[Congressional Record Volume 154, Number 148 (Wednesday, September 17, 2008)]
[Senate]
[Pages S8922-S8925]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                              THE ECONOMY

  Mr. DORGAN. Mr. President, today the stock market is down over 400 
points. Yesterday it was pretty mixed. The day before it was down over 
500 points. It is pretty clear that, judging by what is happening on 
Wall Street and judging what is happening to the economy--the news this 
morning on the front page of the paper: Loan guarantee offered to one 
of the largest insurance companies of America; the bankruptcy of an 
institution, Lehman Brothers, which has been around since the late 
1800s; it survived the Civil War and the Great Depression--all these 
together demonstrate a very serious problem for this country's economy. 
This economy is in some peril, and I think we should not underestimate 
the difficulties that face it.
  Our Treasury Secretary and the head of the Federal Reserve Board are 
taking midnight action, working 24 hours a day, apparently, convening 
meetings here and there, but they share something in common with us. 
None of us have ever been here before. No one quite understands where 
we are and what we do to deal with this very serious economic challenge 
to our country.
  This is a great country. It is the only country like it on this 
planet. It has a very strong economy and has had for a long while. It 
has lifted a lot of people out of poverty and dramatically expanded the 
middle class. It has provided opportunity over the last century that 
has been almost unparalleled. Yet we now face some very difficult 
times, and it requires all of us to think together and work together to 
put together some plans to deal with this issue and this challenge. 
However, you cannot fix a problem you have not diagnosed.
  I wish to talk a little about what got us here and a bit about what I 
think we ought to do about it. Two things: a subprime mortgage scandal 
decimated part of the foundation of this country's economy. I wish to 
talk about what it means. It sounds like a foreign language: Subprime 
loan scandal. Then, at the same time this economy was weakening because 
of an unbelievable subprime loan scandal, the price of oil was going up 
like a Roman candle, up to $147 a barrel. It has come down some now; 
back up I think $4 or $5 a barrel today. But that had a huge impact on 
this economy as well. In some ways, these problems have the same roots: 
Unbridled speculation, regulators who didn't regulate, those who were 
supposed to regulate were willing to be willfully blind.
  Let me talk about these things for a moment. Let me talk first about 
the situation with the price of oil. I held a hearing yesterday for 
almost 3 hours on the subject of speculation that I believe drove the 
price of oil to $147 a barrel. At a time when our economy was reeling 
from the subprime scandal, running oil up to $147 a barrel was a huge 
burden and had a huge impact in weakening this economy. I am somebody 
who believes it was speculation that drove this up, right under the 
nose of regulators who didn't care about regulating.
  Let me tell my colleagues what happened yesterday. We have had all 
kinds of testimony about this. One of the witnesses who was at the 
Energy Committee yesterday was from J.P. Morgan, a venerable investment 
bank in this country, and Lawrence Eagles delivered testimony yesterday 
from J.P. Morgan. He is the head of commodity research, and here is 
what Mr. Eagles said:

       We believe that high energy prices are fundamentally the 
     result of supply and demand. We fundamentally believe that 
     high energy prices are a result of supply and demand, not 
     excessive speculation.

  This from a man from the J.P. Morgan company, the global head of 
commodity research. But an e-mail we obtained today that was sent late 
last evening to the clients of J.P. Morgan by a Michael Zimbalist, who 
is the global chief investment officer for J.P. Morgan--the same 
company--said this--what we have been saying:

       There was an enormous amount of speculation pent up in 
     energy markets; example, an eight-fold increase in bank OTC 
     oil derivatives exposure in the last three years and it 
     wasn't just the supply-demand equation. Oil will rise again 
     and we need solutions to energy supplies, but $140 in July 
     2008 was ridiculous.

