NEW YORK (CNNMoney.com) — The wars in Iraq, Afghanistan and anti terrorist efforts abroad could cost the country $2.4 trillion over the next ten years, according to a report Wednesday.
The money, over 70 percent of which would go to support operations in Iraq, includes the estimated $600 billion spent since 2001, Congressional Budget Office Director Peter Orszag said in testimony before the House Budget Committee. That estimate includes projected interest, since the government is borrowing most of the funds required.
The wars in Iraq, Afghanistan and anti terrorist efforts abroad could cost the country $2.4 trillion. cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");The $2.4 trillion would pay to keep 75,000 troops deployed overseas from 2013 to 2017. About 210,000 troops are currently deployed. It does not include the Pentagon’s normal spending, which in 2007 is estimated to be about $450 billion.
The estimated $2.4 trillion works out to about $21,500 per American household.
Without interest, the war efforts are projected to cost about $1.7 trillion. Several lawmakers noted the wide gap.
"This entire war has been paid for with a government credit card," one lawmaker said.
The CBO also prepared another estimate, this one reducing the number of troops overseas to 30,000 beginning in 2010 and not relying on borrowed funds.
Under that scenario the wars are expected to cost about $1.2 trillion.
In the runup to the Iraq war in 2003, Bush administration officials said that forcibly changing regimes in Iraq should cost somewhere around $50 billion, and would be financed mostly through selling Iraqi oil.
Iraq war’s creeping costsBut in relation to the nation’s overall economy, it’s been noted that the war is relatively cheap.
The entire Defense Department budget, including funding for Iraq and Afghanistan, is about 4.5 percent of the nation’s economy. During the Vietnam War it was about 7 percent, and during WW II it was 25 percent.
Orszag’s testimony comes as President Bush is asking Congress for more money to fight in Iraq, Afghanistan and elsewhere.
On Monday, President Bush asked for another $42 billion for war efforts on top of the $142 billion already requested for the current fiscal year, bringing the overall total for 2007-08 to nearly $200 billion. This is extra money for the war, above and beyond the Pentagon’s regular budget of about $450 billion, which accounts forabout a sixth of the $2.8 trillion in total government spending for 2007.
The request is not expected to easily pass through a Congress controlled by Democrats, who are unhappy with the way the war is going and uneasy about giving the president unrestricted funding. The Democrats are also bristling over Bush’s opposition to some domestic spending proposals.
"It’s amazing to me that the President expects to be taken seriously when he says we cannot afford $20 billion in investments in education, health, law enforcement and science, but he doesn’t blink an eye at asking to borrow $200 billion for a policy in Iraq that leaves us six months from now exactly where we were six months ago," House Appropriations Committee Chairman Dave Obey (D-WI), said in a statement Monday.

Bush has urged Congress to approve the money before the end of the year, but congressional staffers say it’s more likely legislators will only approve partial funding and take up the matter again in 2008.

DAEGU, South Korea (AP) — American billionaire investor Warren Buffett said Thursday that problems in the U.S. subprime mortgage market will likely weigh on consumers for up to two years, but that the U.S. economy will weather the storm.
The subprime problem "is having an impact," Buffett said on his first visit to South Korea. "It will have more of an impact."
Billionaire investor Warren Buffett cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");Rising default rates among U.S. mortgage holders with poor credit histories have rattled global credit, stock and currency markets since August and raised concerns about a possible recession in the U.S. economy, a major export market for Asian companies.
"In the next 6 months, one year, two years the problems in the mortgage market can cause a lot of problems with consumers and hurt buying power in the United States," he said at a press conference after arriving earlier in the day from China on his private jet.
However, the U.S. economy has often had to face various difficulties and the present was no exception, Buffett said.
"Overall the economy will make progress," he said.
Buffett came to Daegu, located about 180 miles southwest of Seoul, to inspect Iscar Korea, a subsidiary of Iscar, the Israeli industrial tool manufacturer that his company, Berkshire Hathaway Inc. (Charts, Fortune 500), purchased last year for $4 billion, its first overseas acquisition.
Buffett also expressed pessimism on the U.S. dollar.
"We still are negative on the dollar relative to most major currencies," he said.
The dollar has fallen against the euro, British pound, Japanese yen, Indian rupee and many other Asian and European currencies this year. The euro, for example, has gained 8 percent against the dollar this year.
Buffett spoke highly of South Korean stocks, including steelmaker Posco, saying he first became attracted to them years ago because he saw that they were far too undervalued.
He said he feels that currently South Korean stocks in general are valued at prices that "are no higher and probably somewhat less" than stocks in the United States.
Buffett said that Berkshire Hathaway owns the equivalent of 3.4 million shares in Posco.
In March, Buffett said in his annual letter that Berkshire in 2006 bought 3.49 million shares, or 4 percent, of South Korean steelmaker Posco. Berkshire spent $572 million on the Posco shares, which were worth $1.16 billion at the end of 2006.

