The deflationist view, which makes some compelling and elegant arguments, maintains that the credit losses in the U.S. financial system far surpass the size of the government’s monetary and fiscal stimulus. All those trillions in bad loans – plus the yanking of credit from consumers and businesses – overwhelm new money creation. The Fed, in other words, is trying to fill a swimming pool with a Dixie cup. This might take a while.

Therefore, this reasoning goes, the greater risk is that asset prices continue to fall. This is the classic debt-deflation point of view. I don’t dismiss these arguments lightly. I’ve spent some time going over the arguments of some of deflation’s most persuasive and sophisticated advocates – like the successful Treasury bond investor, Van Hoisington and the insightful economist, David Rosenberg.

Still, I think the endgame is for inflation — which is when paper currencies buy less. Given the choice of holding U.S. dollars or real assets (such as gold or iron ore or land), I’ll take real assets.

Over the weekend, Thomas Donlan at Barron’s presented a good analogy for it all. He asked what you would rather own as store of value, bananas or corn? The obvious answer is corn, because you can store it for months. Corn lasts longer than bananas. Fruit rots. You can also use corn for a lot of different things — corn flour, animal feed, etc. You can also arrange to sell corn into the future, say, by arranging to deliver corn so many days from today.

Corn can lose value, obviously, as can any real asset. But it is a better choice than holding the bananas.

Donlan likens paper money to bananas and natural resources to corn. “In the modern economy,” he writes, “a barrel of oil is much like a bag of corn… Paper money and bank balances are more like the bag of bananas.” When currency rots, we call that inflation.

The problem with the deflation arguments long term, it seems to me, is that you are betting against a government’s ability to destroy its own currency. Governments are seldom good at anything, but one thing they are undeniably good at is destroying their own currencies. The dollar has lost 95% or so of its value since 1913, the year the United States established the Federal Reserve. Enough said.

Long-term, betting that a government will safeguard its currency seems like a very bad bet. Deflation – or at least symptoms of deflation – may prevail today, but the real question is for how long. My own crystal ball is frustratingly cloudy on the issue. But the great rewards in investing are always with the out-of-consensus view.

The upside from holding Treasuries seems hardly worth the risk of being wrong, for instance. On the other hand, if we are right about currency rot, then we’ll make multiples of our money on natural resource stocks.

The downside on many commodities seems low, because the prices have already corrected. In several instances, as with oil and natural gas and iron ore, we are already below the marginal cost of production for much of the industry. So unless we don’t need these things at all anymore, the simple economics of the businesses involved help support a certain price structure.

And anyway, as far as the case for gold is concerned, I’ve been arguing that it is less about inflation or deflation than it is about creditworthiness in general. Gold does well during times of credit troubles. It did well in the 1930s, for instance, even though that was largely a deflationary era. Banking troubles made investors turn to gold.

On that front, we’ve got plenty of banking troubles on the way. Yesterday’s Wall Street Journal headline, buried in the middle of the paper, hints at what’s to come: “Pick-a-Pay Loans: Worse Than Subprime.” The piece begins:

“For the third straight month, option adjustable-rate mortgages are generating proportionately more delinquencies and foreclosures than subprime mortgages, the scourge of the U.S.”

These loans require only partial-interest payments each month. So the loan balances on many of these loans have actually gone up while housing prices have tumbled. Bad combination. As of April, 36% of these loans were at least 60 days past due.

These troubled loans will mean more large losses for banks — in particular for Wells Fargo, J.P. Morgan Chase and others who were active in these markets. Wells Fargo, the WSJ points out, has a mountain of this stuff — $115 billion of it.

So as long as we have banking troubles, we have the potential for fear to return in a big way. And that is when gold does well…with or without inflation. But I’m not counting inflation out just yet.

I’d use the market weakness in the gold price and in gold shares to pick up your favorite gold miners.

Source: Gold…If Not Now, When

U.S. stocks tumbled on Wednesday as investors feared more credit losses in the banking sector, while bleak December retail sales compounded worries about the toll on consumers from the deepening recession.

