Europe's reputation savaged by euro crisis

LONDON (Reuters) - Whether the euro lives or dies, the chaotic way Europe has tackled the crisis could undermine the region's geopolitical clout for years to come and leave it at a distinct disadvantage in a rapidly changing world.

With an apparently never-ending series of last-minute summits and telephone calls, Europe's leaders and finance ministers have held the bloc together in the face of growing strains between states, a rising political backlash and market alarm.

But with hindsight, outsiders say each measure proved too little, too late. US officials in particular complain European leaders have either failed to grasp the scale of the problem or proved unwilling to countenance the awkward political decisions necessary to fix it.

As a result, they say, what should have been one of the most stable parts of the world has now become one of the most unpredictable.

At one extreme, the euro area might be about to embark on a journey towards further fiscal and political union as an almost totally unitary "super state". At the other, it could unravel and collapse into an unstable mess of regional rivalry.

"From almost every conversation I've had in the last year - with Chinese, with Indians, with just about anybody - the message is always the same," says Fiona Hill, a former senior officer for the US National Intelligence Council and now head of the Europe program at Washington think tank the Brookings Institute. "Europe can no longer be trusted. It seems to be moving from being a source of stability to a driver of instability."

Long-held certainties were being challenged, she said. Even non-euro member Britain suddenly appeared at risk of breaking up, with Scotland due to hold a referendum on independence that experts say could yet go either way.

The slow burning euro zone debt and banking crisis is accelerating. Last weekend brought a decision by euro zone political leaders to bail out Spain's banks. This weekend Greece holds a parliamentary election which many observers fear could spell the end of its euro membership.

Some argue it is too soon to write Europe - or the EU institutions - off altogether. Under foreign policy chief Catherine Ashton, some credit Europe with making real progress in talks with Iran and other powers over the future of its disputed nuclear program. But their energy for anything beyond their immediate problems is seen decidedly limited.

"The Europeans are completely consumed with a battle to save the euro zone," says Ian Bremmer, president of political risk consultancy Eurasia Group. "It's a deep and ongoing crisis bigger than any they've experienced in decades... it's an environment where European leaders could hardly be expected to prioritize anything else."

That could leave the continent being increasingly sidelined as emerging powers - not just the BRIC powers of Brazil, Russia, India and China but other states such as Turkey, Indonesia and South Africa - grow in importance.

At the very least, it could undermine the ability of the continent's leaders to persuade the rest of the world to take them seriously on a range of issues, from trade to the importance of democracy and human rights.

"Europe probably isn't going to stop preaching to the rest of the world," says Nikolas Gvosdev, professor of national security studies at the US Naval War College. "But it's much less likely that others are going to be inclined to listen."

EUROPE AT CROSSROADS

At the Copenhagen climate summit in 2009, European states suffered the indignity of being outside the room when the final deal was struck between the United States and emerging powers. In the aftermath of the euro zone crisis, it's a position European leaders may simply have to get used to.

But for the rest of the world, it's not just the continent itself that is rapidly losing its shine. The whole European political model - generous welfare systems, democratic decision-making, closer regional integration and the idea of a currency union as a stabilizing factor - no longer seems nearly as appealing to other, still growing regions.

"Europe is at a crossroads, with the very future of the EU at stake," says Brahma Chellaney, professor of strategic studies at New Delhi think tank the Centre for Policy Research. "If the euro dies, it will mark the end of the European experiment in forging closer financial and political integration. But it will also have wider international implications."

Not everyone agrees what those will be, however. Chellaney argues the demise of the euro might help secure the primacy of the dollar - and therefore perhaps of the United States itself - for years to come.

But others believe a European collapse would be a sign of things to come for the US as well. Bharat Karnad, a colleague of Chellaney at the Centre for Policy Research, argues that whatever happens powers such as China are on the rise and that the West will be increasingly challenged regardless of what happens to the euro.

"The health of the euro or the EU, for that matter, will have a marginal impact on gold and power that is tending any way towards Asia, especially China," he said.

Washington takes the potential threat of Europe's unraveling very seriously. In the short-term, the Obama administration is clearly concerned over the electoral fallout should the crisis in Europe cross the Atlantic before November's presidential election.

But in the longer term, whether the euro survives or not US planners are beginning to face up to the fact that the continent will likely be poorer and rather more self-centered than Washington had hoped.

Washington has long been pushing European powers to take more responsibility for their own immediate neighborhood. While Britain and France took the political lead in Libya last year, US Defense Secretary Robert Gates complained European NATO forces were in fact almost entirely dependent on US munitions, logistics and other backup.

But the change in European thinking and the additional defense spending Washington called for now looks all but impossible in this time of austerity.

WASHINGTON WORRIED

"It's doubtful any future US Defense Secretary is even going to bother to make that kind of pitch," says Gvosdev at the US Naval War College. "We'd hoped Europe could take the lead in some parts of North Africa as well as the Balkans and Eastern Europe. That now looks very unlikely."

