Washington prior to an address before a joint session of Congress. WASHINGTON -- President Barack Obama, in his first formal address to Congress, straddled the divide between fear and hope Tuesday night, declaring the "day of reckoning has arrived" for an indulgent nation but vowing to lead a recovery from the deepest recession since World War II. The speech, 52 minutes long, punctuated by more than 60 ovations, was billed as a rhetorical salve to a nation battered by layoffs and plunging stock prices -- and a tempering of pessimistic rhetoric from the Oval Office over the past few weeks. Despite the recession and a large budget deficit, Mr. Obama promised to press forward with major initiatives in health care, energy and education. He warned the nation's major banks, teetering on the brink of collapse, that he will "force the necessary adjustments" to push them back to viability, even as he conceded those banks will likely need even more money from the federal government than the $700 billion in the initial bailout. The president said he'll address the burgeoning costs of entitlement benefits for health care and retirement, and hinted at a Social Security plan that would include tax-free savings accounts for everyone. Insisting that he could pursue his wide-ranging agenda, and at the same time cut the deficit in half, Mr. Obama singled out programs he will try to cut from the budget, from agricultural subsidies to military weapons systems, and taxes he said must be raised, on affluent individuals and businesses that shield overseas profits from the Internal Revenue Service. But the speech was intended to be more about broad themes -- about trying to give Americans some optimism amid the gloom. It was a note he struck early in his address when he declared, to sustained applause from lawmakers, cabinet officials, military leaders and Supreme Court justices in the Capitol's packed House: "While our economy may be weakened and our confidence shaken; though we are living through difficult and uncertain times, tonight I want every American to know this: We will rebuild, we will recover, and the United States of America will emerge stronger than before." State of the Economy Compare how other presidents before Barack Obama have outlined their proposals in times of economic uncertainty. After speaking of that brightening future, the president tried to turn the page on a past era he hoped would not stain his administration or bring down his ambitious agenda. The blame, he said, lay both in former President George W. Bush's Washington and outside it, and in a time when a budget "surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future." He went on to portray an age when "regulations were gutted for the sake of a quick profit at the expense of a healthy market" and "people bought homes they knew they couldn't afford from banks and lenders who pushed those bad loans anyway." Mr. Obama tried to put a hard stop to what he portrayed as a ruinous decade and to assure listeners that with shared sacrifice and a new sense of responsibility, Americans can emerge stronger than ever. The "day of reckoning has arrived, and the time to take charge of our future is here," Mr. Obama said. "Now is the time to act boldly and wisely -- to not only revive this economy, but to build a new foundation for lasting prosperity." The president spent much of his address explaining what his administration has already done: one of the largest economic-stimulus plans in history; an expansion of children's health insurance; a new effort to rescue the banking sector, and plans to prop up the housing market. How Did Obama Do? Obama sought to build realistic hopes for an economic turnaround while persuading Americans that his ambitious plans will help them. How would you grade his speech? Mr. Obama said he was saving the main policy details of his agenda for his budget blueprint, which is scheduled for release Thursday. But his nods to those policies -- many shaped during the presidential campaign, before the downturn consumed his early agenda -- were ambitious. He vowed to tame health-care costs while expanding access to insurance, and promised to not let the opportunity for comprehensive reform slip away, as has been the case for many presidents before. "Health-care reform cannot wait, it must not wait, and it will not wait another year," he said. On energy, he cheered environmentalists by asking Congress to send him legislation with a market-based cap on carbon production that will control climate change and increase production of renewable energy. And the president talked at length about education, promising to reform the fundamentals of U.S. schools, adding new accountability as well as new dollars, while challenging all Americans to get at least one year of education or training beyond high school. Mr. Obama entered the House chamber with high approval ratings and a series of legislative successes already under his belt. With an audience of 313 Democrats and Democratic-leaning independents in the House and Senate, against 219 Republicans, he played to a friendly crowd. His praise for the $787 billion stimulus plan that passed with virtually no Republican support drew lavish applause from Democrats and stony silence from the GOP. His vow not to saddle future generations with a crushing government debt drew cheers from Republicans, who blame the president's stimulus plan for adding significantly to that debt burden -- then partisan applause from Democrats when he stressed he inherited most of that debt. The Republicans signaled their reaction through Louisiana Gov. Bobby Jindal, who delivered the GOP's official response, pledging to work with the president. The rising Republican star took a pass at criticizing Mr. Obama, saying, "We don't care what party you belong to if you have good ideas to make life better for our people." Instead, he focused his shots at unnamed "Democratic leaders" who passed the $787 billion stimulus bill. "What it will do is grow the government, increase our taxes down the line, and saddle future generations with debt," Mr. Jindal said. The president faces a slate of challenges that even his top aides say they weren't prepared for on Inauguration Day. The Dow Jones Industrial Average has fallen nearly 10% since he took office. The financial sector is in worse shape than previously thought. Consumer confidence has dropped to record lows. That sense of crisis helped propel passage of the president's stimulus package. But now, White House aides said, Mr. Obama wants to restore the same sense of hope that buoyed his campaign. "If we come together and lift this nation from the depths of this crisis...," he concluded, "then someday years from now our children can tell their children that this was the time when we performed, in the words that are carved into this very chamber, 'something worthy to be remembered.'" The speech was an attempt to navigate the tricky politics of the current financial crisis, trying to explain to Americans why they needed to turn hundreds of billions of dollars -- probably beyond the funds already committed -- to financial institutions widely blamed for creating the country's current problems. "I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions. I promise you, I get it," he acknowledged. But, he added, "we cannot afford to govern out of anger." The president said a U.S. recovery will not arrive until the financial sector is stabilized, noting that "this plan will require significant resources...and yes, probably more than we've already set aside." Still, he nodded to that anger by promising to impose tight strings on executives of financial institutions seeking federal funds. "CEOs won't be able to use taxpayer money to pad their paychecks or buy fancy drapes or disappear on a private jet," he promised. "Those days are over." To help cover the cost of the short-term financial fixes and his longer-term goals, the president mentioned some specific federal programs to cut or consolidate: Cold War-era military weapons, payments for large agribusinesses, and duplicative education programs. In a challenge to businesses already steeling for a fight, he said he will press forward with a promise to end the indefinite deferral of taxation on overseas profits, a policy that he says encourages the sending of jobs abroad. And he said he will make good on rolling back President Bush's tax cuts for families earning at least $250,000. —Laura Meckler and Naftali Bendavid contributed to this article. Write to Jonathan Weisman at jonathan.weisman@wsj.com

