Q: Would you please explain cdo tranches? Would you also explain how they were marketed and sold and who bought them? Are they held by foreign governments and sovereign wealth funds? Were investors misled about the quality of the mortgages they contained? Thank you from Just Wondering in Ann Arbor

Submitted by cecile dunham from ann arbor, mi

A: CDO's are collateralized debt obligations. As I understand them, they are either entirely compromised of mortgages, or can be a mix of mortgages, car loans, student loans etc that are sliced and diced in what was called financial engineering. The idea behind these CDO's was to spread risk a mile wide and an inch deep. In theory these are a good thing, taking loans off bank balance sheets, spreading the risk and leaving more money for more lending. But as we all know, underwriting standards sank dramatically in subprime loans and the credit rate agencies passed stuff off as AAA rated with caveats in the fine print that amounted to exceptions big enough to drive a tank through. As to who holds these CDO's, it is safe to presume that both foreign governments, rich oil countries etc probably hold some of it, hedge funds hold some of it, and people in search of so-called alpha returns. The game was a race for the highest yield, and with little regulation the underwriting standards weakened on the collateral -- the underlying loans -- and the house of cards tumbled.

Answered 07/17/08 18:35:33 by Kevin Hall and Tony Pugh

Q: Recently, SEC Chairman Cox came out with some emergency rules on short sales and rumor-mongering companies to death. Whatever the SEC's intention was, the overall impression on Wall Street seems to be "Where has this guy been, and why is he only showing his face now?". Whch leads me to ask, given all of the irregularities in business practices and on the Street that has gotten us where we are today, where HAS this guy been? Seems like he only got involved when some big names might be taken out, as if small business or other industries were not worth the effort or trouble or concern. What, in your opinion, should have been a proper role for the SEC in containing, moderating or preventing this crisis that is on so many fronts?

Submitted by Melinda Sisson from Lemoore, CA

A: It's an excellent question, and one we've wanted to ask. Cox has refused to give us an interview for two months running now, and we have the same questions you do. The WSJ had an excellent front-page story recently detailing how Cox didnt break his vacation when Bear Stearns collapsed. We understand that staff is very demoralized at SEC because there has not been aggressive action on the sub-prime crisis. The simplest answer to your question is that the SEC is not charged with safey and soundness issues but rather consumer protection. So its regulatory scope by law is more limited than say the Fed. And in fairness to the SEC, they just recently were given authority to regulate the credit-rating agencies, who were instrumental in the subprime meltdown and whose questionable practices have undermined confidence in the entire financial system. In response to where has this guy been, you know the old saying -- lead, follow or get out of the way. I'd guess he and many others have gotten out of the way of Treasury Secretary Paulson, who has proposed broad regulatory reforms that work against the SEC as currently set up.

Answered 07/17/08 13:06:39 by Kevin Hall and Tony Pugh

Q: Sen. Phil Gramm has recently suggested that this is the case, "Americans are whining too much." Here is my question: The aparatchiks that have been governing America always catered to the wealthy elite! When the wealthy class said, "we are fed up with having to pay high salaries," the governing elite engineered the globalization. Globalization allowed transfering the means of production to China along with the American know-how! Even spying drones' technology and missile stabilization technology was transfered - technologies that may be used against us at some future date! There is a biblical lesson here: When Merodek Baladan, the king of Babylon, visited the king of Judah, Ezekiach, presumably "to congratulate him about his miraculous recovery from an illness," Ezekiach foolishly showed him all sources of his economic and military power - the know-how. What happened next? The prophet Isaiah immediately received a word from God, that "in punishment, Israel will be taken in captivity into Babylon" (2 Kings 20, 12. 17)! There is a remarkable similarity in what is happening between the U.S. and China - the transfer of wealth and the increased transfer of independence! We are loosing jobs vital for our Social Security ... to China! Why shouldn't we be whining? Our Senators and Representatives seem completely out of touch! The poor are suffering because they have no perks, no pension funds, and no salaries! It is normal that they see the world differently! America is booming for a few, but for the many, she dies! Do you agree?

