For the tumultuous week, the Dow (down 36.3% y-t-d) and S&P500 (down 38.8% y-t-d) sank 18.2%. There was no place to hide. The Morgan Stanley Consumer index dropped 14.5% (down 26.2%) and the Utilities were hit for 20.3% (down 39.2%). The Transports declined 9.4% (down 18.1%), and the Morgan Stanley Cyclical index fell 15.4% (down 41.5%). The small cap Russell 2000 declined 15.6% (down 31.8%), and the S&P400 Mid-Caps dropped 16.9% (down 35.9%). The NASDAQ100 fell 13.7% (down 39.1%), the Morgan Stanley High Tech index 15.9% (down 41.6%), and the Semiconductors 13.6% (down 39.7%). The Street.com Internet Index (down 34.8%) and the NASDAQ Telecommunications index (down 38.3%) each fell 14.8%. The Biotechs dropped 15.8% (down 21.4%). The Broker/Dealers collapsed 25.6% (down 57.7%) and the Banks sank 21.7% (down 40.3%). With Bullion down $13.60, the HUI dropped 7.8% (down 39.4%).

One-month Treasury bill rates dipped to 0.08% and three-month yields sank to 0.21%. Two-year government yields added 4 bps to 1.64%. Five-year T-note yields jumped 12 bps this week to 2.75%, and 10-year yields surged 22 bps to 3.87%. Long-bond yields added 4 bps to 4.12%. The 2yr/10yr spread increased 22 to 223 bps. The implied yield on 3-month December '09 Eurodollars declined 11.5 bps to 2.90%. Benchmark Fannie MBS yields jumped 39 bps to a 7-wk high 5.92%. The spread between benchmark MBS and 10-year T-notes widened 23 to 204 bps. Agency 10-yr debt spreads widened 8 to 90 bps. The 2-year dollar swap spread declined 1.75 to 149, and the 10-year dollar swap spread sank 11.25 to 55. Corporate bond spreads were wider. An index of investment grade bond spreads widened 40 to 207 bps, and an index of junk bond spreads surged 70 to 757 bps.

Debt markets remain pretty much frozen. Investment-grade debt issuance included IBM $4.0bn, Southern Cal Edison $500 million and Detroit Edison $250 million.

I saw no junk or convert issuance this week.

International debt issuance included Export Development Canada $1.0bn.

October 10 - Bloomberg (Gabrielle Coppola and John Detrixhe): "The U.S. corporate bond market remained effectively closed for the fifth straight week as the deepening credit crisis sent yields to record highs above Treasuries... IBM, the biggest non-financial company to sell U.S. bonds since June 24, raised $4 billion. The... company paid its highest yields over benchmark rates... The offering included... 10-year notes that priced to yield 387.5 bps above similar-maturity Treasuries, as well as $1 billion of 8%, 30-year bonds with a spread of 400 bps..."

October 8 - Bloomberg (John Detrixhe): "Yields over benchmark rates on high- yield, high-risk corporate bonds rose to a record for a sixth straight day, Merrill Lynch & Co. data show. The difference between yields on junk bonds and U.S. Treasuries widened 33 bps to 1,351 bps... The bonds yielded 16.3% on average, the highest since March 1991."

October 6 - Bloomberg (Sree Vidya Bhaktavatsalam): "Investors pulled a record $20.5 billion from emerging-market stock funds in the third quarter as the seizure of global credit markets threatened to push developing countries into recession. The withdrawals exceeded the $12.3 billion in outflows during the first half of 2008..."

German 10-year bund yields rose 7 bps to 3.99%. The German DAX equities index sank 21.6% (down 43.7% y-t-d). Japanese 10-year "JGB" yields increased 7 bps to 1.52%. The Nikkei 225 collapsed 24.3% (down 45.9% y-t-d). Emerging markets are in crisis. Brazil's benchmark dollar bond yields surged 234 bps to 9.15%. Brazil's Bovespa equities index sank 20% (down 44.3% y-t-d). The Mexican Bolsa dropped 13.4% (down 32.6% y-t-d). Mexico's 10-year $ yields jumped 138 bps to 7.52%. Russia's RTS equities index dropped 21% (down 63.1% y-t-d). India's Sensex equities index sank 19.4%, with y-t-d losses rising to 48.1%. China's Shanghai Exchange fell 12.8%, boosting y-t-d losses to 62%.

Freddie Mac 30-year fixed mortgage rates dropped 16 bps to 5.94% (down 46bps y-o-y). Fifteen-year fixed rates declined 15 bps to 5.63% (down 43bps y-o-y), while one-year ARMs added 3 bps to 5.15% (down 58bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates this week up a notable 26 bps to 7.38% (up 55bps y-o-y).

