By BOB HERBERT
A story that is not getting nearly enough attention is the ruinous fiscal meltdown occurring in state after state, all across the country.

Taxes are being raised. Draconian cuts in services are being made. Public employees are being fired. The tissue-thin national economic recovery is being undermined. And in many cases, the most vulnerable populations — the sick, the elderly, the young and the poor — are getting badly hurt.

Arizona, struggling with a projected $2.6 billion budget shortfall, took the drastic step of scrapping its Children’s Health Insurance Program. That left nearly 47,000 low-income children with no coverage at all. Gov. Jan Brewer is also calling for an increase in the sales tax. She said, “Arizona is navigating its way through the largest state budget deficit in its long history.”

In New Jersey, the newly elected governor, Chris Christie, has proposed a series of budget cuts that, among other things, would result in public schools receiving $820 million less in state aid than they had received in the prior school year. Some well-off districts would have their direct school aid cut off altogether. Poorer districts that rely almost entirely on state aid would absorb the biggest losses in terms of dollars. They’re bracing for a terrible hit.

For all the happy talk about “no child left behind,” the truth is that in Arizona and New Jersey and dozens of other states trying to cope with the fiscal disaster brought on by the Great Recession, millions of children are being left far behind, and many millions of adults as well.

“We’ve talked in the past about revenue declines in a recession,” said Jon Shure of the Center on Budget and Policy Priorities, “but I think you have to call this one a revenue collapse. In proportional terms, there has never been a drop in state revenues like we’re seeing now since people started to keep track of state revenues. We’re in unchartered territory when it comes to the magnitude of the impact.”

Massachusetts, which has made a series of painful cuts over the past two years, is gearing up for more. Michael Widmer, president of the Massachusetts Taxpayers Foundation, told The Boston Globe: “There’s no end to the bad news here. The state fiscal situation is already so dire that any additional bad news is magnified.”

California has cut billions of dollars from its education system, including its renowned network of public colleges and universities. Many thousands of teachers have been let go. Budget officials travel the state with a glazed look in their eyes, having tried everything they can think of to balance the state budget. And still the deficits persist.

In the first two months of this year, state and local governments across the U.S. cut 45,000 jobs. Additional layoffs are expected as states move ahead with their budgets for fiscal 2011. Increasingly these budgets, instead of helping people, are hurting them, undermining the quality of their lives, depriving them of educational opportunities, preventing them from accessing desperately needed medical care, and so on.

The federal government has tried to help, but much more assistance is needed.

These are especially tough times for young people. “What we’re seeing now in Arizona and potentially in New Jersey and other states spells long-term trouble for the nation’s children,” said Dr. Irwin Redlener, a pediatrician who is president of the Children’s Health Fund in New York and a professor at Columbia University’s Mailman School of Public Health.

“We’re looking at all these cuts in human services — in health care, in education, in after-school programs, in juvenile justice. This all points to a very grim future for these children who seem to be taking the brunt of this financial crisis.”

Dr. Redlener issued a warning nearly a year ago about the “frightening” toll the recession was taking on children. He told me last April, “We are seeing the emergence of what amounts to a ‘recession generation.’ ”

The impact of the recession on everyone, of whatever age, is only made worse when states trying to balance their budgets focus too intently on cutting services as opposed to a mix of service cuts and revenue-raising measures.

As Mr. Shure of the Center on Budget noted, “The cruel irony is that in a recession like this, the people’s needs go up at the same time that the states’ ability to meet those needs goes down.”

Budget cuts also tend to weaken rather than strengthen a state’s economy, especially when they entail furloughs or layoffs. Government spending stimulates an economy in recession. And wise spending is an investment in everyone’s quality of life.

All states have been rocked by the Great Recession. And most have tried to cope with a reasonable mix of budget cuts and tax increases, or other revenue-raising measures. Those that rely too heavily on cuts are making guaranteed investments in human misery.

http://www.nytimes.com/2010/03/20/opinion/20herbert.html

To the uninitiated, the term ‘Repo 105’ evokes the name of a basic finance course or perhaps an expensive perfume. However, the broader implication of Lehman’s corrupt accounting strategy is neither simple nor does it pass the smell test.

While hiding $50 billion off balance sheet is nothing to sneeze at, ‘Repo 105’ may be an unfortunate distraction. We should focus our attention on a far more mainstream and dangerous use of repurchase agreements backed by securitized bonds to grow balance sheets. This practice, enabled by a 2005 legal change, directly destabilized the financial sector and led to the ultimate credit crisis of 2008. In other words, the approximately $7-10 trillion repo financing market created what Gary Gorton and Andrew Metrick call the “run on repo” or what Gerald Epstein describes as a “run on the banking system by the banking system.”

