The $55 trillion question

The $55 trillion question

The financial crisis has put a spotlight on the obscure world of credit default swaps - which trade in a vast, unregulated market that most people haven't heard of and even fewer understand. Will this be the next disaster?

By Nicholas Varchaver, senior editor and Katie Benner, writer-reporter
Last Updated: September 30, 2008: 12:28 PM ET
(Fortune Magazine) -- As Congress wrestles with another bailout bill to try to contain the financial contagion, there's a potential killer bug out there whose next movement can't be predicted: the Credit Default Swap.

In just over a decade these privately traded derivatives contracts have ballooned from nothing into a $54.6 trillion market. CDS are the fastest-growing major type of financial derivatives. More important, they've played a critical role in the unfolding financial crisis. First, by ostensibly providing "insurance" on risky mortgage bonds, they encouraged and enabled reckless behavior during the housing bubble.

"If CDS had been taken out of play, companies would've said, 'I can't get this [risk] off my books,'" says Michael Greenberger, a University of Maryland law professor and former director of trading and markets at the Commodity Futures Trading Commission. "If they couldn't keep passing the risk down the line, those guys would've been stopped in their tracks. The ultimate assurance for issuing all this stuff was, 'It's insured.'"

Second, terror at the potential for a financial Ebola virus radiating out from a failing institution and infecting dozens or hundreds of other companies - all linked to one another by CDS and other instruments - was a major reason that regulators stepped in to bail out Bear Stearns and buy out AIG (AIG, Fortune 500), whose calamitous descent itself was triggered by losses on its CDS contracts (see "Hank's Last Stand").

And the fear of a CDS catastrophe still haunts the markets. For starters, nobody knows how federal intervention might ripple through this chain of contracts. And meanwhile, as we'll see, two fundamental aspects of the CDS market - that it is unregulated, and that almost nothing is disclosed publicly - may be about to change. That adds even more uncertainty to the equation.

"The big problem is that here are all these public companies - banks and corporations - and no one really knows what exposure they've got from the CDS contracts," says Frank Partnoy, a law professor at the University of San Diego and former Morgan Stanley derivatives salesman who has been writing about the dangers of CDS and their ilk for a decade. "The really scary part is that we don't have a clue." Chris Wolf, a co-manager of Cogo Wolf, a hedge fund of funds, compares them to one of the great mysteries of astrophysics: "This has become essentially the dark matter of the financial universe."

***

AT FIRST GLANCE, credit default swaps don't look all that scary. A CDS is just a contract: The "buyer" plunks down something that resembles a premium, and the "seller" agrees to make a specific payment if a particular event, such as a bond default, occurs. Used soberly, CDS offer concrete benefits: If you're holding bonds and you're worried that the issuer won't be able to pay, buying CDS should cover your loss. "CDS serve a very useful function of allowing financial markets to efficiently transfer credit risk," argues Sunil Hirani, the CEO of Creditex, one of a handful of marketplaces that trade the contracts.

Because they're contracts rather than securities or insurance, CDS are easy to create: Often deals are done in a one-minute phone conversation or an instant message. Many technical aspects of CDS, such as the typical five-year term, have been standardized by the International Swaps and Derivatives Association (ISDA). That only accelerates the process. You strike your deal, fill out some forms, and you've got yourself a $5 million - or a $100 million - contract.

And as long as someone is willing to take the other side of the proposition, a CDS can cover just about anything, making it the Wall Street equivalent of those notorious Lloyds of London policies covering Liberace's hands and other esoterica. It has even become possible to purchase a CDS that would pay out if the U.S. government defaults. (Trust us when we say that if the government goes under, trying to collect will be the least of your worries.)

You can guess how Wall Street cowboys responded to the opportunity to make deals that (1) can be struck in a minute, (2) require little or no cash upfront, and (3) can cover anything. Yee-haw! You can almost picture Slim Pickens in Dr. Strangelove climbing onto the H-bomb before it's released from the B-52. And indeed, the volume of CDS has exploded with nuclear force, nearly doubling every year since 2001 to reach a recent peak of $62 trillion at the end of 2007, before receding to $54.6 trillion as of June 30, according to ISDA.

Take that gargantuan number with a grain of salt. It refers to the face value of all outstanding contracts. But many players in the market hold offsetting positions. So if, in theory, every entity that owns CDS had to settle its contracts tomorrow and "netted" all its positions against each other, a much smaller amount of money would change hands. But even a tiny fraction of that $54.6 trillion would still be a daunting sum.

The credit freeze and then the Bear disaster explain the drop in outstanding CDS contracts during the first half of the year - and the market has only worsened since. CDS contracts on widely held debt, such as General Motors' (GM, Fortune 500), continue to be actively bought and sold. But traders say almost no new contracts are being written on any but the most liquid debt issues right now, in part because nobody wants to put money at risk and because nobody knows what Washington will do and how that will affect the market. ("There's nothing to do but watch Bernanke on TV," one trader told Fortune during the week when the Fed chairman was going before Congress to push the mortgage bailout.) So, after nearly a decade of exponential growth, the CDS market is poised for its first sustained contraction.

***

ONE REASON THE MARKET TOOK OFF is that you don't have to own a bond to buy a CDS on it - anyone can place a bet on whether a bond will fail. Indeed the majority of CDS now consists of bets on other people's debt. That's why it's possible for the market to be so big: The $54.6 trillion in CDS contracts completely dwarfs total corporate debt, which the Securities Industry and Financial Markets Association puts at $6.2 trillion, and the $10 trillion it counts in all forms of asset-backed debt.

"It's sort of like I think you're a bad driver and you're going to crash your car," says Greenberger, formerly of the CFTC. "So I go to an insurance company and get collision insurance on your car because I think it'll crash and I'll collect on it." That's precisely what the biggest winners in the subprime debacle did. Hedge fund star John Paulson of Paulson & Co., for example, made $15 billion in 2007, largely by using CDS to bet that other investors' subprime mortgage bonds would default.

So what started out as a vehicle for hedging ended up giving investors a cheap, easy way to wager on almost any event in the credit markets. In effect, credit default swaps became the world's largest casino. As Christopher Whalen, a managing director of Institutional Risk Analytics, observes, "To be generous, you could call it an unregulated, uncapitalized insurance market. But really, you would call it a gaming contract."