Bank Credit surged $284bn to $9.864TN (week of 10/1), with a 4-wk gain of $472bn. Bank Credit has now expanded $651bn y-t-d, or 9.2% annualized. Bank Credit posted a 52-week rise of $885bn, or 9.9%. For the week, Securities Credit jumped $78.2bn. Loans & Leases ballooned $206bn to $7.258 TN (52-wk gain of $647bn, or 9.8%). C&I loans increased $21.1bn, with y-t-d growth of 12%. Real Estate loans jumped a notable $165bn (up 7.4% y-t-d). Consumer loans rose $9.2bn, while Securities loans declined $16.7bn. Other loans jumped $27bn.

M2 (narrow) "money" supply dipped $4.0bn to $7.860 TN (week of 9/29). Narrow "money" has expanded $397bn y-t-d, or 7.1% annualized, with a y-o-y rise of $476bn, or 6.4%. For the week, Currency increased $2.4bn, and Demand & Checkable Deposits rose $29.1bn. Savings Deposits sank $49.5bn, while Small Denominated Deposits increased $13.4bn. Retail Money Funds added $0.9bn.

Total Money Market Fund assets (from Invest Co Inst) jumped $58.6bn to $3.458 TN, with a y-t-d expansion of $345bn, or 14.4% annualized. Money Fund assets have posted a one-year increase of $549bn (18.9%).

There was little Asset-Backed Securities (ABS) issuance again this week. Year-to-date total US ABS issuance of $129bn (tallied by JPMorgan's Christopher Flanagan) is running at 26% of comparable 2007. Home Equity ABS issuance of $351 million compares with 2007's $225bn. Year-to-date CDO issuance of $24bn compares to the year ago $286bn.

Total Commercial Paper outstanding sank another $56.4bn this week to a 3-year low $1.551 TN (4-wk decline $264bn), with CP down $235bn y-t-d. Asset-backed CP declined $17.6bn last week to $707bn, with 2008 showing a decline of $66bn. Over the past year, total CP has contracted $314bn, or 16.8%.

Federal Reserve Credit ballooned another $106bn to a record $1.495 TN, with a historic 4-week increase of $606.4bn. Fed Credit has expanded $621bn y-t-d (90% annualized) and $636bn y-o-y (74%). Fed Foreign Holdings of Treasury, Agency Debt last week (ended 10/7) jumped $19.5bn to $2.485 TN. "Custody holdings" were up $429bn y-t-d, or 26.4% annualized, and $481bn y-o-y (24%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.037 TN y-o-y, or 17.7%, to $6.898 TN.

Global Credit Market Dislocation Watch:

October 6 - Bloomberg (Caroline Hyde): "Losses from the credit crisis may rise to $1.7 trillion, leaving the U.S. Troubled Asset Relief Program inadequate to clear toxic securities from banks' balance sheets, according to JPMorgan Chase & Co. analysts. 'The $700 billion on the Treasury balance sheet at risk is really a loan,' analysts including... Christopher Flanagan wrote... 'Banks could need this amount in a capital injection to remain viable.'"

October 7 - Bloomberg (Christopher Condon and Bryan Keogh): "The Federal Reserve's decision today to buy U.S. commercial paper came after money-market mutual funds fled the market, cutting off a vital source of short-term corporate financing... Money-market funds, the biggest buyers of commercial paper, reduced holdings of the highest-rated debt by $200.3 billion, or 29%, in the final two weeks of September, according to... IMoneyNet Inc..."

October 9 - Bloomberg (Neil Unmack): "The $50 trillion credit-default swap market is a 'walking zombie' after investors lost money on contracts linked to Fannie Mae and Freddie Mac bonds even when they were bailed out, according to UniCredit SpA. The U.S. government's seizure of the mortgage companies prompted an auction of their debt so that traders who bought and sold default protection could settle contracts. The price for Fannie senior debt was set at 91.5 cents on the dollar, resulting in a loss of about $25 billion for investors who sold protection, UniCredit's Philip Gisdakis said. 'If you put on the right trade -- that banks will be bailed out -- and you end up making a huge loss when you are right, you will simply stop using these instruments because they are unpredictable. The market, in its current form, is a walking zombie.'"

October 10 - Bloomberg (Shannon D. Harrington and Neil Unmack): "Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay holders 91.375 cents on the dollar, setting up the biggest-ever payout in the $55 trillion market. An auction to determine the size of the settlement on Lehman credit-default swaps set a value of 8.625 cents on the dollar for the debt... Based on the results, sellers of protection may need to make cash payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione... said... No one knows exactly how much is at stake because there's no central exchange or system for reporting trades."