A repurchase agreement or “repo” is a two-part arrangement. The seller (cash borrower) agrees to sell securities at a slight discount to a buyer (cash lender). Under that same agreement, that original seller agrees to buy them back at a future date at a higher price. The securities are known as “collateral.” The discount is known as the margin or a “haircut.” The ratio between the increase in price and the original price is known as the rate.

With ‘Repo 105,’ Lehman, according to volume III of the examiner’s report, acting as a seller (cash borrower), treated $50 billion in repo transactions as sales instead of financing transactions. Lehman did not reveal to investors that it was doing so. In contrast, standard practice was to record these transactions on balance sheet by increasing both cash (assets on the left side) and collateralized financing (liabilities on the right side). Thus a properly recorded repo transaction results in both a larger balance sheet and also higher leverage ratios.

Not wanting to issue more equity to boost leverage ratios, Lehman instead chose a cosmetic solution. With ‘Repo 105,” near the end of a reporting period, Lehman treated the transactions as sales and used the cash proceeds to pay down other liabilities. This made the firm appear to have a smaller balance sheet and less leverage than it truly had. The transactions were called ‘Repo 105’ and ‘Repo 108’ in reference to the size of the haircut. In other words, for ‘Repo 105’ transactions, Lehman would provide collateral purportedly worth 105% of the amount of cash it received.

As we blame the bad apples at Lehman, we fail to see how recent legal changes brought about bigger problems in the repo markets and how instead of reversing these missteps, the law may instead amplify it. Indeed, as discussed below, language in the Dodd draft released Monday, March 15th suggests we have not learned some basic lessons.

Lehman’s ‘Repo 105’ was blessed under UK law by a perhaps questionable legal opinion from the Linklaters law firm. However, the transformation of the broader repo market, from one backed by largely US Treasury and agency collateral to one backed by securitized bonds, was enabled by US law. As detailed below, changes to the Bankruptcy Code, through BAPCPA in 2005, expanded this vital financing market and made it far more unstable.

Repos have been called the “oil in the industry of Wall Street” largely because, prior to the global financial crisis, investment banks financed up to 50% of their assets in the repo markets. One bank analyst notes that “repo markets are only one channel linking the “shadow banking” sector to the broader economy.” Given its size and importance, the repo market is surprisingly obscure.

At its peak in 2007, the repo market in the US was estimated to be between $7 trillion to $10 trillion. Outstanding US repos today are estimated to be in the $3.8 trillion to $4.27 trillion range. Buyers (cash lenders) in the repo market are typically institutional investors like pension funds and mutual funds who need a liquid but relatively safe place to invest cash for the short term, often overnight. Buyers also include broker-dealers and banks that need securities to cover short positions. Sellers (cash borrowers) in the repo market are often broker-dealers and banks who use these arrangements to finance asset purchases and to leverage. With a matched-book repo, a dealer will act as buyer, bringing in collateral, then will with the same collateral act as a seller with a different counterparty, profiting on the spread.

Gorton observes that “The current panic centered on the repo market, which suffered a run when lenders [whom he likens to depositors during Depression-era banking runs] required increasing haircuts, due to concerns about the value and liquidity of the collateral should the counterparty ‘bank’ fail.” These repo lenders also refused to rollover existing repos. Both actions created “massive deleveraging . . . resulting in the banking system being insolvent.”

To be clear, though, the run did not appear to be on the whole repo market, but rather on repo agreements backed by non-government collateral–in particular, repo backed by securitized bonds. In other words, repo backed by Treasuries did not experience a run. Cash-rich buyers sought out opportunities to loan against US Treasuries. Perhaps the buyers did not trust the valuation of the securitized debt, including mortgage backed securities. Thus, it follows that haircuts got larger for non-government collateral – the amount of collateral posted for a loan escalated. And ultimately, some collateral simply could not be used at all. The average haircut on structured debt, according to Gorton and Metrick went from zero in early 2007, to 10% by March of 2008. In September 2008, the rate shot up from 25% to 45%.

