Greece in Debt, Eurozone in Crisis

The Nation -- The Greek verb agorevo means “I speak in public.” But agora also is the market. The market was an area of politics. When you try to separate the two, as neoliberalism does, trying to create a purely economic market place, then there is no democratic control.   —George Papandreou, Interview with Open Democracy, 2004

Are we the prodigal children of a neat global economy and an all-successful Europe? Or was the system ailing since its youth?   —from Debtocracy, a Greek documentary

Athens—When he was elected prime minister in 2009 at the head of Greece’s Panhellenic Socialist Movement (PaSoK), George Papandreou was going to wipe out corruption, open up politics, rejuvenate the country’s sclerotic economy. “There is money,” he said then, although he must have known there wasn’t any in the public coffers. Less than two years later, he has allowed the “troika” of the European Commission, the European Central Bank (ECB) and the International Monetary Fund to bind him on the horns of an impossible dilemma: either the Greek government implements a second round of austerity measures more savage than any yet endured by a developed country, with deeper cuts and tax hikes and a wholesale, cut-price sell-off of its public assets, or Greece faces default on its sovereign debt, imminent bankruptcy.

Meanwhile, since the end of May, Syntagma Square has overflowed with Greece’s aganaktismenoi (cousins of the indignados who filled Spanish squares this spring), here to refuse the troika’s blackmail and demand their democracy back. On the street in front of Parliament, protesters are banging drums, chanting and waving, singing. The crowd is huge, politically diverse and overwhelmingly peaceful. There are people here from all walks of Greek society; at times the rhetoric is that of a national resistance. A neat elderly couple on their first demonstration push through the crush because their pensions have been slashed, prices are rising and they just can’t make ends meet. Vassilis Papadopoulos, a 50-year-old unemployed truck driver living on loans from his mother, has come all the way from Corinth wrapped in a giant Greek flag, with a look of despair in his eyes and saucepans to bang together. This is a movement, he says, against the political system: “They’ve all cheated us. They destroyed the banks, our pension funds. They invested our social security money in bonds for their own benefit.” Farther down, in the square itself, something entirely new seems to be taking shape. A tent village has sprung up, a liberated zone in which an open conversation has been going on for weeks. University professors, passers-by, unemployed laborers, all get their three minutes with the microphone. There’s a medical tent, a “time bank,” a “team to promote calm.” When riot police cleared the square with clubs on the night of June 15, these protesters didn’t fight. They simply walked right back, picked up the rubbish and repaired their neighborhood.

The Greek debt crisis is said to threaten the survival of the eurozone and a global financial meltdown worse than the one set off by the collapse of Lehman Brothers in 2008; each new prediction of default sends frissons of panic and flurries of speculation through the markets. In June the ratings agencies said that German Chancellor Angela Merkel’s plan to persuade Greece’s private creditors to roll over the debt into longer-maturing bonds would be deemed a “credit event”—finance-speak for a default that triggers debt insurance policies, in which American as well as European banks are heavily implicated. That, Merkel told the German Parliament, could have “uncontrollable consequences” for financial markets. At the eleventh hour, an EU summit agreed in principle to a new rescue package of up to 120 billion euros, but demanded further cuts and tax hikes to close a 5.5 billion euro “black hole” in the existing plan. The markets rebounded. But Papandreou now has to push the new, augmented austerity package through a resistant Parliament before Greece can get the final tranche of last year’s 110 billion euro loan. Without it, the country will be broke by mid-July. The vote is due to take place on Wednesday; Greece's trade unions have scheduled a two-day general strike, and rallies are planned in sixty-five different towns. The Syntagma protesters intend to encircle Parliament.

Already parts of Athens look like New York City circa 1980, with shut-up shops, derelict buildings and graffitied walls. The effects of the game of chicken being played out by bankers and politicians are visible in the way Athenians walk now, head down and defended, through once-safe neighborhoods; in the irritable, shamed anxiety you see on people’s faces. Depression is endemic; suicide rates have soared. For Greeks, this is much more than an economic crisis. It is a social and political convulsion unlike anything seen here at least since the fall of the colonels’ dictatorship in 1974.

* * *

At a church-run soup kitchen in a dusty park, with his white hair combed back and his clean shirt neatly buttoned, Takis Karis is eating beans from a take-out container. When I ask what brought him here, a furious despair bursts through his gentlemanly manner: “We come so we won’t be hungry. Otherwise, we may as well kill ourselves.” Karis owned a factory, but his business went bankrupt; now he sleeps in the last of the company vans. He has lost his family and, he feels, his country. “You’re speaking to someone who was a Greek, but I’m not a Greek anymore. We’ve given up everything—flag, traditions, family, pride—for money. There is no state, no borders. They brought in 4 million migrants so they could have cheap labor for the Olympic Games and created an unemployment problem.” Niazi, at the same table, joins the conversation in fluent if accented Greek; he came here (legally, he stresses) from Alexandria twenty-seven years ago. He used to make shoes, but then the Chinese arrived and he, too, lost his business. The government, he says, should deport all illegal migrants. “If there is a Europe it has to be for Europeans, not Africans and Asians. An honest man can’t live in Greece anymore. What Greece needs is a new Papadopoulos [the dictator whose junta took over in 1967].” Karis agrees. “Under Papadopoulos, everyone had a job. People would go out and enjoy themselves all night.”

Such rhetoric is not new in Greece, but it’s become more common. A poll in June suggested that 23 percent of Greeks would favor a “strong leader” who could make decisions unencumbered by Parliament; another 31 percent would prefer the country to be managed by a “team of experts.” These numbers reflect the widespread (and not inaccurate) view that a political class steeped in cronyism and corruption has run the country aground and plundered the public purse; hence the cries of “Thieves!” that ring out nightly in Syntagma Square. But they also reflect something more dangerous: a sense of powerlessness, resentment and humiliation that finds no foothold in democracy, reaching instead for scapegoats and too-easy answers.

Athens is living through a double nightmare. Unemployment in Greece is officially at 16 percent, up by 40 percent in a year—?42 percent among the young. Those with jobs face wage cuts?of up to 30 percent, tax and price increases, public services in chaos. The social fabric is tearing. Father Andreas, the young priest running the soup kitchen, calls the situation “desperate,” as more and more families find they can’t support their own. At the same time, there is an uncontainable migration crisis. Tens of thousands of Afghans, Iraqis, Pakistanis, Bengalis, Somalis and North Africans are packed into crumbling buildings owned by slumlords, mostly Greek, who double as traffickers. Around Omonia Square, migrants search in rubbish for bottles, cables, clothing, anything to sell. The charity Médecins du Monde has declared a humanitarian emergency; in the lobby of its small clinic young men wait for hours, three deep against the wall.

Like the debt, the migration crisis has a European dimension. Greece is a main entry point for people trying to reach the EU from the Middle East, South Asia and Africa; 150,000 entered the country without papers in 2010 alone. Most of them cross the Turkish border, where the government plans to build a seven-mile wall; hundreds are detained there in conditions unfit for animals. Few want to stay in Greece, but under pressure from the EU the government has tightened controls over the exit points, turning the country into a giant lobster trap to keep migrants from reaching London, Paris or Berlin. According to the 2008 Dublin II Regulation, refugees have to apply for asylum in the first EU country they reach; Greece has 54,000 pending asylum applications and an approval rate of 0.3 percent.

With mass irregular migration and immiseration comes crime, both petty and organized, run by Greeks as well as foreigners. Athens was once seen as Europe’s safest capital; last year there were 145 armed robberies in a single week. The city has become a mecca for illegal weapons: you can get a “used” Beretta for around 800 euros or a .357 Magnum for a mere 500. Racist violence is on the rise, as are revenge killings and turf wars. Five dismembered brown-skinned bodies have been found since Christmas at one municipal dump. Even at midday, formerly prosperous streets are lined with women in hot pants and high heels, most of them African; their pimps stay in the shadows. Heroin is cheaper here than anywhere else in Europe.

As the authorities abdicate from policing parts of the city, the task of “keeping order” is assumed by vigilantes affiliated with the neofascist party Chrysi Avgi, or Golden Dawn, which last year won its first seat on the City Council. Chrysi Avgi patrols large areas of Athens, with the explicit or tacit support of many Greek residents and often of the police, staging pogroms against migrants and pitched battles with bands of anarchists who oppose them; on May 19 more than 200 people rampaged through the center, smashing shop windows and kicking or beating every dark-skinned man they saw while the police stood by. A young sympathizer described the group’s activities to me, proudly lifting his shirt to show a scar on his back inflicted, he said, by an Afghan with a knife. “We go into the basements where they have illegal mosques to check their papers, clear them out. They could be Al Qaeda; they could be anything. It’s not chance that they’re Muslims; they’re coming on purpose to undermine the country. There’s a plan, a secret funding mechanism, and there’s no state to protect us. The police are on the side of the migrants. We had to liberate Attica Square with our fists. The migrants were washing their clothes, their children, in the fountain; they were sleeping and praying in the square. It offends me to see them praying in the square.” This spring a 21-year-old Bengali was stabbed to death in “revenge” for the murder of a Greek expectant father knifed on the street for his camera. Two Afghans have been charged with the killing of the Greek; no one has been arrested for the Bengali’s murder.