That would be worth considerably more now as Posco have more than doubled this year.

NEW YORK (AP) — A gauge of future economic activity edged higher in September, suggesting the economy may trudge forward at a modest pace despite a worsening housing slump.
The Conference Board said Thursday its index of leading economic indicators rose 0.3 percent in September to 137.9, slightly below analysts’ consensus forecast for a 0.4 percent rise. The modest growth follows a sharp 0.8 percent drop in August. The index has been erratic this year - rising one month and falling the next - but overall, growth has been flat.
cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");"You have an economy sputtering, in which some parts are trying to regain momentum, while other parts like the housing market are losing steam," said Ken Goldstein, labor economist at the Conference Board. "The question is, how long will it remain that choppy?"
The index is designed to predict economic activity in the coming three months.
Seven of the 10 data points tracked by the Conference Board increased last month, the strongest of which were vendor performance, the job market and stock prices. The housing market continued to lag.
The September reading only partially reflects the Federal Reserve’s decision to lower key interest rates at mid-month, Goldstein said. The Fed cut its benchmark federal funds rate Sept. 18 by a half percentage point to 4.75 percent, a move that helped loosen credit conditions and ease turmoil in the financial markets.
Research group says economy will lose steamPeter Cardillo, chief market economist at brokerage Avalon Partners Inc., expects slower growth, as weakness in the housing market weighs on the economy but other, stronger areas provide some expansion.
"While third-quarter growth is likely to come close to 3.9 percent, fourth-quarter growth could come in under 2 percent," he said. However, he added that "none of the indicators point to recession."
Investors are now awaiting the Fed’s Oct. 30-31 meeting, when the central bank will decide its next move on interest rates. Expectations surrounding that decision have been in flux; this week’s dismal housing market data have helped shift market sentiment toward another cut.
The Commerce Department said Wednesday that homebuilding dropped to its lowest level in 14 years last month. That "probably once again reverses in favor of another rate cut as an insurance policy on the part of the Fed to keep the economy growing, even at weak levels," Cardillo said.

The Conference Board’s coincident index, which measures where the economy is at present, rose 0.2 percent in September. Its lagging index rose 0.5 percent.

NEW YORK (AP) — A gauge of future economic activity edged higher in September, suggesting the economy may trudge forward at a modest pace despite a worsening housing slump.
The Conference Board said Thursday its index of leading economic indicators rose 0.3 percent in September to 137.9, slightly below analysts’ consensus forecast for a 0.4 percent rise. The modest growth follows a sharp 0.8 percent drop in August. The index has been erratic this year - rising one month and falling the next - but overall, growth has been flat.
VideoMore videoDeloitte Touche Tohmatsu CEO James Quigley joins CNN to discuss rising oil prices and economy fears.Play video cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");"You have an economy sputtering, in which some parts are trying to regain momentum, while other parts like the housing market are losing steam," said Ken Goldstein, labor economist at the Conference Board. "The question is, how long will it remain that choppy?"
The index is designed to predict economic activity in the coming three months.
Seven of the 10 data points tracked by the Conference Board increased last month, the strongest of which were vendor performance, the job market and stock prices. The housing market continued to lag.
The September reading only partially reflects the Federal Reserve’s decision to lower key interest rates at mid-month, Goldstein said. The Fed cut its benchmark federal funds rate Sept. 18 by a half percentage point to 4.75 percent, a move that helped loosen credit conditions and ease turmoil in the financial markets.
Research group says economy will lose steamPeter Cardillo, chief market economist at brokerage Avalon Partners Inc., expects slower growth, as weakness in the housing market weighs on the economy but other, stronger areas provide some expansion.
"While third-quarter growth is likely to come close to 3.9 percent, fourth-quarter growth could come in under 2 percent," he said. However, he added that "none of the indicators point to recession."
Investors are now awaiting the Fed’s Oct. 30-31 meeting, when the central bank will decide its next move on interest rates. Expectations surrounding that decision have been in flux; this week’s dismal housing market data have helped shift market sentiment toward another cut.
The Commerce Department said Wednesday that homebuilding dropped to its lowest level in 14 years last month. That "probably once again reverses in favor of another rate cut as an insurance policy on the part of the Fed to keep the economy growing, even at weak levels," Cardillo said.

