TOKYO (Reuters) - "The dollar hovered near a record low against the euro on Wednesday on expectations of an interest rate cut by the Federal Reserve, which wraps up a two-day policy meeting later in the session.

      The U.S. central bank is widely seen slashing the fed funds rate by a quarter percentage point to 4.5 percent to shield the economy from problems in the housing sector, following an aggressive half percentage point rate cut last month.

      The dollar was also kept in check as some market players speculated that the Fed will signal in its post-meeting statement that additional policy easing might be needed to avoid an economic recession.

      "Dealers are showing no hesitation in selling the dollar against the euro as they think the Fed is likely to go for more rate cuts even after the one expected today," said Tsutomu Soma, senior manager of foreign securities at Okasan Securities.

      The euro barely budged from late U.S. trade at $1.4438. In early Asian trade, the European single currency matched a record peak of $1.4442, first hit on trading platform EBS on Tuesday, which was the highest since its launch in 1999.

      But analysts warned that the Fed might not be so clear about its future policy path in the statement, so as to keep its options open on how to react to the economic situation.

      The dollar will rebound if the statement cools expectations for further monetary policy easing by the Fed, traders said.

      The Bottom Line:  The vicious cycle continues.

      LONDON (belfasttelegraph) - "Veteran reporter Seymour Hersh, who unearthed the My Lai massacre during the Vietnam war, says the West could now be on the verge of a major conflict with the Muslim world.

      The reporter is accusing the US President George Bush of 'science fiction' politics over his attitude towards Iraq and possible attacks against neighbouring Iran.

      Pulitzer Prize-winning Hersh - who also exposed the Abu Ghraib prison torture scandal - says Bush is trying to convince his people that Iran is behind the insurgency in Iraq.

      He says there's no guarantee that Mr Bush won't go to war against Tehran before he leaves office:

      "What we have now is operational planning. This is serious.

      "They have done their targeting, they've done everything they need.

      "They've limited the planning to try and get support from our allies, including the UK."

      Prime Minister Brown will have to decide how far British support will go. An all-out assault plan on Iran's nuclear facilities is said to have been ripped up by the Pentagon. In its place is said to be limited precision bombing of key facilities.

      Hersh stated that: "The bombing plan has had its most positive reception from Gordon Brown."

      Neither the Pentagon nor Downing Street say they recognise the assessment..."

      LONDON (CNNMoney.com) -- "Since the subprime crisis erupted earlier this year, vulture investors looking for bargains have been circling battered securities backed by mortgages.

      But the feeding has not yet begun in earnest - and that's not a good sign for the housing and credit markets.

      While opportunistic investors may be reviled by some, their presence is often an indication that a beaten down market has reached a bottom. The longer they stay away, the more likely it is that turmoil will roil the market.

      "[Distressed debt investors] are a good thing for the market - they're a new force for providing liquidity," said Mark Adelson, an independent mortgage securities analyst.

      For sure, vulture investors are getting ready to strike. Fundraising in the first nine months of the year hit a record $6.6 billion, according to London-based Private Equity Intelligence.

      The research firm doesn't break down how much of that total is directed at risky mortgage-related debt, but several high-profile investors are eyeing the sector. The market chattered last month about a new $2 billion fund by Allianz's (Charts) Pacific Investment Management Co. Distressed debt investor TRW Group and hedge-fund firm Marathon Asset Management also have been said to be making moves in the sector.

      The mortgage meltdown has sent many investors fleeing from risky mortgage bets like subprime-backed securities and collateralized debt obligations, which are pools of bonds sold off in slices of varying credit risk. It has also brought out vulture investors who, as their name suggests, smell an opportunity.

      These investors face the difficult task of determining when prices for the distressed securities have hit a bottom. Until they're sure they're getting a bargain, they're likely to hold back on investing their money..."

      The Bottom Line:  Nothing new.

      LONDON (BBC) - "Oil prices have risen to fresh highs due to a combination of the weak dollar, supply concerns in Mexico and continued tensions in northern Iraq.

       By close of trade in New York, US light crude for December delivery rose by $1.67 to $93.53 a barrel, marking a record settlement price.

       Light crude had hit an intraday high of $93.80. In London, Brent crude added $1.63 to settle at $90.32 a barrel.

       Some analysts believe oil prices will hit $100 a barrel before year end.

