n late 2006 he sold $74 million of preferred stock although he had no immediate use for the proceeds. He says he couldn’t resist the “stupidly mispriced” terms–as low as Libor plus 1.7 percentage points for 30 years. He wanted as much money available when the boom turned to bust. With the extra money the bank could pay off nearly all its depositors with capital on hand–nearly unheard of in the history of banking.

Then came a shocker: Amid one of the most reckless lending sprees in history, regulators focused on the one bank that refused to play along. Beal’s moves confused and worried them, and so they began to probe him with questions. “What are you doing?” he recalls them asking. “You’re shrinking yet you’re raising capital?”

Says Beal about the scrutiny, “I just didn’t fit into any box.” One regulator, the former head of the Texas Savings & Loan Department, Charles Danny Payne, says, “I was skeptical at first, but I’ve gained a lot of confidence over the years,” adding that Beal has an “uncanny ability to sniff out deals.”

Next, the credit rating agencies started pestering him about his dwindling loan portfolio. They never downgraded him but scolded him for seeming not to have a “sustainable” business model. This while their colleagues were signing off on $32 billion of bum collateralized debt obligations issued by Merrill Lynch.
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He thinks the government is going to be “disappointed” by its various programs to revive lending. He says Treasury Secretary Timothy Geithner’s new plan to guarantee loans to buyers of toxic assets won’t lead to many sales because the problem isn’t liquidity but price. They are not low enough. Half the country’s banks–4,000 in all–would be bust, he says, if they marked their loans to what the loans would fetch in an auction. He says banks are fooling themselves by refusing to mark busted assets down.

“Banks are on a prayer mission that somehow prices will come back and they won’t have to face reality,” Beal says. And that reality, according to Beal, is going to get a lot worse. “Unemployment is going over 10%, commercial real estate hasn’t even begun collapsing and corporate credit defaults are just getting started,” he says. His prediction: depression, without bread lines this time, thanks to the government safety net, but with equal cost to society.

The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it, aides said. It would become one of the most significant achievements this year by the White House and the Republicans leading the 106th Congress.

”Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. ”This historic legislation will better enable American companies to compete in the new economy.”

The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation’s financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.
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‘The world changes, and we have to change with it,” said Senator Phil Gramm of Texas, who wrote the law that will bear his name along with the two other main Republican sponsors, Representative Jim Leach of Iowa and Representative Thomas J. Bliley Jr. of Virginia. ”We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.” In the House debate, Mr. Leach said, ”This is a historic day. The landscape for delivery of financial services will now surely shift.”

But consumer groups and civil rights advocates criticized the legislation for being a sop to the nation’s biggest financial institutions. They say that it fails to protect the privacy interests of consumers and community lending standards for the disadvantaged and that it will create more problems than it solves.

The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.

”I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930’s is true in 2010,” said Senator Byron L. Dorgan, Democrat of North Dakota. ”I wasn’t around during the 1930’s or the debate over Glass-Steagall. But I was here in the early 1980’s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”

Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ‘’seemed determined to unlearn the lessons from our past mistakes.”

The Federal Reserve will try to get long-term interest rates moving down again when the central bank today launches its first purchases of Treasury bonds. The Fed triggered a stunning drop in Treasury bond yields on March 18 when policymakers surprised Wall Street by announcing a plan to buy up to $300 billion of Treasuries over the next six months.

The yield on the 10-year T-note plunged to 2.53% on March 18 from 3% the previous day, the biggest one-day drop in decades. But since then, Treasury bond yields have been creeping higher. The 10-year T-note ended Tuesday at 2.65%. Conventional mortgage rates have flattened or inched up, although they remain historically low, in the range of 4.75% to 5%.
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On Tuesday the Treasury sold $40 billion of new two-year T-notes at a yield of 0.95%, which was lower than expected, indicating healthy investor demand. The government will auction $34 billion in five-year notes today and $24 billion in seven-year notes on Thursday. Against numbers like those in just one week, the Fed’s commitment to buy $300 billion of Treasuries over six months doesn’t look like much.
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there’s nothing to stop the Fed from suddenly announcing that its $300-billion commitment will get substantially bigger: The central bank can, in effect, print as much money as it wants to buy bonds — at least, until the day that global investors stop wanting dollars.

What we’re now living through, though, is the result of a conscious, planned looting of the world economy. Its roots stretch back decades. And it wouldn’t have been possible without the contrivances of the bought-and-paid-for folks who sit in Congress.

Of course, just because the plan blew up on the looters, taking off a financial finger here and a portfolio hand there, you shouldn’t have any illusion that they’ve retired. In fact, in the “solutions” now being proposed — by Congress — to fix the global and U.S. financial systems, you can see the looters at work as hard as ever.