Renters Lose Edge on Homeowners

Cost Gap Returns to Historical Norms in Some Markets as House Prices DropArticle By NICK TIMIRAOS The relative cost of owning versus renting is swinging back in favor of homeownership in some U.S. markets, buoyed by several quarters of sharp declines in home prices. At the height of the housing boom, as home prices surged, demand for rentals started to rise as the gap between owning and renting widened significantly. Even after the housing market soured, apartment demand grew as former homeowners became renters, allowing landlords to push healthy rent increases. Now, after two years of rapid home-price depreciation, the relationship between the cost of rental payments versus after-tax mortgage payments is tilting toward ownership in a number of metropolitan areas. Over the past 18 years, after-tax mortgage payments have averaged 26% more than rent payments, according to Green Street Advisors, a real-estate consultancy based in Newport Beach, Calif. In 2006, at the height of the housing bubble, mortgage payments reached as high as 66% more than rent payments. But by the end of 2008, average monthly rent for the largest 50 metropolitan areas was $1,045, compared with after-tax mortgage payments of $1,300, assuming a rate of 5.5% on a 30-year fixed mortgage. That means mortgage payments averaged just 24% more than rent payments, the narrowest gap since 2001. A new housing development in Las Vegas, a market like several others in the U.S. where the cost equation has shifted in favor of homeownership. In more than half of the top 50 U.S. housing markets -- including Los Angeles, northern Virginia and Las Vegas -- the ratio is now below its 18-year average. In Los Angeles, for example, mortgage payments averaged 60% more than rent payments between 1990 and 2008. Now, those payments average 30% more than rent. "We're not saying on an absolute basis that it's cheaper to own a home, but on a relative basis...owning is looking much more attractive than it has in a long time," said Andrew McCulloch, a Green Street analyst. While the shift doesn't mean that renters will rush to buy homes soon, "it's not a 'no-brainer' anymore if they're going to rent versus own," he said. If mortgage rates fall to 4.5% -- and some economists have called for the government to push rates to that level to ease the housing crisis -- mortgage payments would average 14% more than rent payments, a level last reached in 1998. While lower rates could further boost home affordability, that may not be enough to overcome a psychological barrier for many would-be buyers who believe homes will become even more affordable. "One of the challenges in the housing market is not only affordability but also willingness to buy," said Nicolas Retsinas, the director of Harvard University's Joint Center for Housing Studies. "People are still worried about falling prices." And lending standards are much tighter than they were during the housing boom, when less-creditworthy tenants left apartments in droves to take advantage of no-money-down financing. At the housing market's peak, nearly one in four renters left to buy homes, said Richard Campo, chief executive of Houston-based Camden Property Trust. That rate fell to near its historical norm of around 12% by the end of 2008. "The nonqualified renters are not moving out this time," said Mr. Campo. A separate report by Moody's Economy.com also finds that home prices relative to rents are more in line with their historical relationship. Using data that measure average home prices and rent payments for 54 metro areas between 1984 and 2004, Moody's Economy.com estimated that eight markets are "undervalued." In those eight markets, home prices relative to rents are below or within 5% of their historical levels. "The bottom is coming into view," said Mark Zandi, chief economist at Moody's Economy.com, "But we've still got a ways to go." The report notes that home prices relative to rents remain well above historical levels in 30 markets, including Philadelphia; Portland, Ore.; and Virginia Beach, Va. Lower prices and interest rates are spurring some buyers to get off the sidelines. Jason Schanta, 37, an independent contractor, has been ready to buy for three years, but he said he waited because Southern California home prices had become "outrageous." "I'm not an economic guru but I knew the bubble was going to burst," he said. He is ready to buy a $500,000 home if Bank of America Corp.'s Countrywide Financial unit approves a short sale on the property in San Juan Capistrano, Calif. (In a short sale, the lender agrees to sell a home for less than the value of the mortgage.) Mr. Schanta currently rents a three-bedroom house for $2,250 a month, and says that he will pay just $150 more in mortgage payments and taxes for a house that has an additional bedroom and 350 more square feet. "Renting now costs just as much as buying," he said. Others are finding that they could pay less on their mortgage than they would on rent. Carla Zeineh, 22, and her husband recently began shopping for a home in Irvine, Calif., and discovered that with a 5% mortgage rate, her monthly payment on a $350,000 two-bedroom home with 20% down could be less than the $1,800 month that they pay in rent on their two-bedroom condo. Write to Nick Timiraos at nick.timiraos@wsj.com

Gold Reigns Atop the Great Divide

By LIAM DENNING Goldbugs and their similarly intense brethren, the "peak oilers," appear to have had a falling out. Their apocalyptic visions of crude shortages and economic and political chaos helped prices of both oil and gold surge in recent years. Since early November, however, they have diverged, with New York Mercantile Exchange crude down more than 40%, and gold up by much the same amount. It is becoming clear that in this particular Armageddon, two things are happening: Governments are printing money, and people and factories are burning less oil. Even with oil now below $40 a barrel and gold nudging $1,000 an ounce, this "schism spread" could continue widening for some time. Gold demand, normally weighted heavily to jewelry, is now driven by investors. Retail buyers, in particular, lacking easy access to more sophisticated inflation hedges, have piled into gold exchange-traded funds. UBS metals strategist John Reade points to a collapse in gold leasing rates, the cost of borrowing gold, since November. That can be interpreted as a positive sign. In particular, speculators that might be tempted to sell gold short in anticipation of a price fall must contend with a fear that the financial system will unravel or the cost of government backing for the economy will mean higher inflation further down the road. In one respect, that reliance on investment demand should make speculators nervous: Once fear of inflation subsides, the ETFs' vaults might empty quickly. Inflows have slowed this week. That could prove temporary, however. The amount of money invested in gold ETFs is a fraction of the trillions lying in U.S. money-market funds. A small switcht would underpin further increases in prices. As a dollar-denominated commodity, oil also ought to do well as the Federal Reserve prepares to flood the system with money. Against that, however, retail investors, having seen the oil price drop precipitously, will tend to choose yellow gold over the black variety. Unlike gold, oil's transformation into a popular asset class is a relatively recent phenomenon. Its price is ultimately tied to how much we are burning. On that front, there is little to cheer energy bulls. The International Energy Agency now expects global oil demand to drop a total of 1.5% across 2008 and 2009. That would be the first two-year decline since the early 1980s. But in terms of magnitude, it would be closer to the recession of the early 1990s. Given the seriousness of the current recession, the impact on energy demand probably will be deeper and longer lasting than the IEA envisions. Where the current economic downturn bottoms out is anyone's guess, but it is clear governments want to print their way out of it. Such crude logic favors gold. Write to Liam Denning at liam.denning@wsj.com