  Let me say that again. An executive with J.P. Morgan testified 
yesterday before our committee and said: We believe high energy prices 
are the result of supply and demand, not excessive speculation.
  Last evening, an e-mail was sent from J.P. Morgan by their global 
chief investment officer and it says what we have been saying: There 
was an enormous amount of speculation pent up in energy markets.
  I am trying to understand--and this is not to focus just on this 
company--J.P. Morgan. They testified they were an investment bank. We 
have had meetings with a lot of interest about this subject of excess 
speculation. I am trying to understand whether we are getting the 
straight story from people. What was the straight story here, the man 
they sent to testify or one of the top folks in J.P. Morgan who sent an 
e-mail to clients last evening? They directly contradict each other.
  We have a whole lot of folks who are making a living these days 
saying: Well, the price of oil went to $147 a barrel because of supply 
and demand, and I say to them: It doubled in a year. From July to July, 
the price of oil doubled. I defy anyone to tell me what happened to 
supply and demand in that year that justified the doubling of the price 
of oil. There isn't anyone in this Chamber and there is no one who has 
testified before my committees who can make that case. Why? Because the 
case is not valid. It isn't valid.
  I have sent a letter to Mr. Jamie Dimon, the chief executive officer 
of J.P. Morgan, asking him to reconcile this. The company was willing 
to testify and they were one of the witnesses yesterday. I invited 
witnesses who had made the case that speculation was a significant part 
of this problem, of the runup of oil; others had invited those who 
believed that speculation was not. This testimony from J.P. Morgan was 
part of testimony invited by those who believe there is not a 
speculative component. But we have a right as a committee, it seems to 
me, to understand how does this happen. The company sends a 
representative to tell us there is no speculation and then sends an e-
mail to clients the same day and says speculation is a significant 
part.
  The reason I mention this is oil is a part of what is happening in 
this country today with our economy. The runup in the price of oil 
significantly weakened this economy. I am expecting a response from 
J.P. Morgan to try to tell me why the contradiction. Who is talking 
straight here? When do we get straight answers? If we are going to fix 
what is wrong, we have to know what happened and what caused it.
  Now, I mentioned the subprime loan scandal. The subprime loan 
scandal. I described what I thought was going to happen 9 years ago on 
the floor of the Senate. We had a bill that came to us from Senator 
Gramm called Gramm-Leach-Bliley. Senator Gramm spent a career here 
trying to get rid of all regulation: Deregulate. Deregulate, he 
claimed. Financial modernization, he

[[Page S8923]]

called it. The Financial Modernization Act. That was a fancy way of 
saying: Let's take apart the protections that existed after the banks 
failed in the 1930s and the Great Depression, let's take apart the 
protections we put in place to make sure it didn't happen again. We put 
in place the Glass-Steagall Act that said you have to keep separate 
banks and real estate and securities. Why? Because real estate and 
securities can be very speculative, and banks need to stay away from 
speculation. It needs to not only be safe and sound, it needs people to 
think they are safe and sound.
  So what was put in place in the 1930s--the Glass-Steagall Act and 
other provisions to separate inherently risky enterprises from 
banking--worked for a long time. Then to the floor of the Senate comes 
the Financial Modernization Act in 1999. I voted against it. Let me 
read what I said on the floor on May 6, 1999, on the floor of the 
Senate:

       This bill will also, in my judgment, raise the likelihood 
     of future massive taxpayer bailouts. It will fuel the 
     consolidation and mergers in the banking and financial 
     industry at the expense of customers, farm businesses, family 
farmers, and others. In some instances I think it inappropriately 
limits the ability of the banking and thrift regulators from monitoring 
activities between such institutions and their insurance or securities 
subsidiaries, raising significant safety and soundness consumer 
protection concerns.

  Let me say that again: This bill will also, in my judgment, raise the 
likelihood of future massive taxpayer bailouts.
  No, I am not a soothsayer. I didn't have a crystal ball. But I knew 
if you don't have good regulation and you are going to create the 
homogenization of big financial industries and put banking and 
everything together, even if you claim you are going to build 
firewalls, I knew exactly what was going to happen.
  On November 4, 1999, on the conference report--I was one of eight 
Senators to vote against it--I said:

       Fusing together the idea of banking--which requires not 
     just the safety and soundness to be successful but the 
     perception of safety and soundness--with other inherently 
     risky speculative activities is, in my judgment, unwise.