* * *

Victoria Square, a stone’s throw from the National Archaeological Museum, used to be a cheerful place full of outdoor cafes; now it contains a few uncomfortable metal seats and ugly concrete planters, “improvements” made for the 2004 Olympics. On a June evening, groups of Middle Eastern men stood talking among themselves; a few women and children sat quietly on the ground. As night fell policemen on six motorbikes roared round and round among them, revving their engines threateningly until most had scattered. Marina Vichou, a third-generation resident and member of a local community group, says that in the past two or three years the area has become “a warehouse for human souls.” Eleni Zoi, who has lived here since 1967, described brothels and gambling dens, illegal shops and filthy apartments where fifty people live without sanitation, filling the airshafts with used toilet paper. “Uneducated people blame the migrants, not the people who rent to them, who are often Chrysi Avgi supporters, or the authorities that fail to integrate them. We kept asking the authorities to do something about the situation, and they wouldn’t—as if they wanted the area to become a ghetto.”

The group came together two years ago, opposing a plan to turn a rare green space into a parking lot; much of their energy is now spent trying to defend the neighborhood from Chrysi Avgi. “The best way to fight the fascists,” Vichou says, “is to be united and do community things together. It’s very important for people to see that fascist activities are closely connected with illegal ones.” But she feels the cause is hopeless: “It’s all older people here, Albanian immigrants who are not yet established, small shop owners. Chrysi Avgi takes over and won’t allow anyone else to speak. They harass us too, call us filthy names in the street. If I could, I would sell my house and leave.” Zoi—a veteran of many protests, including the occupation of the National Technical University, which helped to bring down the colonels in 1974—insists she won’t be moved. But, she says, it’s the anarchists from a local squat who have so far held the line against Chrysi Avgi. “What can we do? Look at us. We can’t fight them with our fists. I’ve been on countless demonstrations in my life, always peacefully. I’m the one who goes up to people and tells them not to throw things. This is the first time I’ve ever been afraid.”

After decades of expecting everything to be done for them by the state, more and more Greeks are discovering the satisfaction of doing things for themselves: the Atenistas, a network that plants empty lots and cleans up derelict buildings; the community group that filled Kalliga Square with candles when a migrant was murdered there; the cyclists who swoop through the streets in a great flock every week; the campers in Syntagma. But they are working in the shadow of a tidal wave.

In 2010 Greece’s economy shrank by 4.5 percent; a further slump of 3.8 percent is projected for this year. By the troika’s own figures, even if the Greeks can be forced to accept a second wave of cuts and privatizations, by next year sovereign debt will have risen to 166 percent of GDP; 8–9 percent of GDP will go just to pay the interest. (The interest on US debt, which so exercises Washington politicians, was at 1.3 percent of GDP in 2010.) The country will still be bankrupt, and the drumbeat for default is becoming deafening. What, then, is the point of punishing Greece further?

Despite the contemptuous grumblings of Northern Europeans, Greeks are quick to acknowledge the country’s responsibility for its fiscal mess, sometimes to the point of masochism. (“We ate it together, we’ll pay for it together,” the politicians frown. “We didn’t eat it, you did,” the protesters roar back, pointing to multimillion-euro bribes paid to fixers and legislators by companies like Johnson & Johnson, Siemens and Ferrostaal.) Many Greek intellectuals supported the government’s first agreement with the troika, because it was preferable to disorderly default and because some of its reforms (clamping down on corruption and tax evasion, shrinking the public sector, opening up restricted professions, making it easier for businesses to invest and thrive) have long been necessary but are blocked by vested interests. But such changes can’t be effected in the space of months, in the midst of a deep recession and without democratic control; even economists who backed the plan agree that it had little provision for growth and less regard for Greek realities. Rather than commit hara-kiri by alienating its base in corrupt public sector unions, PaSoK has shut its eyes and slashed the knife across the board, without planning or forethought. Hit by rising taxes and shrinking demand, 50,000 businesses have gone bust in a year. The new austerity package will see most of the state’s assets, from ports to power plants and banks to motorways, sold off to foreign companies, which will have no compunction about firing workers. The troika’s main aim is to rescue not the Greek economy but the country’s creditors—or at least to postpone default until “contagion” can be limited and the banks protected, by transferring the debt to taxpayer-funded lenders like the IMF and ECB.

Since the pain is almost certainly going to get worse, why not simply cut and run back to the drachma, as some of the Syntagma protesters advocate? At least then Greece would be in charge of its own destiny, free to take the traditional route out of debt through devaluation. Some analysts compare Greece’s plight to Argentina’s in 2001, when it saw daylight by unpegging its peso from the dollar. But Greece is not Argentina—among other things, the only oil it produces comes from olives—and even if leaving the euro were possible, the unpredictable consequences could be devastating: economic collapse, rampant inflation, rising nationalism. And while drowning by sudden default may seem a shorter, sharper torment than suffocation by the EU and IMF, the truth is that neither should be necessary.

Although most European bankers and politicians officially shudder at the prospect of a Greek defection from the euro, there are many on the right who would welcome such a “catharsis,” for reasons that Boris Johnson, London’s Conservative mayor, recently explained: “Bit by bit we seem to be creating a fiscal as well as a monetary union, in which huge sums…are being transferred from the richer to the poorer parts of the EU.” The Greek crisis has forced a recognition that the eurozone can’t continue as it is. It must either fly apart under the centrifugal force of the periphery’s debt or become more integrated, a union in which nations have common interests as well as a common currency. Neither option appeals to the bankers and eurocrats—or indeed to the voters of Germany, Britain, France or Finland, the main audience for the spectacle of Greece’s humiliation.

Just as the migrants have become the scapegoat for the Greek people’s suffering, so Greece has become the scapegoat for the structural problems of the eurozone, as well as for the failures of neoliberal orthodoxy. If the medicine isn’t working, it must be the patient’s fault. Greece’s entire economy is worth less than 3 percent of the eurozone’s GDP; the obstacles to a more humane, realistic and lasting reform are not financial but political. Like any homeless person on the street in Athens, the country has reached this point for reasons that are particular aa well as systemic. Beginning from the premise that it is in no one’s interest for Greece to default, any lasting solution must address both aspects—which means a rethinking of the eurozone’s policies and purposes, and a decision by political leaders to reclaim democratic control from the markets and ratings agencies. It would be pretty to think that such a thing might happen, but no one I know in Athens is holding their breath.

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Recent financial crisis rooted in politics of creditworthiness, new study contends

A common reading of the recent subprime mortgage crisis pins the blame on bankers and loan brokers who extended mortgages to those who could not afford them, thereby inflating a housing bubble that was destined to burst.

While technically correct, that reading ignores the "politics of creditworthiness" that undergirded the rise of subprime mortgages, as explained in a new article in the June issue of the American Sociological Review by Simone Polillo, an assistant professor of sociology in the University of Virginia's College of Arts & Sciences.

Defining creditworthiness criteria is an exercise of moral authority, Polillo argues, and political contesting of those criteria is a fundamental aspect of financial innovation. The innovation of subprime mortgages was made possible only after accepted "sound banking" criteria of creditworthiness had come to exclude a growing portion of Americans, Polillo writes in his article, "Money, Moral Authority, and the Politics of Creditworthiness."

After World War II, one typically qualified for a home loan with a substantial down payment and a record of employment and the prospect of future stable employment. By the late 1970s, it was clear that such criteria, in practice, often excluded or marginalized racial minorities, people from poor neighborhoods, individuals with poor credit histories and a growing portion of Americans affected by the breakdown of manufacturing and ever-withering employment benefits and stability.

"Wildcat" financial innovators stepped into this opening with new, looser credit criteria, based not on employment, but solely on the collateral value of the real estate to be purchased. "Wildcat" is Polillo's term for those who disobey "sound banking traditions" and thus create more inclusive, but more unstable credit systems.

Outflanked by these new offerings, more conservative local banks, to varying degrees, gradually followed the wildcats' lead, bolstered by claims from financial elites that the risks of such loans were parceled out by strategically bundling them into mortgage-backed securities.

As was learned in the financial crisis of 2007-08, the whole enterprise was founded on a flawed assumption, based on historical trends, that home prices would continue to rise steadily for the foreseeable future, Polillo said.

This was the latest example, among several in American history, of wildcat financial innovators spotting an underserved credit market, offering new financial products and creditworthiness standards to serve the underserved, and parlaying the innovations to financial elites and a wider market, he said.

A similar process played out when Michael Milken led the junk bond revolution of the 1980s. Junk bonds provided credit to companies that, Milken thought, had been systematically undervalued by rating agencies. Milken was particularly interested in bonds that, from a position of high credit rating, had fallen to "below investment grade," bonds he called "fallen angels."

"The fact that Milken became an emblem of reckless risk-taking and corruption," Polillo said, "should not distract us from the process that made his success possible: the recasting of previously excluded actors as worthy of credit (fallen angels) and the creation of new products to serve them."

Milken's case illustrates two pressures on prudent bankers who draw the line that establishes creditworthiness, Polillo said. First, those who are excluded may challenge how creditworthiness is defined and assessed. Second, new ideas may emerge within the banking system itself about how credit should be allocated.

Creditworthiness criteria are constantly being contested by bankers, financial innovators, the state and local communities, Polillo argues. Significant disagreement between those groups about the boundaries of creditworthiness can destabilize the financial system, as happened in Milken's junk bond revolution; in the subprime mortgage crisis; and in the post-Civil War clashes between "Greenbackers" and those who favored a gold standard.

In such clashes, both sides often lay claim to "laws" of the market, but the issue really boils down to ideas about how we decide where to draw boundaries between outsiders and insiders, Polillo said.

In the wake of such disruptions, the public grows skeptical of the competency of traditional monetary authorities like the Treasury, the Federal Reserve and Congress, and even banking elites, opening the door to debates on the proper role of the government and banks in the financial system, Polillo said.

Such concerns underlie our current debates on the national budget deficit, the debt ceiling and government bailouts, he said. As these debates play out observers should be mindful of how the politics of creditworthiness are being contested once again.