Citigroup , down more than 15 percent to $4.98, was a standout drag on the financial sector, while shares of JPMorgan and Bank of America fell 5 percent and 3.5 percent respectively.

The fall in Citigroup, a Dow component, followed a deal by the embattled bank to sell a controlling stake in its crown jewel unit, the Smith Barney retail brokerage, to Morgan Stanley for $2.7 billion.

Analysts reckon the Smith Barney sale was a precursor to a break-up of Citigroup and that the bank must be urgently seeking to replenish capital due to mounting losses.

“You’d think the news on banks is baked in, but there’s still a lot of headwinds,” said Rich Parker, head of trading, Stanford Group, in New York.

“The write-downs are starting to really scare people outside of the banking area as well. Is there a balance sheet out there that you can really trust? By all indications, it seems the recession is going to be a historically long one.”

The Dow Jones industrial average slid 277.01 points, or 3.28 percent, to 8,171.55. The Standard & Poor’s 500 Index tumbled 29.99 points, or 3.44 percent, to 841.80. The Nasdaq Composite Index dropped 48.07 points, or 3.11 percent, to 1,498.39.

The sell-off marked another hindrance to the market’s push to recover from its November bear market low. The benchmark S&P 500 began 2009 up more than 20 percent from that low but is now up about 11.5 percent. The S&P financial index fell nearly 6 percent.

Sales at U.S. retailers fell 2.7 percent in December, government data showed on Wednesday, as a deteriorating economic climate forced consumers to cut back on spending during the key holiday period.

Consumer spending accounts for about two-thirds of U.S. economic activity and as such is a key pillar of corporate profits. The S&P retail index declined 3.7 percent.

Investors also sold off shares of economic bellwethers including big manufacturer Caterpillar Inc , down 6 percent. On Nasdaq, shares of iPhone maker Apple Inc led the slide, falling 2.4 percent to $85.64.

Even more unnerving to investors was a forecast by Morgan Stanley analysts that HSBC , Europe’s biggest bank, is likely to halve its dividend and may need to raise up to $30 billion of capital.

Additionally, Germany’s Deutsche Bank posted a loss of about $6.4 billion for the last three months of 2008, hitting markets in Europe.

JPMorgan is due to post quarterly results on Thursday after it moved up its reporting date, followed by Citigroup on Friday after it also moved up its results date.

Thomson Reuters data show expectations for JPMorgan have crumbled: A month ago it was expected to earn 27 cents per share in the fourth quarter. Two days ago that view was down to 5 cents. Before the bell, the view was a penny before special items.

On Tuesday, Federal Reserve Chairman Ben Bernanke said more steps were needed to stabilize banks, reviving the idea of authorities sopping up toxic assets from banks’ books.

NEW YORK, Jan 14 (Reuters)

In a separate story today (Wednesday), Wall Street banking analyst David Trone said that he expects higher credit costs and additional losses to force Citi to take $3 billion in write-downs in the year’s final quarter, a realization that prompted him to boost his quarterly loss estimate for the company and cut his target price for the stock.

“The key question is whether management will be able to continue to find buyers for business units, which is necessary to fortify the capital base against further credit losses and write-downs,” Trone, an analyst with Fox-Pitt Kelton Cochrane Caronia Waller, wrote in a research note to clients.

Fox-Pitt boosted its quarterly loss estimate for Citigroup from its prior projection of only 8 cents a share all the way to 79 cents a share. The brokerage then cut its profit estimate for 2009 from its earlier estimate of 69 cents per share all the way down to 28 cents, Reuters reported.

Trone, who rates Citi shares as performing “In Line” with the general market, cut his target price on the shares from $20 to $16. From Tuesday’s closing price of $8.36 a share, even that lower target price would represent a return of 91%.

Worries about Citigroup’s problem assets will continue to weigh down investor confidence, Trone wrote. Thus, while Citi is definitely a “cheap” stock by one key measure, it isn’t necessarily a bargain.

“Citi trades below tangible book, although we believe this is at risk given still-large problem asset exposures,” Trone wrote.