Questions have arisen as to the wisdom in allowing a vast range off collateral to back repos. Some argue that the market needs more than Treasuries and agencies because of the demand for Treasury and agency bonds as collateral for derivatives trades. This, of course invites the question of whether a side-benefit to shrinking the derivatives market would be to make Treasuries more available for repo. For example, approximately 80% of the approximately $28 trillion credit default swap market (once closer to $57 trillion) is said to be contracts where the insured party did not own the underlying reference credit. Shrinking the derivatives market might decrease the demand for Treasuries, thus decreasing the reliance on riskier, less secure repo financing that is prone to dry up when asset values decline.

What enabled the tremendous expansion of outstanding repos were amendments to the US Bankruptcy Code in 2005 through BAPCPA. Prior to these amendments, it was clear that if a debtor filed for bankruptcy, a lender who had Treasury collateral, agency, commercial paper and certain bankers acceptances could hold onto that collateral. Unlike most parties with contracts with a debtor that have not been completed, the repo lender would not be subject to the automatic stay.

However, prior to the amendments (notwithstanding another possible provision to rely upon in the Code), it was not clear what would happen to the repo lender who had other types of collateral, in particular mortgage-related securities. BAPCPA made certain to protect these creditors who took in a new list of collateral types, including mortgage loans and interests in mortgage-related securities. It also was expanded to include foreign sovereign debt. These new types would also be free from the automatic stay. In addition interest paid on the repo would not be clawed back as a preference. This was affirmed in a subsequent court decision in early 2008 in the wake of the subprime crisis. Outstanding repos grew from $4.9 trillion in 2004 to $5.6 trillion in 2005 and ultimately to $7 trillion by first quarter 2009.

Repo contributed heavily to the maturity mismatch and interconnectedness at the center of the crisis. Maturity mismatch was at the heart of crisis as corroborated by investment bank leaders. For example, in the January FCIC hearings, Goldman Sachs CEO, Lloyd Blankfein noted that:

“Certainly, enhanced capital requirements in general will reduce systemic risk. But we should not overlook liquidity. If a significant portion of an institution’s assets are impaired and illiquid and its funding is relying on short-term borrowing, low leverage will not be much comfort.”

Little has been done to address the maturity mismatch associated with the use of short-term (overnight) repo funding by banks to finance longer term assets. Moreover, the recently announced SEC rules affecting mutual funds will only send more cash into repurchase agreements. This will likely increase now that the SEC is requiring taxable money market funds to hold 10% of total assets in instruments which the fund has the right to receive cash with one day’s notice and 30% that give the fund the right to receive cash in five business days.

Finally, language in the Senate financial reform bill, the “Restoring Financial Stability Act of 2010,” (see page 203, beginning on line 12) introduced on March 15 by Senator Dodd, appears to expand even further the rights of repo buyers (lenders) if a financial company is under an FDIC receivership. In the words of President Bush, “Wall Street got drunk.” The bartenders pouring the drinks were repo market buyers (lenders). We should impose some liability on these bartenders for the leverage and liquidity problems to which they contributed. However, instead, it appears we are going in the opposite direction.

http://baselinescenario.com/2010/03/16/a-whiff-of-repo-105/

It all started with Shearson Lehman American Express back in 1975. Lehman Brothers inherited an audit relationship with Ernst & Young when Lehman was spun off from American Express in 1994. Current Ernst & Young Global Chairman Jim Turley cut his teeth on American Express.

“The decision to make Lehman Brothers an independent company again, owned by American Express shareholders and Lehman employees, completes American Express’s effort to rid itself of the draining weight of its extraordinary, and ultimately unsuccessful, expansion in the 1980s…the two companies will share no directors and that Richard S. Fuld Jr. will continue as president and chief executive of Lehman. Fuld, in a brief telephone press conference, said Lehman was vigorously pursuing its plan to cut costs by $200 million but could not say if that would result in further loss of jobs. “It is much more important for us to talk in terms of dollars and not in terms of people,” he said.”

Ernst and Young (EY) was fired by American Express at the end of 2004. After a string of issues with independence that threatened their credibility and ability to accept new audit work, American Express unceremoniously dumped them and hired PricewaterhouseCoopers.

