Subprime Crisis Far From Over

Banks' Credit Crisis Over? Not So Fast
By Rachel Beck
Associated Press

Bank CEOs missed the mark in forecasting the destructive path of today's credit crisis. That's why we shouldn't take too seriously their predictions that it is almost over now.

Some of Wall Street's biggest names have been proclaiming in recent weeks that the worst of the financial market turmoil is likely done. JPMorgan Chase's Jamie Dimon thinks it is "maybe 75 percent to 80 percent over," while Goldman Sachs' Lloyd Blankfein says "we're closer to the end than the beginning."

Those kind of comments helped put a positive spin on what otherwise would have been a tough earnings season for financial companies, which have tallied massive losses as mortgage and other debt woes continued to weigh on their businesses.

It's in the CEOs' best interests to steer sentiment higher. If people feel better about the state of the economy or financial markets, that will lead to more deals or stock trading and will boost bank profits.

The data don't back up their happy views, however. We're still stuck in a painful housing downturn, mortgage defaults continue to soar, and rising inflation is hurting businesses and consumers.

The credit crisis has led to more than $200 billion in write-downs taken by banks and financial firms over the last year — far more than anyone had expected, given the optimism of those companies' CEOs last summer.

As the housing market contraction accelerated and subprime borrowers were increasingly defaulting on their home loans in the first part of 2007, those executives were telling us not to worry.

Last June, Bear Stearns CFO Sam Molinaro talked about how the high level of subprime mortgage defaults hadn't "spilled" into other areas of the market. Merrill Lynch CEO Stan O'Neal said the subprime crisis was "reasonably well contained."

And in July Citigroup's CEO Chuck Prince said: "When the music stops in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

All those executives are now out of work and all their banks are now wallflowers.

By August, risk aversion spread through the marketplace, and has since paralyzed credit markets and caused a tightening of lending standards for consumers and businesses.

That's why we might want to listen cautiously to what the bank CEOs are saying now. Richard Fuld, CEO of Lehman Brothers, commented at the company's annual meeting that the worst is "behind us." Morgan Stanley CEO John Mack told investors that the collapse of the subprime market in the U.S. has reached its eighth inning or maybe the "top of the ninth."

Weighing against that are findings of a new CEO survey from the Financial Services Forum, which represents 20 of the largest U.S. financial companies. The survey showed that executives by a wide margin believed that the current credit turmoil has far to go; one in three of those CEOs polled put the likelihood of a recession at 100 percent.

Among the trade group's members is current Merrill Lynch CEO John Thain, who reported on Thursday that the investment bank had a $2.14 billion first-quarter loss and write-downs of $6.5 billion on its debt including mortgage-related securities and leveraged loans.

"I hope those who say we are at the end are correct. I am somewhat more skeptical," Thain told the Financial Times after the earnings were released.

Last summer, Bank of America's Ken Lewis seemed confident that the end was nearing for the housing slump. On Monday, the Charlotte, N.C.-based bank said its profits tumbled 77 percent in the first quarter due to trading losses and a $3.3 billion increase in reserves for problem loans.

"I think first it would be too early to strike up the band and sing happy days are here again," Lewis said Monday on a conference call with analysts during which he said the situation in the capital markets was particularly tough in March.

Forget about ninth, or even eighth inning. Maybe we haven't even gotten to the seventh inning stretch yet.

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Chertoff Gears Up For Internet Lock-Down

Chertoff Likens U.S. Cyber Security To 'Manhattan Project'
By Thomas Claburn
InformationWeek

In a keynote address at the RSA Conference in San Francisco, Homeland Security Secretary Michael Chertoff warned that the damage caused by a large-scale cyberattack might result in consequences comparable to the Sept. 11, 2001, attack on the World Trade Center buildings in New York.

"We have to look not only at threats that have materialized in the past," said Chertoff. "We have to consider the threats that may materialize in the future. ... We know that a successful large-scale cyberattack against our country would have very wide-reaching consequences."