Provided by American Sociological Association (news : web)

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Without IMF loan, Greek-style debt crisis may face Ukraine - minister

The Ukrainian economy may plunge to a "pre-default" level and experience problems similar to those facing Greece if Ukraine's cooperation with the International Monetary Fund (IMF) fails, Deputy Prime Minister Serhiy Tihipko has said.

"The IMF's exit [from Ukraine] will immediately lower the country's rates, and the cost of our foreign debt, which has significantly expanded over the past three years... will immediately increase," Tihipko, who is also serving as minister for social policies, said in an interview with Ukraine's Inter TV channel.

"Moreover, I can tell you that after we take another one or two loans, we may find ourselves in a pre-default situation," he added. "Then, we will face a situation like the one in Greece."

In July 2010, the IMF approved a $15.15-billion standby loan for Ukraine "in support of the authorities' economic adjustment and reform program" following a request from Kiev. Ukraine has received two tranches with a total worth of $3.4 billion, but the fund has been reluctant to allocate new tranches, citing insufficient efforts by the Ukrainian government to cut budget deficit and its unwillingness to increase gas prices and raise the retirement age.

Ukraine's inflation rate rose to 9.4 percent from 7.7 percent in April, its highest level in six months, as prices for food, alcohol and utilities increased. According to expert estimates, the figure may rise further to 12-13 percent by mid-July.

The Ukrainian government has not been spending the money received from the IMF, Tihipko said. "All the money from the International Monetary Fund goes to currency reserves, it is being saved there... we don't take a hryvnia from those loans," he added.

On Thursday, local news agency Unian published a copy of letter sent by Sergei Arbuzov, the head of Ukraine's National Bank, to Prime Minister Nikolai Azarov. In the letter, Arbuzov blames the government for undermining cooperation with the IMF and raises concerns about growing inflation in the country.

Tihipko confirmed that such a letter had been received by the government. "There are certain risks, which Mr. Arbuzov stressed, and we understand this very well," he said.

KIEV, June 4 (RIA Novosti)

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In Financial Crisis, No Prosecutions of Top Figures

GRETCHEN MORGENSON and LOUISE STORY, On Thursday April 14, 2011, 7:33 am EDT

It is a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?

Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. But a private meeting in mid-October 2008 between Timothy F. Geithner, then-president of the Federal Reserve Bank of New York, and Andrew M. Cuomo, New York’s attorney general at the time, illustrates the complexities of pursuing legal cases in a time of panic.

At the Fed, which oversees the nation’s largest banks, Mr. Geithner worked with the Treasury Department on a large bailout fund for the banks and led efforts to shore up the American International Group, the giant insurer. His focus: stabilizing world financial markets.

Mr. Cuomo, as a Wall Street enforcer, had been questioning banks and rating agencies aggressively for more than a year about their roles in the growing debacle, and also looking into bonuses at A.I.G.

Friendly since their days in the Clinton administration, the two met in Mr. Cuomo’s office in Lower Manhattan, steps from Wall Street and the New York Fed. According to three people briefed at the time about the meeting, Mr. Geithner expressed concern about the fragility of the financial system.

His worry, according to these people, sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.

Asked whether the unusual meeting had altered his approach, a spokesman for Mr. Cuomo, now New York’s governor, said Wednesday evening that “Mr. Geithner never suggested that there be any lack of diligence or any slowdown.” Mr. Geithner, now the Treasury secretary, said through a spokesman that he had been focused on A.I.G. “to protect taxpayers.”

Whether prosecutors and regulators have been aggressive enough in pursuing wrongdoing is likely to long be a subject of debate. All say they have done the best they could under difficult circumstances.

But several years after the financial crisis, which was caused in large part by reckless lending and excessive risk taking by major financial institutions, no senior executives have been charged or imprisoned, and a collective government effort has not emerged. This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s. In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail. Among the best-known: Charles H. Keating Jr., of Lincoln Savings and Loan in Arizona, and David Paul, of Centrust Bank in Florida.

Former prosecutors, lawyers, bankers and mortgage employees say that investigators and regulators ignored past lessons about how to crack financial fraud.

As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.

Leading up to the financial crisis, many officials said in interviews, regulators failed in their crucial duty to compile the information that traditionally has helped build criminal cases. In effect, the same dynamic that helped enable the crisis — weak regulation — also made it harder to pursue fraud in its aftermath.

A more aggressive mind-set could have spurred far more prosecutions this time, officials involved in the S.&L. cleanup said.

“This is not some evil conspiracy of two guys sitting in a room saying we should let people create crony capitalism and steal with impunity,” said William K. Black, a professor of law at University of Missouri, Kansas City, and the federal government’s director of litigation during the savings and loan crisis. “But their policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here.”

Even civil actions by the government have been limited. The Securities and Exchange Commission adopted a broad guideline in 2009 — distributed within the agency but never made public — to be cautious about pushing for hefty penalties from banks that had received bailout money. The agency was concerned about taxpayer money in effect being used to pay for settlements, according to four people briefed on the policy but who were not authorized to speak publicly about it.

To be sure, Wall Street’s role in the crisis is complex, and cases related to mortgage securities are immensely technical. Criminal intent in particular is difficult to prove, and banks defend their actions with documents they say show they operated properly.

But legal experts point to numerous questionable activities where criminal probes might have borne fruit and possibly still could.

Investigators, they argue, could look more deeply at the failure of executives to fully disclose the scope of the risks on their books during the mortgage mania, or the amounts of questionable loans they bundled into securities sold to investors that soured.

Prosecutors also could pursue evidence that executives knowingly awarded bonuses to themselves and colleagues based on overly optimistic valuations of mortgage assets — in effect, creating illusory profits that were wiped out by subsequent losses on the same assets. And they might also investigate whether executives cashed in shares based on inside information, or misled regulators and their own boards about looming problems.

Merrill Lynch, for example, understated its risky mortgage holdings by hundreds of billions of dollars. And public comments made by Angelo R. Mozilo, the chief executive of Countrywide Financial, praising his mortgage company’s practices were at odds with derisive statements he made privately in e-mails as he sold shares; the stock subsequently fell sharply as the company’s losses became known.

Executives at Lehman Brothers assured investors in the summer of 2008 that the company’s financial position was sound, even though they appeared to have counted as assets certain holdings pledged by Lehman to other companies, according to a person briefed on that case. At Bear Stearns, the first major Wall Street player to collapse, a private litigant says evidence shows that the firm’s executives may have pocketed revenues that should have gone to investors to offset losses when complex mortgage securities soured.

But the Justice Department has decided not to pursue some of these matters — including possible criminal cases against Mr. Mozilo of Countrywide and Joseph J. Cassano, head of Financial Products at A.I.G., the business at the epicenter of that company’s collapse. Mr. Cassano’s lawyers said that documents they had given to prosecutors refuted accusations that he had misled investors or the company’s board. Mr. Mozilo’s lawyers have said he denies any wrongdoing.

Among the few exceptions so far in civil action against senior bankers is a lawsuit filed last month against top executives of Washington Mutual, the failed bank now owned by JPMorgan Chase. The Federal Deposit Insurance Corporation sued Kerry K. Killinger, the company’s former chief executive, and two other officials, accusing them of piling on risky loans to grow faster and increase their compensation. The S.E.C. also extracted a $550 million settlement from Goldman Sachs for a mortgage security the bank built, though the S.E.C. did not name executives in that case.

Representatives at the Justice Department and the S.E.C. say they are still pursuing financial crisis cases, but legal experts warn that they become more difficult as time passes.

“If you look at the last couple of years and say, ‘This is the big-ticket prosecution that came out of the crisis,’ you realize we haven’t gotten very much,” said David A. Skeel, a law professor at the University of Pennsylvania. “It’s consistent with what many people were worried about during the crisis, that different rules would be applied to different players. It goes to the whole perception that Wall Street was taken care of, and Main Street was not.”

The Countrywide Puzzle

As nonprosecutions go, perhaps none is more puzzling to legal experts than the case of Countrywide, the nation’s largest mortgage lender. Last month, the office of the United States attorney for Los Angeles dropped its investigation of Mr. Mozilo after the S.E.C. extracted a settlement from him in a civil fraud case. Mr. Mozilo paid $22.5 million in penalties, without admitting or denying the accusations.

White-collar crime lawyers contend that Countrywide exemplifies the difficulties of mounting a criminal case without assistance and documentation from regulators — the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Fed, in Countrywide’s case.

“When regulators don’t believe in regulation and don’t get what is going on at the companies they oversee, there can be no major white-collar crime prosecutions,” said Henry N. Pontell, professor of criminology, law and society in the School of Social Ecology at the University of California, Irvine. “If they don’t understand what we call collective embezzlement, where people are literally looting their own firms, then it’s impossible to bring cases.”

Financial crisis cases can be brought by many parties. Since the big banks’ mortgage machinery involved loans on properties across the country, attorneys general in most states have broad criminal authority over most of these institutions. The Justice Department can bring civil or criminal cases, while the S.E.C. can file only civil lawsuits.

All of these enforcement agencies traditionally depend heavily on referrals from bank regulators, who are more savvy on complex financial matters.

But data supplied by the Justice Department and compiled by a group at Syracuse University show that over the last decade, regulators have referred substantially fewer cases to criminal investigators than previously.

The university’s Transactional Records Access Clearinghouse indicates that in 1995, bank regulators referred 1,837 cases to the Justice Department. In 2006, that number had fallen to 75. In the four subsequent years, a period encompassing the worst of the crisis, an average of only 72 a year have been referred for criminal prosecution.

Law enforcement officials say financial case referrals began declining under President Clinton as his administration shifted its focus to health care fraud. The trend continued in the Bush administration, except for a spike in prosecutions for Enron, WorldCom, Tyco and others for accounting fraud.