Auto Industry Faces Squeeze From Fed Lending Program

By LIZ RAPPAPORT The government's $200 billion program to revive the market for securities backed by consumer loans may end up providing little help to the very industry that needs it most: U.S. auto makers. As the Federal Reserve hashes out final terms of its Term Asset-Backed Securities Loan Facility, or TALF, it is becoming clear that securities that help finance auto dealers mightn't meet some criteria. That would block a form of funding that auto companies had hoped would provide immediate relief as they fight for survival. The problem came to a head because of credit ratings. The Fed has insisted that any deal it helps finance be given a triple-A rating from Moody's Investors Service, Standard & Poor's or Fitch Ratings. Bankers said this kicks out deals backed by loans to auto dealers because S&P and Moody's, in particular, have cut the ratings on such securities over the past several weeks as the industry grapples with potential bankruptcy filings and weaker demand for U.S. cars. The auto companies and their finance arms were expected to be among the biggest beneficiaries of the TALF. They needed the money so dealers could get financing to buy cars from manufacturers. Investors have shunned these deals, and banks are trying to get out of commitments for these loans. The government aid comes at a crucial time because car makers will need to refinance more than $15 billion in loans to dealers, including $6 billion that comes due next month, said people familiar with the situation. Through the program, the Fed would make loans to investors to purchase securities backed by their loans, allowing investors to achieve double-digit-percentage returns in some scenarios. This type of financing for dealers has been essential to auto manufacturers' attempts to keep cars rolling off assembly lines. If dealers can't borrow money to buy cars to fill their lots, "you're out of business," said Charles Oglesby, chief executive of Asbury Dealer Group, of Duluth, Ga., which operates 87 retail auto stores. "It backs up the whole process of selling cars." Cheaper loans for dealers also mean cheaper deals for consumers, he said, adding he gets financing from a consortium of lenders and isn't concerned about his own dealers' ability to borrow. The TALF has been saddled with complications from the start as the government tries to balance protecting taxpayers from losses with efforts to restart the economy. Fed Chairman Ben Bernanke said Wednesday that the program will launch soon, but questions about the terms of the Fed's loans, its overreliance on credit ratings, and the back-office procedures for distributing investors' money are rankling potential participants. While the Obama administration has said it expects to expand the TALF to as much as $1 trillion to include residential and commercial mortgage-backed securities, investors are beginning to question whether the program will get off the ground in time to have an impact. The asset-backed debt markets, which provided at least 50% of the Big Three's financing needs, have been virtually stalled since Lehman Brothers Holdings Inc.'s bankruptcy filing in September, and deals to fund loans to auto dealers haven't been done in the market since 2007. Ford Motor Credit and GMAC LLC had plans under way for offerings of TALF-eligible debt that would have financed dealers, said people familiar with the matter. Preparations were halted once it became clear that the deals mightn't qualify. A Ford Motor Credit representative declined to comment beyond saying the company still is awaiting final details on the program. GMAC said it is in discussions with the Federal Reserve about the program. Ford Motor Credit and GMAC have at least $3 billion each of such debt due in March, said the people familiar with the matter. Chrysler LLC's finance arm has $6 billion coming up for renewal in August. Mike Jackson, the chief executive of auto retailer AutoNation Inc., has heralded the program as the auto industry's best hope for pulling out of "depression-level" sales. But he acknowledges there needs to be some solution for lenders to get financing for loans to dealers or the whole system falls apart. "It's integral to the system," Mr. Jackson said. Write to Liz Rappaport at liz.rappaport@wsj.com

The Overhang in Housing Hangs Around

The housing market is still crucial to the recovery of other markets, yet it still hasn't found a bottom. Fresh evidence is being hauled out by the unpleasant truckload this week. Wednesday brings home-resale data from the National Association of Realtors, and the Commerce Department on Thursday reports new-home sales. Economists estimate that both measures fell modestly in January, following a December in which foreclosures boosted existing-home sales but crushed new-home demand. Optimists have shreds of hope that a turn is near. Prices are off 27% from their 2006 peak, according to Standard & Poor's/Case-Shiller data released on Tuesday. And the massive overhang of housing inventory is eroding: Construction has nearly ground to a halt, and the supply of existing homes tumbled in December to 9.3 months from 11.2 months in November, the biggest decline since the NAR started keeping track in 1999. But the inventory figures aren't seasonally adjusted, and they will rebound this spring if sellers tiptoe back into the market. Speculators have done much of the distressed buying lately and aren't loath to dump houses back on the market if they have to cut losses. Supply is still nearly twice its "normal" level of about five months, last seen in March 2006. That level probably won't return until at least 2011, Barclays economist Michelle Meyer estimates. "As long as we have this overhang, particularly in this environment with so many distressed homes, prices are likely to fall," Ms. Meyer says. Prices still are too high compared to rent and income and seem well on track for at least a 40% peak-to-trough decline. That would generate still more losses for banks, threatening fresh turmoil for markets and the economy. Here's hoping the government uses realistic housing scenarios when it stress-tests banks, starting on Wednesday.

GE Mortgage Exposure

from Q4 2008 http://www.sec.gov/Archives/edgar/data/40545/000004054509000012/frm10k.htm --Non-U.S. residential mortgages: 59,595 (NOTE 12. GECS FINANCING RECEIVABLES ) At December 31, 2008, net of credit insurance, approximately 26% of this portfolio comprised loans with introductory, below market rates that are scheduled to adjust at future dates; with high loan-to-value ratios at inception; whose terms permitted interest-only payments; or whose terms resulted in negative amortization. At the origination date, loans with an adjustable rate were underwritten to the reset value. allowance: 382 mil charge off: 150 mil provision: 323 mil --(Commercial) Real estate(c)(d) : 36,679 GECS investment in real estate consisted principally of two categories: real estate held for investment and equity method investments. Both categories contained a wide range of properties including the following at December 31, 2008: office buildings (45%), apartment buildings (17%), industrial properties (11%), retail facilities (9%), franchise properties (7%), parking facilities (2%) and other (9%). At December 31, 2008, investments were located in the Americas (47%), Europe (31%) and Asia (22%).