There is at least one key difference between casino gambling and CDS trading: Gambling has strict government regulation. The federal government has long shied away from any oversight of CDS. The CFTC floated the idea of taking an oversight role in the late '90s, only to find itself opposed by Federal Reserve chairman Alan Greenspan and others. Then, in 2000, Congress, with the support of Greenspan and Treasury Secretary Lawrence Summers, passed a bill prohibiting all federal and most state regulation of CDS and other derivatives. In a press release at the time, co-sponsor Senator Phil Gramm - most recently in the news when he stepped down as John McCain's campaign co-chair this summer after calling people who talk about a recession "whiners" - crowed that the new law "protects financial institutions from over-regulation ... and it guarantees that the United States will maintain its global dominance of financial markets." (The authors of the legislation were so bent on warding off regulation that they had the bill specify that it would "supersede and preempt the application of any state or local law that prohibits gaming ...") Not everyone was as sanguine as Gramm. In 2003 Warren Buffett famously called derivatives "financial weapons of mass destruction."

***

THERE'S ANOTHER BIG difference between trading CDS and casino gambling. When you put $10 on black 22, you're pretty sure the casino will pay off if you win. The CDS market offers no such assurance. One reason the market grew so quickly was that hedge funds poured in, sensing easy money. And not just big, well-established hedge funds but a lot of upstarts. So in some cases, giant financial institutions were counting on collecting money from institutions only slightly more solvent than your average minimart. The danger, of course, is that if a hedge fund suddenly has to pay off on a lot of CDS, it will simply go out of business. "People have been insuring risks that they can't insure," says Peter Schiff, the president of Euro Pacific Capital and author of Crash Proof, which predicted doom for Fannie and Freddie, among other things. "Let's say you're writing fire insurance policies, and every time you get the [premium], you spend it. You just assume that no houses are going to burn down. And all of a sudden there's a huge fire and they all burn down. What do you do? You just close up shop."

Dow drops as bailout defeated

http://rawstory.com/news/2008/Dow_d...eaded_0929.html

RAW STORY
Published: Monday September 29, 2008

The House failed to pass a $700 billion economic bailout package Monday, sending lawmakers back to the drawing table to try to stave off an economic collapse, and the stock market plummeted on the news.

The package failed on a 228-205 vote after Congressional leaders held the vote open for a half-hour after time had expired as they tried to persuade lawmakers to change their votes.

The failure -- after lawmakers remained in Washington over the weekend to negotiate a compromise -- essentially sends Congress and the White House back to the drawing table as they try to craft a compromise.

The Dow Jones Industrial Average was down nearly 600 points as traders worried the vote would go down in defeat. The Dow dropped as much as 705 points at one point.

It was unclear how long Pelosi would hold the vote open to try to persuade lawmakers to shift their votes. House rules allow leaders to hold the vote open indefinitely.

Lawmakers on Monday debated the bailout plan for struggling Wall Street banks as US President George W. Bush appealed to Congress to quickly approve the deal to free up frozen credit markets.

"I fully understand that this will be a difficult vote," Bush said at the White House before the House of Representatives began debate on the proposal amid stiff opposition from some members of his Republican party.

But he said the rescue package "will help keep the crisis in our financial system from spreading throughout our economy."

The US president spoke after a compromise proposal was hammered out in high-stakes negotiations between rival party leaders in Congress and White House officials over the weekend before global markets reopened on Monday.

The plan would mark the largest government economic intervention since the Great Depression of the 1930s, and is designed to shore up a troubled economy suffering from a burst US housing bubble that has ravaged the global banking system.

The proposal grants the Treasury secretary authority to buy up toxic mortgage-related assets in troubled banks in hopes of easing the flow of credit and reviving the moribund housing market.

As the pivotal debate began in Congress, the shakeup of the US banking sector continued with Citigroup on Monday agreeing to takeover Wachovia Bank. US regulators backed the deal that grants the government a stake in one of the nation's biggest banks.

The takeover came as Wachovia faced a near collapse of its share price and weakening confidence because of its exposure to troubled mortgage assets.

Congressional leaders, mindful of the approaching November 4 general elections, acknowledged the vote could be close while some conservative Republicans and liberal Democrats vowed to oppose the measure.

"We now have a deal that promises to bring near-term stability to our financial turmoil, but at what price?" Republican Congressman Michael Pence, a critic of the bailout, asked in a letter to colleagues.

White House hopefuls Republican John McCain and his Democratic rival Barack Obama have offered cautious backing for the plan, both claiming that demands they had made had been included in the new bill.

Despite the weekend deal, the financial crisis spread anxiety across global markets, prompting nationalizations and rescues of European banks while sending stocks down in Asia and Europe.

Britain had to nationalize Bradford & Bingley bank, governments intervened to prop up Belgian-Dutch group Fortis and other European banks got sucked into the storm.

Federal Reserve chairman Ben Bernanke echoed Bush's appeal, voicing support for the bailout bill.

"This legislation should help to restore the flow of credit to households and businesses that is essential for economic growth and job creation, while at the same time affording strong and necessary protections for taxpayers," he said in a statement.

Democratic leaders portrayed the revised plan, that ran more than 100 pages, as much improved from the three-page version sent days earlier by the White House, saying it included stricter oversight, safeguards for taxpayers and caps on executive pay packages.

"Working in a bipartisan way, we sent a message to Wall Street. The party is over," said House Speaker Nancy Pelosi.

"The era of golden parachutes for high flying Wall Street operators is over. No longer will the US taxpayer bail out the recklessness of Wall Street."

The proposed rescue, posted on financialservices.house.gov and formally titled the Emergency Economic Stabilization Act of 2008, calls for the immediate release of 250 billion dollars to enable the government to buy up troubled assets.

Under the bill, the president is authorized to approve a further 100 billion dollars, but the plan gives Congress a veto power over purchases above that limit and sets a ceiling for all purchases of 700 billion dollars.

The rescue operation will be overseen by a board including the chairman of the Federal Reserve, the Treasury secretary and the chairman of the Securities and Exchange Commission.

The bill prohibits "golden parachutes" for CEOs or other executives who lose or leave their jobs at companies participating in the plan as long as the Treasury holds equity in those firms.

The negotiations were reportedly marked by bitter disagreement over how to pay for possible losses suffered by taxpayers after debt has been bought and sold.

Democratic lawmakers had called for financial firms to help pay for the losses but the draft legislation left the question open for the next US president to tackle.

Regulator sells Washington Mutual

WaMu was set up on 25 September 1889

Washington Mutual (WaMu) has become the biggest US bank to fail, as regulators were forced to take control and sell off the mortgage lender.

The Office of Thrift Supervision (OTS) sold its assets to JPMorgan Chase for $1.9bn (£1bn) after $16.7bn of deposits had been withdrawn in 10 days.

Regulators were quick to reassure customers that WaMu would be trading as usual despite the change of ownership.

WaMu was hit by mortgage defaults the collapse of the US housing market.

"For bank customers, it will be a seamless transition," said Stella Blair, chairman of the Federal Deposit Insurance Corporation (FDIC).

"Bank customers should expect business as usual come Friday morning."

WASHINGTON MUTUAL 2,239 branches in 15 states 43,198 employees on 30 June Set up in 1889

"With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business," the OTS said.