The Office of Thrift Supervision was in a particularly good position to help guide possible prosecutions. From the summer of 2007 to the end of 2008, O.T.S.-overseen banks with $355 billion in assets failed.

The thrift supervisor, however, has not referred a single case to the Justice Department since 2000, the Syracuse data show. The Office of the Comptroller of the Currency, a unit of the Treasury Department, has referred only three in the last decade.

The comptroller’s office declined to comment on its referrals. But a spokesman, Kevin Mukri, noted that bank regulators can and do bring their own civil enforcement actions. But most are against small banks and do not involve the stiff penalties that accompany criminal charges.

Historically, Countrywide’s bank subsidiary was overseen by the comptroller, while the Federal Reserve supervised its home loans unit. But in March 2007, Countrywide switched oversight of both units to the thrift supervisor. That agency was overseen at the time by John M. Reich, a former banker and Senate staff member appointed in 2005 by President George W. Bush.

Robert Gnaizda, former general counsel at the Greenlining Institute, a nonprofit consumer organization in Oakland, Calif., said he had spoken often with Mr. Reich about Countrywide’s reckless lending.

“We saw that people were getting bad loans,” Mr. Gnaizda recalled. “We focused on Countrywide because they were the largest originator in California and they were the ones with the most exotic mortgages.”

Mr. Gnaizda suggested many times that the thrift supervisor tighten its oversight of the company, he said. He said he advised Mr. Reich to set up a hot line for whistle-blowers inside Countrywide to communicate with regulators.

“I told John, ‘This is what any police chief does if he wants to solve a crime,’ ” Mr. Gnaizda said in an interview. “John was uninterested. He told me he was a good friend of Mozilo’s.”

In an e-mail message, Mr. Reich said he did not recall the conversation with Mr. Gnaizda, and his relationships with the chief executives of banks overseen by his agency were strictly professional. “I met with Mr. Mozilo only a few times, always in a business environment, and any insinuation of a personal friendship is simply false,” he wrote.

After the crisis had subsided, another opportunity to investigate Countrywide and its executives yielded little. The Financial Crisis Inquiry Commission, created by Congress to investigate the origins of the disaster, decided not to make an in-depth examination of the company — though some staff members felt strongly that it should.

In a January 2010 memo, Brad Bondi and Martin Biegelman, two assistant directors of the commission, outlined their recommendations for investigative targets and hearings, according to Tom Krebs, another assistant director of the commission. Countrywide and Mr. Mozilo were specifically named; the memo noted that subprime mortgage executives like Mr. Mozilo received hundreds of millions of dollars in compensation even though their companies collapsed.

However, the two soon received a startling message: Countrywide was off limits. In a staff meeting, deputies to Phil Angelides, the commission’s chairman, said he had told them Countrywide should not be a target or featured at any hearing, said Mr. Krebs, who said he was briefed on that meeting by Mr. Bondi and Mr. Biegelman shortly after it occurred. His account has been confirmed by two other people with direct knowledge of the situation.

Mr. Angelides denied that he had said Countrywide or Mr. Mozilo were off limits. Chris Seefer, the F.C.I.C. official responsible for the Countrywide investigation, also said Countrywide had not been given a pass. Mr. Angelides said a full investigation was done on the company, including 40 interviews, and that a hearing was planned for the fall of 2010 to feature Mr. Mozilo. It was canceled because Republican members of the commission did not want any more hearings, he said.

“It got as full a scrub as A.I.G., Citi, anyone,” Mr. Angelides said of Countrywide. “If you look at the report, it’s extraordinarily condemnatory.”

An F.B.I. Investigation Fizzles

The Justice Department in Washington was abuzz in the spring of 2008. Bear Stearns had collapsed, and some law enforcement insiders were suggesting an in-depth search for fraud throughout the mortgage pipeline.

The F.B.I. had expressed concerns about mortgage improprieties as early as 2004. But it was not until four years later that its officials recommended closing several investigative programs to free agents for financial fraud cases, according to two people briefed on a study by the bureau.

The study identified about two dozen regions where mortgage fraud was believed rampant, and the bureau’s criminal division created a plan to investigate major banks and lenders. Robert S. Mueller III, the director of the F.B.I., approved the plan, which was described in a memo sent in spring 2008 to the bureau’s field offices.

“We were focused on the whole gamut: the individuals, the mortgage brokers and the top of the industry,” said Kenneth W. Kaiser, the former assistant director of the criminal investigations unit. “We were looking at the corporate level.”

Days after the memo was sent, however, prosecutors at some Justice Department offices began to complain that shifting agents to mortgage cases would hurt other investigations, he recalled. “We got told by the D.O.J. not to shift those resources,” he said. About a week later, he said, he was told to send another memo undoing many of the changes. Some of the extra agents were not deployed.

A spokesman for the F.B.I., Michael Kortan, said that a second memo was sent out that allowed field offices to try to opt out of some of the changes in the first memo. Mr. Kaiser’s account of pushback from the Justice Department was confirmed by two other people who were at the F.B.I. in 2008.

Around the same time, the Justice Department also considered setting up a financial fraud task force specifically to scrutinize the mortgage industry. Such task forces had been crucial to winning cases against Enron executives and those who looted savings and loans in the early 1990s.

Michael B. Mukasey, a former federal judge in New York who had been the head of the Justice Department less than a year when Bear Stearns fell, discussed the matter with deputies, three people briefed on the talks said. He decided against a task force and announced his decision in June 2008.

Last year, officials of the Financial Crisis Inquiry Commission interviewed Mr. Mukasey. Asked if he was aware of requests for more resources to be dedicated to mortgage fraud, Mr. Mukasey said he did not recall internal requests.

A spokesman for Mr. Mukasey, who is now at the law firm Debevoise & Plimpton in New York, said he would not comment beyond his F.C.I.C. testimony. He had no knowledge of the F.B.I. memo, his spokesman added.

A year later — with precious time lost — several lawmakers decided that the government needed more people tracking financial crimes. Congress passed a bill, providing a $165 million budget increase to the F.B.I. and Justice Department for investigations in this area. But when lawmakers got around to allocating the budget, only about $30 million in new money was provided.

Subsequently, in late 2009, the Justice Department announced a task force to focus broadly on financial crimes. But it received no additional resources.

A Break for 8 Banks

In July 2008, the staff of the S.E.C. received a phone call from Scott G. Alvarez, general counsel at the Federal Reserve in Washington.

The purpose: to discuss an S.E.C. investigation into improprieties by several of the nation’s largest brokerage firms. Their actions had hammered thousands of investors holding the short-term investments known as auction-rate securities.

These investments carry interest rates that reset regularly, usually weekly, in auctions overseen by the brokerage firms that sell them. They were popular among investors because the interest rates they received were slightly higher than what they could earn elsewhere.

For years, companies like UBS and Goldman Sachs operated auctions of these securities, promoting them as highly liquid investments. But by mid-February 2008, as the subprime mortgage crisis began to spread, investors holding hundreds of billions of dollars of these securities could no longer cash them in.

As the S.E.C. investigated these events, several of its officials argued that the banks should make all investors whole on the securities, according to three people with knowledge of the negotiations but who were not authorized to speak publicly, because banks had marketed them as safe investments.

But Mr. Alvarez suggested that the S.E.C. soften the proposed terms of the auction-rate settlements. His staff followed up with more calls to the S.E.C., cautioning that banks might run short on capital if they had to pay the many billions of dollars needed to make all auction-rate clients whole, the people briefed on the conversations said. The S.E.C. wound up requiring eight banks to pay back only individual investors. For institutional investors — like pension funds — that bought the securities, the S.E.C. told the banks to make only their “best efforts.”

This shift eased the pain significantly at some of the nation’s biggest banks. For Citigroup, the new terms meant it had to redeem $7 billion in the securities for individual investors — but it was off the hook for about $12 billion owned by institutions. These institutions have subsequently recouped some but not all of their investments. Mr. Alvarez declined to comment, through a spokeswoman.

An S.E.C. spokesman said: “The primary consideration was remedying the alleged wrongdoing and in fashioning that remedy, the emphasis was placed on retail investors because they were suffering the greatest hardship and had the fewest avenues for redress.”

A similar caution emerged in other civil cases after the bank bailouts in the autumn of 2008. The S.E.C.’s investigations of financial institutions began to be questioned by its staff and the agency’s commissioners, who worried that the settlements might be paid using federal bailout money.

Four people briefed on the discussions, who spoke anonymously because they were not authorized to speak publicly, said that in early 2009, the S.E.C. created a broad policy involving settlements with companies that had received taxpayer assistance. In discussions with the Treasury Department, the agency’s division of enforcement devised a guideline stating that the financial health of those banks should be taken into account when the agency negotiated settlements with them.

“This wasn’t a political thing so much as, ‘We don’t know if it makes sense to bring a big penalty against a bank that just got a check from the government,’ ” said one of the people briefed on the discussions.

The people briefed on the S.E.C.’s settlement policy said that, while it did not directly affect many settlements, it slowed down the investigative work on other cases. A spokesman for the S.E.C. declined to comment.

Attorney General Moves On

The final chapter still hasn’t been written about the financial crisis and its aftermath. One thing has been especially challenging for regulators and law enforcement officials: balancing concerns for the state of the financial system even as they pursued immensely complicated cases.

The conundrum was especially clear back in the fall of 2008 when Mr. Geithner visited Mr. Cuomo and discussed A.I.G. Asked for details about the meeting, a spokesman for Mr. Geithner said: “As A.I.G.’s largest creditor, the New York Federal Reserve installed new management at A.I.G. in the fall of 2008 and directed the new C.E.O. to take steps to end wasteful spending by the company in order to protect taxpayers.”

