Unless demand for cars can be revived, it may not matter how much fat GM and Chrysler cut.

In Pictures: What's Your Economic Outlook?

You know the economic outlook for much of the country is rough, with unemployment rising, home prices falling, credit short and manufacturing, retail and services all in decline. Bad news indeed. But--surprise--there are bright spots across the country.

According to the Federal Reserve's Beige Book report on regional economies, released Wednesday, areas around Boston, St. Louis, Chicago and San Francisco have seen increased demand in aerospace manufacturing. St. Louis, Dallas and San Francisco saw gains in food processing. Most of the Midwest has seen agriculture hold up well, and in Nebraska and Kansas, farmland prices continue to rise.

The Great Plains and East Coast (particularly around the mid-Atlantic) have seen relatively stronger demand for lower- and middle-priced "starter homes." The troubles of New York banks have actually led to increased volumes for banks in Pennsylvania and Ohio, as people turn from the national chains to regional firms.

Eight times a year, the Fed collects surveys from the 12 Federal Reserve districts, representing every region of the country. On Tuesday, the Bureau of Labor Statistics released its first look at unemployment in the country's metro areas for the month of October. Together, these two reports were the first deep look into how parts of the country are doing in the wake of this summer's banking implosion.

Though the regions are named after the city in which the Federal Reserve bank is located, they represent broader regions. Because the system was established nearly a century ago, the regions are not equally sized. The Boston Fed's domain is only the Northeast, whereas the San Francisco Federal Reserve covers the entire West Coast. But activity reported by the Fed's different districts represents the activity of entire regions, not just the central cities. (See a map of the Federal Reserve districts.)

The mood of the Fed's report is, on the whole, grim. In the dry parlance of the Fed report, New York's economy "deteriorated substantially"--worse than San Francisco's "weakened decidedly." Both regions would have been happy with the Fed's appraisal of Philadelphia's economy which "remained generally weak" or Boston's, which merely "slowed further."

Wearing yellow badges and traveling in groups of 10 or more, agency review teams for President-elect Barack Obama have swarmed into dozens of government offices, from the Pentagon to the National Council on Disability.

With pointed questions and clear ground rules, they are dissecting agency initiatives, poring over budgets and unearthing documents that may prove crucial as a new Democratic president assumes control. Their job is to minimize the natural tension between incoming and outgoing administrations, but their work also is creating anxiety among some Bush administration officials as the teams rigorously examine programs and policies.

Lisa Brown, who served as counsel to Vice President Al Gore and is helping manage the reviews, said typical questions include: "Which is the division that has really run amok? Or that has run out of money? If someone is confirmed, what's going to be on their desk from Day One? What are the main things that need to happen, vis-a-vis Obama's priorities?"

Every presidential changeover includes some type of review of the federal landscape, but some have succeeded more than others, experts say. Obama's teams -- 135 people divided into 10 groups, along with a list of other advisers -- started earlier than most, gearing up months before Election Day with preliminary planning, and will work until mid-December preparing reports to guide the White House, Cabinet members and other senior officials.

The team members include Democratic Party loyalists jockeying for senior administration jobs and subject experts in areas ranging from military systems to Medicare policy.

The Obama teams say they have benefited from a commitment by the Bush White House to cooperate as fully as possible to ease the shift.

"President Bush initiated preparations for the transition earlier, and with more extensive planning, than has ever been done before," said White House spokesman Tony Fratto. "We've also benefited from new legal authorities that allowed for better preparation of the transition teams. As we're at war, defending the nation against terrorist threats, and addressing a global financial crisis, it's more critical than ever that we have a successful transition."

John D. Podesta, a former Clinton White House chief of staff and co-chairman of the Obama transition, said the Obama teams have been dispatched with "clear roles and missions." In assembling the study groups, Podesta drew heavily from the Clinton administration, academia and think tanks such as his own, the Center for American Progress. Many team members were informal advisers to Obama throughout the campaign -- such as Sarah Sewall, a Harvard University human rights specialist who is a leader of the national security team.

Many chosen for the teams come with high-level, firsthand knowledge of certain agencies.

"They were part of that culture; they understand the political issues as well as the bureaucratic issues," said Melody C. Barnes, Obama's incoming Domestic Policy Council director, who is helping with the agency reviews.