The Conference Board’s coincident index, which measures where the economy is at present, rose 0.2 percent in September. Its lagging index rose 0.5 percent.

NEW YORK (Fortune) — Careful optimism about the U.S. economy and financial system has given way to a resurgence of unease in the last couple of days, prompted by an announcement Monday of an extraordinary plan to pump liquidity into an important part of the debt markets and less-than-upbeat speeches from Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson.
Suddenly, the credit crunch is being talked about as a serious phenomenon again. But, as is always the case on Wall Street, it won’t be long before a gaggle of self-interested players make their way to center stage to tell us that recovery is just around the corner, seizing on any halfway optimistic shred of data to bolster their case.
More from FORTUNEIndia’s firms build global empires
Macintosh sweetens Apple
Newspapers down but definitely not out
FORTUNE 500Current IssueSubscribe to Fortune cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");So, in an effort to stay grounded amid the hype, it’s worth making a shortlist of things that need to start happening before anyone can talk about the credit crunch coming to an end.
First: way more transparency. The movers and shakers need to tell us what’s really happening and show that they understand the seriousness of the credit crunch.
Take the mess created by the so-called structured investment vehicles (SIVs), which Citigroup (Charts, Fortune 500), Bank of America (Charts, Fortune 500) and J.P. Morgan Chase (Charts, Fortune 500), under the sponsorship of the Treasury, are trying to shore up, according to a plan announced Monday. Citigroup has $83 billion of SIVs, which reside off its balance sheet. The Treasury-sponsored move is a clear sign the SIVs have problems, but Citigroup has not said why it can’t solve its SIV problems on its own (not strong enough?) and it hasn’t even begun to provide key data points, like losses racked up in its SIVs so far, the potential demands on Citi’s balance sheet if the SIVs do have to come onto its balance sheet and amount of SIV debt it’s actually been able to sell to replace debt that’s coming due.
Recession chatter gets louderIn short, the SIVs, because of their size - they hold about $400 billion of assets - are a massive cog in the credit machine, and the public knows nothing meaningful about them.
Second: greater realism. To be fair, this week, Bernanke and Paulson have started to acknowledge that the credit crunch is far from over.
Paulson, in a speech Tuesday, acknowledged something that half of Wall Street still won’t recognize - that the mortgage mess is spreading beyond the subprime sector.
"Yet, the problem today is not limited to subprime mortgages as the number of homeowners having trouble making payments on prime mortgages is also increasing," Paulson said. And in a speech Monday night, Bernanke softly echoed this, saying, "…despite a few encouraging signs, conditions in mortgage markets remain difficult."
But something big that happened last week shows that the depth of the credit problems have not been fully recognized. The credit rating agency Moody’s downgraded a massive number of mortgage-backed securities that hold subprime loans, and held up the possibility that there will many more downgrades to come.