       "Every new bullish factor pushes US crude irrationally closer to $100 barrel," French investment bank Societe Generale said in a commentary on energy markets.

'Geopolitical tensions'

       An array of factors has forced prices up, analysts said.

More:

How a Fed rate cut raises oil proces

      Noel was expected to dump up to 20 inches (50 centimeters) of rain on the Dominican Republic and Haiti, which share the island of Hispaniola, as it heads northwest toward the Bahamas.

      The spinning tropical storm had been forecast to hit Haiti hardest but veered toward the Dominican Republic, apparently catching residents offguard.

      "We didn't know that it was going to be like this, it took us by surprise," said Guarionex Rosado as he left his home in La Cienaga, one of Santo Domingo's most affected neighborhoods.

      Noel temporarily knocked out the Dominican Republic's entire power system early Monday, plunging 9.4 million people into the dark for about two hours, said Radhames Segura, vice president of the state-owned electric company..."

      NEW YORK (Reuters) - "In the weeks after Wall Street returned from the Labor Day holiday, the credit market picture appeared to brighten, with loans moving through the system and banks reporting numbers not nearly as bad as some feared.

      But that picture turned gloomy again this week when Merrill Lynch and Co Inc (MER.N: Quote, Profile, Research) posted a quarterly loss and a whopping $8.4 billion write-down, mostly from bad investments related to risky subprime mortgages.

      The larger than expected write-down sent a fresh wave of anxiety across Wall Street and fueled fears that the woes of the credit market -- which impacts the buying and selling of everything from residential homes, to commercial buildings, to entire corporations -- were far from over.

      The fear throughout the financial world is that there are more ugly numbers coming, making the current bloodshed in America's banking sector look like a scratch.

      "People are really afraid of the unknown, in the sense that nobody really knows what's coming," said Steven Rattner, managing principal of media-focused private equity firm Quadrangle Group. "Nobody knows what all this exposure really amounts to. It's very opaque."

      Bank exposure to the subprime mortgage mess is a major concern, as is exposure to hundreds of billions of dollars in leveraged loans from private equity takeovers stuck on their balance sheets.

      Particularly worrisome for analysts and investors is the growing sense the banks themselves are unclear as to the exact value and exposure to mortgage-related investment pools known as collateralized debt obligations (CDOs). Merrill CEO Stan O'Neal said during the earnings conference call he misjudged the bank's exposure to subprime and he struggled to explain why.

      The Bottom Line:  Alarm bells folks; they are ringing.

      SINGAPORE (Reuters) - "U.S. crude oil futures leapt more than $1 a barrel to surpass $93 for the first time on Monday, supported by news of a halt to one-fifth of Mexico's oil output as well as the weak U.S. dollar and geopolitical tension.

      Oil, touching its third record high in as many days, added another 50 cents to earlier gains amid a flurry of buying possibly linked to technical levels, traders said. It was trading up $1.28 a barrel at $93.14 by 0334 GMT..."

More:

New highs for stocks and oil

      WASHINGTON (Computerworld) -- "If a pandemic strikes the U.S., it will kill about 1.7 million people, hospitalize 9 million, exhaust antiviral medications and reduce basic food supplies, according to a planning scenario developed by financial service firms preparing for such a catastrophe.

      This particular disaster occurred only on paper. But those grim numbers are some of the pandemic planning assumptions used by nearly 3,000 banks, insurance companies and security firms in a just-concluded, three-week, paper-based exercise that may have been the largest pandemic test of its kind.

      In each week of this drill, participants -- some 10,000 people were involved -- received an updated scenario and were asked to assess their capability to deliver services as the pandemic deepened and then abated.

      "We wanted to look at the impact a pandemic can have on our sector," said George Hender, chairman of the Financial Services Coordinating Council, in a teleconference Wednesday. "One of the things that we tried to do is put some real stress on the firms."

      During the height of the pandemic, which was estimated to occur midway through the scenario, participants were asked to consider operating with an absentee rate of nearly 50% -- above the 35% to 40% rate federal officials believe may actually happen, said Hender. "We deliberately took the rate up much higher to see where their stress points were," he said.

      The financial services groups are now sharing the pandemic flu exercise information, and all the scenarios are available for download.

      The U.S. Department of Treasury is also a sponsor of the test, and Valerie Abend, deputy assistant secretary for critical infrastructure protection and compliance at the department, said the financial services industry has been "thinking long and hard about a pandemic."

