This from the Wall Street Journal…..

Merrill Lynch & Co.’s announcement Friday that it would take a $5.5 billion hit to third-quarter earnings is exposing the weak oversight exercised by top Merrill executives as it became a big force in the mortgage-securities business.

Wall Street has been reeling from the recent credit crunch tied to questionable home mortgages, with several companies taking multibillion-dollar write-downs. But Merrill is taking the biggest charge and is the only major U.S. firm so far that has said it will report a loss for the third quarter.

The announcement gave a boost to Merrill’s shares, which rose $1.89, or 2.5%, to $76.67 in 4 p.m. trading Friday on the New York Stock Exchange. That reflected investors’ relief that Merrill is trying to put the problems behind it.

The psychology that enables the markets to raise Merrill’s stock price after reporting over 5 billion dollars in losses continues to puzzle me. Especially considering that only a couple months ago Merrill claimed that therr exposure to sub prime was limited. As Wall Street Journal article above says….

In July, before the market worsened, Merrill’s chief financial officer, Jeff Edwards, said in a conference call with investors that the firm’s exposure to subprime mortgages was “limited, contained and appropriate.” These mortgages are typically made to borrowers with poor credit records, and their value has plunged this year.

Given that kind of track record and fact that the ARM reset charts that seem to show that the worst is yet to come, why is everyone relaxing now?

The Fed closes a bank out in Ohio…..

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved the assumption of the insured deposits of Miami Valley Bank, Lakeview, Ohio, by The Citizens Banking Company, Sandusky, Ohio.

Miami Valley, with $86.7 million in total assets and $76 million in total deposits as of October 1, 2007, was closed today by Ohio’s Superintendent of Financial Institutions, and the FDIC was named receiver.

The failed bank’s two offices will reopen tomorrow as branches of The Citizens Banking Company. Depositors of Miami Valley will automatically become depositors of the assuming bank.

The Fed betrayed the dollar by cutting interest rates. European’s don’t seem to want to hold dollars any more. And now, even the oil producers seem to be having second thoughts about the dollar. This from Brad Setser’s blog…..

I would note one additional change: a likely shift in the currency composition of the portfolio of the world’s large oil exporters. Qatar (hat tip Macro man) recently indicated that it cut the dollar share of its investment authority’s portfolio to around 40% . Kuwait has also reduced the dollar share of its portfolio. Russia cut the dollar share of its reserves from around 70% to around 50%. Pretty soon the Saudis will be the only big oil exporter keeping the majority of their assets in dollars …

Ramin Toloui calculates that the oil exporters need to keep around 60% of their assets in dollars for a rise in oil prices to be dollar positive. They probably aren’t doing that. More spending and investment in the oil-exporting economies also isn’t a dollar positive: the dollar’s share of the oil-exporting economies financial portfolio certainly tops the United States share of their import portfolio.

A substantial number of leftists, union leaders, American manufacturing CEO’s, and economists, think that that the average American worker should be paid less. And as much as it pains my hillbilly soul to admit it, I agree with them.
But I do have one gripe. Most of the afore-mentioned pressure groups are dishonest. They would Click Here to continue reading.

This quote was taken from Brad Setser’s blog (though Michael Pettis is currently minding the shop)…..

Logan Wright, a Beijing-based analyst who regularly writes excellent reports on China’s financial system for Stone & McCarthy, puts it this way in a September 27 report called “China’s Perfect Storm? Food Price Inflation and a Possible PBOC Policy Shock:”

First, at the same time that pork prices have driven August CPI growth to 6.5%, China has also been ravaged by unusually harsh floods in the south and droughts in the north. As a result, the autumn harvest, which comprises around 70% of total annual grain output, could produce a significant negative surprise, accelerating the rapid rise in food prices. At the same time, global food prices and futures continue to trend higher based on a series of bad harvests around the world, just as China may need to increase imports to supplement its own supplies. Secondly, signs of weakness in the housing sector spilling over into U.S. consumption are developing, and this could have consequences for China’s exports, which have been a critical engine of China’s growth and a safety valve for domestic overcapacity in several industries. Third, and perhaps most significantly, inflation is more salient politically in China than in other nations, because of its tendency to produce social unrest that challenges the legitimacy of the Chinese Communist Party’s rule. Support for the CCP depends heavily upon improving standards of living for Chinese citizens. This means that the Chinese government is very likely to react quickly and strongly in response to a potential threat of escalating inflation.

