For the shortened week, the Dow dropped 6.6% (down 16.1% y-t-d) and the S&P500 sank 7.4% (down 14.7%). The Morgan Stanley Cyclicals were hit for 13.4% (down 25.8%), and the Transports were hammered for 9.6% (down 23.7%). The Utilities dropped 7.7% (down 10.6%), and the Morgan Stanley Consumer index fell 5.0% (down 12.3%). The S&P400 Mid-Caps dropped 8.3% (down 13.3%), and the small cap Russell 2000 sank 9.1% (down 17.7%). The NASDAQ100 declined 5.5% (down 3.2%), and the Morgan Stanley High Tech index fell 7.7% (down 4.2%). The Semiconductors sank 11.8% (down 7.0%), and the InteractiveWeek Internet index lost 5.2% (down 0.2%). The Biotechs were hit for 6.9% (up 1.9%). The Broker/Dealers sank 11.9% (down 12.9%), and the Banks were hammered for 20.3% (down 51%). With bullion surging $51, the HUI Gold index gained 3.2% (up 6.3%).

One-month Treasury bill rates ended the week at 17 bps, and three-month bills were at 26 bps. Two-year government yields slipped 2 bps to 0.92%. Five-year T-note yields ended the week down 5 bps to 1.795%. Ten-year yields declined 10 bps to 2.75%. Long-bond yields fell 6 bps to 3.62%. The implied yield on 3-month December '09 Eurodollars dropped 7.5 bps to 1.465%. Benchmark Fannie MBS yields dipped one basis point to 4.24%. The spread between benchmark MBS and 10-year T-notes widened 9 to 145 bps. At the same time, agency 10-yr debt spreads narrowed 8 to 63 bps. The 2-year dollar swap spread declined 2.25 to 65.75 bps; the 10-year dollar swap spread was unchanged at 25 bps, and the 30-year swap spread declined 3.75 to negative 32.75 bps. Corporate bond spreads were wider. An index of investment grade bond spreads widened 15 to 235 bps, and an index of junk spreads widened 50 to 1,227 bps.

February 18 - Bloomberg (Gabrielle Coppola and Pierre Paulden): "Roche Holding AG sold $16 billion of bonds to finance its acquisition of Genentech Inc. in the second- largest corporate bond offering... The sale propelled U.S. corporate debt issuance to a daily record of $32.55 billion in a sign of thawing credit markets."

February 20 - Bloomberg (Bryan Keogh and Josh Fineman): "Corporate bond trading in the U.S. is rising to the highest in two years... An average $17.1 billion of corporate bonds traded daily this month... The business is up from last year's low of $9.4 billion in August and reached the highest level since February 2007, Finra data show."

Investment grade issuance included Roche $17.5bn, JPMorgan $10bn, Dupont $900 million, Union Pacific $750 million, Coca-Cola Enterprises $600 million, Goodrich $300 million, Private Export Funding $325 million, Snap-On $300 million and Amherest College $100 million.

Junk issuers included DCP Midstream $450 million.

International debt issues this week included SFEF $5.5bn, Canadian National Railroad $550 million, and Banco Bilbao $270 million.

U.K. 10-year gilt yields dropped 14 bps to 3.41%, and German bund yields fell 9 bps to 3.01%. The German DAX equities index sank 9.0% (down 16.5%). Japanese 10-year "JGB" yields ended the week up 2 bps to 1.275%. The Nikkei 225 dropped 4.7% (down 16.3%). Emerging markets were under pressure. Brazil's benchmark dollar bond yields rose 12 bps to 6.93%. Brazil's Bovespa equities index declined 7.1% (up 3.1% y-t-d). The Mexican Bolsa lost 5.4% (down 18.1% y-t-d). Mexico's 10-year $ yields dipped one basis point to 6.63%. Russia's volatile RTS equities index sank 17.1% (down 18.1%). India's Sensex equities index dropped 8.2% (down 8.3%). China's Shanghai Exchange gave back 2.6% (up 24.2%).

Freddie Mac 30-year fixed mortgage rates dropped 12 bps to 5.04% (down 100bps y-o-y). Fifteen-year fixed rates declined 13 bps to 4.68% (down 96bps y-o-y). One-year ARMs sank 14 bps to 4.80% (down 18bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 18 bps this week to 7.08% (up 32bps y-o-y).

