European gas supplies disrupted

Ukraine has denied taking any of the gas meant for Europe for its own use

Several European countries say their supplies of Russian gas have been cut or sharply reduced amid an energy price dispute between Moscow and Ukraine.

Serbia, which has had its supply completely cut, said it was a "critical" situation.

Countries as far west as Italy and Austria say they have received only 10% of their expected supply.

Amid cold weather across the continent, the European Commission said the supply cut was "completely unacceptable".

The EU depends on Russia for about a quarter of its total gas supplies, some 80% of which is pumped through Ukraine.

Ukraine's main energy company, Naftogaz, says talks with Russian counterpart Gazprom aimed at resolving the crisis are due to resume in Moscow on Thursday.

Naftogaz chairman Oleh Dubyna made the announcement, but it has not yet been confirmed by Gazprom.

Russia stopped supplying gas to Ukraine on New Year's Day in a row about unpaid bills. The row comes amid a cold snap across Europe likely to push up demand for gas.

EU GAS IMPORTS FROM RUSSIA 100% dependent on Russia: Latvia, Slovakia, Finland, Estonia More than 80% dependent: Bulgaria, Lithuania, Czech Republic More than 60% dependent: Greece, Austria, Hungary Source: European Council on Foreign Relations, 2006 figures Pressure rising as gas supplies fall Europe's need for Russian gas Bulgaria revisits nuclear power

Gazprom accuses Ukraine of an "unprecedented" shutdown of transit pipelines. It says only 40m cubic metres of gas is getting through to Europe, instead of 225m cu m.

Serbia's Srbijagas, which imports 92% of its natural gas from Russia, said it had about 10 days' of gas left, Reuters reported.

Slovakia says it will declare a state of emergency over the drop in gas supplies, though it aims to prevent the shortage hurting key public services and ordinary consumers.

The Austrian energy company OMV said it would now have to tap into its gas reserves after its supply fell to 10% of the expected level.

Bulgaria, almost wholly dependent on Russian gas via Ukraine, says it has sufficient supplies for just a few days. It says no more gas is flowing through a pipeline that also supplies Turkey, Macedonia and Greece.

Bulgarian President Georgi Purvanov said the situation was grounds for restarting a nuclear reactor, shut as part of Bulgaria's accession to the EU in 2007.

Gazprom decided to cut exports through Ukrainian pipelines by a fifth in a row over unpaid bills.

Wide impact

Early on Tuesday, Ukraine's Naftogaz said Russia had cut gas transit supplies by more than two-thirds and listed nine countries, including Germany, Poland, and Hungary which would receive reduced supplies as a result.

Gazprom's Alexander Medvedev said gas flow through Ukraine was a fraction of its usual level

"Naftogaz of Ukraine considers that in such a case if European users receive less volumes of natural gas, all claims of the noted countries must be directed to Gazprom," said a statement on the company's website.

Russian gas supplies to Turkey via Ukraine have been completely cut, the Turkish government said.

The Turkish government announced it was increasing the flow through an alternative pipeline, under the Black Sea, to compensate.

Turkey gets about 65% of its gas from Russia and about one-third of its daily supply has now been cut, the BBC's Sarah Rainsford reports. But the government says it has sufficient gas stocks to avoid immediate economic hardship.

Czech supplies also fell significantly overnight, and Croatia, which imports 40% of its gas, said supply of Russian gas via Ukraine had completely halted.

EU deplores quarrel

In a statement on Tuesday, a European Commission spokesman said that "without prior warning and in clear contradiction with the reassurances given by the highest Russian and Ukrainian authorities to the European Union, gas supplies to some EU member states have been substantially cut - this situation is completely unacceptable".

Europe's gas pipeline network Enlarge Map

"The Czech EU presidency and the European Commission demand that gas supplies be restored immediately to the EU and that the two parties resume negotiations at once with a view to a definitive settlement of their bilateral commercial dispute."

The new EU member states in Central and Eastern Europe are heavily - and in some cases entirely - dependent on Russian gas imports. Yet Germany and Italy together account for nearly half of the Russian gas consumed in the EU.

German Economy Minister Michael Glos called on Russia and Ukraine to resume talks, and is due to hold talks with senior Gazprom officials later on Tuesday.

