submits: Good description in a recent CEPS report of how the U.S., via its AIG bailout, temporarily saved the over-leveraged European banking system. But the AIG case shows the importance of another link across financial markets, namely massive regulatory arbitrage. The K-10 annex of AIG’s last annual report reveals that AIG had written coverage for over US$ 300 billion of credit insurance for European banks. The comment by AIG itself on these positions is: “…. for the purpose of providing them with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee”. AIG thus helped to organise regulatory arbitrage on a gigantic scale. A formal default of AIG would have had a devastating impact on banks in Europe. This explains why AIG’s problems had sent shock waves through the share prices of European banks. For the time being the US Treasury has saved, inter alia, the European banking system, but given that AIG is to be liquidated European banks now have to scramble to find other ways of obtaining the ‘regulatory capital relief’ they appear to need urgently.

Delinquencies among recent vintages of subprime mortgage securities continued to rise in August, but in the prime jumbo sector, delinquencies leveled off, latest data from Standard & Poor’s shows. Delinquencies among U.S. subprime residential mortgage-backed securities ((RMBS)) transactions originally rated in 2006 and 2007 continued to increase as of the August 2008 distribution date, while delinquencies for the 2005 vintage started to decline. Total delinquencies were 38.05%, 42.89%, and 32.79% of the current aggregate pool balances for the 2005, 2006, and 2007 vintages, respectively. Compared with the July 2008 distribution date, these figures marked increases of approximately 3% for the 2006 vintage and 5% for 2007 and a 0.1% decline for the 2005 vintage.

Wall Street rebounded even as the global banking system was gripped by a worsening crisis of confidence as the leaders of the US Congress struggled to salvage the administration's $700bn bail-out plan

NEW YORK (Reuters) - The U.S. housing market bust may not bottom until 2010, later than previously thought, and more home builders may fail before the housing market recovers, Moody's Investors Service said in a new report.

Efforts to keep at-risk borrowers in their homes have actually worsened over the past year, according to a report released by the State Foreclosure Prevention Working Group. As of the end of May 2008, 305,000 subprime loans were in the process of foreclosure, and over 131,000 foreclosures were completed on subprime and Alt-A loans during the [...]

As Congress wrestles with another bailout bill to try to contain the financial contagion, there's a potential killer bug out there whose next movement can't be predicted: the Credit Default Swap.

Sadly, recent events in Washington suggest that this optimism of some kind of meaningful rescue plan for Main Street may have been misplaced and that politicians, never the most economically intelligent of mankind, may be working towards constructing the Great Depression - Part II. The reality now is that we are heading into a major recession and the [...]

Over the weekend, Congress formally approved a continuing resolution that included $25 billion in low-interest loans for the auto industry to speed its transition to more fuel-efficient vehicles.

Interesting front page coverage of yesterday's market action: >

Saying this is a 'very critical moment for the economy,' President Bush makes a fresh push for Congress to act quickly on legislation to save the financial system, one day after the House rejected a $700 billion rescue plan.

Conventional wisdom has been that Treasuries have been the yet another bubble as cash exited equities and other risky investments, first feeding a commodities spike, then seeking a better home in Treasuries. But Merrill's David Rosenberg, who was in a decided minority in seeing deflation as the likely outcome for the US (he has for some time forecast Fed funds at 1% by year end 2008), thinks that Treasuries will go even higher (which means lower yields) as debt deflation takes hold. We have excerpted his discussion of the interest rate and housing price outlook from his September 29 report. He starts by showing that financial firms, consumers, and non-financial businesses are all shedding assets, which is deflationary. From Rosenberg: Barely halfway through the real estate deflation The data we got yesterday were quite telling. New home sales sank to 460,000 units in August, a fresh 17-year low, and the inventory-to-sales ratio gapped up to 10.9 months’ supply (MS) from 10.3 MS in July. There is no chance that home prices stabilize until this ratio moves convincingly below 8 months. In fact, our models suggest that there is another 15-20% downside in average home prices and they are already down 20% from the peak. So, we are barely past the halfway mark in this real estate deflation. Inventory backlog is proving intractable As a sign of how difficult it has become for the builders to move product, the median length of time it is taking to make a sale from the time the unit is completed shot up to a record high of over 9 months from 5.7 months last year and the 4 months that typifies a normal market. Sales are down to 460,000 units and yet single-family starts, while down 35% from a year ago, are still running far ahead of demand at 630,000 units. This is why the unsold inventory backlog is proving so intractable this cycle – and this will exert ongoing downward pressure on residential real estate prices in most parts of the country. We can’t grow our way out of this...

Wachovia announced this summer it would stop offering pick and pay loans, but that wasn’t soon enough for thousands of homeowners like Marie, who are already in those loans. Citigroup did not return our calls on Monday seeking comment about what it will do with the existing loans and Wachovia said it was too early to [...]

Is an imperial presidency destroying what America stands for? Bill Moyers sits down with history and international relations expert and former US Army Colonel Andrew J. Bacevich who identifies three major problems facing our democracy: the crises of economy, government and militarism, and calls for a redefinition of the American way of life. > Part I click for video > Part II click for video September 26, 2008 BILL MOYERS: Welcome to the JOURNAL. Here in New York a new season is opening on and off Broadway. But nothing, not even a comic opera, can compete with the spectacle, drama and farce of what's happening in Washington and on Wall Street. If it is possible for a political system, like individuals, to become deranged, so unhinged from reality there is no longer any regard for the consequences, we saw the process this week. It's nothing but bizarre, and for a supposedly mature democracy, deeply troubling. For technical reasons we had to tape this broadcast before John McCain finally made up his mind about whether to show up for the debate tonight. So we decided not to try and second guess events. Instead, we are going to hear some truth-telling from a man who says our country's in deep trouble and needs a renewed commitment to critical thinking, honest words, and hard choices. In this slim volume on THE LIMITS OF POWER, Andrew J. Bacevich goes to the root causes of our discontent and to our broken and foundering politics. That many people agree with this unsentimental diagnosis was apparent when we first aired this interview a few weeks ago, your emails poured in to pbs.org. In a matter of hours his book had become a best-seller. Now, with chaos in Washington and the markets, it seems a good time to give this soldier, scholar, and patriot another hearing. He has found an audience across the political spectrum, whether writing for THE NATION or THE AMERICAN CONSERVATIVE magazines, lecturing to college classes or testifying before Congress. ANDREW...

The past week’s rescues of Washington Mutual and Wachovia suggests that some combination of free-market capitalism and government assistance can provide solutions to the crisis.

The U.S. banking system is going through a decade's worth of consolidation in a matter of weeks, with the government often acting as matchmaker.

From Leslie Wayne, a DealBook colleague: Edward L. Yingling, chief executive of the American Bankers Association, has been in the thick of the action on the $700 billion bailout bill. So what went wrong? “It got into partisan politics real fast,” said Mr. Yingling, a skilled Washington hand who has lobbied on financial services matters in [...]

Getting Congress to agree on a $700 billion financial bailout package might have seemed difficult, but the really hard work is only about to start, The New York Times’s Barry Meier writes. The federal government will now have to oversee and manage a bailout of enormous magnitude involving complex mortgage-backed securities so byzantine in their [...]

Hedge funds are braced for massive withdrawals by wealthy clients as the sector's worst year prompts a flight to the safety of cash, according to investors and managers

Barely containing his temper, Virginia's Eric Cantor, deputy whip for the House Republicans, stepped to the microphone this afternoon to blame the bailout defeat on House Speaker Nancy Pelosi's "failure to listen" and her charged partisan rhetoric in condemning President George Bush's "budgetary recklessness" and "anything-goes mentality."