Federal Reserve Credit surged $76.9bn to $1.907 TN. Fed Credit expanded $1.040 TN over the past 52 weeks (120%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt last week (ended 2/18) jumped $15.3bn to a record $2.576 TN. "Custody holdings" were up $446bn over the past year, or 21%.

Bank Credit increased $12.7bn to $9.817 TN (week of 2/11). Bank Credit expanded $506bn year-over-year, or 5.4%. Bank Credit jumped $425bn over the past 23 weeks. For the week, Securities Credit slipped $1.9bn. Loans & Leases jumped $14.4bn to $7.165 TN (52-wk gain of $315bn, or 4.6%). C&I loans dropped $10.4bn, with 52-wk growth of 8.4%. Real Estate loans jumped $13.3bn (up 6.1% y-o-y). Consumer loans were little changed, while Securities loans rose $11bn. Other loans added $0.3bn.

M2 (narrow) "money" supply increased $11.2bn to $8.261 TN (week of 2/9). Narrow "money" has now inflated at an 18% rate over the past 21 weeks and has jumped $735bn over the past year, or 9.8%. For the week, Currency increased $2.6bn, while Demand & Checkable Deposits declined $1.0bn. Savings Deposits gained $14.2bn, while Small Denominated Deposits slipped $1.4bn. Retail Money Funds fell $3.1bn.

Total Money Market Fund assets (from Invest Co Inst) fell $24bn to $3.879 TN, with a 52-wk expansion of $471bn, or 13.8% annualized.

Total Commercial Paper outstanding slumped $32.7bn this past week to a 13-wk low $1.521 TN. CP has declined $160bn y-t-d and $296bn over the past year (16.3%). Asset-backed CP dropped $13.8bn to $722bn, with a 52-wk decline of $83bn (10.3%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $381bn y-o-y, or 6.0%, to $6.7 TN. Reserves have declined $222bn over the past 18 weeks.

Global Credit Market Dislocation Watch:

February 19 - Dow Jones (Maya Jackson Randall): "By enlisting Fannie Mae and Freddie Mac in its dramatic fight against the foreclosure crisis, the Obama administration is boosting the importance of the two troubled mortgage entities while also increasing the risk that the firms will continue to lose money... Under the plan the administration unveiled Wednesday, Fannie Mae and Freddie Mac would refinance loans in effort to make mortgages more affordable for as many as 4 million to 5 million homeowners who are unable to refinance because of plummeting home prices... At the same time, the Treasury Department agreed to boost its funding commitment to Fannie and Freddie - which were seized by the government in September amid concerns they would collapse from mounting mortgage defaults - to $200 billion each from the original level of $100 billion each... New America Foundation Financial Services Policy Director and former Clinton administration economic policy official Ellen Seidman said the administration is right to lean on Fannie and Freddie to ease the pain in the housing markets. 'I think it's exactly the right thing to do,' she said... 'You now have these two pretty well-oiled machines. We've essentially nationalized them, so let's use them.'"

February 18 - Bloomberg (Belinda Cao): "China, whose $1.95 trillion in currency reserves are the world's largest, called on the U.S. and Europe to protect the value of its overseas investments and said it plans to spend more foreign exchange on imports and acquisitions. 'We hope countries whose currencies are the main holdings in our international reserves will take effective measures to cope with the financial crisis,' Fang Shangpu, deputy director at the State Administration for Foreign Exchange, told a press conference... 'They should work to maintain economic and financial stability, and protect the interests and confidence of investors.'"

February 20 - Bloomberg (Wes Goodman and Jody Shenn): "Asian investors won't buy debt and mortgage-backed securities from Fannie Mae and Freddie Mac until they carry explicit U.S. guarantees... The risks are too great without a pledge that the U.S. will repay the debt no matter what, according to Hideo Shimomura, chief fund investor in Tokyo for Mitsubishi UFJ Asset Management Co., and other bondholders and analysts in Japan, China and South Korea interviewed by Bloomberg... 'Looking at the risk, they're not so attractive,' he said. 'We need a guarantee before we'll buy.' Foreign investors sold $170 billion of agency debt and securities in the second half of 2008, the largest amount since the Treasury began tracking sales in 1977..."