But he said Germany could cope with any shortages. "Gas storage sites are full. And Germany gets its gas from different sources, for example from Norway or the Netherlands. Supplies from there could be increased," he said.

Many other countries are now tapping strategic reserves, built up to cope with just such a development, says the BBC's Europe correspondent Nick Thorpe.

Gazprom has promised to pump extra supplies through other pipelines - the Yamal from Arctic Russia through Belarus to Germany, and the Blue Stream to Turkey under the Black Sea.

'Gas stolen'

The move to reduce supplies going through the Ukraine by a fifth came after Russian Prime Minister Vladimir Putin held talks with Gazprom CEO Alexei Miller.

Mr Miller recommended that deliveries via Ukraine should be reduced "by the amount stolen by Ukraine, that is 65.3 million cubic metres of gas".

Ukraine has denied stealing gas, saying technical problems are disrupting the onward flow of gas to Europe.

The row between Russia and Ukraine has been simmering for weeks. Gazprom says Ukraine owes it more than $600m (£413m); Ukraine says it has paid its debt. The two sides have also failed to agree on the price Ukraine should pay for gas in 2009.

A similar row between Gazprom and Ukraine at the beginning of 2006 led to gas shortages in several EU countries.

EU officials have been meeting in Brussels to discuss the dispute and a delegation has also been sent for talks with both Ukrainian and Gazprom officials.

Gazprom wants Ukraine to pay $450 per 1,000 cu m of gas - more than double what Kiev says it is willing to pay, yet still less than what most EU states pay.

German billionaire kills himself

Mr Merckle had lost heavily on Volkswagen shares in 2008

German billionaire Adolf Merckle has committed suicide after his business empire ran into trouble in the global economic slowdown.

In a statement his family said he had been "broken" by the financial crisis, and had taken his own life.

Mr Merckle ran up losses of about 400m euros (£363m;$535m) last year due to wrong-way bets on Volkswagen shares.

He was ranked as the world's 94th richest person in 2008, and his family controls a number of German companies.

The 74-year-old's body was found on Monday near railway tracks in southern Germany. Officials said there was no evidence that anyone else was to blame.

Volkswagen losses

His family, which had reported him missing after he failed to return home, said in a statement: "Adolf Merckle lived and worked for his family and his firms."

"The distress to his firms caused by the financial crisis and the related uncertainties of recent weeks, along with the helplessness of no longer being able to act, broke the passionate family businessman, and he ended his life."

MERCKLE BUSINESS INTERESTS Phoenix Pharmahandel, drugs wholesaler with annual sales of 21bn euros Heidelberg Cement, cement firm with annual sales of 11bn euros Ratiopharm, generic drugs firm with annual sales of 1.8bn euros Kaessbohrer ski slope equipment firm with annual sales of 183m euros VEM, bought in 1997, includes three engine makers with annual sales of 280m euros

Mr Merckle's business interests included the generic drugs maker Ratiopharm and the cement maker Heidelberg Cement.

In all, his business conglomerate has about 100,000 employees and in 2008 reported 30bn euros in annual sales.

His holding company had recently been in talks with banks to secure credit after it ran up high levels of debt amid the global financial crisis.

The holding company said it had suffered heavy losses on investments in shares of the carmaker Volkswagen, which fluctuated wildly in value late last year as rival car company Porsche moved to increase its stake in VW.

Mr Merckle had helped turn his grandfather's chemical wholesale company into one of Germany's biggest pharmaceutical wholesalers, Phoenix Pharmahandel, in which he held a 57% stake.

He used his wealth, estimated by Forbes magazine last year to be $9.2bn, to take stakes in Heidelberg Cement and Ratiopharm.

Mr Merckle also owned stakes in companies that made a wide array of goods including all-terrain vehicles, software and textiles.

He is survived by his four children.

The End of the Financial World as We Know It

By MICHAEL LEWIS and DAVID EINHORN

Published: January 3, 2009

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.

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Op-Ed Contributors: How to Repair a Broken Financial World (January 4, 2009)

This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?

To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.

In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.

In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.

Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

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MSNBC - Toyota to suspend car production in Japan

11-day stoppage called as automaker grapples with low demand

Toyota employees work the assembly line at the Japanese automaker’s factory in Kitakyushu city, Fukuoka province, Japan. Facing sharply reduced production amid faltering U.S. sales, Toyota is suspending production at all 12 of its Japan plants for 11 days over February and March.

TOKYO - Toyota is suspending production at all 12 of its Japan plants for 11 days over February and March, a stoppage of unprecedented scale for the nation’s top automaker as it grapples with shrinking global demand.

The last time Toyota Motor Corp. halted production at all its Japan plants was in August 1993, when demand plunged because of a rising yen, and that was for only one day, according to the company.

A global economic downturn has hammered the auto industry in Japan and elsewhere, forcing carmakers to cut staff, lower production and delay new models. Major automakers in the U.S. had teetered on the brink of collapse until securing a multibillion dollar government lifeline.

“We are coping with a slump in global sales,” Toyota spokesman Hideaki Homma said Tuesday. “Demand in the world auto market is so depressed that every model is falling sharply in sales.”

Toyota said last year that it was stopping production at its 12 domestic plants for three days in January. But it decided on additional closures because of the global downturn. Toyota will stop output for six days in February and five days in March, it said.

Of Toyota’s domestic factories, four produce vehicles while the rest make engines and auto parts.
Overnight, Toyota reported that its U.S. sales in December were down 37 percent on year, a worse drop than Ford Motor Co.’s 32 percent drop and General Motor’s 31 percent slide.

Toyota last year suspended production at its auto plants in Alabama, Indiana and Texas for three months, and shut down output for two days in December at all its North American vehicle factories including five in the United States, one in Canada and another in Mexico.

Chrysler LLC also shut down its plants for a month in December, longer than the usual two-week break, while GM has said it would shut down a plant in Thailand for up to two months.

Toyota is also struggling in its home market, which has been stagnant for years. The sales drop has worsened amid a global recession.

Sales of new vehicles in Japan fell to 3.2 million vehicles last year, the lowest in 34 years, the Japan Automobile Dealers Association said Monday.

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Major automakers report U.S. sales plunge

Last month, Toyota said it was slipping into its first operating loss in 70 years, expecting 150 billion yen ($1.66 billion ) of operating losses for the fiscal year ending March 2009.

Toyota, which makes the Prius gas-electric hybrid and Camry sedan, expects 50 billion yen ($555 million) in net profit, down from 1.7 trillion yen earned the previous year.

In brutal economy, more sell their burial plots

(01-05) 04:00 PST Los Angeles -- Burial plot brokers are reporting an unprecedented uptick in the business of reselling grave sites, as money troubles prompt a growing number of people to put their burial plots up for sale, often at a loss.

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Baron Chu, who owns the burial site resale business Plot Brokers, said he is doing nine or 10 times as much business as usual, a jump he attributes to the economic downturn.

Chu said people are only getting about a quarter of what their plots would have fetched six months ago because of the increased supply hitting the burial plot market. He said one client, who had just been evicted from her home, got $500 for a plot worth $6,800.

"It allowed her to move into a hotel for a month where she can live and look for work," he said. "It kept her out of Skid Row."

In some cases, the sales are breaking up plots that have remained in families for generations.

Southern California native Carol Lieberman said she is trying to sell two adjoining plots at a cemetery in the Mission Hills area where her parents and other family members are buried.

"I need the money," Lieberman said.

Cal State Northridge psychology Professor Stan Charnofsky said people who sell their burial plots face a difficult dilemma of weighing their financial needs in life against their desire for a peaceful resting place beside family members after death.

"It's a decision to make between the history of your family and the current survival of your family," Charnofsky said. "A lot of people are obviously concluding it's more important to survive."

People Pulling Up to Pawnshops Today Are Driving Cadillacs and BMWs

Well-to-Do Turn to Last-Resort Lenders; Putting Up Diamonds, Dumpsters as Collateral

By GARY FIELDS

PHILADELPHIA -- At Society Hill Loan, a pawnshop in a middle-class neighborhood here, a steady rain fell outside as a fashionably dressed young man parked his Cadillac Escalade outside. Looking around warily, he came in to speak with Nat Leonard, co-owner of the store.