Citigroup’s shares have traded as high as $35.29 in the past 52 weeks. Its market capitalization (market cap) – the actual value of a publicly traded company – has plunged from $195 billion at the stock’s 52-week high to just under $41 billion today.

A new report states that Citigroup has slipped to the fifth-largest U.S. bank by market value, falling behind U.S. Bancorp (USB). The top five are JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), Bank of America Corp. (BAC), U.S. Bancorp and Citigroup. Less than two years ago, Citigroup was on top of that list.

As for the asset buyback, Citi said it’s moving the structured investment vehicle assets into a portfolio of assets held for sale. The transfer allows the SIV funds to fully repay maturing debt obligations. It will be accounted for as a “cashless” transaction, since the funds were essentially already on Citi’s balance sheet. In fact, the assets will be labeled as being “available for sale” basis, meaning changes in their value will affect the company’s balance sheet equity – but not its earnings, Reuters reported.

Back in December, Citigroup agreed to support the SIVs, which at the time held roughly $49 billion of assets. At one point, the bank’s SIVs were actually “off-balance-sheet” entities, holding roughly $100 billion in assets.

A SIV is a fund that borrows money by issuing short-term securities at a low interest rate and then lends that money by purchasing long-term securities at higher rates of interest. If managed correctly, fund investors can make a profit from the difference.

SIVs proliferated, and were in widespread use by investment banks and other financial institutions. But they ran aground when the credit crisis caused the demand for short-term bonds and commercial paper to evaporate. SIVs saw the value of their holding plummet, forcing institutions such as Citi – which had been operating the funds as off-balance-sheet funds – to prop them up with financial support.

This is the latest move Citigroup – one of the hardest-hit by the worldwide financial crisis – has been forced to make as it struggles to get back into the black. Citi has notched losses in each of the past four quarters, including a $2.8 billion loss in the third quarter, and has taken in excess of $40 billion in write-downs.

On Monday, Citi unveiled plans to cut more than 50,000 jobs in the “near term” and slash expenses by 20% to preserve capital as it faces a global slowdown that’s expected to push well into 2009. The cuts are on top of the 23,000 jobs eliminated so far this year and are part of Chief Executive Officer Vikram Pandit’s plans to whittle the bank’s work force down to 300,000. By the time Pandit puts down the corporate-cost-cutting machete, he’ll have lopped off about 20% of the company’s work force.

At its peak at the end of 2007, Citigroup had a work force of 375,000.

Just last week, as Money Morning reported, Citigroup announced the release of 10,000 employees, and said it was boosting interest rates an average of 3% for about one-in-five of its credit card holders.

Source: Hot Stocks: Citigroup to Buy Back Billions in SIV Assets, May Face Another Write-Down

“Hot Stocks” is a new Money Morning feature that analyzes the investment outlook of global companies that are in the news. This is the seventh installment of this ongoing investment series.

American Express won the Fed’s approval unanimously and without the application’s standard 30-day waiting period because of “the unusual and exigent circumstances affecting the financial markets,” according to a Fed statement.

High unemployment and a severe drought of credit are plaguing the consumer market, causing them to spend less. Worse, it’s caused many to be unable to pay existing debts such as credit cards.

October was the first month in 15 years that credit card companies weren’t able to sell bonds backed by customer payments, Bloomberg reported. And this upgrade to commercial bank status allows American Express – the fourth-largest U.S. credit card company – access to government funds.
American Express becomes the third major institution to switch over to a commercial bank in as many months, joining Goldman Sachs Group, Inc. (GS) and Morgan Stanley (MS).

In the past year, American Express has lost nearly half its market value as it posted four consecutive quarters of declining profit.

Mixed Analyst Reactions

Oppenheimer Holdings, Inc. (OPY) analyst Meredith Whitney said that the approval will give American Express a more stable mix of funding and allow it to cut borrowing costs.

“Whether institutions like it or not, the only prudent thing to do is assume a protracted worst-case funding scenario,” Whitney said in a note to investors, Reuters reported.

