The economy is beginning to shed jobs at a worrisome pace. Initial unemployment claims soared 38,000 last week to 407,000, according to the Financial Times. That was well above the 366,000 that economists had predicted. Most of the stories note that it’s the highest level since Katrina in September 2005, but that was a statistical blip that doesn’t help us compare the proverbial apples to apples.

Here’s Bloomberg:

”This is just breaking into recession-type territory,” Stephen Gallagher, chief U.S. economist at Societe Generale SA in New York, said in an interview on Bloomberg Television. “400,000 is usually a trigger point when we consider recessionary times.”

A Bloomberg survey of economists predicts a key economic report out today will show that payrolls shrank by 50,000 jobs in March and that the unemployment rate will hit 5 percent.

The Wall Street Journal’s Ahead of the Tape column says job stats indicate the recession started sometime in January.

“The layoffs started in housing and spread from construction workers to broader manufacturing jobs, and now it’s in the financial sector,” says Thomas Higgins, chief economist at Payden & Rygel. Other sectors—from temporary help to retailing to transportation —are also softening.

The Journal says on C2: “Tough Forecasts Released.” Ahhh, space constraints. Most large companies see a weak economy lasting at least a year, according to a survey by Greenwich Associates. Who is Greenwich Associates? A Connecticut law firm? A cabal of hedge fundies? A Village co-op? We’re not told.

In layoff news, Motorola is slashing 2,600 jobs, while Dell says it will lay off more than the 10 percent of employees it previously said it was firing.

Anatomy of a bailout

The WSJ leads its right column on page one with testimony before Congress yesterday that the Federal Reserve tried to avoid bailing out Bear Stearns but instead guaranteed $30 billion of its loans and sought a low price for JPMorgan Chase’s deal for the investment bank.

“If you want to say we bailed out the market in general, I guess that’s true,” (Bernanke) said. “But we felt that was necessary in the interest of the American economy.” He reiterated comments from a day earlier that the Fed doesn’t expect to lose money on its $30 billion loan. J.P. Morgan has agreed to cover the first $1 billion in losses, if there are any.

That comment doesn’t jibe with what JPMorgan’s CEO Jamie Dimon in the next paragraph says about why his firm got involved:

Mr. Dimon said his bank “could not and would not have assumed the substantial risk” of buying Bear without the Fed’s involvement.

Bloomberg says “hours from a market meltdown,” Dimon played a high-stakes game of chicken with the Fed, saying no to a deal until the central bank guaranteed Bear’s risky loans. Officials said without shoring up Bear, they feared a market-shaking crash like the Panic of 1907 or the Great Depression.

”The sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and would have severely shaken confidence,” Bernanke said.

Bear CEO Alan Schwartz, who told everyone that things were just fine while Bear circled the bowl, said his company’s balance sheet was as strong as anyone else’s but that rumors got a hold of it, causing the panicky run on the bank. (The NYT on C1 notes that Schwartz has hired Robert S. Bennett the uber-Washington lawyer people run to when they’re in trouble.)

As the WSJ’s Market Beat blog quotes Minyanville.com saying: “If chatter alone can cripple a franchise, how strong was the franchise to begin with? Taking it a step further, given the stated interdependency, could a shift in perception sink the entire system?”

Good questions.

Corporate welfare kings

The New York Times checks Senator Chris Dodd, a former Democratic presidential candidate, for doing the bidding of Bear, which has been one of his biggest contributors, even encouraging the dumb speculation that rumor-mongers did the company in by manipulating the market.

And the New York Fed chief calls the lie (or self-delusion) on Schwartz: “We only allow sound institutions to borrow against collateral,” he said. “I would have been very uncomfortable lending to Bear given what we knew at that time.”

The NYT’s Floyd Norris writes in his C1 column that Bear met the Securities and Exchange Commission’s definition of “well capitalized” even as it was collapsing that weekend.

Could that indicate there is something wrong with the Fed’s rules? Does it sound a little like a doctor emerging from a funeral to proclaim that he did an excellent job of treating the late patient? The S.E.C. does not see it that way. It its view, this was a case of an old-fashioned bank run, and no capital standards can stop such a run when confidence is lost.

Norris goes on to say:

It is no coincidence that the crisis of 2007 and 2008 had its origin in unregulated financial products traded in unregulated markets. Ever since the Great Depression, the government has tried to limit the leverage available to the public in the American stock market. But regulators, led by Alan Greenspan, the former chairman of the Federal Reserve, thought innovation would be hampered, and financial activity driven overseas, if there were any attempts to impose limits on leverage in the unregulated markets.

And not to fluff Dana Milbank of The Washington Post too much, but he has another good piece this morning, which gives those involved in the proceedings yesterday one of his trademark acid baths.

After repeatedly calling Schwartz a “corporate-welfare recipient”, Milbank writes:

No moral hazard, however, would interfere with the lawmakers’ compassion for the beleaguered Schwartz and his fellow witness, J.P. Morgan Chase’s Jamie Dimon, who had given a combined $260,000 in political contributions in recent years—a small part of the $1.7 million their co-workers contributed in this election cycle alone. That’s a sizable handout—but a good investment compared with the $30 billion federal hand-up.

States rights

The WSJ reports on its page two that the states are getting more aggressive in their bids to help homeowners stay out of foreclosure, and the moves are putting the governments “at odds with mortgage lenders.” The plans are coming about in large part because of frustration with the federal government’s activity. The paper notes that the new Congressional plan doesn’t do much for individual homeowners (hey, it’s gotta help out Big Business!)

Illinois and Maryland are each proposing a moratorium on foreclosures of sixty to 150 days, while Ohio is enlisting an armada of lawyers to help homeowners block banks from foreclosing on them.