  Then I said:

       We will, in 10 years' time, look back and say we should not 
     have done that because we forgot the lessons of the past.

  Those are my statements from 1999. It is now 9 years later, not 10. 
What we see are massive bailouts, massive taxpayer bailouts, and the 
lessons we apparently forgot. I voted against all of that. The fact is 
they sold it. They sold it like medicine from the back of a wagon in 
the old West, snake oil, solve everything. Allow all these big 
institutions to get married; fall in love, get married and become 
bigger and do a little of everything. That way you get one-stop 
shopping. Go ahead and buy your securities, buy your insurance, buy 
your real estate, and then make a deposit, if you will, and maybe get a 
check book if you want to still write some checks if you don't want to 
do it electronically; just one-stop shopping at all of your financial 
institutions and there will be no problem.
  Guess what happened. In 2001, we had regulators come to town, hired 
by a new President, who said: You know what. It is a new day. 
Regulation is a four-letter word and we think four-letter words are 
dirty and we don't intend to regulate. Yes, we are going to get paid. 
We are going to run these regulatory agencies, but we don't intend to 
do anything. We intend to take an 8-year sleep, and they did. They 
dozed off immediately and they have not yet awakened.
  We had a regulator at one of the very important agencies say: In 
fact, there is a new sheriff in town and this is a new business-
friendly environment. We now see what that means. Willful blindness by 
people we paid to regulate, who came to town hostile to the basic 
notion of regulation.
  Now, they saw what I saw. I have a tiny little television set, and so 
in the morning when I shave and brush my teeth, I have that television 
set on and I hear the advertisements on television. Countrywide, the 
biggest mortgage bank in America, here is what they said:

       Do you have less than perfect credit? Do you have late 
     mortgage payments? Have you been denied by other lenders? 
     Call us.

  What they were saying, essentially, is: Hey, are you a bad risk? Give 
us a call if you want a mortgage. Do you need a loan? This is the 
biggest mortgage bank in the country saying: If you can't pay your 
bills, for gosh sakes, call us. We want to give you a loan.
  It wasn't just Countrywide. Here is a company called Millennium 
Mortgage and here is what they said. This was seductive. They said: 
Twelve months, no mortgage payment. That is right. We will give you the 
money to make your first 12 payments if you call in 7 days. We pay it 
for you. Our loan program may reduce your current monthly payment by as 
much as 50 percent and allow you no payments for the first 12 months. 
That is a pretty good deal. We will make your first 12 months payments. 
Of course, they will put that on the back of the loan and it will incur 
interest and you will end up paying a lot more.
  This is Zoom Credit. You all saw these advertisements:

       Credit approval is just seconds away. Get on the fast track 
     at Zoom Credit. At the speed of light, Zoom Credit will 
     preapprove you for a car loan, a home loan, or a credit card.

  It says:

       If your credit is in the tank, Zoom Credit is like money in 
     the bank.
       Zoom Credit specializes in credit repair and debt 
     consolidation, too. Bankruptcy, slow credit, no credit--who 
     cares.