Question: Why weren’t state insurance regulators more aggressive in regulating AIG?

Answer: Because the federal government had forced them to back off. An aggressive interpretation of the definition of insurance could have let state insurance agencies regulate the derivatives contracts that AIG’s financial-products group was writing out of London. These were, in fact, insurance policies that guaranteed the companies taking them out (banks, other insurance companies, investment banks and the like) against losses on securities in their portfolios.

But Congress had made it very clear in the Commodity Futures Modernization Act — supported by then-Federal Reserve Chairman Alan Greenspan, steered through Congress by then-Sen. Phil Gramm, R-Texas, and signed into law by President Bill Clinton in December 2000 — that most over-the-counter derivatives contracts were outside the regulatory purview of all federal agencies, even the Commodity Futures Trading Commission.

With the new law on the books, the market for credit default swaps exploded from $632 billion outstanding in the first half of 2001, according to the International Swaps and Derivatives Association, to $62 trillion in the second half of 2007.

Question: Wasn’t anybody worried about the risk to the financial system posed by a market that dwarfed the assets of the sellers of this insurance?

Answer: Worry about leverage? You’ve got to be kidding.

In 2004, the Securities and Exchange Commission, after hard lobbying by Wall Street, reversed its 1975 rule limiting investment banks to leverage of 15-to-1. The new limit could be as high as 40-to-1 if the investment banks’ own computer models said it was safe.

The state unemployment rate jumped to 10.5 percent in February, a level not seen since 1983. All told, the recent economic slide has left 1.95 million Californians scrambling for work. Friday’s report from the Employment Development Department charts a sharp rise from January’s 10.1 percent rate and brings the state closer to its modern peak of 11 percent, which occurred in late 1982 and early 1983.
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Back then, unemployment remained above 10 percent for a year and briefly hit 11 percent. This time Levy said unemployment probably will break 11 percent and stay there for months, until the housing market hits bottom and starts to recover, healing the state’s biggest economic wound.
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Metropolitan San Francisco, consisting of San Francisco, San Mateo and Marin counties, had a jobless rate of 7.8 percent in February, better than the state or the nation.

Coca-Cola, health-insurer WellPoint Inc. and more than 30 other companies are issuing bonds and using the proceeds to repay their short-term IOUs, according to data compiled by Bloomberg. The amount of commercial paper outstanding shrank 16 percent since Jan. 7 to $1.48 trillion last week and daily issuance dropped to a four-year low, according to the Federal Reserve.
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By lessening their reliance on commercial paper, borrowers are paying higher interest rates to avoid the risk of not being able to roll over the debt every few weeks. With the gap between short- and long-term debt rates the widest in at least two decades, the cost of swapping $1 billion of 30-day paper with long-term debt can cost more than $75 million in additional annual interest

Finance has already changed irrevocably. The grand investment banks which once strode alone have either collapsed, or joined the flock of retail banks. Governments are now borrowers, lenders, investors and insurers of last resort for much of the financial system. The future of finance will be determined by their efforts to disentangle themselves from the thickets of guarantees they have been forced to make. The depth of the crisis will determine how easily they manage it.

The fiscal cost of this episode is unclear. In some countries, it may be state-busting. Some nations will need to cope with extraordinary fiscal tightenings in the coming years. The domestic impact of government spending – and its geopolitical ramifications – could yet be colossal. Again, much depends on how soon the downturn ends.

There is one certainty. While recessions are inevitable, deep depressions or slumps – or whatever you call them – are neither necessary nor welcome. They destroy wealth, sap happiness and crush old certainties. What is more, increasing poverty is a grave threat to world stability and democracy. Revolutions often start as bread riots, and economically-stagnant countries make belligerent neighbours. Growth must be restarted.
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governments must take responsibility for dealing with their financial systems. The toxicity which started in mortgage-backed securities is spreading through the world’s banks as ever more assets go bad in the recession. Politicians must make sure that their banking systems are adequately capitalised and deal with the illiquid securities at the heart of this crisis.

PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from BlackRock and Highfields Capital, a hedge fund based in Boston. It makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.

Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.

Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect, with the government receiving the rest. Eventually that will rise to 40 cents.
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Phone operators for PennyMac — working in shifts — spend 15 hours a day trying to reach borrowers whose loans the company now controls. In dozens of cases, after it has control of loans, it moves to initiate foreclosure proceedings, or to urge the owners to sell the house if they do not respond to calls, are not willing to start paying or cannot afford the house. In many other cases, operators offer drastic cuts in the interest rate or other deals, which PennyMac can afford, given that it paid so little for the loans.
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But a PennyMac representative instead offered to cut the interest rate on their $590,000 loan to 3 percent, from 7.25 percent, cutting their monthly payments nearly in half, Ms. Laverde said.