When a much fewer number of bonds were downgraded in the summer (approximately 700 then versus 2,200 last week), there was a sharp negative reaction, but this time the market reacted with a shrug of the shoulders.
"This was a huge event that went almost unnoticed," says Joseph Mason, professor of finance at Drexel University. That makes no sense, says Mason, because this will have a huge negative impact on collateralized debt obligations, those weird and toxic debt securities that have already caused big hits to banks’ balance sheets, and will only cause more after the downgrades.
Third, there has to be a complete discrediting of the view that says asset prices are not that out of line and it’s only a matter of time before liquidity comes back to the market. The opposing view - that, in fact, liquidity can’t return in earnest till bond prices fall to levels that look enticing - has to become the new orthodoxy, all the way up to the Fed.
Bernanke seems to be a committed proponent of the former view. In explaining the Fed’s recent actions Monday, he said a central bank has to do things that will prevent sales of assets that "will drive the prices of those assets well below their longer-term fundamental values, raising the risk of widespread insolvency and intensifying the crisis."
But what if their fundamental values are actually much lower than the central bank thinks? Then the Fed would be delaying the inevitable, by doing things that keep assets at prices that are too high. Sure, drops in bond prices could cause even more markdowns than have taken place at the banks, but if they’re going to occur anyway, it makes no sense to delay them. We need the banking sector as a whole to return to normal more than we need certain banks to survive or remain independent, which brings us to our fourth point.
The pace of consolidation in the financial industry has to pick up markedly. This will allow the stronger banks to swallow up weaker lenders, which would lead to a far more efficient use of the balance sheets.
If, say, China Citic Bank were to acquire a minority stake in Bear Stearns (Charts, Fortune 500), it’d be a great start to this process, but there’d have to be much larger deals. But, again, prices have to fall - in this case, the stock prices of the banks themselves.
Potential deals can already be seen. Bank of America no doubt would love to increase its effective stake in troubled mortgage lender Countrywide (Charts, Fortune 500), but probably at a stock price below the current $18.09.
And one event that could surely galvanize the financial markets is if Citigroup’s stock, as a result of its SIV mess, fell to a point where an acquisition became interesting to rivals. Wounded banks are a huge drag on the economy - look at Japan in the ’90s - so it always pays to have them quickly acquired.
And, finally, the credit crunch is not only a financial industry problem. It has occurred because borrowers took on way too much debt themselves. Sadly, it will take years to mend this. One statistic shows this more clearly than any other: Household liabilities as a percentage of the market value of total assets, which includes everything from houses to cars to stocks. At 19%, it’s now at its highest level than at any time in the past 50 years.
It could take years to bring that ratio down. But one thing credit crunches are good at is forcing debt levels down so they become more manageable, preparing the ground for a recovery.