  These were the advertisements being run on television and on the 
radio across the country by the shysters trying to place bad mortgages 
out there that people could not make payments on, and then they run the 
paper up through securities, hedge funds, and investment banks, run 
them all over the world. Then it goes sour and people cannot make 
payments, and you have all these bad loans out there and things 
collapse. It is called the subprime loan scandal, and here is the 
origin: companies that said: If you have bad credit or you cannot make 
your payments, come to us, we will give you a loan.
  So you start with the first baby step of bad business practices--
because everybody was making money. The folks who were selling the 
loans, cold-calling people, were making big bonuses; and the mortgage 
banks, such as Zoom and Countrywide--the biggest--were making lots of 
money slicing these mortgages, the subprime mortgages, up into 
securities, securitizing them all.
  By the way, they also said this: If you have bad credit and cannot 
make your payments and have been bankrupt, you know something, we also 
have no-doc loans. That means you don't ever have to document your 
income. They said: We will give you a loan, and you don't have to make 
the first 12 months of payments--we will make them for you--and you 
don't have to document your income. You could do that if you have been 
bankrupt and have been unable to pay your bills. Isn't that 
unbelievable? Guess what. They were all over the country like hogs in a 
corn crib snorting and making money, hauling it to the bank, saying: We 
are making big money by putting out bad paper.
  Then what happens? All of a sudden, these mortgages, which in most 
cases had a 3-year reset of interest rates and were offered with teaser 
rates--sometimes 1 percent or 1.25 percent--these mortgages, 3 years 
later, had the interest rates reset, and they were now paying 10 
percent. And then deep in the mortgage was the provision of a 
prepayment penalty so that you could not prepay the mortgage even 
though you were now stuck at 10 percent and could not pay the bill. 
These companies and the brokers said that it didn't matter; just line 
this up, and between now and 3 years, you can flip the property; the 
housing bubble is going up and you are going to make money anyway. And 
then the whole thing collapses.
  So hedge funds are making money hand over fist, and investment banks 
are buying securities that are loaded, like sausage packed with 
sawdust, with good mortgages and bad mortgages, and things go sour, and 
all of a sudden, in these big, homogenized financial institutions, you 
have massive timebombs exploding inside their balance sheets. Then, 
guess what. We wake up and discover that Bear Stearns cannot make it 
and Lehman Brothers is going belly-up. They bail out Bear Stearns by 
allowing somebody else to buy them with $30 billion from the Federal 
Reserve Board, securitized

[[Page S8924]]

by, in many cases, bad securities. This morning, the papers said $85 
billion. It is pretty unbelievable what is going on. It all starts 
here.
  Now, did somebody see this? Did somebody watch television in the 
morning or read the newspaper or listen to the radio and hear the 
advertisements about the seductive new mortgages you could get and how 
the brokers and bankers and all these folks are making all this money? 
If the American people didn't see it, should the regulators have seen 
it? Weren't there people in this town whom we paid to regulate? How 
about Alan Greenspan, who is now treating us with a book and 
appearances on the Sunday shows and giving us a current diagnosis? 
Where was Mr. Greenspan when this was happening? What happened at the 
Fed that persuaded them not to interrupt essentially bad business that 
would injure the foundation of this country's economy, or the many 
other regulatory agencies where people at the head of them decided to 
be willfully blind and do nothing?
  If ever there were a time for the people of this country to question 
whether the term ``regulation'' is a four-letter word, it is now. I 
believe the free market is a wonderful thing. I used to teach 
economics. I believe the free market is one of the best allocators of 
goods and services known to mankind. I also know it needs effective 
regulation--a regulator--because occasionally it becomes perverted. 
Occasionally, it is broken by certain interests.
  As I said earlier, I wish I had been wrong when I said, on the floor 
of the Senate on May 16, 1999, in opposing the Financial Modernization 
Act, which took apart the basic protections we had and that we had 
learned were needed from the bank failures of the 1930s:

       This bill will also, in my judgment, raise the likelihood 
     of future massive taxpayer bailouts. It will fuel the 
     consolidation and mergers in the banking and financial 
     services industry at the expense of customers, farm 
     businesses, family farmers, and others. . . .
       Fusing together the idea of banking . . . with other 
     inherently risky speculative activity is, in my judgment, 
     unwise.