      "We are one of the most prepared, I would argue, if not the most prepared of the critical infrastructures that are out there," said Abend.

      One thinks back to the whistle-stop Asian tours that the then Treasury Secretary Robert Rubin did 10 years ago. Such trips became more numerous as the Asian financial crisis spread from Bangkok to Jakarta to Seoul to Kuala Lumpur and beyond.

      At every stop, Treasury bigwigs lectured leaders to scrap the financial socialism and crony capitalism feeding the excesses behind Asia's turmoil. They counseled fiscal belt-tightening, higher interest rates, stronger currencies, avoidance of asset bubbles and limits on bailing out reckless investors.

      Basically, the United States told Asia to avoid doing much of what the United States is doing today amid its own crisis.

      Take the Federal Reserve, which cut interest rates twice and hinted at doing more. The investor Marc Faber is absolutely right when he says the Fed acted "like a bartender" and that its actions are contributing to asset bubbles. The United States also has avoided reining in imbalances, including huge current-account and budget deficits.

      The United States is arguably devaluing its way to faster growth, something Treasury officials chastised Asians for in 1997. Paulson puts on a good poker face, saying he favors a strong dollar to placate Europe's concerns. He hardly seems bothered by the euro's 14 percent surge against the dollar this year.

      As for crony capitalism, Asians can turn the mirror on the United States with one word: Halliburton. The region also watched with a mixture of horror and satisfaction when free market symbols such as WorldCom and Enron blew up a few years back.

      Asians were berated for a lack of transparency. In the late 1990s, the United States demanded that reserves figures be published and that clear lines be drawn between governments and private sectors.

      In the United States, dubious mortgage products were sold, repackaged and resold with negligible transparency, while ratings companies approved of the process. The government and the Fed just stood by..."

      The Bottom Line:  In the company of fools, no one can look the part of a sage.

       LONDON, England (CNN) -- "The world has reached the point of maximum oil output and production levels will halve by 2030 -- a situation that will eventually lead to war and disaster, a report claims.

       The German-based Energy Watch Group released a report Tuesday saying the world's oil production peaked in 2006 and from now on will drop by around 3 percent a year. It says that by as early as 2030, the global availability of oil will be half of what it was at its peak.

       "It's a very serious result," said Hans-Josef Fell, a German lawmaker from the environmentalist Green Party who commissioned the report. "I fear the world will come into a big economic crisis in the coming years."

       The report warns that coal, uranium, and other key fossil fuels are also in declining supply. It predicts the fall in fossil fuel production will bring with it the threat of war, humanitarian disaster, and general social unrest.

       But Leo Drollas, who leads oil and gas market analysis and forecasting at the Center for Global Energy Studies in London, said there are plenty of supplies and no looming crisis. He said the report sounds like "scaremongering."

       Drollas says production could still slow one day, but only because new reserves will be considered too difficult or expensive to extract.

       "Oil could be left in the ground and we could move on to another fuel in the future, not because we're running out of oil but because, economically speaking, it is not worth extracting the oil," Drollas said.

      NEW YORK (Reuters) - "Wall Street is counting on a Halloween treat from a U.S. central bank that looks set to lower interest rates next week, but the Fed might just double the sweetness with another surprisingly large cut.

      Admittedly not the predominant view on Wall Street, it has nonetheless gained some ground following news this week that the U.S. housing slump, already the most severe in more than a decade, had taken another turn for the worse.

      Respectable consumer spending and upward revisions to employment earlier this month had convinced analysts the Federal Reserve could afford to pause at its October 30-31 meeting, having chopped the benchmark fed funds rate by a half point to 4.75 percent in September.

      Since then, a deepening of the housing downturn, including a startling drop in home values, has put a modest quarter point decrease back on the market's radar. Nonetheless, the vast majority of investors have stopped short of forecasting another 50 basis point cut.

      Yet a closer look at the reasoning behind the surprisingly robust reduction in rates at its last meeting, as well as developments since, suggests the Fed may opt for an encore. Last time around, it is worth remembering, very few expected the bolder cut that came to pass.

      "We're entering a period of speculation of whether the Fed will go 25 or 50" basis points, said Steve Malyon, currency strategist at Scotia Capital in Toronto.