Submitted by Bohdan Szejner from Kraków, Poland

A: Not sure I see the future as dire as you do, but you raise some interesting issues pertaining to globalization. I think as globalization increasingly becomes less of a win-win, there will be greater political consequences at home and abroad. As for pensions, the Chinese aren't but a decade away from their own demographic crunch and they are facing their own issues. The Carneige Endowment has an interesting paper just released on China surpassing the U.S. economy in size somewhere between 2035 and 2050. Albert Keidel is the author, a long-time Treasury export on China and Asia. Worth a read if the subject interests you. Here's the link, you'll have to cut and paste into your Internet browser. http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=20279&prog=zch

Answered 07/15/08 16:32:47 by Kevin Hall and Tony Pugh

Q: Just think 30 years ago we had the S&L Crisis under Reagan/Bush and now we have the Bank Crisis and both were the result of DEREGULATION. No, it really does not make sense to allow the foxes to guard the hen house. Can you provider more information about the Parallels between these 2 issues??? Great Article, you at McClatchy RULE!

Submitted by Mary Schott from Owing Mills

A: The parallels are really about financial institutions getting too leveraged, having insufficient reserves to cover potential losses, making the age old mistake of chasing past returns ... that is, something was profitable so it must mean it will be profitable. Under the SandL crisis, there were assets that could be seized and sold off. A variation of that might be coming with the housing bill moving through Congress. This would allow banks to hand over their worst loans to the government, providing they accept a 30 percent reduction in price from today's current valuation and not the original valuation ofthe loan. Most economists believe this well-intended move will actually allow banks to pass to a government entity the weakest home loans. This is not too far from the Resolution Trust Corp. liquidating the assets of failed thrifts. The common thread in both crises, of course, is the belief that market discipline is enough and that regulation should be as light as possible. When the head of the Fed is practically begging for regulatory powers, seems like the writing is on the wall, regulation is back in vogue.

Answered 07/15/08 16:27:10 by Kevin Hall and Tony Pugh

Q: A question has been raised regarding China's oil trading. I would like you to enlighten us what currency do they use to pay for their oil purchases and whether they trade in London or on Wall Street. We the American people need to know these things to make sound judgments why the oil price keeps rising!

Submitted by Bohdan Szejner from Kraków, Poland

A: I am pretty sure they buy in dollars or euros because the yuan is not a currency traded widely given the fact that it is pegged to the dollar. If the Chinese trade in London or Wall Street, they dont do so very publicly. They get a lot of their foreign oil through sweetheart contracts, often in places like Sudan where they actually pump out the oil and I presume pay a royalty like U.S. companies do when drilling along US Gulf Coast. This is an educated guess, however, can't say for absolute certain.

Answered 07/15/08 16:22:13 by Kevin Hall and Tony Pugh

Q: I commented recently about seeing early methods of "mining" oil shale using huge quantities of water. Ckd with friendly mining engineer he said, yup. Also uses ALL the electricity. (using Sh--l Oil Method). Or one can Heat the shale after mining it way down out of the earth; and the part that does not burn up, can be made into oil. Wouldnt that be an environmental disaster. We got to the moon but we cant get oil shale yet. Or have you heard of any practical methods?

Submitted by peg from birmingham al

A: Following up on the earlier answer to answer this one too, the moon reference is a good one. There was a determination to do that voyage. There is less agreement on the need for shale. If there were agreement, I am pretty sure it could be done profitably and within reasonable environmental protection. It is hard to imagine, having seen the massive oil sands projects in Canada, that it would have a fairly visible environmental consequence. Then it all comes down to tradeoffs. Do we need or want it bad enough to choose this over other potential oil sources. All of the energy solution involve some serious tradeoffs, where it is offshore drilling, nuclear power etc. All have merit and all have consequences.

Answered 07/15/08 16:19:55 by Kevin Hall and Tony Pugh

Q: regarding the oil shale, my careless post asked, is it not very difficult to obtain, using huge amounts of water, and not well researched?

Submitted by peg from birmingham al

A: It is difficult and costly, but it is not unlike the oil sands in Alberta, which I visited two years ago or so. Done in scale large enough, it is profitable given today's high oil prices. but you are right in noting it takes a lot of energy to get to this energy source, and lots of water.

Answered 07/15/08 16:16:48 by Kevin Hall and Tony Pugh

Q: What are over the counter derivatives and why are they not required to be on the balance sheet of investment banks if they involve the bank's capital?