“In 2003, Amex shelled out $23 million to E&Y in audit fees, and $3.5 million for other services. The audit fee was the largest paid by any U.S.-based E&Y client…an E&Y spokesman declined to comment on the reasons the firm was dropped…E&Y has been in the Securities and Exchange Commission’s (SEC) cross-hairs for about a year, including one probe into whether the audit firm violated federal auditor independence rules by entering a so-called profit-sharing agreement in the 1990s with Amex’s travel-service unit…”

But EY’s relationship with Lehman continued until the bitter end. So it comes as no surprise to me that EY had a hard time acting independently with their “sticky” client. Lehman Bankruptcy Examiner Anton Valukas, of local Chicago Jenner & Block, sums it up nicely:

he Examiner concludes that sufficient evidence exists to support colorable claims against Ernst & Young LLP for professional malpractice arising from Ernst & Young’s failure to follow professional standards of care with respect to communications with Lehman’s Audit Committee, investigation of a whistleblower claim, and audits and reviews of Lehman’s public filings. (V3, Pg 1027)

More here:

http://retheauditors.com/2010/03/15/liberte-egalite-fraternite-lehman-brothers-troubles-for-ernst-young-threaten-the-big-4-fraternity/

5 Top Articles Examining The Lehman Examiner’s Report

SUBMITTED BY STEVEN MEYEROWITZ ON FRI, 03/12/2010 - 9:33AM

A lot is being written, including here, about the report released yesterday by the examiner for Lehman Brothers, but we’ve found five articles online that we believe do an excellent job in summarizing the key findings and conclusions of the report. They are:

“Lehman report blames execs, auditor,” by Grace Wong and Aaron Smith, at http://money.cnn.com/2010/03/12/news/companies/lehman_examiner/

“Factbox: What key witnesses told Lehman examiner,” by Phil Wahba, at http://www.reuters.com/article/idUSTRE62B0B620100312

“British law firm cleared way for Lehman cover-up,” by David Robertson and Alexandra Frean, at http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article7059592.ece

“Lehman Examiner Finds Fraud, Probably,” by Stephen Gandel, at
http://curiouscapitalist.blogs.time.com/2010/03/12/lehman-examiner-finds-fraud-possibly/?xid=rss-topstories

“Lehman Bros. accounting trickery alleged,” by Nathaniel Popper, at http://www.latimes.com/business/la-fi-lehman-report12-2010mar12,0,4628996.story

These officials, whose work was kept under wraps at the time, were assigned by Timothy Geithner, then president of the New York Fed, and Christopher Cox, then the S.E.C. chairman, to monitor Lehman in light of the near collapse of Bear Stearns.

Similar teams from the S.E.C. and the Fed moved into the offices of Goldman Sachs, Morgan Stanley, Merrill Lynch and others.

There were plenty of reasons to send in these SWAT teams. With investors on edge about the veracity of valuations on Wall Street — and with hedge fund managers like David Einhorn publicly questioning Lehman’s numbers — the government examiners rifled through Lehman’s accounts. They also interviewed executives about various decisions, and previewed the quarterly earnings reports.

Yet now, two years later, we learn through a 2,200-page report from Lehman’s bankruptcy examiner, Anton R. Valukas, that the firm was taking a creative approach with its valuations and accounting.

One crucial move was to shift assets off its books at the end of each quarter in exchange for cash through a clever accounting maneuver, called Repo 105, to make its leverage levels look lower than they were. Then they would bring the assets back onto its balance sheet days after issuing its earnings report.

And where was the government while all this “materially misleading” accounting was going on? In the vernacular of teenage instant messaging, let’s just say they had a vantage point as good as POS (parent over shoulder).

The new mystery is why it took this long for anyone to raise a red flag. “Even though Lehman dressed up its accounts for the great unwashed public, it did not try to fool the authorities,” Yves Smith, the author of “ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism,” wrote on her blog last week. “Its game-playing was in full view.”

Indeed, it now appears that the federal government itself either didn’t appreciate the significance of what it saw (we’ve seen that movie before with regulators waving off tips about Bernard L. Madoff). Or perhaps they did appreciate the significance and blessed the now-suspect accounting anyway.

Oddly, when the bankruptcy examiner asked Matthew Eichner of the S.E.C., who was involved with supervising firms like Lehman, whether the agency focused on leverage levels, he answered that “knowledge of the volumes of Repo 105 transactions would not have signaled to them ‘that something was terribly wrong,’ ” according to the examiner’s report.

There’s a lot riding on the government’s oversight of these accounting shenanigans. If Lehman Brothers executives are sued civilly or prosecuted criminally, they may actually have a powerful defense: a raft of government officials from the S.E.C. and Fed vetted virtually everything they did.

On top of that, Lehman’s outside auditor, Ernst & Young, and a law firm, Linklaters, signed off on the transactions.

The problems at Lehman raise even larger questions about the vigilance of the S.E.C. and Fed in overseeing the other Wall Street banks as well.