February 18 - Associated Press (Robert Wielaard): "Public spending by European Union governments to ease the recession is knocking big holes in many national budgets, the European Commission said... But mindful of the extraordinary economic slowdown, it said it will cut countries both in and out of the 16-nation euro zone some slack in complying again with the bloc's sound finances rules. In the euro zone, France and Germany will see their budget deficits go way above the ceiling of 3% of gross domestic product ... It confirmed France's budget gap will shoot to 4.4% of GDP in 2009 up from 3.2% in 2008... Germany's 2009 budget gap is expected to be 3% of GDP but will jump to 4% in 2010... Joaquin Almunia, the EU Monetary Affairs Commissioner, put six nations euro zone members Ireland, Greece, Spain, France and Malta plus non-euro member Latvia on notice by monitoring their excessive deficits."

February 18 - Bloomberg (Laura Cochrane): "Hungarian, Polish and Czech government debt, among the highest rated in emerging markets, has already been downgraded by bondholders. Investors are demanding 20 bps more yield to own Hungary's bonds than similar-maturity Brazilian debt, which is rated four levels lower by Moody's... The risk of Poland defaulting is about the same as Serbia, ranked six levels lower... Czech 10-year bonds yield the most compared with German bunds since 2001."

February 17 - Bloomberg (Zoe Schneeweiss and Niklas Magnusson): "Moody's... said some of Europe's largest banks may be downgraded because of loans to eastern Europe... Moody's sees 'continuous downward rating pressure' in the region as a result of worsening asset quality and western banks' reliance on short-term funding..."

February 19 - Bloomberg (Finbarr Flynn): "Two of Japan's eight nationwide banks are braced for $2.6 billion in losses after investments by U.S. private equity groups... The lenders took on increased risks under foreign ownership. Aozora Bank Ltd., acquired in 2003 by Cerberus Capital Management LP, reported reverses on subprime mortgages, GMAC LLC shares and Bernard Madoff's fund. Shinsei Bank Ltd., bought in 2000 by private investors including billionaire J. Christopher Flowers, had losses on a stake in Germany's Hypo Real Estate Holding AG. 'Aozora and Shinsei were managed like many banks in America, investing in derivatives and other toxic assets,' said Neil Katkov, head of Asia research at... Celent LLC. 'It was a bargain with the devil.'"

February 18 - Bloomberg (Alexander Nicholson): "Russia's central bank plans to print 3.2 trillion rubles ($88.4 billion) to cover this year's budget deficit, Reuters reported, citing First Deputy Chairman Alexei Ulyukayev."

Currency Watch:

Currency markets were volatile, with the dollar index ending the week up 0.5% to 86.49. For the week on the upside, the British pound gained 0.5%, the Swiss franc 0.3%, and the Nowegian krone 0.02%. On the downside, the South Korean won declined 6.7%, the Brazilian real 5.4%, the Swedish Krona 4.0%, the Taiwanese dollar 2.2%, the New Zealand dollar 2.1%, the South African rand 1.8%, the Australian dollar 1.7%, the Japanese yen 1.5%, the Mexican peso 1.5% and the Singapore dollar 1.4%.

Commodities Watch:

February 18 - Bloomberg (Helen Yuan and Rebecca Keenan): "Wuhan Iron & Steel Group and Jiangsu Shagang Group Co., China's third- and fifth-largest steelmakers, are shopping for iron ore mining stakes in Australia and Brazil, executives said... 'We are evaluating and selecting' candidates in Australia and Brazil, said Shen Wenrong, Jiangsu-based Shagang's chairman. 'Going overseas is the government policy, so I believe we will get financing from Chinese banks.' ...The world's top metal user, China has agreed to acquire $22 billion worth of commodity assets this year after a 70% drop in metals and oil since July..."

February 17 - Bloomberg (Ye Xie and Candice Zachariahs): "Shipping costs have more than doubled this year... The 147% jump in ocean-transport prices is evidence that China's $580 billion stimulus plan will lift raw materials, said Ihab Salib, who oversees $3 billion at Federated Investments Inc. in Pittsburgh."