The bank had about $307bn of assets but only about $188bn of deposits, which meant it had to raise funding on money markets, which has become increasingly expensive.

Additional funding

It raised an extra $7bn of capital from a consortium led by the private equity group TPG in April.

If WaMu had just failed then depositors would have been compensated by the FDIC, so the sale to JPMorgan may be a positive step.

"There was some concern that if a bank the size of WaMu failed the FDIC fund would not be adequate to meet the task and would require additional funding from the government," said David Resler, chief economist at Nomura Securities.

Instead, the responsibility for the deposits has been transferred to JPMorgan Chase.

"That means the FDIC fund is intact and can be used for other closures if necessary," Mr Resler added.

Sub-prime lending

It is less than three weeks since WaMu dismissed its chief executive Kerry Killinger, who it blamed for the bank's expansion into sub-prime and other comparatively risky lending.

Sub-prime mortgages are offered to borrowers with inferior credit records or unpredictable incomes.

WaMu is JPMorgan's second big fire-sale acquisition since the start of the credit crunch. It bought Bear Stearns in March.

WaMu launched an upbeat advertising campaign in February

The WaMu deal means it is now the second-biggest US bank, with 5,410 branches in 23 states.

"This deal makes excellent strategic sense for our company and our shareholders," said Jamie Dimon, chairman of JPMorgan Chase.

Before WaMu's closure was announced, it had a stock market value of $2.9bn.

In February this year, WaMu unveiled a new Whoo Hoo! advertising campaign, aiming to "capture the essence of what it feels like to bank at WaMu".

THIRD PARTY DEBATES?!?!?!

September 28, 2008 www.votenader.org www.officialnaderstore.com

Trevor Lyman is the man who organized the Ron Paul money bombs. One Lyman money bomb raised $4 million in one day. Another raised $6 million in one day. Now, Lyman is at it again. Lyman wants to hold a third party debate in New York City. Lyman was inspired by Ron Paul's press conference a couple of weeks ago. At that press conference, Paul called on his followers to ditch the two major parties and throw their support to one of the independent or third party candidates. So, we all need to support Lyman's push for an alternative debate now. If Lyman gets 10,000 pledges by October 8, he and the other sponsors will organize a debate in New York City. All major candidates -- Nader, Barr, McKinney, Baldwin, Obama and McCain will be invited. Already, with no publicity, Lyman has close to 1,000 pledgers. So go to thirdpartyticket.com now. And add your name to the pledge list. You don't have to say how much you are pledging. Just add your name. The Commission on Presidential Debates won't let Ralph debate. So, let's get behind Trevor Lyman's push now. Let's crank it up. And get it done. Onward to November The Nader Team PS: Third partyticket.com is being sponsored by Lyman's group breakthematrix.com, the Chicago-based Free and Equal Elections, and Open Debates.

US destroyer nears Somali pirates

The USS Howard is one of several vessels in the area

A US navy destroyer has made visual contact with a Ukrainian ship which was seized by Somali pirates last week and is now moored off the town of Hobyo.

There is no indication that the USS Howard is about to approach the MV Faina, which is carrying 33 T-72 battle tanks destined for Kenya's government.

A Russian navy vessel is also heading towards the region.

The pirates have reportedly demanded a ransom of $35m (£19m) to release the Ukrainian vessel and its crew.

But the Kenyan government has cast doubt on the report, saying it had not been issued with ransom demands.

The pirates also warned against any attempt to rescue the crew or cargo of the ship.

The US 5th Fleet is patrolling the area.

Deputy spokesperson Lt Nathan Christensen told the BBC USS Howard was within five miles (8km) from the stricken Ukrainian vessel, but refused to say whether an intervention was likely.

He said negotiations were continuing between the pirates and the owners of the Faina.

International concern

In an interview with the BBC, one of the pirates, Januna Ali Jama, claiming to be speaking on their behalf, said they were prepared to negotiate with the Kenyan government, but that would not release the MV Faina unless the ransom was paid.

Battles and looting in Mogadishu Life in Somalia's pirate town

"We are warning France and others who are thinking of carrying out a rescue that we have the power to reach them wherever they are," he said.

"We are demanding a ransom of at least $35m."

Later, in a tersely-worded statement, a spokesman for the Kenyan government said they had not received any credible demands for a ransom to release the ship.

He went on to say that the government would not negotiate with what it called international criminals, pirates and terrorists, and said efforts to recover the hijacked ship and its cargo would continue.

The BBC's Karen Allen, in Nairobi, says there is constant monitoring of the international waters off the coast of Somalia - considered some of the world's most dangerous waters.

'Big business'

On Friday, Ukrainian Defence Minister Yury Yekhanurov confirmed that 33 Russian T-72 tanks and "a substantial quantity of ammunition" were aboard the MV Faina.

Ukraine's foreign ministry said the ship had a crew of 21 and was sailing towards the Kenyan port of Mombasa.

Authorities in Somalia's semi-autonomous region of Puntland say they are powerless to confront the pirates, who regularly hold ships for ransom at the port of Eyl.

The MV Faina was carrying a shipment of battle tanks destined for Kenya

Senior UN officials estimate the ransoms pirates earn from hijacking ships exceed $100m (£54m) a year.

Pirate "mother ships" travel far out to sea and launch smaller boats to attack passing vessels, sometimes using rocket-propelled grenades.

Last week, France circulated a draft UN resolution urging states to deploy naval vessels and aircraft to combat such piracy.

France, which has troops in nearby Djibouti and also participates in a multi-national naval force patrol in the area, has intervened twice to release French sailors kidnapped by pirates.

Commandos freed two people whose boat was hijacked in the Gulf of Aden earlier this month and in April, six arrested pirates were handed over to the French authorities for trial.

Somalia has been without a functioning central government for 17 years and has suffered from continual civil strife.

Senate sends big spending bill to Bush to sign

By ANDREW TAYLOR, Associated Press Writer 35 minutes ago

WASHINGTON - Automakers gained $25 billion in taxpayer-subsidized loans and oil companies won elimination of a long-standing ban on drilling off the Atlantic and Pacific coasts as the Senate passed a sprawling spending bill Saturday.

The 78-12 vote sent the $634 billion measure to President Bush, who was expected to sign it even though it spends more money and contains more pet projects than he would have liked.

The measure is needed to keep the government operating beyond the current budget year, which ends Tuesday. As a result, the legislation is one of the few bills this election year that simply must pass. Bush's signature would mean Congress could avoid a lame-duck session after the Nov. 4 election.

White House spokesman Tony Fratto said the bill "stands as a reminder of the failure of the Democratic Congress to fund the government in regular order." But, he said, it "puts the United States one step closer to ending our dependence on foreign sources of energy" by lifting the offshore drilling ban and opening up huge reserves of oil shale in the West.