“I’m concerned that the revelations about Lehman Brothers are just the tip of the iceberg,” Senator Ted Kaufman wrote in a speech he was preparing to give Tuesday on the Senate floor. “We have no reason to believe that the conduct detailed last week is somehow isolated or unique. Indeed, this sort of behavior is hardly novel.”

Here’s how Repo 105 worked in simple terms: At the end of each quarter, to reduce its all-important leverage levels, Lehman would “sell” assets (typically highly liquid government securities) to another firm in exchange for cash, which it would use to pay down its debt. The assets were typically worth 105 percent of the cash Lehman received. Several days later, after reporting its earnings, it would buy the assets back. Normally, this would be considered a loan, or repurchase agreement, but instead it was booked as a sale.

Huge piles of cash were moving in and out. According to the examiner’s report, “Lehman reduced its net balance sheet at quarter-end through its Repo 105 practice by approximately $38.6 billion in fourth quarter 2007, $49.1 billion in first quarter 2008, and $50.38 billion in second quarter 2008.”

Perhaps tellingly, there is no evidence that Lehman kept two sets of books or somehow tried to hide what it was doing from regulators. The bankruptcy examiner spent over a year searching through virtually every e-mail message at the firm and didn’t say he found any evidence of a cover-up.

That may explain why so few at the firm seemed to think that what they were doing was wrong, based on the e-mail traffic reviewed by the examiner. They talked openly about Repo 105. And while some apparently felt queasy about it, they also repeatedly said that it was legal (there are no e-mail messages from Richard Fuld Jr. or any senior executive directing another executive to use Repo 105 to mask earnings).

Lehman’s shell game didn’t come to light until June 2008, when a lower-level executive named Matthew Lee sent a letter to management raising a host of questions about the firm’s practices. (By the way, the S.E.C. and Fed were still working inside the building at this point.)

What the examiner didn’t report, however, was that Mr. Lee started raising questions about Repo 105 only when it became clear that he was being replaced in his role, according to people briefed on the matter. Indeed, Mr. Lee’s original letter to management did not mention the use of Repo 105.

Whatever the case, in an age calling for more accountability on Wall Street, it seems we could use some in Washington too.

http://www.nytimes.com/2010/03/16/business/16sorkin.html

That’s what the municipal bond market is telling investors. It’s also telling them not to fret about state and local economies, beset as they are by budget deficits, pension shortfalls and rising health-care costs.

Of course, this market doesn’t speak in English, but in numbers. Sometimes, such as when tax-exempt bonds yield double their U.S. Treasury counterparts, the numbers shout. More often, and in the present case, they imply and infer.

What is the municipal market saying when the Los Angeles Unified School District borrows money for 10 years at 3.54 percent, or Seminole County, Florida, does the same for 3.49 percent, or the town of Rye, New York (a natural Aaa credit from Moody’s Investors Service) pays 2.93 percent?

California, Florida and New York are all looking at oceans of red ink right now, and for the foreseeable future. The market says: Don’t worry about it.

These aren’t isolated examples. Every week, hundreds of municipalities sell bonds. It’s business as usual. The Bond Buyer’s 20-General Obligation Bond Index, the oldest gauge of what it costs these places to borrow money for 20 years, is 4.34 percent, well below its average for the last 10 years of 4.79 percent, and within calling distance of its recent record low of 3.94 percent. That rate, not seen since the days of U.S. President Lyndon Johnson’s administration, was reached in 2009.

There has rarely been a better time for a municipality to borrow money. That’s a good thing because they will need it.

It’s Munigeddon

The news is bad. The headlines are worse, especially on the blogs, where a mixture of misinformation and hysteria typically holds sway. California is Greece! All the states are going bust! It’s Munigeddon!

Let me repeat: The news is bad. I can’t remember when it was ever worse, in terms of tax revenue and investment returns falling, and defaults rising.

Add to that the refusal of public officials to fire government employees and instead contemplate Chapter 9 municipal bankruptcy; labor unions digging in their heels; the Department of Justice’s investigation into anticompetitive practices among dealers; and now a Capitol Hill proposal to do away with tax- exempt borrowing altogether.
It’s not surprising that some people are starting to think the municipal market resembles the trailer for last year’s movie called “2012.” You may remember it: Actor John Cusack is racing his car ahead of a convulsive suburban landscape.

Scarce Commodity

The municipal market isn’t a disaster movie. There are no terrific explosions. States and localities rarely go out of business. They muddle through.

