From the New York Times….

But Mr. Paulson and Mr. Geithner made it clear to the company, its potential suitors and to the meeting participants on Friday that the government has no plans to put taxpayer money on the line. The government is deeply worried that its actions have created a moral hazard and the Federal Reserve does not want to reach deeper into its coffers. Instead, Mr. Paulson and Mr. Geithner insist that Wall Street needs to come up with an industry solution to try to stabilize Lehman Brothers and calm the markets.

Still, some of the other Wall Street banks, facing billions of dollars in losses themselves, have resisted this approach. They argue that Lehman Brothers overreached and brought its current troubles on itself. If there are no bidders for Lehman Brothers, these banks say they can collect their collateral and liquidate the troubled firm’s assets. In this high-stake game, they may also be trying to call the government’s bluff, knowing that if push came to shove, it would provide financial support.

I wish that Mr. Paulson and Mr. Geithner would let Lehman’s Brothers fail. But their past performance does not give me hope.

When their lips are moving, they are lying. This from RIA Novosti…

Russian President Dmitry Medvedev dismissed speculation on Friday that his country would not have enough natural gas for European consumers and pledged to launch new fields if the market grows.

“It is amusing to hear statements that Russia will not have enough gas for supplies to Europe…This is not so,” Medvedev told a Valdai International Discussion Club meeting.

Medvedev also said that the country’s plans to develop energy cooperation with Asian states would not adversely affect energy supplies to Europe.

Talk is cheap. The investment needed to secure future gas production is not. So far, their is no sign that the Russians are spending the necessary money to keep their exports from going down.

I have not been writing much about Washington Mutual because I did not have any good way of explaining why it was important. But Nemo provides good explanation of why this is not just another bank failure in the making.

From AFP….

According to the local state agriculture organisation, the drought had inflicted losses of more than two billion dollars by July.

“The problem is that in autumn there will be no water for next year,” said Mansour Rashidi, a provincial ministry of agriculture expert.

“The underground water table will not be replenished. We will be hit with the lowest amount of water ever because we have used up all the reserves.”

Tehran has allocated nearly five billion dollars to fight the drought nationally. Even arch-foe the United States, often referred to in Iran as the Great Satan, is helping out.

To cover demand, Iran needs to import five million tonnes of wheat to make up for this year’s drought-induced shortfall.

According to a recent US Department of Agriculture report, Tehran has bought 1.18 million tonnes of American hard wheat, commonly used in breads and pasta, since the 2008-2009 crop season began in June.

From the San Francisco Chronicle

Pension spiking (e.g., retroactive increases in pension benefits or pre-retirement promotions that qualify workers for bigger pension benefits), has been a major trend in California since our dot-com boom. It has saddled state and local governments with serious fiscal problems ever since (e.g., Orange County has a $2.7 billion pension deficit, and a 2005 review of California’s biggest government agencies found pension, health care and workers’ comp commitments more than $100 billion under-funded), even leading to bankruptcy by the city of Vallejo.

100 billion dollar short fall in one state. That is not pocket change.

From the Daily Express….

Britain is “quite simply running out of power” and blackouts are almost inevitable within the next few years.

This is the stark warning from the head of an energy think-tank who believes power cuts could be serious enough to spark civil disorder.

You might be thinking “Sure you can find a head of a think-tank who will say just about anything. But there is little more to this then hot air. From latter on in the same article….

Only last Thursday, National Grid issued an urgent call for power after a series of power station breakdowns. Suppliers were asked to bring all their available generating capacity online, including costly oil-fired stations.

In May, hundreds of thousands of people in Cleveland, Cheshire, Lincolnshire and London suffered blackouts when seven power stations were closed.

The electricity industry estimates it needs to spend £100billion on new stations to ensure supplies.

The “retirement” of a string of nuclear and coal-fired power stations will see 37 per cent of the UK’s generation disappear by 2015, partly because of EU environmental directives.

That last part is the real kicker. But it also might not happen.

I suspect that the UK government may just ignore EU directives when it comes time to take 37 percent of their power off line. Still, they are having problems without EU intervention and I suspect those problems will just get worse.

Infrastructures costs is one of those hidden bombs in modern society. We built it in the past for far cheaper then we can build it today, even accounting for inflation. And when we pay for it to be rebuilt we will also have to be dealing with all the cost associated with an aging demographic.

From the Knowledge Problem…..

According to the US Department of Energy, “The Strategic Petroleum Reserve exists, first and foremost, as an emergency response tool the President can use should the United States be confronted with an economically-threatening disruption in oil supplies.”

In response to disruptions caused by Hurricane Gustav, the DOE has indicated a willingness to release reserves from the SPR. Unfortunately, due to a continuing power outage – also caused by Hurricane Gustav – the DOE is unable to pump oil from storage.

The original rational for the strategic petroleum reserves was the fear of limited war that disrupted oil supplies. So it does not surprise be that the SPR can’t operate without power. Its still kind of funny though.

From the New York Times….

Now the new managers of Fannie and Freddie will have to decide how they want to run enterprises controlled by the government. Lowering fees and buying large numbers of mortgages would serve as an economic stimulus, but could increase the ultimate cost to the government if the housing market gets worse. Raising fees, and being cautious in lending, could prolong the housing slump. Being generous in restructuring loans could help borrowers, but cost the enterprises money.

Henry M. Paulson Jr., the Treasury secretary and former chief executive of Goldman Sachs, tried to assure the public that the enterprises would follow both courses, an indication that the need to serve multiple masters remains. On one side, he promised that “the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.”

On the other side, he said Fannie and Freddie “will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking.”

It may not be easy to take less risk while lending more and charging lower fees.

A bit too understated, but otherwise spot on.

Cue scary music…..

Reports circulating Friday night have the two companies entering conservatorship, which would nearly wipe out equity holders but preserve the interests of debt holders. The chief executives of both companies would lose their jobs, but the companies could continue to operate, with quarterly infusions of capital from the Treasury depending on losses.

Any announcement would come just weeks before the two companies have to refinance $225 billion of mostly short-term notes. Fannie and Freddie sell debt to investors regularly, but concern about their financial position threatens to scare away those needed buyers, many of them foreign banks. A solid federal guarantee would allay investor fears and allow Fannie and Freddie to continue to raise funds as needed.

Quarterly infusions of capital depending on losses sounds pretty open ended. The New York Times has more….

Then, last week, advisers from Morgan Stanley hired by the Treasury Department to scrutinize the companies came to a troubling conclusion: Freddie Mac’s capital position was worse than initially imagined, according to people briefed on those findings. The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the companies’ capital resources and financial stability.

Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.