The Pentagon is in line for a record budget. In addition to $70 billion approved this summer for operations in Iraq and Afghanistan, the Defense Department would receive $488 billion, a 6 percent increase. The spending bill also offers aid to victims of flooding in the Midwest and recent hurricanes across the Gulf Coast.

Such a huge bill usually would dominate the end-of-session agenda on Capitol Hill. But it went below the radar screen because attention focused on the congressional bailout of Wall Street.

The measure settles dozens of battles that have brewed for months between the Democrats who run Congress and the White House and its GOP allies.

The administration won approval of the defense budget. Democrats wrested concessions from the White House on $23 billion for disaster-ravaged states, a doubling of low-income heating subsidies, and smaller spending items such as $24 million more for food shipments to the elderly.

The loan package for automakers would reward them with $25 billion in below-market loans, costing taxpayers $7.5 billion to subsidize the retooling of plants and development of technologies to help U.S. carmakers to build cleaner, more fuel efficient cars. Companies would not have to begin repaying the loans for five years, drawing objections from Sen. Jon Kyl, R-Ariz., who predicted they would return for more help when the money is due.

Republicans made ending the coastal drilling ban a central campaign issue this summer as $4-plus per gallon gasoline stoked voter anger and turned public opinion in favor of more exploration.

The action does not mean drilling is imminent and still leaves the oil-rich eastern Gulf of Mexico off limits. But it could set the stage for the government to offer leases in some Atlantic federal waters as early as 2011.

Also in the bill is money to avert a shortfall in Pell college aid grants and solve problems in the Women, Infants and Children program delivering healthy foods to the poor.

In addition to the Pentagon's budget, there is $40 billion for the Homeland Security Department and $73 billion for veterans' programs and military base construction projects. Combined with the Defense Department's spending, that amounts to about 60 percent of the budget work Congress must pass each year.

Democrats came under criticism from the GOP for short-circuiting the normal process for a spending bill after it became clear that Republicans would force difficult votes on the drilling ban.

Democrats also wanted to avoid an election-year clash with Bush that would have played in his favor. They are willing to take their chances that Democrat Barack Obama will be elected president in November and permit increases for scores of programs squeezed by Bush each year.

Bush had threatened to veto bills that did not cut the number and cost of pet projects in half or cause agency operating budgets to exceed his request. Democrats ignored the edict as they drafted the plan and the White House has apparently backed down.

Taxpayers for Common Sense, a watchdog group, discovered 2,322 pet projects totaling $6.6 billion. That included 2,025 in the defense portion alone that cost a total of $4.9 billion. Critics of such projects are likely to discover numerous examples of links to lobbyists and campaign contributions.

Astronomers spot a 'bizarre' strobe light star

A "most bizarre" strobe light star reported by European astronomers likely belongs to a long-sought family of compact "neutron" stars.

It initially showed up as a gamma-ray burst, leading astronomers to think it was the death of a star in the far-off universe. But after that first gamma-ray pulse, there was a three-day period of activity during which this odd celestial object emitted 40 visible-light flashes before disappearing again. Eleven days later, there was a brief near-infrared flaring episode recorded by ESO's Very Large Telescope. Then the weird object went visibly "silent" again.

"We are dealing with an object that has been hibernating for decades before entering a brief period of activity," said Alberto J. Castro-Tirado, lead author of a paper in this week's issue of Nature.

Astronomers now think this celestial enigma is a 'magnetar' located in our own Milky Way galaxy, about 15,000 light-years away in the area around the constellation of Vulpecula, the Fox. Magnetars are a type of young neutron stars. They boast a magnetic field that's a billion billion times stronger than Earth's.

To put that in perspective for those of us with the financial crisis willies: “A magnetar would wipe the information from all credit cards on Earth from a distance halfway to the Moon,” explains Antonio de Ugarte Postigo, the study's co-author.

Because magnetars can be celestially silent for decades at a time, they're hard to pin unless we're looking at the right place at the right time. Postigo says there's likely a large population of them in the Milky Way even though we've only identified about 12.

The magnetar, known as SWIFT J195509+261406, is a candidate for what scientists have been looking for: A magnetar moving towards a pleasant retirement as its magnetic fields decay

Gas shortages: get ready for more

By Brian O'Keefe, senior editorSeptember 26, 2008: 1:29 PM ET
NEW YORK (Fortune) -- While Congress and Bush administration officials have been working to complete a bailout plan and stem the financial contagion on Wall Street, a different kind of economic crisis emerged across the South this week: A severe, hurricane-related gasoline shortage has curtailed trucking from Atlanta to Asheville, N.C., and created a wave of panic buying among motorists.

The return of gas lines has largely flown under the radar of politicians who are usually keenly attuned, because their constituents are, to what's going on at the pump. But more of the Capitol gang should be paying attention to this.

That's because nationwide our gasoline inventory is shockingly low. Liquidity must be restored soon to this market, or we could be facing a crippling run on the gasoline bank. And if you think Americans are outraged about Wall Street, wait until their Main Street grocery store doesn't get the bread and milk delivery for a week or two.

Back to the '70s
The scenes over the past several days in places like Nashville, Tenn., Anniston, Ala., and western North Carolina looked like file footage from 1979 - with bags over empty gas pumps and quarter-mile long lines of cars waiting to fill up at stations that hadn't run out. AAA reported that drivers were so desperate that they were following tankers to gas stations to ensure a fill-up.

In Louisiana, Gov. Sonny Perdue got a waiver from the Environmental Protection Agency to temporarily allow stations to sell high-sulfur gasoline. In Alabama, Gov. Bob Riley ordered a state of emergency to prevent price gouging by station owners that do have gas.

What's going on? The immediate answer is that the double whammy of Hurricanes Gustav and Ike, which swept through the Gulf of Mexico earlier this month, caused much of the Gulf's oil drilling and refinery production to be shut down. In particular Ike, which hit refinery-rich Southeastern Texas on Sept. 13, caused massive power outages in the Galveston and Houston areas.

As of this week, more than a dozen refineries around Texas City and Port Arthur were not operating at full capacity and, according to the Department of Energy, six refineries, with a combined capacity of 1.6 million barrels a day, were still not running at all.

A bigger problem
But while the current shortages can be traced directly to the two hurricanes, the severity of the problem points out a bigger issue: The U.S. has been operating for a while with razor-thin spare gasoline capacity.

In its most recent Weekly Oil Data Review, Barclays Capital pointed out that the U.S. gasoline inventory has reached its lowest level since August 1967, when demand was a little more than half its current level of 9.3 million barrels a day. At 178.7 million barrels, inventories are 21.6 million barrels below their five-year average.