Gold surged 5.4% this week to $993 (up 12.6% y-t-d), and silver jumped 5.6% to $14.39 (up 27.4% y-t-d). April Crude dropped $2.22 to $39.75 (down 11% y-t-d). March Gasoline slid 11.2% (up 1% y-t-d), and March Natural Gas deflated 9.9% (down 29% y-t-d). March Copper fell 6.1% (up 3.5% y-t-d). March Wheat declined 3.0% (down 15% y-t-d), and Corn fell 3.6% (down 14% y-t-d). The CRB index sank 5.0% (down 11.8% y-t-d). The Goldman Sachs Commodities Index (GSCI) fell 5.7% (down 9.8% y-t-d).

China Reflation Watch:

February 18 - Bloomberg (Jiang Jianguo): "China's central government may issue 200 billion yuan ($29 billion) of bonds on behalf of local authorities to help them raise cash, China Business News said, citing unidentified officials from the Ministry of Finance."

February 17 - Bloomberg (Chua Kong Ho and Zhang Shidong): "Chinese companies may be using record bank lending to invest in stocks, fueling a rally that's made the benchmark Shanghai Composite Index the world's best performer this year, according to Shenyin & Wanguo Securities Co. As much as 660 billion yuan ($97 billion) may have been converted by companies into term deposits or used to buy equities..."

February 17 - China Knowledge: "China saw its fiscal revenue fall 17.1% year on year to RMB 613.16 billion (US$89.72 billion) in January, according to...the Chinese Ministry of Finance..."

February 16 - Bloomberg (Li Yanping): "Foreign direct investment in China declined for a fourth month in January as companies cut back on spending to weather the global financial crisis. Investment fell 32.6% to $7.54 billion from a year earlier..."

February 17 - Bloomberg (Chia-Peck Wong): "Home prices on the Peak, Hong Kong's most-expensive residential area, had their steepest decline since the Asian financial crisis a decade ago... CB Richard Ellis Group Inc. said. Prices slumped 30.5% in the fourth quarter of 2008 from a year earlier..."

February 19 - Bloomberg (Chia-Peck Wong): "Prime office rents in Hong Kong, the world's third-most expensive, fell 17% in January from a year earlier as landlords sought to retain tenants amid a recession, Colliers International said in a report today."

Japan Watch:

February 16 - UPI: "Japan's economy shrank in the fourth quarter at the worst annual rate since the first quarter of 1974, government officials said. The Japanese economy, the second-largest in the world, was particularly hard hit by plummeting exports and a downturn in domestic consumer spending... The real gross domestic product declined at an annual rate of 12.7% from October to December..."

February 16 - Bloomberg (Tom Kohn): "The cost of protecting Japanese corporate bonds from default rose to a record after the economy shrank the most since the 1974 oil shock last quarter."

February 16 - Bloomberg (Michio Nakayama and Shigeru Sato): "Japan's electricity generation dropped for a sixth straight month in January, falling 6.4% from a year earlier as factories and businesses cut production because of the deepening recession."

India Watch:

February 16 - Bloomberg (Kartik Goyal and Anil Varma): "India plans to raise a record 3.62 trillion rupees ($74 billion) selling bonds in the fiscal year that starts April 1 as it spends more to counter the impact of the biggest global slump since the Great Depression... India also raised its borrowing target for the current fiscal year by 80% to 2.61 trillion rupees."

February 16 - Bloomberg (Cherian Thomas): "India's budget deficit may be almost double next year's planned target as the government steps up spending to protect the economy from the global recession ahead of elections in two months. Spending will rise 6% to 9.53 trillion rupees ($196bn) in the year starting April 1, Foreign Minister Pranab Mukherjee said... That will result in a budget gap of 5.5% of gross domestic product by March 31, 2010..."

February 16 - Bloomberg (Rakteem Katakey): "India has allocated 955.8 billion rupees ($19.6 billion) to pay subsidies to companies selling food, oil products and fertilizers below cost in the year to March 2010, Acting Finance Minister Pranab Mukherjee told parliament..."

Asia Reflation Watch:

February 18 - Bloomberg (Janet Ong and Yu-huay Sun): "Taiwan's economy shrank at the fastest pace on record last quarter... Gross domestic product fell 8.36% from a year earlier..."