This is from Reuters….

LONDON, Sept 28 (Reuters) – Record high coal prices and tight supply are piling the pressure on electricity generators already hit by soaring oil markets and high gas prices, industry players say.

Coal fuels about 40 pct of global power generation. Physical coal prices for delivery into Europe have risen by over 50 percent this year.

High freight rates are tightening the screws on prices and utilities and cement producers, also big coal users, may be forced to scale down operations.

“The market is having to adapt to coal prices, to freights, which we’ve never seen before,” a trader said.

“I do believe that before the end of the year it’s possible that some generators in Asia will have to look at turning off their plants because they won’t have enough coal,” said a coal producer.

This from Bloomberg…

Sept. 28 (Bloomberg) — Commodities had the biggest monthly gain in 32 years, led by wheat, crude oil and gold, as the dollar’s slump enhanced the appeal of energy, grains and precious metals as a hedge against inflation.

The 19-commodity Reuters/Jefferies CRB Index was up 8.1 percent this month, the most since July 1975. Wheat climbed to a record in September amid a global grain shortfall, boosting corn and soybeans. Oil also hit a record, and gold reached a 27-year high. The Federal Reserve cut borrowing costs to bolster the U.S. economy, sending the dollar tumbling.

From the Wall Street Journal….

Rising prices and surging demand for the crops that supply half of the world’s calories are producing the biggest changes in global food markets in 30 years, altering the economic landscape for everyone from consumers and farmers to corporate giants and the world’s poor.

“The days of cheap grain are gone,” says Dan Basse, president of AgResource Co., a Chicago commodity forecasting concern.

This year the prices of Illinois corn and soybeans are up 40% and 75%, respectively, from a year ago. Kansas wheat is up 70% or more. And a growing number of economists and agribusiness executives think the run-ups could last as long as a decade, raising the cost of all kinds of food.
In the past, such increases have been caused by temporary supply disruptions. Following a poor harvest, farmers would rush to capitalize on higher crop prices by planting more of that crop the next season, sending prices back down. But the current rally, which started a year ago in the corn-futures trading pit at the Chicago Board of Trade, is different.

Not only have prices remained high, but the rally has swept up other commodities such as barley, sorghum, eggs, cheese, oats, rice, peas, sunflower and lentils. In Georgia, the nation’s No. 1 poultry-producing state, slaughterhouses are charging a record wholesale price for three-pound chickens, up 15% from a year ago.

Every once in a while, I am reminded why it is good to be American. We still do some things right in this country.

This particular thought occurred to me as I was reading the FDIC notice regarding the shutdown today of NetBank. Unlike the British regulators who at first lied and then had to cave in to what the market already knew, the FDIC seems to have spotted this problem before it became widely known. And when they spotted the problem they did not mess around. They just shut the whole operation down.

This is part of their press release……

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved the assumption of the insured deposits of NetBank, Alpharetta, Georgia, by ING Bank, fsb, Wilmington, Delaware.

NetBank, with $2.5 billion in total assets and $2.3 billion in total deposits as of June 30, was closed today by the Office of Thrift Supervision, and the FDIC was named receiver.

The failed bank was an Internet bank and did not have any physical branches. Depositors of NetBank will automatically become depositors of ING Bank.