None of this surprises industry watchers such as Matt Simmons, the chairman of Houston energy industry investment bank Simmons & Co. and chief spokesman for the Peak Oil movement. I recently wrote a profile of Simmons for Fortune ("The prophet of $500 oil") and I can report that he has been warning about the potential of gasoline shortages in the U.S. for months.

"Our system is so fragile," he told me recently. "All you need is a tiny change to go from 'Oh, we're in fine shape' to an unmitigated disaster."

Simmons points out that the gasoline weekly stock reports have been trending sharply downward since last winter (with a brief upturn in the spring), and that even before Gustav and Ike we were in "just in time" supply mode.

Getting back to a safer level of extra capacity isn't simple, either. Once the refineries get back up and running, they'll drain the already low crude oil inventories. Unless gasoline demand stays low, Simmons believes, we'll have a hard time clawing back to stability.

That's why he worries about a top-up catastrophe that could cripple the trucking industry and disrupt food deliveries.

As he told me the other day: "If we end up having gasoline shortages, the odds are about 90% that Americans will do what we always do: We'll top up our tanks. And in topping up our tanks, within three or four days we'll drain the pool dry and then within seven days we'll run out of food."

That sounds awfully dire. And it probably won't happen. But, then again, a couple of months ago hardly anybody would have predicted that AIG would collapse, Congress would be mulling a Wall Street bailout, and '70s-era gas lines would be back.

Statement of September 11th Advocates Regarding the Release of the NIST Final Draft of Collapse of WTC7


For Immediate Release
September 26, 2008


NIST has finally released its long awaited investigative report regarding the collapse of World Trade Center 7. WTC 7 was the third building in the World Trade Center Complex to collapse at 5:20 PM on September 11, 2001. However, this building was not hit by an airplane.

As family members of 9/11 victims, we were extremely interested in the findings of this report. We had hoped that NIST’s report would serve to explain the cause of a total collapse of a conventional steel building and be able to refute the rampant conspiracy theories. We also hoped that this report, in conjunction with NIST’s final reports on WTC 1 and 2, would offer recommendations for improved building and fire codes to ensure public safety in ALL buildings going forward.

While we feel that technical experts should review, critique and replicate the findings within this report, we also feel that we must express our concerns based on public comments by NIST regarding their findings.

Over the past seven years, the Families of the 9/11 Victims have been repeatedly told by fire experts, engineers and architects that we should NOT FOCUS our efforts on advocating for building and fire code changes based on the collapse of the WTC 1 and 2 towers. We were continuously reminded that the crashing of airplanes into buildings was a unique event. Additionally, we were told that the design and construction of WTC Towers 1 and 2 was unique and that there were no other buildings of that particular height or design in the world. We were repeatedly told that the key was WTC 7 since this building was of conventional design and height, yet it too collapsed without the unique event of an airplane striking it.


As admitted by Dr. Shyam Sunder of NIST, WTC 7 was a more conventional design, like many other buildings in NYC and across the country.

Essentially, the construction of WTC 7 utilized traditional steel frame skeleton (uniformly spaced column and beam construction), without the questionable bar joists and trusses used in the construction of the WTC 1 and 2 Towers. WTC 7 was not a “tube” building like the WTC Towers. It was a rectangular shape and was less than half the height of WTC 1 and 2.

Dr. Sunder also stated that WTC 7 met all New York City codes. Yet, WTC 7 is the first steel high-rise building of traditional construction in the United States – and the world, to completely collapse as a result of fire.
 
According to the briefing given by Dr. Shyam Sunder on August 21, 2008, the collapse of WTC 7 was due to fire that was ignited by debris from another WTC building which was then fed by office paper and furnishings – NOT the diesel fuel tank stored in the building by Giuliani and his Administration against the strong advice of the FDNY, NOT a plane, and apparently, as stated by Dr. Sunder, “there were no flaws with the construction of the building”.

We don't how the rest of the country is feeling about this news, but we are very scared! These findings suggest that ANY EXISTING building is prone to a progressive collapse if a fire should start and the sprinkler system fails for whatever reason – regardless of how it starts! This is a distinct possibility, especially in earthquake prone areas where the water supplies can easily fail and the availability of firefighters is scarce or stretched very thin.



The ultimate purpose of advocating for the $16 million to have NIST study this event was to determine how to make buildings safer in the future. If we are now to believe that any skyscraper is subject to total collapse from fire, why isn't NIST emphasizing the impact on EXISTING buildings? The actual quality of spray-on fireproofing is a well-known problem throughout the country. NIST's report indicates that a complete burnout, without sprinkler system or fire department intervention, could lead to the complete collapse of ANY high-rise. NIST needs to rewrite its "new" recommendation B (5.12) and provide guidance for EXISTING buildings. 


NIST should put the most important conclusion in plain English and announce it to the entire country: UNCONTROLLED FIRES IN HIGH-RISE BUILDINGS CAN LEAD TO THEIR TOTAL COLLAPSE. 
 
NIST also needs to be more aggressive with the code writing groups regarding this critical fact, communicating with them through a high-profile meeting that includes the Director of NIST and the leaders of these code groups.

NIST must address this dangerous issue immediately. The future safety of the public and the fire services hangs in the balance. 
 
Refusal to make changes based on economics, greed, willingness to retain the status quo, cowardice to accept responsibility, failure of leadership to promote reform and political expediency are a deadly combination to the public at large.


# # #

Patty Casazza

Monica Gabrielle
Mindy Kleinberg
Lorie Van Auken 


__________________

Bush says bail-out will be passed

President Bush on the ongoing bail-out talks

President George W Bush has said that legislators will "rise to the occasion" and pass the proposed $700bn (£380bn) Wall Street rescue plan.

He said disagreements remained as "the proposal is big and the reason it's big is because it's a big problem".

Senate Majority Leader Harry Reid, a Democrat, said lawmakers would stay in session until a deal was reached.

But rebel Republicans remain unhappy at the plan to buy mortgage-backed assets from US banks.

However there were some positive signs later on Friday, when Democratic House of Representatives Speaker Nancy Pelosi said progress was being made on a financial rescue bill.

She said Congress was "back on track" in its efforts, and that lawmakers would continue to work over the weekend to reach agreement.

'Harmful'

Speaking earlier in the day Mr Bush said were "disagreements over aspects of a rescue plan but there is no disagreement that something substantial must be done".

Republicans in the House are going to continue, they say, to try to resist this plan BBC's Adam Brookes, Washington Rescue deal stalemate Rescue deal sticking point More cash injected into banks

Senator Reid agreed, saying: "We're going to get this done and stay in session as long as it takes to get it done."

Mr Reid was hopeful a bill could be drawn up by midnight in the US on Friday, and voted on either on Sunday or Monday.

He also said that "the insertion of presidential politics has not been helpful, it's been harmful" adding that Republican presidential candidate John McCain had not made his position on the financial rescue package clear.