October 9 - Bloomberg (Gavin Finch and Ben Sills): "Danilo Coronacion oversees 15% of global coconut oil production at CIIF Oil Mills Group in the Philippines. These days, he spends a lot of time worrying about events half a world away in London. The name of his pain? Libor. CIIF has more than $60 million of debt, or 70% of its working capital, linked to London interbank offered rates that have soared since Lehman Brothers... collapsed... The cost of borrowing in dollars overnight in London jumped 1.44 percentage points yesterday to 5.38%... Rising Libor, set each day in the center of international finance, means higher payments on financial contracts valued at $360 trillion -- or $53,500 for each person worldwide --including mortgages in Britain, student loans in the U.S. and the debt of companies like CIIF in Makati City, the Philippines."

October 6 - Bloomberg (Scott Lanman and John Brinsley): "Federal Reserve Chairman Ben S. Bernanke may find the next fronts of the financial crisis to be just as chilling as last month's downfall of Wall Street titans: its spread to corporate America and state and local governments. Companies from Goodyear Tire & Rubber Co. and Duke Energy Corp. to Gannett Co. and Caterpillar Inc. are being forced to tap emergency credit lines or pay more to borrow... California Governor Arnold Schwarzenegger says his and other states may need emergency federal loans as funding dries up. A cash crunch on Main Street would endanger companies' basic functions -- paying suppliers, making payrolls and rolling over debt."

October 9 - Bloomberg (Denis Maternovsky): "Developing nations' borrowing costs jumped to the highest in five years relative to U.S. Treasuries... The extra yield investors demand to buy emerging-market bonds surged 71 bps 6.07 percentage points... The yield jumped 167 bps this week, the biggest weekly increase since Sept. 1998."

October 10 - Bloomberg (Neil Unmack and Oliver Biggadike): "The cost to protect corporate debt from default soared to records around the world on investor concern that the deepening credit crisis will trigger rising failures as companies struggle to finance their businesses. Credit-default swaps on the Markit CDX North America Investment Grade index, linked to 125 companies in the U.S. and Canada, jumped 8 bps to 206 bps..."

October 10 - Bloomberg (Caroline Hyde): "The value of U.S. and European high risk, high-yield loans fell to a record low... The Markit LCDX index of credit-default swaps on U.S. leveraged loans, which falls as credit risk increases, dropped 1.5 percentage point to 83.75% of face value, according to Goldman Sachs..."

October 9 - Bloomberg (Sree Vidya Bhaktavatsalam): "Investors pulled a record $72 billion from U.S.-managed stock and bond mutual funds in September... Shareholders took $43.5 billion from stock funds last month and $28.8 billion from bond funds..."

October 7 - Bloomberg (Pierre Paulden): "McClatchy Co., Building Materials Holding Corp. and almost 100 other companies across the U.S. are suffering payback from lenders stung by at least $112 billion of losses in the loan market. Banks and investors who are losing money on the record $1.7 trillion of high-yield, high-risk loans made in 2006 and 2007 are charging borrowers an average of 1.64 percentage points more in interest to amend borrowing agreements and avoid default, according to S&P. That's the highest since 1997 and almost eight times more than the first half of last year."

October 8 - Bloomberg (Esteban Duarte): "The European Central Bank said it increased lending to banks in Europe last week to the highest level since Jan. 1. The ECB loaned banks 635.1 billion euros ($864 billion) through monetary operations, up from 487.31 billion a week earlier..."

October 9 - Bloomberg (Poppy Trowbridge): "The British government may own as much as 30% of four of the country's biggest banks as it doles out the 50 billion-pound ($87 billion) lifeline announced yesterday, according to analysts at Sanford C. Bernstein Ltd. Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling offered to buy preference shares to help boost capital at Royal Bank of Scotland Group Plc, Barclays Plc, Lloyds TSB Group Plc, HBOS Plc and four other lenders in the unprecedented rescue plan."

October 6 - Bloomberg (Tasneem Brogger and Christian Wienberg): "Denmark guaranteed all bank deposits in an agreement funded by the country's commercial lenders, becoming the latest European nation to bolster the stability of its financial markets."

October 9 - Bloomberg (Tasneem Brogger): "Iceland's government seized control of Kaupthing Bank hf, the nation's biggest bank, completing the takeover of a banking industry that has collapsed under the weight of its foreign debt... The banks are saddled with about $61 billion of debt, 12 times the size of the economy..."

October 7 - Bloomberg (William Mauldin): "Russian President Dmitry Medvedev is tackling the country's worst financial crisis since the 1998 default by providing almost $200 billion for banks, builders and energy producers."

October 7 - Bloomberg (Lyubov Pronina): "Russia's government should lend the country's biggest banks 950 billion rubles ($36 billion) for at least five years to help unfreeze credit markets, President Dmitry Medvedev said."

