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George W. Bush has been an exceptional leader. Setting aside the foreign policy legacy, no president in the last sixty years has left a comparable economic record. He'll be the first leader in the last 60 years to leave the stock market lower than when he took over on January 19, 2001 -- the S&P is down 28% since then. Bush's closest competitor is Richard Nixon, whose stock market still managed to eke out a 0.6% annual gain.

And the fiscal situation is equally remarkable. The budget deficit will hit a new record, possibly as high as $1 trillion in 2009. The national debt will be $11.3 trillion, up 126%. The dollar would be about 48% weaker based on today's exchange rate -- it was 92 cents to the Euro when he took over. And based on today's price, oil would be triple the $24 it was when he took office (one piece of good news is that this is half of its July peak of $147 a barrel). No other president can match his record.

But these statistics don't tell the story of what kind of holiday Americans will experience after we choose Bush's successor. Thanks to the financial crisis, people will spend less on family gifts and they'll struggle to heat their homes while still feeding their families and taking their medicines. How so? Nielsen reports that 35% of U.S. consumers expect to spend less this holiday season than they did last year, 6% expect to spend more, while 50% of consumers expect to spend the same amount as last year.

The financial crisis is not over. If things were back to normal, banks would be lending to each other and to businesses and individuals. But measures of bank lending risk suggest fear is 12 times as high as it would be in normal times. The reason? Banks know more than you do about what's wrong. And they're not talking about it because they don't want you to withdraw your deposits and sell your stock. What they know is that on October 21st, some of the biggest players on Wall Street could be required to come up with $400 billion that some may not be able to pay.

Last month, the White House decided that we could afford to let Lehman Brothers file for bankruptcy. That proved to be an enormous mistake. It triggered a run on money market funds because one of the oldest such funds, Reserve Primary, broke the buck since it held Lehman Brothers paper. The U.S. responded with a $50 billion guarantee of money market funds. But the biggest consequence of that mistake is in the $54.6 trillion market for Credit Default Swaps (CDSs).

A CDS is like selling insurance on your car to hundreds of people who don't own it -- yet if your car goes up in flames each of those people collects the full value of your car. More specifically, CDSs are insurance against a bond or loan default. Why are CDSs so dangerous? Three reasons: a CDS seller does not need to put any capital aside to cover losses if the security defaults, the buyer doesn't need to own the asset it wants to protect, and there is no central place where information about all these CDS deals is collected and updated.

Wells Fargo (NYSE: WFC) is looking like a winner. Although its net income fell 24% to $1.64 billion; its 49 cents a share beat what analysts expected by 6 cents. And the better news is that Wells' competitive position is improving in this down market. July's failure of IndyMac Bancorp and September's Washington Mutual collapse let Wells Fargo gain deposits and borrowers.

Its revenues grew, but so did its credit losses. Wells Fargo's revenues rose 5% to $10.38 billion and it increased its allowance for credit reserves by an additional $500 million to $8 billion. Since the government decided to invest $250 billion in bank capital, the world will be split between winners and losers. Wells, which got $25 billion of that, will benefit as depositors and borrowers flee the firms that did not get enough of our money.

Its third quarter performance suggests that it will be among the winner's circle that will gain market share.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Wells Fargo stock.

It's kind of amazing that any bank is earning a profit these days. But JPMorgan Chase (NYSE: JPM) pulled it off -- making a profit of $527 million -- 84% less than last year at this time. Bad loans are the culprit -- leading to $5.8 billion in write-downs, losses and credit provisions. And JPMorgan's outlook for the next few quarters is not upbeat.

What I find most interesting about its numbers is that one of its lines of business saw a boost in revenue and profit. In particular, its investment-banking division made $882 million in the third quarter -- 198% more than last year -- and its revenue rose $1.1 billion. Unfortunately, its retail and credit card units suffered. Retail bank earnings fell 61% to $247 million and its credit-card division's $292 million in profit was 63% below last year's.