Mr. Cuomo’s office said, “The attorney general went on to lead the most aggressive investigation of A.I.G. and other financial institutions in the nation.” After that meeting, and until he left to become governor, Mr. Cuomo focused on the financial crisis, with mixed success. In late 2010, Mr. Cuomo sued the accounting firm Ernst & Young, accusing it of helping its client Lehman Brothers “engage in massive accounting fraud.”

To date, however, no arm of government has sued Lehman or any of its executives on the same accounting tactic.

Other targets have also avoided legal action. Mr. Cuomo investigated the 2008 bonuses that were paid out by giant banks just after the bailout, and he considered bringing a case to try to claw back some of that money, two people familiar with the matter said. But ultimately he chose to publicly shame the companies by releasing their bonus figures.

Mr. Cuomo took a tough stance on Bank of America. While the S.E.C. settled its case with Bank of America without charging any executives with wrongdoing, Mr. Cuomo filed a civil fraud lawsuit against Kenneth D. Lewis, the former chief executive, and the bank’s former chief financial officer. The suit accuses them of understating the losses of Merrill Lynch to shareholders before the deal was approved; the case is still pending.

Last spring, Mr. Cuomo issued new mortgage-related subpoenas to eight large banks. He was interested in whether the banks had misled the ratings agencies about the quality of the loans they were bundling and asked how many workers they had hired from the ratings agencies. But Mr. Cuomo did not bring a case on this matter before leaving office.

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NYT: In financial crisis, no major prosecutions

It is a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?

Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. But a private meeting in mid-October 2008 between Timothy F. Geithner, then-president of the Federal Reserve Bank of New York, and Andrew M. Cuomo, New York's attorney general at the time, illustrates the complexities of pursuing legal cases in a time of panic.

At the Fed, which oversees the nation's largest banks, Geithner worked with the Treasury Department on a large bailout fund for the banks and led efforts to shore up the American International Group, the giant insurer. His focus: stabilizing world financial markets.

Cuomo, as a Wall Street enforcer, had been questioning banks and rating agencies aggressively for more than a year about their roles in the growing debacle, and also looking into bonuses at A.I.G.

Friendly since their days in the Clinton administration, the two met in Cuomo's office in Lower Manhattan, steps from Wall Street and the New York Fed. According to three people briefed at the time about the meeting, Geithner expressed concern about the fragility of the financial system.

His worry, according to these people, sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.

Asked whether the unusual meeting had altered his approach, a spokesman for Cuomo, now New York's governor, said Wednesday evening that " Geithner never suggested that there be any lack of diligence or any slowdown." Geithner, now the Treasury secretary, said through a spokesman that he had been focused on A.I.G. "to protect taxpayers."

Whether prosecutors and regulators have been aggressive enough in pursuing wrongdoing is likely to long be a subject of debate. All say they have done the best they could under difficult circumstances.

But several years after the financial crisis, which was caused in large part by reckless lending and excessive risk taking by major financial institutions, no senior executives have been charged or imprisoned, and a collective government effort has not emerged. This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s. In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail. Among the best-known: Charles H. Keating Jr., of Lincoln Savings and Loan in Arizona, and David Paul, of Centrust Bank in Florida.

Former prosecutors, lawyers, bankers and mortgage employees say that investigators and regulators ignored past lessons about how to crack financial fraud.

As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.

Leading up to the financial crisis, many officials said in interviews, regulators failed in their crucial duty to compile the information that traditionally has helped build criminal cases. In effect, the same dynamic that helped enable the crisis — weak regulation — also made it harder to pursue fraud in its aftermath.

A more aggressive mind-set could have spurred far more prosecutions this time, officials involved in the S&L cleanup said.

"This is not some evil conspiracy of two guys sitting in a room saying we should let people create crony capitalism and steal with impunity," said William K. Black, a professor of law at University of Missouri, Kansas City, and the federal government's director of litigation during the savings and loan crisis. "But their policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here."

Even civil actions by the government have been limited. The Securities and Exchange Commission adopted a broad guideline in 2009 — distributed within the agency but never made public — to be cautious about pushing for hefty penalties from banks that had received bailout money. The agency was concerned about taxpayer money in effect being used to pay for settlements, according to four people briefed on the policy but who were not authorized to speak publicly about it.

To be sure, Wall Street's role in the crisis is complex, and cases related to mortgage securities are immensely technical. Criminal intent in particular is difficult to prove, and banks defend their actions with documents they say show they operated properly.

But legal experts point to numerous questionable activities where criminal probes might have borne fruit and possibly still could.

Investigators, they argue, could look more deeply at the failure of executives to fully disclose the scope of the risks on their books during the mortgage mania, or the amounts of questionable loans they bundled into securities sold to investors that soured.

Prosecutors also could pursue evidence that executives knowingly awarded bonuses to themselves and colleagues based on overly optimistic valuations of mortgage assets — in effect, creating illusory profits that were wiped out by subsequent losses on the same assets. And they might also investigate whether executives cashed in shares based on inside information, or misled regulators and their own boards about looming problems.

Merrill Lynch, for example, understated its risky mortgage holdings by hundreds of billions of dollars. And public comments made by Angelo R. Mozilo, the chief executive of Countrywide Financial, praising his mortgage company's practices were at odds with derisive statements he made privately in e-mails as he sold shares; the stock subsequently fell sharply as the company's losses became known.

Executives at Lehman Brothers assured investors in the summer of 2008 that the company's financial position was sound, even though they appeared to have counted as assets certain holdings pledged by Lehman to other companies, according to a person briefed on that case. At Bear Stearns, the first major Wall Street player to collapse, a private litigant says evidence shows that the firm's executives may have pocketed revenues that should have gone to investors to offset losses when complex mortgage securities soured.

But the Justice Department has decided not to pursue some of these matters — including possible criminal cases against Mozilo of Countrywide and Joseph J. Cassano, head of Financial Products at A.I.G., the business at the epicenter of that company's collapse. Cassano's lawyers said that documents they had given to prosecutors refuted accusations that he had misled investors or the company's board. Mozilo's lawyers have said he denies any wrongdoing.

Among the few exceptions so far in civil action against senior bankers is a lawsuit filed last month against top executives of Washington Mutual, the failed bank now owned by JPMorgan Chase. The Federal Deposit Insurance Corporation sued Kerry K. Killinger, the company's former chief executive, and two other officials, accusing them of piling on risky loans to grow faster and increase their compensation. The S.E.C. also extracted a $550 million settlement from Goldman Sachs for a mortgage security the bank built, though the S.E.C. did not name executives in that case.

Representatives at the Justice Department and the S.E.C. say they are still pursuing financial crisis cases, but legal experts warn that they become more difficult as time passes.

"If you look at the last couple of years and say, 'This is the big-ticket prosecution that came out of the crisis,' you realize we haven't gotten very much," said David A. Skeel, a law professor at the University of Pennsylvania. "It's consistent with what many people were worried about during the crisis, that different rules would be applied to different players. It goes to the whole perception that Wall Street was taken care of, and Main Street was not."

The Countrywide puzzle
As nonprosecutions go, perhaps none is more puzzling to legal experts than the case of Countrywide, the nation's largest mortgage lender. Last month, the office of the United States attorney for Los Angeles dropped its investigation of Mozilo after the S.E.C. extracted a settlement from him in a civil fraud case. Mozilo paid $22.5 million in penalties, without admitting or denying the accusations.

White-collar crime lawyers contend that Countrywide exemplifies the difficulties of mounting a criminal case without assistance and documentation from regulators — the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Fed, in Countrywide's case.

"When regulators don't believe in regulation and don't get what is going on at the companies they oversee, there can be no major white-collar crime prosecutions," said Henry N. Pontell, professor of criminology, law and society in the School of Social Ecology at the University of California, Irvine. "If they don't understand what we call collective embezzlement, where people are literally looting their own firms, then it's impossible to bring cases."

Financial crisis cases can be brought by many parties. Since the big banks' mortgage machinery involved loans on properties across the country, attorneys general in most states have broad criminal authority over most of these institutions. The Justice Department can bring civil or criminal cases, while the S.E.C. can file only civil lawsuits.

All of these enforcement agencies traditionally depend heavily on referrals from bank regulators, who are more savvy on complex financial matters.

But data supplied by the Justice Department and compiled by a group at Syracuse University show that over the last decade, regulators have referred substantially fewer cases to criminal investigators than previously.

The university's Transactional Records Access Clearinghouse indicates that in 1995, bank regulators referred 1,837 cases to the Justice Department. In 2006, that number had fallen to 75. In the four subsequent years, a period encompassing the worst of the crisis, an average of only 72 a year have been referred for criminal prosecution.

Law enforcement officials say financial case referrals began declining under President Clinton as his administration shifted its focus to health care fraud. The trend continued in the Bush administration, except for a spike in prosecutions for Enron, WorldCom, Tyco and others for accounting fraud.

The Office of Thrift Supervision was in a particularly good position to help guide possible prosecutions. From the summer of 2007 to the end of 2008, O.T.S.-overseen banks with $355 billion in assets failed.

The thrift supervisor, however, has not referred a single case to the Justice Department since 2000, the Syracuse data show. The Office of the Comptroller of the Currency, a unit of the Treasury Department, has referred only three in the last decade.

The comptroller's office declined to comment on its referrals. But a spokesman, Kevin Mukri, noted that bank regulators can and do bring their own civil enforcement actions. But most are against small banks and do not involve the stiff penalties that accompany criminal charges.

Historically, Countrywide's bank subsidiary was overseen by the comptroller, while the Federal Reserve supervised its home loans unit. But in March 2007, Countrywide switched oversight of both units to the thrift supervisor. That agency was overseen at the time by John M. Reich, a former banker and Senate staff member appointed in 2005 by President George W. Bush.