October 8 - Bloomberg (Alison Vekshin): "The volume of large, syndicated loans rose a record 22.6% last year, reflecting a 'merger and acquisition financing boom' through the first six months, U.S. regulators said. An 'inordinate volume' of loans had 'structurally weak underwriting,' particularly in non-investment grade or leveraged transactions, according to the Shared National Credits report..."

October 10 - Bloomberg (Christine Richard): "MBIA Inc. may end up operating a tunnel in Australia because the project probably won't be able to make payments on debt that the bond insurer guaranteed. Plans to refinance the Lane Cove Tunnel in Sydney and restructure its debt haven't succeeded... Traffic remains below forecasts and the toll project isn't expected to meet its debt service payments without help from MBIA later this year, Moody's said. Under bond-guarantee terms, MBIA has the right to take control of the project..."

Currency Watch:

October 10 - Bloomberg (Kim-Mai Cutler and Andrew MacAskill): "The yen headed for its biggest weekly gain in a decade against the dollar as the global stock-market rout caused investors to sell higher-yielding assets funded with the Japanese currency..."

October 6 - Bloomberg (Belinda Cao): "China should prepare for a fall in the dollar and reduce the rate of the yuan link to the U.S. currency, a government economist said in an article published in the China Securities Journal today. The U.S. government may print more money to stimulate the economy if the slowdown continues, which may cause a 'big' depreciation in the dollar, said Ba Shusong, an economist at the Development Research Center of China's State Council."

Panic selling overwhelmed the currency markets, as the dollar index jumped 3.3% to 83.0. For the week on the upside, the Japanese yen gained 4.6%. For the week on the downside, the Australian dollar declined 16.9%, the Mexican peso 14.0%, the Brazilian real 11.6%, the South African rand 10.4%, the New Zealand dollar 10.1%, the Canadian dollar 7.7%, the South Korean won 5.9%, the Norwegian krone 4.6%, the British pound 3.8%, and the Euro 2.6%. Examining the ongoing rout in some of the "emerging" currencies, this week the Mexican peso dropped 14.0%, the Chilean peso 10.6%, the Turkish lira 8.3%, the Polish zloty 7.9%, the Hungarian forint 7.8%, and the Colobian peso 7.1%.

Commodities Watch:

What an ugly liquidation. For the week, gold prices swung in a range of over $100, before ending the week up 1.4% to $847. At one point today, silver was down over 20%, before closing the week with a 10.5% loss to $9.97. November Crude sank another $13.61 to $80.27. November Gasoline dropped 16.4% (down 24.8% y-t-d), and November Natural Gas declined 9.6% (down 11.2% y-t-d). December Copper sank 19%. December Wheat dropped 12% and Corn fell 10%. The CRB index dropped 11.2% (down 19.2% y-t-d). The Goldman Sachs Commodities Index (GSCI) sank 13.9% (down 17.6% y-t-d).

China Watch:

October 8 - Bloomberg (Li Yanping and William Bi): "China cut interest rates for the second time in three weeks as the global financial crisis threatened to undermine the world's fourth-largest economy."

Japan Watch:

October 10 - Bloomberg (Kyung Bok Cho and Chua Kong Ho): "Asian stocks tumbled, driving Japan's Nikkei 225 Stock Average to its biggest weekly decline on record, on concern the deepening credit crisis will push the global economy into a recession. The yen surged."

India Watch:

October 10 - Bloomberg (Anil Varma): "India's rupee slid to a six-year low, completing its worst week since 1997, as a global stocks rout prompted investors to seek safer bets than emerging markets. The currency reached a record low of 49.26 per dollar in intraday trading as the Sensitive Index plunged as much as 9.6%."

Asia Bubble Watch:

October 7 - Bloomberg (Janet Ong): "Taiwan's exports declined for the first time since February 2007 because of falling shipments to the island's biggest market, mainland China."

October 6 - Bloomberg (Shinhye Kang): "South Korea may post a $6 billion trade deficit in 2008, Knowledge Economy Minister Lee Youn Ho said... The shortfall amounted to $14.2 billion for the first nine months this year."

October 6 - Bloomberg (Aloysius Unditu and Arijit Ghosh): "Indonesia's inflation accelerated to the fastest pace in two years in September... Consumer prices rose 12.14% from a year earlier..."

Latin America Watch:

October 7 - Bloomberg (Adriana Brasileiro and Andre Soliani): "Brazil canceled a local bond sale for the first time in seven months, a sign the global credit crisis is beginning to squeeze the finances of Latin American countries... The real sank as much as 5.8% today to a two-year low of 2.3125 per dollar."