US planners were also waking up to the fact that European states were no longer likely to match US donor pledges when it came to humanitarian or financial aid for war zones and troublespots, he said. Then, there were longer term strategic concerns.

Washington's military "pivot " towards Asia, he said, had been based in part on the assumption that Europe would remain stable and wealthy and the US now had little or nothing to worry about on its North Atlantic flank. A weakened Europe could make US planners much less confident of that, particularly if China extends its influence.

Beijing has upped its investments in Europe in recent years, including major port projects in Greece and Italy.

Some political analysts contend the weaknesses and drivers behind the euro zone crisis go much further and can be found in most western economies - including the United States itself.

"The jettison involves essentially the ballast which used to provide stability to the vessel of post-war society," Jin Liqun, chairman of the supervisory board for China's sovereign wealth fund the China Investment Corporation, wrote on May 21 in Communist Party-run newspaper the People's Daily, making it clear he saw similar problems in the US.

Some waning of Europe's international influence was always likely, experts say, with an ageing population chewing up ever more resources and emerging economies inevitably growing faster. But the current crisis could supercharge its decline. Whether the continent's leaders realize that, however, is another matter.

"Europe's main source of influence (should) be the success of its political and economic model in providing high living standards and democratic freedoms," says Jack Goldstone, professor of international affairs at George Mason University near Washington DC "If the current crisis undermines both of those as well, Europe will look like a rather weak, badly run system of ageing and economically stagnant states. Irrelevance awaits."

(Editing by Janet McBride)

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Haiti creating home loan system to help in crisis (AP)

PORT-AU-PRINCE, Haiti – Haiti's struggle to rebuild homes for hundreds of thousands of quake victims may be giving the impoverished nation something it has never had: loans to help people buy them.

If efforts by international donors and local agencies succeed, at least a few members of Haiti's small middle class will be able for the first time to get a mortgage. Some of the efforts reach even further, offering micro-mortgages for families who make as little as $150 a month.

The hurdles will be significant in a nation where 70 percent are unemployed, many land titles were destroyed in the January 2010 quake and banks have little experience in offering loans to anyone but the country's tiny elite, leaving most of Haiti's 10 million people to rent their housing.

Even those who would seem to qualify are finding it a struggle.

Radio journalist Hertelou Vellette, who has worked for the same company for 11 years, has waited for more than two months to learn if a state bank will help finance a $52,000 two-bedroom prefabricated house.

And that's after he submitted title deeds, a letter of employment, bank statements for the past six months, credit card statements for the most recent three months, water and electricity bills, statements from other income sources, a land survey and a copy of his identity card.

He also had to pay a nonrefundable $500 fee for the application. Most Haitians don't have credit cards or a bank account, let alone $500, a sum greater than what most earn in six months.

What is not lacking is demand. About 500,000 people like Vellette are still without homes of their own following the earthquake. Most are holed up in flimsy tent-like shelters vulnerable to heavy wind and stormy weather.

The biggest international effort so far to create a mortgage market is a $47 million package backed by former U.S. Presidents Bill Clinton and George W. Bush. It would give Haiti's private banks long-term liquidity at low, fixed interest rates so they can finance home repair loans, regular mortgages and micro-mortgages for 10,000 to 15,000 families.

The Clinton Bush Haiti Fund contributed $3 million to the plan and the World Bank's Haiti Reconstruction Fund approved a grant of $10 million. The U.S. government's Overseas Private Investment Corporation, which works with the private sector on development projects, has pledged $34 million, though the project is still awaiting approval by OPIC's board of directors.

"We were particularly attracted by this initiative because it targets the economically active poor," said Gary Edson, CEO of the Clinton Bush Haiti Fund, in a telephone interview. "We found that this market had not been served."

Haitian President Michel Martelly has launched his own housing program. Dubbed Kay Pa'm — Haitian Creole for "my own house" — it aims to provide mortgages to first-time homeowners who belong to Haiti's middle class, the approximately 10 percent of the population who have steady work.

"We focused on people who have jobs and can pay their debt," said Jean Philippe Vixamar, board chairman for the state-run National Bank of Credit, which created the project.

That still won't include most Haitians. The unemployment rate is estimated at around 70 percent, though many of those have sporadic, low-paying jobs, such as the shoe shiners and street merchants on the broken sidewalks.

Most banks aren't interested in such clients, so when most Haitians need credit, they turn to friends and family. But those networks can rarely provide the kind of loans needed to finance a home.

The Kay Pa'm program has gotten off to a slow start. It was delayed because the president of the government bank's board was killed at his home in June, a slaying that has gone unsolved.

And while it aims to give 12,500 mortgages, so far only about 300 people have expressed interest either by contacting the bank or inquiring online. Only 75 people have actually applied, and the bank has approved just 10 mortgages, Vixamar said.