Submitted by Kim from Portland, Oregon

A: we're working on a story about this very theme. During the last revamp of laws governing commodities trading, where the famous enron loophole occurred allowing unregulated electronic trading, there was also language deregulating the trading of derivatives -- which a complex schmeme in which a swap dealer -- often an investment bank -- can enter into an agreement with a private party to bet on commodities like oil (there are a wider range of swaps but oil is of great interest these days). The bet on futures contracts is placed by the swap dealer, the investor is never disclosed, and the investment bank is treated in regulatory statistics as a commercial player just as the airlines and truckers are when they hedge oil prices for physical delivery. critics believe this is a big reason for the speculative run up in oil markets and the bigger danger from these unregulated markets is when something goes wrong, sorting out who owes what to whom is a real problem. Bear Stearns was big in oil swaps and other derivatives, and the Fed chairman Tuesday let on that this dark area is a growing concern. As to how it is kept off balance sheet, I confess I don't completely understand how that part works, I suspect it is because it is on the balance sheet of the counter party, the investor. Remember that in the subprime meltdown, a lot of the mortgage-backed securities and collateralized debt obligations-- the pooled mortgages sold off to investors as mortgage bonds -- also contained off-balance sheet provisions. Then Citigroup co-chairman Robert Rubin, the former treasury secretary, acknowledged he was unaware his bank had all these off-balance sheet products. Off-balance sheet deals are what sunk Enron too. Where this no regulatory light, the tendency is for bad things to happen.

Answered 07/09/08 18:50:20 by Kevin Hall and Tony Pugh

Q: We keep borrowing money from China, japan and others. What exactly are we putting up for collateral? If I remember my Econ history correctly, one of the main reasons we came off the precious metal standard was that that is what all the countries wanted in repayment and not our currency.

Submitted by John from mather, California

A: The decision to leave the gold standard was a bit more complicated than that, but the answer to what we are putting up as collateral is our good name and standing. One way of looking at the billions worth of treasuries being snapped up by China and the Japan is kind of the old Soviet era approach to nuclear weapons -- mutual assured destruction. If they've plunked down that much on our treasuries, it is in their interest that we remain strong and solvent, so I don't necessarily see it as a bad thing in and of itself. But there is nothing free in life, and these billions being snapped up are why the US debt is now above $9 trillion and it erodes our long-term fiscal outlook. As our debt and unfunded liabilities mount, nations may come to increasingly see us as an unsafe bet and demand higher returns in exchange for buying our debt instruments. That makes the debt load go even higher and could become a vicious circle. This is why the recently resigned comptroller general, David Walker, warned endlessly that the U.S. is on a fiscal path to ruin and if don't act soon it will only get harder to dig out of the mess. When asked about China and Japan, Fed Chairman Bernanke recently testified that its better to have willing lenders than unwilling one. If things stay the way they are, we may soon have unwilling lenders, but for now, it seems the United States remains the safest place to park assets and for all the talk of the euro, the long-term bet continues to be on the dollar.

Answered 07/07/08 16:27:55 by Kevin Hall and Tony Pugh

Q: I never have nor ever will believe in coincidental effects. They are caused by decisions made by people with power. The current multi sided crisis is too broad, too fast, and too soon to the Bush administration to suit me. I care only about implementing structural reforms to keep us away from this situation repeating in another generation when the gambler return to play games with "OPM". The corporation is not defined on this country. It should be. It has been running the whole show since before the revolution. It should serve the nation as a matter of law. Its principals held accountable. If economic freedom meant freedom to buy and sell slaves, I think we are far enough removed from that to cut a new deal with our executioners and quit this silly nonsense of "The Corporation is King". An economy must be able to support its population. People want enough $ to live and to educate their children. You know full well that today's economy has concentrated wealth into the hands of a few; intentionally and with malace towards the wage earner. The polititians have made easy credit the driving force behind "Growth". How bizzare is that? I suspect that old-line regulation would have kept us from reaching this disaster. I believe that if "Supply Side Economics" was defunct in 1980, the country would no have reached this fragile state. So What do you think of that?