February 18 - Bloomberg (Janet Ong and Yu-huay Sun): "Taiwan's central bank cut interest rates to a record low... Governor Perng Fai-nan and his board pared the discount rate on 10-day loans to banks to 1.25% from 1.5%..."

February 16 - Bloomberg (Seyoon Kim and William Sim): "South Korea faces a 'deeper and longer' recession than during the 1997-1998 Asian financial crisis as the global slump pummels exports and indebted consumers and companies cut spending, Nomura Holdings Inc. said. 'The biggest difference this time around is the country's exports won't provide a cushion for a drop in local demand,' Nomura's... Kwon Young Sun said."

February 16 - Bloomberg (Sangim Han and Kim Kyoungwha): "South Korea failed to meet its target at an auction of 10-year bonds for a second consecutive month on concern that the nation will increase debt sales to fund stimulus spending."

February 17 - Bloomberg (Shamim Adam): "Singapore's exports fell the most in at least 22 years in January... Non-oil domestic exports dropped 34.8% from a year earlier, after contracting 20.8% in December..."

Latin America Watch:

February 20 - Bloomberg (Lester Pimentel): "Mexico is riskier than Brazil in the bond market for the first time since at least 2001... Five-year credit-default swaps tied to Mexico's bonds and used to hedge against losses traded at 4.14 percentage points yesterday, compared with 3.78 points for Brazil..."

February 18 - Bloomberg (Laura Price): "Brazilian banks are seeking to share default risk with the government to reduce the interest rates they charge to small and medium-size companies, Folha de S. Paulo reported, citing Fabio Barbosa, president of the Brazilian Federation of Banks."

February 16 - Bloomberg (Heather Walsh): "Chile, the world's biggest copper supplier, said the value of its exports of the metal fell 58% in January from a year earlier. Exports were $1.49 billion, compared with $3.58 billion a year earlier..."

Central Banker Watch:

February 19 - Bloomberg (Jody Shenn): "The Federal Reserve bought $19.9 billion of Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds under a program aimed at keeping home-loan rates low... Acquisitions since the program started last month now total $134.8 billion. The U.S. central bank also today boosted its total buying of Fannie, Freddie and Federal Home Loan Bank corporate debt to $32.7 billion under a separate program started in December..."

February 18 - Bloomberg (Brian Swint): "Bank of England policy makers unanimously agreed to ask the government for authority to create money in an effort to kick start the economy... The Monetary Policy Committee, led by Governor Mervyn King, voted 8-1 to cut the main rate to 1 percent, the lowest since the central bank was founded in 1694..."

February 19 - Bloomberg (Mayumi Otsuma): "The Bank of Japan said it will buy corporate bonds for the first time, widening its asset-purchase program... The central bank will buy as much as 1 trillion yen ($10.7bn) in bonds rated A or higher from March 4 to Sept. 30."

Fiscal Watch:

February 19 - MarketNews International (Steven K. Beckner): "Atlanta Federal Reserve Bank President Dennis Lockhart... predicted that current and forthcoming policies 'will work' to bring about economic and financial recovery, but if not he said the Fed has more it can do, including expanded purchases of agency and agency-guaranteed mortgage-backed securities... To address falling house prices, Lockhart said 'the FOMC has stated that the Fed will continue to purchase large quantities of agency debt and mortgage-backed securities to support mortgage and housing markets, and the Fed stands ready to expand the quantity and duration of such purchases.'"

Unbalanced Global Economy Watch:

February 16 - Bloomberg (Svenja O'Donnell): "The U.K. economy will shrink at almost twice the pace previously forecast this year as the credit famine plunges the nation deeper into the worst recession in almost 30 years, the Confederation of British Industry said. Gross domestic product will contract 3.3%..."

February 19 - Bloomberg (Jennifer Ryan): "U.K. mortgage lending fell an annual 52% in January, the Council of Mortgage Lenders said."

February 19 - Dow Jones (Natasha Brereton): "U.K. broad money supply growth accelerated again in January, but the expansion is being distorted by the credit crunch... M4 money supply grew GBP48.5 billion last month, marking a 17.5% year-on-year increase, up from 16.2% in December."