Vixamar said that is partly because many Haitians don't know the program exists, and many of those who do are taking a wait-and-see attitude, perhaps hoping that free homes will be distributed and they will not need to buy one.

He said the low approval rate is largely because two-thirds of the applicants didn't have proper land titles. Haiti's land registry hasn't been updated for decades, and many of the records that did exist were lost in the earthquake.

Despite the problems, Vellette holds out hope he will finally be able to buy his home, a quiet place with a flower garden for his wife and two children, ages 12 and 2, in the town of Croix-des-Bouquets northwest of Port-au-Prince.

He meets the Kay Pa'm requirement of holding a steady job for at least three years, and he has two sisters in New York who can help him meet the monthly loan payment of $100. The home seller, Shelter-IT LLC of West Haven, Conn., is helping him through the application process. The company is one of dozens that arrived in Haiti after the quake to sell homes.

Vellette learns in December if his loan is approved. Until then, Vellette and his family will continue living with in-laws in downtown Port-au-Prince.

"That's everyone's dream, owning a house," Vellette said. "You're no longer moving around from house to house."

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This time, US fears a financial crisis from abroad (AP)

By PAUL WISEMAN, DANIEL WAGNER and CHRISTINA REXRODE, AP Business Writers Paul Wiseman, Daniel Wagner And Christina Rexrode, Ap Business Writers – Thu Aug 11, 6:48 pm ET

WASHINGTON – Three years ago, a financial crisis triggered by bad mortgage investments spread from U.S. banks to Europe. Panicky financial markets tanked.

Now, fear is running in the opposite direction. Worries about toxic government debt held by European banks have hammered U.S. stocks and threaten to freeze credit on both sides of the Atlantic.

And traders are wondering: Could Europe's government-debt crisis spread through the U.S. financial system?

No one's sure because no one knows how much toxic debt European banks hold — or how much risk that debt poses to U.S. banks. But investors are worried.

The 2008 financial crisis left countries like Greece, Ireland and Portugal holding huge debts. The three have required bailouts from the European Union and the International Monetary Fund totaling $520 billion. Italy and Spain, which are much bigger economies, might need bailouts, too.

As the crisis has intensified, Spanish and Italian interest rates have surged. Escalating rates could throw their economies back into recession — which would worsen their debt loads. This week, the European Central Bank started buying Italian and Spanish debt to try to drive rates back down.

Should Italy or Spain default, European banks that hold their bonds would suffer. Wall Street's fear is that the contagion would imperil U.S. banks that do business with those European banks.

French banks, with huge amounts of Italian and Greek government debt, are especially vulnerable. Shares in Societe Generale, France's No. 2 bank, plunged nearly 15 percent Wednesday on rumors it was teetering under the weight of debts tied to troubled Eurozone economies. The bank rejected the rumors as unfounded.

French regulators on Thursday banned short-selling of bank and insurance company stocks, preventing speculators from betting against them and driving their prices down when rumors flare. Societe Generale's stock recovered 3.7 percent Thursday. But most other European banks fell sharply.

Using data from European Union stress tests on 91 European banks, Fitch Ratings said losses of 50 percent on Greek bonds and 25 percent on Portuguese and Irish bonds wouldn't have made any of four big French banks flunk the test.

Still, investors were rattled this week by rumors that a credit rating agency was about to downgrade French government debt. Without France's AAA credit rating, Eurozone countries might be unable to raise enough money to bail out their weaker neighbors.

What most frightens investors is the worst-case scenario — the one that struck Wall Street in 2008: That banks would stop lending to each other because they're worried about each other's solvency. Since July 21, JPMorgan Chase's stock price has dropped 13 percent. Citigroup's has sunk 25 percent.

Major international banks are so intertwined that once they lose confidence in each other, fear spreads rapidly. And once it does, investors tend to panic and send stock markets plunging.

Rumors like the ones that pummeled Societe Generale and raised concerns about France's creditworthiness are "what panics are made of," says William Longbrake, former chief financial officer at Washington Mutual and now executive in residence at the University of Maryland.

In 2008, "Banks were suddenly afraid to lend to each other because they had no trust in ... other institutions," Longbrake said. "What happened yesterday in France is indicative of the same situation."

"It's starting to feel like it did in 2008," says Peter Tchir, who runs the hedge fund TF Market Advisors. "Someone says something about a bank, and boom — shares are down ... and people are panicking."

That said, 2011 isn't 2008. U.S. banks are sturdier now. They're holding more capital than in 2008, when collapsing home prices and mortgage-backed securities crushed Lehman Bros. and forced the government to rescue insurance giant American International Group. The toxic investments that are spooking markets this time are straightforward government debts, not exotic mortgage investments.