While she maintained her “perform” rating on American Express’ stock, she said that “concerns for American Express and other consumer lending-related stocks continue to be worse-than-expected credit losses.”

Scott Valentin of Friedman, Billings, Ramsey Group, Inc. (FBR) wasn’t as generous, the Associated Press reported. While maintaining his “underperform” rating and $22 target price for American Express stock, Valentin said the company’s earnings and model “are under severe stress in the current environment.”

Source:American Express Now a Commercial Bank

“Inflation is a long-term problem because there is no long-term will to solve it,” Chief Executive Officer Michael Geoghegan said during an informal shareholders meeting in Hong Kong.

He went on to criticize central banks that have kept interest rates low in response to curtailed economic growth and weak housing markets. But due in part to low interest rates, inflation has escalated as costs for food and energy soar, dampening consumer spending in such markets as the United States – and causing major food shortages in other markets around the world.

Geoghegan also said he expects that it will take three years for HSBC to return its U.S.-based consumer-lending unit to a profit. Its U.S. operations, acquired from Household International, was heavily exposed to the subprime-lending market and resulted in HSBC taking a $3.2 billion dollar write-down in the first quarter of 2008. That’s on top of a $4.6 billion dollar write-down in the fourth quarter last year.

Back in November 2006, HSBC was the first bank to acknowledge losses on subprime mortgages.

The world’s biggest banks have suffered about $383 billion in write-downs and credit losses since the subprime crisis began in earnest last year, and have raised about $270 billion to replenish capital, Bloomberg News reported today.

Over the weekend, UBS AG (UBS) – the Swiss banking giant seeking to raise $15.6 billion from shareholders to replenish a capital base eviscerated by such write-downs – revealed that it faces more losses from its mortgage-related holdings in both the global and U.S. markets, Bloomberg said.

In a prospectus for the rights offering that was posted on its corporate Web site, the Zurich-based UBS said it had losses on non-U.S. residential and commercial real- estate securities in 2007 and in the first quarter of this year and said those losses “could increase in the future,” the Bloomberg report stated.

In the United States, lending remains tight and home foreclosures are at a record high, as overextended homeowners are having difficulty obtaining favorable refinancing terms.

Almost two-thirds of U.S. banks have raised their lending standards for mortgages, even to their most creditworthy borrowers, Bloomberg reported. For those with limited or bad credit history – the so-called subprime borrowers – three-fourths of banks have raised lending requirements, according to a U.S. Federal Reserve survey of senior loan officers published May 5.

Lending also remains tight in the United Kingdom, where mortgage approvals continued to be low in April, the British Bankers’ Association announced today.

Home mortgage approvals increased to 38,704 in April from March’s historic low of 35,546, however, approvals remain below the 42,000 six-month average.

“March was the record low and April is the second lowest ever, so you cannot call that a recovery,” Michael Saunders at Citigroup Inc. (C) told Reuters.

Added Saunders: “The housing market remains extremely weak.”

A Changing Industry

Inflation isn’t the only problem facing the financial industry, according to the HSBC chief executive.

“The investment-banking model is flawed,” Geoghegan said. “If banks aren’t strong, they should be restructured or taken over.”

HSBC has been able to weather the subprime crisis better than some of its competitors due to its heavy focus on the Asian and emerging markets. The London-based lender has only had to dismiss 90 employees, or 0.1% of its total staff, as a result of the global credit crunch, according to Bloomberg-compiled data.

The European lending firm’s employee retention stands in stark contrast to The Bear Stearns Cos. Inc. (BSC), which has had to let 66% of its employees go as it eliminated 9,160 jobs in the process of being acquired by JPMorgan Chase & Co. (JPM).

Traditional financial centers such as New York, London and Tokyo are shedding jobs, while up and coming cities like Dubai and Hong Kong continue to add to their financial ranks.

Credit Suisse Group (CS), Deutsche Bank AG (DB), Morgan Stanley (MS) and Citigroup have all relocated top rainmakers to Hong Kong as investment bankers look to cash in on the large number of sovereign wealth, private equity and corporate deals occurring in Asia.