Submitted by cab02149 from Everett, MA

A: Thanks for your views, I'll let them stand as stated. My only add is that there are an estimated 6 million employer firms in the U.S., another 20.8 million are "small businesses" that are employee owned or a sole proprietorship. About 99.7 have fewer than 500 employees. There are about 17,000 "large" employers nationwide. You can decide which tax policy helps whom and who controls what, but I found those numbers interesting, particularly in the debate over jobs lost to foreign trade and corporate tax policies.

Answered 07/07/08 15:53:35 by Kevin Hall and Tony Pugh

Q: Bernanke hasn't raised interest rates, the ECB is likely to raise interest rates today, and the dollar goes u 0.63 points? What in the world is going on? Inflation is rampant and I found some ways to track inflation like the website www.viritix.com. Also, is it a sure thing that those unemployment figures are going to come out today? Could it be the market thinks that Benanke will raise interest rates along with the ECB, thereby strengthening the dollar? Why would the dollar go up when people can expect the Euro to go up and make the dollar index go down?

Submitted by jjbond007 from

A: Events you referred to have since happened, but the question underscores the unusual situation in today's markets. Things that are supposed to happen don't, those that aren't do, and the headline I really loved was "Oil falls as Iran fears subside." What has happened to cause fears to rise or subside, nothing. An excuse to call a risk premium on oil but there is no less threat of an invasion or deepening problems today than there was last week. It's all about perception, and as long as the supply/demand balance is tight then things like a strike in the North Sea, hostages in Nigeria, tensions with Iran etc will serve as the "explanation" for rising oil prices.

Answered 07/07/08 15:45:49 by Kevin Hall and Tony Pugh

Q: Airline Question? When will "AMFLIGHT" start??????????????

Submitted by Harry Schlitz from Park City,MT

A: This question transferred to George's Q and A, will be answered there.

Answered 07/07/08 15:42:16 by Kevin Hall and Tony Pugh

Q: Mr. Donohue, I couldn't agree with you more and for years I have been saying that the business model for the airlines is broken - but for a different reason - the pricing structure. A ticket from Charlotte, NC to Columbus, OH costs $870. But, if I travel 90 miles to Greensboro, NC and take a shuttle back thru Charlotte to take the same flight to Columbus, then the price is $288. How can I fly 2 additional legs and more miles for one-third the price? That defies all business logic. Why not have a flat price per mile of say 50 cents with a minimum of $250 and take away all of the crazy fares and hidden cities?

Submitted by Ed Hickman from Charlotte, NC

A: Transferred this question to George's Q and A. Your answer will be there.

Answered 07/07/08 15:40:37 by Kevin Hall and Tony Pugh

Q: Your article concerning air travel mentioned the importance of smoke hoods for travelers. Where can we purchase these?

Submitted by Pam Ericson from Fredericksburg, Va

A: This question should go to the aviation Q and A, so I cut and paste it for our expert to answer.

Answered 07/07/08 15:36:54 by Kevin Hall and Tony Pugh

Q: I supported President Bush when we attack Iraq. But today, I dont feel the same way. I am in the aviation industry, and the cost of aviation fuel is killing the industry. We are paying and average of $7.00 per gallon. I would like to know when is President Bush,going to stop following around with Iraq in this issue. I believe the Europeans will never complaint if we sent the Marines to take over the Iraqui oil fields. I believe is about high time we open the Florida oil fields and the Alaskan oil fields for that matter. We are on track to become a "Third World Class Nation"!!!!!

Submitted by Capt. Denis Murphy from Plantation, Florida

A: Thanks for your thoughts, to be sure the drilling debate will continue through the general election.

Answered 07/07/08 15:36:04 by Kevin Hall and Tony Pugh

Q: Can you help your readers and write an article clearly tracing the $140 per barrel of crude to the final $4.00 cost per gallon of gas? Follow the money.....your readers will figure out who is really making the money.