And U.S. banks have limited direct exposure — $39 billion — to the riskiest European countries, Portugal, Ireland, Italy, Greece and Spain, according to first-quarter U.S. government data analyzed by SNL Financial. That figure, a small fraction of U.S. banks' total assets, includes holdings of government debt and loans to banks and corporations.

But many worry that European governments aren't prepared to solve their crisis. Germany and other healthy countries, for instance, are balking at putting enough money in the European Union's rescue fund to rescue one of the larger countries.

The broader fear is that one of them, such as Italy, will default and damage European banks whose reach extends to the United States.

All that "could trigger a chain reaction whose final repercussions would be very difficult to predict," says Domenico Lombardi, senior fellow at the Brookings Institution.

Complicating the problem is that indebted European countries have tried to reduce debt by cutting spending. Those spending cuts tend to weaken their economies. The result is that their debt can get bigger, not smaller.

White House spokesman Jay Carney expressed confidence Thursday that "Europe's institutions have the capacity to handle this situation."

Still, the vulnerability of U.S. banks goes beyond their direct holdings of European debt, said Christopher Whalen, managing director at Institutional Risk Analytics. U.S. banks also rely on fees from European bank and corporate clients. And they run the risk they won't be able to collect on financial bets they've entered into with European banks.

Similar fears contributed to the panic that engulfed Wall Street in the fall of 2008.

Troubles with money-market mutual funds also worsened Wall Street's crisis three years ago. Investors withdrew their money once they realized the funds were exposed to losses on Lehman Brothers. Short-term credit markets that corporations rely on froze up.

Large U.S. money-market funds had 49.6 percent of their holdings in certificates of deposits, commercial paper and other instruments from European banks at the end of June, according to Fitch.

U.S. money market funds have been slashing their exposure to banks in the Eurozone. Their holdings of Eurozone bonds declined about 10 percent in July, to $340 billion from $378 billion, according to research from J.P. Morgan Securities LLC.

The Investment Company Institute, a mutual fund trade group, says U.S. funds have no holdings in the three bailed-out countries — Greece, Portugal, Ireland — and little exposure to Spain and Italy.

"Fund managers have been aware of these issues and have been taking actions for a long time to reduce their exposures to potential risks in Europe," said Sean Collins, senior director at the investment institute.

But Fitch has warned that if credit froze up, money market funds would find it difficult to avoid losses.

___

Associated Press Writers Martin Crutsinger and Marcy Gordon in Washington and David McHugh in Frankfurt, Germany, contributed to this article.

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Buy This Sector to Beat the European Sovereign Debt Crisis (The Motley Fool)

The sovereign debt crisis in Europe is beginning to take a tone very reminiscent of the credit crisis that plagued the U.S. in 2008. The domino effect of a potential Greece debt default coupled with worries that the same thing could happen in Portugal, Spain, and Italy is creating a dicey situation for investors who often look to foreign markets for investing diversification. So what's a long-term investor to do? How about the exact opposite of what you'd have expected?

Returns you can bank on
Buying bank stocks in Europe could be your ticket to ridiculous returns over the next few years as the credit crisis stabilizes and investors' emotions come into check. Understand that European banks don't have a magic pill that's going to transform them into profit-producing machines overnight, but the worries surrounding many of its largest banks may be overdone. Specifically, focusing on banks that are based in the United Kingdom could be your ticket to success.

Many of the largest European banks have very little exposure to the troubled EU countries -- Greece, Italy, Portugal, Spain, and Ireland. Barclays (NYSE: BCS - News), Lloyds (NYSE: LYG - News), Royal Bank of Scotland (NYSE: RBS - News), and HSBC (NYSE: HBC - News) all have relatively minimal exposure to sovereign debt from the PIIGS. Currently making up 1.26%, 0.01%, 0.15%, and 0.27% of total assets, it makes little sense to lump these banks in with the rest of the sector that is in trouble.

Secondly, these banks all share the common trait that they have globally diverse operations. In short, these banks aren't just sovereign lending entities. They have personal and commercial lending segments, as well as personal investment divisions -- and investors seem to have forgotten that.

They've also forgotten just how profitable these European banks are. With the exception of RBS, these companies are trading at single-digit forward P/E ratios with impressive five-year growth expectations. Barclays and HSBC analysts anticipate growth of 23% annually over the next five years while Lloyds, which was hit much harder in the recession of 2009 than many other banks, is expected to grow at a blistering 69% per year.

Based on their assets, these banking giants are also inexpensive. Barclays, RBS, and Lloyds all trade significantly below their book value, with HSBC trading at a mere 1.1 times its book value. To boot, Barclays and HSBC are paying a highly sustainable dividend currently yielding 1.8% and 3.7%, respectively.