Although its CEO is downplaying expectations, I think that JPMorgan will benefit from the new two-tiered banking system created by the $250 billion capital infusion plan. Banks that don't get enough government capital will lose deposit and loan business to the strongest players. JPMorgan -- which got $25 billion in taxpayer money -- will be one of the beneficiaries.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in JPMorgan securities.

Based on the decline in two key measures of business risk, it appears that the actions of global financial leaders is beginning to thaw out the frozen credit markets. This improvement means that the dollar will drop as investors take their money out of U.S. Treasury bills to buy stocks. It also means that the price of oil will rise -- since a weaker dollar means it takes more of them to buy a barrel of oil.

What are these measures of business risk? The TED spread -- which is the difference between the three month London Interbank Offered Rate (LIBOR) and the three year Treasury rate -- has declined from its high of 4.65% to 4.09%. This is a big improvement but a far cry from the 1.04% at which it stood a month before. And the the LIBOR-OIS spread -- a measure of inter-bank lending risk -- fell to 3.41% from its record high 3.67% Friday -- still much higher than the 0.30% at which it stood a year ago. Things are getting better but there's a long way to go.

Meanwhile the dollar is losing altitude as oil prices rise. The dollar is losing ground to the Euro now that panicked global investors are getting out of Treasuries. For instance, the euro climbed to 1.3712 dollars from 1.3576 dollars in New York on Monday. Oil hit a 14 month low of $77.70 last Friday but has traded as high as $83 today.

Does today's record 936 point rally in the Dow mean that happy days are here again? I think it's a gift to investors who want to stop their losses after having seen their portfolios plummet in the last year. Last week, the Dow fell 22%, destroying $2.4 trillion in market value -- it gained back $940 billion of that today. As an unpleasant reminder, after today's 11% rally, the S&P 500 has lost 36% of its value in the last year. And, while I hope I am wrong, I don't see the conditions yet in place to believe that we have reached bottom with the economy and can now expect the earnings growth that would justify investment in stocks

Today's rally feels good but it is highly likely that there was an element of short covering driving up the market. Last Wednesday, the SEC lifted its ban on short selling. Investors who shorted financial and insurance companies were doing quite well last week as fears of another financial bankruptcy mounted. With today's successful save of Morgan Stanley (NYSE: MS), anyone who was short that firm -- or other financial stocks -- was forced to buy those stocks as they spiked in order to repay their stock loans. This probably contributed significantly to a buying panic.

If you need your money in the next six years, you could sell first thing tomorrow morning and you will be able to limit the losses that could come from unpleasant surprises. What kind of surprises? Here are two:

• Credit Default Swap settlements. There is no central repository of information about who owes how much to whom for their CDS obligations. Nor is there solid data on how much these CDS counterparties have in their capital accounts in the event of a default that triggers their obligation to pay up. For instance, I was surprised to learn that Goldman Sachs (NYSE: GS) had a $20 billion obligation in the event of an American International Group (NYSE: AIG) failure. Who else is out there with such obligations? Do each of these counterparties have the ability to get the government to bail them out by taking over the company to prevent them from having to pay? Probably not.

The U.S. decided it could not allow another investment bank to fail. And if it had allowed Morgan Stanley (NYSE: MS). to file for bankruptcy -- as it did with Lehman Brothers -- that would not have happened. Why not? Because Morgan Stanley is now a commercial bank. But thanks to a guarantee from the Treasury and a change in the structure of its deal, Morgan Stanley has skated away from bankruptcy.

That's because Mitsubishi UFJ negotiated a new deal with Morgan Stanley. Instead of buying a mixture of common and preferred stock, Mitsubishi will acquire a 21% stake in Morgan Stanley by purchasing $9 billion worth of its preferred stock yielding 10%. More specifically, $7.8 billion of the Mitsubishi investment is in preferred shares which its can convert into Morgan Stanley common at $25.25 per common share. The other $1.2 billion is in perpetual noncumulative preferred stock that is not convertible into Morgan Stanley stock.