Nat Leonard

The visitor was a 29-year-old engineer who was laid off earlier this year from one of the local chemical companies. Since then, he's been cleaning planes at the airport for less than half the salary he was earning a year ago.

Now he needs a $2,500 loan on his watch -- a Movado Fiero with a diamond bezel -- to pay his mortgage note.

"I want to help," said Mr. Leonard. But unlike Rolex and a few other brands, "there's no market" for Movado in his pawn universe.

The young man, who didn't wish to give his name, left the store disappointed. "I'm not sure what I'm going to do," he said.

Typically, pawnshop customers have a household income of about $29,000, according to Dave Adelman, president of the 2,400-member National Pawnbrokers Association. But operators around the country say they are seeing a surge in new activity fueled in part by a different clientele: middle- and upper-middle-class customers facing ravaged stock portfolios, tightened bank credit and unexpected layoffs. In areas dogged by high unemployment and foreclosure rates, the pawn business is especially robust.

Rick LaChappelle, owner of four pawnshops in Maine, calculates he has lent about 33% more money this year than last. "The banking industry is not giving out any money right now," he said. "So people are relying on second-tier lending institutions."

While some pawnshops -- like Beverly Loan Co. in Beverly Hills -- have discreetly served the wealthy for decades, more stores, such as Society Hill, are newly awash with furs, diamonds and other baubles from the bubble. At places like Society Hill, transactions are up by as much as 40% in recent months.

Even Beverly Loan has seen a shift in customer patterns. "We have had so many $50,000-plus loans and more businesses [as clients] than ever before," said Chief Executive Officer Jordan Tabach-Bank. Many business clients, he said, are "getting loans to meet payroll or other obligations because their lines of credit are frozen."

Pawnshops are lending companies that take collateralized or pawned merchandise in exchange for money. If a customer defaults, or fails to pick up their belongings, then the shop can sell the goods. Though fees vary from state to state and are set by law, the cost of a typical $75 loan is about $15 a month. While total fees can pile up over a period of several months, the industry argues that its rates can be lower than some high-interest credit cards and bank fees.

Lee Amberg, owner of AA Classic Windy City Jewelry & Loan in affluent Evanston, Ill., said he's been seeing Cartier watches, two-carat diamonds, David Yurman jewelry and pieces from Tiffany's. One client, he said, brought in a fur coat from Saks Fifth Avenue that retailed at $9,000. She told him she needed a loan to help buy private-school uniforms for her child.

Diamond Exchange USA is more of a hybrid store. In addition to selling its own pieces, it makes loans against customers' goods and purchases used jewelry too. Located on a major thoroughfare in Bethesda, Md., it has a constant stream of Mercedes-Benzes, BMWs and other luxury cars pulling into the lot. Virtually all of the clientele are women. Many come to sell their gold or diamond jewelry.

A potential new customer recently strolled in to speak with co-owner Justin Carmody. A resident of Potomac, Md., she owns a small wholesale company and was looking to obtain a $6,000 loan on a 1.91-carat diamond ring given to her by her husband. With a 10% fee, she learned, it would cost her $6,600 to get the ring back. If she failed to resolve her cash issues in a month, she'd be responsible for an additional payment -- $600, or 10% of the principal -- each month until satisfying the debt.

Albert Langlois

"I've never done anything like this. I'm looking at my options," she said. "I'm trying to separate my emotions. I just want to get through the next week." Ultimately, however, she decided against the loan.

This year, the number of first-time pawnshop users is up 10%, according to Mr. Adelman of the pawnbroker trade group. Owners say the rate at which people are coming back to retrieve property and pay off loans has fallen about 10%. That leaves the store on the hook to sell the goods.

Though some pawnbrokers now have more items to sell -- the result of higher loan defaults -- their general prospects remain healthy. Richard Shane, managing director at Jefferies & Co., who covers the pawnshop industry, said publicly traded companies, such as Cash America International Inc., are doing well in this difficult economy. (Pawn balances at the company rose by 16% in the quarter ended Sept. 30.) Banks, moreover, continue to make funds available to them "because the businesses are strong and cash flow is strong," said Mr. Shane.