Investment Outlook - William H. Gross

Investment Outlook Bill Gross March 2009 “Where’s the bottom?” someone shouted at a recent PIMCO staff meeting. “Which market?” I shot back, which sort of ended the conversation, but provided little else in the way of an answer. The fact is (I should have said) that financial delevering affects most markets in the same way; they are similar trades. As unwinding leverage fails to be cushioned by a government check, prices go down on risk assets. Only the strong – or in this case – the highest quality assets survive. And so the bottom for risk assets is divorced and distinct from government guaranteed assets. “Where’s the bottom and where’s the top?” would have been a better question. No one knows of course, but we make educated guesstimates and try to communicate them to an enquiring public. We believe in giving a listener, as well as any one of our more than eight million individual clients, their money’s worth. One thing I’ve never done however, is provide expert testimony in front of a congressional subcommittee. Newport Beach probably doesn’t have the cachet of Wall Street, or perhaps my style has always been a little irreverent or my brain a little irrelevant – I’m not sure. In any case, I thought I’d create my own virtual testimony to a hypothetical committee delving into the complexities of our financial crisis. What follows is what might have taken place last week: Question: Mr. Gross, is this a recession or a depression? Answer: We don’t know yet, Madame Congresswoman. Recessions are cyclical downturns of a relatively brief time frame, characterized by inventory corrections and addressed by low interest rates and mild doses of fiscal stimulus. Depressions are more extreme with double-digit levels of unemployment but defined more importantly by credit contraction and debt liquidation. The deflation that normally accompanies a depression is dangerous not because prices are going down, but because the “for sale” sign goes up on the credit markets which have always made capitalism possible. At the moment, you policymakers are attempting to prevent that. We shall see. Question: How did this happen so fast? Answer: Trillions of dollars of credit have been sucked out of the financial system over the past 12 months. Banks may be lending but the larger shadow banking system is not. All of those SIVs and credit default swaps that once generated credit are now contracting and pulling the real economy down with them. Think of it this way: If you had three or four pints of blood drained from your body you’d be on life support, very quickly. Same thing now. The solution is for government spending to simulate a transfusion of whole blood, plasma, or whatever’s available. Question: How bad could this get? Answer: No one knows for sure, but common sense would provide a good guess. If the government cannot substitute credit to the same extent that it is disappearing from the private system, then the U.S. and global economies will retreat. If the economy is viewed as a bathtub filled with water (credit) at two different times with two different levels, then draining it back down to the lower first level might reduce economic activity proportionately. Liquidate debt (credit) to 2003 totals and you just might reduce economic activity (GDP) to 2003 numbers as well. Whoops! That would mean a 10%+ contraction in the economy with unemployment approaching the teens. Keep that bathtub full! Question: What can be done? Answer: Keeping the tub sufficiently full means advancing policies in content and magnitude never contemplated since the days of FDR. The U.S. and global financial systems require credit creation and foreclosure prevention, not bank nationalization as currently contemplated by some. Trillions will be required in the U.S. alone and it is critical that there be a high degree of policy coordination among all nations, which avoids protectionist measures reflective of failed policies in the 1930s. To date, PIMCO’s Mohamed El-Erian’s imperative of “shock and awe” has been more like “don’t bother us, we’re working on it.” Get moving. Risk being bold – Washington. Question: Are there no negative consequences from “shock and awe?” Will these policies destroy capitalism while trying to save it? Answer: Good question. The substitution of the benevolent fist of government for the invisible hand of Adam Smith involves risk. The private system is the heart of capitalism and generates most of its productivity, so more government usually involves less prosperity and certainly more inflation. PIMCO recommends a 180-degree turn towards government only as a last resort. They have the only credible checkbook in town. Will those checks create inflation? Let’s hope so provided it is low and stable over time. Policymakers are more than vocal about attempting to reflate the economy, which in essence means a hoped for return to nominal GDP growth levels of 5-6%, the majority of which might actually come in the form of higher prices as opposed to increased production. This Faustian bargain would be acceptable if only to stabilize what now appears to be an even more dangerous deflationary debt liquidation. Question: Why do we assume that the U.S. can unilaterally do whatever it wants? Answer: Much like we are the world’s strongest nation militarily, we entered this crisis with certain economic and financial strengths relative to all other nations. Our reserve currency status was the primary one which means that we can write checks in our own currency and they are accepted all over the world – sort of like American Express Travelers Cheques. This privilege, however, can be and is being abused. Travelers Cheques are acceptable only when redeemed at 100 cents on the dollar. Lately, quasi-American dollars in the form of Aaa CDOs, corporate bonds, and even national champion bank stocks have floundered closer to zero than par. There is fear on foreign shores that even U.S. agency debt may not be honored and that U.S. Treasury debt itself, when “repoed” as in prior years, may now suffer from counterparty risk. Global willingness to accept American dollars is being tested. Granted, the U.S. currency has appreciated strongly against its counterparts during most of this crisis, but technical short covering as opposed to a flight to quality may have been the dominant consideration. Watch the dollar. If it falls hard, there may be nothing policymakers can do to restore the ensuing financial chaos. Question: What do you think about nationalizing the banks? Answer: I think Roubini, Dodd and Greenspan haven’t thought this one through. The U.S. isn’t Sweden, and not just because our blondes aren’t au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders’ interests. To go further, however, and “haircut” senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite. Question: Enough already about this still confusing crisis – how should I invest my own money? Answer: I’d give you an invitation to our PIMCO client conference next month in Newport Beach if you weren’t so busy here in Washington. Its theme is titled “Evolution or Revolution – The Future of Investing.” No golf or vintage wines though – just cheeseburgers and interesting conversation. But come on out if you care. I’m sure we’ll stress our current theme of “shake hands with Uncle Sam” – buying agency mortgages, and other developing areas of government policy support in the credit markets. But we’ll talk about the future of stocks too, leveraging and deleveraging, globalization and deglobalization, and why safe secure income may be the most desirable investment in this evolving economic and financial crisis. Tell you what, Madame Congresswoman, if you can’t make it I’ll write it up in next month’s Investment Outlook. Question: Well thanks, Mr. Gross, but one last thing. Whatever happened to your mustache? Answer: My mother always said there was something shady about a man with hair on his lip, but then she’d never met Mohamed El-Erian and Paul McCulley whose mothers undoubtedly approve. I think my mom watched too many Charlie Chan movies in her day, but I can’t be sure. We feel the same way about this economy though, Madame Congresswoman. It’s hard to trust policymakers; there’s too little consistency, not enough boldness, and too much political game playing. Say a little prayer will ya, but tell those Congressmen to shave their lips just in case. William H. Gross Managing Director