October 7 - Bloomberg (Andre Soliani and Telma Marotto): "Brazilian President Luiz Inacio Lula da Silva authorized the central bank to buy loans from cash- strapped lenders and will use the nation's international reserves to ease a credit crunch that sent the local currency to the lowest in two years and roiled stock markets."

Central Banker Watch:

October 6 - Wall Street Journal (Jon Hilsenrath, Joellen Perry and Sudeep Reddy): "The world's central banks launched a large coordinated attack against the widening global financial crisis, lowering short-term interest rates in unison... The emergency interest-rate action, which involved the Fed, the European Central Bank, the Bank of England and others, is a sign that fears that the financial crisis could cripple the global economy are spreading rapidly."

October 10 - Wall Street Journal (Meena Thiruvengadam and Brian Blackstone): "Total direct borrowing from the Federal Reserve's expanded discount window soared to more than $430 billion..."

October 7 - Bloomberg (Craig Torres): "The Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened to cut off a key source of funding for corporations. The Treasury will make a deposit with the Fed's New York district bank to help set up the new unit. The central bank will also lend to the program at policy makers' target rate for overnight loans between banks. The Fed Board invoked emergency powers to set up the unit, the central bank said..."

October 9 - Bloomberg (Janet Ong): "Central banks in South Korea, Taiwan and Hong Kong cut interest rates a day after their colleagues in the U.S. and Europe coordinated monetary easing to stem the damage of the global financial crisis."

Unbalanced Global Economy Watch:

October 9 - Times of London (Miles Costello): "More than £100 billion will be wiped off the personal fortunes of Britain's wealthiest industrialists and entrepreneurs in the coming months as tumbling stock markets and sliding property prices take their toll. Steel magnates, City brokers, hedge fund managers and the owners of Premier League football clubs will see their spending power cut, and that is likely to influence the price of urban mansions and hit sales of luxury goods."

October 9 - Bloomberg (Brian Swint and Jennifer Ryan): "U.K. house prices fell by the most in 25 years as the global financial crisis discouraged buyers and prompted banks to stop lending, HBOS Plc said. The average cost of a home dropped 13.3% in September from the same month a year earlier..."

October 9 - Bloomberg (Svenja O'Donnell): "The U.K.'s trade deficit matched the widest on record in August as exports to countries outside the European Union dropped the most in two years. The goods-trade gap was 8.2 billion pounds ($14.2 billion), the same as in July..."

October 7 - Bloomberg (Svenja O'Donnell): "U.K. factory production contracted for a sixth month in August in the worst streak for almost three decades, bringing the British economy closer to a recession. Manufacturing output fell 0.4% from July, the Office for National Statistics said..."

October 10 - Dow Jones (Caroline Hyde): "Irish retail sales have posted their biggest fall in 24 years... Consumers are bracing themselves for a painful 2009 budget next Tuesday when the public are expecting major cuts in services and no change in tax bands, economists say. The volume of retail sales fell 6% on the year during August 2008..."

October 9 - Bloomberg (Johan Carlstrom): "Sweden's inflation rate unexpectedly rose to a 15-year high in September, damping the chances of a second rate cut this month when the central bank makes its next rate announcement on Oct. 23. The headline inflation rate rose to 4.4% from 4.3% in August..."

October 7 - Bloomberg (Johan Carlstrom): "Norway plans to boost spending by 3.25% next year to cushion the economy from turbulence on the international financial markets... 'The Norwegian economy is in good standing,' Finance Minister Kristin Halvorsen said... 'We have money on our books and bigger opportunities than most to meet the difficulties that we have to face.'"

October 10 - Bloomberg (Yuriy Humber, Greg Walters and Maria Kolesnikova): "Russian billionaires from aluminum magnate Oleg Deripaska to soccer-club owner Roman Abramovich lost more than $230 billion in five months during the nation's worst financial crisis since the 1998 default on its debt. The combined wealth of Forbes magazine's 25 richest Russians tumbled 62% between May 19 and Oct. 6..."

October 9 - Bloomberg (Maria Levitov): "Russia's international reserves, the world's third largest, fell $16.7 billion last week, the biggest decline this year... The value of reserves decreased to $546.1 billion... 'We are confident that we're in a stable position,' President Dmitry Medvedev's economic aide Arkady Dvorkovich said... 'The reserves are huge, they are above $500 billion and we believe that any figure above $100 billion is good for Russia today.'"