You're up, Europe!
With lower exposure to sovereign debt than even some of the United States' largest banks, it makes sense to consider investing in U.K.-based European banks. I'm even willing to speculate that a portfolio evenly divided among these four banks could easily outperform a portfolio divided evenly among the four largest U.S. banks over the next three years. While I can't make your investing decisions for you, I highly recommend you at least get these four banks on your watchlist and consider giving Europe another look.

Add Barclays, Lloyds, Royal Bank of Scotland, and HSBC to your watchlist.

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Despite mortgage crisis, home ownership remains cherished American dream (Exclusive to Yahoo! News)

Last week's confirmation that the gross domestic product grew only 1.8 percent in the first quarter came when economists were already busily revising their growth forecasts downward for the rest of this year. A double-dip recession remains unlikely, but this is the weakest recovery since the Great Depression and the first one not being led by housing. The nearly moribund housing sector is, in fact, weighing down the recovery.

The conundrum is very real. On the one hand, the subprime-mortgage crisis and easy money—loans with minimal down payments and scant documentation—brought the U.S. economy to its knees just three years ago. Clearly, changes had to be made to prevent that from recurring. On the other hand, housing-industry leaders now fear that the pendulum is swinging too far the other way, potentially decimating an already battered sector and further stifling the anemic recovery. Although we hear the perennial debate over limiting the homeowners' mortgage-interest deduction, which would hurt the middle and higher end of the housing market, other proposed regulations really terrify the industry. These rules include increased down-payment requirements and loan restrictions for all but those with near-bulletproof credit ratings.

A bipartisan national poll of 2,000 likely voters to be released next week by the National Association of Home Builders makes clear the unique position that homeownership holds in Americans' minds and the delicacy required in dealing with the issue.

The May 3-9 telephone survey, conducted by Celinda Lake and Jonathan Voss of the Democratic polling firm Lake Research Partners and by Neil Newhouse and Robert Blizzard of the GOP outfit Public Opinion Strategies, found that 75 percent of voters believe "that owning a home is the best long-term investment they can make and is worth the risk of ups and downs in the housing market."

Interestingly, a high percentage of people in different financial situations felt this way, including 81 percent of those who own their homes outright, 76 percent with mortgages, 67 percent who are renters, and 65 percent with underwater mortgages. Respondents were also asked whether they would recommend buying a house to a close friend or family member just starting out. Eighty percent of all voters said yes, including 78 percent who had underwater mortgages. Seventy-three percent of the respondents who do not own a home said that their goal is to eventually buy one. Clearly, the decline in home values and economic turmoil have not diluted their dream of homeownership and the aspirational element that makes the notion a core value.

Today's Lesson: Neither Party's Economic Plan is Working

Some have suggested that the government end tax incentives for homeowners, but the survey suggests a hostile voter reaction to that plan. Told that "since the federal income tax was introduced in 1913, the federal government has used the tax code to encourage home­ownership," respondents were then asked: "In general, do you think it is appropriate and reasonable for the federal government to provide tax incentives to promote homeownership, or do you think it is not a good idea?" Seventy-three percent of all voters thought those incentives should be provided, including 71 percent of Republicans, 68 percent of independents, 79 percent of Democrats, and even 68 percent of those who support the tea party movement.

PICTURES: Political sex scandals

When asked about requiring a 20 percent down payment to purchase a home, respondents split evenly, with 49 percent supporting such a threshold and 49 percent opposing it. But among those most likely to be affected, mortgage holders and renters ages 18 to 54, opposition was strong, with 58 percent of younger mortgage holders and 59 percent of younger renters opposed to adding that hurdle to buying a home.

Given this kind of visceral connection to home ownership, it's not surprising that 71 percent of respondents oppose eliminating the mortgage-interest deduction and 63 percent oppose lowering it. Moreover, 58 percent oppose eliminating the deduction for home-equity loans or limiting the deduction for those who earn more than $250,000 a year. Fifty-seven percent of voters said they would be less likely to support a candidate for Congress who wanted to eliminate the mortgage-interest deduction; only 26 percent said they would be more likely to support such a candidate.

PICTURES: Religion and the GOP contenders

These numbers are pretty much across the board: Sixty-three percent of Republicans, 56 percent of independents, 55 percent of Democrats, 61 percent of tea party supporters, and 58 percent of those voters in congressional districts held by freshman Republicans would be less likely to support a candidate who favored killing the deduction. With the unusually large sample, the pollsters segmented respondents who live in congressional districts that The Cook Political Report rates in the swing category. Fifty-eight percent of that group were less likely to support such a candidate, with 56 percent of those voters in swing Senate states and 54 percent in states that The Washington Post's Chris Cillizza rates as swing presidential states.

The clear message is that owning a home is among the values that Americans most cherish—an important part of the American Dream.

Visit National Journal for more political news.

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Your Sovereign Debt Crisis Survival Guide (The Motley Fool)

This article has been adapted from Fool U.K., our sister site across the pond.