For individuals and the banks it’s the same: For the credit crunch to end, we have to let it actually happen.

(Fortune Magazine) — "No one knows what anything is worth." Lately I’ve heard that from lots of people. We’re in one of those odd periods when things feel unmoored.
Six months ago you knew, or at least you thought you knew, what your house would sell for. Now you probably don’t. The bond market is quaking with fear about the credit crisis, while the stock market is saying rock on.
More from FORTUNEIndia’s firms build global empires
Macintosh sweetens Apple
Newspapers down but definitely not out
FORTUNE 500Current IssueSubscribe to Fortune cnnad_createAd("401110","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=technology&cnn_money_section=quigo&pa rams.styles=fs","200","220");"Either U.S. economic conditions are really not that bad after all, or investors are suffering from a collective attack of wishful thinking," Martin Barnes, editor of the Bank Credit Analyst, wrote recently.
The hidden risks in bondsValuation is supposed to be a science, sort of, but there are times when it feels more like a demented form of multivariable calculus. Bond guru Bill Gross of Pimco recently wrote that "the modern financial complex has morphed into something unrecognizable to many astute market veterans and academics."
But while you may not be able to analyze the price of a security right now, you can at least analyze the insecurity.
The first issue is that the nationwide decline in home prices that wasn’t supposed to happen — even Alan Greenspan said he didn’t expect it — and there’s no historical precedent for it. Pros like Steven Romick, who heads the FPA Crescent Fund, look to the past for lessons.
After 9/11, for instance, Romick studied how Israel’s economy coped with the threat of terrorism. But he says home prices haven’t fallen nationwide (in nominal terms) since the 1930s.
Another issue is that our homes are assets with two dangerous traits: They are laden with emotion, and they are illiquid. While you could sell a share of IBM (Charts, Fortune 500) today, you probably couldn’t sell the roof over your head in a day, or maybe even a year.
The inventory of unsold and new homes is still extremely high, which suggests that a "clearing price" — a price that buyers and sellers agree upon — has yet to be found. It’s hard to feel secure when your feet can’t touch the bottom.
But the scariest thing is that today the price of every asset — houses, stocks, and bonds — seems to rest on a foundation that looks increasingly shaky. David Wyss, the chief economist at S&P, puts the losses from the subprime meltdown at around $150 billion, a manageable figure in and of itself. But the subprime crisis was like a termite coming out of the wall. It made everyone start worrying that there were deeper problems.
In the past few years, there’s been an explosion of what the Street calls "structured credit" — everything from mortgages to loans used to finance LBOs was carved up into exotic new securities and sold to buyers who didn’t understand what they were purchasing. (For a close look at one such security, see Junk mortgages under the microscope.)
Would you buy a bridge from this man?Now it turns out that Wall Street didn’t understand its own mad, tangled creations either. A Bank of England official called the tests that financial firms used to measure the risk of these new products "completely hopeless." Firms from Citigroup (Charts, Fortune 500) to Merrill Lynch (Charts, Fortune 500) have declared multibillion-dollar write-downs due to losses on these products. And they’re still guessing.
In August a Morgan Stanley (Charts, Fortune 500) equity analyst recommended that investors buy the stock of insurer Ambac, which guarantees the payment on billions of dollars of bonds backed by subprime mortgages. A Morgan Stanley fixed-income trader promptly fired off an e-mail calling the recommendation "absurd." "My analyst has no idea how to value" the securities Ambac guarantees, he wrote. "No one in the world can put a definitive view on recovery levels" for some of these bonds.
The subprime crisis was also the first visible sign of a weird inversion that took place during the past few years. Instead of the value of an asset dictating the amount of debt you could use to purchase it, the availability of the financing began to dictate the price of the asset.
In 2004 even the Federal Reserve Bank of New York argued that a chunk of the increase in house prices was justified by the easing of lending standards. "The price exists at the pleasure of the financing," is how one hedge fund manager put it to me recently. "That is true for stocks and houses and bonds and buyouts." But if the financing doesn’t exist, or only maybe exists, then how do you determine price?
In early October a Craigslist posting, in which a self-described "spectacularly beautiful 25-year-old girl" asked for advice on meeting a man who made at least $500,000, sparked a raging debate on how you measure the value of a man or a woman.

How appropriate.