Some teams parachuted in at the top. At the State Department, Obama team leaders Tom Donilon and Wendy R. Sherman met with Secretary of State Condoleezza Rice. At the Pentagon, transition team members John White and Michèle A. Flournoy dropped by the offices of four senior officials and arranged for further interviews over the coming days. Defense Secretary Robert M. Gates named a transition leader, Robert Rangel, to work with the group, even though Gates is slated to continue in his job when Obama takes office.

A typical approach has been playing out at the Environmental Protection Agency, where the Obama team is led by Lisa Jackson, commissioner of the New Jersey Department of Environmental Protection, and Robert Sussman, a former Clinton official and now a lawyer and fellow at the Center for American Progress. Both are considered front-runners for senior administration jobs (Jackson as EPA administrator, Sussman as a top EPA deputy).

Overview of U.S. Federal Laws

Although some hackers might have the benefit of bouncing around the globe from system to system, your work will likely occur within the confines of the host nation. The United States and some other countries have instigated strict laws to deal with hackers and hacking. During the past five years, the U.S. federal government has taken an active role in dealing with computer, Internet, privacy, corporate threats, vulnerabilities, and exploits. These are laws you should be aware of and not become entangled in. Hacking is covered under law Title 18: Crimes and Criminal Procedure: Part 1: Crimes: Chapter 47: Fraud and False Statements: Section 1029 and 1030. Each are described here:

• Section 1029— Fraud and related activity with access devices. This law gives the U.S. federal government the power to prosecute hackers that knowingly and with intent to defraud, produce, use, or traffic in one or more counterfeit access devices. Access devices can be an application or hardware that is created specifically to generate any type of access credentials, including passwords, credit card numbers, long distance telephone service access codes, PINs, and so on for the purpose of unauthorized access.

  The Evolution of Hacking Laws In 1985, hacking was still in its infancy in England. Because of the lack of hacking laws, some British hackers felt there was no way they could be prosecuted. Triludan the Warrior was one of these individuals. Besides breaking into the British Telecom system, he also broke an admin password for Prestel. Prestel was a dialup service that provided online services, shopping, email, sports, and weather. One user of Prestel was His Royal Highness, Prince Phillip. Triludan broke into the Prince's mailbox along with various other activities, such as leaving the Prestel system admin messages and taunts. Triludan the Warrior was caught on April 10, 1985, and was charged with five counts of forgery, as no hacking laws existed. After several years and a 3.5 million dollar legal battle, Triludan was eventually acquitted. Others were not so lucky because in 1990, Parliament passed The Computer Misuse Act, which made hacking attempts punishable by up to five years in jail. Today, the UK, along with most of the Western world, has extensive laws against hacking.

  
  

• Section 1030— Fraud and related activity in connection with computers. The law covers just about any computer or device connected to a network or Internet. It mandates penalties for anyone who accesses a computer in an unauthorized manner or exceeds one's access rights. This a powerful law because companies can use it to prosecute employees when they use the rights the companies have given them to carry out fraudulent activities.

The federal punishment described in Sections 1029 and 1030 for hacking into computers ranges from a fine or imprisonment for no more than one year. It might also include a fine and imprisonment for no more than twenty years. This wide range of punishment depends on the seriousness of the criminal activity and what damage the hacker has done. Other federal laws that address hacking include

• Electronic Communication Privacy Act— Mandates provisions for access, use, disclosure, interception, and privacy protections of electronic communications. The law encompasses USC Sections 2510 and 2701. According to the U.S. Code, electronic communications "means any transfer of signs, signals, writing, images, sounds, data, or intelligence of any nature transmitted in whole or in part by a wire, radio, electromagnetic, photo electronic, or photo optical system that affects interstate or foreign commerce." This law makes it illegal for individuals to capture communication in transit or in storage. Although these laws were originally developed to secure voice communications, it now covers email and electronic communication.

• Computer Fraud and Abuse Act of 1984— The Computer Fraud and Abuse Act (CFAA) of 1984 protects certain types of information that the government maintains as sensitive. The Act defines the term "classified computer," and imposes punishment for unauthorized or misused access into one of these protected computers or systems. The Act also mandates fines and jail time for those who commit specific computer-related actions, such as trafficking in passwords or extortion by threatening a computer. In 1992, Congress amended the CFAA to include malicious code, which was not included in the original Act.

• The Cyber Security Enhancement Act of 2002— This Act mandates that hackers who carry out certain computer crimes might now get life sentences in jail if the crime could result in another's bodily harm or possible death. This means that if hackers disrupt a 911 system, they could spend the rest of their days in jail.