Mr McCain, who had announced that he not take part in a presidential debate with rival Barack Obama until a bail-out plan was agreed, said on Friday that he would fly to Mississippi for the debate later.

Mr Bush's public backing for a deal did not ease nervousness on Wall Street, with stocks fluctuating throughout the day on small trading volumes.

However the benchmark Dow Jones index closed the day more than 1%, with the S&P 500 and Nasdaq virtually unchanged.

Resistance

Senators Harry Reid and Chris Dodd lay out their terms

Republican critics of the bail-out plan are worried about both its cost and how it would involve the government in the financial sector.

The BBC's Adam Brookes in Washington predicted a tough day of negotiations ahead.

"Republicans in the House are going to continue, they say, to try to resist this plan," he said.

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"They are also trying to convince Senator John McCain, the presidential contender, to jump in their direction."

Instead, the rebels want a government-backed insurance policy to cover the huge amounts of bad debt built up by US banks.

House Republican leader John Boehner said "we need to act quickly and protect the American taxpayer first and foremost".

Democrats meanwhile want to secure limits to payments for executives of failed banks and ensure there is adequate help for struggling US homeowners.

Impact

Financial markets are gummed up because banks do not know exactly how much bad debt they hold and are therefore reluctant to lend to businesses, consumers and each other.

The fall-out of this credit crunch continues to have a huge impact:

• The United States suffered its largest bank failure yet, when regulators moved in to close down Washington Mutual and then sold it to US rival JP Morgan Chase for $1.9bn

• In a co-ordinated move the European Central Bank, the US Federal Reserve, the Bank of England, Bank of Japan and the Swiss National Bank announced new short-term loans to the banking sector worth tens of billions of dollars

• Banks continued to cut costs, with UK banking giant HSBC saying it would axe 1,100 jobs

• Shares in UK bank Bradford & Bingley fell another 20% to 17 pence before recovering slightly

'Full-throated discussion'

Talks to agree the huge bail-out of the financial industry ended in a "shouting match" on Thursday.

After several hours of discussions with President Bush, a group of Republican members of Congress blocked the government plan, which would have seen the government buy bad debts from US banks to prevent more of them collapsing.

The intense discussions reportedly saw US Treasury Secretary Henry Paulson literally down on one knee, begging Ms Pelosi to help push through the bail-out package.

However, the agreement unravelled when a group of Republican legislators objected to the principle of the plan.

The talks at the White House, led by Mr Paulson and US President George W Bush, then descended into what one participant described as "a full-throated discussion".

McCain to attend debate even without bailout deal

By NEDRA PICKLER, Associated Press Writer 33 minutes ago

WASHINGTON - Republican John McCain agreed to attend the first presidential debate Friday night even though Congress doesn't have a bailout deal, reversing an earlier decision to delay the event until Washington had taken action to address the crisis.

With less than 10 hours until the debate was scheduled to start, the McCain campaign announced that the Arizona senator would travel to the University of Mississippi. The campaign said that afterward McCain would return to Washington to continue working on the financial crisis.

Obama had always planned to attend the debate and was aboard his plane preparing to take off when McCain's announcement was made. McCain quickly moved to his own private aircraft and headed South with his wife and former New York Mayor Rudy Giuliani and his wife, Judith, on board.

The action contradicted the position McCain had taken Wednesday, when he announced, "I'm directing my campaign to work with the Obama campaign and the Commission on Presidential Debates to delay Friday night's debate until we have taken action to address this crisis."

McCain had also said he would suspend all campaign activities, but in reality the campaign just shifted to Washington while the work of trying to win the election went on.

McCain had taken a gamble with the move, trying to appear above politics and as a leader on an issue that had overshadowed the presidential campaign and given him trouble. But Democratic rival Barack Obama had not bowed to McCain's challenge, and instead questioned why the Republican nominee couldn't handle two things at once — the debate and involvement in the bailout negotiations.

An Associated Press-Knowledge Networks poll out Friday just before McCain's announcement showed the public overwhelmingly wanted the candidates to debate, 60 percent to 22 percent, with the rest undecided.

By Friday morning, it appeared McCain was looking for a face-saving way to get to the debate even though a deal had not been reached. He met with Senate Minority Leader Mitch McConnell, R-Ky., and House Minority Leader John Boehner, R-Ohio, before heading to his campaign headquarters and issuing a statement that blamed others in Washington for the failure to reach an agreement.

"John McCain's decision to suspend his campaign was made in the hopes that politics could be set aside to address our economic crisis," the statement said. "In response, Americans saw a familiar spectacle in Washington. At a moment of crisis that threatened the economic security of American families, Washington played the blame game rather than work together to find a solution that would avert a collapse of financial markets without squandering hundreds of billions of taxpayers' money to bail out bankers and brokers who bet their fortunes on unsafe lending practices."

Just before McCain's announcement, Obama told reporters that he had spent Friday morning on the phone with Treasury Secretary Henry Paulson and congressional leaders and he was optimistic that progress was being made toward a bailout deal.

"At this point, my strong sense is that the best thing that I can do, rather than to inject presidential politics into these delicate negotiations, is to go down to Mississippi and explain to the American people what is going on and my vision for leading the country over the next four years," Obama told reporters aboard his campaign plane as they prepared to travel to Mississippi.

Former Arkansas Gov. Mike Huckabee, a McCain supporter, said the Republican made a "huge mistake" by even discussing canceling the debate.

"You can't just say, 'World, stop for a moment. I'm going to cancel everything,'" Huckabee told reporters Thursday night in Alabama before attending a benefit for the University of Mobile. He said it's more important for voters to hear from the presidential candidates than for them to huddle with fellow senators in Washington.

Both McCain and Obama had returned to Washington on Thursday at the urging of President Bush, who invited them to a meeting with congressional leaders at the White House. But a session aimed at showing unity in resolving the financial crisis broke up with conflicts in plain view.

McCain's campaign said the meeting "devolved into a contentious shouting match" and implied Obama was at fault — on a day when McCain said he was putting politics aside to focus on the nation's financial problems.

Democrats differed, saying the refusal of McCain and other Republicans to support the plan worked out by congressional negotiators was creating a road block.

"The insertion of presidential politics has not been helpful," Senate Majority Leader Harry Reid, D-Nev., said Friday.

When asked whether the meeting was a mistake, Obama replied, "I'm not sure it was as productive as it could have been. I think at this point it's important to just move forward."

Man charged with battery for farting near cop

Man charged with battery for farting near cop
Police say suspect passed 'very odorous' gas during breathalyzer test

http://www.msnbc.msn.com/id/26877682/

(Gold9472: I'm a repeat offender.)

9/25/2008

SOUTH CHARLESTON, W.Va. - A man has been charged with battery on a police officer for allegedly passing gas and fanning it toward a patrolman.