AIG Seeks to Ease Its Bailout Terms

By MATTHEW KARNITSCHNIG, LIAM PLEVEN and SERENA NG American International Group Inc. is seeking an overhaul of its $150 billion government bailout package that would substantially reduce the insurer's financial burden, while further exposing U.S. taxpayers to its fortunes, people familiar with the matter say. Under the plan, the government loan of up to $60 billion at the heart of the bailout would be repaid with a combination of debt, equity, cash and operating businesses, such as stakes in AIG's lucrative Asian life-insurance arms. AIG and the government have been discussing the changes since December and plan to announce them by Monday when the insurer is expected to report fourth-quarter results, the people said. The earnings report is expected to underscore AIG's worsening condition with its total loss for the quarter likely to top $60 billion, these people said. One of the restructuring plan's central goals is to safeguard AIG's credit ratings, which, if cut, would force it to make billions of dollars in payments to its trading partners, further weakening its already precarious financial position. The new plan is being structured in close consultation with major credit-rating agencies. AIG's talks with the government are ongoing and while they are at an advanced stage the deal may still fall apart or change significantly. Government approval would signal a complete turnabout in its approach to the insurer since it first intervened to rescue it: from that of a creditor to one of a potential owner. At the time of the original bailout in September, the government imposed what many considered onerous interest rates and deadlines for AIG to repay its loans by selling off assets. It quickly became clear, however, that the erosion of the value of AIG's assets and worsening financial crisis would make it difficult to meet the goals without jettisoning assets at fire-sale prices. Associated Press AIG's offices in New York. The bank is expected to report a quarterly loss that will likely top $60 billion. "The markets aren't open for asset sales," said one person close to AIG. "There is a trade-off between protecting the value of the assets for the government and just selling them in the short term." Under the new structure, AIG's interest burden on the government money would be reduced. It currently pays 3% plus the London interbank offered rate, or Libor, a common benchmark interest rate, on a loan of up to $60 billion that it gets from the government, and also pays a 10% annual dividend on a separate $40 billion investment by the government in the company. The plan would entail a wholesale restructuring of the company. AIG would continue to try to sell some assets to repay its obligations but other assets would be transferred to the government in lieu of cash repayment. The assets, expected to include some of AIG's Asian holdings, would likely be spun off and may be taken public with the government owning a major stake, according to people familiar with the discussions. AIG's debt to the government would be reduced by an equal amount. One major sticking point is how to value the assets, especially because prices are in rapid decline. Similarly, the government could end up the outright owner of certain businesses, which presents myriad issues, both operational and regulatory. Inside the Fed, officials have been worried about AIG's fourth-quarter loss and about the risk that the insurance giant will have its credit rating downgraded. AIG's share price has fallen nearly 59% since the end of January and ended trading Monday at just 53 cents a share. That AIG would be reporting large investment losses in the fourth quarter is not, in and of itself, a huge surprise given the turmoil in the financial markets late last year and the breadth of the company's portfolio. In a statement Monday, the company said it is continuing to work with the government "to evaluate potential new alternatives for addressing AIG's financial challenges." The company has a week to report fourth-quarter and full 2008 earnings. "We will provide a complete update when we report financial results in the near future," AIG said. News of AIG's expected loss was first reported by CNBC. The government's stake in the parent company already stands at nearly 80% and is unlikely to be substantially changed in the near term, according to a person close to AIG. The new rescue moves are being weighed in part because a new credit-rating downgrade would force AIG to come up with billions of dollars to pay counterparties. It was just such a downgrade in September that nearly pushed AIG into bankruptcy and triggered the initial rescue. "If there were a downgrade, it would be difficult," says a person familiar with the matter. "Nothing's locked down. Everything is under discussion." AIG's results are expected to include large write-downs of its exposures to commercial mortgage debt, which suffered record price declines during the fourth quarter of last year. Delinquencies among real-estate loans, which help finance office buildings, shopping centers and other properties, are also on the rise, a factor that is weighing on their values. A Merrill Lynch index of triple-A commercial real-estate securities indicates prices declined around 13% in the fourth quarter and currently trade at around 75% of their original values. Similar securities with lower ratings fared much worse -- some declining 50% or more during the quarter. Even though the Federal Reserve helped protect AIG from further write-downs on certain swap positions late last year by financing the purchase of troubled securities AIG had insured against losses, the company continued to incur collateral calls and further write-downs on other swap trades that couldn't be unwound easily. Most of the troubled collateralized debt obligations were backed mainly by subprime-mortgage collateral. Prices of those mortgage assets also slumped further during the fourth quarter. The threat of further collateral calls is one major reason why a downgrade in AIG's credit ratings could pose an immediate threat to its liquidity. Standard & Poor's has an A-minus long-term rating on AIG, and Moody's Investors Service has an equivalent rating of A3. Both credit-rating firms said Oct. 3 they were reviewing the ratings for downgrades. Such reviews typically take around 90 days, but have been known to go longer. Rating downgrades from current levels could be devastating to AIG's finances and would trigger billions of dollars more in payments to its policyholders, trading partners and customers. A one-notch rating cut would push AIG's long-term ratings down to BBB-plus at S&P and Baa1 at Moody's. Downgrades may also cause AIG's short-term debt ratings to fall below A-1, which is the minimum rating threshold for borrowings under the Federal Reserve's Commercial Paper Funding Facility. Since that facility went live in late October, some AIG units have been tapping it to the tune of around $15 billion. Any loss of access to these rolling three-month loans -- which have very low interest rates -- may force AIG to draw down more of its credit line from the Fed and incur significantly more in interest costs. In a November filing with the Securities and Exchange Commission, AIG warned that a one-notch downgrade of its long-term rating could cause it to have to pay out around $8 billion to its counterparties, including collateral and "termination payments" on contracts it has written. The filing said the impact of a two-notch downgrade from current levels could be much bigger, giving counterparties the right to terminate transactions that cover nearly $48 billion in debt. AIG has since exited or posted collateral against some of those positions, so its actual cash outflow in such a situation would likely be less than that amount. AIG's rescue package has already been increased twice since September, from $85 billion to nearly $123 billion in October and then to $150 billion in November. The expanded rescue reflects, in part, the pressure on AIG from the same market turmoil that's tripping up many other financial institutions that made soured bets on the housing market. AIG's losses for the first three quarters of 2008 were due largely to write-downs in the value of credit protection it had sold on securities backed in part by subprime mortgages. The latest changes under consideration could require the government to increase its exposure to potential losses, if they lead to the government essentially insulating AIG from some losses on risky assets still in its portfolio, even if it doesn't actually put up any more dollars right away. With Citigroup Inc., for instance, the government has agreed to shoulder most losses on $301 billion of assets. As of Sept. 30, AIG was exposed to commercial mortgage-backed securities originally valued at at least $20 billion, but that sector has been hit hard during the downturn. Yet insuring against losses on troubled assets might be another imperfect solution. Such protection has been used in other cases -- Citigroup and Bank of America Corp. -- and the share prices of both companies have kept falling. —Jon Hilsenrath contributed to this article. Write to Matthew Karnitschnig at matthew.karnitschnig@wsj.com, Liam Pleven at liam.pleven@wsj.com and Serena Ng at serena.ng@wsj.com