• The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001— Originally passed because of the World Trade Center attack on September 11, 2001. Strengthens computer crime laws and has been the subject of some controversy. This Act gives the U.S. government extreme latitude in pursuing criminals. The Act permits the U.S. government to monitor hackers without a warrant and perform sneak and peek searches.

• The Federal Information Security Management Act (FISMA)— Signed into law in 2002 as part of the E-Government Act of 2002, replacing the Government Information Security Reform Act (GISRA). FISMA was enacted to address the information security requirements for non-national security government agencies. FISMA provides a statutory framework for securing government owned and operated IT infrastructures and assets.

• Federal Sentencing Guidelines of 1991— Provide guidelines to judges so that sentences would be handed down in a more uniform manner.

• Economic Espionage Act of 1996— Defines strict penalties for those accused of espionage.

• U.S. Child Pornography Prevention Act of 1996— Enacted to combat and reduce the use of computer technology to produce and distribute pornography.

• U.S. Health Insurance Portability and Accountability Act (HIPPA)— Established privacy and security regulations for the health care industry.

Citigroup's Uneasy Victory

The federal bailout calmed the market and seems to fence off Citi's toxic assets. But some investors wonder what it says about the state of other banks

It's been a difficult first year for Citigroup CEO Vikram Pandit. Jin Lee/Bloomberg News /Landov

Federal regulators got a fresh inside look at Citigroup's (C) books over the weekend—and it wasn't pretty.

The result: a new $306 billion federal bailout for the bank. On the one hand, it provides more clarity as to the lengths the government will now go to shore up the U.S. financial system. On the other hand, investors continue to be wary about whether Citi was worth saving from oblivion. Worse, some of them worry that if a bank with one of the highest capital ratios nearly went under, who's next?

"You had a tremendous amount of people looking inside at Citi in the last few days to figure out how bad it was, and they came away thinking that the capital markets can't handle this," says David Ellison, manager of the $185 million FBR Small Cap Financial Fund (FBRSX). "So, Citigroup wasn't a going concern. What does it tell you about the industry and everybody else all around the world that has the same assets?"

On Monday, at least, the market chose to view the bright side of the Citi deal. Citi's shares jumped 2.18, or 58%, to close at 5.95 on Nov. 24. And the prospect of stability for financial stocks lifted the broader market, as the Dow Jones industrial average gained 397 points, or 4.9%, to 8,443.39. The Standard & Poor's 500-stock index gained 52 points, or 6.5%, to 851.78.

Bailout Terms

Citigroup agreed to the unprecedented series of steps with the U.S. Treasury, the Federal Reserve Board, and the Federal Deposit Insurance Corp. to strengthen the bank's capital ratios, reduce risk, and increase its liquidity. Under the program, announced on Nov. 24, the Treasury will invest an additional $20 billion in Citi preferred stock under the Troubled Asset Relief Program (TARP), on top of $25 billion the bank received about a month ago.

Also, Citi will issue an incremental $7 billion in preferred stock to both the Treasury and the FDIC as payment for a government guarantee on $306 billion of securities, loans, and commitments backed by residential and commercial real estate and other assets. The bailout agreement also means that Citi must submit any executive compensation plans to the government for approval.

Under the guarantee, Citi will assume any losses on the $306 billion portfolio up to $29 billion on a pretax basis—meaning the government will assume 90% of any losses.

According to people familiar with the negotiations, the government struck a plan to "ring-fence" around about $300 billion in questionable assets, which will remain on Citigroup's books. That was the only group of assets for which the feds and Citi could agree on a potential value, sources say. That amounts to just 15% of Citi's total assets, which are a shade over $2 trillion.

The plan is not only good for the system, say those sources, but it provides cheap insurance for the government compared with the costs of a financial system in meltdown mode.

Sources also say that the calculations on the value of the portfolio were made on the "very unlikely event" that the U.S. economy has a downturn as severe as the Great Depression. The values of the assets in that $300 billion pool were based on projected cash flows for the life of the assets and not on their current and fluctuating distressed prices.

Federal regulators on Friday shut down two big thrifts based in Southern California, saying they fell victim to the acute distress in the housing market in that state.

The failures of Downey Savings and Loan Association, based in Newport Beach, and PFF Bank & Trust of Pomona brought the number of U.S. bank failures this year to 22.

The Federal Deposit Insurance Corp. was appointed receiver of the two thrifts. U.S. Bank, based in Minneapolis, acquired all the deposits of both.