Why the change? Previously $3 billion of Mitsubishi's stake was to be in common stock purchased for $31.25 a share, but after Morgan Stanley's stock fell 58% last week -- this deal would have been embarrassing to complete. This weekend I was thinking about buying Morgan Stanley stock but I held back because I thought that the Treasury might inject senior preferred capital into Morgan Stanley which would drive down the value of its common.

The first speech by bailout guru Neel Kashkari reveals that the $700 billion bailout plan to save the world is turning into a Wall Street WPA program (WSWPA). What a disappointment!

WSWPA started off by hiring a law firm -- Simpson Thatcher & Bartlett LLP! And it hired a consultant -- Ennis Knupp & Associates -- to help Kashkari evaluate which of 70 Wall Street firms will get their share of the gravy train. To be fair, Kashkari mentioned a voluntary program to invest in healthy banks -- but it sounds far from aggressive to me. So the U.S. is announcing its plans to dole out our tax dollars to enrich Wall Street firms while Britain has already taken action to shore up its banking system.

Perhaps disappointment with the glacial pace of U.S. response to this financial crisis helps explain the somewhat anemic stock market action. Futures had indicated a 6% rise; however, markets are currently up a relatively mild 4.2%. I find it interesting that the administration is choosing to use Kashkari's discussion of the nuts and bolts of a government contract for Wall Street as the best way to lead us out of this financial crisis.

November 4th cannot come too soon.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Princeton professor and New York Times op-editorialist, Paul Krugman, just won the Nobel Prize in economics "for his analysis of trade patterns and location of economic activity." This award comes at a time when he has been weighing in on the debate as to how best to fix the financial crisis. And I found inspiring his suggestion that governments should inject capital into ailing banks -- an idea that has taken hold in the U.K. and may also prevail here.

Why did Krugman win the Nobel? His work bolstered a branch of economics called strategic trade theory which argues that countries can subsidize certain industries to gain global market share. Others have praised his work on the development of clusters of related industries and his equations that measure how economic shocks affect the current account, exchange rates and capital flows.

The official name of Krugman's prize is "The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel." He'll get $1.4 million, a gold medal and a diploma. I've agreed and disagreed with him but if his ideas about how to fix the financial crisis take hold, maybe he'll be able to find a safe bank in which to deposit his winnings.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

The current financial crisis differs from the Great Depression in many respects. At the moment, the most significant difference is that central banks around the world are moving fast to try to stop the problem from getting worse. Stocks in Asia and Europe are rallying and futures point to a higher opening in the U.S.

Should you sell into this rally? Maybe. It depends on whether you think the world's finance ministers have solved the problem.

What are European central banks doing? The UK is injecting $64 billion into three large banks -- Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group -- European governments agreed to guarantee new bank debt until the end of 2009, and the U.S. is coordinating with Europe to offer unlimited dollars to ease the credit crunch.

How are markets reacting? In Asia, stocks rose -- Hong Kong's Hang Seng index surged 7.5% while Sydney's S&P/ASX 200 index rose 5.6%. Things are looking up in Europe as well -- London's FTSE 100 index and Paris's CAC-40 are both up 5.4% and S&P 500 futures suggest a 6% gain in the U.S. What will the U.S. do?

With reports that the UK will invest $60.5 billion to take control of its four top banks, leading Western finance ministers left Washington with an important unanswered question: "What can we do that will restore confidence to the global financial markets?" I am heartened to learn the U.S. leaders are discarding their reverse auction strategy in favor of a plan to inject capital into our banks. But if that plan is not done the right way, it could be a missed opportunity of colossal proportions.

Here's what worries me about the current vague discussions. If the U.S. invests $700 billion in banks that apply for the investment, then the applications are likely to come from banks that are losing money and have the least amount of capital. If the Treasury invests in these money losing applicants, odds are good that they will keep losing money and the investment will be wasted.