  That is what I said 9 years ago. I wish I had been wrong, but I was 
not.
  We come now to this intersection with the American economy in peril. 
I know we have people at the Fed and at the Treasury Department working 
full time to try to put this back together. Again, I say you cannot fix 
something if you don't know what went wrong. It is why I describe two 
things today--one, the unbelievable bubble of speculation that moved 
oil to $147 a barrel, which put an enormous burden on this country's 
economy at exactly the time when we could not afford it, as the economy 
was already suffering the unbelievable effects of the subprime loan 
scandal. Now we have seen an almost perfect economic storm.
  One doesn't have to be an economist to understand what is happening 
now in this economy. But it seems to me that all Americans are hoping 
all of us pull together to find ways to put this country back on track, 
insist that regulators finally begin to regulate on behalf of the 
interests of the American people--insist that Congress do what it needs 
to do, and there are a number of things we need to do to set this 
right.
  It is not with joy that I come to the floor of the Senate describing 
the conditions that, in my judgment, have caused the most significant 
economic collapse we have seen in a long time. But we must face the 
truth, and the truth is that we have been through a very difficult 
period and we need our Government to behave in a way that stands up to 
protect the interests of all Americans, not just a few. I am going to 
have more to say tomorrow about this subject.
  I ask unanimous consent to have printed in the Record a letter that I 
had referred to that I have written to the head of J.P. Morgan, as well 
as an attachment with that letter.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                                  U.S. Senate,

                               Washington, DC, September 17, 2008.
     Mr. Jamie Dimon,
     Chief Executive Officer, Chairman of the Board, JPMorgan 
         Chase & Co., Inc., New York, NY.
       Dear Mr. Dimon: I am the Chairman of the Energy 
     Subcommittee of the Senate Committee on Energy and Natural 
     Resources. I convened a hearing of the Subcommittee 
     yesterday, which focused on speculative investments in the 
     energy futures markets. I am troubled that the testimony 
     delivered by Lawrence Eagles, Global Head of Commodity 
     Research for your company, appears to be contradicted by an 
     internal JPMorgan email that my staff has obtained, dated the 
     same day.
       At the hearing, Mr. Eagles said, ``we believe that high 
     energy prices are fundamentally the result of supply and 
     demand.'' Additionally, the written testimony which was 
     submitted on behalf of JPMorgan by Blythe Masters said, ``we 
     fundamentally believe that high energy prices are a result of 
     supply and demand, not excessive speculation.''
       But, an email we obtained that was sent late last night by 
     Michael Cembalest, identified as JPMorgan's Global Chief 
     Investment Officer, directly contradicts the testimony by Mr. 
     Eagles and Ms. Masters. In his email (a copy of which is 
     attached), Mr. Cembalest stated, in part: ``what we've been 
     saying: there was an enormous amount of speculation pent up 
     in energy markets (e.g., an 8-fold increase in bank OTC oil 
     derivative exposure in the last 3 years), and it wasn't just 
     the supply-demand equation. Oil will rise again, and we need 
     solutions to energy supplies, but $140 in July 2008 was 
     ridiculous.''
       It appears that JPMorgan is telling Congress and the public 
     that the run up in oil prices is solely due to supply and 
     demand, while at the very same time it is telling its clients 
     that an ``enormous amount of speculation'' is running the 
     prices up.
       Please explain why JPMorgan testified before Congress that 
     the high oil prices are only due to supply and demand when 
     your experts clearly acknowledge privately that it was 
     speculation, not market fundamentals, that sent oil prices 
     skyrocketing. As you know, this is a matter of enormous 
     public interest and concern. Americans across our country are 
     hurting as run-away prices have permeated our entire economy 
     and devastated family budgets.
       It is critical that we have honest and accurate information 
     as we debate solutions to this energy crisis. As Chairman of 
     the Subcommittee that held the hearing yesterday, I am 
     requesting that you send me all documents in the possession, 
     custody or control of JPMorgan Chase during the last 12 
     months relating or referring to the role of speculation on 
     oil prices. Given that the Congress is currently debating and 
     will be voting on these matters imminently, please provide 
     these documents to us on a rolling basis beginning as soon as 
     possible with all such documents provided by one week from 
     today. Also, due to the limited amount of time available to 
     us before voting will occur, please ensure that the most 
     relevant documents are provided first.
       I appreciate your willingness to do this promptly to ensure 
     that the public and Congress receive full, accurate, honest 
     and complete information from those who testify before it.
       I appreciate your timely response. If you have any 
     questions, please contact Dennis Kelleher, my Chief Counsel, 
     or Ben Klein, my Legislative Director.
           Sincerely,
                                                  Byron L. Dorgan,
     U.S. Senator.
                                  ____

       E-mail sent last night by the Global Chief investment 
     Officer for all of J.P. Morgan (see bold section below).