NEW YORK (CNNMoney.com) — Builders continued to slam the brakes on new homes in September, with levels hitting their lowest point in more than a decade.
The government’s latest reading on the battered market Wednesday suggests the slump in home building could be much deeper than earlier estimates and could become a bigger drag on the overall economy than previously feared.
Housing starts fell to the lowest level in 14 years in September.Special Reportfull coverageLeading Dem tackles abusive lending
Subprime Bailout: Taxpayer toll
Delinquency risk rising
Forecast: Fewer refinished kitchens
VideoMore video Business 2.0 takes a look at 10 real estate markets that are near rock bottom and ready to bounce back.Play video Fortune’s Andy Serwer talks with former Fed Chairman Alan Greenspan about the credit crunch and what it means for the housing market.Play video cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");It also raised the prospect that the Federal Reserve will have to go ahead with interest rate cuts in an effort to avert the U.S. economy from falling into a recession.
The report showed the pace of housing starts plunged 10 percent in one month to an annual level of 1.19 million, compared to a 1.33 million rate in August. Economists surveyed by Briefing.com had forecast that starts would fall to an a rate of 1.29 million.
Housing starts - down nearly 31 percent from year-ago levels are now at their weakest level in 14 years.
Real Estate: More price drops, more layoffsHousing permits, which are seen as a sign of builders’ confidence in the market, slumped 7 percent to an annual rate of 1.23 million from 1.32 million in August. Economists had looked for permits to slow to a 1.3 million pace.
The news on housing permits was equally bleak: The figures represent the lowest level of permits in more than 12 years, and the latest drop left permits down about 26 percent from a year earlier.And permits for single-family homes were even weaker, falling to a 15-year low. Every region of the country saw a drop in permits for single family homes in September, compared to the already soft levels seen in August.
The weak level of building suggests that housing is in an even deeper slowdown than originally expected, as the collapse in the mortgage market, falling home prices and an equally weak market for existing homes has dried up the supply of potential buyers.
Beyond the impact on home sales and prices, the sharp drop in home building could also prove to be a major drag on the economy because it depresses employment levels and overall economic activity.
Paulson: Subprime help, not bailout, neededAccording to Bill Hampel, chief economist for the Credit Union National Association, housing problems raise to 40 percent the chances that the economy could topple into recession.
"What I had always thought is that we would have a long, flat bottom for the housing market, but it is now apparent that the contraction is sharper than that," he said. "It raises the chance it [the slowdown in housing] will have an impact outside of the housing market."
Hampel said that he is expecting the Federal Reserve to respond to the housing slump by cutting rates at its Oct. 31 meeting. Economists’ expectations of a rate cut had started to wane after a stronger than expected September employment report earlier this month. But Hampel said the crisis in housing now raises the need for at least one additional cut in rates, and sooner than later.
The Fed cited the slowdown in housing when it announced its first rate cut in four years in September.
In a speech Tuesday, Treasury Secretary Henry Paulson called the housing decline the most significant risk to the U.S. economy.
The report follows a survey released Tuesday that showed that home builders’ confidence in the battered market for new homes fell to an all-time low in October, and a measure of their outlook for six months down the road remained at a record low level.
A forecast released Wednesday from the Mortgage Bankers Association shows that a glut of homes on the market and the greater difficulty many buyers will have getting loans will cause declines in home sales and prices to extend into next year.
Doug Duncan, the MBA’s chief economist, said he is predicting a 22 percent drop in new home sales this year, followed by an additional 10 percent drop in 2008. National median home prices for new and existing homes are forecast to fall between 2 percent and 4 percent both this year and next.
Subprime meltdown hammers new home salesBut the slowdown in new home construction could be an important element to a longer-term recovery of the housing market. With weak demand for new home purchases, the only way to trim the glut of homes on the market is to choke off supply.
The National Association of Home Builders issued a statement saying the drop in housing starts is a necessary step, given the oversupply of homes on the market.
"We do expect some additional downward movement in housing production going into next year, at which point starts should begin to stabilize as sales turn upward in the second quarter," said David Seiders, chief economist for the trade group.
A separate Census Bureau report showed there were 180,000 completed new homes for sale at the end of August, just barely below the record 182,000 level seen in May. Further, the National Association of Realtors reports a record 4.6 million existing homes on the market at the end of August.
The downturn in housing and demand for new homes has hammered the results of the nation’s top builders. Leading home builder D.R. Horton (Charts, Fortune 500) reported Tuesday that its fiscal fourth-quarter orders fell 39 percent, while the value of those orders plunged 48 percent.

Last month, Lennar (Charts, Fortune 500), the nation’s No. 1 builder in terms of revenue, posted a much bigger than expected loss, and KB Home (Charts, Fortune 500) also reported a steep loss as it warned that problems would continue into 2008. Last week, credit rating agency Moody’s downgraded the debt of Lennar, Centex (Charts, Fortune 500) and Pulte Homes (Charts, Fortune 500) to junk bond status.