The financial crisis is entering a new, dangerous phase. But while it is risky to try to predict what will happen next, this does not mean that you cannot take steps to protect your portfolio, or even to enhance it, during the turmoil ahead.

The snowball effect
Let us take a step back and consider how the crisis has unfolded so far.

It started during the summer of 2007 when some investment funds that owned subprime securities collapsed. From there, the crisis moved on to banks, including Northern Rock (September 2007), Bear Stearns (March 2008), and Lehman Brothers (September 2008).

After the banks came countries: Iceland (October 2008), Greece (May 2010), Ireland (November 2010), and then Portugal (April 2011).

Although the underlying causes were different, the fundamental problem was essentially the same in every case: These funds, banks, and countries were simply insolvent.

Lessons so far
We cannot predict the future, but two conclusions emerge from the story so far:

the entities collapsing under the weight of their own debt are getting larger, from funds to banks (of increasing size) to countries (again of increasing size); and there is no evidence that any government or institution is on top of this crisis, or able to stop it. We do not know whether this pattern will continue, but we have to assume that it might.

It's not just the peripherals
If Greece defaults on its debt, as is now widely expected, a similar move may follow in Ireland or Portugal, two countries that also face decades of painful, grinding austerity if they are to repay their national debts the hard way.

Rising yields on Spanish and Italian debt suggest that concerns about repayment are spreading further afield. But Spain and Italy are not the end.

The national debts (including off-balance-sheet liabilities like unfunded pension and health care promises) of both the U.S. and the U.K. are also far higher than the 90% of GDP threshold at which national debt is considered to become dangerously unsustainable.

Strategies for survival
Here are five suggestions for surviving the next phase of the financial crisis.

1. Diversify
Dollars may go up tomorrow, or maybe equities, or gold, or commercial property, or farmland. The markets are still driven by fear and will continue to gyrate wildly depending on which asset class is perceived to be the safest at any particular moment.

Maximum diversification should help avoid a wipeout when the next panic sets in.

2. Seek liquidity
Many recent crises, like the Irish and Portuguese bailouts, were flagged some weeks ahead. Future crises may also be preceded by a period of increasingly loud warning signals.

If your assets are liquid then at least you have a shot at moving them out of harm's way before the hammer falls.

If not, for instance if your assets are tied up in land where transaction times are measured in months rather than minutes, you will be much more vulnerable.

3. Avoid assets tied to countries at greatest risk of default
Historically, defaults by countries have been followed by collapsing property prices, recession, and currency devaluation. Each of these will hit foreign investors particularly hard.

As foreign investors cannot vote, expect the same to happen in the future as well.

4. Think the unthinkable
The crisis has already reached a stage unthinkable even a year ago; why should it stop now?

The U.S. may default, if only for a few days; Spain may require bailing out; Greece or even Germany may leave the euro; or something else of equal magnitude might happen instead. The only thing we can be certain will not happen is the Rapture.

5. Be prepared for another credit freeze
If a Western country defaults, expect a temporary panic and possible freeze on future lending as markets and governments rush to assess where the losses will finally fall.

Inflation
Lastly, watch out for inflation. Countries that issue debt in their own currency, like the U.S. and the U.K., are less likely to default openly on their debts as they can simply print the money required to pay them off. However, they may not be too concerned if higher-than-average inflation eats into their debt for a while.

Inflation is generally much more acceptable politically than other forms of default, but it is default all the same.

Am I being too gloomy, or perhaps even too optimistic? Let me know in the comment section below.

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Why So Few Ended Up in Jail After the Financial Crisis (The Motley Fool)

While accepting the Oscar for best documentary earlier this year, Inside Job director Charles Ferguson came out with a bang.

"Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that's wrong," he said.

At least one now has. Lee Farkas, former chairman of mortgage lender Taylor Bean, was convicted last week on 14 counts of conspiracy and fraud. He could spend the rest of his life in prison.

So there's one.

But why no others? After a financial crisis that doubled the unemployment rate and slaughtered wealth around the globe, nobody thinks one executive -- and one few have ever heard of -- was solely to blame. Nor is it how these things usually work out. After the savings and loan crisis of the early '90s, 800 financial executives went to prison. Not only have most bank execs avoided prosecution this time around, but many are still gainfully employed by the banks that ran the economy into the ground.

Why is a difficult question. I think it can be broken down into three parts.

1. The ground troops have been charged
The most disgusting, outright-fraudulent parts of the bubble years didn't take place on Wall Street. It took place on the ground in areas like Orange County and Las Vegas, where mortgage brokers, Realtors, and borrowers lied through their teeth, forged loan documents, and actively pursued screwing over anyone within reach. The industry of selling mortgages was a magnet for some of society's sketchiest characters. As the Financial Crisis Inquiry Commission noted in January, "at least 10,500 people with criminal records entered the [mortgage-broker] field in Florida, including 4,065 who had previously been convicted of such crimes as fraud, bank robbery, racketeering, and extortion."