                Eye on the Market, September 16, 2008, 
                           11-Something P.M.

       Update: The U.S. government took another unprecedented step 
     in this odd year and provided a bridge loan to AIG in 
     exchange for 80% ownership in the company.
       ``SWF: Sovereign Wealth Fed''. Say this for the U.S. 
     Federal Reserve: they're reinforcing their historical 
     independence from the legislative branch. On a day during 
     which Senators McCain, Obama, Dodd and Shelby all came out 
     publicly against a bailout of AIG, the Fed did it anyway. 
     That's not entirely unprecedented; President Clinton tried to 
     pass the 1994 Mexican Stabilization Act through Congress, 
     couldn't, and then figured out a way to get the Exchange 
     Stabilization Fund done without legislative approval. But 
     what is unprecedented, at least for the Fed, is equity 
     ownership. The United States now has its own Sovereign Wealth 
     Fund, with Fannie Mae, Freddie Mac and AIG as its inaugural 
     investments. Is this a backdoor alternative to privatizing 
     social security?
       First, a brief bit of background, AIG is an insurance 
     company with roughly $100 billion in capital and $1 trillion 
     in assets. They have an insurance operation that's been 
     around for almost 100 years, and which has deep experience in 
     life, property & casualty, personal, specialty and D&O 
     insurance (indemnifications related to mistakes by directors 
     and officers). AIG set up a capital markets subsidiary, 
     AIGFP, which effectively provides re-insurance on $440 
     billion in securities and other derivatives when you cut 
     through all the industry jargon. AIG allowed this subsidiary 
     to grow to be half the company's assets, a decision which in 
     hindsight borders on the bizarre. Within this business unit, 
     there are concentrated problems with a specific $80 billion 
     portfolio of multi-sector CDOs linked to residential 
     mortgages. They've taken $25 billion in losses so far on this 
     exposure, with more expected by Moody's in Q3. While vintage 
     years and terms/conditions differ, AIG's CDO exposure 
     relative to shareholder equity was much larger than other big 
     CDO holders such as UBS and Citigroup.

[[Page S8925]]