Over the weekend, customers can access their money by writing checks, or by using their debit or ATM cards. Checks drawn on the bank that did not clear before today will be honored up to the insured limit. Starting on the morning of Monday, October 1, customers will have full access to their insured deposits via the Internet and for the foreseeable future should continue to utilize NetBank’s current Website to transact banking business.

ING Bank has agreed to assume $1.5 billion of the failed bank’s insured non-brokered deposits for a one percent premium and will purchase $724 million of assets. NetBank had approximately $109 million in 1,500 deposit accounts that exceeded the federal deposit insurance limit. While these customers will have access to their insured deposits, they will become creditors of the receivership for the amount of their uninsured funds.

This is the right way to shut down a bank. By shutting down the weak institutions and giving their money to the strong institutions, you can keep the problem from spreading.

As a side note, I found the fact that the FDIC was sending NetBank’s deposits over to ING interesting. On one hand, the FDIC had no choice but to send NetBank’s money to another internet bank so it would make sense to chose ING. On the other hand, there are a lot other internet banks out there beside ING.

But I have long thought that ING was the only internet bank that was worth anything. I wonder if the FDIC agrees with me.

After delivering bad new, I usually grin. Unless I feel personally affected by the events.
This week in the daily meeting, M.B. the production manager gave us the sketchy details of the recent visit by the Scary One (the member of senior management most prone to asking for what we are not ready to deliver). The Click Here to continue reading.

According to witness, this rant at Long or Short Captial made our publisher laugh so hard that he almost busted a gut. He disputes the fact that he laughed that hard, but he will testify to the fact that it was very funny.

This from Spiegel…

Deutsche Bank’s announcement that it is short €29 billion has Germans fretting. If the country’s biggest bank is in trouble, what does that mean for the others? Commentators think it could be bad news.

This from the New York Times….

The dollar remained at a low ebb today against major world currencies.

One euro traded at $1.4090 this afternoon, up from $1.4065 yesterday, the first time in the common European currency’s nine-year history that it has crossed the $1.40 mark. The British pound also rose, trading at $2.0202, after closing at about $2 yesterday.

And the American dollar remained at virtual parity with the Canadian dollar, the first time that the two currencies have traded that closely since late 1976. It was trading today at 1.0007.

This from the New York Times via Calculated Risk….

It is a measure of the continued confidence in the power and wisdom of central bankers that markets around the world rallied. Both moves showed that the bankers had grown more fearful of credit market contractions damaging economies, but investors initially chose to focus on the action rather than the fears.

By yesterday, however, the markets were moving in ways that cannot have made the Fed happy. The dollar fell — an expected result from cutting short-term interest rates — but long-term rates rose, and so did mortgage rates.

“Alan Greenspan’s conundrum is becoming Ben Bernanke’s calamity,” said Robert Barbera, the chief economist of ITG, recalling that when the Fed raised short-term rates under Mr. Greenspan, long-term rates did not follow. Now the opposite is happening, a fact that will make it that much harder to stimulate the economy.

Those wanting to understand the Fed’s reversal can profit from reading two papers by Fed officials, released this summer as the credit squeeze was worsening.

In total, they constitute an admission that the Fed was surprised by the housing and borrowing boom on the upside, and now fears it will be surprised on the downside.

This from Marco Man…

Macro Man has long been more favourably disposed to the buck than many. His disavowal of the “dollar must go down forever” thesis is one of the reasons that he (unfortunately) didn’t delta hedge his powerball strip. However, even his patience has its limits. A few weeks ago, he noted that any aggressive gesture from the Fed to bail out turd-holders and reflate asset markets would force him to turn structurally bearish.

That has now come to pass, and in what Dennis Gartman might refer to as a “Watershed” moment, Macro Man has lost faith in George Washington. Simply put, if the Fed doesn’t give a crap about protecting the purchasing power of the dollar, why should anyone hold it?

Meanwhile, Jeff Matthews mocks the Fed. And Saudi Arabia declines to follow the Fed off the cliff.