Through the Internet, terrorists and criminals can do the kind of damage they could never do on their own, Chertoff said.

"Imagine what would happen if it were possible for hackers to enter the air travel system," he said.

Chertoff characterized cybersecurity as a very serious challenge, one that is likely to grow more serious over time. A network response, he said, is necessary to deal with network attacks.

"It takes a network to beat a network," said Chertoff.

Though US-CERT, the U.S. Computer Emergency Readiness Team, which provides information necessary to defend the nation's networks, Chertoff hopes to bring additional resources to bear to defend the country's computers.

Chertoff likened the government's attempt to improve its cybersecurity to the intensive effort of the Manhattan Project that brought the atomic bomb to fruition. In January, President Bush signed an order that gave DHS and the National Security Agency greater power to oversee government computer security. Details about what the agencies are doing remain classified.

Chertoff also emphasized the need for the federal government to engage with the private sector, given that so much of the nation's critical infrastructure is secured by private organizations.

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One Nation Under Google

Google, Seeking To Diversify, Looks To Uncle Sam
By John Letzing
MarketWatch

Rob Painter doesn't fit the typical profile of a Google Inc. employee. While many of the company's new workers are hired fresh from prestigious universities, Painter, the chief technologist for Google's federal business, has a background that includes stints with U.S. Special Operations and the intelligence community. He's also well removed from the company's Silicon Valley headquarters, working out of Washington, D.C. and Virginia.

But Painter's division -- selling souped-up versions of Google Earth satellite-image technology to military, intelligence and other government organizations -- is one of many smaller parts of the company that is becoming increasingly important as it seeks to expand beyond its traditional online-advertising business.

To the benefit of Google and other companies, a policy authorized by President Bush in 2003 [U.S. Commercial Remote Sensing Space Policy] specifically directed agencies to rely more on commercial satellite companies. Since then, the private sector also has become able to provide better imagery through advancing technology.

DigitalGlobe Inc., for example, a provider of images to Google Earth, launched a satellite last fall that boasts clear pictures of earthbound objects as small as 50 centimeters across.

The National Geospatial-Intelligence Agency, which collects and analyzes satellite imagery for national-security purposes, has awarded contracts to Google in the past. A spokesman for the NGA said Google Earth can be useful for everything from providing imagery during natural disasters to supporting the military in Iraq and Afghanistan. The NGA was established by the Central Intelligence Agency and Defense Department in the 1990s.

While versions of Google Earth sold to customers like the NGA do feature imagery accessible online by the public, Painter said that they can include enhancements such as more-frequent image updates and the means to quickly access and blend in the agencies' own specific data.

Google acquired a direct line into selling the product to U.S. intelligence agencies when it bought a startup in 2004 called Keyhole Inc. Keyhole was funded by In-Q-Tel, a venture-capital fund administered by the CIA, and its technology was rebranded as Google Earth.

"We're not only interested, we're the government agency that developed Google's technology and spun it off into the private sector," the NGA spokesman said. "We've had that stuff embedded in us since day one."

Painter, who served as director of technology assessment with In-Q-Tel, pointed out that connections developed during his years in government can be of use now, with his unit growing at brisk pace: "We're functionally more than tripling the team each year."

But Google faces a number of competitors in the market, including rival Microsoft Corp.'s Virtual Earth product. What's more, the NGA has developed its own technology, called Palanterra, which the NGA spokesman described as "exactly the same kind of system that allows you to look at a part of the world and have the maps and charts readily available along the lines of Google."

Google's contract opportunities may expand alongside a private sector progressively able to provide better satellite imagery. Its partner DigitalGlobe, for example, plans to launch a new satellite by the end of this year called WorldView-2, which is touted as a significant step forward.

"WorldView-2 will advance the state of the art ... by providing significantly expanded area coverage each day," said Steven Aftergood, a research analyst at the Federation of American Scientists. "It's a good bet that demand will follow supply."

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