Downey, the 23rd-largest U.S. savings and loan, had assets of $12.8 billion and deposits of $9.7 billion as of Sept. 30. PFF, the 38th-largest, had assets of $3.7 billion and $2.4 billion in deposits.

Also Friday, Georgia regulators shut down The Community Bank, a small bank in Loganville, Ga. The FDIC was made receiver of the bank, which had $681 million in assets and $611.4 million in deposits as of Oct. 17. The FDIC said all the bank's deposits and about $84.4 million of its assets will be acquired by Bank of Essex, of Tappahannock, Va. Its four branches will reopen Monday as offices of Bank of Essex.

The Office of Thrift Supervision, the federal regulator for the two California thrifts, said they both suffered mounting losses since last year. Downey's business focused on nontraditional, high-risk home mortgages such as payment-option and adjustable-rate loans.

The Treasury Department agency recently boosted the minimum capital requirements for the parent, Downey Financial Corp., as the company struggled with the slumping mortgage market. Downey was hit hard by rising mortgage defaults, especially in its option adjustable-rate mortgage holdings. Option ARMs allow customers to choose a different payment option each month -- including a payment that is smaller than the interest due on the loan.

Option ARMs have been among the worst-performing loans during the downturn in the real estate market.

PFF, established in 1892, had a large concentration of housing construction loans hit hard by the deteriorating real estate market on the West Coast, the thrift agency said.

"The closing of these two thrifts once again demonstrates the tremendous impact of the housing market distress on the state of California," said John Reich, director of the Office of Thrift Supervision, in a statement. This year, four of the five failures of institutions regulated by the agency -- and all the ones of significant size -- had major concentrations in housing finance business in California, he said.

In July, another big savings and loan, IndyMac Bank based in Pasadena, Calif., failed and was seized by regulators with about $32 billion in assets.

The FDIC estimated that the resolution of Downey will cost the federal deposit insurance fund about $1.4 billion, while that of PFF will cost an estimated $700 million.

Regular deposit accounts are now insured up to $250,000 as part of the financial rescue law enacted in early October.

The 22 bank failures so far this year compare with three for all of 2007 and are far more than in the previous five years combined. It's expected that many more banks won't survive the next year of economic tumult. The pressures of tumbling home prices, rising mortgage foreclosures and tighter credit have been battering many banks, large and small, nationwide.

This year's failures also include Seattle-based thrift Washington Mutual Inc. in late September, the biggest bank collapse in U.S. history. It had $307 billion in assets.

The FDIC estimates that through 2013 there will be about $40 billion in losses to the deposit insurance fund, including an $8.9 billion loss from the failure of IndyMac Bank. The FDIC is raising insurance premiums paid by banks and thrifts to replenish its fund, which now stands at around $45.2 billion, below the minimum target level set by Congress and the lowest level since 2003.

On Friday, the FDIC formally approved a program to guarantee as much as $1.4 trillion in U.S. banks' debt for more than three years as part of the government's financial rescue plan. Under the program, meant to thaw the freeze in bank-to-bank lending, the FDIC will provide temporary insurance for loans between banks -- except for those for 30 days or less -- guaranteeing the new debt in the event of payment default by the borrowing bank.

The FDIC also will guarantee deposits in non-interest-bearing "transaction" accounts by removing the current $250,000 insurance limit on them through the end of next year. That could add as much as $500 billion to FDIC-backed deposits.

Well over half of the roughly 8,500 federally insured banks and savings and loans are expected to tap the FDIC's temporary guarantees.

Of the 8,500 federally insured banks and thrifts, the FDIC had 117 on its internal list of troubled institutions as of June 30, a five-year high. The agency doesn't disclose the banks' names.

The government said it was giving banks more money so they could make more loans. Dollars paid to shareholders don't serve that purpose, but Treasury officials say that suspending quarterly dividend payments would have deterred banks from participating in the voluntary program.

Critics, including economists and members of Congress, question why banks should get government money if they already have enough money to pay dividends -- or conversely, why banks that need government money are still spending so much on dividends.

"The whole purpose of the program is to increase lending and inject capital into Main Street. If the money is used for dividends, it defeats the purpose of the program," said Sen. Charles E. Schumer (D-N.Y.), who has called for the government to require a suspension of dividend payments.

The Treasury plans to invest up to $250 billion in a wide swath of U.S. banks in return for ownership stakes, which the government will relinquish when it is repaid.