February 17 - Bloomberg (Jurjen van de Pol): "Europe recorded the biggest trade deficit in 2008 since the euro's introduction 10 years ago as higher oil prices boosted energy costs and the global financial crisis curtailed exports. The region's trade deficit of 32.1 billion euros ($40.5 billion) compared with a surplus of 15.8 billion euros in 2007..."

February 17 - Bloomberg (Kateryna Choursina): "Ukrainian industrial production plummeted in January at the fastest pace in Europe... Output tumbled an annual 34.1%... following a 26.6% annual drop in December..."

Bursting Bubble Economy Watch:

February 18 - Bloomberg (Alison Fitzgerald): "R. Allen Stanford, accused by federal regulators of a 'massive, ongoing fraud' at his Houston investment firm, cultivated his image by shuttling politicians in corporate jets and spending money on cricket, polo and golf. The 58-year-old head of Stanford Group... began using the title 'Sir' in 2006 after being knighted by the leaders of Antigua & Barbuda, his adoptive country. The banker began building a fortune by investing in Texan real estate following the 1980s savings-and-loan crisis, according to his company's Web site."

February 17 - Bloomberg (Bradley Keoun): "Looking for Charles O. 'Chuck' Prince, ousted 15 months ago as Citigroup Inc.'s chief executive officer? Just call his extension at the bank, which still pays for his office and secretary in Midtown Manhattan. Former Citigroup investment-banking head Michael Klein also has a free office and secretary after receiving a $34.3 million exit package when he quit in July 2008. John Reed, 70, who hasn't worked at the bank since he resigned as co-CEO in 2000 with a $5 million parting bonus, is entitled to an office and secretary for as long as he wants. Sanford I. 'Sandy' Weill, who retired as chairman in 2006, is ending a 10-year consulting contract with the bank in April after just three years. The agreement gave him millions of dollars in perks, including an office, car and driver and use of company aircraft, which he gave up in February."

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

February 20 - Bloomberg (Michael McDonald): "Mike Stelzer expected to retire after selling his cattle ranch outside Bakersfield, California. Instead, the 73-year-old is raising Holsteins on leased land, unable to quit because a chunk of his $2 million nest egg is stuck in auction-rate securities paying next to nothing. 'I have lost all faith in bankers and Wall Street,' said Stelzer, who invested the proceeds from the sale of his ranch in the securities..."

February 20 - Bloomberg (Bob Ivry): "Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest. About 2.57% of prime borrowers who took out jumbo loans last year were at least 60 days delinquent..."

February 17 - Bloomberg (Sarah Mulholland): "Delinquencies on commercial mortgages bundled and sold as bonds may triple by late 2009 as large real estate loans default, according to S&P... The commercial real estate market is in the early stages of a correction, and delinquencies may reach 3.5% this year, the New York-based ratings company said."

GSE Watch:

February 19 - Bloomberg (Jody Shenn): "Originations of U.S. government- insured home mortgages soared to a record last year and so-called prime-jumbo loans plunged to the lowest since 1990 as property prices tumbled, newsletter Inside Mortgage Finance reported. Loans insured by the Federal Housing Administration or the Department of Veteran Affairs more than doubled to $290 billion, from $116 billion..."

Real Estate Bust Watch:

February 17 - Wall Street Journal (Lingling Wei): "In the fading years of the commercial real-estate boom, mezzanine debt was all the rage among yield-chasing private-equity firms and hedge funds... Today, for most, mezz is a four letter word. Firms made an estimated $50 billion to $75 billion in mezzanine - dubbed 'mezz' -- loans, debt that fills the gap between the borrower's equity and the first mortgage. Billions of dollars already have been lost and the figure is likely to balloon... The losses are sending shock waves through the rough-and-tumble world of office buildings, shopping centers, hotels and other commercial properties, which are only now facing the full brunt of the recession. Mezz debt was one of the biggest culprits that enabled commercial real-estate investors and developers to participate in the broader speculative binge on Wall Street."

February 18 - Bloomberg (Hui-yong Yu): "The vacancy rate at U.S. office buildings will rise to 16.7% this year and could reach an 18-year high next year as tenants cut jobs and try to sublet space, property research firm Reis Inc. said."

February 19 - Dataquick: "Bay Area home sales rose above a year ago for the fifth consecutive month in January... The role of foreclosures in the housing market continued to grow, representing 54% of the Bay Area homes that resold last month..."