Bursting Bubble Economy Watch:

October 10 - Wall Street Journal (Pui-Wing Tam, Ben Worthen and Robert A. Guth): "The technology industry, which had seemed immune to the financial crisis, is now getting squeezed on two sides: Established companies are struggling with slackening demand while venture capitalists are telling start-ups to cut costs and plan for a prolonged downturn. Sequoia Capital, which has invested in Silicon Valley stars such as Google Inc. and YouTube, gathered the chief executives of its portfolio companies this week and told them to focus on becoming profitable and take a hard look at expenses they could cut... Sequoia's partners, who began the special meeting with a slide that read 'RIP: Good Times,' pored over dire economic data and warned that the current downturn will be long and painful... Until a few weeks ago, the tech sector looked relatively insulated from a downturn... But the turmoil of the past few weeks has changed that momentum. Venture capitalists are running into trouble raising new funds and tech vendors are getting squeezed as businesses cut budgets, banks pull credit lines and consumers close their wallets."

October 10 - Bloomberg (Joseph Galante): "Experts wonder if the financial crisis will lead to a rise in crime in New York City, a pattern associated with every recession since the late 1950s, the New York Times reported, citing Richard Rosenfeld, sociologist at the University of Missouri-St. Louis. After the stock market fell in 1987, New York City murders hit historic highs in subsequent years, the Times said. During the financial crisis in the 1970s, the city saw abandoned neighborhoods and increased robberies, the newspaper said."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

October 8 - Bloomberg (Jody Shenn): "Moody's... put $110 billion of prime-jumbo mortgage-backed securities under review for downgrades, a spokesman said."

GSE Watch:

October 8 - Bloomberg (Dawn Kopecki): "Fannie Mae and Freddie Mac were directed to step up their purchases of mortgage bonds to help speed the housing market's recovery, Treasury Secretary Henry Paulson said. Paulson, who cited falling real estate prices as the 'root cause' of the current economic turmoil, said Fannie and Freddie can purchase more than $150 billion before reaching regulatory limits. The government seized control of the two money-losing mortgage-finance companies last month partly to intensify federal efforts to bolster mortgage finance and lower interest rates. 'We must continue to keep mortgage credit available and support the housing market so that we can more quickly turn the corner on the housing correction,' Paulson said..."

October 9 - Bloomberg (Dawn Kopecki): "Fannie Mae and Freddie Mac's federal regulator suspended their capital rules and classified the companies as undercapitalized in the second-quarter, citing deteriorating credit quality and market conditions that raised 'significant questions about the sufficiency of capital'... The agency is suspending the capital classifications while the companies are in conservatorship, as FHFA Director James Lockhart 'determined that it is prudent and in the best interests of the market.'"

Real Estate Watch:

October 7 - Bloomberg (Sharon L. Lynch): "New York City home prices fell in every borough except Manhattan in the third quarter, according to the Real Estate Board of New York... Prices fell the most in Queens, where the median cost of apartments and one- to three-family homes fell 17% to $400,000... In the Bronx, prices declined almost 12% to $389,000; in Brooklyn, they dropped 11% to $500,000; and on Staten Island they fell 8.2% to $390,000... In Manhattan, third-quarter apartment transactions fell 24% to 2,654 from a year earlier and the number of apartments on the market increased to 7,003..."

October 7 - Bloomberg (David M. Levitt): "The vacancy rate for top-class New York City office space rose to 7.7% in the third quarter, a 43% jump from the same period last year, as Wall Street firms laid off workers... Manhattan's financial services industry had rented one out of every three square feet of space in the U.S.'s most expensive office market until this year..."

October 6 - Bloomberg (Hui-yong Yu): "Vacancies at U.S. neighborhood and community shopping centers reached a 14-year high in the third quarter, rising to 8.4%, as the credit crisis and slowing economy took a toll on retailers, Reis Inc. said."

October 6 - Bloomberg (Peter S. Green): "The vacancy rate for U.S. rental apartment buildings rose to 6.1% in the third quarter as a dropoff in mortgage lending and stagnant wages deterred people from buying homes, Reis Inc. reported."

October 6 - Wall Street Journal (Kris Hudson): "Vacancy rates at U.S. malls and shopping centers continued their steep rise in the third quarter as slumping sales forced retailers to close stores. Malls are seeing their highest vacancy rate since 2001... Until recently, most commercial landlords had struggled with the financing drought, but the so-called 'fundamentals' of their properties -- vacancy rate, rent and expenses -- remained healthy. Now that is changing."

Speculator Watch:

October 7 - Bloomberg (Gillian Wee): "Hedge funds worldwide in September recorded their biggest drop since August 1998... The HFRI Weighted Composite Index fell 4.68% in September, marking the fourth consecutive monthly decline and extending the loss this year to 9.41%, according to... Hedge Fund Research Inc."

October 6 - Fortune (Roddy Boyd): "September was the worst month on record for hedge fund performance, but for one legendary player what's going on in the markets now must seem like its coming straight from the gates of hell. Tontine Associates, a $10 billion Greenwich-based fund, told investors... it expected to show a 2008 loss through Sept. 30 of 65%... Tontine builds large, concentrated positions in companies..."