Robert Gnaizda, former general counsel at the Greenlining Institute, a nonprofit consumer organization in Oakland, Calif., said he had spoken often with Reich about Countrywide's reckless lending.

"We saw that people were getting bad loans," Gnaizda recalled. "We focused on Countrywide because they were the largest originator in California and they were the ones with the most exotic mortgages."

Gnaizda suggested many times that the thrift supervisor tighten its oversight of the company, he said. He said he advised Reich to set up a hot line for whistle-blowers inside Countrywide to communicate with regulators.

"I told John, 'This is what any police chief does if he wants to solve a crime,' " Gnaizda said in an interview. "John was uninterested. He told me he was a good friend of Mozilo's."

In an e-mail message, Reich said he did not recall the conversation with Gnaizda, and his relationships with the chief executives of banks overseen by his agency were strictly professional. "I met with Mozilo only a few times, always in a business environment, and any insinuation of a personal friendship is simply false," he wrote.

After the crisis had subsided, another opportunity to investigate Countrywide and its executives yielded little. The Financial Crisis Inquiry Commission, created by Congress to investigate the origins of the disaster, decided not to make an in-depth examination of the company — though some staff members felt strongly that it should.

In a January 2010 memo, Brad Bondi and Martin Biegelman, two assistant directors of the commission, outlined their recommendations for investigative targets and hearings, according to Tom Krebs, another assistant director of the commission. Countrywide and Mozilo were specifically named; the memo noted that subprime mortgage executives like Mozilo received hundreds of millions of dollars in compensation even though their companies collapsed.

However, the two soon received a startling message: Countrywide was off limits. In a staff meeting, deputies to Phil Angelides, the commission's chairman, said he had told them Countrywide should not be a target or featured at any hearing, said Krebs, who said he was briefed on that meeting by Bondi and Biegelman shortly after it occurred. His account has been confirmed by two other people with direct knowledge of the situation.

Angelides denied that he had said Countrywide or Mozilo were off limits. Chris Seefer, the F.C.I.C. official responsible for the Countrywide investigation, also said Countrywide had not been given a pass. Angelides said a full investigation was done on the company, including 40 interviews, and that a hearing was planned for the fall of 2010 to feature Mozilo. It was canceled because Republican members of the commission did not want any more hearings, he said.

"It got as full a scrub as A.I.G., Citi, anyone," Angelides said of Countrywide. "If you look at the report, it's extraordinarily condemnatory."

An F.B.I. investigation fizzles
The Justice Department in Washington was abuzz in the spring of 2008. Bear Stearns had collapsed, and some law enforcement insiders were suggesting an in-depth search for fraud throughout the mortgage pipeline.

The F.B.I. had expressed concerns about mortgage improprieties as early as 2004. But it was not until four years later that its officials recommended closing several investigative programs to free agents for financial fraud cases, according to two people briefed on a study by the bureau.

The study identified about two dozen regions where mortgage fraud was believed rampant, and the bureau's criminal division created a plan to investigate major banks and lenders. Robert S. Mueller III, the director of the F.B.I., approved the plan, which was described in a memo sent in spring 2008 to the bureau's field offices.

"We were focused on the whole gamut: the individuals, the mortgage brokers and the top of the industry," said Kenneth W. Kaiser, the former assistant director of the criminal investigations unit. "We were looking at the corporate level."

Days after the memo was sent, however, prosecutors at some Justice Department offices began to complain that shifting agents to mortgage cases would hurt other investigations, he recalled. "We got told by the D.O.J. not to shift those resources," he said. About a week later, he said, he was told to send another memo undoing many of the changes. Some of the extra agents were not deployed.

A spokesman for the F.B.I., Michael Kortan, said that a second memo was sent out that allowed field offices to try to opt out of some of the changes in the first memo. Kaiser's account of pushback from the Justice Department was confirmed by two other people who were at the F.B.I. in 2008.

Around the same time, the Justice Department also considered setting up a financial fraud task force specifically to scrutinize the mortgage industry. Such task forces had been crucial to winning cases against Enron executives and those who looted savings and loans in the early 1990s.

Michael B. Mukasey, a former federal judge in New York who had been the head of the Justice Department less than a year when Bear Stearns fell, discussed the matter with deputies, three people briefed on the talks said. He decided against a task force and announced his decision in June 2008.

Last year, officials of the Financial Crisis Inquiry Commission interviewed Mukasey. Asked if he was aware of requests for more resources to be dedicated to mortgage fraud, Mukasey said he did not recall internal requests.

A spokesman for Mukasey, who is now at the law firm Debevoise & Plimpton in New York, said he would not comment beyond his F.C.I.C. testimony. He had no knowledge of the F.B.I. memo, his spokesman added.

A year later — with precious time lost — several lawmakers decided that the government needed more people tracking financial crimes. Congress passed a bill, providing a $165 million budget increase to the F.B.I. and Justice Department for investigations in this area. But when lawmakers got around to allocating the budget, only about $30 million in new money was provided.

Subsequently, in late 2009, the Justice Department announced a task force to focus broadly on financial crimes. But it received no additional resources.

A break for 8 banks
In July 2008, the staff of the S.E.C. received a phone call from Scott G. Alvarez, general counsel at the Federal Reserve in Washington.

The purpose: to discuss an S.E.C. investigation into improprieties by several of the nation's largest brokerage firms. Their actions had hammered thousands of investors holding the short-term investments known as auction-rate securities.

These investments carry interest rates that reset regularly, usually weekly, in auctions overseen by the brokerage firms that sell them. They were popular among investors because the interest rates they received were slightly higher than what they could earn elsewhere.

For years, companies like UBS and Goldman Sachs operated auctions of these securities, promoting them as highly liquid investments. But by mid-February 2008, as the subprime mortgage crisis began to spread, investors holding hundreds of billions of dollars of these securities could no longer cash them in.

As the S.E.C. investigated these events, several of its officials argued that the banks should make all investors whole on the securities, according to three people with knowledge of the negotiations but who were not authorized to speak publicly, because banks had marketed them as safe investments.

But Alvarez suggested that the S.E.C. soften the proposed terms of the auction-rate settlements. His staff followed up with more calls to the S.E.C., cautioning that banks might run short on capital if they had to pay the many billions of dollars needed to make all auction-rate clients whole, the people briefed on the conversations said. The S.E.C. wound up requiring eight banks to pay back only individual investors. For institutional investors — like pension funds — that bought the securities, the S.E.C. told the banks to make only their "best efforts."

This shift eased the pain significantly at some of the nation's biggest banks. For Citigroup, the new terms meant it had to redeem $7 billion in the securities for individual investors — but it was off the hook for about $12 billion owned by institutions. These institutions have subsequently recouped some but not all of their investments. Alvarez declined to comment, through a spokeswoman.

An S.E.C. spokesman said: "The primary consideration was remedying the alleged wrongdoing and in fashioning that remedy, the emphasis was placed on retail investors because they were suffering the greatest hardship and had the fewest avenues for redress."

A similar caution emerged in other civil cases after the bank bailouts in the autumn of 2008. The S.E.C.'s investigations of financial institutions began to be questioned by its staff and the agency's commissioners, who worried that the settlements might be paid using federal bailout money.

Four people briefed on the discussions, who spoke anonymously because they were not authorized to speak publicly, said that in early 2009, the S.E.C. created a broad policy involving settlements with companies that had received taxpayer assistance. In discussions with the Treasury Department, the agency's division of enforcement devised a guideline stating that the financial health of those banks should be taken into account when the agency negotiated settlements with them.

"This wasn't a political thing so much as, 'We don't know if it makes sense to bring a big penalty against a bank that just got a check from the government,'" said one of the people briefed on the discussions.

The people briefed on the S.E.C.'s settlement policy said that, while it did not directly affect many settlements, it slowed down the investigative work on other cases. A spokesman for the S.E.C. declined to comment.

Attorney general moves on
The final chapter still hasn't been written about the financial crisis and its aftermath. One thing has been especially challenging for regulators and law enforcement officials: balancing concerns for the state of the financial system even as they pursued immensely complicated cases.

The conundrum was especially clear back in the fall of 2008 when Geithner visited Cuomo and discussed A.I.G. Asked for details about the meeting, a spokesman for Geithner said: "As A.I.G.'s largest creditor, the New York Federal Reserve installed new management at A.I.G. in the fall of 2008 and directed the new C.E.O. to take steps to end wasteful spending by the company in order to protect taxpayers."

Cuomo's office said, "The attorney general went on to lead the most aggressive investigation of A.I.G. and other financial institutions in the nation." After that meeting, and until he left to become governor, Cuomo focused on the financial crisis, with mixed success. In late 2010, Cuomo sued the accounting firm Ernst & Young, accusing it of helping its client Lehman Brothers "engage in massive accounting fraud."

To date, however, no arm of government has sued Lehman or any of its executives on the same accounting tactic.

Other targets have also avoided legal action. Cuomo investigated the 2008 bonuses that were paid out by giant banks just after the bailout, and he considered bringing a case to try to claw back some of that money, two people familiar with the matter said. But ultimately he chose to publicly shame the companies by releasing their bonus figures.

Cuomo took a tough stance on Bank of America. While the S.E.C. settled its case with Bank of America without charging any executives with wrongdoing, Cuomo filed a civil fraud lawsuit against Kenneth D. Lewis, the former chief executive, and the bank's former chief financial officer. The suit accuses them of understating the losses of Merrill Lynch to shareholders before the deal was approved; the case is still pending.

Last spring, Cuomo issued new mortgage-related subpoenas to eight large banks. He was interested in whether the banks had misled the ratings agencies about the quality of the loans they were bundling and asked how many workers they had hired from the ratings agencies. But Cuomo did not bring a case on this matter before leaving office.