NEW YORK (Fortune) — A large Bank of America money market fund has over $600 million of exposure to Cheyne Finance, the structured investment vehicle (SIV) that recently defaulted on its obligations.
As of Oct. 12, Bank of America’s $67-billion Columbia Cash Reserves fund had approximately $640 million - or just under 1% of its assets - invested in Cheyne, according to Jon Goldstein, a Bank of America spokesman. "Up until now, Cheyne has been paying its maturities as they come due," Goldstein said. He added that Deloitte, the firm acting as receiver for Cheyne, said this week that it was pleased with the progress of efforts to refinance and shore up the troubled SIV.
More from FORTUNEIndia’s firms build global empires
Macintosh sweetens Apple
Newspapers down but definitely not out
FORTUNE 500Current IssueSubscribe to FortuneVideoMore videoCNN’s Maggie Lake sits down with "Bonfire of the Vanities" author Tom Wolfe to discuss the stock market crash 20 years ago.Play video cnnad_createAd("401110","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=technology&cnn_money_section=quigo&pa rams.styles=fs","200","220");It’s but the latest blow to SIVs - large, lightly-regulated debt funds that have run into a liquidity squeeze as investors have balked at buying the securities that SIVs issue to fund themselves. Experts estimate that some $400 billion is tied up in SIVs. Banks like Citigroup (Charts, Fortune 500) have set up SIVs themselves and have been allowed to keep them off their balance sheets - an omission which causes problems for investors and regulators because they can’t easily gauge the banks’ true exposure to SIVs.
Banks and other financial firms are also exposed to the SIVs because they have bought securities issued by the SIVs. Along with banks like Bank of America (Charts, Fortune 500) and JP Morgan Chase, the U.S. Treasury is trying to organize support for the SIVs, because they fear that, without such help, the SIVs may have to sell off their assets to raise funds, which could drive markets lower. Friday’s steep dive in stock prices reflects, in part, fears that credit markets will deteriorate still further.
Beware banks’ bragging on earningsThus far, the SIV crisis has been almost exclusively contained among big institutional investors; the impact of SIVs on money market funds could be a development that brings the SIV problems into the lives of retail investors. As of Oct. 12, Bank of America’s Columbia Cash Reserve fund appeared to hold securities issued by at least five other SIVs, according to a list of holdings published on the fund’s website. Asscher Finance, Axon Financial Funding, Cullinan Finance, Five Finance, Sedna Finance and Whistlejacket Capital all appear on the fund’s list of holdings, and all appear on lists of SIVs published by rating agencies.
Because the public sees money market funds as very conservative investments, banks will almost always step in to support them and ensure that investors in them don’t take a loss on their original investment in the fund. Bank of America’s Goldstein says that investors in the Columbia Cash Reserves fund have not suffered such a loss. He adds that the vast majority of the SIV securities held in Bank of America money market funds have high credit ratings.
Money market funds like Columbia Cash Reserves typically take investors’ money and invest in short-term notes and bonds that carry very high credit ratings. However, in a bid to increase returns, some money market funds may have invested in debt securities that were not as safe as they looked, like the SIV securities.
While other lenders said no, this one said yesOther financial institutions have had to deal with the negative impact of SIVs on their money market funds. On Friday, Wachovia (Charts, Fortune 500) said it booked a $40 million loss related to the purchase of "certain asset-backed commercial paper" from money market funds run by its Evergreen asset management arm. (One of the things SIVs issue is asset-backed commercial paper, which is basically short-term debt that is collateralized with assets, although those assets may just be other types of debt.) It appears that the banking arm of Wachovia took that writeoff to make sure that its money market funds didn’t have to take a loss. "Evergreen has reduced and eliminated exposure to asset-backed commercial paper," says Laura Fay of Evergreen.
JP Morgan Chase also manages large money market funds. Just under 5% of the assets held by its $103 billion Prime Money Market fund are securities issued by SIVs. JP Morgan Chase (Charts, Fortune 500) declined to comment.
As of Sept. 30, Fidelity’s $305 billion of money market funds had 2.3% of their holdings - or about $7 billion - in SIV debt securities, according to company spokesman Alexi Maravel. The SIVs in question are Asscher Finance, Beta Finance, Centauri Corp., Dorada Finance, Cullinan Finance, K2 Finance, Links Finance and Nightingale Finance. Fidelity’s Maravel says: "We can state unequivocally that Fidelity’s money market funds continue to provide safety and security for our clients’ cash investments. We continue to invest in money market securities of the highest quality, and our clients continue to have full access to their holdings to invest as they wish."