On a recent weekday morning, a line stretched from the front counter at Lewiston Pawn Shop. Mr. LaChappelle and his Lewiston, Maine, staff turned away many customers with less-than-desirable goods. Computers, because they become obsolete so quickly, are among the items that are hard to use as collateral. Other things such as porcelain figurines and collectibles have negligible loan value since there's a limited market to resell them if necessary.

"I try to take all I can but I also have to be aware of the market," explained Mr. LaChappelle. "We have to evolve with the economy or I get stuck with merchandise that doesn't sell."

At the 10-floor gallery, an out-of-work contractor named Albert Langlois walked the aisles pointing to construction equipment he has pawned as collateral for loans.

Included in the stash: industrial-size nail guns, drills, air compressors for running power tools and several saws. The scaffolding he uses to work on multi-story buildings is stacked in a storage room. "Pretty much everything I own is in here," Mr. Langlois said.

So far this year, Mr. Langlois, 40, has laid off the eight members of his contracting crew and lost a house through foreclosure. In addition to his equipment he has pawned two motorcycles, valued at $20,000 between them. Mr. LaChappelle has become one of the primary lenders around, Mr. Langlois said. "You can't go to a bank and get small loans to make ends meet, so you come to Rick."

Derek Arthur, 27, owner of Ground Up Construction, was returning to the store to recover his equipment after satisfying a loan. A year ago, he said, he had 20 people working for him, including subcontractors. Now he has four employees and just one job. He had needed a $3,000 loan to get the business through a rough period while awaiting payment from a customer.

Mr. Arthur figured no bank would lend him such a small amount for a month or two. So he pawned a dump trailer as well as other equipment and a smattering of jewelry. The money, he said, paid his work crew, insurance and other expenses.

"You have to have a Plan B," he said. "If you don't have one, you'd better find one fast."

Fears of a million layoffs a month in corporate America

As many as a million American jobs could be lost every month by next spring as businesses struggle to raise capital in financial markets consumed by fear, according to a new analysis.

November was the worst month in the US labour market since the oil crisis of 1974, as more than 500,000 US workers were laid off, according to official figures released on Friday.

But Graham Turner, of consultancy GFC Economics, says the rising cost of corporate debt is now flashing a red warning signal that far worse is to come over the next few months and job losses are heading for levels last seen in the 1930s Great Depression.

Corporate bond yields have rocketed since the credit crisis began as investors flee risky assets in search of safe havens such as US Treasuries. That effectively means many firms are being forced to pay eye-watering interest rates to borrow funds.

Turner says when the gap between the yield on high-risk company bonds and US Treasuries widens sharply, unemployment tends to shoot up - and current credit conditions are pointing to a doubling in the pace of layoffs, to more than a million workers a month, by spring.

'The correlation is holding up all too well,' he said. 'It's very disconcerting.' He added that the pace of layoffs already happening in the US 'is indicative of panic'. During the 1970s oil crisis the panic was relatively short-lived, he says. 'But the worry now is that this will just roll on and on.'

On Friday alone, embattled car firm General Motors, fund manager Legg Mason, and motor parts supplier Gentex announced plans to shed staff.

November's jobs figures were so much worse than analysts had expected that the Dow Jones share index actually rallied by 259 points, more than 3 per cent, as investors bet that Washington would have to launch a major new rescue package for the economy even before President-elect Barack Obama takes over the White House in January.

The scale of the layoffs in the US, which pushed unemployment to 6.7 per cent, could also point towards a further deterioration in conditions in the UK: David Blanchflower, an independent member of the Bank of England's Monetary Policy Committee and labour market specialist, warned recently: 'What happens in the US tends to be repeated six to nine months later in Britain'.

David Frost, director-general of the British Chambers of Commerce, believes Britain's companies are gearing up for large-scale layoffs.

'There will be a huge raft of redundancies. I am sensing that talking to firms. The worry is that next year the job losses will be just horrendous. All sectors are taking the hit. In the middle of the year it was construction and estate agencies. Now it is services, the automotive industry, retailers. Firms are waiting for Christmas and if they can't see any improvement they will cut their payrolls.'