Jose A. Cruz, 34, of Clarksburg, W. Va., was pulled over early Tuesday for driving without headlights, police said. According to the criminal complaint, Cruz smelled of alcohol, had slurred speech and failed three field sobriety tests before he was handcuffed and taken to a police station for a breathalyzer test.

As Patrolman T.E. Parsons prepared the machine, Cruz scooted his chair toward Parsons, lifted his leg and "passed gas loudly," the complaint said.

Cruz, according to complaint, then fanned the gas toward the officer.

"The gas was very odorous and created contact of an insulting or provoking nature with Patrolman Parsons," the complaint alleged.

He was also charged with driving under the influence, driving without headlights and two counts of obstruction.

'I couldn't hold it no more'
Cruz acknowledged passing gas, but said he didn't move his chair toward the officer nor aim gas at the patrolman. He said he had an upset stomach at the time, but police denied his request to go to the bathroom when he first arrived at the station.

"I couldn't hold it no more," he said.

He also denied being drunk and uncooperative as the police complaint alleged. He added he was upset at being prepared for a breathalyzer test while having an asthma attack. The police statement said he later resisted being secured for a trip to a hospital that he requested for asthma treatment.

Cruz said the officers thought the gas incident was funny when it happened and laughed about it with him.

"This is ridiculous," he said. "I could be facing time."

KUCINICH'S MAIN STREET RECOVERY PLAN

KUCINICH'S MAIN STREET RECOVERY PLAN

Dear Friend,

While Wall Street and the Bush Administration try to blackmail Congress into a $700 billion bailout for corporations that have shown zero concern about the plight of the American people through the last decade, I have been working on a comprehensive alternative. Today, I am releasing a plan for economic recovery that will provide not only economic stimulus, but also fairness for everyday people on every "Main Street" in America. The plan is detailed below, and it will also be available on the campaign website www.kucinich.us.

Of course, this is a plan that has not only economic implications, but also moral and spiritual implications as well. The social, economic, and political divisions in our nation must be healed. We can make a new beginning, seizing this moment of crisis and transforming it into a moment of rebirth for our nation. I hope you will take the time to read it, consider it, and share it with your friends. I welcome your comments and your support.

More tomorrow.

Thank you,

Dennis
www.Kucinich.us
216-252-9000 877-933-6647

---

Kucinich’s Main Street Recovery Plan

1. Health Care for All: Insurance companies make money not providing health care. As the co-author of HR 676, a universal, single-payer, not-for-profit health care system, Medicare for All, I understand millions of Americans want health care that is accessible and affordable.

Medicare for All will help businesses large and small, create jobs as well as save the jobs of thousands of people including those of doctors, nurses and other healthcare workers who are currently leaving medicine because it is run by the insurance companies. $1 in every 3 dollars of the $2.4 trillion spent annually in America for health care goes to the insurance companies. If we take that money ($800 billion in unproductive wasteful spending) and put it directly into care, we will have enough money to cover everyone. We are already paying for Medicare for all, but not receiving it. HR 676 changes that!

2. Prescription Drug Benefit for Seniors: HR 6800 is the MEDS Act, which provides a fully paid prescription drug benefit, under Medicare, for all seniors. I wrote this bill to help alleviate the economic pressure that comes from the high cost of prescription drugs. We can pay for it by letting the government negotiate drug prices with the pharmaceutical companies as well as by permitting re-importation.

3. Stop the Oil Companies’ Price Gouging: As you know, I was the first one to step up to challenge of the corrupt price gouging and market speculation of the oil companies by proposing a windfall profits tax, on oil and natural gas companies, with revenues put into tax credits for the purchase of fuel-efficient American-made cars. However, it may be that nationalization is the only way to put an end to the oil companies' sharp practices.

4. Protecting the American Homestead: As Chairman of the Domestic Policy Oversight Subcommittee, I am working to protect your basic right to have a roof over your head, whether as an owner or renter. I have investigated and helped to expose the manipulation of mortgage markets, and I am crafting a new federal policy so that neighborhoods with the highest number of foreclosures get the most help.

5. Jobs for All: Congressman LaTourette and I have co-authored the bi-partisan New Deal-type jobs program, HR 3400, "Rebuilding America's Infrastructure." It will create millions of good-paying new jobs rebuilding our roads, bridges, water systems and sewer systems.

6. American Manufacturing Policy: I am drafting the American Manufacturing Policy Act, which for the first time, will state that the maintenance of U.S. steel, automotive, and aerospace industries are vital to our national economic security and must be maintained through integrated public-private cooperation, new trade policies, and investment.

7. Works Green Administration: I am also drafting plans for a green New Deal jobs program, in which the government creates millions of jobs by incentivizing the design, engineering, manufacturing, distribution and maintenance of millions of wind and solar micro-technologies for millions of homes and businesses, dramatically lowering energy costs and reducing our dependence on oil.

8. Fair Trade: The U.S. has lost millions of good-paying jobs, and more jobs have been out-sourced. As you know, I have helped to lead the way in opposition to trade giveaways. I strongly urge repeal of NAFTA. We must include workers' rights, human rights and environmental quality principles in all trade pacts. We must also protect the Great Lakes' water resources from the reach of multi-national corporations.

9. Education for All: I know families need help with the rising cost of day care. That is why I introduced HR 4060, a universal pre-kindergarten program to ensure that all children ages 3-5 have access to full-day, quality day care.

10. Protecting Pensions: I am working to change bankruptcy laws so pensioners' claims will be first, ahead of banks, and that corporate executives who misuse workers' pension funds are subject to criminal penalties. I want to fully fund the Pension Benefit Guarantee Board.

11. Social Security: From my first moments in Congress, I have exposed Wall Street's efforts to privatize Social Security and attacked it in the Democratic Caucus when it was being proposed. Can you imagine where seniors would be today if Social Security had been turned over to the stock market? Social Security is solid through 2032 without any changes.

12. Protect Bank Deposits: I will work to make sure the Federal Deposit Insurance Corporation (FDIC) has sufficient funds to provide for insurance of deposits up to $200,000 at all banks and savings and loans. This is an urgent matter since so many banks are said to be vulnerable.

13. Protect Investors: Bring back strong regulation to Wall Street. As Chairman of the Domestic Policy Subcommittee, I challenged the Wall Street hedge fund speculators as a threat to small investors. I intend to keep active watch over the machinations on Wall Street.

14. Strength through Peace: You'll remember when I led the effort against the ill-conceived Iraq war, which has now cost more than 4,100 US soldiers' lives, cost U.S. taxpayers between $3 trillion and $5 trillion, and resulted in the deaths of more than a million Iraqis. We must bring our troops home and end the war. We must engage in diplomacy. We must reduce the military budget, and we must stop outrageous cost overruns by the likes of Halliburton.