This article, "In Financial Crisis, No Prosecutions of Top Figures," originally appeared in The New York Times.

Copyright © 2010 The New York Times

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Portugal Seeks Bailout From EU After Failing to Stem Crisis

April 07, 2011, 11:10 AM EDT By Joao Lima, Jim Silver and Anabela Reis

(Updates with comment from Fitch Ratings in seventh paragraph, more comments from Silva Pereira in ninth.)

April 7 (Bloomberg) -- Portugal is set to start hammering out a bailout package that may total 75 billion euros ($107 billion) as it becomes the third euro-region country to seek European Union aid.

The Portuguese government will make a formal aid request to the European Commission today, government minister Pedro Silva Pereira said today at a press conference in Lisbon. The request comes as Finance Minister Fernando Teixeira dos Santos travels to Budapest to meet with other officials from the other 16 euro nations near Budapest tomorrow.

Portugal is the latest nation to seek an EU-led bailout after Greece sparked a sovereign-debt crisis that threatened to splinter the euro region a year ago and then engulfed Ireland. The challenge for Teixeira dos Santos will be negotiating an interest rate on bailout loans that doesn’t strangle an economy that’s barely grown in the past decade or spark the public outcry that greeted Ireland’s bailout package in November.

“Clearly the view of the market was that this was inevitable and that it was only a matter of timing even if we still don’t know what the deal will be,” said Julian Callow, chief European economist at Barclays Capital in London.

No Choice

Prime Minister Jose Socrates said last night he had no choice than to seek aid as the country faces 9 billion euros of bond maturities in April and June. The yield on Portugal’s 10- year bonds, which hit a record after Socrates resigned last month and early elections were called, rose 6 basis points to 8.595 percent today. Portugal yesterday sold one-year notes at a yield of 5.9 percent, 200 basis points more than Germany pays for 30-year debt.

The euro weakened 0.2 percent to $1.4299 at 4:00 p.m. in Lisbon today. The difference in yield between that Portuguese 10-year bonds and comparable German bonds widened 6 basis points to 517 basis points today. The cost of insuring Portuguese sovereign debt rose 8 basis points to 562, according to CMA prices for credit-default swaps. The contracts earlier traded as low as 532 basis points.

Fitch Ratings said in a statement today that Portugal’s aid request “will help moderate the near-term risks to macro- economic and financial stability.”

Three Weeks

German Finance Minister Wolfgang Schaeuble said today that it will take two-to-three weeks to assess a request for European aid made by Portugal. Conditions will be attached to any bailout granted, he said in an e-mailed statement.

The conditions and the amount of EU financial aid has not been defined yet, government minister Silva Pereira said at a press conference in Lisbon today.

“What we expect is that this request for financial assistance can provide the immediate response that our economy needs,” the minister said.

Portugal’s package is likely to be worth as much as 75 billion euros, said two European officials with knowledge of the situation. Portugal may pay rates similar to what Greece is being charged for its rescue loans, which were renegotiated last month, Goldman Sachs Group Inc. said in a report to clients.

Greece pays an average of 3.5 percent for the first three years of its plan and 4.5 percent thereafter. Ireland, which is also trying to get lower terms, currently pays an average of 5.8 percent.

Greek Rates

“We would assume that it would be lower, as Greece got a 100 basis point cut in its rate, and Ireland could have gotten something similar if they had played ball on their corporate tax rate,” said Padhraic Garvey, head of developed-market debt at ING Groep NV in Amsterdam.

The Social Democrats, Portugal’s biggest opposition party, would aim for a lower interest rate on the aid program than the rate on the Irish package, Antonio Nogueira Leite, an adviser of the Social Democratic Party, said today in a Bloomberg Television interview. The Social Democrats lead Socrates’ Socialist party in opinion polls, and elections are set for June 5.

The terms of Portugal’s bailout package must be tighter than they otherwise would have been given the political situation caused by the pending elections, Finnish Prime Minister Mari Kiviniemi said.

Portugal will need about 15 billion euros to 20 billion euros to tide it over until the country gets a new government, Swedish Finance Minister Anders Borg said at a press conference in Stockholm today. Sweden is “very far” from having reached a decision on whether it will contribute to a Portuguese bailout, Borg said. Portugal should have acted last autumn to seek financial aid, he said.

Spain

Portugal’s announcement sparked optimism that the worst of Europe’s sovereign debt crisis is over and won’t threaten Spain, the euro region’s fourth-largest economy. The premium investors demand to hold Spanish debt over German bunds rose 2 basis points to 182 basis points today, and has dropped more than 100 basis points from its euro-era record in November.

Spanish Finance Minister Elena Salgado said she “absolutely rules out” contagion from Portugal as “markets absolutely distinguish between the two countries.”

“We do not expect any other EMU sovereign to be in need of financial assistance,” Francesco Garzarelli, Goldman Sachs London-based chief interest-rate strategist, in a report to clients.

At the same time, the euro region is still threatened by the risk that countries receiving aid won’t be able to tame their deficits and may be forced to restructure debt.

Restructuring Risk

“The urgent question still remains whether sovereign debt will have to be restructured, particularly in the case of Greece,” said Torge Middendorf, an economist at WestLB in Dusseldorf. “Should there indeed be a restructuring, Germany’s banks would be hit particularly hard.”

At 12.7 percent, Greek 10-year bond yields are almost 390 basis points higher than last April before the country received bailout funds. Standard & Poor’s Ratings Services said last week Greece may have to restructure its debt as “there are growing risks to the sovereign’s budgetary position.”

European governments will also be facing higher interest rates after the European Central Bank raised its benchmark rate a quarter point to 1.25 percent, the first increase since 2008.

The ECB has already suspended collateral conditions for all securities guaranteed by the Greek and Irish governments and Portuguese banks have been virtually cut off from interbank markets. The ECB had “encouraged” Portugal to seek EU aid, ECB President Jean-Claude Trichet said at a press conference in Frankfurt today.

Banks Gain

Banks led the gains on Portugal’s benchmark PSI-20 Index today, with Banco Espirito Santo SA adding 5.1 percent to 3.016 euros and Banco Comercial Portugues SA advancing 3.9 percent to 61.3 euro cents.

Portugal’s bond yields surged to records this month after Socrates resigned on March 23 when parliament rejected new austerity measures that aimed to bring the euro region’s fourth largest budget deficit within the EU’s limit of 3 percent of gross domestic product next year.

Portugal reported a 2010 budget deficit last week equal to 8.6 percent of gross domestic product, higher than the 7.3 percent the government had previously forecast, after a change in EU accounting rules forced it to add more than 2 billion euros in charges to last year’s accounts.

--With assistance from James G. Neuger in Brussels, Emma Ross- Thomas in Madrid, Kevin Costelloe and Sandrine Rastello in Washington, Dan Tilles in London, Tony Czuczka, Alan Crawford and Rainer Buergin in Berlin and Susan Li in Hong Kong. Editors: John Fraher, Andrew Davis

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Jim Silver in Lisbon at jsilver@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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Portugal Seeks EU Aid After Trying ‘Everything’ to Ease Crisis

April 07, 2011, 11:10 AM EDT By Joao Lima, Jim Silver and Anabela Reis

(Updates with comment from Fitch Ratings in seventh paragraph, more comments from Silva Pereira in ninth.)

April 7 (Bloomberg) -- Portugal is set to start hammering out a bailout package that may total 75 billion euros ($107 billion) as it becomes the third euro-region country to seek European Union aid.

The Portuguese government will make a formal aid request to the European Commission today, government minister Pedro Silva Pereira said today at a press conference in Lisbon. The request comes as Finance Minister Fernando Teixeira dos Santos travels to Budapest to meet with other officials from the other 16 euro nations near Budapest tomorrow.

Portugal is the latest nation to seek an EU-led bailout after Greece sparked a sovereign-debt crisis that threatened to splinter the euro region a year ago and then engulfed Ireland. The challenge for Teixeira dos Santos will be negotiating an interest rate on bailout loans that doesn’t strangle an economy that’s barely grown in the past decade or spark the public outcry that greeted Ireland’s bailout package in November.

“Clearly the view of the market was that this was inevitable and that it was only a matter of timing even if we still don’t know what the deal will be,” said Julian Callow, chief European economist at Barclays Capital in London.

No Choice

Prime Minister Jose Socrates said last night he had no choice than to seek aid as the country faces 9 billion euros of bond maturities in April and June. The yield on Portugal’s 10- year bonds, which hit a record after Socrates resigned last month and early elections were called, rose 6 basis points to 8.595 percent today. Portugal yesterday sold one-year notes at a yield of 5.9 percent, 200 basis points more than Germany pays for 30-year debt.

The euro weakened 0.2 percent to $1.4299 at 4:00 p.m. in Lisbon today. The difference in yield between that Portuguese 10-year bonds and comparable German bonds widened 6 basis points to 517 basis points today. The cost of insuring Portuguese sovereign debt rose 8 basis points to 562, according to CMA prices for credit-default swaps. The contracts earlier traded as low as 532 basis points.

Fitch Ratings said in a statement today that Portugal’s aid request “will help moderate the near-term risks to macro- economic and financial stability.”

Three Weeks

German Finance Minister Wolfgang Schaeuble said today that it will take two-to-three weeks to assess a request for European aid made by Portugal. Conditions will be attached to any bailout granted, he said in an e-mailed statement.

The conditions and the amount of EU financial aid has not been defined yet, government minister Silva Pereira said at a press conference in Lisbon today.

“What we expect is that this request for financial assistance can provide the immediate response that our economy needs,” the minister said.