Will H-P Issue Entice Buyers?

By KELLIE GERESSY Computer giant Hewlett-Packard is taking advantage of improved borrowing conditions in the investment-grade market to sell new debt. H-P's $2.775 billion three-part offering priced Monday via active bookrunners Bank of America, Deutsche Bank and Royal Bank of Scotland Group. While H-P will enjoy the spoils of a better issuing environment, lower interest rates may not guarantee an easy sell to investors, who have remained picky and who are buying securities on a case-by-case basis. H-P sold $2 billion of five-year notes in December, and market participants thought the company would be able to sell the new notes at a much better price. Launch levels were better than preliminary price guidance, suggesting good demand for the bonds. The first, $275 million part has a maturity of Feb. 24, 2011, with a coupon of the three-month London interbank offered rate plus 1.75 percentage points. It priced at par, with a yield of three-month Libor plus 1.75 percentage points. The second, $1 billion part has a maturity of Feb. 24, 2012, with a coupon of 4.25%. It priced at 99.956, with a yield of 4.266%. The spread is 2.95 percentage points above Treasurys. The third, $1.5 billion part has a maturity of June 2, 2014, with a coupon of 4.75%. It priced at par, with a yield of 4.753%. The spread is 2.95 percentage points over Treasurys. H-P sold $2 billion of five-year notes on Dec. 2 of last year that offered a 4.6 percentage point risk premium above Treasurys -- about the average for a single-A rated company at that time when investors were still thin-skinned about investing in any securities not carrying a government guarantee. That issue traded at a risk premium of 2.45 percentage points above Treasurys late last week. But despite a boost in corporate-bond supply against an improved issuing backdrop, H-P may have to entice bond buyers with the offer of a larger concession on its bonds to mitigate integration risk perceived by potential investors. H-P raised eyebrows last year when it announced its $13.9 billion acquisition of Electronic Data Systems and the company is still working through a series of challenges in a crippled economy. Partial proceeds from the sale will be used to fund repayment of the company's outstanding commercial paper, according to the offering's prospectus. The offerings were rated A2 by Moody's Investors Service and single-A by Standard & Poor's Ratings Services. An H-P representative said the company had no comment on the offering.

Markets Face a Debt Déjà Vu

By RICHARD BARLEY Red lights are flashing in the credit market again. The revival in risk appetite seen at the start of the year has faded as government bailout plans have been deemed lacking. The common thread is renewed pressure in a banking system already weakened by 18 months of financial-market turmoil. A large part of the problem stems from a lack of clarity on how governments plan to inject new equity into banks and take bad assets off balance sheets. They need to provide details on their plans to stop the rot sooner rather than later. First, consider the spread between the U.S. dollar London interbank offered rate, the rate for interbank lending, and the overnight indexed-swap rate, which captures expectations for official interest rates. The spread has narrowed from October's peak of 3.66 percentage points, but the move has reversed, and the spread is now back over 1.0 percentage point versus a low of about 0.9 percentage point in January, leading to fears over bank funding and a further loss of trust in the system. Precrisis, the typical spread was under 0.1 percentage point. Second, look at the Markit LCDX index of default swaps on 100 U.S. leveraged loans. The index rallied in January to 82% of face value, but has returned to 73%, close to the low seen in December. Auctions to determine swap payouts are producing low indicative recovery rates: For the five most recent auctions on LCDX companies, the average loan price used to settle the swap is 40%. Moody's said the average recovery rate over the past 20 years for bank loans is 81%. Low recoveries will hit loss reserves hard. Third, spreads on nearly all tranches of the CMBX index, which tracks default swaps on 25 U.S. commercial mortgage-backed securities, have reached record wide levels in February after a January rally. Moody's on Feb. 5 said that it was considering cutting ratings on $302 billion of CMBS due to falling commercial-property values and rising delinquencies. Fourth, corporate defaults and ratings downgrades are accelerating, placing strains on bank capital. By Feb. 17, Standard & Poor's had recorded 31 defaults affecting $49 billion of debt in 2009, already one-quarter of the 125 defaults in 2008 and more than all the defaults recorded in each of 2007 and 2006. Behind the gloom lies the risk that while banks and policy makers still are grappling to cap exposure to toxic securitized assets, a fresh wave of turmoil may emerge from underlying, "traditional" lending. Corporate-bond issuance remains strong, offsetting some of the systemic worries, but fears are building that the issuance window could close as concerns over the banking system persist. That could signal a new phase of the credit crisis. Write to Richard Barley at richard.barley@dowjones.com