China and the other emerging Asian economies haven’t been as adversely affected by the global credit crunch. While deals are slowing down in the United States and Europe, the pace of business is still fast and furious in the Pacific Rim.

“Investment bankers follow the money,” Scott Moeller, a professor at the Cass Business School and former executive with Deutsche Bank and Morgan Stanley, told BBC News.

And even with the many job cuts and losses the financial industry has already suffered, some think the worst is still to come.

“We’ve never seen write-downs like we’re seeing now and such big losses,” John Challenger, chief executive officer of Chicago-based outplacement firm Challenger, Gray & Christmas Inc., told Bloomberg. “More job cuts will come. Even with the market’s optimism recently, I don’t think we can safely say that we’re out of the woods yet.”

Source: HSBC Chief Calls for Tougher Inflation Fight, Industry Changes

Forbes reports that yesterday “Fannie Mae executives told analysts that 43.0%, or $946 million, of the $2.2 billion in losses incurred during the first quarter involved Alt-A loans. They also said that the company’s ‘Alt-A book will continue to drive an outsize portion of our overall credit losses.’

Alt-A loans appeal to lenders because they yield higher rates on prime classified mortgages and are backed by borrowers with stronger credit ratings than subprime borrowers. But they carry extra risk for lenders due a lack of documentation–including limited proof of the borrower’s income.

“The US housing finance system needs replacing,” says Martin Hutchinson.

“The mortgage broker’s incentive is to maximize loan volume — pretty much regardless of whether or not the borrower can afford the loan. Falsification of documents, suborning of appraisers, and other similarly reprehensible machinations becomes a normal course of action in such a situation, as does turbo-charging the housing market to valuation and sales levels it cannot sustain. A system in which prices are forced up to unsustainable levels and fraud is rampant is broken, and needs to be replaced with something better.”

“The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity,” the policymaking Federal Open Market Committee (FOMC) said in the statement announcing the interest-rate move. Central bank policymakers also said that “recent information indicates that economic activity remains weak” before going on to say “uncertainty about the inflation outlook remains high” and noted that the Fed would continue to monitor both economic growth and inflation closely.

The Fed launched this rate-cutting campaign on Sept. 18, not long after it became clear that the U.S. subprime mortgage meltdown was having a global impact. The reason: Banks in Germany and France had – for whatever reason – invested in debt obligations that were backed by subprime mortgages. And when the subprime market blew up, so did the holdings at those foreign banks.

Before the crisis broke, and even in its early weeks, Fed Chairman Ben S. Bernanke and other U.S. leaders repeatedly maintained that the problem was limited in scope and that no real “crisis” would evolve. Today, an estimated $312 billion in write-downs and credit losses later, the central bank has slashed interest rates seven times and helped engineer the bailout of The Bear Stearns Cos. (BSC) by JPMorgan Chase & Co. (JPM).

Yesterday marked the seventh time since mid-September that the U.S. central bank reduced the Federal Funds rate, the interest rate that banks with excess reserves charge one another for overnight loans. The Fed Funds rate also serves as the benchmark for the Prime Rate, the base rate that commercial banks use to price loans to their best and most-credit-worthy customers. Wachovia Corp. (WB) and other lenders pared their Prime Rates by a similar quarter point – reaching 5% – shortly after yesterday’s Fed action.

Stocks soared in early trading. But then the markets shed those gains following the announcement of the expected quarter-point cut and ended mostly flat. The blue-chip Dow Jones Industrial Average Index was down 11.81 points (-0.09%), to trade at 12,820.13. The tech-laden Nasdaq Composite Index shed 13.30 points (-0.55%), to reach 2,412.80. And the broader Standard & Poor’s 500 Index decreased 5.35 points (-0.38%), to hit 1,385.59.

“The markets pretty much knew what was coming and what we wanted to see were the changes in the statement,” said Joel Naroff, president and chief economist of Naroff Economic Advisors, in a note to clients. “There were some, but the Fed still left itself plenty of wriggle room to do what it pleased.”
 