Portugal’s package is likely to be worth as much as 75 billion euros, said two European officials with knowledge of the situation. Portugal may pay rates similar to what Greece is being charged for its rescue loans, which were renegotiated last month, Goldman Sachs Group Inc. said in a report to clients.

Greece pays an average of 3.5 percent for the first three years of its plan and 4.5 percent thereafter. Ireland, which is also trying to get lower terms, currently pays an average of 5.8 percent.

Greek Rates

“We would assume that it would be lower, as Greece got a 100 basis point cut in its rate, and Ireland could have gotten something similar if they had played ball on their corporate tax rate,” said Padhraic Garvey, head of developed-market debt at ING Groep NV in Amsterdam.

The Social Democrats, Portugal’s biggest opposition party, would aim for a lower interest rate on the aid program than the rate on the Irish package, Antonio Nogueira Leite, an adviser of the Social Democratic Party, said today in a Bloomberg Television interview. The Social Democrats lead Socrates’ Socialist party in opinion polls, and elections are set for June 5.

The terms of Portugal’s bailout package must be tighter than they otherwise would have been given the political situation caused by the pending elections, Finnish Prime Minister Mari Kiviniemi said.

Portugal will need about 15 billion euros to 20 billion euros to tide it over until the country gets a new government, Swedish Finance Minister Anders Borg said at a press conference in Stockholm today. Sweden is “very far” from having reached a decision on whether it will contribute to a Portuguese bailout, Borg said. Portugal should have acted last autumn to seek financial aid, he said.

Spain

Portugal’s announcement sparked optimism that the worst of Europe’s sovereign debt crisis is over and won’t threaten Spain, the euro region’s fourth-largest economy. The premium investors demand to hold Spanish debt over German bunds rose 2 basis points to 182 basis points today, and has dropped more than 100 basis points from its euro-era record in November.

Spanish Finance Minister Elena Salgado said she “absolutely rules out” contagion from Portugal as “markets absolutely distinguish between the two countries.”

“We do not expect any other EMU sovereign to be in need of financial assistance,” Francesco Garzarelli, Goldman Sachs London-based chief interest-rate strategist, in a report to clients.

At the same time, the euro region is still threatened by the risk that countries receiving aid won’t be able to tame their deficits and may be forced to restructure debt.

Restructuring Risk

“The urgent question still remains whether sovereign debt will have to be restructured, particularly in the case of Greece,” said Torge Middendorf, an economist at WestLB in Dusseldorf. “Should there indeed be a restructuring, Germany’s banks would be hit particularly hard.”

At 12.7 percent, Greek 10-year bond yields are almost 390 basis points higher than last April before the country received bailout funds. Standard & Poor’s Ratings Services said last week Greece may have to restructure its debt as “there are growing risks to the sovereign’s budgetary position.”

European governments will also be facing higher interest rates after the European Central Bank raised its benchmark rate a quarter point to 1.25 percent, the first increase since 2008.

The ECB has already suspended collateral conditions for all securities guaranteed by the Greek and Irish governments and Portuguese banks have been virtually cut off from interbank markets. The ECB had “encouraged” Portugal to seek EU aid, ECB President Jean-Claude Trichet said at a press conference in Frankfurt today.

Banks Gain

Banks led the gains on Portugal’s benchmark PSI-20 Index today, with Banco Espirito Santo SA adding 5.1 percent to 3.016 euros and Banco Comercial Portugues SA advancing 3.9 percent to 61.3 euro cents.

Portugal’s bond yields surged to records this month after Socrates resigned on March 23 when parliament rejected new austerity measures that aimed to bring the euro region’s fourth largest budget deficit within the EU’s limit of 3 percent of gross domestic product next year.

Portugal reported a 2010 budget deficit last week equal to 8.6 percent of gross domestic product, higher than the 7.3 percent the government had previously forecast, after a change in EU accounting rules forced it to add more than 2 billion euros in charges to last year’s accounts.

--With assistance from James G. Neuger in Brussels, Emma Ross- Thomas in Madrid, Kevin Costelloe and Sandrine Rastello in Washington, Dan Tilles in London, Tony Czuczka, Alan Crawford and Rainer Buergin in Berlin and Susan Li in Hong Kong. Editors: John Fraher, Andrew Davis

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Jim Silver in Lisbon at jsilver@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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Portugal seeks bailout, Europe debt crisis spreads

17 hours ago

By BARRY HATTON and ALAN CLENDENNING
Associated Press

(AP:LISBON, Portugal) Portugal asked for a bailout Wednesday to relieve its crushing debt, joining Greece and Ireland by becoming the third European nation to ask for outside help amid a bruising European financial crisis.

Prime Minister Jose Socrates went on national television to announce that Portugal must take international assistance to save its rapidly deteriorating economy, after months of insisting that he would do everything possible to avoid a bailout.

Socrates said his caretaker government asked "for financial help, to ensure financing for our country, for our financial system and for our economy."

He did not say how much Portugal would seek, but analysts have predicted Portugal will need up to euro80 billion ($114 billion). That amount is bearable for Europe's finances unless other nations _ notably Spain _ end up asking for help.

Portugal urgently needs the rescue because has been forced to pay increasingly unsustainable interest rates to persuade investors to buy its debt. Banks from Spain to Germany are heavily exposed to the possibility of a Portuguese default, which would threaten the very existence of the eurozone.

But experts believe a package to save Portugal will be crafted by the European Union and the International Monetary Fund, and European Commission President Jose Manuel Barroso said in a statement the Portugal's request "will be processed in the swiftest possible manner."

The IMF said in a statement Wednesday night that it had not yet received a request for financial assistance from Portugal, but added that "we stand ready to assist Portugal."

Portugal has one of the 17-nation eurozone's smallest and weakest economies and has struggled for months to finance its economy amid investor fears that it is incapable of settling its debts.

Socrates announced his resignation two weeks ago after opposition parties refused to accept additional austerity measures he proposed to stave off a bailout, but he agreed to stay on as a caretaker leader until the nation holds new elections in June.

There was confusion over whether he could ask for a bailout in his current post because of doubts whether Portugal's constitution permitted an interim leader from doing so, but Socrates said in his speech that he hoped opposition party leaders would support his decision.

"This is an especially grave moment for our country," he said. "And things will only get worse if nothing's done."

Other European nations have been urging Portugal for months to accept outside help in a bid to contain the continent's debt crisis from spreading to other European nations, amid market fears that the eurozone itself could break apart if it didn't.

The biggest risk for investors is Spain, which has the zone's fourth largest economy and could be too big to bail out. Economic conditions in Spain are especially grim _ with one out of every Spaniards out of work _ but analysts generally agree that the government has recently put in place enough austerity measures to prevent the country from becoming another bailout victim.

Portugal insisted for nearly a year that it would not seek outside assistance because terms of a bailout would lock it into austerity measures like tax raises and wage cuts for years. And that, Socrates and other said, would further lower the standard of living in a nation already hurting with high unemployment and few job prospects for a young and highly educated work force.

Greece and Ireland faced the same difficult situation, but ended up asking for bailouts when it became clear they had no choice.

Portugal' economic troubles differ from Ireland, where banks became over- leveraged because of a real estate boom that went bust, and Greece, where government officials lied about the nation's financial health.

Portugal's troubles are rooted in a decade of measly growth averaging only 0.7 percent a year while it simultaneously amassed huge debts to finance social programs and government expenses to give the Portuguese benefits similar to their richer European neighbors.

Investor were not convinced that the moves were sustainable, and their fears amplified over the last six months as buyers of Portuguese bonds increasingly demanded higher returns to buy the nation's debt

The yield on Portugal's 10-year bonds hit 8.54 percent Wednesday before Socrates made the bailout announcement, up from 5.8 percent a year ago.

The higher yields are unsustainable, especially because Portugal is expected to enter a double-dip recession this year.

The resignation of Socrates' government left the nation without a fully operating administration, amplifying market fears. Two ratings agencies subsequently downgraded Portugal's bonds to just one notch above junk level in recent days, triggering widespread alarm across Europe.

Socrates blamed opposition parties for forcing him to make the bailout request because they rejected a fresh round of austerity cuts endorsed by European Commission and European Central Bank. He had been seeking a new round of tax hikes along with pay and welfare programs cuts, and had promised he would quit if they were not approved.

Portugal managed to raise about euro1 billion ($1.43 billion) in a Treasury bill sale Wednesday before Socrates made the bailout announcement, but investors demanded record interest rates.

Portugal's short-term borrowing rates then rose above what it would likely have to pay for bailout loans as the yield on five-year bonds on the secondary market hit 10 percent. In contrast, Irish average interest rates _ currently under review for a decrease _ stand at 5.8 percent for loans with longer maturities.

Analysts believe Portugal probably has enough money in reserve to repay a euro4.5 billion ($6. billion) loan that falls due later this month, but predict it would be extremely difficult for the nation to find almost euro7 billion ($10 billion) to roll over and make interest payments in June.

On top of that, Portugal still needs to collect funds to keep the country running.

The bailout request came as Portugal's biggest banks announced they will no longer buy national debt as they deal with their own liquidity problems amid heavy assistance from the European Central Bank.

Amid tightened financing, predictions abound that Portuguese companies may face difficulties making their payrolls. And Portugal's unemployment rate last year reached a record 11.2 percent, with gloomy prospects of any relief for job seekers.

Across the border in Spain, Prime Minister Jose Luis Rodriguez Zapatero announced last weekend that he would not seek a third term next year as Spain's financial problems deepen, but said he made the decision in keeping with his decision years ago that two four-year terms were enough.

Spain's leading opposition party renewed its call for immediate special elections because of the country's troubled economy, with more than 20 percent unemployment that is the eurozone's worst jobless rate.

___

Clendenning reported from Madrid.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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