In order to get a return on our investment, Treasury must follow a plan I called cull and capitalize. In this plan, Treasury would analyze our 8,400 banks and pick the winners. To do this, the FDIC could rank banks based on their profitability, their capital levels, and the quality of their assets. The banks that did not make it into the winner's circle would either be encouraged to merge with those winners or close down.

John McCain has made several unexpected moves during his campaign. For instance, he picked Alaska Governor Sarah Palin as his vice president. After an initial surge of support, her charming personality has given way to revelations about her lack of familiarity with the issues and Troopergate -- which led a bipartisan committee to conclude that she violated an Alaskan law prohibiting abuse of power. Now McCain may be questioning whether this maverick move hurt him more than it helped.

McCain also decided to suspend his campaign last month to deal with the financial crisis. Coincidentally, this decision came just a few days before McCain was to debate his opponent during a week when he was down in the polls. As it turns out, McCain resumed his campaign in time for the debate but without fixing the crisis. Did this maverick move strengthen McCain's image as a strong, effective leader?

At the end of a week in which the S&P 500 fell over 18%, more than it ever has in any previous week in history, some in the Republican party are questioning whether McCain's campaign is functioning as well as it could. Former Massachusetts governor, Mitt Romney, has suggested that what McCain needs is a "broad vision of how he would lead the country through the economic crisis," according to the New York Times. This comment suggests a maverick move that McCain could take to revive his chances: replace Palin with Romney.

The SEC's ban on short selling ended Thursday. This creates the conditions to resume the cycle of value destruction that brought down Lehman Brothers Holdings. What happens is that a threat of a credit downgrade causes a spike in the premiums for credit default swaps (CDSs) that insure the bank's debt. That premium spike requires a collateral call which the bank lacks the cash to meet. This jeopardizes its effort to raise capital and sends the stock plunging -- to the profit of the short sellers.

Enter Morgan Stanley (NYSE: MS). A few weeks ago, it announced that it would raise $9 billion from an investment from Japanese bank Mitsubishi UFJ Financial Group, which is due to close on October 14th. However, the $25 a share purchase price is now about double Morgan Stanley's closing stock price Thursday. If the $9 billion capital commitment remains constant, MUFJ would own 65% of Morgan Stanley rather than the original 21%.

And this morning, a report emerges that Moody's (NYSE: MCO) will put $200 billion of Morgan Stanley's debt on downgrade watch -- helping drive its stock down 27% in pre-market. As happened at Bear Stearns and Lehman, hedge fund clients have pulled out their money and its CDS premiums are up so much that it can't issue new debt. Specifically, Morgan Stanley's 5-year CDSs rose to an upfront payment of 28% of the amount insured -- yesterday it was 19% -- plus 5% percent a year. So Morgan Stanley would pay $2.8 million to insure $10 million of debt plus $500,000 a year.

While you were sleeping, Asian markets followed the U.S. down. Japan's Nikkei lost 9.6% as a real estate investment trust and an insurance company -- Yamoto Life -- filed for bankruptcy. Markets in Hong Kong, Korea, Australia, Singapore and Thailand fell between 6.5% and 8%. In Europe, markets opened down 10%. Fear is rampant with the volatility index (VIX), a measure of fear, closing at an all time high of 63.92.

By chance, there is a meeting of G7 finance ministers in Washington this weekend, and there will be a push to do something by Sunday night. I think it would be a triumph if everyone in the meeting could agree on a common definition of the key problem: the freezing up of short-term lending markets (the TED Spread, a measure of short-term lending risk, hit a record 4.23%), the lack of capital in the global banking system, or investors fleeing the stock market.

Why would this help? Part of the reason that global efforts so far have failed is that there does not appear to be a common understanding of what is wrong and what it will take to fix it. This has been reflected in uncoordinated tactics -- flooding the markets with liquidity, cutting interest rates, guaranteeing money market funds, injecting capital into banks -- in the UK only -- and our DOA $700 billion reverse auction plan.