Central bank policymakers have slashed the Fed Funds rate by a total of 3.25 percentage points from its starting point of 5.25% level in mid-September, and the comments that accompanied yesterday’s announcement seemed to indicate the committee was content to step back and allow rate reductions to work their way through the U.S. economy.

The committee also reduced the lesser-known Discount rate (the rate charged at the Fed’s discount window) by a quarter point to 2.25%.

A Look to the Future

The committee did leave some room for future cuts by stating it “will act as needed to promote sustainable economic growth and price stability.”

Some analysts took the statement as a clear signal the Fed plans to pause.

“We do not expect to see a rate cut at the next few meetings without a substantial contraction of the economy,” Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, told Bloomberg News. “We are not yet to Memorial Day weekend, but the Fed effectively told us today to take the summer off.”

But the language was ambiguous enough to leave the statement open to some interpretation.

Ian Shepherdson, North American economist at High Frequency Economics, sees it differently. The Fed may “intend” to stand back and take a breather, but if a series of reports show that the U.S. economy is weakening, all bets are off.

“If the data deteriorates further, as we expect, the Fed will ease again,” Shepherdson said in a note to clients. “Today’s statement is important – [but only] today. Tomorrow, the numbers are back in charge.”

Steve Gallagher, chief economist at Societe General SA (OTC: SCGLY) in New York, called the statement a “soft non-binding pause.”

Not a Unanimous Move

Two FOMC policymakers reprised their dissenting votes. Both Richard Fisher, president of the Federal Reserve Bank of Dallas, and Charles Plosser, president of the Federal Reserve Bank of Philadelphia, had opposed the last rate reduction. Yesterday, they were again the only voices of dissent against yesterday’s rate cut, opting instead to hold rates steady.

“The two dissents show they are still worried about inflation,” Diane Swonk, chief economist at Chicago-based Mesirow Financial Holdings Inc., told Bloomberg “This is a Fed ready to watch from the sidelines.”

Playing to a Global Marketplace

The real question investors have now is this: What happens next?

Whatever the answer turns out to be, it’s almost certain to have a global spin – and a global impact. And that answer is likely to contain two other terms: Inflation and the dollar.

In its commentary, the Fed did warn that “some indicators of inflation expectations have risen in recent months.”

Indeed, many would argue that the Fed itself – with its ambitious rate-cutting campaign – has actually fueled domestic inflation and exacerbated the decline of an already weak greenback.

Here’s why some analysts believe that. The central bank’s preferred inflation barometer – the personal consumption expenditures price index – rose at only a 2.2% annual rate in the first quarter. But that indicator excludes food and energy prices – the most volatile and steeply climbing portion areas in the U.S. economy.

Officially, the U.S. inflation rate stands at about 4%, though many experts – including Money Morning Contributing Editor Martin Hutchinson – believe the actual U.S. inflation rate is much higher.

In fact, with yesterday’s latest rate cut by central bank policymakers, anyone who has closely followed the steep-and-steady increases in energy, food prices, commodities, healthcare, and a university-level education may find it tough to argue that prices aren’t headed even higher, still.

Because interest rates abroad are higher than they are in the United States, capital has moved out of the U.S. market and into the higher-yielding regions. The result: The dollar has dropped precipitously.

The fact that most central banks abroad have held rates steady even as the Fed pared U.S. rates has only exacerbated the greenback sell-off.

The culprits: write-downs linked to failed home-equity loans, subprime mortgages and leveraged buyouts that cost the bank upwards of $5 billion.

Net revenue fell 52%, while investment-banking fees fell 30% and debt-underwriting fees declined 58%.

Its investment-banking division posted a net loss of $87 million in the first quarter, down from its record $1.5 billion net income a year earlier. Retail finance services posted a net loss of $227 million, down from an $859 million gain in 2007.

In other words, it wasn’t a good quarter.