      For one thing, policy-makers specifically stated in their last communique that the aggressive cut had been preemptive, an effort to keep tighter credit conditions from hanging around long enough to crimp an already faltering economy.

More:

US mortgage firm sees $1.2bn loss

Bruised dollar hits record lows on rate cut fears

For sale: 2 million empty homes

What Goes Around, Comes Around?

The Downward Trend Is Unstoppable

Three-Ingredient Recipe for Recession

BOE Says Banks Face 'Shocks' After Credit Collapse

SIV-Positive

      The Bottom Line:  Ugly situation just got worse.

      NEW YORK (Reuters) - "Oil prices shot to an all-time high above $92 a barrel on Friday as the tumbling dollar and Nigerian output disruptions helped extend a rally that has lifted prices nearly 30 percent since August.

      Worries that supplies may come up short ahead of the Northern Hemisphere winter have fueled the rise, drawing a fresh wave of speculative money from investors.

      U.S. crude settled up $1.40 at $91.86 a barrel, off the record $92.22 struck during electronic trading earlier.

      Oil was closing in on its inflation-adjusted high of $101.70 seen over the course of April 1980, a year after the Iranian revolution and at the start of the Iran-Iraq war.

      London Brent gained $1.21 to $88.69 a barrel.

      "Fresh highs are now attracting fresh buying, especially following yesterday's violation of the futures highs just above the $90 level," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.

      Prices jumped past $90 a barrel after a U.S. government report on Wednesday showed a sharp drop in crude stocks in the world's biggest energy consumer.

      WASHINGTON (Reuters) - "A test of a missile defense system successfully intercepted a ballistic target, the U.S. military said on Saturday, a boost to development of an anti-missile shield program.

      The hit by the Lockheed Martin Corp.-built Terminal High Altitude Area Defense (THAAD) program was the fourth in as many tests and involved intercepting the missile outside the Earth's atmosphere, the U.S. Missile Defense Agency said.

      The THAAD is designed to defend troops, population centers and critical facilities against short- to medium-range ballistic missiles of a type that could be fired by Iran or North Korea. The system could also be sold to U.S. allies like Israel.

      Military representatives from Israel, Australia and the United Arab Emirates observed the test conducted off the island of Kauai in Hawaii, said Riki Ellison, who heads a missile defense advocacy group funded in part by military contractors.

      The test conducted late Friday evening was designed to show how the radar, launcher, fire control equipment and procedures of the system worked together, as well as the interceptor detecting and destroying the target using only the force of the collision.

      The system is a part of a broader U.S. anti-missile shield and is the only one able to engage targets in or outside the atmosphere..."

More:

Attack Iran and you attack Russia

Iran's Guards: We are ready for war

Putin compares US shield to Cuba

Turkey pounds rebel positions, Iraq pushes diplomacy

      NEW YORK (Reuters) - "Bank of America Corp (BAC.N: Quote, Profile, Research) on Thursday said it will stop offering home mortgages through brokers by the end of the year, resulting in a loss of 700 jobs, so that it may focus on lending directly to consumers.

      The job cuts are part of the 3,000 that the second-largest U.S. bank announced on Wednesday, after a poor quarter in investment banking led to a larger-than-expected 32 percent drop in quarterly profit.

      "We believe our long-term opportunity lies in maximizing our more competitive retail channels," Floyd Robinson, who runs the bank's consumer real estate operations, said in a statement.

      The cuts affect about 5 percent of the bank's 13,000 employees in consumer real estate.

      Charlotte, North Carolina-based Bank of America plans to offer mortgages through its 5,748 branches, where it employs about 10,000 personal bankers. It also has 2,200 mortgage loan officers in 33 U.S. states and Washington, D.C.

      Other mortgage lenders have this year also reduced their reliance on brokers, including Wells Fargo & Co (WFC.N: Quote, Profile, Research), Washington Mutual Inc (WM.N: Quote, Profile, Research) and Wachovia Corp (WB.N: Quote, Profile, Research).

      Bank of America made $95 billion of mortgage loans from January to June, ranking fifth nationwide, according to the newsletter Inside Mortgage Finance.

More:

Economists smile as greenback drops

The Escalating Costs of Imperial Overstretch

Sharp drop in US new home sales

      The Bottom Line:  The writing is there; right there on the wall.

       The new measures target the finances of Iran's Islamic Revolution Guards Corps and three state-owned banks.