The municipal market isn’t the stock market. With equities, bad news has a real minute-by-minute impact. Yet here we are in the depths of Munigeddon, and it’s business as usual. One of the reasons for that is because municipal bonds are relatively inert within a few weeks after they are first sold. As the old municipal-market axiom has it: All bonds go to bond heaven. They are tucked away in safe deposit boxes until they mature or their owners are called.

The biggest reason tax-exempt yields are declining even in the face of bad news by the barrel is because there are fewer tax-exempt bonds. Tax-exempt, fixed-rate issuance fell 6 percent to $39.2 billion during the first two months of this year from the comparable 2009 period, based on Bloomberg figures. Taxable offerings, driven by the Build America Bonds program, were almost 16 times as plentiful, at $19.1 billion, the data show. Public offerings of the BAB subsidy deals began in April 2009.

It’s a simple matter of supply and demand. The issuers are selling more taxable bonds because the government’s 35 percent subsidy makes it cheaper for them to borrow that way than in the tax-exempt market. And the government aims to extend the BAB program, and expand other ones that would replace exemptions with tax credits. Even if Senators Ron Wyden and Judd Gregg go nowhere with their overhaul of the tax system, the tax-exempt market is dying a slow death. One way or another, the federal government will kill it off.

The scarcity premium trumps the hysteria discount.

http://www.businessweek.com/news/2010-03-09/-bond-heaven-defies-the-disasters-in-munigeddon-joe-mysak.html

Sants will step down by the end of the summer, the FSA said in a statement. He began his role in July 2007, weeks before problems emerged with subprime mortgages that triggered the credit crunch, and two months before a run on deposits at Northern Rock Plc, Britain’s first casualty of the crisis.

“When I was appointed I told the board that I planned to serve as CEO for three years, and I intend to stick to that timetable” said Sants, 54, in the statement. “Those three years have encompassed the most extraordinary circumstances for a financial regulator, and I am very proud of the manner in which the FSA rose to the challenge of dealing with such unprecedented turbulence across global financial markets.”

The opposition Conservative lawmakers in the U.K. have pledged to abolish the FSA and carve up its duties should they win this year’s election, which must take place by June. They said they will return banking supervision to the Bank of England, arguing that the FSA’s lax oversight of banks contributed to the crisis.

The FSA was created by Prime Minister Gordon Brown in 1997 in what was one of his first undertakings as the then-Chancellor of the Exchequer. The Labour government had swept to power the same year, promising to overhaul financial services so scandals like the collapse of Barings Plc and the closure of the Bank of Credit and Commerce International wouldn’t happen again.

‘Orderly Succession’

Brown’s spokesman Simon Lewis told reporters in London that there would be an “orderly succession” to appoint a replacement for Sants.

“Taken with the Conservative Party threat to break up the FSA, Hector Sants’s resignation risks the regulator being viewed as a lame duck,” said Jonathan Davies, a regulatory lawyer at London-based Reynolds Porter Chamberlain LLP. “This is not the environment in which the future of financial services regulation can be left hanging in the balance for months, it risks sowing too much confusion.”

Sants, a former executive at Credit Suisse Group AG, didn’t say where he would go after a period of six months’ leave that he must complete after departing. His resignation comes at a key time for regulation both in the U.K. and across the world, where policy makers are trying to grapple with rules in the wake of the worst financial crisis in a generation.

‘Dark Ages’

Sants has been critical of the Conservative plans in recent months, describing them in November as a “return to the dark ages.” He also said they made recruiting more FSA officials a challenge.

“Sants carried the can for failures at the FSA, but he did plenty of good stuff too,” said James Perry, a lawyer at Ashurst LLP in London. “As a poacher-turned-gamekeeper, he knew some parts of the market, particularly equity, very well indeed.”

A cross-party parliamentary committee criticized the FSA for “systematically failing” in its duty to supervise Northern Rock in January 2008. Since then, Sants made the FSA undertake an internal audit into what went wrong, and personally apologized for FSA failings.

He initiated a system of tougher, more intrusive regulation where the FSA scrutinizes all aspects of banks’ business models, from whom they hire to how much they pay them, saying last year that people “should be frightened” of the FSA.

‘Mixed Bag’

“In terms of his legacy it’s a mixed bag: he sharpened up and refocused the organization but as a result of the financial crisis, firms are struggling with a lot of heavier regulation that he is a proponent of,” said Ian Mason, a regulatory lawyer at London-based Barlow Lyde & Gilbert LLP, who left the FSA as an enforcement official in 2005. “He’s a very decent guy and popular with staff. He’s perceived as a good manager.”