       AIG's problem is that rating agency downgrades of AIGFP 
     force collateral to be posted. Such a clause essentially 
     transforms their exposure from an insurance policy that only 
     requires payout when losses are realized, to a policy which 
     requires payout depending on how markets price similar 
     exposures. And right now, mortgage-backed derivatives are the 
     leprosy of the financial markets, with prices arguably below 
     fair value (a). However, for valuation and capitalization 
     purposes, insurance regulators, accountants and rating 
     agencies (no irony intended) are not interested in anyone's 
     estimate of fair value right now. Instead, they're relying on 
     the last marginal price that anyone happens to sell at, with 
     the most desperate seller setting the price. If only property 
     taxes worked that way; everyone would get tax certiorari 
     relief based on the neighborhood's worst foreclosure sales.
       I will leave it to others to describe the calamitous (or 
     not) outcomes that the Fed decided to avoid. It would be 
     speculation, although today's news of the oldest money market 
     fund in the country (with $60 billion at its peak) ``breaking 
     the buck'' was possibly a small example (b). What the Fed 
     gets in return for saving AIG: a 2-year loan at Libor plus 
     8.5%, plus an 80% ownership interest in the company. I 
     know a lot of private equity and mezzanine funds that 
     would love to have gotten a deal like that, but they 
     didn't have enough capital. And that was the problem: AIG 
     is so big that the numbers involved were too large for 
     banks and other private sector entities to contemplate, 
     particularly within 48 hours. AIG's former chairman stated 
     that equity investors did not have to be wiped out, but 
     there was only one entity left that was big and adroit 
     enough to offer the terms and capital needed to forestall 
     a possible bankruptcy (c), and it was the U.S. government. 
     While I think the U.S. government made a good investment 
     for taxpayers, the Pandora's box is going to be quite a 
     challenge.
       We're not going to rush out and buy equities on the view 
     that the world's problems are over, or that the Fed will bail 
     anything else out. The economic news, drowned out by 
     corporate events over the last two weeks, is still pretty 
     bad. This week's charts from our investment meeting (state 
     tax receipts, small business optimism, the U.S. manpower 
     employment survey, the Baltic Freight index, retail sales, 
     Eurozone industrial production, hotel occupancy rates and 
     just about everything related to growth or construction in 
     China) all look the same: plummeting. There's also the minor 
     issue that the Fed is running out of money for these bailout/
     investment exercises (d). But with the decline in commodity 
     prices, inflation forecasts are tumbling, rendering 
     stagflation risks much lower. While we're at it, the Peak Oil 
     crowd promoting crude oil call options struck at $200 should 
     concede what we've been saying: there was an enormous amount 
     of speculation pent up in energy markets (e.g., an 8-fold 
     increase in bank OTC oil derivative exposure in the last 3 
     years), and it wasn't just the supply-demand equation. Oil 
     will rise again, and we need solutions to energy supplies, 
     but $140 in July 2008 was ridiculous.
       We are making some regional shifts in portfolios (from 
     Europe to the U.S.) given a slower global economy, the 
     prevalence of much higher levels of government and corporate 
     debt in Europe, and more rapidly slowing European earnings 
     estimates. We are also holding onto our cash balances, and 
     are investing newly funded accounts slowly. But we are not, 
     as we reiterated last week, positioning for Armageddon, which 
     the Fed might have just averted with its actions this week.
       Notes:
       (a) AIG released a report on August 7 with their CDO 
     stress-testing. The assumptions look conservative to me: 80%-
     90% of subprime loans expected to default, with 20%-30% 
     recoveries upon foreclosure. Assumptions on prime loans were 
     not much better: 60% expected to default, with recoveries of 
     65% upon foreclosure. AIG computed its fair value stress-
     testing loss on the CDO portfolio at around $10 billion, 
     compared to the $25 billion in losses they've taken so far. 
     This suggests that one of 3 things are true: (i) the non-
     transparent process through which AIG applied the stress-
     testing assumptions were too generous and underestimate the 
     loss, (ii) secondary market prices driving the actual marks 
     are too low, or (iii) the markets are right and the 
     assumptions above are still not catastrophic enough. These 
     outcomes are not mutually exclusive, but you could drive 
     a truck through the difference between the stress-testing 
     case and losses realized so far. Call me crazy but I think 
     it's mostly (ii).
       (b) That's what happens when a money market fund does not 
     provide a dollar back for each dollar invested. A very rare 
     occurrence which only happened once, in 1994.
       (c) As far as we can tell, the Fed's investment does not 
     constitute an ``event of default'' the way the GSE 
     conservatorship did.
       (d) For monetary policy geeks only: the AIG deal reduces 
     the amount of unencumbered Treasury bonds held by the Fed 
     under $200 billion. From the March 12, 2008 Eye on the 
     Market: ``Something is nagging at me. Over the long run, I 
     hope the Fed hasn't misjudged something. It's not that the 
     Primary Dealer Credit Facility, is inflationary. For every 
     dealer that comes to the Fed, the Fed sells assets to raise 
     cash to lend, so their monetary targets are unchanged. But 
     Fed assets are not unlimited: existing facilities already 
     reduce some of the Fed's $700 billion in assets. In the 
     highly unlikely event that the Fed's assets were exhausted, 
     they'd have to start the printing press. We need to hope they 
     haven't prematurely pledged assets to dealers that are 
     normally reserved to stabilize banks during a potentially 
     painful economic downturn.''
       CDO = Collateralized Debt Obligation.
       GSE = Government Sponsored Enterprise.

                                            Michael Cembalest,

                                  Global Chief Investment Officer,
                                                      J.P. Morgan.

       The above summary/prices/quotes/statistics have been 
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     all investment ideas referenced are suitable for all 
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       This material is not intended as an offer or solicitation 
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  The PRESIDING OFFICER (Ms. Cantwell). The Senator from Iowa is 
recognized.

                          ____________________