Among other restrictions, participating institutions cannot increase dividend payments without government permission. They also are barred from repurchasing stock, which increases the value of outstanding shares.

The 33 banks signed up so far plan to pay shareholders about $7 billion this quarter. Companies generally try to pay consistent dividends and, at the present pace, those dividends will consume 52 percent of the Treasury's investment over the initial three-year term.

"The terms of our capital purchase program were set to encourage participation by a broad array of financial institutions so they strengthen their financial positions," Treasury spokeswoman Michele Davis said.

The Treasury's approach contrasts with decisions by foreign governments, including Britain and Germany, to require banks that accept public investments to suspend dividend payments until the government is repaid. The U.S. government similarly required Chrysler to suspend its dividend payments as a condition of the government's 1979 bailout.

The legislation passed by Congress authorizing the Treasury's current bailout program is silent on the issue.

The first nine participants were major banks, some running short on capital, that were told by Treasury officials earlier this month to sign on to the program for the good of the country. Their major shareholders are primarily institutional investors, such as pension funds and mutual funds, although a few wealthy individuals hold large stakes, such as Warren Buffett in Wells Fargo and Prince Alwaleed bin Talal in Citigroup.

Several banks are on pace to pay more in dividends than they get from the government. The Bank of New York Mellon got $3 billion from the government on Tuesday. It will pay out $275 million to shareholders this quarter, and a projected $3.3 billion over the next three years. A spokesman declined to comment.

Protesters in Philadelphia call for more action on the subprime crisis Adam Nadel/Polaris

The financial system, perhaps, has been saved. Now, what about homeowners?

So far, attempts to slow the foreclosure epidemic at the center of the crisis have had little impact. Despite "voluntary" industrywide efforts to rework troubled mortgages—efforts that Treasury Secretary Henry Paulson jawboned banks and mortgage servicers into undertaking last fall—the numbers continue to soar. In 2008 some 1.69 million homeowners will lose their houses—double the rate of two years ago, says Rod Dubitsky, managing director for asset-backed securities at Credit Suisse (CS). He thinks 3.6 million more foreclosures could pile up through 2012.

Both Presidential candidates now want the federal government to take a more active role in buying up troubled mortgages and helping homeowners refinance with more affordable loans. Congress has also insisted the Treasury do more. But many of the proposals, which are based on the Depression-era Home Owners' Loan Corp., are likely to run into the same legal woes that have stymied mortgage workouts so far. The government may have to find a more extreme legal solution to get mass workouts going.

The reason: No one has figured out how to untie the Gordian knot created by the mass securitization of mortgage loans. Hundreds of investors may own an interest in the trust that holds any given mortgage. If a loan is reworked, some of those investors would lose more than others. In many cases, mortgage servicers are prohibited from modifying a pool of loans without the consent of two-thirds of the investors; often, the servicers also earn more in foreclosure than in reworking a loan. "The servicer or the lender needs more flexibility to reach a rational economic decision," says John L. Douglas, chair of the banking and financial institutions group at law firm Paul, Hastings, Janofsky & Walker.

What might that mean? Douglas thinks servicers need protection from investor lawsuits. But others say the government may have to nullify or supersede some of their obligations or investors' rights. To give securities holders more incentive to loosen the trust rules that govern them, Georgetown University Law Center associate professor Adam Levitin argues that Congress could reduce the favorable tax status for trusts that don't go along. Or, he says, what's known as the Gold Clause could be invoked. Under this New Deal-era legal precedent, the government, citing the need to preserve gold because of the economic emergency, abrogated private contracts that required payment in bullion. Washington could use the Gold Clause to give trusts leeway to modify mortgages.

Those tactics could spark enormous litigation, however. Uncle Sam might also have to reimburse investors for lost value. That's why many argue it would be better for Congress to change the bankruptcy laws. Currently, homeowners who go belly-up cannot renegotiate their mortgages in court. Democrats have tried to alter the law so bankruptcy judges can trim interest or principal. "It gets around the biggest impediment to workouts without costing taxpayers a penny," says Jaret Seiberg, an analyst for the Stanford Group brokerage.

Republicans have blocked the effort, arguing that if courts were granted these new powers, lenders would see their losses soar and pass the cost on through pricier mortgages. But should foreclosures continue to skyrocket—and should Barack Obama, who backs the bankruptcy measure, be elected President—mortgage holders could find themselves on the losing end of the battle.