October 6 - Bloomberg (Warren Giles): "Julius Baer Holding AG, Switzerland's biggest independent money manager for the wealthy, dropped the most in at least 19 years in Swiss trading amid speculation the bank's U.S. asset management business GAM may lose client funds... 'GAM is the most obvious concern,' said Christian Stark, an analyst at Credit Agricole... 'They have a relatively heavy U.S. investor base and if those hedge funds are selling, that would have an effect.'"

October 6 - Bloomberg (Katherine Burton): "Lancelot Investment Management LLC, a hedge-fund firm in Northbrook, Illinois, lent about $1 billion to a company whose former chief executive officer has been arrested amid allegations he ran a fraudulent investment scheme. The loans to Petters Group Worldwide and affiliates represented 'nearly all' of the assets managed by Lancelot..."

October 8 - Bloomberg (Saijel Kishan): "Citadel Investment Group LLC, the $17 billion investment firm run by Ken Griffin, had the credit outlook for two of its hedge funds lowered by S&P. The ratings firm revised its outlook for... Citadel's Kensington Global Strategies Fund Ltd. and Citadel Wellington LLC to 'negative' from 'stable.'"

October 9 - Bloomberg (Tom Cahill): "Drake Management LLC, F&C Asset Management Plc and New Star Asset Management Ltd. all closed funds today, as a cull in the $1.9 trillion hedge-fund industry accelerates after the worst performance in a decade. Drake...was closing three funds that once ran about $2 billion."

Fiscal Watch:

October 8 - Dow Jones (Corey Boles): "Evidence of the U.S. federal government's weakening finances continued to mount with a total budget deficit of $438 billion in fiscal 2008, up sharply from the $162 billion deficit in fiscal 2007... CBO estimates that the federal budget will be $45 billion in surplus in September, $68 billion less than the $113 billion surplus recorded in September 2007. This is primarily due to lower net corporate income tax receipts, which fell by almost 30% to around $22 billion... Federal government spending on programs other than defense, social security, medicare and medicaid increased by around 12% to $911 billion, the CBO said."

October 6 - Bloomberg (Bob Ivry): "The Federal Housing Administration has grown so large that by the end of the year it will guarantee mortgages for three in 10 U.S. borrowers, many of whom have bad credit or loans that required no verification of income. Congress wants FHA to do more. The Hope for Homeowners program... authorizes the agency... to guarantee up to $300 billion of 30-year, fixed rate home loans for struggling borrowers over the next three years. 'FHA has completely replaced subprime and Alt-A,' said Olson... who now runs Wholesale Access Mortgage Research & Consulting Inc...."

Muni Watch:

October 7 - Bloomberg (Jerry Hart): "U.S. states need federal financial assistance to cope with diminishing access to credit and widening budget deficits, a report by the Center on Budget and Policy Priorities says. Congress should consider aid similar to the $20 billion in Medicaid-payment assistance and grants to states authorized in the last recession, Nick Johnson, an analyst at the... research group, wrote... 'States are facing the same problem faced by millions of businesses across the country -- tightening credit markets,' wrote Johnson... 'The Treasury or Federal Reserve may have to serve as the lender of last resort... At least 15 states have new budget gaps, Johnson wrote, and 29 have cut spending, used reserves or raised revenue to balance budgets for this fiscal year. More reductions in services or higher taxes are likely in coming weeks, he said."

October 6 - Bloomberg (Adam L. Cataldo): "Interest on weekly municipal auction-rate bonds rose to 8.08%, the highest on record, exceeding the peak reached after the market collapsed in February."

October 8 - Bloomberg (Michael McDonald): "The Massachusetts state pension fund lost $8 billion so far this year, a 15% drop in assets under management that wiped out about two years of gains. The fund... had $45.7 billion in assets as of Sept. 30, down from $53.7 billion at the beginning of the year... 'Almost every asset class is negative,' said Michael Travaglini, executive director of the investment trust."

New York Watch:

October 10 - Bloomberg (David Mildenberg and Mike Ramsey): "Capital One Financial Corp., the lender that raised $200 million last month to cover future losses, will end financing of auto dealers' inventories in New Jersey and New York by the end of this month, a spokesman said."

California Watch:

October 8 - Bloomberg (Michael B. Marois): "California's two-week-old budget is already suffering from a $3 billion shortfall, as the state prepares to ask the near-paralyzed municipal bond market for a short-term loan next week to pay its bills... Schwarzenegger signed a $143 billion budget Sept. 23, ending an 85-day stalemate with lawmakers over how to close a $15 billion deficit in the fiscal year that began July 1... The governor's office today said tax revenue for September was $814 million less than forecast. That would amount to a $3 billion shortfall by end of the fiscal year on June 30."