Woolworths administrators made 450 of its office staff redundant on Friday, but the future of the 25,000 staff who work in its stores remains uncertain.

Wall Street: It's payback time

An angry mob of investors and taxpayers is assembling, and they want to see some executives' heads on pikes. The question for the courts will be, Who was just foolish with our money - and who was lying, cheating, and stealing?

By Roger Parloff, senior editor

January 6, 2009: 9:15 AM ET

(Fortune Magazine) -- In today's dire financial climate, what exactly should a CEO say when it's time to hold that quarterly earnings call with analysts and the media?

On the one hand, he could try refreshing candor and say, "Look, let's be honest. This sucker could go down." The problem with this approach is that it tends to ensure that the company will indeed go down - that afternoon. The stock price will plummet, lenders will call in their loans, banks and customers will freeze the company out, credit agencies will downgrade it, and soon our commendably honest CEO will notice a half-dozen satellite television trucks - those modern-day vultures - double-parked outside the lobby.

Or there's Plan B. The executive could exude confidence and willfully paint a disingenuously rosy picture featuring lots of gilded lilies. The problem with this tack is that, while it might get the company through a rough patch, the executive is certainly committing civil fraud, and if the company crashes and burns anyway, he may also go to prison.

It's no defense for an executive who bends the truth to say that he did so only to prevent a run-on-the-bank-type situation, says one criminal-defense lawyer. (The lawyer requests anonymity because in this climate, he notes, such an on-the-record statement might lose him some business opportunities.) Even if the executive thinks that short-sellers are spreading lies about his company, he can't respond in kind. If he does, this lawyer says, "he's betting the farm. He's betting his life."

Today's crisis has placed under the forensic microscope scores of reassuring assertions made by CEOs and CFOs during earnings calls or "investor day" gatherings or breezy, on-camera flirtations with Maria Bartiromo that have proved, sometimes within hours, breathtakingly off the mark. Were the officials honestly relying on flawed business models - or lying through their teeth?

It's not just the Securities and Exchange Commission, New York State attorney general Andrew Cuomo, and hordes of civil plaintiffs lawyers who want to find out. According to understated disclosures in SEC filings or newspaper reports, federal criminal prosecutors in Manhattan, Brooklyn, Newark, Los Angeles, San Francisco, Seattle, and Alexandria, Va., are all poring over e-mails and other records right now trying to answer that question in regard to high-level officers at such formerly blue-chip companies as Lehman Brothers, AIG, Washington Mutual, Countrywide Financial, Fannie Mae, and Freddie Mac.

To be clear, we're not talking here about sensational, not conceivably legal, out-and-out Ponzi schemes, like the $50 billion one that former Nasdaq chairman Bernard L. Madoff has been arrested for, or brazen forgery and criminal impersonation, like the $100 million spree that glitzy New York litigator Marc S . Dreier has been accused of. Crimes like those typically have only one of two defenses: (a) "It wasn't me," or (b) "Okay, it was me, but I was sleepwalking on Ambien at the time." This article is, rather, about an entirely different category of accusation. The probes being discussed here concern statements that ultimately proved incorrect, but which reasonable, straight-faced people can, and vigorously do, contend were honest when made.

The level of fury surrounding these inquiries is of a different order from what we saw with, say, the backdating scandals or the Enron and WorldCom failures. Today's credit collapse has already vaporized about $9 trillion in investment capital, while ripping another trillion in assorted bailout money from the pockets of enraged taxpayers - also sometimes known as "jurors."

So there's an angry mob with pitchforks assembling, and they want to see some heads on pikes. While former Enron CEO Jeff Skilling could at least try to have his case transferred out of Enron-devastated Houston, the credit-crisis targets will have no such card to play. This time the corporate shenanigans have wrecked the globe. "This is the ugliest enforcement environment I've ever seen in my professional career," says one criminal- defense lawyer, who also asks for anonymity.

"People are hot," observes John Dowd, who heads the white-collar unit of Akin Gump Strauss Hauer & Feld. "It can get toxic pretty quickly."

People have a right to be angry, but anger is not the best frame of mind in which to mete out due process. Here, the process that is due requires distinguishing foolish mistakes from lies and fraud - a line that can get surprisingly fine. To the chagrin of John Q. Public, there will be serious defenses in most of these cases.