Uncertainty mounts over outstanding bank bonds

By Aline van Duyn, Nicole Bullock and Paul J Davies Published: February 24 2009 02:00 Last updated: February 24 2009 02:00 Government efforts in the US to reassure investors yesterday that it stands behind the banking sector did little to alleviate uncertainty towards hundreds of billions of dollars of outstanding bank debt. Concerns about the financial strength of Citigroup, Bank of America and other large, troubled institutions have resulted in sharp falls in the value of these banks' shares. The value of bank debt has also been falling sharply - including the senior bonds traditionally regarded as least risky - amid growing concerns that bondholders might also end up taking losses. Even if the US government were forced to take over some institutions - and authorities insisted yesterday that they wanted to see the industry remain in private hands - senior bondholders do not expect to have to take any losses. US officials would be too afraid of triggering a repeat of the collapse of the credit markets that followed the bankruptcy of Lehman last year, when bondholders lost billions of dollars. Yet bond investors still are not convinced that they will not ultimately have to take losses as banks restructure. Government actions in the UK, which have been detrimental to some classes of bondholders, have highlighted the potential risks of intervention. "It's a big concern and it continues to be a big concern," said Bill Bellamy, director of fixed income at Thompson, Siegel & Walmsley. "The one thing that the government has failed to do is stabilise the fear in the bond market." Citigroup's five-year senior debt was quoted at a risk premium, or spread of 725 basis points over Treasuries, while the subordinated debt was quoted at more than 1,000 basis point over Treasuries, a level indicative of distress. Credit default swaps on the bank remained elevated, but they have fallen from the recent highs reached last week. Preferred shares - which rank in between equity and debt - are trading at 25 cents on the dollar. This is similar to preference share levels for a number of European banks, although Royal Bank of Scotland, the UK bank that is majority controlled by the government, has prefs trading as low as 10 pence in the pound. "The government appears to understand that it could completely destabilise the financial system if senior bondholders at some of the big banks are wiped out," said Greg Peters, chief US credit strategist at Morgan Stanley. "However, if the government does end up taking over large parts of the financial system, there are concerns about whether the government could take on all the liabilities. This possibility does make me more worried about senior debt than in the past." The statement on Monday would indicate that the government still aims to support the entire capital structure, a plus for senior bondholders and even those holding hybrid securities. Hundreds of billions of dollar of bank debt is held by pension funds and insurance companies where losses would affect the wealth of many individuals. But deep uncertainty remains. "Will it work, or do they have to go to Plan C, D, E or F?" asks Kathleen Shanley, a senior analyst at Gimme Credit. Letting Lehman Brothers fail last year was meant to demonstrate that the government would not reward failure, but it brought the entire financial system to the brink. "Now, [the government's] top priority is maintaining market stability," Ms Shanley said. "The problem is that insurance companies are holding a large amount of these [bonds and securities]. By letting one fail you may be just passing things on down the line." In Europe, senior bank debt remains under heavy pressure as governments struggle to restore faith in their financial systems. However, subordinated or junior debt continues to suffer more and the market was dealt a further blow by the UK government on Friday. In the credit derivatives markets, the cost of protecting junior bank bonds against default on the iTraxx index of subordinated financials rose 20 per cent on Friday to a record and rose another 15 basis points yesterday to breach 315bp, meaning it costs more than €315,000 per year to insure €10m of such debt over five years. The renewed panic was sparked by the UK government using a new bill that became law last week to alter the terms of outstanding subordinated bonds issued by Bradford & Bingley, a nationalised mortgage lender. The changed terms mean B&B can defer interest payments on these bonds. The move was condemned by investors as ill-judged and bad for sentiment in a market that has been crucial in supporting banks' balance sheets. Deutsche Bank first upset the market in December when it decided not to repay a similar bond at the first opportunity because the penalty coupon rate it would incur was less than rates in the open market. Since then a variety of actions by banks or governments have created great uncertainty about the treatment and value of banks' junior debts. Some analysts and investors thought the fresh panic was overdone. "Ultimately, if we were to be negative to the extreme, one could say that the Banking Bill 2009 allows the UK government to do what it likes," say Olivia Frieser and Axel Swenden at BNP Paribas. "However, we hope that today's events will show that the market is extremely sensitive."

China urges west to establish ‘bad banks’

By Jamil Anderlini in Beijing Published: February 17 2009 19:15 Last updated: February 17 2009 19:15 The US and Europe should follow China’s example and establish “bad banks” to manage toxic assets if they want to resolve the financial crisis, according to the head of China’s largest bad bank. In a rare interview Tian Guoli, chief executive of Cinda Asset Management Corporation, urged western governments to act quickly to avoid slipping into a protracted, Japan-style recession and stagnation. “Bad assets in a bank are just like a rotten spot in an apple – you must cut it out if you want to eat the apple and if you don’t get rid of it the rotten part will spoil the rest,” said Mr Tian. “Japan waited too long to remove bad assets from their banks and when they finally set up a bad bank, it was too late.” China’s financial system has been left relatively unscathed by the global crisis. It is barely integrated into the global system and the financial sector has been transformed in the past decade after near-collapse in the Asian crisis. Two state-controlled lenders, Industrial and Commercial Bank of China and China Construction Bank, are the largest and second-largest banks in the world by market capitalisation and are among the most profitable after the humbling of groups such as HSBC and Citigroup. “Who would have thought that these banks we used to revere, such as HSBC and Citigroup would have such big problems?” said Mr Tian. “Today, Chinese banks are beginning to have a voice in the world.” Members of the US administration have advocated a bad bank that could be modelled on the Resolution Trust Corporation, established in the US in 1989 to deal with the fall-out from the savings and loans crisis. European governments are considering a similar solution. China’s four bad banks, known as “asset management corporations” (AMCs), were established in 1999 and were themselves modelled on the RTC. Analysts say China’s decision to establish the AMCs was effective in revitalising the banks, but the problems were shifted elsewhere and have never been fully dealt with. In the past decade AMCs have received a total of Rmb2,400bn ($350bn) in non-performing assets from the banks, with Cinda taking about Rmb1,000bn of that, according to Mr Tian. China’s state auditor raised concerns last year that the AMCs were unable to repay the interest or principal on bonds issued to the large banks in return for their bad assets. Copyright The Financial Times Limited 2009