       US Secretary of State Condoleezza Rice said the moves were part of "a comprehensive policy to confront the threatening behaviour of the Iranians".

       But Iran said the latest "hostile policies" were counter to international law, and accused the US of hypocrisy.

       The US declared the Revolutionary Guards a "proliferator of weapons of mass destruction", a reference to ballistic missiles they are allegedly developing, while their elite overseas operations arm, the Quds Force, was singled out as a "supporter of terrorism".

       The US has repeatedly accused Iran of destabilising Iraq and Afghanistan, blaming the Revolutionary Guards for supplying and training insurgents.

'Illicit activities'

       Ms Rice accused Iran of a litany of abuses, including pursuing technologies "that can lead to a nuclear weapon", building ballistic missiles, and spurning peace talks.

      LONDON (Reuters) - "Every day more loans to more Americans with all sorts of credit profiles, secured on all sorts of housing, are going bad, and every day the chances of a recession rise.

      From the beginning, Fed officials and others have preached "containment" on the housing debacle: first that its effects would be confined to subprime borrowers, then to locations, such as California, and finally that the damage would not spread too far within the economy.

      But like a nightmare version of the movie Spartacus, now even the most unlikely borrowers are standing up and telling their lenders: "I am subprime".

      Wachovia Corp (WB.N: Quote, Profile, Research), for example, last week reported disappointing earnings and set aside $408 million against bad loans, nearly quadruple the year ago figure.

      "It's interesting to note here that problems in these markets, really for all lenders, seem to be across the board without regard to originating FICO, the type of loan or the condition of the property," Wachovia chief risk officer Donald Truslow told analysts on a conference call. FICO is a credit scoring system widely used to gauge risk in lending to individuals.

      A close look at the latest loan delinquency figures from FirstAmerican LoanPerformance bears this out.

      The figures, which are only through July before the worst of the housing credit crunch hit, show that late payments, a red flag for eventual defaults, are rising across the board. What's worse, delinquencies are accelerating faster in some "safer" segments than they are in the subprime sector, which caters for those with poor credit histories.

More:

Staring into Countrywide's abyss

Japan's Economy Can't Afford 43% Housing Plunge: William Pesek

Too Many Black Swans?

      The Bottom Line:  Time to wake up folks.

More:

Food prices to treble in five years: CBH

The Globalization of Hunger

New Treasury documents reveal loans, swaps of U.S. gold

US dollar touches a new euro low

Weakened greenback sinks to fresh low

Panic of 1907 pales in comparison to risks of global market

      The Bottom Line:  The implications of self-explanatory at this point.

      The German-based Energy Watch Group will release its study in London today saying that global oil production peaked in 2006 - much earlier than most experts had expected. The report, which predicts that production will now fall by 7% a year, comes after oil prices set new records almost every day last week, on Friday hitting more than $90 (£44) a barrel.

      "The world soon will not be able to produce all the oil it needs as demand is rising while supply is falling. This is a huge problem for the world economy," said Hans-Josef Fell, EWG's founder and the German MP behind the country's successful support system for renewable energy.

      The report's author, Joerg Schindler, said its most alarming finding was the steep decline in oil production after its peak, which he says is now behind us.

      The results are in contrast to projections from the International Energy Agency, which says there is little reason to worry about oil supplies at the moment.

      However, the EWG study relies more on actual oil production data which, it says, are more reliable than estimates of reserves still in the ground. The group says official industry estimates put global reserves at about 1.255 gigabarrels - equivalent to 42 years' supply at current consumption rates. But it thinks the figure is only about two thirds of that.

      Global oil production is currently about 81m barrels a day - EWG expects that to fall to 39m by 2030. It also predicts significant falls in gas, coal and uranium production as those energy sources are used up.

      Britain's oil production peaked in 1999 and has already dropped by half to about 1.6 million barrels a day.

      The report presents a bleak view of the future unless a radically different approach is adopted. It quotes the British energy economist David Fleming as saying: "Anticipated supply shortages could lead easily to disturbing scenes of mass unrest as witnessed in Burma this month. For government, industry and the wider public, just muddling through is not an option any more as this situation could spin out of control and turn into a complete meltdown of society."

      Mr Schindler comes to a similar conclusion. "The world is at the beginning of a structural change of its economic system. This change will be triggered by declining fossil fuel supplies and will influence almost all aspects of our daily life."