Maravel adds that ensuring that investors never take a loss on their original investment in a money market fund "always has been our top objective when it comes to managing money market funds." And certainly that is what most money market customers believe is the case - but then few are likely to have known that some of their funds ended up in SIVs.

WASHINGTON (AP) — The Federal Reserve will do whatever is necessary to prevent damage to the economy from the credit crunch that has gripped Wall Street, a Fed official said Monday, warning it will take time for financial markets to fully recover from the strains.
Fed Governor Randall Kroszner’s remarks came as fears about the credit crunch and a painful housing slump have gripped investors in recent months, causing stocks to nosedive. Wall Street took another sharp plunge - 366 points - on Friday. The Dow Jones industrials was up in trading on Monday afternoon, after being down more than 100 points early in the session.
VideoMore video Fortune’s Andy Serwer talks with former Fed Chairman Alan Greenspan about his relationship with the magazine and how he got his start as a writer.Play video cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");"The Federal Reserve will continue to monitor developments in financial markets and act as needed to support the effective functioning of these markets and to foster sustainable economic growth and price stability," Kroszner said in a speech here to the Institute of International Bankers.
It is the same pledge that Federal Reserve Chairman Ben Bernanke and other central bank colleagues have been making in the past months. That is, to keep the economy growing and inflation under control.
Subprime Bailout: Taxpayer tollSome economists believe the Fed will lower an important interest rate at the end of a two-day meeting next Wednesday, to help bolster economic activity. But others, citing the economy’s resiliency and worries about an inflation flareup, think the Fed will leave rates alone. Oil prices, which had surged to record highs in recent weeks, have eased a bit but are still hovering above $86 a barrel.
It’s a delicate situation facing the Fed.
To prevent the ill effects of the credit crunch and housing troubles from sinking the economy, the Fed in September sliced a key interest rate by a bold one-half percentage point to 4.75 percent. It was the first rate cut in more than four years.
Before that aggressive move, the Fed had taken other actions to deal with the credit crises, which had taken a turn for the worse in August. The Fed pumped billions of dollars into the financial system to help banks and other institutions get over the credit hump. It also reduced its lending rate to banks.
"I should emphasize that the purpose of these actions was not to insulate financial institutions from the consequences of their business decisions, but rather to facilitate the orderly function of markets more broadly in the face of risks to the overall economy," Kroszner said.
"I believe that this provision of liquidity has contributed, at least in part, to the recent improvements, we have seen in the functioning of financial markets," he added.

Still, the financial situation is fragile, and it will take time for the markets to fully recover. "Strains … persist even now," Kroszner said.

WASHINGTON (AP) — The average retail price of electricity increased by more than 9 percent last year, the largest jump in 25 years, the government said Monday.
Electricity prices rose in 2006 by 10 percent or more in 14 states and the District of Columbia, according to an annual report released by the Energy Department’s Energy Information Administration. The average price increase was the largest since 1981.
VideoMore videoThe price of oil shot into record territory, past 90 dollars a barrel. ITN’s Bridgid Nzekwu reports.Play video cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");Prices rose nationwide but most of the larger jumps were in the East, mainly due to the lifting of retail electricity price caps in states transitioning to competitive retail markets. That means consumers paid more from previous cost increases that had not been completely reflected while the caps were in place, according to the EIA.
Households that use electricity are expected to pay $32, or 4 percent, more this winter, with the price of power climbing 2 percent to 10.3 cents per kilowatt-hour, the EIA predicted earlier this month. Thirty percent of U.S. households are heated by electricity.
While consumers paid more in 2006, emissions of carbon dioxide, sulfur dioxide, and nitrogen oxides from electricity generation declined, according to the government report.
Sulfur dioxide emissions fell 7.9 percent, the largest drop since 2000, while carbon dioxide emissions dipped 2.2 percent, and nitrogen oxides emissions declined 4.1 percent. Carbon dioxide in the atmosphere contributes to global warming, while nitrous oxide produces smog and sulfur dioxide causes acid rain.

Decreases in generation from fossil fuels and increases from emissions-free sources like nuclear, hydroelectricity and wind helped drive the reductions, according to EIA.