15. Safety in America: I am proud of my work for peace. In July 2001, I introduced a bill, which today is HR 808, that for the first time creates a comprehensive plan to deal with the issues of violence in American society, particularly domestic violence, spousal abuse, child abuse, gang violence, gun violence, racial violence, and violence against gays by establishing a Cabinet-level Department of Peace and Restorative Justice. This proposal has sparked a national movement and when implemented will save tax payers millions of dollars.

16. Monetary Policy: It is long past the time that we looked at the implications of our debt based monetary system, the privatization of money created by the 1913 Federal Reserve Act, the banks fractional reserve system and our debt-based economic system. Unless we have dramatic reform of monetary policy, the entire economic system will continue to accelerate wealth upwards. I am currently working on drafting legislation for an 'American Monetary Act' to address these and other issues in order to protect the economic wellbeing of America.

Stocks fluctuate after Buffett-Goldman deal

By TIM PARADIS, AP Business Writer 9 minutes ago

NEW YORK - Financial markets gave mixed signals Wednesday, with stocks stabilizing following investor Warren Buffett's $5 billion bet on Goldman Sachs Group Inc. but the credit markets showing added strain as they await news about the government's plan to rescue banks from crippling debt.

Buffett's Berkshire Hathaway Inc. said Tuesday it was investing at least $5 billion in Goldman — a move Wall Street took as strong sign of support for the independent investment bank model. Besides buying $5 billion in preferred stock, Berkshire also got warrants to buy another $5 billion in Goldman's common stock.

Goldman Sachs also said it will sell $5 billion worth of common stock to the public; the company and Morgan Stanley earlier this week were granted approval to become bank holding companies, which would help them strengthen their balance sheets.

Though Buffett's move soothed nervous investors, it could also lead to new questions from lawmakers for Treasury Secretary Henry Paulson, a former co-CEO of Goldman Sachs. He and Federal Reserve Chairman Ben Bernanke are scheduled to appear before Congress for a second day Wednesday to brief lawmakers on a $700 billion bailout measure for financial services firms.

Their appearance on Capitol Hill Tuesday unnerved investors, who questioned whether lawmakers were beginning to doubt the necessity and form of the government bailout.

In the first hour of trading, the Dow Jones industrial average fell 16.25, or 0.15 percent, to 10,837.92. The Dow is down more than 4 percent for the week.

Broader stock indicators were mixed. The Standard & Poor's 500 index fell 2.23, or 0.02 percent, to 1,186.17, and the Nasdaq composite index rose 4.62, or 0.21 percent, to 2,157.95.

In the bond market, demand for short-term government Treasuries remained strong as investors again sought safe places to keep cash. The yield on the 3-month Treasury bill, considered the safest short-term financial asset, was at 0.42 percent early Wednesday, down from 0.79 percent late Tuesday. In other Treasury trading, the yield on the benchmark 10-year Treasury note fell to 3.77 percent from 3.80 percent late Tuesday.

The dollar, whose struggles earlier this week contributed to extreme volatility in other markets, was mixed, falling against the euro but rising against the Japanese yen.

China's product safety watchdog steps down

By TINI TRAN, Associated Press Writer Mon Sep 22, 5:06 PM ET

BEIJING - The head of China's food safety watchdog resigned Monday for failing to stop the widespread contamination of baby formula as the number of children sickened in the scandal soared to nearly 53,000, including four infants who died.

The shake-up came as investigators revealed that China's biggest producer of powdered milk, Sanlu Group Co., had received complaints as early as December 2007 linking its infant formula to illnesses in babies. Months later, tests revealed the milk was tainted with the industrial chemical melamine, which causes kidney stones and can lead to kidney failure.

"During these eight months, the company did not inform the government and did not take proper measures, therefore making the situation worse," China Central Television reported, citing an investigation by the State Council, China's Cabinet.

Melamine, used to make plastics and fertilizer, has been found in infant formula and other milk products from 22 of China's dairy companies. Suppliers trying to cut costs are believed to have added it to watered-down milk because its high nitrogen content masks the resulting protein deficiency.

The number of sick children reported by the Health Ministry has jumped from 6,200 to nearly 53,000. Of those, 12,892 remain hospitalized, with 104 of them in serious condition. Another 39,965 children have been treated and released.

The ministry did not explain the sudden increase in the number of cases but it suggested health officials were combing through hospital records from May through August to trace the origins of the contamination.

Baby formula and other milk products have been pulled from stores around the country and Chinese dairy products, including baby formula, milk candy and ice cream, have been recalled or banned in Japan, Singapore, Malaysia, Brunei and Hong Kong.

In a reflection of the breakdown in supervision of the dairy industry, Sanlu and several other leading companies embroiled in the scandal had been given inspection-free status by the food safety watchdog.

That privilege has since been rescinded, but the World Health Organization stressed Monday it was only a first step and urged closer monitoring.

Quality issues can crop up at any point in the supply chain, from the farm to the retail outlet, said WHO China representative Hans Troedsson, adding: "It's clearly something that is not acceptable and needs to be rectified and corrected."

The resignation of Li Changjiang, who headed the General Administration of Quality Supervision, Inspection and Quarantine since 2001, comes a year after he and the government promised to overhaul the system in response to a series of product safety scares.

New regulations and procedures were introduced in an attempt to restore consumer confidence and preserve export markets after a string of recalls involving tainted toothpaste, faulty tires, contaminated seafood and in March 2007, pet food containing melamine that was blamed for the deaths of dogs and cats in the United States.

A series of improvements were announced from establishing a national food recall system to random inspections to increasing exchanges with quality inspectors in other countries.

In an indication of Beijing's determination to improve product safety, the government in July 2007 executed the disgraced chief of China's food and drug agency, who was convicted of accepting bribes in exchange for letting fake medicine into the domestic market.

The official Xinhua News Agency said Li stepped down with the approval of China's Cabinet.

The agency "failed to conduct a proper inspection in this case, and Li Changjiang bears responsibility for this. The State Council has accepted his resignation," China Central Television reported.

In addition, the top official from Shijiazhuang, where Sanlu is based, was fired Monday for "failing to deal with the case properly," the official Xinhua News Agency said. Party secretary Wu Xianguo is the latest in a string of city officials who have been sacked over the scandal.

The discovery of the tainted milk is especially damaging because Sanlu was considered one of the most reputable brands in China, winning an industry award in January and being featured on state television last fall as a domestic company with stringent quality controls.

WHO was having discussions with Chinese officials on how to strengthen its food quality system, said Troedsson, its country representative. Local authorities need increased training to create a "more robust reporting system," he said.

"It is important to know if information was withheld, where and why it was withheld," he said. "Was it ignorance by provincial authorities or was it that they neglected to report it? Because if it was ignorance there is a need to have much better training and education ... If it is neglect then it is, of course, more serious."