Obama to unveil plan for halving budget shortfall he inherited

By Krishna Guha in Washington Published: February 23 2009 02:00 Last updated: February 23 2009 02:00 Barack Obama will this week set the goal of halving the budget deficit he inherited by the end of his first term, while pushing ahead aggressively on healthcare reform, climate change and education. His first budget, to be released on Thursday, will show the deficit's falling to $533bn by fiscal year 2013, against an inherited deficit that aides estimate at $1,300bn. The deficit projected for this year will be higher than $1,300bn due to additional spending on the fiscal stimulus and other crisis-fighting measures. Revenue from the sale of emissions permits under a cap-and-trade system will help pay for the deficit reduction, along with cuts in spending on the war in Iraq, higher taxes on wealthy individuals and businesses. "The president is committed not only to addressing healthcare costs - the key to our long-term fiscal future - but also to reducing our medium-term deficits to a sustainable level without resorting to the budget gimmicks that have been used too often in the past," said Peter Orszag, director of the White House budget office. The Obama budget will allow the Bush tax cuts for those earning more than $250,000 to expire after 2010. The top marginal income tax rate will rise to 39.6 per cent. The top capital gains tax rate will be set at 20 per cent. Hedge fund and private equity executives will be taxed on "carried interest" - their share of profits on investments - at the higher income tax rate rather than the lower capital gains tax rate as at present. The budget blueprint will be followed by a final and more detailed budget by early April. It will make a downpayment on structural reform in health, energy and the environment by creating pools of money set aside for these purposes. A new approach to projecting future deficits will increase the cumulative deficit forecast over 10 years by $3,000bn. Some analysts think that the deficit projected for this year could approach $2,000bn. But the number is likely to be closer to $1,500bn, in part because bank recapitalisation funds will now be scored as subsidy cost rather than cash outgoings. However, the senior administration official said that Mr Obama recognised that the budget was "only a start" and wanted to work with both parties in Congress to address the nation's "long-run fiscal challenges" starting with a bipartisan fiscal summit today.

Property Frights: GE Capital Punishment

By PETER EAVIS General Electric hasn't kept pace with the plunging banks. But its shares have still dived more than 42% this year on doubts over its finance subsidiary. A trawl through GE Capital's balance sheet shows why investors should remain wary. On the surface, the unit looks enviably positioned. It retains a triple-A rating, has no meaningful exposure to U.S. residential mortgages and enjoys one of the highest tangible-common-equity ratios in the financial sector -- a meaty 4.9% at the end of last year, against, for instance, J.P. Morgan Chase's 3.8%. Dig a little deeper, however, and the uncertainty mounts. One reason: GE Capital has large concentrations of other real-estate assets -- commercial exposures and foreign residential mortgages -- that could lead to large losses in a deep recession. Another: Despite some changes, GE Capital still looks like a classic "wholesale" finance company, relying on market funding. This is a drawback when credit markets are skittish and large amounts of long-term debt -- $133 billion this year and next -- are coming due. On the asset side, a big source of jitters is GE Capital's $36.7 billion in commercial-real-estate investments. These are equity-type investments, the first to absorb any losses. As a result, most firms are currently applying big haircuts to this type of asset. In its fourth quarter, Goldman Sachs Group, using mark-to-market accounting, took a 25% write-down, totaling $961 million, on its commercial-real-estate equity investments. GE Capital, which values its holdings using estimates of future cash flows rather than marking them to market, took $300 million of impairments last year, equivalent to less than 1% of the equity investments. That is even more surprising given that GE has booked sizable unrealized losses on its book of securities backed by commercial real estate, which the company does mark to market. These bonds, senior to equity in the investments they fund, are written down by 23%. Admittedly, they are in different deals from GE's equity investments. But the huge divergence in the accounting hits understandably rings alarm bells with investors. In GE's defense: Marks on the debt securities may be exaggerated by extreme stress in the market for such securities. Second, unlike some other investors, GE operates most of the properties in which it has equity-like investments, arguably giving them a higher value. Also, in the vast majority of the equity deals, GE itself provided the debt funding -- not third-party investors -- meaning there could be less immediate refinancing risk to the individual deals. Finally, GE does flag the risks by disclosing in its annual report that its real-estate equity investments' "estimated value" is $4 billion less than the value on the balance sheet. But since GE was a big commercial-real-estate equity investor in the frothy years -- it added $12.6 billion of these assets in 2007 alone -- investors should watch this portfolio very closely. Attention should also be paid to GE Capital's $59.6 billion of overseas residential mortgages, many of which are based in troubled markets like the U.K. Some $3.3 billion of these mortgages are more than 90-days past-due, but GE Capital's loan-loss reserve is equivalent to only 11.5% of the past-due total, up only slightly from 10% at the end of 2007. Cross-bank comparisons should be treated warily because of differences in loan-portfolios. But, for example, Bank of America's reserve for residential mortgages in the U.S. is far higher at just under 20% of nonperforming residential assets. The need to clear up uncertainties about future credit losses at GE Capital is key, not just for stock investors and creditors, but also for the ratings firms. Going by GE's credit-default-swap spreads, the market expects the triple-A rating to go. How much lower depends on how many losses are lurking in the balance sheet -- and the amount credit markets will charge to keep supporting wholesale-funded businesses. Write to Peter Eavis at peter.eavis@wsj.com

Investors Decide: In Gold We Trust

By JOHN JANNARONE Call it the GLD rush. As the financial system teeters, investors have fled to gold as a haven. Exchange-traded funds have made it easy. ETFs such as SPDR Gold Shares -- ticker GLD -- are a direct bet on bullion prices. The trusts have to buy physical gold to match investment levels. Having doubled the gold in their vaults in a year, the stash is worth $45 billion. That's tiny in the context of big asset classes like stocks. But gold's scarcity keeps the market small. If ETFs continue to grow fast, they could start to create a real squeeze in gold, with its limited supply. Trusts have added 306 metric tons of gold to their vaults in the first seven weeks of the year, says Barclays Capital Analyst Suki Cooper. That's just short of the 322 tons added in all of 2008. If that rate were to continue, this year's ETF purchases would surpass the 2,120 tons procured for jewelry in 2008, replacing it as the top source of demand. Lately, gold ETFs haven't blinked in the face of typical obstacles. The dollar has gained nearly 9% against the euro this year, normally a cue for gold to weaken. But the metal has gained 13%. Ultralow inflation in most countries would also be negative for gold normally. But some investors are betting on a return to inflation as governments try reflating their economies. Others are hedging the risk of financial collapse. Either way, individual investors and hedge funds are making room for gold in their portfolios. ETFs make the task easier. They are freely tradable, and cheaper to own than it would cost for an individual to locate and secure the physical commodity. UBS reckons gold coins command a 10% convenience premium. Barring a sudden improvement in financial markets, investor fear should preserve gold's allure -- even though unlike other assets, it generates no yield. But ETFs won't always be a friend to gold, by underpinning physical demand. If, and when, investors decide the game is up, ETFs will have to liquidate holdings as people sell. Just as they are squeezing the market now, they could flood it when the frenzy ends. Write to John Jannarone at john.jannarone@wsj.com