Thousands of mortgage brokers and scam borrowers have indeed been charged, and in many cases jailed. In June 2008, before the financial crisis unraveled, the FBI busted 400 brokers in a single sting. A sting last summer brought One borrower was found guilty of defrauding Bank of America (NYSE: BAC - News) by "recruiting 'straw buyers' to apply for a mortgage loan for a home that he himself intended to occupy, and inflated the value of that home in order to increase the amount of the loan." These guys did the same with loans from JPMorgan Chase (NYSE: JPM - News). These folks forged loan documents submitted to Regions Financial (NYSE: RF - News). All were caught. All were charged. The public hasn't heard their stories because they don't involve the executive suite.

2. Coddling regulators, strapped detectives
That few execs have been charged doesn't mean they're all innocent, of course.

High-level fraud cases are typically referred to the Justice Department by industry regulators. The Department of Health and Human Services, for example, works in tandem with the Justice Department to reel in medical fraud. Same for the Department of Agriculture. And the National Association of Insurance Commissioners.

Bank regulators are different. Since 2000, the Office of Thrift Supervision has not referred a single case of fraud to the Justice Department, according to The New York Times. The Office of the Comptroller of the Currency has referred just three cases.

There could be many reasons for this. The two regulators, though, have a long history of coddling the banks they oversee. They have every incentive to do so: Regulators' existence depend on banks -- or "clients," as the OCC refers to them as -- since fees paid by banks fund their operations. In some cases, banks can shop around for the regulator with the lightest touch.

That's what Countrywide did in 2007. Then-CEO Angelo Mozilo was frustrated with the demands of the OCC. Regulators were getting in his hair. Easy solution: Countrywide changed charters to fall under the purview of a gentler regulator, the OTS. As Connie Bruck of The New Yorker pointed out, the OTS actually lobbied Countrywide to make the switch.

Not that the OCC was a regulatory pit bull itself. When West Virginia tried to sue Capital One (NYSE: COF - News) for credit card abuse in 2005, the company applied for a national charter with the OCC. By doing so, Capital One escaped West Virginia's jurisdiction, and the state lost authority to pursue its case. This wasn't an isolated incident. The OCC stopped Georgia when it attempted to enforce predatory lending laws. New York regulators were intervened while pursuing discriminatory lending investigations. The head of the Financial Crisis Inquiry Commission told former OCC head John Dugan, "You tied the hands of the states and then sat on your hands."

If regulators didn't make it hard enough, the FBI has seen a radical cut in the number of agents available to investigate financial crime. Law enforcement's focus began shifting to health care fraud in the '90s, and to terrorism after 9/11. During the savings and loan crisis, 1,000 FBI agents worked the financial-crimes scene. Today, just 240 do.

3. Stupid isn't illegal
Crime deserves jail time. Idiocy is another issue.

This explains most of why so few major financial executives are behind bars. Blowing up your company isn't necessarily a crime. Leveraging 30-to-1 isn't unlawful. Neither is buying securities backed by homeowners unable to repay. Nor is ignoring caution signs. Or disregarding history. Much of what brought the financial system to its knees was unbelievably stupid and unethical, yet perfectly legal.

Investors were shocked, for example, after discovering Lehman Brothers used an accounting trick called repo 105 to mask the health of its balance sheet. Yet as The Wall Street Journal notes, "SEC officials have grown more worried they could lose a court battle if they bring civil charges that allege Lehman investors were duped by company executives. The key stumbling block: The accounting move, while controversial, isn't necessarily illegal."

Not only was this stuff legal, but lucrative. Many executives walked away rich. Filthy rich. This was heads they win, tails you lose, and in either case, jail remains elusive. You can almost hear them laughing now.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Credit raters triggered financial crisis: panel (Reuters)

By Rachelle Younglai and Sarah N. Lynch Rachelle Younglai And Sarah N. Lynch – Thu Apr 14, 8:00 am ET

WASHINGTON (Reuters) – Moody's Corp and Standard and Poor's triggered the worst financial crisis in decades when they were forced to downgrade the inflated ratings they slapped on complex mortgage-backed securities, a U.S. congressional report concluded on Wednesday.

In one of the most stark condemnations of the credit rating agencies, a Senate investigations panel said the agencies continued to give top ratings to mortgage-backed securities months after the housing market started to collapse.

The agencies then unleashed on the financial system a flood of downgrades in July 2007, the panel said.

"Perhaps more than any other single event, the sudden mass downgrades of (residential mortgage-backed securities) and (collateralized debt obligation) ratings were the immediate trigger for the financial crisis," the staff for Senators Carl Levin and Tom Coburn wrote in their report.

The findings come after the Senate's Permanent Subcommittee on Investigations spent two years poring over countless documents and holding hearings on the causes of the crisis. The probe only focused on the two largest rating agencies; it did not study Fitch Ratings.