Submitted by Peter O'Connell from Key Largo, Fl

A: it's not as easy as it seems, or more directly this approach doesnt tell the whole story because there is old oil, being pumped out of the ground for 20 years, which has one cost structure, and new oil, subject to oilfield inflation and higher costs for everything associated, making it much costlier to pump out. the sell price for oil is about the same for each, the former makes a killing, the latter a more modest profit. that's just production. then there's the distribution and transportation, refining, marketing and retail etc. and state and local gas taxes. my understanding is the marginal cost of a new barrel of oil is about $75, and those other things add another $20 to $25 so the "true" cost of a barrel is around $95 to $100. The weakening dollar has resulted in roughly $8 a barrel increase when factored as the slide of the dollar against major currencies. That gets us to about $108 a barrel on the high end. And $30 more per barrel from "speculators".... How much of that speculation is excessive is now the debate. The tight supply/demand balance is the trigger that allows this "speculation" and hedging to take place. So you have to allow for a certain amount of risk premium as part of the normal workings of future markets. If you arbitrarily called it $10 thanks to "healthy" or "normal" futures market activities, we're up to $118 a barrel, leaving roughly $22 more a barrel thanks to the wash of non-traditional speculative money pouring into commodities (about $280 billion in oil futures these days). So your original question, who is making the money? If you own an old U.S. or Saudi oil field with low production costs, you are making the most money. If you are an investment bank taking investor money and pumping it through the commodities markets with one-way bets on higher prices, you are making a lot of money. If you are a refiner, you're not making so much money, nor are the gas station owners, and even the hedge funds who don't take long positions in oil but bet on fluctuations are not doing well because there is too much volatility and direction is hard to ascertain. That's a condensed answer to a good but complicated question.

Answered 07/02/08 11:39:46 by Kevin Hall and Tony Pugh

Q: Mr. Jefferson George has written in The Charlotte Observer, in "With weak dollar, exports skyrocket", that weak dollar is a bonanza to U.S. economy. I think that the article has a big flaw. The weak dollar is a fool's gold! In the short run, the weak dollar will benefit the wealthy who own manufactuting companies. But in the long run, the employees of those companies will have nothing to retire on! I am absolutely opposed to a weak dollar. The weak dollar may be a temporary necessity, but it must be strengthened again and soon. The globalization has deprived the U.S. from the tax dollars necessary to pay for future retirees. The taxes are now being paid by the Chinese to the Chinese government! Is this OK? I don't think so! This is the unspoken and seldom mentioned tragedy of globalization! The United States cannot survive as a superpower without workers paying taxes! Yet we have decided that the Chinese do all the work! What do you think?

Submitted by Bohdan Szejner from Kraków, Poland

A: As in an earlier question, currency traders determine the value of the dollar in large measure based on the perception of the health or weakness of the U.S. economy. And right now there aren't many things to be bullish about but exports. A bright spot. But unless we hope to be the new China, they're a bright spot and not an economic miracle. As to the tax questions, we seem as a nation to want it all, the best infrastructure, the best healthcare for retirees, the best schools and parks etc. and oh, by the way, we want it for free. Taxes are bad, evil, undermine everything that's good for America. You can't have it all, lawmakers will have to come to some sort of agreement on what we need and what we want and how to pay for it. Right now, my kids and grandkids will be paying for our current spending spree, given the $9 trillion in govt debt and $50 trillion or so in unfunded liabilities, according to the Comptroller General, the nation's chief accountant. The Chinese have helped the American consumer by holding inflation in check with low and lower prices. This won't last forever and the recent inflation data and manufacturing cost info coming out of China suggests we will increasingly import Chinese inflation in the form of higher priced imports.

Answered 07/01/08 11:46:26 by Kevin Hall and Tony Pugh

Q: As of Friday the dow has lost more than 2500 points froms it's high water mark last October. Is there any real potential of a major, one-day stock market crash, and if so, can companies like GM survive?

Submitted by Erik from Eau Claire, WI

A: Interesting question, not sure how best to answer it. I'm doubtful of a crash, and it appears a bear market is more likely. we are almost 20 percent off the high and there's reason to think we will float in this 20=25 percent range for awhile. but the stock market is a mystery. just as many market watchers can argue that perhaps this is the bottom from which the market begins climbing etc. that's what the stock market is all about, guessing the sentiment and playing the odds. Surprises or shocks usually are the spark that causes a market crash. The Federal Reserve was worried enough about that to intervene and broker the sale of Bear Stearns. My gut tells me we know what the problems are -- subprime mortgage losses, freeze up in credit markets -- and these are now known matters. The size of losses may surprise etc but a market crash would have to come from something like some major British or European banks suddenly going bust, a surprise invasion of Iran that goes badly and keeps oil of intl markets etc. I hope I am not wrong!