October 7 - Market News International (Chris H. Sieroty): "California's economy is nearing a financial crisis intensified by the credit crunch. The state is several weeks away from running out of money and would normally generate interim financing by issuing revenue anticipation notes to meet any short-term deficit until tax revenues arrive later in the fiscal year. But access to the credit markets has been severely curtailed in recent weeks."

October 6 - Bloomberg (Michael B. Marois): "California may have to turn to foreign investors to raise the cash it needs to pay bills if the financial-market rescue plan doesn't end a credit squeeze that has stalled tax-exempt bond sales."

October 8 - Bloomberg (Jeremy R. Cooke): "California wants to sell $4 billion of short-term notes next week to avert a potential cash shortage, seeking demand from individual investors, as states struggle to obtain financing, State Treasurer Bill Lockyer said. 'The credit markets are so impossibly frozen at this moment, we are still a little nervous about that... We're hoping in this state with the pool of investors that we have here that we can convince a lot of people to purchase these individually.'"

Crude Liquidity Watch:

October 5 - Bloomberg (Matthew Brown): "Saudi Arabia's M3 money supply growth, an indicator of future inflation, accelerated to 22% in August from 21% in July."

Hoping There's Hope:

This is the first all-encompassing global dislocation of contemporary finance, impacting virtually all economies, markets and asset classes. The media is now all over the "Wall Street" and "banking" crisis. I am of the view, however, that the collapse of the hedge fund industry has moved to the forefront - that it is now at the epicenter of global market upheaval. To watch silver lose more than 20% of its value today in intraday trading; to see the collapse in energy prices; to see the entire commodities complex absolutely routed; to view global currency markets in complete disarray, with double-digit intraday drops in the Brazilian real and Mexican peso; to witness major currencies such as the Australian and Canadian dollars suffer precipitous declines; for benchmark Fannie Mae MBS yields to surge 62 bps in three days; to see Brazilian dollar bond yields jump almost 200 bps in four sessions; for global equities indices to suffer rapid double-digit drops throughout both the developed and "emerging" markets; to witness a 1,000 point intraday swing in the DJIA. All the favorite trades are blowing up, and the leveraged speculating community is in a panic de-leveraging.

There is no doubt that markets are in the midst of an unprecedented liquidation of positions across virtually all asset classes and a vicious unwind of a multitude of investment and trading strategies. The Massive Pool of Global Speculative Finance is being drained. Investors and speculators alike are desperate to flee risk. Having watched the ballooning of the hedge fund industry over the past few years in absolute awe, I can say today that an industry collapse would entail the sale (voluntary and forced by the margin clerk) and unwind of literally Trillions of positions. It has been history's most spectacular speculative Bubble and, especially over the past few years, it became very much global in nature and infiltrated virtually all asset classes. This Bubble is in a full-fledged collapse - entailing unprecedented liquidations - and it's taking global markets down with it.

The situation is dire, as is now commonly recognized. The media is in a tizzy, and Wall Street makes for an easy and generally deserving villain. I fear the rapidly mounting anger. But I guess for this evening there is something about coming home after a distressing week and spending time with my little four month old baby. My wife and I gave our smiling and laughing little guy a bath and I just kissed them goodnight. I just don't have it in me right now to analyze and to write gloom and doom. I'd rather Hope there is Hope.

Perhaps things will stabilize once the hedge fund liquidations run their course. Treasury (TARP) purchases will commence soon. It appears that Fannie and Freddie will be expanding their market purchases. The Fed is now buying commercial paper, and the Fed and Treasury are working to resolve the dislocation in the "repo" market. Across the globe, governments are in full crisis management mode. There appears universal resolve to bolster financial sectors and stem the collapse. And there were actually some positive indications of stabilization in our Credit system late in the week.

I also hold out Hope that the Trillions of reserves held by global central bankers will provide some buffer to stem financial system collapse. In particular, I am Hoping that China, India, Russia, Brazil and the Middle East have today sufficient reserves to somehow avoid a '90s style financial and economic meltdown. I am Hoping that demand from China, India, Asia and Latin America will help offset inevitable economic downturns in the U.S. and Britain and, hopefully to a lesser extent, Europe. I am hoping that the collapse in energy and commodities prices is more a reflection of acute financial market dislocation rather than a harbinger of synchronized global economic upheaval. I am hoping there is more substance to the dollar's rally than simply an unwind of bearish dollar bets. And I am hoping that with large capital infusions our deeply impaired banking system will retain the capacity to finance a much less robust but at least functioning U.S. economy. I really Hope everything is not as dire as it appears.