“Our earnings this quarter were down significantly as market conditions and the credit environment remained challenging. The Investment Bank had markdowns related to leveraged lending and mortgages and increased loan loss reserves. Retail Financial Services again increased loan loss reserves related to home equity and subprime mortgages, as performance in these portfolios continued to deteriorate,” Jamie Dimon, Chairman and Chief Executive Officer, said in a statement.

Somehow, one stockholder sees that as good news.

“In this environment, being able to post earnings as they did is I think all-in good news,” Charles Bobrinskoy, vice chairman of Ariel Capital Management LLC in Chicago, which owned more than 611,000 JPMorgan shares as of Dec. 31, told Bloomberg.

If that wasn’t bad news to him, Dimon was clear about the near term outlook.

“Our expectation is for the economic environment to continue to be weak and for the capital markets to remain under stress,” he said. “These factors have affected, and are likely to continue to negatively impact, our firm’s credit losses, overall business volumes and earnings – possibly through the remainder of the year, or longer.”

To prepare for it, JPMorgan added $2.5 billion to credit reserves, including $1.1 billion related to home equity loans.

It also has its merger with The Bear Stears Cos., Inc. (BSC), a deal Dimon said “provides a unique opportunity to enhance our ability to serve clients by adding new capabilities in prime brokerage and clearing and by improving strength in equities, mortgage trading, commodities and asset management.”

Trouble for the Titans

On Tuesday, Washington Mutual Inc. (WM) reported a $1.14 billion loss due to a growing number of customers that have fallen behind in their mortgage payments. A week earlier, the Seattle-based lender announced it raised $7 billion in capital, while slashing its dividend and cutting 3,000 jobs. Ironically, the capital raise was a last-ditch effort to stave off a takeover bid from JPMorgan.

U.S. Bancorp (USB) announced Tuesday that first-quarter earnings fell 4% as a result of losses connected to the mortgage market.

Bear Stearns said Monday that profit fell 79% in its fiscal first quarter, Reuters reported.

Also on Monday, General Electric Co. (GE) shocked the market when it announced a 6% drop in net income for the first quarter of 2008.

“Our primary shortfall was a decline in financial services earnings,” GE Chairman and CEO Jeff Immelt said.

And though Wells Fargo & Co. (WFC) beat analysts’ estimates in its first-quarter earnings release today (Wednesday), net income dropped 11% to $2 billion, the company said in a statement.

National City Corp. (NCC) will report its earnings tomorrow (Thursday).

Now, at the age of 77 Soros is making the rounds to promote his new book, “The New Paradigm for Financial Markets,” which goes on sale next month. And while he travels the media circuit he’s taking the opportunity to speak his mind on the country’s current financial crisis, which Soros considers the “biggest financial crisis” of his lifetime. Last week, he echoed the International Monetary Fund’s estimate of more than $1 trillion in losses linked to the collapse of mortgage-backed securities. However, Soros pointed out that losses so far disclosed by financial institutions are related only to the decline in value of those financial instruments.

“I think it’s a pretty accurate estimate of the loan losses,” Soros said during a conference call with reporters. “But we have not yet seen the full effect of possible recession. It only relates to the decline in the value of the various financial instruments which are held by the banks and other institutions.”

They don’t “in any way reflect possible decline in the quality of loans that they hold. These are the eventual losses yet to be seen,” he added.

Almost 50 of the world’s biggest banks have recorded a combined $232 billion in asset write-downs and credit losses since the beginning of 2007, according to Bloomberg data.

Soros described the $45 trillion market in credit swaps – which gives investors the opportunity to place bets on the likelihood that companies will default on bond payments – as the “Sword of Damocles.”

“This $45 trillion market is unregulated,” he said. “That’s more than five times the entire government bond market of the United States. It’s almost equal to the entire household wealth of the United States.”

As far as accountability is concerned, Soros blames regulators and the current U.S. administration, which he says “failed to perform their job.”

“This is a man-made crisis and it’s made by this false belief that markets correct their own excesses,” he said. “It will take much longer for the full effect of the decline in the housing market to be felt.”

He continued: “I think the situation is more serious than the authorities admit or recognize. They claim that there will be a pickup in the second half of the year. I cannot believe that.”