      Jeremy Leggett, one of Britain's leading environmentalists and the author of Half Gone, a book about "peak oil" - defined as the moment when maximum production is reached, said that both the UK government and the energy industry were in "institutionalised denial" and that action should have been taken sooner..."

      By Monday afternoon, the California Department of Forestry and Fire Prevention had reported 13 active wildfires have consumed more than 98,000 acres and destroyed or damaged at least 50 homes and businesses across six counties.

      The winds driving the flames are expected to stay strong, coming out of the northeast, at least through Tuesday, according to CNN meteorologist Rob Marciano.

      "It's a tragic time for California," California Gov. Arnold Schwarzenegger said earlier Monday.

      He declared a state of emergency in seven counties and asked the National Guard to pull 800 soldiers from patrolling the U.S.-Mexico border to help battle the wildfires.

More:

Burned by Real Estate, Some Just Walk Away

"The Fundamentals Are Sound"

Asian stocks sink on U.S. worries

Euro hits record high versus dollar on weak stocks

U.S. banks face one-two credit punch

      The Bottom Line:  We're seeing everything getting squeezed at the bottom line.

      He said Iran's efforts to pursue technology that would allow them to build a nuclear weapon are obvious and that "the regime continues to practice delay and deceit in an obvious effort to buy time."

      If Iran continues on its current course, Cheney said the U.S. and other nations are "prepared to impose serious consequences." The vice president made no specific reference to military action.

      "We will not allow Iran to have a nuclear weapon," he said.

      Cheney's words seemed to only escalate the U.S. rhetoric against Iran over the past several days, including President Bush's warning that a nuclear Iran could lead to World War III.

Mr. Chairman and members of the Committee:

      Thank you for this opportunity. My name is Robert Kuttner. I am an economics and financial journalist, author of several books about the economy, co-editor of The American Prospect, and former investigator for the Senate Banking Committee. I have a book appearing in a few weeks that addresses the systemic risks of financial innovation coupled with deregulation and the moral hazard of periodic bailouts.

      In researching the book, I devoted a lot of effort to reviewing the abuses of the 1920s, the effort in the 1930s to create a financial system that would prevent repetition of those abuses, and the steady dismantling of the safeguards over the last three decades in the name of free markets and financial innovation.

      Your predecessors on the Senate Banking Committee, in the celebrated Pecora Hearings of 1933 and 1934, laid the groundwork for the modern edifice of financial regulation. I suspect that they would be appalled at the parallels between the systemic risks of the 1920s and many of the modern practices that have been permitted to seep back in to our financial markets.

      Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and enduring. When you strip them down to their essence, they are variations on a few hardy perennials -- excessive leveraging, misrepresentation, insider conflicts of interest, non-transparency, and the triumph of engineered euphoria over evidence.

      The most basic and alarming parallel is the creation of asset bubbles, in which the purveyors of securities use very high leverage; the securities are sold to the public or to specialized funds with underlying collateral of uncertain value; and financial middlemen extract exorbitant returns at the expense of the real economy. This was the essence of the abuse of public utilities stock pyramids in the 1920s, where multi-layered holding companies allowed securities to be watered down, to the point where the real collateral was worth just a few cents on the dollar, and returns were diverted from operating companies and ratepayers. This only became exposed when the bubble burst. As Warren Buffett famously put it, you never know who is swimming naked until the tide goes out.

      There is good evidence -- and I will add to the record a paper on this subject by the Federal Reserve staff economists Dean Maki and Michael Palumbo -- that even much of the boom of the late 1990s was built substantially on asset bubbles. ["Disentangling the Wealth Effect: a Cohort Analysis of Household Savings in the 1990s"]

      A second parallel is what today we would call securitization of credit. Some people think this is a recent innovation, but in fact it was the core technique that made possible the dangerous practices of the 1920. Banks would originate and repackage highly speculative loans, market them as securities through their retail networks, using the prestigious brand name of the bank -- e.g. Morgan or Chase -- as a proxy for the soundness of the security. It was this practice, and the ensuing collapse when so much of the paper went bad, that led Congress to enact the Glass-Steagall Act, requiring bankers to decide either to be commercial banks -- part of the monetary system, closely supervised and subject to reserve requirements, given deposit insurance, and access to the Fed's discount window; or investment banks that were not government guaranteed, but that were soon subjected to an extensive disclosure regime under the SEC.

      Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s -- lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn't paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction -- assuming perpetually rising asset prices -- so in a credit crisis they can act as net de-stabilizers.

      A third parallel is the excessive use of leverage. In the 1920s, not only were there pervasive stock-watering schemes, but there was no limit on margin. If you thought the market was just going up forever, you could borrow most of the cost of your investment, via loans conveniently provided by your stockbroker. It worked well on the upside. When it didn't work so well on the downside, Congress subsequently imposed margin limits. But anybody who knows anything about derivatives or hedge funds knows that margin limits are for little people. High rollers, with credit derivatives, can use leverage at ratios of ten to one, or a hundred to one, limited only by their self confidence and taste for risk. Private equity, which might be better named private debt, gets its astronomically high rate of return on equity capital, through the use of borrowed money. The equity is fairly small. As in the 1920s, the game continues only as long as asset prices continue to inflate; and all the leverage contributes to the asset inflation, conveniently creating higher priced collateral against which to borrow even more money.

      The fourth parallel is the corruption of the gatekeepers. In the 1920s, the corrupted insiders were brokers running stock pools and bankers as purveyors of watered stock. 1990s, it was accountants, auditors and stock analysts, who were supposedly agents of investors, but who turned out to be confederates of corporate executives. You can give this an antiseptic academic term and call it a failure of agency, but a better phrase is conflicts of interest. In this decade, it remains to be seen whether the bond rating agencies were corrupted by conflicts of interest, or merely incompetent. The core structural conflict is that the rating agencies are paid by the firms that issue the bonds. Who gets the business -- the rating agencies with tough standards or generous ones? Are ratings for sale? And what, really, is the technical basis for their ratings? All of this is opaque, and unregulated, and only now being investigated by Congress and the SEC.

      Yet another parallel is the failure of regulation to keep up with financial innovation that is either far too risky to justify the benefit to the real economy, or just plain corrupt, or both. In the 1920s, many of these securities were utterly opaque. Ferdinand Pecora, in his 1939 memoirs describing the pyramid schemes of public utility holding companies, the most notorious of which was controlled by the Insull family, opined that the pyramid structure was not even fully understood by Mr. Insull. The same could be said of many of today's derivatives on which technical traders make their fortunes.

      By contrast, in the traditional banking system a bank examiner could look at a bank's loan portfolio, see that loans were backed by collateral and verify that they were performing. If they were not, the bank was made to increase its reserves. Today's examiner is not able to value a lot of the paper held by banks, and must rely on the banks' own models, which clearly failed to predict what happened in the case of sub-prime. The largest banking conglomerates are subjected to consolidated regulation, but the jurisdiction is fragmented, and at best the regulatory agencies can only make educated guesses about whether balance sheets are strong enough to withstand pressures when novel and exotic instruments create market conditions that cannot be anticipated by models.

More:

More Fallout from Funny-Money Finance Gone Bad?

Welcome to Captivity

      The Bottom Line:  Those who do not heed the mistakes of the past are doomed to repeat them.

      TEHRAN, Iran (AP) -- "The Iranian government announced Saturday that its top nuclear negotiator had resigned, a move seen as a victory for hardline President Mahmoud Ahmadinejad that could bring about an even tougher stance in ongoing talks.

      Government spokesman Gholam Hossein Elham, said Saeed Jalili, a little-known deputy foreign minister for European and American affairs, was to succeed Ali Larijani as lead negotiator effective immediately.

      Larijani in many cases held a hardline view on the nuclear standoff between Iran and the West but was also considered to be a more moderate figure than Ahmadinejad within Iran's hardline camp. He was seen as more committed to a diplomatic solution over Iran's nuclear program while Ahmadinejad is seen as not favoring talks with the West.

      Larijani's resignation was interpreted by many here as giving Ahmadinejad a free hand in dictating his views to the less experienced Jalili.

      Elham did not give a specific reason for Larijani's resignation other than to say he wanted to focus on "other political activities."

      "Larijani had resigned repeatedly. Finally, the president accepted his resignation," Elham told reporters.

      The United States and some of its allies accuse Iran of secretly trying to develop nuclear weapons. Iran denies the claim, saying its program is for peaceful purposes including generating electricity.

      Elham stressed that Iran's nuclear policy would not change because of Larijani's resignation.