To begin with, bad business models - even business models that in retrospect look like prescriptions for disaster - are not crimes as long as they are fully disclosed to investors. And the fact that lenders were hawking outlandishly risky mortgages to people who were terrible credit risks was, in fact, no secret in America: It was bipartisan national policy. The fact that exotic mortgages (like "pick a payment option" AR Ms and "Alt-A" loans with no documentation of the buyer's assets or income) were then being packaged into complex derivative securities - some rated AAA by Moody's, S &P, and Fitch - was not just well known but also hailed as ingenious by some of the putatively best financial minds in the country.

If CEOs did not foresee the imminent train wreck that, looking back, seems so inevitable, neither did former Federal Reserve chairman and erstwhile "maestro" Alan Greenspan, who has recently, if self-servingly, termed our predicament a "once-in-a-century credit tsunami."

Accordingly, Carl "Chip" Loewenson Jr., cohead of Morrison & Foerster's white-collar defense unit in New York City, sees an impending collision of two powerful opposing forces. "No one - not Fannie, not Freddie, not Lehman, not AIG, not [SEC chairman Christopher] Cox, not [Federal Reserve chairman Ben] Bernanke - thought it would get as bad as it has gotten," he says. "This weighs against proving criminal intent.

"On the other hand," Loewenson continues, "there is a long populist tradition in our country that insists on finding villains in any economic downturn."

The job of the prosecutors is not to ferret out the root causes of what went wrong with the economy. That's a task for historians. The prosecutors are to look for unambiguous, intentional wrongdoing - and since a lay jury will be the official scorer here, the simpler the wrongdoing, the better. While it might be true, for instance, that investors were misled by the way companies handled mark-to-market accounting of derivatives, a prosecutor who makes that the centerpiece of his case will end up with a swearing contest between opposing accounting experts - a morass in front of a jury.

Investors dump $89B in U.S. securities in historic fire sale

By David J. Lynch, USA TODAY

The deep river of private money that helped knit together the global economy has abruptly dried up, new government figures show.

As the global financial crisis grew more severe this summer, foreigners sold almost $90 billion of U.S. securities — the greatest quarterly fire sale by overseas investors since the government began keeping track in 1960. U.S. investors also are retrenching; they unloaded about $85 billion worth of foreign holdings in the quarter, says the Commerce Department's Bureau of Economic Analysis.

"We've had a global panic. Everyone is pulling their money home," says economist Adam Posen of the Peterson Institute in Washington, D.C.

That's bad for economic growth in the U.S. because it threatens to starve capital-hungry companies and entrepreneurs. But it's especially serious for emerging-market countries that rely heavily on outside financing. Capital flows into countries such as South Korea, Turkey and Brazil were evaporating even before the mid-September Lehman Bros. bankruptcy made things worse.

The reversal of private capital flows signals an abrupt end to a nearly two-decades-long era of financial globalization, says economist Brad Setser of the Council on Foreign Relations. Private flows into and out of the U.S. for purchases of stocks, corporate bonds and federal agency bonds have dropped from around 18% of economic output to near zero "in a remarkably short period of time," Setser says.

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The past five quarters — roughly since the August 2007 onset of the financial crisis — private foreign investors have been net sellers of U.S. securities. The turnabout represents a dramatic change from the first half of 2007 when foreign purchases of U.S. securities other than Treasuries averaged about $250 billion per quarter.

The past two quarters also have seen an about-face in cross-border bank flows as institutional investors found lenders unwilling to extend credit. In the first quarter of 2008, foreigners deposited more than $79 billion with U.S. banks. That flow reversed in the second quarter, as foreigners withdrew a staggering $256 billion, and the outflow continued in the third quarter with an additional $147 billion. Likewise, banks in the U.S. brought home more than $151 billion in the quarter, as overseas institutions repaid loans.

"Institutional investors, including banks, across the board are pulling their capital back home," says economist Eswar Prasad of the Brookings Institution.

One bright spot: Foreign central banks continue to spend heavily on U.S. government securities, allowing the U.S. to finance the gap between what it produces and consumes.