The report calls for radical reforms to the industry that are authorized in last year's Dodd-Frank financial reform law, but may not be realized.

Dodd-Frank did little to change what some say is an inherent conflict of interest in credit raters' business model, in which the raters are paid by the companies whose products they rate.

The panel's suggested reforms include having the U.S. Securities and Exchange Commission rank the credit raters, based on the accuracy of their ratings.

"WATCHING A HURRICANE"

The Senate panel released internal documents showing how Moody's and S&P failed to heed their own internal warnings about the deteriorating mortgage market.

Emails in 2006 and early 2007 show employees were aware of housing market troubles, well before the massive downgrades in July 2007.

"This is like watching a hurricane from FL (Florida) moving up the coast slowly toward us. Not sure if we will get hit in full or get trounced a bit or escape without severe damage ..." one S&P employee wrote in response to an article on the mortgage mess.

Senate investigators concluded that had Moody's and S&P heeded their own warnings, they might have issued more conservative ratings for the securities linked to shoddy mortgages.

"The problem, however, was that neither company had a financial incentive to assign tougher credit ratings to the very securities that for a short while increased their revenues, boosted their stock prices, and expanded their executive compensation," the report said.

Edward Sweeney, a spokesman for S&P, said in a statement on Wednesday that the Dodd-Frank Act, coupled with the company's own internal reforms, have significantly strengthened the oversight of the industry. He added that the 2007 and 2008 downgrades "reflected the unprecedented deterioration in credit quality, but were not a cause of it."

Michael Adler, a spokesman for Moody's, declined to comment ahead of the report's release.

NO REAL CHANGES YET SEEN

The SEC has been grappling with how to clamp down on the conflicts of interest embedded in the so-called "issuer-paid" model. Congress contemplated radical reforms for the agencies during the drafting of the Dodd-Frank law but in the end passed a sweeping financial regulation bill without them.

Wednesday's report includes emails from employees at both companies that illustrate the pressure that raters came under from investment banks.

An August 2006 email reveals the frustration that at least one S&P employee felt about the dependence of his employer on the issuers of structured finance products, going so far as to describe the rating agencies as having "a kind of Stockholm syndrome" -- the phenomenon in which a captive begins to identify with the captor.

The SEC did take some steps to address conflicts of interest at rating agencies in the past few years.

Although the Dodd-Frank law directs the SEC to write numerous additional regulations for raters, most have yet to be proposed.

And one key rule that did go into effect last July, subjecting credit raters to increased liability, was suspended after credit raters' refusal to include their ratings for asset-backed securities led to a freeze in the secondary market.

The reform has not been reinstated.

(With additional reporting by Kim Dixon; Editing by Steve Orlofsky)

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Senate report to reveal mortgage crisis details: WSJ (AFP)

WASHINGTON (AFP) – The Senate will soon issue findings of a probe of the US mortgage meltdown that fueled the global financial crisis, with Goldman Sachs likely to face fresh embarrassment over its role, the Wall Street Journal reported Sunday.

The Senate Permanent Subcommittee on Investigations, whose high-profile inquiry commission subpoenaed Goldman's and other executives last year, is due to release its report on the subprime implosion of 2007 and 2008.

The paper, citing people familiar with the matter, said the report was expected to release emails from securities firms that developed or sold subprime mortgages and financial vehicles including collaterized debt obligations (CDO).

CDOs were used to help Wall Street firms bet against the housing market. When the housing bubble burst, several of the top CDOs were downgraded to "junk" status, and their values plunged.

Goldman, the Journal reported, created CDOs in 2006 and 2007 to shield its exposure to the US housing market, and has been accused of making large bets against the market while selling bullish positions to group that were not expecting the market to fall.

People familiar with the matter said Goldman and Deutsche Bank -- both of which have been criticized for misleading investors in the housing market -- were expected to draw particular scrutiny in the report, the Journal said.

In January, Goldman said it was renewing its commitment to the "primacy" of client interests, and laid out 39 recommendations stressing greater transparency in how the company does business, especially with regard to its own private trading and potential conflicts of interest.

The Journal said the Senate investigation's findings would likely expose bad blood between Goldman and Morgan Stanley, another Wall Street giant, over their roles in a deal involving a CDO called Hudson Mezzanine Funding 2006-1.

According to the Journal, Goldman had sold insurance on the CDO, allowing the company to make money if and when the loans backing the deal began to default.

The Senate report was expected to disclose that Morgan Stanley was a key counterparty in the Hudson deal, said the paper.

It said Morgan Stanley's involvement in the deal was one of the company's bad mortgage bets that contributed to its $9.0-billion trading loss in 2007, while Goldman's mortgage division lost some $1.2 billion in 2007 and 2008, the worst years of the crisis.

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