February 17 - Bloomberg (Sarah Mulholland): "Riverton Apartments, a high-rise complex in Manhattan's Harlem neighborhood, is set to be auctioned off Feb. 20 because owners Rockpoint Group LLC and Stellar Management have been unable to modify loan terms, according to Trepp LLC... A recent appraisal valued the property at $196 million, compared with a valuation of as much as $340 million when the complex was last appraised in December 2006..."

Speculator Watch:

February 17 - Bloomberg (Netty Ismail): "Hedge-fund assets will likely drop by about $192 billion this quarter..., according to... UBS AG. Global assets will likely fall to $1.215 trillion in the first quarter, said Timothy Bell... head of hedge- funds advisory at UBS's wealth management unit. Hedge-fund investors withdrew a record $152 billion in the fourth quarter..."

February 18 - Wall Street Journal (Kerry E. Grace): "Hedge-funds outflows totaled an estimated $74 billion in January, the second-highest ever... according to... TrimTabs... Hedge-fund investors have taken out $315 billion since September, TrimTabs said..."

February 17 - Bloomberg (Joe Carroll and Mark Chediak): "T. Boone Pickens... shed energy-related shares as their value declined, a public filing showed... As Pickens sold positions, the worth of the holdings in the fund tumbled 97% during the final three months of 2008 to $40 million from $1.29 billion on Sept. 30..."

Muni Watch:

February 17 - Bloomberg (Terrence Dopp): "New Jersey's budget shortfall for the current fiscal year is now $3.6 billion, up from a projection a month ago of $2.1 billion... State revenue collections fell $526 million short of projections last month..."

California Watch:

February 20 - Bloomberg (Michael B. Marois): "Governor Arnold Schwarzenegger said he will sign a package of tax increases, spending cuts and borrowing as soon as tomorrow and praised lawmakers for ending a months-long stalemate over how to close a record $42 billion deficit."

New York Watch:

February 19 - Bloomberg (Michael Quint): "New York state's personal income tax collections, its largest revenue source, fell $1.31 billion in January from a year earlier while business taxes declined $99 million, according to a state comptroller's report. 'Revenue growth is slowing dramatically,' Comptroller Thomas DiNapoli said..."

February 20 - Bloomberg (Stacie Servetah): "New York Governor David Paterson said the state's budget deficit may be as high as $17 billion."

Crude Liquidity Watch:

February 17 - Bloomberg (Camilla Hall): "Investors and home buyers in the United Arab Emirates may default on payments for properties that have yet to be completed, creating a liability for developers of as much as $25 billion over the next two years, UBS AG said."

Surreal:

CNBC's impassioned Rick Santelli suffered an impromptu "mad as hell and not gonna take it any more" moment. And there is definitely plenty of dry kindling lying around awaiting a spark. Mr. Santelli's outburst could very well mark a turning point for national policy debate. Hopefully it is not used as a battle cry for more rage and open "class warfare." Public outrage, as understandable as it is, is a troubling facet of The New Post-Bubble Landscape.

There's no way around the reality that government bailouts and stimulus packages are inequitable and unjust for most of us. There is hope that they bolster stability for the system overall. The majority of us are begrudgingly willing to pay a significant price to ensure stability. Policymakers will, of course, craft policy in hope of stabilizing an acutely unstable system. "Implosion" will never be an option for politicians and other policymakers. At the same time, the government's (predictable) responses to a breakdown in market mechanisms provide such an easy target. As I tried to touch upon last week, policy debate that jolts deep ideological hot buttons is messy business.

The nuts and bolts of today's reflationary policies will not be received warmly by the majority of taxpayers that work hard, live within their means, and pay their bills. Post-Bubble policymaking, by its nature, can be reliably counted upon to throw good "money" after bad. And the bigger the Bubble the greater the amount that will find its way down the rat hole.

In a highly inflated system, it matters little that, say, 90% of an economy's loans are sound. The problematic (say) 10% remains more than sufficient to bring down a highly leveraged and fragile financial sector - which risks collapse for the entire Bubble Economy and Credit system. So, inevitably, policy focus will be on the minority "10%" group of problem borrowers, institutions and their loans. And it certainly doesn't help the tone of policy discourse that this group is comprised of an indeterminable blend of millions of "misfortunates" and "miscreants".