Answered 07/01/08 11:41:18 by Kevin Hall and Tony Pugh

Q: Warren Buffett has 61 billion and I, as American as he and probably more educated, starve on 765 dollars Social Security! This cannot be American Dream ... for me! All I know is this: today, when I drove past the money exchange billboards in a major town in Poland, I was frightened to notice that the dollar has lost four cents from last night's 2.22 złotych exchange rate. This has been the story in Europe for three years, and this means hunger for thousands of Americans living here. Every American citizen who for whatever reason lives in Europe, undergoes a trauma each morning watching the dollar slide a few cents! When I studied in Rome, between 2000 and 2005, each year I was in Poland on vacations, the dollar was steadily at 5 złotych. Then, in 2005, the dollar began to slide, reaching 2.18 zlotych this morning! What does this say to America? Except for the rich who got richer, 250 million American citizens, many without noticing it, are 54 percent poorer than they were three years ago! Their dollar is now worth 46 percent of what it was worth three years ago! How does this affect future retirees? It's a monumental tragedy, I think! We are becoming a banana republic ... except for the rich who get richer! The linkage between the cost of oil and dollar slide is abundantly obvious: the Saudis want more dollars for their oil! Where this will end, only God knows! If dollar continues to be devalued, the oil will proportionally cost more. Whoever decided that dollar be brought to the level of a banana republic currency, must have been insane! It was a criminal act against the citizenry! Correct me if I am wrong.

Submitted by Bohdan Szejner from Kraków, Poland

A: I wont go as far as to label it a criminal act, but currency traders largely set the price based on the perceived strengths or weaknesses in the currency, the growth picture etc. It's hard to be bullish about much in the U.S. economy right now. Weak regulation and weak congressional oversight (by both parties) allowed the abuses in the housing sector that have led to a distrust of virtually any sophisticated financial instrument being offered to investors. That's led to a credit crisis, whose worst days may still be in front of us, not behind us. Add to the mix high energy prices that are causing inflation and limiting the Federal Reserve's ability to respond without tipping the economy into recession and it's easy to see why currency traders would be bearish on the dollar. If the European Central Bank raises interest rates Thursday, as expected, that would strengthen the euro even more against the dollar, eating further into your government check and driving oil prices even high. Fasten your seatbelt, seems like a bumpier ride is coming in months ahead.

Answered 07/01/08 11:35:52 by Kevin Hall and Tony Pugh

Q: Your columns have stated that speculators drive up the price of oil through speculative trading in the futures market. But how does that specifically drive up the price of oil? What is the process? Do some entities buy oil and hoard it until the price goes up to a certain level?

Submitted by Jay from columbus, ohio

A: First, not all speculatoin is bad and it is an important part of how futures markets work. Second, no one can say with certainty how much of today's prices are due to speculation, in part because there is a real supply-demand variable that is at the root of it all. The question then is how much is fundamentals, how much is speculation and how much is other factors. The biggest "other" factor is the sagging dollar. This forces producers to ask more for their product to offset the loss they face when converting their dollars into euros or their own currency. And oil has become an asset class like gold, in which money pours when there are signs that the dollar is or will be worth less. Oil has become a hedging instrument. Now to your question how speculation might drive up prices, the most common theory is that investment banks like Goldman Sachs and Deustch Bank offer big pension funds, endowments and other big institutional investors the chance to invest in an index of commodities, weighting the investment so if they plunk down $100 million, 18 percent might go into oil, 12 percent into corn, 17 percent in sugar etc. They are "exposed" to a broad range of commodities but in all cases they are playing it long, that's to say they are betting that the future price for these commodities will be more than it is today, given the growth of China, India, Brazil and other global players. Some see this as a rational move, others see it as a speculative bubble that will be the next asset bubble to burst. Those who think this is running up the prices argue that this massive amount of money places in one-way upward bets -- about $280 billion -- distorts the functioning of futures markets and drives up prices. And the sad truth, is regulators don't have a complete view on what is really going on and are scrambling to get a sense of whether or not there is nefarious activity going on in dark, unreglated places that might be pushing prices higher than they otherwise would be.

Answered 07/01/08 11:30:46 by Kevin Hall and Tony Pugh