The Minnesota legislation would require a mortgage lender attempting to foreclose on a home to honor a borrower’s request for a 12-month deferment. During that time, the borrower would have to continue paying either the monthly payment due on the loan at the time it was made, or 65% of the monthly payment at the time of default, whichever was less, though the borrower would eventually have to make up the deferred payments. The bill has passed committees in the Minnesota House and Senate, but the governor has said he probably will veto it. Wednesday, the bill’s sponsors sent to the governor a letter suggesting that lawmakers work with him to craft a compromise.

The legislation faces strong industry opposition. “It would significantly erode the confidence lenders and borrowers have about the stability of contracts in Minnesota,” said Tom Deutsch, deputy executive director of the American Securitization Forum, an industry group.

Back in Ohio, lawyers are finding lots of ways to prevent foreclosure:

“There are defenses to many more of these proceedings than we ever thought,” said Ohio Attorney General Marc Dann. For instance, the party bringing the foreclosure action may not own the mortgage, he said, or attorneys may be able to show that the mortgage was “fraudulently induced.”

ATA’s wings clipped

Discount flyer ATA Airlines filed for bankruptcy, and the WSJ puts it on B1.

ATA Airlines Inc. grounded its planes, the latest sign of pain for the discount carriers that helped push the U.S. airline industry toward lower fares but now are being squeezed by soaring fuel prices and a slowing economy.

Their troubles could lead to big cutbacks in cheap seats and limit consumers’ ability to fly for the low prices they have come to expect. But fewer seats could also help the rest of the industry, including bigger rivals, raise fares to cover swelling fuel bills.

CD dinosaur

Apple became the biggest music seller in the world, overtaking Wal-Mart, the Los Angeles Times reports. It’s a landmark in the shift from hard copies to digital downloads.

“It’s a major milestone,” said Tom Adams, president of consulting firm Adams Media Research. “It is the first instance of an electronic venue surpassing a [bricks-and-mortar] retail venue for any kind of media delivery.”

Larry Ellison, upstanding citizen

Bloomberg has a great report on Oracle CEO Larry Ellison, No. 14 on Forbes list of the richest people in the world, screwing over the kids to save a few bucks.

Seems Ellison paid $200 million to build a house south of Frisco in the manner of a “16th-century Japanese emperor’s country house” and screamed because the county assessed its value at $166 million. Get this: he argues that it shouldn’t be assessed that high because “the property was so elaborate that no one else would pay that much for it.”

Two years later, Ellison wins his appeal, lowers his future tax bills, and gets $3 million in taxes back. That will shave 3 percent off the Portola Valley School District’s annual $10 million budget, which will have to cut six jobs. The Bloomberg report doesn’t quite spell it out, but it appears that the ruling dropped the value of the $200 million house to $66 million.

Ellison has a net worth of $25 billion. Dude has a 450-foot yacht.

It’s alive!

The Journal writes on C2 that the $2.5 trillion asset-backed securities markets are showing “tentative signs of life.”

There is investor demand for new deals and supply has picked up. Last week alone, $4.6 billion in new offerings were sold, mainly offerings backed by credit cards and auto loans.

But the market still has a long way to go before a full recovery can be declared. Issuance has plummeted in the latest quarter and prices remain soft, as investors have turned selective, even on deals with top-notch credit rankings amid worries about the state of the consumer…

Asset-backed securities bundle consumer debt—such as car, home and student loans—into new securities with different risks and returns and then sell them to investors. In the first quarter of this year, securitization of such loans totaled $43 billion, a 75% drop from the year-earlier quarter, according to J.P. Morgan research.

If it’s not a false dawn, this would be big news— a sign that the financial crisis is finally easing somewhat.

John Reed’s regret

Contrition on Wall Street? John Reed, who along with Sandy Weill created the behemoth “financial services supermarket” Citigroup in 1998, now tells the Financial Times that deal was a mistake.

In a rare interview, Mr Reed said it was unclear whether the company’s model or its management deserved the greater share of blame for its problems. But he said Citigroup turned out to be a “sad story”.

“The specific merger transaction clearly has to be seen to have been a mistake,” Mr Reed said.

“The stockholders have not benefited, the employees certainly have not benefited and I don’t think the customers have benefited because our franchises are weaker than they have been.”

And the former president of UBS, which has been hammered by two write-downs of at least $18 billion apiece, is now calling—in a shareholder-activist campaign—for the Swiss banking giant to be broken up. Come on, guy. That’s not very sporting for a former exec. Aren’t these things best handled behind closed doors in smoke-filled rooms? The WSJ’s C1 Heard on the Street column:

For British investor Luqman Arnold, the fight will mark a rematch with the bank that forced him out in 2001 after a dispute over governance and how much power he would have. Among Mr. Arnold’s proposals: UBS should legally separate its investment bank from its private-client bank and consider selling the investment bank; sell its asset-management business to raise money; and remove the chairman it named just Tuesday, according to a letter Mr. Arnold sent to UBS Thursday night.

The surprise attack from Mr. Arnold, chairman of London investment firm Olivant Advisers Ltd., promises to increase acrimony inside UBS, which has gutted its leadership since becoming one of the hardest-hit banks in the credit crisis.

The WSJ gets our Quote of the Day for this gem, pointing out what seems obvious when you point it out:

“It’s hard to make a case to someone wealthy that you can manage their money well when you’ve just lost $37 billion yourself,” said Dirk Hoffmann-Becking, an analyst at Bernstein Research in London.

Consumer woes mount

In economic news, tapped-out consumers are having more and more trouble paying their bills. The NYT puts on C2 a Reuters report that the percentage of delinquent consumer loans rose to a sixteen-year high in the fourth quarter.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.