It is fair to suggest that the greater the public outrage the less compassion forthcoming for the unfortunates and the greater the hostility directed toward policies viewed as benefiting the undeserving. And the bottom line is that the Post-Bubble policymaking focus is, by its nature, unjust and inequitable. Moreover, it comes on the heels of a Bubble period recognized in hindsight as especially unjust and inequitable. It all creates a quite complex and volatile mix of finance, economics, policymaking and social tension. At the same time, an increasingly emboldened government - with its simple mandate to make things better - mobilizes massive financial and real resources in its less-than-studied effort to fulfill its newfound role as System Stabilizer of Last Resort.

I will not jump into the fray regarding the merits (and fairness) of modifying millions of troubled mortgages. Instead, I this evening want to address the Administration's less arousing announcement that it is boosting the taxpayers' commitment to Fannie Mae and Freddie Mac recapitalization from $200bn to $400bn. Consistent with the overarching goal of not bankrupting our nation, it is disconcerting that the GSEs have apparently once again evolved into primary tools of government reflationary measures.

It is worth noting that Fannie's and Freddie's combined books of business (mortgages held and guaranteed) jumped $31.3bn during December to a record $5.319 TN (strongest growth since July). For the year, their books of business jumped $326bn (6.5%), as their combined balance sheet assets rose 10.2% to $1.592 TN. In just two years Fannie and Freddie's combined books of business ballooned by $964bn, or 22%. Embedded taxpayer losses are now expanding exponentially.

I am protesting the use (once again) of the GSEs as mechanisms for systemic reflation. These institutions were at the heart of the U.S. Credit Bubble, a Bubble that severely distorted the U.S. financial sector and economy - only to then set its sights on inflating the world. Today's synchronized busts create a precarious global policymaking dilemma at home and abroad. My greatest fear at this point is a Government Finance Bubble that insidiously destroys our government's Credit worthiness, similar to what occurred on Wall Street.

I understand the argument for temporary government deficit spending. I appreciate the recent imperative for Fed's balance sheet expansion to accommodate financial sector delivering. These hopefully temporary fiscal and monetary policy measures can be quantified, monitored, debated and regulated. Conversely, the GSEs are financial blackholes. Their operations are today dictated by political goals, yet have seemingly no objective oversight ("we're all inflationists now"). And being too big to really fail, the markets freely finance these failed institutions.

I scoffed at the notion of GSE privatization. They were simply much too big. To be sure, their financial deficits had become as overwhelming as their roles throughout the mortgage, housing and overall global financial markets. Their implicit government guarantees were poison for distorting various markets - and the scope of the ensuing Credit Bubble ensured that there was no way for Washington to ever retreat from their backing of these institutions.

It is imperative that the GSEs not be used as stealth mechanisms for system reflation. The critical issue is not the federal government directing Fannie and Freddie to modify mortgages. What I fear is another round of massive GSE balance sheet and guarantee expansion. It is today too politically tempting to use GSE obligations to reflate. Their debt and guarantees are conveniently not counted as part of the federal deficit, while the GSEs provide a convenient mechanism for transferring mortgage risk away from the troubled banking system and securitization marketplace. And as long as the markets provide ample cheap GSE financing, the revelation of the true loss to be absorbed by the American taxpayer can be left (to grow) for another day.

Besides, it is increasingly clear that policymaking must turn its focus directly to our troubled banking system. The basket approach of stimulus and myriad measures to bolster housing and securities markets is doing little to alleviate concerns for the solvency of some of our major banks. The hope was that new measures would significantly buoy market confidence and, thus, provide general support for the banking system. It's just not working. The markets have grown too accustomed to downplaying every policy move in anticipation of the next more dramatic one. The markets are forcing policymakers to hit the banking problem head on.

The markets are now abuzz with "nationalization." "The horse seems to have left the barn," as they say. One way or another, a reasonably functioning banking system is an absolute priority. We are in for a fascinating few weeks, as the Treasury and Federal Reserve grapple with what dramatic measures would have the highest probability of effectively restoring confidence in the banking system. The environment is almost Surreal.