His replacement will be chosen jointly by the U.K. Treasury and the FSA’s board. The Treasury declined to immediately comment on whether it will begin a selection process before the election, and the FSA said a replacement would be selected in due course.

“They may begin the wheels of it but candidates of standing will wait to see the outcome of the election and what the new role will entail,” Mason said of the selection process.

While Sants has no official deputy, the most senior FSA employees under him are Sally Dewar, managing director of risk; Jon Pain, managing director of supervision; and Mark Norris, the chief operations officer, according to the FSA’s Web Site.

‘Strong Purpose’

“He will leave behind an organization with strong purpose and clear strategy,” FSA Chairman Adair Turner said in the statement. “We will continue to work together to deliver the FSA’s reformed and intensive supervisory approach and drive forward the global regulatory reform agenda.”

Turner has been more visible than Sants in recent months on the world stage. Turner is heading a group at the Financial Stability Board, a collection of policy makers and regulators from the Group of 20 Nations, examining what to do about banks that are deemed too big to fail.

In addition to the Conservative plans to split up the FSA, the regulator also faces a new framework created by the European Union, which would bolster regional agencies’ powers to oversee banks, securities firms and insurers.

Sants had a career in the securities industry before joining the FSA in May 2004 as its managing director of wholesale and institutional markets. He was a regional CEO at Credit Suisse First Boston and worked previously with Donaldson Lufkin & Jenrette before it merged with CSFB in 2000.

He said in 2004 that he was joining the regulator as a committed Christian “to give something back to the system which had provided me with an interesting and worthwhile career.”

http://www.bloomberg.com/apps/news?pid=20601108&sid=a93hkb6y6smY

Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports.

Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies.

Speculation that the chairman of the US Federal Reserve, Dr Ben Bernanke, would make an appearance could not be confirmed last night.

The event will be dominated by Asian delegations and is expected to include governors of the Peoples Bank of China, the Bank of Japan and the Reserve Bank of India.

The arrival of the high-powered gathering coincided with a fresh meltdown on world sharemarkets, sparked by renewed concerns about global growth and sovereign debt.

Fears countries including Greece, Portugal, Spain and Dubai could default on debt repayments combined with disappointing US jobs data to spook investors.

Australia’s ASX 200 slumped 2.4 per cent, to a its lowest close since November 5, echoing a sharp fall on Wall Street.

Asian share markets were also pummelled, with Japan’s Nikkei 225 down almost 3 per cent and Hong Kong’s Hang Seng slumping 3.3 per cent.

The damage was also being felt by European markets last night with London’s FTSE 100 down sagging 1 per cent in early trade.

Sovereign debt fears rippled through to the Australian dollar which was hammered to a four-month low of US86.43 and was trading at US86.77 cents last night.

“This does feel like ‘08 and ‘07 all over again whereby we had these sort of little fires pop up and they are supposedly contained but in reality they are not quite contained,” said H3 Global Advisors chief executive Andrew Kaleel.

“Dubai should have been an isolated incident and now we are seeing issues with Greece, Portugal and Spain.”

It wasn’t all bad news with the RBA yesterday upping its Australian growth forecasts and flagging more interest rate rises this year.

The central bank estimates the economy grew 2 per cent in 2009, and will expand by 3.25 per cent in 2010, and by 3.5 per cent in 2011.

The outlook for global growth is likely to be a key theme of the high level central bank talks.

The gathering also comes at an important time for the BIS as it initiates an overhaul of the global banking system which will include new capital rules applying to banks and more stringent standards regulating executive pay.

A key part of the two-day talkfest will be a special meeting of Asian central bankers chaired by the governor of the Central Bank of Malaysia, Dr Zeti Akhtar Aziz.

Influential BIS general manager Jaime Caruana is also expected to take a prominent role in the talks.

Federal Treasurer Wayne Swan will address the central bank officials at a dinner on Monday night.

http://www.perthnow.com.au/business/secret-summit-of-top-bankers/story-e6frg2rl-1225827368391

We don’t hear a lot that is serious about the sorry state of the nation’s infrastructure or the trade policies that crippled so many American industries or our inability (or unwillingness) to compete effectively with China when it comes to the new world of energy for the 21st century or our abject failure to provide a quality public education for the next generation of American workers, scientists, artists and entrepreneurs.

Speaking at a conference here on Wednesday, Gov. Ed Rendell of Pennsylvania said that if we don’t act quickly in developing long-term solutions to these and other problems, the United States will be a second-rate economic power by the end of this decade. A failure to act boldly, he said, will result in the U.S. becoming “a cooked goose.”

Neither the politicians nor much of the mainstream media are spelling out the severity of these enormous structural problems or the sense of urgency needed to address them. Living standards are sinking in the United States, and there is no coherent vision or plan for reversing that ominous trend over the long term.

The conference was titled, “The Next American Economy: Transforming Energy and Infrastructure Investment.” It was put together by the Brookings Institution and Lazard, the investment banking advisory firm.

When Governor Rendell addressed the conference on Wednesday, he used words like “stunning” and “unbelievable” to describe what has happened to the nation’s infrastructure. His words echoed the warnings we’ve been hearing for years from the American Society of Civil Engineers, which tells us: “The broken water mains, gridlocked streets, crumbling dams and levees, and delayed flights that come from failing infrastructure have a negative impact on the checkbook and on the quality of life of each and every American.”

The conference was sparked by a sense of dismay over what has happened to the U.S. economy over the past several years and a feeling that constructive ideas about solutions were being smothered by an obsessive focus on the short-term in this society, and by the chronic dysfunction and hyperpartisanship in much of the government.

I was struck by the absence of grousing and finger-pointing at the conference and the emphasis on trying to develop new ways to establish an economy that is not based on financial flimflammery, that enhances America’s competitive position in the world, and that relieves us of the terrible burden of reliance on foreign energy sources.

I was also struck by the pervasive sense that if we don’t get our act together then the glory days of the go-go American economic empire will fade like the triumphs of an aging Hollywood star. One of the participants raised the very real possibility of Americans having to get used to living in an economy “that won’t be number one,” an economy that perhaps is more like Germany’s.

Rescuing the U.S. economy will require a commitment, and undoubtedly sacrifices, that need to start now. And it will require leadership that pulls together the best talents from all sectors of the society — not just business, not just government, but from everywhere.

Bruce Katz, the director of Brookings’ Metropolitan Policy Program, discussed some of the steps that need to be taken to remake an economy that has been thrown completely out of whack by frantic, debt-driven consumption, speculative bubbles, exotic financial instruments, and so on.

A new, saner, more sustainable economy will have to be more export-oriented, powered by cleaner fuels, bolstered by innovation that comes from a renewed focus on research and development, and committed to delivering a better-educated, more highly skilled work force.

Mr. Katz believes this is doable, but by no means easy. The nation’s infrastructure, he said, will have to “shift from 20th-century models of transport and energy transmission to rapid bus, ubiquitous broadband, congestion pricing, smart grid, high-speed rail and intelligent transport.”

New ways of financing such transformative changes will have to be developed, linking public and private capital, preferably through the creation of a national infrastructure bank, among other things. The nation’s political leaders and the public at large will have to grasp the difference between wasteful spending and crucial investments in the future.

It’s time for serious people to step forward and help lead on these critically important issues. Time is short.

http://www.nytimes.com/2010/02/06/opinion/06herbert.html?emc=eta1

The firm will now be able to assist issuers with capital structure services across the board, such as secondary stock offerings, corporate bonds and initial public offerings.

Due to the improving economy and the pent-up demand of issuers, the industry is forecasting a substantial pickup in capital markets activity this year.

Alexandra Lebenthal, President and Chief Executive, of the certified woman-owned firm, meaning she owns over 51% of the firm and has management control, said the firm has been thinking about expanding in the area for the past year, as it is a natural extension of its existing capital markets arm.

The boutique hired Steven Willis and Matthew Eng from Muriel Siebert to head up the efforts. Willis worked for four years as senior managing director of capital markets at Siebert. A search is under way to replace Willis and Eng, said a spokesperson for Siebert.

The expansion will offer existing clients more services, attract new clients and allow the sales force to offer more products to sell, said Willis.

Additional hires will be made to build out the area as well, Lebenthal said.

The New York-based boutique, which focuses on tax-free municipal bonds and wealth management, also added two professionals to its capital markets business in August. Lebenthal, which has 36 employees, is well known in the New York area for its advertisements advocating municipal bonds.

-By Jessica Papini, Dow Jones Newswires; 212-416-2172; jessica.papini@dowjones.com

http://online.wsj.com/article/BT-CO-20100203-717611.html?mod=WSJ_latestheadlines